Zurn Elkay Water Solutions Corp (ZWS) 2009 Q4 法說會逐字稿

Please stand by. Good morning and welcome to the Rexnord Fourth Quarter Fiscal 2009 Earnings Results Conference Call with Bob Hitt, Chief Executive Officer, and Todd Adams, Chief Financial Officer of Rexnord.

This call is being recorded and will be available on replay for a period of one week. The phone number for the replay can be found in the earnings release the Company filed on an 8-K with the SEC on Friday, May 29th and is also posted on the Company's website at www.rexnord.com.

At this time, for opening remarks and introductions, I'd like to turn the call over to Todd Adams, Chief Financial Officer of Rexnord. Please go ahead sir.

Good morning. Before we get started, just a brief reminder that this call may contain certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we filed on Friday, May 29th, as well as in our periodic filings with the Securities and Exchange Commission.

Today's call we'll provide an update on our overall performance across the Company, as well as some further detail on our financial results. After the discussion, we will open it up to your questions.

Now with that, I'll turn it over to Bob Hitt, Chief Executive Officer of Rexnord.

Thanks Todd and good morning everyone. Thank you for joining us on the call today. First, I will go over a quick summary of our operating performance in the fourth quarter and fiscal 2009.

For the fourth quarter, sales were $432.2 million, which represents a 14% decline from the prior year fourth quarter. The core sales, which is year-over-year sales in existing businesses adjusted for divestitures and excludes currency, declined 10%.

For the fiscal year, our sales increased 1.5% from the prior year with core sales coming in flat year over year.

Our adjusted EBITDA in the fourth quarter was $87.2 million or 20.2% of net sales, which is a 20 basis points expansion from the prior year fourth quarter margin despite a 14% top line decline. And for fiscal 2009, adjusted EBITDA was $365.5 million or 19.4% of net sales.

And finally our net debt leverage was 5 times at the end of March compared to 4.9 a year ago and 6.8 times approximately 2.5 years ago at the time of the Apollo LBO.

Later in the call, Todd will touch on the debt exchange offer we completed in April and the impact of the transaction on our overall capital structure and leverage.

Given the impact of the economic downturn had on our sales in the second half of our fiscal year, I am pleased with our performance in fiscal '09, particularly our fourth quarter where we were able to expand our adjusted EBITDA margins by 20 basis points from the prior year despite the 14% decline in sales I mentioned earlier.

We proactively addressed the sudden slowdown in order volume with aggressive cost reduction actions. We have reduced our headcount by nearly 18% since the end of our second quarter, cut spending throughout the business, and reduced our material cost through our diligent and disciplined approach to our procurement process. These actions delivered nearly $30 million of savings in the second half of fiscal '09 and will benefit fiscal '10 by over $90 million.

In addition to the cost reduction actions, we managed our working capital and capital expenditures well and generated $117 million of free cash flow during the year. $94 million of the free cash flow came in the second half of the year driven by a $42 million reduction in inventory from the second quarter.

This cash flow allowed us to invest in our water management platform and expand our presence in the water and wastewater markets we serve with the acquisition of Fontaine-Alliance in February of this year. This acquisition is a great complement to the GA Industries acquisition we completed just over a year ago.

Next, I'll take a few minutes to walk you through the operating performance in each of the platforms as well as what we're seeing in some of the key end markets in each of our platforms.

Starting with the Power Transmission segment, sales in the quarter declined 16.3%. Currency was unfavorable to the prior year by 430 basis points, and the divestiture of a non-core business at the end of last year adversely impacted growth in the quarter by 140 basis points. So on a net basis for Power Transmission, this equates to a 10.6% contraction in core sales in the quarter.

From a profitability perspective, the adjusted EBITDA in the quarter was $68.7 million or 22% of sales compared to $80 million or 21.5% of sales in the prior year fourth quarter. The adjusted EBITDA margin expansion of 50 basis points was driven by the favorable impact of our cost reduction actions.

In terms of overall business conditions in the end markets we serve in Power Transmission, we felt the full impact of the weak macroeconomic environment and turbulent financial markets in all of our end market order rates. During our quarter, fourth quarter and as a result, our backlog declined approximately 18% from the end of our third quarter.

Our key end markets of mining, cement, and aggregates and aerospace continue to be adversely impacted by the current economic environment. The ability to finance capital projects in the mining and cement end markets remains difficult. The rapid decline in commodity costs, while favorability our material costs, continues to have an adverse impact on our customers in the mining markets and is a driver in the near-term reduction in the demand of our products. The aerospace end markets have seen a reduction in demand for both large and small aircrafts. And the Boeing delays have resulted in orders being pushed out.

With respect to industrial distribution, one key element we track in the Power Transmission segment is the health of the overall US industrial distribution channel. US industrial distributors posted calendar year sales growth of 3.8% but experienced a 10% and 19% decline in year-over-year sales in the months of December and January respectfully.

While these times are challenging, we continue to believe that we are very well positioned within the Power Transmission business to deliver solid core growth and profitability over the long term. In the near term, we will continue to be aggressive in both our focus on reducing our cost and working capital management by continuing to make investments in the business to drive future growth.

Now I'll turn my comments to the Water Management platform. Sales in the Water Management platform contracted 7.2% in the quarter. The Fontaine acquisition contributed 240 basis points of growth in the quarter, which was offset by a 100 basis point reduction in sales due to unfavorable currency movement and an 8.6% decline in our core sales growth in the fourth quarter.

From a profitability perspective, Water Management adjusted EBITDA in the quarter was $17 million or 14.1% of sales, which compares to $24.8 million or 19.1% of sales last year.

The year-over-year decline in our adjusted EBITDA margin was impacted by two primary items. First one of our product lines where we are vertically integrated in the manufacturing process experienced a volume decline just over 25% in the quarter. As a result, our margins were impacted by the reduction in cost absorption in the quarter. We are in the process of moving away from this integrated manufacturing model to a design, procure, assemble and test model which is similar to our Zurn businesses. This change, which will be substantially complete by the end of the next quarter, will provide us with a more flexible cost structure going forward. And second, approximately 260 basis points of decline was due to an increase of inventory and accounts receivable reserves driven by the deterioration in the macroeconomic environment during the quarter.

In terms of the overall Water Management business, we break the business down into three end markets when we analyze performance; the infrastructure and water, wastewater treatment markets, which represents between 50% to 55% of our total water management businesses; the commercial construction market, which accounts for approximately 35% of the total; and residential construction, which accounts for the balance or 15% to 20% of the total Water Management business.

So you look during the first-- the fourth quarter, order rates in the non-residential end markets were soft. In fact, recent McGraw-Hill data estimates that non-residential construction measured on a square footage put in place contracted 17% in calendar '08 and is estimated to contract 24% in calendar '09. Commercial and industrial construction contracted 26% in '08 with the projection of 32% decline in '09 while institutional end markets were flat in '08 and are estimated to be 12% contraction in '09.

Despite these market trends, we experienced only a high single-digit, year-over-year decline in these end markets during our fourth quarter as growth of new products in our water conservation product lines particularly offset the downward pressure from the broader market declines. So growth in the infrastructure end markets measured in dollars spent was 6% for calendar '08 but is estimated to grow only 2% in calendar '09. Our GA acquisition, which serves the infrastructure and water-- and wastewater treatment markets, continues to perform well. And the backlog for this business has remained solid all year.

With respect to residential construction, the market situation deteriorated further during the quarter. And recent McGraw-Hill estimates point towards a 40% contraction in square footage put in place in calendar '08 compared to '07. Within the residential part of our business, we experienced between 20% and 25% decline during the quarter compared to the prior year. Meaning despite the significant decline in demand, we grew relative to the market as we did in the first nine months of the fiscal '09.

One last comment I'd like to add regarding our Water Management platform. As mentioned in my opening comments, in February we completed the acquisition of Fontaine, a manufacturer of stainless steel slide gates and other engineered flow control products for the municipal water and wastewater markets. This acquisition further expands our Water Management platform and specifically our presence in the municipal water and wastewater markets both domestically and internationally as Fontaine has a product offering that complements our January '08 acquisition of GA.

Over the past year, the acquisition of GA combined with the Fontaine acquisition has diversified our Water Management platform with over $100 million of revenue that will be coming from this market and providing us with nearly $95 million in backlog going into fiscal '10. We feel this diversification strengthens our Water Management platform and makes us well positioned to deliver profitable core growth over the long term.

So as I wrap up the fourth quarter, just a couple final thoughts. Again I'm pleased with our performance in the fiscal '09, considering the challenges we faced from rising commodity costs in the first half of the year and the unprecedented global economic downturn in the second half of our fiscal year. Our team responded quickly with aggressive cost reduction actions and we were able to expand our margins year over year in our fourth quarter.

Our working capital management was solid in the second half of the year. We generated $94 million of free cash flow, driven by a $42 million reduction in inventories and managed our capital expenditures very well.

We feel we have a real opportunity to continue to reduce our inventory levels and improve our inventory turns during fiscal '10 and in turn continue to improve our liquidity position.

As we look ahead, we expect '10 to be a challenging year, particularly the first half of the year. We still have a solid backlog at just over $455 million, but the backlog has declined over 15% from a year ago. Order rates in the fourth quarter declined nearly 28% from '09 fourth quarter and we expect orders to remain soft for the near term.

As a result, in addition to the cost reductions already implemented and discussed in my earlier comments, we will be taking further action to reduce our cost structure over the next several quarters. We currently anticipate additional savings of $10 million to $15 million in fiscal '10 and from these actions, with a cost between $5 million and $10 million.

Despite the challenges we face from these unpredictable economic conditions, we will not lose sight of one of our major assets, our Rexnord business system. We will continue to proactively communicate with our customers, focus on their needs, and deliver world-class products and services and invest in and to drive growth opportunities. We will continue to proactively take cost-reduction actions as necessary, drive productivity improvements, and remain focused on working capital management. The combination of these actions we believe puts us in a position to continue to outperform during these coming years.

With that, I'll turn it over to Todd to provide some more in-depth financial information regarding our fourth quarter performance. Todd?

Thanks Bob. I'll start by quickly going over a few highlights on the fourth quarter income statement. As Bob mentioned, sales in the quarter were $432.2 million, a decline of 14% from the same period a year ago. Our core sales contracted 10.1% in the quarter with the remaining 390 basis point decline coming from-- primarily from foreign currency translation.

Gross profit in the fourth quarter was $140.5 million or 32.5% of sales compared to 32.7% of sales in the fourth quarter a year ago. SG&A expenses in the fourth quarter were $72.4 million or 16.8% of sales compared to $84.7 million or 16.9% of sales in the fourth quarter a year ago.

In the fourth quarter, income from operations was $15.7 million, which includes $19.5 million of non-cash impairment charges related to certain intangible assets as well as a $20.9 million restructuring charge. To expand just a bit on the impairment charge, during the fourth quarter of 2009, our fiscal 2009, as a result of the continued deterioration in the macroeconomic environment and its impact on our order rates, we reviewed the carrying value of our intangible assets for a potential impairment. As a result, we recorded a $19.5 million non-cash impairment charge related to certain trademarks and trade names.

Regarding the restructuring charge, $18.7 million of the charge is a cash expense and primarily relates to severance. $5.7 million of this charge was paid in 2009, fiscal 2009, with the majority of the $13 million liability at March 31, 2009, to be paid throughout the first half of fiscal 2010. The remaining $5.8 million of the restructuring charge related to asset impairments and inventory write downs is a result of our decision to exit a distribution channel and exit the internal manufacturing of our PEX plumbing line.

Excluding the impairment and restructuring charges, our income from operations was $56.1 million or 13% of sales. When you adjust our prior period fourth quarter income from operations for an $11.2 million loss on a divestiture associated with a French subsidiary, Rexnord SAS, our fourth quarter 2008 income from operations was $67.3 million or 13.4% of sales. So on a more comparable basis, our year-over-year operating income as a percentage of sales declined by 40 basis points, primarily due to the year-over-year decline in our Water Management margin as Bob previously discussed.

Interest expense in the fourth quarter was $43.1 million, which compares to $46.6 million in the prior year fourth quarter and primarily reflects the benefit of lower LIBOR rates on our term loan facilities compared to one year ago.

With respect to taxes, we recorded a $22.6 million tax benefit on a $30.4 million pretax loss, resulting in a 74.3% effective tax rate. The increase in the effective rate was driven by the utilization of net operating losses that we had previously reserved. For the full fiscal year, we recorded an $8 million tax provision on a $386.3 million pretax loss for an effective rate of 2.1%.

The provision recorded differs from the statutory rate really due to two items. First, the goodwill impairment charges we recorded in our third quarter impacts our pretax loss but we received no tax benefit. And secondly, the deferred tax asset valuation allowance that was established in our third quarter results in tax expense with no impact on pretax earnings.

And finally, our net loss in the quarter was $7.8 million, which includes the impact of the impairment and restructuring charges I referenced earlier. Our net income in the prior year fourth quarter was $11.7 million.

Quickly moving to adjusted EBITDA, our adjusted EBITDA in the fourth quarter was $87.2 million or 20.2% of sales, which compares to $100.6 million or 20% of sales in the same period a year ago. Despite the 14% decline in sales in the quarter, we expanded our margins by 20 basis points as our cost reduction actions gained traction in the quarter and resulted in a benefit to our margins.

Quickly touching on our balance sheet and cash flow, our cash balance as of March 31, 2009, was $277.5 million, an increase of nearly $136 million from a year ago and $38 million from the end of December. From a trade working capital perspective at the end of the year, receivables were just under $260 million. Inventories were approximately $327 million. And accounts payable were approximately $135 million for a net trade working capital balance of approximately $451 million.

During the quarter, we generated approximately $44 million in operating cash flow through working capital reductions. And while we made significant strides, we continue to see trade working capital as an opportunity to generate cash over the next several quarters from working capital with the most significant opportunity coming from the velocity of our inventory turns.

A few additional comments on our balance sheet before I move on to cash flow. First, since the Zurn acquisition, we have recorded a liability and offsetting receivable related to asbestos and class action related litigation. The liability represents an estimate of the potential liability for asbestos-related claims pending against Zurn as well as the claims expected to be filed in the next ten years. We estimate our current insurance coverage on these claims to be well in excess of the estimated liability and therefore we recorded a receivable equal to the value of that liability.

The liability is based on a number of variables, one of which is case dismissal rates. During the fourth quarter, there was a significant increase in the rate of case dismissals, which had a favorable impact on our estimated liability. The change in this variable was the primary driver of the $44 million reduction in the liability and related asset to $90 million at March 31, as it relates to our asbestos liability.

Next I'll touch on our pension accounting. During fiscal 2009, we incurred a loss on our plan assets of approximately $211 million or 32%, consistent with the overall market declines in the equity markets. And as a result, our plans became unfunded. They went from being funded by $30 million, overfunded by $30 million at the end of last year to underfunded by approximately $135 million at the end of fiscal 2009.

The changes in funded status had no impact on our fiscal 2009 earnings. But our fiscal 2010 earnings will be adversely impacted by approximately $40 million on a year-over-year basis as we shift from recording $15 million of pension income on our US-defined benefit plans to approximately $25 million of expense on those same plans in 2010.

As a result of this change, our overall 2010 margins will be adversely impacted by approximately 230 to 250 basis points when you excluded the pension impact on 2009 compared to 2010. $13 million of the incremental pension expense will impact our Power Transmission platform, which translates to an approximate 100 to 120 basis point reduction in PT adjusted EBITDA margins year over year looking forward. The remaining $27 million of incremental expense will impact our corporate segment.

With respect to cash funding, our cash contributions to our US qualified plan trusts were $2.4 million in fiscal 2009 and will be approximately $4 million in 2010.

One final thought on the balance sheet. We did acquire Fontaine at the end of February and completed a preliminary purchase price allocation at the end of March. We expect to continue to refine and finalize our purchase price allocation in the coming quarters and will make appropriate adjustments to any-- if any, to the balance sheet at that time.

Moving on to cash flow. Cash flow from operations in fiscal 2009 was $156.1 million compared to $232.8 million a year ago, a $77 million reduction year over year.

The year-over-year change in operating cash flow was driven really by three items. First, our 2008 cash flow included $34 million of insurance proceeds related to business interruption in property casualty insurance as we closed out the matter related to the Canal Street accident. And secondly, the timing and delivery of certain projects resulted in a $20 million decrease in receipt of our customer advances. And finally, cash flow from trade working capital declined by $16.5 million year over year really due to the timing impact of AP payments and AR collections compared to the prior year.

From a free cash flow conversion perspective, which we define as cash flow from operations less CapEx compared to net income excluding the non-cash impairment charge and the tax impacts, we generated approximately $37 million of free cash flow in the quarter. And for the year, we generated $117 million of free cash flow, pushing our cash flow conversion ratio to just over 300% of net income.

Capital spending in the fourth quarter was $9.2 million or 2.1% of sales. And for the fiscal year 2009, capital spending totaled just over $39 million or again 2.1% of sales. We have been and will continue to closely monitor our capital investments and anticipate capital spending to be in the range of 1.7% to 2% of sales going forward.

Our total debt at the end of the fourth quarter totaled $2.141 billion and includes $7 million of debt assumed through our acquisition of Fontaine. Excluding the acquired Fontaine debt, our debt increased $109 million from the end of March a year ago. The increase in debt is primarily due to a $47.5 million borrowing that we've talked about on our revolving credit facility. At the end of our third quarter really we did that to preserve our overall flexibility in light of the-- what was going on in the capital markets. And additionally, we borrowed another $65.2 million in our fourth quarter from our revolving credit facility as well as our asset securitization program.

These funds in the fourth quarter were used to purchase Fontaine as well as pay $70 million in dividends to RBS' indirect parent to Rexnord Holdings in order to report-- in order to repurchase a portion of Rexnord Holdings outstanding PIK Toggle Senior Debt. In addition to the borrowings under our revolver in accounts receivable program, as of the end of the fourth quarter we had $766 million of term loan B borrowings, $802 million of 9.5% senior unsecured notes, $150 million of 8-7/8% senior unsecured notes, $300 million of 11 3/4% senior subordinated notes, $7 million of long-term debt acquired from Fontaine, and $3 million of other debt.

One final point I want to make on our debt structure and leverage, on April 29th, 2009, RBS Global and Rexnord Holdings completed a debt exchange offer whereby approximately $196.3 million of new 9.5% senior notes due in 2014 were issued by RBS Global in exchange for approximately $71 million of our existing 8-7/8% senior notes due 2016 as well as $243.6 million of Rexnord Holdings PIK Toggle Senior Debt. Assuming the transaction had occurred on March 31st, RBS Global's net debt leverage, pro forma for the transaction would have gone from 5 where we ended to 5.4. So that is really just sort of a pro forma look at leverage post transaction. Again, well below the 6.8 times at the LBO almost 2.5 years ago.

When you look at net debt leverage for Rexnord Holdings, on a pro forma basis, assuming the transaction had occurred on March 31, 2009, our total leverage would have been 5.7 compared to 6.3.

Quickly moving to liquidity, our liquidity remains strong at $374 million at the end of the fourth quarter. During fiscal 2009, we were able to increase our liquidity by $13 million after making dividend payments of $70 million to Rexnord Holdings in order to repurchase the Toggle Debt, utilizing $24 million to acquire Fontaine and pay down-- as well as losing $7.5 million from the revolver as a result of the Lehman bankruptcy in September. So all in all, solid liquidity as we exit the year.

One final note, we do get a lot of questions but our PIK Toggle balance pro forma for the transaction, meaning the debt exchange offer, sitting at March 31, would have $123.5 million as well as our RP basket under the indenture would be $275 million. And in the RP basket under the credit agreement would be about $450 million. So two common questions that we got and we took your input and just let you know.

So with that, I'll turn it back over to Bob.

Thanks Todd. Historically, we have not provided earnings guidance and do not intend to do so prospectively. That being said, given the current environment and the fact that we are over two months into our fiscal '10 first quarter, I feel it's important to provide some general guidance on our first quarter.

We currently anticipate our first quarter sales, excluding the impact of currency translation, to contract between 24% and 26% from the '09 first quarter with Power Transmission sales declining somewhere between 29% and 31% and Water Management sales decline somewhere between 14% and 16%.

Within Power Transmission, the soft order rates, reduced backlog from a year ago and continued market-based inventory adjustments at our customers will adversely impact the top line. Within Water Management, continued softness in residential and a further deterioration in commercial construction volume will put downward pressure on our first quarter sales in that business.

With respect to profit, adjusted EBITDA margins in the first quarter inclusive of the quarterly year-over-year impact of the incremental pension expense Todd discussed earlier, which is $10 million, will be approximately 15% with Power Transmission coming in around 15% and Water Management around 21%. Despite the significant cost reduction actions we have taken, the magnitude of the volume decline will impact our margins and particularly in our Power Transmission segment where we are vertically integrated and will experience a reduction in cost absorption during the first quarter of '10.

Now I'll turn it back to the operator for any questions.

Thank you sir. (OPERATOR INSTRUCTIONS) And we'll take our first question from Tom Klamka with Credit Suisse.

Close enough, Tom Klamka.

Hi Tom.

Hey Tom.

Hi. Back on the fourth quarter, Bob you mentioned two items having to do with Zurn. When you look at the decline in revenues and the decline in EBITDA was over 30%, one item you mentioned was your vertically integrated product lines. Which lines are those? How much of the business does that represent? And how quickly can you fix that area?

Yes Tom that's specifically centered around the PEX business.

So that's like 15% of revenues?

Yes, say between 15% and 18% of revenue. And as far as quickly fixing it, we're-- I said in the next quarter but we're really almost close to having that done in terms of the integration we're talking about doing. And we also, frankly speaking, got out of some of our lower margin type business segments within that business that will also improve the margin as well. So we're-- we've taken out some of the lower margin type channels. We've going to a more outsourcing model, which is what Zurn is better at. And I see in this quarter some impact, but particularly next quarter will have a much more favorable impact.

Okay. And the other item was receivables reserves. This was a true up of reserves I guess to reflect some collection issues?

Tom it's probably more on the inventory side I think. You know we talked about top line being down 14% to 16% in water in our first quarter. You know looking ahead, that probably actually decelerates a little bit. So we looked at our inventory levels, some of our slow-moving, some of excess and obsolete and took a conservative position at the end of March just based on what we know to be coming down the pike. If you look back at architectural billings and all that kind of stuff, you know that dried up 12 to 18 months ago. And as that rolls through a construction process, obviously that's going to impact our top line. So it's more of-- I'd say it's more of a look ahead than it is a look back.

Okay and then I guess in the backlog, your backlog numbers in the K are down about 20% when you adjust for the acquisitions. Is that mainly PT or is that in both segments?

It's almost exclusively out of PT, yes.

Okay.

I mean backlog in the-- on the water business as you know Zurn operates with very, very little backlog. The majority of the backlog in water is really the water, wastewater treatment businesses. And those backlogs are very, very consistent year over year. It's the majority of the decline is out of Power Transmission.

Okay. So can you maybe take a step back? When you look at the March quarter, EBITDA was down 13% or so, just about in line with sales. And it-- when you look at the June quarter using the numbers you're talking about, you're down closer to 50% year over year. So sequentially, what happened? Did orders drop off that quickly or this quarter benefited more from backlog? Or how should we be looking at that?

Yes Tom I would say yes to both. You know there's two things that go on there. You've got your order rate of your higher capital items and then your book and ship business. And you can tell by the order rate of last quarter, we started to see both starting to deteriorate but you know we started chewing into the backlog of the longer capital item business. And the book and ship business has come down quite rapidly as well.

And if you look, as I mentioned, just take a look at even the distribution channel in PT, you know they're down as well. You know that 15% to 20% range.

Yes I think Tom to look at is you know if you look about the swing in the pension side, $40 million on an annual basis, it's $10 million in the quarter. So the margins we're quoting are inclusive of a $10 million dollar year-over-year change in margin. So depending on what top line you use, you know it's a significant difference as well.

Right, but it would still be down 35% or so or even more?

Yes. Yes I think you know the challenge really is sales down you know 10% to 15%. I think if you look at our fourth quarter, you can see that we had cut costs really to deliver a very solid earnings result in that type of environment. I think given the way the order patterns flowed throughout the fourth quarter and even the first couple of months of the June quarter, we're not going to be able to ship anything out of backlog in certain instances. And therefore, it's more of a real-time mission in Power Transmission. And again, I think you know we're more vertically integrated there.

So from a cost perspective, once the decline in top line year over year gets to be 20% or 25%, you really can't catch that in a very short window. I think we're going to continue to cut costs and try to stay ahead of it. But you know near in, you know we view the June quarter as our toughest quarter as a result of the way the order patterns flow and where we are with all of our cost reduction actions.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) We'll take our next question from Ryan McGrath with Denali Capital.

How you doing? Thanks for taking my question. I was just hoping management could provide some additional color on the debt exchange, specifically the strategic rationale behind the exchange? Thanks.

Sure Ryan. I think you know we had an opportunity to exchange a substantial amount of debt within our capital structure, opportunistically at an attractive discount. And from a strategic perspective, we took that opportunity. We didn't take the decision lightly. But in any event, the PIK Toggles are part of the capital structure that we want to solve for as we de-lever the company over time. We had an opportunity to do it at an attractive price and we did.

I think from a cash flow perspective, from a covenant perspective, from an outlook perspective, we felt very comfortable at the operating company level given the fact of we don't have any maturities for the next three years. Our leverage is well in check. We're going to be cash flow positive even in an awful environment. And as a result, we took a chance-- took the opportunity to, you know start to resolve some of our overall leverage that we've got to reduce over time. So that's really the strategic view of what we did.

Appreciate it. Thank you.

We'll move on to our next question from Jordan Hollander with Jefferies & Company.

Hey guys. Just a couple questions. You know I think last quarter we talked a lot about inventory destocking at the distributors. Just wanted to get a sense of how that's going. Is that slowing down any? And you expect that to kind of taper off here as we get through the-- your first quarter and the June quarter?

I would classify destocking by the way, not to just be distribution but also on the OEM side. If you looked across all businesses, I think you'll see that everybody is destocking in form or another. It's hard to me to clarify or quantify on the distribution side until we see where they end up flattening out to in terms of their business side of it. But I think we'll see that certainly start to taper off somewhere probably my estimate at this point would be the mid timeframe of the next quarter, the third quarter before that goes away or flattens out completely at that point.

Again, that would also depend on where their sales rates go. But at this point, we do see that they flattened out and the decline has pretty much taken place. In fact, conversations with them would say their second half of the year they see would be improving from where they are now.

I think it's safe to say Jordan that we feel like-- I think we're much closer to the end than a quarter ago.

Right.

But you know again there's a little bit left. But it's leveling out. I mean I think overall on both sides PT and Water Management, the rate of change is definitely slowing and leveling out. And the question is when do we start to see a little bit of an uptick. So that's how we see it.

Yes.

So basically you saw-- I think it was the last quarter saw the brunt of that come off quickly and are feeling most of that--

Yes I think that's a fair statement.

Knock off this quarter.

Yes.

That's a fair statement.

I think we'll see, again we-- I think we see June as our sort of low water mark in the year. You know with order rates a little bit of additional destocking and it's-- a lot of it's in Power Transmission. So that's really the impact of the quarter.

And then just in terms of any end market color, I guess mining probably held up somewhat better. Is that-- you're starting to see that fall off more quickly this quarter?

Clearly if you looked back here on the order rates, mining did-- a lot people stepped back just based on the sheer commodity cost of what was going on. And what we're seeing-- it's interesting now is that as you can see, just look from December to today of what nickel prices, copper prices etc. have gone up. There is somewhat of a stabilization. And we're seeing a lot of "activity" across that business and others, but not to the point where the money has been freed up yet. But they're getting close to it.

If you look particularly down in the South American region of mining, you know they have a cheaper extraction cost to begin with. We're seeing a lot of activity starting to take place. But it's difficult to say when that will turn into orders at this point.

Would you say it held up reasonably well in your fourth quarter and you're seeing that big drop now in the first quarter? Is that a big part--?

If you look at our first-- from an order rate, the quarter was down. From a sales rate and the backlog, it wasn't too bad.

Yes Jordan I--

I would classify. And the order rate still in this-- what we're seeing so far remains about the same as the fourth quarter.

I mean I think we-- the majority of the mining business Jordan would be delivered out of backlog.

Right.

And so I'd say that the order rates as it relates to that particular end market have been weak since November and continue to be weak today. I think quotation activity is getting better as some of the global stimulus money starts to come back on line. And so from a sales perspective, I think we didn't see much of an impact in our March quarter but we sure did see it in our order rates and have seen it for the last five or six months.

Yes that's helpful. That makes a lot of sense. Just housekeeping item on the-- you gave the PIK Toggle balance. What's the balance out there on the unsecured term loan?

I'm sorry Jordan?

Just the balance post exchange on the unsecured Holdco term loans?

That's all in. So the loans and the notes are $123.5 million in aggregate. I can--

Okay.

I can give you the split. But I think the notes are about $76 million and the loans are $47 million or thereabouts.

And then as far as cash you guys on the balance sheet, any near-term target? Just looking at other acquisition opportunities? Looking to take out some more of these Holdco's--?

You know I think again we turned cautious September of '07 on cash-- I'm sorry September of '08 on cash. Just really to preserve liquidity. You know we don't have any mandatory term payments. So again I think we want to just keep ourselves as flexible and as liquid as possible. And right now, it's holding cash in the balance sheet. You know we'll-- we wouldn't give you-- we wouldn't be able to give you guidance on if we were doing an acquisition or not. But again I think, you know our main objective really going back for a while has been preserving our overall flexibility and the cash balance allows us to do that.

Okay, great guys. Thanks a lot.

Thanks.

You're welcome.

(OPERATOR INSTRUCTIONS) Mr. Hitt, there are no further questions at this time sir.

Okay. I'd like to thank everyone listening to our call today. And we appreciate your interest in Rexnord and look forward to providing further updates when we announce our fiscal year 2010 first quarter results in the coming months. Thanks everybody and have a good day.

That does conclude today's conference. Thank you for your participation.