Zurn Elkay Water Solutions Corporation

Good morning. Before we get started, just a brief reminder that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release we issued yesterday, 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 first quarter, including details on our 2 platforms, followed by an overview of our financial statements and liquidity highlights. Afterwards, we'll open the call up for your questions.

[Operator Instructions]

Before I turn the call over to Todd, I want to highlight, as we did in our earnings release, some specifics from our initial public offering during the first quarter. On April 3 of 2012, we closed the IPO of our common stock.

Total proceeds received were approximately $458 million, net of underwriter discounts and commissions and other direct costs. The IPO resulted in the sale of approximately 27.2 million new shares of common stock.

The proceeds were primarily used to redeem the outstanding balance of our 11 3/4% senior subordinated notes that were due 2016 for a total of $325 million, inclusive of the early redemption premium and accrued interest. Additionally, we paid Apollo, our majority stockholder, a fee of $15 million to terminate the management agreement that was in place.

With that, I will turn the call over to Todd Adams, President and Chief Executive Officer of Rexnord.

Good morning, everyone, and thank you for joining us. We have a lot to cover, and there are a fair amount of complexities embedded in the reported financials as a result of the accounting for the IPO, as well as a few other corporate-level events that we'll try to simplify so that everyone gets the essence of our operating performance in the quarter and more importantly, our outlook.

Turning to Page 4. I'll start with a situational overview and some qualitative comments about the first quarter and the actions we've taken to deliver a solid fiscal year '13 in spite of market conditions that have softened over the past 90 days.

Our consolidated top line growth in the quarter of 4% reported and minus 1% core was below what we'd been anticipating due to headline and macro issues that have evolved to the downside since we reported our fourth quarter. Despite this, we managed well and delivered strong margins in the quarter in total and in each of the platforms.

PMC sales grew 2% on a core basis and margins expanded 160 basis points. And we saw our Water Management margins continue to improve sequentially without any near-term significant improvement in the served markets.

That continues to remain on the horizon.

In the quarter, we saw broadly weaker industrial demand in Europe, a slower environment in U.S. mining, effectively coal, and a nonresidential market that contracted more than anyone had expected, with mining and nonres largely impacted by the unusually warm winter and spring, which ended up pulling some activity forward, as well as significantly reducing energy demand.

On the positive side, we did build $26 million of backlog in the quarter to a record $516 million, as our book-to-bill grew 1.05, which improves our visibility and confidence in the balance of the year. I'll touch on the growth, performance and market color by platform in just a minute.

After stepping back and evaluating everything in our end markets, talking to customers and looking at the overall sentiment in the macro environment, we've reduced our growth expectations for the year by a couple of points, inclusive of Q1, and have concurrently taken actions to reduce our costs. The impact of the European debt situation and related austerity continues to create general weakness and uncertainty.

The impact of lower China growth in the first half of the calendar year has had a ripple effect across many industries. And finally, the cumulative collateral impact of poor global sentiment and the fall elections are creating an even slower U.S.

recovery.

Anticipating a likely slower environment, we began to take action on our costs during the first quarter to be in a position to control our destiny by effectively controlling the controllable. We have implemented plans to reduce our costs and spending by $30 million annually, while continuing to protect prioritized growth investments this year and remaining vigilant about doing more if the macro situation changes.

We believe that the change in the growth trajectory is contained in the year, in essence, effectively a rerating to lower run rates for a period of time and a soft landing compared to falling into a recession. All of the regression analysis, pressure curves and leading indicator indices that we've correlated to our business suggest that's the case, and we remain confident that all the basic, fundamental secular growth drivers in our markets remain intact.

What is even more encouraging is the traction we're seeing from our growth investments that are actually delivering results in the near term and will accelerate growth in the medium and long term.

With that backdrop, and as we discussed in our earnings release, we are refreshing our full year financial outlook to reflect everything I just mentioned, plus a change in the euro-to-dollar exchange rate impacting translation, as well as the implementation of a couple of portfolio management actions, namely, a decision to exit a product line in a geography where we didn't have a sustainable competitive advantage and a divestiture we completed the quarter.

In short, we had been expecting 5% to 6% core growth for the year. We now expect 3% to 4% core growth for the year and 3% to 4% growth on a reported basis compared to the prior year, as 4% growth from acquisitions will be offset by currency and divestitures and exits.

This is inclusive of core growth being down 1% in the first quarter. Even with the lower full year growth expectation, we expect our incremental margins for the year to be between 42% and 50%, our free cash flow to exceed our adjusted net income at over $100 million and our leverage to be in the 3.6x to 3.7x range by the end of the fiscal year.

Finally, our focus over the remainder of the year will be to deliver the margins and fundamental operating performance that we had been anticipating, while positioning Rexnord to perform moving forward. Our confidence in our ability to do that stems from the experience we gained in the prior recession and the improvements to our business model we've implemented since.

Perhaps most importantly, and Mark will take you through more details, our balance sheet is in great shape and we expect it to continue to improve over the course of the year.

We ended the quarter with $713 million in liquidity, post the IPO. No meaningful maturities until 2018, an extremely covenant-light bank and term loan facility and confident in the earnings and free cash flow growth we forecasted for the back 9 months of the year.

Starting our fiscal year '13 with a revision of the full year isn't something we take lightly, but it is the reality of both the current macro environment and some of our end markets. We know how to manage and navigate in this type of environment and are very capable of dealing with this wobble and even any further erosion by controlling the controllable on the cost side; by controlling our destiny on the growth side with superior service levels and customer satisfaction, along with new products, markets, customers and geographies; and finally, having the foundational operating discipline of the Rexnord Business System that consistently drives execution better than competition.

Turning to Slide 5. As I referenced in my earlier comments, the core growth in the quarter was down 1% at the Rexnord level, with the biggest drivers for the difference laid out in the top-left quadrant.

I spent a good portion of the quarter out with customers, assessing their views on visibility and demand profiles and the resulting impact to our outlook.

Looking at it by platform, you'll see that in Process & Motion Control, we grew 2% core, which was driven by our non-U.S. Mining business, our energy vertical and continued growth in our Aerospace business, offset by softer, short-cycle North American mining and European industrial demand.

Taken as a whole, we saw fairly flat market conditions in North America, Europe and China down about 10% and very good growth in places like Australia, Latin America and Africa. The aftermarket growth in the quarter was in the mid-single-digits, while overall growth to end users and OEMs contracted.

As I've gotten out and spoken to customers, service levels, lower total cost of ownership and responsiveness are paramount in this environment. Everyone's visibility is limited, so having the very best lead times are incredibly important, as is having broad, efficient distribution.

We have both, and that drives a real competitive advantage in markets like the one we're in.

Since the recession in 2008 and 2009, we've done a ton of work on collapsing lead times and creating a very efficient industrial distribution channel. Our channel inventory turns above 6x today, up from the 2x range in the past recession.

Secondly, we've distanced ourselves from competition in the space by committing the resources and effort to create new products, drive new specifications and more deeply penetrate our key vertical markets. All of this is helping us take share in a choppy market.

This growth, coupled with the factory transformation activities we've outlined in the past, drove margins to 23.3%, up 160 basis points over the prior year, a tangible testament to the work across the enterprise in productivity and waste elimination we're driving with RBS.

To close on PMC. Overall, a good quarter operationally, with some headwinds in part of a few vertical markets and some tailwinds from others.

All in, I'd say we're watching our costs very closely here and expect that we've seen the majority of the rerating in demand in Q1.

In Water Management. Reported growth was 24% and core sales contracted 9%.

The story here is that not much in the macro environment has changed and that we're getting the margin improvements we've targeted. The things we control in Water Management are the cost reductions and the integration of VAG, and both are truly on track.

The factory consolidation we initiated last year was wrapped up in the early part of the first quarter and is yielding the expected benefits. On top of that, the overall VAG integration and business is performing very well.

Consistent with what we had anticipated and communicated, our Water Management margins grew 230 basis points sequentially and the book-to-bill at VAG was 1.2x, setting up the basis for a strong second half. And on a positive note, the order rates in North America improved for the second straight quarter.

Our nonres business grew 1% year-over-year in a market that was down in the low teens and our legacy North American water treatment business contracted based on shipments out of backlog, impacting the overall growth of the segment. We had expected this.

However, a couple of request date changes by customers pushed a few shipments into the second quarter, and frankly, we could have executed better as we finalized the facility consolidation and ended the quarter with a little past due backlog that we're cleaning up in the second quarter.

Broadly, all of the secular growth trends across the segment remain intact. And given that the residential market seems to be showing improved signs of life is a positive leading indicator which bodes well for our Zurn business, perhaps towards the latter half of our fiscal year and into next.

Also we can clearly see the advantage of having the global footprint, product breadth and go-to-market we now have with VAG. It's allowing us to grow and diversify into things like hydropower and dams in ways individually neither business could do before.

To close on Water Management. The nonres market is now another quarter closer to recovery and Zurn continues to chug along, growing in a weak market and holding margins.

Our execution and service levels are as good as they've been since we've owned the company. And we have a number of new products and channels that will help us in the second half.

Also we're less than a year into actually having a true global water infrastructure business and are very confident that we're poised to capture the water infrastructure growth wherever it's happening in the world.

I'll turn it over to Mark to walk through the numbers, and then come back to talk about our outlook.

Thanks, Todd. Before I cover the financial highlights for the quarter, we have a number of nonrecurring items in the quarter that I want to highlight, so everyone can better understand our operating performance, net income and earnings per share.

Slide 6 of the presentation takes our reported results, reconciled to the adjusted results that exclude these nonrecurring items. I'll take a few minutes to discuss the significant items on the slide.

First, as we discussed earlier in the call, we used the majority of the IPO proceeds to redeem all the outstanding 11 3/4% senior subordinated notes in April. As a result, we recorded a $21 million loss in the extinguishment of debt that is recorded as a nonoperating expense in our corporate segment.

Second, in conjunction with the IPO, we paid Apollo $15 million in April to terminate the management agreement. This charge was recorded as a nonoperating expense in our corporate segment.

Third, as we described in our Footnote 4 of our Form 10-Q we filed with the SEC yesterday, as a U.S. producer of ball bearing products, we have received payments from antidumping cases under the Continued Dumping and Subsidy Offset Act.

In our first quarter, we recorded $16 million of other nonoperating income in our corporate segment related to payments we received in the quarter. We believe this is the final payment under the CDSOA.

And lastly, in July, we reached an agreement in principle to settle the Zurn PEX brass fittings liability underlying the litigation that is described in Footnote 14 of the Form 10-Q we filed yesterday with the SEC. The settlement is designed to resolve, on a national basis, our overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of Zurn PEX brass fittings on PEX Plumbing Systems.

As a result, we recorded a $10 million operating expense related to this matter in the quarter, in our corporate segment, and feel that this is the most probable estimate based on the terms of the tentative agreement and the facts and assumptions as they stand today. The settlement, if finalized and approved by the court, is a real positive for the company as it utilizes a product liability claims fund that is capped in both amount and duration.

Because of the impact of these and some other nonrecurring items in the quarter, I will speak to the adjusted operating profit, adjusted net income and adjusted earnings per share numbers on the next 3 pages, as we feel these non-GAAP metrics provide a better understanding of our results in the quarter.

Turning to Page 7. First quarter sales increased 4% from the prior year to $497 million.

The VAG acquisition we completed in our fiscal 2012 third quarter contributed 10% of year-over-year growth, which was partially offset by fluctuations in foreign currency, a fiscal 2012 second quarter divestiture and a 1% decrease in core sales. As Todd discussed earlier, 2% core growth in Process & Motion Control and low single-digit growth in Zurn core sales was more than offset by lower year-over-year shipments in our North American water and wastewater end markets in the first quarter.

Adjusted operating income for the first quarter increased 4% to $67 million or 13.4% of sales and first quarter adjusted EBITDA increased 4% to $97 million or 19.5% of sales. Adjusted net income in the quarter increased 61% to $22 million and adjusted diluted earnings per share was $0.22 compared to $0.19 in the prior year period, which is really $0.14 on an apples-to-apples basis when you adjust for the additional outstanding shares we have this year.

Free cash flow was a $52 million use in the quarter, which is in line with our expectations and compares to a $46 million use in the prior year.

Next, we'll move to Slide 8 and walk through the operating performance in our Process & Motion Control platform. Sales in the quarter were $317 million, a decrease of 4% compared to our prior year.

Core sales increased 2% in the quarter. Solid sales in our non-U.S.

mining, aerospace and energy end markets were partially offset by softer-than-anticipated European industrial demand and pockets of weakness in our North American mining end market. Foreign currency fluctuations and the fiscal 2012 second quarter divestiture negatively impacted sales by 6%.

Adjusted operating income in the quarter, which excludes $2 million of restructuring costs, increased 10% from the prior year's $56 million or 17.7% of sales, a 230 basis point increase versus the prior year. Our adjusted EBITDA was $74 million in the quarter, and our adjusted EBITDA margin improved 160 basis points from the prior year to 23.3%.

Despite the decrease in year-over-year sales, we were able to increase our operating profit and adjusted EBITDA through productivity gains and operating leverage on a higher year-over-year core sales.

Now turning to Page 9. I'll make a few comments on our Water Management platform.

Water Management sales in the first quarter increased 24% from the prior year to $180 million, as the 2012 third quarter VAG acquisition contributed 33 points of growth, which was partially offset by a 9% decrease in core growth. Zurn core sales continued to outperform in the quarter, as Zurn grew core sales in the low single-digits through share gains and increased alternative market sales.

Zurn's core growth was more than offset by lower sales in our North American municipal water and wastewater end markets. While sales in this end market remain challenging as we expected, we continue to see improving stability, evidenced by the strong book-to-bill ratio in the quarter.

In addition, the acquisition of VAG continues to give us exposure to these markets globally, and we are encouraged by the order rates and level of project quotations we experienced in the first quarter.

First quarter adjusted operating income, which excludes $700,000 of restructuring expense, was $17 million or 9.6% of sales compared to $20 million or 13.7% of sales in the prior year first quarter. Adjusted EBITDA was $29 million or 16.3% of sales and compares to $28 million or 19.2% of sales in the prior year.

As we discussed earlier in this call and on previous calls, margins in the segment have been adversely impacted by reduced operating leverage on lower sales in our North American water and wastewater end markets, as well as the unfavorable mix impact of the VAG acquisition. The cost actions we took in our third and fourth quarter of fiscal '12 are beginning to benefit our margins and contributed to the 230 basis point sequential improvement in adjusted EBITDA margins.

And we continue to see a path to year-over-year margin improvement in this segment.

Moving to Slide 10. I'll touch on a few liquidity and leverage highlights.

For the past 6 months, we've taken meaningful steps to strengthen our balance sheet. As we discussed in our earnings call last quarter, we completed a refinancing of our credit facility in March of 2012, resulting in the pushout of the debt maturity on those borrowings to 2018.

In addition, the completion of the IPO, as we discussed earlier in the call, allowed us to redeem all of the then outstanding $300 million senior subordinated notes, as well as improve our cash position. As a result of these actions, we stand here today with a much better balance sheet.

Our liquidity is at an all-time high at $713 million, with $393 million of that liquidity in cash on our balance sheet. Net debt at the end of the quarter is just over $1.7 billion and our net debt leverage is 4.3x.

Looking forward, we anticipate our net debt leverage to continue to decline over the year through a combination of improved adjusted EBITDA and the generation of free cash flow. And we anticipate ending the year in the range of 3.6x to 3.7x.

In addition, the free cash flow we anticipate generating over the balance of the year will further strengthen our cash position and overall liquidity on the balance sheet.

Turning to Slide 11. This details the maturity profile of our debt.

As you can see, we have no meaningful maturities of outstanding debt until 2018, which give us a very patient and manageable capital structure.

Lastly, I'll provide a few of the financial metrics on our credit agreement and bond indenture. Under the credit agreement, our senior secured leverage ratio was 1.5x versus our covenant of 5x and the cumulative credit basket was $481 million.

On the indenture, we finished the first quarter with a fixed charge coverage ratio of 2.4x and a restricted payment basket total of $464 million, inclusive of the $25 million general basket.

With that, I'll turn the call back to Todd to cover our outlook.

Thanks, Mark. On Slide 12, you can see our refreshed outlook for the fiscal year.

First, you'll see the digital currency translation assumption changes, as well as the divestiture and exit activity, which is very good for the portfolio long term.

Next, our change to the full year is a reduction of $55 million to $60 million of sales growth, inclusive of the first quarter, and still implies $70 million of growth in fiscal year '13 at the midpoint. Adjusted operating income margin is between 14.6% and 14.9% and $412 million to $425 million of adjusted EBITDA.

The midpoint of the range implies 8% adjusted EBITDA growth from the prior year, driven by 45% incremental margins.

When comparing the current outlook to our initial outlook, you'll see a 30% decremental margin on the changes to the outlook, a testament to the permanent cost reductions we implemented both last year and this year, tight controls around spending, the benefits of some factory transformation work we've done and margins on new products, all actions that will enhance our operating leverage beyond fiscal year '13.

Moving to Slide 13. Here, you'll see the major assumptions embedded in our outlook and how we anticipate our results to roll forward from the first quarter to the second quarter and the second half, where anticipation and response on the cost side of the equation creates the ability to deliver a record year in a suboptimal macro environment.

Given that we start Q2 with over $500 million in backlog, I'd characterize our overall visibility as slightly improved and that our revised outlook is one that we're deploying to exceed.

Over the past several weeks, we've refreshed all of our forecasts across every business and have purposely taking a pessimistic view of any market growth, with a bias towards a slight deterioration. Broadly, our second quarter will be very similar to the first in total.

Our assumptions are that the daily rates in our second quarter, adjusted for currency, are generally in line with the rates we experienced in Q1. However, core growth improves in both platforms based on the prior year comparatives and is expected to be in the low single-digits for the second quarter.

Moving to the second half. We have again assumed that there is no significant change to the market, good or bad, beyond the normal seasonality we see in our businesses.

Notably, we see a stronger Q3 and Q4 in our beverage markets, as the majority of the capital spending and maintenance is done during the cooler winter months in the Northern Hemisphere, as well as a weaker nonresidential construction market in the U.S. in the December and March quarters.

The essence of the forecast for the remainder of the year is that the majority of the growth comes from our backlog and places where our visibility is pretty good. These would include our shipments to our noncoal mining customers, aerospace and the water and wastewater end markets in both North America and globally.

On the profit side, the fixed cost reductions, improved margin in our backlog and other productivity gains that we anticipated in our initial outlook are delivering the desired result. Sitting here today, we're effectively through July, and the sales for the month are tracking to our revised forecast at the discrete market, geographic and business level, as well as in total.

Lastly, on Page 14, before I turn it over to questions, you'll see the additional outlook assumptions that are, frankly, in line and consistent with what we've provided in our initial outlook.

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

I'm trying to get a sense -- and the quarter, obviously, is disappointing. But trying to get a sense of how -- when things got bad, meaning did we see a pull-forward in business because the weather was better, and then just things fell off a cliff in April?

Or did things get worse kind of April, May, June? Just give us a sense of kind of the timeline of visibility.

Because I think part of the context to my question is you seem to have some confidence in the outlook because of the backlog. But you had confidence 3 months ago in the outlook for this quarter.

So I was trying to get a sense of how much confidence should we have that you have that kind of visibility, I guess. So I'm trying to get a sense of the quarter, how it played out.

Sure. The business, frankly, Scott, was, I'll say, very consistent and strong through probably the first part of April.

The back week or so was a little bit weaker, weaker in May, weaker through most of June and strengthened towards the end of June. And so if you think about that, we're sitting in July, we feel very good about where July is coming out.

Europe strengthened for us. We see a good visibility out of our backlog for our non-U.S.

mining customers. And so I would say that the middle part of the quarter was where we saw the difference in what we had been expecting in the first quarter.

We took action on the cost side and we've gone back and talked to all of our customers and refreshed our guidance and outlook based on what we think is the most likely case. We've been a little bit pessimistic on some of the recovery that maybe we're hearing from them.

So I think we feel good about the second quarter. I think the second half is set up based largely in part -- largely due to the backlog we've built in the first quarter, $25 million of backlog growth, as well as the margins in backlog.

So I'd say that the macro environment over that first part of the -- our -- I guess our June quarter are what really created the difference.

Okay. Yes.

That's very helpful, actually. And when you think about the change in inventories at the customer level, I mean, it sounds like there might have been a bit of a destock, kind of a panic destock, if you will, that occurred sometime in the quarter.

Is that something that you can measure, get a good sense of?

Sure. I think I'll separate the question into 2 parts.

So from an industrial distribution standpoint, as I said in my comments, we're turning inventory above 6x. So there was little to no impact from that.

What we did see was certain OEM customers, I'll say, hit the pause button, right? And if you think about the macro sentiment over the course of April, May and June, the Europe situation deteriorated to the downside.

China growth was a big concern. And I think, in general, we saw some OEMs simply work through whatever inventory they had and really start to collapse lead times and keep the visibility for us relatively low, which is fine.

I don't think it's pronounced in any way, meaning is it $4 million to $5 million of that? Probably.

But that's sort of what we're hearing as we get out and talk to people. For better or for worse, our lead times are such that customers don't have to hold a lot of inventory for us.

Sure, makes sense. And just last, can you guys just remind us what percent of your business either total or just at the segment is coal-related?

We haven't disclosed it in general. But mining is about 18% to 20% of our Process & Motion Control segment in terms of revenue.

Of that, notionally, 1/3 is probably coal-related globally.

It's Adam Samuelson filling in for Terry. I guess my first question is on the organic revenue growth guidance of 2%.

And maybe some color, and you provided a little bit of this in the slides, on end markets relative to that 2% over the balance of the year. Presumably mining and coal would be weaker, U.S.

nonres softer. But any additional color there would be helpful.

Sure. I think you've got the 2, Adam, that are really the headwinds that we see as compared to our initial core growth guidance.

When we look at other end markets, energy, we look at aerospace, are all doing quite well. We've got a backlog in sort of non-U.S.

coal that rolls out of backlog and delivers solid organic sales growth as well. So the headwinds really are around those 2 things in aggregate.

And maybe same question geographically, just any color there as well.

Sure. I think what we've got in the outlook is sort of low single-digit growth in North America in total.

I think we've got a Europe for the year, and I'll separate the answer. In Process & Motion Control, we'll say it's flat.

In the Water side, we're seeing very, very good growth out of Europe, as well as the rest of the world with VAG. So the European question is really bifurcated, flat on the industrial side, growth in sort of the mid-single-digit range across our Water segment.

And then rest of the world, I'll call it, mid- to low single-digit growth.

Okay. That's helpful.

And then just to be clear, the free cash flow expectation for the year was effectively unchanged despite some of the one-timers that hit in the quarter. Or is that revised down, just given some of the cash outflows that you did experience?

It's not revised down. So the guidance that we had initially provided anticipated the management fee payment.

And so I think that as we sit here today, we still feel like free cash flow, in excess of net income, which in this case will be, on an adjusted basis, above $100 million is still very much the outlook for us.

Okay. Maybe in that context, can you comment on the M&A pipeline and any changes in your thinking on M&A, given a slightly weaker macro environment?

Again, we're not going to comment on anything discretely other than to say, we do have a funnel that we are monitoring very closely. There are a number of things that we're working at, all of which I would categorize in the tuck-in, bolt-on, sort of down the fairway sort of size.

And I think we're going to be disciplined to make sure that whatever we do fits inside the envelope of the leverage profile we're talking about for the year, as well as being very highly accretive year 1.

It's Charlie for Julian. Just didn't know, just kind of high level, if you could kind of give us just core growth assumptions by segment.

Obviously, just heard you kind of talk about geography. But maybe just kind of core growth for the 2 segments, and then maybe just kind of an EBITDA margin range for just the 2 segments, didn't know if you'd be willing to kind of offer that.

I think from a core growth perspective, when we say 3% to 4% for the year, you'd see Process & Motion Control on the high end of that range and maybe slightly above, and you'd see the Water Management platform maybe on the low end of that range. So that's probably the degree at which we'll probably provide that sort of guidance.

In terms of the margins, obviously, I think for the year, we see Process & Motion Control margins continuing to improve, sort of to that mid-20s range, 25-ish for the year and continuing to make steady progress in Water Management for the year, somewhere in that mid- to high-teens, so 16% to 17% range on a platform basis.

Okay. Great.

And what were the VAG margins, the V-A-G margins in the quarter, EBITDA?

We're not going to get into that. I mean, we're really sort of [ph] managing it as a global business at this point.

But it's -- suffice to say it's better it was than a year ago and continues to improve throughout the integration process, as well as some of the growth and cost reductions that we're implementing.

If global coal is about 1/3 of your exposure in mining, what would be your largest commodity exposure?

It would be copper and gold. Copper, gold and iron ore make up the balance, the 2/3.

Okay. And can you talk about the $30 million in cost savings expectations?

A little color, including how we should expect to see that emerge. Because I assume that there are some upfront costs necessary to achieve that.

Sure. We saw a little bit of the upfront costs in our first fiscal quarter here, probably a couple of million dollars of costs.

Those are primarily headcount and some facility moves. If I break down the $30 million, $10 million to $15 million is actual structural cost reduction, permanent, and $10 million to $15 million is anything from deferrals to value engineering savings and other things that we can effect within the year.

And so that $30 million, call it, $10 million to $15 million fixed permanent out and the balance, a little bit of self-help with value engineering, permanent cost reductions in the product and sourcing, as well as some discretionary spend. That's how we think about the $30 million.

So the latter $10 million to $15 million that you're talking about wouldn't require significant incremental spending. I assume that the...

You're exactly right. To get to the first $10 million to $15 million, I think it's in the range of $6 million to $8 million to effect.

To get to the balance of the $10 million to $15 million, there's no costs associated with that.

And do you think the balance of the $6 million to $8 million shows up in the second quarter or...

The majority of it should, yes.

Can you go into -- what in the product line divestiture and the business line can you tell us exactly what you got out of and what the impact was on the quarter and kind of quantify it for the full year guidance, revised guidance?

Sure. When you look at the guidance table -- I think, Mark, maybe you want take the impact of the guidance in the quarter, then I'll come back and talk about what it is that we actually got rid of, Charlie.

Yes. So Charlie, from a guidance impact, you've got roughly the $20 million that we had coming through from a guidance standpoint.

And roughly, on the EBITDA side, $3 million of EBITDA. So that's the impact over the balance of our fiscal year, the $20 million in sales and $3 million in EBITDA.

So the 2 things, Charlie. The divestiture was a product that we sold, a very small niche product line that long term did not have the growth or the margin trajectory that we wanted, so we had to sell it.

We sold it. And then on the exit, we've made a decision to exit our Chinese chain business.

And that's something that'll be winding down over the second quarter and early into the third. Both sort of good long-term portfolio margin-accretive long-term moves on our part.

All right. And then on the water shipment pushouts you had, I guess that was due to customer delivery date changes.

Can you quantify the magnitude of that pushout kind of, I guess, the impact of this on the first quarter? And do you recognize that in the second quarter?

We sure do. So the combination of pushouts and us leaving a little bit more past due than we'd like is it that $4 million to $5 million range, all of which should get filled in our second quarter.

Thank you. To close on the quarter, it's important to articulate that to us, this environment was clearly very different than the prior recession for many reasons.

First and most importantly, the steps we've taken to position the company through diversification and growth, coupled with a night-and-day difference in the channel inventory dynamic, 3 years of traction on new products and the aerospace cycle are all positives compared to 3 years ago. Second, our overall customer satisfaction and service levels are the best they've been, which can differentiate us from competition in this environment.

On the Water side, we have really built out a balanced global business. The nonresidential market is already in a trough, whereas in the prior recession it was coming down from a peak.

And we're confident that the same secular growth trajectory exists for Water.

Lastly, one thing that's really important to articulate is that excluding acquisitions and divestitures, a run rate headcount embedded in our guidance is already roughly in line with the prior trough levels that we had in January of 2010. This is with revenues approximately $300 million higher, but still below the peak in 2008, demonstrating the productivity we've implemented and maintained.

Our playbook for the year will be consistent, leverage platforms where we have a sustainable competitive advantage, execute highly accretive M&A and leverage RBS to drive growth, incremental margins and free cash flow to create superior shareholder returns. We know how to navigate in this environment and are working on contingencies in the event the situation changes to protect areas of investment that will be important in the future.

We appreciate everyone's interest on the call this morning, hope that everyone enjoys the balance of the summer. And we look forward to updating everyone on our second quarter sometime around Halloween.

Thanks.