Q3 2020 Earnings Call
Good morning, and welcome to the next door third quarter fiscal 2020 earnings results Conference calls 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 the replay for a period of two weeks the phone numbers for the replay can be found in the earnings release, the company files and an 8-K with the FCC yesterday January 20, Eightth at this time for opening remarks, and introduction I'll turn the call over to Rob Mccarthy. Please go ahead.
Hi.
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 them, we issued yesterday afternoon as well as in our filings with the S. We see in addition, some comparisons will refer to non-GAAP measures our earnings release.
Sanofi 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, we will speak to core growth adjusted EBITDA adjusted earnings per share and free cash flow as we feel these non-GAAP metrics provide a better understanding of our operating results.
Our bid these measures are not a substitute for gap data and we urge you to review the GAAP information in our earnings release and in our filings with the FCC.
Today's call provide an update on our strategic execution or overall performance for the third quarter of our fiscal 2020, and our outlook for the remainder of the year well cover some specifics on our two platforms followed by selected highlights from our financial statements.
Afterwards, we'll open up the call for your questions and with that I'm. Please turn the call over to Todd Adams, President and CEO of Rexnord, Thanks, Rob and good morning, everyone. I Trust, everyone has had a chance to review our earnings release from last night and hopefully you also see in the release, we issued Monday regarding our enhanced capital allocation strategy, but a lot the commercial August .
Right to it our overall third quarter results were broadly in line with our expectations continuation of the trends we saw across our first half modest core growth inclusive of our product line simplification actions, coupled with solid margin expansion that reflects our high level of operational execution, our core growth was up one.
Descent and is net of a roughly 150 basis point impact on our sales growth from our 80 20 simplification initiatives. Despite what I would call. It generally stagnant growth environment, we delivered year over year growth in our adjusted EBITDA and another quarter of more than 20% growth in our free cash flow, which brings our year to date increase in free cash flow to more than 25.
Percent.
Please turn to slide three and I'll quickly review, our third quarter results.
Our net sales finished at $492 million up 1% from last year net of the impact of a stronger us dollar and our product simplification actions adjusted EBITDA increased year over year to $107 million and margin expanded 50 basis points.
Incremental drops through exceeded 50% and was higher yet on a core basis and we continue to track to another record year free cash flow.
Turning quickly to our operating platforms core growth in our PMC platform was flat and up almost 2% after adjusting for our product simplification actions.
Well, we applications across most end markets in North America, and Asia were broadly in line with we then what we anticipated and Europe continued to be relatively weak, but modestly better than our expectations our growth in the quarter through the North American distribution channel improved slightly sequentially from the September quarter, and we expect a little more improvement in demand.
From the channel in our upcoming fourth quarter.
North American channel inventories are bumping around at all time lows and inventory turns with our channel partners continue to be at all time highs. So we'd expect any fundamental improvement in MRO demand to be almost immediately reflected in our order rates.
PMC adjusted EBITDA margin was 22.7% and we continue to benefit from the broad based growth in our aerospace business and the structural cost reductions that are being delivered by the second wave of our scope for initiatives that we completed last year.
Core growth in our water management platform came in at a solid 3% in the third quarter has earned continued to benefit from steady demand in commercial and institutional plumbing end markets as well as success with our strategies to grow our share of the adjacent fire protection type works markets.
Syringe core growth was slightly below our target for the quarter as we saw an unusually quite at last two weeks in December and channel partners manage their inventories a little more aggressively into year end, we think that in impact concern sales in the quarter by about $2 million to $3 million.
Turning delivered 40 basis points of margin expansion in its adjusted EBITDA margin over the record established in last year's third quarter as we continue to manage the ongoing tariffs structures and price cost equation, while sustaining our investments in innovation and marketing agencies.
Turning to our financial outlook with nine months behind us and three months to go in our fiscal 20, we're narrowing our prior and our prior range of adjusted EBITDA to primarily reflect the estimated impact at Boeing suspension of 737 Max production.
Well, we big while we will be able to mitigate a portion of the near term impact. The reality is that the upper end of our guidance is now less likely to be achieved and we're moving our revised adjusted EBITDA range for the year to $460 million to $464 million.
We're also affirming low single digit core growth for the year. This is inclusive of more than a point and a half impact of our simplification initiatives and finally, we expect another record year of free cash flow.
Exceeds our net income.
On Monday of this week, we announced that our board has approved the enhanced capital allocation strategy that includes our first ever quarterly common dividends starting at eight cents, a share which equates to 32 cents annually and a yield of approximately 1%.
Our expectation is to grow the dividend rate, an annual basis and by a double digit rate for at least the first few years.
Our board all also authorized expanding our share repurchase authorization to $300 million and we intend to allocate between 75 and $150 million annually. The regular share repurchases. We believe that our equity offers a compelling value that does not yet reflect the full impact of the changes we've made and continue to make and our growth.
Profile, the resilience of our earnings and our improving free cash flow profile, all things that I'll come back to in a couple of minutes.
Well, we will continue to invest both internally and externally on a disciplined please visit and disciplined basis to drive growth and shareholder returns and we intend to execute our strategy, while maintaining a relatively conservative balance sheet.
Keeping our net debt to EBITDA ratio within the target range of two to three times that we established three years ago.
Please turn to slide floor side for and we'll talk more about our enhanced capital allocation strategy and why now is the right time to execute this strategy.
I'd like to start by helping everyone understand that when we buy rexnord shares in the open market, we're capturing an underlying 17% return on our investment for shareholders. This isn't readily apparent to investors that may not realize that our capital structure is distorted by our unique private equity Eric.
When one private equity investor, namely Apollo purchased Rexnord in 2006 from another PE firm have been Carlyle there was a substantial portion of the purchase price $1.7 billion to be specific that represented a change of control brief premium that was unrelated to investing and productive asked.
Sets and took the form of goodwill and intangible assets.
The incremental debt that was required to fund that premium became an element of our capitalization and depresses our conventionally calculated paralysing.
And we adjust our capital structure to eliminate that distortion to our total invested capital you can see this is a measure this that this measure actually yields 17.1% not the 10.5% that calculates based on our unusual back to back the acquisition phenomena.
Two points to make about this first I think many investors have understood. This issue and understand this level of return is obviously more consistent with our overall financial profile, including our high margins are history of disciplined investing both internally and externally and are increasingly asset light operating model second these calculations have been.
Made using our unadjusted GAAP operating results and a normalized tax rate that reflects statutory rates across our geographic footprint and which exceeds our periodic effective tax rate in other words, we believe 17.1% is in fact, a conservative estimate of our normalized underlying return on invested capital.
Please turn to slide five.
Over the last four years, we've worked hard and executing a change in the composition of our portfolio to produce higher financial returns with reduced cyclicality.
In prior calls I've detailed the shift in our portfolio toward more stable consumer facing end markets by exiting relatively project dependent businesses and investing in the expansion of our food and beverage footprint through product innovation, and our acquisition of Cambridge, leading supplier to the food processing industry.
Last quarter I provided an update on our digital on our direction digital strategy and shared our excitement about the progress with our introduction of digital customer interfaces and families of digitally enabled and I O T connected product solutions.
We're compounding the impact of these improvements with our 80 20 work and associated product line simplification that increases our focus on high potential products and customers.
On this slide were illustrating the current state of our transformation in another way by highlighting the progress we've made and repositioning our overall product portfolio to drive above market growth in both operating platforms.
The green bars represent discrete and absolutely product line revenue that we believe is positioned to deliver above market growth as we go forward and as you can see these specific product lines represent almost three quarters of our revenue today as compared to less than half of our revenue just four years ago.
Turning to slide six I'd like to quickly review the progress we've made with critical levers of fundamental value creation.
The clockwise from the top left as you are likely aware our platform margins are well above those of most of our competitors and the discipline of the rexnord business system is helping us convert our improved operating profile into a stronger and more sustainable free cash flow profile, starting with this year, we expect that cumulative cash free cash flow.
Within three years through our fiscal 2002 will be approximately 40% higher than the proceeding three years.
Contributing to our success to date and our confidence going forward is the progress we are driving through our supply chain optimization and footprint repositioning initiatives, which are on track to deliver a cumulative $60 million a permanent structural cost reduction as we exit our fiscal 2001 next year also structurally reducing the capital reinvestment required in our business.
Yes.
As we stated since the outset and once we complete our scope for initiatives, we expect to operate with annual capital expenditures below 2% of annual revenue.
We've executed the structural changes freed up the internal resources to fund our digital transformation and continue to execute our discipline and strategic approach to acquisitions, while expanding our margins, bringing our net leverage down to less than two times, our EBITDA and driving our ROIC to above 17%.
Moving to slide seven.
Here, we're simply profiling our growth over the last three years against several industrial companies that Garmin Garner premium valuations based on their growth and return profiles as you can probably guess by looking at this chart and what the conviction we have around our future cash flows. We believe the intrinsic value of rexnord is considerably higher than what it's been.
Valued at today.
Well this isn't a phenomenon that we believe makes a ton of sense, we're more than happy to invest and appropriate portion of our free cash flow to buyback rexnord rexnord shares with the certainty of earning 17% plus return on invested capital that we will that we believe we'll go to 20% plus in the coming years.
If you turn to slide eight we're simply illustrating one of the more obvious competitive advantages that we think that's relevant to shareholders and that is a difference in the operating performance and profitability of our water management platform relative to that of some of relative to that of some leading pure play water businesses that also command premium valuations.
Our grass simply compares earns adjusted EBITDA margins with the comparable margin profile of these companies was also important is the fact that when coupled with our aerospace operations over half of the profit of the company comes from these two parts of our business, where we believe we have created particularly significant competitive advantages.
Additionally, with all of the portfolio work, we've done over the last three to four years almost half of power transmissions earnings are generated consumer facing end markets.
Together the flat the five slides just taking you through are intended to support our view that our equity represents an excellent value and that our enhanced capital allocation strategy represents a balanced and sustainable approach to delivering shareholder returns.
Please turn to slide nine I'll summarize and close.
We believe our free cash flow profile supports a moderately leveraged balance sheet and that we can drive attractive shareholder returns with modest volatility if we maintain our leverage in the two to three times range. We are initiating a common dividend that we intend to grow annually, we expect to allocate between 75 and $150 million annual free cash flow to share repurchases.
Which leaves room to be more aggressive and capture and enhance return if the stock price suffers a major dislocation or if we don't invest as much as we'd like and acquisitions in a given year.
We will continue invest internally and externally to drive innovation productivity and core growth and we plan to continue our disciplined and focused approach to M&A that requires a double digit return or is that right turn on our investment in a reasonable period of time generally three years or less so while we're committing.
Turning to shareholders. So while we're committing to return a substantial portion of our free cash flow to shareholders through dividends and repurchases, we retained ample financial capability and capacity.
Execute acquisitions that can enhance our competitive advantages our core growth in free cash flow and total shareholder returns. Our objective is straightforward deliver crop top quartile shareholder returns among us industrials and continue to make progress towards earning an enterprise value that is better reflection of rex towards intrinsic value with that I'll turn the call over to Mark.
Thanks, Scott Please turn to slide number 10.
On a consolidated basis, our third quarter of fiscal 2000 financial results were broadly in line with your expectations on a year over year basis, our total and core sales growth for both up 1% none of the impact from our product line simplification actions.
Currency and acquisition contributions of growth Ross setting.
Our adjusted EBITDA increased by 4% to $107 million and our adjusted EBITDA margin expanded by 50 basis points year over year, 21.8%.
Please turn to slide 11.
Our outlook for fiscal year 2020 continues to incorporate low single digit core growth, which is net approximately 150 basis point impact more product lines.
We expect our adjusted EBITDA to be in a range of 460 $464 million, representing 4% growth at the midpoint and for our free cash flow through seat or net income.
Our revised outlook for our fiscal 2000, adjusted EBITDA incorporates expected impact of Boeing's decision to suspend assembly of its 737 Max aircraft in mid January .
On slide 12, we summarize our consolidated results for the quarter, let's turn to slide 13 discussed versamark through operating platforms profits in motion control.
Total sales were essentially flat year over year in PMC with core sales growth off of what and what were some acquisition contribution offset by roughly member some adverse impact from currency translation.
PMT is topline growth was reduced by up to be approximately 200 basis point impact of our products move occasion or pls actions.
Breaking PMC Dom and major end markets, we continue to see good growth from our aerospace operations and we believe we continue to outperform the broader industry and our global food and beverage our markets in terms of both Ob MRO demand generation.
Demand in our process industry remarks will generally stable demand trends, we experienced in our second quarter.
In our North American distribution channels, we saw overall sell through generally stable sequentially and more in line with our sales to distributors as we expected all in one part of a goal in our fiscal 2000, our broader market growth assumptions for you on the slide are unchanged.
Turning to profitability.
Good morning, strong operating execution combined with the benefits of our school for actions over 40 basis point expansion of EBITDA margin, despite the west topline.
We continue to expect PMC murders to increase year over year in our fiscal 2020.
Structural savings we are realizing from our Pos in school for initiatives ongoing growth in our aerospace operations and operational execution the restaurant of system.
No more than offset ongoing investment spending.
One driver of a relatively stronger growth and our food and beverage end markets has been in development and the introduction of our premium services offerings.
Premium services builds on our direction architecture and largest our smart take technology.
The QR codes that we attached to all of our products provide immediate shot for access to most valuable resources, what product identification technical literature, and how to videos covering installation maintenance and replacement.
The service starts with a complete line survey performer one of our technical experts and covers the overall line condition for our products as well as competitive products.
We analyze the chain wide configuration and speed enable complete wind condition optimization report with opportunities to improve the timely product indication and operating performance that will ultimately award costly unscheduled downtime because we enhanced capabilities, we provide with our summer condition monitoring smart paying technologies.
Please turn to slide 14 to discuss our water management platform.
During our third quarter, our water management platform delivered a 4% increase in that fills growth with represent core growth and roughly 1% contribution from sales brands Dot com, which we acquired in our first quarter.
Our Pos initiatives impact watermelons core growth by just under 100 basis points in the quarter.
Our underlying north American nonresidential construction markets remain supportive of core growth as illustrated by our unchanged at market outlook of as summarized on slide.
Growth in overall us nonresidential building construction spending improving our third quarter, although new start growth has moderated somewhat becomes more difficult year over year comps.
Based on our relatively greater exposure to institutional verticals like public education and healthcare.
Due to investments adjacent market growth and the growing momentum were seeing in our sales funnel digitally enabled products. We believe we are well positioned to continue to outperform overall construction sector growth.
Earlier this week, we closed on our strategic bolt on acquisition in our water management platform with the acquisition of just manufacturing leading manufacturer of stainless steels sinks that represent the natural addition, deserve better supplement product line.
Adding just same stores earned business strengthens our position in several key institutional construction verticals, notably, including education, and healthcare and expands our ability to drive more complete solutions commercial markets like food service and hospitality.
This is expected to be agreed to discern margins was acquired for about eight times trailing EBITDA. After factoring in certain tax benefits just will add over $20 million of new revenue for water management platform.
Looking profitability, what our management's adjusted EBITDA increased by 5% year over year in the third quarter with a solid 37% incremental margin as a result, certain over 40 basis points year over year margin expansion.
We continue to leverage our core growth while funding our market expansion connected product development and cost reduction initiatives.
Moving on to slide 15.
For the chart in the far left our free cash flow continued to grow by more than 20% year over year, our third quarter and has increased by more than 25% year to the basis, we remain confident our expectations for a record level free cash flow in fiscal 2020.
Moving to the chart in the center you can see that our financial leverage as measured by our net debt leverage ratio declined to 1.9 times and finished the quarter just on the low end over long term target a range of two to three times.
During our third quarter, we allocated $20 million to share repurchases under our existing authorization.
Earlier this week.
Border over authorize expanding our existing share repurchase authorization of $300 million available capacity.
The board also authorized initiation of the quarterly common dividend, which translates to about $39 million an annual dividends based on the roughly 122 million shares outstanding at the end of our fiscal third quarter.
During our third quarter, our mandatory convertible preferred shares converted into approximately 16 million new shares of common and eliminate views the associated $23 million of annual preferred dividends.
Separately, we also repaid $100 million outstanding term debt under our credit facility, which we refinanced during the quarter and secure to 25 basis point reduction in the effective interest rate.
Combination the debt Paydown and low interest rate will reduce our annual interest expense by approximately $5 million August 2024 maturities is unchanged.
Before we open the call for questions ill briefly on restructuring expenses and our effective tax rate.
First and in terms of our cost reduction initiatives, including our school from three initiatives.
We expect total restructuring expenses of $12 million to $14 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 pretax income as well the timing of other planning initiatives.
We anticipate our fiscal 2020 adjusted net income on corporate effective tax rate of approximately 25%.
And our fourth quarter, we anticipate there will be approximately 27%.
Turning to slide deck appendix, we've included certain other assumptions incorporated into our financial guidance for our fiscal 2020 separate slide.
I remind you that our guidance excludes the impact potential acquisitions potential accounting gains or losses, and future nonrecurring items, such as restructuring costs.
One last note.
After further analysis. It has been determined that the if converted test is still required when calculating our EPS in our third quarter and for our Fulfils fiscal year Unilin mandatory convertible preferred has converted to common shares.
As you recall this requires a calculation assumes the convertible preferred had converted at the beginning of the period no preferred dividends would have been paid.
This method was used in our third quarter and it was one penny dilutive to our EPS as it was in the first two quarters of year.
The same who will be necessary for a full fiscal year when the if converted test will be performance all preferred dividend back today.
Using a share count as expected to be approximately 100.4 million shares.
With that won't call 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 town sign or hash key if you're using a 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 today comes from the line of Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, good morning, gentlemen.
Good morning, Jeff.
Very good presentation that was very helpful. The front for the deck just on slide five you show the shift.
From kind of non growth the growth and.
Just wanted to get a sense in that other remaining 26% how much you think of that can kind of shift into the green or if theres any other pairing.
That you would see in the portfolio that end markets, maybe where there isn't isn't the growth profile.
Yes, Jeff I think it's great question. There I think there is room to move it I think weve focused on the things that we could do both organically and Inorganically that we felt had the biggest opportunity and so there are always going to be elements of the portfolio that aren't positioned to grow above market.
Maybe just grow with the market, but I do think theres some room that we can.
So we go that percentage a little bit higher I think we'd love to see it at 80 plus.
Primarily through a combination of things that we're doing strategically as opposed to.
Just sort of selling something or divesting something so I think.
I think we're targeting to move it little bit forward, but I think that the lion's share the lifting over the last four years has put us in a in a pretty nice nice place.
Absolutely and then.
Okay.
And does zurn kind of have a quiet ended the year and channel Destocking.
Can you just kind of talk about trends into January if thats normalized where you think inventory levels are and then just kind of a comment on yes, I think theres, some increasing worry that the nonres cycles maturing and just what you're seeing there from a quoting him and project activity. Thanks.
Sure I.
I think they ended the year phenomenon had a lot to do with the holidays falling in the middle of the week.
So people took the opportunity to really now things back the other thing to point out is that January is not a great barometer, because it's cold across most of North America, and so I would tell you that I don't see anything abnormal and the way we're starting the.
The fourth quarter relative to maybe what we expected.
But as you get through February and March and things warm up in parts of the country. That's when we see no things accelerate so nothing unusual from away. We're starting the quarter in February March are always where the majority of our fourth quarter comes when it relates to discern.
Back to your second question on.
What we're seeing in terms of demand I would tell you we feel pretty good about where.
Starts are particularly on some of the institutional verticals as we start our fiscal 21, and I think we would sort of point to albeit slower growth market growth over the course of the next 12 months still positive and.
And I think when you couple that with some of the things that were doing around 80, 20, we're seeing outsized market growth in those areas as well as fire protection and second we are sure which are both growing substantially above the market.
The other thing that Mark mentioned was this acquisition as if you think about what we've been doing in a pretty methodical way is adding to the size of our available markets and so.
First opens up another 100 $150 million market opportunity, where we have a chance to really grow the business through what we have in place tremendous spec share our third party reps and the ability to bundle and package. This product with all the other water labor savings products that we already have so I think we're pretty excited about was Ernst.
Yes.
And again I think that the market itself.
Is absolutely in the process of slowing but I think the resilience of the business through all the things we've done and also this retrofit business that we built and are building, we think put us in a great spot even if the market slow so.
I'll sort of a long winded answer to your question, Jeff, but I think thats the way, we would hope people would think about it.
Great. Thanks, a lot.
And our next question comes from the line of Kalo days from vertical research. Your line is open.
Hi, good morning, everyone.
First question just take congrats cash flow.
I think year to date, Europe 30 million year over year. The prior framework was thinking about free cash flow growth kind of mirroring what we might see an EBITDA growth year ahead of that pace or just what you're thinking for the fourth quarter weather.
That that's a little bit of Oh, the get back on the year to date gains or whether we should just be thinking that free cash flow might come in a little stronger.
Yes. So this is mark I think.
When you look at the fourth quarter, obviously its are always our strongest quarter I think if you look at levels that we did last year will be in that similar ZIP code of the free cash that we did last quarter, obviously, plus or minus three to $4 million to $5 million, but.
There will be strong finish record year this year with momentum going into our fiscal 2001, when it comes free cash.
Great.
And then there were a couple of comments in the press release about progress on the connected products direction side of things. Both the then PMC and water management and I was looking for any additional context in terms of what you see as a as a revenue run rate or what you see is the revenue growth opportunity.
For the next 12 months or so.
Sure, we just wrapped up our strategic planning cycle and as.
As we went through we see.
Three year goal of in excess of $100 million and so the revenue run rate.
I think it's probably been a little bit slower than we would've liked out of the gate and I think our fiscal 21 will be sort of a catalyst year as as we.
Of modified I would say some of the the offerings. We've had we've built to go to market. We've established the solutions that are that our customers are really wanting and so we think.
The run rate beginning in our fiscal 21 ramps pretty considerably.
Over the course of the next three years and it's really opening up.
The incredible conversations in both parts of our business.
That we weren't able to access without this solution and so things like connected retail stores that provide.
Perfect visibility into the water safety quality flow control things touching water inside of the building no. These are solutions that customers are really excited about and I think the traction we've gotten and the learning cycles that we've been through across the entire portfolio and I think thats the important thing to keep in mind.
When you look at our connected product solutions is it covers the broadest portfolio of products that serve the markets that we that we go after which is very very difficult and it's also a solution that works with whatever customers have chosen.
Two two to use whether it's a building control system a factory automation system, we're having us look at it through our cloud.
It's a very flexible scalable solution that covers that brought us gamut of products. So we're excited about it look for the inflection in 21 and think about it as 100 plus million dollar opportunity over the next three years.
And just a clarification is is that an incremental 100 million and what would the base fee in fiscal 20 roughly.
We do think it's an incremental 100 million and that Ace is probably close to 20 million.
Okay.
Thanks very much.
Our next question comes from the line of Brian Blair from Oppenheimer. Your line is open.
Good morning, everyone.
Good morning, Thanks, Brian Brian .
Yes on.
Folio composition over time, you signaled and started to act on.
Zero weighted M&A is the ideal to have relatively balanced for revenue and EBITDA contribution from the platforms overtime or is that to refer you to construct.
Brian I think that.
We havent said that as a sort of discrete goal, but I think our view is that adding more half.
To the water platform.
Certainly can't hurt us in terms of the way the company is valued responder and so if you were to look at the priorities that we laid out on one of those pages.
Water related M&A is our number one priority.
The second.
To consumer facing end market related applications in PMC. So I don't think we are looking at.
You know expanding through M&A in things like process industries, because we've got such a terrific.
Share already and so without question I think we're going to target those areas.
But without a mandate to do it in this period of time, we're going to continue to stay disciplined and if you look at the acquisitions that we have done over time and and frankly, when we just talked about and just we're retaining the discipline of.
Our financial profile that creates a great return, while adding significant runway to these businesses that we can bolt on and run with quickly.
I will make sense and just a clarification point on just did you say that's margin accretive concern.
Yes, Thats correct.
Yes, that's impressive.
One last one second.
On scope for three.
Any.
Update you can offer and how thats progressing and if there is further line of sight on.
The timing of cost savings how much of that we should expect to hit in fiscal 21.
So we started to make some internal announcements you will see some some.
Some cost in our fourth quarter related to that.
You'll see some incremental costs to implement as we start our fiscal 2001 will outline what those are.
But it's sort of in $5 million to $7 million range of cost to implement in our fiscal 21, maybe just a little bit in our fourth quarter and we start to see some level of benefit.
From those.
Those efforts towards the end of fiscal 21, so think about it as a little bit of up front spending just like we did in scope for one just like we did in scope to defend that spending goes away and we begin to accrete, all the fixed cost and and cash flow benefits from the actions and so a little bit in fourth quarter little bit the first.
For the year five to 7 million Bucks, a little bit of benefit in the fourth quarter of our fiscal 21 with the run rate really starting in our fiscal 2002.
Okay appreciate the color.
Sure.
Our next question comes from the line of Andrew Open from Bank of America. Your line is open.
Hey, Good morning, this is Emily shoe odd for Andrew Obin.
Good morning elegantly.
So my first question, so I noticed the outlook for.
Aerospace in PMT has.
A green light.
Has that changed given you noted some risk from Boeing 77, Max production help in the first half of 2020 and also the Corona virus outbreak.
You seeing.
Basically air traffic.
Yes, we are aware of both of.
The 737, Max production changes and the Corona virus I think what the Green light is intended to do is sort of maybe look through that a little bit.
I think we'd like like many people think there will be a resolution to the Max and it's very difficult to assess the impact certainly the long term impact of.
The virus situation and so look we have a record backlog in our aerospace business right now.
We anticipate that there will be some near term headwinds as the production rate for the 737 Max slows.
We're optimistic that.
There will be some resolution to the virus in China and.
We've got a good couple of years left at least in the aerospace cycle. So thats why its green I don't think we're.
Turning to ignore the two things that you spoke about but I do think we're trying to be a little bit realistic that everything is likely to get resolved in a pretty short window and there's a lot of runway left.
Okay great.
Just a follow up question.
Is there any January data that provide on your question.
Those are there any early signs of green shoots anything you're hearing in the channel that would give you confidence.
Short cycle.
Fiscal 21.
Well again, I think we're not looking out into fiscal 21, when we're not guiding to that yet I think.
The data that we have so far in January supports kind of the thesis that I spoke about Barclays out, which is the fourth quarter is sort of tracking to what we had anticipated to deliver that.
Low single digit core growth number EBITDA that will end up being a record record free cash flow. So I think we'll get the fiscal 2001.
A couple months, but so far everything seems to be tracking in line with the way, we've guided and really no surprise.
Okay, great. Thank you much.
Our next question comes from the line of make no phrase from Baird. Your line is open.
Thank you good morning, guys.
Good morning to make that.
Yes, just one follow up on that.
37 question can you can you help us understand better understand impact.
In the fourth quarter on topline four pm yen.
I think it's pretty clear on EBITDA, given you said that that accounts for your changing and guide.
Yes, yes on the topline and how do you how do you sort of thing this will play out over the next couple of quarters based on what you've heard from your customer.
Sure.
So the the run rate Mig of our Max exposure is in that put a 22% $25 million range.
So you can look at what that is per quarter.
In our fourth quarter that gets impacted by three to 4 million.
And the related profitability on that as sort of the.
The majority of the change to the top end of our.
Our EBITDA guidance, if we were to look ahead.
We're assuming that the run rate.
In our fiscal 21 is substantially lower at least through the first half if not the full year.
Based on what we've been told so we've been told to modify that production rates down to that 20 to 30 range over the course of the here. If you were just to look at it.
On a digital basis.
Would impact next year by $7 million to $10 million.
Now, we think theres opportunities for us to go.
When some some additional business with the capacity that we have and so I wouldnt flag.
Really an issue at this point other than to say production rates at least fourth index.
Six months, maybe nine months, we're going to be a little bit less than what they are running at the first nine months of the year.
Those aircraft, we believe still get delivered so it may be it just pushes a little bit in the meantime.
I think we've highlighted the fact that we've got an amazing.
Center of excellence that is a competitive weapon that we can win business.
And we're using that to try to fill some of that divot in the near term and frankly, we.
We're doing our best fulfill some of that dividend the fourth quarter with that capacity and so that's what we think happens.
But as you can see the relative impact is pretty low.
For us relative to the size of our aerospace aerospace business and the size of Rexnord, It's just a little bit of an acute issue in the fourth quarter as we dial that back very quickly and deal with sort of the incremental profitability changes challenges when you do that but.
Thats it hurts, but it's not.
It's certainly not up not not not something that were overly concerned with at this.
Okay, great. Thanks for clarifying that.
And next question I had was on product line simplification and I'm sure you know I'm wondering.
What you're doing here I mean, I understand the concept, but I, but I'm wondering what you've done through the year and can you maybe help us understand if this is a continued.
Drag going forward was there something special about fiscal 2000, just the puts and takes.
Well I think when we started.
The process leads you to taking sort of your.
Your twentys customers year, twenties products, and making some tough decisions around either exiting or.
Or raising price and I would say the majority of that work has is somewhat behind us.
By the time, we get too.
Our fiscal the end of our fiscal 2000 there'll be some incremental drag going forward is as you re run all the way you look at it there'll be some some obviously some more pruning that gets done, but I would say that it'll be less in our fiscal 21 that has been in our fiscal 2000.
Where we're at now is really pivoting towards growth so with the resources that we have freed up by thinking more about are our most important customers are opportunities with our best and maybe most profitable products pointing our resources towards that and so.
It's logical conclusion.
80, 20, certainly takes cost out but its intent is to free up the resource in the capability to drive.
Above market growth and I think thats, what youre seeing.
As we talk about what's happening in sort of pockets of zurn, what's happening in pockets of consumer facing end markets.
Inside a PNC and frankly, that's what that chart is intended to do.
In the deck, where you look at all the product line revenue in what we've done to it and where we believe we are positioned today relative to just three years ago and so.
We've given you sort of it out outline of what the drag is this year hopefully.
You start to see that that.
The market outgrowth is really starting to happen in pockets I think we've got tons of illustrations of where it's happening I mean inside of our beverage business a metal product line, where we cut 60% to 70% of its skews, we're experiencing 12% to 14% growth. This year at great margins. So we've got.
Lot of these things happening and I think as you get into our 21, you'll see that contribute to the incremental outgrowth that we expect from these initiatives.
Great Lastly.
Question on pricing.
Is there.
Any updated thoughts there in terms of trends and.
I know you're not talking about 21, but I'm going ask it anyway as you think about pricing into 21.
Is there anything different versus 20 at segment level that you'd call out.
Makers and market failing as our year progressed, obviously the price impact of has moderated.
Every year, so year the quarter of go under or just under a point in PMC no a couple of points to point to happen in water.
So that overall impact does moderate as we cycle against the pricing because we put in place last year.
Assuming eight.
Sure if I remember that stable from where we sit today.
I think pricing next year is very moderate for us it won't be overweight overseas as it has been the best past year now.
Yes, I think maybe to put a finer point on to make the incremental margins.
In the third quarter, where above 50% and that that thats with probably very little priced so as we transitioned to the fourth quarter into next year.
Most of the incremental profitability comes from the operating leverage from RBS and the things we're doing their 80 20, and then obviously the.
The net impact of all the scope for initiatives that we've done in our implementing and so we expect that to.
Sort of keep the incremental margins in that 35% range as we've been community chance of the school for but absent the scope so yes.
I think mark laid it out pretty well and I think we're optimistic that.
You know incremental margin stated very high level as we make that make the turned to a more normalized.
Input cost environment.
Very helpful. Thank you.
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 kind of looking at PMC exiting the second quarter. It seemed like you guys I kind of more cautious tone there in that.
Growth in the quarter was better than we were expecting were there any end markets that were kind of positive surprises in the quarter.
And then if you could provide a little bit more color on what you saw from your end markets kind of by geography for food and beverage North America versus your out that process in any trends in the two January .
All right I'll try to walk through that there's a lot to unpack there too.
Good luck is of a missile did let me now.
Okay for us in our third quarter that I'd say pmcs sales dollars core growth, but I'll just as we had expected in the quarters. There wasn't anything that was unusual.
In the quarter that impacted the core growth number again I'm going to write level, what we'd expected, we look into our fourth quarter and again as we talked about for me and market standpoint generally stable.
Muted market conditions, but generally stable from what we saw in our second quarter, you kind of play afforded the fourth quarter than this obviously any we cover here some of the impact Boeing.
In our fourth quarter.
And we say well against basically a.
Tougher comp and was a couple of prices have shifted last quarter in our processes through that don't repeat this year. So in our fourth quarter. We do expect our core growth to be down a couple points for those for those reasons you take the end markets and look at it by geography, I got to not really different from what we what we talked about last quarter food and beverage.
For us.
It has been a good end market for us not only just a market with things that we've been doing.
Scott touched on from simplification strata Cowen some of this new product in that space.
Seeing good growth.
On our European based business, which obviously serves the serves the globe.
In North America as well.
In our process industries, I'd say generally North America stable Europe has remained weak for us.
Both we and MRO space in Asia for Us will be the smaller piece has been a growth mode. What we're doing some things to capture some share in those regions, but again small dollar sport. So.
I think that hits your questions if I missed anything.
Let me know I know that all of it. Thank you that's very helpful.
And then just maybe one on Jeff manufacturing there any significant seasonality within that business that we should be aware of and then maybe just from a higher level perspective, if you could elaborate a little bit more kind of how that fits within their current distribution.
Yes, I would say on.
It should follow the traditional cycle, we've seen sir so theres there'll be nothing different from the seasonal patterns oil follows earn seasonal patterns on that would traditionally seen.
In North America.
It's a great addition to our portfolio.
It's a product categories that fits really well into our sweet spot of education.
And healthcare in our institutional verticals. So again, it's one of those it's kind of down the middle the fairway type acquisition of Russia, we have a product category that fits our strongest verticals broadens our overall product portfolio. So it allows us to certain to be just more relevant that has that was the day before we acquired it and allows us to grow that product care.
A growing much faster given our established commercial front end, so again, a great acquisition for us right diving, a little fairway looks at about what what we can do that product category with what is your brand wide.
Great. Thanks, guys.
Again, if you'd like to ask a question that star one on your Touchtone phone. Our next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open.
Joe Ritchie your Joe maybe.
We have no further questions in queue.
So the from Mccarthy, Thanks, everybody, who is able to join us on the call today.
And we'll look for Joe suing find him.
We appreciate your interest and Rexnord, we look forward to providing our next update when we announced our fiscal year 2024th quarter results in May have a great day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.