Welcome to the Xylem Third Quarter 2021 Earnings Conference Call. I would now like to turn the call over to Matt Latino, Vice President of Investor Relations.

Thank you, Ashley. Good morning, everyone, and welcome to Xylem's third quarter earnings conference call. With me today are Chief Executive Officer, Patrick Decker; and Chief Financial Officer, Sandy Rowland. Tony Milando, our Chief Supply Chain Officer, is also joining today's call. They will provide their perspective on Xylem's third quarter results and our outlook. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website at www.xylem.com. A replay of today's call will be available until midnight on November 9th. The telephone replay will be available at 1(800) 839-8707 or 1(402) 220-6076. Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide 2. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. All references will be on an organic or adjusted basis unless otherwise indicated. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC, including in our Form 10-Q to report results for the period ending September 30, 2021. Please note that the company undertakes no obligation to update forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. In the appendix, we have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and adjusted basis, unless otherwise indicated. Non-GAAP financials have been reconciled for you and are in the appendix of the presentation. Now please turn to Slide 3, and I'll turn the call over to our CEO, Patrick Decker.

Thanks, Matt. Good morning, everyone, and thank you for joining us. By now, you will have seen that the team delivered a solid third quarter performance with earnings and margins above our expectations. The fast pace of orders growth that we saw in the first half of the year has continued, with orders up 20% in the quarter, driving our backlog up 34%. That commercial momentum reflects strong underlying demand for our solutions, which continues to be robust in all segments, markets and geographies. Nevertheless, supply-driven constraints on volume slowed the conversion of orders to revenue. A month ago, we indicated a probable $100 million impact on full year revenue, driven by the global supply chain environment. The continuing shortage of electronic components, especially microcontrollers and other chips, is particularly affecting players with large digital solution businesses like Xylem, so we're reflecting those ongoing challenges in our full year view. Having raised guidance at the end of the first and second quarters, we now anticipate that the constraints on volume will moderate our full year revenue growth to between 3% and 4% and bring adjusted earnings per share into a range of $2.40 to $2.50, which represents roughly 20% EPS growth over last year. The growth in orders and EPS reflects the privileged position we're in. Macro trends in our sector are driving durable and increasing demand for sustainable digital water solutions. And the team is executing on a clear strategy to drive above market growth and expand margins as our portfolio continues to digitize. This quarter has been a vivid demonstration of those trends. The team has also shown its ability to capture that demand while showing real discipline on cost. Still, given the impact that supply headwinds are having on volume, we'll provide some additional color on what we're seeing and how the team is addressing those conditions. I've invited Tony Milando, our Chief Supply Chain Officer, to join us on the call today. But first, let me hand over to Sandy to look at the third quarter in more detail, and then we'll turn to a discussion of the market landscape that we see through the end of the year. Sandy, over to you.

Thank you, Patrick. Please turn to Slide 4, and I'll cover our Q3 results in more detail. Revenue grew 2% organically compared to the prior year. Utilities, our largest end market, was down 5% despite continuing strong demand. The decline was driven by supply chain impacts on order conversion, especially chip shortages, slowing M&CS deliveries. Industrial was up 11%, led by continued growth in Emerging Markets and Western Europe. Commercial grew 10%, led by the ongoing recovery in the United States, while residential, our smallest end market, was up 4%. Geographically, Emerging Markets was up high single digits, with particular strength in Eastern Europe and Latin America. Western Europe was up mid-single digits while the US declined modestly. As Patrick mentioned, the team delivered exceptional organic orders growth of 20%, which was broad based across all segments and regions. In fact, year-to-date order volume is higher at this point of the year than in any previous year in company history. M&CS led the way with nearly 42% orders growth, driven by large smart metering contract wins, the impact of longer lead times and pent-up demand from a COVID-19 impacted prior year. We're exiting the quarter with an overall backlog of 34%. And as expected, we are seeing positive momentum on price realization, which will continue ramping through Q4 and into 2022. Looking at other key financial metrics. Margins were above our forecasted range with EBITDA margins coming in at 17.9%, reflecting strong productivity and good cost control by the team. Year-over-year, EBITDA margin contracted 30 basis points as inflation and strategic investments were largely offset by productivity, price realization and cost containment. Earnings per share in the quarter was $0.63. Please turn to Slide 5, and I'll review our segment performance for the quarter. In Water Infrastructure, orders were up 9% on strength in wastewater transport applications in the US and Western Europe. Revenues were up 2% organically. Wastewater Utilities were down modestly, mostly due to delays in ocean shipping. Industrial demand was broad based across all regions. Regionally, Emerging Markets delivered high single digit growth, led by increasing industrial dewatering activity. Western Europe was also up, driven by resilient wastewater OpEx spending and recovery in industrial applications. The US was down modestly due to the shipping delays I just mentioned. EBITDA margin expanded over the prior year as strong productivity savings, price realization and volume leverage more than offset inflation and investments. Please turn to Slide 6. In Applied Water, orders were up 17% organically in the quarter on broad industrial strength and commercial recovery. Revenue grew 8% in the quarter from continued commercial momentum and industrial growth in most regions. Residential growth moderated slightly due to volume constraints. Geographically, the US and Western Europe both contributed 6% growth due to the uplift from commercial and industrial. Emerging Markets were up 13% on continued strength in China and gains in Eastern Europe. Segment EBITDA margin contracted 60 basis points compared to the prior year as inflation and investments more than offset productivity benefits and price realization. And now please turn to Slide 7 and I'll cover our Measurement and Control Solutions segment. In M&CS, orders were up 42% organically as I mentioned a moment ago. Our M&CS backlog now stands at roughly $1.6 billion. The bidding pipeline remains very active as customer demand for advanced digital technologies accelerates. Organic revenue was down 5%, which is a tangible effect of chip shortages. Water applications were down modestly as growth in our test and assessment services businesses largely offset lower sales from smart metering. Due to the digital composition of our metrology portfolio, it has greater exposure to chip shortages. By geography, Western Europe was up 1% while Emerging Markets was flat. The US was down mid single digits. Segment EBITDA margin in the quarter was down 60 basis points compared to the prior year as volume declines from component shortages and higher inflation offset productivity and price realization. And now let's turn to Slide 8 for an overview of cash flows and the company's financial position. Our financial position continues to be very strong. We closed the quarter with $1.3 billion in cash after paying down $600 million of debt in the third quarter. Free cash flow conversion was 57% in the quarter in line with our expectations, and we continue to expect full year free cash flow conversion of 80% to 90%. Net debt-to-EBITDA leverage was 1.3 times at the end of the quarter. And now please turn to Slide 9 and I'll turn the call back over to Patrick.

Thanks, Sandy. The team has clearly done a great job delivering a solid quarter's earnings in difficult circumstances. I want to give a special shout-out to our sales, service and supply chain teams. They've been pulling out all the stops to care for our customers despite the unusual challenges. Let's turn to the quarter now and look forward. Since the supply chain environment has everybody's attention, we want to provide more detail on what we're seeing and the actions we've been taking. So I've asked Tony Milando, our Chief Supply Chain Officer, to walk us through that. Tony, over to you.

Thank you, Patrick. I'm sure many of you are already familiar with the various dimensions of stress on the supply chain across all sectors. Material shortages are having at least some effect on each of our segments with particular challenges in microcontrollers and other chips. In addition, logistics times have continued to lengthen and carrier reliability is at an all-time low. We're also seeing labor tightness in markets where we have significant manufacturing, particularly in the US. Of course, all of this has contributed to inflation across commodities, logistics and labor. We're managing the challenges with both short term mitigations and longer term actions. In short term, we're committing freight with carriers nearly two months further ahead than usual. We're using fast boat options to gain access to smaller ports and thus improve lead times. And we've accelerated value engineering and dual sourcing. To create more resilience beyond that, we're working directly with our technology manufacturers to firm up allocations well into 2022 and beyond. We've dedicated teams to accelerate product redesign rounds around components that are unavailable or nearing the end of life, and we're taking advantage of this opportunity to take strategic actions around SKU rationalization. One more thing to mention, albeit with a slightly greater time horizon: there's been a lot of discussion about cross-border supply chains. Our developed markets largely depend on global supply chains. What we've seen is that in several cases, the current challenges aren't hitting our emerging markets nearly as hard, simply because we have well-established localization strategies there. So to that point, we'll continue to drive our strategy of making where we sell, always evaluating the benefit of shortening domestic supply chains. Patrick, that's the overview. Of course, I'm happy to go into more detail perhaps in response to questions when we get to Q&A.

Thank you, Tony. So now turning from supply to demand. It's essentially the opposite story. Bidding pipelines are very active, order pace continues to be strong and we are not seeing project cancellations. We're staying as close to our customers as we are to our suppliers and doing everything we can to keep them served and, in turn, to help them serve their communities. Just last week, we had about 500 of our customers join us at our annual Xylem Reach User Conference. These are utility operators who are at the forefront of digitizing their networks with AMI and advanced analytics. What we continue to hear from them is that the value they're getting from these technology deployments continues to grow. In the short term, supply constraints are top of mind for nearly all of them. And from their vantage point, they're seeing the same challenges industry wide, so they're being patient and staying as flexible as possible. On longer term demand, the trends driving the water sector are more durable than the causes of today's supply headwinds. One example is the growing market for sustainable solutions. A month ago, we announced Xylem's commitment to net zero greenhouse gas emissions and to science based targets. Over the next two weeks, the water sector will be turning out in force at the COP26 Climate Conference in Glasgow to encourage utilities around the world to do the same. Xylem will be sharing platforms at COP with utility leaders as they call on their peers to also make net zero commitments with the aim of decarbonizing the entire sector. More than 65 water utilities around the world have already done so and it's a movement that's gaining momentum, which is just one reflection of the trend toward technologies that affordably decarbonize water systems. Turning back to the near term drivers in our end markets, I'm going to hand it back over to Sandy to share some detail on what we're seeing and to lay out our guidance for the balance of the year.

Thanks, Patrick. The full year outlook for our end markets remains largely consistent with our view from last quarter, with the exception of utilities. In utilities, underlying demand for our technologies continues to be very strong in both wastewater and clean water. But in the immediate term, we expect growth will come down from a range of mid to high single digits to flat. On the wastewater side, we have seen steady performance in Western Europe on resilient utility OpEx and continued growth in Emerging Markets as a result of large capital projects and our localization efforts there. Order rates remain solid in the US but revenue growth is challenged by constraints on volume. On the clean water side, demand for smart water solutions and digital offerings continues to be robust. However, consistent with our earlier commentary, the impact of chip shortages is particularly acute in the clean water end market. And now please turn to Slide 11. Looking at the industrial end market, we continue to anticipate growing in the high single digits. The growth is broad based with rebounding industrial activity across all segments and most regions. We're seeing healthy demand in our industrial dewatering business in Emerging Markets as well as share gains with OEMs, and the impact of the new product introductions in Western Europe. We're also seeing continuing strength in marine and food and beverage, driven by ongoing recovery in outdoor recreation and the hospitality sector. We are also maintaining our high to mid single digit outlook in the commercial end market. The US business continues to recover at a brisk pace as new commercial building begins to ramp, and key leading indicators reflect optimism for continuing recovery in the institutional sector. Sustained growth in Western Europe and China is coming from new product introductions and energy efficiency mandates. In residential, we're maintaining our expectations of low teens growth for the full year on strength of backlog and continuing market momentum. And now let's turn to Slide 12 and I'll walk you through our updated guidance. For Xylem overall, we now see full year organic revenue growth in the range of 3% to 4%, down from the previous range of 6% to 8%. This reflects the adverse effects of chip shortages and other supply chain disruptions. This revenue guidance breaks down by segment as follows. For Water Infrastructure, we maintain our expectations of mid single digit growth. We expect high single digit growth in Applied Water, down from low double digits. And in Measurement and Control Solutions, we now expect to be down mid single digits rather than up mid single digits. We are now expecting EBITDA margins in the range of 17.1% to 17.4% compared to our previous guidance range of 17.2% to 17.7%. This guidance represents full year margin expansion of roughly 100 basis points. Our adjusted EPS guidance is now $2.40 to $2.50 which, at the midpoint, reflects 19% increase in EPS over last year. Full year 2021 free cash flow conversion is in line with previous guidance at 80% to 90%, putting our three year average right around 130%. We've provided you with a number of other full year assumptions to supplement your models. Those assumptions are largely unchanged from our original guidance. We have updated our euro to dollar conversion rate assumption for the fourth quarter from 1.18 to 1.16. And as you know, foreign exchange can be volatile so we've included our typical foreign exchange sensitivity table in the appendix. Now before wrapping up, let me share some thoughts on our fourth quarter outlook. We anticipate total company organic revenues will be down roughly 4% to 6% in the quarter. This includes flattish growth in Water Infrastructure and Applied Water and M&CS down high teens. We expect fourth quarter adjusted EBITDA margin to be in the range of 16% to 17%. And with that, please turn to Slide 13 and I'll turn the call back over to Patrick for closing comments.

Thanks, Sandy. Just in the last couple of days, we've been recognizing Xylem's 10-year anniversary. The Xylem ticker started trading a decade ago when the company spun out of ITT. Some of you have been with us since the very beginning, and I want to say thank you for your confidence in us. Ten years ago, it wasn't nearly as obvious to the market that water was an investable thesis, much less that it was about to become a growth sector. Our anniversary has been a reminder to reflect on how much progress we've made. I genuinely believe our team has created something special. And along the way, we've been creating a lot of value. Xylem's total shareholder returns have been nearly double the S&P 500 over the decade. But what's most exciting to us are the opportunities that lie ahead. The immediate challenge around supply chain are a good reminder that growth rarely happens in a straight line. But the trends driving demand in the water sector are only intensifying and we're strongly positioned on those trends. We have an outstanding purpose driven team that's passionate about solving the world's water challenges. We built technology leadership on the foundation of a durable business model. We're benefiting from the growing market for sustainable solutions, and we're driving growth and margin expansion on the back of digitization. All of which underpins our commitment to the growth framework that we laid out last month at our Investor Day. So I'm confident that our current market momentum will carry us strongly into 2022 and beyond and keep us on pace to deliver our 2025 strategic and financial milestones. Now let's turn the call over to you, and we're happy to take any questions you may have. Operator, please lead us into Q&A.

We'll take our first question from Scott Davis with Melius Research.

It's a busy day here, but the comments on chip shortage are not unique just to you. Can you help us understand, particularly with Tony on the line here, how this works? Do you know when you're getting chips in? Do you have visibility around deliveries? Do we get a bunch of them in January and then you're able to make deliveries in the first quarter of next year? Just help us understand a little bit about how you think about when you get chips and when you can actually deliver, and the visibility around that.

We deal with our contract manufacturers and our electronic suppliers. We give them forecasts and it's very similar to the way we deal with all of our materials. We provide forecasts in advance. We're committing forecasts out over a 12 to 24 month horizon depending on the component. So it's not very different than anything else we do in terms of how we get supply in; no more complicated than that.

Scott, on how quickly this will snap back: we don't see this being resolved in a single month where a bunch of chips show up all at once. It's going to have some duration as we work through the constraints. Tony, do you want to add?

There are a number of industries clamoring for constrained components, whether it's industrial, automotive or personal electronics. We're all looking for the same things. We're working very closely with our contract manufacturers and directly with the integrated device manufacturers to make sure they understand our demand and commitments, and we're looking to get allocations in over the course of the next 12 to 24 months. We anticipate it will get better as we move into next year, although we can't be precise on timing.

There are different views in the market on timing. We're trying to give a balanced, responsible view because there still is uncertainty. Tony and the team are working hard to secure allocation, and we'll have more visibility by our Q4 earnings call.

When you miss a shipment to a customer, does that move into backlog at that point? Or does the customer have the right to cancel and perhaps go to somebody else? Are the revenues lost, mechanically how does that work?

Yes, in many cases the business moves to the right. We haven't seen project or order cancellations. Competitors are facing similar issues. Customers, particularly utilities, are understanding and being patient since this is industry wide. They generally do not have good alternatives right now, so orders tend to shift to later shipment rather than being canceled.

We'll take our next question from Andy Kaplowitz with Citigroup.

Maybe you could give more color on how you're thinking about getting ahead of costs with pricing and productivity. You've mentioned raising price several times — do you think you can get ahead of inflation and logistics costs as you turn the calendar into 2022 with pricing and productivity?

Let me give you a little color. We are seeing price realization come through as expected. We anticipated to start seeing that tick up in Q3 as we worked through backlog of earlier orders, and we expect momentum to continue to accelerate into Q4 and into 2022. When I look at where we stood in the third quarter, if you look at price and material and freight costs as a basket, we're essentially neutral. As we move into Q4, we expect that to be modestly positive.

You mentioned that Xylem is better positioned in Emerging Markets because it is local-for-local on supply chains, whereas developed markets rely more on global supply chains. Could you give more color on what could be done to improve localization in developed markets? Would that mean ramp-up of investment in the US, for example?

Our underlying strategy is to make where we sell. While Emerging Markets are highly localized, we are also substantially localized in Europe and in the US from a manufacturing perspective. We will continue to move toward more local supply where the business case makes sense, and we will keep evaluating that.

You should not expect a significant uptick in either OpEx or CapEx to address localization in the US. This is not a material, high-cost initiative. It's more about working with our suppliers and third-party manufacturers to move closer where it makes sense on an accelerated basis.

We'll take our next question from Deane Dray with RBC Capital Markets.

It sounds like supply chain conditions have worsened. Since your Analyst Day a month ago, you had sized $100 million of revenues that would be pushed some into Q4 and some into 2022. Where does that stand? How much did it end up getting pushed? It sounds like it was more than $100 million.

Deane, 30 days ago we thought we'd have somewhere between $35 million and $40 million impact in the third quarter. We saw about a $50 million impact in the third quarter. About half of that was related to chip shortages and the other half related to other supply chain delays. As things have tightened, we've sized Q4 right around $120 million of impact. The greatest impact will be on the chip side, which is why you see the guide in our M&CS business down in Q4 quite a bit.

It sounds like the meter side of your business is most impacted because of exposure to semiconductors. If you think about the shortfall, how much of that is centered in your meter business?

When I look at Q3 and Q4 combined, about 65% of the impact is in our metrology business.

The large majority of the impact in Q4 is the metrology business. Importantly, this is not a demand issue; it's shifting revenue to the right. Also, the margin on our backlog that has shifted is as attractive as we had laid out at Investor Day. We're not giving up margins to chase volume, and our partnership with customers has been crucial.

Are you doing partial assemblies? We've heard companies lining up partial, nearly completed products awaiting one component. When those ship, some costs are already expensed so margins can be decent. Are you prebuilding?

Yes, we absolutely are. You'll see our inventory tick up a bit; part of that is rescheduling of parts coming in but also prebuilds waiting for those final parts to arrive so we can ship them out. We are doing that.

Tony, I appreciate the color about using smaller ships and different ports. Keep up the good work.

We'll take our next question from Saree Boroditsky with Jefferies.

The de-watering business and Water Infrastructure seemed really strong. Can you provide more color on how you're thinking about demand in that business going forward, and should that be a tailwind for margins?

When we look across the portfolio and within Water Infrastructure in the third quarter, this was a bright spot. We saw 8% growth in the quarter. Orders were strong and the cost structure in this business, when we get growth, helps margins. Emerging Markets did really well in this business. We're seeing good strength in mining and other industrial markets, and that's been a key part of our growth.

It definitely is a margin-accretive business when volume grows, so that will help us as we go into 2022.

On M&CS, how does pricing work on some of these long-term contracts? Will you be able to recover supply chain inflation within the current backlog?

We're well positioned. Many of our longer-term M&CS contracts have escalator clauses embedded where we reference a basket of price indexes, allowing us to adjust prices based on where the index is.

This is a historically consistent situation. The deals that are approved by regulators and authorities are typically approved because they will generate significant value for the utility. So even if there's some delay or price escalation, it's in the utilities' interest to move forward. The overall value proposition with those utilities supports this approach.

We'll take our next question from Andrew Buscaglia with Berenberg.

The margin dynamics impacting M&CS — you did well in Water Infrastructure on margins. Applied Water was slightly below expectations. What are the differences between those two segments that impact margins?

There are a couple of dynamics. We saw an uptick in dewatering, which is good mix for margin. Also, inflation impacts differed between Water Infrastructure and Applied Water. Inflation was more modest in Water Infrastructure, which helped margin there relative to Applied Water.

You talked about utility weakness. Are you seeing any hesitation around spending given uncertainty around infrastructure stimulus and timing?

No, we've not seen signs of hesitation and our bidding pipeline remains very robust. The conversations at our Reach conference with over 500 utilities covered the entire portfolio of solutions. Historically, utilities haven't relied heavily on federal funding, and orders activity in the US was up strongly. The near-term challenges are port and shipping delays rather than demand weakness.

So as long as there aren't cancellations, you feel confident that demand is there?

That's correct. And again, the margin on those orders in the backlog remains robust.

Also, there's a bias for customers to place orders earlier given longer lead times, which we expect to impact timing between order intake and revenue recognition.

We'll take our next question from Nathan Jones with Stifel.

M&CS had just under $320 million of revenue in Q3. Guidance looks like around $300 million in Q4 or slightly below. Is that roughly the level of revenue you're constrained to with chip and logistics shortages for the next few quarters until things loosen up? Or are there product redesigns or other actions that could boost that in the short term?

If you look at our Q4 guide, it's in that neighborhood. Over time, chip supply should improve and we expect a gradual ramp. We also see strength in other parts of our portfolio outside of metrology, such as assessment and test services, which have strong margin structures and can grow sooner. The chip supply will constrain us over the next couple of quarters, but we expect gradual recovery.

Again, this is not a demand issue. It's a matter of converting orders into revenue. We haven't seen cancellations and margins remain strong.

I'm trying to get an idea of what the first half of 2022 might look like in M&CS.

We're trying to give a responsible, prudent view. There is uncertainty, so we'll provide more detailed guidance for 2022 at the appropriate time.

On localizing supply chains, your contract manufacturing is largely in Mexico supporting the US. Is it even possible to localize more of the electronics from Asia to North America or Europe, or is the supplier base too thin and the cost prohibitive?

Our largest contract manufacturing facility is in Mexico, supporting the US business; assembly and some componentry are localized. Electronics largely come from Asia. We continue to look at possibilities to bring that closer, but chip supply in North America remains limited, so much of that still comes from Asia.

We'll take our next question from Connor Lynagh with Morgan Stanley.

For Water Infrastructure, you called out dewatering as an area of strength. Is that the main driver of the significant increase in orders this year, or are there other areas contributing?

Orders growth in Water Infrastructure has been across the board. We're seeing good growth on the treatment side and transport, which is the largest part of our business, has also been very strong.

You mentioned a change in the typical timing between order intake and revenue conversion. How different is that versus history? The order intake suggests 2022 could be quite strong, but how should we think about the risk relative to history?

We won't comment on 2022 guidance yet; we'll provide that on the next earnings call. For Water Infrastructure, demand is strong and the challenges in Q3 and Q4 are mainly transitory, related to port delays and freight. We expect to get through these issues in the coming months and feel good about Water Infrastructure heading into 2022.

There has been an increase in lead times across the board, so customers are placing orders earlier than usual, which affects conversion timing between order and revenue.

We'll take our next question from Pavel Molchanov with Raymond James.

Given everyone is facing supply chain complications, are you seeing any distressed M&A opportunities to act as a consolidator among smaller players who are more impacted than blue chips?

We see ourselves in a strong position from an M&A standpoint due to our financial wherewithal and bandwidth. We remain confident in our pipeline and priorities, focused on bolt-ons in utilities, industrial and commercial building. The supply chain situation hasn't dramatically changed our M&A view. We'll keep you updated.

On Europe, with policies like Fit for 55 in place and COP26 upcoming, have you seen pickup in customer activity or orders from the EU tied to climate policy?

Not in the immediate term, though we're seeing more discussion. We view that as an opportunity a bit further out. Conversations around COP26 provide a backdrop that should bode well for demand over time, but it takes time for policies to convert into orders.

We'll take our next question from Brian Lee with Goldman Sachs.

It seems price hasn't read out as much in M&CS versus Water Infrastructure and Applied Water. You mentioned inflation escalators in contracts. Can you give a sense of the timing for these adjustments? Are they annual reviews, and do unregulated utilities see the same constructs or is it case by case?

First, inflation has hit some of our other segments more than M&CS because of the commodities purchased. Many contracts do have escalator clauses; they come at different times. We are seeing favorable price coming through in M&CS as well.

In metrology and related long-term deals, we typically have price escalation clauses negotiated on a deal-by-deal basis. We expect those to roll through as orders are implemented, so we're less concerned about margin expansion in that part of the company.

On inflation, you said company-wide you were neutral in Q3 on price versus cost and expect to be modestly positive in Q4. Is that the same timeframe for M&CS or does that read out more into 2022?

Across the company we were neutral from a price-cost perspective in Q3 and expect that to turn positive in Q4 as price realization ramps sequentially. We believe this trend will continue into the first part of 2022. Teams have taken multiple price actions this year. At the start of the year we expected inflation across the company around 3%, but it looks closer to 5% on an annual basis, which is why we've implemented price increases to keep that in balance.

We'll take our next question from Ryan Connors with Boenning and Scattergood.

On supply chain: some macro commentators are talking about double or triple ordering across the economy. Are you seeing any of that in customer orders? On your side, are you doing excess ordering or stockpiling chips hoping something gets through?

We have seen some customers ordering earlier to get ahead of port and logistics delays, particularly in book-and-ship businesses. It's less prominent in M&CS, which is driven by large deals. Overall, the order growth in Water Infrastructure and Applied Water has some of that advance ordering, but M&CS is more about the large deals converting.

We're not doing double or triple ordering. We are working with multiple suppliers — brokers, distributors and IDMs — to secure parts wherever we can. That natural bull-up effect can lead to double ordering in the market, but our approach is to work with multiple legitimate suppliers rather than indiscriminate over-ordering.

Any labor issues or upcoming collective bargaining negotiations? Your filings show about 17% of US labor force is unionized.

No, nothing on collective bargaining. We have good relationships with our unions around the world, particularly in the US. We are seeing labor tightness in the US, especially in distribution locations, but we're not anticipating challenges with our unionized facilities.

Where we're seeing labor tightness is in some distribution centers in the US, which are high-traffic and competitive for labor. We've been hiring ahead and taking actions to be flexible and manage workforce needs.

At this time, I will turn the call back over to Mr. Patrick Decker for any additional closing comments.

Well, thank you all very much. I really appreciate your interest and support. I know we've covered a lot this morning. I look forward to our follow-up conversations with many of you and we'll see you on our next earnings call. In the meanwhile, stay safe and stay well. Again, I want to say thank you to all of you who have been a part of this journey over the last 10 years as we celebrated our 10th anniversary of trading as Xylem. Thank you all very much and we'll be back in touch.

Thank you. This does conclude today's Xylem Third Quarter 2021 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.