자일럼(XYL) 2026년 3분기 실적 콘퍼런스 콜: 수주 잔고 13% 증가 속 가이던스 하향 조정

핵심 요약

• 자일렘(Xylem)의 2026년 3분기 자체 매출(organic revenue)은 계측 부문의 약세와 자본 프로젝트의 매출 전환 지연이 북미 운송 및 데이터 센터 분야의 강세를 상쇄하면서 전년 동기 대비 보합 수준을 기록했습니다.
• 수주는 10% 증가했으며, 기말 수주잔고는 55억 달러로 13% 늘어났고, 수주/매출 비율(book-to-bill)은 1을 초과했습니다. 경영진은 단기적인 실적 압박이 근본적인 수요 악화라기보다는 주로 시점상의 문제라고 설명했습니다.
• 조정 EBITDA 마진은 23.9%로 전년 동기 대비 70bp 확대되었습니다. IEEPA 관세 환급 혜택을 제외한 조정 EPS는 5% 증가한 1.44달러를 기록했습니다.
• 자일렘은 연간 매출 전망치를 약 89억 5,000만 달러로 하향 조정했습니다. 이는 보고 기준 약 1% 감소, 자체 매출 기준 보합 수준입니다. 조정 EPS 전망치도 5.40~5.45달러로 낮아졌습니다.
• 회사는 어플라이드 워터 인터내셔널과 스페셜티 플로우 컨트롤 사업부 매각을 추진하고 있습니다. 두 사업부는 전체 매출의 약 9%를 차지하지만 EBITDA 비중은 5% 미만에 불과합니다.
• 어플라이드 워터 부문의 데이터 센터 수주는 2분기 연속 200% 이상 성장했습니다. 경영진은 연말까지 런레이트(run-rate) 기준 데이터 센터 매출이 자일렘 전체 매출의 약 2%에 달할 것으로 예상하고 있습니다.

주요 재무 데이터

사업 및 운영 성과

계측 및 제어 솔루션(MCS)

대형 수도 및 가스 계측 수주에 힘입어 수주가 30% 증가했습니다. 수주/매출 비율은 1.16에 달했으며, 수주잔고는 약 13억 달러를 기록했습니다. 수도 계측 수주잔고는 전년 동기 대비 13% 증가했으며 전분기 대비로도 개선되었습니다.

전년 동기 11% 성장에 따른 역기저 효과로 매출은 5% 감소했습니다. 유틸리티 기업들은 인플레이션, 금리 상승 및 비용 부담 속에서 임의적인 계량기 교체에 대해 신중한 태도를 취했습니다. 수주한 대형 프로젝트 다수는 2027년 하반기부터 2028년 사이에 본격 도입될 예정입니다.

사업부 EBITDA 마진은 생산성 향상, 가격 인상 및 해외 도량형(Metrology) 사업 매각 효과에 힘입어 270bp 상승한 24.5%를 기록했습니다.

워터 인프라

수주와 매출은 각각 1% 감소했습니다. 수처리 부문은 프로젝트 지연, 80/20 사업 구조조정(walkaway actions) 및 중국 시장의 지속적인 역풍으로 타격을 입은 반면, 미주 지역의 운송 수요는 견조한 흐름을 유지했습니다.

생산성 개선과 가격 인상이 인플레이션, 물량 감소 및 투자 지출 부담을 상쇄하며 EBITDA 마진은 180bp 상승한 26.2%를 기록했습니다.

어플라이드 워터

수주는 15% 증가했으며 수주/매출 비율은 1을 상회했습니다. 데이터 센터 수주가 200% 이상 증가한 가운데, 데이터 센터를 포함한 미국 상업용 빌딩 시장의 강세에 힘입어 매출은 9% 성장했습니다.

인플레이션, 사업 믹스 변화 및 성장 투자 비용이 생산성, 물량 증가, 가격 인상의 이익을 상쇄하면서 EBITDA 마진은 40bp 하락했습니다.

워터 솔루션 및 서비스(WSS)

수주는 6% 증가했으며, 자일렘의 전분기 대비 수주잔고 증가액(약 2억 달러) 중 가장 큰 비중을 차지했습니다. 다만 주요 대형 자본 프로젝트의 진행 속도가 예상보다 더뎠고 전년 동기에 반영되었던 일회성 대형 프로젝트의 기저 효과로 인해 매출은 2% 감소했습니다.

인플레이션, 물량 감소 및 사업 믹스 악화 영향으로 EBITDA 마진은 140bp 하락한 24.9%를 기록했습니다. 경영진은 단기 및 중기적으로 WSS 사업부의 중한자리수(mid-single-digit) 성장을 계속 목표로 하고 있습니다.

포트폴리오 전략

자일렘은 어플라이드 워터 인터내셔널과 스페셜티 플로우 컨트롤 사업부를 매각하고, 2027년부터 보고 사업 부문을 4개에서 3개로 재편할 계획입니다. 경영진은 이번 재편을 통해 고객이 수자원 시스템을 이송, 처리, 계측 및 최적화하는 방식에 회사의 사업 구조를 더욱 긴밀히 맞추게 될 것이라고 밝혔습니다.

매각 예정인 두 사업부는 런레이트 기준 매출의 약 9%를 차지하지만 회사의 EBITDA 비중은 5% 미만입니다. 경영진은 이들 두 사업부가 자일렘의 전체 EBITDA 마진을 희석시키고 있다고 말했습니다. 또한 이번 매각으로 전체 매출 중 중국 노출도가 약 2%에서 1%로 줄어들 것으로 예상됩니다.

자일렘은 자체적 유기적 투자, 고성장 시장에서의 볼트온(bolt-on) 인수합병, 수익 성장에 부합하는 배당 확대, 그리고 기회주의적 자사주 매입을 우선순위로 둘 계획입니다. 코넬 로퍼(Cornell Roper) 인수는 2026년 4분기에 완료될 것으로 예상됩니다.

경영진 실적 전망(가이던스)

경영진은 4분기 MCS 매출이 전분기 대비 소폭 감소하고 2027년 상반기까지 3~4분기 수준을 유지할 것으로 예상합니다. WSS 부문은 자본 프로젝트 추진 시점 영향으로 종전의 한자리수 후반 성장에 못 미치는, 4분기 한자리수 초반의 성장률로 회복할 것으로 전망됩니다.

경영진은 2027년에 대해 어플라이드 워터, 데이터 센터 및 워터 인프라를 성장 가시성이 비교적 높은 분야로 꼽았습니다. 계측 수요와 대형 WSS 프로젝트의 추진 시점이 주요 변수로 남아 있습니다. 자일렘은 2월에 더욱 구체적인 2027년 실적 전망 가이드라인을 제공할 계획입니다.

리스크 및 주요 관전 포인트

• 유틸리티 기업의 비용 부담으로 인해 임의 성격의 수도 및 전기 계량기 구매가 둔화되고 있습니다.
• 대형 WSS 및 수처리 프로젝트는 사업 시점, 시공업체 수급, 인플레이션에 따른 사업 규모 재조정(rescoping) 및 조달 프로세스 등의 문제로 인해 매출 전환 속도가 더뎌지고 있습니다.
• 2027년 말 및 2028년 예정된 대형 계측 수주 건을 포함해 수주잔고의 상당 부분이 차기로 이월되어 배정되었습니다.
• 경영진은 80/20 사업 구조조정(walkaway actions)에 따른 매출 감소 영향이 2026년 고점인 2%에서 감소해, 2027년에는 50~100bp 수준의 역풍을 일으킬 것으로 예상하고 있습니다.
• 단기적인 데이터 센터 용량 확충 투자는 수익성이 회사 전체 수준으로 정상화되기 전까지 마진에 압박을 가할 수 있습니다.

애널리스트 Q&A 주요 내용

경영진은 강한 수주 성장과 완만한 매출 성장의 차이가 사업별 매출 전환 주기의 시차를 반영한 결과라고 설명했습니다. MCS 부문은 대형 프로젝트를 수주했으나 단기 사이클의 계량기 구매는 여전히 부진하며, 주요 프로젝트 중 다수는 2027년 말이나 2028년에야 비로소 실행될 예정입니다. WSS의 수요와 파이프라인 활동은 견조하게 유지되고 있으나, 대형 자본 프로젝트 특성상 분기별 실적 변동성이 불가피하다고 전했습니다.

지방자치단체의 지출과 관련해 매슈 파인(Matthew Pine) CEO는 신중한 지출 기조가 즉각적인 운영에 필수적이지 않은 구매 항목에 집중되어 있다고 말했습니다. 자일렘의 미국 유틸리티 자본지출(CAPEX) 노출도는 전체 매출의 10% 미만이며, 대부분의 유틸리티 관련 매출은 연기가 어려운 보수 및 교체 수요와 연계되어 있습니다.

현재 데이터 센터의 성장은 어플라이드 워터 사업부에 가장 직접적인 수혜를 주고 있으나, 경영진은 반도체 제조용 초순수 수처리 시스템에서의 기회도 강조했습니다. 또한 장기적인 관점에서 자일렘은 광범위한 AI 인프라 구축을 지원하기 위한 발전(power generation) 관련 용수 수요 확대를 기대하고 있습니다.

경영진은 계획된 3개 사업 부문 체제가 책임 경영을 강화하고, R&D 및 운영 시너지를 창출하며, 산업 고객 대상 사업 구조를 더 향상시킬 수 있을 것이라고 말했습니다. 또한 회사는 사업부 매각을 통해 매출 성장세와 마진 구조가 모두 개선될 것으로 기대하고 있습니다.

실적 발표 콘퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Welcome to Xylem's Third Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Gregory Giometti, Senior Vice President, Investor Relations and FP&A. Please go ahead.

Gregory Giometti

Thank you, operator. 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 perspective 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'll ask that you please keep to 1 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.

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 move 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 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 4 segments to 3 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 noncore 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 3 segments reflects the company we're becoming. The 4 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 Roper, WaterFleet and TriOS have historically grown at rates above our target growth rate and our additions to 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 view in Mexico is now being commercialized globally and 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.

And recently, we secured a significant win with a new customer and 1 of the world's leading semiconductor manufacturers, providing advanced ultrapure 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're 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, and the actions we're 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.

Andrea van Berg

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 strengths 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 1. 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 refund. 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 1.1x, 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 & 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 and 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 and 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 headwind, partly offset by strength in transport orders in the 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 in China headwinds. EBITDA margin for water infrastructure of 26.2% increased 180 basis points with productivity and price more than offsetting inflation, volume and investments.

In Applied Water, orders grew 15% and book-to-bill was above 1, lifted by data center wins and strength in Americas Commercial business. Data center orders in Q3 were again up over 200%. Revenue grew 9% versus the prior year, primarily driven by strength in U.S. commercial buildings, including data centers. EBITDA margin declined 40 basis points against the strong prior year quarter. as inflation, mix and growth investments more than offset productivity volume and price.

Our planned divestiture of Applied Water International and Specialty Flow Control will strengthen the financial profile and durability of island as these 2 businesses represent roughly 9% of Xylem revenue on a run rate basis. for less than 5% of company EBITDA and reduces our exposure from China from approximately 2% of Xylem revenue to 1%. This divestiture supports our continued strategic portfolio rotation towards margin-accretive high-growth industrial verticals.

In Water Solutions and Services, demand remains healthy. Orders increased 6% in the quarter, led by continued strength in capital. Funnel activity remains strong across capital and services. Revenue declined 2% year-over-year. certain large capital projects rent more slowly than anticipated, and we're comparing against the prior year quarter that grew double digits on onetime service and capital work. We view this as an issue of timing rather than demand. Segment EBITDA margin was 24.9%, down 140 basis points versus the prior year, driven by inflation, lower volume and mix, partially offset by price and productivity.

Now let's turn to Slide 7 for our updated full year and fourth quarter guidance. As we've discussed, underlying demand remains healthy as reflected in our orders and backlog in the near term, however, demand is converting to revenue more slowly than anticipated. The municipal markets, affordability pressures are leading some utilities to defer more discretionary purchases. We've stayed close with our utility customers and remain confident that federal funding is not a major factor. In industrial markets, demand is solid, with some large capital projects are ramping more slowly than we anticipated. As a result, more of our backlog is now scheduled to ship in later periods.

With that, we're lowering our full year revenue guidance to reflect lower revenue conversion in MCS and WSA. Based on our current visibility in both water and electric metering markets, MCS is expected to decline modestly on a sequential basis in the fourth quarter and stabilize at that level for the near term. In WSS we expect to return to low single-digit growth in the fourth quarter. The improvement from the third quarter, but below our prior expectations as large project timing continues to weigh on revenue. Full year reported revenue is now expected to be down roughly 1% year-over-year at $8.95 billion, with organic revenue roughly flat to last year versus prior guidance of 2% to 3% growth.

Despite the top line challenge, our disciplined execution is still expected to result in EBITDA margin of roughly 23.2% or 100 basis point expansion versus the prior year, driven by productivity and price more than offsetting inflation as well as investments for growth. As a result, we now expect full year EPS of $5.40 to $5.45 compared to $5.55 to $5.70 previously. The reduction reflects lower volume as we continue to hold margin and remains within our original EPS guidance for REC for the year. We now expect free cash flow margin of about 10.2% at the low end of our prior range, driven by higher interest costs from financing the Cornell and Roper acquisition and our opportunistic share repurchases.

Now drilling down on the fourth quarter. We anticipate revenue will be down roughly 5% on a reported basis and down 1% to 2% organically. We expect fourth quarter EBITDA margin to be roughly 24.5%, which is up 130 basis points driven by price realization and productivity gains. We expect these results to yield fourth quarter EPS of $1.39 to $1.44. While more of our backlog is now scheduled to ship in later periods, we exited the third quarter with strong demand indicators and remain confident in our competitive position.

With that, please turn to Slide 8, and I'll turn the call back over to Matthew for closing comments.

Matthew Pine

Thanks, Andrea. The long-term demand drivers for our business remain strong. Water challenges continue to intensify, infrastructure needs continue to grow, and customers remain focused on reliability, resilience and sustainability. While near-term spending decisions have become more cautious, our customers continue to tell us the same thing. The need to invest in water infrastructure, resilience and efficiency has not changed.

At the same time, Xylem is fundamentally a stronger company than it was just a few short years ago. We strengthened operations, sharpen the portfolio and build greater resilience across the business. The actions we're announcing today represent the next step in that journey. They further focused Xylem on the businesses, technologies and end markets where we see the strongest opportunities for growth and value creation. We remain confident in our strategy, confident in our positioning and confident in our ability to create long-term value as these opportunities continue to unfold.

With that, let's open up the call for your questions.

Operator

[Operator Instructions] The first question today comes from Mike Halloran with Baird.

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Michael Halloran

Welcome back, Andrea. So a couple of questions here. First, maybe help just drill in more with the dichotomy you're seeing between what was good order patterns, the more broad-based commentary of decent underlying strength with some of the air pockets you're seeing in the short term in terms of whether it's conversion timing or just some of the softness in the utility spend given some of the inflation and spend challenges. How does that play out as we work into next year?

Are we going to be seeing some softness emerge in the front half versus back half? When does this type of thing normalize as far as you're concerned? And just kind of any context on the contrast between those 2 points that you've been making?

Andrea van Berg

Thanks, Mike. As you mentioned, we had really strong orders in Q3, and that was primarily driven by MCS as well as data centers and Applied Water. Overall, though because of the timing that we're seeing on MCS orders, especially on the book-to-bill portion of the metering business, that tends to be more discretionary, although we won significant projects in Q3 that drove that orders growth. However, those projects are slated for the end of 2027 going into 2028. As well with WSS, we saw great demand. We had a strong funnel, 6% orders growth in WSS. And where we saw the sequential backlog growth in WSS was in WSS drove the biggest portion of that $200 million of sequential backlog growth. However, that WSS tends to be lumpier and some of those projects were booked either at the end of Q3, and we still have a strong funnel going into Q4. So in general, it's about timing of when those WSS capital projects support growth in going into next year.

I'll hand it over to Matthew to give a broader view of revenue going into 2027.

Matthew Pine

Thanks for the question, Mike. So yes, just elevating into thinking about '27 from a revenue perspective, I frame revenue into 2 buckets, the areas where we have strong visibility to growth. And I would say the other area is where timing is the main variable. On the growth side, we continue to see momentum in AI-related infrastructure and data center orders. But still, I'd say, relatively small, but growing quickly, supported by a stronger growth profile in Applied Water than we've historically described. So you can think about that in '27 as being Applied Water historically above where we've typically been. .

Also, we feel really good about water infrastructure. Transport remains very durable given the break-fix nature of the business. And in treatment, we're lapping much of the 80/20 headwind in China headwind from this year, and that really disproportionately affected 2026. The second bucket, as we think about 2027, where the watch item is and remains a variable is primarily in M&CS and WSS as Andrea was talking about in M&CS, we have strong order activity, projects are scheduled for the back half of '27 and into '28, but the shorter cycle water maturing business remains a little softer.

In WSS, the funnel and orders are strong. The pace of large project conversion will really determine the growth cadence. We have a nice step up from Q3 to Q4, and we expect that momentum to carry into '27 as we exit Q4 of this year. So in general, I'd say we like the underlying setup for '27, but we're going to give you a more precise framework when we provide guidance in February.

Michael Halloran

And then maybe just some thoughts on where you are in terms of the portfolio journey from here. Obviously, a couple of noncore divestitures, resegmentation actually makes a lot of sense. But let's break that into 2 buckets. One, how much more larger-scale divestiture opportunity do you see from here? And two, when you think about the more run rate E20 revenue work that you've done, the 2 points of headwind this year, how does that second bucket then translate on a forward basis? Are we towards the end of the journey on either of those 2 different buckets? Maybe just kind of help with the thought process from here? .

Matthew Pine

Yes. Maybe on the first, just at a high level, we continue to evaluate the portfolio to make sure it aligns with our long-term strategy and the needs of our customers. And I would say at the moment, we're focused on the divestitures we announced this morning around Applied Water and International, especially Flow Control. But it's something that we obviously look at pretty consistently. Obviously, we look at that with the Board, and we'll continue to do that as good hygiene.

In terms of 80/20, maybe I'll just elevate and talk about the broader transformation of Xylem first and then get a little bit more double click into the details. But 80/20 is really part of a broader transformation of Xylem. Phase 1 has really been about executing over the past 3.5 years on improving our operating model. And I've talked a lot about, that's very comprehensive. That's our culture, our processes, systems and structure. And maybe just a couple of things I'd like to point out that are, I think, really good testament to our success there is, I'll start with safety, because we always start with safety and quality. Our safety injury frequency rate is down 34%, very significant and approaching world-class. Our on-time performance is 700 basis points of improvement. Our days of inventory outstanding has improved by 22%. Our margins were up 600 and our SKU count is down 40%. So 80/20 is a part of a broader operating system, but it's not all that we do to execute on our transformation.

Now obviously, we'll continue to do that, but we're really focused on Phase 2 and 3 of our journey, and that's about building the growth engine of the company, and it's about optimizing our portfolio. And you can see that in the actions that we announced today. As far as 80/20 goes specifically, it's well embedded into the functions, the segments and divisions of our company now going into year 4. That's led centrally by Tom Pettit, our Chief Operations Officer. And we plan to be at our peak walk away this year at 2%. And into '27, we see this probably 50 to no more than 100 basis points of headwind. And obviously, we'll continue to see margin improvement from that.

Operator

The next question comes from Andy Kaplowitz with Citigroup.

Andrew Kaplowitz

Andrea, congrats on the role. Maybe just back to MCS and how to think about as you go into 27, I think, Andrew, you mentioned of MCS projects you burn later in '27 that's fine. But obviously, as you talked about, have a pretty big backlog. So if we break down water versus electric metering, any more color you can give on the respective end markets and when you might see that book and ships start to reaccelerate? Is some of this may be election uncertainty? Like how do you think about all that? .

Andrea van Berg

Yes. Thanks, Andy. So as we mentioned, we had really strong orders in MCS up 30%, but the backlog is still down or is down year-over-year. But when you peel that back, water metering within our backlog is up by 13%, and it sequentially increased as well. So we're seeing really good strength in our water metering business. but the book-and-bill portion of that business has been softer and it's for projects that are more later dated in the end of 2027 into 2028. So we'll continue to monitor the booking book-and-ship business portion of the business and how those projects, whether they accelerate earlier or deferred later, which is why we said, overall, it's strong demand, but it's pushing out into look to CS revenue is sequentially around Q3 and Q4 levels going into the first half of next year. And then it will all be about whether those projects stay on track and the book and ship business recovers and accelerates from there.

Andrew Kaplowitz

That's helpful. And then one, Andrea, maybe a similar question on WSS. Some I know you've mentioned delays, but obviously, a lot of that business seems to be well positioned given the markets it serves. So why are you seeing these delays? And what's the unlock to sort of get these larger projects going to go forward? Is it rates exposed? I mean what's going on sort of in these industrial markets? Because I think you should see acceleration at some point here. .

Andrea van Berg

Thanks, Andy. So we are seeing benefits from the industrial cycle. It shows up first in our pipeline and then orders and then later in revenue. Our WSS business as a portion of capital projects that tend to be lumpier. The majority, as I mentioned, the majority of our sequential backlog improvement was within WSS. It's just all about when those convert those orders get converted into revenue as well as some of the later pushouts of some of these projects in Q3 also impact Q4, which is why we previously guided WSS high single digits in Q4 and now that will be low single digits because of the timing of these larger capital projects. But overall, we're still seeing very strong demand as Matthew mentioned. We highlighted 2 large customer projects, and we expect WSS over the long term or in short term, medium term to be at mid-single-digit growth rate.

Operator

The next question comes from Joe Giordano with TD Cowen.

Joseph Giordano

Maybe just the resegmentation. So we've had some moves in the past. I just want to understand, like from a customer standpoint versus like a Xylem internal standpoint, because I thought like moving the rental like a dewatering stuff into WSS was to keep that whole segment kind of run on this service, rental type basis and now bringing in like the treatment stuff which is more capital sales seems a little bit against that. And I'm thinking like from a utility standpoint, you're probably buying flight pumps and then treatment stuff, and now you're buying it from 2 different segments. And does this like complicate it in some ways as well, even though it streamlines down to 3 segments from 4?

Matthew Pine

No, I think it's a natural evolution, Joe, of what we've been working on. We were highly metricized before, and you'd have a lot of finger-pointing and not a lot of accountability into like I said in my prepared remarks, for segment, 16 divisions with much more accountability. And that's worked well for us as we integrated Evoqua. And we did, to your point, make the dewatering business integrate into WSS, that will not change. So really taking a step back, too, when we looked at that transformation, 80% of our customers buy from 1 division. And so buy from multiple divisions, but a lot of them don't even know it.

So when you think about water infrastructure, transport and treatment are very different. You've got mechanical kind of electromechanical pumping and then you've got biological treatment, and those are very different customers. within a utility. And sometimes, they're not even the same utility in a market. So we have a process when we do have overlap where we do have internal lead sharing. We built an enterprise selling team over the past 2 years that also works at kind of an enterprise level calling on these types of customers when we can have a more holistic solution-driven conversation. But that's really the 20% of our business, if you kind of put it in 80-20 terms. The new structure really just better aligns the company on how customers move water, treat water, measure water, optimized water systems.

For me, it's about bringing together shared technologies, Joe, in end markets enables us to unlock greater value across the portfolio and operate with greater speed and accountability and a sharper focus on growth. And maybe just a couple of examples that I wrap this up. As we pivot to more industrial exposure, we do see a lot of overlap in WSS and WI today and within WI and Applied Water. And a good maybe example of this is evidenced in the Cornell Roper deal. I'd walk into meetings and we would have 2 and sometimes 3 segment presidents in the meeting. And as we look at our pipeline, we are cultivating targets where there's multiple segments involved. And by aligning this way, it's just going to make us much more efficient as we execute on our portfolio and get better focus.

And the second thing I would say is there is significant R&D synergies when you think about a treatment portfolio and a transport flow portfolio, where we align pumping and treatment into discrete segments. And there's operating synergies as well. For example, our castings, a lot of that is outsourced in Applied Water today by bringing flow together in our pumping business, we think there's a lot of in-sourced opportunities that give us more economies of scale. And so the last thing which is a benefit from this as well is eliminating the WI segment support cost. So there's a lot of, I would say, outweighing very positive than any of the negative of moving this way and our customers actually will be much more benefited by the structure.

Joseph Giordano

And just a follow-up. Matthew, you mentioned your excited about like the former water infrastructure growth into 2027. Orders look like they're going to be flat to down this year. So that kind of surprises me. Like historically, normally like orders kind of that rate this year, it kind of means growth pressure next year. And then Andrea, if you could just comment on the margin profile of the stuff you're booking in MCS now versus like what you're currently putting up in margins for that segment? .

Matthew Pine

Yes, no problem. I mean in terms of water infrastructure, transport remains very healthy. I mean I talked about 80-20 walk away in China. That's been a big drag on some of the orders. We lapped that in Q4. And I have meetings with the treatment team and looking at our backlog coming into Q4, we feel really confident that we can get WI to mid-single-digit growth, but even treatment into potentially mid- to high single digits as we exit the year. So I think there's really good momentum.

There has been some delays in terms of those projects maybe being pushed out 4, 6, 8 months. Some of that has to do with how the utilities are bidding this project kind of contractor manager at risk, which is kind of making them go a little bit slower. But in general, we see momentum there as we exit the year.

Andrea van Berg

And Joe, on the MCS margin profile, 1 of the biggest drivers of the margin profile that will benefit MCS is on the international metrology divestiture. And then also, as I mentioned, on water projects, water metering backlog was up sequentially, and it's up year-over-year. So we continue to see strength on water metering. It's just that book and ship business in the near term. Mix will be the biggest driver or variable for our 2027 margin because of the strong incrementals in water. But again, we have strength in our backlog year-over-year and sequentially within MCS in the water metering business.

Operator

The next question comes from Nathan Jones with Stifel.

Nathan Jones

I guess I'll do the data center questions. I think you talked about 3Q revenue -- or 3Q orders having or up 200% year-over-year. I think, Matthew, you've talked about exiting the year at 2% of revenue from data centers. Can you just talk about, I guess, what the expected growth there is in 2027? Can this add a point of growth, a couple of points of growth to the 2027 outlook?

Matthew Pine

Yes. Maybe just at a high level, I mean, we're definitely excited about the opportunity. We're staying disciplined in terms of how we're investing. We're trying to invest behind demand versus way in front of it. So we're not building a ton of capacity ahead of what we see, but we are adding capacity, and that's going to have a little bit of impact on margins in the short term, but normalizing back to kind of our standard margins for the company. as you said, the data center orders are up 200% for Applied Water again in the quarter. And we're seeing broader opportunities across the entire portfolio, especially with our expanding relationship with Amazon there that we mentioned in the prepared remarks.

We do, to your point, expect data centers to exit at 2% of Xylem revenue on a run rate basis. And we clearly see it as an attractive growth opportunity in '27. I think we'll be able to size that better in February. But just as I was making my comments around our 2027 revenue just a moment ago, Applied Water is definitely going to be at a much higher growth than we've been signaling in the past on that business is benefited by the data centers.

Nathan Jones

Got a follow-up on data centers. It appears to me that a bigger opportunity over time would be around recycling reuse of water and potentially build on operate projects at data centers. Are you at a point where you're having discussions with customers about things like that? And can you talk about any of the opportunities over what I would imagine would be a few years, you could go retrofit existing data centers that are liquid called. Just any thoughts you've got around that. .

Matthew Pine

Yes. I mean at a high level, there's not a lot of water consumption at the data center itself, the direct usage, especially as a lot of those are being converted to air cooled chillers, and so that's not really a huge benefit. Now there are opportunities that we've seen, and we're taking advantage of where a data center can get municipal water, because for whatever reason, it could be location. It could be that the water doesn't give them a permit because they expect them to use too much water. But we would take surface water into the data center and treat that. That's more an exception than the rule.

Really where we're seeing the benefit of kind of the, I'd say, the broader AI ecosystem build-out is on semiconductor chip fab. And I mentioned we've had a few wins here recently with some new customers in that area. And the 1 that is on the horizon, it's probably not '27, but for sure, it's going to be '28, '29 and '30 is power. Power is where the most water is used in the AI ecosystem. And we're positioned very well there from the legacy of local business, especially on nuclear. And so as those projects come online, both in Europe and the U.S., we're well positioned to take advantage of that growth.

Operator

The next question comes from William Grippin with Barclays.

William Grippin

Excellent. Just wanted to dig in here a bit more on, Andrea, I think you mentioned affordability concerns. What product segments, I guess, within that context, you really do consider sort of see as being more discretionary? And then you did reference funding in your prepared remarks. As we look into next year, what are you seeing in terms of the overall funding picture? And what have you been hearing from your municipal customers? .

Matthew Pine

Yes. Thanks for the question. I'll take that. So I would say, in general, let me just elevate at a high level, I would say that municipal demand remains, I would say, fundamentally healthy. And there's obviously all of you know, the secular drivers that are driving that. I would say at the same time though, we are seeing caution in some areas on muni spending. I wouldn't characterize it as a broad-based slowdown per se. But I do have several conversations with over the course of each quarter. And in my recent conversations with utility CEOs here in the U.S., I would say that they are more cautious about the general economy than they were a quarter or 2 quarters ago. And they're seeing increases in construction costs, energy costs, financing costs, along with a little bit of spillover from energy of pushback on customer rate increases in some areas.

I wouldn't say it's holistic, but in some areas. And that is leading to a deferred spending on things that are not immediately operational in need. And for that, that really shows up mainly in metering, both kind of the short-cycle replacement nature of the metering that we do as well as some project pushouts where utilities kind of have flexibility on timing. I would say treatment demand remains really strong. But as I mentioned earlier to Joe, projects are taking just a little bit longer, in some cases, due to contractor availability. They're tied up on AI jobs, for example, or they're rescoping them due to inflation or, as I mentioned before, they're bidding them as contractor manager risk, which takes more time.

I would say the last thing I would wrap up on, there's been some commentary that I'd like to get out in front of here is I think it's important to keep it in context that our U.S. -- the Xylem U.S. utility CapEx exposure is less than 10% of our revenue. And the majority of our utility exposure is repair and replace demand, and that can't be deferred. So you really see that show up in our transport orders and our transport business. So that's a little bit of a state of the muni business in the U.S. as we see it.

William Grippin

Great. I appreciate that color. And I just wanted to ask my follow-up here on -- if you could provide a bit more color on the customer mix and exposure for the 2 divested or the 2 businesses that you announced planned divestiture for today? And could you sort of scope or quantify to what extent those could be margin-accretive divestments.

Andrea van Berg

Thanks, Will. Overall, the planned divestiture will improve our portfolio mix resilience, growth and margin profile, while again, sharpening our focus on higher growth and more attractive verticals as part of our portfolio rotation. So as we highlighted, these 2 businesses represent 9% of Xylem revenue but less than 5% of Xylem EBITDA. From a revenue growth profile, they are negative this year with our forward expectation that we'll be well below our target frame mark. It also, again, reduces our exposure to China. This year, China is 2% of Xylem revenue. And after the divestiture, China will be 1% of revenue. And from an EBITDA margin perspective, these 2 businesses are dilutive to EBITDA margin, while Applied Water Americas margin is accretive to Xylem overall margin.

Operator

The next question comes from Steve Volkmann with Jefferies.

Stephen Volkmann

So I just want to follow up on that last question. Are there also some opportunities sort of stranded costs for these 2 businesses that you might be able to get at over time? And what might that look like?

Matthew Pine

No, great question. And as a reminder as well, we'll be closing the Cornell & Roper acquisition in Q4 too, which will be adding additional revenue, and that's accretive to our growth in margin as well. And then we continue on our transformation. So we will still continue to have benefits from structural cost actions as 80/20 continues to be embedded in our operating model.

Stephen Volkmann

Okay. Great. And then, Matthew, I think you mentioned this in your prepared remarks around having capital to sort of deploy, but I'm curious how you're thinking about the EBITDA that's lost from these divestitures. Do you already have stuff in the pipeline? Do you you're going to be looking for something and you'll maybe just take your time on that or maybe buy back some stock in the meantime. Just curious how you're thinking about that kind of EBITDA impact as you divest these things.

Matthew Pine

Yes. Maybe just elevate to kind of our priorities in terms of capital deployment. The first is going to be organic investment then, to your point on M&A and looking to -- from a bolt-on perspective, looking to move that more towards high-growth. We're going to grow dividend in line with earnings. And then at the end, we're going to use what's left for opportunistic buybacks. And so after -- to Andrea's point, we're going to close on Cornell Roper here within the end of the year. And by then, we'll be managing about 1.5 to 2x leverage. And from a proceeds perspective, we'll take the proceeds from Applied Water, specialty flow control divestitures, and it will give us some more capacity to execute against the healthy pipeline, which will allow us to accelerate the strategic rotation of our portfolio.

So really the proceeds are not going to come into play until the end of 2017, beginning of 2018. So we have time to work on the business to your first question, and then we've got time to plan and continue to execute against our healthy pipeline on acquisitions.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Pine for any closing remarks.

Matthew Pine

We'll wrap it up there. Thanks for your questions today, and thanks to everybody who joined on the call. A lot of our colleagues joined these calls and I just want to say to our colleagues, really appreciate all you're doing to transform Xylem and make it a best-in-class company. As always, we appreciate your interest in Xylem. All the very best.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.