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Xylem Q3 2024 Earnings Call Transcript

Operator

Welcome to Xylem's Third Quarter 2024 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Keith Buettner, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Keith Buettner
Vice President, Investor Relations and Financial Planning and Analysis at Xylem

Thank you, operator. Good morning, everyone, and welcome to Xylem's third quarter 2024 earnings call. With me today are Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's third quarter 2024 results and discuss the fourth quarter and full year outlook. Following our prepared remarks, we will address questions related to information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of the website. A replay of today's call will be available until midnight, November 11, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of key performance metrics, including both GAAP and non-GAAP metrics with references to the prior year segment metrics being made on a comparative basis, reflecting the change in segments as of the beginning of the year. For the purposes of today's call, all references will be on an organic and/or adjusted basis, unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation.

Now please turn to slide four, and I will turn the call over to our CEO, Matthew Pine.

Matthew Pine
President and Chief Executive Officer at Xylem

Thanks, Keith. Good morning, everyone, and thank you for joining us. As you've seen in our press release earlier this morning, the team delivered very strong earnings in the quarter. In fact, I want to recognize the whole Xylem team for disciplined execution across the business. The result was record EBITDA margins and record earnings per share in the quarter. Operational discipline also delivered accelerated momentum in our integration of Evoqua. We're now well ahead of schedule and capturing the expected cost synergies ending the year above our run rate targets. Our profitability is also beginning to benefit from the work to optimize our portfolio and simplify our organization. All that work is in service of reducing Xylem's complexity in serving our customers better in addition to delivering systematic margin improvement in support of our long-term framework. The team showed great customer focus delivering healthy orders growth across all segments in the quarter. Organic orders were up high single-digits overall, with a book-to-bill greater than one, reflecting strong underlying demand in resilient end markets that continue to prefer our differentiated mission-critical solutions. Moderated revenue growth in the quarter was primarily driven by project timing pushouts in MCS and WSS, combined with tough compares versus prior year.

Orders are up sharply in both of those segments, indicating healthy underlying demand and customer preference. Overall, end market demand continues to be resilient with a few pockets of softening in the short term. With good visibility through Q4, we're narrowing full year earnings guidance and maintaining the midpoint despite a slightly lower revenue expectation. Also in Q4, we expect to increase our stake in the Idrica joint venture, giving us a majority ownership position. As a reminder, Idrica is a global leader in data management and analytics for water utilities. The system powering the Xylem view platform at the heart of our intelligent solutions for utilities. Having been borne out of the utility operator itself, the platform has been deployed in more than 300 customers around the world. We took a minority stake last year and became the global distribution partner for the technology. Our teams continue to get traction with customers. And with this transaction, the business will be consolidated into Xylem's Measurement & Control Solutions segment.

Now, I'm going to turn it over to Bill to get into the quarter's results, our financial position and our outlook. Bill?

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Thanks, Matthew. Please turn to slide five. Q3 was a strong operational quarter, and I want to thank our entire organization for their focus and effort progressing on our organizational transformation. Productivity and pricing resulted in record-breaking quarterly EBITDA margin and earnings per share. The demand remains solid with our backlog reaching $5.3 billion, driven by notable growth in WSS and water infrastructure, offsetting continued progress executing the past-due backlog in MCS. Our book-to-bill ratio exceeded one and orders were healthy, up 8% in the quarter, primarily driven by MCS and WSS. While orders remained strong, revenue growth moderated versus a challenging comparison of 10% growth in the same period last year. Q3 total and organic revenue grew at 1%, slightly below our expectations. The moderation came from project timing in MCS and WSS. The team's operational discipline delivered record quarterly EBITDA margin of 21.2% up 140 basis points from the prior year despite the modest top line growth. Productivity savings and pricing more than offset inflation, investments and mix, driving incrementals of approximately 130% on a consolidated basis. We also achieved a record EPS of $1.11, surpassing the midpoint of our guidance by $0.01 and marking a 12% increase over the prior year. Our balance sheet remains robust with net debt to adjusted EBITDA at 0.6 times. Year-to-date free cash flow has increased by 27% from the prior year. The conversion rate of 79% was driven by higher net income, offset by increased capex and net working capital.

Working capital efficiency in the quarter was impacted by timing of sales. Let's turn to slide six. In Measurement & Control Solutions, we continue to work down our pass-through backlog. Total MCS backlog now sits at roughly $1.9 billion, a 14% organic decrease from prior year, driven by smart metering conversion. Orders were strong at 12%, driven by smart metering and analytics demand. Revenue was up 11%, driven by smart metering demand and backlog execution. This was below our expectations due to project timing, as we were able to ramp up production of past dues faster than our customers were able to schedule their deployments. We are seeing some pockets of softness in Europe and emerging markets, but overall demand is still healthy and the pipeline is strong, particularly for our AMI solutions in North America. We finished the quarter with robust EBITDA margins of 21.2%, up 350 basis points versus the prior year, with 53% incrementals. Year-over-year margin expansion was driven by productivity, price and volume, which more than offset inflation and investments. In Water Infrastructure, orders were up 6% in the quarter, with strong demand across treatment and transport. Revenue increased 1%, driven by transport demand, slightly offset by treatment, which had a difficult comp given strong performance last year from legacy Evoqua's APT segment. EBITDA margin for Water Infrastructure was up 50 basis points. Productivity and price more than off inflation and mix, incrementals were strong at 45%.In Applied Water, orders were up 4% and book-to-bill was 1, reflecting a few large project wins, which will ship next year.

Revenues were down 4%, in line with our expectations, primarily driven by softness in emerging markets. Segment EBITDA margin declined 10 basis points year-over-year but increased 110 basis points sequentially. Lower volumes, higher inflation and unfavorable mix were mostly offset by productivity savings and price. Rounding out the segments, Water Solutions and Services saw robust demand with orders increasing 11% driven by strength in outsourced water and in dewatering. Organic revenue was down 1% with strength in dewatering offset by declines in capital sales from treatment projects, primarily due to a difficult comp and project timing within the quarter. Segment EBITDA margin was strong at 24.7%, up 200 basis points. Productivity and price offset inflation and volume declines. Now, let's turn to slide seven for our updated full year and Q4 guidance. Given our year-to-date performance in both commercial and operational momentum, we are updating part of our full year guidance. Our revenue guide of $8.5 billion results in approximately 15% growth with organic revenue growth of approximately 5%. The Evoqua integration is going very well, and we are accelerating expected cost synergies to an exit run rate of $130 million in 2024. In light of our lower revenue expectations, we are confident about driving further margin expansion through operational productivity and our simplification efforts and are reiterating our EBITDA margin guidance of roughly 20.5%.

That represents 160 basis points of expansion versus the prior year, driven by higher volume, productivity, including our cost synergies and price offsetting inflation. We are narrowing EPS guidance to $4.22 to $4.24 from $4.18 to $4.28. Free cash flow conversion for the year is still expected to be at least 120% of net income. We do expect significant conversion in the fourth quarter. The full year outlook for two segments has changed with MCS now expected to grow in mid-teens versus our prior outlook of high teens and WSS now expected to grow low single digits versus our prior outlook of mid-single digits, both due to project delays impacting the second half. For the fourth quarter, we anticipate revenue growth to be roughly 2% to 3% on a reported and organic basis. We expect fourth quarter EBITDA margins to be in the range of 20.5% to 21%, up 70 to 120 basis points. This yields fourth quarter EPS of $1.12 to $1.14. We have solid momentum and continue to have strong orders growth and anticipate healthy long-term demand across our divisions and applications. While we are closely monitoring the macro environment, including election uncertainty, geopolitical tensions and tariffs, our overall outlook for the fourth quarter remains positive. And we look to our simplification efforts and 80/20 implementations to not only help address any short-term challenges we may face but also be among the key drivers to our systematic margin improvement over time, supporting our long-term profitability framework.

With that, please turn to slide eight, and I'll turn the call back over to Matthew for closing comments.

Matthew Pine
President and Chief Executive Officer at Xylem

Thanks, Bill. Again, I'm proud of the team's strong results in the quarter. The risk orders growth demonstrate the team's customer focus and commercial momentum, alongside healthy demand for our solutions. The record profitability and margin expansion only comes from real focus on execution, which shows up in the same discipline the team showed to get us out ahead of our integration synergy targets. That accelerated integration in turn, enables us to put greater attention on portfolio optimization and capital deployment. The team's performance is what gives us confidence to narrow the guide as we expect to continue delivering that same level of execution on continuing demand. At the start of the call, I referenced some of the benefits we're beginning to see coming through our work on simplification. Reaffirming what we said at Investor Day in May, we're building momentum and it's showing up in our results. We're doing the meaningful work on our operating model across culture, process and structure, and we're already beginning to see the benefits. I look forward to sharing more about that in coming quarters as the work continues.

Lastly, I want to share a change in the executive team, which happened after the quarter's close. You may have seen our announcement appointing Meredith Emerick to lead the Applied Water segment succeeding Franz Cerwinka. I want to thank Franz for his many contributions, not only to Applied Water, but also in his prior leadership of emerging markets. He'll stay on as a senior adviser to ensure a smooth transition and to maintain the momentum of the segment's 80/20 work. Meredith and I first cross path at Carrier, her experience there and at Mitsubishi has given her deep experience in engineered solutions for commercial and residential buildings across a range of industrial end markets. She has a track record of high-performance P&L leadership and emphasis on profitable growth, operational discipline and customer centricity. We welcome Meredith to the Xylem's leadership team just last week, and I know you value getting to know her in the coming months.

With that, operator, I'll turn the call back over to you for questions.

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] Today's first question comes from Deane Dray at RBC Capital Markets. Please go ahead.

Deane Dray
Analyst at RBC Capital Markets

Thank you. Good morning, everyone.

Matthew Pine
President and Chief Executive Officer at Xylem

Hey, good morning, Deane.

Deane Dray
Analyst at RBC Capital Markets

Maybe we can start with just like the tone of business, the timing of decision-making approval process. We're hearing lots of industrial companies talking about those kinds of delays, slower decision-making. And then very specifically, how did this impact WSS, you referenced timing of capital projects. When do you see these outsourcing contracts start to get released and what kind of time frame, we'll start there. Thanks.

Matthew Pine
President and Chief Executive Officer at Xylem

Okay. Thanks for the question, Deane. I'll start out, and I'll turn it over to Bill to get into the details. But just to provide some high-level perspective, before I do hand it over to Bill, Q3 is really a tale of what I would call two stories. Utilities end market for us was up 10%, so up double-digits, but although a bit less than we anticipated primarily with M&CS. On the other side of that is the industrial and commercial building end markets were down 4%, respectively. And those are largely due to project pushouts, and I would say some slight softening in our mining verticals internationally. That's where we saw a little bit of softening. But in general, as you see from our orders in the quarter, very strong in general across all the end markets. Maybe I'll just pause there, and maybe turn it over to Bill to get into some detail on WSS.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

So yeah, the difference between our expectations coming in the quarter for WSS is really, again, just the timing of some of these projects that pushed out in the back half. These aren't cancellations. These are really delays. Some due to just elongated commercial negotiations, Deane, some of these are really complicated outsourced water projects or project delays that we are a component of, and then just some election and interest rate uncertainty giving a little bit of pause in the industrial markets for big projects. We continue to have differentiated technology to support these projects and water is a critical component of the application. So we're highly confident that this is just timing. We have the orders. It's just when do they start to be put in place. Our expectation is a little bit of softness continuing in the fourth quarter and then pick back up again at the beginning of the year based upon all the indicators we're getting. And again, maybe the other thing I would mention is that we had really tough compare in this business as well for the quarter. Last year, pro forma growth was 10% on an organic basis. And we talked last quarter; the 12% growth just put some pressure on the pacing that we experienced in the back half. So fundamentals are still strong, high demand for our unique solutions. A little bit of delay here as we exit the year, but we're confident that we're back positive in the fourth quarter and then ramping in Q1.

Deane Dray
Analyst at RBC Capital Markets

All right. That was really helpful and broadly consistent with the slower decision-making that we've seen elsewhere. And then just as a follow-up question, can we put the spotlight on MCS. There's been some anxiety, if I can phrase it that way, about the ramp down in the business as you work off past due backlog and you go from some pretty heavy 20% growth down to what we're expecting to be a normalized high single digits, which is still healthy, but just give us where are you in that process? I see the $1.9 billion backlog, how much of that is actually past due. And then meanwhile, you've had really strong orders this quarter. So what is that expectation about the ramp down to high single digits? Thanks.

Matthew Pine
President and Chief Executive Officer at Xylem

I'll start it out Deane and just a few comments, maybe specific to Q3 and some of the trends, and then Bill can get into some color in the read-through as we head into 2025. We're now out of the woods on production constraints that we've been talking about for the past couple of years. They've come down very quickly. Our lead times have moved from 52 weeks to five weeks over the course of this year and we're able to ramp up production of the past dues faster than customers were able to reschedule their deployments. That's really the bottom line. And I really want to be clear on this point. This is not a demand issue like a typical destocking. This is a rescheduling of deployments that will happen over the coming months. The demand is there. It's just getting the deployments rescheduled to catch up with the shipments. Really, the market relative to AMI is still underpenetrated, it's less than 50%. Our funnel is up significantly year-over-year, up over 25%. And we're still winning currently out in the marketplace above our current market share. So there's a lot of positives here, a little bit of timing, and I'll let Bill kind of walk you through a little bit more color on that timing.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Yeah, Dean, I think we're likely to see this adjustment period last for the next quarter or two as our partners work to align customer home access and the labor schedule needed to nail down the deployment timing. The bottleneck shifted kind of from our production into the channel. So it will take a little bit of time to resolve. We do expect high single-digit growth here in the fourth quarter for that business, but the potential continuation of the rephasing into the first part of next year. But our expectations at this point is for MCS still to be within that high single-digit framework for the year. Just that as we talk about the normalization, and we've had questions just on the order patterns, and just want to remind everyone that historical norm for MCS is book-to-bill of about one, and then we'd have kind of backlog of about 60% of the next year's sales. So we expect to continue to bleed our backlog into the first part of 2025 and then start to be book-to-bill positive as we exit the year and just as they normalize to their historical patterns.

Deane Dray
Analyst at RBC Capital Markets

Great. That's really helpful. And not a question, just to shout out. That was a big free cash flow quarter. So congrats to the team.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Thank you.

Operator

Thank you. And our next question today comes from Mike Halloran with Baird. Please go ahead.

Mike Halloran
Analyst at Robert W. Baird

Hey. Good morning everyone.

Matthew Pine
President and Chief Executive Officer at Xylem

Good morning, Mike.

Mike Halloran
Analyst at Robert W. Baird

So can we just put a finer point on that MCS then? Because the backlog bleed this year, I know that you're going to continue to execute against the past due backlog next year, you still have very strong orders. Could you just frame what that impact looks like, whether it's how the past due backlog helped the growth rate this year? And is next year a more normal growth year for the MCS segment? Or is there an overhang from the execution against the past due backlog. I know demand is still good. It sounds like the quoting bidding is still where you want it to be but just want to make sure I think those two variables.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Yeah. No, for the all intents and purposes, we're pretty well caught up on our past due for the most part. And we're back to our normalized past due levels. So we've been able to progress on that kind of ahead of pace. And again, I think as Matthew highlighted, that's a little bit of the disconnect that was created. Relative to our expectations for next year, like I said, I still think the smart metering business will be at its long-term framework. There might be some timing first half, second half but we expect positive results from that business.

Mike Halloran
Analyst at Robert W. Baird

Thank you for that. So then kind of on where you are from an internal processes perspective, maybe just an update on where you sit in the segmentation, identification journey of the portfolio? And when you start basically, how broad through that portfolio have we gotten now? And when do we start seeing kind of that push pull of some pressure on revenue as you start executing against some of the areas of the business that maybe don't fit and then seeing the margin benefit from some of those actions. Has that started yet? Or is this more of a next year thing and just kind of an update holistically on the timing there?

Matthew Pine
President and Chief Executive Officer at Xylem

Yeah, it's more of a next year thing. We're going to exit, I would say, Mike, in a really good position. 2024 was a year of really deep dive analytics and kind of zeroing up the business and we're through that process. And as we exit 2024, a lot of the implementations happening in Q4, and then we'll start to see results in Q1 through the course of next year. So that's going to really help from a bottom line perspective. We did talk about 80/20 specifically, and there are some other things we're working on, whether that's spans or layers or as we think about our structure, next year that will also help. But I think in the first part of our cycle that we talked about at Investor Day, there will be probably a little bit more pressure on the top line, but we're still very committed to the outlook that we gave 4% to 6% over the course of the next three years.

Mike Halloran
Analyst at Robert W. Baird

So if I just put those together then, you're basically saying if you take the order patterns, the timing of all these projects, what you're executing on, really no change in the thought process as you work through next year. Next year should look good but normal relative to how you frame things.

Matthew Pine
President and Chief Executive Officer at Xylem

Yes.

Mike Halloran
Analyst at Robert W. Baird

Okay. Thanks everyone. Appreciate it. Thank you.

Operator

Thank you. And our next question comes from Scott Davis from Melius Research. Please go ahead.

Scott Davis
Analyst at Melius Research

Hey, good morning, Matt and Bill.

Matthew Pine
President and Chief Executive Officer at Xylem

Good morning.

Scott Davis
Analyst at Melius Research

Guys, you mentioned price in each of the segments as being a positive. Is that -- should we think about that as price that in the backlog that's coming out that was priced appropriately and obviously higher. But -- or are you still able to get incremental price and new business today?

Matthew Pine
President and Chief Executive Officer at Xylem

Yes. I think it's a little bit of both. Scott, as we talked in our Investor Day, we're really targeting to be price/cost positive, which we've been able to continue to do strong results again here in the third quarter with price cost spread of about 60 basis points, we continue to see some of the businesses show significant strength with that. MCS being the largest contributor on price cost with it being greater than 200 basis points. We've seen year-to-date price a little bit ahead of what we expected coming into the year. Some of that is the targeted efforts and results from our 80/20 implementation and then just different parts of the business, leveraging their differentiation to capture more value within their market. So that is a lever we think we're going to continue to try to expand upon as we progress. One, on just the process of pricing internally and how we execute on that and try to eliminate leakage and then the other half on the strategic pricing side. So, we think there's opportunities on both for us to be a continued tailwind as we get into next year and beyond.

Scott Davis
Analyst at Melius Research

Okay. That's helpful. And then in the prepared remarks, you commented on pockets of Europe and Asia just being a little bit weaker. I imagine that I think China is probably at least half of your Asia business so that I would imagine that explicitly references China. But can you just a little clarity there. Is it -- are there similar reasons for pushbacks like Deane was saying or the -- I know there's been a fair amount of stimulus in China, but it doesn't seem to have helped any companies yet. Is there a little -- maybe just a little color on what your guys on the ground are saying that is this something that it leaks into 2025 or more of a shorter-term hiccup?

Matthew Pine
President and Chief Executive Officer at Xylem

So I'll make some comments on China, too. And I think probably the one other area of emerging markets, that's a little bit softer for us is the Middle East and then some specific applications within Africa. But just -- from a China perspective, just to remind everyone, it's about mid-single digits of our total revenue, largely tied to public utilities within water infrastructure, that's about half of our business. There in China is the water infrastructure piece. Q3 orders did decline in kind of the mid-teens and revenue was down low single digits, and that has been decelerating throughout the year. We talked about our expectations for China being roughly flattish, and now it's gone slightly negative. The underlying demand there, especially with municipalities is still strong. But I do think the economic environment there remains difficult, right? Tight liquidity, especially for the municipalities is causing kind of projects to continue to delay and defer the real estate issues that they're having is adversely impacting our building services end market. So, we're keeping a close eye on China. The teams are focused, making their own lock, looking at areas where we have differentiated technology to address some specific opportunity set. But then how do we manage costs and infrastructure on the lower volumes to make sure we're focused on margins. So, I think it's probably something that lingers here in the short term. But China, overall, we'll get back to be a big part of our growth story at some point in time.

Scott Davis
Analyst at Melius Research

Okay, good color. Thank you. Best of luck guys, I'll pass it on.

Operator

Thank you. And our next question comes from Nathan Jones at Stifel. Please go ahead.

Nathan Jones
Analyst at Stifel Nicolaus

Good morning everyone.

Matthew Pine
President and Chief Executive Officer at Xylem

Hey good morning Nick.

Nathan Jones
Analyst at Stifel Nicolaus

I'm going to start on Idrica. You talked about acquiring a majority stake in that business. So, a couple of questions around that. First, any kind of color you can give us on the financial metrics around that valuation and the impact to your financial statements from consolidating it? And then second, on Idrica, how does that change the outlook, the trajectory, your plans for that business now that you have control of it?

Matthew Pine
President and Chief Executive Officer at Xylem

Yes. Maybe I'll start us out on the second part, and I'll let Bill get into the financials. We signed an agreement the other day on October 29th, and we plan to close on the business in December, Nate. I would say we took the majority position so we could more deeply integrate and rationalize our R&D investments because there's a lot of overlap and so we wanted to get that synergy and to really integrate it appropriately, we felt like we needed to have a majority share. And then also, we're going to leverage the platform in the user interface and standardize that across Xylem. So, it's going to have a tremendous impact on our ability to scale across the business and really drive synergies and efficiencies. We have a lot of confidence in the platform. It's the -- when we talk to utilities that was out and about in Australia and the U.K. over the past months and their biggest pain point is data management, application management, and we see a lot of interest in this, and we've got a huge funnel, and we're starting to win some big orders. So, strong -- again, strong traction. Orders are balanced across the globe. And I think the last thing I would say, the pull-through on the core business of Xylem has also been a pleasant surprise. So, maybe I'll pause there and then let Bill get into the little bit of financials.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Yes, Nathan, I mean, nothing material for this year. We don't plan on closing until late in December. So, it will be meaningful to our economics this year and then we'll lay out kind of more specifics as we guide next year and what the impact will be.

Nathan Jones
Analyst at Stifel Nicolaus

Okay. I guess my follow-up then Applied Water. I mean revenue comparisons there have been negative for a few quarters now, but the order comparisons or order growth has been positive for four of the last five quarters. Do you guys think that we've kind of seen the bottom in Applied Water and an expectation for return to growth going forward in 2025?

Matthew Pine
President and Chief Executive Officer at Xylem

I think so. Again, right, AW has been our most challenged business here over the last couple of quarters. It is our shortest cycle most cyclical group and it has played out kind of in line with our expectations on that low single-digit decline. We're probably closer to the bottom from where we expect growth rates to be in Q4. That team has done a really good job leveraging their technology and their advantage in several markets to win some larger projects that will help support our expected recovery in 2025. So we're not giving a specific guide now, but I think there is some momentum behind that business that gives us a more positive view going into next year. And, obviously again they've been on our longest journey with 80-20. So they're finalizing some business decisions there that might put a little bit of pressure. But outside that, the fundamentals, I think, to your point, are going to get better here over the next couple of quarters.

Nathan Jones
Analyst at Stifel Nicolaus

Awesome. Thanks very much for taking my question.

Matthew Pine
President and Chief Executive Officer at Xylem

Thank you.

Operator

Thank you. And our next question comes from Damian Karas with UBS. Please go ahead. Hello, Damian, is your line on hold or on mute perhaps? All right. Looks like we don't have Mr. Karas on the line. So we'll move on to our next question from Brett Linzey with Mizuho. Please go ahead.

Brett Linzey
Analyst at Mizuho

Hey, good morning all.

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Good morning.

Brett Linzey
Analyst at Mizuho

I wanted to come back to the dewatering. So you noted some strength in the quarter. I know in years past, the dewatering business has picked up a little bit of incremental business from various storm events. Was there any discernible impact in the quarter positive or negative? And then are you contemplating any pickup from restoration efforts into the fourth quarter?

William Grogan (Bill)
Senior Vice President, Chief Financial Officer at Xylem

Yeah. I would say it's on the fringe. We do go to market through channel partners in some of our territories, and that would determine maybe the level of impact. Maybe if I just elevate from there, the business in general was very strong in Q3, although we did see some pockets of softening in specific mining applications. But holistically for that business, it was pretty resilient. But in terms of the storm impact, it's not a huge impact for us and probably just on the fringes.

Brett Linzey
Analyst at Mizuho

Okay, got it. And I just wanted to come back to the margin progression. So you're executing well in a tough macro, but the 4Q year-over-year does step down versus Q3 in the first half. I guess, is this just a function of the lower revenue expectation or mix? Or is there some cost to achieve some of the 80-20 benefits or resource commitments that might be a drag and won't repeat next year?

Matthew Pine
President and Chief Executive Officer at Xylem

No, I think it's really just a portfolio mix as water infrastructure increases at a little bit lower margin rate, they have a seasonal increase in Q4. And then we've talked just about MCS having a little bit more of energy exposure versus water in the back half would be the two main things I'd point to.

Operator

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Matthew Pine for any closing remarks.

Matthew Pine
President and Chief Executive Officer at Xylem

I failed to mention with the question on Idrica, I was going to mention that our thoughts and prayers are with the citizens of Spain, our colleagues that are there for Xylem as well as our Idrica partners. We've reached out everyone safe and healthy, but we need to keep that country and our thoughts and prayers are going through some devastating impacts from recent flooding. Thanks for your questions. Thanks for everybody that's joined the call, and we appreciate your interest in Xylem. Thank you.

Operator

[Operator Closing Remarks]

Corporate Executives

  • Keith Buettner
    Vice President, Investor Relations and Financial Planning and Analysis
  • Matthew Pine
    President and Chief Executive Officer
  • William Grogan (Bill)
    Senior Vice President, Chief Financial Officer

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