Good morning and welcome to the Rexnord First Quarter Fiscal 2020 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, July 30th. 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 we believe they're helpful to investors, and contain reconciliations to the corresponding GAAP data. Consistent with prior quarters, we'll speak to core growth, adjusted EBITDA, adjusted earnings per share, and free cash flow 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 in our filings with the SEC. Today's call will provide an update on our strategic execution, our overall performance for the first quarter of our fiscal 2020, and our outlook for fiscal year 2020. We'll cover some specifics on our two platforms followed by selected highlights from our financial statements. Afterwards, we'll open up the call for your questions. And with that, I'm pleased to turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks, Rob, and good morning everyone. Our first quarter results overcame some short-term weather challenge concern and with the strong finish to the quarter ended up about where we expected. Overall our core growth was 2% which was in line with our outlook and does include a roughly 150 basis point impact on our sales growth from our simplification initiatives. Despite a bit of a headwind from currency translation, we delivered 6% year-over-year growth in our adjusted EBITDA to $111 million which is a record for any first quarter for us, and our adjusted EPS grew 17% year-over-year. Our strong near-term execution reflects the importance of the Rexnord business system and our relentless focus on continuous improvement. In a macro environment that makes everything feel very short cycle, doing the little things to get better each day compound into meaningful improvements when we look back over years and quarters. Taking a step back, we're essentially exactly where we had planned to be three years ago delivering strong earnings and free cash flow in a slower growth environment with the balance sheet in a great place, a significant number of structural fixed cost actions behind us, and with a Phase 3 well underway. We've put ourselves in a leading position amongst our competitive set when it comes to delivering a connected products platform that's right down the middle in terms of where the industry is heading and we've also invested in a number of organic growth initiatives and portfolio actions that create a more resilient business than ever before. I'll also add, we've added substantial talent to continue to scale our business through acquisition as we execute our disciplined acquisition strategy to grow various parts of our two great platforms. I'll add that we've done all of this with very little…

Thanks, Todd. Please turn to Slide number 5. On a consolidated basis, our first quarter of fiscal 2020 financial results were mostly in line with our expectations. On a year-over-year basis, our total sales grew 1% with core sales increasing 2%. Our adjusted EBITDA increased by 6% to $111 million and our adjusted earnings per share increased by 17% to $0.48. Please turn to Slide number 6. Our outlook for our fiscal year 2020 continues to incorporate low to mid-single-digit core growth before factoring in a 150 to 200 basis point impact from our product line simplification initiatives. So on a net basis our outlook continues to incorporate low-single-digit core growth. We expect our adjusted EBITDA to be in a range of $460 million to $475 million representing 6% growth at the mid-point and for our free cash flow to exceed our net income. On Slide 7, we summarize our consolidated results for the quarter. But before I move on, I would like to draw your attention to a new schedule we have added to our earnings release that provides a bridge from our GAAP income statement to an adjusted income statement. In addition, we have also restructured and expanded our scheduled of quarterly platform results to include the composition of quarterly sales growth and a summary reconciliation of GAAP income from operations to adjusted EBIT and adjusted EBITDA for each platform. Now let's turn to Slide 8 and discuss the first of our two operating platforms Process & Motion Control. Total sales decreased 1% year-over-year in PMC as positive core growth of 1% and a 1% contribution to growth from M&A were more than offset by the 3% impact of the stronger dollar. At recent exchange rates, we would expect the currency translation to remain a modest headwind through…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Joe O'Dea. Your line is open.

Starting on PMC and just thinking about kind of where you get confidence as you move through the year and thoughts or your comments around just how short cycle things feel out there and understandably whether it was a tougher comp in 2Q, but just generally kind of what you are looking at across various end markets there that continue to give you confidence in kind of that full-year low-single-digit organic and maybe with that anything that's perhaps changed within the complexion that you talked about in the first quarter in expectations around what you're seeing on the price side, what you're seeing on the volume side?

Sure. I think when we look at PMC, a couple of things. Absolute sell-through to the end market has been up low-single-digits for the last couple of quarters. Our base case is that continues which is a combination of I would say relatively low market growth plus some price. Looking specific and that's a roughly, Joe, as you know about half of PMC. We also have a solid outlook for aerospace that gives us good visibility from a backlog perspective to that high-single-digit core growth number. And then when you look at all the other sort of end-user OEM end markets, I think we're taking a cautious view right. I think as Mark pointed out North America food and beverage things like that have been good, still getting good growth from Centa. I think we're taking a rather cautious view on the remainder of the year but that's how we're sort of playing it out. And again I think when we guided relatively short time ago; we had visibility to a lot of that. So we guided to low-single-digit core growth. We contemplated much of the same environment that we're seeing today. I don't think much has changed. And I think the confidence we get is from absolute sell-through and industrial production is still in a reasonable place. We get good view on Centa and aerospace and then a couple of other things that are doing well from an end market perspective. So I think that's sort of where we're thinking about it at least today. But I don't see a significant downside from where we plan things.

And then on Water Management and some of what you're doing on the digital launches. Can you talk a little bit about the way the go-to-market has worked and how potentially it could change in terms of kind of faucets, backflow drains, are those generally a separate kind of sale avenue and when you get connected product across those ranges, it become more of a system sale opportunity really getting at how substantial market share opportunity or something like that could be?

Yes, I think the nice thing is these components all work together in an integrated way with a building control system. And so where we're seeing a lot of traction with performance contractors and contractors in general who are able to offer a solution to the building owner that integrates all these components that prior to having the capability, were a critical part of both the water quality and safety inside of a non-residential building that can be integrated into whatever interface the end user or the building owner has. And so from a systems sale we were always sort of selling these as components that work well and integrate well together. They not only do the job when it comes to safety and flow control but also lower labor and installation costs. This takes us to another level where we're actually monitoring these things real time so that the contractor can work with the building owner and actually setup the right maintenance schedule and everything else but in a really intelligent way. So it's -- the path to market is the same. But I think we're finding additional channel partners that can see the value of this and also this fills a critical void in that building control on performance contracting world where they've been monitoring HVAC in lighting and all that for a long period of time but nothing has really gone down the route of being able to monitor water inside of a non-res building. So we're seeing a lot of interest from that part of the world where performance contractors see this as a real value added. So they're really pulling us into opportunities that we think are going to be pretty significant over time.

Your next question comes from the line of Julian Mitchell. Your line is open.

Hi this is Jason on for Julian. Just one question on Water Management. I guess just if I realize it's difficult to size but if there's any color that you could give as to what growth would have been in the quarter without sort of poor weather conditions particularly in May. Just so we can sort of get a picture as to what run rate have been first [ph] quarter?

I mean it's got to be two to three points would be our guess. If we looked at April by the time we had decided, we had perfect visibility to what April looked like, May was really bad and June picked up pretty substantially. So we ended at a pretty good rate. That continues into July and we're into the sort of heart of construction season now. So we would anticipate that growth would be better as we get through our second quarter and then we go to that seasonal sort of tapering down in North America and then obviously March quarter is less but the May weather was tough, June finished strong, July is in a good place.

Great. And just following up a little bit on that PMC color that you gave earlier, you mentioned how compared relative to when you guided post Q1, you didn't really see anything in the demand environment that you did see back then is that to imply that demand didn't really get too much worse in PMC throughout the quarter or demand did get worse you just saw a solid come in and that's why you guided what you guided in after Q1, just trying to clarify that point?

Well again when we guided sort of mid-May, so we had good visibility to April and the first half of May and I would say that not much changed over the course of the first quarter from what we guided and I don't think that we're saying that it's substantially different from what we thought 90 days ago. So I'm not sure exactly the distinction in your question other than to say, we gave everyone what we thought was our best look, we haven't seen a material change to that and we are sort of I think confident that the outlook that we provided is still the right one for a whole lot of different reasons.

Jason this is Rob. Our -- if this is what you're looking for our growth did not take a loss in June.

Your next question comes from the line of Jeff Hammond. Your line is open.

Just on the product line simplification I think you called out the 200 basis points is that kind of we see that run rating through each of the next three quarters and then and then you lap that or does it move around at all quarter-to-quarter?

I think it probably moves around a little bit. But I would say that it is more pronounced in PMC relative to Water Management. And so I would expect between the first three quarters you will see the majority the impact in PMC and then by the fourth quarter we start to sort of anniversary the prior year. And then in water it probably picks up a little bit as we get into the second and third quarter and then starts again tail back into the fourth quarter. So I would say by platform that's how it rolls out. And by the fourth quarter should be relatively clean.

Was there any impact in water this quarter?

Yes, it was modest. It was probably only 50 basis points or so.

And then I know you don't give quarterly guidance but just given the comp in PMC, how should we think about the core growth rate in the 2Q for PMC. I think you have the timing issue with Arrow?

Yes, Jeff, this is Mark. I think if you look at sequentially you'll see a step up in the absolute sales dollars Q1 to Q2 like you saw last year but that tough comp to put that core growth closer to that, call it, plus 1 to flattish type range in 2Q just given last year's percent number.

And then just on the end markets. I think the softening in Europe and maybe the change in rest of world. Are there any particular end markets that are jumping out where you're seeing some of that softer activity?

Well we've seen that softer activity, Jeff, in Europe in our beverage business that's continued, but that's partially Europe but also partially lot of the large equipment manufacturers are producing product for Asia there so it partially driven by some of the Asian stocks as well. But I think that's one of the most pronounced area for us in our processed industries. It's been slower but not to the same extent as the beverage side so not a lot new there. I think that trend is going to continue for the past couple of quarters. So beverage will be the leading category of revenue in Europe and Asia.

Okay. And then just finally on the stainless drain acquisition looks like you paid around $25 million. Anything you can give us on the growth profile that business margin profile, what you paid on a multiple basis what the revenue contribution would be kind of on a run rate basis quarterly. Thanks.

Yes. It's relatively small Jeff. It's a nice little tuck-in, it's accretive to margins. It's accretive to I think what we sort of viewed from a return on invested capital within a year. So I think about it as a couple million bucks a quarter maybe three million bucks a quarter. Great EBITDA margins, we paid a relatively low multiple for it and we think within a year it's well into double-digit return on invested capital. Nice little tuck-in for us, it gives us extension of our leading drain line and something that we thought made a lot of sense and it's off to a great start.

Okay good to hear. Thanks.

Your next question comes from the line of Mig Dobre. Your line is open.

Yes, good morning everyone. I'm just sticking with this. Good morning, sticking with this comps theme here. When we are looking at Water Management sequentially maybe in the second quarter given the weather disruptions that you mentioned before and just normal seasonality should we expect a sequential uptick in revenue here as well?

Yes, Mig, this is Mark. We would expect a sequential uptick in revenue from Q1 to Q2 as we have historically seen like from a growth standpoint. So as we laid out in the last year we posted 12%, so similar phenomenon. As we talked about PMC, so I think we're expecting the core growth number to look similar to what we saw in Q1 on a year-over-year core basis. But the absolute dollar will definitely step-up from Q1.

Great, that's helpful. And then I'm wondering in C&I and Resi the two areas where you have yellow lights if you would on the slide kind of how you were thinking about the market here is it a function of contractors kind of working through backlogs and your sales through these end markets still being positive with potential slowness down the line or is this something that you're actually seeing currently in terms of weaker growth. How does that work?

I think what we're doing Mig is just trying to flag that. It's been -- starts have been inconsistent. If you look at the start data for June on a standalone basis it says it's down 15% commercial starts. The problem with that is last year's June was over $40 billion, right, which is an all-time record. And there's only been five or so months in the last 10 years that have been above 30 and this June happen to be one of them. So on a relative basis, the number is less than it was a year ago from a starts basis but it's still very robust. And I think all we're trying to do is sort of flash the fact that you're going to see months where starts number is really good, you're going to see starts where the numbers a little bit weaker and how that sort of manifests itself over the build cycle is going to be maybe less predictable. But again I think we still see contractor backlogs in a great place. And again this but it's a hyper regional business. Right, so there is parts of the country that are doing really well, there's parts that aren't. And I think we're just trying to sort of flag the fact that it's not green everywhere all day. It's a function of having to having to work for it. And I think the market is still good, the backlogs are big, the labor constraints are real. And when weather happens it doesn't get caught up in a quarter. It extends things. And so I think that's really all we're trying to maybe signal is that as you look out. We still see growth but it's probably not a 12% range. It's still solidly mid-single-digits. On the resi side -- res for us is a relatively small thing and I think that's sort of well documented in terms of where that market sits relative to where it's.

Right. And I mean fair enough I guess we all understand kind of like the end market data that everybody looking at is more of a question of what you are really seeing in the business and I think your comments I guess have made that clear. When going to PMC now how are you thinking the puts and takes to margin for the rest of the year. I mean are there any specific quarters that you would like to call out in any way based on investments that you might have to make or mix or anything else that we should be aware of?

Yes, Mike, this is Mark. If you look into starting in Q2, we'll start incurring some of our SCOFR 3 duplicative costs that will run through the operating results. So you'll see sequentially not a big margin step-up from Q1 to Q2, probably the same going into Q3 that's a margin pickup in Q4. So starting in our Q2, I think that's going to be a little different as that we will start incurring some of those duplicative costs as we start executing some of SCOFR 3 and that will dampen the margin a little bit. But overall if you look at the full-year, we are still projecting full-year margin expansion in PMC despite those incremental costs.

I mean I think the incrementals in the first quarter were really good. I think if you look at Q2 to Q4 --

They will be good, yes.

Even net of the duplicative cost, you will see incrementals at the higher end of the range of what we've communicated to expect over time.

Okay. And then, maybe last question when you're looking at your leverage, you're expecting to be down to 1.6 by the end of the year which is great, cash flow generation is good. How are you thinking about deploying this capital that you obviously have available now, your convert is set to actually convert in November. So I'm wondering how you're thinking about that? And then from a M&A perspective, what are the things that you're looking at. And is there anything more material rather than just a tuck-in acquisition that would be considered? Thank you.

Yes. Well again I think we feel really good about marching the leverage towards that. I think as we've communicated over time, we're going to continue to be disciplined in our approach to M&A and that would include things that are both bolt-on, tuck-in in nature as well as things that could be larger, but always keeping in mind we want to keep -- we want to keep the leverage at a very manageable place not only in today's environment but as we would look forward into a scenario where we did see a recession. So I think we're going to continue to be very disciplined and I would say use the balance sheet in a way that is very manageable and appropriate. And beyond that, we always have the opportunity to think about incremental ways to give some money back to shareholders in the form of dividend and/or buybacks. At this point, our view is that we are likely going to allow the mandatory to convert and then we have the option to sort of continue to see how we want to approach that from a dilution standpoint, if we wanted to buy some back down the road or not. So I'm not going to get too specific about it but I think expect the form of our M&A to continue to be disciplined high return hurdles and using the balance sheet in a way that keeps leverage very manageable across a variety of scenarios. So we don't envision doing anything that takes leverage to four times or anything like that.

[Operator Instructions]. Your next question comes from the line of Joe O'Dea. Your line is open.

Hi. Just wanted to also ask about water management margins in the quarter that were well ahead of what we expected and anything that might have been a benefit to 1Q or normally from a sort of cadence perspective we see things improve as you move into 2Q. And so just anything that's more kind of contained to the quarter or thinking about this as kind of like a structural level?

Nothing unusual relative to prior year. And I think as you think about margins that usually get better into the second quarter, I think you can you can expect that as well. So I think it's really the compounding effect, Joe, of a lot of the things that we've done with the SCOFR initiatives, the simplification initiatives. And I think staying well ahead on the price cost equation and so nothing unusual with respect to mix or one-timers. So really happy with I think the quality of the performance in both the first quarter and what we expect in the second.

And then, just the comment kind of I think raises one other question. Just I think some of the commentary over the course of earnings season and hearing from some sort of distribution channel and distributors. There's been so much price pushed through distribution in response to the cost inflation and I think in a slowing environment, you're hearing about maybe some pushback. Are you seeing evidence of that at all from your distribution partners?

Well I would say not in any pronounced way. Again I think when you look at how we've managed it, it hasn't all been priced. I mean we've done a significant amount of rerouting our supply chains, doing things to avoid the tariffs in addition to passing along some price. So I think if we were to look at the pareto, I think price as a component that we're not pushing it to the level where we're forcing distributors into a spot where they're getting significant pushback. So I think we've tried to manage it across all the different levers we have. And I would not say that we've seen any significant pushback on the water side in particular around the price increases we pass-through because frankly we've tried to manage it appropriately because what we don't want to do is when you pass along significant price increases through the channel and then on to the building owner all of a sudden things become unaffordable, right. And so we're trying to be pretty -- pretty disciplined in how we go about it but not overdo it to the point of people doing things that hurt demand.

We have no further questions at this time.

So I'd like to thank everybody that could join us on the call today. We appreciate your interest in Rexnord and we look forward to providing our next update when we announce our fiscal 2020 second quarter results in late October. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.