Xylem - Earnings Call - Q4 2017
February 1, 2018
Transcript
Speaker 0
Welcome to the Xylem Fourth Quarter and Full Year twenty seventeen Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions following the presentation. I would now like to turn the call over to Matt Latino, Senior Director of Investor Relations.
Speaker 1
Thank you, Holly. Good morning, everyone, and welcome to Xylem's fourth quarter and full year twenty eighteen earnings conference call. With me today are Chief Executive Officer, Patrick Decker and Chief Financial Officer, Mark Rykowski. They will provide their perspective on Xylem's fourth quarter and full year twenty seventeen results and discuss the full year outlook for 2018. 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 Friday, March 2. Please note the replay number is eight zero zero five eight five eight three six seven and the confirmation code is 4178248. Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events.
Please turn to Slide two. 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 ks 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 three.
We have provided you with a summary of our key performance metrics, including both 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 four, and I will turn the call over to our CEO, Patrick Decker.
Speaker 2
Thanks, Matt, and good morning, everyone. Thanks for joining us today to discuss our strong 2017 results and our outlook for 2018. As 2017 unfolded, we continued to strengthen our execution, which helped us accelerate our growth momentum throughout the second half of the year. We delivered on all of our financial commitments for the year and are on track to meet our long term objectives. In both the fourth quarter and full year, we delivered solid top line growth in The U.
S, Europe and emerging markets and across each of our key end markets. We made solid progress in each of our businesses with a number of standout achievements, including successful new product launches, strategic project wins and the continued deployment of capital, all of which will drive our long term growth and value creation for shareholders. Yesterday, we closed on our acquisition of Pure Technologies and we couldn't be more excited about the prospects we see ahead. We also acquired a small company called Mnet, which operates in the water infrastructure analytics space as well. I'll come back to this in a few minutes.
We have a lot to cover today, so I'm going to hit a few highlights and then turn it over to Mark to walk through the numbers. In addition to our broad based revenue growth, we also continue to drive increases in orders and backlog. Orders grew 10% in the fourth quarter, up sequentially from the 6% growth we delivered in the third quarter. This sets up very well going into 2018. It is worth noting that a sizable portion of these orders is for longer lead time projects and won't translate into revenue until 2019.
We also delivered solid and broad based growth across our key end markets. Our performance in Public Utilities particularly stood out with 10% growth in the quarter. We saw strong results in nearly every geography and across all applications with our census business delivering 15% growth versus the prior year period. Another notable result was in our residential business. While it is a relatively smaller part of our overall business, it's worth calling out the double digit growth achieved in both the fourth quarter and the full year.
We'll discuss the outlook for this and our other end markets later in the call. While we continue to enhance our execution in the marketplace, we also continue to execute our productivity for growth strategy. The team delivered another year of record results, about $150,000,000 in continuous improvement savings, a 10% increase over last year's performance. A portion of these savings are being reinvested in the business by way of R and D, innovation and commercial initiatives to drive growth. We ended the year with adjusted EBITDA of 18.7%, an increase of 80 basis points year over year.
This reflects a strong operational performance I just discussed as well as the Census contribution. Our operating margin for the full year was 13.4%, up 30 basis points excluding the impact of acquisitions. We delivered full year adjusted earnings per share of $2.4 an increase of 18% year over year. We also had another year of strong cash generation with free cash flow up 41% over the prior year. This is an area where historically we have underperformed.
So I'm quite pleased with the progress we've made and our outlook for sustaining this performance. Free cash flow conversion was 147% for the year. So all in all, a year of strong results. I want to recognize and thank our teams throughout the company who stayed focused on the task at hand while also keeping an eye on the opportunities ahead of us and laying the foundation for our long term success. None of this happens without their commitment and execution, and I am very proud of what we've achieved together.
Now let me shift gears to spend a few minutes on the progress we've continued to make on the strategic priorities. These are the highest order imperatives that will enable us to meet our long term financial commitments and set the company on a path of sustainable growth and expansion for many years to come. The priority of accelerating profitable growth encompasses our initiatives to drive commercial excellence, grow in emerging markets and strengthen innovation and technology. The moves we made in 2017 to bring together our various U. S.
Commercial teams and reorient our sales and marketing focus around vertical end markets is helping to increase our bidding pipeline, leading to strong top line results. Specifically in emerging markets, we delivered 6% revenue and 15% orders growth for the year, and momentum in our key markets of China, India and Middle East is building. Accelerating innovation is a core element of our long term growth strategy. The creation of new centers of excellence, a streamlined approach to product development and smart acquisitions have fueled our new product pipeline, leading to a 500 basis point increase to 24% in our vitality index over the previous year. As I already mentioned, our continuous improvement program continues to generate impactful results.
This is an area where we will continue to develop, creating new opportunities to unlock savings by eliminating waste and increasing efficiencies. These efforts not only fuel margin expansion, but they are funding investments that are vital to our long term growth and improving our speed to market. Underpinning these efforts are the programs we are expanding to further deepen our talent pool. The additional capabilities we brought into Xylem through acquisitions have also accelerated this work. As I outlined in my first Investor Day back in 2015, we will continue to put capital to work in smart disciplined ways to develop and acquire the solutions we need to best address our customers' challenges.
Our acquisition to date fits squarely into our smart water technology strategy. Finally, we continue to return capital to shareholders, today announcing a 17% increase in the dividend. Now let's turn to the next slide to talk about Pure Technologies and the role this new addition will play in our long term growth plans. As I mentioned, we closed on the Pure transaction yesterday, and a team has been working on the integration planning for the past month. So we're ready to get started.
Pure, which until yesterday was a publicly traded company, finished 2017 with strong results. In the fourth quarter and the full year, they delivered revenue growth of 1511% respectively. They also delivered strong adjusted EBITDA at 25% in the quarter and 18% for the full year. This is a fantastic business that will expand our opportunities, fuel our growth and accelerate value creation for our shareholders. Pure will be the foundation of a broad platform we're building, bringing together a portfolio of analytics capabilities and technologies that will address our utility customers' infrastructure pain points and significantly improve the economics of their operations.
Challenges such as non revenue water and aging infrastructure cannot be effectively addressed with a one size fits all approach, particularly as you move around the globe. Customers need a partner who can effectively assess and understand their unique challenges and then bring together the right solutions to address them in ways that add value to their operations. Collectively, our advanced infrastructure analytics capabilities will increasingly position Xylem as that vital partner and solutions provider, in addition to being a supplier of unmatched products and services. Joining Pure in this group will be our Vicente and Hypac businesses as well as a smaller acquisition we recently completed of a company called Mnet, and we'll continue to fill in other gaps as needed. Mnet, which is based in South Bend, Indiana, provides network modeling and optimization solutions that enable municipalities to manage the urban water cycle and wastewater and stormwater systems.
This is a pivotal addition to Xylem as it significantly increases our ability to help customers manage their wastewater network and storm water systems, areas of growing concern. Both Pure and MNET are excellent examples of M and A serving as a proxy for R and D that will help accelerate our progress. This advanced infrastructure analytics business will be led by Al Cho, our former Head of Global Strategy, who also led the acquisition team for most of these businesses. It will be part of our Measurement and Control Solutions segment under Colin Sable's leadership, but it will be an enterprise operation, partnering and collaborating with all of our commercial teams and business units around the world. We're very excited to bring together these capabilities to tap new opportunities.
We will leverage the deep knowledge each team has along with our trusted customer relationships and global scale to accelerate the growth of our business. Now I'll turn it over to Mark for a more detailed review of our results.
Speaker 3
Thanks, Patrick. Please turn to Slide six. Patrick's already covered some of the highlights of our 2017 results, so I'll quickly touch on a few of the details. I'm very pleased with the team's performance this year, particularly our strong revenue growth in the fourth quarter, which enabled us to deliver at the high end of our revenue guidance for the year with 3% organic growth and 4% on a pro form a organic basis. This reflects strength across all of our end markets and solid growth in each of our businesses.
Geographically, we saw the largest increase in the emerging markets, up 6% with The U. S. And Western Europe up 31% respectively. Adjusted EBITDA margin was up 80 basis points to 18.7%, which largely reflects continued traction from our productivity initiatives as we realized $148,000,000 in savings, an increase of 10% year over year as well as the benefit of volume leverage. Partially offsetting these improvements are inflation, higher investments for growth and unfavorable mix driven by emerging markets project revenues.
Operating margin for the year was 13.4%, up 30 basis points from the prior year excluding the purchase accounting impact from Census. Earnings per share this year of $2.4 increased 18%, a clear indication that we're on the right path to deliver financial returns in line with what we laid out at our Investor Day last April. Another important indicator and one that I'm fond of is our free cash flow performance. This year, we generated $544,000,000 of free cash flow, an increase of 41% year over year. We also delivered 147% cash conversion, which is well above our target of 110.
An important driver of our cash flow performance is the progress and focus from our teams globally on improving our working capital levels. We reduced working capital to 18.5% of sales, which is 150 basis point improvement year over year. I'm proud of the work of our teams. However, there's further room for improvement and we have good confidence in our ability to achieve our long term goal of reducing working capital to the mid teens. Please turn to Slide seven and I'll take you through our fourth quarter performance.
We recorded orders of $1,300,000,000 in the fourth quarter, an increase of 10% organically year over year with good growth across all three segments. Revenues were up 17% in the fourth quarter. Organic growth was 7%. Acquisitions contributed 6% and we benefited four percent from foreign exchange. From an end market perspective, public utilities were up 10% organically.
While we had an easier comparison to the flat performance in the prior year period, as Patrick mentioned, this growth reflects strength across nearly all regions and applications globally, driven by continued momentum in our markets and some share gains. Industrial was up 3%, including mid single digit growth in The U. S. And Europe as we continue to see recovery in those markets. Rounding out our performance, we saw continued strength in residential and commercial markets up 154% respectively.
I'll touch on these markets in more detail in the Applied Water segment discussion in just a few minutes. Regionally, The U. S. Market drove most of the organic increase for the quarter and was up 9%. Emerging markets and Western Europe were up six percent and three percent respectively.
EBITDA margins increased 40 basis points in the quarter to 20.2%. This margin expansion was primarily driven by ongoing savings from our productivity programs and volume leverage. This was partially offset by inflation, unfavorable revenue mix and higher investments for growth. Operating margin for the quarter was 15.2%, which is up 10 basis points versus the prior year, excluding purchase accounting amortization. Overall, I'm encouraged by the continued momentum in our markets and the strong execution by our teams in delivering fourth quarter earnings per share of $0.76 an increase of 15% year over year.
Please turn to Slide eight, and I'll provide additional details on our segments. I'm just going to address our fourth quarter segment results, but the details of our full year segment performance are included. Water Infrastructure recorded orders of $566,000,000 in the quarter, up 11% organically year over year. This growth was primarily driven by wastewater transport orders, which increased more than 20%, reflecting strong demand across all regions. We exited the quarter with total backlog of $610,000,000 up approximately 17% organically over the prior year period and providing us with confidence in delivering our first quarter revenue outlook.
It's also worth noting that a higher percentage of our backlog entering 2018 is shippable beyond one year due to several large project wins during the quarter. Water infrastructure revenue of $583,000,000 in the quarter represents a 6% year over year increase on an organic basis, with foreign exchange providing a $21,000,000 headwind tailwind. In The U. S, segment revenues were up 8% overall, driven by strength in wastewater transport market and double digit growth in our dewatering business, which has benefited from the continued recovery in the industrial energy and commodity sectors. These businesses were also strong in Canada, where we posted 22% growth.
Emerging markets revenue increased 5% with mid single digit growth in all regions. Of particular note was the demand in China and The Middle East for wastewater transport pumps as well as 60% growth in India from large custom pump projects. Western Europe was up 3% overall, primarily driven by treatment project deliveries in The Netherlands, Belgium and France. Operating margin for the segment decreased 70 basis points to 18.4%. Benefits from cost reduction and volume leverage were more than offset by higher inflation, foreign exchange transactional losses and higher year over year strategic investments to accelerate growth in product localization in key emerging market countries.
Please turn to Slide nine. Applied Water booked orders of $373,000,000 in the quarter, which was up 6% organically over the prior year period. Our book to bill ratio was one in the quarter, which is in line with our historical performance. Overall, we exited the quarter with backlog of approximately $200,000,000 up 20% organically compared to last year. Our shippable backlog for the 2018 increased 13% on an organic basis.
This provides us with good confidence in our first quarter revenue outlook, but it's important to remember this is a very short cycle business and backlog represents less than a third of our expected first quarter revenues. Revenue was $373,000,000 up 5% organically versus the prior year quarter. In Europe, revenue increased 7% driven by double digit growth in both industrial and residential applications. Our investments in new products and sales capabilities have enabled us to take modest share in these markets. In The U.
S, segment revenue was up 6% year over year. This was primarily driven by the segment's commercial business, which benefited from cold weather in the Northeast driving restocking of heating and circulator pumps. The industrial vertical was also strong in the quarter as the general industrial and oil and gas markets continued their recoveries. Finally, emerging markets revenue grew 4%, reflecting strong growth in China and other Asia Pacific countries from demand for secondary clean water sources. We had double digit growth in The Middle East from large project wins and some modest market share gains as as we continue to benefit from the investments we've made to localize our supply chain.
This growth was partially offset by weakness in the commercial business in Asia Pacific as well as softness in Latin America. Segment operating margin in the quarter increased 150 basis points to 17.2% year over year, the highest of any quarter for the Applied Water segment. Margin expansion was driven by three forty basis points of productivity savings as well as volume leverage. This was partially offset by 190 basis points of cost inflation and 70 basis points of growth investments. Now let's turn to Slide 10.
Measurement and Control Solutions booked orders of $331,000,000 in the quarter, which was up 12 organically over the prior year period. Revenue for the quarter was $321,000,000 up 10% on a pro form a organic basis over the prior year period. This includes 15% pro form a organic growth in our census business and 1% growth in our Analytics business. For Sensus, revenue in our Water business increased 11% year over year in the quarter, which was in line with our expectations as we lap the challenging comparisons to the prior year from the restocking of our iPearl water meters. And we also delivered higher growth from AMI deployments in North America, as well as increased demand in Eastern Europe and The Middle East.
Our gas business was up 35%, mostly from the growth in large AMI project deployments in North America during the quarter. Electric was down modestly in the quarter due to the timing of large project deployments. We continue to see high demand for our solutions in this sector. In fact, during the quarter, we shipped our one millionth Stratus meter, pretty impressive accomplishment for having been launched only a year ago. Finally, the team delivered a 45% increase in revenues in our software and services business, which was largely driven by a couple of major contract upgrades.
Shifting to our analytics business, it delivered 1% growth in the quarter. Double digit growth in emerging markets from strong demand in China and India for surface water monitoring applications was largely offset by softness in Europe. Now moving to segment margins. Adjusted EBITDA margin for the quarter improved 170 basis points year over year to 19.9%. The increase was primarily due to two ninety basis points from productivity savings as well as benefits from volume leverage, partially offset by cost inflation and higher investments for new product development and revenue synergy programs.
In the quarter, adjusted operating margin for the segment increased 130 basis points from 9.3% to 10.6% and was up 190 basis points excluding the impact of purchase accounting. Now please turn to Slide 11 for an overview of cash flows and the company's financial position. We closed the quarter with a cash balance of $414,000,000 Free cash flow in the quarter increased 58% from the prior year to $261,000,000 and was driven largely by significant improvements in working capital across all of our businesses as well as strong operating performance in Census. Free cash flow conversion was 147% for the year, the highest in our history as a public company. We invested $51,000,000 for capital expenditures in the quarter and returned $33,000,000 to our shareholders through dividends.
We also repaid $98,000,000 of debt, which was the remainder of our outstanding short term borrowings. We closed the year with debt at three times EBITDA, which is below our original forecast for the year, and we remain committed to maintaining our investment grade credit rating. Now please turn to Slide 12 and Patrick will cover the update to our 2018 outlook.
Speaker 2
Thanks, Mark. As we've discussed, we entered 2018 with solid momentum. We have confidence that this momentum and the initiatives we continue to invest in are advancing us to our long term growth and earnings targets. At the top line, we expect to deliver full year revenue of approximately 5,100,000,000.0 to $5,200,000,000 reflecting an organic growth rate of 4% to 6%. Pure will add approximately 2% to our reported 2018 revenue.
Our continuous improvement initiatives will continue to generate savings, which we expect to total about $160,000,000 in cost savings for the full year. This is a 10% year over year increase and will keep us well on pace to meet our long term target. Our adjusted operating margin is forecasted to expand 60 to 100 basis points to between 14% to 14.4. This excludes about 20 basis points of margin dilution from acquisitions. Adjusted EBITDA is expected to improve by 70 to 100 basis points, which will bring that to a range of 19.4% to 19.7%.
At the bottom line, we expect to generate adjusted full year earnings per share in the range of $2.82 to $2.97 This excludes integration, restructuring and realignment cost of about $35,000,000 Adjusted EPS growth is projected to be in the range of 18% to 24 for the year. Finally, as Mark discussed, we expect to continue to generate solid cash from operations. This will enable us to deliver free cash flow conversion of at least 115% in 2018. This contemplates anticipated capital expenditures of 190,000,000 to $200,000,000 Now please turn to Slide 13 and I'll walk you through our end market assumptions. Public Utility constitutes about 47% of our revenue.
We are entering 2018 with solid momentum in this end market and we continue to see indicators of sustained growth, particularly in The U. S. And key emerging markets. For 2018, we expect revenue in Public Utilities to grow in the mid single digit range overall. The smart meter market is projected to generate slightly higher growth in the high single digit range.
Industrial end market revenues represent about 36% of revenue. Here, we continue to see a mixed environment. The light industrial markets, specifically in The U. S. And Europe, are solid, and we see the oil and gas and mining sectors continuing to improve.
That will be balanced by mixed conditions across the emerging markets where strength in China and India, which are benefiting from increased government investments, will be somewhat offset by softness in parts of Latin America. As a result, we project industrials to be up low to mid single digits. Moving to the commercial end market, which makes up about 12 of our revenue, we expect 2018 organic growth to be in the low to mid single digit range. Here, we see low but stable growth in The U. S.
And some moderation in Europe, which is coming off more than two years of strong growth. We expect to see some strength in the emerging markets where the Smart Cities initiative in India and solid growth in China continue to drive demand. We also anticipate greater success in winning larger projects in The Middle East now that we are able to produce product locally. Finally, in residential, about five percent of our revenue, we anticipate full year 2018 revenue growth in the mid single digit range, coming off particularly strong growth in 2017. We expect the competitive dynamics to continue in The U.
S. Where demand tends to be replacement driven. We do anticipate a continuation of the solid demand we've been seeing in China and other Asia Pacific countries as residents seek a secondary clean water source. Now please turn to Slide 14, and Mark will walk you through more details on the outlook.
Speaker 3
As we've done in prior years, we're providing the seasonal profile of our business as well as highlights of our 2018 planning assumptions. As Patrick just discussed, we're guiding to 4% to 6% organic growth for the company in 2018. This breaks down by segment as follows: 4% to 6% growth in Water Infrastructure 3% to 5% growth in Applied Water and 7% to 8% growth in Measurement and Control Solutions. We're assuming an FX euro rate of $1.21 which was the average rate for January through the end of last week. For your reference, we've included our FX sensitivity table in the appendix.
We're also updating our estimated tax rate to reflect our current view following the passage of the new tax law in December. Overall, reform will be modestly beneficial to our business, lowering our long term structural tax rate from 22% to 20. Also during the fourth quarter, we recorded a $45,000,000 non cash charge in connection with the new tax law, which reflects the cost of repatriation of foreign earnings, partially offset by the benefit from remeasuring our U. S. Deferred tax liabilities at the new rate.
We estimate that the cash taxes to be paid related to repatriation will be approximately $60,000,000 payable over eight years, and this will partially offset the benefit of lower cash taxes payable in The U. S. Due to the rate reduction. Now moving to our first quarter planning assumptions. We expect growth in the range of 5% to 6% as we lap a relatively weak first quarter in the prior year and benefit from the strong backlog position exiting the year.
We expect our first quarter adjusted operating margin to be in the range of 11.3 to 11.5%. This reflects 110 basis to 140 basis points of margin expansion, excluding the dilution from purchase accounting amortization. Also, the first quarter is Pure's seasonally lowest revenue period and is expected to result in a penny of EPS dilution. With that, I'll turn the call back over to Patrick for some closing comments.
Speaker 2
Thanks, Mark. 2017 was a strong year for Xylem. We delivered on our financial commitments and made significant progress on each of our strategic priorities. Our teams are executing well and that is manifesting in stronger results at both the top and bottom line. I'm very pleased with the momentum that we've been building across the business.
With a growing portfolio of smart solutions, we're forging deeper customer relationships, becoming a valued partner and not just a supplier. We are in a very strong financial position fueled by excellent cash generation. This will enable us to continue to deploy capital in smart ways. We understand what our customers' challenges are and where we can create the most value in their operations and for Xylem. That's where we will continue to focus our innovation and M and A activities.
We look forward to continuing this progress in 2018, further strengthening our performance and advancing on our 2020 objectives. Now operator, we can open up to questions.
Speaker 0
The floor is now open for questions. Thank you. Our first question is coming from Nathan Jones, Stifel.
Speaker 4
Good morning, everyone.
Speaker 3
Good morning, Nathan.
Speaker 4
One of the things I noticed from the slide deck here is that the level investments in the fourth quarter are higher than they were for the whole year.
Speaker 5
Can you talk
Speaker 4
about what the incremental level of investments is increase is in 2018? What kinds of things that you're investing in? Where you are in the development process for those kinds of things? I know there's transferring Census technology to the legacy portfolio and that kind of stuff. If you could just give us an update on what these investments are, where they're going, what kind of level we should think of as a sustained level of investment in the businesses here?
Speaker 2
Sure. So Nate, I'll talk directionally as to where we are investing and so forth and the timing of that. And then I'll let Mark speak specifically to the rate of investment that we saw in Q4 and what we expect for 2018. I think directionally, we're seeing here is we've made good progress. The teams have identified specific areas of investment to drive the synergies with respect to leveraging the Census technology and those new offerings to market.
Two, we've seen opportunities to increase our investments in emerging markets and accelerate those growth investments as we focus on localization. And I would also say that we have made some good investments in building out some of our marketing capabilities as well, especially around our vertical marketing efforts. So those are a few examples. Obviously, as we turn to 2018, we're not planning. I mean, if you look at our long term targets we put out last April at Investor Day, we're not looking at any kind of increases in investment levels above what we laid out there.
A lot of this is timing within any given quarter depending upon how we feel about the performance of the business. But Mark, you want to comment on
Speaker 3
specific dollars? I think, Nate, one of if you just look at the year over year, one of the things you have to keep in mind is in 2016, we had fairly heavy investment in building out some of the capabilities in Middle East. And so that to some extent depressed, if you will, the year over year comparison. So we did ramp up a little bit more in the back half of the year. And some of that's just a function of being clear in terms of what and where we need to spend money relative to building out our systems intelligence centers of excellence.
We are building out capability in emerging markets as well to take advantage of what we believe will be continued very strong growth rates in 2018 and beyond. So some of it is just the timing of what we had spent in 2016 and how that ramp looked and really just some of the time it's taken us to really make sure that as we do ramp up our spending, know what we're what and where we should be spending.
Speaker 2
To close out on that one, Nate, I anything into the kind of spike there in investment levels in Q4 as to any change in view on our investment strategy or our margin targets of the company. It's simply timing from any one quarter or year to the
Speaker 4
Okay, that's fair. Then I know I mean everybody is fascinated with the opportunities for marrying the Census Technologies together with the legacy portfolio. I know you've been doing some development and some pilot testing of that. Can you talk about where you are in that process? When we should start to see these things coming to market and what the commercial opportunities are?
Speaker 2
Sure. Yes. So as I've said before, we've got pilots going in a number of locations around the world with customers that obviously will remain nameless here for competitive reasons. But and we really are looking at capability or opportunities to leverage the Census technology from a comms perspective and a data analytics perspective into the wastewater sector of the market. We've talked about energy efficiency along the wastewater network, as well as now we have the opportunity also to marry our capabilities within Census on the AMI deployment piece along with what we already have in Vicente with Pure and Mnet to build out an even stronger offering there, not just in non revenue water, but also as we go after one of the big pain points that our utility customer space and city space, and that is combined sewer overflows.
The whole stormwater overflow challenge is a big issue. So now we see an opportunity to even augment some of the pilots that we were already doing by bringing in these other capabilities. So I think you should expect to begin to hear about some of those wins here, I'd say, in the early to middle 2018. And that really begins to ramp, at least in terms of project wins later this year into 2019. Those projects may or may not turn to revenue in 2018 because they're longer lead time, but I would certainly be expecting to be announcing some significant wins there this year.
Speaker 4
When do you think you'll be kind of at a run rate kind of level of production of these kind of products?
Speaker 2
Well, I mean each one these projects and offerings are going to be unique. There's not a one size fits all. And so I wouldn't look at it in turn. I don't think the measurement, Nate, is going to be so much there's going be a run rate of a product offering or technology offering. I think it's going to be when are we at a point where we've got a steady stream of contract wins and revenues coming through on that.
And I would say certainly late this year is the expectation. Doesn't mean we're not going to get any before then. But I think in terms of being able to say, we're there now, we actually have an established offering that we're able to use reference account wins to win other projects. And at the age old, the best thing about winning big projects is you win more big projects because of the reference. And so that's the aim here.
Got you. All right.
Speaker 4
I'll pass it on. Thanks
Speaker 2
you.
Speaker 0
Our next question will come from the line of Deane Dray, RBC Capital Markets.
Speaker 6
Thank you. Good morning, everyone.
Speaker 2
Good morning, Deane.
Speaker 6
Hey, maybe we'll start with the record free cash flow. And I was glad to hear Mark say he was very fond of that metric because I think our investors are too. And Patrick, you said that a couple of years ago you were underachieving. And I'll say you were like below 90%, but you made it a priority. And so we're seeing it come through here.
So for Mark, you touched on the improvements in working capital, point 5% this year mid teens is your goal. Talk about the timeframe to get there, incentives for the management team and the sustainability at these levels because that would put you at like the top five of the multi industry sector in terms of conversion.
Speaker 3
Yes, sure, Deane. And yes, thanks for that question. We're we did make very good progress this year. But as we look at the opportunities across our supply chain and inventory, some of our processes in terms of the billing and collection of receivables and even in payables, there's still good room for opportunity to improve. That mid teens target is certainly something that we think is achievable and out in 2020.
But we're looking at making continued progress in 2017. So we'd expect it probably won't be 150 basis points, but another good chunk of progress. So a lot of work to do. We've opportunities around standardizing payment terms, cleaning up our processes. And also in terms of on the commercial front, just as we negotiate contracts getting more cash upfront.
Speaker 2
I would say, Deane, a couple of things I would add. So you're right. You asked a question about incentives as well. When I made the comment a couple of years back about us underperforming, one of the changes that we made at that point in time was to simplify our annual incentive plan and to broaden the scope of population of people that were in that. And one of the three metrics that we have, obviously, one is organic revenue growth, the other being our operating income targets, but the third was working capital as a percentage of revenue.
And I would say it took as is oftentimes the case, it took a good year or so for that to sink in and for the organization to really understand the levers that they can pull to drive that and the impact. And I would say where we really felt good this year was really in the second half of the year. There really seemed to be a pivot across the organization in terms of things coming together. And a part of that was driven by us bringing some talent over from the Census team. Census has done a terrific job historically because they had a crisis years ago in terms of having to deal with working capital and cash.
And the transfer of those learnings has gone a long way. And I think the new frontier for us beyond what Mark laid out is as we bring more and more of this longer term contract mix into our portfolio on the smart water solutions, customers are usually willing to give you some payment upfront to really finance that. And so I would expect the mix of our revenue to be favorable there in terms of working capital.
Speaker 6
That's all good to hear. And for my follow-up, I just wanted to follow-up on Nathan's last question there on these new smart infrastructure platforms. So we've heard all about non revenue water. We understand how Pure fits in with Vicente and what's been done in Singapore and what the opportunities are. We've heard a bit, you've been kg Patrick about the watershed opportunities.
But I have heard from customers, I know which customers are doing the pilot programs. The feedback has So been we're excited about that. So maybe a little bit more on the combined sewer overflow. I know it's a pain joint. And coincidence or not, I was in South Bend or excuse me, I was in Austin for the Big Water Conference.
Speaker 5
And I sat in
Speaker 6
a presentation from the South Bend municipality and they talked about MNET. And they gave they showed the dashboard. It was pretty compelling and now it turns on So it's part of take us through what that opportunity is.
Speaker 2
Sure, yes. So I would and this is a big compliment to the MNET team that in terms of what you've shared there. And we love the team. We love what we've seen there. I would almost view them as an equivalent of the Vicente of wastewater and stormwater overflow.
They've got a terrific distributed sensing capability and data analytics capability to really help cities and municipalities both predict and deal with surges around storm water overflow. So as you're well aware and you would have heard there Dean, heavy rainfall, snow melt, a variety of things cause sewer systems to overflow and exceed the capacity of the wastewater treatment plant or they run off and they directly pollute rivers and streams and so forth. So again, MNET provides this predictive analysis capability that helps the again, the wastewater part of the utility better design and prepare for those kind of events. We see that as you well know, they have a number of these contracts underway across The U. S, but they are really just getting started.
South Bend was their origin. These guys came out of Notre Dame to address that. And we really think that this is a great opportunity for us to leverage our channel to utilities, not just here in The U. S. This is an issue that we deal with around the world.
And it really is a new market.
Speaker 6
Yes, absolutely. And it's great seeing you make an acquisition in this space. Just last point, just related to this, the whole premise of using M and A as a proxy for R and D and it seems like MNET fits that exactly. And just talk about the funnel of other MNET type of acquisitions out there.
Speaker 2
Yes. So we've one of the things we're really excited about here is the opportunity to have Al Cho, who many of you have had a chance to meet and work with before. Al, really, as I said in my prepared remarks, been instrumental with myself and the team here and Colin and others to really kind of architect what this platform needed to look like based upon our value mapping of our customers a few years back. And so I would say we already knew going into the acquisition of Pure and Mnet, we had a pretty good idea of what those pain points in our gaps were. So we already had a growing pipeline of things like Mnet and we've got number of others that are out there that we are courting right now.
I would say though, what I'm even more excited about is Jack Elliott, the CEO of Pure has agreed to stay on with me as a senior advisor to myself, to Al, to Colm to really help us architect even further what this broader universe of opportunities can look like as we drive even more of a consultative approach towards the utility. So while we think we've got a pretty good view on that, obviously, the ability to get in there with these customers and further explore what their pain points are is really just going to inform further what that pipeline looks like. So there's more to come, Deane.
Speaker 7
Thanks.
Speaker 2
Thank you.
Speaker 0
Our next question comes from the line of Mike Halloran, Baird.
Speaker 8
Hey, good morning, everyone.
Speaker 2
Hey, good morning, So
Speaker 7
first on the demand side, obviously, really dynamic orders and good to see the acceleration of orders through the year here. The prepared remarks commented on a lot of those orders provided a nice runway through 2018 but more into 2019. So could you parse out what you're seeing both in terms of call it the repair replace, the shorter cycle stuff, how the momentum carried in the fourth quarter and how you're thinking about that into next year? And then also large project funnel, customer willingness to put capital dollars forward and kind of compare contrast those two dynamics?
Speaker 3
Yes, Mike, let me take that one. And I would say that the order strength was fairly broad based in terms of what we saw in bookings both. There was quite a bit of short cycle business. I mentioned transport was up 20% year over year. And that's generally shorter cycle.
However, one of the things that we did see over the past quarter, we were very successful in winning a number of larger projects. And as a result, as we decompose that backlog, we had a, you know, a much higher percentage than normally that will be, you know, shippable beyond 2018. So it wasn't I would say it wasn't that we saw a decline in the shorter cycle business that was still there, but was really encouraging was we're really starting to get traction on some of these larger projects, treatment as well as industrial. And a number of those certainly in our emerging market countries where we have made investments to be able to be responsive to those types of opportunities.
Speaker 2
I would just add, Mike, that if you and maybe tie that back to what we're guiding to for 2018 and kind of what the cadence looks like over the course of the year. Bear in mind that certainly Q3 and Q4 were a little bit easier compares to the previous year, but they were strong in terms of order growth overall. As we look at 2018, I would say the way it shapes up is kind of 5% to 6% in both Q1 and Q2, and then probably moderates to 4% to 5% in Q3 and Q4 just because you get a little bit tougher compare at that point. But I think what we felt good about with those orders that go out to 2019 as well as the fact that when you look at our bidding pipeline in our treatment business, which we've always used as a proxy for the health of the muni market, that continued to grow year over year and is up north of 2,600,000,000 now in terms of bidding pipeline. So all indicators are that we're still well in we're still kind of in the early to mid stages of this cycle of recovery and don't really yet see any signs there of any softening or weakness.
Speaker 7
So just summing that up, I mean, essentially continued short cycle weakness strength, excuse me, and momentum on that side while you're building the project backlog at a pace that is better than you've seen over the last few years with a still nice pipeline in front of you. That's fair?
Speaker 2
That's all said.
Speaker 7
All right. And then on the margin side, obviously, really nice margins in Applied and then the Census businesses. Maybe just talk a little bit about Infrastructure. I understand a lot of the puts and takes there, particularly on the growth side. The one that I was trying to get a little color on was the really the lack of volume, price mix, other leverage.
I'm guessing the volume leverage is still there, but maybe the price mix other components were a little less so. So maybe what happened in the fourth quarter and just how you think about incrementals in the next year on a core basis there?
Speaker 3
Yes, sure, Mike. And the you're right. I mean, was solid volume leverage. We price was flattish, wasn't a big factor. Where we took a little bit of a hit there was I mentioned in my prepared remarks, we did have some FX transactional losses.
We do sell a lot of product out of Europe in U. S. Dollars and as the we try and hedge as much of that as we can, but when the euro really moves, it has an impact. So that was one factor. And we just talked a little bit earlier about the great success that we had in some of our emerging markets in terms of those growth rates, particularly I mean, India was up 60%.
We had good growth in China. And those do carry lower margins. And so that there was a bit of unfavorable mix as well. As we look forward, we expect continued margin expansion in that segment and would expect the drops on revenue growth to be more in line with what you typically see in that 25% to 30% drop.
Speaker 7
Great. Thanks for the answers. Appreciate it.
Speaker 2
Yes. Thank you.
Speaker 0
Our next question will come from the line of Jim Gionikoros, Oppenheimer.
Speaker 9
Hey, good morning, everyone.
Speaker 2
Hey, good morning.
Speaker 9
Looking at your margin progression goal of I think it's 17% to 18% by 2020, does that adjust for acquisitions? And just to get that clarification question out of the way.
Speaker 3
It's reflective of the amortization that comes with Census. But I think the important point here, Jim, is that we do have good confidence in getting to that 17% to 18% target. We're going to continue to generate solid volume growth. Productivity savings are going to be we can continue to deliver strong productivity savings. And in fact, we've got significant opportunities around our back office that we're ramping up this year and will really be a big lift in 2019 and 2020.
We really haven't seen any of the benefit from some of the volume leverage and revenue synergies that we'll certainly expect to be getting with Census. And so we've got very good confidence in terms of our ability to deliver that 17% to 18% by 2020.
Speaker 9
Got it. And since you touched on it, that Census legacy sound revenue synergy opportunity, that's 150,000,000 to $200,000,000 or so. Are you tracking on plan there? Or you I'm sorry if misunderstood you anticipating there?
Speaker 2
No, Jim, I think that's right. I mean, I think the what I was alluding to earlier was, I think the good indicator for us this year is we're definitely going to have revenue synergies that come from Sensus, we'll have revenue synergies that are coming also from the Pure transaction and the new platform we're building here. But I think the real strong indicator is going to be what are some of the big project wins and order momentum that we have that we can talk to later this year and as we exit 2018 going into 2019. So not that we're not counting on revenue there, but I that's not really reflected in our guide for this year. I'm really focused more on what the order rate momentum and the contract wins are as we get later in the year.
Speaker 9
Understood. And one follow on if I may. Residential exposure within Applied Water is subject to specific regional influences if I recall, but in your slides and Patrick you reiterated that you're calling for mid single digit growth of 12% comp in 2017. That's stellar. Can you frame that for us a bit more granularly?
Appreciate it. Thanks.
Speaker 2
Yes. So I'll certainly give you my thoughts on that. I mean, if you look at what happened in certainly 2017 in the fourth quarter, we had a lot of strength in China and across Asia Pac. We also had some share gains in Europe from some of the new products that we've rolled out there. I would say growth in The U.
S. Was flattish in the fourth quarter, but it was strong for the full year. What happened, I think, for the full year was you get the Asia Pac Europe growth that's being driven there by domestic expansion. But it was also we've had some disruption, as you all know, in the competitive dynamic here in The U. S.
In terms of one of our competitors buying out a distributor that created some disruption in the marketplace that our teams were successful in taking advantage of quite frankly. And that got us nice pop for 2017. We do see all that moderating as we go into 2018, but we expect there to be at least solid market growth in 2018. I wouldn't be calling share gains in 2018. It really is more the market growth here, predominantly in The U.
S. And Europe.
Speaker 9
Thank you.
Speaker 2
Okay.
Speaker 0
Our next question will come from the line of Joe Giordano, Cowen.
Speaker 5
Hey guys, good morning.
Speaker 2
Good morning, Hey,
Speaker 5
Let's start on the census side. Obviously, things well ahead of the growth rates that you have underpinning 2020. I just want I wonder if and Patrick, you've kind of commented
Speaker 4
on the big piloting
Speaker 5
revenues are still ahead of you. But like when we talked about I think you mentioned something like $100,000,000 of revenue synergies would be almost a disappointment if you didn't get there. Are you seeing any of that right now?
Speaker 2
In terms of the actual revenue synergy or in terms of confidence around outlook?
Speaker 6
Yes, I guess, well,
Speaker 5
I guess both. Mean, the growth rates here are 15%. Like are you starting to see is that something that would have happened without the Xylem portfolio behind it? Is that just how much of this is stuff that you guys are able to impart into the company?
Speaker 2
Sure. Yes, I would say there is nothing that has been achieved to date that we would explicitly call out as Xylem driven synergies. Have there been cases where there's perhaps a bit of a halo effect in terms of winning some contracts and bids perhaps. But the things that we call the revenue synergy are going to be very explicit in terms of bigger deals that the team either wasn't even looking at before or were, but didn't have the relationship. And then some of these new offerings to the market that we've talked about earlier with Dean in terms of leveraging the Sensus technology across the portfolio.
Those areas, we continue to remain very confident. We've got a regular tracking here each month with the team in terms of what those are going look like, where they stand. And those are not reflected in the census growth rates to date, nor are they reflected in the guide that we've given you for 2018.
Speaker 5
And then when I think about that market, that metering market in general, obviously a huge fall off in terms of market share after you get through the first few major players there. You have a big transaction in the space with Hubbell and Aclara. And I just wonder if do you see any of these like smaller players as complementary to your business from a technology standpoint? Is there an opportunity there to kind of consolidate a little bit of that industry?
Speaker 2
Yes. I would say, as I look at that sector right now, I wouldn't as I look at it today, things can obviously change. I wouldn't say that consolidation of the metering sector is a high priority for us. I think that the moves that have happened here, I think are good I think it's a healthy move in terms of that consolidation.
There are a lot of players in the space. But certainly, when we look at our core offerings and what we're focused on, we don't see it really having a meaningful impact, if anything, it's net positive for us. But again, I wouldn't see us being a major consolidator in the metering space as I look at it today in terms of what our overall priorities are for growth.
Speaker 5
Okay. And then, Mark, you kind of talked about this a little bit earlier. Apologize if I missed some of it. But when we think about the margin guidance for 2020, 17% to 18%, maybe exiting 2018 at a lower level than we thought, part of that due to deals and things that you've done. Have the buckets that get you to that level changed somewhat?
I mean revenue is probably coming in a little hotter than we thought and margins probably exiting 2018 a little bit lower. So how are you closing that gap with comfort there?
Speaker 3
Yes. I don't think the buckets have changed materially in any respect. I think there's a we are growing a little bit higher than we thought in 2017. Some of that was stronger growth in our treatment business and in emerging markets, which have a little bit more lower margin profile. But the biggest driver, our productivity savings is right where we expected it to be and expect that to continue as we outlined back in April at Investor Day.
The level of investments is relatively in line with what we expected. The timing might be a little bit off just in terms of the year over year comparator, but relative to what we're the quantum of the spend is in line. And so there's it's very much what we expected. And there's really nothing that we see looking out ahead that would give us reason to believe that those buckets in terms of what's driving the margin expansion are shifting.
Speaker 5
Great. And Patrick, maybe if you could just comment on like your appetite for large scale M and A in this environment where multiples keep widening. And then I'll leave it there. Thanks.
Speaker 2
Sure. Yes. So look, we're going to continue to be strategic in our focus around M and A. Obviously, anything we do from an M and A standpoint really needs to tie into what our overall growth strategy is, not just for the sake of going and getting bigger or doing something. And so I take us back to what I laid out at Investor Day last year in terms of the three focus areas, one being obviously building out the kind of smart infrastructure component two, was looking at the opportunities over time to expand our presence in the industrial part of the water sector.
And then the third was where necessary, obviously, we would defend our core franchises here in terms of any consolidation necessary there. In terms of capacity, we certainly have the financial capacity to be able to do this. We have the management capacity to do things of larger scale. But right now, we really are just focusing in on integrating what we've got here, building out these new capabilities and really kind of, again, in my view, hopefully establishing a first mover advantage in some of these spaces. So that's where our focus and attention is right now at this point in time, Joe.
Again, we'll continue to look at things in this space as need to and as they come along, but nothing specific that we're looking at right now of size and scale. Okay.
Speaker 0
Thank you. Our next question will come from the line of John Walsh, Vertical Research.
Speaker 3
Hi, good morning. Good morning. Hey, John. So thinking about the margin bridge for 2018, you've obviously covered a lot of ground. I mean cost inflation headwinds have kind of been pretty steady here through 2017.
Just wanted to get your view as we think about 2018 there in terms of cost inflation and what are kind of the biggest pain points in that line either around people inflation and or commodities? Yes, John, sure. Once again, we are expecting the biggest driver of margin expansion will be the benefits from our productivity programs. That will be in that 300 basis point plus range. We do expect to see some nice volume drop.
Mean, with higher growth rates, we'll see margin expansion from volume leverage. Some of that there'll be a little bit of unfavorable mix as we continue to grow our see outsized growth in emerging markets. Inflation, we're seeing it tick up a little bit. Our expectations for the full year is roughly 200 basis points of headwind. A lot of that is just it's labor cost, benefit cost.
There's certainly a tick up we're seeing in some of the commodities, but it's not rampant. I mean aluminum, steel, copper, but they're not huge components of our product bill. And then we'll continue to invest in at rates that are fairly consistent with where we've been in over this past year. Great. Thank you.
Speaker 2
Yes.
Speaker 0
Our next question will come from the line of Brian Lee, Goldman Sachs.
Speaker 10
Hey guys. Thanks for taking the questions. Hey, how's it going? And not to beat a dead horse here, but I think you guys had targeted, if I recall, 40,000,000 in revenue synergies with Sensus in 2018. Is that target officially shifting out some here?
I just want to clarify, because it sounds like it's not part of the 7%
Speaker 3
to 8% view in Measurement and Control Solutions.
Speaker 10
And then I guess if it
Speaker 3
is pushing out maybe the reasons as to why that might be the case?
Speaker 2
No, wouldn't say it's shifting per se. I mean in my view, it's just we've these things take some time. We're talking I'm thinking more run rates at this point in time in terms of contract wins. Look, we're going to get some revenue synergy here in 2018. We'll be clear on mapping out what that is.
But we're still I'd say not in the early stages of this, but we are still in the stages of pilots on a number of these areas. The pilots and these large deal efforts that we're going after, I talked before about the dozen or more large international deals that we were pursuing. Those things shift around. They take time. There's a lot of investment upfront that we have to do in those areas in terms of time and resource.
So look, I hope that least that a much, if not more comes through this year, but we didn't feel it prudent necessarily to explicitly build that into our guide for the year.
Speaker 10
Fair enough. Then one quick one for me and I'll pass it on. And I might have missed this, but Mark, I noticed that Canada was it was highlighted as an area of strength in the Water Infrastructure segment. Can you give some context as to what drove that? How much exposure you have there?
And if that's a trend line
Speaker 3
that sustains into the new year? Thanks. Sure. Yes, it's really a function of strong recovery in oil and gas and mining. The commodities are really picked up in that country over this past year and we saw the benefit of that.
It's around $150,000,000 of revenue. It's relatively sizable but not one of our largest geographies. But it was it's good to see
Speaker 7
a bounce back there this year.
Speaker 10
And just any quick thoughts around the trend line from these levels?
Speaker 3
Well, listen, with that kind of growth, it's going to be a tougher compare. The good news is that those markets continue to remain stable and we'd expect low mid single digit growth in 2018, just a very tough compare when you're in the 20s this year.
Speaker 2
Yes. No, I would just add that I think that what we saw in Canada this past year really was a recovery and catching up of things that have been deferred, delayed because Canada had been on its back for the last couple of years, at least in terms of our business going down year over year. So we saw some of that recovery, but it really will be kind of low single digits expected as that market kind of normalizes to typical spend. It's largely driven by, again, the public utility piece and then a little bit less in our dewatering business.
Speaker 1
Right.
Speaker 0
Thank you.
Speaker 9
Very helpful.
Speaker 2
Thanks, guys.
Speaker 0
Our Thank final question will come from the line of Scott Graham, BMO Capital Markets.
Speaker 8
Hey, good morning. Well done.
Speaker 2
Good morning,
Speaker 8
I have two questions I for suspect you not enter 2017 with the level of inflation that we've seen as we exit 2017. So I guess what I'm assuming here is that the cost reductions, which have been extraordinary, are maybe been a little accelerated. I don't you've made some comments about that they're being on plan. It looks like a little above plan, but even still, do you think that there's some stress on the organization, Patrick, because the price cost with you guys is negative by nature of the business? And are the cost reductions maybe providing excess stress in certain areas?
Speaker 2
Well, I think the short answer is no, although I never want to understate the challenge that you have in terms of change management organization when you're driving a number of initiatives and cost takeout and efficiency and so forth. But what I'd say has really, I think, helped mitigate that stress and anxiety is a couple of things. One, boy, it a whole lot easier to do that when you are at least in a growth market and people can feel growth going on around them. It was tougher when there was not as much growth. That's one.
That certainly helps with the sales teams in terms of their motivation and inspiration. But I think it's also being clear and transparent with the organization as to what our priorities are and that our cost efforts aren't just across the board go after 1,000 things at one time. We've got programs around global business services implementation. There's a lot of change management going on around that and communication. Two, I think it's important to recognize that a big chunk of our cost savings are coming out of the procurement and the deployment of Lean and Six Sigma.
So these are basic process capabilities and skills that we're teaching the organization how to fish in these areas as opposed to being always with a blunt object. And I think when you're giving people those skills and capabilities, that makes it easier because they feel empowered to go drive change and make things more efficient. And our CI efforts, improvement is not just focused on the cost takeout. It's about making it easier for our customers to do business with us and be faster to market. And that always makes an organization feel better.
So I don't want to come across as too much CEO speak as if it's easy because it's not. This is hard work. It's heavy lifting. I would say if it was that easy, it would have already been done. So I recognize that level of stress.
But no, I feel that the organization is very healthy and healthier than it's ever been in my view. But it's something, you're right, Scott, that I pay a lot of attention to and that's why I spend so much time out on the road with our teams hearing how things are going.
Speaker 8
Understood. Thank you. My follow-up question is one of the things that you indicated in your year ago analyst meeting was the desire to push up new product sales spending development by about I think it was by about 150 basis points over a several year period. You also you personally champion the whole we need to get better in commercialization as well. I guess my questions are on those two metrics, where do you think they're impacting the most?
And where do you which areas of the business are maybe lagging in those areas?
Speaker 2
Sure. Yes. So I think the I would say that two dynamics or two pieces to that. One on the driving kind of commercial leadership and the commercial excellence. Really in my view, the whole purpose of me putting that out there as one of our top priorities was to move our organization away from where many industrial companies are and that is spending way too much time focusing on inside the four walls of the company and being an administrative company as opposed to a commercially driven company that is hungry, that understands why you lose an order versus why you win one, and that the center of gravity is with the sales team and the people that are serving the customers' needs every day.
And so putting in things like a Net Promoter Score mechanism, a sales force barometer, So one, to measure how customers feel about us two, to measure how our sales teams feel about what we're doing has, I think, been a big move forward for us. It shows them that we actually care about what's going on. And we've got a lot of areas to improve. And that's why that to me is all upside in front of us. We do not yet score well and high on either one of those.
But the good news is people are being very honest with us about where we can do better, and that's what we're very much focused on. I would say an area that we can do also a much better job in is broadening our key account management skills and capabilities. And that's an area that we are now investing in as we go forward. I feel good about the progress in R and D and the spending there and the activities. But now it's a matter of commercializing those and embedding those new skills in our selling organization as we sell different value propositions here.
And certainly, the acquisition of Sensus, Impure, MNET, Vicente, those are all very different DNA in terms of how they sell value to customers. And that's certainly been a nice changing dynamic in our commercial organization.
Speaker 8
Very good. Thank you.
Speaker 2
Thank you, Scott. Thank
Speaker 0
you. I'll now turn today's conference over to Patrick Decker for closing comments.
Speaker 2
Well, thank you all for your interest and your questions and hanging on here. And so again, safe travels. I wish you all Happy New Year. I know we're well into it, but I haven't seen all of you. Until I do, I get to say Happy New Year.
And wish you all the very best. Safe travels and look forward to talking to you on our next earnings call. Thank you.
Speaker 0
Thank you. This does conclude today's Xylem fourth quarter and full year twenty seventeen earnings conference call. Please disconnect your lines at this time and have a wonderful day.