Welcome to the Xylem's Third Quarter 2015 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. [Operator Instructions] I would now like to turn the call over to, Phil De Sousa, Vice President of Investor Relations.

Well, thank you, Paula and good morning everyone, and welcome to Xylem's third quarter 2015 earnings conference call. With me today are Chief Executive Officer, Patrick Decker; and Interim CFO, Shashank Patel. They will provide their perspective on Xylem's quarterly results and discuss the full-year outlook for 2015. Following our prepared remarks, we will address questions related to the information covered on the call. For those participating in the Q&A, I'll ask that you please keep to one question and a follow-up and then return to the queue so we will have enough time to ensure everyone the opportunity to ask a question. We anticipate that today's call will last approximately one 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. 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 the future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances and actual results or events could differ materially from those anticipated. Also note, 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 midnight of November 15. Please note, the replay number is 1800-585-8367 and the conference ID is 331-34966 and web pin ID is 9510. 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 and I'll turn the call over to our CEO, Patrick Decker.

Thanks, Phil and good morning, everyone. Thank you for joining us on the call. Today we reported another solid quarter for Xylem, with better than expected growth at both the top and bottom lines. We are also reaffirming our full year organic revenue growth expectations of 1% to 2% as well as our full year earnings expectations of $1.82 to $1.87 per share. I'm pleased with our teams overall executions and we're continuing to build our capabilities. We are in the early stages of executing against the long-term objectives that we laid out at Investor Day last month and I look forward to updating you on our progress. Before I get into the business highlights for the quarter. Let me start with some color commentary on our markets. As I've discussed previously, Xylem is well positioned in key end markets that have solid longer term growth profiles. Well some concerns do exists in the broader industrial end market and certain sectors of our emerging markets. I'm quite encouraged by the fundamentals and underlying trends impacting our business. For example, we continue to see positive signs of steady recovery in the Public Utility market, which constitutes roughly one-third of our global business. We are seeing improvement in the Break/Fix side of the market. This is an area that has been suppressed for the last few years as municipalities have deferred needed repairs and upgrades. But eventually, this equipment either breakdowns or reaches the end of its operational life and must be addressed. In addition, project quotation and our longer cycle treatment business which we view as the bellwether for the more capital intensive investment cycle of the public utility market remains strong. In fact, our treatment bid pipeline has grown 17% versus a year ago. This is a positive leading indicator…

Thanks, Patrick. Please turn to Slide 6. We generated revenues of $902 million, down $61 million from the prior year. The year-over-year decline reflects the anticipated foreign exchange translation headwind driven by a stronger US Dollar. Excluding this impact organic revenue increased 2% slightly above our expectations. We saw growth across our key end markets, the strongest being public utility which was up 5% driven by an uptick in municipal spending. Additionally, we generated growth in industrial up 1%, residential up 6% and commercial up 1%. This growth was partially offset by a decline in our smallest end market agriculture which was down 7%. From a regional perspective, we again saw the strongest performance coming from emerging markets which grew 9%. We continue to experience growth in Western Europe and Australia during the quarter, but we also felt the unfavorable impact from a weak oil and gas market, which drove declines in Canada and the US. Operating margins was 13.7% flat year-over-year excluding the negative impact of foreign exchange translation. Global procurement, lean initiatives and restructuring savings reduced cost by $29 million in the quarter driving 320 basis points of margin expansion. Offsetting these reductions were material, labor and overhead cost inflation. Unfavorable mix driven by lower dewatering, rental and sales and lower margin project deliveries and to a lesser extent foreign exchange transaction headwinds. Overall, pricing was neutral for the quarter. At the bottom line earnings per share declined by $0.04 to $0.49. However, excluding the foreign exchange translation headwind of $0.06, we grew EPS by 4%. Our tax rate was generally in line with our expectations. Our share repurchases during the quarter were executed opportunistically in late August and early September and therefore had a relatively insignificant impact to our share count expectation. Now, let me cover each…

Thanks, Shashank. To wrap up, I'd again highlight that we delivered another solid quarter. We continue to see signs of an improving public utility market and post above average organic growth overall, overcoming industrial weakness. We still have a lot of work ahead of us to close out the year, as our teams delivered a very strong fourth quarter last year. Looking ahead, we know our year-over-year comparison will ease starting in the second quarter of 2016, as we finally lapped the substantial declines in our dewatering rental business driven by the oil and gas sector. In addition, we are committed to maintaining focus on driving productivity and cost discipline, which will enable us to continue to deliver a stronger bottom line performance. We are also focused on executing our capital deployment strategy. Returning capital via dividends and opportunistic share repurchases and cultivating a solid pipeline of M&A targets. Lastly, I'm encouraged by the progress we've made this year and pleased that we continue to be on track to deliver on our full year commitments. And now operator, we can begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Nathan Jones of Stifel.

I wonder, if we could just, with trying to get a little bit more color on Slide 6 the volume price mix at minus 50 basis points. I would assume that with plus 2% organic growth, volume was a very slight tailwind and the mix just from dewatering, I would think was probably at least 100 basis points of headwinds. So I wanted to try and get some idea on how price is behaving overall for the company there.

Hi, Nathan. This is Shashank, so I'll take that question. From a price realization standpoint, we're neutral overall. So what we've experienced in the second quarter. We saw third quarter, so there's pockets of price pressure out there. But overall, it was pretty much flat in the third quarter and that's our expectation in the fourth quarter. The mix dynamic you talked about was primarily coming from the dewatering side, where the oil and gas headwinds were stronger than we had forecasted, so that impacted the mix part of the equation.

That's there. I guess price was neutral and I guess, it sounds like it has been for the whole year.

Yes, correct.

And you did say, in your prepared remarks Patrick, that you're expecting some modest general industrial growth going forward. I think that's probably better than the general industrial economy outlook. Can you talk about what's giving you confidence that you're going to share growth there? Perhaps what the different market exposures are that help you out?

Sure I think, first of all it's our geographic exposure that helps in that regard as well. So again, there is some of the emerging markets that factors into that. But it's also, when you look at the nature of our industrial exposure, it much less weighted to the energy sector and much more to broad based general industrial and again, we do - we just continue to see signs of strength that's there. If you look at where we are in the quarter industrial growth excluding oil and gas was up about 2.5% and that's roughly what we're continued to expect through the balance of the year.

Okay, thanks. I'll jump back in the queue.

Your next question comes from Scott Davis of Barclays.

Trying to get a sense of your M&A pipeline. Now it's your first deal that we've seen and quite some time and I'm trying to get a sense of this as a first of and many and a flurry, it's relatively small transaction but is there a stuff that's a little bit larger in your pipeline.

Sure, thanks Scott. There certainly are acquisitions of larger size in the pipeline. We are actively in discussion with a number of bolt-on targets kind of smaller tuck-ins. Certainly larger than the ones that we announced here, but we also continue to cultivate some larger targets that are out there. And so, we really highlight this one not so much because of the size, I wouldn't consider this to be typical of the sizes we go after, with really to demonstrate as much that the pause is over. And two, the fact that as I mentioned in Investor Day. I really do see M&A serving sometimes as a proxy for R&D and that really is largely what this acquisition is pointing to.

Okay, great and then. From a strange question, but trying to get a sense like Break/Fix infrastructure is old we all know that, but is Break/Fix the type of thing. I mean, you mentioned it's been weak for a last few years. I mean, I would assume that just based on the installed base you have and infrastructure that you have existing it's pretty old that Break/Fix would be fairly decent growth through the cycle. I mean, how do you think about what that should be? I mean, have you drawn out models or how to sense I guess of Break/Fix specifically should be 5% grower or is it something that could be a little bit better than that because there's pent-up demand.

Sure, I'll take that one Scott. So I would say, you're absolutely right. So we've got a very large installed base especially on the Public Utility side and as a result of that. Even throughout the cycle, we would normally see low-to-mid single digits in terms of steady growth. I think what we're saying here is, we're seeing kind of the upper end of that and would expect that could probably be growing even faster as we go forward here because as you've heard it say before, it really is a trade-off for these infrastructure owners. You can only kick the can down the road so long before it's going to catch up with and you're going to be forced to deal with the Break/Fix aspect of things. Now obviously that could moderate and balance towards Greenfield infrastructure investment as well. So it's always the balance in the equation, but we would expect to continue to see probably the upper end of that mid single-digit growth in Break/Fix.

That's really helpful. Okay, I'll pass it on, thanks good luck, guys. Thank you.

Your next question comes from Deane Dray of RBC Capital Markets.

I was hoping you could expand on the data point you gave regarding the bid pipeline being up 17%. Just remind us about the methodology, the parameters, how you're tracking that win rates and how it converts to backlog?

Sure. So, our teams have a very, especially in the project side have very good visibility to all of the active projects that are out there within the EPC community as well as the property owners themselves. And certainly as, we've continue to build out the utilization of Salesforce.com. We've got even more visibility to the pipeline and what the conversion rates are and we have seen some improvement in our win rate as well, as an increase just in the level of quoting activity. And so, pretty rigorous pipeline review that we do on a regular basis. So as I mentioned earlier, Deane in my prepared remarks. We're not really looking at that pipeline so much as a view towards what our treatment business would be per se because as you know the project side is still a relatively small portion of our overall revenue. It's just historically been a leading indicator as to demand that's coming for our broader water infrastructure business overall.

And just to remind us, that mix between the Break/Fix and projects. Historically it's been around 70-30 is that still the case?

Yes, I'd say that's a case right now. It's probably shifting a bit more towards maybe 75-25.

Okay and with 75 on the Break/Fix just, so we're clear.

That's correct.

Okay and then, hoping you can expand on China. Lots of focus in terms of, what their economy is doing, but we're seeing real differences across the multi-industry sector, that's on China growth depending on their vertical exposures and obviously you're on the favorable side of this. So talk about your mix in China pipeline and who you're competing with for these projects. How much of it is domestic Chinese players versus other western players?

Sure. So I'll take various aspects of the gains [ph] and if I don't address each of your questions. You're just, remind me again of some elements of it. So we saw again in the third quarter continued robust growth as you pointed out and that really is driven by our over waiting towards public utilities and the municipal side. And that really is being driven by largely the government mandate there around pollution control and water preservation. So that's the overall macro driver that's there. We obviously have seen a slowdown in the commercial building sector. Although, it was still growth for us in the quarter and we expect that to continue to grow, albeit at a slower pace. In terms of the - who we're competing against there. It is a combination of global players, but also local players. Obviously part of what we're doing in terms of localizing our product design in China and looking at ways to augment what we call our Tier 1 offering with a Tier 2 offering there as well, is to protect ourselves on the flank in terms of local competition. We're optimistic about the opportunities that we have there to be able to even grow that kind of Tier 2 segment, while still preserving margins in that business because of the features and benefits that we can decouple and deliver that at a better value for customers more in the Tier 2, Tier 3 cities that can't really afford [indiscernible] any of the larger pumping stations that these large cities do.

And just to, this is Shashank just to add to that. So on the - as far as the international players, obviously the [indiscernible] are big one, we compete directly head-on against. And on that side, that is premium value segment of the market and that's a lot of way, we participate today and as Patrick said on the infrastructure side. The investment continues there, so we've continued to see strength there. As we've all heard, there's been a slowdown on the construction side and that's where we've seen the slowdown in commercial building services, but there again with the localized product. Where we're going to be looking at competing more on the, let's call it the value segment. Which is where you see a lot of the local players.

Great, that's real helpful. Thank you.

Your next question comes from Brian Konigsberg of Vertical Research.

I just wanted to touch on the fourth quarter guidance. So just looking at the sequential change from Q3 to Q4, you had a pretty big uptick or a decent uptick on sales, which is a bit higher than what you potentially see and then separately just on the margin, you were down you [indiscernible] basis points in Q3 year-over-year, but you're expecting that to take a pretty big step up into Q4, I know there was some mix you said on the Applied Water. But you also noted, the oil headwind being a mix negative, which I assume will continue in the water infrastructure in Q4. So can you address me the revenue and margin, how you see the progression sequentially?

Yes, let me take that one. From a revenue perspective, first point is, we do have an extra day versus the prior year last year, that's what the bottom 1% as far as organic growth. If you recall, last year we had a very tough compare, we were up about 6% in the fourth quarter but when you look at the normalized growth it's more like 3% to 5% in Q4 last year. Since we equate that and we look at the guidance this year, it's about 1% to 3% organic growth over the fourth quarter last year. Which with the extra day and normalizing last year it's kind of inline and it's supported by the strong order activity we've seen. On the margin question, clearly in the third quarter we had margin headwind not only from the softness in the - from the oil and gas and dewatering, but also the points I noted especially on the AWS side, where we had the Italian tax true up, which was a one-time true up as well as FX transaction and those were primarily driven by the strength in the [technical difficulty]. But when we take a look at that headwind going away, as well as the extra volume leverage we get in the fourth quarter that's how we anticipate the extra margin expansion Q3 to Q4.

And Brian, I would just, this is Patrick. I would just add a couple of things. On the margin side, we also as is normally the case, our global procurement savings accelerate over the course of the year. So we'll have some additional procurement savings in Q4 as well. On the revenue side, within that range, obviously we talked about there's always risk of project delays at the end of the quarter shifting from one to the next. The way I would handicap it for you all, it would be within the guidance range that we gave you. I'd kind of go right down in the middle of fair way in terms of what that revenue guide would be and that would help mitigate any, of that risk that maybe out there. So just to help you guys kind of do your models, I'd say right down the middle of fairway on the revenue guide.

That's on the water infrastructure side that you noted, possibly.

That's overall. Yes, that's actually - it's mainly on the water infrastructure side that you would see some of the bigger project, right.

Okay great and then just maybe comment a little bit more on the oil and gas. So you're lapping the steep decline starting Q2 of next year. But are you starting to see stability at low rates or are you - is it still falling at a pretty substantial degree even sequentially.

Yes, so it's a good question, Brian. Just to maybe help size it up for everyone. So again the oil and gas exposure for us for the whole company, is roughly less than 5% of our 2014 revenue. It's actually going to be down around 3% to 4% of our 2015 revenue given the sharp drop that we've seen. That exposure really has begun to stabilize and we got 44 branches in the US, seven which are the ones that are really tied to fracking and they're the ones that are really been hit the hardest. The team's done a lot of great work in managing the cost side there, mothballing in some locations, moving equipment to other international markets to open up opportunities there. And so, we really don't see another leg down from a dewatering standpoint and oil and gas. Given that our exposure is really now being contained. That's why we're making the commentary around getting through Q4 and Q1 and then we finally lap that tough compare on that, small piece of our revenue but disproportionately profitable.

And just to add to that, the 5% that Patrick talked about as far as the percentage of total revenues. We expect that to be down 50%, so that function change we saw with the oil and gas.

Okay, that's helpful. Thank you.

Your next question comes from Ryan Connors of Boenning & Scattergood.

I wanted to revisit this topic of mix in Public Utility and think about in a little more strategically, not in the fourth quarter or even 2016, but as the cycle kind of plays out in theory. You've got a pretty good, divergence in the mix there. Your project business is more subject to bid and there, I would assume lower margin, but yes the repair and replaces almost had some aftermarket type elements and higher margins. So as we move years into this upcycle. Where do you see that mix evolving and where do you see the impact on the margin being?

Yes, certainly there would be some shift towards a larger project mix. But it's certainly over the timeframe that we talked about at Investor Day kind of looking at over the next three years to five years. I certainly wouldn't expect that to shift dramatically. There's probably, if you look at it historically that might go up to maybe a third of our overall revenue that would be on the project side versus where we've been tracking over the course of the last few years.

The other point - the other point to notice as we discussed during Investor Day. One of the big initiatives on the innovation technology side will be to work around VOD [ph] which is really taking cost out of the material component of our product. So obviously, you talked about long-term, that's the big long-term drive over the next five years and that has an impact directly on the gross margin line and then some of other business simplification work we'll be doing, obviously will improve gross margins as well.

I mean to be specific, Ryan on just to give you a feel and maybe to take it back to Investor Day in terms of the targets that we laid out there for you all, that we're marching towards. Historically, our incremental margins have been around that 35% give or take. What we factored into, our long-term outlook was through a combination of some slight uptick in project mix as well as faster growth rates in emerging markets that, that long-term incremental margin that we assumed might be more around that 30%, maybe little slightly better than that, but it's you know probably down about 5 points from historical average and we got that already modeled in, that obviously derived, are thinking also been around simplification, VOD [ph] some of the other things we're doing to offset that to really driver the bottom line expansion, that we committed to.

Okay, great and then my second one had to do with sort of the new product pipeline. Obviously, a strategic focus on innovation that was a big theme at the Analyst Day. So can you provide any real-time color on what's hitting the market for you and whether there's anything that will move the needle as a pricing or volume standpoint over the next say 12 months.

Ryan, its Phil. We just have a little bit of a technical difficulty here. You just flipped over to a backup line, can you just repeat the question for us, just one more time from the beginning.

Sure, thing. So yes, just asking about the new product pipeline, that's something that you focused on quite a bit innovation at the Analyst Day and wondering, whether you can provide any update on kind of the potential for new product introductions to drive pricing over the next 12 months or so.

Sure. Ryan, this is Patrick. So we feel very good. First of all, can you hear me?

I can.

Okay, great. So I feel very encouraged and very good about what's happening in our innovation funnel and pipeline. The areas that we highlighted at Investor Day focused on elements such as energy efficiency. Obviously as the Internet of Things make its way to the water segment. Our whole monitoring and control platform that we're building here, those were things that we are already bringing the market and we have a number of introductions that are scheduled here through the end of this year and end of 2016 and onwards. We do feel and see that does give us a pricing opportunity, as we increase the value, we're giving to our customers and as we've seen and parts of our business where we really activated that pipeline. The growth rate, as you would expect in that part of the business, where we're actually introducing new products has grown function over the rest of our base business and has come at more favorable margin. But we'll have more in our coming earnings call. We'll be announcing some of the new products that we've actually launched.

Great, well thanks for your time.

Your next question comes from Brent Thielman of D.A. Davidson.

Appreciate the comments on the pipeline and backlog of public utility work. I'm curious, regionally has the mix of that pipeline shifted more toward emerging markets compared to recent years or is it kind of relatively unchanged between developed and emerging?

I would say, right now there is not been a big shift between the two obviously. There are some large projects that you've heard us announce that we booked here, I'd say over the course of the last year. so whether that be in parts of Asia, whether that be in Latin America or the Middle East and we certainly had a number of those high profile big project wins. But in terms of what we see in terms of bidding pipelines as well as other bookings. We are seeing again emerging strength in the US that we discussed again thus far this year. Secondly, we would expect more so in 2016 and 2017 not sure if you're familiar with the UK AMP Cycle, which is a five-year investment cycle, really targeting the water sector by the UK government. We are now in that first year, there's typically a bell curve that's associated with that five-year timeframe and so it's typically year two and year three, which is next year and the following that you will also hear us talking about ramp up in project and order activity there in the UK, which is not our largest market, but it certainly moved the needle in terms of our overall order activity.

Okay, great and then, I think I'm going to step back as you're kind of building momentum in emerging markets, where you know these market shares are kind of still up for grab. How do you assume the competitive environment evolving here lately because you look around many of your global peers are kind of suffering into pressures in oil and gas or other industrial markets. And I'm wondering if that's kind of accelerating some of their interest in pursuing business on the utility side, where clearly things look better.

Certainly there is heightened level of interest in these emerging markets especially on the public utility side. I would say that, where we have and I certainly never take that for granted but where I think we really do have a distinct advantage is, if you take an example like China. We've already got a very well established footprint there, we got great customer relationship, we've been there for a number of years. To our customers there, we really feel like a local company. Obviously, although we're run as a professional global organization. The Xylem name is well-known there. We're well penetrated and I really think that we benefit from the integration of our portfolio. And so, often times it maybe that our Flygt brand is example of the calling card. Based upon the great relationship we have there. But that now is pulling through in many cases, our treatment and our Analytics opportunities there in the country as well. The same is happening in India, as well as in the Middle East and certainly in South America as well.

And I think to just to add to that, is clearly the competition for, all companies. They're focusing towards more of the emerging markets because that's where the growth is and that's how we're addressing that, is with the local presence. So the investment in Middle East, South Africa and Dubai that's one way to address it. But then a greater way is for localizing the product content and getting the lower cost into our material [ph] so we can be more competitive in those markets as well.

Okay, thank you.

Your next question comes from Robert Barry of Susquehanna.

Hi [indiscernible] I'm on the call for Rob. So first question on, if you can comment on the outlook going forward for that Canada business given the impact of lower oil price on the broader Canadian economy. So how would you say the business going forward?

Yes, I would say fairly simply. We've seen some level of stabilization, in terms of the exposure that we've got there in Canada. Obviously we've benefited this last quarter from some growth there and some project activity. But again I'd say for us is, it's pretty stable at this point.

Okay that's helpful and then, if you can maybe breakout the 5% growth in public utility in 3Q. To what extent that was driven by your share gain versus the end market improvement?

Yes, I will say out of that 5%, I mean it's tough to say that, because share gain or not but I think we're roughly speaking probably 30% to 40% on that will probably be share gain and the balance is just the overall market is improving.

Okay, very helpful. Thank you.

Your next question comes from Nick Prendergast of BB&T.

I just had a question on your corporate and other expense. When I look at your EBIT calculation, you give the two segments and then you give a consolidated number and then obviously the delta is that corporate expenses. Anyway, those significantly lower than we're expecting in the quarter. Is there anything going on there specifically?

Well so and you're right, corporate expense was lighter [ph] in the quarter and what we did, is we aggressively managed discretionary cost in order to mitigate some near-term margin headwinds because we saw that in the third quarter especially with the volatility, with China's devaluation and the turmoil out there, a lot of in emerging markets, but there was collateral damage. So we aggressively managed the project type cost that we have in corporate. So and that's why we've got a lower cost in Q3. But the more typical run rate that we see is in the $11 million to $13 million range for each quarter.

Okay that was very helpful and then finally on your share repurchases. In your guidance you said that reflects the repurchase activity that you had in Q3, does that imply that you're not looking to repurchase anymore in Q4?

No, I mean not, we're not implying that. I think the - we'll continue to be opportunistic in terms of share repurchase. We clearly have the capacity with the authorization that we already have there as well as our balance sheet. We've got the capacity here to do both share repurchase as well as accelerated M&A activity. So I wouldn't read anything into the comments as it relates to Q4.

Okay, thank you very much.

Your next question comes from David Rose of Wedbush Securities

I have a couple follow-up questions and just to dig a little bit deeper into the order rates. I mean this is sequentially continue to move down or versus upward and I know you talk about the funnel of RFP's being up 17%, but help us in kind of reconcile the direction. I can understand maybe one quarter it's a little bit lumpy, but again this is a third quarter, where you're a little bit soft and then just think about the timing. If you're going to articulate the timing for us, how we should think about some of those projects going into at the end of 2017 or end of 2016 rather. What do you need to see in terms of RFPs coming through or orders coming through, in order to see growth in 2016?

Yes, I would say that I wouldn't read too much into the last couple of quarters or so of the order moving. I really would focus more on what's happening to our backlog. They're shippable in 2016 and beyond. We've had in any given quarter there are a number of projects in any given year and we try to kind of call that out for you guys in terms of what's in there and I realize it maybe choppy overtime. But as I just kind of look ahead to 2016 and beyond, certainly based on what we're seeing here in terms of our public utility strength again the modest strength that we in industrial and certainly the strength in commercial building. I think you should see kind of continued pattern in terms of organic revenue growth here through the first quarter and as I mentioned earlier, when you get into Q2 when we pass this difficult dewatering compare, then I think you begin to see a further acceleration of our top line. So not quite so dependent upon the long-term bookings and projects. Really being driven as much by the short cycle nature of our business and what we're seeing in the trend line there.

And just another note, when we look at the third quarter last year, this is the tough compared note that we had in the prepared remarks. Last year, Q3 were up 10%, so it was a very tough compare. It was our strongest quarter from an order booking standpoint in 2014.

I appreciate the color and then it's helpful. And maybe, we can kind of do the same thing, as we think about the margins and I know Ryan touched upon sort of the mix shift to longer term, but as we think kind of think about, even the mix shift go into 2016, you have a number of puts and takes and as we look at, maybe you talk about total care in terms of your service component adding to margins and maybe even the mix shift in terms of treatment and Analytics, helping the margin story. Can you provide a maybe a little bit more color about what can help margins in 2016?

Sure. I'll hold back from giving any kind of perceived guidance for 2016. We'll certainly cover that in our February call. But in terms of the trend lines that are there. When you think about the impact this year of the unfavorable mix of dewatering, which is a small - the oil and gas piece of our revenue is small, but it was disproportionately profitable. So when you think about kind of getting through Q4 and Q1, you then should expect to see a return to kind of our normal incremental margins that we'd have in the past that kind of 35% range. In terms of the things that help that obviously we'd lapping the dewatering compare. Secondly, you would get the normalized incremental margins on volume fall through. Obviously. We're going to continue to be driving lean and procurement and simplification opportunities, as we talked about in Investor Day. There obviously will be some reinvestment for growth as well. But we'll outline at that for you in the February call.

Okay and that's helpful. Thank you.

Your next question comes from Joe Giordano of Cowen.

I just wanted to ask about, the systems integration on the margin side. I know that's a longer term project, but it's a real opportunity for you guys, regardless of kind of the markets you're in, so what are you kind of seeing there in terms of, I guess it could be in the front end and the back end? I know the front end you're looking at the sales side in terms of CRM as well.

Sure, yes. We're pleased with the progress that the teams' have made there. Obviously it’s' a lot of work, it's more than just putting systems energy well in there, Joe. It's a cultural change and its training and education and getting people accustomed with the tools, with the adoption rate on the Salesforce.com or CRM is very impressive here in North America, which is where we've largely focused our efforts. We're now obviously doing in other countries as well. We're doing a lot of work right now on the project quote configurator [ph] software that we got to make that easier for our customers and our sales teams to work with and so we're in the middle of that implementation as well. But I certainly echo your comments that's going to be in my view, a significant competitive advantage for us. We're early stage in that. It is a multi-year implementation that we're focused on. The other piece that you alluded to was the back end and that was also a big piece of our simplification game plan that we laid out at Investor Day and we already have some level of shared services implementation in North America. We're prioritizing Europe next and we are very advanced in the planning phase and moving into execution on that.

Great. Thanks for the color there. I had to hate to ask you questions on oil and gas for you guys because I know how small it is, piece of the overall pie. If we're - I'm hearing people talk about spending in North America being down potentially another incremental 20% next year. I know your business took a major hit this year like kind of an immediate hit as spending drops. So now if that was to happen next year again on the E&P side. How do you think your business would fair relative?

Yes and I think, that if you look at the direct exposure that we have in oil and gas which by the end of this year would be somewhere between 3% to 4 of our total revenue and it is really isolated largely to a certain number of branches in dewatering and to some extent our Applied Water business. You know I wouldn't suggest we're completely into it, but I think it's a manageable kind of impact for us. And so we keep a close eye to it, but a number of these locations. We're about as close to mothball as you can get. And we've redeployed the pumps to other markets and so I think the team's done a great job in sheltering us from another leg down in that area. But we certainly keep a close eye on it.

You know that's kind of what I was thinking and just last from me. I just want to touch on the buyback. It's the most active quarter in the company's history. Do you know what you have left on the authorization by wondering from a piece perspective? Should we start thinking this is more representative of a more average rate?

I wouldn't read anything into it. I mean again we're going to be opportunistic. Like I said before, we have the capacity to do both that as well as acquisitions and if we think it's smart to do so, we'll continue to do so.

Great, appreciate the time. Thanks.

At this time, there are no further questions. I would now like to turn the call back over to Patrick Decker for any additional or closing remarks.

Great. Again, I want to thank you all for your continued interest in Xylem and thank you for joining the call today and we look forward to updating you on the fourth quarter as well as our 2016 guidance in early February. So between now and then, safe travels and happy holidays and we'll see you [indiscernible] soon.