Good morning and welcome to the Rexnord Second Quarter 2021 Earnings Results Conference Call with Mr. Todd Adams, Chairman and Chief Executive Officer; Mr. Mark Peterson, Senior Vice President and Chief Financial Officer; and Mr. Dave Pauli, Vice President and Corporate Controller for Rexnord. This call is being recorded and will be available on the replay for a period of 2 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, July 20. At this time, for opening remarks and introduction, I will turn the call over to Mr. Dave Pauli.

Good morning, everyone. Before we get started, I would like to remind everyone 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 are helpful to investors and contain reconciliations to the corresponding GAAP data. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP data and we encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I will turn the call over to Todd Adams, Chairman and CEO of Rexnord.

Thanks, Dave and good morning everyone. It’s a great morning to be in Milwaukee after the Bucks won the NBA title last night. So, 50 years since the last title, so fantastic for the City of Milwaukee. As it relates to Rexnord, we had another terrific quarter with strong momentum in both platforms, which creates a great backdrop for the pending RMT transaction with Regal. Our margins and cash flow were very strong, both sequentially and against the cost constrained prior year second quarter. And our overall leverage dropped to only 1.7x. I want to recognize our teams really in both PMC and Water for the way we have navigated the first half of the year in the midst of a pretty complex transaction. Our relentless focus on leveraging RBS and now GBS to drive results and customer satisfaction, truly without a blip, speaks to the culture, talent and commitment we have collectively built here at Rexnord. In Water, we grew the top line 39%, 29% organically, with margins right at 27%, as core margins were exceptional, while we continue to integrate Hadrian and make significant organic growth investments in our business. One additional point of perspective on the Zurn performance in the quarter, the comp from last year’s second quarter wasn’t all that easy. We were down only 5% in a pandemic-impacted quarter, one of only two quarters, we haven’t posted positive core growth in the last 11 plus years. So when compared to the 2019 second quarter, second quarter sales this year are up 24% organically and core margins have expanded almost 200 basis points. In PMC, we are seeing continued recovery across really all of our end markets as core growth of 16% was split between 21% in our PT businesses and down only 15% in aerospace.…

Great. Thanks, Todd. Let’s start on Slide #7, please. On a year-over-year basis, our second quarter consolidated sales increased 27% to $568 million. The growth was driven by a 300 basis point benefit from foreign currency translation, a 400 basis point positive contribution from our Hadrian acquisition in our Water Management platform, partially offset by a small divestiture in our PMC platform that reduced our total sales by approximately 100 basis points, and finally, our core growth in the quarter of 21%. With respect to profitability, our adjusted EBITDA increased 29% from the prior year second quarter to $133 million and our adjusted EBITDA margin expanded 50 basis points year-over-year to 23.5%. The incremental sales volume and the realization of our SCOFR 3 and other productivity actions drove the year-over-year improvement in our margin this quarter, despite the headwinds we faced from the temporary cost reduction actions we took last year starting in the June quarter due to the COVID-19 pandemic. Please turn to Slide 8 and we will review our platform results. At the platform level, Water Management sales were up 39% from the prior year June quarter as the Hadrian acquisition contributed 9 points of growth. Positive foreign currency translation contributed 1 point of growth and the core business increased 29% from the June 2020 quarter that was down only 5%. Continuing on the strength we experienced in the first quarter, demand increased across our entire broad product portfolio during the second quarter as orders increased over 35%, resulting in an improved backlog heading into the third quarter. As we look to the back half of 2021, we see solid growth in the platform and feel we can deliver low double-digit core growth for the year. With respect to profitability, our Water Management platform delivered a 20% increase…

Thank you. [Operator Instructions] We have our first question from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is now open.

Hi, good morning guys.

Hi Jeff.

Good morning Jeff.

So, really just wanted to get a better sense of what’s really driving the 2Q water business. I think that was the biggest surprise in my model. Is it more the hygienics momentum or is it more broad-based? And maybe within that, just speak to what you are seeing on the broader non-res side?

Yes. Frankly, Jeff, it’s really the entire business. I think hygienics continues to be a huge opportunity for us. But in flow systems, we are seeing all the things that were supposed to start perhaps 12 months to 18 months ago begin to start now. We continue to have great traction in water safety and control with our backflow and a host of other products. So it was really, frankly, much more broad-based than just the hygienic and environmental part of the business. And look, I think as non-res – look, at the end market, we have said it before, it’s a hyper local market, and there is always activity. And you see California, beginning with Texas is doing great things. The Northeast is beginning to come back to life. It’s – we think the rest of the year looks good, and all signs indicate that 2022 is really good. I mean the momentum index is strong. So, it’s sort of what we had expected. I think there was a big fear that there was going to be a dearth of activity in 2021 and hygienics was going to carry us through. The reality is, I think, the end markets regionally are going to be fine. And obviously, we have got this long tailwind on hygienic and environmental and the conversion away from manual to sensor. And so that’s, I think, the way to think about it the rest of this year and into next year, for sure.

Okay, great. And then just – I know a lot of moving pieces in the margins had a tough comp there. Maybe just talk about what the underlying incrementals are in the business if you kind of cut out the noise of FX, Hadrian, some of the temp costs coming back. And then maybe just speak to the Hadrian integration and how it’s progressing in terms of some of the margin improvement initiatives? Thanks.

Yes, Jeff, this is Mark. I think, as Todd mentioned, if you look at the underlying core business, the Zurn core business in the quarter was approximately 20% EBITDA margin. So the core business, despite some of the headwinds from the cost-out last year, performing very well, continue to be managing the price/cost equation effectively in the business. So yes, from a quarter standpoint everything that we expected, and I think the team is going to do a great job. While at the same time, as we mentioned, we step up our investment in the business on multiple fronts to drive some near-term growth opportunities as well the long-term growth strategy. So, core margins are in a really good spot. I will turn it back to Todd and he will cover Hadrian.

Yes. In terms of Hadrian, look we are really excited about the opportunity long-term with Hadrian. Obviously, it’s been a little bit difficult to do all the integration stuff and just given the inability to travel up till now. So, I suspect that we are going to – we are going to really accelerate the margins in the second half of the year and into 2022 with Hadrian and march them up the ladder to something that starts with a two on it in a relatively short period of time. So, we are thrilled to have it in the portfolio. Now we are starting to be able to use it in the ways that we envision, which is offering SKU solutions in and around commercial restroom that would include that. The other thing to remember about Hadrian is a lot of this is in schools and hospitals and things like that, that really have done no retrofit upgrades for the past 12 months. So the backlog, the order rate, the inquiry rate is substantially higher than what we would have envisioned just probably six months ago. So, I think we are on a good path to get Hadrian right where we want it, and we are thrilled to have it in the portfolio.

Okay. Great. Thanks guys.

Thank you. The next question is from Bryan Blair from Oppenheimer. Your line is now open.

Good morning guys, very strong quarter. I was hoping we could dig in a little more on what you are seeing in the education vertical specifically, obviously, core to your business and how the space is influencing Zurn’s current momentum and the revised 2021 growth outlook.

Well, obviously, when you look at some of the extra funding, that’s going to be a positive tailwind that I don’t think many people had anticipated over the course of last year. And again, I think the specific verticals follow the specific economic activity regionally in these local markets. And so when you think about places like Texas, Arizona, Florida, where you are seeing significant population growth, that drives all the other things around it, whether that’s additional healthcare facilities or K-12 schools, high school, etcetera. And now with this incremental extra funding that states are getting, I think there is going to be a real opportunity. We are tracking the levels of funding where it’s going, quotation opportunities. And then you just got to work through how that money is going to get spent and allocated through, frankly, things like school boards, etcetera. So, it’s going to be a positive tailwind for us that we probably didn’t fully anticipate probably six months ago.

Helpful detail. That makes sense. You touched on Hadrian integration, the pandemic conditions that haven’t been ideal for that, but good momentum overall. Revenue this quarter looks like it shook out in the high teens, obviously above $60 million annualized. What kind of growth are you expecting for the year from Hadrian?

Bryan, I think it’s, basically – yes, if you look at the numbers, it’s a mid to high-teens number. So, I think that feels relatively consistent if you look at the next few quarters and how it will contribute to our overall growth. The business itself is growing very well on a core basis year-over-year with more of that mission. It’s like a little more in the back half on a core basis, given the opening up we are seeing in the momentum starting some of these retrofit projects that are coming to fruition over time, so more to come on that. And then on the margin side, as I mentioned earlier, making really good progress, a meaningful improvement in the margin in the back half versus the first half, in 2022, [indiscernible] EBITDA margin, that’s down to 2.1% in the next fiscal year, the level that we are doing around the synergy case in the retro business.

Got it. And then one higher level one, perhaps I was reading too much into this, but the preliminary 2022 market outlook being decent for your press release. Can you offer some color on how your team is thinking about the puts and takes there? I would think the outlook, at least assuming we don’t have a drastic shift in the backdrop, would be quite a bit more bullish given the indicators at hand and then certainly the momentum of your own business.

Well, I guess the way to read it, Bryan, is with six months to go or so in ‘21, I think decent is an appropriate way to characterize it. As we get closer to that and things hang in there, I would – we will upgrade our outlook accordingly. So I think a year ago, we had a view that the world wasn’t going to end in ‘21, and everyone did. And so I think the way to read into that is decent, probably only gets upgraded as we go through the year. But generally speaking, I think we feel pretty good about it.

Thanks guys.

Thank you. The next one from Mig Dobre from Baird, your line is now open.

Well, as a Bucks fan myself, I was hoping around midnight last night that maybe you guys would delay the call, but I guess that wasn’t to be. So, I had a couple of strong coffees, and here I am.

That makes a few of us, mate, yes.

I guess what I am wondering here as we are thinking about ZWS as a standalone entity, how are you planning on talking about the business? Are you going to provide some kind of a new segment structure either by end market or – and even within the makeup of the business, right? I mean you are talking about institutional and then commercial and industrial. But I am wondering, based on questions that have been asked already, are we going to be able to put maybe a finer point as to what the sub-verticals, if you would, education versus healthcare versus true commercial is going to be as ZWS gets closer and closer to be a standalone entity? How do you think about that?

Well, I think the one thing I will say is, last quarter, we outlined or previewed essentially a little bit on ZWS just in terms of what it is we do, how we do it, some of the product categories. And we talked about three sectors, water safety and control that would essentially cut across all different verticals. We talked about hygienic and environmental, which is, I think, that’s the sensor category and other things. And then finally, flow systems, which is primarily our drainage business, which again cuts across all different verticals. Each has a little bit of a different dynamic with respect to retrofit, but I think that’s the sector view is how we are sort of planning on talking through the business on a go-forward basis. And as we get closer to the eventual standalone pure-play water business, we will be out, I think, doing a little bit of a mini roadshow and getting people exposure to how we are going to talk about the business, some of the dynamics and how we expect it to perform going forward.

Okay. For several quarters now, you have been talking about new product introductions, obviously, focused on water management. And I am sort of wondering how you are thinking about, first, the product vitality now versus, say, 5 years ago in terms of all the work that’s been done here and how you are thinking about the growth algorithm in terms of, at this point, what’s the fair expectations for new product contribution to organic growth. But also, what happens with margin, right, from all these new products that you are introducing that you are basically saying, “Hey, these are unique. They are differentiated, and they create a lot of value for our customers.” Can you talk about that?

Well, I would start by saying there is, without question, far more innovation and new product development in the last 5 years than probably the 20 prior to that. Secondly, every product that we have been introducing is at a financial profile margin better than probably the fleet average. And number three, you can’t – I think it’s really important to understand that to develop a product to drive the best or highest level of specification that you can. And so if I – you drive specification with an engineer, architect or end user, you don’t want to introduce a new product that doesn’t reap the rewards and having done that spade work on the specification. So I don’t think vitality is necessarily the right way to think about this. It’s the compounding moat of either basis or design or high-level specification that we’re really driving within this, because if you just want to look at pure product vitality numbers, you’re going to walk down this road of doing all the work to get specified. And when the time comes for it to get bought, if it goes into a construction site and you get a different product, right? So you want to make sure that you’re pacing the new product innovation, but equally important is the specification work upfront. So I think there is a level of understanding on this that has to be well understood from your side and obviously investors. But look, I mean, the business grew 29%, 24% on a stack basis. Core margins, as Mark said, almost 28%. I think we’re doing something right. And so as you think about the go-forward, again, pounding new products, creating a greater competitive moat and driving specification of those products is the focus organically. And then obviously, we can – we expect to be able to do some M&A in and around these three sectors that will drive even more overall growth beyond just core growth.

Yes. No, that’s fair. If I can ask a question...

Thanks, Mig. Well, thank you.

You’re welcome. If I can ask a question on PMC the recovery here, like you said, a little bit better than what you previously anticipated. As you’re looking at this business and you’re comparing it to prior cycles, prior downturns, leaving our aerospace aside, right, that’s kind of – we all understand those dynamics there. But I’m curious, what are you seeing that’s maybe different in this up cycle? And what do you think are some implications for the business down the line, right? Post transaction in the way maybe RBC is going to be able to drive either synergies or incremental growth based on that?

Well, I think, from an end market perspective, I would say it’s much less individual end market-driven. Meaning, looking back, mining was great or looking back, oil and gas was great. This is far more broad-based. I think our level of diversification in and around more stable end markets like food and beverage is clearly playing through. And I think, as we look forward and partner with Regal on this, I think they see the opportunity to continue to own and win these more process-based industries but continue to diversify the business into these more broadly stable end markets with a significant amount of content, win the first fit and then win the aftermarket for a long period of time. So I think it’s coming together at the perfect time. I think our teams are working together really, really well. And I think we’re excited to just get down to the final strokes and get the merger done. But I think, generally speaking, I think, just far more broad-based and far more focused on more stable end markets and the diversification of what we’ve done over the last, whatever, 5 or 6 years.

Great. Thanks for taking the questions.

You bet.

Thank you. The next question is from the line of Andrew Obin from Bank of America. Please go ahead.

Hi, good morning. This is Emily Shu on for Andrew Obin.

Good morning.

Good morning. I just wanted to dig deeper on the school vertical for Zurn. Is there any way to break down how much of the current backlog is existing retrofit work that was pushed out of last year? And then what is new work that’s being spent on by the stimulus money? Thanks.

Yes. Emily, if that exists, we’d love to have it, too. I think we just think that we’re looking at each of these opportunities in a very hyper local regional basis, but I don’t think we have the ability to break that out for you.

Okay. No problem. And then my follow-up question is on supply chain. What types of challenges are you and your suppliers experiencing, particularly in Asia? How do you think your supply chain strategy has allowed you to navigate through all the shortages that are going on right now? Thank you.

Well, we obviously leverage a – heavily leveraged a design-procure-assemble-test model. We’ve done, I think, an outstanding job over the last 10 years to establish that and establish multiple sources of supply, diversify out of China, as appropriate, and then run a SIOP process that is very strong to be able to predict demand and then ensure that we get the things that we want on time. The challenges are numerous from individual component suppliers supplying our suppliers, whether it’s shipping costs, shipping lanes. But that’s the business we’ve chosen to be in. And I think our SIOP process in general, it has to be super robust because we do rely on third-party suppliers for helping us bring products to market. And so that’s been, I think, the thing that’s helped us the most. Our teams have done a terrific job of staying in front of what we think expected demand may be in order to ensure that lead times and availability are best in class, and that’s also helping us win business. So it’s really a multifaceted view of what we’ve done and continue to do. I mean, like anybody else, we have challenges day to day, but the ability to navigate through those to keep lead times and service levels super high is allowing us to win more often than not.

Great. Thank you. I will pass it on.

Thank you. The next one is from Joe Ritchie from Goldman Sachs.

Thanks. Good morning guys and congrats on the Bucks win last night. It looks like Mig wasn’t the only one partying.

We feel like that. Let’s put it that way.

Yes, yes. What they look like [indiscernible] last night. But couple of quick ones for me. I guess, maybe just kind of following on the line of questioning that you just got on the supply chain and really disinflation in general. We heard from Dover yesterday that in one of their segments they built backlog this quarter because capably they just didn’t have enough labor really to ship out some of their products. And they highlighted kind of like inflation being a little bit more of a headwind in the second half of the year, particularly on the labor and price side. So I’m just curious to hear any comments that maybe you guys make along those lines and what you’re seeing in your business.

Well, obviously, the outlook we provided with Q3 has our best view on all of that. We are not seeing the labor challenge that you just spoke of. And I guess it’s our view that, when you have the dynamic that we have in the world the last couple of years, starting with tariffs, and then you have a pandemic on top of it, and then you try to start the world up in a synchronous fashion, it never comes back on the same straight line as you shut it off. And obviously, there are labor shortages in certain industries and certain parts of the market that are, of course, impacting that ability to get capacity back online across a wide array of interconnected suppliers and industries. And so it’s our view that the inflation that we’re seeing now is a little bit transitory. And by the time we get to winter, we will see that abate. But everything that Mark talked about and I spoke about in terms of how we’re seeing the top line and our margins and things like that have all of that sort of with our best cut of what we’re seeing and expect in it.

And Joe, we would agree with Dover’s comment that we would expect to see some of the trend for freight cost, shipping costs become a little steeper in the back half of the year, more in the third quarter than the fourth. We agree with that. But that’s the point, we know that we see it. We’ve built it, and we’re managing around it.

Got it. Okay. That’s helpful. And then maybe just my one follow on would be just around like M&A. So clearly, nice job in working down the leverage numbers and continuing to working down, I’m sure, once the transaction is completed. I guess maybe just any color you can give us on your pipeline today, how you’re thinking about where valuations fit and how robust the pipeline is today?

Look, when we made the decision to do this, we made it with – knowing that we were going to be stand-alone and we better have a robust enough pipeline to begin to acquire and leave ourselves with the balance sheet to be able to do that. And so I think we see a number of opportunities. I don’t think we’re going to predict the time or the timing, but I think we feel really good about M&A opportunities in and around our core business and maybe some line extensions over time. And in terms of valuation, obviously, we’ve been a disciplined acquirer for a long, long time. I think we’re going to continue to do that. Our philosophy has been cultivate things that make a lot of sense and doing the value that discipline that creates a high ROIC in a relatively short period of time, and that’s not going to change. You listen to some of these calls, and people just gripe about how expensive things are. We get paid to get these things done and create value for shareholders, and so that’s what we’re going to continue to do.

That’s great to hear. Thanks guys. Nice quarter.

Thanks, Joe.

Thank you. There are no further questions at this time. Presenters, please continue.

Great. Well, thanks, everyone that could join us on the call today. I definitely appreciate your interest on Rexnord and we look forward to providing our next update when we announce our September quarter results late October. Have a great day, everyone. Thanks.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.