Xylem Q2 2025 Earnings Results & Report

Xylem EPS Results

• Actual EPS: $1.26
• Consensus EPS: $1.15
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: $1.09
• EPS Beat Rate: 6 of last 8 quarters

Xylem Revenue Results

• Actual Revenue: $2.30 billion
• Expected Revenue: $2.20 billion
• Beat/Miss: Beat by +$99.19 million
• YoY Revenue Growth: +6.10%

Xylem (NYSE:XYL) (NYSE: XYL) is a global water technology company that develops products, services and solutions for the movement, treatment, testing and efficient use of water. Its offerings serve municipal water and wastewater systems, utilities, industrial customers, commercial buildings and other infrastructure operators.

The company’s portfolio includes water and wastewater pumps, mixing and aeration equipment, treatment systems, measurement and monitoring technologies, smart metering, network-management software, and related services. Xylem also provides solutions designed to help customers manage water quality, reduce leakage, improve operational efficiency and address challenges such as flooding, water scarcity and aging infrastructure.

Xylem was formed in 2011 through the spinoff of ITT Corporation’s water-related businesses. The company serves customers across North America, Europe, Asia-Pacific, Latin America, the Middle East and Africa. Matthew Pine serves as Xylem’s president and chief executive officer.

Xylem Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Xylem delivered 6% organic revenue growth in Q2 and a record 21.8% adjusted EBITDA margin, up 100 basis points year-over-year.
• Positive Sentiment: The company raised its full-year guidance to $8.9–9.0 billion in revenue and $4.70–4.85 in adjusted EPS, reflecting confidence in sustained performance.
• Positive Sentiment: Demand remained resilient with smart metering orders up 12% and backlog staying above $5 billion, underpinning strong execution across end markets.
• Neutral Sentiment: Targeted pricing and supply-chain measures largely offset inflation and tariffs, though management expects a modest dilutive impact on margins.
• Positive Sentiment: Two strategic acquisitions—Vacom and EnviroMix—enhance Xylem’s advanced treatment capabilities in zero liquid discharge and non-mechanical mixing.

Presentation

[Operator]

Good day, everyone, and welcome to Xylem's second quarter 2025 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypads. To withdraw your questions, you may press star and two. 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.

[Keith Buettner, VP, Investor Relations and FP&A at Xylem]

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 perspectives 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 I'll follow up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investor section of our website. A replay of today's call will be available until midnight, August 14th, and will be available for playback via the Investor section of our website under the heading Investor Events. Please turn to slide two.

[Keith Buettner, VP, Investor Relations and FP&A at Xylem]

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 three. 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.

[Keith Buettner, VP, Investor Relations and FP&A at Xylem]

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

[Matthew Pine, CEO at Xylem]

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've seen particularly solid orders pace, including double-digit growth in smart metering. We are raising our full-year guidance for revenue and EPS. That raised 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.

[Matthew Pine, CEO at Xylem]

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. We are 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 are 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've 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 and enabled faster decision-making.

[Matthew Pine, CEO at Xylem]

As an example, this quarter, we set a Xylem record for on-time performance. We are seeing the benefits of simplification in our focus, speed, and margins. At the same time, we are enhancing our operational performance. We are also enhancing our portfolio for growth, for example, with two recent targeted acquisitions and 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 over to Bill to walk through the quarter's results, our financial position, and our updated outlook. Bill?

[Bill Grogan, CFO at Xylem]

Thanks, Matthew. Please turn to slide five. 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. 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 one. 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.

[Bill Grogan, CFO at Xylem]

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 six. 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.

[Bill Grogan, CFO at Xylem]

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, mostly offset by productivity, higher volumes, and price. In Q2, we saw an acceleration in higher margin and 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 one 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.

[Bill Grogan, CFO at Xylem]

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. The Water Infrastructure team continues to get significant traction with their 80/20 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. The segment continues to set the pace for delivering benefits from 80/20. In Water Solutions and Services, orders increased 5%, led by services for utility and power end markets. Revenue grew 5% with contributions from capital projects and services.

[Bill Grogan, CFO at Xylem]

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 seven. As outlined in our last quarterly earnings call, we've taken proactive steps to mitigate tariff impacts, implementing 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 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 eight.

[Bill Grogan, CFO at Xylem]

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-$9 billion, representing 4%-5% total growth and approximately 4% organic growth. Adjusted EBITDA margin is unchanged at 21.3%-21.8%, reflecting 70 basis points-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-$4.85, up from $4.50-$4.70. Free cash flow margin remains at 9%-10%. For Q3, we expect revenue of $2.2 billion with 4%-5% organic growth. Adjusted EBITDA margin is expected to be 21.7%-22.2%, and adjusted EPS is expected to be $1.20-$1.25. There continues to be macro uncertainty, particularly around tariffs and FX movements that could impact our performance.

[Bill Grogan, CFO at Xylem]

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 benefits from simplification. Let's turn to slide nine, and I'll turn it back to Matthew.

[Matthew Pine, CEO at Xylem]

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 three of those vectors of value creation. On Evoqua, we're now two years post-close, and the team has done an outstanding job with the integration. By the numbers, we delivered the 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.

[Matthew Pine, CEO at Xylem]

We also recognize that 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. 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.

[Matthew Pine, CEO at Xylem]

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 two high-value capabilities to our platform with the acquisitions of Vacom and Enviro-Mix. Vacom brings proprietary breakthrough solutions in zero 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 non-mechanical mixing and biological process solutions, which enhances our ability to serve one of the fastest-growing segments in water, advanced nutrient removal.

[Matthew Pine, CEO at Xylem]

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]

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your telephone keypads. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. Our first question today comes from Mike Halloran from Baird. Please go ahead with your question.

[Mike Halloran, Senior Research Analyst at Baird]

Hey, good morning, everyone.

[Matthew Pine, CEO at Xylem]

Hey, good morning, Mike.

[Mike Halloran, Senior Research Analyst at Baird]

Hey, 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 are we on the stocking side? What are your customers saying from a forward perspective, what the replacement piece looks like? Lastly, any updated thoughts on when you think that book to bill can track towards one again?

[Matthew Pine, CEO at Xylem]

Yeah, I'll start us 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 two stands out, but the book to bill was greater than one. 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, as they're moving into their AMP cycle eight. That can be typical at the start of new AMP cycles.

[Matthew Pine, CEO at Xylem]

We also saw some delays in Canada with their change in government. We expect those things to snap back in the second half. With the line of sight that we have for sure over the next 90 days, we feel that demand is pretty resilient across the board. We'll continue to monitor it and stay on top of it, really to stay close to our customers.

[Bill Grogan, CFO at Xylem]

Yeah, 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. It has been inflated for the last couple of years, and they're getting close to the $1.7 billion. We have signaled that MCS will be back to book to bill positive as we close the year, and we maintain that expectation.

[Mike Halloran, Senior Research Analyst at Baird]

Good. Appreciate all that color there. 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.

[Matthew Pine, CEO at Xylem]

Yeah, I'll start us out, and then I'll let Bill give some commentary, Mike. We're tracking ahead of the timeline that we laid out in February on our Q4 earnings call. 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 get in the pulse of the organization. I'd say our colleagues and our customers say the impact is real, and they're feeling the change. The teams are much more focused, making decisions more quickly. We're seeing, again, customer metrics improve, like on-time performance. As we look at our eight customers, they're starting to grow at a higher rate and are raving fans.

[Matthew Pine, CEO at Xylem]

One thing I'd point to also, Mike, we just wrapped up our long-range planning last week, where we had our 16 new division GMs present their long-range plans for the first time in our new structure. I walked away very energized by the depth and level of detail in the review and how we're able to really drive focus and execution. 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 division. All in all, making good headway.

[Bill Grogan, CFO at Xylem]

Yeah, maybe just from an 80/20 operating model.

[Mike Halloran, Senior Research Analyst at Baird]

Exactly.

[Bill Grogan, CFO at Xylem]

If we look at specifically from an 80/20 perspective, Matthew, I think he's talking about the overall simplification on org 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'll have across our key stakeholders. 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. We now have all four segments that have pieces that are actively engaged in the tool set.

[Bill Grogan, CFO at Xylem]

About 80% of the business has some stage of implementation. For the most part, MCS, Applied Water, and Water Infrastructure are further along, and they've made solid progress on the implementation, just identifying their largest areas of complexities. They've redesigned their organizations to take significant costs out and look at kind of 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.

[Mike Halloran, Senior Research Analyst at Baird]

Thanks, gentlemen. Really appreciate it.

[Matthew Pine, CEO at Xylem]

Thank you.

[Operator]

Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.

[Andy Kaplowitz, Managing Director at Citigroup]

Hey, good morning, everyone.

[Matthew Pine, CEO at Xylem]

Morning, Andy.

[Andy Kaplowitz, Managing Director at Citigroup]

I just wanted to focus on Applied Water for a second. You obviously had good orders and revenue growth. I think you mentioned driven by commercial buildings. I think supposedly you've talked about having the highest headwind from 80/20 on Applied Water. Maybe you can give us a little more flavor into 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?

[Matthew Pine, CEO 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 eight customers. The tool is about not only simplifying, but it's about redeploying effort to focus on growth. 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. On the orders front, this is a sixth 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. On the revenue side, I would say that we've had really strong price execution here.

[Matthew Pine, CEO at Xylem]

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. When you look at the headwinds from tariffs, the teams were really able to get ahead of that. We had a little, 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 here. 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. The performance has been in line with what we expect, and simplifying the business will only help us continue to grow going forward.

[Andy Kaplowitz, Managing Director at Citigroup]

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

[Matthew Pine, CEO at Xylem]

Yeah, the delays were just, I mean, largely funding timing. The AMP cycle in the U.K., they're going to double their investments over the next AMP cycle, so pretty significant. It's just really a timing issue, and we see that pick up in the second half. The same with Canada with the change in the government. That's just pushed some of the traditional buy to the right, and we believe that'll pick back up in the second half as well, talking to folks on the ground there. 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 for us.

[Matthew Pine, CEO at Xylem]

I think orders were down around 18% year-over-year. That would be the area that I'd call out outside developed markets. I would say also the 80/20 tool, Andy, is forcing us to kind of rethink, do everything for everybody everywhere. 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.

[Andy Kaplowitz, Managing Director at Citigroup]

Very helpful. Thanks, guys.

[Matthew Pine, CEO at Xylem]

Thank you.

[Operator]

Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone.

[Matthew Pine, CEO at Xylem]

Morning, Deane.

[Deane Dray, Managing Director at RBC Capital Markets]

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

[Matthew Pine, CEO at Xylem]

Yeah, 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 two fit into. Like you said, we're 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. Vacom is a great solution around zero liquid discharge. It's becoming more and more important and imperative in areas like mining and microelectronics and food and beverage. Enviro-Mix, a really great technology.

[Matthew Pine, CEO at Xylem]

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. Another big area of improvement around nutrient removal. We're excited about the technologies. We'll continue to do these, and we've got a lot of velocity in this area.

[Bill Grogan, CFO at Xylem]

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

[Deane Dray, Managing Director at RBC Capital Markets]

Good. That's what I was looking for, Bill. Second question on MCS, there's always some consternation about the energy meters, the non-smart water meter business. It sounds and it 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? Thanks.

[Matthew Pine, CEO at Xylem]

Yeah, I would just say that 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. 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 a water and electric utility. It really just drives a lot of scale for them when they can put it in a network and put multiple different utilities on the network. That's going well. The last thing I would say on the electric side, that industry tends to be a leader in terms of AMI.

[Matthew Pine, CEO at Xylem]

We learn a lot from being in that market that flows down into the water, into the gas side of our business and metrology.

[Deane Dray, Managing Director at RBC Capital Markets]

Great. Thank you.

[Matthew Pine, CEO at Xylem]

Thank you.

[Operator]

Our next question comes from Jacob Levinson from Melius Research. Please go ahead with your question.

[Jacob Levinson, Director and Director of Associate Research at Melius Research]

Hey, good morning, everyone.

[Matthew Pine, CEO at Xylem]

Hey, good morning.

[Bill Grogan, CFO at Xylem]

Hey, Jake.

[Jacob Levinson, Director and Director of Associate Research at 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? Where are you on that journey? I'm sure you're benchmarking to some level, but just any color you can provide would be helpful.

[Matthew Pine, CEO at Xylem]

Thanks for the question. That's a great output of the simplification that we're doing. Two metrics that I always look at in our CEO scorecard monthly are quality and on-time performance, because if you have those two things, then you're probably doing pretty well as a company. We've seen a marked improvement in our on-time performance since implementing 80/20. 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, which in turn improves our ability to operate in our factories and drive down lead time, but also improves our working capital. We had good working capital improvement this quarter as well. We're also tracking, as a part of 80/20, our on-time performance to eight customers. We want to make sure we overdeliver there, and that's a new metric that we're looking at.

[Matthew Pine, CEO at Xylem]

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. Year to date, we're close to 300. 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. I think just a continued focus on simplification and customers will get us there.

[Jacob Levinson, Director and Director of Associate Research at Melius Research]

That's helpful color. 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 would be challenging to juggle too many balls at once if you're thinking about M&A, for example. 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?

[Bill Grogan, CFO at Xylem]

Yeah. No, I think we're still forward-leaning 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. 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 the three categories that we've highlighted multiple times and Matthew talked about a little bit earlier. I think we have a really robust funnel.

[Bill Grogan, CFO at Xylem]

We're focused on it, and the balance sheet will get levered when the time comes and these assets are actionable.

[Jacob Levinson, Director and Director of Associate Research at Melius Research]

All right. Great. Thank you. I appreciate it. I'll pass it on.

[Matthew Pine, CEO at Xylem]

Thank you.

[Operator]

Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.

[Nathan Jones, Senior Equity Analyst at Stifel]

Good morning, everyone.

[Matthew Pine, CEO at Xylem]

Hey, good morning, Nate.

[Nathan Jones, Senior Equity Analyst at Stifel]

I guess 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 are cuts to EPA funding, potentially rolling through state water funds. I'd love to get your perspective on that and what, if any, negative impacts you think that might have on your business.

[Matthew Pine, CEO at Xylem]

No, thanks for the question. Maybe I'll just start to remind everybody that roughly about 75% of our demand is OpEx. I would say that also infrastructure in the U.S. is not getting any younger. This has to be replaced. As a proxy, the first half, WI being the proxy, was up about mid-single digits. I'd say been pretty resilient given the macro uncertainty. It continues to be a watch item for us, but I would say we're not overly concerned at this time. I will say that on SRF 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.

[Matthew Pine, CEO at Xylem]

All signs are that Congress will appropriate money and get back to healthy SRF levels, even though there's been a lot of chatter about that not happening. I think Congress will do that, and we should see SRF levels back to norms going forward.

[Nathan Jones, Senior Equity Analyst at Stifel]

Great. Thanks for that. 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 mid-year. Can you confirm that and that we should get improvements in mix in the second half? I think on the electric side, you're talking about more profitable business there. I think there'd been an anticipation of a replacement cycle for the electric meters that were put in 10-15 years ago starting up. Is that part of the contributing factor to improve profitability on electric? Should we see that continue for the next few years as that replacement cycle progresses? Thanks.

[Bill Grogan, CFO at Xylem]

Can I just say yes, Nate?

[Bill Grogan, CFO at Xylem]

I would say first, kind of our expectations for water meters have been right in line. We said it'd 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, yeah, 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 evolve and 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.

[Bill Grogan, CFO at Xylem]

The entire segment leveraging 80/20 to simplify the reduced product portfolio complexity and double down on their 80s products. 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 three areas. Lots to be excited about that business going forward.

[Nathan Jones, Senior Equity Analyst at Stifel]

Great to hear. Thanks for taking my questions.

[Matthew Pine, CEO at Xylem]

Thanks, Nate.

[Operator]

Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.

[Tyler Bisset, Equity Research Associate at Goldman Sachs]

Hey, guys. This is Tyler Bisset on for Brian. Thanks for taking our questions. You guys raised your revenue guidance. You also guided for strong adjusted EBITDA margins in 3Q and with less of a tariff impact expected. I was wondering if maintaining your full-year adjusted EBITDA margins 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?

[Bill Grogan, CFO at Xylem]

Yeah. I think ultimately, we highlighted there's a little bit of dilutive nature of the tariffs, right? The incrementals on that, we're not making a significant amount of money. That's somewhere between 10 basis points and 25 basis points of pressure on our year-over-year EBITDA margin expansion in the back half. Obviously, we continue to try to push for the top side on it. Again, we highlighted lots of progress on our simplification efforts. 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.

[Tyler Bisset, Equity Research Associate at Goldman Sachs]

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

[Bill Grogan, CFO at Xylem]

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

[Tyler Bisset, Equity Research Associate at Goldman Sachs]

Perfect. Thank you.

[Bill Grogan, CFO at Xylem]

Thank you.

[Operator]

Our next question comes from Mark Strouse from JPMorgan. Please go ahead with your question.

[Mark Strouse, Equity Resarch Analyst at JPMorgan]

Yes. Good morning. Thank you very much for taking our questions. 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 the legacy energy business that is in your backlog? As that gets burned off the next couple of quarters, how we should think about kind of EBITDA margins overall for MCS as that occurs?

[Bill Grogan, CFO at Xylem]

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

[Mark Strouse, Equity Resarch Analyst at JPMorgan]

Okay. On the Applied Water side, just the over 400 basis points expansion that you saw year-over-year, is there any kind of one-timers in there, how should we think about that kind of sustainably going forward? Thank you.

[Bill Grogan, CFO at Xylem]

Yeah. No, I don't think any one-timers. For me, there's an element of about two-thirds of that is the significant traction they made on 80/20 and then positive price cost. Matthew highlighted there was a little bit of pull ahead on some volume. They'll sequentially go down a little bit in the third quarter. There'll be some underabsorption. I think their expansion won't be as great, but it'll still be really robust on a year-over-year basis.

[Mark Strouse, Equity Resarch Analyst at JPMorgan]

Thank you very much.

[Matthew Pine, CEO at Xylem]

Thank you.

[Operator]

Our next question comes from Andrew Buscaglia from BNP Paribas. Please go ahead with your question.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Hey, good morning, everyone.

[Matthew Pine, CEO at Xylem]

Good morning.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Next quarter in Water Solutions and Services, for orders and growth, I'm wondering on the order side, those are picking up and you're seeing it more on services. I know this business can be lumpy. What are you seeing on the capital equipment side and how have tariffs impacted that?

[Bill Grogan, CFO at Xylem]

I think WSS overall is positioned for another strong year of growth as it leverages 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. To be honest, I give Rodney and team a lot of credit for the improvements they've made in that section of the business.

[Bill Grogan, CFO at Xylem]

They've turned it around in a very short period of time. 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. Their capital business is a real shining point of growth within the portfolio.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Okay. 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 three, six months?

[Matthew Pine, CEO at Xylem]

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. We are 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 50,000 people in terms of a population, and it's about 5 million gallons of water a day that they're using. I don't think people really appreciate that.

[Matthew Pine, CEO at Xylem]

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.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Do you think this will be a real meaningful driver, multi-year driver?

[Matthew Pine, CEO at Xylem]

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

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Yeah, okay. Thank you.

[Matthew Pine, CEO at Xylem]

Thank you. Thanks for the questions.

[Operator]

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.

[Matthew Pine, CEO at Xylem]

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

[Operator]

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

Participants

Executives

• Keith Buettner, VP, Investor Relations and FP&A
• Bill Grogan, CFO

Analysts

• Matthew Pine, CEO at Xylem
• Mike Halloran, Senior Research Analyst at Baird
• Andy Kaplowitz, Managing Director at Citigroup
• Deane Dray, Managing Director at RBC Capital Markets
• Jacob Levinson, Director and Director of Associate Research at Melius Research
• Nathan Jones, Senior Equity Analyst at Stifel
• Tyler Bisset, Equity Research Associate at Goldman Sachs
• Mark Strouse, Equity Resarch Analyst at JPMorgan
• Andrew Buscaglia, Senior Analyst at BNP Paribas