Xylem (XYL) Q4 2025 Earnings Call Transcript

Image source: The Motley Fool.

Date

Tuesday, February 10, 2026 at 9:00 a.m. ET

Call participants

• Chief Executive Officer — Matthew Pine
• Chief Financial Officer — Bill Grogan
• Vice President, Investor Relations — Keith Buettner

Takeaways

• Backlog -- $4.6 billion at year-end, with a book-to-bill ratio near one for both the quarter and the full year, reflecting balanced demand and conversion.
• Orders -- Total orders grew 7% in the quarter, with over 20% growth in the Measurement & Control Solutions (MCS) segment; full-year orders rose 2%.
• Revenue -- Increased 4% in the quarter and 5% for the full year, despite comping against 7% quarterly growth last year.
• MCS Segment -- Backlog ended at roughly $1.4 billion; quarterly orders climbed 22% but fell short of internal expectations due to project delays shifting into 2026.
• Water Infrastructure -- Orders dipped by 1% in the quarter, with nearly a 30% decline in China offsetting double-digit U.S. growth; revenue was flat.
• Applied Water -- Orders advanced 5%, supported by large U.S. projects and data center wins; segment EBITDA margin rose 60 basis points year over year.
• EBITDA Margin -- Quarterly adjusted EBITDA margin reached 23.2%, up 220 basis points; the full-year margin rose 160 basis points to 22.2%, driven by productivity and pricing offsets to inflation.
• EPS -- Fourth-quarter adjusted EPS was $1.42, representing a 20% increase year over year, establishing a quarterly record.
• Free Cash Flow -- Year-to-date free cash flow declined by 2%, consistent with expectations, due to system investments, outsourced water projects, and restructuring, partially offset by higher net income.
• China Performance -- Q4 China orders in Water Infrastructure fell by nearly 70%, with sales down almost 30% because of end-market weakness and price competition from local firms; local headcount was reduced by over 40% to align with volume contraction.
• 2026 Revenue Outlook -- Full-year revenue is projected at $9.1 billion to $9.2 billion, equating to 1%‑3% reported growth and 2%‑4% organic growth; guidance reflects a planned, temporary top-line headwind of approximately 2% from acceleration of 8020 simplification actions.
• 2026 Segment Growth -- MCS: mid-single-digit growth expected, led by energy meters; Water Infrastructure and Applied Water: low-single-digit growth anticipated, with ongoing China weakness and 8020 headwinds; Water Solutions & Services: mid-single-digit growth driven by outsourced projects and dewatering demand, supported by $1.4 billion backlog.
• 2026 EBITDA Margin Guidance -- Expected in the range of 22.9% to 23.3%, a 70‑110 basis point improvement driven by productivity, price, and volume, partially offset by inflation.
• 2026 EPS Guidance -- Projected at $5.35 to $5.60, representing 8% growth at the midpoint.
• First Quarter 2026 Guidance -- Revenue growth anticipated at 1%‑2% reported (flat organically); adjusted EBITDA margin expected at 20.5%‑21%, up 25 basis points at midpoint; EPS guidance of $1.06 to $1.11.
• Divestiture Activity -- International metrology business (roughly $250 million revenue, under 10% EBITDA margin) is scheduled for divestiture at the end of Q1 2026; EPS impact described as “fairly small,” at approximately $0.02‑$0.03 for the year.
• Capital Allocation -- Management expects to maintain capital deployment priorities as core business investment, M&A (~$1 billion/year), dividends, then opportunistic share buybacks; more active on buybacks at low leverage levels.
• Xylem View Digital Business -- Revenues doubled in 2025; management forecasts over 30% growth in 2026.

Need a quote from a Motley Fool analyst? Email pr@fool.com

Risks

• Bill Grogan reported that "Orders were up a robust 22% driven by smart metering demand across water and energy. However, this was below our expectations with several projects pushing out into 2026," signaling risk of revenue timing and backlog conversion volatility.
• China remains a challenging market, as Bill Grogan stated, "Q4 orders were down almost 70%. Sales declined almost 30%," attributing this to weak utility and building markets plus intense price competition from local suppliers.
• The increase in purposeful walkaways from low-quality revenue, described as a 2% top-line headwind for 2026, results in near-term revenue softness, although positioned as value accretive long-term.

Summary

Xylem (NYSE:XYL) delivered record performance in revenue, EBITDA, and EPS, concluding the year with balanced order activity and a healthy $4.6 billion backlog. Management emphasized the acceleration of the firmwide 8020 simplification initiative, which is expected to produce a 2% revenue headwind in 2026 but reinforce margin gains and long-term earnings quality. Strategic actions in China included a greater than 40% headcount reduction as the company targeted higher-margin opportunities amidst continued end-market weakness and price pressure. 2026 guidance reflects modest top-line growth and margin expansion, with the divestiture of the international metrology business contributing a minimal EPS impact and further portfolio streamlining.

• Xylem View's continued expansion in digital solutions, projected to increase revenues by over 30% in 2026 after doubling in 2025, may support structural top-line momentum outside traditional hardware.
• Management's capital deployment priorities remain consistent, favoring core investment and bolt-on M&A, with opportunistic share buybacks becoming more likely as leverage stays low.
• Ongoing backlog normalization, especially in the Measurement & Control Solutions segment, is explicitly shaping the cadence of 2026 revenue, with project delays contributing to a slower start and expected acceleration into the second half of the year.
• Major sector opportunity is highlighted in water demand management for data centers and semiconductor fabrication, with management citing a commissioned Global Water Intelligence report forecasting a 130% increase in water demand for these sectors by 2050 and identifying reuse and leak mitigation as critical solution areas for Xylem's growth.

Industry glossary

• 8020 (Eighty‑Twenty): Xylem’s internal framework for business simplification, product and customer portfolio optimization, and focus on high-value segments, which often includes exiting low-margin business lines.
• Backlog: Unfulfilled customer orders expected to be converted into revenue in future periods, used by Xylem as a leading indicator of demand and revenue visibility.
• Book-to-Bill Ratio: Ratio of orders received to revenue billed in the same period; a value around one indicates stable demand and conversion.
• Measurement & Control Solutions (MCS): Segment focused on smart meters, network devices, and analytics, including water and energy meter technologies and software solutions.
• Xylem View: Company’s digital business line offering cloud analytics, remote monitoring, and data management solutions.
• Applied Water: Segment encompassing pumps, valves, and associated systems for industrial, commercial, and building applications.
• Water Infrastructure: Segment including water transportation and treatment solutions, such as pumps, filtration, and disinfection systems for utility/municipal and large-scale projects.
• Water Solutions & Services (WSS): Segment providing outsourced water projects, dewatering, and value-added services to industrial and municipal clients.

Full Conference Call Transcript

Keith Buettner: Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth quarter 2025 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's fourth quarter and full year 2025 results and discuss the first quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investor section of our website.

A replay of today's call will be available until midnight, February 24, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will, or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-Ks and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances.

And actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, unless otherwise indicated, all references will be on an organic and/or adjusted basis. And non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide four, and I will turn the call over to our CEO, Matthew Pine.

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

And there's more to come in 2026. In parallel, we're entering phase two, strengthening our growth engine by leveraging improvements in our operating model. Focusing on Salesforce effectiveness, product management, and innovation. Phase three will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation, and deepening exposure to the most attractive future water markets. We're tracking to the framework we laid out almost two years ago, and we have plenty of runway ahead. As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower quality revenue. That creates a short-term top-line headwind, as we've communicated previously. But it drives higher quality earnings.

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

Bill Grogan: Matthew. Please turn to slide five. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year. Delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year. Demand remains positive. With our backlog finishing at $4.6 billion. Our book to bill was near one, both in the quarter and for the full year. Orders were healthy, up 7% in the quarter. Driven by over 20% growth in MCS. And for the year, orders were up 2%. Revenue grew 4% in the quarter, despite a challenging comparison of 7% growth in the same period last year. Full year revenue growth was solid at 5%.

Full year EBITDA margin expanded 160 basis points to 22.2% driven by the same factors. The team's operational discipline delivered quarterly EBITDA margin of 23.2%. Up 220 basis points versus the prior year. The improvement was driven by productivity and price, more than offsetting inflation. Full year EBITDA margin expanded 160 basis points to 22.2% driven by the same factors. We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape. With net debt to adjusted EBITDA of 0.2 times.

Year-to-date free cash flow decreased by 2% from the prior year, in line with expectations driven by outsourced water projects, system investments, and restructuring costs offset by higher net income. Let's turn to slide six. In measurement and control solutions, we continue to convert the backlog with MCS' backlog finishing the year roughly $1.4 billion. Orders were up a robust 22% driven by smart metering demand across water and energy. However, this was below our expectations with several projects pushing out into 2026. Revenue was up 10%. Driven by energy metering demand, but supported by high single-digit gains in water as well. Which offset softness in analytics, related to timing effects caused by the government shutdown.

EBITDA margin of 20.2% was 310 basis points higher than prior year. Driven by productivity, price, and volume more than offsetting mix and inflation. In water infrastructure, orders were down 1% in the quarter, with softness in treatment primarily in China mostly offset by strong demand in transport. Revenue was flat, with strong double-digit growth in The US, offset by an almost 30% decline in China. EBITDA margin for water infrastructure was up a remarkable 510 basis points driven by productivity, price, and mix, offset by inflation, volume, and investments. In applied water, orders were up 5% and book to bill was roughly one. Lifted by large projects and data center wins in The US.

Revenues were up 3% versus the prior year. Primarily driven by strength in US commercial buildings. Segment EBITDA margin increased 60 basis points year over year. Driven by productivity and price, offset by inflation, volume, and mix. With some of these items being nonrecurring in nature, we expect Applied Water to be back in the 20% EBITDA range in the first quarter. Finally, water solutions and services saw robust demand orders increasing 7% driven by strength in services. Revenue growth was strong, up 4% against a tough comp. With strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year driven by price, volume, and productivity, offset by inflation and mix.

Now let's turn to slide seven for our 2026 segment outlook. Heading into 2026, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem. Focus on our customers, and drive profitable growth. We are providing full year organic revenue outlook for the segments. And want to highlight that we are accelerating our 8020 efforts around product and customer simplification. As a result, we will have an outsized headwind to our top line for the year of roughly 2% doubling the impact we experienced in 2025. We expect this as a one-year elevation we are still committed to delivering on our long-term framework. In MCS, we expect growth in the mid-single digits.

Overall demand is positive, and our pipeline remains strong. But project timing has been more variable and less predictable than we have experienced over the last few years. Our expectation is energy meters will drive a majority of the growth in 2026. And water meters will grow low single digits as expected orders from the fourth quarter pushed out into the '26. We will also have an impact from our eighty twenty actions. Primarily in analytics, impacting overall segment growth for the year. The first quarter will be challenged, down low single digits. We expect to see sequential revenue improvement throughout the year. As project kickoffs accelerate in the back half of the year.

Also, as a reminder, we expect to close on the divestiture of the international metering business at the end of the first quarter. In water infrastructure, we expect low single-digit growth. We anticipate resilient OpEx and CapEx demand due to the mission-critical nature of our applications. With healthy utility end markets across most regions. However, we will see headwinds from eighty twenty actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market. Primarily impacting the first half of the year. In applied water, we expect growth in the low single digits. We see growth across developed markets, particularly in The US, with large projects coming online and strong growth in data centers.

Similar to the story in water infrastructure, growth will be offset in applied water by eighty twenty actions, exiting unprofitable business, and a weak China market impacting the first half of the year. WSS will deliver mid-single-digit growth driven by strength in outsourced water projects, and solid demand in dewatering. Though we expect this will continue to be a more variable segment quarter to quarter, due to the project nature of our capital offerings. The segment is supported by a $1.4 billion backlog in strong funnel across all businesses. Now let's turn to slide eight for our full year and Q1 guidance for 2026.

The growth outlook by segment translates into 2026 full year revenue of $9.1 billion to $9.2 billion resulting in revenue growth of one to 3% organic revenue growth of two to 4%. Again, this is on the low end of our long-term framework, through the eighty twenty actions we are taking across our segments. By continuing to increase the quality of our earnings and simplifying our business, to outperform our markets for the long term. 23.3%. EBITDA margin is expected to be 22.9 to This represents 70 to 110 basis points of expansion versus the prior year driven by productivity, volume, and price offsetting inflation.

With productivity continuing to benefit from our simplification efforts, This yields an EPS range of $5.35 to $5.60. Up 8% at the midpoint over the prior year. As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework. And we'll make additional progress in 2026. Drilling down on the first quarter, we anticipate reported revenue growth will be in the 1% to 2% range on a reported basis and flat organically. We expect first quarter EBITDA margin to be approximately 20.5% to 21%. Up 25 basis points at the midpoint. Driven by productivity gains and impacts from our simplification efforts offset by mix. This yields first quarter EPS of $1.06 to $1.11.

We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning, the durability of our portfolio, and further benefits from simplification. Though we are monitoring broader market conditions and volatility, including tariffs, Overall, our expectations for the year remain positive as we build on our strong results. With that, please turn to slide nine, and I'll turn the call back over to Matthew for closing comments.

Matthew Pine: Thanks, Bill. Before we open for questions, let me close with a broader lens. Xylem participated in the World Economic Forum annual meeting at Davos for the first time this year. The headlines were all about AI and geopolitics. But water emerged as a significant underlying theme. More than a dozen sessions frame water is foundational to economic growth, energy systems, and geopolitical stability. That aligns directly with the research we released last month watering the new economy. Which makes a simple point. As AI accelerates growth in power generation, data centers, and microelectronics, water strategy becomes business strategy. These sectors are wrestling with availability, reliability, and efficiency.

They need reuse at scale, dramatic reductions in network leaks, and adaptive infrastructure that automatically optimizes performance. And that's where Xylem is uniquely positioned, covering the full water value chain with practical solutions. That breadth differentiates us at a time when customers are looking for credible, scalable partners. As we pivot further into growth, we'll keep building capability where we have structural advantage. Mission-critical utility and industrial applications where reliability, compliance, and life cycle costs matter most. Digital platforms that help customers optimize network performance, and make resilience affordable. Advance treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities.

In services that turn our technology and installed base into dependable high-value outcomes for customers and durable revenues for Xylem. We're already doing this work at scale. Helping cities and industries recover water they already have reuse what they once discarded, and run their assets more efficiently. We're helping Los Angeles produce 508 million gallons of recycled water per day with plans to deliver 260 million gallons more. Smaller communities like Hot Springs, Arkansas are reducing water losses by 50% or more with far less digging costs. On the industrial side, Silphex, a microelectronics manufacturer, is reusing 80% of its processed water with a Xylem Ultrapure water system.

One of our aerospace customers is now avoiding more than $30 million in wastewater disposal costs with zero liquid discharge technology. Reusing more than 66 million gallons of water annually. All of these examples are responses to intensifying water trends. Driving sustained demand for the solutions we provide across the water value chain. We are confident in the strength of our team, and our platform to capitalize on that demand. And to deliver sustainable high-quality growth over the long term. With that, open the call for your questions.

Operator: Ladies and gentlemen, we'll now begin that If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.

Deane Dray: Thank you. Good morning, everyone.

Matthew Pine: Hey. Good morning, Dean.

Deane Dray: Hey, Matthew. As we do the calendar flip and as you start the phase two, maybe you can give us a two-year progress report if you could Just kinda reflect on the initiatives regarding margin improvement, portfolio optimization and how you are also trying to keep your eye on growth opportunities too?

Matthew Pine: Yeah. So first, we've got a lot of work to do in front of us, so I'll start there. But 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 Evoqua and Xylem. And we 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 eighteen 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. You know, the first in a significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day. In an essence, an engagement rating in your employee survey is would you recommend Xylem as a great place to work? Almost 90% of our top one fifty leaders said they would, and overall company was 74.

When you're going through a significant transformation, I think that's a really good outstanding result. And the industrial sector average is around 37%. And so if they could just speak to the resilience of our team and the culture that we're creating. You know, another good measure that I talk about a lot is on-time performance in terms of how we're you know, 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 a more 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. So we've really improved our structure, our culture, 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 you know, focused on a few areas I would highlight at a high level. One is our Salesforce effectiveness. We need our sales teams, you know, 75, 80% of the time facing the customer versus 40 or 50 or 60 doing back-office work. We need to improve our product life cycle management and innovation, really speed to customer value. So those are areas that we're, as we pivot, we're gonna be keenly focused on this year in building capability. We can leverage the simplicity and get back to growth. But I'm just I'm very proud of the team.

I appreciate the question, and really the resilience they've shown, not only with all the change that we had to deal with, but also, you know, 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.

Deane Dray: That's really helpful. And then as a follow-up for Bill, maybe you can have 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 less identifying less profitable businesses. Not having it accelerate into the second year. So maybe just kind of help Yes. Put that into context. Appreciate it.

Bill Grogan: Yep. No. Sure. But let me let me step back first and just talk about you know, how 8020 is really taking hold in the organization two years into the transformation that Matthew highlighted. Each quarter, we take another step in simplifying Xylem. You know, shifting from just leveraging 8020 as a tool set being a critical piece of how we run the company. With a real focus on resource allocation, putting our best people investments around our 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 not fully launched, and they'll start at the end of this year after they get through their ERP upgrade. And the team continues to make solid progress leveraging the tool set. Right? We started this year, with redesigning the organization and putting P&L leaders in charge of the divisions. 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 this that organizational construct.

You know, as for the 2% headwind, right, a lot of that comes with you know, an evaluation of the product and customer portfolio. Really understanding, you know, the geographies where you might be underperforming, putting in a commercial filter, getting a 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 wanna make sure you bleed the inventory so you don't have an excess issue. You wanna partner with your customers to make sure they're supported through the transition.

So there's know, 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.

Deane Dray: Thank you.

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

Scott Davis: Hi. Good morning, guys. Matthew and Bill.

Matthew Pine: Hey. Good morning, Scott.

Scott Davis: Wanted to follow-up on that question because there's a there's a certain point where eighty twenty goes from being a headwind to a tailwind, meaning that you're doing better with the customers that matter the most and perhaps gaining share and such. But when is that point? You know, it do you start to see some impacts? Like, 2027, 2028? Is it is it is it or is it just too hard to say at this point now that you're kind of in the middle of it?

Matthew Pine: I would say that really 2026 is kind of inflection point Scott for us. You know, the operational transformation never ends, as you know. But we've taken enough ground where we started in the back half of 2025, and it will 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 get more oriented toward the customer 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 the customer maybe 30, 40% of the time. And the goal over the first half of this year is to change that to, say, 75, 80%. So I think we're building momentum, and I'd say we exit 2026 with a lot of, again, momentum around building the growth engine and starting to move towards growth and leveraging this simplicity that we've created.

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

Matthew Pine: Yeah. Maybe just, you know, just to highlight that our priorities continue to be investing in our core business, followed by M&A, dividends and then lastly share buybacks. 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 you know, 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's already in process for the '26. So seeing good momentum there.

And we'll continue to 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 gonna be more forward-leaning towards investing in the core and M&A. However, you know, at low leverage levels, know, like we're seeing now, we're gonna be much more active in buying back shares.

Scott Davis: Gotcha. Thank you, guys. Best of luck. I'll pass it on.

Matthew Pine: Thank you.

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

Mike Halloran: Hey. Morning, everyone.

Matthew Pine: Morning.

Mike Halloran: So can you put the backlog exiting the year in context, what it means for this year? And the phasing for the year. Is where the backlog exit rate was? Is that part of the 1Q softness? How do those sequentials work to 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 wanna put it.

Bill Grogan: Yeah. Maybe I'll touch first just on the backlog positioning. And Matt, you 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 guide. First on MCS, we talked about them working down their backlog throughout the year. Getting to a more normalized level. You know, we highlighted really strong orders in the fourth quarter, we actually had anticipated a few larger projects to book to book that pushed out in the first half. Which puts a little bit pressure on ending backlog and then pressure on kind of our first and second quarter revenue.

And we've talked China has been really weak, especially in treatment, which is a bigger backlog business for us. That probably put us at a lower backlog position. Then we talked about the walk away, revenue. Obviously, that's impacted orders, you know, first before it impacts revenue. So we've seen just a lower backlog associated with some of those actions. You know, as we progress to the back half of the last year. So I think we're in good shape to start the year.

Know, we've talked about healthy commercial funnels for both MCS and WSS our largest backlog businesses, You know, what we have line of sight to relative to commercial funnel, I think reasonable confidence in line of sight to the improve progression as we go through the year.

Mike Halloran: And then maybe some thoughts on China. You know, 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, by local as well as softer end markets. And kinda what changes are you making?

Bill Grogan: Yeah. No. I so I think consistent with the commentary 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 progress through 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 building and industrial end markets and primarily impacting us within water infrastructure and applied water. My local competition continues to drive intense price competition. Due to the capacity that they've built.

But our teams are applying an eighty twenty lens to focus on higher quality more profitable opportunities, which is creating some of the top line pressure. Right? I mean, we're calling that within the China bucket, but you could probably put a little bit of that in the walk away just as we're deliberately exiting some of that low margin, negative margin, business within China. As we talked about last quarter, 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 price some differentiation in certain applications where we can win and deliver stronger margin performance. Because of that differentiation. Ultimately, right, China is a very large economy. You know? We don't think there's 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.

Mike Halloran: Thanks. Appreciate it.

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

Andy Kaplowitz: Good morning, everyone.

Matthew Pine: Hey. Good morning, Andy.

Andy Kaplowitz: Bill. So just maybe a little more color on going on in smart meters. You did have solid orders, but, Bill, you mentioned orders were still below what you expect, 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?

Matthew Pine: Yes. Maybe I'll just maybe start at a high level, Andy, then I'll let Bill get into a little bit of color. But I just wanted to tell everyone on the call, we remain very confident in M MNCS to achieve high single digits long term. As segment. The near-term outlook really reflects project timing and some of the backlog normalization coming out COVID and walk away 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 the one of the last divisions to go into the 8020 tool. And, they're in the process of shedding you know, 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 margin. So 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 and some of the unevenness that we typically get in this segment. And that can have. So I do I think, you know, we do expect a bit more variability in quarter to quarter going forward. So maybe they'll maybe one other point I would make is, you know, I would highlight that Xylem the Xylem View business which doubled in 2025, we're expecting that digital business grow 30 plus in 2026. So we exit this year, that'll continue momentum.

And help drive the top line of this segment as well.

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

Andy Kaplowitz: Helpful, guys. And then, Bill, maybe a follow-up for you. You're to 70 to 110 basis points of margin improvement in twenty six. 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 gonna have an investor day? Maybe just set new targets, and maybe the entitlement of the business from when you started here. Is it mid-twenties or higher? How do you think about that?

Matthew Pine: Yeah. I'll take it, Andy. I think from my perspective, we're already outlining an Investor Day for 2027. We'll update strategy and targets at that point. It's probably sometime in the spring of next year. You know, we have some work ahead of us to deliver this year. And we don't wanna get too far out over our skis. But you know, as a reminder, we laid out, you know, the LR the long-range plan at our last Day in May '24. That we to your point that we would move from 20%, which is the forecast of 2024 margins to 23 by the '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 a lot of change, and we've been able to execute. So I think you know, Andy, about just over a year from now, we'll be in a better position to update the framework and talk about margins.

Andy Kaplowitz: Appreciate that. Thank you.

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

Nathan Jones: Good morning, everyone.

Matthew Pine: Hey. Good morning, Nathan.

Nathan Jones: I'll start with, a follow-up on the MTS orders. And the smart native projects that are 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?

Bill Grogan: Yeah. And I think there's several projects, and all of it they're have a little bit different reasons for pushing out. There's not a common thread around it. Some of them are just relative to where they're at with several other projects going on. So I wanna 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 another inflation creeping up over time. So it's you know, 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 you know, has an ability for us to, drive kind of incremental revenue this year. So I think we have reasonable visibility. You know, again, this isn't 50 different projects. It's you know, kind of five to 10 that we're working with the end customer. That we have confidence in based upon our guide and our revenue progression for MCS through the year, that we'll be able to deliver on.

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

Bill Grogan: Yep. Yeah. I think we talked about, Nate, we were evaluating about 10% of the portfolio Last year, we exited a business in the first quarter that was about 1%. You know, international metrology is about another, percent. There's probably two or three assets that, you know, maybe another couple percent. So don't think we're gonna hit the 10% number. You know, that we were looking at. But, obviously, portfolio evaluation, you know, something that we do on a recurring basis. You know, as businesses shift strategy or they wanna 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 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 that less than 10% EBITDA margin. We'll close it at the end of the third quarter. Or, excuse me, at the end of the first quarter, so you kinda get three quarters. So it's you know, $2.03 pennies.

Nathan Jones: Thanks for that taking the questions.

Matthew Pine: Thank you.

Operator: Our next question comes from Joseph Giordano from TD Cowen. Please go ahead with your question.

Michael Halloran: Good morning, guys. This is Michael on for Joe.

Matthew Pine: Hey, Michael.

Michael Halloran: So yeah, on the last call, you mentioned there was a path to higher margins for the energy meter side. At MC and S. And since it's 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.

Bill Grogan: And your question is specifically was around just the improvement on the energy meter margin?

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

Bill Grogan: Oh, yes. I think there's a couple of things. One, there's some structural changes on the energy side from an engineering and a technology perspective that are gonna 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 you know, put pressure, on margins in 2025. That'll continue into the 2026. So you'll see a margin progression with MCS, you know, 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.

Michael Halloran: Great. Thanks for that color. And then orders for the year ended pretty strongly The organic kind of implies a ramp to the back half. Can you just unpack organic expectations mean, 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 probably most were expecting. Yep. Would appreciate the color. Thank you.

Bill Grogan: 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.

Michael Halloran: Thanks, guys.

Matthew Pine: Thank you.

Operator: And our next question comes from William Griffin from Barclays. Please go ahead with your question.

William Griffin: Good morning. Thanks very much. Just the first one here, I did want to ask about the four 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, you know, the ongoing tailwinds of eighty twenty execution?

Bill Grogan: Yes. And I would say, really, WSS, it's more of mix of business between quarters. So nothing structural there. Within applied water, obviously, Q4 was a bit of a blip relative to the performance that they experienced through the first half of the year. It really reflected just some negative project mix, a little bit of execution timing, and some onetime items. Yeah. These are our 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, that it's more of a short term than anything structural. Applied water, I think.

Gets back to some pretty robust margin expansion in 2026.

William Griffin: 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 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?

Matthew Pine: Yes. Thanks for the question. When I was at Davos, '26 was deemed kind of the year of artificial intelligence. There were 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 point 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 know, the reason we commissioned the report is we have a pretty good view of the whole 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 just 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 late need a year.

In the Western Part Of The US, so it's 12,000,000 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, you know, roughly 600%. So that was probably one of the biggest takeaways. I think the second and I don't like to be chicken little. I wanna the second point is we can solve the problem.

And we have the technology and solutions to manage the demand today in 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 freshwater 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 Amazon. But maybe one example I'll leave you with as I wrap this up is in Arizona, we were out there a few years ago, Intel in the city of Chandler have partnered together. So we need much more private public private partnerships. 90% of the reject water that they generate so when you have to provide ultra-pure water in chip fabric, your reject water is very high to get to that purity.

So all that reject water Intel invested capital and OpEx to build a recycling plant that they handed over to the city to run and manage, and 96% of that water is being reused So we need more of that. At scale. To solve the problem. So, again, the solution's there. It's just about getting the stakeholders at the table early in the data center planning where we talk mostly about energy. We've gotta talk about 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 gonna see the growth within Xylem.

William Griffin: Appreciate it. Thanks very much.

Matthew Pine: Thank you.

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

Matthew Pine: 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.

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

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Xylem. The Motley Fool has a disclosure policy.