Xylem Inc. (XYL) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen. It is 11:00 a.m., and the shareholders meeting will now come to order. I am Markos Tambakeras, and I'm the Chair of the Board of Directors of Xylem Inc. We are holding this meeting virtually to allow all of us to avoid travel and to observe appropriate physical distancing and stay-at-home orders that remain in effect. We hope that you and those close to you are safe and well. We look forward to a successful meeting and a good engagement with you today. However, because we're in our homes and some of us are relying on mobile phone connections, we ask that you please bear with us in the event of any technical disruptions or communication delays. On behalf of the Board and over 16,000 company employees, I want to welcome you to the 2020 Annual Meeting. I would like to extend my best wishes to you and your families in these very challenging times. I would also like to acknowledge the Board members participating virtually in the meeting this morning: Patrick Decker, Xylem's President and CEO; Jeanne Beliveau-Dunn, President and Chief Executive Officer of Claridad LLC; Robert Friel, former Chair, President and Chief Executive Officer of PerkinElmer, Inc; Jorge Gomez, Chief Financial Officer of Dentsply Sirona, Inc.; Victoria Harker, Chief Financial Officer of TEGNA, Inc.; Sten Jakobsson, former President and CEO of ABB Sweden; Steven Loranger, former Chair, President and CEO of ITT Corporation; Surya Mohapatra, Ph.D., former Chair, President and CEO of Quest Diagnostics, Inc.; Jerome Peribere, former President and CEO of Sealed Air Corporation. As Dr. Crawford is retiring as of this annual meeting, we want to recognize and thank him for his outstanding service of the Board since Xylem was spun off from its former parent in 2011. It has been my pleasure to serve as Chair of this distinguished Board of highly qualified and seasoned leaders. Each one of them brings decades of experience and a unique business perspective to the oversight role at Xylem. I'd also like to recognize the members of Xylem's senior leadership team, in addition to Mr. Decker, and -- Claudia Toussaint, General Counsel, Chief Sustainability Officer and Corporate Secretary, who are also participating this morning. You should see the agenda for the meeting on the meeting page, but a copy is also posted under the Meeting Materials heading. Under Meeting Materials, you will also find the rules of procedure for this meeting. To conduct an orderly meeting, we ask that participants abide by these rules. All shareholders participating today will have an opportunity to submit questions by entering them in the box at the lower left of the meeting page. After we have addressed the official business of this meeting, I will again introduce our CEO, Patrick Decker, and he will provide remarks on how Xylem is well positioned to respond to the world's most challenging water needs. Following Patrick's comments, we will answer as many questions as we have time to address. Claudia Toussaint, Xylem's Corporate Secretary, will now discuss the record date and quorum for the meeting. Claudia, could you please proceed?

Thank you, Markos. The Board of Directors has appointed Douglas Czarnecki of American Election Services and Gary Ross as inspectors of election to supervise the voting by proxy and ballot at this meeting. The inspectors are on the line here with us. As noted in the notice and proxy statement provided to all shareholders, the record date for voting at this meeting was the close of business on March 16, 2020. The list of registered shareholders as of the record date is available for review on the meeting website by clicking the link to shareholders' list and entering your control number. The inspectors of elections also have the affidavit of distribution from Broadridge Financial Solutions, which confirms the distribution of proxy materials for this meeting. Approximately 86.5% of the shares outstanding and entitled to vote as of the record date are now present at the meeting, either virtually or by proxy. This represents a quorum. With that, Markos, we're ready to proceed.

We will now turn to the 4 official items of business that have been properly brought before the meeting. Each item is described in Xylem's 2020 proxy statement. Please note that shareholders may vote at any time until the closing of the polls by clicking the Vote Here button on the meeting page. If you previously voted by proxy, you do not need to vote today unless you wish to change your vote. Following submission of all the proposals, we will welcome any questions shareholders may have about our director nominees or any of the other 3 proposals. The first item of business is the election of 10 directors of the company. I will now ask Claudia to submit the first proposal.

Thank you. The following individuals are hereby nominated to serve as directors of Xylem Inc. for a 1-year term expiring in 2021 or until their earlier retirement or resignation: Jeanne Beliveau-Dunn, Patrick Decker, Robert Friel, Jorge Gomez, Victoria Harker, Sten Jakobsson, Steven Loranger, Surya Mohapatra, Jerome Peribere and Markos Tambakeras. The second proposal relates to the ratification of Deloitte & Touche. The Audit Committee of the Board has appointed Deloitte & Touche as the company's independent registered public accounting firm for 2020. This appointment is subject to the ratification of Xylem's shareholders. Deloitte representatives are participating in the meeting today. On behalf of the Board of Directors, I offer the following resolution: Resolved, that the shareholders of Xylem Inc. hereby ratify the Audit Committee's appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2020. Proposal #3 relates to the advisory vote to approve the named executive officers' compensation. On behalf of the Board of Directors, I offer the following resolution: Resolved, that the compensation paid to the company's named executive officers, as disclosed in the 2020 proxy statement, including the compensation discussion and analysis, compensation tables and narrative discussion, is hereby approved. Proposal 4 is the shareholder proposal to lower the threshold for shareholders to call special meetings from 25% to 15% of company stock. The company received timely notice of this proposal, which was included in the proxy statement, together with the proponent's supporting statements and the Board's recommendation against the proposal. This proposal requests to lower the threshold for shareholders to call special meetings from 25% to 15% of company's stock. The proponent of this proposal will be provided 2 minutes to make a statement in support of this proposal. Operator, could you please open the line for [ Mr. Alba ], the proponent's representative? [ Mr. Alba ], are you on the line?

Yes. Thank you, and good morning.

Terrific. We will now recognize [ Mr. Alba ] for commenting on Mr. Chevedden's proposal for a period not to exceed 2 minutes. Please go ahead.

Thank you. Proposal 4, Special Shareholder Meeting Improvement sponsored by John Chevedden. Resolved, shareholders ask our Board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders in the aggregate of 15% of our outstanding common stock the power to call a special shareholder meeting. Scores of Fortune 500 companies allow 10% of shares to call a special meeting. Special meetings allow shareholders to vote on important matters, such as electing new directors that can arise between annual meetings. This proposal topic won more than 70% support at Edwards Lifesciences. A shareholder right to call a special meeting and to act by written consent are 2 complementary ways to bring an important matter to the attention of both management and shareholders outside the annual meeting cycle. More than 100 Fortune 500 companies provide for shareholders to call a special meeting and to act by written consent. We have no right to act by written consent, hence, the greater need to expand the right to call a special meeting at Xylem Inc. Unfortunately, management decided relatively recently to incorporate in the shareholder-unfriendly state of Indiana. Indiana does not allow shareholders to act by written consent unless every single one of 180 million shares agree, which is unfortunately no right at all under Indiana law. Thus, shareholders need a stronger right to call a special meeting to help make up for no right to act by written consent. The management argument makes no sense on restricting the shareholders' special meeting right when shareholders will never have any right to act by written consent. The 2019 management statement next to the 2019 version of this proposal said, "We continue to view direct shareholder engagement as critical to our company's success." Apparently, this so-called "shareholder engagement" did not predict the strong support that the 2019 version of this proposal received 41%, which represents a near majority from the Xylem shareholders who had access to independent proxy voting advice. Apparently, the so-called Xylem "shareholder engagement" also did not predict that Ms. Victoria Harker, the Chair of the Xylem Audit Committee, would be rejected by 17x as many shares as each of the 5 other Xylem directors. Please vote yes, special shareholder meeting improvement, Proposal 4. Thank you.

Thank you, [ Mr. Alba ]. As you know, the Board recommends a vote against this proposal for the reasons set out clearly in our proxy statement. So we now welcome any questions shareholders may have about our director nominees or any of the other 3 proposals. The polls will remain open. Go ahead.

So there are no questions on the -- on any of the proposals. There are some questions on the business, which we will handle later.

Great. Thank you. So the polls will remain open, and you may vote by clicking the Vote Here button on the meeting page. And we will now pause to give shareholders time to vote. Again, if you have already voted by proxy, you do not need to vote again unless you would like to change your vote. [Voting]

Okay. I hereby declare the polls closed. Claudia, would you please report the results of the voting?

Thank you. I will do so. The inspector of election have provided the following preliminary results. Proposal 1. Each of the 10 director nominees has been elected as a director of Xylem Inc. for a 1-year term. Proposal #2. With approximately 98.9% of the votes cast in favor of this proposal, the appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2020 has been ratified by the shareholders of Xylem Inc. Proposal 3. With approximately 91.3% of the votes cast in favor of this proposal, the shareholders of Xylem Inc. have approved in a nonbinding vote the compensation of our named executive officers set forth in our 2020 proxy statement. Proposal 4. With approximately 58.5% of the votes cast against this proposal, a majority of the shareholders of Xylem Inc. who voted at this annual meeting have voted against the shareholder proposal to lower the threshold for shareholders to call special meetings from 25% to 15% of company's stock.

So based on the preliminary results of the inspectors of election, proposals 1, 2, 3 have been approved. The majority of shareholders voted against proposal 4, the shareholder proposal. As there is no further business to be addressed, I now declare Xylem Inc.'s 2020 Annual Meeting of Shareholders formally adjourned and all matters before it closed. At this time, I would like to invite our CEO, Patrick Decker, to provide a few remarks about Xylem and the company's progress. After which we will have a brief question-and-answer period.

I would -- so Patrick, before you proceed, I would just like to remind everyone that we may make some forward-looking statements on our -- at today's webcast, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC, including our Form 10-Q to report results for the period ending March 31, 2020. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. And with that, Patrick, I'll turn it over to you.

Okay. Thanks, Claudia. Thanks, Markos. To all those who are listening, these are extraordinarily difficult times. And I want to express my sincere hope that you and all those that are close to you are keeping safe and well. I want to thank you for joining us, and as always, I want to thank you for your investment in our company. I'm going to give a very brief overview of our performance last year. However, given the times that we're in, I will spend the balance of my remarks focusing on how we are adapting to a marketplace that is dealing with the impacts of COVID-19. We entered this period on firm foundations, and I am very confident of how we will emerge into a post-pandemic environment even stronger competitively than before. But focusing first on 2019. We delivered full year organic revenue of 4% growth for the year. Our full year margin expansion was 20 basis points, and we closed at an operating margin of 13.9%. Our earnings per share was up 5%, and even up 9%, excluding the effects of foreign exchange. We returned more than $200 million, $214 million to be exact, of capital to our shareholders through dividends and share repurchases. This included a 14% increase in the dividend last year. And your Board approved an 8% increase for 2020 earlier this year, the ninth consecutive annual increase. In 2019, we also committed to a set of bold, new, industry-leading sustainability goals, targeting the downstream impact of the solutions that we provide. That approach deepens the alignment between our business and our sustainability strategies, and it advances sustainability for our company, our customers and the communities that we serve. When I look back to the turn of the year, it's now difficult to view our business and our markets without seeing them through the lens of COVID-19. We felt the impact of the outbreak early, given our sizable business in China, and we've since experienced its progression across Europe, the U.S. and globally. When the pandemic emerged, our first priority was to provide for the safety and well-being of our colleagues, our customers and our partners. Then we moved to shore up our supply chains. We focused on getting critical equipment into our customers' hands so they could keep their essential services flowing, and we continued to do that. We also acted to protect our financial and our competitive position. As the pandemic spread, we significantly reduced our nondiscretionary spending, both in the areas of OpEx and CapEx. But most importantly, and I want to underscore this, we put in place a package of employee support to underpin the well-being of our workforce, so they can make sure they stay focused on serving our customers' mission-critical work. Clearly, the impact of the pandemic is continuing, so we are being appropriately cautious. But I want to reiterate, we are in a very strong position. We have a durable business model that is at the heart of essential services. We entered this period on firm foundations, and we are differentiated in ways that position us to outperform over the medium and the long term. As our customers deal with this pandemic, we are seeing a notable light to quality. The strong get stronger. And we are using that to shape our investments as certain trends accelerate across the water sector. We see COVID-19 shifting how our customers are thinking about sustaining their essential services. As they face the imperative, which is to become more resilient, they are turning to Xylem's knowledge and services. We are looking to help them adapt to their new realities. Solving water and natural resource challenges is work that always matters. It always matters. It's -- but now it also at the heart of our public health defense network. Our customers choose to partner with us in that work because of very few things, very clear strengths that drive our medium- and long-term investment thesis. First, our leading market positions, our depth of installed base and our differentiated portfolio, they underpin our ability to drive sustainable and profitable growth. Secondly, our disciplined delivery and execution enables us to drive sustainable margin expansion. Our financial strength, which all of our customers depend on, especially in these extraordinarily difficult times, it relies on a robust balance sheet and our demonstrated cash flow. Our innovation. We anticipate our customers' challenges. That underpins our investment in R&D and how we deploy capital to further strengthen our portfolio. And last but not least, our commitment to create value for all of our stakeholders. It underpins the sustainability of our company, our customers and our communities. 5 years ago, we set a very bold vision to become a company that would combine the power of digital and hardware solutions to address the world's toughest water and resource challenges. You've heard me say this before. It is scarcity of water, it is affordability and it is resilience of our infrastructure. If there was ever a time for the world to focus on resilience, it's now. Our vision and our medium- and our long-term investment thesis, they remain intact. In closing, I want to thank all my Xylem colleagues for all they are doing right now to support our customers, our partners and our communities. And I want to thank each and every one of you for your continued commitment. You are amongst our most important partners in creating both economic and social value. And doing this together, we will solve water. With that, Claudia, I'll hand it over to you.

Great...

Thanks, Patrick. I think we will now be pleased to answer your questions, and I'll hand it over to you, Claudia.

Thank you, Markos. So we have received a number of questions, and I'll start with one that is for you, Patrick. And that is, are there -- whether there are new business opportunities arising from COVID-19 that you see.

Yes. I think the biggest opportunities are around the challenges associated with affordability. And our new digital opportunities and offerings are helping our customers address both their OpEx and their CapEx needs in a more affordable way. And this pandemic has offered us opportunities to have new conversations. And I hate to say the word excited because of what's going on around us, but yes, we have many opportunities within our digital offering.

Thank you. The other questions, and there are a couple of them that are coming in here, relate to how the Board and the company is thinking about share repurchases and dividends. And there is a perspective shared here that I would like to note from one of our shareholders, the Carpenter Union Pension Fund. As long-term investors, they appreciate the company's action to address employee safety and the generosity of the company's Partner Community Grants Program in response to the difficulties related to the COVID-19 pandemic. They are commending the Board and the management team for having done a strong job guiding a sustainable growth program over the years, and they would like to request perspectives on share repurchases. And then a number of other questions have come in with respect to the dividend. And so maybe, Markos, I'll hand it over to you.

Yes. I'll give it Markos.

From the Board's perspective, no change is being contemplated at present to our practice, which is essentially to buy back enough shares to offset any dilution. This is with respect to the share buyback. Patrick, would you like to comment on the dividends?

Yes. Look, I think that we are in a very strong position in terms of liquidity. We will continue to monitor things as they develop. But right now, there is no planned change in the dividend.

So in both the dividends and in share buyback, we do not contemplate any changes at present.

That's correct.

Yes. Thanks, Claudia.

Thank you. There is another question, Patrick, and this one is probably also for you. It relates to employees' ability to work from home and how the company is thinking about strategies with respect to that. And also a question related to any employee furloughs.

Yes. So I would start by reinforcing that a large majority of our employees, our colleagues, we don't call them employees, our colleagues, have been on the front line, supporting our utilities, our industrial customers, our commercial building partners and everyone else. So we've had people on the front line throughout all of this. And our #1 priority has been to make sure that they are safe and sound. So we have gone out of our way to make sure that they are taken care of. In terms of those of our colleagues that are able to work from home, we will continue to support them working from home. So we have a steering committee that is focused on the whole return-to-office approach. It's the same group that was working on the COVID-19 mitigation response. And we will be here to make sure that we take care of our colleagues around the world and support them in what they need as they think about returning to the office. We're all in this together.

Thank you. Great. We have another question coming in, and it relates to infrastructure investments, Patrick. And one of our shareholders' expresses, whether there is a belief that health care infrastructure will overtake opportunities for physical infrastructure investments, particularly in the water utility area, and how you are assessing infrastructure investments.

So the investments we're making right now are focused very much on water infrastructure because -- actually, the questions I've gotten more from water utilities is how we can help them connect with leading health care research institutes such as John Hopkins. And so we are spending money with WEF, which is the Water and Environmental Foundation. We are providing for them to have a Chief Medical Officer that is dedicated through the end of the year, at a minimum, to better understand how the virus behaves in wastewater and clean water. So we are very focused right now on helping water utilities. We care deeply about the health care infrastructure, of course, but our expertise is in the area of water.

Great. Thank you. We have a question that has come in that relates to the liquidity and strength of the company in terms of its access to credit lines and credit markets. And so maybe we can open the line for our CFO, Mark, to provide perspectives on that.

Yes. Is Mark on the line?

Can you hear me?

Yes, we can.

Mark, we can. Yes.

Great. Yes. Yes. We -- and Patrick mentioned this in his prepared remarks, but we do enter the crisis in a very strong financial position. We've got $1.7 billion of liquidity. We closed the quarter with approximately $740 million of cash. Our leverage is under 3x. And we are actively managing our cash flow profile, including tightly managing working capital to maintain that position throughout.

Thank you, Mark. And Patrick, we have one question that is coming in, and it relates to whether you see differentiation in our opportunities from a geographic perspective. And in particular, whether there are opportunities for the company or also whether there are risks associated with any China and U.S. tensions.

So we are privileged to have the global breadth in our business model. China is returning particularly strong, back to pre-pandemic levels. I would say the same for India. We are certainly looking at each one of our geographies in terms of how we think about them coming out of the crisis, but I would not suggest that there is any seismic shift in terms of our changes and plans. But we are looking at every one of our markets uniquely.

Thank you. And then we have one more question that relates to our water utility companies, and there is an interest in understanding what areas, in particular water utility companies, are asking us to help them with. And so you touched on some of these topics, Patrick, during your prepared remarks and some other Q&A. But if there's anything you'd like to expand on, I thought I'd pose the question.

Sure. I think the biggest challenges that utilities are facing right now is going to be affordability, and they are looking to our new solutions and technologies to help them in that regard. They are looking at different ways of working, most notably protecting their workforce from a safety standpoint, but also supporting them to work at home. Secondly, they are deeply concerned about the safety and well-being of their folks and worrying about, again, whether the virus can be transmitted through water and wastewater. So those are 2 areas that we are deeply committed to working with them on, and they happen to be unique areas for us at Xylem to lead.

Great. Thank you. And with that, Markos, I have gone through the Q&A that we have received here and would like to turn it over to you to close out.

Thanks very much, Claudia, for doing this. We've now concluded our question-and-answer session. I will thank you again for attending today's meeting. Thank you for your interest in our company. Stay healthy, stay safe. We now conclude the meeting. Thank you.

Thank you.