Good morning, and welcome to the Rexnord Fourth 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 SEC yesterday, May 12. 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 will speak to core growth, adjusted EBITDA, adjusted earnings per share, free cash flow and return on invested capital 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. And with that I'm pleased to turn the call over to Todd Adams, President and CEO of Rexnord.

Yes. Thanks, Rob and good morning, everyone. This is Todd, and I'm here with Mark Peterson our CFO. This morning as Rob said, we're going to cover our financial results for the three months ended in March as well as our fiscal year. The other things we'll do or provide an update on our operating environment, the actions we've taken to protect our associates and our business near-term while positioning ourselves to thrive in a world where we're going to have to live with COVID for a period of time, and that will eventually transition to a post-COVID world. Mark will go through a little more detail on our platforms highlighting some of the key attributes, and frankly changes we've made to our business over the last several years have made it far more resilient going forward. Obviously, the strength and positioning of our balance sheet and cash flows, and finally we'll sort of, talk through how we're planning for this upcoming June quarter. And I'll start on slide 3. I think we've tried to keep everyone up to speed with our investor call that we did at the end of March, and then the pre-release we did in early April. The results we announced last night are essentially in line with what we communicated with one small exception. Free cash flow is just a touch higher than in the pre release. As earnings season has rolled on, I think, it's even more clear that our March quarterly results were exceptionally strong relative to the broader industrial universe, very high-quality industrial peers, and particularly against our end market competitors. Rexnord, like every other company, was impacted in the fourth quarter by the virus. Our teams in China and Italy have dealt with the challenges throughout the quarter. And as the…

Thanks, Todd. Please turn to slide number 11. I'd like to make a few comments about how our platforms are positioned coming off of strong fiscal 2020 results, starting with our Process & Motion Control platform. PMC is characterized by operational excellence and execution. Core growth was down slightly but excluding a 2-point impact from our 8020 product line simplification efforts, PMC core growth was up about 1%. PMC delivered adjusted EBITDA was flat to the prior year despite the $22 million drop in reported net sales, which clearly highlights the benefits from the structural cost reduction actions we have taken in the platform. Over the last four years, we've downsized the original PMC physical footprint by approximately 25%, including a major foundry here in Milwaukee. We've taken out roughly $35 million of structural costs. At the same time, we've expanded our base in lower-cost regions, which now account for 0.25% of total PMC employment. As a result, we have a more flexible and variable cost structure. At the same time, we've integrated two substantial and highly strategic acquisitions, Cambridge and Centa that have added balance to PMC's end market diversification and strengthened our position in food processing, renewable energy and marine power. Returns on tangible assets have been improving and capital investment requirements are moderating. You can see from the slide that we invested just 2.6% of revenue in CapEx during our fiscal 2020, and a portion of that was allocated to investments associated with the current round of structural cost reduction actions, as part of our supply chain optimization and footprint repositioning initiatives. PMC's commercial excellence and 8020 initiatives are delivering tangible results. We've been winning a higher share of new first-fit applications with strategic customers, which has positive implications for our longer-term share of the long tail…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Hammond with KeyBanc Capital Markets is on the line with the question. Please go ahead.

Hi, good morning guys. How are you?

Good morning, Jeff. How are you?

So, I think the thing that sticks out most is the resilience and certainly the snapback in water. Can you -- we've heard some broader weakness in some other non-res businesses. Can you talk about what's driving that kind of snapback in the order rates, and how sustainable you feel that is?

Well, I think you got -- you start with our March quarter. I mean, we grew 7% core. And I think some of the next closest people were flat to down. So, we had seen strength really, I mean, for years substantially ahead of competition that accelerated and widened into March. And the specification work, the adjacency work, some of the strategic synergies with the acquisitions we've done and obviously the hygienic solutions and packages that we've now created that are frankly unparalleled, there were all things that were creating positive momentum and continue to create positive momentum for us. And so, as job sites around the country open up, I think we're going to see that continue for a little bit of time here, and what we've got to do is continue to watch starts and we've got to continue to watch what it looks like down the road. But for the time being, our outperformance of the market and our outperformance of competition has been a strategic win and share gain versus we're in some pocket of secular growth, so that's how I think you should interpret it.

Okay, great. And then it looks like as you add in some of these additional cost saves in your guide, you're kind of low-to-mid 20s decremental margins and just trying to get a sense if these kind of trends continue, is that a sustainable decremental margin into the latter part of the year?

Yes, it is. Again I think the actions that we took and when you really study those charts, we went about it assuming that things were going to be really bad. And we sized all of the cost reductions and plans we had to deliver, again that $51 million over the next 9 months, really 8 months when you factor in when it was implemented. And as a result of that, the momentum on those will carry us all the way through the December quarter. And so the decrementals -- the cost structure is in place. It really comes down to what happens to order rates over the course of the next 6 to 7 months. But without question, that's what we’ve endeavored to do and that's where we've cut our costs.

Okay. Thanks a lot guys.

You bet.

Joe O'Dea with Vertical Research Partners is on the line with a question. Please go ahead.

Hi, good morning everyone.

Good morning, Joe.

On the cost cuts and the $51 million, $68 million annualized, can you give any context in terms of your planning for what kind of range of demand declines that addresses? And how far you need to move outside of those ranges either to the upside or downside to start making changes to your cost out plans?

We're refining it as necessary starting today either in the last several weeks. If you're below the touchy [ph] line, we're asking you to think about what else we need to do and respond real-time as opposed to try to project what order rates are going to be four or five months from now. It would certainly be our assumption that some of these declines moderate to a degree. But that being said, we've got to just be vigilant about it, and so we're not giving guidance now for the December quarter. What we're talking about is, we're already cut below what we hope to be a pretty tough quarter. When we get to July and we give you the next update, we'll have hopefully a slightly better view. We may not. But, nonetheless, the cost structure that we've gotten ourselves too is very durable across pretty big declines for a while is the way to think about it. We didn't have -- we don't have a V recovery in the September and December quarter. And we took the approach of lower for longer, forced ourselves to cut our cost to that level, and then work our tails off to do better than that as we take share. And again, I think that's the prudent thing to do and that's the way we've approached it.

And then, as you think about that part of the year, into the back half of the calendar year, could you talk a little bit about end markets both within PMC and Water Management, that might be poised for more of an improvement post June, and those that would be more positioned to endure a sort of lower for longer type of environment in Aerospace, kind of curious about what your expectations are there versus other markets that you see could be kind of more resilient or more kind of, V-shaped?

Well, again, we're taking the approach that aerospace is going to be lower for longer. We think, some of the MRO activity, right if you think about the last two or three months, there's been a lack of MRO activity, just because people haven't been doing it, haven't been spending money. As people get back to work, as general industry starts to make things, manufacture things, we're going to be -- we're going to see MRO improve, we think relatively quickly. I do think that, things like food production, beverage production, power generation, and all those that are just fundamental infrastructure, essential industries, they're being consumed everyday, everywhere around the world no matter. If we're in a crisis or not, those are things that are going to come back sooner, rather than later. I don't think this hygienic period is going to go away anytime soon. In fact, I think it's going to amplify and accelerate. And so -- and then on the other end as Mark already highlighted it, which is Aerospace. And so, we've got a number of different end-market exposures. Some are going to do quite well, as things begin to moderate and ultimately recover. And some -- Aerospace is in a tough spot. I don't think we're alone in saying that, but that being said we think it's a terrific opportunity to take share. We have -- it's part of our SCOFR initiatives. We implemented a world-class facility with world-class cost structure. This is a great time for us to go in and work with OEMs. And pick off people with the competitive advantage that we've created in lead time, service levels and cost. And so, we're not trying to predict anything specifically. But that's how we think about it and see it. And that's what our plan is.

And then, lastly, just to understand the day's impact, I think you talked about April down 21, but down 12 days adjusted for the full June quarter, what is the year-over-year day's impact?

No. There's numbers of days impact in June quarter, Joe. This is a phenomenon of how our fiscal year ended and where April started. So for the quarter, days are consistent year-over-year.

Got you and so the down 18 to 23 is acceleration in declines from the April level?

That's what our...

That's correct. Yeah.

Yeah, all right. Thank you very much.

Bryan Blair with Oppenheimer is on the line with a question. Please go ahead.

Good morning, everyone. Hope you are all doing well.

Good morning, Bryan.

I was hoping you could offer a little more color on segment order trends and specifically the split of OE versus MRO and PMC. And the new construction versus retrofit and Zurn to the extent you can parse out those trends?

OE and end-user is higher than what is on the chart. And MRO is lower. Meaning the declines in MRO are lower today OEM end-user higher in PMC. With respect to new construction and retrofit, retrofit is growing, new construction is down.

Okay. Fair enough. All right and then, you've called out the SKU reduction impact to-date and specifically noted the SKUs in both platforms. How much of a SKU reduction impact is expected in 2020? And how should we think about that, all else equal relative to your share gain trajectory?

The impact in our calendar year 2020 will be less than what it was last year. For the year it was probably 150 basis points, maybe a touch more all in, it will be modestly less than that probably closer to one point.

In calendar, 2020?

In calendar 2020, that's the way to think about it.

Okay. And then, the second part of that was share gain. I know that's not the easiest thing to parse out at all times. But are you confident that the share you're gaining via these initiatives is offsetting that figure annually?

100%. I mean, I think it's somewhat obvious, right? Our closest market competitors in water are flat and we're growing 7%. So yes, I think we're more than offsetting the point of simplification.

Okay. Very good. And just to level set on the 2020 cost savings, the $10 million for workforce reductions or call it $13 million annualized, is that truly structural or is there some variability in that number?

Structural.

Structural.

Got it. Thank you.

John Walsh with Crédit Suisse is on the line with a question. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

And thanks for running through all that details on the slide. Very helpful. I guess two questions here. One, obviously you talked about your liquidity position of strength. Kind of what are you looking for from either if it's macro, if it's something internal to kind of get more sensitive on the other side of the COVID-19 disruptions? Because it seems like you're in a position that you could probably go faster than some others?

Well, yes, I think we talked about this maybe in one of the earlier calls maybe end of March, we have a very strong funnel of activity on the Water Management side. I think out of the abundance of just basic street smarts. We added some things that we probably could have done towards the end of our March quarter. We chose jointly to just take a step back and see where our numbers – both our numbers and their numbers sort of pull out over the next several months. But I do believe that once we see some level of stabilization and are confident in the targets and we all agree that now is the right time, I think you will see us do some things. But it's not something that we're racing to do. We're going to be cautious. We've got – these are proprietary deals too. So these are not auctions, we sort of have a handshake that we're the one. And on the other side of this or amidst this or something like that I'm pretty sure we're going to be able to do some really, really smart things and good things that complement what we put together.

Great. And then maybe a bigger picture question you spent time talking about connected, on the industrial side, we've heard that from several other players in the industry that it's moving that way. Maybe if you could compare and contrast, on the construction side I would think it's more mixed. I'm curious what you're hearing from your customers. But are they viewing this more as a temporary dislocation? Or are they actually having conversations that they need to move to touchless that they need to make buildings more seamless? Kind of maybe where is the traction greatest at this point if you had to compare versus the two segments, if that captures the spirit of the question?

I would answer it this way. The long-term secular trend towards remote monitoring, reliability and uptime on the PMC side is unchanged and likely accelerates. On the water side, the number of conversations we're having with hospitals, university, schools other healthcare facilities is vertical. And I don't think that's a trend that's going to change anytime soon. And so I mean, one example is major retailers who are really struggling, as they consider reopening stores, the one place they're spending money is retrofitting their facilities to hygienic solutions so people feel safe. And so that's an indication of when – if you think about – some of these retailers are struggling but they're willing to spend money in one spot. They bring the consumer back and that's with the solutions we have. And then if you just think about heading back to school, university I mean, at some point this is going to be a little more easy to see. We're going to get through the COVID crises, whether it's in the next nine months or 18 months. But I do think that a hygienic solution that's connected into the building management system it's something that's just not going to go away. And this is something that we have that's unique, the breadth of product we have, the ability for them to work together and us to specify and value engineer is we think an incredible strategic advantage not just in the moment but for a long, long period of time. So I would tell you that I think the adoption curve on the construction side is going to go much faster, quicker.

Great. Thanks for taking the questions.

Mig Dobre with Baird is on the line with a question. Please go ahead.

Thank you. Good morning. I also want to stick with that very last topic on hygienic, up 55% in May is what I heard which is quite a number. Can you maybe help size this business so that we understand kind of what would you guys are currently working with? And I'm wondering this significant growth that you saw in May here, maybe give us some context or some color as to what's been driving it? And as you think of the next six, 12, 18 months, what do you see as the total addressable market that your salespeople would be going after here?

Well Mig, we're not going to give you the size of it. But the addressable market is probably in the billions when you measure it today and going to grow over time. And so, when you look at the major competitors there's not many. And this is a business that we created organically starting about 10 years ago. And it's becoming a bigger and bigger and bigger piece of certain. And the addressable market is getting bigger and bigger and bigger. And from a technology standpoint we've got gear-driven technology in our sensor and touchless products which is the only one in the market that has it. And so it's a bulletproof solution on top of this growing market. So, we think this is a real opportunity and something that will differentiate our growth for a while.

I see. Sorry to press on this. It's just that number is kind of eye-popping for me. And I'm just trying to figure out if this is maybe just something that's off a very low base with a couple of customers that are placing orders or if this is something broader? I mean is it that you're see in health care and related type demand that could potentially expand more broadly, or is it the retail example that you talked about earlier? Just looking for some context here.

Well you can sort of triangulate right? Our Zurn core growth last year was 4% and this grew 16%. So it's not off of a very small number. It's a small number, but it's not a tiny number by any stretch of imagination and our health care facilities going to convert scrub rooms, surgical rooms, restrooms, common areas to stainless or copper sinks with touchless technology to produce the ability to execute a CDC-compliant handwashing. The answer is yes. As retail, yes. Right? Our high-traffic areas, yes. I mean there's very little from an end market standpoint that we can't address this hygienic awareness. May 5 was National Hygiene Day, right? And we had people speaking with huge university forums where we were the industry expert on what they need to do when students eventually return to dorms and campus buildings and things like that. We're on these panels. And so it's virtually every end market we have across Zurn, both new and for the moment retrofit. So I'm not going to give you much more than that other than we're not cherrypicking a number here to make it eye-popping. It's the real deal.

I'm sure it is. Just trying to understand kind of what the moving pieces are here. And then my last question on Process & Motion Control. You gave good color on Aerospace. I'm wondering if there are some other end markets that you can maybe call out in terms of progress and how you're thinking about demand going forward. I'm particularly interested in how you think about process automation in food and beverage? Thank you.

Yes. I mean, I think we already covered that, right? On the consumer side of things, food production, power generation, marine all things that are growing and obviously the broader MRO activity around all those industries. So, yes Aerospace is down. But there's a lot of other levers we have that we think are driving some of the maybe surprisingly for you reasonable performance today.

Okay. Thanks.

Julian Mitchell with Barclays is on the line with a question. Please go ahead.

Hi good morning and congratulations Todd on the chairmanship role that I think was announced yesterday. Maybe just a first question around water. You gave some very good color on the subpieces earlier and the tone is pretty upbeat around share gains. Maybe just help me understand, what are you seeing in the way of sort of backlog development there and the extent to which you're seeing project order pushouts kind of where we are in that cycle in what is a very sort of fast-changing environment. If you saw order delays and pushouts get very bad in April and now they're easing or it just depends state-by-state maybe just any context on that?

So, we crossed over March with a record backlog for our Zurn business which is for us somewhat unusual, right? It's a much more book ship business on -- and within our financial results. That being said we knew the strength based on the specification work that we had done years and months before. As you think about different work sites, obviously, the Northeast corridor has been shut down and tough, California as well. But if you think about places like Florida and Texas and frankly, the middle of the country, many job sites have continued to stay open. But those two large regions of the country where most of the people are in a good percentage window happens those are essentially shut. So, we would expect as those open back up really over the course of the summer and resume work we know, we'll get the activity there. But we have not seen any meaningful pushout or cancellation of orders. I mean if we were going to ship something to a work site in New York City, obviously, with the job sites closed we're not shipping it. So, if you want to call that a pushout you call it a pushout. But those are going to get finished once it's safe for people to do so. So, nothing from a cancellation or anything like that on certain side of things.

Thanks. And then just a quick follow-up on the cost-out initiatives, so I just wanted to double check that the $51 million of cost savings you talk about over the next sort of eight months or the last nine months of the year, just wanted to check if that's excluding the SCOFR savings? And then what the SCOFR savings are for this current calendar year? I saw you said what it was last fiscal year and next calendar year just wanted to think about the SCOFR progress and what we get in calendar 2020?

Yes, Julian, this is Mark. So, calendar 2020 is really more of a year of a lot of heavy lifting for us. As Todd noted earlier, we've made some announcements but we're going to be using this calendar year to do a lot of the heavy lifting on the projects. The savings will really start hitting our P&L like as we highlighted in the slide starting what would be calendar 2021 and probably even more so in that June quarter versus the March quarter. So, think of this year as a kind of get the work done year for us on SCOFR 3 benefits starting to accrue to the P&L in calendar 2021. So that -- and $51 million here is just actions we've taken near term in our P&L no SCOFR 3 in that number.

Great. Thanks.

No benefits.

Understood. Thank you.

Nicole DeBlase with Deutsche Bank is on the line with a question. Please go ahead.

Yes, thanks. Good morning.

Good morning.

Hi there. So, I guess maybe thinking about looking past this and into what will hopefully be a decent recovery. How do you guys think about what your incremental margins can look like coming out? Just tying together all the work you guys have done around costs, the SCOFR programs, seems to me that potentially incrementals could look better in a recovery than they've looked in past cycles, but just want to talk through that.

Well our incrementals frankly are pretty good now, 43% in our March quarter. I think it depends on the shape of the recovery, obviously earlier in a recovery, before we would add back any of these variable expenses and things of the like the margins are going to be better. And we're going to continue to endorse a normalized 30 to 35 over time. But without question, I think we've demonstrated really good incremental margins in the last three or four years. And SCOFR 3 is another $15 million to $20 million. So -- and that's structural and permanent, so there's a compounding effect of SCOFR 1, SCOFR 3 80-20, SCOFR 3. And we think that more than underwrites the 30 to 35, but we're not going to commit to what that looks like at this point, but I think you can get pretty comfortable with that if we're doing 43 in a March quarter where most people are posting decrementals and we've got this compounding effect of all the work we've done and there's still more to go, I think you can feel pretty good about underwriting that 30, 35 and maybe you can touch better.

Got it. That's helpful. And then secondly, I think there's growing concern around prospects for nonresidential construction over the next several years, totally get the hygienic discussion that sounds really interesting. It might be a little bit too early to tell, but I guess in the Zurn business outside of hygienic the more traditional Zurn business, how concerned are you about non-residential trends over the next several years, maybe based on the customer conversations you're having about new projects entering the pipeline?

I think it's going to be determined. Right? I mean, this really started to hit home in January. The pandemic in the U.S. was declared on March 12. What's today May 13?

May 13.

I don't think customers and people we're talking to are making multiyear decisions based on a two month period. So we think activity and conversations remain high. I think our entire suite of connected water products is going to resonate in any environment and it's certainly an opportunity to pick share as we go forward. But I think it's a little bit premature to making multiyear projections on a very short sample.

Understood. Thanks. I'll hop it on.

We have no further questions at this time.

So thanks everybody who was able to join us on the call. I appreciate your interest in Rexnord of course and we look forward to providing our next update around our June quarter results which will occur in late July. Please stay safe and stay well.

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