Rob McCarthy - Vice President of Investor Relations Todd Adams - President and Chief Executive Officer Mark Peterson - Senior Vice President and Chief Financial Officer.

Charles Brady - SunTrust Jeffrey Hammond - KeyBanc Capital Markets Joseph O'Dea - Vertical Research Partners Mircea Dobre - Robert W. Baird & Co. Ronald Weiss - Credit Suisse.

Good morning, and welcome to the Rexnord First 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, August 2. 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 and adjusted earnings per share as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data, and we urge you to review the GAAP information in our earnings release and 10-Q.

Please note that 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 first 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 from our financial statements and our cash flow. Afterwards, we'll 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 saw in our release last night, we had a solid start to our fiscal '18, as the positive momentum we saw in our fourth quarter accelerated, positioning us well for the second quarter and the balance of the year.

Both our core growth and order rates accelerated during the quarter and our overall backlog grew by $25 million from the end of March. We're pleased with the solid year-over-year growth in our EBITDA and are confident it can be sustained as we go through the year.

We're encouraged by the breadth of the pickup in demand that we're seeing across almost every vertical and excited about the success we're having with our strategic initiatives around core growth, cost reduction and finally, our digital enterprise strategy DiRXN.

DiRXN takes many of our competitive advantages to a new level and is something we think is a real game changer for our customers and channel partners, solving so many of the challenges the market faces in a much smarter way.

First quarter sales of $488 million included core growth of 3% and were at the higher end of our expectations for the quarter and reflected the acceleration of core growth in our PMC platform to 5%. Our overall operational execution was strong as our adjusted EBITDA increased 9% year-over-year to $86 million.

Consolidated EBITDA margin expanded by 60 basis points, while our incremental margin on core growth exceeded 40%. Adjusted EPS was $0.27 for the quarter as taxes came in a little higher than we had projected. Mark will review both the consolidated results and the performance of each platform as part of his comments a little later in the call.

Turning to Slide 3. The primary strategic development that I'd like to highlight this morning is the formal launch of our DiRXN digital platform at the end of May.

DiRXN, which represents our digital enterprise strategy, is something we've been working really hard at over the past several years to combine and digitize our unrivaled application expertise across the broadest product portfolio in the industry and connect all of that into a market-facing delivery system, including ERP, CRM and e-commerce capabilities that enable our customers and channel partners to seamlessly search, design, select, buy, install, operate, maintain, monitor and replace all of our products.

In other words, a true industrial Internet-of-Things platform. In addition, we've launched our first couple series of connected products, and the benefits our customers are seeing in their ability to improve their overall equipment efficiency, reliability and uptime were just outstanding.

At the end of the day, we're making our customers and channel partners more productive by saving them time and money, and that should translate into better growth for us and ultimately, greater value creation for our shareholders. Turning to our operating platforms.

Our PMC platform had a strong quarter with order and revenue growth across most end-market verticals, including the first meaningful improvements we've seen in some of our longest challenged process industry end markets like mining.

We built additional backlog during the quarter as we saw relatively stronger industrial order rates that sustained through the quarter.

Our first-fit strategy has developed momentum and continued to contribute to our core growth in the quarter, with our success in winning new applications tracking in line with our plans for the quarter of this critical driver of installed base and market share growth.

Cambridge continues to perform well and our focus on building our share in food processing applications continues to gain traction. PMC responded very - with a very strong operational execution in the quarter and converted on improving core sales growth while delivering a 35% incremental margin and 140 basis points of margin expansion.

We expect the incremental in PMC to get stronger in the second half of the year as the full run rate of the scope of our actions reads through and the final frictional transaction - transition costs go away. Results in our Water Management platform were sorted exactly as we had planned and reflected this year's most difficult quarterly comparison.

The flat organic growth resulted from the impact of the particularly strong water infrastructure project shipments a year ago that masked what was otherwise solid organic growth in the Zurn business during the first quarter.

Adjusted EBITDA margin at 18.6% tracked to what we had expected for the quarter, and the increased order backlog and continued momentum in our nonresidential construction end markets, coupled with the benefits of some of our SCOFR actions and the productivity we're driving with RBS, give us visibility to positive core sales and margin comparisons over the rest of the year.

Looking at our cash flow. We got off to a strong start to the year with $30 million of free cash flow in the quarter and our net debt-to-EBITDA ratio declined to 3x at June 30.

We remain optimistic about our potential for small bolt-on acquisitions this year, but our base case, which obviously doesn't include any acquisitions, gets us to a leverage profile in the mid-2x area by the end of our fiscal year.

So to close out my comments on the quarter, I'd characterize our first quarter as down the middle of what we expected, with the overall demand environment and the benefits of our strategic actions probably a little ahead of where we thought we'd be at the start of fiscal year.

At this point, it's probably fair to characterize the lower end of our earnings guidance to be incrementally more conservative than it was just a couple of months ago. But as I stated last quarter, we've intentionally taken a cautious approach to forecasting and we're not going to abandon that methodology after just one quarter.

We've got 9 months to go in our fiscal year, and given that our Q2 is so far also tracking well with our expectations, I suspect we'll revisit the full year outlook after we finish the first half of our fiscal year.

In the meantime, we think communicating and knowing that we're seeing solid demand patterns across most of our businesses, coupled with the benefits of our strategic initiatives around growth and cost reduction reading through, creates a nice balance to our currently unchanged external guidance that was established and intended to provide an outlook that would be very durable through a variety of scenarios and through March of 2018.

Before I turn the call over to Mark, please turn to Slide 4. Some of you may have seen this graphic previously, which we use to depict how we interact with the life cycle of a customer's application.

Our objective is to create a digital productivity platform that combines innovative industrial Internet of Things and e-commerce technologies that digitally connect customers to the products, tools and services that can enable them to optimize their productivity.

While this holistic approach represents a major step forward, the foundation is the application expertise and the established set of related competitive advantages that we've been creating and enhancing for years.

We've leveraged best-in-class solutions across the business and technology sector, and we're integrating them into a seamless digital environment that will ultimately help us better monetize the value we provide to end users of our products, the value that has made Rexnord and our other flagship brands recognized for their reliability and superior performance.

The journey that brought us to the launch of DiRXN began with the investments we made in common IT platforms, in each platform that have been executed over the past several years, and the subsequent integration with the common CRM platform that have formed the foundation of our recently introduced e-commerce solution for our PMC platform.

This capability addresses the first 4 elements of the customer's life cycle and our opportunities to add value to the customer's process through search, design, product selection and procurement with enhanced capability that can simplify yet improve the process of finding the best product or service solution for a specific application, determine price and availability and place an order without having to navigate across multiple platforms, and make it available on a range of mobile devices and control systems that positions us to meet the customers' needs in an increasingly familiar and an increasingly expected digital environment.

While the system incorporates the ability to determine that a specific application may require an engineered-to-order component and provides the gateway to secure the individualized and personal support that our customers have counted on for decades, we expect 100% of our standard and 100% of our configurable Power Transmission product sales to be able to be sourced and transacted through a self-directed model by the end of this fiscal year.

Customers will be able to, through this platform, request drawings and specifications for engineered-to-order components in more than 90% of cases, leaving only a small fraction of customer requirements that will require traditional direct engineering support.

We believe that establishing a leadership position with these capabilities has an important first-mover advantage that gives Rexnord well positioned - that makes Rexnord well positioned to continue to capture market share. We have provided digital guides and video support for the next step, installation, for several years.

But these are now being integrated into our single point of access for the customer, which brings us to the critical life cycle stages of operating, maintaining and replacing.

Here, the breadth of our product portfolio, which includes virtually every core category of Power Transmission component that is downstream from the motor, engine or turbine that powers the customer's process or system, is a distinct advantage.

We sell system uptime and we can offer improved uptime at a reduced cost by connecting our digitally enabled components to a customer's process control architecture to provide real-time, critical performance data and more importantly, provide the appropriate context in which to evaluate and act on that data.

Such as, is a change in operating condition leading to suboptimal component performance that will degrade the system efficiency or shorten the life of a component? Could it signal an impending system breakdown? Should I dispatch a maintenance technician or order a replacement? Our end users are very interested in this capability and some are already rapidly adopting and leveraging these capabilities.

On the slide, you can see an image of our flagship V-Class Gear Drive outfitted with sensors to collect relevant operating data in an edge device that enables wireless connection to a customer's process control network. We put our first prototypes into the field with customers last year.

We made our first commercial shipments during our first quarter and the customer reception has been very positive. We will be adding to this capability of additional product lines in coming quarters, and we're excited about the incremental growth potential represented by the intersection of our DiRXN strategy with our first-fit strategy.

The price premium for this connectivity is relatively modest and the payback on the incremental investment is very fast, generally, well under 1 year. More importantly, we will become more actively engaged with our end users and our installed base.

Today, we only know where and how a fraction of our components in the field are being used, and that will change as we develop a stronger relationship with our end users and gain the ability to drive more productive marketing and selling strategies.

When it comes to maintaining and replacing a component, we're leveraging our digital platform with another well-established technology that will make it easier for customers to identify exactly what model component is included in their system, when and from whom it was purchased and what resources are available to help the customer determine the appropriate replacement component.

I'm talking about QR codes attached to every component we sell, first available on our new PT select mid-tier line of bearing products and rapidly extending to all of our other product transition product lines. We expect to be tagging roughly 50% of our PT production volume by this year's fourth quarter across multiple product lines.

And by integrating this capability with an e-commerce platform, we close the loop on the entire component life cycle.

You might picture an end user's maintenance technician in the field using a cell phone or other mobile device to specifically identify an individual component that needs to be replaced, to check price and availability and to enter a replacement order, all within minutes and without returning to an office or requiring intervention of any other person.

We're finding that end users are very interested in the potential to check all their components in the field, independent of make, model or vintage, and we're developing the capability to help them do that.

And the digital architecture we've created is readily transferable to our Water Management platform, where Zurn has historically had a more complete package of web tools that can likewise be integrated into a comprehensive e-commerce platform that leverages the digital architecture we've created within PMC.

Zurn will soon begin enabling - Zurn will soon be enabling its products by tagging relevant product categories with QR codes, and we expect to have the product families that generate over 80% of high-volume replacement parts demand covered by the end of the year.

In tandem with that, we plan to have our first connected plumbing products in customer field tests during the second half of this fiscal year. Here, the opportunities are essentially the same.

More ways to provide value to our customers and end users with more ways to be compensated for that value, stronger relationships with end users plus more profitable growth and greater opportunities for share capture. In other words, a stronger position from which to compete in a rapidly changing world.

We intend to maintain a proactive orientation that embraces change and the opportunities it creates for our customers and channel partners. Simply put, in an environment where traditional business methods and models are being threatened and becoming obsolete, we plan to be a trusted disruptor and to benefit from rapid change.

This isn't easy, but we'll execute this ambitious program within the Rexnord Business System, which provides the discipline and focus to successfully execute complex strategic programs while tightly controlling investment and minimizing execution risk.

Just like the supply chain optimization and footprint repositioning we launched a couple of years ago. We've been working to get to this point for several years and we are looking forward to the shareholder value we're creating and will create being reflected in our share price. With that, I'll turn it over to Mark..

Thanks, Todd. Please turn to Slide 5. On a consolidated basis, our first quarter of fiscal '18 financial results were broadly in line with our expectations. Our core sales increased 3%, our adjusted EBITDA of $86 million increased by 9% on a year-over-year basis and our adjusted earnings per share was $0.27.

As Todd indicated earlier, our outlook for fiscal '18 is unchanged. It incorporates low single-digit core growth and adjusted EBITDA in a range of $365 million to $385 million. The range implies year-over-year growth in adjusted EBITDA of 5% to 11% from the comparable $347 million we delivered in our fiscal 2017.

In our second quarter, our year-over-year core growth comparisons will be impacted by 2 fewer shipping days in the U.S., but we expect the year-over-year EBITDA margin comparison to be similar to the 60 basis point expansion we delivered in our first quarter.

Slide 6 summarizes our consolidated results in the quarter, but let's move on to Slide 7 and discuss the first of our 2 operating platforms, Process & Motion Control. Total sales increased 9% at PMC as the core sales comparison increased to 5% year-over-year and Cambridge contributed another 5%.

Recall that Cambridge was acquired in June of 2016 and becomes a full contributor to our core growth in the current September quarter, our second quarter. Currency translation was a 1% offset.

PMC saw growth in the majority of its end markets during the quarter, including several of the process industry end markets that have been headwinds over recent quarters or, in certain cases like mining, even longer. We also continue to benefit from sustained core growth in PMC's consumer discrete and aerospace end markets.

Global aftermarket revenue increased low single digits on a core basis, driven primarily by strength in Europe and Asia. Distributor sell-through in North America continued its generally stable trend in the quarter, and year-over-year comparisons generally get easier as we move through our second quarter of fiscal '18.

In the bottom right corner of the slide, you can see the end market assumptions that support the outlook for low single-digit core sales growth at 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 first quarter results seem to validate our view that demand has bottomed out in our process industry end markets.

With that view, we are incorporating a modestly more positive outlook for overall growth in our served process industry end markets. However, as Todd stated, we believe there are good reasons to maintain a cautious approach with our guidance.

At the same time, our confidence is improving as the lower end of our unchanged guidance has become less likely.

PMC's EBITDA increased 17% from the prior year first quarter and margins are slightly ahead of our expectations, as margins benefited from solid operational execution and volume growth that together offset the impact of our ongoing investment spending, which included the final meaningful earnings impact from nonrecurring expenses associated with our supply chain optimization and footprint repositioning initiatives.

I'd also like to highlight that the stronger results we've seen from PMC over the last 2 quarters has been achieved including the final and also the largest and most complex plant move in our supply chain optimization and footprint repositioning initiative, involving 3 locations and a high-mix, short-lead-time production and assembly model.

The ramp-up has progressed quite well in our 2 new facilities, tracking in line with our original fundamental outlook. The acceleration of bearings demand has been stronger than expected over this period.

So in order to best serve our customers, we postponed shutting down the last production area in our previous facility so we can complete the production ramp to a now higher absolute production rate in the new facilities during our second quarter.

Positively, the financial impact is measured in the low single digits and this doesn't impact our ability to deliver our full year financial outlook or our expectations for realized structural savings and associated EBITDA growth in the current fiscal year.

So inclusive of our planned incremental investments in innovation and market expansion during fiscal '18, we continue to expect PMC's margins to expand by more than 100 basis points for the full year as an unchanged expectation for EBITDA is measured against likely stronger revenue than previously assumed.

As we turn to our Water Management platform summarized on Slide 8, please recall that we're excluding the financial impact of the RHF nonstrategic product line we exited during our fiscal '17 from the calculation of core growth and adjusted earnings metrics in order to provide an 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 first quarter, our Water Management platform experienced a 1% net sales decline that was a function of flat year-over-year core sales and a 1% drag from foreign currency translation.

Top line results are in line with our expectations and incorporated the most difficult year-over-year comparison we'll face this year in our water infrastructure-focused operations.

Sales of our commercial-grade plumbing products increased year-over-year by a low to mid-single-digit core growth rate in our first quarter as we experienced positive growth across our product portfolio. We believe that overall end market growth can remain robust in our fiscal '18 as demand benefits from the reacceleration in growth of new U.S.

nonresidential construction starts that emerged in the second half of calendar year '16. We are particularly encouraged by the improvement in institutional building starts, which increased about 8% in 2016 and where data is projecting another year of 8% growth in 2017.

We expect to leverage the somewhat steadier market environment that we anticipate in our fiscal '18 with key new product introductions occurring during the year, and we continue to feel good about sustained growth in new nonresidential construction into calendar 2018.

Turning to our project-oriented business serving water and wastewater infrastructure markets. Our first quarter results benefited from a relatively stable product schedule and steady operational execution, but we faced our toughest year-over-year comp this quarter due to a large project shipment in the first quarter of fiscal '17.

As we expected heading into the quarter, we again saw book-to-bill exceed 1. Given our backlog position and favorable demand outlook, as well as our reduced reliance on large multimillion dollar project orders, we continue to project a return to positive core growth in our water infrastructure end markets for fiscal '18.

With our expectations for positive core growth across the majority of our 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 slight year-over-year decline in EBITDA margin was consistent with our expectations and reflected the significant volume decline on the infrastructure side during the quarter and our sustained investment spending.

We continue to expect the EBITDA margin to expand by roughly 100 basis points in fiscal '18 with positive year-over-year comparisons over the remaining 3 quarters of the year. Moving on to Slide 9. 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 3x.

Given normal seasonal patterns for our free cash flow, we expect our net debt leverage ratio will remain in a range of around 3x until the second half of our fiscal '18.

But excluding any impact from potential acquisitions over the balance of this year and assuming our current earnings guidance, we expect our net debt leverage ratio to approach 2.5x by the end of our fiscal year.

In the chart at the top right, you can see we finished our first quarter with free cash flow of $30 million, which includes an approximate $5 million outflow associated with our SCOFR initiative.

Looking at our earnings expectations for fiscal '18 and considering the remaining cash outflow of about $10 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 the $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 our bolt-on acquisition strategy while maintaining our leverage ratio in the range of between 2.5 and 3 times.

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 cost reduction initiatives, we expect to report total restructuring expenses of $7 million to $10 million in our fiscal '18, which is unchanged from our previous outlook. These costs are primarily made up of severance costs and are excluded from adjusted operating results.

Next, our effective tax rate will fluctuate by quarter given the drain levels of pretax income as well as the timing of our 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 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 3 quarters of the year.

As you are probably aware, the projected 32% full year range used to calculate our adjusted net income operates - or compares to 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 the 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 corporate incremental quarterly share count to use for modeling our diluted earnings per share under the if-converted method, if it is applicable.

As you are aware and as illustrated on Slide 14, the if-converted method was not dilutive to EPS and thus did not apply in our first quarter. Lastly, we included 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] And our first question is from Julian Mitchell from Credit Suisse..

Hey Good morning, guys. Ronnie on for Julian..

Hey Ronnie..

So if we dig into PMC a little bit more, I looked back at the commentary on the Q4 call and the expectation was low single-digit growth there and it ended up being 5%.

I guess, what was the biggest change in June that you saw that kind of acceleration? Was it all in the process industries? Was it more broad-based and kind of how to think about that moving into Q2, Q3?.

Ronnie, it's Todd. I would characterize it as more broad-based than specifically a given end market. Obviously, as Mark sort of highlighted in his comments and I may have mentioned, we clearly think some of the - the bottom is in, in some of these more challenged process end markets like mining.

And the acceleration that we're seeing is really a combination of that stabilizing, a slight recovery across the broader industrial universe, and frankly, we think some of the things that we're doing organically around first-fit and new product to drive share. And so we're pleased with the growth in the quarter.

We think we're well positioned should these markets continue to recover. But much of what we're doing is really, I would say, outside of what we're going to try to predict the market to do and focus on what we can control, which is grow organically through some smart things that we've been working at for a couple of years..

And that kind of acceleration you saw throughout the quarter, that's kind of continued you said, it's been stable?.

It's been very stable, yes. I mean, our second quarter is - we're tracking to growth rates that look close to that, for sure..

And the one thing that's right in the plan that I mentioned in my comments, the 2 days - 2 fewer shipping days trimmed a couple of points of core growth. So if you take Todd's comments, we're tracking to a similar core growth rate, you got to take a few points off that just based on the shipment days in the quarter..

Okay. That makes sense.

And then on the margin side, could you just give us an update on what you saw for margin pressure on incentive comps and some of those investment spends you called out in Q4 and how to think about that for the rest of the year, if there's any change to that?.

Well, again, I think we highlighted, I guess, close to $10 million, a quarter ago, of investment. We said half of it's investment, half of it's incentive comp. At this point, I would say that it sort of flows through the quarters ratably, so I don't think there's any change to that in any material way.

I think, the thing to think about is we get a better benefit from the SCOFR actions as we get to the second half of the year because some of the frictional costs go away and the benefits that we expected are really coming through and it looks like they're going to come through with higher volumes.

So the benefit that we outlined was on a probably a lower volume sort of environment. So as that stabilizes and improves, obviously the savings come through incrementally. So I think we're not going to walk away from the investments that we're making.

In fact, we may continue to make more, but I think the incremental margins that you're seeing in PMC are probably going to get better as we go through the year..

Got it. Thanks. Congrats on the execution..

Our next question is from Mig Dobre from Baird..

Yes, good morning, everyone. Maybe picking up on this last point you made, Todd, on SCOFR savings. I don't know if there's any way you can help us think about the first half versus the second half numerically in terms of how these savings are coming through and some of these frictional costs.

It seems like there might be some incremental frictional costs that you're experiencing for a number of reasons versus what we've heard in the past.

Again, as some of these go away, how should we think about the cadence of margins?.

Mig, this is Mark. I'll answer the second half of your question first. I think the way to think about this is our SCOFR plan is right on track. Everything that we planned to execute through June took place as anticipated. And if you look at the volumes that we had submitted in the plan, we're executing really well on that.

During the quarter, we've seen a nice ramp-up in demand for this bearing product category.

So in order to make sure we are serving our customers the best to our ability, we made the decision to utilize our legacy facility a little bit longer for one operation, for one component, basically giving us and allowing our Monterrey team the ability to ramp up production at a rate above and beyond what we anticipated going into this plan.

That is occurring in this quarter. So when we talk about the frictional costs or transitional costs, all it really is, is that we're just utilizing a legacy facility a little bit longer. I think it's the right thing to do better serve our customers. So the $25 million savings we talked about, it's there, it's intact.

There's some volumes that will come with that because we're using our legacy cost structure on one component for an extended period of time. So that's kind of second part of your question.

First part, if you think about the timing of how these savings come through, it's relatively consistent with what we talked about the last quarter of the year, about 30% of the savings coming from the first half of the year and about 70% of the savings coming through in the back half of the year..

Okay, that's helpful. And then maybe we can talk a little bit about Cambridge as well. A little more color on the growth and what you're seeing in some of the key end markets there. I know that Cambridge is going to start contributing to organic growth, I believe, next quarter.

So even though you have fewer selling days, with the contribution from Cambridge, I'm wondering if we can continue to see pretty good pace in PMC organic..

Well, I think, to, I think, reiterate your thoughts, I mean, Cambridge has been an outstanding acquisition. I think, we saw very good order growth through the course of last year and through the first quarter this year. It is definitely growing above the fleet average on a core basis.

And then if you couple that with, I think, some of the commercial opportunities that we see in Europe and other things that were part of the original investment thesis and case that we outlined, we're going to see that continue to accelerate through the year. So we're very pleased with the acquisition.

It's absolutely contributing to core growth and will absolutely help with core growth throughout the remainder of the year. And I don't think that we're going to sort of start to dissect pieces of the core growth by product category or end market other than to say that it's very much on track and probably above where the overall platform was at 5%..

Okay. Lastly, maybe a bigger-picture question on your Water Management segment. I'm wondering how you're thinking strategically about the fit of the water infrastructure business. Obviously, that business is primarily focused outside of the United States. We have Zurn, your other side of the business, which is predominantly an American business.

There are meaningful differences between the 2. Infrastructure is lumpy.

Is there a sense here that you can either achieve higher integration of these 2 platforms or at a point in time you might consider monetizing the water infrastructure business and redeploying capital?.

Mig, you're correct in that they do serve different end markets and geographies. I think one of the opportunities that we saw and continue to see is some level of further integration between the 2, whether it relates to production or, frankly, sort of the crossover end markets of wastewater, particularly in North America.

And so what I would say is that the water infrastructure part of the water platform has had a tough, probably, last 3 or 4 quarters, largely based on the fact that we saw some project shipment timing shuffle around.

I think when you look to the balance of the year, what you're going to see is a Water Management platform in its entirety growing very nicely with very strong incremental margins and clearly accretive to what it is - we think that water platform can be which is a faster grower with a margin profile in the 20% range.

So we're - we've worked really hard to get through what was a tough set of comparisons. And we think that as we look forward, it's definitely something that when you take it as a whole, it contributes really nicely to the overall performance of the company..

Alright, I appreciate the answer..

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

Hi. Good morning. First question just on conversations with the distribution channel and what you are hearing on expectations for the year.

Are you seeing any restocking at this point or any communication with them that suggests that, that would pick up as we go deeper into the year and some of these industrial markets are picking up?.

It's a great question. As you look at - a couple of the public companies and/or segments of our distribution channel partners have been announced. I think they've all sort of stated that they expect things to improve over the course of the remainder of their year or the calendar year.

But in terms of restocking, we're not, at this point, really seeing any, I would say, appreciable restocking. I think our view is that inventories across the channel are too low with the rates of inquiry and the demand that we see coming.

It's driving us effectively to collapse lead times in order to meet that improved demand, and we'd certainly like to see some of that. But I'd say the case that we've outlined does not include any appreciable restocking.

I think that the distributors are taking probably a prudent, more cautious view on their inventory levels and that's a transition from, I would say, lower - low declines to flat to an increase. And so we certainly hope that the inventory levels come up.

It's not in our base case, but in the meantime, I think we're encouraged by what we're seeing on the sell-through side and expect that to continue. And whether that manifests itself in a restock is really not our decision. But we're clearly here trying to do everything we can to meet the end market demand through our channel partners..

Got it. And then on the cash deployment side, just given the cash that you have on the balance sheet right now and the free cash flow expectations for the rest of the year. You talked about continuing to target bolt-ons, sometimes timing is outside of your control there.

What else do you think about in terms of capital deployment and the level of cash that you're comfortable with carrying and when you feel like there is more of a need to do something?.

We're really looking at the overall cash balance as an offset to the gross debt. So we think about it as essentially debt reduction, and I would suspect that there will be an opportunity for us to repay some debt over the course of the year to reduce our borrowing cost.

I suspect that there's probably some deployment of cash into some smart tuck-in or bolt-ins. But beyond that, I think we're going to continue to evaluate what opportunities are out there, recognizing the leverage that we're at. We sort of said that we want to march it down 2.5x over the course of this year and then evaluate from there.

So we're - I'd say, we're monitoring all angles to deploy the cash, but I wouldn't be surprised if we were to actually make some gross debt pay downs over the course of the remainder of the year..

Thank you. I appreciate it..

Yep..

Next question is from Charley Brady from SunTrust..

Hey, thanks. Good morning, guys..

Good morning, Charley..

Just on PMC incremental margins, obviously, really good performance in the first quarter here. You've talked about 30% to 35% and I know you don't want to go too far out on a limb here, Todd, and I get that.

But it sounds like if we're going to continue at kind of the pace we're running and it doesn't backtrack on you that were certainly going to come in probably at the high end of that incremental.

But is there opportunity as you look down the road to see above the high end of that 35% range of incremental on PMC, at least in the near term?.

Well, I mean, I think the 30% to 35% was at the company level, with PMC probably above that. So I think we're not - we don't feel like we're out on a limb by saying that the incremental margins for PMC over the balance of the year are going to be above that.

We're pretty confident that with the SCOFR savings, regardless of the environment, we're going to generate a really nice incremental. And if you tag on some better growth, the follow-through on that is going to be also very good.

So I think we're at a point where we feel really good about the structural costs that we've put in place that should allow us to turn in a nice incremental performance above that 35% for the year for PMC with, I would say, some pretty conservative assumptions around it..

Yes, got it. And just a quick one on the DiRXN initiative.

So does that create - so I understand a little better, does that ultimately create a subscription-based annuity stream for you guys?.

It ultimately could, Charley.

I think the way we're thinking about it is, to the degree we know where all these components are, how they're functioning and how they - I would say, the application expertise and really the context around what's important to this component in the overall life cycle, it gives us multiple vectors of growth to be able to ultimately provide a service around monitoring.

It allows our channel partners to provide a potential service around service, repair, replacement and monitoring as well. So we're really looking at it as enabling us and our channel partners to provide more value to the end users who use our equipment..

Thanks..

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

Hey, good morning, guys..

Good morning, Jeff..

Just a couple of questions on water. Maybe just - it seems like the order trends continue to be good and backlog is building.

What's kind of visibility shaping up where you start to see, I guess, shipments more match up with that order growth? And maybe just talk about incremental in water, how you think they're shaping up for the year as you start to see growth..

Sure. I think just to reiterate for clarity purposes, this quarter we fully expected sort of the flattish growth and this - and the modest incremental margin - the modest margin decline relative to the prior year.

From here on out, we're talking about solid core growth, mid-single-digit core growth and incremental margins in that 30-plus percent range. So we're pretty confident that we've been through the tough patch with some of the shipment timing that occurred really in prior years. And we're pleased with the backlog build.

We're confident with the cost structure and we think that the incremental and core growth read out really positively from here on out the rest of the year..

Okay, great. And then a lot of discussion this quarter around price/cost and some companies kind of indicating that there has been some incremental inflation and also through different distribution channels, maybe it's proving a little more difficult.

So can you just maybe speak to what you're seeing on price/cost?.

Yes, Mark will sort of give you a more fulsome response. But our ability to perform in that inflationary sort of environment is very, very good. I mean, our ability to pass on price, control material input cost has proven to be something that Rexnord has been historically outstanding at.

And so we're - I wouldn't say we look forward to some inflation, but we would look forward to some inflation because our ability to perform in that sort of environment is very strong, and I think Mark can give you some of the specifics.

But we're not seeing any sort of pressure and really don't have much of any concerns as it relates to that price/cost sort of equation. We've heard it come up as well, but we're - we look forward to that sort of challenge..

Yes, Todd is exactly right. You look at by platform, PMC through the first quarter and then quite frankly our expectation for the balance of the year has been overall minimal inflation. We talked in the past, we do work very closely with our vendor base on the overall cost of product with things that we're doing with RBS and VAVE.

So we've got - it's really been very minimal. And then pricing has been minimal too. We haven't experienced a lot of price in our PMC platform year-over-year either. To Todd's point, if that would never change for some reason, we are very confident in our ability to deal with the pricing side as needed.

In water, inflation is probably more on the modest side, we're talking less than 2% from a material cost increase standpoint. Really, I'd say, in line and maybe even a little bit less than what we actually had expected.

And we've offset that with things that we're doing internally as well some modest pricing in water as well, again talking 1% to 2% here from a price increase..

Okay, thanks guys..

Thanks..

[Operator Instructions].

This is Rob McCarthy. Thank you, 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 2018 second quarter results in early November. Have a great day..

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