KEYBANC INDUSTRIAL AUTOMOTIVE & TRANSPORTATION … · 2019. 1. 18. · Integration Process •...
Transcript of KEYBANC INDUSTRIAL AUTOMOTIVE & TRANSPORTATION … · 2019. 1. 18. · Integration Process •...
KEYBANC
INDUSTRIAL
AUTOMOTIVE &
TRANSPORTATION
CONFERENCE
May 2017
2
SAFE HARBOR STATEMENTS
This presentation contains “forward-looking” statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever
materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking
statements. Accordingly, we caution you not to place undue reliance on these statements. All statements other than statements of historical
fact could be deemed forward-looking, including, but not limited to, any projections of financial information; any statements about historical
results that may suggest trends for our business; any statements of the plans, strategies and objectives of management for future
operations; any statements of expectation or belief regarding future events, technology developments or enforceability of our intellectual
property rights; and any statements of assumptions underlying any of the foregoing.
These statements are based on estimates and information available to us at the time of this presentation and are not guarantees of future
performance. Actual results could differ materially from our current expectations as a result of many factors, including but not limited to: the
impact of our substantial indebtedness; the effect of local, national and international economic, credit and capital market conditions on the
economy in general, and on the industries in which we operate in particular; access to available and reasonable financing on a timely basis
and the availability of financing for our customers; our competitive environment; dependence on independent distributors; general economic
and business conditions, market factors and our dependence on customers in cyclical industries; the seasonality of our sales; impact of
weather on the demand for our products; changes in technology and manufacturing techniques; loss of key personnel; increases in cost of
our raw materials and our possible inability to increase product prices to offset such increases; the loss of any significant customer; inability
to make necessary capital expenditures; risks associated with international operations, which have increased in size due to our recent
acquisitions; the costs of environmental compliance and/or the imposition of liabilities under environmental, health and safety laws and
regulations; the costs of asbestos claims; a potential impairment of goodwill and intangible assets; changes in governmental laws and
regulations, or the interpretation or enforcement thereof, including for environmental matters; viability of key suppliers; reliance on
intellectual property; potential product liability claims; work stoppages by unionized employees; the costs related to strategic acquisitions or
divestitures or the integration of recent and future acquisitions into our business; performance, and potential failure, of our information and
data security systems; changes in pension funding requirements and costs of maintaining healthcare insurance and benefits; and anti-
takeover provisions in our charter documents. These and other risks and uncertainties associated with our business are described in our
Annual Report on Form 10-K for the year ended March 31, 2017. We assume no obligation and do not intend to update these forward-
looking statements.
In addition to U.S. GAAP financials, this presentation includes certain financial measures on a non-GAAP basis as defined in the Form 8-K filed
with the Securities and Exchange Commission on May 17, 2017. These historical and forward-looking non-GAAP measures are in addition
to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. Our SEC filings contain
additional information about these non-GAAP measures, why we use them, and why we believe they are helpful to investors, and contain
reconciliations to GAAP data.
REXNORD OVERVIEW
3
PROCESS & MOTION CONTROL
Be the leading global provider of
high-value, mission-critical solutions
that help customers
safely, reliably and productively
keep their goods and assets moving
WATER MANAGEMENT
We aspire to provide the safest
and most efficient water solutions
to protect human health
and the environment
Multi-Platform Industrial • Engineered Products for Specification-Driven Applications
FY17 Revenue: $1.9 billion • Adjusted EBITDA: $347 million • FCF: $141 million(1)
FY17 Revenue: $1.1 billion
FY17 Adjusted EBITDA Margin: 21%
FY17 Revenue: $0.8 billion
FY17 Adjusted EBITDA Margin: 18%
Note: Platform margins exclude corporate expenses. FYE March 31. FCF, Adjusted EBITDA are non-GAAP measures and are defined in our SEC filings.
(1) FY17 Free Cash Flow includes $42 million investment in Supply Chain Optimization & Footprint Repositioning initiatives.
WE ADVANCE THE EFFICIENT USE OF RESOURCES THROUGH
SMARTER SOLUTIONS.
5
Focus. Execution. Value.
continuous improvement
Rexnord Business System
process focus
businesses not collections
superior value prop
strategic flexibility
global installed base
serve fundamental needs
reliability & productivity
innovation
expanding total addressable market
operational excellence
our engine
act as partner
discretionary effort
competing for the long term
drives our strategies
leverage best practices
proprietary funnels
REXNORD VALUE CREATION MODEL
6
REXNORD BUSINESS SYSTEM
Creates Operational Alignment with Strategic Objectives
Quantifies specific objectives and Key Performance Indicators
Clearly defines responsibilities and fosters accountability
Connects Strategy Deployment to Daily Management
Promotes Continuous Improvement
Common language enables sharing of best practices
Internal knowledge transfer system enables sharing of CI case studies
Drives resource allocation
Replicable & Scalable
Structured approach to 20 core business processes
Supported by RBS specialists within each business unit
Foundation to enable step-function growth
Integrated Strategic Planning & Operational Management System
7
CONTINUOUS IMPROVEMENT IS OUR CULTURE
Focus on CI
8
STRATEGIC MANAGEMENT FY13 - FY17
Information Technology
Upgraded business unit ERP systems
Deployed salesforce.com across platforms
Deployed enhanced customer design software tools
Product Portfolio
Simplified product portfolios, exited non-strategic product lines
Refocused product management resources
Generated more than $80 million cum savings from VAVE
Commercial Excellence
Realigned and refocused commercial resources
Restructured customer service & support
First Fit delivering PT wins, Zurn spec share +20 ppts
Operational Excellence
Expanded RBS resources within business units
SCOFR near completion, $30 million annual savings
Platform margins establish historical new highs
Capital Allocation
Strategic acquisitions additive to growth strategies
Rebalanced portfolio, strengthened diversification
Net debt leverage down to 3.1x at 3/31/17
PMC & WM Adjusted EBITDA ($mm)
source: Company reports. Excludes RHF (product line exit).
0
50
100
150
200
250
300
350
FY13 FY14 FY15 FY16 FY17
PMC - Continuing
WM - Continuing
source: Company reports, Rexnord estimates. Excludes RHF (product line exit).
FY13 Adjusted EBITDA
72%
28%
PMC - Continuing WM - Continuing
FY17 Adjusted EBITDA
62%
38%
PMC - Continuing WM - Continuing
9
MORE BALANCED PORTFOLIO
Better positioned to
drive secular, cyclical,
and share growth
North Early Mid Late
Platform Vertical Major Market America EMEA APAC Cycle Cycle Cycle Comment
PMC Process Materials Handling & Processing P P P P High Volatility
PMC Consumer Food & Beverage Production & Packaging P P P P P P Lower Volatility
PMC Aerospace Large Commercial Aircraft P P P P Long Order Cycles
WM Plumbing Nonresidential Buildings Water Systems P P P P New Construction & Retrofit
WM Infrastructure Municipal Water & Wastewater P P P P P Low Correlation with Cycle
Typical Cyclical StrengthPrimary Geographic Exposure
source: Company reports, Rexnord estimates. Excludes RHF (product line exit).
FY15 Adjusted EBITDA FY17 Adjusted EBITDA
PMC: Process
Industries43%
PMC: Aero +
Consumer29%
Water Manageme
nt28%
WaterManagement
28%
PMC:Aero +
Consumer / Discrete
29%
PMC: Process
Industries24%
PMC: Aero + Consumer
38%
Water Management
WaterManagement
38%
PMC:Aero +
Consumer / Discrete
38%
PMC: Process Industries
24%
PMC: Process Industries
42%
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KEY GROWTH INITIATIVES
PROCESS & MOTION CONTROL
First Fit Market Share Growth
Builds installed base & future
like-for-like MRO demand
PT Select Mid-Tier Products
Expands addressable market, leverages
Rexnord brand, distribution & product support
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KEY GROWTH INITIATIVES
PROCESS & MOTION CONTROL
Consumer Goods / Food Portfolio Expansion
Accelerated by Cambridge acquisition –
leverages PT product range, distribution
strength, established European infrastructure
Commercial Aircraft Shipset Growth
Strong product technology portfolio,
investments in advanced manufacturing,
increasing Airbus content
12
KEY GROWTH INITIATIVES
WATER MANAGEMENT
Expansion in Adjacencies
Leverage competitive advantages in
product performance, portfolio breadth,
distribution, commercial execution
Lean Construction Penetration
Leverage digital design tools,
pre-fab capability, single-delivery model
Geographic Expansion
Expand penetration of
North America, Middle East
water infrastructure applications
13
DIGITAL REXNORD
DiRXN = ‘DIRECTION’
• Rexnord enterprise-wide initiative to enable improved customer
productivity via digitally-connected tools, products, and services
• Differentiates by digitally connecting traditional mechanical solutions to
control systems, engineering & asset management software, and IIoT
• Encapsulates our deep application knowledge into digital components
for easy customer & partner use at each stage of their lifecycle
• Leverages common digital infrastructure across Business Platforms –
unique deliverables to match end-market requirements
Reduce Downtime & Expedite Recovery
Mitigate unexpected process interruption
Reduce maintenance frequency, costs
Reduce routine inspections, improve technician productivity
Optimize Asset Management
Avoid investment in spare units, storage costs
Plug-and-Play Capabilities
Unit birth certificate with baseline performance signature
Deliver complete with plug-and-play connectivity
24/7 access to online operating data, instructional videos,
performance specifications, CAD drawings, upgrade tools
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REXNORD ACQUISITIONS
Product Life Cycle
Management
Operational Excellence Planning
Strategic Planning
Proprietary Identification & Cultivation
Internal Negotiation & Transaction
RBS Integration
Process
• Strategic process focuses on market leadership, leveraging competitive advantages
• Accelerates penetration of adjacent product categories, targeted vertical markets
• Proprietary process benefits both buyer and seller
• Target ROIC > WACC within 12-36 months
Add Diversify Diversify
Strengthen Adjacent End Geographic
Acquisition Year Platform Core Product Market Footprint Comment
Cambridge FY17 PMC P P P P Food processing expansion
Euroflex FY15 PMC P P P P India engineering & manufacturing
Tollok FY15 PMC P P P P Product line extension
Green Turtle FY15 WM P P Leading product technology
Source: Company reports.
Strategic Rationale
15
CASH FLOW & BALANCE SHEET UPDATE
3.9x
3.8x
3.7x
3.8x
3.3x
3.1x
2.5x
3.0x
3.5x
4.0x
31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Dec-16 31-Mar-17
Net Debt Leverage Ratio (1)
84
139
197167
141
(24)(42)
(50)
0
50
100
150
200
250
FY13 FY14 FY15 FY16 FY17
Free Cash Flow ($ millions) (2)
Free Cash Flow includes SCOFR Impact (3)
2,104 1,944 1,912 1,893
1,599 1,595
0
500
1,000
1,500
2,000
2,500
31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Dec-16 31-Mar-17
Total Debt ($ millions) (4)
325 336 341 344 339 346
524
339 370 485
429 490
0
200
400
600
800
1,000
31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Dec-16 31-Mar-17
Total Liquidity ($ millions) (5)
Available Borrowing Capacity Cash & Equivalents
(1) Net Debt Leverage is defined as the ratio of total debt less cash to pro forma LTM Adjusted EBITDA.
(2) Free Cash Flow is defined as Cash from Operations less Capital Expenditures.
(3) SCOFR = Supply Chain Optimization & Footprint Repositioning program.
(4) Total Debt includes a New Market Tax Credit Receivable ($28), which is more than offset by an associated payable ($37) that is also included in Total Debt in all periods presented.
(5) Liquidity is defined as cash and cash equivalents plus available borrowing capacity.
16
CAPITAL ALLOCATION
Debt Reduction
Debt reduction has been the primary use of capital
Covenant-light term debt, maturity recently extended to 2023
Target to operate with Net Debt / Adjusted EBITDA ratio of 2.5x - 3.0x
Strategic Acquisitions
Strategic acquisitions will continue to be a significant use of capital
No acquisitions to date resulting from auction process
Base case assumes reinvestment of annual free cash flow
Share Repurchases
Can offset dilution from employee compensation programs
$200-million authorization with $160 million unused source: Company reports, Rexnord estimates.
Debt Reduction
61%
Acquisitions36%
Other3%
FY13 - FY17 Capital Allocation
17
REXNORD SUMMARY
• Rexnord Business System & Continuous Improvement
• Organization Aligned for Success
• Improved Portfolio Balance
• Key Organic Growth Initiatives
• DiRXN Strategic Execution
• Acquisitions & Capital Allocation
APPENDIX
19
PROCESS & MOTION CONTROL PLATFORM
Vision
Be the leading global provider of high value, mission-critical solutions that help
customers safely, reliably, and productively keep their goods and assets moving
Target
$25-billion global market opportunity
PMC Adjusted EBITDA & Margin ($mm)
25.1% 25.9% 25.0% 21.3% 20.7%0
100
200
300
400
FY13 FY14 FY15 FY16 FY17
Discont Ops
PMC - Continuing
PMC Revenue ($mm)
source: Company reports, Rexnord estimates.
0
200
400
600
800
1,000
1,200
1,400
1,600
FY13 FY14 FY15 FY16 FY17
Discont Ops
PMC - Continuing
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PROCESS & MOTION CONTROL PROFILE
Broadly diversified across
process industry,
consumer-facing &
aerospace end markets
Consumer / discrete &
aerospace applications
accounted for >50% of
FY17 PMC revenue
Global installed base of
engineered components
that wear in use over time
generates long-tail
MRO demand
Regional manufacturing &
assembly capacity to
serve local markets
Distribution channel
partners play critical role
in local customer
service & support
MRO demand drives >50%
of PMC revenue with
high rates of like-for-like
replacement
source: Company reports, Rexnord Estimates
General Industrial
& Misc Process
32%
Food & Beverage
20%
Aerospace15%
Energy & Pow er Gen
10%
Bulk Material Handling
7%
Const
Materials & Eqpt
5%Paper &
Forest Products
4%
Transport
4%Agri/Farm
3%
FY17 PF Sales by End Market
US & Canada
63%
Europe18%
Latam8%
ROW11%
FY17 PF Sales by Geography
OEM & End User
Direct52%
Aftermarket
48%
FY17 PF Sales by Channel
IndustrialDistribution
48%
Direct to OEM &
End User
52%
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PMC KEY END MARKETS
Industry Applications Representative Products
Food &
Beverage
• Beverage Filling
• Food Handling & Packaging
• Food Processing
• Case Handling
• Container Making
Commercial
Aerospace
• Flight Control Systems
• Aircraft Doors
• Airframe Structures
• Engine / APU / Gearbox
• Landing Gear
Energy &
Power
Generation
• Electrical Power Generation
• Oil & Gas Compression
• Process Equipment
• Wind Turbines
Bulk Material
Handling
• Conveying Equipment
• Processing Machinery
• Hard Rock & Coal Mining
• Potash Mining
• Fertilizer Production
Construction
Materials
• Cement Production
• Aggregates Processing
• Asphalt Production & Paving
• Lumber / Wallboard Prod
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PMC COMMERCIAL EXECUTION MODEL
New Application Engineering & Specification
First Fit Installation
World-Class Customer Service
& Support
Component Replacement or Rebuild Event
High Rates of Like-for-Like Replacement
Long-Lived
Customer
Assets
Components
Wear in Use
Rapid
Fulfillment
Capability
High
Customer
Satisfaction
Reliable &
Predictable
Service Life
Voice of
Customer
Proven model . . . strengthening execution efficiency across PMC
23
PMC COMPETITIVE DIFFERENTIATION
New Application
Engineering &
Specification
First Fit
Installation
World-Class
Customer
Service & Support
Component
Replacement or
Rebuild Event
High Rates of
Like-for-Like
Replacement
Established global brand with massive installed base
Deep end-market expertise creates customer value & new product innovation
Total cost of ownership advantages drive strong end-user specification
Dedicated technical & commercial teams for OEMs and End-Users
Top-rated customer satisfaction amongst OEM, End-Users, & Distributors
Tiered technical support model and self-serve tools = Ease of Doing Business
Highly predictable, recurring product replacement / repair lifecycles
Leading market share position with top-tier mechanical distributors
Long history of market-leading product performance, reliability, and breadth
Like-for-like replacement commonly exceeds 80%
Market leader with high margins & free cash flow
24
WATER MANAGEMENT PLATFORM
Vision
We aspire to provide the safest and most efficient water solutions to protect
human health and the environment
Target
$15-billion global market opportunity
WM Revenue ($mm)
source: Company reports, Rexnord estimates.
0
200
400
600
800
1,000
1,200
FY13 FY14 FY15 FY16 FY17
Discont Product
WM - Continuing
WM Adjusted EBITDA & Margin ($mm)
17.0% 16.4% 16.7% 20.3% 18.4%
(50)
0
50
100
150
200
250
FY13 FY14 FY15 FY16 FY17
Discont Product
WM - Continuing
25
WATER MANAGEMENT PROFILE
US & Canada nonresidential
buildings account for
~50% of WM sales
Expanding specification
share expands
total addressable market
Water & wastewater
solutions sold primarily in
EMEA, APAC markets
Regional manufacturing &
assembly capacity to
serve local markets
Multiple channels to market,
including direct sales in
global markets
Water efficiency & safety plus
cost of ownership drive
retrofit demand
source: Company reports, Rexnord Estimates
Residential13%
FY17 Sales by End Market
Water & Wastewater Infrastructure
31%
Nonresidential:Commercial & Industrial
30%
Nonresidential:Institutional
26%
US & Canada
75%
Europe10%
ROW15%
FY17 Sales by Geography
New Construction
65%
Replacement / Retrofit
35%
FY17 Sales by Application
Replacement & Retrofit
35%
26
WATER MANAGEMENT KEY END MARKETS
Commercial Buildings
Institutional Buildings
Municipal Water & Wastewater
Dam & Hydropower
Industrial Power
Value-added water solutions from source to tap
27
SPECIFICATION & CONSTRUCTION CYCLE
Delivering value at each stage of building development
28
ZURN COMPETITIVE DIFFERENTIATION
Ease of Design / Fit
Aesthetics
Superior Function
Reduced Cost / Time
Complexity Reduction
Labor Productivity
Uptime / Reliability
Water Efficiency & Safety
Lower Cost of Ownership
BIM Models
Design Visualization Tools
Web Tools
Lean Construction Pre-fabrication & pre-tagging
Weight-reduced products
Integrated bundles
Service Centers Single-point accountability
Complete content package
Water-Saving Fixtures
Water-Saving Plumbing
Extended Product Life
Ease of Maintenance
LEED Certification
Solid surface
integrated
wash basins
Paired fixture
& carrier
29
VAG COMPETITIVE DIFFERENTIATION
Case Study
Big Silver Creek
Hydropower Plant
British Columbia, Canada
Run-of-river power station
located near Canada’s
southwestern coast supplies
20,000 households with
electric power
VAG Value Creation
Engineering Expertise
• Computational Flow Dynamics (CFD)
• Optimal Solution Selection
Optimized System Design
• Anti-cavitation cylinders
• Downstream venting equipment
• Orifice plates in downstream pipeline sections
• Hydraulic brake & lift units for fast actuation
CFD flow simulation of the system
Challenges:
• Fast-action
bypass valve needed
in case of turbine failure
• High pressure drop
requirements
• Limited space available
• Cavitation-free operation
Solution:
• Turbine bypass valve used
in case of turbine failure -
two seconds to fully open
• 116-meter water column
pressure reduction
• Compact design
• Cavitation-free operation
40” VAG RIKO® Plunger Valves installation on site
NON-GAAP
RECONCILIATIONS
31
NON-GAAP RECONCILIATIONS
FYE March 31,
US$ in millions 2012 2013 2014 2015 2016 2017
Net income from continuing operations $30.6 $47.3 $25.0 $91.8 $68.9 $66.8
Interest expense, net 176.2 153.3 109.1 87.9 91.4 88.7
Provision (benefit) for income taxes 6.5 15.4 (10.0) 16.8 17.1 7.9
Depreciation and amortization 112.7 110.9 106.9 112.2 115.4 105.4
EBITDA $326.0 $326.9 $231.0 $308.7 $292.8 $268.8
Adjustments to EBITDA:
Actuarial loss (gain) on pension and post
retirement benefit obligations $9.1 $5.5 $2.7 $59.4 $12.9 ($2.6)
Impact of RHF product line exit (1) — — — 8.9 21.3 12.2
Loss on divestiture(2) 6.4 — — — — —
Loss on extinguishment of debt 10.7 24.0 133.2 — — 7.8
Restructuring and other similar charges(3) 6.8 8.6 8.4 12.9 34.9 31.6
Stock-based compensation expense 3.7 7.1 7.0 6.4 7.5 13.4
Acquisition-related fair value adjustment 4.2 — 1.7 3.2 — 4.3
LIFO expense (income)(4) 2.2 5.0 5.6 (1.7) (0.8) (2.3)
Zurn PEX loss contingency — 10.1 — — — —
Dividends on preferred stock — — — — — 7.3
Other expense (income), net(5) 7.1 2.9 15.1 7.2 (3.1) 5.2
Other non-cash adjustments — — — — — 0.8
Subtotal of adjustments to EBITDA 50.2 63.2 173.7 96.3 72.7 77.7
Adjusted EBITDA $376.2 $390.1 $404.7 $405.0 $365.5 346.5
LTM pro forma adjustment for acquisitions 4.5
LTM pro Forma Adjusted EBITDA $351.0
(1) During fiscal 2016, the Company announced its decision to exit the Rodney Hunt-Fontaine (“RHF”) flow control gate product line within its Water Management platform. The operating loss (excluding restructuring and related charges) is not included in Adjusted EBITDA in accordance with our credit agreement. RHF results have not been excluded for FY12-14.
(2) The loss on divestiture is the result of the Company's sale of a non-core subsidiary to a third party. (3) Represents restructuring costs comprised of work force reduction, lease termination, and other facility rationalization costs, including impairment charges. (4) Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as permitted by Rexnord’s credit agreement. (5) Other expense (income), net includes the impact of foreign currency transaction losses (gains), sale of property, plant and equipment, and other miscellaneous expenses.
32
NON-GAAP RECONCILIATIONS CONTINUED
Q4 FY 2017 Q4 FY 2016
US$ in millions
(except per share amounts) Net Income EPS(5) Net Income EPS
As reported, from continuing operations $21.6 $0.18 $0.8 $0.01
Amortization 8.4 0.07 14.3 0.14
Actuarial (gain) loss on pension and
postretirement obligations (2.6) (0.02) 12.9 0.13
Restructuring Expense 9.9 0.08 24.2 0.23
Supply Chain Optimization & Footprint
Repositioning Program (1) 4.4 0.04 1.0 0.01
Impact of RHF Product Line (2) 2.7 0.02 10.7 0.10
Dividends on preferred stock 5.8 0.05 — —
All Other Non-Operating (3) 2.3 0.02 (5.6) (0.05)
Tax Impacts on Adjustments (4) (9.3) (0.09) (20.5) (0.20)
As Adjusted $43.2 $0.35 $37.8 $0.37
(1) Represents accelerated depreciation associated with our strategic supply chain optimization and footprint repositioning initiatives. (2) Operating loss of RHF product line, excluding restructuring and other nonrecurring items. (3) All Other Non-Operating includes the impact of foreign currency transaction losses (gains), sale of property, plant and equipment, and other miscellaneous income and expense. (4) The tax rates used to calculate adjusted net income and adjusted earnings per share are based on a transaction-specific basis at the applicable jurisdictional rate. (5) Assumes 123.0 million outstanding shares using the “if-converted” method of per-share dilution.