Xylem Inc. (XYL) Earnings Call Transcript & Summary

Good morning, and welcome to Xylem Inc. Annual Meeting of Shareholders. I'd now like to introduce Mr. Chairman, Robert Friel.

Good morning, everyone. It is 11:00 a.m., and the shareholders meeting will now come to order. I am Robert Friel, and I am the Chair of the Board of the Directors of Xylem, Inc. For the well-being and safety of our shareholders, Director nominees and management, we are holding this meeting virtually this year to allow us all to avoid travel and to observe appropriate physical distancing. We hope that you and those close to you are safe and well and extend our best wishes to you and your families in these challenging times. On behalf of the Board and over 16,000 company employees, I want to welcome you to the 2021 annual meeting. I'd also like to acknowledge the Board members participating in the meeting this morning. Patrick Decker, Xylem's President and CEO; Jeanne Beliveau-Dunn, President and Chief Executive Officer of Claridad LLC; Jorge Gomez, Chief Financial Officer; DENTSPLY SIRONA Inc.; Victoria Harker, Chief Financial Officer of TEGNA Inc.; 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; Markos Tambakeras, former Chair, President and CEO of Kennametal Inc; Lila Tretikov, Corporate Vice President and Deputy Chief Technology Officer at Microsoft; and Uday Yadav, President and Chief Operating Officer of the Electrical Sector of Eaton. As Mr. Sten Jacobsen is retiring as of this annual meeting, we recognize and thank him for his outstanding service on the Board of Xylem, since it was spun off from its former parent in 2011. It is a pleasure to serve as the Chair of this distinguished Board of highly qualified and seasoned leaders. Each brings decades of experience and a unique business perspective to the oversight role at Xylem. I'd also like to recognize the members of our Xylem's senior leadership team in addition to Mr. Decker and Claudia Toussaint, Corporate Secretary, who are participating this morning. The agenda for the meeting can be found in the meeting materials section in the lower left corner of the meeting website. 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. [Operator Instructions] 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 pertinent 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, Rob. The Board of Directors has appointed Douglas [ Zanarchi ] of American Election Services; and Gary Ross as our inspectors of election to supervise the voting by proxy and ballot at this meeting. The inspectors are on the line. 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 15, 2021. The list of registered shareholders as of the record date is available for review on the meeting website by clicking the link to registered shareholders list in the bottom-right corner of the web page and entering your control number. The inspectors of election also have the affidavit of distribution from Broadridge Financial Solutions, which confirms the distribution of proxy materials for this meeting. Approximately 85% 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.

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 2021 proxy statement. Please note that shareholders may vote at any time until the closing of the polls by clicking the vote icon at the bottom of 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 pertinent questions shareholders may have about our Director nominees or any of the other proposals.

The first item of business is the election of 11 Directors of the company. The following individuals are hereby nominated to serve as directors of Xylem Inc. for a 1-year term expiring in 2022 or until their earlier retirement or resignation. Jeanne Beliveau-Dunn, Patrick Decker, Robert Friel, Jorge Gomez, Victoria Harker, Steven Loranger, Surya Mohapatra, Jerome Peribere, Markos Tambakeras, Lila Tretikov and Uday Yadav. 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 2021. This appointment is subject to 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 2021. The third proposal relates to the advisory vote to approve 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 2021 proxy statement, including the compensation discussion and analysis, compensation tables and narrative discussion is hereby approved. The fourth proposal is a shareholder proposal to amend our proxy access bylaw by eliminating the 20 shareholder limit on nominating group size. The company received timely notice of this proposal, which was included in the proxy statement, together with the proponent's supporting statement and the Board's recommendation against this proposal. This proposal requests the elimination of the 20 shareholder limit on nominating group size in our proxy access bylaw. 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 the proponents' representative, Ms. Cam Franklin?

Good morning. Can you hear me right now?

Yes, we can. Ms. Franklin.

Okay. Here I go.

Yes. I now recognize [indiscernible] Please, go ahead.

Okay. Proposal 4 improve our Catch-22 proxy access. Shareholders request that our Board of Directors take the steps necessary to enable as many shareholders as may be needed, combine their shares to equal 3% of our stock owned continuously for 3 years in order to enable shareholder proxy access. Proxy access allows a group of shareholders a nominated director, who will compete with management nominated directors to see who gets more votes. Competition is good for our Board of Directors. Currently, a strict limit of 20 shareholders must have owned 600 million of Xylem stock for an unbroken 3 years in order to nominate one candidate for the Board under our proxy access rules. A strict limit of 20 deep pocket shareholders does not allow for a diverse group of shareholders. It is disappointing that management does not support the diversity that this proposal calls for. As a practical matter, it is unlikely that more than 50 shareholders would participate in our meeting with Director, using proxy access with this proposal. There was hardly any administrative difference in 20 shareholders submitting proof of owning of 600 million of Xylem stock compared to 50 shareholders submitting proof of owning 600 million of Xylem stock and adopting this proposal would show management's commitment to diversity. This proposal is asking for so little. Our current proxy access is was out of balance and too difficult for shareholders to make use of. There has not been one proxy access candidate placed on the ballot of any company during the past 5 years. There have been 500 companies with the shareholder right for proxy access during these 5 years. 500 companies time 5 years equals 2,500 company years without one proxy access candidate. This means that under the current roles, a company such as Xylem would not expect one proxy access Director candidate during the next 2,500 years. This is way out of balance as far as shareholders are concerned, plus a proxy access Director candidate then has a formidable challenge of getting more votes than at least one established Director. This would require impressive shareholder support over an incumbent Director and would be a clear indication that an incumbent Director needed to be replaced. Please vote, yes, improve our Catch-22 proxy access, proposal #4. Thank you very much.

As you know, the Board recommends a vote against this proposal for the reasons set forth in our proxy statement. We would now like to welcome any pertinent questions shareholders may have about our Director nominees or any of the other proposals. The polls remain open. And you may vote by clicking the vote icon at the bottom of the meeting page. 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]

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

Thank you. The inspector of elections have provided the following preliminary results. Proposal 1, each of the 11 Director nominees has been elected as a Director of Xylem Inc. for a 1-year term. With approximately 99% of the votes cast in favor of this proposal, the appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2021 has been ratified by the shareholders of Xylem Inc. Proposal 3, with approximately 86% 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 as set forth in our 2021 proxy statement. Proposal #4, the shareholder proposal, with approximately 56% 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 eliminate the 20 shareholder limit on nominating group size in our proxy access bylaw.

Based on the preliminary results of the inspectors of election, proposals 1 through 3 have been approved. The majority of the shareholders voted against proposal 4, the shareholder proposal. As there is no further business to be addressed, I now declare Xylem Inc.'s 2021 Annual Meeting of Shareholders formally adjourned, and all matters before it closed. I would now 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.

Thank you, Rob, and thanks to all of you for joining us. The events of 2020 changed our world. Society adjusted to new realities, and business had to adapt faster than we ever thought possible to shift in markets, supply chains, ways of working, and especially our customers and stakeholders' priorities. The way the Xylem team responded was frankly inspiring. Thanks to Xylem colleagues around the world, the company came into 2021 in a strong position. And we continue that momentum, as you saw, reflected in healthy revenues and orders growth across the business in our first quarter results. Xylem's business and mission have never been more relevant than today. COVID-19 put essential services in the spotlight. Water was on the front line of the world's public health defenses. And the economic and social value of critical infrastructure became perhaps more apparent than ever. Because our business is global, we felt the impact of COVID-19 early. Our colleagues' safety was obviously our first concern, and we quickly activated expanded safety and health protocols globally. As the pandemic intensified, our utility customers worked heroically to keep essential services flowing to homes and hospitals everywhere. Our people, our suppliers and our partners stepped up to help with incredible results. Despite the many challenges, our team also continued to make progress on sustainability. I think many of us feared that the cause of sustainability might suffer setbacks from the economic hardships of 2020. But instead of a retreat, we saw, in advance, a broad global embrace of sustainability as a business imperative. Through the year, we took several meaningful steps towards our Signature 2025 sustainability goals. Most notably, we put sustainability at the heart of Xylem's financing strategy with our $1 billion green bond offering. And in 2021, we are continuing to augment sustainability-linked compensation for an increasingly broad group of executives and employees. Our commitment and action has put us in a leadership position, both in the water sector and beyond. As a result of the team's exceptional work in 2020, Xylem came into this year having demonstrated the agility required to meet the challenges of an increasingly volatile, uncertain and complex world. We focused on what we could control and delivered positive outcomes even in unfavorable conditions. Our financial foundations are even more robust now than prepandemic. From the shock of the last year, the world has turned toward what is essential: the need for greater resilience and the imperative of a sustainable world. Our mission, our business and our values are more relevant today than ever. On October 31 of this year, we will celebrate the 10-year anniversary of Xylem. Some of you have been with us for a decade, and some have invested more recently. We are grateful to all of you for your confidence in our company and our team, and for joining with us and our mission to solve water. We look forward to the great work and the value that lies ahead. Thank you. Back over to you, Rob.

Thank you, Patrick. We'd now like to open up to answer any questions that you all have.

Let me go and look at the questions. There are a number of questions that have come in. We have a question. And I think, Patrick, you're probably the best person to respond to this, regarding product innovations, and shareholder would like to understand a couple of examples of product innovation.

Sure. Happy to do so. So I would start with saying, innovation and technology is one of our top 5 strategic priorities and something that we measure ourselves on. The primary measurement is what we call the Vitality index, which is the percentage of our revenue in any given year that comes from products and solutions that have been launched in the last 5 years, and we continue to see excellent progress on that as we've increased investments in R&D, both absolute dollars but also percentage of revenue. There's a long list of innovations that I could articulate, I'll state a couple here. One of them is our new digital offering that we have branded Xylem Vue. And it is a consultative opportunity we have with utilities around the world, to use the power of data analytics and AI and machine learning, to help them develop smarter networks around the utility, to help them address some of their biggest pain points around energy consumption, around water losses and the utility. And so, we've got a number of offerings there that we have launched this past year. Secondly, we've done a lot of work in strengthening our metrology and our advanced metering infrastructure network capability, smart metering. And so we've had a number of big deal wins and products that support those along the way. And we've also had a number of new pump offerings that are really focused on driving energy efficiency as part of our focus on sustainability. So those are a few examples of the last year.

Great. Thank you. Let me go to another question that has come in, and it relates to our approach to employee vaccination. And the shareholder would like to know whether we have programs to encourage our employees to be vaccinated. And again, I think, Patrick, you're the right person to respond to that.

Sure. Great question. We clearly are creating a culture and a climate in the organization to strongly encourage all of our colleagues around the world and their families to get vaccinated. We actually have vaccination sites. We are paying for people to take time off to go get vaccinated. We waived co-pays during the initial testing phase to encourage people to go get tested. Now we're doing that with respect to vaccinations. We're role modeling. I got my second vaccination about a month ago, and we talked about this a lot in my all-hands meetings with colleagues around the world. We are not mandating vaccinations, but we also have all other safety protocols in place as we are evaluating what our return-to-workplace policies all around the world. But we are clearly encouraging all of our colleagues to get vaccinated.

Perfect. Thank you. Another question. And again, Patrick, I think, you are the right person to take the lead on this one. And it relates to cost-cutting measures that were taken in the past year. And if you can just give maybe a couple of examples, that would be great.

Sure. So there were a variety of things that we did on the cost-cutting front. Bear in mind that we were also being ambidextrous. We knew that we needed to continue to invest in critical capabilities in the organization. So part of the cost-cutting we did, we reinvested back into innovation technology and some market expansion as an example. But some of the cost-cutting measures that were litany of them that we did. We try to be very strategic in that regard. We started early. And so, the first thing we went after was discretionary cost. So we went after things like travel spending, some of our consulting spend, things that we just do not believe were absolutely essential to keep our services flowing. And that represented about $60 million of cost in 2020 that we were able to avoid. Secondly, we took an approach. We had already identified a number of restructuring efforts that we plan to do in '21 and '22 before the pandemic. And we simply accelerated a number of those actions into 2020 to go ahead and be strategic about cost-cutting as opposed to across-the-board type of approach. So examples of that where we simplified management layers in a number of places around the world. We consolidated some locations around the world. And again, those are structural changes that remain permanent at this point in time. And we'll -- we realize those savings here in 2021 and beyond.

Great. And then there is another question, and it relates to share buybacks. And the question is, when was the last share buyback. And Patrick, I think, it's a pretty straightforward answer.

Sure. Yes. So we -- our share buyback philosophy is predominantly to focus on covering the dilution of annual equity grants to employees and executive population. That continues to be our primary philosophy on share buybacks. So the last buyback, by definition, would have been in the first quarter, and that will continue through the year as, again, we minimize dilution from other equity issuances.

Thank you. There also is a question related to CEO pay, and just simply the request is for the total of CEO pay for 2020 and 2019. And I would like to just note that, that information is fully and transparently disclosed in our proxy statement that is available on our xylem.com website in the Investor Relations section. Let me go to another set of questions that came in. And this question -- I'm going to read it out because it provides some context. Mr. Chairman, the carpenter pension fund holds a total of 158,600,000 shares of the company's stock. We support the company's executive compensation plan. A company's executive compensation plan should be designed primarily to drive the successful execution of the Board's long-term strategic business plan. The question then is, would you or the Chair of the Compensation Committee speak to whether Xylem might be better served with an executive compensation plan tailored specifically to the company's particular circumstances versus some of the plants today that are at times largely formulaic? And I think, Rob, maybe you can take the lead on responding to that question.

Sure. First of all, I believe we are -- that our compensation plan does, in fact, take into consideration our strategy, and is not necessarily formulaic. I would say there's a number of components, 25% of our annual compensation is specifically tied to an individual component. In addition, particularly recently, we've tied some compensation to ESG and our sustainability goals. And I would say a significant amount of our compensation is tied specifically to the financial performance. In fact, our CEO is -- actually 87% of his compensation is performance-based. And for the other neos, it's over 75%. So we do believe that our compensation system is tied specifically to the strategies of Xylem.

Great. And we have one final question, and it relates to the topic of balancing on stakeholder interests. And in particular, the question relates to the Board's perspectives on the concept of stakeholder capitalism, and how the Board balances various stakeholder interests and considers shareholders' interest in that context.

Well, the Board exercises their business judgment to acting. What we believe is in the best interest of Xylem as well as shareholders to build long-term sustainable value. However, to do that is critical to invest in a lot of other stakeholders, including our employees, suppliers, customers and the communities that we operate in. So consideration of this broader constituencies, we believe, aligns with our deep commitment to sustainability. And actually, we believe, ultimately promotes financial growth and -- which benefits really all our shareholders. And in fact, we think it's simply not possible to do well as a company, if you're not properly treating and serving your customers and being a great citizen to the community.

Thank you. I will say that there are no more questions at this point. And so I'll turn it back to you, Mr. Chairman, to close out the meeting.

Great. Thank you. We have now concluded our question-and-answer session. Thank you for attending today's meeting, and thank you for your interest in our company.

Thank you. The Annual General Meeting of Xylem Inc. has now come to an end. Thank you for attending. You may now leave the virtual meeting.