Good morning, and welcome to the Rexnord June Quarter 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 2 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 28. 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, why we believe they're helpful to investors and contain reconciliations to this 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 believe 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. With that, I'm pleased to turn the call over to Todd Adams, Chairman and CEO of Rexnord.

Okay. Thanks, Rob. Good morning. As Rob said, we're going to cover our financial results for the June quarter. We'll also provide a little bit of an update on our operating environment, some detail on the platforms, particularly highlighting some of the key initiatives and priority to give us some confidence in our ability to perform moving forward, the strength and positioning of our balance sheet and our cash flow profile, and finally, a look at how we're planning for the September quarter. I'm on Slide 3. To cut to the chase, we performed really well in the quarter. From our view, it was gratifying important thing to take away from this quarter and really the last 6 months is to reflect on how agile and resilient our teams and business model have been in the face of something unprecedented. In the March quarter, our incremental margins were 43%. 90 days later, amidst a pretty tough environment, our decremental margins were only 13%. Using our new fiscal year convention through the first half of our fiscal year '20, our sales were down 5%, and our adjusted EBITDA is only down 2%. Specifically, looking at the June quarter, core and reported sales were each down 12% at the Rexnord level, with Water Management leading the way down only 2% and 5% core, respectively, PMC was down 15%. And while we had talked about a moderating impact from 8020 in PMC, we did choose to get a little bit more aggressive in our simplification efforts in a couple of product categories given the environment, and that turned out to be almost a 2-point drag to PMC's reported numbers in the quarter. Adjusted EBITDA was $103 million, and our margins actually grew 120 basis points year-over-year to 23%, with segment margins up 160…

Thanks, Todd. Please turn to Slide #7. On a consolidated basis, our June quarter financial results demonstrated the resilience we built into the company over the last 4-plus years is becoming an independent public company. On a year-over-year basis, our total sales and core sales growth were both down 12%, net of a roughly 1 point impact from our product line qualification actions. Currency translation and acquisition contributions to growth were offsetting. Our adjusted EBITDA margin expanded by 120 basis points year-over-year to 23%, as EBITDA declined only 7% year-over-year to $103 million and a 12% top line decline, which translated into a 13% consolidated decremental margin. Please turn to Slide 8, and we'll review our platform, starting with sale in PMC. PMC sales were down 15% year-over-year on a core basis as we experienced sales declines in most end markets, generally in the double-digit percentage range, and we accelerated some 8020 simplification actions that reduced year-over-year sales by approximately 190 basis points. We did generate positive growth in Asia and in renewable energy, but together, they only come up for about 10% of PMC sales in the quarter. Year-over-year sales declines were moderate relative to the platform average in our consumer-facing and power-generation end markets, but higher than the platform average in our process industry and aerospace end markets. Our North American distribution business was choppy, and the year-over-year decline in the quarter was slightly above the platform average, as sell-through was broadly weak, although it improved in June after bottoming in May. Overall, and given support from backlog, OEM end-user growth outperformed global MRO in the quarter on a sales basis. Outside of our aerospace markets, demand patterns improved in June, and it remained stable in July. Operating execution was strong as we benefited from our scope for…

[Operator Instructions]. And our first question comes from the line of Jeff Hammond from KeyBanc.

Just want to go over the 3Q guide. I think it's a step down from 2Q which was pretty resilient. One, can you just talk about the difference between the two segments? And then just anything -- or more color around the backlog relative to the prior quarter and order trends into July that kind of inform that range?

Well, I read your note, I figured you might be asking the question. So here's the thing. When you look at Q3, holistically, it just doesn't look a whole lot different on an absolute basis relative to Q2. And if you look at seasonality, if you look at margin performance, if you look at a lot of different things, then I think what we're pointing you to is we had a really good quarter. July is sort of tracking pretty well or tracked well, I should say, the quarter is over. And we're guiding to a range that is clearly comfortable for us. But in absolute terms, it doesn't look a whole lot different holistically than Q2. And that's, I think, really the way to think about it more than anything.

Okay. Can you just talk about the drivers of the Water margins, how much of that is mix? How sustainable is that high level? And then just talk about where you're stepping up investments, specifically given what you've kind of been finding in the markets?

If you look at the overall margin, we do benefit from really two mix elements. One, a greater percentage of our sales today are in the retrofit market than ever before. Traditionally, had been 10 years ago, it was 5% or 10%. It had been running in the mid-30s. I think there's a chance that sort of moves to 40% to 45% over the next 12 months. So that's obviously a net benefit. And then the categories that we're talking about in and around hygienic are also mix positive for us. So when you look at Zurn margins, I wouldn't think about this as wild cost controls and not spending $0.01, we think about it as some modest cost controls early in the quarter that we have subsequently decided to go the other way on and put money into a couple of initiatives, namely in and around hygienic, developing sort of a model that we think can be extraordinarily powerful in the aftermarket on an MRO basis and really being able to click to install and get this work done at any point in time anywhere in the country. And then also considering some elements of what a restroom in the future might look like. Being able to connect all the components and have them speak and work together. And so we're sort of making that investment -- accelerating that investment. So 29.1%, I think, is a pretty good indication of what we can do. I wouldn't think that it's a Unicorn buying expression of imagination, but based on some seasonality over the course of the year, Q3 should be pretty good. As we go into construction season decline in the December quarter margins, obviously, just based on volume from that. But it's a legit number, and we feel really good about it.

Our next question comes from the line of Joe O'Dea from Vertical Research.

First I wanted to ask on PMC and the organic down mid-teens. And over the course of results so far this quarter, seeing a lot of short-cycle industrial down in the sort of 25, 30 kind of range. And outperformance is not a new thing, but just any degree to which you can bridge some of that difference in terms of where you're seeing some of the greatest outperformance opportunities across your portfolio?

Well, we haven't seen many peers report yet. So I think we'll learn that over the course of the next couple of weeks. But fundamentally, I think a lot of it has to do with some of the structural end market and positioning decisions we've made over the last several years to get more exposure to consumer-driven end markets, to get more exposure to power gen, to get more explored to marine. We think we are clearly benefiting that -- obviously, we have an aerospace segment that from an order standpoint is -- it's a tough end market, as everyone knows. We do have some backlog. So when you look down to mid-teens, we benefit from a degree of a little bit of a backlog release in the quarter. But when you look at it on all the puts and takes, it's all right around that number -- a significant number of outliers. So we'll see where everyone else that we sort of generally compete with holds out. But I think a lot of the decline and maybe better-than-anticipated or better-than-feared, it has to do with some of the more structural things that we've done over the course of the last 3 or 4 years.

Got it. And then, Mark, it looks like you've got EBITDA setting up for the year, sort of trending $400 million plus and the cash cost items that you laid out on Slide 10 are in the $135 million to $140 million range, which would give a lot of cushion versus the north of $200 million free cash flow you're talking about. Are there any other cash items to call out in addition to what's laid out on Slide 10 in terms of where we kind of frame on free cash flow?

Joe, we're trying to lay out the big piece in the puzzle. There are smaller things, puts and takes here and there, pension cash contributions and whatnot. But we try to lay out the big items to help people frame out the number, I think. But we feel very comfortable with the 200-plus number at this point in time with 2 quarters to go. So I think we laid out the big piece. There's really nothing that's of substance or size that we haven't put on that page, Joe.

Joe, he did say plus. He just didn't tell you what the plus was.

Okay. Got it. And then, Todd, you were sort of framing a return to cash deployment. Any bogeys that you can set on that in terms of what we should be thinking about repurchase levels that you're comfortable with and then the confidence in back half M&A, where you think that's kind of directed from a segment perspective or any kind of cash use that goes toward that?

I think with respect to the buybacks, we're going to sort of feather that in, obviously. I think in February, we were talking, call it, $75 million to $100 million annually. It will be less than that. We've already got 30 in, I think, from -- through March. So there'll probably be some incremental, but it's going to be something that we think gets balanced really over Q3 and Q4. From an M&A standpoint, I think we're very optimistic that we'll get something -- or maybe 2 things on the Water side done. It could be tuck-ins. It could be bolt-on. But I think over the next 6 months, we think that those are things that are probably likely going to happen.

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

On Hygienic Solutions, and I'm sorry if I missed any of this detail. But could you parse out sales growth versus order growth in the quarter? I guess, related question, is the team facing any material supply chain issues in trying to meet the ramp in demand there?

Well, for competitive reasons, we're not going to give you the size of it. But suffice it to say that it's almost a double on a run rate basis at this point. And we think that, that has the chance to sort of sustain for a period of time. And so the supply chain aspect of it, as we've migrated to a more distributed model, we've obviously run a bunch of scenarios. We didn't stress test the doubling or tripling in the course of the 12-month period. But we think that by the sort of mid- to end of this quarter, we'll be in a spot to catch the current run rate demand. So the order rate is substantially above sales rate. Therefore, we did build backlog in the quarter. And it's really coming at us in waves. Success we're having is not sort of one-off. It's major restaurant chains. It's major retailers. It's major banks, universities, and these are orders measured in the tens of thousands of units. And so for us, it's really about continuing to ramp the supply chain to meet demand, pulling lead times and then really start to capitalize on the unique value proposition we have and being probably less vertically integrated than anybody we compete with; that's an area of high priority and focus. And I think we feel really confident that in the span of a, call it, 3- to 6-month period, we're able to sort of absorb and deliver against and actually pull in lead times against the business that's doubling. So that's sort of the way to think about the hygienic piece.

Okay. I appreciate all the color. And then Zurn's core growth was understandably restricted by shutdowns early in the quarter and then you mentioned some acceleration. If we think about the trajectory of hygienic sales, and I'm assuming we can layer on 2 or 3 points of contribution from Just, is it realistic that Water Management returns to growth in the back half?

Look, I think it's certainly possible. I think we'll have to -- look, absent disruption, absent some crazy things happening, I think the answer is it probably should. But I guess my perspective on things is we're really not out of the woods. If you look at the number of states that are sort of going the wrong way, restrictions at the job sites, the travel, quarantines between states, all of that kind of stuff, it does us no good to sort of get ahead of ourselves. We had a terrific first half inside of that. We've leveraged this hygienic opportunity along with connected products to create some meaningful, meaningful growth for us. We had a really good July. But your guess on September, August, much less November and December is as good as mine. So I think what we're trying to do is just keep beating our competitors, beating what the market growth is and investing in our business so that when we turn the corner, we're flying as opposed to figuring out how to run. So that's, I think, how we think about growth in the second half reserve.

Okay. Well, makes sense. And then Mark, one last one, if I may. Really good decremental performance in PMC in the quarter. Is mid-20s a reasonable range to think about for the back half? Or are there some variable costs coming back or other pressure points that may lift that number?

Yes. As Todd mentioned, we are turning some investments back on in the business. And kind of the weigh our overall cost across -- out of this but across the bank on the balance of the back half of the year. The decrementals probably won't be in that mid-20 range, but we're still going to deal. PMC, think of it probably a 30 to 34 type range just in the back half. And you'll see strong decrementals in the Water as well. So as we -- but we are turning to investment back on, as Todd mentioned, so -- but all that being said, you're going to see good solid decrementals in both platforms in the back half of the year.

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

This is Trish on for Julian. So it sounds like you guys think that Water Management could return to growth in the second half. And if we think about, then PMC seems to imply either flat or kind of worse sales declines in that business. So just wondering, are there any end markets you're seeing conditions get worse or any that you're seeing getting better within that segment?

When we look at end markets, obviously, the one that definitely is underperforming and probably has some downside risk to it is aerospace. Beyond that, I think our commentary was stabilized through June into July. We're sort of thinking about seasonality. We're thinking about customer behavior, investment decisions, all that kind of stuff. And I think we're probably just taking a cautious view of what that could look like. But the one end market that I would call out that's probably lower for longer is aerospace.

Understood. That's helpful. And then just maybe one more on the cost-out program, the $51 million laid out last quarter and around $40 million or kind of more temporary in nature. Is the right way to think about as those come back in calendar 2021 that they're kind of offset by the scope for savings coming through?

We'll see. I mean, again, I think that as we look at our back half, it's really a function of how long do you squeeze the rock? And do you begin to put some of that back in, in the second half of the year, so that there's not a big headwind into fiscal '21. The savings from SCOFR are real; they'll come through. And so I think we're really sort of managing for the next 24 to 36 months as opposed to the next 6. So I wouldn't think of it as a pure offset. I think it will probably be a little bit better than that. But that's the way we're thinking about those onetime cost saves.

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

I guess, just trying to follow-up to some degree on Jeff's question at the very top, trying to get a little more clarity as to how you're thinking of what's embedded in your outlook at segment level for Q3? How we should think about PMC versus Water Management? And also sort of related to this, as you're looking at your order trends into July, I'm kind of curious if you're hearing anything different from either customers or distributors in both of your segments that might be operating in some of the states that have seen some of these COVID spikes. Are you starting to see some impact to business already? Or is this not a factor yet?

Well, Mig, I think you have to separate the guidance numbers and set those off to the side, right? I think what we're trying to do is provide you a range of outcomes based on what we see. Obviously, as you saw in the last 2 quarters, we outperformed what we said. And so we're not trying to set this up. It's just -- we were trying to give you the range of outcomes that we see. So from a customer standpoint, the feedback, as you can likely imagine, is mix. When you look at the number of end markets that we have in the 2 segments, I think you're barely going to get some customers that are super excited about the next 6 months, and you're going to get some that are a little more bearish depending on the end market. At this point, we haven't seen on the Water side, any pronounced changes to construction cycle based on these COVID outbreaks, but that could happen in a moment's notice. And so the way we've tried to sort of set up the way to think about the third quarter in the second half is one of a high degree of confidence in our ability to execute in a tough environment. If it's better than we think, we'll probably do a little better. If it's worse, we've got the cost structure in place, we've got some growth investments that are driving outperformance. And we feel like that we're going to turn in on comparative to the prior year, a really good result. And so I know you're trying to reconcile maybe what your model is versus consensus versus what we said. But I wouldn't -- I wouldn't spend a lot of time worrying about that. I would just simply say,…

I can appreciate that. And at least for me, it was less reconciling to consensus and more trying to understand exactly what you see in your business. And so that, that can frankly inform our view more broadly on the company and your opportunity. So that's where I was coming from. If I may switch to the cost side, I guess, I'm wondering if you can provide us a little bit of an update as to how your cost takeouts have been progressing versus your initial plan. If there's anything to kind of call out about the June quarter, in particular? And then maybe a little bit of framework as to how we should be thinking about your -- again, the framework that you put forth for the September quarter, where decremental margins are looking slightly different than the prior quarter. Is this just a factor of ramped up investment? Or is there something else in there as well that we need to be aware of?

Sure. I think the cost takeout that we had outlined in the second quarter was very much on track in PMC and the corporate line. It was less than what we had targeted in the Water side. And as I mentioned earlier, that was a conscious decision to make some investments, eliminate furloughs, do the things that would allow us to continue to capitalize on the opportunity we see. As you move to the third quarter, I think that the PMC cost takeouts will probably be exactly in line relative to the second quarter. On a net basis, that's an investment offset by some course correction. Corporate is in line. And Water, the cost reductions will be less as we see the opportunity to make some investments now. But taken as a whole, it's in the ZIP code. And the decrementals of 13% in the quarter clearly have the benefit of no spending in April. And as you -- if you return over the course of the month of May and June, it sort of ramps up. And now we're sort of in a normal zone. And as Mark pointed out, the decremental margins in that 25% to 30% range is something we've endorsed for a really, really, really long time. And I think that's the way to think about the second half.

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

This is Emily on for Andrew Obin. Just a question on nonresidential construction outlook for Water Management. Any visibility on non-res construction for second half of the year and 2021? We've been hearing about some leading indicators suggesting that 2021 could be a down year for non-res.

Well, we've owned Zurn for 13 years now. And the forecasts, I think, have only been wrong 12.5x. So fundamentally, there's a chance that, that may happen. There's a chance it may not. I think what we take comfort in is that of those 13 years, we'd beaten the market every year by a considerable margin. If you look at some of the verticals underneath the big number, we see actually reasonable performance heading into the next year. Without question, there's a period of time where there hasn't been a lot of new work coming in. That will have an impact down the road into '21, size and length. [Technical Difficulty]. We don't know yet. The other thing that I think is important to know is, as I mentioned earlier, the retrofit opportunity is massive. The relative share we have there is low but growing dramatically. The margins are better. And we think that, that has the opportunity to at least if there is some sort of a cover a good portion of it and maybe even provide some growth on top of that. So we're not going to prognosticate what the non-res market does in '21 other than to say we beat it every year for 13 years. We've got some awesome breakthroughs that are right in front of us that are ramping and we're going to manage through it, whatever it looks like.

Great. And then one more question from me on supply chain, specifically. How are you thinking about supply chain post COVID in terms of derisking either by shifting supply chains or adding back up suppliers?

Emily, are you there?

Yes, did you get the question? Did you hear me?

You sort of -- you cut in and out.

No, no worries. I'll ask that again. It was just a question on supply chains. How are you thinking about supply chains post COVID in terms of derisking either by adding suppliers or shifting geographies?

Well, as you know, we've been working at our supply chain optimization plan for almost four years. So it's something that is top of mind fluid and changing every day. So I don't think there's anything substantial to report as a result of COVID. I think we've been diversifying ourselves out of China, as you saw with the tariff impact. We navigated through that sort of flawlessly. So we've done a fair amount of change to our supply chain over the last 3 years. We continue to do that but always on a forward-look basis. So much less reactionary to this COVID environment than our long-term strategy and ensuring that we've got a robust supply chain, some of it domestic, some of it foreign, appropriately mixed between regions to allow us to get the best price with the highest level of quality and with the best lead times. So nothing specific to call out COVID supply chain oriented.

We have no further questions in queue. I'll turn it back to the presenters for closing remarks.

I'd like to thank everybody for joining us today on the call. We'll be back to you again in late October to report on our September quarter results. I hope everybody has a great day, and please stay safe.

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