Zurn Elkay Water Solutions Corp (ZWS) 2015 Q3 法說會逐字稿

Good afternoon, and welcome to the Rexnord third-quarter FY15 earning 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 numbers for the replay can be found in the earnings release the Company filed on an 8-K for the SEC today, February 4, and 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 Rob McCarthy. Please go ahead.

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 will 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 third quarter of our FY15. We will cover specifics on our two platforms and update our outlook, followed by an overview of our financial statements and liquidity highlights. Afterwards we'll 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've been considering strategic alternatives for this non-core product line, and as a result have excluded Mill Products from our FY15 guidance. More on that in a few minutes. With that said I'll 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 a review of our FY15 third-quarter financial results.

Starting on page 4, we're pleased to report our third-quarter results that were essentially in line with our expectations for core growth, profitability and free cash flow. Our core growth was 3%, despite a generally choppy global market environment, and is a function of 1% core growth in our process and motion control platform, and 5% core growth in our water management platform.

Overall, new order bookings again exceeded our shipments in both platforms and we leveraged the Rexnord business system to mitigate the impact of somewhat weaker mix and adverse currency translation on our overall results. Our adjusted EPS was $0.32, as a higher effective tax rate and shares outstanding, plus adverse currency translation, were together a roughly $0.05 drag and offset higher pre-tax earnings in the quarter.

As Mark will discuss in a few minutes, we again had very strong free cash flow in the quarter, which allowed us to continue to fund internal investments and growth and close two highly strategic acquisitions in the last 90 days, while continuing to reduce our financial leverage. With respect to our guidance, we are narrowing our range for FY15 adjusted earnings per share to $1.52 to $1.56 to incorporate the more adverse impact of currency translation implied by current exchange rates.

Turning to our PMC end markets, demand trends remain mixed, as they have all year. We continue to see good growth in our aerospace markets and in end markets like concrete and aggregates processing, forest products, transportation, and in energy, where most of our sales are for downstream applications and our market share continues to have significant near- to medium-term upside.

North American activity in our food and beverage markets is expanding, helping offset weaker demand from some foreign markets. More generally, we continue to see broadly stronger domestic demand, but generally uneven and modestly slower demand in markets outside of North America. As we've been projecting and communicating, the order activity in bulk material handling continues to be relatively stable and produced another quarter with a book to bill above 1.

While shipments in the quarter were just slightly below our expectations for the quarter. At this point, we continue to feel good about the prospects for PMC core growth to benefit in our FY16, from eliminating the 2 to 3 point drag from our bulk material handling end markets.

To close on PMC, our view for a base case is for a generally slower industrial growth market environment, with some near-term volatility as the impact of falling commodity costs and the strengthening dollar creates some level of end-market uncertainty, along with customer uncertainty over the next couple of quarters. With that as a backdrop, we're really leveraging and relying on the Rexnord business system to drive an even higher level of operating efficiency, across all facets of the business, to create the capacity to fund initiatives that enhance the ongoing core growth trajectory of the platform.

We have moved aggressively over the past year to exit parts of the mining business, and we've simplified and streamlined the organization around our customers, vertical markets and geographies where we need to be long term. As a result, we're far better positioned to deal with the current level of uncertainty in the industrial end markets than just a year ago. Everyone who serves customers in our end markets is going to deal with the same challenges I outlined above.

Our opportunity, and one that we have a lot of conviction about is as a result of RBS, is to continue to sustain 30% to 35% incremental EBITDA margins over the next several years, while investing organically and inorganically where it makes sense, to improve the fundamental growth profile of the platform, while enhancing the margins and free cash flow, generated by PMC.

Turning to our water management platform, I'm pleased to announce and deliver another strong quarter. With 5% overall growth and strong margin expansion, which validates our progress towards achieving a 200 basis point improvement in the platform's adjusted EBITDA margin in FY15. Our core business grew 5%, and acquisitions contributed 3%, while currency translation reduced reported year-over-year growth by 3%. The ongoing success of RBS-directed initiatives in driving better execution and permanent cost reduction, gives us confidence in our ability to drive 20% to 25% incremental EBITDA margins into an improving set of end markets over the coming years.

Market fundamentals in our water management platform continue to track to our expectations. The recovery in the US nonresidential construction sector continues to gain momentum, and we remain confident in the prospects for sustainable North American market growth over the next few years.

Our core growth continues to sell the outpace measures of overall market activity, and we continue to be excited about further in our increase specification share, as we continue to execute on substantial pipeline of new products that offer meaningful economic and environmental benefits to our customers. Global order activity also remains decent for our water and water infrastructure products, with a favorable impact of our RBS-directed cost-reduction efforts and improving execution, while helping drive improved margins.

Looking specifically at the fourth quarter, we expect sales to be in the range of $540 million to $550 million, and adjusted EPS to be in a range of $0.54 to $0.58. And as I said earlier, this translates to adjusted earnings per share of $1.52 to $1.56 in our FY15, which implies 13% to 16% year-over-year growth.

Before I hand it over to Mark, I'll provide a framework on how we're thinking that the medium-term performance over Rexnord heading into next year. In water management we're seeing the performance we expected in the platform, both in terms of growth and profitability based on the execution of our strategy. This is encouraging, because it's happening against the backdrop of strengthening North American markets and a pressing demand for enhanced access to clean water across the developing world.

In PMC we're navigating well through a lower growth year, constrained by some moderate headwind in certain geographies and end markets, that in aggregate should improve over the next couple of years. Macro uncertainty remains high and we remain focused on controlling what we can control. Focusing on operational execution, driving process efficiencies through the direction of our business system, and sustaining both internal and external investments in core growth. In any environment, our consistently robust free cash flow underpins our ability to pull multiple levers to create shareholder value over time. With that, I'll turn it over to Mark to cover some additional details on the financials.

Thanks, Todd. Consistent with prior quarters, we'll speak primarily to adjusted operating profit and EBITDA, adjusted net income, adjusted earnings per share and use these numbers to measure and 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, you'll find our operating performance highlights for the third quarter. Before I go through the numbers, I'll provide an update on the outcome of the strategic review of our Mill Products business. During the third quarter, we signed agreements with two separate buyers and we expect the transaction to close by the end of March. As a result, we'll be presenting Mill Products as a discontinued operation we when report our fourth-quarter results. In the meantime, please note that our quarterly analysis continues to exclude the results of our Mill Products business in both years.

Third-quarter sales increased 4% from the prior-year period of $497 million, our adjusted operating income increased to $72 million, and adjusted EBITDA increased to $99 million, with margins essentially flat on a year-over-year basis. Our corporate expenses in the quarter included a $31 million non-cash pension expense, due to required plan remeasurement, that was driven by plant settlements we initiated in the quarter, that will ultimately generate $9 million of cash savings for us over time. This non-cash charge is excluded from our adjusted EBITDA and our adjusted earnings per share.

Third-quarter adjusted net income was $33 million, resulting in adjusted earnings per share of $0.32, which is flat on a year-over-year basis. As a higher tax rate in the quarter, increase shares outstanding, and an unfavorable impact of foreign currency translation is offsetting our pre-tax earnings growth in the quarter. Cash flow increased nicely in our third quarter, as adjusted free cash flow was up 7% year over year to $78 million.

Next, I'll take some time on slide 7 to walk through the operating performance in our process and motion control platform. Sales in the third quarter increased 3% year over year to $299 million, as core sales growth of 1%, combined with a 4% contribution of some acquisitions, to overcome a 2% decline due to currency. The core sales growth in the quarter was driven by generally stronger sales to domestic markets that were partially offset by weaker global sales in our beverage end markets, as well as the diminishing, but expected headwinds, from our bulk material handling end markets.

Turning to profitability, adjusted operating income and EBITDA margin declined year over year, as we anticipated. 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'll make a few comments on our water management platform. Water management sales in the third quarter increased 5% from the prior year to $198 million, core sales growth contributed 5% and acquisitions accounted for 3%, while currency had a negative 3% impact. On a year-over-year basis, third-quarter adjusted operating income increased by 160 basis points, and our EBITDA margin increased 130 basis points to 16.3%.

Margins benefited from the ongoing success of RBS-directed initiatives on driving execution proficiency and cost reduction, as well as our higher year-over-year sales. We remain on track for margins in water management to expand by at least 200 basis points in our FY15.

Moving to slide 9, I'll touch on our capital structure and liquidity. We finished the third quarter with $395 million of cash, and $725 million of total liquidity. Total debt was $1.928 billion, and net debt was $1.533 billion, resulting in a net debt leverage ratio 3.6 times at December 31, 2014.

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 elements of guidance that Todd highlighted earlier in the call, page 10 of 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 FY15.

In addition, our guidance assumes we do not occur any non-operating other income or expense, as we do not forecast realizing 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. With that, I'll turn the call back to Rob.

Thanks, 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 FY15 fourth-quarter results in mid-May. With that I'll turn call back over to the operator and we'll open it up for your questions.

We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from Jeff Hammond, please go ahead.

Hi, good afternoon guys.

Hi Jeff.

So on bulk handling. I guess a lot of that goes to mining, we've been hearing more recent negativity. I think you're saying you've seen stability. What's the risk that we see maybe some risk into FY16 on mining, based on some of that anecdotal commentary?

Sure and just to dimension it for you Jeff, the order of magnitude for us is about 12% or so of PMC sales. And at one point that was close to 20%. And when we entered the year, we knew we were going to work through, call it a 2 to 3 point headwind at the Rex level regarding that reduction in backlog.

So where we sit today is, orders have been stable, book to bill above 1 for the last four quarters, in line with what we had been projecting. I suppose there's always some level of risk. But I think the order of magnitude of that risk on a go forward basis is greatly diminished, just based on where we're running. And I think the overall impact of the Company is a much smaller way, given the actions we took around Mill Products and everything else. Maybe that helps in terms of how to think about the risk heading into next year related to mining.

Okay. And then I think you mentioned in the presentation robust order rates in water management. Is there any quantification you can put around that? Any color you can add to kind of where you're seeing it? Again our business in the nonresidential construction market continues to -- the underlying market continues to get better and our performance continues to outpace the underlying growth in the market. So we saw good growth there. We again built backlog in our water infrastructure business.

So year to date we're positioned, I think quite well both to finish out FY15 and then as we head into next year. In both cases, we see accelerating growth in non-res construction, and we see with some of the backlog that we've been able to build this year, a solid year next year on the water infrastructure side. So in water I would say that we're pretty confident that there are no headwinds. And it really comes down to execution. Okay. Thanks guys.

Our next question comes from Julian Mitchell, please go ahead.

Hi, thank you. Just a question on the process in motion control margins. Because in Q1 they were sort of off a bit, Q2 down a little bit year on year, Q3 down a bit more. On the top line core and reported has still been positive. So I just wondered, is there something going on with the mix inside PMC that's starting to drag on the overall margins? And if there is, when do you think that may end?

Julian, it's Todd. There was a little bit of adverse mix the last couple of quarters really around a slightly weaker European food and bev business that we have that is quite profitable. It got better in our third quarter. We're also putting some growth investment in heading into next year.

So it is a little bit of adverse mix in any given 90 day period, depending on some of the various projects and other things we are working on. Mix could vary a little bit. There's nothing that we step back and say, long-term there is an issue at all. In fact, we think that heading into next year we're pretty confident in that 30% to 35% incremental margin for the year, and then going forward. So a little bit of adverse mix, a little bit of investment like you would expect us to do in any given quarter. But nothing really to report on.

Thanks. And then just on energy. If you could just quantify sort of the exposure there in revenue terms? And if it is any different in terms of the share of earnings?

Sure. The overall energy exposure in PMC as a percentage is a little bit less than mining. So it's probably about 6% or so of total sales -- of total Rexnord sales. And most of that is downstream.

So, we don't really see much of anything at this point where we could look out and say that's a major problem for us. So it's a relatively small piece of Rexnord, bigger piece of PMC. But in any event, we're seeing really good growth because we've focused on energy as a vertical that we wanted to get into. So our relative share is small. So even though the market may be a little bit choppy, I think we continue to have opportunities to grow inside of energy clearly over the long term, and even over the next year or so.

Thanks. And then just lastly, quickly. Food and beverage. What's the update there on those orders? I guess they softened five, six months ago, any change in trend on those?

They did. We saw a little bit better, so we did see some of the seasonality come back. You'll recall that most of the maintenance and other project work is done over the winter months, as they run these lines over the summer. We did see a little bit of improvement, back to not quite normal seasonality, but clearly a trajectory up. And so I think we're seeing a little bit of recovery there. As we head into next year, I think we'll hope to continue to see that progress as we normally would.

Great. Thank you.

Our next question comes from Karen Lau, please go ahead.

Thanks, good afternoon.

Hi Karen.

So just to follow-up on PMC margins. You said the food and beverage mix was actually better sequentially, but if I look at the EBITDA margins for PMC sequentially is down about 80 bps. Food and bev would actually help you sequentially, so would you attribute the sequentially lower margins to just investment spending? Or are there any other end markets that got worse in the quarter, that dragged the mix?

No end markets got worse over the course of the quarter. I think when you step back, I think you could be mixing a little bit of the sequential versus the year-over-year. Sequentially it did get a little bit better, but you're comparing a different quarter, this year to last.

And so, I don't know that there's a way to answer your question, other than to say relative to the prior year, food and beverage was down a little bit which hurts our mix and we put investments. It did get better sequentially, but the comps in Q2 or to last quarter's comps, the comps in Q3, are this quarter's comps. So in general I think you've got it right.

There's more of a quarterly seasonal thing?

Yes. I mean whatever happened last year in the second quarter is influenced by, it could be a variety of other end markets right, and so I think the biggest thing we see is, food bev got better sequentially, relative to the prior year the mix is a little bit adverse. And we've got some investments in the third quarter relative to the last year as well.

Okay. Any puts and takes that we have to pay attention to regarding fourth-quarter margins in PMC? Because last year was very strong. I believe you closed Euroflex in January which has much higher EBITDA margins. So anything sequentially, anything we should, do you expect a big jump sequentially?

Sequentially they'll go up. Last year I think if you sort through it, margins in the fourth quarter were circa 29%. Which included, I think you will recall, sort of the last big backlog reduction to mining. So we don't have that this year.

So I would say that you'll see margins move sequentially up in our fourth quarter, from our third. They'll probably still be down a little bit from last year's fourth quarter, really based on some project shipment that happened last year that doesn't repeat, and I think we've been pretty clear about that all year long.

Okay thanks. And then just a more general question. Given the lower hard commodity prices. Are you seeing more pushback in terms of pricing increases from either your distributors or end-users? And what do you expect in terms of price cost the rest of the year and going into next year?

That's a great question Karen. We haven't seen any pushback as of yet. I think for us, as we head into next year there's clearly going to be a bit of the tailwind opportunity around commodity cost and input cost that we'll benefit from. To date we really haven't seen or heard much of a pushback from our customers.

And I think that's one of those things we'll just have to wait and see. It's a little bit too early to call it. I think we know the input costs across a variety of commodities, and things like freight should help us. But to call what the price impact is going to be next year is probably a little bit early to do that at this point.

Okay, but near-term you expect price cost to be more positive as the input cost gets lower?

I think that's right.

Okay and then lastly if I may what's the book to bill for VAG? And it looks like the water infrastructure business is down mid-single digit. Is it just timing? Or are you seeing some push out in terms of what infrastructure projects in Europe or emerging markets?

In the quarter it was flat, relative to the prior year and the book to bill was 104. And I think for the first nine months, it's probably around 105, 106 range. And again for us, think about book to bills in halves for this business and sales for the year.

We'll see low- to mid-single digit growth for the year, we will have built backlog heading into next year and I think that's really sort of a function of some of the timing of these things, and when they get booked and when they ultimately ship. But they're generally order rates tracking to where we expected them to. And entering the year with a bigger backlog than we started.

Okay. Thanks very much.

You bet.

Your next question comes from Mig Dobre, Robert W. Baird. Please go ahead.

Good afternoon guys. Todd, just going back three months ago in your outlook you were calling for organic growth in the second half of 3% to 4%. You did 3% in the current quarter, you're guiding for 1% in the fourth, so you're going to come in at about 2% versus 3% to 4%. I'm just sort of looking to clarify that the delta here is the result of the weakness in these beverage end markets, rather than that along with maybe something else, whether it's on deferral projects in water, or anything else in PMC that need to be aware of?

Sure. I don't think there's anything pronounced big, keep a point of core growth in context, it's less than $5 million for us. So if you look at our order rates that we saw in our third quarter, they were probably actually little bit better than we thought. The delivery dates on some of those, maybe were into our FY16. So again in both platforms we will have built backlog, both for nine months and for the year.

So while the core growth rate on a shipment basis for the fourth quarter is probably down a little bit, I think if you look at that second half order rate growth versus where we were 90 days ago, it's probably a little bit better. I don't think there's anything pronounced, I think food and bev is getting better as we expected.

When we called it down, I think we had it generally right, and we're seeing it progress with the normal seasonality and some of the improvement opportunities that we saw, around penetrating some other geographies and then maybe getting after it a little bit different way. So I don't think there's anything to read into 3% to 4% for the second half and then something that looks more like 2%, It's $5 million and order rates are actually little bit better.

Sure that's helpful, I appreciate that. Since you volunteered some comments about FY16, sort of sticking with PMC. Since we're no longer going to have this 2% to 3% drag from bulk material handling, is it fair to say that considering you're also maybe seeing things pick up in food and beverage, that we should be expecting this business to outgrow industrial production by at least 2% to 3%?

It's a little bit early for FY16 guidance. Mig, but I think--

A man has to try.

It was a strong effort, I won't give you the Marshawn Lynch answer. But I will give you an answer. Which is, all things being equal, yes, we lose the headwind, we should get some price, and I think we'll see better core growth in PMC in our FY16 than we saw in 2015. I think that's a very good base case assumption at this point.

Alright. And then the last question for me, going back to pricing. Considering the amount of currency volatility we're seeing out there. I'm wondering, are you seeing any competitive pressure, for instance in PMC, from some of your European and Japanese competitors? And at the same time in your water business, thinking of VAG, can a weak euro help you at all?

It's a good question Mig. At this point, I think again it's pretty early. We haven't seen anything at this point. You're right on the water infrastructure side where we do have some opportunities globally, given the weakening euro.

In PMC, discreetly, remember that these are components, they're relatively small portion of the overall cost of the program or project. And so the price impact on this is not usually the swing vote, if you know what I mean. It's more the product quality, the reputation, the breadth of the portfolio and service and follow-up afterwards. I don't think we've seen it yet, it's something we're going to watch closely. But at this point we haven't seen that happening. But it's a good question.

What about VAG?

I thought I led with that.

I'm sorry I must've missed it.

Obviously again, these are long, long lead time projects. So the ability to see the impact of price on a very near-term decision, we wouldn't see the impact of that for quite a while. So at this point we haven't seen any of that.

Obviously it's an opportunity for us, as we do manufacture all over the world, and our functional currencies are those current currencies that are weaker relative to the US dollar. So we've got an opportunity, but I don't think it's anything that's going to be pronounced, particularly in the next year.

Thank you Todd, good luck.

You bet.

Our next question comes from Andrew Obin, please go ahead.

Hi guys

Good evening.

Just to follow up on the growth question I understand. So as we think about sort of quarter to quarter growth. I generally thought about you guys, you have the business that's exposed to the industrials, you have the business that's exposed to the construction. But generally you sort of grow in line with the rest of my coverage. But I think the rest of my coverage reflected positive this quarter, with pretty good outlook for next quarter and you guys are decelerating.

Should we think about you, just sort of being more choppy quarter to quarter than an average industrial company? Just because the mix of business is so eclectic? Is that the right comment?

Well we certainly don't think so. Really to be perfectly honest with you, I'm not familiar with your coverage universe.

Well, it's mostly industrial companies, which you peg yourself into, right? And every majority of multi- industrial companies accelerated this quarter and guided to good quarterly growth, and you guys decelerated. And you're sort of saying, we decelerating next quarter but it's only $5 million, but you're a smaller company, so $5 million is a bigger number for you guys. So that's what I'm trying to understand.

Yes, again, so we had 3% core growth in the quarter and we've got a couple of points of headwind in there from a mining backlog reduction, that's been true all year. As we look to our fourth quarter, our order rates through the first nine months of the year were a little bit better than that. So we're going to exit our FY15 into 2016 with a higher backlog.

I think it's entirely realistic to assume at this point, all things being equal, that our growth rate on a core basis heading into FY16 is going to be better than 2015. If you're asking --

That's exactly what was looking for.

If you're asking me to analyze your coverage universe and how we correlate to that, I think that's a discussion--

No, I totally get, I'm just trying to figure out where you fit first, is it general trend. Let me ask a question on M&A. Have you seen any change in the market, given the restrictions that were put on private equity bidders in terms of leverage? I would assume that's a meaningful positive for you guys? But is it early enough to see any difference, or one of the companies replied, look there's just not enough volume out there to really make a judgment call at this point?

I don't think we really have seen anything meaningful related to that yet Andrew.

Thank you very much.

Our next question comes from Charley Brady, please go ahead.

Hi guys, this is Patrick Woo standing in for Charlie, how are you doing?

Hi Patrick.

I wanted to get a little more granular on the water treatment side? On VAG, I know you guys mentioned that there was growth there. But can you talk about, in more specifics what the growth was, was it double digits, or high single digits? And sort of what the cadence of sales was over the course of the quarter.

Hi Patrick, I think I got the question maybe just get a little bit closer to the phone. I think you asked for some color around the split of sales and water management, and also the cadence of sales over the course of the quarter, did I get it right?

Sure, and also perhaps more granular growth rates for VAG and Zurn would be helpful as well.

Yes we saw Zurn grow high-single digits, VAG was flat on a shipment basis in the quarter. And I wouldn't say that there was anything at all unusual about the way the quarter unfolded in terms of the cadence of shipments or orders in the platform in general.

And traditionally it's not, it's tied to construction. So in Zurn, you would see sequentially sales get a little bit weaker in the winter months as the North American construction season winds down, and then picks up in the summer. But nothing abnormal throughout the course of quarter.

Okay. SG&A expense seems to be quite high this quarter. What was attributable to that?

Well, this is Mark, if you look at the GAAP number we recorded that $31.4 million non-cash pension charge. When you strip that out the sales actually improved year-over-year. So it's that nonrecurring, non-cash that I referred to in my script.

Okay, and that's all that's charged SG&A--

Correct.

It would be awfully tough to spend that much in the quarter. But I think, when you chat with Rob or Mark I think they can take what it was and how it got recorded and probably explains everything you're looking at.

Perfect. And going back to a question earlier about the 3% to 4% organic growth that you guys mentioned earlier in the year and now you're expecting, obviously 1% growth in the fourth quarter. How much of that can you pin on currency weakness versus overall macro economic weakness? How would you provide color from that standpoint?

Sure. I think the color we gave when we updated our guidance at the end of second quarter was 3% to 4% core growth for the second half. That number feels more like 2% today than 3% to 4%, and none of it would really have to do with currency. It would have been, really some of the orders that we recorded in the course of the third quarter, were really phased and dated for our early 2016.

So if currency would have nothing to do with the core rate, nor would acquisitions or divestitures. So I think the comparison, Patrick, was really 3% to 4%, versus 2%, and that point or so is really a function of order phasing versus anything we're seen on an end market basis.

Okay. Thanks.

Our next question comes from David Rose, please go ahead.

Hi, good afternoon. Thank you for taking my question. I had a couple follow-ups. Maybe we can just go a little bit deeper on the water management side.

If you could provide a little bit more color on the benefits that you achieved? You had some really great incrementals, maybe break it down into fixed cost absorption, materials, maybe scrap. Where do we see kind of the breakthrough on that? And how much of it is repeatable?

I think again David, you know the story, but we've been telling folks for a while that, with all the productivity, with all the efficiency, with some of the, and the quality improvements we're making in North America infrastructure and in Zurn, we felt like that over time we could get the overall platform margins in the high teens. We set a goal for 200 basis point improvement in margin for this year. We're tracking to that, you'll see again another 100 plus points of margin improvement heading into next year and beyond.

So it's really a combination of ongoing initiatives, both around fixed cost and then quality and everything else. And where we are today is reaping the benefits of that. So I think you'll continue to see the margins pick up. A lot of it is fixed and permanent. So none of the margin improvement in the quarter is, I would say temporary transitory, it's ours to keep. And there's more to come.

And nothing is specific, there's nothing really acute in that.

I'm sorry.

I mean there's nothing that you can-- I mean, I understand the overall efficiencies in the RBS, but there wasn't anything in particular that really drove it, it's a combination of everything?

Well yes, it's a lot of everything. And actions that we took last year in the fourth quarter. Last year in the fourth quarter we made a conscious effort to get ahead of what we saw coming in North America. We took out a bunch of fixed costs, we exited the foundry and did a lot of things and as a result of that we're getting the benefit of that in our FY15, and we'll get the benefit in 2016 and 2017.

So I'm giving you the -- maybe don't worry about it version. But yes, there's a lot of discrete items that have taken place from quality improvements to additional sourcing opportunities, fixed cost reductions, exiting foundries. There's a long, long list of things that our management teams are doing to deliver the results. But that is just part of what it is we do.

And maybe that's why I am talking past it a little bit. That's the expectation around here, and I think you will continue to see us do it, and we'll get the benefits on an ongoing basis. So maybe Rob can take you through some discreet examples.

Sure we can do that Mark.

Okay, and then the last couple ones, the pension you mentioned $9 million in cash savings. Can you kind of walk us through how that comes about?

Well David, it's cash contributions saving over time. And what you're doing by settling out some of these pension obligations, you're reducing your exposure to the amortization table start coming into play, and over the next several years you effectively benefit from that. Having to just lower your ultimate contributions into the plant.

So you're pre-funding some of this now?

Pardon?

I'm sorry, is a part of it pre-funding then?

No. This is no P&L. This is just literally cash funding that will incur over the next, call it five years plus or minus. So not really material for any given year--(inaudible) for a five year period.

Okay. That's helpful. And then the last one quickly. If you can go a little bit deeper on the M&A activity?

How would you characterize farm and are you feeling a little bit better? You've got Borg, can you give us a little bit more color in terms of what sort of activity we should expect? Is it going to be accelerating, or would you say it's a little bit slower than you'd like?

I don't know that we're going to give you any sort of green light or red light on M&A, other than it's always going to be part of the value creation story at Rexnord. I think the funnel, I feel better about the funnel today than we did six months ago, six months from now we're going to feel better about the funnel. And then it comes down to timing. And as you know, these things are not easy to predict, and we're not going to get into the business of predicting them.

But I would tell you that we fully expect that M&A to be a big part of the Rexnord story, our free cash flow supports it, I think we're going to do everything we can to allocated it to higher growth, better margin businesses that enhance the overall profile of the Company over time. We've done that this year with three deals. And again I would say that over the course of the next year, you should expect more from us, David. But to give you any discrete sort of red light, green light every 90 days, I don't think is impactful, but yes we feel good about it in general.

Okay. I appreciate that, thank you.

Yes

Our next question comes from Samuel Eisner, please go ahead.

Afternoon, everyone.

Hi Sam.

On the food and beverage comments you guys were giving during the beginning portion of the Q&A. Can you just comment about, is there a normal seasonal trend where you would see the sequential uplift in the third quarter? And can you just comment about how the difference in the food and beverage business versus that normal seasonal trend sequentially?

Sure. When we talk about food and beverage, we're talking about the conveyance of beverage and food through packaging and bottling systems. During the summer months, food manufacturers are running that equipment full out to meet the demand in the warmer months in the Western Hemisphere. Over the winter months, that's when they do capital upgrades, change packaging and also do a significant amount of maintenance. For us that would be our Q3 and Q4.

So in terms of just a general year, about 40% to 45% of our year is in the first half of our fiscal year. And the balance is in the second half. So we always see a seasonal sort of lift in our second half. We saw a seasonal lift in our third quarter from our second, as we had expected. And we'll see that continue into our fourth quarter. And as we start our fiscal year, you'll see that sort of moderate down.

The relative growth rates over the prior year, I think are the more important thing. We didn't see -- we saw a weak second quarter, which is why we modified the guidance. We saw the sequential uplift that we saw, but on a relative basis it's probably still a little bit less than what we would've liked to see.

Got it, very helpful there. And then on the commentary regarding orders and backlog. Sounds as though that you'll be in a better position on backlog entering 2016.

Has the timing of when you anticipate to recognize the revenue out of that backlog changed at all versus this point last year? I just want to understand how that backlog timing's going to be phasing out?

I don't think we have. So we're going to start the year with a backlog that's meaningfully higher, and I don't think we've seen a big shift in how that will be recognized over the course of the year. So from a modeling standpoint I don't know how to model it any different, other than to say we started this year with a little bit of more of FY16 in the bag and we did last year.

Got it. Since we are about a month into the fourth quarter, can you maybe comment about any trends that you've seen through January, and in particularly concentrate on the general industrial market?

Sure. I think in general, industrial, it's been a little choppy. If you look at what happened with oil and commodity cost, really from, call late November through December and January, it's materially different than a lot of people's planning assumptions. So we typically would see the annual budgets get lead and people begin to spend against those early in the calendar year.

I think people just generally more cautious as we start the year. But beyond that, I think it's a little bit too early to say that we're seeing discrete changes in end market activity because of energy. I think people, it's just a general I'll say a little more cautious, sentiment around some of the industrial customers as we start 2015.

Great. If I could sneak one more in. The investment spending you guys called out in the quarter, is that in for a particular project? Is that the normal investment spending in the segment? Any color on that would be helpful.

Its ongoing investments, really around growth and some vertical markets and regions that we see, that we want to sort of get ahead of as we head into our FY16.

Great, thanks.

You bet.

Our next question comes from Karen Lau, please go ahead.

Thanks. I just want to follow up on the 1% core growth in fiscal 4Q. Are we sort of looking at down low-single for PMC and then up mid-single for water management?

Yes Karen, you've got that right. PMC would be in that low-single digit range and the water growth will be in the high single, so you're thinking about that exactly right.

Okay, so it looks like the NCS comps year-over-year, but water management you actually, if I remember correctly, you had some weather issue last year in the fourth quarter and some, I think water infrastructure shipment got pushed into fiscal first-half. So are you not expecting any easier, benefit from easier compare? Because you did 5% in the third quarter, and you're not a assuming the rate to accelerate in 4Q.

Fourth quarter, the overall core growth in the water platform will accelerate from what we had in the third quarter. As you may recall it was flipped, so we had a little bit of a tougher comp in water in our third quarter, little bit of an easier comp tied to project shipments in the fourth quarter. On the PMC side, we're facing a little tougher comp in our fourth quarter, we shipped a lot of backlog in the fourth quarter which drove the growth and margin ahead of growth in PMC. So that's why you see that low-single digit growth expectation in our fourth quarter on PMC.

Okay.

Maybe just to put some perspective on it, water will grow mid-high single digits this year, we expect the end markets to continue to recover into next year and we built some backlog on the water infrastructure side. So rather than, I think get stuck on a quarter and a comp, what happened last year, which is important and we've got to guide to it. But I think what Mark is telling you is, mid-high single digit this year moving to probably mid-higher plus single digits next year, given everything we see.

Yes, I understand that. I just want to see if you guys are thinking in any conservatives given the choppiness in markets. That makes sense. I guess lastly, have you seen any changes in the competitive dynamics in PMC given one of your key competitor now has a different owner?

We have not. I think it closed this week, so it would be a little bit early to call that. But again, we're focused on what we're doing, we're obviously very keenly aware of what's happening in the marketplace and we feel good about where we are at.

Okay. Thanks.

Yes.

I'm not showing any further questions at this time. I'll now turn the call back over to Rob McCarthy.

Thanks everybody for your interest in Rexnord, and we'll look forward to catching up with you in about three months from now. Thank you.

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