Zurn Elkay Water Solutions Corp (ZWS) 2008 Q1 法說會逐字稿

Good day everyone and welcome to today's Rexnord Corporation Conference Call to report the first quarter fiscal year earnings results. Today's call is being recorded. With us today are Bob Hitt, Chief Executive Officer; George Moore, Chief Financial Officer; and Todd Adams, Controller and Treasurer. Mr. Adams, please go ahead, sir.

Good morning and welcome to the Rexnord Investor conference call to discuss our first quarter fiscal 2008 financial results. My name is Todd Adams, Controller and Treasurer of Rexnord, and with me this morning are Bob Hitt, Chief Executive Officer and George Moore, Executive Vice President and Chief Financial Officer of Rexnord LLC.

During today's call, Bob will discuss the events of the quarter and also provide additional commentary about the industries and end markets we serve. George will then discuss the financial results for the quarter. After this discussion, we will open up your call to your questions. A replay of this call will be available for a period of one week and the phone numbers for the replay can be found in the earnings release we filed in an 8-K with the SEC yesterday and is also posted on the Company's website at rexnord.com.

Before we start, I will refer everyone to our earnings release and Form 10-Q filed yesterday regarding our view on forward-looking statements and risks. I would also like to remind everyone that any forward-looking statements made in this call, including future market conditions, future operating results and other plans represent management's best estimates as to what may occur in the future and are intended to fall within the meaning of the Private Securities Litigation Reform Act of 1995.

Even though the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, they can give no assurance that its expectations will be attained. Finally, our business is subject to various risks and uncertainties, so please refer to the risk factors outlined in our reports filed with the Securities and Exchange Commission.

Additionally, within this call we may use some non GAAP measures, such as adjusted EBITDA as an indication of underlying operating performance. The Rexnord definition of adjusted EBITDA starts with EBITDA as defined in the Company's credit agreement and is defined as earnings before interest, taxes, depreciation and amortization with additional provisions for add backs of certain restructuring expenses, other income and expense, LIFO income and expense, stock option expense, charges and gains associated with the Canal Street accident, exclusive of recoveries under business interruption policies and the impact of fair value accounting and the corresponding amortization of the step up of inventory required under purchase accounting.

Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP.

Because EBITDA, is calculated before recurring cash charges, including interest expenses and taxes and is not adjusted for capital expenditures or other recurring cash requirements to the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.

With that, I'll turn the call over to Bob Hitt, Chief Executive Officer of Rexnord.

Thank you, Todd. Good morning and thank you all for joining us on the call today. Yesterday we issued our press release outlining our first quarter of fiscal 2008 results, which I'm hopeful everyone had the opportunity to review. As we've done in the past couple of quarters, I will start by providing a quick update on our recovery efforts at Canal Street.

When we last updated everyone on May 24, regarding our fourth quarter results, we told you that our recovery efforts up to that point had surpassed our initial expectations and that we were confident that we would be back to pre-blast production rates by the end of the summer. I can tell you sitting here today, I am happy to report that we are on track with our prior commitments.

By the end of our second fiscal quarter less than two months from now and less than 10 months from the date of the tragic accident that caused three associates their lives, we will have barring any unforeseen set backs made a full recovery from the December 6, accident.

Let me just give you a couple of high points and the level of progress over the past couple of months as well. Our standard products -- the standard gearboxes on time delivery at Canal Street is up to 95% compared to a 50-60% ratio even post accident. We have made a tremendous amount of progress within that particularly putting [our VS] into that area. Approximately 500 of our large engineered drive orders were rescheduled due to the blast and as of the end of June all but eight of those orders have been shipped, and we certainly anticipate the residuals to take place quite quickly.

Building and physical reconstruction efforts are in the final stages and will be completed by this fall. All the receiving and warehousing of products and components have returned to Canal Street from the temporary locations we had after the accident. Coordination with the insurance carriers continues to be excellent. We've received another $10 million in insurance proceeds in the first quarter bringing the total since the accident to $47 million.

And finally, I would like to mention how extremely proud I am of all of our employees throughout the entire organization and how well they have handled the adversity of this tragic accident. There was hundreds of people from all functions, have worked tirelessly for the past eight months to get us to where we are today. So, to them I certainly say thank you.

Later in the call, George will walk you through the financial impact of the accident in the quarter as well as discuss the future impact that we may have as we finish the recovery. And I also look forward to updating everyone again when we announce our second quarter results.

Additionally, the first quarter represents our first four quarter of ownership of the Zurn business after the acquisition in the fourth quarter of fiscal '07. Throughout the call, we will try to give everyone a transparent view of the spilt of how much each of the businesses, Power Transmission and Water Management, contributed to the quarterly results.

So with that let me go through some numbers. In the first quarter, consolidated sales grew 55% from last year's first quarter to $448.2 million. Within that Power Transmission's sales grew 7.4% close to $310 million, 309.8 to be exact, in the first quarter and there was only minimum impact as a result of the business interruption at Canal Street, which adversely impacted sales by about an estimated $2 to $3 million.

Water Management's first quarter sales were $138.4 million. On a pro forma basis, Water Management sales grew 13.1% for the three months ending June 30th, compared to the prior year June quarter. On a consolidated basis, our first quarter sales grew -- growth pro forma that includes Zurn in the prior year was 9.2%.

And as we exit the first quarter, our consolidated order backlog sits at $452 million, which is up $28 million or 7% from March. Our Power Transmission backlog at the end of the quarter was $430 million, which was an increase of 6% from March and up 23% or $81 million from a year ago June.

Our first quarter consolidated adjusted EBITDA increased 67.3% to $87 million or 19.4% of sales. When you look at it by platform, Power Transmission adjusted EBITDA in the first quarter was $56.4 million, which was an increase of 8.5% over the prior year quarter. And our Water Management platform generated $30.6 million of adjusted EBITDA in the quarter, which equates to 22.1% of sales.

For the first quarter adjusted EBITDA in the Power Transmission platform included $2.9 million of severance costs related to some organizational re-alignment that we did in our Power Transmission business that occurred in the quarter. But also includes the benefit of $2.5 million of recoveries under our business interruption policy for Canal Street.

Additionally, we estimate that the adjusted EBITDA is approximately $1 million lower as a result of the Canal Street accident and the corresponding business interruption and adverse sales impact that I mentioned previously for the quarter. And of course, George will share some additional comparability when he goes through his information.

Finally in the first quarter we reduced our debt by $20.3 million, which drove our leverage ratio to six times at the end of June compared to 6.2 at the end of March and this is down from 6.8 times at the time of the Apollo acquisition little less than a year ago.

From an economic outlook and the environment as far as how it's impacting Rexnord, we continue to see fairly decent market conditions throughout both platforms in the first quarter. In the Power Transmission platform, we are well diversified with both customers and markets and many of the markets where we have strong leadership position such as in energy, mining, aggregates, aerospace which continue to grow and have a solid outlook.

Within Water Management, commercial construction continues to be solid and our exposure to residential construction is relatively small. So, we are very excited about starting to reap the benefits of the work the Zurn team has done over the past couple of years to develop innovative new products, as well as penetrate the municipal and civil markets.

And as we exit the first quarter and look ahead to the second quarter, I would characterize the majority of our end markets as relatively healthy with our focus being on executing on the opportunities that we have.

Now from a standpoint of the broader economics, as I think we all know the Institute of Supply Manufacturing data was relatively strong throughout the quarter; June slipping a little bit from the 54 to 56 range to April-May to 53.8. And the U.S. industrial output did grow by 1.4% year-over-year and 1.6% adjusting for manufacturing output only. And June capacity utilization at 81.7, relatively flat from March which also bodes well.

Additionally being very specific within our industry of Power Transmission, the PTDA members that we follow closely, their sales were up 6.8% through May and the industrial distribution channel remained very healthy, as to the sales to inventory ratios ending at 10 times in June, which was up 8.9% from January and 9 from a year ago. So continues to be also the inventory positions in the channel to be very healthy.

Specifically as we look at Zurn on the Water Management side, we see overall construction spending has continued to be relatively solid with non-residential construction startup 6.66% in June when measured by square footage and we are seeing strong activity levels in lodging, manufacturing, hospitals and healthcare as well as the civil and municipal markets.

Everyone is well aware of the weak industrial construction situation; begin that we are primarily focused on non-residential, in fact greater than 75% of our sales over there. We're cautiously optimistic we'll continue to see reasonable market growth throughout calendar 2007.

As we look at our business over the next several months, we believe we're well positioned in both platforms. We see reasonable fundamental growth characteristics in a number of our key end markets such as energy, the mining, commercial construction, water works and sewer Water Management, our cement and aggregates, as well as, of course, our aerospace.

Within Power Transmission, the ID channel continued to be healthy, and inventories, as I mentioned earlier, are at reasonable levels. And within Water Management, we are very excited about our new product offerings and see that as an opportunity to extend Zurn's strong tradition of double-digit organic growth, as we continue through fiscal year '08.

One of those examples I'd like to mention of this innovation is what we call our new ECOVANTAGE product line, which includes high-efficiency Zurn system that only uses an eight of a gallon of water for a flush, compared to a traditional one that uses one to three gallons. This product saves only as in the environment thousands of gallons of water annually, result some hardcore savings year-over-year based on reduced water consumption charges. It's a great example of some of the cutting-edge things we are doing at Zurn to promote water conservation and leading the industry with green initiatives by savings building owners and the municipalities real money.

One situation we are closing managing costs is commodity cost increases, within the Water Management over the past several quarters. We've seen the adverse impact of higher copper course. We certainly are actively working to meditate those impacts through implementing price increases, as well as through innovative product development and enhancements to existing products. And within Power Transmission we are seeing some escalation of metals and certain resins.

We are going to continue to actively work on productivity and cost reductions throughout the balance of the year to minimize any potential gross margin impact, as well as locate pricing opportunities. And in fact we've recently announced the price increase through distribution, effective October 1 for Power Transmission.

Couple of other points, as most of [you aren't] aware, we've been actively working through the Zurn integration related to items since the acquisition date. The primary integration work has been to wind down the former headquarters of Jacuzzi, West Palm Beach, Florida. And I could tell you the integration is effectively done and we expect to be at the spending run rate anticipated at the time of the transaction by mid-February '08 -- fiscal year '08.

For my conclusion, we're off to a solid start in fiscal '08. Our strong organic sales growth of 9.2% in the quarter, 7.4% for Power Transmission and 13.1% for Water Management, coupled with margin expansion and debt reduction allowed us to continue delivering our commitment to reduce our leverage, which is down at 6.0 as I mentioned earlier from the 6.8 less than a year ago.

We continue to be on track with the recovery from the Canal Street accident, as I mentioned, and we are more resilient and confident, I will tell you, from having dealt with such an adversity.

As we look forward, our diversity and our leadership positions and platforms, with attractive growth profiles, coupled with the obvious direction of business system established Rexnord as a premier, multi-platform industrial company.

Our priorities in fiscal year '08 remain the same, focus on the customer, drive world-class performance on quality, delivery, and costs. And so if we do things right, we will continue to grow, drive margin expansion and generate cash to reduce our debt.

So, with that I will turn it over to George to provide some more in-depth financial information regarding the quarter. George?

Thanks, Bob. As Bob mentioned earlier, our first quarter 2008 reported results were minimally impacted by the accident at Canal Street on December 6th. We estimate that sales were adversely impacted by only $2 to $3 million in the first quarter with a corresponding decrease in operating income of approximately $1 million.

The relatively small impact in the quarter was driven by the catch up of shipping some of the orders in the first quarter that had been rescheduled after the accident. We shipped most of those rescheduled items in the first quarter and we anticipate that any business interruption impact in the second, and perhaps to a lesser extent the third quarter, will be as a result of the delay and hesitation of customers in placing orders immediately after the accident or orders we do not receive in the weeks after the accident.

Offsetting the approximate $1 million operating income impact in the quarter is the allocation of $2.5 million of the $10 million of cash insurance proceeds to recoveries under our business interruption insurance, as included within the line item Gain on Canal Street accident, net on our income statement.

Now, I would like to provide you with financial overview of the first quarter and some insight into our debt reduction activity. Let's start with sales. For the quarter, sales were $448.2 million or 55.4% higher than the first quarter of last year. $138.4 million or 86.6% of the total growth was attributable to having acquired Zurn Water Management Business included in our current quarter, without being included in the prior year. The remaining increase is a result of 7.4% organic growth in our Power Transmission products.

End markets of energy, mining, aggregates and aerospace remained strong, somewhat offset by the unfavorable impact from the Canal Street accident. Additionally, favorable foreign currency translation added approximately 2% to the growth compared to the prior year quarter.

Gross profit in the quarter was $142 million or 31.7% of sales compared to 31.1% in the first quarter of a year ago. Gross profit margins in the first quarter of fiscal 2008 were adversely impacted by 100 basis points as a result of a net impact of the amortization of inventory fair value purchase accounting adjustments related to the acquired Zurn inventories.

SG&A in the first quarter was $78.1 million, or 17.4% of sales, compared to $50.8 million or 17.6% of sales in the first quarter of last year. This inclusion of the acquired Zurn business from the acquisition date added $22.1 million of SG&A expense, compared to the prior year first quarter. The additional increase in SG&A dollars over the prior year first quarter of $5.2 million is driven primarily by higher non-cash stock option expense of $1.8 million and additional severance costs of $1.2 million for combined impact of 60 basis points.

In the first quarter, we recorded a gain on Canal Street explosion net of $8.1 million. This net gain in the quarter is primarily comprised of expenses associated with clean-up and restoration expenses totaling $1.9 million. Offsetting the $1.9 million of expenses is the allocation of $10 million of the insurance proceeds received in the quarter. The allocation is split between $7.5 million to our property and casualty insurance policy and $2.5 million to our business interruption policy for items through March 31, 2007.

Income from operations in the quarter was $59.1 million, compared to $18.3 million in the first quarter of last year. This year's operating income includes the acquired Zurn business, which was $20.1 million in the first quarter. Operating income in the prior year first quarter included $16.6 million of seller-related transaction costs associated with the sale of the company through Apollo last year.

Adjusted EBITDA in the first quarter was $87 million or 19.4% of sales. Adjusted EBITDA for the Water Management business was $30.6 million in the quarter or 22.1% of sales and Power Transmission adjusted EBITDA was $56.4 million or 18.2% of sales in the quarter compared to $52 million or 18% in the prior year first quarter.

Adjusted EBITDA in the first quarter includes the adverse impact of $2.9 million of severance costs associated with an organizational realignment within the Power Transmission segment, and benefit of $2.5 million of the business interruption recoveries. Adjusted EBITDA in the first quarter excludes approximately $1 million adverse profit impact from lower sales in the quarter as a result of Canal Street accident.

Finally, as we mentioned on the call last time, I will bring your attention to one item that affects comparability of Q1 sales, gross profit, and adjusted EBITDA between fiscal 2008 and fiscal 2007 for the Power Transmission segment.

After the Apollo acquisition in July, we modified the methodology around the timing of how and when we'll record rebate incentive programs with our customers. This modification has no impact on the comparability of full year numbers between fiscal 2008 and 2007. However, had we applied the same methodology throughout fiscal 2007 sales, gross profit and the $52 million of Power Transmission adjusted EBITDA in the first quarter of 2007, would have been reduced by $2.3 million.

Interest expense in the quarter was $49 million, reflecting the additional interest on increased indebtedness arising from the Apollo acquisition, as well as the Zurn acquisition compared to the prior year first quarter.

An income tax expense of $4.8 million was recorded in the quarter. The effective tax rate in the first quarter of 66.7% includes the accrual of interest expense relating to unrecognized tax benefits in accordance with FIN 48, as well as an increase in the valuation allowance relating to certain tax credits, which future utilization is deemed not to meet the more likely than our threshold. We continue to expect the total cash taxes paid in fiscal 2008 to be in the $12 million to $20 million range.

Looking at our balance sheet as of June 30, 2007, you'll notice it is relatively consistent with the balance sheet as of March 31, 2007. Our cash balance grew $4.7 million from the end of March to $60.8 million at the end of June. We held cash at the end of June to make some semi annual bond coupon payments on August 1st.

From a trade working capital perspective at the end of the first quarter, receivables were $268.3 million, inventories were $376.6 million and accounts payable were $131.1 million for a net of $513.8 million of trade working capital. Included within the inventory balance is a non-cash fair value step-up of approximately $37 million. As a percentage of annualized sales, trade working capital was 28.7% on a consolidated basis in the first quarter compared to 31.4% in the fourth quarter of fiscal 2007.

First quarter trade working capital as a percent of annualized sales excluding the inventory step-up was 26.6%, which compares to 28.7% in the fourth quarter of 2007 excluding the inventory step-up. We continue to see working capital as a significant cash opportunity particularly inventory within both Power Transmission and Water Management businesses. Our goal remains to drive trade working capital as a percent of sales and we believe that the majority of the opportunities will come from improving the velocity of our inventory turns.

Additionally, in the first quarter we've continued to refine, the purchase price allocation associated with both the Apollo and Zurn transactions. We expect to finalize the purchase price allocation associated with the Apollo acquisition during our fiscal second quarter and we anticipate that we'll continue to refine the Zurn purchase allocation throughout the balance of fiscal 2008, and make the appropriate adjustments to the balance sheet in future quarters.

Capital spending in the first quarter was $8.3 million or 1.9% of sales, compared to 3.1% in the first quarter of last year. Consistent with what we communicated during the prior call, we anticipate that for the full fiscal year, capital spending will be in the range of 2.6% to 2.9% of sales.

Our total debt at the end of the quarter was approximately $2.027 billion, after reducing debt by $20.3 million in the first quarter. After incurring $669.3 million of additional indebtedness to finance the Zurn acquisitions, we have reduced our total debt by approximately $80 million. Our liquidity at the end of June remained strong as we had cash balances of $60.8 million and no borrowings outstanding on our $150 million revolving credit facility; however, $36.7 million of the facility is considered utilized from letters of credit leaving approximately $113 million of borrowings available under the revolver as of June 30.

As of the end of the first quarter, we had $767.5 million of term loan B borrowings, $803.9 million of the 9.5% senior unsecured notes, $150 million of 8.875% senior unsecured notes, 300 million of the 11.75% senior subordinated notes and $5.2 million of other debt. Our leverage at the end of the quarter was 6 times debt-to-EBITDA, down 8 times from the 6.8 times at the July 21 acquisition date and down 2 times from the 6.2 times at the end of March.

As we have previously disclosed and discussed, we continue to expect to recover the majority of the non-recurring expenses associated with Canal Street accident as well as the business interruption impact. We expect to continue to make progress with our insurance carriers in the coming quarters to finalize and settle out our total insurance claims. Consistent with what we've communicated since the accident we do not expect the accident to have any material impact on our overall financial positions or liquidity.

With that financial overview, I'll turn it back over to the operator and open it up for any questions.

[OPERATOR INSTRUCTIONS]. We'll take our first question from Stefan Keitel with Credit Suisse.

Good morning.

Good morning.

Morning Steve.

If you look at the margins at Zurn, it looks like there was decent amount of deterioration there. I guess it's because of raw materials costs. How has pass through been, I guess copper prices is now kind of around 350. How has pricing been there, you have you been able to get acceptance?

Yeah, if you look at where it is today, in fact the June margin was improved though slightly from what we saw in March. We are seeing prices being captured one more year. We look at ourselves as price leadership and went out there and in some cases in the past some people were -- competitors hesitated a little while longer but we are seeing them stick more and more.

And then also Zurn, I guess a quarter of that business is kind of exposed to residential construction, I suppose that's through PEX, but has there -- have you guys seen any other impact really from the slowdown aside from kind of PEX acceptance, I mean is that segment been impacted?

No, in fact, I would say, no we haven't, and in fact PEX doesn't see the full impact either because there is a conversion factor from copper to PEX, that's mitigating a lot of that decline in the typical residential marketplace.

Okay, and then with Power Tran, if you talk about some of the markets there, give us a little more color, I guess the forest products is probably little bit slow, and then kind of more specifically I guess can you talk about kind of international growth versus some of the domestic growth kind of what you are seeing domestically and then kind of where the growth is coming from?

Yeah, if you look at, forest product continues to be soft for obvious reasons, but certainly offset by a lot of the large industrial marketplaces they were in across the board. And if you look at internationally, clearly, a lot of -- there were heavy industrial because of mining and heavy equipment, we have seen improvement both in North America and internationally. And overall on a broad based perspective, I would say that our Power Transmission business on an international side is up similar to type of percentages. And of course we got aerospace, which is no doubt a tremendous backlog and continues to grow quite substantially.

And you talked about orders if they become a backlog growing. Where is there -- is there a focus there or they have been pretty barred or is there certain segments that are taking up the majority of the backlog?

Well, segments, clearly if you look at it the longer lead time backlog hasn't changed a bit. It's very typical within aerospace and than particularly within gear -- particularly with heavy ring gears and industrial gears is where you get a lot of visibility.

Okay. And then finally acquisitions, if you've seen -- you've anything, is it -- any activity there or I don't know valuations have been -- any kind of activity I suppose?

I would classify the same as I have always said, which is, we are always looking at opportunity and certainly, if there was one sitting right in front of my face I couldn't [fade] that anyways. But, we clearly continue to look to see what's there, and I don't think I -- we view it right now any differently.

Okay. Thanks guys.

You are welcome.

I see.

[OPERATOR INSTRUCTIONS]. We'll hear next from Yilme Abebe with J.P. Morgan.

Good morning, thank you. Nice quarter. Can you -- looking at the Zurn business, firstly as you compare the end market for that segment in the first quarter? And as you look out, I guess in the second quarter, are you seeing any change in trends either positive, negative in terms of the end markets demand there?

Yeah, I -- well, at this point what we expect is -- we see it quite high as we have said and over the fiscal year towards the latter part of the year we would probably see it would be coming downward a bit. So, I look still it is in that high single digit type of growth for the year overall, because it is at a peak and we would expect somewhat of a slowing of the growth coming up in the second half.

Okay. And Power Transmission business, looks likes the first quarter was fairly solid on the end market demand side in most of your segments. It looks like that's -- it's probably like you have to continue at least in next several quarters and that is fair characterization?

Yeah. We continue to be -- I think I said this last time, cautiously optimistic. We said single -- again similar single digit numbers over the term of this year, and that's basically what I think we see right now as well.

Great. That's it for me. Thank you.

[OPERATOR INSTRUCTIONS]. We'll here next from [Kathy Nolan with Stone Harbor Investment].

Yes, good morning. In the first quarter of the year you reduced debt by $20 million, can you discuss your thoughts on your debt reduction plans for the year, if you have any targets or what your expectations are?

Yeah. Well, simply our goal is to be in the mid 5s on leverage profile by the end of the year and now we are still looking to that. When we look at the first quarter you saw little over $20 million pay down. Second quarter is really where we have the interest, third quarter is typically -- will better for us, fourth quarter we have a more interest payments. So, we continue to see that leverage coming down both from debt reduction and increased EBITDA as year-over-year result.

Okay. And can you discuss in terms of working capital if there are any opportunities there, and if given Zurn as part of the company now, we are going to see kind of a seasonal issue with respect to working capital needs in the first half of the year versus the back half of the calendar year?

Nothing unusual, Zurn's seasonality is slightly different than ours. Okay, their strongest quarters are typically first and second quarter -- fiscal quarters and ours really the fourth quarter is the strongest quarter, so they somewhat offset. We think from a working capital opportunity. As I've mentioned, we think there is opportunity in inventory and that's really going to come from putting RBS and improving the velocity. So, really no surprises from or major change for is expected.

And in term of the acquisitions strategy, I guess to the extent that the company is generally looking for opportunities. Given what's going on in the capital markets, have you seen any change in kind of acquisition multiples or is it too early to get a read on that?

I am not sure that we're in a position to answer that here. Really anything that you have seen in the papers is credit markets are tight, but we are -- we will not comment on acquisition targets.

No, I didn't -- I mean on multiples, are you seeing any change in terms of prices or...?

No, not really.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. We will take our follow up question from Stefan Keitel with Credit Suisse.

Just a question on BI, on the business interruption. Where are we now in terms of recoveries? I guess, where you through with -- I guess $47 million is total was -- I guess breaks with the property and casualties level. Where are you in terms of business interruption? How caught up are you and how much is there an opportunity to recovery?

From a business interruption standpoint the 47 to 12.5 is business -- allocated to business interruption, so -- and that really takes us through March 31, 2007. We think there is -- a little bit left in case we go forward, but as we -- our volumes come up there is still some impact that came back in the first and second, third quarter from possibly lost sales as we look at that. And we also don't expect the impact that was -- if you look at our midpoint is more than just the -- what would be recovered on business interruption. While we were down we continue to have some costs, whether its advertising, salaries and we ran at levels, because we're going to be back in business that we did not expect to recover, but the vast majority of the direct business interruption impact we do expect to recover. But, through -- we are through March 31, and that should be trailing off.

Okay. Thank you.

Moving on, we'll take our next question from [Jordan Hollander] with Jefferies and Company.

Hi, guys. This is sort of a follow up of one of the earlier questions where you talked target debt-to-EBITDA buys by year end. Do you guys have a longer term goal of -- whether you are comfortable with that ratio going forward?

Yeah. We want see this continue to come down, okay. We haven't given long terms, but, again, we are focusing on the debt reduction -- I think once we are down into the 4s we are very comfortable.

Okay, thanks.

And gentlemen, seeing no further questions, I will turn the conference back over to you for any additional or closing comments.

Okay. Thanks to everyone listening for your attention on the call today. As you can see we had a relatively strong quarter, solid core growth in both platforms with the adjusted EBITDA margin expansion. And we pay down debt as we set to reduce our leverage, while we completed integrating Zurn and continue to recover back Canal Street.

So, we look forward to reporting our second quarter results some time in the early fall and by then we will have additional progress to report, of course, on the recovery of Canal Street facility, as well as the progress we're making on continued focus on our customers and improving our overall quality, delivering cost, which is the center of the RBS.

So, thank you again, and we look forward to speaking with you again as we announce our second quarter fiscal 2008 results. Have a good day.

That does conclude today's conference. Thank you all once again for your participation and have a wonderful day.