Xylem Inc (XYL) — Q1 2026 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to Xylem Inc.'s first quarter 2026 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspectives on Xylem Inc.'s first quarter results and discuss the second quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I will ask that you please keep to 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 the website. A replay of today's call will be available until midnight, May 12, and 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. These statements are subject to risks and uncertainties such as those factors described in Xylem Inc.'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. 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. Please turn to slide four. I will now turn the call over to our CEO, Matthew Pine.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Coming off a strong 2025 with sustained momentum, 2026 is proving resilient with a solid first quarter financial performance despite a dynamic external environment. Demand for our mission-critical solutions was consistent with expectations. Our teams are leveraging our reduced complexity to execute with discipline, staying close to customers, as evidenced by our strong book-to-bill in the quarter, and focusing on long-term value creation. We had a strong start to the year deploying capital across the business in line with our priorities. In January, we increased our dividend by about 8%. In February, we announced a new $1.5 billion share repurchase authorization, executing on $581 million in the first quarter. This reflects our confidence in the business and our commitment to a balanced approach to capital allocation. In March, we signed an agreement to acquire a German firm that designs and manufactures highly engineered water quality instruments. The company is a leader in submersible sensors for environmental monitoring, and the acquisition expands our role as a systems intelligence partner supporting resilient long-cycle demand, enabling higher-value digital and service solutions. I also want to highlight how our transformation is helping advance our priorities. Our self-improvement initiatives are foundational, simplifying our structure and processes to build stronger capabilities. They strengthen our resilience, enhancing our ability to mitigate macro uncertainty. That operational foundation is centered around making it easier to do business with us and building our growth engine. To that end, WSS booked our largest order ever this month, an outsourced water contract for $850 million delivered over 20 years. This is not just a milestone; it reinforces that our strategy is delivering. We continue to make progress with our disciplined approach to M&A with a solid pipeline of opportunities in place, progressing towards our $1 billion annual target, optimizing our portfolio, and leveraging our balance sheet. Taken together, this progress shows we are well underway in our multiyear operating model transformation, strengthening our growth engine through disciplined execution and operational rigor. I will now turn the call over to Bill to take us through the details of Q1 and updated guidance.

Thanks, Matthew. Please turn to slide five. We are pleased with the strong start to the year. The team stayed focused despite volatility and delivered healthy results to build off of as we progress through the year. Demand remained solid with our ending backlog up sequentially to $4.7 billion and our book-to-bill for the quarter above one. Orders were flat versus last year, driven by project timing in WSS offsetting strength in the other segments. Revenue was also flat in the quarter versus prior year, in line with expectations, as we saw impacts from our 80/20 efforts in China, with headwinds moderating our short-term revenue outlook. The team's operational discipline delivered a quarterly EBITDA margin of 20.6%, up 20 basis points versus the prior year. Improvement was driven by productivity and price, more than offsetting inflation, significant mix, and lower volume. We also achieved quarterly EPS of $1.12, a 9% increase over the prior year. Net debt to adjusted EBITDA increased to 0.6 times, driven by our opportunistic share repurchases in the quarter. Free cash flow was positive in the first quarter, driven by timing of accruals and lower payments, offset in part by restructuring costs and higher CapEx. The teams continue to make progress with our working capital efficiency metrics. Please turn to slide six. In Measurement and Control Solutions, book-to-bill was below one, but backlog remained flat sequentially at roughly $1.4 billion. Orders were up a robust 15%, driven by smart metering demand in Water as we made progress on the projects that shifted out of Q4. We expect double-digit orders growth for Water throughout the balance of the year. Revenue was up 1%, driven by Energy metering demand, offset in part by softness in Water meters. EBITDA margin was 20.9%, down 10 basis points year-over-year, driven by unfavorable mix and inflation, partly offset by productivity and price. We also want to provide an update to our metering divestiture. Due to regulatory approval timing, we now expect the deal to close at the end of Q2, which is reflected in our updated guidance. In Water Infrastructure, orders were up 2% in the quarter, driven by strong demand in Transport, supported by growth in the U.S. and India. Revenue was down 1%, driven by softness in Treatment related to walk-away actions, partly offset by strength in Transport. Growth in the U.S. was offset by declines in China and Western Europe. EBITDA margin for Water Infrastructure was up 120 basis points, with productivity more than offsetting inflation and mix. In Applied Water, orders were also up 2% and book-to-bill was well above one, lifted by large projects and data center wins. Data center orders in Q1 exceeded the full-year amount for all of 2025. Revenues were flat versus the prior year, primarily driven by strength in U.S. commercial buildings offsetting softness in industrial and residential end markets. EBITDA margin was below expectations but increased 10 basis points year-over-year, driven by productivity and price, mostly offset by inflation, volume, and mix. We are confident in the segment's strong margin expansion opportunities throughout the remainder of the year. Finally, Water Solutions and Services saw an orders decline driven by capital project timing. Subsequently, WSS booked its largest order ever in April, an $850 million outsourced water contract. Revenue declined 2% year-over-year, driven by capital project timing and weather impacts on service branch operations, partly offset by strength in dewatering. Segment EBITDA margin was 22.1%, up 40 basis points versus the prior year, driven by price, productivity, and mix, offset by inflation, volume, and investments. Please turn to slide seven for our updated full-year and second-quarter guidance. The organic outlook is largely unchanged versus what we provided at the start of the year, with minor changes to our reported figures due to the delayed divestiture closing in MCS. Full-year reported revenue is now expected to be $9.2 billion to $9.3 billion, up from the prior guide of $9.1 billion to $9.2 billion, which delivers revenue growth of 2% to 3%, while organic revenue growth of 2% to 4% remains unchanged versus prior guidance. EBITDA margin is expected to remain at 22.9% to 23.3%. This represents 70 basis points to 110 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation, as well as investments in the business. Benefits from our simplification efforts will help mitigate mix pressure from MCS. There is no material impact to our projected results from recently announced changes in tariffs. Despite the benefit from share repurchases, we have chosen to keep our EPS range unchanged at $5.35 to $5.60, reflecting a prudent approach to guidance in an uncertain macro environment and not a change to our outlook for the year. Cash flow generation started strong this year. We remain committed to low double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026. Now drilling down on the second quarter, we anticipate revenue growth will be in the 2% to 3% range on a reported basis and roughly 1% organically. We expect second quarter EBITDA margin to be approximately 22% to 22.5%, which is up 20 to 70 basis points, driven by price realization, productivity gains, and higher volumes. Second quarter MCS EBITDA margin will be down year-over-year, driven again by the impact from Energy; however, we expect it to improve sequentially from the first quarter and return to margin expansion in the second half. These results will yield second quarter EPS of $1.31 to $1.36. We started the year with strong demand and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and benefits from our simplification efforts, while we also continue to monitor broader market conditions and volatility, including the Middle East conflict, changes in tariffs and other inflationary pressures, along with fluctuations in currency and interest rates. Overall, our expectations for the year remain positive and we are building on our strong momentum. With that, please turn to slide eight, and I will turn the call back over to Matthew for closing comments.

Thanks, Bill. I want to return to the core purpose of our company: to empower our customers and communities to build a more water-secure world. We have been very intentional about putting customers and communities at the center of our strategy. One place you can clearly see that progress is in sustainability. Xylem Inc.'s 2025 sustainability report was posted to our website on April 24. The report reflects the fundamental truth about our business: long-term success is driven by disciplined execution, applied in service of a clear purpose that delivers meaningful outcomes for the communities we serve. Looking back at 2025, that alignment delivered concrete, measurable results. In partnership with our colleagues, customers, and communities, we achieved our sustainability goals we set in 2019 around water reuse, pollution prevention, and stewardship. Looking ahead, we are building on that progress through our 2030 sustainability agenda, which is focused on longer-term systematic impact around three signature priorities: decarbonizing the water sector, strengthening water stewardship, and expanding access to water, sanitation, and hygiene. Sustaining this progress means continuing to evolve Xylem Inc. so we are positioned for what comes next, especially for our customers, as we leverage the simplicity we have created through the first phase of our transformation. That is why I am pleased to share two updates to the executive leadership team to further strengthen how we serve our customers across our global footprint. Snehal will assume a more focused role as Chief Growth and Commercial Officer. In this role, Snehal will lead our enterprise growth strategy and execution, doubling down on commercial excellence, customer focus, and consistent delivery of scale. At the same time, to accelerate innovation that directly translates into customer value, Sivan has been appointed to a newly created role as Chief Innovation and Products Officer. Sivan will build the capabilities required to bring differentiated solutions to market faster. This leadership update, along with our purpose-forward culture, operational rigor, and disciplined capital deployment, accelerates Xylem Inc.'s growth engine and positions us to deliver exceptional long-term value creation. We will now open the call for questions.

Thank you. Good morning, everyone. Can we get more about this outsourced contract and congratulations. This is exactly the way you have positioned WSS to build out services. Anything about the customer and anything on the economics? And is there a pipeline for more of these types of outsourced contracts?

Yes, there is more pipeline, and I push the team every day on that topic, Deane. Thanks for the question. I cannot name the actual customer, but it is an existing customer of ours in the specialty chemical vertical. We are providing process water for cooling and also boiler feed water in their manufacturing process. It is a great example of our technical know-how on the front end of a capital build along with our ability to provide a long-term service tail, which is really great for the next 20 years for our business. I will have Bill walk you through some of the numbers.

Yes, Deane. Out of the $850 million, it is about 75% service and 25% capital. We will realize about 10% of the contract value this year, with the balance of the capital build next year, and look to flow water in 2028 to start the service tail.

Really good to hear. Just a second question, Matthew. I like how you started off using the word resilient. Can you give us a sense of the municipal demand outlook at this stage of the year, and anything on the macro? There is nervousness about project activity away from municipal, but just the approval process on projects. Any color would be helpful. Thanks.

Yes. I would say that overall utility demand remains resilient. As I noted, I was with about 15 utility CEOs across all parts of the U.S. a few weeks back. These are large municipalities across the U.S., and there was no indication of any meaningful funding pullbacks or project delays outside of some of the normal things you would expect to see. For our business in Q1, U.S. utility orders—based on the MCS and the Water Infrastructure segments, which are really a proxy for utility orders—were up double digits in the U.S., and our revenue was up mid-teens. That shows the resilience of utility demand in the U.S. If you pull the lens back, overall Water Infrastructure was up 2% in orders, supported by Transport, the U.S., and India. We have talked a lot about China and have signaled that in the past, and we were down 30% year-over-year in China, which is a big part of the drag. In Western Europe, there is short-term noise with our 80/20 initiatives. In MCS, as Bill noted, orders were up 15%, driven by large Water orders primarily in the Southeast U.S. and solid Energy activity. All in all, there remains significant demand for our solutions. We are dealing with aging infrastructure in the developed parts of the world—Western Europe and the U.S.—that must be addressed. The U.S. Army Corps of Engineers grades our water infrastructure poorly—C- to D+ depending on drinking water, wastewater, or stormwater—so there is about $1.5 trillion needed over the next decade just in the U.S. to maintain those poor ratings. From our perspective and from customers' perspectives, things are still robust.

Good morning, everyone. Can you give us a little more color on what you are seeing in terms of price versus inflation across the company? And you mentioned Applied Water—Q1 margin was generally fine across the portfolio—but you thought Applied Water would get back to 20%, and you did acknowledge you recorded a bit lower than you expected. Talk about conviction staying ahead of inflation and getting that uptick in margin trajectory for the rest of the year.

For the broader portfolio, we are still price-cost positive from a price and material cost perspective, including the tariff piece. The teams have been extremely proactive and have built up a solid skill set to understand the levers, timing, and process to capture incremental value to offset inbound inflation. With the escalation in the Middle East and fuel prices increasing, we have implemented immediate fuel surcharges to offset that. We are confident we can stay ahead of inflation through price as our first lever, with sourcing actions as a secondary lever. For Applied Water specifically, performance was below our expectations, primarily due to mix within sales on the gross margin line. We are confident they will get back above 20% as we look at the balance of the year relative to cost actions taken, mix normalizing, and some of the data center projects Matthew highlighted starting to ship at a little bit higher margin, with sequential improvement through the balance of the year.

Thanks, Bill. Maybe the same kind of question on organic growth for the year. You need an uptick in growth in the second half to meet your forecast. It seems like you made progress on booking those 5–10 projects you have been most focused on in MCS. Give us a little more color there. And on WSS, do you need a capital recovery at all to make your original mid single-digit organic growth for that segment?

We have seen the things we needed to see happen in the first quarter relative to strong MCS orders and some of those projects that were delayed now converting, which will play out through the balance of the year. We still need a couple more orders to hit for us to reach our back half, but conversations with the team look positive. The book-and-ship for MCS is actually up 9%, so there is a lot of traction and progress, and channel inventory is back to normalized levels. From a broader Xylem Inc. perspective, we will see a significant ramp in volume from the first quarter as part of our normal seasonality. If you look at the third quarter, it is basically the same revenue dollars sequentially, and we go from 1% growth to 5%. Then we will see the normal seasonal ramp in the fourth quarter relative to Water Infrastructure to get to another mid single-digit number. Normal seasonality and the orders we needed to win have progressed and give us confidence in our back-half figures.

Good morning, everyone. Just touch on the capital allocation piece. Good to see the magnitude of buyback in the quarter. What does the intent look like from here? If the stock stays in and around where it is now, do you see yourself being as aggressive as we move through the year?

We continued to buy in April and will reassess the balance of Q2 after this month. We are looking at it a couple of ways: managing our leverage between half a turn and a turn net debt to EBITDA, and balancing that with taking advantage of stock dislocation. We will reassess at the end of the month as we get into Q2. We have a healthy balance sheet and will continue to deploy capital across our whole framework over the course of the year.

Makes sense. Maybe talk about the M&A optionality—pipeline and ability—and give more context on why the tuck-in you made on the analytics side made sense.

We have talked about $1 billion of capital deployment toward M&A to help us get to the mid-teens EPS growth outlined at our 2024 Investor Day. We are still tracking for that. Our improved internal process is now much more focused within segments with segment presidents owning pipeline development bottom-up. Because of that work, we have a very strong pipeline across all segments, which gives us confidence we can be more consistent over time with capital deployment. Regarding the recent tuck-in, we signed an agreement—subject to confidentiality with the seller—so we cannot share the target's name. The purchase price was $219 million. It is a highly engineered water quality instruments business, strengthening our position in high-margin optical sensing and process applications across clean water, wastewater, environment, and industry. We expect significant revenue synergies by leveraging our industrial and utility customer base as we continue to grow our analytics business.

Good morning, everyone. On Measurement and Control, it looks like things are stabilizing a bit there; the order book looks solid. Can you mark to market where we are in the cycle across Electric and Water? There is a refresh cycle in Electric; maybe that is coming in Water. How does that play out this year and into 2027?

At a high level, if you go back to 2008–2009 with the American Recovery and Reinvestment Act coming out of the Great Recession, utilities on the Electric side did a major push on AMI. You started to see a refresh last year into this year and over the next couple of years. Water was five to seven years behind that initial wave of AMI deployments. As we move through the next two to three years of Electric refreshes, we will start to see a pickup in Water refresh as we exit this decade going into 2030.

That is helpful. On China, I think you mentioned it was down 30% this quarter. Have we bottomed in that market, and is it a function of comps? Relatedly, how much of that 30% is market versus the work you are doing to reposition the business?

We would say it is bottoming out—bouncing at the bottom. The team is making progress with focused efforts in areas where we have more differentiation. Roughly a third of the decline is market, a third is competitor actions, and a third is us actively walking away from business. For total Xylem Inc., most of the pressure is in the first and second quarters, and the comp gets easier in the back half. For the full year, China is about a 1% headwind for sales, concentrated in the first half at about 2%.

Good morning, everyone. On MCS, we have seen pretty good order growth over the last few quarters—double-digit for four quarters in a row—but the actual dollar level of orders has been below the level of revenue. How does that support growth going forward, not just this year but into 2027–2028? What kind of order rates do you need to support growth over the next couple of years?

Long term over the cycle as things normalize, it is that high single-digit rate. Given lumpiness from large projects, you have to look at a combination of our backlog position in conjunction with orders. Our backlog increased sequentially but not to the magnitude implied by book-to-bill because some orders received within the quarter were for projects we had already won and now have firm commitments to start delivering within the year. Look over a rolling 24 months at a high single-digit orders growth rate, with a check on backlog growth and position as replenishments progress.

As a follow-up, margins: you already guided to stronger margins in the second half, and the margin expansion in 2026 is significantly lower in the first half than implied in the second half. What are the contributors to accelerating margin expansion in the second half, and where should we see those materialize?

It is across the portfolio, with significant expansion within MCS and Water Infrastructure, primarily as mix normalizes and we shift from price-driven growth to significant volume growth as projects hit in MCS and Water Infrastructure. We also get past some walk-away pressure and China pressure in the first half. It is volume and mix normalization, leveraging structural cost taken out last year and continued in 2026.

Good morning, everyone. Following up on Nathan's question, given current visibility with MCS inclusive of mix expectations and the pending divestiture, how should we think about margin cadence through the back half and, more importantly, a realistic exit rate—or equivalently—jumping-off point for 2027 margin?

As noted in the prepared remarks, MCS will sequentially increase and exit the year post the international metrology divestiture well in excess of 25% EBITDA margins. That is the base rate going into next year, with the Water balance-of-sale normalizing and continued profitability improvements within the Gas and Electric businesses.

Understood. Your consolidated organic sales outlook is unchanged, and it does not sound like the moving parts have meaningfully shifted. If we think about the segment expectations you outlined last quarter, are there any shifts you would call out, particularly for MCS and WSS?

No major changes to the organic guide in aggregate, and no major changes to the makeup between the segments.

Thanks for the time. Good morning. Coming back to price-cost, specifically potential supply chain impacts on material costs as global supply chains continue to be disrupted. I know you have some fixed-price arrangements for materials, but how long do those last, how much do they insulate your business, and what is your visibility to managing increases in raw materials costs post those arrangements?

We have some forward fixed contracts, but they are limited and focused on certain raw commodities. Our supply chain team does a strong job of alternate sourcing and competitive bidding to mitigate increases through dynamic supply chain management. Our first lever is incremental pricing. The team’s practice post-COVID, through inflationary drivers, tariffs, and now potential increased inflation due to rising fuel costs, gives us confidence we can continue to offset. The magnitude could compress margins slightly—since we are not getting 40% flow-through on incremental price—but dollar for dollar, our expectation is that we can manage. The next four weeks will be critical relative to geopolitical developments and logistics lanes, but we are as prepared as we can be given the nimbleness of our organizational construct.

Appreciate that. On 80/20, you had previously talked about 2026 being the peak of walk-away—about a 200 basis point offset to organic growth guidance. What is the cadence or timing? Is that primarily in the first half or evenly spread?

It is more weighted to the first two to three quarters of the year. There is some longer-tail activity within the Treatment business in Water Infrastructure that may extend past that, but it is more heavily weighted in the first half.

We will wrap up there. Thanks for your questions, and thank you to everyone who joined today.