Good morning, and welcome to the Rexnord’s Second 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, October 29. At this time, for opening remarks and introduction, I’ll turn the call over to Rob McCarthy. Please go ahead.

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 will 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 second 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. And afterwards, we’ll open up the call for your questions. 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 overall second quarter results are broadly aligned with our expectations with a little less top line, mostly due to currency and offset by better margin expansion deliver through our sustained high level of operational execution. Overall, our core growth was flat, which is mostly in line with our outlook and does include a roughly 150 basis point impact on our sales growth from our 80-20 simplification initiatives. Despite a stronger headwind from currency translation, we delivered year-over-year growth in our adjustment EBITDA to $118 million, which is a record for any second quarter for us. My takeaways from the quarter are essentially more of the same with the Rexnord Business System and our relentless focus on continuous improvement as the foundation, our strategy of delivering against the objectives we set out three years ago to sustain strong earnings and free cash flow in a slowing macro environment, to strengthen our balance sheet, and to deliver substantial structural fixed cost reductions, while investing areas to drive better growth over time. We’ve been tested by an unprecedented wave of tariffs, and our teams have responded with aggressive countermeasures and it’s not only neutralize the profit impact to our earnings and cash flow, but have also enabled us to sustain an elevated level of investment and a series of growth initiatives including DiRXN, our digital enterprise strategy. I’ll share an update on our progress with DiRXN in a few moments. As quarters click by, it’s sometimes easy to forget the magnitude of the tangible and foundational changes we’ve made to our business. We’ve dramatically improved our end market exposure lead by the important strategic additions of Cambridge and Centa, both substantial businesses with leadership positions and far more stable end markets that are both performing today…

Thanks, Todd. Please turn to Slide number 5. On a consolidated basis, our second quarter of fiscal 2020 financial results are most in line with our expectations. Year-over-year, our total sales were down 1%, but up 1% if you exclude currency translation. As our product line simplification actions held our core sales to a flat year-over-year comparison, our adjusted EBITDA increased by 3% to $118 million and our adjusted earnings per share increased by 11% to $0.51. Please turn to Slide 6. Our outlook for fiscal year 2020 continues to incorporate low single digit core growth net of a 150 basis point to 200 basis point impact from our product line simplification initiatives. We expect our adjusted EBITDA to be in a range of $460 million to $467 million representing 5% growth at the midpoint and for our free cash flow to exceed our net income. Our revised outlook for our fiscal 2020 adjusted EBITDA incorporates two elements: a $4 million increase to our estimate for the adverse impact of currency translation and a narrowing of our operating forecast range around an unchanged midpoint. On Slide 7, we summarize our consolidated results for the quarter. Let’s turn to Slide 8 and discuss the first of our two operating platforms, Process & Motion Control. Total sales decreased 3% year-over-year in PMC as a 1% contribution to growth from M&A was more than offset by a 2% impact of a stronger dollar and a 2% decrease in core sales growth, all of which is due to our product line simplification actions. As Todd noted earlier, the sequentially lower core growth number at PMC was in part a function of the strong core growth generated in last year’s second quarter when PMC delivered its strongest quarter of core growth during our fiscal 2019.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey good morning guys.

Good morning Jeff.

Good morning Jeff.

So just on PMC, I mean it seems like macro certainly getting challenging goal process industries, and certainly you’ve got the product line certification. But do you think the business can grow at least nominally in the second half of the year?

I think adjusted for the PLS, I think, the answer is absolutely yes. I mean if you look at where we are through the first half, it’s sort of flattish. And it is inclusive of essentially two points of PLF simplification. I think the way we talked about it was we think the second half looks a little bit like the first half. So I think there is a chance to even net of that is positive, but I think, we’re thinking about it as flattish inclusive of the two points. But we’ll see what transpires really over the second half. But yes, I think, in general it’s hanging in there pretty nicely. A lot of it has to do with some of these growth initiatives into more stable end markets. The verticals around food, and beverage and consumer we’re having really good success penetrating those. So I think we’re encouraged. I think we wish it was a little bit higher in total, but for the most part tracking pretty nice.

Okay. And then just over to water, I mean, it seems like the outlook and visibility is pretty good, but we’ve seen some macro indicators like the ABI and Dodge Momentum start to slow a little bit. And some other companies have talked about some signs of project delays, just how are you thinking about those macro indicators? Are you seeing any signs that people are just getting more cautious and pushing things to the right?

Well, I think, what’s reflected in the market outlook that we have and frankly, probably the last year are all those same things, right. Things are continually moving around. And I think that – I don’t think that we see anything on a pronounced basis, or unique that would tell us that we’re seeing more project deferrals than we were six months ago. I think what you’re seeing in our growth rates is: one, the institutional side of things is still quite strong and you can get lost a little bit watching the ABI and starts to flick around year-to-year. I think what we’re seeing is sort of some steady reasonable growth, big backlogs. And on the positive side we’re seeing some share wins based on both the connected products, the breadth of portfolio, the inspect. And then we’ve got two nice adjacencies in fire protection and site works that are helping us sort of grow above market, we think. So nothing unique or significant that we would call out on deferrals or other things Jeff, just, I think, pretty good execution in our strategy sort of work a little bit.

Okay. Thanks Todd.

Our next question comes from the line of Joe ODea from Vertical Research. Your line is open.

Hi, good morning.

Good morning Joe.

Related to the PMC question, I think, a continuation of growth in line with the first half the comps do get slightly easier. And so just whether or not there’s any sort of sequential slowing second half to first half that you’re contemplating in there. How you are thinking about de-stock playing out for the remainder of the year?

Yes, I think, what’s reflected in our outlook, it clearly highlights the fact that we think it’s a little slower in the second half. That being said, I think, some of the organic things are going to help that. As far as destocking, we wouldn’t call how significant destocking in any given quarter, it does impact us a little bit in the first half because distributors were adding some inventory in the first half last year and they didn’t add as much. But sell through has been relatively stable the whole time. As we sit here today, we think that over the second half it plays to a tie. So we don’t see any significant increase or decrease in channel inventories. And that’s what’s the foundation of our second half outlook. So most of the jostling around, I would call it, more than destocking is behind us. And we’ve got a pretty stable outlook with the second half. And I think the sell through rates and the alignment of inventories to that sort of make a lot of sense to us at this point.

And then Tod some of your comments on direction, you mentioned lowering the cost to connect and being on track to hit the key threshold as you exit the year, any additional commentary that you can add with respect to that? And sort of what that threshold is, what kind of revenue opportunity that opens up?

Yes. It’s a very high end when we started off two years ago the cost to connect with the edge computing device and everything was over $5,000, it’s come down to $2,000. And we think we’re sub-$1,000 by the time we get to March. And so when you think about what that does in terms of not just the new opportunities, the retrofit opportunity expands considerably. And so the cost side of the equation is where we’ve made the progress. The price side is still holding. So I think we’re sort of in line with our development cycle that we had laid out, which is, get it into the field, get it working, get people interested in buying it, and then continually perfect the cost to connect to a point where, for us the margins on new and retrofit opportunities specifically as it relates to connected products should be substantially above our fleet average.

And then just lastly, the $4 million on the currency, any additional details on what’s on that?

No, I mean it’s just really a function of when we laid out our initial guidance for the year, we had a set of currency assumptions that were sort of based on the rates at the time. We built a little bit of hedge into that obviously. And the $4 million is just the incremental change and the translation effect of the stronger U.S. dollar against foreign currencies, primarily the Euro, I mean is sort of the big thing. So it’s just the math of translating euros back to U.S. at a stronger U.S. dollar exchange rate.

Joe this is Mark. Just to add on to that if you look back, we assume they’re probably about a 50 basis point impact to the top line in our year, it’s going to be more like 150 basis points. So when you drop that through to the property, you can quickly figure out the math on that.

Perfect. Thanks very much.

Thanks Joe.

Our next question comes from the line of Bryan Blair from Oppenheimer. Your line is open.

Good morning guys, solid quarter.

Thanks Brian.

Thanks Brian.

I was hoping you could offer a little more color on the free cash outlook. You mentioned over 100% free cash conversion maintain that record absolute level. And I believe entering fiscal ‘20 you said that the year-on-year step-up in EBITDA was a reasonable way of framing the dollar increase for free cash this year. Is that still the case or are there any moving parts in the back half that we should keep in mind?

Yes, Brian, this is Mark. I think that’s still a reasonable base case. There isn’t really anything unusual or unique in the back half. Our back half is always stronger than our first half. We’re running ahead year-to-date. As Todd mentioned, you look at – you’ve run at that same pace you can kind of ballpark what the number will look like. I think, again, using that proxy of the EBITDA change and look at that in relation to our cash flow as last year, going to where it could be this year is still a good baseline assumption.

Yes, that’s helpful. Thank you. And with your balance sheet in good shape, as you said the low end of the target range on a normalized basis, generating a lot of cash, plenty of flexibility looking forward. Is there any update you can offer on your M&A pipeline? And also, if stock valuation remains attractive given your level of cash flow, any chance you get aggressive in buying back your own shares?

Yes Bryan, I mean, with respect to our funnel, again, I am optimistic that we’re going to get something done here in the second half of our year. I think we’d like to sort of err on the side of things that are probably a little bit larger, a little bit water related. But we’ll have to wait and see how that all plays out over the course of the next six months. With respect to our cash flow and balance sheet, I think absent M&A, I don’t think there’s any question that you’re going to see us begin to probably move towards that buyback. If you look at our return on invested capital at 17%, we think it’s a pretty good investment. And so as we’ve navigated the balance sheet to where we are today as we look at our – the balance of our year and our outlook, particularly around our outlook beyond this year for free cash flow, we think is very strong. And so we’ve got a real opportunity to deploy some cash both in M&A, and I would say it’s a very good chance you’ll see us thinking about buybacks as we move forward over the next six months and into next year.

Okay. Appreciate the color. Thanks again.

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

Hey, good morning, this is Trish [ph] on for Julian. So just looking at the updated guidance, low single digit core I know you mentioned the weakness within distribution and process industries. But can you talk about some of the other end market trends you’re seeing that kind of gives you confidence in maintaining that low single digit core?

Sure. This is Mark. I think a couple we touched on in detail. Aerospace for us obviously has a solid end market. Order growth has been solid. Backlog is in a great position. We have really good visibility to that in the back half. So we think the growth in aerospace remains a solid mid-single-digit for us in the back half as we saw in the first half and like a lot of that’s in the backlog. On the consumer side, our food and beverage end markets, as we had in the call in our second quarter, we saw some uptick in our order rates. A lot of things that we’ve been doing from an organic growth initiative, both domestically and with our European key OEMs that are serving global food and beverage customers, starting to gain some more traction. So those are two end markets that have been positive for us, and we have good line of sight to those staying strong in the back half as well to offset some of the mild softness we’ve seen in process. And as Todd pointed out, IV [ph] we think that balances itself as well in the back half, where we’re seeing sell-through and sell in sync up. So I think, overall, that’s a…

Yes. I mean, Trish [ph], one thing I would sort of point you to is if you look at the revenue pie for Rexnord three, four, five years ago relative to what it looks like today, specifically for PMC, we have migrated from heavy process exposure, the largest at that point in time being mining, to that being a fraction of what it was. And frankly, the markets that Mark talked about like aerospace, food and beverage and unit handling being far more than 50% of the business, which I think is what gives us both the confidence going forward and what demonstrates sort of what we just went through. The follow-on to that is we’ve also got Zurn, and Zurn is going to grow nicely over the course of the second half. So the combination of, I think, some strategic things we did to shift our end market mix, along with just an incredibly strong position we have at Zurn in a good part of the market with share gain opportunities, is sort of how we end up with the low single-digit core growth forecast for the year.

Okay, great. And then just kind of a quick follow-up on that, in terms of the revenue mix in PMC you talked about how it has changed over time. Are you kind of where you want to be with that, or is there more to do? What type of exposures are you looking to grow? And kind of what others are you looking to shift away from here?

Well, again, I think we’ve been pretty consistent in saying that we want to continue to penetrate those end markets that have more linkage to consumer demand. And so things like food and beverage continue to be at the very top of our list. And I would tell you the things that we’re doing with DiRXN and continually monitoring operating environments is another wedge that we think is an important wedge to think about in PMC, both organically and inorganically. So those are the two primary areas that we think we’re going to take specific action to outgrow. That being said, our process end markets are in a really good spot. When you take – taken as a whole, right? A good portion of it is MRO. We’ve invested smartly to drive the growth in the installed base in areas where we want to grow. And so I don’t know that we’re disappointed we have process industry exposure. It’s just substantially less than what it was based on the actions we took, and we’ve been investing aggressively in areas where we want to be. So I would tell you it’s a little bit more of the same. But I wouldn’t say that we’re going to be exiting anything from here, just continued strategic effort in there as we want to be.

Okay, great. Thanks.

[Operator Instructions] Our next question comes from the line of Mig Dobre from Baird. Your line is open.

Thanks, good morning guys.

Good morning Mig.

Good morning Mig.

Just wonder if you can comment a little bit on price cost? I’m curious to hear as to how you see pricing in both your segments. I know there’s a lot of products, right? But maybe sort of a general view. And input costs, I’m presuming, are coming down and starting to help a little bit going forward. How should we think about that?

Yes Mig this is Mark. I think from the price standpoint, it’s really unchanged on what we talked about going into the year. We talked about one point of price or so in PMC. We’ve been consistently delivering on that. On the water side, we’ve talked about 2.5 to 3 points of price. And I think that’s been playing through as well. So the price equation has been really consistent with what we expected going into the year. And they really aren’t having a lot of pushback on the price side. On the input side, I think we’ve seen – obviously, we are in tariff situation. Todd touched on earlier. For us, we’ve been able to make sure that everything we do from a pricing standpoint, material substitutions, moving supply chain, getting certain product additives excluded has resulted in us not adversely getting certain product additives excluded has resulted in us not adversely impacting our overall margins in our business. So that’s why we continue to deliver on that. To your point on the input cost, a couple of things. We have seen freight costs improving. We’ll see some benefit from that in the back half of the year. And some of our supply base out of China tariffs aside, we have some opportunity to see some improvement in that in the back half of the year as well.

Okay. And then sort of sticking with this margin theme, looking at PMC, you’re expecting flattish organic revenue, call it, in the back half that kind of makes modeling incremental margins a little bit difficult as you can appreciate. So what’s the best way of thinking about margins, EBITDA margins on a year-over-year basis in this, call it, flattish organic environment in the back half?

Specifically as it relates to PMC, Mig?

Yes.

Yes, I think, the right way to do it is assume similar margins to last year for the time being. The difference – or how you get there is we are seeing incremental benefit from the SCOFR 2 actions of last year. But we are investing a little bit, and we’ve got some SCOFR 3 costs in the back half of our year that are sort of getting into neutral. We hope to maybe do a little better than that. But if I were sitting in front of a spreadsheet, trying to plug in a number, use the same numbers as last year, and you’ll get close.

That is helpful, and pretty much everybody that’s dialed on this call’s sitting in front of a spreadsheet. So I appreciate that. Then I’m presuming that sort of real lift on margins would have to come from Water Management. And again, you’ve got volume growth there, so that’s good. You’ve got good pricing that helps. Can you maybe help us understand incrementals? And maybe even beyond the next six months, how do you think about kind of the normal incremental margin run through for this?

And again, Mig, just specifically related to Zurn?

Specifically related to water, to Zurn, yes.

Water, yes okay.

Yes, Mig, in the back half of the year, you will see an incremental margin in water that’s very similar to what we’ve experienced in the first half. So you’ll see incremental year-over-year margin expansion in Q3 and Q4. Again, if you look at H1 versus H2, it should be very similar. Going forward, we’ve always talked about our water platform in that 25% to 30% incremental margin range. I think as you move forward [ph] in a high 20s, 30%-type incremental margin is a reasonable assumption to use for the water platform going forward. That’s inclusive of obviously the investments we’re making in the business and obviously assuming there’s some modest core growth in the platform.

Understood. Last question. Going back on this pricing on water, I guess how much of this pricing action you think is driven by the changes that we’ve seen on tariffs, input costs so on and so forth versus other items that you might be doing, whether it’s DiRXN, whether there are other things that you’re doing in a channel? I guess what I’m really trying to get at here is, are we seeing sort of an unusual pricing environment in fiscal 2020? Or would this business maybe better pricing dynamics longer term given technology and everything else that you’re doing?

Sure Mig. Good. I think that, without question, the backdrop that we’ve been through in the last 18 months or so has provided a little bit of a window to, frankly, get more price than on a normalized basis. The magnitude of it, I would tell you, is probably not that much when you look at it long term, because we are always raising price in that end market, and we typically keep it. In the last 18 months, we’ve had to use some of it to just fund the cost increases. But the structural difference over time, we think, allows us to get more price. I mean if you look at the brands, the specification, the portfolio we have, then you add in real competitive advantages around DiRXN that lower the overall cost to not only build the building, but to operate it long term, we think, gives us a real strategic advantage looking beyond this sort of little bit noisy window with tariffs. So again, I don’t think you’re going to see us have to take things and reduce price going forward if, in fact, the tariffs do roll off at some point, because the farther and farther you get away from when they were implemented, they’re basically just accelerating some of the annual price increases that you would have ordinarily got. So I think that the pricing environment heading into next year, absent any more movement on tariffs, looks probably – probably looks a little more muted relative to where we’ve been in the last 18 months. But it’s still, we think, a competitive advantage that we have, and we think structurally, we do get more price just because of where this business is and how we compete than our competitors.

Alright appreciate the color. Thank you Todd.

Yes.

We have no further questions at this time. I’ll turn the call back to Rob McCarthy for closing remarks.

Thanks, everybody, for joining us on the call today. We look forward to providing our next update when we announce our 2020 third quarter results in late January. Have a great day.

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