Robert McCarthy - Rexnord Corp. Mark W. Peterson - Rexnord Corp. Todd Alan Adams - Rexnord Corp..

Charles Brady - SunTrust Robinson Humphrey, Inc. Jeffrey Hammond - KeyBanc Capital Markets Ronnie Weiss - Credit Suisse Securities (USA) LLC Mircea Dobre - Robert W. Baird & Co., Inc..

Good morning, and welcome to the Rexnord Second Quarter Fiscal 2018 Earnings Results Conference Call with Todd Adams, President and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Rob McCarthy, Vice President of Investor Relations for Rexnord.

This call is being recorded and will be available on replay for a period of 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, November 1. At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy..

Good morning, and welcome, everyone. Before we get started, I need to remind you that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures.

Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors, and contain reconciliations to the corresponding GAAP data.

Consistent with prior quarters, we will speak to core growth, adjusted EBITDA, adjusted earnings per share, and free cash flow as we feel these non-GAAP metrics provide a better understanding of our operating results.

However, these measures are not a substitute for GAAP data, and we urge you to review the GAAP information in our earnings release and 10-Q.

Please note that the presentation of our operating results includes adjustments to GAAP reporting for the impact of the RHF non-core product line in our Water Management segment that we exited during our fiscal 2017 in order to enable investors to better understand and assess our continuing core operating results.

Today's call will provide an update on our strategic execution, our overall core performance for the second quarter of our fiscal 2018, and our outlook for our fiscal 2018. We'll cover some specifics on our two platforms, followed by selected highlights from our financial statements and our cash flow.

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

Thanks, Rob, and good morning, everyone. As you hopefully saw in our release last night, our second quarter results sustained the positive momentum that we began to build a couple of quarters ago with our core growth accelerating, our adjusted EBITDA continuing to expand year-over-year, and year-to-date free cash flow up 50%.

We continue to see improving end market demand across most of our served end markets, and the strategic growth initiatives we've been driving are starting to read through.

Activities associated with our supply chain optimization and footprint repositioning initiatives wrapped up in the quarter, and we're positioned to fully capture the targeted structural cost reduction of $30 million annually.

At the halfway mark of our fiscal year, we think it's prudent to take up our outlook for both core growth and EBITDA, and we'll cover that in a few minutes. From a strategy standpoint, we've made excellent progress in the rollout of our DiRXN strategy.

It's still early, but the customer feedback and adoption has been terrific, and the very practical point-of-impact approach we've taken with the solution is something we think is a game-changer. Finally, in early October, we closed on the acquisition of World Dryer in our Water Management platform.

It adds additional content to our already market-leading level of content per square foot in a commercial building when it comes to water safety, flow control and conservation. There's a lot to cover, and we'll try to move through it quickly so we can get to your questions.

Our second quarter sales of $511 million included core growth of 4% and were at the high end of our expectations for the quarter. It's notable that this year's second quarter has actually two fewer days compared to the prior year quarter.

We've sustained positive core growth in our PMC platform, and the core growth in our Water Management platform accelerated, as we expected. As you'd expect, in each platform there was a minor but immaterial drag on our growth from the impact of Hurricanes Harvey and Irma that we think finds its way into future quarters.

Our overall operational execution was solid as our adjusted EBITDA increased 9% year-over-year to $98 million, with margins in both platforms finishing in line with our expectations.

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

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

Turning to slide 3, within our operating platforms, our PMC platform had a strong quarter, with order and revenue growth across most end-market verticals, including another quarter of either stability or growth in some of our key process industry end-markets, such as mining and energy.

The impact of our First Fit strategy gained momentum in the quarter, and the pace of our success-winning new OEMs and end users through application expertise is now running a bit ahead of our annual targets, which only bodes well for the future, as these components wear in use and are serviced and replaced multiple times over the life of a customer's application.

PMC's margins were in-line with our expectations and improved 70 basis points sequentially, which equates to a 37% incremental margin sequentially.

The margin we generated in the quarter and the first half includes both the final frictional transition cost as we complete the exit of our Indiana facility and reflects year-over-year differences in the timing and scale of incentive comp accruals and our increased investment spending around our DiRXN strategy.

We see significant margin runway for PMC post the completion of our SCOFR initiatives, and we're confident you'll see a solid down payment on that longer-term opportunity as we move through the second half of our year.

Results in our Water Management platform were solid with second quarter core growth accelerating to 5% in the quarter, as Zurn delivered another quarter of solid growth as we continued to see positive underlying trends in our non-residential construction markets and the initial impact of our new product launches helped to offset the impact of the calendar and some Gulf Coast weather.

We had relatively stronger growth in our water infrastructure end markets, which are no longer facing the difficult comparisons created by last year's push-outs in large international infrastructure projects.

Adjusted EBITDA margin came in at a record 21.1%, which was at the higher end of our expectations for the quarter as we benefited from our past SCOFR actions, strong management of input costs and solid execution.

As we've mentioned, we've been actively working to de-risk some of the volatility inherent in some of the water infrastructure parts of our business, and as a result, have fewer what I would call large projects in our backlog, which mitigates the potential degree of shipment timing risk and focuses on smaller, and frankly more profitable, business but typically has less of a digital impact within a quarter.

For the platform, we see second half core growth above the level we posted in the first half and year-over-year margin expansion. If you could turn to slide 4, just a few words on the strategic importance of the World Dryer business acquisition we completed in early October.

World Dryer is an important element of our core strategy to increase our specified content per square foot in commercial and institutional buildings. World Dryer is a well-established brand and has established a large installed base of electric hand dryers in North America.

This is a growing product category as building owners and operators in most non-residential verticals are increasingly choosing air drying over paper towels as they seek to reduce waste and lower their operating costs.

This is important because earlier this year we launched our Sundara product line, which is an integrated hand-washing station combining Zurn's sensor faucets with a high-performance solid surface basin offering as part of our strategy to offer building owners and contractors a contemporary single-source hand-washing solution for commercial washrooms.

World Dryer adds to our competitive advantage in terms of being able to not only provide an integrated specified hand-washing solution, but to provide a complete single-supplied specified SKU in the commercial washroom that captures all of the conservation-related content for both water and paper with all the benefits of ease of installation, integrated shipments and leading frankly to just a better value for our customers.

Standalone, the acquisition is both gross margin and EBITDA margin accretive to our fleet average, and we anticipate generating double-digit return on invested capital within one to two years. Finally, our year-to-date free cash flow of $45 million and growth in EBITDA drove our net debt-to-EBITDA ratio to 2.9 times at September 30.

And inclusive of the World Dryer acquisition in early October, we continue to expect to be in the mid-2 times range at the end of our fiscal year. We remain optimistic about our potential for more bolt-on acquisition activities this year, but that base case leverage target would not obviously include any of those.

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

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

Before I do turn the call over to Mark, please turn to slide 5 so that I can provide an update on our DiRXN strategy. Last quarter, I discussed in some detail the DiRXN platform that we officially launched at the end of May.

As I outlined then, our objective is to create a digital productivity platform that combines innovative Industrial Internet of Things and e-commerce technologies to digitally connect customers to our products, tools and services that can enable them to optimize their productivity.

At the same time, DiRXN leverages the application expertise and the established set of related competitive advantages that we've been creating and enhancing for decades. I'm pleased to share with you today that the initial reception for end users has been really positive. First, let me bring you up to speed on some of the early milestones.

Relative to the first four elements of the customer's life cycle and how we can enhance productivity around the steps of search, design, select, and procure, we've continued to make excellent progress at the front end by adding a steady pool of product configurators which can simplify and accelerate a customer's ability to intuitively determine the combination of product specifications and features that best addresses the user's application.

And at this point approximately 85% of all products are configurable online. And we expect the balance of that to be available over the next six months. The customer can then directly link to our e-commerce platform for pricing, availability and lead times to place an order, including for engineered to order products.

In September, our e-commerce platform handled the vast majority of quotations and orders for our power transmission business, creating substantial capacity in our selling and application engineering organizations by greatly simplifying, actually eliminating the touches between sales, engineering and production processes.

In addition, we tagged more than 10% of PMC's second quarter global production volume with product-specific QR codes, which can bring relevant tools and resources directly to the hand-held device used by a customer's maintenance tech, operations supervisor, or manufacturing engineer. And again, all within a single digital platform.

Relative to the remaining four elements of the customer's life cycle, namely, install, operate, maintain, and replace, we're continuing to increase the number of connectable SKUs. Getting to about 85% of the total is what we think makes sense over the course of the next year.

Every month that goes by, we end up learning more and the products and solutions we've developed are beginning to validate the proposition that they can increase a user's productivity and reduce their cost largely through the avoidance of unscheduled downtime.

In fact, to share one specific anecdote, early in the quarter we delivered four large IIoT-enabled V-Class smart gear drives for a process industry material handling application. The gear drives were installed in the customer's system and went to work without issue.

About a week later, the customer was ready to connect the drives into their process control network, and once they had been done, one of our smart gear drives immediately signaled unusual vibration and heat that can result from shaft misalignment, both in the customer's control room system and as we monitored the situation from our control room.

A subsequent visual inspection revealed that atypical wear patterns on certain drive elements indicated that there was indeed a shaft misalignment issue. We were able to contact the customer directly, who in real time was able to communicate back to us that one of the drives had initially been installed incorrectly, but it felt has been corrected.

The value is that this misalignment would have absolutely led to a failure and an unexpected shutdown of the entire process. In other words, lost revenue and increased costs for the customer.

There's no question that our customer was delighted with the in real-time demonstration of the feasibilities of their newly purchased Rexnord digitally enabled and connected smart gear drives.

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

In the meantime, we're tracking towards our specific objectives for the current year, and we're continuing to see evidence that this initiative can strengthen our ability to win, not just First Fit applications but also with incremental replacement demand opportunities. We believe that translates into incremental organic growth opportunities.

We're also working diligently on platforms and opportunities to leverage these investments within our Water Management business where Zurn has started tagging certain of its high volume SKUs with QR codes, enabling the same one-click access to product information, and replacement parts there as well.

As I indicated last quarter, we are also working towards several field trials of digitally enabled Zurn plumbing products that are planned for the second half of this fiscal year. We'll have more to report as we get deeper into our second half. I'll close with a point I've made before.

We're executing this ambitious program within the Rexnord Business System, which provides the discipline and focus to successfully execute complex strategic programs while practically controlling investment and minimizing execution risk.

Just as we have managed the supply chain optimization and footprint repositioning initiatives that we launched two years ago and as we adjust and manage the next set of initiatives to streamline our cost structure and enhance our returns.

We're looking forward to the shareholder value we're creating, and we will continue to create, being increasingly reflected in our share price. Now I'll turn it over to Mark..

Thanks, Todd. Please turn to slide number 6. On a consolidated basis, our second quarter of fiscal 2018 financial results were broadly in-line with our expectations. Our core sales increased 4% on a year-over-year basis, our adjusted EBITDA increased 9% from the prior second quarter to $98 million, and our adjusted earnings per share was $0.32.

Our effective tax rate when calculating our second quarter adjusted EPS was just over 32%, and compares with the roughly 22% adjusted tax rate we reported for last year's second quarter. As Todd indicated earlier, we are increasing our outlook for fiscal year 2018.

After a solid second quarter and taking into consideration the fact that we have another six months left in our fiscal year, we are modestly increasing our outlook for core growth to a low to mid single-digit range from our previous outlook for low single-digit growth as the midpoint of our expectations is now just a bit too high to continue to call it just low single-digit.

At the same time, we are adjusting our outlook for adjusted EBITDA to be in a range of $375 million to $385 million, which takes the low end of our previous range off the table and moves the midpoint of the adjusted EBITDA range up by $5 million.

The revised range implies year-over-year growth in adjusted EBITDA to 8% to 11% from the comparable $347 million we delivered in our fiscal 2017. Slide 7 summarizes our consolidated results in the quarter. Let's move on to slide 8 and discuss the first of our two operating platforms, Process & Motion Control.

Total sales increased 5% year-over-year in PMC, with core sales growth of 3% constrained by having two fewer selling days in this year's second quarter. Currency translation added almost 2%.

For the second consecutive quarter, PMC experienced growth in the majority of its end markets during the quarter, including several of the process industry end markets that have presented significant headwinds to our growth in recent years.

Global aftermarket revenue was flattish on a core basis, reflecting the days issue in North America, offsetting the ongoing growth we're seeing in Europe and Asia. Distributor sell-through in North America continued the general stable trend in the quarter, and we're seeing some improvement in the year-over-year comparisons.

In the top-right corner of the slide, you can see the unchanged end market assumptions that support the outlook for low- to mid-single-digit core sales growth in PMC that is incorporated into our fiscal 2018 guidance.

We believe that we can continue to generate growth in our consumer/discrete, and aerospace end-markets, and our second quarter results seem to reinforce our view that demand has bottomed out in our process industry end markets. However, as we have stated, we intend to maintain a cautious approach with our end market outlook.

PMC's EBITDA and margins were in-line with our expectations as margins improved sequentially but were down 50 basis points year-over-year, as the timing of incremental incentive compensation accruals, our ongoing investment spending more than offset the benefits from our volume growth.

In addition, and as we discussed last quarter, in order to help meet the stronger end market demand for mounted bearings, we maintained certain operations in the Indiana facility well into the quarter. All of this wound down in September and has been now moved to Monterrey.

In total, we absorbed approximately $5 million of temporary period cost during our first half that are associated with sustaining certain operations in the Indiana facility beyond the original target date in order to better serve the increased demand from our customers.

Positively, structural benefits from our supply chain optimization and footprint repositioning initiatives are showing up in our results and will become even more evident during our third and fourth quarter now that the last facility move is entirely behind us.

So inclusive of our planned incremental investments in innovation and market expansion during our fiscal 2018, we continue to expect PMC's margins to expand by more than 100 basis points for the full fiscal year.

While PMC's sales in the December quarter are expected to demonstrate their historical seasonal pattern, we expect margins to expand sequentially as the increased store benefits show up in the PMC's numbers.

As we turn to our Water Management platform summarized on slide 9, please recall that we are excluding the financial impact of the RHF non-strategic product line we exited during our fiscal 2017 from the calculation of the core growth and adjusted earnings metrics in order to provide enhanced comparability with our core operating results in fiscal 2018.

Exiting this product model was completed during the fourth quarter of this past year, and that will have a negligible impact on our year-over-year reported sales comparisons by our fourth quarter.

During our second quarter, our Water Management platform experienced a 6% net sales increase that was the function of 5% year-over-year core sales growth and a 1% contribution from foreign currency translation.

Top line results were beyond our expectations and benefited from double-digit year-over-year growth in our water infrastructure focused operations.

Sell-through of our Zurn (20:09) plumbing products increased year-over-year by low single-digit core growth rates in our second quarter, despite the drag of two fewer days in the quarter and the near-term storm disruptions in the U.S.-centric business.

Supported by the launch of several important new products this year, such as our new line of EZ1 point drains, as seen on the slide, and the Sundara handwashing station that Todd mentioned earlier, we believe Zurn's core growth can reaccelerate into our second half and a steady end market growth appears likely to be sustained at least through the calendar 2018 construction season.

We are particularly encouraged by the recent strengthening in institutional buildings starts, with the preliminary guide to estimate for year-over-year growth in the recently concluded September quarter was a healthy 7%.

Institutional verticals like healthcare and education typically involve relatively higher investment in plumbing per square foot construction, and our competitive position is quite good.

Turning to our project-oriented business serving water and wastewater infrastructure markets, our second quarter results benefited from the strength of new order activity and its associated growth in our order backlog over the past year.

Given our backlog position and favorable demand outlook, as well as our reduced reliance on large multi-million project orders, we expect to sustain positive core growth comparisons in our water infrastructure end markets for fiscal 2018.

With our expectations for positive core growth across the majority of Water Management end markets, has seen an unchanged end market outlook on the slide, our fiscal 2018 outlook continues to incorporate low to mid-single-digit core growth of the overall Water Management platform.

The substantial year-to-year increase in Water Management EBITDA was consistent with our expectations and reflected the benefits from the volume growth during the quarter, ongoing cost reduction of productivity initiatives and some favorable project mix, partially offset by our sustained investment spending.

We continue to expect the Water Management margin to expand by roughly 100 basis points in our fiscal 2018.

In terms of quarterly progressing, we'll see the traditional seasonal contraction of sales and margins on a sequential basis in our December quarter, but we expect to continue to leverage year-over-year core growth into attractive year-over-year margin expansion.

Moving on to slide 10, you can see in this chart at top left that our financial leverage, as measured by our net debt leverage ratio, has declined to 2.9 times.

Given normal seasonal patterns for our free cash flow and excluding any impact from potential acquisitions over the balance of this year, and assuming our current earnings guidance, we would expect our net debt leverage ratio to be in the mid-2 times range by the end of our fiscal year.

On the chart at top right, we finished our second quarter with year-to-date free cash flow of $45 million, which includes an approximate $8 million outflow associated with our defined SCOFR activities.

Looking at our earnings growth expectations for fiscal 2018 and considering the remaining cash outflow of about $7 million required to complete our SCOFR investment, which primarily reflects delayed timing of severance payments, we continue to project our free cash flow to exceed our net income and be in a $175 million range for the full year.

Given that we expect our free cash to expand on fiscal 2018 and given our strong overall liquidity, we believe we have ample resources to continue to execute on bolt-on acquisition strategy while maintaining a leverage ratio in a range between 2.5 times to 3 times.

Before we open the call to questions, I'd like to comment on our restructuring expenses and our effective tax rate, as well as call your attention to the sixth slide in the appendix to our earnings presentation.

First, and in terms of our cost reduction initiatives, we expect to report total restructuring expenses of $9 million to $12 million in fiscal 2018, which is up approximately $2 million from our previous outlook. These costs are primarily made up of severance costs and are excluded from our adjusted operating results.

Next, our effective tax rate will fluctuate by quarter given varying levels of pre-tax income as well as the timing of other planning initiatives. That said and going forward, we currently expect substantially less quarter-to-quarter volatility in our effective tax rate than we have experienced in recent years.

We continue to anticipate that our fiscal 2018 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 two quarters of the current fiscal year.

As you're probably aware, the projected 32% full year rate used to calculate our adjusted net income compares with the 24% rate reported for our fiscal 2017. Turning to the sixth slide in the appendix, first, we've included the other assumptions incorporated into our guidance for fiscal 2018 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 non-recurring 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 appropriate incremental quarterly share count to use for modeling our diluted earnings per share under the if-converted method, if it is applicable.

As you're aware, and as illustrated on slide 15, the if-converted method was not dilutive to EPS and thus did not apply in our second quarter. Lastly, we include the reconciliation tables related to adjusted EBITDA and adjusted earnings per share that are included in our earnings release each quarter.

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

Thank you. Our first question comes from Charley Brady from SunTrust..

Thanks. Good morning, guys..

Hey, Charley. You're really breaking up..

Better?.

I don't think so..

I'll try this. Okay. Just quickly, on the $5 million adjusted on the Indiana cost that's $5 million you referenced that is essentially done, right? There's no carry through into the second half on that facility, it's out..

is the $5 million related to the final frictional transition costs behind this? And the answer is absolutely yes..

Okay. Thanks.

And just can you comment on input costs that you're seeing? I think you started touching on it a little bit in the prepared remarks, but some of the raw materials and maybe potential pricing to offset some of that?.

Yeah.

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

Okay. Just one more from me.

On World Dryer, is the distribution channel the same as what Zurn is currently doing or is there some differences there?.

They go to market through third-party reps.

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

Thank you..

Next, we have Jeff Hammond from KeyBanc Capital Markets..

Hey. Good morning, guys..

Good morning, Jeff..

Good morning, Jeff..

So, I think the SCOFR savings is starting to hit. Can you just remind us kind of what the ramp is into the second half to get to the better margins, particularly in PMC? And then, Todd, you talked about kind of a longer-term margin runway from these actions.

Can you maybe just elaborate where and when you think those happen, and is there a number to think about from a quantification standpoint? Thanks..

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

Yeah, Jeff, the cadence of that is the savings of this project really has been pretty consistent, so we're extending on the first half of the year you're looking at $25 million year-over-year, you get about 30% rolling through. So 70% coming in the back half.

So as you can appreciate obviously the margin step-up in PMC will be quite good going into Q3 and it's going to get a little more incremental as we go into Q4. So the mix doesn't change too much, but we'll see our first real material step-up as we go into our third quarter here, Jeff, and you'll see that in the PMC margin..

In terms of longer term, Jeff, I think as we've I think frankly told people over the last couple of years, we think mid-20%s is sort of where we can get to in the next couple of years without any, I would say, significantly different market environments that we're seeing now.

So as Mark said, we'll get a good down payment on the incremental margin in the second half of the year now that the move is completely behind us, and we really do feel like this is call it a 24% to 26% business within the next couple of years..

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

Sure. It has been I would say stubbornly low relative to what you'd expect. The sell-through is picking up. The inventory levels are at sort of record lows. So what we're seeing is really the end market demand. And we see that continuing to improve.

But in terms of any additional bump that you'd get from maybe right-sizing inventories to fulfill demand closer to the point of impact, we haven't seen that yet. We really don't have it in our second half. But to the degree that that starts to occur, obviously that's helpful.

But at this point, it's still very, I would say, a little bit disappointing, right. The amount of inventory being carried in the channel is, in our view, simply not enough. I don't think we're the only ones that would feel that way.

And I do think as that improves, which I think we're somewhat optimistic that it will, we haven't baked it in, we'll see that as an additional leg of improvement..

Okay. Thanks a lot, Todd..

Thanks..

Thank you. And next we have Julian Mitchell from Credit Suisse..

Hey, guys. Ronnie Weiss on for Julian..

Hey, Ronnie..

Good morning, Ronnie..

And the free cash flow in the quarter was down versus a year ago despite the better EBITDA and lower CapEx. I think we're sitting a little bit below the target for the year.

Wondering if you could provide a little extra color on what drove the weakness in Q2 and what reverses it in the second half to hit that guide?.

Yeah. Ronnie, actually from a target standpoint, we're actually a little bit ahead of where we thought we'd be in the first half of the year, so first our target of $175 million, we're tracking a little bit above that. The difference this year is really our first quarter was a little heavier, free cash flow than normal.

So, therefore, the second was a little bit lower. And the issue was just the timing of some of our large distributors when they take their rebates, so rebates are taken as credits against receivables. So last year they took more of those credits in our first quarter. This year they took more in the second quarter. So that really impacted that.

Certainly focusing on the first six months, if you pull that timing element out of it, (32:26) in the first six months. As I said, it's a little bit above where we wanted to be. And, obviously, substantially above where it was last year in the first six months..

And just to reiterate, I think we don't see any risk running for the full year sort of targets that we've outlined and Mark sort of provided in his guidance outlook..

Got it. Makes sense. And then the water margin's up 200 basis points in the quarter. Obviously, very strong. If we're looking at a similar top line for the rest of the year, I guess, what are the moving parts there and why that margin wouldn't stay at that type of elevated level margin expansion..

Well, yeah. I think in the script we said, we had some really strong volume levels within our water infrastructure group. We levered that. Some of the project mix that we had was favorable. I think as Todd pointed out, we've gone to these projects that are not as large in total. We're seeing some better margins there.

As you think about the back half of the year, you'll see some incrementals in water. We said we got – we talked about 25% to 30% incremental margin range in that platform. I think in the back half of the year you'll see us tracking towards the higher end of that. So we expect some nice incrementals in that platform and continued in the back half..

Got it. Congrats on a good quarter, guys..

Thank you..

Thanks, Ronnie..

Thank you. Next, we have Mig Dobre from Robert W. Baird..

Yes. Good morning, everyone..

Good morning..

Good morning, Mig.

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

In terms of the accelerated?.

Yeah. Exactly. How did you see demand progress through the quarter? That's really my question..

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

Great.

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

Yeah. Mig, this is Mark. You're right. The days is not a headwind in our third quarter, so think about our organic growth in our third quarter in PMC is in the single-digits. We're being a little more cautious as we look at our market outlook if you think about the fourth quarter and it's still little ways away for us.

And our fourth quarter, and the point you made is right, our third quarter is an easier comp than our fourth quarter when you look back at the growth impact last year. That's true, our third quarter is an easier comp, fourth quaarter is a little tougher. But that's how we – we think the third quarter (35:27) number for PMC..

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

Sure. In terms of the overall Water Management, we had a record quarter from a margin standpoint. It's a combination of I think very good performance inside of Zurn. That's sort of net of some of the hurricane impact that we think will wind its way into future quarters.

On the VAG side of things, as we've outlined, we've been de-risking the business for a while. I think we've taken some cost out of the business, we've worked through some of the larger lumpier projects that impacted shipment timing, and we're executing a little better. So relative to how we're doing, I think we're doing better.

We think that the business is additive to our core growth, we think the backlog's in good shape, and the margins are going to clearly come up. So overall I wouldn't say that we're done. I think there's more work to do obviously, but we think we've put it on a much steadier path for growth, as well as improving margins over this year and into next.

In terms of the yellow light, I think it's more of a sign of look, we're not going to call it wide-open and blowing and going; I think it's not bad. But we wouldn't call it out as unusually good. I think it's more thinking about it as stable than anything else..

I see.

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

I think taken as a whole, because I think relative to any given quarter in the past you're going to have variability because of that shipment timing, but I think we're going to see mid single-digit growth with the platform for the entire year, and we think that there's an opportunity to do that again next year.

And obviously, Zurn is probably right there and water is maybe a little bit above that – the water infrastructure side in this given year. Heading into next year, we think about it as much more even in terms of their contribution to the overall core growth of the platform..

All right. Thanks..

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

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

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