Xylem Inc. (XYL) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Xylem’s Second Quarter 2015 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to, Mr. Phil De Sousa, Vice President of Investor Relations.

Thank you, Brandie. Good morning everyone, and welcome to Xylem’s second quarter 2015 earnings conference call. With me today are Chief Executive Officer, Patrick Decker; and Interim Chief Financial Officer, Shashank Patel. They will provide their perspective on Xylem’s quarterly 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. For those participating in the Q&A, I’ll ask that you please keep to one question and a follow-up and then return to the queue so we will have enough time to ensure everyone the opportunity to ask a question. 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 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 August 13. Please note, the replay number is 1800-585-8367, and the conference ID is 74050051. 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 two. We will make some forward-looking statements on today’s call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to the future risks and – at 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 or events could differ materially from those anticipated. Now, please turn to slide three. Now I’ll turn the call over to our CEO, Patrick Decker.

Thanks, Phil, and thank you all for joining us today. We have a number of items to cover this morning but before we get started, I’d like to address the news regarding our Chief Financial Officer transition that we announced earlier this month. First, my sincere thanks to Mike Speetzen for his many contributions to the company over the past six years. As many of you know, he played a key role throughout the separation process from ITT, providing strong leadership for the financial organization as well as broadly across the business. We wish Mike and his family the very best as they transition to a great new opportunity at Polaris. I would also like to recognize and thank Shashank Patel, who is here with us this morning for quickly stepping into the role of CFO on an interim basis. With nearly two decades of experience at ITT and Xylem, Shashank has deep knowledge of our many businesses and is a highly respected finance and operational leader. He has been able to hit the ground running and help facilitate a smooth transition which is allowing us to proceed with a disciplined, thorough search for a permanent successor. Now let’s turn to the current market environment. Our second quarter results and finally our outlook for the balance of the year. The combination of our uniquely diversified portfolio along with strong execution, enabled us to deliver solid results in the second quarter. I am pleased with our team’s ability to perform well in a challenging environment, increasing long-term backlog, continuing to gain share, and taking cost actions to mitigate pricing pressures. In our Applied Water Systems business turned in another record operating margin performance. In addition, we are encouraged by what we’re seeing in key end markets. The commercial market for example generated solid growth over the first half of the year, and we anticipate growth to accelerate in public utility during the second half. However, market conditions do remain mixed. The industrial market broadly speaking is challenged. As we’ve noted previously, the significant downturn in the oil and gas sector, is shaving an unfavorable direct impact on our dewatering business. As that downturn has persisted, the impact has expanded to other industrial sectors that are currently served by dewatering. That said dewatering is a very attractive business with a compelling historical growth profile, but we currently are working through some near-term market challenges. Looking ahead, our focus remains centered on executing our long-term strategy and delivering on our commitments. I am confident that we’re well-positioned to weather the near-term headwinds and generate solid results within the range of expectations we previously announced. As you saw on our press release this morning, we have narrowed the range of our full-year outlook to reflect our latest view. Now let’s review our results. Orders in the quarter were up 1% organically against record bookings last year. We continue to build backlog, exiting the quarter with just over $800 million in projects. Notwithstanding that, we’re still primarily a book and term business. I am encouraged by the strong execution that resulted in an increase in our sequential backlog, shippable beyond this year by nearly 40% in the quarter. Let me highlight a few project examples. We recently won a $6 million rental contract for Godwin Pumps for the Panama Canal expansion project. As many of you know, the expansion project will double the Canal’s capacity and allow even larger vessels to utilize this waterway. Our dewatering pumps are being used to fill the new lock basins with nearly 2 billion gallons of water as part of a testing phase for this new system. This is a very complex application that needed tremendous technical expertise and the team will very quickly to meet the customers’ tight timeline. On our call last quarter, I discussed one of our innovative water reuse pilot projects in California where interesting water reuse continues to grow. This past quarter Xylem was commissioned to deliver a unique water reuse solution, Island Water Reclamation Plant in Los Angeles. Our advanced oxidation process from Wedeco will be used to ensure that the plant complies with California’s stringent groundwater recharge regulations for indirect potable reuse. Finally, an example in the Middle East. Ashghal, the Public Works Authority of Qatar has commissioned the construction of a new wastewater treatment plant in Al Dhakhira, northeast of the capital city of Doha, included in this plant will be a 56,200 cubic meter per day capacity water reuse facility. In addition to our flight pumps and mixers, our state-of-the-art reuse technology including products from Leopold, Sanitaire and Wedeco were selected for this new plant. We expect to deliver product for this project in both 2016 and early 2017. Shifting back to the second quarter results. Organic revenue growth in the quarter was 1%. We generated growth of 3% in our Applied Water segment including double-digit increases in China and Latin America as well as continued strength in the U.S. commercial building sector. The Water Infrastructure segment was flat for the quarter primarily due to a decline in our dewatering rental services business, which serves the U.S. and Canadian oil and gas market. We expect these oil and gas sector headwinds to continue, but we are working to minimize the overall impact in the near-term. For example, we currently are redeploying assets to regions where they can be utilized and at the same time help us to expand our international dewatering presence. Partially offsetting these near term challenges is growth in other key applications, including our water and wastewater pump business. We are capitalizing on our strong offering, and well-earned reputation to outgrow the underlying market and increase share. During the quarter, our business posted mid-single and double-digit growth in the U.S. and Europe respectively. Again, this is an encouraging indicator [Technical Difficulty] utility end market is stable and likely moving into an upward trend. Our adjusted operating margin was flat year-over-year, excluding the unfavorable impact from foreign exchange. The increase savings generated through continuous improvement actions preserve profitability, offsetting inflation and unfavorable mix resulting from the declines in dewatering rental services. During the quarter, our new centralized procurement team was able to leverage our global scale in key categories to drive nearly $20 million in cost savings. This team, which commenced late last year, is continuing to expand the universal spend categories that it targets, in order to reduce the consolidated Xylem spend. I’m very pleased with our contributions today. At the bottom-line, we delivered earnings per share of $0.43, up 2% year-over-year excluding the impact of foreign exchange translation. Considering the muted top-line growth and unfavorable mix, we were pleased with our team’s ability to deliver earnings in line with expectations for the quarter. And finally, we also improved free cash flow generation, up 21% year-over-year for the quarter. Now let’s turn to slide four. I’ll briefly summarize our outlook for 2015, and on the next slide, I’ll outline the changes relative to our previous guidance. We now anticipate 2015 organic revenue growth of 1% to 2% for the full year. Our adjusted operating margin is expected to grow in the range of 40 basis points to 60 basis points. We are narrowing the range of our adjusted earnings per share guidance to $1.82 to $1.87 for the full year. We now expect year-over-year EPS growth in the range of 4% to 7% excluding the year-over-year impact of foreign exchange translation. Finally, we’ll continue to execute a discipline approach to capital deployment, which is still expected a result in a 100% free cash flow conversion. With that, let’s turn to slide five, and I’ll provide some additional color on the outlook. We are reducing the top end of our full year revenue outlook by approximately one point of organic growth or $40 million. This reflects the incremental weakness in our dewatering business. While the dewatering rental declined then the oil and gas market generally remain in line with our previous expectations. We are seeing incremental unfavorable impacts on our distribution partners. This is a result of a weaker industrial CapEx market, as well as the prolonged oil and gas decline. We’ve also updated our pricing outlook. We now expect pricing to be flat for the year, which is down slightly from our previous expectations. In summary, organic revenue growth is now expected to be approximately 1% to 2% and as a result of the slightly stronger euro, total revenue in the range of $3.64 billion to $ 3.68 billion. From an earnings per share perspective, we’ve narrowed our guidance range to a $1.82 from $1.87. This reflects the change in revenue as well as unfavorable mix. We are diligently working to offset as much of these headwinds as possible and are driving for an incremental $0.07 of earnings from productivity actions. These actions, which include global procurement opportunities, further Lean deployment, and strategic cost management are currently underway. However, we expect to realize the majority of the benefits in the fourth quarter. Finally, we are also updating our second half guidance for foreign exchange translation of $0.02. As we look ahead to the second half, we are not counting on a significant uptick in the current macro environment. We are confidence in our ability to deliver modest growth as we navigate through challenging conditions in the industrial market. We intend to leverage that growth and execute on cost savings initiatives to deliver on our full year commitments. With that, let me now turn the call over to Shashank Patel to walk you through the results and full year guidance in more detail. Shashank?

Thanks, Patrick. Please turn to slide six. We generated revenues of $920 million, down $85 million from the prior year. The year-over-year decline reflects the anticipated foreign exchange translation headwind driven by a stronger U.S. dollar and the impact of our valves divestiture in the third quarter of 2014. Excluding those items, organic revenue increased 1%, slightly below our expectations and the outlook we provided during our last call of approximately 2%. From an end market perspective, commercial lead the way up 6% with public utility and agriculture up 2% and 1% respectively. Partially offsetting these gains were declines in the residential market of 2%. The industrial end market was flat year-over-year. From a regional perspective, we again saw strong growth in emerging markets, up 9% combined with 10% growth in Australia and modest growth in Western Europe, up 1%. This was mostly offset by declines in Canada and the U.S., which were down 16% and 2% respectively, primarily due to industrial oil and gas market headwinds. Operating margin was flat at 12% excluding the negative impact of foreign exchange translation. Once again despite headwinds in our largest end markets limiting our organic growth, we’re able to demonstrate our ability to execute cost management to maintain our operating margin. Focus on continuous improvement and restructuring savings, reduce cost by $32 million in the quarter and resulted in 350 basis point of margin expansion. Partially offsetting these reductions, where inflation cost, unfavorable sales mix and the impact from the divestiture of our valves business last year. Earnings per share, declined by $0.05 to $043, however excluding the foreign exchange translation headwind of $0.06, we grew EPS by 2%. Now let me cover each of our reporting segments. Please turn to slide seven. Water Infrastructure recorded orders of $585 million, slight organically. Here we saw the high-single digit growth in treatment and modest growth in water and wastewater pump applications, offset by weakness in our dewatering business. Book-to-bill was $1.06 in the quarter. We exited the quarter with total backlog of $614 million, up 9% on an organic basis. Of this amount, approximately 70% is due to be shipped this year with a balance of nearly $200 million expected to ship in 2016 and beyond. The revenue of $551 million was also flat year-over-year on an organic basis. From an application perspective, test and transport revenues were flat, while treatment was down 2%. Regionally, we generated most of our growth in the emerging markets, which are up 8%. Australia and Western Europe, both contributed approximately $3 million of growth or 11% and 1% respectively. However, declines in the U.S. and Canada, mostly offset our growth. To further summarize our revenue performance, I’d highlight international expansion of dewatering and test, drove growth in emerging markets like Latin America, India and China. In Western Europe, we saw broad-based demand for water and wastewater pumps, partially offset by a decline in treatment project deliveries in Spain and France. Australia was up double-digits, probably driven by strength in treatment, where we are benefiting from regulatory growth drivers around controlling sewer outflows and increasing wastewater recycling for reuse. Test was slight overall probably because of the timing of a multi-million dollar project shipment, which lifted to July. Lastly, we saw significant declines in the U.S. and Canada, derived from lower demand for oil and gas dewatering applications. Operating margin decreased 30 basis points from 13.1% to 12.8%, excluding a 30 basis point headwind from foreign exchange translation. Operating margins was negatively impacted by inflation and unfavorable mix, coupled with an increase in growth investments and pension costs. This was partially offset by cost reductions resulting from sourcing and lead initiatives, as well as $3 billion of restructuring savings. Let me now turn to slide eight and walk through our Applied Water. Applied Water recorded orders of $359 million, up 3% organically. The strength was headlined by commercial building services, as we continue to see recovery in the institutional building market in the United States. Additionally, we saw significant growth in the commercial sector and to a lesser extent in industrial within emerging markets. As a result, we entered the third quarter with a total backlog of $198 million, up 6% on a constant currency basis. Approximately 80% of this backlog is expected to ship this year. Revenue was $369 million, up 3% organically from the prior year. Building service applications were up 3%. Industrial water increased 3%, and irrigation grew 1%. Regionally, we generated growth in emerging markets and the U.S., which grew 13% and 1% respectively. Western Europe was slightly down overall for the quarter. To summarize further our revenue performance, I’d highlight, we continue to see growth in emerging market regions particularly Asia Pacific and Latin America as commercial and industrial markets continue to expand. Additionally, growth in building services was driven by strength in U.S. commercial up 6%, where we have seen distributors stocking due to the continued recovery in the institutional building sector. Irrigation increased slightly as strength in the U.S. and Latin America offset weak market conditions in Europe. Residential was down 2% globally from weakness in Europe and roughly flat performance in the U.S. Operating margin expanded 10 basis points from 14.7% to 14.8% year-over-year excluding FX translation headwinds. Margin improvement was driven by the favorable impact of cost reduction initiatives and volume leverage. These factors were partially offset by negative sales mix, inflation costs and the unfavorable impact of the valves divestiture. Now let’s turn to slide nine, where I will cover the company’s financial position. Xylem maintains a strong cash position with a balance of $600 million at the end of Q2. Our net debt-to-net capital ratio is a healthy 25%, and our commercial paper and revolving credit faculties remain in place and continue to be unutilized. We remain committed to our balanced capital deployment strategy, which is to maintain and grow the business while enhancing shareholder returns through dividends and share repurchases. During the second quarter, we invested $20 million into capital expenditures, and we returned $25 million to shareholders through dividends. We have approximately $60 million of additional potential repurchases under our authorized share repurchase program. Free cash flow was $64 million during Q2, which marks an improvement of $11 million from the prior year and primarily reflects improved working capital performance. With that said, please turn to slide 10, and I’ll cover our 2015 guidance. At the segment level, we expect Water Infrastructure revenue in the range of $2.2 billion to $2.3 billion, reflecting organic growth of 1% to 2%. And for Applied Water, we expect revenue of $1.4 billion, with organic revenue growth of 1% to 2%. Segment margins are anticipated to be in the range of 14.3% to 14.5%, and operating margins are projected to be in the range of 13.0% to 13.2%, reflecting margin expansion of 40 to 60 basis points, excluding the impact of foreign exchange translation. At the bottom-line, we anticipate earnings per share of $1.82 to $1.87, excluding restructuring and realignment costs of $20 million. As Patrick noted earlier, we have narrowed our full-year outlook to reflect a slightly lower organic growth and unfavorable mix partially offset by an increase in productivity and cost savings. Additionally, we have also updated the projected impact from foreign exchange translation. As noted on the slide, we expect EPS growth of 4% to 7%, excluding the negative impact of foreign exchange translation. As mentioned earlier, we are driving to 100% free cash flow conversion of net income, and this takes into consideration expected CapEx in the range of $120 million to $130 million. We expect return on invested capital to remain at approximately 11%. Excluding the anticipated impact of foreign exchange translation, we would expect approximately 50 basis points of improvements in 2015. Our operating tax rate is still expected to be 21%, approximately 1% higher than 2014 given the expected mix in regional revenue. Lastly, fully diluted share count is expected to be 183 million. Turning to slide 11, we have provided for you a summary of our first half performance by end market along with our current full-year outlook which, as you can see, has been adjusted to reflect current end market conditions and anticipated trends. In summary, Industrial, which represents 44% of our total revenue, is expected to be flat year-over-year versus our previous expectation of low single digit growth. Our current full year outlook reflects our first half performance and lower general industrial growth assumption over the second half of the year. The public utility sector, which constitutes 33% of our total revenue is anticipated to grow at low single-digit to mid-single-digit rate. Here we have increased our outlook, to reflect our first half performance, solid backlog in our water waste water transport pump division, and encouraging signs of improving market conditions in the U.S. For the Commercial market, our full year outlook remains unchanged. With growth expected to be in the low single-digit to mid-single-digit range. Again, the U.S. market appears to be improving, and we continue to anticipate strength in the emerging markets. We do expect growth to moderate over the balance of the year, given the restocking activity we saw over the last nine months. Conditions in Europe remains soft, but we continue to expect that new products will drive growth over the second half. We now project the residential end market to be flat, reflecting our first half performance and expected stable U.S. market conditions. Previously, we had anticipated a low single-digit decline. Finally, our smallest sector, Agriculture, will likely be down low single-digits for the year. Strength in the western U.S. region driven primarily by continuing drought conditions is expected to be more than offset by unfavorable flooding impacts in Texas and other parts of Central U.S. It is also important to note that we face very difficult year-over-year comparisons in this market segment as well as weak European market conditions. Turning to slide 12. Given the continued focus on foreign exchange and expected incremental headwinds, we thought it would be appropriate to revisit the information we covered last quarter. So first, let’s begin by discussing Xylem’s foreign exchange transaction exposure. This is true economic exposure and as such we have a place – we had in place a comprehensive hedging program that substantially mitigates our overall transaction exposure. Our strategy is to proactively hedge and mitigate up to 75% of net cash flows for our seventh largest currency pair exposures. We do this on a rolling 12-month basis. Furthermore, we hedged the monthly mark-to-market exposure on our balance sheet, and all of our hedging activity utilizes forward instruments. Finally, as it relates to foreign currency transaction exposure, I would highlight that any residual impact not offset by our hedging program is reflected in our underlying operational performance. Now let me address foreign currency translation exposure, which is the impact resulting from translating financial statements of foreign entities back into U.S. dollars for financial reporting purposes. Given the nature of this exposure and the anticipated impact on our financial results in 2015, we will continue to isolate the impact, so you will be able to better judge the operational performance of our company and progress against strategic initiatives. The table illustrates the top-five currency exposure for Xylem. It provides you with the average exchange rate for each currency last year and the rate assumed in our previous guidance as well as the average rate during the first-half. Perhaps most importantly, because FX rates have continued to significantly fluctuate. We have also included the rates we assumed in our guidance update. Similar to last quarter, the table includes the full year expected impacts on revenue and operating income. To summarize, based on the rate assumptions used for our guidance update, full year revenue will be negatively impacted by approximately $300 million, and operating income by approximately $54 million, which will result in $0.23 of EPS headwind. As you can from this the slide, we already saw revenue negatively impacted by $162 million and operating income by $25 million over the first half. And we expect second half results to be negatively impacted by $138 million on the top line and $29 million for operating income. As Patrick highlighted earlier, we are reflecting the recent strengthening of the euro in our forecast. This benefit is reflected in both our second quarter performance and the outlook for the balance of the year. We will continue to provide quarterly updates with full transparency. Turning to slide 13, I’ll provide some color with regards to our expectations for the second half. I’d like to spend a minute calibrating everyone on the call around what we expect our revenue and operating income profile to be over the balance of 2015. I’ll begin with some comments around our shippable backlog. Of the total $812 million in backlog, $573 million of shippable in the second half of the year, and the remaining $229 million as expected to ship in 2016 or thereafter. Third quarter shippable backlog is approximately $405 million and that represents approximately 45% of our expected third quarter revenue, and its consistent with what we had last year. So we still have a lot of book and term business to secure and deliver in the quarter. As per revenue growth, we expect second half organic revenue to be approximately 1% to 2%. We see the second half profile similar to years past, down sequentially in the third quarter with a ramp up in the fourth quarter. More specifically, we expect revenue to decline in Q3 approximately 3% sequentially from the second quarter reflecting the impact of European seasonality in July and August. On a year-over-year basis, we expect third quarter organic growth of approximately 1% to be more than offset by foreign exchange impact of approximately $80 million. We expect sequential operating income performance in the second half to be driven by volume and incremental cost improvements in areas such as global souring, lien, and strategic cost management. Second half sequential incremental margin is expected to be approximately 56%, lower than last year’s sequential performance primarily reflecting unfavorable mix. As for the third quarter, we anticipate margin declines of approximately 20 basis points year-over-year including FX translation. By segment, we expect the sequential margin improvement to be more pronounced in Water Infrastructure than in Applied Water. Finally, we expect full year corporate expense of approximately $50 million. With that said, please turn to slide 14, and let me hand the call back over to Patrick for some closing comments. Patrick?

Thanks, Shashank. As we move past the midpoint of the year, I’m pleased with the progress the team has made, particularly in terms of their continued focused execution. While we are weathering some near term market challenges, several areas of the business have delivered solid growth. Importantly, we continue to advance our strategic agenda. And I look forward to updating you in more detail on that agenda at our upcoming Investor Day. As a reminder, it will take place on Thursday, September 24, in New York City. At that time, we plan to outline our long-term growth strategy, which will include organic and inorganic growth plans, our continuous improvement agenda, as well as our capital deployment framework to drive shareholder value. It will also be an opportunity for you to engage directly with my leadership team. We will share more details on the agenda in last August. And, now operator, we can begin the Q&A session.

The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from Deane Dray of RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Deane.

Good morning.

I was hoping, we could start on the comments on muni, and it’s been a while since there has been some positive comments about growth and rebounds and so, take us through first geographically, the European municipal buyers versus the U.S. and address where the pickup is coming? Is it from break in fix MRO or are there any projects getting released?

Thanks, Deane, yeah. So, let me give some overall commentary here. I would say, it’s a combination of both in terms of break in fix as well as some project activity there, that we see rebounding. When you take a look at what we’ve seen thus far, we’ve looked at about 2% growth in muni in the second quarter, about 2% to the first half of the year. We are seeing an acceleration in that area. We expect the second half of the year to be up mid-single-digits. And so we are seeing some acceleration there. It’s being driven primarily by both treatment and transport predominantly in the U.S., but I would say also as well as Europe, but Europe to a lesser extent than the U.S.

Are you actually seeing projects getting released?

It’s a combination, but yes, we are seeing – we are seeing projects are getting released, again, it’s still a bit slow, but we also have seen an increase in the quoting activity as well as in our win rate on that quotes.

And Deane, this is Shashank, and just add to the on the pump side from our transport division in the second quarter, we’re up 6%, for the half, we’re up 4% and that’s where we see strength in the second-half of the year as well.

Understood. And this is the second question to, maybe you can expand on the expectations regarding pricing, it doesn’t sound like it’s a big headwind, but directionally it looks like it’s gotten a little bit tougher for you. And maybe if you can parse out what the pricing environment is like on OVE versus your aftermarket business?

Sure. Good question, Deane. So, I would say first of all, you know through the first-half of the year and continuing through the second quarter and we expect this continue through the rest of the year. Pricing has is pretty been neutral. We had previously expected it be up about 30 basis points, 40 basis points, and right now, we’re seeing that being neutral across the businesses, but an aggregated number. When you take a look at the individual pieces of the portfolio. I would say we are beginning to see the supply demand mix work in our favor over time on the muni side of the equation. We haven’t seen that fully come to realization yet, but we expect that to be the case more in 2016 and beyond. As we see increase in demand, where we’ve seen the most pressure from a pricing standpoint has been predominantly in Applied Water and that’s in the well pump business, there where again it’s a soft market, tough competition. And so, we are taking a very disciplined strategic approach in that area. Obviously, we’re also working to put that pressure back on our suppliers by being more aggressive on the sourcing side. So we can mitigate any of that that pricing pressure that we’re seeing.

Thanks. And just, hopefully he’s listening, I wanted to wish Mike Speetzen the best and we’ll really miss him.

Absolutely. I’m sure he is listening.

Thanks, Deane.

Thanks, Deane.

Our next question comes from the line of Nathan Jones of Stifel.

Good morning, everyone.

Good morning.

If we could just start on the commercial side there. You had first half plus 8%, you’re looking at low-to-mid singles for the full year, which would kind of imply pretty wide range of down low-singles to up mid-singles in the second half. I know you’ve talked a little bit about distributor stocking in the first half and destocking in the second half. If you could just give us a little bit more color around the slowdown in the commercial in the second half, and how much of that is destocking versus end market slowdown?

Yeah. This is gigantic that one. We actually saw a growth in the first half of 7% and there was – just give you destocking in the first half, primarily in the U.S. as well as we have strength in China. China was up in the high-teens. And what we expect in the second half, specifically in the U.S. a little bit of destocking going on as well as slower growth in China in the second half, driving to our – we’re calling it low-single digit growth in the second half versus the plus 7% we saw in the first half. I will say that we are quite encouraged by what we see happening in the commercial building sector. As you know, we’re heavily weighted towards the institutional side of that market. And we are seeing a continued recovery in that space.

Okay. Then on the overall margin guidance for the company, it’s gone from 13.2% midpoint to a 13.1% midpoint. You said you had expected 30 basis points to 40 basis points in price that’s now neutral. Is a couple of million dollars lower expectation of restructuring savings? Can you talk about where the offset on the positive side is coming from to those two negative things?

Sure, yeah. So, couple of areas. First of all, we have really been driving the global source and global procurement and productivity effort here quite aggressively, and we’ve seen – we’ve seen an uptick in that progress, so that’s certainly helping us out here. Obviously, we also saw some uptick as we talked about in the area of commercial and public utilities, and those tend to be good margin businesses for us and so that’s help mitigate. The biggest single driver, of our margin outlook for the balance of the year, really is driven by industrial being weaker than expected, and that’s just given the very high margin nature of our dewatering rental business. And so, that’s really what’s driving predominately that downtick. But we’re trying to more than offset that as much as possible through other productivity efforts. And just another note on that is. Realizing that we were in competitive markets as well as tough markets industrially as well as dewatering mix impact. We have taken a more – we always take good approach in cost management but we’ve also focused more on the cost management side, to help with all the other productivity that we work on.

All, right. Thanks very much guys.

Thank you.

Thanks, Nathan.

Your next question comes from the line of Ryan Connors with Boenning & Scattergood.

Great, thank you. Yeah, I wanted to talk a little bit, hello. Wanted to talk a little bit about the Europe side. You noted stronger growth in I guess, industrial applications in the slide deck in Europe. I assume that some of the new products on the HVAC side that might be driving that, but if you could just expand on the drivers behind that strength in European industrial?

Yeah, actually on the HVAC side, we did have significant product launches last year, as well as this year. So, we’ve seen some of the benefit of that for in the first-half of the year, and we expect to see the some additional products that will be launched in the Q3 time period of this year. So we expect to see continued strength from them – primarily driven by product launches.

And Ryan, this is Phil. Just we also saw an uptick in the quarter, particularly from our wastewater pump division, and Patrick’s comments earlier I think with regard to the public utility market, and we did actually see strength there as well. But the industrial wastewater pump market also was up quite significantly in the second quarter. Q – RyanConnors: Okay. And then that, I mean, that, will that pipeline of new products continue to be refilled as we move into the balance of 2015 and into 2016, or will we kind of start to anniversary some of those and hit some tougher compares?

Yeah, so good question, Ryan. First of all, we definitely will continue to see an uptick in the amount of new product launches. Obviously, we need to manage that in terms of, we don’t want to overload our sales teams with too many new products, but there is quite a bit in the hopper right now that we’re quite excited about. And we’ll be walking you guys through at Investor Day. Some of those exciting launches, and some of the key focus areas that we’re targeting, but the short answer is, yes, we will continue to see new products be a very integral part and critical part to our growth strategy. And when you look at our vitality index, it’s up to 18%. So this is something we’ve been working on for the last two years or three years, and it – continues to tick upwards. So that continues to be in focus, and our goal is to continue growing that, so the pipeline will continue.

Okay. And then, this is kind of a tough one to answer, I realize, and I know we’re e going to hear more about this at the Analyst Day. But if you could just kind of qualitatively discuss for us, Patrick, your initial thoughts on kind of 2016 top-line, I mean, there is so many moving parts we have, I guess, the 4x headwind will annualize and kind of go away on a translation basis and we’ve got the different end markets. And what’s your kind of your thought process about how 2016 will shape up relative to the company’s longer term top line growth goals?

Sure. So, yeah, as you said – obviously we’ll give more color at Investor Day and it’s a little early for us to predict given somewhat of the short cycle nature of the business here, but let me speak at a top level. I’m very encouraged by what we’re seeing particularly on the public utilities and the commercial side of the equation. And the fact that you’re looking at a sizeable increase in our backlog and shippable in 2016 and beyond. Again, we’ve seen more than a 50% growth in that in a total company wide basis. So that’s quite encouraging. I would say, so looking at from that perspective that all net-net is positive and probably positive up versus what I’d have been thinking previously. Having said that, the one big unknown that we’ve got obviously is how long this oil and gas weakness is going to continue and given the impact that has on our dewatering business, which is such a high margin business for us. So that’s really in my view the biggest wildcard right now, but everything else in net-net, I’m feeling more encouraged.

Okay. So I guess if we look at the long-term growth goals of the companies, turnout there in the past, would it be safe to say 2016 has given us some puts and takes, but it’s more or less kind of a normal year, right. It means, you’ve got some nice drivers and a few offsets.

That’s correct.

Okay. Well, great thanks for your time this morning.

Thank you.

Thanks, Brian.

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

Good morning. Thank you for taking the call.

Sure, good morning.

Good morning.

Just a couple of quick ones. One, following up on the procurement initiatives, I mean can you quantify how much of the spend as a percentage of total spend is left to target and what you’re expectations are in terms of the dollar amount of savings left and maybe the big buckets if you could?

Yeah, I’ll start surely giving specific numbers here today and we certainly will be in a position to kind of layout what that overall target opportunity is and certainly at investor day, this is a multi-year journey that we’re on and we have obviously being going after the biggest spin categories and the most obvious spin categories things like castings for example and so I would say most of our progress thus far has been in those direct spin categories. There is still plenty of room for us to move there and certainly as we see growth in volume as we look into the out years just that increased level of volume and spend will continue to refresh and give us an opportunity to drive become savings there. Obviously indirect spend in some of the other categories of spending are areas that are still very rich and fertile for us to go after. But again, we’ll talk more about that in detail at investor day.

Can you just maybe bracket a ballpark about how much spend was left to go after?

I would say that on the direct spend which we’ve been working on for many years we’ve captured most of that. On the indirect spend category where we had a big effort starting about 12 months to 18 months ago, there I think is where the biggest opportunity is, as far as the percentage, I’m not exactly sure but I think we have probably targeted at least 50%, 75% of the indirect spend categories. So there’s still, as Patrick said, there’s still more opportunity for that. Yeah, this is a multi-year journey and effort. So the buckets evolved, the level of spinning evolves and so, I’ll stop short of talking about a specific number or a percentage right now, but again we can get into that more depth on Investor Day.

Okay. I appreciate and I certainly understand. And maybe if I could one more, kind of on a big picture item is the cash flow is great for the quarter. You seem a little timid on the share buyback and maybe you can articulate for us what you’re thinking about that?

Sure. Yeah. So, share repo, it continues to be one of the elements of our capital deployment framework. It will continue to be an important element of our capital deployment framework. Obviously, beyond offsetting dilutive impacts from equity grants, we do view repurchases as an opportunistic lever to return capital back to shareholders. Again, we’re going to update you in terms of what our outlook and what our plans are for that Analyst Day as well, but you can rest assure it will continue to be an important element of our framework.

Okay, great. Thank you and I look forward to hearing more from you.

Thank you.

Your next question comes from Joseph Giordano of Cowen & Company.

Hey, guys. This is Tristan Margot for Joe today.

Good morning.

Good morning. Just a couple of quick ones here, most of my questions have been answered, but could you give us a breakdown of the organic order growth that you have by region and by end markets?

Hi, Tristan. This is Phil. That information we don’t typically provide, but if we get a sense, just as a reminder, the Applied Water division is very much so a book and ship business and so you can pretty much approximate the same to a geographic profile – application profile as the revenue organic profile – organic growth that we highlighted earlier today. As far as the organic order growth for Water Infrastructure, perhaps I’ll just leave you with a thought process so that we are seeing an uptick in orders on the treatment side, both the U.S., Europe, and we continue to see – if you had continued healthy growth on the emerging market side.

All right, great, thank you. And then, just a quick one on oil and gas, I know, you’ve highlighted, I think 40% decline in the second half.

Yeah.

What are you seeing currently in oil and gas? Is it how we flatten out here or, or what are your expectation or what do you see right now?

Sure. Yeah, so, the 40% decline that we talked about previously is in still line with our latest outlook and expectations as we talked about in our prepared comments. What you’re saying here in terms of us talking about further weakness there is really more of a broader industrial knock-on effect and the impact that has on some of our distribution partners. So our outlook remains unchanged, again 40% down year-over-year. In terms of whether that’s the bottom, I mean, it’s certainly we hope it’s still bottom, it feels like it’s the bottom. But I [indiscernible] anyone to make that projection just yet. So that’s why we’re taking a cautious approach here.

Okay. Great. Thank you for taking the questions guys.

Sure, thank you.

Thanks, Rose.

Your next question comes from the line of Scott Davis from Barclays.

Hi, good morning guys.

Good morning

Good morning.

I wanted to get some clarity on where you’re spending capital, where you think there is, where do you think there is growth in and what kind of projects and things you’re spending money on, whether it be adding capacity versus productivity and things like that?

Sure. Yeah, so from an overall capital perspective, I would say – and I’ll talk about this both in terms of true CapEx versus where we’re directing maybe our ongoing expense focuses well. Certainly we see the opportunity we’re executing on that in terms of investing more in a few of our critical emerging markets. And so again building some extra capacity in China to support the growth in demand there as well as certainly in the Middle East. We’ve approved an expansion there that I’d talked about it a little bit briefly in the last earnings call and that will be localizing our assembly in test capabilities and adding some additional feet on the street. We’ve been investing as a priority more in R&D to again drive our new product development pipeline, and again we’re quite encouraged by some of the opportunities there. And then I would say third, probably not big news if you are on the phone, simplifying our IT environment and reducing the number of systems that we’ve got and investing more in the IT implementations to support the frontend of the business is the third area, I would say a priority from a capital perspective.

It sounds good. Fair answer. And then I don’t know how you can comment on this, but I’m curious to hear your thoughts at least on pain there and trying on it at least the concept of consolidating the industry. I mean how easy to approach from these angles, since you could probably tell me [indiscernible] your comment, but – I mean how easy is it to consolidate this industry? And how – how much consolidation do we need to see? I mean when I think about flow in general, it is one of the most fragmented of the sectors that we. Industrial analysts are covering, there’s probably 25 players out there. I mean we’ve got number of verticals that are consolidated down to a four or five major global players. I mean what do you – how do you think about this industry and how it stacks up in the next several years, and what kind of consolidation we might see and how easy this to consolidators, and just...?

Sure.

It does look easy from the outside, but when you really dig in, it’s – their channel conflicts and all of kinds of other issues that have to navigate that makes a less interesting?

Sure. Well, I may be pleased to hear this, because I won’t say, no comment. But obviously, as a general practice, we don’t comment on speculation or on others kind of move. But obviously being a flow control veteran and bound to space for a number of years, I think it is easier [indiscernible] . Having said that, it’s till fragmented and there are opportunities to consolidate in the space. There is more complexity behind that that meets the eye for many of the reasons that you pointed out. And so in terms of predicting what will happen, what could happen, I wouldn’t go further than that to speculate. Again, we remained focused on our strategy, and executing what we’re going to do. Obviously, deployment of capital towards M&A is going to be a very meaningful part of that. We’ll be sharing a bit more about that in terms of areas that are particularly interesting to us at Investor Day, and that will be a richer dialog at that point, Scott.

Okay. And then just last question. I mean when times are tough like this, we normally see market share shifts go back to the best players or the strongest players. Most of all, capitalized has been most cost supplier, producers in the scale, and [indiscernible]. It’s difficult for us to get external validation, but do you feel like you’re gaining share, there’s a feel like you are outperforming your pump industries?

I am always cognizant Scott not to get too far ahead of my [indiscernible] , in terms of talking about share, but the bottom-line is, I’m very pleased by what I’ve seen through the first half of the year. When you take a look at our growth rates in our key end markets relative to what the underlying end market growth is, I think you see that most prominently, and again our pump business, you also see that I think to a meaningful extent in a number of our business, including treatment. But it’s – it’s too early to kind of declare that. It’s still a tough market. We’re – we’re using all the levers that we have at our disposal. But it does feel quite encouraging on behalf of the team right now. But again, we still got a lot of work to do to make this sustainable.

Okay. Fair enough. Good luck, guys. Thank you.

Okay, thank you.

Thank you, Scott.

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

Good morning. Thanks.

Good morning, Chip.

Just wanted to follow-up on the rental biz a bit. Do you think headwinds bottom out here in the second half as some of those idle assets get redeployed or where do you think we stand in that process, maybe if you have some historical context?

Sure. Yeah, so we’ve – the team – I’ve been very pleased with what the team has done in proactively addressing this and we do expect to see benefits of the redeployment of a large number of our pumps to put them out for rent in some of the international markets. And so I think we are looking at this as a silver lining on the situation, because it does help us accelerate building out that international business. That takes time to get the pumps there to get them in place and ready to rent, and then obviously you’ve got to create demand. But we’re quite encouraged and optimistic about the opportunities there. That certainly will help us as we go into 2016 as well. Certainly, in terms of – do we think it’s the bottom, do we think it gets better from here. As I mentioned earlier, that’s hard to predict. I mean it feels like it. I think the team is optimistic that it is the bottom at this point in time. What I feel good though about is the again -the approach the team’s taken. And I do think that will help buffer relative to some of the other players in the marketplace.

And this is Phil. I just add. It’s not that we want to exclude obviously portions of the business from our results because it’s now already behind the diversified portfolio. But if you did take aside the oil and gas related say, deep water and rental branches out of the equation. We’re seeing very solid growth, in all the other branches, and I think that plays into the diversified application expertise of our Godwin business here in the U.S. and more broadly speaking across the globe.

Okay. That’s helpful. Thanks, folks.

Thank you.

So our next question comes from Brian Konigsberg of Vertical Research.

Good morning.

Good morning, Brian.

Good morning, Brian.

Hey, guys. Hey, couple of quick questions. On the – just the adjusted guide for the year, the productivity number of $0.07 just seems like, it’s decently large. I know you guys put in place, spending curtailments late in 2013 as well, which seem to yield pretty good benefit. Has the belted loosened over the course of 2014, and now you’re bringing that back down, are you finding more opportunities? And maybe a little bit more color on that bucket would be great?

Sure. Yeah, I would say, the bell is absolutely not loosen. I think, the – it is an issue of just continuing to apply good disciplined cost management and in constrain, as well as identifying further opportunities for cost reduction efforts. As well as we talked about, just the acceleration in our global procurement capabilities as well. As you’ve heard us probably say before I do think that the large majority of the opportunities that had been done thus far have been happening within the individual business units themselves. And to some extent, the function, the opportunity going forward here as we talk about the opportunity to simplify the company further, is really looking at things horizontally, from a company perspective, and as opposed to just within the unit themselves. Those are harder to get out, but that’s say a big part of the, what I’d call the self-help story in terms of margin expansion. The other point I note is from a productivity standpoint. Historically, the second half is stronger than the first half. And that’s just leveraging the incremental volume, we have that helps productivity as well as the whole fixed overhead cost issue. So if you look at even 2014 second half to first half, we had an improvement of almost $0.06 in productivity. So $0.07 is kind of in line with that with the additional actions, we’ve taken and the global procurement effort, we are accelerating this year.

Okay. But just to be clear that $0.07 when you build up from previous guidance to the new guidance that $0.07 incremental versus what you’ve planned as of say to the first quarter, is that correct? And is that mostly coming from procurement or is it mostly coming from discretionary spend that you’re able to cut back on?

It’s primarily coming from procurement.

Okay.

And Brian, one element just to highlight, we’ve got some of that benefit already here in Q2. And so as you kind of think as we are trying to offset some of these unfavorable mix and we’re certainly ramping up the GSS activities, given the deflationary environment. We want to go back and certainly first half, with some of our suppliers, expecting of course that they will take some time to get a little bit of acceleration. So you should see more of that benefit come in to the fourth quarter.

Okay. Got it. Yeah. And maybe you just touched on inflation and deflation. I mean, do you anticipate you’re going to start to see some deflationary benefits in the second half of the year just from commodity prices coming down? I know you’re pushing down [indiscernible] itself, but just kind of raw materials, you’re purchasing. Does that become additive to you versus the previous guidance? And is it baked into the numbers?

It’s baked into the numbers. And you’re right that will help in the second half.

That will be in the second half. Okay.

Yes.

If I could just sneak one more in. Just on the oil and gas part, so there’s been a lot of discussion about U.S. drillers kind of approaching, I guess the market with refracing, rather than just natural fracing. Does – is that present the same type of opportunity for your transport dewatering business, as it would for I guess a normal state of drilling?

It would be – we would largely be indifferent to that. So it would still be the same level of activity to be managed.

Okay, all right. Thank you.

Thank you.

Your next question comes from the line of Brent Thielman of Davidson.

Thanks. Just one more question. On the dewatering business, you have some headwinds in areas like mining and oil and gas. Can you remind me, how much these sort of commodity sectors represent as a portion of business?

Yeah, so oil and gas is about, again oil and gas mining, that whole commodity play is about 15% of our dewatering revenue.

Okay.

And Brent, this is Phil. I just want, it’s 15%, [ph] how much worth, its 15% each.

Between mining and oil and gas?

Correct. So the total combined make-up approximately call it 30% to 35% of the dewatering profile.

Great. Thank you.

Sure.

Your next question comes from the line of Robert Barry of Susquehanna.

Hey guys. Good margining. Thanks for taking my question.

Good morning.

Good morning.

I was wondering if you could unpack the industrial outlook a little bit, I guess especially on the Applied side. It sounds like it’s more than just oil and gas and mining getting worse. And I know you have very broad exposure within what you call industrial in Applied?

Yeah, I would say that, you’re right. Its primary oil and gas and mining, but then there is a whole bunch of other segments that get impacted by industrial, it’s the all other industrial category. And there, obviously, we just like the rest of the business in Applied Water, we were soft in the first half. In the second half, we actually have some projects that are shipping in the second half. So when you look at the second half versus the first half, first half was negative 1. Second half is projecting low single-digits. It’s held by the backlog that’s in there rather than improving market conditions in industrial.

So whenever you see – the outlook is lower because industrial is weaker, and it sounds like you kept the oil and gas decline the same, and all the nine oil and gas and mining stuff actually looks better in the back half. So, is this incremental weakness kind of absorbed already or are things actually worse out?

No, sorry. It’s absorbed. I mean it’s absorbed in the revised guidance now that we’re giving you. And the way that you’ve read it is absolutely right. What we saw deteriorating further was in the oil and gas mining piece, again predominantly in dewatering. We did see some weakness through the first half in Applied Water on that broader industrial piece, but to Shashank’s comment, when you take a look at the second half of the year based on very specific projects and backlog and demand mainly in the Applied Water business, we expect a more positive outlook for the second half. When you bring all that together, it still ends up being flattish.

Got you, got you. And then maybe just a quickly, I wanted to clarify on the restructuring, and if you said this already, just tell me and I’ll read the transcript, but it looks like the carryover savings are lower now from 2014, I think 2015 versus it was $18 million. Did you talk about why that’s lower?

Robert, that’s right. So I think the key point to bear in mind here, and perhaps, we could probably made this a little bit clear in our prepared remarks or in original Q&A. But the expected carryover savings this year is a bit lower, but you should expect the balance that $2 million, to $3 million that has essentially been reduced here. We’ll see that early part of next year, it’s more of a timing shift if you would in terms of when we’ll actually realize some of those year-over-year savings. We have one specific project that’s included in and it’s been delayed but it’s still on the docket, and will be executed by early 2016.

I see. Okay, thank you.

Thanks, Robert.

Thank you.

Thank you, there are no further questions at this time. I would now like to turn the floor back over to Patrick Decker for any additional or closing comments.

Sure. Well, thank you. Thanks, everybody again for joining us this morning, I appreciate your continued interest. We look forward to seeing you all at our Investor Day again September 24 in New York City. Between now and then, safe travels to all, have a good summer and we look forward to seeing you then. Thank you.