Welcome to the Xylem First Quarter 2019 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open a few questions following the presentation [Operator Instructions]. Now, I would like to now turn the call over to Matt Latino, Senior Director of Investor Relations.

Thank you, Bridget. Good morning everyone and welcome to Xylem's first quarter earnings conference call. With me today are Chief Executive Officer, Patrick Decker and Chief Financial Officer, Mark Rajkowski. They will provide their perspective on Xylem's first quarter 2019 results. Following our prepared remarks, we will address questions related to the information covered on the call. I will ask that you please keep the one question and a follow-up and then return to the queue. As a reminder, this call and our company 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 June 2nd. Please note that the replay number is 800-585-8367, and the confirmation code is 2987515. Additionally, the call will be available for playback via the Investors section of our website under the heading Investor events. 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 a future. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the Company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances and actual events or results could differ materially from those anticipated. Please turn to Slide 3. We have provided you with a summary of our key performance metrics, including 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 4, and I will turn the call over to our CEO, Patrick Decker.

Thanks Matt, Good morning everyone, thanks for joining us to discuss our first quarter results. We continue to see strong top line growth and healthy demand in the first quarter but frankly we were disappointed with missing our guidance for margin and earnings. Lower margin performance was driven by the mix of products that we sold and operational factors that we should have identified and planned for, most notably in our sales and operations planning process. We take our commitments very seriously and we care deeply about doing what we say we are going to do as our track record has shown over the past five plus years and we have taken corrective actions to address these shortfalls. We are pleased with our continued growth momentum, remain very excited about our ongoing growth prospects and an achieving healthy margin expansion for the remainder of this year and well beyond. Now, let me review some of the other key details. We once again delivered solid organic revenue growth of 6% in the quarter. We saw gains across all of our end markets, highlighted by the continued mid single digit growth in our largest sector utilities. This continues to represent above market growth in a healthy market. From a geographical standpoint, the U.S. market produced strong revenue growth with an 11% increase year-over-year. This included double digit growth in utilities and at least mid single digit growth in our other end markets. The emerging markets continue to be healthy and build momentum as well up 12% overall with particularly, strong performance in Asia and Latin America. India and China saw strong gains once again. India increased 58% with growth in transport and treatment, as well as the beginning of our deployment of a large Sensus metrology project, China was up 14%. And…

Thanks Patrick. Please turn to Slide 5 and I will begin with our first quarter results. I am pleased with the continued market momentum we saw throughout the first quarter. Organic orders growth of 4% was in line with our expectations, very solid considering the tough comparison to last year's 10% growth. Revenues were up 6% in the quarter in at the high end of our revenue guidance. We had strong revenue growth across the majority of our geographic regions, led by the 12% growth in emerging markets and the 11% growth in the U.S. China continued its strong growth trend with revenues up 14% with growth across each segment. Western Europe declined 2%, which was in line with our forecast and driven by a tough comparison to last year's first quarter, where we had significant software sale in several large treatment project deliveries. Each of our end markets grew in the quarter with continued strength in utilities market up 6% and 12% growth in commercial building services, which benefited from strong price realization, better than expected market conditions, end products. Industrial and residential end markets both delivered solid growth of 4%. Adjusted operating margin for the quarter was 10.8%, down 30 basis points from the prior year. Cost reductions from our productivity programs in accelerating price realizations of 170 basis points where more than offset by inflation, growth investments and weaker sales mix. Part of the weaker mix of revenue was driven by lower than expected sales in a high margin test in service and aftermarket businesses in Europe. We also had lower than expected overhead cost absorption in our applied water and water infrastructure segments. This was driven by lower production levels during the quarter to better align inventory to our market demand to optimize working capital. As…

The view of our end markets for the full year remains largely unchanged from the guidance we provided on our last earnings call. While relapse some tougher year-over-year comparisons, the growth that we saw in the first quarter combined with healthy orders and backlog reinforces our confidence in our growth momentum for 2019. I will quickly run through some key points for each one of our end markets. In the utilities market, we still expect solid growth in the U.S. where we continue to see strong project backlog and a very healthy aftermarket business. Even with tough comparisons through the balance of the year, we still expect mid-single digit growth in the U.S. We are moderating our outlook for Europe slightly as we saw some softening from uncertainty in the UK. In the emerging markets, China and India continue to lead the way, regulation is expanding in both countries and adoption of our advanced treatment technology and other core infrastructure work is accelerating. We therefore, maintain mid single digit growth expectations in the overall utilities market. In industrial, we continue to expect low to mid single digit growth as we foresee moderation in the second half of the year. While mining and construction boosted first quarter growth, we do expect general slowing consistent with our last outlook. In commercial, we saw another quarter of strong growth, driven primarily by the activity in the US and China. We do expect that the market will moderate in the back half of the year and we will also face challenging comparisons. However, our performance in the first quarter and outlook based on order demand gives us confidence to raise the outlook for commercial for the full year slightly to mid-single digits. Our residential outlook remains at low-single digit growth. Signs of a flattening…

On Slide 12, we are providing the seasonal profile of our business, as well as highlights of our updated 2019 planning assumptions. We continue to expect 4% to 6% organic growth for 2019, which brings down by segment as follows. We expect 5% to 7% growth in Water Infrastructure, 3% to 5% growth in applied water systems and 4% to 6% growth in measurement and control solutions. We are now assuming a year rate 1.12, which was the average for the month of April and we have included that in our FX sensitivity table in the appendix. We are increasing our forecast for restructuring and realignment costs for the year to $60 million to $70 million. The increase relates to the actions Patrick covered earlier related to organization simplification. The increase in estimated restructuring charges will largely be recorded in the back half of this year with the majority of savings being realized in 2020. Our estimated tax rate for 2019 remains at 19.5%. Now moving to the second quarter. We expect total company growth in the range of 4% to 6%, led by continued strength in the U.S. municipal market, as well as broad-based growth in China and India. We expect second quarter adjusted operating margin to be in the range of 14.3% to 14.5%, representing 50 basis points to 70 basis points of expansion over the prior year. We expect continued strong margin expansion in both our water infrastructure and applied water system segments, driven by cost reductions, volume leverage and improved price realization. We expect margin expansion of about 20 to 60 basis points from our MCS segment, which reflects moderating impacts from the component supply mix challenges [Technical Difficulty]…

Ladies and gentlemen, please continue to hold till the conference is restarted. And you are live and you may resume.

Yes, so this is Patrick and sorry we have had some technical difficulties that I can assure you were not planned. So, we are going to go back to Slide 13. I realized that some of my comments may be redundant here, but it is important as we talk about this section of the call that you hear it in its entirety. A little over two years ago, we laid out our financial targets through 2020 at our Investor Day, we continue to make solid progress and are on track for the high end of our organic growth target of 4% to 6%, notably, having delivered 8% growth in 2018. Our adjusted EBITDA margin target is on track as well having finished last year at 19.5% and an outlook for this year between 20.3% and 20.6%. This is clearly indicative of the strong operational expansion and volume leverage from growth that we've seen, which also stripped out the noise from purchase accounting amortization. Our adjusted EPS is also tracking at the high end of our target of mid-teens growth as we delivered 20% growth last year and 18% growth year before. Our outlook for this year is at roughly 12% growth at the midpoint of our range. In the next year, adjusted operating margin. I realize there may be some questions about our ability to achieve our target in the 2020 time frame, while continuing to support our growth objectives. And while we have made significant progress, there are a couple of things have changed as we laid out those targets back in 2017. First, earlier this month we made the decision to delay the next phase of actions related to our global business services initiative. We decided to do this in order to optimize its implementation and minimize any…

[Operator Instructions] And our first question comes from Deane Dray with RBC Capital Markets.

Maybe we can start with the, the first quarter and the margin miss here and Patrick I apologize I missed like the first a minute or so of your opening remarks, but the next layer of detail when you talked about your lower factory absorption and demand planning decisions that said we need more help there and are seeing what actually went wrong oftentimes that's an ERP decision or just in the chain of linking the demand with the actual factory deployment and inventory commitments and so what went wrong and how the degree of confidence that it's fixed?

I'll speak first then, Mark, add some color here as well. So you have to be very clear what we're targeting here is, as you recall, we built up inventories at the end of December ahead of the expected tariff increases and some component shortages. So we came into the year, knowing we had higher inventory levels and you recall that actually had led to some of the bullet and free cash flow conversion last quarter. So we made the conscious decision to work down those inventories are in the factory. The disconnect was in terms of that getting translated by couple of factories into a financial forecast that we would have built into our guidance originally as we came out of the quarter. That's where the miss occurred and we've taken the actions now within our supply chain organization and the finance team at the factory level, make sure that disconnect was resolved and does not reoccur.

I want to add anything. And part of it is making sure we have the right folks involved in those conversations at the right levels. Also as we work through this beginning of April and the team working on to make sure that we've completely through where some of the gaps were so we make sure that does not happen again.

And can you size for us between those three factors, mix factory absorption. I understand the mix had to abandon that order pushout at AIA but size for us the mix of the 3 including FX?

In terms of the mix and it wasn't AIA, that was our analytics business or test business and also we saw softer than expected revenues in our aftermarket service business in Europe. And that impact in the quarter was roughly 25-30 basis points. And then on the absorption and just on this absorption point I want to make sure that you understand that investors. This is an isolated incident in a couple of our factories, it is across all of our factories and we do have our hands on it, but it did impact both AWS in Water Infrastructure by approximately, 45 to 50 basis points in the quarter.

And then the second question on the push-out of the margin target, the 17% to 18% by 2020. It sounds as though one of the tripping factors was this slower roll out in the global business services. So, yeah, what was its contribution expected to be, was it 100 basis points there and why was it not ready. So maybe start there?

We had, yes. So if we go back to Investor Day in 2017 and we laid out, the various drivers of the margin walk to that expansion target of that are 100 basis points was going to come from what we called broader business simplification of which part of that was global business services, which is all about the back office simplification, what we are talking about finance, IT, HR, work implementation etc. The other piece of that 100 basis points was be with broader organization simplification, which are the actions that we just announced here in the call today and foreshadowed back in the last earnings call. So those are the two big drivers. We are still going forward with both, but what we said I have said in the past that doing a global business services implementation. We have the experience in doing this and we understand the importance of getting it right and not letting it become a distraction or disrupt the front end of the business in terms of top line demand. We are in the midst of that implementation, we have learned some things in the first couple of phases of roll out that caused us early this month to say, we are not putting a hold on it. We simply spreading of the time frame to make sure that we do not rush and then we get it right, and that is the single biggest driver too why we are pushing out the margin target expectations beyond 2020. And then as you can also see, we have been making other investments behind this new AIA platform that was not in the original 2017 Investor Day discussion.

So maybe just a little bit of color in terms of where we're at. We had our initial wave implementations in January of this year in the U.S., so it's a meaningful part of our revenues and that included new ledger, new master data, new processes for quarter-to-cash quarter with floors procure to pay and parts of the implementation are going well, other parts are not where we want them to be and it is taking a little bit more effort and time then we like relative to getting our financial information. So, we have work to do to optimize these processes and as Patrick said, we are going to get this done, we are going to get savings, but we are going to do it right and so we push the waves out that we had scheduled for currently to later in the back of the year and that is going to push out the entire implementation.

So Deane, one other thing I would add, and this is I am sure on the minds of others on the call. I would not be clear we could have made the decision to take a bunch of other additional cost out including cutting some investment to make our '17 and '18 margin targets that is not our approach, because of the growth in the health that we see in the portfolio and the attractive margin accretion from this growth over time. So, I just want to be clear, there is not as if we did not have areas as we could go back, but that is not going to be our approach here.

And just one last clarification and then that will be all from me, but the clarification on the delayed implementation on global business services. Patrick, you said in the prepared remarks, I was one to make sure I understand where the timing of the initiatives starts and when the savings start coming into the P&L, just to clarify that?

So we had very modest amount of savings in 2019, big part of the savings in the original timeline in 2020 with the remainder flowing through in 2021 and now that has moved out, almost a year.

Effectively, about three quarters is the phasing out being so, as to why we would not get nearly as much as we would expected in '20, we will get that in '21 at a larger scale being at originally planned.

And your next question comes from the line of Nathan Jonson, Stifel.

I guess we can stop endlessly talking about the 17%, 18% percent margin target now, just a question on the miss and the internal part of that in 1Q, you guys are certainly have a reputation for not making those internal errors. Maybe Mark, you can talk a little bit more about what was behind that, how isolated you think it is, have you reevaluated the internal FP & A process to make sure that this thing does not come up again. It is pretty unusual for you guys to have this thing?

It is a really good question. And as I mentioned just a moment ago, we have got a lot of factories, a few dozen or more around the Company and it was really in 3 factories and we all gets down to this sales and operations planning process right signals into from our commercial teams into the factories and then translating that into financial outlook and we had, missed there were communication around that process needs to be really, really tight particularly, as you are going through some changes in as you trying to balance inventories and making sure that we, do what we say we are trying to do and not more, but also making sure we are getting good signals from the commercial teams into the factory. So there, as a whole line of communications, including finance that is required and quite frankly they innovate, they were not as tight as they needed to be. And part of that is making sure we have got the right leadership in that process to make those calls. So it is isolated, we know where the breakdown occurred and I can assure you this is a hot topic with our Senior leadership team and Senior finance folks to make sure that it does not happen again. And it boils down to really good communication.

I think our net all I would offer up here is not to further pile up on the [Technical Difficulty]…

And again, ladies and gentlemen, this is the operator, today's conference will resume momentarily.

Okay, sorry about that, Nate. I don’t know how much of the answer you heard.

We cut out right as you started talking, Patrick.

You missed some good stuff. You missed the best part of the call. So your comments around -- this is very much unlike us. As I said, we take these things very seriously and we own this, we were on it. I think the thing that was unique here not to so much explained, but why this time around, I think it is the first time in a long while that we have been in a situation where we were purposely working off so much inventory toward our working capital numbers in a couple of our factories and it was net in terms of the hand off and communication, in terms of what the absorption impact would be on the back as a result of that. So that is the piece that mark in the finance team are all over and we got the right leaders involved in the commercial side in the factories to make sure those things it incorrectly do not happen again.

So I guess my second question here is going to be back to the fundamentals of the business now, order rate in the quarter still pretty healthy 4% against a pretty tough comp of 10% last year. Are there any markets where you are seeing any slowdown in order growth? I thought maybe Europe Industrial. Yeah, I mean, I thought maybe commercial but you are taking guidance for that up, just any color you have around the order trends you are seeing?

So really the only area that we have seen some level of order softness and it impacted in the quarter, we think it will be for the balance of the year is some softness in Europe, which is really driven by the uncertainty in the UK. And so again, the UK was down 3% on its own in first quarter and we are expecting to be down, mid single digits or so in Q2, and maybe low single digit for the full year, so that would be the one area I would say we are seeing some softness, we think it is still just purely a timing issue as we work through the uncertainty there in the UK. Other than that we saw strength across the board, I will also give color on the 4%. Not only is that against a harder compare from last year, 10. But we also had a large treatment project that we would expected to win and we expect to win, did not get awarded in March. It is likely to get awarded here in Q2 that would have normalized back up to probably mid-single digit, so in order growth. So, we still feel quite confident about the momentum behind the business.

[Operator Instructions] And your next question comes from Scott Graham with BMO Capital.

The MCS margin was obviously pretty difficult in the quarter, and I know you explained some things that you are expecting from at least what I heard before you cut off that you are expecting the margin to be up in the second quarter and maybe just a wreck that bridge for us is that is a big swing.

Unfortunately, you cut out. I think what I heard, Scott was a bridge in terms of how things get better in Q2 for MCS.

So there is a couple of things, one is the fact that the, we will continue to scale our AIA platform and there is good margin drop there. We will also seen improvement in mix as well as we will start to see some moderation of the impacts on tariffs, but it is really a combination and component shortages, but it is really mix better mix, better scaling around our AIA platform in a little bit less challenge, if you will in our supply chain.

Are you still there, Scott?

When you say you expecting better mix, mix is always difficult to predict. I know that you gave some explanation, but you are seeing in your delivery book, a better mix for the second quarters, is that…

Yes, a couple of pieces to that nature pieces are the lapping of the alignment installation, which had low margins on the installed because subcontract in a work out, so that is a big chunk. And then we expect a much better mix and a higher mix of water and that carries higher margins than in the energy, electric and those are really the two big factors.

So in this business, we have got really good visibility into backlog, because of these large deals that we won in the margin profile of those, and when the installs are expected to occur. And then we have got good insight into what the day to day replacement businesses and so in that regard. That is what gives us great confidence that we are going to see the margin expansion in the second half of the year relative to Q1.

The other thing too, we got off to a late start in price driving price in the business, and really did not have much, if any, last year we had a little bit in Q1. We have gone out and raise some prices and that those rent bump in Q2 in the second half of the year, so that will be some help as well.

So, the preponderance of the guide down on the margin is MCS largely…

First, let me make sure I understand that question we see the guide.

Now that you are actually the guide down. Scott is really tied to two specific thing, but I know with the call dropping here a few times it made invest the guide down specifically $0.04 for currency and that just is actually re-striking it at the latest Euro rate and then the second is just the in Q1 we recover, maybe a candidate. We are basically saying right now, we are not counting on recovering that we are not going to go slash cost just to recover that it would come back on other investments we need to maintain.

And your next question comes from John Walsh with Credit Suisse.

I guess maybe the first question, just thinking about the strong order growth. The strong sales, I think you guys have done a very good job explaining what is happened with the margin, but it does lead to the question what is actually in the backlog in terms of the margin and if that still relatively healthy, if you are seeing margin backlog still expand year-over-year. Any color around that would be helpful.

We do feel good about margins and backlog. We have got good visibility on that, I would say is, again it is a function of the mix between project work and day-to-day book and ship business is healthy. Two; we have seen very good pricing traction. Again, as you will recall over the course of last year and that continues as we go forward here. When you look at the mix of MCS business that Mark alluded to, where it is going to be much heavier water business, which is substantially higher margin than electric and gas. Those are the projects that we see in backlog in the second half.

So is it fair to say that the margin in the backlog is actually up year-on-year. And then maybe just a question around the pipeline as you think around what is out there in the market in terms of acquisition opportunity?

I think as we have said before, we maybe just reiterate the key focus areas for us. We have talked before about we do think that there continue to see opportunities, if I think about it first from the utility space perspective we think we have got a great platform here. We do think there are opportunities as we continue to build out our AIA platform that there are both opportunities there to build out an even stronger decisions intelligence type offering to utilities. We just did a small acquisition in Germany, it is very, very small, but it is a terrific artificial intelligence capability for inside the treatment plant and we closed that deal just about a month or so back small deal, but really excited about leveraging that on a global scale. So, in the utility space, I think it will largely be just a series of tuck-ins and bolt-ons that will not be material from a financial perspective, but be material in terms of strength in the solution to the customer. Beyond that, again, we continue to look at opportunities across the industrial water space. It is a fairly fragmented area, we do see there being some interesting ideas out there, not foreshadowing or signaling anything there. We will continue to be disciplined there from a valuation standpoint, I do not see anything in the immediate term, but that is an area we continue to keep our eyes and ears close to the ground on.

And your next question comes from Joe Giordano with Cowen & Company.

So, I just wanted to start on free cash flow. So you guys are maintaining your target for 2019 here, but you are also doubling our percent effectively the restructuring for the year. So, talk us through given the some of the issues you faced here in 1Q, how conservative is that target to get incrementally more aggressive by keeping it flat.

Joe, that is a good question relative to the impact of restructuring, a lot of that was that really gets at is the timing of the accounting impact and not necessarily all of the cash flows. So, we think that in terms of the cash flow related to restructuring, it may be up a little bit, but we are not expecting that to have material negative impact on that free cash flow conversion.

So you went from 30 something to 60 to 70 in restructuring, but you are saying most of that incremental increase the cash impact of that is next year.

And most of that is will be late in the year and not all of that is going to be paid out in cash. And I would say, Joe. What also gives us confidence around that cash conversion is literally just be the decisions and working with made in Q1 to work at inventories, and so that will have a conversion benefit in terms of helping to get to our working capital numbers.

And I would say that there is still inventory built up there, related to tariffs that will continue to warrant down through the course of the year.

And then next, I know so we are not supposed to talk about 2020 targets anymore, but I am going to ask one. So you pushed the operating target which I think our people are hoping to see you kept the EBITDA target. So I am just curious now. Are you effectively just pushing out the amortization and not the simplification benefit because like the EBITDA target staying the same, so just curious as to how that how you square that?

Our EBITDA has been running ahead of it more in line with our targets been than our operating margin. Obviously, a chunk of that is related to the related to the amortization. So, we are still expecting to be within the range of the EBITDA target that we put out there for 2020.

But effectively, like the operating margin change was because of amortization and because of the push-out of the global business areas and the simplification…

So obviously the global business services impact is going to impact both operating margin and in EBITDA margin. The amortization related to our acquisitions continues to be part of that calculation is also in others taxes there is interest, all of those are components of the EBITDA.

Joe, we will finish this year, roughly around 20.5% EBIT in EBITDA. So, we are committed to a 100 basis points for next year that will be on both, right. So we will finish roughly in that target was about 21.5 to 22.5 on EBITDA from the Investor day.

And your next question comes from Brian Lee with Goldman Sachs.

You maybe if I could just squeeze one last one in my maybe hopefully the last one in for you guys on the, in the long-term margin targets. Is this effectively just a one-year push out? Are you committing to those original targets in the 2021 time frame or where we might be to finite in China pigeonhole you guys.

I mean I think what we are committing to here Brian is we confident around 100 basis points of margin expansion next year. We think that trend line can continue in terms of just continued healthy progression on margins for some time to come, not in a position here today to declare new targets for '21 and beyond, will do that obviously later this year as we are get closer within the year and we are talking only about 20, but we are getting new longer-term target to that point.

And then just second question, you mentioned a couple of times throughout the call, this Philadelphia win, which is encouraging, especially in the context of the water business that part of the mix picking up, so it could you guys give us some frame of reference in terms of how big this deployment is in relation to other water deployments in your backlog and then maybe related to that. I noticed the SaaS business was a bit weaker in the quarter, I know there were some tougher comps, but does that reverse in the second half with this Philadelphia deployment or are there other deployments that drive that part of the business and MCS back to double-digit growth later in the year. Thanks guys.

So the Philly water deal, it is sizable and it is in our backlog now and it really, it is not yet in orders. So, we secure the contract, but we have got the orders as they place them on us and we expect that really to be happening later this year mainly into 2020. The general size that we have here is similar to other deals we have been out the, you can take somewhere between roughly $60 to $90 million is the ballpark out if it moves around a bit, depending upon the final specs, etc., but it is a meaningful size deal. We do still see a number of other large deals out there in the pipeline with the team is going after both in North America, but also we are still pursuing a number of them on the international side, there are also both the combination of AMI metering deployments, but also broader link between that in our new AIA platform around things like water losses, non revenue water, etc. So, those would likely be announced either late this year, early next and so and those would certainly be an attractive margins to the current portfolio.

And just quickly on the SaaS. The SaaS makes any any views into when those trends pick back up moving through the year.

We think certainly we are already. We saw a little bit of, I mean the issue in the quarter was simply specifically a compare of a large software sale that we did in Europe last year was one project, again we do not want to get into spend two quarters and so that will be behind us. If you look at the rest of our SaaS offering, which is predominantly coming out of our AI platform, as well as my side of the business with Sensus, we continue to see very good growth in healthcare. We talked about the 30% orders growth in AIA in the quarter. We see that accelerating based upon the market demand and the deployment that we are doing and expect that to be in converting into organic revenue really in Q2 through the end of the year and onward.

And your next question comes from Brett Lindsay with Vertical Research.

I wanted to go back to the margin bridge and specifically, the cost inflation bucket that actually worsened relative to Q4 and just wondering what some of the moving parts are in terms of the underlying components there. And then just on the strategic investments that was actually a positive swing in water infrastructure applied with delta of about 150 bps relative to last Q4 just timing on investments you throttle back a little bit. Any color would be good.

In terms of inflation is that is, it is largely in line, it might be up a little bit I mean there really was not any incremental impact related to tariffs we been seeing that already in the fourth quarter same thing with components, maybe a little bit in freight, but nothing material, and certainly, as we look out over the course of this year, we would expect that to trend down as we lap some of those tougher comparisons in the back half of last year, so that will decrease. Now, the second part of your question related to investments with AWS…

No, specific to water infrastructure and applied, just looking at the delta that was a drag it all of 2018 in Q4, but it was actually a tailwind here in the Q1.

Well, we still have some investments in Water Infrastructure. So, we certainly did throughout on an enterprise-wide basis, most notably when you look at MNCS. So we are continuing to invest, particularly in that segment, but in other parts of our business as well.

And then just shifting to the restructuring, up about $35 billion at the midpoint, I know it is back-end loaded, but where are the targeted opportunities by the at the segment level?

Yes. So, all refrain from getting into too much of the Inside Baseball on details of the work moves as we are in the midst of doing those as we speak. It is broad based, it is not really targeted, I would say on any one segment. Each one of our three segments have opportunities here that we are going to streamlining and it is a broader de-layering and elimination some of the duplicate support from we got so, I probably would not want to go into more caller than that right now and if you could share more with you on the next call.

And then maybe just one follow-up on the U.S. growth, it has been very strong across the board. What is your sense of the underlying market rate or run rate here in those pieces of the business. And then as you examine those out growth factors, what the big drivers the channel products in any color would be good.

So, I would say the predominant drivers that we are seeing are really I would say threefold. First is because that U.S. number is a companywide number. So, in the U.S. you see first of all, a continued healthy utility market and we believe the utility market is growing really a mid-single digit level and what we are seeing there in terms of faster growth in that we do believe is market share gain and that is predominantly within our transport business, but also treatment. Second driver is we again continue to see accelerated growth of especially in orders on the new AIA platform, which is heavily concentrated right now in the U.S., as well as some of the project wins within piece of the organization. I think in those in both areas we see those as being sustainable. The one that I would say we are expecting to see some moderation of growth would be within our applied Water business on the industrial side in the U.S. where we have been running pretty hot there for the past year, year and a half all of that has come from a couple of things. One, we made at the organization move about a year and a half ago, where we integrated the commercial teams around our applied water and in our water infrastructure businesses and we have been getting a large amount of revenue synergies there that reflects share gains by expanding channel, streamlining our distribution channels and just incentivizing people to go out and sell the portfolio. And so, there comes a point where you start lapping that and so, we would say that part of the business would begin to moderate down to probably more low-mid single digits at the back half of this year. So, when you do the math on all that that is why we are saying for the full year while we did 11% in Q1. We do expect that to be more medium to high-single digits in Q2 and then blends out for the full year at somewhere in that high-single digit level for the full year aggregated.

And your next question comes from Walter Liptak with Seaport Global.

Just have a quick follow-up, the first quarter margin issue, I just want to clarify that was a problem they get taken care of and that is behind us now.

As both Patrick and I mentioned and there is a couple of follow-ups on that you may not have been on online at that point, but yeah, we have done quite a bit of work around that in terms of our sales and operations planning process, we know what the root causes are and we have taken corrective action, so we do believe that is fully behind us.

And then it sounds like despite some of the macro international things that are going on that your order intake internationally, still looks pretty stable for this year, and I wonder if you could just talk about that especially on the larger systems side.

So yes, we definitely are seeing continued robust demand pretty much consistently across outside of North America. I would say the one exception to that would be I did mention earlier some softness in the UK that affected our European results. So, we are guiding Europe and the low-single digits for the full year. But the rest of international certainly across Asia, we see continued very robust growth there in terms of orders and bidding pipeline. The same is the case within Latin America. We see some great results there. We see strength continuing in Eastern Europe. And I would say the Middle East has moderated but is healthier now for us than it was last year and so, it feels pretty good, right now touch wood. And again the things we look at our things like line and backlog and that is where we have our comments.

And your next question comes from Andrew Buscaglia with Berenberg. Andrew, your line is open. Please state your question. Andrew, your line may be on mute.

Just wanted to just delve into your guidance. Obviously that is come out a few times on the call. Just given, it is still implies a big, I am questioning you how conservative if there is any contingency in place for some of the issues that occurred in Q1 and then you are talking about moderation in a number of areas, Industrial, Commercial talked about softness in the UK, Middle East moderating, Applied Water even, so why, so your guidance is only reduced by the mix and the FX, but where do you get this confidence, are you being conservative enough to meet your expectations for the year.

Obviously, we go through a lot of analysis and digging into these things before we put together a guidance for the full year. And certainly as we look to do adjusted downward, by definition, we make sure that we build in appropriate [Technical difficulty] to be able to cover for a rainy day, obviously we are not proud and missed that in Q1 for the reasons that we described. But we feel confident that we have got an appropriate range there and the issues around the words moderation that I used, those are all embedded in the 4% to 6% organic revenue guide, which still gives us some room in the case of things or soften, it also addresses that the top of some the comps do get tougher in the second half of the year from a growth standpoint, but we feel we have got all that reflected in embedded in our guidance.

Well, I would point out big certainly a big part of that is also our MCS segment. We had -- the comps are certainly much easier there and we know we have a ramp big ramp in higher margin water business scaling up AIA, so we have good confidence in that. We continue to drive productivity and we expect that to ramp in throughout the course of the year. So, as Patrick said, particularly after not hitting your numbers. We were particularly focused on making sure that we identified all of the potential risks out there and we had sufficient contingencies address.

And maybe just one more on your MCS side, that disappointing this quarter, but where some of the things get like the energy applications due to lapping a volume project, the softness, it sounds like you had a tough comp in the SaaS piece what maybe where did it, we would not have expected or where you missed in that in your guidance or your steering us to where that margin would be this quarter.

The miss in the quarter, we were a little bit below what we had out and that was primarily a function of mix and just, we expected better sales growth in our high margin test business, that is our analytics equipment sensors and it was flat. And that was really the difference between what we outlook and what we delivered from a margin perspective.

And just be clear, again we are not talking about the AIA platform, we are talking about the traditional analytics piece of the MCS segment, which is very high gross margins for us and it was a specific project in Europe that got pushed out. And that drove the shortfall there, it hit margin hard just because the gross margins in that business.

Thank you. And your final question will come from Shereen Undavia with Raymond James.

This is Shereen on for Paul. If I'm not mistaken, it's been over a year since your last acquisition announcement. That as a pretty long M&A hiatus for you, so I was wondering if there is an indication of private company valuation that have gone to rich or should we read anything else into that?

I would not read anything into our year passing in terms of not doing M&A to do anything with valuations. I mean obviously, valuations move around and they vary depending upon the target that you are exploring. But I think, we just important to pause on anything of significance, over the last year, while we continue to focus in on the successful integration of both as well as pure and building up this new platform, this new AIA platform. And so since, then we have done a few small tuck-ins and bolt-ons that are not material from a financial standpoint that are strategically. We continue to explore and we will continue to be active in terms of M&A, win the right opportunities present themselves are strategically and financially. But no, I would not read anything into it being a commentary on valuation.

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

Sure will again thank you all for bearing with this here this morning on the technical difficulties. I know it was painful on this end and so, appreciate your patience and for this and also by hanging on the phone a bit longer than we normally planned. Appreciate the ongoing support. Look forward to get back to you after our Q2 results. We appreciate your support. Safe travels and we will be in touch soon. Thank you.

And thank you. This does conclude today's first quarter earnings conference call. Please disconnect your lines at this time and have a wonderful day.