Xylem, Inc. (XYL)
March 07, 2013 9:00 am ET
Phil De Sousa
Gretchen W. McClain - Chief Executive Officer, President and Director
Colin R. Sabol - Chief Strategy & Growth Officer and Senior Vice President
Michael L. Kuchenbrod - Senior Vice President and President of Water Solutions
Christopher R. Mcintire - Senior Vice President and President of Analytics
Kenneth Napolitano - Senior Vice President and President of Applied Water Systems
Michael T. Speetzen - Chief Financial Officer and Senior Vice President
Allan Glick - First Manhattan Co.
Clifford Ransom - Ransom Research, Inc.
Deane M. Dray - Citigroup Inc, Research Division
Ryan M. Connors - Janney Montgomery Scott LLC, Research Division
David L. Rose - Wedbush Securities Inc., Research Division
Phil De Sousa
Good morning, everyone. I'm Phil De Sousa, Director of Investor Relations. Welcome to Xylem's 2013 Investor and Analyst Day, our first since spinning out of ITT in 2011. For those here with us at the historic New York Stock Exchange and those joining via webcast, I thank you for your time and interest in our company.
As I look out into the audience, I see many familiar faces. A great number of investors and sell side analysts, a number of new faces, both buy side and sell side, which signals the continued interest in Xylem today. I am certain that today's presentation will cater to this broad audience. And I believe that you will leave today with a better understanding of our business, our industry, and the strategy the team has set forth as we continue to move forward. With that said, allow me to highlight today's agenda on Slide 2.
We will have a series of speakers beginning with our CEO, Gretchen McClain, who will provide a brief update on the business and provide a Xylem overview. Following, we will turn to Xylem's Chief Strategy & Growth Officer, Colin Sabol, for a market update and a detailed discussion around how Xylem drives growth in the marketplace. We will then plan to take a short break, following which, we will begin a series of reviews led by our Business Presidents, Mike Kuchenbrod will cover our transport and treatment businesses, including an in-depth review of our dewatering transport platform; Chris Mcintire will follow with a deep dive into Xylem's Analytics business; and then we'll turn it to Ken Napolitano, who will cover Applied Water Systems. Finally, we will wrap up with Mike Speetzen, our Chief Financial Officer who will layout the strategic initiatives and capital deployment plans into financial context. Of course, we plan to take some time at the end of the day of the presentations to address questions from those here with us today.
Turning to Slide 3. Everyone is quite familiar with this slide, but let me run through it, anyways. We will make some forward-looking statements today including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to risks -- future risks and uncertainties, such as those outlined in our annual Form 10-K and those described in subsequent reports 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 events or circumstances, and actual results could differ materially from those anticipated.
With that out of the way, I'll ask everyone to please turn off your BlackBerries, your iPhones, your iPads, your mobile devices, or at least please put them into silent mode. So it's time to start the program.
Please help me welcome to the stage, Xylem's President and Chief Executive Officer, Gretchen McClain.
Gretchen W. McClain
Thanks, Phil, and good morning. Thank you for joining us today. It's great to have you all here. And it's interesting, when you think about -- it's been 17 months since we separated from ITT and went out on our own as an independent company. In some ways, it seems like just yesterday, in other ways, it seems like it's been a long journey. We have been doing an enormous amount of work to separate and to step up a company on its own. And I will tell you, yesterday, really was an exciting day because it brought it all together. We got the opportunity to close the bell on our high for our stock, as well as a market new high. And so it was a great feeling. It was a great feeling from the perspective of, we've got the spin behind us, we've set a great foundation and we've got 4 new acquisitions with us. So we're on a journey. And I hope, this morning, what you will see is that strategy come alive as we all go through the presentation this morning.
So let's go ahead and jump in with Slide 5. So as most of you know, last week, we announced another acquisition and it's part of our family, and that's privately held MultiTrode. And with 2012 revenue, we purchased it for $26 million. This is consistent with our bolt-on acquisition strategy that we have been executing. MultiTrode provides us with advanced monitoring and control technology. It's a state-of-the-art platform that enables us to provide smarter solutions including cloud-based services to our customers. It's also a scalable platform, which can easily be adapted to plug into our large installed base.
It's also going to enable us to commercialize future products in our water and wastewater market much more rapidly because it's scalable. They're based in Australia, they were founded in 1986 and today have 60 employees and serve roughly 20 countries. So when you combine them with Xylem's large installed base and our reach, it's a perfect match to ensure our customers are provided with industry-leading monitoring control capabilities, providing them the information they need to solve their water challenges and realize significant savings in operations.
So let's turn to Slide 6, and I'll spend a few minutes on 2013 before we move into our long-term strategy and plans. Last month, we reported fourth quarter and full year 2012 results and provided our 2013 full year guidance. Today, we're updating our 2013 full year guidance to solely reflect the financial impact of the MultiTrode acquisition. Purchase price accounting and transaction costs, lowers our previous segment and operating margins by 10 basis points. And we'll reduce our EPS range by $0.01 in 2013 and we'll be neutral to EPS in 2014.
2 months into the quarter and we're still seeing some market volatility, with February slightly lower than our expectations. But our teams are actively engaged with our customers, they're bidding projects, they're working extremely hard to execute our customer excellence and initiatives across the globe, and we remain very positive about the full year. Our restructuring and realignment activities are underway, as expected. And I'll touch a little bit more on that as we go through our presentation on framing where we are with those activities, and Mike Speetzen will provide a little more color on 2013 in his presentation.
So in summary, I'm confident about our strategy and the course that we're on. We're moving forward this year on leveraging our full power of our portfolio, our industry knowledge and our customer relationships to grow this business.
So turn to Slide 7, and I'll talk to you about our vision, our strategy and where we are headed. Water is the global challenge that will define the 21st century. For Xylem, these challenges translate into opportunities for all of our businesses. And the complexity of these water challenges will fuel demand for decades. Many people around the world work and live in areas where they're either experiencing or facing threats to their water supply or water security.
Water scarcity is reaching crisis proportions. Environmental issues including drought and population, as we saw drought last year, an aging infrastructure such as the leaking pipes and inefficient pumping systems are accelerating the problem. At the same time, population growth and urbanization are creating increasing needs for the shrinking water demand. It's a supply and demand challenge on a global scale. And the issues that are causing it are complex, urgent and interrelated.
At Xylem, we have the size, the scale and the scope to address these challenges. Many of our competitors have businesses in other markets or focused on a very niche part of the market, but we're a global company united around water. We devote our technology, our time and our talent to advance the smarter use of water. And it's that focus that will be the strength of our company going forward. Xylem is uniquely positioned to address complex water issues. And we're uniquely positioned to promote sustainability for our communities, for our customers and for our own business.
Turn to Slide 8. Clearly, water is a global and very challenging resource. And so when we step back and we look at the global issues, it helps us shape our vision, inform our goals and underpins our strategy. It helps us build our image of Xylem's future as we go forward.
So Slide 9 simply states our goal. Our intention is to become the world's trusted leader in solving water issues. This means nothing less than a leadership position. Taking not only this business but taking our industry forward. And it means solid and demonstrated business performance. This is what will make this company the trusted leader. And solving means far more value than just equipment and components alone. It means Xylem brings answers to our customers' needs and ultimately, it means that customers think of Xylem when they think of water.
So now let me walk you through our strategic framework to achieve our goal on Slide 10. This our business model to drive excellence throughout the company. This framework allows for a clear identification and alignment around our key objectives and strategies.
Our simple framework is used to guide and drive our decisions and our actions. It's used to determine and to communicate where we will invest and take our business. And it's used to provide the rhythm and the discipline to ensure we achieve our key objectives and commitments and ultimately, increase our shareholder value. The common denominator of some of the most successful companies out there is a strong fundamental base from which they are driven from, and this is true for Xylem. We're built on a solid base of truly unique global assets. We have 3 critically important objectives to achieve our goal of the world's trusted leader in solving water, and this is driven by our high-performance culture and it's surrounded by a robust and disciplined capital deployment plan. In the remainder of the presentation, we'll provide color on each element of this framework.
So let's get started on Slide 11, and we'll talk about our unique assets, our foundation. And for those who are less familiar with the company, a look back on how this company was built. Today, we're a global company, a global leader in the water application solution of revenues of $3.8 billion. Strong fundamentals are the foundation of our growth. Our business is built on a unique set of global assets beginning with our fortress brands with over 150 years of experience. Our strong customer relationships, which are true partnerships; diverse geographic and end-market exposure, provides us balance; and our large installed base, which has been built over the past century, provides an attractive and profitable recurring revenue base; and our large distribution, which is unmatched, provides a clear competitive advantage.
Xylem is an attractive business with proven execution, solid growth, resilient margins, strong cash flow generation and a proven acquisition model. Slide 12 helps us to illustrate the solid building blocks of our company and our evolution to be the world leader in design, manufacturing and application of highly engineered technology in the water industry.
We started out as a pump company, 150 years ago. The green on this slide represents the collection of strong pump brands that we've acquired over the many years. We built a treatment portfolio, it's shown in the blue, in the early 2000s, acquiring a wide range of treatment applications. And most recently, our Analytics platform, shown in purple, and then our dewatering rental and services, a new business model for us, which is shown in red. Attractive technology platforms, which are allowing us to forge strong partnerships, which is shown on the orange. And our partnership with GE, their Zenon membrane is a great technology. As I mentioned, our distribution is broad. For us to be able to bring their technology to help us solve our customers' issues, is an actually winning partnership.
The journey has brought knowledge, deep applications expertise and a broad understanding of global water challenges. It's brought a fundamental cultural change with sustainability becoming a defining element of everything we do at Xylem. We're proud to be listed on the Dow Jones Sustainability Index in our first year, and we're inspired by our Watermark social responsibility program. And it has taken us beyond engineering of products to today we are working on sustainable solutions of tomorrow. Our history demonstrates how a fragmented industry can be brought together to form a global leader. And it provides confidence in our acquisition strategy as we move forward.
Slide 13 illustrates where we play in the water cycle and highlights further our broad portfolio. Our industry includes thousands of small companies that lack scale and breadth. Yes, there are some larger companies, but most of these companies, water is just a small percentage of their focus. The singular pure-play exception in Xylem. Xylem's portfolio spans the entire cycle of water. Water and wastewater, transport, treatment and test, all addressing all end users.
Having leadership positions throughout the water cycle gives us a balanced portfolio and presents opportunities for us to create solutions for customers, no matter where they are in the loop. And this is also one of our competitive advantages. After so many years of experience, we've built a wide ranging applications expertise within our business. And as the industry evolves and requires more than just simple products, we will be best positioned to address it.
We will discuss, today, some of the actions and the strategies that we're driving to leverage our unique applications knowledge that exists across our 12,700 employees globally. We're increasing our collaboration, bringing new innovation and truly differentiating ourselves across the cycle of water.
Let's turn to Slide 14, and I'll cover a brief overview of our 2 business segments: Water Infrastructure and Applied Water. Water Infrastructure, which encompasses 64% of our business and includes the world's largest wastewater pump and dewatering service provider. The broadest portfolio of biological, disinfection and filtration technologies, and the industry-leading water and environmental analytics platform. Applied Water, which accounts for the other 36% of our business and it includes: The U.S. leader in building services and industrial water technologies, a leading global provider on a wide range of energy-efficient solutions and our unique portfolio provides for innovative solutions, backed by deep applications expertise and knowledge, which was, literally, been educating the industry and its constituents.
Slide 15 further illustrates the balanced portfolio that we have. We have a diverse customer base serving a broad array of end market. No one customer represents more than 2% of revenue. Today, the industrial end market represents 43% of our total revenue mix. Our industrial exposure has grown over the last few years, driven by our portfolio additions such as Godwin Pumps, as well as our renewed focus on delivering our existing technologies and solutions into the space. We are also focusing on a few new areas where our applications expertise and our wide range of equipment and services will allow us to gain share and grow, Colin will highlight a few of those.
And as the only provider of transport, treatment and test applications, we support the water infrastructure needs for both industrial and public utility customers, with our building services, industrial water and irrigation applications, we reach each type of end user. We're geographically diverse with 63% outside the U.S. and an increasing presence in the growing economies of the world. Emerging market now makes up 20% of our total revenue and remains a top focus of our strategy, which you'll hear a lot more about as we go forward.
When you take a look at our global footprint on Slide 16, you will see the local yet -- the global yet local presence that we have. This map shows that we have the geographic balance to meet the customer needs, no matter where they are. We have more than 360 global locations, we market and sell products in over 150 countries, and we have more than 4,500 sales reps, including more than 2,000 indirect sales, creating close relationships and partnerships with our customers around the globe. This gives us the flexibility that we need, that local flexibility to address those local issues that our customers are dealing with, but allows us to leverage our global brands, our solutions and our expertise efficiently. This unmatched global presence is what it takes to be an industry leader.
So to measure up the health of our unique platform, our unique assets, our solid foundation, let's turn to Slide 17. This slide shows our proven track record and helps demonstrate the balanced and focused strategy. Mike will cover off the financial performance in more detail, but I'd like to make a few points on our past performance. We've demonstrated our ability to grow revenue and expand margins over the past 4 years, while investing in growth. For example, revenue has increased $500 million or 15%. During this period, we established global platforms in dewatering and analytics through acquisitions. And our aftermarket revenue growth has stayed strong and we have increased our new product revenues during a challenging marketing dynamic. Operating margin has improved 210 basis points, including the added cost of a stand-alone public company. In summary, our business foundation is solid, with a balanced strategy and focused execution.
Now let me walk you through our growth plan on Slide 18. First, coming back to our strategic framework, it starts with 3 key objectives essential to achieving our goal. Deliver customer value. This is the fundamental element of a growth company, the customer. Drive profitable growth. This is all about the underlying -- uncovering the real growth opportunities that are in front of us, about truly differentiating us and creating more value. Improve business sustainability. And this is all about increasing profitability and ultimately, the returns on our investment, which then fuels our growth with the competitive edge.
So let's start with the customer on Slide 19. To win, we must have incredible focus on delivering customer value. We pride customer intimacy above all, and we're working to meet our customer needs and deliver unique value and we know that must be the dominant part of our company DNA. To deliver more value across our portfolio of products and services, we must continue to improve our responsiveness to our customers. Whether it's improving our on-time delivery or with real-time configurators, to new ways to engage such as our virtual worldwide water show, we have developed plans for change and ways to measure these changes.
Colin Sabol will talk about our commercial excellence initiative, which has created value, and with continued focus on strengthening the front end of our business, building robust processes, sharing best practices, we, ultimately, will make our sales team world-class and the entire organization more responsive to our customers.
Delivering applications expertise. We are actively seeking new ways to create more value through bringing together our unique applications expertise and our integrated processes across the business to help work and solve these complex challenges that our customers confront. You'll hear key examples of how our teams' applications expertise is uniquely positioning us in the market. Having the largest installed base in the water equipment industry provides Xylem a robust aftermarket services business to capture profitable growth. On the next slide, I'll discuss our plans to capture this growth and how it provides incredible knowledge and understanding of the entire water cycle and it creates unique value for us, given our portfolio.
Enhancing the aftermarket capability, not only drives recurring revenue but it's essential to our customer intimacy program and key to our organic growth. First, as background on the left side of the chart, approximately 37% of our revenue comes from our large installed base. This provides stable base of revenue and income, and a significant portion of this revenue is associated with replacement equipment. So this occurs when the pump or a component comes to the end of its life, long service life, the operator pulls it out, cleans off the nameplate and actually orders an exact duplicate, or something that's been upgraded with energy efficiency or smart. We estimate this to be 22% of our revenue base coming from replacement.
In addition, parts and service revenue represents approximately 15% of our revenue, and has grown at an 8.5% per year pace over the last 4 years, despite the economic downturn. This best illustrates the power and the heritage of our business, the strength and the brand loyalty associated with our products and our customers and the importance of a global installed base.
On the right-hand side of the chart, you can see we're increasing our focus on this profitable revenue stream. We have launched a robust aftermarket and advanced services program, our Xylem TotalCare. And more recently, we acquired the PIMS group, 12 aftermarket service offerings, a comprehensive and proactive program. And now with PIMS, a deep set of core competencies, tools, processes and talents that will enhance our sales capability across our global footprint. Mike Kuchenbrod will highlight the value of this program. And by focusing on our foundation, our recurring revenue, leveraging our knowledge and our installed base and our reach, we know we can grow even in low-growth economies.
Please turn to Slide 21. Our second objective, driving profitable growth. We're balancing growing our main lines of business with pursuing dynamic new opportunities, both through organic investments and our disciplined acquisition strategy. We have built 2 great powerful growth platforms: Analytic instrumentation and dewatering rental and services. And have established a leadership position in both.
Analytics is an attractive and growing market by itself. And in addition to growing this attractive profitable business, Analytics brings us a critical application and knowledge that's essential to bringing the smart into the water infrastructure. Dewatering brings Xylem a new business model, a 24/7 rental services arm. And it positions us nicely as we expand geographically, leveraging Xylem's global footprint. We will continue to invest in significant growth in these attractive areas. Mike Kuchenbrod and Chris Mcintire will provide more color.
There are 2 other key strategies I'd like to cover in driving profitable growth: Accelerating our geographic expansion and increasing innovative offerings. Turn to Page 22. From our core, we have built innovation through a series of product first. To name just a few, the first is submersible wastewater pump, the first non-clog dewatering solution, our solar power eco surf pump and our EcoMapper. As we've expanded our technology platform and we work to harmonize our offerings, we are investing in smart products, energy efficiency, localized products and reuse. And we focus on creatively bringing innovative systems and solutions forward to meet our customers' needs.
But innovation means more than just products and technology, it includes business models such as partnering with others who have expertise but no access to the market, or have assets to demonstrate our technology. A challenge in our industry is the ability to have reference site, demonstrated technologies, given many of our customers' concern -- they have concern about trying new technology, because they're responsible for delivering safe water and reliable services regardless of the known advantages of this technology. So we're expanding our testbeds by partnering with our customers who have developed trust in us and we're helping to mitigate this challenge, providing us the opportunity to demonstrate our new technology innovation into their applications, their platforms, such as what we're doing with the Singapore PUB.
We wrap all this up with one key metric, vitality index. Measuring our success of launching new products, services and applications. A measure of the health of our portfolio and innovation. We've done a lot here but we've got a lot more to do, but I think we're really headed on the right direction. Just last year, we generated over $0.5 billion in revenue from new innovative product launches, including more than 1/3 from applications focused on reducing the energy consumption of our customer processes. And I am confident that our actions and the investments that we're making, we will be able to achieve a vitality index of greater than 25%.
Our third strategy to drive profitable growth is accelerating geographic growth on Slide 23. Our geographic growth strategy is primarily focused on advancing our position in the emerging markets. But we are also taking a proven business model from one developed market into another developed market. First, in regions within developed markets where we are less penetrated, our strategy is to replicate our successful model for higher growth and market share gain.
During 2012, we geographically expanded our dewatering rental model and leveraged our international footprint. As a result, we grew over 20% in select regions such as Australia. Chris will talk about how we are growing market share in developed markets through cross-branding and cross-selling.
In emerging markets today, we're primarily focused and centered in the mega cities, where we supply premium performance products. And we plan to continue to grow our premium position in those megacities with customer excellence initiatives, such as our key account management, service excellence and channel management, but we're focused on expanding our premium offers -- offering into future growth cities, the fastest-growing urban centers around the world. We've refined our strategy from a country-focused strategy to a region/city-focused strategy. And focused our investment and our execution in areas of new urbanization and infrastructure development. And finally, we are selectively introducing value price offerings in the upper segment of the value market. Mike Kuchenbrod will give you an example of this in his presentation.
Given our strong sales, engineering and manufacturing teams in emerging markets, and our R&D centers in both India and China, we are identifying and investing in key opportunities. Let me expand on this strategy a little bit further, specifically in China, on Slide 24. Last year, we grew over 20% in China driven by our focused strategy and execution. Key drivers for Xylem's future growth is China's investment in infrastructure, real estate and industries. China's 12th 5-year plan focus on infrastructure investment, in general, and investments in future growth regions, in particular. In the 5-year plan, infrastructure investments are focused on water and wastewater networks, and municipal treatment plants.
We will maximize growth potential by following these investments into growth regions, the future growth cities. There, we're deploying dedicated resources and channels into those cities. Leveraging our knowledge and our experience in municipalities. And as infrastructure develops, real estate developers follow with commercial buildings for office spaces and retail malls. And as the industrial development increases its demand, it's driven by stricter regulations and wastewater discharge. So industrial treatment and reuse has become a new focus and attention area for us. So our teams have and continue to develop exclusive relationships with top real estate developers, establish OEM channels to support industrial market expansion. And as I stated earlier, our growth rate in China is a reflection of a sound strategy leveraging our core competencies.
In summary, our emerging market strategy is extremely focused. We leverage our applications expertise, our customer excellence tools to aggressively grow in existing markets and follow the growth into future growth markets, while selectively entering new segments.
Please turn to Slide 25, and I'll cover our third objective, improving business sustainability. We're focused on continuously improving the efficiency and effectiveness in all we do. This translates into greater competitive advantage, and it also builds a sustainable cycle of financial stability and flexibility. These initiatives provide the fuel to invest further into our -- with our customers and into our growth strategies, while returning value to our shareholders. They enable us to leverage our scale, optimize our cost base through business and process standards and drive a robust operating rhythm throughout the organization for solid and improved execution.
This year, we're making investments in cost structure, optimization and business simplification. A continuation of the actions that we started in 2012 and our efforts in streamlining in leveraging our business as we stepped out as an independent company, and we'll continue our lean journey with our operational excellence. These strategies are all about staying agile, adapting to enable profitable growth and driving margin durability. Driving a leaner, more efficient and highly competitive Xylem.
Let's turn to Slide 26. We have a long track record of driving operational performance through operational excellence initiatives. Through Lean Six Sigma implemented across our organization, we have continued to improve our on-time delivery to our customers, driven direct labor and variable overhead reductions and we continue our lean journey in transforming our factories. Always striving for maximum efficiency and continuous improvement. As a result of hundreds of projects completed around our facilities globally, we recognized incremental gross savings in 2012 of $68 million.
Implementing our global sourcing strategy has also been a focus over the last 4 years. Today, we are approaching 25% sourcing from low-cost regions, we have a balanced manufacturing footprint and we are leveraging our scale to purchase material across our entire business portfolio. In 2012, global sourcing drove incremental savings of $51 million. Our performance in operational excellence has been, and will continue to be, a key contributor to our growth and operating margin.
This has been a continuous journey, and as you know with lean, it will always be a journey because there's always room to improve. And as we transition from ITT, this has provided the opportunity to streamline, to leverage and to modernize our business processes and our systems.
Turn to Slide 26 and I'll walk you through some of the key system consolidations that are currently underway. We are building a simplified architecture that will actually provide customer-friendly experience, increase our efficiency across the company and drive growth.
First, our customer facing system. This will allow our customers to get information on multiple products and solutions online through a single interface, a simpler way of doing business with us. This global selling platform leads to a stronger relation and up selling opportunity with our customers, while we improve our visibility to sales, wins and losses across the company and our sales team become more informed with broader intelligence about our entire Xylem portfolio. You couple it out with elimination of multiple systems from over 50, today, to 1, and the improved efficiency in our sales lifecycle process it's a perfect example of business simplification to stay competitive and close to our customers.
Second, an ERP implementation focus on our back-office to drive efficiency and unlock productivity with a clear link to the customer. Given the many legacy product businesses within our Applied Water Systems, we will move from 7 different platforms to 1. This will provide us better line of sight of our operations and lifecycle process, improving on-time delivery and inventory turns, and driving productivity improvements in our factory. Another example of driving lean, more efficient business.
Turn to Slide 28 and I'll highlight the actions that we're taking in Europe in a little more detail. We have operated in Europe successfully for more than 100 years and have built a large installed base with trusted customer relationships. By capitalizing on the entire portfolio of products and services and leveraging our scale and expertise across the region more efficiently, we not only preserve but we enhance our competitive position. In January, we established a European headquarters that, for the first time in Europe, will bring together our key strategic and operating decision-making responsibilities for all of our business in the region, into a single, centrally located site in Schaffhausen, Switzerland.
The restructuring and realignment steps that we're taking are primarily focused on advancing this new European management structure for growth and will provide cost synergies. This is a phased approach which started first with the move of our Water Solutions headquarters at the beginning of the year, followed by the consolidation of the European headquarter functions for our Applied Water Systems, and then on to analytics. This structure will enable us to take actions that will align our strategies around vertical markets, consolidate our multiple business sales offices in each country, leverage sales administrative and functional back-office support, and drive standardization and some factory realignment. And in the future, will allow us to be able to move forward with shared services and centers of excellence. We have detailed plans in work, actually being executed as we speak. And I am confident in our ability to deliver the benefits that we've highlighted. Austria and Sweden are successful examples where we've already taken steps like this to create one Xylem organization. And we've seen growth and cost benefits.
In summary, our European realignment will add $0.03 to EPS in 2013, and will provide us a more competitive cost base for the future. And best position us to take a more focused view of our customers' needs, really demonstrating the differentiation that Xylem brings to the marketplace.
Please turn to Slide 29. So I layout our goals, our strategies, our objectives to create value. Now I'd like to spend a few minutes on what drives this high performance culture, our talent and our leadership team and let me start with our strong leadership team on Slide 30. A team with strong customer and industrial experience, a broad global knowledge and a relentless drive to win. Many of you have had the opportunity to meet a few of the members of the Xylem team, but they're all here with me today and so I ask you to take the opportunity to meet them. It's a strong team really focused and really aligned. We have 2 new members since our last Investor Day, filling out my leadership team. Christian Na, who is our General Counsel and Corporate Secretary; and Nicholas Colisto, who is our chief information officer. We also have one additional board member, and that's Rob Friel. Many of you may know him in the market, he's the President -- he's Chairman and CEO of Perkin Elmer. And I can tell you his experience in strategy and in finance is outstanding, we're really delighted to have him on the board and complement a very, very strong board that we have.
But it takes more than a great team and a great board, it takes strong culture and connectivity and alignment throughout the organization to create value, which I will discuss on Slide 31. Our global experience team is highly regarded in the water industry with a successful track record of capitalizing on attractive opportunities, winning new business and executing operational efficiencies. But this is not enough. The opportunity and challenges require us to be more responsive, to be more innovative and be adaptive and to execute and to be accountable for what we say we're going to do.
Creating that spirit, the ownership and the empowerment and the collaborative framework to bring together our 12,700 employees is the culture that we're striving to achieve. This will unleash the creativity that already exists in our organization. It will attract new energetic talent for the future. And it will encourage our teams to take the right calculated risk to move forward in the industry. We know what it takes to succeed, experience, knowledge, customer focus and a relentless drive to improve. We also know that alignment and accountability is critical to create the value that we're looking for, a clear vision, a simple strategic framework, the deployed goals and actions throughout the organization has us linked together around let's solve water. And my executive leadership team, we're all in one compensation plan, focused on both short-term and long-term value. And just last week, I proposed and received board approval to modify our long-term incentive plan with a strong link to return on invested capital performance, driving focus not only on profit generation but to ensure our company's capital is invested effectively and efficiently, and our shareowners' value is created.
This leads us to our final piece of the strategic framework. Our disciplined capital strategic strategy, turning to Slide 32. We have a balanced and disciplined approach to cash usage, prioritized towards return on invested capital. Our principal focus is to fund growth and enhance returns to our shareowners. Xylem's unique asset, our strong position in the market and our proven performance, makes reinvestment in our business our top priority. And I hope you saw that as we went through the charts earlier. Including optimizing our global operating platform to increase our cash power, as well as continuing our inorganic growth opportunities in this fragmented water market. We stay focused on our growth platform, dewatering analytics, our aftermarket strategy, our geographic expansion and technologies to advance sustainable solutions in the market. Mike will cover in great detail, our capital deployment plan and provide a closer look on how our acquisitions are creating value.
But in summary, we remain focused on maintaining solid investment-grade metrics and ensuring our targeted returns are achieved. It is this disciplined capital deployment process that makes our strategic framework come alive.
So let me turn to my final slide, Slide 33, to highlight what Xylem looks like in 2012 -- in 2017. Xylem continues to really expand our global leadership position in the attractive water industry, with leading positions in all the markets that we serve, a simplified business structure and an improved cost base. The trusted leader in applications expertise in the industry bringing solutions to our customers, and a stronger financial position with increasing profitability and return.
So I'd summarize it as this. Xylem becomes a $5 billion company, with the most attractive margins in the industry, delivering double-digit EPS growth, strong return on invested capital and a strong cash generating company.
As I handoff the day to my team, I just like to just make a couple of comments. I think you'll see the strategy come alive over the next several presentations. And you'll see that we play in a complex and fragmented market, but our singular focus has simplified our strategy, we're positioned correctly in the industry that we know extremely well, and we know that as we leverage our expertise, our technology and our knowledge across our organization, you will see us unleash the value of Xylem, the true value of what we can become.
So now let me introduce Colin Sabol, our Chief Strategy & Growth Officer to walk you through our market and our key customer and growth initiative. Colin?
Colin R. Sabol
Thanks, Gretchen, and good morning, everyone. I'm Colin Sabol. I'm responsible for driving strategy and growth at Xylem. Today, I'm going to talk to you about our markets and make sure you understand the economic framework that we are assuming as we underpin that long-term plan. I'm going to talk to you about how we are looking at our water markets that we serve and what we think the outlook for those are over the next 5 years. And I'm going to give you a deep dive into the portfolio of Xylem, so you understand it a bit more thoroughly. And then I'm going to wrap up my section talking about how Xylem will drive growth in any market environment, with a few key initiatives.
So let's turn to Slide 36 and take a look at our geographic profile. 72% of Xylem's revenue comes from Europe and the U.S., and 20% comes from the emerging markets. Our 5-year outlook for these served markets is as follows: We expect 1% to 3% growth from the developed markets; a modest recovery in the U.S., including a commercial construction rebound that we're just beginning to see start; a European recession that continues and political uncertainty in that market that slows growth in Europe through 2014; emerging markets will grow at 6% to 8% over the 5-year period, driven primarily by a build out of infrastructure. And just an example of this, is China's 12th 5-year plan where they're focus on putting $60 billion into upgrading their urban wastewater network, that's 14% more than the prior 5-year plan.
Turning to Slide 37, we'll take a look at the served markets cut by our end-market exposure. As Gretchen said, Xylem's largest end-market exposure is industrial, that's our number one exposure. Public utilities is number two and building services, number three. And we split that between commercial and residential building services. So the outlook for each of these markets. The Industrial Water segment will grow at 3% to 4% in the next 5 years, driven by an increase in industrial production, particularly in the U.S. and emerging markets. Public utility water markets, we expect to grow 2% to 3% on the back of OpEx growth in public utilities, although we expect the CapEx growth to be minimal. Commercial and residential building services will grow at 3% to 4% through 2017 with the U.S. strengthening and Europe continuing to stay weak. So in aggregate, we expect 2% to 4% growth in our underlying markets between now and 2017, on average, over that 5-year period. This is against a very challenging economic background that we're assuming.
Turning to Slide 38, I'll give you a deep dive into our largest served market, which is industrial. Again, this is $1.6 billion of revenue for Xylem, it's 43% of our overall portfolio. Mining, oil & gas, construction and food and beverage comprise 41% of our industrial exposure. But I want you to notice that 53% of our exposure to this market is in what we call general industrial. In this segment, there's literally hundreds of underlying markets, things like automotive manufacturing, aerospace manufacturing, paper, power generation, chemicals, pharmaceuticals, et cetera. And inside of each of these end markets, there are dozens of application areas. So let me just give you an understanding of some of the application areas where Xylem plays.
In pumping, we transport water, wastewater and even beverages. In treatment, we purify wastewater and we make industrial reuse possible. In analytics, we test everything from lakes and streams to even fruit juice. So there's a very broad range of applications in a very broad set of markets. So how do we win in this market? First of all, it's important to know that we use an indirect channel to reach most of these markets. So you have to have incredibly powerful brands and leading channels. Xylem has the pleasure of having both. We have innovative offerings that are also crucial to winning in this market. You have to have a broad set of products that are constantly refreshed, and you have to have application expertise in each of these end markets to effectively sell those products. And again, Xylem's positioned very well there.
So let me move on to Slide 39 and a summary of our second largest end market, public utilities. This is $1.3 billion of Xylem's revenue, which is 35% of our total. And frankly, this is the most misunderstood market that we play in. So I thought I'd take a few minutes and explain it so that everybody understands the underlying dynamics of this public utility market, and I'm talking about the global public utility market. That global public utility market spends approximately 70% of its budget on what we call the operating expense side of the business. This is keeping the system up and running that's crucial to maintaining the health and the economic welfare of communities around the world. It's funded by water tariffs and connection fees. Water tariffs and connection fees have increased on a range of 4% to 6% around the globe over the past decade and we expect that to continue, that's partially offset by the fact that some communities are using less water each year. So the 70% is a very stable part of the marketplace.
30% of global public utility budgets are spent on what we call the CapEx side. These are long-term finance projects and you should think of them as projects that either build new capacity or rebuild aging infrastructure. It's typically done to meet regulatory requirements or to keep up with economic or housing growth. This part of the market, as you all know, has been down since 2009. We are not counting on a strong rebound in the CapEx market in our underlying assumptions, this is about 20% of Xylem's public utility segment revenue. We do see some increase in bid activity in this space, but those bids continue to be slow to convert to orders. Xylem's strongest position is in public utilities. This is the place where we have the strongest brands, the biggest installed base, the newest product lines that have been launched over just the past couple of years, and we have a unique and powerful direct channel that allows us to bring application expertise to our customer set and to provide services.
Turning to Slide 40. I want to give you a sense for the key application areas that Xylem plays in. And let me start by making sure you understand that our key applications add up to a served market of $35 billion. That's $5 billion more than the $30 billion that we talked about when we spun the company out from ITT. The 2 major drivers of that are $2 billion increase in the test application area, that was driven by our acquisition of YSI. And a $2 billion increase in our treatment area, that's driven by our move to take technologies that we sell in treatment in the public utilities space and move them into the industrial market place, existing technologies moving to an adjacent market. So that's expanded the size of our served market to $35 billion.
The 3 pie charts across the top of this page represent the water infrastructure segment of Xylem. Transport, treatment and test add up to $20 billion, that's the served market for water infrastructure. The bottom row of pie charts add up to $15 billion and that is the served market for our applied water segment, building services, industrial water and irrigation. I want you to notice 2 things about these pie charts. First, Xylem is either #1 or #2 in almost every market that we serve. And the second thing I want you to notice is that these markets are highly fragmented. There's room for this company to grow in any market environment due to the fragmentation.
Shifting to Slide 41. I want to start talking about not our markets now, but against that backdrop, how has Xylem and how will Xylem drive growth in these markets? So I talked a lot about industry verticals in our markets, our end markets. We look at these to appraise our business and appraise the opportunity of each of our markets. We also use that vertical alignment to drive growth for our company. As you see on the left side of this slide, water is at the center of some of the most complex challenges that we face around the globe, things like increasing food and energy demands driven by a growing population and an emerging middle class. These challenges cannot be addressed with products alone, we recognize this. So we formed industry vertical teams in Xylem. These industry vertical teams focus on developing what we call sustainable water infrastructure solutions. This is something we refer to as SWI. And you'll hear the value center presidents talk about it at length.
The diagram at the right shows what these industry verticals look like. We cut across transport, treatment, test, services and monitoring and control products and capabilities in our company, and line those teams up by an industry vertical to create better solutions for our end markets. This approach allows us to get higher growth and higher profitability. And this outside in thinking is really changing the way Xylem works, it makes us a much better solutions company. But even where we still just sell products, it makes us a lot better at describing our products in terms that our customers can understand for the vertical in which they play.
Moving on to Slide 42, I'm going to give you a few examples of these SWI initiatives. The first is ballast water treatment. 60,000 ships across the world need to retrofit their systems to meet emerging regulations. This is to make sure that water that's discharged from there ballast tanks when they arrive at port, doesn't introduce invasive species into the waterways. This requires disinfection technology like UV and ozone that our Wedeco business has, and it also requires analytics capability to make sure that those shipping operations are in compliance with the new laws.
Xylem is uniquely positioned here.
In aquaculture, meeting the global demands of a growing population and their dietary needs are changing, is very difficult. And the best way to do this is with commercial tank-based aquaculture systems. It's the most efficient way to grow protein for a growing population. And Xylem has some very unique capabilities in this large and growing market as well. The third area is efficient secondary treatment. This is a very large and fast-growing market and we are uniquely positioned here with our wastewater expertise. Aeration consumes 50% of the energy in a wastewater treatment facility. Xylem's technology and approach can reduce that amount by 50%. The combination of energy audits, analytics and something we call advanced process controls, which Chris will talk about later, is a great way for utilities to reduce their operating expenditures and improve their energy efficiency.
This SWI initiative and industry vertical approach is really changing the way Xylem works. It helps us to identify new market opportunities and it also helps us rethink our core business.
So I now want to switch to Slide 43, and talk about how Xylem optimizes its commercial process by thinking about what we call the customer journey. So we worry about how customers think throughout the process, from the point where they realize they have a need, which we call awareness, to a point where they go out and learn of all the possible ways that they might be able to solve that need that they have, which we call learning, to the point where they engage with a few suppliers to look at the specific products that are available to them and the value proposition of each, which we call engagement. They then buy, and then in the operation, they put their products or the product they've chosen into service, and we call this application. Each of these 4 steps is critical, and meeting the customer where they execute each of these 4 phases is crucial to helping us grow. So we've developed initiatives around each of the 4 steps of the customer journey, and let me just give you a highlight of a few.
To create awareness amongst our possible customers, we do things like the Xylem value of water survey and typical analog and digital marketing and awareness campaigns. This raises the awareness of both the Xylem brand, as well as our important 100-year-old product brands like Flygt and Bell & Gossett. So when a customer has a problem, they think of Xylem or our product brands first. As they move into the learning phase, we're focused on things like digital marketing, to a growing extent, our customers are learning about possible solutions in the digital arena. And we want to meet them where they learn. I'll talk more about this one in a moment.
And then engagement. We have a terrific commercial team. And making sure that, that terrific commercial team sells the same way everywhere in the world and puts Xylem's best foot forward is crucial. We do that with something we call customer excellence. And then the last phase, the application phase. This is all about creating a terrific aftermarket experience for our customers. So they enjoy using our product and they come back for more. And Mike Kuchenbrod is going to talk about something we call total care services, a great way that we're continuing to build our installed base and make sure they come back for more products. So I want to hone in on learning and engagement, and give you a few examples of how we engage with customers in these 2 areas. These are my favorite 2 steps of the 4, because at the end of it, if we do it right, customers buy from Xylem. So let me step into the learning phase and talk about how Xylem meets our customers where they're currently learning.
Over 50% of our customers use digital mechanisms to learn about water solutions to their problems. So in November of 2012, we met them in that arena. We created the first worldwide digital water show in Xylem. We followed the sun around the globe and made an online show for our customers to come and see every single one of Xylem's brands. We had 4,000 participants from 120 countries around the world, we hosted 5,000 online chats, 4,500 documents were downloaded, and we did 2,500 webcast presentations. What that boiled down to was 1,500 highly qualified leads coming into Xylem. Just to give you a sense, that's the number of leads we generate at our largest tradeshow of the year. And we did it at 1/10 the cost.
So this is a terrific way for us to meet customers where they are learning and to drive efficiency in our operation. This show won the Best International Event by Chief Content Officer Magazine, and we've got lots more planned for 2013.
Moving onto Slide 45 to talk about where we engage with our customers during that phase of the process. Again, we call this customer excellence. And at a high level, it's depicted on this slide. The top row of this is really focused on commercial strategy. It's things like channel strategies and pricing strategies. And we do this once a year or twice a year. The bottom row, Chevron [ph], is focused on commercial execution. Think of this more as in the field, how do we generate leads and how do we price products at the point of proposal.
We've got 80% coverage in customer excellence across our company, but room for more. Just like in Six Sigma, we have a dedicated team of individuals who roll this out and work with our sales and marketing teams everyday to go deeper, and they will become our next generation of sales and marketing leaders. Importantly, this reduces variation in our commercial process, which is a prerequisite to some of the IT investments we're making like front-end configurators and CRM tools. And I've got to tell you, my experience with our commercial teams over the last 3 years has changed quite dramatically. You used to be able to hear a different language when you would go meet salespeople from different brands. Now they use the same tools, they speak the same language, they're sharing leads. It's really starting to feel like a team out in the field with the Xylem commercial leaders.
So moving onto the next slide. I want to give you a couple examples of what customer excellence looks like inside of Xylem. So we've been at price for now about 3 years. And it's the area we started in customer excellence. We started with things like pricing Kaizens where we do deep dives on data that allow us to maximize the curve between volume and profitability. We also do things like pricing waterfalls to understand where the leakage occurs from beginning to end and then to remove certain elements of leakage from that process. And we focus on salespeople's individual behavior, how they discount as they sell products around the world. And we'd make changes. We've changed our delegation of authority. We've published discount to list into things that we call the Wall of Fame and Wall of Shame to create visibility amongst very competitive salespeople and it's making a difference. We've driven $110 million of profit improvement in the last 2 years alone from price.
On the right side, you see value proposition, and value proposition is something that all of our salespeople do every day. But we've refocused on making sure that our salespeople all sell like our very best salesperson. And the way we do this is to make sure that we're talking in the customers' language, not ours. We're getting away from talking about features, benefits and technical specs and moving into that customers' language, talking to them about their pain points and making sure we talk in economic terms about how we can solve those pain points, contrasting clearly against the competition, and making sure that we have proof points to demonstrate it. We piloted this in Scandinavia last year with great results and we're rolling it out across the company in 2013.
So moving onto my final slide. I want to just walk back through the growth expectations we have for our markets and for Xylem. Our served markets will grow in aggregate over the next 5 years, on average 2% to 4% per year. Xylem will outperform it by 1 point or so, giving us organic growth of 3% to 5%. Our acquisitions like MultiTrode and PIMS, which were recently executed, will add another 2% to 4% to our growth rate, giving us 5% to 9% overall growth.
I do want to leave you, though, with some ideas of catalyst that might make the market grow faster and Xylem grow faster. So we are, as I described, expecting a modest economic growth recovery. This is a pretty responsible approach, we think, for establishing a long-term objective for the company, but it could be better.
Acceleration of global regulatory tightening and enforcement policy, particularly in the areas of energy consumption and water quality to drive CapEx expenditures up in both industrial and public utilities.
Our industry faces a pretty severe demographic challenge. 35% of the professionals in the water and wastewater industry will retire in the next 10 years. What this means to us is as that void occurs, our direct sales force can provide services to fill that void for public utilities around the world, and should that accelerate, it will accelerate our services growth.
And then finally, we are expecting and counting on minimal improvement in public utility capital expenditures. As I said, this market's been down since 2009 and we're not counting on a strong recovery. But if governments decide to stimulate the economy through expenditures in water infrastructure, it will help us. We've seen a recent surge in public/private partnerships, and should that accelerate, that would also help us.
And then finally, if troubled economies around the world were to decide to privatize their water systems outright to raise capital, then that would also help our business to grow.
So let me conclude with a couple of comments. I think we've established a responsible growth plan for the next 5 years. It's admittedly underpinned by a economic outlook that is, what we see today, fairly weak and a slow recovery. But I'm very confident that the initiatives that I laid out for you and the commercial team and marketing team that I deal with everyday will help this company grow faster than any market that we encounter.
So, thank you. And I want to turn it over to Phil for a few administrative announcements before we wrap up for the break.
Phil De Sousa
Welcome back, everybody. So what we're going to do now is take a quick break. We had scheduled it for 15 minutes, but in order to provide for a robust Q&A session at the end of the second half, we're going to shorten that up and ask that everybody come back to us here at 10:20, so we can get started with the second half of our presentation. And we'll allow the management team here to take a quick break, and we'll see you in about 10 minutes.
Phil De Sousa
Okay. Welcome back, everyone. We're going to get started with the second half of our presentations here this morning. So with no further ado, let me please welcome to the stage Mike Kuchenbrod, our President of our Water Solutions Business.
Michael L. Kuchenbrod
Welcome. It's a great pleasure to be here today. And my name is Mike Kuchenbrod. I'm the President of Water Solutions. This includes our transport and treatment segments, and it is part of the Water Infrastructure segment.
I'd like to show you what we're working on and how our business fits into the strategy and vision that Gretchen described. I'll take you through some strategic initiatives that we're focused on to give you a sense of where we see some of the best growth opportunities. I'll take you through a quick review of our dewatering business, which we've spoken about before, but it's an important topic and I think we should spend some more time on it today. And finally, I will wrap up with an overview of our focus and execution of operational excellence.
So let's turn to Slide 50 and get started. Water Solutions participates in a 16 billion market with leading positions in the transport and treatment segments. Total revenue for the business in 2012 was $2.1 billion. We're different from our competitors in a number of areas, most importantly, our customer intimacy, footprint and proximity to the market and applications and engineering knowledge base. With over 40 direct sales companies, serving customers in more than 150 countries, there is no other water technology company in the market that match our sales and service capability. And there's no one else in the industry that has the breadth and experience in solving so many of our customer challenges.
Please turn to Slide 51. Xylem is part -- is active in all parts of the water cycle. To help illustrate the Water Solutions business and our role in the water infrastructure network, I'd like to take a few minutes to ground you on some key application and technologies.
Please turn to Slide 52. There are 2 primary ways wastewater is moved from a residential community or industrial business to the treatment facility. No other company moves more public utility and industrial wastewater than Xylem. First is the traditional pump station, which is a building structure where we provide Flygt submersible pumps. We invented the submersible wastewater pump in 1947 and have been innovating ever since. Most recently, we introduced Flygt Experior, which is delivering customers up to 50% energy savings due to advances in hydraulics, introduction of premium efficiency motors and simple intelligent controls that are optimized to work with our Flygt pumps.
For those attending here today, please take a few minutes to visit our exhibit outside where you can hear what our customers in the New Orleans area think about their experience with Flygt Experior.
Let's turn to Slide 53. Alternatively, we could also provide a complete package pump station for smaller flows, which include standardized, pre-fabricated containers with our pumps. These turnkey pump stations come with everything our customers need to achieve reliable, cost-effective pumping. Whether it's a submersible pump or packaged solution, both are moving wastewater from the point of generation to the treatment facility.
Let's look at Slide 54. Let's move from the pump station to treatment. Xylem has decades of experience in each stage of the water and wastewater treatment with industry-leading capabilities in biological, disinfection and filtration systems. In addition, we have great capabilities in testing in these environments, which is represented in our Analytics business.
We're unique in having this breadth of technologies needed to address the world's most pressing water challenges. This capability will allow us to expand in industrial adjacencies, as well as our core public utility markets. I'll come back to this point later.
Let's turn to Slide 55. Finally, with our Godwin portable diesel-driven pumps, we provide dewatering capability for sewer bypass to enable for repairs or preventative maintenance. Later, I'll show you several examples of how we are not only providing the pumps, but full dewatering service to our customers in a host of applications inside, but more often outside, the wastewater infrastructure network. We're very excited about our opportunity in this growing market where we are building from a position of strength.
Let's turn to Slide 56. So let's look at a few of the strategic initiatives that we're pursuing now to grow the business. The first strategic initiative I would like to share with you is our focus on the industrial market for treatment. Historically, Xylem treatment business has largely served the municipal market. However, over the years, we have selectively sold treatment solutions in various industrial applications. For example, selling our biological treatment solutions into meat packing plants or selling our mixers into biogas. This initiative is about a more focused penetration strategy on select industrial segments where we have success, have a strong value proposition and the customer base needs strong application support for their operation. This market segment, as we've defined it, is $1 billion to our served available market. The average market growth rate is growing at 5% to 7%, but does vary within the segment that we -- or application. As an example, China, there's a very strong demand coming as part of their 12th Five-Year Plan to reduce ammonia pollution from stack gas. This segment will experience double-digit growth over the next 5 years and we've initiated pilot testing with our ozone systems for this application.
Many industrial applications are like this: they're quick needs based on changing regulations. We will be able to address these emerging market demands with our application expertise. The attractiveness of the industrial treatment segment to Xylem is really twofold. First, we can obtain higher margins since we are tailoring our offer to the application. The customer relies on our expertise for the applications engineering. The second, we are using our core technology. There is little investment required in order to penetrate these markets. The cost of entry is low, and the net returns are very attractive.
Since there are numerous industrial market segments, we've assessed where we think we have the strongest value proposition and they are: pulp and paper, ballast water, biogas and mining. In order to have laser-like focus, we've set up capture teams to target key accounts. These things are mapping the landscape, meeting with the customers and defining our unique value proposition into these market segments. We are leveraging a deep applications expertise of our teams around the world and connecting them in new ways to solve the unique challenges our customers face.
Over the many decades, we've established many unique assets and built the foundation for delivering and growing the industrial segment.
Let's now turn to Slide 57. The core of Xylem's growth strategy is to leverage our large installed base to deliver advanced solutions and services that create peace of mind for our customers and help ensure their operations are running optimally. In 2012, we introduced Xylem TotalCare, a comprehensive, integrated portfolio of services from design and consultancy to energy audits, to supervisory services, to maintenance contracts, all designed to ensure that customer operations run at their best. We know from our vast experience that up to 45% of the life cycle costs of our products is related to maintenance and energy.
To address this, the first advanced service we created were plant audits. Audits are one of the 12 service groups in TotalCare and addresses issues that customers have with clogging and energy consumption. Our value proposition is minimized downtime, reduced energy consumption and increased reliability. In performing an audit, our trained staff is always looking to demonstrate additional savings are available through upgrading technology, changing parameters on the control systems, or otherwise, affecting the conditions of the plant. In the end, this can lead to retrofit opportunities for us and the potential to grow our share of equipment within the plant.
The final step is to encourage customers to enter into a maintenance contract with us to -- such that the plant continues to operate at the peak performance and keeping us close to the customer.
We've made significant progress in developing tools and training our teams to deliver these advanced services. Last month, we added some additional firepower to this initiative with the acquisition of PIMS, which is the market leader for municipal and industrial wastewater plant services in the U.K. They have an advanced skill set and capability that will not only help grow our share in the U.K., but be an accelerator for TotalCare globally.
Let's turn now to Slide 58. Let's look at a couple of examples for TotalCare so far. Watercare in New Zealand operates the world's largest UV site and had an offer out for replacing all of their UV lamps. It was a competitive bid that other replicators went in with low prices. We managed to come in, perform an audit, which proved we could lower their energy consumption by 15% by installing our lamps, tuning the PLC programming and run the right level of power to the banks. This led to us securing the order as well as a 5-year maintenance agreement worth $4 million.
In the U.K., the water companies are very interested in keeping energy and maintenance costs down. We have agreements to do audits with -- for many of them. As an example, for Southern Water, we started out doing 100 pump stations and making recommendations how to optimize performance. We showed an average savings of GBP 10,000 per station, which resulted in an additional 400 audits. In the end, we were given the permission to upgrade the stations based upon our findings, leading to a retrofit potential of $4 million.
Let's look at Slide 59. Let's now transition and talk about the opportunities to grow -- to growth in our geographic markets. As I mentioned initially, we have leading positions in the premium segment in mature markets with our Flygt products. However, when we look into future significant growth, it will become in the emerging markets and we see a need to add a product range and value proposition dedicated mainly for the emerging markets, but also for the second tier in mature markets. So we've developed a simplified limited range of wastewater products sold under the STEADY brand.
So we can distinguish between the 2 markets, the premium segment, which is about a $1.4 billion in size and characterized by the need for highest product quality and performance, a wide range of highly configured products and materials, extensive support and services, and mainly direct sales, which are addressed through our Flygt premium value proposition. And the second tier or value segment, around $900 million in size where the needs -- where the main needs are value for money, a limited product range, high availability, and a lower price, and this is where we will promote the STEADY value proposition and products.
We are now in the process of rolling out STEADY into a number of markets. We have the design, supply chain and manufacturing base that provides the right cost structure for the targeted second tier markets.
Let's turn to Slide 60. Let's focus on dewatering for a moment, a platform we're very excited about. For many of you, this may be a new term, so let me first explain that dewatering refers to the removal of unwanted water. And Xylem is the undisputed world leader in the market. This segment is a tremendous area of strength for us for a number of reasons. First of all, our customer base is well established and we are actively engaged with them. In addition, main dewatering segments are generally stable segments like public utilities, oil and gas or those that have a critical need for continued operation like power plants and other 24/7 industrial segments.
The 24 service (sic) [ 24/7 ] response mindset that dewatering requires is not easily replicated by our competitors. It requires an extensive product inventory, so we maintain the world's largest rental fleet. The dewatering rental business requires a different model, so we invest and manage it with different metrics. As an example, monitoring utilization rates of our fleet is a key performance indicator and one that we track regularly. And it also requires a unique service mindset, so we hired the best people who understand every aspect of our customer's pain and can solve their problems day or night. When a customer's existing equipment fails or a flood condition strike, our ability to be on site quickly with the right pump and expertise makes Xylem an indispensable partner to our customers.
Let's turn to Slide 61. So how did we get to this position of strength? Well, our growth in dewatering was jump-started in 2010 when we purchased Godwin pumps. With the addition of Godwin, we established the broadest dewatering portfolio available. The acquisition also gave us a platform to build upon, integrating the best of our existing brands with Godwin's unique offers. And Godwin will not only -- Godwin not only filled out our product offering, but also netted us the best dewatering rental and services capability in the U.S.
But the Godwin acquisition is only the beginning. We believe there is a tremendous opportunity to grow our international dewatering business by integrating the Godwin model into our global direct sales channel.
Since 2011, we've been extending our footprint organically to grow our share in attractive dewatering markets such as Australia and Latin America. And just a few months ago, we expanded our U.S. footprint by acquiring a longtime value-added partner in the Midwest called Heartland Pumps. As a result, we have more than doubled our revenues in dewatering in 3 years and are positioned nicely for continued growth.
Let's turn to Slide 62. We're going to look at a few examples now, we have a very diversified customer base including construction, industrial, mining, municipal and oil and gas. Our pumps are not specific to any one market segment, but can move across all of our market segments as opportunities arise. In this picture, from a DuPont site in New Jersey, DuPont is a national account, calls on us daily to solve their fluid transfer problems. This is a solution for a chemical application. We supplied 2 electric-driven, 4-inch stainless steel pumps and the appropriate plastic piping to withstand the chemicals they needed to transfer processed water to their treatment facility.
Let's look at Slide 63. When you hear the term sewer bypass, this refers to the bypassing of a certain area or pipeline while repairs or replacements are made. The sewer system infrastructure in the U.S. and as well as in many mature markets is aging and undersized due to population growth, increased flows and old construction technology. We provide bypass solutions and equipment to our customers in both the municipal and construction segments as they are needed to bypass sections of the sewer line for rehabilitation and repair projects. In this picture, we're providing a bypass solution to our customer, Anchor Construction, while they provided repairs to the sewer system in Washington, D.C.
Let's turn to Slide 64. The oil and gas markets play a role in our businesses where refineries operate. In Philadelphia, our sales team and engineering department provided technical drawings as Sunoco needed to repair the cooling tower pumps. We supplied HL 10 pumps to bypass the cooling tower water during the pump renovations.
Industrial facilities such as refineries, power plants, paper mills are the targets in our expansion plans to capture additional work.
Let's turn to Slide 65. In Phoenix, Arizona, we provide pumps to Newton Mining for one of their open-pit gold mines to maintain and lower water levels so that the mine can keep operating. Please note one of the Xylem's service staff in this picture. Our job is to ensure the continued operational success of the rental equipment on site. We often hear from our customers, "Your salesman gets involved with every aspect of the project, design, setup, coordination and on-site support. It's just great."
Let's look at Slide 66. Due to the 13-foot tidal surge from Sandy, Godwin pumps were used to dewater various high rises throughout the city. In this picture, Godwin CD150 pumps were staged along Wall Street to remove standing water. All told, more than 400 pumps were deployed in the storm-affected region. We were extremely proud of our team during this response. They worked tirelessly 24/7 in the days leading up to, during and after Sandy hit -- made landfall. They were true heroes, working together with customers and authorities to drain -- help drain New York and the affected region and allow the recovery process to begin.
The Wall Street Journal said it best about our services: the pumps that are saving New York.
Let's look at Slide 67. As you can imagine, opportunities for growth in these application areas are present all around the world and we will follow the strong Xylem channels to expand some of our rental capabilities in areas where we can make the most impact. A few examples. In the U.S., we will continue to open new branches in underserved markets. We opened 5 last year and have planned to open additional 5 to 10 in 2013. We are looking at several branch expansions in Canada to capture mining opportunities there.
In Western Europe and Scandinavia, we will utilize our current footprint to manage demand and control capital costs. We're going to introduce a European rental bank of equipment that will be able to be deployed throughout the region as demand expands.
In emerging markets, in Latin America, the Middle East, greater Asia, specifically Indonesia, we'll look to add branches. We are looking at a rental and local assembly in China to capitalize on the fragmented rental market there.
In South Africa, we looked to 2 branches in Zambia and Tanzania.
In 2012, our international dewatering business grew 23% in our strategically targeted markets.
Let's turn now to Slide 68. Operational excellence is truly a way of life for us. We've carried this commitment to continuous improvement forward from ITT. It's in our DNA. And we continue to reap tremendous benefits, which is giving us the capacity to continue to invest in our growth despite the global economic challenges we face.
Let me touch on a few areas and some of the results that we are seeing. Our Lean Six Sigma is embedded deep into the organization as helping to drive improvements in customer satisfaction and freeing up resources to fund our growth efforts. This year, we'll conduct more than 400 Kaizen events. In 2012, Lean Six Sigma activity contributed to more than $22 million in our margin expansion.
In Emmaboda, Sweden, home of our largest factory, Lean Six Sigma projects led to our replacing 4 assembly lines for our small pumps into 1, reducing footprint and manpower by more than 1/2.
Another project led to improved processes for machining hard iron used in our impellers, which reduced machining and cycle time significantly and improved our customer lead time by 25%.
For many years, we've taken a global view of our sourcing activity across the Xylem portfolio. Through our global sourcing strategic initiative organization, we are leveraging our global strength to drive improved supplier quality, material flow and price. Again, the savings we expect to achieve provide essential fuel for our growth initiatives.
Now on to our global footprint rationalization. Part of our strength and value proposition is our proximity to our customers. As we look for opportunities in emerging markets, we're aligning our assembly and testing capabilities to be closer to the market in China, India and Latin America, specifically. This year, we'll open the world's largest test facility for our large custom pumps in Baroda, India where we're seeing significant growth for our large custom pumps in the booming power generation market there.
When I think about business integration, again, we see opportunities to leverage our scale and create synergy through the integration of certain front end and back-end functions of our business. As Gretchen mentioned, we will focus on aligning our teams in Europe under a unified leadership structure to fully capitalize on the synergies, but also take a more holistic view of the market opportunities we have in this important region.
We're investing in common front-end sales tools that allow us to respond more efficiently to our customer requests. And we are investing in a new global inventory management system that will allow us to centralize the planning for our warehouses, and more efficiently, distribute stock amongst our sales companies and distribution centers.
And finally, product simplification. We have a broad portfolio to meet a wide range of customer requirements. Our challenge is simplify our portfolio to create product development and manufacturing efficiency while preserving the range of solutions that we can offer. A good example of this is the launch of our Flygt Slimline range, our new propeller pumps designed for high volume and low head launched in 2012. We leveraged our modular design used across our entire midrange wastewater pump portfolio.
Let's turn to Slide 69, my last slide. Water Solutions is aligned with Xylem's strategy. And as we discussed today, we have a deep applications expertise that we can leverage in new, industrial markets. We have the ability to develop lasting customer relations with our TotalCare. We have a clear vision for growth in emerging markets through footprint expansion and our targeted product development. We will continue to aggressively pursue our growth platforms in dewatering and sustainable water infrastructure. And finally, our operating performance is advancing customer satisfaction and fueling our growth initiatives.
So thank you for your time. I look forward to some discussions later in the morning. And I'll now turn it over to Chris Mcintire. Thank you.
Christopher R. Mcintire
Thanks, Mike. Good morning, everybody. It's a pleasure to be here. My name is Chris Mcintire and I'm going to talk to you about test or analytics, starting on Slide 71. I'll begin the discussion today with a description of analytics. This is a fantastic business that participates in an attractive and growing market. After the overview, I will move to a broader discussion about our technical and application capabilities.
I'll share 2 specific examples of how we're helping customers with their measurement needs. These examples will help bring to life the deep application expertise and technology that we're bringing to bear on measurement challenges around the world. I'll also give you a glimpse of how our local experts are working directly with customers to put together solutions that meet their overall measurement needs. I'll then move to a discussion about growth, an important topic at Xylem. I'll cover geographic expansion, innovative offerings, acquisitions, and finally, operational excellence. I'll give you a quick look at our business and at how we're thinking about the future.
Onto Slide 72. Our Analytics business today has reached nearly $300 million in revenue. For those of you that have been following the growth of Analytics, you'll be interested to hear that this represents a nearly 40% growth from 2011. Our Analytics business serves a $4 billion market, growing in the mid-single digits. This is a focused and attractive portion of the larger $6 billion analytical instrumentation market. We have a wide range of analytical instrumentation capability, focusing on both water quality and water quantity.
This business has been built with a series of acquisitions over the past 10 years or so. This has provided us with several strong and well-known product brands: WTW, YSI and Aanderaa, our 3 great brand examples. The Analytics brands are a key component of our business and are recognized worldwide as being best in their categories.
We serve the global markets from our strong positions in North America and Europe and from a growing analytics presence in the emerging markets.
We go to market using well-established distribution partners, as well as working direct on many large projects. We're beginning to take advantage of Xylem's global scale and infrastructure, allowing us to consider geographic growth on new terms. Combined, our Analytics business enjoys the #2 position in our served markets with particular strength in field and outdoor applications.
Let's move to Slide 73. The product portfolio employs a wide range of analytical technologies. We can measure nearly 50 different individual parameters. It's important to understand a bit about our technology, so bear with me as I use a bit of technical jargon to describe our range. These 50 can be broadly grouped into several major technology categories. The first is electrochemistry. This is pH dissolves oxygen, conductivity and specific ions. Next, our optical measurements. This is very specific spectroscopy and color imagery. Next, we move to acoustic Doppler. This allows us to measure water quantity and water movement. And our latest acquisition, MJK, has given us the ability to measure water level and flow.
These sensing technologies are integrated into our individual product platforms, providing simplicity of use for our customers. We have a wide variety of fixed and portable systems that allow for a diverse set of conditions, each is specifically designed with our deep technical and application expertise. This graphic shows the entire cycle of water from source to domestic and industrial usage. It details treatment and return to the environment. Weather and marine interactions are also shown. It's a very broad range of applications as water is quite simply everywhere and critical to both population and economic growth. The demand for data on water is critical and ever-growing.
The key to continued growth and success is our ability to pull these individual parameters together with expertise that allows our customers to measure what they need to measure, to comply with regulations, to protect the environment, to protect their products, to protect their brand, to save energy or to meet their needs for making decisions.
Onto Slide 74. We think of our Analytics business not as discrete companies, but as a portfolio of capabilities. We organize these capabilities into 4 segments: field monitoring, field sampling, online and lab.
The largest segment is field monitoring. These are outdoor applications, primarily done right at the site where the measurement needs to be made. The second is field sampling. These are also outdoor applications, but the instrument is carried with the operator and not left in the environment. Moving to online. These products are screwed right onto the wall and are monitoring processes. As we move to lab, the products are electrochemistry systems, titration and water quality analyzers.
We have a unique combination of application knowledge, technology, brand recognition and access to market. Each of the companies that have become part of the group have competed successfully on an individual basis. We're now bringing together solutions that meet the needs of several key vertical markets. We're not thinking brand-by-brand or even product-by-product. Each of our initial vertical market focus program cuts across 3 or 4 of our segments. Each includes products from multiple brands.
Wastewater is a clear and natural vertical market for us. We're working closely with Mike and the treatment and transport teams to bring combined solutions to this market. Surface water includes water quality and water quantity. Ocean and coastal focuses on customers interested in our harbors and oceans. Many of our water applications use technology that's also applicable to other markets. Our inclusion of food and beverage as an initial vertical market represents our commitment to continue to grow in this area. We're working with Ken's team at AWS to jointly solve food and beverage customer's problems. This vertical market approach is allowing us to take advantage of our global scale and is the basis for many of our growth initiatives.
Let's turn to Slide 75. The first example I'll use today is IQ SensorNet. This is our online water quality network system. IQ SensorNet is a sophisticated digital network systems, supporting dozens of sensors all suitable for harsh environments. This system is flexible, easy to install and maintain, easy to upgrade, and most importantly, accurate and reliable. The primary application is wastewater treatment plants. This system, when coupled with our leading treatment solutions, forms the core of our APC offerings, as described earlier by Colin. By brining simplicity of installation and operation to a difficult application, we're delivering value to our customers. Retrofitting instrumentation into an operational wastewater treatment plant is a real challenge. In some cases, it's a very dangerous proposition. One of the key values of this system to our customers is the ease and simplicity of this installation.
The city of London, Ontario chose IQ SensorNet for a 5-plant upgrade. London needed to measure dissolved oxygen, total suspended solids and pH immediately and had a desire to evaluate a future addition of ammonia and sludge level. The immediate need was to monitor the process. The follow-on need is to reduce energy usage by using analytics to better control specific elements of the process. Our local technical and sales teams worked closely with the wastewater engineers at the plant. The combined team defined a solution to the City of London's needs, both immediate and in the future. By standardizing on Xylem's IQ SensorNet's system at this wastewater treatment plant, they immediately added measurement capability and secured the opportunity to add additional parameters easily in the future. Our local technical applications experts were a key reason why we succeeded with this opportunity.
Now to Slide 76 and our next example. Water quality in lakes and oceans is critical to life. Our environmental sensor buoys allow a wide range of customers to be able to remotely monitor dozens of crucial water quality parameters. This can all done -- this can all be done remotely, critical when the desired monitoring location is in the middle of the ocean. Our wireless communication capabilities use technology to send data directly to where the customer wants it easily and with no intervention.
Buoy applications are varied and opportunities exist around the world. We have over 350 buoy systems installed globally. Pictured at right is a buoy monitoring a body of water at the Beijing Olympics, a great example of how this technology is needed around the world. The specific application I want to highlight here is one that we announced recently. The Caribbean Community Climate Change Centre, or CCCCC, has selected Xylem to provide buoys to help monitor ocean water quality. This is all part of the Coral Reef Early Warning System or CREWS. The buoys will monitor critical water quality parameters as part of this project to monitor the health of the Caribbean reef system. The data will be posted directly to the CREWS website. CCCCC chose Xylem based on our experience with installations in both the Florida Keys and Jamaica. Our local experts on environmental monitoring work directly with the CCCCC team to help put together a solution that met their monitoring needs. The team used its deep experience and technical knowledge to shape a solution that would be successful in meeting the goal of the program. Here, again, is a success based on our local experts, working with customers to solve their problems.
Now onto our growth initiatives, starting on Slide 77. Analytics is present in all major geographic regions with a good balance across the Americas, Europe and Asia. We generate 25% of our revenue in emerging markets and are growing these locations at a higher rate than in developed markets. As part of our move to face our customers as a global analytics company, we reorganized our entire sales force at the beginning of 2012.
Previously organized by brand, the new structure places our entire analytics sales team, including tech specialists, into one regionally organized group responsible for all of our products.
The thinking has shifted from brand-by-brand activities to-customer-by-customer activities. We're working programs in the key vertical markets and are tailoring efforts to each major geography. This organization also aligns perfectly with the rest of Xylem and regional sales collaborations and colocations are a new reality.
Our geographic expansion plans follow a rigorous and staged approach. We typically enter a new geography with distribution partners. We provide technical support and the partner services the channels of the customer. As we gain a foothold, we look to increase customer intimacy with services and support. As volume and capacity build, local product and the system integration is the next step as we build regional capability.
Onto Slide 78. New product and application development is a critical component of our growth strategy. We're taking advantage of our breadth of scale to increase organic growth rates. I want to highlight a couple of key examples of the products that we introduced in 2012. The first is our YSI XL water quality sonde. This is a next-generation release of our 6-Series sonde product range. The 6-Series has been a market leader for 15 years with over 20,000 units deployed globally. The new XL adds digital plug-and-play capability, easing selection, configuration, calibration and operation. Further wireless communication allows for extremely convenient, hands-free connection in the field. The product has been very well received and is delighting existing customers and winning new ones.
Second example is our DAA Storm Datalogger. This product serves as the hub in a remote monitoring system. Developed on the experience of thousands of monitoring installations, the storm can be easily connected to dozens of sensors.
Combined with our hosting site, Storm Central, we have the ability to collect data from nearly any location wirelessly and provide the information to the customer on a secure website using any number of portable or desktop devices. An additional component of our increasing offering is to bring innovations from one geography to another. We have bidirectional cross-branding happening between our WTW and YSI businesses. We've brought our WTW IQ SensorNet online product to North America, using the well-known YSI brand. We've also brought a range of surface water products from YSI to Germany using our locally strong WTW brand.
By leveraging the brand, support, channel access and resources in each geography, we've already seen strong growth in each of these programs. IQ SensorNet grew over 40% in North America with this effort in 2012 alone.
Next is acquisitions on Slide 79. Our acquisition strategy remains a key focus for our growth. Analytics is in an attractive and growing market with strong margins and a high degree of fragmentation. The capabilities obtained by bringing analytics to Xylem supports our ability to combine specific expertise in transport, treatment and test. Mike Speetzen will cover acquisitions in more detail shortly. I want to give you a deeper look at how we're thinking specifically about Analytics acquisitions.
Our focus will be to continue to see bolt-on targets that fill out technology or geographic needs. These acquisitions will not only bring value, themselves, but will help us to feel continued organic growth as we take full advantage of the opportunities provided. We follow a screening process to focus on companies that fit a specific profile. We look for companies that are using deep application expertise to solve critical and important problems for customers. These companies typically provide premium offerings and are recognized by strong brands. We think of these targets as we think of the existing Analytics business: thousands of dollars of our products protecting millions of dollars for our customers. This notion of thousands protecting millions sums up the key to our value proposition across Analytics.
Let's turn to Slide 80. A key component of our growth strategy is to add new acquisitions to a solid and healthy base. We can demonstrate this focus with the description of our success with YSI acquired in late 2011. YSI has been a successful growing and vibrant company for many years. With the history of consistent growth and a strong reputation in the market, YSI was a natural addition to Xylem. Our first year of integration efforts have exceeded our expectations. YSI continued to grow with over 10% top line growth in 2012. This was achieved while improving both gross margin and OpEx spend. Gross margin increased over 300 basis points. Volume leverage, Lean Six Sigma activities and stronger buying power all contributed. Operating expense was concurrently reduced by 23%. The elimination of a YSI board and executive management changes were contributing factors, but we also organized YSI to take advantage of our existing global structure. The end result was an increase in EBITDA of over 168%. We're all very proud of the YSI team. The business is well positioned to continue to expand gross margin and EBITDA as it continues to grow. This is a specific and current example of our efforts to build a strong and healthy base to support continued acquisitions.
Now to Slide 81. The core of the Analytics business has been growing both top and bottom line for the past decade. The business was started from the ground in 2003 and has grown to a nearly $300 million entity in 2012. Continued acquisitions, coupled with organic growth and a focus on operational excellence and cost structure, has driven sales to grow over 25% and EBITDA to grow even faster at over 30%. This has been the strategy from day 1. As a global competitor and a key component of Xylem, this strategy will continue, We're taking advantage of our scale. We're working cooperatively to combine our expertise with the rest of Xylem. We're taking advantage of our position as an analytics leader.
Now to my last slide, 82. There is reason for excitement about our Analytics business. Our organic and acquisition-driven growth has combined and created a strong global analytics presence. We are expanding our successful model of bringing our application experience and technology directly to customers. We're focusing on building strong and sustainable businesses that will support additional acquisitions. We're benefiting from being a critical part of Xylem's overall offering. Analytics is a key component of Xylem's unique capability to transport, treat and test in the water space. We look to a bright future as we continue to bring complete solutions together to help solve the world's water issues.
I'll now hand things over to Ken Napolitano, President of Applied Water Systems.
Thanks, Chris. Good morning, and thank you all for taking the time to be with us today. I started in this business when I was 18 years old, so I'm kind of the old dog on the team. I hate to admit it, but the numbers are the numbers, right? You guys can appreciate that, the numbers are the numbers.
Over the past 30-plus years, I've seen a lot of change and a lot of progress in our industry. And I'm pleased to have the opportunity to share with you how we see and how I see the current dynamics in the Applied Water segment.
So let's get started on Slide 84. Applied Water's strategy for profitable growth has 4 pillars: driving customer excellence, increasing our innovative offerings, expanding in emerging markets and delivering efficiency and productivity from our operations, 4 key points.
Let's go to Slide 85. Applied Water Systems is centered in 3 large, attractive markets: building services, industrial water and irrigation. Inside of those, commercial building, HVAC and industrial water represent our strategic focus areas. We have a balanced geographic mix and focused investments to grow faster in the emerging markets. Our broad product technology and application expertise enable us to deliver superior solutions to our customers. Market-leading brands like Bell & Gossett, Goulds Water Technology, Lowara and FloJet, to name a few, coupled with our broad experience channels, position us to grow faster than the market.
So let's talk about some of the market drivers, going to Slide 86. Macro drivers of urbanization and the growing middle class will be a catalyst for long-term growth, particularly in our target markets of commercial building services and industrial water. Water scarcity will demand smarter, more efficient solutions. We're rewarding those providers with system capabilities and application expertise. And very importantly, moving and treating water consumes a tremendous amount of energy. As a result of this, governments and regulatory bodies around the world are enacting energy efficiencies standards and legislations all over.
For example, in the EU, legislation is already in place that defines minimum acceptable efficiency over a wide range of pumps and that's expanding. The scope of what they're attacking is continuing to expand every year. Green building initiatives around the world are demanding higher performance solutions. ASHRAE, the American Society for Heating, Refrigeration and Air Conditioning Engineers, has published building code regulations driving energy efficiency and energy optimization. And now, in the U.S., the Department of Energy has embarked on a regulation similar to what's already in place in the EU. As past Chairman of the Hydraulic Institute and current board member, I led an industry delegation to Washington just 3 weeks ago where we engaged in a public hearing at the DOE on their proposed energy efficiency legislation. The Hydraulic Institute has been working with the DOE for the past 2 years to ensure that the legislation and the regulations achieve, first, substantial energy savings for our country, but also makes sense for both consumers and for the industry. And the Hydraulic Institute has had a lot of influence over this over the past 2 years and we were, in fact, the leading voice at the table in that DOE public meeting.
The result of all this is a substantial investment by manufacturers in highly efficient products and systems that will sell at a premium to today's technologies and it will favor those companies with the means to deliver it.
Let's turn to Slide 87. Although Xylem is a relatively new company, our products and brands have been in the market for generations, some dating back to 1848. As a market leader for decades, Applied Water Systems has amassed over 25 million installed products worldwide, and between 30% and 40% of the applied water revenue is derived from replacements and retrofits driven from that installed base at above-average margins.
Our strong brand equity, coupled with broad channel coverage and exceptional customer support ensures high retention. We also have a strong focus around OEM platforms because this is a key driver of continuing to build and expand that installed base over time.
So this huge installed base that we have provides a strong and reliable foundation to support our growth investments and our growth platforms into the future.
Let's turn to Slide 88, talk a little bit about commercial building. In the HVAC and commercial building space, AWS supplies the broadest range of products and systems, enabling us to provide integrated solutions that deliver higher value to our customers. Our deep application expertise allows us to deliver consultative services to building owners and their engineers and designers, assisting in the optimization of core building processes that result in better-performing systems that use less energy. Because of our product array that not only includes pumps, but valves, heat exchangers, boiler controls and other control equipment, we can provide a more holistic approach and that is a prime differentiator for us.
Let's turn to Slide 89, and we'll look at an example. This example is a retrofit and an upgrade of the HVAC systems at the Monarch Plaza in Atlanta, Georgia. Some of the notable tenants in this building are Bank of America, Morgan Stanley, Deutsche Bank and JPMorgan Chase. So some of you may have some friends or colleagues that work in the Monarch Plaza. This building was built in 1983, so it's not an 80-year-old building. But nonetheless, the system had substantial performance issues. It was unable to provide adequate cooling to all parts of the building and it consumed way too much energy. Xylem and its channel partner, James M. Pleasants, worked closely with the building owner and the engineering firm to help design an integrated retrofit solution. It provided high performance and control and substantially reduced the energy consumption. This project provided an attractive payback for the owner and enabled them to achieve an ENERGY STAR rating on the building and LEED Silver certification. So this plaza is now a green building.
For those of you here in person today, you can view a video of this case story and hear directly from the customer right over in our display area at the end of the presentations.
Moving to Slide 90, talk a little bit about the industrial market. Xylem offers a broad range of pumping, treatment and system solutions across a wide range of industries. As Colin mentioned, the industrial market is very fragmented. There's a lot of verticals, a lot of SIC codes that make up that market. And we're a leader in this space. And we serve a wide range of those attractive verticals including food and beverage, oil and gas, mining, power gen and the general industrial and manufacturing markets.
Our energy-efficient solutions support the critical water systems that are the backbone of our customers' operations. And also, Colin referred to how do you get to all these places. Well, we have broad and deep channels and they have the ability for us -- to allow us to effectively reach that diverse set of markets.
The customers in this space are typically large, blue chip companies with -- that have both the sophistication and the means to select premium technology with an eye to total cost of ownership. One such customer is Coca-Cola who recently named Xylem a supplier of the year for 2012 and with whom we have a strategic supply agreement.
So let's turn to Slide 91. A recent example of a win in the industrial space involves one of the largest coal mines in South America. This remote mine was constrained by availability of freshwater to support its processes and unable to achieve its full production capability or expand. Xylem designed and delivered an effective treatment and pumping solution to convert available seawater into processed water and this allowed the customer to expand their output, throughput, maximize their production capability with a very attractive payback. We provided the design and the application expertise to ensure that the system perfectly fit the customer need.
Now I'd like to talk a little bit about innovation and new product development on Slide 92. To capture the opportunity stemming from the market drivers that we just discussed, Xylem continues to increase investment in new product development, focused on delivering smarter and more energy-efficient solutions. We're using state-of-the-art computational hydraulic design techniques that maximize the efficiency of our designs and cut the design time by 50%. We're investing in next-gen, highly efficient motor designs, utilizing both permanent magnet and other new motor technologies.
Next, we are advancing our smart monitoring and control technology that adapt to varying system conditions, provide data on equipment condition and communicate with the customers' management systems, again maximizing the efficiency, and in this case, also the reliability and the operating cost of the equipment.
And lastly and importantly, these technologies are coming together in a seamless way where we're seeing an integration of smart controls, new motor technology and highly efficient pumping systems in a seamless integrated product, where in the past they were different devices kind of bolted together.
With all of that, we have a large pipeline of new products that will improve the vitality index in applied water 40% to 50% over the next few years.
But just as important as the technology, we have a legacy of training the industry on system optimization. Smart, efficient products are just part of the puzzle, but understanding the total system design and incorporating this knowledge into the design is key to extracting the highest performance. This is something that our customers look for, they come to expect from Xylem, and importantly, it's something they really highly value.
Let's turn to Slide 93, talk a little bit about emerging markets. Needless to say, emerging market expansion is a key driver of our growth. We will double our revenue in high-growth regions over the next 5 years by deploying a robust and repeatable penetration process. It begins with investments in the channels, in local marketing and in customer support. Then it's followed by building out local capability for inventory, for value-add, for packaging, and ultimately, local designs based on the specific market needs.
We have a strategic focus in China, Asia, Russia, Mexico and the Middle East. And all of that, together, will result in 25% of AWS' sales coming from high-growth regions over the strategic plan period.
A good example of this is our recent investments in Russia. We've been participating in Russia for many years, more on an export basis. But over the past 2 years, we've built a local infrastructure in Russia. We're expanding our channels and increasing our value-added capabilities in the region. And as a result, Russia is now growing at 20% to 30% for us and we expect to continue on that trajectory.
Now, I'd like to talk a little bit about productivity, so let's turn to Slide 94. AWS is delivering productivity and business simplification in 3 main areas: first, we're driving continuous improvement in our operations using the disciplined built in ITT around Lean and Six Sigma. And as Mike Kuchenbrod mentioned, this is, in fact, part of our DNA. I mean, we have a robust and disciplined process throughout the company. And over the past few years, we've completed several major Lean transformations in our factories: in Lubbock, Texas; in Auburn, New York; in Montecchio, Italy; and in Szeged, Hungary. And we continue on this journey.
Secondly, we're in the process of a substantial business system initiative that targets both the front end and the back end of our business that Gretchen referred to this morning in her presentation. On the front end, we're developing a new platform to harmonize and modernize our customer-facing tools that includes product selection, configuration, proposal generation, web-based interface, web-based ordering as well as customer relationship management. This platform will integrate with our upgraded back-end systems where we are driving multiple legacy ERP systems to one. In fact, we successfully went live with our first U.S. site in January and we have several more sites to deploy in 2013.
Third, we are driving product line rationalization across the business that will continue to fuel our future productivity. Let me walk you through one important and specific example of this on Slide 95.
Applied Water is comprised of several market-leading brands and businesses that have been integrated over a period of years. But part of that legacy includes producing a variety of unique product families that fundamentally perform the same function. One example of this is our horizontal and inline water pump family of products.
Today, we manufacture 7 distinct product lines in multiple factories around the world, all of which have discrete supply chains.
Our global water platform project is a large development that will harmonize designs into a global, modular platform, improving efficiencies to exceed the upcoming efficiency regulations that are either already in place in Europe or coming in the U.S. and other parts of the world, as well as reduce the product cost. So when we think about how we're driving productivity and efficiency in our operations, a project like this is a major enabler.
Reducing the number of SKUs, this particular product will reduce the number of SKUs across those family by 30 -- 35%. And the number of possible product configurations from 20,000 down to 4,000. So this has a huge impact on simplifying and leveraging our supply chain and streamlining the manufacturing environment.
This will, of course, also support our footprint rationalization efforts across the business. Beyond the substantial productivity improvement that we get from a project like this, our customers will also benefit. They'll benefit from having best-in-class efficiencies as we redesign the hydraulics when we go through this transformation, but they'll also see better lead times and product availability through the standardization and the reduction of SKU numbers and the simplicity and the modularity of the product line. So this is a project that not only will drive a lot of productivity in the business, but is also a driver for growth.
So let's turn to the last slide and wrap up. Applied Water Systems has a solid plan to deliver profitable growth. We're focused on attractive end markets. We have built a strong new product pipeline. We're accelerating our expansion into high-growth regions, and we are delivering strong productivity in operations, as well as across the businesses.
So thanks for your time and attention today, and it's my pleasure to introduce our CFO, Mike Speetzen, who's going to walk us through the financials. Mike?
Michael T. Speetzen
Thanks, Ken. Good morning. I'm Mike Speetzen, Xylem's Chief Financial Officer, I'm pleased to have the opportunity this morning to talk to you a little bit about our financial performance, touch about our capital deployment strategy, how we're doing on our acquisitions, and then cover off on our projections through 2017. So with that, why don't we get started by turning to Slide #98.
As Gretchen mentioned, with the acquisition of MultiTrode, we've revised our full year guidance solely for this acquisition. We've increased our sales by just under $10 million and have maintained our midpoint of $3.9 billion. Margins are negatively impacted by 10 basis points, and we've reduced earnings per share by $0.01 to reflect normal transaction, step-up and integration costs associated with these acquisitions.
Lastly, let me take a minute to remind you of some of the margin dynamics we're facing in 2013 that we discussed on our earnings call. With the addition of MultiTrode, we now see an additional negative 10 basis points versus 2012 impact from acquisitions and foreign exchange. Essentially, we've added over $100 million worth of revenue with slightly negative margins, driven by transaction cost, integration and purchase accounting, which obviously has a negative impact on operating margin rates.
The costs associated with our European structure place 30 basis points of pressure on margins, but again, is accretive to earnings per share. And as we discussed, the small amount of onetime spin cost remaining in 2013, which we've included in our guidance, coupled with headwind from pension discount rates, places a negative impact of 20 basis points on our margins.
Our core margin expansion is 50-plus basis points and is really masked by some of these items. The core operating margin expansion is driven by our restructuring actions that were executed in 2012 and planned for 2013. And this, coupled with customer excellence and our ongoing productivity programs, will more than offset inflation, enable some room to continue to invest in the business.
Let me spend just a minute on Q1. We've seen sales and orders slightly below expectations in February. That said, we will continue to drive for organic revenue being down mid-single digits as we guided to on our earnings call.
With 2 acquisitions closed in Q1 and associated transaction fees and purchase accounting impacts, coupled with negative mix and lower volume relative to a relatively strong Q1 of 2012, we see segment margins of approximately 10%. We anticipate margins improving sequentially through the year driven by volume, the impacts of the restructuring actions underway, as well as our ongoing productivity initiatives, and we'll obviously talk more about Q1 during our earnings call on April 30. Please turn to the next slide.
I think it's important to look back at past performance as a predictor of our future capability. Revenue has grown 4% from 2008 through 2012, driven by our growth platforms around key areas such as analytics and dewatering. And we've seen our base business recovering to precrisis levels.
We executed significant restructuring, focused at rationalizing facilities and our general and administrative costs. We maintained cost discipline and drove aggressive productivity actions, which enabled our operating margin to expand 210 basis points. Operating margin growth was fueled by significant gross margin expansion, which enabled continued investment in critical areas such as R&D and our key differentiator, our direct selling channel.
And this enabled us to more than offset the costs associated with becoming a standalone public company. We've continuously generated strong free cash flow, and we deployed $1.4 billion into acquisitions, which have not only added significant revenue but have enhanced the profitability of the business. I'm going to spend time later in the presentation talking through the performance of these recent acquisitions. Please advance forward one slide.
As we look ahead to 2017, we see the markets returning to modest growth levels of 2% to 4% and feel we can slightly outpace this with organic growth of 3% to 5%. We're targeting to add between 2% and 4% of revenue from acquisitions, and this totals up to about a 5% to 9% revenue growth target, which means we'll be approximately $5 billion by 2017.
We're committed to continue to see margin expansion in our core business, and we're targeting 50 to 75 basis points, excluding the dilution associated with acquisitions. We see gross margins expanding north of 40%, and we see EPS growing at 7% to 14%.
And lastly, we see free cash flow generation continuing to be strong, and I'll walk through our plans for the cash that we generate later in this presentation when I talk through our capital deployment strategy. Let me end this slide on this note. We've demonstrated a strong track record of growth, margin expansion and effective capital deployment to build upon as we look forward to the next 5 years. Please advance to the next slide.
Our revenue was up 15% from 2008 through 2012, driven by new product innovations, continued expansion in emerging markets, where revenues are now 20% of Xylem's total revenues and investment in key growth platforms such as dewatering and test have driven substantial growth.
Operating margins have expanded 210 basis points, fueled by a focus on expanding gross margins through our productivity, price and portfolio management. Gross margins have improved significantly, which has enabled us to make critical investments in innovation and expanding our channel. Our focus on price through our customer excellence program, coupled with our focus on key productivity initiatives such as lean and global sourcing are a way of life for us and have enabled considerable margin expansion.
As we deployed over -- we also deployed over $100 million in restructuring to reposition our footprint and lean out our cost structure to further enhance margins.
I'd like to make 2 final points on this slide. First, we were able to maintain our margins during an unprecedented downturn in 2009 that impacted many of our end markets, some of which have not yet fully recovered. We were able to maintain our operating margin despite a 13% decline in top line due to our aggressive and proactive response to the deteriorating market conditions.
Second, the 210 basis point improvement in operating margins includes the ramp-up of cost to be a standalone public company, which placed 90 basis points of headwind against our margin expansion. So truly, a strong track record of financial performance to build upon. Now let me spend a few minutes on margins and cost structure, so please turn to the next slide.
As I've mentioned, we've made tremendous gains in gross margin expansion since 2008. We've expanded margins 490 basis points, driven by a deliberate and focused strategy. Let me walk you through the components of this strategy.
First is price. Our customer excellence program has been a critical enabler of margin improvement. We've driven on average 1% to 2% of price and margin gains by effectively managing key accounts, value proposition, taking a more strategic view of pricing and ensuring we have critical linkages between what we're seeing in input cost and on the front end when we price products.
Second is our portfolio. By focusing on acquiring strategically significant and more profitable business platforms, we've enhanced our gross margin by roughly 200 basis points. This, coupled with continuing to fuel our organic growth through innovative new products, has been a critical enabler of our performance.
And third is productivity. This is a combination of our continued focus on key areas such as lean and global sourcing, coupled with restructuring programs that have variabilized our cost base and repositioned us to have a more competitive cost position.
As we look forward to 2017, we see our gross margins continuing to expand north of 40%. This will be fueled by our continued pursuit of accretive acquisitions, coupled with our relentless focus on lean, global sourcing and customer excellence, as well as leveraging the restructuring and realignment moves made in 2012 and underway in 2013. We believe this places us in a more competitive position, enabling continued investment and an ability to lever the volume as we grow. Let me now turn and talk about our operating margins and operating costs, please turn to the next slide.
Operating margins have expanded by 210 basis points, driven by gross margin expansion and leveraging our fixed cost base in areas such as G&A. Our gross margin expansion has enabled us to continue to invest in 2 critical areas. R&D has increased from 2% to 3% of revenue, to support our push for more innovative solutions and in support of improving of our vitality index. We've also continued to invest in our direct selling channel, which is one of our largest competitive advantages and a key differentiator for us in the marketplace.
G&A has increased as a percent of revenue, primarily driven by 2 items. First is the ramp-up of cost to support being a public company. We benchmarked our corporate cost against our peers and feel that at 1.5% of revenue, these costs are at a competitive level.
Second, we've also seen a 1 percentage impact from amortization costs associated with the acquisitions executed since 2010. I think it's important to note that G&A, excluding these 2 items, is actually down as a percent of revenue since 2008. As a result of the restructuring actions that we've taken and effectively managing our cost as we grew the business.
As we look forward, we see core margins expanding 50 to 75 basis points on average over the projection period. Acquisitions will place some pressure on this, in areas such as intangible amortization and transaction costs. We see additional opportunities to bring G&A down as a percent of revenue as we leverage the existing cost base and seek opportunity such as global shared services to enhance our cost position.
We've made considerable progress and feel confident with the plans we have to drive continued margin expansion and bring Xylem up to a 15% operating margin business. Let me now talk about cash generation. Please turn to the next slide.
We omitted some of our historical cash flow information, while it shows incredibly strong cash performance, well over 100% conversion. We do not feel it fairly depicts the company structure we now have in place. For example, our historical cash flows are based on the Form 10 process, which excluded debt service, does not reflect all tax payments that may have been a Xylem obligation in past periods and does not reflect our standalone cost structure. As you can see, Xylem is a cash -- is a strong cash flow generating company, generating roughly a conversion on sales of 8% and a conversion on net income of 95% to 100%. We see this performance continuing through the projection period and feel that we have several ways to ensure this performance.
I'll talk in a minute around capital deployment, but specifically, we see opportunities to dial back CapEx as we get through the first couple of years as a new company standup [ph] and exit from our transition service agreements with ITT.
We also have an opportunity to improve our working capital. We've made great strides. We've brought working capital down to about 2.5% (sic) [22.5%] of revenue. And while that's competitive against many of our peers, we've set more aspirational targets, as reflected by our target for 2013 where we're seeking a 50 basis point reduction in working capital as a percent of revenue, and we plan to continue these improvement gains through the projection period. Let me now turn and talk through our 2 segments. Please advance to the next slide.
Revenue was up 33% or 7% on average from 2008 through 2012 in Water Infrastructure, driven by a number of dynamics. Organic growth has been resilient even through the downturn where revenues declined a modest 4%. Organic growth has been impacted by an unprecedented slowdown in public utility CapEx since 2009, as well as the lingering effects from the European crisis. Organic growth has been fueled primarily through emerging market expansion and new product launches.
Acquisition growth has fueled this segment as we've more than doubled our dewatering platform and added a completely new $300 million test platform.
Operating margins have improved 210 basis points from 2008 through 2012. This margin expansion has enabled us to continue to invest substantially in this segment. I do think it's worth noting some of the dynamics around 2013.
Margins are impacted by the recent acquisitions of PIMS and MultiTrode, both of which will be accretive to margins within 2 years. Foreign exchange translation gains, while favorable to the top line, actually slightly erode margins. And lastly, as we indicated on our earnings call, the standup of our European structure has a dilutive impact on the current year margins. Please turn to the next slide.
Revenue was down 7% since 2008, reflecting the significant impact to Applied Water from the downturn. Despite revenue headwind, operating margins have improved by 60 basis points. We've achieved this performance through a focus on the key areas I articulated earlier around customer excellence, lean, global sourcing, productivity and restructuring actions. And as Ken just emphasized, there's a considerable work -- amount of work being done to streamline the portfolio, as well as reposition the cost base to enhance profitability. Now I'm going to switch gears a little bit and talk about the next 5 years. Please go to the next slide.
We've laid out some of the key assumptions we have as we look ahead and project out our performance. So let me make just a few key points. As Colin mentioned, we see the developed markets growing 1% to 3% and emerging markets growing 6% to 8%. We plan to deploy significant capital towards acquisitions to drive 2 to 4 points of top line growth. We'll continue to drive margin improvement actions to enable margin expansion by focusing on price, productivity and enhancing our portfolio.
You can also see the other assumptions we've provided, let me just emphasize the tax rate. At 21%, it's planned flat to our current 2013 guidance rate, and we'll obviously look for opportunities to improve this into the future. Before turning to what this looks like in total, let me know spend just a few minutes on our capital deployment strategy. Please turn to the next slide.
Gretchen spoke to our strategy at the beginning of the presentation, let me delve into this in a little bit more detail. Capital deployment has been an area we have focused on with many of you during our conversations, so we felt that it was important to spend more time on this subject.
As we've discussed in the past, our #1 priority is organic investment, given this is our opportunity to generate the highest risk-adjusted returns for the business. This reflects R&D investment, as well as the effective investment in CapEx into key areas such as product innovation, expansion into fast-growing and developing economies, product rationalization and cost optimizing activities like the ones executed in 2012 and underway in 2013.
We see a deployment of 3% of revenue into R&D, and we see a deployment of approximately 2.5% to 3% of revenue into CapEx.
Our next priority is deployment of cash into acquisitions. As I mentioned earlier, in the past 4 years, we have deployed $1.4 billion, and we see ample opportunity to effectively deploy another $1-plus billion over the next 5 years. I'm going to cover our performance thus far and the acquisitions in a minute, but I thought it was important to reiterate our focus areas.
Given the fragmented nature of our industry, our focus will continue to be primarily around bolt-on deals aligned with the buildout of our analytics and dewatering platforms, as well as enhancing our aftermarket position and our core business. The final area of focus is on return of capital to shareholders.
As it relates to our dividend, we announced a 15% increase and stated that our policy will be to have future dividend increases in line with earnings growth, signaling the confidence we have in the strong cash generation of this company.
Our dividend now reflects a 30% payout as it relates to 2013 projected free cash flow. We feel this is an important part of the equation for investors and with the recent change in our policy, aligns us competitively amongst our peers. As it relates to share repurchases, at this time, we have a program solely aimed at dealing with dilution from stock awards to management.
Our combined return of capital to shareholders represents approximately a 40% payout of 2013 anticipated free cash flow. We'll continue to balance the return of capital against practical issues such as our geographical profile of our cash and tax efficient strategies.
As with all strategies, we'll continue to review and evaluate the effectiveness of our capital deployment strategy, and we will make adjustments as required to ensure we balance return of capital to shareowners and investing in the future of the company. Please turn to the next slide.
We've been asked by many of you how we're doing on our acquisitions, so here's a scorecard of the performance thus far in our 9 most recent deals. We've laid out our desired criteria for the acquisitions across the top of the chart, and we bucketed the acquisitions in 2 groups: acquisitions completed from 2009 through 2011, where we have more of a track record to report on. And we've also shown the more recent acquisitions, where we've executed in the last year or so at the bottom portion of the chart. As you can see, Laing, Nova, Godwin, OI and YSI are all performing quite well. The green checkmarks demonstrate where we've achieved our key parameters and the green dots show that we're well aligned to achieve our goals, but the measurement window is a bit short to verify.
You'll also note some red x marks. These reflect where we've not met some of our stated goals, which is typical when you look at an array of acquisitions. I'd further point out that while some acquisitions may not meet all hurdles, one area that we will not compromise on is the required rate of return, where we will work to ensure our acquisitions perform to meet this must-have metric.
For these 5 acquisitions, the results are very powerful. Not only have they -- these acquisitions added significant strategic value, but they've created enormous financial value. We've added roughly 200 basis points to gross margin and roughly $0.45 cumulatively to earnings per share since 2008, demonstrating the significant impact these deals have had.
We're well-aligned to achieve and more than likely exceed our return metrics, and all businesses are contributing strongly to free cash flow generation. For MJK, Heartland, PIMS and obviously, MultiTrode, it's a bit early in the process for us to determine where we're at, but all indicators are favorable and reflect a positive trend.
Aside from these being great businesses, there's some other factors at play behind the success of these acquisitions. We not only have a very disciplined process to evaluate our deals, but we also have a very disciplined process to bring them into Xylem effectively. Our acquisitions not only go through a rigorous screening and due diligence process, but they also go through a robust integration process.
After we acquire a company, there's a 30, 60, 90-day integration to ensure the acquisition is successfully introduced to the business and key synergy plans are initiated. We hold our management teams accountable to a financial case that's more aggressive than the case used to justify the acquisition, and we monitor their progress on a regular basis. Lastly, we review the status of our acquisitions with the board on an annual basis to ensure we're held accountable to the various commitments that we've made.
I'd also add that we seek to keep critical management team members who are vital to the success of the company before it was acquired. This ensures that we have continuity and maintain the vital elements that made the company successful on its own. We use the learnings we gain from this process to enhance our review process on future acquisitions.
And lastly, we feel the disciplined process we have in place has served us well and provides the right control and stewardship as we continue forward on our acquisition strategy. The effectiveness of this strategy will ultimately show up in the return on invested capital. To that end, as Gretchen mentioned, we've added in a new component to the senior management team's long-term incentives, specifically targeted around long-term ROIC improvement to ensure we've got vital linkage to this critical metric.
Let me now turn and walk through our 5-year projections. Please go to the next slide.
We see Xylem becoming a $5 billion company with gross margins north of 40%. Operating margins of 14% to 15%, reflecting a 50 to 75 core improvement to operating margins.
We see continued strong free cash flow generation and double-digit EPS growth. This will culminate in a substantial improvement to ROIC, where we target to be from 13% to 14% by 2017. I have tremendous confidence in this goal. We have a proven track record of being able to both drive growth and profitability. We've successfully deployed significant capital into acquisitions, which has enhanced our revenue, margin and return profile of the business, and we have a team with a proven track record of execution.
With that, let me invite the other speakers up to the stage and we'll open it up for any Q&A.
Gretchen W. McClain
Hands up. So I think we're going to hand out some mics, I believe, and get started so we can make sure that folks on the line can also hear as well. So Phil, we've got several folks here.
Allan Glick - First Manhattan Co.
Allan Glick with First Manhattan. If I start at the end and go back with Slide 110, I just want to be clear, when you lay out the targets, what are your assumptions, if any, for restructuring going forward because to be fair, if you restructure every year, the numbers aren't quite as concise as one would like to be. So when you say core margins expand, I'm not really sure what that means. So maybe you could talk to us in a straight-ahead fashion.
Gretchen W. McClain
Yes. So let me just talk about our restructuring and realignment and our thought process on how we include that in terms of our projections and so forth. As you know, this year we're doing a significant realignment and restructuring action, $60 million to $70 million, so we separated that and pulled that out of our earnings. Going forward, our intention is typical operation activities around restructuring the business will be embedded in it, but something large, substantially, that's truly a realignment will be outside. We'll obviously talk about that, give everyone a clear guidance of it. But typical, typical activity that we'd be including to change your business and operations we would be doing. An example of that would be, in 2010 -- no, actually 2011.
Michael T. Speetzen
Gretchen W. McClain
When we were closing the year, we saw economic issues, we went ahead and took activities. We baked that into our business. It wasn't a standalone activity. But coming into a year where we're doing significant realignment is just not part of your base.
Michael T. Speetzen
Yes, so let me just reiterate. We're not counting on any future restructuring, number one. Number two, we talk core in terms of the core part of the business and then if you do the math, in terms of where we are today going forward, you'll see that you don't get 50 to 75 on a linear fashion, mainly because of dilution associated with the acquisitions. So we've pumped the size of the acquisitions from what we talked last year when we said 1% to 2% of revenue. We're now saying 2% to 4%, and that creates just a little bit more dilution as you look forward in terms of transaction cost, purchase accounting, those types of things. That's all built...
Allan Glick - First Manhattan Co.
But that's in the numbers?
Gretchen W. McClain
That's in the numbers.
Michael T. Speetzen
That in the numbers.
Allan Glick - First Manhattan Co.
Yes. So again, everybody -- so baked in your numbers is not any, like 2 years from now, doing a restructuring to get to the $2.50 to $3.40? I mean, as far as...
Michael T. Speetzen
Gretchen W. McClain
Michael T. Speetzen
Right. The only thing that's built in is the benefits from the restructuring executed in '12 and '13.
Clifford Ransom - Ransom Research, Inc.
This is Cliff Ransom. My question for Ken and then a quick follow-up. When you start talking about services, how do you structure or discipline yourself to keeping away from simple wrench turning? I just get nervous when people talk about the demographics of the engineering life because on that demographic, we're all either dying or retiring, because you've got the same problem within your own company in terms of talent and wrench turning is typically very low margin. So how do you decide what you want to go after as you try to deepen your penetration of the operations of these customers?
Sure. You said Ken, but that's really more of a question for Mike. In the AWS business, it's more of a replacement business than it is a repairing issue. So for Mike, the TotalCare initiative, I think, is what you're referring to.
Michael L. Kuchenbrod
And you're absolutely right that the whole goal of going to advanced services is enabling us to actually get more value because if you do a typical time and material type contract, and you're really just supplying the labor. Although that's valued for maybe a retrofit of pump, it's not really where we're going. If you think about going in and doing these audits in some of the examples that I've given, you actually bring value into optimization of the plant. You have follow-up maintenance contracts that go with that, which helps make sure that the plant runs at its peak performance. So those things are absolutely great enablers for us, not only to provide service that our customers value, but also some of the equipment upgrades that then are necessary to take place such that the plant operates at the right level. So that's where the value comes from, and that's where the service is actually a great vehicle to actually have the conversation with the customer about the problem that they're facing.
Gretchen W. McClain
And just -- I would add, when we bought the PIMS Group, when you look at their model and how it's working, I mean, they make profit in what they're doing and it gets back to getting maintenance contracts, serving upfront, getting that return. And in that situation, they're seeing greater than 90% of reassignment of those maintenance contracts going forward. We've learned in terms of what do we need to do in regions where we are getting great return with our services capability. And in the U.S., just last year, Mike's business improved its profitability in the services applications by really putting a focus and a discipline around processes and services.
Clifford Ransom - Ransom Research, Inc.
If I could, I just want to ask a follow-on, Gretchen, to the question that I asked you last week. It's kind of turning on its head. The Water business is, as you commented, highly fragmented. You're still highly silo-ed as an enterprise. You're working to break down those silos and integrate yourselves as you approach these verticals. But that's a big change. You gave us some color on that today, but for those who are most involved in that process, could you just add a little flesh to it? And then the last question related to that a little bit downstream is, it's one thing to have lots of sensors. How difficult will it be to take that installed base and turn them into control elements so that you can maximize the efficiency of a system as opposed to add one point in the pipe?
Gretchen W. McClain
Cliff, all great questions. And let me just comment a little bit, and I'll ask my team to jump in, especially since some have come new to the Xylem team and through acquisitions and others who have seen the migration that we've been trying to drive throughout the organization. We were very separate businesses, and I can tell you, when I came to ITT in 2005, very silo-ed, very brand oriented and so forth. Still important. I want to make sure it's important everyone understands, that brand to the market is critically important. That's what our customers know. But as we've been able to break down the barriers and really share the expertise and the knowledge across the organization, it's helped us actually penetrate and be able to position ourselves differently than our competition with that customer. Now by no means are we going to be a company that everything's integrated into the future. The market's not going to move in that direction. But there are, clearly, water challenges that are interrelated and ultimately needs you to understand the different technologies, that expertise, and in many cases, bring them together to optimize your system solution. And I think you've got a highlight of some of that behind us as we went through that today. So I think that's just making us stronger as we go forward. Getting back to your question around the aftermarket, when you play in the aftermarket, now you can bring the opportunity of monitoring control into the market, and then you ultimately then can bring in new equipment because you know of the new opportunities that they're expanding. You can help bring what today is not a smart water industry. We can drive it to what I believe is a smart industry that ultimately now gets more proactive in solving its issues rather than reactive. So Chris, do you want to comment on the analytics prospect?
Christopher R. Mcintire
Yes, yes, good question. So selling analytics just by itself, it's all about not just having sensors because a sensor by itself doesn't provide information you can take action on. So we've always historically focused on systems that give our customers reliable information that they can decide on and take action. And before we had the connection with treatment businesses and deep application knowledge, we typically would rely on others to try and draw those monitoring and control links. And they don't have the expertise and the application. But by coming together with the treatment business and by coming together with the experts in Mike's business, we can take those folks that know how to do the treatment, they know how to do the analytics and can put together a real combined monitoring and control that can bring real value to the customer. And Mike, do you want to add to that?
Control would be [indiscernible] it's one thing to measure it, it's another thing [indiscernible] on the control [indiscernible]. Is that a fair statement to say?
Michael L. Kuchenbrod
In different applications. Again, I'd invite you to look at the Flygt Experior example. That is a control element that demonstrated where you actually have a controller that's looking at the application and then optimizing the pump to be able to make sure that it's doing the job at the right level. That is a control aspect. So we absolutely have that. I would suggest that some of these advanced process control that Chris talked about where you link the measurement of water quality and feed back that information into treatment optimization, that is the area that we're advancing into today. But we have had -- we have a sizable piece of our business that's in controls today around pump management.
Deane M. Dray - Citigroup Inc, Research Division
What I thought was really interesting was Mike's speech in Slide 102 that shows the migration on the gross margin side because that, in it's essence, is a good progress report in terms of the value creation that's going on. And the 3 elements that you put in there, price portfolio and productivity, those drivers, I'd like to ask 3 questions and you can divide it up because that will tell us how sensitive it is in terms of what that migration and how much higher gross margin we can expect. So for Colin, on the price side of it, just think about the questions, I'm going to ask all 3, but for you, it's going to be the 1 to 2 percentage points of price realization, just what are the levers that you're pulling? How much of this is new product? How much of this is moving up the technology scale? So where is that 1 to 2? For, Ken, the Slide 91 on the reverse osmosis skid systems, really interesting. How much of Xylem content is there today? How much might it be down the road. As you move up the technology scale, that's really the sweet spot where you'll be leveraging the technology know-how, the systems integration and solving a solution as opposed to providing components. And then back to Mike Speetzen, 7 to 1 ERP, going from 7 to 1, seems almost too ambitious. So just tell us, are there diseconomies at all as you force some of the businesses like systems -- or service into an ERP system where it may not fit. But -- all right, so I apologize, but here we go, 3 different answers that get us to gross margin. Let's start with you, Colin.
Colin R. Sabol
So we can start with price. As I laid out in some of the materials I spoke about today, we have this initiative called customer excellence, and we've gotten $110 million of price over the last couple of years by driving it. While we've touched 80% of our sales force, I still think there's a lot more than just 20% to go. So in other words, we've rolled it out across 80% of the company, but driving it more deeply and embedding it into the way we act is certainly still an opportunity for us in customer excellence. I would target both strategic pricing and tactical pricing. There's -- we used to take our price lists from the previous year and multiply it times 1.03 to set next year's stock -- price for our products. We don't do that anymore. We use great data analysis to understand where are we differentiated, where can we get more than our fair share of price and where are we competitively challenged and we price our products lower, maybe, than what they were the previous year to drive volume. So it's a very data-driven analysis, and there's certainly room in that. I also think there's a lot of room in the behavior of our commercial leaders, making sure that they are pricing and eliminating leakage from the price waterfalls. So there's still some opportunity there. I think you mentioned one thing that I think is really relevant, and that is we're on a journey to improve our vitality index across the company. We are at approximately 15% now. We'll get to 25% or better over the 5-year period. And every time we launch a new product, we're very careful to launch a product that is significantly better than the previous product we had and better than the competition. And that gives us an opportunity to gain price. And so if you just do some simple math of taking our 15% vitality index to 25 and getting a significant price premium on each of those, that's a very large contributor to our price impact as we go forward.
Yes, Dean, on the RO skids, really there's 2 pieces to this. There's 2 pieces of our business. One is an RO package business that's based out of Dallas, Texas. And another piece is a tubular membrane business, PCI business in Poland. You may recall that earlier in the beginning -- middle of 2012, we combined the former RCW, Residential & Commercial Water, and flow control into one value center. And those 2 pieces resided in each piece. PCI was in flow control, and RO skid business was in RCW. And so we have now combined those groups as one. They do different things. The tubular membrane is a specific membrane technology that has a great value proposition in certain applications that we're focused on. The package systems business, there are a number of components in the RO skid business which have been commoditized. Right, so it isn't necessarily about producing all the individual components that go on in RO skid. It's about really applications. It's understanding where your portfolio in terms of the scope of what you produced and what applications are attractive in terms of the growth. So we're working with Mike's team, as well as with Chris's team in terms of industrial -- not just desal. I mean, there is still a lot of desal work going on. So your ability to come up with modular designs that you can produce sufficiently and to have very good control schemes that eke out a little bit better energy consumption because ultimately, those are expensive systems to provide, that's where a lot of the value creation is. And then in the consultative services, working with the customer in terms of the application. So it's -- in that piece, it's not about we're not in the standard RO membrane technology business today. I mean, that's not where we are. But it's about understanding the application and how to produce a cost-effective and energy-efficient system for the application. That's a relatively small piece of our business today but a big growth opportunity for us.
Michael T. Speetzen
So the 7 to 1. It's a lot of work. Some of it we had to do coming out of the spin because we shared some systems with ITT. But we really stepped back and said, "We don't want to just get off a system and go to something without really having a strategy." So we laid out a pretty comprehensive roadmap. And what I'd say is we've got it in stages. So this is not an attempt to do some sort of a Big Bang. You heard Ken talk about we've done one ERP implementation that went live in January. Until we get that stabilized, we won't be on to the next one. We're going through the process right now of coming off of a shared general ledger system with ITT for some of our business. In the process of determining what we wanted to do, we decided to go with Oracle, mainly from the standpoint of we had another portion of the business that was already set up on that. So we really stood back and made sure that we were aligning with systems that we use today and use this opportunity in every staged fashion to be able to get our business up on the same system but also recognizing it's key to have that ability to talk within businesses that need to versus trying to force it where it doesn't make a lot of sense. It's part of our capital deployment. So as we look forward, Ken, as he looks at his roadmap, he's juggling the ERP implementations against investment in new products, facility rationalization and such. So...
Gretchen W. McClain
Deane, I'd just add, I mean, we've brought on Nick, who's here with us today, as our CIO, to really think about what's our end state, where do we want to go. So as we need to upgrade certain businesses and plants and we're going in a direction that drives us to one solution ultimately rather than disparate solutions or things where it makes sense to be leveraged. We're not going to do it all overnight. It doesn't make sense. But ultimately, it drives us in a direction that we have governance around the organization, driving us where we can all get access to our information. We've got a lot of old legacy systems, which take a lot of folks that are retiring to keep them up and grade -- upgraded. And so the idea here is to get more modernized, think about the relationship and the interface with our customer first and then ultimately making sure that it's going to streamline the back end of our business so we can move more quickly but it's disciplined.
Just to pull it all together, do you have a 2017 gross margin target that you can talk about today?
Gretchen W. McClain
I'd just say it's north of 40.
Ryan M. Connors - Janney Montgomery Scott LLC, Research Division
It's Ryan Connors with Janney Montgomery. One of the things that makes your business a little bit unique versus some of your peers is the prevalence of the rental business that you talked about it a little bit. And it's something, I think, that we struggle to understand because we don't run across it too often. Can you just talk a little bit about the capital needs of that business and the capital commitment and how it impacts the ROIC of that business relative to your manufacturing businesses? And any kind of capital commitments you see on the horizon in that pocket of the business?
Michael T. Speetzen
Yes. So let me talk just a little bit about -- first of all, it was very different to us as well. And in recognizing that, we carve it off and look at it from a very different perspective. So we use some different measures in terms of how we look at the effectiveness of that business. Key indicator, for example, is asset utilization by geography so that we can determine where we want to invest and where we may need to redeploy assets to another region that may need them more. We spend time with Mike each month, looking at a set of measures around return on assets. The business is accretive to our ROIC. We're careful about how much money we do invest. It's hard to give you an exact number because there's a couple things that happen. One is you spend money refurbing the existing fleet or replacing equipment that actually gets sold coming off of rental. And then there's a portion that we have been investing over the past couple of years as we look to expand geographically. So we've talked about going into Australia, making some inroads in China and Latin America, as well as expanding our depot network within the U.S. So we fit all that in with the CapEx numbers that I talked about earlier in terms of about 2.5% to 3% of revenue and try and manage it in a very disciplined manner so that we're very careful about the asset utilization and making sure that we get the highest return off of that business.
Colin R. Sabol
I would just add to it, and that's what I tried to communicate earlier, which is that the utilization metric is really critical because it gives you a flavor for how you're utilizing that asset. The other thing I would say is I mentioned a European rental bank, because there's different types of mix of what customer demands are. In some cases, on the smaller end pumps, if they're not there that day, that second, you're not going to get it. So you have to have that very local and available, where others on the larger side, there's a little bit longer lead time because the project design and construction allows for that. So you can have a bank that you can use in a region rather than just in a local area. So we look at all of those things to make sure that we're optimizing that investment.
Gretchen W. McClain
One example would be just with Sandy. I mean, we had equipment coming from west to be able to be brought here, to be able to help because we didn't have that number of pumps sitting around. But ultimately, we were able to redeploy and be able to help support in a situation where when you're monitoring the weather in that situation, you had a little bit of visibility.
Michael T. Speetzen
I made a comment during the acquisition process. We look for key management talent that comes with the business to retain. One of the things that we got from Godwin was that capability to manage the asset base, something that we had not done a good job of within our existing dewatering business where we tended to have these pools all localized. Godwin had a very disciplined process for being able to quickly move assets. And that way, you didn't have to have as many, and you were efficiently able to move them where you needed them. We've now started putting that into our European business where we have more of the electrical submersible solutions. So that's a good example of how that's played to our benefit.
Ryan M. Connors - Janney Montgomery Scott LLC, Research Division
So just a quick question on margins. On this part of the thesis on Xylem's margin expansion, you demonstrated you were able to expand margins from '08 to '12. Essentially, organic growth was flat during that time period. If you just look at the revenue base, flat over that period. And I just don't understand your margin guidance looking forward because in a period of flat organic growth, you had 27% incremental margins. If you look forward to 2017, you're projecting 3% to 5% revenue growth. So higher organic revenue growth, but yet, your incremental margins are only 19%. So just help us understand exactly what's happening here with the incremental margins.
Michael T. Speetzen
Yes, so there's a couple of dynamics. One is we're looking to step up the acquisitions on more of a recurring basis. And relative to the discussion we had about 1.5 years ago and what we're seeing in the environment relative to what we need to pay for the acquisitions, although they're still below the highs, they are ahead of where they were historically for us. So there's going to be a little bit of dilution coming from that piece. The other piece is we obviously are going to continue to expand, consistent with the message, I think, you heard this morning, around the geographic reach, as well as innovation. I mean, getting product vitality up to 25% or more percent requires us to continue to put money in, which essentially dilutes your incremental drop. A lot of the increase we had in R&D thus far really came as a result of some of the businesses we acquired and the structure that they had. As we look forward, we're actually going to be redeploying more of our own direct cash into that. And I would also say the selling channel. That's one of our biggest differentiators, and as we look to go more global than we are today, that means putting people on the ground in these different locations. And so that's a part of our cost base that I don't want to call it variable, but it's going to be more variable than, say, G&A cost as we look into the future.
Ryan M. Connors - Janney Montgomery Scott LLC, Research Division
I mean, I thought a lot of these investments you guys had already done when you were a part of ITT, and now you're going to enter a period of nice robust margin expansion. I mean, the average industrial company talks about 25%, 30%, maybe 35%, incremental margins, and here, it's just a lot lower. So I'm just trying to understand those dynamics a little better.
Gretchen W. McClain
So I would just say, so in terms of the investment in the sales channel and so forth, we have made substantial investment across the emerging market and base facilities. But as you go and you bring analytics into it, you need a unique applications knowledge, sales team that's working with it. Now we won't have to build the infrastructure because we will leverage the footprint that we've got in that installed base and the IT systems and so forth that are already there. But you will have an investment to be out and able to continue to expand in terms of the market.
A couple of questions. One is there's a lot of change going on in the organization, sales force consolidation and facility consolidation, particularly in Europe where some of the Flygt and some of your strong brands reside. Can you talk a little bit about your ability to retain key talent as you're doing all these things? How are you getting people to move where you need them to move? And where are they going if you're losing them? And then the second thing is you're stepping up the acquisition pace. Can you talk about the competition for these acquisitions? Number one. And number two, your ability, if -- I guess it can be challenging, too, if you're doing lots of little acquisitions, can you do that? And if you're doing a few big ones, can you pull those off? And do you have an M&A team in place to do that?
Gretchen W. McClain
Okay. Let me first talk a little bit about the change, the dynamics, the restructuring that we're doing. If you look at where we've been and where we've come over quite a few years, there's been a constant change in the organization. And it's part of our culture in terms of to stay competitive, to be out in front. You've got to continue to adapt and to be flexible and modify yourselves. And clearly, Europe, a wonderful location for us, strong position. We need to make sure we're maximizing the investment we've already made and be able to bring a unique value to our customer. And so we are making substantial changes, but our turnover rate is extremely, extremely low. I'd say the commitment and the excitement and the spirit that's in our organization is quite high. I've had a chance to be able to travel, be out to our fields and so forth, and there's high energy. Now you do in some cases, when you move someone's location and their job, you're going to lose some folks. But I would say the top talent we've got have been flexible and as adaptive as they can to be able to move with us, and we're not seeing that to be an issue at this point in time. Mike, you can probably comment on it more than anyone.
Michael L. Kuchenbrod
Yes, we're into this process, and I would say there's also the other side to it. With the change comes opportunity because some of the jobs on how you do business provide an opportunity for people to grow and expand their capabilities. So there's also the opportunity side that goes with that. But I think so far, for the people that we've reached out to in key roles relative to the -- and I'm specifically talking about the European structure, it's going well. People are excited about it, and they see the benefit that it can bring in terms of being able to represent Xylem to our customers in a more holistic way.
Gretchen W. McClain
The way we approach Europe, too, is we've got to the top leaders in Europe and said, "We want you to be a part of it. We want you to help us make sure we design this correctly because we want you to be the leaders of the organization and help make sure we can execute it." So their engagement, I think, has been key and is ultimately helping us maintain, attract that talent and to be able to go forward. Now onto your second question which was around acquisitions and speeding up our acquisition strategy and so forth, how we've done that. We do have a robust acquisition team, and we've been focused on it. So I'll comment in 2 ways. First of all, when we first did the acquisition of Nova, which got us the start of our analytics platform, when we brought Chris in and his team, one of the things we wanted to do is we knew this is an area we wanted to grow through acquisitions. And so we invested in a team, not only that would do well in executing the business that we bought, but was prepared to be able to continue that strategy of acquisitions. So we brought on the right talent. So his team has been very key in terms of how we played this out. Under Colin, we've got a great team that is really looking at our strategic opportunities. And then within each of the business, we have folks that are really driving what are the candidates that are out there that would help position us strategically faster than organic investments, and we've got a robust pipeline. And we have a good team that's executing and so forth. So I feel good about our process, lots of bolt-on we've done for in the last 3 quarters. We've got a strong pipeline. But as we deploy that, we've got to make sure we got the right team and we will go at the pace with the right team and not make a mistake. It's too important. And our scorecard back here and our discipline, it's critically important to keep that at the right levels so that we get the right returns to our shareowners.
David L. Rose - Wedbush Securities Inc., Research Division
David Rose with Wedbush Securities. About 1/3 of your growth is coming from some of your energy-efficient products. I mean, you've highlighted about $500 million in some of your new product introductions coming from energy efficiency. So with that said, maybe this is a 2-part question. But if you could give us some color on the impact of EU regulation on energy-efficient growth or growth in energy-efficient products in the EU. And given what appears to be an increasing likelihood of that regulation pass through here in the U.S. in a couple of years, what are your expectations? And maybe you can give us some color on your considerations of using your balance sheet to help fuel growth in that, particularly given the success in Jefferson Parish.
Gretchen W. McClain
Okay. So let me just ask Ken. Why don't you talk about it a little bit more? I know you touched on it in terms of Hydraulic Institute, and his leadership there, but very active in terms of the activity here in the U.S.
Yes, so there's a couple of dynamics. So in the EU, there's kind of stages of legislation that's just rolling out. So the first couple of big ones hit in January 1, 2013. And they're in 2 spaces, they're in the circulator pump space where hydronic heating in Europe is prevalent. It's the predominant way both in small residences and in large building that heating happens. That's different than in U.S. So that's actually a much bigger market in Europe, and hence, there was a lot more energy at stake. And so the EU went first at essentially heating circulators. So that went into effect January 1 and at the primary energy efficiency level. They also then just expanded into a much broader water pump category. That's a wide range of pumps that go all the way up to -- from 1 to a couple of hundred horsepowers, so a pretty big range. And that also went into effect January 2013, but it was all only an initial step, a small efficiency standard, if you will, to give the industry some time to adapt. So the more stringent standard goes into effect on January 1, 2015. So the whole industry, depending on where your current state is, is investing to get their products there. We're already 100% compliant to the legislation and the regulations that are in place already, and we have a clear path. The global water platform was one example where we're not only doing that modularization to increase the simplicity and the productivity of the product lines but we're also redesigning the efficiencies to exceed those 2015 regulations. So I mean, ultimately, it's hard to put an exact number on it, but clearly, in Europe, it's the law. So I mean, if you don't have a circulator that hits that efficiency, you can't sell it. It's not a soft regulation. So those products sell for about double the price of the old ones. So you can kind of do the math on just what the revenue impact on the growth is going to be, even if the unit volume doesn't change, and that's going to transpire over the next 2 years. So we're playing in that market. That was why we bought Laing. They had that technology, and that's a key technology for us that we're now leveraging across other portfolios. The U.S. is going to take a little longer. I mean, the DOE -- I'm not going to make any editorial comments about the speed of government, but the reality is there are several more years before that legislation is actually in place in the U.S. But as I mentioned, manufacturers are running to get their products, and not everybody is going to have the wherewithal to do this. So I would say we already are put -- using a lot of our balance sheet leverage to take advantage of those opportunities over the next, call it, 3 to 7 years.
Gretchen W. McClain
Okay. So let me just -- I'd just like to say a few comments. First of all, thank you. Thank you for your time, your attention. I know this morning was a lot of data and a lot of detail, but I hope what you walked away with is a couple of key points that I want to summarize.
First of all, I'm confident on our course. We are evolving this company, and you can see it from some of the numbers from 2008 and directionally where we're headed. We come from a very strong core business. We've got unique global assets that are critically important when you look at the macro trends around the world, around the issues we all know around water, whether it's in the U.S., whether it's in Europe, whether it's ultimately in the emerging markets, which are the economies of the future. So we're positioned extremely, extremely well. We've also continued to strengthen that with the new product launches that we've talked about and advancing our strategic acquisition strategy, as demonstrated with the 4 new acquisitions that we've just announced over the last several months.
And I'm really excited about being separated at this point in time. We've got that strong base, and last year, when we were faced with a tough economic situation, there's clearly uncertainty in the marketplace, we had operational strength. We stayed focused on what we needed to do, but we did it as well while we were investing in the long-term growth of this company because that's critically important. And we are committed and we continue to execute to make sure that we're improving our customer delivery and our focus with them.
And I hope you saw that today, that our applications expertise is broad. And the more that we can come together as a team and we can break through those barriers, it only makes us even that much stronger in the spaces that we play today that are absolutely critical in the future but also those new spaces that open up in the market where we'll be positioned ultimately with solutions and systems where a product in itself isn't enough. It would be that technology, that expertise that Xylem brings to be able to position ourselves in the long term.
And one last point is this organization has got the best talent. I'll tell you, if you get a chance to go to one of our facilities, you'll see an excitement and an organization that's really thrilled about what they're doing. And I tell you that because I compare and contrast it to when I was at NASA and I got the chance to work in space. I mean, to think about getting to go out and explore unknown areas. You talk about talent, talking about the water issues in the industries and their products and their pumping capability. You've got an organization that's got just as much passion about what they're doing, and I think again, as an organization, coming together, and you're seeing this team, really define what we're doing. It's a matter of continuing to stay focused, simplify the water industry, because you can get caught up into that it's complex. But we've focused our strategy. We're positioned well. Our experience of working in the water industry tells us where to go but also where to avoid, and I'm confident you're going to see the true value of Xylem come out in the years ahead.
So thank you again for your time and your attention. We're here. We'll get a chance to talk a little bit more. But again, thank you.
Phil De Sousa
Ladies and gentlemen, that concludes the webcast portion of today's Investor and Analyst Day. For all of you who joined us here today at the New York Stock Exchange, we invite you to join us here for the next 1.5 hours or so. We'll be serving a passed lunch, and certainly, we'll be making our senior management team available to follow on with. I'd also like to take the time just to introduce some of our value center business leaders who are joining us, who will be...
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!