Xylem Inc (XYL) — Q2 2025 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to Xylem's Second Quarter 2025 Earnings Call. With me today are our Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's second quarter results and discuss the third quarter and full year 2025 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 14, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that we 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 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. Now please turn to Slide 4, and I'll turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered another strong performance in Q2, continuing the momentum we built over the last several quarters. We generated broad-based organic revenue growth led by measurement and control solutions. Adjusted EBITDA margin reached a quarterly record of 21.8%, up 100 basis points year-over-year, and adjusted EPS grew mid-teens. Demand for our products and solutions remains resilient, and we see a particularly solid order pace, including double-digit growth in smart metering. So we're raising our full-year guidance for revenue and EPS. That raises guidance reflects our confidence in delivering strong performance balanced with prudent management of our outlook. I'm very proud of the team for operating with discipline in a dynamic environment, navigating tariff uncertainty, inflation and speculation about the impact of trade policy on demand. Our pricing and supply chain actions more than offset inflation and tariff-related costs. Simplification efforts are driving measurable improvements in productivity and customer responsiveness and we're seeing the benefits in margin expansion and in our ability to serve customers more efficiently. As I mentioned, underlying demand signals remain resilient across our end markets. We're not seeing any material demand pull forward from the second half, and our backlog remains strong. Our guidance, which Bill will get into in a moment, assumes current and announced tariff structures remain in place and we built in contingencies for potential volatility. We remain focused on executing the plan we laid out at Investor Day last year. The transformation of our operating model across culture, processes and structure has already had significant positive impact on our business and our results. Simplifying our operations and structure has reduced complexity, enabled faster decision-making. As an example, this quarter, we set a Xylem record for on-time performance. We're seeing the benefits of simplification in our focus, speed and margins. At the same time, we're enhancing our operational performance, we're also enhancing our portfolio for growth. For example, with two recent targeted acquisitions in advanced treatment. Our strong first half performance gives us confidence in our ability to deliver both a strong 2025 and our long-term financial framework. With that, I'll turn it over to Bill to walk through the quarter's results, our financial position and our updated outlook. Bill?

Thank you, Matthew. Please look at Slide 5. We are very happy with our strong quarter and the first half results. The team stayed focused and achieved better results than we anticipated. Our simplification initiatives have positioned us to be agile and manage risks in an unpredictable environment, with more positive impacts expected as we continue our operating model transformation and realize the benefits of 80/20. Demand across the business remains strong, with orders increasing by 4% despite challenging comparisons, and we finished the quarter with a year-to-date book-to-bill ratio close to 1. Backlog has grown in all segments except MCS, where we are effectively reducing it to a more normal level. Overall, backlog is still above $5 billion. Revenue grew by 6% this quarter, exceeding our expectations, mainly due to strong performance in MCS, but we saw contributions from all segments. The EBITDA margin expanded by 100 basis points year-over-year, thanks to productivity, pricing, and volume offsetting inflation, mix, and investments. Our increasing operational discipline is evident in our results. In Q2, we achieved EPS of $1.26, which is $0.12 above the midpoint of our guidance and a 16% increase from last year. Year-to-date free cash flow decreased by $61 million compared to last year, primarily due to outsourced water projects and timing of tax payments, but this was mostly offset by higher net income and improved net working capital. Our net debt to adjusted EBITDA is at 0.4x, which reflects our solid balance sheet and our ability to invest further. Now, let's proceed to Slide 6. We achieved excellent results in all segments, starting with measurement and control solutions. Demand for our AMI solutions continues to grow strongly, with orders increasing by 12% organically, particularly in water and energy metering. Backlog is healthy at $1.7 billion. Revenue was up 10%, driven by strong demand in energy metering and effective backlog execution. Adjusted EBITDA margin was better than anticipated at 23.1%, only down 30 basis points year-over-year, influenced by inflation and mix but mostly offset by productivity, higher volumes, and pricing. In Q2, we experienced an acceleration in higher-margin energy orders, which helped to mitigate the negative effects of unfavorable legacy projects. Project timing and lower tariffs also contributed to better-than-expected performance. In Water Infrastructure, demand remains strong in most regions and end markets. Book-to-bill exceeded 1, despite a 2% decline in orders due to tough comparisons, with funding delays in the U.K. and Canada being the main factors for this downturn. We expect these issues to resolve in the second half of the year. Revenue grew by 4%, driven by demand for treatment and growth across all regions, except for China, where we face ongoing economic challenges. The adjusted EBITDA margin increased by 200 basis points to 21.8%, driven by productivity and pricing, with some offset from inflation. The WI team is making significant progress with their 80/20 initiatives. In Applied Water, orders increased for the sixth consecutive quarter, growing by 4%, particularly in commercial buildings. Revenue rose by 5%, with growth in the U.S. and robust performance in commercial sectors. The adjusted EBITDA margin rose by 420 basis points to 21.7%, driven by productivity and pricing, although inflation and tariffs provided some offset. This segment continues to lead in realizing the benefits from 80/20. In Water Solutions & Services, orders grew by 5%, primarily from services for utility and power markets. Revenue increased by 5%, with contributions from both capital projects and services. The adjusted EBITDA margin expanded by 60 basis points to 24.4%, benefiting from strong execution in pricing and productivity, divestitures, and revenue synergies, despite some inflationary pressures. Now let’s move to Slide 7. As we mentioned in our last earnings call, we have proactively taken steps to reduce tariff impacts by implementing targeted pricing strategies and accelerating supply chain adjustments. We're updating our annual guidance based on the current rates while acknowledging the fluid nature of these impacts. We have added the effects of Section 232 tariffs on steel and aluminum as well as global factors. While uncertainties regarding the exact timings and tariff levels remain, we are optimistic that our pricing strategy and available supply chain options will help us significantly mitigate the current effects, although we anticipate a slight dilution in margins. Now let’s go to Slide 8. Given our strong performance in the first half and our execution momentum, we are raising our full-year guidance. We now project full-year revenue between $8.9 billion and $9 billion, which represents 4% to 5% total growth along with approximately 4% organic growth. The adjusted EBITDA margin remains unchanged at 21.3% to 21.8%, indicating an increase of 70 to 120 basis points compared to last year. Our strong performance in the first half is somewhat tempered by the dilutive effects of tariffs. We are increasing our adjusted EPS guidance to between $4.70 and $4.85, up from the previous range of $4.50 to $4.70. The free cash flow margin continues to be expected at 9% to 10%. For Q3, we anticipate revenue of $2.2 billion, with 4% to 5% organic growth. We expect the adjusted EBITDA margin to be between 21.7% and 22.2%, and adjusted EPS is projected to be between $1.20 and $1.25. There is still macroeconomic uncertainty, particularly concerning tariffs and foreign exchange movements that could influence our performance. However, the results reflect that our team is effectively managing what we can control. We remain confident in our capability to meet our full-year commitments, relying on strong demand, effective backlog management, and benefits derived from our simplification efforts. Now let's move to Slide 9, and I will hand it back to Matthew.

Thanks, Bill. Building on Bill's guidance comments, we entered the second half with confidence, both in our ability to deliver a strong 2025 and also in our long-term framework that we laid out at Investor Day last year. That plan outlined how Xylem would create value by leveraging our combination with Evoqua, simplifying our business for speed and performance and delivering profitable above-market growth over the cycle. I want to take a moment to recognize and thank the team that is driving so much momentum on all 3 of those vectors of value creation. On Evoqua, we're now 2 years post-close, and the team has done an outstanding job with the integration. By the numbers, we delivered cost synergies ahead of schedule, and we're seeing the value of our combined portfolio and strong traction on revenue synergies across both industrial and utility end markets. But we also recognize a sustainable success from an acquisition of this scale requires deep cultural integration, which is why we've given so much attention to transforming our combined culture and made it an integral part of our operating model and it shows in the way our teams are working. When you walk around our operations, you can see and feel how aligned our teams are, how quickly they're turning strategy into action and delivering results. We also use the integration as a catalyst and imperative to simplify our business. Since launching our operating model transformation last September, the changes we've made to structure, processes and systems have enabled faster decisions, clearer accountability and better service. We're seeing that show up in our performance. The second quarter is a strong demonstration of the team's increased speed and agility. In addition to the strong financial results, the team delivered a new benchmark in on-time performance. That's a clear signal that our customers are benefiting from the team's hard work and getting tangible value from our transformation. At the same time, we're sharpening our operational discipline, we're also strengthening Xylem's growth engine. For example, we recently added 2 high-value capabilities to our platform with the acquisitions of Vacom and Envirex. Vacom brings proprietary breakthrough solutions in zero liquid discharge which offers compelling value propositions to attractive industrial verticals like microelectronics and energy. Envirex represents another enhancement to our advanced treatment portfolio. The company is a leader in non-mechanical mixing and biological process solutions, which enhances our ability to serve one of the fastest-growing segments in water, advanced nutrient removal. These moves reflect our intent to continue simplifying our business for performance and agility. While we invest in the applications and end markets that will drive customer impact, profitable growth and sustainable value creation. With that, operator, let's go to your questions.

So first on the MCS order side of things, obviously, good orders this quarter, good absolute dollar levels of orders. Maybe you can just give an update on how you think that outlook looks today, where we have the destocking side, what are your customers saying from a forward perspective, what the replacement piece looks like? And then lastly, any updated thoughts on when you think that book-to-bill can track towards 1 again?

Yes, I'll begin, Mike. First, I want to emphasize that we see strong demand across the board, particularly considering the global volatility. The only exception might be China, which currently represents a small portion of our business and is now in the low single digits. If I had to highlight one segment from the quarter, it would be Water Infrastructure, which is down by 2, but the book-to-bill ratio is above 1. We faced a tough comparison to last year, where we saw high single-digit growth in orders for Water Infrastructure in Q2. Additionally, we experienced some delays in the U.K., which is one of our key markets, as they transition into AMP cycle 8. Such delays are typical at the beginning of new AMP cycles, and we also faced delays in Canada due to a government change. We anticipate these issues will improve in the second half of the year. Based on what we can foresee over the next 90 days, we believe demand remains robust across the board, and we will continue to keep a close watch on it to stay connected with our customers.

Yes, Mike. And specifically to MCS, I think commercial demand remains extremely strong. As we look at the back half of the year, I think we see a sequential improvement in orders. We talked about MCS continues to work down its backlog for more normalized historical levels, right? It has been inflated for the last couple of years and they're getting close to the $1.7 billion. Yes, we have signaled that MCS will be back to a book-to-bill positive as we close the year and we maintain that expectation.

Appreciate all that color there. And then lastly, maybe just an update on where you stand on the simplification side of things, how the rollout has gone in a couple of the areas you've put it in the front half of the year and what the next steps are from here?

Yes. I'll start it out, and then I'll let Bill give some commentary, Mike. But we're tracking ahead of the timeline that we laid out in February on our Q4 earnings call. So really proud of the team for leaning into the transformation. I've been traveling quite a bit since I became the CEO; just when you're going through a large-scale transformation like this, it's good to make sure you get out and get the pulse of the organization and I'd say our colleagues and our customers say the impact is real, and they're feeling the change. So the teams are much more focused, making decisions more quickly. And we're seeing, again, customer metrics improve like on-time performance; as we look at our customers, they're starting to grow at a higher rate in a raving fan. So one thing I'd point to also, Mike, we just wrapped up our long-range planning last week. And where we had our 16 new division GMs present their long-range plans for the first time in our new structure. And so I walked away very energized by the depth and level of detail in our review and how we're able to really drive focus and execution. Each division really understands their position in the company, whether that's a growth position, kind of a transformation position or continuing to maintain their execution in their divisions. So all in all, making good headway.

If we look specifically from an 80/20 perspective, Matthew is discussing the overall simplification in our organizational design, including the 80/20 approach. From my viewpoint, it is beginning to take root in the organization. Each quarter, we make further progress and we have emphasized that 80/20 is not just a tool, but a fundamental aspect of how we want to operate the business and integrate that into our culture. We are gaining a greater understanding of the value of simplification and the beneficial effects it will have on our key stakeholders. We are witnessing an acceleration of learning as we implement the tool. The dewatering business started its journey in the second quarter, so all four segments are now engaged with the toolset. Approximately 80% of the business is at some stage of implementation. Generally, MCS, supplied water, and Water Infrastructure have made more significant progress, identifying their main complexities and redesigning their organizations to reduce costs while addressing their operational needs. The margin improvement seen in Applied Water and Water Infrastructure truly demonstrates the potential across our businesses.

So I just wanted to focus on Applied Water for a second. You always had good orders and revenue growth. I think you mentioned driven by commercial buildings. And I think you've talked about having the highest headwind from 80/20 on Applied Water. So maybe you could give us a little more flavor to what's going on. How does this also make you feel about affecting change with 80/20 and maybe not slowing down growth at Xylem?

That's a good question. First, I'm really proud of the Applied Water team. They've done an excellent job with 80/20, focusing on both margin and customer engagement. This tool aims to simplify processes and redirect efforts towards growth. While growth has been a secondary focus, we're beginning to see some positive signs. This business has the most complexity and potential within our portfolio. In terms of orders, we've seen an increase for six consecutive quarters, which is encouraging, particularly in developed markets and across most of our portfolio, especially in commercial buildings and industrial sectors. Revenue has also been strong, thanks to effective pricing strategies, partly influenced by the 80/20 tool. Our new structure has made us more agile, allowing for quicker decision-making. This has helped us mitigate headwinds from tariffs; we managed some minor adjustments by pulling in orders from the second half of the year to stay ahead of these challenges, but it won't significantly impact our results in the latter half. Lastly, we are prioritizing profitability over volume as part of our long-term strategy. Overall, our performance aligns with our expectations, and simplifying the business will support our growth moving forward.

Matt, that's helpful. And maybe just stepping back. Maybe talk about the dichotomy between developed and developing markets. I mean you said the strength really is coming from developed. Anything sort of different going on in the two markets and cognizant of China continued to be a bit of a headwind. Maybe you can talk about that. And I think you mentioned sort of delays in Canada and U.K. in treatment maybe just address that again.

Yes. The delays were mainly due to funding timing. In the U.K., they are planning to double their investments in the upcoming AMP cycle, which is significant and just a matter of timing. We expect to see improvements in the second half. Similarly, in Canada, the change in government has pushed some traditional purchases to the right, but we believe that will also pick up in the second half based on our conversations there. I was recently in Toronto speaking with some of our customers, and I feel positive about that rebound. Regarding geography, while this might not be specific to Applied Water, I would highlight that China is currently a weaker area for us, with orders down approximately 18% year-over-year, which stands out compared to developed markets. Additionally, our 80/20 tool is encouraging us to reconsider our approach to servicing various markets, and we are deliberately stepping back from certain areas outside developed markets where we haven't been as effective.

Can we put the spotlight on these two deals? And I know they're smaller, but just the M&A strategy on these niche types of applications that then you can, without a big cash outlay drop into your portfolio of offerings and scale. So just the implications, and that would suggest really high returns on these smaller dollar amount deals. But just how does that fit into what you're seeing in the pipeline? And that would be a big help.

Yes. Thanks, Deane. We do have a really healthy pipeline. I think I mentioned on the last call that we really changed our M&A process and much more risk, much more bottom-up, which I think is helping really drive the funnel improvement and the velocity. We talked a lot in our last Investor Day about areas that we're going to focus. One of those that we highlighted was advanced treatment, which these two fit into and like you said, we are really excited about some of these technologies and smaller acquisitions that can scale over time and we can kind of help them incubate and do that. So Vacom is a great solution around zero liquid discharge; it's becoming more and more important and imperative in areas like mining and microelectronics and food and beverage. And Envirex is a really great technology. Today, we use a lot of mixers, mechanical mixers, and this moves away from that and brings in a technology for us that uses air compression in bubbles. So another big area of improvement around nutrient removal. So we're excited about the technologies. We'll continue to do these, and we've got a lot of velocity in this area.

And I think, Deane, to your point, these are strong return deals where I think there are significant synergies with our core business, not only from a cost perspective, but significant revenue uplift.

Good. That's what I was looking for, Bill. And then second question on MCS. There's always some consternation about the energy meters, a non-smart water meter business. And it sounds and looks like there's some difference between some of the legacy energy meter projects versus some of the new ones that you've booked in terms of the returns? Can you just clarify that?

Yes. I would just say that, yes, that's a great observation that we've introduced new technology in both the gas and electric side of our businesses, which has helped us get better margin improvement and also be a leader in those spaces in terms of the technology that we're introducing in those meters. So we really like that part of the business. We have over probably 300 combination accounts where you have a water and a gas utility or water and electric utility. And it really just drives a lot of scale for them when they can put in a network and put multiple different utilities on the network. So that's going well. And the last thing I would say on the electric side, that industry tends to be a leader in terms of AMI, and we learn a lot from being in that market that flows down into the water, into the gas side of our business in metrology.

Matthew, you mentioned that you had a record on-time delivery quarter. Could you provide some context regarding your journey since becoming COO and then CEO? It would be helpful to know where you currently stand, and if you're using any benchmarks for comparison. Anything you can share would be appreciated.

Thank you for your question. It's a great reflection of the simplification efforts we're undertaking. I consistently monitor two key metrics in our CEO scorecard each month: quality and on-time performance. If we're excelling in those areas, it usually indicates that the company is doing well. We've observed significant improvements in our on-time performance since implementing the 80/20 strategy and restructuring for better focus. By simplifying our SKU counts, we've not only enhanced operations in our factories and reduced lead times but also improved our working capital, which showed positive results this quarter. Additionally, as part of the 80/20 initiative, we're tracking our on-time performance to customers, aiming to exceed expectations in that regard. To provide some specifics, in June, our on-time performance increased by 600 basis points year-over-year, and year-to-date, we're close to 300. In certain areas, we're nearing best-in-class, but overall, the organization still has work ahead. A sustained emphasis on simplification and customer focus will help us achieve our goals.

That's helpful color. And just on a different topic, you've got a balance sheet at this point, as you could argue underlevered. I know there's a lot of change going on within the organization that I'm sure will be challenging to juggle too many balls in one if you're thinking about M&A, for example. But just I guess, how are you thinking about capital deployment here? And really as it relates to the M&A environment or buybacks for that matter?

Yes. No, I think we're still forward leading on the M&A side. Again, we continue to look at assets that fit our strategy and then also have strong financial returns. I think as we created a different process with the organization, we pushed some of the cultivation down to the segments. We've seen an increase in volume and quality of our funnel across the portfolio, but again, we're balancing things within the organization on transformation actions that we're taking across the portfolio and what those returns are going to be from an organization and then looking at a high bar relative to things that are strategic that we want to invest in three categories that we've highlighted multiple times and Matthew talked about a little bit earlier. So I think we have a really robust funnel. We're focused on it. And the balance sheet will get levered when the time comes and these assets are actionable.

I'm going to start with a question we often receive from investors regarding municipal utility funding in the U.S. I'm sure you're familiar with this topic, but I want to bring it up on the call so you can address it directly. Investors are worried that funding for utilities may decrease under the Trump administration, while utilities were well supported during the Biden administration with various programs. There are potential cuts to EPA funding that could affect state water funds. I would appreciate your insights on this and any negative impact you foresee on your business.

Thank you for the question. I want to remind everyone that approximately 75% of our demand comes from operational expenditure. Additionally, the infrastructure in the U.S. is aging and needs replacement. As a reference point, the water infrastructure segment showed mid-single-digit growth in the first half, demonstrating resilience amid macroeconomic uncertainty. While it remains an area of attention for us, I wouldn't say we are overly worried at this moment. Regarding state revolving fund funding, it currently constitutes only 5% of municipal budgets, historically around $3 billion. It's crucial that we maintain this funding, as our infrastructure is already significantly underinvested in the U.S. However, indications from Congress suggest that funding will be appropriated to restore the state revolving fund to healthy levels, despite some discussions implying otherwise. I believe that Congress will follow through, and we can expect state revolving fund levels to return to normal in the future.

Great. And my follow-up is going to be on MCS. A couple of questions on that. You had seen customers looking to destock inventory on the water side in the first half, which I think you anticipated coming to an end about midyear. Can you confirm that and that we should get improvement in mix in the second half? And then I think on the electric side, you're talking about a more profitable business there. I think there's been an anticipation of a replacement cycle for the electric meters that were put in 10 to 15 years ago starting up. Is that part of the contributing factor to improved profitability on electric, and then should we see that continue for the next few years as that placement cycle progresses?

Can I just say yes, Nate? I would say, first, kind of our expectations for water meters have been right in line we said that it would be down in the first half and start to ramp in the second half. We see that with an exit rate back at kind of high single digits as we exit 2025 on the water side. On the energy side, yes, there's significant growth driven by both gas and electric. I think the refresh cycle that you're talking about is kind of early stages and will all then be a big tailwind over the next couple of years. I think the profitability associated with both continues to improve. Matthew highlighted just on the new projects on the gas side, margin improvement and kudos to that team for going after price and continued operational efficiencies the entire segment, leveraging 80/20 to simplify the reduced product portfolio complexity and double down on their 80s products. So I think they're well positioned having both the energy and water assets together. We highlighted just the benefits that we get from sharing the network provides a tailwind and learnings that we can spread across all three areas. So lots to be excited about that business going forward.

This is Tyler Bisset on for Brian. You guys raised your revenue guidance. You also guided for strong adjusted EBITDA margins in Q3. And with less of a tariff impact expected, I was wondering if maintaining your full-year adjusted EBITDA margin is just accounting for some conservatism or some of those contingencies you mentioned in the back half of the year, or are there potential impacts you're assuming in Q4?

Yes. We noted that there is a slight dilutive effect from the tariffs. The incremental impact is not significant, representing a pressure of about 10 to 25 basis points on our year-over-year EBITDA margin growth in the second half of the year. We are actively working to optimize this situation. Additionally, we have made significant progress on our simplification efforts, and our teams are making headway. However, we are proceeding with caution due to ongoing volatility, and we will have to wait and see how things unfold in Q4.

Great. And you raised your assumptions for corporate expenses this year by $10 million to $15 million. Anything in particular driving that increase? Is it just that M&A you mentioned or anything else?

No, I think it's a combination of FX and variable comp relative to the stronger results.

I believe most of the questions have been addressed. I wanted to ask a couple of questions regarding margins. First, can you discuss the margin impact from the legacy energy business in your backlog for MCS? As that gets resolved in the upcoming quarters, how should we view the overall EBITDA margins for MCS during that time?

I think we discussed three factors, one of which involves some of the lower-margin legacy projects. We had to go back and negotiate additional pricing due to the tariffs, which put some pressure on our sequential margins in the third quarter, estimated at about 50 to 100 basis points. However, MCS will improve sequentially and year-over-year in both quarters, with further improvements expected in Q4.

Okay. And then on the Applied Water side, just the over 400 basis points expansion that you saw year-over-year. Just any, I'm sorry if I missed it, but any kind of one-timers in there, how we should think about that kind of sustainably going forward.

No, I don't think there are any one-time factors for me. About two-thirds of that is due to the significant traction they gained on the 80/20 strategy and the positive price/cost dynamics. Matthew noted that there was a slight pull ahead in some volume, so sequentially it may decrease a bit in the third quarter, which means there will be some under absorption. Therefore, I think their expansion won't be as large, but it will still be very strong compared to last year.

It was a good quarter for Evoqua Water Solutions in terms of orders and growth. I'm curious about the order trends, especially regarding services. I understand this business can be variable. What is your experience with capital equipment, and how have tariffs affected that?

No. I think WSS overall is positioned for another strong year of growth as it leverages the synergies with the combined portfolio and it does have significant strength with the outsourced water projects across several of their end markets. Energy being one of them. They've also seen significant growth in their utility services business, which is a combination of the legacy municipal services business from Evoqua and the assessment services business in legacy Xylem. And to be honest, I give Rodney and team a lot of credit for the improvements they've made in that section of the business. They've turned it around in a very short period of time. But again, they've got a significant funnel of their outsourced water projects. Like you said, projects can be lumpy. That's why we're not overly concerned with their book-to-bill being less than one; it's timing of some projects that have already filtered in here in the third quarter. So their capital business is a real shining point of growth within the portfolio.

Okay. And then one of your larger water peers is talking a little bit more about data centers as a demand driver. I'm wondering, just an update there. I know it's small for you, but any big incremental you're seeing in the last 3, 6 months?

I wouldn't describe it as significant. It will likely be more noticeable in our Applied Water business with heat exchangers and pumps. While we have observed a slight increase in our Water Solutions and Services business, some data centers, believe it or not, are unable to access municipal water and are instead using surface water. As a result, there is a growing need to filter that water before it enters the data center. I anticipate that this trend will persist as municipalities face challenges. Data centers consume a large amount of water, approximately equivalent to the needs of about 50,000 people, using around 5 million gallons daily. I don't think the public fully grasps this. There’s a lot of discussion about the energy consumption of data centers, but we all need to pay close attention to the water aspect of the energy transition we are experiencing.

Do you think this will be a real meaningful multiyear driver?

I think in the next year, probably not so much. But as we look out in the next 3 to 5 years, and you look at the stresses that we're seeing across different parts of the world and here right here in the U.S. on water, absolutely, it's going to be more and more of an issue. And so water reuse will become really important.

Thanks a lot. We'll just wrap it up there. Thanks for your questions, and thanks to everybody who joined the call today, especially our colleagues, many of them dial into the call. We appreciate your interest and support, all the best.