Zurn Elkay Water Solutions Corp (ZWS) 2013 Q4 法說會逐字稿

Good morning. My name is Dawn and I will be your operator for today's call. At this time, I would like to welcome everyone to the Rexnord fourth-quarter and full fiscal year 2013 earnings results conference call, with Todd Adams, President and Chief Executive Officer; 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 the Company filed on an 8-K with the SEC today, May 21, and they are also posted 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.

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 issued today, as well as in our filings with the SEC. In addition, some comparisons refer to 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 will provide an update on our overall performance for the fourth quarter and full fiscal year, including details on our two platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards, we'll open the call up for your questions. With that, I'll turn the call over to Todd Adams, President and Chief Executive Officer of Rexnord.

Thanks, Mark, and good morning, everyone. Thank you today for joining us for an overview of our fiscal 2013 fourth-quarter and full-year financial results. Before we get started, I'll briefly comment on the status of our Board's exploration of strategic alternatives. As we discussed in the release, the Board continues to review alternatives and expects to complete its review during the course of our first quarter. I thank you all in advance for your understanding and cooperation, and for obvious reasons, we will not comment further or take any questions on the topic.

With that, let's turn to Page 4. Overall, we're quite pleased with our fourth-quarter results in sales, profits, and cash flow were all in line with our expectations heading into the quarter. We delivered 1% overall core growth in the quarter, which is on top of the 10% core growth we delivered in last year's fourth quarter. The growth highlight in the quarter was the 11% core growth in our water management platform. Consistent with what we've been communicating over the last year, this is a combination of Zurn growth that is outpacing market and competitor growth, as well as the product and geographic diversity within VAG that is allowing us to benefit from the growth in water infrastructure globally. What's really exciting is the fact that all of the strategic work we've been doing in this platform that is driving the growth today will allow us to disproportionately capitalize on the market recovery that we expect to see in the coming years. In process and motion control, we saw good progression in almost all of our end markets from a demand perspective and delivered strong profitability across the platform, despite a slightly weaker top line than the prior year.

As we look back over the course of the year, it's been very challenging to find a two- to three-month period of sustained demand in our industrial end markets. It's hard to draw an exact conclusion how that plays forward into our fiscal '14, but a couple of positive points that we see are the following. First, our largest end market of mining, really bulk material handling or conveyance, crushing, and pumping from an application perspective had a tough year, and it changed very rapidly from what almost anyone who serves as end market was expecting. But everything we see from an end market perspective is that's beginning to stabilize. Looking forward, the overall tonnage of processing of various materials is supposed to actually grow globally and that will help us promote within a characteristically weak year.

Additionally, we've made great strides in diversifying our business into other hard rock mining, as well as advancing globally, allowing to us capture projects that we expect to improve our order rates later in the fiscal year, as well as into the future. However, given the long lead times inherent in the subsegments of this market, we expect to have a year that transitions towards growth in late calendar 2013 and into calendar 2014. The second positive point is that we see the overall levels of industrial production and capacity utilization continuing to remain relatively high, and as a result, we expect the short cycle and after-market pieces of our business to remain relatively stable during the first half of the fiscal year with some modest improvement towards the back half. Finally, both our aerospace and food and beverage end markets have been good and we expect them to remain solid during the course of fiscal 2014.

Turning to our water management platform. As we've laid out beginning a year ago, the overall end markets are improving and all of the momentum indices point to a sustained recovery. For us, the upturn in our served markets should begin to have a meaningful benefit towards the end of this fiscal year and into calendar 2014 and beyond based on the lead lag effect. This is a real positive, because the above market and competitor growth we're delivering today is being driven by the effectiveness of our strategy and execution in both Zurn and VAG.

From a performance perspective, we continue to do a good job in controlling the controllable. In our fourth quarter, we delivered $115 million of adjusted EBITDA, or 21.3% of sales, which is up 40 basis points compared to the prior-year fourth quarter, and drove a 19% increase in our adjusted net income, while continuing to invest in our businesses. For the year, our sales grew 3% and we delivered a 31% incremental margin on that growth, which drove our adjusted EBITDA margin up 40 basis points year over year to 20.2%. Our adjusted net income increased 39% from the prior year and our free cash flow exceeded net income again for the year. Finally, we continue to delever, as our net debt leverage ratio ended the year at 3.9 times.

The final thing I want to touch on before I hand it over to Mark to go through the financials is our initial outlook for fiscal 2014, which is on Page 5 of the presentation. Not to get too far ahead of ourselves, but when you look at calendar 2014 and 2015, it's likely that we could be in a position where our two largest end markets, mining and non-residential construction, have very strong momentum and we believe that we will be very well positioned to outpace the growth provided by that market recovery. As it relates to our fiscal 2014, the over arching backdrop to our guidance this year is that we are taking the view that some of the macro uncertainty that continues to exist out there today will not likely materially improve from here. And as such, we're taking a cautious view on market growth. As a result, the growth and profitability we are planning on in fiscal 2014 is being driven by our strategic initiatives and execution.

With that, we expect core growth for the year to be in the range of 1% to 3%, with stronger growth in the second half of the fiscal year, and growth in water management outpacing growth in process and motion control. We expect our incremental margins at both the operating income and adjusted EBITDA level to approximate 30%, and our free cash flow to exceed net income. Mark will fill in some of the blanks for you later in the call, but we expect adjusted earnings per share in the range of $1.10 to $1.18, a 16% increase year over year at the midpoint. All of these numbers exclude the impact of acquisitions which we don't predict or include in our guidance, but may likely occur given our overall levels of liquidity and strong free cash flow. Looking at our first quarter, we anticipate sales to be in the range of $489 million to $499 million, with core growth essentially flat at the midpoint. We expect adjusted earnings per share in the range of $0.17 to $0.19.

With that, I'll turn the rest of the presentation over to Mark to cover the numbers.

Thanks, Todd. Consistent with prior quarters, we will speak primarily to adjusted operating profit and EBITDA, adjusted net income, and adjusted earnings per share, as we feel these non-GAAP measures provide a better understanding of our operating results. Slide 6 and 7 of the presentation take our reported results and reconcile to the adjusted results.

Turning to Page 8, I'll discuss our operating performance highlights for the fourth quarter. Sales in the fourth quarter of 2013 and 2012 were $540 million. Core sales grew 1% over the prior year, offset by the unfavorable impact of foreign currency translation. Adjusted operating income increased 5% from the prior year to $87 million in the fourth quarter, and as a percentage of sales, increased 70 basis points to 16% year over year. Fourth-quarter adjusted EBITDA was $115 million, and our adjusted EBITDA margin increased 40 basis points from the prior year to 21.3%.

Fourth-quarter adjusted net income increased 19% year over year to $32 million, resulting in adjusted earnings per share of $0.32. This compares to adjusted earnings per share of $0.38 in the prior year. Year over year adjusted earnings per share is impacted by the increased shares outstanding tied to our April 3, 2012 initial public offering. Free cash flow is $77 million in the quarter, an increase of $18 million, or 30% over the prior-year quarter.

Moving on to Slide 9, I'll quickly cover the full fiscal-year results. Full-year sales increased 3% from the prior year to $2 billion. Acquisitions net of divestitures contributed 4% of growth, which is partially offset by the 1% unfavorable impact of foreign currency. Core growth was flat year over year. Adjusted operating income increased 8% from the prior year to $292 million, and as a percentage of sales increased 60 basis points to 14.6% of sales. Full-year adjusted EBITDA increased 5% year over year to $405 million, and adjusted EBITDA as a percentage of sales increased 40 basis points from the prior year to 20.2% of sales.

Our adjusted net income increased 39% versus the prior year to $98 million, resulting in adjusted earnings per share of $0.98. This compares to prior-year adjusted earnings per share of $0.97, again, year over year earnings per share is impacted by the increase in shares outstanding tied to our IPO on April 3, 2012 last year. Moving on to cash flow, we generated $84 million of free cash flow in the fiscal year, which includes $18 million of non-cash use related to the excess tax benefits recorded in connection with stock option exercises. Excluding that non-cash item, our free cash flow was 105% of adjusted net income.

Next, I'll take some time on Slide 10 to walk through the operating performance in our process and motion control platform. Sales in the fourth quarter were $304 million. Core sales decreased 4%, primarily tied to lower year over year shipments to our mining end markets, and a flattish to slightly down industrial MRO environment in North America. It's also important to point out that we grew core sales 14% in the prior-year quarter and we had one less shipping day this quarter.

Turning to profitability, our adjusted EBITDA decreased $7 million on the $19 million year over year sales decline, a decremental margin of 35%, which is in line with our expectations on the sales change. Adjusted EBITDA as a percentage of sales in the quarter was a solid 26.2%, as the productivity gains and cost reduction actions we executed this year have allowed us to generate solid margins despite the challenging market conditions we've faced. For the full fiscal year, sales were $1.266 billion compared to $1.311 billion in the prior year. Divestitures and unfavorable foreign currency changes accounted for 2 percentage points of the change in sales, and core sales were down 1% for the year. Looking back on the year, the macro environment was challenging globally, but we believe the strategic growth initiatives we have been executing allowed us to outperform in a tough market this year. Fiscal 2013 adjusted EBITDA was essentially flat year over year, despite a $45 million reduction in sales. Productivity gains, targeted cost reductions, and focus on [permanent] material cost reduction allowed us to deliver a 70 basis point improvement in our EBITDA margin to 24.9%, while still investing in our key growth initiatives.

Turning to Page 11, I'll make a few comments on our water management platform. Water management sales in the fourth quarter increased 11% from the prior year to $200 million. Core growth was also 11% as the impact of foreign currency translation was minimal. In the quarter, we saw 4% core growth in our Zurn business, driven by share gains and increasing alternative market demand. Within our valve and gate group, core growth was 22%, aided by the timing of several large product shipments during the quarter. Fourth-quarter adjusted EBITDA increased 21% to $31 million year over year, and as a percentage of sales increased 130 basis points to 15.3% in the fourth quarter. The year over year improvement in margin was driven by the benefits from the footprint consolidation actions taken on our North American water business late in the prior fiscal year, as well as productivity gains and volume leverage in the current year.

Turning to the fiscal year, fiscal 2013 sales increased 17% from the prior year to $739 million. Our prior-year acquisition of VAG accounted for 16% of the growth, and core sales growth was 1%, driven by mid-single digit growth in our Zurn business despite tough markets, which is partially offset by lower year over year shipments to our North American water infrastructure end markets. Adjusted EBITDA was $114 million for the fiscal year, or 15.5% of sales, compared to $96 million or 15.2% of sales in fiscal 2012.

Moving to Slide 12, I'll touch on a few cash flow and liquidity highlights. We finished the year with $524 million of cash, a record $849 million of liquidity, and no meaningful debt maturities until 2018. Total debt at the end of the year was $2.104 billion, and net debt was $1.580 billion, resulting in a net debt leverage ratio of 3.9 times, which compares to 4.1 times at the end of our third quarter, and 5.3 times at the end of last year. Subsequent to our year end, we repriced our term loans resulting in a 75-basis point reduction and the interest rate to 275 basis points with a 1% LIBOR floor. In connection with this repricing, we also prepaid $150 million of the term loans. As we look to next year, we anticipate our net debt leverage to continue to decline through a combination of incremental earnings and continued strong free cash flow generation.

Next, I'll provide a few of the financial metrics under our credit agreement and bond indenture. First, under the credit agreement, our senior secured leverage ratio was 1.09 times versus our covenant of 5 times, and the cumulative credit [basket] was $622 million. Under this indenture, we finished the year with a fixed charge coverage ratio of 2.7 times, and restricted payment basket totaled $531 million, inclusive of the $25 million general basket.

One last comment on the fourth-quarter financials. I want to provide some color on the non-cash actuarial loss on pensions of $6 million that was reflected in our fourth-quarter and full-year results. As you may recall, in the fourth quarter of fiscal 2011, we voluntarily made an accounting change whereby we elected to expense actuarial gains and losses related to pensions and other post retirement benefit plans that exceeded corridor, which is sized at 10% of the PBO or plan assets at the beginning of the year, whichever is greater, instead of capitalizing these costs as a component of stockholders equity and amortizing them into the P&L over time. While both methods of accounting are correct, we feel that this new method is preferable, as it reflects the impact of current economic conditions on or plans in a more realtime fashion. The $6 million loss in the fourth quarter was primarily driven by the 50 basis point reduction in the discount rate during the year. It is also important to note that this change in accounting has no impact on our cash contributions to the plans.

Before we turn the call back to the operator to take any questions you may have, I'll make a few final comments on our outlook. Page 13 of the presentation reiterates the guidance Todd discussed earlier in the call, and also highlights our assumptions for interest expense, depreciation and amortization, stock option expense, effective tax rate, capital expenditures, and fully diluted shares outstanding for fiscal 2014. In addition, our guidance assumes we do not incur any nonoperating other income or expense as we do not forecast realized or unrealized gains or losses from foreign currency fluctuations, gains or losses on the disposal of assets, or other items that are recorded in this P&L line item. Our guidance excludes the impact of potential acquisitions and divestitures and future nonrecurring items, such as restructuring costs or costs we will incur as a result of the Board's strategic review process that will be completed in the first quarter of fiscal 2014. With that, I'll turn the call back over to the operator and open it up to any questions.

(Operator Instructions)

Our first question comes from Mig Dobre from Robert W Baird. Please go ahead.

Good morning, guys.

Good morning, Mig.

Good morning, Mig.

So I'm wondering maybe you can provide a little more color on your growth expectations for PMC. How are you thinking about it for full-year growth? I mean, do you expect positive growth here for the year as a whole? And then looking at progression, how should we flow that through?

We do for the year, Mig, expect PMC growth to be positive for the year. I think the progression will be -- the inflection point is probably in the September timeframe, in terms of moving from low-single digits to positive, is sort of how we've modeled it in at this point. That's how we would think about core growth over the course of the year in PMC.

I see, okay. That's helpful. And you highlighted mining. This isn't the first time. I guess when I'm looking back at 2012 mining from what I recall was a little better than $230 million in revenue in PMC. As you are exiting the year now, how big is mining? What kind of decline have you seen in that business in 2013? And can you also remind us what your exposure to US coal is?

Mig, the overall growth in mining, and I want to be clear, when we say mining, what it is we actually mean. It's conveyance, crushing, and pumping, so it's virtually nothing to do with construction equipment or mobile equipment, it's probably a little bit bigger than $230 million. So when we look at the exposure there from a coal standpoint, coal is probably close to 50% a year ago. I think that number is less than that now, based upon the diversification efforts that we've made over the course of the last year into other hard rock mining. We've had a conscious strategy to diversify away from North American coal.

And so while it was a tough year last year, we do expect growth, albeit slow, and low growth for the year. That's markets turning, plus the diversification efforts. The issue is it takes time to work its way through the shipments. So we expect the backlog to continue to improve over the course of the year, and by the time we get to the end of our fiscal year, really late calendar '13 into calendar '14, then that's when we start to see growth again.

I'll jump in the queue after this question, but my last one for now would be on your unallocated expenses, they sort of came in below what we expected for this quarter and I'm wondering how we should be thinking about this looking at the upcoming year.

Mig, are you referring to the corporate segment?

Yes, yes.

Yes, so in the corporate segment, there's a lot of professional fees. There's timing in there around some deal fees and whatnot. It can be kind of lumpy throughout the quarter. As you look forward next year, I think I would say the number in the $27 million to $28 million range, call it about $7 million a quarter, would be the right way to think about it.

All right. Very well. Thank you, guys.

Our next question comes from Julian Mitchell from Credit Suisse. Please go ahead.

Hi, guys. It's Charlie for Julian.

Good morning, Charlie.

Just a question on organic growth. First, in the PMC business, just wondering if you guys have seen any destocking from customers and whether or not you could kind of see a snapback there moving forward. And then on the water management side, just maybe some incremental color on the strength there. I mean, it doesn't look like the comp from last year was particularly easy and just a big step-up in the numbers, the year-over-year numbers sequentially. Thanks.

Sure, Charlie. We really don't have any adverse impact from destocking in our numbers, in process and motion control as best we can tell. I think we monitor channel inventories quite well, and really the decline in core growth is fundamentally based on shipment timing, and as Mark talked about, really just one fewer day in the quarter. So the impact of destocking in process and motion control for the year into next year on a downside is zero. We think that as the industrial end markets and MRO capacity utilization, industrial production stay high, we could see a little bit of a bump. We're not modeling any bump in at this point, but we do think that there's no downside from destocking in our numbers this year or heading into next year.

As it relates to water management, the growth there is frankly exactly as we've been expecting. Zurn has continued to perform really well. If you look at the Zurn growth numbers that Mark talked about for the quarter and sort of that mid-single digit number, that's on top of a 5% number last year. And if you'll recall, last year, we had an unusually warm construction season. So the growth last year was likely a little bit hot relative to the market. If we look at this year, we had a very difficult winter-spring. So therefore the comp of mid-single digit growth on top of 5% last year is really strong.

And if you look at VAG, we've articulated all year long that the quarters are very difficult to look at just because of the project-based nature of some of the shipments. But when you look at the course of half or a year, we are clearly seeing the benefits of having the portfolio that we have of products, as well as the geographic coverage to capture all the growth opportunities in the water infrastructure space globally. So the growth in the quarter is outstanding. It's very consistent with what we had been anticipating and I think it's really a testament to our teams and the strategy and the execution.

Great, thanks.

Sure.

Our next call comes from Charley Brady from BMO Capital Markets. Please go ahead.

Good morning, guys. This is Andrew [Donimov] for Charley Brady.

Good morning.

Good morning, Andrew.

I was just wondering if you could break out the split between VAG and Zurn for sales, the nominal sales amount, sales growth, and if you had orders for both of those.

I don't think we're going to break it out specifically. I think we can give you some color around it. Again, the Zurn business grew about 5% to 7% in the quarter and VAG grew in the high teens to low 20%s, is sort of on a relative basis, how to think about the growth.

Okay. Do you have any color on maybe like how orders have been in those businesses?

Order rates in Zurn have been very consistent and solid, very similar to the sales rate. We don't operate with a big backlog in that business. If you look at the VAG business, in any given quarter, the order rates can be -- I don't want to say volatile, but they can be pronounced very positively one quarter and flattish for the year. The book-to-bill was over 1 for VAG.

Globally.

Yes.

Okay, great. And I guess you guys have been speaking about kind of the outlook for both segments throughout the call, but kind of along the same line, like what gives you the confidence for the second half of the year in your guidance? And then also, well specifically with PMC, I guess, but also the water management, too.

I think the guidance that we've provided of 1% to 3% core and 30% incremental, taken as a whole, has an element of conservatism to it in terms of how we think about the industrial end markets. And so we think that the water business is going to continue to perform quite well. The cost management efforts that we, that we work on all the time through RBS gives us great confidence that we can drive the right side of productivity in a low-growth environment to generate 30% incremental.

So I don't think we're counting on anything heroic in terms of a market recovery. I think it's prudent, given the uncertainty in some of these end markets, given some of the lead/lag in our largest end market of mining or both material handling to sort of go in with a very low growth number and then simply outperform over the course of the year. So that's sort of how we've thought about the guidance. We don't think it's in any way shape or form inconsistent with what we see or what we can execute to.

Okay, great. Just one more question. I was wondering if you guys could speak to any of -- you mentioned kind of growth initiatives throughout 2014, if you maybe could be more specific about that?

Going back a couple years, we started to orient ourselves towards becoming the industry expert across a number of key verticals, which has driven everything from the way we go to market to product development to our geographic expansion plans. So that in and of itself is broad and pretty high level. But when you get underneath, you start to see some modifications in channel strategies. You get to see some modifications getting into adjacencies we previously hadn't played, as well as driving deeper specification with OEMs, end users, engineers, architects, EPC firms. So it's really the combination of all of those different things that we've been working on, and we expect that over the medium term will drive well above competition and market growth just because we're focused very deeply on these end markets and we feel really good about the management teams we have and the progress we're making on those strategic plans.

Okay, great. Thanks, guys.

Our next question comes from Andrew Noorigian from Vertical Research. Please go ahead.

Good morning, guys.

Good morning, Andrew.

Good morning.

I was wondering if there was some way to kind of dig a little deeper into water margins and how much of the strength there was driven by the 22% growth at the valves and gates? And I guess what I'm getting at, is if that's a little lumpy, should we expect margins to bounce around or can they continue to go higher from here?

There's no question that the margins can go higher across the segment. We believe that the growth there over time moderates. We're not going to grow 22% in a quarter in valve and gates moving forward, at least the next couple of quarters, just based on shipment timing. But I wouldn't conclude that the margin expansion is as a result of that 22% growth. It's a combination of continued very strong margin performance against, in our Zurn business, as well as strong margins in VAG, but offset with some investment to continue to extend our global reach. So the overall margin performance at 15.5% in the quarter can go up from here. It does not require 22% growth in VAG to do that, we think that the margins across water management can get to the high teens, low 20%s in aggregate over the next three or four years.

Okay. And then just following up, could you comment a little bit more on what you're seeing in the non-res markets? I think you made some comments that it's starting to pick up a little bit. What do you see in terms of just customer discussions, bookings, things like that?

What we're seeing is all the momentum indices that we look at, which are projects that are effectively funded and in the planning phase, that backlog continues to build quite nicely. And when we look out, we expect that that really comes to fruition for us very late in the calendar year and then into the next couple of years. So looking at the backlogs, looking at the lead/lag, looking at the increase in specifications that we've driven throughout the downturn, we're very confident that the overall market recovery is real. It's not anywhere near the peak at this point, but just from the progression standpoint, there are a number of projects that we know are going to happen. We're really well positioned there.

And so that's the discussion. It's really a sustained long-term discussion around driving preference at the owner level and as well as through the channel and architects and everything else. So we're really confident in our ability to outgrow the market as that market recovers. And if you look at where the backlogs sit, they continue to build and the momentum is very strong there.

Great. Thank you.

Our next question comes from Alex Gomez from [Sunai] Trust. Please go ahead.

Yes, hi, guys. Actually just a very quick question. And I apologize if you guys went through this already in much more detail. But I read in your press release you were talking about the Board is reviewing very strategic alternatives and then previously they're going to report on Bloomberg. Can you kind of comment on that a little bit more?

Alex, I think in my opening remarks, we sort of outlined the fact that the Board continues to review its various alternatives and we expect to come back by the end of our first quarter. That's really all we're going to be able to say about the process.

All right, great. Thanks.

Sure.

Our next question comes from Matt Vittorioso with Barclays. Please go ahead.

Yes, hi, guys. Oscar Bate in for Matt here. How are you guys doing?

Oscar, you're a little bit faint. If you could speak up, that would be great.

Yes. Can you hear me now?

Yes, that's much better. Thanks.

Okay. Sorry about that. I just had a question on free cash flow. Fourth quarter was pretty strong. I think you guys stated in your comments that you expect net leverage to decline as you continue to generate cash, which makes sense. Can you just give us an idea of how you're looking to use the cash you generate going forward? Will you consider paying down debt? Are there acquisitions in the pipeline that you're looking at? If so, sort of what size and where? Any comment there?

Yes, I think as we think about the free cash flow, as we talked about on our calls previously, you just saw we used $150 million to pay down debt. So I think looking at the balance and looking at the opportunities in the acquisition funnel, I think our strategy is still focused on bolt-on tuck-in type deals in the existing platforms that we have today, so we balance that opportunity funnel with debt paydown, as we have for several quarters now, and making best decisions as we go forward based on those opportunities. So I think we'll be looking at both as we go forward.

Oscar, maybe just a follow-on to what Mark said, we don't provide any guidance that would include potential acquisitions. In terms of size, we think that we can do M&A inside the existing platforms while delevering very predictably over the next couple of years. So our funnels are in really good shape. We're not going to predict timing, but it's not inconceivable that we could be adding $150 million-plus spend or investment over the course of the next couple years towards M&A at reasonable multiples.

Okay. That's fair. That's very helpful. And then just quickly, with regard to the 8.5% notes, I think they are callable in a little under a year at 104.25%. Would you guys just comment on how you're thinking about those bonds and possibly refinancing them in the future?

Yes, I think that's -- you're right. It is May of next year. The call is 104.25%. It's all dependent upon market conditions at the time. But I think it's something we would obviously consider, and weigh our options when that time rolls around, and depending on what the market looks like. But if the market remains robust like it is today, it's something that we'll definitely consider doing.

Okay, great. Thanks, guys. Good quarter.

Thank you.

Thank you.

We have a follow-up from Mig Dobre from Robert W Baird. Please go ahead.

Thanks for taking my follow-up, guys. Just a couple of quick ones. First one, I'm wondering if you can give us a little more color as to what you're seeing from a pricing environment standpoint in both water and PMC.

Generally, Mig, I would say the pricing environment is fine. If you look at what we sell through, distribution and channel partners, the traditional price increases that we've been able to capture, we continue to see those being available to us. We don't see much change there at all. I think where we've been more focused is on driving that preference at end users, as well as OEMs and from a pricing standpoint that's tough to gauge how much is price versus how much is the price of entry. So for us, we see the pricing environment being reasonable and stable.

But you wouldn't highlight any sort of differences by end markets, because obviously not all end markets are enjoying the same level of demand, if you would.

Sure. I think that as I look at it, I wouldn't spend a whole lot of time trying to differentiate by end market and price. For us, stuff that we would sell through channel partners on an after-market basis, we continue to get reasonable the low-single digit price increases that we historically would achieve on the new business and new projects and new platforms. It's market pricing.

So to say that it's depressed because the end markets are down I think is probably the wrong assumption. I think there are some natural price points for the products we sell and the applications and the value they bring. So we're not really suggesting or seeing any material price pressures or any material pressure the other way to the positive. I think it's a pretty stable pricing environment from everything we see.

All right. That's great. And you provided some comments on water margins. I guess I'm wondering if you can talk a little bit about PMC margins as well and how you expect those to progress. Also wondering if there is maybe a little bit of mix benefit that you could get presuming that the mining end market is reaching some sort of stability.

Well margins for the year were right around 25%. And all of that margin expansion over the course of the last three or four years has come through gross profit in an environment that's been flattish. So most of the productivity and margin -- most of the margin expansion has been really driven through productivity and things that we can control. So we feel very good about the sustainability of the gross margins.

Obviously to the extent we get more volume through our businesses, the greater the margin expansion from there. I think we can continue to expand margins in a slower growth environment as we've shown this year. And to the extent we get some tailwind from certain end markets, obviously that flow-through margin will be very good.

So I wouldn't think about it as at all being done. I think over the last four years, I think our gross margins in process and motion control have moved from 31% to 38%. And we've had the ability to come back and reinvest in new growth, and we sit here today in a market environment that is okay, not great, with things pointing positively to the future. So we feel like we're really well positioned to capture the growth on the upside because of the investments we've made over the course of the last couple years, that were really, we were able to invest in it forward by driving sustainable productivity each and every day. So I think we're really happy with where the margins are. They can go higher. Obviously volume helps.

All right. Good luck, guys.

Thanks, Mig.

Thanks, Mig.

Thank you. We have no further questions at this time. I will now turn the call over to Todd Adams for closing statements.

I want to thank everyone for joining us this morning. We appreciate your interest in Rexnord and look forward to providing further updates when we announce our fiscal year 2014 first-quarter results in early August. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.