Good morning, and welcome to the Rexnord June Quarter 2020 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, July 28. 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, why we believe they're helpful to investors and contain reconciliations to this 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 believe 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 in our filings with the SEC. With that, I'm pleased to turn the call over to Todd Adams, Chairman and CEO of Rexnord..

Okay. Thanks, Rob. Good morning. As Rob said, we're going to cover our financial results for the June quarter.

We'll also provide a little bit of an update on our operating environment, some detail on the platforms, particularly highlighting some of the key initiatives and priority to give us some confidence in our ability to perform moving forward, the strength and positioning of our balance sheet and our cash flow profile, and finally, a look at how we're planning for the September quarter.

I'm on Slide 3. To cut to the chase, we performed really well in the quarter. From our view, it was gratifying important thing to take away from this quarter and really the last 6 months is to reflect on how agile and resilient our teams and business model have been in the face of something unprecedented.

In the March quarter, our incremental margins were 43%. 90 days later, amidst a pretty tough environment, our decremental margins were only 13%. Using our new fiscal year convention through the first half of our fiscal year '20, our sales were down 5%, and our adjusted EBITDA is only down 2%.

Specifically, looking at the June quarter, core and reported sales were each down 12% at the Rexnord level, with Water Management leading the way down only 2% and 5% core, respectively, PMC was down 15%.

And while we had talked about a moderating impact from 8020 in PMC, we did choose to get a little bit more aggressive in our simplification efforts in a couple of product categories given the environment, and that turned out to be almost a 2-point drag to PMC's reported numbers in the quarter.

Adjusted EBITDA was $103 million, and our margins actually grew 120 basis points year-over-year to 23%, with segment margins up 160 basis points to 24.6%. Adjusted EPS in the quarter was $0.36. I think taxes were probably just a little bit higher than what was embedded in the last consensus number I saw.

The strong quarter in Water Management is a result of the compounding benefits of executing our strategic plan. We're pretty confident we delivered significant competitor and market outgrowth and delivered record margins of 29.1%. Over the course of time, we get asked can margins go higher. I think we posted 26.4% in the 12 months ended in March.

And I think this quarter is a pretty good down payment on the fact that we can.

I think it's also important to note that given the success we're having in several of our breakthrough initiatives, we made the decision to actually increase the level of investment in a number of our strategic areas compared to what we anticipated just 90 days ago, and we expect to continue to do that over the remainder of the year.

In PMC, despite a 15% core sales decline in the quarter, we were able to deliver a 26% decremental margin, which speaks to the greater flexibility that we've engineered into the cost structure in recent years through our SCOFR and our ongoing 8020 simplification efforts.

As I said last quarter, our plan was to use the June quarter to learn and evaluate what a recovery in our outlook might be and that we'd likely be making some course corrections.

Similar to what we're doing in Water Management, in PMC, we're making some incremental investments around a couple of focused areas and capabilities that we're building, while also making some course corrections on the cost side given some of the potential for some end markets to be lower for longer.

Overall, we're very pleased with our performance relative to our views on the market and the competitive landscape. From a balance sheet and capital structure perspective, we ended the quarter in a really good spot, with leverage flat for March at 1.9x, and we have repaid all the outstanding debt we had borrowed amidst the crisis in March.

Finally, back in January, we communicated a comprehensive capital allocation strategy, one that we had worked at being able to holistically and consistently deliver and implement for a number of years.

90 days ago, we communicated that we were taking a pause and implementing a couple of pillars of that strategy, namely share repurchases and likely M&A.

Today, given how we view our competitive position and also taking into account the general level of uncertainty is probably going to be around for a while, we're communicating that likely you'll see both of those elements of our strategy back in play as we finish up our second half of our fiscal year and turn the quarter into FY '21.

I'll move to Page 4. As I said last quarter, I'm going to say it again, if you take away one thing from today's call is that culture matters. The Rexnord business system, which is simply the way we work in our common language is without a doubt, the single biggest competitive advantage we have.

It's about everyone being on the same page and always doing the right thing for our associates, for our customers and shareholders. It's about being nimble and entrepreneurial. But being nimble and entrepreneurial inside of a framework of disciplined tools and processes that allow everyone to be fact-based and decisive.

Our philosophy of engaging our people around the plan, with proven processes that drive performance is something that's ingrained in our culture. While it's always more fun to do this in a growth environment, you can see when we harness the power of that culture during difficult times, how fun it is to take market share and beat competition.

Our teams have done an exceptional job over the last 6 months and in the June quarter, in particular, adjusting to having to work and be productive in different ways. The way we've supported each other, our customers and the communities we live and work in, has been simply amazing.

Our return-to-work plan for our nonplant associates has been very measured. We have only about 15% of our people back in the office, ensuring maximum amount of social distancing and associates -- and safety for our associates and their families.

Our overall case numbers are generally quite small and managed along established safety protocols, and all of our facilities are open and remain operating with the typical intermittent challenges that we've all come to have to deal with.

If we've learned one thing over the course -- over this pandemic is having an established business system with a common language with tools and processes that can be deployed anywhere while empowering and engaging our teams to deliver at the point of impact to an outcome is powerful and something that we're really proud of.

I'm so thankful and proud of our team for all they continue to perform at high levels through this unprecedented period. The hardest part of this whole thing is the uncertainty it creates for basically every aspect of a person's life.

What we're doing is staying connected and transparent with our associates around communication, what we know, what we don't know, but we're also listing. We're asking what can we do better? Or would you like to see changed, whether it's health care related, child care, technology and tools we can provide, it's all in the table.

We're actually visiting our factories visually -- virtually and continuing to engage with our teams to foster and actually grow the fabric of the culture we've built. The punchline of this page is that we've been preparing for a really tough environment for some time.

More than 4 years ago, we launched a multiyear initiative to streamline our operations, build flexible and robust supply chains while reducing our fixed cost and the capital intensity of the company to raise the sustainable level of free cash flow.

Things like successfully establishing a new campus in Mexico, an Engineering Center of Excellence in India and 8020 are now broadly behind us. And we can clearly see the benefits. And most importantly, we can take advantage of the competitive advantage we've built and take market share. I'll move to Page 5.

Here, I'll touch on just how we've used some of those investment dollars and capacity we've created over time. It was about 4 years ago when we made the decision to create the framework to be able to run almost all aspects of our business essentially as close to 100% as possible digitally.

We still believe deeply in building long-lasting relationships, human-to-human interactions and believe we'll get back to that reasonably soon. Our priority was to get ahead of where the market and competitors were, whether it's engineering, sales, operations or supply chain.

And today, we're able to interact and perform at levels we couldn't have even thought about 4 years ago. Our digital foundation is also enabling us to expand our channels to market in order to meet the customer where they want to do business, and it's delivering growth multiples ahead of our traditional channels and at a fraction of the cost.

As we made this digital push, we developed and launched connected products, essentially leveraging sensors and other performance-monitoring information to be able to provide a better solution for customers to ensure uptime remotely without having to physically be on-site and in environments that are critical infrastructure.

We think over the next several years, this long-term secular change only accelerates, and we're incredibly well positioned based on the work we've done over the last several years. The huge success we're having today in hygienic is about hand hygiene and restaurant tools, hospitals and office buildings.

The ability to do that without touching anything and having all of the critical information around maintenance, usage, even consumables integrated into a customer's building management system of choice is a powerful package and one that we're uniquely positioned to capitalize on.

The nice thing about the growth investments that we've made over the last several years is they're sort of in their sophomore or junior year in terms of evolution. We've developed the solutions in concert with our customers, the market. We've done the pilots. We've made the course corrections and now they're starting to ramp.

Over the course of the year, it's going to be resourcing and driving those as we stand up a couple of new growth initiatives that are enabled by some of the foundational work we've already done. There's definitely more to do but we believe we're at a stage where our solving smarter growth concept has real momentum.

Before I hand it over to Mark, please turn to Page 6. From a capital allocation strategy perspective, the overarching plan we outlined in February is essentially unchanged, as I said earlier. Keep leverage 2 to 3x, and in this environment is close to 2 as possible. We've clearly committed to our dividend, having just announced it last week.

Systematically buy shares back below the intrinsic value of the company. And while we paused this out of prudence during the March quarter, this is definitely something that we're going to resume in the back half of the year.

And finally, continue to make the right high-returning organic investments to grow our business and augment that with strategic acquisitions, all inside our free cash flow and leverage envelope, focused around water and consumer end markets. With that, I'll turn it over to Mark. And after he's done, we'll take your questions..

Thanks, Todd. Please turn to Slide #7. On a consolidated basis, our June quarter financial results demonstrated the resilience we built into the company over the last 4-plus years is becoming an independent public company.

On a year-over-year basis, our total sales and core sales growth were both down 12%, net of a roughly 1 point impact from our product line qualification actions. Currency translation and acquisition contributions to growth were offsetting.

Our adjusted EBITDA margin expanded by 120 basis points year-over-year to 23%, as EBITDA declined only 7% year-over-year to $103 million and a 12% top line decline, which translated into a 13% consolidated decremental margin. Please turn to Slide 8, and we'll review our platform, starting with sale in PMC.

PMC sales were down 15% year-over-year on a core basis as we experienced sales declines in most end markets, generally in the double-digit percentage range, and we accelerated some 8020 simplification actions that reduced year-over-year sales by approximately 190 basis points.

We did generate positive growth in Asia and in renewable energy, but together, they only come up for about 10% of PMC sales in the quarter.

Year-over-year sales declines were moderate relative to the platform average in our consumer-facing and power-generation end markets, but higher than the platform average in our process industry and aerospace end markets.

Our North American distribution business was choppy, and the year-over-year decline in the quarter was slightly above the platform average, as sell-through was broadly weak, although it improved in June after bottoming in May. Overall, and given support from backlog, OEM end-user growth outperformed global MRO in the quarter on a sales basis.

Outside of our aerospace markets, demand patterns improved in June, and it remained stable in July. Operating execution was strong as we benefited from our scope for structural cost-reduction initiatives executed in recent years off the cost actions we limited or we initiated last quarter in response to the pandemic.

PMC management was 26% decremental margin despite some adverse mix through the relative weakness in our aerospace business. Turning to Water Management. Sales were down only 5% on a core basis and just 2% after factoring in the contributions from the acquisitions of Stainlessdrains.com and Just Manufacturing in the prior 12 months.

Both acquisitions delivered a positive year-to-year for growth in the quarter, and Just Stainless Steel Sinks have proven to be a timely addition to our suite of hygienic solutions. Regional construction site shutdowns early in the quarter were a drag on Zurn's top line, but we saw very strong growth in our touchless sensor products.

And overall growth rates in the platform improved as the quarter progressed and into July.

Zurn delivered an 8% increase in adjusted EBITDA as the margin increased 270 basis points from last year's June quarter to 29.1% and strong cost control with benefits from the relative strength in touchless products and contributions from our recent acquisitions. Please turn to Slide #9.

With visibility still challenging and given a wider than usual range of potential outcomes for the upcoming quarter and a quote for the next 6 months, we will again limit our forward commentary to the upcoming quarter and continue to incorporate wider-than-typical ranges around our assumptions for revenue growth and margins.

The planning guideposts that we're providing for September, the quotes are similar to what we provided a quarter ago. And our focus around providing relatively precise guidance for elements where we can exercise substantial control over the results and incorporating some downside of risk for those elements where we have frankly less control.

With that said, and taking into consideration demand trends through July, a modestly lower backlog in PMC than a quarter ago and the elevated uncertainty given the persistent strength of the global pandemic, we're projecting that our consolidated revenue could decline between 12% to 17% in the September quarter.

Based on that sales range and incorporating our cost-reduction initiatives and other common measures, we would expect the combined adjusted EBITDA margin at the platform level, which excludes our corporate expenses to finish the September quarter between 22% and 24%.

We expect our corporate expenses to be approximately $8 million in the quarter or down about 20% on a year-over-year basis. Lastly, our interest expense for the quarter is expected to be approximately $12 million, and our depreciation and amortization will come in at about $23 million. Please turn to Slide #10.

On this slide, we're maintaining the high level of transparency regarding our free cash flow outlook that we provided last quarter. In the top half of the slide, you can see our updated outlook for the 9-month interim period, now factoring in the results from the June quarter.

The forecasts are largely unchanged, although the cash used for restructuring is down slightly as the pandemic as pushed some of our SCOFR projects to the right by a few weeks to a few months.

In addition to the 9-month numbers, we've included a set of forecasts for the full calendar year 2020 on the bottom half of the slide, which takes our actual results for the March quarter and add them to the 9-month outlook.

The bottom line is that we currently expect to extend our track record of free cash flow conversion above 100% for the coming 9 months and the entire 2020 calendar year. Moving on to Slide 11. I'll finish with a look at our free cash flow and our balance sheet.

Turning to the chart on the far left and on a year-over-year basis, our free cash flow tripled on a low base of $39 million in the June quarter and our calendar year-to-date free cash flow to $147 million.

We believe we are well positioned to deliver free cash of more than $100 million in the 9-month interim period and therefore, more than $200 million with impaired calendar year 2020. Moving to the chart in the center.

You can see our financial leverage, measured by our net debt leverage ratio was unchanged at 1.9x and finished the quarter just under the low end of our long-term target range of 2 to 3x.

Finishing with the chart on the far right, in March, we borrowed on our revolver and our AR facility effective short-term liquidity and the potential magnitude of any downside of risks from the early days the global COVID-19 outbreak was unknown.

With the quarter behind us now and a better feel to put a potential downside risk to our liquidity, we are comfortable repaying the borrowings on the facilities. We repaid the $250 million of borrowings on our revolver in June. In early July, we repaid the $75 million of short-term borrowings under our asset securitization facility.

Before we move to questions, I'd like to mention that in order to help simplify modeling the transition of our fiscal year-end to 12/31, we filed pro forma quarterly financials for calendar year 2018 and 2019 and the 8-K with our earnings release yesterday, and we'll be posting them to our investor website.

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

[Operator Instructions]. And our first question comes from the line of Jeff Hammond from KeyBanc..

Just want to go over the 3Q guide. I think it's a step down from 2Q which was pretty resilient.

One, can you just talk about the difference between the two segments? And then just anything -- or more color around the backlog relative to the prior quarter and order trends into July that kind of inform that range?.

Well, I read your note, I figured you might be asking the question. So here's the thing. When you look at Q3, holistically, it just doesn't look a whole lot different on an absolute basis relative to Q2.

And if you look at seasonality, if you look at margin performance, if you look at a lot of different things, then I think what we're pointing you to is we had a really good quarter. July is sort of tracking pretty well or tracked well, I should say, the quarter is over. And we're guiding to a range that is clearly comfortable for us.

But in absolute terms, it doesn't look a whole lot different holistically than Q2. And that's, I think, really the way to think about it more than anything..

Okay.

Can you just talk about the drivers of the Water margins, how much of that is mix? How sustainable is that high level? And then just talk about where you're stepping up investments, specifically given what you've kind of been finding in the markets?.

If you look at the overall margin, we do benefit from really two mix elements. One, a greater percentage of our sales today are in the retrofit market than ever before. Traditionally, had been 10 years ago, it was 5% or 10%. It had been running in the mid-30s. I think there's a chance that sort of moves to 40% to 45% over the next 12 months.

So that's obviously a net benefit. And then the categories that we're talking about in and around hygienic are also mix positive for us.

So when you look at Zurn margins, I wouldn't think about this as wild cost controls and not spending $0.01, we think about it as some modest cost controls early in the quarter that we have subsequently decided to go the other way on and put money into a couple of initiatives, namely in and around hygienic, developing sort of a model that we think can be extraordinarily powerful in the aftermarket on an MRO basis and really being able to click to install and get this work done at any point in time anywhere in the country.

And then also considering some elements of what a restroom in the future might look like. Being able to connect all the components and have them speak and work together. And so we're sort of making that investment -- accelerating that investment. So 29.1%, I think, is a pretty good indication of what we can do.

I wouldn't think that it's a Unicorn buying expression of imagination, but based on some seasonality over the course of the year, Q3 should be pretty good. As we go into construction season decline in the December quarter margins, obviously, just based on volume from that. But it's a legit number, and we feel really good about it..

Our next question comes from the line of Joe O'Dea from Vertical Research..

First I wanted to ask on PMC and the organic down mid-teens. And over the course of results so far this quarter, seeing a lot of short-cycle industrial down in the sort of 25, 30 kind of range.

And outperformance is not a new thing, but just any degree to which you can bridge some of that difference in terms of where you're seeing some of the greatest outperformance opportunities across your portfolio?.

Well, we haven't seen many peers report yet. So I think we'll learn that over the course of the next couple of weeks.

But fundamentally, I think a lot of it has to do with some of the structural end market and positioning decisions we've made over the last several years to get more exposure to consumer-driven end markets, to get more exposure to power gen, to get more explored to marine.

We think we are clearly benefiting that -- obviously, we have an aerospace segment that from an order standpoint is -- it's a tough end market, as everyone knows. We do have some backlog. So when you look down to mid-teens, we benefit from a degree of a little bit of a backlog release in the quarter.

But when you look at it on all the puts and takes, it's all right around that number -- a significant number of outliers. So we'll see where everyone else that we sort of generally compete with holds out.

But I think a lot of the decline and maybe better-than-anticipated or better-than-feared, it has to do with some of the more structural things that we've done over the course of the last 3 or 4 years..

Got it. And then, Mark, it looks like you've got EBITDA setting up for the year, sort of trending $400 million plus and the cash cost items that you laid out on Slide 10 are in the $135 million to $140 million range, which would give a lot of cushion versus the north of $200 million free cash flow you're talking about.

Are there any other cash items to call out in addition to what's laid out on Slide 10 in terms of where we kind of frame on free cash flow?.

Joe, we're trying to lay out the big piece in the puzzle. There are smaller things, puts and takes here and there, pension cash contributions and whatnot. But we try to lay out the big items to help people frame out the number, I think. But we feel very comfortable with the 200-plus number at this point in time with 2 quarters to go.

So I think we laid out the big piece. There's really nothing that's of substance or size that we haven't put on that page, Joe..

Joe, he did say plus. He just didn't tell you what the plus was..

Okay. Got it. And then, Todd, you were sort of framing a return to cash deployment.

Any bogeys that you can set on that in terms of what we should be thinking about repurchase levels that you're comfortable with and then the confidence in back half M&A, where you think that's kind of directed from a segment perspective or any kind of cash use that goes toward that?.

I think with respect to the buybacks, we're going to sort of feather that in, obviously. I think in February, we were talking, call it, $75 million to $100 million annually. It will be less than that. We've already got 30 in, I think, from -- through March.

So there'll probably be some incremental, but it's going to be something that we think gets balanced really over Q3 and Q4. From an M&A standpoint, I think we're very optimistic that we'll get something -- or maybe 2 things on the Water side done. It could be tuck-ins. It could be bolt-on.

But I think over the next 6 months, we think that those are things that are probably likely going to happen..

Our next question comes from the line of Bryan Blair from Oppenheimer..

On Hygienic Solutions, and I'm sorry if I missed any of this detail.

But could you parse out sales growth versus order growth in the quarter? I guess, related question, is the team facing any material supply chain issues in trying to meet the ramp in demand there?.

Well, for competitive reasons, we're not going to give you the size of it. But suffice it to say that it's almost a double on a run rate basis at this point. And we think that, that has the chance to sort of sustain for a period of time.

And so the supply chain aspect of it, as we've migrated to a more distributed model, we've obviously run a bunch of scenarios. We didn't stress test the doubling or tripling in the course of the 12-month period. But we think that by the sort of mid- to end of this quarter, we'll be in a spot to catch the current run rate demand.

So the order rate is substantially above sales rate. Therefore, we did build backlog in the quarter. And it's really coming at us in waves. Success we're having is not sort of one-off. It's major restaurant chains. It's major retailers. It's major banks, universities, and these are orders measured in the tens of thousands of units.

And so for us, it's really about continuing to ramp the supply chain to meet demand, pulling lead times and then really start to capitalize on the unique value proposition we have and being probably less vertically integrated than anybody we compete with; that's an area of high priority and focus.

And I think we feel really confident that in the span of a, call it, 3- to 6-month period, we're able to sort of absorb and deliver against and actually pull in lead times against the business that's doubling. So that's sort of the way to think about the hygienic piece..

Okay. I appreciate all the color. And then Zurn's core growth was understandably restricted by shutdowns early in the quarter and then you mentioned some acceleration.

If we think about the trajectory of hygienic sales, and I'm assuming we can layer on 2 or 3 points of contribution from Just, is it realistic that Water Management returns to growth in the back half?.

Look, I think it's certainly possible. I think we'll have to -- look, absent disruption, absent some crazy things happening, I think the answer is it probably should. But I guess my perspective on things is we're really not out of the woods.

If you look at the number of states that are sort of going the wrong way, restrictions at the job sites, the travel, quarantines between states, all of that kind of stuff, it does us no good to sort of get ahead of ourselves. We had a terrific first half inside of that.

We've leveraged this hygienic opportunity along with connected products to create some meaningful, meaningful growth for us. We had a really good July. But your guess on September, August, much less November and December is as good as mine.

So I think what we're trying to do is just keep beating our competitors, beating what the market growth is and investing in our business so that when we turn the corner, we're flying as opposed to figuring out how to run. So that's, I think, how we think about growth in the second half reserve..

Okay. Well, makes sense. And then Mark, one last one, if I may. Really good decremental performance in PMC in the quarter.

Is mid-20s a reasonable range to think about for the back half? Or are there some variable costs coming back or other pressure points that may lift that number?.

Yes. As Todd mentioned, we are turning some investments back on in the business. And kind of the weigh our overall cost across -- out of this but across the bank on the balance of the back half of the year. The decrementals probably won't be in that mid-20 range, but we're still going to deal.

PMC, think of it probably a 30 to 34 type range just in the back half. And you'll see strong decrementals in the Water as well. So as we -- but we are turning to investment back on, as Todd mentioned, so -- but all that being said, you're going to see good solid decrementals in both platforms in the back half of the year..

Our next question comes from the line of Julian Mitchell from Barclays..

This is Trish on for Julian. So it sounds like you guys think that Water Management could return to growth in the second half. And if we think about, then PMC seems to imply either flat or kind of worse sales declines in that business.

So just wondering, are there any end markets you're seeing conditions get worse or any that you're seeing getting better within that segment?.

When we look at end markets, obviously, the one that definitely is underperforming and probably has some downside risk to it is aerospace. Beyond that, I think our commentary was stabilized through June into July. We're sort of thinking about seasonality. We're thinking about customer behavior, investment decisions, all that kind of stuff.

And I think we're probably just taking a cautious view of what that could look like. But the one end market that I would call out that's probably lower for longer is aerospace..

Understood. That's helpful. And then just maybe one more on the cost-out program, the $51 million laid out last quarter and around $40 million or kind of more temporary in nature.

Is the right way to think about as those come back in calendar 2021 that they're kind of offset by the scope for savings coming through?.

We'll see. I mean, again, I think that as we look at our back half, it's really a function of how long do you squeeze the rock? And do you begin to put some of that back in, in the second half of the year, so that there's not a big headwind into fiscal '21. The savings from SCOFR are real; they'll come through.

And so I think we're really sort of managing for the next 24 to 36 months as opposed to the next 6. So I wouldn't think of it as a pure offset. I think it will probably be a little bit better than that. But that's the way we're thinking about those onetime cost saves..

Our next question comes from the line of Mig Dobre from Baird..

I guess, just trying to follow-up to some degree on Jeff's question at the very top, trying to get a little more clarity as to how you're thinking of what's embedded in your outlook at segment level for Q3? How we should think about PMC versus Water Management? And also sort of related to this, as you're looking at your order trends into July, I'm kind of curious if you're hearing anything different from either customers or distributors in both of your segments that might be operating in some of the states that have seen some of these COVID spikes.

Are you starting to see some impact to business already? Or is this not a factor yet?.

number one, take care of our people; number two, invest in the differentiated growth opportunities we have; number three, finish SCOFR; and then finally, beat our competitors and beat the underlying market. Those are our priorities.

And so the math exercise of guidance amidst all this, as you can imagine, one that we're not spending an enormous amount of time on. We're not attempting to win a guidance contest against consensus. We're trying to do with those 5 things extraordinarily well.

And if you look at the body of work, over the last several years in an acute basis for the last 6 months, I think it reads out pretty well. So that's really the comments on guidance and trying to reconcile it back and forth.

But just recognize that if things are a little better than we think, obviously, you'll see what happens when we perform a little bit better. I mean the margins were terrific. Decrementals are very good. Cash flow is high. And I'm optimistic that 1 month into the third quarter, July is on track. It will do probably a little bit better than what we saw.

But we also have 2 more months to go. So that's the way we framed up our third quarter guidance..

I can appreciate that. And at least for me, it was less reconciling to consensus and more trying to understand exactly what you see in your business. And so that, that can frankly inform our view more broadly on the company and your opportunity. So that's where I was coming from.

If I may switch to the cost side, I guess, I'm wondering if you can provide us a little bit of an update as to how your cost takeouts have been progressing versus your initial plan.

If there's anything to kind of call out about the June quarter, in particular? And then maybe a little bit of framework as to how we should be thinking about your -- again, the framework that you put forth for the September quarter, where decremental margins are looking slightly different than the prior quarter.

Is this just a factor of ramped up investment? Or is there something else in there as well that we need to be aware of?.

Sure. I think the cost takeout that we had outlined in the second quarter was very much on track in PMC and the corporate line. It was less than what we had targeted in the Water side.

And as I mentioned earlier, that was a conscious decision to make some investments, eliminate furloughs, do the things that would allow us to continue to capitalize on the opportunity we see. As you move to the third quarter, I think that the PMC cost takeouts will probably be exactly in line relative to the second quarter.

On a net basis, that's an investment offset by some course correction. Corporate is in line. And Water, the cost reductions will be less as we see the opportunity to make some investments now. But taken as a whole, it's in the ZIP code. And the decrementals of 13% in the quarter clearly have the benefit of no spending in April.

And as you -- if you return over the course of the month of May and June, it sort of ramps up. And now we're sort of in a normal zone. And as Mark pointed out, the decremental margins in that 25% to 30% range is something we've endorsed for a really, really, really long time. And I think that's the way to think about the second half..

Our next question comes from the line of Andrew Obin from Bank of America..

This is Emily on for Andrew Obin. Just a question on nonresidential construction outlook for Water Management. Any visibility on non-res construction for second half of the year and 2021? We've been hearing about some leading indicators suggesting that 2021 could be a down year for non-res..

Well, we've owned Zurn for 13 years now. And the forecasts, I think, have only been wrong 12.5x. So fundamentally, there's a chance that, that may happen. There's a chance it may not. I think what we take comfort in is that of those 13 years, we'd beaten the market every year by a considerable margin.

If you look at some of the verticals underneath the big number, we see actually reasonable performance heading into the next year. Without question, there's a period of time where there hasn't been a lot of new work coming in. That will have an impact down the road into '21, size and length. [Technical Difficulty]. We don't know yet.

The other thing that I think is important to know is, as I mentioned earlier, the retrofit opportunity is massive. The relative share we have there is low but growing dramatically. The margins are better.

And we think that, that has the opportunity to at least if there is some sort of a cover a good portion of it and maybe even provide some growth on top of that. So we're not going to prognosticate what the non-res market does in '21 other than to say we beat it every year for 13 years.

We've got some awesome breakthroughs that are right in front of us that are ramping and we're going to manage through it, whatever it looks like..

Great. And then one more question from me on supply chain, specifically.

How are you thinking about supply chain post COVID in terms of derisking either by shifting supply chains or adding back up suppliers?.

Emily, are you there?.

Yes, did you get the question? Did you hear me?.

You sort of -- you cut in and out..

No, no worries. I'll ask that again. It was just a question on supply chains.

How are you thinking about supply chains post COVID in terms of derisking either by adding suppliers or shifting geographies?.

Well, as you know, we've been working at our supply chain optimization plan for almost four years. So it's something that is top of mind fluid and changing every day. So I don't think there's anything substantial to report as a result of COVID. I think we've been diversifying ourselves out of China, as you saw with the tariff impact.

We navigated through that sort of flawlessly. So we've done a fair amount of change to our supply chain over the last 3 years. We continue to do that but always on a forward-look basis.

So much less reactionary to this COVID environment than our long-term strategy and ensuring that we've got a robust supply chain, some of it domestic, some of it foreign, appropriately mixed between regions to allow us to get the best price with the highest level of quality and with the best lead times.

So nothing specific to call out COVID supply chain oriented..

We have no further questions in queue. I'll turn it back to the presenters for closing remarks..

I'd like to thank everybody for joining us today on the call. We'll be back to you again in late October to report on our September quarter results. I hope everybody has a great day, and please stay safe..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..