XYL - Earnings call transcript Q4 2019

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Operator

Welcome to the Xylem Q4 2019 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]

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

Matt Latino

Lisa. you, Thank and year everyone, Xylem's quarter fourth Good earnings welcome conference full XXXX Call. and morning to With me today Chief are Chief Executive Officer, Mark Financial Patrick Rajkowski. Officer, Decker and year Xylem's They outlook year quarter perspective provide XXXX. and on will and the their for full XXXX full Results discuss fourth

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

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

will available section Events”. via the call website the the playback be heading “Investors” under for “Investor our of Additionally,

to Slide turn Please X.

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

Please turn to Slide X.

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

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

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

Patrick Decker

everyone. morning and Matt, good Thanks,

we'll some the company. Mark round as on and it XXXX detail fourth Let for additional on our I'll taking with me Then outlook questions. our offer year to results XXXX a and quarter start before full back turn to reflections progress over

solid Focusing first end digits on a XXXX, better or in markets, delivered more our half dynamic clearly and able year market our in second agility organic deliver those the revenue full across half the presented changing teams but growth, we mid-single to adapting we with pleased environment and and conditions first of I the conditions were to X%. almost segments growth was challenging. were year of

the Solid in and of markets. in our and offset performances industrial commercial U.S. and second emerging softness utilities markets and end half some

we XXXX year margin Our and full and closed XX effects of operating share up with were of excluding points XX.X%. an Earnings up margin exchange. basis per foreign year-over-year expansion was X% the X%

while significant of team's unfolded managing conversion working the we to free also can as cash performance cash essential investment we quarter delivering execution control, our things on capital focused the our in That improvements. kind in commitment and Because was flow call the discipline we of by quarter. also earnings target of over our growth. operational against agility for fourth earnings XXX% maintaining driven solid much and with October The foresaw on the delivered XXX%

and beyond. positioned well XXXX are We for

margin significant have pipeline about our fundamentals strong from value that years growth, give we continuing We good and the last term expansion, over cash us visibility of near business to of and long-term and few built confidence deliver creation generation.

today company few at of moment. key a the initiatives the were a We for than different just years Day a out fundamentals profile those on focus company to growth ago. back our We laid we original were Investor in our lift very let's XXXX. So

in contributed total the roughly revenue. $XXX At delivering was growth, low-single-digit markets the time, company million emerging

or we comprised the in stood the digital the just launched last at five XX% solutions proportion is of and metrology businesses index, vitality at the years yet products Our of which sales new all. in weren't

So, than innovation. China more edge timeframe. with and over growing emerging five than We've India that more on, now now XX% billion cutting at are doubling of the $X markets over also well years placed Xylem

brought portfolio us to of into and the have technologies higher business rates. industries exposes M&CS our Our leading the with growth many market investments segments

Our vitality from customers. for growth index of transformation an to risen was and customer which XX%. The in has demand. double-digit digital enthusiasm now fragmented the executable until proposition orders shows reality water recently a XXXX XX% our networks, is AIA's

sector that reality networks. in their job helping value to Our the is now the in catch customers and XXXX on in deliver leave latent

growth consistent Our annual last organic three mid-single a pace years. is revenue have digit set we now the of and over $X.XX billion

would emphasis to Of work to we've become invested if along growth growth and expansion. we as more margin the sustainable margins diluted had course, ensure we but our done profitable the sword on be double-edged a way,

expansion more new EPS we last years. in growth to the as the even the to but compound previous We priorities, reach the in EBITDA years, have top one increased the has to five five clearly do have and work EBITDA by segments. same And in we of over average Margin last invested annual expansion new significantly points far here. our continues of delivered we've years, geographies able XX% approximately basis four period. an be the been XX% product XXX versus over so deliver improved

revenue years, as deals CapEx growth growth in and bottom-line and large and attractive. same the to At conditions. the outcomes the market expect ago the even rigor of moment I become at capability our operational to in do focus time, the to profile even we deliver mentioned a developing execution, margin brought unfavorable we more digest to recurring of favorable the aftermarket next we new streams As shifts front-end several

discipline last cash execution by key example average generation. us. a from flow their capital We one conversion the XXX% largely that working XX.X%, in focused of Just of to down expect over for continue driving delivered XX% years, free I cash to operational increased is capability being five

we few of business the Not strategy. would last over ago, been long goals and ambitious, Any that be sincere were largely were the about incomplete we're opportunity. and our in they which Today, at of sustainability, building the this on considering create in years reflection Xylem's focused sustainability they on and customers center outcomes reducing environmental which operate. is sustainability our but equally impact much a positive our our bigger without products what footprint. the is the we've communities solutions, with of Because own

approach provide. So differentiator. we strategy, more and is of our the sustainability industry-leading into we believe impact is to far solutions a sustainability built the a aggressive, This clear commitments meaningful targeting one downstream we

fundamentals a of cautious deliver and towards beyond. We're but XXXX are we the view and us also uncertainty well-grounded to we've give growth. established we The the balanced face sustained able built and near-term trajectory in

continuing expect the We do parallel short softness to the see In half, increasingly our we cycle in an with revenues solid half. in in moderate second that position our some in of backlog. first

on over X, now more during I'm how in Q&A, We'll the including for We into address detailed a slide half in of part deeper of ended detail happy the review to to level year our want the latter results, provide any on of but of XXXX. XXXX it's overview Mark segments expect our to to shortly growth up to the mid-single-digit of about some turn the your more XXXX drivers detail I back that delivering and talk that be guidance call on I in

Mark Rajkowski

Thanks Patrick.

of quarter we timing some Top-line well to began the market. affected and flat was than softness experience quarter related in cycle as shorter third slightly commercial the softness the we in continued industrial to to by as market growth persisted market the be sales fourth weakness growth in end Revenue worse expected. the as in

down X% we for in XXXX. We view Organic soft orders rates the year. orders orders in did soft rate growth lapping of quarter, versus in at it the the that the XX% influences noting came intake although worth quarter end of some in top-line is The were deceleration quarter certainly see also of first the organic half prior of on our the fourth a the year XXXX. growth order

As end continue quarter down at markets than in we saw across of utilities cycle primarily end up and dynamics short the weaker were reflected same most in third the growth we across end X% major by the strength markets, revenue we the look Industrial geographies. impacted X% quarter. at the with expected performance experienced

X% commercial most end-market with the which better declines slightly market was was than detail was the down move dynamics in across more residential major down expected. we end as end cover geographies and through X% discussion. market Our will I segment

But, XX the margin as particularly performance points Operating we volumes XX% performance moment. to impacted our across versus margin segment and basis declines in review margin compared operating the margin mix by will look than was dewatering our the the a unfavorable negatively in from double-digit high expected expectations. business I weaker businesses, quarters down year. prior

performance on margin per to quarter. and flow pleased and discipline the strong deliver operational team's in I'm am earnings revenue of growth disappointed our execution meet and the I cash commitment our $X.XX. in cost share with

Please Slide the large and XXXX declines by timing turn the quarter. performance our down orders segment business our quarter X will as I well segment in year backlog for is up fourth driven review infrastructure versus Water project as in X% exiting in X% the shippable last to were dewatering wins. on Total

in X% within strong the with large XXXX XXXX the is beginning reflecting beyond or first organically is term decline hand in in offset and of shippable double XXXX the half softness be a single in segment of to in Water growth up in digit North Backlog quarter in rest grew expected X% down digits projects backlog mid as near shippable dewatering of along backlog infrastructure the our XX% revenue American delivered business largely the XXXX. the

to decline expected XX%. gas a the in softer lower had Rental America we well the down quarter. rentals over to rentals sharp be year related expected as declined as was and year to than in due revenues to events. North While dewatering storm customers business This oil in

half least We first expect to year. persist at through the cycle the this of

and impact negative American XX.X% the Operating versus from the volume flat last dewatering productivity declines from business. cost North were savings reductions quarter. our margin remained segment Significant for and net year by mix at in offset the

XX.X% in year continued points than reflects realization price XX the delivered half in offsetting the segment the ending expansion for productivity second weaker this across The gains year declines basis revenue. of more and margin full volume at

residential. well applied driven year. X% down each in Segment backlog backlog in quarter, turn X% lower last to commercial the within down declined please Shippable in orders modest revenue were the the quarter. X, water X% by and versus XXXX as fourth slide Next, declines building services as in is sales

in end the Western what to driven timing price Europe. first demand Both with perspective, of we increases compares, to tough an indicators in as be pointing of softer some a these well XXXX From as for quarter market for commercial expect related the U.S. by tariffs the shipments of are revenues. segment to X% prior declined half in slowing

in Europe Residential was market digits and economic residential and by up up X% market U.S. the quarter for share and in was by down single full softness low improvement spot in quarter, the the XX% year modest housing fourth driven in bright driven activity. gains some a

team able year, expansion, basis commercial Operating basis the to inflation. quarter and market XXX XXX the margin strong basis price points declined by deliver in XX.X%. Volume the was offset the business, Despite business. amid and for in not impacts challenging in points across in geographic of declines fully quarter. of productivity tariff by margin points mix basis points the productivity headwinds price XX quarter XX of realization driving to the We're fourth overall realization and the

timing and and X, North Middle East quarter, in control American in XX% included a slide large I'll reflected cover compare which to year, turn solutions metrology a to Measurement tough orders of primarily organically order the the declined M&CS. growth orders prior let's which large the X% orders. energy in Now

growth up driven is first increased exiting XXXX the Revenue of in partially of modest in X%. backlogs X% backlog timing in by by decline large and mid-single project analytics year. impact of the AIA. the in in Shippable business the of with and offset most are X% down Segment the deployments digit weakness timing half Sensus the reflecting XXXX project

confidence providing XXXX. and in backlogs half and are digits into for the XXXX shippable momentum of XXXX up revenue growth However, on beyond double back

the metrology driven deployments in by emerging in quarter revenues and Sensus grew growth in markets. X% water energy

organic Advanced in also Orders While noting coming quarter, lapping infrastructure of that year. off a tough growth push down this quarter worth several orders declined project with analytics quarter X% in outs. compare the XX% the XX% revenues although the third were growth. last it's is with nearly revenue

orders double backlog year revenue digits. Full and were up

a business expect to as scale growth see continue revenue relatively in We to lumpy orders this quarterly on basis project we driven

margin XX and XX X.X%. quarter increased segment basis Segment EBITDA margins operating up points are to the XX.X% basis in points to

margins strategic slower by realization investments partially points weaker XXX full productivity and of and perspective, X.X% mix. mix of year in XX.X% EBITDA were of unfavorable partially a basis points of margins offset basis revenues operating points by to From price XX ramp productivity, a Net to XXX XX were declined basis ahead benefits price declined basis of solutions realization. offset and points the impact than digital volume expected revenue leverage

accounts to financial reduction This in inventories at the the collections flows year, Working in XXXX, quarter from driven company's million versus dividends. and $XX capital turn XX receivable, is on shareholders $XX of quarter million. the efficiency, in We of basis $XXX focus significant through to cash last XX.X% in by ending solid let's team's payables. Slide sales. invested Well, and cash XXX closed improvement also an improvements point for improved returned and significantly with the million operational position. a balance We CapEx in overview

Our cash and XXXX five cycle grow which us free a by of cash XX% free deliver conversion flow strong half improved with flow conversion in full push, year the to days for XXX% enabled cash second

an announced ninth of dividend dividend X% consecutive also annual increase annual our increase. we representing Lastly,

and Please will our turn slide Patrick cover outlook. XXXX XX to

Patrick Decker

Thanks, Mark.

the slow of at business look on an the XXXX, took outcomes forward the close the growth revenue we profile year. exited in Given and mixed our half saw second of extremely we as what we based

revenues One of a cycle impacts how reminder XXXX, business and short still margins. much of the it's lessons our of the

conditions uncertainty as appropriately for guide we're market So to short in cycle XXXX. we attentive being

our We taking to our because timing China. two account CapEx India proportion growing careful of Sensus including and for are highest higher AIA, businesses businesses a a treatment, account and revenue projects. markets, deliver in fastest also the We've of profile large growth our into effects emerging been intensive and guidance. these

a straight in that. This halves. is comparisons. two first tough It's of say a to due half organic happens In the flat that heard provide primarily utilities. growth you story and this me line very have to Several growth year going rarely much of to evidence good see we year-over-year of down is

large U.S. half several You we're mid-teens also was year lapping the may projects up and period. last the recall in same in utilities same

business second the markets, XXXX experienced least at our end and through conditions in of industrial second In muted short constrain expected the the are to half cycle quarter. book ship

the second China deliveries this tempered as we China, anticipated impact since further is outlook. has Asia Corona of the softness and trade and being year, its the The in Although more our continued generally. in within exited we then virus have fastest growing our time events largest market short-term slowing for halted essentially which

of of XXXX took further and EPS. Corona In is today, and maintain to likely XXXX. demonstrated of first quarter monitoring cautious the we being situation our are operational very in dynamic virus of As savings to closely. realizing one managing actions investments $X.XX with this and headwinds. half it to view this that we impact through is $X.XX second actions on we enable obviously to light challenges, the from company the of the us a the combined quarter the we approximately points in of growth be discipline best are our costs half for two restructuring of revenue period the top market It's in first Those down will to in

Sensus have dozen the of to momentum growth into year visibility half return half half utilities, a AMI hand deployments. significant large see second deals We XXXX. clear the including in and In in second we the a from of in

the driven receiving the our and from double-digit expect the modest recovery both and of we the customers in distributors, return revenue and India, industrial based half. moderate in end year deployments. a foresee we're on second in project to commercial by also information and And China growth in We half a markets second growth

on opportunity growth In the the second measure, returning just comparisons. mid-single-digit in and we second half the quarters also lapping getting overall. to good be year-on-year of will XXXX, to we've For the quarters third build fourth anticipate soft both half experienced short, favorable

XX. to Now turn please Slide

from for anticipate end half in second modest XXXX half spending is offset despite growth and first be come in market expected single Industrial to recovery year meter OpEx softness to For in flattish organic the half. in levels of the the up. year, the will as benefiting normalizes will recovery low-single-digit with second second smart the U.S. half the be deployments low continue largely And to utilities anticipate the we we full commercial the digits and ramp a up in year. to healthy

uncertainty in a And picture and growth position revenues our XXXX to a influence, digits. dynamic focusing It's to long-term. productivity, will things For visibility low-single can the so of revenue with on the ensure Xylem, committed costs growth we over to we XXXX. continue exit continue so given the driving into invest combined elements of increased we to full of the environment, manage momentum backlog through we controlling heading foresee year can organic sustainable we overall, by effectively expect and XXXX strong

to we fortunate the $X end the billion global with we expect cash continue to well the foresee cash portfolio are a balanced year, hand. that having We on By in delivering approximately generation of be through year. healthy positioned

growth investments see opportunity our M&A has stance our been capital remains priority in understandable there cash investment in interest year. we allocation. on for balance, and a Given this Alongside the top some organic do

authorizations remaining million. that, including more additional under Having all to $XXX options considering share of we XXXX existing deployment than in capital which a repurchase capacity said returns are shareholders for have

Now the Mark on detail it quarter a more and I'll year. for the both over bit to full turn first

Mark Rajkowski

Patrick. Thanks

the assumptions reviewed. just half planning XXXX market second dynamic as well first our provided the we've Patrick and XX, profile, Slide which On as

low breaks digit first single and as mid guiding growth to half. be we digits then half to expect second return revenues down We're growth organic of for XXXX, follows. the to in X% by to X% segment revenue this down the single XXXX In

We lapping in to double-digit growth growth weakness by expect utilities dewatering X% in be continued the compares flat will business, infrastructure year. American first North our solid growth in with through of partially being water offset the half which

half In backlogs. as solutions, full weak project growth X% enters to with by the control first to growth driven and lower America to we project the half segment X% X% and second flat water measurement growth year large shippable XX% expect applied expect order through In tough we the trends XXXX a growth as energy offsetting lower double-digit climates. in strong prior compares related North well growth revenues with deployments year in against as water,

month We're the assuming a was of which [X.XX] [ph] average for of Euro rate January. the

FX the Our is included table in sensitivity appendix.

to Our income exchange planned tax XXXX decline out share X% XXXX of Non-cash $X.XX in Expected income. pension rate $X.XX pension excluding translation reduction to is of for buy expected the to U.K. is an EPS due million and of estimated non-cash per of to X% plan. the $XX $X.XX is impact the or increase XX.X%. by pension our foreign

first impact the the will to to quarter, to X%. X% backlogs the from revenues and two We quarter. anticipate declined points down growth at in in of one range total revenue X% of company with Moving organic least the shippable Corona virus

X% XXX the adjusted to range be expect year. XXX operating margins We versus quarter in prior of the first contraction representing X% basis points of to to

by China. business driven and in EBITDA dewatering are range in see American breaking of North We the volumes, expected segment XX%. margins level, to our American unfavorable largely metering EBITDA in follows. margins the to lower and by this North business, will be At down as be mix Xylem XX.X% the Sensus

to to in water XX.X% range be range water has the in We infrastructure XX.X% to and be the to of XX% to the M&CS of XX.X%. XX.X% applied range XX.X%, be of in expect to

and comments. to closing With Slide back Patrick turn over for to please turn I'll the that, call XX some

Patrick Decker

good return of near presents of Mark. we balanced our degree competence our from XXXX about some short-term, year, sees halves. sight term we year but entering and XXXX from of the this line half of XXXX picture. the guidance to Thanks, of second momentum market The a look of transition and year. Despite uncertainty, for major we one high projects the the year halves our which us are conditions emerging another a timing two There still in two exit will backlog provide and to as about both XXXX toward to the as

of and investment tenants thesis. the term, now over longer the remain And in we grounded both our

continue businesses. more in to expect growth, investments customers that to deliver top-line and solutions We the our enable their attractive capabilities transform to

remain gains capital capacity We shareholders. initiatives productivity, investments to while expansion by organic those maintaining will future investment simplification in in sustainable. inorganic for deployment, growth increase margin And generation ongoing driving and that returns growth we make the disciplined costs continue pursuing our committed will attractive including margin to and our to and enhance cash

more on strategic then our update hearing of investor priorities our customers. upcoming possible an on Analytics at Day you capabilities, at leaders our look business XXst. Center to solution technology many some Data plans to provide on directly long-term in discussing and We'll growth March forward host and Georgia. Analyst Excellence detail as We'll our our as plans our sharing I'm our and Atlanta, of and hoping of from and

to Now over you turn operator, the we'll for questions. call

Operator

Scattergood. with [Operator of Connors comes the Instructions] Your question line from Boenning first Ryan &

Ryan Connors

taking questions. Thanks my Great. for

of details a of the couple bigger covered had I think lot pretty I well. questions a you actually. picture

strategically, one of but a the The bit be just becoming story part in different period. in a to now, term. the you're a restructuring transitory, cost near here is, more what important obviously of Headwinds may fact especially first right transitioning and control

R&D and in about want investments you've things. can said into you to how relative you're at control don't other and things cost the talk look restructuring doing obviously cut So the in just you you to bone, but past

about rationalize vitality as product and lose R&D you you talk things. on index don't innovation how ensure momentum that you of kind and development the that and You

Mark Rajkowski

create continue the need great close the It's in mean to day. it's a by it's most maintain our the We to Good attention Ryan. we morning. Yes, R&D. going investments to pay a, it's something to and of Mark. that growing. end value I We're point at certainly

grow invest to continuing solutions platform. digital are We to our

organization. So where, to got be last very those are get going to the roughly million. of complexity too we're restructuring $XX in redundancy really on, focused continuing those from much spend the that And in launched coming of to And we We're got programs, after savings a thing. we've at series areas look year, where all we've efforts opportunities.

We that through drive Tony great the continuous leadership cost through are continue work to all out doing improvement. Milando's teams of under

bit past There's late savings costs complexity a will that while year in GBS little take and this well. provide opportunities to out reduce as

not back at So cutting on at investment we're all. looking

Patrick Decker

Yes, right.

adopted handful has we I a deployed investing that, point. going be near I of this portion our improvement especially invested called years the for a long-term this opportunities point. believe think it's of we across the company to early my And a for definitely of are but walls years our your of we're handful productivity where, six But, P&L. across noise. factory, all, productivity a to growth we've in opportunities still there'd continuous quite great from growth of think four the because we of the where perspective starting the a be first through see level Sigma on of stages We ago. and meaningful mindset been still rest lean frankly high a term game the is as will But be ago are, beyond

Ryan Connors

seems -- call companies lower kind businesses become it times, if that everything follow-on radar this last a on or divestitures or that's Is lots have was pruning. going years, look something are peer that landscape was core? of facing, realignment there popular kind for my brands targeted of or sort other of any the tougher is would industrial of you the related Or you offloading? few And considered companies that route, your that, have portfolio they it across that strategy consider margin then pruning, whether in my Okay. you

Patrick Decker

Yes, right.

but returns And least review, growth apply economic capital, than on lines. if so, creation annual is that we the the our also criteria we that, each profile, more across, value at take not the of an of frequent even business

sit There's we above times really some growth. return cost its to nothing are, not right on dilutive be there capital. that businesses of well might there are close now cycles capital that at As anywhere here delivering is, to today, the in

So, everything in on time. minimum. at is at something It at clears the hurdle annual that point this an look basis a we

Ryan Connors

time. your for Thanks great. Okay,

Patrick Decker

Ryan. you, Thank

Operator

Your comes Dray from RBC Markets. next line with Capital the Deane of question

Deane Dray

everyone. was give Thank hoping some you. high you Good level morning here. guidance could Patrick, I us on thoughts

I think interested you've explaining approach half, different along good dynamics of I'd but you've if a guidance to the setting first year the job taken this maybe hearing done second any in be half, lines change embedding some is with more any terms especially there contingency of a stream, has to you're in conservatism, dewatering guidance? maybe but some earning variability your been implied because cycle how there short business, approaching

Patrick Decker

Yes.

we still we into view. in pretty short contingency, the were XXXX. a seeing in before, meaningful marketplace. what still and I cycle. have just I frankly, think reflect what built Heading mentioned I more and mean, were reiterated we of that of bullish our into feeling based business learned XXXX, in is look quite portion as that kind we back as on we Deane But on, you should

comps. guide to in we assuming is this laid uncertainty in just half projects return not short that hand a for the second again, second a in the us year. the see half. of miracle orders a modest view. is Corona out, think have year tough QX, virus into the growth required balanced But near-term the backlog and the clearly cycle, already the And some we that is half about clearly second headwinds We lower the gives softened with and year, what We coming China shippable in backlogs confidence

it's but achievable, it's feel do we So properly adjusted. a risk

Deane Dray

virus. then, Corona companies businesses have the revenue in give taken And are that industrials appreciate how Maybe terms impacted. we only the this and impact it. that you've the some EPS and from are actually follow certainly just We you ones your fact embedded being in approach. one the Got that color of of us real-time

terms in there negative impact, lasting $X.XX but relationships affects see today? seeing or got you that types of of is You've fall-off demand other any $X.XX or the you're that

Patrick Decker

question, that business to Appreciate right Deane. be disingenuous the felt We to Great U.S. is, given be you transparent that not we business in tried it as that of second outside appreciate out would now see real-time lay what we've our of here. Sure. largest it impacts

as the safety you of is all our paramount. appreciate, absolutely first, people So,

of we're involved there towers -- are it, advertising water have humanitarian and the we heavily some offering Secondly, the In to been Wuhan, not are although response. hospitals. delivering we at pumps, we pop in build up

very been that's important. So

fluid now this so now we said, know of versus in is quarter simply because don't would we do get our know recovered, delays that, QX. how it on deliveries, As right what there or shutdown of in have halted the much and impact the would is is We factories, either you again. be very that right

we're monitoring very that closely. So

on down being There clearly our chain, terms supply as impact suppliers is an our well. in of

so that recovered QX. knock you a and of that the basis But on on is that's no trying keep be we're going there's later to very than Day. and on over certainly kind handle the keep the again, for really to what And would on we we're think that laid And this of all effect closely course the position out Again, impact earnings revenue a Investor in which to certainly give we per monitoring updates share. year.

Deane Dray

if ask cash vindication team, flow a Appreciate great this also so will work performance. the that. guide? year, some free you that the flow of all, the on So, And year cash Mark first then, I for was can questions

there I guide cut? any can other did of Is up, give in appreciate of it, us We but also we give concerned conservative improvements that color is quarter. I'm XX%? in So might that. you so you back capital Is at that working see explains the be on -- some CapEx fourth the look a that some the there especially

So give there, us please. some context

Mark Rajkowski

driving on Dean. great digit timing did Yes, And that a had we looking at the And ramp a done thanks that inventory say a but big of discipline ourselves We our we're down. the as vindicate inventories, in sales year, ramping for were revenues in year, a single lot we some up a of and the we prepared in to of We inventory would built you We've payables volumes up comments, that, a extent, managing a and build. half. of high softer chunk drive teams the end after took was better second expecting There around cash, growth. as had last we to discussed, maintained good certainly certainly we had inventories. note. collecting job through up to down I was job

capital as be So as be won't working it of a cash there XXXX. big instead in will flow source, source being of

reducing cash still in inventories, days receivables we're improving both outs. conversion -- However, and pay at cycle looking and cash our

Patrick Decker

as working to still ago. to much in but here, try than we with about to working very now years a better Obviously, that to alluded Mark the opportunities There's few Deane, think that on some balanced think, I that have no pressure capital. on we view well. mitigate a there's guide capital built here movement Adding feel it's really we'll major our of into working that We were capital. we're the spot

but to question your we've laid growth well India as expansion out predominantly support really in -- picked MCS, I conversion, on and modest is software, really breakout the CapEx, investment of driven capitalized. by the continued there gets segments, plans where there other also up that much some some that of an also for the the where as the that increase think you to on

really those for are big CapEx so drivers increase in two And XXXX. the

Operator

Stifel. the Your from next question of comes Nathan line with Jones

Nathan Jones

the in you expectation half. sounds short It you're to be to expectation have I back here to there second Good like the comps. like year to around I mean morning cycle going some mid-single-digit everyone. you're I'd to improvement. specifically of the clearly going stuff. an of go guidance, M&CS has I the that some backlog primarily mean clearly shippable think kind see But there eight have

probably kind that half? of hand, you But, to see projects about in environment. in You rate of back need ship terms to quarters backlog quarter. to next in improvement rate what's have couple underlying in see orders those need you outlook over these half, and back support in can the to for of half, mid-single-digit in need you the in the of talk orders what to in What about, start kind the the versus growth rolling that what see second the in you growth back

Mark Rajkowski

Mark. its Nathan, Yes. Sure.

business. starts backlogs broadly, the that our the think the of I utility much M&CS of but got it the deliveries in stronger we've in terms accentuated are with are confidence half the space way There year-over-year, projects certainly in work second the in year. the

tougher of but year We comparison. of are in projects I miracle a is recovery the in also, comparison. cycle I easier mean confidence more much they really in say gives we're or of hand in business. cycle recovery terms not our strong against said, looking, in half for back the what a the going short up versus as Patrick businesses, and would us in terms short

Patrick Decker

inventory hearing bidding activity to Nate, U.S. channel as that we've partners they and well of part our good they half been done. quoting increases as had that close saw that especially involved of the feel stay they quite about second in of here we now was in the ahead the some in we And are that working right the in. And their down softness they bought price

So there's bit of that. a

to the of industrial that's in we're the like be looks that the that QX. staying more in rate will closest in the order in pressure seeing -- the half second what So terms one And more would linger of that business. of

Nathan Jones

stuff headwinds bit enough. clearly I'd for XXXX to term. mean, high some margin. dewatering. fair very It's Okay, both a then here talk longer got you've love in little about and mix I like

mix, the however you some couch whether margin roll or as have mix these you You're of talk the what to on impact it out of hardware headwinds you initially. going basis points it's, Can projects in anticipate want M&CS to XXXX. about, you

these I dewatering forward, think, installed look would to you if projects, and let's then, software. the M&CS recovers say And hardware move get and

any mixes you have little qualitatively see more quantitatively? go see over talk bit to or what improving as should margins You should we expect next a of kinds about, we impacts on Can that forward go few years. forward the you

Mark Rajkowski

a to in get And the Sensus it going back together the gets out We're to lay in of March, a business of quarter first that given right? around, Mark. expecting of the M&CS, North second American water compares the set is turn And in that first But, that in businesses, in it's a story mix, Nate, clearly and two business but compares half really services. Yes. see plus the year. dewatering -- growth lot half our it's short our our ramp certainly we we digital in compares more with some more an in tough of it our see this growth. also a does bit cycle better halves, robust the mentioned, given in commercial our just are And given, deployments timing the Patrick business. when of we little to as solutions project easier

better, So second tough, overall contributor a it's half not first big in probably half all to margin but expansion.

Patrick Decker

is So Patrick. Nate, this

understand, margin. to impact very think I will see higher here profile in at much raised this Day the to go we the is point You've on a the company that into for growth Investor shift detail more important investors look and at and from we the of

overall, margins, But dewatering. will on in see of AIA It very have will incremental recovery We profile. and top nice which is a high M&CS higher accretive adoption see growth that, will the very of we margins.

in is investments. from on that Day, focusing mix part Investor is going cost that a productivity to And what be not control. us but that story of our we remove So does our in

Nathan Jones

will it on. Okay. pass Thanks I much. very

Operator

Davis your from Melius is comes open. Your the Mr. next Scott question line with of David, line Research.

Patrick Decker

to we will back him maybe come one. go the next to and Lisa,

Operator

question comes line Walsh John Your Credit Suisse. from the with next of

John Walsh

And lot everything of and Thanks get as then, at and QX some prepared your XXXX, have savings just trying savings assuming through last for but of wondering you et already looking conversation stuff flow the in highlighted I'm some and how tail a just together how through. Obviously I that restructuring the into detail what guess a can the remarks. about question, talk about that maybe following could if you XXXX volume, has positive. detrimentals a how I'm stuff we around of are? flow we implied all the into realignment well. on put cetera, to

Mark Rajkowski

Yes.

realignment So, the XXXX is simplification. around and business restructuring It's GBS-related. primarily

the ramp council. actions to works additional Europe, them North look finance as And is from take we're which at benefits through programs later about But those did to procurement year, to tower So into of in XXXX. coming our we've some actions talked those delayed terms we simplification up benefits, the America. certainly Europe we in through were in expecting seeing we year in as particularly just be are going initiate longer last into work

John Walsh

can HX Good. HX of just And kind the we an any versus I way for to quantify mean, benefit, in help so an purposes? of kind modeling

Patrick Decker

of John. X million about in QX savings It's restructuring

John Walsh

like, just fees? And Okay. backlog understand details a place us how a visibility better. also or firm bit gave Can the customer into those that cancellation once payments in wanted then, you around appreciate, the Just are either to shippable to progress orders decides there, and the little XXXX order, obviously you XXXX. are remind an

Mark Rajkowski

Yes, these commitments. And John. are

infrastructure we markets, emerging larger some particularly look payments. to of in in do in projects, some advanced but Now, our cases, to particularly limited emerging get not markets

hand, as some as commitment, orders quarter-to- move -- there's out of quarter. timing these are from in of long the While the a can them

certainly for close always are need commitments pay But attention these are timing something in quarter. -- So can but to we any that things these shift are that that's to. given

Patrick Decker

Patrick. part rare rarely And a do, them they to think Yes. attractive especially the backlog returns we these gotten And deals rate about see on Very AMI these be the when utility. their these. so canceled. would be that Very ever our of would for what are they, it in that's metrology economics approved things the them beyond for in you the we one shippable big they'd for cancel case on side, Once rarely. is regulator on things, the This even capital by XXXX. of that

John Walsh

it. color. the Thank you Appreciate for Great.

Operator

Molchanov Your next Pavel comes with James. from Raymond question

Pavel Molchanov

for Thanks taking the question.

about expecting year balance You that end landscape. me to of context, the hefty by the that guys ask and M&A you're the cash in let you alluded the

consolidation angle? You if a Is many becoming opportunity more. are guys are the in water valuation seeing not from more smaller interesting space tech the as the players of kind presumably headwinds, much, seeing

Patrick Decker

we've to-date. could would to. change in I upon you not alluded that any change Obviously, seen say valuations the meaningful volatility based

think have We we pipeline so, a we opportunities. of evaluating. And very are attractive always

really critical the We these that enabling And portfolio. the sure discipline will of strategic are again, remain always growth on make valuations. to things

So again, more we we'll on Investor there But Day year. this least mentioned pipeline at that an in there earlier, terms like, are directionally. update opportunities out what that of again, at have we think looks some of

Operator

Joseph with Cowen. Your next Giordano from question of the line comes

Francisco Amador

M&CS Good how year it Amador Joe. M&CS just the longer Could This what and you for in and Francisco so start target expect morning you is margin the there? why get term guys. explain to your margins, is is of you for low

Mark Rajkowski

mixed One, our relative It's American impact dewatering margins. there also, tough digital solutions very see Francisco. couple some timing things. given really the are and And there's business high some down leverage. North a as margin of volumes as compare in year-over-year, a Mark. high of to we just remarks, prepared we'll mentioned Yes, I have in some our also impact new our But There's on business, that see well. mix

we point continuing about soft got invest. volumes last is, of need opportunities to mix the excited to We've patch we commitments in in this, mentioned terms meet. in We're digital customer are the and the the side. QX, despite and And Patrick

we're year-over-year. So increasing actually our investment

Patrick Decker

for are do this space roll very that modification are predominantly, that And the some invest areas of really segment the I the deals. going investment of right metrology would in of We couple say out customer to commitments some now product think just we're are have to we to some products on large year some new in again, that priority exciting. punctuate the to comment, that meeting, be our looking the

building U.S. go-to-market got. scale. lastly, the capabilities the we've in the just global solutions on a And that's for out invest then digital that's continuing not And that infrastructure in to

Francisco Amador

competitors you. great. on having just Thank follow-up, on an And market, the pricing Okay, dewatering here? And have competitive the do seeing impact any color you in as then margins? a any by landscape just are aggressive you

Patrick Decker

Yes.

that the this dewatering always standpoint, although pricing But don't competitive from that I margins competitive and at area, pricing always that has I'd a and it of margins to a quite we much are too attractive. we rather in the probably need. stage. not major see but it's I really, the competitive think they obviously emergency critical business a just are is what think services sea the been in comment are space, lift how helps say customers been really don't very in it on would nature we market I -- when change

Mark Rajkowski

even as And obviously volumes are softer, it's more competitive.

Francisco Amador

Appreciate Great. you. Thank it.

Operator

line question from Partners. Linzey the with of Brett Vertical next Your comes Research

Brett Linzey

morning. good Hi,

the second is there, to it finer the point about and back those half that year? delivery come specific between M&CS size of the of deployments end pretty is to wanted expect? it QX you Could Just timetables pretty guide. tail the just in you And a on put then loaded QX? Or thinking balanced the up

Mark Rajkowski

in component, is No. revenue recurring continued business but a improvement fairly balanced. meters global we just It as of in a It's see and we well. replacement have certainly

but difference to compare robust more QX evenly the is across thing pretty really the deploy much bit and So, that and QX. expected makes backlogs little a are easier that then

Brett Linzey

dollars? you of absolute the it, projects could points the there just call Is quantify way to Okay. and size year or any the

Mark Rajkowski

deployment projects digit it's larger impact. the plus of in growth mid is, The Yes. these single

Brett Linzey

on a it. from Shifting drop the thinking and just restructuring this I on softness and the the here question, catch-up the, and efforts simplification thought savings about Thanks. year. just shifting Okay. there how the Got through the the process and payback given and timing. And you're restructuring Maybe, go doing restructuring standpoint then, more am ahead. then a question back back to to some bit surprised

Mark Rajkowski

half Yes. been undertook in America, happen that of really always programs the have at in saw Europe once. and last North phased. simplification we The as year from perspective things we year. doesn't savings out It moving we're rolled all discussed we The back a the

benefits some ramp we throughout this the see end of year, more we'll that to but see So this last saw year. start year. up at We

Patrick Decker

that got Again, off restructuring rolling anytime about you've as are you're This you some got is you've Patrick. laughing. programs, think

one and That last trails was into to That the had bit that a that in had second really involved this in like a launched phase taken the the half second Europe that And work's in we getting of done. year so, kind phase last Europe. began council year restructuring first times approval, of We given of in just the things implications. announced some phase of lead year. benefit in two half And little we there's factory year. we was had half

have things to managed. these be So

the year. second half We happen in the expect to those of

out when bit a of in in launched always and savings. rolled a gets when gets deliver terms here of versus there's phase program So, it

Brett Linzey

a lot. Got it. the Thanks I appreciate color.

Operator

Brian next line the Sachs. Our comes question Goldman with from Lee of

Brian Lee

of taking guys margin basis you points know the first just been us, stuff of here. obviously something been But about focused moving Hey morning. have on I has highly XXXX guys. just I Good for on if EBITDA help guess talking you question. I XXX Thanks parts originally. this front. you couple margin could the believe had a in been a expansion

like Now Appreciate the of XX target points mid to there's XX a here. point is more year-on-year. parts a lot moving basis

you the about bridge expansion that had can as before. between savings, you operational that bridge kind is the is how then any kind how think can of again, short sense lower you much been of extent any the items a how mix much to other trajectory we falling -- margin back targeting maybe and faster But views, and the you to old new can volume, of provide

Patrick Decker

Clearly, out shifting opportunity. all, at expansion. still deeply amount productivity, about through revenue to Patrick. we to I some on still Investor really time how plan is a of of our expansion of portfolio mean, lay and margin first This I that to thinking say, mix this other Yes. we're we committed are margin Day would kind spend in clearly take fair costs

we'll a more walk So that Investor Day bit depth. through in at certainly

deeply in drivers on margin two you ramp believe at dewatering we'll here that I businesses revenue the being to are highest walk challenges of those dramatically slower orders simply simply digital the our up transitory, conversion are We of that think the biggest as that. and through has some but We're solutions. committed Investor tower. moving still about to finance been that's in a to the related it right. we part the to that year talked that it there We're certainly execution impacting talked shift but forward, delays XXXX. about -- Mark Day. last And

growing so we're invest on expansion of But how through pulled for longer again, margin to businesses. back about not thinking in going investments that term year. that R&D these we'll to to continued other faster growth guide walk you on each or also in and to depth more grow terms We've we've how we're

Brian Lee

$XX that. I'll enough. to just forward look maybe million fair close the for And it's interest coming then Mark. a Okay, assumption noticed housekeeping down question about, expense for to XXXX, I a assumptions year-on-year. on the additional debt driving outside refinancing of Any on just year-on-year paying cash might the what down be sheet? year else that embedded or through balance or change there

Mark Rajkowski

into programs the of are through well is, as part a it we benefiting as other this little swaps rate interest of XXXX. manage part well, our year that a full year benefit bit risk and the certainly Yes, us year in back

program. rate risk management interest that of effects the just that's So

Brian Lee

got I Thank right, you. All it.

Operator

Your from comes Kaplowitz next Citi. line question the of with Andrew

Andrew Kaplowitz

morning good Hey, guys.

think rental Your in business was you starting said when QX. I was it weaken reported October, last to XX% down you

are decline the You subside? oil in gas. and all your of Have when weakness it that yet? and rental market seen what mentioned you tough And the teams storm stabilize rentals at in comparisons, about rate weakness you incremental telling might in

Patrick Decker

Yes.

we dewatering break uncertainty, cash, reaction They run driven our the growth distributors rental typically. largely distributors. in I So, digits. to what It of that sales a seeing by question big if rental the the drop equipment they And -- of and did single to our actually, by part equipment you there. have business sell. business piece saw the really were out And on the between CapEx they really that mid they're we follow was see was your correctly, saw, small our

And understandably so and pulled skittish they back. got

piece timeframe. continued Our to during rental grow that modestly

a guide continue in terms dewatering business. part Now to of we're heading that this That's we trying be have year. and weakness that we how for into of again, cautious why seen that

broad based At point seeing still time, a industrial weakness. are in this we

this temper cautious such of a when terms because how our has that we here. way. goes and it so to how view detrimental guide wrong We large the And in want it be view does we on impact

Mark Rajkowski

and channels. I'll our expected two in are we what in fourth so side we more just terms our down rental expected. quarter, oil distributor upon than the sales just weaker And add what the really into space one, expected. in color than for in the were weakness quarter? in of, a changed reasons; shipments on fourth the we little was some We it And more based gas seeing customers

oil refinery then a some to decline explosions. of and do in that And storm had there was And rentals big to year-over-year with bankruptcies events. related

So the both of particularly normalization those we point, period, And in had we half But, of the oil get when half to at were XXXX, comparison tough Patrick's and as rental we as to the industry that first you into but that to expect of the heavy look expected. of some first we in than particularly out XXXX. persist, gas. the of do some weakness we more other sell

Andrew Kaplowitz

growth backlog about, QX you just shippable of down you for Revenue digits in double I to M&CS said that guys. XXXX. color but up And for the XXXX Thanks Great. I the ask then, X%, context think in was was X%, wanted in up timing.

as just So, of hesitant digital what decision-making sort the to down? is happening availability? take difficult couple slowing of you down quarter, projects on is? it over labor or in more it last quarters customers either economy, to What worried but further given slow Is that something it is comparisons, it they're that's the mentioned these the been about

Patrick Decker

between it's as think one, one to -- it down have to not break Well, we Yes. line. business M&CS it's about hard talk I

very projects projects. the So kind different of they're --

pilot lack solutions we on phase. there where Then based QX. orders. always in start funding that of QX off weather then, being these into regard they things reflection It's talking coming timing typically move digital lack not events. the are of of It's a we're simply and a orders to or upon of a those. So, piece off projects, they're matter kinds interest that those pulling had a the hand a subject they're on about of of that or And in out

get decision-making, for really for here that's then in length not M&CS, really for -- we've time the finalized. several these to of finalized a terms get not specs their just of backlog. and It's why approved And we census terms any metrology takes, dynamics change that get large and and are RFPs the been -- stepped -- those out driver it the in a of large it case implementations piece seen for while utilities takes the in of

there. that And the so or to next. of there's couple even level be a it's longer important lumpiness one always from to in over these going things a we of year view at that's timeframe quarters And why a look our than

Andrew Kaplowitz

guys. it Appreciate

Operator

this today's time QX conference does and call. have a Please you. conclude This earnings disconnect lines wonderful XXXX day. Xylem Thank your at

Xylem (XYL) 6 Feb 202019 Q4 Earnings call transcript