Good morning. My name is Maria, I will be your conference operator today. At this time, I would like to welcome everyone to the Xylem Inc. Introduction of its New President and Chief Executive Officer conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you wish to ask a question at this time, simply press star then the number one on your telephone keypad. Thank you. It is now my pleasure to turn the call over to Mr. Phil DeSousa, Vice President of Investor Relations. You may begin your conference.
Thank you, Maria, good morning, everyone. I'd like to welcome you to our conference call to introduce Xylem's new President and Chief Executive Officer, Patrick Decker. Also joining us on this call is the chairman of Xylem's Board of Directors, Markos Tambakeras, Steve Loranger, who has served as interim CEO for the past six months and will continue as director on our board, Mike Speetzen, our Chief Financial Officer. We have a few brief prepared remarks to share, we'll open the call to your questions. In total, we expect this call to last approximately 30 minutes. I'll ask that you please keep to one question and a follow-up, return to the queue, we'll have enough time to address everyone on the call. As we do at the beginning of our calls, let me take care of a couple of administrative items.
First, this call may include some references to events or developments that we anticipate will or may occur. These statements may relate to the future of our business, our operations results, economic expectations, and other aspects pertaining to and affecting our businesses. These remarks constitute forward-looking statements for purposes of the Safe Harbor provision and are subject to future risks and uncertainties, such as those outlined on Xylem's annual report on Form 10-K, those frequently described in subsequent reports as filed with the SEC. Please note that the company undertakes no obligation to update such statements publicly or reflect subsequent events or circumstances, actual results could differ materially from those anticipated. Lastly, this call is being webcast, a replay of this call will be available on our website. The replay will be available until Tuesday, March 18th at 6:00 P.M.
Please note the replay number: 404-537-3406, the confirmation code is 7851564. Additionally, the call will be available for playback via the investor section of our website under the heading Presentations. With that said, I'd like to turn the call over to Markos.
Thank you, Phil. Good morning, good afternoon, good evening, wherever you may be. We'd like to thank you for joining us today. We're obviously delighted by Patrick's appointment, and I would like to share with you the thinking from the perspective of the board of directors regarding his selection, and then to talk briefly about the leadership transition process. As you know, when Steve Loranger was named interim CEO, we set some clear goals in order to stabilize the company and set it on track for sustained success. These were to deliver on 2013 revised financial commitments, to position the company for 2014, to refine our long-term strategy in order to drive improved performance and growth, to identify a new CEO as expeditiously as possible, and we also recommitted to our long-term financial goals. So far, we've done what we said we would do.
The question I'm certain you all have is: Why Patrick Decker? The board believes that in Patrick Decker, we now have the right CEO to lead Xylem forward. When we began the search, we were very deliberate in defining the right candidate profile and conducting a targeted and thorough search. We said we would take as long as it took in order to get the right person. We were looking for someone who is a seasoned leader with a successful track record of performance, preferably knowledgeable of the water industry, a global mindset, the strategic capabilities to manage a complex business, a good fit for our company culture, and ideally someone with previous CEO experience. Patrick is all that. He emerged as a clear choice to lead Xylem from an impressive field of candidates. Let me review some of these qualities. He has extensive leadership experience.
He joined us from Harsco, a global industrial company where, as president and CEO, he led a business turnaround. He has water industry experience from his time at Tyco, where he held several key leadership roles, including leading the Tyco Flow Control business. He has spent many years living and working overseas. He has a passion for water and is energized by our company, our vision, and our strategies. He shares our values. Finally, we believe that he's a thoughtful leader who takes the time to get to know his business, his opportunities and challenges, but he's also tough-minded enough to make difficult decisions when warranted. Some other key messages I'd like to convey. First, let me stress that the board of directors is fully committed to the vision of Xylem of being the premier pure water company in the world.
Most importantly, Patrick believes in it, and the strategy to accomplish this goal. Second, we are also committed to delivering on the targets that have been communicated previously. Third, let me also stress that while the board is encouraged by the progress in our recent performance, we are under no illusion that we are done. It is clear that we have more to do internally to achieve our goals. At the same time, our end markets continue to be volatile. Finally, I can assure you that Patrick and Steve have developed a detailed transition plan aimed at helping Patrick get up to speed quickly and to ensure continuity with no disruption. Patrick understands Xylem's challenges, but we are confident he's the right person to lead Xylem now. I look forward to working with Patrick, and I hope that you will too.
Finally, the board is also very grateful to Steve Loranger for stepping up at the critical time to lead the company and is deeply appreciative for all he's done. He will, of course, continue to be on our board and will help ensure the smooth transition I referenced above. With that, I'd like to hand it over to Steve to say a few words. Steve.
Thank you, Markos. First of all, it has been an honor, a privilege, and it's been extremely fulfilling to lead this company over the past six months. I've been thrilled by the response of our global team and by all of our employees. Everybody did a very nice job rising to the challenges that we faced. We delivered and in fact, exceeded our revised 2013 numbers. We put a new business and organizational operating model in place, which stressed the importance of simplicity, accountability, and speed. This model is already enabling us to drive for higher performance. We've worked to take cost out of the business so we can be more competitive and in the best possible shape to compete globally. We focused on the most critical priorities for 2014 to build on this momentum, especially in strongly focusing our integrated front end to assist in sales growth.
We laid out our strategic approach for pursuing the growth opportunities with the highest potential for long-term success. With that said, let me make a few things clear. While we have a much better platform in place to achieve our vision, we now have the right leader to guide the way forward, we do continue to see some volatility in our markets, we have plenty of hard work ahead of us to achieve our targeted performance. For example, revenue through February is flat to last year, reflecting the negative impact of these harsh weather environment that we've seen in some areas, it's affected some of our businesses, such as dewatering, rental, general construction-related activities. Nonetheless, despite this near-term headwind, we are affirming our full-year guidance, we are very encouraged by the strength in our bookings and the execution of our cost plans.
I'm confident that with Patrick at the helm, we're going to surmount these challenges and fully realize our goals. I do look forward to continuing to be involved in the company's progress as a member of the board of directors and interacting with many of you in that capacity. Patrick and I are going to spend the next month going through a very, very nice, well-thought-out transition plan, and I couldn't be more excited by that. Now I'd like to introduce Patrick Decker, Xylem's new President and CEO.
Thank you, Steve and Markos. First of all, I'm incredibly honored to be named Xylem's new President and CEO, and I'm very eager to join what I consider to be a great company with great potential. Obviously, to those of you on the phone, you can appreciate that any time that you are deciding to leave one company as a CEO to join another, there's a great level of deliberation all around that one takes to make sure that it's the right opportunity. For me, the choice to join Xylem was obvious. First of all, I am very drawn to Xylem's mission to solve water. It's an exciting company to be a part of. It is the leading pure play water company in the world, and I do believe it's well-positioned to solve some of the most urgent water challenges that we face around the world.
I also have the benefit during my time at Tyco, where I led the Flow Control business to see firsthand the great products and brands and technology and people that Xylem has around the world. We clearly have unrivaled assets, beginning with our people. We have a very broad portfolio across the water cycle with fortress brands, leading market positions, global scale and reach, and deep, strong customer relationships. I do believe the strategy that Steve and the board working together have put in place is absolutely the right one for the company. I'm looking forward to rolling up my sleeves and working with the team to realize the execution of that strategy and our goals. I am deeply committed to making sure that we, as Xylem, deliver on our 2014 commitments, and I certainly will be focusing with the team on execution and driving accountability across the organization.
I realize everyone wonders about what a change may come when a new leader comes in, but let me reassure you that I'm focused on a smooth, seamless transition and keeping the company on the right trajectory. I also have the benefit here, as both Markos and Steve pointed out, that not only is Steve available to me over the course of the coming days, weeks, and months, but the fact that he's remaining on the Board of Directors means that he'll continue to be there for me as a resource as I continue to transition into the company. I'll be formally starting on March 17th, just a little less than a couple of weeks from now, and will spend a lot of time in my early days getting to know the business better and doing what I call an active listening tour.
Going out to the front line, meeting with our people, meeting with our customers, our channel partners, and really hearing about what is and is not working, and to better understand our opportunities and challenges. Having spent 10 years of my career living in Latin America and Asia, I understand the importance of making sure that the leader of the company is visible all around the world. We have a very diverse footprint with tremendous opportunities for growth around the world. It's important for me to be out there on the front line. Now, there are a number of things that I'm particularly passionate about. Again, part of why I was drawn here was that there was tremendous alignment between Steve and I and the board on things that matter to me.
First of all, I am a zealot for continuous improvement and driving Lean Six Sigma across the organization. People and talent development, making sure we have the best people on the ground, but also that we are building succession plans and capabilities for generations to come. I talk a lot about making sure that our center of gravity is squarely around the customer. Obviously, having the voice of that customer to help us drive innovation and make sure that we're delivering on our commitments to them. Safety matters deeply to me, not only in terms of our value proposition to our people, but also to our customers. Last, but absolutely not least, is I'm very impressed with the culture of integrity and accountability that Steve and the team are building here.
Doing what we say we're going to do and doing it the right way is very important to me. I look forward to working with Xylem and helping the team deliver the mission of solving water around the world, and can't wait to get started. With that, I would now love to open it up for Q&A.
Thank you. The floor is now open for questions. If you have a question, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that you ask one question and one follow-up. Our first question comes from the line of Deane Dray of Citi Research.
Thank you. Good morning, everyone.
Good morning, Deane.
Patrick, I'd like to extend my congratulations and best of luck. The question I would be interested in hearing right up front is you're joining Xylem in a period of a focus on cost takeouts, right-sizing the organization. One of the things I've learned is every spin-out company is sent out without an optimal cost structure, and I know that's a big priority. You're joining the company now maybe midstream in this process of cost takeouts. Is there a concern that you'll hit the reset button and revisit these priorities in individual projects? Maybe just address where this is, and how seamless this might be in terms of keeping that pressure on SG&A.
Sure, absolutely. Well, first of all, thank you for the congratulations, Deane, and I look forward to getting time with you. Absolutely there is not going to be any reset button here being hit. Certainly part of my interviewing and part of my exploring the opportunity here was to really understand the markers that have been put out there, what the commitments are as a company, and certainly when you think about our top-level strategies as articulated by Steve and the board, certainly aligning our cost structure. I believe that we've said publicly there's at least two to 300 basis points of SG&A, for example, that can come out of here. I certainly share that view. Obviously, there are opportunities to continue to drive simplifying our organization structure, really continuing to embed operational excellence, whether it be in the areas of working capital, again, driving global sourcing opportunities.
I realize I'm joining midstream here, but I'm completely aligned with the markers that have been put out there and the priorities.
Great. That's real helpful. Just my last question would be, maybe frame for us when you talk to the board and representing your background and all the things you did at Tyco Flow, where the strategic overlaps are with Xylem's businesses. Maybe it's the value chain, maybe it's the previous experience selling to municipal. You did run one of the largest water reuse companies in all of Australia that was part of Tyco. What would you highlight in terms of the key overlaps with Xylem today?
Sure. I think that there are a number of overlaps that I highlighted to the board and that they certainly probed on, and that was the fact that, first of all, you're talking about businesses that were very globally diverse, operated in a number of different end markets and channels to market, businesses that were fairly highly distributed in terms of footprint, and therefore opportunities really to get the organization focused on aligning the cost structure, getting the front end of the business aligned. I was very drawn to one of the priorities that Steve had laid out in terms of integrating the front end of the business, to really leverage our portfolio. That was a common theme there at Flow Control and something I was proud of.
Certainly, the opportunities to grow in the developing markets around the world was something that you'll recall, Deane, that we really focused on heavily at Flow Control, both organically as well as through acquisitions. I think the other thing is really seizing on the opportunities to drive continuous improvement, Lean Six Sigma deployment through the way. Secondly, to really go after global sourcing. I would also say we have a number of customers in common. I think I have a pretty good feel for what the needs and priorities of those customers are. Then lastly, getting comfortable with what can sometimes be various complexity in terms of channels to market, having both a direct and indirect distribution model is also something that was very similar between Xylem and Tyco Flow.
Great. Then I'd just like to add, Steve, that was a great six-month run coming in off the bench, and in case anyone was wondering, you still got it.
Thank you, Deane. Listen, as I mentioned, the team really did a terrific job of stepping up. This is a team that wants to win. I've been thrilled by the fact that the team has collectively come together to define a really good agenda with some great action plans and great focus in both an operating and strategic and talent dimension. I feel very confident that this is a nice platform that Patrick can come in and take advantage of as he thinks about where we are headed in the future. Thanks a lot, Deane. It's been great, and I appreciate your support as well.
Our next question comes from the line of Brian Konigsberg of Vertical Research.
Yes. Good morning.
Good morning.
Congratulations, Patrick.
Thank you. Good morning.
Good morning. I just wanted to get your view on your general thoughts of the portfolio. You kind of discussed it very briefly in your initial comments, but I guess, what gets you most excited within the portfolio from a growth perspective? Then maybe if you could just add onto that, what you think could be complementary to this portfolio that could augment or add a little fuel to the fire?
Sure. Great question, Brian. I think first of all, what I was attracted to here was, again, the strategy that the team has put out around being the premier pure play water company around the world. When you look at the breadth of what we already have in the portfolio in terms of products and technologies and geographic reach, I think that's something that we can really continue to build upon. Certainly, I think the commitment to better integrating the front end of the business to where our frontline folks are really put in a position to sell the breadth of what we've got, and expand our channels to market there is something I believe we have an opportunity to leverage. Secondly, I have a real passion for, again, the developing markets around the world.
I have an equal passion for the developed markets as well, I do think there's opportunities for us to continue to expand in that area as well. When I think about the opportunities to further leverage what we've got, I was certainly attracted to what we're doing in the area of analytics, and also in transport. I think when people have talked about is Xylem going to be a pure play, premier water company or are we going to be a fluid handling, kind of Flow Control company? I deeply believe in the strategy that Steve's put out in the board, that it is going to be a pure play water strategy. I think one of the areas that I would suggest that we have opportunities to expand, and the team here agrees with that, is in the industrial sector of water applications for a variety of reasons.
Those are a few things, Brian, that I would point to.
Great. I know this is a call about your introduction to the company, I think that's fantastic. I figured I would take this opportunity to maybe ask about what the recent trends you've seen in the quarter. I think in the opening commentary we did still talk about volatile markets. Any update to date actually would be fantastic.
Yeah, Brian, this is Mike. Let me go ahead and take that one and then we'll get the call back on track relative to Patrick's joining the company.
Okay.
Steve made a couple of comments relative to what we've seen through February around the top line being flat versus last year. Let me maybe step back a bit and revisit some of the comments I made during our earnings call on February 4th, where I gave some commentary around what we anticipated seeing in terms of revenue. We had talked about 22%-23% of the full year, which would be about flat to up 2% organically. That was against tough compares on the dewatering side, where we were still doing quite a bit of work on the disaster recovery activity for Superstorm Sandy. Also as we articulated, we've got one less selling day this quarter.
As it relates to what we've actually seen through February, and I think this is similar to what you've seen and heard from other companies, we are experiencing impacts from the weather. It's largely more unfavorable than what we had anticipated. I think Steve hit on a couple of the examples, specifically around our dewatering rental business, where we've seen branch closures and we've also seen construction sites that have been shut down, given not only the snow, but also the unusually frigid temperatures. Based on what we've seen through February, we're looking at being towards the lower end of that 22%-23%, which would be about flat to up 1%. We do see the margin expansion that I mentioned in our call on the 4th of 100 basis points still being in line with what we'd expect to see based on that revenue range.
I do want to point out, and Steve mentioned this, a couple of the positive aspects that we've seen. We have seen order strength through February. Our orders are up 4% on a total basis versus last year through the first two months. I am very pleased with the progress we're making on the cost reductions, where the teams have reacted to the volume environment, and have also been moving forward to get the cost actions aligned around the activities that support the full year. I think to kind of wrap it up and give you just the key takeaways. We are seeing some near term externalities impacting the top line, but we feel good about the things we can control around the cost side as well as how the orders are progressing. As we stated, we are reaffirming our full year guidance.
Great. Appreciate that. Thank you very much, and welcome again.
Thank you.
Thank you.
Again, ladies and gentlemen, if you wish to ask a question, simply press star then the number 1 on your telephone keypad. Our final question comes from the line of Joe Giordano of Cowen and Company.
Hi, guys. How you doing? Thanks for taking my call, and congratulations, Patrick.
Thank you.
Good morning, Joe.
I just real quick, want to get your take on the M&A environment. Obviously, the company has kind of switched gears a little bit from a period of fairly rapid M&A as a percentage of growth. Steve, much more focused on internal inefficiencies and driving the bottom line. I just kind of want to get your take of how you see the marketplace and how you see that going forward, what opportunities you might see there.
Sure. Great question. I think, first of all, as you well know, it is a pretty fragmented market. What that typically yields opportunities from an M&A standpoint over time, and I do think that there are some very attractive opportunities that are out there. I would kind of lay it out in kind of two phases in terms of how I'm looking to approach this. Phase one really is the continuation of what Steve and the team have put in place here. Again, focusing on the cost structure, both from a restructuring standpoint, but also building our global sourcing capability, continuous improvement, et cetera. Again, a real zealot focus on working capital improvements, integrating the front end of the business, and just continuing to simplify the operating model. That's certainly going to be a plateful as we continue to work through 2014 here.
As I look at kind of phase two, I think it really is about accelerating the growth, both through innovation on the organic side, but also looking at strategic bolt-on acquisitions over time here. I think it's just a great platform to be building off of. I will continue to make sure that we're focused on executing on the operational and cost side while still again, pursuing growth in the right fashion.
Great. Thank you.
Thank you.
There are no further questions at this time. I'd like to turn the floor back over to management for any additional remarks.
Great. Well, again, this is Patrick. I want to thank all of you for taking the time to join us here. On behalf of certainly the board and entire Xylem and our investors, I want to thank Steve once again for all of the sacrifice and work that he's put in. He's really put us on a great trajectory here. I want to thank him for that. I want to kind of wrap up here by saying this is day two for me. I guess technically probably 10 minus two. I already certainly recognize that we have great brands and technology here as a company. I'm clearly going to be digging into the opportunities to further improve the cost base, the operational efficiency, and effectiveness of our sales deployment.
What I'm going to be focused on in the early days here really is execution and continuing the efforts around accountability. This, at a minimum, is already a great company, but it is one that has not yet reached its full potential. I certainly look forward to the opportunity to be able to take the helm here and lead the organization to that very bright future. Thank you all very much.
Thank you. This concludes today's call.