Xylem Pricing Spineometer: 3 of 5 Vertebrae

Xylem, a global water treatment company, had a positive Q3 2024. Revenue rose 1.3 % to $2.1 billion and earnings before interest and taxes rose 47% to $280 million over the same period last year.

A review of Xylem’s 31 October 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Mathew Pine, the CEO of Xylem since January this year, was proud of his team’s revenue growth. He stated: “The team drove high single-digit organic revenue growth reflecting a healthy balance of both volume and price.” Later, he quantified these claims stating, “we’re up 6% in volume and 1% in price. I think that’s a good beginning of what we’re building here on the top line and I’m super proud of our team’s top line mindset.”

Bill Grogan, CFO of Xylem, reiterated this focus by stating, “Total revenues grew 40%, and organic revenues rose 7%, exceeding our guidance and a healthy combination of volume and price.” Regarding margins and price, he stated, “EBITDA margin was 19.2%, up 290 basis points from the prior year with productivity savings, strong volume, price and mix more than offsetting inflation and investments.”

Regarding priorities, Bill Grogan signaled that productivity improvements, possibly related to synergies to be gained from a recent Evoqua acquisition, are a higher priority than price increases for driving business performance in the next year. He stated, “…price capture has been a focus with rising inflation. … just a new approach to strategic pricing. … we’re looking to offset our material inflation with price and then let productivity handle the balance of indirect and SG&A inflation and fund our investments. … it’s for us just to continue to refine our process relative to value capture for the products that we offer to our customers. We were price cost positive. We’re looking to really manage that spread going forward, and that’s really the target of the teams.”

Xylem’s end market, usable water, is anticipated to grow over the next decades. Their annual report mentions an anticipated 40% gap between water demand and supply by the end of 2030 and a doubling of demand every 20 years due to population growth, agricultural demands, and industrial growth. This translates into a 4% growth in demand year over year, similar to that of the anticipated global GDP growth.

These statements by management imply (1) a solid awareness of the impact of pricing decisions on business performance, (2) solid metrics on the role of pricing in business performance, and (3) a focus on maintaining or growing market share within a growing industry.

Industry benchmarks suggest that 15 to 75 pricing professionals should be working at Xylem. Given the complexity of their business, and given the CEO’s likely experience with the value of pricing analytics from his stents at Carrier and Trane in HVAC, we would expect to find the headcount at the upper end of this spectrum.

• Xylem operates in 150 different countries. Each country would present its own complexities in customer makeup, trading practices, and negotiation expectations.
• Xylem counts utilities worldwide along with farms, power plants, homes, food, beverage, and pharmaceuticals as their customers.
• Xylem operates in four segments: Water Infrastructure, Applied Water, Measurement and Control Solutions, Integrated Solutions and Services.
• Xylem sells many products, services, and software solutions.
• Xylem sells both directly and through distributors to end customers.

These complexities reveal the jobs pricing should address at Xylem.

1. Commercial teams would benefit from working with pricing to define commercial policy and price waterfalls that align the business strategy with revenue and channel performance at the individual country level.
2. Product development teams would benefit from pricing research and intelligence for price setting of new offering development.
3. Annual or more frequent price changes related to input cost inflation and competitive pressures would benefit from a standardized price update process at the individual offering level.
4. Sales teams and commercial planning would benefit from pricing analytics revealing price variance drivers, win/loss by price proposed, and price/mix captured per major customer. These metrics can be converted into predictive price guidance for managing customer negotiations.
5. Economic impacts, such as GDP growth, import tariffs, inflation rates, currency fluctuations, and regulatory changes, all impact business performance and pricing decisions. As such, applied economics would be useful for anticipating demand shifts and identifying appropriate pricing responses to economic changes.
6. While the management focus appears to be on revenue growth rather than profit growth, management may want to consider profit-based sales incentives to encourage better price negotiations.

Research into the investment by Xylem in pricing yielded positive but problematic results.

1. The pricing team size is within the industry benchmark but below expectations given the business complexity.
2. Pricing professionals held titles of coordinator, administrator, analyst, analytics, manager, and director. No vice president of pricing was identified
3. An overwhelming majority of Xylem’s pricing professionals were located in the States which does not align with the fact that over 40% of Xylem’s revenue is non-U.S. based,
4. The pricing team appears to be focused highly on analytics and administration. Strategic pricing questions, such as pricing at the customer level, pricing of new products, or annual price changes, appear to be managed by sales, product, and marketing teams themselves.

Given the importance and capability of pricing at Xylem as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of December 2024.

Xylem Pricing Spineometer: 3 out of 5 Vertebrae. There is much good about the pricing decisions at Xylem but there are also many opportunities for potential improvement should management determine to increase their investment in this capability.

XYL (Xylem Inc.) fell from 130 the day prior to their earnings call to 123 one week later. FY 2023 revenue of $7.3 billion with an 8.9% operating margin and P/E ratio near 36.

For FY 2023, a 1% improvement in price would yield an 11% improvement in operating profits holding all else constant at Xylem.