Mark Peterson – SVP and CFO Todd Adams – President and CEO.

Mig Dobre – Robert W. Baird Charlie Brady – BMO Capital Markets Andrew Noorigian – Vertical Research.

Good morning. My name is Christine and I will be your operator for today’s call. At this time, I would like to welcome everyone to the Rexnord Second Quarter Fiscal Year 2014 Earnings Results Conference Call; with Todd Adams, President and Chief Executive Officer; and Mark Peterson, Senior Vice President and Chief Financial Officer of 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, October 24th, and they 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 Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord..

Good morning. Before we get started, just a brief reminder that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we issued today as well as in our filings with the SEC. In addition, some comparisons refer to non-GAAP measures.

Our earnings release and SEC filings contain additional information about these non-GAAP measures and why we use them. Today’s call will provide an update on our overall performance for the second quarter of our fiscal 2014 including details on our two platforms, followed by an overview of our financial statements and liquidity highlights.

Afterwards, we’ll open the call up to your questions. With that, I’ll turn the call over to Todd Adams, President and CEO of Rexnord..

Thanks, Mark, and good morning, everyone, and thank you for joining us today for an overview of our fiscal 2014 second quarter results. Starting on page four, we’re pleased with our results this quarter as we deliver slightly better operating profit on sales that were in line with our expectations going into the quarter.

Through the first six months of our fiscal year, our performance in aggregate is on track with our expectations and overall strategy which is focused on driving above market core growth delivering strong operating leverage on that growth, generating significant earnings per share leverage to our ability to both delever and fine tune our capital structure to take advantage of the favorable financing environment.

Additionally, given that our business model produces a significant free cash flow, we’ve been able to invest the portion of that free cash flow to execute three smaller but strategically important acquisitions and very reasonable multiples that will quickly deliver double-digit returns on invested capital to the synergies we’re able to achieve.

As it relates to the second quarter, we’re confident that again our core growth continues to outpace the growth in our shared markets as we delivered 3% consolidated core growth in the quarter, which is comprised of 6% core growth in water management, in advance of the market recovery we actually see coming and 1% core growth in process and motion control.

Our adjusted earnings – our adjusted operating income increased 7% from the prior year, delivering an incremental margin of 31% and sequentially from the first quarter we generated $11 million of additional adjusted operating income on $6 million of additional sales.

With respect to earnings per share, our adjusted EPS increased 29% year-over-year to $0.31, $0.06 above the high-end of the guidance range we gave in August as stronger operating performance contributed $0.02 of EPS improvement and the significant debt refinancing we completed mid-quarter contributed an additional $0.04.

The debt refinancing is a great transaction for us as it allows us to generate approximately $48 million of annual cash interest savings or roughly $0.30 of annualized EPS accretion.

Given well positioned both strategically and our transition from an LBO to a public company effectively leveraging our free cash flow which only gets stronger after the refinancing to both de-lever and execute on a solid funnel of bolt on and tuck-in acquisitions, two of which we closed in the quarter will be a significant driver of value over the next several years.

I’ll further say that at the moment, we’re pleased with the status of our acquisition funnel that should allow us to continue to be smartly acquisitive over the next 12 to 24 months.

Turning to the highlights for the quarter within the platforms, the momentum in water management remains strong as core sales grew 6% really all in advance of what we see is a market recovery that we should benefit from the beginning in calendar year 2014.

To add a little color on the end markets and group performance within the platform, the growth and operating performance in the Zurn continues to accelerate, again delivering high single digit core growth in the quarter clearly outpacing the overall market growth, but cleanly navigating through all of the low led conversation issues required in the marketplace.

As far as the outlook for nonresidential construction, we continue to see construction backlogs build in the U.S. and Canada.

This trend coupled with all the progress we’ve made over the past few years on innovation, specification and operational execution gives us great confidence that will disproportionately benefit from an expected market recovery over the next several years.

Within VAG, our backlog continues to grow as our book-to-bill ratio in the quarter was 1.16 setting up a solid second half of fiscal 2014.

As we look at the global demand for water infrastructure, we’re uniquely positioned to capture and deliver on the secular growth net market, where ever it’s happening in the world, as a result of the product breadth, technical competence and geographic capability that we've have established.

Over the past three to six months, we’ve seen the global project funnel become increasingly robust and feel good about where the order rates are trending.

In addition to the solid organic growth rate trends in water management, we completed a small acquisition in Australia within our Zurn business during the quarter, which allows us to expand both our product portfolio, as well as, geographic foot print.

To close on water management, we posted another solid quarter, a trend which we expect to continue with our served market improved. As we’ve discussed based on the market dynamics of our water infrastructure end markets, we look at this part of our business more in half years versus quarter.

And through the first half of 2014, the book-to-bill ratio is 1.15 and we feel good about the visibility and demand environment for the balance of fiscal 2014 and into 2015. Moving to Process and Motion Control, core sales growth was 1% year-over-year and we’re encouraged by an average of book-to-bill ratio that progressed as we expected to 1.0.

The first we’ve been at 1.0 in the last five quarters. Overall, we’re confident that we continue to outperform our overall served industrial end markets as a result of the strategic progress we’ve made over the past couple of years to both diversify our end markets, geographies and customer base.

We also believe that taken as a whole, market growth driven demand in process and motion control will be muted over the next year based on what we see globally from our customers and end markets.

We have and will continue to position ourselves to deliver strong profitability in this lower growth environment and you’re seeing it in the second quarter where with 1% core growth, we’re delivering 41% incremental operating income margins and an average EBITDA margin of 25%.

Finally, as we discussed last quarter, the diversity of Process and Motion Control in terms of its end market, customer and geography is a real strength and one we’re continually working to upgrade towards more resilient sustainable growth both organically and through M&A. In the quarter, we completed the acquisition of Micro Precision, a U.K.

based provider of specialty precision gears and core packs, key elements of content in the next generation of efficient commercial aircraft, which have become increasingly electric as compared to hydraulic or pneumatic.

The acquisition allows us to further penetrate our existing aerospace customers while providing access to new customers and geographies with an expanded product portfolio and engineering capability.

Before I hand it over to Mark to go through the financials, I’ll quickly cover our outlook for the full year as well as the third quarter, which is on Page 10 of the presentation.

For the fiscal year, we’re raising our adjusted earnings per share guidance by $0.20 per share resulting in an adjusted EPS range of $1.32 to $1.38 which prices in $0.18 of the annualized $0.30 refinancing benefit, we’ll see based on the partial year benefit over the remainder of fiscal 2014.

We’re also increasing our core growth range from 2% to 4% to 3% to 4% for the year based on our performance in the first half and latest outlook.

Specifically for the third quarter, we anticipate sales to be in the range of $495 million to $505 million with core growth of approximately 4% at the mid-point and adjusted EPS in the range of $0.29 to $0.32.

As it relates to the December quarter, we do have some seasonality in our Zurn business that I’d like to remind everyone of, primarily due to the slowing of the non-residential construction season in North America due to weather and secondly and more broadly, there are simply fewer shipping days as a result of the holidays.

Finally, our outlook excludes the impact of future acquisitions that may likely occur over the course of the year. 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 and adjusted earnings per share, as we feel these non-GAAP metrics provide a better understanding of our operating results. Slide 5 of the presentation takes our reported results and reconciles with the adjusted results.

Turning to Page 6, I’ll discuss our operating performance highlights for the second quarter. Second quarter sales increased 3% from the prior year to $515 million driven by our core sales growth of 3%. Adjusted operating income increased 7% from the prior year to $76 million in the second quarter or 14.8% of sales.

Sequentially, our adjusted operating income margin increased 200 basis points from our first quarter. Our adjusted EBITDA was $103 million or 20% of sales, 170 basis points increase in the margin sequentially. Second quarter adjusted net income was $31 million resulting in adjusted earnings per share of $0.31 which increased 29% from the prior year.

We generated $25 million of free cash from the quarter inclusive of approximately $30 million of incremental cash interest year-over-year. That was accelerated in the quarter primarily resulted the refinancing transaction that occurred in August. Excluding this tiny impact, second quarter free cash flow increased by $24 million year-over-year.

Next, I’ll take some time on Slide 7 to walk through the operating performance and our Process and Motion Control platform.

Sales in the second quarter increased 1% year-over-year to $312 million as a result of 1% core sales growth that was driven by low single digit growth in the majority of our end markets partially offset by a decline in sales for bulk material handling markets.

Turning to profitability, adjusted operating income was $61 million or 19.5% of sales driven by a 41% incremental margin year-over-year. Sequentially, our adjusted operating income margin improved 280 basis points from our first quarter.

Adjusted EBITDA was $70 million in the quarter or 24.9% of sales at 240 basis point margin improvement sequentially from our first quarter. Turning to page 8, I’ll make a few comments on our Water Management Platform. Water Management sales in the second quarter increased 7% from the prior year to $203 million.

Core sales growth was 6% in the quarter driven by market share gains in the majority of our served markets and increased alternative market sales in our non-residential construction end market.

Second quarter adjusted operating income was 15% year-over-year to $23 million and our adjusted operating income margin increased 80 basis points from the prior year 11.1%. Sequentially, our adjusted operating income margin improved 60 basis points from our first quarter.

Adjusted EBITDA was $32 million and adjusted EBITDA as a percentage of sales was in line with our expectations at 15.8% which is up 50 basis points sequentially from our first quarter of fiscal 2014. Moving to slide 9, I’ll touch on a few cash flow and liquidity highlights. We finished the quarter with $260 million of cash, $530 million of liquidity.

Total debt at the end of the quarter was $1,958 million and net debt was $1,752 million resulting in a net debt leverage ratio of 4.3 times. First, I’ll provide a little more color on the debt refinancing Todd discussed earlier in the call.

During the second quarter, we entered into an amended mentor senior secured credit facilities for our new seven year term loan in an agar amount of approximately $1,950 million with a maturity date of August 2020. Pricing under the new term loan is LIBOR, subject to 1% floor plus 3%.

The proceeds of the new term loan will be used to retire 100% of our $1.145 billion [indiscernible] 8.5 senior notes, retire 100% of our $786 million [indiscernible] term loan, fund the early tender premium on the senior notes and the accrued interest as well as transaction expenses.

In connection with this transaction, we incurred $129 million pre-tax loss in the debt extinguishment which is comprised of the tender premium as well as the write off of previously recorded deferred financing fees and transaction expenses.

Looking forward, this refinancing has meaningfully extended our debt maturity profile and strengthened our perspective free cash flow. At prevailing interest rates, we expect the realized annualized pretax cash interest savings were approximately $48 million. Upon completion of this transaction, our debt structure became primarily variable rate debt.

So subsequently with the end of our second quarter, we’ve entered in the $650 million of forward starting interest rates swaps to fix a portion of available rate debt. We’ll continue to actively monitor this exposure and may extend our hedging program at marketing conditions want to change.

Before I discuss some of the details on our outlook, I want to comment on our effective tax rate. As a result of the $129 million loss in debt extinguishment in the quarter, we recorded the tax benefit in the second quarter.

When you break down with pieces of our pretax loss, we have pretax income, if within the loss of debt extinguishment, $44 million which had a 35% effective tax rate as we anticipated going into the quarter. The pretax loss and debt extinguishment have a 37% effective tax rate benefit.

Some of the pieces result in the tax rate benefit of approximately 39%. As we discussed in our last call, we anticipate our full year effective tax rate excluding non-recurring items like the loss in debt extinguishment to be in the range of 31% to 33% and that range remains unchanged.

Our effective rate, excluding the loss and debt extinguishment in the first half of the fiscal year is 29% and was impacted by recognizing certain discrete tax benefits in the first quarter that drove the effective rate down.

Because these items are recognizing the first of our fiscal year, we'll have a tax rate of approximately 35% in our second half of the fiscal year resulting in a 31% to 33% rate for the full-year. Before we turn the call back to the operator to take any questions you may have, I’ll make a few final comments and our outlook.

Page 10 of the presentation reiterates the guidance Todd discussed earlier in the call and also highlights our assumptions for interest expense, depreciation or amortization, stock option and LIFO expense, our effective tax rate, capital expenditures, and fully diluted shares outstanding for fiscal 2014.

In addition, our guidance assumes do not incur any non-operating other income or expense as we do not forecast realized and unrealized gains or loss from foreign currency fluctuations, gains or loss on the disposal of assets or other items that are recorded in this P&L line item.

Our guidance excludes the impact of potential acquisitions and divestures, and future non-recurring items such as restructuring cost. With that, I’ll turn the call back over to the operator and open up to any questions you may have..

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Mig Dobre from Robert W. Baird. Please go ahead..

Good morning, guys, nice steady as you go quarter here. .

Thanks Mig, good morning..

First, a small housekeeping item.

On your acquisitions can you sort of remind us the revenue contribution from both Micro as well as the Australian acquisition?.

In the quarter, it's very amendable [ph], if you look at those acquisitions in total --.

Yes. Going forward..

There will annual basis approximately $27 million of revenue and approximately in round numbers I call it you know $0.04 or so of EPS on an annualized basis. .

Okay, that’s helpful and then I’m trying to clarify something on your outlook too.

Correct me if I’m wrong, but you’re core growth outlook has increased a little bit but it seems like your earnings guidance primarily reflect adjustments to interest costs, am I missing something or is that what's going on here?.

Mig I think the gains for the year is from last time it's up $0.20, $0.18 from the refinancing $0.02 from sort of the quarter – I think the core growth is up primarily due to our water business and so we’re really trading you know may be some lower aggregate margin water topline based on where we're at versus a may be slightly weaker industrial topline.

So the core growth is better you watch it through in terms of the mix and everything else, it's sort of you get to the same spot from the EPS standpoint..

That’s helpful and that kind of goes to my next question, which may be you can update this on your expectations by segments as to where you’re seeing core growth this year?.

I don’t think we’re going to give you any discrete guidance on the platform growth, but I think when you look at the water, it's clearly well above what we’re seeing in Process and Motion Control. I think when you look at Process and Motion Control for the first half I think it's roughly flat.

We think it gives incrementally a little bit better from here but still very low single-digits. I think when you look at our Water Management platform that’s going to -- through to the first half, it's sort of mid-to-high single digits and we think it'll sort of be there for the balance of the year as well..

Okay.

And you highlighted a book-to-bill of one in PMC and obviously that’s encouraging, any sort of end market commentary or any other color that you can provide us there?.

No, I mean I think it's again it's a customer to the diversity. I think we’re seeing a good growth in a number of end markets, energy, food and beverage as well as in aerospace. Obviously bulk material handling is a little bit weak, but we are seeing that sort of stabilize relative to the book-to-bill as well.

So in aggregate it's a combination of I think our diversity as well as the work we’re doing to sort of outrun the underlying market growth or market decline to the case may be. So you know it's really a lot of effort across a bunch of different vertical markets in different geographies. .

Great, and the last one before I jump back into cue, RBS a big portion of the story of Rexnord, I’m wondering if you can sort of give us a sense for what RBS has contributed thus far in a year and sort of any initiatives that you might have going on currently and how you think that’s going to play out for margins going forward?.

Sure and I think we referenced that a little bit in the call Mig, but we feel really good about the momentum we’re getting both in the water platform as well as the industrial platform with productivity and cost reduction – significant ongoing cost reductions and as I look forward you know I would say that you probably see us continue to accelerate those types of things for the rest of this year and into next year because we are looking at a – I thought a more muted growth from an industrial standpoint and I think that the other things we’re doing there around footprint, the things we’re doing around ongoing productivity, product design and just getting frankly more efficient in every aspect of our business including the back office I think you’re going to see that continue to accelerate really over the next 12 to 18 months.

And you’ll see a lot of that in Process and Motion Control as it relates to the RBS driven margin expansion and productivity, we’ve been working that really hard over the last three to four years inside of Zurn and we’re seeing that pay off not just in the margin, but on the growth you know we’re seeing high single digit growth in a market that is still declining you know in very low single digit but still declining.

So the upshot of that is that we’re done in terms of the commercial positioning and now it's just driving the productivity and service levels to the customers and as it related to VAG, I think you’ll see that accelerate that as well.

So we’re to say a specific thing would be you know probably disingenuous, it's a combination of really starting with the customer working all the way back through, engaging our people in the pursuit of that customer satisfaction and aligning goals, objectives and tools to sort of get it all done.

So we’re pretty excited about where we’re positioned as it relates to that and expect the lot more over the next 12 to 18 months. .

I appreciate it. Good luck in the quarter guys..

Thanks Mig..

Thanks Mig..

Thank you, our next question comes from Charlie Brady from BMO Capital Markets. Please go ahead..

Thanks, good morning guys..

Good morning, Charlie..

Good morning, Charlie..

On my voice we had a pretty big game here in Boston last night, so I’m trying to make it through here..

Nice win..

Thanks, and you just told on the margin profile, [indiscernible] I guess you kind of cover that $0.04 accretive to EPS on annual basis.

I think I worked the math on that, what's the – on the fixed rate again on the swap what's the rate on the fix?.

On the swap, so the – so it's going to be about 255 basis points and which has LIBOR floor built into. So if you play forward two years and LIBOR is above one, we’ll be paying effectively a fixed rate [indiscernible] while 455 basis points. .

Okay.

Can you comment on where you see the net debt of rate kind of going down like 4.3 right now, where you see that kind of going down by year end and kind of may be 12 months out where you get that down to?.

I think we’re going to see Charlie if you look at the guidance in terms of free cash flow and backing that EPS back through EBITDA, you sort of get this sort of four by the end of March may be at 3.9 and then if you fast forward 12 months past that you are sort in the mid-three, so call it 3.4 or 3.5 zip code and that is – that again assumes no acquisitions and divestures or anything else.

So we’re looking at you know being sort of mid-threes within 16, 17 months..

Great.

And one more, just can you – can you comment on how much the bulk material handling business was down in the quarter?.

Yeah, if we look at the – if we look at that sort of part of our business, it's probably down high single digits, low double digits, so sort of minus 9 to call it a 11. .

Great, thanks guys..

You bet..

Thank you, our next question is from Julian Mitchell from Credit Suisse, please go ahead..

Unidentified Analyst:.

Hey guys its Charlie for Julian.

How are you?.

Hey, Charlie..

Hi, Charlie..

Just had a question, you called out the incremental margins obviously in both segments in consolidated on the operating income line, just wondering if there is any color on why there wasn’t much leverages on the EBITDA margin line, just in the incremental there obviously seems like the margins came down in both segments and consolidated as well?.

It's frankly just lowered depreciation and amortization.

So we’re not get – it's very tough to leverage depreciation and amortizations, so when you look at the operating income, that’s sort of, I think the true things that you could influence in a relatively short period of time and so the operating income leverage is -- I think the relevant operating statistic and the absolute EBITDA margin is still very good..

Sure.

And then just on the M&A pipeline any color -- I mean you obviously talked about kind of full things -- anything that you guys particularly think looks attractive or just spaces are cheaper than others or just kind of maybe some color on kind of what you guys are seeing there?.

We do, Charlie. We see a number of things. As mark pointed out, you know we were able to do two deals in the quarter. You know, revenue run rates between $25 million and $30 million and EPS, $0.04 on an annualized basis, we’ll get probably half of that this year. So we like those size deals.

There are a number of things that look a lot like that in both of our platforms. So I would characterize the focus of our funnel and the priority of our funnel is to do things that we can stick into both of the existing platforms where we can gain significant synergies quickly both, revenue synergies, but more importantly cost synergies.

So you know, I think we’re buying at reasonable multiples with the ability to sort of leverage RBS and our existing platforms to plug these things in and make them far better businesses, when we own them, relative to standalone.

So we’re really, I’d say, picking the level of activity around those types of things and there are plenty to do in both platforms..

Sure, thanks..

Thank you. [Operator Instructions]. Our next question is from Andy Noorigian of Vertical Research. Please go ahead..

Hi, good morning, guys..

Good morning, Andy. .

Good morning, Andy..

I was wondering on Zurn with the market share gains you’re making in the progress on organic growth and then some of these investments starting to last, do you think as you look out through past this year the bar has kind of been raised and with the margin potentials in the business?.

Certainly. I think it’s a -- and again, I’ll separate water management and say specifically to Zurn. The amount of effort that we’ve had over the last two or three years to really remake the front end of the business as well as streamline the back end distribution and fulfillment model has been significant.

The other thing that I think you’ll appreciate which is the new construction recovery will aid in our margin performance as well. Right, so some of the products that we would sell in a new construction environment carry a better margin profile than some of the things we’re selling through the retrofits.

So I think a couple of things, just beyond going productivity and efficiency that we’ve laid in and if we get a favorable market environment that’s going to redo at a higher rate than historically it has. And secondly, when you turn on new construction in a more meaningful way, we’re going to get a second leg of benefit there.

So it’s really well positioned both for the current environment and increasingly well positioned for a non-res recovery..

So I think historically you’ve spoken to the water management segment is like a low 20s to high 20s incremental margin; potentially you think that can maybe step up to like to low 30s now if you get a recovery in construction?.

Not in total. I think we’re going to probably -- I think we’re going to wait and see what sort of recovery we get. But at this point, I think solidly that should be the expectation.

And if we get non-res recovering in that double digit range in a couple of years, I don’t think it’s -- I don’t think it’s not aligned to say that you would probably see it in the 30s.

But I think from a base case standpoint a gradual recovery starting off with maybe plus a few points and then maybe high single digits, I think we’re going to be in that mid-to-high 20s sort of incremental range. I do believe at some point in the next two or three years, you’re going to see a double digit recovery in non-res construction.

And at that point, I think it’s probable that you would see higher incremental, no question. But from a base case standpoint, we’re sort of looking at a gradual recovery over the next couple of years. But in the event and potentially, likely event that we do get a double digit sort of year; I think we could probably be there, yeah..

Fair enough. And then can you just comment on what you’re seeing in municipal markets, maybe in Europe, in the U.S.

kind of customer tone and trends there?.

I would characterize it as stable both in those geographies, North America and Europe. What we’re seeing, I think frankly just a lot of growth and activities in South American and the Middle East. The project size and pace in both of those geographies is really picking up. I think our funnels from a lead time and project outlook are really strong.

So the stability and the mature market is good. I think we’re happy with that. But then we’re really starting to see some of the growth markets of the Middle East and South America pick up meaningfully..

Great, thank you..

You bet..

Thank you. And we have no further questions at this time..

Great, thank you everyone for joining us this morning. We appreciate your interest in Rexnord and look forward to our next update when we announce our third quarter earnings in early next year. Thanks so much..

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..