Good morning and welcome to the Rexnord Third Quarter Fiscal 2019 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 in an 8-K with the SEC yesterday, January 30th. At this time for opening remarks and introductions, I'll turn the call over to Rob McCarthy.

Thanks Paulette. Good morning 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 that we issued yesterday afternoon as well as in our filings with the SEC. In addition some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP data. Consistent with prior quarters, we will speak to core growth, adjusted EBITDA, adjusted earnings per share, and free cash flow as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data and we urge you to review the GAAP information in our earnings release and in our filings with the SEC. Please note that the presentation of our operating results is focused on our continuing operations as our VAG operations, the sale of which was completed during the quarter, are reported as discontinued operations. Today's call will provide an update on our strategic execution, our overall performance for the third quarter of our fiscal 2019, and our outlook for fiscal year 2019. We'll cover some specifics on our two platforms followed by selected highlights from our financial statements, and then we'll open up the call for your questions. With that, I'm pleased to turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks Rob and good morning everyone. As you hopefully saw in our release last night, our third quarter results were generally right down the middle. We continue to be pleased with the progress we've made in building upon the competitive advantages we enjoy in both platforms, while leveraging RBS to drive consistent execution. We're also well on our way to delivering a record year for free cash flow. And coupled with delivering adjusted EBITDA towards the higher end of our original forecast, we expect to end March of 2019 with our leverage ratio right around two times and heading lower into fiscal 2020. Fundamental market demand continues to support growth and margin expansion in both of our platforms and as I'll speak to in a moment, we are seeing the benefits read out from our strategic initiatives around innovation, cost reduction, and commercial excellence, which positions us really well across a wide range of potential macro and end-market scenarios in our upcoming fiscal 2020. With just a quarter to go, we're going to continue to maintain our cautious approach to forecasting, which as a consequence, results in us slightly raising our adjusted EBITDA outlook for the year, which we now project to be in the range $437 million to $443 million while affirming our core growth outlook. Looking more closely at our third quarter results, sales of $485 million included core growth of 6% and were up 11% on a reported basis. Core growth in our Water Management platform was 10% year-over-year even as the year-over-year comparison became more difficult. PMC delivered 4% core growth with balanced growth across our aerospace, process, and consumer-facing end markets. We delivered another double-digit growth EBITDA -- quarter of EBITDA, which resulted in $103 million with solid operating execution and margins in both platforms.…

Thanks, Todd. Please turn to slide number 5. Our consolidated financial results for the third quarter of fiscal 2019 were in line with our expectations. On a year-over-year basis our total sales grew 11%, our core sales increased 6%, our adjusted EBITDA increased by 11% to $103 million and our adjusted earnings per share increased by 21% to $0.47. Please turn to slide 6. Our outlook for our fiscal 2019 core growth continues to incorporate core sales growth in the upper half of the mid-single digit range. Our increased outlook for adjusted EBITDA to be in a range of $437 million to $443 million translates to a 13% to 15% year-over-year growth. And we expect to deliver a year with record free cash flow. On slide 7, we summarize our consolidated results for the quarter. Let's turn to slide 8 and discuss the first of our two operating platforms Process & Motion Control. Total sales increased 12% year-over-year in PMC, with core sales growth of 4%, through the first nine months of the fiscal year core growth in our PMC platform is running between 4% and 5% and right in line with our expectations heading into the year. Currency translation reduced our sales growth by two points and the acquisition of Centa added 10% to our top line growth in the quarter. PMC continued to see growth across a wide range of aerospace consumer-facing and process industry end markets and growth is generally stable in our domestic distribution channels. We saw somewhat weaker trends in our European distribution channels late in the quarter and reflected that in our set of end-market assumptions that support our unchanged outlook for mid-single-digit core sales growth at PMC in our fiscal 2019. PMC's EBITDA and margins were in line with our expectations as we…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joe O'Dea from Vertical Research. Please go ahead.

Hi, good morning.

Good morning, Joe.

Good morning, Joe.

First question on the Water Management side. When we look at 10% organic in the quarter and 12% organic last quarter any perspective on how that compares to what you are seeing in the end markets? Just to try to appreciate what you are posting from an outgrowth perspective and then how you look at that opportunity set to continue outgrowing over the next 12 months or so?

Yes. Joe, I mean, I'm not sure we're perfectly equipped to tell you exactly what the market grew in the quarter, but our view is that it's sort of growing in 3%, 4%, 5% range. We're getting a little price on top of that. And the balance really coming from a combination of both our connected initiatives, our adjacencies that we talked about in both fire protection and site works and then also the fact that as the institutional markets recover, we have a higher relative share there. And so, you're seeing that sort of translate into above-market growth. I think the 12% we posted last quarter was off of essentially a flat number the year before. The 10% growth we're posting this quarter is off about a 7% growth a year ago -- I'm sorry 5%. And so, we expect good growth again in our fourth quarter. And as we start our fiscal 2020 I think we feel really good about where the end markets sit. Obviously, pricing is sticking, and then more importantly is the fact the initiative driven growth is building momentum. And so, I think we feel pretty good about where we position the business. And obviously, we're watching the latest data like everybody else, but I think that'd be our best shot at this point.

And then, one on free cash flow, you talked on -- can you put any context around that on pace to hit the $200 million or better target for fiscal 2019? And I think some moving parts in terms of savings that you should have from SCOFR 2, cash taxes, but even -- if you just take it off of the fiscal 2019 base, what would that be rolling into 2020 when some of these kind of contained cash outflows go away?

Yes. Mark is shaking his head a little bit, but didn't want to get too far in front of providing -- we still have a quarter to go. But again, it's tens of millions more right I think is the way to think about it. We'll get a little sharper as we close out the quarter and provide a little guidance. But you're right there are a lot of digital benefits on the tax side as well as the benefits we're getting from a variety of things that we've already done that should benefit next year nicely. So I would think about it in the range of tens of millions of dollars and we'll refine that and get back to you when we announce in May. But it's comfortably above $200 million.

And then, just thinking about kind of the out years from a tax rate perspective and now at 25% to 26% for the year. Is that a better longer-term tax rate to use or should we still be thinking kind of 27% to 28%?

Yes. I think Joe for now, you look -- the rate within the year we thought was in that 29% to 30% range. I think next year it's safe to use the 27%, 28%. We're still working on some things strategically, but we've made some progress in some of the things related to GILTI that we've talked about over the past several quarters. So I think, looking into next year I think a 27% to 28% rate in the P&L on an adjusted basis is reasonable.

Got it. Thanks very much.

Our next question comes from Mig Dobre from Baird. Please go ahead.

Good morning, guys. I want to go back to Joe's question on Water Management. And the way I understood what you said, you're essentially generating outgrowth effectively as high as 500 basis points versus the market. There are a number of things that you're doing here that you cited. I guess the question is, as you look going forward, do you believe that this level of outgrowth is sustainable? I mean, we can make our own assumptions as to kind of what we think about the construction environment overall, but would your own initiatives still allow you to be able to post this kind of performance in the next 12 months or 18 months?

Well, Mig, I think if you were to go back and look at the business, really, since we've owned it, beginning in 2007, I think you could make a very strong case that we've had market outgrowth every single year. And I think if we look at the things that we've done over the course of the last couple of years around, again, adjacencies around connected products and where we are with our spec share and a variety of other things that really drive long-term growth, and we've only done things to enhance that. And so, without question we will outgrow the market. Whether it's 500 basis points or 200 basis points, I couldn't tell you exactly. But without question, we're confident in our ability to outgrow our served markets, our competitors. And I think it's not just a one or two quarter phenomenon. It's really a decade of doing so. And so, we feel really good about being able to make that statement heading into our fiscal 2020.

All right. And then, I guess, we spent quite a bit of time talking about your institutional business in the past, but maybe we can focus a little bit on commercial. You upgraded your outlook here. So I'd love a little more color or your thoughts around that. But what sort of exposure do you really have here in commercial? How do you define that market, as far as Zurn is concerned?

Yes. I'll give you, sort of, qualitatively how we're thinking about commercial. And obviously, I think, it's attracted a little bit of attention on that little chart that changed from yellow to green. And just for context, this is set up to sort of provide our best view on how we think our business is going to perform, really, over the next quarter or so. And based on backlogs, based on what we're seeing in the marketplace, based on business that's been won, that's our best view of where we're going to see commercial over the next two to three quarters. In terms of our business there, it would be anything that is non-institutional. So think about office, think about manufacturing, think about retail and things like that, those are the areas that we would group into the commercial bucket. And so it's not meant to sort of be a criterion call and say that it's growing again. But in our view is, without question, the next quarter or two, it's still going to be very good for us. There is no question that the growth is slowing overall. But in general, we feel really good about not just institutional, but commercial over the sort of near to intermediate term.

Okay. So that's more specific to what you're seeing in your business rather than a broader market call? Just to be clear.

Yes. That's correct. That's correct.

All right. And then lastly for me just kind of housekeeping items into fiscal 2020. Just want to confirm that you're still expecting $10 million of incremental SCOFR savings in fiscal 2020 and your margin exit rate on Centa would be that that 1,000 basis points that you talked about previously. And that's it for me.

Close. I think as it relates to the SCOFR benefit from SCOFR 2.0 in our fiscal 2020, the comments we've made on the call were actually $15 million of savings, probably a little bit more in the back half than the front. And then the Centa exit rate of 2020 will include that 1,000 basis points of margin. We'll get the full run rate benefit of that 1,000 basis points from acquisition in our fiscal 2021. But the exit rate will definitely be at that level.

But Todd, on SCOFR, you had some savings, SCOFR 2.0 you had some savings in 2019 too, right? So that incremental truing -- incremental 2020 versus 2019 is not $15 million, it's less. Or do I have that wrong?

No, no, that's not what happened. I mean, so the $15 million SCOFR 2.0 will all be incremental in 2020.

Very helpful. Thank you.

You bet.

Our next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi. This is Jason on for Julian. Maybe just starting on the free cash flow. You had commented in previous quarters, how both businesses might have seen a little bit of lean inventory in the channel. Is that still the case? And if so, is that something to consider? I know you're not giving specific guidance on free cash flow, but just heading into 2020, is that something to consider there? Or has that kind of been resolved and we should sort of more be thinking about restructuring, savings, et cetera?

Yes. This is Mark. I think, we'll -- I think the question you're referring to is inventory in our channel those are distribution partners, if I'm understanding that right, we've kind of got a long channel inventory, so our product at distributors before selling to the customer has been relatively consistent. Our opinion has been it's been on the lower end of where we think it should be. But that's been very steady for several quarters. And it didn't really change a lot as last quarter. So channel inventories remained stable. Our opinion has been low on the low side, but stable is the answer to the question.

Understood. There was no -- I'm sorry.

No impact on our free cash flow as a result right one way or the other, because that's sold inventory which is relatively flat from where it's been. And so the only comment was there's no change to our resulting free cash flow no matter what happens with that channel inventory.

Got it. And then moving on to demand a little bit. You've mentioned a weakening of European industrial distribution just certainly in the quarter and the just referencing that red/green chart earlier. It sort of remained yellow. Was European distribution trending more towards green throughout the first maybe two-thirds of the quarter and then it sort of turned for the worse and that's why you kept it yellow? Or was it always sort of trending there and then had a little bit more incremental weakness late in the quarter? Just any more color you could give there would be helpful.

I mean, I wouldn't, I don't think any of it's particularly pronounced, right? I think we saw a general weakening over the course of the quarter and our view is that that's not going to change as we round out our fourth quarter here. And that's sort of why we chose to shade it a little bit of a different color heading into our March quarter. Obviously, I think when you read and see all the news coming out of primarily Western Europe. It is slowing a little bit. And so we chose to just sort of update the outlook for people and it's obviously reflected in our fourth quarter outlook and what we just did in the third quarter. So nothing pronounced, but I think it's the general – generally a little bit slower than it was in the first half of the year. Q – Unidentified Analyst: Great. Thanks a lot. I will pass it on.

Our next question comes from Jeff Hammond from KeyBanc. Please go ahead.

Hey, good morning, guys.

Hi, Jeff.

Good morning, Jeff.

So maybe just speak to what you're seeing in the North America industrial distribution channel. And certainly, you've improved the mix within PMC, but any particular end markets where you're seeing yellow or red lights flashing?

No. I think in general the distribution business for us is pretty stable, right? I think it just doesn't – it doesn’t fluctuate a whole lot. Channel inventories have remained relatively flattish really from the last two years. So we're not seeing anything to us that is a flashing red. In any given quarter you'll see things that are maybe a little bit better maybe a little bit worse than what you would have expected. But overall, I would characterize it as very much stable and consistent with what we usually see. We've had a couple of distributor partners announce earnings and I think that their industrial distribution side of things was pretty much in line with what we see. And so the fundamental pull-through in end market demand just doesn't vary that much as you look at the MRO market, which is primarily what we're talking about here. And so I wouldn't call it anything flashing red. I would say that there's some things that are green, there's some things that are yellow, but overall generally pretty consistent and stable with what we usually see.

Okay. And then just talking about direction and the Smart Condition Monitoring System, as you kind of push into 2020 how are you thinking about kind of incremental revenue contribution? And how is that kind of run rating as you went through the third quarter?

Yeah. I mean, it's pretty exciting. I think when we look at it the things that we've done over the course of the year to put ourselves in a position to launch. I would say even a more fulsome suite of solutions as well as now the opportunity to address the retrofit market put us in a spot where we should see tens of millions of growth from direction heading into our fiscal 2020. We're not going to sort of get into the quarter-over-quarter growth, but I would tell you that in the quarter we won a number of larger new projects that will ship in 2020. That – we won it solely as a result of having a Smart Condition Monitoring System offering. And the funnel around retrofit opportunities is growing by the day. And so in both cases, we're pretty excited. And I -- it's not just PMC. It also is on the Zurn side. So we're optimistic that this is sort of a growth opportunity in any environment, but more and more we're seeing that this is really a differentiator in the marketplace. Customers are choosing us as a result. And the retrofit opportunity, we're just scratching the surface on that. But that is a install base that's massive that we can exploit and you'll see the benefits of that really for the first time in our fiscal 2020.

Okay. And then last one. It seems like this year you stayed ahead, managed the inflation pretty well. Have you -- are you contemplating or have you announced any pricing for I guess calendar 2019 in either business?

Well, we've made a number of pricing adjustments really over the second half of the calendar year. We have some normal price increases that go into place January 1 and we're just sort of contemplating our next move. I would tell you that we don't have a long lead time to implement. And so, we're pretty comfortable that if the macro cost environment requires it, we can act very quickly. But as of right now, we're in a pretty good place with our price increases. But obviously if things change we'll revisit that. And just like this year we anticipate a very smooth and effective implementation and we'll see where we go. But other than that no, nothing pronounced.

Okay. Thanks Todd.

Our next question comes from Charley Brady from SunTrust Robinson. Please go ahead.

Hey, thanks. Good morning guys. Just wondering if we can get a little more granularity for PMC on the three sort of buckets there; aerospace, food and the broad-based distribution and kind of what the growth you're seeing among those three buckets?

Hey, Charley, it's Mark. Yes on the distribution side as Todd said, and then we kind of – and the comments we made, distribution across North America has remained generally stable. So we've been growing in that low to mid-single digit in distribution for the better part of this past fiscal year. We did see a little incremental weakness at the end of the year in Europe and a little bit in rest of the world to be expected. But nothing that was totally a surprise as we finished out the calendar year. Within aerospace, the demand in aerospace has been strong. We've seen nice backlog build in aerospace, nice book-to-bill rates in aerospace business. Consumer, I'd characterize as generally stable. That's been a low single-digit grower for us for this fiscal year and we look for that to continue. And then our process side as Todd mentioned, look in any given quarter some can be up some can be down. But in general, our overall process industry end markets, again grew for us in that low to mid-single-digit range in the quarter. And there is where we won some of these larger projects Todd talked about in the direction initiative, a couple on the new gearbox side, a couple on the retrofit side. That will benefit 2020. So overall we kind of characterize the balance of the end markets as generally stable in the quarter.

And Charley, it's Todd. Just one other thing, we talked about it over the course of the call, but we've started the simplification journey about a year ago. So in addition to the growth we're seeing, we also are walking away from some revenue with respect to customer and product configurations as we try to segment our business and simplify it a little bit. So embedded in, our growth numbers is some walk-away revenue and that will continue. So the growth numbers we're posting and everything we're talking about is initiative-driven. But on the back side of that you're going to see us sort of simplify our business which is something that we think is a real opportunity both on the cost and simplification side of things to allow us to invest in better growth. So embedded in everything Mark just said is you got to include some walk-away revenue along the way.

Great. That's really helpful. And just one more from me probably a question you haven't had maybe ever. How low are you expecting leverage to go before you have to deploy capital on either more M&A or stock buyback or something the way you're not building cash? Obviously very strong cash flow this year even better next year. You're going to be well below two if you don't do any M&A. I'm just wondering what's the bottom end of your comfort level on net debt? A – Todd Adams: Well Charley you're right that is a question we've never had before. We paid down $75 million of gross debt post the end of the quarter. We've got a very good outlook for free cash flow heading into next year. We think that we've got some decent earnings growth as well. So we end next year sort of in the 1.5-ish sort of range. I think we've said all along, our view was to march the leverage down to something that was very comfortable, not just for us, but for the way investors thought about Rexnord. I think we're getting into that range. And once we get to that range, I think we'll sit back and make the right decisions for shareholders. And that could be a combination of a lot of things to return capital and we're not going to run out and do a big deal to delever the balance sheet. We're going to stay very disciplined as we have been. But the story here is that returns on invested capital are extraordinarily high for our core business and we're going to continue to make smart investment decisions and create shareholder returns. But the reality is Rexnord could be an investment-grade company. We generated tremendous amount of free cash flow. We think it’s a combination of investment back into the core and doing smart acquisitions is best for shareholders along with some sort of return of capital either through a dividend or a buyback of some sort. But it's a little bit early to talk about that. But it is a reality that we are going to face which is a great problem to have. And so heading into our fiscal 2020, we may talk a little bit more about that, but appreciate the question.

Great. Thanks.

Our next question comes from Bryan Blair from Oppenheimer. Please go ahead. Q – Bryan Blair: Good morning guys. Thanks for taking my question. A – Todd Adams: You bet. Q – Bryan Blair: I don't think you specified -- I apologize if I missed it. Is there an update on expected PMC first-fit wins for fiscal 2019?

I don't know that we have provided that, but it's going to be greater than $50 million. If you look at where we started this three years ago I guess it went from $15 million to $30 million and this year it'll probably be closer to $50 million and so all that does is create a larger installed base. And I expect the number to frankly be a little bit bigger in 2020 as a result of the direction and Smart Conditioning Monitoring System that we're deploying. So, again, thanks for reminding us to talk about it but it's going to be north of $50 million this year.

Okay, very good. And then if you could provide a little color on your deal funnel. Obviously you have increasing balance sheet flexibility as you're discussing and M&A is certainly a big part of the long-term story. Any chance that we see you get more aggressive into your fiscal 2020?

I don't think you're going to see us do anything crazy. I don't think you're going to wake up and go, what did they just do? I think the things that we're looking at in our funnel consist of things that look a lot like the World Dryers of the world that look a lot like the CENTAs of the world that make a lot of sense that we fit very nicely into our core business. And we have the ability to extract both cost and revenue synergies in a relatively short period of time and create great returns. And so I think our funnel is a little bit bigger than it was a year ago this time and I think the things in it look a lot like the things that we've just done and have done for a while. And I think we're optimistic that a couple of these things get to the finish line over the course of the next six to nine months. But we're obviously not going to comment on anything specific. But I think we're optimistic that a couple of these things will convert and work out really well.

All right. That's helpful. Thank you very much.

I will now turn the call back to Rob McCarthy.

Thank you and thanks to everybody that could join us on the call today. We appreciate your interest in Rexnord and we're looking forward to providing our next update when we announce our fiscal year 2019 fourth quarter results in mid-May. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. And you may now disconnect.