Xylem Inc. (NYSE:XYL) Q4 2022 Earnings Call Transcript

As we think about the year and the seasonality in the year, different businesses look a little bit different. Certainly, you touched on AWS, which is our most cyclical business when it comes to macro. And from an AWS perspective, we’re entering the year with a very, very strong backlog. And so as we’ve modeled that business, we have modeled a stronger first half versus a stronger second half. The other businesses don’t have quite as much seasonality built into the plan, other than in M&CS, we have been calling for a bigger ramp-up in the second half when some of the redesign work comes online and that coincide with better chip supply.

Patrick Decker: So I would just add a couple of things, from a historical perspective, just to amplify what Sandy had said here. We are reflecting in our guide that backlog in AWS carries into the first half of the year, but we are forecasting softness in the second half. So obviously, that remains to be seen. Hopefully, things recover faster, and we kind of glide through this and don’t get impacted by that. But right now, we’re embedding our guide that there is softness that hits us in terms of conversion in the second half. Historically, Water Infrastructure has a bigger Q4 and slows down in Q1 because we’re serving the wastewater side of utilities and they spend out their capital and OpEx budgets through the end of the fourth quarter and then they ramp up again in the following year. So just to give some context for those of you that may be new to the story.

Operator: And we’ll take our next question from Mike Halloran with Baird.

Mike Halloran : So just following up on that last little bit there. Patrick, you gave some context on the applied backlog. It seems like you’re expecting normalization as you work through the year that it makes sense and it’s a short-cycle business. Maybe some thoughts on how you’re thinking about the backlog tracking for the other 2 segments? And if you think that there’s a chance for normalization either of those as we move towards the end of the year towards a more consistent run rate or more consistent balance between how you think about orders and backlog and revenue conversion.

Sandy Rowland: Yes, Mike. I think we are already starting to see some normalization. If you look at the orders rate that we’ve had in the second half of the year, as — particularly as the pockets where the supply chain has stabilized, we’re seeing some of our customers there return to normal behaviors. I’d say Water Infrastructure is a great example of that. We’ve had a more stable supply chain there. And so that’s where we’ve seen more normal order patterns, and we don’t see a backlog that has been as elevated. We still have quite a bit of our backlog that’s past due in M&CS, and we do expect to start eating into some of that in 2023. And I think that’s a good thing because that means our projects are getting deployed.

Patrick Decker: Go ahead, sorry.

Matthew Pine: Yes. I was just going to build on the M&CS comment. We still have 30% of the backlog past due coming into the year. And so we’ll still continue to monitor that as the chip supply continues sequentially to improve. That’s something where we’re looking at. But orders sequentially are good in that business, and we see good momentum going forward commercially.

Mike Halloran : Makes sense. And then on the kind of order side in the quoting pipeline side of things, obviously, orders taking the quarter not a surprise, given the comps, given some balancing out here. How do you think that the sequentials will work out through the year on the order side? What are the expectations there? And maybe any comments on how you’re looking at the bidding pipeline as we sit here today in the areas where that’s relevant?