Xylem Inc.

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 questions following the presentation. If you would like to ask a question at this 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 Mr. Matt Latino, Senior Director of Investor Relations.

Thank you, Lisa. Good morning, everyone, and welcome to Xylem's fourth quarter and full year 2019 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 2019 results and discuss the full year outlook for 2020. 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 March 7th. Please note the replay number is 800-585-8367, and the confirmation code is 4880738. 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've 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. Let me start with some reflections on 2019's full-year results and our progress as a company. Then I'll turn it over to Mark for additional detail on the fourth quarter, and we'll round back to offer our 2020 outlook before taking questions. Focusing first on 2019, in the first half, we delivered solid growth, mid-single digits or better across our segments and end markets. But the year presented a dynamic market environment, and second-half conditions were clearly more challenging. I was pleased with the agility of our teams in adapting to those changing conditions, and we were able to deliver full-year organic revenue growth of almost 4%. Solid performances in utilities and in our U.S. and emerging markets offset some of the second-half softness in industrial and commercial end markets. Our full-year margin expansion was 20 basis points, and we closed 2019 with an operating margin of 13.9%. Earnings per share were up 5% year-over-year and up 9%, excluding the effects of foreign exchange. The fourth quarter unfolded much as we foresaw in our October earnings call, and the team's agility and discipline delivered overperformance on cash, with free cash flow conversion of 124% against a target of 105%, driven by significant working capital improvements. That kind of solid operational execution was also essential to delivering our earnings commitment in the quarter. Because we focused on managing the things we can control while also maintaining our investment for growth, we are well positioned for 2020 and beyond. We have good visibility of our pipeline of business, and we've built strong fundamentals over the last few years that give us confidence about continuing to deliver significant value creation from near-term and long-term growth margin expansion, and cash generation. So let's focus on those fundamentals for a moment. We're a very different company today than we were just a few years ago. We laid out our key initiatives to lift the growth profile of the company back at our original investor day in 2015. At the time, the company was delivering low single-digit growth. Our emerging markets contributed roughly $750 million of total revenue. Our vitality index, which is the proportion of sales comprised of new products launched in the last five years, stood at just 18%. And we weren't yet in the metrology or digital solutions businesses at all. So now five years on, emerging markets are now well over a billion dollars, with China growing more than 50% and India more than doubling over that time frame. We've also placed Dialum at the cutting edge of innovation. Our investments have brought many of the industry's leading technologies into our portfolio, and the MNCS business exposes us to market segments with higher growth rates. Our vitality index has risen from 18% to 25%. The digital transformation of water networks, which was until recently a fragmented proposition, is now an executable reality for our customers. AIA's double-digit orders growth in 2019 shows the customer enthusiasm and demand. Our job in 2020 is now to deliver on that reality and lead the sector in helping customers catch the latent value in their networks. Our annual revenue is now $5.25 billion, and we have set a consistent pace of mid-single-digit organic growth over the last three years. Of course, our emphasis on growth would be a double-edged sword if we had diluted margins along the way, but we've done the work to become more profitable as we invested to ensure sustainable growth and margin expansion. We clearly have more work to do here. Margin expansion continues to be one of our top priorities, but we have so far delivered approximately 250 basis points of EBITDA expansion in the last five years, even as we invested to reach in the new geographies and new product segments. And we've been able to deliver an average 13% compound annual growth in EPS over the last five years, significantly improved versus the previous four years. EBITDA has increased by 65% over the same period. As we digest the large deals at the front end of new growth, and as CapEx shifts to aftermarket and recurring revenue streams in the next several years, we do expect the margin profile of our growth to become even more attractive. At the same time, we brought focus and rigor to operational execution, developing the capability I mentioned a moment ago to deliver favorable bottom line outcomes even in unfavorable market conditions. Just one example of that is our increased discipline in cash generation. We've delivered average pre-cash flow conversion of 108 percent over the last five years, largely by driving down working capital from 23 percent to 17.5 percent. I expect focused operational execution to continue being a key capability for us. Any reflection on what we've been building over the last few years would be incomplete without considering sustainability. which is at the center of Xylon's business strategy. Not that long ago, our sustainability goals were sincere and ambitious, but they were largely about reducing our own environmental footprint. Today, we're equally focused on the sustainability outcomes we create with our customers and in the communities in which they operate. Because of the positive impact of our products and solutions, this is a much bigger opportunity. So we built aggressive, industry-leading commitments into our sustainability strategy, targeting the downstream impact of the solutions we provide. This is a far more meaningful approach to sustainability and one we believe is a clear differentiator. The fundamentals we've built and the trajectory we've established give us a balanced view towards 2020 and beyond. We're cautious in the face of near-term uncertainty, but we're also well-grounded and able to deliver sustained growth. We do see continued softness in some of our short-cycle revenues in the first half, In the second half, we expect that to moderate and parallel with an increasingly solid position in our backlog. We expect to be delivering mid-single-digit growth in the back half of the year and into 2021. We'll talk about that full review shortly, including some more detailed guidance on 2020. A review of the drivers of our 2019 four-year results is on slide five. I'm happy to address any of that in more detail in the latter part of the call during Q&A. But now, I want to turn it over to Mark to provide a deeper level of detail on how our segments ended the quarter.