Q2 2021 Rexnord Corp Earnings Call

Good morning, and welcome to the Rexnord September quarter, Twentytwenty Investor Conference call, Let Todd Adams, President and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and about the Mccarty Vice President of Investor.

Our relations rexnord.

This call is being recorded and will be.

No I would be pleased okay period of two weeks the phone numbers for the replay.

Whatever they can be found in the earnings release, the company filed in an 8-K with that.

C. yesterday October 27 at this time for opening remarks, and introduction I'll turn the call that you've got the Mccarthy.

Good morning, and welcome everyone.

Before we get started I need to remind you that this call contains certain forward looking statements that are subject to the safe Harbor language contained in the press release that we issued yesterday afternoon as.

As well as in our filings with U.S.P.C. diff.

In addition, some comparisons will refer to non-GAAP measures our earnings release and SEC filings contain additional information about these non-GAAP measures why we use them and why we believe they are helpful to investors and contain reconciliations to the corresponding GAAP data consistent with prior quarters, we will speak to core growth adjusted EPS.

EBITDA adjusted earnings per share free cash flow and return on invested capital as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data and we urge you to review the gap information in our earnings release and in our filings with the US you see.

It's Adam please turn the call over to Todd Adams, Chairman and CEO of Brexit. Thanks.

Thanks, Rob I'm here with more Peterson, our CFO and this morning, where to cover our financial results for the September quarter.

We will also provide some updates on her operating environment, yes.

The execution of our capital allocation strategy and how we're thinking about our overall.

Teach positioning.

Well also take a look at the dynamic growth opportunity, we have within our conscious an identical offerings within zurn.

Provide a little more detail on our platforms and how we're planning for the December quarter and into 21.

And finally, looking strength and positioning of our balance sheet and cash flow.

I'm starting on page three.

Bottom line is we put up another great quarter in September our culture and business system.

Education of our associates and the resilience of our business continues to deliver results.

The strong margin.

And significant runway for improvement over the coming years as we execute our strategic plan.

Sales were down just 5% with core growth down, 7% and actually only down 2% and 4% core excluding our aerospace business has continued solid growth within our water platform and sequential improvement in our PT businesses drove the third quarter results in line with our internal expectations.

From an earnings perspective, we delivered $109 million of EBITDA in the quarter, which was 22% of sales down only 8% year over year down less than 5% excluding aerospace I.

I think it's important to point out that this is inclusive of about 5 million of additional investment in the quarter relative to what we embedded in our prior outlook.

The things like number one can modify or temporary compensation reductions and implement merit increases to all of our non executive associates and secondly to.

To invest in commercial resources and product development to continue to accelerate our differentiated growth opportunity in water hygiene.

Oh, which was enabled by the cost response really beginning in March through August.

Looking at our year to date results. We think is particularly impressive that our sales are down only 5% and our adjusted EBITDA was down only 4%.

And that is in that year over year, excluding our aerospace business, which we see stabilizing over the next several quarters.

The close out of my comments on the quarter.

Adjusted EPS in the quarter was 47 cents versus the September quarter record of 51 cents, we delivered a year ago.

Our free cash flow in the quarter was $59 million, bringing our year to date total to 207 million up 23% versus the prior year and well on our way to annual free cash flow of around 250 million.

Equally important we see cash flow accelerating into 2020 2021.

As a result of the compounding benefit of our Scotia school for initiatives and the completion of phase three.

Finally, our financial leverage ended the quarter at two times, and we resumed our share repurchase activity in the quarter investing $15 million to repurchase shares, bringing the year to date total to $96 million to acquire about 3% of our outstanding shares since January one.

As we said throughout the year, our plan has been to use each quarter to learn and evaluate what a recovery in or out but my outlook might look like.

It makes some course corrections as we move through 2020 to set up 2021 and beyond.

As we see it there's clear evidence that we continue to outperform our end market competitors at.

At the same time, we continue to believe that there is a heightened level of uncertainty over the coming in the coming months as the pandemic remains on container we.

We do have is tremendous confidence in our ability to navigate challenging economic conditions.

As a direct result of the disciplined execution of our strategic plan over the last four years to improve almost every aspect of our business.

When you incorporate our fourth quarter guide to our year to date results.

We see rexnord position to deliver 2020, adjusted EBITDA well within 10% of the record level, we achieved in COVID-19 with.

With terrific free cash flow and well positioned to deliver sales earnings and free cash flow growth in 2021.

Please turn to page four.

Back in January which feels like a really long time ago at this point.

We communicated an enhanced and comprehensive capital allocation strategy.

One that we defined as being able to be holistically and consistently implemented for a number of years.

In May we communicated that we are prudently, taking a pause and implementing a couple of pillars of that strategy.

Namely share repurchase and M&A.

Then in July we indicated that you'd likely see both of these elements back in our strategy as we moved in the second half of the year and into 2021.

In terms of the first element and I mentioned it earlier, we resumed our share repurchase activity in August spending.

$50 million over the balance of the quarter and we expect to increase our activity in the December quarter.

Secondly.

Were actively engaged with a couple of strategic acquisition targets that can strengthen our water platform and help further strengthen our competitive advantage.

Well, we're not a spot to announce anything today, we're highly confident there'll be more to come on this front between now and our next investor call.

From my Vantage point, and I think they're pretty fact based way we've never been we've never had better strategic optionality, well did better positioned strategically financially and competitively to consider all potential opportunities to enhance total shareholder returns and we're committed to capitalizing on those opportunities.

It was not lost and everyone that this quarter the earnings in our water business or just under 50% of our total segment earnings and that our margins there are substantially above any public company water related business.

Move to page five before things turn things over to Mark.

Like to spend just a minute focusing on the value creation opportunity, we're working to maximize our portfolio of iconic products within our water platform.

As I've discussed previously we've been seeing exceptional really unprecedented demand and growth in order flow for our touchless sensor products the public restrooms patients and we're seeing the market developing along three sets of opportunities.

The first leg of the opportunity, which is essentially the only pillar for the growth that we're seeing at this point is the tree on stage of building owners, making the restrooms feel more safe and more comfortable for users when they're out of their home environment and either at their place of work, what's your school or a local business like a retailer.

We're seeing a surge of activity to replace manually operated restroom faucets and flush valves and retrofit applications that began during the second quarter of this year and that momentum continues to build as we go throughout the year.

As you can see on the slide the retrofit opportunity is huge with.

With an estimated 2.5 billion dollar installed base today of manual flagships and flush valves that will convert to touchless census brought touchless sensor products overtime and an average selling price that is two times that the manual product, which means that the retrofit opportunity, it's really 5 billion overtime in.

In addition, you have a new annual construction market today for manual products. They will also convert to touchless sensor products resulted in resulting in an estimated 600 million dollar new installation market opportunity annually.

Second we're in the final stages of launching an integrated hydrogenics retrofit capability with a variety of partners that will allow customers to essentially put to install this.

This integrated connected installed solution is generating signal a significant amount of interest and it puts us in a spot to essentially own the commercial restroom.

We are engaged with several potential partners and M&A targets. They will also enhance our ability to provide these those solutions under one brand with one point of contact and engineered to work together to maximize the user satisfaction with the restroom facility. This.

This is starting to gain traction it will be an important part of our strategic plan as we move into 2021 and beyond.

And finally, the third which you'll see on slide six.

Have a lasting positive trajectory and that's the restroom in the future.

If we've learned anything over the past 10 months, the real estate and a restroom is far more valuable to a building owner than ever before.

Having the capability to provide the most safe genic restroom connected to a building management system with turnkey capabilities is something that we're having real time discussions on with owners and operators of large building populations and with engineers and architects about fundamental changes in restroom designed to be incorporated in the next iterations of Newbuilds.

Including things like different layouts active management of traffic in and out of restrooms, and the enhanced digital connectivity necessary to ensure capacity is available when its needed and it's clean.

We expect we expect this will have an increasing influence on building design and specification as we move through 2021, and ultimately into a renewed upcycle in new non residential construction and structural we remodel activity.

Underpinning all of this is really.

We've developed the next generation touchless offering over the last several years, which is far more reliable than any of our competitors secondly, the product placement in shelf space. We've earned within the wholesale community is better than it's been in the last 13 years Weve owns burn and finally E commerce part of our business is growing like you'd expect.

In E Commerce type business to grow.

When you compound that with the specification tools, the digital backbone and the comprehensive product offering to leverage these developments and opportunities into further share gains and above market growth.

We're feeling very confident that this sustainable competitive advantage, we have in zurn has gotten appreciably wider over the last year and are excited over the next couple of years as we continue to execute at a very high level.

Still on page six in order to help everyone size the opportunity of how it might influence our growth and profitability as we move into 2021 deaths.

Definitionally, we refer to touchless, we mean sensor activated plumbing products like faucets soap dispensers and flush wells.

Hi, Jack is a broader turn that also includes other products that can further enhance the safety and comfort of breast from users to date that includes products like electric hand, dryers and sinks with anti microbial services surfaces and other water safety products to control the spread of bacteria and disease.

We're on pace to generate about $100 million of revenue from touchless products in 2020, well.

Order rates are currently running at about a $140 million to $150 million at the end of an annualized rate.

The size is touched us revenue at about 14% of where we expect zones total sales to land in 2020 and offer substantial insulation from a potential downturn and newbuilding construction activity in 2021.

Our supply chain has been ramping its output levels.

Above our order rates and we're now positioned to easily handle twice in 2020 sales volumes or more in 2021 with the benefit of knowing that we're positioned now deliver the best lead time and availability in the industry.

At the same time, we recognized that many smaller customers.

May need some help securing the replacement product they need but also finding a local contractor that can most quickly to respond to their requirement.

As I mentioned earlier, one of our investments is what we call click is this click to install model.

That combined online product ordering with immediate online installation scheduling through partnerships with local contractors and adjacent channels.

We have pilots running in multiple markets and expect to roll out the service and most regional markets as we get through the December quarter, and the first half of 2021.

Almost 20% of certain sales. This year are expected to be generated from our broader suite of iconic products and we also expect attractive growth and these related product categories moving forward.

As I referred to earlier, we intend to expand our portfolio of identity solutions as we move through 2021 and to continue to build out the capability to leverage our existing competitive advantages into a sustainable leading position in this rapidly evolving market.

With that I'll turn it over to Mark and after he is done we'll take your questions. Thanks, Todd will start on slide number seven.

On a year over year basis, our consolidated sales were down 5% and core sales were down in the 7% net roughly 80 basis point impact from product line simplification actions.

Positive contributions from currency translation and the just manufacturing acquisition in our water management platform.

About one point each tour reported sales growth.

With respect to profitability, our adjusted EBITDA was down only 8% year over year on a 5% sales decline, we delivered a 27% while consolidated core decremental margin after excluding a couple of million dollars of onetime duplicative expenses.

Associated with our scope or three plant.

Our adjusted EBITDA margin was 22%.

Please turn to slide eight overview our platform results.

Apart from level the decline in PMC sales moderated sequentially to 13% year over year on both the core and reported basis and net of approximately 110 basis point headwind from our 80 20 simplification actions.

Breaking that down a bit year over year decline in our aerospace operations, which accounted for approximately 15% of PMT sales in COVID-19 was 36% in the quarter compared to a 19% decline in the June quarter.

Excluding our aerospace operations the quarter quite in the balance of the PMC platform in the September quarter moderated, 9% versus the comparable 15% decline in our June quarter.

While we continue to experience year over year sales declines in most end markets the rate of decline moderated in virtually every industrial end markets in September quarter, when compared with the June quarter.

We generated sales growth in our power generation end markets you have your year over year sales declines were more modest role to depart from average than our consumer facing end markets, but were higher than the buff on average our profit industrial markets.

Our global industrial MRO business again, excluding aerospace end markets also.

Also contributed to a sequentially stronger industrial sector comparison.

North American distribution channel sell through multiple somewhat choppy month to month with less volatile across the quarter and improved in June quarter, overall, and getting support from our backlog.

The year over year change in our shipments to Oems and end users continue to outperform global MRO, but we did see better balance emerging during the quarter.

Operating execution was again strong in the quarter, we benefited from our scope or structural cost reduction initiatives executed in recent years.

The cost actions, we initiated earlier this year in response to the ongoing pandemic despite.

Despite some adverse mix through the relative weakness in our aerospace business PNC managed to a 33% decremental margin after excluding about $2 million of nonrecurring over three costs.

On slide highlighting another new product losses, as we continue to bring innovative product solutions to customers in the food processing industry.

During the quarter PMC launched an upgraded design of metal conveying chain for certain challenging applications in poultry and baked goods processing as we continue to strategically target this end market.

Markedly within the Queen tough family of her agenda conveying solutions for the food processing industry will design enhancements offer longer product life and increase production uptime will also enhancing both food quality and employee safety all increasingly important characteristics in today's world.

Moving on to water management sales.

Sales were up a solid 5% on a core basis and up 8% after adding the contribution from the just manufacturing acquisition, which we completed at the end of January this year.

With most construction sites back to work in the quarter zones role, providing a clear view of market demand and the underlying business and then able to very strong growth in our couple of sensor products to better read through.

Although we still expect the absolute zurn feels low to moderate seasonally the December quarter, we expect the strong momentum to continue and are tough with an adjunct products as order rates are outpacing shipment growth.

Learn delivered an 11% increase in adjusted EBITDA as a margin increase of 60 basis points from last years September quarter to 20% a strong cost control some benefit from the relative strength and purpose products and contributions from our recent acquisitions.

Please note that most of all three of them ended in June at the strong operating execution in the September quarter also fund the step up in our growth investments.

Please turn to slide nine.

The visibility is still challenging and given a wider than usual range of potential outcomes for the upcoming quarter, reflecting in part because we are going to pull the case cost in North America and Europe.

Well again limit our forward commentary to the upcoming quarter and continue to incorporate wider than typical ranges around EUR assumptions for revenue growth and margins.

The planning guide posts that we're providing through the summer quarter similar to what we provided a quarter ago and are focused on providing relatively precise guidance for almost a week of exercise emissions control will result in.

And incorporating some downside risk for those elements, where we have frankly less control.

With that said and taking into consideration demand trends through October our backlog position and the elevated uncertainty given the persistent strength local pandemic.

We are projecting that our consolidated revenue could decline between 7% and 11% year over year in the December quarter.

This sales outlook and with the winding down and modifications to some of the temporary cost reduction initiatives, coupled with our step up investments a little bit.

We would expect the combined adjusted EBITDA margin at the platform level Nos, excluding corporate expenses.

Finished with the summer quarter between 21.5% and 23%.

We expect a corporate expenses to be approximately $9 million in the quarter were down about 10% year over year.

You'll recall that when we first announced our cost savings target for 2020. After our March quarter, we indicated that we had decided to be more aggressive with our initial cost measures with the expectations that we that we can recalibrate and rebalance our actions as we move through the year.

Shaped recovery curve across our served markets became more evident.

As stated in our press release, our December quarter outlook incorporates them end of most from any productivity across the company in the September quarter, and the restoration of merit based compensation increases excluding executives.

We're also planning to restore our incentive compensation plans to 100% cash payments versus a combination of cash and stock. These actions impacted our third quarter adjusted EBITDA by approximately $5 million and will impact our fourth quarter adjusted EBITDA by approximately $7 million.

And the other handling salary reductions we took a management team will remain in place for the balance of 20.1 expenses continue to realize significant savings from our tight control of discretionary spending in areas like t. any.

As we look around the corner in the 2021 I want to highlight some of the moving pieces way to our cost reduction initiatives.

Our March quarter weighed on our cost reduction plan for the remaining nine months of 2020 total of $51 million.

$10 million of that plan will structural workforce reductions and the balance of the plan was discretionary spending cuts and temporary compensation reductions most of furloughs.

Well the decision we recently implemented rewarded towards some accommodation plans remain $41 million of temporary savings include our original 2020 cost lesson plan is I'll modify the $34 million of approximately 50% of the revised label coming from discretionary spending reductions and the other 50% coming from temporary compensation adjustments.

As we head into 21, we.

We have taken steps to effectively convert a portion of the temporary compensation reductions to permanent cost reductions additional workforce reductions that will generate approximately 7 million in savings in 2021.

Regarding discretionary spending we anticipate turning some spending back on next year, we will continue to manage this pool cost very tightly.

With respect to our store initiatives and incorporating the impact of some cold weather related delays some of our projects. We expect revenue initial $12 million to $14 million of structural cost savings. During 2021, we will plan to exit 21, that's what we're driving savings running at the targeted $20 million realized rate and.

In addition, our 2020 results include approximately $3 million of nonrecurring duplicate costs related to our school for free facility moves that will not repeat in 2001. So.

When you add it all up the additional permanent cost out of $7 million plus $15 million to $17 million of who your scope of load saving will have approximately $22 million to $24 million in structural cost savings of 21, offset the year over year impact of 2020 temporary compensation actions that will roll off and any increase we implement this rush.

And our spending.

Before I discuss free cash flow just a few comments on our tax rate interest and depreciation and amortization.

We anticipate our tax rate on adjusted pretax earnings in the December quarter to be approximately 25% to 26%.

Helping and an adjusted tax rate of approximately 27% for the calendar year 2020.

Our interest expense for the summer quarter is expected to be approximately $12 million and our depreciation and amortization will come in at about $23 million.

Please turn to slide 10.

On this slide we are maintaining a high level of transparency regarding our free cash flow outlook that we provided over the last two quarters.

And the top half of the slide you can see our updated outlook for the nine month interim period now factoring in the results from the September quarter.

In addition to the nine month numbers. We've included the full calendar year 2020 in the bottom half of slide six for actual results for the March quarter was as over the nine month outlook.

We continue to expect to extend our track record of free cash flow conversion above 100% over the nine month transition period, and tire 2020 calendar year.

Moving to slide 11, I'll finish the look at our free cash flow and balance sheet.

Starting with the chart on the far left our calendar year to date free cash flow totaled $207 million.

Year over year basis is 23% ahead of where we were through the first nine months of calendar year 19 as.

As Todd mentioned earlier, we believe we are positioned to deliver approximately $250 million of free cash flow for calendar year 2020.

Moving to the chart in the center you can see that our financial leverage as measured by our net debt leverage ratio finished the quarter at two times at the low end of our long term partner the range of two to three times.

In closing I'd like to mention that in order to help simplify mile in the transition of our fiscal year ended December 31, we will be updating the pro forma calendar year presentation of our financial statements posted on our Investor website.

[music] include the most recent quarter.

With that we'll open the call up for your questions.

Thank you at this time, if you'd like to ask a question press star one on your telephone to withdraw your question has the fancy.

And your first question comes from the line of Jeff Hammond Keybanc capital markets. Please go ahead.

Hey, good morning, guys.

Jeff.

Hey, so if we look at this.

So despite some of the future on slide six you know clearly some things that you have and clearly some some stuff you don't can you just talk about how you think you go about broadening out the portfolio, whether it be partnerships or acquisition or you know.

How much can you do this internally.

It's going to end up being a combination of all three Jeff.

When you look back at.

The path.

We've taken.

We bought some stainless stream businesses.

We developed a solid surface solution.

But.

Just manufacturing and so that's going to be a combination of Oh, the three I think the.

The partnership leg will be really important for us going forward as we integrate into.

Integrate connected products into a building management system. So I think it will be a really a combination of all three I think near term there's.

There's some more M&A that you can do.

That really deepens.

And.

Gives us a lot more content so.

The combination of all three just like we've been doing.

Okay, Great and then on slide five you know it looks like you know.

Basically that the touchless kind of two x., yeah, the manual, but I'm just trying to understand.

What's included in this kind of 5 billion market opportunity.

That's on you know if you were to <unk> like if you incorporate everything on page six like what does that market opportunity because it seems like you're limited it to you know to the touches files.

Hey, Jeff. This is mark yes that those market numbers are really just sensor processing plus valves. So if you look at the installed base. They have just manual.

Bosses and flush valves.

It's going to convert revenue over time, that's the $5 million that does not incorporate some of the things that I was referring to here and the rest is that's all additive.

Market opportunity.

Okay, and then and then just a quick one clarification, yes.

He said I think 5 million of temp costs came back to when you guided you wouldn't have expected is that the way to is that the way to think about it.

Yes, when we provided our outlook for the September quarter and gave you the sketch of the segment margins.

That would not have included that we made that decision you know.

As we got into mid August and so.

So there's $5 million in the third quarter, there would be 7 million in the fourth quarter related to those two things. So whatever you would have assumed off of our run rate.

That's it that's $12 million of incremental expense.

Really from sort of mid August through December.

But the strength of our response.

And our conviction around you know.

Investing in our teams now.

Getting ahead of it so it doesn't become a significant headwind as we start next year.

And on top of that I think as Mark pointed out there is $3 million.

Frictional slash.

Duplicative cost as we round out.

The third phase of Scoper.

And.

The significant investment, we're making to make.

All the things that Weve talked around Igenity reality, we're sort of.

To a degree pulling that ahead.

And so you know when you can you take it a big step back I think you know if you extrapolate our fourth quarter guidance you can find yourself.

You know do the mid four Twentys you know had we.

Done nothing and really squeezed everything.

You could easily have seen four four.

But again, we're trying to play the long game here, you think taking care and investing in our our team that we've created.

And I'd also investing ahead of this terrific growth opportunity was absolutely the right thing to do and despite all of that we're going to end up within a very small margin of last year and cash flows.

As Mark said right around 50, so that's that's how we thought about it.

No I think that makes a lot of sense I appreciate the color I'll get back in queue.

And your next question comes from the line of Joseph what would be the first to call me. Please go ahead.

So you may may be on mute or may of last year.

Hi, sorry, I didn't see any.

Yes, but we probably for you Jeff.

All right.

First question just wanted to touch on water management and Todd you commented about right now.

Looking into 2021 in a set up yeah. This is sort of total rexnord comment, but about set up for sales free cash flow earnings growth and just wanted to address that.

Specific to water management and I think you really helpful details on what you see for an agenda, Nick and what you see as a run rate in touch less and looking at the nine hi, Janet piece.

If that were down like 10%, it's a 50 560 million headwinds and so you've got a pretty good run rate today to eat into that.

And so I'm really trying to understand whats your confidence is that overall water management can grow and embedded within that what you kind of expect in the non hydrogenics pieces of the business.

Well I think it's important to note that.

A couple of things even that are on display I think the last couple of quarters.

There is a cannibalization of our manual products embedded in our numbers today.

When you look through with our overall mix that is or in level.

40% of it as retrofit.

Total not just not just the igenity piece, but in total.

So you know if you think about.

60% of Zurn down 10% you know, it's more like a potentially a $40 million headwind or a 50 million dollar headwind. When you look at the run rate, we're seeing in just a sensor categories and add in you know a very conservative 3% to 5% growth in the retrofit market.

I think we've got a high degree of confidence that we're going to see growth in water management next year and this is before some likely M&A between now and when we start the year. So I I really do think that when you look at the.

The split between new and retrofit you look at Touchless and then you look at you know sort of where we're actually running a on the new construction side of the business.

It's not as if it's down much if any at all and I think as Mark pointed out you know we saw strength throughout the quarter month to month to month and we've started October.

Stronger than we posted for the quarter. So you know I.

I think.

I think we're going to go into with eyes wide open and but I think the competitive advantages that we have.

Joe around driving specifications.

I'm getting a look at what's happening in a hyper local sort of market.

And winning more I mean, our close rates are just simply better than they've ever been I think it positions us really well and then you know the little little math equation around you know new versus retrofit add anti genic.

You know I think you can get comfortable that we're going to see growth in 2021.

Hi, I really appreciate those details.

And on the new side of things can you talk a little bit about what you're seeing in the various in a major segments within non res and sort of the commercial industrial side institutional side general tone of the of the contractors out there in the market.

Well I think you know the conversations.

Our cautious but.

When you think about health care facilities and educational facilities. Those are things that are going to continue to.

Chug, along and we see that.

You don't you don't pick it up I.

I think necessarily when you look at the you know the aggregated you know entire domestic market, but when you look at pockets of the country. You see you know you see education, continuing to grow and I think health care is going to be a.

Very resilient throughout.

Whatever whatever sort of dip we see in the.

The broader commercial part of the market.

Yes.

And then just a last one on aerospace helpful to understand that the Q2 into the Q3 trend.

For some I think stabilization in orders over the next few quarters.

What do you think that sort of then sets up for you know that the type of decline rate, we're going to see where did those decline rates kind of bottom out.

I think the way we are seeing it developed today you know the fourth quarter decline looks sort of similar to the to the third quarter and we start to lap. It you know beginning in March.

So Marshall improve.

And then we see it you know sort of getting better in the June and September quarter of next year. So it's.

It's been tough.

We will continue to be difficult to a couple of quarters, but I think it's really important to highlight that you know despite this sort of decline.

The margin profile of the business is above the fleet average.

So you know what's the scope of work we've done a.

We've been able to really.

Performing extraordinarily well throughout this and leverage that lead time.

And cost structure to win new business in the aftermarket and so you know but.

Believe me the new the new builds are down more than what we're we're posting so we're winning new content in aftermarket programs to offset some of that which sets us up for you know I take it a decent second half of 2021.

Perfect. Thanks very much.

And your next question comes the line of Brian Blair with Oppenheimer. Please go ahead.

Thanks, Good morning, yes.

Good morning, Brian.

Looking at your calendar fourth quarter guide or something you could offer a little more color on what you're contemplating in terms of core growth or decline and margin by segment, particularly curious on the zurn side, obviously really good momentum there you mentioned.

No seasonality will hit the business a little bit in the fourth quarter, then it sounds like significant reacceleration into 2021, just trying to piece that that.

That trend together.

But I think hopefully that the pattern recognition is starting to to set in for people which is.

No.

I think mark pointed out that each month of the quarter It got better than where we ended up.

When we.

Looking ahead, we're not going to assume that it gets appreciably better.

Over the course of the quarter when we guide externally internally our expectations are clearly higher our results in October are clearly better but what we're building. It is you know I think a level of conservatism just based on the disruption. So that's the the third party sort of external guide view of the world.

When you think about growth.

In that guide you know you have to assume the same right, we're not going to see much of any change, but we're off to a good start in Q4.

And you know.

Hopefully we continue on that trend in November and December there's nothing that we're doing internally that gives us pause or concern about you know the improving trajectory I think we're sort of guarding a little bit against Ah you know the unknown I mean, if you if you think about the range of outcomes for the.

The month of November and December I think it's fair to say that skewed to the downside.

In terms of disruption and things of the like but from a pure day to day demand were not seeing it right now, but I think we tried to embed some level of that into our guidance.

Okay, that's perfectly fair.

And we know you've made a lot of investments throughout the year to support the ramp in touch listen like Janet can you provided some good detail on what that means and what it what it should mean going forward.

Just to confirm are there any other foundational moves that need to be to be made are key investments require in terms. The team you know more or less ready to to handle two X or more growth in that.

That business.

[noise], but without question I mean, what we're run rating into extra relative to you.

Where we were a year ago right now.

Probably a little bit better than that and so you know we're going to we've been investing.

I mentioned in my.

Sort of opening comments you know we went through a complete product redesign we've been investing in E commerce.

We've.

Established wholesale placement to levels, we've never had before and so those have all been embedded in you know sort of the performance. We've delivered and will continue to do those so were more than ready.

To deliver you know at a two X sort of run rate into 2021.

Okay excellent and just a clarification point on PMC arrow on a trailing basis, what would be your split between a new build exposure and the aftermarket.

In aerospace.

Yes, roughly 70% Newbill, 30% aftermarket plus minus.

Got it okay. Thank you.

So.

Your next question comes from the line of Andrew I'll go to the Bank of America. Please go ahead.

Hi, Good morning. This is an issue on for Andrew Obin.

I just had a follow up question on the floor to guidance. So if I do the math it implies sequentially flat or even down revenue in and I just wanted to dig into what the puts and takes to that or is it just.

From a seasonality or potential are you baking in like a potential like and I guess, even third wave of Cove. It.

And what are you seeing in terms of any impact from the rising you Echo the cases in October Keith Thanks.

Thanks.

Well, there's a lot on character Emily but.

You know the the biggest I think thing to understand is you know in North America.

The construction season sort of slows in October through December.

And so that will have you know sort of a traditional seasonal impact sequentially from the third to the fourth aside from that I don't think there's anything notable other than you know there's a there's a couple of fewer days due to the holidays, and obviously you know year over year or the year.

Space business will be down in roughly the same.

Magnitude as it was in in Q3, and so you know that's how to think about the sequential trend I don't think it's an unusual pattern you know our revenues are traditionally down in the fourth quarter based on those same attributes. So it's nothing specific that we could point to a related to the cobi.

Cases, and the spike in the last several weeks, but I think we're you know sort of embedding or the potential for some of that to happen in the way we guided externally.

Okay, Great and then my follow up question any comments on how channel inventory levels and have you heard anything.

From your distributor is a restocking cycle now could come on.

Yeah, I wouldn't say anything significant you know I think we've been.

Talking about channel inventories for quite a while particularly in the industrial side of our business and they remain at sort of record lows and and so while I think there's a potential that you know as sell through picks up we'll see that increase.

Some level of inventories the way we operate the business is really you know on.

On a demand basis, so the inventory turns.

Wouldn't wouldn't move a lot so I don't think that.

Oh, we're going to see any significant.

Restocking activity and it's not something that you know you should sort of think about one way or the other I think can.

Industrial business and it's been that way for the last.

Hi, the eight years.

Great. Thanks very much.

Sure.

Hi, Dan just like to ask a question press Star one on your telephone keypad and your next question comes online of children.

Excellent with Barclays. Please go ahead.

Hey, good morning. This is Trish I'm criterion until last quarter, you guys had mentioned, you're making some incremental investments within the PMC business kind of sunlight to how you are doing in water management can you just talk about kind of where you are with that is there more to do in the fourth quarter and then I'm not sure. If you can size in any way, but when we think about the year over year am I missing there.

Finds that they're not segment how much of that was a function of these increased investments or a question that the costs coming back versus mix given the weaker.

<unk> expenses as Barack I gave you think about the the incremental investments.

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Rob pointed out we're.

We're not even really good alright can you hear me okay.

Yep, Thanks, Alright, I'm sure they have a a microphone issue there.

Regarding incremental investment I think that there's nothing that that's a different pace.

In PMC outside of what Todd referred earlier, if you think about no. It hasn't we made in our associates, obviously that steps up in our fourth quarter versus our third quarter as far as growth investment.

There was not a step up in pace of growth as in the fourth quarter from where we would have had it earlier in the year.

And your second question Hi, two from margins you know with obviously with the being about the Guy that we've put in place you think about the decline in sales sequentially obviously.

He got a detrimental margin on that the incremental.

Costs are he was the impact of the Atkins wrong merits and incentive compensation actions in place obviously impact.

The margin sequentially and spoke with Republic kind of almost on par and develop a little bit. So those are the kind of the moving pieces that are embedded in the.

Segment margin guidance that you gave.

Yeah, I mean, you know Jade.

One final thought is.

When you when you.

Gibson.

Credit to you know the frictional costs from the scope removed.

Did the decremental margin PMC.

In 2020 will be right around 30%.

And if you you know so that's sort of been very very much inside the range of what Weve communicated that's.

So that's sort of using the fourth quarter guide post as a.

As a proxy to get to the full year. So I think it's well inside of what we've been communicating yeah I'm really.

For for a long time, Yeah. You go back that's right you go back to our first call both cold and we settle up for the year, we have high confidence that overall decrementals would be less than 30% at the restaurant level for the calendar year.

That's what we'll end up.

Understood that's helpful and then.

Did he found the right yeah that was very helpful. As well I think last quarter, you guys had expected retrofit to comprised 40% to 45% or water revenue that the next 12 months and then that's why it seems that's already 40% any updated outlook on that over the next 12 months.

Thanks.

Well that was not was it a forward look.

We provided last quarter and I think.

Fortunately, we're well on track to a.

To be in that range for 2021.

Got it thank you.

And there are no further questions at this time I will turn the call back over to the presenters for closing remarks.

[noise] like thank everybody, who joined us on the call today. We appreciate your interest in Rexnord is as always and look forward to providing our next update when we announced our December quarter results in February have a great day and she's Stacy.

This concludes today's conference call you may now disconnect [noise].

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