Welcome to Xylem's Fourth Quarter and Full Year 2024 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Keith Buettner, Vice President, Investor Relations and FP&A. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth 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 fourth quarter and full year 2024 results and discuss the first quarter and full year 2025 outlook. Following our prepared remarks, we will address questions related to 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 the website. A replay of today's call will be available until midnight, February 18, 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 with references to the prior year segment metrics being made on a comparative basis, reflecting the change in segments as of the beginning of the year. 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 will turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us today. The results we released earlier today reflect a strong fourth quarter finish to a record-breaking 2024. In a year of transition and significant transformation for Xylem, the team served our customers and communities with discipline and delivered on our commitments, and the results show their impact. For full year revenue, EBITDA margins, and EPS all set new benchmarks for us. Revenue grew 6%, we expanded EBITDA margins by 170 basis points, and EPS was up double digits for the year. The team's operating discipline was apparent across all segments, and the integration of Evoqua is delivering cost synergies significantly faster than expected. In a moment, I'll ask Bill to drill down on the fourth quarter, but the headline numbers reflect a big finish to a big year. The team executed well on resilient underlying demand, with all segments delivering Q4 orders growth of mid-single digits, which has given us great pace coming into the new year. We anticipate demand will continue to be healthy overall through 2025 despite uncertain dynamics in a few end markets and regions. The team is doing a great job managing what we can control and is committed to the transformation of Xylem we began in 2024, enabling us to improve focus, increase our speed, and drive accountable execution. The transformation is behind our 8-K filing last week, which follows through on our discussion at Investor Day when we indicated our intent to simplify Xylem's operating model. We're moving from a matrix to a structure with a single access or segments. The plan streamlines our organization, which will strengthen our competitive positioning, enabling us to better serve our customers. We've also taken several targeted capital deployment actions since our last earnings call, all aimed at optimizing our portfolio for growth and profitability. In December, we increased our stake in Idrica to a majority ownership and management control of the technology platform at the heart of Xylem View, which is a strategic growth priority for us as utilities continue to digitize. We also acquired a few tuck-ins to enhance our offerings in Water Solutions and Services and Water Infrastructure. Finally, just last month, we signed a definitive agreement to divest a non-core business that came with the acquisition of Evoqua and represents about 1% of revenue. As our 2024 performance indicates, transforming our operating model has energized the enterprise, and that's reflected in the 2025 guidance we issued earlier today, which is in line with delivering the long-term framework we committed to you last May. Before we go into more detail on that full year outlook, I'm going to ask Bill to unpack the team's fourth quarter performance, which provides the foundation for our momentum into 2025.

Thanks, Matthew. Please turn to Slide 5. As Matthew mentioned, we are very pleased with the strong finish to 2024. The team stayed focused and consistently delivered throughout the year, exceeding our expectations, and delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year. Demand remains positive, with our ending backlog of $5.1 billion essentially flat from the prior year, driven by progress executing at MCS on their past due backlog, but offset in part by growth across the other three segments. Our book-to-bill ratio was near one in the quarter and exceeded one in the year. Orders were healthy, up 7% in the quarter, driven by strong performance across all segments, with Water Infrastructure leading the way with 10% orders growth. Revenue growth was robust, up 7% in the quarter despite a challenging comp of 9% growth in the same period last year. The team's operational discipline delivered a quarterly EBITDA margin of 21%, up 140 basis points from the prior year. This improvement was driven by productivity, price, and volume more than offsetting inflation and investments. We also achieved a record EPS of $1.18, surpassing the midpoint of our guidance by $0.05 and marking a 19% increase over the prior year. Our balance sheet remains in great shape with net debt to adjusted EBITDA at 0.5x. Year-to-date free cash flow increased by 29% from the prior year. The conversion rate of 116% was driven by higher net income, offset by higher net working capital and increased CapEx. Working capital efficiency in the quarter was negatively impacted by the timing of sales, but our overall performance for the year was strong. Let's turn to Slide 6. In Measurement and Control solutions, we continue to convert the backlog, though total MCS backlog remained at roughly $1.9 billion, in line with the prior quarter. This is a 13% organic decrease from the prior year, driven by smart metering conversion. Orders were up 6%, driven by smart metering and analytics demand. Revenue was up 6%, again, driven by smart metering demand and backlog execution. EBITDA margin of 17.1% was 120 basis points lower than the prior year, driven by mix, inflation, and investments more than offsetting productivity, price, and volume. As expected, there was a sequential margin headwind for mix in the quarter as energy meters accounted for a larger portion of sales. In Water Infrastructure, orders were up 10% in the quarter, with strong demand in transport. Revenue increased 8%, driven by treatment and transport demand across most regions. EBITDA margin for Water Infrastructure was up an outstanding 360 basis points. Productivity, price, mix, and volume more than offset inflation and investments. In Applied Water, orders were up 5% and book-to-bill was roughly one, lifted by large project wins in the U.S. and strength in Europe. As expected, revenues were essentially flat to the prior year, primarily driven by softness in emerging markets. Segment EBITDA margin increased 60 basis points year-over-year. Productivity, mix, and price more than offset higher inflation, lower volumes, and other costs. Finally, Water Solutions and Services saw robust demand with orders increasing 8%, driven by strength in capital projects and dewatering. Revenue growth was up strong at 11%, with strength in capital projects, dewatering, and services. Growth was also fueled by projects coming online faster than anticipated as we entered the quarter. Segment EBITDA margins were 22.8%, up 10 basis points versus the prior year, driven by productivity, price, and volume, more than offsetting inflation, investments, and mix. Now let's turn to Slide 7 for our 2025 segment outlook. Before I go through our overall guidance, I want to highlight that we have not factored in any impact for the recently enacted tariffs by the U.S. administration. At this time, we do not believe that they will have a material impact on our full year 2025 results, but it is obviously a fluid situation, and we will update our guidance accordingly as we learn more. Heading into 2025, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem, focus on our customers, and expand margins. We are providing full year organic revenue guidance for the segments that is largely in line with our long-term framework. In MCS, we expect growth of high single digits. We are seeing some pockets of softness in Europe, but overall demand is still healthy, and our pipeline is strong. Our expectation is energy meters will drive a majority of the growth in 2025 and water meters will grow low single digits. We expect to see sequential revenue improvements throughout the year, supported by our backlog and easier comps. In Water Infrastructure, we expect growth of mid-single digits. We anticipate resilient OpEx demand due to the mission-critical nature of our applications and solid CapEx demand. Healthy utility end markets across most regions, Evoqua synergies, and price capture will drive strong growth in the year. However, as expected, we will see headwinds from 80/20 actions as we simplify Water Infrastructure's offerings, and we do expect weakness in China's utility market. In Applied Water, we expect modest growth of low single digits. We see growth across developed markets, particularly in the U.S., with large projects coming online and a general recovery in their end markets. Growth will be offset in Applied Water as well by 80/20 actions as we exit unprofitable businesses. WSS growth is expected to be mid-single digits, driven by strength in outsourced water projects and solid demand in dewatering. This segment is supported by a $1 billion backlog and strong funnel activity across all of their businesses. Now let's turn to Slide 8 for our full year 2025 and Q1 guidance. The growth outlook by segment translates to full year revenue of $8.6 billion to $8.7 billion, resulting in revenue growth of 0% to 2% and organic revenue growth of 3% to 4%. This is on the low end of our long-term framework due to the 80/20 actions we are taking across our segments. There will be a larger impact in early phases of implementation. EBITDA margin is expected to be 21.3% to 21.8%. This represents 70 basis points to 120 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation in our investments in the business. We will also benefit from our simplification efforts, which helped to mitigate mix pressure from MCS. This yields an EPS range of $4.50 to $4.70, up 8% at the midpoint over the prior year. FX will be a meaningful headwind in the year, and excluding those impacts, EPS growth would be double digits at the midpoint. As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework. However, cash flow will be impacted in 2025 by our recently announced restructuring actions that may drop us slightly below our long-term goals. Drilling down in the first quarter, we anticipate revenue growth will be in the 0% to 2% range on a reported basis and 1% to 2% organically. We expect first quarter EBITDA margin to be approximately 19.5% to 20%, up 30 to 80 basis points, driven by higher volumes, price realization, and productivity gains as well as impacts from our simplification efforts. We do want to note that MCS EBITDA margin will be down year-over-year, driven by the energy and water mix we highlighted earlier, but will be up sequentially from Q4. This yields first quarter EPS of $0.93 to $0.98. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and benefits from our simplification efforts. While we also continue to monitor broader market conditions and volatility, including potential new or additional tariffs and fluctuations in FX. Regarding tariffs, we are ready to take additional price actions as needed to offset any increases and take cost actions to mitigate the impact on our margins. Overall, our expectations for the year remain positive as we build on our strong momentum. With that, please turn to Slide 9, and I'll turn the call back over to Matthew for closing comments.

Thanks, Bill. We spend a lot more time looking forward than back, but the full year results do offer a moment for reflection and appreciation. We had a smooth leadership transition coming into 2024, and then we spent the year digging in and frankly, getting a lot more done. The results tell a great story, but not the whole story. What we've accomplished in just one year is a huge credit to our colleagues around the world. They delivered for our customers, at the same time, doing the difficult work of deep change. I really appreciate how the team has leaned in and embraced our transformation as an energizing challenge. Earlier, I spoke about simplification and taking complexity out of our structure. That work on structure goes hand-in-hand with refining our operating model more broadly, sharpening our high-impact culture, streamlining our processes and systems, and optimizing our portfolio with targeted capital deployment. At the same time, we've amplified our commitments on sustainability, raising the bar again with our 2030 sustainability targets. And in 2024 alone, the team responded to more than 40 water-related disasters, serving communities in times of crisis from India to Spain, to the Carolinas to Brazil. Together, the team is transforming Xylem to be better positioned to fulfill our purpose, to empower our customers and communities to build a more water-secure world. In 2025, our transformation initiatives will improve our profitability, further optimize our portfolio, and make it easier for customers to do business with Xylem. We know this kind of transformation takes time and may not happen in a straight line, but we've made a great start, we have an outstanding team, the right strategy and privileged positions in attractive markets. Building on the progress we made in 2024, we're looking ahead to a strong 2025 in delivering on our long-term commitment to profitable growth and sustainable value creation. With that, operator, I'll turn the call back over to you for questions.

The first question today comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Maybe we can start with the restructuring announcement. Just based upon your Analyst Day last year, you knew that this was a next step coming. It would be helpful if you could provide more color on the plan. Is it all SG&A? It seems like it's headcount; what's the mix between North America, outside of North America, and maybe some payback expectations?

Yes, I'll start this off, and I'll let Bill get into some of those details in terms of timing and geography and things of that nature. But I just want to say these actions, however necessary, mean that valuable colleagues are leaving Xylem, and we don't take that lightly. We're going to ensure a smooth transition and that colleagues are treated respectfully and fairly. So I want to start there. To your point, Deane, the plan is consistent with our '24 Investor Day in May, really about taking complexity out of our business, which includes not only simplifying our structure but really implementing 80/20. It's a little bit of both in terms of the 8-K filing, the structure, and the bottoms-up work we've done from the initial 80/20 work. We are focused on reducing that complexity, making it easier for our colleagues to do their jobs, but also making it easier for our customers to do business with us. And we've already seen here in the back half of '24 and as we enter '25, the organization is moving much faster. They're definitely more focused, and we have much more end-to-end accountability. Maybe one other point I would call out is this is in service of growth. At the same time, we're doing this work, it allows us to redeploy our resources and efforts across the business to focus on customers. In many cases, through 80/20, we have been moving some of our B customers to channel partners that can better serve them and be more efficient. The majority of the workforce reductions are expected to be complete in 2025, with some of them moving into 2026, subject to local laws. But maybe I'll pause there and let Bill give you a little bit more color on some of the numbers.

Yes. And just to level set everyone, for those who didn't see it, as we highlighted in our 8-K last week, we expect to incur total pretax charges of approximately $95 million to $115 million. We incurred some initial costs in Q4, but the bulk of the remaining expense will be realized in 2025 and early '26. We expect to realize about $130 million of net benefits from the program over the next two years, with about $75 million of the benefit coming in 2025. Timing of the benefits will be more back half weighted as we work through the labor negotiations and different processes around the globe, as Matthew mentioned. I think of it as kind of 30% first half, 70% second half. Again, these actions are going to impact all of our segments and corporate functions, with Water Infrastructure and Applied Water having the two largest impacts in Europe, probably the most impacted region. The plan impacts a little bit less than 10% of our workforce and is mostly concentrated in SG&A.

Great. I appreciate all those details. That's a big help. And then the second question unrelated, just given the administration change, there's some anxiety about potential rollbacks of PFAS. We saw a halt of industrial PFAS testing. Just what's your expectation here? I realize PFAS is not in your framework. That was made very clear at your Analyst Day. But just the understanding of what might be done differently from the industrial side versus the drinking water side? I'd love to hear your thoughts.

Yes, Deane, to your point, I'll just echo, we didn't have any PFAS regulatory impact in our guidance or in the long-range plan for municipal or industrial. The industrial is the one that was still kind of a draft rule. That specific draft rule, which I think you mentioned recently in a note, was dropped with the Trump executive order to pause all regulations. It was aimed largely at the chemical industry and really designed to set an affluent limitation or guideline for PFAS chemical manufacturers. This has no impact on the drinking water regulation when that rule went final last year. A comment I would make is that Lee Eldon recently stated in his confirmation testimony for EPA Head of EPA that he would be an advocate for PFAS cleanup. So it will be kind of a wait and see when it comes to the industrial side, but we don't see any rollback of the municipal side. I think that the Trump administration was, as a lot of people know, the ones that initially started the PFAS regulation for municipal drinking water in the first term. So in general, we're still bullish on PFAS. We know that the timing is going to push out. But states have taken action of their own, specifically in Georgia, which recently set standards for industrial affluent. It will be a little bit of a tailwind from a state-by-state basis. But from a federal perspective, the industrial side will probably push out, but the municipal side is still tracking.

The next question comes from Mike Halloran with Baird. Please go ahead.

Good morning, everyone. So first on the MCS side, maybe just talk through how you think about the margin progression through the year? I know you said sequentially improved through the year. What are we thinking for an exit rate or an approximate exit rate, all else equal, once mix normalizes and given all the restructuring things you're doing? And then on a related basis, maybe just talk through what you expect to see in the end markets through the year that give you confidence in that high single-digit margin? Because I know some of it's backlog, but I have to imagine some of it is what your customers are saying, front-log stuff like that, too.

Yes. Maybe I'll take the first shot. If we start just with the Q4 margin performance, I want to highlight again, that's really related to the mix shift between water and energy. There are a few small one-timers, but fundamentally, mix is the biggest driver of the year-over-year decline. We need to talk about the adjustment period over the next couple of quarters as we go from less water meter customer volume as they rephase their deployment schedules, continuing to work with our partners and customers to get home access and labor scheduling nailed down. We've said that with one to two quarters. It's probably closer to three quarters, inclusive of Q4. This is going to shift that balance of sale towards the energy meters we saw in Q4 and expect that through the first half of the year. From a full-year perspective, MCS margins were phenomenal; they were up 370 basis points last year. Some of those core elements will continue to be captured strong price. The teams are continuing to drive solid productivity. With the restructuring actions, they're going to get some benefit, while mix is probably the only outlier relative to our short-term margin expansion journey. We said, I think Q4 is probably the bottom. That should sequentially improve through the year as mix normalizes, and some of the impacts from the restructuring start to take hold. For the full year, we will see expanded margins. The first half will see a little bit of contraction, but then we'll see significant expansion in the back half, with net-net 2025 exiting at a higher rate than 2024.

And then the second part of the question was just help me get to the high single-digit organic guide, and what that means from a customer perspective?

Yes. Overall demand is still healthy. The team has a very strong pipeline. We've won a couple of verbal awards that we haven't just received in the backlog yet. Really, Europe is the only place we've seen some softness. The fundamentals across the majority of the business are still solid. We're quite a long way to go in the AMI adoption curve. The short-term noise is just along this project rephasing. Just to remind everyone, the North American water business over the last two years has grown 30% per year, which is absolutely phenomenal relative to our peer set in that market. For next year, the energy meters relative to the refresh that they're going through will grow at a significant rate, close to 40%. It's the refresh cycle, and we've had a couple of projects in backlog that we have full visibility to with defined ship dates. On the water side, relative to the backlog phasing that we have and in-line of sight customer projects that we've won have yet to just get into our backlog, we're pretty confident in the ramp that we'll see there in the back half. On the water meter side, kind of low single digits, and energy being the significant driver of growth.

The next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning, everyone. I wanted to go back and follow up on some of Deane's questions on the restructuring. I think you said $75 million that you'll realize in benefits in 2025, which is about 90 basis points of margin expansion and kind of accounts for all of the margin expansion you're expecting at the midpoint of the guidance for 2025. You do get some organic growth; there should be some simplification benefits; there should be some pricing and other productivity benefits. Maybe you can just help fill in the gaps there on what the headwinds are that doesn't actually have margins up a little bit more with the benefit of this restructuring?

Yes. The simple walk, Nate, here is, if we look at roughly the midpoint of 100 basis points, our productivity and price are more than offsetting all of our material and labor inflation as well as our continued investments in the business, giving us about 50 basis points of expansion with that group. To your point, we get the benefit of our restructuring actions and the balance of the Evoqua synergies gives us about another 125 basis points of favorability. So about 175 basis points there. But then the biggest piece in the math is really the negative mix within MCS, which puts about 75 basis points of pressure, again, due to the energy and water mix shift, netting out to the 100 basis points.

That's helpful. And I guess then you're still pretty early in the 80/20 rollout. I wouldn't imagine that this restructuring program gets you to the end state that you're looking for. Are you able to comment on the potential to see opportunities to do some more restructuring in '26 or '27 or whenever you get through this and start looking at the next round?

Yes. I would say that the announcement in the 8-K does roll into 2026. So some of that's baked into that initial announcement in the 8-K. I would just maybe highlight that part of this 8-K was focused on our operating structure, and part of it was 80/20. It was really driven by the first wave of 80/20, with predominantly focus on our legacy Xylem business with a lot more focus on Applied Water and Water Infrastructure, and a little bit on MCS. We didn't get through the entire segment. We talked about having about 40% of the business kind of exiting '24 fully through the tool. Through the first quarter of this year, we will have about 70% of the business. There will be more opportunities as we continue to optimize the portfolio and customer line simplification. This is a journey. We talked about transformation. It's developing a transformative mindset in the business, which means you're never done optimizing. For sure, there will be more things that we look at over time.

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning, everyone. Matter, Bill, can you give a little more color into the bookings environment that you're seeing and maybe some of the cyclical headwinds emerging markets and/or in Applied Water that you've seen and when they might turn? Orders up 7% obviously seemed solid in Q4. Would you expect that kind of order trend into '25? It looks like you're predicting a modest turn in Applied Water. Can you talk about visibility into that?

Yes. I think orders in the fourth quarter overall for all of our segments was extremely strong. We continue to be pleased with the commercial momentum we have across all of our businesses. Specific to Applied Water, they'll be back to growth in 2025. We do see momentum across the developed markets, particularly in the U.S. They continue to have some larger project wins that we realized through 2024, a lot of those will be coming online. A general recovery is expected across many of their end markets after a fairly challenging year. Growth will be offset a little by some of our 80/20 actions exiting unprofitable businesses, as we focus on simplifying their product portfolio and geographic presence. To your point, they have seen some challenges in emerging markets, which is more about leveraging our technology and specific applications to win in those markets. Bottom line performance for them in 2025 will be really strong.

Very helpful. And then it appears Xylem passed on some large water assets that were available for a while, but you do have a very strong balance sheet. So how are you thinking about M&A right now versus other methods of deployment, such as repurchases? How should we think about ultimately what happens here? You talked about your majority ownership in Idrica. What does that mean for you moving forward?

Yes. Thanks, Andy. First, I just want to say how proud I am of the team's execution on the integration of Evoqua. I don't want to skip over that. It was a big transaction, and we've delivered 18 months early on our cost synergies. We built a lot of muscle, and that muscle has translated well into our operating model transformation. We formed a transformation management office, largely for some of that team that did local integration in Xylem. As we laid out in Investor Day, we want to be more consistent deployers of capital and help move us to the mid-teens EPS over the long-range plan. We want to optimize the portfolio, whether through divestitures or exits across business lines through 80/20 that are underperforming or no longer fit. One thing I'd highlight is that we put in place a very strong acquisition committee process, and it's much stronger on a bottoms-up process to drive consistency and help us gain momentum. We want to deploy capital obviously to our core. Secondly, we want to achieve accretive M&A and do opportunistic share buybacks if needed. We want to be consistent deployers of capital, and hopefully you're starting to see this as we exit 2024. To your earlier point, we're going to remain disciplined and be aligned to our strategy and the value mapping work we completed last year. Regarding Idrica, we signed and closed that in Q4 and moved our ownership to majority so we could more deeply integrate and rationalize the R&D investments of that joint venture with the legacy Xylem business. We have a lot of confidence in the platform and its ability to solve many of our customers' biggest pain points, which is managing their data in application management. So, I think that's a really good fit for us and there's good momentum in that acquisition.

The next question comes from Scott Davis with Melius Research. Please go ahead.

Hey, good morning, everyone. I may have missed it, but is it reasonable to estimate that the 80/20 headwind is around two points? Does that sound about right? If you mentioned it, I apologize for not catching it.

No, no, we didn't. It's a little less than two points. I just did a tour of North American factories a couple of weeks ago. The two biggest things I focus on are quality and on-time performance. If you do those things right and you have a great product with a fair price, you're going to win. We've made improvements in on-time performance. It's only going to get better through 80/20 because that will help us simplify our factories and create better flow and execution. We've already started to see it happen. We don't really get into quoting our on-time delivery, but I would just say that over the course of 2024, we made a 500-basis-point improvement. We have about 500 to 700 basis points more to go to hit our kind of what I would call our entitlement or where we think best in class is. If I look at our road map and our KPIs, we will come close to that this year. So, we're keenly focused on that metric.

The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey guys, good morning. Thanks for taking the questions. I guess one on the free cash flow. I know you're talking about this being a little bit of a softer year. If I back into it, I mean, you've given us conversion targets in the past, I think this year implies around maybe 70% to 80%. So one, is that kind of a fair range to be thinking about? And two, what are some of the biggest factors here in '25 that you have visibility and confidence around will revert back in 2026? Is the target for 2026 to be back to that 100% or higher free cash flow conversion?

Yes. Again, a little bit in the prepared remarks, the largest negative factor is the cost of the restructuring program weighing on overall cash flows. We highlighted that we've got some larger build on operates that are going to aid our top line and bottom line, but some upfront capital associated with them will impact. Lastly, as we continue to improve our systems across the organization, some incremental investments to support that activity. Those are the three biggest things with the restructuring being $80 million out of that.

All right. Fair enough. I know you also mentioned in the prepared remarks that you're not factoring in any tariff impacts that you're not expecting anything at the moment. Just to level set us, none of the dust has settled here, obviously, but as we think about your potential exposures, can you sort of walk us through some of your key kind of geos where you do have either supply chain or procurement exposure to some of the regions that are being talked about in terms of being potentially impacted by tariffs?

Yes, I'll start this off and turn it over to Bill to get into some of the numbers. We don't believe that tariffs will have a material impact on our full year results for 2025. Our teams were ready and sprang into action to help offset tariff increases. We were out with our China increase. We had to pull back on a couple of others that we thought were going out yesterday, and we were quick to take action. We have taken action with regard to China and mobilizing our supply chain where possible to take advantage of secondary sources. We have spent a lot of time over the past two to three years diversifying our supply chain, especially as we look at Asia. It’s important to make sure that we're buttoned up on discretionary costs to mitigate any impact. So our teams are ready and we've taken some action regarding the China tariff. We'll continue to monitor the situation over the next 30 days and see what comes of Canada and Mexico, and obviously monitor our customers and our channel partners to understand how this may or may not impact their order patterns.

If we look at the proposed tariffs for Canada and for Mexico and the enacted for China, they impact about 5% of our material cost as a percentage of sales. The Canadian tariff impact is really negligible. To Matthew's point, the team has done a phenomenal job post-COVID of lessening our dependency on supply from China, and the supply chain there is really just for in-country production. The Mexico tariff is the 80 for us and primarily impacts MCS and Applied Water. Again, both segments are taking the appropriate actions to mitigate the impact on our customers and on our bottom line. We're well positioned. It’s obviously a very fluid situation, so we’re keeping a close eye on it and taking any and every action necessary to mitigate the impact.

The next question comes from Andrew Buscaglia with BNP. Please go ahead.

Hey, good morning, guys. I just wanted to check on your Water Solutions. It's been a really good quarter. I'm just curious what the trends are in that segment. I know that can be pretty lumpy, but what do you see going into the first portion of the year? And then you had a couple of months to digest President Trump and his new EPA pick. Obviously, treatment can be influenced by some policy there. Could you just talk about specifically what you guys think of this new administration and how it pertains to Water Solutions?

Sure. I'll start with Water Solutions. The fourth quarter was quite different from the third quarter. Projects that our customers were unsure about accelerated much quicker than we expected. We anticipated this could happen, but we considered it unlikely enough that we didn’t include it in our expectations for the quarter. We're noticing an uptick in demand for our outsourced water solutions, which creates some variability in Water Solutions' performance due to the revenue linked to the system build-out before we see ongoing revenue. We expect next year to be another solid year for Water Solutions as they continue to take advantage of synergies within the combined portfolio. Dewatering had a very strong performance in 2024, and we anticipate that will carry on into next year. There is a robust pipeline for outsourced water projects, and we foresee some significant wins later in the year. We are enthusiastic about this segment, which has only been active for a year, and the integration is yielding strong, consistent results.

So maybe I'll just start by saying we operate in a sector where there's, from my perspective, strong bipartisan consensus regarding the need for safe, clean, affordable water services. On a number of issues, we see strong support on both sides of the aisle. We anticipate that water infrastructure funding will likely remain at kind of the historical norms. We do checks with several utilities in the U.S., confirming continued OpEx and CapEx spending increases into 2025 to improve a significant aging infrastructure in the U.S. We'll stay close to our government affairs team; myself and some other key leaders will stay close to the incoming administration as they take their new positions, and we'll just keep a close eye on them. We've had great relationships with regard to Lee Eldon, as I mentioned earlier on Deane's question, that water remains a key priority for him and the administration. He did talk about PFAS and the need to make that a top priority. Net-net, we're pretty positive on the new administration's focus on water and we'll continue to drive those relationships to understand it.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.