Zurn Elkay Water Solutions Corp (ZWS) 2013 Q1 法說會逐字稿

Good morning and welcome to the Rexnord First Quarter Fiscal 2013 Earnings Results Conference Call with Todd Adams, President and Chief Executive Office and Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord.

This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release to the company filed on an 8-K with the SEC yesterday, August 1st and I'll also post it on the company's website at www.rexnord.com.

At this time, for opening remarks and introduction, I'll turn the call over to Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord. Please go ahead, sir.

Good morning. Before we get started, just a brief reminder that this call contains certain forward-looking statements that are subject to safe harbor language contained in the press release issued yesterday as well as in our bonds with the SEC. In addition, some comaprisons report non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures and why we use them.

Today's call provides an update on our overall performance for the first quarter including details on our 2 platforms followed by an overview of our financial statements and liquidity highlights. Afterwards, we'll open the call up for your questions. To ensure you've ample time for all questions, we need to limit everyone to 1 question and 1 followup.

Before I turn the call over to Todd, I want to highlight as we did on our earnings release, the specifics on our initial public offering during the first quarter. On April 3, 2012, we closed the IPO of our common stock. Total proceeds received were approximately $458 million, net of underwriter discounts and commissions and other direct costs. The IPO resulted in the sale of approximately 27.2 million new shares of common stock.

The proceeds are primarily used to redeem the outstanding balance 11.75% senior subordinated notes that were due 2016, for a total of $325 million inclusive of the early redemption premium and accrued interest. Additionally, we paid Apollo, our majority stockholder a fee of $15 million to terminate our management agreement that was in place. With that, I will turn the call over to Todd Adams, President and Chief Executive Officer of Rexnord.

Good morning, everyone and thank you for joining us. We have a lot to cover and there are a fair amount of complexities embedded in the reported financials as a result of the accounting for the IPO as well as a few other corporate level events that we'll try to simplify so that everyone gets the essence of our operating performance in the quarter, and more importantly, our outlook.

Turning to page four, I'll start with the situation overview and some qualitative comments about the first quarter and the actions we've taken to deliver a solid year fiscal year '13 in spite of market conditions that have softened over the past 90 days.

Our consolidated topline growth in the quarter of 4% reported and minus 1% core was below with what we've been anticipating due to headline and macro issues that have evolved to the downsides since we reported our fourth quarter. Despite this, we managed well and delivered strong margins in the quarter in total and in each of the platforms. PMC sales grew 2% on the core basis and margins expanded 160 basis points and we saw our Water Management margins continue to improve sequentially without any near-term significant improvement in the serve markets that continues to remain on the horizon.

In the quarter, we saw a broadly weaker industrial demand in Europe, a slower environment in US mining effectively coal, and a non-residential market that contracted more than anyone has expected. With mining, and non-res largely impacted by the unusually warm winter and spring which ended up pulling some activity forward as well as significantly reducing energy demand.

On the positive side, we did build, $26 million of backlog in the quarter to a record $516 million as our book to bill grew to 1.05 which improves our visibility and confidence in the balance of the year. I'll touch on the growth performance in market teller by platform in just a minute.

After stepping back and evaluating everything in our end markets, talking to customers, and looking at the overall sentiment in the macro environment, we've reduced our growth expectations for the year by a couple of points inclusive of Q1 and have concurrently taken actions to reduce our costs. The impact of the European debt situation and related austerity continues to create general weakness and uncertainty. The impact of lower China growth in the first half of the calendar year has had a ripple effect across many industries and finally, the cumulative collateral impact of poor global sentiment and the fall elections are creating an even slower US recovery.

Anticipating a likely slower environment, we began to take action on our costs during the first quarter to be in a position to control our destiny by effectively controlling the controllable. We have implemented plans to reduce our costs and spending by $30 million annually by continuing to protect prioritized growth investments this year and remaining vigilant about doing more if the macro situation changes.

We believe that the change in the growth trajectory is contained in the year, in essence effectively re-rating to lower run rates for a period of time and a soft landing compared to falling into a recession. All of the regression analysis, pressure curves, and leading indicator indices that we've correlated to our business suggests that's the case, and we remain confident that all the basic fundamental secular growth drivers in our markets remain intact.

What is even more encouraging at the traction we're seeing from our growth investments that are actually delivering results in the near term and will accelerate growth in the medium and long term. With that backdrop and as we discuss in our Earnings Release, we are refreshing our full year financial outlook to reflect everything I just mentioned plus the change in the euro to dollar exchange rate impacting translation as well as the implementation of a couple of portfolio management actions. Namely, the decision to exit a product line in a geography where we didn't have a sustainable competitive advantage and the divestiture we completed in the quarter.

In short, we had been expecting 5% to 6% core growth for the year. We now expect 3% or 4% core growth for the year, and 3% to 4% growth on a reported basis compared to the prior year as 4% growth from acquisitions will be offset by currency and divestitures and exits. This is inclusive of core growth being down 1% in the first quarter.

Even with the lower full year growth expectation, we expect our incremental margins for the year to be between 42% and 50%. Our free cash flow to exceed our adjusted net income of over $100 million and our leverage to be in the [3.6] to [3.7] range by the of the fiscal year.

Finally, our focus over the remainder of the year will be to deliver the margins and fundamental operating performance that we had been anticipating while positioning Rexnord to perform moving forward. Our confidence and our ability to do that stems from the experience we gained in the prior recession, and the improvements to our business model that we've implemented since.

Perhaps most importantly and Mark will take you through more details, our balance sheet is in great shape and we expect it to continue to improve over the course of the year. We ended the quarter with $713 million in liquidity post the IPO. No meaningful maturities until 2018 and extremely confident light bank and term loan facility, and confident in the earnings and free cash flow growth we forecasted for the back nine months of the year.

Starting off fiscal year '13 with a revision of the full year isn't something we take lightly but it is the reality of both the current macro environment and some of our end markets. We know how to manage and navigate this type of environment and are very capable of dealing with this wobble and even any further erosion by controlling the controllable on the cost side, by controlling our destiny on the growth side with superior service levels and customer satisfaction along with new products, markets, customers, and geographies and finally, having the foundation on the operating discipline of the Rexnord business system that consistently drives execution better than competition.

Turning to slide five as I referenced to my earlier comments, the core growth in the quarter was down 1% at the Rexnord level with the biggest drivers for the difference laid out in the top left quadrant. I spent a good portion of the quarter out with customers assessing their views on visibility, and demand profiles, and the resulting impact to our outlook.

Looking at it by platform, you'll see that in process and motion control with your 2% core which was driven by our non-US mining business, our energy vertical and continued growth on our aerospace business offset by softer, short-cycle North American mining and European industrial demand. Taken as a whole, we saw a fairly flat market conditions in North America. Europe and China are down about 10% and very good growth in places like Australia, Latin America, and Africa. The aftermarket growth in the quarter was in the mid-single digits while overall growth, end users, and OEMs contracted.

As I've gotten our and spoken to customers, service levels, lower total cost of ownership, and responsiveness are paramount in this environment. Everyone's visibility is limited. So, having the very best lead times are incredibly important as is having broad, efficient distribution. We have both and that drives a real competitive advantage in markets like the one we're in.

Since the recession in 2008 and 2009, we've done a ton of work on collapsing lead times and creating a very efficient industrial distribution channel. Our channel inventory turns above 6 times today, up from the two times range in the past recession. Secondly, we've distance ourselves from competition in the space by committing the resources and efforts to create new products, drive new specifications, and more deeply penetrate our key vertical markets. All of this is helping us take share in choppy market.

This growth coupled with the factory transformation activities we've outlined in the past drove margins to 23.3%, up 160 basis points over the prior year. A tangible testament to the work across the enterprise and productivity and waste elimination we're driving with RBS.

To close on PMC, overall a good quarter operationally with some headwinds in part of a few vertical markets and some tailwinds with others. All in, I'd say we're watching our costs very closely here and expect that we see a majority of the re-rating and demand in Q1.

In Water Management, reported growth was 24% in core sales contracted 9%. The story here is not much in the macro environment has changed and that we're getting the margin improvements we've targeted. The things we control in Water Management are the cost reductions and the integration of VAG, and both are truly on track.

The factory consolidation we initiated last year was wrapped up in early part of the first quarter, and is yielding the expected benefits. On top of that, the overall VAG integration and business is performing very well. Consistent with what we anticipated and communicated, our Water Management margins grew 230 basis points sequentially and the book to bill at VAG was 1.2 times setting up the basis for a strong second half, and on a positive note, the order rates in North America improved for the second straight quarter.

Our non-res business grew 1% year-over-year in a market that was down in the low teens and our Legacy North American water treatment contracted based on shipments out of backlog impacting the overall growth of the segment. We haven't expected this; however, a couple of request date changes by customers pushed a few shipments into the second quarter, and frankly, we could've executed better as we finalize the facility consolidation and ended the quarter with a little pass through backlog that we were cleaning up in the second quarter.

Broadly, all of the secular growth trends across the segment remain intact and given that the residential market seems to be showing improved signs of life is a positive leading indicator which goes well for our Zurn business perhaps, towards the latter part of our fiscal year and into next. Also, we can clearly see the advantage of having a global footprint, product breath, and go to market we now have with VAG. It's allowing to grow and diversify into things like hydropower and dams in ways individually neither business could do before.

To close on Water Management, the non-res market is now another quarter closer to recovery and Zurn continues to chug along, growing in the weak market and holding margins. Our executions and service levels are as good as they've been since we've own the company, and we have a number of new products and channels that will help us in the second half.

Also, we're less than a year into actually having a true global water infrastructure business and are very confident that we're poised to capture the water infrastructure growth wherever it's happening in the world. I'll turn it over to Mark to walk through the numbers and then come back to talk about our outlook.

Thanks, Todd. Before I cover the financial highlights for the quarter, we've a number of non-recurring items in the quarter that I want to highlight so that everyone can better understand our operating performance, net income, and earnings per share.

Slide six of the presentation takes a reported result reconciled to the adjusted result that excluded these non-recurring items. I'll take a few minutes to discuss the significant items on the slide. First, as we discussed earlier in the call, we used the majority of the IPO proceeds to redeem all the outstanding 11.75% senior subordinate notes in April. As a result, we recorded a $21 million loss on the extinguishment of debt and as recorded in the non-operating expenses in our corporate segment.

Second, in conjunction with the IPO, we paid Apollo $15 million in April to terminate the management agreement. This charge was recorded in the non-operating expensed in our corporate segment. Third, as we described on our footnote for our Form 10-Q we filed at the SEC yesterday, as a US producer of ball bearing products, we received payments for anti-dumping cases on a continued Dumping and Subsidy Offset Act.

In our first quarter, we recorded $16 million of other non-operating income in our corporate segment related to payments we received in the quarter. We believe this is the final payment under the CDSOA. And lastly, in July, we reached an agreement in principle with the Zurn PEX brass fittings liability underlying the litigation that is described in the footnote 14 of the Form 10-Q we filed yesterday with the SEC.

The settlement is designed to resolve on a national basis, our overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of Zurn PEX brass fittings on PEX plumbing systems. As a result, we recorded a $10 million operating expense related to this matter in the quarter in our corporate segment, and do the business estimate based on the terms of the tentative agreement and the facts and assumptions of the [stand] today.

The settlement, if finalized and approved by the court is a real positive for the company as it utilizes the product liability claims fund that is capped in amount and duration. Because of the impact of this and some of the non-recurring items in the quarter, I will speak to the adjusted operating profit, adjusted net income, and adjusted earnings per share numbers in the next three pages as we fill these non-GAAP metrics provide a better understanding of our results in the quarter.

Turning to page seven, first quarter sales increased 4% in the prior year to $497 million. VAG acquisition, we completed in our fiscal 2012 third quarter contributed 10% of year-over-year growth which is partially offset by fluctuations in the foreign currency. Our fiscal 2012 second quarter divestiture and a 1% decrease in core sales.

As Todd discussed earlier, 2% core growth in process and motion control and a low single digit growth in Zurn core sales was more than offset by lower year-over-year shipment in our North American Water and wastewater and markets in the first quarter. Adjusted operating income for the first quarter increased 4% to $67 million or 13.4% of sales and the first quarter-adjusted EBITDA increased 4% to $97 million or 19.5% of sales.

Adjusted net income net in quarter increased 61% to $22 million and adjusted diluted earnings per share was $0.22 compared to $0.19 in the prior year period which is really $0.14 on an apples-to-apples basis when you adjust (inaudible) shares we have this year. Pre-cash flow was a $52 million use in the quarter which is in line with our expectations in comparison to $46 million use in the prior year.

Next, we'll move to slide eight and walk through the operating performance in our process and motion control platform. Sales from the quarter with [$317 million], a decrease of 4% compared to our prior year. Core sales increased 2% in the quarter, a solid sale in our non-US mining, aerospace, and energy end markets were partially offset by softened anticipated European industrial demand and pockets of weakness in our North American mining and market.

Foreign currency fluctuations in the fiscal 2012-second quarter divestiture negatively impacted sales by 6%. Adjusted operating income in the quarter which excludes $2 million of restructuring costs increased 10% from the prior year's $56 million or 17.7% of sales, a 230 basis points increase versus the prior year. Adjusted EBITDA was $74 million in the quarter and adjusted EBITDA margin improved 160 basis points from the prior year to 23.3%.

Despite the decrease in the year-over-year sales, we were able to increase our operating profit and adjusted EBITDA through productivity gains and operating leverage on a higher year-over-year core sales.

Now turning to page nine, I'll make few comments in our Water Management Platform. Water Management sales from the first quarter increased 24% from the prior or $180 million and the 2012 third quarter VAG acquisition contributed 33 points of growth which is partially offset by a 9% decrease in core growth. The Zurn core sales continue to outperform in the quarter as the Zurn group core sales in lower single digits due to shared gains and increased alternative market sales. The Zurn's core growth is more than offset by a lower sale in our North American municipal water end-markets.

While sales in this end market remained challenging as we expected, we continued to see improving stability evidenced by the strong book to bill ratio in the quarter. In addition, the acquisition of VAG continues to give us exposure to these markets globally and we're encouraged by the order rates and level of market quotations we experienced in the first quarter.

The first quarter adjusted operating income which excludes $700,000 of restructuring expense was $17 million or 9.6% of sales compared to $20 million or 13.7% of sales in the prior year, first quarter. Adjusted EBITDA was $29 million of 16.3% of sales and compares to $28 million or 19.2% of sales in the prior year.

As we discussed earlier in this call and on previous calls, margins in the segment have adversely impacted by reduced operating leverage on lower sales in our North American Water and wastewater end markets as well as the unfavorable mix impact of the VAG acquisition. The cost actions we took in our third and fourth quarter of fiscal '12 are beginning to benefit our margins and contributed to the 230 basis points sequential improvement and adjust EBITDA margins. And we continue to see path to year-over-year margin improvement in this segment.

Moving to slide ten, I'll touch on a few liquidity and leverage highlights. Over the past six months, we've taken meaning steps to strengthen our balance sheet. As we discussed in our earnings call last quarter, we completed a refinancing of our credit facility in March 2012 resulting in the push out of the debt maturity on those borrowings to 2018. In addition, the completion of the IPO, as we discussed earlier on the call allowed us to redeem all of the our outstanding $300 million senior subordinated notes as well as improved our cash position.

As a result of these actions, we're standing here today with a much better balance sheet. Our liquidity is at an all-time high at $713 million with $393 million in net liquidity in cash on our balance sheet. Net debt at the end of the quarter is just over $1.7 billion and our net debt leverage is 4.3 times. Looking forward, we anticipate our net debt leverage to continue to decline over the years through a combination of improvement adjusted EBITDA, the generation of free cash flow, and we anticipate ending of the year in the range of 3.6 times to 3.7 times.

In addition, the free cash flow anticipated generating over the balance of the year [on the] strength of our cash position and overall liquidity on the balance sheet. Turning to slide 11, this details the maturity profile of our debt. As you can see, we have no meaningful maturities of our outstanding debt until 2018 which gives us a very patient and manageable capital structure. Lastly, I'll provide a few other financial metrics on our credit agreement and bond indenture.

Under the credit agreement, our senior secured leverage ratio is 1.5 times and [reflects] our covenant of five times and the cumulative credit basket was $481 million. On the indenture, we finished the first quarter with a fixed charge coverage ratio with 2.4 times and a restricted payment basket with a total of $464 million inclusive of the $25 million general basket. With that, I'll turn the call back to Todd to cover our outlook.

Thanks, Mark. On slide 12, you can see our refreshed outlook for the fiscal year. First, you'll see the digital currency translation assumption changes as well the divestiture and exit activity which is very good for the portfolio in the long term.

Next, our change to the full year is a reduction of $55 million to $60 million of sales growth inclusive of the first quarter and still implies $70 million of growth in fiscal year '13 at the midpoint. Adjusted operating income margins between 14.6% and 14.9% and $412 million to $425 million of adjust EBITDA. The midpoint of the range supplies 8% adjusted EBITDA growth from the prior year driven by 45% incremental margins.

When comparing the current outlook to our initial outlook, you'll see a 30% decremental margin on the change to the outlook. A testament to the permanent cost reductions we implement both last year and this year, tight controls around spending, the benefits of some factory transformation work we've done and margins on new products. All actions that will enhance our operating leverage beyond fiscal year '13.

Moving to slide 13, here you'll see the major assumptions embedded in our outlook and how we anticipate our results to roll forward from the first quarter to the second quarter and the second half. Our anticipation and response on the cost side of the equation, creates the ability to deliver a record year in a sub-optimal and macro environment. Given that we start Q2 with over $500 million in backlog, I characterize our overall visibility as slightly improved and that our revised outlook is one that we're deploying to exceed.

Over the past several weeks, we refreshed all of our forecast across every business and is purposely taking a pessimistic view of any market growth with a bias towards a slight deterioration. Broadly, our second quarter will be very similar to the first in total. Our assumptions are that the daily rates in our second quarter adjusted for currency are generally aligned with the rates we experienced in Q1. However, core growth improves in both platforms based on the prior year comparatives and is expected to be in the low single digits for the second quarter.

Moving to the second half, we have again assumed that there is no significant change to the market good or bad beyond the normal seasonality we see in our businesses. Notably, we see a stronger Q3 and Q4 in our beverage markets as the majority of the capital spending and maintenance is done during the cooler winter months in the Northern Hemisphere, as well as weaker non-residential construction market in the US in the December and March quarters.

The essence of the forecast for the remainder of the year is that the majority of the growth comes from our backlog and places where our visibility is pretty good. This would include our shipments to our non-coal mining customers, aerospace, and the water and wastewater end markets in both North America and globally.

On the profit side, the fixed cost reductions improve margin in our backlog and other productivity gains that we anticipated in our initial outlook are delivering the desired result. Sitting here today, we're effectively through July in the sales for the month for tracking to our revised forecast at the discreet market, geographic, and business level, as well as in total.

Lastly, on page 14 before I turn it over to questions, you'll see the additional outlook assumptions that are frankly in line and consistent where we provided in our initial outlook. With that, I'll turn the call back to the operator and open it up to any questions.

Thank you. (Operator Instructions).

And we'll go first to Scott Davis at Barclays.

Hey, good morning, Scott.

I'm trying to get a sense, you know, in the quarter obviously is disappointing but I'm trying to get a sense of how, you know, when things got bad, meaning, you know, did we see a pull forward in business because of the weather was better and then just thing just fell off a clip in April or did things get worse kind of in April, May, June, just give us a sense, a kind of the timeline of visibility. Because I think, part of the context to my question is you seem to have some confidence in the outlook because of the backlog but you know, you had confidence three months ago in the outlook for this quarter, so, I was just trying to get a sense of how much confidence should we have that you have that kind of visibility, I guess, so, kind of how the quarter played out.

Sure. The business, frankly, Scott, was I'll say very consistent and strong through probably the first part of April. The back week or so was a little bit weaker, weaker in May, weaker through most of June, and strengthened towards the end of June. And so, you know, if you think about that, you know, we're sitting in July, we feel very good about you know, where July is coming out. Europe strengthened for us. We see a good visibility out of our backlog for our non-US mining customers. And so, you know, I would say that the middle part of the quarter was where we saw the difference in what we have been expecting in the first quarter.

You know, we took action on the cost side and we've gone back and talk to all of our customers and refreshed you know, our guidance and outlook based on what we think is the most likely case. We've been a little bit pessimistic on some of the recovery that you know, maybe we're hearing from them. So, I think we feel good about the second quarter. I think the second half is set up based largely in part -- largely due to the backlog we built in the first quarter, $25 million of backlog growth as well as the margins in backlog. So, I would say that the macro environment over that first part of the -- I guess, our June quarter are really what created the difference.

Okay. That's very helpful actually. And when you think about the change in the inventory at the customer level, I mean, you know, it sound like there may have been a better destock, kind of a panic destock if you will that occurred sometime in the quarter. Is that something that you can measure to get a good sense of?

Sure, I think I'll separate the question into two parts. So, from an industrial distribution standpoint, we, as I said in my comments, you know, we're turning inventory above six times. So, there was little to no impact from that. What we did see was certain OEM customers, I'll say hit the pause button, right? And if you think about the macro sentiment over the course of April, May, and June you know, the Europe situation deteriorated to the downside. China growth was a big concern and I think in general, we saw some OEMs simply work through whatever inventory they had and really start to collect lead times and keep the visibility for us relatively low which is fine.

I don't think it's pronounced in any way, meaning, you know, is it $4 million to $5 million of that? Probably. But that's short of what we're hearing as we get out and talk to people. For better, for worse our lead times are such that you know, customers don't have to hold a lot inventory for us.

Sure, it makes sense. And just last, can you guys just remind us what percent of your business either total or just this segment is coal -- coal related?

You know, we haven't disclosed it in general but you know, mining is about 18% to 20% of our process and motion control segment in terms of revenue. Of that, you know, usually a third is probably coal-related globally.

Okay. That's really helpful. Okay. Good luck, guys.

Thanks, Scott.

I'll go next to Terry Darling at Goldman Sachs.

Yes, hi. Good morning. It's Adam Samuelson filling in for Terry. I guess my first question is on the organic revenue growth guidance of 2% and maybe some color and you probably had a little bit of this on the slides on -- and markets relative to that 2% over the balance of the year presumably mining and coal would be weaker, US non-res softer but any additional color there will be helpful.

Sure. I think you got the two, Adam that are really the headwinds that we see as compared to our initial core growth guidance. You know, when we look at other end markets energy, we look at aerospace are all doing quite well. You know, we've got a backlog in sort of the non-US coal that rolls out of backlog and deliver solid organic sales growth as well. So, the headwinds really are around those two things in aggregate.

And maybe same question geographically, do you have any color there as well?

Sure. I think what we've got in the outlook is sort of low single digit growth in North America in total. I think we've got a Europe for the year and I'll separate the answer in process and motion control will say it's flat, in the water side we're seeing very, very good growth out of Europe as well as the rest of the world with VAG. So, the European question is really a bifurcated flat in the industrial side growth in sort of the mid-single digit range across our water segment. And the rest of world call it you know, mid to low single digit growth.

Okay. That's helpful. And then, just to be clear, the free cash flow expectation for the year was effectively unchanged despite some of the one-timers that hit in the quarter or is that revised down just given some of the cash outflow that you did experience.

It's not revised down. So, the guidance that we have initially provided anticipated the management fee payment and so, I think that you know, as we sit her today, we still feel like free cash flow in excess of net income which in this case will be on adjusted basis, above $100 million is still very much the outlook for us.

Okay, and maybe in that context, can you comment on the M&A Pipeline and any changes in your thinking on M&A given a slightly weaker macro environment?

Again, we're not going to comment on anything discreetly other than to say, you know, we do have a funnel that we are monitoring very closely. There are a number of things that you know, we're working at. All of which I would categorize in the tuck in bolt on sort of down the fairway sort of size and you know, I think we're going to be disciplined to make sure that whatever we do fits inside the envelope of the leverage profile we're talking about for the way, as well as being very highly and creative year on.

Okay, great. Thanks very much.

Thanks, Adam.

I'll move next to Julian Mitchell at Credit Suisse.

Hey, guys. It's Charlie for Julian. Just to know -- just kind of a high level, if you could kind of give us just you know, core growth assumptions by segments. I just heard you kind of talk about geography but maybe just kind of you know, core growth for the two segments and I mean, maybe just kind of an EBITDA margin range for just the two segments, don't know if you'd be willing to kind of offer that?

I think from a core growth perspective, when we say three to four for the year, you see process and motion control on the high end of that range and maybe slightly above, and you'd see the Water Management platform maybe on the low end of that range. So, that's probably the degree at which we'll probably provide that sort of guidance.

In terms of the margins, you know, obviously I think our outlook for the year, we see process and motion control margins continuing to improve sort of in that mid-20s range, you know, 25-ish for the year and continuing to make steady progress in Water Management for the year, somewhere in that mid to high teens, so 16% to 17% range on a platform basis.

Okay, great. And where would the VAG margins in the quarter with EBITDA?

We're not going to get into that. I mean, we're really managing it as global business at this point. But it's -- suffice to say, it's better than it was a year ago and continues to improve throughout the integration process as well as some of the growth and the cost reductions that we're implementing.

All right, great. Thanks, guys.

I'll go next to Robert McCarthy at Robert W. Baird.

Good morning, guys.

Good morning, Rob.

If coal -- if global coal is about a third of your exposure in mining, what would be your largest commodity exposure?

It would be copper and gold. Copper, gold, and iron making the balance, the two-thirds.

Okay. And can you talk about the $30 million in cost on savings expectations, you know, a little color including how we should expect to see that emerge because I assume that there's some upfront cost necessary to achieve that?

Sure, we saw a little bit of the upfront cost in the -- in the first -- our first fiscal quarter here, probably a couple million dollars of cost. Those are you know, primarily headcounts in some facility moves, you know, as I breakdown the $30 million, you know, $10 million to $15 million is actual structural cost reduction, permanent and $10 million to $15 million is anything from deferrals to value engineering savings and other things that we can affect within the year.

And so that $30 million call it, you know, $10 million to $15 million fixed permanent out and the balance is a little bit of self-help with value engineering, permanent cost reductions in the product and sourcing as well as some discretionary spending. That's how we think about the $30 million.

So, the latter $10 million to $15 million that you're talking about, you know, wouldn't require significant incremental spending.

You're exactly right. To get to that first $10 million to $15 million, I think it's in the range of $6 million to $8 million to effect to get to the balance of the $10 million to $15 million, there's no cost associated with that.

And you think the balance of the $6 million to $8 million shows up in the second quarter?

The majority of it should, yes.

Okay, all right. Thank you. That's very helpful.

And we'll go next to Charley Brady at BMO Capital Markets.

Thanks. Good morning, guys.

Good morning, Charley.

Can you go -- where in the product, divestiture, and the business line; can you tell us exactly what you got out off and what the impact was on the quarter and kind quantify it for the full year guidance -- revised guidance?

Sure. You know, when you look at the guidance table, I think, you know, Mark, maybe you want to take the impact to the guidance?

Sure, yes.

And I'll come back and talk about what it is that we actually got rid of, Charley.

Yes, so Charley, from a guidance impact, we got roughly you know, the $20 million that we had coming through from a guidance standpoint, and roughly on the EBITDA side, $3 million of EBITDA. So, that's -- that's the impact over the balance of our fiscal year, the $20 million in sales and $3 million in EBITDA.

So, the two things -- two things Charley, that the divestiture was a product that we sold very small, niche product line that, you know, long term did not have the growth of the margin trajectory that we wanted so then we had seller and we sold it. And then on the exit, you know, we made a decision to exit our Chinese chain business, and that's something that'll be winding down over the second quarter and early into the third. Both, are sort of good long-term portfolio, you know, margin accretive long-term moves on our part.

All right. And then on the water shipment push outs you had, I guess that was due to customer delivery date changes, can you quantify the magnitude of push out, you know, I guess the impact on the first quarter and do you recognize that in the second quarter?

We sure do. So, the combination of push outs and us leaving a little bit more past due that we'd like is in that $4 million to $5 million range. All of which should get filled in our second quarter.

Okay. Thank you.

You bet.

And at this time, that does conclude the question and answer session. I'll turn the conference back over to management for any closing remarks.

Thank you. To close on the quarter, it's important to articulate that to us, this environment is very different than the prior recession for many reasons. First and most importantly, the steps we've taken to position the company through diversification and growth coupled with the night and day difference in the channel inventory dynamics, three years of traction on new products in the aerospace cycle are all positives compared to three years ago.

Second, our overall customer satisfaction and service levels are the best they've been which can differentiate us from competition in this environment. On the water side, we have really built out a balanced global business, the non-residential market is already on a trough whereas in the prior recession, it was coming down from a peak. And we're confident that the same secular growth trajectory exists for water.

Lastly, one thing that's really important to articulate is that excluding acquisitions and divestitures are run-rate headcounts embedded in our guidance is already roughly in line with prior trough levels that we had in January 2010. This is with revenues approximately $300 million higher but still below the peak in 2008 demonstrating the productivity we've implemented and maintained.

Our playbook for the year will be consistent. Leverage platforms we have a sustainable competitive advantage, execute highly accretive M&A and leverage RBS to drive growth, incremental margins and free cash flow to create superior show of returns.

We know how to navigate in this environment and are working on contingencies in the event the situation changes to protect areas of investment that will be important in the future. We appreciate everyone's interest on the call this morning. Hope that everyone enjoys the balance of the summer and we look forward to updating everyone on our second quarter sometime around Halloween. Thanks.

And does that conclude today's conference. Again, thank you for your participation.