Q2 2021 Rexnord Corp Earnings Call

Good morning, and welcome to the Rexnord second quarter 2021 earnings results Conference call with Mr. Todd Adams, Chairman and Chief Executive Officer.

Mr. Mark Peterson, Senior Vice President and Chief Financial Officer.

And Mr. Dave <unk>, Vice President and corporate controller for Rexnord.

This call is being recorded and will be available on the replay for a period.

Weeks.

The phone numbers for the replay can be found in the earning stream.

The company filed in an 8-K with the S. E C yesterday July 20th.

At this time for opening remarks, and introduction I'll turn the call over to Mr. Dave Ball.

Good morning, everyone before we get started I'd like to remind everyone that this call contains certain forward looking statements that are subject to the safe Harbor language contained in the press release debt, we issued yesterday afternoon as well as in our filings with the SEC <unk>.

In addition, some comparisons will refer to non-GAAP measures our earnings release and SEC filings contain additional information about these non-GAAP measures why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP data.

Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP data and we encourage you to review the GAAP information in our earnings release and in our SEC filings with that I will turn the call over to Todd Adams, Chairman and CEO of Rexnord.

Thanks, Dave and good morning, everyone. It's a great morning to be in Milwaukee.

After the box when the NBA title last night, So 50 years since the last title so.

Fantastic for the city of Milwaukee as.

As it relates to rexnord he had another terrific quarter with strong momentum in both platforms, which creates a great backdrop for the pending RMT transaction with Regal, our margins and cash flow was very strong both sequentially and against the cost constrained prior year second quarter, and our overall leverage dropped to only 1.

7 times.

I want to recognize our teams are really in both P&C and water for the way we've navigated the first half of the year in the midst of a pretty complex transaction.

Our relentless focus on leveraging RBS and now GBS to drive results and customer satisfaction truly without a blip.

Speaks to the culture talent and commitment we've collectively built here at rexnord.

In water, we grew the top line, 39%, 29% organically with margins right at 27% with core margins were exceptional.

We continue to integrate Hadrian and make significant organic growth investments in our business.

1 additional point of perspective on the zone performance during the quarter the comp from last year's second quarter wasn't all that easy we were down only 5% in the pandemic impacted quarter 1 of only 2 quarters, we haven't posted positive core growth in the last 11 plus years, so when compared to the 2019 second quarter second quarter sales this year up 24%.

Organically and core margin should expand at almost 200 basis points.

In PMC, we're seeing continued recovery across really all of our end markets as core growth of 16% was split between 21% in our PT businesses.

And not only 15 in aerospace and as we had anticipated.

We expect aerospace to be a contributor to core growth in the second half.

Overall, PMC order rates were up 40% on a core basis in the quarter and our backlog to start the second half of the year is $60 million higher than it was when we started in January.

At this point, we expect PMC EBITDA for 2021 to exceed $300 million up considerably from the announcement of the transaction with Regal, which puts the combined business and $120 million of announced synergies ahead of where we were all expecting at the time of the announcement as we get into the 2022 run rate.

As far as the RMT transaction, you noticed that last night it probably really early this morning, our proxy related to the transaction was declared effective by the FCC.

And in there we've set a date for the shareholder vote on September 1.

After that we've got to wait for the IRS ruling to close but continue to believe that at some time early in the fourth quarter potentially even late in the third quarter and it's contingent upon that ruling.

To close on the second quarter.

<unk> exceptional performance in water, coupled with the momentum and recovery in PMC come at a perfect time to consummate the transaction and the merger of PMC with Regal.

A standalone water business is performing exceptionally and once we go through the separation will be renamed zone water solutions as I mentioned last quarter and trade under the ticker Gws on the New York stock exchange upon the separation.

If you can go to the next slide.

As I mentioned, just a few minutes ago, we've significantly ramped our growth investment spend over the last couple of years to open up new parts of our served markets drive new markets drive greater levels of specification and continue to build on our competitive moat, we built inside of our water management business.

First of all we've taken all of our hygienic and environmental products and started to brand and market the entire portfolio under the bright shield by zone banner.

Bright shield equates to hygienic clean and shape public and private spaces.

With our unrivaled suite of products that are connected and pairs to performance.

We're bringing together a package that can be used to create a safe haven inside of buildings, where students fans medical staff customers and employees can walk in and no other entering a clean and safe space and building owners can scheduled maintenance based on demand replenished consumables and provide their patrons with a positive experience.

Relevant to bright shield as its backed up with analytics that show people spend more money return more often and have a more favorable impression of a public or private space, when it's clean and safe.

Have you been patented things like hand, washing scores, which are incredibly important in things like health care facilities and hospitals.

All of this really generates a positive tangible ROI for building owners Theres a lot more to come around bright children coming months, both from a product and capability offering as well as some adjacent channel opportunities that we see which will greatly enhance our served market.

If you turn on the next slide.

Inside of <unk>, We recently launched our hydro ex sensor forces are.

Hydro power driven philosophy is built on our gear driven actuation platform with an embedded ceramic diaphragm valves, creating a bulletproof.

Stable energy solution for hand washing it drives higher performance on all types of water quality settings, it's easier to install and maintain and creates the opportunity for us to become the basis of design is the only 1 in the marketplace with this compounding benefit of gear, driven ceramic and sustainable solution.

If you turn to the next slide.

Slide a flow systems, we've just launched the flow flow stream. This new patented technology is by far the best flow rates in the industry that allows building owners to use fewer dreams that perform at a higher level reducing.

Producing building costs through the cost of the product.

And the installation.

Developed in our flow lab with industry experts and it's been an absolute homerun since we launched it about 45 days ago to date, we're batting a thousand with establishing this as a basis design basis of design and over 50 active specifications and absolutely no competitor has anything close to this.

What I hope you are taking away from this on all of this is that so many of these solutions are actually contributing to making the plumbing and mechanical part of the building more cost effective which is an increasingly important part of the equation for building owners to do deal with cost inflation.

<unk> solutions that reduce cost is a really powerful value proposition lean construction, coupled with sustainable solutions is only negative only going to become more important as we move forward and we see ample opportunities to exploit our unrivaled portfolio of water solutions for health human safety.

Environment to drive growth over the coming years with that I'll turn it over to Mark. Thanks.

Thanks, Todd I'll start on slide number 7 please.

On a year over year basis, our second quarter consolidated sales increased 27% to $568 million.

The growth was driven by Athene on a basis point benefit from foreign currency translation of 400 basis point positive contribution from our Hadrian acquisition on our water management platform, partially offset by a small divestiture on our PMC platform that reduced our total sales by approximately 100 basis points and finally on our core growth in the quarter of 21%.

With respect to profitability, our adjusted EBITDA increased 29% from the prior year second quarter to $133 million on our adjusted EBITDA margin expanded 50 basis points year over year to 23, 5% the.

The incremental sales volume on the realization of our scope 3 and other productivity actions drove the year over year improvement on our margin this quarter. Despite the headwinds we faced from the temporary cost reduction actions. We took last year, starting with the June quarter due to the COVID-19 pandemic.

Please turn to slide 8 I will review our platform results.

On the platinum level water management sales were up 39% from the prior year June quarter as the Hadrian acquisition contributed 9 points of growth positive foreign currency translation contributed 1 point of growth in the core business increased 29% from a June 2020 quarter that was down only 5%.

Continuing on the strength, we experienced in the first quarter demand increased across our entire broad product portfolio. During the second quarter as orders increased over 45%, resulting in an improved backlog heading into the third quarter.

We look to the back half of 2021, we see solid growth on the platform because what we can deliver low double digit core growth for the year.

With respect to profitability on water management platform delivered a 20% increase on adjusted EBITDA with the prior year as margins work behind their expectations at 26, 8% in the quarter.

<unk> are a step up on our growth investments.

Over year margin comparison was impacted by the COVID-19 related temporary cost reduction actions, we took on the prior year second quarter as well as the temporary mix impacts on our recent Hadrian acquisition, both of which will impact on year over year margin comparison in the third quarter as well.

Turning to PMC.

Sales increased 18% non includes a 400 basis point benefit from foreign currency translation.

200 basis point reduction for the small 2024th quarter divestiture in China on.

Core sales increase of 16%.

The core sales increase was driven by 21% increase on our non aerospace end markets, which was partially offset by the anticipated core sales decline in our aerospace on markets of 15%.

While our year over year sales declining on aerospace end markets. The demand trend continued to improve as the orders grew sequentially from the first quarter of 2021 and year over year orders turn positive in the quarter and were up 60% from last year's second quarter, which resulted in an increase in our backlog with a book to bill ratio of just under $1.1.

Demand trends in our non interest, but it's on markets continued to improve sequentially and quarters were up over 35% in the quarter with growth coming from nearly all end markets and geographies, resulting in an increase in our backlog with a book to bill ratio of just over 1.1.

With respect to North American distribution channel sell through again, excluding our aerospace on markets, we saw improvement in year over year growth rate each month of the quarter for the rest.

Operating execution was again solid on the quarter as our adjusted EBITDA margin was up 260 basis points year over year to 24, 2%.

The benefits from our sales growth and a sculpture and other structural cost reduction initiatives more than offset the year over year margin headwind from the temporary cost reduction actions, we implemented in the second quarter of 2020.

The COVID-19 pandemic.

Please turn to slide number 9 with.

With a strong first half start to free cash flow generation and our adjusted EBITDA. Our net debt leverage was reduced to 1.7 times EBITDA ended the June quarter down from the 2 times at March 31.2021.

Please turn to slide 10.

Give me anticipated timing to close the RMT transaction, we will continue to limit our external outlook for the upcoming quarter.

With that said, we're projecting total sales on our water management platform to increase by a high teens percentage and we are projecting that year over year total sales will increase by mid teens percentage in our PMC platform.

Based on our platform sales expectations, we would expect our adjusted EBITDA margin in our water management platform to be between 26% and 27%.

And for our adjusted EBITDA margin on our PMC platform to be between 23% and 24%.

We expect our corporate expenses to be approximately $10 million in the quarter.

Before we open the call up for questions a few comments on our tax rate.

Interest expense stock comp expense and depreciation and amortization.

Anticipate our tax rate on adjusted pre tax earnings in the September quarter to be approximately 27% to 28%.

Our interest expense for the September quarter is expected to be approximately $12 million.

Non cash stock comp expense should be about $12 million and our depreciation and amortization will come in around $24 million.

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

Thank you at this time of the day to take any questions you might have for us today.

If you would like to ask a question over the phone simply press Star then the number 1 on your telephone keypad.

We have our first question from the line of Jeff Hammond from Keybanc capital markets. Your line is open.

Hey, good morning, guys.

Jeff more on Jeff.

So.

Really just wanted to get a better sense of what's really driving the <unk> water business I think that was the biggest surprise on my model.

Is it more the <unk>.

<unk> momentum or is it more broad based and maybe within that just speak to what youre seeing on the broader non res side.

Yes, frankly, Jeff it's <unk>.

It's really the.

The entire business I think <unk> continues to be a huge opportunity for us.

Got.

And flow systems, we're seeing on.

All the things that were supposed to start perhaps you know.

18 months ago.

Begin to start now.

We continue to have great traction and water safety and control with our backflow and a host of other products. So it was really frankly much more broad based than that.

And then just the hygienic and environmental part of the business.

And look I think as non res.

Look at the end market, we've said it before it's a hyper local market and there is always activity and when you see.

California begin to Texas.

Texas is doing great things in the northeast is beginning to come.

Come back to life.

We think the rest of the year it looks good and all signs indicate that 2022 is really good I mean, the momentum index.

Strong so.

Sort of what we had expected.

I think there was a big fear that there was going to be a dearth of activity in 2021, and <unk> was going to carry us through the <unk>.

Reality is I think the end markets.

Regionally.

We're going to be fine and obviously, we've got this long tailwind on the hygienic environmental and the conversion away from.

Manual to sensor and so that's I think the way to think about it the rest of this year and into next year for sure.

Okay, Great and then just.

I know a lot of moving pieces in the margin G&A on a tough comp there maybe.

Maybe just talk about what the underlying incrementals are in the business. If you kind of cut out the noise of FX Hadrian. Some other temp costs coming back and then maybe just speak to the Hadrian integration then.

How it is progressing in terms of some of the margin improvement initiatives. Thanks.

Yes, Jeff this is mark again.

Todd mentioned, if you look at the underlying core business.

Those are incorporated in the quarter was approximately 28% EBITDA margins on the core business. Despite some other headwinds.

From a cost out last year are performing very well continues to be managing the price cost equation effectively.

The business.

So I can get from a from a quarter standpoint, you know everything that we expected and I think the team is doing reach on while at the same volume.

We mentioned, where we're stepping up our investment in the business on multiple fronts to drive near term growth opportunities, while the long term growth strategy. So.

Core margins on that on a really good spot I'll turn it back to Todd 11 couple of Hadrian.

In terms of Hadrian's were.

Really excited about the opportunity.

Long term with Hadrian, obviously, it's been a little bit difficult to do all the integration stuff in.

Just given the inability to travel up till now so I suspect that we're going to we're going to really accelerate the margins in the second half of the year and into 2022 with Hadrian and March them up the ladder.

That starts with a 2 on it.

In a relatively short period of time. So we're we're thrilled to have it in the portfolio now we're starting to be able to use it in the ways that we envision which as you know.

Offering.

<unk> solutions in Iraq.

Sound commercial restroom that would include that the other thing to remember about Hadrian is.

A lot of this.

And schools and hospitals and things like that that really have done no retrofit upgrades for the past 12 months. So the backlog the order rate the inquiry rate.

Is.

It is substantially higher than what we would have envisioned.

Just probably 6 months ago. So I think we're on a on a good path to get Hadrian.

Net where we want it and we're thrilled to have in the portfolio.

Yes.

Okay, great. Thanks, guys.

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

Good morning, guys very strong quarter.

Brian Thank you.

As Todd when we can dig in a little more on what Youre seeing in the education vertical specifically, obviously core to your business and how the space is influencing <unk> current momentum than the revised 2021 growth.

Well, obviously when you look at some of the funding.

That's going to be a positive.

<unk> I don't think many people have.

Anticipated.

Over the course of the last year.

And again I think the.

The specific verticals followed the specific economic activity.

Regionally and in these local markets and so when you think about places like Texas, Arizona.

Florida, where you're seeing significant population growth that drives all the other things around it whether that's additional health care facilities are or K through 12 schools high schools et cetera.

And now with this incremental as your funding debt.

That states are getting I think I think there's going to be a real opportunity we're tracking.

The levels of.

Funding, where it's going.

Quotation opportunities and then you've got you just got to work through.

How that money is going to get spent and allocated through.

Frankly things like school boards et cetera. So.

It's going to be a positive tailwind for us that we probably didn't fully anticipate probably 6 months ago.

Helpful detail all makes sense.

Touched on Hadrian integration.

On.

And the pandemic conditions that haven't been ideal for that but good momentum overall.

Net revenue this quarter looks.

It looks like it shook out on a high teens, obviously above $60 million annualized what kind of growth are you expecting for the year from Hadrian.

Brian I think it's basically if you look on the numbers.

The Hiseq number.

So that feels relatively consistent but if you look at the next few quarters on how it will contribute to our overall growth other than <unk>.

Ralph is going very well on a core basis year over year with more of that as Todd mentioned like on a little more on the back half on a corp, giving.

Given the opening up we're seeing momentum sort of fee income.

All of these retrofit projects that are coming to fruition of all the time so.

More to come on that.

The margin side I mentioned earlier.

Making really good progress on meaningful incremental margin on the back half versus first half.

2022, a lot of site EBITDA margin, that's about a 2 on it.

That's on that stuff going on.

Listen education business.

Got it and then 1 higher level 1.

Perhaps I was reading too much into on this but the preliminary 2022 market outlook being decent for your press released can you offer some color on how your team is thinking about the puts and takes there.

I think.

The outlook at least assuming we don't have a drastic shift in the backdrop.

Would be quite a bit more bullish given the indicators at hand, and then certainly the momentum of your own business.

Well I guess the way to read it Brian is with 6 months ago or so in 'twenty 1.

I think decent is an appropriate way to characterize it as we get closer to that.

And things hanging there I would I would.

Upgrade our outlook accordingly, so.

I think a year ago, we had a view that the world wasn't going to end in 'twenty 1.

Everyone did and so I think the way to read into that is.

Decent probably only gets upgraded as we go through the year.

But generally speaking I think we feel pretty good about it.

Perfect. Thanks, guys.

Thank you. The next 1 is from Mig <unk> from Baird. Your line is open.

Thanks, well as a box fan myself I was hoping around midnight last night that maybe you guys would delay the call, but I guess that wasn't to be so.

I had a couple of strong coffees and here I am.

That makes that makes it a funeral's Meg.

[laughter].

I guess, what I'm wondering here as we're thinking about VW as a standalone entity.

How are you planning on talking about the business.

Are you.

Going to provide some kind of a new segment structure, you either by end market or.

Even even within within the makeup of the business right I mean, you're talking about institutional and then commercial and industrial but I'm wondering.

Based on questions that have been asked already.

Are we going to be able to put maybe a finer point as to what the sub verticals. If you would you know education versus health care versus true commercial is going to be as dws gets closer and closer to be standalone.

Standalone entity, how do you think about that.

Well the 1 thing I'll say is <unk>.

Last quarter, we outlined.

Our previewed essentially a little bit on gws just in terms of what it is we do how we do it some other product categories and we talked about 3 sectors water safety and control that would essentially cut across all different verticals, we talked about hygienic and environmental.

I think that's the sensor category and other things and then finally flow systems, which is primarily our drainage business, which again cuts across all different verticals. Each has a little bit of a different dynamic with respect to retrofit, but I think thats. The sector view is how we're sort of planning on talking.

Through.

The business on a go forward basis and as we.

As we get closer to the eventual.

On Standalone pure play water business.

We will be out I think doing a little bit of a mini roadshow in getting people exposure to.

How long are you talking about the business some of the dynamics in it.

And how we expect it to perform going forward.

Okay.

On.

For several quarters now you've been talking about new product introductions.

Obviously focused on on water management.

Sure.

I'm sort of wondering how you were thinking about.

First.

The product vitality.

Now versus say 5 years ago in terms of all the work that's been done here.

And how are you thinking about the growth algorithm in terms of at this point, what's a fair expectations for new product contribution to organic growth, but also what happens with margin right from all these new products out there on introducing debt Youre basically, saying hey, these are unique they are differentiated and they create a lot of value.

Our customers can you can you talk about that.

Well I'll start I'll start by saying.

There is without question far more innovation and new product development in the last 5 years, and then probably the 20 prior to that.

Secondly ever.

Every product that we've been introducing.

Is that a financial profile and margin.

Better than probably the fleet average.

And number 3 you can't I think it's really important to understand that.

Develop a product to drive.

The best or highest level of specification that she can.

And so by.

So you drive specification with an engineer architect or end user.

You don't want to introduce a new product.

That doesn't.

Does it reap the rewards of having done that spadework on the specification. So I don't think vitality is necessarily the right way to think about this it's the compounding mode.

Other basis of design or a higher level of specification, we're really driving within this because.

Just want to look at pure product vitality numbers youre going to youre going to walk down this.

Road of doing all the work to get specified and when the time comes for it to get bought.

Goes into a construction site and you've got a different product.

So you you want to make sure that you're pacing the new product innovation, but equally important is it.

Suffocation work upfront.

So I think there is.

There's a level of understanding on this that has to be.

Well understood.

From your side, and obviously investors, but look I mean, the business grew 29%.

24% on a stack basis core margins as Mark said almost 28%.

I think we're doing something right.

And so as you think about the go forward again pounding.

New products, creating a greater competitive moat.

On driving specification of those products is the focus organically and then obviously, we can we expect to be able to do some M&A.

Around these 3 sectors.

That will drive even.

Overall growth beyond just core growth.

Yes.

Fair.

If I can ask a question on <unk>.

Well thank you.

Youre welcome.

If I could ask a question on on PMC.

Hey.

The recovery here like you said, a little bit better than what you previously anticipated.

As you are looking at this business and you're comparing it to prior cycles prior downturns.

Leaving aerospace the aerospace side right, because that's kind of.

We all understand those dynamics, there, but I'm curious what are you seeing debt, that's maybe different and.

This up cycle and what do you think are some implications for the business.

Our business down the line right post post transaction and to wait maybe RBC is going to be able to.

To drive either synergies or incremental growth.

Based on that.

Well I think.

From an end market perspective, I would say it's much less.

No.

Individual end market driven meeting.

Looking back mining was great.

Or looking back oil and gas was great. This is far more broad base I think our level of diversification in and around more stable end markets like food and beverage.

Is clearly playing playing through.

And I think as we look forward and partner with Regal on this.

I think they see the opportunity to continue to.

1 and when.

These more process based industries, but continuing to diversify the business into these more.

Broadly stable end markets with.

A significant amount of content.

When the first fit and then when the aftermarket for a long period of time, So I think it's coming together at the perfect time.

I think our teams are working together really really well and I think we're excited to just.

Get down to get down to the final strokes and.

And get the merger done, but I think generally speaking I think it's just far more broad based on far more focused on more stable end markets and the diversification what we've done over the last whatever 5 or 6 years.

Great. Thanks for taking my questions.

You bet.

Thank you. The next question is from the line of Andrew <unk> from Bank of America.

Please go ahead.

Hi, Good morning. This is Emily <unk> on for Andrew or open.

Good morning.

Good morning.

I wanted to dig deeper.

On the school vertical share zurn.

Is there any way to break down how much of the current backlog is.

Existing retrofit work that was pushed out from last year.

And then what is new work.

<unk> spent on by the states by the stimulus money.

Yes, Emily if that exists.

We'd love to have it too.

I think we just think that.

We're looking at each of these opportunities on a.

On a very.

Hyper local regional basis, but I don't think we have the ability to break that out for you.

Okay no problem.

And then my follow up question is on supply chain.

What types of challenges are you and your suppliers experiencing particularly in Asia on how do you think your supply chain strategy has allowed you to navigate too.

On the shortages that are going on right now thank you.

Well, we obviously leverage.

Heavily leverages design procure assemble test model.

We've done a I think an.

An outstanding job over the last 10 years to establish that established multiple sources of supply diversify.

Out of China as appropriate and then run a sign up process that.

It was very strong to be able to predict demand and then ensure that we get the things that we want on time Chad.

Challenges are numerous.

From individual component suppliers supplying our suppliers.

Whether it's.

Shipping costs shipping lanes, but.

That's the business, we have chosen to be in.

And I think our SIOP process in general.

It has to be Super robust because we do rely on third party suppliers for for helping us bring products to market and so that's been the.

The thing that has helped us the most our teams have done a terrific job of <unk>.

Staying in front of what we think expected demand may be in order to ensure that lead times on availability or best in class and that's also helping us win business. So.

It's really a multi faceted.

<unk> view of what we've done and continue to do I mean like anybody else, we have challenges day to day.

But the ability to navigate through those keep lead times and service levels Super high is allowing us to win more often than not.

Great. Thank you I'll pass it on.

Yes.

Thank you. The next 1 is from Joe Ritchie from Goldman Sachs.

Thanks, Good morning, guys and congrats on that win last night, it looks like make with dealing with party.

Let's put.

Put it that way.

Yeah, Yeah, so, let's say like walking with rocket last night.

But.

Couple of quick ones for me I guess.

Maybe you could comment on on that line of questioning that you just got on the comply chain and really this is the place and in general Yes, we heard from from Dover yesterday that 1 other segment.

<unk> backlog this quarter because.

Candidly they gets that.

Didn't have enough labor really to get out some of their products and they highlighted kind of like in place and being a little bit more of a headwind in the second half of the year, particularly on the labor side. So I'd be curious to hear any comments that maybe you got make along those lines and what youre seeing in your business.

Well obviously.

The outlook, we provided with Q3 is our best view on all of that.

We are not seeing a lag.

The labor challenge that you just spoke of and I guess, it's our view that win.

When you have.

The dynamic that we have in the world. The last couple of years, starting with tariffs and then you have a pandemic on top of it and then you try to start the world up on a synchronous fashion.

It never comes back on a same straight line as you shut it off and on obviously there are labor shortages in certain industries and certain parts of the market that are of course impacting.

That ability to get capacity back online across a wide array of interconnected.

Players and industries and so it's our view that the inflation that we see.

Seeing now is a little bit transitory and by the time, we get to you know.

Winter.

You will see that abate, but everything that mark talked about and I spoke about in terms of how we're seeing.

The top line and our margins.

Things like that have all of that.

With our best cut.

What we're seeing and expect in it.

It was strong.

<unk> comment that we would expect to see some other transitory freight processing costs become a little steeper in the back half on here more on them, but are important on the fourth.

The first point.

We built on them and we're managing around it.

Got it Okay. That's that's helpful. And then maybe just my 1 follow on would be just around like M&A clearly.

Nice job and then working down the leverage numbers.

And continuing on working down on tier 1 per transaction completed.

Maybe just any color you can give us on your pipeline today, how you're thinking about where valuations day.

And yes, how robust the pipeline is today.

Look when we made the decision to do this you know we made it with.

Knowing that you know we were gonna be.

We're gonna be stand alone and we better have a robust enough pipeline to begin to acquire and leave ourselves with the balance sheet to be able to do that until I think.

I think we see a number of opportunities.

I don't think we're going to predict the time, where the timing, but I think we feel really good about M&A opportunities in and around our core business and maybe some some line extensions over time.

And in terms of valuation obviously.

We've been a disciplined acquirer.

For a long long time, I think we're going to continue to do that on.

Sure.

Our philosophy has been.

Cultivate things that make a lot of sense and do it at a value that's discipline that creates.

A high ROIC in a relatively short period of time, and that's not going to change so.

You know.

You listen to some of these calls and people just gripe about how expensive things are.

We get paid to get these things done and create value for shareholders and so that's what we're going to continue to do.

Yes, that's great to hear thanks, guys nice quarter.

Thanks, Joe.

Thank you there are no further questions at this time presenters. Please continue.

Great well, thanks, everyone for joining us on the call today.

Definitely appreciate your interest in Rexnord, and we look forward to providing our next update on we announced our September quarter results in late October other great day, everyone. Thanks.

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

[music].