Good morning, and welcome to the Rexnord’s Third 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 the 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, January 28. 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 are 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 third quarter of our fiscal 2020 and our outlook for the remainder of the year. We will cover some specifics on our two platforms followed by selected highlights from our financial statements. Afterwards, we will 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. I trust everyone has had a chance to review our earnings release from last night and hopefully you also seen the release we issued Monday regarding our enhanced capital allocation strategy. We’ve got a lot to cover, so I will just get right to it. Our overall third quarter results were broadly in line with our expectations, the continuation of the trends we saw across our first half. Modest core growth inclusive of our product line simplification actions, coupled with solid margin expansion that reflects our high level of operational execution. Our core growth was up 1% and is net of roughly 150 basis point impact on our sales growth from our 8020 simplification initiatives. Despite what I would call a generally stagnant growth environment, we delivered year-over-year growth in our adjusted EBITDA and another quarter of more than 20% growth in our free cash flow, which brings our year-to-date increase in free cash flow to more than 25%. Please turn to Slide 3, and I will quickly review our third quarter results. Our net sales finished at $492 million, up 1% from last year net of the impact of a stronger U.S dollar and our product simplification actions. Our adjusted EBITDA increased year-over-year to $107 million and margin expanded 50 basis points. Our incremental drop through exceeded 50% and was higher yet on a core basis, and we continue to track to another record year of free cash flow. Turning quickly to our operating platforms. Core growth in our PMC platform was flat and up almost 2% after adjusting for our product simplification actions. OE applications across most end markets in North America and Asia were broadly in line with we had -- what we had anticipated and Europe continued to be relatively…

Thanks, Todd. Please turn to Slide number 10. On a consolidated basis, our third quarter of fiscal '20 financial results were broadly in line with our expectations. On a year-over-year basis, our total and core sales growth were both up 1%, net of the impact from our product line simplification actions. Currency and acquisition contributions to growth were offsetting. Our adjusted EBITDA increased by 4% to $107 million and our adjusted EBITDA margin expanded by 50 basis points year-over-year to 21.8%. Please turn to Slide 11. Our outlook for fiscal year 2020 continues to incorporate low single-digit core growth, which is net of an approximately 150 basis point impact from our product line simplification initiatives. We expect our adjusted EBITDA to be in a range of $460 million to $464 million, representing 4% growth at the midpoint and for our free cash flow to exceed our net income. Our revised outlook for our fiscal '20 adjusted EBITDA incorporates the expected impact of Boeing's decision to suspend assembly of its 737MAX aircraft in mid January. On Slide 12, we summarize our consolidated results for the quarter. Let's turn to Slide 13 to discuss the first of our two operating platforms, Process & Motion Control. Total sales were essentially flat year-over-year in PMC with core sales growth also flat and a 1% acquisition contribution, offset by roughly 1% adverse impact from currency translation. PMC's top line growth was reduced by approximately 200 basis point impact of our product line simplification or PLS actions. Breaking PMC down by major end markets, we continue to see good growth from our aerospace operations and we believe we continue to outperform the broader industry in our global food and beverage end markets in terms of both OE and demand generation. Demand in our process industry end…

Thank you. [Operator Instructions] And our first question today comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey, good morning, gentlemen.

Good morning, Jeff.

Good morning, Jeff.

Very good presentation. That was very helpful at the front of the deck. Just on Slide 5, you showed the shift from kind of non-growth to growth and just want to get a sense in that other remaining 26%, how much do you think of that can kind of shift into the green, or if there is any other pairing that you would see in the portfolio that end markets maybe where there isn't the growth profile?

Yes. Jeff, I think it's a great question. I think there is room to move it. I think we've focused on the things that we could do both organically, inorganically that we felt had the biggest opportunity. And so there are always going to be elements of the portfolio that aren't positioned to grow above market, maybe just grow with the market. But I do think there's some room that we can to wiggle that percentage, a little bit higher, I think we would love to see it at 80 plus, primarily through a combination of things that we are doing strategically as opposed to just sort of selling something or divesting something. So I think we are targeting to move it a little bit forward, but I think the lion share of the lifting over the last four years has put us in a pretty nice place.

Yes, absolutely. And then Todd, you mentioned Zurn, kind of have an acquired end of the year and channel destocking. Can you just kind of talk about trends into January if that's normalized, where you think inventory levels are? And then just kind of a comment on, yes, I think there's some increasing worry that the non-res cycles maturing and just what you're seeing there from a quoting and project activity? Thanks.

Sure. I think the end of the year phenomenon had a lot to do with the holidays falling in the middle of the week. So people took the opportunity to really dial things back. The other thing to point out is that January is not a great parameter because it's cold across most of North America. And so I would tell you that I don't see anything abnormal in the way we are starting the fourth quarter relative to maybe what we expected. But as you get through February and March and things warm up in parts of the country, that's when we see things accelerate. So nothing unusual from the way we are starting the quarter and February-March are always where the majority of our fourth quarter comes when it relates to Zurn. Back to your second question on what we are seeing in terms of demand, I would tell you, we feel pretty good about where starts are, particularly in some of the institutional verticals as we start our fiscal '21. And I think we would sort of point to albeit slower growth market growth over the course of the next 12 months, still positive. And I think when you couple that with some of the things that we're doing around 8020, we are seeing outsized market growth in those areas as well as player protection and sites, which are both growing substantially above the market. The other thing that Mark mentioned was this acquisition. And if you think about what we've been doing in a pretty methodical way is adding to the size of our available markets. And so just opens up another $100 million, $150 million market opportunity where we’ve a chance to really grow the business through what we’ve in place, tremendous spec share, our third-party reps and the ability to bundle and package this product with all the other water labor savings products that we already have. So I think we are pretty excited about where Zurn sits. And again, I think that the market itself is absolutely in the process of slowing, but I think the resilience of the business through all the things we've done and also this retrofit business that we've built and are building, we think put us in a great spot, even if the market slows. So that’s sort of a long-winded answer to your question, Jeff, but I think that's the way we would hope people would think about it.

Great. Thanks a lot.

And our next question comes from the line of Joe O'Dea from Vertical Research. Your line is open.

Yes. Hi. Good morning, everyone. The first question just on cash flow, I think year-to-date you are up $30 million year-over-year, the prior framework was thinking about free cash flow growth kind of mirroring what we might see an EBITDA growth you're ahead of that pace. So just what you're thinking for the fourth quarter, whether that's a little bit of a get back on the year-to-date gains, or whether we should just be thinking that free cash flow might come in a little stronger.

Yes. Joe, this is Mark. I think if you look at the fourth quarter, obviously it's our -- always our strongest quarter. I think if you look at kind of level that we did last year, we will be in that similar ZIP Code of the free cash that we did last quarter, obviously plus or minus $3 million to $4 million to $5 million, but Q4 will be strong. We will finish record year this year with momentum going into our fiscal '21 when it comes to free cash.

Great. And then there were a couple of comments in the press release about progress on the connected products direction side of things both within PMC and Water Management. And I was looking for any additional context in terms of what you see is a revenue run rate, or what you see is a revenue growth opportunity over the next 12 months or so?

So we just wrapped up our strategic planning cycle. And as we went through, we see a 3-year goal of in excess of $100 million. And so the revenue run rate I think it's probably been a little bit slower than we would have liked out of the gate. And I think our fiscal '21 will be sort of a catalyst year as we’ve modified, I would say, some of the offerings we've had, we've built the go-to market, we've established the solutions that are -- that our customers are really wanting. And so we think the run rate beginning in our fiscal '21 ramps pretty considerably over the course of the next three years and it's really opening up incredible conversations in both parts of our business that we weren't able to access without this solution. And so things like connected retail stores that provide perfect visibility into the water safety, quality flow control, things touching water inside of the building, these are solutions that customers are really excited about and I think the traction we've gotten and the learning cycles that we've been through across the entire portfolio. And I think that’s the important thing to keep in mind when you look at our connected product solutions, it covers the broadest portfolio of products that serve the markets that we go after, which is very, very difficult. And it's also a solution that works with whatever customers have chosen to use, whether it's a building control system, a factory automation system, we're having us look at it through our cloud. It's a very flexible scalable solution that covers the broadest gamut of products. So we are excited about it. Look for the inflection in '21 and think about it as $100 million plus opportunity over the next three years.

And just a clarification. Is that an incremental $100 million? And what would the base be in fiscal '20 roughly?

We do think it's an incremental $100 million and the base is probably close to $20 million.

Okay. Thanks very much.

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

Good morning, everyone. Solid quarter.

Good morning. Thanks, Bryan.

Thanks, Bryan.

Question on portfolio composition over time. You signaled and started to act on Zurn weighted M&A, is the idea to have relatively balanced revenue and EBITDA contribution from the platforms over time, or is that too rigid a construct?

Bryan, I think that we haven't said that as a sort of discrete goal. But I think our view is that adding more heft to the water platform certainly can't hurt us in terms of the way the company is valued or thought. And so if you were to look at the priorities that we laid out on one of those pages, water-related M&A is our number one priority with a second to consumer-facing end market related applications in PMC. So, I don't think we’re looking at expanding through M&A and things like Process industries because we’ve got such a terrific share already. And so without question, I think we're going to target those areas, but without a mandate to do it in this period of time. We are going to continue to stay disciplined. And if you look at the acquisitions that we’ve done over time and frankly when we just talked about in Just, we are retaining the discipline of financial profile that creates a great return, while adding significant runway to these businesses that we can bolt-on and run with quickly.

All makes sense. And just a clarification point on, Jeff. Did you say that margin accretive to Zurn?

Yes, that's correct.

Yes, that's impressive. One last one, if I could. On SCOFR 3, any update you can offer on how that's progressing? And if there's further line of sight on the timing of cost savings, how much of that we should expect to hit in fiscal '21?

So we've started to make some internal announcements. You will see some cost in our fourth quarter related to that. You will see some incremental cost to implement as we start our fiscal '21, we will outline what those are. But it's sort of in the $5 million to $7 million range of cost to implement in our fiscal '21. Maybe just a little bit in our fourth quarter and we should start to see some level of benefit from those efforts towards the end of fiscal '21. So think about it as a little bit of upfront spending just like we did in SCOFR 1, just like we did in SCOFR 2, but then that spending goes away and we begin to accrete all the fixed cost and cash flow benefits from the actions. And so a little bit in fourth quarter, a little bit in the first part of the year, $5 million to $7 million, a little bit of benefit in the fourth quarter of our fiscal '21 with the run rate really starting in our fiscal '22.

Okay. I appreciate the color.

Sure.

Our next question comes from the line of Andrew Obin from Bank of America. Your line is open.

Hey, good morning. This is Emily Shu on for Andrew Obin.

Good morning, Emily.

Good morning, Emily.

Good morning. So my first question. So I noticed the outlook for commercial aerospace in PMC has a green light. Has that changed, given you know there's some risk from Boeing 737MAX production halt in the first half of 2020 and also the Coronavirus outbreak reducing basically air traffic?

Yes, we are aware of both of -- both the 737MAX production changes and the Coronavirus. I think what the green light is intended to do is sort of maybe look through that a little bit. I think, we, like many people think there will be a resolution to the MAX and it's very difficult to assess the impact, certainly the long-term impact of the virus situation. And so, look, we’ve a record backlog in our aerospace business right now. We anticipate that there will be some near-term headwinds as the production rate for the 737MAX slows. I think we are optimistic that there will be some resolution to the virus in China. And we’ve got a good couple of years left at least in the aerospace cycle. So that's why it's green. I don't think we're trying to ignore the two things that you spoke about, but I do think we're trying to be a little bit realistic that everything is likely to get resolved in a pretty short window and there's a lot of runway left.

Okay, great. And just a follow-up question. Is there any January data that you could provide on your industrial distribution businesses? Are there any early signs of green shoots or anything you're hearing in the channel that would give you confidence of short cycle recovery in fiscal ' 21?

Well, again, I think we are not looking out into fiscal '21, we're not guiding to that yet. I think the data that we’ve so far in January supports kind of the thesis that I spoke about Mark laid out, which is fourth quarter is sort of tracking to what we had anticipated to deliver that low single-digit core growth number, EBITDA, that will end up being a record and record free cash flow. So I think we will get the fiscal '21 in a couple of months, but so far everything seems to be tracking in line with the way we've guided and really no surprises.

Okay, great. Thank you so much.

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

Thank you. Good morning, guys.

Good morning, Mig.

Good morning, Mig.

Yes. Just wanted to follow-up on the 737 question. Can you …

Sure.

… maybe help us understand, better understand the impact in the fourth quarter on the top line for PMC. And I think it's pretty clear on EBITDA given that you said that, that accounts for your changing in guidance, but, yes, I’m curious on the top line and how you sort of think this will play out over the next couple of quarters based on what you've heard from your customers?

Sure. So the run rate, Mig, of our MAX exposure is in that sort of $22 million to $25 million range. So you can look at what that is per quarter. In our fourth quarter, that gets impacted by $3 million to $4 million and the related profitability on that is sort of the majority of the change to the top end of our prior EBITDA guidance. If we were to look ahead, we are assuming that the run rate in our fiscal '21 is substantially lower, at least through the first half, if not the full-year based on what we've been told. So we've been told to modify the production rates down to that 20 to 30 range over the course of the year. If you were just to look at it on a digital basis, it would impact next year by $7 million to $10 million. Now we think there's opportunities for us to go win some additional business with the capacity that we have. And so I wouldn't flag really an issue at this point other than to say production rates at least for the next six months, maybe nine months are going to be a little bit less than what they were running at the first nine months of the year. Those aircraft, we believe, still get delivered. So maybe it just pushes a little bit. In the meantime, I think we've highlighted the fact that we've got an amazing center of excellence that is a competitive weapon that we can win business with and we're using that to try to fill some of that dividend in the near-term.and frankly, we're doing our best to fill some of that dividend in the fourth quarter with that capacity. And so, that's what we think happens. But as you can see the relative impact is pretty low for us relative to the size of our aerospace business and the size of Rexnord. It's just a little bit of an acute issue in the fourth quarter as we dial that back very quickly and deal with sort of the incremental profitability challenges when you do that. But it's -- it hurts, but it's not -- it's certainly not something that we're overly concerned with at this point.

Okay, great. Thanks for clarifying that. Then the next question I had was on product line simplification.

Sure.

And you know I'm wondering really what you're doing here, I mean, I understand the concept, but I'm wondering what you've done through the year. And can you maybe help us understand if this is a continued drag going forward? Was there something special about fiscal '20 just the puts and takes?

Well, I think when we started, the process leads you to taking sort of your '20s customers, your '20s products and making some tough decisions around either exiting or raising price. And I would say the majority of that work is somewhat behind us by the time we get to our fiscal -- at the end of our fiscal '20. There will be some incremental drag going forward as you re-run all the way, if you look at it there will be some -- obviously some more pruning that gets done. But I would say that it will be less in our fiscal '21 than it has been in our fiscal '20. Where we are at now is really pivoting towards growth. So with the resources that we’ve freed up by thinking more about our most important customers, or opportunities with our best and maybe most profitable products pointing our resources towards that. And so it is logical conclusion 8020certainly takes cost out, but its intent is to free up the resources and capabilities to drive above market growth. And I think that's what you are seeing as we talk about what’s happening in sort of pockets of Zurn, what's happening in pockets of consumer facing end markets inside of PMC. And frankly, that's what that chart is intended to do in the deck where you look at all the product line revenue and what we've done to it and where we believe we are positioned today relative to just three years ago. And so, we've given you sort of the outline of what the drag is this year. Hopefully, you start to see that the market out growth really starting to happen in pockets. I think we've got tons of illustrations of where it's happening. I mean inside of our beverage business, a metal product line where we cut 60% to 70% of the SKUs. We are experiencing 12% to 14% growth this year at great margins. So we've got a lot of these things happening and I think as you get into our '21 you will see that contribute to the incremental out growth that we expect from these initiatives.

Great. Lastly, a question on pricing. Is there any updated thoughts there in terms of trends? And I know you're not talking about '21, but I'm going to ask it anyway as you think about pricing into '21, is there anything different versus '20 at segment level that you would call out?

Mig, this is Mark. I would say, as our year progressed, obviously that the price impact has moderated year-over-year. So in the quarter under our -- just under a point in PMC, a couple of points to 0.5 in water so that overall impact does moderate as we cycle against the price increase we put in place last year. Assuming a tariff environment that stable from where we sit today, I think pricing next year is very moderate for us. It won't be overweighed or worse as it has been in the past year and a half.

I think maybe to put a fine point on it, Mig, the incremental margins in the third quarter were about 50% and that's what probably very little price dividend. So as we transitioned in the fourth quarter in the next year, most of the incremental profitability comes from the operating leverage from RBS and the things we're doing there 8020 and then obviously the net impact of all the scope for initiatives that’s done in our implementing. And so we expect that to sort of keep the incremental margins in that 35% range as we've been communicating.

Absent the SCOFR [indiscernible].

Absent the SCOFR [indiscernible]. So I think, Mark, laid it out pretty well and I think we are optimistic that incremental margin stay at a very high level as we make the turn to a more normalized input cost environment.

Very helpful. Thank you.

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

Hey, good morning. This is [indiscernible] on for Julian. And so just kind of looking at PMC exiting the second quarter, it seems like you guys have kind of a more cautious turn there and that core growth in the quarter was better than we were expecting. Were there any end-markets that we're kind of positive surprises in the quarter? And then, if you could provide a little bit more color on what you saw from your end-markets, kind of by geography, for food and beverage, North America versus Europe, and process in any trends in those through January?

I will try to walk through that.

There's a lot to unpack there.

If I miss something, let me know.

Okay. Thank you.

For us, in our third quarter, I'd say PMC's sales dollars core growth put out just as we had expected in the quarter. There wasn't anything that was unusual in the quarter, that impacted the core growth number. Again, I think right line with what we had expected, we look into our fourth quarter, and again, as we talk about from an end-market standpoint, generally stable muted market conditions, but generally stable from what we saw in our second quarter. You are going to play it forward in the fourth quarter and that's obviously uniquely covered here is some of the impact Boeing in our fourth quarter. And we cycle against basically a tougher comp and with a couple of projects that shift in the last quarter in our process industry that don't repeat this year. So in our fourth quarter, we do expect our core growth to be down a couple of points for those reasons. We think the end markets, and look at it by geography, I got to see not really different from what we, talked about last quarter. Food and bev for us has been a good end-market for us, not only just the market, but things that we’ve been doing, as Todd touched from simplification, strata [ph] accounts, some of the -- some new product in that space. We’ve seen good growth out of our European-based business, which obviously serves the globe in North America as well. In our process industries, I would say, generally, North America stable, Europe has remained weak for us, both OE and MRO in that space. And Asia for us will be the smaller piece as has been a growth mode, when we are doing some things to capture some share in those regions, but again small dollars for us. So I think that hits your questions. If I missed anything, let me know.

That's all of it. Thank you. That's very helpful. And then just maybe one on just manufacturing. Is there any significant seasonality within that business that we should be aware of? And then, maybe just from a higher level perspective, if you could elaborate a little bit more on kind of how that fits within Zurn's current distribution?

Yes. I would say, it should follow the traditional cycle we see in Zurn. So those will be nothing different from the seasonal patterns. So it will follow Zurn's seasonal patterns that we’ve traditionally seen in North America. It's a great addition to our portfolio. It's a product category that fits really well into our sweet spot of education and healthcare in our institutional verticals. So again, it's one of those -- it's kind of a down the middle of the fairway type acquisition approach. We have a product category that fits our strongest verticals, broadens our overall product portfolio. So it allows us to Zurn to be just more relevant than it has -- than it was the day before we acquired it and allows us to grow that product category at a much faster, given our established commercial front-end. So, again, a great acquisition for us right down a little fairway and we are really excited about what we can do with that product category with the Zurn brand behind it.

Great. Thanks so much, guys.

[Operator Instructions] Our next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open. Joe Ritchie, your line is open. We have no further questions in queue.

So this Rob McCarthy. Thanks everybody who is able to join us on the call today. And we will look for Joe, see if we can find him. We appreciate your interest in Rexnord and we look forward to providing our next update when we announce our fiscal year 2020 fourth quarter results in May. Have a great day.

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