Xylem Earnings Call Insights: Scaling a Service Business and Restructuring

Xylem Inc (NYSE:XYL) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Scaling a Service Business

Deane Dray – Citi Research: It was interesting hearing more about the PIMS acquisition moved into services, it does complement the equipment model. But could you comment on how do you scale a service business. There is a lot of headcount (indiscernible) that business model. So, how much is it growing and how do you scale it and do you get a flow through of your aftermarket products through service organization like PIMS?

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Gretchen W. McClain – President and CEO: Let me step back a little bit. We’ve been talking about our aftermarket strategy for quite some time. We’ve been spending enormous amount of time driving what we call our TotalCare program is and so in all of our businesses where we have a large install base our sales teams have been working aggressively to make sure that we are capturing the parts and services but also bringing advance services where we can bring the broad portfolio of products that we have and our ability to go in and do energy audits and so forth. What we get with PIMS is; one, some very nice processes. We also get a very talented group of folks that have a core competency that we can help train geographically our teams that are positioned very well. So, not only do we get a great position in the U.K. which complements where today we play into public utilities and 90% of their customer base is non-public utilities. We also get a core competence of talent that we can actually use to help our teams geographically expand.

Deane Dray – Citi Research: Just a quick follow up from Mike. Can you comment on the lower tax guidance, what’s driving that as sustainability?

Michael T. Speetzen – SVP and CFO: We do quite a bit of work around the tax planning, as we have mentioned in prior discussions. We actually were fortunate to take the tax leader that was at ITT with us given the global footprint that we have, so we’ve been doing a lot of work around the planning aspects. I think the key element is, this is a sustained tax rate improvement from some of the restructuring that we’re doing in Europe and we look it at as a great position not only to leverage including other parts of our current portfolio, but as we look to bring new acquisitions into the fold it will give us a good leverage point in terms of building sustainability around further improvements in that tax rate.

Restructuring

Matt Summerville – KeyBanc: Can you talk a little bit more, I understand the relocation of the headquarters, but just what you’re doing from a heavy lifting perspective in terms of restructuring, are you taking out facilities, people? Can you put other numbers sort of behind that and then what do you expect the pay back to be on the 60 to 70, you’re investing in ’13 as we think about ’14?

Gretchen W. McClain – President and CEO: Sure Matt. Let me first talk a little bit about what we’re trying to do in Europe. We’ve been positioned in Europe for quite some time and as separate independent companies, we have not really been fully utilizing or leveraging our unique and broad capabilities as the total Xylem in the water industry. So, our objective here is to set up a headquarter, one headquarter, today we have three headquarters in Switzerland. We will be aligning our strategies around our end markets that we go to and so a couple of the restructuring actions will lead to consolidating multiple sales companies in one country. We’ll be able to leverage our back-office more efficiently and effectively. We’ll be able to set up shared services to support the teams across the Europe and have centers of excellence, and ultimately be able to get some opportunity to leverage manufacturing and our supply chain leverage commodity buys across the whole organization. So, I feel like we’re going to be able to position ourselves to be able to work more effectively and efficiently in the market, but ultimately be able to bring more value to our customers. Mike, you can walk through the…

Michael T. Speetzen – SVP and CFO: So, Matt, let me just kind of step back and hit some of the numbers. So, in 2012, we executed about $17 million from a cost perspective or restructuring. We got about $1 million of benefit in 2012, the remaining $12 million will be a benefit in 2013. Out of the $60 million to $70 million of restructuring and realignment, $40 million to $50 million of that is restructuring and we see that giving us a benefit in 2013 of about $13 million to $15 million. So, think about the total restructuring benefit from actions done in 2012 as well as 2013 in a range of $25 million to $27 million. The payback period on these, like we’ve articulated before given the fact that we’re focused primarily around Europe is going to be approximately 2 years.

Matt Summerville – KeyBanc: So, then we should think about that, if you’re getting a (1 to $1) payback that they are somewhere in the range of $35 million that will benefit you in ’14, is that the right way to think about it, Mike?

Michael T. Speetzen – SVP and CFO: Yeah, we’re essentially from an execution standpoint for the actions being done in 2013, planning in Q1, execution in Q2 and then we’ll be looking for run rate savings to have achieved in Q3 and Q4.