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Rexnord Corporation (NYSE:RXN)

Q4 2014 Results Earnings Conference Call

May 21, 2014 5:00 PM ET

Executives

Todd Adams - President and CEO

Mark Peterson - Senior Vice President and CFO

Rob McCarthy - Vice President, Investor Relations

Analysts

Mig Dobre - Robert Baird

David Rose - Wedbush

Mig Dobre - Robert W. Baird

Charlie Boorady - BMO Capital Markets

David Rose - Wedbush Securities

Operator

Good afternoon. And welcome to the Rexnord Fourth Quarter Fiscal 2014 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 on an 8-K with the SEC today, May 21, and are also posted on the company’s website at www.rexnord.com.

At this time, for opening remarks and introduction, I’ll turn the call over to Rob McCarthy, Vice President of Investor Relations.

Rob McCarthy

Thank you. Good afternoon and welcome. 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 we issued today, as well as in our filings with the SEC. In addition, some comparisons refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures and why we use them.

Today’s call will provide an update on our overall performance for the fourth quarter and full fiscal 2014 and our initial outlook for fiscal 2015. We will cover specifics on our two platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards, we’ll open the call up for your questions.

With that, I’ll turn the call over to Todd Adams, President and CEO of Rexnord.

Todd Adams

Thanks, Rob, and good afternoon, everyone. And thank you all for joining us today for an overview of what Rob talked about. Starting on page four, we are pleased with our fourth quarter results and overall levels of core growth, profitability and free cash flow.

We delivered robust profitability and cash flow in the quarter, as well as 4% core growth, despite some of the challenges related to the exceptional weather in the quarter and its affect on the progress of certain customers’ projects and our related shipments specifically in Water Management. Fortunately, these are simply transitory issues and we’re confident that we will pick these shipments up during the first half of fiscal 2015.

Overall, we delivered another record year in terms of sales, earnings and cash flow. Over the course of the year, we made meaningful progress on enhancing our capabilities to accelerate and improve upon each of those key operating metrics.

Specifically, we believe our ability to generate free cash flow which has become a hallmark of Rexnord will strengthen and underpin the continued long-term value creation opportunity we see in the coming years.

As it relates to the fourth quarter, we are confident that our 4% core growth continues to outpace the growth in our served markets. At 4% core growth, it is comprised of 6% growth in our Water Management platform and 3% core growth in Process & Motion Control.

With respect to earnings per share, our adjusted EPS increased 56% year-over-year to $0.50, inclusive of the temporary dilution from the primary share offering we completed in February.

Finally, we had a free -- we had a strong free cash flow quarter of $79 million, which enabled us to delever while effectively funding an acquisition in the first quarter of early 2015 within our Water Management platform and one that I’ll discuss more in a few minutes.

For the full year, consolidated revenues increased 4%, core growth was 3%, EBITDA margins were approximately 20%, adjusted EPS increased 42% to a $0.39 and free cash flow excluding non-cash and non-recurring items that Mark will cover was 100% -- was 109% of our adjusted net income.

The momentum in Water Management remains strong. The U.S. non-residential construction sector continues to recover and we believe the outlook for sustainable North American market growth over the next several years is favorable.

We believe the investments we have made over the last year have positioned us to continue outgrow the improving market demand we anticipate in 2015 and we are leveraging a stronger competitive position with new product introductions and customer service initiatives.

In addition, global demand for water and water infrastructure continues to be strong and delay in shipments from the fourth quarter should be recaptured in the first half of fiscal 2015 and at worst in the year.

We expect Water Management to leverage mid to high single-digit sales growth in fiscal 2015 with at least 200 basis points of margin expansion on contributions from volume growth, mix, cost reductions and cost improvement initiatives.

We will see that the margin in Water Management will move up significantly in the first quarter as we expect margins to improve at least 300 basis points sequentially. Longer term we continue to target EBITDA margins in the high teens with the current composition of the platform.

Industrial sector demand remains generally stable and a headwind we have been facing from the mining sector is expected to flatten out in the second half of our fiscal 2015 from a shipment perspective.

We expect core growth rates in our Process & Motion Control platform to strengthen over the course of the year with the first four to five months of the year challenged as a result of a lower backlog to start the year, masking with decent underlying growth in our industrial short cycle businesses.

For the full year, net of the diminishing mining headwind, we are anticipating Process & Motion Control core growth to be in the low single digits. Execution within our Process & Motion Control platform continues to be very strong with our fourth quarter EBITDA margin approaching 30% in the quarter and 26% for the year.

In fiscal ’15, we will continue to make strategic investments in the platform to expand and grow our installed base, expand our served markets while improving our global service levels and refining our overall footprint.

Inclusive of these investments, we believe we can continue to deliver 30% to 35% incremental margins for PMC and over the next several years with EBITDA margins in the higher 20s to 30% range.

We are also in a very early innings of what we expect to be a growing contribution from our acquisition strategy. With a strong and active funnel, we are targeting the addition of at least $25 million of annualized EBITDA from acquisitions in fiscal 2015 that we've excluded from our guidance for the time being.

In fiscal 2014, we deployed over $100 million of capital to acquire four businesses at attractive purchase multiples as all the acquisitions were done on a proprietary basis. Each of the integration plans is on track and is contributing to our overall growth and profitability in fiscal 2015.

We completed our first acquisition of the year in April adding Green Turtle Technologies. Consistent with our strategy to deliver more content per square foot by expanding our portfolio of specified products, Green Turtle adds a proprietary product solution to Water Management platform and we plan to leverage this performance advantage across our water distribution footprint.

As with all our acquisitions, we aim to leverage a combination of growth and cost synergies to the implementation of Rexnord business system to deliver a double-digit return on invested capital over our targeted horizon.

Before I hand it over to Mark and turning on page five, I want to spend a few minutes outlining our financial guidance for fiscal 2015. We're initiating guidance for adjusted EPS in the range of $1.60 to $1.70 based on core growth of 3% to 5% and overall growth in the high single-digit range. Incremental margins of EBITDA level of approximately 30% and free cash flow again exceeding our adjusted net income.

This implies adjusted EPS growth in the range of 20% to 28%, inclusive of the $0.06 dilutive impact from our February offering, but not the accretion from acquisitions we expect to make over the course of the year.

Breaking down the year in a little more detail based on our backlog going into fiscal 2015 and the timing of certain project shipments, we anticipate consolidated core growth to be 2% to 4% in the first half of our fiscal year and 4% to 6% in the second half for our year.

As we also highlighted in our press release, our guidance excludes any contribution for our Mill Products product line. And as a result, our core growth forecast excludes Mill Products from the fiscal 2014 base.

Mill Products contributed approximately $50 million to our sales and $0.06 to our EPS in fiscal 2014. Our Mill Products business manufactures large ring gears and pinions, used primarily in miners crushing plant and is highly dependent on new mine capacity CapEx. After a thorough review, our Board of Directors has approved a review of strategic alternatives for the Mill Products business.

We expect to conclude our review in fiscal 2015. We have always exercised discipline around our portfolio and evaluate returns in existing businesses, just as we would evaluate external investments. To close our guidance, our fiscal 2015 outlook incorporates strengthening core growth with robust incremental margins and strong free cash flow as a base case.

During the year, we are targeting to augment that with the growing contribution from accelerated pace of acquisition activity. Leading indicators in key markets like U.S. non-res construction appear favorable. And we expect to deliver a record 2015 while continuing to make progress in our longer-term strategic initiatives that set the company up for even better performance in the future.

With that, I'll turn it over to Mark to cover some of the financials.

Mark Peterson

Thanks Todd. Consistent with the prior quarters, we’ll speak primarily to adjusted operating profit and EBITDA, adjusted net income and adjusted earnings per share, as we feel these non-GAAP metrics provide a better understanding of our operating results. Slide 6 and 7 of the presentation takes our reported results and reconciles with the adjusted results.

Turning to Page 8. I'll discuss our operating performance highlights for the fourth quarter. Please not that these results continue to include our Mills Products business. Fourth quarter sales increased 5% in the prior year to $570 million driven by our core sales growth of 4%. Adjusted operating income increased to $92 million and adjusted EBITDA increased to $120 million with margins roughly flat on a year-over-year basis.

Fourth quarter adjusted net income was $52 million resulting in an adjusted earnings per share of $0.50, which increased 56% from the prior year due to increase in operating income and the benefit of the debt refinancing we completed last August. Cash flow was strong in the quarter as we generated $79 million of free cash flow.

Moving to Slide 9. I’ll quickly cover the full fiscal year results. Full year sales increased 4% from the prior year to $2.1 billion, as core growth of 3% and acquisitions contributed about 1% to year-over-year growth.

Adjusted operating income increased $305 million and adjusted EBITDA increased to $413 million with margins consistent on a year-over-year basis. Adjusted net income increased 44% versus the prior year to $141 million, resulting in adjusted earnings per share of $1.39. This compares to prior year adjusted earnings per share of $0.98.

With respect to free cash flow, we generated $144 million of free cash flow in the fiscal year, which includes approximately $9 million of non-recurring costs associated with our Board -- with our debt refinancing last August and the Board’s review of strategic alternatives that concluded late June. Excluding these items, our free cash flow was 109% of adjusted net income.

Next, I'll take some time on Slide 10 to walk through the operating performance in our Process & Motion Control platform. Sales in the fourth quarter increased 5% year-over-year to $359 million. Core growth of 3% combined with another 3% from acquisition, was partially offset by 1% unfavorable impact from currency translation. As we experienced throughout fiscal 2014, low single-digit core growth, sales growth in majority of our end markets was constrained by decline in sales for our bulk material handling markets.

Turning to profitability, adjusted operating income was $86 million and our adjusted operating income margin improved 340 basis points of 24%. Adjusted EBITDA was $105 million in the quarter and our adjusted EBITDA margin increased 300 basis points from the prior year to 29.2%. We continue to focus on effectively managing our cost structure, driving productivity gains in this low-growth environment while investing in our strategic growth initiatives.

For the full fiscal year, sales increased 2% to $1,286 million driven by core sales growth of 1% and acquisitions adding another point. Looking back on the year, the macro environment was challenging globally. We believe strategic growth initiatives we have been executing allowed us to outperform a tough market this past year.

Our fiscal ‘14 adjusted EBITDA was 4% year-over-year. Productivity gains, targeted cost reductions and our continued focus on permanent material cost reductions drove a 70 basis improvement in our EBITDA margin to 25.6% while still investing in our key growth strategies.

Turning to Page 11, I’ll make a few comments on our Water Management platform. Water Management sales in the fourth quarter increased 5% from the prior year to $211 million. Core sales growth of 6% was partially offset by 1% drag from currency translation.

Unusually severe and widespread winter weather and related extensive and prolonged snow cover delayed numerous customer product schedules, which in turn resulted in postpone shipments during the second half of the quarter that adversely impacted our core growth and margins. That being said, we believe our core sales growth of 6% still represents solid above market growth in the quarter.

Fourth quarter adjusted operating income and EBITDA margins were both off by 4 points, reflecting adverse mix in our non-residential construction and water infrastructure markets as well as accelerated initiatives to improve our North American valve and gate group asset utilization. As Todd referenced earlier in the call, we are confident that margin with Water Management can meaningfully improve in our first quarter and expand year-over-year over the course of our fiscal 2015.

Turning to the full year, fiscal ‘14 sales increased 8% from the prior year to $796 million. Core sales growth of 8% with growth in Zurn and Zurn business above the platform and had a mid-single digit growth in our valve and gate group. Adjusted EBITDA was $113 million for the fiscal year, 14.2% of sales and was impacted by the same items I noted in the quarter.

Moving to Slide 12. I'll touch on a few cash flow and liquidity highlights. We finished the fourth quarter with $339 million of cash, $675 million of total liquidity, inclusive of the $74 million of net cash proceeds from our February stock offering. Total debt was $1,944 million and net debt was $1,605 million resulting in a net debt leverage ratio of 3.8 times at March 31, 2014.

Before I discuss, some of the details of our outlook, I want to comment on our effective tax rate which excluding non-recurring items like the loss on debt extinguishment, finished fiscal [‘15] (sic) ‘14 at approximately 28%. The successful implementation of certain tax strategies in the fourth quarter positively affected our tax rate and will benefit our cash taxes on a go-forward basis.

Before we turn the call back to the operator to take any questions you may have, I’ll make a few final comments on our outlook. In addition to the outlook highlights, Todd covered earlier in the call, Page 5 of presentation also highlights our assumptions for interest expense, depreciation and amortization, stock option and LIFO expense, our effective tax rate, capital expenditures and fully diluted shares outstanding for fiscal 2015.

In addition, our guidance assumes we did not incur any non-operating other income or expense, as we do not forecast realized and unrealized gains or losses from foreign currency fluctuations, gains or losses on the disposal of assets or other items that are recorded in this [P&L] (ph) line item. Our guidance excludes the Mill Product business that Todd discussed earlier, the impact of potential acquisitions and divestitures and future non-recurring items such as restructuring costs.

One last guidance, I want to highlight relates to taxes. We’re anticipating effective tax rate of approximately 30% for the year. This rate excludes the non-recurring, non-cash expenses we recorded in our first quarter related to a tax planning initiatives that will basically allow us to reduce the taxation and certain foreign entities and benefit our rate going forward.

Our effective rate will fluctuate by quarter, given levels of pretax income as well as the timing of other planning initiatives. In our first quarter, we expect the tax rate to be approximately 34% to 36% excluding the tax planning action I just discussed.

With that, I’ll turn the call back over to the operator and open up to any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we have Mig Dobre from Robert Baird on line to question. Please go ahead.

Mig Dobre - Robert Baird

Good afternoon, gentlemen.

Todd Adams

Hi Mig.

Mark Peterson

Hey Mig.

Mig Dobre - Robert Baird

So I guess, my first question is on Mill Products. I’m trying to get a little more detail maybe out of you as far as -- why is that you are looking to do this now? As I understand that this is mostly mining related and obviously, we’ve been through a heck of a downturn here. And this business is still from what I can tell generating pretty good earnings for you. Can you help me figure this out?

Todd Adams

We do a detailed strategic plan each and every year and look out over the next three to five years. And based on our view of the markets, the technologies and the investments required to continue to be successful in this business for a long period of time, we looked at it and returns on invested capital didn’t meet the hurdle rate that I think we provide to shareholders.

And so we kicked it around for long time. There was a lot of conviction. We think it’s the right thing to do. And obviously with where the market is, we think we’ve got an opportunity to put it in the hands of an owner that makes more sense for them than perhaps us. So that’s really discipline around the decision.

Mig Dobre - Robert Baird

I see, but I guess Todd my question was really surrounding the cyclical aspect of mining here, because things have been pretty difficult. I'm wondering if from a timing perspective, you wouldn’t have been able to potentially garner more shareholder value. I don't 12 to 24 months down the road doing something like this.

Todd Adams

Yes. Look I think, Mig, the issue is, if we look at it and say what’s the likelihood of the market, continuing to market accelerating right from here and I don't think the market is going to accelerate for this application. So new mine CapEx, we don't have a very positive outlook. And so our view is over the next couple of years we could be patient only to find out the fact that we are not even better off than we are today.

And so from a time value of money, redeploying the capital, and the things that we know we want to own long term and make a lot of sense for the portfolio that was really the trade-off in decision. So in either event, it’s a very small piece of the company at this point. And from our view, we are reducing a cyclicality of the company, reducing capital intensity of the company, and we will in a spot to redeploy into faster growth, less cyclical, value creating things.

Mig Dobre - Robert Baird

Sure. I appreciate that. Thanks. And, Mark, maybe one for you. I am trying to understand if you're going to be putting this business in discontinued ops going forward, if you’re planning maybe some restatements, how do we think about this, what…?

Mark Peterson

Yes, so you don’t. The accounting rules that allow us to do it today, there will come a time in a year when we do so. We are going to do, Mig, is as the quarters go by, we will provide the appropriate color around the impact that had on the results in the quarter. So you guys can model that out of your numbers until what I actually hit something operations account at some point in fiscal ’15?

Mig Dobre - Robert Baird

All right. And I guess the last one for me and I will jump in the queue is. A motion control, I am trying to understand exactly what your guidance implies here. Should I be expecting a core decline if you would in the first half of the fiscal year given the backlog dynamics or can we be say for instance flattish here?

Todd Adams

I think for the first half, Mig, flattish. I think it’s right around flattish in the first quarter, maybe down a little bit to up a little bit depending on what happens with some of the shorter cycle businesses. But the big drag is the fact that the backlog throughout the year didn’t develop, so the rate that allows us to continue to grow at least in that first quarter. But I think as you look at the run rate in terms of orders that we saw over the fourth quarter, it clearly supports our forward look for that part of the business over the course of the year. So I think we feel good about the run rate. It’s just really eating through that backlog comp in the first quarter in a more acute way than the second quarter.

Mig Dobre - Robert Baird

Right. Thanks, guys. I will jump back in the queue.

Operator

And the next question comes from David Rose with Wedbush. Please go ahead.

David Rose - Wedbush

Hi, good afternoon. I was wondering if I could touch on the Water Management margins a bit more and I understand that there were some impacts from maybe fixed cost absorption but maybe you can go over a little bit more the variance because it’s pretty big number in terms of the variance. Were there some other items that you wanted to talk about? Were there any rework, scrap, or productivity issues? Maybe you can provide a little bit more color.

Todd Adams

Yes. Dave also to go down in main order, right, I mean the biggest driver in the quarter of the margin maybe underperformance with respect to what we would hope for is project shipment timing. Lot of fixed costs and frankly some high-margin good projects that for a variety of reasons got pushed to fiscal ‘15. So that is a good job in fiscal 2014. The really good news is we actually have the shipment, it’s made ready to go and we will ship it in fiscal 2015.

The second thing is within our nonres construction business, the mix was a little bit adverse. Because if you look at the phases of the build cycle, some of the earlier phases are some of our more higher margin products as the weather crept and stepped, stayed in the ground a lot longer. Some of things didn’t start. So we got a little bit of mix issue. The final thing that I think that I want to highlight a little bit on is our North American water infrastructure business. The recovery has been a little bit slow. We've been increasingly aggressive on making sure managing our cost to a, I will call it, lower growth outlook and we started to do some things in the fourth quarter that are embedded in the results that we could benefit for in fiscal ‘15 from a cost reduction standpoint.

So when you really look through all the various items, the project shipments we get in as to the project push and timing we get in ‘15 and we’re seeing that you really come through already and then the cost reduction initiatives that we front end loaded, we will get those in ‘15 and beyond. So those are really the three items that you could walk yourself back to the expected margin if you will with number one and number two.

David Rose - Wedbush

And as a follow up to your comments on those projects being pushed up, why wouldn't we see them in Q1 given that they were late as a result of weather, the commentary from a number…?

Todd Adams

It wasn’t only weather, right. Some of that larger construction projects and we are component of extremely large projects and all around the world. So for a variety of reasons, the timing is imperfect as it relates to a quarter, but we are confident that 2015 and we think it’s in the first half. I’d love to tell you that it’s the first quarter, but I think from a guidance perspective, we haven’t included it in the first quarter.

David Rose - Wedbush

And then lastly on that, do you have a way or have you been working on to improve your visibility on those projects?

Todd Adams

We have perfect visibility to them.

David Rose - Wedbush

Okay.

Todd Adams

We have perfect visibility to them. I mean it’s not as if we don’t know what’s happening or when. We have a scheduled ship date based on a variety of engineers and firms, construction firms and shipment timing and on the water and all that kind of stuff. And we are going to change this just a little bit, the downstream ripple is pretty broad. And so I’d like to tell you that these are small shipments, but these are $5 million to $10 million shipments. And when one doesn't go that impacts growth by a couple of points in the quarter. There is no bearing on the year, the long-term growth trajectory, the profitability, cash flows, but it does create a little bit of volatility quarter-to-quarter.

David Rose - Wedbush

Okay. That’s helpful. Thank you. I will get back in queue.

Todd Adams

You bet.

Operator

(Operator Instructions) And Mig Dobre from Robert W. Baird is online with question, please go ahead.

Mig Dobre - Robert W. Baird

Yes. Just a couple of follow-up items. Todd, if I heard you right, you are talking about potentially adding as much as $25 million of EBITDA through acquisitions that’s sort what you're aiming for in fiscal ’15, maybe a little more color as to how you're thinking about the progression of that or maybe some of the things that you guys are working on, anything you would be helpful.

Todd Adams

Well, maybe I would love. I can’t tell you that, but the way I would characterize it is that if you look at the team and the process we have after a hiatus in the prior fiscal year, you saw us start to get after it in a more meaningful way. We got done in fiscal 2015 deploying probably a $100 million of capital to do for good deals on a proprietary basis at very good valuations. We got another one done only in fiscal ‘15 here and the idea is to continue to keep pace with that sort of routine.

So it’s really not a new, it really just comes down to continuing to build the funnel, make sure that we like the fit, obviously working in for a period of time because the proprietary valuation versus the painting contest auctions that are going on are materially different. And we feel like we have a real advantage where we can get this on a proprietary basis, we want to keep doing that.

Mig Dobre - Robert W. Baird

Sure. And just to kind of clarify my initial question. I guess, I was wondering, are you focusing on one segment versus the other? Are you seeing more opportunities in one area versus another? And is this kind of a net number including the potential mill divestiture or is this sort of gross of that?

Todd Adams

Yeah. Just to clarify, the 25 is a net number, right. So the guidance that we’ve provided excludes any impact from products from an earning standpoint. And we haven’t assumed any proceeds from the divestiture, either. So that's sort of all out of scope if you will. And in terms of prioritization, we've got a broad funnel, I would say, of tuck-in, bolt-on and some adjacencies across both platforms. And if you were to think about what those could look like in PMC, it’s product adjacencies in new geographies. In Water Management, it’s more content per square foot that fits really nicely inside of Zurn. And in water infrastructure right, it’s additional technologies that we can sell through the same time extensive go-to-market that we already have. So those are sort of the -- I’d say the broad categories to look at and more active frankly in all three of those buckets.

Mig Dobre - Robert W. Baird

That’s great. And then maybe we can talk a little bit about green turtle, too. I just want some clarification as to do you agree that the accretion that you might be expecting out of this business for fiscal ’15?

Todd Adams

Yeah. In the fiscal year we expect low-single digit EPS from the deal in this fiscal year.

Mig Dobre - Robert W. Baird

Like it’s a $0.01 or $0.02.

Todd Adams

Yes, $0.01 or $0.02.

Mig Dobre - Robert W. Baird

Okay. All right. That’s helpful. And then Mark, last question for me would be on the tax rate. You got some things going on there and frankly you're guiding a little lower than what I originally expected. How do you see this evolving over time? Is there opportunity to maybe continue to do some things here? And given you changing business mix maybe see this rate drift a little bit lower or am I being hopeful here?

Todd Adams

Well, I think if you are going to model out the next couple of years, Mig, using the rate and the zip code is reasonable, we are always working on tax planning initiative to try to improve that rate. We feel confident with where we’re going to fit next year. Beyond that, I can't give you a number but know that we’re always continue to work to improve that rate from where it is today.

Mig Dobre - Robert W. Baird

All right. Great. Thank you, guys.

Todd Adams

Thanks, Mig.

Operator

The next question comes from Charlie Boorady from BMO Capital Markets. Please go ahead.

Charlie Boorady - BMO Capital Markets

Hi, thanks, guys.

Todd Adams

Hey, Charlie

Charlie Boorady - BMO Capital Markets

Hey, on PMC, can you talk about the aftermarket versus OE growth in the quarter kind of where you're seeing that as we go out, I’m assuming aftermarket maybe doing better than the OE side?

Todd Adams

Yes. I mean if you were to characterize that I think in our case we would call the MRO or the aftermarket business is growing in that low single-digit range. I mean, if you look at all of our major industrial distributor partners, they’re all growing in that sort of lowest single-digit range. We’re seeing that maybe just plus a little bit. And on the OEM side, if you were to take out the impact of mining/bulk material handling, I think the OEMs are probably growing at a similar rate overall. But the downdraft from that at least looking backwards from an order rate standpoint was pretty stiff. I think, we’re at point now where we see that order rate sort of flattening out and supporting our forward look for next year, but the OEM side has been a little bit challenging, particularly on the mining side but decent absent that.

Charlie Boorady - BMO Capital Markets

Okay. And then just looking geographically, can you discuss a little bit about what you’re seeing outside North America and kind of time that and maybe switch over to VAG. What’s kind of maybe the status update on the opportunity to expand that beyond, it’s largely European or non-North American footprint?

Todd Adams

Sure. The growth what we’re seeing in areas like the Middle East is frankly very good. The number of projects, the demand and need for the water infrastructure that frankly just doesn’t exist is pretty significant. You got things in the Emirates and Qatar and other places that just require tremendous amounts of build-out over the next 5 to 10 years. So we’re there active and our business starts growing very nicely. We’re seeing opportunities in Asia, begin to sort of pick up a little bit.

We would call Europe stable and I would call North America as a little bit sluggish. It is sort of once to go but it's sort of the downstream derivative from the housing going and non-res going and then maybe some of the newly spending starts to improve a little bit. But I think we’re in pretty good success going in that. If I would have point to a case study that, sort of, would be the Middle East, where they value the engineering content and the broad portfolio we can get. But you have to have been there for a long time.

It’s not like you can show up today when the demand is needed and begin to win. We’ve been there for a while and VAG has been there for a while too. So that’s what we see regional growth going forward.

Charlie Boorady - BMO Capital Markets

Okay, thanks. And just on Mill Products, I don’t know, if I missed it, could you tell us that what Mill Products was in Q4?

Todd Adams

I don’t think we did. I think it’s $50 million for the year, Charlie. And I don’t know, markets were going to disclose that or not, I guess we are not. But it’s about $50 million bucks for the year. You wouldn’t be off by time if you divide it by four.

Charlie Boorady - BMO Capital Markets

Got you. That’s helpful. Thanks.

Operator

(Operator Instructions) And we have David Rose from Wedbush Securities on the line to question. Please go ahead.

David Rose - Wedbush Securities

Hi, I have two follow-up questions. On PMC, maybe you can help us better understand. What were the dynamics to get the -- incrementals were pretty impressive. And I’m not sure if that's something that's repeatable or not, maybe you can help us understand what actions were taken to create that margin profile? And then secondly, housekeeping as if you can breakdown the $4.8 million and other expenses and put into buckets for us?

Todd Adams

Sure. David, I’ll go back a little bit longer than you may like to answer the question but 10 years ago PMC margins were 16% and today they are on the roughly 26%. So when we step back over that time period, we've done a lot of things around, driving greater specification of our products to OEMs and end users. And then everything we make wears out, need to be replaced like for like 85% of the time. And so by growing our installed base that’s helped build the annuity in the aftermarket.

Along the way, we've done tremendous amount of work through the business system and continuous improvement and leading our operations to make them more efficient and more effective. Our service levels have frankly never been better or higher than they are today. And there is still room to improve. And so it's really all of those things. And if you go back over the course of the year, we’ve moved from 16 to 26, and I think over the next several years, you’ll see that continue to move up to the high 20s and my goal would be 30% sort of platform.

And so it’s really all of the above but really all centered around the discipline of the business system. And just doing the little things each and every day, over and over and over, but starting with making sure our customers are happy, making sure people are safe in the factories and then along the way some portfolio pruning, right. I mean, we’ve made some divestitures along the way. The Mill Products divestiture is sort of just like a few others that we’ve one in the past where we evaluate the forward look.

And does it meet the requirements that we want to have in the portfolio to deliver shareholder returns? And if the answers is no, than we go ahead and take action. So it's really the progression over a long period of time. I wouldn’t call anything heroic. I think the 29% in the quarter is indicative of when the volume comes back to the cost structure and the processes and the discipline the way we operate the company is there. So we’re doing at a low growth, (inaudible) environment. We’re trying to navigate to higher growth. But the tools and the processes are there to stay in that once we see the volume.

David Rose - Wedbush Securities

And I appreciate that kind of hard work that’s been done over the years. But clearly the incrementals were pretty significant year-over-year. And I just wasn’t sure there was anything that you broke through in the particular quarter, doesn’t sound like anything in particular?

Todd Adams

I mean, there is nothing really -- if you would say was it mix and if one was the worse mix we could have and ten was the best, I would call it a six. So it wasn’t anything extraordinary. I think when we get -- a quarter where we can get a little bit more growth. I think that’s indicative of what you see from margin standpoint in the business.

David Rose - Wedbush Securities

Okay. Great. Thank you. And then the breakout on the other?

Mark Peterson

Yes. The breakdown on the other, I’ll give you around numbers. It means a plus or minus couple $100,000# but we had approximately $1 million in FX loss in the quarter but $1 million of loss in sales from property, plant and equipment, about $1 million of costs related to the offering that was completed in February. About $1 million of cost related to the Board’s review of strategic alternatives over in the year and [looking] out for few quarters from here. And then there is another $1 million of plus or minus small items that make up the $4.8 million.

David Rose - Wedbush Securities

In the M&A activity, is that just on SG&A?

Mark Peterson

The M&A activity is an SG&A for us.

Todd Adams

Yes. That’s not another.

Mark Peterson

Yes. Not another.

David Rose - Wedbush Securities

Okay. Perfect. Thank you.

Operator

And we have no further questions at this time.

Todd Adams

Great. Well, thank you everyone for joining us today. We appreciate your interest in Rexnord. We’re going to announce our first quarter results for fiscal 2015 in early August. And I think as many of you know, we are having an Investor Day in New York City on June 3. So hope to see you there as well. Thanks so much. Good night.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.

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Source: Rexnord's (RXN) CEO Todd Adams on Q4 2014 Results - Earnings Call Transcript
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