Xylem Inc.

Q1 2026 Earnings Call — April 28, 2026

Analyst Dean Dre (RBC Capital Markets): Good morning, everyone. I'd love to hear more about this outsource contract, and congratulations. This is exactly the way you've positioned WSS to build out services. So anything about the customer, you know, anything on the economics, and is there a pipeline for more of these types of outsource contracts?

Executive Name: Yeah, so for sure there's more pipeline, and I push the team every day on that topic, Dean. Thanks for the question. I can't name the actual customer, but it is an existing customer of ours, and it's in the specialty chemical vertical. You know, we're providing process water for cooling and also boiler feed water in their manufacturing process. So it's a great example of our technical know-how on the front end of a capital build, along with our ability to provide a long-term service tail, which is really great for the next 20 years for our business.

Maybe I'll have Bill walk you a little bit through some of the numbers.

Executive Name: Yeah, Dean. So out of the $850 million, it's about 75% service and 25% capital. We'll realize about 10% of the contract value this year with the balance of the capital bill the next year and look to flow water in 2028 to start the service tail.

Really good to hear.

Analyst Dean Dre (RBC Capital Markets): And then just the second question, and Matthew, I liked how you started off with using the word resilient. Can you give us a sense of the municipal demand outlook at this stage of the year and anything on the macro and there's nervousness about project activity, you know, away from municipal, but just, you know, the approval process on projects, any color there would be helpful. Thanks.

Executive Name: Okay. Yeah, I would say that the overall utility demand remains resilient, like I said in some of the opening remarks. I was with about 15 utility CEOs across all parts of the U.S., specifically, a few weeks back, and we spent a lot of time together the full day. And these are large municipalities across the U.S., and there was really no indication of any meaningful funding pullbacks or project delays outside of some of the normal things you would expect to see.

For our business in Q1, U.S. utility orders, and this is based on the MCS and the WI segments, which are really a proxy for utility orders, we were up double digits in the U.S. Our revenue was up mid-teens. So, you know, I would tell you right there that that shows the resilience of the utility demand in the U.S.

If you kind of pull the lens back and look at those two segments I talked about, overall WI was up 2% in orders, you know, supported by transport, the U.S. and India. And you've heard us talk a lot about China, and we've signaled that in the past, and we were down 30% year over year in China. So that's really a big part of the drag.

And then in Europe, specifically Western Europe, there's short-term noise with our 80-20 initiatives. In MCS, you heard Bill talk in the opening comments. Orders were up 15% for MCS, driven by large water orders, primarily in the southeast of the U.S., and solid energy activity. So all in all, Dean, there remains significant demand for our solutions. We're dealing with an aging infrastructure in the developed parts of the world, Western Europe and the U.S. It has to be addressed.

If you look at what the U.S. Army Corps of Engineers says about our infrastructure, they give us a C minus to a D plus depending on which part of the infrastructure you're looking at in water, drinking water, wastewater, stormwater. You know, we talk about $1.5 trillion needed over the next decade just in the U.S. to maintain those poor ratings. So, you know, from my perspective and, you know, from the customer's perspective, things are still pretty robust. Appreciate that. Thank you.

Analyst Andy Kaplowitz (Citigroup): Hey, good morning, everyone. Can you give us a little more on what you're seeing in terms of price versus inflation across the company? And I know you mentioned applied water. Q1 margin was generally fine across the portfolio. But for instance, you thought applied water would get back to 20%. And you did acknowledge you record a bit lower than you expected. So maybe just talk about conviction staying ahead of inflation and getting that uptick in margin trajectory that you expect for the rest of the year.

Executive Name: Yeah, I think for the broader portfolio, we're still price-cost positive from a price of material cost, including the tariff piece. Again, I think the teams have been extremely proactive and have built up a solid skill set to understand the levers, timing, and process to capture the incremental value to offset the inbound inflation.

Obviously, we've seen it here with the escalation with Iran and fuel prices increasing, where we've seen immediate fuel surcharges go into place to offset that. So I think we're confident that we can stay ahead of inflation through prices are first lever and the teams continue to work on sourcing actions as a secondary lever.

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

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

Executive Name: Yeah, no, I think, again, we've seen the things that we needed to see happen here in the first quarter relative to strong MCS orders and some of those projects that were delayed to start. Now we've got the orders that they're going to play out through the balance of the year. We still need to have a couple more orders hit for us to reach our back half, but relative to conversations with the team, that looks positive.

The book and chip for MCS, it was actually up 9%, so there's a lot of traction and progress there as inventory within the channel is back to normalized levels. I think from a broader Xylem perspective, the ramp in the second half, we're going to see a significant ramp in volume here from the first quarter. That's part of our normal seasonality. If you look at the third quarter, it's basically the same revenue dollar sequentially, and we go from a 1% growth to a 5%. And then we'll see the normal seasonal ramp in the fourth quarter relative to water infrastructure to get us to another mid-single-digit number.

So I think relative to normal seasonality and the orders we need to see win have progressed and give us confidence in our back half figures at this point in time. Appreciate the call.

Analyst Mike Halloran (Baird): Hey, morning, everyone. So just on the cap allocation piece, you know, one, good to see the magnitude of buyback in the quarter. What's the intent look like from here? Stock stays in and around where it is now. Do you see yourself being as aggressive as we move through the year?

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

Makes sense.

Analyst Mike Halloran (Baird): And then maybe just talk about what the optionality looks like in terms of pipeline, actionability, et cetera, and then maybe just give a little bit more context on why the tuck-in you made on the analytics side made sense to you all.

Executive Name: Yeah, I think, you know, in my opening remarks, and I've said this in the past, we talk about $1 billion of capital deployment towards M&A, you know, to help us get to the kind of mid-teens EPS growth that we outlined at our investor day back in 2024. So we're still tracking for that.

You know, you've heard me talk a lot about our improved internal process, where before we were a bit more top-down, a bit lumpy in terms of our execution on M&A, bigger targets. Now we're much more focused in the segments, with the segment presidents really owning it, working bottom up. And because of that work over the past couple years, we have a very strong pipeline, and across all of our segments. So I think that gives us a lot of confidence that we'll be more consistent over time with capital deployment.

What was the second part of your question?

Executive Name: Oh, the tuck-in, sorry. Yeah, the recent deal we just signed. So it's a, like I said on the prepared remarks, we signed a, first of all, we have confidentiality provisions with the seller, so we're unable to share the target's name or a lot of the transaction details outside of the purchase price. That was $219 million. But it's really a highly engineered water quality instruments business. It strengthens our position in high-margin optical sensing and process applications across clean water, wastewater environment and industry.

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

Analyst Jacob Olson (Mellis Research): Hey, good morning, everyone. Just on measurement and control, it looks like things are stabilizing a little bit there. The order book looks pretty solid. Can you maybe just mark to market where we are in the cycle across electric and water? Because I know there's not necessarily synchronized right now, but it seems like there's a refresh cycle going on in electric, and maybe that's coming in water. But how do you see that playing out this year and maybe into 27?

Executive Name: Yeah, I mean, just at the high level, if you go back to kind of 2008 and 2009 with the America Reinvestment Recovery Act kind of coming out of the Great Recession, the utilities on the electric side did a major push on AMI. And so you started to see a refresh there over the past, probably last year into this year and the next coming couple of years.

Water was probably anywhere from five to seven years behind that initial wave of AMI deployments. And so, you know, as we're moving through the next, you know, two to three years of electric refreshes, we'll start to, as we exit this decade going into 2030, start to see a pickup in the refresh of water. So that's a little bit of history and some of the timing as we think about energy and the refreshes going on now.

Analyst Jacob Olson (Mellis Research): And then as we get into the end of the decade, we'll start to see a turn and a pickup on the water refresh side.

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

Executive Name: Yeah, I think we'd probably say it is bottoming out, kind of bouncing at the bottom here. With the team making some progress in some of their focused efforts with areas where we actually have more differentiation and we're doubling down and focusing. I think we've highlighted about a third is market, a third is actions that our competitors are taking, and then a third is us actively walking away from business.

I think for the total Xylem, most of the pressure is here in the first and second quarter, and that comp gets easier. We said for the full year it was about 1% headwind for sales, but that equates to, again, on the first half of the year about 2% since it's primarily concentrated in the first and second quarters.

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

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

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

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

Executive Name: Yeah, I think it's across the portfolio, but significant expansion within MCS and water infrastructure, primarily as mix normalizes and we shift from price driven growth to significant volume growth based upon some of the projects hitting within MCS, and then within water infrastructure, getting past some of this walkaway pressure and China pressure here in the first half.

So that's really, it's a volume and mix normalization, kind of leveraging the structural costs that we've taken out last year and continue to take out in the first half of 2026.

Analyst Brian Blair (Oppenheimer): To follow up on Nathan's question, I guess I'd ask a little more directly. Given current visibility with MCS inclusive of mixed expectations and the pending divestiture, how should we think about, you know, margin cadence through the back half and, you know, more importantly, what's a realistic exit rate or equivalently jumping off point for 27 margin?

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

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

Executive Name: No. No major changes to the organic guide and aggregate, and no major changes to the makeup between the segments.

Analyst Brian Blair (Oppenheimer): Understood. Thank you again.

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

Executive Name: I think we have some forward fixed contracts, but that's limited on some of our raw commodity exposures. I think our supply chain team does a phenomenal job at looking for alternate sources and competitive bids to help mitigate just increase in prices through dynamic supply chain management.

But again, our first and fourth lever on this is incremental pricing. Again, the practice the team has had post-COVID supply chain challenges, inflationary drivers, now with tariffs and then now potential increased inflation due to rising fuel costs and the ripple effect that that has across the industrial supply chain.

I think we're confident that we can continue to offset that. The magnitude could compress margins slightly, you know, as we're not getting incremental, you know, flow through of 40% on that and those types of price increases. But relative to dollar for dollar, right now our expectations are that we can manage.

Obviously, we'll see. The next four weeks, I think, will be critical to see what happens with the conflict and if the strait opens up. But again, relative to the actions that we've taken internally, I think we're as prepared as we can be, the nimbleness of our new organizational construct. I appreciate that.

Analyst William Griffin (Barclays): And then just wanted to follow up on 80-20. I know you had previously talked about 2026 being sort of the peak of walkaway. I think that was a 200 basis point offset to the organic growth guidance. Could you just talk about the cadence or timing of that walkaway? Is that primarily in the first half or evenly spread throughout the year?

Executive Name: No, I think it's more weighted to the first two to three quarters of the year. There's some longer tail stuff within the treatment business within water infrastructure that'll maybe extend past that, but we're more heavily weighted here in the first half of the year.

Got it. Appreciate the time. Thank you.

Executive Name: Thank you. We'll wrap up there. Thanks for your questions, and thank you to everyone who joined today. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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.