Xylem Inc. (NYSE: XYL) Second Quarter 2022 Earnings Conference Call August 2, 2022 9:00 a. m. m. ET
Participating companies
Andrea van der Berg – Vice President, Investor Relations
Patrick Decker – President and Chief Executive Officer
Sandy Rowland – Chief Financial Officer
Conference Call Participants
Deane Dray – RBC Capital Markets
Nathan Jones – Stifel
Connor Lynagh-Morgan Stanley
Mike Halloran – Baird
Scott Davis – Melius Research
Sari Boroditsky – Jefferies
Andrew Kaplowitz – Citigroup
Joe Giordano – Cowen
John Walsh – Credit Suisse
Pavel Molchanov – Raymond James
Operator
Welcome to Xylem’s 2022 quarter earnings convention call. Currently, all participants are in listen-only mode and the ground will be open for your questions after the presentation. [Operator Instructions]
I would now like to speak with Andrea van der Berg, Vice President of Investor Relations.
andrea van derberg
Hello everyone and welcome to Xylem’s 2022 quarter earnings convention call. With me is Patrick Decker, president and chief executive officer; and CFO Sandy Rowland. They will provide their perspectives on the effects of the Xylem moment in the 2022 quarter and discuss the outlook for the third quarter and full year.
After our comments ready, we will answer questions similar to the data covered through the call. [Operator Instructions] As a reminder, this call and our webcast are accompanied by a slideshow that can be viewed in the investor segment of our website, www. xylem . com.
There will be a repeat of today’s call through August 9. Note that the reproduction number is 1800-839-5676 or 1402-220-2565.
In addition, the call will be available for reading through the investor segment of our online page on Investor Events.
Continue to slide two. We will make forward-looking statements in today’s call, adding references to long-term events or developments that will or could happen in the long term. These statements relate to long-term risks and uncertainties, such as those outlined in the Xylem report. recent maximum annual report on Form 10-K and upcoming reports filed with the SEC.
Please note that the Company assumes no legal responsibility to publicly update forward-looking statements to reflect upcoming occasions or circumstances, and actual occasions or effects may differ materially from those anticipated. We have provided you with a summary of our key functionality measures, add GAAP and non-GAAP measures in the Addendum.
For the purposes of today’s call, all references will be biological and adjusted, unless otherwise stated and non-GAAP monetary knowledge has been reconciled for you and also included in the appendix segment of the submission.
Now, move on to the third slide and I’ll pass the call on to our CEO, Patrick Decker.
Patrick Decker
Thank you Andrea and good morning everyone. We are pleased to report that the team delivered very strong functionality in the current quarter in all key signs and well ahead of our forecasts. But the result is based on the momentum and underlying demand we saw in the first quarter with disciplined operational execution on forged basics and a moderate relaxation of chip source constraints.
Revenue grew 6% organically, beating our guidance. The business functionality of the team has been remarkable in all segments and innovations in M sourcing
Geographically, the expansion was broad, Western Europe grew by 9% and North America by 6%, and emerging markets, China, recorded double-digit expansion. underlying demand.
In addition to the biological expansion of earnings, the team recorded a 6% order expansion. This ordering dynamic reflects a functionality forged in the segment. compared to last year, with virtual responses accounting for more than a portion of the overall order book.
The EBITDA margin is also well above our forecasts. We achieved strong quarter-over-quarter expansion through disciplined execution. All of these smart paints generated consistent profits with a consistent percentage of $0. 66, which exceeded our expectations.
As you can see, a slow improvement in the chip source came earlier than expected and had a very positive impact on the quarter. To be clear, we don’t think the chip source will improve much faster than expected. seeing a slow improvement at the source, which reinforces confidence in our outlook for the current part of the year.
The team also implemented price movements to mitigate inflation across all segments, and I must congratulate the entire team, adding our distribution and distribution partners for managing in a dynamic market environment. We combined those disciplined moves with productivity savings by simplifying how and fully offset the quarter’s inflation. We expect demand to remain resilient due to the critical nature of the facilities our consumers expect from us.
So, as you saw in this morning’s press release, we’re expanding our biological profit margin to an increase of 8% to 10% for the full year, and we’re expanding the lower limit of our EPS diversity of $0. 10.
We’ll be back and discuss our full review of the macro environment in a few minutes, but now let me talk to Sandy to get a little more color in the current quarter.
Sandy Rowland
Thank you, Patrick. Continue to slide 4. The team has done an excellent job of meeting our commitments to disciplined execution on forged basics and ongoing demand. As a result, revenues rose globally to a higher figure in Western Europe and to a figure in the United States. In emerging markets, revenue grew by double digits, with the exception of China, which slowed due to ongoing COVID restrictions.
In a moment, I will detail the functionality by segment. But in short, utilities grew by 2%, driven by the strength of Western Europe and the United States. The industry grew by 12% thanks to increased activity in all geographies, namely in the United States, Western Europe and Latin America. Trade earnings declined by 1%, strength in Western Europe was offset by persistent supply chain situations in the United States. And the residential sector grew by 13%, driven by ad execution and conversion of the U. S. order book. USA Organic orders increased 6% in the quarter, with water infrastructure up 21% and AWS up 2%, partially offset through M
The EBITDA margin was 16. 6%, well above our indicative range, reflecting a sequential build-up of 240 core issues thanks to strong business execution and discretionary charge discipline. Price contributed sequentially to two problems of higher earnings growth. As Patrick mentioned, the combined value and productivity benefits more than offset inflation, and our eps for the quarter was $0. 66, which is above expectations.
Skip to slide 5 and I’ll review the functionality of the quarterly segment in a little more detail. Water infrastructure gain exceeded expectations and developed organically by up to 9% in the quarter. The industry remained strong, driven by continued order book conversion, and our U. S. sanitation applications business. The U. S. economy experienced double-digit expansion as supply chain constraints advanced in the quarter.
Geographically, the U. S. The U. S. and Western Europe also recorded double-digit growth, driven by transportation demand in the U. S. U. S. and processing programs in Western Europe, along with the growth of dehydration.
Emerging markets China posted single-digit gains, driven by strength in Latin America and Africa. These markets fell into the single digits, adding China, due to COVID site access restrictions there.
Second-quarter orders were up 21% organically from last year, as expansion was supported by strong underlying demand for support through primary infrastructure projects in the U. S. The segment’s EBITDA margin increased by 240 basis points, as solid value realization, volume and productivity gains more than offset inflation and investments.
Continue on page 6. In the implemented water segment, biological revenue for the current quarter increased by 7%, exceeding our expectations. Geographically, USA the advertising sector. Western Europe saw weak double-digit expansion with really broad gains across all end markets, driven by the benefits of introducing new energy-efficient products.
Emerging markets posted weak single-digit growth, driven by strong trade call. Orders increased 2% organically and continued to outperform revenue with an order-to-invoice ratio of 1. 1 for the quarter. last year. And while the realization value more than offset inflation, the volume and mix of the quarter were negative. continue to provide a sequential improvement in EBITDA, as the benefits from price movements come from our backlog.
And now, let’s move on to slide 7, and I’m moving on to cover our measurements and responses business.
We recorded an order-to-turnover ratio of 1. 4 and accumulated an order book of more than $2 billion. The segment’s EBITDA margin in the quarter was higher than expected, expanding through 120 core issues sequentially thanks to increased volumes. As the stability of the origin chain improves and we convert our order book, we will see a strong accumulation of margins in the upper volumes, as we discussed above.
Now let’s move on to slide 8 for a review of money and our balance sheet. In the current quarter, we generated loose money of $67 million, driven through profit conversion, partially offset through upper current capital. Our monetary position remains strong with $1. 1 billion in money and $1. 9 billion in money available. Net debt/EBITDA leverage is 1. 5 times.
Skip to slide 9 and I’ll pass the call on to Patrick to look forward to the rest of the year.
Patrick Decker
As you have seen, the equipment produces solid effects in a very dynamic environment. Given the importance of debates about macroeconomic uncertainty in the economy, it’s worth spending a few minutes talking about our confidence in the resilience of the underlying call. for Xylem. La facet of our sector and our business style that is discussed to the fullest in this context and for an intelligent explanation of why our business offering is at the center of a need through the vagaries of business cycles.
Towns and villages will have to provide essential water and sanitation services. Therefore, the demand related to water control tends to be resilient. It is also vital to perceive the dynamics between OpEx and CapEx throughout economic cycles, especially for water services.
OpEx spending is very stable, given the fundamental need for daily water services, capital expenditure, which accounts for about one-third of Xylem’s supply spending, is aimed at expanding or renovating infrastructure and comes with longer regulatory approvals and funding.
Therefore, spending on those projects, once approved, has not traditionally decreased significantly. And it’s not just an American dynamic, it applies globally. This is seen in Europe, either at the regional level. For example, with EU investment for recovery and resilience, and at the country point as observed in the UK’s EMP process.
Similarly, infrastructure financing is incorporated into China’s five-year plan-making cycle. And, of course, everyone is familiar with the recent federal investment in infrastructure in the U. S. The U. S. and the timelines in which the rotating state budget operates. These structural merits of the sector, however, are only a merit if our portfolio gives our clients a unique price the cycle.
For many of our customers, the price is explained in terms of efficiency. And that means modernizing your infrastructure, with virtual technologies, to make your networks more affordable. Our delays in AMI metrology offer a point of evidence on the resilience of this demand. Due to the ongoing chip source demanding situations that have affected the generation sector over the past year, our overdue orders have continued to grow.
Our data- and communications-driven AMI responses will deliver a potential and resilient sea upgrade for utilities. AMI now accounts for about one-third of all water meters in the U. S. In the U. S. , which shows progress in adoption, but also the long-term outlook. growth. Given the budgetary pressures facing the utility, whether to generate water profits or losses, wise meters will remain a primary imperative.
Another requested trend that will persist throughout the cycle and, in fact, is expected to increase is the growing reaction to climate substitution. Cities around the world are committed to net-zero emissions. At the same time, they are making an investment in mitigating the effects of climate by replacing those that already exist, such as those we saw this summer in the form of historic and tragic floods in the United States and Asia. These are generational challenges.
Innovations and new approaches are sure to solve them, as water control is the main carbon contributor and accounts for up to 10% of global greenhouse fuel emissions.
In the advertising and residential markets, cities have begun to introduce structural regulations to emissions, adding effective water control criteria for regional and structural renovations, and the application market, which produces greenhouse fuel emissions, equivalent to the entire global shipping industry. to their carbon intensity in line with the commitments of their peoples, municipalities and countries.
And at Xylem, we are absolute leaders in this area and we are in an exclusive position vis-à-vis our consumers in their sustainability commitments. You may have noticed that we released our annual sustainability report in May. Among all the progress made against our 2025 goals, I would like to point out that we have enabled our consumers to reduce their carbon footprint through 730,000 metric tons in 2021 alone through our technology. This is equivalent to taking 160,000 cars off the road. And we’re on track to help them reduce their emissions by 2. 8 million metric tons by 2025.
Therefore, taking a step back, we are very confident that the macroeconomic strength that fuels our underlying demand will continue. Xylem is also better placed than ever to create prices by helping our consumers respond to them.
So now I’m going to give Sandy back the ground to get more main points and colors about our perspectives and our guide.
Sandy Rowland
Thank you, Patrick. De accordance with our previous presentations, we provide key information for the final contract in the final application. , with a greater price/cost mix and modest improvements in the origin chain. We now expect our application business to grow in simple figures, compared to a low minimum figure.
On the wastewater side, we now expect an average single-digit expansion from a low to medium single-digit expansion thanks to higher order book conversion and resilient global demand. Water utilities, we now expect an average single-digit expansion from the plane.
Although the source has improved, delivery times are still the best and our volumes are still limited. We also expect continued momentum in our pipeline evaluation and testing business, as our end markets are increasingly focused on infrastructure and climate challenges, as evidenced by our strong order book.
Continue to slide 11. Regarding the advertising finishes market, we now expect expansion from high to low digits, above the average single-digit expansion and increased activity in the U. S. In the U. S. and Europe and a strong global demand for our solutions. We continue to expect the advertising finishes market to show mid- to upper-single-digit expansion through strong replacement activity and new introductions in the U. S. USA and Europe.
In the residential sector, our smallest finishing market, we now expect healthy demand to generate double-digit growth, above an average figure. As a reminder, most of our exposure to the residential ad and finishing market is aimed at replacement as opposed to new construction.
Now let’s move on to slide 12, and I’ll walk you through our updated tips. Our outperformance in the current quarter gives us confidence to build our full-year course for bio-earnings expansion and move to the bottom of adjusted EPS Diversity. We now expect an expansion of biological earnings of 8% to 10% for the full year, from 4% to 6%, and we have raised the bottom of our EPS diversity to $0. 10.
The buildup in reported earnings forecasts is more modest, as the strength of the dollar offsets some of our operational improvements. We have replaced our assumptions about our currency exposure basket, which is included in the appendix. These adjustments result in an additional $0. 05 headwind in the EPS consultant for the full year. And that’s at the most sensitive of a $0. 10 EPS FX headwind we discussed last quarter.
On slide 13, we show how our recommendation is broken down by segment. We now expect a higher single-digit expansion in water infrastructure, above averages, and a weak double-digit expansion in implemented water, above the top single-digit digits, thanks to disciplined business execution and conversion of the order book into continued strong demand in either segment.
We now expect the measurements and answers to be to the average single digit, from flat. This reflects the superior performance in the first part of the advanced chip source earlier than expected.
For 2022, we are raising the decreasing end of our adjusted EBITDA margin diversity, which is now 16. 5% to 17%, resulting in the adjusted EPS diversity of $2. 50 to $2. 70 that I just mentioned. We now expect loose money conversion to take into account for about 90% of net income. We have approximately one month of additional stock to mitigate the threat of supply chain disruptions and ensure continuity of service to our customers.
We plan to return the conversion to old levels as the source chain stabilizes, allowing us to return to a loose money conversion of at least 100%. We provide you with a number of other assumptions for the whole year on the slide to complement your models. And now, looking into the third quarter, we expect the company’s overall biological profit to grow by 10% to 12%.
This includes an average single-digit expansion in water infrastructure and an average double-digit expansion in Applied Water and M
And with that, move on to slide 14, and I’ll come back to Patrick for the closing remarks.
Patrick Decker
Thank you Sandy. We have noticed the power, some short-term fluctuations during the last quarter. A small improvement in the chip source has had a big impact. Currency movements have presented what is called a challenging forecasting environment and the unforeseen duration of COVID shutdowns has held China back.
Just a quick note about China, our team and the consumers there continued to serve their communities in very difficult conditions, given the significant restrictions in position to handle COVID, I’m incredibly proud of the team. We expect the market position gradually on the part of the year and are completely confident that China will continue to be a source of innovation and growth in the long term.
In a context of short-term uncertainty, our work is required in the face of the unexpected. Being a smart operator is all about addressing those demanding situations and the team did. The team’s strong operational execution is based on the same foundation as our 2025 expansion and strategic milestones, a consistent story at the core of our investment thesis.
We are based on our leadership position as a generation company with a sustainable business model. We gain advantages from long-term secular trends of increased demand, driven by water and climate challenges. We are driving market-leading margin expansion and expansion through the digitization of our portfolio to meet our clients’ imperative to be more efficient.
We effectively position sustainable skills in the middle of everything we do, in our business, our consumers and our communities. And we will create more for stakeholders through disciplined capital allocation as the opportunity arises. seeing from the Xylem team shows our ability to make this thesis a reality.
And with that, operator, let’s open for questions and answers.
Q&A session
Operator
[Operator Instructions]. Our first comes from Deane Dray of RBC Capital Markets. Your line is open.
Deane Dray
Thank you. Hello everyone.
Patrick Decker
Hello, Deane.
Sandy Rowland
Hello, Deane.
Deane Dray
Hey, maybe we can start with the most productive news about chip supply. And we’ve heard from other brands that it’s starting gradually, and your comment is pretty consistent with that. But just a little extra color, what does it mean?How much of the virtual order eBook can you sell?
Sandy Rowland
Yes. Hello, Deane. Thanks for the question. In fact, we were very happy to see a slightly better quarter being offered. in the fourth quarter, we have less than $300 million in revenue.
We’ve recovered that and we’re reaching 350 in the current quarter. So it’s definitely a bigger step forward than we had anticipated. Looking at the current part of Deane’s year, we see a more modest buildup from the second to the third quarter and then a little bit more, some other step towards Q4.
We think we’re going to come out this year in line with what we had modeled. We were only given a larger previous source in the year. And I pay tribute to the team that has been in very close contact with all our main suppliers. supporting and being opportunistic in the spot market so that we can take care of our customers.
Patrick Decker
And I would just go up to Deane who, sorry, from my voice, in the most sensitive of that, the team has done a great job not only to get chips in the spot market, but also a lot of the redesign work that we’ve been talking about. in recent quarters it is about to be completed. So, there was an additional charge in the quarter for that, however, it was there to make sure we secured the source to our customers. And we’ve also sent out more mechanical meters in the meantime to close that hole while waiting for the chip to pass. So there were a number of dynamics, but as Sandy explained, things have taken a step forward and we now feel more confident than before.
Deane Dray
It’s useful. And just the context of that and I don’t know if you can give exact numbers, however, we expect the profitability of those virtually improved products and facilities to be about 50% more successful than the legacy, I don’t need to say it of stupid products. and installations, but not virtual. Is this magnitude still a margin difference on the virtual side?
Sandy Rowland
Yes. Deane, the margins are much richer on the virtual side. And we saw it in our M mix.
Patrick Decker
If anything has gained, the order book has strengthened, especially with some of the big deals we’ve closed in recent quarters and the bidding line is still very powerful physically, the fact that we’re still ahead in terms of conversion to MI, especially in the U. S. on the water side. So we hope that track will be there for a while.
Deane Dray
And then the last consultation for Sandy, at Loose MoneyArray, we’ve noticed that top corporations in this earnings season lowered their loose money forecasts, all because of higher operating capital commitments, either supply chain inefficiencies and strong demand. Simply, how do you need – expecting a one hundred percent return of loose moneyArray, does it really depend on the chain of origin?And what would be the deadline?
Sandy Rowland
Ouais. Je think it’s a wonderful question, Deane. When we developed our plan for 2022, we expected the supply chains to be significant, particularly moving forward in the current part of the year. And we still don’t see big adjustments. And therefore, it is prudent to keep more stock in order to generate profits and meet our order book.
So a couple of things are happening. The deadlines are still extended. We have disorders where we are missing one or two key parts and we cannot offer the complete solution.
And, of course, inflation is increasing the overall balances of our inventory. But we’re going to reduce that. We expect it to be in 2023 at the latest and it will be a key detail for our teams. This is something we plan to do for a long time.
Patrick Decker
And from a Deane segment standpoint, that was a notable peak at Applied Water, where again, we had ongoing ripple effects, whether they were instances of the origin chain coming out of China because of COVID. Obviously, we expect them to continue at the middle moment.
And that’s why, according to Sandy, we’ve brought an additional month of stock to this company. So it’s very visible. We know exactly what it is. It is totally under control. It’s just a matter of sense to do this to get consumers and that demand.
Deane Dray
It is ok. It’s a beautiful color. Thank you.
Patrick Decker
Ok thanks.
Operator
We’ll take our next Nathan Jones with Stifel. Su line is open.
nathan jones
Hello everyone.
Patrick Decker
Hello, Nathan.
Sandy Rowland
Hello Nath.
nathan jones
go to m
Can you tell us about the way forward to get back to the profitability goals you set on Investor Day?How long does it take you to succeed at this kind of expected margin point in the company?
Sandy Rowland
Ouais. Je clearly thinks about a very important issue, Nath. I think one thing I have to say is that I already noticed from the lowest point in the fourth quarter, three hundred basic margin expansion problems from the quarter to the moment. quarter.
And that’s evolving because of the higher volumes, partially limited by some of the things we referred to earlier in the so-called mechanical mix of redesign prices in optimal production flows.
But as we look at the current part of the year, there’s not as much recovery from a earnings perspective, but we expect margins to continue on the same trajectory we’ve identified from the quarter to the second quarter.
And I’m not going to give any indication about 2023 on this call. But when it comes to 2024, 2025, we don’t see anything structurally different as to where margins deserve to land in that period.
nathan jones
It is ok. One of the biggest prospects for investors is Europe and the industry, not only does it not see this. I think that was one of the most powerful spaces in terms of expansion of the quarter and forged orders there. Maybe you can tell us about the trends you see. And then, if you can tell me about the resilience of business activity in general, especially in the business side of the company, and how would you expect me to react to the option of a recession in Europe?
Sandy Rowland
Ouais. Je I believe that for us, Europe has been a real ray of hope. And it’s not just in one segment. In fact, it’s all over the portfolio. We have noticed smart gains in Europe. We have noticed smart orders. I know, there is a lot of fear about an imaginable recession in Europe, and about the trading market in particular. I think one thing, I would say if you look at our dehydration business, for example, which is more commercial, we’ve done a lot to diversify the finishing markets there, which are much less exposed to oil and fuel than in the previous recession. I think we’ve fallen to about 1% profit in that end market. And then, of course, here too, we diversify geographically.
Patrick Decker
Again, I’d like to say, Nathan, don’t forget this publicly, however, if you go back in time and take a look at the types of previous trade recessions in 2015, 2016, our European business has held up in terms of expansion during that period, because the effects there are much less cyclical given the end market exposure we have. that you are in the midst of a trade recession.
So we feel pretty smart about it. We think it would be just as resilient again. I think, as you well know, if we first saw a slowdown in orders that we’ve noticed so far, it would be, it would be in our short-cycle activities, that it would be more implemented for water and dehydration.
And again, we haven’t noticed it yet. Our order book continues to grow in a smart ratio between order and billing, and again, there would be obvious steps we would take, if we saw those steps come to fruition, as we’ve done in the past. We can stagger investments. We still have more productivity opportunities to capture across the organization, and we’re sitting on a record backlog.
And the fact that we were able to triumph over the chip source problem, without wasting any business, and the deals and that buildup is a pretty strong factor about the resilience of our pipeline and the markets that we serve.
nathan jones
Thank you for answering my questions. I will.
Patrick Decker
Reserve Army
Operator
Let’s take the next one from Connor Lynagh with Morgan Stanley. Your line is open.
connor lynagh
Ouais. Merci. Je was just looking to communicate a little bit about money and capital allocation. So, on the money side, your forecast of loose money for the whole year turns out to anticipate a rather clever relief from the execution of the capital investment in the current part. of the year. I think it turns out to have a CapEx acceleration. Obviously, we can get to the EBITDA figure. So is it because you think you’re going to start reducing your inventory, or is it because it’s just some kind of seasonal release of current capital that you anticipate?
Sandy Rowland
Yes. No. Excellent question. We have a plan to start reducing some of our stocks in the current part of the year. This is nothing dramatic. It will take a stand over the next six months in a very slow manner. And I think we’re doing it: our groups have done a smart job on the current capital elements. We will continue to rely heavily on collections and make sure to bring them in, and that, we’ve noticed very clever effects of the pandemic on our fundraising front. And in the same way, we try to solve the problem, obtaining better situations from a paid point of view.
Possibly I would have discussed that in some other call. We have a supply chain financing program that is active and allows our supplier base to leverage our credit rating. A larger portion of our supplier base participates in this program, which will give us some extra days from a credit perspective. I think it’s all similar to caution also in terms of pricing and discretionary expenses, and CapEx spending to make sure we start to see a higher conversion of money in the current part of the year, which is also in line with our old seasonality.
connor lynagh
So, I realized, it turned out that he lowered his buyback rate in the quarter. Is it motivated by a fear about the state of the company?Is it because you’re starting to see more and more opportunities emerging in the M&A picture?Any color you think of there?
Sandy Rowland
So, we haven’t replaced our strategy, our capital allocation strategy. We typically buy back inventories in the first quarter, when we have an acquisition date in our inventory payment schedules. ended this in – in the March era. And when we take a look at our funnel of mergers and acquisitions and our pipeline, we see that it actually encourages us through the funnel, the diversity of opportunities, and that’s still a higher priority for us than buying back our inventories.
Patrick Decker
Yes, I just want to get on that, if you take a look at our balance sheet, we have over $4 billion in dry powder, and we don’t hesitate to make a deal when we want to. But, again, all this would be for adelantado. al service of our strategy that we have defined.
As Sandy said, the pipe is very active, all other sizes of opportunities in that pipeline. But again, we must continue to be disciplined and selective towards meaningful price creation. And again, as I say, it takes two to tango.
connor lynagh
Droit. Logique. Je will leave that comment with else to ask me questions. But thank you.
Operator
We will take our next Mike Halloran with Baird. Su line is open.
mike halloran
Hello, hello everyone.
Patrick Decker
Hi mike.
Sandy Rowland
Hi mike.
mike halloran
Thank you very much for that. So obviously it seems pretty self-confident in the underlying finishes in the end market. I know, he’s spent a lot of time communicating about his ability to react the way things do here and there. But obviously, accumulation is strong. Perhaps you could tell us a little about how this visibility of accumulated accumulation ends here?How does this compare to what this overall visibility looks like?point?
Sandy Rowland
I think Ouais. Je, Mike really asks smart. Nothing has been structurally replaced in our order book. If you take a look at our AWS business, which has a higher order-to-turnover ratio than other segments, and we have record order books in all 3 of our segments. And we saw a very strong order: ratios to turnover across the portfolio in the quarter from an order perspective.
When we take a look at our water infrastructure and M arrears
and then m
mike halloran
I am aware that. And then, the sequential improvement in the value-cost cadence catches up with the value aspect versus inflationary pressures. What does the dollar-based part of the year look like today when you think about it as a whole?What do you think are the margins?starting to reflect the positive values you offer?
Sandy Rowland
Oui. Je means that we are actually satisfied with what we have noticed from a pricing perspective. We look at prices more, as inflation also increases the year.
An important milestone allowed us to achieve a positive price to charge the quarter from a dollar attitude, given the magnitude of its slightly dilutive effect compared to the current quarter rate. Q3 is a small decrease from a seasonal attitude, a small decrease in the profit aspect compared to the second quarter only due to the typical seasonality of our water infrastructure business. And so, in the third quarter, we expect to remain positive in terms of value/charge on the basis of the dollar, probably still on the same order of magnitude of about 30 foundation issues this quarter in this order of magnitude dilutive of a rate attitude.
And then we believe that in the fourth quarter we will be positive from an attitude towards the dollar and impartial from an attitude towards the rate. So, very smart progress across the portfolio to succeed in this vital milestone.
mike halloran
Thank you. Yes.
Patrick Decker
If I may go back to your query about visibility and order book, I think the other size that we feel much bigger about now than even in the last trade recession is the visibility and proximity that we have with our channel partners, our channel partners. here in the U. S. In the US as well as in Europe, where we have significant oblique channel businesses. And now we have much more visibility and coordination with them than we did back then.
So we come across some surprises last time in a quarter or two, we feel much better that it doesn’t happen in the future. So, they’re also our eyes and ears about what’s on the market locally.
mike halloran
Thank you for that Patricio. Thank you Sandy.
Sandy Rowland
Thank you, Mike.
Operator
We’ll take our next Scott Davis from Melius Research. Your line is open.
Scott Davis
Hello everyone.
Patrick Decker
Hello, hello, Scott.
Sandy Rowland
Hi Scott.
Scott Davis
I mean some things, the origin chain issues, I mean, the chips that we’ve been talking about for a while, the other demanding situations of the source chain have improved a lot, the things that aren’t chips that make it imaginable to get fabrics faster and easier.
Patrick Decker
Yes. Scott some other big question. It is a combined bag. I would say that the total supply chain has advanced a bit compared to the first quarter, but it varies between the 3 segments. So, as we mentioned, the chip source is getting a little better inside. of MCS, although delivery times are still long but not worse, they are getting better and better.
And the water infrastructure, we have noticed an improvement in the delivery times of our European plant in the United States. And certainly, what our infrastructure has benefited from over the last year by providing more competitive delivery times thanks to greater vertical integration they have done within the company.
But then I would say that, as we discussed earlier, one of the reasons we do an extra month of inventory is because of the water implemented. It is not limited to water, but it is the main driver. And they are the side effects of China. , most commonly castings, but we are also seeing ongoing shipping and logistics delays that we simply have to overcome. So I’d say it’s slightly improving in all areas, though it varies from segment to segment.
Scott Davis
And we talked a little bit about Chine. Je, how does it work?When you think about their economy controlled that way and their CapEx budgets and how they think about the speed of projects and stuff when you have blockages like you had. year, do you push the projects until 2023, but then the current 2023 plan remains and then they review to catch up, everything is boosted, no?I mean, how does China work?
Patrick Decker
Yes, of course. So, and obviously, it’s a big market. Therefore, it varies depending on the finish in the vertical: the end markets we are talking about. What we found is that the look of the app is much more stable. So, right now, the challenge for us is not so much that our factories are not operational.
I think we went back to the general grades in terms of personnel and assistance in May. However, logistics and transportation are stagnant as consumers and colleagues want to be at home. This has an effect on all sorts of Scott’s projects. , but basically in government-funded projects. But that’s not a bad thing because those projects don’t happen. They just move to the right.
And we would see in the afterlife that there would be an accelerated recovery as restrictions were lifted. So we have a lot of capacity in our factories and in terms of distribution partners to get these things out. It’s just a matter of sites that aren’t open. I mean, visitor sites, utilities are not open. That’s what we’re waiting for to see recovery.
We don’t assume we’ll get much of the recovery in the current part of this year, but we expect the recovery to return strongly in 2023. But there is no structural replacement in our view of China’s attractiveness. These are just things to move to the right.
Scott Davis
It is ok. It’s useful. Good luck. Thank you.
Patrick Decker
Ok thanks.
Operator
Let’s take Brian Lee’s next one with Goldman Sachs. Your line is now open. Brain, your line is already open.
unidentified analyst
Yes. Hello. Hello. I’m Miguel for Brian. Just a quick query about the origin chain of the chips. Improving, however, some of its peers have been even more cautious when it comes to the chip source. Is there anything about the source aspect or what you’re doing in particular that’s helping you a little more recently compared to your peers?
Sandra Rowland
I can’t speak for all our colleagues. I think it worked very, as we said before, very strongly with our suppliers. The starting trajectory of the year is very much in line with what we expected. It’s been a smart task to get a bigger chip source before. METER
Patrick Decker
The only other thing I would add is that I’m careful to give too many percentages because we have smart visibility, but it’s not the best because things can change. But I think, depending on who you come with. this peer group, talks about digital, we have a little more concentration. As a result, we receive a little more influence from suppliers. And we have very strong relationships with our partners, whether it’s the direct suppliers of chips and wafers or whether it’s our partnership with Flex, we added our call and I think that gives us a more powerful platform, at least more powerful than it would be if we did everything on our own.
So, some of those things are also correct, I mean the number of calls that I and others have had with the leaders of those corporations and you just had, the team has been working on that. And we had to be more patient than we wanted. But I,” those relationships, those investments, and those relationships are starting to pay off.
unidentified analyst
Heard. Thanks a lot. I’ll do it on. Enjoy the color.
Patrick Decker
Ok thanks.
Operator
We will take our next Saree Boroditsky with Jefferies. Su line is open.
sari boroditsky
So he pointed out the strong expansion of dehydration applications in the highest geographies. Could you comment on the merit of the March quarter?And does it deserve this to remain a tailwind for the rest of the year?
Sandy Rowland
So if you look at the water infrastructure business, we’ve noticed very smart margin performance. This company has been the most resilient in the last two years. And surely, the resumption of exhaustion is a contributing factor. of hard paints has entered our dehydration business to diversify it from the point of view of the final market, from a geographical point of view. We have made specific investments in our fleet to make it more modern and up-to-date and are also seeing this merit on the leasing side. Therefore, it is certain that positive drying makes the intelligent momentum of orders continue the quarter on a global scale. Therefore, it will surely be useful for the history of margin expansion with water infrastructure.
Patrick Decker
Oui. Et, I would just add that it’s, I mean, certainly, it’s one of the shortest cycle businesses we have and it’s not immune to a cyclical slowdown, as it hits it on the way up. I think the other domain we’ve benefited from is the full integration into our sales team, specifically in North America, where I think progress has been made and led. I think there have been investments that Sandy talked about. And diversification has moved away from heavy oil. , fuel and mining and more application opportunities, where there is visibility with some of our other businesses in the portfolio. Therefore, intelligent generation of leads through the exchange of leads with our checkout service teams. We are in the early stages, but we have had a very smart expansion. rates there. We would possibly be above double digits here in the first part of the year on the orders side and we expect this to continue.
sari boroditsky
It is ok. And then obviously he talked a lot about MCS and the strong customer expansion there, but the biological colors went down the quarter. So, I was just wondering if I expected to see orders come back positive.
Sandy Rowland
I think when orders have had a real buildup of orders over the last few quarters, so even though the headlines about MCS orders may have been negative, when you look at orders from a dollar perspective, we’re still on track to go from what we’re able to convert from a profit perspective. I think we had $475 million in orders in the quarter, which is still a very smart number compared to our earnings. The pipe is still solid. We are still at the beginning of the overall AMI conversion journey. About a third of the industry switched to AMI in North America. Therefore, there is still a long way to go and we have a differentiated product that is gaining ground.
Patrick Decker
Oui. Et I think, as we said before, I know none of us like to talk about tough competencies from year to year, when you have big business in a quarter last year, however, there’s a detail of the nature of that in the business. And, in fact, we’re going to be even more transparent, in the future, about the length of the agreements, about the other big deals that are coming up, because it’s a big, rich pipeline right now that we’re bidding. And so, we work for up to a year and a part or so, in big big books. So, however, we were very positive on this pipeline.
Q – Sari Boroditsky
Thank you for taking my question.
Patrick Decker
Ok thanks.
Operator
We’ll take our next Andrew Kaplowitz with Citigroup. Su line is open.
Andrew Kaplowitz
Hello everyone.
Sandy Rowland
Nice day.
Patrick Decker
Nice day.
Andrew Kaplowitz
Patrick, I told you that you can let us know what you’re seeing on the municipal water front and how IAG’s investment [ph] could start coming. And how do you think progress is being made in 2023?
Patrick Decker
Sí. No, we haven’t really realized, I mean, first of all, we see that the demand for public facilities is very strong. China and it was really strong during the quarter here in North America. We haven’t noticed anything significant yet from an investment standpoint. That would be a good thing. And, we talk a lot about the infrastructure bill here in the United States. But as I mentioned in my ready remarks, it also has recovery and resilience funding in the EU in place. It has at its national point the five-year procedure of the United Kingdom, about which we are communicating. And then there’s infrastructure investment that’s built into Sean’s five-year plan-making cycle, which remains unchanged. So all of those things together, we actually think we’re aiming for a strong investment infrastructure for application spending globally.
Andrew Kaplowitz
Obtenido. Es helpful, Patrick. I know Sandy, you communicated about costs and costs. Of course, you discussed productivity in the past. It turns out it’s also getting bigger, but maybe you can communicate how hard work is limited and is driving productivity as you go and how that affects overall cost and cost dynamics.
Sandy Rowland
Oui. Je, therefore, I think we were positive in terms of costs and non-productivity costs in the quarter. So it was really encouraging. We have a portfolio of uninterrupted improvement products: projects that we lead throughout the portfolio. Some of that has been a bit limited this year, as we’ve moved engineers from uninterrupted improvement projects to redesign work.
As Patrick spoke earlier in the call, it’s that the paint is maturing and if we go through the kind of testing and certification of this process, we will be able to recover some of our resources and concentrate on continuous improvement projects. and continue to decide to improve the productivity front as well. But I think around the world, our groups are doing a smart job there and that contributes to our history of margin improvement on a quarterly basis.
Andrew Kaplowitz
Enjoy.
Operator
And we’re going to take our next Joe Giordano consultation with Cowen. Your line is open
jose giordano
Hi, guys. Hello.
Patrick Decker
Hi.
Sandy Rowland
Hi Joe.
jose giordano
So when, you think when we start, when everything normalizes in the chain of origin, you look at how it was and you think, I feel it when you think of M.
Patrick Decker
That’s a wonderful question. I think right now Joe likes it, in fact, as I watch him and Sandy can definitely comment here. , maintain morale, other people spend days, nights and weekends over and over again talking on the phone with providers. Customers are running, our sales groups are working with consumers to keep them on board. Happy person. But the courage of the team manifested itself and continued to manifest itself.
Secondly, I think the fact that there have been no cancellations in a record order book is evidence of that. And there was no drop in the margins of this e-book of orders due to the source of the chips. Our margins have been affected by some of the short-term changes. We had to make possible options to spend money on redesigns, to sell some mechanical meters at a lower margin than our other meters. So, I think everyone will be in the positive column.
I think if there were things we could have done differently, the one that comes to mind is that I think we probably wait too long to start some of the redesign work. I think we’ve all learned that the sooner you do it, the better you get because it takes time to figure it out. So that would be my high-level opinion on that, but we’re not out of it yet. So you still have time to reserve the right to smarter.
jose giordano
It’s the right color. Thank you Pat. Et and then maybe I ask you one of their maximum foreign products, you’ve heard it from other companies. local currency, so they don’t want to raise prices. I guess your margins are benefiting from that and you find yourself in a relatively more complicated situation. Do you see that?
Sandy Rowland
Joe, we don’t see anything significant on that front. We see in our end markets with our competition that they also settle for value increases. I mean no one has been immune to inflation in this market. leader where we have a competitive advantage. And so–
Patrick Decker
We have a design that is probably different from some of our peers or other corporations that you follow. And that our competitive fundamental products that we sell, for example, outside Europe. These product lines are also fundamentally European competitors. footprint, whether in Italy, or in Sweden, or in the UK. So, we’ve reduced our delivery times so we can keep shipping those things to the United States.
In North America, the markets we serve, our competition there are also U. S. -based corporations. USA Therefore, there is not a major structural disadvantage to our competition. We’re all in this together. take that for granted. We are looking for tactics to locate more, reduce prices and reduce lead times.
jose giordano
Ok thanks.
Operator
We’ll take the next one from John Walsh from Credit Suisse. Su line is now open.
John Walsh
Hello, hello and I meant neighborhood.
Patrick Decker
Reserve Army
Sandy Rowland
Ok thanks.
Patrick Decker
Enjoy.
John Walsh
A large amount of land traveled, inquire about the value of the cargo. First, I wonder if you can communicate about what you see sequentially with some of the large cargo sets, whether it’s materials, logistics, etc. And then, I know you’ve done structural pricing initiatives, how much of the value do you think is structural?And how much could be related to surcharges?Thank you.
Sandy Rowland
Yes. Thanks for the question, John. Yes, I will deal with the last one first. Fact is a more permanent construction of value. So our roadmap there. Let me give a little color from a values standpoint, we saw a strong construct in our value realization from the first quarter to the moment. We expect this to moderate in the current part of the year, as in the current part of the year, last year, we started to apply our value increases. Therefore, it will stabilize a little in the current part.
And the other thing, I would like to end by reminding people that there have been headlines about some moderation in commodity prices. We still see inflation in many other categories, freight, labor, overhead, and so on. And so, we still face an inflationary environment. But net, all things considered, we’re going to be in a better position in the moment part than in the first part.
John Walsh
Super. Et and then just as a follow-up, any color you can provide the last time we saw commodity deflation and experienced it. I mean, obviously, as you just pointed out, it’s more than raw materials, but it’s interesting historically, the price capacity.
patrick decker
Sí. Si takes an example where we were in a high price scenario and some of the rates were cancelled, we didn’t give up on the increases because of the price we were promoting to our customers, and they understood the scenario we were in. So historically, when there has been a decrease in curtain inflation, we have succeeded in holding on to it. So I think I’ve almost completely controlled doing it. But I’m sure there’s an exception or two here or there. But in the headlines, they don’t back down.
John Walsh
Super. Thank you for joining me and answering questions. Enjoy it. Welcome.
Operator
We will take our next Pavel Molchanov with Raymond James. Your line is open.
pavel molchanov
Thank you for answering my questions. Obviously, the supply chain is a problem for everyone and you probably touched on this topic a quarter ago. Do you see scenarios where some of the smaller mid-market players that may just be potential acquisition targets for you, struggle disproportionately and maybe create some sort of opportunistic scenario to account for M&A?
Patrick Decker
No. Es an attractive question. And I think this would possibly have been raised in the last quarter, when we were all even more in need in the face of supply chain challenges.
Actually, we never saw it that way. We haven’t actually seen, I mean, the corporations we’re looking for are high quality and maybe not on a large scale, but they’re also pretty smart at managing their supply chains. I mean, they’re much more focused on the product line or some offerings.
That said, I, and this perhaps relates to the question Joe asked earlier, I think we all see the chain of origin today as one of the most important and new competitive benefits a company wants to have, because if it’s chip sourcing this time, it’s going to be anything else in the way. And the global is so interdependent right now.
And we have much bigger ourselves. We still have a long way to go. But I think it would possibly be the form of a new synergy in the future, but it’s not vital in our thinking about the express pipeline that we have right now.
pavel molchanov
Heard. A follow-up in the UK in particular. The other day, one of the government’s experts published a report claiming that without the implementation of smart water meters, the UK would revel in water scarcity until the end of this decade, a rather surprising headline. of view on that.
Patrick Decker
Ouais. Je is not waiting for the wait. But what I can is that the industry leader, which is the water workplace in the UK, regulates the approximately 17 utilities that provide services in the UK. And this five-year MPA cycle where they pass there is a preventive detail from where everyone has to come with their proposals to get their investment approvals, their approved tariff tokens.
And all this is published in a very visual way about the 3 big priorities that public service focuses on, they have the mandate to have that. And we can see that in this last cycle, unlike all previous cycles, practically all public services, when you look at what they sought to solve, were problems of scarcity.
It was about water losses and how they do it all successfully and affordably. Therefore, this non-unusual topic was a big deal. And then, in some cases, the impact of climate replacement in terms of flood prevention and more resilient construction. infrastructure. So there are a lot of them. This makes it a very horny market. So I hope it was helpful.
pavel molchanov
Thank you very
Patrick Decker
Ok thanks.
Operator
We have reached our allotted time for questions. I would now like to turn to Patrick Decker for any additional or final comments.
Patrick Decker
Well, thank you all for your time today for your continued support. I know we’ve been competing here for a long time. I appreciate the questions and the interest. I hope everyone has a really fun summer. I know they want a season of equivalent earnings. Therefore, we appreciate your time and attention. And I look forward to hear from you again.
Operator
This concludes the call of the 2022 quarter earnings convention of the Xylem moment. Disconnect your lines at this time. And have a glorious day.