Participants

Keith Buettner; Vice President - Investor Relations and Financial Planning and Analysis; Xylem Inc

Matthew Pine; President, Chief Executive Officer, Director; Xylem Inc

William Grogan; Chief Financial Officer, Senior Vice President; Xylem Inc

Deane Dray; Analyst; RBC Capital Markets

Mike Halloran; Analyst; Robert W. Baird & Co., Inc.

Scott Davis; Analyst; Melius Research

Nathan Jones; Analyst; Stifel Nicolaus and Company, Incorporated

Saree Boroditsky; Analyst; Jefferies

Bryan Blair; Analyst; Oppenheimer & Co., Inc.

Joe Giordano; Analyst; TD Cowen

Presentation

Operator

Good day, and welcome to Xylem's first-quarter 2025 earnings conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Mr. Keith Buettner, Vice President of Investor Relations and FP&A. Please go ahead, sir.

Keith Buettner

Thank you, operator. Good morning, everyone, and welcome to Xylem's first-quarter 2025 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's first quarter results and discuss the second quarter and full year 2025 outlook.
Following our prepared remarks, we will address questions related to 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, May 13, 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 and 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 key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be 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'll turn the call over to our CEO, Matthew Pine.

Matthew Pine

Thanks, Keith. Good morning, everyone, and thanks for joining us. The team got off to a strong start to the year, and Q1 exceeded expectations building on our prior momentum. Demand was resilient, and our book-to-bill remained above 1. Revenue grew across all segments, and we delivered 120 basis points of EBITDA margin expansion, driving double-digit EPS growth. I'm proud of the team for staying focused on helping customers despite various distractions in the business environment.
We're better positioned than most to address the water needs of communities and businesses because the portfolio we built is differentiated in every part of the water cycle. On top of that, our structural exposure in this sector is disproportionately aligned with customer OpEx, which historically has been remarkably stable in the face of broader volatility. We're also confident in the agility we built into the business by doing what we said we would do at our Investor Day last May. We are leaning into our high-impact culture, simplifying our processes and systems and reorienting our structure to improve customer focus.
As a result, we're in a better position now to respond with speed and agility in any business environment. While we'd welcome less uncertainty around tariffs, we have pricing and supply chain programs in place designed to offset the majority of the impacts from the current tariff scheme. We have a strong line of sight to Q2 and execution momentum reflected in our first quarter results. So based on where we stand today and at current tariff levels, we are reaffirming our full year 2025 guidance on both revenue and earnings per share.
In a moment, I'll offer some comments updating where we stand 12 months into executing on the plans laid out in our Investor Day last year. But first, I'm going to turn the call over to Bill to provide more detail on our outstanding Q1 results and on the assumptions underpinning our guide. Bill?

William Grogan

Thanks, Matthew. Please turn to slide 5. As Matthew mentioned, we are very pleased with the strong start to the year. The team stayed focused despite the volatility and delivered results exceeding our expectations. Demand remains solid with our ending backlog of $5.1 billion and our book-to-bill for the quarter above 1. Orders were down slightly versus last year, but against challenging comps in WSS and MCS. Revenue growth was ahead of expectations, up 3% in the quarter, driven by an outperformance in MCS. The team's operational discipline pushed quarterly EBITDA margin to 20.4%, up 120 basis points from the prior year. This improvement was driven by productivity, impacts from our simplification efforts and price more than offsetting inflation and mix.
The strong commercial and operational performance helped us realize quarterly EPS of $1.03. Surpassing the midpoint of our guidance by $0.08 and delivering 14% increase over the prior year. Our balance sheet remains in great shape with net debt to adjusted EBITDA at 0.5 times. Year-to-date, free cash flow decreased by $53 million from the prior year and was driven by outsourced water projects and payables, partly offset by higher net income.
Now, let's turn to slide 6. In Measurement & Control Solutions, we continue to convert the backlog with the total for MCS coming down slightly from the prior quarter to $1.8 billion. Orders were down 8%, driven by difficult comps in smart metering, partially offset by growth in analytics. Bidding and funnel activity remains healthy overall and has increased year-on-year with some key wins with AMI projects that will fill in the second half.
Revenue grew more than expected for the quarter, up 6% versus the prior year, driven by energy growth and offset by water delivery calibration. EBITDA margin of 21% was up sequentially versus the fourth quarter, but 170 basis points lower than prior year, driven primarily by the energy water mix challenges we highlighted previously, which will impact margins for the first half of the year.
In Water Infrastructure, orders were up 1% in the quarter, led by strong demand and treatment offsetting double-digit declines in China due to ongoing economic challenges. Revenue increased 5%, driven by strong treatment and transport demand across most regions, with the exception of China. EBITDA margin for water infrastructure was up an outstanding 290 basis points productivity and price more than offset inflation and mix and the WI team continues to get significant traction with our 80/20 efforts.
In Applied Water, orders were up 3%, growing for the fifth straight quarter. Orders were driven by strength in Building Solutions and book-to-bill was well above 1. Revenues were up 1% compared to the prior year, primarily driven by strength in Building Solutions, partially offset by 80/20 walkaway impacts.
Segment EBITDA margin improvement of 300 basis points year-over-year was a company best for the quarter. Productivity, price and mix more than offset higher inflation and lower volumes. AW simplification efforts are really starting to take hold.
Finally, Water Solutions and Services saw robust demand with book-to-bill well over 1. Orders decreased by 5%, though, lapping a difficult comp due to a large order in the prior year. Revenue grew 1% with strength in services, offset by weather impacts in the southeastern part of the US Segment EBITDA margins were down 60 basis points versus the prior year at 21.7% and driven primarily by mix and lower volume, partially offset by productivity and positive price cost.
Now, let's turn to slide 7 to discuss our current views on tariffs. Before I go through our overall guidance, I want to highlight that our reaffirmation of our full year guidance is based on the assumption that the current tariff scheme remains in place for the balance of the year. At this time, we expect to offset the cost of the additional tariffs with incremental pricing and supply chain actions and any softening demand should be buffered by our strong start to the year in FX tailwinds.
We're providing a summary of the imports from our largest regions and the estimated impact tariffs will have at current levels. The large rate increase on China imports from our last earnings call has changed the math and made this our [AD], but we should note that our imports from China are down significantly from where they were just a few years ago. And we continue to reduce our exposure with dual sourcing of most of what comes out of China now.
On Mexico, fortunately, 75% of goods imported are covered through the USMCA exemption, and we continue to work to increase that number. At this time, we have a net increased costs from tariffs on Mexico of just $30 million. From the EU, we are primarily seeing impacts on our imports of water infrastructure products and are exploring a few alternatives outside of implemented pricing actions to help mitigate the impact. I think everyone realizes that this is a very dynamic situation with multiple potential tariff rate changes in the future, but our newly implemented operating model makes the organization more nimble, which gives us confidence in our ability to manage the evolving situation.
Now, let's turn to slide 8 for our Q2 and full year guidance. The organic outlook is unchanged versus what we provided at the start of the year, but there are several changes to our reported figures and initial assumptions. Full year reported revenue is now expected to be $8.7 billion to $8.8 billion, up from our prior guide of $8.6 billion to $8.7 billion, which delivers revenue growth of 1% to 2%, while organic revenue growth of 3% to 4% remains unchanged versus prior guidance. FX has shifted and is no longer a material headwind, while the divestiture impact we've noted is roughly 1% of sales.
We are holding back the impact of our enacted tariff pricing in our guide until we get better visibility into any softening demand that may result from evolving trade dynamics. EBITDA margin is expected to remain at 21.3% to 21.8%. This represents 70 to 120 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation as well as investments in the business. And benefits from our simplification efforts will help mitigate mix pressure from MCS. This yields an unchanged EPS range of $4.50 to $4.70. Despite a challenging start, we remain committed to the 9% to 10% free cash flow margin.
Again, cash flow will be impacted in 2025, primarily by our recently announced restructuring actions. Now, drilling down on the second quarter. We anticipate revenue growth will be in the 1% to 2% range on a reported basis and 2% to 3% organically. We expect second quarter EBITDA margin to be approximately 21% to 21.5%, which is flat to up 50 basis points. driven by price realization and productivity gains and higher volumes as well as impacts from our simplification efforts.
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. This yields second quarter EPS of $1.12 to $1.16. We started the year with momentum and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio and benefits from our simplification efforts. While we also continue to monitor broader market conditions and volatility, including potential new or additional tariffs, inflation and fluctuations in currency and interest rates.
Overall, our expectations for the year remain positive as we build on our strong momentum. With that, please turn to slide 9, and I'll turn the call back over to Matthew for closing comments.

Matthew Pine

Thanks, Bill. Our solid Q1 performance is another proof point that we are delivering on the plan we laid out at our Investor Day last May. It's been almost a year since then. So as a reminder, we outlined our intention to create value from simplifying our operating model, integrating Evoqua and optimizing our portfolio with disciplined capital deployment.
On our operating model, as I mentioned a few moments ago, that work has already begun to make us more agile, and that's a great benefit. But the real reason to simplify our operating model is to position us for long-term growth. And we're doing that by implementing our high-impact culture, driving 80/20, which is progressing nicely across the business and simplifying our organizational structure, which is tracking to the timing we laid out on our last earnings call. We can already see the spike in productivity from those actions, which is reflected in our margin expansion over the last five quarters. But just as important, simplification has unleashed a new energy across the enterprise.
Our team told us that very clearly in our most recent employee survey, and our global leaders report an increase in the speed of our responsive [listed] customers alongside less wasted time and effort. In the integration of Evoqua, we've delivered the cost synergies faster than planned. And now we've got great momentum on the revenue synergies.
And finally, on capital deployment, we built considerable momentum in the last 12 months. We have an attractive and robust M&A pipeline focused on capabilities that complement our core, especially in advanced treatment, intelligent solutions and in services. So we're confident about delivering a consistent flow of opportunities with the right level of discipline. In the recent weeks, as an example, we closed on Vacom a leading technology company with proprietary breakthrough solutions and zero liquid discharge. As in addition to our treatment portfolio, the technology offers a compelling value proposition in attractive industrial verticals like microelectronics and energy.
Alongside M&A, we're actively optimizing our portfolio with specific actions in place to further focus on our strategic priorities. So the team has gotten a lot done since last May, and the benefits are reflected in our results. At the same time, we've remained fully committed to sustainability leadership. Our annual sustainability report will be out tomorrow, April 30. When you read it, you'll get a strong impression of the impact the team is having on the customers and communities we serve. In fact, we've exceeded all four of our 2025 customer sustainability goals ahead of schedule, and we've raised the bar with our 2030 goals.
We outlined those at Investor Day last year, and you'll be able to find further detail on them in the report, which will be on our website tomorrow. Before we get to your questions, I want to highlight our team once more because this is a team sport. I'm proud of the team for delivering such a tremendous start to the year and for leaning into the transformation of Xylem with so much determination and positive energy and for putting us in such a privileged position to execute on our purpose, which is to empower our customers and communities to build a more water secure world.
And with that, operator, I will turn the call over to you for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Deane Dray, RBC Capital Markets.

Deane Dray

Just really appreciate all the tariff detailed mitigation plan and so forth and page 7 is a big help. And kind of interesting as you all in terms of China as a percent of COGS, are pretty similar to a number of the multi-industry companies that we cover. So no surprises there. So first question is more of a -- just a reflection of this past quarter, did you benefit in any way from customers' prepositioning inventory to pull forward?
And then similarly, did you all reposition any inventory ahead of some of the tariff issues, supply chain issues and so forth?

Matthew Pine

Yes, Dean, I'll start this out. In terms of kind of front-loading orders ahead of tariffs, we didn't see any increase in to get ahead of tariffs. We post the teams actually in our business were used 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.

Deane Dray

Got it. And anything for yourself or in terms of positioning?

Matthew Pine

No.

Deane Dray

Good. And then second question would be, just can you clarify the point about the price increases that you're putting through, you're not assuming any falloff in demand. I'm not sure that that's your typical price elasticity, but just what is the underlying assumption there -- and maybe it's kind of the timing and when you could see some overall falloff in demand because of these price mitigation issues?

Matthew Pine

Yes. I think for sure, we do anticipate some demand falling off in the second half of the year. We don't have a really good line of sight to that. That's probably the biggest puzzle this piece of the puzzle that's missing. But as we've done sensitivity analysis, if we looked at tariffs, we looked at price, we looked at demand we feel really comfortable with having beat Q1 and our first quarter beat.
Now, we've got tailwinds from FX in the right direction. We feel very comfortable that any sizable amount of demand impact in the second half we can manage. But we brought different sensitivity, and we feel confident that we can manage any movement in demand. But we do anticipate it. It's just to what extent that we feel we've got it covered.

William Grogan

Yes. I mean, Dean, the comment in the prepared remarks was we've gone out with extensive pricing across the portfolio. So we didn't raise our organic growth guide, which would reflect that because we're going to offset it with any potential decline that Matthew just highlighted. That's yet to be determined.

Operator

Mike Halloran, Baird.

Mike Halloran

So just kind of walk through a couple of things too. First, the tariff side of things. How are you expecting to manage the pricing piece of this on a forward basis, surcharges versus formal price increases. Are these layering in over the next two months? Have they already been put in place? Would you roll some of those back, if tariffs come down, leverage if there are even more tariffs? Just kind of walk through the moving pieces there to help understand the timing and related. Does this matter for the second quarter, particularly much based on order levels, inventory, timing, et cetera? Is this kind of like a back half of the quarter impact? Or is it more 3Q?

Matthew Pine

Yes, I'll start with where you finished. It's more back half loaded to the quarter and then obviously to the second half of the year. But Mike, we've got a mix of surcharge and price increases. I would say it's probably two-thirds price increase, about one-third surcharge. Different parts of our business needed to handle it in different ways. But those actions -- look, I think a lot of the work we've done on our operating model structure have enabled us to move more swiftly. We took pricing actions in Q1. We took those again in early April in Q2 and those are in the market and in play right now.
So there's parts of our backlog that we can reprice and we're doing that, and there's parts that we can't. We've done an assessment we understand that, and that's kind of baked into our full year guide. But we're pretty nimble and moving quickly in an evolving situation as things change, we'll reevaluate and we'll readjust. But I think we're in a good position right now.

Mike Halloran

And then the follow-up is if at all, how much does this change your approach to the simplification side of things? Is this an opportunity to lean in even further? Is it creating any challenges mean, obviously, you're pretty comfortable in what you're doing internally. Otherwise, you wouldn't tell the guide and all the offset points. But I'm just curious if it changes that dynamic at all? And just if you don't mind also adding where you are right now in the process and what the main focal point is on the simplification side.

William Grogan

Yes. Maybe I would start. I think fundamentally, no change to our methodology or approach I think if anything, as we look for areas to accelerate businesses that are more challenged from the tariffs. We look for other actions to expedite some of the simplification efforts to help offset the weight of the tariffs. I think overall, on the restructuring plan, we're on track.
I think our Q1 performance was slightly ahead of schedule. I think we're starting to see it, as Matthew highlighted, though, as the businesses come together, our resegmentation and the divisional structure we've created, where we've got dedicated leaders that have P&L ownership that nimbleness and them to have full control and line of sight to the actions that they need to take to drive business results.
I think it's hugely beneficial in this environment. So I think it was obviously a much needed activity and then perfect timing to face a really challenging macroeconomic environment.

Operator

Scott Davis, Melius Research.

Scott Davis

Seems -- doesn't seem like this tariff stuff is creating as much drama for you guys as perhaps maybe some others out there. But -- so I'll ask questions in a different way, maybe more traditional, and that would be balance sheet still really under levered and you've got a lot of market disruptions. Is this an environment that we've heard mixed things. Some folks say M&A is stalled out, and some have said it, it hasn't. So what have you guys seen? And what do you expect as far as able to put some capital to work this year?

Matthew Pine

Yes. We may look like a duck, but the feet are moving pretty quickly under the water. Scott, as we laid out at our Investor Day, our priorities are first investing in the core. M&A is really important to us to get to the mid-teens EPS guide that we put out for LRP. So we're very active there. We have a lot of targets in the funnel.
Obviously, we talked about, obviously, we want to continue dividends and then we'll be opportunistic on share buybacks. I think it's a little bit from a valuation perspective, maybe I'll talk about that. I think it's a little bit too early to kind of see maybe any impacts to valuations. Private valuations tend to lag public markets. We haven't really seen a lot of movement there. However, high-quality companies usually come into premium. And the one thing that we continue to do is optimize our portfolio. We're very direct about that at Investor Day last year.
We did one deal in Q1 or on divestiture in Q1. We've got a few other things in the portfolio that we're looking to divest that either we're no longer fit or not accretive to the business. And we're going to continue to look at assets that fit our strategy and make decisions based on strategic fit and financial hurdles and I know that we built a lot of muscle to do a lot of M&A. So we're -- we've built a lot of capability, and we're going to be active out with M&A over the course of this year and through our LRP.

Scott Davis

Okay. Sounds encouraging. Total switch gears, and sorry, I missed the first seven minutes of your call, the Water Solutions and Services segment, is that a little bit too lumpy for us to start picking on quarters. What should we expect kind of this new segmentation. Just trying to get used to it at 1% growth seemed a little light for versus kind of what we were thinking. But again, if it's just lumpy and it's kind of hard to call it quarters and maybe we should make a big deal out of that stuff.

William Grogan

Yes. No, I would definitely agree with that. It is our lumpiest segment just right, we were at double-digit growth in the fourth quarter, double-digit growth in the second quarter. So you're going to see as some of these larger capital projects hit a little bit less consistency, as you'll see in the balance of the portfolio. I think overall, they've got outside of the tough comp, I mean, last year, just to remind everyone, we had a about $150 million outsourced water project that we booked. So excluding that, orders would have been extremely strong.
In the quarter, we built significant backlog I think backlog year-over-year is up 6% or 7% for that business. So I think the fundamentals are still there. And yes, I'd look at a rolling 12-month organic rate versus a quarter-to-quarter to really get the true health of WSS. But relative to expectations, they were right in line, and I think they have a really strong year ahead of them.

Scott Davis

Okay. That's what we thought. That's helpful. I'll pass it on. I appreciate it guys. Best of luck this year.

Operator

Nathan Jones, Stifel.

Nathan Jones

I guess my question on tariffs, are there parts of the portfolio where tariffs leave you either better or worse off relative to competitors. So are there differences in the competitive impact or your competitive position that you see coming from tariffs? And does that make price increases easier to get in places, harder to get in others? And how do you deal with that?

Matthew Pine

Yes. That's a good question. I would just start maybe at a high level that roughly about -- we're 4% of our COGS in terms of tariffs. And I think we're in a very competitive position based on what I've been able to glean over the past couple of weeks, and I think we're in a really good space. I think I would just -- like I said in the opening remarks, that our diversification of our portfolio and the end markets help us really have a stable business in the face of economic downturns like the potential one we're looking at and also the critical nature of our products and solutions are really important.
So if I harken back to COVID, we obviously had kind of a peak of the trough of down 6%. But I think normal pullbacks, we have been pretty resilient across the markets driven by muni exposure and then high-growth verticals in our industrial business, especially as we brought on legacy Evoqua into the portfolio. So I think we're feeling really good about our competitive position, and we'll take it one day at a time.

Nathan Jones

I guess the other question I wanted to ask about or have you guys comment on was about the organizational realignment that you guys have gone through over the last few quarters, I mean, I think pretty much going live into place now. Can you talk about how you've changed the internal organization of the company? And what impact you're looking for that to have on the business?

Matthew Pine

Yes. Yes, I think like I said last call, just -- I'll start out with just reiterating that these actions, however, necessary for the business, meaning that we're going to have 2,000 colleagues that either have or will be leaving the business over the course through the summer.
We don't take that likely. We do want to make sure that everyone is treated fairly and that with the utmost respect. So I'll start there. first and foremost, Nate, we're tracking to the timeline that we laid out on the last earnings call. I think Bill just alluded to that as well.
With the majority of our actions wrapping up this summer, especially in Europe where we're working with workers' councils there. I would say I've been traveling quite a bit around the globe spending time with colleagues and customers. And I can already see the impact. The teams are much more focused. They're making decisions more quickly, and we're already seeing the impact on customer focus. And prior to that, we were highly matrisized, as you know.
Now, we're singularly focused on a segment, and now we have 16 division GMs that have end-to-end accountability for the P&L statement. And so that's enabling the speed and focus and accountability, and it's going to make us much better. I'm already starting to see that in my travels -- maybe another thing I would mention is we've set up an enterprise solutions organization. Before we were focused on the $20, not the $80 million in terms of customers that wanted to buy our total portfolio. And I am personally calling on C-suite executives and helping that team for customers that want to buy our total solution. So that's making a lot of great progress.
And I said this in our prepared remarks, but I'll just reiterate it, we do poll surveys 3 times a year. We just wrapped up our poll survey, and we've seen really marked improvements. And the two questions we asked, we asked different questions, but the two that really reflect the transformation are. Are we making it easier to serve our customers -- and are we making it easier for you as a colleague to do your job.
We've seen especially marked improvement with our top 150 our global leaders, as you think about the fusion of the structure and culture down, it should start there. And we've seen the broader organization improve in those two questions as well. So we're off to a good start, and there's a lot more to go, but we're off to a good start.

Operator

Saree Boroditsky, Jefferies.

Saree Boroditsky

Maybe just on M&CS, orders have been choppy recently. So just any color on how you're thinking about orders versus high single-digit growth expected for the full year? And then maybe any additional color on the margins that are included in that backlog? And do you expect to have this energy mix issue going forward?

William Grogan

Yes. I would say we've said just MCS orders as they go through the rephasing of their projects, that book-to-bill, we think will be positive in the back half of the year. I mean general bid activity remains strong. Our win rate has maintained. So the fundamentals of that business as we get through some of this rephasing, I think returns to a more normal cadence, and you'll see that water business back to the high single-digit growth rate. Yes, we highlighted the energy part of smart metering is doing significantly well. growth with 40%-plus growth rates this year. So -- and we have line of sight to how some of those projects are going to lay in the back half as we see an acceleration of growth as we go through the balance of the year.
From a margin perspective, I think we're very solid on the water side. We've talked about we've got a specific project or two in the energy space, that's putting some pressure on overall margin. It's less margin than the water portfolio on balance, but we've got some specific issues that we're cycling through our backlog and will be at a more normal level going into 2026.
I think the MCS team overall, from a margin perspective, continues to work on core productivity to help try to offset that. But the mix impact is significant, a couple of hundred basis points here in the first quarter, and we'll ramp here in the second quarter. Like we said in the prepared remarks, I think Q2 is the bottom and then start to see a sequential improvement from there and then back to year-over-year expansion.

Saree Boroditsky

I appreciate all the color. And then last quarter, I believe you talked about seeing some impact on orders from 80/20, I think, in water infrastructure. Just can you update us on any impact you saw this quarter? from 80/20 on overall orders? And then do recent tariff actions change this strategy in any way, given maybe the higher cost base for some products.

Matthew Pine

Yes. I think we highlighted we had built into our guide a little over 1% of headwind from an 80/20 perspective, and maybe a little bit heavier in Applied Water and water infrastructure as they have been they've implemented the tool set, the longest within the portfolio, and we looked at kind of the buildup of their product and customer portfolio, there was the largest opportunity there.
So I think the teams are continuing to make those decisions to reduce the complexity free up the team's time to help at the end of the day, longer term, grow and innovate with our largest customer. So I don't think there's a material change to that strategy now with tariffs in place. Overall, obviously, the incremental pricing will provide a tailwind if there's no material economic pullback, as we said earlier.

Operator

Bryan Blair, Oppenheimer.

Bryan Blair

I actually wanted to follow up on M&CS margin performance and outlook, Bill, you just said Q1 mix impact couple of hundred basis points. By how much does that step up into Q2? And then given the visibility that you have on first half results, second half project pipeline tariff impact, et cetera. Are you still confident in full year segment margin expansion.

William Grogan

Yes. So first off, I'd say Q1 margin was right in line with our expectations. And again, just -- it's very specifically attributed to the mix shift between our water and energy meter businesses. We talked about last quarter, this is really a first half type of phenomenon as they get through the rephasing of their backlog. So I think we are on track and in line with expectations.
I think as we get into the second quarter, the margin decrease for MCS be close to double the impact that we experienced in the first quarter. Again, that's why our overall Xylem margin guidance at a flat -- was flat on the bottom end because of that significant MCS pressure. But again, that team continues to do a lot of great work on profitability that's being masked by this mix issue.
They drove a few hundred basis points of productivity through their 80/20 and organizational simplification efforts. They continue to drive material efficiencies or sorting and design work. So they're tackling it, that will create a better leverage point for when this mix issue resolves later in the year. But we're confident that as we stand here today, full year MCS margins will expand year-over-year.

Bryan Blair

Okay. Very helpful detail. And as a follow-up, you have covered this directionally with some other responses, but perhaps offer a little more detail on April order trends and any apparent impact in the early days of additional pricing. Curious if there are callouts by segment or at a higher level, OpEx versus CapEx-oriented businesses.

Matthew Pine

Just maybe starting with Q1, we exceeded our expectations on orders across all segments and into the first part of the quarter, in our first business were used in April, we're tracking to our order forecasting. So we haven't seen any pullbacks as of late. Obviously, we're keeping a watchful eye on that as tariffs start to really work their way through the system and people start to react to that maybe from a demand perspective.
We have seen a few project delays, mostly on the industrial treatment side, but those are well within what we do in terms of hedging against as we negotiate contracts or are there any project delays, things that we always account for with typical kind of delays in the capital project. So nothing outside the realm of things we don't hedge against. So I think so far, so good, but obviously, there's a lot of road in front of us this year. and we're going to have to take it kind of day by day, week by week and month by month.

Operator

Joe Giordano, Cowen.

Joe Giordano

Apologies if you covered this in the prepared remarks have been down steaming between calls. But can you just talk me through the the sequential dynamics in margin at MCS from 4Q to 1Q? Because I thought the energy headwind is kind of on both of those quarters. But I know margin is down year-on-year in the 1Q, but still up fairly significantly sequentially.

William Grogan

Yes. I think -- obviously, we started to see some of the margin improvement of overall MCS in Q1 of 2024, which I think adds some of the -- just the year-over-year pressure as we look at mix between the two sides.
On a quarter-to-quarter basis, I think just as -- there was a couple of other one-timers outside of mix in Q4 on true-up of incentive and things like that, that mitigated their margin expansion. So again, this was in line with our expectations. I think we sequentially go down into the second quarter and then look for sequential improvement and year-over-year improvement starting in Q3 and moving on to Q4.

Joe Giordano

Perfect. And then you mentioned book-to-bill there looking at above 1 in the second half. Are we talking like getting back -- it's a pretty big increase versus the first quarter, first half order rate. What's kind of informing that magnitude of increase in the back half there from an order standpoint?

Matthew Pine

Just as we look at the commercial funnel and the activity of projects as we see to start to layer in one. And then two, just the movement of inventory through the channel as they rephase those projects, I'll let blood that down and start getting in a more normal order pattern.

Operator

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

Matthew Pine

Well, we'll wrap it up there. Thanks for your questions, and thanks to everyone who joined the call today. As always, we appreciate your interest and support. All the very best. Take care.

Operator

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