Xylem Inc (XYL) — Q2 2024 Earnings Call Transcript

Thank you, Operator. Good morning, everyone, and welcome to Xylem's second quarter 2024 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 second quarter 2024 results and discuss the third quarter and full-year 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 August 6. Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-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 three. We have provided you with a summary of our key performance metrics including both GAAP and non-GAAP metrics with references to prior year segment metrics being made on a comparative basis reflecting the change in segment as of the beginning of the year. For 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. Now, please turn to slide four, and I will turn the call over to our CEO, Matthew Pine.

Thanks, Andrea. Good morning everyone, and thank you for joining us today. It's a pleasure to report the achievements of the Xylem team in the second quarter. As you've seen in this morning's release, the team delivered another very strong quarter, outperforming expectations on all metrics. With high single-digit organic growth reflecting gains in both volume and price, the team also expanded adjusted EBITDA margin by 170 basis points. With that outperformance, we delivered adjusted EPS growth of 11%. The story of the second quarter is similar to Q1. On the demand side, our largest markets continue to be resilient. Internally, our outperformance is driven by increasingly disciplined operational execution by the team. This kind of performance momentum is only possible when the whole team is engaged and aligned to make a difference. I want to say a big thank you to the whole Xylem team for the dedication and drive they've demonstrated through the first half of the year. While there were many highlights across the team, I particularly want to mention the standout performance in Measurement & Control Solutions. The MCS segment revenue was up 26%, and EBITDA margins increased by 700 basis points compared to this time last year. The team is doing an outstanding job. Our first-half performance reflects the value creation direction we set early in the year and discussed at Xylem's Investor Day in May. That direction includes both resilient above-market growth and accelerated margin expansion. It's gratifying to see the kind of momentum reflected in our quarterly performance. In addition, our simplification initiatives and our work on 80/20 are progressing well and are set to pay off beginning in 2025. Turning to the integration of Evoqua, in late May, we passed the one-year anniversary of our combination with Evoqua. The combination continues to reveal its value. Cost synergies are well on track, and the team is looking to accelerate our pace wherever possible. Our commercial teams are successfully taking Xylem's combined capabilities to the many customers who will benefit from our integrated solutions in both utility and industrial end markets. With Evoqua integration on track, strong momentum from the first half, resilient demand, and the team's increasing operational discipline, we're raising our full-year guidance for both revenue and margin, increasing our EPS guidance by $0.06 from the prior midpoint. In a moment, I'll provide an update on our high-impact culture and our leadership alignment, as well as our industry-leading 2030 sustainability goals, but first, I'm going to turn it over to Bill to elaborate on the quarter's results, our financial position, and our outlook. Bill?

Thanks, Matthew. Please turn to slide five. Q2 was another great quarter, and I want to thank our entire organization for their amazing work. We outperformed against our guidance across revenue, margin, and earnings per share. We continue to see resilient demand, and our backlog is at $5.2 billion, a modest decline from the prior year as we execute on MCS past due backlog. Book-to-bill was approximately one, supported by strength in water infrastructure, while organic orders were down 1% in the quarter due to project timing within MCS and WSS. Total revenues grew 26%, and organic revenue rose 9%, exceeding our guidance on a healthy combination of volume and price. Outperformance was led by MCS and WSS, as we saw growth in all regions led by double-digit growth in the U.S. EBITDA margin was 20.8%, up 170 basis points from the prior year, with productivity savings, strong volume, and price more than offsetting inflation, investments, and mix. This reflects incrementals of 28% on a consolidated basis and 50% on a pro forma basis. Our EPS in the quarter was $1.09, above the high end of our guidance by $0.04 and up 11% over the prior year. Our balance sheet is strong with net debt to adjusted EBITDA at 0.7 times. Year-to-date free cash flow was up 200% versus the prior year, and conversion of 62% is strong given seasonality. This year-over-year improvement was driven by higher net income, offset slightly by increased CapEx. We continue to benefit from improved working capital efficiency. Please turn to slide six. Measurement and Control Solutions had another great quarter and again, exceeded our expectations. MCS revenue is up 26% driven by smart metering demand and backlog execution. However, due to project timing orders were down 18% and book-to-bill came in under 1. We worked down the past due backlog. Total backlog for MCS now sits at roughly $2 billion, a 12% organic decrease from the prior year. We finished the quarter with impressive EBITDA margins of 23.4%, up 700 basis points versus the prior year and up 70 basis points sequentially. Margin expansion was driven by volume, price, productivity, and favorable mix, more than offsetting inflation. As a reminder, we continue to expect a margin headwind from mix in the second half as energy meters account for a larger portion of our sales. In Water Infrastructure, orders were strong, up 8% in the quarter, led by robust treatment demand. Revenue exceeded our expectations with total growth of 22% and organic growth of 7%, driven by healthy demand across all regions and applications. Adjusted EBITDA margin for the segment was down 60 basis points with roughly 40% pro forma incrementals. This decline was driven by inflation and acquisition but was offset partially by productivity, volume, and price. Without the impact of acquisitions, adjusted EBITDA margin improved by 40 basis points for the quarter. In Applied Water, orders were up 5% and book-to-bill was greater than 1, reflective of a few large project wins that will ship next year. Revenues were down 4% in line with our expectations, lapping strong comps and 12% growth in the second quarter of last year. The decline was primarily driven by softness in developed markets. Segment EBITDA margin declined by 200 basis points year over year but increased by 100 basis points sequentially. Higher inflation and unfavorable mix were partially offset by productivity savings. Closing the segments with Water Solutions and Services, orders declined by 1% organically driven by the timing of large capital projects, offset by strength in the watering. Organic revenue was up 12% with healthy growth across most of the business. Adjusted EBITDA margin was strong at 23.8%, up 60 basis points and driven by volume, productivity, and price, offset in part by unfavorable mix and inflation. Two quarters in re-segmentation, we continue to see synergy momentum and benefits for our customers in combining our service-based offerings. Now, let's turn to slide seven for updated full-year and Q3 guidance. Given our first-half outperformance and both commercial and operational momentum, we are raising our full-year guidance. We are increasing our revenue guidance by approximately $50 million, up from $8.5 billion. This reflects an additional 0.5 points of growth at the midpoint versus our prior guidance. That will put total revenue growth at approximately 16% and organic revenue growth at 5% to 6%. The integration is going smoothly, and we continue to expect $100 million of run-rate cost synergies in 2024 with a potential to accelerate by year-end. We are confident about driving further margin expansion with operational productivity and are raising our EBITDA margin guidance to about 20.5%. That represents 160 basis points of expansion versus the prior year, driven by higher volume, productivity including cost synergies and price offsetting inflation. Our updated EPS guidance of $4.18 to $4.28 reflects an increase of $0.06 at the midpoint. Free cash flow conversion for the year is now expected to be over 120% of net income. The full-year outlook at the segment level remains largely unchanged with the exception of MCS, which we now expect to grow at high teens during our first-half performance versus our previous outlook of low teens. For the quarter, we anticipate revenue growth to be 3% to 5% on a reported and organic basis. We expect third quarter EBITDA margin to be in the range of 20.5% to 21%, up 70 to 120 basis points, driven by higher volumes, continued price realization, and productivity gains. This yields third quarter EPS of $1.07 to $1.12. Our diversified portfolio of mission-critical products and services positions us well to address our customers' evolving needs, and we anticipate healthy demand across most end markets and applications. We talked about our drive for profitability through simplification efforts and our 80/20 implementations at the Investor Day in May. We are progressing well on those initiatives, and I want to reiterate our commitment to systematic margin improvement through operational excellence, supporting our long-term profitability framework. While we are closely monitoring the macro environment, including geopolitical, election uncertainty, and tariffs, our overall outlook for the year remains positive. With that, please turn to slide eight. And I'll turn the call back over to Matthew for closing comments.

Thanks, Bill. I'd like to mention two events in the quarter that don't show up in the financial results but are fundamental to Xylem's success and impact. First, in June, just a few weeks after our Investor Day, we gathered Xylem's global leadership team in Washington, D.C. This was the first time we had our top 150 executives in one room, spanning legacy Xylem and legacy Evoqua. It was an energizing two days of collaboration focused on leadership alignment and culture. I've spoken before about culture as fundamental to how Xylem will deliver stronger execution of our strategy, realize our aspirations, and create our next chapter of impact. You can see in our second quarter results that the team is already working well and winning. What our Leadership Summit reinforced was how much more value creation potential we have ahead of us, with an aligned team and a high-impact culture. It was fantastic to see the team so engaged by the opportunities ahead of us. Last quarter also saw the publication of our annual sustainability report. We're very pleased to be tracking well towards our 2025 goals, but we took the opportunity presented by this year's report to set out our aspirations beyond 2025. We're raising the bar again by setting 2030 sustainability goals in three strategic areas. The first is decarbonization, reducing our own greenhouse gas emissions and enabling our customers to decarbonize. Secondly is water stewardship, aimed at reducing water demand, and finally, we'll provide access to water, sanitation, and hygiene for 80 million people. All three strengthen our customer relationships and increase our impact. Before turning to your questions, I have one more special note. This is Andrea van der Berg's last quarterly earnings call at the helm of Investor Relations. We're happy to announce that Andrea is taking on a new role within Xylem, and it's an exciting new opportunity for her. Over the years, so many of you have told me you deeply value Andrea's energy, accessibility, and professionalism, and I've benefited from her insightful counsel and positive encouragement in every circumstance. So, thank you, Andrea. Some of you have already met Keith Muller, who's taking the reins as our investor relations leader. Keith has had a great impact as the Head of Finance in the Water Solutions and Services segment, having joined us with the Evoqua combination more than a year ago. He brings deep knowledge of the business to his leadership of IR. I'm confident you'll enjoy getting to know Keith and will find great value in his insights and perspectives. With that, let's go to your questions.

Thank you. Good morning, everyone.

Hey, good morning, Deane.

Hey, I'll add my welcome to Keith and wish Andrea best of luck and thanks for all your help. Maybe we can start with 80/20, and I'll also make the observation you can see 80/20 at work in your conference call prepared remark and slides, and how much they've been slimmed down, and you get right to the point. So, really appreciate that. So, 80/20, I know you say the payoff is likely in 2025, but we heard lots of specifics at the Analyst Day on the rollout. So, any updates you can share, I know we're still in the early innings, but you had Applied Water North America initially, MCS initially, any early actions, and what can you share? Thanks.

Yes. I'm happy to give an update. The teams are progressing well. Like you said, we have three businesses in the thick of implementing the toolset. North American AWS and North American M&CS smart metering businesses are a few months ahead of global transport that kicked off in the second quarter. We actually just had a kickoff for Applied Water in Europe that started on their journey last week. AWS and smart metering have gone through their initial quads and quartile analysis. They are now working through the segmentation of their businesses, how they want to support their ongoing customer base, and building their P&Ls, highlighting the appropriate level of resources they need to run those businesses. They've come out with some initial price increases. Again, those benefits take a little while to work their way through the backlog. So, no material short-term benefit, but we see a significant pickup at the end of this year, leading into 2025, where we'll see a more material P&L hit or pickup. The teams are focusing on communicating with their customers about how their toolset will impact them, really engaging their largest customers on how these changes will provide long-term benefits, thereby improving the overall experience with Xylem as we bring new product innovations to them faster, improving our delivery and quality. So, a lot of excitement around the toolset externally for their customer bases. Progress continues. I think we're right on schedule. Confident in the value 80/20 is going to bring and provide for us over the next several years, really in line with what we highlighted in the additional impact the toolset is going to have in the framework we laid out back at Investor Day.

That's a really helpful update, Bill. Thanks. Given that most of the operating results are either as expected or a little bit better, I could ask a broader industry question, if I could, just implications on the Supreme Court overruling the Chevron doctrine. I know we're still in the early innings, but any kind of high level thoughts on what the ripple effects might be in PFAS remediation at the federal level, the super-fund timing? And I know it's not in your numbers, it's not in your three-year guide, but just the idea here is what might the implications be? I can see that at state level, that's where all the remediation efforts have been going in any way. The states, like California, are not waiting for the federal government to lead the way. So, just from your perspective and insight, how do you think this plays out?

Thanks for your question, Deane. We didn't see this one coming. If you asked us three months ago, this was not on our radar. We're reacting to lots of different volatility out in the marketplace. But the Supreme Court striking this down, the Chevron doctrine, introduces some uncertainty in some regulations and federal laws; there's a risk of being challenged, much like the EPA's final rule on PFAS, to your point. Additionally, beyond that, Deane, there's ongoing litigation that's already challenging the EPA's cost estimates used to set the MCL level, the maximum contaminant level, that four parts per trillion, as you're aware. It could potentially push out what's already a long phasing timeline of three years to test and five years to mitigate PFAS. To your point, we believe the states will fill in the gaps if the national PFAS regulation is reversed. We don't really anticipate that, but if it does, about 11 states today have MCL, the maximum contaminant level for PFAS in drinking water already, with another 12 states that have some kind of PFAS regulation around guidance, health, or notification levels. That's over half the U.S. population. While it may stumble a little at the beginning, and we are already seeing challenges in litigation, that's why we didn't bake it into our long-term framework. We just think it's too far out. But we stand ready to and are well-positioned to partner with utilities, and we have partnered with utilities, as you know, in helping them manage this and other emerging contaminants. More to come, but that's kind of what we think.

It's real helpful. Thank you.

Thank you.

Hey, good morning, everyone. Thanks, Andrea.

Morning.

Thanks, Mike.

So, just to clarify, the margins for the quarter have been very healthy, and Bill's earlier comments about our momentum remain valid. However, in terms of your demand commentary and your outlook for the second half of the year, it seems that the trends guiding your expectations have not changed much. I would like to get some clarity on that and hear any thoughts you have regarding this.

Yes, Mike. No change or expectations for the second half. Yes, I think it's playing out exactly how we thought when we gave our update last quarter. Yes, except that we had some accelerated performance in M&CS, which drove us to take up our full-year guidance. We increased our full-year revenue guidance to 5% to 6% and some timing of capital projects in WSS drove better results in the second quarter. Sequentially, Q3 looks a lot like Q2 from a dollars perspective, which is more challenging year-over-year comps really driving the lower implied organic growth rate. We're still confident and bullish in most of our end markets. The macro noise that we highlighted is there, but from our perspective, we don't see any material impact or any signaling of expected slowdown for us. M&CS, there's still high demand for our smart metering products and our differentiated AMI network. Orders were down, but again, that's primarily just project timing. There's still a strong funnel of large deals in the U.S. and Europe, and we've had several wins recently, another really good one that leverages synergy sale with the team. They continue to do a great job of finding new projects and winning new business. In WSS, again, strong growth, just really the timing of capital projects there, but they still have strong demand across the legacy ISS and the watering business. They had some order lumpiness. Again, we had a huge build on operate project last quarter. We have a couple of these in the funnel that could be realized in the orders over the back half of the year. So, really nothing there that is any concern, so bullish around their high-growth verticals. Water Infrastructure, again, really strong performance on healthy demand, high-single-digit orders with growth across all regions, treatment was up over 20% with some large project wins. The Transport business is one of our most differentiated businesses and continues to perform well. Our developed markets and pretty much all our applications within WI are doing extremely well. AWS obviously is the one market that remains a little bit challenged. It is our shortest cycle, most cyclical group of businesses. We've seen there has been pretty consistent with our expectations, low-single-digit, second-half comps get a little easier, so they'll gradually get to a lower organic decline. Some of the project wins that we highlighted in the prepared remarks will start to help them get back on growth in 2025.

Super helpful. And then maybe some thoughts on how you think backlog tracks from here and what normal looks like once you work through the past due backlog across a couple of segments, and how we think book-to-bill should track?

Yes. I would say backlog is still really strong. It declined slightly organically; that's primarily just us continuing to work down the MCS past due backlog. That's a tough one to forecast just because of the lumpiness of some of the large projects within MCS, and again just the new business opportunities within WSS on the build and operate. I think we'll bleed a little bit here as we progress through the year, but still confident in our long-term growth frameworks for the individual segments getting into 2025. I would say lumpiness probably gives us a little caution to give you a specific number, but again, robust demand and outlook for most of our end markets.

And Bill, you mean bleed to a more normalized level because of the past due backlog normalization? Are you suggesting something different?

No, exactly. That's spot on.

Awesome, great. Thanks, everyone. Appreciate it.

Thank you.

Hey, good morning everybody and congrats Andrea on your move. You didn't talk at all about capital deployment, which is fine because you still have Evoqua coming in. But is there a certain tipping point where you get more confident being able to do deals? Are we close to that? Are we there? Just some commentary would be helpful.

Good question. Our first priority is to focus on the integration of Evoqua. I think you can see from the results that we're doing a great job on both the cost synergies and revenue synergies. We have built a lot of muscle on M&A over the past 18 months with the planning of Evoqua, now the passing one year of execution. We've started to build that muscle in the organization, which is going to help us moving forward. I would reiterate what I said at Investor Day that we've also put in place a strong bottoms-up process in our M&A acquisition process to drive consistent organic growth and deployment. I think that's going to help us over the cycle. We just laid out the three-year framework. It's not going to happen overnight, but I can tell you that we're very active and we have a strong pipeline that we're managing. It aligns well to the value mapping that we just finished up. So, we're going to continue to run those targets through our decision criteria; the strategic fit and the financials have to make sense. We're not going to do anything unreasonable. It's about organizational readiness, and I think we're trending well, we've got good momentum, and we're ready to execute our M&A pipeline. Some of it is just timing, but it's an important piece as we outlined at Investor Day to our EPS growth at mid-teens over the cycle. So, we're very active, but some of it's just timing and we're still in the early innings.

Okay. Good question or a good answer. Thank you. And guys, I don't I'm sure you don't want to give a lot of detail here, but you referenced the large project wins. I assume those are domestic. Are they related to mega projects? Can you give us a little bit of color on the scope and size historically versus how you kind of think about what large looks like? I mean, there are so many big semi plants, just stuff out there of scope that we've never seen before. I'd love to get a little color from you on those projects, if you can.

Yes, I think back at Investor Day, we talked about data centers starting to ramp up for us, especially in our applied water business. We're positioned uniquely, Scott, in that we can move water through pumping, treat it, and sense for it. As we're winning these projects with data centers, we can offer a more turnkey solution and are working with both some of the actual providers that build the data centers themselves. That's started to gain momentum for us. We've had a nice win in applied water. We've had a couple actually in the $7 million to $10 million range. That’s going well. We've highlighted a big win in green hydrogen. The water needed for that over a 20-year contract is significant. We have some others in the pipeline that we've got a lot of momentum around as well, around power, and we see more consistency in the semiconductor space with microelectronics and the need for clean water. Many of these places face water scarcity issues, so the water reuse is super important. I would say that we see good momentum and a strong pipeline in these high-growth verticals, and we don't see slowing in this segment.

Okay. Thank you, and congrats on the first couple of quarters of the year here, well done. I'll pass it on.

Thank you.

Good morning, everyone.

Good morning.

I want to start off with some follow-up questions on MCS. Orders down in the quarter, I understand there's some lumpiness around that, but orders have been down, have declined a little bit the last couple of years, burning off some backlog in '23 and '24. Maybe you could just talk about the visibility into the order pipeline that you have to see that turnaround and start heading in the right direction to support growth. And with that, I know high-single-digits to long-term guidance here, but you are burning a fairly significant amount of backlog down in 2024. Should we expect the 2025 growth to be a little bit lower than the long-term average because you're comping against that backlog burn?

Yes. I'll start, and then maybe turn it over to Bill. Again, just a reminder, we're still in fairly early to mid-innings in AMI adoption. So, there's a lot of runway ahead. Although it doesn't always show up in orders, we do obviously put some of the orders in backlog, and how they convert to orders can be a little lumpy. It's also a reminder that only 20% of that business is big deals, and 80% of it is book and ship or what we call flow. Just looking at the pipeline that I see, we've got a lot of room for continued growth in that business. We don't see any slowdown; it's just a matter of timing, more than anything.

Yes. Our expectation for next year is that it will be in line with our long-term framework. It may be a little bit stronger before we get to kind of that high single digits at some point in time next year.

Yes. I think you had asked a few calls ago about where we are in past due. We expect to be almost complete with the past due backlog by the end of the year, probably wrapping that up in Q1 of next year. That burn is happening and obviously leading to the increased guide in M&CS revenue at the high teens.

Second one I wanted to ask was on cash conversion. Obviously, the guidance has taken up to 120%. I would think that 80/20 and simplification initiatives should have an impact on working capital, probably over the next couple of years that may drive cash conversion higher than the long-term average as you simplify the business, take inventory out, and work on receivables and payables. So, any commentary you can give us on opportunities you're seeing in working capital as a result of these initiatives? Thanks.

Yes, Nate. You're exactly right. That's a big part of the toolset. As you start to reduce a lot of the complexity of the product portfolio, we get much more efficiency through faster-moving inventory. Obviously, you reduce the complexity of a tremendous amount of long-tail customers, and your DSO improves from that perspective. I totally agree, we'll see some benefits. The team does a phenomenal job with our overall cash conversion. But I think 80/20 will be able to take it to the next level. But I think that will be on the back end of the P&L benefits that we get. So, we're probably looking at, as you get through the implementation, we said, 12 to 18 months to realize the P&L benefits, probably in that 18 to 24 months. That's the second phase of simplification at the back end.

Makes sense. Thanks very much for taking my questions.

Thanks, Nate.

Hey, good morning, guys.

Hey, good morning, Joe.

Andrea, thanks for everything. You've been a huge help. If anything happens with water infrastructure, we'll now know who to blame for it.

Thank you, Joe. It's been a project.

A lot of my questions have been asked already, but maybe you could touch on since moving the service business and combining it with WSS, any concrete examples of how this is changing conditions on the ground for you guys and leading to better results.

Yes, I can start this out. I think we did it for a few reasons. One is to increase our synergies because there are a lot of synergies when you can move water and treat water. Now we're able to go in with a turnkey solution. We're already seeing that segment is the quickest to drive synergies. Some of those we highlighted at the Investor Day. I would also say just a common toolset. We had two service companies when we put the two companies together, and the legacy Evoqua business was much more mature and had good processes and tools. Now, leveraging that across the entire services business has been a big help. The biggest change will be our technician utilization, allowing technicians to work across the portfolio. Not everyone is completely interchangeable, but about a third to half of your technicians can flex to do other types of work. That gives our Aqua Pros a broader career path. There are many different aspects of how we're seeing it play out, but it's the fastest part of our revenue synergy right now, and it's working well.

And then if I can ask maybe you talked about data center and stuff like that. If I think about the large project pipeline at WSS and maybe also general industrial-type exposure to infrastructure. Are you seeing any bifurcation there because data center is definitely strong, but the commentary around large project activity in other sectors is kind of weakening? So, curious if you're seeing puts and takes in any of those businesses?

Not really. Data centers, as I've mentioned, are not a huge part of our portfolio. It mainly shows up in Applied Water, although we've seen some synergies, one of those in China at our Investor Day, and we've seen some other synergies where we're managing water in a data center as well as doing treatment. It's not going to be a big swing for us because it's not a large part of our business, but in general, we're seeing high growth verticals like pharma, life sciences, and microelectronics continue to be really robust. No matter what regulations are, whatever's happening from that perspective, climate and water scarcity is driving a lot of interest. I'm getting phone calls all the time from leaders and CEOs dealing with some real challenges in keeping their operations open or ensuring the quality of their water due to saltwater intrusion and other water treatment challenges. We don't see any real slowdown; we're positioned in strong high-growth verticals. Data centers are not big for us, but we're going to take advantage of them while they're hot.

Thanks, guys.

Thank you.

Good morning, everyone. Andrea, thanks so much for your help.

Thank you, Andrew.

So, Matthew, Bill, you mentioned inflation and water infrastructure and the margin in that segment, after being up nicely in Q1, year-over-year was down a bit in Q2. I know you said that was acquisition-related, but could you give more color into what you're seeing on the price versus cost side, particularly in that segment? Did anything materially change, or is it just lumpiness? Also, we know you have some China exposure in there, so maybe you could talk about the competitive environment in China?

Price-cost was positive there. The biggest impact was that the second quarter last year, during the short time that APT was part of that segment, it had an unusually high margin. It was in the low 20s versus its normalized rate in the teens. That was the biggest difference. We added in the pro forma margin expansion, 40 basis points, and it was at 40% performance incrementals. The profit there remains strong; it improved sequentially, and we expect it to continue improving as we progress into the back half and achieve year-over-year margin expansion. I would say from a water infrastructure perspective, that segment has the largest piece of our China exposure. China has been a bit lumpy for us. It's actually been positive in terms of revenue in the first half. Orders were down, but we still expect some of the larger projects, especially within treatment, to continue getting delayed. I think China is trying to navigate their overall economic situation and how to fund several things across their investment framework. That's probably the one area we are continuing to monitor as things seem to be shifting to the right.

Very helpful. And then just maybe focusing on applied water, orders; as you said, look good. They were for long cycle projects. Maybe talk about the short cycle market as you see it. Is the business sort of bouncing along the bottom? What's the channel telling you? You obviously mentioned the easier comparison in the second half of the year. I know you talked about applied water returning growth in 2025, but it couldn't do that before the end of the year.

Yes, I think the third quarter is still down, low single digits. The fourth quarter is probably closer to zero. The decline is largely seen in developed markets and primarily in our commercial and industrial space. From a macro perspective, the institutional ABI has been negative for 16 consecutive months. We continue to see the manufacturing PMI, which are good indicators for us for that business. I give the teams credit; they're making their own luck. They're leveraging our differentiated technology to win some of these larger projects, which will help them get back on a growth track into next year.

I appreciate all the color.

Thanks, Andy.

Thank you. Good morning, everyone. Andrea, thank you very much for your help.

Good morning, Bryan.

Thank you, Bryan.

Very solid quarter and MCS again, MCS's margin again stood out. I'm sorry if I missed this detail, but Bill, you called out and were very upfront about there being some mixed headwinds going into the back half with energy deployments. Are you willing to size that sequential headwind relative to the strength of 1H?

Yes, we think it could be around 100 basis points in the back half, a sequential decrease from where we finished the first half.

Okay, understood. Appreciate that. Can you offer a little more color on how treatment orders phase through the quarter? I think you cited around 20% growth there, so very robust for a business that tends to be a leading indicator. Any meaningful differences by region that you would call out, and how does treatment momentum influence your team's confidence in the back half?

Yes, we're very encouraged. Thank you again.

Thank you. We will wrap it there. Thanks for your questions, and thanks to everyone who joined today. As always, we appreciate your interest in Xylem, and wish you all the very best.