Xylem Inc.

Welcome to the Xylem fourth quarter and full year 2021 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 telephone keypad. 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, Vice President of Investor Relations.

Thank you, Ashley. Good morning, everyone, and welcome to Xylem's fourth quarter and full year 2021 earnings conference call. With me today are Chief Executive Officer Patrick Decker and Chief Financial Officer Sandy Rowland. They will provide their perspective on Xylem's fourth quarter and full year 2021 results, and discuss the first quarter and full year outlook for 2022. Following our prepared remarks, we'll 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 10th. Please note the replay number is 1-800-695-0395 or 1-402-220-1388. 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. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics in the appendix. 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 also included in the appendix section of the presentation. Now, please turn to slide three, and I will turn the call over to our CEO, Patrick Decker.

Thanks, Matt, and good morning, everyone. As we indicated in our release this morning, the team delivered a strong operational performance in the fourth quarter, meeting or exceeding our expectations across all major metrics. Despite the challenges that 2021 presented us, especially in the second half, I'm very proud of the team for what they did to deliver on our commitments. And as a team, they delivered a very strong full-year performance. This was reflected by mid-single-digit organic revenue growth, solid EBITDA margin expansion of 80 basis points, and adjusted earnings per share growth of 21%. And orders grew 23% for the year and in the fourth quarter, giving us very strong momentum coming into 2022. We posted our strongest orders growth in our MNCS segment. And it reflects the need and desire of our customers for digital solutions to address their growing needs around water affordability and infrastructure resilience. Our water infrastructure and applied water segments also posted very strong orders growth for the year and the fourth quarter, demonstrating the healthy demand across our portfolio. We continue to experience very strong underlying demand globally, with double-digit orders growth across all regions, and we expect that momentum to continue throughout 2022 and beyond. And our investments in R&D are clearly paying off, enabling us to win market share due to the customer value we're creating. And our investments in geographic coverage have made significant contributions to our overall growth, especially in emerging markets, where we posted double-digit revenue growth in 2021. Of course, the other side of the story in 2021 was the constrained supply chain challenges of the second half, along with inflation that really accelerated in the last quarter. As we anticipated in our last conference call, the severe chip shortage affecting the entire tech sector held back our ability to convert such strong orders into revenue, especially in our MNCS segment. Against that backdrop, the team did an excellent job managing what we can control, bringing discretionary costs down below 2020 levels and taking aggressive pricing actions to mitigate inflationary pressures. In fact, price realization in the fourth quarter was modestly higher than our expectations. And we expect to offset inflation further as we deliver creative margins in our backlogs. So despite all the year's headwinds, the team not only delivered solid operational results, but they did it with heart and purpose. Along the way, we made significant progress towards our 2025 signature sustainability goals. One example of that is that the team set a Xylem record for hours volunteered to solve water challenges in our communities around the world. It's a privilege to be a part of a team with that level of commitment to our mission. Now, looking ahead at 2022, we see continued strong demand for our products and solutions, strong fundamentals across our business in terms of productivity and free cash flow conversion, and continued ability to drive price as a market leader to offset inflationary pressures. Nevertheless, our outlook is tempered by the reality of a prolonged chip shortage, limiting the speed at which we can convert orders to revenue. So we are being balanced in our guidance based upon the visibility we have. Our guidance assumes modest and gradual increases in chip supply in the second half and into 2023. And as volumes return, we expect to realize significant margin expansion consistent with the first half of this past year when we operated in a less chip-constrained environment in MNCS. And we see this in the backlog margins we have coming into 2022. In the second half of this year, growth and margin expansion, both gross margin and EBITDA, are expected to return to levels that put us on track to deliver on the 2025 strategic and financial framework that we outlined last September at our Investor Day. In a moment, we'll discuss the assumptions in our 2022 outlook and speak to our intentions for capital deployment given the strength of our financial and competitive position. But first, I'm going to hand it over to Sandy to dig in briefly on the quarter's results before we turn back to 2022.