Zurn Water Solutions Corporation
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good morning, and welcome to Rexnord First Quarter 2021 Earnings Result Conference Call with Todd Adams, Chairman, President and Chief Executive Officer; and Mark Peterson, Senior Vice President and Chief Financial Officer.

[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, April 27.:]

[At this time, for opening remarks and introduction, I will turn the call over to Mark Peterson.:]

[Mark Peterson:]

Good morning, and welcome, everyone. Before we begin today's call, it's with great sadness that we want to pay tribute to Rob McCarthy, Vice President, Investor Relations, who passed away unexpectedly less than 2 weeks ago. Rob joined Rexnord in January of 2014, shortly after the company went public, and Rob really established and built our Investor Relations function over the years. Rob brought tremendous passion, expertise and discipline to his job, and he was instrumental in the formulation and articulation of our environmental, social and governance initiatives. But most importantly, Rob was a trusted adviser to Todd, me and the Board of Directors and has left an invaluable mark on Rexnord. Our entire Rexnord team mourns his loss, and our thoughts and prayers are with Rob's wife, Sharon, and his family.

[In the interim, I have assumed Rob's responsibilities until a successor is named. And one of those responsibilities is to start the call and 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 contains 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, 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 our filings with the SEC.:]

[With that, I'll turn the call over to Todd Adams, Chairman, President and CEO of Rexnord.:]

[Todd Adams:]

Thanks, Mark. Obviously, I echo your thoughts and comments on Rob. We try to reach out to as many of you as we could to let you know as a courtesy and as a colleague. And obviously, as we make the transition, hopefully, we'll be able to do that in person over the coming months.

[I'm starting on Page 3, and the basic takeaway is that Q1 is very much on track and a little bit above of what we thought just 90 days ago. Clearly, a much better start in PT, both at the OEM level as well as through the ID channel. We saw, as we predicted, the aerospace end market sort of bottoming. Our book-to-bill was just below 1 this quarter, and we anticipate it being meaningfully above 1 in the June quarter. And finally, really strong demand across the board in Zurn and improving early indicators in the ABI and renovations are up as well. And so we're really set up to have a great Q2 and full year '21.:]

[The highlight of the quarter is our strong profitability and cash flow. And recall, this is against a record March quarter for us last year. We really, in early onset of the pandemic, were able to battle through and really have not much impact to our March results at all. So this is, I would say, a very credible comparison. And one of the hallmarks of Rexnord is really managing that price/cost equation extraordinarily well, and we continue to do that.:]

[I also want to remind you, it's not just managing price/cost, but the compounding benefits of 80/20, continuous improvement in all of our scope for work showing up as well. And as you've seen in our outlook for Q2, we expect that to continue as we move forward.:]

[As it relates to the RMT with Regal Beloit, we're making great progress. We are hitting all of the key milestones with respect to regulatory filings, carve out financial work and working really well together. And hopefully, we're tracking towards the finish line sometime in the fourth quarter. They've got their earnings call next week. And so we're not going to say a bunch more than that. But really pleased with the transaction and the traction around the work that we're able to do to bring this to fruition.:]

[And equally importantly, all the things we're working on for a stand-alone pure-play water business. We've got a plan for eliminating any of the stranded corporate costs. We completed in the quarter or posted quarter, I should say, a small tuck-in acquisition of ATS Environmental's service and monitoring business that serves restaurants and kitchens. And then the acquisitions of Just and Hadrian are going really, really well. And I'll, after Mark's comments, provide a little bit of a deeper dive on what that stand-alone Zurn business looks like moving forward.:]

[If you turn to Page 4. Last quarter, we published our sustainability report. It was really our second one, but it really lifted the prominence of the work we had done over the course of the last 10 years. The steps that we took this year, I think, are to align around some of the best practices reporting with SASB and GRI. I think everyone knows that we added a committee last year to our Board. And so we're in year 2 of that work plan and goal setting to continue to make, I would say, pretty meaningful progress on things like greenhouse gas emissions and water consumption. And then finally, we go into, I think, reasonable detail talking about all the work we did through the pandemic to support not just our customers, but our associates. So we're really proud of that. And hopefully, you can get a chance to look at it. We've gotten great feedback so far, and we'll continue to build on that as we move forward.:]

[So with that, I'll turn it over to Mark, and he'll take you through the quarterly results.:]

[Mark Peterson:]

Thanks, Todd. Please turn to Slide #5. On a year-over-year basis, our consolidated sales declined 4% to $526 million as a 200 basis point benefit from foreign currency translation, a 300 basis point positive contribution from our acquisitions of Just Manufacturing and Hadrian in our Water Management platform was offset by the 8% decline in our core sales inclusive of a roughly 60 basis point impact from the product line simplification actions, primarily in PMC and a small divestiture in our PMC platform that reduced our total sales by approximately 1 point.

[With respect to profitability, our adjusted EBITDA was $120 million in the quarter, and our adjusted EBITDA margin expanded 10 basis points year-over-year to 22.8% despite the overall decline in sales as our cost controls and benefits from our SCOFR 3.0 actions drove an 18% decremental margin in the quarter.:]

[So please turn to Slide #6, and we'll review our 2 platforms. At the platform level, Water Management sales were up a solid 12% from the prior year March quarter as Just Manufacturing and Hadrian acquisitions contributed 8 points of growth, and the core business generated 4 points of growth on top of a 7% core growth quarter 1 year ago. More importantly, core orders in the quarter increased 10% year-over-year driven by solid demand across the platform, including our hygienic and environmental product offering, resulting in an improved backlog heading into the second quarter and an acceleration in our core and total sales growth in the June quarter.:]

[Strong operational execution on our Water Management platform delivered a 14% increase in adjusted EBITDA, and our margin expanded 40 basis points year-over-year to 26%, which is an approximately 30% incremental margin, inclusive of the mix impact of our recent acquisition.:]

[PMC sales declined 12% as a 200 basis point benefit from foreign currency translation was more than offset by the small 2020 fourth quarter divestiture in China that reduced PMC sales growth by about 1 point and a core sales decline of 13%, inclusive of an approximate 100 basis point headwind from our 80/20 simplification actions.:]

[Breaking that down further, the year-over-year sales in our aerospace operations decreased 46% as anticipated in the quarter, represents the bottom of the sales decline for the end market. Demand, while still down year-over-year, improved significantly from what we experienced in the last 9 months of 2020, and we anticipate a return to sales growth in the second half of 2021. Excluding our aerospace operations, core sales in the balance of the PMC platform in the March quarter were down 7% year-over-year, inclusive of the 100 basis point headwind from our 80/20 actions and were impacted by the lower backlog we had entering the quarter as well as a change in the customer buying patterns year-over-year given the pandemic. That said, demand trends continue to improve sequentially and core orders turned positive in the quarter across nearly all end markets and geographies, resulting in a nice improvement in our backlog as we head in the second quarter.:]

[North American distribution channel sell-through, again, excluding our aerospace end markets, improving each month as the quarter progressed as a result of the demand trends we anticipate that growth in our non aerospace end markets will turn positive starting in the second quarter of 2021. Operating execution was again solid in the quarter as we benefited from our SCOFR structural cost reduction initiative, coupled with our cost control and RBS-led productivity actions. As a result, our adjusted EBITDA margin was flat year-over-year at 23.8% despite the decline in sales from the prior year March quarter.:]

[Please turn to Slide #7. With a strong start to free cash flow generation and adjusted EBITDA in the quarter, our net debt leverage was reduced to 2x at the end of the March quarter from 2.1x at December 31, 2020, and remains at the low end of our targeted leverage range of 2 to 3x.:]

[Please turn to Slide #8. Given that the RMT transaction is anticipated to close sometime in the fourth quarter of calendar 2021, we will continue to limit our external outlook for the upcoming quarter. With that said, and taking into consideration demand trends of April, our backlog position and the continued uncertainty given the persistence of the global pandemic, we're projecting core revenue in our Water Management platform to increase by a high-teens percentage year-over-year, and our total revenue in the platform to increase by a high 20s percentage.:]

[For our PMC platform, we're projecting core revenue to increase by mid- to high-teens percentage year-over-year, inclusive of 1 last quarter of declines in year-over-year aerospace growth.:]

[Based on our platform sales expectations, we expect our adjusted EBITDA margin in our Water Management platform to between 26% and 27%, and our adjusted EBITDA margin in our PMC platform fee between 23% and 24%. We expect our corporate expenses to be approximately $10 million in the quarter.:]

[Before I turn the call back to Todd, a few comments on our tax rate, interest expense, stock comp expense and depreciation and amortization. We anticipate our tax rate on adjusted pretax earnings in the June quarter to be approximately 28%. Our interest expense for the June quarter is expected to be approximately $12 million. Our noncash stock comp expense should be about $13 million, and our depreciation and amortization will come in around $24 million.:]

[Please turn to Slide 9, and I'll turn the call back to Todd.:]

[Todd Adams:]

Thanks, Mark. I'll just spend a minute or 2 doing a little bit of a preview of what stand-alone Zurn pure-play water will look like. A couple of points. We anticipate changing the ticker upon the close. We plan on doing some sort of modified road show as we begin to trade as a stand-alone water business. And we're going to use the next couple of quarters, I think, to ramp up everyone's understanding of what the business will look like from a profile standpoint to educate investors. So they don't miss it as we begin to trade on a stand-alone basis.

[Zurn Water Solutions will continue to be headquartered in Milwaukee. We've got about 1,400 employees, and I would say, 5 primary facilities and a truly extensive global sourcing footprint. If you turn to the next page and take a giant step back, I think it's really important to understand the role we play in the overall water sector. And that's providing water solutions that improve health and human safety and the environment with the broadest array of products with a single brand, designed to work together that come together to create this really unique solution set for public and private spaces. And obviously, we've got a track record of performance, really driven by what was the Rexnord business system, which easily transitions to the Zurn business system. And obviously, we're saving water, protecting the environment, reducing cost of building an ownership and creating value along the way.:]

[If you move to Page 11, what we do falls into really 3 sectors of the water economy, again, all for public and private spaces. Water and safety -- water, safety and control are things like backflow prevention, pressure management, fire protection. In hygienic and environmental, obviously, that's our touchless products, our faucets and our flush valves, our privacy partitions, our sinks and our hand dryers, which has been an instrumental part of our growth strategy the last several years. And finally, flow systems, that specification grade drainage, storm water management, dream rooms, things like that, that move water in and around a public or private space. And our key end markets are education and health care.:]

[If you turn to Page 12, obviously, the track record that we have is, we think, pretty solid relative to not just water companies, but really any industrial business. This year, sales will exceed $850 million. Our returns on invested capital, inclusive of all the acquisitions and all the purchase accounting from prior LBO transactions is north of 20%. You heard from Mark, the 26% adjusted EBITDA margin and very strong cash flow. I think it's also important to note that out of the last 41 quarters, 39 of those have driven core growth positive. We obviously had 1 in 2016 with the weather event and the June quarter of 2020 amidst the pandemic. So the 39 out of the last 41 quarters, so 10-plus years,of really strong growth. And obviously, 35% of the business is retrofit and replacement, which is up considerably over the last 10 years.:]

[If you move to Page 13. In the last 6 to 9 months, we've talked a lot about touchless and what's been happening to the pandemic around hand watching and upgrading. If you think about what we've been doing here, it's really happened over the course of the last 3 or 4 years. We've developed this portfolio organically and inorganically to provide really the ultimate hygienic ecosystem for a public or private space, and that will be branded Bright Shield as we launch the marketing campaign in the coming months, that is lavs, hand dryers, sinks, partitions.:]

[We see opportunities for safety and eye washing as well as bottle fillers. And these -- there's is a huge addressable market that's 50% retrofit, where we have stitched together a unique value proposition for building owners and also being able to connect all this information to building management systems or the cloud or your phone, that sends, respond and anticipate what's happening in these critical parts of buildings to advance hygiene and reduce germ transfer. So we're excited to talk about our hygienic ecosystem and really under the brand Bright Shield by Zurn.:]

[If you move to Page 14. The obvious comparisons of Zurn to others really aren't that pure because we think we've got a competitive advantage that is so strong, starting at the bottom with product breadth, spec share, our supply chain capability, and then in the last several years, building on to that with omnichannel presence, Bright Shield, IoT. And that is where we feel incredibly well positioned to stand it up and carve it out and run it on a stand-alone basis.:]

[I also think it's important to talk about the flexible business model that we have around very few facilities, third-party rep agencies, and also that supply chain that's just so powerful, delivering that high return on invested capital.:]

[If you turn to Page 15. So that manifests itself, and what we believe is truly a differentiated financial performance relative to other businesses that participate in the water economy. I won't read all of the attributes, but we feel really good about what we've delivered since we bought Zurn in 2007. It accelerated pretty dramatically in the last 4 years. And we don't think that there's any seasoning required as a stand-alone public company as we've been delivering these kind of results for really a long period of time, and we'll continue to educate people throughout the next couple of quarters. But look for Zurn sometime in the fourth quarter on a stand-alone basis.:]

[So with that, I will turn it back over to the operator to take any questions you may have.:]

[Operator:]

[Operator Instructions] Bryan, your line is open.

[Bryan Blair:]

Solid start to the year, and hoping we can touch on Zurn, Zurn momentum a bit more, and specifically, what your team is seeing and expecting on the new construction side of the market. The overall business momentum, obviously, very, very strong. We know that in the recent prints you've had, the second quarter guide is robust. There has been the expectation of a new construction offset that at least for part of '21 to the touchless and hygienic growth, continued MRO penetration, et cetera. Just curious how the recent improvement in market indicators, Todd, you mentioned that in your script, impacts your team's thinking on second half growth, and I guess, more importantly, the cycle tailwinds that stand-alone Zurn should have going into 2022?

[Todd Adams:]

Yes. Obviously, some of the early indicators around ABI and renovation activity, I think along with some potential stimulus, I would say they're it's early days, but they're in the graph, and they're starting to grow. So obviously, we're going to continue to drive areas of growth through our Hygienic and Environmental platform that we can take share in our other segments. But we do think that the setup over the back half and into '22 has clearly improved maybe from what we thought 6 months ago. And obviously, a lot of that has to do with our own luck and some of the things we've been working on. But clearly, from an end market standpoint, a little positive momentum in new construction is clearly better news than maybe what we would have dialed in, in late last year.

[Bryan Blair:]

Yes. I appreciate the color there. And how should we think about Zurn's margin progression over the near term? Obviously, we have the second quarter guide. Trying to parse out the core trend versus Hadrian impact. Obviously, the Zurn margin last year was very, very strong. How close to last year's margin level should Zurn be over the next couple of quarters? And then for Hadrian, any shifts to your expectations of getting merchants into the 20s over a reasonably short time period?

[Todd Adams:]

Yes. I think Mark laid it out a little bit, but we won't match the margins of last year. I think that's in our guide.

[Mark Peterson:]

In this quarter, in the second quarter.

[Todd Adams:]

In the June quarter. We will certainly be closer in Q3, we believe. But on an organic basis, we think it's pretty darn close. So what you're seeing is that the transition of Hadrian in and working the margins up over the course of this year in that. So I would say sometime at the end of '22, if the margins aren't 20%, they should be in the very high teens for Hadrian.

[Mark Peterson:]

Correct.

[Todd Adams:]

But obviously, very strong profitability over the next several quarters as we typically have. And I think most important is to understand that the build cycle for construction impacts Q2 and Q3 in a positive sense in North America.

[Mark Peterson:]

Bryan, we're working, Todd mentioned, not to led the commodity inflation and how we're managing that good. Good job on that in the past, and it's fair to say. On a year-over-year basis, inclusive of Hadrian, our goal is to keep margins generally flat year-over-year for the full year, which means the core business obviously improves year-over-year, inclusive of it. I mean, we built Hadrian with -- we're working to keep those margins flat for the full year.

[Bryan Blair:]

Okay. Great to hear. And then how about PMC incrementals as top line accelerates in the right direction in the next couple of quarters? Second quarter guide implies kind of low mid-30s, incrementals solid there. Is that a reasonable anchor going forward? Or will price/cost go for timing the -- what I assume will be an inflection in aerospace growth in the back half imply higher or lower range moving into Q3, Q4?

[Todd Adams:]

Yes. I think as a starting point, mid-30s in Q2 is good, and I think it's very likely that it's better in the second half and so we resumption in aerospace. And for the year, I think they'll be substantially above the 35% range for the full year.

[Operator:]

[Operator Instructions] The next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

[Jeffrey Hammond:]

So I think just on a lot of questions this quarter on other companies on price/cost and supply chain, which were kind of absent, I think, in the prepared remarks. Can you just -- I know you guys manage those pretty well. So can you just talk about what you're seeing on inflation? What you're doing on price? And particularly with the hygienic piece, which has got great momentum, where you see any emerging supply chain issues?

[Todd Adams:]

Yes. I mean, I don't want to say it's sort of business as usual for us, but it's sort of is business as usual. I think the way we've developed our supply chains and also the ability to pass on the price in our business in different ways in both platforms. And I guess we're not particularly -- we don't think it's too unusual. Obviously, the supply chain shortages, they crop up for us as well from time to time and we've been able to manage through our SIOP plan and being able to be proactive in what that might look like. And obviously, the hygienic piece, we've got a plan that was very robust from a demand standpoint. And so the supply chain is not an issue at all at this juncture.

[So I don't want to say it's sort of business as usual, Jeff, because there is a level of inflation out there, but our ability to manage it is unchanged, right? The ability to smartly run our SIOP and tether inflation where appropriate, none of that is different. And I think the benefit that we have is the compounding offsets of 80/20 of a robust continuous improvement program, and obviously, the SCOFR initiatives that Mark talked about. So that's why we're not really guiding to any margin pressure or issues over the balance of the year.:]

[Jeffrey Hammond:]

Okay. Great. And then you mentioned, as you were talking about Zurn, education and health care. And we're hearing a lot from on the HVAC companies about the stimulus and IAQ. But I just wanted to get a sense from you, what you're seeing in the education market? How you think you might benefit as that spend goes through. Obviously, safety is a big item for schools and just seeing -- and what you're seeing in that platform?

[Todd Adams:]

Yes. It will definitely be a positive for us. I mean, obviously, these schools are getting a significant amount of money to do upgrades around safety and technology. So HVAC is important. IT is important, but also hygiene is also important. So we're -- we've got a team that's tracking where all these sellers are going, how we're winning and how we're presenting what the opportunity is to improve the overall safety of a school. And that will be a catalyst for positive growth in the back half of the year, for sure.

[Jeffrey Hammond:]

Okay. And then just last one on free cash. Clearly, the comp was tough in 1Q, but just how are you thinking about -- I think you made some comments last quarter, how you're thinking about free cash flow versus what you had talked about a couple of months ago?

[Todd Adams:]

Q1 is, I think, considerably above what we had thought. And so more and more, it's looking like it will start with the 3 at the end of the year. There's a lot of road to travel between now and then. And obviously, we may not even see the full year with the RMT transaction. But if you had to pin me down right now, I would tell you, it probably starts with the 3.

[Operator:]

The next question comes from the line of Mircea Dobre with Baird.

[Mircea Dobre:]

Yes. I think that's me. I guess, so maybe trying my hand to Jeff's question, but in a slightly different way. Obviously, you guys have a lot of tailwinds in this Water Management business, increased funding for some of your key customers and just the core level of activity in the end market picking up. So I guess I'm wondering here is we're all contemplating this Zurn business as a stand-alone company. How should we think about the growth algorithm maybe longer-term here? I mean this business was able to grow mid-single digit quite comfortably when you didn't have the kind of tailwinds that we're all talking about here. What's the right framework as we think about the next 2, 3, 4 years for growth?

[Todd Adams:]

Yes. I mean, Nick, obviously, we don't want to get ahead of ourselves upon that separation. But 39 out of 41 quarters of positive core growth over a 10-year period, 5% to 6% compounded core growth, and hence the backdrop. And if it comes to fruition, I think, as we believe, it's certainly going to be better than that. And so that was sort of a relatively mixed period of end market activity for us. So yes, I mean, I think we'd be super comfortable with 5% to 6%. And then if the regulatory and funding and end markets sort of turn positive, it will definitely be better than that because the 5% to 6% sort of demonstrate performance over the last 10 years. Not exactly what we are looking for, but better than what we've been doing.

[Mircea Dobre:]

No, look, fair enough. I understand that you don't want to sort of get ahead of yourself here. But that's a question that I get from investors quite often. And I wanted you to maybe comment publicly on this. When we're kind of looking at the slides that you provided here on Zurn, you talked about the $8 billion addressable market. I just want to make sure that I properly understand this. First, this is simply talking about the hygienic ecosystem, like Bright Shield as being an $8 billion market. Can you maybe give us a little more sense as to kind of how you came up with this number? Is this just a North American number? Is this a global number? And as you think about the other portions of your business, kind of how do you frame that opportunity outside of this hygienic ecosystem?

[Todd Adams:]

Yes. So we think the sensor market stand-alone is about $5 billion, and that the incremental $3 billion is all the renovation and retrofit activity, just around the hygienic and environmental categories that we're now in. So I think a couple of quarters ago, we sized that sensor market-based on an installed base and an expected life cycle of a product. And so this would be just primarily a North American number, as we really don't have much exposure outside of North America, some pockets in Australia and Middle East.

[I think what's exciting for us is a lot of that comes through an adjacent channel in Jansen, that our people are doing that each and every day, maintaining facilities and as things need to be addressed for either wear or for health and safety, T.hose are the guys that are performing that work. We've had essentially no exposure to that end market. And in the last several months, we've partnered with some companies to address that channel. We now have upwards of 150 sellers that our third-party that will be packaging our solutions and providing them to their existing customers. And so there's momentum in that that's brand new for us...:]

[Mark Peterson:]

Brand new channel?

[Todd Adams:]

Brand new channel that we really haven't addressed. And obviously, we've added the omnichannel, and we've got an organic click-to-install model where you can define what do you want to change in your building to improve the health and safety of the building and we'll schedule the upgrade and install with a network of performance guys that we've lined up around the country. And so this Bright Shield opportunity was in the works for a while having identified the products that were needed. We had the fusion organic development. We did some organic -- inorganic activity. And now, I'd say, bringing the market in a pretty robust way is sort of what we were planning on doing all along. The pandemic spurred, I would say, an initial surge that we really had not penciled in, but now we're sort of back to the consistent demonstrated growth of this channel and opportunity that we've been able to pull together.

[Mircea Dobre:]

Right. Okay. Then last question for me, and another longer-term question, if you would. As you're thinking maybe 5 years out, your business currently is a North American business, like you said, predominantly, and I'm talking about Zurn here. Is there some thought here that this is going to become a more global business? Can you -- are you contemplating M&A or any other means through which you could be looking more broadly at opportunities beyond North America?

[Todd Adams:]

Yes. There's no question that we see opportunities to grow the business inorganically, both in North America as well as selectively outside of North America. I don't think that we're going to chase some regions just because of the market structure and things like that. But I think it's a really good chance that we'll be more global than it is today in the next 5 years, for sure.

[Operator:]

The next question comes from the line of Brett Linzey with Vertical Research.

[Brett Linzey:]

I was hoping you could just provide a little more color on the complexion of the 10% order increase at water. Was it primarily the hygienic applications? Are you continuing to see positive development in the rest of the business portfolio? And then any color you can provide on the various verticals between commercial, institutional, what those trends look like on an order and sales basis within water?

[Todd Adams:]

Yes. I'll let Mark give you a little more detail, but it was broad-based. The order growth was broad-based. I think we saw terrific growth in our water safety and control categories. Our hygienic and environmental was up considerably in the quarter, and we're starting to see the new construction flow systems were picking up, I would say both in education and to a surprising degree, some of the commercial applications as well. I don't know if we need to give him much more color than that, Mark, but...

[Mark Peterson:]

Yes. And I think I just said as people know, you're start seeing New York opening up and Boston opening up and California opening up. These are projects that started at some point in time last year. Once those projects get started, it's going to get finished. So I think to Todd's point, we're kind of seeing it a little bit broad-based right now because a lot of things that were stalled are opening back up.

[And the momentum to Todd's point, I would say it was really generally broad-based and then in some of the categories, like in our flow products that are going in kind of earlier on in the building application, we saw that picking up in the quarter as well, as well as into April. So we -- as Todd commented earlier on the call, we feel much better about our end markets today than we did in clearly 90 or 180 days ago, and it's generally broad-based at this point.:]

[Brett Linzey:]

Good to hear. And then just one last one on the Q2 margins. Maybe you could just put a finer point on some of the moving pieces within the guide within water management? I guess I'm just surprised -- I mean I get the dilution from some of the integration on the deals, but just surprised that we wouldn't see a better margin profile given the uplift in sales and orders. Is it restoration of COVID cost saves from last year, price/cost, any other finer point you could offer?

[Todd Adams:]

Yes. Well, margins last June were 29.1%. And I would say that it was very bare bones with spending in travel and anything of the like. And so obviously, there's the mix impact of Hadrian we locked about. There is some of that spending coming back. And then we also are investing. I think we're investing in this through Jansen channel. We're investing in some of the connected products that fits together the Bright Shield product offering and solution. And so I think we guided to 26% to 27% and on an organic basis, it's a stones throw away from where we were last year with all that in there.

[So I think that the decrementals are what they should be, given what we're doing inside the business and the mix change with Hadrian.:]

[Mark Peterson:]

Yes. But if you look at it sequentially from our first quarter, it's going to be the incremental sequentially is a high 30% range, which is pretty good for that platform.

[Operator:]

[Operator Instructions] The next question comes from the line of Andrew Obin with Bank of America.

[Emily Shu:]

This is Emily Shu on for Andrew Obin. Just a question on PMC. So PMC, excluding aerospace, declined 7% organically this quarter. So I'm curious, other than aerospace, could you unpack sort of which end markets are still soft and which ones you're starting to see recover within PMC?

[Mark Peterson:]

Yes. I think the important thing to note, to think about there is what the orders did versus the sales. Sales is more tied to timing and backlog and some of the -- you may recall last year, when you looked at our results last year in PMC compared to that industrial concept, we outperformed everyone last year. Our core growth was like down 1% in PMC. From an order standpoint, that's truly what's happening in the end markets. We saw demand turn positive in PMC. We saw orders expand for the first time in several quarters, but the demand did turn positive in the quarter, and I'd say it was across really the majority of our sectors, our process sector, our consumer, our energy sector and the reason as well.

[So from a demand standpoint, we did see that positive trend, and we expect that in the second quarter, as you saw from the guide, to really accelerate. And I think as you get in the back half of the year as well, we should see some very nice core order demand growth as well as sales growth in the back half of the year as well.:]

[Emily Shu:]

Okay. Great. And then my follow-up question, just switching gears a little bit, another question on stimulus. So I know the school stimulus will likely be positive for Zurn. But in the recent release, I think there was about $350 billion of state and local aid marked for water-sewer infrastructure that must be spent by 2024. So I'm curious if you have any early thoughts on how the jump in government spending on water infrastructure will impact Zurn?

[Mark Peterson:]

Yes. I think, as Todd mentioned earlier, it's not just the extra funding for the schools, it's also, as you highlighted, general stimulus funding. And I think that can benefit us if you look at our site works, end markets where you're looking at management of water -- storm water around the building. We don't have a lot of infrastructure-defined exposure, but bringing product categories that are managing water, managing separation of water around a building will clearly be a benefit to us. So both of those funding programs provide nothing but tailwinds for the platform.

[Operator:]

The next question comes from the line of Mitchell Shapiro with Gates Capital.

[Todd Adams:]

It looks like he hung up.

[Operator:]

[Operator Instructions] We have a question from the line of Mitchell Shapiro with Gates Capital.

[Mark Peterson:]

With no other questions, so thank everyone that could join us on the call today. We appreciate your interest in Rexnord, and we look forward to providing our next update when we announce our June quarter results in late July. Thanks, everyone. Have a great day.

[Operator:]

This concludes today's call. You may now disconnect.