Good morning and welcome to the Rexnord Fourth 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 reply can be found in the earnings release and -- the company filed in an 8-K with the SEC yesterday, May 8th. At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy.

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'll speak 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 our third quarter, are reported as discontinued operations. Today's call will provide an update on our strategic execution, our overall performance for the fourth quarter of our fiscal 2019 and our outlook for fiscal year 2020. We'll cover some specifics on our two platforms followed by selected highlights from our financial statements and afterwards, 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 fourth quarter results were at the very high end of our outlook and capped off a great year, both financially and strategically. Financially, we delivered new records for annual free cash flow at $213 million, adjusted EBITDA at $443 million and adjusted earnings per share at $1.85. These growth results were underpinned by our solid execution of RBS-led strategies to offset input cost inflation and the ongoing tariff situation and enabled us to report margin expansion and an incremental margin in our core growth above 35%. We also leveraged our stronger free cash flow and earnings with debt reduction to bring our net debt to EBITDA ratio down to 2.1 times with visibility to an even stronger year of free cash flow as we look ahead. Strategically, we executed our second round of structural cost reduction initiatives to reduce our fixed costs, enhance our productivity, and improve our free cash flow, and completed the planning and preparation for another round. We also advanced our simplification initiatives and expect to capture significant productivity benefits from the simplified and better focused product line offerings that we can reinvest in our growth and commercial excellence initiatives. We accelerated the introduction of IIoT-enabled digitally connected product solutions in both platforms, including retrofit options, to accelerate adoption within our large installed base and to leverage the investments we're making in our direction and digital enterprise strategy. While we're pleased with fiscal year 2019, which was a record year on many fronts, we're actually more excited about the leverage we're getting on the investments we've made the past couple of years in innovation, commercial excellence, and operational excellence that position us to perform extremely well over the coming year and…

Thanks, Todd. Please turn to slide number 7. Our fourth quarter of fiscal '19 consolidated financials results were on the high-end of our expectations. On a year-over-year basis, our total sales grew 4%, core sales increased 4%, our adjusted EBITDA increased by 6% to $120 million and our adjusted earnings per share increased by 9% to $0.51. For the full year, our sales were 11% year-over-year, core sales growth was 6%, adjusted EBITDA increased 15% to $442 million and our adjusted earnings per share advanced 25% to $1.85. Please turn to slide 8. As Todd outlined earlier, our initial outlook for our fiscal year 2020 includes low to mid-single-digit core growth before factoring in a 150 to 200 basis point impact from our product line simplification initiatives. So on that basis, our outlook incorporates low-single-digit core growth. We expect our adjusted EBITDA to be in a range of $460 million to $475 million and for our free cash flow to exceed our net income. Achieving our outlook, we'll deliver another record for annual free cash flow and adjusted EBITDA. Turning to slide 9, we present a bridge from our fiscal '19 adjusted EBITDA to the midpoint of the range and our outlook for adjusted EBITDA in fiscal 2020. Besides the impact of core growth and our RBS-led productivity gains, I'd like to point out the $15 million contribution from SCOFR 2, the impact of our recent acquisitions and our investments in our connected product strategy and the execution of our initial SCOFR 3 projects. The potential upside from our core growth and incremental margins explains the path to the high-end of our outlook range. On slide 10, we summarize our consolidated results for the quarter. Well, let's turn to slide 11 and discuss the first of our 2 operating platforms,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, Jeff.

Good morning, Jeff.

So just a couple of questions on kind of the noise in the quarter and what we're hearing from others. So one, can you just talk about any evidence of destocking in the PMC channel in your different geographic markets, how you think inventory in the channel looks? And then just on the weather, do you expect any catch-up in fiscal 1Q from some of the delays?

Sure. With respect to destocking, we really didn't see any impact whatsoever. We talked about it a number of times on these calls that our model is to essentially compensate our distribution partners on sell-through. And so there's really no incentive for them to keep more inventory than actually is being required by end demand. And so our inventory levels remain sort of at or very close to all-time lows in our distribution channel. So no impact of destocking really anywhere. On the weather side of things, of course, we'd like to think that there's -- some amount of that that flips into our first quarter. The reality is when you think about a building schedule, it's not as if all of a sudden there is incrementally more resources to get that stuff done. But it will actually sort of roll in through the fiscal year. Whether it all comes in the first quarter or not, it's sort of difficult to tell. But without question, we didn't -- we're not missing anything. We didn't lose anything. It's going to show up. But whether it shows up in the first quarter or not, I think we'll get some of it, perhaps not all of it.

Okay. Great. And then just on SCOFR 3, a couple of questions there. One, can you just talk about what's in the bridge? What's included that wouldn't be excluded as restructuring? And then just if we do see a recession here near-term, what are the opportunities to accelerate some of SCOFR 3 actions?

Hey Jeff, this is Mark. The first part of your question, I think in the investment bar there -- and roughly half of that is some -- we call non-recurring costs that will incur in our operating results whether to the -- some of the moves that we'll be taking place in the next fiscal year. You may recall in SCOFR 1, we had some of that as well, duplicative expenses, as you're getting ready to establish new facility. So that's if we mix those costs up. I think as far as acceleration, certain things are dictated, some timelines that you can accelerate, but other pieces of the puzzle, we can accelerate around -- and by simplification the ones that setting. There is some flexibility in the SCOFR 3. Right now, we have a time line that we feel is relatively aggressive. But if a recession scenario hits earlier, there are certain pieces of it that we know we can try to move quicker on.

Yeah. I mean, Jeff, just to add to that. I would tell you that there are a number of incremental levers that we can pull, if we were to see weakness beyond what we sort of have targeted. And also, don't forget that with the essentially $40 million of fixed costs already out of the business and an increasingly variable model in both platforms, I think we're really well positioned to deal with that sort of environment. And so as Mark alluded to, there are some things that we can do quicker, for sure. But just know that there are other incremental things that we can do. The business is substantially more variable than it was two to three years ago and then we've got this coming on top of it. So I think we're -- we feel really good about sort of the ability to control our earnings and more importantly, the free cash flow through sort of -- any sort of weakening environment.

Okay, great. I’ll get back in queue. Thanks guys.

Your next question comes from the line of Joe O'Dea from Vertical Research Partners. Please go ahead.

Hi, good morning.

Good morning, Joe.

Good morning, Joe.

First, I wanted to start on the $250 million of growth initiatives you referenced. I think that you framed that as opportunities you have within the strategic planning horizon. But the degree to which you could kind of map that out anymore from a time line perspective, from a segment perspective, maybe how much of that you have in fiscal 2020 planning?

Sure. The -- I would say the bigger buckets that we would sort of point you to would be obviously the direction platform, but not as much on the new side of things, but clearly, on the retrofit side. We think about our installed base both in PMC and with the presence we have in commercial buildings. The retrofit opportunity alone exceeds $100 million. If you think about fire protection, we had a really good presence in fire protection. The internal product development and innovation that we've been going after the last couple of years offers us at least a $50 million opportunity to grow in fire protection. On the site work side of things, very similar. And as Mark alluded to, with the acquisition we're just talking about, we think that's another $50 million market opportunity. And at least as far as we can tell, the food opportunity is greater with the Cambridge acquisition that we did, our growing presence in things like pharma and other consumer goods. So we've got a really good sort of relatively tight segmented view on where the available market is, what our share is, what's needed to grow there. And in terms of time line, it's sort of tough to give you the exact time line, but I would tell you that the aggregate of all of that in terms of growth next year is $40-plus million. And so we've gone through this pretty methodically over the last couple of years, and I think we're really well positioned and we're deployed to go get it this year.

Thanks. I appreciate that. The -- and then on POS and the drag that you anticipate this year, to what degree will that complete a lot of what you see as the opportunity within POS? Or is this something that we should anticipate as kind of a multiyear initiative?

As you, I would say, aggressively begin to implement it, the impact obviously is greater in the earlier years. And so we've -- we really spent the last, call it, 18 months understanding what it means, communicating what we want to do and then starting to implement. So I would tell you that I think the impact will be greater over the next 12 to 18 months than we would expect on an ongoing basis because you really start to reinvest back into higher growth and better growth opportunities and products and categories and customers. And so the headwind this coming year will be greater than what we would expect it to be going forward.

And when we think about a $30 million or $40 million revenue impact, what kind of an EBITDA impact should we think about, because presumably this is a margin expansion kind of move.

Well, we would tell you that we're going to have to take whatever overhead costs and personnel costs related to those and redeploy them towards growth. And so there shouldn't be a margin hit over time. This should be in a margin expansion opportunity. And it's really about prioritizing where we think we have the best chances to win and putting resources behind it. So I wouldn't think of it as a margin hit in any way. It really turns out to be -- if you follow the wheel all the way around, it's investing in higher better growth that should come at better incremental margins as well.

Last one, just a firmer number on free cash flow for fiscal 2020.

I would comfortably say that it's going to be, more than this past year. And if you think about the growth, at the midpoint, of our guidance range and add that incremental EBITDA to our free cash flow, it's probably not a bad place to at least start.

Got it, thanks a lot.

Your next question comes from the line of Mig Dobre from Baird. Please go ahead.

Good morning gentlemen and well, well done on fiscal 2019. My first question real quick, how do you think about pricing into fiscal 2020?

Let's say, if -- you got to unpack that a little bit, Mig. If you look at the two platforms, fundamentally, the pricing environment across the PMC platform is split between first-fit opportunities with OEMs and end users, and the other half of the business being distribution. So I would tell you that, on the first-fit side of things, we're not seeing any sort of dramatic price compression whatsoever. You've got to get in there, and win the first time. And then, as the equipment wears out and used. And gets replaced like-for-like over time, you get multiple cracks at that recurring revenue in the aftermarket. And so when you look at the aftermarket, the pricing environment has been okay. We think we're putting in about 1.5 points at the platform level, which would imply notionally 3%, in the aftermarket. And if you were to think about Zurn, I would say the aggregate price increase on a yield basis is probably close to 3%. So obviously, the announced price increases are a little bit higher than that. But when you go through the multipliers, and you have to remember, it's a very regional business. So, we would tell you to think about 1.5 points in PMC, over the next sort of year and three points on the Water side.

That's really helpful. What I was really trying to get at here is that following up on Joe's question a little bit. And trying to kind of understand the assumptions baked into your guidance, right? As you were saying, you're guiding core revenue growth to low to mid-single digits, which, to me, that means something around three. You've said that the outgrowth initiatives are generating maybe a couple hundred basis points of lift. You've got pricing north of 1.5% between the 2 segments. So, on a combined basis, it looks to me like your end-market outlook is for volumes being relatively flattish, which -- I want to make sure that, I understand this properly, and that you're thinking about it that way, and if this is a function of conservatism at this point in the year or if there's anything else that I might be missing.

Mig, I think the other thing you're missing would be the exits, right? We've talked about 150 basis points to 200 basis points of core growth impact …

No. No, no…

…from a product solution.

I get that part. I get how you're getting to your guidance. I'm just trying to understand how you were thinking about, how the core market grows, right? Because if you're saying that the core market grows in the low- to mid-single digits, that would essentially imply your growth initiatives, and your pricing and volume, right? That's what drives the core market growth.

Again, Mig, I think you have to do two things. One, look at it by platform, so I would tell you that we feel good about where we are in the commercial construction cycle, so, we think the Zurn part of our business is above that low-single-digit rate. And I would tell you that as we sit here today, we perhaps may have taken a more cautious view on PMC end market, because we're in the first month of our fiscal year. And I would tell you that relative to 30 days ago, the world is a more uncertain place. And so, what we're trying to do, and it's very consistent to what we have been doing, is put out a financial guidance that we think is a little bit resilient and durable. And over time, the expectation would be -- at least our hope would be -- to be able to take it up over time. And so, don't misread anything. We do believe we are getting price. We understand the impact of our growth initiatives. We sort of have a very good view of what we're walking away from. And then, we have a view on market growth, in each of the platforms; that is different. And it aggregates the sort of that low-single-digit range. If you're centered around 3, it's probably not a bad place to be. And hopefully, over time, we have the option to come back and give you better news. So that's -- so don't over-think it, so a little over-thinking.

That's very helpful color. I want to ask my final question on capital use here. The balance sheet is in good shape. Cash flow generation is accelerating. And I want to get your thoughts on what's happening with your pipeline, how you're thinking about the M&A environment at this point in the cycle. And maybe more specifically, with your stock trading at roughly 9 times EBITDA, how do you think about returning cash to shareholders and maybe buying back your own stocks, especially in a more volatile macroeconomic environment? Thank you.

Sure. Obviously, you pointed out the elevated free cash flow and what that will do really over the coming years. As we've communicated for a long period of time, our idea was to tack to that 2 to 3 times leverage range. I think, with the guidance we've provided and assuming no acquisitions, you sort of get to that mid-1 range over the course of the next 12 months. I would say that the pipeline of opportunities around the bolt-on tuck-in sides of things feels pretty good. We announced one this morning. Mark, talked about it, I guess, at least. We think there's probably a couple more like that. And so our priority remains to continue to use our free cash flow to do things that grow the future earnings and cash flow of the business and deliver really high shareholder returns. We hope that over time, that reflects a better valuation of Rexnord, because we are performing. The valuation, as you pointed out, is relatively inexpensive compared to the quality of the financial performance and the outlook for the business. So I wouldn't tell you that we wouldn't buy back stock. But, I think, we believe over time that's the highest-returning opportunity for us is to continue to invest in our core business, do smart bolt-on tuck-in M&A and while we search for things that are potentially a little bit larger. As far as where we are in the cycle, the way we go about our M&A program is pretty disciplined. We don't tend to participate in auctions. Most of the acquisitions are -- frankly, all the acquisitions we've done in the last 12 years have come through a proprietary funnel. And so, we're going to work these things, because we know we can create value with them. And I think if you think about Centa, it's just a small case study. This is something we cultivated for -- in excess of eight years. And when we finally had the chance to invest in that business, we had a really good idea of what we could do with it. And as the results point out, we're delivering upon what we said. So we're going to be deliberate. We're going to be focused on a combination of internal growth, making sure that we keep the leverage at a comfortable spot for investors and also thinking about doing smart M&A. And that's really been the game plan and the playbook we've used the last several years. And I don't think we're going to deviate from that.

Great. Thank you.

Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead.

Hi, guys. Good morning. This is Jason Makishi on for Julian. Just kind of wanted to get your take on the difference, maybe from an organic growth perspective by end market on the low and the high-end of your guidance. Which end markets do you think there's sort of most scope for upside in line with the conservatism that you typically embed in the early guides in your fiscal year?

Yes, Jason. This is Mark. If we kind of go back to the slide, I'll walk through the end markets as we talked about them in the slides. I think, from a distribution standpoint, we called overall distribution in the yellow front. So, I think, that's kind of code for low-single-digit growth. Europe, we -- Europe's been more challenging, and that continues. But I don't think we see a lot of upside in Europe. And we think there could be a little bit of upside in North America over the course of the year, in the distribution channel, probably not in the first half or in the second half of our fiscal year. The rest of the world is pretty small for us, so if there is upside or downside, it doesn't really move the needle that much. Food and beverage, I think, we look at -- Europe, again, has been slower for us. We're not standing, or just we're not turning around. North America was a little soft in our fourth quarter, but we've seen something's percolating of late. So I think there could be some upside in our North American food and beverage as the year progresses. And looking at our overall commercial aerospace, that's going to be a grower for us next year. It's relatively locked in from a backlog standpoint, so relatively predictable. But aerospace will be an excellent contributor of growth next year for us. And within the process industries, I'd say been relatively steady. I don't think I'd call out anything within those end markets that maybe a big upside or a big downside from what we can see today. Turning to water, I think we've taken a relatively cautious approach on the commercial side of the water end markets. I think institutional, as the year progresses, again could be an opportunity where we see some growth on the positive side versus what we've assumed. So it's a long-winded answer to your question, but -- and that covers what the key end markets and what we think could be upside or downside versus where we sit today.

Great. That's very helpful. And could you just talk a little bit more about why the end-market outlook for commercial and industrial is a little bit worse or maybe just a little bit more uncertain relative to your -- the outlook you gave last quarter in the Water Management business side?

So last quarter, we spoke then -- we had certain projects in our funnel that we knew we were going to deliver in the fourth quarter. So that's why we had kind of turn up green. If you went back to our third quarter, we had that yellow on the commercial side. That was a bit more reflective of what we saw in our funnel at that 90-day period. So that passing, we've flipped that kind of back to yellow. It's again where we are in the cycle. We feel as prudent to be a little bit more cautious on the overall commercial side but then being balanced with acknowledging there's some upside in institutional side, of course. And that is our sweet spot in general, which should help the business over the next year.

Great. Thank you very much.

Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead.

Yeah, good morning, guys. Can you hear me?

Can hear you, yeah.

Just a question in terms of -- and I apologize if I missed it, I dialed a little bit late. But could you talk about -- on the PMC side, order progression through the quarter, did it slow down towards the end? Just curious how that played out?

Andrew, we would tell you that we really didn't see any sort of much of a change throughout the quarter, right? I would tell you that. And that is consistent at least through April. So I would tell you that we built a little backlog in the quarter. Our aerospace business, still, they had a lot of backlog in the quarter. But fundamentally, we didn't see a significant change throughout the fourth quarter. And as we start April here -- one thing to just recall is that our distribution partners, the arrangement we have is we pay on sell-through. So there's really no incentive to accelerate or decelerate orders. So what we're seeing is sort of real-time demand. And the order impact is not influenced by spot-buy programs or putting inventory in the shelf that perhaps is unneeded. And so there's really no order volatility from that sort of behavior, which I think happens some of the time. And so very consistent throughout the quarter and looks continue to be steady in the month of April here.

Got you. And then the second question on cash flow, so I understand I think the midpoint. It's interesting that you said it's a good place to start. And I was just wondering, what are the incremental opportunities on working capital? And also how should I think about the net impact of restructuring spend cash versus earnings in next fiscal year? Thank you.

Well, I think with respect to cash flow, every number that we've provided for the last, at least, seven years as a public company, we beat it. So I think I said that's a good place to start only because I think we've got a high degree in confidence -- high degree of confidence in our cash conversion cycle. So there are many opportunities as we look through things like working capital and a variety of other opportunities around CapEx, largely driven by the SCOFR 1 and SCOFR 2, which substantially reduces CapEx on a go-forward basis. So we pointed you to do that as sort of a good place to start. And again, we'll monitor that as we go throughout the year. With respect to uses of cash, Mark has that..

Yeah. I think as Todd mentioned -- look, obviously, earnings additive, working capital will be additive to our cash for this year. On the other side, CapEx was a little bit higher this year due to SCOFR 3. In the back half of the year, we'll be starting to put some capital in. So the CapEx number on just on the raw number basis will be a little bit higher year-over-year. Our restructuring cash out will be higher than it was last year. And one thing, too, we'll have a little more pension cash at the door. We're doing something with our pension plans, due to the recent acquisition -- there's some consolidations that require to do some earlier funding, but reduce our liability over time. So those are some of the things that will work against some free cash flow. But to Todd's point, fully -- better number next year. And I think as the quarters move forward, we'll get a little sharper on that. And then the last thing that I'll point out is from a tax standpoint, we said, look, going into this year, our cash tax rate will be in the low 30s. We've gotten that point. That's just one more data point you can use in your cash flow modeling. I think that kind of hits the highlights for free cash flow at this point in time.

Okay. I will follow-up offline. Great to see execution and strong cash flow. Thanks.

Thanks, Andrew.

Your next question comes from the line of John Walsh from Credit Suisse. Please go ahead.

Yes. Good morning.

Good morning.

Good morning, John.

So -- well, first, good quarter. And then I guess in terms of my questions, just going back to the product line simplification initiative, you know, should we think this is kind of just running, end of life in some of these products? Is there an opportunity to maybe prune one-off and sell it? And then I guess, thinking about free cash flow, these are kind of going end-of-life. Is there kind of like an inventory benefit, right, that would be embedded in the guide?

Not specifically. The process that we've deployed as part of RBS really takes a look at not so much product lines in totality, but a combination of customers and SKUs. And so I wouldn't expect a divestiture of any discrete product line resulting out of what we're talking about. It's really doing a better job of managing SKUs through a customer lens. And working on things like material substitution,-- converting things from one -- maybe a direct channel to a wholesale channel. Those are the types of things we're talking about. And so you're correct in so much as saying that -- if you've got a long tail of SKUs, you're going to absolutely have more inventory. So we haven't specifically guided our free cash flow with that benefit, but there is absolutely a benefit resulting from that. So it's migrating towards maybe less engineered to order or one-off to a more standardized product offering that fits the majority if not almost all the applications and just doing it in a much smarter way.

Great. That makes sense. And then I guess just as a follow-up, you called out the higher tax rate in Q1 where you said a discussion around CapEx are weighed in H1, H2, kind of anything else to call out in terms of timing as we think about the quarterly progression for the annual guidance?

I don't think there really is. I think -- one of the others that I kind of highlight, when you kind of look at our overall sales and EBITDA cadence last year to this year, kind of, an H1, H2, look for some consistency in 2020 as how to it's based in 2019 in -- within both platforms. But I think outside of that, we've kind of covered the key highlights on timing, space and what not throughout the Q&A here.

Great. Thank you. Appreciate taking the questions.

Thanks, John.

We have no further questions in the queue at this time. I will turn the call back over to Rob McCarthy for closing remarks.

Thanks to everybody who could join us on the call today. Appreciate your interest in Rexnord, and we look forward to providing our next update when we announce our fiscal 2020 first quarter results in late July. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your -- participating, and you may now disconnect. Have a great day.