Welcome to the Rexnord Second Quarter Fiscal 2017 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Rob McCarthy, Vice President of Investor Relations for Rexnord. This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday, November 2, and are also posted on the company's website at investors.rexnord.com. At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy.

Good morning and welcome, everyone. Before we get started, I need to remind you that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why believe they're helpful to investors and contain reconciliations to the GAAP data. Consistent with prior quarters, we will speak primarily to core growth, adjusted EBITDA, adjusted net income and adjusted earnings per share as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data and we urge you to review the GAAP information in our earnings release and 10-Q. Please note that we are excluding from the presentation of our operating results the impact of a non-core product line in our Water Management segment that we are exiting in order to enable investors to better understand and assess our continuing core operating results. Today's call will provide an update on our overall core performance for the second quarter of our fiscal 2017 and our outlook for the rest of the year. We'll cover some specifics on our two platforms followed by selected highlights from our financial statements, our liquidity and our cash flow. Afterwards, we'll open up the call for your questions. With that, I'll turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks, Rob, and good morning, everyone. I'm going to start on slide 4. Our overall execution in the quarter was solid as our adjusted EPS was in line with our guidance even though our sales were a little bit behind what we had anticipated heading into the quarter. While clearly not satisfied, we were still pleased to see our overall consolidated revenue increase year-over-year in the quarter but the contribution from our Cambridge acquisition more than offset the modest core sales decline. We also continue to leverage RBS to drive productivity across our business while managing our cost carefully allowing us to reinvest in new products and market expansion initiatives that we've discussed in previous calls. Cash flow performance was in line with our expectations for the quarter and consistent with our historical seasonality. In summary, we've continued to make solid progress against our strategic priorities of enhanced organic and overall growth while leveraging the Rexnord business system that deliver against our operational and commercial excellence objectives. Including the impact of the non-strategic product line exit that we announced at the end of last year, our consolidated total revenue returned to positive growth in the second quarter, increasing 2% year-over-year. Cambridge contributed about 5% to total growth while currency translation was only a minor headwind. Core sales were down 2% after adjusting for the RHF product line exit, which was the function of 1% core decline in our Process & Motion Control platform and a 4% core decline in our Water Management platform. For the quarter our adjusted earnings per share was $0.38 and adjusted EBITDA was in line with our expectations. Looking at the performance of our platforms. Process & Motion Control delivered a strong quarter with core sales down only 1%, while positing year-over-year a sequential improvement in…

Thanks, Todd. Slide six of the presentation takes our reported results and reconciles with the adjusted results. Please recall that we intend to exclude the financial impact of the Rodney Hunt-Fontaine non-strategic product line exit from the calculations of our core growth and our adjusted earnings metrics in order to focus on our core operating results. We expect the impact of this product line on our consolidated GAAP financial results to rapidly diminish in the second half of the current fiscal year. Turning to slide 7, I'll just comment on a few key metrics from our consolidated results in the quarter. First, please note that we have excluded $5.5 million and $8.6 million of Rodney Hunt-Fontaine product line revenue from our analysis of the second quarters of fiscal year 2017 and 2016, respectively. The earnings adjustments for Rodney Hunt-Fontaine appeared on slide 6 and the Rodney Hunt-Fontaine sales and EBITDA comparisons are also detailed in our earnings release. Turning to our core operating results, we reported 2% revenue growth in our second quarter, which includes a 2% year-over-year decline in core growth and Cambridge's 4% contribution. Currency translation remained a slight headwind. Next, as we look at the operating performance in our Process & Motion Control platform on slide 8, you can see that PMC's sales increased by 7% year-over-year as the core sales decline moderately to 1% and Cambridge contributed 8% in its first full quarter within PMC. Currency translation was modestly negative. The core sales comparison benefited from ongoing stabilization in our North American distribution channels and overall global MRO demand plus positive growth in our aerospace and consumer-facing end-markets. PMC's adjusted EBITDA margin of 21.2% improved by 260 basis points sequentially as core execution and Cambridge's contribution largely offset the impact of sustaining our investments in our…

Thank you. We will now begin the question-and-answer session. Our first question is from Charley Brady with SunTrust Robinson.

Hi. Thanks. Good morning, guys.

Good morning.

Good morning, Charley.

Hey, just a clarification on the rest of world Middle East projects that are deferred. These are deferred projects into 2018. You're not seeing cancellations or anything that might affect any kind of backlog you have, correct?

At this point, Charley, that's right. I mean, these are active projects whereby we've got a want take. We've, in some cases, built the product and when it comes time to ship it or for the final inspection, they've told us we'd like it a little bit later. And so, as a result of that, obviously, we're honoring our customer's wishes and not shipping it. And as we've looked at our backlog, we're trying to look at other areas where that could potentially happen based on past behavior and experience. And in making that decision, as we reflected in our outlook, I can tell you this is slightly more than usual given the size and the concentration of the region. So, I think we're trying to be cautious with respect to what's in our backlog. But these are not cancellations, these are deferrals into 2018.

Understood. Thanks. Can you just speak a little more on the 60-day push-out of the footprint rationalization supply chain optimization program, kind of what's going on and what's the genesis of having the 60 days?

Yeah, Charley, I think if you – first of all, thanks for the question. If you take a step back, when we set about trying to implement this over two years ago, it was to take approximately 20% of our overall square footage out, reduce overall fixed cost. And so, this was a big deal for us all along. It's still going to generate $25 million of savings as we get to the finish line and look at some of the things that we want to do to ensure that it's a success not just in terms of the cost savings, but in terms of delivery schedules, in terms of service levels to our customer. We've decided to tell you that it could be another 60 days. Our internal schedule is still pushing for completion on time. But I think it's important to just sort of highlight the fact that this is a big deal. We've been at it for a couple of years. We're not going to let 30 days or 60 days impact what's going to be great long-term structural savings. So, I wouldn't say it's anything other than, as you get a little bit closer to the ground and you're planning to shift, we're telling you it's going to take potentially another 60 days. And so, that's really it. The costs are roughly the same, the benefit is the same, the impact to next year is the same but I think we're just trying to be I think communicated what's happening because we've been at this for a while and as we close it out, we want to do it the right way and that's really it.

Great. Thank you.

The next question is from Jeff Hammond with KeyBanc Capital Markets.

Hey. Good morning, guys.

Good morning.

Good morning, Jeff.

Hey. So, you say that I think four things kind of that knocked down your guidance around $0.15, $0.20. I was wondering if you could just kind of bucket or at least put them in order of magnitude the Middle East project, the process weakness, the non-res and the move to just get a better sense of the magnitude of the headwinds.

Yeah. Jeff, this is Mark. I mean, you kind of want the piece that's mid-point of our prior guidance where we are today. You have, as Todd has referenced and discussed the 60-day move from SCOFR, and that's roughly we call it $0.03 or so just from that impact in the year. With these projects we have a mixed impact. In the U.S. it's going to be a few pennies as well. From there, it's really volume after that point, Jeff, and it really kind of buckets in roughly 70% of the volume is really coming out of water with a larger piece obviously coming from these projects that are being deferred primarily in the Middle East. And then, as we discussed some impact from some moderating growth within the non-res end markets, and the balance really, 30% of that revenue change that we're talking about is really coming from the process industry end-markets. So, those are kind of the broad buckets, Jeff, that I put those in when you kind of – when you rough out the math on the revenue decline where our prior midpoint was roughly just below flat to down 0.5%. And when you say approximately 2 points to 2.5 points of core growth, which drives that revenue, then finally we're going deal with the back half year.

Okay. That's helpful. And then, Todd, I think you mentioned some regions in sub-verticals within non-res where you're seeing choppiness. Can you just provide some more granularity where you're seeing that and maybe a little more context on why you're still feeling optimistic about the outlook?

Thanks Jeff. I mean, if you take a step back, the leading indicator of future activity ultimately is the start information. And if you look back across, I would say office, education, government, healthcare, each of those in calendar 2015 saw pretty tepid starts particularly as you got towards the end of the year. And so, in total, the starts last year were down. If you think about build cycle and you fast-forward anywhere from 9 months to call it 18 months, that's what's the – that's the resulting activity we see. And so, we've been able to offset a lot of that with share gains, with the alternate end-market exposure through commercial and other things. But you get into these quarters where there's just a little bit of noise, right, and it's just down a little bit and it's down regionally, right. When you look through Northeast, this quarter was a little bit weak. Midwest and Great Lakes were a little bit weak and the West was a little bit weak. But if you look at the Mid-Atlantic, the Southeast and the West and the North – I'm sorry – the Southwest and Northwest was actually pretty good. So, when we look at what's happening with starts this year, in each of the four call it institutional segments, starts are going to be better or projected to be better in calendar year 2016 than they were in 2015. And if you would – if you think about what that means as you cascade into next year or the next 9 months to 18 months, we think that that bodes well for continued growth in institutional structure. So, I think it's one of these things where we've been able to offset some of it as starts have popped around over…

Okay. Good color, guys. Thanks.

The next question is from Joe O'Dea with Vertical Research Partners.

Hi. Good morning. Just...

Good morning, Joe.

... on the water infrastructure side and what you saw in some of the weakness in the Middle East, it seems like maybe you're looking at like 50% decline or so in that region. I guess, just in terms of whether or not we see that continue to be a source of softening, whether these delays convert to cancellations or just kind of how you're feeling about comfort level with that being a bottom or that being another source of declines as we move forward?

Joe, we certainly – first of all, it's a great question. We – it's not quite 50%, but it's very, it's significantly double digit. And I think what we've tried to do and the way we reflected our outlook in the second half, we're trying to de-risk that part of the business. We don't think these are cancellations. I mean, I think – and we look at the projects, these are projects that are under way for, I'll call it, significant events and/or requirements in various countries. So, it's not just one country, it's Qatar and Saudi Arabia, the Emirates, and these are major water infrastructure projects that are ongoing there, will be finished, that are simply pushed out some delays versus large deal cancellations. So, these aren't sort of speculative I would say. These are very much needed to be completed and we think that's broadly a deferral. That being said, I think it's appropriate to assume that the order activity on a go-forward basis is going to hampered somewhat. I mean, these are economies that are generally dependent upon oil substantially above where it is today. And as you go through the downstream impact and the ripple effect on water projects, we can debate whether it should happen, it does happen. Near-term, I think we've got it sort of boxed in. On a go-forward basis, it's really going to be weaker. We don't think it's a collapse. We think this is more of a push-out timing and then the re-phasing sort of this – pushes everything out versus there's a big year where you catch everything up, right? This is sort of a move out as opposed to a big deferral that we're going to catch up in one particular quarter or six-month period.

Got it. And then some of the comments around, it sounds like a little bit of bigger share of the wallet. Could you just talk about kind of – it sounds like that effect is happening both on the PMC and the Zurn side, but any degree to which you can kind of frame some of the successes there or expect share and what you're capturing, but just to kind of put in context some of the successes on the share gain?

Sure. I think as we've tried to outline, we've spent a lot of time amid some tough end-markets finding ways that we can outgrow the served markets, and a lot of that had to do with incremental new products, first-fit opportunities with our industrial businesses and then increased spec share and pull-through with product adjacencies in our Zurn business. With each case we've launched a number of things in the first half of the year and I can tell you that today that's meeting maybe slightly ahead of what we've expected at least through the first six months that grows as we get to the second half. So, part of the walk to our second half is incremental success along these initiatives with new products, first-fit and increased spec pull-through. And, moreover, I think as we get into the next couple of quarters, you're going to hear us talk a lot more about technology-enabled products across Rexnord in each of the platforms and we think that that's an incremental growth opportunity as we look into next year and beyond whereby we've got a – the broadest portfolio of products that, as we connect them and provide context and data and information to owners and operators, we think that that is a big opportunity for us to differentiate the marketplace. We think there's more to come on that, but those are just some of the examples. I think of the success we're having early in the journey here that builds each quarter and there's a lot more, I think, which you'll hear about in the coming quarters.

Okay. Thanks very much.

The next question is from Mig Dobre with R.W. Baird. Joseph M. Grabowski - Robert W. Baird & Co., Inc. (Broker): Good morning, everyone. This is Joe Grabowski on for Mig this morning.

Good morning, Joe.

Good morning, Joe. Joseph M. Grabowski - Robert W. Baird & Co., Inc. (Broker): Good morning. I wanted to start with the PMC core growth guidance for the year. It was lowered a bit to mid-single digit. And it seems, year-to-date, core growth there is down maybe 2.5%. It was only down 1% in the second quarter and the prior year comparisons are sort of comparable first half to second half. So, maybe just a little more color on why core growth will decelerate in the back half.

Joe, this is Mark. As we kind of talked going into the year, we knew we were going to have – we knew our second quarter, the core growth was going to moderate just given the pacing of some projects within that platform year-over-year. And we knew we said in the back half it's going to kind of revert back to closer to where it was in the first quarter. On the same theme, we just think it's a few points, maybe a little tougher on the back half and the reason really being, as I said, in the process industries, you look around not just us, but a lot of other industrial companies are signaling signs of not only weakness in this current quarter, but they're calling for weakness in the next quarter. And given the fact that we have two quarters left, not just one, we think that really plays itself. We're going to be cautious with it. We think that's going to play itself into our fourth quarter, so we've taken what before was going to be low-mid-single digit, so mid-single digit, for growth decline in the back half of the year, really, again, focused on those process industries that have been very difficult.

And, Joe, maybe just color. I mean, if we look at our sales funnels, they're measured in the hundreds of millions of dollars. And if we're talking about one to two points of core growth out in the quarter, we're talking $3 million to $6 million in PMC. That's entirely within the realm of possibility based on, I'll say, the sentiment, challenges that are out there. I mean, the people committing to new capital projects in the December quarter here, there's a lot fewer today than we thought there was going to be maybe in May. So, we're not talking about anything other than I would say there's some tweaking, trimming based on, I would say, experience and maybe just being a little bit, I'd say, prudent in the way we're thinking about it. So, $3 million to $6 million of revenue that we thought maybe they're based on project activity simply isn't at the present. That's not a view. The nice thing we are seeing is the MRO spend has been very stable for almost three quarters now. We think the outlook there is reasonable. If you look at and talk to the large major U.S. industrial distributors, they're saying the same thing. So, we've got the base business is now stable and beginning to improve a little bit and the funnels are growing, the hit rates are still high, but there's a likelihood and a reluctance for those things to convert in the next six months just based on where we think the sentiment exists. And that's what's reflected in our second half guidance. Joseph M. Grabowski - Robert W. Baird & Co., Inc. (Broker): Sure. That makes sense. Thanks for the color there. And I guess last question. You gave good color on your outlook for U.S. institutional construction, took the outlook there down a little bit, but you kept the outlook for commercial construction. So, maybe a little further color on what you're seeing in commercial.

Yeah, I think, as we look at commercial, it's a little bit more mature in its recovery. I think the starts information, if you were to look back on that, was a little bit stronger last year modestly. And we think that that build cycle really kind of continues over the balance of our fiscal 2017 and into our fiscal 2018. I don't think it's any more complicated than that. I mean, the growth is there. It's, I would say, it's a broader set of end markets. When you look at institutional where we're typically strong it's education, it's healthcare, it's government buildings. So, those are more I would say larger and episodic and much earlier in the recovery process of these verticals relative to where commercial has been. So, I think it's just a maturation of where commercial sits relative to institutional. Joseph M. Grabowski - Robert W. Baird & Co., Inc. (Broker): Great. Thanks, guys.

Yes.

Our next question is from Karen Lau with Deutsche Bank.

Thank you. Good morning, everyone.

Good morning, Karen.

Good morning. I was wondering if you could give us some more help on the sequential margin trajectory. If I'm doing my calculations correctly, I think that your guidance implies, sequentially, margins would drop somewhere between a point and a point and a half. I'm talking about EBITDA margins. And you also said full-year outlook for the PMC margins has not changed. So I'm guessing that imply pretty significant drop sequentially in water. Maybe you can guide us through what kind of sequential decremental you're assuming for both businesses.

Sure.

And are you assuming a ramp in the fourth quarter?

Sure. Yeah. Karen, this is Mark, no problem. If you look at – we'll start with water, right, and the PMC margin are generally intact. Now, if you look at – if you take Q2 going to Q3, our revenue is going to decline in Q3 just given the seasonality inherent in that business and also some of these projects that are deferred or pushed out. So, if you look it sequentially, within water you're going to see a decremental margin that's going to be in the low-to-mid 30% range is what you'd generally expect for that platform from a decremental margin standpoint. When you look into the fourth quarter then, you'll see the revenue starts recovering of the seasonality, so it's picking back up and also giving some of the project timing that we have in our VAG business. You'll see an incremental margin in our fourth quarter in that same range, low-to-mid 30% range. So, that's kind of how we expect the decremental and incremental margin to play-out over Q3 and Q4 in water. If you look within PMC, sequentially, we'll see a mid-30% incremental margin in the third quarter. That's all on a reported basis. On a core basis, obviously, it's going to be decremental margin but in the range of what you expect, down 35% to 40% in that quarter. And then when you look at our fourth quarter, you'll see a sequential margin, it's going to be a little bit over 50%. There's a lot of restructuring that we've been doing in that business and also the productivity initiatives are going to benefit us disproportionately in our fourth quarter. So, that's generally how you expect to see those decremental and the incremental margins play out over Q3 and Q4 by platform, Karen.

Okay. Thank you. That's very helpful. Maybe a slightly different topic. I was wondering if you can talk a little bit about the appointments of the group president in Water Management. I've always kind of perceived the two businesses within water kind of running separately. They don't have much product like geographic overlap especially after you exited Rodney. So, I was wondering if that is some sort of I guess signal of maybe you're going to do more geographic expansion in both businesses kind of bring down more overlap between the two or maybe it's a signal of some sort of like acceleration in M&A. I just want to get a little bit of rationale into that appointment. Thanks.

Sure. Sure, Karen. I mean, so, Matt Stillings started as our President of Water Management Group Executive the very first part of October. As we looked at our long-term strategic objectives, obviously, growing our water platform was of high importance to us as well was adding just executive talent and depth to the company to allow us to scale the business as we go forward. And we were really fortunate to get Matt. We now have Matt running Water. We have Kevin Zaba running Process & Motion Control, so we've get two outstanding executives. They are frankly helping with the strategy in terms of core growth and expansion. So, absolutely, Matt's charged with figuring out how do we continue to grow our water business, cope with the existing businesses we have and through also acquisition and organic growth initiatives. So, for us, it's about, again, moving the company forward to continue to be able to grow and scale successfully, and that's how we've got Matt on-board and that's how we brought Kevin on-board two years ago.

Okay. And maybe last one on M&A. Mark, could you remind us what kind of – after doing Cambridge, what kind of leverage ratio are you targeting and what's your comfort level? If the right deal comes along, what kind of leverage are you comfortable in taking the company up to?

Sure. Well, Karen, like as we've said over time, our main objective is to delever ultimately. In the long term we want to get that leverage down closer to 3% I think this year. I won't comment if we do – if we are going to do and if we were not, but just if you look at the cash flow of the business in the back half, if you didn't have an acquisition, you get levers down to around 3.5% or 4%. So, the cash flow for us, again, to continue to balance between the cash flow generation to get us down to 3% in a reasonable period of time, but we do have a good funnel, proprietary deals, bolt-on, tuck-in deals as we've executed over the past several years that we're going to want to get into our portfolio. I think it's going to be a balancing act of taking that levers down over time. I think you're not going to see us tackle big deals, take leverage up to some range. It's going to be immaterially north of where we are today. We recognize that that's not in the best interest, but we keep focused on balancing our M&A funnel, our cash flows and deleveraging over time.

Got it. Makes sense. Thanks, guys.

Thanks, Karen.

And we have no further questions at this time. I'd like to turn the call back to Rob McCarthy for closing remarks.

Always catches me by surprise. Thanks for everyone – to everyone for joining us on the call today. We appreciate your interest in Rexnord and look forward to providing further updates when we announce our fiscal year 2017 third quarter results in February. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.