Zurn Elkay Water Solutions Corp (ZWS) 2017 Q1 法說會逐字稿

Welcome to the Rexnord first-quarter FY17 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 will be available for replay. The phone numbers can be found in the earnings release and also posted on the company's website at investors.Rexnord.com.

At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy.

Good morning and welcome everyone.

Before we get started, this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon 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. Why we use them, and why we believe they are helpful to investors. And they contain reconciliation to GAAP data.

Consistent with prior quarters, we'll speak primarily to core growth, adjusted EBITDA, adjusted net income, and adjusted earnings per share as we feel these Non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data and we urge you to review the GAAP information in our earnings release and 10-Q. Please note that we are excluding from the presentation of our operating results the impact of on a non-core product line in our water management segment that we are exiting. In order to enable investors to better understand and assess our continuing core operating results.

Today's call will provide an update on our overall core performance for the first quarter of our FY17 and our outlook for the rest of the year. We'll cover some specifics on our two platforms, followed by selected highlights from our financial statements, our liquidity, and our cash flow. Afterwards, we'll open 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 morning.

Starting on slide four, first quarter of FY17, was a solid quarter for us amidst a muted macro economic environment. Our results were generally in line with our expectations and we continue to execute well against our strategic initiatives to drive better core growth and reduce our cost from our global supply chain optimization and footprint repositioning program. We closed the important acquisition of Cambridge, adding incremental growth opportunities in our food and beverage end markets and increasing our relative exposure to consumer facing and markets.

At the same time, we reduced our outstanding debt by $100 million as we prepaid all of our schedule debt repayments through 2020. Our core EPS was a bit ahead of where we had guided. We saw about 3% of tax benefit that flowed into the quarter than we had targeted to recognize in Q2. Cash flow performance was in line with our expectations for the quarter, and consistent with our historical seasonality. All in all, we delivered a solid quarter of progress against our strategic priorities of enhanced internal and external growth. While driving operational excellence by leveraging the restaurant business system across the enterprise.

Including the impact of the nonstrategic product line exit that we had announced last quarter, our consolidated total revenue declined 3% year-over-year. Cambridge contributed a little more than 1% to the total growth, while currency translation subtracted about 1%. Core sales were down just 1% after adjusting for the Our Chef product line exit, which was a function of 3% core growth in our water management platform, and a 5% core decline in our processing motion control platform. For the quarter, our adjusted shares per share was $0.35, which benefited from solid operational execution and the $0.03 tax benefit I mentioned earlier.

Looking at the performance of our platforms, our core water management platform operations delivered 3% core growth against a difficult prior year comparison and adjusted EBITDA margin of 19%. Our growth benefited from ongoing mid single growth in our North American non-res end markets and some favorable timing of project shipments to infrastructure markets. With a slight drag attributable to the extensive flooding during the quarter in the south central US. Current market fundamentals and leading indicators continue to be supportive of continuing market expansion for both new construction and retrofit applications in commercial markets and particularly in the institutional space, which is our most content-rich end market and seemingly still early in its cyclical recovery.

Turning to our process and motion control platform, we were pleased to see the stabilizing pattern of sell-through rates in our North American distribution channels that we discussed last quarter continue into first quarter and combined with reduced channel destocking to enable a meaningful improvement in our core growth rate when compared with last quarter and the run rate of last four quarters. Over all, our global MRO revenue was up 3% year-over-year on accrual basis. And we are also seeing a little better day-to-day order flow in some of our smaller geographic markets.

We continue to generate positive core growth in our consumer facing end markets, and our aerospace operations made excellent progress on recovering from the execution issues that impacted our fourth quarter. Not surprisingly, we continue to see weak order flow from our process industry end user and OEM customers. Offset by traction of new customer wins, resulting from the commercial excellence breakthroughs we have been working.

While we certainly wish it was better, we see a stabilizing aftermarket as a positive compared to last year. And a necessary first step toward the bottoming of our direct OEM, and end user demand coming quarters. PMC margins in the quarter were in line with what we expected as the impact of elevated investment spending in our supply chain optimization plan accelerates over the next couple quarters before beginning to see the benefits emerge as we go through our Q4 and into our FY18.

As we move through the year, PMC's reported results will benefit from the contributions from the Cambridge acquisition that closed on June 1. You may recall, Cambridge's annual revenue is about $80 million with adjusted EBITDA margins above 20%. Two months post closing, the integration is on track with our RBS play book, and we have already booked orders from some of the customers we identified to deliver our expected growth synergies.

We continue to be quite excited about the significant growth potential we plan to capture, as we leverage the complimentary market presence and value-added capabilities of the two organizations. As we discussed previously, PMC will be generating between 20% and 25% of its global revenue in food and beverage end markets going forward, which we believe adds important long-term growth potential and stability to the PMC platform.

Given our outlook to the water management platform, our expectations for bottoming demand in our industrial distribution channel, and solid demand in aerospace and food and beverage end markets, we continue to project our overall core growth in our FY17 to range between 2% decline and a 1% increase. We are reaffirming our guidance for adjusted earnings per share to be between $1.47 and $1.57.

Finally, a quick update on our supply chain optimization and footprint rationalization program. As we previously outlined, this program is expected to deliver $30 million of annualized savings beginning at the end of our FY17, which is eight months from now. The year-over-year impact in our FY18, or our next fiscal year, will be a function of eliminating the 2017 expenses to execute the program, plus capturing the incremental benefits as we achieve the full run rate savings. The total year-over-year impact in our FY18 adjusted EBITDA is expected to be approximately $25 million. To quickly update you, we're continuing to expand production in our new plant in Mexico. And our other projects are progressing as expected. We still have significant work to do this year, but the program is well underway and we remain on track to deliver plan savings.

Now let's move to slide 5. Consistent with what we presented last quarter, this slide outlines our growth assumptions for our largest shared markets that account for more than 90% of our total annual revenue. Our outlook for the overall end-market growth in our FY17 is unchanged, with the weighted average market growth ranging between flat and a 3% decline.

We made a couple minor changes to elements of our overall end market growth outlook to reflect our latest assessment, but the impact is essentially offsetting. We are trimming our outlook for developing more water and waste water infrastructure demand to about flat from our previous forecast for low single growth to reflect slowing project schedules, primarily in the Middle East.

Offsetting that, is a slightly improved outlook for low single digit growth in the rest of the world industrial distribution. Otherwise, our outlook is unchanged for our US non-residential construction, our US industrial distribution, European distribution, and global aerospace and food and beverage end markets, offset by on going head winds in our process industry end markets. We expect above-market core growth to be driven by our commercial excellence and innovation initiatives. And we continue to project our core growth for the year be in a range of minus 2% to plus 1%.

With that, I'll turn it over to Mark to review the numbers.

Thanks, Todd.

Slide 6 of our presentation takes the reported results to reconcile to the adjusted results. Please recall that we intend to exclude the financial impact of the RHF nonstrategic product line [IFit] from the calculations of our core growth and our adjusted earnings metrics in order to focus on our core operating reports. We expect that the impact of this product line on our consolidated GAAP financial results to rapidly diminish as we move through the current fiscal year.

Turning to slide 7, I will comment on a few key metrics from our consolidated results in the quarter. First, please note we that we have excluded $6.5 million, and about $17 million of RHF product line revenue from our analysis of the first quarters of FY17 and FY16 respectively. Our earnings adjustment for RHF are on slide 6 and the RHF sales and EBITDA comparisons are detailed in our earnings release.

Turning to our core operating results, the year-over-year decline in our first quarter [quarter oath] is just 1%. Our decremental margin exceeded 100% as we continue to invest in the strategic programs that we expected to deliver accelerating benefits, as we move through the current fiscal year and into our next fiscal year.

Next, as we look at the operating performance in our Process and Motion Control platform on slide 8, you can see that PMC sales declined by 3% year-over-year as the core sales declined moderated to 5% and Cambridge contributed roughly 2% in a partial quarter, currency translation was essentially neutral. The core-sales comparison benefited from on going stabilization in our North American distribution channels, positive over all growth in global and aftermarket sales, and positive grown in our consumer facing end markets. PMC's adjusted EBITDA margin of 18.6% is expected to be the low water mark this year. As it reflects the peaked impact of our investments and our innovation, market expansion, and footprint initiatives.

Our full-year outlook for PMC is essentially unchanged. A low to mid-single digit core sales decline that balances positive growth in our consumer facing and aerospace end markets with the on going head wind in our process industry verticals, plus a 550 to 600 basis point top-line contribution from Cambridge. Core PMC margins are expected to be flat to down slightly for the year, as investment spending ticks up and we offset most of the top-line pressure on margin with RBF line improvements and operating efficiency in the initial benefits from our supply chain and footprint initiatives. Cambridge is expected to be slightly accretive to PMC's overall adjusted EBITDA margin in FY17.

Turning to slide 9, I'll make a few comments on our water management platform, where we are, again, reflecting the RHF product line exit in our analysis. Core growth was 3% in the quarter as sales benefited from on going momentum in our non-residential construction markets and stronger product shipments to our water and waste water infrastructure markets. Adjusted EBITDA margin was a robust19%, despite the mixed impact of relatively stronger product shipments and our investments to support key new product introductions planned for later this year.

Our full-year outlook for water management is also unchanged, including another year of core growth in the mid-single digit range with relatively higher growth in our non-residential construction markets, and we expect to leverage in some modest margin expansion. As always, we caution that the timing of product shipments can create significant variability in quarterly year-over-year core sales growth comparisons in water management.

Moving to slide 10, you'll see that our cash position has declined, as we internally funded the Cambridge acquisition and also repaid $100 million of outstanding debts. As a result, our net-leverage ratio was increased temporarily. Assuming no additional acquisitions in FY17, our robust free cash flow generation would enable us to reduce our leverage our ratio over the coming quarters and finish the year back with 3.8 times level of a quarter ago.

Our liquidity position remains strong and we have a patient capital structure, given our maturity profile. Going forward, we will continue to evaluate our capital allocation opportunities in the context of our overall capital structure, our liquidity requirements, and our longer-term objective to reduce our financial leverage.

Before we turn the call back to the operator to take any questions you may have, I'll make a few final comments on our outlook. In addition to the outlook highlights Todd covered earlier in the call, slide 11 of the presentation also highlights our assumptions for interest expense, depreciation and amortization, our effective tax rate, capital expenditures, and fully diluted shares outstanding for FY17.

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 times that are recorded in this P&L line item. Our guidance also excludes the impact of potential acquisitions and divestitures in future nonrecurring items such as restructuring costs. With respect to restructuring, I'll take a minute to provide you with an update. First, the supply chain optimization and footprint reposition program is expected to impact our FY17 results as follows. We expect to incur approximately $8 million in net costs that are included in our adjusted operating results. We expect to report restructuring expenses of $19 million to $21 million, which are primarily made occupy of severance costs and are excluded from our adjusted operating results.

Also excluded from our guidance for adjusted EPS is approximately $11 million of accelerated depreciation in the year. Our forecast for capital expenditures in FY17 related to this program is unchanged, as included in our CapEX outlook of approximately 3% of sales. These figures have not changed from a quarter ago. Second, in addition to this program, we anticipate incurring restructuring costs of approximately $4 million to $5 million related to other cost reduction initiatives during the year, which is up about $2 million from last quarter's estimate.

Before we open the call up for questions, I would like to take a minute to make one final comment on our effective tax rate. Our effective tax rate will fluctuate by quarter, giving varying levels of pre-tax income. As well the timing of other planning initiatives. In our first quarter, we adapt to the new accounting standard for employee stock based compensation.

Given the timing of option exercises between our first and second quarters, our first quarter tax provision reflected approximately $0.$0.03 of related benefits that we originally expected to record in our second quarter. This timing issue hasn't changed our expectations for a full year tax rate, which we continue to project to be approximately 27%. Our guidance for our second quarter assumes as an effective tax rate of approximately 22%.

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

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Our first question is from Julian Mitchell with Credit Suisse.

Hi, this is (inaudible) on for Julian Mitchell.

Good morning.

Morning. You mentioned the Middle East when discussing the decrease in outlook for water and waste water infrastructure. Which region or country drove the raising of the guidance in [rest of world] industrial distribution?

So, the question around waste water in the Middle East or are you looking for the changes in market outlook?

Just looking for more detail about the increase in outlook for rest of world industrial distribution.

Specifically, when we look at rest of the world industrial distribution in [it's a smack right of] both Western Europe and Southeast Asia. I think we're talking about a very small change relative to what we thought 90 days ago. I think with respect to the water and waste water infrastructure in the Middle East, it is a prudent reality that as the price of oil has come down, some of the projects that perhaps would have been left over the course of the year, there's probably a greater likelihood that those will be delayed slightly. And we're trying to reflect that into the market growth outlook for the region.

Got it. And then could you elaborate about how the aerospace end market performed for the quarter for Rexnord?

On a relative basis, orders were up year-over-year. The reality of our aerospace business is, we don't have a lot of defense business. We're primarily focused on [Boeing] platform, narrow body platforms. And you know, the aerospace exposure is relatively small. When we guided for the year, to low single digit growth for aerospace end market, we think that's very much in tact relative to where we see things today.

Got it, thank you.

Our next question is from Jeff Hammond with KeyBanc Capital Markets.

Hey guys, good morning.

Morning, Jeff.

So, I just wanted to understand a little bit better the in decrementals in PMC. They looked still a little bit heavy and I know you mentioned peak spending. So, is there a way to carve out what that incremental spending was, what you think were normal decrementals? And how, mix or any kind of disruption might have impacted it.

Yes, Jeff, I'll give you an order of priority. The three things that really impacted the quarter. This quarter our scope for spending was materially higher than last year.

Last year in our first quarter, we really hadn't started spending. So, that was a material impact on the overall margin this quarter.

We also had, in this quarter in both platforms, investment that we were putting in place on some growth initiatives tied to new products. That will be introduced in the back half of the year. Sometime in the back half, really impacting the [display] team. But again, we had some material investment concentrated in the quarter in both platforms.

And I think lastly, year-over-year, we have some additional severance compensation we've recorded. And in this quarter in the last year at this time, we were making adjustments for outlook and rightfully so. Making adjustments are for incentive account accruals. This year, we are back to a full accrual and those three things, kind of in that order, really impacted decrementals in the platform.

If you strip out some of that noise, you were back at your normal 30% decremental?

Yes. And the way to think about it Jeff, as Mark said, the first quarter has some elevated spending around the scope [for] plan. It has investment that we started to make over the course of last year that we weren't making in the first quarter of last year. And then finally there's some normal timing stuff that happens throughout the year. The short answer is, absolutely. [Go] through the course of the year. The incremental margins for the year normalize in right around that 30% range for the year.

But you know, it phases in. It's exactly as we had anticipated when we guided an outline [in] the year. I don't think there's anything abnormal about the quarter from our view, relative to what we had planned. I think when you get to the end of the year. You'll see the decrementals are, again, right around that 30% range.

Okay, great. The last comment, Mark, on the higher restructuring. By $2 million. Is that restructuring that's included or, one time?

That would be restructuring that we would exclude from adjusted [BPM]. Some additional pop up initiative that we'll be executing over the next two quarters. It's outside of scope. It's more tied to our normal operating business, but those restructuring costs will be excluded from our results.

Okay. Perfect, thanks, guys.

Our next question is from Joe O'Dea with Vertical Research Partners.

Joe you may be on mute.

The next question is from Charlie Brady with SunTrust Robinson.

Hi, thanks, good morning, guys.

Good morning, Charlie.

Back on Jeff's question on the decremental. From your comment, Todd, we should expect an improvement as we go through the year to get to that 30%. Right? Since we are starting below that now, we should see sequential improvement through the year? Or will that be more lumpy as we go through the other quarters?

No, Charlie, I think what you'll see is a sequential improvement each quarter from here.

Got it. Can you talk a little bit more about the commentary round, the new products. Of the [uni-cut]? Sounds like you upped your spend on that.

Was it up from what we thought looking in? Or was it up from internally you had advanced forward or put more investment into that relative to original expectations? And talk about, to the extent you can, where those products are going into from an end market perspective. I know you can't get specific on the product.

It's difficult for me to comment what you thought looking in. I can tell you, that as we went to the back half of last year, we spent a lot of time planning how we accelerate our core growth. And a lot of that has to do with new product categories as well as getting into some adjacencies.

As we went through the back half of last year and early this year, those development and working things through the stage gate is accelerating. So that these products are ready to be commercialized over the back half of the year.

From our standpoint, the growth investments we started to make last year, we will conclude some of those this year. And to be perfectly honest with you, we probably will re-up and do some more in the second half. And so, I think what we're trying to articulate is that we think investing in adjacencies, investing in new products that give us an advantage with [first-fit] customers in the industrial world, and consumer facing end markets. And frankly, into some of the non-res markets is a great investment for us. Because we have the brand, we have the commercial resources in place. And we're going to continue to accelerate that. It's not any different than what we told anybody at this point. But, we're pretty excited about what they can do for us in the second half and into next year.

Right, one more real quick then. In the press release, you talk about [under] water benefiting from timing in shipments in waste water. Can you give more color on that? Was that tied to stuff in the Middle East that was advanced and now is on the back half of the year because of what oil's done slowing? Or is this something else?

No, I wouldn't read anything into it other than, as we go through each and every quarter, there's going to be some quarters that compare favorably as a result of project shipment timing in the prior year or not. In this quarter, I think we had some more shipments for water infrastructure projects than we had in the first quarter of last year. So, I wouldn't read anything more to it than that. All we are trying to articulate, is the growth in that part of the business was probably a little bit ahead of the growth in the overall segment.

Got it, thanks a lot.

You bet.

(Operator Instructions)

Our next question is from Karen Lau, Deutsche Bank.

Thank you, good morning.

Good morning, Karen.

Morning. So sorry, one more on the decremental [NPMC]. The $8 million of net cost from the [supreme] realignment. Are we still looking at $14 million of charges and $6 million of benefits? Is that how we get to the $8 million for the year?

That's right, Karen.

Okay, so is the way to think about it, the first half is probably all cost and then, second half is all benefit. Trying to parse out exactly how much of the redundancy cost impacted your decrementals in the first quarter. And how we should think about it going forward?

That's a fair assessment, Karen. In the first half of the year, it's primarily all cost, as you said. The second half of the year, it's more benefit.

You look at the expense by quarter. It doesn't change too materially by quarter. So [we end up] at $14 million spread it over the quarter. Think about that what is impacting the first half of the year. And you start to get the benefit in the back half. [Addresses $6 million of income]. You're thinking about it just right.

Okay, got it. So, is the expectation that, if we look at the top line trajectory, assuming things stable, you may be able to get back to flattish or maybe slightly up organic sales in PMC? Should we expect the resulting incremental margins to be much stronger than the normal 35%? Because, you have this benefit coming and then with the cost [sections] and everything, the incremental on the slightly positive top-line should be much stronger than normal? Towards is the back half?

Karen, I'll segment maybe my response in two ways. I don't think we're guiding for core growth in PMC over the course of the year. We're looking at better comparables as we move throughout the year. And the completion of all the cost reductions associated with our supply chain optimization. And footprint rationalization program.

What that does mean is that, as we move forward with the benefit of that in next year and with flat growth, you should see incremental margins, I would say, above that 30% that we're talking about on the upside. If we do see growth, I think the short answer is we'll absolutely see very strong incrementals. Which is the entire rational for the program.

Which is to eliminate fixed costs, allow better leverage, allow cash flow improvement, and really prepare us for either a better environment or frankly a worse environment. I think that's really the way to think about the overall intent of the program, but you're right, early on, if we see some growth in PMC, this will definitely enhance the incremental margins that we currently see.

Okay. Got it. And then with aftermarket or MO turning -- or doing better, can you give us an update on what you are seeing in terms of pricing in the channels? Is it still depressed or would you be able to get back to more normal type of pricing in the aftermarket channel?

I think a couple of things. With respect to price through industrial distribution. We haven't seen pressure. I would say that the pricing environment in industrial distribution that we see and experience has been relatively stable. Not just in the last year, but really historically for a very long period of time. So, we're not seeing the price pressure there.

We think we see normal price. Albeit low single digits, we're not seeing any sort of deflationary pressure there, nor do we expect any big change to the upside. I think pricing, with respect to the US industrial distribution channel, has been relatively stable for us.

Okay, got it. And then, lastly, any updates you can provide with the mid-range products? Is the launch on schedule in July? And any update on further plans in the second half, things like that?

You know, I don't think we are going to comment specifically. I can tell you that some of the mid-tier products that we had targeted to launch have been launched. We have seen some of initial stocking orders placed by distribution.

There will be more as we go through the second half. And all indications and sell through rates and hiccup rates have been good so far. All things seem to be on track with respect to the mid-tier categories we talked about.

Got it, thank you.

Our next question is from Samuel Eisner with Goldman Sachs.

Good morning, everyone.

Good morning.

So, just going back on the timing question. I know you guys qualitatively gave some details behind it. Did you give any numbers regarding how much the timing actually benefited water management in the quarter?

The question, Sam, what? The water management top line?

The top line, the timing benefit associated with some of those product deliveries on a dollar basis.

We didn't. All we're trying to do is articulate that the water infrastructure part of the platform grew a little bit faster as a result of some project shipments. Than the core non-res business. So, we didn't articulate what that was. I wouldn't read into it as it being a big number.

Got it. And then, with regards to the investment spending for new product initiatives. Again, another question about numbers here. But, did you give any or can you give any clarity on the actual dollar value of spending associated with growth initiatives that are embedded in the quarter?

We didn't. You know, again, it's in both segments. But by order of magnitude, it's greater than $5 million when you look at Rexnord (inaudible).

Got it, that's helpful there. A couple other housekeeping questions here. The time line. I know you are adjusting out, Rodney Hunt here, but obviously this is a business that you're looking at either closing down or looking to divest. Any update on the time line of the ultimate decision for that business?

Yes. I mean, from a timing standpoint, the decision is made. We're exiting the product line. We, right now, our plan is to have a backlog that has to be built out. That backlog should be completed approaching the end of our second and early into our third fiscal year quarter. That will be done behind us, and we will completely out of that product line.

That's pretty helpful. And lastly, Todd, any questions or any commentary on July here? Obviously, we're through the month. I was wondering, you gave some initial comments in your prepared remarks.

Any color on both the PMC as well as water management? About order trends have been, they're continued of the stabilization that you called out in the quarter as it relates to the aftermarket. Thanks.

Yes, I mean, as we look at July, it's clearly on track with the way we've guided for the second quarter. And you know, the book to bill really in July was greater than1 for us in each of the platforms.

Thanks so much.

You bet.

The next question is from Mircea Dobre with Robert Baird.

Yes, good morning, guys. Just going back to your pricing comments. I know you talked about industrial MRO. I'm wondering if you can talk more broadly about the rest of your business?

And also related to this, maybe an update on how you're thinking about raw materials in each of your segments? What are some of your big exposures? And have you seen any notable changes thus far this year?

Sure, I'll take the pricing question, maybe Mark will take the raw materials question. So if you were to look at the business on the industrial side, clearly there's a big MRO [conform] that we cover.

I think as it relates OEMs and end users, depending on customer, depending on end market, and depending on if it's a first fit or it's an application that we currently have. The pricing will vary. I don't think we have seen significant pressure one way or another. I think that's historically been the way we have characterize it. We haven't really seen anything change.

If you go through opportunity by opportunity, are there certain instances where in a mining or an energy application, pricing has been a little bit sharper in the last year? I think the short answer is yes. As it relates to consumer end markets and other things, we haven't seen having to sharpen the pencil as much as we would in some of those end markets. I think it's more end market customer application opportunity specific.

As it relates to Zurn, again, we haven't seen any significant price pressure whatsoever. I think we are continuing to monitor price in the market and be pretty prudent with respect to where we position ourselves compared to competition.

So I think you probably know this, but price, for us has never been a big positive nor has it been a big negative. Whether it's been great or whether it's been a pretty difficult time. Because at the end of the day, these are application engineered products. And again, price has typically been pretty stable for us, really for a very long time.

Yes, the material side of the equation. The story is very similar to what Todd talked about. Material for us, we haven't experienced enough significant increases or significant decreases in the overall price of material costs.

So we don't buy, we're not buying raw copper. We're not buying a lot of raw commodities. A lot of the majority we buy has a value-add component to itself.

Over the last year, when you saw material costs decline significantly, you didn't hear us talking about a huge benefit in our P&L. There's been uptick in commodity costs. We're not seeing that price impact on the negative side either coming through.

So, looking at where we sit today and we spent a lot of time (inaudible), obviously given where commodity costs have gone. We haven't seen and we don't anticipate seeing any real material, adverse impact on our material cost front going forward.

I appreciate the color there.

And then my followup is on water management. I'm wondering if you can help us a little bit, think about this business sequentially? There are all sorts of moving pieces, including some of the timing of these projects.

Can you talk about the natural seasonality? What we should be expecting, for instance? In the second quarter versus the back half of the year sequentially?

Sure. Again, I think it's been fairly consistent as we've talked. As it relates to significant projects in the water and waste water infrastructure. A piece of that. That's going to happen periodically. Depending on when the customer wants a particular delivery and or the prior year comparison.

I don't think that there's a natural seasonality there, Mic, that we can perfectly clarify for you. I think as it relates to the non-res part of the platform, obviously, the June and September quarters are the construction season in North America. So, those are going to be quarters with higher revenues, relative to our December and March quarter.

And so, if you think about how it's going to progress, the first half for water management, is typically a little bit higher than the second half. When you look through it. I think that this year, it will play out in a similar way.

As it relates to core growth, you'll see core growth get a little bit better in the second quarter. And core growth probably a little bit better in the second half. So I think that's the way it will lay out based on where the backlog sits and where we see the end markets.

Yes. I appreciate that thought. It's just that the comps look very different. You have your easiest comp next quarter and your toughest comp, I believe, on a core-growth basis in the fourth quarter. That's why I'm trying to basically triangulate if the second quarter indeed should be the highest, in terms of both revenue and organic growth for the year in your mind.

Mic, I think you'll see it when we get there. And again, I think what we're trying to articulate is, we have a lot of confidence that the non-res business is going to perform throughout the year. And have the traditional seasonality that we expect based on the project shipments that we see in our backlog and the order rates that we have in our water infrastructure business. That is the way we've got it in the year, that's the way we've got it in the market outlook and that's what's embedded in our outlook.

I think you'll have to wait and see. And to the extent you want to talk to Rob offline, he can maybe help you a little better.

I appreciate that. Thank you.

We have no further questions at this time. So I'd like to turn the call back over to Rob McCarthy for closing remarks.

Thank you, everybody, for joining us on the call today. We appreciate your interest in Rexnord and we'll look forward to joining you again to provide further updates when we announce our FY17 second quarter results in early November. Have a great day.

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