XYL - Earnings call transcript Q3 2018

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Operator

Good morning, and welcome to the Xylem Third Quarter 2018 Earnings Conference Call. At this time, all participants have been placed on listen-only mode, and the floor will be open for your questions following the presentation. I would now like to turn the call over to Matt Latino, Senior Director of Investor Relations. Please go ahead.

Matthew Latino

Thank you, Christy, and good morning, everyone, and welcome to Xylem's Third Quarter 2018 Earnings Conference Call. Chief Rajkowski. Patrick are Financial and today Mark Officer, me Executive Decker; Officer, Chief With provide perspective will discuss They their the results quarter full and XXXX year outlook. on Xylem's third

related remarks, the will the prepared queue. I'll you and one that keep ask information then a our Following follow-up, call. address questions and covered to we on to question please the return to

website call a Investors on reminder, the this available and www.xylem.com. our slide section XXXXXXX. and XXX-XXX-XXXX available a are be by number confirmation our replay of As accompanied November replay code the presentation in of will note, today's is at A webcast is the XXth. call Please midnight until

of to under Please our Investor Events. Additionally, number slide heading, website playback call the be section available the turn will for X. Investors via the

Form company XX-K events to actual no those anticipated. or subsequent slide and any to the some reflect We X. update undertakes to statements described and will future. statements most to Annual future results forward-looking subject call, future we including recent in publicly may to obligation differ or or today's note that circumstances, filed These occur materially references from SEC. subsequent with Please in on and on anticipate could those developments the Report factors in events such the as reports that are or will events Xylem's make Please statements uncertainties, forward-looking risks turn

performance including metrics. We have a non-GAAP and provided both GAAP our you of metrics, with summary key

included and references for been non-GAAP presentation. section basis today's an otherwise of you in indicated, adjusted of appendix reconciled all call, the on have be the purposes For and are will financials unless

the to and Decker. to I CEO, Now, will X Patrick please call slide over turn our turn

Patrick K. Decker

earnings our is sets Year-to-date, our Thanks, Matt, orders. and also us strength Thanks and delivered to we've leveraging robust in delivered and breadth to markets win in strong to realization but and growth morning, which strong continued larger joining quarter team for more underlying both discuss for revenue be the orders, we everyone. operate markets, in And quarter. remain quality both and that of continue the Overall, our we're today results. third we reflects well The us growth. good up our in with the strength price pleased the portfolio. an X% increase achieving. This the in I that

deliver in to expanded solutions address we've bringing to ability our needs we're the even Our customers' meaningful more them comprehensive has strengthened value ways. to and

also year. work. quarter. the inflationary enabled We seen productivity demonstrating, pressures pleased teams the earnings expansion double-digit the throughout to mindset into That, are embedding our on again, in discipline once our with that margin daily we've continue us which to deliver our contributed and to initiatives, growth truly that improvement mitigate the our I'm continuous very the

let review again a delivered few So orders the we me In broad-based growth. details. revenue of strong quarter, the third and

had single China. a mentioned, As us strong increase in growth, of I XX% orders We growth sustained four brings increased just increase including orders double-digit a consecutive the across XX% which orders markets, and indicator third high more quarters of strong quarter, in emerging ahead. growth our India in than X% to to

exceeded across platform. our Sensus notable & the in as Solutions building our advanced see analytics strength infrastructure Control segment, great as new orders saw also our in businesses We to momentum and Measurement where It's the business XX%. well

about we've to now more revenue the secured continuing the make we're $XXX third quarter, wins revenue With area significant addition, synergy wins In in million finalized in year-to-date. during of progress synergies.

Sensus also were already two to able solutions. to strong the These we able comprehensive the Our wins relationship a alone Likewise, were door India, America. solution most Xylem recent Sensus Latin $XX project metrology worth Xylem the wins about combo that a utility open customer to million. in large in a with were we have include to to leverage sell where

grew the not these see wins appropriate and teams drive with plans, largely in thesis across quarter end customers strength solutions opportunities wins Now, with presence Revenue latest pipeline, strength to our further Revenue and we're all late Sensus to the XXXX continuing materialize X% beyond of work which these larger across and implementation a of couple start global our will the validate in opportunities but AIA and utilizing international with to every to in create into results. develop market until standout further our XX% platform growth. region. Emerging Xylem's in deal increased for about We as quarter the our new develop. revenue new our organically Markets of

China business continue in than facilities XX% those regulatory we more by upgrade the in quarter. requirements, grew strong see investment discharge standards. utilities Our to sewage new particularly to There, their meet around to

in quarter. the We also growth XX% in up Latin saw strong America,

our our other this the I as the strength quarters, and traction offering, health relative Markets, in but utilities made in we've in our progress success the has is to reflects teams. and role strength and In we we're our our focus our fourth strong provide we announced realization customers building value the with discussed sales of Our additional public to-date, good certainly the market pressure. actions promising the Again, and also most inflation the in already but pricing Last smaller plays marketplace. That there such achieving end work even stay of our of of a Emerging discipline good progress is we opportunities, third team business mining. as region to the ahead progressed very our a in further momentum price efforts. our on quarter,

on mentioned, our continuous to improvement I deliver already we As initiatives. continue

across with share; And impact of and drive of the you initiatives. outlook excluding a purchase margin This through the in our XX do I of another increase quarter, later and expansion adjusted our operating increase basis address our savings the in finally, the XX% XXX we year year-over-year adjusted I'll us in strong in $XX generated the million our productivity basis quarter. an helped This delivered accounting. for our expectations point want earnings margin, remind but point lean we an to of you board, adjusted beginning as earnings. call, so, of per have EBITDA execution $X.XX. modestly weighed execution to which the been strengthening realization that initiatives, a but we as have the has the the impact Furthermore, shared the through growth also those with X% in X% dollar, inflationary we productivity challenges. discussion, of well mitigated earnings faced at began we marketplace, outlook and strong price of top organic on line our managing pressures to share $X.XX we We of year. adjusted tariffs, per and Since have

up nine today, midpoint X% higher X%, the impact. outlook organic same EPS growth, to negative revenue for is absorbing Our now and despite exchange about $X.XX nearly months later, foreign of

closing we with strong long-term focused So team's the on out performance, and delivering our will and on our remain pleased I'm very year commitments.

their the we Before XX% of compliance investing or meeting I the asked is on drivers and double-digits. bidding resiliency touch pressures in strengthen a few of which up infrastructure. And of so every often U.S. other turn first, the pipeline, with very U.S., dealing big the globally, healthy number the operations, the from to and market solutions our a the across about to utilities quarter, interest; essential remain quarter; investors, Utilities a In I the at There in over that third a here had our have from share market aging topic couple regions the the operations, utilities leading Utilities regulatory by of perspective. revenue, my to projects all see overstressed a so, strength metric I'm Mark, point are they their strong. indicator, into me backlog which want the to Year-to-date, of differ region, market just items I fourth in are market. realities let with up our slip our continued about revenue a end we XX% have our to of of the This in increased of but to as we remains is operate. observations. strength XX%, our roughly need. and treatment need we in we largest a is

and our key innovation strategic pipeline has been innovation; of our one accelerating strengthening priorities. is Next

are and progressing this through organically acquisitions. work We

stands result, a we've progress just under As now made at steady XX%. our which vitality in index, growing

has a As first the the index is vitality points. increased calculated years five over index sum the as reminder, And revenue product years, our basis XXX vitality of our in launch. past three from new

Our new well. portfolio product is performing

faster In products these fact, is rates and generating revenue the growing margins. from accretive at they're

We've services. building well an to on software and will center the XX% Xylem a XXXX offerings This Xylem-wide of early data in software governance the network value analytics. provide embedded our to are track increasing of to software vitality software in enterprise-wide excellence We're is of index. of meeting on target our out analytics the that's stages We that integral strategy and data developing future and focusing innovation. and created group

our scalable businesses and are ensure are solutions and that needs closely to Importantly, partnering alignment with in all our customers' it's developed with globally. expectations,

faster As I development margin-accretive to new mentioned work, on help to marketplace. of solutions accelerate excellence of first-mover are in advantage looking software-enabled this This our bring capitalizing these us to our solutions. will on the for center customers us new our move last call, these the

more in X slide and now, detail. Mark will So review to quarter results please the turn

E. Mark Rajkowski

perspective, in markets revenue all points were key organic I'm proud reflects our as third we across by in year-over-year. X% of From of our very Overall, growth organic of from headwind. X points revenues of X% This growth strength acquisitions quarter. Patrick. geographies. was Thanks, this up and foreign also X the offset an in broad-based were exchange end performance all team's generated the

Water which X% the expectations. and America. We from our with continue where with Latin and project The deployments & respectively. Market Europe, was North as in in This Measurement and industrial in growth. treatment strength to U.S. with by end well Pacific and The deliveries, our strength in expectations conditions momentum as and remain strong market, healthy Water year-over-year, see performance to segment, in Applied dewatering good continues of America, the regions, with our X% saw in were end highest and perform up project Infrastructure XX%, Solutions segment. X% businesses, our line in our and line Asia well growth in growth was transport Control market driven utilities

market XX% robust driven end commercial and China project markets. very the strong expectations our a in growth. U.S. also activity Our above with This quarter was and by had

XXX investments up and (XX:XX) increased strong Shifting productivity organic and mix, EBITDA quarter. driven inflation XXX mitigate very continued points saw savings, quarter. improvement growth, XX.X%, This basis were and adjusted points strong accounting basis Europe related to acquisitions we the cost improved primarily from basis the execution by inflation, from platform. to accelerate our Adjusted impacts. non-cash we was the by quarter. residential, teams Western to exchange to in to offset performance, amortization our the in and growth realization XX the from and advanced partially Price foreign to higher in Finally, of We're the in by encouraged points margin price points leverage infrastructure operating includes XX.X% in basis increased operational increased in XX X% for volume the U.S. which purchase realization, to unfavorable commercial analytics

operational price increase treatment in the we in execute This to per orders on $X due timing X impacts realization to our on year-over-year. high details of tariff improvement recorded million. of of at into cost XXX-basis-point and we an Through solid which additional $X.XX, provide down programs shift strong segment million including end we $XX This improving about to slide and primarily million continue was year-over-year, X% turn that to teams the of quarter. transport of inflation, savings large share and expect and custom quarter. our our expectations. performance. the quarter, was our during was Please fourth delivered which Water offset several of the earnings revenue $XXX XX% Infrastructure delivered Our execution, performance, productivity I'll organically orders

segment basis. demand $XXX healthy through for the orders up and reflective year-over-year. million, industrial grew to X% organic revenue, exited overall continue up quarter into are digits, an XX% $XXX on year-over-year fourth organically backlog total mid-single and Our Infrastructure the the with the expect of markets, utility million, in quarter which XXXX. we We for year Water up of the the

the treatment gas X% construction growth in and was China Foreign in oil and exchange business a Markets XX% dewatering The than by project by including outsized XX% up was growth increased by strong and modest transport dewatering prior-year project Western The growth in in demand performance several of million saw driven a our softer businesses, demand. the our wastewater Emerging underlying reflected both and majority saw in wastewater headwind. and Emerging from our of pocket with treatment to of transport were more large comparison XX%, as of growth offset the timing we due of business, this which We the partly our growth notable roughly up which Europe, the in industrial than we X% Latin America. was Markets quarter, quarter $XX year. project XX% an came deliveries. deliveries XX%, activity markets deliveries tough business. strength solid lapped flat and more for driven in was in growth U.S. prior utility Canada in and primarily strength

in Please points fourth digits up Infrastructure. higher higher were accelerating with inflation, basis and industrial slide volumes versus full from We segment in market be emerging growth for growth this in mix in XX.X% Operating and range. expect cost last to treatment than digits savings programs, growth margin quarter to year. productivity Water U.S. realization. to mid-single quarter more projects up investments, driven price high-single-digit revenues year This X. the the third the offset XXX the the year U.S. in from from to unfavorable by mid-single turn utility mid- increased

X% million, exited prior-year also with compared Applied is of $XXX to million, up had Applied Water were X% quarter good up Revenue Our organically. X%, up $XXX last the for very Water million organically year. segment which of organically was $XXX Orders quarter. versus a backlog We the quarter.

activity was was and the to exchange we in flow There Emerging across saw In across as continue in growth broad-based In strength we in Commercial Markets of X%, million also by were points Segment share expectations. driven also China price operating Latin margin $X institutional the strength gains. from was grew was pockets in and finally, year-over-year project The mix. foreign strong X% respectively. more driven specialty all the by productivity strength each industrial to sector. our the strength segment's project activity. strong programs, XX% Industrial which And This line revenue the by a XX%, industrial was modest up building Foreign exchange which inflation, Revenues than verticals. of from headwind. quarter U.S. leverage. America increased driven in XX.X% verticals. growth in reflects sector cost savings our Europe, realization by grew growth were unfavorable of with and year-over-year. Residential XX expansion in driven the primarily margin offset and up and X% in see basis excellent commercial, building as standouts, well in demand and higher Western volume growth business. commercial X%, from

turn Control to & let's performance Now, Measurement slide to of discuss X Solutions. the

build growing XX%, to the and Orders business. clean million in marketplace. North market organically, This the its the revenues confidence up our of by $XXX driven our segment quarter $XXX Control segment. basis. strong growing an offerings Solutions year-over-year from the & water primarily American were continues growth were Measurement health increases the upon opportunities in were Our momentum in million, across water up of organic on this X% broad Segment and

project this million the operating areas from infrastructure the commercial and The quarter our down sizable difficult the the million. higher the compares Those XXX the in in offset deals deployments. acquisitions XX impact investing water and two won to mix to The to as quarter, we include This initiatives. such points quarter amortization, European fast-growing support low-single quarter. X.X% Increased basis price inflation EBITDA year-over-year. improved to well in and deployment, Gas U.S. have as pipeline, headwind, and the by which networking Nicor $X XX points each from a investments the with Foreign efforts mentioned, quarter orders of due our was by in analytics XX%. divestitures strategic synergy gas in were strength Adjusted was and along unfavorable was added segment's the basis deployment Adjusted development Emerging due investments, increased and the as and in we savings in year-over-year of were to digits market, opportunities our businesses capture XX% XX% in Patrick points software XX%. $XX exchange margins grew to contract. large of prior-year margin margins capabilities impacted that past segment growth cost the up the volumes, resources grew operating in the our share against Markets basis and business, net benefits accounting revenues where across quarter. the realization investments in project Xylem declined purchase

also we saw which inflation quarter a year-over-year certain of points. XX sequential cost on electronic quarter, the basis basis During component ramp-up by increased the parts, in

capital quarter. decrease slide flows let's certain balance of free flow as well driven the capital the conversion projects cash million We quarter financial of to to (sic) to levels shipments $XXX free million]. higher and support Now, and to working closed cash the the higher primarily company's turn by earnings quarter sales. [XX%] levels [$XXX year-over-year declined discuss Despite XXX% reflecting cash in efficiency, (sic) higher X a of flow approximately and as timing cash capital inventory the is of cash working improved about fourth with position. timing in The

and than we XXX% target U.S. pension deliver an in year of contribution full capital to continue flow optimize cash our our more conversion. tax to investment free to to benefit. the expect quarter, capital anticipate quarter working spending and We This reflected also normalize fourth accelerated

our capital investment working on I'm pleased is working year-over-year, with of amount efficiency. capital higher progress the While

teams a end committed we completely to to the Our pay to point down of We reduction discipline. repay basis short the to continue credit acquisition, fund processes and grade rating which improve to we expect drove this maintaining XXX we by our continue as investment use debt remain our the and Pure year. term

please cover updated XX Now, slide our outlook. will turn to and Patrick

Patrick K. Decker

Thanks, Mark.

Let we expectations market call. our our is end deliver the that growth at year strength. view earnings to so the last reflect updated the with Overall, market, commercial for continue our from look our we've end guidance to do me a projection continued largely markets. provided We in on unchanged full above begin end

run quickly projections. me Let our through

As stated in the strength, I continues end Markets. and utility to earlier, particularly Emerging our market key show U.S.

full-year we expect XXXX, to For high-single-digit revenue to in range, continue grow the overall.

somewhat performed have have businesses continued industrial to well the softer continued East. America in see We U.S. The solid year-to-date. the America, in India industrials we the Europe. In and in strengthen. in growth North stronger in Emerging conditions Markets, Middle of the and see continue end market with to parts heavy China, Our Latin conditions

Organic has moderation year. We U.S. Markets our in some high-single-digit to increased expect strong the the see occur continue should be all spending, mid-single to Emerging in Europe. full-year to the been for China. solid and commercial outlook expect in up digits raised We've do particularly end to We in range. growth government benefit growth and the industrials full market continued growth year. India from

X% Finally, year, back in had quarter. in but third somewhat first half the results residential, up we we're of in softer the the

low-single where high, full-year the revenue tends the XXXX replacement-driven. to Competition anticipate demand in remains be range. to U.S. continue market growth digit We in

countries also in Asia China solid well as Pacific and We demand Western Europe. anticipate to other continue as

well range full-year longer-term commitments growth to our XX updated and to to now organic revenue our X%. initiatives. X% our on full-year to in strong turn be continuing address With We're the growth our please outlook. growth in to Now, of while year-to-date, revenue positioned we expect I'll deliver slide invest

exchange expect XX.X% continue expansion million to points adjusted to by between for to basis XX%. significant to integration, points, the be excludes brings generate price from margin basis and XXX to to margin impacts at the improve $X.XX to basis margin XX%. range million. points costs to of over the We XX adjusted an of basis the of after which is full-year and realignment us EBITDA operating meet projected XX expansion targets bottom the accounting to absorbing the the $X.XX acquisitions. are points drive That XX.X% for in Adjusted margin to $XX full-year year. of dilution At EPS points. to This Adjusted to to expected enable excludes purchase range narrowed line, course to negative which $X.XX third we've about restructuring XX about for cost growth of savings, $XXX our XX% share results This in quarter, earnings expected year. XXX per actions is foreign of basis operating approximately

planning of growth range strength and commercial operating X%, solid fourth assumptions lastly, be Now, XX%, please of XX X% review the the and the backlog of in XX.X%. reflecting and revenue the for entering organic anticipate expected turn adjusted to to continued performance, slide range the quarter. the margin quickly our I'll quarter. in XX.X% in overall our EBITDA benefits to is And markets, XX.X% our margin adjusted We of underlying to quarter fourth strong to for our

Now, please XX. to turn slide

execute growth, continue longer also in very I'm over the in been that with term margin performance strategically enabling propel and course the growth is solid team to momentum up, a near quarter strong revenue This the in realization. So the expand our high to at another building in the us price had continue to accelerate important productivity level. of strong while year will driving margins wrap term. to us initiatives the investing and continues our we've expansion that will forward. and to the pleased and That's initiatives, our has business

operator, So we'd be to questions. take happy that, with

Operator

your comes Connors of from Boenning Thank Scattergood. Ryan you. first question And &

Ryan Michael Connors

tariffs a a wanted pull ahead lot my industrial theory in for seeing I the a of combination forward a of order to to guess, we're cetera. increases story represents rounds taking stuffing that and bit. discuss little Great. related There's, price strength I of the sort of in industrial channel Thanks and there channel the et out question. making

us So there's point. take the being pullback or – your you Can and guess I a that give your as to that hangover it a relates implication on at some business?

Patrick K. Decker

Ryan. Yeah,

really have impact tad really see market. in we're might in not the but Having there the quarter, other channel. met of having a been with our number they tariffs I at channel seeing – So of both big offering on any and that to a don't our mean, a pointing activity last that. as our recently, as we spoken certainly to not of that WEFTEC well were events, partners channels and their happening in

So seeing in that that's our not something are we business.

Ryan Michael Connors

Okay. Great.

Patrick K. Decker

Yes.

Ryan Michael Connors

And bigger then, other one my is nature. in somewhat picture

to mentioned seeing a seem sale quarter. nice multi-utility combo week the these in had and utility talk front formats; that some out increased trend last big it We the might there not terms matter? of on You more negative? does that that an announcement U.S. really Sensus Does there? positive, come a that a What's that Sensus in be to Is trend? there in view the of How be view multi-utility.

Patrick K. Decker

to we it endpoints we're And stronger economics trend. a them; make they're when more see that offering network. utility it's because many of able our we a fixed a see that feel for positive sense combo around even much from because Yeah, the we that FlexNet the is that that more reason off competitive very leverage position that much as

positive. very do And to that we it and so, we see continuing be trend consider

Ryan Michael Connors

Sensus do in percentage type – rough you what number not, is any business is have do globally? this of terms you – today mean, And – have what formats probably utility combo any I portion Okay. but of

Patrick K. Decker

get don't my guys. off Ryan. of We – and be top Yeah. back here number would that it you, to I in don't U.S. have head, have predominately certainly the can I the it

Ryan Michael Connors

Sure. Thanks for your time. Okay.

Patrick K. Decker

Thank you.

E. Mark Rajkowski

Thanks, Ryan.

Operator

Thank you.

next with Dray is Your Capital RBC from Deane question Markets.

Deane Dray

Thank you. Good morning, everyone.

Patrick K. Decker

Deane. morning, Good

E. Mark Rajkowski

Good morning.

Deane Dray

across Hey. that China. this better put of China hand-wringing XX% you all It's industrials, and up interesting about than the growth slowing quarter lots there's, in

of What if moment, but about could, you your a translating business? seeing? you tighter I regulatory really discharge, into about kind that how's know of spend book and mix wastewater just Where's that So, demand. backlog there's enforcement pricing? are

Patrick K. Decker

Sure. Yeah.

drivers the about of absolutely utilities it and part, whenever fact able most absorb our we've mandate commercial flow years government talking the were you're softness to central seen revenue a really the quality overall, building continues that and Even the over two-thirds years. policy China space, the a people be Deane. The were there is ago the So, right, really for treatment in there, connected the water top that China but, last regulatory down are on the industrial being because is we few side; of in to there, drivers.

of margin terms long aftermarket that, what us, margin building attractive through a mix from of at in for rest the China, also replacement favorable that's always we're a we In mix a We've said business of standpoint. the as similar world. very are rates, more the would coming seeing to we see around

Deane Dray

that infrastructure analytics market know to And focusing were margin, out discussions interested what maybe like kind sounds of what as for try but Network something translates be built But that was customer And kinds it kind the going but now, how business, then of and Service a growth in. that about a didn't model. developing more, of look to that it's could us maybe And you've like get you're acceptance? if share into rate, platform, percent hopes was that a you over the still – was Got on there water, you'd and non-revenue there to as some all advanced swing then, model. of from a savings it. pricing I early,

Patrick K. Decker

Yeah.

you're right, Deane. So

still businesses. performance-based contracting, where or different value trying models the are be of we stages the we a So sharing, pricing and are of pilots – in number about whether before early that talked we've strictly it subscription-based

will nevertheless, And but like that to move we very business are converting margin in more here see as of to here. standpoint margins attractive into so and gross and we'll on dynamics, are a the here. on orders quarter little on fourth that seen have lift overall, chest next say competitive keep year. standpoint. There operating so, and you and a We've in delays the more see big bit close into that some a very in net we along that QX to QX later pocket margin a the of I'd from accretive, both revenues,

Deane Dray

just Great. And would some going this you for whatsoever last I quarter, then, as if you deliveries order the an one just but excuse fourth third orders, Thanks. from customer us that about use didn't how those quarter could into like helpful. be the clarification. size

Patrick K. Decker

Yeah.

The overall, quarter, we – So have those for Infrastructure, have probably orders X%. been effect to – had in would we those delays in Water came we'd if in down came the growth. X% about orders of X% order the

was an it Deane. about impact, big of So that

Deane Dray

Terrific. Thank you.

Patrick K. Decker

Thank you. Good.

Operator

you. Thank

Your Jones of next question from is coming Stifel. Nathan

Nathan Hardie Jones

morning, everyone. Good

Patrick K. Decker

morning, Good Nathan.

E. Mark Rajkowski

morning. Good Hey.

Nathan Hardie Jones

Just you, Patrick. start level question for a higher with here

You changed saying positively came upswing. multiyear negatively? or in the cycle there either anything happened utility was you that's year this this Has that thought your for a has been that into year that, outlook

Patrick K. Decker

Yeah.

So again, I year. at specific not the say, really certainly I of I can't on leading are look we can I it, a in cycle? I up but in so has give where we indicators. were mean, much the I I – mind, at X% orders, where mean, through When our our prognosis Nate. changed are, would kind look

backlog Our is XX%. up

solutions. continued of products in of the think a idea XX% the and the on because indicator serve is rest lot whole which integrated still room technology for pipeline providing there for leading of And up that connected side, the infrastructure markets and convergence we're here of the business. is treatment a is software we that we bid Our the that

health the we that nature the period different think given the this some can you a digits being cycle, there and long that on time, the growth for down the the very historically of the wastewater them over of utilities here just hard has what of emerging dealing know, as road grown So come. of to see side mid-single we to are neglect and kick there to market time Also, the spending. criticality is dynamic with buoy going a and and for

see we long a So continuing that time. for

on not We're tend that can this because a offering seeing the to that communications heavy now lumpier. and to up. market, as towards that we and water be utilities a That's and projects defer of Software little the conversion AMI clean spending. that the right On see backs side metrology where the can are continuing bit Service

we're that healthy a feel here. prolonged still we cycle So in

Nathan Hardie Jones

here aggressively off more mean, don't on price be environment expansion going to in there have of aggressive neutralize bucket is productivity? Okay. Then you price up your XXX XXX points. points, your cost, balance here? intention price cost a then basis at basis margin basis looking XXX to points, slide on an for aggressive. increase and the really some your that XXX productivity it basis restructuring basis from potential there, see your a difference I this more opportunity with and being just I maybe you need you there, points overall look or I to points view cost, price do cost Is at up little particularly little price with there If as price being XXX competitive Is to price up dynamics?

Patrick K. Decker

Yes.

to I'd So, I'll like – Mark here. words share and a then few Mark in jump – have here,

So indicated But again, jump on say catch-up of to able back so do will to be we do I whole there opportunity round prominent think across commentary, we that we have Europe. increases so just of to with to bit out, price, aggressive that equal our of as there's we're the would been – believe in want Mark, where, be so. But But – in? but and, an we narrow we're would to businesses some in hasn't plan – be little yeah, we a gap, discussion gone Europe price another globally. we across I again, probably as playing the say, inflation you going

E. Mark Rajkowski

around with better material margin as when little Six Sigma, would we well. cost But That's to Nate, increases continue definitely more we the of Lean it in bit I in is view do Yeah. – can and up more component of that drive procurement, agree ramp no with to the what and drove material on a price, for continuous expansion ability us of but the as improvement. really job by we also a terms terms was of think But really of to the in important of about doubt. be saw offsetting price, sequential you terms we mentioned, we model, a material; No. aggressive lot increase, a freight need quarter particularly, that. it productivity to

Patrick K. Decker

competitors on will more act Nate, they to I'd follow the the our encouraged, us and leader, we as and But we've follow we're leader; And well. seen be like we'll price. presumably, by they weren't. that moves make to concerned like if have continue acted the

Nathan Hardie Jones

you've the to inflation the or operating any margin forward XXXX? potentially in on your targets going seen impact here, over last amount have the system XX% two, of Does in and year XX%

Patrick K. Decker

impact. No

E. Mark Rajkowski

Yeah...

Nathan Hardie Jones

Okay.

E. Mark Rajkowski

zero-price, higher material, we whole ...just Nate, that, harder inflation. – certainly, our we yes we that's about assumption levels price out was did to original are because point when the expect That's offset – little a our but target – – of up, driving more laid at ticked on So, okay? when on and bit we that. looked

Nathan Hardie Jones

That's very helpful. much. Thanks very

Patrick K. Decker

you. Thank

Operator

you. Thank

Scott Scott, Graham of next BMO line And is question from your Your comes Capital Markets. open.

R. Scott Graham

hear me now? you Can Hi.

Patrick K. Decker

we Yes, can.

E. Mark Rajkowski

Scott. Yes,

R. Scott Graham

myself had Good I'm of I sorry. course. muted, morning.

E. Mark Rajkowski

you? are How

Patrick K. Decker

Good morning.

R. Scott Graham

where Nathan asked to now of next, your say, the some is higher you with I large, perspective, lot resi I zero and Could from let's business really recently see coming questions, with residential rates your as my these housing-related showing was just both and possible numbers just like your wondering like and couple would? about, months, talk really, know (XX:XX) a stocks if of up a of as resilience follow trend-wise, so ones. you six you business kind down. different over you I'm I – were a kind that not couple but wondering of going what seeing was of

Patrick K. Decker

Yeah. Sure.

a replacement because So, of not or much there. business really on more resi we're of really Scott, too so business, expansion relying our exposed and resi installed much have too is we much base the

to of buy-in see calling still So that a bounces you real for called in snap around something we're a it in we've It of trajectory. sort, that pop there low-single-digit if any of but here growth. a kind don't distributor or be get terms historically or that low-single digits and

R. Scott Graham

in the has But higher materially months Okay. what you couple last with of see? from rates, nothing changed

Patrick K. Decker

same distributors. that's with our No, not we've discussion the in seen; that and

R. Scott Graham

things wondering that you. tell doing kind recently. of if maybe Yeah. some in the pursuing the about of three about opportunities side, I on that The now. water you're talked is us, industrial, was you which next you're maybe Thank question we've big just industrial really right could or the two

Patrick K. Decker

Are standpoint, – from you you a Scott? mean commercial

R. Scott Graham

yes I'm in commercial line, the sorry. Yes, commercial, please.

Patrick K. Decker

Yeah.

are we're together. was the act gotten and, year Emerging to fourth to our as to of marketplace, seeing that there. last one that as had piece again We'd some our And of of revenue this together we've Americas more are the say, and have space. number of NPD in and I'd integrated industrial for some opportunities I as come some team, we've integration we say, commercial secondly, in synergies new we've those gain this gotten benefits team Americas. of already you the and and well team. in think done all year offering meaningful continue region the pipeline going would certainly, there, that finalized a is us industrial the there of is because So here in a grow revenue of last some we having of the commercial the benefits would in from quarter synergies the we're next also the some that share that that commercial sizable Wedeco and scheduled was getting of product seen the amount we QX Europe year certainly treatment of done launched Markets. say help a that of integration and that one I of seeing have across our That

R. Scott Graham

sneak final prior question. piggyback a if think a you quarter? to here for it's and on the a fourth in one third just I – what give us in the you can pricing Got rate it. be will And Are a position exit

E. Mark Rajkowski

just points of We're in give in ultimate tell the quarter realization. a Yeah. predict reminder, we basis basis of We to you, and in Scott, What basis got basis it points up A lot then ramped the that basis try points. a XX not QX, function we've ramp at August, XXX XX and going were in that. points is And in good QX, and to points you is to acceleration. I negotiations got September. XXX in July as XX to would

good but fourth the feel moving there's you good realize; just function So, what is of it momentum but, we've increases, momentum got But price not there. also quarter. into a the that we

R. Scott Graham

helpful. Thank you. That's hugely

Patrick K. Decker

Okay.

You're welcome.

Operator

Thank you.

comes Your question with Cowen. Joe next from Giordano

Joseph Giordano

morning. Hey, guys. Good

Patrick K. Decker

Good morning, Joe.

Joseph Giordano

mean, it the your built forward impact? there environment, what's of a if couple years this you of offset there's lot about on that inflationary just in your that you that of already, And obviously other business. or confidence prices in and talk touched like to we extrapolate of I and that kind bridge, offset a of kind target but are happening an prices we sourcing you is now, And like – kind areas part what's XXXX on

Patrick K. Decker

Yeah.

price lever the on. driving is that, it's be a to to only certainly, the hard piece – Joe, so not that So, on we're big going and focusing continue of this we're but

power in lot purchasing benefiting a also have there do So our now more volumes, right doing volume obviously, the leverage negotiation. higher value still design. of from so we're in terms we're what we we we get optimized of space – procurement in work call Two,

is people age, in a it but the margins; in Some those that portfolio, growth are may lever to we're above we've to work going a lot that hitting a to the value G&A be and, of as being now. we're our where Global expect We're we from which and of a course, early think our a improve the where benefits gross third is lot to have rate GBS then, don't the And expansion but contributor about predominantly bit that's those growth That we the And XXXX. substantial – about right be design we number of that optimized we spur of VAVE, rates, and introduction really XXX is that points, at taking can XXXX until those margin of outside challenged. the we Services, basis in about really Business doing at still line functions. still end talked a margins we're margin the little those in maybe working the of redesign phases and that We in see simplifying need to really we of don't with ramping standpoint. call those products do, and and Cognizant partner, slower our back products implementation. least, longer of about that terms start office tooth the be

Joseph Giordano

us give Has or kind little that? that Sensus? of kind you it? of can then, little is are the electronics more of what with of ordering and over you a that couple bit bit last a – double to dealing months, mitigated the are And buying, fair. accelerating, That's for guys care Okay. color How you on tightness take

E. Mark Rajkowski

Mark. it the in to also, bringing meet nevertheless, components the terms of manufacturer Yeah, been of contract to brings sure for from that scale make increase. our their we where really, continued Yeah. aggressive it these fair we need in we course in. we've you us share And of to, that of the But having has been out year. Joe, quarter ahead to ramp more in partner can is, the done what can we more has price M&CS. up get so a terms third tried We inflation to what our have play. This demand that's in in it's benefit to But the we enough where inventory those The really for demand. extremely good get throughout on has of really saw of managing we team on do challenge components get with a well. And

Patrick K. Decker

not going on which we are in It's we kind I And margin, just it really Solutions through need great them. to highlighted have really the commentary, partner the manufacturing commented, to to overall supply. over impact scale a call our of as segment-by-segment only significant as that really able had out. points. to The Measurement teams not we the commentary reason was leverage Control make that we're contract Xylem. sure get their felt And access It's Mark we we're all downplaying it XX think, the that's was that this. basis & Joe, But really

to We're a having it. get continue little to price other the teams it, going pay on angle offset. to the in hard we're but So extra to areas work

Joseph Giordano

public see me, from least some, to we're valuations last the come starting at in. on side, then, And

you more As sheet getting sharpening of here, aggressive the down? deployment, kind valuations more look key you guys already bit you've and a wanting how are areas that you your as you are – at bit a balance for strategic delineated or come to look pencils little little deploy with

Patrick K. Decker

point, mean, I do I healthy certainly, to your I Joe, mean, attractive, think – have we pipeline. a really

capital here keep an the being to go they going But pipeline privately wouldn't what on to so, will deploy whether assets. because continue public we of where of a valuations we Certainly, eye near-term jump think I or anything And that foreshadow valuations we is be we're are something are. great held. on just it there, in on that out

opposed also of we While always any there's where as cost capital And of cost discussions what the of a valuations it cycle. the long-term point may take around in capital be at course, view matter, to is. on

how we on disciplined be evaluate to opportunities, these evaluate and continue to going and we're monitor. So

Joseph Giordano

Thanks. Great.

Patrick K. Decker

Thank you.

Operator

John next Credit from Walsh Suisse. your is question And of

John Walsh

Hi. Good morning.

Patrick K. Decker

Good morning, John.

E. Mark Rajkowski

Hey, John.

John Walsh

short-term Hey, that wondering you're off down to piggybacking going debt – here. question, some pay

is your you what generate a remaining credit lot cash set and to as year. see actual Can grade you it QX going of today? on level investment an within You're rating into us next capacity

E. Mark Rajkowski

ramp little But this to investment as into back EBITDA quarter us. as we're mean, at our able about X a part we clear how our more can what maintaining I And function will it ultimately is a a and you're that and range. of a will acquiring bit leverage. continue lever of That function be big of get And flow we confidence we're to decline it pay into past, the the to the quarter, for paying. cash in which is times up it going rating. fourth with definitely you're XXXX. down through part much target of is grade move done we've Right now, John, Yeah, up

we into the this are more and more into XXXX. – certainly going fourth we move building firepower as – third So, quarter to year be

Patrick K. Decker

with the to And I leverage great of building job on – Mark's the agencies. credibility a the with a rating I done agencies, team's point think, in think lot we've

committed got the faster we've would because we've great and than there we've flow than down leverage things we businesses more with So, have profile just had past acquired what paid we've high-quality to in the agencies. probably that demonstrated cash

John Walsh

seems can and the the quick Infrastructure U.S. Got impact And size you. around at from a if us, you any discussions then for here, positive, then, a stuff of tailwind a local funded it's like and you're it obviously specific just market more follow-up in state a get seeing business at be Understood. municipal maybe the bill? would maybe in mean, at to least lot relative done Washington. level, not does Water it that just least being something I but but the

Patrick K. Decker

Yeah.

roughly, to So just continue see broad-based billion I be health our there. And rough would exposure of mentioned again, there $X.X just I we as earlier, about, revenue. mean,

seeing we certainly space a in gain and side to half to within and installed Sensus, spending wastewater I in As exposed CapEx. we earlier, we're about we've right healthy to versus leveled the pieces a of mentioned seeing about well. tend we're on and the about that that – which OpEx water replacement side, on then, half got And the fix side, that we're wastewater network. what CapEx still the historically, of as benefit exposed a of wastewater, Pure, now. we clean base repair exposures of of where side. seeing now in those been call kind break terms course, we're and XX% tide large and share is distribution the drinking And our had acquired And because we're when out there, now rising on on And equation we've then, such biggest

John Walsh

you. Thank Great.

Patrick K. Decker

Okay. Thank you.

Operator

you. Thank

of Your next question is Sachs. Lee Goldman from Brian

Brian Lee

Good guys. morning. Hey,

Patrick K. Decker

Brian. morning, Good

E. Mark Rajkowski

Brian. morning, Good

Brian Lee

Yes.

Can in you how First we've watering, which since is Sensus it's strength off, encouraging. we the sense that's XX% just thinking think MCS here? a how large sounds few just like order projects, about the sustainability was best it it's tied in or order the the some growth, us and bought should American broad-based I North seen and give of to be you if

Patrick K. Decker

continuing in grow that It Yeah. of the market And spend. based. in about overall broad pretty terms business was mid-single that the see digits to in we

were in growth was So a number, but broad-based helped terms couple pretty line, of certainly, that of the there geographically. but projects product pop both that also

E. Mark Rajkowski

smaller business while And analytics XX% well, within in infrastructure as a quarter piece of it's segment, our that as orders advanced the almost was well. growth the

Brian Lee

just industrial? relative that some strength where bigger can your guys markets, of speak kind end for gears coming was think are shifting you to the we most then, from? end No, trend felt of of commercial of end And like changes one utilities Great. and seeing Where like directional bit cycle you the a are bigger a guess, terms follow-up in helpful. terms of that here that of to in maybe I market that's Okay. positive. market, to question, you the I little

E. Mark Rajkowski

Yeah, Brian. kind Yeah, was saw talking this. the about we had we we growth. where U.S. had two in been really One strong regions where of

amount of there. particularly, back room was number lot in very key pipeline there for they're a then, good getting very the If of saw price, segment released. very, run that, on but so, the you in of driver really, really we building room in were growth run was go growth in the had starting U.S. activity that were And bidding there's strong year growth; tremendous had with they It we that of other strong we think to released. in Well, sure. and and get some And U.S. a to institutional our a the China we and some we customers in weren't to projects where very, or

Patrick K. Decker

Yeah.

high-single So to we couple for just certainly, the cumulative I and just up we year fourth the what based through digit where a we've quarter. of quarter for, the upon full One, here. offer expect are would notes guided third

and planning of outlook high-single remains growth it of the too moderates of one in attached to digit say I'd few account years dividends to down the that diversify said broader like I downturn standpoint. in did certainly our so across the was things likely that terms level, punctuate, paying – a broader mid-single-digit I customer Asia to up timeframe wouldn't key XX% what in the a Having over unchanged. great back really there now one a rate as that XXXX Pac get running looks think just view over to that, that revenue the a team in is team was on where ago reaction from China, quarter to forever. set, our kind of growth approach

Brian Lee

Great. Okay. Thanks, guys.

Patrick K. Decker

Thank you.

Operator

Thank you.

next Global. question Walter Liptak with is Your Seaport from

Walter Scott Liptak

morning, Good guys. Thanks. Hi.

Patrick K. Decker

Good morning, Walter.

E. Mark Rajkowski

Walter. Hey,

Walter Scott Liptak

I are pipeline wanted a of And to ask there the couple was because weather, any in storms quarter, wonder from projects if fourth and the then, in the were that any of about in the quarter. impact storm-related that. any damage? building big there I

Patrick K. Decker

Yeah.

impact. gets bit a got here seen team's in maybe it – is a revenue. around I bit they nature a these and estimating the and $X probably high-calorie $X.X revenue, but million on million, high it's we that haven't overall, of of just bottom think occur. of benefit a little We not the of big the storms But mean, little the end Part in line QX. quarter I where

tends in Sandy, it maybe really runoff, of were perhaps, lot the infrastructure. as and a natural not be as where was, in And so, dewatering involved dewatering are there where we applications underground to de-flooding critical

quarter we for the a built we – certain repair the of big our in are as number to infrastructure some benefit but quarter. is areas, see that expect be in some outlook utility will in we've us don't into We there that

Walter Scott Liptak

accounting. Great. ongoing strategic When right. with that that's strategic wanted offset Is looks do And profit How M&C. investment, ask All the investment, on and purchase statement? then, the from the those should we the just (XX:XX)? – most in the And income we bucket I just of the it to to clear like an purchase comps about Okay. from improvement? accounting

E. Mark Rajkowski

Yeah, Walter.

out to done, these really deals, capability to technical taking international AIA away. it's the of have first-mover these beginning accounting, function of first purchase of that's our building as also we've terms resources, platform, commercial next some been commercial, but that, it So of projects. in quarter smaller on the investing both deliver the we've but a investments, the on – both in anniversary – been of There that was as too, ground, a support well some but And as of in terms of deals we year, of goes support really largely advantage couple Pure. both that

Patrick K. Decker

So, a around platform the building on with we that that's business standpoint. done, a the expect acquisition of smaller platform the other capabilities And analytics the investments deals mid-XXXX. of, probably the certainly, again, Pure combination those to continue, through new The thing is likely and sometime them they're to late-XXXX. about deals have we've deals also large to, international going in mid probably, development these but investing in mid- decisions from to and

outcomes. binary are those so, And

investing don't made. them, you them, it And the you you you then deal. stop in if win investments the pays than for If win more

bit a part of be of to the next that expect we a middle So, really year. in cliff

Walter Scott Liptak

right. All it. Got Okay. you. Thank

Patrick K. Decker

Thank you.

Operator

you. Thank

is question James. Molchanov Pavel of next Your Raymond from

Pavel S. Molchanov

taking for question. Thanks the

Patrick K. Decker

Sure.

Pavel S. Molchanov

in On to equity private the strategics, range wide M&A tech And everything buyers water of large seen a to kind XX valuations over smaller market active the curious, view, for the last front, on months? the deals, very we've of has one in from most perspective of I'm buy-side as consolidators, landscape are how and competitive the seeing changed what your maybe, you the from strategics.

Patrick K. Decker

Yeah. potential valuation certainly the part There's in some been on uptick of sellers. the Sure. expectations

lot than be tend most people something disciplined. going a a certainly be think either fairly into that public well, where are count obviously, to a for. I as these of relationships take cultivate family areas very we we've tend And along to PE. synergies. to any terms – of over them result and privately are owned the cultivate those competitive we a what of the disciplined on that focus valuation. long know ultimately high-competence the are they seen they're purchasing owned, other the without things owned synergies cost we part, for We very to you We side, We to or in that tend of tend by that, the them on cost We build we opportunities see we're market and only our timeframe on as revenue for that don't natural that the of going try way. synergies off becoming have lot model to

disciplined but we're here very not our in always So of in successful terms proud corporate M&A I'm well-connected how they are. doing team development that, and of and

Pavel S. Molchanov

in headwinds terms Thanks. be do or felt? of Are just impact And margin, yet of quick a of in what more into there like tariffs. That's think one kind that you QX the on to all then, the value incorporated tariff-related chain is has was helpful.

Patrick K. Decker

Yeah.

pressure the we in it the QX QX talked happening but QX. Emerging might our very going that import into it focusing outlook impacts on think on was and about we really of increase We're, But the certainly continue the we That China. so understand unique the side. it about a realization. of work say, I to pretty To we execution have things again, product the localization meaningful. product years impact four So results really of already our localization ago. lot just about little modestly that think The one put our on is the which We joined, bit that probably in Markets. $X on top ramped we've forward, perspective, be price but to or started of offerings of the in because I a direct a not beginning and We had teams well up. it. that's from, front, that some strategy, impact there We here, about the Whenever for million, us of tariffs. productivity investors indirect helps the it's also, U.S. now what are in many not think modest reflected both on of mitigate is

and much, largest our market business there, we then, impact the supply really that one that line have our doesn't there revenue any, we're within dealing of have in business do, in because terms small on localized. right trade and if mitigating We now XX%-plus, is China But our that. concerns the with of chain portion even

And so, now benefits, getting it this for a localized. you're again, but localization in we to trade the for help environment, from growth, does management tend of what things kind seeing to the market we're really cost about is tremendously purpose and that right talk fit be when in a

E. Mark Rajkowski

in some some both our need manufacturer where make contract as changes as where of And to. our we we that's some chain, flexibility our supply – have to through of good own too, capacity well those

Pavel S. Molchanov

you very much. Thank

Patrick K. Decker

Thank you.

Operator

you. Thank

is question Berenberg. is coming Andrew your Andrew, line Buscaglia of from open. Our final

Andrew E. Buscaglia

question, Thanks guys. my that. about for taking Sorry

Patrick K. Decker

Sure.

Andrew E. Buscaglia

So your Water a digits some just orders. can you a I details delay touch that were in the orders I is X% you What and the just like the know Infrastructure up more? to so into just in around more a give wanted something – dig in that. segment on commented bit next little but decline decline double on your there you – – that us to mentioned was or for quarter,

Patrick K. Decker

first question. your Was part of order I first versus missed growth the of part the revenue you're the the reconciling growth? the question

Andrew E. Buscaglia

backlog up is double digits... You in Water say Infrastructure your

Patrick K. Decker

Okay.

Andrew E. Buscaglia

declined percent. orders about a ...and

Patrick K. Decker

it we up projects before, from taken in had was you QX, X% to in orders. it if Like down growth are few would being about simply Year-to-date, Sure. if in I being have a have that would a have X% those just said large to timing we would Yeah. up us – there. point of X% order

the itself, So, times into backlog these when function that's some the on projects lead really orders. form convert of of they hard a and

Andrew E. Buscaglia

Okay.

all Indirectly – but it of why but guys see wouldn't costs, from you doesn't seem your indirectly, regarding this, have impact, peers much are? an though, last influenced really quarter like you your changed of chain by – on segment yeah, disruptions yours but impacts Infrastructure the Water on hate a tariffs. belabor and the these seeing I inflationary competitor to point some is guys at in Then Okay. tariffs supply view

Patrick K. Decker

revenue secondly, we're product I percent to. we're think, that localized. the from I peers and scale that terms are about benefits cross-border fact is that think, the which lines our in – the again think, more you're movement. which referring of is it our upon I many We're talking localized predominantly of much and coming than channel And is competitive depending Well, of of

seen created team this And what also our close are that laid things make exceptions, they're three and a our supply can didn't four the chain depending categories impacts the lightly. they're it referring knowing, until on be out. regular in we've not our have our trying the also these on of We've it's with being a it. a don't I teams So, with look, about – particularly, basis you also ahead to, we again, we take we work to and lot competitor of see. heavily moves the with We're these also sticking benefits get working think there ago. but may that just teams And ones here They're managing legal working terms the we which of of get moving facts optimize by adequate that here having are to leveraging scale, are what network. better up years very to half, place that commercial doing in global capacity procurement is manufacturing upon got on management

multi-prong a it's So, effort.

Andrew E. Buscaglia

Thanks, All right. guys. Okay.

Patrick K. Decker

you. Thank

Operator

the or any you. to back closing now floor remarks. turn Patrick over I'll additional Thank for

Patrick K. Decker

Appreciate you earnings call next your with travels, call. hanging with very Thank all back in our Thank continued Safe holidays and on great. support Well, much. interest. you you. Appreciate touch be we'll and happy to us. you the in

Operator

today's you. conclude does call. This Thank conference

now disconnect. may You

Xylem (XYL) 30 Oct 182018 Q3 Earnings call transcript