Xylem Management Discusses Q2 2012 Results - Earnings Call Transcript

Xylem (XYL)

Q2 2012 Earnings Call

August 02, 2012 9:00 am ET

Executives

Phil De Sousa

Gretchen W. McClain - Chief Executive Officer, President and Director

Michael T. Speetzen - Chief Financial Officer and Senior Vice President

Analysts

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Chip Moore - Canaccord Genuity, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Kevin R. Maczka - BB&T Capital Markets, Research Division

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

James Krapfel - Morningstar Inc., Research Division

Stewart Scharf - S&P Equity Research

Presentation

Operator

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

Phil De Sousa

Thank you, Brandi. Good morning, everyone, and welcome to Xylem's Second Quarter 2012 Earnings Conference Call. With me today are Chief Executive Officer, Gretchen McClain; and our Chief Financial Officer, Michael Speetzen. They will provide their perspective on Xylem's second quarter results and full year 2012 outlook and, of course, we will allow for time to address your questions at the end. This call and our webcast are accompanied by a slide presentation available in the Investor section of our website at www.xyleminc.com. A replay of today's call will be available until August 9 at 6:00 p.m. The replay number is (404) 537-3406 and the confirmation code is 93016589. Additionally, the call will be available for playback via the Investor section of our website, under the heading Presentations. Please note that all references today will be on an adjusted basis, unless otherwise indicated. Non-GAAP financials are reconciled for you in the appendix section of the presentation.

Now please turn to Slide 2. We will make some forward-looking statements on today's call, including references to its future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those outlined in Xylem's annual report on Form 10-K and those described in subsequent reports as filed with the SEC. These remarks constitute forward-looking statements for purposes of the Safe Harbor provision and are made out as of today. Please note that the company undertakes no obligation to update publicly, such statements to reflect subsequent events or circumstances, and actual results could differ materially from those anticipated.

So with that, please turn to Slide 3, and I'll turn the call over to our CEO, Gretchen McClain.

Gretchen W. McClain

Thank you, Phil. Good morning, everyone, and thank you for joining the call. We appreciate your interest in Xylem. I'll begin the call by providing you an update of our overall financial results for second quarter, then a few minutes updating on the progress we've made on our strategic objective and provide my perspective on our first half revenue performance and our full year outlook. I will also discuss the actions we're taking to address the continued economic uncertainty and positions us future growth. I'll then hand it over to Mike to walk through the details of our quarterly performance on our full year guidance.

Today, we're reporting second quarter revenue of $966 million, reflecting growth of 4% on a constant currency basis. Organic growth was 1%, with acquisitions adding another 3%. While overall revenue were below our expectations for the quarter, our performance was on top of strong growth last year and in a more challenging environment. In Europe, where overall economic growth is negative, our revenues, on a constant currency basis, were down a modest 1%. And our continued focus an attractive acquisitions is helping us to drive top line growth. YSI added $32 million in revenue in the quarter and continued to outperform our expectations.

On a year-over-year basis, YSI is up approximately 11%. We received orders of $970 million, up 2% in constant currency, resulting in a book-to-bill ratio of 1.0. During the quarter, we won some key public utility and industrial transport and treatment projects that spread across the U.S., Europe and emerging markets, which will ship in 2013.

Let me highlight that in the second quarter, we registered our highest order rate in treatment projects since the first quarter 2011. This is a positive sign for next year and we're encouraged by the number of projects still in the funnel. As I mentioned last quarter, good activity for capital projects has continued to increase, but release of orders continued to be slower than anticipated.

A key focus for us has been margin expansion. Despite the lower demand, we continue to reach higher levels of profitability. This performance demonstrates the result of years in disciplined execution, a focused growth strategy and processes put in place to drive price and reduce operating costs. We will cover these details later on the call, but for now, I'd simply note that for the quarter, gross margin was 39.6%, up 60 basis points versus last year and fast approaching the long-term target we set out at our Investor Day.

Operating margin was 14.8%, up 100 basis points, excluding the impact of recurring standalone costs. Earnings per share were $0.49, up 4% on a comparable or normalized year-over-year basis. Core operations and YSI performance drove earnings up 13%, giving us confidence that we can continue to deliver fundamental growth in a tough environment. The negative impact of foreign exchange, 9 points off that growth rate, bringing it down to the 4% you see on the slide. We've generated year-to-date free cash flow of $86 million, which represents 54% conversion of net income and is consistent with our seasonal performance.

Please turn to Slide 4. As we laid out in our October Investor Day, we have 3 key focus areas in 2012. Advancing our strategic position, deploying innovative new product applications and services, and continued strong execution. We continue to make good progress in advancing these priorities, and this slide highlights just a few of these accomplishments. On July 13, we announced another important step in advancing our strategic position with our first Xylem acquisition, MJK Automation. MJK's strong position in the Scandinavian market and their flow in level-centric technology and expertise, enhances our analytical instrumentation platform and provides energy-saving measurement and control equipment. MJK is another example of a perfect bolt-on for our Water Infrastructure segment, as it allows us to expand our wastewater and surface water applications, and bring together our transport and test capability.

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