Zurn Water Solutions Corporation
Q4 2015 Earnings Call Transcript

Published: 21 May 2015

[Operator:]

Good afternoon and welcome to the Rexnord Fourth Quarter Fiscal 2015 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Rob McCarthy, Vice President of Investor Relations for Rexnord. This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release the company filed on 8-K with the SEC today, May 20, and are also posted on the company's website at www.rexnord.com. At this time for opening remarks and introduction, I'll turn the call over to Rob McCarthy.

[Robert McCarthy:]

Thank you, Adrian. Good afternoon, 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 we issued today 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. Today's call will provide an update on our overall performance for the fourth quarter and full fiscal 2015, our launch of an important strategic initiative and our initial outlook for fiscal 2016. We'll cover specifics on our two platforms followed by an overview of our financial statements and liquidity and cash flow highlights. 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 afternoon, everyone and thank you all for joining us today for an overview of our fiscal 2015 fourth quarter and full year financial results. We've a lot of ground to cover this afternoon. So, I'll try to move quickly through my comments, so we can get to your questions. Starting on page four, we definitely saw evidence of a broadly weaker industrial end market environment in our fourth quarter as end customers and distributors alike broadly became more cautious about their CapEx, MRO spending and inventory levels to start calendar 2015. The combination of weaker energy prices, persistently weaker hard commodity prices, the strength of the U.S. dollar and some other drag on the seasonal ramp of new construction activity were all headwinds that were a click worse than what we expected a quarter ago. The more difficult macro was compounded by the unforeseen delay of two large water infrastructure projects late in the fourth quarter that adversely impacted reported core growth by 2%, resulting in a 5% core sales decline in our fourth quarter. Despite these challenges in the fourth quarter, we responded aggressively in areas we could control with solid operating execution that generated record levels of free cash flow for fiscal 2015. While the timing of the delays was an unfortunate way to close the year, the delays were not an internal execution issue but a customer site preparation delay and we're confident that both projects ship in the first two quarters of fiscal 2016. Moving ahead, we're excited to share a few details on something we've been developing over the past two years. Over the next 24 months, we will be implementing a comprehensive supply chain optimization and footprint repositioning program that will result in the net elimination of between 20% and 25% of our current manufacturing footprint across the company while repositioning a portion of our manufacturing capability for lower cost regions. We believe that at current business levels, this plan can generate an annualized run rate savings of approximately $30 million as we exit our fiscal 2017, primarily through gross profit improvements. For obvious reasons, we can't go into the location-level details of the program in advance of our internal timeline and communications, but to clarify a few details. It's across both platforms. It involves facility rationalizations and consolidations as well as adding to our footprint in lower cost manufacturing regions. A big piece of the plan includes leveraging a more robust supply chain element into our fulfillment strategy while ensuring the highest levels of quality and service to our customers. This has been a plan for a plan or something that's a knee-jerk reaction to the current market environment. It's a plan with a timeline that's been developed over the course of the last year that will be disclosed quarter-by-quarter as it becomes practical to do so. The end game of this program is twofold. Number one, it's to enhance our competitive advantage and improve upon our industry-leading service levels, quality and customer satisfaction with no customer disruption. Second, it's to position Rexnord to produce permanently higher returns in whatever economic environment exists and over cycles by reducing our fixed costs and enhancing our free cash flow and being more nimble. This plan plus the ongoing execution of RBS-driven operational excellence initiatives gives us great confidence that we'll continue this margin expansion over the coming years despite an uncertain growth outlook. You'll see it begin to rollout in our first quarter and expect to see increasing momentum as we get deeper into the announcements and execution over the course of this year and next. Before turning to our outlook for the year, I thought it could be useful to hear us self reflect on what we've learned throughout fiscal 2015 as it relates to our view on the market, how that influences our forward view and ultimately how we positioned our fiscal 2016 guidance. Turning to page five, you'll see a table that summarizes our market growth assumptions for our 10 large end markets from a year ago, essentially what we incorporated into our outlook last year at this time. Next to it is our actual fiscal 2015 core growth for each market including share gains and price. And next to that are the market forecasts that we've assumed as we developed our forward guidance for fiscal 2016. Cutting to the punch line, we assume 2% to 4% market growth heading into fiscal 2015 and we ultimately delivered flat core growth inclusive of the point headwind related to the Q4 water infrastructure shipment delays. For fiscal 2016, you'll see we're incorporating a much lower market growth outlook at flat to down 2% which we hope turns out to be conservative but at this point, it feels more realistic, it feels like a more realistic view of the weighted average of where our end markets are given the best information we have. To walk through a few of the details, starting at the top, you'll see that our outlook for Water Management end markets align pretty well with how we performed in fiscal 2015 adjusted for the project shipment timing. Our outlook heading into fiscal 2016 calls for a stable to an improving set of end markets, specifically the U.S. non-residential construction markets continue to be a bright spot for us and we anticipate U.S. non-residential construction activity to accelerate modestly in fiscal 2016. While still choppy quarter-to-quarter, we think that the growth in the global water and wastewater infrastructure markets will remain generally stable in the low single-digit range. In aggregate, our outlook for fiscal 2016 incorporates a solid mid-single digit core growth rate for our Water Management platform compared to 4% core growth we delivered in fiscal 2015. Moving down the page just a bit and in order of relative size, you'll see that our served industrial end markets across the Process & Motion Control platform were broadly weaker than our original expectations from a year ago. Starting with our broadest end markets, the U.S. and European general industrial distribution channels, here we delivered low single-digit growth in markets that were generally flat to up just a little. I characterize our share positions as stable over the course of the year given our market intelligence and the lack of any real switching dynamic in the channel. The low growth across the distribution channel which is primarily our MRO spending isn't particularly surprising given the relatively stagnant U.S. and European industrial economies we've seen over the past year. For fiscal 2016, which I'll remind everyone extends through March of next year, we aren't expecting a change in trajectory. As you see to the right, we've actually lowered our growth expectations for the broad general industrial end market we serve through the channel. While we are seeing some initial signs of improving market growth in our European markets, we expect to see continued pressure on overall growth in our U.S. based general industrial end markets. For us weaker global process industry end markets, driven by low global commodity prices, the strong U.S. dollar and eroding project backlogs in the energy markets, gives us caution that we'll likely see some incremental downside from current run-rates. With the environment I am describing, we think it's likely we'll have some level of channel de-stocking early in our fiscal year and we've incorporated that into our outlook as well. Moving to food and beverage, in fiscal 2015 we saw reasonable performance out of the U.S. and weaker performance out of Europe, particularly on the CapEx and export side of the new equipment business based on the investment cycle of some key customers and some competitive dynamics. Moving into fiscal 2016, we're pretty confident that we will see growth return in Europe and that North America will continue to grow in the low single digit range. Commercial aerospace has been and will continue to be a bright spot for us as the OEM build rate outlook which drives the majority of our sales remains favorable. The end market we see coupled with our backlog gives us confidence to expect another year of attractive core growth in fiscal 2016. The global mining and bulk material handling market weakened in our fourth quarter from where it had been running the first nine months of fiscal 2015. This multiyear commodity down-cycle and now a stronger dollar continue to pressure the CapEx and MRO parts of our business. Last year, our served market ended down in the mid-to-high 20% range versus our sales that were down mid teens. For fiscal 2016, we are expecting orders to be down again for the fifth consecutive year in the low double-digit range with some level of optimism that we're past the worst in terms of the rate of decline and also with the reality that the order of the magnitude of the decline from these levels doesn't impact us nearly as much as it did a few years ago. Finally, in terms of energy, for us it's (10

[Mark W. Peterson:]

Thanks, Todd. Consistent with prior quarters, we'll speak primarily to adjusted operating profit and EBITDA, adjusted net income, adjusted earnings per share as we feel these non-GAAP metrics provide a better understanding of our operating results. Please also note that our discussion of our fourth quarter and fiscal 2015 financial performance excludes the results of the divestment of the Mill Products business from both years given that is now reported in discontinued operations. Slide 11 and 12 of the presentation take our reported results and reconcile with the adjusted results. Turning to slide 13, I'll discuss our operating performance highlights for the fourth quarter. Fourth quarter sales decreased 8% from the prior year period to $519 million as adverse currency translation amplified the sales decline by 5%. Acquisitions contributed 2% year-over-year but core growth was down 5%, with over 300 basis points driven by the previously discussed delayed shipments and weather impact. With also well anticipated headwinds and excluding the currency drag, our sales would have been roughly flat year-over-year. Adjusted operating income was $57 million and adjusted EBITDA was $96 million with margins diversely impacted by reduced volume and a one-time $10 million reserve or receivable associated with a water system project in Venezuela. Excluding the reserve, our margins would have been approximately 200 basis points higher. Fourth quarter adjusted net income was $57 million resulting in adjusted earnings per share of $0.54 which increased 8% from the prior year primarily due to the contribution from a lower year-over-year average tax rate that more than offset the impact of the receivable reserve I just previously discussed. Cash flow was solid in the quarter. We generated $53 million of free cash and achieved a new record level for the fiscal year. Going to slide 14, I'll quickly go over the fiscal year results. Full sales increased 1% from the prior year to $2.050 billion. Core growth was flat year-over-year. Acquisitions contributed about 3% to year-over-year growth and currency had an adverse impact of approximately 2%. Adjusted operating income was $284 million and adjusted EBITDA was $396 million. Excluding the fourth quarter reserve, our adjusted EBITDA margins would have been essentially flat year-over-year. Adjusted net income increased 17% versus the prior year to $159 million resulting in adjusted earnings per share of $1.52. This compares to prior year adjusted earnings per share of $1.34. Earnings growth benefited from solid operating execution, reduced interest expense and a lower average tax rate. With respect to free cash flow, we generated a record $203 million of free cash in the fiscal year, up 41% year-over-year, representing 120% of adjusted net income. Next we'll take a couple of moments on slide 15 to walk through the operating performance in our Process & Motion Control platform. Sales in the fourth quarter decreased 6% year-over-year to $328 million. The core sales decline of 4% combined with a 3% contribution from acquisitions to produce a roughly 1% sales decline before incorporating the 5% negative impact from currency. Substantial declines in shipments to bulk material handling end markets as we had experienced throughout fiscal 2015 coupled with a moderate fourth quarter decline in our general industrial end markets offset positive growth in majority of our other Process & Motion Control end markets. Turning to profitability, adjusted operating income was $68 million and our adjusted operating income margin was 20.6%. Adjusted EBITDA was $87 million in the quarter and our adjusted EBITDA margin was a healthy 26.5%. Margins were lower year-over-year due to the lower sales volume, unfavorable mix and the incremental investments in our growth initiatives. We continue to focus on effectively managing our cost structure and driving productivity gains in a slow growth environment while investing in our strategic growth initiatives. For the fiscal year, sales decreased from 1% to $1.230 billion, that's a 2% drag from currency and a 2% core sales decline more than offset the 3% contribution from acquisitions. Our fiscal 2015 adjusted EBITDA decreased 4% year-over-year. Productivity gains and targeted cost reductions enabled us to overcome most of the impact from lower core sales as well as fund our ongoing investments in operational excellence and key growth strategies while sustaining a 25% adjusted EBITDA margin for the full year. Turning to page 16, I will take a few moments to walk through our Water Management platform. Water Management sales in the fourth quarter decreased 10% from the prior year to $190 million. The $12 million impact from delayed shipments plus the estimated impact of the weather delayed ramp in the U.S. construction season reduced our core sales growth in Water Management by approximately 9%. The Green Turtle acquisition added about 2% year-over-year growth but currency translation reduced sales by 6%. Unusually cold weather across much of the U.S., particularly in February and March, delayed many of the customer project schedules which in turn resulted in the postponed shipments that contributed to a lower core growth rate and reduced margins for the quarter. Despite the lower sales level, our fourth quarter adjusted operating income and EBITDA margins would have been higher year-over-year if not for the $10 million reserve described earlier. Excluding the reserve, adjusted operating income and EBITDA margins improved year-over-year by 340 basis points and 410 basis points respectively. Turning to the full year, fiscal 2015 sales increased 3% from the prior year to $820 million. Even with the temporary headwinds experienced in the fourth quarter, core sales growth was 4%. The full year impact of the delays experienced in the fourth quarter on Water Management core growth was approximately 2% for the fiscal year. Currency translation was a 3% headwind and offset the 2%-plus contribution from Green Turtle. Adjusted EBITDA was a $121 million for the fiscal year. 14.8% of sales and was impacted by the same items I noted for the quarter. Excluding the $10 million one-time reserve in the fourth quarter, our adjusted EBITDA margin expanded by 180 basis points year-over-year to 16%. Moving to slide 17, I'll touch on a few capital structure and liquidity highlights. We finished the fourth quarter with $370 million of cash, $711 million of total liquidity. Total debt was $1.923 billion and net debt was $1.553 billion, resulting in a net debt leverage ratio of 3.8 times at March 31, 2015. Our net leverage ratio increased in the prior quarter due to our closing of the Euroflex acquisition during the fourth quarter. Turning to slide 18, we're presenting a bridge to our cash balance at the end of fiscal 2015 from our cash balance a year earlier in order to highlight the sources of our operating cash flow and our capital allocation in fiscal 2015. As mentioned earlier, our free cash flow was $203 million after investing $49 million of capital in our operations. We also used $24 million for debt repayments and invested $138 million for three highly strategic acquisitions with an average EBITDA multiple of below 8 times. Before I discuss some of the details of our outlook, I want to comment on our effective tax rate which excluding non-recurring items of the tax charge we recorded in the first quarter and our non-cash actuarial pension losses reported in the second half of the year finished fiscal 2015 at approximately 17%, it was determined late in the quarter that we'll now be able to utilize certain foreign tax credits that we were previously required to reserve. 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, some additional information we included in the press release we filed today. In addition to the outlook highlights Todd covered earlier in the call on page nine 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. We also note that our effective tax rate will fluctuate by quarter given levels of pre-tax income as well as the timing of other planning initiatives. In our first quarter, we expect the tax rate to be approximately 33% to 35%. Regarding the press release we filed today, in order to assist you in understanding of our operating results and enable you to adjust your financial models, today's press release covering our fourth quarter and fiscal 2016 financial results includes supplementary table that provides a pro forma summary and adjusted fiscal 2014 and 2015 operating results (26

[Operator:]

Thank you. We'll now begin the question and answer session. . And our first question comes from Sarah Dobre from Robert Baird. Please go ahead.

[Mig Dobre:]

Hi, good afternoon everyone. This is Mig Dobre with Baird.

[Todd Alan Adams:]

Hi, Mig.

[Mig Dobre:]

I guess, can you may be provide us with a little more clarity as to what's going on with this delay in water infrastructure shipment. Sort of what's causing and when are you making it up. And then I guess how confident are you in your outlook for a low single-digit growth for European water and RW water and infrastructure? And what gives you that confidence in your outlook I guess.

[Todd Alan Adams:]

I'll hit the delay first, Mig. As you know, most of these projects are hundreds and hundreds of millions if not billions of dollars and we're a component there. If there is a small blip in the site preparation or some of the upstream activity, things get pushed. These particular orders were going to the Middle East and therefore the transit time and everything else didn't afford us the opportunity to record the revenue. It's done, it's on the way and we're very confident that it will ship in our first quarter. So, I think that's one that is fairly easy. In terms of what gives us confidence in EU and rest of the world, a lot of it has to do with backlog as well as visibility on some projects and things that we know that are coming down the pike. So, we would characterize as we think about water infrastructure globally next year, low single-digit growth reasonably safe. Our book-to-bill across that for the course of the year was 1.03 and as you go back over time, our book-to-bill in the prior year is generally a pretty good predictor of the future growth rate.

[Mig Dobre:]

I see, okay and I guess my follow-up is around the $30 million of savings.

[Todd Alan Adams:]

Yes.

[Mig Dobre:]

I know you mentioned both segments are participating but I'm wondering if there is a heavier tilt in one versus the other and how we should be thinking about the Water Management opportunity given the way you're talking about the environment going forward in terms of margin expansion that is?

[Todd Alan Adams:]

Well, one, absent the $30 million we expect continued margin expansion in water consistent with what we've been saying for the last couple of years marching towards the higher teens. So, we saw 180 basis points of improvement this year. I don't think it's unreasonable to think about it as a 17%-plus heading into next year. This is before the benefit of some of that $30 million that will fall into the Water Management platform. In terms of splits, I don't know that it's helpful to sort of give you the discrete splits at this point, but it's safe to say that some of it is absolutely in water as well.

[Mig Dobre:]

All right. Thank you.

[Operator:]

And the next question comes from Rob Wertheimer from Vertical Research. Please go ahead.

[Rob C. Wertheimer:]

Hi, good afternoon.

[Todd Alan Adams:]

Hey, Rob.

[Mark W. Peterson:]

Hey, Rob.

[Rob C. Wertheimer:]

Thanks for all the detail and I apologize if I missed this but you talked about the inventory destocking in the channel happening and that's happened already and you expect it to happen next quarter, did you quantify it for the quarter or embedded in the outlook and I know you've given a lot, I'm just asking. And then more broadly can you talk about what that feels like when you're talking to customers, I mean is everybody seeing a real slowdown preparing for, is everybody just getting nervous maybe if you could just give your opinion on what's going on there?

[Todd Alan Adams:]

And Rob maybe just to clarify, we're talking about our PMC platform and primarily our PT business and we'll talk about that. We didn't disclose exactly how much impact was in the quarter, there was a little bit. I think we've incorporated more of that in our first quarter and for the year it's a point or two, I would say in the impact of the overall growth. We hope we're wrong but I think it's reasonable given the types of conversations in the environment we're seeing. If you look at these process based industries, the commodities are in sort of the fourth inning or fifth inning, fourth year I should say of deflation and that coupled with energy, I think people are sort of just sort of very cautious in their spending both on the CapEx and MRO side of things. And so, I think our guidance is sort of taking the sort of sentiment more than anything and saying looks it's going to be a tough start to the year. We're assuming that sort of extends throughout the year and sort of running the cost assuming that and then trying to win business where we can. And so, I would say our conversations are generally a little bit subdued, right. I think customers on these process industries are really struggling to make sure that they don't get over their skis and therefore they are watching their spending pretty carefully.

[Rob C. Wertheimer:]

And then – that was great. And then if you could just maybe, is that true that cautiousness, is that true across industry that really should have no real contact with mining and energy and the beverage and the general, I mean is there just sort of a general cease up with people's desire to hold inventory or not?

[Todd Alan Adams:]

No. Again I think on the beverage side, the answer is no. But when you look at mining energy and then you start to look at all the adjacent industries and in our case customers that serve those adjacent industries in general industrial, they've been experiencing a nice run over the last several years as oil and gas has done pretty well. They don't know exactly why but now all of a sudden some of the components that are in their factories, manufacturing these components, they don't have the same demand, right. So, I would say we're feeling in obviously in the process and resource base industries as well as the broader industrial economy in the U.S. that's been benefiting if you will for the last few years as the oil and gas run up has happened.

[Rob C. Wertheimer:]

Perfect. Thank you.

[Operator:]

And the next question comes from Jeff Hammond from KeyBanc. Please go ahead.

[Jeffrey D. Hammond:]

Hi, good afternoon guys.

[Todd Alan Adams:]

Hi, Jeff.

[Mark W. Peterson:]

Hi, Jeff.

[Jeffrey D. Hammond:]

So, you mentioned in the guidance discussion fiscal 2015 didn't come out as planned, you kind of walked through the variances, can you just maybe speak to how you may be approached fiscal 2016 guidance differently to kind of avoid that, where do you see potential conservatism, contingency kind of as you lay out that plan and that guidance?

[Mark W. Peterson:]

Well, I think we tried to highlight where we pegged the market last year and I think when you look back on it, I think we got the water side of it pretty close, perhaps some shipment delays that impacted the timing in the year. The markets were pretty close to what we thought. I think where we sort of missed it is we – the U.S. industrial distribution was going to be a little better. We thought mining was going to be a little bit better and on food and bev, Europe for us was a little bit of a challenge for a couple of reasons; one, some key customers sort of pushed out of CapEx cycle and then as you know there was some competitive dynamics with a transaction that took place in (34

[Jeffrey D. Hammond:]

Okay, great. And then just with this broad supply chain initiative, can you maybe just talk about management capacity to kind of handle both the operational moving pieces as well as M&A and maybe just speak to the M&A pipeline and how you are thinking about balance sheet capacity?

[Todd Alan Adams:]

Yeah, with respect to the supply chain and footprint repositioning we've been adding resources really for a year. And so, this is not something that we wanted to go into under resource. So, the cost and impact of that are sort of largely behind us with the exception of a little bit of stuff that I talked about $0.05 that's in our 2016 number. So, we felt like we needed to make sure that we were ready to execute this because of the brands, because of the market share, because of the margins and because we simply didn't want to do anything that would impact our customers in anyway. We perhaps over invested over the course of the last year to be ready. So, from a management capacity, we're ready to go and we're confident that we're going to get it done. We got great people on it and we're ready to go. In terms of M&A, we've been very active looking at a lot of different things, the funnels are building. I think we'll definitely get some things done in fiscal 2016. We did three really good acquisitions over the course of the last year, invested $138 million and I think we'd like to do more in fiscal 2016 given the free cash flow we're generating. But as you know the timing on these things are a little bit dodgy. We're not going to grouse about valuations, they are what they are. Our job is to continue to develop that proprietary funnel, play in auctions and processes where we have an angle, an advantage and go get these things done and integrate them and create value. So, we think we'll get some M&A done this year for sure and we've got the management capacity to do it.

[Jeffrey D. Hammond:]

Okay, great. Thanks, guys.

[Operator:]

And our next question comes from Julian Mitchell from Credit Suisse. Please go ahead.

[Unknown Speaker:]

Hey guys, Charley.

[Todd Alan Adams:]

Hey Charley.

[Mark W. Peterson:]

Hey Charley.

[Unknown Speaker:]

Just on my way back from EPGs right now and sorry to kind of maybe ask another question on M&A, I felt like every company that stood up this week, just talked about how multiples were hard and they kind of had it relax their kind of ROIC assumptions and things of that nature. So just to know if kind of that's the same for you, I feel like that's been a problem that you guys haven't had in the past, you guys have been able to find cheaper deals and source cheaper deals and also just if some of the shake up in the energy markets or kind of elsewhere in industrial, is maybe kind of opened some doors for you, and maybe made some things cheaper, so just to know either by vertical or anything you could share with respect to kind of the M&A pipeline and things like that that will be great?

[Todd Alan Adams:]

Sure. One of the things we sort of highlighted in our early remarks Charley was the fact that we've embedded some business development resources into our various groups to grow the proprietary side of the funnel. And we expect that over the course of the year that's going to yield some positive results for us. We haven't relaxed and we haven't passed on anything because of valuation. And so from our standpoint, it's very much about finding the right strategic fit that create the right value over the right timeframe. And I don't think we're in the business of sort of opening up or relaxing the acceptable return hurdles just to get something done. We're going to lean into things that we need to lean into because we think we can create the value for shareholders over time and we haven't passed on anything because of valuation. So in terms of where we are, obviously the funnel is in varying stages of development across our groups and make sure that you will see us get some things done over the course of fiscal 2016.

[Unknown Speaker:]

Great. Thanks, guys.

[Todd Alan Adams:]

Yep.

[Operator:]

And our next question comes from David Rose from Wedbush Securities. Please go ahead.

[Unknown Speaker:]

Good afternoon. This is actually James calling in for David. Thank you for taking my questions. So, my first question is actually on PMC, just looking at margins, decrementals for PMC in the quarter were certainly very high and I know you talked about some incremental investments along with unfavorable mix, but can you talk about that little bit more, help us understand the margin impact there, I know this unfavorable mix kind of happened last quarter as well, would we expect similar trends in 2016 or with food and beverage getting back to a positive territory kind of help us get back to margins that you expect for the segment?

[Mark W. Peterson:]

Yeah, I think this is Mark. I think if you look at the quarter the bucket that we talked about number one, the mix piece, back half of the year, if we go back six months we saw some headwinds coming in, in the beverage end market for us in Europe and rest of world and that as we discussed is a more attractive margin profile, end market for us. So, we knew we're going to have some of the mix headwind there. Todd alluded to the de-stocking that we saw starting in our fourth quarter earnings and it's been into our first quarter that clearly was a piece of the puzzle and our energy end markets are nice margin products for us as well. So, you add those three up and that's majority of the mix impact we had in our fourth quarter. That coupled with some of the money we've been putting into some strategic growth initiatives including the footprint actions that we talked about, and supply chain optimization was the piece of the puzzle and overall just with the volume declines, just the decremental, (41

[Unknown Speaker:]

Okay. I appreciate that. And going to water, I know you're exiting some of the non-strategic infrastructure related product lines going forward and I know you probably can't touch upon it too much. But can you talk a little bit more about may be what product lines or regions you may be kind of considering and how does that impact sort of your margin expectations as well, I know previously you were expecting to continue to improve margins going to 2016, does that kind of slow down or if you could provide some color there, it will be great.

[Mark W. Peterson:]

Yeah, I know, I think we have a lot of confidence around the margin expansion opportunity in the water platform going into next year as well as beyond, even with some of the footprint and supply chain optimization on the side even before that. So when you think about – the first part of your question related to some product categories. Yeah, some of our valve and gate products and we're talking volumes that are less than $50 million here in total that we consider to be overall not required to be part of our strategic product portfolio were exited. They are lower margin products and overall that products will be net margin accretive to the platform as we get out of those product categories over the next several quarters in the end of fiscal 2016. So, that's going to be margin accretive, what we're hoping and continuing to do around RBS-led productivity initiatives, supply chain initiatives and overall continue to focus on optimizing, going to be more efficient with our goal of VAG (44

[Unknown Speaker:]

Okay. And lastly on M&A, I know you touched upon that quite a bit but as you talked about, you made sizable acquisitions in the past year largely in line with the target that you provided of adding at least $25 million of EBITDA, do you have a similar target in mind for 2016 obviously given the weaker than expected environment and some new cost saving initiatives you guys are launching, would you be somewhat constrained in keeping up that pace?

[Todd Alan Adams:]

We don't think so James. I think in terms of a target, look whether it's $20 million or $30 million, we think $25 million is a reasonable way to think about the M&A that we're thinking about in terms of earnings added to the base over the coming year, and so I don't know that we would call it a formal target, obviously if we can only find things that are $15 million that makes sense to produce the returns we want, we'll do $15 million. If it's $30 million, we'll do $30 million and so, there'll be some M&A in there and I don't think you're thinking about it directionally wrong.

[Unknown Speaker:]

Okay. Thank you for your time.

[Todd Alan Adams:]

You bet.

[Operator:]

And our next question comes from Karen Lau from Deutsche Bank. Please go ahead.

[Karen K. Lau:]

Hi, good afternoon.

[Todd Alan Adams:]

Hi, Karen.

[Mark W. Peterson:]

Hi, Karen.

[Karen K. Lau:]

Hi, I apologize if I missed it, but did you guys call out what's the expectation for core growth in the first quarter and how does that split between water and PMC?

[Todd Alan Adams:]

We didn't call it out. Core growth will be in the range that we provided for the year. Water will be better sort of in the range that we provided for the year and so will PMC. So, I think what we're saying is the first quarter looks like a range that we provided for the year and at the Rexnord level as well as within the segments.

[Karen K. Lau:]

Okay, so mid single-digit for water?

[Mark W. Peterson:]

Yeah, you'll see, the kind of mid single-digit that come from water and mid-single digit decline in PMC.

[Karen K. Lau:]

Okay. And the PMC number would be inclusive of I think the 1 points to 2 points of de-stocking that you had mentioned?

[Mark W. Peterson:]

That's correct.

[Karen K. Lau:]

Okay.

[Todd Alan Adams:]

In the given quarter it could be a little bit more.

[Mark W. Peterson:]

Right.

[Karen K. Lau:]

Okay. Makes sense. And then a lot of moving pieces with the guide I'm just wondering what would be the embedded EBITDA number apples-to-apples for fiscal 2016, just so we have a comparison.

[Mark W. Peterson:]

Yeah, so our reported number was $396 million. That EBITDA number, that midpoint of the range is going to be in that $400 million to $405 million range.

[Karen K. Lau:]

$400 million to $405 million.

[Mark W. Peterson:]

Yep.

[Karen K. Lau:]

And then the $0.05 of non-restructuring cost, I think it amounts to may be like $7 million that would be included in the EBITDA number as well?

[Todd Alan Adams:]

Correct.

[Mark W. Peterson:]

That's correct.

[Karen K. Lau:]

Okay. And just for modeling purposes what would be the magnitude of the stock comps and the LIFO that was previously excluded in EPS, what will be the magnitude of the number that we should now include in the EPS calculation for 2016?

[Mark W. Peterson:]

Yes. If you kind of add them, stock comps could be in that $9 million to $10 million of expense and LIFO would be low single-digits, call it two to four, somewhere in that range.

[Karen K. Lau:]

Okay. So for modeling we should add back the $55 million of non-cash amortization?

[Mark W. Peterson:]

Correct.

[Karen K. Lau:]

And subtract kind of amounts sort of maybe like $10 to $15 million of items that you previously excluded.

[Mark W. Peterson:]

Yeah and then.....

[Karen K. Lau:]

(48

[Todd Alan Adams:]

Right.

[Mark W. Peterson:]

Yeah, that's right.

[Todd Alan Adams:]

And then Karen relative to fiscal 2015 at current exchange rates EBITDA is impacted by about $15 million on currency translation.

[Mark W. Peterson:]

Correct. Year-over-year translation.

[Todd Alan Adams:]

Year-over-year translation.

[Mark W. Peterson:]

Yeah.

[Karen K. Lau:]

Okay, got it. Thank you very much.

[Operator:]

We have no further questions at this time. I'll now turn the call back over to the speakers for closing remarks.

[Todd Alan Adams:]

Thanks everyone for joining us on the call today and we certainly appreciate your interest in Rexnord and hope that you're able to join us at our Investor Day at New York on June 2. If you're unable to attend, we obviously will report our first quarter results in early August and look forward to catching up then. Thanks a lot. Bye.

[Operator:]

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