Xylem Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• The team delivered strong performance in Q2 with broad-based organic revenue growth led by measurement and control solutions. Adjusted EBITDA margin reached a quarterly record of 21.8%, up 100 basis points year-over-year, and adjusted EPS grew mid-teens. Demand for products and solutions remains resilient with a solid order pace, including double-digit growth in smart metering.
• Simplification efforts are driving measurable improvements in productivity and customer responsiveness, with margin expansion and more efficient customer service. The transformation of the operating model across culture, processes and structure has had significant positive impact.
• The company has made targeted acquisitions in advanced treatment, such as Vacom and Envirex, to enhance the portfolio for growth. The integration of Evoqua is progressing well with cost synergies ahead of schedule and traction on revenue synergies.

Segment Performance

• Measurement and Control Solutions: Demand for AMI solutions remains robust with orders growing 12% organically. Revenue was up 10%, and adjusted EBITDA margin was 23.1%, down 30 basis points year-over-year, driven by inflation and mix but offset by productivity, higher volumes and price.
• Water Infrastructure: Demand remained strong across most regions and end markets. Book-to-bill was above 1 despite orders declining by 2% against tough comps. Revenue grew 4%, and adjusted EBITDA margin expanded 200 basis points to 21.8% driven by productivity and price, partially offset by inflation.
• Applied Water: Orders rose for the sixth straight quarter, up 4% with strength in commercial buildings. Revenue increased 5%, and adjusted EBITDA margin expanded 420 basis points to 21.7% driven by productivity and price, partially offset by inflation, including tariffs.
• Water Solutions & Services: Orders increased 5%, led by services for utility and power end markets. Revenue grew 5%, and adjusted EBITDA margin expanded 60 basis points to 24.4% reflecting strong execution on price and productivity, divestitures and revenue synergies, partially offset by inflation

Guidance

• Raised full year guidance for revenue and EPS. Now expects full year revenue of $8.9 billion to $9 billion, representing 4% to 5% total growth and approximately 4% organic growth. Adjusted EBITDA margin is unchanged at 21.3% to 21.8%. Adjusted EPS guide is raised to $4.70 to $4.85, up from $4.50 to $4.70. Free cash flow margin remains at 9% to 10%.
• For Q3, expects revenue of $2.2 billion with 4% to 5% organic growth. Adjusted EBITDA margin is expected to be 21.7% to 22.2% and adjusted EPS is expected to be $1.20 to $1.25.

Risks

• Tariff uncertainty, inflation and speculation about the impact of trade policy on demand. Macro uncertainty, particularly around tariffs and FX movements that could impact performance.

Question and Answer

Q: On the MCS order side, outlook, customer forward perspective, and when book-to-bill can track towards 1?

A: Demand across the board has been resilient. WI had delays in the U.K. and Canada which are expected to snap back in the second half. MCS continues to work down its backlog and expects to be back to book-to-bill positive as we close the year.

Q: Update on simplification in Applied Water and next steps?

A: Applied Water team has done well with 80/20, focusing on growth. The simplification is tracking ahead of the timeline, with teams more focused and customer metrics improving. All segments are actively engaged in the 80/20 tool set.

Q: Implications of acquisitions Vacom and Envirex?

A: Vacom brings proprietary solutions in zero liquid discharge for attractive industrial verticals. Envirex enhances the advanced treatment portfolio with nonmechanical mixing and biological process solutions. These are strong return deals with significant synergies.