Xylem Inc 2026 Q3 Earnings Call

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Good morning, everyone, and welcome to Xylem's third quarter 2026 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Andrea van der Berg. They will provide their perspectives on Xylem's third quarter results and discuss the fourth 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 our website. A replay of today's call will be available until midnight November 10, 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 our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be made 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, Greg, and good morning, everyone. Thank you for joining us. Before I begin, I'd like to welcome Andrea to her role as CFO of Xylem. Her deep knowledge of our business provides important continuity as we continue to execute our strategy. The third quarter reflected a mixed operating environment. Demand for Water Infrastructure and technology remains strong, which was evident in our order performance during the quarter. Across the markets we serve, the long-term drivers of water investment remain firmly in place. Near-term conditions were more challenging, with revenue coming in below our expectations as certain projects moved more slowly than anticipated and utility customer spending decisions took longer to materialize amid a more cautious and deliberate spending environment. While those near-term factors affected revenue, our healthy order performance and solid earnings results reflect the greater resilience we've built into Xylem.

Through the operational excellence and portfolio actions we've been driving, we're better positioned to navigate short-term variability while staying focused on long-term growth and value creation. Today, we're taking another step in focusing Xylem on growth. This morning, we're announcing our intent to divest Applied Water International and Specialty Flow Control, which is our beverage and marine business, while also moving from four segments to three beginning in 2027. These actions are rooted in a simple objective: continue applying our 80/20 principles to sharpen Xylem's focus around the businesses and end markets with the strongest growth and margin potential. The assets we intend to divest are non-core to our long-term strategy or operate in markets that are less aligned with where we see the greatest opportunities for growth.

We believe exiting these businesses strengthens the portfolio and increases our ability to invest in higher growth, higher margin markets that are shaping Xylem's future. At the same time, moving to three segments reflects the company we're becoming. The four-segment structure served us well as we integrated Evoqua and executed the first phase of our transformation. However, the new structure better aligns the company around how customers move water, treat water, and measure and optimize water systems. It enables us to accelerate value creation, capture synergies across the portfolio, and operate with greater speed and accountability. Together, these actions reflect our determination to proactively advance our transformation plan and position Xylem to accelerate growth while continuing to expand margins over time. Most importantly, we're rotating our exposure to higher growth, higher margin opportunities.

Over the last few years, we've deliberately reshaped our portfolio towards markets with stronger underlying growth, more attractive economics, and compelling long-term demand drivers. Businesses like Cornell Pump, Roper Pump, WaterFleet, and TriOS have historically grown at rates above our target growth rate, and their additions expand our presence in attractive high-growth industrial verticals. As we continue rotating the portfolio, proceeds from divestitures and other capital sources will provide additional capacity to execute against our capital allocation priorities and help to further increase our exposure to these higher growth, higher margin markets. We're already seeing tangible evidence of that momentum. Amazon provides a strong example. What began with digital water replenishment efforts through Xylem Vue in Mexico is now being commercialized globally. More recently, treatment solutions for data center infrastructure projects at scale. Today, the relationship engages multiple parts of our portfolio and demonstrates the value of our differentiated platform.

Recently, we secured a significant win with a new customer and one of the world's leading semiconductor manufacturers, providing advanced ultra-pure water treatment technology for a critical U.S. fabrication facility. This breakthrough win demonstrates our competitiveness in the high-growth microelectronics sector. These are the types of opportunities that validate our strategy and reinforce our confidence in where we are headed. The long-term demand drivers for water remain intact. Our portfolio is becoming more focused. Our exposure to higher growth end markets continues to increase. The actions we are announcing today position Xylem to accelerate organic growth while creating additional opportunities for margin expansion and value creation in the years ahead. With that, let me turn the call over to Andrea to discuss the quarter in more detail.

Thanks, Matthew. Please turn to slide 5. As Matthew mentioned, revenue results fell short of our expectations, largely due to lower MCS book and ship volume and timing of WSS capital projects. However, the strength of our operating model enabled us to deliver earnings in line with our guide. Despite some near-term volatility, overall demand remains healthy. Orders were strong, up 10% versus prior year, driven by water and gas metering strength in MCS and data center orders in AW. Our ending backlog grew 13% to $5.5 billion versus prior year, sequentially up roughly $200 million, and our book-to-bill for the quarter was above one. Revenue was roughly flat to last year on an organic basis, largely driven by lower MCS metering, WI treatment, and WSS. Together, these more than offset continued strength in North America transport and data center execution.

Through productivity improvements and price, we more than offset the impact of inflation, lower sales volumes, and mix to deliver earnings in line with our guidance. The team's operational execution delivered quarterly EBITDA margin of 23.9%, up 70 basis points versus the prior year. We also grew EPS 5% compared to last year to $1.44, excluding any benefit from IEEPA tariff refunds. Year-to-date free cash flow was $444 million, slightly below last year, mainly because of working capital and investments in outsourced water contracts. We expect working capital improvements in the fourth quarter. Net debt to adjusted EBITDA increased to 1.1 times, driven by our opportunistic share repurchases in the quarter. Let's turn to slide 6. Across the segments, the common theme was healthy underlying demand with different revenue conversion dynamics by business.

For Measurement and Control Solutions, demand remains healthy, supported by strong customer engagement, a book-to-bill of 1.16, and backlog of approximately $1.3 billion. Orders increased 30% in the quarter, driven by large water and gas metering awards, with deployments largely scheduled for the second half of 2027 and into 2028. While these orders reinforce our confidence in the long-term growth outlook, we are seeing greater caution in shorter cycle demand. The affordability pressures that have weighed on electric metering are now extending into water metering purchases. Although these purchases are generally funded through utility operating budgets, replacement timing is more discretionary than mission-critical repair and maintenance activity in Water Infrastructure. As utilities continue to manage inflation, interest rates, and affordability concerns, some customers have slowed the pace of these purchases. We continue to believe the issue is pace rather than demand.

Customers remain committed to these investments and our strong value proposition, but are progressing more deliberately than prior periods. Revenue was down 5% on a tough compare with 11% growth last year, driven by softness in electric metering and analytics. EBITDA margin of 24.5% was 270 basis points higher than the prior year, driven by favorable productivity, price, and the divestiture of International Metrology, partially offset by inflation, volume, and mix. In Water Infrastructure, orders were down 1% in the quarter, driven by delays in treatment order intake and continued China headwinds, partly offset by strength in transport orders in Americas, where OPEX-funded demand remains healthy. Revenue was down 1%, as growth in transport was more than offset by lower treatment revenue, reflecting 80/20 walkaway actions and China headwinds.