Xylem Inc. Aktie

Welcome to Xylem's First Quarter 2026 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Michael Travers, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's First Quarter 2026 Earnings Call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. Bill will provide the perspective on Xylem's first quarter results and discuss the second quarter and full year 2026 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 1 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 Investors section of the website. A replay of today's call will be available until midnight, May 12, and will be available for playback via the Investors section of our website under the heading Investor Events.

Please turn to Slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties and such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated.

Please turn to Slide 3. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis, unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation. Now please turn to Slide 4, and I'll turn the call over to our CEO, Matthew Pine.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Coming off a strong 2025 with sustained momentum, 2026 is proving resilient with a solid first quarter financial performance despite a dynamic external environment. Demand for our mission-critical solutions were consistent with expectations. Our teams are leveraging our reduced complexity to execute with discipline, staying close to customers as evidenced by our strong book-to-bill in the quarter and focusing on long-term value creation. We had a strong start to the year deploying capital across the business in line with our priorities.

In January, we increased our dividend by about 8%. In February, we announced a new $1.5 billion share repurchase authorization, executing on $581 million in quarter 1. This reflects our confidence in the business and our commitment to a balanced approach to capital allocation. In March, we signed an agreement to acquire a German firm that designs and manufactures highly-engineered water quality instruments. The company is a leader in submersible sensors for environmental monitoring. And the acquisition expands our role as a systems intelligence partner supporting resilient long-cycle demand and enabling higher-value digital and service solutions.

I also want to highlight how our transformation is helping advance our priorities. Our self-improvement initiatives are foundational, simplifying our structure and processes to build stronger capabilities. They've strengthened our resilience, enhancing our ability to mitigate macro uncertainty. That operational foundation is centered around making it easier to do business with us in building our growth engine. To that end, WSS booked our largest order ever this month, an outsourced water contract for $850 million delivered over 20 years. This isn't just a milestone. It reinforces that our strategy is delivering. And we continue to make progress with our disciplined approach to M&A with a solid pipeline of opportunities in place. We're progressing towards our $1 billion annual target, optimizing our portfolio and leveraging our balance sheet.

Taken together, this progress shows we are well underway in our multiyear operating model transformation, strengthening our growth engine through disciplined execution and operational rigor. I'll pass it over to Bill to take us through the details of Q1 and updated guidance.

Thanks, Matthew. Please turn to Slide 5. We are pleased with the strong start to the year. The team stayed focused despite the volatility and delivered healthy results to build off of as we progress through the year. Demand remains solid with our ending backlog up sequentially to $4.7 billion, and our book-to-bill for the quarter was above 1. Orders were flat versus last year, driven by project timing in WSS, offsetting strength in the other segments. Revenue was also flat in the quarter versus prior year, in line with expectations as we saw impacts from our 80/20 efforts in China headwinds moderating our short-term revenue outlook. This team's operational discipline delivered quarterly EBITDA margin of 20.6%, up 20 basis points versus the prior year. The improvement was driven by productivity and price more than offsetting inflation, significant mix and lower volume.

We also achieved quarterly EPS of $1.12, a 9% increase over the prior year. Net debt to adjusted EBITDA increased to 0.6x and driven by our opportunistic share repurchases in the quarter. Free cash flow was positive in the first quarter, driven by timing of accruals and lower payments, offset in part by restructuring costs and higher CapEx. And the teams continue to make progress with our working capital efficiency metrics.

Let's turn to Slide 6. In Measurement & Control Solutions, book-to-bill was below 1, but backlog remained flat sequentially at roughly $1.4 billion. Orders were up a robust 15%, driven by smart metering demand in water as we made progress on the projects that shifted out of Q4. We expect double-digit orders growth for water throughout the balance of the year. Revenue was up 1%, driven by energy metering demand, offset in part by softness in water meters. EBITDA margin was 20.9% and was 10 basis points lower than prior year, driven by unfavorable mix and inflation, offset partly by productivity and price. We also wanted to provide an update to our international metering divestiture. Due to regulatory approval timing, we now expect the deal to close at the end of Q2, which is reflected in our updated guidance.

In Water Infrastructure, orders were up 2% in the quarter, driven by strong demand in transport supported by growth in the U.S. and India. Revenue was down 1%, driven by softness in treatment related to walkaway actions, partly offset by strength in transport. Growth in the U.S. was offset by declines in China and Western Europe. EBITDA margin for water infrastructure was up 120 basis points with productivity more than offsetting inflation and mix. In Applied Water, orders were also up 2% and book-to-bill was well above 1, lifted by large projects and data center wins. Data center orders in Q1 exceeded the full year amount for all of 2025. Revenues were flat versus the prior year, primarily driven by strength in U.S. commercial buildings offsetting softness in industrial and residential end markets.

EBITDA margin was below expectations, but increased 10 basis points year-over-year, driven by productivity and price, mostly offset by inflation, volume and mix. We are confident in the segment's strong margin expansion opportunities throughout the remainder of the year. Finally, Water Solutions and Services saw an orders decline driven by capital project timing. Subsequently, WSS booked its largest order ever in April, an $850 million outsourced water contract with a 20-year service contract. Revenue declined 2% year-over-year driven by capital project timing and weather impacts on service branch operations, partly offset by strength in dewatering.

Segment EBITDA margin was 22.1%, up 40 basis points versus the prior year, driven by price, productivity and mix, offset by inflation, volume and investments. Now let's turn to Slide 7 for our updated full year and second quarter guidance. The organic outlook is largely unchanged versus what we provided at the start of the year. with minor changes to our reported figures due to the delayed divestiture closing in MCS. Full year reported revenue is now expected to be $9.2 billion to $9.3 billion, up from the prior guide of $9.1 billion to $9.2 billion, which delivers revenue growth of 2% to 3%. And while organic revenue growth of 2% to 4% remains unchanged versus prior guidance. EBITDA margin is expected to remain at 22.9% to 23.3%. This represents 70 basis points to 110 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation as well as investments in the business. And benefits from our simplification efforts will help mitigate mix pressure from MCS.

Also, there is no material impact to our projected results from recently announced changes in tariffs. Despite the benefit from share repurchases, we've chosen to keep our EPS range unchanged at $5.35 to $5.60, reflecting a prudent approach to guidance in an uncertain macro environment and not a change to our outlook for the year. Cash flow generation started strong this year. We remain committed to low double-digit free cash flow margin in our long-term financial framework and we'll make additional progress in 2026. Now drilling down on the second quarter. We anticipate revenue growth will be in the 2% to 3% range on a reported basis and roughly 1% organically. We expect second quarter EBITDA margin to be approximately 22% to 22.5%, which is up 20 to 70 basis points, driven by price realization, productivity gains and higher volumes.

Second quarter MCS EBITDA margin will be down year-over-year, driven again by the impacts from energy. However, we expect it to improve sequentially from the first quarter and return to margin expansion in the second half. These results will yield second quarter EPS of $1.31 to $1.36. We started the year with strong demand in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio and benefits from our simplification efforts. While we also continue to monitor broader market conditions and volatility, including the Middle East conflict, changes in tariffs and other inflationary pressures along with fluctuations in currency and interest rates. Overall, our expectations for the year remain positive, and we build on our strong momentum. With that, please turn to Slide 8, and I'll turn the call back over to Matthew for closing comments.

Thanks, Bill. I want to return to the core purpose of our company to empower our customers and communities to build a more water-secure world. We've been very intentional about putting customers and communities at the center of our strategy. In 1 place, you can clearly see that progress is in sustainability. Xylem's 2025 sustainability report was posted to our website on April 24. The report reflects the fundamental truth about our business. Long-term success is driven by disciplined execution, applied in service of a clear purpose that delivers meaningful outcomes for the communities we serve. .

Looking back at 2025, that alignment delivered concrete measurable results in partnership with our colleagues customers and communities, we've achieved our sustainability goals we set in 2019 around water reuse, pollution prevention and stewardship. Looking ahead, we are building on that progress through our 2030 sustainability agenda, which is focused on longer-term systematic impact around 3 signature priorities: decarbonizing the water sector; strengthening water stewardship; and expanding access to water, sanitation and hygiene. Sustaining this progress means continuing to evolve Xylem to we're positioned for what comes next especially for our customers as we leverage the simplicity we've created to the first phase of our transformation.

That's why I'm pleased to share 2 updates to the executive leadership team. To further strengthen how we serve our customers across our global footprint, Snehal Desai, assuming a more focused role as Chief Growth and Commercial Officer. In this role, Snehal will lead our enterprise growth strategy and execution, doubling down on commercial excellence, customer focus and consistent delivery of scale. At the same time, to accelerate innovation that directly translates into customer value, Sivan Zamir has been appointed to a newly created role as Chief Innovation and Product Officer. Sivan will build the capabilities required to bring differentiated solutions to market faster.

This leadership update, along with our purpose forward culture, operational rigor and disciplined capital deployment accelerates Xylem's growth engine and positions us to deliver exceptional long-term value creation. And now let's open up the call for your questions.

[Operator Instructions] Our first question comes from Deane Dray with RBC Capital Markets.

Can we get -- I'd love to hear more about this outsourced contract and congratulations. This is exactly the way you've positioned WSS to build out services. So anything about the customer? Anything on the economics? And is there a pipeline for more of these types of outsourced contracts? .

Yes. So for sure, there's more pipeline, and I pushed the team every day on that topic, Deane. Thanks for the question. I can't name the actual customer, but it is an existing customer of ours, and it's in the specialty chemical vertical. We're providing processed water for cooling and also boiler feed water in their manufacturing process. So it's a great example of our technical know-how on the front end of a capital build along with our ability to provide a long-term service tail, which is really great for the next 20 years for our business. So maybe I'll have Bill walk you a little bit through some of the numbers.

Yes, Deane. So out of the $850 million, it's about 75% service and 25% capital. right? We'll realize about 10% of the contract value this year with the balance of the capital build next year and look to flow water in 2028 to start the service tail.

Really good to hear. And then just a second question. Matthew, I'd like how you started off with using the word resilient. Can you give us a sense of the municipal demand outlook at this stage of the year? And anything on the macro. And there's nervousness about project activity away from municipal, but just the approval process, on projects? Any color there would be helpful.

Okay. Yes, I would say that the overall utility demand remains resilient, like I said in some of the opening remarks, I was with about 15 utility CEOs across all parts of the U.S., specifically a few weeks back, and we spent a lot of time together the full day. And there was really -- and these are large municipalities across the U.S. and there was really no indication of any meaningful funding pullbacks or project delays outside of some of the normal things you would expect to see. For our business in Q1, U.S. utility orders, and this is based on the MCS and the WI segments, which are really a proxy for utility orders, we were up double digits in the U.S. Our revenue was up mid-teens.

So I would tell you right there that shows the resilience of the utility demand in the U.S. If you kind of pull the lens back and look at those 2 segments I talked about, overall, WI was up 2% in orders. supported by transport in the U.S. and India. And you've heard us talk a lot about China and we've signaled that in the past, and we were down 30% year-over-year in China. So that's really the -- a big part of the drag. And then in Europe, specifically Western Europe, their short-term noise with our 80/20 initiatives.

In MCS, you heard Bill talk in the opening comments. Orders were up 15% for MCS driven by large water orders, primarily in the Southeast of the U.S. and solid energy activity. So all in all, Deane, there remains significant demand for our solutions. We're dealing with an aging infrastructure in the developed parts of the world. Western Europe and the U.S., it has to be addressed. If you look at what -- the U.S. Army Corps of Engineers says about our infrastructure, they give us a C- to a D+ depending on which part of the infrastructure you're looking at in water, drinking water, wastewater, storm water. So we talk about $1.5 trillion needed over the next decade, just in the U.S. to maintain those poor ratings. So from my perspective and from the customer's perspective, things are still pretty robust.

And the next question comes from Andy Kaplowitz with Citigroup.

Can you give us a little more color on what you're seeing in terms of price versus inflation across the company? And I know you mentioned Applied Water, Q1 margin was generally fine across the portfolio. But for instance, you thought water back to 20%, and you did acknowledge you record a bit lower than you expected. So maybe just talk about conviction staying ahead of inflation and getting that uptick in margin trajectory that you expect for the rest of the year? .

Yes. I think for the broader portfolio, we're still price cost positive from a price of material cost, including the tariff piece. Again, I think the teams have been extremely proactive and have built up a solid skill set to understand the levers, timing and process to capture the incremental value to offset inbound inflation. Obviously, we've seen it here with the escalation with Iran and fuel prices increasing, where we've seen immediate fuel surcharges go into place to offset that. So I think we're confident that we can stay ahead of inflation through price is our first lever and the teams continue to work on sourcing actions as a secondary lever.

For Applied Water specifically, as we said in the call, I think the performance was below our expectations. But I think primarily, that was more of mix within the sales on the gross margin line. I think we're confident that they're going to get back above 20% as we look at the balance year relative to the cost actions they've taken, mix normalizing some of these data center projects that Matthew highlighted in the opening comments will start to play at a little bit higher margin and they'll sequentially improve through the balance of the year.

Bill, that's helpful. And then maybe the same kind of question on organic growth for the year. You obviously mean an uptick in growth in the second half. to meet your forecast. It seems like you made progress on booking those 5 to 10 projects that you've been most focused on in MCS. Maybe give us a little more color there. And then it's nice to hear about the big capital project in WSS, but do you need a capital recovery at all in WSS to make your original, I think it was mid-single-digit organic growth for that segment? .

Yes. No, I think, again, we've seen the things that we needed to see happen here in the first quarter relative to strong MCS orders in some of those projects. that were delayed start. Now we got the orders that they're going to play out through the balance of the year. We still need to have a couple more orders hit for us to reach our back half, but relative to conversations with the team, that looks positive right the book and ship for MCS was actually up 9%. So there's a lot of traction and progress there as inventory within the channel is back to normalized levels.

I think from a broader Xylem perspective, the ramp in the second half, we're going to see a significant ramp in volume here from the first quarter. That part of our normal seasonality. If you look at the third quarter, it's basically the same revenue dollar sequentially, and we go from a 1% growth to a 5% and then we'll see the normal seasonal ramp in the fourth quarter relative to water infrastructure to get us to another mid-single-digit number. So I think relative to normal seasonality and the orders we've need to see win have progressed and give us confidence in our back half figures at this point in time.

Appreciate the color.

The next question comes from Mike Halloran with Baird.

Can you just touch on the capital allocation piece. One, could just see the magnitude of buyback in the quarter. What's the intent look like from here? Stock stays in and around where it is now? Do you see yourself being as aggressive as we move through the year? And then -- well, I'll leave that as the first question, sorry. .

Yes, I'll take that, Mike. We continue to buy in April, and we'll reassess the balance of Q2 after this month. And we're kind of looking at it a couple of ways. One is managing kind of our leverage between half a turn and 1 turn net debt to EBITDA. And then obviously, we also want to balance that with taking advantage of stock dislocation. So we'll reassess it here at the end of the month as we get into the meat -- but we've got a real healthy balance sheet, and we'll continue to deploy capital across our whole framework over the course of the year.

Makes sense. And then maybe just talk about what the optionality looks like in terms of pipeline, actionability, et cetera? And then maybe just give a little bit more context on why the tuck-in you made on the analytics side made sense to you all.

Yes. I think in my opening remarks, and I've said this in the past, we talk about $1 billion of capital deployment towards M&A. -- to help us get to the kind of mid-teens EPS growth that we outlined at our Investor Day back in 2024. So we're still tracking for that. You've heard me talk a lot about our improved internal process, where before we were a bit more top down. a bit lumpy in terms of our execution on M&A, bigger targets. And now it's much more focused in the segments with the segment presidents really owning it, working bottom up. And because of that work over the past couple of years, we have a very strong pipeline and across all of our segments. So I think that gives us a lot of confidence that will be more consistent over time with capital deployment. .

What was the second part of your question, No, the tuck-in sorry. Yes, the recent deal we -- the recent deal we did sign -- so it's a -- like I said on the prepared remarks, we signed a -- first of all, we have confidentiality provisions with the seller. So we're unable to share the targets name or a lot of the transaction details outside the purchase price that was $219 million. But it's really a highly engineered water quality instruments business. It strengthens our position in high-margin optical sensing and process applications. across clean water, wastewater environment and industry.

And I think for us, we expect pretty significant revenue synergies, although it's a small to medium bolt-on, we do expect significant revenue synergies through leveraging our industrial and utility customer base. And so I think from that perspective, it makes a lot of sense as we continue to grow our analytics part of our business.

And the next question comes from Jacob Levinson with Melius Research.

Just on measurement and control, it looks like things are stabilizing a little bit there. The order book looks pretty solid. Can you maybe just mark to market where we are in the cycle across electric and water because I know there's not necessarily synchronized right now, but it seems like there's a refresh cycle going on in electric and maybe that's coming in water. But -- how do you see that playing out this year and maybe into '27.

Yes. I mean just at the high level, if you go back to kind of 2008 and '09 with the American Reinvestment Recovery Act, kind of coming out of the great recession. The utilities on the electric side did a major push on AMI. And so you started to see a refresh there over the past, probably last year into this year in the next coming couple of years. Water was probably anywhere from 5 to 7 years behind that initial wave of AMI deployments. And so as we're moving through the next 2 to 3 years, of electric refreshes we'll start to as we exit this decade going into 2030, start to see a pickup in the refresh of water. So that's a little bit of history and some of the timing as we think about energy and the refreshes going on now. And then as we get into the end of the decade, we'll start to see a turn in a pickup on the water refresh side.

Okay. That's helpful. And just on China, I think I heard you mentioned it was down 30% this quarter. Have we bottomed in that market yet, and it's just a function of the comps today. And I guess just relatedly, how much of that 30% is the market versus some of the work you're doing to reposition that business? .

Yes. I think we'd probably say it is bottoming out, kind of bouncing at the bottom here, right, with the team making some progress in some of their focused efforts with areas where we actually have more differentiation, and we're doubling down and focusing. Relative to the -- I think we've highlighted about 1/3 is market, 1/3 is kind of actions that our competitors are taking and then 1/3 is kind of us actively walking away from business. So I think for the total Xylem, most of the pressure is here in the first and second quarter, and that comp gets easier. We said for the full year, it was about 1% headwind for sales. but that equates to, again, on the first half of the year, about 2% since it's primarily concentrated in the first and second quarters.

And the next question comes from Nathan Jones with Stifel.

I guess I'll start with an M&CS question. Obviously, seeing some pretty good order growth over the last few quarters. I mean it's been double digit for 4 quarters in a row. But the actual solar level of orders has been below the level of revenue. Can you talk about how that supports growth, how we should think about growth going forward, not just this year, but as we go into '27, '28, what kind of order rates do you need to support growth over the next couple of years?

Yes, I think long term over the cycle as things normalize, it's at high-single-digit rate. Now relative to the lumpiness of the business and large projects come in, I think you have to look at a combination of our backlog position in conjunction with orders, right, because you see our backlog increased sequentially but not in the magnitude of our -- what the implied book-to-bill because the orders we received within the quarter were things of projects that we had won that now we have kind of a go with firm commitments to start delivering within the year.

So I think it's really looking at over a kind of rolling probably 24 months looking at a high-single-digit order growth rate with a check on our backlog growth and position as that progresses as we hit some of the replenishments that Matthew highlighted.

Okay. I guess the follow-up is margins. The business already has sequentially stronger margins in the second half and the margin expansion is -- in 2026 is significantly lower in the first half than the implied expansion in the second half. So can you just talk about the contributors to the accelerating margin expansion in the second half and where we should see those materialize?

Yes. I think it's across the portfolio, but significant expansion within and water infrastructure, primarily as mix normalizes and we shift from price-driven growth to significant volume growth based upon some of the projects hitting within MCS and then within water infrastructure, getting past some of this walk away pressure in China pressure here in the first half. So that's really it's a volume and mix normalization kind of leveraging the structural costs that we've taken out last year and continue to take out in the first half of 2026.

And the next question comes from Bryan Blair with Oppenheimer.

To follow up on Nathan's question I guess I ask a little more directly. Given current visibility with MCS inclusive of mix expectations and the pending divestiture. How should we think about margin cadence through the back half? And more importantly, the -- what's the realistic exit rates or equivalently jumping off point for '27 margin?

Yes. I think as we said in the prepared remarks, MCS will sequentially increase and exit the year post the international metrology divestiture, well in excess of 25% EBITDA margins. I think that's the base rate going into next year with again, the water balance of sale normalizing and then the actions the team are taking on continued profitability improvements within the gas and electric business.

That's very encouraging. And we know your consolidated organic sales outlook is unchanged. And it doesn't sound like the moving parts within that have meaningfully shifted. But if we think about the segment expectations that you outlined last quarter, are there any shifts that you would call out, particularly curious about MCS and WSS just given the moving parts for those segments?

No, no, no major changes to the organic guide in aggregate and no major changes to the makeup between the segments.

The next question comes from William Grippin with Barclays.

Just wanted to come back to your comments on sort of price cost and really specifically kind of drilling into potential supply chain impacts here on material costs as sort of global supply chains continue to be disrupted. I know you've got some locked in sort of fixed price arrangements for materials. But could you elaborate a bit on how long do those last? How much does that insulate your business and what is your sort of visibility to managing any increase in raw materials costs post any of the fixed price arrangements?

I think we have some forward fixed contracts, but that's limited on some of our raw commodity exposures. I think our supply chain team does a phenomenal job at looking for alternate sources and competitive bids to help mitigate just increase in prices through dynamic supply chain management. But again, our first and fourth lever on this is incremental pricing again, the practice the team has had post COVID supply chain challenges, inflationary drivers now with tariffs and then now potential increased inflation due to rising fuel costs and the ripple effect that, that has across the industrial supply chain. .

I think we're confident that we can continue to offset that. The magnitude could compress margins slightly as we're not getting incremental flow-through of 40% on that on those types of price increases. But relative to dollar for dollar, right now, our expectations that we can manage. Obviously, we'll see the next 4 weeks, I think, will be critical to see what happens with the conflict of the [indiscernible] opens up. But again, relative to the actions that we've taken internally, I think we're as prepared as we can be in the nimbleness of our new organizational construct.

I appreciate that. And then just wanted to follow up on 80/20. I know you had previously talked about 2026 being sort of the peak of walk away. I think that was a 200 basis point offset to the organic growth guidance. Could you just talk about the cadence or timing of that walk away? Is that primarily in the first half or evenly spread throughout the year?

No, I think it's more weighted to the first 2 to 3 quarters of the year. There's some longer-tail stuff within the treatment business within water infrastructure that will maybe extend past that, but we're more heavily weighted here in the first half of the year.

We'll wrap up there. Thanks for your questions, and thank you to everyone who joined today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, everyone, and welcome to Xylem's Fourth Quarter 2025 Results Conference Call.

[Operator Instructions]

Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Mr. Keith Buettner, Vice President, Investor Relations and FP&A. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's Fourth Quarter 2025 Earnings Call. With me today are Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's fourth quarter and full year 2025 results and discuss the first quarter and full year 2026 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 on the Investors section of our website. A replay of today's call will be available until midnight, February 24, and will be available for playback via the Investors section of our website under the heading Investor Events.

Please turn to Slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated.

Please turn to Slide 3. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis, unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation.

Now please turn to Slide 4, and I will turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered an outstanding fourth quarter to close a record year for Xylem. We delivered strong Q4 performance across all major metrics. The team executed with discipline across the portfolio, both in the quarter and full year. The record results demonstrate the impact of our operating model transformation, which represents Phase 1 of our plan to deliver Xylem's long-term framework. That first phase has been about transforming Xylem's operating model, our high-impact culture, a simpler, scalable structure and improvements in our business processes and cornerstone systems.

We've simplified Xylem, increasing speed and accountability. The numbers we posted this morning reflect the ground we've already taken, and there's more to come in 2026. In parallel, we're entering Phase 2, strengthening our growth engine by leveraging improvements in our operating model, focusing on sales force effectiveness, product management and innovation.

Phase 3 will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation and deepening exposure to the most attractive future water markets. We're tracking to the framework we laid out almost 2 years ago, and we have plenty of runway ahead.

As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower quality revenue. That creates a short-term top line headwind as we've communicated previously, but it drives higher quality earnings.

Looking ahead to 2026, we see resilient demand in our largest end markets, strong backlog conversion and continued traction from our transformation efforts. I'll leave the detailed guidance to Bill, but at a high level, we will build on our commercial and operational momentum, growing the top line and expanding margins again in 2026. With that, Bill will take you through the quarter and full year and also our 2026 outlook in more detail. Bill?

Thanks, Matthew. Please turn to Slide 5. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year, delivering record revenue, EBITDA and earnings per share for the fourth quarter and the full year. Demand remains positive with our backlog finishing at $4.6 billion. Our book-to-bill was near 1, both in the quarter and for the full year.

Orders were healthy, up 7% in the quarter, driven by over 20% growth in MCS. And for the year, orders were up 2%. Revenue grew 4% in the quarter despite a challenging comparison of 7% growth in the same period last year. Full year revenue growth was solid at 5%. Full year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors. The team's operational discipline delivered quarterly EBITDA margin of 23.2%, up 220 basis points versus the prior year. The improvement was driven by productivity and price more than offsetting inflation. Full year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors.

We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape with net debt to adjusted EBITDA of 0.2x. Year-to-date free cash flow decreased by 2% from the prior year, in line with expectations, driven by outsourced water projects, system investments and restructuring costs, offset by higher net income.

Let's turn to Slide 6. In Measurement & Control Solutions, we continue to convert the backlog with MCS' backlog finishing the year at roughly $1.4 billion. Orders were up a robust 22%, driven by smart metering demand across water and energy. However, this was below our expectations with several projects pushing out into 2026. Revenue was up 10%, driven by energy metering demand, but supported by high single-digit gains in water as well, which offset softness in analytics related to timing effects caused by the government shutdown. EBITDA margin of 20.2% was 310 basis points higher than prior year, driven by productivity, price and volume more than offsetting mix and inflation.

In Water Infrastructure, orders were down 1% in the quarter, with softness in treatment, primarily in China, mostly offset by strong demand in transport. Revenue was flat with strong double-digit growth in the U.S., offset by an almost 30% decline in China. EBITDA margin for Water Infrastructure was up a remarkable 510 basis points, driven by productivity, price and mix, offset by inflation, volume and investments.

In Applied Water, orders were up 5% and book-to-bill was roughly 1, lifted by large projects and data center wins in the U.S. Revenues were up 3% versus the prior year, primarily driven by strength in U.S. commercial buildings. Segment EBITDA margin increased 60 basis points year-over-year, driven by productivity and price offset by inflation, volume and mix. With some of these items being nonrecurring in nature, we expect Applied Water to be back in the 20% EBITDA range in the first quarter.

Finally, Water Solutions and Services saw robust demand with orders increasing 7%, driven by strength in services. Revenue growth was strong, up 4% against a tough comp with strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year, driven by price, volume and productivity, offset by inflation and mix.

Now let's turn to Slide 7 for our 2026 segment outlook. Heading into 2026, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem, focus on our customers and drive profitable growth. We are providing full year organic revenue outlook for the segments and want to highlight that we are accelerating our 80/20 efforts around product and customer simplification. As a result, we will have an outsized headwind to our top line for the year of roughly 2%, doubling the impact we experienced in 2025. We expect this is a 1-year elevation, and we are still committed to delivering on our long-term framework.

In MCS, we expect growth in the mid-single digits. Overall, demand is positive and our pipeline remains strong, but project timing has been more variable and less predictable than we have experienced over the last few years. Our expectation is energy meters will drive a majority of the growth in 2026, and water meters will grow low single digits as expected orders from the fourth quarter pushed out into the first half of '26. We will also have an impact from our 80/20 actions, primarily in analytics, impacting overall segment growth for the year.

The first quarter will be challenged, down low single digits, we expect to see sequential revenue improvement throughout the year as project kickoffs accelerate in the back half of the year. Also, as a reminder, we expect to close on the divestiture of the international metering business at the end of the first quarter.

In Water Infrastructure, we expect low single-digit growth. We anticipate resilient OpEx and CapEx demand due to the mission-critical nature of our applications with healthy utility end markets across most regions. However, we will see headwinds from 80/20 actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market, primarily impacting the first half of the year.

In Applied Water, we expect growth in the low single digits. We see growth across developed markets, particularly in the U.S. with large projects coming online and strong growth in data centers. Similar to the story in Water Infrastructure, growth will be offset in Applied Water by 80/20 actions, exiting unprofitable business and a weak China market impacting the first half of the year.

WSS will deliver mid-single-digit growth, driven by strength in outsourced water projects and solid demand in dewatering. Though we expect this will continue to be a more variable segment quarter-to-quarter due to the project nature of our capital offerings. The segment is supported by a $1.4 billion backlog and a strong funnel across all businesses.

Now let's turn to Slide 8 for our full year and Q1 guidance for 2026. The growth outlook by segment translates into 2026 full year revenue of $9.1 billion to $9.2 billion, resulting in revenue growth of 1% to 3% and organic revenue growth of 2% to 4%. Again, this is on the low end of our long-term framework due to the 80/20 actions we are taking across our segments, but continuing to increase the quality of our earnings and simplifying our businesses to outperform our markets for the long term. EBITDA margin is expected to be 22.9% to 23.3%. This represents 70 to 110 basis points of expansion versus the prior year, driven by productivity, volume and price offsetting inflation with productivity continuing to benefit from our simplification efforts.

This yields an EPS range of $5.35 to $5.60, up 8% at the midpoint over the prior year. As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026.

Drilling down on the first quarter, we anticipate reported revenue growth will be in the 1% to 2% range on a reported basis and flat organically. We expect first quarter EBITDA margin to be approximately 20.5% to 21%, up 25 basis points at the midpoint, driven by productivity gains and impacts from our simplification efforts, offset by mix. This yields first quarter EPS of $1.06 to $1.11. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning, the durability of our portfolio and further benefits from simplification, though we are monitoring broader market conditions and volatility, including tariffs. Overall, our expectations for the year remain positive as we build on our strong results.

With that, please turn to Slide 9, and I'll turn the call back over to Matthew for closing comments.

Thanks, Bill. Before we open for questions, let me close with a broader lens. Xylem participated in the World Economic Forum Annual Meeting at Davos for the first time this year. The headlines were all about AI and geopolitics, but water emerged as a significant underlying theme. More than a dozen sessions framed water as foundational to economic growth, energy systems and geopolitical stability. That aligns directly with the research we released last month, watering the new economy, which makes a simple point. As AI accelerates growth in power generation, data centers and microelectronics, water strategy becomes business strategy.

These sectors are wrestling with availability, reliability and efficiency. They need reuse at scale, dramatic reductions in network leaks and adaptive infrastructure that automatically optimizes performance. And that's where Xylem is uniquely positioned, covering the full water value chain with practical solutions. That breadth differentiates us at a time when customers are looking for credible, scalable partners.

As we pivot further into growth, we'll keep building capability where we have structural advantage. mission-critical utility and industrial applications where reliability, compliance and life cycle costs matter most, digital platforms that help customers optimize network performance and make resilience affordable, advanced treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities. and services that turn our technology and installed base into dependable high-value outcomes for customers and durable revenues for Xylem.

We're already doing this work at scale, helping cities and industries recover water they already have, reuse what they once discarded and run their assets more efficiently. We're helping Los Angeles produce 580 million gallons of recycled water per day with plans to deliver 260 million gallons more. Smaller communities like Hot Springs, Arkansas are reducing water losses by 50% or more with far less digging costs.

On the industrial side, Silfex, a microelectronics manufacturer is reusing 80% of its process water with a Xylem ultra-pure water system. One of our aerospace customers is now avoiding more than $30 million in wastewater disposal cost with 0 liquid discharge technology. reusing more than 66 million gallons of water annually. All of these examples are responses to intensifying water trends, driving sustained demand for the solutions we provide across the water value chain. We are confident in the strength of our team and our platform to capitalize on that demand and to deliver sustainable, high-quality growth over the long term.

With that, we'll open the call for your questions.

[Operator Instructions] And our first question today comes from Deane Dray from RBC Capital Markets.

Matthew, as we do the calendar flip and as you start Phase 2, maybe you can give us a 2-year progress report, if you could, just kind of reflect on the initiatives regarding margin improvement, portfolio optimization and how you are also trying to keep your eye on growth opportunities, too.

Yes. So first, we've got a lot of work to do in front of us. I'll start there. But if you look back over the past few years, the results have really exceeded expectations from my perspective. Maybe just even starting firstly with not long ago, we were talking about the integration of Evoqua and Xylem. And we've built a great deal of muscle in terms of M&A and integration, and we really enhanced our combined culture along the way, and we delivered synergies 18 months early. So I give the team a lot of credit there starting with that integration.

And at the same time, we've made significant progress in our operational model transformation, which is really about really our culture, our high-impact culture, improving our processes and systems and our structure. And maybe I'll just maybe point to a few proof points on the progress that we've made. The first in significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day.

And in essence, an engagement rating in your employee survey is, would you recommend Xylem as a great place to work? Almost 90% of our top 150 leaders said they would. And overall company was 74%. When you're going through a significant transformation, I think that's a really good outstanding result. And the industrial sector average is around 37%. And so I think it just speaks to the resilience of our team and the culture that we're creating. Another good measure that I talk about a lot is on-time performance in terms of how we're really moving our operating model forward. And we've gained 500 basis points of on-time performance, delivering products to customers more effectively over the past couple of years.

And structurally, we've really improved moving from a highly matrix structure to a more 4 segments, 16 divisions, a single axis, reducing our spans and layers. And we reduced our -- we had several micro teams, I think 1,500 micro teams. We reduced that by 40%. So that's folks that have 4 or less direct reports. And so we've really improved our structure, our culture, processes and our systems along the way. Maybe I would just -- like I said in the prepared remarks, we've taken a lot of ground on what I would call Phase 1. It's not over. We have more work to do, but we're starting to transition into what I would call Phase 2, which is really about leveraging that simplicity that we've created, the focus, the speed and accountability to really build a growth engine in the company.

And that's focused on a few areas I would highlight at a high level. One is our sales force effectiveness. We need our sales teams 75%, 80% of the time facing the customer versus 40 or 50 or 60 doing back-office work. We need to improve our product life cycle management and innovation, really speed to customer value. So those are areas that we're -- as we pivot, we're going to be keenly focused on this year and building capabilities so we can leverage the simplicity and get back to growth.

But I'm just -- I'm very proud of the team. I appreciate the question and really the resilience they've shown not only with all the change that we had to deal with, but also the change that's been external to the company as we've dealt with over the past couple of years. So maybe I'll end it there.

That's really helpful. And then as a follow-up for Bill, maybe you can expand on the point of increasing the 80/20 walkaway revenues in the second year. Maybe it's a surprise to me, I think, because I would have thought in the first year, there'd be more opportunities for less -- identifying less profitable businesses, not having it accelerate into the second year. So maybe just kind of help put that into context. Appreciate it.

Yes. No, sure. But let me step back first and just talk about how 80/20 is really taking hold in the organization kind of 2 years into the transformation that Matthew highlighted. Each quarter, we take another step in simplifying Xylem, shifting from just leveraging 80/20 as a tool set to being a critical piece of how we run the company with a real focus on resource allocation, putting our best people and investments around the largest value-creating opportunities. We've got about 80% of the business in some phase of implementation right now with the capital and services piece of WSS, the only part of the company that fully launched, and they'll start at the end of this year after they get through their ERP upgrade. And the team continues to make solid progress leveraging the tool set, right?

We started this year with redesigning the organization and putting P&L leaders in charge of the divisions so they could have a good perspective and drive a lot of this change. They looked at the cost that they needed to support the business and optimize that overhead to get our foundation as lean as possible to make sure that we're focused on simplifying that organizational construct. As for the 2% headwind, right, a lot of that comes with an evaluation of the product and customer portfolio, really understanding the geographies where you might be underperforming, putting in a commercial filter, getting the sales and engineering teams developed and leveraging that filter to make sure that we're not taking business that we shouldn't.

We're looking at parts of the business where we have significant pass-through revenue that doesn't have significant margin. And all of those decisions take a little bit of time because you want to make sure you bleed the inventory, so you don't have an excess issue. You want to partner with your customers to make sure they're supported through the transition. So there's the cultural and adoption part of it that extends it. And then there's just the customer coordination, which really pushes it into 2026. So excited about the teams taking these actions. And ultimately, I think it's going to free up our organizational and economical capacity to better support or facilitate our longer-term growth trajectory.

Our next question comes from Scott Davis from Melius Research.

I wanted to follow up on that question because there's a certain point where 80/20 goes from being a headwind to a tailwind, meaning that you're doing better with the customers that matter the most and perhaps gaining share and such. But when is that point? Do you start to see some impacts like 2027, 2028? Or is it just too hard to say at this point now that you're kind of in the middle of it?

I would say that really 2026 is kind of an inflection point, Scott, for us. The operational transformation never ends, as you know. But we've taken enough ground where we started in the back half of 2025, and we're coming into '26 with a bit more momentum around, I would say, building the growth engine and focusing on customers what we call raving fans and actually building out our enterprise selling organization. So all that is in flight.

I think the big thing this year is about building sales force effectiveness and helping our sales organization get more oriented toward the customer, the majority of the time, meaning today, a lot of our sales teams are doing a lot of admin work, and they don't get in front of the customer, maybe 30%, 40% of the time. And the goal over the first half of this year is to change that to, say, 75%, 80%. So I think we're building momentum. And I'd say we exit 2026 with a lot of, again, momentum around building the growth engine and starting to move towards growth and leveraging this simplicity that we've created.

Okay. Yes, that makes sense. And I have to ask, your balance sheet is starting to look a little bit too good. And it looks like your stock might open up a little bit light today. I mean, what are you guys thinking as far as buyback and -- or do we want to keep the dry powder for M&A?

Yes. Maybe just to highlight that our priorities continue to be investing in our core business, followed by M&A, dividends and then lastly, share buyback. So I've said this on some other calls that our acquisition process that we put in place a couple of years ago is really maturing nicely. It's much more bottoms up. We've got a very strong actionable funnel as an outcome of this process. And we deployed about $250 million of capital last year towards M&A in the second half of the year, and we have much more than that, that's already in process for the first half of '26. So seeing good momentum there.

And we'll continue to target around $1 billion a year of capital deployment towards M&A. We won't not entertain a transformational deal, but it's not something we're focused on right now. It's more medium -- small to medium bolt-ons. With regard to your thoughts on share buybacks, we'll continue to be opportunistic. But again, we're going to be more forward leaning towards investing in the core and M&A. However, at low leverage levels, like we're seeing now, we're going to be much more active in buying back shares.

Our next question comes from Mike Halloran from Baird.

So the backlog exiting the year in context, what it means for this year and the phasing for the year is where the backlog exit rate was? Is that part of the 1Q softness? How do those sequentials work through the year? And then related, maybe just a little bit about the hesitancy on the project side and compare that to maybe what the customers are saying, the pipeline, verbal orders, however you want to put it?

Yes. Maybe I'll touch first just on the backlog positioning, and Matthew, you can comment on the project side. So first off, right, obviously, we've led backlog as we progress through this year and the lower backlog directly impacts the 2026 cadence and revenue guide. First, on MCS, we talked about them working down their backlog throughout the year, getting to a more normalized level. We highlighted really strong orders in the fourth quarter, but we actually had anticipated a few larger projects to book that push out in the first half, which puts a little bit pressure on our ending backlog and then pressure on kind of our first and second quarter revenue.

We've talked China has been really weak, especially in treatment, which is a bigger backlog business for us that probably put us at a lower backlog position. And then we talked about the walkaway revenue. Obviously, that's impacted orders first before it impacts revenue. So we've seen just a lower backlog associated with some of those actions as we progress through the back half of the last year. So I think we're in good shape to start the year. We've talked about healthy commercial funnels for both MCS and WSS, our largest backlog businesses. What we have line of sight to relative to commercial funnel, I think reasonable confidence and line of sight to the improved progression as we go through the year.

And then maybe some thoughts on China. I know you've done a lot of work already because of the environment. But what are the steps you're taking from here given the softness? And how do you see that shaking out over the next couple of years in terms of the commitment to the market, ability to manage that market given the local headwinds, both local as well as softer end markets and kind of what changes are you making?

Yes. So I think consistent with the commentary we provided for the last couple of quarters, China remains a challenging market for us, both on the orders and revenue side. It did accelerate that decline as we progress through the back half. Q4 orders were down almost 70%. Sales declined almost 30%. Part of that is just reflecting of the economic headwinds impacting utility and commercial building and industrial end markets and primarily impacting us within Water Infrastructure and Applied Water, right? Local competition continues to drive intense price competition due to the capacity that they've built. But our teams are applying an 80/20 lens to focus on higher quality, more profitable opportunities, which is creating some of the top line pressure, right?

I mean we're calling that within the China bucket, but you could probably put a little bit of that in the walk away just as we're deliberately exiting some of that low margin or negative margin business within China. As we talked about last quarter, China restructured its operations. We reduced our headcount by over 40%, just to better align with that volume contraction. But right, we're looking to reallocate the resources that are on the ground just around targeted opportunities where we think we have a technological advantage and we can provide some differentiation in certain applications where we can win and deliver stronger margin performance because of that differentiation.

And ultimately, right, China is a very large economy. We don't think there's going to be a material improvement here over the next year or 2. But longer term, it's a place that we think that Xylem will be able to grow -- get back to growth at a much higher margin profile.

Our next question comes from Andy Kaplowitz from Citigroup.

Matt or Bill, so just maybe a little more color on what's going on in smart meters. You did have solid orders, but Bill, you mentioned orders were still below what you expected. And I think peers have had even a harder time than you in water smart meters. So what are you seeing in the market between water and energy? Is your mid-single-digit revenue growth forecast for '26 contingent on converting some of these delayed projects to backlog in the first half? And does availability of memory chips impact the outlook at all?

Yes. Maybe I'll just maybe start at a high level, Andy, then I'll let Bill get into a little bit of color. But I just want to tell everyone on the call, we remain very confident in M&CS to achieve high single digits long term as a segment. The near-term outlook really reflects project timing and some of the backlog normalization coming out of COVID and walk away revenue. So it's not a change so much in underlying demand. The biggest area of walk away in the segment is in analytics. It's one of the last divisions to go into the 80/20 tool, and they're in the process of shedding organic business right now.

Although we do have a little bit of walk away in smart metering as well in 2026, and we've exited mechanical meters, and we've made a decision to be a bit more selective when we do the meter installation. A lot of times, that comes at low margin or no margin pass-through and is a drag on earnings and margins. So we've been a bit forward leaning into that. Bidding remains strong and customers are still ordering and our win rate is higher than it has been in the past.

So I think in general, things are healthy. But maybe one other comment I would make is, again, going back to this post-COVID, the backlog helped to smooth and some of the unevenness that we typically get in this segment and that can have. So I do think we do expect a bit more variability in quarter-to-quarter going forward. So maybe one other point I would make is I would highlight that in the Xylem Vue business, which doubled in 2025, we're expecting that digital business to grow 30-plus in 2026. So as we exit this year, that will continue momentum and help drive the top line of this segment as well.

And then Andy, I think your question on the memory piece, we don't see that as a material impact either from an availability or significant increase in inflation for us to have to pass on to customers.

Helpful, guys. And then, Bill, maybe a follow-up for you. You're guiding to 70 to 110 basis points of margin improvement in '26. As you know, it basically takes you past your 23% and change adjusted EBITDA margin goal for '27 in '26. So where do you go from here? Are you going to have an Investor Day? Maybe you just set new targets and maybe the entitlement of the business from when you started here, is it mid-20s or higher? How do you think about that?

Yes, I'll take it, Andy. I think from my perspective, we're already outlining an Investor Day for 2027. We'll update strategy and targets at that point. It's probably sometime in the spring of next year. We have some work ahead of us to deliver this year, and we don't want to get too far out over our skis. But as a reminder, we laid out the long-range plan at our last Investor Day in May of '24 we -- to your point, that we would move from 20%, which was the forecast of 2024 margins to 23% by the end of '27. So we're guiding this year just over 23% at the midpoint. So we're tracking ahead, and there's likely upside to our long-term targets as we exit '27.

We've made a lot of great progress. And I give the team a tremendous amount of credit, as I said with Deane's question at the beginning, a lot of change, and we've been able to execute. So I think, Andy, about just over a year from now, we'll be in a better position to update the framework and talk about margins.

Our next question comes from Nathan Jones from Stifel.

I'll start with a follow-up on the MCS orders and the smart meter projects that have pushed out. Maybe a little bit more color on what the cause of those pushing out are, if you have any insights there, degree of confidence that those things kind of come through in the first half in order to support the outlook for improved growth in the second half?

Yes. And I think there are several projects and all of them have a little bit different reasons for pushing out. There's not a common thread around it. Some of them are just relative to where they're at with several other projects going on. So I want to push out a couple of months. Some of them have reshaped the scope of the project relative to just increased inflation they've seen from tariffs and other inflation creeping up over time. So it's -- for us, it's a handful of things that we're intimately involved with the customers.

We understand kind of their project plans and some of the hesitancy, and we're working with them to shape an implementation that works with them economically and then still has an ability for us to drive kind of incremental revenue this year. So I think we have reasonable visibility. Again, this isn't 50 different projects. It's kind of 5 to 10 that we're working with the end customer that we have confidence in based upon our guide and our revenue progression for MCS through the year that we'll be able to deliver on.

Okay. I guess next question on divestitures. You guys have talked about up to 10% of revenue being a potential candidate for divestiture. Anything we should expect action on that in 2026? And if you could provide the EPS impact from the divestiture of the international automated business, that would be helpful as well.

Yes. I think we talked about, Nate, we were evaluating about 10% of the portfolio. Last year, we exited a business in the first quarter. That was about 1%. International metrology is about another percent. There's probably 2 or 3 assets that maybe another a couple of percent. So I don't think we're going to hit the 10% number. that we were looking at. But obviously, portfolio evaluation, something that we do on a recurring basis as businesses shift strategy or they want to double down in certain parts of the business, maybe an area becomes less important.

So I think it's an ongoing activity with -- I don't think anything significant outside of international metrology for this year. And then the EPS impact for international metrology is fairly small for the year. We talked about it's a $250 million business at less than 10% EBITDA margin. We'll close it at the end of the third quarter -- or excuse me, at the end of the first quarter, so you kind of got 3 quarters. So it's $0.02, $0.03.

Our next question comes from Joseph Giordano from TD Cowen.

This is Michael on for Joe. Yes, on the last call, you mentioned there was a path to higher margins for the energy meter side and MCS. And since it's mix negative versus water meters, can you just unpack that glide path higher? And what's the status of the transformation?

And your question specifically around just the improvement on the energy meter margin?

Yes. I believe on the last call, you mentioned there was a path higher for energy meters on the margin side. So I would just love to better understand where we are in that cycle.

Yes. I think there's a couple of things. One, there's some structural changes on the energy side from an engineering and a technology perspective that are going to level up, value-add value engineering projects that will lift the margin profile. We did highlight there's a couple of projects that are legacy within energy that they're working through their backlog that put pressure on margins in 2025. That will continue in the first half or first 3 quarters of 2026. So you'll see a margin progression with MCS down slightly overall in the first quarter and then sequentially build a pretty robust margins as it exits the fourth quarter with water balance, the water meter balance being back to more legacy rates and then some of the progress on the energy margin improvement taking hold.

Great. And then orders for the year ended pretty strongly. The organic guide kind of implies a ramp to the back half. Can you just unpack organic expectations? You kind of mentioned this a little bit in the beginning of the call, but by segment for Q1, I just want to understand it came in a little bit lighter than probably most were expecting. I would appreciate the color.

Yes. I think the biggest variable is probably MCS. They'll be down kind of 1 point or 2 in the first quarter relative to probably the external expectations. WSS, we talked about just the lumpiness of that business. They'll be kind of flattish with Water Infrastructure and Applied Water a little bit below their full year guide just with some of the first half pressure that they have from China.

And our next question comes from William Grippin from Barclays.

Just first one here. I did want to ask about the 4Q operating margin step down across Applied Water, MCS and WSS. Is there seasonality inherent in this business? And then maybe how should we think about that, I guess, in relation to the ongoing tailwinds of 80/20 execution?

Yes. And I would say really for WSS, it's more of a mix of business between quarters. So nothing structural there. Within Applied Water, obviously, Q4 was a bit of a blip relative to the performance that they experienced through the first half of the year and really reflected just some negative project mix and a little bit of execution timing and some onetime items. These are transitional factors, and we expect EBITDA margins to be back up in the 20% range in the first quarter and then sequentially improve throughout the year with volume increases and their productivity initiatives ramping up. So yes, it's more of a short term than anything structural. Applied Water, I think, gets back to some pretty robust margin expansion in 2026.

Got it. And then I wanted to ask also about the recent report you folks published in partnership with GWI on water demand management for data centers. I would just be curious to hear sort of your thoughts on what surprised you from that report and perhaps where you think the biggest opportunities for Xylem are to accelerate its growth might come from?

Yes. Thanks for the question. When I was at Davos, 2026 was deemed kind of the year of artificial intelligence. There were a lot of talk of pilot projects now scaling into productivity solutions, and that's why a lot of the AI build-out is racing ahead. Actually, Gartner had a recent prediction that 2026, hyperscalers would invest over $2 trillion in new data centers. But I think one big thing from the report that was pointed out that there's 2 big constraints to that $2 trillion of investment, and that's energy and water.

Up until now, energy has gotten the majority of the attention, and I think water is starting to finally be brought up in the discussion.

So the reason we commissioned the report is we have a pretty good view of the whole water value chain, and we were trying to figure it out ourselves what is the impact of this new economy and the broader AI ecosystem on the water sector. So we couldn't really find any good data. So we partnered with Global Water Intelligence and commissioned the report, and we kicked it off at Davos.

But maybe the first eye-opening stat I would point to is the demand is soaring, and it's really not so much that this new economy is more water intensive to say, some of the first or second industrial revolutions around textiles or steel mills or pulp and paper. It's really more about where the data centers and chip fabs are located is the biggest issue.

But the AI ecosystem, which is data centers, it excludes mining, but data centers, power and semiconductors will need about 30 trillion liters of water each year by 2050. That's a 130% increase in water demand and kind of frame it for everybody on the call, that's late me a year in the western part of the U.S. where it's 12 million Olympic swimming pools. So it's a significant amount of water. The interesting finding was the data centers, the actual direct use is not really the culprit. It's only 4% of the water that's needed. The other 96% is power and chip fabrication, which is predominantly actually power driven, but chip fab is set to grow by roughly 600%. So that was probably one of the biggest takeaways. I think the second, and I don't like to be chicken little.

I want to -- the second point is we can solve the problem, and we have the technology and solutions to manage the demand today and quite frankly, offset the 30 trillion extra liters that we need. And that's largely through water reuse. And I talked about in my opening remarks what we're doing in Los Angeles with reuse water there to help recharge their aquifers and also leak mitigation. These are not hard things to do. I mean, they're hard to implement. They're not hard things to do, though. And over almost 30% of water that's generated today, freshwater to send out to businesses, industry and residents is what gets leaked into the ground. And we have solutions to solve those problems like the project we talked about in the last call with Amazon.

But maybe one example I'll leave you with as I wrap this up is in Arizona, we were out there a few years ago, Intel and the city of Chandler have partnered together. So we need much more public-private partnerships. 90% of the reject water that they generate. So when you have to provide ultrapure water in chip fabrication, the reject water is very high to get to that purity. So all that reject water, Intel invested capital and OpEx to build a recycling plant that they handed over to the city to run and manage. And 96% of that water is being reused.

So we need more of that at scale to solve the problem. So again, the solutions there. It's just about getting the stakeholders at the table early in the data center planning where we talk mostly about energy, we've got to talk about water. So thanks for the question. And maybe I think the second part of your question, I'll answer. For us, it really -- inside the 4 walls of the data center, yes, we do some business, but it's really outside the 4 walls, and it's largely in our WSS segment around mining, around power generation and around chip fabrication is where you're going to see the growth within Xylem.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Matthew Pine for any closing remarks.

Thanks for your questions. We'll wrap it up there and thank everyone who joined today. And as always, we appreciate your interest in Xylem. All the very best.

And with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.

Welcome to Xylem's Third Quarter 2025 Results Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Keith Buettner, Vice President of Investor Relations and FP&A. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Xylem's Third Quarter 2025 Earnings Call. With me today are Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's third quarter results and discuss the fourth quarter and full year 2025 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 1 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 Investors section of our website. A replay of today's call will be available until midnight, November 11, and will be available for playback via the Investors section of our website under the heading, Investor Events.

Please turn to Slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note 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 3. We have provided you with a summary of key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis, unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation.

Now please turn to Slide 4, and I will turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us. I'm pleased to share that the team delivered another great quarter, continue our momentum with disciplined execution, driving strong results across the business. Revenue grew in all segments and most end markets with double-digit growth in Measurement & Control Solutions and Water Solutions and Services. We also achieved record quarterly EBITDA margin north of 23%, expanding 200 basis points year-over-year and delivering 23% EPS growth. It's a great performance by the team, supported by healthy demand. While orders were down slightly against tough comps, we saw notable growth in Measurement & Control Solutions with strong performance across smart metering, underscoring the differentiation of our core portfolio. .

We continue to see strong demand for our mission-critical solutions across all segments. These results reflect the impact of our commercial and operational momentum as well as the benefits of our ongoing simplification efforts. Our 80/20 implementations continue to drive margin improvement and focus our resources on the highest value opportunities. And we're also moving even faster than anticipated, especially with the restructuring component of our operating model transformation. These changes we've made to culture, processes and structure are enabling faster decisions, clear accountability and better service.

The team's impact on increasing quality of our customer experience is a great example. We began to set new Xylem benchmarks for on-time performance. That serves to strengthen our customer relationships and reinforce our reputation for reliability. Solid execution is deepening trust with our customers. At the same time, it's expanding margins, and they see the benefit in how we partner with them on innovation because 80/20 focuses our energy and resources on their most important challenges. As we've often said, 80/20 isn't a cost-out tool, it's about resource allocation, helping us redeploy capacity to the areas of our portfolio and customer base where value and impact are greatest, which is aligned with our strategy of portfolio optimization and disciplined capital deployment.

It's that discipline and mindset that led to divesting the international metering business, which we announced earlier this month. The sale concentrates are focused on AMI technologies in markets where we have the strongest differentiation and are best positioned for profitable growth.

Turning to our outlook. Given our performance and resilient market demand, we're raising our full year guidance for revenue, margin and EPS. Our guide reflects confidence in the team's ability to deliver our commitments even as we manage through continuing macro uncertainty. We expect our momentum to continue through the end of the year and beyond, and we're solidly on track to deliver our long-term financial framework.

With that, I'll turn it over to Bill to walk through the quarter's results, our financial position and our updated outlook in more detail. Bill?

Thanks, Matthew. Please turn to Slide 5. We're very pleased with the strong quarter and year-to-date progress. Ongoing simplification efforts have improved our organizational agility and risk management effectiveness, positioning us to navigate uncertainty with confidence. We anticipate further benefits as we continue advancing our simplification initiatives through our operating model transformation and fully leverage the advantages of our 80/20 implementations. Demand across the business is healthy, and our year-to-date book-to-bill ratio remains near 1. Orders were down 2% in the quarter, but against tough comps, with softness in China, mostly offset by growth in the U.S. and Western Europe.

Backlog remains robust, closing the quarter at approximately $5 billion. Revenue growth was strong at 7% in the quarter, ahead of our expectations, driven by outperformance in MCS and WSS. North America was particularly strong in the quarter while we grew across most regions and end markets. EBITDA margin expanded 200 basis points year-over-year, driven by productivity, pricing and volume, more than offsetting inflation, investments in mix. Increased operational discipline continues to come through in our results with Q3 EPS of $1.37, up 23% versus the prior year.

Year-to-date free cash flow was down modestly, primarily due to outsourced water projects and restructuring payments, mostly offset by higher net income and improved net working capital. Net debt to adjusted EBITDA stands at 0.4x, reflecting our strong balance sheet and capacity for continued investment.

Let's turn to Slide 6. We had fantastic results across the segments, starting with Measurement & Control Solutions. Demand for our AMI solutions remains robust as orders grew 11% organically with strength across water and energy metering. Backlog remains healthy at $1.5 billion. Revenue was also up 11% driven by energy metering demand and backlog execution. EBITDA margin was up 60 basis points year-over-year to 21.8%, driven by productivity, price and higher volumes, offset in part by mix and inflation.

As Matthew mentioned, at the end of the quarter, we signed a definitive agreement to sell our international metering business. The business, which includes water and heat meters generated around $250 million of revenue in full year 2024 with a consolidated adjusted EBITDA margin of less than 10%. We expect to close in early 2026 with a selling price of $125 million. This will drive a 100 basis point margin improvement in the MCS segment on a run rate basis. The divestiture will allow us to focus on the North American meter market where we have substantial competitive differentiation with the only FCC licensed proprietary bandwidth on our FlexNet fixed network, serving water, gas and electric utility customers. .

In Water Infrastructure, demand remains strong across most regions and end markets. Book-to-bill was above 1 despite orders declining by 2% against difficult comps. Significant softness in China and funding timing from the AMP cycle in the U.K. were the primary drivers of the decline. Revenue grew 5%, led by strong demand in transport and treatment and growth in most regions with double-digit growth in the U.S. EBITDA margin expanded a robust 400 basis points to 24.4% driven by productivity, price and mix, partially offset by inflation, volume and investments. And the team continues to get significant traction with their 80/20 efforts as treatment starts to replicate the success we have realized in transport.

Applied Water continued its turnaround in the year with orders growth in the quarter, just edging into positive territory, making it its 7th consecutive quarter of gains. The result was driven by strength in the U.S., mostly offset by a significant slowdown in China. Revenue increased 1% with growth in both the U.S. and Western Europe and strength in Building Solutions, again, partially offset by China. EBITDA margin expanded 310 basis points to 21.7%, driven by productivity, mix and price, partially offset by inflation, investments and volume. Applied Water continues to gain traction from 80/20 as it accelerates both productivity and growth.

And in Water Solutions and Services, orders were down 11% against really tough comps, driven by timing of capital projects, though year-to-date book-to-bill remains above 1. Revenue grew 10%, with contributions from capital projects to watering and services. EBITDA margin expanded 160 basis points to 26.3%, reflecting strong execution on price, volume and productivity, partially offset by inflation, mix and investments.

Let's move to Slide 7. We're updating our annualized tariff outlook based on the current rates, noting the fluid nature of the impacts, as of today, our updated annualized impact is roughly $180 million with the inclusion of additional Section 232 derivative tariffs. While there remains uncertainty around final timing and tariff levels, we are confident that the pricing actions and available supply chain levers will allow us to substantially offset the current impact, though we expect a slight margin dilutive effect. We have not seen a meaningful volume impact on the business due to tariffs, but decision-making has taken a bit longer than normal given the uncertainty.

Let's turn to Slide 8. Given our strong year-to-date performance and execution momentum, we are again raising our full year guidance. We now expect full year revenue of roughly $9 billion, representing 5% to 6% total growth and 4% to 5% organic growth. EBITDA margin is expected to be 22% to 22.3% reflecting 140 to 170 basis points of expansion versus prior year, up from the previous guide of 21.3% to 21.8%, primarily due to an acceleration of our restructuring and simplification efforts. We are further raising our EPS guide to $5.03 to $5.08, up from $4.70 to $4.85. Free cash flow margin expectation remains at 9% to 10%.

For the fourth quarter, we expect revenue of approximately $2.4 billion with 2% to 3% organic growth. And as a reminder, we grew 7% in the fourth quarter of 2024. EBITDA margin is expected to be roughly 23% and EPS is expected to be $1.37 to $1.42. We have a strong trajectory as we close out the fiscal year. While there continues to be macro uncertainty, particularly around tariffs and FX movements, the team is doing a great job controlling what we can control and building a systematic process to deliver results. We have confidence in our ability to meaningfully outperform our initial guidance set out in February, supported by strong demand, backlog execution and accelerated benefits from simplification.

Let's turn to Slide 9, and I'll turn it back to Matthew.

Thanks, Bill. Before we move to Q&A, I want to highlight some great work the team has done with Amazon and 2 of our large municipal customers on a couple of projects, we announced during the quarter. They are a great example of how Xylem's leadership in digital water solutions positions us in a global economy being transformed by artificial intelligence. Together with Amazon, we're deploying Xylem's view advanced analytics in Mexico City on Monterrey, helping these cities save more than 1 billion liters of water each year. .

This partnership is a model for how hyperscalers and communities can collaborate to ensure water security for both businesses and residents. And it's a clear example of how our solutions are creating meaningful impact for customers and communities. That's only going to become more consequential as AI infrastructure expands. Attention is focused on data centers, which is understandable. Data centers consume a lot of water, so they present clear applications for water management and reuse solutions that AI's water footprint is much, much larger.

The whole AI value chain runs on water. Alongside data center build-outs, water demand is growing across key verticals like power generation, chip fabrication and mining for essential minerals. In examples like the work with Amazon in Mexico, we see the potential for water solutions that resolve the difficult trade-offs between economic growth and community well-being by effectively providing for both. As AI shapes a new economy, we're optimistic about the opportunity to have positive impact on both customers and on the communities that they serve, increasing water security for both.

That optimism is built on both underlying macro trends and on solid foundations the team has been building, positioning Xylem for sustainable long-term growth. The word simplification can make it sound easy, but our strong performance over the last several quarters is a function of the team's dedication, drive and tireless execution. Our self-help initiatives, including 80/20, portfolio optimization and our operating model transformation are all delivering results. If anything, we're moving a little faster than expected.

Overall, we have a positive outlook for the remainder of the year, we're well on track to deliver our long-term financial framework, and we are strongly positioned to drive sustainable growth and value creation over the cycle.

With that, operator, let's open the line for questions.

[Operator Instructions] And your first question today will come from Andy Kaplowitz with Citigroup.

Nice quarter. Matt and Bill, you're now expecting 140 to 170 basis points of EBITDA margin improvement for '25. I think your Investor Day algorithm has been 100 basis points per year. And obviously, segments such as Water Infrastructure and Applied have had substantial 80/20 benefits so far. So the obvious question becomes how much improvement is still left in the tank? Can you continue to get that 100 basis points off the higher base as you go into '26 and beyond? And is it time to start thinking about a higher potential '27 adjusted EBITDA margin versus your Investor Day target?

Great question. Just as a reminder for folks that may have not heard our Investor Day numbers, we had put out 4% to 6% growth with 23% EBITDA margin by 2027. Now to be fair, we did finish 2024 at 20.6%, so there was 300 basis points up to 20.6%. We're guiding to your point, 22 plus for this year ahead of schedule. So there's likely some upside to our long-term targets. Right now, we're focused on delivering on 2025 commitments. And quite frankly, working to dial in 2026.

There's still a lot of noise out there, macro we're trying to digest. And internally, there's a lot of good things going on that we're trying to calibrate as well. And we'll have a lot more detail in February. But I would say we've made great progress. And I would -- Andy called this the first phase of our journey, and that was really around transforming our operating model, both around our culture, our processes and our structure. And this work never ends. It's always ongoing.

But what we're trying to do in the next phase of our journey as we move out of Phase 1, we've taken enough ground into Phase 2 is to leverage that simplification that we created, to drive our growth engine in what we call Phase 2. And some examples of that would be enterprise account management, targeted selling, especially with our A customers, customers we call raving fans. And to leverage what we've done in 80/20 to redeploy effort for innovation as well. So maybe the last thing I would also comment, what I would call Phase 3 is getting after a long-term competitiveness by doubling down on some of our core franchises like North America metrology.

Hence, you saw the divestiture of the international business, commercial services, our transport business, where we really have strong positions. So -- and M&A that aligns to our value mapping and leveraging the strong balance sheet that we have. So I would say that we have a lot left in the tank. There's more on margins. But more holistically, really this in our first phase of our journey and making good progress.

Very helpful. And then, Matt, you had difficult comparisons in Q3 in MCS, yet you still delivered 11% order growth. Is the strength broad-based in energy and water meters? How is that strength sets out up for 2026 in that segment? Does it mean good visibility toward growth in both smart energy and water meters in '26?

Yes. I mean, in MCS, overall demand is still healthy, right? Our pipeline is strong and the fundamental growth drivers for AMI adoption are still solid. We don't have a concern about funding here in the short term that's been raised a little bit, and we have a long way to go on AMI adoption. We're still less than 50% there. We're through the deployment calibration phase, which took almost a year, but we sit with pretty strong backlog level at $1.5 billion, which is down versus last year, but reflecting a move towards a more normalization to historical levels, kind of after the post supply chain surge in this project redeployment phase, and we're typically around 60% of the following year sales, and we're getting closer to that balance.

This order strength in Q3, up 11%, it was across both water and energy meters. We have a really strong commercial funnel and continue to gain share with our largest 4,400 municipalities that account for about 80% of the AMI market. Q4, we've talked about all year. We think we're going to be back to a book-to-bill positive. As we see some of the water meter project wins convert to orders and our energy funnel still remains robust. So Q4 is shaping up really well, are expected to be up double digits on the water side, making our water growth in the back half, kind of mid-single digits. MCS sales will be up sequentially, too, from the third quarter to the fourth quarter. And the outlook for 2026 remains in our long-term framework of high single digits.

Your next question today will come from Deane Dray with RBC Capital Markets.

That was a really nice earnings quality this quarter between organic revenue, incrementals and cash flow, so you can check the box there. Would like to hear a bit about the government shutdown. We're getting a lot of questions about that. Just kind of what are the ripple effects into -- from federal funding to state and local, have some projects being delayed because of that? And just kind of what does that mean for the setup into '26?

Yes. On the government shutdown front, we haven't seen anything meaningful. Funding mechanisms have always been slow to move in general in this space, especially with municipalities. And previously allocated funds will still make their way down to fund projects. So right now, we don't see any meaningful impact. In the near term, there could be a pause on EPA grant application reviews, but I don't see that, that's going to have any material impact on Q4 or, quite frankly, on the full year of 2026. So all in all, we feel good about the municipal resilience, not only in the U.S., but more broadly across the globe.

Really good to hear, and I appreciate the answer to Andy's question about the 80/20 implementation and entering Phase 2. But can you just step back on 80/20 because there was such high expectations, and there are still high expectations about the fundamental changes that are happening at Xylem. Broadly, what inning are you in? Have all the business has gone through their first implementation? And kind of where do you go from here in terms of further divestitures at the margin? Should we be expecting anything like that in the next couple of quarters? .

Okay. I'll start here. Deane, 80/20 is, as you can tell by the results, really starting to take hold, almost 2 years into our transformation. And I would say that each quarter, the team continues to take another step towards what we call simplifying Xylem. So it's moving from a tool set to more of a critical piece on how we run the business, which is, in my mind, more cultural. So that's very strong evidence that things are progressing in a positive way. As I said in my opening remarks, it also provides this kind of what I would call them a maniacal focus on resource allocation, which is really, really important for any company.

So to answer your question more specifically, 80% of the business is in some phase of the implementation with our dewatering business globally, our analytics business and our treatment business, the most recent divisions to start the implementation of 80/20. Treatment being probably one of the bigger divisions we have so far to date going into the tool, and we'll see some meaningful impact to that division of our company. As you see from the results, we're moving with more speed, accountability, customer focus. One thing I talk a lot about is on-time performance and quality is metrics of the health of your company.

And on-time performance with our A customers reached a record high, and it's nearing what I would deem best-in-class in terms of industrial companies performance to their customers. So yes, maybe the last thing I would say, another proof point is just the margin improvement you're seeing in the legacy Xylem businesses with Applied Water and Water Infrastructure over the past several quarters. So maybe just one thing I just want to highlight for those listening. We're going to continue to walk away from revenue, Deane. We do have divestitures. We obviously will have just about 1% this year in divestiture and about 1% of acquisition this year, kind of almost washing, but obviously, the international metrology piece will happen next year.

It is a core focus. We've talked publicly about $400 million to $600 million of things that will be pruning on the portfolio and that we're still kind of tracking there. But the walkaway business will be a little bit more in 2026 in terms of 80/20. It was just under 1% this year. It will be just over 1% next year. But just to remind everybody, that comes with higher quality earnings. And it's all about simplifying the business so we can really build the long-term growth engine and focus on our customers.

Your next question today will come from Scott Davis with Melius Research.

I'll echo the congrats not just on the quarter, but it's been a really good couple of years for you guys. I just had to ask Matthew, this is kind of a strange question, but you led in with culture, processes and structure. What do you specifically mean by structure? I think that can mean different things to different people. So some explanation.

Yes. So structure was really getting at -- we were -- prior to this year, we were kind of highly a metricized structure. So we pivoted to more of a -- we had a segment orientation but more with discrete divisions under the segment, 16 P&Ls with discrete leadership GMs. And it just drives better accountability. I think the matrix structure served us well in the past, but going forward, just to drive better accountability, better empowerment, getting to a kind of a singular access around the segments and divisions, this enables us to make faster decisions. For example, in the prior structure, we would have 20 to 25 people sign off on a delegation of authority. Now we have 4 to 5.

And so this provides us the ability to be more nimble. It makes our colleagues lives easier and make our customers happier with our service. And so those were 2, what I would call, pieces of voice of customer that we got 2.5, 3 years ago that we wanted to address.

That makes sense. And then your net debt to EBITDA, 0.4, I think you mentioned. the kind of question on priorities in the next 12 months and if you can talk to your M&A backlog or when and if you kind of switch to more of a buyback priority and just where your head is on that stuff right now?

Yes. No, it's a good question. We've always said kind of our priorities are, let's invest in the core. We like M&A. We think it will help us really grow the business in a positive way. Dividends, obviously, would be next. And then we talked about opportunistic share buyback. So that's kind of our approach. As I've mentioned in prior calls, we have put a really strong process in place. Before a couple of years ago, we were a bit more top down and M&A were much more bottoms up, assigning targets to our segment leaders that are now focused maybe not equally, but for sure, focused on organic and organic in terms of growing the business.

So we've got a very strong funnel, probably the most actionable funnel we've had and it's largely because of the new process that we've put in place. So we'll continue to be very disciplined look at things that are strategic fit, meet our hurdles. We've got such a great self-help story right now, Scott, that real focus is on small to medium bolt-ons. We talked about deploying $1 billion of capital a year, trying to create $60 million to $75 million of EBITDA. But I wouldn't rule out if there was something very strategic and transformational, we would definitely look at it, but that's not our intent. So our intent is about $1 billion of capital deployment towards M&A each year.

And your next question today will come from Nathan Jones with Stifel.

A couple of follow-ups on MCS for me. Bill, I think you mentioned in your answer to Andy's question that you're still in the kind of high single-digits framework for 2026. The book-to-bill service is about 0.83, probably gets to 0.85 if you're close to 1 in the fourth quarter. And you have talked about burning off some backlog and backlog being at a more normalized level. I'm just wondering how that -- how the math works to get to high single digits for 2026? And why there wouldn't be maybe a little bit of a reset lower because you're not burning off backlog next year? So any additional color you could give on that would be helpful. .

Well, I think the $1.5 billion that we're at right now, Nate, is still elevated relative to historical. So as we burn existing backlog and start to get the book-to-bill positive, I think that supports that high single-digit framework with. We talked about the calibration of water getting back to a more normalized growth within that framework and some of the additional projects we have on the energy side that will layer in here over the next quarter or 2, gives us real confidence to get back there next year.

Great. I guess, second follow-up on the margin profile in M&CS, 60 basis points of margin expansion. I think I probably expected that to be a little higher. I think we're probably expecting the water mix to improve a bit and, obviously, can leverage on volume given the good growth. Maybe you can just talk about what the offsets were to the margin profile for MCS in the quarter and kind of where we should be longer term for that business? .

Yes. I think the biggest lever there has been the energy water mix. We talked about last quarter, obviously, the strong performance. There was a push out in some of the lower-margin energy projects that we've talked about. I think it's calibrated and sequentially, margins for MCS should look fairly similar here with the energy water mix normalization getting back to historical levels later in 2026 with that business, though, with some of the structural changes they've made relative to 80/20, you see it come through with Applied Water and with Water Infrastructure.

MCS has just been masked a little bit with this mix challenge. So we look for them to continue to expand margins into next year as mix normalizes and the second phase of some of their 80/20 simplification efforts pull through.

Your next question today will come from William Grippin with Barclays.

Just a couple of basic ones here, but you had a little bit of M&A spending in the quarter. Just wondering if you could provide some color on what that was for?

Yes, it's primarily associated with international metering divestiture.

Got it. And on that front, are you able to quantify sort of how accretive that divestiture could be to margin for the MCS segment?

Yes. In the prepared remarks, we talked about on a run rate about 100 basis points.

And your next question today will come from Andrew Buscaglia with BNP Paribas.

On the MCS margins related to the divestment. What are -- how do we compare you guys versus your larger peers in that space? And I ask that in that can you get 2 or even above some of those peers that you comp to? And I think divesting the international piece gets you one step closer. But are there other things you think you can do? Or how should we think about that long term?

I think, Andrew, if we would bucket our margin profile, our core water business within smart metering is at or above our peer set. I think the rule of nature is obviously the international metrology business that we're divesting. Within the energy piece, we've talked about is at a lower margin profile. Obviously, the team has done a phenomenal job of identifying opportunities to increase that over time, but there will always be a gap there relative to the technology differentiation and the end market applications. But right, our core water business, the profitability is significantly higher than some of our competitors and at some of the leading margin profiles that you're probably referring to.

Yes. Okay. Okay. That's helpful. And then I was hoping you could sort of parse out where you're seeing demand pickup versus internal efforts to improve organic sales. If you could just run through some of the markets, and you talked about what was maybe a little bit better or a little bit worse than you expected, demand-wise?

From an overall demand perspective, I would say, if we ticked off -- obviously, we spend a lot of time here just talking about, hey, resilient demand within MCS is still there relative to getting -- it's actually been in excess of our long-term framework here this year with the energy meter refresh cycle and then next year getting back to a combo of high single digits for both water and energy. Water Infrastructure rate, we continue to see resilient OpEx and CapEx demand. Transport has been really strong over the last few quarters. It was 5% growth against this quarter due to its mission-critical nature of its applications and gaining shares, the team has identified several different opportunities through segmentation, different regional opportunities where they're underpenetrated.

Treatment also has had pretty strong growth as it executes its backlog and focuses on different areas of the portfolio that they have the best profitable growth outlook. They're doing a lot of portfolio and looking at different bidding practices to nail down where they have differentiation and go after those areas. Applied Water, we talked about continuing its growth streak with really strong performance in the Western world and within commercial buildings, they've seen, along with -- the biggest headwind for applied water and water infrastructure has been China with double-digit decline in sales and orders for both segments.

And just to frame kind of China overall for Xylem, it had about 2% headwind on revenue and orders growth within the quarter. So pretty material. It's a smaller part of the overall portfolio. But as that market kind of accelerated its decline from kind of a macroeconomic perspective, and then the team is getting much more disciplined with the work that we're going after has created some headwinds.

And then lastly, I'd say WSS, obviously, double-digit growth, again, continued strength with our outsourced water projects. That's ramped here over the last 2 years as they focused providing some really differentiated technology to some large customers, along with dewatering, it was up double digits again this quarter. So we've seen lots of strength across all 4 segments with the only area of watch we dial in on China. And then a little bit in our prepared remarks, just talking about large capital projects. Nothing has been canceled, but things relative to conversion from our commercial funnel to an order has taken a little bit longer is maybe one area we continue to monitor.

Your final question today will come from Mike Halloran with Baird.

Here. First, when you triangulate into all the things you just said, Bill and some of the comments earlier, is there anything to suggest about underlying dynamics in the marketplace, where you would not be at least in the range for kind of normal-ish type growth as you look to 2026. Meaning, we know China is a little bit of a headwind here, but it seems like you're talking to pretty healthy normal dynamics, resilient dynamics; however, you want to characterize it for the majority of your markets. So could you just frame that as a thought process as we head into next year?

Yes, I think you're spot on. I think the fundamental dynamics for all 4 segments are strong. Again, outside of a little bit of the China headwind, Matthew highlighted a little bit. There's probably a little bit more walk away as the teams are accelerating kind of their 80/20 progress. Obviously, you're seeing it in the margin. We expect that to continue, but as we get much more selective and make bigger strides on our customer simplification or product line simplification, there's probably, again, a little bit more headwind, a little under 1 point this year, a little over 1 point next year.

But outside of that, I think as we look out, as best as we have visibility over the next 12 months with still macro volatility, I mean, the fundamental dynamics are still strong with resilient demand within muni and I think, differentiated technology helping us on the industrial side with some of the fits and starts other companies are seeing in that space.

And what's the long-term thought process on how to manage China from here? I know it's an area of softness today. It's maybe there's some deprioritization of U.S.-based products. What's the thought on how you guys plan on addressing or attacking that market from here?

Yes. I think we're staying the course, but we're also rightsizing the business for the demand environment, Mike. We're taking restructuring actions as we speak in China to the extent of around 40% of the workforce is coming out. That's -- we don't take those decisions lightly. It's unfortunate, but it's really just an indicator of the demand that we're seeing in the market and the hyper competitiveness of the market as well. We like the market long term, but we have to size the business for the market that we're dealing with over the next balance of this year and through '26, that's the approach we've taken. .

And we'll just -- it will be a watch item for us as we head into the first half of 2026, but that's really where we are right now.

Yes. And I think that the teams are stepping back and looking at what is the greatest market opportunity where we have the technology to match that and then reallocating all of our resources around those efforts to try to spur incremental growth as we move forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Pine for any closing remarks.

Thanks for joining today. We'll wrap it up there. I appreciate the questions. And as always, we appreciate your interest and support. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, everyone, and welcome to Xylem's Second Quarter 2025 Results Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Keith Buettner, Vice President, Investor Relations and FP&A. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's Second Quarter 2025 Earnings Call. With me today are Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's second quarter results and discuss the third quarter and full year 2025 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 Investors section of our website. A replay of today's call will be available until midnight, August 14, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide 2.

We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and synergies such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated.

Please turn to Slide 3. We have provided you with a summary of key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis, unless otherwise indicated and non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation.

Now please turn to Slide 4, and I'll turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered another strong performance in Q2, continuing the momentum we built over the last several quarters. We generated broad-based organic revenue growth led by measurement and control solutions. Adjusted EBITDA margin reached a quarterly record of 21.8%, up 100 basis points year-over-year, and adjusted EPS grew mid-teens. Demand for our products and solutions remains resilient and we see a particularly solid order pace, including double-digit growth in smart metering. So we're raising our full year guidance for revenue and EPS. That raises guidance reflects our confidence in delivering strong performance balanced with prudent management of our outlook.

I'm very proud of the team for operating with discipline in a dynamic environment, navigating tariff uncertainty, inflation and speculation about the impact of trade policy on demand. Our pricing and supply chain actions more than offset inflation and tariff-related costs. Simplification efforts are driving measurable improvements in productivity and customer responsiveness and we're seeing the benefits in margin expansion and in our ability to serve customers more efficiently. As I mentioned, underlying demand signals remain resilient across our end markets. we're not seeing any material demand pull forward from the second half and our backlog remains strong.

Our guidance, which Bill will get into in a moment, assumes current and announced tariff structures remain in place. and we built in contingencies for potential volatility. We remain focused on executing the plan we laid out at Investor Day last year. The transformation of our operating model across culture, processes and structure has already had significant positive impact on our business and our results. Simplifying our operations and structure has reduced complexity, enabled faster decision-making. As an example, this quarter, we set a Xylem record for on-time performance. We're seeing the benefits of simplification and our focus, speed and margins. At the same time, we're enhancing our operational performance, we're also enhancing our portfolio for growth.

For example, with 2 recent targeted acquisitions in advanced treatment. Our strong first half performance gives us confidence in our ability to deliver both a strong 2025 and our long-term financial framework.

With that, I'll turn it over to Bill to walk through the quarter's results, our financial position and our updated outlook. Bill?

Thanks, Matthew. Please turn to Slide 5. We're very pleased with the strong quarter and first half. The team remained focused and delivered results that exceeded our expectations. Our simplification initiatives have set us up to be agile and mitigate risk in an uncertain environment. And there's still considerable impact to come as we continue to implement our operating model transformation and reap the benefits of 80/20. Demand across the business remains healthy with orders up 4% even against tough comps, and we closed the quarter with year-to-date book-to-bill near 1.

Backlog increased in all segments except MCS, where we are successfully working it down to a more normalized level. Overall, backlog remains above $5 billion. Revenue growth was strong at 6% in the quarter, ahead of our expectations, primarily driven by outperformance in MCS, but with contributions from all segments. EBITDA margin expanded 100 basis points year-over-year driven by productivity, pricing and volume more than offsetting inflation mix and investments. Increased operational discipline continues to come through in our results. With Q2 EPS of $1.26, $0.12 above the midpoint of our guidance and up 16% versus the prior year. Year-to-date free cash flow was down $61 million year-over-year, primarily due to outsourced water projects and timing of tax payments, mostly offset by higher net income and improved net working capital. Net debt to adjusted EBITDA stands at 0.4x, reflecting our strong balance sheet and capacity for continued investment.

Let's turn to Slide 6. We had outstanding results across the segments and want to start with measurement and control solutions. Demand for our AMI solutions remains robust as orders grew 12% organically with strength across water and energy metering. Backlog remains healthy at $1.7 billion. Revenue was up 10%, driven by energy metering demand and backlog execution. Adjusted EBITDA margin was better than expected at 23.1%, down just 30 basis points year-over-year, driven by inflation and mix, most offset by productivity, higher volumes and price. In Q2, we saw an acceleration in higher-margin energy orders, helping offset the negative impact of unfavorable legacy projects. Project timing and lower tariffs also helped drive favorable performance compared to our original expectations.

In Water Infrastructure, demand remained strong across most regions and end markets. Book-to-bill was above 1 despite orders declining by 2% against difficult comps. Funding delays in the U.K. and Canada were the primary drivers of the decline, and we expect that to resolve in the second half of the year. Revenue grew 4%, led by treatment demand and growth in all regions, with the exception of China, where we continue to see ongoing economic challenges. Adjusted EBITDA margin expanded 200 basis points to 21.8%, driven by productivity and price, partially offset by inflation. And the WI team continues to get significant traction with their 820 efforts.

In Applied Water, orders rose for the sixth straight quarter, up 4% with strength in commercial buildings. Revenue increased 5% with growth in the U.S. and strength in commercial buildings. Adjusted EBITDA margin expanded 420 basis points to 21.7%, driven by productivity and price, partially offset by inflation, including tariffs. This segment continues to set the pace for delivering benefits from 80/20. And in Water Solutions & Services, orders increased 5%, led by services for utility and power end markets. Revenue grew 5% with contributions from capital projects and services. Adjusted EBITDA margin expanded 60 basis points to 24.4%, reflecting strong execution on price and productivity, divestitures and revenue synergies, partially offset by inflation.

Let's move to Slide 7. As outlined in our last quarterly earnings call, we've taken proactive steps to mitigate tariff impacts, implementing targeting -- targeted pricing actions and accelerated supply chain adjustments. We're updating our annualized outlook based on the current rates, noting the fluid nature of the impacts though. We've added the impact of Section 232 tariffs and steel on steel and aluminum as well as the rest of the world. While there remains uncertainty around final timings and tariff levels, we are confident that the pricing actions and available supply chain levers will allow us to substantially offset the current impacts though we expect a slightly dilutive impact on margin.

Let's turn to Slide 8. Given our strong first half performance and execution momentum, we are raising our full year guidance. We now expect full year revenue of $8.9 billion to $9 billion, representing 4% to 5% total growth and approximately 4% organic growth. Adjusted EBITDA margin is unchanged at 21.3% to 21.8%, reflecting 70 to 120 basis points of expansion versus prior year. Our strong first half performance is mitigated a bit by the dilutive impact of tariffs. We are raising the adjusted EPS guide to $4.70 to $4.85, up from $4.50 to $4.70. Free cash flow margin remains at 9% to 10%. For Q3, we expect revenue of $2.2 billion with 4% to 5% organic growth. Adjusted EBITDA margin is expected to be 21.7% to 22.2% and adjusted EPS is expected to be $1.20 to $1.25.

There continues to be macro uncertainty, particularly around tariffs and FX movements that could impact our performance. But as the results show, the team is doing a great job controlling what we can control. We remain confident in our ability to deliver our full year commitments, supported by strong demand, backlog execution and benefit from simplification.

Let's turn to Slide 9, and I'll turn it back to Matthew.

Thanks, Bill. Building on Bill's guidance comments, we entered the second half with confidence, both in our ability to deliver a strong 2025 and also in our long-term framework that we laid out at Investor Day last year. That plan outlined how Xylem would create value by leveraging our combination with Evoqua, simplifying our business for speed and performance and delivering profitable above-market growth over the cycle.

I want to take a moment to recognize and thank the team that is driving so much momentum on all 3 of those vectors of value creation. On Evoqua, we're now 2 years post close, and the team has done an outstanding job with the integration. By the numbers, we delivered cost synergies ahead of schedule, and we're seeing the value of our combined portfolio and strong traction on revenue synergies across both industrial and utility end markets. But we also recognized a sustainable success from an acquisition of this scale requires deep cultural integration, which is why we've given so much attention to transforming our combined culture and made it an integral part of our operating model and it shows in the way our teams are working.

When you walk around our operations, you can see and feel how aligned our teams are, how quickly they're turning strategy into action and delivering results. We also use the integration as a catalyst and imperative to simplify our business. Since launching our operating model transformation last September, the changes we've made to structure, processes and systems have enabled faster decisions, clearer accountability and better service. We're seeing that show up in our performance. The second quarter is a strong demonstration of the team's increased speed and agility. In addition to the strong financial results, the team delivered a new benchmark in on-time performance. That's a clear signal that our customers are benefiting from the team's hard work and getting tangible value from our transformation.

At the same time, we're sharpening our operational discipline, we're also strengthening Xylem's growth engine. For example, we recently added 2 high-value capabilities to our platform with the acquisitions of Vaycom and Environics. Bacon brings proprietary breakthrough solutions in 0 liquid discharge which offers compelling value propositions to attractive industrial verticals like microelectronics and energy. Enviro mix represents another enhancement to our advanced treatment portfolio. The company is a leader in nonmechanical mixing and biological process solutions, which enhances our ability to serve one of the fastest-growing segments in water, advanced nutrient removal. These moves reflect our intent to continue simplifying our business for performance and agility. While we invest in the applications and end markets that will drive customer impact, profitable growth and sustainable value creation. With that, operator, let's go to your questions.

[Operator Instructions] Our first question today comes from Mike Halloran from Baird.

So first on the MCS order side of things, obviously, good orders this quarter, good absolute dollar levels of orders. Maybe you can just give an update on how you think that outlook looks today, where we have the destocking side, what are your customers saying from a forward perspective, what the replacement piece looks like? And then lastly, any updated thoughts on when you think that book to grow contract towards one again?

Yes, I'll start this out, Mike. First, let me say that we feel our demand across the board has been really resilient, especially given the volatility globally -- probably the one exception there, Mike, I would say, from a geographic standpoint would be China, which is a small portion of our business, and it's now low single digits. If you had to look at one segment in the quarter, I would say that WI being down 2 stands out, but the book-to-bill was greater than 1. And we did have a tough compare over last year.

Last year, we were up high single digits in orders in Q2 for water infrastructure. We did see some delays in the U.K., which is one of our top markets is they're moving into their AMP cycle 8. And that can be typical at the start of new AMP cycles and also, we saw some delays in Canada with their change in government. So we expect those things to snap back in the second half. But with the line of sight that we have for sure over the next 90 days, we feel the demand is pretty resilient across the board, and we'll continue to monitor it and stay on top of it really to stay close to our customers.

Yes, Mike. And specifically to MCS, I think commercial demand remains extremely strong. as we look at the back half of the year, I think we see a sequential improvement in orders. We talked about MCS continues to work down its backlog to a more normalized historical level, right? It has been inflated for the last couple of years. and they're getting close to the $1.7 billion. We have single signaled that MCS will be back to book-to-bill positive as we close the year and we maintain that expectation.

Appreciate all that color there. And then lastly, maybe just an update on where you stand on the simplification side of things, how the rollout has gone in a couple of the areas you've put it in the front half of the year and what the next steps are from here? .

Yes. I'll start it out, and then I'll let Bill give some commentary, Mike. But we're tracking ahead of the time line that we laid out in February on our Q4 earnings call. So really proud of the team for leaning into the transformation. I've been traveling quite a bit really since I became CEO, just when you're going through a large-scale transformation like this, it's good to make sure you get out and getting the pulse of the organization and I'd say our colleagues and our customers say the impact is real, and they're feeling the change. So the teams are much more focused, making decisions more quickly.

And we're seeing, again, customer metrics improve like on-time performance, as we look at our customers, they're starting to grow at a higher rate in a raving fan. So one thing I'd point to also, Mike, we just wrapped up our long-range planning last week. And where we had our 16 new division GMs present their long-range plans for the first time in our new structure. And so I walked away very energized by the depth and level of detail and how we're in the review and how we're able to really drive focus and execution. And each division really understands their position in the company, whether that's a growth position, kind of a transformation position or continuing to maintain their execution in their divisions. So all in all, making good headway.

Just from -- just if we look at specifically, from an 80/20 perspective, Matthew, I think is talking about the overall simplification on orig design, including 80/20. I'd say that from my perspective, it's really starting to take hold in the organization. Each quarter, we take another step -- we've talked a lot about internally that 80-20 is not just a tool set, but a key element of how we want to run the businesses. and embedding that in the culture. I think we're starting to get a better understanding of the power of simplification and the positive impacts it will have across our key stakeholders. And I think we see an acceleration of learning as we roll the tool set out.

The dewatering business began its journey in the second quarter. So we now have all 4 segments that have pieces that are actively engaged in the tool set. So about 80% of the business has some stage of implementation. For the most part, MCS, supplied water, water infrastructure are further along and they've made solid progress on the implementation, just identifying their largest areas of complexities. And then they've redesigned their organizations to take significant costs out and look at what the structural needs are to run their business. When you look at the margin improvement we've seen in Applied Water and water infrastructure, really the proof points of the potential we see across our businesses.

Our next question comes from Andy Kaplowitz from Citigroup.

So I just wanted to focus on applied water for a second. You always had good orders and revenue growth. I think you mentioned driven by commercial buildings. And I think supposedly you've talked about having the highest headwind from 2 on Applied Water. So maybe you could give us a little more flavor to what's going on. How does this also make you feel about affecting change with 80/20 and maybe not slowing down growth at Xylem?

That's a good question. First, I'd say I'm really proud of the Applied Water team. They've done a really nice job with 80/20, both in terms of margin but also focusing on customers. The tool is about not only simplifying, but it's about redeploying effort to focus on growth. So the growth tends to come second but we're starting to see pockets or some green shoots of that as well. This business, Andy, has the most complexity within our portfolio. and the most opportunity. So on the orders front, this is a -- I think it's a 6 quarter in a row, we're up in orders, which is a positive. I'd say it's a bit more weighted to developed markets. .

And it was across most of the portfolio, especially commercial buildings, to your point, and industrial. And on the revenue side, I would say that we've had really strong price execution here. Part of that is from the 80/20 tool. Part of it is we've just gotten especially through our new structure, just more nimble and can make faster decisions. So when you look at the headwinds from tariffs, the teams were really able to get ahead of that. We had a little -- some -- I would say, some very minor pull-ins from the second half to get ahead of tariffs in this segment, but nothing meaningful that would have any impact on the second half year. So maybe the last thing I'd say on revenue, we are walking away from volume, right?

We talked about that as part of the tool set and part of our long-range outlook is we're going to walk away from volume. So the performance has been in line with what we expect in simplifying the business will only help us continue to grow going forward.

Matt, that's helpful. And maybe just stepping back. Maybe talk about the dichotomy between developed and developing markets. I mean you said the strength really is coming from developed. Anything sort of different going on in the 2 markets and cognizant of China continued to be a bit of a headwind. Maybe you can talk about that. And I think you mentioned sort of delays in Canada and U.K. in treatment maybe just address that again. .

Yes. So the delays were -- I mean, largely funding timing. I mean the AMP cycle in the U.K., they're going to double their investments over the next AMP cycle. So pretty significant, and it's just really a timing. And we see that pick up in the second half. The same with Canada with the change in the government. Let's just push some of the traditional buy to the right and we believe that will pick back up in the second half as well, talking to folks on the ground there. And I was actually just in Toronto a couple of weeks ago. talking to some of our customers. So feel good that, that will rebound. In terms of geography you were asking me, maybe less specific to Applied Water, but in general, I would say that would point to China as being probably the weak area us, I think orders were down around 18% year-over-year.

That would be the area that I'd call out outside developed markets. And I would say also the 80-20 tool Andy is forcing us to kind of rethink do everything for everybody, everywhere. And we're intentionally kind of walking away from different parts of our businesses outside of kind of developed markets where we've probably been not as effective.

Our next question comes from Deane Dray from RBC Capital Markets.

Can we put the spotlight on these 2 deals? And I know they're smaller, but just the M&A strategy on these niche types of applications that then you can, without a big cash outlay drop into your portfolio of offerings and scale. So just the implications, and that would suggest really high returns on these smaller dollar amount deals. But just how does that fit into the what you're seeing in the pipeline? And that would be a big help.

Yes. Thanks, Deane. We do have a really healthy pipeline. I think I mentioned on last call that we really changed our M&A process and much more risk, much more bottoms up, which I think is helping really drive the funnel improvement and the velocity. We talked a lot in our last Investor Day about areas that we're going to focus. One of those that we highlighted was advanced treatment, which these 2 fit into -- and like you said, we are really excited about some of these technologies and smaller acquisitions that can scale over time and we can kind of help them incubate and do that.

So Vycom is a great solution around 0 liquid discharge, it's becoming more and more important and imperative in areas like mining and microelectronics and food and beverage and Enviromax a really great technology. Today, we use a lot of mixers, mechanical mixers and this moves away from that and brings in a technology for us that uses air compression in bubbles. So another big area of improvement around nutrient removal. So we're excited about the technologies. We'll continue to do these, and we've got a lot of velocity in this area.

And I think, Deane, to your point, these are strong return deals where I think there are significant synergies with our core business, not only from a cost perspective, but significant revenue uplift.

Good. That's what I was looking for, Bill. And then second question on MCS. There's always some consternation about the energy meters, a non-smart water meter business. And it sounds and looks like there's some difference between some of the legacy energy meter projects versus some of the new ones that you've booked in terms of the returns? Can you just clarify that?

Yes. I would just say that, yes, that's a great observation that we've introduced new technology in both the gas and electric side of our businesses, which has helped us get better margin improvement and also be a leader in those spaces in terms of the technology that we're introducing in those meters. So we really like that part of the business. We have over probably 300 combination accounts where you have a water and a gas utility or water and electric utility. And it really just drives a lot of scale for them when they can put in a network and put multiple different utilities on the network.

So that's going well. And the last thing I would say on the electric side, that industry tends to be a leader in terms of AMI, and we learn a lot from being in that market that flows down into the water into the gas side of our business in metrology.

Our next question comes from Jacob Levinson from Melius Research.

Matthew, I think you mentioned that you had a record on-time delivery quarter here. I'm not sure what you're comfortable sharing, but can you give us some context around kind of where you've come since -- I guess, since you became COO and CEO. And where are you on that journey? And I'm sure you're benchmarking to some level, but just any color you can provide would be helpful.

Thanks for the question. That's a great output of the simplification that we're doing. And 2 metrics that I always look at in our CEO scorecard monthly as quality and on-time performance because if you have those 2 things, then you're probably doing pretty well as a company. And we've seen a marked improvement in our on-time performance since implementing 80/20 and transforming our structure is starting to help as well, just getting more focus.

We've reduced a lot of complexity by simplifying our SKU counts not only which in terms improves our ability to operate in our factories and drive down lead time, but also improves our working capital and we had good working capital improvement this quarter as well. So we've -- we're also tracking as a part of 80/20, our on-time performance to customers. We want to make sure we overdeliver there. And so that's a new metric that we're looking at. So all this, to give you some numbers, in the month of June, we were up 600 basis points year-over-year on on-time performance. So year-to-date, we're close to 300. And I'd say that in pockets, we're getting close to best-in-class. But overall, as an organization, we still have some work to do. And I think just a continued focus on simplification will -- and customers will get us there.

That's helpful color. And just on a different topic, you've got a balance sheet at this point as you could argue underlevered. I know there's a lot of change going on within the organization that I'm sure will be challenging to struggle too many balls in one if you're thinking about M&A, for example. But just I guess, how are you thinking about capital deployment here? And really as it relates to the M&A environment or buybacks for that matter? .

Yes. No, I think we're still forward leading on the M&A side. Again, we continue to look at assets that fit our strategy and then also have strong financial returns. I think as we created a different process with the organization, we pushed some of the cultivation down to the segments. We've seen an increase in volume and quality of our funnel across the portfolio but again, we're balancing things within the organization on transformation actions that we're taking across the portfolio and what those returns are going to be from an organization and then looking at a high bar relative to things that are strategic that we want to invest in 3 categories that we've highlighted multiple times and Matthew talked about a little bit earlier. So I think we have a really robust funnel. We're focused on it. and the balance sheet will get levered when the time comes and these assets are actionable.

Our next question comes from Nathan Jones from Stifel.

I guess I'm going to -- I'm going to start with a question we get a lot from investors on municipal utility funding in the U.S. I'm sure you've heard this, but I'm going to ask it on the call, just so you can address it directly. Investors are concerned that funding for utilities under the Trump administration is going to decline. Utilities were very well funded under the Biden administration with a bunch of those programs. There's cuts to EPA funding potentially rolling through state water funds. So just I'd love to get your perspective on that and what, if any, negative impact do you think that might have on your business?

Thanks for the question. Maybe I'll just start just to remind everybody that roughly about 75% of our demand is OpEx. And I would say that also infrastructure in the U.S. is not getting any younger. And so this has to be replaced. As a proxy the first half -- water infrastructure being the proxy was up about mid-single digits. So I'd say, been pretty resilient given the macro uncertainty. It continues to be a watch item for us, but I would say I'm not -- we're not overly concerned at this time. But I will say that on RF funding, state revolving fund funding, it only makes up 5% of muni budgets, about $3 billion historically.

Obviously, we don't want to defund that because we're already woefully underspent on our infrastructure in the U.S. But all signs out of the Congress will appropriate money and get back to healthy SRF levels even though there's been a lot of chatter about that not happening. So I think Congress will do that. and we should see SRF levels kind of back to kind of norms going forward.

Great. And my follow-up is going to be on MCS. A couple of questions on that. You had seen customers looking to destock inventory on the water side in the first half, which I think you anticipated coming to an end about midyear. Can you confirm that and that we should get improvement in mix in the second half? And then I think on the electric side, you're talking about more profitable business there. I think there's been an anticipation of replacement cycle for the electric meters that were put in 10 to 15 years ago starting up. Is that part of the contributing factor to improve profitability on electric and then should we see that continue for the next few years as that placement cycle progresses?

Can I just say yes? I would say, first, kind of our expectations for water meters have been right in line we said that it would be down in the first half and start to ramp in the second half. We see that with an exit rate back at kind of high single digits as we exit 2025 on the water side. On the energy side, yes, there's significant growth driven by both gas and electric. I think the refresh cycle that you're talking about is kind of early stages and will all then be a big tailwind over the next couple of years. I think the profitability associated with both continues to improve. Matthew highlighted just on the new projects on the gas side, margin improvement and kudos to that team for going after price and continued operational efficiencies the entire segment, leveraging 80/20 to simplify the reduced product portfolio complexity and double down on their 80s products.

So I think they're well positioned having both the energy and water assets together. We highlighted just the benefits that we get from sharing the network provides a tailwind and learnings that we can spread across all 3 areas. So lots to be excited about that business going forward.

Our next question comes from Brian Lee from Goldman Sachs.

This is [ Tyler Bisset ] on for Brian. You guys raised your revenue guidance. You also guided for a strong adjusted EBIT margins in 3Q. And with less of a tariff impact expected I was wondering if maintaining your full year adjusted EBITDA margin is just accounting for some conservatism or some of those contingencies you mentioned in the back half of the year, are there potential impacts you're assuming in 4Q?

Yes. I think ultimately, we highlighted there's a little bit of dilutive nature of the tariffs, right? It's not -- the incrementals on that. We're not making a significant amount of money that's somewhere between 10 and 25 basis points of pressure on our year-over-year EBITDA margin expansion in the back half. So obviously, we continue to try to push for the top side on it. Again, we highlighted lots of progress on our simplification efforts. So we're -- the teams continue to progress, and we're just being cautious here as a lot of volatility still remains, and we'll see what happens in Q4.

Great. And you raised your assumptions for corporate expenses this year by $10 million to $15 million. Anything in particular driving that increase? Is it just that M&A you mentioned or anything else?

No, I think it's a combination of FX and variable comp relative to the stronger results.

Our next question comes from Mark Strouse from JPMorgan.

I think at this point, most of them have been asked. I wanted to follow up with a couple of margin questions, if I could. First, on MCS. Can you talk about the margin drag that you're seeing from that -- the legacy energy business that is in your backlog? And as that gets burned off in the next couple of quarters, how we should think about kind of EBITDA margins overall for MCS as that occurs?

Yes. So I think we talked about the 3 factors. One of those some of the lower-margin legacy projects. Some of that put a little bit to the right relative to us having to go back and try to negotiate additional pricing relative to the tariffs. So we'll put a little bit of pressure on sequential margins in the third quarter. I'd say, 50 to 100 basis points in that kind of ballpark. And then MCS sequentially improve and will improve the quarters year-over-year but sequentially improve for Q4.

Okay. And then on the Applied Water side, just the over 400 basis points expansion that you saw year-over-year. Just any I'm sorry if I missed it, but any kind of one-timers in there, how we should think about that kind of sustainably going forward.

No, I don't think any onetimers -- for me, there's an element of about 2/3 of that is the significant traction they made on 80/20 and then positive price/cost. Matt highlighted there was a little bit of pull ahead on some volume likely go down a little bit in the third quarter, so there'll be some under absorption. So I think their expansion won't be as great, but it will still be really robust on a year-over-year basis.

Our next question comes from Andrew Buscaglia from BNP Paribas.

So [indiscernible] or larger solutions rather for orders and growth I'm wondering on the order side, those are picking up and you're seeing more on services. And I know this business can be lumpy. What are you seeing on the capital equipment side? And how have tariffs impacted that?

No. I think WSS overall is positioned for another strong year of growth as it leverage is the synergies with the combined portfolio. It does have significant strength with the outsourced water projects across several of their end markets. energy being one of them. They've also seen significant growth in their utility services business, which is a combination of the legacy municipal services business from Evoqua and the assessment services business in legacy Xylem. And to be honest, I give Rodney and team a lot of credit for the improvements they've made in that section of the business. .

They've turned it around in a very short period of time. But again, they've got a significant funnel of their outsourced water projects. Like you said, projects can be lumpy. That's why we're not overly concerned with their book-to-bill being less than one, it's timing of some projects that have already filtered in here in the third quarter. So their capital business is a real shining point of growth within the portfolio.

Okay. And then one of your larger water peers is talking a little bit more about data centers as a demand driver. I'm wondering, just an update there. I know it's small for you, but anything incremental you're seeing in the last 3, 6 months?

I wouldn't call it anything meaningful. It would probably show up more in our Applied Water business with heat exchangers and pumps. Although we have seen a little bit of an uptick in our Water Solutions and Services business, where -- in some cases, believe it or not, data centers can't get municipal water, and they're bringing in surface water. And so we're seeing more and more of a need to filter that water before it gets into the data center. I think you'll actually see that trend continue as municipalities get stressed. Data centers take about 50 -- what is it? It represents about 50,000 people in terms of a population and it's about 5 million gallons of water a day that they're using.

So I don't think people really appreciate that. I think people talk a lot about the energy side of data centers. But I would say that we've all got to put a watchful eye towards the water side of the energy transformation that we're going through.

Do you think this will be a real meaningful driver -- multiyear driver?

I think in the next 1 year, probably not so much. But as we look out in the next 3 to 5 years, and you look at the stresses that we're seeing across different parts of the world and here right here in the U.S. on water, absolutely, it's going to be more and more of an issue. And so water reuse will become really important.

And ladies and gentlemen, at this time, we're going to be ending today's question and answer session. I'd like to turn the conference call back over to Matthew Pine for any closing remarks.

Thanks a lot. We'll just wrap it up there. Thanks for your questions, and thanks to everybody who had joined the call today, especially our colleagues, many of them dial into the call. And we appreciate your interest and support, all the best.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.