Xylem Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Strong revenue growth in all segments with double-digit growth in Measurement and Control Solutions and Water Solutions and Services.
• Record quarterly EBITDA margin north of 23%, expanding 200 basis points year-over-year and 23% EPS growth.
• 80/20 implementations driving margin improvement and focusing resources on high-value opportunities.
• Operating model transformation enhancing decision-making, accountability, and customer service, with new on-time performance benchmarks set.
• Divested international metering business to concentrate on North American meter market with competitive differentiation.
• Partnership with Amazon to deploy Xylem's Vue advanced analytics in Mexico City, saving over 1 billion liters of water annually.

Segment Performance

• Measurement and Control Solutions: Orders grew 11% organically with strength in water and energy metering. Revenue up 11%, EBITDA margin 21.8% (up 60 basis points year-over-year). The international metering business, generating ~$250 million in 2024 with <10% adjusted EBITDA margin, was sold for $125 million, expected to close in early 2026, driving a 100 basis point margin improvement in the segment on a run rate basis.
• Water Infrastructure: Demand strong across most regions and end markets. Orders down 2% vs tough comps, but revenue grew 5%. EBITDA margin expanded 400 basis points to 24.4%.
• Applied Water: Orders growth in the quarter, revenue up 1%. EBITDA margin expanded 310 basis points to 21.7%.
• Water Solutions and Services: Orders down 11% vs tough comps, but revenue grew 10%. EBITDA margin expanded 160 basis points to 26.3%.

Guidance

• Raised full year revenue to ~$9 billion (5-6% total growth, 4-5% organic), EBITDA margin to 22-22.3% (up 140-170 basis points), and EPS to $5.03-$5.08.
• Free cash flow margin expected to be 9-10%.
• Fourth quarter expected revenue ~$2.4 billion with 2-3% organic growth, EBITDA margin ~23%, and EPS $1.37-$1.42.

Risks

• Macro uncertainty, including tariffs and FX movements.
• China market softness impacting certain segments.
• Competitiveness challenges in specific market segments, as seen with the divestiture of the international metering business to address margin and focus issues.

Question and Answer

Q: Andy Kaplowitz asked about EBITDA margin improvement and future outlook.

A: Matthew Pine mentioned they're ahead of schedule on margin targets, with potential upside to long-term targets, focusing on 2025 commitments and calibrating 2026, with Phase 2 focusing on enterprise account management and innovation.

Q: Deane Dray inquired about the 80/20 implementation phase.

A: Matthew Pine stated 80% of the business is in some phase of implementation, with continued progress in culture, processes, and structure, and plans for further divestitures to simplify the business.

Q: Scott Davis asked about the definition of 'structure' in operating model transformation.

A: Matthew Pine explained it involved moving from a matricized structure to a segment-oriented structure with discrete divisions for better accountability and faster decision-making.

Q: Nathan Jones questioned MCS margin expansion and 2026 outlook.

A: William Grogan noted margin expansion was impacted by energy-water mix, but expected margins to improve as mix normalizes and 80/20 efforts continue.

Q: William Grippin asked about M&A spending.

A: William Grogan stated it was primarily related to the international metering divestiture.

Q: Andrew Buscaglia asked about MCS margins vs peers and China market management.

A: William Grogan said core water business margins are above peers, and Matthew Pine discussed rightsizing the business in China by restructuring and reallocating resources.