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Rexnord Corp (NYSE:RXN)
Q1 2021 Earnings Call
Jul 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 8-K with the SEC yesterday, July 28th.

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

Rob McCarthy -- Vice President-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, 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 believe these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data and we urge you to review the GAAP information in our earnings release and in our filings with the SEC.

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

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Good. 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 that give us some confidence in our ability to perform moving forward; the strength and positioning of our balance sheet and our cash flow profile; and finally, a look at how we're planning for the September quarter.

I'm on Slide 3. To cut to the chase, we performed really well in the quarter. From our view, that 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%. 90 days later, amid the pretty tough environment, our decremental margins were only 13%. Using our new fiscal year convention, through the first half of our fiscal year '20, our sales were down 5% and our adjusted EBITDA was 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 8020 in PMC, we did choose to get a little bit more aggressive in our simplification efforts in a couple of product categories. Given the environment, that turned out to be almost a 2-point drag to PMCs 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 a 160 basis points to 24.6%. Adjusted EPS in the quarter was $0.36 and 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've posted 26.4% in the 12 months ended in March and I think this quarter is a pretty good down payment on the fact that we can.

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

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

As I said last quarter, our plan was to use the June quarter to learn and evaluate what a recovery in our outlook might be and that we'd likely be making some course corrections. Similar to what we're doing in Water Management, in PMC we're making some incremental investments around a couple of focused areas and capabilities that we're building while also making some course corrections on the cost side, given some of the potential for some end markets to be lower for longer. Overall, we're very pleased with our performance relative to our views in 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 amid 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 in implementing a couple of pillars to 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 that's probably going to be around for a while, we're communicating that likely you'll see both of those elements of our strategy back in play as we finish up our second half of our fiscal year and turn the quarter into FY '21.

I'll move to Page 4. As I said last quarter, I'm going to say it again. If you take away one thing from today's call is that culture matters. The Rexnord Business System, which is simply the way we work and our common language is, without a doubt, the single biggest competitive advantage we have. It's about everyone being on the same page and always doing the right thing for our associates, for our customers and shareholders. It's about being nimble and entrepreneurial, but being nimble and entrepreneurial inside of a framework of disciplined tools and processes that allow everyone to be fact-based 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 we harness the power of that culture during difficult times, how fun it is to take market share and beat competition.

Our teams have done an exceptional job over the last 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, customers and the communities we live and work in has been simply amazing. Our return to work plan for a 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 associates -- and safety for our associates and their families.

Our overall case numbers are generally quite small and managed along established safety protocols and all of our facilities are open and remain operating with the typical intermittent challenges that we've all come to have to deal with. If we've learned one thing over the course of the last -- over this pandemic is 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 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 the 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, child care, technology and tools we can provide, it's all on the table.

We're actually visiting our factories visually -- virtually and continuing to engage with our teams to foster and actually grow the fabric of the culture we built. The punch line 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 cost and the capital intensity of the company to raise the sustainable level of free cash flow.

Things like successfully establishing a new campus in Mexico and 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 that we built and take market share.

I'll move to Page 5. Here I'll touch on just how we view 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 performance at levels we couldn't even 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 is 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 onsite and in environments that are critical infrastructure.

We think over the next several years, this long-term secular change only accelerates and we're incredibly well positioned based on the work we've done over the last several years. The huge success we're having today in hygienic is about hand hygiene in restaurant, 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 gross -- growth investments that we've made over the last several years is sort of in their sophomore or junior year in terms of evolution.

We've developed the solutions in concert with our customers, the market. We've done the pilots. We've made the course corrections and now they're starting to ramp.

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

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

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

And finally, continue to make the right high returning organic investments to grow our business and augment that with strategic acquisitions, all inside our free cash flow and leverage envelope, focused around water and consumer end markets.

With that, I'll turn it over to Mark, and after he's done, we'll take your questions.

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Thanks, Todd. Please turn to Slide number 7. On a consolidated basis, our June quarter financial results demonstrated the resilience we 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 1-point impact from our product line solidification [Phonetic] actions. Currency translation and acquisition contributions to growth were offsetting.

Our adjusted EBITDA margin expanded by 120 basis points year-over-year to 23% as EBITDA declined only 7% year-over-year to $103 million and the 12% top line decline which translated into a 13% consolidated decremental margin.

Please turn to Slide 8 and I'll review our platforms, starting with PMC. PMC sales were down 15% year-over-year on a core basis as we experienced sales decline in most end markets, generally in a double-digit percentage range and we accelerated some 8020 simplification actions that reduced year-over-year sales by approximately 190 basis points.

We did generate positive growth in Asia and in renewable energy, but together they only account for about 10% of PMC sales in the quarter. Year-over-year sales declines were moderate relative to the platform average around consumer-facing and power generation end markets, but higher than the platform average in our process industry and aerospace end markets.

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

Outside of our aerospace markets, demand patterns improved in June and it remained stable in July. Operating execution was strong as we benefited from our SCOFR structural cost reduction initiatives executed in recent years, plus the cost actions we limited or we initiated last quarter in response to the pandemic. PMC managed a 26% decremental margin despite some adverse mix due to the relative weakness in our aerospace business.

Turning to Water Management, sales were down only 5% on a core basis and just 2% after factoring in the contributions from the acquisitions of Stainlessdrains.com and Just Manufacturing in the prior 12 months. Both acquisitions delivered positive year-over-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 with benefits from the relative strength in touchless products, and contributions from our recent acquisitions.

Please turn to Slide number 9. 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 were provided -- that we're providing for September -- 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 risk for those elements where we have, frankly, less control.

With that said, and taking into consideration demand trends through July, a modestly lower backlog in PMC than a quarter ago, and the elevated uncertainty given the persistent strength of the global pandemic, we're projecting that our consolidated revenue could decline between 12% 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. On the top half of the slide, you can see our updated outlook for the nine-month interim period, not 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 SCOFR 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 forecast 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% into 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. Turning to the chart in the far left and on a year-over-year basis, our free cash flow tripled on a low base of $39 million in the June quarter and our calendar year-to-date free cash flow to $147 million. We believe we are well positioned to deliver free cash of more than $100 million 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 levers, as measured by our net debt leverage ratio, was unchanged at 1.9 times and finished the quarter just under the low end of our long-term targeted range of 2 times to 3 times.

Finishing with the chart on the far right. In March, we borrowed on our revolver and our AR facility effective [Phonetic] with short-term liquidity when the potential magnitude of any downside risks from the early days of the global COVID-19 outbreaks was unknown. With a quarter behind us now and a better feel for the potential downside risk to our liquidity, we're comfortable repaying the borrowings on these facilities. We repaid the $250 million of borrowings on our revolver in June and early July we repaid the $75 million of short-term borrowings under our assets 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 ended 12/31, we filed pro forma quarterly financials for calendar year 2018 and 2019 in the 8-K with our earnings release yesterday and we'll be posting them to our Investor website.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Jeff Hammond from KeyBanc. Your line is open.

Jeff Hammond -- KeyBanc -- Analyst

Hey, good morning guys.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Hey Jeff.

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Good morning, Jeff.

Jeff Hammond -- KeyBanc -- Analyst

Just want to go over the 3Q guide. I think it's a step down from 2Q, which was pretty resilient. One, can you just talk about the difference between the two segments. And then, just anything or more color around the backlog relative to the prior quarter and order trends into July that kind of inform that range?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Well, I read your notes. I figured you might be asking the question.

Jeff Hammond -- KeyBanc -- Analyst

Good.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

So, here's the thing. When you look at Q3 holistically, it just doesn't look a whole lot different on an absolute basis relative to Q2. And if you look at seasonality, if you look at margin performance, if you look at a lot of different things. I think what we're pointing you to is, we had a really good quarter. July is sort of tracking pretty well or tracked well, I should say, the quarter is over.

And we're guiding to a range that is certainly comfortable for us. But in absolute terms, it doesn't look a whole lot different holistically than Q2. And that's I think really the way to think about it more than anything.

Jeff Hammond -- KeyBanc -- Analyst

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

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

If you look at the overall margin, we do benefit from really two mix elements. One, a greater percentage of our sales today are in the retrofit market than ever before. Traditionally, had been, ten years ago it was 5% or 10%, it had been running in the mid 30s, I think we have 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 when you look at Zurn margins, I wouldn't think about this as you know, wild cost controls and not spending a penny. I think about it as a modest cost controls early in the quarter that we have subsequently decided to go the other way on to 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 quick to install and get this work done in any point in time, anywhere in the country. And then also considering some elements of what a restroom in the future might look like. Being able to connect all the components and have them speak and work together. And so we're sort of making that investment, accelerating that investment. So 29.1%, I think is a pretty good indication of what we can do.

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

Jeff Hammond -- KeyBanc -- Analyst

Okay, great, thanks guys.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Thanks.

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 everyone.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Good morning, Joe.

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

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.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

We haven't seen many peers report yet, so I think we'll learn that over the course of the next couple of weeks. But fundamentally, I think a lot of it has to do with some of the structural end market and positioning decisions we've made over the last several years to get more exposure to consumer-driven end markets, to get more exposure to power gen, to get more exposure to Marine. We think we are clearly benefiting that obviously we have an aerospace segment that from an order standpoint is -- it's a tough end market as everyone knows. We do have some backlogs. So 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 takes, it's all right around that number -- a significant number of outliers. So we'll see where everyone else that we serve generally compete with holds out. But I think a lot of the the decline and -- maybe better than anticipated or better than fear has to do with some of the more structural things that we've done over the course of last three or four years.

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

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

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Hi, Joe. We're trying to lay out the big piece in the puzzle. There are smaller things, puts and takes here and there pension cash contributions or whatnot, but we tried to lay out the big items to help people frame out the number of things. But we feel very comfortable with the 200 plus number at this point in time of two quarters ago.

So I think we laid up -- lots of big pieces laying up next of substance or size that we haven't put on that page Joe.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

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

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

Okay. Got it. The -- 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?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

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

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

All right. Got it. Nice quarter. Thanks very much.

Operator

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

Bryan Blair -- Oppenheimer -- Analyst

Good morning, guys. Nice continued execution in the quarter.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Thanks, Bryan.

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Good morning, Bryan.

Bryan Blair -- Oppenheimer -- Analyst

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? And I guess related question, is the team facing any material supply chain issues in trying to meet the ramp in demand there?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Well, for competitive reasons, we're not going to give you the size of it. But suffice it to say that it's almost a double on a run rate basis at this point and we think that, that has the chance to sort of sustain for a period of time. And so the supply chain aspect of it. As we 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, yeah, 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, you know 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 orders measured in the tens of thousands of units.

And so for us, it's really about continuing to ramp supply chain to meet demand, pulling lead times and then really start to capitalize on the unique value proposition we have and being probably less vertically integrated than anybody we compete with. That's an area of my priority and focus, and I think we feel really confident that in the span of a sort of a three to six month period we were able to sort of absorb and deliver against and actually pull in lead times against the business that's doubling.

So that's sort of the way to think about the hygienic piece.

Bryan Blair -- Oppenheimer -- Analyst

Okay. I appreciate all the color. And Zurn's core growth was understandably restricted by shutdowns early in the quarter than 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 half?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Look, I think it's certainly possible. You know, I think we'll have to -- we'll have to look, absent disruption, absent some crazy things happening, you know, I think the answer is it probably should. But I guess my perspective on things is we're really not out of the woods, you know, 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. We had a terrific first half. Inside of that, we've leveraged this hygienic opportunity along with connected product to creates some meaningful, meaningful growth for us.

We had a really good July. But your guess on September, August much less November and December is as good as mine. So I think what we're trying to do is just keep beating our competitors, beating what the market growth is, and investing in our business so that when we turn the corner, we're flying as opposed to figuring how to run. So that's I think how we think about growth in the second half reserve.

Bryan Blair -- Oppenheimer -- Analyst

Okay. That makes sense. And then, Mark, one last one if I may. Really good decremental performance in PMC in the quarter is mid 20s a reasonable range to think about for the back half or are there some variable costs coming back or other pressure points that may lift that number?

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Well, yeah, as Todd mentioned, we are turning to investment back on in the business and kind of weigh our overall cost -- out of this [Phonetic] but across the bank on back half of the year. The decrementals probably won't be in that mid-20 range, but we still need to go. PMC, you think it is not probably a 30 to 34 type range just in the back half. And we'll see strong decrementals in Water as well. So, as we -- we're [Phonetic] turning [Phonetic] investment back on, as Todd mentioned. So, all that being said, you're going to see some good solid decrementals in both platforms in the back half of the year.

Bryan Blair -- Oppenheimer -- Analyst

Got it. Thanks guys.

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

You bet.

Operator

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

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Hey, good morning. This is Trish on for Julian. So it sounds like you guys think that Water Management could return to growth in the second half. And if we think about, then PMC seems to imply either flat or kind of worse sales declines in that business. So just wondering, are there any end markets you're seeing conditions get worse or any that you're seeing getting better within that segment?

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

When we -- when we look at end markets, obviously, the one that definitely is underperforming and probably had some downside risk to it is aerospace. Beyond that, I think our commentary was stabilized through June into July. We're sort of thinking about seasonality, we're thinking about customer behavior investment decisions, all that kind of stuff. And I think we're probably just taking a cautious view of what that could look like. But the one end market that I would call out that's probably lower for longer is aerospace.

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Understood. That's helpful. And then just maybe one more on the cost-out program, the $51 million laid out last quarter and around $40 million or kind of more temporary in nature. Is the right way to think about as those come back in calendar 2021 that they're kind of offset by the scope for savings coming through?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

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

And so I think we're really sort of managing for the next 24 months 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. But that's the way we're thinking about those one-time cost saves.

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Great. Thanks so much.

Operator

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

Mig Dobre -- Baird -- Analyst

Hey, good morning everyone. I guess just trying to follow-up to some degree on just a question at the very top, I'm trying to get a little more clarity as to how you are thinking of what's embedded in your outlook at the segment level for Q3? How we should think about PMC versus Water Management? And also sort of related to this, as you're looking at your order trends into July, I'm kind of curious if you're hearing anything different from either customers or distributors in both of your segments that might be operating in some of the states that have seen some of these COVID spikes. Are you starting to see some impact to business already or is this is not a factor yet?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Well, Mig, I think you have to separate the guidance numbers and set those off to the side. Right. 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 said. And so we're not trying to set this up, but just we're trying to give you the range of outcomes that we see. So from a customer standpoint, the feedback as you can likely imagine is mixed. How -- do you know when you look at the number of end markets that we have in the two segments, I think you're barely 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 market.

At this point we haven't seen on the water side, any pronounced changes to 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 the 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 our performance and we feel like that we're going to turn in on -- comparative to the prior year, a really good results. And so I know you're trying to reconcile maybe what your model is, versus consensus versus what we said, but I wouldn't -- 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 3 finish SCOFR, and then finally beat our competitors and beat the underlying market. Those are our priorities. And so the math exercise of guidance amid all this, as you can imagine, one, that we're not spending an enormous amount of time on. We're not attempting to win a guidance contest against consensus. We're trying to do with those five things extraordinarily well. 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 if things are a little better than we think, obviously you will see what happens when we perform a little bit better. I mean the margins were terrific, segment was very good, cash flow was high and I'm optimistic that one month into the third quarter, July is on track.

It will do probably a little bit better than what we saw. But we also have few more months to go. So that's the way we framed up our third quarter guidance.

Mig Dobre -- Baird -- Analyst

I can appreciate that, and at least for me it was less reconciling to consensus and more trying to understand exactly what you see in your business. And so that that can frankly inform our view more broadly on the Company and your 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 is anything to kind of call out about the June quarter in particular. And then, maybe a little bit of frame work as to how we should be thinking about your again, the framework that you put forth for the September quarter where the detrimental margins are looking slightly different than the prior quarter.

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

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Sure. I think the -- the cost take out 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 makes some investment, 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, and Water, the cost reductions will be less, as we see the opportunity to make some investments now. But taken as a whole, it's in the zip code and the decrementals of 13% in the quarter clearly have the benefit of no spending in April. And as you return over the course of the month and May and June, it sort of ramps up. And now we're sort of in a normal zone and as Mark pointed out, the detrimental margins in that 25% to 30% range, it's something we've endorsed for a really, really, really long time. And I think that's the way to think about the second half.

Mig Dobre -- Baird -- Analyst

Great. Thank you.

Operator

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

Emily Shu -- Bank of America Securities -- Analyst

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

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Well, we've owned Zurn for 13 years now. And the forecast I think it's only been wrong 12.5 times. So fundamentally there is a chance that that may happen, there is a chance it may not. I think what we take comfort is that, you know, 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 the next year. Without question there's a period of time where there hasn't been a lot of new work coming in, that will -- that will have an impact down the road into '21, size and length and definitely, 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 [Indecipherable] 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 -- that are right in front of us that are ramping.

And we're going to manage through it, whatever it looks like.

Emily Shu -- Bank of America Securities -- Analyst

Great. Thanks. And then one more question from me on supply chain, specifically. How are you thinking about supply chain post COVID in terms of derisking either by shifting supply chains or adding back up suppliers?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Emily, are you there?

Emily Shu -- Bank of America Securities -- Analyst

Hi, yes. Did you get the question?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

You sort of cut in.

Emily Shu -- Bank of America Securities -- Analyst

No, no worries. I'll ask that again. It was just a question on supply chains. How are you thinking about supply chains post COVID in terms of derisking either by adding suppliers or shifting geographies?

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

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 is anything substantial to report as a result of COVID. I think we've been diversifying ourselves out of China, as you saw with the tariff impact, we navigated through that sort of flawlessly. So we've got a fair amount of change to our supply chain over the last three years. We continue to do that, but always on a forward look basis. So much less reactionary to this COVID environment than our long-term strategy and ensuring that we've got a robust supply chain. Some of it domestic, some of it foreign, appropriately mixed between regions to allow us to get the best price with the highest level of quality, and with the best lead times. So nothing specific to call out COVID supply chain oriented.

Emily Shu -- Bank of America Securities -- Analyst

Great. Thanks very much.

Operator

We have no further questions in queue, I will turn back to the presenters for closing remarks.

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

I would like to thank everybody for joining us today on the call. We will 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.

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Rob McCarthy -- Vice President-Investor Relations

Todd A. Adams -- Chair of the Board, President and Chief Executive Officer

Mark W. Peterson -- Senior Vice President and Chief Financial Officer

Jeff Hammond -- KeyBanc -- Analyst

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

Bryan Blair -- Oppenheimer -- Analyst

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Mig Dobre -- Baird -- Analyst

Emily Shu -- Bank of America Securities -- Analyst

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