Xylem Inc.

Q4 2025 Earnings Call — February 10, 2026

Analyst Dean Dre (RBC Capital Markets): Hey, Matthew, as we do the calendar flip and as you start phase two, maybe you can give us a two-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. Thank you.

Executive Matthew Pine (CEO): Yeah. First, we've got a lot of work to do in front of us, so I'll start there. But, you know, if we 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 Avoqua 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, you know, at the same time, we've made significant progress in our operational model transformation, which is really about, you know, 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. An 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 this 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. We've gained 500 basis points of on-time performance, you know, 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, you know, four 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 four or less direct reports. And so we've really improved our structure, our cultural processes, and our systems along the way.

You know, maybe I would just, you know, like I said in the prepared remarks, we've taken a lot of ground on what I would call phase one. It's not over. We have more work to do. But we're starting to transition into what I would call phase two, 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 lifecycle management and innovation, really speed to customer value. So those are areas that as we pivot, we're going to be keenly focused on this year in building capabilities so we can leverage the simplicity and get back to growth. But 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. Thanks for the question.

Analyst Dean Dre (RBC Capital Markets): And then as a follow-up for Bill, maybe you can expand on the point of increasing the 80-20 walk-away 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 identifying less profitable businesses, not having it accelerate into the second year. So maybe just kind of help put that into context. Appreciate it.

Executive Bill (CFO): Yeah, no, sure. But let me step back first and just talk about, you know, how 80-20 is really taking hold in the organization kind of two years into the transformation that Matthew highlighted. Each quarter we take another step in simplifying Xylem. You know, 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 investments around their 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. 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, 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 believe 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. 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 and facilitate our longer-term growth trajectory. Thank you.

Analyst Scott Davis (Mellius 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? 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?

Executive Bill (CFO): 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 eight 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 Salesforce effectiveness and helping our sales organization grow, get more oriented toward the customer the majority of the time. Meaning, you know, today a lot of our sales teams are doing a lot of admin work and they don't get in front of the customer, but 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.

Analyst Scott Davis (Mellius Research): Okay. Yeah, 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, or do we want to keep the dry powder for M&A?

Executive Bill (CFO): Yeah, 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, it's already in process for the first half of 26. So seeing good momentum there. And we'll continue to, you know, target around $1 billion a year of capital deployment towards M&A. You know, 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.

You know, with regard to your thoughts on share buybacks, you know, we'll continue to be opportunistic. But, you know, again, we're going to be more forward-leaning towards investing in the core in M&A. However, you know, at low leverage levels, you know, like we're seeing now, we're going to be much more active in buying back shares.

Analyst Scott Davis (Mellius Research): Gotcha. Thank you, guys. Best of luck. I'll pass it on.

Analyst Mike Halloran (Baird): So can you put the backlog exiting 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 what the customers are saying, the pipeline, you know, verbal orders, however you want to put it.

Executive Bill (CFO): Yeah, maybe I'll touch first just on the backlog positioning, and Matthew can comment on the project side. So first off, right, obviously we've led backlog as we've progressed through this year, and the lower backlog directly impacts the 2026 cadence and revenue guides. 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 anticipated a few larger projects to book that pushed out in the first half, which puts a little bit of pressure on our ending backlog and then pressure on kind of our first and second quarter revenue.

We've talked, China's 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 to the back half of the last year or 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 in line of sight to improve progression as we go through the year.

Analyst Mike Halloran (Baird): 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 years in terms of the commitment to the market, ability to manage that market, given the local headwinds, both, you know, buy local as well as softer end markets, and kind of what changes are you making?

Executive Bill (CFO): Yeah. Yeah, so I think consistent with the commentary we provided for the last couple quarters, China remains a challenging market for us, both on the orders and revenue side. It did accelerate that decline as we progressed to the back half. Q4 orders were down almost 70%. Sales declined almost 30%. Part of that's just the reflecting of the economic headwinds impacting utility and commercial buildings and industrial and markets, and primarily impacting us within water infrastructure and applied water. 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 walkway just as we're deliberately exiting some of that low margin, negative margin business within China. As we talked about last quarter, you know, China restructured its operations. You know, 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 could provide some differentiation in certain applications where we can win and deliver stronger margin performance because of that differentiation.

Ultimately, China is a very large economy. We don't think there's going to be a material improvement here over the next year or two, 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. Thanks. Appreciate it.

Analyst Andy Kaplowitz (Citigroup): Good morning, everyone.

Executive Matthew Pine (CEO): Hey, good morning, Andy.

Analyst Andy Kaplowitz (Citigroup): 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?

Executive Matthew Pine (CEO): Yeah, maybe I'll just maybe start at a high level, Andy, then I'll let Bill get into a little bit of color. But, you know, I just want to, you know, tell everyone on the call, we remain very confident in MNCS to achieve high single digits long term, you know, as a segment. The near-term outlook really reflects project timing and some of the backlog normalization coming out of COVID and walkaway revenue. So it's not a change so much in underlying demand. The biggest area of walk-away in this 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, you know, we've been a bit, you know, forward-leaning into that. You know, bidding remains strong, and customers are still, you know, ordering, and our win rate's higher than it has been in the past. So I think in general things are healthy, but, you know, maybe one other comment I would make is, again, going back to this post-COVID, the backlog helped to smooth some of the unevenness that we typically get in this segment. And it can have. So I do think, you know, we do expect a bit more variability in quarter to quarter going forward.

So, you know, maybe one other point I would make is, you know, I would highlight the Xylem View business, which doubled in 2025. We're expecting that digital business to grow 30 plus in 2026. So as we exit this year, that'll continue momentum and help drive the top line of this segment as well. Dan and 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.

Analyst Andy Kaplowitz (Citigroup): Helpful, guys. And then, Bill, maybe if I'll put you, you're guiding to 70 to 110 base points of margin improvement in 2026. 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?

Executive Bill (CFO): Yeah, I'll take it, Andy. I think from my perspective, you know, we're already outlying an investor day for 2027. We'll update strategy and targets at that point. It's probably sometime in the spring of next year. You know, 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, you know,

as a reminder, we laid out, you know, the LR, the long-range plan, our last investor day in May of 24, that 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, you know, 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.

You know, we've made a lot of great progress and, you know, give the team a tremendous amount of credit. As I said with Dean'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. Appreciate that. Thank you.

Analyst Nathan Jones (Stiefel): Good morning, everyone.

Executive Matthew Pine (CEO): Hey, good morning, Nathan.

Analyst Nathan Jones (Stiefel): I'll start with a follow-up on the MCS orders and the smart native 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?

Executive Bill (CFO): Yeah, and I think there's 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 they want to push out a couple 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 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 based upon our guide and our revenue progression for MCS through the year that we'll be able to deliver on.

Analyst Nathan Jones (Stiefel): Okay, thanks for that. 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. Thanks.

Executive Bill (CFO): Yeah. Yeah, I think we talked about, Nate, we were evaluating about 10% of the portfolio. You know, last year we exited a business in the first quarter. That was about 1%. You know, international metrology is about another percent. There's probably two or three assets that, you know, maybe another couple percent. So I don't think we're going to hit the 10% number that we were looking at. But obviously, portfolio valuation is 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, you know, it's a $250 million business at less than 10% EBITDA margin. We'll close it at the end of the third quarter. Excuse me, at the end of the first quarter. So you kind of get three quarters. So it's, you know, two, three pennies.

Analyst Joseph Giordano (TD Cowan): Good morning, guys. This is Michael on for Joe.

Executive Matthew Pine (CEO): Hey, Michael.

Analyst Joseph Giordano (TD Cowan): Yeah, in the last call you mentioned there was a path to higher margins for the energy meter side and MC&S and, you know, since it's, you know, mixed negative versus water meters, can you just unpack that glide path higher and, you know, what's the status of the transformation? Thank you.

Executive Bill (CFO): And your question specifically was around just the improvement on the energy meter margin?

Analyst Joseph Giordano (TD Cowan): Yeah, I believe the last call you mentioned there was a path higher for energy meters on the margin side, so we'd just love to better understand where we are in that cycle. Thank you.

Executive Bill (CFO): Oh, yeah. I think there's a couple things. One, there's some structural changes on the energy side from an engineering and a technology perspective that are going to level up, you know, value-add, value-engineering projects that will lift the margin profile. And we did highlight there's a couple projects that are legacy within energy that they're working through their backlog that put pressure on margins in 2025. That'll continue in the first half, first three quarters of 2026.

So you'll see a margin progression with MCS down slightly overall in the first quarter and then sequentially build. It's a pretty robust margin 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.

Analyst Joseph Giordano (TD Cowan): Great. Thanks for that, Collar. And then, you know, orders for the year ended pretty strongly. You know, 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, just want to understand it came in a little bit lighter than probably most were expecting. I would appreciate the call. Thank you.

Executive Bill (CFO): Yeah, I think the biggest variable is probably MCS. They'll be down kind of a point or two 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. Thanks, Gus.

Analyst William L. Griffin (Barclays): Good morning. Thanks very much. Just the 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 executions?

Executive Bill (CFO): Yeah, 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 their performance that they experienced through the first half of the year. Really reflected just a negative project mix and a little bit of execution timing and some one-time items.

Yeah, 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, yeah, it's more of a short-term than anything structural. Applied water, I think, it's back to some pretty robust margin expansion in 2026.

Analyst William L. Griffin (Barclays): Got it. And then 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.

Executive Matthew Pine (CEO): Yeah, thanks for the question. You know, when I was at Davos, you know, 2026 was deemed kind of the year of artificial intelligence. You know, there was a lot of talk of pilot projects now scaling into productivity solutions. And, you know, 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, you know, I think one big thing from the report that was pointed out that there's two big constraints to that $2 trillion of investment, and that's energy and water. Up until now, energy's gotten the majority of the attention, and I think water's 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 a 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 incentives 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 one lake need a year in the western part of the U.S., or 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 probably actually power driven. But chip fab is set to grow by roughly 600%. That was probably one of the biggest takeaways.

I think the second, and I don't like to be chicken little. 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, you know, over almost 30% of water that's generated today, fresh water to send out to businesses, industry, and residences, what gets leaked into the ground.

And we have, you know, solutions to solve those problems, like the project we talked about in the last call with. 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 ultra-pure water in chip fabrication, your reject water is very high to get to that purity. So all that reject water, Intel invested capital in 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 is 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 four walls of the data center, yes, we do some business, but it's really outside the four 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.

Executive Matthew Pine (CEO): 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.

Q3 2025 Earnings Call — October 28, 2025

Andy Kaplowitz (Citigroup): Good morning, everyone. Nice quarter. Matt and Bill, you're now expecting 140 to 170 base points of EBITDA margin improvement for 25. I think your investor day algorithm has been 100 base points per year. And obviously, you know, segments such as water and disruption 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?

Management: Great question. You know, just

as a reminder for folks that may have not heard our investor day numbers, you know, we put out four to 6% growth with 23% EBITDA margin by 2027.

Now, excuse me, to be fair, we did finish 2024 at 20.6. So there was 300 basis points up to 20.6. You know, 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. You know, 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, call 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, you know, this work never ends. It's always ongoing. But, you know, what we're trying to do in the next phase of our journey as we move out of phase one, we've taken enough ground into phase two, is to leverage that simplification that we created to drive our growth engine in what we call phase two.

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, you know, maybe the last thing I would also comment, what I would call phase three, 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, you know, services, our transport business, where we really have strong positions. So, and, you know, 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 just in our first phase of our journey and making good progress.

We expect revenue to grow 40% next quarter.

Andy Kaplowitz (Citigroup): And then, Matt, you had difficult comparisons in Q3 and MCS, yet you still delivered 11% order growth. Is the strength broad-based in energy and water meters? Has that strength set them up for 2026 in that segment? Does it mean good visibility toward growth in both smart energy and water meters in 2026?

Management: Yeah. 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 a 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. 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 winds convert to orders, and our energy funnel still remains robust.

Q4 is shaping up really well. We're 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.

Dean Dre (RBC Capital Markets): Thank you. Good morning, everyone.

Management: Hey, good morning, Dean. That was 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, I'm getting a lot of questions about that. Just kind of, you know, what are the ripple effects into, you know, from federal funding to state and local? You know, have some projects been delayed because of that? And just kind of what does that mean for the setup into 26?

Management: Yeah, 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, you know, right now we don't see any meaningful impact. You know, 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.

Dean Dre (RBC Capital Markets): Really good to hear. And I appreciate the answer to Andy's question about the 80-20 implementation and entering phase two. But can you 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 businesses gone through their first implementation? And kind of where do you go from here in terms of, you know, further the vestiges at the margin? Should we be expecting anything like that in the next couple of quarters?

Management: Okay. I'll start us out here, Dean. You know, 80-20 is, as you can tell by the results, really starting to take hold, you know, almost two years into our transformation. You know, and I would say that each quarter, the team continues to take another step towards what we call simplifying Xylem. So, you know, 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 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 is 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, yeah, maybe the last thing I would say, another proof point is, you know, just the margin improvement you're seeing in the legacy Xylem businesses with applied water and water infrastructure over the past several quarters. So, you know, maybe just one thing I just want to highlight for those listening. You know, we're going to continue to walk away from revenue. Dean, we do have divestitures. We obviously will have just about a percent this year in divestiture and about a percent 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 to $600 million of things that we'll be pruning on the portfolio, and 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 a percent this year. It'll be just over a percent next year. But just to remind everybody, you know, that comes with higher quality earnings. And, you know, it's all about simplifying the business so we can, you know, really build the long-term growth engine and focus on our customers.

Scott Davis (Mellius Research): Hey, good morning, guys. I'll echo the congrats, not just on the quarter, but it's been a really good couple 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 I'm looking for some explanation there. Thanks.

Management: Yeah, so structure... was really getting at, we were, prior to this year, we were kind of highly a matricized structure. So, you know, we pivoted to more of a, you know, we had a segment orientation, but more with discrete divisions under the segment, 16 P&Ls with discrete, you know, leadership GMs. And it just drives better accountability. I think, you know, 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 axis 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 four to five. And so it just provides us the ability to be more nimble and make our colleagues' lives easier and make our customers happier with our service. And so those were two, you know, what I would call pieces of voice of customer that we got two and a half, three years ago that we wanted to address. That makes sense. Thanks.

Scott Davis (Mellius Research): And then your net debt to EBITDA, point four, I think you mentioned, begs the kind of question on priorities in the next 12 months. And if you can talk to your M&A backlog or, you know, when and if you'd kind of switch to more of a buyback priority? You know, just where your head is in that stuff right now.

Management: Yeah. No, it's a good question. You know, we've always said, you know, kind of our priorities are let's invest in the core. We like M&A. We think it will help us, you know, 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 here. You know, 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 in M&A. We're much more bottoms-up, assigning targets to our segment leaders that are now focused, you know, 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 a real focus is on small to medium bolt-ons. We've talked about deploying a billion dollars of capital a year, trying to create $60 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's about a billion dollars of capital deployment towards M&A each year.

Nathan Jones (Stifel): Good morning, everyone.

Management: Morning, Nate. A couple follow-ups on MCS for May 1st. 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 so far this year is about 0.83, probably gets to 0.85 if you're close to one in the fourth quarter, and you have talked about, you know, burning off some backlog and backlog being at a more normalized level. I'm just wondering how that 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.

Management: 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 to 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 we'll layer in here over the next quarter or two gives us real confidence to get back there next year.

Nathan Jones (Stifel): Great. I guess second follow-up on the margin profile in MCS. 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 some 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. Thanks.

Management: Yeah, 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.

William Gripen (Barclays): Just a couple basic ones here, but you had a little bit of M&A spending in the quarter. I'm just wondering if you could provide some color on what that was for.

Management: Yeah, it's primarily associated with international metering divestiture.

William Gripen (Barclays): Got it. And on that front... Are you able to quantify sort of how creative that divestiture could be to margin for the MCS segment?

Management: Yeah, in the prepared remarks we talked about on a run rate, about 100 basis points.

Andrew Buscaglia (BNP Paribas): Hey, good morning, everyone. Just, you know, on the MCS margins related to the divestment, how do we compare you guys versus your larger peers in that space? I ask that in that, you know, can you get to or even above some of those peers that you comp to? And is, you know, is it 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?

Management: 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. But then the energy piece we've talked about is at a lower margin profile. Obviously, the team's 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, you know, at some of the leading margin profiles that you're probably referring to.

Andrew Buscaglia (BNP Paribas): Okay, that's helpful. And then, yeah, I was hoping you could sort of parse out where you're seeing demand pickup versus internal efforts to improve organic sales. If you just run through some of that markets and you talk about what was maybe a little bit better, a little bit worse than you expected demand-wise.

Management: From an overall demand perspective, I would say if we ticked off, obviously we spent a lot of time here just talking about, hey, resilient demand within MCS is still there relative to getting, you know, it's actually been an 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, we continue to see resilient OPEX and CAPEX demand. Transport's been really strong over the last few quarters. It was 5% growth against this quarter due to its mission-critical nature of its applications. In 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. You know, they've seen along with the biggest headwind for applied water and water infrastructure has been China, you know, with double digits decline on sales and orders for both segments. And just to frame 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 accelerated its decline from a macroeconomic perspective, and then the team's getting much more disciplined with the work that we're going after, it's 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 two years as they focused providing some really differentiated technology to some large customers, along with dewatering was up double digits again this quarter. So we've seen lots of strength across all four segments with the only area of watch we dial in on China is.

And then a little bit in our prepared remarks, just talking about, you know, large capital projects, nothing's been canceled, but things relative to conversion from our commercial funnel to an order has taken a little bit longer as maybe one area we continue to monitor.

Mike Halloran (Barrett): Hey, morning, everyone.

Management: Morning. 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?

Management: Yeah, I think you're spot on. I think the fundamental dynamics for all four 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 dynamics 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 a point this year, a little over a 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.

Mike Halloran (Barrett): And what's the long-term thought process on how to manage China from here? I know it's an area of softness today. 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?

Management: Yeah, I think we're staying the course, but we're also right-sizing 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. 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, you know, balance of this year and through 26. That's how the approach we've taken. And we'll just, you know, it'll be a watch item for us as we head into the first half of 2026. But, you know, that's really where we are right now.

We're taking restructuring actions as we speak in China to the extent of around 40% of the workforce is coming out.

Management: Yeah, 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. Thanks, guys. Appreciate it.

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

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