Good morning, and welcome to the Rexnord First Quarter Fiscal 2013 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; and Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord. This call is being recorded and will be available on replay for a period of 2 weeks. The phone numbers for the replay can be found in the earnings release to the company filed on an 8-K with the SEC yesterday, August 1, 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 Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord. Please go ahead, sir.

Good morning. Before we get started, just a brief reminder that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we issued yesterday, as well as in our filings with the SEC. In addition, some comparisons 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 first quarter, including details on our 2 platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards, we'll open the call up for your questions. [Operator Instructions] Before I turn the call over to Todd, I want to highlight, as we did in our earnings release, some specifics from our initial public offering during the first quarter. On April 3 of 2012, we closed the IPO of our common stock. Total proceeds received were approximately $458 million, net of underwriter discounts and commissions and other direct costs. The IPO resulted in the sale of approximately 27.2 million new shares of common stock. The proceeds were primarily used to redeem the outstanding balance of our 11 3/4% senior subordinated notes that were due 2016 for a total of $325 million, inclusive of the early redemption premium and accrued interest. Additionally, we paid Apollo, our majority stockholder, a fee of $15 million to terminate the management agreement that was in place. With that, I will turn the call over to Todd Adams, President and Chief Executive Officer of Rexnord.

Good morning, everyone, and thank you for joining us. We have a lot to cover, and there are a fair amount of complexities embedded in the reported financials as a result of the accounting for the IPO, as well as a few other corporate-level events that we'll try to simplify so that everyone gets the essence of our operating performance in the quarter and more importantly, our outlook. Turning to Page 4. I'll start with a situational overview and some qualitative comments about the first quarter and the actions we've taken to deliver a solid fiscal year '13 in spite of market conditions that have softened over the past 90 days. Our consolidated top line growth in the quarter of 4% reported and minus 1% core was below what we'd been anticipating due to headline and macro issues that have evolved to the downside since we reported our fourth quarter. Despite this, we managed well and delivered strong margins in the quarter in total and in each of the platforms. PMC sales grew 2% on a core basis and margins expanded 160 basis points. And we saw our Water Management margins continue to improve sequentially without any near-term significant improvement in the served markets. That continues to remain on the horizon. In the quarter, we saw broadly weaker industrial demand in Europe, a slower environment in U.S. mining, effectively coal, and a nonresidential market that contracted more than anyone had expected, with mining and nonres largely impacted by the unusually warm winter and spring, which ended up pulling some activity forward, as well as significantly reducing energy demand. On the positive side, we did build $26 million of backlog in the quarter to a record $516 million, as our book-to-bill grew 1.05, which improves our visibility and confidence in the…

Thanks, Todd. Before I cover the financial highlights for the quarter, we have a number of nonrecurring items in the quarter that I want to highlight, so everyone can better understand our operating performance, net income and earnings per share. Slide 6 of the presentation takes our reported results, reconciled to the adjusted results that exclude these nonrecurring items. I'll take a few minutes to discuss the significant items on the slide. First, as we discussed earlier in the call, we used the majority of the IPO proceeds to redeem all the outstanding 11 3/4% senior subordinated notes in April. As a result, we recorded a $21 million loss in the extinguishment of debt that is recorded as a nonoperating expense in our corporate segment. Second, in conjunction with the IPO, we paid Apollo $15 million in April to terminate the management agreement. This charge was recorded as a nonoperating expense in our corporate segment. Third, as we described in our Footnote 4 of our Form 10-Q we filed with the SEC yesterday, as a U.S. producer of ball bearing products, we have received payments from antidumping cases under the Continued Dumping and Subsidy Offset Act. In our first quarter, we recorded $16 million of other nonoperating income in our corporate segment related to payments we received in the quarter. We believe this is the final payment under the CDSOA. And lastly, in July, we reached an agreement in principle to settle the Zurn PEX brass fittings liability underlying the litigation that is described in Footnote 14 of the Form 10-Q we filed yesterday with the SEC. The settlement is designed to resolve, on a national basis, our overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of Zurn PEX brass fittings on…

Thanks, Mark. On Slide 12, you can see our refreshed outlook for the fiscal year. First, you'll see the digital currency translation assumption changes, as well as the divestiture and exit activity, which is very good for the portfolio long term. Next, our change to the full year is a reduction of $55 million to $60 million of sales growth, inclusive of the first quarter, and still implies $70 million of growth in fiscal year '13 at the midpoint. Adjusted operating income margin is between 14.6% and 14.9% and $412 million to $425 million of adjusted EBITDA. The midpoint of the range implies 8% adjusted EBITDA growth from the prior year, driven by 45% incremental margins. When comparing the current outlook to our initial outlook, you'll see a 30% decremental margin on the changes to the outlook, a testament to the permanent cost reductions we implemented both last year and this year, tight controls around spending, the benefits of some factory transformation work we've done and margins on new products, all actions that will enhance our operating leverage beyond fiscal year '13. Moving to Slide 13. Here, you'll see the major assumptions embedded in our outlook and how we anticipate our results to roll forward from the first quarter to the second quarter and the second half, where anticipation and response on the cost side of the equation creates the ability to deliver a record year in a suboptimal macro environment. Given that we start Q2 with over $500 million in backlog, I'd characterize our overall visibility as slightly improved and that our revised outlook is one that we're deploying to exceed. Over the past several weeks, we've refreshed all of our forecasts across every business and have purposely taking a pessimistic view of any market growth, with a bias…

[Operator Instructions] And we'll go first to Scott Davis at Barclays.

I'm trying to get a sense -- and the quarter, obviously, is disappointing. But trying to get a sense of how -- when things got bad, meaning did we see a pull-forward in business because the weather was better, and then just things fell off a cliff in April? Or did things get worse kind of April, May, June? Just give us a sense of kind of the timeline of visibility. Because I think part of the context to my question is you seem to have some confidence in the outlook because of the backlog. But you had confidence 3 months ago in the outlook for this quarter. So I was trying to get a sense of how much confidence should we have that you have that kind of visibility, I guess. So I'm trying to get a sense of the quarter, how it played out.

Sure. The business, frankly, Scott, was, I'll say, very consistent and strong through probably the first part of April. The back week or so was a little bit weaker, weaker in May, weaker through most of June and strengthened towards the end of June. And so if you think about that, we're sitting in July, we feel very good about where July is coming out. Europe strengthened for us. We see a good visibility out of our backlog for our non-U.S. mining customers. And so I would say that the middle part of the quarter was where we saw the difference in what we had been expecting in the first quarter. We took action on the cost side and we've gone back and talked to all of our customers and refreshed our guidance and outlook based on what we think is the most likely case. We've been a little bit pessimistic on some of the recovery that maybe we're hearing from them. So I think we feel good about the second quarter. I think the second half is set up based largely in part -- largely due to the backlog we've built in the first quarter, $25 million of backlog growth, as well as the margins in backlog. So I'd say that the macro environment over that first part of the -- our -- I guess our June quarter are what really created the difference.

Okay. Yes. That's very helpful, actually. And when you think about the change in inventories at the customer level, I mean, it sounds like there might have been a bit of a destock, kind of a panic destock, if you will, that occurred sometime in the quarter. Is that something that you can measure, get a good sense of?

Sure. I think I'll separate the question into 2 parts. So from an industrial distribution standpoint, as I said in my comments, we're turning inventory above 6x. So there was little to no impact from that. What we did see was certain OEM customers, I'll say, hit the pause button, right? And if you think about the macro sentiment over the course of April, May and June, the Europe situation deteriorated to the downside. China growth was a big concern. And I think, in general, we saw some OEMs simply work through whatever inventory they had and really start to collapse lead times and keep the visibility for us relatively low, which is fine. I don't think it's pronounced in any way, meaning is it $4 million to $5 million of that? Probably. But that's sort of what we're hearing as we get out and talk to people. For better or for worse, our lead times are such that customers don't have to hold a lot of inventory for us.

Sure, makes sense. And just last, can you guys just remind us what percent of your business either total or just at the segment is coal-related?

We haven't disclosed it in general. But mining is about 18% to 20% of our Process & Motion Control segment in terms of revenue. Of that, notionally, 1/3 is probably coal-related globally.

We'll go next to Terry Darling at Goldman Sachs.

It's Adam Samuelson filling in for Terry. I guess my first question is on the organic revenue growth guidance of 2%. And maybe some color, and you provided a little bit of this in the slides, on end markets relative to that 2% over the balance of the year. Presumably mining and coal would be weaker, U.S. nonres softer. But any additional color there would be helpful.

Sure. I think you've got the 2, Adam, that are really the headwinds that we see as compared to our initial core growth guidance. When we look at other end markets, energy, we look at aerospace, are all doing quite well. We've got a backlog in sort of non-U.S. coal that rolls out of backlog and delivers solid organic sales growth as well. So the headwinds really are around those 2 things in aggregate.

And maybe same question geographically, just any color there as well.

Sure. I think what we've got in the outlook is sort of low single-digit growth in North America in total. I think we've got a Europe for the year, and I'll separate the answer. In Process & Motion Control, we'll say it's flat. In the Water side, we're seeing very, very good growth out of Europe, as well as the rest of the world with VAG. So the European question is really bifurcated, flat on the industrial side, growth in sort of the mid-single-digit range across our Water segment. And then rest of the world, I'll call it, mid- to low single-digit growth.

Okay. That's helpful. And then just to be clear, the free cash flow expectation for the year was effectively unchanged despite some of the one-timers that hit in the quarter. Or is that revised down, just given some of the cash outflows that you did experience?

It's not revised down. So the guidance that we had initially provided anticipated the management fee payment. And so I think that as we sit here today, we still feel like free cash flow, in excess of net income, which in this case will be, on an adjusted basis, above $100 million is still very much the outlook for us.

Okay. Maybe in that context, can you comment on the M&A pipeline and any changes in your thinking on M&A, given a slightly weaker macro environment?

Again, we're not going to comment on anything discretely other than to say, we do have a funnel that we are monitoring very closely. There are a number of things that we're working at, all of which I would categorize in the tuck-in, bolt-on, sort of down the fairway sort of size. And I think we're going to be disciplined to make sure that whatever we do fits inside the envelope of the leverage profile we're talking about for the year, as well as being very highly accretive year 1.

We'll move next to Julian Mitchell at Credit Suisse.

It's Charlie for Julian. Just didn't know, just kind of high level, if you could kind of give us just core growth assumptions by segment. Obviously, just heard you kind of talk about geography. But maybe just kind of core growth for the 2 segments, and then maybe just kind of an EBITDA margin range for just the 2 segments, didn't know if you'd be willing to kind of offer that.

I think from a core growth perspective, when we say 3% to 4% for the year, you'd see Process & Motion Control on the high end of that range and maybe slightly above, and you'd see the Water Management platform maybe on the low end of that range. So that's probably the degree at which we'll probably provide that sort of guidance. In terms of the margins, obviously, I think for the year, we see Process & Motion Control margins continuing to improve, sort of to that mid-20s range, 25-ish for the year and continuing to make steady progress in Water Management for the year, somewhere in that mid- to high-teens, so 16% to 17% range on a platform basis.

Okay. Great. And what were the VAG margins, the V-A-G margins in the quarter, EBITDA?

We're not going to get into that. I mean, we're really sort of [ph] managing it as a global business at this point. But it's -- suffice to say it's better it was than a year ago and continues to improve throughout the integration process, as well as some of the growth and cost reductions that we're implementing.

We'll go next to Robert McCarthy at Robert W. Baird.

If global coal is about 1/3 of your exposure in mining, what would be your largest commodity exposure?

It would be copper and gold. Copper, gold and iron ore make up the balance, the 2/3.

Okay. And can you talk about the $30 million in cost savings expectations? A little color, including how we should expect to see that emerge. Because I assume that there are some upfront costs necessary to achieve that.

Sure. We saw a little bit of the upfront costs in our first fiscal quarter here, probably a couple of million dollars of costs. Those are primarily headcount and some facility moves. If I break down the $30 million, $10 million to $15 million is actual structural cost reduction, permanent, and $10 million to $15 million is anything from deferrals to value engineering savings and other things that we can effect within the year. And so that $30 million, call it, $10 million to $15 million fixed permanent out and the balance, a little bit of self-help with value engineering, permanent cost reductions in the product and sourcing, as well as some discretionary spend. That's how we think about the $30 million.

So the latter $10 million to $15 million that you're talking about wouldn't require significant incremental spending. I assume that the...

You're exactly right. To get to the first $10 million to $15 million, I think it's in the range of $6 million to $8 million to effect. To get to the balance of the $10 million to $15 million, there's no costs associated with that.

And do you think the balance of the $6 million to $8 million shows up in the second quarter or...

The majority of it should, yes.

And we'll go next to Charlie Brady at BMO Capital Markets.

Can you go into -- what in the product line divestiture and the business line can you tell us exactly what you got out of and what the impact was on the quarter and kind of quantify it for the full year guidance, revised guidance?

Sure. When you look at the guidance table -- I think, Mark, maybe you want take the impact of the guidance in the quarter, then I'll come back and talk about what it is that we actually got rid of, Charlie.

Yes. So Charlie, from a guidance impact, you've got roughly the $20 million that we had coming through from a guidance standpoint. And roughly, on the EBITDA side, $3 million of EBITDA. So that's the impact over the balance of our fiscal year, the $20 million in sales and $3 million in EBITDA.

So the 2 things, Charlie. The divestiture was a product that we sold, a very small niche product line that long term did not have the growth or the margin trajectory that we wanted, so we had to sell it. We sold it. And then on the exit, we've made a decision to exit our Chinese chain business. And that's something that'll be winding down over the second quarter and early into the third. Both sort of good long-term portfolio margin-accretive long-term moves on our part.

All right. And then on the water shipment pushouts you had, I guess that was due to customer delivery date changes. Can you quantify the magnitude of that pushout kind of, I guess, the impact of this on the first quarter? And do you recognize that in the second quarter?

We sure do. So the combination of pushouts and us leaving a little bit more past due than we'd like is it that $4 million to $5 million range, all of which should get filled in our second quarter.

And at this time, that does conclude the question-and-answer session. I'll turn the conference back over to management for any closing remarks.

Thank you. To close on the quarter, it's important to articulate that to us, this environment was clearly very different than the prior recession for many reasons. First and most importantly, the steps we've taken to position the company through diversification and growth, coupled with a night-and-day difference in the channel inventory dynamic, 3 years of traction on new products and the aerospace cycle are all positives compared to 3 years ago. Second, our overall customer satisfaction and service levels are the best they've been, which can differentiate us from competition in this environment. On the Water side, we have really built out a balanced global business. The nonresidential market is already in a trough, whereas in the prior recession it was coming down from a peak. And we're confident that the same secular growth trajectory exists for Water. Lastly, one thing that's really important to articulate is that excluding acquisitions and divestitures, a run rate headcount embedded in our guidance is already roughly in line with the prior trough levels that we had in January of 2010. This is with revenues approximately $300 million higher, but still below the peak in 2008, demonstrating the productivity we've implemented and maintained. Our playbook for the year will be consistent, leverage platforms where we have a sustainable competitive advantage, execute highly accretive M&A and leverage RBS to drive growth, incremental margins and free cash flow to create superior shareholder returns. We know how to navigate in this environment and are working on contingencies in the event the situation changes to protect areas of investment that will be important in the future. We appreciate everyone's interest on the call this morning, hope that everyone enjoys the balance of the summer. And we look forward to updating everyone on our second quarter sometime around Halloween. Thanks.

And that does conclude today's conference. Again, thank you for your participation.