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Rexnord Corporation (RXN)
F2Q13 Earnings Call
November 8, 2012 10:00 AM ET
Mark Peterson – SVP and CFO
Todd Adams – President and CEO
Andrew Breichmanas – BMO Capital Markets
Charlie Boorady – Credit Suisse
Elana Wood – Deutsche Bank
Mig Dobre – Robert W. Baird
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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 the replay, can be found in the earnings release the company filed on an 8-K with the SEC yesterday, November 7th and are also posted on the company’s website, at www.rexnord.com.
At this time, for opening remarks and introduction, I’ll the call over to Mark Peterson, Senior Vice President and Chief Financial Officer of Rexnord.
Good morning. 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 yesterday, as well as in our SEC filings. In addition, some comparisons are for the non-GAAP measures.
Our earnings release in SEC filings contain additional information about this non-GAAP measures and why we use them.
Today’s call will provide an update on our overall performance for the second quarter, including details on our two platforms, followed by an overview of our financial statements and liquidity highlights
Afterwards, we’ll open up the call for your questions. With that, I’ll turn the call over to Todd Adams, President, and Chief Executive Officer of Rexnord.
Thanks, Mark, and good morning everyone. I want to thank you for joining us for an overview of our fiscal 2013, second quarter financial results.
Turning to page 4, overall, we are pleased with our second quarter results which were slightly ahead of what we communicated in early August. Reported sales growth was 11%, core sales growth was 2%, our adjusted EBITDA was $101 million or 20.1% of sales, and our adjusted EPS was $0.24.
In the second quarter, we implemented the cost reductions we articulated, and continue to be vigilant on managing our cost while protecting long term growth initiatives.
In general, the market conditions we anticipated back in August for the balance of our fiscal year, have broadly been as we expected, with some puts and takes that I’ll discuss as we go through the platform results.
We are affirming our full year guidance of sales between $2,020 million to $2,060 million adjusted EBITDA between $412 million and $425 million and free cash flow greater than net income.
Moving to page 5, I’ll give a little color on each of the platforms starting within Process and Motion Control. Overall, the platform hosted 3% core growth and an adjusted EBITDA margin of 25.1%.
With strong execution, and enhanced growth initiatives offsetting what I’d characterize as incrementally slightly weaker industrial market trends which has broadly been discussed over the past several weeks.
We’re particularly pleased with the traction we’ve made on delivering gross profit improvements as our gross margins was 39% in the second quarter, up 210 basis points over the prior year which drove 140 basis point increase in our adjusted EBITDA margin and allowed us to deliver 4 million of incremental adjusted EBITDA year-over-year on reported sales that are effectively flat.
From a market perspective, our business through distribution continues to be solid with only a slight sequential moderation in the sell-through growth in the quarter, but still in the low to mid single digit range.
OEM and end user growth reflects the continued caution we discussed in August, which is a trend we don’t anticipate to change quickly, however, we are seeing some progression in a number of end markets.
We believe we’re beginning to see the order rates in our mining business stabilize, and our broad, industrial European demand recovered as we had expected in the quarter.
I think it’s very clear that within Process and Motion control, the overall OEM and end user sentiment is difficult with low visibility likely to continue for the next several quarter.
Our focus has been, and will continue to be, ensuring that our service levels are the very best, continuing to aggressively invest in new products and innovation to provide our customers with superior solutions that improve their overall reliability, productivity and ultimately make them more profitable while continuing to leverage RBS [ph] to eliminate waste to create the funding to allow us to invest back into our business, and extend our leadership positions.
Moving to our water management platform. As we had expected, and communicated, core growth improves sequentially to flat in the second quarter, compared to the prior year after having decline by 9% in our first fiscal quarter.
Reported growth was 38% reflecting the VAG acquisition, and our adjusted EBITDA margin was 16%.
If you look at the chart on the lower left part of the page, you’ll see the elements of our core growth broken down by platform, and ultimately by the two components of our water management platform.