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    XYL
    Earnings call· Mar 2025(Q1 FY25)

    Xylem Inc. XYL

    Apr 29, 2025 Source

    Executive summary

    Xylem Q1 FY25 — Strong Start Exceeds Expectations, Reaffirms Full-Year Guidance

    Xylem delivered a strong Q1 FY25, exceeding revenue and EPS expectations, driven by broad-based segment growth and significant margin expansion from productivity and simplification efforts. The company reaffirmed its full-year guidance, confident in its ability to manage evolving tariff dynamics through pricing actions and supply chain adjustments, despite anticipating some demand softening in the second half. Strategic initiatives like the Evoqua integration and operating model simplification are yielding tangible benefits, positioning Xylem for continued agility and long-term growth.

    Highlights

    5

    • Q1 revenue grew across all segments, exceeding expectations with a 3% increase.

    • EBITDA margin expanded by 120 basis points to 20.4%.

    • Diluted EPS increased by 14% to $1.03, surpassing the midpoint of guidance by $0.08.

    • Book-to-bill remained above 1, indicating healthy demand.

    • Net debt to adjusted EBITDA stood at a strong 0.5x.

    Concerns

    5

    • Orders were down slightly versus last year, driven by challenging comps in WSS and MCS.

    • MCS EBITDA margin was down 170 basis points YoY due to energy/water mix challenges.

    • Water Infrastructure orders saw double-digit declines in China due to economic challenges.

    • Water Solutions and Services orders decreased 5% due to a difficult prior-year comp.

    • Year-to-date free cash flow decreased by $53 million from the prior year.

    Guidance & targets

    12
    CategoryTargetConfidence
    Full-year 2025 Reported Revenue
    $8.7 billion to $8.8 billion
    high materiality
    High
    Full-year 2025 Organic Revenue Growth
    3% to 4%
    high materiality
    High
    Full-year 2025 EBITDA Margin
    21.3% to 21.8%
    high materiality
    High
    Full-year 2025 EPS
    $4.50 to $4.70
    high materiality
    High
    Full-year 2025 Free Cash Flow Margin
    9% to 10%
    medium materiality
    High
    Q2 2025 Reported Revenue Growth
    1% to 2%
    medium materiality
    High
    Q2 2025 Organic Revenue Growth
    2% to 3%
    medium materiality
    High
    Q2 2025 EBITDA Margin
    approximately 21% to 21.5%
    medium materiality
    High
    Q2 2025 EPS
    $1.12 to $1.16
    medium materiality
    High
    MCS EBITDA Margin
    improve sequentially from Q2 and return to expansion in the second half
    medium materiality
    Medium
    Full-year MCS Margins
    expand year-over-year
    medium materiality
    High
    MCS Book-to-bill
    positive in the back half of the year
    medium materiality
    Medium

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Measurement & Control Solutions
    Revenue growth driven by energy, offset by water delivery calibration. Orders down due to difficult comps in smart metering, partially offset by analytics growth. EBITDA margin impacted by energy/water mix challenges, expected to be low mark for the year in Q2.
    Orders: down 8% YoYBacklog: $1.8 billionEBITDA Margin: down 170 bps YoYEnergy growth: 40%+ this year
    		up 6%6%—21%
    Water Infrastructure
    Orders led by strong demand in treatment, offsetting declines in China. Revenue growth driven by strong treatment and transport demand across most regions. EBITDA margin significantly improved due to productivity and price offsetting inflation and mix, with traction from 80/20 efforts.
    Orders: up 1% YoYChina orders: double-digit declines
    		up 5%5%—up 290 bps
    Applied Water
    Orders driven by strength in Building Solutions. Revenue primarily driven by Building Solutions, partially offset by 80/20 walkaway impacts. Segment EBITDA margin improvement was a company best for the quarter, driven by productivity, price, and mix offsetting higher inflation and lower volumes. Simplification efforts are taking hold.
    Orders: up 3% YoY (fifth straight quarter)Book-to-bill: well above 1
    		up 1%1%—up 300 bps
    Water Solutions and Services
    Robust demand with book-to-bill well over 1. Orders decreased due to lapping a difficult comp (large order in prior year). Revenue growth from strength in services, offset by weather impacts in the Southeastern U.S. Segment EBITDA margins impacted by mix and lower volume, partially offset by productivity and positive price/cost.
    Orders: down 5% YoYBook-to-bill: well over 1EBITDA Margin: down 60 bps YoY
    		up 1%1%—21.7%

    Operational metrics

    10
    EBITDA margin
    20.4%up 120 bps YoY
    Q1 FY25

    Driven by productivity, simplification impacts, and price offsetting inflation and mix.

    EPS
    $1.0314% increase YoY
    Q1 FY25

    Surpassed midpoint of guidance by $0.08.

    Net debt to adjusted EBITDA
    0.5x
    Q1 FY25

    Balance sheet remains in great shape.

    Tariff cost impact (Mexico)
    $30 million
    Full-year 2025

    Net increased cost from tariffs on Mexico. 75% of goods imported are covered by USMCA exemption.

    Tariff cost impact (overall COGS)
    4%
    Q1 FY25

    Roughly 4% of COGS is impacted by tariffs.

    Pricing actions (tariff mitigation)
    2/3 price increase, 1/3 surcharge
    Q1/Q2 FY25

    Mix of strategies to offset tariff costs, implemented in Q1 and early Q2.

    80/20 walkaway impact
    >1%headwind
    FY25

    Headwind to revenue from reducing complexity and walking away from less strategic business.

    Evoqua cost synergies
    delivered faster than planned
    Q1 FY25

    Integration progressing well, now focusing on revenue synergies.

    Headcount reduction
    2,000 colleagues
    through summer

    Part of organizational realignment, with majority of actions wrapping up this summer.

    Smart metering (energy) growth
    40%+
    FY25

    Significantly strong growth in the energy part of smart metering.

    Industry KPIs

    3
    MetricValueDetails
    Tariff cost impact$30 millionUSD
    Parts aftermarket businessresilience
    Incremental margin operating leverage120 bpsbps

    Orderbook & backlog

    4
    Total backlog$5.1 billionQ1 FY25 end
    Book-to-bill ratioabove 1Q1 FY25
    Measurement & Control Solutions backlog$1.8 billionQ1 FY25 end

    down slightly from prior quarter

    Company continues to convert backlog.

    Water Solutions and Services backlogup 6% or 7%Q1 FY25 end

    up 6% or 7% YoY

    Significant backlog built, excluding a tough prior-year comp.

    Product announcements

    1
    ProductTypeDetails
    Vacomlaunch

    Deals & partnerships

    2
    VacomAcquisition of a technology company specializing in zero liquid discharge solutions.

    Closed in recent weeks, adding proprietary breakthrough solutions to Xylem's treatment portfolio.

    VariousOptimization of portfolio through divestiture of non-accretive assets.

    One divestiture completed in Q1, with a few other assets in the portfolio being considered for divestment as they no longer fit or are not accretive to the business.

    Risks & headwinds

    7
    Tariff scheme changes and demand softeningQ2 FY25, H2 FY25

    Potential for new or additional tariffs; anticipated demand falloff in H2 FY25 due to tariff-related pricing.

    Mitigation: Incremental pricing, supply chain actions, strong Q1 performance, FX tailwinds, nimble operating model.

    InflationFY25

    Higher inflation impacting costs.

    Mitigation: Productivity, price realization, and simplification efforts.

    Fluctuations in currency and interest ratesFY25

    Unquantified impact.

    Mitigation: Monitoring broader market conditions.

    Challenging comps for ordersQ1 FY25

    Orders down slightly YoY due to difficult comps in WSS and MCS.

    Mitigation: Healthy bidding and funnel activity, strong backlog, expected H2 improvement for MCS.

    China economic challengesQ1 FY25

    Water Infrastructure orders down double-digits in China.

    Mitigation: Diversified regional demand offsetting China weakness.

    MCS energy/water mix challengesH1 FY25

    MCS EBITDA margin down 170 bps YoY in Q1; Q2 expected to be low mark for the year.

    Mitigation: Core productivity, material efficiencies, expected sequential improvement and H2 expansion.

    Project delaysQ1 FY25

    Few project delays, mostly on the industrial treatment side.

    Mitigation: Accounted for in typical hedging against capital project delays.

    What to watch in Q2 FY25

    5

    MCS EBITDA margin trajectory

    Q2 FY25 / H2 FY25
    Current21% (down 170 bps YoY in Q1)
    TargetSequential improvement from Q2, return to expansion in H2

    Why it matters

    MCS margins are a key focus due to current mix challenges; improvement is critical for full-year segment and company profitability.

    Second quarter MCS EBITDA margin will be down significantly year-over-year, driven again by the energy and water mix. It will be the low mark for the year. But we will -- we expect it to improve sequentially from there and return to expansion in the second half.

    Q&A highlights

    8

    Did Xylem or its customers preposition inventory in Q1 ahead of new tariffs, and did this affect demand?

    Xylem did not observe any significant customer pull-forward of orders in Q1 to get ahead of tariffs, nor did the company preposition its own inventory. A small impact was noted in Applied Water's commercial business, but generally, no material front-loading occurred.

    “In terms of kind of front-loading orders ahead of tariffs, we didn't see any increase in Q1 to get ahead of tariffs. We pulled the teams actually in our business reviews in April, and we did see a small impacted area in Applied Water in our commercial business. But in general, we really haven't seen anybody do any pull-ins to get ahead of the tariffs.”

    asked by Deane Dray · answered by Matthew Pine

    2 min read5 chapters

    Detailed Narrative

    01

    Q1 Performance Exceeds Expectations

    Xylem reported a strong start to the year, with Q1 results exceeding expectations. Revenue grew 3% organically across all segments, driven by outperformance in Measurement & Control Solutions (MCS). The company achieved 120 basis points of EBITDA margin expansion, reaching 20.4%, and delivered a 14% increase in EPS to $1.03. This performance was attributed to operational discipline, productivity gains, and simplification efforts, with price increases more than offsetting inflation and mix challenges.

    02

    Tariff Management and Full-Year Reaffirmation

    Despite evolving tariff schemes, Xylem reaffirmed its full-year 2025 guidance for revenue and EPS. The company assumes current tariff levels will remain in place and expects to offset costs through incremental pricing and supply chain actions. While some demand softening is anticipated in the second half due to tariff-related pricing, management is confident that Q1's strong start and FX tailwinds will buffer any negative impacts. The company's tariff exposure from China imports is down significantly, and 75% of Mexico imports are covered by USMCA exemptions.

    03

    Operating Model Simplification and Evoqua Integration

    Xylem's operating model simplification, initiated at last year's Investor Day, is progressing ahead of schedule. This includes implementing a high-impact culture, driving 80/20 principles, and simplifying the organizational structure, with the majority of actions completing by summer. These efforts have already led to increased productivity, reflected in margin expansion over the last five quarters, and improved customer focus and responsiveness. The integration of Evoqua has also delivered cost synergies faster than planned, with momentum now building on revenue synergies.

    04

    Capital Deployment and M&A Strategy

    The company maintains a disciplined capital deployment strategy, prioritizing investment in the core business and M&A to achieve its mid-teens EPS long-range plan. Xylem is actively pursuing M&A opportunities, focusing on capabilities in advanced treatment, intelligent solutions, and services, and has a robust pipeline. In Q1, Xylem closed on the acquisition of Vacom, a technology company specializing in zero liquid discharge solutions. Concurrently, the company is optimizing its portfolio through divestitures, having completed one in Q1 and planning others for non-accretive assets.

    05

    Segment-Specific Dynamics

    Measurement & Control Solutions (MCS) revenue grew 6%, but orders were down 8% due to tough comps, and EBITDA margin declined 170 bps due to energy/water mix challenges, which are expected to bottom in Q2. Water Infrastructure revenue increased 5%, with EBITDA margin up 290 bps, despite double-digit order declines in China. Applied Water saw 1% revenue growth and 3% order growth (fifth consecutive quarter), achieving a company-best 300 bps EBITDA margin improvement. Water Solutions and Services revenue grew 1%, with orders down 5% against a difficult prior-year comparable.

    AI-generated summary of the company’s earnings call. Not investment advice.