Matthew Latino - Xylem, Inc. Patrick K. Decker - Xylem, Inc. E. Mark Rajkowski - Xylem, Inc..

Michael Halloran - Robert W. Baird & Co., Inc. Deane Dray - RBC Capital Markets LLC Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc. Joseph Giordano - Cowen & Co. LLC Chip Moore - Canaccord Genuity, Inc. Walter Scott Liptak - Seaport Global Securities LLC R. Scott Graham - BMO Capital Markets (United States) Brian Lee - Goldman Sachs & Co. LLC.

Welcome to the Xylem Second Quarter 2018 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to Matt Latino, Senior Director of Investor Relations. Please go ahead, sir..

Thank you, and good morning, everyone, and welcome to Xylem's Second Quarter 2018 Earnings Conference Call. With me today are Chief Executive Officer, Patrick Decker; and Chief Financial Officer, Mark Rajkowski. They will provide their perspective on Xylem's second quarter 2018 results and discuss the full year outlook.

Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website at www.xylem.com.

A replay of today's call will be available until midnight on August 30th. Please note, the replay number is 800-585-8367 and the confirmation code is 5289-886. Additionally, the call will be available for playback via the Investors section of our website under the heading, Investor Events. Please turn to slide number 2.

We will make some forward-looking statements on today's call, 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.

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. Please turn to slide 3.

We have provided you with a summary of our key performance metrics including GAAP and non-GAAP metrics. For purposes of today's call, all references will be on an adjusted basis unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide 4.

And I will turn the call over to our CEO, Patrick Decker..

Thanks, Matt. Good morning, everyone. Thanks for joining us today to discuss our second quarter results. We delivered another quarter of strong results at both the top and bottom line. Our teams' strong execution again led to share gains in key end markets.

They were also very disciplined in their approach to pricing actions, leveraging our strong positions in the marketplace, and I'm quite pleased with the traction we've already achieved. Importantly, these factors contributed to an excellent operational performance, one in which we expanded margins and delivered strong double-digit earnings growth.

The momentum we've built broadly across our businesses is continuing and supports our updated expectations for the full year. Let me now read you a few of the details. In the second quarter, we again delivered solid broad-based orders and revenue growth across all of our major markets.

Orders increased 8% in the second quarter, making this the third consecutive quarter of high single- to double-digit orders growth. Our Water Infrastructure business, again, was a standout in this regard with treatment orders up 25% in the quarter and transport up mid-single-digits.

Our treatment project bidding pipeline was also up double-digits in the quarter. Revenue in the quarter grew 8% organically with strength across nearly every end market and region. As I mentioned earlier, we made good progress in our price realization efforts in the quarter.

The combination of our strong brands and positions in the marketplace as well as the health of our end markets helped us gain and sustain significant pricing traction. These efforts are continuing and are an important part of our effort to offset the impact of rising input cost.

In addition, we continue to deliver on our continuous improvement initiatives. This helped us drive a 70-basis point year-over-year increase in both our adjusted EBITDA margin and our operating margin in the second quarter and we delivered a 24% increase in our adjusted earnings per share.

So, across the board, a very strong quarter, in fact a very strong first half of the year. Before I turn over to Mark, I want to provide a few comments on our strategic work.

Our consistent performance building quarter-after-quarter really reflects the focus our teams have on executing our strategic priories, which provides a roadmap to evolving our company to a faster growing, highly innovative and more profitable enterprise.

These initiatives are advancing our progress towards our long-term financial targets and helping us foster a culture that is united in our purpose. Let me quickly review our progress. First is accelerating profitable growth. We address this first by driving commercial excellence.

We've made significant strides over the past three years to improve how we do business with our customers, making it easier for them to work with us.

While obvious on its face, it's much more complicated to change the way previously independent business teams and brands work together to harness the full scale and power of Xylem solutions to solve our customers' challenges. But success breeds success.

And today, our teams have better tools and are collaborating in new ways to maintain focus where it should be, which is on the customer. Furthermore, this shift in how we execute in the marketplace is advancing our progress on revenue synergies. These synergies are of varied size and scale.

Some take considerable time to bring to fruition, while others are already occurring in the due course of business. Year-to-date, we won about $30 million in synergy deals which largely will be recognized in 2019 and beyond.

By way of example, one is a communications network deal leveraging our FlexNet platform along with smart meters for a consortium of water utilities operating in the Midwestern U.S.

Another deal is one of the larger leak detection projects for a utility in Southeast Asia in which our Visenti technologies will be deployed across more than 6,000 kilometers of pipe. These deals are great demonstrations of how Xylem's financial strength and longstanding customer relationships can be leveraged to drive additional opportunities.

In addition, we are in late stage pursuit of finalizing a couple of medium-sized deals with larger deals in our sights. Some are expected to be announced by the end of the year or early 2019. The bigger picture is that this type of collaboration is happening across our global business teams and it's yielding results.

We have a growing number of pilot projects in the field and we've already expanded this collaborative effort to our Advanced Infrastructure Analytics platform. The second component of our accelerating profitable growth priority is capitalizing on growth in the emerging markets.

In the second quarter, our organic growth increased 13%, bringing our first half total organic growth to 10%. Our targeted approach investing first in China, India and the Middle East has helped us establish a strong foothold in each market. Year-to-date, our business in China is up nearly 30%.

Revenues in India are up in the high-teens and the Middle East is up mid-single-digits. And our product localization strategy is paying multiple dividends. It's enabling a closer relationship with our customers as we are better able to meet their unique needs, and it's helped to reduce the impact of a dynamic global trade environment.

The third component of accelerating profitable growth is to strengthen innovation and technology at the company. We've significantly increased not just our investment in this area, but we also changed our approach in order to capitalize on the enormous expertise we have across the company, providing focus in order to speed results.

We closed out the second quarter with another increase in our Vitality Index both sequentially and year-over-year. And we have not hesitated to use M&A as a proxy for R&D.

Our acquisitions have provided immediate access to different vectors of technology and science, but the real impact is happening as our teams and technologies come together to create new solutions that will fundamentally transform how water and wastewater is managed in the future.

Many of these efforts are made possible by our focus on driving a continuous improvement culture. We have exceeded our savings targets each year since we announced them back in late 2015, and we are on track to continue that trend in 2018. One part of this work is our business simplification initiatives.

For example, our global business services program is taking dozens and dozens of varied processes in our back office functions and placing them on common platforms and centralizing this work. This will drive cost efficiency and significantly raise our level of execution, improving cycle time and the quality of this work.

We're still largely in the implementation phase, but we have clear line of sight to significant savings and resulting margin expansion next year and beyond. Finally, we must have the right teams in place to deliver on our ambitious goals.

That requires the right leadership and development at all levels of the company, and it requires that across the organization, all of our roughly 17,000 colleagues understand not just what we're doing but why we're doing it. Harnessing the collective passion of a global organization around the united purpose is something we focus on every day.

There's one other area of strategic importance that I want to mention and that is our ongoing investments in longer-term growth opportunities. I'm specifically referring to our increased investments in our newly acquired businesses as well as in the communications platform that will support solutions from all areas of the company.

During the first few months of owning these businesses, we've learned a lot, particularly from the very strong receptivity they've gained from our customers. They're looking for us to move faster and think bigger in terms of scaling these businesses and bringing them new solutions.

This is particularly true around the build-out of more software-enabled solutions as well as network-as-a-service. Their feedback has reinforced our view that we have a first mover advantage in this area and we intend to capitalize on that.

The strength of our operational performance along with our continuous improvement savings are affording us the opportunity to make these investments while remaining fully committed to our near- and long-term margin expansion targets.

It's very clear to us that we have significant opportunities that we need to pursue now to accelerate the growth profile of Xylem to deliver what will clearly be margin-accretive initiatives over the medium- to longer-term. Now, let me quickly address our updated outlook for the year.

On the top line, our revenue growth in the first half, combined with orders and backlog strength, gives us confidence to raise our revenue outlook from 4% to 6% growth to 6% to 7% growth. We are also increasing our EPS guidance operationally by $0.04.

This improvement is offset by a couple of non-operational items which results in maintaining our EPS midpoint. We will take you through these details later in the presentation. So, now, please turn to slide 5, and Mark will review the quarter results in more detail..

Thanks, Patrick. I'm very pleased with our team's performance in the second quarter. Overall, revenues were up 13% year-over-year. This represents 8% organic growth, 3 points of growth from foreign exchange tailwind, and 2 points of growth from acquisitions.

From an organic perspective, the strength in revenue was broad-based across most of our end markets and in all key geographies. The utilities end market led the way with 11% growth.

This was slightly above our expectations and was driven both by the timing of project deliveries in the Water Infrastructure and Measurement & Control Solutions segments, as well as continued strong performance in our pumps and aftermarket business broadly. We saw the strongest growth in the U.S. utilities market, which was up 12%.

We had another good quarter in the industrial end market with growth of 6% year-over-year. This was also slightly above our expectations. Market conditions remained solid in our Applied Water business as well as dewatering.

And we benefited from some large industrial treatment project deliveries in the emerging markets where we saw strength across nearly all geographies. We also continued to see solid performance in our commercial end market, up 6% with strong growth in the U.S. and China.

Finally, in residential, we were down 2% primarily reflecting a tough comparison to the prior year results when revenues grew 15%. Moving to operational performance. Our teams delivered an increase to our adjusted EBITDA of 70 basis points to 19.3% in the quarter.

This improvement was primarily driven by increased productivity savings, volume leverage from strong organic growth, and price realization, which was partially offset by cost inflation, unfavorable mix and investments.

Price realization improved 60 basis points in the quarter, and we're very encouraged by the rapid acceleration that we saw on price realization during May and June.

Adjusted operating margin increased 70 basis points to 13.8%, which includes 20 basis points of non-cash amortization related to purchase accounting for the acquisitions in our advanced infrastructure analytics platform.

Our teams continue to execute on our productivity programs, and we delivered $41 million in cost savings during the quarter, an 8% increase from the prior year. This 310-basis point improvement offset inflation and enabled us to continue to fund strategic investments to support revenue synergies in other growth programs.

Strong revenue performance and operational execution drove earnings per share of $0.73, an increase of 24% year-over-year, which was slightly higher than our expectations. Please turn to slide 6, and I'll provide additional details on our segment performance.

Let's turn to our Water Infrastructure segment, which had a strong performance across all key metrics. Orders of $580 million in the quarter were up 9% organically year-over-year and reflect strength in all applications within the segment.

Treatment orders were up 25%, the second consecutive quarter of more than 20% orders growth, reflecting the continued upward trajectory of our pipeline which has expanded double-digits versus the prior year. The results also speak to the continued overall health and strong demand in the utility market.

It is important to note that the majority of the treatment orders are for projects that require longer lead times and will not ship until 2019 and beyond. We exited the quarter with total backlog for this segment of $672 million, up 16% organically year-over-year.

Water Infrastructure revenues of $546 million grew 11% year-over-year on an organic basis. Foreign exchange was a $13 million tailwind. In the U.S., the segment grew 11% driven largely by double-digit growth in the utility end market, reflecting solid underlying demand and share gains.

We're continuing to see strong market performance across all of our businesses. Treatment benefited from the timing of several project deliveries and transport continued to benefit from strong aftermarket sales and achieved share gains. Dewatering also generated mid-single-digit growth from increased municipal bypass work.

Outside the U.S., performance in this segment was also very strong. Emerging markets were up 18% including double-digit growth in China, the Middle East, and Latin America.

The majority of the outsized growth we saw in emerging markets came from our treatment business, which was up more than 50%, driven both by the timing of project deliveries and strong underlying demand.

In general, we continue to see growing bid activity and demand as government mandates on water quality continue to drive spending across the emerging markets.

In addition to the robust treatment growth in emerging markets, we also saw high single-digit growth in our wastewater transport business, which continues to benefit from our product localization strategy.

Finally, we also saw a second consecutive quarter of improving market conditions in Western Europe where our business grew 6% overall, primarily driven by growth in transport in the Nordic region and the UK. It is also worth noting that our industrial end market in Water Infrastructure was up mid-single-digits during the quarter.

The growth was largely driven by our dewatering business, which continues to see strong activity in construction and oil and gas markets. Additionally, we benefited from the delivery of several large industrial treatment projects in Latin America and Europe.

Operating margin for this segment increased 140 basis points to 17.8% driven by cost savings from our productivity programs, higher volumes, and greater price realization, which accelerated through the quarter. This more than offset inflation and unfavorable mix from a higher portion of treatment projects this year versus last year.

Please turn to slide 7. Our Applied Water segment also had a very good quarter. Orders of $400 million were up 6% organically. Our book-to-bill ratio was 1.03 in the quarter, which is in line with our historical performance. We exited the quarter with backlog of $221 million, which is up 17% organically compared to last year.

While this is still predominantly a short cycle business, the growth of our backlog continues to give us confidence in our ability to deliver our mid-single-digit organic growth outlook for the year. Revenue for Applied Water was $388 million, up 6% organically versus the prior quarter. Foreign exchange was an $8 million tailwind.

In the emerging markets, revenue grew 14%, reflecting strong growth in China, which was up nearly 30%, driven by increased industrial project business and solid demand in the commercial building market. Revenues in the U.S. grew 5% driven by strength in the segment's commercial and industrial verticals which were up 9% and 7% respectively.

In commercial, we continued to see strength in the institutional building sector and demand for our new products. Industrial growth was driven by the continued recovery of heavy industrial project demand as well as growth in our specialty flow business which serves the food and beverage and marine markets.

Residential was down slightly as we lapped mid-teens growth in the prior year. Segment operating margin in the quarter increased 150 basis points to 16.2% year-over-year.

The strong year-over-year margin expansion was driven by cost savings from productivity programs, higher volumes and accelerating price realization, which more than offset inflation and unfavorable mix from a higher portion of lower margin, large industrial projects compared with last year.

Now, let's turn to slide 8 to discuss the performance of Measurement & Control Solutions. Our Measurement & Control Solutions segment saw growing momentum in its markets as well. Orders of $397 million in the quarter were up 11% organically, the third consecutive quarter of double-digit order growth.

Segment revenues were $383 million, up 8% on an organic basis year-over-year. Foreign exchange was an $8 million tailwind and acquisitions added $29 million. U.S. revenues grew 10% primarily due to the deployment of the Nicor Gas deal we announced earlier this year, and we saw a return to growth in the water vertical in the U.S.

We continued to see strength in the North American water pipeline and orders, which were up 40% over last year, and we continue to expect to deliver high single-digit revenue growth for the full year. The segment's European and emerging markets businesses each grew low single-digits in the quarter.

We're also very encouraged with the significant momentum we see in the market with our new Advanced Infrastructure Analytics platform, which is reflected in accelerating orders and pipeline growth, both of which were up over 20% in the quarter.

In the short time that we've owned this portfolio of solutions, we're seeing increased opportunities and excitement from our customers to leverage these capabilities to solve their most critical problems. A great example of this is the recent win in Southeast Asia, which Patrick mentioned earlier.

This win is noteworthy not only because of its size but also in the shorter sales cycle enabled by leveraging existing Xylem relationships. Adjusted EBITDA margins increased 140 basis points – decreased 140 basis points to 18.5%. Adjusted segment operating margin in the quarter declined 150 basis points to 9.1% year-over-year.

Our margin performance in the quarter was expected and largely reflects planned investments we're making to build and to scale up the technologies and commercial capabilities of our Advanced Infrastructure Analytics platform to capitalize on our first mover advantage.

We also continue to invest in networking and software tools as well as commercial resources to support the pilots underway to enable us to win at least our fair share of the large international deals in our pipeline.

Q2 is also impacted by unfavorable mix in the Sensus business primarily due to the deployment of two recent large project wins in the electric and gas verticals which have lower overall margins than our water business. Now let's turn to slide 9 to discuss cash flows and the company's financial position.

We closed the quarter with a cash balance of approximately $320 million. I was very pleased with the team's strong performance in the quarter on cash flow as we delivered 800 basis points of year-over-year improvement and free cash flow conversion which positions us well to deliver our full year target of more than 115%.

Year-over-year increase in second quarter cash flow reflects a 39% increase in operating cash flows. Investment in CapEx in the quarter is up modestly year-over-year driven largely by investments in product software. We continued to expect capital spend in the range of $190 million to $200 million for the year.

We also returned $63 million to our shareholders through dividends and share repurchases. We opportunistically repurchased another $25 million of shares in the second quarter to manage dilution. We continued to make solid progress on working capital with a 250-basis point reduction year-over-year as we continue to improve our processes and discipline.

I'm very pleased with the focus and traction that the team continues to make on this metric. We remain committed to maintaining our investment-grade credit rating and began to repay the short-term debt we used to fund the Pure acquisition. We expect to completely pay down the Pure debt by the end of this year.

Please turn to slide 10, and Patrick will cover our updated outlook..

Thanks, Mark. Let me begin with a look at our end markets. Overall, our end market view for the full year has changed slightly from the guidance we provided on our last earnings call. We had a strong first half in certain end markets.

And while we do expect some of that growth to moderate as we get into the second half of the year, we are updating our outlook to reflect the momentum we're seeing particularly in the utility and industrial end markets. So let me quickly run through our projections. Our utility end market continues to show strength, particularly in the U.S.

and key emerging markets. For full year 2018, we now expect revenue to grow in the high single-digit range overall. Our businesses performed well in the industrial end market year-to-date. Looking out for the full year, we see continued solid growth in the U.S. and Europe with the heavy industrials in North America continuing to strengthen.

In the emerging markets, we continue to see stronger conditions in China and India and somewhat softer conditions in parts of Latin America. We project industrials to be up mid-single-digits. We expect 2018 organic growth in the commercial end market to be in the low to mid-single digit range. We see low but stable growth in the U.S.

and some moderation from recent strength in Europe. Our emerging markets should continue to benefit from increased government spending. Finally, in residential, where we have softer results in the first half of the year, we now anticipate full year 2018 revenue growth in the low single-digit range. We continue to see competitive dynamics in the U.S.

market where demand tends to be replacement driven and we have tough prior year compares. We also anticipate solid demand to continue in China and other Asia Pacific countries as well as Western Europe. Now please turn to slide 11, and I'll address our updated outlook.

As we discussed this morning, we are well-positioned to deliver on our full year commitments while continuing to invest in our longer-term growth initiatives. Given the strong revenue growth to-date, we are raising our full year revenue expectations to an organic growth rate of 6% to 7%.

We remain on pace to deliver about $160 million in cost savings for the full year which will help fuel our operating margin expansion. We now expect to deliver adjusted operating margin expansion of 60 to 90 basis points to between 13.9% and 14.2%.

This expansion excludes about 20 basis points of margin dilution from purchase accounting for acquisitions. Adjusted EBITDA margin is expected to improve by 110 to 130 basis points, which will bring the full year range between 19.8% to 20%.

At the bottom line, we've narrowed the range of expected adjusted full year earnings per share to $2.85 to $2.95. This excludes integration, restructuring, and realignment cost of about $45 million. Adjusted EPS growth is projected to be in the range of 19% to 23% for the year. Please turn to slide 12, and I'll expand on this guidance.

As you can see on the slide, we've laid out the puts and takes on our full year earnings guidance in detail. We started the year with a $0.15 EPS range and $2.90 per share at the midpoint.

As I've already addressed, we outperformed in the first half of the year, delivering growth, price realization and a strong operational performance that exceeded our expectations. We expect this momentum to continue resulting in a $0.04 operational increase for the full year.

However, we expect this improvement to be offset by an equivalent amount by the stronger dollar and the divestiture of a non-core business. So we've narrowed the range and raised the low end of our guidance, while maintaining the midpoint. So please turn to slide 13, and Mark will review our planning assumptions and seasonal outlook..

Thanks, Patrick. I'll provide some additional highlights on our other planning assumptions for the third quarter and full year outlook. Given the popularity and interest in the topic of tariffs, I'll start there. There are a number of tariffs that have been proposed and a few of which have been implemented.

Some of these have had little or no impact on Xylem. With regard to China, we benefit from our product localization strategy. The vast majority of the product we produce in China is sold in China or into the broader Asia region. That said, we do have a global supply chain, so we're not completely immune. But the impact is expected to be fairly modest.

We are proactively managing both the direct in the indirect impacts. Our teams are on it. They thoroughly understand the potential impact and have developed and continued to execute mitigation strategies including price recovery actions.

With the measures we already have underway, we do not expect the impact in the second half of this year to be material to our results and have contemplated this impact in our updated outlook. Now, moving to our other planning assumptions and seasonal profile of our business.

As you can see on this slide, we've increased our expectations for growth in the full year and have updated assumptions on currency as well as restructuring, realignment and integration costs.

For the third quarter, we expect growth in the utility market to continue at high single-digit growth with the industrial market steady at the mid-single-digit level. We expect commercial to continue to grow in the low to mid-single-digits with residential flattish in the quarter.

We anticipate this will result in overall organic revenue growth in the range of 6% to 7%. Consistent with the dynamics we've seen in the first half, we anticipate that project mix will continue to be a margin headwind in the third quarter. Now, I'll turn it back over to Patrick..

Thanks, Mark. So we had a very good first half the year. Our strong execution led to higher-than-expected revenue growth coupled with solid price realization.

With focus on our productivity for growth initiatives, we're driving margin expansion while continuing to invest in strategically important initiatives that will accelerate our growth and margin expansion profile in the future.

I'm very proud of our teams, and we will continue to maintain our focus, which is continuing to create greater value for our shareholders. So with that, operator, we'd be happy to take questions..

And your first question is coming from Mike Halloran of Baird..

Hey, good morning, everyone..

Good morning..

Good morning, Mike..

So with really healthy demand momentum internally, and starting to see some normalization on the price cost side here, the only area that sticks out is the MCS margin side. And a couple of things in that.

One, it sounds like the core margins, if you strip out all the onetime things, are tracking how you guys would hope, so a little commentary on that would be appreciated.

And then also provide some context to how you expect those investments to layer through, give some context to how much we're talking, and then when you can start seeing the benefits of those hit the bottom line..

Yeah, Mike, let me – this is Mark. Let me take that one. I think you've captured the essence. There are a couple of things taking place particularly in this quarter that are impacting the margin profile.

The first is around investments, and that really comes in a couple of flavors, the first being the inclusion of our Applied – our Advanced Infrastructure Analytics platform this year as well as investments we're making in that. And that is dilutive to margins in the current quarter, a little over 100 basis points.

Now, as we scale that business up and it grows, as we get towards the end of this year, that impact is relatively modest in terms of the dilution to margins. And in fact, as we continue to grow that business and the momentum we see there, we expect that to be a contributor to margin expansion in 2019 and beyond.

The other piece of it is investments that we're making in both technology capability, commercial resources to win a number of very large attractive international deals as well as continuing to build out our product and software platforms around our – both water as well as electric and gas.

And that impact for the quarter spends roughly $5 million, and we'd expect that run rate to continue certainly through the end of this year, but it's also – we do expect to win some of these deals.

And as we win those deals and we see the revenues come in later in 2019 and beyond that they're going to have an attractive drop and certainly be accretive to margins.

I think the other point to take away is just through the first half of the year, EBITDA grew 22% year-over-year in the segment and we did see margin expansion of 70 basis points in EBITDA. And we expect that trend to continue for the full year.

We expect strong growth in the segment EBITDA, 20%, and continued margin expansion for the full year as well. So this is more of a – you have the confluence of now we have our new businesses in our platform.

We haven't scaled revenues there, and we also have some mix that hit us in in the quarter that we do expect to see a little bit more of that in the third quarter, but that will be less of an issue in the fourth quarter and beyond as our water business grows faster..

Yeah, so Mike, this is Patrick. I'll just touch a couple of points (00:36:38). I don't want to belabor it here, but I realize it is the probably one primary spot that people are focused on that may have been a little bit of surprise for some. It was not a surprise to us.

So the receptivity that we're getting from our customers and clients on these new offerings is fantastic.

And what we're really doing here between now and really through the back half of this year, which we've reflected in our guidance and outlook and it still gets us to MCS EBITDA margin growth of near 20%, is to really be funding some of the scale that we need to do here around the new analytics platform and pursuing some of these large international deals.

As we turn this order growth into revenue, it's going to come to really high accretive margin.

And so, as we get through this year, you won't see that impact next year because the margin fall-through on the revenue we're getting is going to more than offset that, as well as we hopefully win some of these larger international deals, these are onetime development cost to win the deal, so they don't recur other than the fact that if we're pursuing other international deals down the road.

So we also felt like, look, the business overall in Xylem is performing well in terms of our productivity for growth. And we felt comfortable that we could deliver on our margin commitments and our growth commitments while funding this new platform. And so that's what we're doing. We're taking advantage of first mover advantage here.

And we expect to continue..

Yeah, no, that makes a lot of sense. Essentially what you're saying is the upfront investments are this year, but there's a pretty quick payback and quick turnaround to getting that momentum back in the margin progression and mitigating the impact as you scale these assets..

Yeah..

Good summary..

So the second question then is on forward visibility as you think about your order patterns. Over the last couple of quarters, you've been talking about the backlog starting to expand, pipeline of business getting better. It certainly seems like the forward visibility is stretching out.

Could you just talk about that backlog curve as you look over the next one to two years? How that's starting to fill out and how you would compare that towards maybe a normal build on a forward basis with the orders you're bringing in in the pipeline?.

Sure. I'd start with that first, Mike. I think, obviously, we continue to see high single-digit, double-digit orders growth overall here. Our bidding pipeline for treatment as we indicated was up double-digit in the teens again.

Look, I certainly would not want any of you to expect that we're going to continue to see double-digit growth in the bidding pipeline and funnel or the order rate.

But I do think for the foreseeable future here, certainly over the next several months and even the next probably year or two here, we expect to still continue to see that order backlog continue to grow. We are – when we look at the markets right now, a follow-on to that question, Mike, would be, how much of this growth is market versus share.

And I would say that certainly with respect to the – we take a look at the commercial market, the industrial market, those are continuing to grow at pretty healthy clips right now. We're talking about mid-single-digit in both of those for the full year and the second half. I would see that continuing.

I mean, obviously, the compares are going to get a little more difficult as we get into Q4 and next year, but it's still going to be a healthy trend line there. Public utility, I think, which is really where you're focusing, we see that continuing to be in the high single-digit certainly this year.

I think we'll probably come out and talk about mid- to high single-digits next year as well, but that's premature.

But we're gaining share there, and we feel very good about the progress we've made both on the transport and the treatment side in terms of new product development impact and the fact that since we do have in transport the market-leading position in terms of installed base, by definition, we're going to get more than our fair share of growth when you see a very healthy level of break and fix activity taking place in that market as well..

Very helpful. Appreciate the color as always..

Yeah, thank you..

Thank you. Your next question is from Deane Dray with RBC Capital Markets..

Thank you. Good morning, everyone..

Good morning, Deane..

Good morning..

Hey, I'd like to start on the pricing this quarter which was a nice improvement sequentially from the first quarter and maybe just talk about where you have pricing power, how did you exercise it, and what's the client receptivity to it and is that – are there more pricing actions that you have to go in the second half if needed?.

Yeah, hey, Deane, it's Mark. Yeah, we talked a little bit about this on our last call, and we've been talking about it with our business leaders for some time and recognizing that we – as Patrick just said, we do have strong market positions in a number of geographies and product sets, and we felt certainly in a very strong demand environment.

And with those strong positions, we should be more aggressive. We have been. Listen, customers never like price increases. They understand it, and it gets to – it also gets the value proposition and in service levels. And so we've seen good traction largely in the U.S. across almost all of our businesses.

And as I mentioned in my remarks, we really saw that trending positively throughout the quarter. So, in the first quarter, we had 20 basis points of price realization. April was 30, and then we went 60 in May and 70 in June. So it really provides us with some good momentum headed into the second half of the year..

And, Deane, this is Patrick. So it was pretty broad-based across all of our businesses. Again, it was largely focused within the U.S. But we're – quite frankly, while customers don't like it, they're obviously attuned to what's going on with the tariff discussion and rising input costs.

And so this is not the first time they've gone through this cycle and the criticality of what we sell to them makes it easier. A couple of other comments, one, so we saw like 70 bps in Water Infrastructure, 80 bps in Applied Water as an example, and so very healthy increases.

I would say it was also very healthy whether it'd be our direct channel or our indirect channel through our distribution partners. They've been leaning in as well and been very helpful in driving that aggressive activity.

And then lastly, I would say part of the reason I think we saw the pickup in May and June and obviously we're staying close to it here in Q3 is there were a few of our competitors that were a little bit later in following on the pricing actions. And so that – now that they've done, that simply further strengthens the action that we've already taken..

That's all good to hear. Just as a follow-up, one of the other numbers that really jumps out at us is the China up 30% year-to-date. We just had a field trip in China and Singapore, and we hit three China cities. And this whole theme of the China government ratcheting up enforcement of water pollution laws is really having a big impact.

Just maybe you can expand on that because the plants we saw were – even the ones that you guys didn't host had Wedeco UV, Wedeco Ozone, and you just saw an interest in these western technologies..

Yeah, well, I think we feel we're very bullish on China. As you know, I have been for some time, Deane. And as you do, we have to take the long view on these markets like China and India and others.

So I think it's a convergence of the government prioritization, not just on the connected treatment and obviously dealing with the water quality issues and mandate. But it's also, as you well know, it's a big mandate on reducing non-revenue water, which obviously plays into our new analytics platform.

You take all that coupled with our localization efforts which is a really big deal, that helps mitigate this whole tariff discussion for us.

But it also really speeds our delivery to market and we now have products that are really fit for purpose in that market as opposed to many companies relying upon importing kind of western technologies, so very pleased, very proud. We realize it's not going to last forever. We're not going to grow 30% a clip forever.

But I think we're very much in a healthy trajectory there right now. I know one of the questions we've had from investors is, does the whole trade tension between China and the U.S. create a overhang to the economy there, et cetera.

And we just don't see that affecting the businesses that we're strongest in which really is on the utility side which is a good two-thirds, almost 80% of our revenue now in China is in that space..

Yeah, you kind of stole my follow-up on the not seeing any fallout.

But just maybe, does that differ at all between the public utilities versus the industrial customers in terms of their – how that mandate is affecting them?.

It's hard to say right now. We haven't seen it. We've seen good growth in the industrial and the commercial billing side. Having said that, we all went through – the whole industry went through a rough patch there, not more than two years ago when you had the whole downturn in that part of the segment. So we're coming off of a bottom.

So we're still seeing growth there. So, if there was a part that could be – that would not be immune to that overhang, that would certainly be it. But that's a relatively small piece of our overall business..

That's real helpful. Thank you..

Okay. Thank you..

Thank you. Your next question is from Nathan Jones with Stifel..

Good morning, everyone..

Good morning, Nate..

Good morning, Nate..

I think the $30 million in revenue synergies or orders taken related to revenue synergies is probably the first time that you've actually put any numbers around this for us.

Can you maybe give us a little more color on what these types of products are now that they're out of pilots? You talked about some medium-sized and larger orders maybe later in the year into 2019, size of the opportunity there for us?.

Sure. Yeah, so we are pleased. And we felt it was the first time we felt comfortable putting in the number around it, because we wanted to have something of some size and scale. This is consistent with the timing that we talked about, maybe a little bit earlier than we had originally anticipated.

We were generally thinking it was going to be more back half of this year, and then the larger deals coming through more in 2019. That's still our thinking as to the timing of those larger deals.

The types of things we're talking about here, as I mentioned in my prepared remarks, one of them is obviously leveraging our very strong relationships with one of the large utilities there in Southeast Asia that Xylem had a longstanding relationship with that Visenti had kind of struggled to get in there.

But obviously, with the great work they've done with the Singapore PV, that's a great reference for them and ourselves. So that's upwards to close to a $10 million deal that's related to that. Again, that's going to be the rise of right now the largest leak detection monitoring deployment, I believe, around the world. And so we're very proud of that.

But it's still early stages. Secondly, the one in the U.S., which I think is really exciting as well, is building out a new network-as-a-service capability to where we're actually able to leverage our FlexNet platform to not only serve one utility but the entire consortium of utilities to where we effectively own the network.

And we simply lease that off to them at a fixed price and really good value in margins in those kinds of projects, and we're certainly looking to see how we might be able to roll that in to some of the larger international deals as well to boost the margins and our chances of winning.

The larger deployments are, as we've talked before, these are – it's really predominantly going after non-revenue water challenges of the utilities.

And we think we're one of the only companies that are out there that has an end-to-end solution right now to really be able to draw the data all the way from the water coming out of the treatment plant to its consumption and being built and work with utilities to be able to reconcile that and pinpoint where their biggest needs are as opposed to them not guessing, but certainly making their best estimates on where they should be spending their money.

So a lot of work we have to do. We're in the early stages on this, but we are excited by the prospects here..

And the pipeline is growing..

And yeah, the pipeline is growing..

I think you had a 2020 target for revenue synergies of $100 million.

Are you on track to hit that, see upside to it, anything like that?.

Yeah, I wouldn't adjust my look on that right now. I mean, we'll do that certainly in a future kind of outlook and update. But I'd say our confidence certainly is stronger than ever that we would hit and exceed that number..

And then I think on the gas and electric meters obviously negative mix there, lower margin there. I think you guys have some initiatives to improve the margins in that side of the business.

Can you talk about any time frames for getting the margins there up and things that you're doing to improve the margins on that side of the business?.

Yeah, hey, Nate, it's Mark.

Yeah, part of our investment in R&D is not just these pilots for international deals, not just our Advanced Infrastructure Analytics, but we're also continuing to spend money and develop new products to get at exactly that point, not only provide richer features to our customers on the gas and electric side, but also significantly look to take cost out of those products.

So we can drive margin expansion as well..

And hey, Nate, just back on just to clarify, Matt shot me a note here, so just to remind us all. The number that we had laid out before I think after the – around revenue synergies is actually by 2020, we would be doing somewhere between $150 million to $175 million, I think is what we laid out. And my comment remains the same.

We are just increasing our confidence and the ability to deliver on that number..

Yeah, it points on the board with more to do but certainly the pipeline is growing fast and there's a lot of opportunity..

Well, that's much better than the $100 million I had in my mind. Thank you very much for the help. I'll pass it on..

No worries..

Thank you. Your next question is from Joe Giordano with Cowen..

Hey, guys, good morning..

Good morning, Joe..

Good morning, Joe..

So, Patrick, kind of following up on that. Have you guys like figured out how to sell these kind of solutions, like what's the best way economically to frame this out? Because it is – you said it's a unique end-to-end solution that kind of doesn't exist in the market today.

So what does this look like? Is it some sort of recurring fee? Is it a upfront sale? Like have you guys kind of gotten a little bit closer to figuring out what makes the most sense there?.

Yes, so we're in the midst of really testing that. That's part of the work that our teams are doing around some of these pilots as well. The network-as-a-service idea that I – the opportunity that we kind of posted here is just one of the many approaches that we're taking. Some of these are basic subscription models.

We're also looking at ways in order to perhaps share in some of the higher level value creation that we're doing with the utilities here. I don't want to really go too much more into that from a competitive standpoint. Plus, we're still testing some opportunities here. Either way around, the revenue is very attractive from a margin standpoint.

And I'm just really excited by the level of receptivity that we're getting from the customers quite frankly which is part of what's fueling the need to make some investments here is to make sure we can support that at scale..

Yeah, given like what's going on with price and costs and tariffs, generally, your businesses have a pretty substantial ramp into the back half of the year on a margin standpoint.

Is that still kind of fair to think about?.

Yeah, so what really gives us confidence in the second half outlook, Joe, is as you said, I mean, despite the headwinds coming in from multiple fronts, we tightened our outlook and operationally raised the midpoint to offset some of the currency and divesture impact.

And it really is coming from the incremental margins on the top line and the growth momentum that we've got. It is the traction on price and that we'll be getting the full on impact of that in the second half of the year.

And then third is just our ongoing productivity efforts that always – they always ramp a bit in the second half of the year especially in the procurement side..

Okay. And then last for me, and maybe I can push you a little bit here. On the utility side, everything looks great. I mean that was very impressive performance again. How do you feel on industrial? You mentioned market probably growing around mid-single-digit. This is the second quarter running around 6%.

Look, that's not a terrible number, but we've seen faster growth in general industrial at other companies.

How do you feel like you're doing there? Do you think the share take is the same as what you're seeing in kind of the utility business where you clearly are taking share?.

Yeah, I would say, third question, maybe just to remind everyone again of what our industrial business really is today. But before I go there, I would say, no, I wouldn't suggest that we're gaining share across the board in industrial. I think we're certainly growing with the market.

I mean, there may be some pockets here or there where we picked up a little bit and maybe given up a little bit, but on average, I wouldn't describe the industrial performance as a share gain play.

Having said, your comment about relative to other industrials, you probably see – bear in mind again that the lion's share of our industrial business is what we call light industrial.

And so this is a product that is not tied to production output, typically grows at a kind of GDP plus a point or so kind of growth depending upon where we are in the replacement cycle, but these are pumps basically. People just run to failure and then they replace them. And so as long as the sites are up and running, they're using our pumps.

So, just like when you didn't see that part of our business go down when the rest of the industrial sector was down a couple of years ago, I wouldn't expect us to be growing at a recovery level kind of rate in this market as well. So that 6% growth that we've seen, I'm very pleased with that.

That really is a bit of uptick that we saw in that small portion of our business that's heavy, which is mining and oil and gas. But that's again only 4% of our total revenue as a company. So kind of hard for us to move the needle in a big way in industrial. So we're in this kind of mid-single-digit space. That's a good space to be.

Now, we do know some of that is from new product rollouts as well, and those products are coming in at very attractive margins and very attractive growth rates relative to the businesses or products they're replacing..

Great..

And I would lastly say – I'd lastly say, Joe, that the localization that we've done in emerging markets, particularly in the Middle East, has also given us the opportunity to win some larger opportunities in industrial, some projects that we would not have been able to win because the lead times are too long or the cost position was not in the right spot..

Thank you. Your next question is from Chip Moore with Canaccord..

Hey, good morning.

How's it going?.

Good morning, Chip..

(00:57:00).

So it certainly sounds like there's an increased emphasis on innovation just given all the opportunities you're seeing and a pretty nice first mover advantage, how are you thinking about organic investments as you look to evolve the company over time? You talked about inching R&D closer to 5%, I think.

So how should we be thinking about pace of investment versus potential inorganic opportunities? Thanks..

Yeah, I would say overall in terms of the rate of spending that we've talked about in terms of increasing, between now and 2020, increasing by 100 basis points or more in R&D where R&D is a proxy for other investments, it may not all go to the R&D line. It would remain unchanged. I mean, we still feel the same way about that.

We're not looking to take that up any more than what we were looking at before. That'll be a healthy level of spend.

Especially, given the fact that you may recall, Chip, that we talked about we're also getting much more – much larger bang for the buck out of the R&D dollars in our base spend, because we're doing a lot more of that in emerging markets.

Closer to market, it's bigger bang for the buck given the – where we're spending it in India, China, the Middle East, et cetera.

Two, we've also done a good job at leaning out our new product development pipeline and getting rid of a lot of the smaller, longer-term kind of things that people might have been working on to really focus in on the things that matter most. So we just got more R&D productivity overall than we had before.

In terms of your comment around organic versus inorganic, the way I would lay it out for you all would be as you think about the utilities vertical, think about that as being predominantly an organic play now.

There will be some bolt-ons and tuck-ins that we do, but we don't have line of sight right now to any other big move that we'd be looking to make. It would be really just rounding out the platform that we've got here.

I think as we've talked before, the other areas of inorganic would largely be banned (00:59:06) in various aspects of industrial water management. That's a broad market, very fragmented. There's a lot of opportunities that are out there, takes two to tango. And we're going to be very disciplined as we have been.

Not kind of flashing lights on anything right now. Just letting you know that that would be the part of the business that would be probably more of a inorganic play over time than organic..

Great. That is helpful. Thanks..

Okay..

Thank you. Your next question is from Walter Liptak with Seaport Global..

Hi, thanks. Good morning, guys..

Good morning..

Good morning..

I wanted to circle back on pricing and specifically in Water Infrastructure. And maybe if you could help us understand a little bit more about what you did during the quarter.

And I'm thinking about some of the project work and if you were able to circle – if you were able to get back to the customers and raise prices on projects that are already kind of in your project funnel or in your pipeline versus book and ship business in Water Infrastructure?.

Yeah, Walter, it's Mark. It's largely the book and ship business. It's pumps, it's replacement components, it's aftermarket service mixers. Project work is unique, and you got to go out and bid it. So it's mostly those book and ship components.

And that doesn't mean we're not looking to improve our margin profile on these larger projects, but they're all unique. They're all different. But that's not where the price is coming from..

Okay.

And kind of along those lines in the back half of the year, are there any projects that we need to be concerned about where you were unable to raise prices or they were longer lead time that might compress the margin?.

No..

Okay. Fair enough.

Thinking about residential, outside of the comp that you've got, any other trends that you can talk about that's lowering that growth rate?.

I think that we talked about it in the prepared remarks. It's largely tough compare to last year, which was mid-teens. There was a lot of disruption in the channel last year, which drove some of that. So we'd expect that it's a competitive business environment, and we expect this to grow in the low single-digits through the rest of this year..

Okay. All right. Fair enough. And then the last one for me is, your inventories kind of overall, I thought was going to be up a little bit more that maybe you'd be opportunistic and bring some product into the U.S. ahead of any sort of tariff or threats of tariff.

And I wonder if you had any reaction like that to kind of position for the back half and any benefits we could get from any lower cost product that came into the U.S.?.

Yeah, Walt, we're trying to be smart and make sure we don't get caught short relative to components and supply. So there's certainly some of that going on (01:02:33) and that would be one of the headwinds.

But we're also – we've been working hard on improving our SNLP (01:02:39) and our processes and stock levels that are more time to real-time market needs. So, overall, while there's more work to do, the team has performed fairly well there despite some of those challenges and actually reduced the number of days of inventory on hand year-over-year..

Yeah, I mean, I think (01:03:00) – this is Patrick. I think the overall comment and theme on working capital in general is we changed the management incentive structure for our top few hundred people about two years ago and embedded a third of that payout is tied to working capital ratio, so working capital percentage of revenue.

And I would say it took probably the better part of the first year for it to really kind of take hold. It really has been last year and this year that you've seen significant moves downward in terms of working capital investment. That really has helped fuel the free cash flow conversion that you've seen here.

So I think a lot – there's a long way to go. We feel a lot better where we are now than we did a few years ago. And I would say of all of the areas, it's the most challenging inventory, certainly is and it probably still has the biggest area of opportunity in front of it..

Okay. That sounds great. All right. Thank you, guys..

Thank you..

Thank you. Your next question is from Scott Graham of BMO Capital Markets..

Hi, good morning..

Good morning, Scott..

Good morning, Scott..

I want to maybe somehow get underneath this mix/price sort of waterfall that you've given us, these bridges. Because it looks like all three segments, price mix is better than it was in the first quarter. And you're talking about negative mix impacting all which would therefore suggest that pricing was a lot better in each of the segments.

Yet you're taking down your operating margin guidance for the year. I know you're just pinching it (01:04:42). I know you talked about a couple of the reasons. But what's the other side of the equal sign there? Are you expecting the inflation piece to increase in all three from here? Maybe kind of connect those dots for me..

Yeah, yeah, so we did see mix impact across the enterprise. Probably the biggest piece of it was in our Measurement & Control Solutions, but we had a little bit in the other two segments. So that's a reality. We do expect that to continue into Q3 given how we see the mix setup in backlogs.

But to your other point, we have done very well in terms of driving price that will continue to – we're going to see some acceleration into the second half of the year. But there is a reality and inflation does tick up a little bit as well, and what we're trying to do is get ahead of it to offset it. So it's really – it's nothing more than that.

Mix did impact us in the second quarter, will continue to impact us in the second half of the year. And on your point in terms of the guidance, we've not taken it down. We've narrowed it. And in fact, on an operational basis, we're up $0.04 to where we were last quarter..

Okay. Fair enough. I guess what I'm trying to get at here is it seems to me as if with mix having run negative for a couple of – a number of quarters now, a lot of that is planned of course, because of new products, projects coming through or what have you. I'm not sensing that that's going to get worse in the second half of the year.

So it would seem as if the inflation you're essentially saying will get a little worse, yes?.

That is what I said. We ran about 220 basis points impact through the first half of the year, and there's probably another 30 basis points or 30, 40 basis points higher inflationary impact that we expect to see in the second half of the year. Part of that from tariffs, part of it just from general supply and demand.

But we – that's why we got ahead of the price curve..

But again we're maintaining the midpoint of our (01:07:13)..

Absolutely..

Yeah, okay, fair enough. I guess my other question would be on M&A and thank you for the clarification of kind of looking more into the industrial areas. I was just wondering also though that there does seem to be perhaps some opportunity in commercial areas unless you're including that within industrial.

And maybe you said water management, is this something that maybe – that specificity implies that you've got some things really on your radar right now?.

No, I wouldn't read. I mean, obviously, we always keep a very healthy active M&A pipeline and funnel. We've got a very experienced M&A team here that's working with the businesses to always be staying close to that. So I wouldn't – but I wouldn't read into it that there's anything that is more near end that we're looking at or contemplating here.

So don't read anything to the word change there. I used the word broadly water management and industrial as opposed to – in the past, we've talked about treatment, we've talked about broad-based water services. And so that is an area that we're certainly spending a good amount of time just making sure we understand what the opportunities are.

And to your point around commercial, I mean I do think that the nomenclature on some of these things is a fine line. I think sometimes we use different words to describe things. So we're not – I'm not necessarily describing the scenario where we're going to be going out and doubling down in parts of the market that we're already in.

These would be adjacencies that we think may be attractive and we have a right to play in..

Very good. Thank you..

Okay. Thank you..

Thank you. Your final question is coming from Brian Lee of Goldman Sachs..

Hey, guys, thanks for squeezing me in here..

Sure. Good morning..

Good morning, Brian..

Good morning. Good morning. A couple of things from my end.

I guess first on the utility market, just when you're talking about the high single-digit growth outlook for the year, can you help parse sort of what your view is on the underlying market growth and then how much you would attribute to company-specific factors, namely share gains? And then I guess in the U.S., you're tracking even higher at that sort of low double-digit growth, so wondering if you can also parse out in that region what you think is the market growth versus what you're doing on a share gain basis..

Yeah, I'd say that, look, it's always hard to get precise share data within any one quarter or even a year for that matter.

But based on what we're hearing from utilities and what we're sensing right now is I would say the market itself is overall growing about mid-single-digits, and that typically is about where it is when you have a healthy CapEx cycle underway and you've got a kind of normal OpEx cycle underway. I'll come back to the U.S.

versus the rest of the world in a moment, but I would say globally, mid-single-digit market growth, we're seeing high single-digit growth. So there's probably a point or two of growth there that I would say is coming definitely from either share gain per se or we're just outgrowing the market because of our established base that's there.

Secondly, I would say that in the U.S., that would be more like a high single-digit growth of the market. And again, there's probably a couple three points coming from Xylem specific and the things there that I think are really – now, this is not limited to the U.S. It's just it's been more of a recent phenomenon.

We had integrated our commercial teams across Europe and the emerging markets a number of years back. And while they went through their own growing pains, we learned a lot during that timeframe.

And since then, we've seen really attractive growth by one commercial team, sharing leads and generating leads across the portfolio for their colleagues and getting incentivized to do so. We just made that move last year, you'll recall here in the U.S. and North America.

And we absolutely are seeing revenue synergies from having done that here in the U.S. We've seen a great increase in the bidding pipeline. We track these in Salesforce.com. We see what's there. We give people appropriate credits for passing leads across the aisle, and they are compensated accordingly. And so that makes them hungry.

And a little bit of that with some new products to throw behind it. And then just getting more familiar with what's in the actual portfolio. We have a lot of stuff in the portfolio to sell that is relevant to the utility, and I think we are definitely seeing the benefits of that.

And that will help buffer when the market maybe does moderate a little bit over time. And so, again, I can't give you a specific number of share gain. But directionally, that's what gives us confidence..

Okay. No, that all makes sense. It's helpful. A second question just on MCS. I know the Sensus mix here has been skewing towards increasing the gas and electric, if you just look at the quarterly growth rate over the past several quarters.

So just wondering at a high level if you guys are at all thinking differently about the composition of that business in the context of your longer-term organic growth targets for that segment? And then I know there are implications that you alluded to for margins, and you had a little bit of that in this quarter.

Can you speak to whether or not that was very project-specific or is that just really end market-specific in terms of the mix issues you had there? Thank you..

Yeah, let me take, Brian, the higher level. As always, I'll let Mark handle the near end question. But from a strategic standpoint, no change in view towards either the composition of that portfolio and/or any worries around a shifting mix towards electric and gas biased away from water. This is purely a timing issue.

Our growth in orders on the water side of the business and utility were up again..

40% in North America, yeah..

I think 40%. 40%....

(01:13:28).

That's our biggest business here over 40%. We've got a really healthy bidding pipeline. We're getting close on a few more deals there of size in the water space that we hope we can announce here in the latter part of the half of the year that supports our long-term growth rate. That will skew the mix back to where it historically has been.

At the same time, look, we love these electric deals that we've – electric and gas deals that we've won, and we'll continue to pursue them aggressively because while they may be a little bit less accretive than the water side, they're still very attractive from an economic value standpoint. So we'll take it across the board.

It's just right now, what you're seeing is simply a timing issue within the year and within maybe an 18-month cycle..

Yeah. And I would – that's exactly what we saw in Q2. A little bit in Q1, but we'll – as those deployments continue to roll out, we'll see a little bit more of it in Q3. But as some of those orders translate into revenues on the water side, that is a much lesser issue in Q4 and moving into 2019..

All right. Great. Thanks, guys..

Thanks, Brian..

Thank you..

Thank you. I will now turn the call back over to Patrick Decker for any additional or closing remarks..

Thank you. So again, thanks everybody for your time and your patience today. I know we ran over a little bit again but I really appreciate your interest and questions. Safe travels. Have a good end of the summer and we'll talk to you in the next earnings call. Thank you..

Thank you. This does conclude today's Xylem Second Quarter 2018 Earnings Conference Call. Please disconnect your lines at this time and have a wonderful day..