Q2 2020 Earnings Call
Our relationship 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, what the FCC yesterday October 29 at this time for opening remarks, and introduction I'll turn the call over to Rob Mackay.
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Good morning, and welcome everyone before we get started I need to remind you that this call contain 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 FCC.
In addition, some comparisons will refer to non-GAAP measures our earnings release Onesie see filings contain additional information about these non-GAAP measures why we use them and why we believe there helpful to investors and contain reconciliations to the corresponding GAAP data.
Consistent with prior quarters, where we will speak to core growth adjusted EBITDA adjusted earnings per share in free cash flow as we feel these non-GAAP metrics provided better understanding of our operating results.
However, these measures are not a substitute for gap data and we urge you to review the gap information in our earnings release and in our filings with the FCC.
Today's call will provide an update on our strategic execution.
Overall performance for the second quarter of our fiscal 2020, and our outlook for fiscal year 2020, well 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.
I'm pleased to turn the call over to taught Adams, President and CEO of Rexnord. Thanks, Robin Good morning, everyone.
We're all second quarter results broadly in line with our expectations with a little less topline, mostly due to currency and offset by better margin expansion deliberate through our sustained high level of operational execution.
Overall, our core growth was flat, which is mostly in line with their outlook and does include a roughly 150 basis point impact on our sales growth from our 80 20 simplification initiatives.
Despite a stronger headwind from currency translation, we delivered year over year growth in our adjusted EBITDA to $118 million, which is a record for any second quarter for us.
Well take away from the quarter essentially more of the same with rexnord business system and our relentless focus on continuous improvement as the foundation, our strategies or delivery against the objectives, we set out three years ago.
To sustain strong earnings and free cash flow in a slowing macro environment to strengthen our balance sheet and to deliver substantial structural fixed cost reductions, while investing areas to drive better growth overtime.
We've been tested by an unprecedented wave of tariffs and our teams have responded with aggressive countermeasures and if not only neutralize the profit impact to our earnings and cash flow, but I've also enabled us to sustain a an elevated level of investment in a series of gross and growth initiatives, including direction, our digital enterprise strategy.
I'll share an update on our progress with direction and a few moments.
As quarters quick by its sometimes easy to forget the magnitude of the chance the tangible and foundational changes we've made to our business.
We've dramatically improved our end market exposure led by the important strategic additions of Cambridge incentive both substantial businesses with leadership positions in far more stable end markets that are both performing today and continue to have upside.
We've also exited large project dependent and lower return businesses that introduce significant volatility into our results.
Finally, we reduced our fixed cost structure by $40 million from just three years ago as we've executed our scope for one and two plans and just to reiterate scope for three is well underway and will deliver another $20 million of savings.
Our leverage has never been lower and our free cash flow has never been higher and we'll continue to grow based on the actions we've taken.
These accomplishments are the very real dynamic changes, we've made to our business that makes it far more resilient than it has ever been and positions. The company has little or deliver solid financial results across a far wider range of macro environments.
At the same time, we focused on restructuring and strengthening <unk> strengthening our commercial capabilities.
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More recently, we launched the 80 20 base simplification initiative to reduce some of the inherent complexity that exist in every business and that is allowing us to better focus our resources around differentiated product and service solutions directed at high potential customers in high potential end market verticals to drive growth.
We're still early in the journey, we're very confident that are early successes will only be upside to our financial performance and further distinguish rexnord is a high performing concentrated multi industry business with two great platforms that can grow above their markets, while delivering very high returns and strong free cash flow that we believe can be leveraged into a 3%.
$5 billion enterprise overtime.
Please turn to slide three.
I will review our second quarter results.
Our net sales finished at $521 million down 1% from last year, but up 1% before factoring in the higher than anticipated two point impact the stronger us dollar.
As planned our product line simplification actions reduced our sales by another 150 basis points.
We had anticipated at the second quarter was going to be our toughest comparable to last year, given that we delivered 9% topline core growth a year ago.
Our adjusted EBITDA expanded year over year to $118 million and margins expanded by 80 basis points sequentially, our incremental margins were 55% and we delivered record.
Free cash flow in our second quarter.
Year over year free cash flow or year to date free cash flow was up 27% through the first half and we're well on our way to another year of record free cash flow.
Turning quickly to our operating platforms core growth in our PMC platform was down 2% and essentially flat after adjusting for our product line simplification actions, which reduced PMC sales by 2%.
Being said frankly being flat was a little bit like tour internal expectations OE applications across most end markets in North America, and Asia were broadly in line with what we had anticipated and Europe continued to be relatively weak.
But generally in line with our views heading both ended the quarter and for the year.
We're a little disappointed by our growth in the quarter through the North American distribution channel as their demand from Pos lag the actual sell through in the quarter on the positive side of things inventory turns with our channel partners continue to be at all time highs and I'd say, we're generally confident this levels out over the back half of our fiscal year.
Pmcs adjusted EBITDA margin was 23% as we benefited from the growth in our aerospace business and the structural cost reductions that are being delivered by the second wave of our Scotia scope for initiatives that we completed last year.
Core growth in our water management platform came in at a solid 4% in the second quarter against 12% core growth last year as earned continued to benefit from steady demand growth in commercial and institutional plumbing end markets as well as success with our strategies to grow our share of the adjacent fire protection and site works markets.
Certain delivered 30 basis points of expansion and its adjusted EBITDA margin over the record established in last year's second quarter as we continue to manage the ongoing tariff structures and price cost equation, while sustaining our investments in innovation and market expansion.
Turning to our financial outlook was six months behind us and six months to go in our fiscal 20, we're narrowing our prior range of adjusted EBITDA to reflect the realities of $4 million of incrementally adverse currency translation with the balance of the refresh view, resulting in taking up the prior low end of our guidance range by $4 million and reduced.
In the top end by $4 million, taking our adjusted EBITDA range for the year to $460 million to $467 million.
It's a long way of saying that from an operating point of view the midpoint of the adjusted EBITDA range is essentially unchanged.
We're also affirming low single digit core growth for the year. This is inclusive of almost two points of impact from our simplification initiatives and finally, we expect another year of free cash flow exceeding net income.
Qualitatively as we continue to monitor automotive demand trends, both internal and external the only real change in our topline outlook is that PMC core growth over the back half of our year looks to be a touch lower than we had originally thought necessary to achieve the higher end of our prior range and our revised outlook assumes that will probably be closer.
What we've just grew in the first half the year.
The good news is that our organic initiatives are filling in most of the gap and we feel like our original outlook complying with this mid year tweak keeps us very much on track towards another record year. Despite the somewhat meeker weaker macro environment Mark will review, both the consolidated results and the performance of each platform in more detail as part of his comments a little later in the.
Paul.
Please clear please turn to slide four and I'll provide an update on the important strides we've been making with direction our digital enterprise strategy.
When we embarked on this journey in 2017, a key objective was to build upon the competitive advantages inherent in our business by improving our customers productivity.
Starting with just a conceptual framework developing unique and scalable solutions and close partnership with our customers to where we are now where we are now which is aggressively commercializing the solutions.
The initiative included building significant organizational capability as well as developing key partnerships that are enabling us to bring best in class solutions to the marketplace. I'm pleased to report that we've made major strides in just two years with a few highlights shown on this slide.
Within PMC, we've made significant investments in digital resources to transition what had been traditionally manual processes and resources and resource intensive to the web.
This translates to intuitive and more productive interactions with our customers.
The response has been overwhelmingly positive and is reflected in the broader use of our web based digital resources, including Configurators and automated quoting and ordering processes that are increasingly becoming a solution platform.
Our 80, 20 work, including our product line simplification initiatives dovetails perfectly with direction amplifying our focus on our strongest capabilities being applied where they can have the most impact.
It seems fair to say, we've come a long way in two short years, but we still have the greatest share of the value creation opportunities ahead of us.
I'd say the same about connected product strategy, which is about leveraging our strengths that application engineering and customer mindshare to create a set of differentiated growth opportunities over the long term.
Okay. The massive amount of learning as we've learned how customers explore the applications, our technology and the challenging range of applications that exists when your end markets ranged from bottle beverage bottling to lumber production the grain processing.
Over the last two years are connected gear drives a proven their value and then what's critical and demanding applications like supporting 24 seven operations in a potash mine that is more than a mile underground but.
But focusing initially on the most demanding applications, we've developed capabilities that can be more easily scale to fit the amazing range of applications and duty cycles, where our industrial components are installed.
Related to that we've made steady progress over the last two years and lowering the cost to connect and we're very much on track to achieve a key threshold as we exit our fourth quarter.
Now, let's turn to the progress we're seeing at water management.
You may recall last year Zurn launch the proprietary digital tool named in spec. This tool makes it far easier for engineers should develop the complex plumbing specifications necessary for a new building or major retrofit project.
We've continued to enhance the product based on voice or the customer input and adoption continues to grow rapidly through the first half of our fiscal 20, the cumulative value all projects specifications developed within spec is already about 75% greater than that that was for all of fiscal 2019.
We're also making rapid strides with our connected product strategy and gaining critical insights into how our customers think about their water usage and efficiency.
The bottom line is that that is that.
Two of our core strategic beliefs are being validated.
At the close collaboration on application development is deepening our relationships with strategic customers.
And with critical Specifiers and that our unparalleled ability to address the entire portable water system is going to be an important competitive advantage.
Another reason, we're particularly excited about the potential we see in the near and intermediate term is that certain customers are arriving at the conclusion that the benefits of connecting major elements of the buildings water management system can be significant enough to consider large sale retrofit initiatives.
Should provide an increasingly relevant source of incremental growth when new building construction inevitably slows.
Overall, our funnels are growing quickly we're seeing the progression from demonstration of concept to pilot installation to initial order, which increases our confidence the or gaining light of site to our investments in our connected product strategy and in direction more broadly generating meaningful incremental growth and financial returns.
Bottom line, our directions experienced to date has been incredibly positive.
There were behind our original expectations. The offset is frankly price. This knowledge that we've gained and the increased focus our learning Pat has brought to our development path.
There were ahead the voice of the customers directly influencing our development roadmaps and accelerating our progress.
Our ongoing digital transformation combined with our 80 20 simplification work and our investments in solutions oriented innovation commercial excellence and in our scope for cost reduction initiatives are together delivering increasing influence over our top and bottom lines. As a result, we're seeing steady progress towards a higher growth high return.
And higher cash generating business model with the flexibility to perform and all stages of business cycle and to deliver strong shareholder results over time with that I'll turn the call over to Mark Thanks Todd.
Turning to slide number five.
On a consolidated basis.
Quarter of fiscal 2000 financial results for most in line with our expectations.
Year over year, our total sales were down 1%, but up 1%. If you exclude currency translation as our product line simplification actions held our core sales were flat year over year comparison, our adjusted EBITDA increased by 3% to $118 million and our adjusted earnings per share increased by 11% to 51 cents.
Please turn to slide six.
Our outlook for our fiscal year 2020 continues to incorporate low single digit core growth net of a 150 to 200 basis point impact from our product line simplification initiatives.
We expect our adjusted EBITDA to be in a range of $460 billion to $467 billion, representing 5% growth at the midpoint and for our free cash flow to exceed our net income.
Our revised outlook for our fiscal 2000, adjusted EBITDA incorporates two elements.
A $4 million increase to our estimate for the adverse impact of currency translation and a narrowing of our operating forecast range around an unchanged midpoint.
On slide seven we summarize our consolidated results for the quarter, let's turn to slide eight and discuss the first went through operating platforms process in motion control.
Total sales decreased 3% year over year in PMC as the 1% contribution to growth from M&A was more than offset by a 2% impact on the stronger dollar and a 2% decrease in core sales growth nearly all of which was due to our product line simplification actions as Tom noted earlier sequentially lower core growth number at PMC was in part a function.
The strong core growth generated in last year's second quarter, when PMC delivered its strongest quarter of core growth during our fiscal 19.
Looking at two year stack to core growth PMT is growth in this year second quarter was actually a point stronger than in the first quarter.
Putting aside the 200 basis point impact of our simplification actions.
On our core growth PMC core growth was basically flat in the quarter breaking it down by major end markets. We continue to see good growth from our aerospace operations. We believe we outperformed the broader industry and our global food and beverage end markets, where our order growth strengthened in the quarter.
Overall, OEM and then user demand in the process industry market softened modestly in the quarter and as a result, we've adopted a more cautious outlook for our OEM and then user activity in our global process industrial markets for the second half of our fiscal year.
In our North American distribution channels, we saw sell through moderated slightly sequentially.
It's also activity was close to what we had forecast, but distributor investments were slightly weaker which we believe was isolated to the quarter with one distribution partner as our overall channel inventories remain very tight.
We believe we have line of sight to attend a relationship between Selim and sell through in our North American distribution channels over the balance of our fiscal year.
Turning to profitability solid operating execution and the benefits from our scope for actions delivered a 70 basis point expansion Mpsvs EBITDA margin. Despite the core sales decrease.
We continue to expect PMC margins to increase year over year for our fiscal 2000 as a structural savings we are realizing from our pls and scope for initiatives ongoing growth on our aerospace operations and operational execution for the restaurant business system are expected to more than offset our ongoing investment spending for the fiscal year.
PMC continues to innovate in the food industry with his introduction of new dual detectable plastic belt materials that enhance our customers' ability to detect any material fragments good contaminate the product and the inventive extreme conveyance belt, where or failure.
Atrial fragrance plastic advanced belt as opposed to metal fragments are historically quite difficult to detect.
Our new material formulations, unable to detection of any particle contamination with both magnetic and extra technology, which in turn minimizes damaged product for the customer.
These new materials, therefore increased the customers options when selecting the optimal belt material for the processing applications.
Please turn to slide number nine to discuss our water management platform.
During our second quarter, our water management platform delivered a 5% increase in net sales growth with 4% growth.
For growth and roughly 1% contribution from stainless streams dotcom, which we acquired in our first quarter.
Our product line simplification initiatives had a relatively minor impact on turns core growth in the quarter acid foreign currency translation.
With weather returning to more normal patterns, we experienced the sequential uptick in specs to your core growth that was expected and sustained 4% core growth in the quarter. Despite the more difficult year over year bases of comparison.
Our underlying north American nonresidential construction markets remained stable and.
And we continued to be confident concerns ability to deliver another year of solid growth based on additional demand growth, our innovation pipeline and favorable price realization.
As illustrated by our unchanged end market outlook that is summarized on this slide demand conditions in our core nonresidential construction end markets remain favorable.
Year over year growth and overall us nonresidential building construction spending has been pressured by slowing activity in construction verticals were plumbing content. It's typically a relatively smaller portion of total construction spending.
Looking at overall commercial sector growth steep declines in retail sector, where the plumbing content per square foot is typically relatively lower our detracting from the solid growth seen in office verticals, where the plumbing content is relatively larger.
Our outlook continues to incorporate a more cautious posture towards the commercial sector outlook in our second half the other hand overall growth in institutional verticals like public education, and healthcare has remained relatively more stable.
Institutional sector spending where specifications grid plumbing content is relatively greater and a relative share a stronger is expected to continue to grow at a higher rate.
Zorn continues to introduce game changing innovations with our second quarter launch of a new family of sensor faucets been incorporate proprietary gear Drummond technology that provides superior reliability and service life, when compared with traditional and prevalent solenoid actuation.
These products can be easily retrofit and extend our ability to be being increased water efficiency and specific economic benefits to building owners and operators.
Turning to profitability water management, adjusted EBITDA increased by 6% year over year in the second quarter with core incremental margin above 30% year over year.
As a result, the weren't zorn delivered a 30 basis points of year over year margin expansion as we continued to leverage our core growth while funding our market expansion and cost reduction initiatives.
Moving on to slide 10, and starting with the chart on the far left our free cash flow has increased year over year on year to date basis and in our second quarter, we remain confident and our expectations from free cash flow growth in fiscal 2000.
Moving to the chart in the center.
That our financial leverage as measured by our net debt leverage ratio is now at low end of our long term targeted range two to three times.
Before we open the call up for questions I'll touch on restructuring expenses and our effective tax rate.
First and in terms of our cost reduction initiatives, including the nearly the early innings of our school for three initiatives. We continue to expect total restructuring expenses of $14 million to $16 million in our fiscal 2000. These costs are primarily made up of severance costs and are excluded from our adjusted operating results.
Next our effective tax rate will fluctuate by quarter, given varying levels of pre tax income as well as the timing of other planning initiatives.
We anticipate our fiscal 2000, adjusted net income on corporate and effective tax rate of approximately 26% and our third quarter, we anticipate the rate to be approximately 25%.
Turning to the slides in the appendix first we've included certain other assumptions incorporated into our guidance for fiscal 2000 on a separate slide.
I remind you that our guidance excludes the impact of potential acquisitions, pencil accounting gains or losses, and future nonrecurring items, such as restructuring costs.
As has been our practice the appendix of today's presentation. Also includes a reference table on slide 14 to help you reconcile the incremental quarterly share count to use from modeling our adjusted diluted earnings per share under the if converted method, but as required under accounting for our outstanding mandatory convertible preferred.
As illustrated on slide 15.
Converted method was two cents dilutive to adjusted EPS in the second quarter, and therefore was applied.
I'd also like to visit my comments from last quarter to make sure everyone is clear and how to determine the correct share count to use one estimating our full year fiscal 2020 earnings per share.
Given that the preferred will convert into common shares in November 15th our average full year share count will include the converted shares only after that date.
The first six months of the current fiscal year average fully diluted number of shares and equivalents actually outstanding has been approximately 108 million shares.
Our current estimate for average diluted shares outstanding for the full fiscal 2020, including the new shares issued upon conversion of the preferred as approximately 115 million shares with that we'll open the call up for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound or hash key if you are using the speaker phone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press star.
Then one on your Touchtone phone.
And our first question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, good morning, guys.
Hi, gentlemen, Jeff.
So.
Just on PMC I mean, it seems like macro certainly getting more challenging global process industries, but in certainly you've got the product line simplification, but do you think that business can grow at least nominally in the second half of the year.
I think adjusted for the Pls I think the answer is absolutely yes.
I mean, if you look at where we are through the first half.
Sort of flattish and that is inclusive of essentially two points of.
Lets simplification I think.
The way we talked about it was we think the second half looks a little bit like the first half.
So I think there is there's a chance that sits even net of that is positive, but I think we're thinking about it is flattish inclusive of the two points.
But we'll see we'll see what transpires really over the second half.
But yeah I think in general its hanging in there pretty nicely a lot of it asked to do with some of these growth initiatives into more stable end markets the verticals around.
In beverage in consumer we're having really good success.
Penetrating those.
So were I.
I think we're encouraged I think we wish it was a little to higher.
In total, but the most part tracking pretty much.
Okay, and then just over to water I mean, it seems like the outlook and visibility is pretty good but we've seen some macro indicators like that.
Good momentum start to slow a little bit.
Some other companies have talked about some some signs of project delays just how are you thinking about those macro indicators are you seeing any signs that people are just getting more cautious and pushing things, though right.
Well I think what's reflected in the market outlook.
We have and frankly, probably the last year are all those same things right things are continually moving around and I think that.
I don't think that we see anything on a pronounced basis.
Or unique that would tell us that we're seeing more project deferrals that we were six months ago.
I think what you're seeing in our in our growth rates is.
One the institutional side of things is still quite strong and if you. If you. If you can get you can get lost a little bit.
Watching AB.
And starts flipped around year to year I think what we're seeing is sort of some steady reasonable growth big backlogs and on the on the positive side, we're seeing.
Some share some share wins based on both the connected products the breadth of portfolio. The in spec and then we've got two nice adjacent season fire protection insight works that are helping us sort of grow above above market. So.
Nothing unique.
Or significant that that we would call out on.
On deferrals or other things Jeff just.
I think pretty good execution, and our strategy sort of sort of work a little bit.
Okay. Thanks.
Yes.
Next question comes from the line of Joe O'dea from vertical research. Your line is open.
Hi, good morning.
Ladies and gentlemen.
Related to the PMC question, I think a continuation of growth in line with the first half the comps do get slightly easier.
And so just whether or not theres any sequential slowing second after first half that you're contemplating in there.
How you're thinking about destock, playing out for the remainder of the year.
Yes, I think what's reflected in our.
Our outlook.
It clearly highlights the fact that we think it's a little slower.
In the second half.
That being said I think some of the organic things are going to are going to help that as far as de stocking.
We wouldn't call how did this significant destocking in any given quarter. It does it does impact us a little bit in the first half because distributors were adding some inventory in the first half last year and they didnt add as much but sell through has been relatively stable. The whole time as we sit here today I think we think that over the second half that place to a tie.
So we don't see any significant increase or decrease in channel inventories and that's what's the foundation of our second half outlook. So most of most of the jostling around I would fall at more than Destocking is is behind us and we've got a pretty stable outlook with.
With the second half and I think the sell through rates and the alignment of inventories to that.
Sort of make a lot of sense to us at this point.
And then had some of your comments on direction, you mentioned lowering the cost to connect and being on track to hit a key threshold as you exit the year any additional commentary that you can add with respect to that and sort of what that threshold is what kind of revenue opportunity that opens up.
Yes, it's a very high end when we started off two years ago. The the cost to connect with the edge computing device and everything was over $5000. It's come down to $2000 and we think were sub sub thousand dollars by the time, we get to March and so when you think about what that does.
In terms of not just the new.
The new opportunities the retrofit opportunity expands considerably and so the cost side of the equation is we've made progress.
The price side is still holding so I think were.
We're sort of inline with our development cycle.
We had laid out which is good it into the field.
Got it working get people interested in buying it and then continually.
Affect the cost to connect to a point, where you know for us the margins on new and retrofit opportunities specifically as it relates to connected products should be substantially above our fleet average.
And then just lastly, the 4 million on the currency any additional details on what's on that.
No I mean, it's just really a function of what we laid out our initial guidance for the year, we had a set of currency assumptions.
We're sort of.
Based on the rates at the time, we built a little bit of hedge into that obviously.
In the 4 million is just the incremental change in.
The translation effect of the stronger us dollar against foreign currencies, primarily the euro.
I mean, it's sort of the sort of the big thing. So it's it's just the math of translating euros back to us to.
And a stronger us dollar exchange rate.
Joe This is mark just add on that if you look back we assume there probably about a 50 basis point impact of the topline.
In our year it seemed like a 150 basis points. So you dropped that through to the profit you can quickly to figure out.
The math on that.
Perfect. Thanks very much.
Thanks, Joe.
Our next question comes from the line of Brian Blair from Oppenheimer. Your line is open.
Good morning, guys solid quarter.
Thanks, Brian Brian .
I was hoping you could.
Offer a little more color on the free cash outlook, you mentioned over 100% free cash conversion maintain that.
A record absolute level.
I believe entering fiscal 20 cents.
Year on year step up in EBITDA was a reasonable way of framing.
The dollar increase for free cash this year is that still exists or is there any moving parts in the back half that we should keep in mind.
Yes, Brian This is mark I think that I think thats still a reasonable original base case, there isn't really anything unusual unique in the back half your back half as always strong in our first half.
We're running ahead year to date as Todd mentioned, you look if you'd run at that same same pace you can kind of ballpark on a number would look like but I think again using that proxy of the EBIT that change and look at ventilation, where cash flow was last year going to where it could be this year is still a good baseline assumption.
Okay. That's helpful. Thank you and with your balance sheet in good shape.
As you said low end of the target range on a normalized basis is generating cash.
Plenty of flexibility looking forward is there any update you can offer.
M&A pipeline and also if your stock valuation remains.
Attractive given year.
Your level of cash flow any chance you get.
Aggressive in buying back your own shares.
Yes, Brian I mean with respect to our funnel again I am optimistic that we're going to get.
Something done here in the second half of our year.
I think we'd like to sort of air on the side of things that are probably a little bit larger a little bit water related and.
But we'll have to wait and see how that all plays out over the course of the next six months with respect to our cash flow and balance sheet I think no.
Absent M&A I don't think Theres any question that you're going to see us began to probably move towards that buyback.
If you look at our return on invested capital at 17%.
We think it's pretty good investment and so as we've navigated.
The balance sheet to where we are today as we looked at our the balance of our year and our outlook.
Particularly around our outlook beyond this year for free cash, but we think is very strong and so we've got a real opportunity to deploy some cash.
Both into M&A and I would tell you it's a very good chance you'll see us.
I think about buybacks as we as we move forward over the next six months that into next year.
Okay. Appreciate the color. Thanks again.
Our next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hey, good morning, this is trish on for Julien.
So just looking at the updated guidance low single digit core I know you mentioned the weakness that distribution and process industries that can you talk about.
The other end market trends, you're seeing that kind of give you confidence and maintaining that low single digit color.
Sure this and marketing.
It's a couple has been touched on in detail aerospace for US obviously has been a solid end market.
Order growth has been solid backlog on a great position, we had really good visibility to that Backcast. We think the the growth in aerospace remains a solid mid single digit for us in the back half as we saw in the first half life has a lot of thats in the backlog on a consumer side.
And our food and beverage markets as we have in the call in our second quarter. We saw some uptick in our order rates a lot of things that we've been doing from an organic growth initiative.
Both domestically and with our European key Oems that are serving global food and beverage customers.
Certainly gains more traction. So those are two end markets that have been positive for us than we have good line of sight to watsonville, staying strong and then the back half as well to offset some of the mild softness we've seen in and process and as Todd also present I'd.
We think that balance itself out in the back half, where we're seeing sell through in cell in.
Sync up so I think overall that say.
Yes, I mean, it's just the one thing I would.
So at a point you to is if you look at the revenue pie for rexnord.
345 years ago relative to what it looks like today, specifically for PMC.
We have migrated from.
Heavy process exposure.
The largest at that point in time being mining to that being a fraction of what it was and frankly the markets that mark talked about like aerospace food and beverage and unit handling.
Being far more than 50% of the business, which I think is is what gives us both.
The confidence going forward and what demonstrates sort of what we've we've just we just went through the follow on to that as we've also got Sir.
Zurn.
He is going to grow nicely over the course of the second half. So the combination of I think some strategic things we did to shift our end market mix along with.
Just.
Incredibly strong position, we have at CERN in a good part of the market with foot with share gain opportunities is sort of how we end up with the low single digit core growth forecast for the year.
Okay, Great and then just kind of a quick follow up on that.
In terms of the revenue mix and PMC I talked about it has changed over time are you kind of where you want to be with that or is there more to do what type of exposure to you're looking at CRO and kind of what others do you guys have to wait.
Well again, I think we've been pretty consistent in saying that we want to we want to continue to penetrate those those end markets that have more.
More linkage to consumer demand and so things like food and beverage continue to be at the very top of our list.
And I would tell you that things that we're doing with direction.
In continuing monnet continually monitoring operating environments is another wedged that we think is an important wedge to think about in PMC, both organically and inorganically. So those are the two primary areas that we think we're going to we're going to take specific action to outgrow.
That being said our process end markets and are really good spot when you take take.
Taken as a whole quite a good portion of it is MRO, we've invested smartly to drive the growth of the installed base in areas, where we want to grow and so I don't know that were disappointed we have process industry exposure, it's just substantially less than what it was.
Based on the actions, we took and we've been investing aggressively in areas, where you want to be so I would I would take us a little bit more of the same but I wouldnt say that we're going to be exiting anything from here.
Discontinued continued strategic effort in there as you want to be.
Okay, great. Thanks.
And again, if you'd like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Mig Dobre from Baird. Your line is open.
Thanks, Good morning, guys.
Morning morning Meg.
Just.
I Wonder if you can comment a little bit on price cost.
Im curious to see here as to how you see pricing in both years segment I know, there's a lot of products right, but maybe sort of a general view and.
Costs, I'm presuming are coming down and starting to help a little bit going forward.
How should we think about that.
Yes, maybe this is marketing from a price standpoint, it's really unchanged when we've talked about going into the year, we talked about about a point of prices on PMC.
That's we've been consistently delivering on that.
On the water side, we've talked about two and after three points of price and I think that's that's been playing through as well. So the price the price equations been really consists of what we expected going into the year.
And the really on having a lot of pushback on the price side.
On the input side.
I think we've seen.
Obviously, we all understand the term situation Todd touched on earlier for US we unable to make sure that everything we do from a pricing standpoint material substitutions moving supply chain getting certain product candidate is excluded as a result in us not adversely impacting our overall margins in our business. That's we've continued to deliver on that.
Your point on the input costs, a couple of as we have seen freight costs improving.
I see some benefit from that in the back half the year.
And some of our some of our supply base out of China.
Tariffs aside I wasn't opportunities for improvement that in the back half of your as well.
Okay.
And then sort of sticking with the margin theme looking at PNC.
You are expecting.
Atish organic revenue call it in a back half.
That kind of make modeling incremental margins a little bit difficult. If you can appreciate so.
What's the best way of thinking about margin EBITDA margins on a year over year basis.
Colin flattish organic environment.
Specifically as it relates to PMC Meg.
Yes, specifically MPS.
Yeah, I think the right way to do it is.
Assume similar margins to last year for the time being.
The difference or how you get there you know is we are seeing incremental benefit from the scope or.
Two actions of last year.
But we are investing a little bit and we've got some scope for threeq costs in the back half a year that are.
That are sort of getting it to neutral.
We hope to maybe do a little bit better than that but if if I were sitting in front of a spreadsheet trying to plug in a number.
Use the same numbers as last year and you'll get close.
That is helpful. I am pretty much everybody on this call sitting in front of a spreadsheet. So I appreciate that.
Then on.
Im presuming that.
Sort of real lift on margins would have to come from water management and again.
Growth there so thats good good pricing that helps.
Can you maybe help us understand incrementals and maybe even beyond the next six bonds.
Do you think about kind of than normal incremental margin front.
And again, just specifically related dessert.
Specifically related to water dessert.
Yes, okay.
Yes, and in the back half a year, you will see incremental margin and water. That's very similar to what we experienced in the first half so you'll see incremental year over year margin expansion in Q3 in Q4.
Again, if you look at each one reach these two should be very similar going forward, we've always talked about our water platform in that.
25% to 30% incremental margin range I.
Thank you as you might afforded the.
A high Twentys, 30% type incremental margin is a reasonable assumption to use for the water platform going forward. That's inclusive obviously of investments, we're making the business.
And obviously, assuming there's some modest growth in the platform.
Understood.
Last question.
Going back on on the pricing on on water.
Hi.
I guess, how much of this pricing action you think is driven by.
The changes that we've seen on tariffs input costs on and so forth.
Versus other items that you might be doing.
Whether its direction, where there are other things that you're doing in a channel.
I guess, what I'm really trying to get at here is are we seeing sort of an unusual pricing environment.
In fiscal 2000.
Or would this business just have maybe better pricing dynamics longer term.
Given technology and everything else that you're doing.
Sure make good I think that.
Without question the backdrop that we've been through in the last 18 months or so has provided a little bit of a window to frankly get more price than on a normalized basis.
Magnitude of it I would tell you is probably not that much when you look at it long term.
Because we are always raising price.
In that end market and we typically keep it.
In the last.
In the last 18 months, we've had to use some of it so just fund the cost increases.
But.
The structural difference over time, we think allows us to.
To get more price I mean, if you look at the brands. The specification. The portfolio. We have then you add in real competitive advantage of around Directionally that that lower the overall costs to not only build the building, but the operated long term, we think gives us a real strategic advantage.
Looking beyond this sort of little bit noisy window with terrorists.
So again, I don't think you're going to see us.
You have to take things and and reduced price going forward. If in fact, the tariffs to roll off at some point because the farther and farther you get away from when they were implemented there they are basically.
Just accelerating some of the annual price increases that you wouldn't ordinarily got so.
I think that the pricing environment heading into next year.
Absent.
Any more movement on tariffs looks probably.
You know probably looks a little more muted.
Relative to where we've been in the last 18 months, but it's still we think.
Competitive advantage that we have and we think structurally we do get more price just because of where this business is and how we compete in.
Than our competitors.
All right appreciate the color. Thank you.
Yes.
We have no further questions at this time ill turn the call back to Rob Mccarthy for closing remarks.
Thanks, everybody for joining us on the call today.
And we look forward to.
Providing our next update when we announce our 2023rd quarter results in late January have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.