Xylem Inc.(XYL)Q2 2026 法說會逐字稿

Good day, everyone, and welcome to Xylem's Second Quarter 2026 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To withdraw your questions, you may press star and 2. Also note today's event is being recorded. At this time, I would like to turn the floor over to Michael Travers, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to Xylem's second quarter 2026 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, William Grogan. They will provide their perspectives on Xylem's second quarter results and discuss the third quarter and full-year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I will ask that you please keep to one question and a follow-up, and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website. A replay of today's call will be available until midnight, August 11, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that may occur. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K and subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide 3. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be made on an organic and/or adjusted basis unless otherwise indicated. Non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now please turn to slide 4. I will turn the call over to our CEO, Matthew Pine.

Thank you, Michael. Welcome to the team. It is great to have you with us today. Good morning, everyone. Thank you for joining us. Across our markets, we are seeing a clear theme. Both utilities and industrial customers are placing greater value on comprehensive water solutions that help improve resilience, performance, and efficiency. Over the past several years, we have been intentionally positioning Xylem for this moment. Today, that strategy is increasingly taking shape. Municipal remains a core strength and resilient foundation for our business. At the same time, we have been increasing our exposure to high-growth industrial verticals where our technology, services, and water expertise create greater value for customers. This evolution is being driven by three factors. First, more industries are relying on water to support quality, reliability, and operational performance. Second, the AI ecosystem build-out is increasing the strategic importance of water across a broader set of end markets. And third, our portfolio actions are sharpening our capabilities around the markets where we see the strongest long-term growth and value creation. One of the clearest trends we see is that customers increasingly want simplicity. They are looking to work with a strategic partner that can help them manage growing complexity around regulation, operational resiliency, and risk management. We have seen this play out in a number of engagements this year, from the expansion of our long-term partnership with Dow, which became the largest contract in our company's history, to our recent win with one of the world's largest chemical companies. In this engagement, we were selected over a long-term incumbent to secure a 20-year commitment. This opportunity brings together our advanced treatment technology, operations, maintenance, and digital monitoring under a single integrated model. Importantly, this momentum reflects the stronger industrial platform we created through the Evoqua acquisition, which significantly expands our capabilities across treatment, reuse, and services, deepening our presence in attractive industrial end markets. That brings me to the second area which we documented in the 'Watering the New Economy' report we released at Davos in January. Water will play an increasingly strategic role in the AI ecosystem. As AI-related infrastructure expands from data centers and semiconductors to power and mining, access to reliable water is becoming increasingly important. We are already supporting data centers through wins with hyperscalers, HVAC OEMs, and infrastructure partners, and this year's revenue is expected to increase by approximately 200%. However, this is only part of the story. We view data centers as an early indicator of a larger opportunity across the AI ecosystem, where water is increasingly becoming a critical input to infrastructure development and industrial growth. Over time, we see this same value proposition extending into additional verticals such as food and beverage and life sciences, where water quality, reliability, and sustainability are also essential. To align our business with these growth drivers, we have actively reshaped the portfolio, sharpening our focus through more than $400 million of divestitures while acquiring assets that expand our ability to serve customers in high-growth markets. The recently closed TriOS acquisition strengthens the intelligence layer of our portfolio through advanced sensing and water quality capabilities that are highly relevant to industrial customers. We also recently signed an agreement to acquire WaterFleet, which expands our capabilities in mobile water treatment and strengthens our position across AI-related infrastructure markets. This is a services-led business with recurring revenue, established customer relationships, and strong commercial momentum, including a multimillion-dollar project supporting a hyperscaler data center buildout in Texas. Importantly, we are not investing ahead of hypothetical demand. We are aligning the portfolio with demand patterns we are already seeing in the market and where customers are already choosing Xylem to solve increasingly complex water challenges. At the same time, demand in our municipal markets remains healthy, supported by strong infrastructure spending and backlog execution. I will now turn it over to Bill to take you through the detail for Q2 and our updated guidance.

Thanks, Matthew. Please turn to slide 5. We are pleased with the momentum we have built in the first half of the year. Our team stayed disciplined despite market volatility and delivered solid results that give us a strong base to build on. Demand remains healthy. Our ending backlog is $5.3 billion and our book-to-bill for the quarter was well above 1. This was supported by the Dow order in WSS as orders were up 41% versus last year, with growth in three of our four segments. Revenue was up 1% in the quarter versus prior year, in line with expectations as strength in key markets offset a 27% decline in China and walkaway revenue of almost 2%. The team's operational discipline delivered quarterly EBITDA margin of 23.3%, up 150 basis points versus the prior year. The improvement was driven by productivity, price, and mix more than offsetting inflation and lower volume. Water Infrastructure led the way with strong leverage in North America transport growth. We also achieved record EPS of $1.46, a 16% increase over the prior year. Net debt to adjusted EBITDA increased to 0.8x, driven by our opportunistic share repurchases in the quarter. Free cash flow was strong in the quarter, driven by higher net income, partially offset by outsourced water contracts. The teams continue to make progress with our working capital efficiency metrics. Let's turn to slide 6. For Measurement and Control Solutions, in the quarter, book-to-bill was below 1 but backlog remained at roughly $1.2 billion. Orders were up 2% driven by continued smart metering demand in water, with double-digit orders growth, offsetting declines in electric on difficult comps and project delays. Revenue was down 1% driven by energy metering demand mostly offsetting softness in water. EBITDA margin of 21.1% was 200 basis points lower than prior year, driven by unfavorable mix, inflation, and volume, offset partly by productivity and price. With recent project delays in electric metering, we are bringing down our outlook for the MCS full-year performance to low-single-digit revenue versus the prior year. The pipeline is strong and long-term electric demand remains healthy. But affordability concerns and a more cautious capital spending environment ahead of upcoming elections have slowed near-term investment. We continue to win more than our share of the market, and expect sustained growth in the years ahead, driven by the ongoing AMI 2.0 refresh cycle. In Water Infrastructure, orders were down 4% in the quarter, driven by continued softness in treatment due to 80/20 actions in China, offset by strong demand in transport. Revenue was up 3% driven by transport, offsetting softness in treatment related to our walkaway actions. Double-digit growth in U.S. municipalities more than offset a 40% decline in China. EBITDA margin expansion was outstanding for Water Infrastructure at 480 basis points, with productivity, mix, price, and volume more than offsetting inflation and investments. In Applied Water, orders were up 9% and book-to-bill was well above 1, lifted again by data center activity. Data center orders in Q2 were up over 300%. Revenues were up 3% versus the prior year, primarily driven by strength in U.S. commercial buildings, offsetting softness in the residential end market and China. EBITDA margin was slightly below expectations, down 50 basis points year-over-year, driven by inflation and volume, mostly offset by productivity and price. Finally, Water Solutions and Services saw significant orders growth due to its largest order ever in April, an approximately $850 million, 23-year outsourced water project. Revenue increased 1% year-over-year, driven by capital projects including the impact of the finalized Dow contract and strength in dewatering. Segment EBITDA margin was 25.3%, up 90 basis points versus the prior year, driven by price, mix, and productivity, offset by inflation and lower volume. Now let's turn to slide 7 for updated full-year and third quarter guidance. We are narrowing our organic outlook against the prior guide, with MCS electric project delays impacting the near-term outlook. Full-year reported revenue is now expected to be roughly $9.2 billion which delivers revenue growth of approximately 2% while organic revenue growth will be in the 2% to 3% range versus prior guidance of 2% to 4%. EBITDA margin is expected to be 23.1% to 23.5%, versus the prior guide of 22.9% to 23.3%. This represents 90 to 130 basis points of expansion versus the prior year, driven by productivity, volume, and price more than offsetting inflation as well as investments in the business. Also, there is no material impact to our projected results from recently announced changes in tariffs or tariff refunds. Our strong first half performance, along with the benefits from share repurchases and higher margins, more than offset the revenue headwind from electric metering delays and gives us confidence to raise the EPS range from $5.35 to $5.60 to $5.55 to $5.70. Cash flow generation was strong in the first half, and we remain on target to achieve our low-double-digit free cash flow margin for the year. Now drilling down on the third quarter. We anticipate revenue growth will be flat on a reported basis and up roughly 3% organically. We expect third quarter EBITDA margin to be approximately 23.5% to 24%, which is up 30 to 80 basis points driven by price realization, productivity gains, and higher volumes. These results will yield third quarter EPS of $1.42 to $1.47. We are exiting the first half of the year with strong demand and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and impacts and benefits from our simplification efforts. We also continue to monitor broader market conditions and volatility, including the Middle East conflict, changes in tariffs, and other inflationary pressures. Overall, our expectations for this year remain extremely positive as we build momentum to a strong fiscal year in 2027. With that, please turn to slide 8. I will turn the call back over to Matthew for closing comments.

Thank you, Bill. Stepping back from the quarter, I think it is important to keep sight of what is driving demand across our markets over the longer term. We continue to see healthy demand for water infrastructure investments as the underlying need to modernize and maintain water systems remains strong. At the same time, the growth of AI is making water a more strategic input across a broader ecosystem, driving demand from semiconductors and power generation to mining and other critical industries. Beyond AI, we see similar opportunities emerging across high-growth industrial sectors such as food and beverage and life sciences, where water is increasingly central to quality and operational performance. These trends are creating demand opportunities across the markets we serve and reinforcing the value of the capabilities we have been building. As we position Xylem for the future, we remain focused on strengthening our portfolio, our capabilities, and our leadership team. Recent leadership changes reflect that ongoing focus and I would like to recognize Meredith and Joe as they take on their new roles while also thanking Mike for his many contributions to Xylem and wishing him the very best. Across the organization and portfolio, the strategic decisions we are making today are expanding our ability to serve customers, increasing the quality of our growth, and positioning Xylem to create greater value over the long term. And now let's open up the call for your questions.

We will now begin the question-and-answer session. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. We will pause momentarily to assemble the roster. Our first question today comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.

Thank you. Good morning, everyone. I would like to put the spotlight on Applied Water and that revenue growth of 9%—nice upside there. You talked about the data center growth and the 300% increase in orders. Could you flesh out that 9%? What were the key industrial non-municipal drivers there, and what is the outlook for the balance of the year?

Deane, thanks for the question. Applied Water growth was largely driven by data centers. In North America, our commercial building services business has also performed well across multiple verticals. Data centers remain a very attractive growth area for us, and we expect our exposure to continue to increase over time. As noted in our prepared remarks, we expect data center-related revenue to increase substantially this year; we will likely exit the year with about 2% of our revenue tied to data centers. Also, our acquisition of WaterFleet, which is in the WSS segment, will provide additional exposure into that part of the marketplace as well.

I wanted to put the spotlight on capital allocation. We like the WaterFleet deal and its positioning. Maybe step back and talk about opportunities in outsourced contracts. The Dow order was a milestone for you, but it seems there's more to do—that was the premise of the Evoqua deal. What can you tell us about the pipeline for these contracts?

We have multiple contracts in the pipeline. Build-own-operate arrangements are a big part of that, as well as capital and services deals. Municipal remains a source of strength and a core part of our business, but Evoqua expanded our capabilities and increased participation in high-growth verticals like high-tech, power, life sciences, and others. These are complementary to municipal. A couple of examples: we recently won a job in lithium battery manufacturing—we secured a win with the world's largest lithium battery cell manufacturer to treat and recycle a novel wastewater stream. That solution includes advanced wastewater treatment and leverages our zero-liquid-discharge asset from the Vacom acquisition, giving us a complete treatment train. Another example is a data center in Pennsylvania, where we are treating settled river water to provide the quantity and quality of water they need, supplementing municipal supply. These examples show the type of outsourced and long-term services business we are winning.

Our next question comes from Mike Halloran from Baird. Please go ahead with your question.

Hey. Good morning, gentlemen. Let's start on the MCS commentary. Can you help frame how you are thinking about things? The electric piece sounds like there are some pushouts—what is going on there? Any change in thought process from those customers on a medium- to long-term horizon? And contrast that with what you are seeing on the water utility side as we move to the back half—any change on that side and how you think about what that trajectory means for out years?

Mike, if we start with the revenue takedown from the high end, much of it is around MCS and is directly attributable to the slowdown in electric meter deployments. Affordability concerns and a more cautious capital spending environment ahead of upcoming elections have slowed near-term investment. Politicians have taken a hard stand on electricity rate increases in some areas, and utilities have pulled back pockets of their short-term investments to compensate. We continue to gain share versus competitors based on our bid and win rates and expect the market to be healthy in the years ahead, primarily driven by the ongoing AMI 2.0 refresh. On the water side, we continue to see strength. Order activity and customer engagement are constructive. Our funnel is up about 30% versus last year. Water orders have been up double-digits in both the first and second quarters, and we expect that to continue into the second half, helping offset some declines on the electric side. We expect water to be up about low-single-digits for the year with a strong second half.

Maybe some thoughts on orders more holistically and how you are thinking about things from here. The treatment side seems concentrated overseas and intentional. What is the run rate for WSS on the infrastructure side? And putting this together with the applied comments, 80/20 initiatives, and the water momentum, as you exit this year, are we looking at something more normalized from a growth perspective relative to your long-term growth for Xylem?

If I start at a high level, revenue progression through the year is generally in line with the exception of the electric metering delays. We were flat in the first quarter, up 1% in the second quarter, and expectations are for about 3% in the third quarter, exiting the year in the fourth quarter at mid-single digits. We are building momentum into next year. By segment: Applied Water has had really strong orders consistently with book-to-bill above 1 for several quarters. Beyond data centers, we see resiliency in U.S. commercial buildings and expect them to continue to build backlog into a strong 2027. Water Infrastructure, even with the China headwind and some 80/20 walkaways on treatment, has built backlog in the first half and we expect positive orders growth in the second half. They will finish the year with positive book-to-bill and strong momentum heading into next year. WSS had a phenomenal first half, though it will remain lumpy. The shift toward outsourced water is creating a strong funnel across different end markets, and the backlog they will end the year with puts us in a strong position. On MCS, near-term mitigation exists on the electric side, but water momentum continues to build; we expect positive book-to-bill in the second half with high-single-digit orders growth in that segment. Overall, there is lots of momentum across the organization, giving us confidence heading into next year.

Thanks, guys. Appreciate it.

Thanks, Mike.

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

Hey. Good morning.

This is Adam Farley on for Nathan. Maybe first on Water Infrastructure: could you speak to the underlying treatment market excluding the 80/20 actions you are undertaking?

Overall, treatment demand in the U.S. is positive. Even with 80/20 actions and some projects where we've increased price, we've had a very strong win rate. Treatment in the U.S. has been positive and we expect that to continue into the second half. The challenges are more related to China and decisions we have made on bidding strategy in some emerging markets. The business has momentum heading into the back half.

Thank you. Switching gears, are you seeing any signs of supply chain tightness anywhere in the portfolio? Do you think there is any need to increase safety stock for electronic components?

We review supply chain monthly. I do not think there is anything pressing that we haven't already addressed. We have brought in about a year of supply for critical rare earth components in most of our businesses, and for chips and wafers we targeted about six months of supply as a safety buffer. Outside of those two areas, we are generally balanced and continue to monitor monthly.

Great. Thank you for taking my questions.

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

Good morning, everyone. Matthew and Bill, strong quarter margin, particularly in Water Infrastructure. Could you double-click on the main drivers of that strong performance? Did you hit another glide path in terms of the 80/20 performance? Also, Q3 margin guidance is up 30 to 80 basis points versus Q2's 150 basis point improvement—can you give more color on the puts and takes for Q3?

Water Infrastructure had a phenomenal quarter and continues to lead margin expansion for the company. They are seeing increased benefits from simplification efforts. The 80/20 program has been in place for over two years and they have optimized overhead to more effectively serve customers. They have been purposeful in go-to-market strategies, being selective on bidding projects where they can create the most value. That selectivity has weighed on orders and sales growth in the short term, but should drive better leverage as they return to mid-single-digit growth. They also saw more transport mix in the quarter, which helped margins this quarter but may balance a bit sequentially, creating a Q4 margin challenge. Overall, we continue to see margin opportunities within the segment from operational productivity and other actions, so we remain excited about their margin outlook.

That is helpful. Evoqua was big in microelectronics, mining, life sciences—do you see more incremental projects in those end markets? What are customers saying? Could WSS continue to improve in growth even outside of outsourced water?

Coming into the year there were some project delays due to tariffs and rescoping that pushed some work out by three to six months. Momentum is picking up and the business will be back to mid-single-digit growth in the second half. We have an active funnel and strong backlog, as evidenced by the Dow win and another large order we recently received from one of the world's largest chemical companies. Long term, we expect accretive growth from high-growth verticals within WSS—what we call high-tech: semiconductors, data centers, power. Power is picking up given changes in the energy mix and the generation needed for the AI ecosystem; we see opportunities in nuclear expansion specifically, plus mining, life sciences, and food and beverage as other targeted growth areas. We expect momentum to continue and to exit the year strong in that business.

Great. Appreciate the color.

Our next question comes from Scott Davis from Melius Research. Please go ahead with your question.

I want to talk about 80/20 and how it evolves as it scales. Initially you spent a couple of years doing basic 80/20 with a fair amount of walkaway revenue. By 2027, do you still have walkaway revenue, or are you at the point where you are back to a more traditional 80/20 with customers segmented and the lower-value work already gone, so you're playing offense more than defense?

We have accelerated our actions this year and this will be the height of our walkaway revenue at close to 2%. We expect next year to be significantly lower as we have gone through the majority of the portfolio. 80/20 is becoming a fundamental element of our operating model. We are about 2.5 years into the transformation, and each quarter we simplify further and embed the approach into the culture. It is not just a tool set; it is how we drive long-term growth. As we implement 80/20 and shift resources, we are focusing on underrepresented areas like U.S. transport, data centers, mining, and outsourced water. These actions will be catalysts for incremental growth in 2027. So you are right: we are shifting from using 80/20 primarily as a margin lever to using it to enable our growth algorithm once walkaway revenue has been largely addressed.

Switching to M&A and potential uses of the balance sheet: public valuations have revalued lower, and private markets often follow. Have you seen opportunities where valuations are coming down to attractive levels? Do you have a backlog of opportunities where it makes sense given your position?

It is a mixed bag and depends on the type of businesses. We are starting to see some softening and signals, but it is not uniform across the market. We have a very active M&A funnel. We talked about deploying roughly $1 billion of capital toward M&A this year; we are tracking to that goal and have a healthy pipeline. We remain excited to continue to deploy capital toward accretive M&A opportunities.

Okay. I will pass it on. Thank you.

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

Good morning, everyone. Did you see a noticeable pickup as the quarter progressed in some of your more short-cycle areas, like pump-and-valve areas?

Our short-cycle exposure is primarily within Applied Water. That business has been fairly consistent outside of the data center strength. We did call out small residential exposure as an area of weakness in Applied Water. Overall, we did not see a material immediate inflection tied to increasing industrial production; the short-cycle areas were relatively stable.

Got it. I had some confusion on the China comments. We had thought China was a small portion of revenue. Can you help us understand the nature of the declines and your commitment to China as you continue to apply 80/20?

Our commentary on China has been consistent. It remains a challenging market for us on orders and revenue. In Q2, orders were down over 30% and sales were down almost 30%, reflecting ongoing economic headwinds in water infrastructure and Applied Water. The Chinese government has been investing less in infrastructure and shifting dollars into AI and life sciences. There is significant competition in the market, and our selectivity under 80/20 has affected results. Last year China was about 3% of overall sales; this year it will be about 2%, so roughly a 1% headwind for total Xylem. We think it has bottomed out a bit; the second half should be sequentially similar to the first half on total volume, and comps will be easier year-over-year. We have rightsized the market and are being selective in areas where we can differentiate with our technology. China remains the world's second-largest economy, so it is a market we intend to participate in while we consistently evaluate our approach.

Thanks, Bill.

Our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question.

Hi. Good morning.

This is Chris Granga on for Joe. The MCS outlook continues to rely on a fairly substantial fourth quarter step-up. Could you elaborate on what increases your confidence in that trajectory, particularly given Q2 growth was modest at 2% organic?

Q2 growth included strong water performance offset by electric metering delays. We have double-digit orders growth on the water side through the first half. Our flow business is tracking well and we have line of sight into projects that support sequential improvement. We expect to be book-to-bill positive in the second half with orders in the high-single-digit range on the water side, and the proof points support that outlook outside of the electric challenges.

You highlighted momentum in digital offerings and early adoption of Data Lake. What are you seeing in customer engagement since the launch of that product, and are tools like Data Lake accelerating adoption of higher-value offerings such as Vue and the pathway from metering deployments to recurring software revenue?

We have seen fast pickup in the Vue platform through our joint venture with Idrica. We've been building this for about three years and we have significant momentum: we doubled the business last year and are on pace to grow it significantly in 2026, likely around 30% to 40% growth year-over-year as of today. Utilities' biggest pain point is fragmented applications and the need to bring them into a common platform and data lake to drive insights. Vue addresses that need. We've had significant wins over the past three months that bolster our position with utilities. The platform is scalable beyond municipal customers; we are talking to industrial companies where the platform can also scale. We wanted to get rooted in municipal markets and gain momentum there, and we are now looking to expand into industrial verticals as well.

Thank you.

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

Thanks for your questions today, and thank you to all who joined. As always, we appreciate your interest in Xylem. All the very best. Take care.

With that, we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.