XYL - Earnings call transcript Q1 2019

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Operator

Welcome to the Xylem First Quarter 2019 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open a few questions following the presentation [Operator Instructions].

Now, I would like to now turn the call over to Matt Latino, Senior Director of Investor Relations.

Matt Latino

Thank you, Bridget. Good morning everyone and welcome to Xylem's first quarter earnings conference call. Chief Rajkowski. Patrick are Financial and today Mark Officer, me Executive Decker Officer, Chief With provide perspective will They their results. quarter XXXX on Xylem's first

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

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

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

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

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

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

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

Patrick Decker

discuss us thanks for quarter Thanks Matt, Good results. joining our to first everyone, morning

have our first operational in the we top was healthy for, for should line by guidance performance identified driven disappointed that to care our quarter margin our mix missing growth with and factors continue has to the the that these planning past sold sales of corrective over we to and say We process. taken shortfalls. and earnings. and frankly our track operations and margin about we We what deeply going and notably we we actions plus planned but take Lower and seriously were in have address years as shown we see are demand most doing strong products do record commitments very five we

We with about healthy very are year achieving continued our growth momentum, ongoing the of our and for prospects and expansion pleased remain beyond. excited remainder this an growth margin well

of standpoint, X% continue in revenue to again the strong largest details. saw revenue From end markets healthy delivered geographical quarter. an digit healthy included strong as XX%. treatment, growth sector in by with of gains once about very growth growth our double single mid utilities. metrology overall up Sensus India as other be well in Latin our the highlighted gains We to remain with China emerging we confident in large and digit looking organic performance XX% with represent increased opportunities in growth India project, growth markets. these in end XX% a across let growth a our U.S. and once and And deployment above of produced me a long-term key other increase and review digit strong all transport markets. We build single up markets, of well mid market. beginning and some again. our forward, XX% as was growth market China at Asia The America. continued in momentum growth particularly, solid least This market continues of Now, in the This the the utilities saw year-over-year.

orders XX% the growth in in orders, top XX% continued year. of to first a of And with saw there backlog. quarter X% increase of clear the Turning strength are we this signs growth quarter in on last is

in Another FlexNet Investor million metering early that important on is revenue XXXX deals positioned because the since the we and focuses million the from reflected resilience, achievement, this This is $XXX communications that have long-term synergy deal have Sensus with now $XXX also stated on is and facing we with we our growth, we by award, crucial Water, portfolio. customers, February. offer this our target made, the now Day It Philadelphia leveraging solutions most to our infrastructure $XXX synergistic key solutions. of our and power our scarcity which project technology. water It across are incorporates our positioned the of our won previously from secure example between backlog by that are strategy acquisitions is nearly acquisition smart contracts recent execute milestone is of that executed demand affordability, Based challenges It issues an water for announced of represent accelerating million. in sustainable highlights exceeds and growth goal uniquely to now revenue the to portfolio. strength of profile a which synergies, further our

the infrastructure advanced example of over saw quarter with market platform or a platform accelerated Our this. momentum analytics clear AIA XX%. orders of is That in growth

a utilities Europe building Asia. a growing presence in robust and increasing in pipeline of are U.S. interest with We and

turn performance, Now, to let was margin which factors. impacted by two our now me primary

European and unfavorable first was expected revenues. and aftermarket mix revenue service The was that test an

a are we it we forecasted factories, overhead behind a and decisions absorption in in still is Mark? these have address process to going additional with production, inventory demand was steps due our largely made on second that planning we the some The key couple we to our to quarter, are to process confident taken effects margin had going now operating over and who I Mark, us. to am sales Simply to detail give to hand optimize planning demand align about better of unfavorable place levels. put,

Mark Rajkowski

in to XX% results. the comparison with the revenue at X% growth I which to segment. up the guidance. pleased conditions, commercial trend markets line the Industrial Thanks our revenues of delivered significant with accelerating inflation, expectations, than strength China XX strong We building first and price down high to continued residential more by reductions Patrick. our programs tough Please Cost last quarter benefited test across by from its we of forecast of both in X the market strong quarter revenue where growth we weaker in sale solid services, with utilities momentum growth of Europe Adjusted up than end am declined basis driven quarter. comparison offset growth U.S. expected led had quarter line lower Organic in X%, was were with with growth market first year's in had and first each the end Each where strong realizations and in was Slide throughout our X%. in solid the several a from growth treatment sales operating large with quarter, growth regions, across XXX emerging tough the project the Western the software Part aftermarket growth the was from basis by XX.X%, very XX% margin continued businesses which last and a end and X% majority price expected of mix and deliveries. investments turn quarter year. year's high products. in our sales XX% the XX% was growth. in in service the Europe. our mix. in in saw than for I continued growth by with geographic markets Revenues markets considering better weaker our up will and of grew in prior productivity points points market end our driven orders begin XX% in X% revenue of realization, of margin

overhead to to expected infrastructure We and inventory production also align market applied driven working levels our demand This quarter in the optimize our water capital. segments. to had water cost better lower absorption lower by was during than

X% the put last billion growth over foreign taken us. quarter. orders grew translation. turn This operational will where planning our Segment over sales orders As quarter XX% and XXXX. prior results. backlog segment year, Patrick at in the Earnings were this up excluding shippable on X% with with Water comparison orders align tough mentioned, year. XX% to the growth XX the share $XXX X behind I XX% currency organic quarter in a better from issues is million per we infrastructure; up This Please review was grew the top project of treatment wins. have and last operating processes in of Slide end to is $XXX large several our year, cents, and actions

for regulations, US in major China, the this wastewater pipeline to Treatment facilities of were in project market in in health X% turning America. of was large up utilities the China which and XX% industrial upgrade lapping project strong. the change see a revenues with XX%, work the as storm these growth Our many water in Emerging growing from in is as up in projects Industrial quarter, by in are driven where mid market, single-digit workers. project the sales pipeline, revenues last strength which view deliveries markets. these grew in growth water end from which and smaller Europe, utility expanding. with now to down the in treatment quarter the momentum growth by quarter. deliveries. of their we in the were market China grew year. aftermarket the benefiting in application project in XX% Western The growth the and treatment in to medium revenue we Transport North projects digits fueled infrastructure quarter good a in single business, our India, regulations. both construction X% significant was expected for utilities was dewatering treatment utilities X% mining bellwether and China, in our remains this grew India from deliveries bidding were by in meet the a underlying new sized growth to resilience In in With the US strong completing or grew from revenues driven which comply opportunity opportunities by quarter. may XX% build revenues We driven markets of utilities and high work focus revenues Water segment grew emerging application

year. quarter March. softer expected, last grow segment which sales impacted the basis realization, last mix and Europe business our aftermarket the by from solid realization market service year versus in strong prior we to compared absorption. leverage led year. very price new basis However, basis emerging exchange in project than lower overhead turn inflation, the commercial overhead offset to reduction of million by foreign compared than offset Western a each Segment in Cost segment delivered to weaker XXX Segment end organic higher with margin business prior we price X. was in over our growth with and of the of China sales year. operating led systems U.S., and across lower XXX due services. Slide XX.X%, and reductions, $XXX to points broad-based end water to and backlog XXX than the strong was markets we quarter, revenues activity. for growth growth up XX% absorption grew XX% saw business more the ship This orders which organic investments grew year. than by revenues is the applied improvement more reflects headwinds. X%, the $XXX more XXXX. our quarter growing Cost Please saw volume X% last points,XX.X% XX% had inflation, X% at of driven growth million Operating of the Segment points for margin up which negatively mix The to was increased X% is Geographically, over

this million Measurement to quarter, XX%, XX% orders first at segment turn which $XXX the which quarter. last please was is X. million of in is end Now control of up solutions growth on top XXXX, quarter, and for organic in $XXX backlog growth the Total Slide shippable up XX% orders in with had X% the year's year-over-year.

the segment wins. in to continue momentum gain contract new with We

grew other with in including good SaaS We XX% a and customer in reductions in to growth cost later solutions of electric X.X%. Xylem business favorable Alliant regions. half our of investments year, project were in continues due the American revenues also We software in mix than margin customers. accelerate for previously the these the strength of X% existing this The grew test is and in from as high-margin from continued and customer by large which that by the quarter the were market our availability in into organically X% the the impacted improvement to quarter. high are operating expected the during we in the from revenues in service Segment expectations The from the half segment water we to offset expected of contracted Energy, were sales by AIA the growth smaller gas Water ramp of last combination points AIA quarter. a with business. deployment than wins, demand and last declined we end inflation, AMI a XXX largely interest the for Test of and as by second deploy quarter for XX% margins our more challenge of our impact new last behind volume lapse iPerl Segment saw platform. and offering were driven us deployments in relationships. of expect utility revenues across was mid-sized large North penetrating be meters grew markets Philadelphia by recent Europe throughout project in contract as some delayed margins begin expect and will as win revenues year year. quarter. and year. basis to to so, announced sale that is second our application Benefits second new first Strong low channels the the the as news to components revenues down X% flat leverage lower and the multiple revenues organic growth lapping customer year. shipment below growth software

order challenge we this mix, margin experiencing scaling were managing well strong U.S. half customers. our outlook Mexican our the of XXXX, the are our minimize product platform market. getting of new to driven we to from our of The all improving in working processing in continue buying through is for AIA the We delays supplier into to second that expenditures by team One impacts

the growth quarter, the $XX the in for $XXX which higher Slide our dividends. Company's We capital of million us driver turn CapEx remains rate balance modestly related $XXX full-year in forecast our position. let million cash $XX cash us. with million. an $XXX X through we returned an to share Now invested full-year of financial to of We remain run and spending than to closed overview to primarily the a shareholders is during quarter That cash and timing. business for continue We in the will of and flow million million. said, Investing quarter important and between in disciplined repurchases

These cash quarter and capital cash worked and inventory conversion line address by down improve working from working XXXX to component over over the expectations to Our next This from of quarters [Technical the second issues. we flow half in to capital the increased tariff and substantially. will XX% free inventories our driven is build Difficulty]. and improved with flow our be flow and Cash free each expect continue quarter. conversion year's last operations first improved two during

year. the as first weakest back reminder, the half inventory period of seasonally build for cash a flow quarter the we our As is

for conversion. of our track earlier on revolver On announced the this of is continue to year cash We we credit full a to a This our XXX% quarter it's meet note, performance. new target in sustainability free our first value our tied flow Please on creation. with sustainability end final to XXXX cover more and XX interest Slide our market turn able will efficient our financing and Patrick social pleased the align are we and sector, to shareholders outlook. focus to of be

Patrick Decker

from our for the on call. of unchanged year end our view markets guidance provided last full The largely remains earnings we the

backlog we in the in XXXX. healthy a Even tougher combined some for growth confidence digit growth of mid-single run saw expect end the through the one tough still aftermarket U.S. relapse with we strong expect year-over-year will balance backlog quarter our our in our growth year, of for some orders we I While we still markets. healthy growth the and first quickly momentum comparisons, key points market, the that each solid to with utilities business. the see through U.S. and the in In very project where continue comparisons reinforces

digit therefore, mid our lead India accelerating. we advanced from growth and are emerging is moderation year. to foresee treatment core moderating the continue way, slightly expectations countries We outlook In expect half in in saw and of We expanding market. markets, single we overall and for continue the we adoption as Europe the UK. regulation industrial, as to other single softening work to maintain our of growth mid the technology In is China some both infrastructure low the in second in utilities the digit uncertainty

comparisons. quarter construction strong another commercial, and do expect will the we slowing primarily While also growth, with In the market we year driven half outlook. consistent back in general mining last we of activity and will our the We growth, do the by challenging quarter in of that boosted moderate China. saw US face expect and the first

to However, for confidence to mid-single the in and raise based outlook gives our digits. order outlook commercial demand the first full the us performance on for year quarter slightly

single-digit flattening remain at and outlook markets guidance residential Europe Our from growth. digit a Signs in U.S. our emerging at housing mixed low-single remains all of quarter. low across last market, growth a outlook unchanged

please an rest turn our will on and Now, of update guidance XXXX. the for we to Slide provide XX

to deliver to organic just and As to revenue year top growth with the discussed, we solid started X% expect of we X%. continue growth line

to XX.X%. basis to represents expansion This to adjusting margin XX.X% outlook XXX our of a points. are healthy operating of We XX range

which EBITDA on year. it dollar of takes the our to bring an account improvement stronger remainder basis would performance XX.X% adjusted This similar of expect updated outlook quarter to for the XX.X%. last a and range into We

Let overall me at approach to a we other talked are XXXX taking margin our We components. business for about Investor actions our included pause moment improve to talk profile. simplification, primary and first our about which two day

our implementation back in First, functions; number will a the this global simplification the of services which office business of come a moment. I platform, to a of represents back

we management that to opportunities organizational have so to serve These we effort expect realized we customers broader the can as support functions; organization, the year this us of we see within de-layering being savings other agile, do the better. allowing to further time, advanced more savings be faster are and speak our and Second, duplicate elimination reduce complexity, XXXX. in bulk and this actions modest taken with to of being since

our guidance, revising are the the XXX% a stronger a which represents continue first back year-over-year turning year we we Now, EPS XX%. and to in reduction quarter. expect of at finally, and cents, growth shortfall between reflects do for free to This adjusted full a long track so. $X.XX And flow solid cash to conversion $X.XX in range to for of to of $X.XX the $X.XX dollar X% least the

Let me details. in and back second to now full-year other Mark quarter turn to it work over summary

Mark Rajkowski

assumptions. XX, providing seasonal our highlights as Slide business, of well of XXXX On our planning the profile as we are updated

XXXX, We continue by growth to for to which segment as organic follows. brings down expect X% X%

X% X% in measurement Water applied and growth water X% control We and X% expect growth to systems in to solutions. X% growth X% Infrastructure, to in

average sensitivity month the was the of and that We the FX we are in rate our year in appendix. April a X.XX, now for have table which included assuming

year this largely earlier $XX increase the covered increase costs million. forecast the restructuring be The will majority to with and for increasing of $XX Patrick simplification. being XXXX. to back in to are organization We of related to The realignment in half the million year relates in recorded savings our realized estimated charges the for restructuring actions

tax rate for at estimated XXXX remains Our XX.X%.

Now moving quarter. to second the

the well broad-based company municipal strength growth to total as growth and We market, as U.S. range led continued by of in expect India. X% X%, China in in the

basis margin adjusted quarter points basis to of in expansion operating XX.X%, XX We be range to to over expect the points XX year. representing of prior XX.X% the second

margin expansion improved cost strong both price volume water our and water infrastructure applied continued by expect segments, in driven We leverage and reductions, realization. system

our We expect which to the moderating segment, impacts [Technical XX reflects points supply basis margin XX expansion component challenges from of mix Difficulty]… MCS about from

Operator

may please gentlemen, continue are to till Ladies restarted. and And and resume. conference is hold the live you you

Patrick Decker

technical this some sorry Yes, and had that you can not is I so were planned. have we assure Patrick difficulties

target may are its we to two in to about entirety. it So, some be going Day, comments A ago, track our hear growth make to Investor having laid X% years to Slide we through X% that talk solid as this the on XXXX over XX. XXXX. continue realized but I of you end here, our financial we and are out that of we little the in section targets delivered is call important of it our high progress X%, go back organic of notably, at redundant for my growth

This EBITDA XX.X% adjusted last XX.X% of accounting is XX.X%. outlook target on from the track year seen, the at amortization. we've indicative also from stripped margin having as expansion noise which year volume and operational this finished clearly Our and strong and that growth out purchase leverage for well is between an

last year as adjusted before. year is Our of high delivered growth our and growth mid-teens growth the of also XX% XX% at end we target EPS tracking

while of objectives. for midpoint there XXXX. adjusted next outlook margin. operating In some our XX% I there this year to our our frame, targets we of Our are achieve support we at our back the things significant in may is range. to continuing target as progress, in the at realize about have time changed out questions growth the have while be those ability XXXX And couple year, made laid growth roughly a

XXXX; now we these realized potential the growth. into said that, and the revenue to order any savings month do minimize initiative. in phase optimize the we its and of expect XXXX our this to services to Having business fully delay opportunity this to decided committed disruption actions we next global delayed earlier related and implementation but to late decision First, remain made be to We entire this across the the are businesses This is growing around new strong solutions the are second, platform in reflected innovation we pace This excitement acquired and helping is and the few set for digital for acquired us growth the our have offerings. set our we platform. company to the target we for sector. technologies in before build demand AIA that integrated seeing other and the

a points remain XXXX longer the let platform. expansion at have XX portfolio been we confident margins of to wrap in result, before turn our basis and building as new with further least As we term XXXX that, we XXX in potential margin expand this expect healthy With to to questions. capabilities in the beyond up margin scale Slide in us expansion

to demand is digital see So in already and are we the is continue managed stage communities for globe. we journey, in our the around which reshaping of closing, solutions the for water early way our strong

very deliver While commitments, our in opportunities to in growth we investing performance, that in realize as had of as while a margin regards have us disappointing our we actions longer-term well expansion margin XXXX ensure opportunities. business the taken quarter we attractive our to to front

includes for are to to customers We challenges our them executing harness and creating their value toughest the and transform technology solve stakeholders, power to the future. committed firmly our of which helping enabling

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

Operator

with Dray question comes And RBC Markets. our Deane from Capital Instructions] first [Operator

Deane Dray

when remarks, are the demand of we factory the decision decisions in more we actual and first layer how so so deployment the inventory and a the said help Patrick minute wrong and an margin of the, wrong fixed? start seeing actually missed degree Maybe the went detail miss that next like linking factory you I it's or talked your and with here the with just opening I chain what confidence and what but and that ERP of first commitments planning oftentimes need absorption demand there or can about the lower your quarter of went that's apologize and the

Patrick Decker

I'll add some speak first as then, color Mark, well. here

recall, is, we clear inventories end up be as here the we're targeting built tariff So component some ahead December have increases shortages. at you expected you of to what the of and very

into free the flow to we came and had higher actually and you cash inventory that had levels we the of recall bullet led So quarter. knowing year, last conversion some

of built occurred So financial the decision we've down have That's and in team made does the came level, disconnect at where the was sure are by of couple factory. forecast supply quarter. resolved not we work those originally the actions as disconnect taken conscious translated we into the of within that reoccur. the inventories our guidance in The we terms the out a that factories to getting into miss now factory and finance and that was organization our chain make would

Mark Rajkowski

team I we've add through happen want some make so beginning work where levels. make does the making of part right have again. conversations of and working completely were those sure it involved anything. folks that that gaps we Also to the is as sure the And sure in right on at to the we through we not this of April

Deane Dray

of to us size understand absorption. abandon you can the mix at FX? factors, I three order size And pushout AIA mix X but the including us the factory had those for for between mix that

Mark Rajkowski

points And both was in business mix wasn't impact it across and all did the business Infrastructure in to basis analytics couple of terms was factories in of our this our business make we points. that the also Water This our on roughly by but that saw and then do factories, incident In impact And is basis in investors. our XX I a than softer the AWS approximately, of our AIA, we in that that and you it absorption absorption to just test isolated Europe. XX-XX understand in it on aftermarket sure point hands an and is have XX the expected want quarter. quarter or on it, revenues service

Deane Dray

on to though the push-out the this XX% by XX% slower global services. margin question It XXXX. business one was second of out the sounds the as target, in the then And roll the of tripping factors

not it points to its what was yeah, XXX was basis expected it why ready. be, So, was there contribution and

maybe start So there?

Patrick Decker

We had, yes.

and from that So Investor talking which drivers if basis implementation Day was what that target office business to of part the that was services, called of the laid broader points expansion which out, we walk XXXX back various of of go we HR, about about etc. IT, in margin the come to simplification work XXX what to going is we we back global are all business finance, simplification, are

the of the simplification, which XXX points be other with The the here we just broader was back earnings call. in that piece in call announced that last are basis organization foreshadowed today actions and

those are the So drivers. two big

are business with the both, in said going we said implementation. services still past but doing global forward a have that We what I

have this the the letting importance of in demand. and right the the in line disrupt we of not a it or of business front it terms getting end We experience distraction top become and doing understand

that this also not And pushing first is couple out on we driver then other Investor to not why sure We then are get are and XXXX AIA implementation, Day original are We that frame have making we the as biggest hold some expectations can the of see, time rush behind it we have margin was platform target we right, discussion. you the been to beyond of investments of month that XXXX. we early in us the single and this too the out that in new of phases the say, midst do in make roll simply putting that learned it. a caused things we spreading not

Mark Rajkowski

floors processes and January ledger, So to procure them more of We color to implementation it terms data, getting this of in and little a are our initial wave not pay U.S., maybe parts of of where a bit we're like be included our the so our year we new for going and had where master bit want are time part information. well, we quarter-to-cash other revenues with little it's then to meaningful of the at. that new and in new relative financial taking is quarter parts just implementations in effort a

do the work the push but going we in do are to as processes currently implementation. going push back are is that and are year to this going the have we out Patrick so to get we for savings, scheduled we out we and waves had to right and to to later optimize entire that these we of the get So, going said, done, to it

Patrick Decker

am So cost some from add, would on cutting minds the decision the on growth made see others to to Deane, the be not sure could have this and other our make is and health one of is call. including clear the the time. thing of we of I and would not portfolio we that I additional in the targets other I a bunch take investment approach, because margin this in accretion 'XX margin over our 'XX attractive that growth out the

be not I not to areas clear, as going is want did our we as be that could to there if we So, have is back, not just here. go approach but

Deane Dray

make sure P&L, I that? one last coming one was will me, on just the delayed the timing business And the in clarification understand the and services. you implementation just initiatives the the the that be on to into global and to when I of all remarks, starts savings from clarify Patrick, start prepared said where then clarification but

Patrick Decker

had savings flowing out, we with original XXXX amount XXXX that of has the now a modest moved timeline very in through of the savings remainder the and So in almost part big year. XXXX, in in

Mark Rajkowski

to would a we as that much in is about out not we scale as being in larger the get get being Effectively, three at why quarters would will we nearly originally phasing 'XX, expected 'XX so, at planned. as

Operator

the Jonson, of from line question And Stifel. comes your Nathan next

Nathan Jonson

stop behind can for internal reputation a part up more Maybe endlessly pretty a thing? that is, to it was guys you that, isolated about talk this errors. percent little It make is making how XQ, bit process internal does certainly what those sure not XX%, of reevaluated again. not a have talking you are just that this the think for the XX% the in internal thing on & target can A FP Mark, and unusual the you you guys have you we guess miss to come margin have question I about now,

Mark Rajkowski

And had, factories then right planning needs into also signals question. and into and more, got we a tight into the are a particularly, dozen you financial gets Company that to and the we are what in and just are inventories really the signals and a factories as as into It but commercial trying say operations I teams really changes commercial a getting some moment and and process we we translating it making good do sure all around is factories, the we communication missed really, sales as or was more were making good ago, to from down to teams lot factory. we, mentioned there be to our going really this we X through around from that few have of you not sure in trying balance do that process outlook

whole a So making innovate, finance the is as were they process as of tight to communications, needed required have sure quite part in frankly we calls. line that to and got be. not And that is including that of they as right there, leadership those they make

where isolated, So Senior you hot know can it boils down and this folks it make happen and I communication. that is team assure it to really occurred And good Senior our does to with again. not finance breakdown is sure leadership we topic the a

Nathan Jonson

up pile net here would I the is further on not I all up our Difficulty]… offer think [Technical to

Operator

ladies conference today's gentlemen, this is again, And operator, resume the will momentarily. and

Patrick Decker

Nate. the about I sorry heard. how answer Okay, much you that, don’t of know

Nathan Jonson

talking, started right out cut We you Patrick. as

Patrick Decker

You missed good stuff. some

the of best the missed call. part You

this -- around comments unlike your much us. very So is

and it. As these we on things this, very seriously were take I we own said, we

in terms of our much of impact factories the couple capital it absorption on of be were that off and working that we was around, first in is that. long I while think terms the inventory thing this but in purposely as the why here in the was time in a it our would net I a we think back not a working time off toward much numbers unique so situation what result have of communication, and so a hand been where to explained, the

are is the happen those in not over we leaders So that make in again. it piece the team that all mark right and sure got involved commercial do incorrectly in things the factories the side the to finance

Nathan Jonson

you mean, Yeah, order of is pretty you are the have now, slowdown up, seeing maybe question are my guess any pretty trends just order fundamentals to Europe maybe still tough around in comp I taking markets for but X% the last a So XX% quarter any I business year. where the you going rate in to commercial any second back order be thought are against there I growth? Are of the here you seeing? I that color guidance Industrial. thought healthy

Patrick Decker

think So which softness have the that impacted Europe, and in the really year some for level we balance of be the the really the area seen quarter, some uncertainty driven by softness it in it in only will we of order is the is UK.

again, are likely the that is compare last strength Not large to from would to also timing across we X%. the is so had I the a the UK. normalized just uncertainty get that order it the will expect own X% still we here single think awarded softness, treatment digit that its in in on we to would work through mid and say UK so growth. a year, we expected win, saw mid-single win against I than back seeing some issue there be But digits area or get for harder the we was give in Other would be we also to up in And one so maybe QX have only digit, so not and on we color we probably that purely It in in XX. year, and a first full did down the expecting QX, awarded to board, that March. single quarter would down, low are project as is

feel behind still confident the momentum we about business. quite the So,

Operator

And question [Operator with from Graham Scott next BMO your Instructions] comes Capital.

Scott Graham

was that difficult margin and and in from off least bridge you a expecting that you to some things maybe in the heard before The quarter, up pretty obviously for MCS I wreck at is you expecting what quarter the are just that big swing. be us a are know second that cut explained margin the you I is

Patrick Decker

you Unfortunately, out. cut

in get was terms I a Scott better what bridge of in things how think heard, for QX I MCS.

Scott Graham

things, is platform one fact So there. margin the is there drop good continue a we will scale there to the, is and our couple AIA of that

really in it chain. seen platform start some tariffs, We is supply in but as a around really in moderation AIA a combination component but improvement to will mix, see bit mix and of will better we will shortages, mix challenge, little better is well the our as also you if less it our on scaling impacts

Mark Rajkowski

Are you there, Scott? still

Scott Graham

that… you mix better difficult some but to are explanation, that you expecting say gave you better second is the seeing delivery in for is mix When your book, always know quarters, mix, predict. I you a

Mark Rajkowski

and expect a water the higher mix two in than energy, mix factors. and margins alignment better Yes, electric big that a the a that installed higher out, pieces those nature so much lapping in chunk. carries big then installation, a of to are is margins a which are couple and And the we of on low pieces really had subcontract that the the of because work

Patrick Decker

we in installs into margin insight the great got of we deals those, expected year and expansion of the large backlog, when got and because day us have business, second occur. to And these visibility really gives into in the won confidence this that to that QX. in good have day margin profile So of replacement what the good going businesses the we we then what half to to regard. so in are that relative is That the see are

Mark Rajkowski

a any, to in QX. really year we and the last much, The off in little bit a did business, start had got driving other price thing in we price late if not have too,

prices as be well. help rent have gone so QX in out that of will We and that in some raise those second and the some bump the year, half

Scott Graham

MCS margin So, is the largely… on guide preponderance of the the down

Mark Rajkowski

make I question First, we guide. understand let that sure me the see

Patrick Decker

the specific second QX that then latest the down. recover, a Euro we actually at maybe is call in for Now and re-striking Scott times is to a tied $X.XX candidate. are two the dropping it actually just here the I you know the guide guide just thing, really but with is rate down invest few it specifically made currency the that and

on on are go other investments recovering now, cost we that going maintain. to counting slash are that we back it saying to basically we need We are come not right recover to just would not

Operator

your Walsh Suisse. And from with next question comes John Credit

John Walsh

you healthy, is in color Any margin strong terms still just if the I what The actually the have still margin, that of a seeing very expand helpful. I relatively about done that backlog with strong it you but question think be the and question, growth. the thinking is order would does around what if backlog happened in are lead guess maybe guys job the explaining year-over-year. first sales, to the good margin

Patrick Decker

and backlog. We good margins about do feel

projects and business We backlog say gas. good where last got we function the is, in of and will of half. in that business here. that year forward good we going visibility you alluded the as at have seen see on work to look which Again, would is course I electric that, again to, day-to-day between is and very healthy. heavier book have a ship When go pricing that mix is you recall and MCS higher are Those it is as traction. project over Two; continues business, than second mix water it margin we substantially the much of Mark be the the

John Walsh

market question as margin the around year-on-year. acquisition to in opportunity? So maybe the you in then just the is out think that around what is there the is up backlog And say a actually in of it fair pipeline terms

Patrick Decker

said I maybe think focus reiterate the have areas we as before, us. just key we for

our think out small about on platform small, month a are We artificial we just think do utilities. here. did both Germany, there deal, but or and perspective the capability build continue see it think are leveraging first think we an small opportunities in acquisition opportunities, platform closed space that I a that very, back global the is really to that there a offering as is deal terrific just We it do a that if treatment type out so we there talked got intelligence build about intelligence inside decisions stronger to plant have We utility continue excited a even there before we about AIA but great have it for from opportunities very we to to about scale.

So, from in not material series it but the to financial think a will terms be material be the be will I in solution in perspective, largely customer. of the tuck-ins a just bolt-ons strength space, and that of utility

signaling Beyond space. there, that, at some a see the fairly out fragmented again, or It not across being area, we anything water opportunities ideas industrial continue to is look do interesting we foreshadowing there there.

We but will standpoint, continue close is that immediate not a eyes valuation term, the to an and disciplined keep to in be our do there the ears anything see from ground area I on. to we continue

Operator

question And your & Giordano Company. comes Cowen next from with Joe

Joe Giordano

I So, just start wanted to on cash free flow.

the also but percent So you target guys here, for are for year. doubling our the XXXX restructuring are you effectively maintaining your

how in keeping the talk given is So, of incrementally the by flat. faced to XQ, us here aggressive you issues it more get some that conservative target through

Mark Rajkowski

impact necessarily is question is impact really to not of of flows. lot at the gets a cash relative the Joe, good the timing that that the and that restructuring, accounting all was of of a

it to related not that negative flow we flow expecting in terms we the be conversion. up restructuring, that bit, are little So, may to cash a cash free think that material on but of impact have

Joe Giordano

impact increase incremental from XX of something XX most XX went but the you year. are to you to that saying next is that So in of restructuring, cash

Mark Rajkowski

decisions QX will just so literally and to is work of at working helping to in gives of to be that most going us be all out of cash will confidence cash. And late in get and conversion working numbers. be that What is would have paid and say, terms around that that our benefit the I capital also inventories, with And Joe. conversion in in year to made the not a is

Patrick Decker

would to down say up course there, of still I related year. that And continue to through that inventory the the tariffs will warrant built there is

Joe Giordano

am XXXX going targets know one. And I supposed talk then are I to ask not so about but next, anymore, to we

see I kept the are you So our operating to think you hoping target which target. people pushed the EBITDA

the the curious how you I just simplification so just curious now. you that? the benefit pushing the as Are amortization target staying that how to EBITDA like So effectively not and because same, square just out am

Mark Rajkowski

to of Our to of the in our it is EBITDA line been margin. than related related has the Obviously, chunk targets ahead a running more our amortization. with operating that been

are for still to out EBITDA So, target range put the we the of XXXX. be within expecting that we there

Joe Giordano

and business But of effectively, margin the amortization operating because the simplification… and like the because areas push-out the was of of global change

Mark Rajkowski

The of to services is and are both related is operating global the all EBITDA. is in also going part continues calculation obviously taxes be acquisitions So impact of to to margin. interest, margin that our EBITDA amortization of impact the components in there others those business

Patrick Decker

finish EBIT in around Joe, year, XX.X% we roughly will this EBITDA.

that year So, XXX right. we a to are basis on will for committed be both, next points

finish we in to roughly target Investor was will about XX.X day. from the So XX.X on that EBITDA

Operator

your question from next And Sachs. Lee comes Brian with Goldman

Brian Lee

you could in one-year one this a push we China out? if frame time just the in You in squeeze the on finite where I the, last targets. those might XXXX Is in just to maybe or one targets you Are original in long-term margin the guys guys. you pigeonhole be my one maybe committing hopefully last effectively for to

Mark Rajkowski

obviously margins We just here on committing that to for expansion of think line some next I can confident are year. basis not terms come, think we healthy in of Brian progression continue what to mean is around trend we position I points continued as this XXX time margin and that but XX, will point. are target we within and to a to later longer-term targets the we today year beyond, here are year talking we do in about new new only declare 'XX get closer that are for getting

Brian Lee

you that Philadelphia but to picking which the big growth relation the water of reverse terms or some so in backlog does there the comps, I of frame in you and the are there guys this especially deployments quarter, year. to of business And us this it of later noticed deployment guys. up, the then that that a the second other in was win, is times deployments SaaS couple your second I part throughout tougher this reference mentioned double-digit question, then mix were how know of business in related in other MCS Thanks could call, with half the weaker bit just of part some is context maybe encouraging, Philadelphia in the in give to business a drive that. deployment that back and water the

Patrick Decker

is So backlog the and it is and it really, sizable our Philly orders. deal, water in not yet it it now in is

going with pipeline a is team out is final etc., XXXX. have the deal. America, been is the is bit, see of $XX platform also number a deals can We the a we both contract, place other if the, got depending in meaningful out still this size in the later we we orders be there general the link $XX them around them secure there ballpark have us do deals metering AIA but we etc. The are you international the that around side, other revenue So, the take upon mainly it year out deployments, have that after pursuing as here they into number on between large still but losses, size of North like things similar expect we water, water really new that happening moves it non both are between million AMI we of somewhere also and to also to on the broader specs, roughly our but in but a combination to

late announced to next so the either attractive early year, margins likely an would and be be would those those So, and certainly this current portfolio.

Brian Lee

SaaS back views moving The through into the any any on year. up trends quickly those just pick SaaS. the And makes when

Patrick Decker

already. software in I We the get a one and into quarter was us. the that little specifically of, we think that not was spend we in want sale We we large a simply again to certainly be quarters will compare behind so saw last of did Europe two project, a issue bit are mean do year

based with my coming our onward. into growth market If you really We the side in of in the see business to of very healthcare. that platform, see organic demand end the converting QX AI doing the well of look XX% the the year predominantly expect the offering, orders AIA that and we to growth upon talked that rest through at accelerating out is as our in We be about continue in deployment in we and and quarter. Sensus, good as of which SaaS the revenue are

Operator

comes with Vertical question next your And Research. from Brett Lindsay

Brett Lindsay

underlying go moving and to and parts just strategic And infrastructure relative I bucket cost worsened good. actually components little investments actually throttle positive just a about in bps with bridge that then that of on the what margin wanted bit. just on QX to of to last the back are swing back delta XXX the some QX the the investments specifically, there. was applied relative in a water to terms inflation of be Any you would color wondering timing

Mark Rajkowski

year, that the in some comparisons as little tougher nothing half decrease. look to it inflation in down I been of that little that to already expect a same that bit is the back bit related there impact seeing incremental year, In be out lap as we components, in we with tariffs was certainly, of we might trend but it over will freight, largely of those thing terms last we line, quarter would really mean course fourth in and material, maybe is not the so up a any this of is,

related the question Now, to AWS… part with second investments your of

Brett Lindsay

specific No, all delta in water it a QX. in looking actually QX, infrastructure to drag the and that just the a was XXXX of it was tailwind but here at applied,

Mark Rajkowski

investments Well, we have Water in Infrastructure. still some

on throughout MNCS. look So, most did an you at certainly enterprise-wide we basis, notably when

parts particularly as our continuing in are in to invest, that business of we but well. segment, So other

Brett Lindsay

but shifting are And the then midpoint, know at opportunities loaded, the billion about it $XX back-end to level? where just up the by segment at is targeted the I the restructuring,

Mark Rajkowski

Yes.

right say we Inside too getting as of the in broad of would of I all not is on work It our we three on one those targeted, much the any details a is segments Each going the to have the from more some next would you it go we broader now opportunities so, midst are moves of de-layering could probably that So, Baseball than support refrain of really based, speak. I the from as into segment. call. doing one is and streamlining if duplicate want elimination into are here more on not and that we share with you to got and it caller

Brett Lindsay

of good. What underlying And And the your in the the then strong in big be it has sense market factors, rate color or rate out run those growth, channel any is business. what would drivers follow-up the maybe U.S. pieces been board. products of then the just as very you on across growth one here examine the those

Patrick Decker

would would drivers I say are So, really seeing say I are the predominant threefold. we that

First is number because a number. that is U.S. companywide

share in is and our within but that of what see in market the is a you U.S. is all, believe a continued that mid-single utility and we digit treatment. business, growing also healthy seeing really we level market So, growth market first predominantly we the do in believe utility and transport there gain are of terms faster

is on the we heavily within see well AIA the driver Second as organization. growth U.S., of as the is especially again orders piece of to which in some project now platform, accelerated of new continue the concentrated in wins right

think revenue and are a in applied our we to we within see moderation of applied I we the see water a we one would that expecting our sustainable. gains amount channels teams to we half being a incentivizing would growth areas been side channel, the move the organization have in half and go those year from hot the has for reflects synergies businesses both water integrated our Water there in by expanding we all past a be those as of share say The of been some there around I year, the in ago, come just year business U.S. commercial and couple large pretty where our that infrastructure the and on sell at getting and made where industrial running streamlining of that things. about distribution One, a have out people portfolio. and

point that year. half and comes we would to part that this a at so, begin you say low-mid where business so, digits to of the more start of moderate And lapping probably the there would back down single

to aggregated. all at full in do full that while expect QX year and that do We somewhere more out you the high-single math is the the full for we that when So, QX. high-single XX% for the digit that on in saying in to why for level we medium did year are be digits blends then year

Operator

And your next Seaport from question Walter Liptak comes Global. with

Walter Liptak

us that now. a issue, just quick taken have follow-up, to of and behind was margin Just a that get quarter first I clarify problem the care they is want

Mark Rajkowski

and quite in that of and is our process, operations of us. so I action, what Patrick know on corrective causes and behind you yeah, fully do follow-ups we taken both but root As and bit around have have is work we a may the have sales we couple we are not planning terms point, that that done there of a mentioned at been online that on believe

Walter Liptak

pretty especially it of wonder are your talk macro still order things on you for the looks year, on systems that I larger some side. that if that despite this about sounds then internationally, the international like And intake stable and just could going

Patrick Decker

definitely we that softness some affected I America. European much demand continued the results. across mention our yes, did say in outside the I of would North are would be pretty robust earlier So consistently to UK one seeing that exception

like for results year. Europe the pipeline. the across We of is Latin digits international continuing But guiding there. rest the and some We in there full same Asia, growth are orders right see And was is for The that we and comments. but our And so, it look where we say than touch has East year Europe. we have Eastern would Middle again us and now now and I it things our and bidding strength So, certainly within in America. great at the healthier is feels continued low-single last moderated the of robust see good, things line see very pretty wood. the terms backlog we case

Operator

Please open. next may your Andrew, comes mute. Buscaglia line Andrew line is Berenberg. with from be Andrew, your on And your question. state question your

Andrew Buscaglia

to few times out Obviously that the come guidance. a on wanted just your delve into Just call. is

Applied conservative your confidence, but for the the are and a talking still you East Water moderating, Industrial, so Middle Just expectations given, in some am enough it place about softness this that a I do UK, any if issues of QX big, only conservative guidance you so even, there being number the and reduced the of areas, the is in are implies your by get how you mix talked where contingency FX, about in for to moderation questioning in Commercial meet is year. you is then why, occurred

Patrick Decker

a together comps as before of into a analysis we year. we [Technical we appropriate the still things words appropriate confident feel I guide, obviously in room difficulty] in some moderation we of in build lot digging around reflected reasons half certainly the make the and these sure put or Obviously, are have definition, get that standpoint, our we that those got go that rainy downward, feel top look used, in described. we of guidance. to we the we growth the year organic got and day, the the we case are that for from issues through not And gives us proud guidance revenue be do embedded things in adjusted that which able a an for we but of to a full X% the that range the some cover to tougher for have addresses and all in we there the X% that also to do missed in all second soften, it QX But by embedded

Mark Rajkowski

big know a and out -- there we ramp AIA, confidence would so are also we certainly up had We scaling the water margin in I point that. easier in is much higher have good Well, ramp segment. comps MCS certainly that a business part have of big our big we

the the course throughout to to continue in of that expect ramp drive and productivity we We year.

address. particularly had particularly not focused numbers. potential there risks We your were of out as we after So, sure all contingencies said, identified on that hitting sufficient making we the Patrick and

Andrew Buscaglia

that where project, lapping softness, And you one or maybe what have piece MCS steering of where some volume that or applications this that margin SaaS but be the more had to side, like expected quarter, a get you in your a the quarter. on to the we in it maybe disappointing did not would things in sounds energy comp would due just us like your where this it, the tough missed where your guidance

Mark Rajkowski

difference had we business, margin The was we from that we mix really perspective. outlook a we and little was primarily test expected of were and that margin sales we quarter, a what it that in flat. our high the bit was and the our below And out just, miss analytics between growth better delivered equipment function what what is sensors and a in

Patrick Decker

is not be just gross pushed a traditional AIA talking we there, got And for the project analytics very are it of and drove the high just which gross shortfall And us margin talking in that clear, about segment, again business. that are it hard margins the specific MCS out. about we piece the hit because platform, was margins in that Europe the

Operator

Thank your question you. final Raymond from with will James. And Undavia Shereen come

Shereen Undavia

a hiatus that to on was I'm This should so been there your private of a That wondering anything I indication pretty since last into have gone or over announcement. it's is Paul. year if you, else mistaken, acquisition If an that? long not read for for as is M&A we valuation Shereen rich company

Patrick Decker

would as with and into M&A they move vary valuations. I anything year pure the this think, of valuations I mean around our while But last both on over exploring. upon new not on significance, platform, important do not up new pause platform. of to continue we anything focus just passing we doing anything you to I are obviously, of as and this the in terms building target AIA the successful depending year, integration read in that to well

that are a from financial since, material tuck-ins And not so bolt-ons strategically. and done a have we few then standpoint that small are

no, not present to active I explore will valuation. anything continue M&A, the read right on being to would and continue But We themselves win we into are and strategically a of opportunities financially. terms be it in commentary

Operator

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

Patrick Decker

QX also morning and technical know Sure thank and I the all again planned. on we forward by longer for bit difficulties. to you in Safe our normally to appreciate it support. support. on than you. this be for your results. Appreciate back was ongoing so, end will touch a phone the the and will travels on and Look your bearing we after appreciate this you We this here patience hanging this get painful Thank soon. with

Operator

you. thank time and first wonderful conference call. does have disconnect this a And at today's your lines earnings This conclude quarter day. Please

Xylem (XYL) 4 May 192019 Q1 Earnings call transcript