Zurn Elkay Water Solutions Corp (ZWS) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the Rexnord first quarter fiscal 2015 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 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, August 6, and are also posted on the Company's website at www.Rexnord.com. At this time, for opening remarks and introduction, I will turn the call over to Rob McCarthy, Vice President of Investor Relations.

Thank you. Good afternoon and welcome, everyone. 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 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 first quarter of our fiscal 2015. We will cover specifics on our two platforms and update our outlook followed by an overview of our financial statements and liquidity highlights. Afterwards, of course, we will open the call up for your questions.

Please note that we are excluding mill products from our analysis, as we disclosed in May, that we are considering strategic alternatives for this non-core product line and, as a result, excluded mill products from our fiscal 2015 guidance. With that, I will turn the call over to Todd Adams, President and CEO of Rexnord.

Thanks, Rob, and good afternoon, everyone. Thank you for joining us today for (technical difficulty) our fiscal 2015 first quarter financial results.

Starting on page 4, I'm pleased to report our first quarter results that were in line with our expectations for core growth, profitability, and free cash flow. Our end markets appear to be developing as we expected, and we are increasingly confident that our core growth rates can accelerate in the second quarter and be sustained at higher rates through the balance of our fiscal 2015.

Looking at the first quarter, our sales increased 2% as our recent acquisitions performed well and contributed 3 points of growth of the quarter. This sales growth was partially offset by a 1% core sales decline, which is a function of a 4% decline in our process and motion control platform, offsetting 4% core growth in our water management platform.

As we outlined in our last update, the modest core sales decline in the quarter was driven by the combination of project shipment timing in our water infrastructure markets last year versus this year's first quarter, and the backlog-related contraction in the shipments to our bulk material handling customers in this year's quarter. Importantly, we believe we have now passed the inflection point for any further deterioration in our core growth rates created by the mining sector, which combines with generally stable trends in most of our other end markets to support our outlook for improvement in core growth rates.

With respect to earnings per share, our adjusted EPS increased 18% year-over-year to $0.26. And, as Mark will discuss in a few minutes, we had improved free cash flow performance in the quarter compared to the prior year. I will touch on our outlook in a few minutes, but in summary, we are reaffirming out fiscal 2015 financial guidance and outlook.

Turning to our PMC end markets, industrial sector demand remains generally stable and we sense growing confidence amongst our customers in the near term prospects for market growth. As I think everyone is aware, global mining CapEx has been a major headwind to our core growth in the process and motion control platform over the past several quarters, as mining sector original equipment order rates collapsed and our backlog declined. We are confident that the worst of that impact on revenue is concentrated in our first quarter, which we believe is a significant inflection point in the sector's impact on our year-over-year core growth rates.

Given the reasonable growth and generally stable to improving order rates we see across the rest of our markets, we expect platform core growth to turn sustainably positive in the second quarter.

PMC's adjusted EBITDA margin expanded year-over-year by a full point in the first quarter and we continue to execute against the opportunities to drive and sustain 30% to 35% incremental EBITDA margins over the next several years, ongoing execution of cost and productivity initiatives driven by the Rexnord business system enable us to drive margin expansion, while also continuing to make investments to enhance our core growth potential.

Turning to our water management platform, we delivered the system substantial rebound in our first quarter adjusted EBITDA margin that we outlined on last quarter's call. Margins expanded 360 basis points sequentially, leveraged by efficiency gains delivered by our execution of RBS directed initiatives and growth in the nonresidential segment of the platform, and ongoing cost and productivity initiatives. We remain focused on delivering ongoing margin expansion over the coming years and continue to project that the EBITDA margin in water management will expand by at least 200 basis points for the full year in fiscal 2015.

Longer-term, we remain confident in our ability to drive and sustain 20% to 25% incremental margins off that higher base. End market momentum in our water management platform remains strong. The US nonresidential construction sector continues to recover and we believe the outlook for sustainable North American market growth over the next few years is favorable. Our sales to these markets continue to solidly outpace measures for the overall market growth.

Global order activity also remains strong for our water and wastewater at the structure projects. So, while the project mix adversely affected year-over-year comparisons in the first quarter, and expanding order backlog supports our outlook for more favorable comparisons across the balance of the year.

We continue to work on business development funnel in our first quarter, closing the Green Turtle acquisition in April and sustaining our momentum on other opportunities. Green Turtle expands our product portfolio with attractive product technology that we are excited about the potential to leverage into incremental core growth for a larger distribution platform in the nonresidential to construction markets. We remain actively engaged with additional opportunities at varying stages of development and continue to target acquiring at least $25 million of annualized EBITDA in fiscal 2015.

Before I hand it over to Mark, with the first quarter behind us, we are reaffirming our guidance for fiscal 2015 which includes adjusted EPS in the range of $1.60 to $1.70, and represents EPS growth in the range of 19% to 26%. Our guidance is based on an unchanged outlook for the full year core growth of 3% to 5%.

In terms of the cadence of our core growth throughout the year, we expect our core growth to be 4% to 6% in the second quarter as well as for the balance of the year. For the second quarter, discreetly, we expect sales to be in the range of $540 million to $550 million, and adjusted EPS in the range of $0.38 to $0.41, which represents over 30% -- which represents a 30% year-over-year increase at the midpoint of the range. As Rob discussed, all of these figures exclude -- are excluded -- all these figures exclude mill products.

To close on our guidance, our unchanged fiscal 2015 outlook incorporates strengthening core growth with robust incremental margins and strong free cash flow as a base case. We anticipate augmenting that performance with a growing contribution from the accelerated pace of acquisition activity. Leading and concurrent indicators like key verticals, such as US nonresidential construction and industrial process markets appear favorable, and we expect to make further progress with our long-term strategic initiatives in fiscal 2015.

With that, I will turn it over to Mark to cover the numbers.

Thanks, Todd. Consistent with the 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 5 of the presentation reconciles our reported results to the adjusted results.

Turning to page 6, I will discuss our operating performance highlights for the first quarter. Please note that our analysis excludes the results of our mill products business in both years.

First quarter sales increased 2% from the prior year period to $504 million. Adjusted operating income increased to $64 million and adjusted EBITDA increased to $92 million with margins roughly consistent on a year-over-year basis. First quarter adjusted net income was $27 million, resulting in adjusted earnings per share of $0.26, an increase of 18% from the prior year comparable figure, due to the increase in operating income and the benefit of the debt refinancing we completed last year. Free cash flow was significantly improved versus last year and roughly neutral in the quarter.

Next I will take some time on slide 7 to walk through the operating performance in our process and motion control platform. Sales in the second quarter decreased 1% year-over-year to $298 million as the core sales decline of 4% was nearly offset by the 3% contribution from acquisitions. The core sales decline in the quarter was driven by the expected decline in sales for bulk material handling markets as a result of a lower backlog going into the fiscal year.

Turning to profitability, adjusted operating income was $51 million and our adjusted operating income margin improved 70 basis points to 17.1%.

Adjusted EBITDA was $70 million in the quarter and our adjusted EBITDA margin increased 100 basis points from the prior year to 23.4%. We remain focused on leveraging the Rexnord business system to effectively manage our cost structure while continuing to invest in our strategic growth initiatives.

Turning to page 8, I will make a few comments on our water management platform. Water management sales in the first quarter increased 6% from the prior year to $205 million. Core sales growth contributed 4% and acquisitions accounted for 2%. First quarter adjusted operating income and EBITDA margin were both off 50 basis points, reflecting adverse mix in our water infrastructure markets as compared to the prior year.

As Todd mentioned earlier on the call, we remain confident in the margins in water management can meaningfully improve on a year-over-year basis in fiscal 2015. Moving to slide 9, I will touch on our capital structure and liquidity.

We finished the first quarter with $311 million of cash and $646 million of total liquidity. Total of that was [$1.944 billion] and net debt was $1.633 billion, resulting in a net debt leverage ratio of 3.9 times at June 30, 2014.

Before we turn the call back to the operator or take any questions you may have, I will make a few final comments on our outlook. In addition to the elements of the guidance that Todd highlighted earlier in the call, page 10 in the presentation also outlines our assumptions for incremental margin, interest expense, depreciation and amortization, stock option and LIFO expense, our effective tax rate, free cash flow, capital expenditures, and fully diluted shares outstanding for the fiscal year. In addition, our guidance assumes we do not incur any nonoperating 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 P&L line item.

Our guidance also excludes the mill products business, the impact of potential acquisitions and divestitures, and future nonrecurring items such as restructuring costs. One last guidance item I want to highlight as it relates to taxes, we are anticipating an effective tax rate of approximately 30% for the year. As we indicated last quarter, this rate excludes the $10 million nonrecurring, non-cash expense we recorded in our first quarter related to a tax planning initiative that will basically allow us to reduce the taxation on certain foreign entities, and will benefit our rate in fiscal 2015 and beyond.

Our effective tax rate will fluctuate by quarter, given levels of pretax income as well as the timing of our other planning initiatives. In the second quarter, we expect the tax rate to be approximately 31% to 33%. With that, I will turn the call back to Rob.

Thank you Mark and Todd, and thanks to everyone for joining us on the call today. We appreciate your interest in Rexnord and look forward to providing further updates when we announce our fiscal year 2015 second-quarter results. With that, I will turn the call back over to the operator and open up to your questions.

(Operator Instructions) Karen Lau.

Just housekeeping; could you parse out the growth rates, or how much did bulk material handling decline in the quarter within PMC? And how did aftermarket business do in that segment?

I don't think we're going to begin to parse out the exact details, but the bulk material handling side of the business was down probably 20%-plus, sort of in line with what we had expected last quarter. And the aftermarket business was obviously a lot better than that.

Okay. Did you see any particular end markets that weaken or strengthen during the quarter within PMC?

I wouldn't say that we saw anything different than we anticipated. We walked into the quarter knowing that we had a difficult year-over-year comparative, really backlog driven. Fortunately, the order rates that we were projecting for bulk material handling in the quarter were spot-on, so I think we called it right. And the rest of the markets, I will say, sort of developed sort of in line with what we had been anticipating, which is lower growth but growth nonetheless.

Okay. Thanks. And then, on water management, how did Zurn do in the quarter? And did you ship any of the delayed projects that you called out in the water infrastructure business during the quarter?

Zurn performed quite well in the quarter, double-digit growth in the quarter, which translates to a decline in the water infrastructure business as we had anticipated. We did not ship any of the larger shipments that pushed from our fourth quarter -- in our first quarter consistent with what we had been expecting. But Zurn performed very well in line. I would say that the book to bill in the water structure business was very strong in the quarter as we had anticipated, sort of setting up the core growth acceleration that we have outlined for the second quarter and really second half of our fiscal year.

Okay. Thanks. And then, just lastly, I think the delayed shipments that you had called out previously, was to the magnitude of $5 million to $10 million. Is that sort of baked into your second quarter organic growth guidance?

I would say it is baked into our full year guidance at this point. I don't think we're going to start talking about fungible projects and the discrete timing of each, but suffice to say, that it is in our full year. And whether or not that particular project in our second-quarter or not, I think the core growth shouldn't be distorted as a result. Meaning, we are talking about 4% to 6% in our second-quarter and 4% to 6% core growth for the second half. And that is inclusive of shipments happening throughout the year.

Mig Dobre.

To stick with motion control here, I want just to clarify something. Are you basically saying that in mining that your comparisons are getting easier, and this end market is starting to bottom out? Or are you actually seeing an inflection in orders and you expect this market to actually become a contributor to growth going forward as well?

I think that when you look at the full year next year, we think the end market will be a contributor to growth. I think what we are outlining is when we walked into the year, we felt like we had a difficult first quarter really based on the phasing of backlog and the availability of backlog in the prior year that didn't exist this year. So we had a tough comp.

However, the book to bill in the quarter was what we felt like we needed to -- we accomplished what we needed to see to create bulk material handling being a growth opportunity really over the next 12 months, starting towards the end of our fiscal year and into next year.

So, I am sorry to be pressing on this, but I am trying to understand. Are you seeing sequential improvement in demand in this end market?

No. It is flattening, Mig. If I look at sort of the last six months of the last fiscal year and the first quarter, it is flattening. And we see relative stability in that end market versus, I'll say, any uptick in meaningful growth.

I see. Thank you. And when we are looking at your distributors, we have got pretty strong PMI numbers in the US. I'm wondering, are we seeing any signs of restocking in North America, in the US specifically? Or is it still fairly muted?

I can't speak for the broad set of competitors. I can tell you, from our standpoint, we really don't see the benefit or the detriment of large stocking or destocking, just given our service levels and how we turn inventory with our channel partners.

That being said, I think there is a view and a feeling that the sellthrough and sort of the end demand is picking up, which we would see, frankly, just manifest itself in ongoing monthly/quarterly sales and order growth rate. So I don't think there is a big destocking or restocking impact embedded in anything we are talking about. It is just the underlying sellthrough, which fortunately is good.

Great. One last question on motion control; I remember at the analyst day I heard you guys talk a little bit about the SAP implementation that you have got rolling out. And maybe a little update on that would be helpful, as well as just your thoughts with regards to the level of investment required for this project and what you hope to get out of it longer-term?

We have been, frankly, rolling it out for the last two years. And so each and every quarter, almost every quarter, with the exception of maybe year-ends, you have seen a number of facilities rollout. We saw another one happen just post the end of the quarter. You will see another one towards the end of our third quarter. So for us, it really is the continuation of an ongoing implementation.

We are over halfway across PMC. And so we think, by the time we get towards the end of our fiscal year, and really probably through the first half of next year, we will start to see the benefits of having the integrated platform in which to do decision-support and all that kind of stuff. So it is ongoing, more than halfway through.

So it is not a new thing for us. So it is going to be great once we are through, though. That's for sure.

Is it too soon to put some numbers behind it, though, as far as what you hope to (multiple speakers) achieve?

I don't think we would ever -- we wouldn't externally articulate what the benefit is. I think it manifests itself in everything we just talked about. Incremental margins, better free cash flow, and decision support and ultimately core growth. So I don't think that we are going to tell you that, as a result of implementing a software system, expect X million dollars of savings. That has been feathering itself in as we have gone live, and it is inherent in the guidance we have got going forward.

Julian Mitchell.

Just a question on water management, first. The margin was down about 50 bps year on year in Q1. And, as you said, the full year, you are targeting 200 points-plus of expansion. So do we see that growing year on year in Q2 or it is more about the second half?

It is a great question, Julian, and you will see it sort of immediately in the second quarter. When you look at the prior year, margins in the first quarter were almost at the high watermark based on some margins resulting from favorable project shipments.

And so the comp coming into the quarter was tough. You saw it go up 360 basis points from the fourth quarter. You will see it up considerably again in our second quarter as well as in our third and fourth quarter. So it is not a wait-and-see. It is going to happen this quarter.

Great. And then, within PMC, was there any kind of mix boost that happened to help the margins in Q1, or it was all sort of the productivity efforts?

I would characterize the mixes -- if 5 was sort of average, it was probably a 4 in terms of the overall mix. I think sales to distribution, relative to the first quarter last year, we are down a little bit not in growth rates, but just in order of magnitude which generally come at a slightly favorable margin, so no callouts or favorable mix. Just sort of the ongoing efficiency and sustainability of productivity that we have got baked in.

Thanks. And then, lastly, your restructuring spend was up year on year. It was spread across both the segments. What is the expectation for full year restructuring expense?

--spend?

For the full year, Julian, I think we have got -- and in the quarter we had, as you said it: in both platforms and restructuring, in both segments. I think if you look over the balance of the year, call it anywhere in the range of $3 million to -- call it $4 million to $10 million, in that range, over the balance of the year.

Andrew Obin.

Just a question, I think just thinking about growth in the water business, can you just talk about a -- specifically what are you referring to in terms of the mix in the quarter? And then, if you could give us some color on what you are seeing on residential trends versus nonresidential trends and which are you more comfortable with?

Sure. You know, if you go back, I think the way we have tried to characterize the water infrastructure business is to look at the orders in halves, and the shipments over the course of the year, because some of these projects are rather large and could distort a growth rate in a given quarter. So when I look back last year, our book to bill in the first half, I think, was like 1.13. Our book to bill in the second half was like 1.01, and for the year 1.07, 1.08, something in that ZIP Code.

The shipments, however, based on the order rates of the prior year, there were large shipments that took place in our first quarter last year that didn't repeat in this year's first quarter. However, our book to bill in really just the first quarter for water infrastructure piece was 1.23, which sort of bodes well for that first half, order rates clearly showing solid growth and, obviously, for the full year.

So when you look at the growth rates for water infrastructure, I would coach you to sort of look at order rates in halves and growth over the course of the year. I think we are off to a good start from an orders perspective in building some backlog there that supports the core growth outlook that we have for the second half of the year.

Moving to your question on what are we seeing in nonres versus res, I would point out that res is a very, very small piece of our overall water business. In aggregate, it is probably less than 5%. So, what we can really speak to is what we are seeing in nonresidential construction.

We are seeing the momentum index and backlogs continue to progress, despite some monthly volatility around starts are put in place or ABI. And we feel very confident and comfortable that the end market has yet to fully recover. So, our performance, growing double-digit in advance of a full market recovery, we think, that only gets better over the course of the next several years as the ultimate market growth catches up and hopefully our outperformance relative to that sustains.

And just a follow-up question. If you look at broad industrial reporting season, I think revenues disappointed on the margin, not you guys, but just broadly speaking. Are you seeing any kind of talk about pressure on pricing? Do you see a competition to get more aggressive to try to push the product into slower growth environment, broadly speaking?

I don't think we see it broadly. Obviously, any time you are involved in project activity, I think there is a lot of folks that are aggressive. But it would be tough for me to pinpoint something for me to say that we are seeing this sort of secular shift towards very aggressive pricing in the industrial part of our business.

I think it is always competitive. I wouldn't have any discrete callouts for areas where we are seeing people do unreasonable things. But any time there is big projects, people are aggressive and you have to win the business. But I wouldn't say it's any different, Andrew.

So it is fair to describe you are not seeing any deterioration in pricing.

No, we are not. We are not.

David Rose.

I had a couple of follow-ups on, as we look at the restructuring expenses, I was wondering what you think the payback is, if you can quantify. I guess if we take the $3 million-plus for the first quarter tax and then that onto the $4 million to $10 million, so roughly $10 million in restructuring expenses. Is that 18-month payback; 24-month payback?

David, I will start and then I will let Mark finish. I would say that the bulk of the restructuring activities are really around two things: footprint reduction and simplification, and process and motion control. And also, the same across our North American water infrastructure business, sort of consistent with what we outlined last quarter. The payback on all those -- on the water side, it is inside 12 months.

On the industrial side, given the fact that its footprint, some of it is outside the US, there is a slightly longer. But it is clearly within the 24-month sort of timeframe. But I will let Mark --

No, Todd is exactly right. You break it down on the water side, you're going to have that quick payback. On the PMC side where we are doing more -- starting the earlier phase in the footprint as we have talked about, that is a little bit longer. But assume that 18 to 24 months timeframe on the high end. So we feel very comfortable that there will be a very acceptable return on these investments that we are making.

Okay. So intuitively, we should see an acceleration on the incrementals for both of those in 2015 -- or 2016? Fair?

In 2016.

Absent anything else.

Yes. No. I get it. (multiple speakers)

There is always reinvestment going back into the business as well. But, yes, a lot of that work benefits -- to your point, a lot of that work is going to benefit to the next fiscal year.

Okay. And then, moving on to this quarter, you had an accrual adjustment that worked against you about $5 million or $0.03 net per share, if I calculated that right. Is that a headwind in any other quarter? I mean, was it -- or a tailwind in any other quarter?

It is not a tailwind. It is a little bit account-ese that I think Mark and Rob can take you through off-line. It fundamentally has to do with how we have been accounting for our rebate programs. So, the essence of the comparability is, yes, the first quarter is a little bit tough. There is a little bit of headwind over the balance of the year as a result.

However, I think we are comfortable that there is no reason to sort of call it out as a special headwind or talk about it in that manner. But, yes, your analysis is correct.

So you would [add] a $0.03 better in the quarter otherwise. Okay. And then, if I look at just a couple more if I may, you are not calling out anything specific. But if I can lump, on the PMC side, aerospace and food and beverage collectively, they are about 30% of the business' sales.

Can you give us some color on -- because, I mean, the feedback on aerospace has been all over the place. And F&B has been kind of up and down, too. So maybe you can give us a little bit of color what you are seeing their.

It is probably not too dissimilar. I think we have had reasonable growth over the last quarter in aerospace and the orders over the last, call it, 3 to 6 months have been pretty good. So we are not predicting any sort of big shift up or down. The beauty of our aerospace business is a lot of it is programmatic, and so it is all based on build rates. So the underlying volatility is frankly not as much.

On food and beverage, the volatility more often than not comes due to seasonality. A lot of the beverage manufacturers run full out over the summer months, and then do a lot of the maintenance and upgrades and installation of new lines in the winter months, just based on demand. And so I don't think we are seeing anything unusual from a demand pattern.

We are entering a point of the year where food and beverage gets a little bit slower just because everything -- all the equipment is being run flat out and want to keep it up as much as possible. And as we look over the next, call it, 3 to 6 months, that will wane in our second quarter, pick back up in our third, fourth quarters. And we are seeking, I think, good program activity, good penetration with new products and new categories.

So overall, I think we are pretty positive about food and beverage over the course of the year. But, the trend lines are somewhat consistent with what we have seen in the past.

Okay. Then, if I may, one last one. Maybe this is for Mark. What are the scenarios under which the Company would convert the non-hedged floating-rate debt to fixed? I mean, you have got a third that is fixed, roughly, so with the interest rate environment ticking up a little bit, what are your thoughts on that?

Well, David, we obviously look at it on a regular basis, and probably see outside input and advice on that. At this point in time, we are comfortable with where we sit with what we have hedged today. But we do look on a regular basis.

I won't pinpoint certain -- there isn't really threshold where we say well, look, now we have to do more. We monitor the market closely and if we feel it is appropriate to do so, we will take action. At this point, I know we are comfortable with where we sit.

Samuel Eisner.

Just wanted to talk about your second-quarter guidance here. It looks as though that comps are flat sequentially, yet you're basically calling for a 500 basis point increase in organic growth. So I just wanted to understand what you see as accelerating. Is it primarily just a timing issue that impacted water management this quarter, or just wanted to get some color there?

Again, I think it is sort of very consistent with the case we outlined in our full-year guidance last time. We had a difficult comp as it relates to both material handling and process and motion control really driven by backlog reduction. We have seen that stabilize. And we have seen the other parts of our business really continuing to grow at a relatively decent clip.

All you are doing is you are eliminating that pretty significant headwind that we outlined on water management. We do see a slight acceleration due to some seasonality in nonres construction. When you look at the next three months, it is sort of the primetime building season across the good parts of North America. So you see a little bit of a seasonal uptick.

We also see a little bit of normalcy with respect to our project shipment timing in water infrastructure relative to the prior year, and sequentially it improves. So it is really nothing more than the underlying flow businesses continuing to chug along, a little bit of seasonality in nonres, and then the mining headwind abating and a project shipment sort of normalizing, I think, is sort of the way to think through it.

So I wouldn't think about it as we are calling out a massive step change in growth. I think it is sort of the continuation of a lot of things that we have been talking about and seeing, as well as a little bit normal seasonality, as well is the elimination of some of the headwinds as we had anticipated.

That is helpful. And then, on mill products, obviously, you are giving excluded results, but it certainly is still part of the Company. I don't think you have moved into discontinued operations. So just curious what the timing is for a potential sale of that. Any kind of update there would be helpful.

Yes, Sam, as we said in May when we announced it, we felt pretty confident that by the end of our fiscal year the process will reach a conclusion. I think at this point in time we feel confident with that timeline.

We won't give specifics on where we are in the process, but I would say the process is moving along as we anticipated, and so feel confident that by the end of the year that review process is complete. And you will see that business find its way to those discontinued operations as we solidify what we are going to do with that moving forward.

And then, just lastly, Todd, I think you gave a comment that you are looking at acquiring up to $25 million of EBITDA or annual EBITDA this year. I think you have only really announced Green Turtle, so curious what the potential timing of that could be or kind of how the pipeline looks at this point.

We are not going to comment on specific timing, other than to say we continue to work our funnel. These are proprietary deals. They don't come with the benefits of an auction and a timing element to it. But I would characterize us as sort of deeply engaged in a couple things that we are pretty sure are going to come to fruition in the relatively near future.

So we have got some conviction around the $25 million for the year, based on where we are. I would surely like them to come sooner, too, Sam. But, I think we are saying staying disciplined and we will keep you posted.

Charlie Brady.

Just for clarification, the revenue guidance for Q2 does not include mill products, correct?

That is correct, yes.

Okay. And just on a bigger picture framework, you guys have seen some decent improvement on the SG&A expense in percentage of revenues. And I am wondering, do you have kind of a target level you are looking to shoot for over the next two or three years, on where that can get down to?

I don't think we have significant compression in SG&A as a percentage of sales dialed in. Most of the margin expansion that we see is going to come through gross profit improvement. Obviously, as we go through and optimize our footprint, we take the SG&A savings.

But I wouldn't think, Charlie, you're going to see a whole lot of continued compression in the overall SG&A as a percentage of sales. That is not where the margin expansion comes from at this point.

Got it. Got it. And then just one more; on VHE, broadly speaking, that business was largely -- when you acquired it, it was largely a non-US type of business and it still is today, I guess. But can you just speak to kind of the extension of that business, now that it is owned by Rexnord, and kind of leveraging that VAG product outside of the traditional VAG European markets? What is the progress level on that? And I guess the underlying markets outside of Europe and North America municipal, not been a great help to that, but maybe you could just speak to where that is today.

Without -- it sort of varies, frankly, Charlie, by project and opportunity. What I would say is that the infrastructure that was established by VAG, it is much easier for us to take product based in North America and export it into existing projects through the VAG network that had already been established.

As we have tried to grow the VAG business in North America, we have done it at a time where North American municipal spending has been down considerably. That being said, we are seeing and starting to see acceptance in the marketplace. We are starting to see specifications being written.

I think when you look back over the next couple of years, you will start to see some signature wins as a result of bringing that content and technology that existed in VAG and other parts of the world back to North America. We know that there is a need and demand for it. The technology development done in Europe has been outstanding relative to some of its North American competitors, and we are starting to see that acceptance in the marketplace.

So, without giving you numbers, I think it is one of those things that it takes a little bit of time to gestate. But when it comes, it comes steadily. And I think we are starting to see that happen and we are comfortable with the progress.

At this time, I am showing no further questions.

Okay, Eric, thanks. And again, thank you everyone for taking the time this afternoon. We look forward to providing an update on our second quarter, and enjoy the rest of your summer. Thanks.

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