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spk09: 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 two weeks. The phone numbers for the replay can be found in the earnings release the company filed in an 8K with the SEC yesterday, July 28th. At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy.
spk06: 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 Rexnor.
spk04: 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 priorities 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 three. To cut to the chase, we performed really well in the quarter. From our view, It was a gratifying, important thing to take away from this quarter and really the last six 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%. Ninety 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 are 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, and PMC was down 15%. And while we had talked about a moderating impact from 80-20 and 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 two-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 80-20 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 1.9 times, 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 it's 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 FY21. I'll move to page four. As I said last quarter, I'm going to say it again. If you take away one thing from today's call, it's 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 discipline tools and processes that allow everyone to be fact-based and decisive. Our philosophy of engaging our people around a 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 you 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 six months, and in the June quarter in particular, adjusting to having to work and be productive in different ways. The way they'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 non-plant associates has been very measured. We have only about 15% of our people back in the office, ensuring maximum amount of social distancing 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 of this pandemic, It's that 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 do 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 listening. We're asking, what can we do better? What would you like to see changed? Whether it's healthcare-related, childcare, technology and tools we can provide, it's all on the table. We're actually visiting our factories 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 four years ago, we launched a multi-year initiative to streamline our operations, build flexible and robust supply chains while reducing our fixed costs 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 five. 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 four 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 even have thought about four 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 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 in restaurants, schools, 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 six. From a capital allocation strategy perspective, the overarching plan we outlined in February is essentially unchanged, as I said earlier. Keep leverage two to three times, and in this environment, as close to two 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 pause 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.
spk05: Thanks, Todd. Please turn to slide number seven. On a consolidated basis, our June quarter financial results demonstrated the resilience we've built into the company over the last four plus years since 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 one-point impact from our product line simplification 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 to only 7% year-over-year for $103 million, and the 12% top-line decline was translated into a 13% consolidated decremental margin. Please turn to slide 8, and we'll review our platform starting with PMC. PMC sales were down 15% year-over-year on a core basis as we experienced sales declines in most of the markets, generally in the double-digit percentage range, And we accelerated some 80-20 simplification actions that reduced year-over-year sales by approximately 190 basis points. We did generate positive growth in Asia and renewable energy, but together they only accounted 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. A sell-through was broadly weak, although it improved in June after bottoming in May. Overall, and given support from backlog, OEM and 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, the cost actions we initiated last quarter in response to the pandemic. PMC managed to have 26% documental margin despite some adverse mix through the relative weakness in our aerospace business. Turning to water management, bills were down only 5% from the core basis and just 2% after factoring in the contributions from the acquisitions of stainlesserenas.com and just manufacturing in the prior 12 months. Both acquisitions delivered positive year-to-year core 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%, on strong cost control, some benefits from the relative strength in touchless products, and contributions from our recent acquisitions. Let me turn to slide number nine. With visibility still challenging and given a wider than usual range of potential outcomes for the upcoming quarter and, of course, the next six 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 the quarter of September are similar to what we provided a quarter ago and are focused around providing relatively precise guidance for elements where we can exercise substantial control over the results and incorporating some downside or 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 PMCs 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% and 17% in the September quarter. Based on that sales range and incorporating our cost reduction initiatives and other countermeasures, 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 number 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 nine-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 has pushed some of our scoper projects to the right by a few weeks to a few months. In addition to the nine-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 adds them to the nine-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 nine months and for 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. Putting up the chart in the far left, and on a year-over-year basis, our free cash flow tripled off a low base of $39 million in the June quarter, and brought 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 for the nine-month interim period, and therefore more than $200 million for the entire calendar year 2020. Moving to the chart in the center, you can see that our financial leverage measured by our net death outage ratio, was unchanged at 1.9 times, and finished the quarter just under the low end of our long-term targeted range of two to three times. Finishing with the chart on the far right, in March, we borrowed on our revolver and our AR facility to protect the short-term liquidity and the potential magnitude of any downside or risk from the early days of the global COVID-19 outbreak was unknown. With a quarter behind us now and a better feel for the potential downside risk to our liquidity, we are comfortable repaying the borrowings under the facilities. We repaid the $250 million of borrowings in 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 1231, We filed pro forma quarterly financials for calendar year 2018 and 2019 in the 8K with our earnings release yesterday. We'll be posting them to our investor next week. With that, welcome to call up for your questions.
spk09: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile a Q&A roster. And our first question comes from the line of Jeff Hammond from KeyBank. Your line is open.
spk00: Hey, good morning, guys. Hey, Jeff.
spk05: Morning, Jeff.
spk00: Just want to go over the 3Q guide. You know, I think it's a step down from 2Q, you know, which was pretty resilient. One, can you just talk about the difference between the two segments? And then Just anything more color around the backlog relative to the prior quarter and order trends into July that kind of inform that range?
spk04: Well, I read your notes. I figured you might be asking the question. Good. So, you know, 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, you know, if you look at seasonality, if you look at margin performance, if you look at a lot of different things, you know, I think what we're pointing you to is, you know, we had a really good quarter. July is sort of tracking pretty well, or tracked well, I should say. The quarter's over. And, you know, we're guiding to a range that is clearly comfortable for us, but in absolute terms, you know, it doesn't look a whole lot different holistically than Q2. And, you know, that's, I think, really the way to think about it more than anything.
spk00: Okay. Can you just talk about the drivers of the water margin? 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, you know, what you've kind of been, you know, been finding in the markets.
spk04: If you look at the overall margin, we do benefit from really two mixed elements. One, a greater percentage of our sales today are in the retrofit market than ever before. You know, traditionally it had been, you know, 10 years ago it was 5% or 10%. You know, it had been running. In the mid 30s, you know, I think there's a chance that 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 mixed positive. So, you know, when you look at Zurn margins, I wouldn't think about this as, you know, wild cost controls and not spending a penny. 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. You know, 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, you know, 29-1 I think is a pretty good indication of what we can do. I wouldn't think that it's a unicorn by any stretch of the 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 come down.
spk07: But it's a legit number, and we feel really good about it. Okay, great. Thanks, guys.
spk09: Our next question comes from the line of Jill O'Day from Vertical Research. Your line is open.
spk01: Hi, good morning, everyone. First 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?
spk04: 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 and 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 PowerGen, to get more exposure to marine, we think are clearly benefiting that. Obviously, we have an aerospace segment that, from an order standpoint, it's a tough end market, as everyone knows. We do have some backlog. When you look down the mid-teens, we benefit from to a degree, a little bit of a backlog release of the quarter. But when you look at it on all the puts and fakes, it's all right around that number, not 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 has to do with some of the more structural things we've done over the course of the last three or four years.
spk07: Got it.
spk01: 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 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?
spk05: I think, Joe, we try to lay out the big pieces of the puzzle. There are some other things, you know, puts and takes here and there, pension cash contributions and whatnot, but we try to lay out the big items to help people frame up the number, I think. but we feel very comfortable with a 200-plus number at this point in time with two quarters to go. So I think we've left a big piece. There's really nothing that's of substance or size that we haven't put on that page, Joe.
spk04: Joe, he did say plus. He just didn't tell you what the plus was.
spk01: 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.
spk04: I think with respect to the buybacks, we're going to sort of feather that in, obviously. I think, you know, I think in February we were talking, you know, 75 to 100 million annually. You know, it'll be less than that. You know, we've already got 30 in, I think, through March. So there'll probably be some incremental, but, you know, 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 two things on the water side done. It could be tuck-ins. It could be bolt-on. But I think over the next six months, we think that those are things that are probably likely going to happen.
spk07: All right. Got it. Nice quarter. Thanks very much.
spk09: Our next question comes from the line of Brian Blair from Oppenheimer. Your line is open.
spk02: Morning, guys. Nice continued execution in the quarter.
spk04: Thanks, Brian.
spk02: Morning, Brian. 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 a related question. Is the team facing any material supply chain issues and trying to meet the rampant demand there?
spk04: 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 it 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. And so we did build backlog in the quarter. And it's really coming at us in waves. The 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, you know, orders measured in the tens of thousands of units. And so for us, you know, it's really about, you know, continuing to ramp the supply chain to meet demand, pull in lead times, and then really start to capitalize on, you know, the unique value proposition we have and being probably less vertically integrated than anybody we compete with you know, that's an area of high priority and focus, and I think we feel really confident that, you know, in the span of a three- to six-month period, we're able to sort of absorb and deliver against and actually pull in lead times against the business, but double it. So that's sort of the way to think about the hygienic piece.
spk07: Okay.
spk02: Appreciate all the color. And Zurn's core growth was, understandably restricted by shutdowns early in the quarter, then you mentioned some acceleration. If we think about the trajectory of hygienic sales, and I'm assuming we can layer on two or three points of contribution from just, is it realistic that water management returns to growth in the back end?
spk04: 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, 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. You know, 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 in investing in our business so that when we turn the corner, you know, 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.
spk02: Okay, all makes sense. And then, Mark, one last one, if I may. You know, really good decremental performance in PMC in the quarter. Is mid-20s a reasonable, you know, 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?
spk05: Well, yeah. As Todd mentioned, we are turning some investment back on in the business. And kind of the way our overall cost is feathered in across the bank on the balance of the back half of the year, the deck of metals probably won't be in that mid-20 range, but they're still going to be doing it. You know, P&C, think of it as probably, you know, a 30 to 34 type range just in the back half. And you'll see strong decrementals in water as well. But we are turning some investments back on, as Todd mentioned. But all that being said, you're going to see good, solid decrementals in both platforms in the back half of the year.
spk02: Got it. Thanks, Chris.
spk05: You bet.
spk09: Our next question comes from the line of Julian Mitchell from Barclays.
spk10: Your line is open. Hey, good morning. This is Trish. I'm 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, it 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?
spk04: You know, when we look at end markets, obviously the one that definitely is underperforming and probably has some downside risk to it as aerospace. Beyond that, I think our commentary was, you know, 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.
spk10: 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 are 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?
spk04: We'll see. I mean, again, I think that, you know, as we look at our back half, you know, 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 school for our 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 six. So I wouldn't think of it as a pure offset. I think it'll probably be a little bit better than that. That's the way we're thinking about those one-time cost saves.
spk07: Great. Thanks so much.
spk09: Our next question comes from the line of Nick Dobre from Baird. Your line is open.
spk03: Hey, good morning, everyone. 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 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?
spk04: Well, Meg, I think you have to separate the guidance numbers and set those off to the side. I think what we're trying to do is... provide you a range of outcomes based on what we see. Obviously, as you saw in the last two quarters, we outperformed what we set. And so we're not trying to set this up to just, we're trying to give you the range of outcomes that we see. So from a customer standpoint, the feedback, you know, as you can likely imagine, is mixed. You know, when you look at the number of end markets that we have in the two segments, I think you're invariably going to get some customers that are super excited about the next six months, and you're going to get some that are a little more bearish, depending on the end. At this point, we haven't seen on the water side any pronounced changes to the construction cycle based on these COVID outbreaks, but that could happen at a moment's notice. And so the way we've tried to sort of set up the way to think about the third quarter and the second half, is one of a high degree of confidence in our ability to execute in a tough environment. If it's better than we think, we'll probably do a little better. If it's worse, we've got the cost structure in place, we've got some growth investments that are driving out performance, and we feel like that we're going to turn in, on a comparative to the prior year, a really good result. I know you're trying to reconcile maybe what your model is versus consensus versus what we said, but I wouldn't spend a lot of time worrying about that. I would just simply say our view over the next six months is 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, you know, the math exercise of guidance, you know, amidst all this, as you can imagine, you know, one, that we're not spending an enormous amount of time on. We're not attempting to win a guidance contest against consensus. What we're trying to do are those five things extraordinarily well. And if you look at the body of work over the last several years and in an acute basis for the last six 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, you know, if things are a little better than we think, you know, obviously you'll see what happens when we perform a little bit better. I mean, the margins were terrific. Degmentals were very good. Cash flow was high. And I'm optimistic that, you know, one month into the third quarter, you know, July is on track. They do probably a little bit better than what they said. But we also have two more months to go. So that's the way we framed up our third quarter guidance.
spk03: 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, you know, so that that can, frankly, inform our view more broadly on the company and your opportunities. 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, you know, decremental margins are looking slightly different than the prior quarter. just a factor of ramped up investment, or is there something else in there as well that we need to be aware of? Thank you.
spk04: Sure. You know, 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 had mentioned earlier, that was a conscious decision to make some investments, eliminate furloughs, do the things to 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. In water, the cost reductions will be less as we see the opportunity to make some investments now But taken as a whole, you know, it's in the zip code. And, you know, the detrimentals of 13 in the quarter, you know, clearly have the benefit of, you know, no spending in April. And as you, you know, as you return over the course of the month in May and June, it sort of ramps up. And now we're sort of in a normal zone. And, you know, as Mark pointed out, you know, the decremental margins in that 25 to 30 range is something we've endorsed for a really, really, really long time.
spk07: And I think that's the way to think about the second half. Great. Thank you.
spk09: Our next question comes from the line of Andrew Obin from Bank of America. Your line is open.
spk08: Hi, good morning. This is Emily on for Andrew Obin. Just a question. Just a question on non-residential construction outlets for water management. Any visibility on non-res construction for second half of the year and 2021? You know, we've been hearing about some leading indicators suggesting that 2021 could be a down year for non-res. Thanks.
spk04: Well, you know, we've owned ZERN for 13 years now. And the forecasts, I think, have only been wrong 12 and a half times. 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 beat 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 next year. Without question, there's a period of time where there hasn't been a lot of new work coming in. That'll have an impact down the road into 21. Size and length and depth of it, we don't know yet. The other thing that I think is important to note is, as I mentioned earlier, the retrofit opportunity is massive. The relative share we have there is low, but growing dramatically. Margins are better. And we think that that has the opportunity to at least, if there is some sort of a divot, 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 have 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.
spk08: Great. Thanks. And then one more question from me on supply chains specifically. How are you thinking about supply chains post-COVID in terms of de-risking either by Shifting supply chains or adding backup suppliers?
spk07: Am I there? Hi, yes. Did you get the question?
spk04: Can you hear me? You cut in and out.
spk08: 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 de-risking either by adding suppliers or shifting geographies?
spk04: 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. You know, I think we've been diversifying ourselves out of China, as you saw, you know, with the tariff impact, we navigated to that sort of flawlessly. So we've done a fair amount of change to our supply chain over the last few years. We continue to do that, you know, but always on a forward look basis. So much less reactionary to this COVID environment than our long-term strategy in 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.
spk07: Great, thanks very much. We have no further questions in queue. I'll turn back to the presenters for closing remarks.
spk06: 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.
spk09: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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