Zurn Water Solutions Corporation
Q1 2016 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Welcome to the FY 2016 Q1 Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. And I'll now turn the call over to Rob McCarthy.

[Robert McCarthy:]

Good morning, everybody and welcome to the Rexnord first quarter conference call. 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 and why we use them. Consistent with prior quarters, we will speak primarily to adjusted operating profit and EBITDA, adjusted net income, and adjusted earnings per share as we feel these non-GAAP metrics provide a better understanding of our operating results. Today's call will provide an update on our overall performance for the first quarter and our outlook for the fiscal year. We'll cover some specifics on our two platforms followed by selected highlights from our financial statements, our liquidity, and our cash flow. Afterwards, we'll open up the call for your questions. With that, I'll turn the call over to Todd Adams, President and CEO of Rexnord.

[Todd Alan Adams:]

Thanks, Rob, and good morning, everyone. We hope that the timing of an earnings release the night before coupled with an early call the following morning works better for everyone. So let's get started. Starting on slide four

[Mark W. Peterson:]

Thanks, Todd. Slide six of the presentation takes our reported results and reconciles the adjusted results. Recall at the beginning of this quarter and as reflected in its reconciliation, we revised our definitions of adjusted net income and adjusted earnings per share to exclude non-cash amortization of intangibles and to include stock option and LIFO expenses. Turning to slide seven, I'll just comment on a few key metrics from our consolidated results in the quarter, rather than reviewing the numerical comparisons on the slide. First, and as Todd has covered, our revenue and adjusted EPS were both slightly above our expectations in the quarter. With respect to profitability, we delivered an overall decremental margin of 35% year-over-year despite the significant short-term drag on our margins from de-stocking and weakening sell-through in our largest distribution channel. We expect that our decremental margin will peak in our second quarter before improving significantly in the second half of our fiscal year as distributor de-stocking should then be mostly behind us and the benefits of additional cost reductions actions take hold. Turning to cash flow, our free cash flow is merely a small number, but it was in line with our expectations and was consistent with last year's first quarter and with historical seasonality. Next, as we look at the operating performance in our Process & Motion Control platform on slide eight, you can see the strong year-over-year impact on our margins from the combination of the 9% revenue decline and the adverse mix affected by distributor de-stocking and declining sell-through. As anticipated, we will also face strong headwinds in our bulk material handling and in most energy-related markets in the quarter. On the other hand, food and beverage and aerospace revenues were flat to up against solid comparisons in last year's first quarter. As we look at our second quarter, we expect the combined impact of the adverse mix from additional channel de-stocking and softer sell-through and higher investment spending associated with our footprint actions, to hold PMC's second quarter EBITDA margin to around the first quarter level. For the full year, and incorporating our more cautious outlook for the U.S'. general industrial demand, we now project that PMC's EBITDA margin will be in a 23% to 24% range for the year. Turning to slide nine, I'll make a few comments on our Water Management platform where we continue to generate strong year-over-year margin expansion. Approximately 20 basis points of the margin improvement was driven by a small strategic product line exit we executed last year that reduced Water Management sales by $3 million year-over-year, but was largely neutral to EBITDA. After adjusting for that factor, the balance of the 260 basis point margin expansion reflects the robust level of core growth being leveraged by RBS-led profit improvements and productivity initiatives in our Valve and Gate Group that are largely independent of volume. Looking ahead to the second quarter and recognizing that the timing of product shipments in either the current year's quarter or the prior year quarter can create significant variability in quarterly core sales growth, compared to the Water Management; I'd like to remind everyone that, during last year, the strongest quarter for product shipments was our second quarter. That fact, combined with the current backlog phasing of project load shipments for this year will result in core growth for the platform that is expected to moderate to a low single digit number in the second quarter. With respect to margins in the second quarter, we expect to see margins expand both sequentially and year-over-year. Turning to the second half of the year for Water Management, given current project schedules, we expect platform core growth to then re-accelerate in the third quarter and through year-end. Overall, our confidence in Water Management's full year outlook has increased modestly and we expect the Water Management adjusted EBITDA margin to comfortably exceed 17% in the fiscal 2016. Moving on to slide 10, you'll see our free cash flow is consistent year-over-year, and our cash declined by $40 million we used for share repurchases under the $200 million repurchase authorization we announced in February. Our objective is to offset shareholder dilution from employee incentive compensation programs which we achieved with our first quarter activity. Our liquidity position remained strong, and we have a patient capital structure given our maturity profile. Going forward, we will continue to re-evaluate our capital allocation opportunities in the context of our overall capital structure, our liquidity requirements, and our long-term objective to reduce our financial leverage. Before we turn the call back to the operator to take any questions you may have, I'll make a few final comments on our outlook. In addition to the highlights Todd covered earlier in the call and slide 11 of the presentation, we also highlight our assumptions for interest expense, depreciation and amortization, effective tax rate, capital expenditures, and fully diluted shares outstanding for fiscal 2016. In addition, our guidance assumes we do not incur any non-operating other income or expense as we do not forecast realized and unrealized gains or losses from foreign currency fluctuations, gains or losses on the disposal of assets or other items that are recorded in this P&L line item. Our guidance also excludes the impact of potential acquisitions and divestitures, and future non-recurring items such as restructuring costs. With respect to restructuring, I just want to take a minute to provide you with an update. As we discussed last quarter, the supply chain optimization and footprint repositioning programs are expected to impact our fiscal 2016 results as follows

[Operator:]

Thank you. And I'll begin this question-and-answer session. And our first question is from Jeff Hammond from KeyBanc Capital Markets.

[Jeffrey D. Hammond:]

Hey, good morning, guys.

[Todd Alan Adams:]

Hey, good morning, Jeff.

[Mark W. Peterson:]

Good morning, Jeff.

[Jeffrey D. Hammond:]

So, just on the shape of the year and given kind of 2Q guidance, just help us get comfortable with what the second half weight, and I guess, most zeroing in on kind of the segments, kind of margin trajectory in the PMC business into the second half?

[Todd Alan Adams:]

Sure. Obviously, the Q2 guide was below consensus, but I would characterize as it is not entirely inconsistent with what our internal forecast looks like, so start there. When we look at the half-to-half walk, there's a good piece of growth that we see both in Water Management and Aerospace that contributes a good portion of the top line growth as we look to half-to-half. We also see that minimized level of destocking. So, what we're looking at in the first half is call it a $15 million to $20 million headwind, top line headwind that we think moderates to zero over the second half. And, I think, the – to give you into dimension. Maybe some of the assumptions around that we're assuming as we've said in the release, mid-single-digit declines on a sell-through basis and a destocking over the first half. And, the sell-through continuing to deteriorate in the second half, but you reached the equilibrium with sort of the inventory turn. So, I think, we've got a pretty conservative view of what the second half looks like, and those are sort of the big top line drivers. It's the math – the lack of destocking in the first half – in the second half relative to the first half. It's the growth that we see in VAG and aerospace, and it's really all the cost reduction and margin opportunities we see, and as Mark pointed out the tax rate. So, I think, the half-to-half walk isn't at all in consistent with what we were looking at internally, clearly not consensus but more in line with what we were thinking.

[Jeffrey D. Hammond:]

Okay. Okay. That's very helpful and then just on the mixed dynamic in PMC is that solely distributor destocking or is there something else driving the lower margin?

[Todd Alan Adams:]

That is it, we don't see any – we're not seeing adverse pricing, we're not seeing share issues, we're not seeing anything like that, it's really a fundamental outlook that we are taking which is things are going to be weaker and as a result of that our inventory through distributions is going to come down because again, we want to be viewed as a very strategic partner, so we want them to keep inventory turns high and not hold on to it. And so it's really a joint benefit, right, for us to make sure that they're healthy, we're healthy and we're riding through, which is a little bit of a rough patch. And I think that's really it, in terms of the margin mix.

[Jeffrey D. Hammond:]

Okay. And then I don't know if I missed this, but second half tax rate should be what?

[Mark W. Peterson:]

Yeah, Jeff, so if you look at the tax rate in the first half of the year so we said approximately 30% for the year and the first half, we're running around 32% to 33%. So I'll take the balance of that on the back side. And you'll play yourself out till you get roughly $0.07 of an EPS impact on the first half, second half to the favorable second half obviously.

[Jeffrey D. Hammond:]

Thanks, guys.

[Todd Alan Adams:]

Thanks, Jeff

[Mark W. Peterson:]

Yeah. Thanks, Jeff.

[Operator:]

Next question is from Joe O'Dea from Vertical Research.

[Joe J. O'Dea:]

Hi. Good morning.

[Todd Alan Adams:]

Good morning.

[Joe J. O'Dea:]

So on the activity around destock and then sell-through and what you're seeing and I think part of your prepared remarks you talked about having a little bit more cautious second half to you than what you're hearing from the channel, so could you put any context around kind of what your expectations are versus what you're hearing from them? And to what extent there is some conservatism in that or whether what they're telling you, just so seem to a little intuitive?

[Todd Alan Adams:]

Yeah. Sure, Joe. I mean when we started the broad distribution community was thinking about their growth rates in that sort of mid-single-digit range, so call it, 4% to 6%. We set our initial guidance well below that, probably less than half of that. As we've looked at the first half, they are revising what they are seeing to sort of flat. They are sort of flat through the first six months and they are revising it to flat for the year. And what we're coming back and saying is okay, so we think that sell-through is actually going to be down a little bit more than that. And so what we're trying to do is stay in front of what it is they are seeing in order to protect basically what we're telling you, and also to not get in a spot where we have too much inventory. They have too much inventory. We're trying to manage very effectively through a little bit of a chop period here. The good thing is we call it in July. So we think that we're on the right trajectory with respect to sell-through, and we're going to keep monitoring it. I mean we look at it every day, and we're trying to be as transparent and forthright as we can with what it's we're seeing and how we're managing.

[Joe J. O'Dea:]

Okay, thank you. And then I guess, that should mean that, I mean, the biggest impact and you talked about it a little bit ago is really mix on the margin. And so as you get into two half, and that kind of settles a little bit that should mean that you are talking two half is being more representative of a run rate margin that we think about moving forward, because the margin kind of weakness in the first half heavily, kind of a function of what's going on in mix right now, and that you...

[Todd Alan Adams:]

Sure.

[Joe J. O'Dea:]

...related to 2H? (21

[Todd Alan Adams:]

No question. Look, I think there is obviously a distorted view of the margin in the first half. I mean our PMC platform is a 25%, 26% margin business on a run rate basis. And so, as you go through the first half, you've got obviously – it's a little bit of a margin mix issue, and you have currency still going against you. By the time we get to our fourth quarter, we've anniversaried all the currency headwinds that we're going to see. And so, we've got a good second quarter here; we think we've got a pretty good read on what that looks like. The third quarter, I don't think we've got anything that's crazy in terms of sell-through. We've got currency dialed in, and so, as we get to the fourth quarter, absent anything absolutely way out of bounds from a recession standpoint, we feel like we're in good shape. And I think you'll see our second half margins in PMC right around that 25% level. So, I absolutely think that you're spot on that, that's a far more representative an ongoing way to think about the margins. And this is before – I'd point out – this is before the $30 million of cost reductions that we've got teed up from rolling through by the end of next year. So, no question the first half is not not indicative of what we think the business looks like or what it's going to look like really in the near term.

[Joe J. O'Dea:]

Great. Thanks very much.

[Operator:]

Our next question is from Julian Mitchell from Credit Suisse. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Hi, thank you.

[Todd Alan Adams:]

Hi. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Hi. Just a question within Water Management. You talked about growth, top line growth, decelerating a little bit in the September quarter and then reaccelerating in the second fiscal half. Maybe give some color around the backlog trend and the book-to-bill that you're seeing recently that gives you that confidence?

[Todd Alan Adams:]

Sure. Julian, the book-to-bill is solidly above 1%, and I think we'll exit the first half with core growth in the, let's call it, at least 5% sort of range and then accelerate in the back half based on backlog. As well as, remember the fourth quarter, we had some shipments slide out of the fourth quarter; we were flat on a core growth basis in our fourth quarter, so it's really not a function of anything more than a little bit easier comps in our fourth quarter and what we have in backlog for our third quarter. So, we see our way to sort of that mid to high single digit growth rate for Water Management for the year with not a ton of stretch to it, so that's – I think that's the appropriate color to think about Water. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Thank you. And then just, I think you laid out very clearly the kind of impact of destocking and so on, on the top line and margins in PMC. Maybe give a little bit more color on mix, because I guess mix was an issue late last calendar year as well. It's coming up again now, so maybe just give us some insight as to what's sending the mix down and what you assume for mix for the balance of the year in terms of the margin impact?

[Todd Alan Adams:]

I think the miss, I'm sorry, the mix adversity last year was really centered around a little weakness that we saw in European food and beverage. As I think we highlighted in the fourth quarter and again in the first quarter, we feel like we're seeing a nice recovery in Europe more broadly, but in particular food and beverage. And so there is no mix margin headwind from the food and beverage part of the platform and it really just comes down to a little bit of adverse channel mix as we look at the first half – not product mix but channel mix. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Great. Thank you.

[Operator:]

Our next question is from Mig Dobre from Robert Baird.

[Mig Dobre:]

Hey, good morning, everyone.

[Todd Alan Adams:]

Good morning, Mig.

[Mark W. Peterson:]

Good morning, Mig.

[Mig Dobre:]

So, Todd, I guess we're hearing more and more talk about an industrial recession potentially looming maybe we're in the midst of it right now. I guess I would like to get your review on this point based on the way you think about the world and what you're hearing from customers? And related to this maybe a little more detail on the $3 million to $4 million worth of restructuring. My understanding from your comments is that this is incremental, this is maybe variable rather than structural, restructuring. How do we think about cost savings and how do we think about this amount in terms of the way you plan for the business?

[Todd Alan Adams:]

Sure. Your initial question Mig, are we in an industrial recession? The short answer is I don't know. It certainly feels weak, particularly in the U.S. I think we sort of saw that as we've looked at the end of last year and into this year, you saw us. We were pretty aggressive over the course of last year and readying ourselves for what we think is a pretty disruptive cost reduction opportunity that we're actioning. So, whether we are or aren't almost doesn't matter. I think we're acting as if we are and managing very tightly and have planned I think appropriately for what the year looks like and obviously into next. As we talk to customers, I think people are just generally cautious. I don't think that there is a lot of – there is not a lot of clear green lights ahead and so people are more cautious with spending than they have been and the strong dollar, what's happening in China, our rates going up. Those are all things that just create a little bit of uncertainty and then a pause in an environment where you've got a significant headwind already from oil and gas. So I don't know that – I don't know if we are or aren't, it certainly feels like it at times and we plan – we've planned for it, we're acting and behaving like we're in one. And the nice thing as we've got a disruptive cost opportunity that we're actioned. So, on the plus side of things, our Water Management business is going to approach 50% of our business and it's over 50% if you add an Aerospace. So, I think we've got sort of an inflection point. We feel like we're managing really well the downside of an industrial economy and we've got our Water business and Aerospace business is continuing to grow really nicely at high margin. So we think we're positioned well for the second half. The second part of your question Mig, I forgot.

[Mig Dobre:]

The restructuring – the incremental restructuring?

[Todd Alan Adams:]

Yeah. So look the – if we think about it, I think this is more of a view of – look over the next six months to 12 months things are going to be just like they are now. So let's look around and see what we can do in terms of maybe some medium-term structural opportunities to get a little thinner – get a little leaner and rise through. Don't forget, the $30 million cost save that's already being implemented. So we've got that account on as we exit next year. What we're talking about now, I would say are more near – call it six month to 12 month tweaks on top of what it is we're already doing. So there's a lot of – there's a lot of good things coming on the margin side, and I would say this is just really a function of – doing a little belt tightening to get ourselves to a spot where we're positioned to perform really well in a tough environment.

[Mig Dobre:]

I appreciate that. In Water Management too, is there a seasonal aspect to the way these revenues flow through. When I'm kind of looking at the cadence between the first quarter to the second quarter, adjusting for this kind of $12 million of revenue deferral. Maybe that can get us, I don't know a little more comfortable with organic growth in the way you are guiding it.

[Todd Alan Adams:]

Well, I think the only – a true level of seasonality comes in the Zurn business. So you see obviously the third quarter being the low point, given the construction season in North America, and so I think is the way to – I think the way to think about it would be second quarter revenue is maybe a little bit more than first quarter, third quarter's revenue is lower than second quarter and lower than first quarter. And then in our fourth quarter, we obviously got some project shipment timing out of VAG, and we start to see a little bit of the pre-build stuff happening in the warmer parts of the U.S. in our March quarter. So, I don't think there is anything stretchy or crazy about our core growth numbers in Water, as we look out over the course of the balance of the year.

[Mig Dobre:]

All right. I appreciate it.

[Operator:]

Our next question is from Charlie Brady (30

[Unknown Speaker:]

Hey, good morning, guys. How are you?

[Todd Alan Adams:]

Hey, Charlie (30

[Mark W. Peterson:]

Good morning, Charlie (30

[Unknown Speaker:]

So just I don't know if I caught it, Todd, did you guys give the growth rates in the quarter for Zurn and for VAG separately?

[Todd Alan Adams:]

We did not.

[Unknown Speaker:]

Would you?

[Todd Alan Adams:]

We will not. Look, I think they were both solid. VAG was a little bit more than Zurn in the quarter, but both solidly mid-high single digits.

[Unknown Speaker:]

Okay, and just focusing on the Zurn business, I mean given your commentary about the wet weather in the U.S. impacted some of the construction business, I won't ask you to quantify that because I don't suppose you could or will, but I guess, can you give us a sense of has there been any – have you seen a catch up on some of that business on the Zurn side in the U.S. because of maybe what happened on weather delays?

[Todd Alan Adams:]

Yeah. And we get a question a lot Charlie (31

[Unknown Speaker:]

Got it. Got it. Thanks guys.

[Todd Alan Adams:]

Yup.

[Operator:]

Our next question is from David Rose from Wedbush Securities.

[David L. Rose:]

Good morning. Thank you for taking my call. Couple of follow-ups, and just on the shipment delays, do they all go into Q1 or do we still have some may go through the rest of the year for Water Management?

[Mark W. Peterson:]

Hey Dave, yeah, all the shipments went in the first quarter, which is part of the overdrive versus the outlook. We said there was eight we had in our outlook, four more that we thought would go late Q1, Q2, we planned for a Q2, we were able to get all those out in the first quarter, so that's behind us.

[David L. Rose:]

Okay. And then with that said, you do have the delayed shipments from wetter weather. You haven't been able to quantify it, but would you be able to guess that's partly offsetting that additional four or not?

[Todd Alan Adams:]

Dave, I don't think, we're going to speculate. I don't think, it's even – I don't know that it matters to be perfectly honest, I think, the nice thing is the shipments that we thought we're going to go in Q2 went in Q1. Yeah, we had a little bit of wet weather that impacted some of the growth in our first quarter. We're not counting on catching that up in our second quarter, or third quarter, fourth quarter. It's just one of those things that probably pushes and it gets wrapped into everything else we're looking at and doing, and it's not loss business in any way shape or form. But, I don't think, we're going to – we're going to – not going to try to cherry pick, it is what it is and we grew 9% core pull out the pull forward or the upside to what we've guided and still – we still grew 7%. So, at the end of the day, solid core growth amidst a weather issue in the first quarter that we were able to overcome.

[David L. Rose:]

Okay. That's fair. And, as your – two last ones. I may have missed it, the restructuring benefits in Q1, what were they, how much were they?

[Mark W. Peterson:]

We've been quantifying the restructuring benefits in Q1. We incurred a couple of million dollars of expenses, we massively quantified the restructuring benefits in the first quarter, David.

[David L. Rose:]

I'm assuming they were less than the net, too.

[Mark W. Peterson:]

You'll see, you'll see, call it more the benefit even as from our base plan and what Todd referred to that we're doing incrementally, benefiting more the back half. So yes, our plan going into the year and then additional incremental work we're going to do, is clearly benefiting the back half more than the first half.

[David L. Rose:]

Sure. That's what I get. Thank you.

[Mark W. Peterson:]

Yeah.

[David L. Rose:]

And, then lastly is benefits from the lower raws, you've kind of have some very favorable comparisons, even in the first quarter. How should we think about that for the remainder of the year, the comparison in input costs?

[Todd Alan Adams:]

I don't know that we can actually quantify it in our first quarter, Dave, but I think as you look ahead, it's clear that as commodities stay at relatively low levels here, we're going to start to see a little bit more of that as we go through the course of the year. And so, absolutely, it should benefit margins really over the next five months.

[David L. Rose:]

Okay. Great. Thank you very much.

[Todd Alan Adams:]

Yeah.

[Operator:]

Our next question is from Karen Lau from Deutsche Bank.

[Karen K. Lau:]

Thank you. Good morning.

[Todd Alan Adams:]

Good morning.

[Karen K. Lau:]

Apologize if I missed this, but is PMC core growth for the second quarter, are we looking at high single digit – down high single digit, maybe a little bit worse than the first quarter?

[Mark W. Peterson:]

Yeah, Karen, I think given how we've built it in and what we know is going on in the channel as Todd discussed earlier, we think that core growth number gets a little tougher in our second quarter from where it was in the first quarter and then moderates in the second half of the year. But, yeah, you're right, the second quarter, we think the core growth in PMC will be tougher than what we saw in our first quarter.

[Karen K. Lau:]

Okay. Makes sense. Thank you. And then, I realize this is not a big part of your business, but can you remind us within mine, the 12% of the mining exposure, how much is coal? And given that's some of the U.S. producers may be going bankrupt, what are you seeing there in terms of sell-through to the end users and also to your OEM customers? Are you expecting more disruption there in terms of sales or payment risks, that sort of thing?

[Todd Alan Adams:]

Yeah, Karen it's a good question. Obviously, in our outlook, we had mining down high double digits, right.

[Mark W. Peterson:]

Low double digits.

[Todd Alan Adams:]

Or low double digits. And so as we look at it, we haven't seen much of a change from where we were. And just to dimension it for you, if it's way worse, it's $5 million to $10 million in terms of the top line. So, I think, where we are is, we're not seeing and we're not taking incremental risk with our customers; coal has been declining for us for, geez, four and half years now. And so, I don't think we're seeing anything abnormal given what's going on in the macro, and coal is a whole lot less important to us than it was five years ago. And so, really the diversity of the mining part of our business around other commodities and everything else, and other geographies frankly, has helped us offset what was and has been a pretty tough environment. But I don't think that there's anything that we would characterize as outside of what we expected in mining at this point. And again, to dimension it, it's $5 million to $10 million if you really, really want to have a pessimistic view of it.

[Karen K. Lau:]

Got it. Thank you for the color. And then on Water Management, could you remind us, is there a meaningful delta in product mix or margin mix between the various verticals within construction? So, for instance, if multifamily, it's a little bit slower going forward but institutional or commercial is better, does that impact your margin mix going forward?

[Todd Alan Adams:]

It's probably slightly favorable in large repeatable footprints on the institutional side, right? I mean, that's where we have, frankly, just a lot more content per square foot. So if you look at institutional and if you think about education and healthcare, both areas we have a higher relative content in a building than we would sort of a multifamily sort of building. So, absolutely, as that mix changes, it is slightly margin favorable to us.

[Karen K. Lau:]

Okay. Thank you. And then just last one, bigger picture on M&A. Just tagging back to the point that the macro is very choppy, we don't know whether it – we're in or going into recession – does it change, in anyway change your view or appetite towards larger deals, Todd, given that there might be a little bit more of a unfavorable view towards maybe kind of leveraging up higher than where you are now?

[Todd Alan Adams:]

Well, I think the question is, are we going to change the way we think about investing? And the short answer is, I don't think we're going to change the way we think about investing. We're going to try to find great businesses at good valuations that we think have better core growth and margin opportunities than our existing business. And so, I don't think we're thinking about anything differently, Karen. We're not passing or stretching on things because of the economic environment. I think we're looking at everything through the same lens that we always have. I mean, the reality is we've got a very – a very good diverse business today – with high margins, good cash flows. And the investments we make, we want to be – look accretive over the right time horizon. And so, and be thoughtful about the leverage as well. So, it's really that same dimension of looking at all aspects of the acquisition, our current capital structure and everything else. We're continuing to do that, and hopefully over the course of the year, we'll be able to talk about some of them.

[Karen K. Lau:]

Okay, great. Thank you.

[Operator:]

And we have a question from Mig Dobre from Robert Baird.

[Mig Dobre:]

Hey. Thanks for taking my follow-up here. I just want to go back to this inventory destocking issue in PMC, and if my memory service me, your inventory, your channel inventory is actually pretty lean. You're turning that inventory five to six times a year and we're struggling with destocking now for a couple of quarters. I guess I'm wondering is there a way to separate what's happening with actual end market demand versus pure destocking and is there, in your view, is there the potential for a restocking to occur whenever trend stabilize whenever that is in one quarter, three quarters, however long it takes, that is?

[Todd Alan Adams:]

What, maybe – I think there is no question that there isn't, there will be at some point, and I think what we're saying in our guidance is that we saw and we expect the growth rates to moderate in the June quarter, right. And they did moderate in line with what we had expected. On a trajectory basis, we didn't have them deteriorating much from where they were in that – in that June quarter. What we're saying is we think that they might because this is not a we, this is more of a you, right, and that you last really through what we think is our second quarter, and so fundamentally, we think that once we get to the second quarter, we've got a sell rate – sell-through rate that's down sort of mid-single-digits, inventories again turning at that five times to six times and if sell-through ticks up, inventories going to go up, right. And so, I don't know if you want to call that a restocking but the reality is we're really trying to get all the way to the end demand here and make sure that our channel partners and we are running the companies to live demand. And what we're saying now is live demand is sort of down low to mid-single digits that's what's happening across the industrial landscape. And it's exasperated by the inventory reduction that we're seeing in our first quarter and second quarter, but the guidance we have is sell-through running at that low to mid-single digit down over the balance of the year. If it's better than that, right, of course, we're going to see the benefit of that.

[Mig Dobre:]

All right. Great. Thank you.

[Robert McCarthy:]

That seems to be it. This is Rob McCarthy. We'd like to thank everybody for joining us on the call today. We appreciate your interest in Rexnord and we look forward to providing further updates when we announce our fiscal year 2016 second quarter results in early November. Have a great day, everybody.

[Operator:]

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