Zurn Elkay Water Solutions Corp (ZWS) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Rexnord Second Quarter Fiscal 2018 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Rob McCarthy, Vice President of Investor Relations for Rexnord. This call is being recorded and will be available on replay for a period of 2 weeks. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday, November 1. 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, 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 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're helpful to investors, and contain reconciliations to the corresponding GAAP data. Consistent with prior quarters, we will speak to core growth, adjusted EBITDA, adjusted earnings per share and free cash flow, 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 the presentation of our operating results includes adjustments to GAAP reporting for the impact of the RHF noncore product line in our Water Management segment that we exited during our fiscal 2017 in order to enable investors to better understand and assess our continuing core operating results.

Today's call will provide an update on our strategic execution, our overall core performance for the second quarter of our fiscal 2018 and our outlook for our fiscal 2018. We'll cover some specifics on our 2 platforms, followed by selected highlights on our financial statements and our cash flow. 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 morning, everyone. As you hopefully saw in our release last night, our second quarter results sustained the positive momentum we began to build a couple of quarters ago. With our core growth accelerating, our adjusted EBITDA continuing to expand year-over-year and year-to-date free cash flow up 50%. We continue to see improving end market demand across most of our served end markets and the strategic growth initiatives we've been driving are starting to reap through. Activities associated with our Supply Chain Optimization and Footprint Repositioning initiatives wrapped up in the quarter, and we're positioned to fully capture the targeted structural cost reduction of $30 million annually. At the halfway mark of our fiscal year, we think it's prudent to pick up our outlook for both core growth and EBITDA, and we'll cover that in a few minutes.

From a strategy standpoint, we've made excellent progress in the rollout of our DiRXN strategy. It's still early, but the customer feedback and adoption has been terrific, and the very practical point-of-impact approach we've taken with this solution, is something we think is a game changer. Finally, in early October, we closed on the acquisition of World Dryer in our Water Management platform. It adds additional content to our already market-leading level of content per square foot in a commercial building when it comes to water safety, flow control and conservation. There's a lot to cover, and we'll try to move through it quickly so we can get to your questions.

Our second quarter sales of $511 million, included core growth of 4% and were at the high end of our expectations for the quarter. It's notable that this year's second quarter has actually 2 fewer days compared to the prior year quarter. We sustained positive core growth in our PMC platform and the core growth in our Water Management platform accelerated as we expected. As you'd expect in each platform there was a minor, but immaterial drag on our growth for the impact of Hurricanes Harvey and Irma that we think finds its way into future quarters. Our overall operational execution was solid as our adjusted EBITDA increased 9% year-over-year to $98 million, with margins in both platforms finishing in line with our expectations.

Consolidated EBITDA margin expanded by 60 basis points, which was consistent with the margin expansion we saw in our first quarter, and our incremental core -- and our incremental margin on core growth exceeded 30% and includes some fictional transition costs surrounding the wrap up of the SCOFR project that's now behind us. Adjusted EPS was $0.32 for the quarter.

Mark will review the consolidated results and the performance of each platform as part of his comments a little later in the call.

Turning to Slide 3, within our operating platforms, our PMC platform had a strong quarter, with order and revenue growth across most end market verticals, including another quarter of added stability to the growth, in some of our key process industry end markets, such as mining and energy. The impact of our First Fit strategy gained momentum in the quarter and the pace of our success winning new OEMs and end users through application expertise is now running a bit ahead of our annual targets, which only bodes well for the future, as these components were in use and are serviced and replaced multiple times over the life of the customers application. PMCs margins were in line with our expectations and improved 70 basis points sequentially, which equates to a 37% incremental margin sequentially. The margin we generated in the quarter and the first half both -- it includes both the final frictional transition cost as we complete the exit of our Indiana facility and reflects year-over-year differences in the timing and scale of incentive comp accruals and our increased investment spending around our DiRXN strategy. We see significant margin runway for PMC, post the completion of our SCOFR initiatives, and we're confident, you'll see a solid down payment on that longer-term opportunity as we move to the second half of our year.

Results in our Water Management platform were solid. The second quarter growth -- second quarter core growth accelerated to 5% in the quarter as Zurn delivered another quarter of solid growth as we continue to see positive underlying trends at our nonresidential construction markets and the initial impact of our new product launches helped offset the impact of the calendar and some Gulf Coast weather. We had relatively stronger growth in our water infrastructure end markets, which are no longer facing the difficult comparisons created by last year's pushouts in large international infrastructure projects.

Adjusted EBITDA margin came in at a record 21.1%, which is at the higher end of our expectations for the quarter, as we benefited from our past SCOFR actions, strong management of input costs and solid execution. As we've mentioned, we've been actively working to derisk some of the volatility inherent in some of the water infrastructure parts of our business. And as a result, have fewer, what I would call, large projects in our backlog, which mitigates the potential degree of shipment timing risk and focuses on smaller and frankly, more profitable business that typically has less of a digital impact within a quarter. For the platform, we see second half core growth above the level we posted in the first half and year-over-year margin expansion.

If you could turn to Slide 4. Just a few words on the strategic importance of the World Dryer business acquisition we completed in early October. World Dryer is an important element of our core strategy to increase our specified content per square foot in commercial and institutional buildings. World Dryer is a well-established brand and has established the largest installed base of electric hand dryers in North America. This is a growing product category, as building owners and operators in most nonresidential verticals are increasingly choosing air dryer over paper towels as they seek to reduce waste and lower their operating cost. This is important because earlier this year, we launched our SLIMdri product line, which is an integrated handwashing station, combining Zurn's sensor process with a high-performance solid surface basin offering as part of our strategy to offer building owners and contractors a contemporary single source handwashing solution for commercial washrooms. World Dryer adds to our competitive advantage in terms of being able to not only provide an integrated specified handwashing solution, but to provide a complete single supply, specified SKU in a commercial washroom that captures all of the conservation-related content for both water and paper, with all the benefits of ease and installation and integrated shipments and leading frankly, to just a better value for our customers. Stand-alone, the acquisition is both gross margin and EBITDA margin accretive to our fleet average, and we anticipate generating double-digit return on investment capital within 1 to 2 years.

Finally, our year-to-date free cash flow of $45 million and growth in EBITDA drove our net debt-to-EBITDA ratio to 2.9x at September 30. And inclusive of the World Dryer acquisition in early October, we continue to expect to be in the mid-2x range at the end of our fiscal year. We remain optimistic about our potential similar bolt-on acquisition activities this year, but that base case leverage target would not obviously include any results.

Wrapping up my comments on the second quarter. I'd say, we delivered another quarter of steady performance as we put a vital strategic cost-reduction initiative behind us and also made important progress with our major growth and productivity initiative, which is ramping up nicely.

Our demand outlook remains favorable and across both of our platforms. Mark will cover the details of our outlook in a few minutes, but I'll just add that we're pleased with where we are, at the halfway point of our fiscal 2018 and to be able to increase our guidance, and we're excited about delivering the rest of the year, while executing on our strategic growth investments and looking forward to additional cost-reduction initiatives.

Before I do turn the call over to Mark, please turn to Slide 5, so that I can provide an update on our DiRXN strategy. Last quarter, I discussed in some detail the DiRXN platform that we officially launched at the end of May. As I outlined then, our objective is to create a digital productivity platform that combines innovative Industrial Internet of Things and e-commerce technologies to digitally connect customers to our products, tools and services, that can enable them to optimize their productivity. At the same time, DiRXN leverages the application expertise and the established set of the rate competitive advantage that we've been creating and enhancing for decades. I'm pleased to share with you today that the initial reception from end users has been really positive. First, by bringing up to speed on some of the early milestones, relative to the first four elements of the customers life cycle and how we can enhance productivity around the steps of search, design, select and procure. We continue to make excellent progress at the front end by adding a second pool of product configurators, which can simplify and accelerate a customer’s ability to intuitively determine the combination of product specifications and features that best addresses the user's application. And at this point, approximately 85% of all products are configurable online. And we expect the balance of that to be available over the next 6 months. The customer can then directly link to our e-commerce platform for pricing, availability and lead times to place an order, including for engineered order products.

In September, our e-commerce platform handled the vast majority of quotations and orders for our Power Transmission business, creating substantial capacity in our selling and application engineering organizations by greatly simplifying, actually eliminating the touches between sales, engineering and production processes. In addition, we tagged more than 10% of PMC's second quarter global production volume with product-specific QR codes, which can bring relevant tools and resources directly to the handheld device used by the customer's maintenance staff, operations supervisor or manufacturing engineer. And again, all within a single digital platform. Relative to the remaining 4 elements of the customers life cycle, namely install, operate, maintain and replace. We're continuing to increase the number of connectible SKUs. Getting to about 85% of the total is what we think makes sense over the course of the next year. Every month that goes by, we end up learning more and the products and solutions we develop are beginning to validate the proposition, effectively increase the users productivity, and reduce their cost largely through the avoidance of unscheduled downtime. In fact, to share one specific anecdote, early in the quarter, we delivered 4 large IIoT-enabled B class smart gear drives, for the process industry material handling application. The gear drives were installed at a customer system and went to work without issue. About a week later, the customer was ready to connect the drives under their process control network and once that had been done, one of our smart gear drives immediately signaled unusual vibration and heat that can result in shaft misalignment. Both in the customers control room system, and as we monitor situation from our control room. The subsequent visual inspection revealed a atypical wear patterns on certain drive elements and indicated that there was indeed a shaft misalignment issue. We were able to contact the customer directly who, in real time, was able to communicate back to us that one of the drives had initially been installed incorrectly but had thought it had been corrected. The value was that this misalignment would have absolutely led to a failure and an unexpected shutdown of the entire process. In other words, lost revenue, and increased cost for the customer. There's no question that our customer was delighted with the in real-time demonstration of the capabilities of their newly purchased DiRXN digitally enabled and connected smart gear drives.

In terms of incremental revenue, I'd say it's still early days, but we're steadily adding to the suite of fine resources and capabilities available to customers, and we're working a paced time line of connected product introductions that we expect to accelerate over the balance of fiscal 2018 and into 2019.

In the meantime, we're tracking towards our specific objectives for the current year, and we're continuing to see evidence that this initiative can strengthen our ability to win, not just First Fit applications, but also with incremental replacement demand opportunities. We believe that translates into incremental organic growth opportunities. We're also working diligently on platforms and opportunities to leverage these investments within our Water Management business. The Zurn has started tagging certain of the time line SKUs with QR codes, enabling the same one click access to the product information and replacement parts there as well. As I indicated last quarter, we're also working towards several field trials of digitally enabled Zurn Plumbing products that are planned for the second half of this fiscal year. We have more to report as we get deeper into our second half. I'll close with a point I'd made before. We're executing this ambitious program within the Rexnord business system, which provides a disciplined focus to successfully execute complex strategic programs of tightly controlling investment and minimizing execution risk, just as we manage the Supply Chain Optimization and Footprint Repositioning initiatives that we launched 2 years ago. And as we adjust and manage the next set of initiatives to streamline our cost structure and enhance our returns. We're looking forward to the shareholder value we're creating, and will continue to create be increasingly reflected in our share price.

Now I'll turn it over to Mark.

Thanks, Todd. Please turn to Slide #6. On a consolidated basis, our second quarter fiscal '18 financial results were broadly in line with our expectations. Our core sales increased 4% on a year-over-year basis. Our adjusted EBITDA increased 9% from a prior year second quarter to $98 million, and our adjusted earnings per share was $0.32.

Our effective tax rate when calculating our second quarter adjusted EPS was just over 32% and compares with the roughly 22% adjusted tax rate we reported for last year second quarter. As Todd indicated earlier, we are increasing our outlook for fiscal year 2018, after a solid second quarter and taking into consideration the fact that we have another 6 months left in our fiscal year. We're modestly increasing our outlook for core growth to the low to mid-single-digit range from our previous outlook for low single-digit growth. As the midpoint of our expectation is now just a bit too high to continue to call it just low single-digit. At the same time, we're adjusting our outlook for adjusted EBITDA to be in a range of $375 million to $385 million, which stayed at the low end of our previous financial off the table and moved the midpoint of adjusted EBITDA range up by $5 million. The revised range of year-over-year growth in adjusted EBITDA 8% to 11% from the comparable $347 million delivered in our fiscal 2017.

Slide 7 summarizes our consolidated results in the quarter. Let's move on to Slide 8 and discuss the first of our 2 operating platforms, Process & Motion Control. Total sales increased 5% year-over-year at PMC, with core sales growth of 3% considering we're having 2 fewer selling days in this year's second quarter. Currency translation added almost 2%. For the second consecutive quarter, PMC experienced growth from the majority of its end markets during the quarter, including several of the process industry end markets that have presented significant headwinds to our growth in recent years.

Global aftermarket revenue is flattish on a core basis, reflecting the days issue in North America, offsetting the ongoing growth we're seeing in Europe and Asia. Distributor sell-through in North America continued its general stable trend in the quarter and we're seeing slow improvement in year-over-year comparisons. In the top right corner of the slide, you can see the unchanged end market assumptions that support the outlook for low to mid-single-digit core sales growth in PMC that is incorporated into our fiscal '18 guidance. We believe that we can continue to generate growth in our consumer discrete and aerospace end markets, and our second quarter results seem to reinforce our view that demand has bottomed out in our process industry end markets. However, as we've stated, we intend to maintain a positive approach with our end market outlook.

PMC EBITDA and margins were in line with our expectations, as margins improved sequentially, but were down to 2 basis points year-over-year. At the time of incremental compensation approvals, our ongoing investment spending was more than offset the benefits from our volume growth. In addition, and as we discussed last quarter, in order to help meet the stronger end market demand from mounted bearings, we maintained certain operations in the Indiana facility well into the quarter. All of it wound down in September and has now been moved to Monterrey. In total, we've absorbed approximately $5 million of temporary period cost during our first half that are associated with sustaining certain operations in the Indiana facility, beyond original target date in order to better serve the increased demand from our customers.

Positively, structural benefits from our Supply Chain Optimization and Footprint Repositioning initiatives are showing up in our results and will become even more prevalent during our third and fourth quarter, now that the last facility move is entirely behind us. So inclusive of our planned incremental adjustments innovation and market expansion during our fiscal '18, we continue to expect PMC's model to expand by more than 100 basis points for the full fiscal year. While PMC's sales during the summer quarter are expected to demonstrate a historical seasonal pattern, we expect margins to expand sequentially as the increase SCOFR benefits show up in the PMC's numbers. As we point to our Water Management platform, summarized on Slide 9, please recall that we're excluding the financial impacts of the RHF nonstrategic product line, we exited during our fiscal '17 in the calculation of core growth and adjusted earnings metrics in order to provide enhanced comparability with our core operating results in fiscal '18.

Exiting this product line was completed during the fourth quarter of this past year, and it will have a negligible impact on our year-over-year reported sales comparisons by our fourth quarter. During our second quarter, our Water Management platform experienced a 6% net sales increase. That was a function of 5% year-over-year core sales growth and a 1% contribution from foreign currency translation. Top line results are among our expectations and benefited from double-digit year-over-year growth in our Water Infrastructure-focused operations. Sales of our Zurn Industry Plumbing products increased year-over-year by low single-digit core growth rate in our second quarter, despite the drag and 2 fewer days in the quarter and the near-term storm disruptions in the U.S.-centered business. Supported by the launch of several important new products this year such as our new line of one-point drains as given in the slide, and our SLIMdri handwashing stations that Todd mentioned earlier, we believe Zurn's core growth can reaccelerate into our second half and then steady end market growth appears likely to be sustained at least for the calendar 2018 construction season. We're particularly encouraged by the recent strengthening in institutional building starts, with the preliminary dodged estimate for year-over-year growth in the recently concluded September quarter was a healthy 7%. Institutional verticals like healthcare and education typically involve relatively higher investment in plumbing per square foot construction and our competitive position is quite good.

Turning to our project-oriented business serving water and wastewater infrastructure markets. Our second quarter results benefited from the strength of new order activity and associated growth in our order backlog over the past year. Given our backlog position and favorable demand outlook as well as our reduced reliance on large multimillion dollar project orders, we expect a sustained positive core growth comparisons in our water infrastructure end markets for fiscal '18. With our expectations for positive core growth across the majority of Water Management end markets as seen in the unchanged end market outlook on the slide, our fiscal '18 outlook continues to incorporate low to mid-single-digit core growth for the overall Water Management platform. The substantial year-over-year increases in Water Management EBITDA was consistent with our expectations and reflected the benefits from the volume growth during the quarter, ongoing cost reduction of product initiatives and some favorable project mix, partially offset by our sustained investment spending. We continue to expect the Water Management margin to expand to roughly 100 basis points in our fiscal '18. In terms of quarterly progression, we'll see the traditional seasonal contraction of the sales and margins on a sequential basis in our December quarter, where we expect to continue to leverage year-over-year core growth into attractive year-over-year margin expansion.

Moving on to Slide 10. You can see in the chart at the top left that our financial leverage, as measured by our net debt leverage ratio has declined to 2.9x. Given normal seasonal patterns for our free cash flow and excluding any impact from potential acquisitions over the balance of this year and assuming our current earnings guidance, we would expect our net debt leverage ratio to be in the mid-2x range by the end of our fiscal year. In the chart at the top right, you can see we finished our second quarter with a year-to-date free cash flow of $45 million, which includes an approximate $8 million outflow associated with our defined SCOFR activities. Looking at our earnings growth expectations for fiscal '18 and considering the remaining cash outflow of about $7 million required to complete our SCOFR investment, which primarily reflects the lagging timing of severance payments, we continue to project our free cash flow to exceed our net income and be in a $175 million range for the full year.

Given that we expect our free cash flow to expand in fiscal '18 and given our strong overall liquidity, we believe we have ample resources to continue to execute on bolt-on acquisition strategy while maintaining our leverage ratio in a range between 2.5 to 3x. Before we open the call up for questions, I'd like to comment on our restructuring expenses and our effective tax rate as well as call your attention to the 6 slides in the appendix to our earnings presentation.

First, and in terms of our cost-reduction initiatives, we expect to report total restructurings expenses of $9 million to $12 million in fiscal '18, which is up approximately $2 million from our previous outlook. These costs are primarily made up of severance costs and are excluded from our adjusted operating results.

Next, our effective tax rate will fluctuate by quarter given [drain] levels of pretax income as well the timing of other planning initiatives. That said, and going forward, we currently expect substantially less quarter-to-quarter volatility in our effective tax rate, than we had experienced in recent years. We continue to anticipate that our fiscal '18 adjusted net income will incorporate an effective tax rate of approximately 32%, with the effective rate expected to be in the 33% to 34% range for the remaining 2 quarters of the current fiscal year. As you're probably aware, the projected 32% full year rate used to calculate our adjustment income compares with the 24% rate reported for our fiscal '17.

Turning to the sixth slide in the appendix. First, we've included the other assumptions incorporated into our guidance for fiscal '18 on a separate slide as you've come to expect. I need to remind you that our guidance excludes the impact of potential acquisitions and divestitures and future nonrecurring items, such as restructuring costs. Second, and for your convenience, we've included a table that provides specific after-tax impact of each individual adjustment we have made in our calculation of adjusted net income.

Third, we've attached a reference table to help you determine the appropriate incremental quarterly share count to use for modeling our diluted earnings per share under the if-converted method if it is applicable. As you're aware, and as illustrated on Slide 15, the if-converted method is not dilutive to EPS and thus not apply in our second quarter.

Lastly, we include the reconciliation tables related to adjusted EBITDA and adjusted earnings per share that are included in our earnings release each quarter.

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

(Operator Instructions) Our first question comes from Charley Brady from SunTrust.

Charlie, you're really breaking up. I don't think so.

Okay. Just quickly on the $5 million divested on the Indiana cost that's $5 million. You reference that is essentially done, right? There's no carry through into the second half on that facility to doubt.

Yes, I think Charlie, we're having a tough time hearing you. But I think the question was is the $5 million related to the final frictional transition cost behind us. And the answer is absolutely yes.

Okay. And just could you comment on input costs that you're seeing. I think you started touching on a little bit in prepared remarks, but in terms of raw materials and may be potential pricing to offset some of that?

Yes, I think as you -- as we said, we think we've been very successful, at least for the first half of manage the balance between rising input costs as it relates to various commodities. But also working, I think, diligently with smart strategic pricing. And so far, it's really net positive with the gross margin, and we think we're going to continue to manage it quite well over the second half. So really no pressure at this point beyond what you'd expect, but I think we're managing it effectively, with the way we're taking cost out of the business as well as feathering in some price increases as appropriate.

Okay. Just one more for me on the World Dryer. In the distribution channel same as what Zurn is currently doing or is there some differences there?

The go-to market is third-party reps. Obviously, we think we have the sort of best-in-class or best-in-business reps at work and so our ability to sort of leverage that on a go-forward basis, we think is a substantial growth opportunity. As do we think that -- marrying that with the suite of water conservation products that we already have, and bringing more specified content and even more savings to a building owner and in some cases, the contractors, we think that's a home run for us as we go forward.

Next, we have Jeff Hammond from KeyBanc Capital Markets.

So I think that the SCOFR savings is starting to hit. Can you just remind us kind of what the ramp is into the second half to get to the better margins, particularly in PMC? And then, Todd you talked about kind of a longer-term margin runway from these actions? Can you maybe just elaborate where and when you think those happen? And is there a number to think about from a quantification standpoint?

Sure. I'll let Mark answer the first and I'll take the second.

Yes, Jeff, the cadence of that well proceedings for that product really is in (inaudible) system, so expanding on the first half of the year, moving to $25 million of the year at about 30% of rolling through. So 70% coming in the back half. So as you can appreciate obviously, the margin step up in PMC will be quite good. And going to Q3 I think is a little more incremental as we go into Q4. So the mix doesn't change too much, but that -- we'll see our first real material step up as we go into our third quarter here, Jeff, and you'll see that in the PMC margin.

In terms of longer term, Jeff, I think as we've, I think, frankly told people over the last couple of years we think mid-20s is sort of where we can get to in the next couple of years without any, I would say, significantly different market environments than we're seeing now. So as Mark said, we'll get a good down payment on the incremental margin in the second half of the year, now that the move is completely behind us. And we really do feel like, this is, call it, a 24% to 26% business within the next couple of years.

Okay. Very helpful. And then it seems like in PMC, North American industrial distribution is stubborn. Can you just talk about what you're seeing in that channel? And just kind of comment on order rates trending in PMC and to into this current quarter?

Sure. It has been, I would say, stubbornly low relative to what you would expect. The sell-through is picking up, but the inventory levels are at sort of record lows. So what we're seeing is really the end market demand, and we see that continuing to improve. But in terms of any additional bump that you'd get from maybe rightsizing inventories to a full demand closer to the point of impact, we haven't seen that yet. We really don't have it in our second half, but to the degree that starts to occur obviously that's helpful. But at this point, it's still very -- I would say, a little bit disappointing, right, the amount of inventory being carried in the channel is, in our view, simply not enough. I don't think we're the only ones that would feel that way. But as I do think as that improves, which we -- I think we're somewhat optimistic, that it will, we haven't baked it in. We'll see that as an additional leg of improvement.

And next, we have Julian Mitchell from Crédit Suisse.

Ronald Weiss on for Julian. On the free cash flow in the quarter was down versus a year ago, despite the better EBITDA and lower CapEx. I think we're sitting a little bit below the target for the year. I'm wondering if you could provide a little extra color on what drove the weakness in Q2 versus in the second half to hit that guide?

Yes, I mean, Ron, well, actually from a target standpoint, we're actually a little bit ahead of where we thought we'd be in the first half of the year. So first, our target 125, we're on track holding above that. But the difference this year is really, our first quarter was a little heavier free cash flow than normal, so therefore, the second was a little bit lower. And the issue was the timing of some of our large distributors when they take their readings. So we think it's (inaudible) in receivables. So last year, they took more of those credits in our first quarter. This year we took more in the second quarter. (inaudible) -- we certainly are focusing on the first 6 months to equalize timing on (inaudible) cash list the first 6 months as I said is a little bit above where we wanted to be. And obviously substantially above where it was last year through the first 6 months.

Yes. Just to reiterate I think. We don't see any risk, Ronnie, to the full year, sort of targets that we've outlined and Mark sort of provided in this guidance outlook.

Got it. It makes sense. And then the water margin's up 200 basis points in the quarter. Obviously, very strong. We're looking at a similar top line for the rest of the year. I guess, what are the moving parts there, and why that margin when you stay at that type of elevated level margin expansion?

Well, I think, and of course, we said we had some really strong volume levels within our Water Infrastructure that levers that. Some of the project mix that we had was favorable. I think as Todd pointed out, it got to be projects that are not as large, in total. The small, we're seeing some better margins there. As you think about the back half of the year, you'll see big incrementals in water. We said we've got -- we talk about a 25% to 30% incremental margin range in that platform. I think in the back half year, you'll see us tracking towards the higher end of that. So you can expect some nice incrementals in that platform to continue in the back half.

(Operator Instructions) Next, we have Mig Dobre from Robert W. Baird.

If I may go back to PMC for a second. I guess, Todd, can you comment at all as to the tenure of demand or orders through the quarter?

In terms of did they accelerate, did they...

Yes. Exactly, how did you see demand progress through the quarter? That's really my question.

Yes. I think demand was relatively stable throughout the entire quarter. I don't think we saw any demonstrable difference in the improvement or the sell-through. It sort of ran at a reasonably decent rate overall and, obviously, we're sort of what we're portending into the second half of the year.

Great. Well, So what I'm wondering here is looking at your comps, your comp is getting considerably easier in the third quarter on a year-over-year basis. And I presume you no longer have any distortions from selling days. Correct me if I'm wrong, but if demand has remained pretty good and obviously, you moved up your guidance up a little bit, how should we think about this organic growth in the third quarter versus what you've done in the first half on easier comps?

Yes, Mig, this is Mark. You're right. This is day, it's not a headwind in our third quarter. So I think about our organic growth in our third quarter PMC is in the mid-single digits. We're being a little more cautious as we've been within our market outlook. So we think about fourth quarter is a little ways away for us. And our fourth quarter, and to the point you made is right, our third quarter is an easier comp than our fourth quarter, when you look back at the growth that including staff growth has improved. Third quarter in easier comps. Fourth's a little tougher. So that's how we -- we've been in the third quarter, where we have the visibility. We can estimate mid-single-digit growth for PMC.

Okay. And then on Water Management? Maybe a little more color on the VAG business. How is backlog progressing there? Maybe year-over-year or sequentially, however you want to talk about it? And any color about your business in Europe. There's a yellow light over there? I'm wondering what the challenges might be in that margin -- in that market or region.

Sure. In terms of overall Water Management we had a record quarter from a margin standpoint. The combination of I think very good performance inside of Zurn. And that's sort of net of some of the hurricane impact. We think that it'll run its way in the future quarters. On the VAG side of things, as we've outlined, we've been derisking the business for a while. I think we've taken some cost out of the business. We've worked through some of the larger lumpier projects that impacted shipment timing, and we're executing a little better. So -- and relative to how we're doing, I think we're doing better. We think that the business is additive to our core growth. We think the backlog is in good shape and the margins are going to really come up. So overall, it wouldn't say that we're done. I think there's more work to do obviously, but we think we've put it on a much steadier path for growth as well as improving margins, over this year and in the next. In terms of the yellow light, I think it's more of a sign of look. We're not going to collect wide open, and going and going, I think it's just more -- it's just not bad, but we wouldn't call it out -- unusually good, I think it's more thinking about as stable than anything else.

I see. And if you were to maybe unpack growth in Zurn versus the infrastructure business what sort of differential are you seeing this year?

I think taken as a whole, because I think relative to any given quarter in the past, you're going to have variability because that shipment timing. But I think we're going to see mid-single-digit growth for the platform for the entire year, and we think that there's an opportunity to do that again next year. And obviously, Zurn is probably right there and water is maybe a little bit above that. Water Infrastructure side in this given year, but heading into next year, we think of that as much more even in terms of the contribution to the overall core growth of the platform.

Thank you. And we have no further questions at this time. I will now turn the call back to Rob McCarthy for closing remarks.

Thanks, everybody, for joining us on the call today. We appreciate your interest in Rexnord, and we're looking forward to providing our next update when we announce our fiscal year 2018 third quarter results in early February. We hope you have a great day.

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