Xylem Inc. (XYL) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the Xylem Fourth Quarter and Full-Year 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 p.m. Eastern Standard Time. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions) It is now my pleasure to turn the floor over to Phil De Sousa, Investor Relations Officer. You may begin.

Thank you, Jackie. Good morning, everyone, and welcome to Xylem’s fourth quarter 2012 earnings conference call. With me today are Chief Executive Officer, Gretchen McClain; and Chief Financial Officer, Michael Speetzen. They’ll provide their perspective on Xylem’s fourth quarter and full-year results and discuss the outlook for 2013. Following their prepared remarks, they will address questions related to information covered on the call. I’ll ask that you please keep to one question then return to the queue, so we’ll have enough time to address everyone on the call. We anticipate that today’s call will last approximately one hour. As a reminder, this call and our webcast are accompanied by a slide presentation available on the Investors section of our website at www.xyleminc.com. All references today will be on an adjusted basis, unless otherwise indicated. And non-GAAP financials are reconciled for you in the appendix section of the presentation. A replay of today’s call will be available until Thursday, February 21 at 6 p.m. Please note that the replay number is (404) 537-3406 and the confirmation code is 76727905. Additionally, the call will be available for playback via the Investors section of our website, under the heading Presentations. With that said, 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. Please note that the company undertakes no obligation to update such statements publicly to reflect subsequent events or circumstances, and actual results could differ materially from those anticipated. Now please turn to Slide 3, and I’ll turn the call over to our CEO, Gretchen McClain.

Thank you, Phil. Good morning and Happy New Year. Thanks for joining the call. We appreciate your interest in Xylem. We made substantial progress in 2012 putting a foundation in place and defining a clear path to realizing our full potential. We are confident in our course and we are moving forward this year with continued focus on leveraging our full power of our portfolio, our industry knowledge and our customers’ relationship to grow this business. While we were disappointed from a top line perspective in 2012, we entered the New Year with relatively stable market conditions, a resilient portfolio and plan to earn to drive earnings growth centered on improving our competitive positions, simplifying our business and continue our focus on cost saving initiates to provide flexibility to expand our growth strategy. Later in the presentation we will discuss how we see 2013 from a market perspective and the actions we’ve been taking to deliver earnings growth and impact of these conditions. Now I’d like to walk you through our fourth quarter results. We received orders of $926 million, up 3% in constant currency and 2% organically. Revenues from the fourth quarter was $969 million, down 3% compared to prior year, when we registered over $1 billion in revenue, an all-time record performance. Revenue in the U.S. and Europe was down 4% organically versus the prior year, while super storm Sandy provided a benefit of approximately $8 million, it did not offset weak Industrial and Public Utility markets. Within the emerging markets which today represents approximately 20% of our revenue base, fourth quarter revenues were down 2% organically. However when you exclude the timing of large project shipments the fourth quarter of 2011, emerging markets grew 9%. Investments made in key countries like Russia and China resulted in double-digit…

Thanks Gretchen. Please go to Slide 5. In the fourth quarter Xylem revenues were $969 million, down 3% from our record fourth quarter in 2011. Let me provide some perspective on our fourth quarter and full-year revenue performance by end-market and by region. First in our largest end-market Industrial, organic revenue was down low single-digits, year-over-year in the fourth quarter. Despite the impact from super storm Sandy, U.S. continued to be negatively impacted by dry weather conditions and the slowdown in water transport supporting natural gas fracking. European industrial market weakness continued in the fourth quarter down mid single-digits. Industrial performance in emerging markets was robust with Latin America and the Middle East and Africa regions posting double-digit gains over the prior year. On a sequential basis, Industrial grew mid single-digits in the fourth quarter driven by Europe, reflecting normal seasonal patterns. Overall, full-year organic revenues for Industrial were up low single-digits. Fourth quarter revenues from the Public Utility market declined high single-digits year-over-year. This was weaker than our expectation of a low single-digit decline. As we mentioned on our last quarter’s call we saw the acceleration of some deliveries into the third quarter and we knew we were facing a difficult time given the sizable projects we delivered in 2011. The varying levels of uncertainty among public utilities both in the U.S. and Europe resulted in the delay of smaller projects in discretionary maintenance and drove the additional weakness in this market. Overall, full-year organic revenues for Public Utilities were down approximately 1%. Commercial Building services were up low single-digits. In the U.S. we saw market conditions weaken in the back half of the year. Super storm Sandy partially offset this weakness providing approximately $1.5 million in revenue for the quarter. Outside of the U.S., we saw strength in…

Please turn to Slide 11. I want to say a few minutes providing you with our strategic framework that guides and drives our decisions and actions. We will spend more time in our upcoming Investor Day on March 7 explaining this to you. But simply put these are our key goals and initiatives and from here we develop plans for change and ways to measure the change. It’s our business model to drive excellence throughout the business. In 2012, we made substantial progress putting a foundation in place as a pure play water technology company, taking it to the next level and positioning Xylem for the long-term requires a few things. First an incredible focus on delivering customer values. We price customer intimacy above all and working to meet customer needs and deliver the unique value as part of our company DNA. We will continue to deliver value across our portfolio, products and services and actively seek new ways to create more value to bring together our application expertise and integrated processes across the business to help solve the complex water challenges our customers confront. Through our Xylem Total Care program coupled with the benefits of the PIMS acquisition, we’re enhancing our aftermarket capabilities to protect and expand our large install base. Our applications knowledge gives us the ability to provide energy audits, system upgrades and solutions focused on reducing our customers total cost of ownership. Second, drive profitable growth. We are balancing growing our main lines of business with pursuing dynamic new opportunities, both through organic investments and our disciplined acquisition strategies. We will accomplish this by indexing and innovative offerings in high potential areas like smart products, energy efficiency and reuse, expanding our gross platforms, analytics and dewatering and extending our geographic position in the key markets, both…

Thanks Gretchen. On a global basis Industrial remains our largest end-market representing 43% of our revenues in 2012. In this market we provide cards which are critical running our customers base operations for energy efficient products and total cost of ownership of value by our customers. In addition the majority of our dewatering revenues are associated with Industrial end-markets. With some uncertainty around where U.S. industrial demand will go and European industrial production is expected to remain challenged, we anticipate our revenues will be flat to up low single-digits organically in 2013. In addition to slightly improving economic conditions in the U.S. and emerging markets, we see additional expansion of our Treatment solutions into Industrial applications and a return to more normal weather patterns for dewatering business in the U.S. Revenues from Public Utility is now 35% of our total revenue, and are expected to be flat with 2012 levels. We continue to expect stability and required operations and maintenance activities as this spin is largely non-discretionary and is funded by tariffs end-users. As we’ve discussed during previous quarters, the portion of Public Utility revenue does drive from CapEx project spending continues to be constrained by project orders. Given the longer lead times for such projects and the absence of insignificant change in CapEx spending levels our forecast for 2013 assumes that this continues to be case for this year. We expect the demand for emerging market public utility infrastructure will drive growth for Xylem in 2013. Our revenues from commercial markets are expected to be flat to up low single-digits. While indicators such as the Commercial Architecture Building Index have improved slightly in recent months, we expect market demand in the U.S. to remain flat for at least the first three quarters. European commercial construction is expected to remain…

In summary, 2012 was certainly a challenging but rewarding first full year. Looking back we established an organization with the ability to handle adversity, adapt to changing market dynamics and deliver strong performance. We’ve discussed in detail how we’ve advanced our strategic position over the past 12 months. Launched new innovative products and services and were recognized by organizations and customers as best in class. We delivered strong financial and operational performance despite macro challenges which resulted in softer top line performance than we expected at the beginning of the year. We drove significant growth margins and operating margin expansions in line with our original guidance and we are taking actions to project our progress and continue our efforts we initiated in 2012. As we move forward to 2013, we will focus and maintain our focus on improving our competitive position, investing for long-term growth and increasing our efficiency and effectiveness. We ended the year well positioned in the marketplace with a strong balance sheet and an organization still to succeed. With that we’re happy to take your question. Operator?

The floor is now open to the questions. (Operator Instructions) Thank you. Our first question is coming from Deane Dray with Citi Research. Deane Dray – Citi Research: Thank you, good morning everyone.

Good morning.

Good morning, Deane. Deane Dray – Citi Research: I was interested in hearing more about the PIMS acquisition, the move with the services does cope up with the equipment model but if you can comment on how you scale the service business, there is a lot of headcount in terms of returns of that business model, so how much has it been growing and how do you scale it and do you get a flow through of your aftermarket products through service organizations like PIMS?

Yes, Deane let me step back a little bit and we’ve been talking about our aftermarket strategy for quite some time. We’ve been spending enormous amount of time driving what we call our Total Care program is. And so in all of our businesses where we have a large install base, our sales teams have been working aggressively to make sure that we’re capturing the parts and services but also bringing advanced services where we can bring the broad portfolio of products that we have and our ability to going and do energy audits and so forth. What we get with PIMS is, one, some very nice processes. We also get a very talented group of folks that have a core competency that we can help train geographically our teams that are positioned very well. So we not only do we get a great position in the U.K. which complements where today we play in the public utility and 90% of their customer base is non-public utility. We also get a core competence of talent that we can actually use to help our teams geographically expand. Deane Dray – Citi Research: Great, and then just a quick follow-up for Mike. Can you comment on the lower tax guidance and you know what’s driving that and sustainability?

Yes, good question, Deane. We do quite a bit of work around the tax planning. As we have mentioned in prior discussions, we actually were fortune to take the tax leader [ph] that was at ITT with us given the global footprint that we have. So we’ve been doing a lot of work around the planning aspects. I think the key elements is this is a sustained tax rate improvement from some of the restructuring that we’re doing in Europe and we look at it as a great position not only the leverage, including other parts of our current portfolio but as we look to bring new acquisitions into the full that will give us a good leverage point in terms of doing some sustainability around further improvements in our tax rate. Deane Dray – Citi Research: Great, thank you.

Your next question comes from the line of Matt Summerville with KeyBanc. Matt Summerville – KeyBanc: Good morning. Can you talk a little bit more, I understand the relocation of the headquarters, but just what you are doing from – heavy lifting perspective in terms of restructuring, are you taking out facilities, people, can you put other numbers sort of behind that, and then what do you expecting the payback to be on the $60 million to $70 million year investing in ‘13 as we think about at ‘14?

Sure, Matt, let me first talk a little bit about what we’re trying to do in Europe. We’ve been positioned in Europe for quite some time, and as a separate independent company, we have not really been totally utilizing or leveraging our unique and broad capabilities as a total Xylem in the water industry. And so our objective here is to setup the headquarters, one headquarters, today we have three headquarters in Switzerland. We will be aligning our strategies around our end-markets that we go to and so couple of the restructuring actions will lead to consolidating multiple sales companies in one country. And we’ll be able to leverage our back office more efficiently and effectively. We’ll be able to set up shared services to support the teams across Europe. They have centers of [ph] excellence and ultimately be able to get some opportunity to leverage, manufacturing, our supply chain leverage, commodity-wise across the whole organization. So I feel like we’re going to be able to position ourselves to be able to work more effectively and efficiently in the market, but ultimately be able to bring more value to our customers. Mike, you can walk through the numbers.

Yes, so Matt let me just kind of step back and hit some of the numbers. So in 2012, we executed about $17 million from a cost perspective of restructuring. We got about a $1 million of benefit in 2012. The remaining $12 million will be a benefit in 2013. Out of the $60 million to $70 million of restructuring and realignment, $40 million to $50 million of that is restructuring and we see that giving us a benefit in 2013 of about $13 million to $15 million. So think about the total restructuring benefit from actions done in 2012 as well as 2013 in a range of $25 million to $27 million. The payback period on these like we’ve articulated before given the fact that we’re focused primarily around Europe is going to be approximately two years. Matt Summerville – KeyBanc: Okay and so then we should think about that, in other words [ph] you are getting a one to one dollar payback that there is somewhere in the range of $35 million to be – they will be back in ‘14, is that the right way to think about it, Mike?

Yes, we’re essentially from an execution standpoint for the actions being done in 2013, pardon me, planning in Q1 execution in Q2 and then we’ll be looking for run rate savings to have achieved in Q3 and Q4. Matt Summerville – KeyBanc: Thank you.

Your next question comes from the line of Ryan Connors with Janney Montgomery Scott. Ryan Connors – Janney Montgomery Scott: Thank you, good morning.

Good morning. Ryan Connors – Janney Montgomery Scott: I had a question in regards to foreign exchange, last year you all made a downward guidance revision based on the Euro and translation and given now strongly the Euro in particular has rebounded and look at the guidance assumptions, a little bit surprised that Forex has a little tailwind as it is in that 100 basis points, so you can just talk us through Mike, kind of the assumptions you’re making around currency and the Euro in particular? Thanks.

You bet. Euro is clearly the largest driver we have. In the guidance we used a $1.32. Rates have been trading at slightly higher than that, but just from a modeling perspective if you look back the average rate that we had during the 2012 time period is about $1.20. And so as we look at that, it’s about 1% pickup from a top line perspective. Obviously if the rate were to hold at a $1.35 you would see some incremental pickup. If anybody shot in terms of where the Euro is going to go, if you look at what the projections are through the balance of the year, the Euro is supposed to moderate some based on what they are projecting with interest rates but certainly if it were to hold at the levels it is today we would see potential upside from where we’re at today but again it’s all translation, it has a minimal a impact on the bottom line. Ryan Connors – Janney Montgomery Scott: Great, thank you.

Your next question comes from the line of Chip Moore with Canaccord. Chip Moore – Canaccord Genuity: Good morning, thanks. On the repositioning, I was wondering if you could talk a little under term once you get through the actions in Europe, how much more runway that you have streamline in the business in where you’re at?

So we’ve been making actions as we established Xylem, and so if you were to look at our Asian organization today, we have aligned around the Xylem organization across our Asian region. We’ve been making some moves in Europe, a couple of countries have already integrated and so that has been positive. And so we’ll be making actions. Europe is critical. It’s a market that’s challenged right now. It’s an important customer base. And so those are the first major steps. But I do feel overall we’ve got a nice alignment in the organization and we’re trying to take those big steps now to position ourselves for the long-term. We’ll give a little bit more color in March at our Investor Day but the big step is in Europe. Chip Moore – Canaccord Genuity: Great, thanks.

The next question comes from the line of David Rose with Wedbush Securities. David Rose – Wedbush Securities: Good morning, couple of quick questions. On the spin cost, can you elaborate a little bit more of what we’re seeing and why we’re still seeing that cost, (inaudible) and then maybe a little bit more differentiating the orders for the fourth quarters given that they were up so much and your commentary about public utility is being down, I am assuming that the order growth is more industrial than public utility maybe you can get down for us?

Yes, let me David take the one-time spin cost. Obviously at the time of spin we did our best estimate what do we take to effectively separate ourselves from ITT. When you look at the total amount of money that was spend to exit, the remaining $5 million that we’re talking about in guidance is relatively small. It’s not related to anything that we did not know about. We spent the better part of 2012 trying to make sure that we had a good effective strategy for the IT systems exit as well as exiting our current location for our new corporate headquarters. So it’s nothing that wasn’t anticipated. It was tough to put a number around it. At the end of the day we weren’t going to compromise an effective and efficient exit. I do not see anything beyond this, this effectively ends all the inter-learnings [ph] that we have with ITT this year. So this is the reason we pointed out is to ensure that as you think of the margin going forward it’s not an ongoing cost.

Yes, let me talk a little bit about the fourth quarter dynamics. As we all saw the confidence level in Europe and some of the confidence level around the U.S. fiscal cliff, had people falling back high on their budgets. So we saw that both in Public Utilities and Industrial. In the Public Utilities, part of that was driven by some of the orders that were pulled forward in third quarter but we did see some pulling back. We’ve done a lot of discussion with our customers to understand what’s going online and what to expect going forward. We did see them extending some of their business activities not something we think is a trend or difficult and we also had some very difficult comparison in the fourth quarter. As I mentioned earlier, it was our all-time record fourth quarter in 2011 at $1 billion and a significant part of that growth was tied to treatment orders in the fourth quarter of 2011 – sales in 2011 which didn’t of course repeat. The good thing is we held some nice orders in the fourth quarter of 2012 around treatments so we are feeling good about that. Let me just come back in terms of the order rates we’ve seen, we’ve talked about bidding activities still being strong, bidding activity is still good, our pipeline or I should say our funnel is very full but there is not a significant change in terms of the release of those bids into orders. So see something happen in the fourth quarter, not sure that’s the trend. It’s too early to say that at this point in time and so we’ve not take that in. We think we’re going to still see that market very challenged going forward. David Rose – Wedbush Securities: Okay, great. Thank you.

Your next question comes from the line of John Moore with C.L. King. John Moore – C.L. King: Thank you, good morning. Can you quantify any benefits that Sandy had on the order rate in the fourth quarter, and do you expect to have any benefit from Sandy related demand in the first quarter or longer term?

Yes, let me comment. On fourth quarter we saw $8 million from Sandy that came from both of our segments. The largest portion of it from dewatering business, the team did a remarkable job in executing and being there helping our customers. In terms of 2013, we all know that the Disaster Spending Bill has been approved, projects are being worked. We’re working very closely with our customers. I think we’re well positioned to be able to benefit when you look at the portfolio that we have, the expertise that we’ve got but again it’s early in the stages of those projects getting laid out that should be something that falls out later. So it’s tough to quantify 2013 impact at this point. John Moore – C.L. King: Okay, great. The $8 million was the revenue, but was there a similar benefit to orders in the quarter?

Yes. John Moore – C.L. King: Thanks.

Your next question comes from the line of Jim Krapfel with Morningstar. Jim Krapfel – Morningstar: Hi, good morning. I think you partially answered this question already, but would you think the driving – the weakness you’ve seen from your Public Utility customers, do you think it’s more due to weaker electricity usage trends or the necessitated need for doing product plans or do you think it’s more to due to continued low [ph] power prices making utilities more conservative with available cash. So just trying to get a better sense of whether the utility end-market weakness is more secular in nature or is this typical?

I think you have two dynamics. The Public Utilities have been down in the CapEx expenditure for quite some time. They’re at low ends I think 60 years, that’s not changing. We don’t see any indication of that changing. That’s a big piece from the CapEx perspective. From the operational, OpEx side of the house, as I said we felt some dynamics so we pulled some things into the third quarter. We don’t think the aftermarket is a very strong market and given our large install base that we will reposition very well. I also think public utilities are looking at how they can reduce their total cost of ownership that again positions us extremely well to be able to bring solutions to help them take their costs down. Jim Krapfel – Morningstar: Okay. And then how is the acquisition pipeline looking and what evaluations are you encountering especially relative to the past few quarters?

So our acquisition pipeline is quite strong. We continue to cultivate a lot of different businesses as we know the water industry is quite fragmented and feel good that we have a healthy acquisition pipeline. And it’s working I mean we had three acquisitions over the last three quarters and we feel very good about that. I also felt very good about our acquisition strategy – our pipelines and integration process. Each one of our acquisitions that we’ve acquired are getting well integrated with the businesses, are performing quite well. In terms of evaluation, in the fragmented market you still have various different acquisitions. We have been looking primarily on bolt-ons, smaller, many those who are private companies and it varies whether you are going after a businesses in the services areas, sources whether you are at more of a high attractive value in the analytics or treatment area. Jim Krapfel – Morningstar: Okay. Thank you so much.

Your next question comes from the line of Matt Summerville with KeyBanc. Matt Summerville – KeyBanc: I just have a couple of follow-ups, can you talk about, you know from putting Sandy aside for a minute, what was the magnitude of drop-off you saw throughout 2011 in your dewatering business, and given that some of the longer term kind of drought related statistics that at least we look at are still indicating a pretty severe situation here in early ‘13, were you driving the confidence so that business gets better?

Yes, so the water is two dynamics, two very significant dynamics. One an all-time drought in the U.S. which brought that down. And then the other area where we felt 2011 flow is the pickup that we saw in 2011 around the national gas fracking activities. The positive things about our dewatering, dewatering is well positioned in the U.S. We have been able to take that business model and expand ourselves in Australia, now into Brazil and we intend to take that business model into other regions around the world. We think that will ultimately be significant in terms of growth for us and also help cycles with their when you do have some kind of a drought activity. Overall our position in dewatering does serve many multiple different end-markets but we did see a spike in the natural gas which makes it tougher compare [ph]. But we were flat for the year. Matt Summerville – KeyBanc: Your global dewatering was flat?

Our overall business. Matt Summerville – KeyBanc: Got it. And then, as we think about the margin dynamics, your core business flat to up 1%, Mike sort of talked to my last question about the anticipated cost savings from the ‘12 actions, what’s going to happen in ‘13 following through for the year. I guess I am having a hard time reconciling to your operating margins being down as much as 50 basis points and I would assume you are looking to take more prices this year?

Yes, so let me comment it from a couple of different angles, Matt. From a pricing point we’ve talked firstly about having a target of 100 to 200 basis points. We’re obviously entering a – continued to be in a tough economic cycle and pricing is going to be towards the lower end of that range versus this year we ended up at about 150 basis points. So there is going to be a little bit of headwind now although we do still see a positive contribution from price. But I think the slide we put together in the deck hit of the some key points, I mean first of all we’ve got a pretty substantial pickup from foreign exchange and acquisitions and while they are not dilutive from an EPS standpoint, they are not bringing any income for the most part to the bottom line and that ends up diluting the margins by about 40 basis points. The foreign exchange piece is more of a triangulation effect of the currency change. The acquisitions, it’s more of a short-term impact of the upfront purchase account and some of the transaction cost. The European realignment was a pickup from an EPS standpoint and drives a substantial portion of the tax benefit. We do have to setup infrastructure in Europe to support that. That’s a 30 basis point headwind. Now the good news is over time that’s going to give us a platform to drive future benefit to the business from an operating (inaudible) and then we’ve articulated really two of the – what I’d say is out of the norm adjustments, one it is the pension discount rate came down about 75 basis points and for us its about $5 million impact. And then the one-time separation costs which we’re about just really trying to make sure we exit the connections with ITT in the right way. And then if you look at our core operations, we’re doing a lot of the same things that we did in 2012, dealing with a low growth environment, we have very robust lean and sourcing initiatives and sure we’re driving productivity to not only offset inflation that give us a little bit of room to continue to invest in the key parts of our business and I think that’s a critical element is we have not backed off making sure that we’re investing in the future of the company. And then the restructuring savings obviously to that to help offset what is some headwind from the other cost increases that I had mentioned a little bit earlier. Matt Summerville – KeyBanc: Pretty detailed walk, thanks Mike.

(Operator Instructions) Your next question comes from the line of Brian Konigsberg with Vertical Research. Brian Konigsberg – Vertical Research: Good morning. I just had a only question really on the Public Utility, you hit on some of it but I am just curious what you’re thinking actually is going to take to get the capital projects part of the business to trend upwards, I mean if you think about what – historically how can you refine that, it seems like the healthy – the municipalities is able to issue debt now that we’re seeing some improvements in the residential market, you would think that health of the municipalities are improving. But I am curious is there a kind of a period of absorption that needs to occur or kind of the – the municipalities go less before they are able to get to a point where they are able to improve the bond issuances at the municipal level to start doing these capital projects on a more significant level. We know there is no shortage of demand for new projects, it’s really a matter to regain that capital into the system I think. Can you just – if you could address that?

Sure. It’s a great question. Here is how I think about it, I mean the economy is down until the economy gets dressed in some of the key issues that we’re talking about in the U.S. and other areas it’s going to be a challenge area. Now that’s not stopping us ultimately in terms of strategically looking how we position ourselves in working with our customers to get after cutting, to reducing their operating costs so that they can actually invest in those areas. There are a lot of bills that are out there that are being kicked around and addressed. There are indicators that will say later this year or into 2014 you will see activity taking place, but right now the trends and the orders don’t reflect that. Our teams are aggressively investing in the right technology, so we are well positioned once that opens up. Brian Konigsberg – Vertical Research: Okay, thank you very much.

Your final question comes from the line of Stewart Scharf with S&P Capital IQ. Stewart Scharf – S&P Capital IQ: Can you talk a little bit about the mix in base line, the new products and end-markets, is there – what areas that you are focusing or where the mix generally is better and the margins or is it just pretty even based on the various new products and end-markets?

I would say one thing when I talked about our Vitality Index, we are getting a large percentage of our revenue coming from our new product launches which is a good indication that we have the right technology going into the market. I feel good about that. When I look at the mix, going into ‘13 we think our mix is going to be net neutral. You’ve got emerging markets that is pulling down and that’s an area that is growing and an area that we continue to expand in. Analytics and dewatering is positive.

Yes Stewart and maybe just from a financial standpoint I mean 2012 we saw a lot of negative mix and we had a lot of the drivers around the dewatering business being the primary impact. As we look into 2013, as Gretchen stated, we see mix being less of a factor for us, where we see positive upticks in areas like dewatering and analytics. We’ll see a little bit of an offset from an emerging markets standpoint but nothing that’s significant at this point. Stewart Scharf – S&P Capital IQ: Okay and just going to your financial allocation, it is pretty much the same, focused on the strategic acquisitions, just raised your dividend, maybe change in planning for use of cash, share buybacks and so forth?

No, I mean we have a share repurchase program as we’ve stated in the past, it’s primarily in that managing the dilution from the equity programs. At this point we have a very robust acquisition pipeline and an ample supply of internal investments and our strategy is going to be to focus in those two areas and continue to reevaluate as time goes on. Stewart Scharf – S&P Capital IQ: Okay, thank you very much.

You bet.

That was our final question and I’d now like to turn the floor back over to Gretchen for any closing remarks.

Yes, I just want to say thank you for joining us. It’s been a great year. We’ve got a great plan laid out. We are watching the economy very closely. We’re sizing our business to ensure that we’ve got the flexibility for growth. We’re driving of course for growth in our strategic activities. So if we did it and the market changes, that’s a positive thing that we will see in the future. I look forward to seeing you in our Investor Day on March 7. So thank you very much for your time.

Thank you. This does conclude today’s Xylem Fourth Quarter and Full-Year 2012 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.