Good day, everyone, and welcome to Xylem's fourth quarter 2025 results conference call.

All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then 1 on your telephone keypads. To withdraw your questions, you may press star and 2. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Keith Buechner, Vice President, Investor Relations, and FP&A. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Xylem's fourth quarter 2025 earnings call. With me today are Chief Executive Officer Matthew Pine and Chief Financial Officer Bill Grogan. They will provide their perspective on Xilum's fourth quarter and full year 2025 results and discuss the first quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website. A replay of today's call will be available until midnight, February 24th, and will be available for playback via the investor section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Zyland'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. Now, please turn to slide four, and I will turn the call over to our CEO, Matthew Pine. Thank you, Keith.

Good morning, everyone, and thank you for joining us. The team delivered an outstanding fourth quarter to close a record year for Xylem. We delivered strong Q4 performance across all major metrics. The team executed with discipline across the portfolio, both in the quarter and full year. The record results demonstrate the impact of our operating model transformation, which represents phase one of our plan to deliver Xylem's long-term framework. That first phase has been about transforming Xylem's operating model, our high-impact culture, a simpler, scalable structure, and improvements in our business processes and cornerstone systems. We've simplified Xylem, increasing speed and accountability. The numbers we've posted this morning reflect the ground we've already taken, and there's more to come in 2026. In parallel, we're entering Phase 2, strengthening our growth engine by leveraging improvements in our operating model, focusing on Salesforce effectiveness, product management, and innovation. Phase 3 will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation, and deepening exposure to the most attractive future water markets. We're tracking to the framework we laid out almost two years ago, and we have plenty of runway ahead. As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower quality revenue. That creates a short-term top-line headwind as we've communicated previously, but it drives higher quality earnings. Looking ahead to 2026, we see resilient demand in our largest end markets, strong backlog conversion, and continued traction from our transformation efforts. I'll leave the detailed guidance to Bill, but at a high level, we will build on our commercial and operational momentum, growing the top line and expanding margins again in 2026. With that, Bill will take you through the quarter and full year and also our 2026 outlook in more detail. Bill?

Thanks, Matthew. Please turn to slide five. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year, delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year. Demand remains positive, with our backlog finishing at $4.6 billion. Our book to bill was near one, both in the quarter and for the full year. Orders were healthy, up 7% in the quarter, driven by over 20% growth in MCS. And for the year, orders were up 2%. Revenue grew 4% in the quarter, despite a challenging comparison of 7% growth in the same period last year. Full-year revenue growth was solid at 5%. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors. The team's operational discipline delivered quarterly EBITDA margin of 23.2%, up 220 basis points versus the prior year. The improvement was driven by productivity and price more than offsetting inflation. Full-year EBITDA margin expanded 160 basis points to 22.2%, driven by the same factors. We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape, with net debt to adjusted EBITDA of 0.2 times. Year-to-day free cash flow decreased by 2% from the prior year, in line with expectations, driven by outsourced water projects, system investments, and restructuring costs, offset by higher net income. Let's turn to slide six. In measurement and control solutions, we continue to convert the backlog, with MCS's backlog finishing the year at roughly $1.4 billion. Orders were up a robust 22%, driven by smart metering demand across water and energy. However, this was below our expectations with several projects pushing out into 2026. Revenue was up 10%, driven by energy metering demand, but supported by high single-digit gains in water as well, which offset softness in analytics related to timing effects caused by the government shutdown. EBITDA margin of 20.2% was 310 basis points higher than prior year, driven by productivity, price, and volume more than offsetting mix and inflation. In water infrastructure, orders were down 1% in the quarter, with softness and treatment primarily in China, mostly offset by strong demand in transport. Revenue was flat, with strong double-digit growth in the U.S., offset by an almost 30% decline in China. EBITDA margin for water infrastructure was up a remarkable 510 basis points, driven by productivity, price, and mix, offset by inflation, volume, and investments. In applied water, orders were up 5% and book-to-bill was roughly one, lifted by large projects and data center wins in the U.S. Revenues were up 3% versus the prior year, primarily driven by strength in U.S. commercial buildings. Segment EBITDA margin increased 60 basis points year over year, driven by productivity and price, offset by inflation, volume, and mix. With some of these items being non-recurring in nature, we expect applied water to be back in the 20% EBITDA range in the first quarter. Finally, water solutions and services saw robust demand with orders increasing 7% driven by strength and services. Revenue growth was strong, up 4% against a tough comp, with strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year, driven by price, volume, and productivity, offset by inflation and mix. Now let's turn to slide seven for our 2026 segment outlook. Heading into 2026, our markets remain positive and our teams are delivering on our commitment to simplify xylem, focus on our customers, and drive profitable growth. We are providing full-year organic revenue outlook for the segments and want to highlight that we are accelerating our 80-20 efforts around product and customer simplification. As a result, we will have an outsized headwind to our top line for the year of roughly 2%, doubling the impact we experienced in 2025. We expect this is a one-year elevation, and we are still committed to delivering on our long-term framework. In MCS, we expect growth in the mid-single digits. Overall, demand is positive and our pipeline remains strong, but project timing has been more variable and less predictable than we have experienced over the last few years. Our expectation is energy meters will drive a majority of the growth in 2026, and water meters will grow low single digits as expected orders from the fourth quarter pushed out into the first half of 26. We will also have an impact from our 80-20 actions, primarily on analytics, impacting overall segment growth for the year the first quarter will be challenged down low single digits we expect to see sequential revenue improvement throughout the year as project kickoffs accelerate in the back half of the year also as a reminder we expect to close on the divestiture of the international metering business at the end of the first quarter in water infrastructure we expect low single-digit growth. We anticipate resilient OPEX and CAPEX demand due to the mission-critical nature of our applications, with healthy utility end markets across most regions. However, we will see headwinds from 80-20 actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market, primarily impacting the first half of the year. In applied water, we expect growth in the low single digits. We see growth across developed markets, particularly in the U.S., with large projects coming online and strong growth in data centers. Similar to the story in water infrastructure, growth will be offset in applied water by 80-20 actions, exiting unprofitable business and a weak China market impacting the first half of the year. WSS will deliver mid-single-digit growth, driven by strength in outsourced water projects and solid demand in dewatering, though we expect this will continue to be a more variable segment quarter-to-quarter due to the project nature of our capital offerings. The segment is supported by a $1.4 billion backlog and a strong funnel across all businesses. Now let's turn to slide A for our full year and Q1 guidance for 2026. The growth outlook by segment translates into 2026 full-year revenue of $9.1 to $9.2 billion, resulting in revenue growth of 1 to 3 percent and organic revenue growth of 2 to 4 percent. Again, this is on the low end of our long-term framework due to the 80-20 actions we are taking across our segments, but continuing to increase the quality of our earnings and simplifying our businesses to outperform our markets for the long term. EBITDA margin is expected to be 22.9 to 23.3 percent. This represents 70 to 110 basis points of expansion versus the prior year driven by productivity volume and price offsetting inflation with productivity continuing to benefit from our simplification efforts this yields an EPS range of five dollars and thirty five cents to five dollars and sixty cents of eight percent at the midpoint over the prior year as a reminder we are committed to load double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026. Drilling down on the first quarter, we anticipate reported revenue growth will be in the 1 to 2 percent range on a reported basis and flat organically. We expect first quarter EBITDA margin to be approximately 20.5 percent to 21 percent, up 25 basis points at the midpoint, driven by productivity gains and impacts from our simplification efforts offset by mix. This yields first quarter EPS of $1.06 to $1.11. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning, the durability of our portfolio, and further benefits from simplification. Though we are monitoring broader market conditions and volatility, including tariffs.

Overall, our expectations for the year remain positive as we build on are strong results with that please turn to slide 9 and I'll turn the call back over to Matthew for closing comments thanks Bill before we open for questions let me close with a broader lens Xilin participated in the World Economic Forum annual meeting at Davos for the first time this year the headlines were all about AI and geopolitics but water emerged as a significant underlying theme more than a dozen sessions frame water is foundational to economic growth energy systems and geopolitical stability that aligns directly with the research we released last month watering the new economy which makes a simple point is AI accelerates growth and power generation data centers and microelectronics water strategy becomes business strategy these sectors are wrestling with availability reliability and efficiency they need reuse at scale dramatic reductions in network leaks and adaptive infrastructure that automatically optimizes performance and that's where xylem is uniquely positioned covering the full water value chain with practical solutions that breadth differentiates us at a time when customers are looking for credible scalable partners as we pivot further into growth we'll keep building capability where we have structural advantage mission critical utility and industrial applications where reliability compliance and lifecycle costs matter most digital platforms that help customers optimize network performance and make resilience affordable advanced treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities in services that turn our technology and installed base into dependable high value outcomes for customers and durable revenues for xylem we're already doing this work at scale helping cities and industries recover water they already have reuse what they once discarded and run their assets more efficiently we're helping Los Angeles produce 508 million gallons of recycled water per day with plans to deliver 260 million gallons more smaller communities like Hot Springs Arkansas are reducing water losses by 50 percent or more with far less digging costs on the industrial side still effects a menu a microelectronics manufacturer is reusing 80 percent of its process water with a xylem ultra pure water system one of our aerospace customers is now avoiding more than 30 million dollars in wastewater disposal costs with zero liquid discharge technology reusing more than 66 million gallons of water annually all of these examples are responses to intensifying water trends driving sustained demand for the solutions we provide across the water value chain we are confident in the strength of our team and our platform to capitalize on that demand and to deliver sustainable high quality growth over the long term with that we'll open the call for your questions.

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

Thank you. Good morning, everyone.

Hey, good morning, Dean.

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

Yeah, so first, we've got a lot of work to do in front of us. I'll start there. But, you know, if we look back over the past few years, the results have really exceeded expectations from my perspective. Maybe just even starting firstly with not long ago, we were talking about the integration of a vocal enxylem. And we've built a great deal of muscle in terms of M&A and integration. and we really enhanced our combined culture along the way, and we delivered synergies 18 months early. So I give the team a lot of credit there, starting with that integration. And, you know, at the same time, we've made significant progress in our operational model transformation, which is really about, you know, really our culture, our high-impact culture, improving our processes and systems and our structure. And maybe I'll just maybe point to a few proof points on the progress that we've made. You know, the first, in significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day. And in essence, an engagement rating in your employee survey is, would you recommend Xylem as a great place to work? Almost 90% of our top 150 leaders said they would. And overall, company was 74. When you're going through a significant transformation, I think that's a really good, outstanding result. and the industrial sector average is around 37%. And so I think it just speaks to the resilience of our team and the culture that we're creating. You know, another good measure that I talk about a lot is on-time performance in terms of how we're, you know, really moving our operating model forward. And we've gained 500 basis points of on-time performance, you know, delivering products to customers more effectively over the past couple of years. And structurally, we've really improved moving from a highly matrix structure to a more, you know, four segments, 16 divisions, a single axis, reducing our spans and layers. And we reduced our, we had several micro teams, I think 1,500 micro teams. We reduced that by 40%. So that's folks that have four or less direct reports. And so we've really improved our structure, our culture, our processes, and our systems along the way. Okay. You know, maybe I would just, you know, like I said in the prepared remarks, we've taken a lot of ground on what I would call phase one. It's not over. We have more work to do, but we're starting to transition into what I would call phase two, which is really about leveraging that simplicity that we've created to focus the speed and accountability to really build a growth engine in the company.

And that's, you know, focused on a few areas I would highlight at a high level.

One is our sales force effectiveness. We need our sales teams, you know, 75%, 80% of the time facing the customer versus 40 or 50 or 60 doing back office work. We need to improve our product lifecycle management and innovation, really speed to customer value. So those are areas that as we pivot, we're going to be keenly focused on this year and building capabilities so we can leverage the simplicity and get back to growth. But I'm just I'm very proud of the team. I appreciate the question and really the resilience they've shown, not only with all the change that we had to deal with, but also, you know, the change that's been external to the company as we've dealt with over the past couple of years. So maybe I'll end it there. Thanks for the question.

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

Yeah, no, sure. But let me step back first and just talk about, you know, how 80-20 is really taking hold in the organization kind of two years into the transformation that Matthew highlighted. Each quarter we take another step in simplifying Xylem, you know, shifting from just leveraging 80-20 as a tool set to being a critical piece of how we run the company with a real focus on resource allocation, putting our best people and investments around their largest value-creating opportunities. We've got about 80% of the business in some phase of implementation right now with the capital and services piece of WSS, the only part of the company that fully launched, and they'll start at the end of this year after they get through their ERP upgrade. And the team continues to make solid progress leveraging the tool set. We started this year with redesigning the organization and putting P&L leaders in charge of the divisions so they can have a good perspective and drive a lot of this change. They looked at the cost that they needed to support the business and optimize that overhead to get our foundation as lean as possible to make sure that we're focused on simplifying this, that organizational construct. As for the 2% headwind, a lot of that comes with an evaluation of the product and customer portfolio, really understanding the geographies where you might be underperforming, putting in a commercial filter, getting the sales and engineering teams developed and leveraging that filter to make sure that we're not taking business that we shouldn't. We're looking at parts of the business where we have significant pass-through revenue that doesn't have significant margin. And all of those decisions take a little bit of time because you want to make sure you believe the inventory so you don't have an excess issue. You want to partner with your customers to make sure they're supported through the transition. So there's, you know, the cultural and adoption part of it that extends it, and then there's just the customer coordination, which really pushes it into 2026. So excited about the teams taking these actions, and ultimately I think it's going to free up our organizational and economical capacity to better support and facilitate our longer-term growth trajectory.

Thank you. Our next question comes from Scott Davis from Milius Research.

Please go ahead with your questions. hey good morning guys matthew and bill hey good morning um i wanted to follow up on that question because there's a there's a certain point where 80 20 goes from being a headwind to a tailwind um meaning that you're doing better with the customers that matter the most and perhaps gaining share and and such but when is that point uh you know it do you start to see some impacts like 2027, 2028? Or is it just too hard to say at this point now that you're kind of in the middle of it?

I would say that really 2026 is kind of an inflection point, Scott, for us. The operational transformation never ends, as you know. But we've taken enough ground where we started in the back half of 2025, and we're coming into 26 with a bit more momentum them around, I would say, building the growth engine and focusing on eight customers, what we call raving fans, and actually building out our enterprise selling organization. So all that is in flight. I think the big thing this year is about building Salesforce effectiveness and helping our sales organization get more oriented toward the customer the majority of the time, meaning today a lot of our sales teams are doing a lot of admin work, and they don't get in front of the customer, but maybe 30%, 40% of the time. And the goal over the first half of this year is to change that to, say, 75%, 80%. So I think we're building momentum, and I'd say we exit 2026 with a lot of, again, momentum around building the growth engine and starting to move towards growth and leveraging this simplicity that we've created.

Yeah, that makes sense. And, guys, I have to ask, your balance sheet is starting to look a little bit too good, And, you know, it looks like your stock might open up a little bit light today. I mean, what are you guys thinking as far as buyback and, you know, or do we want to keep the dry powder for M&A?

Yeah, maybe just, you know, just to, you know, highlight that our priorities continue to be, you know, investing in our core business, you know, followed by M&A dividends and then lastly share buyback. So, you know, I've said this on some other calls, that our acquisition process that we put in place a couple of years ago is really maturing nicely. It's much more bottoms up. We've got a very strong actionable funnel, you know, as an outcome of this process. And we deployed about $250 million of capital last year towards M&A in the second half of the year. And we have much more than that that's already in process for the first half of 26. So seeing good momentum there. And we'll continue to, you know, target around $1 billion a year of capital deployment towards M&A. You know, we won't not entertain a transformational deal, but it's not something we're focused on right now. It's more medium, small to medium bolt-ons. You know, with regard to your thoughts on share buybacks, you know, we'll continue to be opportunistic. But, you know, again, we're going to be more forward-leaning towards investing in the core in M&A. However, you know, at low leverage levels, you know, like we're seeing now, we're going to be much more active in buying back shares.

Gotcha. Thank you, guys. Best of luck. I'll pass it on.

Thank you.

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

Hey, morning, everyone. Morning. So with the backlog exiting the year in context, what it means for this year, and the phasing for the year is where the backlog exit rate was. Is that part of the 1Q softness? How do those sequentials work through the year? And then related, maybe just a little bit about the hesitancy on the project side and compare that to maybe what the customers are saying, the pipeline, you know, verbal orders, however you want to put it.

Yeah, maybe I'll touch first just on the backlog positioning, and Matthew can comment on the project side. So first off, right, obviously we've led backlog as we've progressed through this year, and the lower backlog directly impacts the 2026 cadence and revenue guide. First on MCS, we talked about them working down their backlog throughout the year, getting to a more normalized level. You know, we highlighted really strong orders in the fourth quarter, but we actually anticipated a few larger projects to book that pushed out in the first half, which puts a little bit of pressure on our ending backlog and then pressure on kind of our first and second quarter revenue. You know, we've talked China's been really weak, especially in treatment, which is a bigger backlog business for us. That probably put us at a lower backlog position. And then we talked about the walkaway revenue. Obviously, that's impacted orders, you know, first before it impacts revenue. So we've seen just a lower backlog associated with some of those actions, you know, as we progress through the back half of the last year. So I think we're in good shape to start the year. You know, we've talked about healthy commercial funnels for both MCS and WSS, our largest backlog businesses. is, you know, what we have line of sight to relative to commercial funnel. I think reasonable confidence in line of sight to improve progression as we go through the year.

And then maybe some thoughts on China.

You know, I know you've done a lot of work already because of the environment, but what are the steps you're taking from here given the softness, and how do you see that shaking out over the next couple years in terms of the commitment to the market, ability to manage that market given the local headwinds, both, you know, by local as well as softer end markets, and kind of what changes are you making?

Yeah. So I think consistent with the commentary we've provided for the last couple quarters, China remains a challenging market for us, both on the orders and revenue side. You know, it did accelerate that decline as we progressed to the back half. You know, Q4 orders were down almost 70%. You know, sales declined almost 30%. Part of that's just the reflecting of the economic headwinds impacting utility and commercial buildings and industrial markets, and primarily impacting us within water infrastructure and applied water. Right, local competition continues to drive intense price competition due to the capacity that they've built. But our teams are applying an 80-20 lens to focus on higher quality, more profitable opportunities, which is creating some of the top-line pressure, right? I mean, we're calling that within the China bucket, but you could probably put a little bit of that in the walkaway just as we're deliberately exiting some of that low margin, negative margin business within China. As we talked about last quarter, you know, China restructured its operations. You know, we reduced our headcount by over 40%, just to better align with that volume contraction. But, right, we're looking to reallocate the resources that are on the ground just around targeted opportunities where we think we have a technological advantage and we can provide some differentiation in certain applications where we can win and deliver stronger margin performance because of that differentiation. Ultimately, right, China is a very large economy. You know, we don't think there's going to be a material improvement here over the next year or two. But longer term, it's a place that we think that Xylem will be able to grow, get back to growth at a much higher margin profile.

Thanks. Appreciate it.

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

Good morning, everyone.

Hey, good morning, Andy.

No matter, Bill, so just maybe a little more color on what's going on in smart meters. You did have solid orders, but, Bill, you mentioned orders were still below what you expected. and I think peers have had even a harder time than you and water smart meters. So what are you seeing in the market between water and energy? Is your mid-single-digit revenue growth forecast for 26 contingent on converting some of these delayed projects to backlog in the first half? And does availability of memory chips impact the outlook at all?

Yeah, maybe I'll just maybe start at a high-level, Andy, then I'll let Bill get into a little bit of color. But, you know, I just want to, you know, tell everyone on the call, we remain very confident in MNCS to achieve high single digits long-term. you know, is a segment. The near-term outlook really reflects project timing and some of the backlog normalization coming out of COVID and walkaway revenue. So, it's not a change so much in underlying demand. The biggest area of walkaway in this segment is in analytics. It's one of the last divisions to go into the 80-20 tool, and they're in the process of shedding, you know, organic business right now. Although we do have a little bit of walk away and smart metering as well in 2026, and we've exited mechanical meters, and we've made a decision to be a bit more selective when we do the meter installation. A lot of times that comes at low margin or no margin pass-through, and is a drag on earnings and margins. So, you know, we've been a bit, you know, forward leaning into that. You know, bidding remains strong, and customers are still, you know, bordering and our win rates higher than it has been in the past. So I think in general, things are healthy. But, you know, maybe one other comment I would make is, again, going back to this post-COVID, the backlog helped to smooth and some of the unevenness that we typically get in this segment and it can have. So I do think, you know, we do expect a bit more variability in quarter to quarter going forward so you know maybe they'll maybe one other point I would make is you know I would highlight the xylent the xylent view business which doubled in 2025 we're expecting that digital business growth 30 plus in 2026 so as we exit this year that'll continue momentum and and help drive the top line of this segment as well and then Andy I think your question on the memory piece we don't see that as a material impact either from an availability or significant increase in inflation for us to have to pass on to customers.

Helpful, guys. And then, Bill, maybe a follow-up for you. You're going to 70 to 110 base points of margin improvement in 26. As you know, it basically takes you past your 23% and change adjusted EBITDA margin goal for 27 in 26. So where do you go from here? Are you going to have an investor day? Maybe you just set new targets? and maybe the entitlement of the business, you know, from when you started here? Is it mid-20s or higher? How do you think about that?

Yeah, I'll take it, Andy. I think from my perspective, you know, we're already outlining an investor day for 2027. We'll update strategy and targets at that point. It's probably sometime in the spring of next year. You know, we have some work ahead of us to deliver this year, and we don't want to get too far out over our skis. But, you know, as a reminder, we laid out, you know, the LRP, the long-range plan, our last investor day in May of 24, that we, to your point, that we would move from 20 percent, which was the forecast of 2024, margins to 23 by the end of 27. So, we're guiding, you know, this year just over 23 percent at the midpoint. So, we're tracking ahead, and there's likely upside to our long-term targets as we exit 27. You know, we've made a lot of great progress. And, you know, I give the team a tremendous amount of credit, as I said with Dean's question at the beginning, a lot of change, and we've been able to execute. So I think, you know, Andy, about just over a year from now, we'll be in a better position to update the framework and talk about margins.

Appreciate that. Thank you.

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

Good morning, everyone. Hey, good morning, Nathan. i'll start with um a follow-up on the mcs orders uh and the smart smart meter projects that have pushed out maybe a little bit more color on what the cause of those pushing out are if you have any insights there degree of confidence that those things kind of come through in the first half in order to support the outlook um for improved growth in the second half yeah and i think there's There's several projects, and all of them have a little bit different reasons for pushing out.

There's not a common thread around it. Some of them are just relative to where they're at with several other projects going on, so they want to push out a couple months. Some of them have reshaped the scope of the project relative to just increased inflation they've seen from tariffs and other inflation creeping up over time. And so it's, you know, for us, it's a handful of things that we're intimately involved with the customers. We understand kind of their project plans and some of the hesitancy, and we're working with them to shape an implementation that works with them economically and then still, you know, has an ability for us to drive kind of incremental revenue this year. So I think we have reasonable visibility. You know, again, this isn't 50 different projects. It's, you know, kind of five to ten that we're working with the end customer. that we have confidence in based upon our guide and our revenue progression for MCS through the year that we'll be able to deliver on.

Okay, thanks for that. I guess next question on divestitures, you guys have talked about, you know, up to 10% of revenue being, you know, a potential candidate for divestiture.

Anything we should, you know, expect action on that in 2026 and if you could provide the EPS impact from the divestiture of the international water made a business that would be helpful as well thanks yep yeah I think we talked about Nate we were evaluating about 10% of the portfolio you know last year we exited a business in the first quarter that was about one percent you know international metrology is about another percent there's probably two or three assets that, you know, uh, maybe another couple of percent. So I don't think we're going to hit the 10% number, um, you know, that, that we were looking at, but obviously portfolio evaluation, you know, something that we do on a recurring basis, you know, as businesses, um, shift strategy, or they want to double down in certain parts of the business, maybe an area becomes less important. So, um, I think it's an ongoing activity with, um, I don't think anything significant outside of international metrology for this year and then the EPS impact for international metrology is fairly small for the year we talked about you know it's a 250 million dollar business at less than 10% EBITDA margin will close it at the end of the third quarter excuse me at the end of the first quarter so you kind of get three quarters So it's, you know, two or three pennies. Taking the questions.

Thank you.

Our next question comes from Joseph Giordano from TD Cowan. Please go ahead with your question.

Good morning, guys. This is Michael on for Joe. So, yeah, in the last call, you mentioned there was a path to higher margins for the energy meter side at MCNS. And, you know, since it's, you know, mixed negative versus water meters, can you just unpack that glide path higher? and, you know, what's the status of the 10s formation. Thank you.

And your question specifically around just the improvement on the energy meter margin?

Yeah, I believe in the last call you mentioned there was a path higher for energy meters on the margin side. So we'd just love to better understand where we are in that cycle.

Oh, yeah. I think there's a couple things. One, there's some structural changes on the energy side from an engineering and a technology perspective that are going to level up, you know, value-add, value-engineering projects that will lift the margin profile. We did highlight there's a couple projects that are legacy within energy that they're working through their backlog that, you know, put pressure on margins in 2025. That will continue into the first half, first three quarters of 2026. So you'll see a margin progression with MCS down slightly overall in the first quarter and then sequentially build. It's a pretty robust margin as it exits the fourth quarter with the water meter balance being back to more legacy rates and then some of the progress on the energy margin improvement taking hold.

Thanks for that, caller. And then orders for the year ended pretty strongly. you know the organic guide kind of implies a ramp to the back half can you just unpack you know organic expectations um you kind of mentioned this a little bit at the beginning of the call but by segment for for q1 just want to understand it came in a little bit lighter than probably most were expecting yep uh would appreciate the call thank you yeah i think the the biggest variable is probably mcs they'll be down kind of a point or two in the first quarter relative to probably the external expectations WSS we talked about just the lumpiness of that business they'll be kind of flattish with water infrastructure applied

water a little bit below their full year guide just with some of the first half pressure that they have from China thanks guys thank you and our next question comes from William Gripen from Barclays please go ahead with your question.

Good morning. Thanks very much. Just the first one here, I did want to ask about the 4Q operating margin step down across Applied Water MCS and WSS. Is there seasonality inherent in this business?

And then maybe how should we think about that, I guess, in relation to the ongoing tailwinds of 80-20 execution? yeah and um i would say really for for wss it's more of a mix of business between quarters so nothing structural there within applied water obviously q4 was a bit of a blip relative to their performance that they experienced through the first half of the year really reflected just some negative project mix and a little bit of execution timing and some one-time items yeah these are our transitional factors and we expect even the margins we back up in the 20 range in the first quarter and then sequentially improve throughout the year with volume increases and their productivity initiatives ramping up. So yeah, more of a short term than anything structural. Applied water, I think, gets back to some pretty robust margin expansion in 2026.

Got it. And then wanted to ask also about the recent report you folks published in partnership with GWI on water demand management for data centers. I would just be curious to hear sort of your thoughts on what surprised you from that report and perhaps where you think the biggest opportunities for Xylem are to accelerate its growth might come from.

Yeah, thanks for the question. You know, when I was at Davos, you know, 2026 was deemed kind of the year of artificial intelligence. You know, there were a lot of talk of pilot projects now scaling into productivity solutions. And, you know, that's why a lot of the AI build-out is racing ahead. Actually, Gartner had a recent prediction that 2026 hyperscalers would invest over $2 trillion in new data centers. But, you know, I think one big thing from the report that was pointed out, that there's two big constraints to that $2 trillion of investment, and that's energy and water. Up until now, energy's gotten the majority of the attention, and I think water is starting to finally be brought up in the discussion. So, you know, the reason we commissioned the report is we have a pretty good view of the whole water value chain, and we were trying to figure it out ourselves. What is the impact of this new economy and the broader AI ecosystem on the water sector? So we couldn't really find any good data, so we partnered with Global Water Intelligence and commissioned the report, and we kicked it off at Davos. But maybe the first eye-opening stat I would point to is the demand is soaring, and it's really not so much that this new economy is more water-incentive to, say, some of the first or second industrial revolutions around textiles or steel mills or pulp and paper. It's really more about where the data centers and chip fabs are located is the biggest issue. But the AI ecosystem, which is data centers, it excludes mining, but data centers, power, and semiconductors, will need about 30 trillion liters of water each year by 2050. That's a 130% increase in water demand. And kind of frame it for everybody on the call, that's one late need a year in the western part of the U.S., or it's 12 million Olympic swimming pools. So it's a significant amount of water. the interesting finding was the data centers that the actual direct use is not really the culprit it's only four percent of the water that's needed the other ninety six percent is power and chip fabrication which is probably actually power driven but chip fab is set to grow by you know roughly six hundred percent so that was probably one of the biggest takeaways I think the second and I don't like to be chicken little I want to the second point is we can solve the problem and we have the technology and solutions to manage the demand today and quite frankly offset the 30 trillion extra liters that we need and that's largely through water reuse and I talked about in my opening remarks what we're doing in Los Angeles with reuse water there to help chart recharge their occupors, and also leak mitigation. These are not hard things to do. I mean, they're hard to implement. They're not hard things to do, though. And, you know, over almost 30% of water that's generated today, fresh water to send out to businesses, industry, and residents is what gets leaked into the ground. And we have, you know, solutions to solve those problems, like the project we talked about last call with with Amazon but maybe one example I'll leave you with as I wrap this up is in Arizona we were out there a few years ago Intel in the city of Chandler have partnered together so we need much more private public private partnerships 90% of the reject water that they generate so when you when you have to provide ultra pure water in chip fabrication your reject water is very high to get to that purity. So all that reject water, Intel invested capital in OpEx to build a recycling plant that they handed over to the city to run and manage. And 96% of that water is being reused. So we need more of that at scale to solve the problem. So again, the solutions there is just about getting the stakeholders at the table early in the data center planning where we talk mostly about energy. We've got to talk about water. So thanks for the question. And maybe I think the second part of your question I'll answer. For us, it really, inside the four walls of the data center, yes, we do some business, but it's really outside the four walls, and it's largely in our WSS segment around mining, around power generation, and around chip fabrication is where you're going to see the growth within Xylem.

I appreciate it. Thanks very much. Thank you.

And, ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Matthew Pine for any closing remarks.

Thanks for your questions. We'll wrap it up there and thank everyone who joined today. And as always, we appreciate your interest in Xylem. All the very best.

And with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.