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Rexnord Corp (NYSE:RXN)
Q2 2020 Earnings Call
Oct 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Rexnord Second Quarter Fiscal 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. [Operator Instructions] The phone numbers for the replay can be found in the earnings release, the company filed in an 8-K with the SEC yesterday, October 29th.

At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy. Please go ahead.

Robert McCarthy -- Vice President of Investor Relations

Good morning and welcome, everyone.

Before we get started, I need to remind you that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon, as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP data.

Consistent with prior quarters, we will speak to core growth, adjusted EBITDA, adjusted earnings per share and free cash flow as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data, and we urge you to review the GAAP information in our earnings release and in our filings with the SEC.

Today's call will provide an update on our strategic execution, our overall performance for the second quarter of our fiscal 2020 and our outlook for fiscal year 2020. We'll cover some specifics on our two platforms, followed by selected highlights from our financial statements and afterwards, we'll open up the call for your questions.

With that, I'm pleased to turn the call over to Todd Adams, President and CEO of Rexnord.

Todd A. Adams -- President and Chief Executive Officer

Thanks, Rob and good morning, everyone. Our overall second quarter results were broadly in line with our expectations with a little less topline, mostly due to currency and offset by better margin expansion delivered through our sustained high level of operational execution. Overall, our core growth was flat, which is mostly in line with our outlook and does include a roughly 150 basis point impact on our sales growth from our 80-20 simplification initiatives.

Despite a stronger headwind from currency translation, we delivered year-over-year growth in our adjusted EBITDA to $118 million, which is a record for any second quarter for us. By takeaways from the quarter were essentially more of the same with the Rexnord Business System and our relentless focus on continuous improvement is the foundation. Our strategies are delivering against the objectives we set out three years ago. To sustain strong earnings and free cash flow in a slowing macro environment, to strengthen our balance sheet and to deliver substantial structural fixed cost reductions, while investing areas to drive better growth over time.

We've been tested by an unprecedented wave of tariffs and our teams have responded with aggressive countermeasures that have not only neutralize the profit impact to our earnings and cash flow, but it also enabled us to sustain an elevated level of investment in a series of growth initiatives, including DiRXN our digital enterprise strategy. I'll share an update on our progress with DiRXN in a few moments.

As quarter's click by, it's sometimes easy to forget the magnitude of the tangible and foundational changes we've made to our business. We've dramatically improved our end-market exposure led by the important strategic additions of Cambridge and Centa, both substantial businesses with leadership positions in far more stable end markets that are both performing today and continue to have upside. We've also exited large project dependent and lower return businesses that introduced significant volatility into our results.

Finally, we reduced our fixed cost structure by $40 million from just three years ago, as we've executed our SCOFR 1 and 2 plants. And just to reiterate SCOFR 3 is well under way and will deliver another $20 million of savings. Our leverage has never been lower and our free cash flow has never been higher, and we'll continue to grow based on the actions we've taken. These accomplishments are the very real and dynamic changes we've made to our business that makes it far more resilient than it has ever been, and positions the company to deliver solid financial results across a far wider range of macro environments.

At the same time, we focused on restructuring and strengthening our commercial capabilities to better leverage our legacy at engineering excellence. More recently, we launched an 80-20 base simplification initiative to reduce some of the inherent complexity that exist in every business and that is allowing us to better focus our resources around differentiated product and service solutions directed at high potential customers and high potential end market verticals to drive growth.

We're still early in the journey and we are very confident that our early successes will only be upside to our financial performance and further distinguish Rexnord as a high performing concentrated multi-industry business with two great platforms that can grow above their markets, while delivering very high returns and strong free cash flow that we believe can be leveraged into a $3 to $5 billion enterprise over time.

Please turn to Slide three. I'll review our second quarter results. Our net sales finished at $521 million, down 1% from last year, but up 1% before factoring in the higher-than-anticipated two point impact for the stronger US dollar. As planned our product line simplification actions reduced our sales by another 150 basis points. We had anticipated that the second quarter was going to be our toughest comparable to last year, given that we delivered 9% topline core growth a year ago.

Our adjusted EBITDA expanded year-over-year to $118 million and margins expanded by 80 basis points. Sequentially, our incremental margins were 55% and we delivered record free cash flow in our second quarter. Year-over-year free cash flow or year-to-date free cash flow was, up 27% in the first half and we're well on our way to another year of record free cash flow.

Turning quickly to our operating platforms. Core growth in our PMC platform was, down 2% and essentially flat after adjusting for our product line simplification actions, which reduced PMC sales by 2%. That being said, frankly being flat, was a little bit light to our internal expectations. OE applications across most end markets in North America and Asia were broadly in line with what we had anticipated and Europe continue to be relatively weak. But generally in line with our view is heading both into the quarter and for the year. We're little disappointed by our growth in the quarter for the North American distribution channel, as their demand from us lag the actual sell-through in the quarter. On the positive side of things, the inventory turns with our channel partners continue to be at all-time highs and I'd say we're generally confident this level is out over the back half of our fiscal year.

PMC's adjusted EBITDA margin was 23%, as we benefited from the growth in our aerospace business and the structural cost reductions that are being delivered at the second wave of our SCOFR initiatives that we completed last year. Core growth in our Water Management platform came in at a solid 4% in the second quarter, against 12% core growth last year. As Zurn continue to benefit from steady demand growth in commercial and institutional plumbing end markets, as well as success with our strategies to grow our share of the adjacent fire protection and site works markets.

Zurn delivered 30 basis points of expansion in its adjusted EBITDA margin over the record established in last year's second quarter as we continue to manage the ongoing tariff structures and price cost equation, while sustaining our investments in innovation and market expansion.

Turning to our financial outlook. With six months behind us and six months to go in our fiscal '20, we are narrowing our prior range of adjusted EBITDA to reflect the realities of $4 million of incrementally adverse currency translation, with the balance of the refreshed view resulting in taking up the prior low end of our guidance range by $4 million and reducing the top end by $4 million. Taking our adjusted EBITDA range for the year to $460 to $467 million. It's a long way of saying that from an operating point of view the midpoint of the adjusted EBITDA range is essentially unchanged. We are also affirming low single-digit core growth for the year. This is inclusive of almost two points of impact from our simplification initiatives. And finally, we expect another year of free cash flow exceeding net income.

Qualitatively, as we continue to monitor all over the demand trends both internal and external. The only real change in our top line outlook is that PMC core growth over the back half of our year looks to be a touch lower than we had originally thought necessary to achieve the higher end of our prior range. And our revised outlook assumes that will probably closer to what we've just grew in the first half of the year.

The good news is that our organic initiatives are filling in most of the gap and we feel like our original outlook combined with this mid-year tweak keeps us very much on track toward another record year, despite the somewhat weaker macro environment. Mark will review both the consolidated results and the performance of each platform in more detail as part of his comments a little later in the call.

Please turn to Slide four, and I'll provide an update on the important strides, we've been making with DiRXN, our digital enterprise strategy. When we embarked on this journey in 2017, a key objective was to build upon the competitive advantages inherent in our business by improving our customer's productivity. Starting with just a conceptual framework the developing unique and scalable solutions in close partnership with our customers to where we are now, which is aggressively commercializing the solutions. The initiative includes building significant organizational capability, as well as developing key partnerships that are enabling us to bring best-in-class solutions for the marketplace. I'm pleased to report that we've made major strides in just two years with a few highlights shown on this slide.

Within PMC we've made significant investments in digital resources to transition what had been traditionally manual processes and resources and resource-intensive to the web, which translates to intuitive and more productive interactions with our customers. The response has been overwhelmingly positive and is reflected in the broader use of our web-based digital resources, including configurators and automated quoting and ordering processes that are increasingly becoming a solution platform.

Our 80-20 work, including our product line simplification initiatives dovetails perfectly with DiRXN, but amplifying our focus on our strongest capabilities being applied where they can have the most impact. It seems fair to say we've come a long way in two short years. But we still have the greatest share of the value creation opportunities ahead of us.

I'd say the same about the connected product strategy, which is about leveraging our strengths in application engineering and customer mind share to create a set of differentiated growth opportunities over the long-term. We've gained a massive amount of learning as we've learned how customers explore the applications of our technology and the challenging range of applications that exist when your end markets range from bottle -- beverage bottling to lumber production to grain processing.

Over the last two years, our connected Gear-Drives have proven their value in the most critical and demanding applications, like supporting 24/7 operations in a potash mine, it is more than a mile underground. By focusing initially on the most demanding applications, we've developed capabilities that can be more easily scaled to fit the amazing range of applications and duty cycles where our industrial components are installed. Related to that, we've made steady progress over the last two years and lowering the cost to connect and we are very much on track to achieve a key threshold as we exit our fourth quarter.

Now let's turn to the progress we're seeing at Water Management. You may recall last year Zurn launched the proprietary digital tool named inSpec. This tool makes it far easier for engineers to develop the complex plumbing specifications necessary for a new building or major retrofit projects. We've continue to enhance the product based on voice of the customer input and adoption continues to grow rapidly. Through the first half of our fiscal '20, the cumulative value of all project specifications developed with inSpec is already about 75% greater than that was for all of fiscal 2019. We're also making rapid strides with our connected product strategy and getting critical insights into how our customers think about their water usage and efficiency. The bottom line is that -- of that -- is that two our core strategic believes are being validated. But the close collaboration on application development is deepening our relationships with strategic customers and with critical specifiers and that our unparalleled ability to address the entire potable water system is going to be an important competitive advantage.

Another reason we're particularly excited about the potential we see in the near -- in the intermediate term is that certain customers are arriving at the conclusion that the benefits of connecting major elements of the building's Water Management System can be significant enough to consider large sale retrofit initiatives. It should provide an increasingly relevant source of incremental growth with new building construction inevitably slows.

Overall, our funnels are growing quickly. We're seeing the progression from demonstration of concept to pilot installation to initial order, which increases our confidence they are gaining light of site to our investments in our connected product strategy. And in DiRXN more broadly, generating meaningful incremental growth and financial returns.

Bottom line, our DiRXN's experienced to-date has been incredibly positive. We're behind our original expectations, the offset is frankly priceless knowledge that we've gained and the increased focus our learning has brought to our development path, where we're ahead, the voice of the customer is directly influencing our development roadmaps and accelerating our progress. Our ongoing digital transformation combined with our 80-20 simplification work and our investments in solutions-oriented innovation, commercial excellence and in our SCOFR cost reduction initiatives are together delivering increasing influence over our top and bottom lines.

As a result, we're seeing steady progress toward a higher growth, higher return and higher cash generating business model with the flexibility to perform in all stages of the business cycle and to deliver strong shareholder results over time.

With that, I'll turn the call over to Mark.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Thanks, Todd. Please turn to Slide Number five. On a consolidated basis, our second quarter of fiscal '20 financial results were most in line with our expectations. Year-over-year, our total sales were, down 1%, but up 1%, if you exclude currency translation as our product line simplification actions held our core sales to a flat year-over-year comparison, our adjusted EBITDA increased by 3% to $118 million, and our adjusted earnings per share increased by 11% to $0.51.

Please turn to Slide six. Our outlook for our fiscal year 2020 continues to incorporate low single-digit core growth, net of 150 to 200 basis point impact from our product line simplification initiatives. We expect our adjusted EBITDA to be in a range of $460 to $467 million, representing 5% growth at the midpoint and for our free cash flow to exceed our net income. Our revised outlook for our fiscal '20 adjusted EBITDA incorporates two elements; a $4 million increase to our estimate for the adverse impact of currency translation and a narrowing of our operating forecast range around an unchanged mid point.

On Slide seven, we summarize our consolidated results for the quarter.

Let's turn to Slide eight and discuss the first of our two operating platforms, Process & Motion Control. Total sales decreased 3% year-over-year in PMC, as a 1% contribution to growth from M&A was more than offset by a 2% impact of the stronger dollar and a 2% decrease in core sales growth nearly all of which is due to our product line simplification actions. As Todd noted earlier the sequentially lower core growth number at PMC was in part a function of the strong core growth generated in last year's second quarter, when PMC delivered its strongest quarter of core growth during our fiscal '19.

Looking at two years stacked core growth PMCs growth in this year's second quarter was actually a point stronger than in the first quarter. Putting aside the 200 basis point impact of our simplification actions on our core growth, PMC core growth was basically flat in the quarter. Breaking it down by major end markets, we continue to see good growth from our aerospace operations and we believe we outperform the broader industry in our global food and beverage end markets where our order growth strengthened in the quarter.

Overall OEM and end-user demand on the process industry end-market softened modestly in the quarter and as a result, we've adopted a more cautious outlook for our OEM and end-user activity in our global process industry end markets for the second half of our fiscal year.

In our North American distribution channels, we saw sell-through moderate slightly sequentially. Sell-through activity was close to what we had forecasted, but distributor investments were slightly weaker, which we believe was isolated to the quarter with one distribution partner as our overall channel inventories remain very tight. We believe we have line of sight to a tighter relationship between sell-in and sell-through in our North American distribution channels over the balance of our fiscal year.

Turning to profitability, solid operating execution and the benefits from our SCOFR actions delivered a 70 basis point expansion in PMC's EBITDA margin, despite the core sales decrease. We continue to expect PMC margins to increase year-over-year for our fiscal '20 as a structural savings we're realizing from our PLS and SCOFR initiatives ongoing growth in our aerospace operations and operational execution through the Rexnord business system are expected to more than offset our ongoing investment spending for the fiscal year.

PMC continues to innovate in the food industry with it's introduction of new dual detectable plastic belt materials that enhance our customer's ability to detect any material fragments that could contaminate the product in the event of extreme conveyance belt wear or failure. Material fragments or plastic conveyance belt as opposed to metal fragments are historically quite difficult to detect. Our new material formulations enable the detection of any particle contamination with both magnetic and X-ray technology, which in turn minimizes damage product for the customer. These new materials therefore increase the customers' options when selecting the optimal belt material for the processing applications.

Please turn to Slide Number nine, to discuss our Water Management platform. During our second quarter our Water Management platform delivered a 5% increase in net sales growth with 4% growth -- core growth and roughly 1% contribution from Stainlessdains.com, which we acquired in our first quarter.

Our product line simplification initiatives had a relatively minor impact on Zurn's core growth in the quarter, as did foreign currency translation. With weather, returning to more normal patterns, we experienced a sequential uptick inSpec's two year core growth that was expected and sustained 4% core growth in the quarter despite the more difficult year-over-year basis of comparison. Our underlying North American non-residential construction markets remain stable and we continue to be confident in Zurn's ability to deliver another year of solid growth based on additional demand growth, our innovation pipeline and favorable price realization.

As illustrated by our unchanged end market outlook that had summarized on the slide, demand conditions in our core non-residential construction end markets remain favorable. Year-over-year growth in overall US non-residential building construction spending has been pressured by slowing activity in construction verticals, our plumbing content is typically a relatively smaller portion of total construction spending.

I'm looking at overall commercial sector growth, deep declines in the retail sector where the plumbing content per square foot is typically relatively lower where detracting from the solid growth seen in office verticals with the plumbing content is relatively larger. Our outlook continues to incorporate a more cautious posture toward the commercial sector outlook in our second half.

On the other hand, overall growth in institutional verticals like public education and healthcare has remained relatively more stable. Institutional sector spending where specification and grid plumbing content is relatively greater and our relative share is stronger is expected to continue to grow at a higher rate. Zurn continues to introduce game changing innovations with our second quarter launch of a new family of Sensor Faucets been incorporate a proprietary Gear-Driven technology that provide superior reliability and service life, when compared with the traditional and prevalent solenoid actuation. These products can be easily retrofit and extend our ability to be -- being increased water efficiency and specific economic benefits to building owners and operators.

Turning to profitability, Water Management's adjusted EBITDA increased by 6% year-over-year in the second quarter with core incremental margin above 30% year-over-year. As a result, the Zurn delivered a 30 basis points of year-over-year margin expansion as we continue to deleverage our core growth, while funding our market expansion and cost reduction initiatives.

Moving on to Slide 10, and starting with the chart on the far left. Our free cash flow has increased year-over-year -- on a year-to-date basis and in our second quarter. We remain confident in our expectations for free cash flow growth in fiscal '20.

Moving to the chart in the center, you can see that our financial leverage as measured by our net debt leverage ratio is now at the low end of our long-term targeted range 2 times to 3 times.

Before we open the call up for questions, I'll touch on restructuring expenses and our effective tax rate. First, and in terms of our cost reduction initiatives, including the nearly -- the early innings of our SCOFR 3 initiatives, we continue to expect total restructuring expenses of $14 million to $16 million in our fiscal '20. These costs are primarily made up of severance costs and are excluded from our adjusted operating results.

Next, our effective tax rate will fluctuate by quarter given the varying levels of pre-tax income, as well as the timing of other planning initiatives. We anticipate our fiscal '20 adjusted net income will incorporate an effective tax rate of approximately 26%. In our third quarter, we anticipate the rate to be approximately 25%.

Turning to the slides in the appendix; first, we've included certain other assumptions incorporated into our guidance for fiscal '20 on a separate slide. I remind you that our guidance excludes the impact of potential acquisitions, potential accounting gains or losses and the future non-recurring items such as restructuring costs. As has been our practice, the appendix of today's presentation also includes the reference table on Slide 14 to help you reconcile the incremental quarterly share count to use for modeling our adjusted diluted earnings per share under the if-converted method that is required under our accounting for our outstanding mandatory convertible preferred.

As illustrated on Slide 15, the if-converted method was $0.02 dilutive to adjusted EPS in the second quarter and therefore was applied.

I'd also like to revisit my comments from last quarter to make sure everyone is clear and how to determine the correct share count to use when estimating our full-year fiscal 2020 earnings per share. Given that the preferable convert into common shares on November 15th, our average full year share count will include the converted shares only after that date. The first six months of the current fiscal year, the average fully diluted number of shares and equivalents actually outstanding has been approximately 108 million shares. Our current estimate for average diluted shares outstanding for the full fiscal 2020, including the new shares to be issued upon conversion of the preferred is approximately 115 million shares.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Good morning, Jeff.

Todd A. Adams -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

So just on PMC, I mean, it seems like macro certainly getting more challenged in the global process industries, but and certainly you've got the product line simplification, but do you think that business can grow at least nominally in the second half of the year?

Todd A. Adams -- President and Chief Executive Officer

I think, adjusted for the PLS, I think, the answer is absolutely, yes. I mean, if you look at where we are through the first half, it's sort of flattish and that -- it's an inclusive of essentially two points of PLS simplification. I think the way we talked about, it was we think the second half looks a little bit like the first half. So I think there is a chance that it's even net off that it's positive, but I think, we're thinking about it is flattish inclusive of the two points, but we'll see what transpires really over the second half.

But, yes, I think in general it's hanging in there pretty nicely, a lot of it has to do with some of these growth initiatives into more stable end markets, the verticals around food and beverage and consumer. We're having really good success, penetrating those. So we're -- I think we're encouraged, I think, we wish it was a little bit of higher in total, but for the most part tracking pretty nice.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, and then just over to Water, I mean, it seems like the outlook and visibility is pretty good, but we've seen some macro indicators like the ABI and Dodge Momentum start to slow a little bit. And some other companies have talked about some signs of project delays. Just how are you thinking about those macro indicators? Are you seeing any signs that people are just getting more cautious and pushing things to the right?

Todd A. Adams -- President and Chief Executive Officer

Well, I think what's reflected in the market outlook that we have. And frankly, probably in the last year are all those same things right things are continually moving around, and I think that I don't think that we see anything on a pronounced basis or unique that would tell us that we're seeing more project deferrals than we were six months ago. I think what you're seeing in our growth rates is one, the institutional side of things is still quite strong and if you can get lost a little bit watching ABI, then starts flick around year-to-year. I think we're seeing a sort of some steady reasonable growth, big backlogs. And on the positive side, we're seeing some share wins based on both the connected products, the breadth of portfolio, the inSpec, and then we've got two nice adjacencies in fire protection and site works that are helping us sort of grow above market. So nothing unique or significant that we would call out on deferrals or other things, Jeff. Just I think pretty good execution in our strategy, sort of work a little bit.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Thanks, Todd.

Operator

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

Joe O'Dea -- Vertical Research Partners -- Analyst

Hi, good morning.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Good morning.

Todd A. Adams -- President and Chief Executive Officer

Good morning, Joe.

Joe O'Dea -- Vertical Research Partners -- Analyst

Related to the PMC question, I think a continuation of growth in line with the first half, the comps do get slightly easier. And so just whether or not there is any sort of sequential slowing second half to first half that you're contemplating in there? How you're thinking about destock playing out for the remainder of the year?

Todd A. Adams -- President and Chief Executive Officer

Yes, I think what's reflected in our outlook, it clearly highlights the fact that we think it's a little slower in the second half. That being said, I think some of the organic things are going to help that. As far as destocking, we wouldn't call how significant destocking in any given quarter. It does impact us a little bit in the first half, because distributors are adding some inventory in the first half last year and they didn't add as much, but sell-through has been relatively stable the whole time. As we sit here today, I think, we think that over the second half that plays to a tie, so we don't see any significant increase or decrease in channel inventories. And that's what the foundation of our second half outlook. So most of the jostling around, I would call it, more than destocking is behind us, and we've got a pretty stable outlook with the second half, and I think the sell-through rates and the alignment of inventories to that, sort of, make a lot of sense to us at this point.

Joe O'Dea -- Vertical Research Partners -- Analyst

And then, Todd, some of your comments on DiRXN you mentioned, lowering the cost to connect and being on track to hit a key threshold as you exit the year? Any additional commentary that you can add with respect to that? And sort of what that threshold is? What kind of revenue opportunity that opens up?

Todd A. Adams -- President and Chief Executive Officer

Yes, it's a very high-end when we started off two years ago. The cost to connect with the edge computing device and everything was over $5,000. It's come down to $2,000 and we think we're sub thousand dollars by the time we get to March. And so when you think about what that does in terms of not just the new opportunities. The retrofit opportunity expands considerably and so the cost side of the equation is, where we've made the progress. The price side is still holding, so I think we're sort of in line with our development cycle that we had laid out, which is get it into the field, get it working, get people interested in buying it and then continually perfect the cost to connect to a point where -- for us the margins on new and retrofit opportunity, specifically as it relates to connected products should be substantially above our fleet average.

Joe O'Dea -- Vertical Research Partners -- Analyst

And then just lastly the $4 million on the currency, any additional details on what's on that?

Todd A. Adams -- President and Chief Executive Officer

No, I mean it's just really a function of what we laid out our initial guidance for the year. We had a set of currency assumptions that were, sort of, based on the rates at the time we've built a little bit of hedge and had obviously, and the $4 million is just the incremental change in the translation effect of the stronger US dollar against foreign currencies, primarily the euro. I mean it, sort of, the big things. So it's just the math of translating euros back to the US at a stronger US dollar exchange rate.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Yes Joe, this is Mark just to add on to that. If you look back, we assume that we've probably got a 50 basis point impact of the top line in our year, it's going to be more like a 150 basis points, so when you drop that through to the profit you can quickly figure out the math on that.

Joe O'Dea -- Vertical Research Partners -- Analyst

Perfect. Thanks very much.

Todd A. Adams -- President and Chief Executive Officer

Thanks, Joe.

Operator

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

Bryan Blair -- Oppenheimer -- Analyst

Good morning, guys. Solid quarter.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Thanks, Bryan.

Todd A. Adams -- President and Chief Executive Officer

Good morning, Bryan.

Bryan Blair -- Oppenheimer -- Analyst

I was hoping you could offer a little more color on the free cash outlook you mentioned over 100% free cash conversion maintain that record absolute level. And I believe entering fiscal '20, you said that year-on-year step-up in EBITDA was a reasonable way of framing the dollar increase for free cash this year, is that still the case? Are there any moving parts in the back half that we should keep in mind?

Mark Peterson -- Senior Vice President and Chief Financial Officer

Yes, Bryan, this is Mark. I think that's still a reasonable base case. There isn't really anything unusual or unique in the back half, you know, our back half is always strong than our first half. We're running ahead year-to-date, as Todd mentioned, you look at -- you've you run at that same pace, you can kind of ballpark what the number would look like. But I think again using that proxy of the EBITDA change and look at that in relation to our cash flow as last year, going to where it could be this year is still a good baseline assumption.

Bryan Blair -- Oppenheimer -- Analyst

Yes, that's helpful. Thank you. And with your balance sheet in good shape, as you said low-end of the target range on a normalized base is generating lot of cash, plenty of flexibility looking forward. Is there any update you can offer on your M&A pipeline? And also if stock valuation remains attractive given your level of cash flow. Any chance you get aggressive in buying back your own shares?

Todd A. Adams -- President and Chief Executive Officer

Yes, Brian, I mean, with respect to our funnel, again I'm optimistic that we're going to get something done here in the second half of our year. I think, we'd like to, sort of, err on the side of things that are probably a little bit larger, a little bit water-related. And but we'll have to wait and see how that all plays out over the course of the next six months. With respect to our cash flow and balance sheet, I think absent M&A, I don't think there's any question that you're going to see us begin to probably move toward that buyback. If you look at our return on invested capital at 17%, we think it's pretty good investment. And so as we've navigated the balance sheet to where we are today, as we look at our -- the balance of our year and our outlook, particularly around our outlook beyond this year for free cash, but we think it's very strong. And so we've got a real opportunity to deploy some cash both in M&A, and I would say, it's a very good chance, you'll see us, I think about buybacks as we move forward over the next six months and into next year.

Bryan Blair -- Oppenheimer -- Analyst

Okay. I appreciate the color. Thanks again.

Operator

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

Trish -- Barclays -- Analyst

Hey, good morning. This is Trish [Phonetic] on for Julian. So just looking at the updated guidance low single-digit core. I know you mentioned the weakness in distribution and process industries. But can you talk about some of the other end market trends you're seeing that kind of give you confidence in maintaining that low single-digit core?

Mark Peterson -- Senior Vice President and Chief Financial Officer

Sure. This is Mark. I think, you know, a couple we touched on in detail. Aerospace for us obviously has been a solid end-market. Our growth has been solid, backlog is in a great position, we have really good visibility to that in the back half. So we think the growth in aerospace remains a solid mid single-digit for us in the back half as we saw in the first half, like there's a lot of that's in the backlog.

On the consumer side, on our food and beverage end markets as we had on the call, in our second quarter, we saw some uptick in our order rates, a lot of things that we've been doing from an organic growth initiatives, both domestically and with our European key OEMs that are serving a global food and beverage customers starting to gain some more traction. So those are two end markets that have been positive for us and we have good line of sight to those staying strong in the back half as well to offset some of the -- but the mild softness we've seen in process. And as Todd also pointed out IV we think that balances itself as well in the back half, where we're seeing the sell-through and sell-in sync up. So I think overall, that's a...

Todd A. Adams -- President and Chief Executive Officer

Yes, I mean, just a one thing, I would sort of point you too is, if you look at the revenue pie for Rexnord three, four, five years ago relative to what it looks like today specifically for PMC. We have migrated from heavy process exposure, the largest at that point in time being mining through that being a fraction of what it was. And frankly, the markets that Mark talked about like aerospace, food and beverage and unit handling being far more than 50% of the business, which I think is what gives us both the confidence going forward and what demonstrates, sort of, what we've just went through. The follow-on to that is, we've also got Zurn, and Zurn is going to grow nicely over the course of the second half. So the combination of, I think some strategic things we did to shift our end market mix along with just incredibly strong position we have at Zurn in a good part of the market with share gain opportunities, is sort of how we end up with the low single-digit core growth forecast for the year.

Trish -- Barclays -- Analyst

Okay, great. And then just kind of a quick follow-up on that. In terms of the revenue mix in PMC and you talked about it has changed over time. Are you kind of where you want to be with that? Or is there more to do what type of exposures that you're looking to grow and kind of what others are you looking to shift away for here?

Todd A. Adams -- President and Chief Executive Officer

Well, again I think we've been pretty consistent in saying that we want to continue to penetrate those end markets that have more linkage to consumer demand. And so things like food and beverage, continue to be at the very top of our list. And I would tell you, the things that we're doing with DiRXN and continually monitoring operating environments is another wedge that we think is an important wedge to think about in PMC both organically and inorganically. So those are the two primary areas that we think we're going to take specific action to outgrow.

That being said, our process end markets are in a really good spot. When you take it as a whole, right? The good portion of it is MRO, we've invested smartly to drive the growth in the installed base in areas where we want to grow. And so I don't know that we're disappointed we have process industry exposure. It's just substantially less than what it was based on the actions we took and we've been investing aggressively in areas where we want to be. So I would tell you it's a little bit more of the same, but I wouldn't say that we're going to be exiting anything from here. Just continued strategic effort in the areas we want to be.

Trish -- Barclays -- Analyst

Okay, great. Thanks.

Operator

[Operator Instructions] Our next question comes from the line of Mig Dobre from Baird. Your line is open.

Mig Dobre -- Robert W. Baird -- Analyst

Thanks, good morning, guys.

Todd A. Adams -- President and Chief Executive Officer

Good morning, Mig.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Good morning, Mig.

Mig Dobre -- Robert W. Baird -- Analyst

Just wonder, if you can comment a little bit on price cost. I'm curious to hear as to how you see pricing in both of your segments. I know there's a lot of products, right? But, you know, maybe sort of a general view. And input costs, I'm presuming are coming down and starting to help a little bit going forward? How should we think about that?

Mark Peterson -- Senior Vice President and Chief Financial Officer

Yes, Mig. This is Mark. I think from the price standpoint, it's really unchanged from what talked about going into the year. We talked about one point of price or so in PMC that's we've been consistently delivering on that. On the water side, we've talked about 2.5 to 3 points of price, and I think that's been playing through as well. So the price equation has been really consists of what we expected going into the year and really having a lot of pushback on the price side.

On the input side, I think we've seen obviously we all understand the tariff situation Todd touched on earlier, for us, we've been able to make sure that everything we do from a pricing standpoint, material substitutions, moving supply chain, getting certain product additives excluded, has resulted in us not adversely impacting our overall margins in our business. So that's, we continued to deliver on that.

To your point on the input costs, a couple of things, we have seen freight cost improving, we'll see some benefit from that in the back half of the year and some of our supply base out of China, bringing tariffs aside, always an opportunity to see some improvement in the back half of the year as well.

Mig Dobre -- Robert W. Baird -- Analyst

Okay. And then sort of sticking with this margin theme looking at PMC, you're expecting flattish organic revenue call it in the back half that, kind of, makes modeling incremental margins a little bit difficult, as you can appreciate. So how -- what's the best way of thinking about margins, EBITDA margins on a year-over-year basis in this, call it flattish organic environment in the back half?

Todd A. Adams -- President and Chief Executive Officer

Specifically is it relates to PMC, Mig?

Mig Dobre -- Robert W. Baird -- Analyst

Yes. Specifically on PMC.

Todd A. Adams -- President and Chief Executive Officer

Yes, I think the right way to do it is assume similar margins to last year for the time being. The difference or how you get there, you know, is we are seeing incremental benefit from the SCOFR 2 actions of last year, but we are investing a little bit. And we've got some SCOFR 3 costs in the back half of our year that are sort of getting into neutral. We hope to maybe do a little bit better than that, but if I were sitting in front of a spreadsheet trying to plug in a number use the same numbers as last year and you'll get close.

Mig Dobre -- Robert W. Baird -- Analyst

That is helpful, and pretty much everybody that's dialed on this call is sitting in front of a spreadsheet. So I appreciate that. And then I'm presuming that, sort of, real lift on margins would have to come from Water Management, and again you've got volume growth there, so that's good. You've got the pricing, that helps. Can you maybe help us understand incrementals and maybe even beyond the next six months, how you think about, kind of, the normal incremental margin run through for this?

Todd A. Adams -- President and Chief Executive Officer

And again, Mig, just specifically related to Zurn?

Mig Dobre -- Robert W. Baird -- Analyst

Specifically related to Water, to Zurn, yes.

Todd A. Adams -- President and Chief Executive Officer

Water, yes OK.

Mark Peterson -- Senior Vice President and Chief Financial Officer

Yes, Mig, in the back half of the year, you will see an incremental margin in Water that's very similar to what we've experienced in the first half. So you'll see incremental year-over-year margin expansion in Q3 and Q4. Again, if you look at H1 versus H2, it should be very similar. Going forward, we've always talked about our Water platform in that 25% to 30% incremental margin range. I think as you move forward in a high 20s, 30%-type incremental margin is a reasonable assumption to use for the Water platform going forward. That's inclusive of obviously the investments we're making in the business and obviously assuming there's some modest core growth in the platform.

Mig Dobre -- Robert W. Baird -- Analyst

Understood. Last question. Going back on this pricing on Water, I guess how much of this pricing action you think is driven by the changes that we've seen on tariffs, input costs so on and so forth versus other items that you might be doing, whether it's DiRXN, whether there are other things that you're doing in a channel? I guess what I'm really trying to get at here is, are we seeing sort of an unusual pricing environment in fiscal '20? Or would this business just have -- maybe better pricing dynamics longer term given technology and everything else that you're doing?

Todd A. Adams -- President and Chief Executive Officer

Sure Mig. Good. I think that, without question, the backdrop that we've been through in the last 18 months or so has provided a little bit of a window to, frankly, get more price than on a normalized basis. The magnitude of it, I would tell you, is probably not that much when you look at it long-term, because we are always raising price in that end market, and we typically keep it. In the last 18 months, we've had to use some of it to just fund the cost increases. But the structural difference over time, we think, allows us to get more price. I mean, if you look at the brands, the specification, the portfolio we have, then you add in real competitive advantages around DiRXN that lower the overall cost to not only build the building, but to operate it long-term, we think, gives us a real strategic advantage looking beyond this sort of little bit noisy window with tariffs.

So again, I don't think you're going to see us have to take things and reduce price going forward if, in fact, the tariffs do roll off at some point, because the further and further you get away from when they were implemented, they're basically just accelerating some of the annual price increases that you would have ordinarily got.

So I think that the pricing environment heading into next year, absent any more movement on tariffs, looks probably -- probably looks a little more muted relative to where we've been in the last 18 months. But it's still, we think, a competitive advantage that we have, and we think structurally, we do get more price just because of where this business is and how we compete than our competitors.

Mig Dobre -- Robert W. Baird -- Analyst

Alright appreciate the color. Thank you Todd.

Todd A. Adams -- President and Chief Executive Officer

Yes.

Operator

We have no further questions at this time. I'll turn the call back to Rob McCarthy for closing remarks.

Robert McCarthy -- Vice President of Investor Relations

Thanks, everybody, for joining us on the call today. We look forward to providing our next update when we announce our 2020 third quarter results in late January. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Robert McCarthy -- Vice President of Investor Relations

Todd A. Adams -- President and Chief Executive Officer

Mark Peterson -- Senior Vice President and Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Joe O'Dea -- Vertical Research Partners -- Analyst

Bryan Blair -- Oppenheimer -- Analyst

Trish -- Barclays -- Analyst

Mig Dobre -- Robert W. Baird -- Analyst

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