Q4 2025 Xylem Inc Earnings Call

February 10, 2026

Operator: Good day, everyone, and welcome to Xylem's Q4 2025 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star and then one on your telephone keypads. To withdraw your questions, you may press Star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Keith Buettner, Vice President, Investor Relations, and FP&A. Please go ahead.

Speaker #2: After ask questions, to today's presentation, there will be an opportunity to ask a question you may press star and then 1 on your telephone keypads, to withdraw your questions you may press star and 2.

Speaker #3: Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth quarter, 2025 earnings call. With me today are Chief Executive Officer Matthew Pine, and Chief Financial Officer Bill Grogan.

Keith Buettner: Thank you, operator. Good morning, everyone, and welcome to Xylem's Q4 2025 Earnings Call. With me today are Chief Executive Officer Matthew Pine, and Chief Financial Officer Bill Grogan. They will provide their perspective on Xylem's Q4 and full year 2025 results and discuss the Q1 and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up, and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website. A replay of today's call will be available until midnight, February 24, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide 2.

Q4 2025 Xylem Inc Earnings Call

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XYL

Xylem

Earnings

Q4 2025 Xylem Inc Earnings Call

XYL

Tuesday, February 10th, 2026 at 2:00 PM

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Speaker #3: 2. We will make some forward-looking statements on today's call, including references to future events

Keith Buettner: We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide 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 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.

Speaker #3: will or may occur in the future. These statements are subject to Please also note today's event They will provide future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC.

Speaker #3: Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances. Actual events or results could differ materially from those anticipated.

Speaker #3: Please turn to slide 3. We have provided you with a summary of our key performance metrics, including both gap and non-gap metrics, for the purposes of today's call.

Speaker #3: All references will be in an organic and/or adjusted basis unless otherwise indicated, and non-gap financials have been reconciled for you in our included in the appendix section of the presentation.

Speaker #3: Now, please turn to slide 4, and I will turn the call over to our CEO, Matthew

Keith Buettner: Now, please turn to slide four, and I will turn the call over to our CEO, Matthew Pine.

Speaker #3: Pine. Thank you, Keith.

Matthew Pine: Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered an outstanding fourth quarter to close a record year for Xylem. We delivered strong Q4 performance across all major metrics. The team executed with discipline across the portfolio, both in the quarter and full year. The record results demonstrate the impact of our operating model transformation, which represents phase one of our plan to deliver Xylem's long-term framework. That first phase has been about transforming Xylem's operating model, our high-impact culture, a simpler, scalable structure, and improvements in our business processes and cornerstone systems. We've simplified Xylem, increasing speed and accountability. The numbers we posted this morning reflect the ground we've already taken, and there's more to come in 2026.

Speaker #4: Good morning, everyone, and thank you for joining us. The team delivered an outstanding fourth quarter to close a record year for Xylem. We delivered strong Q4 performance across all major metrics.

Speaker #4: The team executed with discipline across the portfolio, both in the quarter and full year. The record results demonstrate the impact of our operating model transformation, which represents phase one of our plan to deliver Xylem's first phase has been about transforming Xylem's operating model, our high-impact culture, a simpler, scalable structure, and improvements in our business processes and cornerstone systems.

Speaker #4: We've simplified Xylem, increasing speed and accountability. The numbers we posted this morning reflect the ground we've already taken. And there's more to come in 2026.

Speaker #4: In parallel, we're entering phase two, strengthening our growth engine by leveraging improvements in our operating model, focusing on Salesforce effectiveness, product management, and innovation.

Matthew Pine: In parallel, we're entering phase two, strengthening our growth engine by leveraging improvements in our operating model, focusing on salesforce effectiveness, product management, and innovation. Phase three will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation, and deepening exposure to the most attractive future water markets. We're tracking to the framework we laid out almost two years ago, and we have plenty of runway ahead. As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower-quality revenue. That creates a short-term top-line headwind, as we've communicated previously, but it drives higher quality earnings. Looking ahead to 2026, we see resilient demand in our largest end markets, strong backlog conversion, and continued traction from our transformation efforts.

Speaker #4: Phase three will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation, and deepening exposure to the most attractive future water markets.

Speaker #4: We're tracking to the framework we laid out almost two years ago, and we have plenty of runway ahead. As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower-quality revenue.

Speaker #4: That creates a short-term top-line headwind as we communicated previously. But it drives higher-quality earnings. Looking ahead to 2026, we see resilient demand in our largest end markets, strong backlog conversion, and continued traction from our transformation efforts.

Speaker #4: I'll leave the detailed guidance to Bill, but at a high level, we will build on our commercial and operational momentum. Growing the top line and expanding margins again in 2026.

Matthew Pine: I'll leave the detailed guidance to Bill, but at a high level, we will build on our commercial and operational momentum, growing the top line and expanding margins again in 2026. With that, Bill will take you through the quarter, full year, and also our 2026 outlook in more detail. Bill?

Speaker #4: With that, Bill will take you through the quarter and full year, and also our 2026 outlook in more detail. Bill?

Speaker #3: Thanks, Matthew. Please turn to slide 5. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year, delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year.

Bill Grogan: Thanks, Matthew. Please turn to slide 5. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year, delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year. Demand remains positive, with our backlog finishing at $4.6 billion. Our book-to-bill was near 1, both in the quarter and for the full year. Orders were healthy, up 7% in the quarter, driven by over 20% growth in MCS, and for the year, orders were up 2%. Revenue grew 4% in the quarter, despite a challenging comparison of 7% growth in the same period last year. Full-year revenue growth was solid at 5%. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors.

Speaker #3: Demand remains positive, with our backlog finishing at $4.6 billion. Our book-to-bill was near 1, both in the quarter and for the full year. Orders were healthy, up 7% in the quarter, driven by over 20% growth in MCS.

Speaker #3: And for the year, orders were up 2%. Revenue grew 4% in the quarter, despite a challenging comparison of 7% growth in the same period last year.

Speaker #3: Full-year revenue growth was solid at 5%. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors. The team's operational discipline delivered quarterly EBITDA margin of 23.2%, up 220 basis points versus the prior year.

Bill Grogan: The team's operational discipline delivered quarterly EBITDA margin of 23.2%, up 220 basis points versus the prior year. The improvement was driven by productivity and price, more than offsetting inflation. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors. We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape, with net debt to adjusted EBITDA of 0.2x. Year-to-date, free cash flow decreased by 2% from the prior year, in line with expectations, driven by outsourced water projects, system investments, and restructuring costs, offset by higher net income. Let's turn to slide 6.

Speaker #3: The improvement was driven by productivity and price, more than offsetting inflation. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors.

Speaker #3: We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape, with net debt-to-adjusted EBITDA of 0.2 times.

Speaker #3: Year-to-date free cash flow decreased by 2% from the prior year, in line with expectations, driven by outsourced water projects, system investments, and restructuring costs, offset by higher net income.

Speaker #3: Let's turn to slide 6. In measurement control solutions, we continue to convert the backlog with MCS's backlog finishing the year at roughly 1.4 billion.

Bill Grogan: In Measurement & Control Solutions, we continued to convert the backlog, with MCS's backlog finishing the year at roughly $1.4 billion. Orders were up a robust 22%, driven by smart metering demand across water and energy. However, this was below our expectations, with several projects pushing out into 2026. Revenue was up 10%, driven by energy metering demand, but supported by high single-digit gains in water as well, which offset softness in analytics related to timing effects caused by the government shutdown. EBITDA margin of 20.2% was 310 basis points higher than prior year, driven by productivity, price, and volume, more than offsetting mix and inflation. In Water Infrastructure, orders were down 1% in the quarter, with softness in treatment, primarily in China, mostly offset by strong demand in transport.

Speaker #3: Orders were up a robust 22%, driven by smart metering demand across water and energy. However, this was below our expectations, with several projects pushing out into 2026.

Speaker #3: Revenue was up 10%, driven by energy metering demand, but supported by high single-digit gains in water as well. Which offset softness in analytics related to timing effects caused by the government shutdown.

Speaker #3: EBITDA margin of 20.2% was 310 basis points, higher than prior year. Driven by productivity, price, and volume, more than offsetting mix and inflation. In water infrastructure, orders were down 1% in the quarter, with softness in treatment, primarily in China, mostly offset by strong demand and transport.

Speaker #3: Revenue was flat, with strong double-digit growth in the U.S., offset by an almost 30% decline in China. EBITDA margin for Water Infrastructure was up a remarkable 510 basis points, driven by productivity, price, and mix, offset by inflation, volume, and investments.

Bill Grogan: Revenue was flat, with strong double-digit growth in the US, offset by an almost 30% decline in China. EBITDA margin for Water Infrastructure was up a remarkable 510 basis points, driven by productivity, price, and mix, offset by inflation, volume, and investments. In Applied Water, orders were up 5% and book-to-bill was roughly 1, lifted by large projects and data center wins in the US. Revenues were up 3% versus the prior year, primarily driven by strength in US commercial buildings. Segment EBITDA margin increased 60 basis points year-over-year, driven by productivity and price, offset by inflation, volume, and mix. With some of these items being non-recurring in nature, we expect Applied Water to be back in the 20% EBITDA range in Q1. Finally, Water Solutions and Services saw robust demand, with orders increasing 7%, driven by strength in services.

Speaker #3: In applied water, orders were up 5% and book-to-bill was roughly 1. Lifted by large projects and data center wins in the US. Revenues were up 3% versus the prior year, primarily driven by strength in US commercial buildings.

Speaker #3: Segment EBITDA margin increased 60 basis points year over year, driven by productivity and price, offset by inflation, volume, and mix, with some of these items being non-recurring in nature.

Speaker #3: We expect applied water to be back in the 20% EBITDA range in the first quarter. Finally, water solutions and services saw robust demand with orders increasing 7%, driven by strength in services.

Speaker #3: Revenue growth was strong, up 4% against a tough comp, with strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year, driven by price, volume, and productivity, offset by inflation and mix.

Bill Grogan: Revenue growth was strong, up 4% against a tough comp, with strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year, driven by price, volume, and productivity, offset by inflation and mix. Now let's turn to slide 7 for our 2026 segment outlook. Heading into 2026, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem, focus on our customers, and drive profitable growth. We are providing full-year organic revenue outlook for the segments and want to highlight that we are accelerating our 80/20 efforts around product and customer simplification. As a result, we will have an outsized headwind to our top line for the year of roughly 2%, doubling the impact we experienced in 2025.

Speaker #3: Now let's turn to slide 7 for our 2026 segment outlook. Heading into 2026, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem.

Speaker #3: Focus on our customers and drive profitable growth. We are providing full-year organic revenue outlook for the segments, and want to highlight that we are accelerating our 80/20 efforts around product and customer simplification.

Speaker #3: As a result, we will have an outsized headwind to our top line for the year of roughly 2%, doubling the impact we experienced in 2025.

Speaker #3: We expect this is a one-year elevation, and we are still committed to delivering on our long-term framework. In MCS, we expect growth in the mid-single digits.

Bill Grogan: We expect this as a one-year elevation, and we are still committed to delivering on our long-term framework. In MCS, we expect growth in the mid-single digits. Overall demand is positive, and our pipeline remains strong, but project timing has been more variable and less predictable than we have experienced over the last few years. Our expectation is energy meters will drive a majority of the growth in 2026, and water meters will grow low single digits as expected orders from Q4 pushed out into the first half of 2026. We will also have an impact from our 80/20 actions, primarily on analytics, impacting overall segment growth for the year. Q1 will be challenged, down low single digits. We expect to see sequential revenue improvement throughout the year as project kickoffs accelerate in the back half of the year.

Speaker #3: Overall, demand is positive, and our pipeline remains strong, but project timing has been more variable and less predictable than we have experienced over the last few years.

Speaker #3: Our expectation is energy meters will drive a majority of the growth in 2026, and water meters will grow low single digits as expected orders from the fourth quarter pushed out into the first half of '26.

Speaker #3: We will also have an impact from our 80/20 actions, primarily on analytics, impacting overall segment growth for the year. The first quarter will be challenged, down low single digits, and we expect to see sequential revenue improvement throughout the year, as project kickoffs accelerate in the back half of the year.

Speaker #3: Also, as a reminder, we expect to close on the divestiture of the International Metering Business at the end of the first quarter. In water infrastructure, we expect low single-digit growth.

Bill Grogan: Also, as a reminder, we expect to close on the divestiture of the international metering business at the end of Q1. In Water Infrastructure, we expect low single-digit growth. We anticipate resilient OpEx and CapEx demand due to the mission-critical nature of our applications, with healthy utility end markets across most regions. However, we will see headwinds from 80/20 actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market, primarily impacting the first half of the year. In Applied Water, we expect growth in the low single digits. We see growth across developed markets, particularly in the US, with large projects coming online and strong growth in data centers. Similar to the story in Water Infrastructure, growth will be offset in Applied Water by 80/20 actions, exiting unprofitable business, and a weak China market impacting the first half of the year.

Speaker #3: We anticipate resilient OPEX and CAPEX demand due to the mission-critical nature of our applications, with healthy utility end markets across most regions. However, we will see headwinds from 80/20 actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market, primarily impacting the first half of the year.

Speaker #3: In applied water, we expect growth in the low single digits. We see growth across developed markets, particularly in the US, with large projects coming online and strong growth in data centers.

Speaker #3: Similar to the story in Water Infrastructure, growth will be offset in Applied Water by 80/20 actions. Exiting unprofitable business and a weak China market are impacting the first half of the year.

Speaker #3: WSS will deliver mid-single-digit growth, driven by strength in outsourced water projects and solid demand into watering. Though we expect this will continue to be a more variable segment quarter to quarter due to the project nature of our capital offerings.

Bill Grogan: WSS will deliver mid-single-digit growth, driven by strength in outsourced water projects and solid demand in dewatering, though we expect this will continue to be a more variable segment quarter to quarter due to the project nature of our capital offerings. The segment is supported by a $1.4 billion backlog and a strong funnel across all businesses. Now let's turn to slide eight for our full-year and Q1 guidance for 2026. The growth outlook by segment translates into 2026 full-year revenue of $9.1 to $9.2 billion, resulting in revenue growth of 1% to 3% and organic revenue growth of 2% to 4%.

Speaker #3: The segment is supported by a 1.4 billion backlog and a strong funnel across all businesses. Now let's turn to slide 8 for our full-year and Q1 guidance for 2026.

Speaker #3: The growth outlook by segment translates into 2026 full-year revenue of 9.1 to 9.2 billion dollars. Resulting in revenue growth of 1 to 3 percent on organic revenue growth of 2 to 4 percent.

Speaker #3: Again, this is on the low end of our long-term framework due to the 80/20 actions we are taking across our segments. But continuing to increase the quality of our earnings and simplifying our businesses to outperform our markets for the long term.

Bill Grogan: Again, this is on the low end of our long-term framework through the 80/20 actions we are taking across our segments, but continuing to increase the quality of our earnings and simplifying our businesses to outperform our markets for the long term. EBITDA margin ex- is expected to be 22.9 to 23.3%. This represents 70 to 110 basis points of expansion versus the prior year, driven by productivity, volume, and price offsetting inflation, with productivity continuing to benefit from our simplification efforts. This yields an EPS range of $5.35 to $5.60, up 8% at the midpoint over the prior year. As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026.

Speaker #3: EBITDA margin is expected to be 22.9 to 23.3 percent. This represents 70 to 110 basis points of expansion versus the prior year, driven by productivity, volume, and price offsetting inflation.

Speaker #3: With productivity continuing to benefit from our simplification efforts, this yields an EPS range of $5.35 to $5.60, up 8% at the midpoint over the prior year.

Speaker #3: As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework. And we will make additional progress in 2026.

Speaker #3: Drilling down on the first quarter, we anticipate reported revenue growth will be in the 1 to 2 percent range on a reported basis and flat organically.

Bill Grogan: Drilling down on the Q1, we anticipate reported revenue growth will be in the 1% to 2% range on a reported basis and flat organically. We expect Q1 EBITDA margin to be approximately 20.5% to 21%, up 25 basis points at the midpoint, driven by productivity gains and impacts from our simplification efforts, offset by mix. This yields Q1 EPS of $1.06 to $1.11. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning, the durability of our portfolio, and further benefits from simplification, though we are monitoring broader market conditions and volatility, including tariffs. Overall, our expectations for the year remain positive as we build on our strong results.

Speaker #3: We expect first-quarter EBITDA margin to be approximately 20.5 percent to 21 percent, up 25 basis points at the midpoint, driven by productivity gains and impacts from our simplification efforts offset by mix.

Speaker #3: This yields first-quarter EPS of $1.06 to $1.11. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning that durability of our portfolio and further benefits from simplification.

Speaker #3: Though we are monitoring broader market conditions and volatility, including tariffs. Overall, our expectations for the year remain positive as we build on our strong results.

Speaker #3: With that, please turn to slide 9, and I'll turn the call back over to Matthew for closing

Bill Grogan: With that, please turn to slide 9, and I'll turn the call back over to Matthew for closing comments.

Speaker #3: comments. Thanks, Bill.

Matthew Pine: Thanks, Bill. Before we open for questions, let me close with a broader lens. Xylem participated in the World Economic Forum Annual Meeting at Davos for the first time this year. The headlines were all about AI and geopolitics, but water emerged as a significant underlying theme. ... More than a dozen sessions framed water as foundational to economic growth, energy systems, and geopolitical stability. That aligns directly with the research we released last month, Watering the New Economy, which makes a simple point: as AI accelerates growth in power generation, data centers, and microelectronics, water strategy becomes business strategy. These sectors are wrestling with availability, reliability, and efficiency. They need reuse at scale, dramatic reductions in network leaks, and adaptive infrastructure that automatically optimizes performance. And that's where Xylem is uniquely positioned, covering the full water value chain with practical solutions.

Speaker #1: Before we open for questions, let me close with a broader lens. Xylem participated in the World Economic Forum annual meeting at Davos for the first time this year.

Speaker #1: The headlines were all about AI and geopolitics. But water emerged as a significant underlying theme. More than a dozen sessions framed water as foundational to economic growth, energy systems, and geopolitical stability.

Speaker #1: That aligns directly with the research we released last month, "Watering the New Economy." Which makes a simple point. Is AI accelerates growth and power generation, data centers, and microelectronics water strategy becomes business strategy.

Speaker #1: These sectors are wrestling with availability, reliability, and efficiency. They need reuse at scale, dramatic reductions in network leaks, and adaptive infrastructure that automatically optimizes performance.

Speaker #1: And that's where Xylem is uniquely positioned, covering the full water value chain with practical solutions. That breadth differentiates us at a time when customers are looking for credible, scalable partners.

Matthew Pine: That breadth differentiates us at a time when customers are looking for credible, scalable partners. As we pivot further into growth, we'll keep building capability where we have structural advantage. Mission-critical utility and industrial applications, where reliability, compliance, and lifecycle costs matter most. Digital platforms that help customers optimize network performance and make resilience affordable. Advanced treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities. And services that turn our technology and installed base into dependable, high-value outcomes for customers and durable revenues for Xylem. We're already doing this work at scale, helping cities and industries recover water they already have, reuse what they once discarded, and run their assets more efficiently. We're helping Los Angeles produce 580 million gallons of recycled water per day, with plans to deliver 260 million gallons more.

Speaker #1: As we pivot further into growth, we'll keep building capability where we have structural advantage: mission-critical utility and industrial applications where reliability, compliance, and lifecycle costs matter most.

Speaker #1: Digital platforms that help customers optimize network performance and make resilience affordable. Advanced treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities.

Speaker #1: And services that turn our technology and installed base into dependable, high-value outcomes for customers and durable revenues for Xylem. We're already doing this work at scale, helping cities and industries recover water they already have, reuse what they once discarded, and run their assets more efficiently.

Speaker #1: We're helping Los Angeles produce 580 million gallons of recycled water per day, with plans to deliver 260 million gallons more. Smaller communities like Hot Springs Arkansas are reducing water losses by 50 percent or more with far less digging costs.

Matthew Pine: Smaller communities like Hot Springs, Arkansas, are reducing water losses by 50% or more, with far less digging costs. On the industrial side, Siltronic, a microelectronics manufacturer, is reusing 80% of its processed water with a Xylem ultrapure water system. One of our aerospace customers is now avoiding more than $30 million in wastewater disposal costs with zero liquid discharge technology, reusing more than 66 million gallons of water annually. All of these examples are responses to intensifying water trends, driving sustained demand for the solutions we provide across the water value chain. We are confident in the strength of our team and our platform to capitalize on that demand and to deliver sustainable, high-quality growth over the long term. With that, we'll open the call for your questions.

Speaker #1: On the industrial side, Silfex, a microelectronics manufacturer, is reusing 80 percent of its processed water with a Xylem ultra-pure water system. One of our aerospace customers is now avoiding more than $30 million in wastewater disposal costs with zero liquid discharge technology.

Speaker #1: Reusing more than 66 million gallons of water annually. All of these examples are responses to intensifying water trends, driving sustained demand for the solutions we provide across the water value chain.

Speaker #1: We are confident in the strength of our team and our platform to capitalize on that demand and to deliver sustainable, high-quality growth over the long term.

Speaker #1: With that, we'll open the call for your questions.

Speaker #1: questions. Ladies and gentlemen, we'll now begin that

Operator: Ladies and gentlemen, we'll now begin the question-and-answer session. To ask a question, you may press star and then one on your telephone keypads. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Dean Dray from RBC Capital Markets. Please go ahead with your question.

Speaker #2: Question and answer session. To ask a question, you may press star, then 1, on your telephone keypads. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality.

Speaker #2: To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster.

Speaker #2: In our first question today, it comes from Dean Dre from RBC Capital Markets. Please go ahead with your question.

Speaker #3: Thank you. Good morning,

Deane Dray: Thank you. Good morning, everyone.

Speaker #3: everyone. Hey, good morning,

Matthew Pine: Hey, good morning, Dean.

Speaker #3: Hey, Matthew. As we Dean. do the calendar flip and as you start phase two, maybe you can give us a two-year progress report, if you could, just kind of reflect on the initiatives regarding margin improvement, portfolio optimization, and how you are also trying to keep your eye on growth opportunities too.

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

Speaker #3: Thank you.

Speaker #1: Yeah, so first, we've got a lot of work to do in front of us—I'll start there. But if we look back over the past few years, the results have really exceeded expectations from my perspective.

Matthew Pine: Yeah. So first, we've got a lot of work to do in front of us, so I'll, I'll start there. But, you know, if we look back over the past few years, the results have, have really exceeded expectations from my perspective. Maybe just even starting, firstly with, not long ago, we were talking about the integration of Evoqua and Xylem, and we've built a great deal of muscle, in terms of M&A and integration, and we really enhanced our combined culture along the way, and we delivered synergies 18 months early. So I give the team a lot of credit there, starting with that integration. And, you know, at the same time, we've made significant progress in our operational model transformation, which was really about, you know, really our culture, our high-impact culture, improving our processes and systems and our structure.

Speaker #1: Maybe just even starting, firstly, with not long ago—we were talking about the integration of Evoqua in Xylem. And we've built a great deal of muscle in terms of M&A and integration.

Speaker #1: And we really enhanced our combined culture along the way. And we delivered synergies 18 months early. So I give the team a lot of credit there, starting with that integration.

Speaker #1: And at the same time, we've made significant progress in our operational model transformation, which is really about really our culture, our high-impact culture, improving our processes and systems and our structure.

Speaker #1: And maybe I'll just maybe point to a few proof points on the progress that we've made. The first, in significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day.

Matthew Pine: Maybe I'll just point to a few proof points on the progress that we've made. You know, the first in significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day. And in essence, an engagement rating in your employee survey is, would you recommend Xylem as a great place to work? Almost 90% of our top 150 leaders said they would, and overall, company was 74. When you're going through a significant transformation, I think that's a really good, outstanding result, and the industrial sector average is around 37%. And so I think it just speaks to the resilience of our team and the culture that we're creating.

Speaker #1: And in essence, an engagement rating in your employee survey is, would you recommend Xylem as a great place to work? Almost 90 percent of our top 150 leaders said they would.

Speaker #1: And overall, the company was 74. When you're going through a significant transformation, I think that's a really good, outstanding result. And the industrial sector average is around 37 percent.

Speaker #1: And so if they could just speak to the resilience of our team and the culture that we're creating. Another good measure that I talk about a lot is on-time performance in terms of how we're really moving our operating model forward.

Matthew Pine: You know, another good measure that I talk about a lot is on-time performance in terms of how we're, you know, really moving our operating model forward. We've gained 500 basis points of on-time performance, you know, delivering products to customers more effectively over the past couple of years. And structurally, we've really improved, moving from a highly matrix structure to a more, you know, 4 segments, 16 divisions, a single axis, reducing our spans and layers. And we reduced our. We had several micro teams, I think 1,500 micro teams. We reduced that by 40%, so that's folks that have four or less direct reports. And so we've really improved our, our structure, our culture, our processes, and our systems along the way.

Speaker #1: And we've gained 500 basis points of on-time performance delivering products to customers more effectively over the past couple of years. And structurally, we've really improved moving from a highly matrix structure to a more four-segment, 16 divisions, a single axis.

Speaker #1: Reducing our spans and layers. And we reduced our we had several micro-teams. I think 1,500 micro-teams we reduced that by 40 percent. So that's folks that have four or less direct reports.

Speaker #1: And so, we've really improved our structure, our culture, our processes, and our systems along the way. Maybe I would just—like I said in the prepared remarks—we've taken a lot of ground on what I would call phase one.

Matthew Pine: You know, maybe I would just, you know, like I said in the prepared remarks, we've taken a lot of ground on what I would call phase one. It's not over. We have more work to do, but we're starting to transition into what I would call phase two, which is really about leveraging that simplicity that we've created, the focus, the speed, and accountability to really build a growth engine in the company. And that's, you know, focused on a few areas I would highlight at a high level. One is our salesforce effectiveness. We need our sales teams, you know, 75-80% of the time facing the customer versus 40 or 50 or 60 doing back office work. We need to improve our product lifecycle management and innovation, really speed to customer value.

Speaker #1: It's not over. We have more work to do. But we're starting to transition into what I would call phase two, which is really about leveraging that simplicity that we've created, the focus, the speed, and accountability to really build a growth engine in the company.

Speaker #1: that's focused on a few areas I would And highlight at a high level. One is our Salesforce effectiveness. We need our sales teams 75, 80 percent of the time facing the customer versus 40 or 50 or 60 doing back-office work.

Speaker #1: We need to improve our product lifecycle management and innovation, really speed to customer value. So those are areas that we're, as we pivot, we're going to be keenly focused on this year and building capabilities so we can leverage the simplicity and get back to growth.

Matthew Pine: So those are areas that we're as we pivot, we're gonna be keenly focused on this year in building capability, so we can leverage the simplicity and get back to growth. But I'm just I'm very proud of the team. I appreciate the question and really the resilience they've shown, not only with all the change that we had to deal with, but also, you know, the change that's been external to the company as we've dealt with over the past couple of years. So maybe I'll end it there. Thanks for the question.

Speaker #1: appreciate the question. And really, But I'm very proud of the team. I the resilience they've shown, not only with all the change that we had to deal with, but also the change that's been external to the company as we've dealt with over the past couple of years.

Speaker #1: So maybe I'll end it there. Thanks for the

Speaker #1: question.

Deane Dray: That's really helpful. And then as a follow-up for Bill, maybe you can help expand on the point of increasing the 80/20 walkaway revenues in the second year. Maybe it's a surprise to me, I think, because I would've thought in the first year, there'd be more opportunities for identifying less profitable businesses, not having it accelerate into the second year. So maybe just kind of help-

Speaker #2: That's really

Speaker #2: helpful. And then as a follow-up for Bill, maybe you can expand on the point of increasing the 80/20 walk-away revenues in the second year.

Speaker #2: surprise to me, I think, because I would have Maybe it's a thought in the first year, there'd be more opportunities for less identifying less profitable businesses.

Speaker #2: accelerate into the second year. So maybe just kind Not having it of help put that into context. Appreciate it.

Bill Grogan: Yeah.

Deane Dray: Put that into context. Appreciate it.

Speaker #3: Yep. No, sure. Let me step back first and just talk about how 80/20 has really taken hold in the organization, kind of two years into the transformation that Matthew step and simplifying highlighted.

Bill Grogan: Yes. No, sure. But let me, let me step back first and just talk about, you know, how 80/20 is really taking hold in the organization, kind of two years into the transformation that Matthew highlighted. Each quarter, we take another step in simplifying Xylem, you know, shifting from just leveraging 80/20 as a tool set to being a critical piece of how we run the company, with a real focus on resource allocation, putting our best people investments around our largest value-creating opportunities. And we've got about 80% of the business in some phase of implementation right now with the capital and services piece of WSS, the only part of the company not fully launched, and they'll start at the end of this year after they get through their ERP upgrade.

Speaker #3: Each quarter, we take another Xylem. Shifting from just leveraging 80/20 as a tool set to being a critical piece of how we run the company.

Speaker #3: With a real focus on resource allocation, putting our best people investments around our largest value-creating opportunities. We've got about 80 percent of the business in some phase of implementation right now with the capital and services piece of WSS.

Speaker #3: The only part of the company that fully launched and they'll start at the end of this year after they get through their ERP upgrade.

Bill Grogan: And the team continues to make solid progress leveraging the tool set. Right, we started this year with redesigning the organization and putting P&L leaders in charge of the divisions so they could have a good perspective and drive a lot of this change. They looked at the cost that they needed to support the business and optimize that overhead to get our foundation as lean as possible to make sure that we're focused on simplifying this, that organizational construct.

Speaker #3: And the team continues to make solid progress leveraging the tool set. Right? We started this year with redesigning the organization and putting P&L leaders in charge of the divisions so they could have a good perspective and drive a lot of this change.

Speaker #3: They looked at the cost that they needed to support the business and optimize that overhead. To get our foundation as lean as possible, to make sure that we're focused on simplifying this, that organizational construct.

Bill Grogan: You know, as for the 2% headwind, right, a lot of that comes with, you know, an evaluation of the product and customer portfolio, really understanding, you know, the geographies where you might be underperforming, putting in a commercial filter, getting the sales and engineering teams developed and leveraging that filter to make sure that we're not taking business that we shouldn't. You know, we're looking at parts of the business where we have significant pass-through revenue that doesn't have significant margin. And all of those decisions take a little bit of time because you wanna make sure you bleed the inventory, so you don't have an excess issue. You wanna partner with your customers to make sure they're supported through the transition.

Speaker #3: As for the 2 percent headwind, right, a lot of that comes with an evaluation of the product and customer portfolio, really understanding the geographies where you might be underperforming, putting in a commercial filter, getting the sales and engineering teams developed and leveraging that filter to make sure that we're not taking business that we shouldn't.

Speaker #3: We're looking at parts of the business where we have significant pass-through revenue that doesn't have significant margin. And all of those decisions take a little bit of time because you want to make sure you bleed the inventory so you don't have an excess issue.

Speaker #3: You want to partner with your customers to make sure they're supported through the transition. So there's the cultural and adoption part of it that extends it.

Bill Grogan: So, there's, you know, the cultural and adoption part of it that extends it, and then there's just the customer coordination, which really pushes it into 2026. So excited about the teams taking these actions, and ultimately, I think it's going to free up our organizational and economical capacity to better support or facilitate our longer term growth trajectory.

Speaker #3: And then there's just the customer coordination, which really pushes it into 2026. So excited about the teams taking these actions. And ultimately, I think it's going to free up our organizational and economical capacity to better support and facilitate our longer-term growth trajectory.

Speaker #2: Thank you. Our next question comes from Scott Davis from Melius Research. Please go ahead with your

Deane Dray: Thank you.

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

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

Speaker #2: question. Hi.

Scott Davis: Hey, good morning, guys, Matthew and Bill.

Speaker #4: Good

Speaker #4: morning, guys. Matthew and Bill. Hey, good

Matthew Pine: Hey, good morning, Scott.

Speaker #1: morning, Scott.

Scott Davis: I wanted to follow up on that question because there's a certain point where 80/20 goes from being a headwind to a tailwind, meaning that you're doing better with the customers that matter the most and perhaps gaining share and such. But when is that point? You know, do you start to see some impacts like 2027, 2028? Is it or is it just too hard to say at this point, now that you're kind of in the middle of it?

Speaker #4: I wanted to follow up on that question because there's a certain point where 80/20 goes from being a headwind to a tailwind. Meaning that you're doing better with the customers that matter the most and perhaps gaining share and such.

Speaker #4: But when is that point? Do you start to see some impacts—like 2027, 2028? Or is it just too hard to say at this point now that you're kind of in the middle of it?

Speaker #1: I would say that really 2026 is kind of an inflection point, Scott, for us. The operational transformation never ends, as you know. But we've taken enough ground where we started in the back half of 2025, and it will come into '26 with a bit more momentum around, I would say, building the growth engine and focusing on a customer's what we call raving fans.

Matthew Pine: I would say that, really 2026 is kind of an inflection point, Scott, for us. You know, the operational transformation never ends, as you know, but we've taken enough ground where we started in the back half of 2025, and we're coming into 2026 with a bit more momentum around, I would say, building the growth engine and focusing on, A, customers, what we call raving fans, and actually building out our enterprise selling organization. So all that is in flight. I think the big thing this year is about building salesforce effectiveness and helping our sales organization get more oriented toward the customer the majority of the time. Meaning, you know, today, a lot of our sales teams are doing a lot of admin work, and they don't get in front of the customer, but maybe 30 or 40% of the time.

Speaker #1: And actually building out our enterprise selling organization. So all that is in flight. I think the big thing this year is about building Salesforce effectiveness and helping our sales organization get more oriented toward the customer, the majority of the time.

Speaker #1: Meaning today, a lot of our sales teams are doing a lot of admin work, and they don't get in front of the customer, but maybe 30, 40 percent of the time.

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Q4 2025 Xylem Inc Earnings Call

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Q4 2025 Xylem Inc Earnings Call

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