Welcome to the Xylem's First Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Phil De Sousa, Vice President of Investor Relations. Please go ahead.

Thank you, Angie. Good morning, everyone, and welcome to Xylem's First Quarter Earnings Conference Call. With me today are Chief Executive Officer, Patrick Decker; and Chief Financial Officer, Michael Speetzen. They will provide their perspective on Xylem's quarter results and discuss the full year outlook for 2015. Following our prepared remarks, we will address questions related to the information covered on the call. [Operator Instructions] We anticipate that today's call will last approximately 1 hour. As a reminder, this call and our webcast are accompanied by a slide presentation available in 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 midnight on May 14. Please note the replay number is (800) 585-8367 and the conference ID is 5381163. 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 factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual results and events could differ materially from those anticipated. Now please turn to Slide 3, and I will turn the call over to our CEO, Patrick Decker.

Thanks, Phil, and, thank you, all, for joining us. Before we get started this morning, I'd like to acknowledge the earthquake in Nepal that occurred last weekend and the events that continue to unfold in the aftermath. The resulting devastation and suffering are profound and we, along with so many other global citizens, are responding with immediate resources to assist with their most urgent needs. We are also actively working to identify additional means and funds to help in this recovery. That spirit is core to our mission here in Xylem, and we're keeping all those who've been impacted in our thoughts. Now let me turn to our results. We started off the year on a sound footing, generating solid first quarter results. This morning, I'll share some highlights with you. I will also provide a brief update on a few of our key priorities for the year and discuss our 2015 outlook. I'll then turn the call over to Mike to share additional details, and we'll wrap up by addressing any questions you might have at the end. We delivered another quarter of solid operational performance, as our team steadily increased their focus and elevated their execution to deliver a 7th consecutive quarter of margin expansion. While growth rates in the immediate term are not particularly impressive, I am pleased with their execution, particularly as we faced mixed economic conditions, including weak industrial markets. And looking ahead, we see some encouraging signs in certain end markets we serve as well as attractive investment opportunities that will position us well for stronger growth over the longer term. As market conditions and macroeconomic variables fluctuate, we remain focused on the factors we can influence, mainly building stronger customer relationships to fuel sales and build backlog, driving better performance and executing a…

Thanks, Patrick. Please turn to Slide 5. We generated revenues of $837 million, down $69 million for the prior year. The year-over-year decline reflects the anticipated foreign exchange translation headwind turned by stronger U.S. dollar and the impact of our valves divestiture in the third quarter of 2014. Excluding those items, organic revenue increased 1%, in line with our expectations and the outlook we provided during our last call. From an end market perspective, commercial led the way, up 9%, with both public utility and residential up 2%. Partial offsetting these gains were declines in the industrial and agricultural markets of 1% and 13% respectively. From a regional perspective, we continue to see strong growth in emerging markets, up 9% and modest growth in the U.S., up 2%. This was partially offset by declines in Canada and Australia, which were each down 12%. Lastly, Western Europe was flat for the quarter. Operating margin increased 40 basis points to 10.8%. Excluding the negative impact of foreign exchange translation, margins increased by 60 basis points, which demonstrates our improved cost base as this is a strong performance given the limited operating leverage on 1% organic growth. Focus and strong execution on continuous improvement and business simplification initiatives reduced costs by $23 million in the quarter and resulted in 270 basis points of margin expansion. Partially offsetting these reductions were inflation of nearly 2%, higher pension expense and the unfavorable impact from the divestiture of our valves business last year. Earnings per share declined by $0.01 to $0.33, however, excluding the foreign exchange translation headwind of $0.04, we grow EPS 9%. Now let me cover each of our reporting segments. Please turn to Slide 6. Water Infrastructure recorded orders of $562 million, up 4% organically, including a $16 million project win for transport…

Thanks, Mike. As I said, we're off to a solid start to the year. We're excited about the direction Xylem is headed and look forward to sharing more details about our future plans at an Investor Day meeting later this year. For now let me get reiterate that we remain focus on driving stronger operating performance even as we face some uncertainty in the marketplace. I'm pleased with the progress the team has made in that regard and the continued momentum of that work. We do see some positive signs ahead, and we will continue to invest to ensure that we are well-positioned to capture new growth opportunities later this year and into 2016. We remain committed to delivering on our financial commitments and executing a broad-based capital deployment strategy. Our operational outlook remains unchanged, and we're on the right path to realizing the full potential that this company is capable of delivering. So operator, we can now begin the Q&A session.

[Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets.

Given all the macro anxiety, that's an awfully nice clean quarter from you guys. First question is help me understand the order cadence for the past 2 quarters. So it looked like Applied was up nicely in the fourth quarter, but now I'm looking at flat organic orders starting off the year. And does that in any way challenge you to hit this 1% to 3% organic revenue growth for 2015?

Yes, Deane, this is Mike. I think from an Applied Water -- and I'd made a couple of comments in my prepared remarks. We had order growth in the fourth quarter about 9%, and we think that the performance in the first quarter is just indicative that a lot of folks, given some of the promotional programs and things that are under way probably did quite a bit of restocking, ordering back in the fourth quarter. And so as we look at what the projection for the balance of the year is, as it relates to Applied Water, we don't see anything from an end market standpoint that says we're going to see anything play out any different. It looks like the commercial market is in a recovery mode. The Architectural Billing Index, specifically around institutional, has remained above 50 now for some time, and so we think that's driving some of the advanced ordering that we saw in the latter part of last year.

And on the -- your comments on oil and gas. Now I'm not surprised, except for your exposure is less than 5%. But the expectation that, that business is -- could be down 40%, that's much higher than our sensitivity model suggests. And maybe expand on the comment that this as one of your higher-margin businesses.

Yes. So Deane, it's -- we have obviously some oil and gas exposure in our Applied Water business, but the predominant exposure really comes out of our dewatering business where we're working on the frac pads for whether it's oil or gas, which is a pretty even blend between the 2. That business was down about 25% in the first quarter, and based on our current projections, we anticipate being down around 40% for the balance of year. We've taken some of that into consideration as we had worked through guidance, but we've obviously made sure that the teams are working the actions that they need to do to try and offset that risk. I think the good news is our dewatering business had such a broad portfolio in terms of exposure to construction, muni bypass disaster recovery that we've got the ability to mobilize and redeploy assets, and that's a lot of what the team is really focused on right now.

And just if I can have one last question. Just to clarify, your comments on the increased business in China on the treatment side. You cited ozone and filtration. And is the filtration piece, is that part of your licensing agreement with GE?

No. This would not be related to the Zenon membrane. This is around our Leopold gravity filtration business.

Great. So that's for your core legacy filtration side...

Exactly, exactly.

Your next question comes from the line of Ryan Connor (sic) [Ryan Connors] with Boenning and Scattergood.

I wanted to -- Patrick, you mentioned this effort, that you'll be announcing a new Chief Innovation Officer. I thought that was an interesting comment. And our understanding was that the product development pipeline had actually begun to regain some momentum and that, that was kind of a positive part of the story. So can you give us a little more color about what drove the decision to sort of more institutionalize that? And what exactly that person's mandate will be? And what the kind of goals are in terms of metrics to drive any kind of material improvement on that front?

Sure. No, I'd be happy to, Ryan. So certainly, I'm very pleased with the progress that each 1 of our 5 growth centers have done over the last few years in revitalizing the pipeline. And you have heard more and more of our new products coming to market. This really is less about a leader coming in and kind of dipping into what each of our business units are doing. There are still some efficiency gains to be achieved there by way of localizing more of our product design and our innovation and technology in some of our fast growth emerging markets, whereas right now that's still large -- a large part of that is happening in the heritage markets in which those brands originated. So certainly driving it towards emerging markets is going to be part of that person's role and responsibility. But this is as much about some of the value mapping work that we've done over the course of the last few months, where we've engaged in a fact-based effort to really map out what the full array of what our -- kind of what our value chain needs are that our customers are managing each day in different end markets, whether that be in the muni market, whether that be in the oil and gas, power, mining, food and beverage. There's a whole list of markets that we have focused in on. And what this person is really going to be doing is working with our marketing teams and others to identify where are some of the white spaces that we want to be driving both organic innovation and technology but also helping inform some of our M&A activity. As you know, M&A is oftentimes a proxy for R&D in an industry where the IP is so fragmented. So those are probably the 2 primary areas that I have the innovation/technology lead focused on.

Okay. And I guess my related follow-up would be related to your last point there, which is as you look at the M&A environment, I mean, you mentioned that the company will likely become more active there over the balance of the year. What is the core? Obviously, you can't share with us any specifics, but are you more looking at acquisitions that add to your distribution or product portfolio in developed markets? Or is it more of a technology M&A? Is that really the focus?

I think it will be a combination of the 2. I would say our predominant interest will be in adding new technology and capabilities to the portfolio, but certainly, where there are opportunities for us to strengthen the core, we'll certainly take advantage of that.

Your next question comes from the line of Joe Giordano with Cowen.

A couple of questions from me. I wanted to talk about pricing. How would you gauge that in 1Q maybe across the different segments or maybe it's better to talk across geographies? And how you view that going forward? I think there's some concern in the industry in general about how much of revenue declines are price generated and when that -- with decrementals associated with that, things like that.

Yes. So we -- for the quarter, pricing was essentially flat for us overall, but it's a tale of old segments. So the reality is in our Water Infrastructure segment, and we talked about this last year, we were undertaking quite a bit of activity to really boost our ability to get price in that segment. And we started to see traction. We started to see that in the fourth quarter. We've seen it again in the first quarter, where we got about 40 basis points. So it's not earth-shattering, but it's good progress. I think the area where we're seeing certainly a lot more pressure, and I don't think we're alone in this in terms of the commentary we've heard from many of our peers and competitors, we had close to 90 basis points where the headwind in the Applied Water segment. That market's very competitive. Given some of the dynamics around the end markets and the weather conditions, we've seen that amplify. I would say that it's remaining at this point disciplined, but it is an area that we're keeping a close eye on and obviously, the teams are very actively working countermeasures. As you think about the full year guidance, we talked about expecting price that would be somewhere less than 50 basis points. There's a chance that could be pressured, but it's early in the year, and we're going to be pushing the teams to do what they can to offset it and quite frankly making sure that we're hitting the right value proposition out there to get the price that we think we're entitled to, given the products that we have.

I would just add that 2 other areas that I think we're very much focusing on in helping mitigate this is, again, you heard us talk about ramping up our global procurement and sourcing efforts. So taking advantage of this low growth and kind of deflationary environment to put that pressure back on our suppliers. Secondly, this is an area where, again, rolling out new products is very helpful to us in terms of arresting the price declines, if not even driving some level of increase. So all the more reason for us to be bringing new products to market.

Yes, that's fair. On the emerging markets side, that's been up double digits, high singles for quite a bit now. When do we start rolling into comps that become a little bit more challenging to keep that kind of pace?

Yes, we actually had our most difficult comp in the first quarter, where we had 18% growth last year. And as we indicated in our initial guidance and obviously what we've reiterated today, we expect strong growth in the emerging markets, high single digits. We just don't anticipate it being at the level that we recognized last year, where we were up about 13%. So we've kind of lapped the most difficult compare, but obviously, there's dynamics going on in China around the commercial markets and so we think the guidance level that we've put out there is pretty consistent with what we experienced in the first quarter and is driving quite a bit of the growth for the company.

I would just add that I do want to just remind everyone that we're still very much in the building installed base mode, and so it's heavy project activity. It will be choppy and lumpy from quarter-to-quarter, but we do see a steady stream of new products coming.

Yes, that's good to hear. Maybe last from me. On the industrial outlook, minus 1% for the quarter. That includes big declines in oil and gas, and you're still looking for up for the full year. And there's been a wide variance across earnings so far this season, I feel, on industrial segment guidance. So why do feel that your products are kind of more resilient in this environment? And what makes you -- what gives you comfort that you could still see growth despite the 40% decline in oil and gas there?

Yes. So I'd say it's a couple of things. One, within the segment that shown about [ph] oil and gas dewatering, as I mentioned earlier, even though we are facing significant headwind from that particular vertical, that business serves a variety of other end markets that we do see continued strength in. So I think from a dewatering standpoint, we certainly have the diversity of the portfolio. From a more broad-based industrial perspective, I would say the geographic and ultimate end market breadth that we have. So if you remember some of the charts we've displayed in the past, our industrial segment is very diverse in terms of general industrial, food and beverage, construction, et cetera. And so we think by that diversity, that's given us a little bit of insulation relative to the low single-digit growth rate that we're expecting for the year.

And this is also where we, I think, are very well-positioned from an emerging market standpoint, especially with the install build in the Middle East and China. And so while we're doubling down our efforts in those areas, I certainly don't want to diminish the great work the teams have already done historically to build our base there.

Your next question comes from the line of David Rose with Wedbush Securities.

I had a couple of questions on the margin profile, both, you know, from kind of above the unit level. So first of all, the R&D reduction that you had year-over-year, is that something that you see as structural what you've done to improve the productivity and return on investment in R&D? Or was this more discretionary?

Yes. I'll take that one. I would say it's largely timing of spend within the quarter. It certainly is not a trend line that we're focusing to continue. If anything, over time, we'll be marginally increasing the amount of investment we spend in R&D. There is also the opportunity we've been driving here to be more efficient and effective in our R&D spend. So as we again further move to localize more and more of our R&D investment in some of the emerging markets, that's a more efficient spend that we're going to get because that will be able to support not only those local markets but also some of our global activity. So it will be a mixed bag going forward, but I wouldn't read anything into the modest decline in the quarter.

And, David, there is also some foreign exchange translation tied up in this. If you remember, we have overweight in terms of our engineering that's outside of the U.S., in areas like Stockholm, where we're benefiting from a translation standpoint. Even if we pull that out, we are down, so the comments that Patrick highlighted absolutely apply, but it's being amplified by foreign exchange rate now.

Okay. So in Q2, that will be set back to a normalized level?

That has declined, yes.

Okay. And then, lastly, within the margin contacts, on the Water Infrastructure side, you seem to make some pretty good progress despite the FX headwinds and some of the sluggish commentary you made about the overall market. Where did you see most of the traction front end or within the 4 walls? Maybe you can provide just a little bit more perspective on that?

Yes. I think, David...

I'm sorry -- and then lastly and within that context, if you can also give us some color on how the pipeline looks within the backlog going forward.

Sure. I think from a margin standpoint, certainly the continued effort and focus that we have across the business on making sure that we're driving the lean and the global sourcing productivity. And I would say for Water Infrastructure, you don't see all of the margin leverage come through because as we indicated, as we're growing in emerging markets, which for that segment, we're up 10%, while there are attractive margins, they're obviously at a lower rate because it's primarily OEM business versus having the after-market content. We are getting that volume leverage off of the growth within the platform and so that's obviously aiding to the margin profile.

So then the backlog...

And then -- yes, so the backlog for Water Infrastructure, so orders were up 4%. The backlogs, it one of the strongest levels we've had. As I indicated in some of my remarks, when you look at our shipments for 2016 and beyond, we are up over 50% and so we're continuing to see the strength. Our treatment business was up about 13% from an order standpoint and that was pretty evenly spread across the globe. So at this point, we're not calling a full-on municipal recovery, but we are certainly seeing a continued growth and order strength for that business, not only in treatment, but also in our large transport business.

I think we've also been pleased. We've seen our win rate improve in the treatment business as well, which is a leading indicator for the rest of the business. It's gone now from 40%, up to 45%, driven by a number of factors, but it's pretty encouraging sign for us.

That's helpful. And I guess really what I was getting at was that the margin profile, that backlog as you start to sell. Continue in emerging markets, as you pointed out, is there margin pressure there or do you see some margin improvement because of the product mix that's changing?

Yes. So we actually took a snapshot of that and continued to look at it. And it supports the gross margin level that we have that's just shy of 40%. Because at the same time that we are obviously winning in the emerging markets with margin that may be a little bit lower than the average, we also have some of our higher-margin business coming through in that backlog as well. So overall, the blend is in supportive of the outlook we have for the year.

Your next question comes from the line of Chip Moore with Canaccord.

As you get ready to roll out the new sales tools globally here, can you talk a little bit about what you've seen so far in the U.S.? And then when you couple that with some of the newer energy efficiency products, et cetera, how are you thinking about potential share gains?

Sure. I'll take the first part of that and maybe let Mike comment on the second piece. I mean, we're very pleased with what we've seen in terms of the collaboration that our new sales tools drive. I think the benefits are in a few areas. One is it does make it easier for our commercial teams to get visibility as to sharing leads across the portfolio. As you've known for a while, we -- oftentimes, our businesses have served the same customers, but we haven't always glanced at those customers in a coordinated fashion. So the salesforce.com tool is certainly helping in that regard. I think it's also getting us more visibility to projects that are out there. So the combination of better visibility and improving our win rate is obviously a powerful combination. I think ultimately, over time, this is also about simplifying the lives of our sales teams and taking a lot of the administrative burden off of them. We are in the very, very early innings of that. So that's all opportunity in front of us to allow them to be able to spend even more time out in the field in front of customers. In terms of again rolling out new products, our vitality index is roughly around 20%. And that dipped down a little bit in the first quarter just by way of mix, but we do feel good about a number of the new products that we have that we've already rolled out and some others that we're going to be announcing here over the coming few months. And if you might add, Mike, on the...

Chip, I assume your question was in relation to the deployment of salesforce.com in terms of the shipping?

That's right..

Yes. So I think, when we look at things like the ecocirc that I talked about in my prepared remarks, we obviously are taking share in the European markets. And as we look at having a tool that enables, as Patrick said, our sales force to be able to communicate opportunities and execute on those, we think that, coupled with the energy-efficient proposition that we have in our products or that we're developing for our products, and given the climate we're dealing with with our customers in terms of trying to reduce costs, we think that's going to give us a very strong platform. As we've talked in the past, being able to outperform the market by 1 point or 2, that's going to be a key part of that equation.

Your next question comes from the line of Brent Thielman with D.A. Davidson. Brent Thielman - D.A. Davidson & Co., Research Division: You've had a few quarters now of strength in the commercial nonresidential product area and seems to be some momentum in that market. Is this a group that can be as meaningful as 20% or more of your sales mix, if the market gives you enough tailwind all else kind of generally equal in the other applications?

I don't think so. I mean, it's 13% of our revenue today. And when I think about the growth potential that we have, say, in industrial and even public utility growing at a moderate rate, it's going to be tough for it to surpass that. I mean, we had 9% growth in the first quarter, but as I indicated in my comments, we think that's going to moderate to kind of low to mid-single digits. Some of that is being driven by advanced stocking. But it is going to be a great part of the portfolio for sustained growth as that market continues through over the next several years. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then in terms of your guidance, are you expecting cost inflation to kind of stay a headwind throughout this year? It seems some of the movement in commodities last several months would help in that regard.

Yes. I mean, at this stage, we're calling it less than 2%. So relative to last year, we actually saw the starting decrement towards the end of last year. But relative to last year, it's actually a net benefit for us. It's also -- there's also a sizable component of wage inflation in it as well that needs to be addressed. And I think Patrick's comments earlier around the strategic sourcing organization, I mean, we are really driving hard to continue what we've already had a strong performance to more than offset that. So back to the earlier point, even if we do start to see some of the price downward pressure coupled with inflation, we're still confident that we can drive margin expansion in that environment.

Your next question come from the line of Brian Konigsberg with Vertical Research.

Question on restructuring. So you kept that at $20 million. Correct me if I'm wrong, I think that there was maybe, what, $17 million, $18 million that wasn't done in '14 that actually you're just doing in '15 and you added a couple of million more when you provided your initial outlook. I guess I was under the impression there that, that could become more aggressive. Can you just maybe talk about where that stands? Is there an opportunity to maybe kind of hit the gas pedal on that this year? And where those opportunities might be, if you could?

Sure, Brian. I mean, again, I -- we certainly announced that there remains a couple of hundred points of opportunity as a percent of revenue to reduce cost. You see that most notably in our G&A line, but there's also costs that are hidden within our gross margin infrastructure. I would say we're taking a very strategic approach, rather -- that's far more proactive rather than reactive, and it's actually tied in to our overall broader strategy. We will be sharing more details on what that plan would be as part of a multi-year, multi-faceted approach later this year at our Investor Day.

So not likely much more this year, is that takeaway?

Still reins open. We'll have more to share. We're in the late stages of developing those plans. As you saw, we announced a few months ago, we appointed Tony Milando as our Head of CI and Business Transformation. So Tony's working very closely with Mike, myself and the leadership team to finalize those plans.

Got it. And secondly, just on the guidance, maybe you could help a little bit with the bridge. So the performance in Q1, you gave a pretty fairly detailed guidance for Q2 and the full year operating profit. Just kind of looking at the revenue trends for the second half of the year, you're looking at down maybe $100 million-or-so at the midpoint, but you're looking for flat operating profit. Could you talk about what is layering in in the second half that's going to help buffer still a decent sizable revenue headwind?

Yes. So one of the items is actually where you started, which is the restructuring. So we ended up picking up about $6 million in first quarter, we'll probably get another $5 million in the second quarter. And then the balance of the $20 million is going to end up showing in the second half. So you're going to have elements of that as well as just the mix of the portfolio in the second half and our continued focus around making sure that we've got the discipline around sourcing and the lean deployment within the business.

[Operator Instructions] Your next question comes from the line of Robert Barry with Susquehanna Financial.

This is [indiscernible] on the call for Rob today. So my first question goes back to dewatering. So you mentioned oil and gas. I was wondering what was the performance in the other verticals, in particular mining, utility and construction.

Yes. So our dewatering business overall for the quarter was flat, and it was primarily obviously driven down by the performance in the oil and gas. So the balance of the portfolio was probably up around 4%, 5%.

Okay, great. So my second question regards more on the geographical basis. In Canada, the weakness that you saw in 1Q, how much of that would you say is related to direct and indirect input of oil and gas? And then in Europe, Europe was flat. And have you seen any improvement in Europe? Or is it too early to say?

Yes. It's on the Canada side, it is driven by oil and gas. We had a big distribution order last year that went into that particular segment. So we do anticipate having headwind through the rest of the year, but it was overtly pronounced in the first quarter. And as it relates to Europe, I mean at this stage, I would say things are progressing. I don't know that we're in a position right now to make a call other than what we've talked about the year being flat.

At this time, there are no further questions. I will now turn the floor back to Patrick Decker for any additional or closing remarks.

Great. Well, thanks again, everyone. Once again, as I said earlier, it's very early in the year, but I do feel that we're off to a very solid start. And I look forward to our next call in late July, where we will be updating you on our progress. So in the meantime, thank you again, and safe travel to everyone.