Good morning, everybody. Welcome to Xylem's 2017 Xylem Investor Day. For those of us here, thank you for making the trip to Raleigh-Durham. For those joining via webcast, thank you for taking the time and interest in the company. As I look out today, I see a lot of familiar faces, investors and analysts, but also many newcomers to our story. The turnout today is certainly a testament to the growing interest in our story, especially with the addition of Sensus. I know I speak for our team when I say we're excited to be able to share it with you today. I'm confident today's presentation will give you a better understanding of our business, an update of our strategy from last Investor Day, and a more thorough appreciation of the Sensus business. With that said, let me take a minute to highlight today's agenda.
We're going to have a series of speakers, beginning with our President and Chief Executive Officer, Patrick Decker. He will provide you with an update on our business. Following, you will hear from Jay Iyengar, our Chief Innovation and Technology Officer, and Tony Milando, our leader of continuous improvement. They will provide a deeper perspective in two critical strategic areas. Mark Rajkowski, our Chief Financial Officer, will provide an update to our 2020 long-term financial objectives. Following his remarks. Given that we do have people on the webcast, we're going to ask that you please wait for the microphone to be delivered to you and state your name and affiliation.
We'll take a short break, and the second portion of our presentation will begin with a fireside chat between Patrick and Dave Stanton, President of Suez North America, Randy Bays, President of Sensus, Dale Harbour, Executive Vice President of Marketing and International Programs, and Brian Crow, Vice President of Data Analytics and Software Solutions. We'll wrap up with some closing comments from Patrick and a second Q&A session. We'll conclude this session and the webcast portion of today's Investor Day at approximately 12:15, and those in Raleigh-Durham will have an interactive facility tour with demos. Please take note of the forward-looking statements on slide three. We will make some forward-looking statements today, including references to future events or developments that we anticipate will or may occur in the future.
I would also draw your attention to some key items for the remainder of the presentations, which relate to our 2017 full-year expected results. Everyone to please turn their phones to silent mode. Please help me welcome to the podium Xylem's President and Chief Executive Officer, Patrick Decker.
Good morning, everybody, and welcome to Raleigh-Durham. Appreciate you guys taking the time to make the trip down here. We are in the home of our new men's basketball college championships. Having said that, having been here at Sensus a number of times in the Raleigh-Durham area, I've learned a long time ago that don't assume that everybody here is a Tar Heel fan. There's probably half the people here in Raleigh-Durham that are actually upset right now with the victory. Again, nevertheless, thanks for coming down. Certainly hope that you'll find that this is time well spent as you get to better understand our strategy going forward, but also what Sensus brings to the table for us. Obviously, we've been busy in 2016, and with the acquisition of Sensus and Visenti.
That really is why we wanted to invite you here so you can see it firsthand and really understand the power of this combination. Looking back over the course of the last year, we've clearly created a significant amount of shareholder value. A key takeaway here for you today is that we are still very much in the early innings of what we see as a long-term run here to create an even more significant value for our shareholders. We are joined here today by my entire senior leadership team, which are in the back of the room. As we mentioned earlier, I will be giving you an update on our overall strategies. I will then be joined by a number of our leadership team members to walk through key elements of the strategy. We also are being joined, and I'm thrilled to have David Stanton here.
Many of you who know David know that he's going to be a terrific set of insights on the water sector and certainly the power of technology and data and how it can further shape the future of that industry. Last but not least, we are joined here today by our Chairman of the Board, Markos Tambakeras. Markos is sitting in the back of the room here, and he will be here through the lunch session. I would encourage any of you to reach out to him with any questions, get to know him, and it's terrific to have him here on board. With that, why don't we go ahead and get started? When you look at the strategy that we laid out for investors back in September of 2015, I feel very good about our progress against that journey.
Now, with any long-term strategy, as you all well know, there are always going to be a series of puts and takes, but I think that we've made good progress on that very powerful investment thesis that we laid out 18 months ago. I do really believe that our team has begun to deliver on that promise. While certainly the feature here today is the acquisition of Sensus and Visenti, we've made a lot of good progress in optimizing our core business, whether that be launching exciting new products, whether that be driving productivity for growth initiatives, as well as driving ahead of pace margin expansion since September of 2015. Again, we've completed four acquisitions since that last Investor Day, all of which have been in the area of smart water infrastructure.
At the end of the day, those acquisitions have actually even further strengthened our financial profile and our ability to continue to do smart capital deployment and smart M&A over time. I want to give you a refreshed look at Xylem and who we are now post the addition of Sensus to the portfolio. You'll see here that we are now just past our fifth-year anniversary of having spun out of ITT. There's been a lot that's happened over that five-year timeframe. We are operating in about 80 countries around the world. We now have about 16,000 colleagues as part of our team. Pro forma revenue in 2016 on a combined basis was about $4.5 billion, EBITDA margins of 18.4%, and operating margins of just under 14%.
I would also say that what Sensus has also done is has even made more attractive the level of recurring revenue that we have in our portfolio. Historically, it was 40%. Sensus's recurring revenue is far north of that, on a blended basis, we've given even more stable focus on our portfolio. As I mentioned, our senior leadership team is here today in full force, and I look forward to you having a chance to engage with them on the breaks and also on the tours. We really have put together, I think, a very diverse leadership team. They've got a very rich set of experiences from different industries. It's a nice blend of tenure from ITT Xylem, but also adding a number of new faces here over the course of the last three years.
It really has been this team and our 16,000 colleagues around the world that have really propelled us forward in executing on that long-term strategy that we laid out. Our focus right now is very much on continuing to build an even deeper bench across the organization, focusing really on sustainable enterprise over time. Our vision as a team, because it takes more than one person, is that we will become the distinctive market leader in the water sector. What does that mean? How does it manifest itself? First of all, we will have and continue to build industry-leading product and technology portfolios that are really focusing in on bringing leading-edge technology and value-added solutions to our customers. With the move to smart infrastructure, Xylem will be the company that leads that transition of the water industry to smart infrastructure.
I want to be clear, and I get this question on a regular basis, commitment to electric and gas. We are fully committed to the electric and gas utility businesses that we brought from Sensus. That actually is going to be a great adjacency for us as we help cities around the world build smart infrastructure to support the needs that I'll talk about here in a moment. This vision requires that we really build a sustainable, high-performance culture, one that is focused on speed, decisiveness, but also constantly learning and constantly improving. It also requires us to act more like one company rather than the collection of businesses that spun out of ITT five years ago. That's a big theme of ours as a leadership team.
To be recognized as the thought leader matters because we expect to be the go-to source as we are shaping the thoughts of the water sector, but also more broadly, smart infrastructure, and that we are the ones that lead that charge, and we cannot do it alone. Embedded in that vision for the company is making sure that we build an enterprise that is sustainable for the long run. I have no desire to have come to Xylem, build something really special and really impressive, only to see it was not sustainable over time. I want my legacy and our team's legacy to be that we really built a sustainable, successful, market-leading enterprise. I've laid out here some key elements of how do we go about doing that. It starts first with our people.
There's a huge correlation that you all probably know between employee engagement over time and the safety performance of an organization, because safety is where management puts their money where their mouths are and our time where our mouths are. Three years ago, when I came on board, we staked a claim that safety was going to be one of our top operating imperatives, and I'm very pleased with the performance that we've had over that timeframe. We've also put some big objectives out there in terms of behaving like better corporate citizens in terms of our own environmental footprint. We laid out objectives that we were going to reduce our water consumption, our greenhouse gas emissions, as well as our waste generation. I'm pleased to say that we reduced our greenhouse gas emissions this past year by 15%, and we reduced our water consumption by 11%.
We're on a good path here to move forward. Collaboration is key in the water sector. No one company can go it alone. The investments of time and money that we've put behind thought leadership and getting involved in things like the Bipartisan Council on Infrastructure, whether it be the Business Roundtable, whether it be the Value of Water Coalition, we've put a lot of time and effort into helping build those enterprises so we can help shape the thoughts of the industry. Lastly, you get nowhere without employee engagement.
We've got a tremendously powerful program called Watermark that is really unique to our company and has gone a great long way in engaging our employees to realize there's something bigger here than necessarily just the making the number in the quarter, but how do you really focus on building something strong that lasts for a lifetime? Very brief update on segment structure. We've got three segments. You will notice in our press release today that we did announce that we will be combining our Xylem Analytics business along with Visenti into Sensus. That will be putting together like-minded businesses that are focusing in on bringing advanced sensing technology to help fuel the industry's move to smart infrastructure. There's a lot of commonalities between those businesses, certainly Randy will talk more about that later this morning.
Otherwise, our Water Infrastructure business is really predominantly focused on wastewater, while our Applied Water business is focused predominantly on clean water distribution in the commercial building and industrial space. While you will hear people talk about air pockets in the industry, and there'll be bumps in the road in terms of end market demand, the bottom line is, when you think back to the slide that I showed you at Investor Day a year and a half ago, little has changed in terms of the large macro trends that are shaping the world's view on infrastructure. First, the policy environment is increasingly focused on water and smart infrastructure, which includes electric and gas utilities. The World Economic Forum has ranked water as one of the top 10 global crises for the last three years running.
It's estimated over the next several decades that two and a half billion or more people are going to be migrating to the major cities around the world. 70% of new infrastructure to be built will be built in emerging markets. This is not limited to any one locale. Flint, Michigan, is a stark reminder of what happens when water infrastructure is neglected. These issues and challenges are spread around the world, and we are the company that has the technology and the wherewithal to really help lead these prominent solutions. You may also recall from our last Investor Day, we talked about three major themes that drive the need for technology in the water sector, and this also applies across broader electric and gas utility infrastructure. We refer to it as our PQR framework.
Productivity is really about the efficient management of water and wastewater across the network. Water management is inherently inefficient from an energy standpoint. Few people realize that one of the biggest contributors to greenhouse gas emissions around the world is actually water management. The technologies already exist today to abate those emissions by up to half at a negative or neutral cost. They simply need to be adopted and put in place. Water quality speaks for itself. Resilience is really about how do we help our broad set of customers, not just water utilities, but all of our customers, build more robust and resilient infrastructure to withstand the impacts of extreme weather events and climate change. That certainly is fueling larger investments of spend, especially along coastal seaboards.
Now I want to shift gears and take you back to, you may recall the roadmap for value creation that I laid out back at the last Investor Day, and there were five elements of that. I'm not going to spend much time on this slide. You'll be able to take it away with you, but this is a brief scorecard on how we performed against those commitments that we laid out. You will notice that we are openly acknowledging that the one that is yellow is arguably one of the most important, and that's growth. I'm going to spend the next five to 10 minutes talking about what I personally and what we as a team are doing to focus on accelerating that profitable growth here in the immediate and medium term.
Before I go there, very pleased with what we've done in continuous improvement, margin expansion, productivity for growth, investments we've made for growth. Tony Milando is going to cover that in more depth here in a moment. We've done a lot, obviously, in the M&A area. We've been very busy. We've deployed $1.8 billion of capital over the past year in M&A. Probably even better news is not just the attractiveness of the assets that we've acquired and the synergies there, but as Mark will walk through later, what they do to also refueling our cash arsenal over the next few years to continue to do really smart, big capital deployment, I think is a movement forward from where we were in September of 2015. Lastly, I think we've done a pretty good job of returning capital to shareholders. We've increased our dividend here most recently.
We'll continue to grow that in line with our EPS growth over time. Let me shift gears now to arguably one of the most important topics of the day, and that is growth. You'll recall that I laid out four pillars to accelerating profitable growth a year and a half ago. It was what we're doing to drive commercial leadership, emerging markets, the role of M&A, and the role of innovation in technology. On the commercial leadership element, there are a few things that I want to spend a couple of minutes on here. The first two are organizational moves, and these organizational moves are very much with the view towards the tip of the spear being driving faster top-line growth. The first was what I mentioned earlier, and that's the combination of Sensus Analytics and Visenti.
Randy Bays and Colin Sabol are going to be working together to make sure that we rapidly put together an optimized business unit there that really leverages the strength of both. There are tremendous strengths. You'll see those on the tour. You'll hear Randy talk about those later this morning. We think this is going to be a really powerful offering to our customers, and it's something through voice of customer they've been asking us to accelerate because of the power they see in the combination there. The second is, those of you that are familiar with the story know that over the last few years, we have integrated the commercial teams in Europe, in our emerging markets.
The idea there is to put sales teams under common leadership, organize them around what we call industry verticals, otherwise simply known as common customer sets, and give them access to the full portfolio of products and solutions that are relevant to that customer. Two, making it easier for customers to do business with us, so they have one point of contact to go to as opposed to a dozen. We've seen in Europe and emerging markets a real benefit in terms of top-line growth from organizing in that fashion. North America is where we are now doing that, effective in Q2. It's our largest geography. This will now take our transport, treatment, dewatering businesses, along with our Applied Water businesses and have those under common commercial leadership, and that's going to be led by Ken Napolitano, along with leading the Applied Water business globally.
Lastly, you're going to hear from Randy talk about how the customer is at the center of everything as it relates to Sensus, and that's been a real demarcation point for the Sensus team. The same is happening here within the historical Xylem businesses. We have been slow to react, very much like other industry players. We have created distractions over the years of our salespeople, and we did not even have baseline metrics that would measure voice of customer, like Net Promoter Score, or be able to gauge the morale of our sales teams through things like sales force barometer. These are tools that we've rolled out this past year.
We have baseline set, and the whole idea here is to make it easier to really get the voice of our customers and our sales teams and where do we need to be focusing to make it easier for them to get more time in selling rather than administrative work. I want to shift next to emerging markets. I'm always fascinated about emerging markets, the short attention span that many investors oftentimes have around emerging markets, and it kind of comes and goes every couple, three years. We're taking the long view on emerging markets. Okay? I said earlier, 70% of new infrastructure is being built and going to be built over the next few decades in emerging markets. We need to be there. We are focused on these countries.
You'll recall a year and a half ago that I had said when I first joined Xylem, it was not as if we didn't have a good presence in emerging markets, but we were in dozens of them. We weren't focused on the ones, in my view, that really mattered the most. So we had talked about, at that time, China and Middle East were our top two priorities. I would say what's changed here now is India has certainly entered the fold for us for reasons that I'll mention here in a moment. In China, water is a top policy mandate of the central government, and we've continued over the course of the last year to see money flowing into that sector.
Two-thirds of our revenue in China is tied to Water Infrastructure, and our overall order growth rate in 2016, which is great momentum for this year, was up 19%. We are seeing a full-on recovery in China based upon this top policy mandate for the government. And we've continued to increase our localization of product and offerings there, and we've expanded our supply chain there over the last year. Middle East, no doubt disappointing right now. It's obviously being impacted by prolonged declined oil prices and the revenues associated with that for governments. We are still bulls for the long run on the Middle East. Based on the obvious, the lack of access to water. Water scarcity is a huge issue there. We opened our greenfield manufacturing R&D facility there just recently and feel good about the progress we've got in front of us.
India, this is really all about supporting Prime Minister Modi's efforts around smart cities, as well as the Ganges and other river cleanup efforts. We've won $80 million in big projects there over the course of the last 18 months. The lion's share of that is still in front of us. The $55 million belies the size of the business and the opportunity there. We're using those projects to build out our local sales supply chain, and R&D capability to really make this sustainable over the long run, because India certainly is a very bright spot for us for years to come. Jay's going to really hit this hard in her section around what we're doing to invest in innovation technology with a view not towards innovation for the sake of innovation, but innovation that customers are going to pay for.
I just want to leave you with a couple of points here. First is that we are clearly evolving Xylem from a traditional industrial company into more of a technology company serving the industrial market. You can see that by way of the size of the investment that we're making in R&D relative to what we had committed to. Focusing on building an open innovation ecosystem. There are so many players that are out there in the water sector that need to be able to collaborate with someone that has size and scale. We expect to be one of those companies that people can partner with and really kind of fail fast, learn quickly, and bring new technologies to market. A proof point of that is Visenti, which you'll hear more about this morning, which very much is down this path.
On the M&A side, since acquisitions in those space, but we will maintain the same disciplined approach towards M&A that we've demonstrated since I've been here over the last three years. One of the attractive things about Sensus as well was their heavy focus on public utilities. These are long lead times. They are across water, gas, and electric, but there are several of them that are. That's one opportunity. Two, have had to get two companies to work together in the past to deal with that. We don't have time for that. Now we've got a player that can come in and hopefully. Point of this slide is to say we do believe that we've got some very unique elements of our business model. 3%-5% organic growth. We've taken that up by a point.
Mark will explain the dynamics here as to what's going on behind that one point. Making strides that you'll see, I think significant strides in innovation, not just through M&A, but organically that Jay will take you through.
Aggressive and innovations need to take place at the right price point. When I reflect on now being in the water industry. In the game, taking it up a different notch. Right. We are transforming into a sophisticated technology savvy company. Starting with the top left, it always starts with the customer. Right. Due to our intimacy with the right product portfolio, global engineering, leveraging the global engineering capabilities, and consolidating as appropriate. Spills, as well as managing the sewer overflow, maintaining that is going to be a really important aspect of what a compelling case that says that a smart infrastructure is very vital to solving all these customer challenges. As there is actually a communication protocol, two-way communication where the smart. We look at it two ways. One is, the top one I call it is strengthening the core. It's really a core strength.
We are enhancing the strength of our core business. What's new here is the second part. Basically, all joking aside, energy efficiency, it's about 70% more efficient than a conventional pump system. As far as operational efficiency, just to give you a feel for it, since it's a smart pump, it's got software in it's possible via software to tune the pump characteristics. By doing that, it's about 80% reduction in the hardware assets for the customers so that they're able to dynamically adjust the pump performance with the software. Lot of excitement. In fact, last week, we were at DC Water, one of the public utility. Meter. It's the world's first water meter with a integrated three-state valve.
What that means is it has temperature sensors and pressure sensors so that the utilities can really manage and monitor the whole network, whether it's. It is really about providing an insight, an actionable insight from looking at the data analytics, whether it's weather information or any other type of GIS, geographical information system, connected to it to further enhance the value. I can tell you it's not that complicated to take a device and hook it up to the cloud. What is really challenging is to create scale. Do this in a high scale manner is really the challenge here. This is where Sensus technology provides the building blocks, helps us build scale as we expand this systems intelligence application to wastewater. Moving on to the next element of my roadmap, which is about partnerships.
One example, one specific thing we're working with MIT on next generation phosphate sensors. Phosphate sensors is an important. It's causing a lot of excitement in the company, and there's more to come on this. Last but not certainly least, we're focusing on optimizing R&D for our enhanced ROI. Focusing both on product development on new products as well as sustain, enhancing the discipline around it, bringing in timely help as needed, on a metrics-based way we're looking at. If you think about the product lifecycle management, we have a lot of mature products in the field. We've kind of launched the enterprise-wide, company-wide program, where we're re-examining the value of these customer value to further create margin expansion opportunities with mature products that are in the field. Third is about products. I'll give you a little bit more color on that.
We are moving to a Center of Excellence model where appropriate. Given the complexity of our distributed R&D sites, we've got some focal points in a few key areas with resources and accountability. The CoEs will have full ownership of driving standard technology platforms. The biggest benefit of this model is it's easier to build capability and scale up as needed. Productivity benefits are also enormous. Basically avoiding redundancy when the teams are working together. One example is Systems Intelligence Center of Excellence. This SI CoE is being led by Dave Ayres right here in Raleigh. He develops common technology platforms for connected solutions across Xylem. Building on proven elements of technology from Sensus. In other words, we've centralized the elements of technology curve that I discussed previously, starting with connectivity products, gateways, network communication, cloud management, et cetera.
This is also the best way for us to scale up, drive consistency as we expand our systems intelligence offerings in applications such as wastewater, outdoor water, dewatering, et cetera. It's also the most efficient, productive way for us to spend our R&D dollars. Another proof point is on the emerging market side of it, we are expanding our footprint in India for R&D. These teams are responsible for global engineering and product localization. We are today in a city called Vadodara. It's not new. We've been there since 2008. Focus of that team has been mainly on the mechanical engineering disciplines. Now knowing that we need to build capability in electronics and software and data analytics, and there's more demand that's coming. We are strengthening capabilities there and actually opening up a sister campus in Bangalore. It's planned for Q2 of 2017.
Let's just talk about the results here in a word. The bar graph on the left is about R&D investments. In our previous Investor Day, we had announced 4% of R&D, 4% R&D investment as a percent of revenue in the previous Investor Day. We are getting close to that now in 2016. We are further increasing our commitment to R&D to target around 5% by 2020, which is a healthy amount. We believe this is the best ROI we have in the business. Results, vitality index. Our five-year vitality index has gone up year-over-year. The number in 2016 there includes Sensus. But even if you strip that out, the rest of the businesses have increased by 100 basis points from 2015 to 2016. We are setting up a new target.
We had 25% before, now it's 30% new target for what we want to achieve in terms of vitality index. It's pretty exciting, a pretty bold target, and associated with really good investments as well. Hopefully you can walk away with a good feel for our journey here in innovation technology, our transformation into becoming a technology-savvy company, our approach, what we're doing differently for innovation technology. As you tour the facilities this afternoon, you will see and hopefully share the excitement we have around technology and around overall innovation in general. With that, I'd like to welcome Tony Milando to give you a perspective on continuous improvement.
Thanks, Jay. Okay, now for the sexy stuff. My name's Tony Milando. Welcome to the headquarters for Sensus, and welcome to Investor Day and spending a little bit of your day with us. I have the pleasure of talking about the Continuous Improvement program and giving you a bit of an update from the last time we spoke, in September of 2015. I hope when you leave today, you walk away with a few key messages. Number one is we're slightly ahead of our plan as we laid out in 2015. In fact, we've executed on or are executing on everything we talked about during that investor conference, that our Continuous Improvement effort is really gaining momentum. We're seeing the tools being used outside of the plan, outside official Kaizen, so we really feel like the culture is starting to shift.
While procurement and Lean Six Sigma, which have carried the margin expansion day so far, we're really starting to see some initial positive momentum behind some of our transformational projects, and we've laid a lot of the plans and are more confident about those plans to commit to, what you'll see is a higher target for 2020 on the Business Simplification side. Last but not least, hopefully you'll see from some of the things we still have yet to go, that we still believe we're in the early innings of this transformation. So those of you that were with us, in 2015, you will recognize the left side of this chart. We talked about our commitment and our three-pronged strategy around procurement, Lean Six Sigma, and Business Simplification.
Think about procurement and Lean Six Sigma as that year-over-year product engine for us, where Business Simplification really guides the big transformative projects for the company. The key takeaway here is that we raise the expectations on both sides, on all three areas. We've done that because we've seen better than anticipated results in our procurement maturity. We've seen Lean projects happening outside of the four walls earlier than anticipated, and we've really put a lot more meat around the bone and granularity to our Business Simplification programs. All that's allowed us to raise our confidence level about what we think we can deliver over the next four years.
What's important about this, and worth noting, is that this excludes the synergy that we get between combining Sensus and Xylem, where we have committed to at least $50 million in net savings, I'll talk to that a little bit later. Let's talk a little bit about the progress that we've made. I won't talk about each one of the elements here, but I will hit on a couple of highlights. Based on our centralization of procurement, we were able to launch standard payment terms across the industry, across our supply base, and that's allowed us to raise our days payable outstanding from about the mid-40s to about the mid-50s, so about 10 days. You can think of every day being worth about $6 million of free cash flow.
Well over $50 million of free cash flow just through payment terms over the last two years. We bought and put in place an e-procurement system in early 2016, and this has given us tremendous visibility to our supply base. We're now able to consolidate spend around the world in different parts of the region that's allowed us to put out for bid this year about $350 million of spend. This is in 2016. From a Lean perspective, we've trained our top 300 leaders in the company. We started this late in 2015. This represents about a top 3% of the legacy Xylem employee base, on how to lead Lean initiatives within their businesses or departments. This was making our leaders appropriately dangerous when it came to Lean and really sniff out Lean around the company. We did this insight 20 leaders at a time.
They led the program, they participated in the value stream mapping, they actually identified over $20 million of productivity on those training sessions alone that have either been executed or are being executed. We launched what we call a Living Lean Webex. This is a monthly Webex where it's invited to all of our people managers. We can get roughly 200 to 300 people on the call once a month, really evangelizing best practice around Lean and how we can learn from each other. Patrick Decker's on the call. The senior leadership team's on the call. We open it up for Q&A. It's a very interactive session and really drives employee engagement around changing the culture around Lean. We talked about, in 2015, about really addressing our footprint. We have a commitment out there to reduce our footprint by 10%.
We've been able to execute on about 10% of the rooftops, which is about 40 rooftops, mostly branch consolidation, sales office consolidation. There's been a manufacturing facility that's been closed as well. It represents about 400,000 square feet. We think we have upside here to another half a million to one million square feet going over the next four years. Last but not least, we talked about how we take complexity out of our G&A. One of the ways we're going to do that is really employ shared services in a much bigger way. We launched a European shared service center in Poland, just outside of Kraków back in September, that's processing basic financial transactions at this point. We'll talk more about that because that becomes a much bigger project for us going forward.
The culture is clearly changing, we have a lot more to go. We have a lot more upside. Let's shift gears and talk about what's next. From a procurement perspective, as I mentioned, we have much better visibility now, our procurement organization is much more mature. In addition to the $350 million we put out for bid or through requests for quotes, RFQs, last year, we have a similar amount on the market as we speak today, we've already identified over $300 million that we're going to put out for bid in 2018. We feel like we can continue to do this over the next three to four years. We're also building capability, we've added should costing to our weaponry. This is not new in the purchasing field, but it's clearly new for Xylem.
This is where we take commodity benchmarks alongside of manufacturing simulations, we're able to simulate what a part should cost us based on the commodity makeup and the manufacturing process. This gives our procurement folks an incredible advantage when they sit and negotiate with suppliers and actually work with the suppliers to eliminate that cost. This happens to be a real live part out of our Morton Grove facility, a cover plate, where you can see there's a 23% gap between what the part should cost, we believe, and what we're actually paying. Now, we won't get all of that, but we'll get a meaningful component of that. You can see we're really starting to up our game relative to maturity in our procurement organization. As you put that into context of our overall journey, you can see where we sit ourselves.
This year, when we save over $100 million of material savings, that'll be the third consecutive year that we've put ourselves in the upper quartile of procurement in terms of benchmarks in the industry. We really feel like that firmly places us in a high-performing organization. What's more important is that we have a couple of other bullets still left to go. Number one is around indirect spend. We've spent a fair amount of money investing in our indirect spend organization, adding some tools there as well, you'll hear more about that on future earnings calls. We feel like there's upside on a really untapped part of our business.
One of the items I mentioned in 2015 was this value-optimized design, we're partnered with Jay from a technology standpoint running a program now that really has a long cycle, we're building the pipeline as we speak. This is looking at our mature portfolio through three different lenses, through the voice of the customer, from a design perspective alongside competitive teardowns, also from a supplier perspective. Through these three lenses, we're able to rightsize the product and make sure that we're getting paid for the value that product delivers, or rightsize the product to adjust the value. Long cycle program. We're building a pipeline now. It'll start to read money here a little bit in 2017, but more so in 2018 and beyond. We're building that pipeline and the roadmap to take this margin expansion story even further.
Now let's shift gears and talk about the second part of that stool, the second leg of the stool, our lean gain. We'll continue to invest in our teachers or our CI professionals, our dedicated black belts and green belts. You can see the investment we made from 2015 to 2016. We have 71 dedicated black belts in the company. This is pre-Sensus. We're going to continue to make that investment. We look at this as a student-to-teacher ratio, where we look at about 150 employees to every dedicated black belt or green belt or dedicated CI individual. They're going to help us evangelize, teach, train, and drive projects throughout the company. We'll continue to use Kaizen as our method of choice to build that muscle inside the company about problem-solving. We had a goal this year.
We didn't know where to peg ourselves, we blew the goal away and delivered nearly 1,200 Kaizens and point Kaizens in 2016. We'll continue to up that until we feel comfortable that we've built that muscle. I'll talk about an element in a minute where we're going to make sure that the muscle sticks. One of the other things we're doing is we're opening the aperture around where lean takes shape, not just in the factories but outside of the four walls. On the right here is a nice example of how we're doing that. This happens to be where we were losing sales in what we call our motor attach rate. In Morton Grove, we sell pumps with motors that we procure. We couldn't get visibility in enough time to have the motors in stock when we needed them.
Our customers would buy the pump and attach their own motors from their own inventory. Through bringing our three motor vendors in-house and using some standard lean tools through a Kaizen for a week, we were able to reduce the order-to-acknowledgment lead time by 60%, and in the first two months of launching, we've increased our revenue on that product by $120,000. Really an elegant way of applying lean beyond just the typical cell layouts and value stream mappings in the plant. Clearly, we're trying to drive and build that foundational mindset and components for our lean program. How that fits into our overall journey is what you see now. Right now, we feel like we're squarely still in that developing range. Some of our businesses are well down the path. Other ones, frankly, are just getting started.
What I want you to take away from this chart is this notion called organizational baseline under the institutional phase. We piloted this last year with three facilities, and we're going to go ahead and baseline every part of our organization, manufacturing-wise, as well as non-manufacturing-wise. This really, across 15 attributes in lean maturity, measures where an organization sits. If you're a one, we want you to get to a two. If you're a two, we want you to get to a three. By doing this, we'll be able to know where every part of our organization is and how we're going to measure success. With each successive level comes an associated benefit for productivity and an opportunity to expand margin for our business. The third leg of the stool is around business simplification. Again, we talked about this.
For those of you who were there in September of 2015, you would've recognized the three buckets that we're looking at simplification in. From a logistics standpoint, this is all about footprint consolidation, and I talked about where we've come from, what we've progressed on over the last two years, and what the opportunity is that lies ahead of us still. From a commercial simplification, this is the work that was started in Europe about simplifying our organization. You heard Patrick talk about that, about simplifying sales operations, service operations through training and recognition, and we're seeing benefit in our European operation.
On top of that now, we can add the consolidation that we just talked about on the North America commercial organization, where we not only know that that's going to help elevate and grow our top line, but we also feel like there's opportunity in the back office, in sales operations and supply chain, to drive more margin expansion from those projects. The G&A rightsizing is all around driving higher shared services, and I'm going to talk about that in just a second. You can see through these programs and putting more meat around the bone, we feel more confident about raising the goal here by 20% versus what we told you in 2015. Let's talk about a couple of different areas of business simplification. Number one is global business services.
Today, our back-office functions, and what we consider back-office functions are IT, finance, HR, procurement, order management, really run across 100 different instances of ERP systems. This is really a holdover from the spinoff from ITT. You can imagine the complexity that those systems drive, the transaction complexity, the non-value-added work that our employees go through to drive processes just to close the books every month. Incredible amount of complexity. What we're going to do is take those processes off of those legacy systems and put them on one common platform that'll drive some cost efficiency from that perspective. We're going to centralize where this work is done so that we're going to get good at it, and we'll increase the cycle time, the compliance, and the quality of processing those transactions.
We'll employ a more new technology called robotic process automation, which allows you to manipulate transactions through an application against rule-based transactions that are taking place. Think about an accounts payable clerk that's trying to process and redeploy an email to another associate. We can do that through robotic process automation. Simple applications that'll allow us to optimize and take the non-value-added work out. We're really excited about this. This is a huge change management project for us. We've put together a project management office. We've brought in an expert that's done this before to run this and run GBS as an internal service provider for the company. We established a steering committee that Mark and I chair once a month. We're really excited about this.
We think this will really simplify our back office and drive that margin expansion that we're excited about. From a working capital perspective, we know that every good company has great hygiene here, and we've made some really good progress over the last couple of years. You can see the gray bar is the Xylem-only progress that we made, but it was really around the basic blocking and tackling. It's the focusing on some of the key elements of working capital. We've done some training. We've added it to our annual incentive plan. Going forward, we're going to really leverage the discipline that we get with the Sensus merger. You can see where they operate at nearly half of our rate in terms of percent to sales, and we've always keep in front of us that benchmark, aspirational goal that we want to get to.
Our long-term goal here is about 18% of sales. We've also added a working capital Center of Excellence, and we brought in experts around sales and operations planning from Newell Rubbermaid group. We brought in order to cash experts from Danaher, and they'll create this Center of Excellence for working capital and allow us to make the progress we know we can make in this part of our simplification effort. The last portion I'll touch on is around our cost synergies. These are the synergies we get from bringing Sensus and Xylem together. As we mentioned, we're excited about being able to achieve well over $50 million of savings as a run rate in 2019.
I think what's more important here, given some of my experience and having been through a couple of these before, most recently in Stanley Black & Decker, we're comfortable and very aligned in terms of the process that we followed here. We really focused on capturing the value right away. We have a very well laid out roadmap on where the savings are coming from. We focused on not disrupting the business, so we had zero customer attrition through the process. We focused on day one and day 100 execution, and we found very little issue with either one of those go lives. Last but not least, we focused on the people and making sure that we over-communicated about what was happening. This is obviously an area that we're excited about, bringing some synergies and speed and cycle time to the company.
We feel pretty good about where we are, and we're tracking the plan. I'll just wrap by saying hopefully you see that our strategy we laid out two years ago is well on track. Continue to expect progress here. Sensus adds not only scale from a procurement perspective, but also real capability that we can leverage in various parts of our organization. We're also bringing scale and capability to procurement and to Lean Six Sigma, and we think this is really going to allow us future valuation adders for inorganic growth going forward. Last but not least, it's really about building that culture of continuous improvement, and we look to making improvement not just within the operations side, but with everyone every day. With that, I want to thank you for your time, and I want to turn it over to Mark Rajkowski, our CFO.
Nice job, buddy. Make sure I don't drink this one here Patrick, I got your glasses here. Thanks, Tony. Good morning, everybody. Welcome. It's great being with you here today. It's been about one year, in fact, about one year to the day, when I joined Xylem. In addition to this being Investor Day, it's also my anniversary, so I want to thank you for celebrating that with me today. Good to see a number of familiar faces out there, folks that I've met over the past year working with Xylem, and also a few faces from my past life as CFO of MeadWestvaco. I know I haven't met all of you, and I do look forward to catching up with the folks that I haven't met over the course of the day today, and if not today, the months to come.
Before I joined the company, there were a number of things that I was really excited about with respect to Xylem. The first was that Patrick and the management team had a very clear and focused strategy. There was no question they knew where they wanted to take this company. They knew where they wanted to play, and they knew how they were going to win. That's not always the case, and that's really essential and the starting foundation for creating shareholder value. Secondly, it was clear to me that there were significant opportunities for value creation, both on the growth side, organic, strong brands, great market positions, as well as the opportunity to create value through meaningful capital deployment. Last but not least, and you got a good dose of that from Tony, I saw substantial opportunity in creating value through further operational improvements.
Lastly, given my past experience over the last 35-plus years, both on the financial and the operational side, I saw this as a really good fit for me to help contribute to this team and help them unlock that value. With that, I can tell you it's been one heck of a busy first year, but the good news is we're just getting started. I think we've got an exciting story. I think we've got a compelling investment thesis. It's certainly based off of the consistent and strong execution that this management team has delivered over the last several years. To that point, and with the exception of organic revenue growth that Patrick addressed early on due to some of the industrial headwinds, we have gotten ahead of each of the key financial metrics that we set out in our September 2015 Investor Day.
We're also well positioned to continue to deliver on our commitments in the years ahead. Having had the opportunity now to work with Randy and the team for the last five months, I can tell you the acquisition of Sensus is truly transformational, and I think as you spend the rest of the day here, you too will come away really seeing the power that Sensus brings to accelerate Xylem's revenue, margin, and cash flow profile. As Patrick highlighted earlier, this is worth repeating, we are increasing our long-term targets for each of our key financial metrics. We also expect to generate over $3 billion in operating cash flow through 2020. Our strong cash flow, combined with our larger scale and leverage capacity, will enable us to deploy an additional $1.8 billion of capital through 2020.
This represents a 50% increase over what we had committed to back in September of 2015. I'm going to quickly hit the highlights of what's changed since our 2015 Investor Day targets, and then we'll go deeper into each of these areas. We're updating our 2020 outlook for revenue growth, operating margins, cash flow, and capital deployment, all of which are improved with the higher productivity savings that Tony addressed, as well as the addition of Sensus and significant related synergies. Let me begin with our revenue targets. At our 2015 Investor Day, we assumed overall organic revenue growth of 3%-5% through 2020, and we assume 3%-4% for the 2016 through 2018 period.
With organic revenue growth of only 1% in 2016 and slower expected recovery in the industrial markets as well as some of the commodity-dependent countries, we've lowered our base Xylem growth rate to 2%-3% through 2018. This will have an impact of reducing our overall organic growth rate in the base Xylem business by one point to 2%-4% through 2020. Having said that, we do expect growth prospects in these industrial markets and the commodity-dependent emerging market countries to begin to accelerate in 2018. We expect our overall base Xylem revenue growth for 2019 to 2020 to return to 3%-5% level. On the positive side, the underlying smart meter market served by Sensus is growing at a faster rate than Xylem's business.
With our expectation of growth of 6%-7% through 2020, Sensus will add a full point of growth to Xylem's overall organic growth rate. We also have good confidence in delivering at least $150 million of revenue synergies with Sensus. That too will add an additional full point of revenue growth to the combined companies, increasing our overall organic growth rate to 4%-6% through 2020. Let me spend a minute looking at our end market growth rates. In addition to Sensus improving our overall growth profile by two percentage points, it also shifts our revenue exposure to our fastest-growing and our least volatile industry vertical, the public utility sector. With substantially all of Sensus's revenues in the public utility markets, pro forma sales from that vertical now represent almost 50% of our consolidated revenues.
We expect this market to grow at an overall rate of 6%-8%, reflecting the faster growth of smart meter segments, as well as the benefits of revenue synergies and continued share gains. In the industrial market, the significant sales decline we saw in 2016 in the oil and gas and mining segments had a dramatic impact on industrial growth last year. We expect the slow recovery in these segments to mute industrial markets growth through 2018. Beyond 2018, we do expect a strong snapback as we see commodities recovery, as well as some of the benefits of a long-awaited buildup in infrastructure to return our growth rate to 3%-5%. We expect commercial building services to remain a stable market for us, growing at 2%-4% over the period, with a low single-digit growth rate in the U.S. through 2017, accelerating modestly thereafter.
Our outlook for European commercial building services is for low to mid-single-digit growth. Now looking at our growth targets by geography, there are a couple of points that I'd like to highlight here. The first is the acquisition of Sensus has meaningfully shifted our revenue base to the U.S., which now represents almost 50% of our sales on a pro forma basis. As a reminder, with almost 70% of the faster-growing Sensus revenues in the U.S., our revenue growth outlook for that market has increased substantially to 4%-6% through 2020. Patrick alluded to this earlier, that the geographic shift in our revenue base has a very positive impact for our U.S.-based cash flows, which will make it easier to fund our dividend, fund M&A, debt service, as well as share repurchases.
We continue to expect emerging markets to provide outsized growth opportunities compared to the other geographies. We have and will continue to invest in local R&D capability, sales capabilities, and manufacturing to further strengthen our position in these markets. Over the period, we expect to benefit from growing infrastructure investments in India and a modest but ongoing recovery in China to be a tailwind. We do expect continued weakness in the Middle East through at least 2018. In addition to our solid revenue growth profile, we have substantial opportunities to further expand our operating margins above what we laid out in the 2015 Investor Day. We now expect to increase our operating margins by an additional 100 basis points to a range of 17%-18%.
We'll achieve this through the greater savings from our expanded productivity programs that Tony took you through just a minute ago, as well as from the significant benefits we expect from the addition of Sensus. If we just look at our base Xylem business, our current outlook for 2020 reflects a 60 basis point improvement over what we said back in 2015, and that's prior to the impact of the 2016 acquisitions. Base Xylem margin profile will benefit from higher productivity sales as well as lower R&D investments required to build out systems intelligence and data analytics capabilities that we acquired with the acquisition of Sensus. This improvement will be partially offset by margin drag from the lower growth rate that we expect to see through 2018, as well as higher expected rates of inflation that we do expect to see through 2020.
As many of you recall, we closed several acquisitions in 2016, certainly Sensus and Visenti being on that list, and this reduced our operating margins by 60 basis points, and that was largely due to the non-cash impact of purchase accounting amortization. Clearly Oops, could you go back one? I was a little quick on the trigger finger there. Clearly, the Sensus revenue and cost synergies have the greatest impact on expanding our operating margins. With over $150 million of revenue synergies and the net cost synergies that we're going to deliver over the next several years, this will provide us with 150 basis points of margin expansion. The last point on this slide is you'll see that the operating margins of the base Sensus business are slightly dilutive to Xylem's overall margins.
Keep in mind that those margins include 200 basis points of non-cash amortization related to purchase accounting. Without that margin profile is actually 150 basis points higher, and we'll talk about that in a little bit as we get into EBITDA. Okay. At our last Investor Day, we had targeted $3.5 billion of capacity for capital deployment, representing the combination of cash flow, cash on the balance sheet, plus leverage. We deployed $1.8 billion in 2016, largely in connection with the acquisition of Sensus, which as you will see today, no doubt will be a source of significant value creation for Xylem. While that's good news for the shareholders, even better news is the fact that we'll quickly be rebuilding this capacity back up to $3.5 billion by 2020.
We'll do this with higher operating cash flows from the expanded productivity programs, the synergy benefits both on the revenue and the cost side from Sensus, as well as from new leverage capacity created by our greater EBITDA scale. I'll cover our capital deployment strategy in a minute, but clearly, we have substantial opportunity to accelerate value creation. I'm going to take a minute to walk you through our financial framework. It all starts at the top line. We expect to deliver 4%-6% organic revenue growth over the period, largely fueled by Sensus. The combination of over $600 million of productivity savings and the Sensus-related revenue and cost synergies will drive 400 to 500 basis points of margin expansion.
All of that will result in the generation of over $3 billion of operating cash flow, which will also include significant improvements in our working capital performance, as Tony mentioned. We expect to deliver 110% free cash flow conversion. As I mentioned, we will have $3.5 billion of available capacity for capital deployment for smart M&A, as well as returning value to shareholders. You can be sure that we will remain disciplined and value-focused in making our capital deployment decisions. We also continue to strengthen our balance sheet, and we expect to reduce our leverage by the end of this year back to our target level of between two and a half and three times EBITDA. We believe it's strategically important for us to maintain our current investment-grade credit ratings to provide the flexibility to enable both efficient as well as opportunistic capital deployment.
I'm going to spend a minute on our capital deployment strategy. Pretty straightforward. Hasn't really changed from 2015 Investor Day. First, we're going to prioritize investing in our core business, funding high-returning growth investments in new product development in our emerging markets, and importantly, in enabling the Sensus revenue synergies. These are clearly our highest value-creating opportunities. Second, we'll continue to return value to our shareholders through a consistent and increasing dividend that we will grow in line with earnings. As Patrick said, for 2017, that represented a 16% increase year-over-year. With our remaining capital capacity, we'll continue to fund value-creating acquisitions.
While we remain very focused in terms of executing our integration plans around Sensus, and there's a lot of work to do there, it's important to understand that we do have a very robust pipeline of attractive targets, and those targets have been further broadened as well as strengthened with the addition of Sensus. Share repurchase remains our lowest priority for capital deployment. We will use this to manage share dilution as well as for deploying excess cash on the balance sheet. This slide lays out the key criteria that we use in assessing and evaluating potential acquisitions, and it also shows how the Sensus acquisition measures up. Sensus acquisition, by far and away, the largest and the most impactful deal this company has ever done.
We were able to purchase Sensus at an attractive price, we were also able to structure the transition in a very efficient fashion, both leveraging our non-U.S. cash position as well as obtaining low-cost financing. We're extremely pleased with the addition of Sensus to the Xylem family, clearly, as you look at this transaction, it checks all of the boxes in terms of our key M&A screens. It is worth noting that in assessing targets, we do not include revenue synergies in that analysis. That $150 million-$175 million of revenue synergies provides upside to the return on invested capital and IRR metrics for this deal. We'll continue to follow the same discipline blueprint in future M&A, particularly our focus on return on invested capital being meaningfully above weighted average cost of capital.
Not easy to do, particularly at some of the valuations, you've got to be very disciplined, that is essential for creating shareholder value. As Patrick mentioned earlier, effective the second quarter of this year, we are going to be combining our analytics business, which currently resides in our Water Infrastructure segment, with Sensus and Visenti. This combination will certainly accelerate the value creation that we see through our revenue synergies. I know this is of interest to all of you out there. We will be providing restated financial information on the new segment basis to you in advance of our second quarter earnings call. Importantly, we will continue to maintain the transparency and the visibility around Sensus performance. It's important for us to be tracking that as well as you to understand how we're performing against the acquisition criteria when we did the deal.
Before closing out with a summary of our 2020 long-term growth targets, let me just reaffirm our 2017 guidance. It's not changing. It remains the same. Okay? With that, let's move on to the long-term targets. We expect to deliver improved financial performance across each of our key metrics compared to our 2015 Investor Day. I've already covered targets for revenues, operating margins, cash flow, and capital deployment. I'd like to highlight a couple other metrics that are important. One I mentioned earlier is EBITDA. With the significant impact to our operating margins related to the amortization of the Sensus purchase accounting, EBITDA becomes an increasingly important metric for our investors to understand the underlying profile of our cash flows as well as our margins. Compared to our prior target, our current outlook reflects an improvement in EBITDA of 150 basis points.
We expect to deliver EBITDA of between 21.5%-22.5% by 2020. Also, on our mid-teens EPS growth target. This assumes no capital deployment. This assumes that we get cash, and we let it build on the balance sheet. That is a fairly conservative assumption, and if you look at scenarios where we are deploying capital, both for M&A or share repurchases, that EPS growth through 2020 would be at the high teens+. In closing, over the next four years, the execution of our plan will certainly deliver more attractive financial returns and financial performance. Importantly, we are also shaping a company that's going to be more efficient, more agile, more competitively and technologically competitive, more relevant to our customers. We think as you look at all of that, this represents a significantly more compelling investment thesis than what we laid out back in 2015.
With that, I think it's time for Q&A.
Thank you, John.
You're good.
I think we can just keep it. In order to best facilitate the Q&A session, I'd just ask you to simply raise your hand, and I'll do my best to identify you and point you out to the mic handlers. Then just state your name and affiliation before, so we have it on record there. First question. Go, Ryan.
Hi. Hello. Ryan Connors from Boenning & Scattergood. This question really is for Patrick as well as for Jay a little bit. Jay's slide number 33 about the technology curve. It seems that there are tens of thousands of public utility customers, even the large customers number well into the hundreds, and yet it seems like those that are truly embracing the higher end of that technology curve are much more anecdotal. You're going to have United Water here and Suez, which is certainly one. Jay mentioned DC Water, well known for that. My question is, what's the roadmap to broadening the adoption of that type of system? Because it certainly contrasts with your experience, Jay, in automotive and aerospace, where innovation is sort of a job one for everybody. What's the roadmap there, and how important is that to realizing the vision of that becoming material?
Thanks.
Okay.
My mic.
Yeah.
This is Patrick, for those on the webcast. Certainly, Jay, you can chime in here afterwards. First, I want to say, you're seeing Mark and I do Q&A. We don't dress up like this for earnings call Q&A.
Never
never, it's fair to say. It's a great question, Ryan. I think the way we look at it, I do think it's important for investors to understand that this is opportunity in front of us. There's a reason why the water utility sector has been historically risk-averse and slow to adopt, it is because of the fear of failure in certain operations and applications.
The smaller to medium-sized utilities and even larger ones, though, they do react and respond to reference cases when they see other thought leaders as water utilities make certain moves. Whether that be Suez, whether that be D.C. Water, Singapore Public Utilities Board, Thames Water in the U.K., they do have an impact on shaping people's comfort level with making those moves, but only once they've had a proven business case. That's why the approach that we're taking is to really leverage the combined Sensus Xylem capability to do more rapid prototype with large-scale utilities and even other industrial customers, build the reference case, prove it out, fail fast, and learn quickly. Then we expect to then begin to see that conversion and adoption going forward because, I don't want to speak for David.
I've got questions to that effect later as to are utilities willing to pay up for these higher order solutions, to what extent do total cost to ownership business cases matter as we go forward. We see early changes in behavior in that space, I think it only accelerates over time. Your point is well taken. This is not something that happens in a quarter or even a year or two, we do see a movement afoot in this space more broadly defined.
Nicholas. Up here.
Thank you, Deane. This is Cliff Ransom. I don't know whether to ask Tony this. I'm a big fan of your Operational Excellence Program, it strikes me that an 18% working capital goal is still way off what I would call a world-class benchmark. I know it used to be a lot higher. Am I missing something inherent in the business, or why shouldn't there be a lot more leverage there?
I'll certainly speak first for 15 seconds, then I'll hand it over to Tony to comment. I agree with you, Cliff, and I think that certainly we're going to be going after an even more aggressive improvement goal in that area. It does come down to relative order of priorities and focus in the organization on growth, on margin expansion, at the same time, focusing working capital as much as a clean bill of health, because as you well know you tend to have poor working capital performance because you have disruption in the supply chain, and there's typically associated with bad customer experiences. We're not going to put a limit on what that ratio could be. Certainly more of a best-in-class will be down around the mid-teens-
Yeah
Certainly, with Sensus' profile, they're even already well beyond that. I think there's upside there, but we felt right now, for sake of putting a long-term target out there for investors to kind of model and value, that was an appropriate place for us to pause. Do you want to comment, Tony?
The only thing I'd say is, we do feel like there's more entitlement to the payable side of things. I think some of it is due to the channels that we participate in and the entitlement from how quickly we can get paid from some of our customers. There's a lot of cleanup that we can do relative to being better in terms of forming our contracts with our customers and making sure we have better hygiene there. Probably the larger element for us and the piece that takes the longest is turning on the inventory-
Right. Where we have a lot of SKUs, a lot of complexity, and that's a longer road to hoe in terms of how we put better hygiene in our product development process to do more platforming, do more part reuse, and that really allows us to shorten lead times-
Got it.
Start to take the inventory. That's probably the biggest single area.
The other question is, in your opening comments, Patrick, you talked a lot about employee engagement, I think it only came up one more time in anybody's presentations. Maybe it'll happen after the break. How do you measure that? What are your metrics, and will you give us a feel for the correlation between that and all these other metrics?
Sure. Yes, employee engagement is a very big deal for us, and I think I can speak for most CEOs, especially in the industrial space these days. I don't think that we've been in as prolonged of a low, no-growth environment, that weighs on organizations in terms of employee morale. You can only get people to run faster so often. To me, we haven't seen, across the industry, a big spike in turnover because quite frankly, there aren't a lot of other places for people to go necessarily right now. As soon as things thaw, that's what I keep my mind on is how do we really make Xylem that place that people say, "I want to work there because they are serving a higher purpose. It's a place that I can grow my career.
It's an inclusive environment where my views are heard, and they matter." It's a way to really also help blend newer talent coming into the organization in the entry level. We do surveys. We'll be having an employee engagement survey that'll be rolling out here within the next few months.
Is that new?
We've not done one for the last few years now. Sensus has done one every year. We did one since spin. Quite frankly, with all of the changes that we had going on within Xylem the last couple of years, I specifically made the call, Cliff, that the time was not right until we at least had gotten through another major move in the portfolio, and this is perfect timing now for us to get that level of engagement. We've done that across our top 300 leaders. We did an intense one-month exercise to get their raw, anonymous feedback on what was working and what was not working. It's going to be retention, turnover metrics. It's going to be engagement scores along various lines coming out of the survey.
Quite frankly, at the end of the day, the one that matters most to me, Cliff, is the sales force barometer baseline that we've got where our salespeople tell us on a regular basis what % feel that we are helping them sell more and win more versus getting in their way. That's going to be an important baseline for us to be measuring against as well.
Thank you.
Hi, thank you. It's Deane Dray from RBC. I just thought one of the most important slides within Jay's presentation was the graphic on the smart water infrastructure, and I don't want to preempt some of the later presentation with David Stanton. Just maybe, Patrick, if you could expand a couple of key points on this, because I do think this is the most exciting opportunity for Xylem, and you've made that clear today. The first is, I saw that you've got pressure and temperature as just kind of sitting out there, and there's so much more you have the capability of monitoring, both from an analytics standpoint with precision, but also to connect it remotely through FlexNet and have real-time updates. Maybe just expand on integrating of the analytics there beyond just pressure and temperature.
At the top of that slide, it said asset management, and that's on the feed water side. It's not just the network of pipes, but it's the feed water, the quality of the water, I know that's something that David Stanton's likely to address as well, just the integration-
Sure
Beyond the pipe networks of water and wastewater, the feed water quality as well.
Yeah. Well, it's a terrific question, Deane. Just administratively, we do have more time baked in for a second Q&A, so we want to make sure that after you've all heard what we think is a pretty exciting opportunity here with Sensus, Visenti and Xylem, we'll be able to answer those even in more depth in that section. What I would say is there is absolutely far more to come, Deane, in terms of the way we're viewing this is we did a ton of voice of customer work as part of our diligence to really understand what are the real pain points, not just within the utilities themselves, but other users of water that they are prepared to pay up for because there's a real business use case that's there.
Taking Ryan's comment earlier. The fact that now some of these customers can be slow to adopt, the reality is you got to start somewhere. We do believe that with bringing Visenti and Sensus into the fold, our ability to connect the installed base of devices that we already have out there, whether it be in outdoor water analytics, whether it be wastewater networks, there's a tremendous value proposition that's there. One of the things that I will tee up for David to speak about is the broader move of real thought leaders around smart watershed management. The downstream effects of upstream problems in the water supply. That's a whole new body of work that only a few utility operators are beginning to think about.
There's clearly something there. We're in the early stages of working through what role we could play given the FlexNet investment and our thought leadership around treatment, wastewater networks, outdoor water, et cetera. Asset management, you're absolutely right. Extending the lives of investments that have already been made, also in new greenfield, how do you design that in a way that is even smarter and more capital effective over time? There's more we can talk about in maybe the second Q&A this morning on that. Okay.
Scott Davis.
Sorry.
Thank you guys, good morning. It's Scott Davis. Just a couple of clarifying points. The new higher targets that you've set, is that also going to be set for compensation targets by the board for you guys and then your teams?
Yes.
Okay. Simple enough. R&D, you've been seemingly getting a pretty good bang for your buck off of just spending 2.6% of revenues, and you pick up some good technology with these two nice acquisitions you've made. What's the magic number in five? How do you get there fast enough to feel like you're getting your money's worth? I guess the context I think about is other companies that have done that have taken seven years, eight years to get there. It's not something you can ramp up and just go hire people and get effective use out of them immediately.
Right
maybe some kind of color around that
Sure
please.
Going back to your first question, short answer is yes. Certainly, we have long-term targets that are approved by the board. Just for those that are new maybe to the story, our annual incentive plan, which is our top leadership team and top few hundred, is a third focused on organic revenue, a third focused on earnings and margin, a third focused on working capital. Of course, our long-term incentive plan is based upon a three-year average on ROIC targets, as well as 50% based on relative TSR compared to the S&P 500 less industrial. Just for the record, to put that out there, we're very much aligned around these targets, and certainly on the break, you can certainly reach out to Marcos.
He will verify to you that we go through and do a look back and check-in to where are the incentive targets we're setting for this year, how do they play out relative to what we said at the time that we get them approved year by year. The board does a great job governing that. On the R&D side, effectively what we're saying here is when you look at the level of spending that Sensus has today, it's about 10% of their total revenue, which is much more like a software and technology company. That is even ahead of our peers in the industry, but it really is there to support a very robust new product pipeline, lots of which has already come into fruition, but still a very healthy pipeline that's rolling out this year, next, and the following.
I would suggest that everything else equal, because there has been some catch-up being played by Randy and the team since he's been here. Everything else equal, that would probably moderate and modulate down a bit Along comes Xylem. What we talked about last Investor Day was we would be adding 100 basis points to that base of 2.6-3, we get it to 4. What we're saying now is Sensus will play that role for us in being that Center of Excellence. Certainly, we will modulate that based upon the health of the pipeline, how we're doing in any given year from a growth and earnings perspective. There's nothing magical about the five other than it's a good, healthy metric, and it's not much higher than what our pro forma blend is right now in terms of rate of spend.
Thank you.
Okay.
Don Hill.
Hey, thanks. It's Robert Barry at Susquehanna. Two questions. One on industrial. We've seen end markets start to inflect. We were chatting a little bit about this earlier. You don't seem to be factoring that necessarily into the outlook. Is that just conservatism or just given the diversity of your industrial, should we just naturally expect a kind of healthy lag from some of the short cycle metrics?
Yeah. This is Mark Rajkowski. I think we see more of a lag. We're not really seeing that inflection point at this point in time. We do think, and as I remarked in my comments, we do see that starting to occur later in 2018. We are on a bit of a lag. We do think there will be some benefits from infrastructure buildup at some point in time, again, I think it's later in 2018. That, we'll call it a two-year gap, where that recovery's a little bit slower. We think, at least from our perspective, that is a pretty down the middle view of what the reality is.
We hope we're wrong. We hope it comes faster, we just didn't feel it was prudent to build that at least to the 2017-2018 timeframe of guidance.
Yeah, fair enough. The second question was actually just on gross margin and what the outlook is there. I think at the last event, it was 42%-43%, I'm curious if that's changing at all. In particular, if you could talk about pricing. Given the vitality is going up so much, are you getting paid for all of the innovation, or are you choosing to kind of use price to gain share? How are you thinking about price?
Yeah. Good questions. In terms of gross margins, we continue to expect to see a strong gross margin profile in that low 40s% range. In terms of pricing, I think this is one of the opportunities that Patrick certainly was getting at as we think about commercial excellence and what we're doing with our sales teams to really get out there and make sure they know exactly the value that we're bringing to our customers, what their pain points are. What is the total cost of ownership? We're focused more on pricing on a value basis. We are not looking to go out and price for share. We need to be competitive in the marketplace, but we really want to go out there and price for value. In our model, we've assumed really neutral impact on pricing. It's a fairly conservative view.
We think there's upside there, but we've got to go out in the marketplace and deliver that.
Yeah. We probably will have another Q&A that's actually longer after the Sensus session this morning, probably have time for maybe two more questions, and then we'll go to break.
The gentleman at the back here.
Hey, guys. Thanks. Joe Giordano from Cowen. Two on, I guess, the most common pushback I tend to get about recent developments here. When you talk about the overlap with Sensus and the leverage that brings to your public utility customers, a lot of people are a bit, concerned is probably not the right word, but they question you're talking to two very different people at the same place. How siloed are the utilities themselves, and are there overlapping people that you're talking to, or are they almost like two separate companies under the same house?
Thanks for the question, Joe. This is Patrick. It really goes customer by customer. I would say the larger the utility, the more likely it's going to be siloed. The small to medium-sized utilities just aren't that big to be siloed, so it's easier to get to that common decision point. What I would say is, again, we talk about this being a journey, especially in terms of leveraging FlexNet, the telecommunications capabilities to devices that are out there that Xylem has sold in. Part of the reason that does have a lead time that we talked about was what Sensus, and quite frankly, Visenti as well, are bringing to us is they've historically sold in to the C-suite of the enterprise. It's a major investment from an IT standpoint, from a capital outlay, so they're talking to the COs or C-suite.
It's not that Xylem has not done that in the past, but it's been less common for us to be able to get that access other than maybe me or other senior executives showing up to a customer meeting. We think that combination together is going to open a number of doors for us to have a different kind of conversation than what we might have had historically and cut across the silos.
That's very interesting. Then last one on the revenue guide, pushing it 100 basis points. Given where you were last year and where the guidance is this year, did you feel pressured to bump that a little bit? I kind of get the sense that if the ability was shown to grow 3%, people'd be extremely pleased with that. Now moving to 4 to 6, I assume that's where you're going to get the most pushback from people generally. What was the thought process there and having not shown that kind of growth over the last couple of years?
Yeah. Listen, good question. We really deconstructed all that. As you look at the base Xylem growth rate, we actually did take that down a point. Again, it's for all the reasons that we've discussed around the industrial markets, some of the pressures on the emerging market countries that are impacted by commodities. While that's down a point, we think that's a realistic view. Remember, we took a big hit this past year, particularly in oil and gas, mining, and also in the Middle East. We think that growth rate makes sense. What's really getting us to 4%-6% is the benefits from Sensus, both the point that Sensus adds in the base business because they're playing in the smart meter segment that is just faster-growing, and secondly, as we talked about, over $150 million of revenue synergies, which adds another point.
The growth, that increase from 4%-6%, is really fueled by the addition of Sensus.
I would just maybe augment this, Joe, then we'll move to break here. No pressure there at all, Joe, to go up or feel the need to go up. At the end of the day, this is about delivering on our commitments.
Yeah.
Anything we're putting out here is a commitment that we're going after. If you look at that core Xylem growth that we took down by a point, even relative to what we did this past year, if you look back over the last two years, we were in a prolonged steep decline in a rather small part of our business, which is now only 5% of our total revenue, that being oil and gas and mining. It was off the magnitude of a full point of organic growth two years in a row. If you add those back, you actually get us back closer to this range to where one doesn't have to believe or hope a lot to be able to see a change in trajectory and the comps get easier here in the second half of the year.
a lot of work to do, but we feel confident with the targets that we put out here.
Not incrementally more aggressive in your view?
No.
No.
No.
Thanks.
Okay.
All right. With that, we'll take about a 10-minute break, and reconvene here about 11:15. If I can just grab everybody to come back to their seats, we'll start with the second portion of the show.
Well, hearing your whole story and the whole roadmap, that was actually really helpful.
Thanks everybody. With part 2 of the presentation starting now, we'll have David Stanton, who's the President of North America Utilities for Suez, for a fireside chat with Patrick.
Great. I am really thrilled to have David here. I think it's probably not entirely common that at an Investor Day you would actually have either a customer or somebody with really broad-based utility experience here to answer a number of questions. David has committed to me that he's going to be very open, candid along the way. Now we have, just for sake of time management, we're not going to be able to open it up on the floor for questions, but we did canvas a number of people beforehand, and hopefully we'll get the questions at the right level that will help inform you a bit more around the water utility industry, but also how David and other executives think about technology, pain points, et cetera.
Real quick, for those of you that don't know David, he currently serves as President of Suez in their North America utility operations and federal services, where he oversees the operations and management of regulated water and wastewater businesses across the nation. David has over 25 years of experience in the water industry, both in the U.S. as well as abroad globally. Prior to Suez, David served as CEO and member of the board of APT Water, a company focused on water reuse. David grew APT Water from its inception through organic sales, service, and acquisition of new technology, and he built an innovative platform and market strategy. Prior to APT Water, he served as COO and interim CFO of SouthWest Water, where he led the company through a turnaround ending in a sale to a private equity company.
David launched his water career in 1990 with a startup company, which was acquired by Wheelabrator Technologies. As the industry consolidated, our paths crossed. He moved to Tyco International, where we worked together for a few years, and there he advanced through a number of positions of increasing responsibility before being appointed Executive Vice President of Earth Tech's International Asset Management division. David holds a BS in electrical engineering from Cornell University and has had continuing education in the University of Virginia Darden School and in Six Sigma process improvement methodology. With that, I want to give a warm welcome to David here today.
Thank you.
Top of mind, David, and I'm really just going to tee up some questions here, and you go where you wish to go. No doubt on the minds of probably everybody in here, it's one of the first questions I always get, is your view on where we are in the U.S. municipal water recovery. What inning are we in? There's been some commentary on air pockets, and possible delays on the muni front, driven by changes in administration, uncertainty, et cetera. What are you seeing at this point?
Well, we're sort of of the view that we're in a kind of a long-term positive upcycle in the entire public utility market, whether it's the investor-owned utility side, which I would say is on a very nice ramp right now, or on the municipal side. The drivers are the drivers that you identified. Largely, there are delays sometimes on the municipal side based on political cycles and these types of things, but the general trend and availability of capital and the need has shifted not only just from a regulatory need, but more of an incentive, in a lot of cases from the government to actually get about it and start fixing the problems. Most of the regulation that affects the water sector is state by state. It's not the federal regulation that gets so much attention.
There's an increasing number of states putting in infrastructure incentives to invest in water and wastewater infrastructure to the point where it's driving, for us, the directions of our growth and where our capital's flowing.
I think it was acknowledged by Ryan Connors earlier that you and a few other utilities are clearly more progressive than others. I know you're very humble, but that's a fact. Could you talk a bit about the adoption of new technologies and the need for innovation in the water sector? Then beyond that, maybe address from your perspective, without putting you on the spot, Ryan's question earlier around what does it take for other utilities to adopt things more quickly? What are they looking for as the proof point?
When we look at the overall utility market, we sort of divide things, North America I'm speaking about generally, it's a little different as we go around the world. In North America, we sort of divide the utilities into kind of A, B, and C camp. A is the thought leading, innovative utility, the early adopters, the ones that will drive where the industry's going. We've already talked about a couple of them, DC Water, Suez, American Water. Out west you've got East Bay Mud and Orange County. You've got a variety of large utilities. The A group is where all the innovation happens.
All the way on the other end, you have the C group, which is municipality-run utilities that are bankrupt, under duress, have pension problems, their balance sheets don't work, their systems are far out of compliance, they have no access to capital easily or strong rates to support their utility needs. The big group is in the middle, they're Bs. Bs are sort of two categories. The Bs that are looking to the As, because they want to move in that direction, the Bs that are headed to C. You know what I mean? The whole idea about adoption, in my opinion, is working with the thought leaders then identifying the Bs that really want to move up to As and kind of save some of them from dropping to Cs. What gets all the press are those Cs, and they are a problem.
We do tackle that problem at Suez with the C, it's a different challenge. A lot of this time you hear that, boy, it's just an impossible market. You're not talking about the As and the kind of B pluses, you're talking about the B minuses and the C utilities. I think segregating the market and identifying the addressable market in some fashion that divides it up as opposed to looking at it like a lump is really clever. Then when you do that, in our experience, you still have a giant market. You really haven't compromised the opportunity because nobody has a significant market share in anything that we do in the water segment.
When you heard myself and Jay Iyengar talk a little bit about pain points that a utility faces, I guess either corroborate that, maybe augment from your perspective. A day in the life of a utility operator, what are the biggest pain points and what role do you see technology playing? Are you willing to pay up for it?
Yeah. It's a good question. I'll start at the top. We heard a little bit in the strategy this morning about the role of efficiency as a core tenet of what the industry needs, and I think we actually undersell that as an industry. The opportunity to drive efficiency in the utility environment is extraordinary. The opportunity to use data to drive that value proposition is really where the industry is headed. Why it's so important is because we have an infrastructure requirement that far exceeds our ability to finance it through rates. Okay? In other words, a municipal utility or an investor-owned utility can't just raise rates enough to fix all our pipes and all our infrastructure problems because of the political pressure and the fact that it's just not reasonable to jack up somebody's rates in one year 100% or something like that.
We have this rate constraint, which is our biggest constraint for solving our infrastructure problem. The opportunity that we are trying to leverage and trying to get the entire industry to work towards, not just Suez and other utilities, A utilities, is by driving efficiency, we create opportunity to invest under the same rates, okay, disproportionately. The efficiency story isn't natural for utility markets because we're generally cost recovery on the cost side, whether you're municipal or investor-owned. We recover our cost in rates. You just add up your costs, put it in rates, and it comes back to you. You make your money either on investment in the investor-owned side through capital investment. On the municipal side, it's through issuing bonds and they pay investment fees and that sort of thing.
Driving that efficiency is really, really core to the future of sustainable utility management. What we've discovered, and we launched this across Suez- wide, but in North America, we got really serious about it four years ago, really impacting kind of this smart utility concept in all the core categories of utility management. We're going to talk more about the Sensus value stream, which is largely meter- to- cash. We also launched it in asset and workforce management. We also launched it in capital creation, where we have to build new assets and new utility. We also did it in sort of SCADA production management, sort of the mechanics of how you pump and treat water. In all those areas, we made a strategic decision to do it all at once.
We weren't going to do one area at a time or one big waterfall project. We started tackling these activities all together. As a result, when we started, we had sort of a governing metric which drives this efficiency idea, which was we started our cost of operating expense as a % of revenue, so sort of the inverse of gross margin, OpEx over revenue, was somewhere around 52%. Here we are, a little less than five years later, we're down to below 42% in the North American Suez footprint. If you look at the American Water and Aqua, they've launched a similar program at similar times, and you can see their published data with very similar results. What that's done is it's given us 10% under rates to increase our investments.
We've more than doubled our capital investment in that same period of time, and our rates have only gone up 3 or 4% as a result. That dynamic is what we're trying to create across the industry right now. It is driven by data-driven decision-making. That efficiency comes from the data that we're getting from these processes.
Could you to that point, I know the term big data is thrown around a lot, and God knows there's tons of data that can come off the network, but when you think about the problems you're trying to solve, big data being turned into actionable information, where do you see that being most helpful to you in the utility space? There's a lot of data we could give you, but what really matters most in your mind?
Sure. It's interesting. When we launched all these activities, we did sequence them in ways that we thought were logical, and one mistake we made, which It was that we actually didn't automate our work order processes first.
What we found was as we were bringing data to life, like in the meter-to-cash process, anything you do with data analytics in a utility that generates an opportunity to improve the utility turns into a work order, because that's how we get work done. Everything becomes a work order. What was happening to us, we adopted Sensus. We started rolling this out. We started really focusing on the metering side first as the first opportunity, and we started generating work orders faster than we could process them through our largely paper process. If we were to process them, we would quadruple the amount of paper all of a sudden we were generating. We've rapidly had to catch up with integrating sort of an automated workflow with our digital outputs.
That's really the key is being able to look at the data, analyze it in a way that's useful for operations, create a work order, get that work done, and then get that resulting data back into the asset management tool or the information record quickly and accurately.
There's a lot of things that can complicate change management. Whenever you put this out in front of the organization, obviously these are big, bold changes that you laid out. We're not going to do it in sequence, we're going to do it at one time. You talk about the impact of workload in the immediate term. What other elements, kind of the degree of difficulty of you even changing inside your organization to deal with-
Sure
the inflow of this information and data?
Well, we can focus on the meter-to-cash side, we looked at really upgrading and improving our meter fleet, changing everything into full AMI. Okay. Collecting that data, analyzing it, feeding it through our billing tool. The Sensus FlexNet is the core in the middle of that process workflow. What we quickly have found is that just a very simple thing like being able to analyze data and make decisions on it is not a core competency of most utility workers. A lot of our utility workers have learned their skill as a trade, and they come up through apprentice-like programs over years and years, to learn what to do. They learned it from the guy that did it before them or the and always the guy, now sometimes the gal. We have some women working their way through operations. Yeah, so that's been a big change.
Now, as we create digital solutions and the algorithms that are attached to them start to make some of the decisions. First of all, we're capturing some of the institutional knowledge of those workers in the process, and we're also making it much easier to train a younger worker to be able to adopt and manage that. This workforce evolution, to be quite frank, would be the constraint if we had to roll this all out in a year. The fact is, even though we're aggressive and we're rolling out as fast as we can, it's kind of a 5- to 7-year rollout to hit all the distant reaches of our utility networks. We have time. We're trying to do this workforce redevelopment program, and we're working with our vendors.
We find vendors, like Xylem and Sensus, that are largely manufacturing and equipment-thinking companies. Now we don't want their pump. We want the smart pump, and it's all about the data that comes out of that pump. It doesn't matter if the pump works, we assume that's the deal. The data's got to work. Getting that cultural change, it actually extends out to our vendor groups as well, to bring to life the data that we want.
People who know me know that I have a tremendously healthy respect for our competitors. You have a lot of choices out there every day, and we've got some great competitors across the industry, whether it be in the pump side, whether it be in the metering side, the technology. You've been a long-time customer and advocate of Sensus, and I know you also deal with a number of our competitors. In your perspective, what differentiates Sensus from the competition? When it comes to the FlexNet technology, which I realize for some in the room, they don't necessarily know what that is yet. Randy will talk about that in a moment. What was the big selling proposition in your mind?
Sure. We largely looked at sort of two core decisions. One was, how are we going to communicate with our sort of Internet of Things? These devices, meters, we have 650,000 of them that are scattered all over, and we don't want to do it differently at every utility, okay? We already had installed Itron systems, Aclara systems, Neptune Systems. We went out and did a kind of a thorough review and study on what we thought was the best system, and we ended up selecting Sensus. A couple of things that sort of led that, there were a lot of small things, but a few big things. One is you need two-way communication.
If you can imagine, even if it's a pump or a smart sensor or a meter, that now has software on it that's doing smart things for you. That software needs to be upgraded, it needs to be patched, it needs to be secured from Chinese hackers. You have to have a way to communicate two-way with that. Surprisingly, not all systems communicate two-way. Surprisingly even more, some states don't allow two-way communication with meters because they think it gives us the ability to manipulate the meter. We actually had to go state by state and get approval to have two-way communications with our meters. It was a lot of work to get that decision in. It wasn't just a procurement decision. We actually had to go get regulatory policy change in order to adopt Sensus system-wide.
That was one big piece of it, was the two-way communication. The other is the license frequency is extremely important. The competition killer for us was, Aclara probably has those two features pretty close to Sensus. I don't mean to offend the Sensus guys, but they more or less have something in that category. The robustness of the communications, was such that if you have hills, buildings, larger terrain, it was an order of magnitude fewer fixed collectors for Sensus than it was for Aclara. A geography where we might have 200,000 meters might take 40 or 60 Aclara collectors and it took 10 to 20 Sensus collectors. That has a massive impact on our maintenance cost, the number of towers we have to locate, the number of sites, the maintenance, and all these types of things. That was a big part of it.
The second piece, which I'm just as excited about, is when we started this process, we knew we wanted an analytical platform for all the big data coming from our customers. This is now three-plus years ago. We actually went out and did a beauty pageant with eight companies that had product. They all came in, Oracle, everybody came in and tried to sell us on the solution. Their solution was basically something they had done for power, and then they said, "What do you want for water? We can do it." Okay. It's going to cost you millions of dollars. You know what I mean? We decided at the time to make no decision on an analytical platform for our big data because we didn't think there was anything out there that was adequate for the water industry.
We chose to make no decision, we basically made some modifications to our SCADA system to receive the data in the interim so we could play around with it. We gave a lot of feedback to everybody, and the Sensus Analytics platform, we felt two years later had really come full circle and really identified the right mix of needs for the water. We're implementing that Sensus Analytics platform which is really going to be a valuable contribution to the whole puzzle.
When you think about synergies across different parts of the water network because commonly as a utility, you're managing not just the clean water network, the wastewater network, you've got outdoor water. What do you see with the investment in FlexNet? What do you see as some of the synergies that are there in terms of connecting devices, et cetera? You've talked a little bit about that already.
Yeah
What do you see as some of the bigger pain points in the network?
The most exciting picture we have in all of Suez North America is this picture of our FlexNet read zone around New York City. We have all the utilities starting at Bayonne going all the way up above Rockland, almost to West Point. We have about half of Westchester County, then we run all the wastewater in Nassau County. We have this big horseshoe right around Manhattan, and that horseshoe now is saturated with FlexNet. Okay? It's the most densely populated non-urban area. It's an urban suburb, I guess, of New York City. We also have a unique aspect that we run all the watersheds in North Jersey, which most utilities don't. We actually manage them either alone or in partnership with North Jersey District Water Supply Commission. We own half of their watershed as well.
We have this kind of unique opportunity to bring data to life in an interesting way in that area. I don't know exactly where this is going to take us, to be quite frank, but I think it's going to be sort of revolutionary. It's going to evolve, but in the end, we're going to look back on it and say, "Wow, this is huge." I'll give you a couple quick examples. One is sort of in-network, where we have dozens of sensors now. We think that, and we're working with Xylem on this, is that if we can saturate our network with sensoring thousands of sensors, that that same data up into a good analytics platform is going to tell us a lot more about water quality and water quality management throughout the region.
If we kind of go on the other side of our plants upstream, the rivers, reservoirs, creeks, and streams, quite frankly, there's a couple of USGS water gauges on them that were installed 30 years ago. The flows on those streams are largely regulated by a Supreme Court case ruling in the 1950s that says how much passing flow and these types of things have to be there. Everyone's afraid to challenge the math because it came out of a Supreme Court case on the Delaware River. We're thinking if we sensor upstream and we start building the environmental data on how to do it right, that we'll learn and develop entirely new ways of increasing yield and management of the entire watershed region and ultimately the long-term sustainability of it.
Well, again, I think for two-thirds of the people in the room here who live in the New York metro area, they didn't realize you're the guy to call.
Well, yeah.
That's-
Yeah. I have a few business cards and if you call me too much, I'm installing one of those valves shutting off meters at your house for Sensus.
Well, hopefully, again, it's been terrific to have you here, David. Hopefully, it's been insightful for the folks in the audience here and online. We're early stage in the partnership here on the whole broader watershed management. There's more to come on that. I think really that is the forefront of thought leadership, so I want to applaud you for taking the role in that. Thank you very much.
Great. Thank you. Happy to be here.
Great. Thank you.
Okay, with that, we're just going to set up the stage here quick, then we'll pivot into the Sensus portion of the presentation. That will start with Randy Bays, our President of Sensus.
Okay. Thanks, Matt. Okay, thank you very much. We appreciate you being here. David, thank you. I think we just took an order for maybe 10,000 ally meters there. It's great news. We'll accept that. Really excited to be here. Just a little bit about myself. I've been with Sensus three and a half years. My experience goes back 20 years. I'm also kind of celebrating an anniversary, 20 years of kind of managing companies. I started back in April 1997, been around a while. Prior to that, many engineering and operational roles at several companies, including 10 years at General Electric. It's been great for me. I've enjoyed being at Sensus. I have to say that I'm really excited about this combination with Xylem.
In fact, I think I can speak for the whole Sensus team when I say we're excited to be here. Think about where we have been over the last few years and just getting this kind of a decision made and landing with a company like Xylem has just been extremely positive for the company. I also think we're going to be a formidable force in the market as we go forward. We're very excited about it. Okay, key messages today. I'll just hit these things very quickly. I've got a lot of charts, I apologize. I'm going to go very quickly, first off is just solving customer challenges with a comprehensive portfolio of technology, Sensus and technologies to resolve end-to-end customer solutions.
What we're really talking about there is starting all the way at one end, where it's a water meter or a sensor or something, going all the way through to analytics. David referenced that. It's very important to have the data, we're working across that whole spectrum. It's very important. There's a lot of things that tie together there. Secondly, accelerating growth potential in several areas. We have a couple areas we're extremely excited about, certainly North America. We're continuing to innovate and bring products to the market, we're super excited about that. We're not just talking products, we're talking software as well. The other thing is large international deals. We're extremely excited about what's happening in the international market. We've got some great opportunity. We're currently pursuing 20-plus deals. The value of those deals, as Patrick mentioned, is $3.5 billion.
I have for over 15 years, I've just got to mention that, but we're very excited. The other point I'll make is, on those large international deals, we have about nine of those we're in pilot on. We've actually stood up FlexNet, doing some things for our customers. We also have a differentiated business model. It's first driven by technology. Second, it's driven by a customer-first mindset. We're really focused on serving our customers well. Very focused on it. We continue to work on it. We call it customer first. The last thing is quality. I have to say, generally speaking about the industry a little bit, there's always a few quality issues. We've taken that on head-on, and we have driven quality leveraging Six Sigma tools.
Lastly is just the revenue synergy that we're going to enjoy with the close cooperation with Xylem as we move forward. From a business perspective, let's talk about 2016 EBITDA, $809, or sorry, sales $891 million in 2016, EBITDA 20.3%. We've also performed very well over the last three years. We've met all of our commitments to our owners over the last three years, we're a very strong team when it comes to planning the business and executing the business. We believe strongly in those principles. Forecasting 6%-7% revenue growth between 2017 and 2020. We feel that's achievable, we're excited about that. Key customers, we love our customers. We find the business to be very sticky. They're typically very loyal, the relationships really last for many, many years.
Hopefully, David, we can, down the road 20 years, we'll still be having these relationships. I'll be pretty old at that point, I'm just saying that we're excited about these long-term relationships, we know how important it is to you that you get the kind of service that you need. We have you right there at the top of the list, by the way. When we deal with utilities, we're dealing at the highest level in these utilities. I made a trip out to Portland to visit PGE and SaskPower just a couple of weeks ago, my meetings are with the CEOs of these companies. We also work throughout the organization, we're meeting with the highest level in these organizations. We're meeting with key decision-makers. Very, very important.
It's also very important to have those lower-level relationships, too, we want you to understand that we're working at a very high level. Just talking about revenue, you can see 65% of our revenue is in water, about 15% in gas, 9% in electric, I was glad to hear Patrick reaffirm our commitment to the gas and electric space. It's very important to us, I would say that our technology in those markets is just as awesome as what we have in the water space, we have a very strong product roadmap. Dale has done a great job. He'll be speaking here in a minute about a strong product roadmap that we're executing against, we feel very good about that. When it comes to international business, about 68% of our business is in the U.S.
However, we are starting to get tons of traction internationally. Two deals we won over the last few years have been the DEK deal and Thames Water deal in the U.K. Each of those deals are worth about $300 million a piece over that 15-year time horizon. I have to say, I joined the company about the time we won the DEK deal, and one of my biggest concerns was coming in and how can we execute a deal of this magnitude? It just feels so big. It is complicated. It is all across the pond. The team has done a flawless job on both of these deals in the execution of these projects. I was over at Thames Water a couple months back, and they are very complimentary, and their question is: What is next? Where do we go? What is the next level? Very excited about that.
We are also very excited about the continued growth in recurring revenue and software and data analytics and really our services model as well. Our technology is really front and center. We love technology in this company. We have had a big appetite for technology over the last three and a half years. We spend about 10% in R&D, and again, we have got that tied to a roadmap. We are not just throwing things up. We have a plan, and we are executing 600 software and hardware engineers and technical staff. We have several R&D facilities. You happen to be in the largest one that we have in the company. We are very proud of this. I think you are really going to enjoy the tour of the facilities later. There has been a lot of really great progress made here over the last few years.
We are not only innovating on our own, we are also doing acquisitions to add to the capability of the company. Let us take Verdeeco. Brian Crow joined us April 1st, 2014, and it has been three years. Sorry, Brian, I did not get a cake for you. I forgot about that. We have really went into data analytics in a big way. Brian was working primarily in the electric space and his team, we immediately wrapped resources around the team, and he released the first water product, I believe, in September of 2015, and today we have captured more than 200 customers with that water analytics platform. The good thing about water analytics and any of these analytics platform is they go this way. They are typically five-year kind of deals, but they also go up, too. As you develop more advanced analytics, you can add to that.
It has really been fantastic. Secondly, CyanTech. CINTEG is probably one of the premier IoT companies in the space today. They are based in Cambridge. They are about 40 people, and 12 PhDs. This is why we look at technology, and we feel like we can do really anything. We can integrate with anything as we go forward. Very good company. We had the opportunity to— based in Cambridge. They are mostly Cambridge graduates. There is one Oxford graduate there, and he takes a lot of heat, but it is a very, very capable It is not really what I call a think tank.
It is a bunch of smart guys that work very hard every day. They are getting stuff done. They are moving developments along. If we have a problem, a quality problem even, pick up the phone, "Hey, we had this thing come up, what do you think?" It is always great.
They have a great perspective and have been a really big help to us. Visenti, very quickly, I think one of the presents that Patrick gave us shortly after the acquisition of Sensus into Xylem was Patrick sat down with us and said, "We're acquiring Visenti." We were kind of floored by that because we had pursued Visenti in early 2014, it was kind of thank you, Patrick. It was a very nice gift. We appreciate it. This is a great company. Visenti brings acoustic methodology for leak detection and detecting non-revenue water, we have a different approach. When you bring them together, you really get one plus one equals three. We're very excited to have them on the team. They're actually arriving tonight.
We're spending the next couple of days, this will be our second call session with them, just to talk about the growth and the opportunities and how we're going to go pursue the market. One thing's very important. We see a nice play in the North American market with their technology and our technology, the international deals that we talked about, the 20-plus, there's also some really good opportunity there because a lot of these large international AMI deals, they're looking at non-revenue water as a big driver for their business case. We're going to bring that together and package it. We think six or seven of those deals are going to be helped by having Visenti on the team.
Just to give you a little, try to make this a little more realistic for you and kind of bring it down a little bit. I'm sure you're familiar with some of these things. You can see gas, water, electric, IoT, we're just trying to make this easy to understand. Here's a gas meter. Here's the iPERL water meter, ally water meter, and Smart Gateway, so on. Basically, we have a device here, typically metrology or a sensor. Then on top of that, we have a radio communications. We call it a SmartPoint. This allows us to communicate back to the base station, so the data's flowing like this. The amount of information we get, goes from just every 15 minutes or it could be every hour, every four hours. It depends.
At this layer, we have the network management software, which kind of operates FlexNet. Then you go up to the next level, which is applications and analytics. At this layer, we have 633 customers that are software as a service customer. We manage the software, our software, in one of our three data centers in North America. It's a real positive for us because it's easier for us to manage in our own data center. Secondly, we get paid for it. We like that. This is just to give you a feel. Again, 400 million messages per day traveling across our networks around the world. Brian likes to always reference Twitter because I think Twitter is nearly 500 million messages per day. We're 400 million messages. Going to the next level, extremely exciting.
We have Visenti coming into play. We have the transport and the pumps. We have Xylem Analytics, water analytics. We have a whole bunch of technology now that we're going to put our arms around and get that communications technology fitted to those things. Guess what? We're going to go right up to the top to David's point just a minute ago and get the actionable insights out of the data. If you think about the amount of data that's coming to these utilities, it's terabytes of data, and how do you look at 100,000 meters every day? What you need is the exception reporting. For example, iPERL is one of the most accurate meters in the industry. It measures extremely low flow rates. We can actually, using data analytics, we can tell customers if they have leaks in their homes.
We have the capability to do that. If you ever get a placard on your door and it says you might have a leak, it's probably an iPERL. Going on, this is powering the city. We like to put this chart out, but again, it just gives you a feel of the range of products that we have. Not everything we have is a meter. We have Smart Gateway, we have All kinds of DA solutions. We have base stations. It's a very broad range of products. I want to spend a minute on FlexNet, and I think David did a great job already kind of presenting this for me. First, private purpose-built, it's licensed spectrum. It means no one else can enter that spectrum.
A lot of our competition operate in open spectrum, same spectrum where there's baby monitors and garage door operators, and a lot of other things. We're in licensed spectrum, and that's a big advantage for us, just for the reliability and the resiliency of the network. It's dedicated and secure. The other thing is, and David touched on this as well, is really the idea that we have less infrastructure. Our technology, because we're in licensed spectrum, we can operate in higher power, and we have less infrastructure, so it's easier to maintain in cases of tornadoes, hurricanes, ice storms. Those kinds of things, it's easier to maintain because there's less of those base stations out in the field. The other thing about our technology with FlexNet, it's easily expandable. If you're an electric utility and you decide that you want to add lighting, it's easily done.
We're full duplex, we can communicate in both directions at the same time, it's just very capable. It's kind of future-proof, if you will. Lastly, deployment services. I just have to say a couple things here, is that we have a consulting team that are very knowledgeable in utility consulting. We have a team that helps with deployment of projects. We have a team that will do training, and We could help in just any utility situation. We have a lot of experience. There's a lot of times where we lean forward beyond what our technology is doing in the utility and help utilities solve their problems, and I think that's customer first. Next is just leveraging our core strengths to win. Technology, certainly at the top of our list.
Continuing to spend that 10% of revenue driving a very strong product roadmap. Passionate and energized management team. We are a company that has run a couple of surveys. We used a great place to work survey over the last couple of years. We've seen dramatic improvement. There's no rocket science to engaging employees. It's just about engaging employees, if you will. We've been very excited here about we've seen. Most of the people in this company believe strongly that the work that we're doing is very important when it comes to conserving natural resources or it's improving utility operation, they believe the work is important. Customer first is a priority for us. We want to continue to serve better than anyone in the industry and keep that trusted partner kind of mindset with our customers.
Lastly is just the diversity of everything you bring together. Great technology, great people, customer first, working in water, gas, electric, and lighting. Growth. We believe strongly in growth. We have a great story around growth. First off is just investing in new products and software for the North American market, in our core markets. It's continued to invest. Secondly, we've talked about the international deals, $3.5 billion that we're pursuing. Again, we've done nine pilots. That's going very well. Also capturing the synergies with Xylem, whether it's just the cross-promotion and cross-selling, is going very well. I happen to sit in with the North American team frequently, I have to say that the teams are working seamlessly in North America, it's very good. Bringing technology to wastewater and outdoor water is something we're going to do very quickly.
Scaling Visenti is also a priority, just using their technology to support our wins in the international market. Quality is my last chart. I see my shot clock has run out here. I just want to say a couple things about this. This has really been a big differentiator for us. Again, the industry quality has not been great. I've been through three Six Sigma implementations. We've started with Six Sigma with Mike McGann. He'll be leading a tour here a little later on. Mike is also trained at GE, we have a couple of hundred green belts that are in training or have been trained. We have 15 black belts, we have three master black belts. This is not just fluffy stuff. This is real stuff. It's a part of the fabric of the company today.
Those black belts, once they complete the program, we typically move them up into a better job. It's been very beneficial for us. It's really increased our capabilities. Six Sigma system test, you'll see that as we tour. Just testing across the full spectrum end to end. You can't put a product in the field today that doesn't work, and it really takes beta testing. It takes good system testing. These are complex products. Return material analysis. Four years ago, nothing was coming back to the company. They were doing no return material analysis. We now analyze everything, we've taken all those learnings from those return materials and driven it into our new products and driven it into our existing products to make sure the quality is good. We've seen that. The data supports that. It's really helped us tremendously. It's reduced our warranty costs.
It's improved customer satisfaction. It's been very big for us. Quality control in the factories, we're doing a very good job there. We've got a lot of data to support the progress we've made there. There's intense focus. Software as a service analytics is just another thing that we're actually, I would call this more of a health of the system kind of thing. We're actually, we have millions of things that we can look at from our SaaS models, millions of devices that have been deployed, meters and so on. We can actually look at that, and we're actually doing some predictive analytics. We haven't marketed this as a product to sell, but it is very interesting in what the capability and Brian's team have done around data analytics. I do see and hope there's a product down the road there for that.
Again, just key takeaways, technology, very key to us. We're excited about it. We're innovating. We've got a strong roadmap. One point I didn't mention is a lot of our customers are combo utilities. They're not just water or electric. They may do water, gas, electric lighting. Having the combined capability, very important. Early stages of growth, very exciting in North America. There's still a big opportunity there. Existing customers that we have deployed with will come back and buy more of our products, whether it's software or, for example, the ally meter, the remote shutoff ally meter. They'll continue to use our technology. Differentiated business model around technology, customer first and quality. Lastly is the significant revenue synergies to be realized with Xylem. That's it. Thank you. Sorry, that was kind of quick, but thank you very much. Appreciate the opportunity.
I'll introduce Dale Harbour.
Thanks, Randy. Appreciate it very much. I don't know if this speaks to my judgment or perhaps Randy's judgment, but this is now the third company that I've worked for Randy at. I spent the last three and a half years here at Sensus. It's been an interesting kind of three and a half years, and it's really been great. Early in my career, I spent also at General Electric and interestingly enough, ITT Aerospace and then several private equity portfolio companies. With that, I hope to walk you through a little bit of what we're doing in the sales and marketing space within Sensus. First off, again, kind of key messages in the sales and marketing space. I'll talk to you a little bit about the markets that we serve.
Suffice it to say, we've heard about water, gas, and electric as kind of the core markets that we serve. We're excited about the long-term trends that we see in that space. More exciting is some of the adjacent space, like intelligent lighting control and some of the data analytics that go into those markets that are driving kind of our accelerated growth. As Randy Bays talked about, we believe we have the industry-leading product portfolio in the space. We've done a fairly significant three-year investment in a product portfolio that we, again, believe is industry-leading. Then, again, I think it's been talked a lot about, but try to bring home a little bit more what the Xylem acquisition does for us at Sensus, how it drives some of our international growth, how we leverage that, and also how it helps us here in North America.
There was a kind of an early market pioneer that talked about there's no such thing as a growth industry, only companies that are organized and operated to create and capitalize on growth opportunities. For us, these drivers create essentially market opportunities or growth opportunities for Sensus. Just a couple examples kind of in each space. In the compliance and regulation, the DECC deal that Randy Bays talked about, that's the Department of Energy & Climate Change in the DECC deal in the U.K. They mandated 2020 smart meter adoption. That compliance for the U.K. market has driven smart meter adoption. Similarly, in the gas market, there's a PHMSA requirement. That's the Pipeline and Hazardous Materials Safety Administration require that gas pipelines every mile have a monitoring device so they can test for pipeline integrity for cathodic protection.
What we've been able to do is automate that process and create an operational efficiency using FlexNet, where they can get that data not only annually, but they can now get it monthly or weekly if they so choose. Aging infrastructure. Jay talked about non-revenue water. For us, non-revenue water is a very tangible marketing tool. She said something to the effect of 30% kind of non-revenue water. I think World Bank says the cost to water utilities is about $14 billion annually for our non-revenue water. We can help drive value and helping those utilities capture that loss revenue associated with aging infrastructure and water leaks, we can certainly benefit our business. Housing starts and urbanization is kind of obvious, technology-driven adoption, again, you've had several examples of that today.
That helps us to not only take in technology that we pioneer in the electric market, but bringing it to the water market. I'll talk about a case later where we have a customer that does about 450,000, what we call a remote connect or disconnect of a water meter, or excuse me, of an electric meter annually. If you think about truck roll, and they're doing 450,000 remote connects or disconnects of that meter, whether it's a move-in or move-out, or a non-pay, or whatever the situation is, if we can bring that technology to the water space with our ally product, think about the value that we're bringing to the water utilities of having the capability to do that. As a proxy, I'll talk a little bit about the metering market. Globally, it's about a $12 billion market.
About 50% kind of that $12 billion is electric, 30% water, 20% gas, and the associated kind of growth rates forecasted over the next three years. It's an extremely large, attractive market in all three segments. What's interesting globally is less than 25% of the 3 billion meters installed are smart. For purposes of this, we talk about a smart meter being a meter that has communication capability, whether it's embedded in the meter or attached to the meter, it has capability to communicate the data that it's measuring. You can see, globally, electric leads the adoption, but water and gas are very low in terms of adoption of smart technologies. What's interesting, if you contrast that, and I'll show you the North American market, it's about a $2 billion market. Again, similarly, about 50% electric, 30% water, 20% gas.
A little bit lower CAGRs, which again, is part of what's driving our strategy to go toward international markets with our product. The adoption rate is much higher. The North American utilities have certainly seen the value of adopting technology and moving towards smart infrastructure for operational benefits. Again, electric tends to lead the adoption rate, but water and gas, somewhat quickly behind. Still a huge market. If you think about globally, 75% of the market has an upsell opportunity to a smart technology. Here in North America, still about 40%. Also what we're seeing is about, in that 60% that have adopted smart technology, is we're starting to see a refresh cycle. We're starting to see some of the early adopters of that technology start coming back for more advanced systems, more capability in their AMI structure.
A little bit about our go-to-market strategy. As Randy talked about, we have a very high-touch customer engagement. We have about 300 sales associates globally. We use a combination of what I would call a key account strategy focused on large deals, particularly in the AMI space. We have regional coverage, both in North America and internationally. That regional coverage allows us to get to the high number of utilities that David had talked about in terms of the number of utilities that exist in North America. We do about 70% of our revenue through distribution. We have typically exclusive distributor agreements, so they're selling Sensus and they're selling Sensus products only into that market. At the bottom of the chart is a little bit about a typical AMI sales cycle.
You can see, and it's been talked a little bit about, these tend to be, on a large AMI deal, fairly protracted sales cycles. Could be as much as two years on the front end of engagement, understanding pain points, potentially doing pilots. More and more, we see more and more pilots being done with some of the larger AMI deployments. Customer then go to RFP, go to a down select, go to a contract, and then go to deployment. I think the interesting thing about the deployment, typically these are 15 to 20 year contracts, but a significant portion of the revenue is in the hardware that's deployed in the first five years, and then the last 10-15 years of the contract, typically we get into a subscription-type software services, and that's where we're trying to upsell analytics.
That's where we're trying to add on additional solutions underneath the FlexNet umbrella. I talked about high touch. Here's just an example of one of the things that we've done at Sensus to improve our customer engagement and our high touch aspect. This is something we call our Xylem Reach Conference. Last year, we had about 1,000 attendees at this conference. That's more than double from 2013. We have what we call sessions. These are typically 45 to a 1-hour session where we do some kind of training, where we do some kind of product education, where we do some kind of product roadmap to give our customers a view of what's coming, what can they expect from us as we go forward. We're really excited about what that does for us. The other thing we've done in the customer engagement piece is something called the Sensus Partner Alliance Network.
All customers of Sensus are able to participate in the Sensus Partner Alliance, and we have monthly calls with the groups. We understand from them kind of engagement, what's happening in the marketplace, what lead times are going, what operational issues may be, but we communicate with them very regularly, and we typically do that by a subcommittee. It'd be water, gas, software, analytics. We have seven different subcommittees that we use to engage with our customers. Next, two case studies that I think are very exciting and really drive home value of Sensus. The first is Thames Water. I think Thames has been mentioned a couple times, but one of the largest water utilities. Nothing disparaging, David. It's okay. One of the largest water utilities in the U.K., certainly, I think in Europe.
They had three operational challenges that they were trying to address: meter accuracy, meter read capability, and non-revenue water. We signed a contract with them in March of 2015. As Randy said, it was a 15-year contract, $300 million kind of initial contract value. We're in the middle of that deployment now. We've sold about 400,000 meters, and it's going extremely successful in the deployment at Thames. I think one of the interesting data points, and I know Brian's going to talk about data analytics, Randy indicated he visited a couple weeks ago at Thames. They indicated in the first 100,000 meters that they installed under FlexNet, they got more data from those 100,000 meters in one day than they had the previous year from their entire 3 million population.
Essentially, that's a 1-hour read for a day, 24 hours, versus the data that they were getting out of their entire population getting a read once a year. The other case study is a Philadelphia-based combo account. Randy talked a little bit about combination accounts. This happens to be PECO. They have 1.8 million electric, half a million gas customers. Again, was probably a very traditional AMI deployment in that they deployed AMI in order to generate operational cost savings associated with the labor to read the meters. What they've gained from it is they've installed. They do about 450,000 remote connects, disconnects a year. Again, huge operational savings. Then in terms of outage management, they get tremendous value from being able to pinpoint outages, being able to save labor costs associated with restoration of service, and the timeliness of that service drives a high customer satisfaction.
Again, three key takeaways. What I would say is, I believe Sensus is organized and prepared to drive success in the markets that we serve. We have made a significant investment in our product portfolio to drive growth. We're excited about that. Lastly, if you remember the market charts, $12 billion globally and only $2 million in North America. 80% of the market that we serve is outside North America. The Xylem global footprint and the Xylem brand will accelerate the growth that we had started in the international space. We're really excited about how that comes together for us. With that, I will introduce Brian Crow. Brian's going to talk about data analytics. Thanks, Brian.
Thanks, Dale Harbour. Before I hand it back over to Patrick to wrap up, let me give you a little bit of a glimpse of what we get really excited about, where our passion lies, and a glimpse of the future. When I was putting this together, I thought that I would basically just come up here on stage, shout analytics, drop the mic, and walk off. They told me that we have this lapel mic, and it would be kind of messy to pull it out of my shirt and drop off. Wouldn't be quite the same experience. Let me jump into it and give you a little bit about my background. I started my career as an engineer at an electric utility. A lot of the problems that we are solving today are problems that I've dealt with at the utility 25 years ago.
I realized firsthand as a young professional, the amount of data that was coming in from out in the field was greater than any amount of data that we'd ever had before. I also knew that it would transform the way that we approach solving problems and the way that we engineer for the future. Data is coming off of every item, everywhere, every second. Increased labor costs, aborting truck rolls, higher energy costs, reducing waste, an uncertain regulatory environment. These are all issues that our industry has to tackle. At Sensus Xylem, we'll give you a little bit of an idea on how we're helping the utilities to tackle these issues.
First, we're looking to drive growth inside of our utilities by combining the data analytic applications alongside of the analytics, alongside the data that's coming in from the field in order to provide insight and move these utilities from being very reactive to very forward-thinking, looking ahead at what's going on. We do this by balancing building products that span different departments inside of the utility, from engineering and operations to marketing, finance, and customer service. As David mentioned in his speech up here earlier, you realize that there's work orders that are tied to this data that's coming out there. We've got field force. The more areas inside of the utility that we can build applications to solve problems, the greater the products that we are developing in the field and the value that drives for those.
It makes us as a company stickier, the more analytic applications that we can drive inside of the utility. Randy Bays will probably mention in passing in context, very much like the hot sauce commercial, we put that stuff on everything. I'll throw out there we can put analytics on pretty much everything. If you want to put analytics on wastewater pumps, absolutely, let's go for it. If we want to combine wastewater pumps, stormwater pumps, metering from the freshwater system, hydrology coming in from the geographic network, absolutely. Let's go do it. Analytics can solve problems. If for nothing else, we'll help to benchmark the mad scientists inside the organizations that have great ideas, and they just need some data to help back it up. Our applications, alongside the products that Xylem deploys in the field, alongside the communications technology, are best-in-class.
We pair that up with a unique data management platform, and we're able to store, capture, and analyze more data than's ever happened in the utility industry. Our strategy is to build a moat around all of this data that's coming in from the field, because all too often, that data's handed off to another system who's able to extract the value from that. I can't tell you how many times I go into a utility and executive's talking about a problem that someone found. Where'd the data come from? Came from SAP. It came from Oracle. It came from IBM. It came from some other application. That's not true. The data came from the field sensors. The data came from the pumps. The data came from the meters.
If we can say the data came from the Xylem Analytics Network, the data came from the Xylem package, the data came from the Xylem mad scientists, then we've just increased our stickiness as a customer. We're building ourselves as that strategic, value-added, trusted partner for the utility, and that's our ultimate goal. We do this through designing, building, and deploying analytic solutions that are very purpose-built to solve specific problems at the utilities. As David mentioned, most utilities, they don't want to buy a toolbox. That's what the original vendors that were coming to David to talk about the different analytic applications. They basically were providing a toolbox and were going to develop something on the fly. Utilities like to buy something that they know exactly what they're getting.
We do this by building these purpose-built solutions, while at the same time, we're keeping our eye on internal analytic applications that will provide us the next generation of revenue-generating products. It's these products that will be our future go-to-market and growth areas. What we find is that the operators in the utility industry, believe it or not, they're still very thirsty for just basic information and reporting. They are looking towards the day, though, where they have a system that is not so much rear view mirror looking, but it is conveying to them not what happened yesterday, but what is happening in real time right now, and more valuable, predicting what will happen down the road. Completing this chalasis and back to action, that's the ultimate goal. We want to complete the full life cycle of what the value the data can bring from us.
We do this by building credibility with our customers in delivering these specific applications that satisfy their thirst for the basic need of information. I can't tell you how many times we go into a utility. As opposed to trying to say, "Let's not boil the ocean. Let's focus on two items, two top problems, and solve those problems like nobody else can." We build so much trust and credibility that we can continue to move horizontally inside of that utility. That's when we become the trusted advisor that they're looking for to help them save money, operate more efficiently, or predict and solve problems faster. When I'm working with our sales teams, a number of the things that I typically will convey to them is most all utilities have their three pillars. Like Patrick talked about earlier, our four pillars of who we are as a company.
Most every utility has a combination of their three pillars of who they are as a utility. They either focus on customer service, they're focused on financial excellence, or they're focused on operational excellence. We build analytic applications that will meet somewhere on one of these three pillars, and when we do that, we're able to become their trusted advisor. We're able to show them that we can deliver the applications that they're looking for. If we align our applications up under one of those three areas, we're always typically successful in the sales cycle side of the utility. Now let me share with you just a couple of examples of some of the applications that we've delivered to the field. One of the applications actually came out of our internal analytics applications that Randy mentioned in one of his previous slides.
We have an internal analytic applications where we're not only trying to sell product out in the field, but we're internally analyzing data from inside of Sensus to make ourselves better from an engineering perspective, from an operations perspective, from a design perspective. In one of those very specific cases, we were analyzing some field data for electric meters coming out from one of our customers, and we started seeing anomalies happening in the data. We sent our data analytics team to the field to see what was going on and work with that utility because we actually thought we had a growing issue around the electric meters themselves because of what the data was bringing off.
What we found is 100% of the meters that were on the list that we thought were suspect were actually throwing off data from the electric grid that was telling the utility that the transformer upline that served that electric meter was about to fail. For me, that was a utopia of kind of the data science and the analytics. Where we want to get to is that point in time where we're driving down a path, we think we're going after one problem, and all of a sudden there's a curve in the road and we're solving a completely different problem that we can turn into a revenue-generating application. On the simple side, we deliver a lot of just visualizations. You'll see this on the tour today. A lot of just simple visualizations that give the utility that basic need for data as it exists today.
I've always said the data, as it's coming in from out of the field, it's telling a story, but it's coming at us so fast, the utilities don't know how to understand that story. They don't understand how to read that story. We've got to build visualization tools that help the utility understand the story that the data's telling as it comes in from out of the field. One of the dashboards we'll show you on the tour today is very simple, a six-block unbilled commodity dashboard. All this does is just simplifies the rolling up of all of the metered data at that particular utility and aggregating it at different points that has happened on a day-by-day basis. Believe it or not, utilities have not had access to their daily sales in forever, pretty much, for the history of utilities.
They don't typically know how much they send downline from their stations that pass through a meter that they will bill for at some point in the future, 30 days, 45 days, whatever the bill cycle may be. They don't have that data on a daily basis. Just that one dashboard changes the way that our utilities are able to forecast, plan, change their environment based on what they're seeing on a very, very granular basis, and it's very powerful to utility. With that, I'm going to hand it back over to Patrick for Q&A. Thank you all for your time to come in today, and look forward to meeting you on the tour.
I guess I'm the last thing between you and lunch, and hopefully for those of you who are able to join the tour, I just wanted to, again, thank you all for taking the time to join us here in Raleigh-Durham. For those of you that are on the Webex, hopefully for those of you that traveled here, it was a good use of your time, hopefully highly educational around not just Sensus and the other acquisitions we've done, but how we really think that we can use this to truly transform the industry. I know it's been a bit overwhelming, probably to some extent, and that was probably by design so that we could really share with you what we're excited about. I think as you walk around the tour today, you'll get even more of a visualization of how this actually works in the field.
I just reinforce that we are in the early stages here of both realizing the value of this combination, but secondly, in the early stages of the value creation for Xylem. I'm excited by the confidence that those of you that own the stock have had over the last few years and certainly the past year. You've got our commitment as a leadership team to continue that journey and fight like hell to make sure that we outperform the market. As I said at the opening, I think our investment thesis, while it remains unchanged, has only been strengthened by the capabilities we've built over the last year, and also the smart deployment of capital that we did to truly transform ourselves into more of a technology company. Look forward to, again, follow-ups with you all.
For those of you that listen on the Webex, we always welcome people to come here and visit our office in Raleigh, Durham, for those of you that are here, more than happy to schedule follow-ups for you as well. Have a great day, everybody, we'll look forward to the tours. Thank you.
I'm going to have Randy. Is Mark? There he is. How much time do we have, Matt?
We're going to do about 15 minutes of Q&A here on the second portion of the presentation. We'll move right to a lunch that we have set up in the conference room next door, followed by the investor tours around the facility. You have a number on the back of your badge, which will indicate which group you'll be in for that.
Can we lose Mark?
Okay. Yep.
Okay. Okay, great. Start with John here.
Hi, John Walsh with Vertical Research. I guess a question for Patrick. We were talking about this a little bit during the break, but I'm just wondering, obviously early innings, but if you can help baseline us on how much of the portfolio today is either software or embedded software, and then really where you feel that entitlement is, 5, 10 years down the line when you think about the portfolio holistically.
I would say, as I said, first of all, we're in the early stages, I think, of really exploring and understanding what the true revenue synergy potential is here. I've gotten the question before as to what portion of the historical Xylem business was so-called smart technology. I think that there was some myth that was there that pumps can't have embedded intelligence in them. I think we truly are educating the industry that they absolutely can and do. I do think that when you look across our traditional kind of rotary equipment business, our pump offerings, for the most part, all have the capability to have embedded intelligence in them. It's not limited to the Flygt Concertor pump that we showcased this morning or at WEFTEC. It really comes back to where it's most relevant in addressing pain points for customers.
That really is largely around energy efficiency when you're thinking about rotary equipment and the pump. I think in terms of other applications, we certainly believe that when you think about our install base of rotary equipment within Xylem, there is clearly, as you heard Brian Crow say, slapping a sensor on there and getting data off that is not necessarily the challenge. It's turning that into actionable information that somebody is going to act upon, pay us for, or it's going to inform a buying decision. That's one where I'd be hesitant to throw a number out and say it's going to be X% of our total revenue. The software-as-a-service model today is under 10% for the Sensus piece. That just, I find incredibly exciting.
If what you've heard from David here today, from an operating standpoint, and Brian from his own experiences in utility, doesn't get you excited about what the possibility is here, then probably nothing will. I think it really just comes down to, it's a matter of time, and it's a matter of really building up the value prop and selling that broadly across the industry.
Yeah.
Yeah.
Thank you. I want to touch on M&A and the funnel. One of the messages today is the spectrum of opportunities that Xylem has, and two that you landed are on both ends of the spectrum with the Sensus, $1.7 billion, then you got Visenti, which you have just as much as excitement about, and this was a rounding error compared to that, but the technology out there and the addition of Visenti is very meaningful. What does the funnel look like? Are there more Visentis out there? Because you don't have to wait, given the current balance sheet to go after these bolt-on technologies. How much of the funnel overlapped? When I met Randy in New Orleans, it was surprising how much that you all were like-minded in terms of one of the potential acquisitions.
Well, I'll start first, and then certainly Randy can chime in here on the pipeline. To your point, Deane, what I find really exciting about this move with Sensus is it really was a validation for us of the move into smart infrastructure, that there really is value to be created there. When we looked at the pipeline that Sensus was already cultivating and compared that to our own, there was a fair degree of overlap in terms of bolt-on opportunities, various ranges and sizes, but that really we're getting at how do you leverage this telecommunications platform, the data analytics around that to solve other pain points for customers, not just limited to the water industry. We talk about things like asset management. We think about other forms of managing non-revenue water. You heard David talk about mobile workforce management, as a big pain point.
There's a number of areas that we've got in our pipeline that we think we're going to be able to do here that are not big dollar outlays. It really comes down to just making sure that we are laser-focused again on getting the integration done successfully of Sensus. I feel very good about it. We're in the early days here, but letting that, you recall the value mapping roadmap that we laid out a year and a half ago. That's really informing that pipeline. It's healthy, it's robust. I would say again, it's not limited just to smart infrastructure. We've got the industrial treatment and industrial services opportunities there as well. Randy, you want to comment at all?
No, just we are working closely together with the Xylem team. We've got our list together. There's activity there, and I think it's super exciting. I don't know if I can say any more than that. Mark's right here. He might smack me, but I can just tell you, I feel really good about working with the team. We've kind of come together very quickly and figured out how to Actually, it's brought resource to us to help us get things done in this regard. It's going to be exciting, I think.
Hey, guys. When you think about the added layers of intelligence that are going to be taken with Sensus, leveraged through the portfolio, added to the product categories, we've seen this intelligence come forward, not in this pace before, but the question becomes, what kind of margin can you actually get on the core products as you layer that through? Obviously, you seem to think that you can capture that margin beyond just other applications like SaaS and leveraging in those ways. Maybe a discussion on how you think about that on a forward basis, and what about the products you think is going to allow that extra price point on a per sale basis?
Yeah, I'll start first, and then these guys can jump in. I think, look, we are very cognizant and focused on not just giving away systems intelligence and data analytics as some kind of a commodity, that ends up through driving margin erosion of some sort. I think a good example of this is when you think about the work that we were doing in Xylem before the Sensus addition to the portfolio, we were building out organically our own remote monitoring and control capability. We were doing it in 12 different ways, in 12 different locations around the world, with 12 different teams working on it. All good stuff. It was people doing it on their own local need.
What we're able to do now, and we were selling value add, when we had that capability, because it made it easier to sell, for example, our Flygt Concertor pump. The value add there is to have that connected to a broader network of data collection. These things will help push through higher margin, higher valuated products from our base equipment portfolio. Also when, as we studied the Sensus deals here, Thames Water, DECC, those happen to be two international. These guys are selling North America deals every day, that they attract very attractive margin profiles on these businesses because of the value add that's embedded in there. It's tough to compare pricing per se, because each deal is somewhat different and unique. You want to comment, Randy?
I would just say we are a technology powerhouse. We're very innovative with the technology. One of the first things we do as we're developing products is we go out and we patent the technology. You saw the hundreds of patents that we have. We try to protect ourselves. We believe that these products will get a high margin. A lot of our products do very well in the marketplace. I would say the other thing is we have a very rigid stage gate process, where if the business case is not there to go do something, we just don't do it just because it's cool or interesting. We do stuff that's going to make us money.
I think a combination of just protecting the IP and doing a good job with business cases will lead us down to very profitable new products.
Cliff Ransom. Randy, you're by background with GE and some of your colleagues from GE, a Six Sigma guy. What happens when you fully integrate lean thinking with the Six Sigma tool? What's going to happen in your Sensus operation?
That's an interesting question. Just to back up just for a second, it's been kind of interesting working with Tony, because Tony has been on this lean march. He's done a fabulous job and doing a great job. We've been on more of the Six Sigma march. I've also been on the other side, and he's been on the other side. I can tell you that once we get together, there is tremendous power in lean. There's a lot we can do. We have leaned some of our lines out. We have done some work there. We've had, over the last few years, really more of a focus around quality. That's another hit we're going to get down the road. That's going to be another step up down the road as we start to bring it all together.
I'll tell you openly, We've done cost reduction. We've taken costs out, true Lean implementations, we barely scratched the surface. There's a lot of opportunity for the Sensus side.
I would just augment that, Cliff, with the fact that likewise, when you look at our products, while we've historically not had significant quality issues within the historical Xylem businesses, it's not really been a Top-level focus in terms of knowing cost to quality across the board. The programs that Randy and Mike McGann, you guys will all meet Mike on the tour, very impressive leader in this space. There's equally an opportunity for us to really apply that Six Sigma approach, especially on the quality end for Xylem.
What's a quick follow-up, if I may? To me, when I started getting brainwashed about IoT, it wasn't that it made the business more efficient. It wasn't even that you could create SaaS models. It was that you wound up with better products because you feed back all that data until you have product and service offerings that are competitive barriers to entry.
Yep.
I haven't heard a lot about that today. Am I on base or off base?
Cliff, you're totally on base in that You'll recall back to my vision for the company. There are those CEOs and leaders that would look at it and say, "We want to be that company, that technology company of the future that's focused on software as a service and data analytics." What I specifically said was that we were going to have a leading portfolio of products and technologies, because to me, to your point, it's the domain expertise around the equipment that you're able to optimize that really becomes a value add, but two, it is the barrier to entry. I think even some of the competitors within the metering space are dealing with that challenge in that they don't have the product to offer. They have to partner with other companies in that space. Nothing wrong with that model.
Certainly if your heritage is around the equipment and technology, that truly can be a barrier. Okay?
We'll take a couple more from over in the back here.
Hi, thank you. John Quealy at Canaccord Genuity. Two questions. First, big picture, philosophical, technical. For the Xylem portfolio, as we bring more intelligence to the endpoint, how do you decide what's an ASIC-based intelligence, so more of a value add field programmable? If we could talk about that first, and then secondly, my view is Sensus has a great combo utility, perhaps the best market share in combo utilities. If I was going to put my cell hat on, I'd call that smart cities, but you didn't. Talk about what's holding back use cases around smart cities and how you folks will think about it. Just two big picture. Thanks.
Well, that's a good question. I would say a couple things. Some of the spin about distributed intelligence and things like that is, part of that is really driven by technology. Our FlexNet technology is really, it's not necessary to do the distributed intelligence to make the system perform pretty well. I think a lot of that might be market spin, just one point. The other thing about smart cities, and we talk about this a lot internally. We always look at the business case. Does this really make sense? If you listen to all the marketing hype out there, and I hope I'm not going off the reservation here, but putting a sensor on everything is probably, even though Brian would love to do that because he liked the data, it may not be the best use of the technology.
We always think about how do we help the utility? How do we make the utility perform better? We talk about the Internet of Things for utilities. We could certainly work in parking meters. We can certainly work in parking garages. We can do all that stuff very easily. The business case is not really core to us right now. We're focused on really utilities. However, our lighting module, the VantagePoint is kind of a step into that, but we really feel that really fits into the utility space more. Everything that can be done out there in the Internet of Things, we can do. It's just a question of does it make sense?
Yeah.
Let's not do it just because it's fun. Let's do it because it makes us money.
Yeah. I think just to augment that, when you think about a smart city, there's a lot going on in a smart city. We don't really have many of them. You really have to go where the profit pools are. Who are the users of this water or the people that are complying with regulation, and where are they prepared to pay to address the pain point? Industrial campuses is an area that we are going to be exploring where these are people that you can sell a business case model to them. Where we can penetrate that by putting up some FlexNet base stations, there's a real opportunity there. These are all lead times that we're looking at that will go out certainly more than the next few years.
That's a great point. We believe campuses around the country, not only from a safety standpoint, there's some things we can do there to really improve the safety on campuses, and we've been working on this, including smart lighting. There's some really great business cases out there. They have money, so it's a great point, Patrick.
Okay.
Let's go one more, and then we'll break for lunch.
Hey, guys. Thanks. I feel like the last couple of years, maybe we talked a bit more about this opportunity in industrial to maybe leverage a wastewater portfolio there and maybe as the burden shifted away a bit from the municipalities a bit more upstream. We haven't talked about that much today. Is that by design? Is that more of a timing pushout, or is that less of an opportunity? Last question on the portfolio as you go forward, it says behind you, "Xylem, let's solve water." You also talked about your dedication to gas and electric, and I wonder how far, like what do you see your core as now, and how comfortable do you feel going a bit outside of what you would've said maybe two years ago?
Sure. Well, let me take the second one first. I would say, as I mentioned in my comments, I and we are completely committed to the electric and gas, and even lighting opportunity that we talked about earlier. Certainly, Markos, our chair, is here. These are conversations we've had with our board. I was very clear to the board, and they were very aligned around the fact that, I'm not going to be, and I know this is Deane's favorite phrase for me, I'm not going to be dogmatic on all things water. That means we would always consider acquisitions that brought in a non-water piece to it. Having said that, we are going to be investing in those businesses. We would not rule them out for smart M&A, bolt-ons, those kind of things.
The reason we're adding the R&D money that we talked about, this goes back to the question of maybe why 5%, was the first question I got from customers in the electric and gas space was, "It's great, Patrick, that you're verbally reaffirming your commitment, but we have ongoing technical development needs in that space. We want to see you put your money where your mouth is." We will be investing in that part of the business. We're not going to lose our identity as a water company, because there's a lot of power in that, and that really also is the lifeblood of the company. On the treatment or on the industrial treatment piece, that remains an attractive opportunity for us. Our business today is about 80% in the municipal treatment space and only 20% in industrial.
Industrial is growing rapidly, albeit also is our muni exposure. The team there has done a terrific job over the last year to year and a half in improving the margins in that business, getting it well up above the cost of capital to really create value. I think we're getting close there that if the right opportunities came along to augment that portfolio, we would certainly take a look at it. No commitments there, not signaling anything. Certainly we see the opportunity as attractive today, if not even more attractive than it was a year and a half ago.
Okay.
Okay. With that, we'll move to lunch, and then we'll have the tours. Apologies for the overrun in time, but hopefully you felt it worthwhile.