Welcome to the Xylem fourth quarter and full year 2015 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Phil De Sousa, Vice President of Investor Relations.
Well, thanks, Jackie, good morning, everyone, and welcome to Xylem's fourth 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 fourth quarter and full year 2015 results and discuss the full-year outlook for 2016. With that, so that we will have enough time to address everyone on the call, I'll ask that you please keep to one question and follow up and then return to the queue. 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 Investor section of our website at www.xyleminc.com.
A replay of today's call will be available until midnight on March 6th. Please note the replay number is 800-585-8367, and the confirmation ID number is 19530850. Additionally, the call will be available for playback via the Investor section of our website under the heading Presentations. 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. 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 the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, actual events or results could differ materially from those anticipated. Please turn to slide three. Just a few key notes for today's presentation.
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. Additionally, please note that references to 2016 metrics include the financial impacts attributable to previously closed acquisitions and have been adjusted to exclude non-recurring transaction costs. Please turn to slide four. I'll turn the call over to our CEO, Patrick Decker.
Thanks, Phil, and good morning, everyone. Over the course of 2015, we faced a dynamic economic environment on a macro level and in key end markets. I'm quite pleased with our team's performance as we remain focused on executing against our long-term objectives. We responded effectively to changing conditions and ultimately closed out the year with another quarter of solid results. We delivered at or above our guidance on several key metrics. Organic revenue grew 2% in the quarter, resulting in 2% organic revenue growth for the full year as well. Adjusted earnings per share increased 3% to $0.60 in the quarter, excluding foreign exchange translation. This brought our full-year adjusted earnings to $1.85 per share, a 5% increase year-over-year, excluding foreign exchange translation. We delivered free cash flow conversion of 105%, driven by working capital improvement.
Importantly, I am encouraged by the fundamentals and underlying trends impacting our business today and in the years ahead. External factors such as steadily increasing spend on Water Infrastructure, growing demand for intelligent monitoring and control systems, and climate-related initiatives that require our water expertise and ingenuity all bode well for sustained profitable growth at Xylem. As we continue to advance the key growth initiatives we laid out during our investor day last year, namely stepping up our commercial leadership, driving accelerated growth in emerging markets, and increasing our investment in R&D and innovation, I am confident that we are well-positioned to deliver that growth. That work will be complemented by our ongoing focus on continuous improvement and business simplification, which will be significant levers for long-term value creation. Xylem has a balanced global portfolio that we expect will further benefit from a number of current and emerging trends.
Here are a couple of examples. The perennial battle to increase spending on Water Infrastructure is gaining some traction here in the U.S. A number of efforts are underway to produce actionable plans to break through the historical barriers of financing, political risk, and competing priorities. The urgency of the need is further punctuated by flashpoints such as the tragic situation in Flint, Michigan, and the flooding events that continue to occur in various parts of the country. Xylem is actively engaged in several of these efforts, including those that are focused on unlocking private capital for infrastructure investment. In addition, on the heels of the Paris climate talks, governments around the world are developing action plans to achieve the carbon emission reductions they signed on to in that historic agreement.
Given that the management of water is a notable contributor to global carbon emissions, the water industry has substantial opportunity to contribute to emission reduction goals. In light of that, last quarter, we issued a report titled "Powering the Wastewater Renaissance." This study outlines how the adoption of readily available wastewater management technologies can cut related emissions by nearly half. The analysis further concludes that 95% of the electricity-related emissions abatement can be achieved at negative or neutral cost, resulting in a win-win scenario for our customers, as well as the governing bodies that are seeking viable solutions to implement in the near term. We believe these activities are positive indicators for the continued recovery we see in the public utility market, which constitutes roughly one-third of our global business.
Improving market conditions and our strong execution enabled us to gain market share in this end market, as we generated 8% organic growth in the fourth quarter. This follows a solid performance in the third quarter when we delivered 5% year-over-year growth. The industrial end market is also significant for Xylem. Similar to other companies in this space, we continue to experience the impact of some negative underlying market trends. For the full year, overall industrial was down 1% organically. This, however, was largely driven by the steep declines in oil and gas, which was down 40% in 2015, with most of the impact felt in the second half of the year.
To be clear, despite the fact that oil and gas represented a relatively small portion of our business, the combination of such a severe drop and its high profit margin resulted in a significant impact on our 2015 results. Specifically, oil and gas reduced our revenues by approximately 1%, compressed our operating margin by 40 basis points, and reduced our earnings per share by $0.12. Looking ahead, we expect those headwinds to continue at least until we begin to lap the initial declines we first experienced in the second quarter of last year. We anticipate the headwinds to moderate somewhat in the second half of the year. Overall, we anticipate challenging conditions in oil and gas to continue, the impact should not be as severe as it was last year. In addition, we expect ongoing headwinds in the mining sector.
Collectively, these two sectors now represent about 8% of our total revenue. We will continue to manage and ultimately optimize efficiency and performance through the inevitable economic cycles that occur within this end market. Fortunately, Xylem is better positioned than many. Our industrial market exposure is more heavily weighted to the light industrial sector. In fact, that represents roughly 36% of our total revenue. The benefits of this sector mix are evident in our 2015 results. Excluding the severe impact of the oil and gas declines, the remainder of our industrial-related business grew 2% for the full year. Driving this growth was the continued demand for industrial water applications such as pressure boosting, equipment cooling, and fire suppression. The critical nature of these products and services in maintaining operations creates more resilience in the light industrial sector, providing a counterweight to the cyclical volatility seen in heavy industrials.
One final point. The leading position we have in certain consumer demand-driven applications, such as beverage dispensing and marine and RV pump applications, helped us deliver solid growth. With combined revenue of more than $120 million, these businesses grew 4% in 2015 and are well positioned to continue growing in 2016. From a regional perspective, we remain optimistic about the U.S. markets, particularly the public utility and commercial building sectors, which we'll address in more detail later on the call. Europe is stabilizing, we expect a more favorable outlook there. We have a strong presence in the public utility market in Europe, we're already seeing early signs of success with key product launches in the residential and commercial building sectors. The emerging markets present a more complex story. As all of you know, many of these markets are already showing signs of slower growth.
After posting 9% organic growth during the first nine months of the year, our businesses in emerging markets grew 2% in the fourth quarter. There are a few dynamics at play here. First, the 2% organic growth compares with 14% organic growth in the prior year period. Underlying this delta is a pattern of choppy project deliveries that can easily cause distortions in quarterly year-over-year growth. Second, our Applied Water segment declined 4% in the emerging markets in the quarter, driven in part by the slowdown in China's industrial and commercial markets. However, given that our business in China is more heavily weighted to the public utility end market, we do expect continued growth ahead, albeit at a slower pace than in the most recent years. Shifting gears now.
As I've mentioned previously, we are still in the early chapters of a multi-year self-help story that will enable us to drive margin expansion. Our continuous improvement initiatives, which include lean and global procurement, along with a sharper focus on driving business simplification, will result in significant operating margin improvement. Today, G&A costs sit at 8.5% of revenue, down 120 basis points over the past two years, but still an opportunity. We will continue to attack these costs in 2016 and beyond as we execute the business simplification plan we laid out at Investor Day, targeting $60 million-$75 million of structural cost reductions over the next few years. Our expectation is to invest approximately $25 million in 2016, from which we anticipate realizing $8 million in savings in the second half of the year and $15 million on an annualized basis.
We will touch on this in more detail later in the call. We are driving productivity within the business so we can fund the necessary investments to achieve our longer-term objectives. This includes increasing our R&D investment for future growth, the targeted investments in the Middle East, China, and India we highlighted at our Investor Day, and accelerating capital deployment on two fronts, returning capital to shareholders and acquisitions. Today, we announced a 10% increase in dividend and the acquisition of Tideland Corporation, our second acquisition in as many quarters. Let's turn to slide five, and I'll cover capital deployment and the Tideland acquisition in more detail. With our strong cash flow generation and capital structure, we are well-positioned to create more value for our shareholders. During the fourth quarter, we repurchased 1.4 million shares for $50 million.
For the full year, we repurchased 5.1 million shares for $175 million, and we have about $430 million available under our authorized programs. We also paid $25 million in dividends to shareholders in the quarter, bringing our full year total to $102 million, reflecting a 10% increase per share year over year. Combined, this represents a 24% increase in return of capital to shareholders in 2015. Earlier this week, we completed our acquisition of Tideland, a leading producer of smart analytic solutions in the coastal and ocean management sectors. More specifically, the company integrates systems intelligence technologies with tools to enable a wide variety of marine and environmental monitoring capabilities to an array of customers. These offerings fit well with our existing analytics portfolio. We intend to further integrate analytics tools from our current portfolio into their systems, including a direct tie-in with our recent fourth quarter acquisition, HYPACK.
The result will be a broader range of systems intelligence solutions that we can provide to the coastal and ocean water sector. Growth in this area will continue to be driven by the customer's need to comply with increasing regulations for a variety of operations in this space. The acquisitions of Tideland and HYPACK illustrate how we plan to bring together distinct products and services to build intelligent, full systems capability and significantly expand the market we currently serve. With that, let me turn the call over to our interim CFO, Shashank Patel, to walk you through the results and the company's financial position in more detail. Shashank?
Thanks, Patrick. Since you already covered some of these full year highlights, I'll make some specific points and then dive further into our fourth quarter results. For the full year, revenue increased 2% on an organic basis, consistent with the midpoint of our guidance at the beginning of last year. We saw solid growth in the public utility, commercial, and residential markets, all up 4% organically. Industrial was down 1%, primarily due to the significant declines we saw in oil and gas over the second half of the year. Agriculture was down 8% as unfavorable weather, namely the severe flooding conditions in the Southern U.S., wiped out this year's season. As a reminder, agriculture represents 2% of our revenues. Regionally, we generated the strongest growth in the emerging markets, where we posted a 7% increase over the course of the year. China led the way here, growing 14%.
Worth noting is that our Water Infrastructure segment grew 17%, driving 80% of the overall growth as a local trend to invest in and improve water quality and wastewater treatment continued. The U.S. and Western Europe markets each grew 1%. In the U.S., growth accelerated over the course of the year and hit a high for the year in the fourth quarter, whereas Europe was relatively stable throughout the year. Canada rounds out our geographic performance. There, significant declines in oil and gas resulted in a 13% decline in revenue. As for margins, productivity actions and volume leverage more than offset material, labor and overhead inflation and unfavorable mix. Excluding FX translation, gross margin expanded 40 basis points and led to a 30 basis point improvement in operating margins.
Embedded in this operating margin performance is an investment in selling capabilities in key growth markets, partially offset by a reduction in G&A costs. We reported earnings per share this year of $1.85, an increase of 5%, excluding the unfavorable $0.22 impact from foreign exchange translation. Just a reminder that this 5% increase is on top of the 18% growth and record EPS in 2014, a solid indicator that we have set Xylem on the right path to improve financial returns. Another similar indicator is our free cash flow performance. This year, we generated $347 million, an increase of 17%. We also achieved 105% conversion of net income. We continue to make progress on reducing our working capital across the business. Strong, focused execution improved working capital as a percentage of revenue by 80 basis points, excluding the impact of foreign exchange translation.
This improvement, coupled with our commitment to accelerate capital deployment, allowed us to increase the return of capital to shareholders by 24% in 2015. That includes our fourth consecutive dividend increase in as many years and a record $175 million of share repurchases. Turning to slide seven, I'll cover our fourth quarter performance. During the fourth quarter, we booked orders of $913 million, up 1% organically. I'll cover our performance by segment in a few minutes. For now, I'll focus my commentary on our ending backlog. We enter 2016 with total backlog of $716 million. Excluding foreign exchange translation impacts, backlog is up about 4%. Of the total, roughly $575 million is due to ship in 2016, and about $335 million is due to ship in the first quarter. Excluding the impact of FX translation, our current year backlog is down 2%.
Jumping back to the fourth quarter results, we generated revenue of $994 million, down 5% versus the prior year, including a $70 million headwind from foreign exchange translation. On an organic basis, revenue was up 2%. From an end market perspective, we saw significant strength in both public utility and residential. Revenue from the public utility end market was up 8%, with double-digit growth in the U.S., Asia, and the Middle East. Project deliveries and an improved U.S. market, coupled with share gains, drove our performance across these regions. Residential was up 10%, primarily driven by market strength and share gains in the U.S., where we have about 50% of our customer base. Commercial was flat for the quarter, but against a tough prior year comparison of 8% growth. The story within commercial remains the same.
We continue to benefit from a steady recovery in growth within the U.S. institutional building sector. The industrial end market was down 2% due to the aforementioned oil and gas headwinds. Agriculture was down 12%. Operating margin was flat at 14.7%, but up 20 basis points, excluding the headwind from foreign exchange translation. Cost reductions, including Lean Six Sigma, global procurement, and business simplification savings, offset inflation, driving 140 basis point improvement in segment margins. Volume leverage on the 2% organic growth was more than offset by unfavorable mix. Wrapping up on the consolidated results, solid organic revenue growth and execution against our cost reduction initiatives resulted in EPS of $0.60, an increase of 3% before the unfavorable impact of foreign exchange translation. Now let me provide more detail for each of our reporting segments. Please turn to slide eight.
Water Infrastructure recorded orders of $559 million, up 2% organically. A couple business mix dynamics worth highlighting. First, treatment orders grew more than 20%, including a large $13 million project order in Saudi Arabia, as well as an increase in both North American project activity and win rates. Nearly offsetting order growth was the overall declining in our dewatering business, again, reflecting the oil and gas weakness. Our book-to-bill ratio was 0.89 in the quarter, the same as last year. Overall, we exited the quarter with backlog of $544 million, up 8% on an organic basis. Of this amount, approximately $430 million is due to ship in 2016, with $230 million shipping in the first quarter. This leaves us with longer-term project backlog shippable in 2017 and beyond of $115 million. This is a 48% increase over what we had seen last year on an organic basis.
While this is a relatively small portion of our revenue, it is a leading indicator of market health and trend stability and provides some confidence in our generally short cycle business. We reported revenue of $629 million, up 1% on an organic basis. Regionally, we saw growth led by the U.S. and emerging markets, up 4% and 5% respectively. Western Europe grew a modest 1%, and Canada declined 21% due to the impact of oil and gas weakness. I would further summarize our revenue performance as follows. Transport application, which include our water and wastewater pump and dewatering business, were up 2% overall. Public utility water and wastewater pump sales and services grew 11% during the quarter, demonstrating both healthy market conditions and the strength of our Flygt brand, which continues to increase its share position.
We also saw double-digit growth in the public utility sector for our dewatering business, driven by a relatively large product delivery, and to a lesser extent, disaster recovery services in the U.S. and U.K. As we've addressed, the unfavorable impact of oil and gas dewatering applications were down nearly 40% in the quarter. Test applications finished the year with a strong up 4%, with particular strength in Europe, up 9%, with growth driven by industrial lab applications and several wastewater facility projects in the Nordic countries. Our delivery of critical analytical instrumentation used in China's river cleanup project drove local revenue growth up by 24%. Treatment revenue was down 3% as we lapped a few large water project deliveries in Latin America. Partially offsetting these headwinds were growth in the Middle East.
We are reporting operating income for our Water Infrastructure segment of $110 million and a record quarterly operating margin of 17.5%. Performance was driven by the increase in cost reductions of $19 million, driven by sourcing and Lean initiatives, as well as $2 million in restructuring savings. This increase was able to more than offset labor and material and overhead inflation, as well as the unfavorable mix driven by lower dewatering rental volumes. Let's turn to slide nine. Applied Water recorded orders of $354 million, down 1% organically. As a reminder, this compares with 9% growth in the fourth quarter of 2014. Our book-to-bill ratio was 0.97 in the quarter, which is in the range we have seen over the last four years. Overall, we exited the quarter with backlog of $172 million.
Of this amount, about $105 million is due to ship in the first quarter of 2016, down approximately 14% on a constant currency basis, which we expect will mute growth in the first quarter. Applied Water reported revenue of $365 million, up 3% on an organic basis. Regionally, we saw strong growth in the developed markets with the U.S. and Western Europe up 5% and 4%, respectively. Emerging markets declined 4%. As expected, our biggest headwind came from China, which was down 18% after posting 16% growth over the first nine months of the year. I'll further summarize our revenue performance as follows. Building services grew 3% as we continued to benefit from the U.S. institutional building market on the commercial side and market share gains in residential. Growth in the commercial building market was muted overall by weakness in China.
Industrial water grew 5%, largely driven by project strength in the U.S. and modestly improving conditions in project shipments in Europe. Lastly, irrigation, which represents less than 10% of Applied Water revenue, declined 12%, driven by unfavorable weather conditions and the lapping of a strong quarter in 2014, when we delivered 25% growth. Operating margin declined 10 basis points year-over-year to 13.4%, including 20 basis points of headwind from foreign exchange translation. Material labor and overhead inflation and unfavorable mix were notable headwinds this quarter, partially offset by cost reductions. Despite volume leverage on 3% organic growth, unfavorable mix associated with a single industrial project significantly impacted our margin performance this quarter. The Applied Water portion of this project was sold at a negative margin. However, the project margin for Xylem overall was positive and reflected in the Water Infrastructure segment.
Let's turn to slide 10 to cover the company's full year performance by segment. Let me start first with the Water Infrastructure segment. Revenue was $2.2 billion, up 1% organically, driven primarily by growing strength in the public utility end market in the U.S., and the continued build-out of water and wastewater infrastructure in emerging markets. We grew 1% in industrial, excluding the significant oil and gas headwind. Operating margin declined 10 basis points year-over-year to 14.2%. While cost reductions more than offset inflation in the year, volume leverage on the 1% organic growth did not compensate for the unfavorable mix impact attributable to the significant decline in rental services to the oil and gas market. Moving on to the Applied Water segment.
Revenue was $1.4 billion, up 3% organically due to strength in the U.S. commercial and residential markets, as well as growth in industrial water applications, despite facing significant oil and gas headwinds. In commercial, 4% growth was driven by an improved U.S. institutional building market. Residential also grew 4%. A strong performance came from improvement in the home construction market and market share gains. Partially offsetting this growth was weakness in the agriculture end market, which was down 8% due to unfavorable weather conditions and the lapping of a strong prior year. Operating margin decreased 10 basis points year-over-year to 13.9% due to unfavorable foreign exchange translation impact. Excluding this impact, adjusted operating margin increased 20 basis points as cost reductions and volume leverage more than offset inflation and unfavorable mix. Please turn to slide 11 and I will cover the company's financial position.
Xylem maintains a strong cash position with a balance of $680 million at the end of December. 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 fourth quarter, we paid $25 million in dividends and purchased $50 million in shares. We generated $165 million of free cash flow in the fourth quarter, largely reflecting improved working capital performance. Relative to the prior year, our free cash flow performance improved by $44 million. Lastly, our return on invested capital decreased by 30 basis points to 10.6%, which is primarily due to unfavorable foreign exchange translation. Please turn to slide 12 and I'll turn it back over to Patrick to cover our 2016 expectations.
Thanks, Shashank. As I said earlier, we believe we are well-positioned to make significant progress against our top priorities in 2016 in order to drive long-term profitable growth at Xylem. We're driving substantial change at Xylem to strengthen our commercial capabilities, taking specific actions to improve our customers' experience at each touch point we have with them. This includes driving more expertise through industry vertical selling and simplifying our commercial processes. We have focused plans to accelerate growth in emerging markets, targeting increased investment of about $30 million in the Middle East, China and India. We plan to increase our R&D investment in 2016 by 30 to 50 basis points to advance innovation. As we drive our continuous improvement work deeper into the organization, we expect our lean and global procurement initiatives to generate gross savings of $120 million, an increase of roughly 20% year-over-year.
The growth rates I refer to on this slide all exclude the anticipated negative foreign exchange impacts. Looking at the year ahead, we expect to generate faster-than-market growth, delivering 2016 organic revenue growth of 2%-4%. The recently completed acquisitions are expected to add an additional 1% of revenue growth. Given that we expect stable conditions across roughly 90% of our portfolio, including growth across all geographic regions, we believe we're positioned to exceed market growth despite the ongoing headwinds from oil and gas and mining. Our adjusted operating margin is expected to grow in the range of 50 to 80 basis points overall, despite roughly 20 basis points of margin dilution from the acquisitions of HYPACK and Tideland. This dilution is driven by purchase price accounting impacts, such as non-cash in tangible amortization.
Excluding the dilutive impact of acquisitions, our operating margin is expected to expand by 70 to 100 basis points. We anticipate generating earnings per share of $1.95-$2.05, which excludes restructuring and realignment costs of about $25 million. This projection does include $0.04 of negative foreign currency translation impact. Excluding foreign exchange impact, EPS growth is expected to be in the range of 8%-13%. Finally, we will continue to execute a disciplined approach to capital deployment, which is expected to result in free cash flow conversion greater than 100%. This also contemplates expected CapEx in the range of $120 million-$125 million. Please turn to slide 13. This slide outlines our expectations for 2016 organic revenue by end market. Industrial, which represents 44% of total revenue, is expected to be flat to up low single digits.
This projection assumes low single-digit growth in light industrial applications and double-digit declines in oil and gas and mining applications. The public utility sector, which constitutes 33% of our total revenue, is expected to grow at a mid-single digit rate. Here, we anticipate growth led by the U.S. and continued investment across emerging markets. We also expect market conditions in Europe to remain stable, and that the U.K.'s multi-year AMP6 cycle of infrastructure investment accelerates late in the second half of the year. For the commercial market, we see growth in the mid-single digit range. Our expectation is that growth in the U.S. institutional building market continues to be here, and that conditions in Europe modestly improve. Lastly, while we expect urbanization to drive growth in emerging markets such as the Middle East, we also anticipate weaker conditions in China.
Residential should grow in the low to mid-single digit range, driven by strength in the U.S., albeit at lower levels than seen in 2015. We also expect continued low single-digit growth in Europe. Finally, agriculture will likely see a modest recovery from the significant weather events in 2015. Please turn to slide 14 and Shashank will provide some calendarization insight for the year.
Thanks, Patrick. As we have done in prior years, I'd like to highlight the seasonal profile of our business, which you can see on the left side of the slide, and our perspective on 2016 on the right. As for the first quarter of 2016, we expect 2% organic growth coupled with approximately 1% growth from acquisition. Foreign exchange translation is anticipated to be a 4% headwind. As for operating margin, we anticipate it to be flat year-over-year as the oil and gas and mining headwinds will continue to offset volume leverage and cost savings. Our expectations also assume a modest level of increased investment for our growth initiatives. We are assuming that both global procurement and Lean savings accelerate through the year, whereby we realize about $20 million on growth savings in the first quarter and expect to deliver about $120 million for the full year.
I'll turn the call back over to Patrick for closing comments. Please turn to slide 15.
Thanks, Shashank. We had a strong finish in 2015 as we faced some challenging conditions. Again, I want to thank our team for their performance as their focused execution against our strategic priorities helped us to deliver on the commitments we set forth at the beginning of 2015. I am confident in their ability and commitment to deliver against our organic growth targets and margin expansion opportunities. Xylem is in a very strong financial position, and we will continue to drive our balanced and accelerated capital deployment plans. I am very encouraged as I look ahead to 2016 and beyond. No doubt there are challenges in the near term, but I am confident that our team will continue to execute with operational discipline to drive our success. That commitment and focus will provide the foundation for future growth for Xylem and our shareholders.
With that, operator, we're ready to open the line for questions.
The floor is now open for questions. At this time, if you have a question or comment, please press *1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the # key. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from the line of Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone.
Good morning.
Good morning.
Hey, you really checked all the boxes this quarter. If I look at it, you had inline EPS, you get free cash flow, you do a dividend boost, you do buybacks, you get a deal done. Hopefully you've still got some feel goods left for the rest of the quarters in 2016. The question I wanted to focus on first is, I'm interested in hearing a bit more about this large shipment that you disclosed in the Applied Water business, because it sounds as though the order spanned both Applied and Water Infrastructure, which is good to see, because that suggests you're doing cross-selling. The way the P&L gets tallied, Applied ended up showing a negative margin. Kind of put this project into context. Is this solution selling?
Do you have other business like this, and if you net the two out, how does that project look?
Sure. Well, thanks for the comments opening there, Deane, as well. We appreciate it. On this project, this is a project actually that has been in backlog for multiple years, and there have been some delays in the customer job site, in terms of ultimately delivering it. It's been in backlog for more than a couple of years. The margin was net positive and attractive for us. I wouldn't say we have other projects like this that are out there. I mean, it was fine. It was an element of some solution sell. It was a bundled offering for an LNG application. Again, it's a bit of a one-off. It was a large project. It's kind of spanned over a few quarters here in terms of shipping it out.
Got it. Then the follow-up question is not so much Xylem specific, but I'm really struck by, and interested in hearing your comments on the ramifications for this water crisis unfolding in Flint, Michigan. Again, it's on the front page of The Journal today.
Yes.
How do you feel, what's your sense of what happens in the response within the municipal water community? There's going to be further congressional pressure here. What went wrong? What does this mean for the need for smart water networks? I know that's been a big focus for you.
Yes.
Just how do you think this plays out, and what are the ramifications for spending on this backlog in U.S. water infrastructure?
Sure. It's a great question, Deane, and as I mentioned in my opening comments, I mean, it's obviously a tragic situation there in Flint. As you'll recall, we had similar situations, although maybe different causes in Toledo, not long before that. You've got a number of these flooding conditions that we see from a resilience standpoint. There's infrastructure that needs to be invested in. As you've been following the water space for a long time, it's always difficult for any of us to predict the timing of when this will unlock some of the pent-up demand that's out there. I do believe that there will likely be increased regulatory scrutiny. I think that will also lead to some increase in backlog movement, in various communities across the U.S.
It always seems to happen slower than any of us think it should occur, it's difficult to predict over what timeframe we think it will begin to free up. I do think this will be a collection of flashpoints that begins to move things forward.
That's real helpful. Just to sneak one last question in. The deal is another focus in the water analytics side, hydrology. What's the pipeline look for M&A?
Yeah. We're excited by both the HYPACK and the Tideland acquisitions. They are very nice additions to our portfolio and really tie in nicely with the capabilities we already have in the analytics space in that area of hydrology. The pipeline overall, that's only one vertical, obviously, that we're focusing in on. If I go back to Investor Day, we talked about smart water infrastructure or systems intelligence. We talked about advanced treatment in industrial, we talked about making sure that we defended and protected some of our unassailable core franchises. The pipeline continues to build. It's very attractive. It's pretty broad and deep. As you know, it's always difficult to predict the timing of when things come forward. It always takes two to tango.
I'm very encouraged by the work the team's done to further build out that pipeline, and lines up really nicely with the value-mapping work that we shared at Investor Day.
Thank you.
Thank you, Deane.
Thanks, Deane.
Our next question comes from the line of David Rose with Wedbush Securities.
Good morning, all.
Good morning, David.
Thank you for the opportunity.
Good morning.
Just a couple follow-up on the restructuring actions, the $25 million. Can you break this down? Is this incremental to 2017 and 2018? How should we think about it? Second question is your mention of unlocking private capital and your role in it, and I was hoping maybe you can elaborate on that.
Sure.
Yeah, this is Shashank. I'll take the first question. As far as the $25 million, it is incremental, and it generates about $8 million savings in 2016, primarily back-end loaded to us in the second half. As far as where those actions are, that is restructuring and realignment, and it's in the areas of footprint. It's in the areas of the G&A and business simplification initiatives we had outlined during the Investor Day.
Okay, I'm sorry, how much is in Applied Water and how much is in Water Infrastructure?
Yeah, we don't disclose how much of that is broken up by segment, the total is $25 million.
Part of the reason for that, David, is some of these are shared locations where it'll impact both businesses.
Okay, great. That's helpful.
On your second question around unlocking private capital, our role there is not necessarily being actively involved in financing and those types of activities. What I'm really alluding to there is, as our role as a thought leader in the water space, we're involved in a couple of efforts with other organizations in helping further this movement around things like public-private partnerships, other models that exist in other parts of the world that are not quite as commonplace here in the U.S. We believe that there is a large role for the private sector to play in driving attractive investments there. Helping in some of the education effort in that area is really the role that I'm referring to.
Okay, that's helpful. Thank you.
Okay, thank you.
Thanks, David.
Our next question comes from the line of Nathan Jones with Stifel.
Morning, everyone.
Good morning.
Good morning.
I think, Patrick, in your prepared remarks, you talked about the public utility market. I think you commented that U.S., Middle East, and Asia were up double digits and did not make any reference to Europe. Given Europe's the biggest end market there, could you give us some color on what you're seeing in the public utility market in Europe and what your expectations are for 2016 there?
Sure, yeah. We saw Europe really stabilize over the back half of the year, and I would describe it as stable at this point. It's a mixed bag. I would say we have not seen the continued deterioration in the southern part of Europe that we'd experienced in the first three quarters of the year. That stabilizes well. I think we're on fairly solid footing. One of the things that will benefit us in 2016, of course, is the impact in the U.K. of the AMP6 infrastructure investment cycle there that you're all probably quite familiar with. That cycle was launched, I think, April 1st of this past year. It takes about 15 months or so for all of the engineering and design and spec work to happen on the part of our customers.
We really begin to see the revenue come our way late 2016 through 2018 or so. I'd say net-net, it's stable in Europe, and low single-digit growth for 2016.
Okay, thanks. If we just look at the light industrial part of industrial, I think we're all fairly comfortable that oil and gas and mining are not going to be very good in 2016. You're talking about low single-digit growth there, which you'll need to get to flat or maybe up slightly. Can you talk about the different dynamics that are going on within that market that have you able to grow in what's probably a flat to maybe slightly down global industrial market?
Sure. No, it's a great question. I'd say, first of all, when you think about the nature of what the light industrial sector is, customers in that area are quite diverse. Across the board, they are very much focused in on energy efficiency to reduce their operating cost. Our volume there is not really like it would be in heavy industry. It's not really tied to factory output, but it's rather more of an ongoing minimal operating cost. These are not large capital outlays that are required on the part of our customers, and so it doesn't tend to be big on their radar screen. Other than, again, these products play a role in helping them reduce their operating cost through energy efficiency. We think we're pretty resilient. I think that was demonstrated through 2015, when that part of the business, again, was up 2% organically.
We've seen really nothing here in the latter part of 2015 or early 2016 that would change our view on that.
How much of that light industrial market is driven by the regulatory environment rather than the operating environment?
I wouldn't say it's a large driver in that area. I would say that as some of the energy efficiency regulations that have already been put in place in the EU come to the U.S. over the course of the next few years, certainly there will be somewhat of a driver there. I wouldn't say it's a big driver today. It's really more just, again, them managing their operating cost.
Okay. Thanks very much for the help.
Thank you.
Our next question comes from the line of Ryan Connors with Boenning & Scattergood .
Great, thanks for taking my question.
Sure.
Wanted to talk a little bit about the kind of price cost situation in this environment. If you might expand on that for us. Obviously, some of the raw material prices have come down, and if you could talk about that impact on your P&L vis-a-vis what you're seeing on the pricing side, that'd be helpful.
Yeah. This is Shashank. From a pricing perspective, we expect fairly neutral conditions, flattish pricing 2015 going into 2016. Clearly, we'd like to see more price in 2016, it will be challenged based on the current commodity environment. As I said, it's flattish, from a savings perspective, that does help because we do buy a lot of raw material, and the current environment helps drive more out of global procurement. Our target in 2016 is for a higher cost out from a global procurement perspective, as well as business simplification.
I would just add, Ryan, I think that as we've talked a little bit in the past, there's probably less than 10% of our revenue that is in end markets that are more challenged from a pricing standpoint, that really being in the ag and resi part of the market. We continue to manage through that and maintain, I think, a very good discipline from a pricing standpoint. The area that we would suggest over time, you would suspect the supply-demand favorability to work in our direction would be on the public utility sector. We're still so early in the recovery there that we're not really counting on that kind of price dynamic in 2016.
Okay. Would you hazard a guesstimate at what kind of a basis point tailwind raw materials could be to the margins if you are able to, say, hold your price flat in aggregate?
I would suspect it's probably about 20 to 30 basis points.
Okay. That's helpful. My other question, just real big picture, Patrick. You issue your 2016 guidance today and talked a lot about some of the puts and takes and some of the positives. What do you view as kind of the biggest risk factor that could cause things to not play out the way you've laid out today as you look out over the next 11 months here?
Sure. I would say that the area that we kind of called out in our prepared comments as we've already built some of this into our outlook, and that is continued downward pressure in both oil and gas and mining. Those are now only 8% of our total revenue, so it's not a large portion of our business. Certainly, if we saw mining drop off dramatically, then that would put pressure on our top line. We feel that we've reflected that in the bottom end of the organic growth range. In terms of profitability, again, as we mentioned in our comments, these businesses are very high profit margin. For us, again, we feel that we've taken that into consideration in our guidance.
Obviously, there are other cost out actions that we would take in the event that we saw that, and that's certainly something we've learned from this past year in our dewatering business.
That's great. Thanks so much.
Thank you.
Our next question comes from the line of Kit Moore with Canaccord.
Morning. Thanks.
Morning.
We touched on muni trends in the U.S. and Europe. Maybe we could move to emerging markets a bit. What gives you the confidence, I guess, that infrastructure spending holds up over there? Then maybe follow up to talk about some of the softness you're seeing on the commercial side.
Sure. On the public utility side for emerging markets, the real key drivers there, certainly at the moment, and we're still seeing this in our quoting activity and bidding activity, is, again, the fact that in our largest emerging markets the whole issue of access to water and sustainability there are top policy issues and concerns, whether it be in China, whether it be in the Middle East, whether it be in India. We're certainly not seeing any significant downward pressure there or slowing down of those large projects. That certainly is something we're keeping a very close, mindful eye on.
We did indicate in our guidance around emerging markets and we saw in the fourth quarter, certainly a significant headwind and pressure on the commercial building side, especially in China, as well as some of the impact of lower commodity prices on the industrial business there in China as well as in Latin America. Again, in our guide for 2016, we feel that we've taken a pretty balanced approach in that area. Again, we'll keep a close eye on that and modulate our cost base accordingly across the rest of the portfolio.
Just to add a little bit of color to that. For the emerging markets in 2015, we delivered about 7% growth, and it did slow down in Q4, primarily due to China. As we look towards 2016, we kind of moderated that to a mid-single digit growth, and certainly we factored in the slowness in China, especially on the commercial building side. We got investments going in Middle East, North Africa, as we've talked about, as well as we have some large project deliveries in India that help the overall emerging market picture.
That's great. That's helpful. Maybe just to follow up on oil and gas, dewatering comps get better in the second half, 40% decline this year. I think you called out double digit decline next year. Maybe you can just talk about sensitivities and what's your bake in there for declines on oil and gas. Thanks, folks.
Sure. We've built in about a 30% impact in a decline the first half. Obviously that stabilizes over the course of the full year, it blends out in that kind of low teen decline for all of 2016. We've also factored in about a 10% decline in mining in that outlook.
Great. Thanks.
Thank you.
Our next question comes from the line of Brent Thielman with D.A. Davidson.
Hi, Brent.
I think most of my questions are answered, A question on Canada. It's shown some pretty sharp declines for a couple of quarters now. How large is Canada for you, and when do we start to see those comparisons ease?
This is Phil. I'm going to just jump in here real quick. Just to put into perspective, the declines that we've seen in Canada, both fourth quarter, full year, completely feel almost entirely tied to that oil and gas decline that we've got there. For the year, off the top of my head, I want to say it's down 13%-15% or so for the year. In terms of size, it's about $150 million in revenue.
Okay, great.
That's Canada overall, not the oil and gas within Canada, just to be clear.
Got it. Thanks, Phil.
Our next question comes from the line of Brian Konigsberg, with Vertical Research.
Yes, hi, good morning.
Good morning, Brian.
This might sound like a little bit of a crazy question considering the backdrop, but under the scenario where oil prices do, say, improve just modestly, and you do get a supply response out of the U.S., I'm just curious, maybe two things. Where do you think that oil prices actually would need to go to actually initiate a supply response? How quickly would you guys benefit if that was to happen?
Yeah, Brian, I wouldn't want to put a dollar amount out there in terms of the oil price to go there. The key is it needs to be substantial enough that there's a meaningful increase in oil rigs. That's really the high correlator for us. I think also given our heavy exposure on the fracking side, again, I think that we would need to see a pretty notable move upwards in oil prices for us to be able to see a meaningful recovery there. I don't want to sound too dour or sour on that, because I do believe that once we get a lift, and there will be a lift at some point down the road, the teams in that part of our business have done a fantastic job at managing the cost base.
We will certainly see a very healthy incremental leverage when we see any growth there, but we're not counting on any of that here in 2016.
Sure. Understood. Next, can you maybe touch a little bit more on the free cash flow? You're looking for 100%+ conversion. Maybe you just give us the outlook as far as what are the kind of meaningful contributors. Obviously, you got D&A. Are you counting on working capital coming through? Are there other items we should be thinking about?
I can take that one. It is over 100%, and the drivers there are the normal generation of cash, plus on the working capital side, we showed good progress in the second half. That momentum continues, and that momentum will continue for the full year. That's why we expect over 100% is all the working capital areas such as we had good progress on inventory and accounts payable. On the AR side, we actually got hurt a little bit with the heavy shipment in December, but that's an area we continue to attack as far as past due receivables, and we saw good progress there in the fourth quarter as well.
Great. If I could just slip one last in, what's the updated status on CFO search?
Sure. We've had a lot of interest in the role, interviewed a large number of experienced public company CFO candidates. We're down now to the short list. I'm confident we're going to be announcing something here in the very near future here.
Great. Thank you very much.
Okay. Thank you.
Our next question comes from the line of Nicholas Prendergast with BB&T.
Hi, good morning.
Morning.
I just had a quick question about your emerging markets, and I know you touched on this in the prepared remarks, but I'm not sure I entirely got it. You noted that growth was 7% in the year. It slowed down to, I believe, around 2 in Q4. What exactly drove that again?
That was predominantly the sharp decline that we had in commercial building and industrial in China in the quarter, and we also had a tough prior year comp as well. We had quite a large growth in the fourth quarter last year in emerging markets.
Okay. If I heard correctly in the Q&A, I think you said you've kind of moderated your view in emerging markets from the 7% in 2015 to somewhere around mid-single digits in 2016. Is that correct? I guess, what gives you confidence that will continue and you don't continue to suffer from this China slowdown or whatever?
Sure. Yeah. No, that is correct in terms of what we laid out. I think, again, what we see there is confidence. First of all, I would say I wouldn't focus too much on any one quarter because, again, the large part of our business in emerging markets is still projects, given that it's new greenfield things that are being invested in. Those can be choppy in terms of quarter-to-quarter movement or year-over-year comparisons. Again, we think that it's continued strength in public utility in China over the course of the full year, and it's the benefits that we're seeing from the investments we're making in the Middle East. Lastly, you may recall that last year we announced a $40 million project win in India, and a large piece of that ships out in 2016.
Got it. Okay. Thank you very much.
Thank you.
Our next question comes from the line of Joe Giordano with Cowen.
Hey, guys.
Good morning.
I actually can't believe I'm asking this question, can you kind of refresh everyone on weak dollar implications for your business, as expectations seem to be shifting a little bit here?
Yeah, I'll take that one. As far as from a euro perspective, which was a big headline about a year ago, the euro today is trading roughly what it was on the average of last year. Where we see the foreign exchange impact in 2016 is probably the British pound, the Aussie dollar, the Canadian dollar impacting us, as well as emerging market currencies. There's some softness there, which kind of bled through in the fourth quarter, still is there, and we've baked all of that in. That's where we see the challenge. As long as the euro holds, we don't see the headwind from the euro like we did a year ago.
No, I mean, if we're getting into a situation where people think the dollar is going to weaken going forward and weaken versus the euro, how is that going to benefit you guys?
Joe, let me just jump in here. Yeah, last year we kind of gave a bit of a rule of thumb schedule, if you would. If you want to kind of do it based on the outlook or based on where we are here in terms of the calendar, you basically think about net for every cent move in the euro, you got about a cent, if you would, benefit to us or if you would, headwind to us at the bottom line. It's about a penny for penny.
That's for the full year.
For the full year.
Yeah, full year.
Yeah. Obviously, as you well know, Joe, and everybody on the call knows, it's such an uncertain environment right now from a currency standpoint that we've simply snapped the rates here based on where we are today. We'll continue to be transparent on moves either direction on EPS impact.
No, perfect. Then on the utility side, can you kind of talk about what you're seeing in larger CapEx type projects versus what you're seeing in repair and replacement? I guess more on the order side, probably more on the forward look.
Sure. Yeah. We continue to see very attractive increase in quoting and bidding activity. We think some increase in our win rates in that area as well. We aren't seeing a major shift in the mix of our business just yet in terms of project versus more of the repair and maintenance. Part of that is the reason is the fact that as we still see some customers kind of kicking the can down the road, we've seen a nice uptick in our break and fix part of the market as well. That piece continues to grow quite nicely. I would, again, reiterate, although it's a small portion of our revenue in a given year, our backlog that's shippable in 2017 and beyond is up 48%.
Again, small portion of revenue, but it's historically been a leading indicator as to what the growth should look like in terms of momentum two, three years out. I would be concerned if I saw that trend going the other direction. It just continued to build over the course of the last year as we've given you those numbers.
Just to add a little.
Yeah.
Yeah. On the treatment side of our business in the fourth quarter, we did see plus 20% on the order side. Granted, that's longer lead time, and that's also leading into the 2017 backlog, but we did see strength in treatment.
If I could sneak one more. On the deals that you've done on the analytics side, outside of near-term dilution from the purchase price and allocation, things like that, how do you see margins of those businesses at scale kind of comparing to the segment average before this?
Yeah, sure. Without getting specifics on any one deal, I would say that to your point, as we get through the noise of the non-cash items that go through EPS, these deals we've done will be in line with our operating margins as a company once we factor in synergies and other benefits. Those margins become even more accretive, quite frankly, as we do further deals in the space because of the knock-on synergies and blended margins that we attain.
Great. Thanks, guys.
Good. Thank you.
Our next question comes from the line of Ryan Cassil with Seaport Global Securities.
Good morning, guys.
Good morning.
Maybe you could talk about the book and ship business. It looks like you're anticipating that being a higher percentage of sales in 2016, or at least in the first quarter, and it's at a time when customers are being cautious on inventories and visibility's low. What gives you the confidence there on the short lead time stuff?
You're right. We are counting on a higher level of book and ship business, and that's tied to the 2%-4% growth we expect. Specifically, the areas that we have a high book and ship, for example, the Applied Water segment. That's driven by new products that we've actually launched and introduced over the last couple of years, and those affect both the European market and the U.S. market. That's going to drive that higher level of book and ship activity in the year.
Okay. Thanks, guys.
Thank you.
Thanks, Ryan.
Our final question comes from the line of Robert Barry with Susquehanna.
Hey, guys. Good morning.
Good morning.
Good morning.
Thanks for taking the question. Just a couple of things. One on the tax rate, I think at the analyst day, you guided that it should be 21 kind of through 2020. I saw it was 18% in the quarter, and you're guiding it to 20 for 2016. Just anything to comment there? Is there more progress being made on tax initiatives, or how should we think about that and in the context of the long-term guide too?
Yeah, the overall tax rate, we are guiding to the 20% range, realizing that any quarter is impacted by the mix of where the profit is from a global perspective, because tax rates do move around. Based on the tax structure we have and based on the mix that we projected in 2016, we're basically guiding to the same roughly 20%. It's an average 20%. As I said, it does move slightly quarter to quarter.
Right. Is the driver just based on the planned mix of business this year, or should we now be thinking based on initiatives that the tax rate are tracking better?
It's the regional mix of the business is the driver.
Got you. Just finally, maybe if you could unpack the mid-single-digit growth that you see in the public utility, how that kind of shakes out between the transport treatment versus test verticals.
Sure. I would say that on a relative basis to that mid-single digit, we would expect that there be a slightly higher growth rate than that in transport and treatment. I would say that thinking about the test side of the business, that would be kind of inline with what we guided to there. Obviously, what kind of pulls it down a bit would be the dewatering piece of the business, which is still going to be dealing with the oil and gas and mining lag.
Got you. Okay, great. Thank you.
Thank you.
That was our final question. I'd now like to turn the floor back over to Patrick Decker for any additional or closing remarks.
Great. Thank you. We appreciate the continued interest by everybody. Thanks for joining the call today. Safe travels between now and the next time we see you all. We look forward to updating on the next earnings call. Thank you all.
Thank you. This does conclude today's Xylem fourth quarter and full year 2015 earnings conference call. Please disconnect your lines at this time.