Welcome to the Xylem Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Phil De Sousa, Head of Investor Relations.

Thank you, Lori. Good morning, everyone, and welcome to Xylem's fourth quarter 2013 earnings conference call. With me today is Chief Financial Officer, Michael Speetzen; and joining us on the call from California is our Chief Executive Officer, Steve Loranger. They will provide their perspective on Xylem's fourth quarter results and discuss the full year outlook for 2014. Following their prepared remarks, they will address questions related to the information covered on the call. [Operator Instructions] We anticipate that today's call will last approximately 1 hour. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website at www.xyleminc.com. All references today will be on an adjusted basis unless otherwise indicated, and non-GAAP financials are reconciled for you in the Appendix section of the presentation. A replay of today's call will be available until Tuesday, February 18 at 6:00 p.m. Please note the replay number is (404) 537-3406 and the confirmation code is 30139459. Additionally, the call will be available for playback via the Investors section of our website under the heading Presentations. With that said, please turn to Slide 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 outlined in Xylem's annual report on Form 10-K and those described in subsequent reports as filed with the SEC. These remarks constitute forward-looking statements for purposes of the Safe Harbor provision. Please note that the company undertakes no obligation to update such statements publicly to reflect subsequent events or circumstances, and actual results could differ materially from those anticipated. Now please turn to Slide 3, and I'll turn the call over to our CEO, Steve Loranger.

Thank you, Phil. In my entire career, I've never missed an earnings call, and hopefully, this one's going to work without any glitches. As Phil mentioned, I'm not in the New York office with the team, but I'm rather with my wife, Betsy, who just had an unplanned appendectomy a couple of days ago. The good news is that Betsy's fine, and I'm settling in my new role as Chief Caregiving Officer. I am very pleased with our Q4 performance. Thanks to the team's hard work, we executed well on our revised business goals, which was the #1 goal that we set last September. While we certainly have execution challenges in front of us, I feel confident that we turned the corner on our recovery and business improvement plans. We've positioned Xylem to perform at a higher level. Just as we saw orders and execution in the third quarter, I believe our fourth quarter was a continuation of that trend. We're proud to report that even in a less-than-robust market environment, we achieved record revenue, our first $1 billion quarter. Overall, revenue increased 7%, with the core up 5% over the prior year. We booked orders of $986 million, up 6% overall and up 5% organically over 2012. Although the market conditions were slightly more positive, our teams stepped up to the challenge and delivered another solid quarter of revenue growth. We also achieved operational improvements, resulting in $145 million of operating income, which was a 12% increase over the prior year. Operating margin of 14% was up 60 basis points over the prior year and up 50 basis points from the third quarter. Our renewed focus on business accountability and cost actions also had a positive effect, and you can see that in our incremental margin drop of 38%,…

Thanks, Steve. Please go to Slide 4. We generated revenues in excess of $1 billion, up 7% from the prior year, primarily driven by 5% organic growth and additional 2% from acquisitions. It's worth noting that we are comparing to a prior year fourth quarter where we experienced negative growth. Industrial and public utility end markets showed strength relative to poor performance last year. We have seen the positive effects of rebounding industrial production in the U.S. and Europe, and we see public utility markets stabilizing, with customers focused on OpEx and small project activities, but we have not seen a meaningful recovery in larger CapEx projects. The commercial end market was down 5%, driven by a tough compare to the prior year, where we first saw the channel start to restock product and we had some benefit from Super Storm Sandy. I'll cover up more specifics by segment, but generally speaking, we saw growth across our key geographic regions, up mid single digits in both the U.S. and Europe, and continue to see growth in emerging markets, driven by timing of project business. Turning to operating income, we delivered strong operational performance. Operating income of $145 million was up $15 million or 12% over last year, and margins reached 14%. Operating margins increased 60 basis points despite headwind from foreign exchange, continued price erosion and acquisitions which are in their early stages of integration and slightly dilutive to margins. These headwinds were more than offset by strong incremental margins, coupled with the favorable impact of cost actions initiated in 2012 and early 2013. Core incremental margins were approximately 38% after excluding the impact of foreign exchange and acquisitions, strong performance considering this includes absorbing the impacts of setting up our European headquarters and remaining onetime spin-related costs. Price pressure…

Yes, thank you, Mike. Let me start by saying that we are beginning 2014 well positioned to accelerate our performance. As Mike mentioned, some of the 2013 headwinds have dissipated a bit, and we are entering 2014 with encouraging signs for more consistency in top line growth. We also expect to deliver improved operating performance across all of our businesses, positioning ourself for strong earnings growth. Let me highlight our top strategic initiatives for 2014. First, we're going to build our business execution. We will deliver on our 2014 targets, and we're going to be using a robust management process to accomplish that. We expect to deliver revenue growth in the range of 2% to 4% while improving operating margins between 12.6% and 13.2%. And at the bottom line, EPS will be in the range of $1.85 to $2, up 11% to 20%. Free cash flow conversion will be 100%, along with a nice improvement in ROIC. These are aggressive but achievable goals, which will -- which we're going to meet by strengthening our sales capabilities and increasing our operating efficiency. To help us achieve our #1 priority, first, we're going to look to accelerate growth by optimizing our integrated front-end strategy. This entails leadership appointments, new customer relationship technology, digital marketing, more robust sales force metrics and aligned compensation plans. Second, to improve our productivity, we are reinvigorating our Lean Six Sigma capabilities and creating a new global strategic sourcing organization. Lean Six Sigma already contributes several million dollars annually to our bottom line results, and we are actively extending its impact. Likewise, we're rolling out a new global strategic sourcing organization with a single leader. This is going to supercharge our already strong sourcing capabilities, with the goal of doubling our net productivity in 2014. Next, we're going to be focused on capital deployment, including rebalancing our portfolio and investment decisions. We're going to provide advanced technology equipment and solutions to resolve our customers' most critical water challenges. And finally, as I mentioned, we are institutionalizing the Xylem management system, which synchronizes our key business processes in an accountable way. Those of you that know me know how much I believe in a disciplined management process, and this is a vital need at Xylem. This is going to help us translate strategy to execution with linked, standardized processes, all aligned to execute our vision. So that's the set of our priorities for 2014 and our top level targets. Let me turn it back over to Mike to go over the details of our 2014 plan.

Thanks, Steve. Turn to Slide 10. We anticipate 2014 revenues of approximately $4 billion, which reflects total growth of 2% to 4% and organic growth in the range of 1% to 3%. For Water Infrastructure, we expect revenues of approximately $2.5 billion, reflecting total growth of 2% to 3%. And for Applied Water, we expect revenues of approximately $1.5 billion, reflecting total growth of 2% to 3% and organic growth of 1% to 2%, with a 1-point benefit from foreign exchange. Segment margins are anticipated to be in the range of 14.1% to 14.6%, and operating margins are projected to be in the range of 12.6% to 13.2%. At the bottom line, we anticipate earnings per share of $1.85 to $2, excluding 2014 restructuring and realignment costs of approximately $40 million to $50 million. Of the $40 million to $50 million, we plan to execute restructuring actions with costs ranging $30 million to $35 million, with an expected payback of approximately 1 year. We expect approximately $10 million of savings to be realized in 2014 from these actions. This is in addition to the carryover savings of $25 million from the actions executed in 2013. If you'll recall, we originally expected $15 million of carryover savings in 2014. The increase reflects accelerated savings and should provide a higher degree of confidence in our expected 2014 performance. Our operating tax rate is expected to be 21%, and fully diluted share count is expected to be approximately $185 million, which takes into account expected share repurchases of approximately $130 million in 2014. Please turn to Slide 11. This slide summarizes our expected 2014 organic revenue performance by end market. Beginning with industrial, our largest end market, representing 43% of total revenues, we expect low single-digit organic growth. In the U.S., the industrial…

Yes, thanks again, Mike. Just to wrap this up before questions, we clearly delivered a solid fourth quarter and a very strong finish to the year. But more importantly, I'm really pleased with the direction that Xylem is headed. Building on long-term market fundamentals and aiming for the best possible business performance, we're acting on several fronts to advance our ability to execute as a high-performing organization. I've been here now for just under 5 months, and I really am pleased with our top leadership team and the trajectory that we're on. To be sure, we do have plenty of operational challenges ahead of us, coupled with improving but still overall slow markets. What I'm really excited about is our collective leadership attitude and ambition. Our sales people want to win, and they want to satisfy customers. Our growth center leaders want to lean out the efficiency of their operation and get our SG&A and material costs where they need to be so that we can afford the vital investments for our future. Our teams accept the execution challenges of the past year and using this as a basis to springboard our competitiveness. So given this, as Mike outlined on Charts 11, 12 and 13, we have constructed for you an appropriate advance in our operating metrics for 2014 with measured and balanced execution conservatism. This gives us great confidence as we internally aspire to even higher performance. We have a new operating model with terrific leadership at the top, fueled to drive organizational speed, simplicity and accountability. We are building our sales and marketing capability to better leverage our leading brands and technology. Our investments in digital capability and product technology have been increased for 2014, a very positive reward for our teams as they eliminate unnecessary overheads. I'm quite encouraged by where we are. It's true, I do toss and turn at night given the execution challenges ahead of us, but I have the confidence that our global team is aligned and aspiring to achieve our vision. I'd like to now ask our operator to turn it over to the folks on the call for any questions that may be on your mind.

[Operator Instructions] Your first question comes from the line of Scott Davis of Barclays.

Steve, you mentioned, several occasions, price in somewhat negative context, and you did last quarter as well. But do you have a sense of prices getting -- can you give us a sense whether price is getting incrementally worse, or do you see things kind of flatlining here?

Yes, Scott. If anything, it's probably more in the flat line. The issue is the entire industry is slightly overcapacity, as you know, and so all the competitors are duking it out on an incremental basis. And so while we do have a number of -- while we have already executed a number of price increases on the catalog basis, these get competed pretty intensely. And as a consequence, we're not realizing as much price as we'd like to the bottom line. So I would call it more or less flat at this situation. It is obviously a concern, but it's one that we're shoring up with our material cost takeout to make sure we balance our operating margin.

Scott, I think we're -- Scott, we're trying to be conservative in the view we have for next year, so we planned for it being down about 0.5 point. Obviously, internally, we're driving higher expectations for that. And the other thing I'd add is, one other headwind relative to pricing is we have seen inflation come down, which is a good thing. We had been averaging just over 3% in the prior years, and this past year, we've gotten down to just over 2%. And we're anticipating core inflation in the business in that same area as well.

Okay, that's really helpful. And then you guys talked -- you spent more time this quarter also talking about cash reinvestment, buybacks and M&A. And I mean, this has always been a tough industry to do deals. There's just not a lot of great assets that are available out there. I mean, what gives you the confidence that there are deals to do? And I guess the natural side part of this question is, would you consider going outside of water to other flow-type businesses?

So let me take a shot at that. Remember that the water industry is highly fragmented, and so there are opportunities. And while we have taken a respite, as we mentioned, to make sure that we get back into a solid operating rhythm, we have kept our pipeline open. And I wouldn't conclude that you can't do deals right now, although we have taken a bit of a rest. With respect to outside of water, I would say not as a strategy. I mean, clearly, we have the ability, because of the breadth of our technology and the capability of our selling marketing distribution, is to be a very, very strong provider of this technology that resolve customers' water challenges. The water market is sufficiently large to play in, and it's fragmented, and it's equally as profitable as other industrial segments. So because we are a pure-play water company, we feel very committed to continue to drive water solutions to our customer needs. In order to do that, we're going to have to do some of the things I mentioned, which is strengthen the distribution and marketing organization so we can flow more product through the front end, continue to invest in innovation and to rebalance into probably the most attractive segment of water, which is really the industrial and the international side. So Scott, we want to stay in water. We're extremely well positioned there, and it's what we do, and we think we can do it well to achieve our vision.

Your next question comes from the line of Deane Dray of Citi Research.

I do have some questions on the guidance, but the first topic is a bit more sensitive for you, Steve. And you're now in this interim role for 5 months, and from our perspective, that process, the search has taken a bit longer. But if you listen to everything on the call and the outlook for 2014, you certainly don't sound like an interim CEO at all, and this is the Steve Loranger we knew of old, managing with intensity. So it begs the question whether the board might be considering you as, let's call it, the medium-term solution for Xylem, and how should we be thinking about that?

Yes, thanks, Dean. I appreciate the view on my attitude, and you've got it exactly right. I only know one speed, and that's full speed ahead. And whether I'm here a day or much, much longer, I'm going to be doing my very best to provide leadership and direction for the company on the basis of creating long-term value. So that's my approach. The CEO search is underway. We have -- we're probably at a point where I would say we are just concluding the Phase 1, which is the broader interview of a number of terrific and qualified candidates. And as we turn into our first quarter, the board certainly wants to focus and narrow and definitize the search down to a couple of qualified candidates. So the search is well underway. There's nothing really to report. The good news is that I am here, serving at the board's pleasure as long as it takes. And I have also committed to the board to provide whatever appropriate or needed transitional leadership in such a fashion. But I really can't be any more specific than that. That simply is where we are, and in the meantime, I've got my head down with the team to focus on executing this long-term strategy.

Great. And then for the guidance, 2 of the metrics you've provided that -- if I could get some more color on, is the $100 million in sourcing savings as well as the $35 million restructuring savings. And maybe share with us what sort of upside there are to those numbers, your confidence. You've got every project identified. Is there an internal stretch goal? And maybe just walk us through those, please.

Yes, so Dean, let me start, and then Steve can add any color. On the core sourcing and Lean Six Sigma savings of $100 million, that's pretty consistent with what we have executed in the past. We've looked over the past several years, and our teams have been pretty effective at going out and doing everything they can to essentially offset inflation and provide some room for reinvesting in the company. On the restructuring, $25 million of that, you can count on, is hard savings in the sense that we locked it in by executing more aggressively in the fourth quarter than we had originally provided externally to get a jump-start on 2014. And then the additional $10 million that we're counting on from restructuring, we've got a high degree of confidence. We've got the areas identified. We have dampened the number a bit for any potential slide in execution timing, but it feels good from our perspective. We are driving more aggressive plans internally. I mean, I think a safe way to think about it is we aren't counting on the revenue growth to get us home in terms of making the EPS range that we've put out there. Similar to what we did in the latter part of 2013, we are driving internal assurance plans that are more aggressive from a cost perspective. And we feel we've got a good line of sight and a good trajectory on them and, at this stage, feel very good about what we've got lined up in terms of cost reduction.

So are there internal stretch goals higher for both of those 2 metrics?

Yes, Dean, of course there are. And these stretch goals are hardwired into our growth center plans, so the teams actually are working to numbers that are higher. The challenge is obviously bringing the ball home to score. You mentioned projects. Take the sourcing, for example. We have identified the areas of all $100 million, but I would say, safely, probably only 70% or 80% of that $100 million is detailed in terms of clear execution plans. That's where businesses normally are at this time in the year, but at the end of the day, I think it outlines the point that there's a bit of execution ahead of us. So I'm not concerned at all about whether or not the opportunity is there, but my interest and our -- is to make sure that we stay very, very focused on the execution. And yes, as you would expect, our internal plans that the teams have committed provide some conservatism.

Your next question comes from the line of Mike Halloran of Robert W. Baird. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: I just want to ask a couple of questions -- well, a question on the dewatering side of the platform. If you strip out the mining side of that, what do the core trends look like there? And then also, specifically, how is the rental component of that business tracking here?

Yes, Mike, it's -- if you pull out mining, I would characterize it as improving. We certainly, coming out of the 2011, 2012 timeframe, the natural gas frac-ing bubble that essentially created a bit of a distortion there, I'd say we're returning back to more normal patterns. We've seen a little bit of an uptick here and there from construction. Public utility seems like it's relatively stable. At this stage, the only area we've seen any downward movement in is primarily around the mining segment. So we're not anticipating dewatering accelerating at rates that we saw back in 2011. I think the nature of the frac-ing industry has changed in terms of the way they look for water services, and so we see a little bit more moderated growth trend there. But all the other indicators look promising at this stage. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: And then on the commercial construction side, maybe you could frame the commentary from the folks you're selling to here, what they're seeing when they're starting to stack a little inventory, as well as maybe, when you're looking through the year here, where is the incremental caution coming, from your perspective, on the timing of the recovery? And what are some of the things you're seeing out there?

Yes, so I think, one, the caution is we've seen this game play before. Two, I think when we look at the commercial market and where we're exposed in terms of the institutional, I mean, we sell into all the different markets, but institutional, we're a little bit more overweight to. We really haven't seen much move in terms of project orders. I think the channel is encouraged because they are seeing more design activity being done, more quotation activity being put into the marketplace, so they've obviously moved forward and taken a position on that. We are just being cautious, with a low single-digit growth expectation, that, that market could be a little bit slower to ramp up. And certainly, some of the trends coming out at the end of 2013, with the Architectural Billing Index coming down a couple of months in a row, and just some of the external commentary says that there is still enough apprehension around the market that counting on it being at a high rate of growth is probably not the right thing to do right now.

Your next question comes from the line of Matt Summerville of KeyBanc.

A couple of questions. First, can you just provide a little more specificity around the $40 million to $50 million in restructuring spend for '14? In the slides, you talked about, over the course of '12 and '13, there was a rift of about 8%. You closed 24 facilities. What's sort of this next wave entail, if you will, and will this be the conclusion of it in '14?

Yes, so I think our expectation, Matt, is that we will substantially get through the majority of the work. I think if I look back a couple of years ago, we were expecting a market that was going to grow 4% to 6%, and it's actually contracted. And so we've been very aggressive about going in and really surgically addressing the cost structure. I think in light of the performance over the past couple of years and the new structure that we put in place in the latter part of 2013, we feel like these actions, which gets to that total workforce reduction, are going to essentially conclude the majority of what we would need to do. Now we're always going to be looking for opportunities to go in and surgically get at the cost base, but in terms of the large programs, I definitely think this is going to be some of the bigger areas that we'll go.

And then just a follow-up question. If you look at the free cash flow improvement, from roughly $200 million to upwards of $310 million to $345 million, I think, how much of that change is coming from working capital? And I guess working capital as a percent of sales is around 24%. What should that be longer term?

Yes, I mean, I think longer term, we would expect to have that, in terms of what the industry operates at, probably in the 22% range. And if you look 2 or 3 years ago, that's where we essentially were. It's been this -- really over the past year or so that we've seen the working capital bubble up a bit. So there's going to be a substantial portion of the improvement in 2014 that comes from that. We're talking about taking our working capital from just over 24% down to about 23%, and that equates for basically about $40 million, about 1 turn of revenue. We've got pretty detailed plans behind what we're doing there. Steve and I are engaging more deeply with the businesses on a monthly and quarterly basis. But we've got plans identified around the inventory side and the receivables side, and we're going after the payables side in terms of getting more robust around our supplier payment term management process. Long term, we'd like to see working capital get down into the high teens. We think that's the hallmark of a very well-run company, but we clearly have a ways to go. So right now, our sights are setting on reversing the trajectory which we saw in the fourth quarter. We saw ourselves get back down to levels that we had earlier in the year on improving revenue trends, which was a good thing. And we're going to continue to drive that into 2014.

Your next question comes from the line of Nathan Jones of Stifel. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Just starting off on the lean and sourcing side of that, you've been taking about $100 million out of that a year. You're talking about, I think, approaching that in a little different and a little more aggressive way. Can you continue to take $100 million of cost out through lean and sourcing in the medium to long term? Or have we picked some of the low-hanging fruit there and that number needs to come down over time?

Yes, it needs -- and obviously, the answer of that is yes. We're not at any asymptotic point on lean. The better you get, the better you can get. So clearly, there may be a point of diminishing returns at some point, but not for the near future. When you think about it, if you look at our material savings as a percent of spend, you look at our total net productivity and you look at our SG&A and even working capital, as Mike mentioned, we've got opportunity. So I would say I would love to entertain that question a couple of years from now, but for right now, I don't think that there's a limit on our opportunity. There's obviously limits on your organizational capacity to execute in a given amount of time, but if you take a look at the operating metrics we're turning in for full year '14, we've certainly got opportunity for further improvement. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: I think you partially addressed it there. You're talking about a new targeted global sourcing organization. How is the talent level there? Are you able to fill everything you need internally there, or do you need to bring in some talent to round that out?

It's a bit of both. We've got some awfully good talent in our sourcing organization throughout the world. We will probably bring in some selective people. We've recently hired a gentleman that comes out of Mercedes-Benz and a couple of other folks that come out of the automotive industry as well. So we'll probably be selectively looking for some help on the outside. We've got a lot to work with. The biggest challenge we have is to integrate our sourcing activities so that we can take advantage of commodity purchasing and long-term contracting across the diversity of our businesses. We know the opportunity is there. We do some of that today, of course, so we've got some selected sourcing and commodity groups. We just believe we can do so much more. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: That's helpful. And my last question, 3% into R&D, which is, I guess, percentage-wise, a fair decline from 2013. Was 2013 overspent on growth investments, R&D investments, and 2014 is more rightsizing it? Or are you cutting back just in soft markets, and you would intend to grow that? And kind of what's the right level, long term, for the company?

Yes, we're actually spending a little bit more on a dollar basis in 2014, call it $115 million versus just over $100 million in 2013. So I think more than anything, it's more a factor of the revenue growth dampening the percentage. Our plan is to continue to invest, and we're obviously doing a lot more to prioritize the investment. The area that you do see our investment coming down is around CapEx, coming down to about 3% of revenue, and that is... Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Sorry, it was CapEx that I meant.

Yes, so for CapEx, CapEx is coming down. It really reflects some of the onetime items that we had to deal with in 2012 and 2013 coming out as a new company, primarily getting into a new headquarters per the spin agreement, as well as disconnecting from several systems that we were leveraging from ITT. I feel like we're through that. 3% still feels a little high to me. We're still doing a lot around our dewatering rental bank globally. And so over the next year or 2, I would anticipate it continuing to come down a bit. We're still at a positive reinvestment ratio, so we're still in a positive trajectory from that standpoint.

Your next question comes from the line of Brian Konigsberg of Vertical Research.

A couple of questions, maybe just starting with Q1 guidance. I know, Mike, you want to stay away from this a little bit. But just thinking about kind of modest organic growth in Q1, I mean, you kind of highlighted there were some tough comps from Superstorm Sandy and dewatering, and there's an extra -- or 1 less day of selling. But at the same time, I mean, you're looking at a negative comparison. I mean, you were down over 7% in Q1 of '13, and obviously, you did a good job exiting the year at fairly decent rates. I'm just curious, maybe there's some other items that you could just kind of provide color on that kind of support the notion that only 1% to 3% is where it should be.

You bet. Yes, I made some comments in my prepared remarks about our ending backlog being up 16% versus where we were last year, which is certainly encouraging from a full year perspective. One stat that I didn't provide was our Q1 shippable backlog. It's essentially flat to where we were last year. And I think when you think about the overall revenue guidance, it is a bit conservative given the volatility we've seen in the market, and I think you see that playing out from quarter-to-quarter. Our January performance has essentially lined up consistent with that in terms of that flat year-over-year performance, although we are comparing against last year, which was down substantially. The initial indications for what we anticipate seeing in the first quarter are pretty consistent with some of the comments that I had made. I think it's important to also think about price as a headwind as we go into the first quarter relative to where we were in the first quarter of 2013. Despite all that, we do anticipate seeing our margins expand, and I think in my prepared remarks, I talked about margins being up around 100 basis points.

Got it. And then just secondly, just thinking about the full year guidance, I mean, if I remove the expected savings from restructuring that you highlighted, the $35 million -- you talked about higher R&D. I think on prices, you're saying about a 50 basis point headwind. Productivity is offsetting inflation. If I kind of just dial down to what your core -- what you're suggesting for core volume, you're looking at conversion of well over -- or easily over 40%. Actually, I mean, if I look at Q1, it looks like the conversion on your volumes were probably less, maybe around the 10% area, if I exclude some of the investments and the European headquarter investments as well. I'm just curious, why is the incremental on the core volume -- maybe can you comment on maybe why Q4 was fairly weak and why, 2014, the core volume conversions get that much better?

Yes. So I guess you had -- there was a lot in there, so let me kind of step back. Let me talk about 2014 versus '13, and then I'll come back. And I think when you strip out the restructuring and you get to the core underlying incrementals that we're anticipating in 2014, so the core operations of the business, it's around 30%, which is quite strong given the fact that we're actually facing what we anticipate is negative price contribution. And again, a lot of that has to do with the mix. We're anticipating a higher growth rate coming out of our Water Infrastructure business, and we're building off of the cost base that we've worked on over the past couple of years, so we get that nice volume leverage off of the fixed cost position that we're in. If you look at our fourth quarter, we were about 20% on the face from an incremental standpoint. There were a couple of items that we had to contend with within the quarter. They were small, but when you add them in, they make a difference. We had some cost issues on a project coming out of India that was worth a couple of million dollars. And then coming out of Europe, we had low-margin project shipments in the fourth quarter that were overweight relative to what they typically are, and so that diluted the margins down. All in, we still had over 20% incremental, so we still feel pretty good about that, excluding restructuring and all the favorable benefits that we had built in the quarter.

Am I interpreting wrong, though? I mean, if I'm looking, for instance, at your Water Infrastructure, you're saying that the volume mix and other was a 50 basis point headwind, Euro headquarters was 30 basis point headwind and this whole investment was 10 basis points, so obviously, there's a 20 basis points relative headwind on your volume. So I mean, I guess that would suggest that your margin is probably less than 16.5% on that segment. Is that the wrong way to interpret it? I guess I just wanted to get a little clarity on how to read that.

Yes, no, like I said, there were 2 things that gave us a bit of a headwind. It's the additional cost in our India project, which shows up in Water Infrastructure, as well as the projects that shipped out of Europe at a low-margin rate, which again is Water Infrastructure. So I think that's what's contributing to the dynamic you're pointing out.

Our final question comes from the line of Joseph Giordano of Cowen.

Just maybe anecdotally, can you talk about how you see the size incrementally in the municipal budgets in U.S. and Europe '14 versus '13 and then how your margins tend to be levered to the size change year-on-year? Because, I mean, we talk here, your operating margins, you say 80 to 140 bps improvement. And the restructuring alone, it looks like, on a $4 billion revenue basis, somewhere around $90 million. So I just want to see how that relationship -- kind of how you see that playing out.

Yes, so I guess just backing up and talking about the muni market overall, we're not anticipating a significant change in the overall budgets. I think if we start to see that movement, it will more than likely occur in the middle of 2014. And given the long order lead nature of our business, it will typically result in something that's more favorable in 2014 -- 2015, I'm sorry. So there is a leverage component. And I would say, when you think about the margin performance between our segments, you've got to remember that Water Infrastructure, obviously, is heavily weighted to public utilities. Within Water Infrastructure, it's a tale of 2 different developed markets. You have the U.S., which goes through more distribution, and Europe, which goes through more of a direct channel. So you end up with a little bit different margin leverage equation when you look at it from that perspective. I think the other thing to take into consideration when you think about that basis point improvement year-over-year is price is a headwind. So we're flipping to a negative 50 basis point impact from pricing versus what we have historically seen, anywhere from 10 basis points this past year to as much as almost 200 basis points in years past. So we're offsetting that, as Steve mentioned earlier in the call, with aggressive cost actions, but some of that is getting diluted by the pricing pressure we're seeing in the market.

Do you think, if you start seeing some of that budgetary positivity towards the second half of the year, does that have -- would impacting that price dynamic?

It really depends. I think first of all, it's probably not going to have an overly dramatic effect on our business initially, meaning most of that would probably get booked as business that has anywhere from a 6-, 9- to 12-month lead time. Certainly, an improving market is going to help on the price side. As the capacity utilization starts to improve in the industry, the competitive dynamics take on a different shape, and so we should start to see pricing move in the right trajectory. But again, we've been conservative, assuming that we're not going to see that type of dynamic play out, and that's why we've essentially built in assuming that we're going to have price pressure through 2014.

Yes, okay. So let me just close the call out. We've gone a couple of minutes long here. I just want to thank all of you for your interest in the company and for your support as we transition from a challenging 2013 to what we believe is going to be a very, very solid and attractive 2014. We've got a good plan in place. We've got, more importantly, a very, very -- an excellent team that's going to execute it, but we have a lot of work ahead of us. So we'll be in touch throughout the season on this and looking forward to talking to you at our next earnings call. But in the meantime, we're going to have our heads down. We're going to stay busy on executing this plan and, hopefully, continue to drive the kind of performance that we know we're capable of. So I want to thank you all and wish you well. We'll talk to you next. Bye.

Thank you. This does conclude today's Xylem Fourth Quarter 2013 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.