Xylem Inc. (XYL) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the Xylem Second Quarter 2012 Earnings Conference Call. Hosting the call today from Xylem's headquarters in White Plains, New York, is Gretchen McClain, Xylem's President and Chief Executive Officer. She is joined by Michael Speetzen, Xylem's Senior Vice President and Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Standard Time. [Operator Instructions] It is now my pleasure to turn the floor over to Phil De Sousa, Investor Relations Officer. You may begin.

Thank you, Brandi. Good morning, everyone, and welcome to Xylem's Second Quarter 2012 Earnings Conference Call. With me today are Chief Executive Officer, Gretchen McClain; and our Chief Financial Officer, Michael Speetzen. They will provide their perspective on Xylem's second quarter results and full year 2012 outlook and, of course, we will allow for time to address your questions at the end. This call and our webcast are accompanied by a slide presentation available in the Investor section of our website at www.xyleminc.com. A replay of today's call will be available until August 9 at 6:00 p.m. The replay number is (404) 537-3406 and the confirmation code is 93016589. Additionally, the call will be available for playback via the Investor section of our website, under the heading Presentations. Please note that all references today will be on an adjusted basis, unless otherwise indicated. Non-GAAP financials are reconciled for you in the appendix section of the presentation. Now please turn to Slide 2. 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 outlined in Xylem's annual report on Form 10-K and those described in subsequent reports as filed with the SEC. These remarks constitute forward-looking statements for purposes of the Safe Harbor provision and are made of as of today. Please note that the company undertakes no obligation to update publicly, such statements to reflect subsequent events or circumstances, and actual results could differ materially from those anticipated. So with that, please turn to Slide 3, and I'll turn the call over to our CEO, Gretchen McClain.

Thank you, Phil. Good morning, everyone, and thank you for joining the call. We appreciate your interest in Xylem. I'll begin the call by providing you an update of our overall financial results for second quarter; spend a few minutes updating on the progress we've made on our strategic objective; and provide my perspective on our first half revenue performance and our full year outlook. I will also discuss the actions we're taking to address the continued economic uncertainty and to position us future growth. I'll then hand it over to Mike to walk through the details of our quarterly performance on our full year guidance. Today, we're reporting second quarter revenue of $966 million, reflecting growth of 4% on a constant currency basis. Organic growth was 1%, with acquisitions adding another 3%. While overall revenue were below our expectations for the quarter, our performance was on top of strong growth last year and in a more challenging environment. In Europe, where overall economic growth is negative, our revenues on a constant currency basis, were down a modest 1%. And our continued focus an attractive acquisitions is helping us to drive top line growth. YSI added $32 million in revenue in the quarter and continued to outperform our expectations. On a year-over-year basis, YSI is up approximately 11%. We received orders of $970 million, up 2% in constant currency, resulting in a book-to-bill ratio of 1.0. During the quarter, we won some key public utility and industrial transport and treatment projects spread across the U.S., Europe and emerging markets, which will ship in 2013. Let me highlight that in the second quarter, we registered our highest order rate in treatment projects since the first quarter 2011. This is a positive sign for next year and we're encouraged by the number…

Thanks, Gretchen. Please go to Slide 7. In the second quarter, Xylem revenues were $966 million, reflecting 4% growth on a constant currency basis. Organic revenue growth contributed 1 point to the total and acquisitions added another 3 points of growth. Foreign exchange was a headwind of 5 points. Organic growth was driven by strength in the industrial and public utility end markets, where we continue to see growth opportunities. The U.S. continued to show modest growth and emerging markets were strong, up 22% on a constant currency basis. Europe continued to present challenges, given the worsening economic environment. YSI had a strong quarter, adding 3 percentage points to our top line. I think it's also important to note that YSI, once again, had double-digit organic growth and is not included in our organic growth performance articulated earlier. Organic order rates were down 1% and book-to-bill was 1. Orders were impacted by sluggish demand from Europe, coupled with tough compares to prior year treatment orders. Operating income, adjusted for onetime separation costs, increased 1% in the second quarter and was up 7% when adjusted for incremental standalone ramp-up costs incurred in Q2 of 2012. Despite lower than expected organic revenue, second quarter operating margins came in at 14.8%, up 100 basis points, excluding separation costs and the impact of standalone ramp-up costs. Gross margin was 39.6% for the second quarter, up 60 basis points versus the prior year, as price, cost improvements in YSI, more than offset inflation and unfavorable mix. By driving gross margin performance, we're able to continue to invest in our business, while expanding operating margins. Investments in the second quarter impacted operating margin by 30 basis points. The impact of foreign exchange translation and transaction was neutral with operating margin. As the chart reflects, on an…

Thanks, Mike. Let's turn to Slide 16. There's no question, today's economic conditions are volatile, but we have faced similar conditions in the past and we have successfully managed through them with strong focus and attention to the many levers that we control in our business. In 2009, our business declined 9% on an organic basis. Despite the external factors, we were able to hold our operating margins flat year-over-year. Our demonstrated performance and our continued margin expansion are the result of several key drivers and management decisions. These include a portfolio of businesses that have demonstrated resiliency during difficult times, thanks to the large install base of leading products and critical customer applications and strong customer relationships. A disciplined management approach, including proactive actions beginning in 2008 at the onset of the decline, and again this year, taking appropriate steps to position us in the future in the face of continued economic uncertainty. In addition, we are aggressively managing our costs through our continued customer and operational excellence initiatives. This has enabled us to continue to invest in our business, to capture growth as markets rebound and to gain market share. And our acquisition strategy has led to higher than average profitability, while expanding our market reach. As the slide illustrates, based on our midpoint guidance, we expect and have expanded operating margin by 290 basis points since 2008. Collectively, through the actions we control, we have shaped the company into what it is today, and we are laying the path for Xylem's future, a better positioned leader in the global water industry. Now turn to Slide 17. In summary, we had strong second quarter operating performance. Our business's performance illustrates the stability of our portfolio in the face of challenging global economics, backed by disciplined execution. However, we're not immune to the environment and we expect some headwinds during the second half of the year, particularly in Europe. We are addressing the challenge head-on, taking actions and making strategic investments today that will drive future growth. And of course, our strong cash flow generation and financial position provides the flexibility to continue to execute our long-term strategy. With that, we'll be happy to take your questions. Brandi?

[Operator Instructions] Our first question is coming from Ryan Connors with Janney Montgomery Scott.

I'm just interested in exploring, for a minute, this issue of -- that you mentioned several times, bid activity continuing to increase while release of orders among your customers are disappointing. Can you just expand on that a bit for us? Your remarks sort of implied that you think order release will ultimately follow. So I'd be interested in your perspective on whether you've seen this kind of dynamic in the past, and if so, how that ultimately played out?

Ryan, I'd look at it first from a broad perspective. I mean, we're seeing large issues around the water industry and public utilities, and then having to pull back to be able to support their operating and maintenance activities. And so a lot of activities around capital expenditures have been deferred or put off. Though the activities are being planned, so when they get the additional funding, they're able to let them go. So this last fall -- I mean, we didn't see much activity. All through last year, our project activity was quite low. And so the stacking of projects in the queue has continued to come forward. And we've been doing a lot of activity around first quarter and second quarter in bidding. They just have not been released as quickly. We believe, given the tariffs that continue to increase with the public utilities, that they will be released as we go forward. And the other area that we've been focused on is trying to the help the public utilities bring their operating costs down, so they can free up money for capital expenditures.

Okay. And then to your knowledge, is there any correlation with project release around fiscal budget resets? I mean, most of your customers, I assume, are either June or September fiscal year, so as those new budgets get set, is that when we start to see some of that money starting to flow?

It varies because if you look at U.S., you'll see the June time frame. It's on around, obviously, the government-type funding. But you also have many of them that are on a year-over-year, especially when you look globally. So it does flow differently throughout the year. We are planning on treatment in our activity, continuing to pick up in the second half from an orders perspective, but given the length of the projects, you'll typically see the revenue come in to 2013.

Okay, great. That's helpful. And then just one last, when you mentioned that you took 170 basis points in price in the first half, obviously, that's a very impressive figure in this kind of environment, and I know you focus more on the value-added, technology-driven-type product lines, but do you feel like you're sacrificing share anywhere in the portfolio as a result of your stance on price in this kind of a tough environment?

Yes, it's a great question. It's something that we try and stay very close to. We feel really good about our strategic position in the market. We're still having good growth, in general, when you strip away a couple of the activities that I talked about, on top of the very great growth in 2011. So we have individual market and regional, and really project strategies that we deploy in a framework of an overall portfolio strategy. So I feel good about where we are. We've put a good process in place, that we review our wins and our losses, and then we make the appropriate adjustments as required. So we feel good that we're driving the right thing and, of course, we're driving profitable growth as we continue in the future.

Ryan, the only other thing I would add is, what you're seeing come through on the first half, is also the product of the price actions that were taken in the second half of last year, primarily in our Applied Water segment, where we saw a pretty significant inflation. And obviously, that will moderate a bit because the compares become a little bit more difficult in the second half. But that also plays into it, in terms of similar dynamics that we saw play out across the broader market.

Our next question is coming from Deane Dray with Citi Research.

I wanted to first start with Mike. If you could just give us an update about the expectation of separation costs, how those may taper off during the course of the year? What are the big components of that? Maybe we can we start there, please.

Yes, so, let's talk onetime separation cost. So we had indicated that we would have $15 million to $20 million. We've incurred about $10 million through the first half. As we've indicated in the past, we see that being -- tapering off, really, in the fourth quarter. So I would look at Q1, 2 and 3 being kind of at that same level. And it's really -- as we finalize legal aspects, as well as any of the branding signage of the company and those types of activities, and there is some IT work that has to go into that, we've got a pretty disciplined process around that, not a lot of concerns relative to the range that we've put out there on that particular bucket. From a standalone cost perspective, we've indicated $25 million to $30 million. We're holding to that range. We've obviously, as you see in our results, did take some actions relative to our corporate cost structure in the second quarter, in light of the current economic environment. But we don't see that impacting the incremental standalone costs. As I've indicated in the past, there's a good chunk of these costs that really relate to IT infrastructure that we had to put in place, and some of the incremental costs that were added, not only at corporate but also within our business segments. Again, we have a good line of sight to that and we feel pretty comfortable that we'll be right in the range on those.

Great. That's really helpful. And I should have just prefaced my comments with the fact that these slides that you're providing, and the bridge and the individual business line commentary is really helpful. And the next question is, to go into the businesses with the impact of the drought. Obviously, from the dewatering side, there are some positives I would expect. You mentioned ag and some of the irrigation, but also, is there much of an impact to weigh on the well business? Anytime you've got drought and water tables get lower, there's problems with wells. Anytime you open up a well, you usually put a new pump into it. So just give us a -- some of the puts and takes, with that or drought-related on your businesses?

Sure, Deane. Just in terms of the other businesses that you see upside, as we mentioned, agriculture is obviously an area when we look at our TTL business with vertical turbines, and so forth. Great business during a time of the drought, helping the farmers continue to grow. If I look at U.S., North America, we're up 5% in our residential market. So we feel good about where we are. You also have, as you mentioned, the well pumps. They're working harder. You see water levels drop and so you have the opportunity for replacement. So we feel good, again, where we are with that position and continue to grow that. Coming back to your dewatering question, the one thing I would just bring up is -- yes, it was impacted by the drought, but our dewatering model in itself supports many other end markets. So we'll continue to help in mining. We're still helping with public utility bypass and other areas, still a very robust business and a great opportunity where you have similar equipment that can be used in many different applications.

Great. And just last question for me, and it's a related question to the MJK acquisition. The idea that there's still a lot of fragmentation to the analytics market, and maybe you can give us a sense of a road map of how you'd like to build out this segment. Just in terms of priorities, is it geography? Is it adding more technology? Is it broadening the line of contaminants that you want to test for? Or maybe it's all of the above. Just kind of the roadmap for the build-out and maybe a sense of the pipeline today.

Yes. Deane, I'd say, you laid it out very nicely, as those are all the areas that we're looking at. In terms of our healthy backlog of candidates, we feel like we've got a healthy deal pipeline and we're working that very aggressively. The bolt-on strategy has worked for us and we think that's a nice way to continue to expand, as well as to invest back into the organic platform that we're continuing to build. So geographic, technology, and clearly, regional areas are going to help us or channel into the market, will be areas that we continue to expand in.

Our next question is coming from Matt Summerville with KeyBanc.

A couple of questions. First, I apologize if you gave this. But what was the EPS hit from FX in the second quarter? And what is the expectation for the full year, relative to your prior estimate?

Yes, so the foreign exchange impact in the second quarter was $0.04, and then we're talking, relative to the guidance range, $0.03 year-over-year in terms of the change in guidance and that's on $50 million of revenue. And Matt, really, where that's coming from is -- although we've seen some of the currencies that make up our basket come down, the biggest impact has been in the euro. It's moved down about 7%. We had given previous guidance at $1.31. It's now at $1.22. If you think back to some of the framework we've put in place in the past, where we talked about a 10% move in the euro, yields about 3% to 4% move in the top line, you can ratio that down and it gets you pretty close to the movement you're seeing right now.

Got it. And then can you -- is there a way to quantify the magnitude of push out you've seen on the projects side of the business into 2013?

I'm trying to help you. Clearly, on the treatment area, we've seen a significant push into next year. We're anticipating our treatment business to be down for the rest of the year, continuing to get orders and continuing to get book-to-bill shipping. But we will see a large portion of our treatment business falling into next year.

Yes, I mean, Matt, when you think about the guidance we initially gave for public utilities, we had guided that they would be in the low to single -- low single-digits. We're now saying flat to low. That change in guidance is being primarily driven by the fact that the anticipated order bookings that we were planning for, coming out of last year, didn't materialize and so that push has essentially moved that range from kind of low single-digits to that flat to low.

And then just one more point, Matt, in terms of public utility treatment, we're also trying to take, as I mentioned, our treatment technology into industrial. And we've seen some very nice orders and wins there. Again, some will be pushed into 2013. There'll be some that obviously play into 2012. But given the length of time, typically a 2013-type revenue recognition.

All other variables held constant, what is your view on Xylem's raw material input costs in the second half of the year versus what you experienced in the first half?

Yes, we -- at this point, we're planning to be essentially flat, meaning about 3% inflation in the second half. And at this point, we felt it was better to plan for a higher level of inflation, both in our cost actions, as well as our cost structure. And if that ends up playing to the benefit, then we'll obviously have that as an opportunity. The thing that I'd also note is, our susceptibility to the current period fluctuations is -- I won't say that we're not, but it's minimized by the fact that we tend to put ourselves on long-term supply agreements, which essentially dampens some of that volatility. Our direct exposure to commodities is relatively small. And so some of that is going to be taken out of the equation. But we've always planned conservatively, and we'll look for any opportunities to improve that as we can.

Our next question is coming from David Rose with Wedbush Securities.

Just very real quick ones. The -- if you could, can you reconcile the difference between the slides showing emerging market growth in constant currency for the second quarter at 20% and for the first half at 11%? Is the implication that it accelerated in Q2 significantly?

So our emerging market -- so let me address that. Our emerging market growth, what we've seen, nice growth in the first half and we continue to see that sequentially growing as we go through the second half the year.

Maybe I can back up. Gretchen, on Page 5 you show organic growth versus prior year of 11%, and on Page 4, it shows emerging market growth at 22% both in constant currency. So it implies a meaningful step-up in the second quarter versus the first quarter.

Yes, that's right, it's true. We had about 17% growth in the second quarter in our emerging markets.

So we've got a couple of big projects that we've won in India and a few others that ship in the second half of the year. And we've had nice order-taking and good business execution in our emerging market's strategy. Think about this, we announced that we positioned ourselves in Russia. Our organization is up and running. We've got an opportunity to continue to grow there. We've put a very focused strategy around our emerging market activity. And so, as we are expecting sequential growth from first half to the second half, we believe we've got good line of sight from some of our projects that we'll ship, as well as what we need to do and execute in our end markets.

Okay. That's helpful. And then, I guess, this could sound like a pricing question, you discussed -- we had all discussed, at one point in time, a pricing slop. How much of the pricing slop do you think you still have in terms of your powder for the second half? I think I recall there was, maybe, a 200 basis-point movement, pricing slop. You took advantage of some of that in the second quarter. How much is left in the back half?

Yes, so when you think about it, we talked about 170 basis points for the first half. I'll still go back to what we have said our goal is, 1 to 2 points a year. And we're driving that aggressively. You're going to see a couple of dynamics in the second half of the year. One, we drove very aggressive pricing last fall, so you're going to have some tougher compares to where we were at the first half. And we've been at it for a while. So the team is getting very disciplined about their approach. The other area is, it is a tougher market. So you're going to have market pressures in the second half and so we've accounted for that as we look through the second half of the year.

Our next question is coming from Chip Moore with Canaccord.

I was wondering if you take us back to the financial crisis in '08, kind of what you saw in Europe then and how that compares to some of the trends you're seeing now?

So in 2008, when the onset -- you saw, the primary focus was in the U.S. at that point in time. Europe came much later, I would say, at the end of 2009. I would say, where we're seeing the issues in Europe -- and I think it's important to really focus where Europe is. It's been driven primarily by southern part of Europe. We're still seeing strength substantially in the Nordic regions. We're seeing strength in the U.K. We're still holding our own in Germany. So it really has been more of a Southern Europe exposure. Now, coming through the second quarter, we did see some volatility across Europe, which had us concerned and, hence, the reason why we have re-forecasted our forecast for the rest of the year. But it's not the same dynamics as what we saw in the 2009 timeframe. But there is a lot of volatility, and we want to be prepared appropriately, and that's why we're taking aggressive steps.

Yes, Chip. I think the way I would think about it is, in 2008 to 2009, we were coming off some market highs, specifically around commercial and the CapEx side of public utilities. And since then, those markets really have not had a significant improvement. We've seen gains in areas like retrofits and specific projects, and so what we're really seeing is more of a moderating environment, which I think is consistent with how we've articulated it versus a dramatic falloff in terms of what we saw back in that '08, '09 time period.

I guess I'd add one more thing. As you know, the public utility business has been stable and what we're seeing is, you saw industrial, you saw ag, you saw the rest of the industry going up. You're seeing that now start to slow back down but, still, stability in the public utilities across the board with the exception of Southern Europe.

And maybe just one follow-up. In terms of the reduction in revenue, the $105 million market-related, can you give us a sense of how much of that is European-related?

Yes, so here's the way to think, kind of the full picture. We had been anticipating the U.S. to be in the mid single-digits. We are now projecting it in low single-digits. We had expected some level of European growth from a full year standpoint. We're now assuming Europe will essentially be flat, and we really haven't moderated the emerging market growth that we had assumed. It's -- I'd say, more heavily weighted towards a European reduction, than it is the U.S. But we are seeing moderation in both those markets.

Our next question is coming from Terry Darling with Goldman Sachs.

Maybe just a follow up on that last comment. Mike, why would Europe get better in the back half, relative to the slight decline in the first half? What are you seeing there?

Yes, so there's a couple of things. One, we do see some of the typical seasonality that has held up over the past several years, especially coming out of the vacation season that we'll see in August. A couple of other components. One, the public utility side tends to ramp. They're on a different fiscal calendar, so you can obviously read into that, in terms of some of the dynamics that play out as you get into back half of the year. And then, our analytical instrumentation business was down heavily at the end of last year. That has obviously moderated and we see that continuing to improve sequentially, and that will also fuel some of the growth. And then we've obviously got a good presence in Eastern Europe, and we'll see that to continue to be an opportunity for growth.

Okay. That's the Russia piece in particular there?

Yes.

Okay. And then on emerging market, what is the assumption on the full year now that is unchanged?

We're essentially looking at approximately 10% growth coming out of the emerging markets.

Okay, so similar second half to first half?

Yes, very similar.

And you've had a very strong growth there. I'm just wondering in China, in particular, are people looking for any signs that some of the stimulus in places like Changxia, and others, will help the industrial sector? Are you seeing anything there from a bid perspective in China that gives you optimism that maybe China gets better in the second half?

Yes, we've actually seen our bid activity in China pretty well. If you think about their 12th 5-year plan, it's around wastewater, and our teams have been aggressively working, not only in the large cities, but moving Westward and trying to capture the growth there. We've got a disciplined approach. I think we will continue to see some nice execution from our China team.

And Gretchen, can you remind us -- in China, the percentage of total revenues, 3% to 5%, something in that range for the company?

That range.

Okay. And then on the restructuring efforts, a couple of questions there. First, any breakdown of the $15 million to $20 million between Infrastructure and Applied for us?

So in terms of the details of it, I don't want to get into the details here. It's too early to do that. But we've got detailed plans that spread across both of our segments. It's really going to position us appropriately for what we're seeing in terms of volume, but also strategically position us as we come together as a Xylem team, to maximize our penetration in the market based upon our strategic objectives going forward.

And Gretchen, does the -- obviously, the step-up in restructuring -- the view that Europe stays a little weaker for longer implicit in that; but I'm wondering from the way you're thinking about the portfolio, is there any change in your thinking on potential divestitures within the context of the changed landscape?

So, yes, we've looked at Europe in terms of it's going to be volatile for some period of time, so we're thinking through that as we make these decisions. We still think Europe is a critically important region for us. And we don't want to lose that focus on our customers and our ability to continue to invest for the long-term growth. So I feel very good about what we need to do, but we need to right-size both from the economy, as well as strategically position ourselves so we can execute our strategy. In terms of our portfolio -- and you look at our fundamental business of Xylem -- solid business, a solid set of portfolio, pipeline, product lines and businesses. So I feel very confident of what we have. Our strategy more is in acquiring and continue to bolt-on to our business, and continue to run our foundation even more effectively.

Okay, and then just lastly, in the $0.10 of cost -- from cost-saving actions in the new guide, that is above and beyond the restructuring program. Just the paced investment comment, can you add some color there? Where are you pacing those investments? Is R&D in the mix there? Is it feet-on-the-street in emerging markets? Where are you pacing the investments incrementally there?

So we're doing a couple of things. I mean, obviously, our first focus is really around discretionary cost reductions and running our business more effectively like we've been doing over the last several years. We will look at pacing some of the investments. One, when we do that, we look at what's happening in the economy, and are there some end markets where we are going to be launching certain activities that we ultimately should be slowing down based upon the execution. So it's really aligning it based upon the strategy that we have, which we are still advancing, but aligning that geographically based upon on where we have the growth. So it's pulling back a little bit, but it's not stopping our growth strategy.

I mean, Terry, we're heavily focused probably more on the discretionary side. You saw it come through in the second quarter. And pulling the levers where we're clearly not jeopardizing the stewardship of the company, but that we have opportunities to defer or cancel out cost levels within the business to preserve the investments. And then really going after the restructuring as a way to make sure that we're in a good position, heading into next year to preserve our ability to continue that investment level in the business.

Then can you just clarify, Mike, on the free cash flow for the year, 95% excluding onetime separation costs. Just to make sure we're on the same page there, 290 to 300 implied by that? Have I got that about right?

Yes, it's in that range.

Our next question is coming from the line of Kevin Maczka with BB&T Capital Markets. Kevin R. Maczka - BB&T Capital Markets, Research Division: Just to clarify on the cost savings, that $0.10, that is not coming from the new or accelerated restructuring, but those savings from that program will be more achieved in 2013, is that correct?

Correct.

Correct. Kevin R. Maczka - BB&T Capital Markets, Research Division: And can you just repeat, what is the savings, do you expect from that in 2013?

Yes, you bet. So we're going to have $15 million to $20 million of cost this year. There will be an additional $2 million next year. The run rate savings that we'll achieve will be about $10 million starting in 2013. Kevin R. Maczka - BB&T Capital Markets, Research Division: Got it. And would you characterize this more as somewhat new, defensive, if you will, move in reaction to something you saw in Q2 and expect in the back half? Or is this more, something that we plan to do all along anyway and we're just accelerating it now because maybe we don't quite have the volume in certain areas that we thought we would?

I'd say it's more proactive steps that we're taking to position us for some of the unknown in terms of the market that we see. But also, as we think about ourselves strategically and how best to position in a geographic region. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay, and just last from me, one more quick one on pricing. Where are you in the rollout of your initiative there as it relates to rolling this out, enterprise-wide, to your sales force?

I'd say, roughly, we're about 70% deployed across the organization. Our plan was to complete about 80% this year. We're slightly ahead. So it's pretty much deployed throughout the leadership teams and very specifically, across end-market-by-end-market. The teams are really driving it in a much more aggressive way than we had in the past, and I feel good about our process.

Our next question is coming from Michael Roomberg with Ladenburg Thalmann. Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division: I just have a quick question for you on branding. Can you refresh us on the extent to which you have or are planning to incorporate the Xylem brand across your platform? And then related that, kind of talk a bit about how you strike the write balance between, I guess, leveraging the cross-selling opportunities of Xylem, the umbrella of Xylem, versus ensuring the customers kind of maintain their previous perceptions or loyalties to the brands that they've grown accustomed to over many years?

Yes, great question. You look at Xylem, brand new company and we need to build our brand as a company and that's extremely important so people to know who we are. And we as a team of 12,500 employees, come together as an organization with a common focus around water. Our legacy brands are very strong. Many of them have been in the market for over 150 years and have a very strong relationship with our customers and the end markets in which they serve. So I think they're like, kind of like a house of brands. Now in that, we clearly will have some brands that we continue to eliminate, and really go after our strong brands, so when we go into different regions, just like I talked in our last earnings call, was we're taking products out of our WTW [ph], which is over in Europe in our analytics business and we're bringing them into the U.S. under our YSI brand, because that makes some sense. So there'll be cross-branding, maintaining those strong legacy brands, all under the house of Xylem. Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division: Got it. So you're not looking necessarily to transform any of your existing brands into a new Xylem brand for instance?

Not at this point.

Our next question is coming from Jim Krapfel with MorningStar.

Does your longer-term margin and revenue goal target some plays, that being, I think, 14.5%, 15.5% on margin in 2015, and then water, mid single-digit organically and applied water up low to mid single-digit organically?

Yes.

Our long-term strategy hasn't changed. I mean, we still see we've got opportunity in our business to continue to get more leverage, more productivity and we can -- and as we think about deploying new products and new markets that we go into, more attractive, more opportunity for profitable growth.

Okay. And then you talked briefly about -- your acquisition pipeline looks pretty good. Would you -- do you see anything in the pipeline that -- if you do, to the size of what you did with YSI at $300 million acquisition costs, or there's more smaller bolt-on acquisitions?

So we've got a healthy pipeline of opportunities, many of them focused around the bolt-on, but we've got some sizable of -- the size of YSI. We look at the full industry and we'll make the decisions based around strategic, obviously, culture, how it fits, and then the final line being the financials and does it make sense for the business. So that strategy hasn't changed. I would say, though, primarily bolt-ons, but we are looking across the whole industry for the right strategic alignment.

And the strategic focus would be on companies with more emerging market exposure and healthy margin levels? Is that the idea there?

Well, you go back to our growth platforms, being dewatering and analytics, that's clearly important to us. But emerging market's important, continuing to expand our technology, and as well as channels that allows us to position ourselves in expanding areas. So when you think about products in the portfolio, we think of gross margin and how we can improve our gross margin. So that aligns with our strategy as we go forward.

Our final question is coming from Stewart Scharf with S&P Capital. Stewart Scharf - S&P Equity Research: On your long-term projections, are you pretty much, over the next few years, sticking with your long-term growth, organic growth of, say, 4% to 6% and operating margins in the 14.5% range with 50 to 75 basis points annually? Do you see that basically transpiring over the next 3 or 4 years?

Yes, so our long-term growth strategy has not changed and the goals that you outlined there are the same. We see that continuing to play. The actions that we're investing in, our core business, as well as the acquisitions that we have pursued, drive us in that direction and so that stays the same and we see ourselves on the right path. Some economic headwinds that we're seeing right now, but nothing's taking our eye off the ball on achieving those. Stewart Scharf - S&P Equity Research: Okay. And targeting around $300 million a year in acquisitions, would that basically mean that you're done for the year, and you're looking more towards '13 now for any acquisitions of that [indiscernible]?

We're very active. We've got a very active pipeline. We're continuing to look at it. Now, we're not going to force something to happen. We're going to be disciplined as we have been because that works for us. Our process has really demonstrated that's the right direction to go in because we're getting profitability out of our acquisitions that we've done to date. So we've got the capability to spend $300 million, but it will be paced, based upon strategic and opportunity at the right time. So let me close with just a couple of comments. Our business operations continue to perform even with the lower anticipated revenues. We feel great about gaining share in the emerging markets. We're introducing new products and services. We're expanding our position in our dewatering and analytics businesses, while we're continuing to advance our strategic acquisition strategy. And we're also, as we talked about, taking proactive actions to reposition ourselves, given the uncertainty in Europe at this point in time. We're focused on good earnings and a strong, solid cash flow. And so we feel good that our business is performing, now that we're 9 months as an independent company. So feel good about the direction that we're headed in and the growth opportunities that are in front of us. So I want to thank for your interest and the time this morning.

Thank you. This does conclude today's Xylem Second Quarter 2012 Earnings Conference Call. Please disconnect your lines at this time and have a wonderful day.