XYL - Xylem Inc.
Price:
--
--
|
CONSENSUS:
Hold
DETAILS
|
PRICE TARGET:
$150.89
DETAILS
HIGH:
$161.00
LOW:
$133.00
MEDIAN:
$157.00
CONSENSUS:
$150.89
UPSIDE:
20.74%
← Back to Transcripts
Q2 2026 Earnings Call
2026-07-28Operator: 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 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.
Michael Travers: 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 1 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 Investors 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 we will or may occur in the future. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K 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 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. And 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.
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. And 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 3 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. 1 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 1 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, And 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 the 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. And 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 in 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.
William Grogan: 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 at $5.3 billion and our book-to-bill for the quarter well above 1. This was supported by the Dow order in WSS as orders were up 41% versus last year, with growth in 3 of our 4 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. And 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 has slowed down 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 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, 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 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. And 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% 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.
Matthew Pine: Thank you, Bill. Stepping back from the quarter, I think it is important to keep sight of what 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 remain 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.
Operator: 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. 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: Morning, Deane. Hey, Deane. Hey.
Deane Dray: Love to put the spotlight on Applied Water in that revenue growth of 9%, nice upside there. And I know you have talked about the data center, growth and the 300% and the orders. But can you just kind of flesh out for us that 9%? You know, what it were the key industrial non municipal drivers there? And kind of what the outlook is for the balance of the year?
Matthew Pine: Yeah, Deane. Thanks for the question. Primarily, it was, I would say, an applied water, it was largely data center driven. Although in North America, our commercial building services business has done well across multiple verticals. You know, data centers remain a very attractive growth area for us, and we expect our exposure to continue to increase over time. And like we said in the prepared remarks, we expect revenue to be up 200% you know, this year, and we will probably be exiting this year about 2% of our revenue tied to data centers. But you know, I think, also, I just mentioned maybe we will get into it later, our acquisition of WaterFleet. Which is not in the applied water business, but in the WSS segment, also gives us more exposure into that part of the marketplace as well.
Deane Dray: Yeah. I did wanna put the spotlight on, capital allocation just really balanced here, and we like that WaterFleet deal and its positioning. And maybe just step back and talk about the opportunities in the outsourced contracts? I mean, the Dow has got a milestone deal for you all, but it does sound like there is more to do, and this was like, the whole premise of the Evoqua deal to begin with. So you know, what can you talk about in terms of that pipeline for these contracts?
Matthew Pine: Yeah. We have multiple contracts, but build-own-operates are obviously a big part of that as well as capital and services. But let me just maybe first say that municipal does remain a source of strength for us. And a core part of our business. But what is changed is that we have expanded our capabilities and really increased our participation through the Evoqua acquisition especially in high-growth verticals like high-tech, power, life sciences, and things of that nature. So you know, we view it as complementary to municipal. But maybe a couple of examples that I would highlight, Deane, that are kind of in this, you know, build-own-operate capital service type of a deal. Recently won a job in lithium battery So, we secured a win with the world's largest lithium battery cell manufacturer We have built a solution to treat the recycling of really a novel wastewater system It includes, I would call it, cutting-edge wastewater treatment and really took the entire treatment train, including our most recent acquisition of Vacom, the zero-liquid-discharge asset that is helped us have the complete front to back part of the treatment train. So you know, that is a really big win. The second I would point to is a data center in Pennsylvania. We are finding not all the time, but sometimes data centers are having to secure additional water outside of municipal water through river streams and wells. And we are we are we are treating settled river water and bringing that into a state-of-the-art facility to make sure that they have got the quantity and the quality of water that they need. that is great.
Deane Dray: Thank you.
Matthew Pine: Thank you.
Operator: Our next question comes from Mike Halloran from Baird.
Mike Halloran: Hey. Good morning, gentlemen.
Matthew Pine: Good morning, Mike. Hey.
Mike Halloran: Let's start on the MCS commentary and just kind of help frame how you are thinking about things. You know, the electric piece sounds like there is some pushouts. what is going on there? Any change in thought process from those customers on a medium- to long-term horizon and then maybe contract that with the water utility side of things all else equal, what you are seeing more on the water 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?
Matthew Pine: Yeah, Mike. I you know, if we start just a revenue takedown from 4 to 3 on the high end is really all around MCS. And that is really directly attributable to the slowdown in electric meter deployments. You know, we talked about affordability concerns or more cautious capital spending environment ahead of upcoming elections. You know, just slow down the near-term investment cycle. And we have really seen politicians take a hard stand on electricity rate increases. And utilities have pulled back in pockets their short-term investments to compensate. I think, again, we continue to gain share versus competitors. As we look at our bid and win rates and do expect to be a healthy market in the years ahead. Primarily driven by the ongoing AMI 2.0 refresh But, again, the near-term pull back is creating a little bit of pressure for us. You know? But to your point on the water side, we actually continue to see strength. Order activities, really positive, and customer engagement is really constructive. Our funnel is up about 30% versus last year. Water orders have been up double-digits in both the first and second quarter, and we expect that to continue. Into the second half. Helping offset some of the declines we are going to see on the electric side. And expect water to be up about low-single-digits for the year with a strong second half. Thanks for that.
Mike Halloran: And then maybe some thoughts on orders more holistically and how you are thinking about things from here. You know, the treatment side of things that seems concentrated overseas and intentional, You know, what is the run rate for the WSS on the infrastructure side? And then maybe just put all this together between, you know, the applied comments that Deane was talking to, some of your 80/20 initiatives, what you just mentioned on the water, timing in the electric, however you wanna answer the infrastructure piece. Are we looking at something more normalized as we exit this year from a growth perspective relative to how you think about long-term growth for Xylem?
William Grogan: Yeah. I definitely. Maybe if I started at a high level, Revenue progression through the year is generally in line with the exception of the electric metering delays. Yeah. We said we are flat in the first quarter. We are up 1%. Here in the second quarter. Expectations are for 3 here in the third, and then we are gonna exit the year in fourth quarter at mid-single digits. So I think we are building momentum leading into next year. And if you break it down by segment, obviously, Matthew highlighted, again, strength in applied water Right? They have had really strong orders consistently with book-to-bill of above 1 for the last several quarters. On top of the data centers, we really see resiliency in the U.S. commercial building space. And expect them to continue to build backlog here in the second half. Leading into a strong 2027. To your point, water infrastructure, you know, even with the China headwind, and some of the 80/20 walkaway on the treatment side, we have built backlog in the first half. And expect positive orders growth here in the second half. Alright. They will finish the year with positive book-to-bill and, again, with strong momentum leading into next year. Again, with a lot of the 80/20 walkaway and the China comp. Behind us. WSS obviously has had a phenomenal first half of the year, but it is always gonna be lumpy. We talked about just the shift in outsourced water in the funnel that is creating. Across a variety of different end markets. Really excited about that, and the backlog that they are gonna end with this year puts us in a in a strong position. And, my commentary around MCS you know, I think we have here a little bit near-term mitigation on the electric side, but water momentum continues to build Right? We will see positive book-to-bill in the second half. With high-single-digit orders growth. So think there is lots of momentum across the organization and continues to give us confidence. In the outlook from a commercial perspective heading into next year.
Mike Halloran: Thanks, guys. Appreciate it. Matthew Pine: Thanks, Mike.
Operator: Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.
Matthew Pine: Hey. Good morning.
Adam Farley: This is Adam Farley on for Nathan. Maybe just following up on some of that commentary, maybe first on water and infrastructure, infrastructure. Maybe could you speak to the underlying treatment market ex the 80/20 actions that you are doing.
William Grogan: I think positive overall. I mean, even with the 80/20 actions and some of the projects where we have increased price, you know, we have we have had a very strong win rate. So I think the treatment market here in the U.S. has been really positive for that business, and I think we expect that to continue in the second half. A lot of the challenges there, again, relative to China, and different, decisions we have made on our bidding strategy around, tenders in different emerging markets. So I think that business has got a lot of momentum here as we progress in the back half.
Adam Farley: Thank you for that. And then maybe switching gears, are you seeing any signs of supply chain tightness anywhere in the portfolio? Do you think there is any need to increase maybe safety stock for electronic components?
Matthew Pine: I mean, it is something we review really monthly in our leadership meeting. I do not think there is anything pressing right now that we already have not taken action on. Obviously, we look at rare earth and we 've got most of our businesses, about a year of supply we pulled in. From a safety stock perspective. Obviously, we have made some investments, and I might have highlighted this on a prior call on chips and wafers. Looking to kind of get about 6 months supply there. This is a more of a safety stock buffer, but outside of those 2 areas, I would say in general, we are pretty balanced, and we do review it you know, like I said, every month.
Adam Farley: Great. Thank you for taking my questions.
Matthew Pine: Mhmm. Thanks, Adam.
Operator: Next question comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.
Andy Kaplowitz: Good morning, everyone.
Matthew Pine: Morning, Andy.
Andy Kaplowitz: Matthew and Bill, strong quarter margin particularly in Water Infrastructure. So maybe you could just double-click on what were the main drivers of the strong performance there. Did you sort of hit another glide path in terms of the 80/20 performance? And then I know you wanna be conservative. But Q3 up 30 to 80 basis points. Q2, you did 150 basis points So you can give us some more color on the puts and takes you see for that Q3 margin.
William Grogan: Yeah. You know, if we if we start with water infrastructure again, they had a phenomenal quarter. And they continue to be the leader in margin expansion for the organization. I think they are definitely seeing increased benefits from their simplification efforts. You know, they have kicked off 80/20 and have been doing this now for over 2 years. They have done a really good job optimizing their overhead to you know, more effectively and efficiently serve their customers. And then, again, they have been really purposeful to go-to-market strategies to be selective on bidding projects where they can create the most value. A little bit to my treatment comment commentary a little bit earlier. You know, that is weighed a little bit on their orders and sales growth, obviously. But that is short-term. Think the focus that they have will help them better lever as they get back into their mid-single-digit growth algorithm Exiting the year with positive performance here in Q3 and Q4. We continue to see margin opportunities within the segment, though. Right? They have made solid progress, and I think they still have operational productivity and things that they are gonna be able to leverage. And the 80/20 benefits that they are they have driven on the margin side, you are gonna see them inflect on the growth side. Particularly in transport where they have made resource allocation decisions to refocus certain areas of their commercial and engineering teams to drive incremental growth. So yeah, they did have a little bit more transport mix within the quarter. That helped overdrive relative to our expectations. That will balance a little bit, Andy. I think that is a you know, part of the Q4 sequential challenge that we will have from a margin per perspective. But overall, still really excited about, their margin outlook.
Andy Kaplowitz: it is helpful. And then I think you we all know that is a bit lumpy, and we talked about the shift toward water. But as you know, Evoqua, before you bought it, was big in end markets that you know, we have been starting to talk about, like microelectronics, mining, life sciences. So do you see, you know, more incremental projects there in general? Matthew, you know, what are your customers doing, saying about that? So you know, WSS overall could, you know, continue to improve in growth even outside of outsourced water.
Matthew Pine: Yeah, Andy. it is Matthew. Andy, you know, like we said coming into the year, there were some project delays coming from tariffs they were creating slower decision making. And really some rescoping of projects that happened, last year that really pushed out that business, some decisions at least probably I would say, 3 to 6 months. So know, momentum is picking up, and the business will be back at mid-single-digit growth in the second half. We have a very active funnel and a strong backlog position. You know, as noted by, obviously, the Dow win we highlighted you know, on the last call, and then another large order that we just received, a few weeks ago. With the with the one of the world.s largest chemical companies. You know, long-term, we do see accretive growth coming from high-growth verticals that mainly sit within the WSS segment. You know, what we are calling high-tech, I would say that is kind of defense. Semiconductor, data centers, power, You know, seeing a big pickup in power where, you know, the energy mix over the past couple of years has actually expanded versus contracted, which has helped, plus if you think about the power generation needed for the AI ecosystem over the next several years, I think that business is in a very strong position to take advantage of a lot of nuclear expansion specifically And then, you know, mining and life sciences, and food and beverage are other ones that we are really focused on. So I think we are really starting to see some momentum, Andy, and we will exit the year pretty strong in that business.
Andy Kaplowitz: Great. Appreciate the color.
Operator: Our next question comes from Scott Davis from Melius Research. Please go ahead with your question.
Scott Davis: I wanna do just talk a little bit about 80/20 and I am just kind of curious to hear your view on how it evolves as it scales. And what I mean by that is that spent the first couple years doing kind of basic 80/20 a fair amount of walkaway revenues. Related to that. By the time you get to 2027, though, our do you still have walkaway revenues, or are you at the point then where you are back to a more traditional 80/20 where you have got your customers segmented and folks kind of that stuff's kind of already gone. Right? And so you are playing offense more than playing defense? You know what I am saying?
William Grogan: Yeah. Yep. Yep. No. Definitely. I think we have highlighted this year. Obviously, we we have accelerated some of our actions, and this will be the height of our walkaway revenue. At close to 2%. I think next year will be significantly lower just as we have we have pretty much gone through majority of the portfolio. So I agree kind of like, 80/20 as an element of fundamental in the operating model for us is taking hold, though. You know, we are kind of midway through, you know, 2.5 years into the transformation, and each quarter, we take an additional step at simplifying. And embedding it in the culture. Right? So it is just not a tool set. And, right, highlighting walkaway revenue and getting the margin increase from it You know, it is really how we are going to drive growth longer-term You know, and I think we highlighted some of that conversation just as we have implemented the tool set and areas of focus where businesses are shifting and developing strategies to drive growth around underrepresented or underrepresented areas within U.S. transport or the data center story or mining or outsourced water offerings We are able to increase our capabilities and the resources we are throwing at those I think will be a catalyst for incremental growth as we, you know, get into 2027. So I think you are exactly right. We are shifting from it being a lever from a margin perspective We are gonna wash through the majority of our walkaway revenue here this year. And then next year, it is all gonna be how it is enabling our growth algorithm.
Scott Davis: Okay. that is that is that is helpful. And then just switching gears to M&A and potential things to do with your balance sheet, We know, we have seen some revaluation lower on water assets, obviously, public assets and hard to know what is going on in private markets necessarily, but typically, they will follow at some point. Have you seen opportunities out there, or do you have a backlog of opportunities where you feel like the valuations are coming down to attractive enough levels where it makes sense, you know, particularly given the fact you have revalued lower a bit too.
Matthew Pine: Yeah. that is a great question. I think it is a mixed bag. It kind of depends on the types of businesses that you are looking at. Scott, I would say in general, it is probably starting to soften a little bit. We are starting to see some signals, but I think in general, it is not aligned to where the market is. Okay. Usually is not. Right? Yeah. Probably. Private valuation is correct. Yeah. But look, we do have very yeah. Slow to get the memo. But we look. We have a very active funnel. We have talked about deploying $1 billion of capital towards M&A year. We are tracking to that to that, you know, to that goal, and we have got a really healthy pipeline So we are excited to continue to deploy capital you know, holistically, but specifically towards M&A. Accretive M&A. Yep.
Scott Davis: Enough. Okay. I will pass it on. Thank you, guys. Appreciate it.
Operator: Thank you. Our next question comes from Andrew Buscaglia from BNP Paribas. Please go ahead with your question.
Andrew Buscaglia: Hey. Good morning, everyone. Just wanted to you know, check-in some of the more short-cycle areas within Xylem. Did you not see a noticeable pickup as the quarter progressed in some of your more core, you know, pump-and-valve areas?
William Grogan: I missed the first part of the question. Sorry.
Andrew Buscaglia: Just, you know, asking if you saw a more noticeable pickup in your more short-cycle pump-and-valve areas as the quarter progressed.
William Grogan: No. I do not think so. I mean, our short-cycle exposure for us is primarily within the applied water business. Know, that is been fairly consistent on the items outside of the data centers. Really strong in the U.S. Europe kind of bumping along a little bit. You know, the our small resi exposure we have was probably the 1 area of weakness that we call out with an applied water. So I think relative to increasing industrial production, not a lot of our business you see an immediate inflection.
Andrew Buscaglia: Got it. And, you know, a little bit of confusion on the China some of your China comments. Just that you know, we had in our head, I think, that China was a pretty small portion of your total sales. Yeah. Can you help us understand know, the nature of the declines and what your commitment is to China, you know, maybe as you reevaluate or you continue to evaluate 80/20 as a strategy.
William Grogan: Yeah. No. I think our commentary with China has been pretty consistent over the last few quarter. It remains a challenging market for us both on the orders and revenue side. Like we said, Q2 orders were down over 30%. Sales were down almost 30%. And, again, I think that is primarily reflecting ongoing economic headwinds within, you know, water infrastructure and applied water. Some of that is you know, the broader economic with the Chinese government investing less on infrastructure and shifting their dollars into AI and the life sciences. Again, we talked about significant competition within the market that is put pressure. And then again, relative to 80/20 and us being more selective, on the quality of business that we are we are bidding there, kind of stacked up and we frame that as, you know, last year was about 3% of overall sales. This year, it is gonna be about 2%. So, again, 1% headwind for total Xylem. You know, we think it is stabilized a bit. There have been a couple data center wins within the country that have been positive. But for the most part, I think we have you know, it is bottomed out a bit. You know, the second half, I think, will be sequentially similar from a total volume perspective to the first half. You know? So the comps will be easier year-over-year, but we have rightsized that market. I think we are being selective in the areas that we are investing and trying target things where we can differentiate with our technology. You know, it again, it is the world's second largest economy. So it is some place here in the near-term that we wanna participate in, but, you know, we consistently evaluate that assumption.
Andrew Buscaglia: Thanks, Bill.
Operator: Our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question.
Matthew Pine: Hi. Good morning.
Chris Granga: This is Chris Granga on for Joe. Thanks for taking the questions. The MCS outlook continues to rely on a fairly substantial fourth quarter step up. Could you elaborate on what you have seen that increases your confidence in the trajectory particularly given that Q2 growth was relatively modest at 2% organic? Thank you.
William Grogan: Yeah. Again, I think the Q2 growth was, yeah, really strong growth on the water side offset with some of this electric metering delays. So I think what gives us confidence is, you know, we have seen here in the first half a double-digit orders growth on the water side. You know, what we have line of sight to with our flow business where that is tracking, has been strong all year. And conversations we have had with customers on the balance of the projects that we need to see the sequential improvement yeah, we are close to signing. Again, we will be book-to-bill positive. In the second half with you know, orders in the high-single-digit range on the water side. So we are excuse me, overall with double-digit orders growth on the water side. So I think all the proof points are there. Outside of the challenges we are seeing on the electric side.
Chris Granga: Thank you. And you have you have highlighted momentum in digital offerings, and we have heard positive feedback around early adoption of data lake. As utilities are leveraging that base of AMI meters. Could you talk about what you are seeing in customer engagement since the launch of that product? And whether tools like data lake are accelerating adoption of higher-value offerings such as Vue and the pathway that you are seeing from metering deployments to recurring software revenue?
Matthew Pine: Yeah. We definitely have seen a pretty fast pickup in the Vue platform, through our joint venture with Idrica out of Valencia, Spain. You know, we have been at this in earnest the past, really probably 2.5 to 3 years, and we have got significant momentum We doubled the business last year. We are on pace to, you know, grow that business significantly in 2026. You know, probably close to 30% to 40% as we sit here today. You know, I would say that, 1 of the-- as I travel around the world and I talk to lots of different CEOs of municipalities, it solves their biggest pain point. Really, it is about they have got to your point about a data lake, they have got several applications that they are trying to manage that are discrete and bespoke. Then they wanna bring them into a common platform and then put that into a data lake so they can drive insights off the data. And so that is what really we are coming over the top of their applications to do We have had some significant wins. Over the course of the past, really, I would say, 3 months. That really continue to, you know, bolster our position with utilities. Know, another area I mean, this platform is scalable beyond municipal. You know, we are we are talking to other industrial companies and other verticals where this platform can also scale. So we obviously wanted to get rooted in municipal and get momentum there, but, also, we are looking to expand the platform into the industrial sector as well. Thanks very much.
Chris Granga: Thank you.
Operator: 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.
Matthew Pine: Thanks for your questions today, and thank you for all that joined. As always, we appreciate your interest in Xylem. All the very best. Take care.
Operator: And with that, we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.
Michael Travers: 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 1 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 Investors 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 we will or may occur in the future. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K 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 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. And 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.
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. And 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 3 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. 1 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 1 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, And 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 the 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. And 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 in 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.
William Grogan: 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 at $5.3 billion and our book-to-bill for the quarter well above 1. This was supported by the Dow order in WSS as orders were up 41% versus last year, with growth in 3 of our 4 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. And 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 has slowed down 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 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, 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 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. And 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% 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.
Matthew Pine: Thank you, Bill. Stepping back from the quarter, I think it is important to keep sight of what 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 remain 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.
Operator: 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. 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: Morning, Deane. Hey, Deane. Hey.
Deane Dray: Love to put the spotlight on Applied Water in that revenue growth of 9%, nice upside there. And I know you have talked about the data center, growth and the 300% and the orders. But can you just kind of flesh out for us that 9%? You know, what it were the key industrial non municipal drivers there? And kind of what the outlook is for the balance of the year?
Matthew Pine: Yeah, Deane. Thanks for the question. Primarily, it was, I would say, an applied water, it was largely data center driven. Although in North America, our commercial building services business has done well across multiple verticals. You know, data centers remain a very attractive growth area for us, and we expect our exposure to continue to increase over time. And like we said in the prepared remarks, we expect revenue to be up 200% you know, this year, and we will probably be exiting this year about 2% of our revenue tied to data centers. But you know, I think, also, I just mentioned maybe we will get into it later, our acquisition of WaterFleet. Which is not in the applied water business, but in the WSS segment, also gives us more exposure into that part of the marketplace as well.
Deane Dray: Yeah. I did wanna put the spotlight on, capital allocation just really balanced here, and we like that WaterFleet deal and its positioning. And maybe just step back and talk about the opportunities in the outsourced contracts? I mean, the Dow has got a milestone deal for you all, but it does sound like there is more to do, and this was like, the whole premise of the Evoqua deal to begin with. So you know, what can you talk about in terms of that pipeline for these contracts?
Matthew Pine: Yeah. We have multiple contracts, but build-own-operates are obviously a big part of that as well as capital and services. But let me just maybe first say that municipal does remain a source of strength for us. And a core part of our business. But what is changed is that we have expanded our capabilities and really increased our participation through the Evoqua acquisition especially in high-growth verticals like high-tech, power, life sciences, and things of that nature. So you know, we view it as complementary to municipal. But maybe a couple of examples that I would highlight, Deane, that are kind of in this, you know, build-own-operate capital service type of a deal. Recently won a job in lithium battery So, we secured a win with the world's largest lithium battery cell manufacturer We have built a solution to treat the recycling of really a novel wastewater system It includes, I would call it, cutting-edge wastewater treatment and really took the entire treatment train, including our most recent acquisition of Vacom, the zero-liquid-discharge asset that is helped us have the complete front to back part of the treatment train. So you know, that is a really big win. The second I would point to is a data center in Pennsylvania. We are finding not all the time, but sometimes data centers are having to secure additional water outside of municipal water through river streams and wells. And we are we are we are treating settled river water and bringing that into a state-of-the-art facility to make sure that they have got the quantity and the quality of water that they need. that is great.
Deane Dray: Thank you.
Matthew Pine: Thank you.
Operator: Our next question comes from Mike Halloran from Baird.
Mike Halloran: Hey. Good morning, gentlemen.
Matthew Pine: Good morning, Mike. Hey.
Mike Halloran: Let's start on the MCS commentary and just kind of help frame how you are thinking about things. You know, the electric piece sounds like there is some pushouts. what is going on there? Any change in thought process from those customers on a medium- to long-term horizon and then maybe contract that with the water utility side of things all else equal, what you are seeing more on the water 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?
Matthew Pine: Yeah, Mike. I you know, if we start just a revenue takedown from 4 to 3 on the high end is really all around MCS. And that is really directly attributable to the slowdown in electric meter deployments. You know, we talked about affordability concerns or more cautious capital spending environment ahead of upcoming elections. You know, just slow down the near-term investment cycle. And we have really seen politicians take a hard stand on electricity rate increases. And utilities have pulled back in pockets their short-term investments to compensate. I think, again, we continue to gain share versus competitors. As we look at our bid and win rates and do expect to be a healthy market in the years ahead. Primarily driven by the ongoing AMI 2.0 refresh But, again, the near-term pull back is creating a little bit of pressure for us. You know? But to your point on the water side, we actually continue to see strength. Order activities, really positive, and customer engagement is really constructive. Our funnel is up about 30% versus last year. Water orders have been up double-digits in both the first and second quarter, and we expect that to continue. Into the second half. Helping offset some of the declines we are going to see on the electric side. And expect water to be up about low-single-digits for the year with a strong second half. Thanks for that.
Mike Halloran: And then maybe some thoughts on orders more holistically and how you are thinking about things from here. You know, the treatment side of things that seems concentrated overseas and intentional, You know, what is the run rate for the WSS on the infrastructure side? And then maybe just put all this together between, you know, the applied comments that Deane was talking to, some of your 80/20 initiatives, what you just mentioned on the water, timing in the electric, however you wanna answer the infrastructure piece. Are we looking at something more normalized as we exit this year from a growth perspective relative to how you think about long-term growth for Xylem?
William Grogan: Yeah. I definitely. Maybe if I started at a high level, Revenue progression through the year is generally in line with the exception of the electric metering delays. Yeah. We said we are flat in the first quarter. We are up 1%. Here in the second quarter. Expectations are for 3 here in the third, and then we are gonna exit the year in fourth quarter at mid-single digits. So I think we are building momentum leading into next year. And if you break it down by segment, obviously, Matthew highlighted, again, strength in applied water Right? They have had really strong orders consistently with book-to-bill of above 1 for the last several quarters. On top of the data centers, we really see resiliency in the U.S. commercial building space. And expect them to continue to build backlog here in the second half. Leading into a strong 2027. To your point, water infrastructure, you know, even with the China headwind, and some of the 80/20 walkaway on the treatment side, we have built backlog in the first half. And expect positive orders growth here in the second half. Alright. They will finish the year with positive book-to-bill and, again, with strong momentum leading into next year. Again, with a lot of the 80/20 walkaway and the China comp. Behind us. WSS obviously has had a phenomenal first half of the year, but it is always gonna be lumpy. We talked about just the shift in outsourced water in the funnel that is creating. Across a variety of different end markets. Really excited about that, and the backlog that they are gonna end with this year puts us in a in a strong position. And, my commentary around MCS you know, I think we have here a little bit near-term mitigation on the electric side, but water momentum continues to build Right? We will see positive book-to-bill in the second half. With high-single-digit orders growth. So think there is lots of momentum across the organization and continues to give us confidence. In the outlook from a commercial perspective heading into next year.
Mike Halloran: Thanks, guys. Appreciate it. Matthew Pine: Thanks, Mike.
Operator: Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.
Matthew Pine: Hey. Good morning.
Adam Farley: This is Adam Farley on for Nathan. Maybe just following up on some of that commentary, maybe first on water and infrastructure, infrastructure. Maybe could you speak to the underlying treatment market ex the 80/20 actions that you are doing.
William Grogan: I think positive overall. I mean, even with the 80/20 actions and some of the projects where we have increased price, you know, we have we have had a very strong win rate. So I think the treatment market here in the U.S. has been really positive for that business, and I think we expect that to continue in the second half. A lot of the challenges there, again, relative to China, and different, decisions we have made on our bidding strategy around, tenders in different emerging markets. So I think that business has got a lot of momentum here as we progress in the back half.
Adam Farley: Thank you for that. And then maybe switching gears, are you seeing any signs of supply chain tightness anywhere in the portfolio? Do you think there is any need to increase maybe safety stock for electronic components?
Matthew Pine: I mean, it is something we review really monthly in our leadership meeting. I do not think there is anything pressing right now that we already have not taken action on. Obviously, we look at rare earth and we 've got most of our businesses, about a year of supply we pulled in. From a safety stock perspective. Obviously, we have made some investments, and I might have highlighted this on a prior call on chips and wafers. Looking to kind of get about 6 months supply there. This is a more of a safety stock buffer, but outside of those 2 areas, I would say in general, we are pretty balanced, and we do review it you know, like I said, every month.
Adam Farley: Great. Thank you for taking my questions.
Matthew Pine: Mhmm. Thanks, Adam.
Operator: Next question comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.
Andy Kaplowitz: Good morning, everyone.
Matthew Pine: Morning, Andy.
Andy Kaplowitz: Matthew and Bill, strong quarter margin particularly in Water Infrastructure. So maybe you could just double-click on what were the main drivers of the strong performance there. Did you sort of hit another glide path in terms of the 80/20 performance? And then I know you wanna be conservative. But Q3 up 30 to 80 basis points. Q2, you did 150 basis points So you can give us some more color on the puts and takes you see for that Q3 margin.
William Grogan: Yeah. You know, if we if we start with water infrastructure again, they had a phenomenal quarter. And they continue to be the leader in margin expansion for the organization. I think they are definitely seeing increased benefits from their simplification efforts. You know, they have kicked off 80/20 and have been doing this now for over 2 years. They have done a really good job optimizing their overhead to you know, more effectively and efficiently serve their customers. And then, again, they have been really purposeful to go-to-market strategies to be selective on bidding projects where they can create the most value. A little bit to my treatment comment commentary a little bit earlier. You know, that is weighed a little bit on their orders and sales growth, obviously. But that is short-term. Think the focus that they have will help them better lever as they get back into their mid-single-digit growth algorithm Exiting the year with positive performance here in Q3 and Q4. We continue to see margin opportunities within the segment, though. Right? They have made solid progress, and I think they still have operational productivity and things that they are gonna be able to leverage. And the 80/20 benefits that they are they have driven on the margin side, you are gonna see them inflect on the growth side. Particularly in transport where they have made resource allocation decisions to refocus certain areas of their commercial and engineering teams to drive incremental growth. So yeah, they did have a little bit more transport mix within the quarter. That helped overdrive relative to our expectations. That will balance a little bit, Andy. I think that is a you know, part of the Q4 sequential challenge that we will have from a margin per perspective. But overall, still really excited about, their margin outlook.
Andy Kaplowitz: it is helpful. And then I think you we all know that is a bit lumpy, and we talked about the shift toward water. But as you know, Evoqua, before you bought it, was big in end markets that you know, we have been starting to talk about, like microelectronics, mining, life sciences. So do you see, you know, more incremental projects there in general? Matthew, you know, what are your customers doing, saying about that? So you know, WSS overall could, you know, continue to improve in growth even outside of outsourced water.
Matthew Pine: Yeah, Andy. it is Matthew. Andy, you know, like we said coming into the year, there were some project delays coming from tariffs they were creating slower decision making. And really some rescoping of projects that happened, last year that really pushed out that business, some decisions at least probably I would say, 3 to 6 months. So know, momentum is picking up, and the business will be back at mid-single-digit growth in the second half. We have a very active funnel and a strong backlog position. You know, as noted by, obviously, the Dow win we highlighted you know, on the last call, and then another large order that we just received, a few weeks ago. With the with the one of the world.s largest chemical companies. You know, long-term, we do see accretive growth coming from high-growth verticals that mainly sit within the WSS segment. You know, what we are calling high-tech, I would say that is kind of defense. Semiconductor, data centers, power, You know, seeing a big pickup in power where, you know, the energy mix over the past couple of years has actually expanded versus contracted, which has helped, plus if you think about the power generation needed for the AI ecosystem over the next several years, I think that business is in a very strong position to take advantage of a lot of nuclear expansion specifically And then, you know, mining and life sciences, and food and beverage are other ones that we are really focused on. So I think we are really starting to see some momentum, Andy, and we will exit the year pretty strong in that business.
Andy Kaplowitz: Great. Appreciate the color.
Operator: Our next question comes from Scott Davis from Melius Research. Please go ahead with your question.
Scott Davis: I wanna do just talk a little bit about 80/20 and I am just kind of curious to hear your view on how it evolves as it scales. And what I mean by that is that spent the first couple years doing kind of basic 80/20 a fair amount of walkaway revenues. Related to that. By the time you get to 2027, though, our do you still have walkaway revenues, or are you at the point then where you are back to a more traditional 80/20 where you have got your customers segmented and folks kind of that stuff's kind of already gone. Right? And so you are playing offense more than playing defense? You know what I am saying?
William Grogan: Yeah. Yep. Yep. No. Definitely. I think we have highlighted this year. Obviously, we we have accelerated some of our actions, and this will be the height of our walkaway revenue. At close to 2%. I think next year will be significantly lower just as we have we have pretty much gone through majority of the portfolio. So I agree kind of like, 80/20 as an element of fundamental in the operating model for us is taking hold, though. You know, we are kind of midway through, you know, 2.5 years into the transformation, and each quarter, we take an additional step at simplifying. And embedding it in the culture. Right? So it is just not a tool set. And, right, highlighting walkaway revenue and getting the margin increase from it You know, it is really how we are going to drive growth longer-term You know, and I think we highlighted some of that conversation just as we have implemented the tool set and areas of focus where businesses are shifting and developing strategies to drive growth around underrepresented or underrepresented areas within U.S. transport or the data center story or mining or outsourced water offerings We are able to increase our capabilities and the resources we are throwing at those I think will be a catalyst for incremental growth as we, you know, get into 2027. So I think you are exactly right. We are shifting from it being a lever from a margin perspective We are gonna wash through the majority of our walkaway revenue here this year. And then next year, it is all gonna be how it is enabling our growth algorithm.
Scott Davis: Okay. that is that is that is helpful. And then just switching gears to M&A and potential things to do with your balance sheet, We know, we have seen some revaluation lower on water assets, obviously, public assets and hard to know what is going on in private markets necessarily, but typically, they will follow at some point. Have you seen opportunities out there, or do you have a backlog of opportunities where you feel like the valuations are coming down to attractive enough levels where it makes sense, you know, particularly given the fact you have revalued lower a bit too.
Matthew Pine: Yeah. that is a great question. I think it is a mixed bag. It kind of depends on the types of businesses that you are looking at. Scott, I would say in general, it is probably starting to soften a little bit. We are starting to see some signals, but I think in general, it is not aligned to where the market is. Okay. Usually is not. Right? Yeah. Probably. Private valuation is correct. Yeah. But look, we do have very yeah. Slow to get the memo. But we look. We have a very active funnel. We have talked about deploying $1 billion of capital towards M&A year. We are tracking to that to that, you know, to that goal, and we have got a really healthy pipeline So we are excited to continue to deploy capital you know, holistically, but specifically towards M&A. Accretive M&A. Yep.
Scott Davis: Enough. Okay. I will pass it on. Thank you, guys. Appreciate it.
Operator: Thank you. Our next question comes from Andrew Buscaglia from BNP Paribas. Please go ahead with your question.
Andrew Buscaglia: Hey. Good morning, everyone. Just wanted to you know, check-in some of the more short-cycle areas within Xylem. Did you not see a noticeable pickup as the quarter progressed in some of your more core, you know, pump-and-valve areas?
William Grogan: I missed the first part of the question. Sorry.
Andrew Buscaglia: Just, you know, asking if you saw a more noticeable pickup in your more short-cycle pump-and-valve areas as the quarter progressed.
William Grogan: No. I do not think so. I mean, our short-cycle exposure for us is primarily within the applied water business. Know, that is been fairly consistent on the items outside of the data centers. Really strong in the U.S. Europe kind of bumping along a little bit. You know, the our small resi exposure we have was probably the 1 area of weakness that we call out with an applied water. So I think relative to increasing industrial production, not a lot of our business you see an immediate inflection.
Andrew Buscaglia: Got it. And, you know, a little bit of confusion on the China some of your China comments. Just that you know, we had in our head, I think, that China was a pretty small portion of your total sales. Yeah. Can you help us understand know, the nature of the declines and what your commitment is to China, you know, maybe as you reevaluate or you continue to evaluate 80/20 as a strategy.
William Grogan: Yeah. No. I think our commentary with China has been pretty consistent over the last few quarter. It remains a challenging market for us both on the orders and revenue side. Like we said, Q2 orders were down over 30%. Sales were down almost 30%. And, again, I think that is primarily reflecting ongoing economic headwinds within, you know, water infrastructure and applied water. Some of that is you know, the broader economic with the Chinese government investing less on infrastructure and shifting their dollars into AI and the life sciences. Again, we talked about significant competition within the market that is put pressure. And then again, relative to 80/20 and us being more selective, on the quality of business that we are we are bidding there, kind of stacked up and we frame that as, you know, last year was about 3% of overall sales. This year, it is gonna be about 2%. So, again, 1% headwind for total Xylem. You know, we think it is stabilized a bit. There have been a couple data center wins within the country that have been positive. But for the most part, I think we have you know, it is bottomed out a bit. You know, the second half, I think, will be sequentially similar from a total volume perspective to the first half. You know? So the comps will be easier year-over-year, but we have rightsized that market. I think we are being selective in the areas that we are investing and trying target things where we can differentiate with our technology. You know, it again, it is the world's second largest economy. So it is some place here in the near-term that we wanna participate in, but, you know, we consistently evaluate that assumption.
Andrew Buscaglia: Thanks, Bill.
Operator: Our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question.
Matthew Pine: Hi. Good morning.
Chris Granga: This is Chris Granga on for Joe. Thanks for taking the questions. The MCS outlook continues to rely on a fairly substantial fourth quarter step up. Could you elaborate on what you have seen that increases your confidence in the trajectory particularly given that Q2 growth was relatively modest at 2% organic? Thank you.
William Grogan: Yeah. Again, I think the Q2 growth was, yeah, really strong growth on the water side offset with some of this electric metering delays. So I think what gives us confidence is, you know, we have seen here in the first half a double-digit orders growth on the water side. You know, what we have line of sight to with our flow business where that is tracking, has been strong all year. And conversations we have had with customers on the balance of the projects that we need to see the sequential improvement yeah, we are close to signing. Again, we will be book-to-bill positive. In the second half with you know, orders in the high-single-digit range on the water side. So we are excuse me, overall with double-digit orders growth on the water side. So I think all the proof points are there. Outside of the challenges we are seeing on the electric side.
Chris Granga: Thank you. And you have you have highlighted momentum in digital offerings, and we have heard positive feedback around early adoption of data lake. As utilities are leveraging that base of AMI meters. Could you talk about what you are seeing in customer engagement since the launch of that product? And whether tools like data lake are accelerating adoption of higher-value offerings such as Vue and the pathway that you are seeing from metering deployments to recurring software revenue?
Matthew Pine: Yeah. We definitely have seen a pretty fast pickup in the Vue platform, through our joint venture with Idrica out of Valencia, Spain. You know, we have been at this in earnest the past, really probably 2.5 to 3 years, and we have got significant momentum We doubled the business last year. We are on pace to, you know, grow that business significantly in 2026. You know, probably close to 30% to 40% as we sit here today. You know, I would say that, 1 of the-- as I travel around the world and I talk to lots of different CEOs of municipalities, it solves their biggest pain point. Really, it is about they have got to your point about a data lake, they have got several applications that they are trying to manage that are discrete and bespoke. Then they wanna bring them into a common platform and then put that into a data lake so they can drive insights off the data. And so that is what really we are coming over the top of their applications to do We have had some significant wins. Over the course of the past, really, I would say, 3 months. That really continue to, you know, bolster our position with utilities. Know, another area I mean, this platform is scalable beyond municipal. You know, we are we are talking to other industrial companies and other verticals where this platform can also scale. So we obviously wanted to get rooted in municipal and get momentum there, but, also, we are looking to expand the platform into the industrial sector as well. Thanks very much.
Chris Granga: Thank you.
Operator: 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.
Matthew Pine: Thanks for your questions today, and thank you for all that joined. As always, we appreciate your interest in Xylem. All the very best. Take care.
Operator: And with that, we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.