Xylem Inc.

Welcome to the Xylem fourth quarter and full year 2018 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. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I would like to now turn the call over to Matt Latino, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Thea. Good morning, everyone, and welcome to Xylem's fourth quarter and full year 2018 earnings conference call. With me today are Chief Executive Officer Patrick Decker and Chief Financial Officer Mark Rakowski. They will provide their perspective on Xylem's fourth quarter and full year 2018 results and discuss the full year outlook for 2019. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the investor section of our website at www.xylem.com. A replay of today's call will be available until midnight on February 28th. Please note that the replay number is 800-585-8367, and the confirmation code is 998-2239. Additionally, the call will be available for playback via the investor section of our website under the heading Investor Events. Please turn to slide number two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances and actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For purposes of today's call, all references will be on an adjusted basis, unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide four, and I will turn the call over to our CEO, Patrick Decker. Thanks, Matt, and good morning, everyone.

We have a lot to cover, so I'm going to hit on a few highlights from our 2018 results. Then I'll turn it over to Mark to provide some additional details. As I reflect on this past year, one of the things that stood out to me is the momentum that we built on the top line. We delivered our strongest growth to date as a public company with 8% organic revenue growth. We saw healthy advances in each of our businesses with a number of important achievements, including several successful new product launches and strategic project wins. We also saw 9% organic orders growth this past year. Fourth quarter orders were up double digits and showed strength across all of our businesses. We see continued strength in our bidding pipelines across the entire company. We see strength across our transport and applied water businesses. And it's worth noting that a growing portion of our orders and recent wins are for longer lead time projects in our treatment, census, and AIA businesses. This tells us that our markets appear to be very healthy over the near and long term. And it further strengthened our conviction around our 2019 and longer-term growth prospects. For adjusted EBITDA, we saw an improvement of 80 basis points, which was in line with our guidance of 19.5% for the year. Operating margins were slightly short of our guidance for the year at 13.7%, up 60 basis points, excluding purchase accounting year over year. We saw benefits from productivity, volume leverage, and price realization, which accelerated throughout the year. Partially offsetting these gains were inflationary pressures, sales mix, and funding our strategic investments. Much of that investment has been focused on our measurement and control solution segment. This is aimed at capturing significant revenue opportunities across our businesses. The investment also capitalizes on our first mover advantage in providing new digital and analytic solutions. We expect this to moderate as we enter the second half of the year. I'm very pleased with the benefits that we're already realizing from this strategy. Since the census acquisition, we've won more than $100 million in contracts that will provide revenue synergies, and we expect to announce another exciting and significant deal this quarter. Adjusted earnings per share were up 20%. Our full-year free cash flow conversion was below our expectations. We took measures in late Q4 to maintain customer service levels impacted by component shortages by building inventory of critical items, and we made strategic purchases to manage tariff impacts. we remain confident in our ability to deliver free cash flow conversion at or above 100% in 2019 and beyond. So in summary, while there are certainly areas for us to work on, I am pleased with our strong momentum as we head into 2019. Let me now spend a few minutes on the progress we're making on our top strategic priorities that enable us to meet our long-term financial commitments and maintain the company on a path of sustainable growth and margin expansion. The first is accelerating profitable growth, which encompasses our initiatives to drive commercial excellence, grow in emerging markets, and further strengthen innovation and technology. First, commercial excellence. I'm encouraged by market share gains across a number of our business lines. I also want to expand upon our team's execution on price. We can attribute about one point of the organic growth we saw this past year to our commercial team's pricing efforts. and we see continuing strength throughout 2019. I am very proud of what our sales and marketing teams have demonstrated here in terms of commercial leadership. In emerging markets, we delivered 11% revenue growth, and orders momentum continued in our key focus markets of China, India, and the Middle East. Advancing innovation is another core element of our longer-term growth strategy. Our team delivered 120 basis point increase in our vitality index to over 25%. And we are pleased by the accretive growth rates and margin profile of these new offerings. We're also excited about a number of new technologies that we'll bring to market in 2019. These offerings combine our data, analytics, and software capabilities with our installed base. And this is enabling us to bring entirely new solutions to our customers as we aim to help them address their biggest challenges of water scarcity, affordability, and resilience. As I already mentioned, we remain sharply focused on our continuous improvement program. In 2018, we achieved $157 million in savings, a 6% increase in the previous year. We still have plenty of runway on our CI journey and see more efficiency opportunities as we penetrate deeper in the company and across our functions. To that end, We are now planning the next stage of our business simplification efforts, which we spoke about at our last Investor Day. This is the next progression in our plan, which we've timed to avoid disrupting our focus on growth and the integration of new businesses over the last 18 months. This work will now further simplify our business structure, eliminate waste and bureaucracy, and allow us to move faster and with greater agility to better serve our customers. We will also focus on further manufacturing and supply chain efficiencies, from footprint optimization SKU rationalization, and improvements to our cost of quality. We expect the execution of the majority of these actions to begin in the second half of 2019. We estimate up to 100 basis points of savings on a run rate basis, with most of the benefit in 2020 and the balance in 2021. This work reinforces our confidence in achieving our 2020 targets, and it positions us to be more efficient and focused for the long term. We continue to put our capital to work in smart, disciplined ways. This allows us to develop organically, as well as acquire the solutions we need to best address our customers' challenges. These investments have focused on disruptive technologies and solutions, and we will continue to remain steadfast in our approach to that area. We continue to return capital to shareholders. Today, announcing a 14% increase in the dividend, consistent with our commitment to growing our dividend in line with earnings growth. We are very proud of our talent, and we continue to strengthen our team through a number of investments in development programs, strategic hires, and the talent that joins us through acquisitions. And finally, we are a purpose-driven company. In 2018, we advanced our commitment to be a company that creates both significant economic and social value. We've achieved our original five-year sustainability goals one year ahead of schedule, and we are set to release ambitious new goals this spring. We're honored to have been recognized by a number of external organizations for these efforts, yet we can and we will do more in terms of the solutions we provide, our social impact in areas like disaster relief, and our environmental footprint. Sustainability is increasingly important to our people, our customers, our investors, and the community, and it's a key priority for Xylem. So now let me turn it over to Mark.