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Xylem is a global water technology company that designs, manufactures, and services engineered solutions for utility, industrial, residential, and commercial building applications. Operating through four key segments, Xylem provides innovative products such as pumps, filtration systems, smart meters, and advanced data analytics under brands like Flygt, Goulds Water Technology, Sensus, and Xylem Vue. The company’s offerings span water and wastewater management, stormwater control, and digital monitoring services to help address the world’s most pressing water challenges.

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Xylem (XYL): Company Profile, Stock Price, News, Rankings

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Xylem

xylem

Good day, everyone, and welcome to Xylem's Second Quarter twenty twenty five Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Keith Buettner, Vice President, Investor Relations and FP and A. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Xylem's second quarter twenty twenty five earnings call. With me today are Chief Executive Officer, Matthew Pine and Chief Financial Officer, Bill Grogan. They will provide their perspectives on Xylem's second quarter results and discuss the third quarter and full year 2025 outlook. Following our prepared remarks, we will address questions related to the information covered on the call.

I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website. A replay of today's call will be available until midnight, August 14, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide two. We will make some forward looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future.

These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10 ks and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of 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 or adjusted basis unless otherwise indicated.

And non GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to Slide four, and I'll turn the call over to our CEO, Matthew Pine.

Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered another strong performance in Q2, continuing the momentum we built over the last several quarters. We generated broad based organic revenue growth led by measurement and control solutions. Adjusted EBITDA margin reached a quarterly record of 21.8%, up 100 basis points year over year, and adjusted EPS grew mid teens.

Demand for our products and solutions remains resilient, and we've seen particularly solid orders pace, including double digit growth in smart metering. So we're raising our full year guidance for revenue and EPS. That raised guidance reflects our confidence in delivering strong performance, balanced with prudent management of our outlook. I'm very proud of the team for operating with discipline in a dynamic environment, navigating tariff uncertainty, inflation, and speculation about the impact of trade policy on demand. Our pricing and supply chain actions more than offset inflation and tariff related costs.

Simplification efforts are driving measurable improvements in productivity and customer responsiveness. And we're seeing the benefits in margin expansion and in our ability to serve customers more efficiently. As I mentioned, underlying demand signals remain resilient across our end markets. We're not seeing any material demand pull forward from the second half and our backlog remains strong. Our guidance, which Bill will get into in a moment, assumes current and announced tariff structures remain in place, and we've built in contingencies for potential volatility.

We remain focused on executing the plan we laid out at Investor Day last year. The transformation of our operating model across culture, processes, and structure has already had significant positive impact on our business and our results. Simplifying our operations and structure has reduced complexity, enabled faster decision making. As an example, this quarter we set a Xylem record for on time performance. We're seeing the benefits of simplification in our focus, speed, margins.

At the same time, we're enhancing our operational performance, we're also enhancing our portfolio for growth. For example, with two recent targeted acquisitions in advanced treatment. Our strong first half performance gives us confidence in our ability to deliver both a strong 2025 and our long term financial framework. With that, I'll turn it over to Bill to walk through the quarter's results, our financial position and our updated outlook. Bill?

Thanks, Matthew. Please turn to slide five. We're very pleased with the strong quarter and first half. The team remained focused and delivered results that exceeded our expectations. Our simplification initiatives have set us up to be agile and mitigate risk in an uncertain environment.

And there's still considerable impact to come as we continue to implement our operating model, transformation and reap the benefits of eightytwenty. Demand across the business remains healthy with orders up 4% even against tough comps and we closed the quarter with year to date book to bill near one. Backlog increased in all segments except MCS, where we are successfully working it down to a more normalized level. Overall, remains above $5,000,000,000 Revenue growth was strong at 6% in the quarter, ahead of our expectations, primarily driven by outperformance in MCS, but with contributions from all segments. EBITDA margin expanded 100 basis points year over year, driven by productivity, pricing and volume more than offsetting inflation mix and investments.

Increased operational discipline continues to come through in our results with Q2 EPS of $1.26.0.12 dollars above the midpoint of our guidance and up 16% versus the prior year. Year to date free cash flow was down $61,000,000 year over year, primarily due to outsourced water projects and timing of tax payments, mostly offset by higher net income and improved net working capital. Net debt to adjusted EBITDA stands at 0.4 times, reflecting our strong balance sheet and capacity for continued investment. Let's turn to Slide six. We had outstanding results across the segments and want to start with Measurement and Control Solutions.

Demand for our AMI Solutions remains robust as orders grew 12% organically with strength across water and energy metering. Backlog remains healthy at $1,700,000,000 Revenue was up 10% driven by energy metering demand and backlog execution. Adjusted EBITDA margin was better than expected at 23.1%, down just 30 basis points year over year, driven by inflation and mix, mostly offset by productivity, higher volumes and price. In Q2, we saw an acceleration in higher margin energy orders helping offset the negative impact of unfavorable legacy projects. Project timing and lower tariffs also helped drive favorable performance compared to our original expectations.

In Water Infrastructure, demand remained strong across most regions and end markets. Book to bill was above 1% despite orders declining by 2% against difficult comps. Funding delays in The UK and Canada were the primary drivers of the decline and we expect that to resolve in the second half of the year. Revenue grew 4% led by treatment demand and growth in all regions with the exception of China where we continue to see ongoing economic challenges. Adjusted EBITDA margin expanded 200 basis points to 21.8%, driven by productivity and price, partially offset by inflation.

And the WI team continues to get significant traction with their eightytwenty efforts. In Applied Water, orders rose for the sixth straight quarter, up 4% with strength in commercial buildings. Revenue increased 5% with growth in The U. S. And strength in commercial buildings.

Adjusted EBITDA margin expanded four twenty basis points to 21.7%, driven by productivity and price, partially offset by inflation, including tariffs. The segment continues to set the pace for delivering benefits from eightytwenty. And in Water Solutions and Services, orders increased 5% led by services for utility and power end markets. Revenue grew 5% with contributions from capital projects and services. Adjusted EBITDA margin expanded 60 basis points to 24.4%, reflecting strong execution on price and productivity, divestitures and revenue synergies, partially offset by inflation.

Let's move to Slide seven. As outlined in our last quarterly earnings call, we've taken proactive steps to mitigate tariff impacts, implementing targeted pricing actions and accelerated supply chain adjustments. We're updating our annualized outlook based on the current rates, noting the fluid nature of the impacts though. We've added the impact of Section two thirty two tariffs on steel and aluminum, as well as the rest of world. While there remains uncertainty around final timings and tariff levels, we are confident that the pricing actions and available supply chain levers will allow us to substantially offset the current impacts, though we expect a slightly dilutive impact on margin.

Let's turn to Slide eight. Given our strong first half performance and execution momentum, we are raising our full year guidance. We now expect full year revenue of $8,900,000,000 to $9,000,000,000 representing 4% to 5% total growth and approximately 4% organic growth. Adjusted EBITDA margin is unchanged at 21.3% to 21.8%, reflecting 70 to 120 basis points of expansion versus prior year. Our strong first half performance is mitigated a bit by the dilutive impact of tariffs.

We are raising the adjusted EPS guide to $4.7 to $4.85 up from $4.5 to $4.7 Free cash flow margin remains at 9% to 10%. For Q3, we expect revenue of $2,200,000,000 with 4% to 5% organic growth. Adjusted EBITDA margin is expected to be 21.7% to 22.2%, and adjusted EPS is expected to be $1.2 to $1.25 There continues to be macro uncertainty, particularly around tariffs and FX movements that could impact our performance. But as the results show, the team is doing a great job controlling what we can control. We remain confident in our ability to deliver our full year commitments supported by strong demand, backlog execution and benefits from simplification.

Let's turn to slide nine, and I'll turn it back to Matthew.

Thanks, Bill. Building on Bill's guidance comments, we entered the second half with confidence, both in our ability to deliver a strong 2025 and also in our long term framework that we laid out at Investor Day last year. That plan outlined how Xylem would create value by leveraging our combination with Evoqua, simplifying our business for speed and performance, and delivering profitable above market growth over the cycle. I want to take a moment to recognize and thank the team that is driving so much momentum on all three of those vectors of value creation. On Evoqua, we're now two years post close, and the team has done an outstanding job with the integration.

By the numbers, we delivered the cost synergies ahead of schedule, and we're seeing the value of our combined portfolio and strong traction on revenue synergies across both industrial and utility end markets. We also recognize that sustainable success from an acquisition of this scale requires deep cultural integration, which is why we've given so much attention to transforming our combined culture and made it an integral part of our operating model. And it shows in the way our teams are working. When you walk around our operations, you can see and feel how aligned our teams are, how quickly they're turning strategy into action, and delivering results. We also use the integration as a catalyst, an imperative to simplify our business.

Since launching our operating model transformation last September, the changes we've made to structure, processes and systems have enabled faster decisions, clearer accountability and better service. We're seeing that show up in our performance. The second quarter is a strong demonstration of the team's increased speed and agility. In addition to the strong financial results, the team delivered a new benchmark in on time performance. That's a clear signal that our customers are benefiting from the team's hard work and getting tangible value from our transformation.

At the same time we're sharpening our operational discipline, we're also strengthening Xylem's growth engine. For example, we recently added two high value capabilities to our platform with the acquisitions of Vacom and EnviroMix. Vacom brings proprietary breakthrough solutions in zero liquid discharge, which offers compelling value propositions to attractive industrial verticals like microelectronics and energy. EnviroMix represents another enhancement to our advanced treatment portfolio. The company is a leader in non mechanical mixing and biological process solutions, which enhances our ability to serve one of the fastest growing segments in water, advanced nutrient removal.

These moves reflect our intent to continue simplifying our business for performance and agility, while we invest in the applications and end markets that will drive customer impact, profitable growth, and sustainable value creation. With that, operator, let's go to your questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Mike Halloran from Baird. Please go ahead with your question.

so first on the MCS order side of things, obviously good orders this quarter, good absolute dollar levels of orders. Maybe you can just give an update on how you think that outlook looks today, where we have the destocking side, what are your customers saying from a forward perspective, what the replacement piece looks like? And then lastly, any updated thoughts on when you think that book to bill contract towards one again?

Yes. I'll start us out, Mike. First, let me say that we feel our demand across the board has been really resilient, especially given the volatility globally. Probably the one exception there Mike, I would say from a geographic standpoint would be China, which is a small portion of our business and it's now low single digits. If you had to look at one segment in the quarter, I would say that WI being down 2% stands out, but the book to bill was greater than 1% and we did have a tough compare over last year.

Last year, we were up high single digits in orders in Q2 for Water Infrastructure. We did see some delays in The U. K, which is one of our top markets as they're moving into their AMP cycle eight and that can be typical at the start of new AMP cycles. And also we saw some delays in Canada with their change in government. So we expect those things to snap back in the second half.

But with the line of sight that we have for sure over the next ninety days, we feel that demand is pretty resilient across the board. And we'll continue to monitor it and stay on top of it, really to stay close to our customers.

Yes, Mike. And specifically to MCS, think commercial demand remains extremely strong. As we look at the back half of the year, I think we see a sequential improvement in orders. We talked about MCS continues to work down its backlog to a more normalized historical level, right? It has been inflated for the last couple of years.

And they're getting close to the $1,700,000,000 We have signaled that MCS will be back to book to bill positive as we close the year, and we maintain that expectation.

Good. Appreciate all that color there. And then lastly, maybe just an update on where you stand on the simplification side of things, how the rollout has gone in a couple of the areas you put it in the front half of the year and what the next steps are from here?

Yes. I'll start us out and then I'll let Bill give some commentary, Mike. But we're tracking ahead of the timeline that we laid out in February on our Q4 earnings call. So really proud of the team for leaning into the transformation. I've been traveling quite a bit really since I became CEO.

Just when you're going through a large scale transformation like this, it's good to make sure you get at and getting the pulse of the organization. And I'd say our colleagues and our customers say the impact is real and they're feeling the change. The teams are much more focused, making decisions more quickly and we're seeing again customer metrics improve like on time performance. As we look at our A customers, they're starting to grow at a higher rate and are raving fans. So one thing I'd point to also, Mike, we just wrapped up our long range planning last week and where we had our 16 new division GMs present their long range plans for the first time in our new structure.

And so I walked away very energized by the depth and level of detail in the review and how we're able to really drive focus and execution. And each division really understands their position in the company, whether that's a growth position, kind of a transformation position or continuing to maintain their execution in their division. All in all, making good headway.

Then maybe just from just if we look at specifically from an eightytwenty perspective, Matthew, I think, is talking about the overall simplification on org design, including eightytwenty. I'd say that from my perspective, it's really starting to take hold in the organization. Each quarter, we take another step. We've talked a lot about internally that eight twenty is not just a tool set, but a key element of how we want to run the businesses and embedding that in the culture. I think we're starting to get a better understanding of the power of simplification and the positive impacts it will have across our key stakeholders.

And I think we see an acceleration of learning as we roll the toolset out. The dewatering business began its journey in the second quarter, so we now have all four segments that have pieces that are actively engaged in the tool set. So about 80% of the business has some stage of implementation. For the most part, MCS, supplied water and water infrastructure, are further along, and they've made solid progress on the implementation, identifying their largest areas of complexities. And then they've redesigned their organizations to take significant costs out and look at kind of what the structural needs are to run their business.

When you look at the margin improvement we've seen in Applied Water and Water Infrastructure, really the proof points of the potential we see across our businesses.

Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.

So I just wanted to focus on Applied Water for a second. You obviously had good orders and revenue growth. I think you mentioned driven by commercial buildings. And I think supposedly, you've talked about having the highest headwind from eightytwenty on applied water. So maybe you could give us a little more flavor into what's going How does this also make you feel about affecting change with eightytwenty and maybe not slowing down growth at Xylem?

That's a good question. First, I'd say I'm really proud of the Applied Water team. They've done a really nice job with eightytwenty both in terms of margin, but also focusing on A customers. Tool is about not only simplifying, but it's about redeploying effort to focus on growth. So the growth tends to come second, but we're starting to see pockets or some green shoots of that as well.

This business, Andy, has the most complexity within our portfolio and the most opportunity. So, on the orders front, this is a six I think it's a six quarter in a row we're up in orders, which is a positive. I'd say it's a bit more weighted to developed markets and is across most of the portfolio, especially commercial buildings to your point and industrial. And on the revenue side, I would say that we've had really strong price execution here. Part of that is from the eightytwenty tool.

Part of it is we've just gotten, especially through our new structure, just more nimble and can make faster decisions. So when you look at the headwinds from tariffs, the teams were really able to get ahead of that. We had a little some I would say some very minor pull ins from the second half to get ahead of tariffs in this segment, but nothing meaningful that would have any impact on the second half here. So maybe the last thing I'd say on revenue, we are walking away from volume, right? We talked about that as part of the tool set and part of our long range outlook is we're going to walk away from volume.

So the performance has been in line with what we expect and simplifying the business will only help us continue to grow going forward.

Matt, that's helpful. And maybe just stepping back, maybe talk about the dichotomy between developed and developing markets. I mean you said the strength really is coming from developed. Anything sort of different going on in the two markets and cognizant of China continue to be a bit of a headwind, maybe you can talk about that. And I think you mentioned sort of delays in Canada and UK and treatment. Maybe just address that again.

Yes. So the delays were largely funding timing. The AMP cycle in The UK, they're going to double their investments over the next AMP cycle. So pretty significant and it's just really a timing. And we see that pick up in the second half.

The same with Canada with the change in the government. That's just pushed some of the traditional buy to the right and we believe that will pick back up in the second half as well talking to folks on the ground there. I was actually just in Toronto a couple of weeks ago talking to some of our customers. So feel good that that will rebound. In terms of geography, you were asking me maybe less specific to applied water, but in general, I would say that would point to China as being probably the weak area for us.

I think orders were down around 18% year over year. That would be the area that I'd call out outside developed markets. And I would say also the eightytwenty tool, Andy, is forcing us to kind of rethink do everything for everybody everywhere. And we're intentionally kind of walking away from different parts of our businesses outside of kind of developed markets where we've probably been not as effective.

Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.

Hey, can we put the spotlight on these two deals? Now I know they're smaller, but just the M and A strategy on these niche types of applications that then you can, without a big cash outlay, drop into your portfolio of offerings and scale. So just the implications, and that would suggest really high returns on these smaller dollar amount deals. But just how does that fit into what you're seeing in the pipeline? And that would be a big help. Thanks.

Yes. Thanks, Deane. We do have a really healthy pipeline. I think I mentioned on last call that we really changed our M and A process and much more risk, much more bottoms up, which I think is helping really drive the funnel improvement and the velocity. We talked a lot in our last Investor Day about areas that we're going to focus.

One of those that we highlighted was advanced treatment, which these two fit into. And like you said, we're really excited about some of these technologies and smaller acquisitions that can scale over time and we can kind of help them incubate and do that. So Vacom is a great solution around zero liquid discharge. It's becoming more and more important and imperative in areas like mining and microelectronics and food and beverage. And EnviroMix, a really great technology.

Today, use a lot of mixers, mechanical mixers, and this moves away from that and brings in a technology for us that uses air compression in bubbles. So, another big area of improvement around nutrient removal. So, we're excited about the technologies. We'll continue to do these, and we've got a lot of velocity in this area.

I think, Deane, to your point, these are strong return deals where I think there are significant synergies with our core business, not only from a cost perspective, but significant revenue uplift.

Good. That's what I was looking for, Bill. And then second question on MCS, there's always some consternation about the energy meters, the non smart water meter business. And it sounds and looks like there's some difference between some of the legacy energy meter projects versus some of the new ones that you've booked in terms of the returns. Can you just clarify that?

Yes. I just say that, yes, that's a great observation that we've introduced new technology in both the gas and electric side of our businesses, which has helped us get better margin improvement and also be a leader in those spaces in terms of the technology that we're introducing in those meters. So we really like that part of the business. We have over probably 300 combination accounts where you have a water and a gas utility or a water and electric utility. And it really just drives a lot of scale for them when they can put it in network and put multiple different utilities on the network.

That's going well. And the last thing I would say on the electric side, that industry tends to be a leader in terms of AMI and we learn a lot from being in that market that flows down into the water, into the gas side of our business in metrology.

Our next question comes from Jacob Levinson from Melius Research. Please go ahead with your question.

Matthew, I think you mentioned that you had a record on time delivery quarter here. I'm not sure what you're comfortable sharing, but can you give us some context around where you've come since you became COO and CEO and where are you on that journey? I'm sure you're benchmarking to some level, but just any color you can provide would be helpful.

Thanks for the question. That's a great output of the simplification that we're doing. Two metrics that I always look at in our CEO scorecard monthly is quality and on time performance, because if you have those two things, then you're probably doing pretty well as a company. And we've seen a marked improvement in our on time performance since implementing eightytwenty. And transforming our structure is starting to help as well, just getting more focused.

We've reduced a lot of complexity by simplifying our SKU counts, but not only which in terms improves our ability to operate in our factories and drive down lead time, but also improves our working capital and we had good working capital improvement in this quarter as well. We've we're also tracking as a part of eightytwenty our on time performance to A customers. We want to make sure we over deliver there. And so that's a new metric that we're looking at. So all this, to give you some numbers, in the month of June, we were up 600 basis points year over year on on time performance.

So year to date, we're close to 300. And I'd say that in pockets, we're getting close to best in class, but overall as an organization, we still have some work to do. And I think just the continued focus on simplification and customers will get us there.

That's helpful color. And just on a different topic, you've got a balance sheet at this point as you could argue under levered. I know there's a lot of change going on within the organization that I'm sure would be challenging to juggle too many balls in once if you're thinking about M and A, for example. But just, I guess, how are you thinking about capital deployment here and really as it relates to the M and A environment or buybacks for that matter?

Yes. No, I think we're still forward leaning on the M and A side. Again, we continue to look at assets that fit our strategy and then also have strong financial returns. I think as we created a different process with the organization, we pushed some of the cultivation down to the segments. We've seen an increase in volume and quality of our funnel across the portfolio.

But again, we're balancing things within the organization on transformation actions that we're taking across the portfolio and what those returns are going to be from an organization and then looking at a high bar relative to things that are strategic that we want to invest in the three categories that we've highlighted multiple times and Matthew talked about a little bit earlier. So I think we have a really robust funnel. We're focused on it and the balance sheet will get levered when the time comes and these assets are actionable.

All right, great. Thank you. I appreciate it. I'll pass it on.

Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.

question we get a lot from investors on municipal utility funding in The US. I'm sure you've heard this, but I'm gonna ask it on the call just so you can address it directly. Investors are concerned that funding for utilities under the Trump administration is going to decline. Utilities were very well funded under the Biden administration with a bunch of those programs. There's cuts to EPA funding potentially rolling through state water funds.

So just I'd love to get your perspective on that and what, if any, negative impact you think that might have on your business?

Thanks for the question. Maybe I'll just start just to remind everybody that roughly about 75 of our demand is OpEx. And I would say that also infrastructure in The U. S. Is not getting any younger.

And so this has to be replaced. As a proxy, the first half, water infrastructure being the proxy was up about mid single digits. So I'd say been pretty resilient given the macro uncertainty. It continues to be a watch item for us, but I would say we're not overly concerned at this time. But I will say that on SRF funding, state revolving fund funding, it only makes up 5% of muni budgets, about $3,000,000,000 historically.

Obviously, we don't want to defund that because we're already woefully underspent on our infrastructure in The U. S. But all signs are that Congress will appropriate money and get back to healthy SRF levels, even though there's a lot of chatter about that not happening. So I think Congress will do that and we should see SRF levels kind of back to kind of norms going forward.

Great. Thanks for that. And my follow-up is going to be on MCS. A couple of questions on that. You had seen customers looking to destock inventory on the water side in the first half, which I think you anticipated coming to an end about midyear.

Can you confirm that and that we should get improvements in mix in the second half? And then I think on the electric side, you're talking about profitable business there. I think there'd been an anticipation of replacement cycle for the electric meters that were put in ten to fifteen years ago starting up. Is that part of the contributing factor to improve profitability on electric? And then should we see that continue for the next few years as that replacement cycle progresses? Thanks.

Can I just say yes, I would say first, kind of our expectations for water meters have been right in line? We said it'd be down in the first half and start to ramp in the second half. We see that with an exit rate back at kind of high single digits as we exit 2025 on the water side. On the energy side, yes, there's significant growth driven by both gas and electric. I think the refresh cycle that you're talking about is kind of early stages and will evolve and be a big tailwind over the next couple of years.

I think the profitability associated with both continues to improve. Matthew highlighted just on the new projects on the gas side margin improvement, And kudos to that team for going after price and continued operational efficiencies. The entire segment leveraging eightytwenty to simplify the reduced product portfolio complexity and double down on their 80s products. So I think they're well positioned having both the energy and water assets together. We highlighted just the benefits that we get from sharing the network provides a tailwind and learnings that we can spread across all three areas. Lots to be excited about that business going forward.

Great, Keith. Thanks for taking my questions.

Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.

Hey, guys. This is Tyler Bissett on for Brian. Thanks for taking our questions. You guys raised your revenue guidance. You also guided for a strong adjusted EBITDA margins in 3Q and with less of a tariff impact expected.

Xylem (XYL) Q2 2025 Earnings Call Transcript

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