Zurn Elkay Water Solutions Corp (ZWS) 2008 Q4 法說會逐字稿

Good morning everyone and welcome to today's Rexnord investor conference call to discuss the fourth quarter fiscal 2008 results. Today's call is being recorded.

With that I will turn the call over to Mark Peterson with Rexnord. Please go ahead, sir.

Good morning and welcome to the Rexnord investor conference call to discuss our fiscal 2008 fourth quarter financial results. My name is Mark Peterson of Rexnord, and with me this morning are Bob Hitt, Chief Executive Officer; Todd Adams, Chief Financial Officer; and George Moore, Executive Vice President of Rexnord.

During today's call Bob will discuss the events of the quarter end also provide additional commentary about the industries and end markets we serve. Todd will then discuss the financial results for the quarter. After his discussion we will open up the 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 on the earnings release we filed on an 8-K with the SEC last week, which is also posted on the Company's website at www.Rexnord.com.

Before we start, I will refer everyone to our earnings release on Form 10-K we filed last week regarding our view on forward-looking statements and risks. I would also like to remind everyone that any forward-looking statements made on this call, including future market conditions, future operating results and other plans, represent management's best judgment 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 on 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 report filed with the SEC.

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 adjustments for add back of certain structuring expenses, other income and expense, LIFO income or 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 measure of performance derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.

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

Good morning and thank you for joining us on the call today. Last week we issued a press release outlining our fourth quarter and full year fiscal 2008 financial results, which I'm hopeful everyone has had the opportunity to review. I will spend a minute on some of these milestones we achieved in 2008, and then talk about how our businesses are performing, including our end markets, and then finally touch on the overall economic environment as we begin our fiscal 2009.

First, let me say how please we are with our overall performance in fiscal '08, both from a financial perspective as well as a strategic point of view. We had a record year in terms of growth, margin expansion and cash flow generation. More importantly, we start fiscal 2009 well-positioned in both our platforms to continue to outperform our competition over the coming years.

First, I will take you through a few of the highlights. Full year of sales in '08 were a record $1.9 billion, an increase of 48% over the prior year. Our consolidated core growth for the year was 9.1% and 8% in the fourth quarter, as both platforms continue to post strong core growth. Additionally we're starting fiscal '09 with a record backlog of $541 million, which is an increase of 28% from a year ago.

The full year adjusted EBITDA grew by 57% or $135 million to $374.1 million, as full year margins expanded as well 120 basis points to 20.2%. If you look at the fourth quarter the adjusted EBITDA was $101 million or 20% of sales.

In addition to the strong sales growth and margin expansion in the year, our operational performance continues to improve, as we reduce trade working capital by $41 million in the year by posting the 9.1% core sales growth. Of the $41 million trade working capital reduction in the year, $37 million of that came from reducing our inventories. So clearly we are pleased with the inventory reduction. We are even more pleased that we achieved this while improving our on-time delivery to our customers.

Next, we continued to advance the strategic positioning of our platforms. In the water management platform we acquired, with cash flow from operations, GA Industries this past January. The GA acquisition provides our water management platform access to the end markets of water and wastewater treatment, which we expect to grow and perform well for the foreseeable future as water conservation and infrastructure needs become increasingly important across the country.

Finally, during fiscal '08 we made a full and complete recovery from the Canal Street accident that occurred in December of '06. The recovery from the accident has been an event what has been tested -- also as an organization, challenge us to deal with not only a tragic event, but then that to rally the entire organization to do whatever was necessary to continue satisfying our customer needs. At the same time, we (inaudible) rebuilt portions of our largest facility, all while continuing to perform financially. I can tell you I'm extremely proud of our organization and how we have come through this as strong Company. And I truly appreciate everyone's efforts.

Before I touch on how our businesses and end markets are performing, I would just like to say to our customers, suppliers and employees, thank you for your support and efforts since fiscal '08. I'm looking forward to our continued success in '09.

As pleased as we were with our financial performance in '08, I'm actually more excited about our future. Over the past couple of years we have positioned the Company into a diverse, multiplatform industrial company by focusing on four key areas that I will go through with you.

First, implementing our business systems, which is as you know, RBS. While we have made significant progress over the past five years on margin expansion, productivity and working capital improvements, we see that there is still an opportunity for improvement. We are early on in this journey of implementing our management process and believe that we have the opportunity to deliver breakthrough by listening to the voice of our customers and providing world-class quality, delivery and cost.

Next is delivering growth, both through core sales growth, as well as by developing and executing an effective acquisition strategy that has allowed us over the past three years to acquire key businesses for our power transmission platform, as evidenced by the acquisitions of Falk and [Delong]. But also the capability to add a platform as we did with the Zurn acquisition a year ago, and then build on the platform as we have been with the recent GA acquisition. Creating a sustainable competitive advantage in our businesses, in power transmissions we have built a leadership position. We have the broadest portfolio highly engineered products in the industry. The cost of (inaudible) the applications of many of our products are multiples of the cost of our products, which creates a dynamic where approximately half of the power transmission business is the aftermarket or replacements business for products used in equipment and/or installed base.

Also we have aggressively grown our installed base in power transmission by focusing on the key vertical markets of mining, energy, aerospace and cement and aggregates, all which are growing substantially, particularly faster outside of North America.

In water management we acquired the market leader in Zurn. Zurn is a business with a 17 year track record of double-digit core internal growth, with industry-leading margins. This growth has been driven largely by doing two things better than competition, driving innovation and specification, and then delivering that value to builders, engineers, architects and contractors through a nationwide distribution network, while implementing a flexible global product sourcing program.

As an example, on the innovation side, we have a productline called EcoVantage, comprised of high-efficiency urinals, toilets, flush valves and sensor faucets that deliver significant economic savings to building owners through water conservation.

And finally, delivering superior financial performance. Looking back over the five years Rexnord has grown sales and EBITDA at a compound annual growth rate in excess of 20%. Our core sales growth over the same period has been 9.9%. And our current EBITDA margins are in excess of 20%, both on a consolidated basis in each platform, with room to improve as we continue to implement our RBS.

This consistent growth and improving operational performance has generated substantial cash flows which have allowed us to predictably deleverage the Company over the past five years, while continuing to invest in business, as well as execute acquisitions.

In summary, we really like how we have positioned the Company for the future. Our objectives will continue to be to outperform, which is something we have been doing in both platforms, and believe we can continue to do going forward as we continue execute our strategy.

Now let me turn my comments over to the economic conditions. If you look at -- and its impact on Rexnord -- we continue to see these end market conditions throughout the majority of our markets in both platforms in the fourth quarter, with the only notable change in end markets being the commercial construction market and our water management platform softening somewhat from the third quarter.

In the power transmission platform our diversity with both customers end markets is clearly paying off, as does the sizable presence we have in mining and energy and aerospace and cement and aggregates. As we penetrate these markets, these key end markets, which are all growing substantially faster outside the U.S., we are seeing our international exposure increase, as our international destinations sales of PT now compromise approximately 40% of our total power transmission sales.

Within our water management platform we have three primary end markets, commercial construction, residential construction, and now the water and wastewater treatment market with the GA acquisition, which should provide steady growth and enhance forward visibility.

As we look ahead, clearly the market growth in commercial construction will be slower than what it has been in the past year. However, within commercial construction, we are well-positioned within infrastructure-related construction projects, such as hospitals, schools, municipal buildings, all of which should fare much better than commercial construction as a whole.

As we exit the fourth quarter and look ahead to fiscal '09, I would characterize the majority of the end markets as relatively healthy, and the overall industrial economy as somewhat fragile. But we expect to continue to see growth, albeit at lower rates than we are currently running.

This is where our strong backlog, new products, replacement/repair nature of our products, and the highly engineered and specification driven nature of our product portfolios should be a competitive advantage for us.

Now I will turn to broader economic indicators, first of all on the power transmission side. As we all noticed, the Institute of Supply Manufacturers, the PMI Index, as of April was 48.6, and has bounced around between 48 and 50 in the past several months, which highlights that the overall industrial economy is relatively flat -- not posting any growth, but not contracting all that much either at this point.

In April when we look at the U.S. industrial output it declined by 70 basis points year-over-year and 80 basis points after adjusting for manufacturing output only. April capacity utilization was just under 80% at 79.7, down 1.3% from December and a year ago.

Then when we look from a power transmission industry perspective, our PTDA, which is the Power Transmission Distributor Association members and manufacturers, sales were up 4% through March '08 for our distributors, and with manufacturers up 2.4%.

Some additional color on the industrial distribution sales that it remains very healthy. The inventory positions within the U.S. channel are in excellent shape, and continued to turn between 8 and 9 times recently. It is something we closely monitor, and we feel very good about the inventory levels of our products in the distribution channel.

Then specifically as we look at the Zurn on the water management side, within commercial construction, square footage put in place forecast are predicting a market decline between 5 and 10% year-over-year, compared to being down 1 to 2% in calendar '07. On the residential side we expect a similar 5% market contraction in the coming fiscal year, and expect steady growth in the water and wastewater markets to the low to mid single digits.

With a sizable portion of our commercial construction revenues related to infrastructure projects, and the addition of the water and wastewater treatment, we expect to continue to post growth ahead of the overall market in our competition.

Growth in the water management platform will come from continuing to provide innovative products to our customers, and advancing the penetration and use of our water conservation and labor saving products, all of which should provide growth from new construction. We also believe there is a sizable opportunity in the same water conservation-related products within the retrofit market, which is a very large market opportunity that we haven't yet exploited.

As it relates to commodities and price in both businesses, we have been very diligent and disciplined on pricing, and we will continue to be as raw materials such as copper, steel, natural gas and oil continue to fluctuate.

So as we wrap up fiscal '08, I would reiterate the strategic priorities that we used to build Rexnord over the past five years, all of which we continue to do next year and into the future, which is relentlessly implement our Rexnord business systems, drive growth both organically and through acquisition, create sustainable competitive advantage in our platforms, and delivery superior financial results.

As we have discussed on the call, we expect the underlying economic conditions in fiscal '09 to be tougher than we have been in the past couple of years. However, by focusing on customers first and then driving world-class performance and quality delivering costs, we'll continue to execute on our strategic priorities and add another year to our track record of creating stakeholder value in fiscal '09.

There is one other item I would like to mention before I turn it over to Todd. As we previously acknowledged as of April 1, Todd Adams became our Chief Financial Officer replacing George Moore, who had been the Chief Financial Officer since joining Rexnord in September of '06. What we didn't announce was that this was a planned succession of the CFO role from George to Todd. And George continues to be Executive Vice President reporting to me, with Rexnord oversight on IT, legal, and business development and acquisition integration. So it gives George the time to focus on those key aspects.

With that, I will turn in over to Todd to provide some more in-depth financial information regarding our fourth quarter and full year performance.

As Bob discussed, our fourth quarter financial performance kept a record year for Rexnord in terms of sales growth, margin expansion, and cash flow generation. I will take you through a few of the highlights of the fourth quarter, and then provide some additional insight to our overall operating and cash flow performance.

Starting with sales. For the fourth quarter sales were $502.3 million or 30.1% higher than the fourth quarter of last year. $60 million or about 52% of the total growth was attributable to having the acquired Zurn and GA water management businesses included in the current year fourth quarter, without being included for entire an quarter in the prior year.

The remaining increase is the result of a just under 18% growth in our power transmission segment, of which 9.4% represents core organic growth and approximately 8.3% of that growth attributable to the recovery from the Canal Street accident that adversely impacted sales in the prior year.

As we have said throughout the year, our power transmission end markets of mining, energy, aerospace and cement and aggregates remain strong, particularly internationally. Additionally, favorable foreign currency translations added a approximately 3% to the growth compared to the prior year quarter.

Gross profit in the quarter was $164.3 million or 32.7% of sales compared to 32.4% in the fourth quarter a year ago. Gross profit margins in the fourth quarter include the adverse impact of approximately 90 basis points net related to the impact of the amortization of inventory fair value purchase accounting adjustments related to the GA acquisition and LIFO expense net, combined. So on adjusted basis fourth quarter gross profit margins were approximately 33.6%.

This compares favorably to 31.8% adjusted gross profit margins in the fourth quarter of the prior year that included the benefit of approximately 60 basis points net of the impact of the amortization of fair value inventory purchase accounting adjustments related to the Apollo and Zurn acquisitions and LIFO income net.

SG&A in the fourth quarter was $84.7 million or 16.9% of sales compared to $67.2 million or 17.4% of sales in the fourth quarter of last year. The inclusion of the acquired Zurn business for the entire fourth quarter in the current year, and the GA business from the acquisition date, added $14.2 million of SG&A expense to this year's fourth quarter compared to the prior year.

We continue to drive overall SG&A expenses as a percentage to sales down, as full year fiscal 2008 SG&A expense as a percentage of sales declined 90 basis points to 16.8% compared to 17.7 in fiscal 2007.

As we previously announced, we sold a French subsidiary, Rexnord SAS, at the end of March to the existing local management for EUR1. The sale of the business resulted in a book loss of $11.2 million in the fourth quarter, which represents the difference between the net book value of the assets of the business immediately prior to the sale, and the EUR1 sale price. The sale was structured as a stock transaction, and as such the Company did not retain any of the obligations of the disposed business.

This was a business that didn't enhance our overall strategic position within Europe for our power transmission, and we will continue to service the French market with other sales resources.

Income from operations in the quarter was $56.2 million, and includes the previously mentioned $11.2 million loss on divestiture. Income from operations in the fourth quarter of last year was $61 million, and includes a $13.9 million gain on the Canal Street accident recovery, which was comprised of $10 million of recoveries under business interruption policies relating to the third quarter of fiscal 2007, and $3.9 million of other gains related to the property portion of the insurance claim.

As we outlined in our press release, the prior year fourth quarter sales were adversely impacted by approximately $22 million to $26 million, with a corresponding income from operations impact of $8 million to $12 million, with the midpoint being $10 million, which matches the amount recovered in the prior year fourth quarter under our business interruption policy, which relates to the third quarter of last year when the accident occurred.

Adjusted EBITDA in the fourth quarter increased 24% to just over what $100 million or 20% of sales. And for the full fiscal year adjusted EBITDA was just over $374 million or 20.2% of sales, as full year margins expanded 120 basis points compared to the prior year.

When you look at it by platform, power transmission adjusted EBITDA in the fourth quarter grew 11.9% over the prior year fourth quarter to $80 million or 21.5% of sales. For the full fiscal year power transmission adjusted EBITDA grew 15% over the prior year to approximately $278 million, as margins expanded 30 basis points to 20.7% of sales.

Within the water management platform, adjusted EBITDA in the fourth quarter was $24.8 million or 19.1% of sales, which compares to $14 million in the fourth quarter of the prior year or 20.1% of sales. After including the acquired Zurn business on a pro forma basis for the entire fourth quarter in the prior year, fourth quarter adjusted EBITDA last year was $19.8 million.

Corporate expenses in the fourth quarter were $4.2 million compared to $4.7 million in the prior year fourth quarter.

Moving to interest expense. Interest expense in the quarter was $46.6 million, reflecting a full quarter of the additional interest on the increased indebtedness arising from the Zurn acquisition compared to the prior year fourth quarter. An income tax benefit of $1.9 million was recorded in the fourth quarter, resulting from the tax deduction arising from the loss on the sale of our French subsidiary. Our full year tax rate was 34%, which was favorably impacted by the benefit reported in the fourth quarter. Prospectively we expect our book tax rate to be in the low 40% tax percent range.

Now let's take a look at our balance sheet. Our cash balance as of March 31, 2008 was $142 million, an increase of $86 million from March 31, 2007. And that is after using existing cash balances to acquire GA Industries for $73.7 million at the end of January, net of cash acquired. As part of the GA Industries' acquisition we also acquired $6.7 million of marketable securities and $5.5 million of debt. As of the end of March, all of the securities have been sold and the acquired debt has been extinguished.

From a trade working capital perspective at the end of year, receivables are $288.5 million, inventories were just over $370 million, and accounts payable were $178.6 million for a net trade working capital balance of approximately $480 million.

As Bob mentioned earlier, in fiscal 2008 cash flow generated from trade working capital, which we define as accounts receivables and inventory, less accounts payable, totaled $41 million, resulting in a recorded cash flow from operations of approximately $233 million.

While we made significant strides this fiscal year, we continue to see working capital as a cash opportunity, particularly inventory within both power transmission and water management. Our goal remains to drive down trade working capital as a percentage of sales. And we believe the majority of the opportunity will come from improving the velocity of our inventory turns.

One other item related to the balance sheet. We expect to continue to refine and finalize the purchase price allocation associated with the GA acquisition in the coming quarters and to make appropriate adjustments to the balance sheet at that time.

Capital spending in the fourth quarter was $17.8 million, or 3.5% of sales, and for fiscal 2008 capital spending totaled just under $55 million or 3% of sales. However, for both the quarter and the year our capital expenditures include capital spent to rebuild and recover from the Canal Street accident, and totaled $11.2 million for the entire year.

Adjusting to exclude these expenditures, capital spending in fiscal 2008 as a percentage of sales totaled 2.4%. Prospectively and consistent with what we previously communicated, we anticipate capital spending to be in the 2.5 to 2.9% of sales range going forward.

Our total debt at the end of the quarter was $2,025,000,000. During the quarter we retired the $5.5 million of debt acquired with the GA acquisition. And after incurring $669 million of additional indebtedness to finance the Zurn acquisition last year, we have reduced our total acquisition debt, both from Zurn and the Apollo purchase, by approximately $82 million.

Our liquidity at the end of March remains strong, as we had cash balances of $142 million and had no borrowings outstanding on our $150 million revolving credit facility or the $100 million AR facility that was put in place in the second quarter. However, $31 million of the revolving credit facility is considered utilized from letters of credit. Again, our solid liquidity at the end of the year is after finding the GA acquisition from existing cash balances during the fourth quarter.

As of the end of the fourth quarter we had $767 million of term loan B borrowings, approximately $803 million of 9.5% senior unsecured notes, $150 million of 8 7/8 unsecured senior notes, $300 million of 11.75% senior subordinated notes, and approximately $5 million of other debt.

Finally, we continue to delever. As of the end of fiscal 2008 we have reduced our debt by $22.4 million, excluding the acquired GA debt, driving our leverage ratio to 5.3 times at the end of March and 4.9 on a net debt basis. Our current leverage compares to 6.2 times at the end of March 2007, and down from 6.8 times at the time of the Apollo acquisition.

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

(OPERATOR INSTRUCTIONS). Tom Klamka, Credit Suisse.

Can you talk about -- the numbers themselves totaled (technical difficulty) for the quarter. It looked like the margins Q4 declined in both businesses year-over-year. Can you talk about what factors went into the margin decline?

Can you say that again?

The margins that you are showing for both PT and water management in the fourth quarter were down year-over-year on higher sales. I am not sure how much of that is materials related or what else is going through. Can you just talk about the margin decline and what factors went into that?

I think a couple of things. If you look at last year in the fourth quarter to get ourselves -- early in this year, I guess I should say, we did some restructuring inside of our operating activities. So we reduced a footprint in a couple of spots, and headcount in certain areas to get ready for fiscal 2009. So some of that is driving it, but there's nothing systemic underneath that.

What kind of impact are higher materials costs having on you? And what are you doing on the pricing side?

If you looked at it, clearly we're being affected like everyone else, but if you look at this impact, we have continued to have that ability to increase prices accordingly to what is reflective in the material increases. We did announce a price increase that goes effective June 1, and particularly in our power transmission. And we have been adjusting in the water management side throughout the year.

Do you think you'll be able to fully recovered the impact?

We expect to.

In dollars we expect to be able to fully recover it.

Right.

So there will be a margin impact in dollars for the change.

There could be.

When you look at just the topline growth, when you make all the adjustments, it seemed to be better than some of the other guys that posting numbers out there, either on the water side or the PT side. What do guys see happening on the market share of Rexnord versus some of your competitors?

If you look at it, we would say -- or characterize it across both platforms that we have been gaining share in some areas. We don't go through by productline, but I think that would be a fair statement to make.

Bob, in your commentary on the call, and also in the press release, you talked about the second half of the year. We are always obviously all concerned about commercial construction. Do you see the Zurn business continuing to comp positive year-over-year in the second half, or do you see that going to a negative comparison?

No, I would say if you look at what we mentioned, a few things. If you look at where we have good efforts within infrastructure, which is doing better than the traditional commercial. You look at our platform into municipal. You look at our breakthrough opportunities that we continue to work on in terms of new product and integration, and our retrofit opportunity, I say that I would characterize it as saying remaining positive.

Sarah Thompson, Lehman Brothers.

I was hoping you could help me on the balance sheet aspects of the GA acquisition. It just looks like your accounts payable went up a lot in the fourth quarter.

Sarah, we are having a tough time hearing you.

The accounts payable looked like it went up a lot in the fourth quarter. I'm wondering how much of that is just from the acquisition, or if there's any kind of a timing issue there?

Obviously it did go up as a result of the acquisition. And when we look at did we stretch accounts payable at the end of the quarter, the answer is I don't think there is much, if any, stretch in the fourth quarter number. It is consistent with traditional patterns. And we don't think there is anything to be concerned about.

Then also your accrual, I think it looked like you generated about $35 million of cash in 2008, I guess same question. Is that a timing issue or is that sustainable?

It is going to be combination of interest expense and timing. So fundamentally, yes, we think that the cash flow generated in the year is something that is sustainable over time.

Yilma Abebe, JPMorgan.

My first question is related to the water management business. If I remember correctly, I believe about 20% of that business is residential, the balance being commercial.

That's right.

That's correct.

What has been the trend third quarter versus fourth quarter? Has that trend been about the same in terms of the split between residential and commercial?

Yes, if you look at percent of split, I don't think -- it is not much different. It would be statistically insignificant I think.

I think you alluded to the fact that a part of your business is related to infrastructure in that segment. Approximately how much is related to infrastructure business?

Inside of -- so if you say commercial construction inside of -- the traditional Zurn business is this probably 75 to 80%. On that 80% above half of that is infrastructure related. So I think from an overall water management perspective, the other end market that we have added now is water and wastewater treatment. So that provides us additional forward visibility and stability going forward. But a good portion of commercial construction is in infrastructure.

I think there was a comment made that I guess that the markets in the water management is somewhat softer in the fourth quarter versus the third quarter. In the markets you compete in can you put a little bit of color around that? Numbers would be good, but if you could talk to it qualitatively, that also would be helpful.

I think as you look at residential -- and so this would be the portion of commercial construction that is unrelated to infrastructure. But as over the past year, as fewer homes have been built, there has been fewer call it ancillary buildings around that, so strip malls, movie theaters, restaurants. And so the commercial construction to support the residential structure has declined a little bit from the third quarter.

I think when we say the market has changed, I think that the fourth quarter growth in the non-infrastructure was slower than it had been in the third. And that is really a catch-up from fewer of those types of things being built around the country.

That is helpful. My final question is related to the PT business. How did the business related to OEM fare against the distribution business in the quarter? And any change in terms of growth in the third quarter versus the fourth quarter in these two end markets?

As I mentioned on the power transmission, it is still up mid digit, single digit type of numbers. If you look at our OEM, what we saw it is characterized as still going up. Particularly in the segment that we talk about -- of particular interest would be mining, energy, those particular ones have been going up.

You look at our international side, as I said of expanding internationally, and you look at just the overall industrial infrastructure build that is taking place in those industries both here and abroad, we continue to see that flowing through to the OEMs who supply that equipment.

(OPERATOR INSTRUCTIONS). Bob Franklin, Prudential Financial.

There's a line in the 10-K that says in the PT business, 45% of sales in North America from the aftermarket. And a year ago the 10-K had the same sentence, but the number was 60%. Did I get that right?

I will have to go back and look. In North America aftermarket revenues fluctuate year-to-year. But again, it is at least 45 to 50% is aftermarket in North America.

We're going to have to look at that, but about some of it might just be fluctuation of the fact that what I mentioned earlier of the strength of OEM being up, particularly in mining.

How about overseas, is it the same ratio or would it be different?

It is about the same ratio.

I want to follow-up, if I could, on the water management questions that were asked before. Before we used to wonder how much of the business -- of the Zurn business was commercial versus residential. And now you've got a third layer in there. So I guess the question is, is there a way we can get at how much of this is predictable, like infrastructure and municipal, and how much of it is new building, and within the new building how much of it is commercial versus residential?

I think to get that accurate is difficult with all that goes through distribution, it would be difficult to do. The best we can tell you is the percentage breakdowns of what we know the product go to, as far as the commercial versus residential. But then to break it down further than that gets a little difficult.

How much then of the business is GA versus Zurn at this point?

At acquisition the GA revenues were between $60 million and $65 million. So the $65 million is going to be clearly infrastructure. And then if you use a 80/20 on call it $500 million of Zurn revenues, you've got $400 million in commercial construction, of which half is related to infrastructure.

So the municipal -- I mean, obviously, the old Zurn business is dwarfing the GA business at this point?

It was a $60 million to $65 million acquisition, so the answer is yes.

Yes.

Two more questions. What is the amount of the [quan] note at this point?

It is about $524 million at the end of March.

$524 million. What is your ability to take dividends right now?

We do have some capability to take that (multiple speakers).

How much? I'm sorry, how much is it?

We will have to come back to you on that, but it is sizable, if we were to (multiple speakers).

You can still take a sizable dividend?

Correct.

Can I call you later to get that?

Yes, you bet.

[Eddie Shaugus], [Tenet Park].

A couple of questions. The first one, as it relates to the PT segment, can you possibly give us a breakdown by percentage of the end market that you sell into, like mining versus energy versus other ones that you have?

Well, to break every one down, we don't do that. But if you look at the key markets that I talked about, mining, energy, aggregates, cement, of aerospace and verticals, you would say that that is about 40% approximately. Somewhere in the 35 to 40, probably closer to 40% range of the total.

Of the total PT business or the total?

The total PT business.

The rest, the 60%, it comes from other kind of small industries or --?

It is a plethora of industries, anywhere from agricultural to forest product to food and beverage to general industrial to material handling. There are quite a few segments within that.

That's helpful. When it comes to the [Holdco] piece, are you guys -- under your current kind of credit structure and credit agreements are you allowed to pay cash interest on the Holdco?

We are. We have the option to pay, provided we have room under the cumulative credit basket, we do have the opportunity to cash pay that.

You are currently PIK'ing it?

That is correct.

How long do you anticipate doing that for?

There is notes that we have PIK'ed the interest since the arrangement was put in place a year ago. For the foreseeable future we expect to continue to do that.

That's helpful, thank you. I had just one more question. As it pertains to the LTM EBITDA you guys show it to be $374ish million, I believe. Right?

That's correct.

But does that reflect the full year's number for GA?

It does not.

If you were to include the full year's number for GA, what would the LTM EBITDA be?

We said at the time of the GA acquisition.

It was $9 million of EBITDA?

Between $8 million and $9 million of EBITDA. So that would be a full year, of which we had a partial year in the number, in the $374 million.

So add another $6 million or so million -- $8 million, $7 million?

That seems reasonable.

Jordan Hollander, Jefferies & Co.

Just a couple of follow-ups on the power transition business. You talked about the strength at mining, energy, any markets showing any weakness or slowdown quarter over quarter?

If you look sequentially quarter to quarter, no.

Just as a split of the 9.4% core growth in the quarter, what was the -- can you break out what growth at the international markets were versus domestic?

We don't exactly break it out, but I could tell you that the international markets are growing at a faster rate. That I can tell you.

Inside the 9, international grew faster than domestic.

Right.

But no added color?

No.

Is domestic like a low -- single low number or --?

I think if you look at the 9, we have got between 2 and 3 of currency in there. And then if you look at international, international grew substantially faster than domestic.

(OPERATOR INSTRUCTIONS). Tom Klamka, Credit Suisse.

Anything else brewing on the acquisition side, and would we expect to see more on the water management versus PT going forward?

If there was (inaudible) it would be difficult for me to comment. What I would say as far as what we would do and not do, I can't comment to that, only to say, on both sides of the segments if something was there that was not colossal in size at this point, but made sense from a strategic point of view -- that strategic would be beneficial to us, I wouldn't say we would not look at it, that's for sure.

How do you balance, with the free cash flow coming out of the business, how do you balance debt reduction versus acquisitions, and how will those acquisitions be financed?

I think we have been consistent in saying that over time we want to continue to delever the Company through a combination of earnings growth and debt reduction. I would say that is our number one priority. Our second priority would be to add to either the platforms through acquisitions that enhance the profile of either platform. Number one would be reduce debt, delever. Number two is acquisition.

Bob Franklin, Prudential Financial.

I think about a year ago you did mention that you were guiding to mid 5 leverage by the end of the year, which you came in at. Maybe you said it, and I didn't hear it, do you have guidance for the current fiscal year where you'll end up?

We didn't guide, but I think it is fair to say that we think we can take leverage to the low 4's by the end of next year.

Gentlemen, it appears there are no further questions. Mr. Hitt, I will turn the conference back over to you for closing comments.

Thank you to everyone listening for your attention on our call today. We appreciate your interest in Rexnord, and look forward to delivering another strong fiscal '09, as well as providing further updates when we announce our first quarter '09 results in the coming months. So thank you everyone.

Ladies and gentlemen, this'll conclude the Rexnord investor conference call to discuss the fourth quarter fiscal 2008 results. We thank you for your participation, and you made disconnect at this time.