Welcome to Xylem's Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. [Operator Instructions]. I would like to now turn the call over to Andrea van der Berg, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's third quarter 2023 earnings conference. With me today are Chief Executive Officer, Patrick Decker; Chief Operating Officer, Matthew Pine; Senior Advisor and former Chief Financial Officer, Sandy Rowland; and Chief Financial Officer, Bill Grogan. They will provide their perspectives on Xylem's third quarter 2023 results and discuss the fourth quarter and full year outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up, and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the investor section of our website. A replay of today's call will be available until midnight, November 7. Additionally, the call will be available for playback via the investor section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements in 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 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 our key performance metrics, including both GAAP and non-GAAP metrics. For 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'll turn the call over to our CEO, Patrick Decker.

Thanks, Andrea. Good morning, everyone, and thanks for joining us. By now you'll have seen that our first full quarter as a combined company was Xylem and Evoqua together. The team delivered very strong performance across each of our segments. We significantly exceeded expectations on organic revenue growth, EBITDA margin and earnings per share, and revenue grew 10% organically. We expanded EBITDA margin well above prior year, and we delivered EPS of $0.99 to the quarter, which represents 14% growth year-over-year. Orders were up 3%, and more importantly, our backlogs continue to grow, especially in our M&CS and ISS segments. Total backlog is now $5.2 billion, and this sets us up for continued growth momentum and demonstrates the health of our key end markets. So on the strength of this performance, we are raising our full year guidance. I want to personally give a big shout out to the team for their strong operational performance during a period of integrating two large enterprises. Instead of getting distracted, the team continued to focus on serving our customers and delivering on our commitments. The integration of Evoqua is well on track to deliver the cost synergies we promised. It's those synergies that underwrote the transaction, but more importantly, it's the growth synergies that excite us the most. And our customers have already begun to experience the advantages of our combined capabilities. Overall, the quarter's strong result, it reflects our continued momentum. And that puts me in a very privileged position on my last earnings call as CEO of Xylem. In September, we announced the planned succession of both me as CEO and Sandy as CFO. Matthew Pine is going to lead Xylem as CEO beginning January 1. I'll remain on as an advisor through the end of March. I'd also like to formally welcome our new CFO, Bill Grogan who is on the call with us today. He's alongside Sandy Rowland. Bill took on the role of CFO on October 1, and it's been a real pleasure to welcome him to the team. Now as Sandy was in the Chair through the end of September, she's going to cover the third quarter results, but that's not going to happen before I take the opportunity to thank her for her many significant contributions as Xylem. She's been a great partner and a great leader over the last few years with me and the team. We simply would not be where we are today without her many contributions. So now over to you Sandy.

Thank you, Patrick. Before I go over the quarter's performance, I would like to take a moment to congratulate Bill. In the short time since he stepped into the CFO role, I've been impressed with how quickly he has immersed himself in the business and taken on financial leadership of the company. Like Patrick, I will continue to stay on as an advisor through March to ensure a smooth transition, but the company will be in great hands with Bill working alongside Matthew next year and I couldn't be more confident in Xylem's future. And now, let's look at the quarter. Please turn to slide five. As Patrick mentioned, the team has continued to deliver strong performance in Q3, exceeding expectations on growth, margin expansion, and earnings per share. Each segment outperformed including Integrated Solutions & Services. As a reminder, since the combination with the Evoqua, we began including ISS as our fourth reporting segment. For Xylem overall, total revenues grew 50%, while organic revenue rose 10%, led by particularly robust double-digit growth in the U.S. Western Europe grew a healthy 6% and emerging markets was down largely due to China, despite strengths in other parts of Asia and also in Africa. From an end-market perspective, utilities grew 16%, mainly driven by robust demand and price realization in both M&CS and water infrastructure. Industrial grew 5%, driven by strong demand in the U.S. and healthy demand in Western Europe. Lastly, building solutions grew 3% with strength in developed markets, more than offsetting moderation in emerging markets. Overall, demand remains resilient. Our backlog is now $5.2 billion, up 5% organically, and this includes a $1.3 billion contribution from Evoqua. Orders were up 3% in the quarter and book-to-bill for the company was approximately one. EBITDA margin was 19.8%, up 150 basis…

Thanks, Sandy. Today is the 12th Anniversary of Xylem's listing on the Newark Stock Exchange. And I think it's pretty fair to say that 12 years ago, water wasn't very widely recognized as an investable thesis. But since then, intensifying secular trends have made absolutely clear, the value of a platform of solutions to meet the global water challenges. In that time, Xylem has evolved in our composition, our scale, and our impact. But our investment thesis has remained constant. It's one that's focused on a multi-year runway of attractive organic growth with sustainable margin expansion and strong free cash flow conversion. And it's that financial strength and confidence that allows us to effectively deploy capital as we continue building a differentiated market-leading water solutions platform. Under that thesis, we built a very durable business model. And Xylem colleagues and partners around the world are creating significant economic and social value as we serve our customers and communities around the world. I am both proud of what we built so far, but also excited to see what Xylem is capable of becoming under Matthew's leadership. Matthew and I have worked side by side for the three and a half years. So this handover is progressing very smoothly. And I have total confidence he will lead this team to realize the full promise of our strategy and create an even greater impact and value in the years to come. So now, over to you Matthew.

Thank you, Patrick. I am grateful and energized at the prospect of building on Xylem's momentum and creating our next phase of growth and impact. I'm also deeply grateful for Patrick's passionate, visionary leadership. His legacy is Xylem's bright future, having put Xylem firmly on a path of continuing profitable growth. The strength of our partnership is making it easy to deliver the continuity essential to all stakeholders in this handover as we approach the turn of the year. And as Patrick said, our thesis is constant, our strategy is sound, and we are committed to our long-range plan. Our team is solving customers' greatest water challenges with the most advanced platform of solutions in the world. In a fragmented, complex market, that integrated offering is a distinctive, competitive advantage. The opportunity ahead of us is to make it easier for even more customers to access the full range of capabilities they need to solve their most critical water challenges. In the process, we'll grow our penetration, our profitability, our durability, and our impact. The team and I look forward to sharing more color about the next phase of our growth at an Investor Day in May next year. We'll provide a further update on our combined company opportunity and long-range plan then. In the meantime, I'm pleased to share our nearer-term outlook. I'll provide a brief update on our Evoqua integration, and then a picture of what we expect in our end markets over the next period. And then finally, I'll ask Bill to provide guidance for the remainder of the year. Moving to slide 12, as you can see, the integration of Evoqua has gained quick momentum, and the team has come together remarkably fast. There's great collaboration, and we have the benefit of bringing two highly complemented…

Thanks, Matthew, and thanks Patrick and Sandy for your kind words. I'm incredibly grateful to Sandy for being so generous with her insight about the business during this handover. She has built a strong team and culture, and I wish her well in her new endeavors. I want to start by saying how excited I am to join the Xylem team. I have long admired the company, both because of its rise to sector leadership and also because of its distinctive commitment to both social and economic value creation. And now, a month in, I'm even more compelled by the opportunities ahead of us. It is a privilege to be part of the team that will take Xylem forward, building on this extraordinary platform and performance. As Patrick mentioned, we are increasing our full-year revenue EBITDA margin and EPS guidance. Full-year revenue will now be approximately $7.3 billion. This translates to total revenue growth of about 32% and organic revenue growth of about 11%, up from 9% to 10% previously. We are raising EBITDA margin to approximately 19%, up from 18%, driven by higher volume, stronger price realization, and productivity initiatives. This reflects about 200 basis points of margin expansion versus the prior year. In addition, we are lifting full-year adjusted EPS guidance to $3.71 to $3.73, up from $3.60 at the midpoint. The revised guidance breaks down by segment as follows: Low 20s growth in M&CS, up from approximately 20% previously, high single-digit growth in water infrastructure, and mid-single digit growth in Applied Water. And we remain committed to achieving free cash flow conversion of above 100% of net income. We have also provided you with a number of full-year assumptions in the appendix on slide 19. And now, drilling down on the fourth quarter. We anticipate total revenue growth will be in the 35% to 36% range on a reported basis, and 4% to 5% organically. By segment, we expect revenue growth to be mid-teens in M&CS, low single digits in water infrastructure, and remain flat in Applied Water. We expect fourth quarter EBITDA margin to be approximately 19.5%, driven by higher volumes, continued price realization, and productivity gains. This yields fourth quarter EPS of $0.94 to $0.96. Our operational discipline, commercial momentum, and backlog strength give us confidence to the remainder of the year in delivering our long-term plan. With that, please turn to slide 15, and I'll turn the call back over to Patrick for closing comments.

Thanks, Bill, and thank you Matthew and Sandy. This is a bittersweet moment for me. I'm wrapping up my last earnings call with Xylem. Leading and helping build this enterprise has been absolutely the greatest privilege of my career. I'm so proud of what the team has achieved in the past 10 years. Of the work that we've done alongside our partners, serving our customers and communities, and of the value we've created together. That said, it's clear to me personally, we are only just beginning to realize our full potential. Xylem is strongly positioned, our momentum is accelerating, and there has never been a greater need for solutions to the world's water challenges. It's incredibly gratifying to know that me, that my more than 22,000 Xylem colleagues and our partners are going to take the work of solving water forward under an exceptionally strong leadership team. We are poised to have an even greater impact and to create even more value in the many years to come. On a final personal note to the many of you whose jobs include closely tracking and analyzing our business, I've come to know you quite well as you followed Xylem's growth. I admire and respect the work that you do. All the very best to each of you, and simply go keep making a difference. Now, we're going to take your questions, and so operator, let's open it up for Q&A.

The floor is now open for questions. [Operator Instructions]. We'll take our first question from Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone.

Morning, Dean.

Good morning.

You'll have to indulge me. I need to start with some important congratulations, so let me just rattle through them here. So Sandy, thank you for all your help and wish you all the best. Matthew, you and I have already connected twice in person since the announcement, but in my view, you've got the right skill set and leadership to lead Xylem from here, so congrats. And Bill, Bill, welcome. And I don't want to put too much pressure on you, but we are expecting the same sort of elite CFO contributions that we saw for years at IDEX, so congrats and welcome to you.

Appreciate it, Deane.

All right, so, and Patrick, no tissues here, but you've had a fabulous 10-year run. You're handing off the reins truly in it from a position of strength, and I just remember when you joined Xylem, it was a company that thought of itself as a pump company. I mean, that's what they said. And the entire portfolio has evolved to where, I love how you phrase it, you're solving water. So just, you should feel really proud about how you developed the company and the portfolio and the leadership team, so congrats.

Thank you, Deane, and that means a lot coming from you. You've been here from the beginning.

Yes sir, yes sir. All right, so let's just talk about the quarter if we could, and maybe start with Evoqua and how the business – Matthew referenced some new wins. Just how have the revenue synergy started, conversations with customers, what'll be the first opportunities maybe to take Evoqua's business with existing customers to Europe? So any color there would be helpful. Thanks.

Yeah, thanks Deane for the question. Maybe I'll just start at a very high level and just talk about the guiding principles that Patrick really stated when we did the deal, which I think were really important to our execution. The first was, we said we have to deliver on our ‘23 plans, and as you can see from Q3, really strong performance. As most of you know, that was the legacy Evoqua's business Q4 in this past fiscal calendar Q3. So great execution by the team, and I couldn't be happier. The second, we need to make sure we deliver on the value capture of the cost and revenue synergies. And on what I would call the softer side, which is equally as important when you bring two companies together, is to make sure we get the right talent on the field or the pitch, if you will, and make sure we retain top talent. We've done a really nice job there. And then lastly, bringing the best to both cultures together. So obviously the work's not done, but we're off to a good start, and those guiding principles have helped really get momentum in the business. Just quickly on cost synergies, we're tracking at the $40 million exit rate that we talked about, and those three buckets of corporate costs, procurement, and footprint. But more so on the revenue synergies, which you're getting at Deane, the momentum is strong. We've just completed the APT integration into water infrastructure, which is really a milestone for us. We've appointed regional synergy leads in each one of the regions to drive the value capture. The incentives are in place, and the training's ongoing, both for the sales team as well as the services organization. The short term, as you talk about,…

That's all really good to hear. And if I could have a follow-up on M&CS, just your update on the chip supply. It looks like we continue to see gradual improvement there. And any comments about the orders in the third quarter and just kind of what the funnel looks like? Thanks.

Yeah, I'll start with orders and I'll come back to chip supply. Although we were down 11%, backlog is up 11%, $2.3 billion in M&CS, book-to-bill ratio greater than one. Deane, the bid activity remains really strong in M&CS, especially metrology. Really the reason for the decline in orders in the quarter was more of a timing of the backlog conversion to orders. As you know, a lot of the larger AMI deals, they sit in backlog for a period of time, anywhere from three to 12 months, while the utility is getting ready for the deployment. And when we receive the PO is when we book it as an order. So it's more of a timing issue, and that can be a little bit lumpy. But in general, we're really bullish on AMI adoption, and it's still fairly early innings. On the chip supply, the original guide this year for the business was low teens. Now we're in the low 20s. So we've seen continual gradual chip improvement quarter-over-quarter. I think this quarter it came in a little faster than we had thought, and it can be lumpy. But really chip supply in Q3 was strong. We see that continued momentum into Q4, especially with our product redesigns. And then obviously we've got -- with the backlog, we have a lot of potential in ‘24 in M&CS.

Deane, this is Patrick. Just to punctuate what Matthew had said, in that segment again, orders are only a function of when POs are placed. The key metric there is what's happening with backlog. And again, the backlog is very healthy, the deal pipeline is very healthy, and the win rate, especially in North America, is very impressive for AMI.

Great. That all sounds good, and congrats again to everyone.

Thank you, Deane.

Thanks, Deane.

And we'll take our next question from Mike Halloran with Baird. Your line is open.

Hey. Good morning, everyone.

Hey, good morning.

Hey Mike.

So like Deane, thanks Patrick for everything over the years. It's been a long, long run, but we really appreciate everything. Sandy, same. Not quite as long, but best of luck moving forward. And obviously Bill and Matthew, I look forward to working with both of you. So I appreciate it, everyone.

Thanks Mike.

I don't think I've had four congratulations on a call before.

Yeah. Hey Mike, we don't do things orthodox here, so – but we do them the right way through, it's called succession planning. So thank you.

No problem. All right. So following up on Deane's M&CS order question, maybe broaden it out a little bit. If you think about end markets heading into 2024, I certainly appreciate Matthew's comments on the fourth quarter itself. Where are the optimistic points? Where are the concern points? A lot of moving pieces here, right? You have really strong backlog. You have some regulatory tailwinds that are starting to hit or at least it seems like it. But you also have this uncertain macro backdrop in some of these emerging market regions where there's a little less clarity. So maybe just talk about some of those moving pieces as you're thinking about next year and where you think there could be some demand sustainability or where you have a little bit more concern points.

No, it's a great question Mike. We're committed to both the legacy businesses, long-range plans that were presented back in ‘21. Just start right there and just get that out. And really we have great momentum heading into next year with the platform that's been built by the Evoqua, Xylem combination. If you look back over the past decade of Patrick's leadership, 50% of the company didn't exist six or seven short years ago, and we're really operating from a position of strength in terms of the platform that has been built. So that feels really good as a jump-off point. I think if you kind of think about the macro drivers or favorable drivers, the secular trends continue to be strong, scarcity of water, aged infrastructure in developed markets, water quality is increasingly an issue, and as many of us have seen this year with flooding happening all over the world. So those trends will continue and they'll continue to buoy the business. Government funding, we talk a lot about the funding. It's going to be a dimmer switch. It's going to come over a period of time. But the next six to seven years, we'll see continued trickle funding globally, not only in the US. I think the resiliency of our OpEx and utilities will continue to be a strong point. I think the ISS durable business model, with the combination coming together with 75% services and aftermarket, gives us a lot more diversity of cash flows as we move into ‘24. And then lastly, M&CS backlog, which we just talked about with the supply chain improvements, I think are all positives. I think if I had to mention a few watch items, our more cyclical pieces of the portfolio with the end markets and applied water are definitely a watch item. There's pockets of industrial weakness. It's really niche when you think about Ag or marine, but they are very small pieces of our business. But in general, industrial has tended to hold up pretty well. And then I think the last thing I'd mentioned is China, which I mentioned in the opening comments. Industrial has remained pretty resilient in China for us. It's been the utilities, but it's been more on just a push to the right more than anything in China, which we can talk a little bit more about that later, but that's kind of the insights that we give. Obviously in our February earnings call, we'll be able to give more color, but that's what I see right now.

Great. I appreciate that. And then second question, just on the pricing and mix. So price costs in the quarter sounds like the backlog for M&CS is better than the margin profile today, which makes a lot of sense. Maybe just talk about some of those two dynamics as you're looking forward ability to continue to manage the price side of things against resilient inflation and how we should think about mix on a forward basis.

Yeah, this price cost in Q3, continue to be positive for Xylem. We're up 70 bips. We expect pricing to moderate in 2024 as we lap previous increases. I think ‘24 is going to fall more in line with historical trends, but in terms of M&CS, definitely price costs contributed to a little bit of the incrementals this quarter. But we feel really positive in a step up in Q4 and into ‘24, we've taken some pricing actions that will start to really materialize into ‘24. And in terms of the mix, it'll continue to be a little bit lumpy with energy, but we're working that backlog down and we expect that to normalize as we get into ‘24.

Great. I appreciate it. Thanks everyone.

Thank you.

And we'll take our next question from Scott Davis with Melius Research.

Hey, good morning, everyone.

Good morning.

Good morning, Scott.

Good morning, Scott.

I'll let Dean's congratulations kind of take the lead for me. And since he's the elder statesman, I will defer to him, but I agree with everything you said to everybody.

Thank you, Scott. Thank you.

No problem. Matthew, can you, just on China, can you guys help us understand kind of the interplay between OpEx and CapEx? I mean, when I assume it's all CapEx that's declined and pushed to the right, but is there a certain OpEx impact as well?

Yeah, I think it's – yeah, in terms of China, yeah. The under – I’ll just say, the underlying demand does remain fairly healthy. It's like I said, industrial has been more resilient than utilities, but with regard to utilities, it's a little bit of a mixed bag. It's really timing of funding, not only for CapEx, but also for OpEx as well. And as we've seen in the treatment piece of our business, in China it's been actually a little bit more resilient than transport. Transport tends to be a bit more OpEx centric. So it's a little bit of a mixed bag, Scott, when it comes to the funding. It's both CapEx and OpEx.

Hey Scott, I guess two weeks ago I was – two weeks ago I was there for a week and I spent time with our leadership gang and the team and visited our locations in Nanjing, Shenyang, Shanghai, traveled around, met with customers, met with the team, and the whole purpose was to really get a sense for kind of how things feel in China. And all I can say is based upon our portfolio, what we have there. Yeah, there's some near term shifting to the right on when backlog gets converted on the utility side, but underlying demand is still very strong there. That market is very positive and as many of you've heard me say before, as my father said, every generation thinks theirs is the last. This is my third time talking about the future of China in terms of demand for water and environment, and things felt very, very good in terms of robust underlying demand.

That makes sense. You guys, I don't think I ever – I'm not sure. I haven't asked this question. I don't think you've talked about it or maybe you have, and I just didn't remember, but how are you integrating the R&D efforts between Evoqua and Xylem? How are you kind of integrating and eliminating duplication if there was any? I would assume there'd be some maybe like in things like PFAS and things like that. And then how are you prioritizing projects with – assuming there is some level of integration, but I'll just let you guys comment on that. Thanks.

That's a great question. We haven't talked a lot about the R&D synergies, but for sure they are there. Let me first start out by Snehal Desai leading that team. And I’m actually here in DC today with his leadership team. So he comes over from the legacy of Evoqua business. And yes, there is some overlap, especially when you think about the work that's being done in PFAS, both obviously the capture technologies there about the destruction and the sensing is really where the innovations required. And obviously one plus one can equal three there. We were both working on that to get – separately. But now together, we think we can get there more efficiently and in a more expedited fashion. But in general, yes, there were different solutions that we were working on separately, that as we come together we can get leverage from that combined spend and really that effort.

And I think Scott, I would just add that part of our innovation effort, because R&D is only one part of innovation, was through the partnerships that we have through academia, venture capital startups coming to us, and that's where I think the scale and platform of Xylem and our relationships will benefit what the legacy Evoqua business was looking to capture, around things like PFAS, but other treatment solutions facing our customers.

It makes sense. Best of luck, everybody. Take care. Congrats on the quarter.

Thank you.

Thanks Scott.

And we'll take our next question from Nathan Jones with Stifel.

Good morning, everyone.

Hey, good morning, Nate.

I'll add my congratulations to Patrick and Sandy and congratulations to Bill and Matthew.

Thank you.

Thanks Nathan.

Maybe just emerging markets outside of China. I mean, you've talked about some of the issues that China saw in the quarter and not particular to your business, I don't think, but maybe you could talk about the emerging market performance outside of China.

Yeah, I think ex-China, emerging markets has been pretty resilient for us across all different end markets, Nate. I think with the exception would probably be a little bit of weakness in the Middle East and our applied water business. But in general, if you look at the other businesses, they've been really resilient outside of China. And it's helped kind of buoy the – a little bit of the tough push to the right that we've seen in China. That's across all different regions; Africa, Northern Asia, Southeast Asia, India and Australia, New Zealand.

I think for the follow-up, I'll ask about the Idrica partnership, Xylem’s new adoption. You guys had some pretty broad presentations at ACE and at WEFTEC this year. So maybe you can talk about customer reception to those kinds of things and customer uptake for those kinds of things.

Yeah, no, it's been fabulous. Actually, it's exceeded our expectations. We've engaged over 200 customers globally, and it's – the thing I'm excited about, it's been really balanced across the globe, both the U.S., Europe, and emerging markets. We've got a tremendous pipeline built. We're working now on executing from orders to sales and deployment. I did – if you remember, I highlighted – I'm going to highlight a couple of examples. One was in the U.S. in a southeastern city, a large city, we're able to cut what I'll say, land and expand. We took the platform, the digital platform and the utility to aggregate all their applications and then making it easy for them. Then we bolted on two of our own applications, which is recurring revenue. And then from there we picked up a $40 million AMI deal. So it's kind of land and expand, but it's also pulling through our products and solutions. On the heels of that, we just also picked up in Europe from a large European utility, $20 million of treatment in metrology in southern Europe, the same situation. They have the platform implemented and we're able to leverage our relationship and pull through treatment and AMI solution. So I've talked a lot about the platform being the consolidator of utilities information. We believe that's true, but the pull through we're getting and the relationships we're building allows us to bundle our offerings, and that's really exciting.

And Nate, I – Matthew, he led the effort on cultivating the Idrica opportunity over a number of years, and obviously he's been involved in cultivating the Evoqua opportunity over a few years. What I would just offer up here is, this has always been as we've said, about helping our customers turn the lights on, on their infrastructure to understand, have a better feel for what's going on in infrastructure, so that when they spend the next dollar of CapEx or OpEx, where best to spend it. And I think the, the few opportunities that Matthew mentioned already, where it's the pull through, that is as much the opportunity as the initial services sell to the customer.

Maybe you'll have to add a discussion on the revenue synergies from Idrica to the revenue synergies from Evoqua at the Analyst Day next year.

Yeah, I think, but I think it's a good comment, because we do think the platform has scalability into the industrial and building services business. Obviously we're going to stay focused on utilities at first. So we stay focused and deliver, but it does have ability to expand into industrial.

Great. Thanks for taking my questions.

Thank you.

Thank you.

We'll take our next question from Joe Giordano with TD Cowen.

Hey guys. Good morning.

Hey. Good morning, Joe.

Hey. Good morning Joe.

Hey, Patrick, Sandy. I mean, thank you for everything. Congratulations. And with five simultaneous calls going on today for me, being done with earnings calls sounds wonderful. So I'm very jealous for both of you. Congratulations.

Thank you, Joe.

Thanks Joe.

Bill, maybe I'll start with you. Like as you come over from IDEX and you kind of want to bring the best of what that firm had, like how do you kind of kick-start an 80/20 kind of culture here? What's involved in really doing that and driving it to be like at the forefront?

Yeah, no, a great question. And the team had already started that initiative before I got here. They recognize that it's a core tool that ultimately frees up organizational capacity, right. Its focus is to eliminate complexity, focus on the things that matter most. There's obviously the core analytics from a product and customer perspective, but thinking about more broadly and then leveraging those tools to help enhance our strategy. So we're doing it very much like we did at IDEX, piloting it in a couple of locations. Getting folks familiar with the tools and the concepts and then rolling it out more thoroughly as we have initial successes and wins. So it is something I think that's going to have a tremendous amount of value, both on the top and bottom line, creating velocity to innovation for our customers and creating longer term returns for our shareholders.

And I think – this is Patrick.

Go ahead, Patrick.

Sorry, sorry, Joe. That's all right. I just add that I think the way I would encourage investors to look at this is we've spent the last decade building a platform that customers can access for their needs, which means growth. And when you've built that platform, then you have something to actually apply 80/20 to. And so that's why right now is the perfect time for this combination to be coming together and Bill coming in with his toolkit. The team had already been working on this, but I think what he brings to the table is going to be incredibly valuable to the enterprise in terms of value creation.

Is that concept even more applicable to the Evoqua platform? I just think of them as having been built from like almost a, we have everything kind of ethos, right, of being nationally available and having tons of different products. It just feels like given the breadth of SKUs there, like maybe something like this, whether it's keeping everything and just charging appropriately or like it just feels like it might be more appropriate for that business. Is that fair to think of it that way?

I think on balance, it'd be similar to the opportunities we have at Xylem that it's not hugely differentiated there. Obviously there's a – 80/20 is applicable to all different business models. So the service aspect versus a product based organization, it's still a tool that will drive significant value.

Okay. And then just last for me, is the infrastructure order rate, do you feel like that's stable here? It's probably a number that caught most people by surprise being that strong. So is that in dollars kind of a good number?

Yeah, the water infrastructure order rate? Yeah. It included a couple of big projects in custom pump. But in general, yeah, we're seeing good demand, resilient demand, both in developed markets and ex-China and emerging markets. So we feel pretty good and it's been pretty resilient.

Thanks, guys. I'll pass it along.

Thanks, Joe.

Thanks, Joe.

We'll take our next question from Andy Kaplowitz with Citigroup.

Good morning, everyone.

Hey, good morning, Andy.

Patrick, Sandy, congrats. We'll miss you. Matt and Bill, we're looking forward to working with you. Maybe I could start. It just doesn't look like it, but are your customers outside of China changing their behavior at all based on higher interest rates or economic uncertainty? Your new public competitor in the water space mentioned that some North American municipalities are holding off on plant upgrades and some investments. But it doesn't seem like that is what your utility or industrial companies are doing. But maybe you can give us some more color on what you're seeing.

Yeah, I would just maybe just specific to utilities and wastewater, I think, is the proxy for the question. Just a reminder that 50% of our revenue is outside the U.S. and 75% of that is OpEx, which can be a little bit different in terms of the mix. We're seeing continued resiliency in orders in developed markets leading the way with emerging markets kind of minus China, like I just said to Joe, contributing nicely. With regard to CapEx, I'd point to our treatment orders, which are up 6% in Q3. And we have a healthy funnel and pipeline up 8%. We have been reaching out to customers, kind of qualitatively a cross section of customers across the globe, and specifically in the U.S. They don't really see a major funding shift in spending. Plus the addition of stimulus money that's going to trickle in over time, Andy, I think will also help kind of keep things stable. But in general, we haven't we haven't really kind of seen anything that's alarming for us, it would be a watch item.

Andy, this is Patrick. Again, one thing I would offer to investors as you think about, I know we have some new entrants into the space. I think it's important that our investors understand that we've got the broadest water platform that's out there. And so I think drilling down into what percentage of our total revenue actually overlaps with some of our competitors that are out there is an important thing to pay attention to. The treatment bidding pipeline as Matthew alluded to, is the single most important indicator as the health of the utilities over time. And that continues to be up, I think, mid to high single digits. So that's a reflection of what the underlying health of utilities are. And again, I just offer that as something for you all to focus on.

Definitely appreciate that color guys. And then maybe I could ask you for a little bit more on what you are seeing in our applied water segment and specifically across your channel and channel inventory there. Can you give us color into sellout versus sell-in? Do you still see inventory is in balance? Do you see a period of slow orders for that segment where they just continue to be a bit lumpy?

Yeah. You know, Andy, within our applied water business, we don’t have a tremendous amount of stocking. Again, it’s if you kind of Resi commercial over the overall Xylem business, it’s only 10%, but a lot of our orders Andy or configure to order engineer to order, so therefore for a specific job. Yes, we have book and ship. It's mainly in our Resi business and a little bit commercially and a lot of that has kind of worked itself out. If you look at our compares on the Resi business, which makes up 3% of our business, we're up on a year-over-year basis and we've kind of hit the bottom when we're coming out of the downturn on Resi. But again, it's a small part of our portfolio.

I appreciate the color guys. Congrats again.

Thanks Andy.

Thank you.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Patrick Decker for closing remarks.

Well, thank you all. I mean it's been a great privilege to work with such an extraordinary set of colleagues and partners over the past nearly 10 years. I couldn't be more proud of where we are today and I'm looking forward to seeing all that Matthew, Bill and the team are going to do is they take Xylem into its next chapter. The work has never been more important as to what Xylem is doing and this company has never been better positioned to make a difference, as we're committed to doing with our customers and communities around the world. Again, I want to thank you everyone and all the very best to you and your families.

Thank you. This concludes today's Xylem third quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.