Robert McCarthy - Vice President, Investor Relations Todd Alan Adams - President & CEO Mark Peterson - SVP & CFO.

Julian Mitchell - Credit Suisse Charles Brady - SunTrust Robinson Humphrey, Inc..

Good morning and welcome to the Rexnord Third Quarter Fiscal 2017 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; andRobert McCarthyy, Vice President of Investor Relations for Rexnord.

This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday, February 1. At this time, for opening remarks and introduction, I'll turn the call over toRobert McCarthyy..

Thank you, Pollard. 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 believe they're helpful to investors and contain reconciliations to GAAP data.

Consistent with prior quarters, we will speak to core growth, adjusted EBITDA, adjusted net income and adjusted earnings per share as we feel that 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 include adjustments to GAAP recording for the impact of the RHF 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 strategic execution, our overall core performance for the third quarter of our fiscal 2017 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 up the call for your questions. And with that, I'll turn the call over to Todd Adams, President and CEO of Rexnord..

Thanks, Robin. Good morning. Before I start I want to call your attention to some changes we will be making to our quarterly calls that we hope will provide everyone on the call with more information on the most critical aspects of our business.

Today and moving forward, you will hopefully notice some changes to the orientation of our formal comments, as well as appreciate some changes to the accompanying charts and appendices that we hope provide, better, more concise information on the platforms.

Our plan is also to provide quarterly updates on various topics like capital allocation, acquisition integration, significant project wins and new product launches, as well as some case studies on how we are leveraging RBS to drive significant improvements across all parts of our business. It has been a very busy quarter on a number of fronts.

We have got a lot to cover. So let us get right into it. Starting on Slide 3. You have all hopefully had a chance to read the release from last night and Mark will take you through the financials in just a minute. But overall our third quarter was a decent quarter for us.

Sales of $452 million were just a little light of where we had guided primarily due to translations stemming from a stronger dollar, and adjusted EPS of $0.25, was at the high-end of our guidance and that is inclusive of a penny of expense tied with the dividend from the mandatory convertible preferred offering we completed in early December.

We are also affirming our operating outlook for the year based on the order trends throughout the third quarter and through the first month of our Q4. Mark will summarize both the consolidated results and the performance of each platform as part of his comments.

In terms of really important things that happened during the quarter, at the top of the list is we are the nearing the completion of Phase 1 of our supply-chain optimization and footprint repositioning plan that started about 18 months ago.

I'm really pleased to report that we are absolutely on track to deliver $30 million of structural cost savings that we expect from the 20% reduction in square footage and the elimination of fixed cost that we embarked on just last fiscal year.

Our last major project milestone is well underway and consistent with what we communicated last quarter, we continue to target completion during our first quarter of our fiscal 2018, which is the June quarter of this calendar year.

As we have discussed on previous calls, this series of initiates will lower our fixed cost base and improve the flexibility of our cost structure, reduce our ongoing capital requirements, and improve our competitiveness over the long-term.

A substantial amount of the benefit comes from investing in and leveraging advanced machining capabilities and third-party suppliers as well as incorporating some automation into what had been more manual processes. We have also put some contingency capacity in McAllen, Texas to enable us to adapt to changes in trade policy should they arise.

In the near term, we expect to see significant impact on our margins as we complete the program and realize an approximately $25 million lift on year-over-year EBITDA in our upcoming fiscal ’18 with an incremental $5 million of savings as we fully annualize the benefits in the following year.

In terms of the specifics, we have crossed a significant number of key milestones, but we do have some critical steps remaining, and over the past 18 months our teams have done all the right things to overcome obstacles, mitigate risk, stay on schedule and not impact our customers.

We have got some of the larger, more critical physical moves of assembly lines beginning in mid-February. The benefit from this phased approach we have employed throughout the implementation of this multi-site plan has resulted in minimal disruption, and been grounded in having a robust knowledge transfer process.

Our associates on both ends of the transfers have been terrific, and we anticipate nothing different as we close out this final phase. Moving on just a bit.

Without question the past couple of years have been tough for our PMC platform, but underneath the progress our team has made on reducing the cyclicality of the platform through targeted share gain initiates and end market diversification has really started to get traction and will play a huge role as we see PMC returning to delivering core growth during the next year.

Specifically, our breakthrough has been to win a disproportionate share of new first fit applications. That is when they are new to us, OEM or any user with selecting its supplier partner for a new product or capital project and specifies Rexnord.

This year alone, we are on track to deliver over $30 million of orders associated with this initiative and expect that to continue to accelerate into next year and beyond.

By winning a greater share of these with our product breadth, innovation, quality, reliability and service levels we are expanding our installed base and ultimately positioning Rexnord for longer-term market share growth as the engineered components that we supply to OEMs and end-users were in use and are rebuilt and replaced several times over the life of the application.

We are going to continue to invest in this strategy going forward and extend our competitive advantage as we roll out families of connected products. There is more to come on that, but a little teaser on what you might hear next quarter.

On the end market diversification front, this year aerospace and consumer industries will end up being greater than 50% of total PMC sales and an even larger portion of profit.

We think having this sort of diversity of end markets, we are having most of the process industries we serve troughing where we continue to have a very high relative market share positions us well over the coming years.

Earlier this fiscal year, we closed the acquisition of Cambridge and added a product line that is woven wire mesh belting that serves a variety of food processing applications. To date the business has performed really well and I will speak to that progress in more detail in just a few moments.

To quickly touch on our Water Management platform, we welcomed Matt Stillings onboard as our New Group Executive early in the quarter. Matt comes to us from IDEX Corporation where he led multiple businesses, and spent his entire career in roles of increasing scope and responsibility. We are really excited to have Matt at Rexnord.

He is a great add to lead the deep and talented teams we have across the Water Management business. We also opened the Zurn global headquarters in Milwaukee during the quarter.

This 52,000 square foot [lead goal] building sits in a water technology business park that the City of Milwaukee and the State of Wisconsin established to bring together businesses and universities as well as start-ups and regulatory agencies to collaborate and solve some of the world’s water challenges.

By establishing ourselves in Milwaukee, we enabled the bringing together of a variety of functions; engineering, product management, sales and marketing that have been fragmented across the various Zurn sites to work together as one Zurn as well as to attract the next-generation of talent that wants to work in the water industry.

It is also home to a brand new customer experience center that allows us to bring together our customers; building owners, engineers, architects, contractors and wholesalers in a place where we can provide training and access to world-class tools that include 4D BIM models and simulators to help them build the most water and energy efficient buildings at the lowest total cost of ownership.

It will be particularly important for us to have asked we begin to aggressively roll out a number of new products and categories over the next year that will enhance our competitive advantage by adding to the industry-leading content that we have for commercial and institutional buildings.

And finally, with the successful execution of our offering of a Mandatory Convertible Preferred Stock offering in early December, we were able to refinance our outstanding debt with favorable terms while extending the maturity by three years out to 2023.

Supported by our strong free cash flow and our expanding diversification into more stable, consumer facing end market verticals we believe we have reduced the risk profile of our equity and enhanced the optionality we have to allocate capital, which should lead to less volatility in our operating results over time.

And last, but certainly not least, we finished our third quarter with the lowest financial leverage since we initially became public, finishing the third quarter with a net debt to leverage ratio of just 3.3x and within site of 2x to 2.5x, 3x range that we have been ultimately targeting to operate within.

Turning to Slide 4, I would like to bring you up to date on the acquisition we made in our first quarter of the Cambridge business. We acquired Cambridge in June of 2016 for around $210 million, adding the North American leader in the woven wire mesh belting industry with a strong track record of growth and innovation.

Cambridge’s largest served market is the food and beverage industry, which is firmly in line with our strategy to diversify our end market exposure into less cyclical and more stable growth markets. As we have articulated at times, probably harped on, the Rexnord business system is simply that way we work and the way we run our business.

It’s incredible power is particularly evident as we deploy it through an acquisition. The Cambridge acquisition is no different. Since the acquisition in June, we have already got the business onto our management teams, and completed dozens of continuous improvement events throughout the manufacturing operations as well as the back-office.

We have leveraged some of these wins in our essential supply-chain organization to drive an incremental $2 million of annual savings into the profit run rate of the business, and also completed a multi-year strategic plan that Cambridge is now deployed to, leveraging one of the core business processes embedded within RBS, our strategy deployment process.

When we announced the deal, we talked about it as having significant revenue synergies and that we felt confident in being able to deliver a double-digit return on invested capital within three years.

On the surface, we invested around $210 million for our business with about $80 million of revenue in evaluation on a multiple of EBITDA was just over 10x. We felt confident by leveraging RBS and the due diligence we were able to do with Cambridge as a proprietary target that we could successfully execute upon the opportunities to get us there.

Our work indicated solid brand recognition for Cambridge in Europe, and we have talked about the potential to grow Cambridge’s relatively small share of this large and highly fragmented market.

We launched the initial fulfillment program in Europe that leverages our existing commercial resources and infrastructure and allows us to serve the market with incredibly short lead times and take advantage of the customers that Cambridge previously couldn’t convert.

And while the base is still small, the rate of incoming orders from Europe since we acquired Cambridge has roughly doubled. The sales funnel is up three-fold, and we will be localizing portions of the manufacturing into an existing Rexnord facility by the end of our June quarter.

We have also seen very solid growth in North America, which was a result of having 68 targeted accounts ready to call on as soon as we closed with an unequalled offering of components for the food industry.

Our sales funnel in North America are currently in excess of $30 million and year-to-date in total Cambridge orders are up mid-teens over the prior year.

What I hope you will take away is that Cambridge is performing in line or actually a little better than our base acquisition case, leveraging RBS to prioritize, invest and execute in an already really good business to make it better is what we are doing, and it is repeatable, scalable and transferable.

Finally, what looked like a 10x EBITDA multiple in June of 2016, looks more like 9x today. In 12 to 18 months from now something that starts with a [7]. We had a lot of great work done by people across the organization and the great team at Cambridge and I really believe the best is yet to come.

Before I turn the call over to Mark please turn to Slide 5, I want to just highlight a simple RBS case study from the quarter.

These case studies are kept in our internal knowledge management system, where everyone in the company has access to a variety of continuous improvement activities and ideas, so as we solve challenges everyone, regardless of the location or function can learn from the work that has been done.

It enables our associates when they are faced with a challenge, to be able to collaborate and learn from peers by essentially taking site specific issues, and turning it into a virtual real life classroom. It also creates a way to rapidly deploy really good ideas across the organization.

The background of this example is that within PMC we believe – that the background on this example is that within PMC we have what we believe is by far the most comprehensive coupling product line portfolio in the industry with the final piece coming a couple of years ago through the acquisition of the high-speed coupling business in India called Euroflex.

As we look to the opportunities to leverage our existing strengths and brands globally we needed to figure out how to drastically improve our lead times and cost positions from some of our North American brands to take advantage of the overall portfolio breadth with the same competitive advantages we have in North America, but do it in India and the Middle East.

We already did $2 million of business in the region based on the strong brand and performance of the product. The price was a $10 million market share opportunity for this particular product. The challenge was that we had 8 to 15 week lead times and a 40% landed cost disadvantage.

In this event, our team in Hyderabad, India, spent a week working with a cross functional team of some RBS resources and was able to accomplish tremendous results. One, lead times went from roughly 12 weeks to three days.

Second, we are now able to price at the market with superior features and benefits, and with multiple customers having put these products through lifecycle testing, we expect significant market share gains over the coming year.

And finally, our facility at Hyderabad has the capacity to support the entire value stream from engineering support to production and customer care. So we have been able to free up the needed capacity in Auburn, Alabama, that had been used to support this incremental volume.

We often get asked, what inning are you in with the implementation of RBS or how is it that you guys are still finding some of these things to do. What I hope you take away from today and going forward is I don't expect [Indiscernible]. What seems great today will be totally unacceptable in the future as we continuously raise our own expectations.

And the beauty of that will be to uncover another opportunity for us to get better. So with that I will turn it over to Mark..

Thanks, Todd. Please turn to Slide number 6. Our third quarter fiscal ’17 financial results were broadly in line with our guidance, although foreign currency translation was a slightly larger drag than expected.

Adjusted earnings per share was $0.25, reflecting solid internal execution as our adjusted EBITDA was also consistent with our guidance despite the minor shortfall in total reported sales growth.

Our tax rate was slightly lower than we have projected which added a penny to the EPS and offset the one penny impact of accounting for the preferred stock dividend in the quarter. Our outlook on an operational basis has not changed.

When we were revising our guidance for fiscal ’17 adjusted earnings-per-share to reflect the capital market transactions we executed during the quarter. Our revised range of $1.27 to $1.33 reflects the $0.05 net impact of three factors.

First the convertible preferred offering, second the $195 million of debt that we repaid with half of the offering proceeds, and third, the reduced coupon we secured with our successful refinancing with our outstanding debt to august 2023. Turning to Slide 7, we summarize our consolidated results in the quarter.

Let us move to Slide 8, and discuss the first of two operating platforms, Process & Motion Control. Total sales increased 2% to PMC as a 6% core sales decrease was more than offset by the solid quarter turn in by Cambridge as our diversification in a more consumer facing end markets helped moderate the headwind in process industry end markets.

Global aftermarket revenue declined slightly against a tougher comparison, but distributor sell through continued its generally stable trend in the quarter. In the bottom right corner of the slide, you can see that our end market outlook has not changed since last quarter.

We believe that we can continue to generate growth in our consumer-facing and aerospace end markets, and we believe we have probably seen the worst in our process industry end markets given several indicators.

First, commodity price levels have broadly improved and the rate of CapEx declines appear likely to moderate in some key process industry verticals, particularly money and energy during the coming year. Second, our [focus] is delivering results and trending upwards.

Third, and as we have been pointing to since last summer, the retail sell through of our industrial distribution partners, which is a proxy for MRO-driven demand and a key indicator of what is happening in the short cycle part of our business has generally stabilized, and channel inventories at the end of December actually looked a little wide when compared with where we think they should be.

We also built some backlog in the quarter and we expect to finish the year with a book-to-bill above 1. PMC’s EBITDA and margins were in line with our expectations, and that reflected ongoing investment spending and disciplined expense management.

As Todd discussed, we used the Rexnord business system to drive continuous improvement in our internal processes and productivity, which enable us to sustain the important investments that we are making in new products, processes and people to improve our competitiveness and drive stronger core growth.

PMC’s margins are expected to expand significantly next year as we wrap up our supply chain optimization and footprint repositioning initiatives.

As we turn to our Water Management platform summarized on Slide 9, please recall that we are excluding the financial impact of the Rodney Hunt Fontaine non-strategic product line exit in the calculations of core growth and adjusted earnings metrics in order to focus on our core operating results.

Our Water Management platform experienced a 5% sales decline in our third quarter, including a 4% core sales decline that reflects the longer infrastructure project deferrals, particularly in the Middle East that we discussed last quarter.

Near term, our outlook for our key end markets, which is summarized in the table on the slide, remains unchanged from last quarter.

Sales of our commercial grade plumbing products were generally stable year-over-year in the third quarter, reflecting the somewhat slower overall US market growth we have seen develop over the last couple of quarters, and the choppy nonresidential construction starts to [abate] from late 2015 as read through variable equity levels by region.

But as we look forward, we continue to be encouraged by the strength of contractor backlogs, the development of our project funnels, and the improvement in nonresidential construction starts activity we saw over the second half of 2016.

We are also excited about our pipeline of new products that are and will be coming to market, and our preliminary view of fiscal ’18 includes a re-acceleration in the North American non-residential construction market. This year, we continue to project that Water Management will finish the year roughly flat on a core growth basis.

Turning to profitability, EBITDA margin was in line with our expectations as the decremental margin was approximately 32% on the seasonal decline in sales in the third quarter from our second quarter.

On a year-over-year basis, the margin decline reflects the difficult comparison due to the timing of certain expenses, variable sales mix across the platform in the prior year’s third quarter as well as the heavier investment in this year’s third quarter on the innovation and market expansion initiates that we have been discussing throughout this fiscal year.

We expect margin to expand in our fourth quarter and we continue to see Water Management as a 20% plus EBITDA margin platform longer-term.

Moving on to slide 10, you can see that our financial leverage as measured by our net debt leverage ratio has declined by a full turn at the end of last quarter, a specific objective of our third quarter convertible preferred offering, given normal seasonal patterns we expect our net debt leverage ratio will be approximately 3.1x at the end of March.

As seen at the bottom of this slide, our total outstanding debt balance has declined by approximately $300 million since the beginning of our fiscal year. As discussed earlier, we successfully refinanced the remaining $1.6 billion of term debt in December [which is in maturity] 2023 and reducing the [$2] by 25 basis points.

Given that we expect our free cash flow to expand meaningfully in fiscal 2018, we complete our scope initiative and given our strong role of liquidity and cash flow, we believe we have ample resources to continue to execute our built on acquisition strategy and maintaining our leverage ratio in a 3x of that total.

Longer term, as Todd mentioned earlier, in terms of operate the company with net leverage ratio in the range of 2.5x to 3x. Next I'll make a few comments on restructuring and cost reduction initiatives. First, the supply chain optimization and footprint repositioning program is expected to impact our fiscal 2017 results as follows.

We expect to incur approximately $12 million in net costs that run towards adjusted operating results which is unchanged 90 days ago. We expect to report restructuring expenses of $20 million to $22 million, which are primarily made up of severance costs and are excluded from our adjusted operating results.

The $4 million increase in our prior estimate is primarily due to our non-cash pension adjustments related to our non-facility closure. Also, excluded from our guidance for adjusted EPS is approximately $9 million of accelerated depreciation in the year.

Our forecast for capital expenditures in fiscal 2017 related to this program is unchanged and is included in our CapEx outlook of approximately 3% of sales. So overall these estimates are essentially the same from those we discussed a quarter ago.

In addition to this program, we anticipate in recurring restructuring cost of approximately $11 million to $12 million related to other cost reduction initiatives during the year, which is up about $3 million from last quarter's estimate.

The change is primarily due to non-cash charge related to additional restructuring actions that we're executing in our fourth quarter. Next, I'd like to comment on our effective tax rate. Our effective tax rate will fluctuate by quarter given varying levels of pre-tax income as well as the timing of other planning initiatives.

Our projected effective tax rate for the fiscal year is unchanged that is approximately 25%. We anticipate our fourth quarter adjusted net income on corporate and effective tax rate of approximately 35%. Before we open the call up for questions, I would like to call your attention to three more slides and an appendix to revise earnings presentation.

First, we've included the other assumptions and corporate in our guidance with fiscal 2017 in a separate slide as you would come to expect.

I need to remind you that our guidance assumes to be non-recurring and non-operating other income or expense, so we do not forecast realized and unrealized gains or losses from foreign currency fluctuations, gains or losses on the disposal of assets or other items that are recorded in this P&L line item.

Our guidance also excludes the impact of potential acquisitions and divestitures and future nonrecurring items such as restructuring costs. Second, and for your convenience, we have included the table that provided the after-tax impact of each individual adjustment we have made in our calculated or calculation of adjustment in net income.

And 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's applicable.

Our diluted earnings per share will be calculated with the If-Converted Method only one of this dilutive to our diluted earnings per share. After first calculating our EPS by simply deducting the preferred dividend from our net income and dividing by average diluted shares outstanding, just as we've have done in this quarter.

When calculated an EPS under the If-Converting method, you will assume the preferred stock is then converted to common shares which increased the total shares outstanding using the calculated EPS not limiting to dividends on the preferred shares.

The incremental shares added with the If converted calculation will depend on whether the average stock [Indiscernible] this quarter, as illustrated in the table on the slide one of those between $20.99 and $25.19.

Please note that assuming a given level of net income as our weighted average stock price during the period rises, the potential dilution from using the If converted method declines and the traditional method of calculating our EPS based on net income that is our preferred dividend becomes more likely.

Lastly, the appendix to our revise presentation now includes the reconciliation table with adjusted EBITDA, adjusted earnings per share that are included in our earnings release each quarter. With that, we'll open the call up for your questions..

Thank you. [Operator Instructions] Our first question comes from Julian Mitchell from Credit Suisse, please go ahead..

Hi, good morning. Thanks for the extra detail. On PMC first of all, I just wanted a little bit more background of what you're seeing there, so I guess the macro indicator sort of seen better, most companies sound better in the last 10 days. The organic sales drop was obviously, it's deeper than in the prior two quarters.

So may be given update of how demand in PMC has moved in recent months, feasibility looks a little bit higher, so I just wonder if you are willing to have any view on when sales may turn positive..

Hi, Julian. Thanks. Couple things if we look at the quarterly growth this quarter compared the lastly sort of expected that based upon where the backlog came into the quarter. So I don't think we were all surprise by the core growth in the quarter.

I would tell you that I would agree with your statement that [Indiscernible] is much better over the past, call it 60 days than the first part of the quarter. I would tell you that our orders throughout the quarter trended probably in line to may be a little bit ahead of where we had expected, we've built some backlog.

We are to the first month of our fourth quarter and had a solid January, so I hope that you want to call it inflexion and I don't think you want to call to prognosticate what's going forward, but the clear improvement that we've seen in the past call it 60 days or so makes us a little bit more confident about our Q4, I think we're optimistic that as we head into our fiscal ‘18 which will start on April 01, we will post core growth during the year whether that’s for the first quarter of the year, I don't know at this point, but I think we are confident we are going to see core growth return to PMC and like the post core growth for the entire year, but that's sort of what we're seeing..

Thanks. That’s very clear. And then secondly on Water Management, as you said that it sounds like there were lots of project deferrals still going on particularly in the Middle East.

I just wondered how the deferrals are one thing, but I guess when you are thinking about new orders and kind of the backlog movement, how was that being trending in different regions in the past few months?.

Maybe just to clarify Julian again, I think we had anticipated the growth performance in the quarter primarily based on project shipments from the prior year and so I would say that there is no new deferrals in the water infrastructure part of the platform in any way, shape or form.

Moving to the order trends, the orders and the backlog in that part of the business is going substantial. And some of that is obviously growing, because we haven't shipped some of these orders this year, but if I just look at the underlying order growth in the business, it's very solid.

We will build substantial backlog this year for our water infrastructure business and the order rates have been very good and we think that we really did in Q4 as well. So I would say no new deferrals, no new news, level of project activity is high, it's high but with smaller more projects than these larger mega projects.

And so I would say a backlog is probably in a good in shape or better than it has ever been in the last four to five years..

That’s very helpful. Thank you..

Your next question comes from [indiscernible] please go ahead..

Yes. Good morning gentlemen. Maybe I will start with PMC as well. I appreciated all the audition on color there and your comment that better than 50% of this segment now is driven by aerospace and consumer and I suppose that perhaps you have better visibility on those two portions of the market.

How do you think about growth in these two areas as you look at calendar 2017?.

Well again, both are positive this year and we expect both to be positive next year. And I think make the one thing that you point out in aerospace we clearly have I think really good visibility based on the backlog of airplane orders as well as our content onward. So you will see continued good growth there on the consumer side of things.

This is something we have really got after the last 12 to 18 months and so this year was a lot of building the capability to go out and do it as well as integrating the acquisition right. I think that is going to accelerate into next year.

So I would say both firm with positive core growth heading into next year and the process side again I think we are seeing MRO stabled as well as and we think we see the drop in some of these process industries to be honest with you and the book of bill comes to that we expect in our fourth quarter in order to be the first backlog build that part of the business and probably through years..

If thank you Todd.

I mean if you look back at your process exposure is there any way to sort of frame the last two to three years in terms of the organic the client that you have seen in that business to get a sense for kind of peak to trough movement here?.

If you I will give you a rough range, I think that if you look when that probably our fiscal 13 or fiscal 14, call it March of 2014 when that was a lot of that had to do with backlog run out and everything else. So the order pick was probably March of 13.

Since that time, that is down probably close to 50% and so as we have seen that cycle down to build the order they come into backlog you ship against that but your book to bill is probably the leading indicator what's going to happen over the next couple of years.

In our case what we are saying is this year we think that book to bill and that part of the business is actually positive. So who knows but this into the cycle the down cycle it feels more like an inflation point than a head trade, and I think it also has a lot to do with what we are doing on our own.

So some of these new first fit wins are also going back in the some of these process industries where they are still spending going on, there is still opportunity in winning some of those. So it's a combination of we think a little bit of a traffic as well as some self help.

So I think we are probably more optimistic about that part of the business than we have been in a while. It's got to read out and I don't think it's going to explode back. I think it's going to move slowly back but I think positive nonetheless..

Okay. Thank you. I will jump back in queue..

[Operator Instruction] And our next question comes from Charles Brady from SunTrust Robinson Humphrey, Inc. please go ahead..

Hi guys this is actually Patrick Lou standing in for Charlie. Thanks for taking my question.

In your comments about the first fit win initiative, can you remind us, can you maybe talk about the timeline of that and sort of what end markets are you looking and are you seeing or expecting a lift in expenses related to that?.

No. I will start with the second question first. So this is essentially we started with sales efficiency break through probably about 18 months ago and that was to observe some of the work that was being done by our current field sellers and use automation and technology sort of drive some of that inside and reduce the cost and free up selling time.

With that available selling time we pointed those resources towards again new to lots OEMs for end users that we felt like we could go out and take competitors.

So the primary I would say end markets would be our process industries as well as consumer probably overweight consumer because that's got just that's slightly a better secular growth profile but at the same time some wins across the process industries. So that's really the timeline and the success we had in a relative short period of time..

Got it. And turning over to water management. Can you possibly walk us for us in terms of the margin decline relative to sales and mix and also I guess you talked about more expenses on the market expansion product innovation portion of it.

And can you give us a little bit more detail on what those maybe?.

Yes, this is Mark, I can walk you through it.

So if you look at the this overall on the sales were down $9 million the EBITDA down in the quarter so a little of course half of that was just coming from the overall sales decline in the mix we have last year I mean I noted in my comments we had – down the business and in our non res side of the business.

So the mix of the big piece of that you look at overall roughly the balance the next large piece is coming from just an expend time we had in the last year's quarter.

Now if you look at last year's that margin of the quarter was not in the quarter and then last piece implementing that we had in the business of this year tie to our mission around primarily new product developments and lot of that is just going to rollout now really how bigger piece of the puzzle [indiscernible] spend because we have all the year this quarter.

If you look at the quarter is really where we are expecting to land sequentially from our Q2 to Q3 until the sale decline margin about 32% this is where we expect. The year-over-year as we really more of what was last year's quarter to what's in this year's quarter..

Great and could you --.

We have been talking about the detailed -- a lot more discussion around new product, [technical difficulty] because it's crucial and vital for their revenue earning.

An OEM may not have the same view, they want the equipment to work well throughout a period of time, but ultimately they're not there as the end user and you open that revenue, the revenue generating application. So, they may opt a little bit more towards the mid-tier.

In either scenario, I think as you all know, the margin that we generate on each the premium, the more premium brand product or some of the mid-tier offerings we have is roughly the same. So, our ability to compete with these OEMs with having a mid-tier product is far better than it's ever been by the introduction of it.

But from a pricing standpoint, I would say still good margins are consistent with the feed average..

Okay, that's great. So, as these more of these first they come through in the process orders, sales come back, the margins incremental margins performance should be very consistent with the historical..

Yes. I mean, that’s our business. Right. We get in, we solve the problem for a customer and application, we hopefully do a really good job with servicing over the life cycle of the equipment and when it openly wears out, it gets placed like a really high percentage of the time.

And that's been the foundation of the business, we are investing heavily in it as well as diversifying the end-market exposure we have. So, you get it, that's the business..

Okay, great. And that kind of leads me to my next question. So, and please come and correct me if I'm wrong, but my understanding of part of the SCOFR's plan, part of it is like moving some other footprints in Mexico.

But I guess like part of the rationale is to have the lower more efficient cost base to support the mid-tier products so that you can sustain a similar kind of margins. But if you look at all these kind of potential headwinds in terms of carry offs or tax policy.

How does that change in the economics of the mid-tier products longer term?.

Karen, it's a really good question. I would tell you that we feel, first of all, we don’t have any privilege information what's going to transpire with carry offs and tax policy. But I would tell you that a portion of that, the portion of the rationale was that, not the entire rationale for the move was that.

And so, we feel very comfortable with having to retain a very a global footprint to support customers in whatever region they may be in, obviously to the extent there are changes to that.

We'll obviously have to review it, but at this point, nothing we see would lead us to on a path of thinking that the benefit or the decision that we made was going to at least be something that we would regret.

But to be determined obviously bending on what happened, but I think we're very much a US manufacturer, but we have global customers and sort of global markets. So, we sort of have to manufacture in a lot of different places to be an effective participant in the market place. So, that's really part of the rationale.

That's some, hopefully that answers your question..

Yes, definitely. And then maybe along similar lines, but its switching gear to there in a little bit. My understanding is that business very much around design and assembly. So, you source, I'm assuming you source a lot of components.

Are you seeing any kind of price cost changes given that we're seeing some raw materials inflation in the past few months? So, I guess first part is on price cost on these components. And then in terms of the sourcing, can you give us a sense of how much of those is the kind of domestically sourced, how much would be sort of imported components.

So, is there is like come changes in the tax policy, some of that be getting? That's it..

Yes. I would answer your first question first Karen. So, on the place cost side of things, I don’t think we're seeing anything adverse. Right, our ability to pass on some of that material cost increase through to the end market is very much intact and to be honest with the way we go about our sourcing program, we sort of feather in purchases.

So, we have the ability to sort of I would say almost match any significant increases in cost on the price line. And also, productivity in our end, is the -- as the second question I think was on --.

Sourcing..

Sourcing. You're right, we source product from all over the world. We have in most cases at least two if not three sources for almost everything we have and so, depending on again what transpires, we'll obviously be flexible.

But this is something we've been doing for a really long time and I think we're confident in our ability to adapt to the changes in the market. And we'll have to wait and see but I think we're actually geared up and then well capable of handling whatever comes down the pipe I think..

Okay. So, if anything happens on the tax fronts, I mean, there are enough alternatives kind of domestically that you can switch to. If you have the --..

We certainly believe so Karen, yes..

Okay, got it. Thank you, very much..

Yes..

And we have no further questions at this time. I will now turn the call toRobert McCarthyy for closing comments..

Thanks everybody for joining us on the call today. As always, we appreciate your interest in Rexnord, and we look forward to providing further updates when we announce our fiscal fourth quarter of fiscal year 2017 and provide our initial financial guidance for fiscal 2018 in mid-May. Take care..

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