Xylem Inc.

Welcome to the Xylem third quarter 2019 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone 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 now like to turn the call over to Matt Latino, Senior Director of Investor Relations.

Thank you, Nicole. Good morning, everyone, and welcome to Xylem's third quarter 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 third quarter 2019 results. 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 November 30, 2019. Please note the replay number is 800-585-8367, and the confirmation code is 866-9179. Additionally, the call will be available for playback via the investor section of our website under the heading Investor Events. Please turn to slide 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. Thank you for joining us today to discuss our third quarter results. As you will have seen from our release this morning, we delivered a solid quarter of earnings performance and continued margin expansion. Year-over-year earnings per share growth, excluding FX impact, was in line with our expectation and represented an attractive year-on-year increase. Margin expansion was quite strong at the top end of our guidance, reflecting disciplined cost management, productivity gains, and pricing. and free cash flow conversion was particularly strong in the quarter. However, in our end markets, we saw softer conditions than anticipated, and that's clearly reflected in the quarter's revenue performance, which came in below expectations. Utilities demand remained solid globally, and we saw good performance across the portfolio, which delivered organic revenue growth in the mid-single digits as expected. However, we also saw a quicker than expected softening in our industrial and commercial demand, reflecting some uncertainties in these markets. In particular, there was a deceleration in the short cycle part of our U.S. business. That slowdown was both more sudden and deeper than expected, pulling overall revenue growth below our expectations for the quarter. We expect this softness will persist through Q4 as a tight labor market continues to push back project timings and uncertainty around some industrial markets impacts capex spend. Therefore, weaker near-term market outlooks have caused us to lower our full-year guidance. Despite that moderation in industrial and commercial demand, we have nevertheless continued to make progress on both productivity and price. And that operational discipline enabled us to deliver on earnings and bring in margins at the higher end of our guidance. Exiting Q3, we had strong bidding pipelines and shippable backlogs beyond 2019. so we contended to see solid growth and margin expansion potential through 2020 and into the long term. Looking at our regional mix, we saw strong North American utilities performance and robust emerging market growth. In the U.S., the short cycle softness I just mentioned held back our growth here overall, but growth in utilities was steady at 5%. Our investments in emerging markets contended to bear fruit, India, one of our fastest-growing markets, delivered 28% organic revenue growth year-to-date. China also turned in a performance of double-digit orders growth in the quarter, giving it year-to-date orders and revenue growth in the double digits. And Europe grew slightly better than expectations in the quarter in the low single digits. Mark will take us into the segment details shortly, but I want to take a moment to provide an update on our AIA business, where we took a non-cash impairment charge in the quarter. AIA's recent commercial momentum has been quite robust. Orders grew more than 80% in the quarter, and organic revenue grew by double digits. The size and incremental margin profile of this business continues to be extremely attractive and a creative desilum, all of which is to say that our growth thesis for the business has not changed. That said, the revenue ramp we're now seeing has taken longer to accelerate than we originally anticipated. And as we've continued to invest in the business, orders to sales conversion has been slower than expected, moving cash returns to the right, something we discussed in detail last quarter. That extended timing of cash returns required an impairment charge against Goodwill in accordance with the accounting guidelines. However, while the early pace of revenue growth lagged expectations, The orders, sales, and backlog growth we're now seeing is strong evidence of a utilities market embracing digital transformation at an increasing pace. We're now beginning to see customers adopt several disruptive technologies at once in order to get the full benefit of transformation, which creates pull-through across our entire portfolio. In India, for example, we're deploying AIA's applications together with pumping solutions, sensor and measurement technologies, and other Xylem services working across the portfolio to deliver our largest digital transformation project in India to date. Increasingly, we're also seeing the benefit of integrating our AIA expertise with our commercial teams to take these solutions into customers. In Kansas, for example, AIA collaborated with our dewatering sales team to win a large robotic condition assessment project, which will provide data-driven insights to reduce our customers' capital investment requirements. These are just two of many examples of the kinds of deals we're seeing as the market embraces digital transformation. Now, with that, I'll turn it to Mark, who will review our results by segment on slide six.