Zurn Elkay Water Solutions Corp (ZWS) 2014 Q4 法說會逐字稿

Good afternoon and welcome to the Rexnord fourth-quarter FY14 earnings results conference call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Rob McCarthy, Vice President of Investor Relations for 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 in an 8-K with the SEC today, May 21, and are also posted on the Company's website at www.rexnord.com.

At this time for opening remarks and introductions, I'll turn the call over to Rob McCarthy, Vice President of Investor Relations.

Thank you. Good afternoon and welcome. Before we get started I need to remind you that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we issued today, as well is 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 FY14 and our initial outlook for FY15. We will cover specifics on our two platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards, we will open up the call for your questions.

With that, I'll turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks, Rob. Good afternoon everyone, and thank you all for joining us today for an overview of what Rob talked about. Starting on Page 4. We are pleased with our fourth-quarter results and our overall levels of core growth, profitability, and free cash flow. We delivered robust profitability and cash flow in the quarter, as well as 4% core growth, despite some of the challenges related to the exceptional weather in the quarter and its effect on the progress of certain customers' projects and our related shipments, specifically in Water Management. Fortunately, these are simply transitory issues and we're confident that we will pick these shipments up during the first half of FY15.

Overall, we delivered another record year in terms of sales, earnings, and cash flow. Over the course of the year we made meaningful progress on enhancing our capabilities to accelerate and improve upon each of those key operating metrics. Specifically, we believe our ability to generate free cash flow, which has become a hallmark of Rexnord, will strengthen and underpin the continued long-term value creation opportunity we see in the coming years.

As it relates to the fourth quarter, we're confident that our 4% core growth continues to outpace the growth in our served markets. At 4% core growth, it is comprised of 6% growth in our Water Management platform and 3% core growth in Process and Motion Control.

With respect to earnings per share, our adjusted EPS increased 56% year-over-year to $0.50, inclusive of the temporary dilution from the primary share offering we completed in February. Finally, we had a strong free cash flow quarter of $79 million, which enabled us to delever while effectively funding an acquisition in the first quarter of early 2015 within our Water Management platform, and one that I'll discuss more in a few minutes.

For the full-year, consolidated revenue increased 4%. Core growth was 3%. EBITDA margins were approximately 20%. Adjusted EPS increased 42% to $1.39. And free cash flow, excluding non-cash and non-recurring items that Mark will cover, was 100% -- was 109% of our adjusted net income.

The momentum in Water Management remains strong. The US nonresidential construction sector continues to recover, and we believe the outlook for sustainable North American market growth over the next several years is favorable. We believe the investments we've made over the last few years have positioned us to continue to outgrow the improving market demand we anticipate in 2015. We are leveraging our stronger competitive position with new product introductions and customer service initiatives.

In addition, global demand for water and water infrastructure continues to be strong, and delayed shipments from the fourth quarter should be recaptured in the first half of FY15 and at worst, in the year. We expect Water Management to leverage mid- to high single-digit sales growth in FY15, with at least 200 basis points of margin expansion on contributions from volume growth, mix, cost reductions, and cost improvement initiatives.

You'll see that the margin in Water Management will move up significantly in the first quarter, as we expect margins to improve at least 300 basis points sequentially. Longer term, we continue to target EBITDA margins in the high teens with the current composition of the platform. Industrial sector demand remains generally stable, and the headwind we've been facing from the mining sector is expected to flatten out in the second half of our FY15 from a shipment perspective.

We expect core growth rates in our Process and Motion Control platform to strengthen over the course of the year, with the first four to five months of the year challenged as a result of the lower backlog to start the year masking the decent underlying growth in our industrial short-cycle businesses. For the full year, net of the diminishing mining headwind, we are anticipating Process and Motion Control core growth to be in the low single digits.

Execution within our Process and Motion Control platform continues to be very strong, with our fourth-quarter EBITDA margin approaching 30% in the quarter and 26% for the year. In FY15 we will continue to make strategic investments in the platform to expand and grow our installed base, expand our served markets while improving our global service levels, and refining our overall footprint. Inclusive of these investments, we believe we can continue to deliver 30% to 35% incremental margins for PMC and over the next several years, with EBITDA margins in the higher 20%s to 30% range.

We're also in the very early innings of what we expect to be a growing contribution from our acquisition strategy. With a strong and active funnel, we are targeting the addition of at least $25 million of annualized EBITDA from acquisitions in FY15 that we've excluded from our guidance for the time being. In FY14 we deployed over $100 million of capital to acquire four businesses at attractive purchase multiples, as all the acquisitions were done on a proprietary basis. Each of the integration plans is on track and is contributing to our overall growth and profitability in FY15.

We completed our first acquisition of the year in April, adding Green Turtle Technologies. Consistent with our strategy to deliver more content per square foot by expanding our portfolio of specified products, Green Turtle adds a proprietary product solution to our Water Management platform, and we plan to leverage its performance advantages across our broader distribution footprint. As with all our acquisitions, we aim to leverage a combination of growth and cost synergies through the implementation of the Rexnord business system to deliver a double-digit return on invested capital over our targeted horizon.

Before I hand it over to Mark, and turning onto page 5, I want to spend a few minutes outlining our financial guidance for FY15. We are initiating guidance for adjusted EPS in the range of $1.60 to $1.70 based on core growth of 3% to 5% and overall growth in the high single digit range, incremental margins of EBITDA level of approximately 30%, and free cash flow again exceeding our adjusted net income.

This implies adjusted EPS growth in the range of 20% to 28%, inclusive of the $0.06 dilutive impact from our February offering but not the accretion from acquisitions we expect to make over the course of the year. Breaking down the year in a little more detail, based on our backlog going into FY15 and the timing of certain project shipments, we anticipate consolidated core growth to be 2% to 4% in the first half of our fiscal year and 4% to 6% in the second half of our year.

As we also highlighted in our press release, our guidance excludes any contribution for our Mill Products product line. As a result our core growth forecast excludes Mill Products from the FY14 base. Mill Products contributed approximately $50 million to our sales and $0.06 to our EPS in FY14. Our Mill Products business manufacturers large ring gears and pinions used primarily in miners' crushing plants, and is highly dependent on new mine capacity CapEx.

After a thorough review, our Board of Directors has approved a review of strategic alternatives for the Mill Products business. We expect to conclude our review in FY15. We have always exercised discipline around our portfolio, and evaluate returns in existing businesses just as we would evaluate external investments.

To close on our guidance, our FY15 outlooks incorporates strengthening core growth with robust incremental margins and strong free cash flow as a base case. During the year, we are targeting to augment that with the growing contribution from an accelerated pace of acquisition activity.

Leading indicators in key markets like US nonres construction appear favorable, and we expect to deliver a record 2015, while continuing to make progress on our longer-term strategic initiatives that set the Company up for even better performance in the future. With that, I will turn it over to Mark to cover some of the financials.

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

Turning to page 8, I'll discuss our operating performance highlights for the fourth quarter. Please note that these results continue to include our Mill Products business.

Fourth quarter sales increased 5% from the prior year to $570 million driven by our core sales growth of 4%, adjusted operating income increased to $92 million, and adjusted EBITDA increased $120 million, with margins roughly flat on a year-over-year basis.

Fourth quarter adjusted net income of $52 million resulting in adjusted earnings per share of $0.50, which increased 56% from the prior year due to the increase in operating income and the benefit of the debt refinancing we completed last August. Cash flow was strong in the quarter, as we generated $79 million of free cash flow.

Moving to Slide 9, I'll quickly cover the full fiscal year results. Full-year sales increased 4% from the prior year to $2.1 billion, as core growth of 3% and acquisitions contributed about 1% to year-over-year growth. Adjusted operating income increased to $305 million, and adjusted EBITDA increased to $413 million, with margins consistent on a year-over-year basis.

Adjusted net income increased 44% versus the prior year to $141 million, resulting in adjusted earnings per share $1.39. This compares to a prior year adjusted earnings per share $0.98. With respect to free cash flow, we generated $144 million of free cash flow in the fiscal year, which includes approximately $9 million of nonrecurring costs associated with our Board -- with our debt refinancing last August and the Board's review of strategic alternatives that concluded late June. Excluding these items, our free cash flow was 109% of adjusted net income.

Next, I will take some time on Slide 10 to walk through the operating performance in our Process and Motion Control platform. Sales in the fourth quarter increased 5% year over year to $359 million. Core growth of 3% combined with another 3% from acquisitions was partially offset by 1% unfavorable impact from currency translation. As we experienced throughout FY14, low single-digit core growth sales growth in the majority of our end markets was constrained by a decline in sales for our bulk material handling markets.

Turning to profitability, adjusted operating income was $86 million, and our adjusted operating income margin improved 340 basis points to 24%. Adjusted EBITDA was $105 million in the quarter, and our adjusted EBITDA margin increased 300 basis points from the prior year to 29.2%. We continue to focus on effectively managing our cost structure, driving productivity gains in this low-growth environment while investing in our strategic growth initiatives.

For the full fiscal year, sales increased 2% to $1.286 billion, driven by core sales growth of 1% and acquisitions adding another point. Looking back on the year, the macro environment was challenging globally. We believe the strategic growth initiatives we have been executing allowed us to outperform a tough market this past year.

Our FY14 adjusted EBITDA was up 4% year over year. Productivity gains, targeted cost reductions, and our continued focus on permanent material cost reduction drove a 70 basis point improvement in our EBITDA margin to 25.6% while still investing in our key growth strategies.

Turning to page 11, I'll make a few comments on our Water Management platform. Water Management sales in the fourth quarter increased 5% from the prior year to $211 million. Core sales growth of 6% was partially offset by a 1% drag from currency translation. Unusually severe and widespread winter weather and the related extensive and prolonged snow cover delayed numerous customer project schedules, which in turn resulted in postponed shipments during the second half of the quarter that adversely impacted our core growth and margins. That being said, we believe our core sales growth of 6% still represents solid above-market growth in the quarter.

Fourth-quarter adjusted operating income and EBITDA margins were both off by 4 points, reflecting adverse mix in our nonresidential construction and water infrastructure markets, as well as accelerated initiatives to improve our North American valve and gate group asset utilization. As Todd referenced earlier in the call, we are confident that margins in Water Management can meaningfully improve in our first quarter and expand year over year over the course of our FY15.

Turning to the full year, FY14 sales increased 8% from the prior year to $796 million. Core sales growth of 8% with growth in Zurn and the Zurn business above the platform and ahead of mid-single digit growth in our valve and gate group. Adjusted EBITDA was $113 million for the fiscal year of 14.2% of sales, and was impacted by the same items I noted in the quarter.

Moving to Slide 12, I'll touch on a few cash flow and liquidity highlights. We finished the fourth quarter with $339 million of cash, $675 million of total liquidity, inclusive of the $74 million in net cash proceeds from our converted stock offering. Total debt was $1.944 billion, and net debt was $1.605 billion, resulting in a net debt leverage ratio of 3.8 times at March 31, 2014.

Before I discuss some of the details of our outlook, I want to like to comment on our effective tax rate, which excluding nonrecurring items like the loss on debt extinguishment, finished FY15 (sic) at approximately 28%. The successful implementation of certain tax strategies in the fourth quarter positively affected our tax rate and will benefit our cash taxes on a go-forward basis.

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. In addition to the outlook highlights Todd covered earlier in the call, Page 5 of the presentation also highlights our assumptions for interest expense, depreciation and amortization, stock option and LIFO expense, our effective tax rate, capital expenditures, and fully diluted shares outstanding for FY15.

In addition, our guidance assumes we do not incur any non-operating other income or expense, as we do not forecast realized and unrealized gains or losses from foreign currency fluctuations, gains or losses on the disposal of assets, or other items that are recorded in this [penal] line item. Our guidance excludes the Mill Products business that Todd discussed earlier, the impact of potential acquisitions and divestitures, and future nonrecurring items such as restructuring costs.

One last guidance item I want to highlight relates to taxes. We're anticipating an effective tax rate of approximately 30% for the year. This rate excludes an nonrecurring, non-cash expense we will record in our first quarter related to a tax-planning initiative that will basically allow us to reduce the taxation on certain foreign entities that benefit our rate going forward. Our effective tax rate will fluctuate by quarter, given levels of pretax income as well as the timing of other planning initiatives. In our first quarter, we expect the tax rate to be approximately 34% to 36%, excluding the tax-planning action I just discussed.

With that, I'll turn the call back over to the operator and open up to any questions.

(Operator Instructions)

Mig Dobre, Robert W. Baird.

My first question is on Mill Products. I'm trying to get a little more detail maybe out of you as far as why it is that you are looking to do this now? As I understand it, this is mostly mining-related, and obviously we've been through a heck of a downturn here. And this business is still, from what I can tell, generating pretty good earnings for you. Can you help me figure this out?

Mig, we do a detailed strategic plan each and every year and look out over the next, call it three to five years. Based on our view of the market, some of the technologies, and the investments required to continue to be successful in this business for a long period of time, we looked at it, and the returns on invested capital didn't meet the hurdle rate that I think we want to provide to shareholders.

We kicked it around for a long time. With a lot of conviction, we think it's the right thing to do. Obviously, with where the market is, we think we've got an opportunity to put it in the hands of an owner that makes more sense for them than perhaps us. So that's really the discipline around the decision.

I see, but I guess Todd, my question was really surrounding the cyclical aspect of mining here. Because things have been pretty difficult. I'm wondering if, from a timing perspective, you wouldn't have been able to potentially garner more shareholder value, I don't know, 12 to 24 months down the road doing something like this.

Look. I think, Mig, the issue is if -- we look at it and say, what's the likelihood of the market continuing to -- market accelerating from here? I don't think the market is going to accelerate for this application. New mine CapEx, we don't have a very positive outlook on. So our view is, over the next couple of years we could be patient, only to find out the fact that we are not any better off than we are today.

So from a time value of money and redeploying the capital and the things that we know we want to own long term and make a lot of sense for the portfolio, that was really the tradeoff and the decision. So in either event, it's a very small piece of the Company at this point. From our view, we are reducing the cyclicality of the Company, reducing the capital intensity of the Company, and we will be in a spot to redeploy it into faster growth, less cyclical value-creating things.

Sure. I appreciate that, thanks. Mark, maybe one for you. I'm trying to understand, if you are going to be putting this business in discontinued ops going forward. If you are planning maybe some restatements, how do we think about this? What's (multiple speakers)?

Yes, the accounting rules that allow us to do it today. There will come a time in the year when we do. What We are going to do, Mig, is as the quarters go by, we will provide the appropriate color around the impact it had on the results in the quarter so you guys can model that out of your numbers until it actually hits the discontinued operations accounting treatment at some point in FY15.

All right. I guess the last one for me, and I will jump back in the queue. On Motion Control, I'm trying to understand exactly what your guidance implies here. Should I be expecting a core decline, if you would, in the first half of the fiscal year, given the backlog dynamics? Or can we be, say for instance, flattish here?

I think for the first half, Mig, flattish. I think it's right around flattish in the first quarter. Maybe down a little bit through up a little bit, depending on what happens with some of the shorter-cycle businesses.

The big drag is the fact that the backlog throughout the year didn't develop to the rate that allows us to continue to grow, at least in that first quarter. But I think as we look at the run rate in terms of orders that we saw over the fourth quarter, it clearly supports our forward look for that part of the business over the course of the year.

So I think we feel good about the run rate. It's just really eating through that backlog comp in the first quarter in a more acute way than the second quarter.

Right. Thanks, guys. I will jump back in the queue.

David Rose from Wedbush.

I was wondering if you could touch on the Water Management margins a bit more. I understand that there were some impacts from maybe fixed-cost absorption. Maybe you could go over a little bit more, the variance. I mean, it's a pretty big number in terms of the variance.

Were there some other items that you wanted to talk about? Were there any reworks, scrap, productivity issues? Maybe you can provide a little bit more color.

Dave, I will go down it in order. The biggest driver in the quarter of the margin, maybe underperformance with respect to what we would hope for, is project shipment timing. A lot of fixed cost. Frankly, some high-margin good projects that for a variety of reasons got pushed to FY15.

The bad news is it didn't show up in FY14. The really good news is we actually have the shipment. It's made, ready to go, and we will ship it in FY15.

The second thing is, within our nonres construction business, the mix was a little bit adverse, because If you look at the phases of a build cycle, some of the earlier phases are some of our more higher-margin products. As the weather crept and stepped, stayed in the ground a whole lot longer, some of those things didn't start. So we got a little bit of a mix issue.

The final thing that I think I want to highlight a little bit on is in our North American water infrastructure business, the recovery has been a little bit slow. We've been increasingly aggressive on making sure we are managing our cost to a, I will call it a lower growth outlook. We started to do some things in the fourth quarter that are embedded in the results that we get the benefit for in FY15 from a cost reduction standpoint.

So when you really look through all the various items, the project shipments we get in 2015; the project push and timing we get in 2015, and we are seeing that really come through already; and then the cost reduction initiatives that we front-end loaded, we'll get those in 2015 and beyond.

Those are really the three items. You could walk yourself back to the expected margin, if you will, with number one and number two.

As a follow-up to your comments on those projects being pushed out, why wouldn't we see them in Q1, given that they were delayed as a result of weather? The commentary from a number (multiple speakers) better?

It wasn't only weather.

Okay.

At some larger construction projects, and we are a component of extremely large projects, and all around the world. So for a variety of reasons, the timing is imperfect as it relates to a quarter. But we are confident that it's in 2015, and we're think it's in the first half. I'd love to tell you that it's the first quarter, but I think from a guidance perspective, we haven't included it in the first quarter.

Lastly on that, do you have a way, or have you been working on to improve your visibility on those projects?

We have perfect visibility to them.

Okay.

We have perfect visibility to them. I mean, it's not as if we don't know what's happening or when. We have a scheduled ship date based on a variety of engineers and firms, construction firms, and shipment timing, and on the water, and all that kind of stuff. When it changes just a little bit, the downstream ripple is pretty broad.

I'd like to tell you that these are small shipments. But these are $5 million to $10 million shipments, and when one doesn't go, that impacts growth by a couple of points in a quarter. Has no bearing on the year or the long-term growth trajectory or the profitability or cash flows, but it does create a little bit of volatility quarter to quarter.

That's helpful. Thank you. I will get back in queue.

(Operator Instructions)

Mig Dobre, Robert Baird.

Just a couple of follow-up items. Todd, if I heard you right, you are talking about potentially adding as much as $25 million of EBITDA through acquisitions, at least that's sort of what you are aiming for in FY15. Maybe a little more color as to how you're thinking about the progression of that, or maybe some of the things that you guys are working on? Anything here would be helpful.

Well, Mig, I'd love -- we both know I can't tell you that. The way I would characterize it is that if you look at the team and the process we have, after a hiatus in the prior fiscal year, you saw us start to get after it in a more meaningful way. We got four done in FY15 (sic), deploying probably $100 million of capital to do four good deals on a proprietary basis, very good valuations. We got another one done early in FY15 here. The idea is to continue to keep pace with that sort of routine.

So it's really not new. It really just comes down to continuing to build a funnel, make sure that we like the fit. Obviously, working them for a period of time because the proprietary valuation versus the paying contest auctions that are going on are materially different. We feel like we have a real advantage when we can compete on a proprietary basis, and we are going to keep doing that.

Sure, sure. Just to clarify my initial question, I guess I was wondering, are you focusing on one segment versus the other? Are you seeing more opportunities in one area versus another? And is this a net number including the potential Mill divestiture? Or is this gross of that?

To clarify, the $25 million is a net number. The guidance that we've provided excludes any impact from Mill Products from an earnings standpoint. We haven't assumed any proceeds from the divestiture either. That's sort of all out of scope, if you will.

In terms of prioritization, we've got a broad funnel, I would say, of tuck-in, bolt-on, and some adjacencies across both platforms. If you were to think about what those could look like, in PMC it's product adjacencies and new geographies. In Water Management, it's more content per square foot that fits really nicely inside of Zurn. And in water infrastructure it is additional technologies that we can sell through the same extensive go-to-market that we already have.

Those are the, I'll say the broad categories that we look at. More active, frankly, in all three of those buckets.

That's great. Maybe we can talk a little bit about Green Turtle, too. I just want some clarification as to the accretion that you might be expecting out of this business for FY15.

In the fiscal year, expect low single-digit EPS accretion from the deal in this fiscal year.

I think it's a penny or two.

Yes.

(Laughter) Most it'll get you is a penny or two, yes.

Okay, all right. That's helpful. Mark, last question from me would be on the tax rate. You've got some things going on there, and frankly you are guiding a little lower than what I had originally expected.

How do see this evolving over time? Is there opportunity to maybe continue to do some things here? And given your changing business mix, maybe see this rate drift a little bit lower? Or am I being hopeful here?

I think if you're going to model out the next couple of years, Mig, using a rate in the ZIP code is reasonable. We are always working on tax-planning initiatives to try to improve that rate. We feel confident with where we are going to sit next year. Beyond that, cannot give you a number, but know that we are always continuing to work to improve that rate from where it sits today.

All right, great. Thank you, guys.

Charley Brady from BMO Capital Markets.

On PMC, can you talk about the after-market versus the OE growth in the quarter? Where you are seeing that as we go out? I'm assuming after-market maybe doing a little better than the OE side.

Yes, if you were to characterize it, I think in our case we would call it the MRO, or the after-market business, is growing in that low single-digit range. If you look at all of our major industrial distributor partners, they are all growing in that low-ish single-digit range. We're seeing that maybe just plus a little bit.

And on the OEM side, if you were to take out the impact of mining/multiple material handling, I think the OEMs are probably growing at a similar rate overall. The downdraft from that, at least looking backwards from an order rate standpoint, was pretty stiff.

I think we are at a point now where we see that order rate sort of flattening out and supporting our forward look for next year. But the OEM side has been a little bit challenging, particularly on the mining side, but decent absent that.

Okay. Then looking geographically, can you discuss a little bit about what you're seeing outside North America? Kind of tying to that, maybe switch over to VAG. What's the status update on the opportunity to expand that beyond its largely European, or non-North American, footprint?

Sure. The growth that we're seeing in areas like the Middle East is, frankly, very good. The number of projects, the demand and need for the water infrastructure that frankly just doesn't exist is pretty significant. You've got things in the Emirates and Qatar and other places that just require tremendous amounts of build-out over the next 5 to 10 years. We are there active, and our business there is growing very nicely.

We are seeing opportunities in Asia begin to pick up a little bit. [We would call] Europe is stable, and I would call North America as a little bit sluggish. It sort of wants to go, but it's sort of the downstream derivative from housing going and nonres going, and then maybe some of the muni spending starts to improve a little bit.

But think we're having pretty good success going, and if I were I were to point to a case study it would be the Middle East where the value of the engineering content and the broad portfolio that we can get. But you have to have been there for a long time. It's not like you can show up today when the demand is needed and begin to win. We've been there for a while, and VAG has been there for a while, too. So that's where we see reasonable growth going forward.

Thanks. On Mill Products, I don't know if I missed it, could you tell us what Mill Products was in Q4?

I don't think we did. It's $50 million for the year, Charley. I don't know, Mark, if we're going to disclose that or not.

No.

I guess we are not. It's about $50 million for the year.

We won't (multiple speakers)

You wouldn't be off by a ton of you divided it by four.

Got you. That's helpful, thanks.

(Operator Instructions)

David Rose from Wedbush Securities.

I have two follow-up questions. On PMC, maybe you can help us better understand it. What were the dynamics to get the -- the incrementals were pretty impressive, and I'm not sure if that's something that's repeatable or not. Maybe you can help us understand what actions were taken that create that margin profile.

And then secondly, housekeeping, is if you can break down the $4.8 million in other expenses and put them in buckets for us?

Sure. David, I'll go back a little bit longer than you may like to answer the question. 10 years ago, PMC margins were 16% and today they are roughly 26%. When you step back over that time period, we've done a lot of things around driving greater specification of our products to OEMs and end-users. And then everything we make wears out, needs to be replaced like-for-like 85% of the time. By growing our installed base, that's helped build the annuity and the after-market.

Along the way, we've done a tremendous amount of work through the business system, and continuous improvement in leaning out our operations to make them more efficient and more effective. Our service levels have frankly never been better or higher than they are today. There's still room to improve. It's really all of those things.

If you go back over the course of the year, we've moved from 16% to 26%, and I think over the next several years you'll see that continue to move up to the high 20%s. My goal would be a 30% platform. It's really all of the above, but really all centered around the discipline of the business system, and just doing the little things each and every day, over and over and over, but starting with making sure our customers are happy, making sure our people are safe in the factories, and then along the way some portfolio pruning.

We've made some divestitures along the way. The Mill Products divestiture is sort of just like a few others that we've done in the past where we evaluate the forward look. Does it meet the requirements that we want to have in the portfolio to deliver shareholder returns? If the answer is no, I think then we go ahead and take action.

So, it's really the progression over a long period of time. I wouldn't call anything heroic. I think the 29% in the quarter is indicative of when the volume comes back through the cost structure and the processes and the discipline the way we operate the Company. It's there. So we are doing in a low growth (inaudible) environment. We're trying to navigate towards higher growth. But the tools and the processes are there to sustain that once we see the volume.

I appreciate the (multiple speakers) lot of work that's been done over the years. Clearly, the incrementals were pretty significant year over year. I just wasn't sure if there was anything that you broke through in the particular quarter. Doesn't sound like anything in particular.

There's nothing really. If you were say was it was mix? And if 1 was the worst mix we could have and 10 was the best, I'd call it a 6. It wasn't anything extraordinary. I think when we get a quarter where we can get a little bit more growth, I think that's indicative of what you'd see from a margin standpoint in the business.

Okay, great. Thank you. Then the breakout on the other?

Yes, Dave. The breakdown on the other, and I will give you round numbers. These are plus or minus a couple hundred thousand dollars. We had approximately $1 million in FX loss in the quarter; about $1 million of loss in sales from property, plant and equipment; about $1 million of costs related to the offering that was completed in February; about $1 million of costs related to the Board's revenue of strategic alternatives over the year, looking [for a few quarters] from here; and then there's another $1 million, or $800,000 of plus or minus small items that make up the $4.8 million.

And the M&A activity? Is that just in SG&A?

The M&A activity is SG&A, correct.

Yes, that's not in other.

Yes, not in other.

Okay, perfect. Thank you.

We have no further questions at this time.

Great. Thank you everyone for joining us today. We appreciate your interest in Rexnord. We're going to announce our first quarter results for FY15 in early August. And I think as many of you know, we are having an Investor Day in New York City on June 3. We hope to see you there as well. Thanks the much. Good night

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