Zurn Elkay Water Solutions Corp (ZWS) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Rexnord fourth-quarter FY15 earnings results conference call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President, 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 on an 8-K with the SEC today, May 20, 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.

Thank you, Adrian. 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 fourth quarter and full FY15, our launch of an important strategic initiative, and our initial outlook for FY16. We'll cover specifics on our two platforms, followed by an overview of our financial statements, and liquidity and cash flow 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, and good afternoon, everyone, and thank you all for joining us today for an overview of our FY15 fourth-quarter and full-year financial results.

We have a lot of ground to cover this afternoon so I'll try to move quickly through my comments so we can get to your questions. Starting on page 4, we definitely saw evidence of a broadly weaker industrial end market environment in our fourth quarter, as end customers and distributors alike broadly became more cautious about their CapEx, MRO spending, and inventory levels to start calendar 2015. The combination of weaker energy prices, persistently weaker hard commodity prices, the strength of the US dollar, and some weather drag on the seasonal ramp of new construction activity were all headwinds that were a clip worse than what we expected a quarter ago.

The more difficult macro was compounded by the unforeseen delay of two large water infrastructure projects late in the fourth quarter that adversely impacted reported core growth by 2%, resulting in a 5% core sales decline in our fourth quarter. Despite these challenges in the fourth quarter, we responded aggressively in areas we could control, with solid operating execution that generated record levels of free cash flow for FY15. While the timing of the delays was an unfortunate way to close the year, the delays were not an internal execution issue, but a customer site preparation delay and we're confident that both projects ship in the first two quarters of FY16.

Moving ahead, we're excited to share a few details on something we've been developing over the past year. Over the next 24 months, we will be implementing a comprehensive supply chain optimization and footprint repositioning program that will result in the net elimination of between 20% and 25% of our current manufacturing footprint across the Company, while repositioning a portion of our manufacturing capability to lower-cost regions. We believe that at current business levels, this plan can generate an annualized run rate savings of approximately $30 million as we exit our FY17, primarily through gross profit improvements.

For obvious reasons we can't go into the location-level details of the program in advanced of our internal timeline and communications, but to clarify a few details. It's across both platforms. It involves facility rationalizations and consolidations, as well as adding to our footprint in lower cost manufacturing regions.

A big piece of the plan includes leveraging a more robust supply chain element into our fulfillment strategy, while ensuring the highest levels of quality and service to our customers. This has been a plan for a plan or something that's a knee jerk reaction to the current market environment. It's a plan with a timeline that's been developed over the course of the last year that will be disclosed quarter by quarter, as it becomes practical to do so.

The end game of this program is twofold. Number one, it's to enhance our competitive advantage and improve upon our industry-leading service levels, quality, and customer satisfaction with no customer disruption. Second, it's to position Rexnord to produce permanently higher returns in whatever economic environment exists, and over cycles, by reducing our fixed costs and enhancing our free cash flow and being more nimble.

This plan, plus the ongoing execution of RBS-driven operational excellence initiatives, gives us great confidence that we will continue to see margin expansion over the coming years, despite an uncertain growth outlook. You'll see it begin to roll out in our first quarter and expect to see increasing momentum as we get deeper into the announcements and execution over the course of this year and next.

Before turning to our outlook for the year, I thought it could be useful to hear us self-reflect on what we learned throughout FY15 as it relates to our view on the market, how that influences our forward view and ultimately how we've positioned our FY16 guidance. Turning to page 5, you'll see a table that summarizes our market growth assumptions for our 10 largest end markets from a year ago, essentially what we incorporated into our outlook last year at this time.

Next to it is our actual FY15 core growth for each market, including share gains and price. Next to that are the market forecasts that we've assumed as we've developed our forward guidance for FY16. Cutting to the punch line, we assumed 2% to 4% market growth heading into FY16 -- I'm sorry, heading into FY15, and we ultimately delivered flat core growth, inclusive of the point headwind related to the Q4 water infrastructure shipment delays.

For FY16, you'll see we're incorporating a much lower market growth outlook at flat to down 2%, which we hope turns out to be conservative, but at this point, it feels like a more realistic view of the weighted average of where our end markets are, given the best information we have. To walk through a few of the details, starting at the top, you'll see that our outlook for Water Management end markets align pretty well with how we performed in FY15, adjusted for the project shipment timing.

Our outlook heading into FY16 calls for a stable to an improving set of end markets. Specifically, the US non-residential construction markets continue to be a bright spot for us and we anticipate US non-residential construction activity to accelerate modestly in FY16.

While still choppy quarter to quarter, we think that the growth in the global water and wastewater infrastructure markets will remain generally stable in the low single-digit range. In aggregate, our outlook for FY16 incorporates a solid mid-single-digit core growth rate for our Water Management platform compared to the 4% core growth we delivered in FY15.

Moving down the page just a bit, and in order of relative size, you'll see that our served industrial end markets across the Process & Motion Control platform were broadly weaker than our original expectations from a year ago. Starting with our broadest end markets, the US and European general industrial distribution channels. Here, we delivered slow single-digit growth in markets that were generally flat to up just a little.

I'd characterize our share positions as stable over the course of the year, given our market intelligence and the lack of any real switching dynamic in the channel. The low growth across the distribution channel, which is primarily MRO spending, isn't particularly surprising given the relatively stagnant US and European industrial economies we've seen over the past year.

For FY16, which I'll remind everyone extends through March of next year, we aren't expecting a change in trajectory. As you see to the right, we've actually lowered our growth expectations for the broad general industrial end market we serve through the channel. While we're seeing some initial signs of improving market growth in our European markets, we expect to see continued pressure on overall growth in our US-based general industrial end markets.

For us, weaker global process industry end markets, driven by low global commodity prices, the strong US dollar, and eroding project backlogs in the energy markets, gives us caution that we'll likely see some incremental downside from current run rates. With the environment I'm describing, we think it's likely we'll have some level of channel destocking early in our fiscal year and we've incorporated that into our outlook, as well.

Moving to food and beverage. In FY15, we saw a reasonable performance out of the US and weaker performance out of Europe, particularly on the CapEx and export side of the new equipment business, based on the investment cycle of key customers and some competitive dynamics. Moving into FY16, we're pretty confident that we'll see growth return in Europe and that North America will continue to grow in the low single-digit range.

Commercial aerospace has been and will continue to be a bright spot for us, as the OEM build rate outlook, which drives the majority of our sales, remains favorable. The end market we see, coupled with our backlog, gives us confidence to expect another year of attractive core growth in FY16.

The global mining and bulk material handling market weakened in our fourth quarter from where it had been running the first nine months of FY15. This multi-year commodity down-cycle and now a stronger dollar continue to pressure the CapEx and MRO parts of our Business. Last year, our served market ended down in the mid to high 20% range versus our sales that were down mid-teens.

For FY16, we're expecting orders to be down again for the fifth consecutive year, in the low double-digit range, with some level of optimism that we're past the worst, in terms of the rate of decline, and also with the reality that the order of the magnitude of the decline from these levels doesn't impact us nearly as much as it did a few years ago.

Finally, in terms of energy, (technical difficult) us is about one-quarter power generation and three-quarters oil, gas, and petrochem, with that split one-quarter upstream and three-quarters mid and downstream, we ended up 5% in a market that was probably right about that level after the decline we've seen in the energy market over the past six months.

Looking ahead, we're not projecting any market-related positives here, given the volatility, and frankly, the low probability that there's any positive catalyst to the demand side of energy. In our first quarter, we're not seeing or expecting much rebound in our short cycle order rates from where they've been running. We also think we'll see continued aggressive channel inventory management like we've seen in March and April, and have incorporated that into our first-quarter outlook.

To close on our market outlook, it's safe to say that a year ago we had a level of optimism in our outlook that related to an improving set of industrial end markets. Our current outlook for FY16 does not. That being said, we have a lot of conviction in the positive direction of about one-half of our served markets: non-residential construction, food and beverage, commercial aerospace, and water infrastructure in aggregate should all be positives.

The other one-half of our end markets will no doubt be tougher. Across the PMC, we serve process-based industries, in an environment with commodity deflation and a strong dollar, something that's not happened in a very long time. That backdrop isn't a great set up for much market growth. We're going to have to compete for every opportunity, win more first-fit business, and continue to manage our costs aggressively while positioning ourselves for growth moving forward.

The supply chain optimization and footprint repositioning plan is a big part of that, and as we turn to page 6 I'll spend a minute highlighting a few initiatives that we'll be providing more detail on during our Investor Day, on June 2, all focused on strengthening our returns and improving our growth profile.

Over the past year, we've structurally organized around our customers and markets and added new senior leadership within the groups of our Process & Motion Control platform. This move, coupled with our progress on a systems implementation, allows us to launch the next step, implementing a series of initiatives that will result in a more competitive and variable cost structure and broader growth opportunities.

Also over the past year, we've invested in incremental resources to support the planning and staging of activities related to this program, largely funded by RBS-led efficiency gains to fund a portion of the upfront cost of implementation. Our FY16 earnings guidance incorporates about $0.05 of drag from non-restructuring implementation costs. We expect the benefits associated with our plan to begin next year and we expect to hit the annualized run rate savings of approximately $30 million within two years.

As it relates to M&A, we've added business development resources deployed within our operating groups to leverage the process improvements that we've made in the past six months at the Corporate level. We're confident that this will continue to accelerate our acquisition funnel development.

We continue to see significant opportunities and strategic adjacencies where we can leverage our go-to-market strengths and create significant value to the Rexnord business system. We invested $138 million to acquire three highly strategic and complementary businesses in FY15 that are additive to our profitability and growth potential and we hope to do more in FY16.

Turning to page 7, over the past couple of years, we've evaluated some of the underlying metrics we've used to report and communicate our results. The outcome of that evaluation will result in us making some changes to the way we will report and guide moving forward.

Beginning with FY16, we will be reporting and guiding to adjusted earnings per share excluding non-cash amortization. Moving forward, we will also include stock option expense and LIFO expense in adjusted net income and adjusted earnings per share. We are making each of these changes in order to provide investors a more representative view of our underlying operating results. Using this year as an example, under our new definition, our adjusted EPS was $1.81, while our adjusted EPS using our old definition was $1.52. As I shared earlier, this compares with $1.94 of free cash flow per share in a year with flat core growth.

As you can see on page 8 the real gap to a normal level of amortization across a wide swath of industrial companies relates to the amortization of the 2006 acquisition premium paid for Rexnord by one private equity owner to another, not primarily related to any acquisition by Rexnord of productive assets on behalf of our current shareholders. If investors want to look at our results inclusive of this stepped-up amortization, there will always be a reconciliation between the two as we report results moving forward.

Moving to page 9, you'll see our initial outlook for FY16. We are projecting full-year consolidated core growth to be in the range of plus 1% to minus 2%, with adjusted earnings per share to be in the range of $1.53 to $1.63, inclusive of the roughly $0.05 of non-restructuring supply chain and footprint implementation cost. We also expect our free cash flow to exceed net income.

Breaking it down a little further, our outlook assumes mid-single-digit core sales increase for Water Management and a mid-single-digit core sales decline for Process & Motion Control. Water Management margins will step up again in FY16, while PMC margins will remain in the 24% to 25% range for the year, despite the sales decline.

As all of the efficiency and cost reductions we have driven over the past year, plus leveraging some end market growth in places like aerospace and food and beverage, and finally the positive impact from our acquisitions, offset some of the downward pressure from other end markets and the investment spending we've planned. Foreign currency is again expected to be a significant drag on reported growth in sales and earnings for both platforms.

On Slide 10, you'll see a bridge between reported EPS in FY15 and our guidance for adjusted EPS in FY16. Given the revised definition, our adjusted EPS in FY15 would have been $1.81. Adjusting that figure to reflect our current tax rate guidance for FY16 and the projected impact of currency translation, our basis of comparison for FY16 operating results becomes $1.50.

Just a little additional clarity here, at current exchange rates, currency translation impacts FY16 by about $80 million on the top line compared to FY15 and $0.11 at the EPS line. We also ended up with a more favorable tax rate in FY15 due to some planning and the benefit of being able to utilize some foreign tax credits.

The rate for the next year is more of a base case rate that we'll try to work at over the course of the year. Acquisitions during FY15 are projected to add $0.05. Our core operations, net of our incremental investment spending, will contribute to the balance and determines the range of our guidance.

Before I turn things over to Mark, I'd like to summarize by acknowledging that FY15 did not go as we had initially planned, nor did it end as expected. However, FY15 did mark a year of significant accomplishment around free cash flow generation and strong margins in a tough market.

More importantly, FY15 was a year spent readying the Company for the next leg of value creation, by adding Management and talent, by more deeply deploying RBS, and finally, positioning ourselves to execute the initiatives to deliver stronger growth and financial returns to shareholders moving forward. With that, I'll turn it over to Mark to cover the numbers.

Thanks, Todd. Consistent with prior quarters, we'll speak primarily to adjusted operating profit and EBITDA, adjusted net income, adjusted earnings per share, as we feel these non-GAAP metrics provide a better understanding of our operating results. Please also note that our discussion of our fourth-quarter and FY15 financial performance excludes results of the divested mill products business from both years, given that it is now reported in discontinuing operations.

Slides 11 and 12 of the presentation take our reported results and reconcile the adjusted results.

Turning to slide 13, I'll discuss our operating performance highlights for the fourth quarter. Fourth-quarter sales decreased 8% from the prior-year period to $519 million, as adverse currency translation amplified the sales decline by 5%.

Acquisitions contributed 2% year-over-year, but core growth was down 5% with over 300 basis points driven by the previously discussed delayed shipments and weather impact. Without those unanticipated headwinds and excluding the currency drag, our sales would have been roughly flat year-over-year.

Adjusted operating income was $67 million and adjusted EBITDA was $96 million, with margins adversely impacted by reduced volume and a one-time $10 million reserve for receivables associated with a water system project in Venezuela. Excluding the reserve, our margins would have been approximately 200 basis points higher.

Fourth-quarter adjusted net income was $57 million, resulting in adjusted earnings per share of $0.54, which increased 8% from the prior year, primarily driven by the contribution from a lower year-over-year average tax rate, that more than offset the impact of the receivable reserve I just previously discussed. Cash flow was solid in the quarter, as we generated $63 million of free cash and achieved a new record level for the fiscal year.

Moving to Slide 14, I'll quickly cover the fiscal year results. Full-year sales increased 1% from the prior year to $2.05 billion. Core growth was flat year-over-year, acquisitions contributed about 3% to year-over-year growth, and currency had an adverse impact of approximately 2%.

Adjusted operating income was $284 million and adjusted EBITDA was $396 million. Excluding the fourth-quarter reserve, our adjusted EBITDA margin would have been essentially flat year-over-year. Adjusted net income increased 17% versus prior year to $159 million, resulting in adjusted earnings per share of $1.52.

This compares to prior-year adjusted earnings per share of $1.34. Earnings growth benefited from solid operating execution, reduced interest expense, and a lower average tax rate. With respect to free cash flow, we generated a record $203 million of free cash in the fiscal year, up 41% year-over-year, representing 120% of adjusted net income.

Next I'll take a couple of moments on slide 15 to walk through the operating performance in our Process & Motion Control platform. Sales in the fourth quarter decreased 6% year-over-year to $328 million, with a core sales decline of 4%, combined with a 3% contribution from acquisitions, to produce roughly 1% sales decline before incorporating the 5% negative impact from currency.

Substantial decline from the shipments to both material handling end markets, as we've experienced throughout FY15, coupled with a moderate fourth-quarter decline in our general industrial end markets, offset positive growth in a majority of our other Process & Motion Control end markets.

Turning to profitability, adjusted operating income was $68 million and our adjusted operating income margin was 20.6%. Adjusted EBITDA was $87 million in the quarter and our adjusted EBITDA margin was a healthy 26.5%. Margins were lower year-over-year due to the lower sales volume, unfavorable mix, and the incremental investments in our growth initiatives.

We continue to focus on effectively managing our cost structure and driving productivity gains in a slow growth environment while investing in our strategic growth initiatives. For the fiscal year, sales decreased 1% to $1.23 billion, as the 2% drag from currency and the 2% core sales decline more than offset the 3% contribution from acquisitions.

Our FY15 adjusted EBITDA decreased 4% year-over-year. Productivity gains and targeted cost reductions enable us to overcome most of the impact from lower core sales, as well as fund our ongoing investments and operational excellence in key growth strategies, while sustaining a 25% adjusted EBITDA margin for the full year.

Turning to page 16, I'll take a few moments to walk through our Water Management platform. Water Management sales in the fourth quarter decreased 10% from the prior year to $190 million. The $12 million impact from delayed shipments, plus the estimated impact of the weather-delayed ramp on the US construction season reduced our core sales growth in Water Management by approximately 9%.

The Green Turtle acquisition added 2% to year-over-year growth, but currency translation reduced sales by 6%. Unusually cold weather across much of the US, particularly in February and March, delayed many of the customer project schedules, which in turn resulted in the postponed shipments that contributed to a lower core growth rate and reduced margins for the quarter.

Despite the lower sales level, our fourth-quarter adjusted operating income and EBITDA margins would have been higher year-over-year if not for the $10 million reserve described earlier. Excluding the reserve, adjusted operating income and EBITDA margins improved year-over-year by 340 and 410 basis points, respectively.

Turning to the full year, FY15 sales increased 3% from the prior year to $820 million. Even with the temporary headwinds experienced in the fourth quarter, core sales growth was 4%. The full-year impact of the delays experienced in the fourth quarter on Water Management core growth was approximately 2% for the fiscal year.

Currency translation was 3% headwind and offset the 2%-plus contribution from Green Turtle. Adjusted EBITDA was $121 million for the fiscal year, or 14.8% of sales, and was impacted by the same items I noted for the quarter. Excluding the $10 million one-time reserve in the fourth quarter, our adjusted EBITDA margin expanded by 180 basis points year-over-year to 16%.

Moving to Slide 17, I'll touch on a few capital structures and liquidity highlights. We finished the fourth quarter with $370 million of cash, $711 million of total liquidity. Total debt was $1.923 billion and net debt was $1.553 billion, resulting in net debt leverage ratio of 3.8 times at March 31, 2015. Our net leverage ratio increased in the prior quarter due to our closing of the Euroflex acquisition during the fourth quarter.

Turning to slide 18, we're presenting a bridge to our cash balance at the end of FY15 from our cash balance a year earlier in order to highlight the sources of our operating cash flow and our capital allocation in FY15. As mentioned earlier, our free cash flow was $203 million after investing $49 million of capital in our operations. We also used $24 million for debt repayments and invested $138 million for three highly strategic acquisitions with an average EBITDA multiple below 8 times.

Before I discuss some of the details of our outlook, I want to comment on our effective tax rate, which, excluding non-recurring items like the tax charge we recorded in the first quarter and our non-cash actuarial pension losses recorded in the second half of the year, finished FY15 at approximately 17%. It was determined late in quarter that we will now be able to utilize certain foreign tax credits that we were previously required to reserve.

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, some additional information we included in the press release we filed today. In addition to the outlook highlights Todd covered earlier in the call on page 9 of the presentation, we also highlighted our assumptions for interest expense, depreciation amortization, effective tax rate, capital expenditures, and fully diluted share outstanding for FY16.

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 and fluctuations, gains or losses on disposal of assets, or other items that are reported on this P&L line item.

Our guidance also excludes impact of potential acquisitions and divestitures and future non-recurring items such as restructuring costs. [We also know] that our effective tax rate will fluctuate by quarter, given levels of pre-tax income, as well as the timing of other planning initiatives. In our first quarter, we expect the tax rate to be approximately 33% to 35%.

Regarding the press release we filed today, in order to assist your understanding of our operating results and enable you to adjust your financial models, today's press release covering our fourth-quarter and FY16 financial results includes a supplementary table that provides a pro-forma summary and adjusted FY14 and FY15 operating results as if our divested mill products business had been reported as a discontinued operation over that period.

With that, I'll open the call up for your questions.

(Operator Instructions)

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

Good afternoon, everyone. This is Mig Dobre with Baird.

Hi, Mig.

Can you maybe provide us with a little more clarity as to what's going on with this delay in water infrastructure shipment, what's causing it, and when are you making it up? And then how confident are you in your outlook for low single-digit growth for European water and ROW water in infrastructure? And what gives you that confidence in your outlook?

I'll hit the delay first, Mig. As you know, most of these projects are hundreds and hundreds of millions, if not billions of dollars, and we're a component there. If there's a small blip in the site preparation or some of the upstream activity, things get pushed. These particular orders were going to the Middle East, and therefore the transit time and everything else didn't afford us the opportunity to record the revenue. It's done, it's on the way and we're very confident that it will ship in our first quarter, so that's one that is fairly easy.

In terms of what gives us confidence in the EU and rest of world, a lot of it has to do with backlog, as well as visibility on some projects and things that we know that are coming down the pike. So we would characterize, as we think about water infrastructure globally next year, low single-digit growth, reasonably safe. Our book-to-bill across that for the course of the year was 1.03, and as you go back over time, our book-to-bill in the prior year is generally a pretty good predictor of the future growth rate.

I see. Okay and my follow-up is around the $30 million of savings. I know you mentioned both segments are participating, but I'm wondering if there's a heavier tilt in one versus the other? And how we should be thinking about the Water Management opportunity, given the way you're talking about the environment going forward, in terms of margin expansion that is?

Absent the $30 million, we expect continued margin expansion in water, consistent with what we've been saying for the last couple years, marching towards the higher-teens. So we saw 180 basis points of improvement this year. I don't think it's unreasonable to think about it as a [17-plus] heading into next year.

This is before the benefit of some of that $30 million that will fall into the Water Management platform. In terms of splits, I don't know that it's helpful to give you discrete splits at this point, but it's safe to say some of it is absolutely in water, as well.

All right, thank you.

Our next question comes from Rob Wertheimer from Vertical Research. Please go ahead.

Hi, good afternoon.

Hi, Rob.

Thanks for all of the detail, and I apologize if I missed it, but you talked about the inventory de-stock in the channel happening and that's happened already and you expect it to happen next quarter. Did you quantify it for the quarter or embed it in the outlook, and I know you've given a lot, I'm just asking?

And then more broadly, can you talk about what that feels like when you're talking to customers? Is everybody seeing a real slowdown they're preparing for, or is everybody just getting nervous? Maybe if you could just give your opinion on what's going on?

And Rob, maybe just to clarify, we're talking about our PMC platform and primarily our PC business, when we talk about that. We didn't disclose exactly how much impact was in the quarter. There was a little bit. We've incorporated more of that in our first quarter and for the year, it's 1 point or 2, I would say, in the impact of the overall growth.

We hope we're wrong, but it's reasonable given the types of conversations and the environment we're seeing. If you look at these process-based industries, the commodities are in the fourth or fifth inning -- fourth year, I should say -- of deflation. And that, coupled with energy, people are just very cautious in their spending, both on the CapEx and MRO side of things.

So our guidance is taking the sentiment, more than anything, and saying, look, it's going to be a tough start to the year. We're assuming that extends throughout the year, and we're running the costs assuming that and then trying to win business where we can. So I would say our conversations are generally a little bit subdued. Customers in these process industries are really struggling to make sure that they don't get over their skis, and therefore, they're watching their spending pretty carefully.

That was great. Then if you can just maybe -- is that true, that cautiousness, is that true across industries that really should have no real contact with mining and energy and the beverage and the general? Is there just a general seize up in people's desire to hold inventory or not?

Again, on the beverage side, the answer is no. But when you look at mining energy and then you start to look at the adjacent industries, and in our case, customers that serve those adjacent industries in general industrial. They've been experiencing a nice run over the last several years as oil and gas has done pretty well.

They don't know exactly why, but now all of a sudden, some of the components that are in their factories manufacturing these components, they don't have the same demand. So I would say we're feeling it obviously in the process and resource space industries, as well as the broader industrial economy of the US that's been benefiting, if you will, for the last few years as the oil and gas run-up has happened.

Perfect, thank you.

And our next question comes from Jeff Hammond from KeyBanc. Please go ahead.

Hey, good afternoon, guys.

Hey, Jeff.

So you mentioned in the guidance discussion, FY15 didn't come out as planned, you walked through the variances. Can you just maybe speak to how you maybe approached FY16 guidance differently to avoid that? Where do you see potential conservatism, contingency, as you lay out that plan and that guidance?

We tried to highlight where we pegged the market last year. And when you look back on it, we got the water side of it pretty close. Absent some shipment delays that impacted the timing in the year, the markets were pretty close to what we thought.

Where we missed it is we thought US industrial distribution was going to be a little better, we thought mining was going to be a little better, and on food and beverage, Europe, for us, was a little bit of a challenge for a couple of reasons. One, some key customers pushed out a CapEx cycle, and then as you know, there was some competitive dynamics with a transaction that took place in the market. And from a share standpoint, people got aggressive. We think we've recovered that.

We think we've gotten rational behavior back into the marketplace and we've got a better outlook there. So we missed it in the big buckets of broad US industrial, we missed it a little bit in mining, and I'd say on the food and bev side, it was mixed a little bit. And obviously, energy was rolling along for us, the first six months of the year, really a strong end market for us and a market that wasn't that big but we were taking share in key categories, and that shut off, here in the last, call it, six months.

So we've taken a much more sanguine view of the industrial economy globally, and hopefully that's reflected in the way we've portrayed the market outlook and guided people this year. Which is a little bit maybe pessimistic, but I don't think we're going to miss it on the downside with this view.

Okay, great, and then just with this broad supply chain initiative, can you maybe just talk about management capacity to handle both the operational moving pieces, as well as M&A, and maybe just speak to M&A pipeline and how you're thinking about balance sheet capacity?

With respect to the supply chain and footprint repositioning, we've been adding resources really for a year, and so this is not something that we wanted to go into under resource. So the cost and impact of that are largely behind us, with the exception of a little bit of stuff that I talked, about $0.05 that's in our 2016 number.

So we felt like we needed to make sure that we were ready to execute this because of the brands, because of the market share, because of the margins, and because we simply didn't want to do anything that would impact our customers in any way. We perhaps over invested over the course of the last year to be ready. So from a management capacity, we're ready to go and we are confident that we're going to get it done. We've got great people on it and we're ready to go.

In terms of M&A, we've been very active looking at a lot of different things. The funnels are building. We'll definitely get some things done in FY16. We did three really, really good acquisitions over the course of the last year, invested $138 million. And we would like to do more in FY16, given the free cash flow we're generating, but as you know, the timing on these things are a little bit dodgy.

We are not going to grouse about valuations. They are what they are. Our job is to continue to develop that proprietary funnel, play in auctions and processes where we have an angle and an advantage, and go get these things done and integrate them and create value. So we think we'll get some M&A done this year for sure and we've got the management capacity to do it.

Okay, great. Thanks, guys.

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

Hey, guys, [Charlie].

Hey. Charlie.

I'm on my way back from EPG right now, and sorry to maybe ask another question on M&A, but I felt like every company that stood up this week just talked about how multiples were hard and they've had to relax their ROIC assumptions and things of that nature. So just didn't know if it's that's the same for you? I feel like that's been a problem that you guys haven't had in the past, that you guys have been able to find cheaper deals or source cheaper deals.

And also just if some of the shake up in the energy markets or elsewhere in industrials has maybe opened some doors for you and maybe made some things cheaper? So just didn't know, either by vertical or anything you guys can share with respect to the M&A pipeline and things like that, that would be great?

Sure. One of the things we highlighted in our earlier remarks, Charlie, was the fact that we've embedded some business development resources into our various groups to grow the proprietary side of the funnel. We expect that over the course of the year, that's going to yield some positive results for us. We haven't relaxed and we haven't passed on anything because of valuation.

So from our standpoint, it's very much about finding the right strategic fit to create the right value over the right timeframe. And I don't think we're in the business of opening up the -- or relaxing the acceptable return hurdles just to get something done. We're going to lean into things that we need to lean into because we think we can create the value for shareholders over time.

We haven't passed on anything because of valuation. So in terms of where we are, obviously, the funnel is in varying stages of development across our groups, and I'm pretty sure that you'll see us get some things done over the course of FY16.

Great, thanks, guys.

Our next question comes from David Rose from Wedbush Securities. Please go ahead

Good afternoon. This is actually James calling in for David. Thank you for taking my questions.

You bet.

My first question is actually on PMC, just looking at margins [decrementals] for PMC in quarter were up certainly very high. I know we talked about some incremental investments, along with unfavorable mix, but can you talk about that a little bit more, help us understand the margin impact there?

I know this unfavorable mix happened last quarter, as well. Would we expect similar trends in 2016 or would food and beverage getting back to the positive territory help us get back to margins that you expect for the segment?

Yes, this is Mark. If you look at the quarter, the buckets that we talked about, number one, the mix piece, back half of the year, if you go back six months, we saw headwinds coming in, in the beverage end market for us in Europe and rest of world. That, as we have discussed, has a more attractive margin profile end market for us, so we knew we were going to have the mix headwind there.

Todd alluded to the destocking that we saw in starting in our fourth quarter and extended into our first quarter. That clearly was a piece of the puzzle. And our energy end markets are a nice margin product for us, as well. So you add those three up and that's the majority of the mix impact we had in our fourth quarter.

That coupled with some of the money we've been putting into some strategic growth initiatives, including the footprint actions we talked about and supply chain optimization, was a piece of the puzzle. And overall, with volume decline, just the [decremental], was really the piece of that impacted Q4.

If you play forward the next fiscal year, as Todd said, we'll see that PMC margin in that 24% to 25% range, and when you use the mid-point of the guidance, and you look at the sales decline inclusive of currency, you'll see it's going to be a pretty solid decremental margin because we do see some of the mix issues coming back in our favor.

We obviously continue to drive productivity, cost reduction over the balance of the year, to drive that margin improvement. So those are the major pieces of the puzzle that gave us some confidence in being able to keep that margin in the general zip code, given some of the top-line pressures we could be facing in FY16.

Okay, appreciate that. Going to water, I know you're exiting some of the non-strategic infrastructure-related product lines going forward, and I know you probably can't touch upon it too much. But can you talk a little bit more about maybe what product lines or regions you may be considering and how does that impact your margin expectations?

I know previously you were expecting to continue to improve margins going to 2016. Does that slow down or if you could provide some color there, it would be great?

Yes, we have a lot of confidence around the margin expansion opportunity in the water platform going into next year, as well as beyond, even with some of the footprint -- supply chain optimization on the side, even before that. So when you think about -- the first part of your question was just some product categories, yes, some of our [val and gate] products, and we're talking volumes that are less than $15 million here in total, that we considered to be overall not required to be part of our strategic product portfolio, we're exiting.

They're lower-margin products, and overall, that product will be net margin accretive to the platform as we get out of those product categories over the next several quarters and into FY16. So that is going to be margin accretive. What we're continuing to do around RBS-led productivity initiatives, supply chain initiatives, and overall continue to focus on optimizing, maybe more efficient with our [Volv EG] cost structure are going to be the key ingredients to drive net margin expansion in water over the next fiscal year.

Okay. And lastly, on M&A, I know you touched upon that quite a bit, but as you talked about, you made sizeable acquisitions in the past year, largely in line with the target that you've provided of adding at least $25 million of EBITDA. Do you have a similar target in mind for 2016, obviously given the weaker-than-expected environment and new cost-saving initiatives you guys are launching, would you be somewhat constrained in keeping up that pace?

We don't think so, James. In terms of a target, look, whether it's $20 million or $30 million, we think $25 million is a reasonable way to think about the M&A that we are thinking about in terms of earnings added to the base over the coming year. So I don't know that we would call it a formal target.

Obviously, if we can only find things that are $15 million that make sense, produce the returns we want, we'll do $15 million. If it's $30 million, we'll do $30 million, and so there will be some M&A in there and I don't think you're thinking about it directionally wrong.

Okay. Thank you for your time.

You bet.

Our next question comes from Karen Lau from Deutsche Bank. Please go ahead.

Hi, good afternoon.

Hi Karen.

Hi. Apologize if I missed it, but did you guys call out what's the expectation for core growth in the first quarter, and how does that split between Water and PMC?

We didn't call it out. Core growth will be in the range that we provided for the year. Water will be better, in the range that we provided for the year, and so will PMC. So what we're saying is the first quarter looks like a range that we provided for the year, at the Rexnord level, as well as within the segments.

Okay, so mid-single-digit for Water?

Yes. You'll see the mid-single-digit zip code for water and mid-single-digit decline in PMC.

Okay, and the PMC number would be inclusive of the 1 to 2 points of destocking that you mentioned?

That's correct.

Okay.

In the given quarter, it could be a little bit more.

Right.

Okay, makes sense. And then a lot of moving pieces with the guide. Just wondering what would be the embedded EBITDA number apples-to-apples for FY16, just so we have a comparison?

Yes, so our reported number was $396 million. That EBITDA number at that mid-point of the range is in that [$400 million] to [$405 million] range.

[$400 million] to [$405 million]?

Yes.

And then the $0.05 of non-restructuring cost, it amounts to maybe $7 million, that would be included in that EBITDA number as well?

Correct.

That's correct.

Okay, and just for modeling purposes, what would be the magnitude of the stock comp in the LIFO that was previously excluded in EPS, but what would be the magnitude of the number that we should now include in the EPS calculation for 2016?

Yes, if you add them -- stock comp is going to be in that $9 million to $10 million of expense, and LIFO would be low single-digits call it [$2 million] to [$4 million], somewhere in that range.

Okay. So for modeling we should add back the $55 million of non-cash amortization?

Correct.

And subtract -- amount to maybe $10 million to $15 million of items that you previously excluded, (multiple speakers) [comp] and LIFO?

That's right. And then, Karen, relative to FY15, at current exchange rates, EBITDA is impacted by about $15 million on currency translation.

Correct. Year-over-year translation.

Okay, got it. Thank you very much.

We have no further questions at this time. I'll now turn the call back over to the speakers for closing remarks.

Thanks, everyone, for joining us on the call today. We certainly appreciate your interest in Rexnord and hope that you're able to join us at our Investor Day in New York on June 2. If you are unable to attend, we obviously will report our first-quarter results in early August and look forward to catching up then. Thanks a lot. Bye.

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