Q1 2025 Xylem Inc Earnings Call
Good day and welcome to the Islands first quarter 2025 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
Speaker Change: On your telephone keypad and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Keith Buettner, Vice President of Investor Relations and S. P. N. A please go ahead sir.
Speaker Change: Thank you operator, good morning, everyone and welcome to the Islands first quarter 2025 earnings call.
Speaker Change: With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan they.
Speaker Change: They will provide their perspective on xylem, its first quarter results and discuss the second quarter and full year 2025 outlook. Following our prepared remarks, we will address questions related to information covered on the call I will ask that you. Please keep to one question and a follow up and then return to the queue.
Speaker Change: As a reminder, this call and our webcast are accompanied by a slide presentation available in the investors section of our website.
Speaker Change: A replay of today's call will be available until midnight may 13, and will be available for playback via the investors section of our website under the heading investor events.
Speaker Change: Please turn to slide two.
Speaker Change: 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.
Speaker Change: These statements are subject to future risks and uncertainties such as those factors described in the islands. Most recent annual report on Form 10-K and in subsequent reports filed with the SEC.
Speaker Change: 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.
Speaker Change: Please turn to slide three.
Speaker Change: We have provided you with a summary of key performance metrics, including both GAAP and non-GAAP metrics.
Speaker Change: For the purposes of today's call all references will be on an organic <unk> adjusted basis, unless otherwise indicated and non-GAAP financials have been reconciled for you.
Speaker Change: And are included in the appendix section of the presentation.
Speaker Change: Now please turn to slide four and I'll turn the call over to our CEO Matthew Pi. Thanks, Keith Good morning, everyone and thanks for joining us the team got off to a strong start to the year in Q1 exceeded expectations building on our prior momentum.
Speaker Change: Demand was resilient and our book to Bill remained above one.
Speaker Change: Revenue grew across all segments, and we delivered 120 basis points of EBIT margin expansion.
Speaker Change: Driving double digit EPS growth.
Speaker Change: I'm proud of the team for staying focused on helping customers. Despite various distractions in the business environment.
Speaker Change: We're better positioned than most to address the water needs of communities and businesses because the portfolio. We built is differentiated in every part of the water cycle on top of that our structural exposure in this sector is disproportionately aligned with customer Opex, which historically has been remarkably stable in the face of broader volatility.
Speaker Change: We're also confident in the agility, we built into the business by doing what we said we would do at our Investor Day last may.
Speaker Change: We are leaning into our high impact culture <unk>.
Speaker Change: <unk>, our processes and systems and Reorienting, our structure to improve customer focus.
Speaker Change: As a result, we're in a better position now to respond with speed and agility in any business environment.
Speaker Change: While we'd welcome less uncertainty around tariffs, we have pricing and supply chain programs in place designed to offset the majority of the impacts from the current tariff scheme. We have a strong line of sight to Q2 and execution momentum reflected in our first quarter results.
Speaker Change: So based on where we stand today and our current tariff levels. We are reaffirming our full year 2025 guidance on both revenue and earnings per share.
Speaker Change: In a moment I'll offer some comments updating where we stand 12 months into executing on the plans laid out at our Investor day last year.
Speaker Change: But first I'm going to turn the call over to bill to provide more detail on our outstanding Q1 results and on the assumptions underpinning our guide Bill.
Bill: Thanks, Matthew Please turn to slide five as Matthew mentioned, we are very pleased with the strong start to the year. The team stay focused despite the volatility and delivered results exceeding our expectations demand remains solid with our ending backlog at $5 $1 billion and our book to bill for the quarter above one.
Bill: Orders were down slightly versus last year, but against challenging comps in WSI and Mcs.
Bill: Revenue growth was ahead of expectations up 3% in the quarter driven by an outperformance at Mcs.
Bill: The team's operational discipline pushed quarterly EBITDA margin to 24% up 120 basis points from the prior year.
Bill: This improvement was driven by productivity impacts from our simplification efforts and price more than offsetting inflation and mix.
Bill: The strong commercial and operational performance helped us realize quarterly EPS of $1 three.
Bill: Surpassing the midpoint of our guidance by <unk>, <unk> and delivering 14% increase over the prior year, our balance sheet remains in great shape with net debt to adjusted EBITDA at <unk> five times year to date free cash flow decreased by $53 million from the prior year and was driven by outsourced water projects.
Bill: Payables, partly offset by higher net income now, let's turn to slide six.
Bill: And measurement <unk> control solutions, we continue to convert the backlog with total with the total for Mcs coming down slightly from the prior quarter to $1 $8 billion.
Bill: Orders were down 8% driven by difficult comps in smart metering, partially offset by growth in analytics bids.
Bill: Bidding and funnel activity remains healthy overall and has increased year on year with some key wins with Ami projects that will fill in the second half.
Bill: Revenue grew more than expected for the quarter up 6% versus the prior year, driven by energy growth and offset by water delivery calibration.
Bill: EBITDA margin of 21% was up sequentially versus the fourth quarter, but 170 basis points lower than prior year.
Bill: Driven primarily by the energy water mix challenges, we highlighted previously <unk>.
Bill: Will impact margins for the first half of the year.
Bill: In water infrastructure orders were up 1% in the quarter led by strong demand in treatment offsetting double digit declines in China due to ongoing economic challenges revenue increased 5% driven by strong treatment and transport demand across most regions with the exception of China.
Bill: EBITDA margin for water infrastructure was up an outstanding 290 basis points productivity and price more than offset inflation and mix and the Wi team continues to get significant traction with our 80 20 efforts.
Bill: In applied water orders were up 3% growing for the fifth straight quarter.
Bill: Orders were driven by strength in building solutions and book to Bill was well above one.
Bill: Revenues were up 1% compared to the prior year, primarily driven by strength in building solutions, partially offset by 80 20 walkaway impacts.
Bill: Segment EBITDA margin improvement of 300 basis points year over year was a company best for the quarter productivity price and mix more than offset higher inflation and lower volumes.
Bill: W. Simplification efforts are really starting to take hold.
Bill: Finally, water solutions and services saw robust demand with book to Bill well over one.
Bill: Orders decreased by 5%, though lapping a difficult comp due to a large order in the prior year.
Bill: Revenue grew 1% with strength in services offset by weather impacts in the southeastern part of the U S.
Bill: Segment, EBITDA margins were down 60 basis points versus the prior year at 21, 7% driven primarily by mix and lower volume, partially offset by productivity and positive price cost.
Bill: Now, let's turn to slide seven to discuss our current views on tariffs.
Bill: Before I go through our overall guidance I want to highlight that our reaffirmation of our full year guidance is based on the assumption that the current tariff scheme remains in place for the balance of the year.
Bill: At this time, we expect to offset the cost of the additional tariffs with incremental pricing and supply chain actions and any softening demand should be buffered by our strong start to the year and FX tailwind as well.
Bill: We're providing a summary of the imports from our largest regions and the estimated impact tariffs will have at current levels.
Bill: The large rate increase on China imports from our last earnings call has changed the math and made this our <unk>, but we should note that our imports from China are down significantly from where they were just a few years ago.
Bill: And we continue to reduce our exposure with dual sourcing of most of what comes out of China now.
Bill: On Mexico, Fortunately, 75% of goods imported recovered through the U S. MCA exemption and we continue to work to increase that number at this time, we have a net increased costs from tariffs on Mexico of just $30 million.
Bill: From the EU, we are primarily seeing impacts on our imports of water infrastructure products and are exploring a few alternatives outside of implemented pricing actions to help mitigate the impact.
Bill: I think everyone realizes that this is a very dynamic situation with multiple potential tariff rate changes in the future, but our newly implemented operating model makes the organization more nimble, which gives us confidence in our ability to manage the evolving situation.
Bill: Now, let's turn to slide eight for our Q2 and full year guidance.
Bill: The organic outlook is unchanged versus what we provided at the start of the year, but there are several changes to our reported figures and initial assumptions full year reported revenue is now expected to be $8 seven to eight $8 billion up from our prior guide of eight six to $8 7 billion, which delivers Rev.
<unk> growth of 1% to 2%, while organic revenue growth of 3% to 4% remains unchanged versus prior guidance.
Bill: FX has shifted and is no longer a material headwind while the divestiture impact. We've noted is roughly 1% of sales.
Bill: We are holding back the impact of our enacted tariff pricing in our guide until we get better visibility into any softening demand that may result from evolving trade dynamics.
Bill: EBITDA margin is expected to remain at 21.3 to 21, 8%. This represents 70 to 120 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation as well as investments in the business and benefits from our simplification simplification efforts will help mitigate.
Bill: Mixed pressure from Mcs.
Bill: This yields an unchanged EPS range of $4 50 to $4 70.
Bill: Despite a challenging start we remain committed to the 9% to 10% free cash flow margin again cash flow will be impacted in 2025, primarily by our recently announced restructuring actions.
Bill: Now drilling down on the second quarter we.
We anticipate revenue growth will be in the 1% to 2% range on a reported basis and 2% to 3% organically.
Bill: We expect second quarter EBITDA margin to be approximately 21 to 21, 5%, which is flat to up 50 basis points, driven by price realization and productivity gains and higher volumes as well as impacts from our simplification efforts.
Bill: Second quarter, Mcs EBITDA margin will be down significantly year over year, driven again by the energy and water mix. It will be the low mark for the year, but we will we expect it to improve sequentially from there and return to expansion in the second half of.
Bill: This yields second quarter EPS of $1 12 to $1 16.
Bill: We started the year with momentum and in a position of strength our balanced outlook reflects our strong commercial position the durability of our portfolio and benefits from our simplification efforts.
Bill: While we also continue to monitor our broader market conditions, and volatility, including potential new or additional tariffs inflation and fluctuations in currency and interest rates.
Bill: Overall, our expectations for the year remained positive as we build on our strong momentum.
Bill: With that please turn to slide nine and I will turn the call back over to Matthew for closing comments.
Matthew Pi: Thanks, Bill our solid Q1 performance is another proof point that we are delivering on the plan we laid out at our Investor Day last may.
Speaker Change: It's been almost a year. Since then so as a reminder, we outlined our intention to create value from simplifying our operating model integrating a vote.
Speaker Change: Optimizing our portfolio with disciplined capital deployment.
Speaker Change: On our operating model as I mentioned, a few moments ago that work has already begun to make us more agile and that's a great benefit but the real reason to simplify our operating model is to position us for long term growth and.
Speaker Change: And we're doing that by implementing our high impact culture, driving 80, 20, which is progressing nicely across the business and simplifying our organizational structure, which is tracking to the timing we laid out on our last earnings call.
Speaker Change: We can already see the spike in productivity from those actions, which is reflected in our margin expansion over the last five quarters.
Speaker Change: But just as important simplification has unleashed a new energy across the enterprise.
Speaker Change: Our team has told us that very clearly in our most recent employee survey and.
Speaker Change: In our global leaders report an increase in the speed of our responsiveness to customers alongside less wasted time and effort.
And the integration of a vocal we've delivered the cost synergies faster than planned.
Speaker Change: And now we've got great momentum on the revenue synergies.
Speaker Change: And finally on capital deployment, we built considerable momentum in the last 12 months.
Speaker Change: We have an attractive.
Speaker Change: And robust M&A pipeline focused on capabilities that complement our core, especially in advanced treatment intelligence solutions and in services.
Speaker Change: So we're confident about delivering a consistent flow of opportunities with the right level of disciplined.
Speaker Change: In the recent weeks as an example, we closed on Baker, a leading technology company with proprietary breakthrough solutions in zero liquid discharge.
Speaker Change: As an addition to our treatment portfolio. The technology offers a compelling value proposition in attractive industrial verticals like microelectronics and energy.
Speaker Change: Long side M&A, we're actively optimizing our portfolio with specific actions in place to further focus on our strategic priorities.
Speaker Change: So the team has gotten a lot done since last may and the benefits are reflected in our results.
Speaker Change: At the same time, we remain fully committed to sustainability leadership, our annual sustainability report will be out Tomorrow April 30, when you read it youll get a strong impression of the impact the team is having on the customers and communities we serve.
Speaker Change: In fact, we've exceeded all four of our 2025 customer sustainability goals ahead of schedule.
Speaker Change: And we've raised the bar with our 2030 goals, we outlined those at Investor day last year, and Youll be able to find further detail on them in the report which will be on our website tomorrow.
Speaker Change: Before we get to your questions I want to highlight our team once more because this is a team sport.
Speaker Change: I'm proud of the team for delivering such a tremendous start to the year and for leaning in to the transformation of xylem with so much determination and positive energy.
Speaker Change: And for putting us in such a privilege position to execute on our purpose, which is to empower our customers and communities to build a more water secure world and with that operator, I will turn the call over to you for Q&A.
Thank you we will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys and Swift. All your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Deane Dray with RBC capital markets. Please go ahead.
Deane Dray: Thank you good morning, everyone.
Speaker Change: Hey, good morning Deane.
Speaker Change: I just really appreciate all the terror detailed mitigation plan and so forth in page seven is a big help in kind of interesting as you wall in terms of China as a percent of Cogs are pretty similar to a number of multi industry companies that we cover so no surprises there and so first question.
Speaker Change: As a.
Speaker Change: More of a just a reflection of.
Speaker Change: This past quarter did you benefit in any way from customers pre positioning inventory pull forward and then similarly did you all preposition any inventory ahead of some of the tariff issues supply chain issues and so forth.
Speaker Change: Yeah.
Deane Dray: Yeah, Deane I'll start us out in terms of kind of Frontloading orders ahead of tariffs, we didn't see any increase in Q1.
Speaker Change: To get ahead of tariffs, we pulse the teams actually.
Speaker Change: Our business reviews in April when we did see a small impacted area in applied water and our commercial business, but in general we really havent seen anybody.
Speaker Change: Do any pull ins to get ahead of the tariffs.
Speaker Change: Got it and anything for yourself.
Speaker Change: For xylem in terms of positioning okay. Good and then.
Speaker Change: Second question would be just to give me clarify.
Speaker Change: The point about the price increases that you're putting through you're not assuming any falloff in demand.
Speaker Change: I'm not sure that that's that your typical place price elasticity, but just what is the underlying assumption there.
Speaker Change: And maybe it's kind of the timing.
Speaker Change: And when you could see some overall falloff in demand because of these price mitigation issues.
Speaker Change: Yeah, I think for sure we do anticipate some demand.
Speaker Change: Falling off in the second half of the year.
Speaker Change: We don't have a really good line of sight to that that's probably the biggest puzzle.
Speaker Change: Piece of the puzzle that's missing.
Speaker Change: But as we've done sensitivity analysis, if we looked at tariffs we looked at price we looked at demand, we feel really comfortable with.
Speaker Change: Having beat Q1 in our first quarter beat.
Speaker Change: Now we've got tailwind from FX and are right in the right direction, and we feel very comfortable that.
Speaker Change: Any sizable amount of demand impact in the second half, we can manage but we brought different sensitivity and we feel confident that we can manage any any movement in demand, but we do anticipate it is just to what extent, but we feel we've got it covered yes, I mean, the comment in the prepared remarks was hey, we've gone out with extensive pricing.
Speaker Change: Across the portfolio. So we didn't raise our organic growth guide, which would reflect that because we're going to offset it with any potential decline that Matthew just highlighted that's yet to be determined.
Speaker Change: Got it I appreciate all the color. Thank you.
Speaker Change: Thank you.
Speaker Change: Next question will come from Mike Halloran with Baird. Please go ahead.
Mike Halloran: Hey, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: So just kind of want to walk through a couple of things here first the tariff side of things.
Speaker Change: How are you expecting to manage the pricing piece of this on a forward basis surcharges versus formal price increases are these layering in over the next two months have they already put have been put in place.
Speaker Change: You know would you roll some of those backs if tariffs come down leverage if there are even more tariffs just kind of walk through the moving pieces there to help understand the timing.
Speaker Change: And related.
Speaker Change: Does this matter for the second quarter, particularly much based on order levels inventory timing et cetera.
Speaker Change: Kind of like a back half of the quarter impact or is it more <unk>.
Speaker Change: Yes.
Speaker Change: Start with where you finished it's more back half loaded to the quarter and then obviously the second half of the year, but.
Speaker Change: Mike We've got a mix of surcharge in price increases I would say its probably two thirds price increase about a third surcharge.
Speaker Change: Different parts of our business needed to handle it in different ways.
Speaker Change: But those actions you know look I think a lot of the work we've done on our operating model structure have enabled us to move more swiftly.
Speaker Change: Took pricing actions in Q1, we took those again in early in April Q2.
Speaker Change: And those are in the market and in play right now so.
Speaker Change: There's parts of our backlog that we can reprice and we're doing that and there is parts of it we can't we've done an assessment and we understand that and thats kind of baked into our full year guide, but we're.
Speaker Change: We're pretty nimble and moving quickly.
Speaker Change: Evolving situation as things change, we will reevaluate and we'll readjust, but I think we're in a good position right now.
Well thanks for that and then the follow up is if at all how much does this change your approach to the simplification side of things.
Speaker Change: Is this an opportunity to lean in even further and is it creating any challenges.
Speaker Change: So you're pretty comfortable and what youre doing internally otherwise you Wouldnt tell the guide.
Speaker Change: And all of the offset points, but I'm just curious if that changes that dynamic at all and just if you wouldn't mind also adding where you are right now in the process and what the main focal point is on the simplification side.
Speaker Change: Yes, maybe I would start I think fundamentally changed.
Speaker Change: Changed our methodology or approach I think if anything as we look for areas to accelerate businesses that are more challenged from the tariffs. We look for other actions to expedite some of the simplification efforts to help offset the way to the tariffs.
Speaker Change: I think overall on the restructuring plan. We are on track I think our Q1 performance was slightly ahead of schedule I.
Speaker Change: I think we're starting to see it as Matthew highlighted though as the businesses come together a re segmentation of individuals' structure. We've created we've got dedicated leaders that have P&L ownership.
Speaker Change: That nimbleness in them to have full control and line of sight to the actions that they need to take to drive business results I think it's hugely beneficial in this environment. So.
Speaker Change: I think it was obviously.
Speaker Change: Much needed activity, and then perfect timing to face a really challenging macro economic environment.
Speaker Change: Yes.
Speaker Change: Thanks, guys I appreciate it.
Speaker Change: Thanks, Mike. The next question will come from Scott Davis with <unk> Research. Please go ahead.
Scott Davis: Hey, good morning, guys.
Speaker Change: Good morning, Scott.
Speaker Change: Doesn't seem like this tariff stuff is creating as much drama for you guys perhaps.
Speaker Change: Maybe some others out there but.
Speaker Change: So I'll ask questions in a different way, maybe more traditional and that would be balance sheet.
Speaker Change: They'll really under Levered and <unk>.
Speaker Change: You've had a you've had a lot of market disruptions is this an environment that.
Speaker Change: You know we've heard mixed things you know some folks M&A has stalled out and some have some have said it hasnt. So what have you guys seen in what do you expect as far as.
Speaker Change: But to put some capital to work this year.
Speaker Change: Yes, we may look like a duck, but the feet are moving pretty quickly into the water.
Speaker Change: Scott as we as we laid out at our Investor day, our priorities are first investing in the core M&A is really important to us to get to the mid teens EPS guide that we put out for <unk>. So we're very active there we have a lot of targets in the funnel.
Speaker Change: Obviously, we talked about obviously want to continue dividends and then we'll be opportunistic on share buybacks.
Speaker Change: I think it's a little bit from a valuation perspective, maybe I'll talk about that I think its little bit too early to kind of see maybe any impacts devaluations private valuations tend to lag public markets. We haven't really seen a lot of movement. There. However high quality companies usually come at a premium.
Speaker Change: And.
Speaker Change: You know the one thing that we continue to do is optimize our portfolio we're very.
Speaker Change: Direct about that at Investor Day last year, we did one deal in Q1 are one divestiture in Q1, we've got a few other things in the portfolio that we're looking to divest that.
Speaker Change: Either with no longer fit or are not accretive to the business.
And we're going to continue to look at assets that fit our strategy and make decisions based on strategic fit and financial hurdles.
Speaker Change: I know that we built a lot of muscle to.
Speaker Change: You do a lot of M&A. So we built a lot of capability and we're going to be active.
Speaker Change: Out with M&A over the course of this year and through our ERP.
Speaker Change: Okay. It sounds encouraging.
Speaker Change: Total switch gears and sorry, I missed the first seven minutes of your call the water solutions and service segment.
Speaker Change: Is that is that a little bit too lumpy for us to start picking on quarters.
Speaker Change: What should we expect kind of this new segmentation just trying to get used to it at 1% growth seemed a little light for.
Speaker Change: Just kind of what we were thinking but again, if it's just lumpy and it kind of hard to call at quarter's end.
Speaker Change: We should make a big deal out of that stuff.
Speaker Change: Yes, I would.
Speaker Change: I would definitely agree with that it is our Lumpier segment, yes.
Speaker Change: Just right we were at double digit growth in the fourth quarter.
Speaker Change: Double digit growth in the second quarter, so you're going to see some of these larger capital projects hit.
Speaker Change: A little bit less consistency as youll see in the balance of the portfolio.
Speaker Change: Overall, they've got.
Speaker Change: Outside of the tough comps I mean last year just to remind everyone. We had.
Speaker Change: About $150 million outsourced water project that we booked so excluding that orders would have been extremely strong in the quarter, we built significant backlog I.
Speaker Change: I think backlog year over year is up six or 7% for that business. So I think the fundamentals are still there and look at a rolling 12 month organic rate versus a quarter to quarter totally get the true health of WSI, but relative to expectations. They were right in line and I think they have a really strong year ahead of them.
Speaker Change: Okay. That's all we thought that's helpful. Thanks, Bill I'll pass it on I appreciate it guys best of luck this year.
Nathan Jones: The next question will come from Nathan Jones with Stifel. Please go ahead.
Nathan Jones: Good morning, everyone.
Speaker Change: Hey, good morning, guys.
Speaker Change: I guess my question on tires.
Speaker Change: Are they positive.
Speaker Change: <unk> tariffs leave U E E.
Speaker Change: Either better or worse off relative to competitive. So there are differences in the competitive impact or your competitive position.
Speaker Change: That you see coming from tax and does that.
Speaker Change: Price increases they can get to get in place is harder to get and others and how do you deal with that.
Speaker Change: Yeah. That's a good question I would just start maybe at a high level that roughly about 4% of our Cogs.
Speaker Change: In terms of tariffs and.
Speaker Change: I think we're in a very competitive position based on what I've been able to glean over the past couple of weeks and I think we're in a really good space.
Speaker Change: I think I would just like I said in the opening remarks that our diversification of our portfolio in the end marks and markets help us.
Speaker Change: Really have a stable business in the face of economic downturns like the potential one were <unk>.
Speaker Change: Looking at.
Speaker Change: And also the critical nature of our products and solutions are really important so.
Speaker Change: If I harken back to Covid.
Speaker Change: We obviously had a kind of a peak to trough down six but I think normal pullbacks, we have been pretty resilient across the markets driven by Muni exposure and then high growth verticals in our industrial business, especially as we brought on legacy of vocal into the portfolio. So.
Speaker Change: I think we're feeling really good about our competitive position and.
Speaker Change: We will take it one day at a time.
Speaker Change: Thanks for that I guess.
Speaker Change: The other question I wanted to ask about or have you guys comment on was about the organizational realignment that you guys have gone through over the last few quarters and I think it's pretty much going live and test into place now. So can you talk about how you've changed the internal organization of the company.
Speaker Change: And what impact you're looking for that to have on the business. Thanks.
Speaker Change: Yeah.
Speaker Change: Yes, I think like I said last call.
Speaker Change: Start out with just reiterating that these actions however necessary for the business, meaning that we are going to have 2000 colleagues that either have or will it be leaving the business over the course through the summer we don't take that likely we do want to make sure that everyone's.
Speaker Change: Treated fairly and that with the utmost respect so I'll start there.
Speaker Change: First and foremost.
We're tracking to the timeline that we laid out on our last earnings call I think bill just alluded to that as well with the majority of our actions wrapping up this summer, especially in Europe, where we were working with Workers' Council is there.
Speaker Change: I would say I've been traveling quite a bit around the globe spending time with colleagues and customers and I can already see the impact. The teams are much more focused they're making decisions more quickly.
Speaker Change: And we're already seeing the impact on customer focus and prior to that we were highly major size. As you know now we're singularly focused on a segment and <unk>.
Speaker Change: Now we have 16 division Gms that have end to end accountability for the P&L statement and so.
Speaker Change: That's enabling the speed and focus and accountability and it's going to make us much better I'm already starting to see that in my travels.
Speaker Change: Another thing I would I would mention is we've set up an enterprise solutions organization.
Speaker Change: Before we were focused on the 'twenty not the 80 in terms of customers that wanted to buy our our total portfolio.
Speaker Change: And I am personally calling on C suite executives and helping that team for customers that want to buy our total solution. So that's making a lot of great progress.
Speaker Change: And I've said this in our prepared remarks I'll just reiterate it we do pulse surveys three times a year.
Speaker Change: We just wrapped up our poll survey and we've seen really marked improvements in the two questions. We ask we ask.
Speaker Change: Different questions with the two that really reflect the transformation are are we making it easier to serve our customers and are we making it easier for you as a colleague to do your job we've seen especially marked improvement with our top 150 are global leaders did you think about the fusion of the structure and culture down it should.
Speaker Change: Start there and we've seen the broader organization improve in those two questions as well so we're off to a good start and.
Speaker Change: Theres a lot more to go but we're off to a good start.
Speaker Change: Thanks, very much for taking my questions.
Speaker Change: Thank you.
Speaker Change: The next question will come from zero for density with Jefferies. Please go ahead.
Speaker Change: Hi, Thanks, so much for taking my questions, maybe just on Mcs you already have been choppy recently.
Speaker Change: Color on how youre thinking about high single.
Speaker Change: The growth expected for the full year and then maybe any additional color on the margins that are included in that backlog and do you expect to have this energy mix plane flying.
Speaker Change: Yes, I would say, we said just mcs orders.
Speaker Change: As they go through the re phasing of their projects that book to Bill We think it will be positive in the back half of the year I mean general bid activity remains strong our win rate has maintained so.
Speaker Change: So the fundamentals of that business as we get through some of this re phasing I think returns to a more normal cadence and youll see that water business back to the high single digit growth rate, yes, we highlighted the energy part of smart metering is doing significantly well growth with 40 plus percent growth rates. This year. So.
Speaker Change: And we have line of sight to how some of those projects are going to lay in the back half as we see an acceleration of growth as we go through the balance of the year from a margin perspective, I think were very solid on the water side. We've talked about we've got a specific project or two in the energy space that is putting some pressure on overall margin.
Speaker Change: That's less margin than the water portfolio on balance, but we got some specific issues that we're cycling through our backlog and will be at a more normal level going into 2026.
Speaker Change: I think the Mcs team overall from a margin perspective continues to work on.
Speaker Change: Core productivity to help try to offset that but the mix impact is significant couple of hundred basis points here in the first quarter and will ramp here in the second quarter like we said in the prepared remarks, I think Q2 is the bottom and then start to see a sequential improvement from there and then back to year over year expansion.
Speaker Change: I appreciate all the color and then last quarter I believe you talked about seeing some impact in order to meet.
Speaker Change: Water infrastructure, just can you update us on any impact you saw this quarter from 80 20 on overall orders and then do recent tariff actions change the strategy in any way given maybe the higher cost base for some products. Thank you.
Speaker Change: Yeah, No I think we highlighted we had built into our guide.
Speaker Change: Little over 1% of headwind from an 80 20 perspective in.
Speaker Change: Maybe a little bit heavier in applied water and water infrastructure as they are.
Speaker Change: Ben.
Speaker Change: They have implemented the tool set the longest within the portfolio and we looked at kind of the buildup of their product and customer portfolio. There was the largest opportunity. There. So I think the teams are continuing to make those decisions to reduce the complexity free up that the team's time to help at.
Speaker Change: At the end of the day longer term grow and innovate with our largest customer. So I don't think there is a material change to that strategy now with the tariffs in place overall, obviously, the incremental pricing will provide a tailwind if.
Speaker Change: If theres no material economic pullback as we said earlier.
Speaker Change: I appreciate all the color thanks, guys.
Speaker Change: Thank you and take care.
Speaker Change: Next question will come from Bryan Blair with Oppenheimer. Please go ahead.
Bryan Blair: Thank you good morning, guys.
Speaker Change: Good morning, Brian.
Speaker Change: I actually wanted to follow up on Mcs margin performance.
Speaker Change: He just said Q1 mix impact couple of hundred basis points like how much does that step up into Q2, and then given the visibility that you have on first half result second half.
Speaker Change: No project pipeline tariff impact et cetera.
Speaker Change: Are you still confident in full year segment margin expansion.
Speaker Change: Yes, So first off I'd say Q1 margin was right in line with our expectations.
Speaker Change: And again, just it's very specifically attributed to the.
Speaker Change: The mix shift between our water <unk> water and energy meter businesses.
Speaker Change: We've talked about last quarter. This is really a first half type of phenomenon as they get through the re phasing of their backlog. So I think we are on track and in line with expectations.
Speaker Change: I think as we get into the second quarter the margin.
Speaker Change: Margin decrease for Mcs, it'll be close to double the impact that we experienced in the first quarter again thats why our overall xylem margin.
Speaker Change: Guidance.
Speaker Change: At a flat was flat on the bottom end because of that significant mcs pressure.
Speaker Change: But again that team continues to do a lot of great work on profitability, that's being masked by this mix issue.
Speaker Change: Drove a few hundred basis points of productivity through their 2020 and organizational simplification efforts. They continue to drive material efficiencies so they're shorting.
Speaker Change: Design work. So they are tackling it that will create a better leverage point for when this mix issue resolved later in the year, but we're confident that as we stand here today full year Mcs margins will expand year over year.
Speaker Change: Okay. That's very helpful detail. Thank you.
Speaker Change: And as a follow up.
Speaker Change: I've covered this directionally with some other responses, but perhaps offer all of them.
Speaker Change: More detail on April order trends.
Speaker Change: Any apparent impact in the early days of additional pricing.
Speaker Change: Curious if their call outs by segments or at a higher level.
Speaker Change: Opex versus capex oriented businesses.
Speaker Change: Okay.
Speaker Change: Just maybe starting with Q1, we exceeded our expectations on orders across all segments and into the first part of the quarter.
Speaker Change: And our first business were used in April we were tracking to our order forecasting. So we haven't seen any any pullbacks as of late.
Speaker Change: Obviously, we're keeping a watchful eye on that as tariffs start to really work their way through the system.
Speaker Change: People start to react to that maybe from a demand perspective, we have seen a few project delays, mostly on the industrial treatment side, but those are well within.
Speaker Change: Yes, what we do in terms of hedging against.
Speaker Change: We negotiate contracts or are there any project delays things that we always account for.
Speaker Change: With typical kind of delays in the capital projects. So nothing outside the realm of things, we don't hedge again, so I think so far so good but obviously theres a lot of road in front of US This year and we're going to have to take it kind of day by day week by week and month by month.
Speaker Change: Understood. Thank you guys.
Speaker Change: Thank you.
Speaker Change: The next question will come from Joe Giordano with TD Cowen. Please go ahead.
Joe Giordano: Hey, guys good morning.
Joe Giordano: Apologies if you covered this on the prepared remarks I've been bouncing between calls, but can you just talk me through the the sequential dynamics and margin at Mcs from <unk> to <unk>.
Joe Giordano: I thought that the energy headwind is kind of on both of those quarters, but yes.
Joe Giordano: I know margins down year on year in the <unk>, but still up fairly significantly sequentially.
Yeah, I think obviously, we started to see some of the.
Joe Giordano: Margin improvement of overall Mcs in Q1 of 2024, which I think add some of the just the year over year pressure as.
Joe Giordano: As we looked at mix between the two sides on a quarter to quarter basis.
Joe Giordano: I think just as there was a couple of other one timers outside of mix in Q4 true up of incentive and things like that that mitigated.
Joe Giordano: Their margin expansion. So again this was in line with our expectations I think we sequentially go down in the second quarter, and then look for sequential improvement in year over year improvement starting in Q3 and moving on to Q4.
Joe Giordano: Perfect.
Joe Giordano: And then you mentioned book to Bill there looking at above one in the second half of it.
Joe Giordano: Are we talking like getting back.
Joe Giordano: A pretty big increase versus the first quarter or first half order rate.
Joe Giordano: What kind of informing that.
Joe Giordano: To those of increase in the back half there from an order standpoint.
Joe Giordano: Just as we look at the commercial funnel and the activity of projects as we seek to start to layer in one and then two just the movement of inventory through the channel as they re phase those projects all have blood that down and start getting into more normal order pattern.
Joe Giordano: Great. Thanks, guys.
Joe Giordano: Thanks.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Matthew Pine for any closing remarks. Please go ahead Sir.
Speaker Change: Well, we'll wrap it up there thanks for your questions and thanks to everyone who joined the call today as always we appreciate your interest and support all the very best take care.
Speaker Change: Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].
Okay.
Speaker Change: [music].