賽莱默 (XYL) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Xylem, Inc.

fourth-quarter 2011 earnings and 2012 guidance call.

All lines have been placed on new to prevent any background noise.

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

I would now like to turn the conference over to Mr.

Phil De Sousa, Director of Investor Relations.

Sir, you may begin your conference.

Good morning and welcome to Xylem's fourth-quarter 2011 Investor review.

We are glad you can join us.

I am Phil De Sousa, head of Investor Relations.

With me today is Gretchen McClain, our Chief Executive Officer; Michael Speetzen, our Chief Financial Officer; and Colin Sabol, our Chief Strategy and Growth Officer.

On today's call Gretchen will provide her perspective on 2011.

Mike will review the financial results, and both Gretchen and Mike will discuss our 2012 outlook.

Please turn to slide number 2.

Before we begin let me remind you that any statements made about the Company's anticipated financial results are subject to future risks and uncertainties, such as those outlined in Xylem's Registration Statement and those described from time to time in subsequent reports filed with the Securities and Exchange Commission.

These remarks constitute forward-looking statements for purposes of the Safe Harbor provision.

Forward-looking statements included herein are made as of today, and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

Actual results could differ materially from anticipated results.

Today's webcast is accompanied by a presentation that can be found in the Investor section of Xylem's website at www.xyleminc.com.

We will reference these slides throughout our prepared remarks.

Any references to non-GAAP financials are reconciled in the appendix of the presentation.

In addition, we have included a number of useful tables which will help you understand our historical performance on an operating basis.

We will reserve time for questions and answers following our prepared remarks.

We expect that today's call would be completed within an hour.

We kindly request that you limit yourself to one question and then get back in the queue so we can get to everyone.

Now please turn to slide 3, and I will turn the call over to our CEO Gretchen McClain.

Good morning everyone and welcome to Xylem's first earnings call.

Let me start with a review of 2011.

We continued to make great strides in the fourth quarter to cap a strong year.

A good way to come out of the gate as an independent company after spinning off from ITT Corporation in October.

Before we jump into the financial details, I would like to just take a moment to thank my team who made it all possible, those in the room with me this morning and the 12,500 others around the world.

When we announced the plan to spin off the water businesses to become Xylem we were all energized by the prospect of standing up an independent company united around water, dedicated to helping our customers solving the most pressing water challenges in more than 150 countries.

We have long known that this is an exciting business, and understood that we would be creating something unique in the market.

We have certainly done that.

And when we announced, few of us really understood the complexities involved in a spinoff.

It was a lot of hard work and a lot of long hours, but the team came together and we effectively executed the launch of our new Company, all while keeping our customers central, improving our operations and meeting our financial goals in uncertain economic climates.

And we kept our focus on the future by introducing new products and making a key strategic acquisition on top of everything else.

I couldn't be more proud of the dedications, the enthusiasms, the pride that our Xylem employees have shown over the past months.

They are the reason I am confident we will continue to succeed.

So let's take a look at our performance.

We made significant progress on several fronts in 2011, as you can see on this slide.

First, advancing our strategic position.

We solidified our leading position in analytical instrumentation with the acquisition of YSI.

Our integration plans are proceeding ahead of schedule, and performance is in-line with our expectations.

Our analytics team has already launched our European [WTW] products in the US, branded YSI.

We continue to build out our fast growing dewatering platform.

Our Australian expansion in 2011 demonstrated we had a proven business model in rental and services that delivers value to our customers and is contributing to our overall performance.

We demonstrated a long history of innovation and applications expertise through the introduction of several major new energy-efficient products and services.

We launched our membrane partnership with GE ZENON, expanding our position and leveraging our global reach.

And we continued to achieve double-digit growth in emerging markets.

For the year we delivered strong financial performance.

Revenue growth was up 19% in total, and up 7% organically.

Adjusted operating margins expanded to 12.7%, up 60 basis points over 2010.

Year-over-year EPS growth was 30% on a normalized basis, and we delivered $388 million in free cash flow, 111% conversion.

As I indicated earlier, we completed a separation from ITT on time, on budget with minimal disruptions to our businesses.

Our teams demonstrate incredible focus and ability.

And back in October we were named to the S&P 500 Index.

We are a leader in water.

We are confident going into 2012 given the strong business fundamentals and strategic focus, our large installed base, loyal customers, diversified portfolio, and stable end markets in aggregate.

I will now turn the call over to our CFO, Mike Speetzen, who will review our 2011 fourth-quarter and full-year performance in more detail.

2011 was a milestone for Xylem in many ways.

We achieved record results for the year, posting revenue growth and operating margin expansion in-line with the guidance we provided during our October Investor Day.

We also delivered strong cash flow and secured long-term debt on favorable terms.

In the fourth quarter our revenues hit $1 billion, the first time this group of businesses has achieved that level of performance.

Total revenue growth was 7%.

Organic revenue growth contributed 5 points to the total.

Acquisitions added another 3 points of growth.

And foreign exchange was a headwind of 1 point, as the dollar strengthened against the euro.

Contributing to our total growth of 7% in the fourth quarter, we saw mid-single-digit growth in the US and Europe.

Emerging market revenues continued strong performance, increasing more than 20%.

Orders for the fourth quarter more $905 million, representing total growth of 8% over the prior year.

Organic order growth was 6% and acquisitions added 3%.

I will cover the dynamics around orders when we review segment details in a few minutes.

Our fourth-quarter book to bill ratio was 0.9, meaning that our order pace was a bit lower than our shipments.

This performance was slightly ahead of last year, and consistent with the seasonal profile of past years.

For the full year revenues were $3.8 billion, up $600 million versus 2010, and at the top end of our $3.7 billion to $3.8 billion guidance range given at our October Investor Day.

This 19% increase was driven by 7 points of organic growth, 8 points of acquisition growth, reflecting significant activity completed in 2010 and 2011 to acquire Godwin, Nova Analytics, OI Analytics and YSI.

In addition, favorable foreign exchange translation contributed 4 points.

We saw significant revenue growth in US and Europe driven by full-year revenues from our acquisitions, organic growth and favorable foreign exchange translation.

Emerging market revenues continued strong performance, increasing over 20%.

Orders for 2011 were $3.8 billion, representing total growth of 19% over the prior year, 7% organically with acquisitions adding 8 points.

Orders slightly outpaced shipments, resulting in a book to bill ratio of 1.01, consistent with 2010.

Operating income, adjusted for one-time separation costs, increased 8% in the fourth quarter and was up 13% when adjusted for stand-alone ramp-up costs incurred in Q4 of 2011.

Fourth-quarter operating margins came in at 12%, up 10 basis points excluding separation costs, but including stand-alone ramp-up costs.

Adjusting for both of these items, operating margins expanded to 12.5%, up 60 basis points versus Q4 of 2010.

Margins increased as price and net cost improvements more than offset inflation, mix, acquisition costs and unfavorable foreign exchange.

Margins on incremental revenues were 13%, excluding one-time separation costs.

On an operating basis incremental margins were approximately 20% when we exclude stand-alone cost, the impact of acquisitions, restructuring and impairment costs from both years.

For the full year margins grew 60 basis points to 12.7%.

Adjusting for stand-alone ramp-up costs adds another 10 basis points.

Margins benefited from our cost improvements and price initiatives, which more than covered higher inflation and foreign exchange headwind.

Acquisitions were margin accretive for the year.

For the full year margins on incremental revenues were approximately 16%, excluding one-time separation costs.

On an operating basis incremental margins were in the mid-teens, excluding stand-alone costs, acquisition impact, restructuring and impairment costs.

Incremental margins where unfavorably affected by transactional foreign exchange, which we could not recover.

This reduced the incremental margins by roughly 5 points.

Going forward we have put a hedging program in place to offset a significant portion of the impact of this transactional foreign exchange exposure.

The results for the quarter and the full year demonstrate that Xylem is off to a solid start.

Our performance sets the base for continued growth and margin expansion.

Let me now turn to slide number 5 and talk to our EPS performance.

This slide shows our EPS walk for the fourth quarter and the full year.

This is a transition year for Xylem, and as such there is a lot of moving parts.

So I want to spend time this morning ensuring we provide the right level of detail and transparency.

As the middle section of this chart depicts, we have adjusted both 2010 and 2011 EPS to a normalized basis to provide a clear picture of how we performed versus last year on a more comparable basis.

The walk starts with GAAP EPS for 2010 and ends with GAAP EPS for 2011.

In between we make two sets of adjustments.

For the fourth quarter on the left side of the chart we reduced 2010 GAAP EPS of $0.53 by $0.15 to show how 2010 would have looked had Xylem been a stand-alone company, with interest expense on debt and required independent company costs.

We also adjusted the numbers to exclude the 2010 impact of favorable special tax items.

For the fourth quarter of 2011 on the right-hand side of the chart we adjusted GAAP EPS of $0.28 by adding back the negative impact of 2011 one-time separation costs and special tax items.

Making these adjustments puts both fourth quarters on a comparable normalized basis to allow for a better view of operational performance.

This analysis shows that normalized EPS increased 5%, or $0.02, driven by $0.05 of operational improvements.

This $0.05 improvement includes better pricing, net operating cost improvements, and increased investments to advance our organic growth strategy.

We also absorbed some costs associated with repositioning our businesses, such as non-restructuring severance.

In the quarter we also had headwinds of $0.02 for foreign exchange and $0.01 for acquisitions, primarily driven by inventory step-up at YSI.

For the full year GAAP EPS was $1.78 for 2010 and $1.50 for 2011.

Making similar adjustments to those described for Q4, normalized EPS increased 30%, or $0.45, driven by $0.30 related to better operational performance and $0.16 contributed by acquisitions, offset by $0.01 of foreign exchange headwind.

For both the quarter and the year our growth initiatives drove our EPS performance.

Now let me get into a bit more detail on our two operating segments, turning to slide 6.

Slide 6 shows the results of our Water Infrastructure segment.

For the fourth quarter this segment reported revenue of $679 million, up 9% over prior year and up 6% organically.

The YSI acquisition contributed 4 points to topline growth and foreign exchange was a 1 point headwind.

Transport grew mid-single-digits for the quarter and year driven by local dewatering and the stability that comes from a large installed base.

Treatment showed growth driven by emerging markets and timing of project shipments.

And test revenues were also up low- to mid-single-digits.

We saw organic order growth of nearly 10% in Q4 at Water Infrastructure.

This strength was driven by orders shipped in the quarter and project orders scheduled for shipment in 2012 and beyond.

Book to bill improved versus prior year, but was less than 1, which is typical for our fourth quarter.

Fourth-quarter operating margins came in at 15.3%, down 90 basis points from 2011.

Acquisitions were 90 basis points dilutive to margins driven by inventory step-up at our YSI acquisition.

Excluding acquisition dilution, margins benefited from our productivity initiatives, lower restructuring costs and strong price performance.

Headwinds included inflation, unfavorable mix and incremental stand-alone costs.

We also continued to invest in the business.

Full-year income results were solid, with margins improving 60 basis points as productivity performance, lower restructuring expense and higher price more than offset headwind from inflation, foreign exchange and continued investment in the segment.

Let me now turn to slide number 7 and talk to our Applied Water segment.

Applied Water's fourth-quarter revenues were up 3%.

Building services was up 2% driven by new energy-efficient solutions and price, partially offset by distributor destocking.

Industrial water applications were up 5%, driven by favorable market conditions across the globe.

And irrigation was up 9%, driven by favorable weather conditions in the US.

We saw organic orders at Applied Water down less than 1%, driven by warmer weather in the US and a tough year-over-year comparison in marine as our largest customer placed a sizable order in 2010 ahead of a manufacturing footprint change.

For the full year revenues expanded 9%, driven by recurring installed base revenue and product innovations that drove growth in a flat end market.

Building services and industrial water, which represents over 90% of this segment's revenue, saw organic revenue growth of 6% and 7%, respectively.

This growth reflects our continued success in providing more energy-efficient solutions to our customers and improving market conditions in industrial.

Fourth-quarter operating margins came in at 9.2%, up 90 basis points from 2011 as price performance and productivity more than offset inflation and non-restructuring severance costs.

Lower restructuring expense was offset by additional investment in the business and unfavorable foreign exchange.

Full-year results improved 10 basis points to 12%.

Margins were impacted by significant material cost increases, which were slightly more than offset by productivity and pricing initiatives enabling additional investment in the business.

Let me now turn to slide number 8, and review our financial position.

We generated free cash flow of $388 million or 111% conversion of adjusted net income.

Our performance was driven by contributions from our acquisitions and continued efforts to improve our working capital requirements.

We are on our way to lowering our working capital requirements, and during 2011 we improved by 20 basis points as a percentage of revenue.

Xylem ended 2011 in a strong financial position.

We had $318 million of cash on hand and our net debt to capital ratio was 33%.

We secured a $600 million revolving credit facility and accessed commercial paper.

These resources, coupled with our strong cash position, provide ample liquidity and flexibility.

So in summary, 2011 was a solid year and a good start for Xylem.

We achieved the financial objectives we laid out at our Investor Day and ended the year in a strong financial position.

Please go to the next slide, and I will turn the call back over to Gretchen as we review our outlook and guidance for 2012.

Please turn to slide 10, where we show the key macro and market indicators we track to better understand the economic environment in which we operate.

Overall, global GDP will be up less in 2012 than it was last year, as slightly better growth in the US is more than offset by flat to potentially negative growth in Europe and moderating emerging markets.

Drilling down a little further, we anticipate stable water and sewer spending, flat residential market, and improving commercial and industrial end markets.

European industrial production will remain soft.

And emerging markets will still be robust, but growth will be slower than 2011 levels.

So this year we will be navigating through some tougher macroeconomic conditions.

Let's turn to slide 11 and I will discuss how we see Xylem's revenue growth in our key end markets.

On a global basis industrial is now our largest end market, representing 40% of our revenue last year, driven by strong 2011 growth and our YSI acquisition.

In this market we provide products which are critical to running our customers' base operations where energy-efficient products and total cost of ownership is valued by the customer.

We anticipate our revenues in this market will increase mid-single-digits, driven by increases in dewatering, continued emerging market strengths and a pickup in OEM activity in the second half of the year.

Revenues from public utilities, now 36% of our total revenue, remained steady, up low- to mid-single-digits.

As a reminder, approximately 70% of our public utilities revenue is associated with required operations and maintenance activities.

These essential activities are supported by increasing tariffs to end-users.

The remaining 30% of public utilities revenue is derived from CapEx spending, which we expect remain constrained in developed markets.

We believe our unique portfolio positions us to work with public utilities to develop solutions that optimize their operational performance and help them free up funding for capital expenditures.

And we expect emerging market growth to continue.

Our revenue for commercial markets are expected to grow in the low- to mid-single-digits, driven by emerging markets, green building legislation and market penetration from our energy-efficient products and applications, such as our new e-SV offering.

Residential markets support low-single-digit growth, as our large installed base and slight improvements in US new construction make up for weakness in the European new construction.

Agriculture is a small market for us and revenues are likely to be down modestly because of a tough year-to-year compare.

This gives you an outside view of our economic drivers and market dynamics and their impact on our projected revenue.

Slide 12 shows our 2012 key initiatives, which are focused on adding value to our customers and extending our leadership position in the water industry.

There are three key areas that we will work on every day -- advancing our strategic position, driving innovation through new products, applications and services, and continued strong execution.

To advance our strategic position we are focused on building our competitively advantaged dewatering and analytical instrumentation positions.

We are also increasing our presence and effectiveness in emerging markets, and we continue to build a robust acquisition pipeline.

The second area on this chart is innovation.

It is at the forefront of what we do.

We are focused on meeting the needs of superior energy efficiency solutions and leveraging our expertise to help our customers solve higher order water challenges.

And, most importantly, we are driven to deliver strong execution, whether it is achieving higher prices, better productivity, improving working capital performance, or spreading best practices around the globe through our proven management system.

For us the goals are to create value for our customers, employees and shareholders and build credibility by delivering on our commitments.

Please go to slide 13, and I will review the capital deployment strategy.

Our top priority is making organic investments in our attractive businesses.

We have established healthy levels of CapEx and R&D spending which support our growth strategies for advanced product development, expanding our dewatering and analytical instrumentation footprint, and growing in emerging markets.

We also have a robust acquisition pipeline to help fuel our growth.

And we have the capacity to complete a number of meaningful deals over the next several years.

We established a dividend policy which is in-line with our peers and demonstrate the confidence we have in our ability to consistently generate strong cash flow.

In summary, all of these actions add up to a clear and focused strategy, supported by a strong balance sheet.

I will turn the call back over to Mike to review our 2012 financial guidance in more detail.

Please note we are providing annual guidance and that will be our approach going forward.

At a minimum, we'll update annual guidance quarterly.

Please turn to slide number 14.

We anticipate 2012 revenues in the range of $3.9 billion to $4 billion, which reflects 4% to 6% organic growth.

Segment margins are anticipated to be in the range of 14.5% to 15%, which is up 50 to 100 basis points versus 2011.

2012 Company operating margins are projected to be in the range of 12.7% to 13.3%, which is up flat to up 60 basis points, including incremental recurring stand-alone costs of $25 million to $30 million in 2012.

These additional stand-alone costs include both items associated with being an independent public company, such as Investor Relations, financial reporting, regulatory compliance, corporate governance and other functions, as well as business level expenses for items such as IT infrastructure and insurance premiums.

In total these items negatively impact operating margins by approximately 70 basis points in 2012.

We anticipate earnings per share, excluding pretax one-time separation cost of $15 million to $20 million, in the range of $1.80 to $1.95.

On an adjusted basis the year-over-year change in Xylem EPS would be minus 7 to up 1% as a full year of interest expense and stand-alone costs are incurred versus a partial year in 2011.

Using the same approach we used on slide number 5 to make both years comparable yields normalized EPS growth of 8% to 17% year-over-year.

Free cash flow conversion is targeted in the range of 95%, which is lower than our 2011 performance, so let me briefly explain.

Factors driving this lower conversion include higher pension cash contributions in 2012, timing of interest payments, and non-cash tax impacts from special items in 2011.

Additionally, we will continue to invest higher levels of capital to expand our dewatering business.

Please turn to slide 15, which shows our 2012 revenue outlook in more detail.

This slide shows the composition of our revenue growth for 2012 and compares it to 2011.

As I mentioned, we expect organic growth of 4% to 6%.

In 2012 revenue growth will be higher in the second half of the year for two reasons -- a tough compare in the first half against strong 2011 results particularly in the first quarter, and end markets expected to improve as we get through 2012.

Foreign exchange can have a large impact on our revenues since 65% is generated outside the US.

The impact of translational foreign exchange swings from a tailwind of 4 points in 2011 to a headwind of 3 points in 2012 based on 2011 year-end rates.

More than half of this impact is driven by the euro to dollar relationship.

To illustrate, the euro strengthened against the dollar last year and we have assumed a weaker euro against the dollar this year.

There are also four other major currencies listed on this chart which contribute to the impact of foreign exchange translation.

It is worth noting that translation is simply the conversion of financial statements of one currency to another and does not reflect economic exposure.

We will update you on foreign exchange as we report throughout the year.

Acquisitions will contribute 2% to our topline in 2012, reflecting the full-year impact of the YSI acquisition we completed last year, and assumes no additional acquisitions in 2012.

2011 revenue benefited substantially from the acquisitions, including YSI and three others we completed in 2010.

As we mentioned, we are not providing quarterly guidance, but we have included a table at the bottom which outlines our historical quarterly revenue profile.

As you can see, revenues are typically lower in the first quarter and highest in the fourth quarter.

Order rates coming out of the fourth quarter and thus far through mid-February support this historical pattern.

All-in, Xylem 2012 revenue growth is targeted to be up 3% to 5%, reflecting strong underlying growth and the foreign exchange shift from a tailwind to headwind.

Slide 16 provides the revenue outlook for our two segments.

As you can see, Water Infrastructure organic growth is in the mid-single-digits, while Applied Water growth will be in the low- to mid-single-digit range.

These expectations reflect the end market projections we discussed, as well as the impact of our initiatives.

Water Infrastructure has a higher level of international sales, which magnifies the impact of foreign exchange.

You can also see the impact of our strategy to expand in the dewatering and analytical instrumentation and the acquisition numbers shown on the slide.

As I mentioned, overall revenue growth is expected to be 3% to 5%, with organic growth and acquisitions contributing to healthy performance.

Let's turn to slide 17.

All of the figures on this slide exclude nonrecurring separation cost.

Segment margins for 2012 are projected to be 14.5% to 15%, up 50 to 100 basis points from 2011, driven by commercial and operational excellence programs and accretion from the YSI acquisition.

These will more than pay for growth investments and cover inflation in the range of 3%.

Company operating margins are projected to be 12.7% to 13.3% and are impacted by the items I just mentioned, as well as higher stand-alone costs.

Stand-alone expenses will increase $25 million to $30 million year-over-year in 2012, levels that are consistent with the guidance provided in our Form 10 and Investor Day.

And they reduce operating margins by 60 to 80 basis points as Xylem is an independent company for a full year.

On this slide you also see a multiyear look at operating margins.

As you can appreciate, there are a lot of moving parts when comparing multiple years of a company, especially when its business units were part of a larger entity for some years and stand-alone for others.

We show historical margins for 2008 through 2010.

For 2011 and 2012 we have removed recurring stand-alone costs for comparability; therefore, what you see on the bottom left of the slide are operating margins for the Xylem businesses on a comparable basis for five years.

The numbers show that on an operating basis we have steadily improved the margins of our businesses from the mid-9's in 2008, growing through the recent recession and increasing to the mid-13's we have projected for 2012.

We are confident that we are taking the right steps to continue driving margin improvement and meet the long-term goals we have set out of increasing operating margins 50 to 75 basis points annually.

Slide 18 provides more detail on 2012 EPS and a bridge from 2011.

This slide starts with 2011 adjusted EPS of $1.93, the same number you saw on slide 5.

We have added $0.27 of incremental interest expense and incremental stand-alone costs, so the resulting EPS number, $1.66, shows what Xylem's earnings would have been if we had been a stand-alone company for the full year of 2011.

As you saw on slide 14, we are anticipating EPS of $1.80 to $1.95 on an adjusted basis.

At the guidance midpoint of $1.87, EPS growth is 13%.

Organic revenue growth of 4% to 6%, our commercial and operational excellence programs, and accretive contribution from the YSI acquisition all contribute to this performance, while continuing to invest in the business.

The key point is that on a comparable basis, adjusting for the partial-year versus full-year impacts of having become a stand-alone company, we are projecting that Xylem will deliver double-digit EPS growth.

Now I would like to turn the call back over to Gretchen for the summary shown on slide 19.

2011 was a watershed year for us.

We became an independent company and the leader in the global water industry on day one.

We focused on execution, made significant advancements in our strategic position, and delivered solid financial performance.

We are positioned to deliver strong performance in 2012 and beyond.

We have a well-established foundation, a solid financial position and terrific growth opportunities.

Our teams around the world intend to capitalize on all that and to continue building Xylem's presence in the marketplace and creating value for our customers, employees and shareowners.

With that we will be happy to take your questions.

(Operator Instructions).

Jim Lucas, Janney Capital Markets.

First question.

Obviously you see the headlines about Europe and the exposure there.

I think a lot was covered, but when you talk about industrial and the dewatering markets in particular, given such dynamic growth that has been there and some of the concerns that are starting to emerge about emerging markets growth, can you give a little color of what you are seeing to give you comfort in the sustainability of the growth rates on the industrial side?

It is a good question.

When you think about our whole business right now, industrial continues to be a strong focus for us.

When you look at your customer base around industrial they need energy-efficient type solutions.

We have got a nice portfolio of products that we have recently launched that help bring them more value, bring their operational costs down and keep them actually growing.

So you are seeing some nice growth in the US.

Europe, yes, we have had some difficulty in Europe across the board, but overall, a robust environment in Europe.

Southern Europe, definitely down.

But if you look in the Nordic areas still very strong.

You are seeing strength in Germany.

So when you look at it from a collective perspective, we are seeing nice growth in industrial.

Dewatering has been really a very solid business for us.

With the acquisition of Godwin we have been able to take a very nice presence in the US and be able to expand just within the US there and be able to invest in the business and capitalize on some expansion.

But we have also been able to take that business model and replicate it, as I talked about in Australia, in other regions of the world, which we intend to continue to grow.

When you think about dewatering, it is driven by several different end markets.

You have got weather-related issues.

You have got construction-related issues.

You have got public utilities needing dewatering.

And you have also got the mining and energy markets that all feed the need for dewatering.

So I feel it is a pretty healthy market and feel very solid about where we are.

The only thing else I would add to that is the nature of our products are not necessarily tied to the factory output coming out of the facility, so as long as the facility is up and running our products are being consumed and required.

They are not a major capital outlay for the facility as well.

A good point.

Second, I just wanted to follow up.

As this spin has taken place, and with the -- there has not been as much of a repositioning in the public side, but can you talk about with the branding of Xylem, the customer responses that you have seen -- just the overall impact, if any?

I would say overall, and I have had a chance to go out and talk to our end customers as well as through our distribution channels and so forth, and the response has been very, very positive.

What they are seeing is a company that is now focused on the issues around water, and that means they are focused on specifically their needs.

So it has been very, very positive.

What an end customer ultimately sees is a very strong brand.

We have got many legacy brands that have been in the market for over 150 years.

We intend to continue to use those brands, but we want to have the backdrop up of one company focused around water and ultimately being able to invest in a much higher -- a higher percentage.

Okay.

Great, thank you.

Terry Darling, Goldman Sachs.

It is Adam Samuelson filling in for Terry.

First question was on the guidance and your assumed margins for 2012.

And just looking at the incrementals it seemed to assume that the segment level for next year seems to be a healthy acceleration from where we were in the fourth quarter, understanding that acquisitions were a drag this quarter.

Maybe talk about some of the dynamics of what is getting better next year -- price costs which seem to be an area, but maybe break out the different pieces in terms of what is assumed in the incremental margin acceleration?

Good question.

There is a couple of things that are at play there.

One, in the fourth quarter we had a pretty heavy mix impact.

As we indicated, our treatment business grew pretty healthy.

Although we make good margins in that business they are certainly not at the level of the overall segment for Water Infrastructure.

As we move into 2012, we see a couple of things.

We see inflation moderating a bit.

In our Applied Water business we were hit pretty heavy in the middle of the year, and we see that playing to our favor.

We're going to continue driving the same programs that we have in the past in terms of driving margin improvement through both commercial excellence and operational excellence.

And we see those as giving us ample runway to be able to offset not only inflation but to continue to reinvest in the business.

So we're looking at incrementals that will be in the 30% range before taking into consideration the stand-alone costs, and we see that is achievable based on historical performance.

I would just add two other things.

We have been really driving two critical initiatives across the business -- commercial excellence as well as operational excellence.

And that has been a driver for our margin expansion over the last several years.

Our commercial excellence has been driving price very aggressively, making sure that we are deploying across our sales team a real focus on making sure we get realization of our price.

And that really comes from being able to differentiate your product with real value to the customer.

Likewise, we will continue with our commercial -- our operational excellence activities.

We will continue to look at our lean efforts within our factories.

We will continue to look at low-cost sourcing.

And, ultimately, looking at how we can take our portfolio and optimize our portfolio as we go forward.

So several key initiatives to keep that momentum going.

That is all very helpful.

Maybe on that point is price cost neutral in the plan next year?

It was negative -- it was still negative by over 100 basis points in the fourth quarter, and maybe how does that specific dynamic play out over the course of 2012?

What we're looking at is between price and cost actions that we will take in the business we will be able to clear the inflation level that we are looking at, which we articulated is about 3%.

And as I mentioned, that will allow us to continue investing in the business as well as cover off on the stand-alone costs that will be incremental on a year-over-year basis.

Perfect.

And maybe just one quick follow-up.

What was the actual euro rate assumed in guidance relative to the minus 3% revenue headwind?

We had assumed $1.31.

$1.31, great, thanks very much.

Mike Halloran, Robert W.

Baird.

So just a question on the destocking side.

You mentioned that destocking was a fourth-quarter impact.

Could you talk about how that trended through the fourth quarter, and then where inventory levels stand across the platform now?

And then additionally, what customers are saying as far as the order trends and trajectories and what their expectations are?

So let me take the destocking.

What we saw in the fourth quarter, and it was primarily at our Applied Water segment, we saw inventory levels dropping at distributors in reaction to some of the economic uncertainty that we have seen.

As we moved into the first quarter we have seen order patterns returning to consistency with what we have assumed in the guidance.

We are not betting on any kind of a major restocking bubble.

We think that the distributors are going to be working off the inventory levels that they have seen.

And so as we look at what we experienced thus far in 2012, it is consistent with our guidance and gives us confidence in the range that we have put out there.

I appreciate the time.

Matt Summerville, KeyBanc.

Just kind of a two-part question here.

Can you talk about in the fourth quarter in Applied Water why the margin dips down sequentially relative to the other three quarters in such a meaningful fashion the last couple of years?

Then what was the magnitude of non-restructuring severance that you ran through the Applied Water P&L?

Sure.

There is a couple of dynamics.

One is fourth quarter in Applied Water is typically our lowest quarter from a revenue standpoint.

So you're going to have a typical falloff created by that dynamic.

I would say that the reduction in Europe that we saw in the fourth quarter somewhat over-amplified that.

Then when you look at the non-restructuring severance charges that we had, it is about $2 million within that segment within the quarter.

So those would be the main drivers of margin performance.

So now what we did is we really wanted to get ourselves prepared for 2012, make sure we were thinking about the dynamics going into the year and we had the cost taken out so that we had the right sizing going forward.

I appreciate it.

Thank you.

David Rose, Wedbush Securities.

I wanted to follow up on a couple of the margin questions.

Particularly as you look at integrating the testing platform and the margin opportunity there, can you give us a little bit more color on what integration initiatives or operational excellence initiatives that we might see to get a little bit more comfort with that margin profile improving on the testing side?

And then to the prior question on the margins in Applied Water, with the non-restructuring initiatives, the headcount reduction, does that change your incremental operating margin?

So those two.

I can jump in and first just talk a little bit about the -- YSI, our whole analytic strategy and just give you a little bit of color of what we are doing there.

The YSI integration, as I mentioned, is going along very, very smoothly as anticipated.

We have made a lot of progress just in a few short months.

We have got a lot of discipline around our topline execution.

Our teams are working across the board to look at our sales funnels in developed markets as well as through Asia.

We are looking at how we create a global sales team where we can really have one face to the world within the regions and be able to accelerate our growth and partner with customers for value.

We had several new product launches, as I mentioned, our WTW products being branded, YSI bringing them into the US.

And we're in the process of doing the same thing of taking the YSI products and bringing those into Europe and branding them our WTW products.

So we're going to continue that activity.

We will get some cost around it in terms of the integration of the team.

But we still want to make sure that we keep the brands that are very well known within the marketplace.

And what I would add is, we have targeted these acquisitions as being high gross margin businesses, which as you can imagine, gives us nice operating leverage as we continue to grow those businesses without adding incremental cost to really facilitate that.

So we see that as a nice opportunity, and it has proven out over the past couple of years, not only with Nova, but also with our dewatering platform.

As it relates to Applied Water, we are looking at incrementals that are up significantly next year.

And I would say there's a couple of things driving that.

One is, as I mentioned, we're assuming inflation is going to moderate a bit.

We have done quite a bit of activity around price improvements in that segment, which is going to give us a year-over-year help.

And then in addition you have got the restructuring actions that we took in the fourth quarter and the continued focus that we have around driving operational excellence.

So this segment has a very high percentage of low-cost region content in terms of what we are moving to from a sourcing standpoint.

So when we look at all that together, that is what is really going to facilitate much higher drop rates moving into 2012.

Okay, great, thank you.

Chip Moore, Canaccord Genuity.

I appreciate all the color today.

I was wondering if you could talk a little bit more about the weighting of sales in 2012?

For the tough year-over-year comps in the first half, are there any particularly large projects there or is that more broad-based strength?

Then if we look at the midpoint of guidance and historical patterns, does that suggest that Q1 sales can be flat to even slightly down?

Clearly, we are going to have some challenges as we go through the first quarter.

And as we have indicated, looking at our historical profile is going to be a good indicator.

If you think about our revenue range of 4% to 6% organic, thinking about the first half, you should think that the lower is slightly below the low end of that range as we come out of the difficult environment in the fourth quarter and build momentum as we get through the first half.

Thanks, that is helpful.

And just to follow-up on the rental business.

I was wondering if you are seeing any sort of positive impact there from customers that might have a hard time financing cap equipment in this environment?

And then as you look at expansion do you see those trends helping in any particular markets?

So just to talk about the rental business.

Across the board -- I mean, we have seen strength across a lot of our markets.

It is a great business model.

I don't doubt we will see some pickup of sales, because they will be those that will rent.

But what we have seen this business model in the past as you have got customers who will rent and then actually purchase the product in the long run.

So I anticipate that will continue to play out as we go forward.

Thanks a lot.

Congratulations.

Deane Dray, Citi Investment Research.

I would like to add my congratulations too on a debut quarter.

And just given all the moving parts and the results very much as expected, as well as guidance, so that is pretty Herculean given the separation.

So you're off to a good start here.

My question is, I think, Mike, you touched on the integration was proceeding ahead of plan, and we're still looking for $15 million to $20 million in one-time costs.

Just give us an update on the integration, what are the key milestones that we should be looking for?

So that $15 million to $20 million, that is remaining one-time separation costs.

Really the bulk of the work is around the efforts we have on the communications and the branding side.

So as we continue to re-sign the Company and make sure that we've got the right promotion material and communication process there is some residual legal and financing costs.

We have got a very structured process.

We have dedicated owners around each of the cost categories.

And our view is that the majority of this cost is going to be digested by the second and third quarter of this year.

Great, and then regarding capital allocation, there is not a lot of balance sheet room, but if you just touch on what the M&A opportunities might be in terms of size as well as potential areas, my guess is there are still lots to build out in analytical instruments, but how would you comment on that?

Our acquisition strategy, we're working it very aggressively.

We have got a rich pipeline of acquisitions that we cultivate, that we work on a regular basis.

As we highlighted before, our attractive areas are dewatering and analytics, we contain intend to continue to look there.

But if you look at our overall business and our portfolio, we look at a number of acquisitions that can expand our footprint, that can expand our technology portfolio, and as I mentioned, continue to really add value to our business.

Services is clearly an area that I identified in the past as an area that we will look at.

So it includes both bolt-on acquisitions as well as larger acquisitions, and they will play out.

As we all know, they had never fall when you want them to, but we will continue.

We have got a good developed, proven model that has worked for us and our anticipation is to continue.

Great.

And then just in terms of the -- on the operating side, can you give us any comments regarding the distribution agreement you have with GE and their ZENON filtration business?

It is really -- it is a buy/sell type of a relationship.

It allows us to sell their world-class technology and use our world-class channel to be able to accelerate and move into the emerging markets.

And could you -- has there been any uptick in terms of penetration selling to existing customers?

Has it opened up any new markets for you?

So, as you know, that is a little longer cycle type of the business.

Our teams have been trained working with GE.

They have got a pipeline of projects that they're tracking and working through.

So I feel pretty good about the direction that we are going on and the progress that we will see in the months and the years to come.

Great, thank you.

Jim Krapfel, Morningstar.

I appreciate the level of detail in the slides and on the call.

So that is all good.

Just a question -- or a follow-up to the acquisition question earlier.

Do you have like a longer-term target for incremental revenue growth from acquisitions?

We have articulated 1 to 2 points over the long term, which has us deploying as high as $300 million in any given year.

And that is basically consistent with guidance that we provided back at Investor Day.

And then the revenue guidance, what does that imply for each geography?

What we see is we see Europe continuing to see a level of growth.

The US, obviously, based on macroeconomic indicators is going to continue to be a good source of growth for us.

As we have indicated, emerging markets will continue to grow, although they are moderating from what we have seen historically.

They will be in the mid-teens.

And that is a quick snapshot for you.

Then a final question.

I would just like to get a breakdown of revenue by lifecycle, given that your aftermarket tends to be higher margin.

Our aftermarket continues to grow.

It is a nice revenue source for us.

As we talked about during the Investor Day, it is a CAGR that has been growing at 8.5 over many years.

This last year we saw some nice increases in the aftermarket.

It is a focus of ours and we are continuing to put resources and investment around it.

In terms of when I look at the cycle of our businesses, residential is usually early cycle.

You have got commercial, which is mid.

And then you have got some of the other ones.

When you look at public utilities, since the largest percentage of our revenue is coming out of the OpEx side of the house, it is not as cyclical as you see in some of the other areas.

What I would add to that is 16% of our revenue comes out of what we call aftermarket parts and service, and that is growing double-digits, which is really leveraging, as Gretchen said, off of our installed base.

And then we get as high as 40% when you add in replacement business, which again is replacing our existing products that are in use in the field.

So that clearly dampened some of the cyclicality variability we have seen.

And that was evident during the downturn, as well as even through what we saw in the fourth quarter.

Right.

So the aftermarket, that 16 plus the 22, that continues to grow faster than your OEM business and probably provides some level of operating margin expansion on a consistent basis then?

Yes.

In this current economy, yes.

Absolutely.

Great, thank you.

[Stewart Scharf], [S&G] Capital.

Can you talk about the -- your emerging markets?

As you said, it is going to grow less rapidly.

More specifically, which areas do you see the slower growth coming from?

I can take that question.

When you look at the emerging markets we have been growing in the double-digits and we had good penetration.

We have invested in the emerging markets, and it is in all areas.

It is in Latin America.

It is Middle East; it is Eastern Europe; and it is also in the Asian region.

Where we have seen some slowdown, we have seen China, the second half of 2011 starting to slow, and we see sequential slowing there.

Still good growth and still great opportunities, but definitely slowing down.

Also, we saw in Latin America some inflation issues that were high, but still opportunity for growth, and we're seeing that picking up.

So it depends on the end market.

The Middle East obviously had some nice growth for us, but slowing specifically with some political and unrest that is happening there.

What we have done in terms of our strategy, so stepping back, is we are in 150 countries.

We have focused specifically on where do we have a differentiation and where can we get profitable business, so we just don't go after any sales.

So we put a great focus on specifically where we are going to invest and where do we actually have a product that we can bring to our customer base?

The last couple of years we put sales folks in the regions.

We have invested in our footprint from an engineering technology center in India.

And we think that is going to pay off as we continue to see volume out of those regions.

And what percentage do you see coming from new products, percentage of revenue?

We have a product vitality index that is basically a five-year rolling average of new products.

It is around 15%.

It is somewhere where we are taking a very close look and trying to grow that aggressively.

But I want to be careful.

It depends specifically on where end market you have and also how you define your vitality index.

Where you can see in analytics you're going to see a much higher new product launch.

In other businesses, where it is not changing out a pump for 30 years, you're not going to see the percentage of a new product revenue increasing.

But we would like to be shooting up into the 20%.

That is a focus for the long term of this business.

It is an emphasis that we are doing.

And you can see that over the last year we have introduced several new product launches and we feel very positive about them.

And just your -- percentage of your hedging program.

And do you have the buybacks in your plans?

So we implemented a hedging program in January.

We have hedged off about 60% of the total exposure.

And that will be a rolling program that is geared it by going one year out initially.

And once we get a little bit more experience under our belt we are going to expand that to an 18-month time horizon.

At this point we have no planned share buybacks.

Our priority from our capital deployment is to reinvest in our business -- we have a very attractive portfolio -- as well as invest in organic -- inorganic growth and continue to expand in that direction.

Thank you very much.

Jim Lucas, Janney Capital Markets.

My question was actually answered.

Thank you.

Let me just wrap up with a thank you for your time, your patience, your interest.

There is a lot of detail to go through here with the breakup of the Company and splitting out, so lots of moving parts.

We are happy to take any of your questions that you have afterwards to help clarify anything.

We look forward to our next call, which will be after first quarter.

And we will be able to talk to you about our progress at that point in time.

So thank you again.

Thank you.

This concludes today's conference.

You may now disconnect.