Welcome to the FY 2015 Q2 Earning Release Call. My name is Angela and I will be your operator for today's call. At this time, all are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Todd Adams. Todd you may begin.

Actually this is Rob McCarthy. Good afternoon and welcome everybody. 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 second quarter of our fiscal 2015. We'll cover specifics on our two platforms and update our outlook, followed by an overview of our financial statements and liquidity highlights. Afterwards we’ll open the call up for your questions. Please note that we are excluding Mill Products from our analysis. As we disclosed in May, that we are considering strategic alternatives for this non-core product line, and as a result have excluded Mill Products from our fiscal 2015 guidance. With that, now I’ll turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks Rob and good afternoon everyone. Thank you all for joining us today for an overview of our fiscal 2015 second quarter financial results. On our call a quarter ago we talked about our expectations that our core growth would accelerate in the second quarter and that we expected a relatively higher level of growth to be sustained in the second half of our fiscal year. In both cases you review our release and you'll hear on the call, we're largely still tracking to those same expectations muted somewhat by weaker European industrial lag. We delivered 3% core growth in the quarter and expect our core growth in the second half to be between 3% and 4%. The incremental perspective we have that we're incorporating into our outlook is weaker European industrial demand that we saw late in our second quarter and through October heading into what is traditionally a seasonally stronger period for us from an activity standpoint. Simply put, a large portion of this is food and beverage and market related that usually picks up in September and into Q3 and Q4 that we're not seeing. This is a good business for us and it offset some of the underlying progression in our served markets that has largely played out as we expected. The expected end market progression, plus the incremental investments we're making in growth both organically and inorganically give us the optimism about sustaining a higher rate of growth in the fiscal year that begins next April. Later in the call I'll provide more color related to our outlook. Before I turn to the second quarter financial performance, I'd like to run through a few highlights that are important from a long-term value creation perspective. Over the last week we've announced two strategic tuck-in acquisitions that…

Thanks Todd. On fiscal prior quarter we will speak primarily to adjusted operating and EBITDA, our adjusted net income and adjusted earnings per share as we feel these non-GAAP measures provide a better understanding of our operating results. Slide 5 of the presentation reconciles our reported results with adjusted results. Turning to page 6, I'll discuss our operating performance highlights for the second quarter. Please note that our analysis excludes the results of our Mill Products business in both years. Second quarter sales increased 6% from the prior year period to $531 million, adjusted operating income increased to $82 million and adjusted EBITDA increased to $110 million with margins improving by 50 basis points on a year-over-year basis. Second quarter adjusted net income was $42 million resulting in adjusted earnings per share of $0.40 an increase of 38% from the prior year comparable figure due to the increase in operating income and the benefit of the debt refinancing we completed last year. Cash flow was significant stronger than during last year second quarter and adjusted free cash more than doubled to $63 million. Next I'll take some time on slide 7 to walk through the operating performance in our Process & Motion Control platform. Sales in the second quarter increased 2% year-over-year to $305 million as the core sales decline of 1% was more than offset by that 3% contribution from acquisitions. The core sales decline in the quarter was driven by weaker than expected sales in Europe as well as a diminishing but expected headwinds from our bulk material handling end-markets. Turning to profitability, adjusted operating income and EBITDA were roughly flat year-over-year and margins were a little changed. We remain focused on leveraging the RBS system to effectively manage our cost structure while continuing to invest in our…

Thank you Mark and Todd and thanks to everyone for joining us on the call today. (Inaudible) providing further updates when we announce our fiscal year 2015 third quarter results in early February. With that, I'll turn the call back over to the operator and we will open it up for your questions.

We will now begin the question-and-answer session. (Operator Instructions) our first question is from Mig Dobre from Robert Baird. Please go ahead.

Good afternoon guys.

Hi Mig.

Hello Mig.

I guess my first question a clarification on guidance, as I understand it you ended up cutting your core growth guidance by 150 basis points for the second half to 3.5% and it's all PMC driven with Europe being a drag, but just sort of running through some math PMC is 60% of revenue, Europe is less than 20% of business. So that would imply that growth in Europe is 12% lower than you originally anticipated. That seems like a high number. So are things that bad in Europe or is there something else we should be thinking about here?

Mig, I think your math is probably close. You know, I think what we are saying is that we saw September weaker than we thought. We saw October weaker than we thought. So we should be growing sort of mid-single digits you know in terms of what we expected heading into our second half and we're sort of down single digits. So the gap is probably close what it is you are highlighting as it relates to what's new relative to sort of last time we provided an outlook.

I mean, sorry to press you on this, but it seems to me like it would have to be something else other than just Europe unless we're talking about Europe really being down double digits here.

And I think maybe just to clarify. You know we're sort of highlighting Europe but it's probably Europe and a little bit of Asia given the fact that a lot of the equipment that's manufactured in Europe gets exported to Asia. So the end demand is probably more Asia driven. We see it sort of manifest itself in Europe. So either way you're right in that we were expecting sort of low mid single-digit growth and were seeing low mid single-digit contraction. And a couple of these businesses are likely quite good and so we felt compelled to take a hard look at it. We hope maybe we're being a little more conservative. But at this point we're doing what we think is right given we still have six months left in our fiscal year.

All right, I appreciate the color there and I guess my follow-up, I know you hired a new VP of Corporate Development. So maybe a little more color on the gentleman's background, what he brings to the team and maybe how confident you feel about reaching or maybe even exceeding your target for 25 million of acquired EBITDA?

Sure. Rodney Jackson we hired to lead our corporate business development activity, he comes to us from Danaher. He was one of the small group of folks in the corporate development office there. Prior to that he was with Pentair, so he's got extensive experience with very, very high quality acquisitive industrials and we're very excited to have him as part of the team working with Mark and I as well as our group executives and the current team to execute what we think is going to be a great M&A story over time. As it relates to the progress, we feel very good about it. If we look, you know this year we will have over the first six months of the year done three acquisitions, were greater than 80% of the way there in terms of what we said we were targeting with six months to go. And so, again we don't know if, I'm not going to project what happens, but I think the demonstrative capability of three proprietary deals at sub eight times within a six-month period I think gives you the conviction that we feel pretty good about it.

I appreciate it, thank you.

Yep.

Our next question is from Julian Mitchell from Credit Suisse. Please go ahead.

Hi thank you. Just a couple of couple of questions on Water Management. You know first I think you'd called out the book-to-bill in the water infrastructure was just over 1.2 in Q1, just wondered what that is now and also how you see the kind of turnaround or project management improvement in VAG specifically?

Yes for the second quarter it was 1 so for the first half it was just under 1.1. And as we've coached people look at the book-to-bill in halves. So you know, the first half being 1.1 or 1.09 I think is a very good sign. Our project management capabilities that we're implementing are really a strong positive inside the group. So we've done some movement of folks from some of our existing businesses with strong obvious backgrounds into the group that are paying dividends right away. So we're optimistic about our ability to continue to grow the backlog and execute the backlog profitably going forward.

Thanks and then on the restructuring, you know on the last call you talked about sort of $5 million to $10 million range for the year of spend, I think you spent about $5 million in the first half. Have you sort of pushed up the restructuring range given the slower growth in Europe?

Yeah Julian this is Mark. I think you know we've talked last call kind of 5 to 10 in the nine months of our year, so we kind of look at where we sit today. We sit in the first half about $5 million expect in that 9 to 10 type range in the back half our year, so call it 14 for the year. And as we talked about and Todd talked about earlier on the call we continue to look at our cost structure and opportunities and you may see some more activity late in the year or going into next fiscal year.

Great, thank you.

Our next question is from Rob Wertheimer from Vertical Research Partners. Please go ahead.

Hi good evening everybody.

Hi Rob.

Just a quick question, did the ex bulk material did you say it was 2% for the quarter organic?

The adverse impact of bulk material handling in the quarter was probably a little bit more than 2% about 3 points of headwind in the quarter. We're saying for the year it will end up being about 2 points the PMC core growth.

Okay. And so you're basically fading, I mean does that underlying you know the compass is normalizing, does that underlying business get worse than you thought and coverage you thought or you’re finally going to be through the next quarter?

No, actually you know the order what we said coming into the year was we expected you know order rates to be flat year-on-year and we’re seeing that. So the book-to-bill in our sort of bulk material handling business through the first half is really positive, it’s about 1.1 maybe a little bit better. So we’re seeing the reduction of backlog a bit, we’re seeing the order rates pick back up, so that’s why we feel confident that next year you know that 2 point headwind this year from the backlog reduction at a minimum goes away from what we see from here. So we do see it’s getting better consistent with what we said as we started the year.

Okay, perfect and this one is a small one, but the $0.4 of currency is a little higher than we had, maybe I’m not understanding, do you have like a net production exposure here in the U.S. that is causing headwind in the margin maybe you can expand on it if there’s any interesting there? Thank you.

Yeah, we don’t it’s pretty, it’s much simpler than that. It’s really when we walked into the year it was sort of €132-€135 $1.25 today in the businesses that we're translating from Euros to U.S. Dollars are relatively profitable. So it’s that change in the Euro translation rate against let’s say a relatively profitable European business for us.

Perfect that’s good, thanks very much.

Our next question is from Charlie Boorady with BMO Capital Markets. Please go ahead.

Thanks, good evening guys.

Hi, Charlie.

Just on the water platform for a minute, can you just maybe give a little more granularity on Zurn and VAG and how they did in the quarter, kind of what you’re seeing a little more specifically as you look out at the back half of the year and particularly on VAG and some of the larger project stuff? And I guess I’ll just stop there.

Sure, overall growth in the quarter was I think 12%. Obviously that currency was a little bit of a drag, but it relates to Zurn, Zurn was north of the 10% core growth number. VAG was a little bit below. We saw a one not a book-to-bill for VAG and you know a 1.09 I think for the first half. So as it relates to water, Zurn continues to perform really well on a core basis as well as the acquisition that we made in April of Green Turtle is growing at or above our expectations and we see the project activity in VAG relatively robust over our second half. So it’s great to see the margins where they are at 17.4% for the quarter. We think that's a pretty big down-payment on the expansion that we projected, not only this year but into that high teens over the next several years. So our confidence as it relates to the water platform performing as we have been anticipating is very high.

Was there any discernable movement as a cadence in the quarter cadence of the month as you went through the quarter, anything unusual whether you know it started spiking up towards the end or beginning or you came out of the quarter different than you went in it?

In into, in water Charlie?

Yeah.

No, no I think you know in Zurn it’s been steady growth throughout the quarter. In VAG you know we walk into the quarter with a good portion of that in backlog and really didn’t see much of any unusual activity as we exited the quarter or even into frankly October.

Great, thanks.

Yeah.

Our next question is from Karen Lau from Deutsche Bank. Please go ahead.

Thanks, good afternoon.

Hi Karen

Hey, so you've seen data has, I mean it’s been bad in August-September timeframe, but I think overall it has improved slightly and I think a lot of industrial companies caught out things being a little bit better it was stable, but it looks like you’re not seeing that into October. So was the weakness which you attribute the weakness to you know maybe some of the food and beverage projects getting pushed out or you know large projects getting pushed out and you know if that is the case, would you expect to regroup some of that later this year?

We, I guess the way we’ve projected it Karen, it’s maybe a little bit unclear. The weakness that we saw and you can just go through the quarter you know July was generally in-line with our expectations. August in Europe is a very difficult month to get a read on just because of the holiday season and really lack of a lot of industrial activity. It didn’t start to come back in September as we had expected and it didn’t come back in October as we had expected. And I think the thing that, the takeaway is that the second half of our fiscal year as it relates to this European food and beverage business is substantially greater than the first half. So it’s not as if we’re projecting a business that's sort of readable throughout the year. We’re heading into a seasonally higher part of our year and we didn’t really see it in the first sort of couple of months that we should have seen it. So what we’ve done is sort of maybe take a conservative view and assume that we don’t see some of that traditional seasonality that we normally would and that’s the way we’ve positioned you know the guidance. We are obviously going for more, but at this point it just felt prudent for us to take the best information we had obviously work to improve that, but give you a view on what we’re seeing. I don’t think we are losing any massive projects. I don’t think that these things don’t shift that quickly. I think it’s a fundamental sort of weakness that we are seeing and there’s no reason to think it doesn’t come back at some point.

Okay, that makes sense. And then some of the companies, your distributors and some of your peer industrial companies have seen very good, very strong North American distribution results. So I'm just wondering how did your North American distribution business did in the quarter?

It was good. I mean, I think it was sort of low mix single digit growth in the quarter. We saw some of the same, you know news that you saw around growth in industrial distribution. We feel like you know we saw it in-line with what we expected. We're continuing to make progress really growing install base and the aftermarket you know is even a disproportionally higher amount of the opportunity we see. So pretty good growth in the quarter and I think that's sort of tracking as we had expected.

Oaky, and then last, one could you give us a sense of whether you’ve baked in any contribution from the two acquisitions that you’ve closed and to the guide and what would be the annual run rate in terms of sales and EBITDA from those businesses?

We’ve perhaps we have perhaps we haven’t. It’s probably close to $0.2 really for the quarter I’m sorry for the year from here. So if you translate that into next year it’s probably $0.7 to $0.8 on a full year basis. So that’s the contribution from the acquisitions on a full year basis. and I forget the first part of your question.

Oh, if you can break it down how much for the sales and the EBITDA contribution?

Yeah, we’ll get to that and we're not going to give you the discrete numbers, but I think you could back into it using $112 million of proceeds at sub 8 times on an aggregate multiple, gets you to sort of up $14 million of EBITDA. And if you take the $35 million of sales that we’ve reported it’s about 35% EBITDA margin aggregate acquisition.

Okay, so on an annualized basis you said it is about $0.7 to $0.8 that we can sort of baked into next year.

Yeah, it’ll be 5 to 6 incremental. Yeah.

Okay. Got it, okay thank you.

Yup.

(Operator Instructions) Our next question is from David Rose from Wedbush Securities. Please go ahead.

Hi, a couple of follow-up questions. First, thank you for taking my call. If I can go through the acquisition, first of all Euroflex, I mean if I go through your press release and the Q it implies that your EBITDA margins are like 60% in that business if I’m not mistaken and $77 million you paid for $16 million in revenues. So what is it about the business that gets you there and maybe you are going to help us through you know some of the growth expectations you have?

Your math is close. I mean they manufacture a high performance disk couplings to go into turbo machinery. So anything from you know 4,000 RPM and above these are essentially the couplings that protect the rotating equipment. So very, very high end applications, very sticky and frankly a growth area globally as it relates to energy. And these guys do an amazing job and have over the past 20 years in establishing the business. The technology, the engineering capability to serve sort of the market leaders at a price below competitors and so and they’re still making you know the type of margins that you’re talking about. So it’s a wonderful deal that's been in our funnel for three plus years and you know we're going to close the deal hopefully by the end of November, but it’s a great deal and you know that’s why.

Okay, now that’s helpful thank you and then if I can return to the F&B question, not to that spot, F&B, how much of F&B is out of Europe for you and how much of these are large products?

Yeah, I'll let Mark get you the rough cap number, but it more over half.

It is, yeah that are originating out of Europe, yes over half.

Well over half, it’s probably between 16% and 17%.

Yup, yup.

The large project nature of it is yes. You know for the most part the project activity happens over the winter months, so you run the equipment sort of full out in the summer months and then do any maintenance repair, upgrading the machines, new capital over the winter months and that’s where you get that seasonal I’ll say you know lift that at this point we're really not seeing the benefit of that. I’m not saying projects that were missing, we’re just not seeing the number and maybe quantity of projects that we would have hoped for and lot of that has to do with maybe a weaker Asia or other things. But you know it’s one of those things where based on everything we’re looking at we just don’t see the big lift coming that we would expect to see. It is an offset, we're leveraging the technology there to grow into automotive and so it’s not just one of these take it down in weight scenarios. We've been trying to grow in the automotive space over the last couple of years making great strides and we continue to see automotive conveyance be a growth area for us. So, but yeah we’ve been maybe more cautious in Europe than others, but it’s an important business for us heading into a seasonally high part of the year and we haven’t seen it in September and we didn’t see it in October. Six months of our year left, so we felt that it would be the right thing to do.

I appreciate that and maybe we can move onto the Water Management business and are there any mix issues or anything you want to call out that through margins the way they went?

No, you know I think nothing unusual from a project standpoint or mix. I think the only thing I would highlight is that the Zurn is seasonally strong in our first and second quarter and get seasonally weaker as the non res construction season in North America winds down over the December and March quarter and then picks back up. So aside from that on a year to year comparative basis and sequentially nothing that’s not repeatable.

Okay, perfect, thank you very much.

You bet.

We have no further questions at this time.

Thanks everybody for joining us. We appreciate your interest in Rexnord and we look forward to discussing our third quarter results with you in about three months from now. Good night.