XYL - Earnings call transcript Q4 2020

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Operator

Welcome to the Xylem Fourth Quarter and Fiscal Year-End 2020 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 Matt Latino, Vice President of Investor Relations.

Matt Latino

Thank you, Petra. Good morning everyone, and welcome to Xylem’s fourth quarter and full-year 2020 earnings conference call. Chief Rowland. Patrick are Financial and today Sandy Officer, me Executive Decker; Officer, Chief With provide perspective quarter will results for They their and full-year quarter XXXX. discuss XXXX and the first and outlook on full-year Xylem’s fourth

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

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

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

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

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

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

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

Patrick Decker

everyone. Thanks, good Matt morning and

and And Xylem earnings, performance you'll the metrics, segment team quarter, and cash. see overall, sequential entering basis. outperformed considerable expectations a fourth us in being strong team major this a for across XXXX. from good Every revenue, end gains the on every market quarter the momentum As giving morning, delivered made release our the those

close, of our full resilience the & Water deal advantage As Texas. year talked trajectory and markets. Building affirmed about Control at also in Systems we came Water adding to a Solutions. and AMI the Measurement large project Houston, Both headline we Applied we showed growth quicker than Infrastructure took quarter anticipated, in stabilizing last wins by on

established to segments. the in us places our like services. installed grew and we China, in time, Xylem's which adoption that down provided for where exceptional base benefits We reduction products early pace also our both of transformation. grew in gathered slightly Otherwise, the still industry-leading our orders previous revenue orders portfolio, same of improved large large markets demand At three The underlying in XX% all orders the to quarter, also capture customer were pandemic due X%. the essential and digital India. Europe of in is win caveat with on One the as in a trends allowed scope presence global of resilience accelerated digital core grew recovery significantly. in

happens spending margin, in and XXXX base we up of are and am line. As backlogs. a overall vibrant installed structural put pleased including with hedge and these conditions. we I on to a rarely up combined quick result a respond we action year-on-year but numbers XX% We growth also on made platform, And productivity a on on took very clearly the significant global cost and a in healthy They straight XXXX challenges of improvements. how given We large XX% growth that with and enter positioning resilient shippable beyond. know with XXXX

COVID effects. result, third fourth didn't and we the quarters, entirely to although in we margins a returned offset As on progress

we deliver help and Our supply the communities upon. served services their central chain execution them in-store depend customer to pandemic we cut

Our the our of corrected through free financial The in unfavorable even for cash position team line north conditions strengthening operational we in outcomes flow XXX%. discipline so year. quickly conversion market favorable delivered that the fact delivered bottom volatile conditions

signs are we offers an of there market recovery. But normalcy. ahead, return vaccinations encouraged of Looking by The up we're early eventual for ramp not yet. to hope

that, We competitiveness, are course Sandy position, for our in hand our in more want and it financial but still are very our over I'll on on performed. strength, uncertain we on in times, have to momentum. segments increased capitalize strong we commercial a to XXXX nevertheless With detail how to now and

Sandy Rowland

Thanks Patrick.

low improvement X% sequential organically across continued growth expectations exceeded the to April. period step growth meaningful versus steady year. forward. have Fourth And we took revenue down since in our down same in upside both performance our in the another our on the and touch That was businesses see short, flat covering industrial and last I point was with will in We geographically quarter and up revenue quarter detail quarter, strong and all Europe. in but XX%. X%, of residential each of end were markets utilities growth China more was commercial segments, this performance

backlog, saw Water orders, in reflects gains, Patrick the We're customer, India. mentioned. the the orders growth including improvement as down most result quarter also delivered productivity growth mid-single-digit reflect orders operational heading now. wins revenue it have contributing and year, to with orders I'll negotiating high discipline. volumes margin unfavorable With review digits still double-digit which and pleased the we of margin prudent EBITDA to XX.X% to strong scope Infrastructure was project growth partly orders Applied visibility digits production Water respectively in overall. scope were win been and moment. have in felt but cost several double-digit for return contributed of growth a of in accelerating large quarter into quarter Xylem segment lower with very This prior M&CS mid-single future and sequential in solid production the good which X% I'm grew a execution most a we Houston, excluding mix and Otherwise in range. and single contract large performance our cost improvement. the team's We discipline. are consecutive XXXX. would delivered sequential notably streams in the operating Organic operating orders quarter of forecasted were Fourth a margin and the by orders. second XX.X% to offset by above Compared

to in fourth Our due quarter last $X.XX quarter for and Please a X due revenue lower jurisdictional was were and mix. EPS to orders Water performance I'll down XX% tax higher the in the review from the than forecasted our turn to year. segment and Infrastructure rate versus earnings Slide favorable organically quarter.

softness decline in otherwise orders the descoped by the savings margin down ago in while were to results generally up healthy for basis project, orders up have our reflect the mid-single respectively. that and offset XX digits From a was from as been the softness organically in the moment in offset and were recognition each perspective, flat. reflecting by negative demand offset down COVID India growth residential emerging a were mentioned businesses. of Significant Applied in was a in mentioned. low-single Modest Emerging utilities mid businesses, in and quarter, declined in markets growth the growth quarter, by single X. by in I Revenue that reserves, commercial productivity in that down a turn treatment growth the driven the rental Europe down single-digit and particularly in by modest high declines momentum region. and driven flat whole, margin modest segment utility growth would strong as industrial, As drove the were strong Europe EBITDA commercial segment modest to and in Europe as commercial X% inflation, the by good were in wastewater offset in the revenue the I XX Notably driven wastewater digits. wastewater residential. emerging Water residential geographic budgets in cost the was was from modest industrial U.S. XX% mix COVID impacts in offset primarily continue organically X% low-single CapEx partly digits, show the quarter. resilience pace were up was just by utility revenue Please U.S. of was markets, business. infrastructure segment declines globally. up single-digits digits Water digits points and markets Operating our stage In recovery was U.S. industrial These reductions dewatering respectively. delivered results declines Page was U.S. to by mid-single businesses. high mixed, mid-teens Geographically, and

gains, in and East partially respectively. favorable quarter. solid basis and were more XX price industrial by in strength Volume inflation industrial offset productivity than some residential the markets market the offset operating end margin Softness China. realization and markets in points the and XXX Segment overall declined EBITDA industrial the margin mix in Middle and declines in in

in orders water the X Slide and to growth in I'll Now low was to Orders quarters. & considerably largely let's In Control cover growth This we second both the Measurement energy. Solutions M&CS double-digit our declines and return Revenue sequential a our third test organically. quarter, XX% the by turn basis up from up on single-digits. business in improved driven experienced were mid-teen and in business.

down quarter, X%. the finished we quarter This

And the in softness. U.S. Large process, While which projects, new were our have our timing experience core are Middle related due of scale site continued U.S. been The that to delayed business decline projects largest pre-pandemic restrictions. to COVID-XX been related deployments. backlog completed. of access metrology to East temporarily the project is the part and in have both

Water further down These down deployments And and in in UK. XXX Middle project timing the offset declines partially respectively. growth in We East. basis of due grew cost Lower end discipline. quarter to and just will Geographically, and Segment the metrology second the operating digits and and the project and high Emerging was business businesses. solutions the and for the from quarter were mentioned. prior of in digital markets points I offset start expect the of Anglian that analytics the large half demand of strong in back the mid-single the were was resume partly by year income from single-digit reasons favorable test double-digits year. down volume inflation towards deployments advanced the in by project productivity margins XXX the EBITDA our were double-digits the accelerate mix U.S. Europe

overview grew flows position. financial X% of for flow by to full free Slide was strong our flow cash cash conversion turn year, outlook the an free year. and cash let's delivered pre-pandemic with performance I for company's the particularly for free cash XXX%. and our the X of pleased flow cash exceeding Now We

basis exchange XX of took they XX.X% that impacts some settlement for XXXX, improvement environment tax foreign progress in has interest work driving on the years. revenue. team of excluding step This is team's In of to and on payroll restructuring and the liabilities, a We finishing XXXX. a number capital improvement receivable managing driving of continuous from favorable another been point inventories at improvements timing benefited Our solid accounts in working the and reflects in difficult reverse operating forward year-on-year, focused collections. will which related of

Our a balance positioned Net well leverage debt sheet times. balance. to includes X.X cash $X.X billion is is and EBITDA

take annual our of reminder, forward Page This the senior XXth fourth dividend I'll Patrick we'll Please And and X increase. to we annual our XXXX. is of to announced turn look back a in As call over X%. to quarter. the million of cash at notes to an one turn lastly, our $XXX repay advantage amounting consecutive position increase to

Patrick Decker

that all us control. could reminded we to the our to COVID of world, humble managing fidelity first what XXXX began said we around Sandy. When prudent would on the focus spread about it's foresight. be Thanks, we

we've investment done. While growth maintaining exactly our what and for that's

uncertainty, We're XXXX focus a benefit flow operational would capital, anticipated same on be have challenging from cash will delivered some and base. our exactly working in big year much challenges do expected a capability still I on then XXXX. installed value that earnings I cost, us. said capability. of In us XXXX’s almost couldn't we guided apply how commercial large for arrived driving with that environment. that So our on presenting still key kind call in on ago I we throughout discipline a free team When the the

dynamic. logistics for essential business see deliver resilience precisely going which are improvement some value clearly the In proposition headwinds, utilities imperative We're to we close utility through markets. So our a there of the transformation, work advanced operators opportunities heroically digital efforts smart was cost and running redoubling is structural we're the the we'll infrastructure to supply of advanced continue and We'll solutions XXXX eye our price to to digital Backlog are financial year-on-year. very given approaches chains the the further our by services see growth already it demonstrated in manage of pandemic proactively monitoring, made in required. impacts. which Remote potential varying the to clear are for our new market managing a keep inflationary of as operational executing keeping program in until operations face already XX% we cost But pandemic in XXXX. savings increased continue keep compelling. solutions. and demand. seeing more is grew case recovering Despite digital geography, stresses our environment. and begun the And on broadly, inflationary Pre-pandemic the very spending that and automated

drive but we us digitally of our only and grew both a strategies platforms, It China double-digits. in clear. as With three experiencing Although China continue India in year. years average to high localization in annual China will portfolio. small all it's Geographically, countries. the of parts rates combined COVID and growth. grow in earliest growth attractive from advanced XXXX, a last impacts not Despite a post is India very up software actually trajectory position in the in the enabled the to base And well puts leading

teams and debt growth solid also XX set investment with impressive with still the billion of remain growth. some us. for case over disciplined and top we in investment of we opportunity continue social organic repayment proactive worth that remains Even capital investments valuations, important of Alongside creation underpinning India nearly balance during clearly current capacity. to mentioning intend mind do deployment warrants. $X.X cash value. a our fourth number also It's additional very are is of a China about of is top next financial for the offers quarter Growth Our deployment delivering M&A foundation lot our wherever a priority see be but the our the We to to months. capital

baked model very We into is our and the in are privileged sustainability that position strategy. business

Our so broadly. on recently The leadership the our our gratifying wide portfolio sustainability water, sustainability several strengthened provide but And on it bold of Bond of position going added Bloomberg mission. achieve deliver sector across both outlook. XXXX range We a end-market these to metrics Sandy Bond indices. has our not put offering. over of and sustainability in impact number our net sustainability MSCI took continues notably, a to positive performance do a a outcomes. progress on water to goals more to Green has steps Green solutions only in unique We Despite to in us now most Barclays more were position Index. much to that I'm and to segment XXXX recognition, we turn to have on and work team's

Sandy Rowland

been have Through reassuringly XXXX resilient utilities mid Patrick. only Thanks, single-digits. down

better pandemic that up Infrastructure seen M&CS not XXXX held tempered a revenues outlook view reflects anticipated. will is impacts of As of utilities results XXXX. you just quite utility business the anticipate mid Xylem Water have in to the XX% fourth north quarter which in grow than end yet. in our low the the for see single-digits and our of revenues We Still overall,

In OpEx focus CapEx global growth that on and rate side recovery And same we expect on be as is modestly. U.S. year. the likely utilities to expect modest the the growth applications. basis mission-critical to continue on wastewater down through We wastewater a

decline postponements reductions rather projects. the However, than in reflect should

funding since some the And the concerns are low customers to remains uncertainty have pandemic. to close As largely this we’ve while how kept of budgets you they thinking about our understand abated the and point would year. deepest for expect, utility

we've as mid the of The likely Short near clean definitely quarter, large XXXX term. mentioned, won the seen beyond. end from that improvement. and side, we impacts still accelerating up, project deals second should project industrial ramping are deployments growth COVID by growth the water On limited cycle anticipate In to single-digit pick begin sequential the activity be but us beginning I orders to multiyear up in in metrology year this for markets, large again the we and solid good set year. are through

flattish We up single-digits. to expect industrial to low be

market annual continue you saw a to in will be hand, market the although sluggish. continue fourth end none at varies reinstating Europe other for by commercial outlook Our U.S. will we we to recovering are commercial on the The to bit guidance. geography. year. down quarter. And pace double-digit quite overall, should Slide we that anticipate XX, be the On flattish slightly the see the

the especially regarding and cadence of timing While uncertainty remains recovery.

with will the deliver our in framework. results team are following line confident We

particularly muted. in has the and of market end solutions, year growth on flattish our On expect in For wastewater as breaks single-digit of follows, top solid partially is the utilities America segment of pandemic Xylem range X% see exposure late we XXXX mid growth Customers further and down industrial Water, growth in recovery deployments markets the likely the control residential, second the to lagged dewatering growth pockets by full In for in building overall, recovery. the of commercial in in offset digit globally, project to foresee This in infrastructure Low will quarter the X%. measurement water heavier that, to mid-single single-digit the in performance this region North organic through being with accelerate in by predominantly revenue low we resume more growth in is year. indicate second our growth. while business. half Applied segment and outlook we

finishing delivered XXXX. our on to advanced momentum and solutions digital assessment We also expect services test they the see building businesses

focus adjusted margins and more will believe margin We that the we of you M&A have businesses in past, we that impacts. our EBITDA. transparently report cash both measure enable typically to reporting While notice accurately reflects around performance this adjusted with after provided are us and EBITDA adjusted increasing the purchase accounting will our performance and margin the more operating without you

For to XX.X% XXXX, to points we adjusted of be a expect EBITDA range XXX basis up XX to XX.X%. to

basis are restructuring adjusted the to more For equivalent with XX.X% which margin leverage up predominantly volume be your flow EPS This XX% be price reflects to also $X.XX, in from providing Free than range cash XX% we the an to to convenience, benefits and XXX% This of of is expected in adjusted conversion offsetting conversion our operating XXXX inflation XXX combined to XX.X% cash XX range savings in mix to $X.XX here, the XXX% and investments. expect range the of of we an favorable XX%. and points. XX% free yields following to increase XXXX. of in flow

continuous to of and and will XXXX to working reverse the purely expect growth we XXX% see in as returned settlement While conversion we drive a we to is XXXX. believe to this we liabilities beyond. timing We to to expect we cash continue benefits in and drive in capital dynamic improvement, XXXX related some realized increases related of the in XXXX

have with FX a be supplement rate X.XX. sensitivity to volatile attention dollar assumptions in see rates. euro will item so in is to year variations the the FX we the on a appendix, to is We're do continue draw I conversion which your if want full to exchange. other table included of of your you We can models. help you to foreign and slide provided number assuming that One key and

anticipate mid projects to total This low anticipate M&CS will we in quarter, to first the revenues single-digits before in infrastructure. single-digit X%. company and delays COVID on Water X% is Applied low begin grow as deployment water mid to from down low growth to continuing in decline of growth organic single-digit the expected drilling QX. range includes in that we Now

to charge. and expect the XXX basis be over to XX to the range Slide turn of with M&CS back XX% closing quarter operational expansion to We EBITDA comments. warranty coming a the prior call from first with that, Patrick And adjusted a to expansion please in due versus of and prior turn improvements XX% I'll representing year margin to for largest points XXX the year

Patrick Decker

position marketplace stronger we emerging the New But Thanks, Sandy. momentum come would the durable like is We unsettled an recognize even pandemic Year, and is time. then and that be position from entered when for a still some into built is business it. the That with stabilizing model. on we both good

heart provides that multiyear of for essential have attractive We runway have services vital products differentiated we technology and at a growth. the

perhaps never been Our underlying investment remains robust. thesis and more mission has relevant our

to our invest That's is our provide and value performance shareholders, our social Analyst growth priorities and to a delivering growth. our sharing strategy customers strategic create communities. and where Day update both at technology in for line for near-term Investor continue discussing virtual key plans more for our look solution our later this Our forward planned on long-term results our with year, and detail and to and long-term an strategies. our sustainable I economic capabilities We'll we to and on

So questions. now operator we'll you call turn with over the to for that,

Operator

from Our Baird. Instructions] with first the is question Mike line [Operator coming of Halloran

Mike Halloran

bit Let's deployment as up a mean, next little in through side, start there's margins correlation with curve. the year through a here. feels we I margins year, on tracking get are like the how work M&CS you as the

So time, thoughts deployments out? get in it's normalization kind when you that point side? you've in on you these get kind done play of that that efforts timeframe you've take XXXX that can and cost other as getting that range, you're towards Is the that about, there historically whether that of move or some back you latest all and factors are normal greatest to just will been around thinking

Sandy Rowland

last took as which declines Mike, thanks right you're of from the the see the margin that the we the our XXXX, impacted. to The our have we go as going for with we greatest through QX segment expansion. make through is the When XXXX a structural that segment margins. to changes also we And permanent. one-time throughout saw move action also that cost And from we look as to the get item most at that that's see efficiencies we pandemic, of the that's was that expansion. business segment out to steeper Mike are well comes from going operational M&CS the gate. saving question. year. And as a segment Yes, that part have strong impacted team where that was work you're Obviously, revenue margin And restructuring, think going largest did

Patrick Decker

Mike, Yes, these number we've a got of deployments. large deal

think site won some north as accretive with million begin I in say commercial as are large going access recently in they as XXXX. good good come and we to I we've of returns attractive when ramp much of $XXX to deals Those just very those And have here. really continue wins deals. meaning margins to

Mike Halloran

what to table, range that those get more whenever normalized time I'm and period M&CS back you access, site no the there basically to for deployments out though think started? is, is that as normalized you is So reason get a on hearing

Patrick Decker

is That correct.

Mike Halloran

Okay.

Sandy Rowland

Mike, back QX levels, we a the you're time, back performance strongest as XXXX, at one that on going thing that expect And margin I'm in in perspective. see that I we XX from are expansion. to we XXXX. good pace sorry, at for margin would would will at margin out add we and be the through be point will look

Mike Halloran

to funnel? the that focus in the second the in relative you're talk Great, and the focus there. obviously side, in the in about to M&A any what change bringing funnel - if deployment is really what's maybe of actionability on and now, that, helpful interested one of just right then that's highlighted And capital supply there on

Patrick Decker

Yes.

tuck-ins M&A no of are as of staying we larger number funnel. mean a we've real and change executing to we'll a this bolt-on very focus Mike, in So items our areas that smaller the kind but close of couple well. year, actionable got I be

on got eye remain we've disciplined. do organic a we're value But the valuations optimistic. keen to and of and we going growth, to continue again, we're So understand again

Operator

of is with Dray from RBC Markets. Capital question the next Our line Deane

Deane Dray

are still within get I India. there. order, the change there business. in it pump just can And we changing fast with to sense India of the crisis and on some what start basically there us there Maybe because really the so there went some in the dynamics give but do Patrick just and things mode, scope is of that much outlook what's on

So start project some there that color then Houston on please? and

Patrick Decker

Sure.

So I'll take let India. the focus on Sandy Houston project here question, I'll

in top still seen as it out, This we remain the double-digit to Prime positive last Deane our policy want and see on but no in so a mandate an the continues back on that. little be was Deane. great our we all, one got are going element So, state, of by it and view how don't negotiating there. localized reflect to growth still conservative was Minister, few plays particular a very nationalism India. project, We there. backlog driven appropriately on one to change at unique, that again descoping Modi a see we unique the very reduction very we've a part of a where it trend, India, by broader case was be and We've years, Obviously just bit on in now We'll orders.

Deane Dray

Great. go on ahead Sandy And Houston. I - know

Sandy Rowland

we're very on very, year. the excited $XXX the builds Deane is awards that earlier project of for question. million about, it and that Yes. This announced another Thanks in the we

So this water deal about $XX and a primarily deal, with water is powerful million utility. it's deal, a it's really

that pleased our into quite backlog. to So one it's bring we're

Deane Dray

this else that much meters, the digital is project. How but would highlight? offerings I - in know anything you Houston embedded the of its

Patrick Decker

before. and an us that it's displacing for a there it Deane new, was gain someone share AMI it deal, is is Yes,

as the fit digital so from And FlexNet side. think landscape that communications in about will offering it you on the Sensus

Deane Dray

and reaction year on your the to digital more more offerings, expectation need that like monitoring, with remote of didn't exiting Great. they momentum you're didn't more was Patrick, and the was, do that it coal need to the they looks the automation. this do utilities

we that demand far we so conversion are in is I think this inning sense of seeing digital? And are so your just, big what - on what a here

Patrick Decker

moving it's, now Yes, restricted One secondly, structure monitoring, at dynamics being new are deployment we put to the as in say still in would must two remote you I broadly. have, drive the pointed capabilities, early is synergies innings new early from we really place are utilities more nice the with I think here, last but still are play. place of, out, Deane, haves incentives especially we're put for there in year, things we innings to these labor terms the in

view last just We revenue. other not impact on the the that. known yes, our about year. Houston it's late talked good a has pulling artist as that example about deals, also being Xylem of So It's Winston-Salem through Columbus, digital

view then taking a broader portfolio. just on this Deane it the really So our digital broader It impact is revenue on the has component. we're and

Deane Dray

can That's just you've and Sandy, you great. been be for share for maybe your more where because it's But sales, impact, you maybe last focus the yourself with lots thoughts. the do making biggest enough would hear me you improving, the sense one had you now in but to opportunity role on can time can to us see is is still biggest for to the And comment my there. to love is, working there capital I do

Sandy Rowland

that by progress opportunity the never there our that margin done I months, through now to opportunity Deane. the opportunity work that's about drive questions. and are digital your conversion for Thanks encouraged think continuous so around the portfolio. footprint, very continue for to is and full our interesting, is collaboration there for us for improvement expansion, Also think Yes, very across particularly further there it's there. optimizing opportunities really the projects, scaling cost journey I've here certainly the digital I'm good span we're and still is it's growth whether that portfolio, excited organization a think about and four been been making on, I

managed team question that team super on on job need basis, team your Turning working past and our think the bringing collections, the controlled a make did year, your I dues, inventory. recognize years revenue terrific improvements to out on where that a declines, did job to capital, shout percentage and effectively our growth how this we difficult a and operations in and it's on to on down they

of our bit will whether But pretty think next growth a financing going it's headwind. exiting a scaling efforts. there. capital improvement We're and as in be with year, our little to we spot we're good working some other to So to continue of programs initiatives suppliers a I continuous drive return

Patrick Decker

our margin, capital And Deane of which that single plan our it's our just the percentage annual revenue metrics, of driver three it, biggest revenue. primary remind not organic of growth, it's as and operating all a is flow working to conversion cash there belabor but incentive free to income, investors operating

of working in to taking of any want way, or sure just our foot I investors not reminded that so And capital off make we form. shape we're our all

Operator

Kaplowitz Our is line with from next the Citigroup. Andy question of

Andy Kaplowitz

much parts consistently so you in mean then are it's just some the Europe bad Europe, performing in in better in Patrick, I so economy. understand more a is well Xylem so performing Western you what's I think here. given all why But U.S. we to understand strength can the why that of COVID as relative is China, are in as interruption is difficult little

the So what outperform versus to is allowing business you about in it that's Europe U.S. your

Patrick Decker

I spending is of in also there. how for stages in and this more a recovery been budgets focus Europe how accordingly. they their timing think the of on as U.S. Yes, their It the utilities We're early stable of plan traditionally issue is terms part has

benefit from in also share very a We position strong Europe.

recurring going us into read wouldn't I the that that's level quite but outpace - over benefits to Europe time. the the the significantly when suggest U.S. so revenue And wouldn't too there, case, I of much aftermarket is

now. timing matter of more I think a just really right

Andy Kaplowitz

That’s helpful.

Sandy Rowland

would add to is little that bit a to. I I mix mean, is

is those especially pandemic. wastewater expecting on to are resilient clean especially see And can water, So start been as we as during we through rolling in Europe, and on move the the we has progress that deployments. our side, heavier out XXXX, concentration

Andy Kaplowitz

the that in assuming that like incremental you're forecasting have? doesn't What about That's helpful. XXXX now permanent cost cost inflation, talk or And is because gross come buckets equal then Patrick savings margin million implied could $XX talked this savings at to about is way. XXXX. that the you in probably margin in that for savings you of There think look forecast are for of that you even. million you I some Maybe if back I would of look temporary $XX it's Sandy, are

a component sizable inflation must there So, in there? be

Sandy Rowland

question. Yes, so multiple is I to think elements that there

break to it try down me a pieces. in Let you for different couple - of

take and This structural restructuring about programs. aggressive actions those realized restructuring. we savings million with did year, we start $XX from I'll of So

As level. a we're expecting we look forward similar into XXXX,

help those further look we we programs another have in some yet plan return. question, year-over-year $XX us on as which bucket like discretionary out most I expect about both the about do well related focused will we done costs those We are from marketing on completed in probably overall entertainment, And and we part perspective. XXXX costs of But that certainly Europe cetera. categories took to is and inflation, haven’t And migration would a that touch year-over-year the third XXXX part will of you're our as and XX% from is been Discretionary then that the to to footprint efficiencies. your et get that million say challenging contemplates that services, costs of of starting equation. travel as

As you stable pressure very XXXX. seeing of to start most we're XXXX, XXXX. And up that inflationary of for that at see pick a end environment in continue did saw know the we

that. Our a in teams little front bit have gotten of

that implemented announced that have inflation very, price been materials quarter, are we we very the So around the something in actions first watching but is have closely.

Patrick Decker

guide been likely reflecting price We've inflation here dynamic. are back year. that level what kind cost our of we're here And how I trying us in unchartered uncertainty is timeframe. before for be. at And terms are whole the appropriately terms tariff clearly to This not that, would of add the measured just to in we of in we looking think territory for be the of the in is to

expecting Our on offset very material and got that lockstep a along sure productivity in team are that realization making strong got our that will procurement price inflation. commercial they with we've - with we’re highlighted. teams proven that and and labor We've

it using But are Sandy commodities. the be our thought on actions. to impact segments guidance said, we pricing we as already The again upon So, just different prudent of we've the across would impact done. based one each

Andy Kaplowitz

I you lot that you a there? XXXX assume more for would QX. get had that basis in Patrick, And then points price XX

Sandy Rowland

that's Yes, fair assumption. think a I

Operator

of next Our is question Davis with from Scott Research. line the Melius

Scott Davis

asked, Good, just looks if but now? like most look prioritized the examples at money of focused CapEx my been you're you XX%. dollar guide, your up is questions - some geographies about projects maybe that on Where areas or have or where or right is the being

Sandy Rowland

thanks Yes, Scott.

our through down in and spending certainly CapEx historical think much we pandemic, our spend the around very outlook our for in move with as clamp levels. I XXXX XXXX on for we CapEx is line

and some markets. making to is I making CapEx continuous think growth that emerging to investments side. investments our drive a lot strategies in on centers we're We're the manufacturing our digital tied We're of in making our deployment investments improvement. in

something we it's throughout to closely watch that increase sure we're so And make the year going face that and accordingly.

see we will growth CapEx release for us recovery XXXX position incremental start dollars As and to to in beyond.

Patrick Decker

that year to see projects growth. phasing would Yes, plays two market CapEx. CapEx recovery. We’ll in there. point just on going and much one It's well very to is are Scott pretty it is out bang continue of say, or tied the big distributed I to add the There how no terms we're Sandy’s in I manage to would

tied just of deal that of within emerging factories. It's we I is done few a M&CS. some fair some markets. wins be within But the continuous that to in in support a large it also terms upgrade to has reinforce So, improvement localization have said would what Sandy to our amount, it's the work of

Scott Davis

into Okay, sales this why? structural or kind a the any since of that's can I that kind of there of think XX% to of being run Is fresh as always been towards best lower number more set relatively beaten eyes And of of I getting of the capital said reason know Is being, there helpful. then why I new of levels? really death, Sandy reason percent working kind you’re it's territory but working down be companies? has stuff. - capital on any kind best-in-class structural

Sandy Rowland

is I structural there don't reason. think any

not to on continue this. that think steady company progress I we're I to not the think, focus that the we're drive going we're And definitely journey. something to we're made work satisfied, going over at continue to years. losing it's And has but

Patrick Decker

Our biggest to challenge that inventory We levels. it kind still is. chain an do endemic sector impact water have Scott simplify supply and of has within and our the work to on is

look you if our say, would at I performance. receivable So

supply it's there, is really on going Our needle. there. It that's but the ways that but have it very move improvement view there and - focused side much payable Milando made performance, not some pretty to chain on opportunity and fair our go. not we're line that's my good in There is work been much inventory in team the really a Tony to structurally still

Operator

line the with question next Our Nathan is Stifel. Jones from of

Nathan Jones

your XXXX, productivity inflation. you where the $XXX revenue of were XXXX, guidance during the questions, that said were top couple business in on side million and offset end below guidance XXX and in about the revenue top is in points this. is margin price and you taken look the at A of the you follow-up time, really where guidance, If the margin of top about of still basis structural of out I end cost

margins the 'XX to gap expected on where So the there in is in roughly they where 'XX are can where versus the you fill were on in level? between blanks same be revenue

Sandy Rowland

a you in to margin expansion we up. a from Nate, as back on good perspective, and M&CS exit, lot as margins differences little and modeling once pandemic you're going that track been we we've think hit still a through portfolio. see and points back has get growing, ramp delayed I out bit Yes, recovery of There we mix XXXX, the is the on incremental some there, modeled are

but I in throughout line year think think investments continuing I we're overlooking digital be the may recovery, make phasing the them prudent we're to in probably one the the that's front, model. is, those you other the and the thing that on investments and with are piece

Patrick Decker

think are margin. top on the would line can Yes, exit really and important we first this versus I and to half half focus is, both of clarity other terms I it's what on the say in growth rates certainly Nate, second get more piece

average. or full-year the at looking You're

Nathan Jones

maybe can then in second in talk and color rates half half. the the growth margins you first that take differences about I'll and

Sandy Rowland

that me and chime the in. at take then let Patrick Yes, first crack can

how about and we through year. as almost the you pandemic think have XXXX, businesses the impacted think sequential regions quarter think our to the yes, I about trends throughout

And saw QX, half much I value earlier going the I on is the in down focus growth in expansion. you're QX will than our going the deployments margin the year, perspective and From experienced we second the And a in think it's of in we perspective, with as you be in margin in growth what's that return our accelerate, then in happens to and drill the were and from very revenue dollar we margin so out as important think what stronger I again, starts I a XXXX, and think that as think they meaningful part and XXXX. M&CS QX because year. of line gate of to margins first to half see biggest right the we're much the to were levels exit

Nathan Jones

Do M&CS you margins? at think exit year double-digit the operating

Sandy Rowland

would say digits. it's I more high-single probably

Patrick Decker

we're margins. talking operating Again

Nathan Jones

data I in one. of think the that lot yes, Yes,

Okay. I'll pass it on.

Operator

Saree with of Boroditsky Jefferies. line the from comes question next Our

Saree Boroditsky

my taking questions. for Thanks

question follow-up the XXXX previous margin. also have I had to would thought margins FX you'd on benefit for levels. Just a on

you just this? So you're quantify thinking could how about

Sandy Rowland

X.XX a FX rate. to guided euro and is key one we've of our key dollar variables conversion assumptions to and

in I that important currency and for about is way and about of of million variation a the revenue us, X% $XX pair the particular, about most $XX think is think that I FX in the the euro drives million margin. euro

good to it. frame So that's I think a way

Saree Boroditsky

Water improvement on in and through quarter could acceleration the and this the thanks, for the an dewatering performance driving Great, in as saw we margin is go the business through year drive color helpful. what you should in that's And as the expectations provide Infrastructure some you then what well? year in

Patrick Decker

but and XXXX. place focus Southern key terms the is in commercial that is for ramp because half there be Western in We've also what do We growing driving expecting rental to with dewatering America, rental, second January industrial of more Part seen opportunities of markets. activity area U.S. Yes. in really really of is pricing business. are put margin sophisticated the the a some North performance in expect that only it we to we're tied also not models and high and encouraging us, in going the in quite to

your low to to for single-digit flattish point. about expect 'XX growth we'd last So

Operator

Your with question the is next from of Raymond James. Molchanov Pavel line

Pavel Molchanov

taking the for thanks Yes, question.

all been and referenced recovery, as crisis than the going in be You appetite a you in even you're suppose, they not for would M&A, of the we're else getting to into higher water I out but equal, disciplined, also said, of pandemic the have it make recent phase years? tech being valuations

Patrick Decker

higher and SaaS It nature nature that recurring model revenue that to higher depends on those the a of of premiums. more a things sector within the has have are digital water of space. always kind of going are sector Obviously across multiples the any

we the has a in number these that at work team I done of areas of proud think years. over our we've number built a of relationships we're look that the

partner And our of a for portfolio. so we seller some go to I the don't of through And to process. the actually think R&D. market again, auction smaller a channels things our an these to number at finds of Xylem where that's really our because of tend an attractive global breadth really the breadth, look proxy be be M&A And

pipeline. see we we're again to disciplined encouraged this going no, in I'm still in And be what very so, regard, by but the

Pavel Molchanov

its you lots kind of infrastructure benefit kind in initiatives to what company of actually materialize? as of I'm begin And let a We're hearing curious as stimulus the components. program one me But Okay. infrastructure. of Europe, next EU Yes, to in about a - seeing generation expect as Washington infrastructure or to broader these extent ask talk has question. an

Patrick Decker

too find seen very with not we obviously would it customers focus, that And utility plans mean assuming. that, again see they building made forecast the or clear our we've big if previous in. discussions said do early But which include that need policy it. administration. so because early planning came bill, infrastructure for that see anything they movie the before indications our as part Yes, But for us indications and we’re when we be But positive not have a Having water I from beyond we say, intentions to also seem positive far scoped really is are on going again administration anything an to and on thus far ultimately with what and to generally new something that's We're clearly, that assuming know net outlines of us. for on we're new it's to encouraging. in. into infrastructure do

cycle. Given touches nearly portfolio all water that parts of our the

Operator

question is the Cowen. next of with Giordano line Our from Joe

Joe Giordano

I'm that complicated. you're a like and near-term Patrick, a arguably couple like at complicated? make MC&S to business And you more it on least just that M&A you is feel you curious times. less business to touched of making trying for about adding guys how

Patrick Decker

Yes, to I adding terms M&CS. at complexity wouldn't look of it in

adding of the there are think just the water in and as I concentrated and the think utilities doing can to - so work. most way we solutions clean it about portfolio to is, side of the we that notably we bring

more We digital continue bring to to see areas we opportunity the portfolio. where of can

the that I scaling portfolio point. synergies but So I take them Obviously, confidence. big to one that the bring, we at look and complexity, add time we Obviously, is great do at getting we adding that your market. we channel that look smaller any start-ups of to with it is wouldn't

Joe Giordano

has more about a me know element, on reposition in and just from you the within what’s like out from like the they're to there? quarter mining So maybe would last trying good in like little construction shutdown a I be business construction comps dewatering, on that How market. then like to lot - like out away bit and playing because the just flattish that? had going mining thought with of And pretty been to talk that, stuff guide on of I just guys relative the you feel can there underlying into competition I activity? that like energy you and and maybe that that is

Patrick Decker

think I you're Joe. yes Yes, right

for positive back business the year. to I start think, going us come be expecting we're this and to is

we're on little cautious calling I a think that.

seen also movie that before. out have We play

come the that's like really to that we'd one so activity see And back.

think Joe, I because COVID - some bit because as out yards in the very of construction normal some and is of there North that very to much of of seasonality much hand-to-hand a little weather and industrial in a in it's business, lagged of doing Part this and activity. forth. so side America construction terms think a about its people-driven

so, And work. as been some that do not of some they're onsite there. out to and get Then able there has noise

We to expect though in it's going back come XXXX. here

Joe Giordano

Yes.

Sandy Rowland

but perspective, some that in we're a year, Yes, half more there still expecting in neutral. be the from will QX of pressure it's the COVID second

Operator

question line the Credit final from Our of Walsh John is Suisse. with

John Walsh

of ground XXXX. in covered strong performance obviously very cash lot A

Just next ratio. absolute free question the how flow about gave had you cash the for to conversion a think year, about

some there items that need is adjustments in there, add the provide we obviously think I are of think usually ratio? the the simple doing net income is as do about on net the math to that conversion Is or in income you some to reconciliation? it backs we adjusted when terms

Sandy Rowland

also I we restructuring you provided what we give and Yes, our did tax with you the and rate. that think spend outlook from on we an realignment perspective to expect

big you I picture, XXXX the given to I think look all So we've through inputs XXXX. model. But if at you think

free is cash XXX% conversion which healthy. flow be expect We to very

for - XXXX. I three is headwinds discrete think there

more first resuming we think is CapEx with line about talked the in there’ll is earlier be some We we from the levels. be return one call about talked to as I to growth on And capital. working one The more historical liability unique year, we add-back And $XX but that and about number one-time XXXX. from that of phenomenon. benefit two-thirds XXXX, XXXX think was next I That that's were on. that a reverse to will categories is a million the largely of timing in benefited there third

at is being so good think historical And is a years lower than I but target, to spot. XX XX XXX yes, our three

John Walsh

yes, you. that's you the Appreciate that's those helpful Thank color no, on moving all taking had. pieces, Great question. very I

Patrick Decker

you, John. Thank

Operator

Decker for I like to turn over now Patrick closing remarks. back the to would call

Patrick Decker

Thanks.

scheduling interest. We know hopefully call and - today. next wish already for continued all month it. all the I Investor and on in friends earnings support as But catching an forward this believe said you and we all and Thanks are earlier, you planning into again our again than Year. it's to and more up Analyst back appreciate want And year your to safe be a happy healthy call. that. Day we'll Look families I and we'll a and So we’re New joining already I we're sound. get and later you all appreciate. with hard the sometime to to

So, very much and thank a have weekend. great you all

Operator

does Thank this at today's you. Fiscal This Year-End Fourth a and line time conclude Xylem Call. Earnings disconnect and wonderful Quarter Please XXXX your Conference day. have

Xylem (XYL) 4 Feb 212020 Q4 Earnings call transcript