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Rexnord Corp. (RXN)
Q3 FY2013 Earnings Conference Call
February 11, 2013 5:00 p.m. EST
Todd Adams – President and CEO
Mark Peterson – SVP, CFO
Charley Brady – BMO Capital Markets
Mig Dobre – Robert W. Baird
Ryan Connors – Janney Montgomery Scott
Good afternoon, my name is [Adrienne], and I'll be your operator for today's call.
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This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for today's replay could be found in the earnings release the company filed on an 8-K with the SEC today, February 11, and they're also posted on the company's website at www.rexnord.com.
At this time, for opening remarks and introduction, I'll turn the call over to Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord.
Good afternoon and evening. Before we get started, just a brief reminder that this call may contain certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we issued today as well as in our filings with the SEC. In addition, some comparisons are for the non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures and why we use them.
Today's call provide an update on our overall performance in the third quarter including details on our two platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards we'll open the call up for your questions.
With that, I'll turn the call over to Todd Adams, President and CEO of Rexnord.
Thanks, Mark, and good afternoon, everyone. Thank you for joining us for an overview of our fiscal 2013 third quarter financial results.
Before we get started, I want to briefly comment on the announcement we made earlier today regarding the exploration of strategic alternatives. As we discussed in the release, the company's Board of Directors has initiated a review of strategic alternatives to enhance value for shareholders and engaged Goldman Sachs as part of that process. It's important to note that no decision has been made regarding any transaction and that we remain completely focused on executing our business strategy. I would like to remind everyone that the purpose of today's call is to discuss our third quarter financial results and outlook for the balance of the fiscal year. Therefore we will not comment further or take any questions on that topic. I thank you all in advance for your understanding and cooperation.
With that, let's turn to page four. There's been a lot of interesting commentary as people have reported December quarterly earnings over the past few weeks, but one common theme has been the industrial end-markets were tough in December, in the December calendar quarter. As it relates to our third quarter, starting with PMC, on balance, I characterize demand in our short-cycle industrial business as choppy as we rolled through the quarter. I'm not going to try to ascertain how much of that was the fiscal cliff or yearend window dressing, but I will say that we saw some unusually erratic order patterns that we frankly don't believe are sustainable given the nature of our businesses and types of applications our products go into.
Four weeks or so into our fourth quarter, we've seen an improvement in order rates in many of our short-cycle businesses compared to the order rates we experienced in November and December, but we remain cautious with respect to our near-term outlook given the volatility we've experienced over the past nine months.
In the longer-cycle industrial part of our business, we're actually encouraged with the level of inquiry and quotation activity we're seeing and expect that we'll see those opportunities begin to convert to orders over the next couple of quarters, which in turn would set up a sales recovery in the second half of our fiscal 2014.
Turning to our Water Management platform, the end-market environment is clearly brighter and the combination of Zurn and VAG is really starting to deliver the results we expected, and for the first time in five years, there's no meaningful market headwind, which actually makes it feel like a tailwind given where we've come from. As we look ahead, we see the market continuing to improve over the next two to three years and believe all the work we have done to reposition the businesses and the platform will allow us to disproportionately capitalize on the market recovery.
From a performance perspective, we continue to do a solid job on controlling the [controllable], delivering $92 million of EBITDA and an 8% increase in adjusted operating income, which translates to a 38% increase in our adjusted net income, while continuing to invest in our business and despite a weak industrial market that drove a reported sales decline of 3%. As we look ahead, in the near term we anticipate Process and Motion Control growth accelerating to the low to mid-single-digit range over the next six to 12 months as the industrial markets slowly recover, a trend that we feel pretty positive about. In Water Management, the progress we've made strategically over the past couple of years positions us to benefit from the improving market fundamentals and deliver strong growth moving forward.