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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Rexnord Fourth Quarter Fiscal 2019 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 2 weeks. The phone numbers for the replay can be found in the earnings release and the company -- filed in an 8-K with the SEC yesterday, May 8.
At this time, for opening remarks and introduction, I'll turn the call over to Rob McCarthy.
Good morning and welcome, everyone.
Before we get started, I need to remind you that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP data.
Consistent with prior quarters, we'll speak core growth, adjusted EBITDA, adjusted earnings per share and free cash flow as we feel these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for GAAP data, and we urge you to review the GAAP information in our earnings release and in our filings with the SEC.
Please note that the presentation of our operating results is focused on our continuing operations as our VAG operations, the sale of which was completed during our third quarter, are reported as discontinued operations. Today's call will provide an update on our strategic execution, our overall performance for the fourth quarter of our fiscal 2019 and our outlook for fiscal year 2020. We'll cover some specifics on our 2 platforms followed by selected highlights from our financial statements and afterwards, we'll open up the call for your questions.
With that, I'm pleased to turn the call over to Todd Adams, President and CEO of Rexnord.
Thanks, Rob, and good morning, everyone.
As you hopefully saw in our release last night, our fourth quarter results were at the very high end of our outlook and capped off a great year, both financially and strategically. Financially, we delivered new records for annual free cash flow at $213 million, adjusted EBITDA at $443 million and adjusted earnings per share at $1.85. These growth results were underpinned by our solid execution of RBS-led strategies to offset input cost inflation and the ongoing tariff situation and enabled us to report margin expansion and an incremental margin in our core growth above 35%. We also leveraged our stronger free cash flow and earnings with debt reduction to bring our net debt-to-EBITDA ratio down to 2.1x with visibility to an even stronger year of free cash flow as we look ahead. Strategically, we executed our second round of structural cost reduction initiatives to reduce our fixed costs, enhance our productivity and improve our free cash flow and completed the planning and preparation for another round. We also advanced our simplification initiatives and expect to capture significant productivity benefits from the simplified and better-focused product line offerings that we can reinvest in our growth and commercial excellence initiatives. We accelerated the introduction of IIoT-enabled digitally connected product solutions in both platforms, including retrofit options to accelerate adoption within our large installed base and to leverage the investments we're making in our direction and digital enterprise strategy. While we're pleased with fiscal year '19, which was a record year on many fronts, we're actually more excited about the leverage we're getting on the investments we've made the past couple of years in innovation, commercial excellence and operational excellence that position us to perform extremely well over the coming year and beyond. Global economic growth has slowed somewhat versus this time last year, yet overall end-market conditions continue to support moderate levels of core growth, and we're confident that the compounding benefits of our strategic initiatives position us to perform quite well across a wide range of potential macro and end-market scenarios in the coming year and in future years. As we initiate our outlook for fiscal year '20, we intend to maintain our cautious approach to financial guidance. Our outlook for the top line embeds low-single-digit core growth net of the targeted impact of our product line simplification initiatives that we estimate will impact recorded core growth by 150 to 200 basis points. Acquisitions will be on top of that with currency translation currently looking like it will be only a minor drag. Our outlook also includes adjusted EBITDA in the range of $460 million to $475 million and another year of record free cash flow. And just for clarity, it includes the List 3 tariff implementation at 25%. Looking more closely at our fourth quarter results, net sales of $538 million included core growth of 4% and were at 4% on a reported basis as well. Core growth in our Water Management platform was 5% year-over-year even as the year-over-year comparison became more difficult and despite a series of severe weather events across the U.S. that cut Zurn's quarterly sales growth by an estimated 200 to 300 basis points, just simply because of the number of days where we saw job sites that were closed and had 0 activity, which is not unusual given our business, but the magnitude of it was significant relative to years past. PMC delivered 3% core growth with modestly stronger growth in our aerospace end markets and a mixed growth profile across our process industry and consumer-facing end markets in the quarter. We leveraged our solid core growth with robust incremental margins and delivered 6% growth in EBITDA, which increased to $120 million as strong operating execution delivered margin expansion in both platforms.
Adjusted EPS was $0.51 for the quarter and up 9% over the comparable year ago figure. Mark will review both the consolidated results and the performance of each platform as part of his comments a little later in the call. Please turn to Slide 3. Looking at our operating platforms, core growth in our PMC platform was in line with our expectations as we saw solid growth in North America and Asia while our sales were down by low single digit -- by a low single-digit percentage on a core basis in Europe. PMC's adjusted EBITDA margin was 24.2% as we continue to offset the impact of tariffs and overall cost inflation on our margins and delivered a core incremental margin that was in the mid-30% range. Centa, which we acquired in last year's March quarter, continued to perform well in this year's fourth quarter and contributes to our core operating comparisons going forward. Our RBS-led integration process has enhanced the fundamental performance of the business and enabled sufficient significant share gains to drive above 10% top line growth for the year and a 50% year-over-year increase in backlog. We remain highly confident in our ability to achieve our original objective of 1,000 basis points of margin improvement by our fiscal 2021 and increasingly confident that we can exceed that over time.
We delivered solid growth on our Water Management platform in the fourth quarter despite the weather. And Zurn continues to benefit from stable demand in commercial and institutional plumbing end markets as well as the increasing penetration of the adjacent fire protection market. Our fiscal 2020 will also be an important year for new product introductions, amplified by an expanding offering of smart, digitally connected products that we expect to generate incremental revenue from both new construction and retrofit applications. Our outlook includes all of the current tariffs in place and are expected to take effect. And although we can't measure the impact of the resulting uncertainty it creates for our customers, we continue to see good order growth from our OEM and end-user customers, and we're confident that we positioned ourselves to mitigate any negative impact on our EBITDA margins. Zurn's EBITDA margin expansion in our fourth quarter provides direct evidence that we can manage the price cost equation in both the intermediate and over the long term. To wrap up, despite the ongoing macro challenges around supply chain costs and demand growth, our fourth quarter results demonstrate that we can navigate the current environment with strong operational execution and the increasingly favorable impact from the innovation and commercial excellence initiatives that we've deployed over the past several years and it will gather additional momentum in our fiscal 2020. Please turn to Slide 4, and I'll provide an update on our Supply Chain Optimization and Footprint Repositioning program. When we initially developed our Supply Chain Optimization and Footprint Repositioning strategy, our ambition was to best position Rexnord for longer-term competitiveness, enhance financial returns and create shareholder value. We delivered $25 million of SCOFR 1 benefits over the second half of fiscal year '18 and the first half of fiscal year '19 while doing the planning for its second phase. If you fast-forward to today, phase 2 has wrapped up, and we will deliver an incremental $15 million of savings in the coming fiscal year, again, while doing the planning for a third phase we announced this morning, which we expect to deliver up to $20 million of annual savings. The work has started, and we'll update everyone on the specifics as we're able given the obvious sensitivities.
But when we complete the third wave of projects in our fiscal '21, we will have reduced our fixed costs by a total of $60 million and moved our primary manufacturing profile in both platforms to a design, procure and assemble and test model with improved geographic balance and a very agile overall cost structure. Combined with our 8020 simplification work and our investments in innovation, commercial excellence and our digital transformation, our SCOFR initiatives are contributing to the steady progress we're making toward a higher growth, higher return and higher cash-generating business model with the flexibility to perform well in all stages of the business cycle and to deliver stronger shareholder returns. If you turn to Slide 5, I'd like to revisit the discussion of our strategic priorities from last quarter as we head into our fiscal 2020. You may recall this slide from last quarter when I spoke to our focus of making the business more resilient in tougher economic environments. From stronger cash generation and leverage reduction to structural cost reductions and margin expansion, we worked hard to position the company for superior through-cycle performance. We've also maintained an elevated rate of investment in innovation, particularly around our direction digital enterprise strategy. Please turn to Slide 6. On this slide, we've connected each of those priorities to our recent progress. First, our fiscal '19 results delivered on our commitment of stronger free cash flow and reduced financial leverage. Second, we're well down the road on executing our SCOFR initiatives. Third, we have managed through an exceptional period of wide-ranging tariffs and input cost inflation and leveraged the Rexnord business system to deliver substantial margin expansion.
Our successful integration of Centa over the last year has added roughly 500 basis points to Centa's core EBITDA margins and positions us for additional margin support as we achieve our 1,000 basis point objective by the end of our fiscal '20. Lastly, we have now delivered more than 2 years of quarterly positive sales growth while launching a range of new growth initiatives that we expect to generate run rate sales of about $250 million within our strategic planning period. This includes expanding into adjacent markets like fire protection and site works at Zurn; new product categories like expanded offerings for food processing applications and PMC; and a growing portfolio of smart, digitally connected and IIoT-enabled product solutions that enhance our opportunities to grow in retrofit applications and that had implications for longer-term market share in both platforms. Before I hand it over to Mark, I want to take a second to thank and acknowledge the tremendous effort and engagement by the broader Rexnord team, whether it's the progress we've made on direction, the execution of the SCOFR initiatives or delighting our customers every day with world-class quality, delivery and products that solve their most critical problems, our competitive position has never been better. And it's because of you I'm optimistic that we can deliver another record year in our fiscal year '20. With that, I'll turn the call over to Mark.
Thanks, Todd.
Please turn to Slide #7. Our fourth quarter of fiscal '19 consolidated financials results were on the high end of our expectations. On a year-over-year basis, our total sales grew 4%, core sales increased 4%, our adjusted EBITDA increased by 6% to $120 million and our adjusted earnings per share increased by 9% to $0.51. For the full year, our sales were 11% year-over-year, core sales growth was 6%, adjusted EBITDA increased 15% to $442 million and our adjusted earnings per share advanced 25% to $1.85. Please turn to Slide 8. As Todd outlined earlier, our initial outlook for our fiscal year 2020 includes low- to mid-single digit core growth before factoring in a 150 to 200 basis point impact from our product line simplification initiatives. So on that basis, our outlook incorporates low-single-digit core growth. We expect our adjusted EBITDA to be in a range of $460 million to $475 million and for our free cash flow to exceed our net income. Achieving our outlook, we'll deliver another record for annual free cash flow and adjusted EBITDA. Turning to Slide 9, we present a bridge from our fiscal '19 adjusted EBITDA to the midpoint of the range and our outlook for adjusted EBITDA in fiscal 2020. Besides the impact of core growth and our RBS-led productivity gains, I'd like to point out the $15 million contribution from SCOFR 2, the impact of our recent acquisitions and our investments in our connected product strategy and the execution of our initial SCOFR 3 projects. The potential upside from our core growth and incremental margins explains the path to the high end of our outlook range.
On Slide 10, we summarize our consolidated results for the quarter.
Well, let's turn to Slide 11 and discuss the first of our 2 operating platforms, Process & Motion Control. Total sales increased 3% year-over-year in PMC with core sales growth of 3%, acquisitions adding another 3% and the impact of the stronger dollar and offsetting 3% headwind. For fiscal '19, total PMC sales increased 11% from the prior year with core sales growth of 4%. Currency translation reduced our full year sales growth by 1% and the acquisition of Centa added 8% to our top line growth. PMC continue to see good core growth across a wider range of its end market and somewhat more moderate growth in our global distribution channels. As we highlighted last quarter, we have seen weaker trends in our European end markets. As we began a new fiscal year, we're initiating a new set of end-market assumptions that support our growth outlook for fiscal 2020.
In terms of global OEM and end-user demand, our outlook assumes positive growth in our process industry and aerospace end markets and a flattish outlook for our global food and beverage end markets. Our outlook also assumes stable overall MRO demand through our distribution channels with positive growth in the Americas partially offset by weaker demand in Europe. Strong operating execution in the quarter delivered a 60 basis point expansion in PMC's EBITDA margin and enabled a 6% increase in adjusted EBITDA. Beyond a strong operational execution through the Rexnord business system, pricing was positive. And we continue to invest in our growth initiatives, and our strategy is to neutralize the impact of tariffs and broader cost inflation. And our adjusted EBITDA margin continues to be successful. Excluding the margin impact of the Centa acquisition, which we anniversaried during the quarter, our currency translation, PMC's incremental margin on its core growth was again in the mid-30s-percent range. For the full fiscal '19 and supported by our SCOFR initiatives, PMC delivered a core incremental margin exceeding 50%. We expect PMC to deliver additional margin expansion on our fiscal 2020 as our results benefit from the positive core growth, RBS-led productivity initiatives, ongoing margin expansion of Centa and the structural cost savings we will deliver for our fiscal -- our SCOFR 2 projects. To briefly highlight another smart solution from PMC during the quarter, we launched a new gear drive designed for cooling tower applications, which leverages the strong competitive position we have established in this niche market over time with our Addax composite disc coupling in mechanical brakes. Our new CT-Series gear drive design completes a comprehensive power transmission product solution for cooling towers and strengthens our ability to gain share within a global power generation market where efficiency, reliability and uptime are critical customer concerns and line up very well with our competitive advantages. Please turn to Slide 12 to discuss our Water Management platform. During our fourth quarter, our Water Management platform delivered a 5% net sales increase on both the core and as-reported basis. As Todd discussed earlier, we went in to the quarter with somewhat higher growth ambitions where we estimate the unusual severe weather during the quarter reduced our core growth by about 2 to 3 percentage points.
Underlying U.S. nonresidential construction market demand remains robust. We are looking forward to another year of solid growth at Zurn based on additional demand growth, our innovation pipeline and favorable price realization. As illustrated by our updated end-market outlook as summarized on the slide, demand conditions in our core nonresidential construction end markets remain favorable. Year-over-year growth in overall U.S. nonresidential building construction spending did fall modestly in the March quarter, but remained solid positive despite the weather impacts. Contractor backlogs remain strong. Construction and plumbing continues to grow and leading indicators like the Dodge Momentum Index were solid in the calendar year-end, also pointing to positive outlook for this year.
Commercial sector growth has slowed as declines from the retail sector are detracting from the ongoing solid growth in office verticals. Our outlook incorporates relatively cautious pass-through for the commercial sector outlook in our second half. Institutional sector spending, where specification grid and plumbing content was greater and our relative share is stronger, continues to grow at a relatively higher rate.
We recently reached an agreement on another small bolt-on acquisition of Zurn that strengthens our capability in a relatively smaller but faster-win market for stainless steel drain products. This acquisition will broaden our stainless products offering, strengthen our leading presence in institutional markets and enhance our ability to grow share in both foodservice and in food and beverage production applications in hospital cafeterias, chain restaurants and bottling plants, all applications that we know well. Water Management's adjusted EBITDA increased by 6% year-over-year in the fourth quarter and delivered 30 basis points of year-over-year margin expansion that are continuing to leverage our core growth and manage through a favorable price-cost equation while funding our market expansion and cost-reduction initiatives. Moving to Slide 13 and starting with the chart on the far left, our free cash flow finished the year at $213 million and up 14% from the prior year. Although significantly higher than the average from the preceding 3 years, our free cash flow was constrained in fiscal '16 and '17 as we made substantial investments to launch our supply chain optimization and footprint repositioning strategy, including the construction of a new manufacturing facility in Monterrey, Mexico. We strongly believe that our fiscal '19 free cash flow is more representative of the core cash generating capability of Rexnord, and we expect our free cash flow generation to increase in fiscal 2020. Turning to the chart in the center, you can see that our financial leverage as measured by our net debt leverage ratio declined to 2.1x at March 31 and is near the low-end of the range that we've been targeting for several years. As indicated in the chart at the far right, we repaid $75 million of debt during the quarter and our total outstanding debt is at a new low.
Before we open the call up for questions, I'd like to speak to our restructuring expenses and our effective tax rate. First, and in terms of our cost reduction initiatives, including our SCOFR 3 initiatives, we expect to incur total restructuring expenses of $14 million to $16 million in our fiscal '20. These costs are primarily made up of severance costs and are excluded from our adjusted operating results.
Next, our effective tax rate will fluctuate by quarter given varying levels of the pretax income as well as the timing of other planning initiatives. We anticipate our fiscal 2020 adjusted net income will incorporate an effective tax rate of approximately 26% to 27%. In our first quarter, we anticipate the rate will be approximately 29%. Turning to the slides in the appendix. First, we have included certain other assumptions incorporated into our guidance for fiscal 2020 on a separate slide. I'll remind you that our guidance excludes the impact of potential acquisitions, potential accounting or losses, and future nonrecurring items such as restructuring costs. As has been our practice, the appendix to today's presentation also includes a reference table to help you determine the appropriate incremental quarterly share count to use for modeling our adjusted diluted earnings per share under the if-converted method if it is applicable.
As illustrated on Slide 18, the if-converted method was dilutive to adjusted EBITDA -- adjusted EPS in the fourth quarter and therefore was applied. Lastly, we include a schedule with the pretax and after-tax impacts of each adjustment in our calculation of adjusted net income plus the reconciliation tables related to adjusted EBITDA and adjusted earnings per share that are also included in our earnings release each quarter.
With that we'll open the call up for your questions.
[Operator Instructions] Our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets.
So just a couple of questions on kind of the noise in the quarter and what we're hearing from others. So one, can you just talk about any evidence of destocking in the PMC channel in your different geographic markets, how you think inventory in the channel looks? And then just on the weather, do you expect any catch up in fiscal 1Q from some of the delays?
Sure. With respect to destocking, we really didn't see any impact whatsoever. I -- we talked about it a number of times on these calls that our model is to essentially compensate our distribution partners on sell-through. And so there's really no incentive for them to keep more inventory than actually is being required by end demand. And so our inventory levels remain sort of at or very close to all-time lows in our distribution channel. So no impact of destocking really anywhere. On the weather side of things, of course we'd like to think that there's -- some amount of that, that flips into our first quarter. The reality is when you think about a building schedule, it's not as if all of a sudden there's incrementally more resources to get that stuff done. But it will actually sort of roll in through the fiscal year. Whether it all comes in the first quarter or not, it's sort of difficult to tell. But without question, we didn't -- we're not missing anything. We didn't lose anything. It's going to show up. But whether it shows up in the first quarter or not, I think we'll get some of it. Perhaps not all of it.
Okay. Great. And then just on SCOFR 3, a couple of questions there. One, can you just talk about what's in the bridge? What's included that wouldn't be excluded as restructuring? And then just if we do see a recession here near term, what are the opportunities to accelerate some of SCOFR 3 actions?
Jeff, this is Mark. The first part of your question, I think in the investment bar there -- and roughly half of that is some, we call, nonrecurring costs that will incur in our operating results whether to the -- some of the moves that we'll be taking place in the next fiscal year. You may recall in SCOFR 1, we had some of that as well, duplicative expenses, as you're getting ready to establish new facility. So that's if we mix those costs up. I think as far as acceleration, certain things are dictated, some time lines that you can accelerate, but other pieces of the puzzle we can't accelerate around things like simplification and whatnot. There is some flexibility in the SCOFR 3. Right now, we have a time line that we feel is relatively aggressive. But if a recession scenario hits earlier, there are certain pieces of it that we know we can try to move quicker on.
Yes. I mean, Jeff, just to add to that, I would tell you that there are a number of incremental levers that we can pull if we were to see weakness beyond what we sort of have targeted. And also, don't forget that with the essentially $40 million of fixed costs already out of the business and an increasingly variable model in both platforms, I think we're really well positioned to deal with that sort of environment. And so as Mark alluded to, there are some things that we can do quicker, for sure. But just know that there are other incremental things that we can do. The business is substantially more variable than it was 2 to 3 years ago and then we've kept this coming on top of it. So I think we're -- we feel really good about sort of the ability to control our earnings and more importantly, the free cash flow through sort of -- any sort of weakening environment.
Your next question comes from the line of Joe O'Dea from Vertical Research Partners.
First, I wanted to start on the $250 million of growth initiatives you referenced. I think that you framed that as opportunities you have within the strategic planning horizon. But the degree to which you could kind of map that out anymore from a time line perspective, from a segment perspective, maybe how much of that you have in fiscal '20 planning.
Sure. The -- I would say the bigger buckets that we would sort of point you to would be obviously the direction platform, but not as much on the new side of things, but clearly, on the retrofit side. We think about our installed base both in PMC and with the presence we have in commercial buildings. The retrofit opportunity alone exceeds $100 million. If you think about fire protection, we had a really good presence in fire protection. The internal product development and innovation that we've been going after the last couple of years offers us at least a $50 million opportunity to grow in fire protection. On the site work side of things, very similar. And as Mark alluded to, with the acquisition we're just talking about, we think that's another $50 million market opportunity. And at least as far as we can tell, the food opportunity is greater with the Cambridge acquisition that we did, our growing presence in things like pharma and other consumer goods. So we've got a really good sort of relatively tight segmented view on where the available market is, what our share is, what's needed to grow there. And in terms of time line, it's sort of tough to give you the exact time line, but I would tell you that the aggregate of all of that in terms of growth next year is $40-plus million. And so we've gone through this pretty methodically over the last couple of years, and I think we're really well positioned and we're deployed to go get it this year.
I appreciate that. The -- and then on POS and the drag that you anticipate this year, to what degree will that complete a lot of what you see as the opportunity within POS? Or is this something that we should anticipate as kind of a multiyear initiative?
As you, I would say, aggressively begin to implement it, the impact obviously is greater in the earlier years. And so we've -- we really spent the last, call it, 18 months understanding what it means, communicating what we want to do and then starting to implement. So I would tell you that I think the impact will be greater over the next 12 to 18 months than we would expect on an ongoing basis because you really start to reinvest back into higher growth and better growth opportunities and products and categories and customers. And so the headwind this coming year will be greater than what we would expect it to be going forward.
And when we think about a $30 million or $40 million revenue impact, what kind of an EBITDA impact should we think about? Because presumably this is a margin expansion kind of move.
Well, we would tell you that we're going to have to take whatever overhead costs and personnel costs related to those and redeploy them towards growth. And so there shouldn't be a margin hit over time. This should be in a margin expansion opportunity. And it's really about prioritizing where we think we have the best chances to win and putting resources behind it. So I wouldn't think of it as a margin hit in any way. It really turns out to be -- if you follow the wheel all the way around, it's investing in higher better growth that should come at better incremental margins as well.
Last one, just a firmer number on free cash flow for fiscal '20.
I would comfortably say that it's going to be more than this past year. And if you think about the growth at the midpoint of our guidance range and add that incremental EBITDA to our free cash flow, it's probably not a bad place to at least start.
Your next question comes from the line of Mig Dob (sic) [ Dobre ] from Baird.
Well, well done on fiscal '19. My first question real quick, how do you think about pricing into fiscal '20?
Let's say, if -- you got to unpack that a little bit, Mig. If you look at the 2 platforms, fundamentally, the pricing environment across the PMC platform is split between first-fit opportunities with OEMs and end users and the other half of the business being distribution. So I would tell you that on the first-fit side of things, we're not seeing any sort of dramatic price compression whatsoever. You've got to get in there and win the first time. And then as the equipment wears out in use and gets replaced like-for-like over time, you get multiple cracks at that recurring revenue in the aftermarket. And so when you look at the aftermarket, the pricing environment has been okay. We think we're putting in about 1.5 points at the platform level, which would imply notionally 3% in the aftermarket. And if you were to think about Zurn, I would say the aggregate price increase on a yield basis is probably close to 3%. So obviously, the announced price increases are a little bit higher than that. But when you go through the multipliers and you have to remember, it's a very regional business. So we would tell you to think about 1.5 points in PMC over the next sort of year and 3 points on the Water side.
That's really helpful. What I was really trying to get at here is following up on Joe's question a little bit and trying to kind of understand the assumptions baked into your guidance, right? As you were saying you're guiding core revenue growth to low- to mid-single digits, which, to me, that means something around 3. You've said that the outgrowth initiatives are generating maybe a couple hundred basis points of lift. You've got pricing north of 1.5% between the 2 segments. So on a combined basis, it looks to me like your end-market outlook is for volumes being relatively flattish, which -- I want to make sure that I understand this properly and that you're thinking about it that way and if this is a function of conservatism at this point in the year or if there's anything else that I might be missing.
I think the other thing you're missing would be the exits, right? We've talked about 150 to 200 basis points of core growth impact from a product presentation.
No. No, I get that part. I get how you're getting to your guidance. I'm just trying to understand how you were thinking about how the core market grows, right? Because if you're saying that the core market grows in the low- to mid-single digits, that would essentially imply your growth initiatives and your pricing and volume, right? That's what drives the core market growth.
Again, Mig, I think you have to do 2 things. One, look at it by platform. So I would tell you that we feel good about where we are in the commercial construction cycle. So we think the Zurn part of our business is above that low single-digit rate. And I would tell you that as we sit here today, we perhaps may have taken a more cautious view on PMC end market because we're in the first month of our fiscal year. And I would tell you that relative to 30 days ago, the world is a more uncertain place. And so what we're trying to do, and it's very consistent to what we have been doing, is put out a financial guidance that we think is a little bit resilient and durable. And over time, the expectation would be -- at least our hope would be to able to take it up over time. And so don't misread anything. We do believe we are getting price. We understand the impact of our growth initiatives. We sort of have a very good view of what we're walking away from. And then we have a view on market growth in each of the platforms, that is different. And it aggregates the sort of that low single-digit range. If you set it around 3, it's probably not a bad place to be. And hopefully, over time, we have the option to come back and give you better news. So that's -- so don't overthink it. So it'll be worth it.
That's very helpful color. I want to ask my final question on capital use here. The balance sheet is in good shape. Cash flow generation is accelerating. And I want to get your thoughts on what's happening with your pipeline, how you're thinking about the M&A environment at this point in the cycle. And maybe more specifically, with your stock trading at roughly 9x EBITDA, how do you think about returning cash to shareholders and maybe buying back your own stocks, especially in a more volatile macroeconomic environment?
Sure. Obviously, you pointed out the elevated free cash flow and what that will do really over the coming years. As we've communicated for a long period of time, our idea was to connect to that 2 to 3x leverage range. I think with the guidance we've provided and assuming no acquisitions, you sort of get to that mid-1 range over the course of the next 12 months. I would say that the pipeline of opportunities around the bolt-on tuck in sides of things feels pretty good. We announced one this morning. Our -- Mark talked about it I guess at least. We think there's probably a couple more like that. And so our priority remains to continue to use our free cash flow to do things that grow the future earnings and cash flow of the business and deliver really high shareholder returns. We hope that over time, that reflects a better valuation of Rexnord because we are performing. The valuation, as you pointed out, is relatively inexpensive compared to the quality of the financial performance and the outlook for the business. So I wouldn't tell you that we wouldn't buy back stock. But I think we believe over time that the highest-returning opportunity for us is to continue to invest in our core business, do smart bolt-on tuck-in M&A and while we search for things that are potentially a little bit larger.
As far as where we are in the cycle, the way we go about our M&A program is pretty disciplined. We don't tend to participate in auctions. Most of the acquisitions are -- frankly, all the acquisitions we've done in the last 12 years have come through a proprietary funnel. And so we're going to work these things because we know we can create value with them. And if you think about Centa, it's just a small case study. This is something we cultivated for -- in excess of 8 years. And when we finally had the chance to invest in that business, we had a really good idea of what we could do with it and as the results point out, we're delivering upon what we said. So we're going to be deliberate. We're going to be focused on a combination of internal growth, making sure that we keep the leverage at a comfortable spot for investors and also thinking about doing smart M&A. And that's really been the game plan and the playbook we've used the last several years. And I don't think we're going to deviate from that.
Your next question comes from the line of Julian Mitchell from Barclays.
This is Jason Makishi on for Julian. Just kind of wanted to get your take on the difference maybe from an organic growth perspective by end market on the low and the high end of your guidance. Which end markets do you think there's sort of more scope for upside in line with the conservatism that you typically embed in the early guides in your fiscal year?
Yes. Jason, this is Mark. If we can kind of go back to the slide, I'll walk through the end markets as we talked about them in the slides. I think from a distribution standpoint, we call overall distribution in the yellow front. So I think that's kind of code for low single-digit growth. Europe, we -- Europe has been more challenging, and that continues. But I don't think we see a lot of upside in Europe. And we think there could be a little bit of upside in North America over the course of the year in the distribution channel, probably not in the first half or in the second half of our fiscal year. The rest of the world is pretty small for us, so if there is upside or downside, it doesn't really -- wouldn't move the needle much.
Food and beverage, I think if we look at -- Europe again has been slower for us. We're not standing or just we're not turning around. North America was a little soft in our fourth quarter, but we've seen some mix percolating of late. So I think there could be some upside in our North American food and beverage as the year progresses. And looking at our overall commercial aerospace, that -- that's going to be a grower for us next year. It's relatively lacking from a backlog standpoint. It's relatively predictable. But aerospace will be an excellent contributor of growth next year for us.
And in the process industries, I'd say it's been relatively steady. I don't think I'd call out anything within those end markets that may be a big upside or a big downside from what we can see today.
Turning to water, I think we've taken a relatively cautious approach on the commercial side of the water end markets. I think institutional, as the year progresses, again could be an opportunity where we see some growth on the positive side versus what we've assumed. So it's a kind of long-winded answer to your question, but -- and that covers what sort of the key end markets and what we think could be upside or downside versus where we sit today.
Great. That's very helpful. And could you just talk a little bit more about why the end-market outlook for commercial and industrial is a little bit worse or maybe just a little bit more uncertain relative to your -- the outlook you gave last quarter in the Water Management business side?
So last quarter, we spoke -- said we had certain projects in our funnel that we knew we were going to deliver in the fourth quarter. So that's why we kind of turn up green. If you went back to our third quarter, we had that yellow on the commercial side. That was really more reflective of what we saw in our funnel at that 90-day period. So that passing, we've flipped that kind of back to yellow. It's again where we are in the cycle. We feel it's prudent to be a little bit more cautious on the overall commercial side but then being balanced with acknowledging there's some upside in institutional side, of course. And that is our is sweet spot in general, which should help the business over the next year.
Your next question comes from the line of Andrew Obin from Bank of America.
Just a question in terms of -- and I apologize if I missed it, I dialed a little bit late. But could you talk about -- on the PMC side, order progression through the quarter, did it slow down towards the end? Just curious how that played out.
Andrew, we would tell you that we really didn't see any sort of much of a change throughout the quarter, right? I would tell you that. And that is sort of consistent at least through April. So I would tell you that we built a little backlog in the quarter. Our aerospace business, still, they had a lot of backlog in the quarter. But fundamentally, we didn't see a significant change throughout the fourth quarter. And as we start April here -- one thing to just recall is that our distribution partners, the arrangement we have is we pay on sell-through. So there's really no incentive to accelerate or decelerate orders. So what we're seeing is sort of real-time demand. And the order impact is not influenced by spot-buy programs or putting inventory in the shelf that perhaps is unneeded. And so there's really no order volatility from that sort of behavior, which I think happens some of the time. And so very consistent throughout the quarter and looks -- continue to be steady in the month of April here.
Got you. And then the second question on cash flow, so I understand I think the midpoint. It's interesting that you said it's a good place to start. And I was just wondering, what are the incremental opportunities on working capital? And also how should I think about the net impact of restructuring spend cash versus earnings in next fiscal year?
Well, I think with respect to cash flow, every number that we've provided for the last, at least, 7 years as a public company, we beat. So I think I said that's a good place to start only because I think we've got a high degree in confidence -- high degree of confidence in our cash conversion cycle. So there are many opportunities as we look through things like working capital and a variety of other opportunities around CapEx, largely driven by the SCOFR 1 and SCOFR 2, which substantially reduces CapEx on a go-forward basis. So we pointed you to that as sort of a good place to start. And again, we'll monitor that as we go throughout the year. With respect to uses of cash, Mark has that.
Yes. I think as Todd mentioned -- look, obviously, earnings additive, working capital will be additive to our cash for this year. On the other side, CapEx was a little bit higher this year due to SCOFR 3. In the back half of the year, we'll be starting to put some capital in. So the CapEx number on just on the raw number basis will be a little bit higher year-over-year. Our restructuring cash out will be higher than it was last year. And one thing, too, we'll have a little more pension cash at the door. We're doing something with our pension plans. Due to the recent acquisition, there's some consolidations that require us to do some earlier funding but reduce our liability over time. So those are some of the things that will work against some free cash flow. But to Todd's point, fully better number next year. And I think as the quarters move forward, we'll get a little sharper on that. And then the last thing that I'll point out is from a tax standpoint, we said, "Look, going into this year, our cash tax rate will be in the low 30s." We've gotten to that point. That's just one more data point you can use in your cash flow modeling. I think that kind of hits the highlights for free cash flow at this point in time.
Your next question comes from the line of John Walsh from Credit Suisse.
So -- well, first, good quarter. And then I guess in terms of my questions, just going back to the product line simplification initiative, are -- should we think this is kind of just running, end of life-ing some of these products? Is there an opportunity to maybe prune one off and sell it? And then I guess thinking about free cash flow, these are kind of going end-of-life. Is there kind of like an inventory benefit, right, that would be embedded in the guide?
Not specifically. The process that we've deployed as part of RBS really takes a look at not so much product lines in totality, but a combination of customers and SKUs. And so I wouldn't expect a divestiture of any discrete product line resulting out of what we're talking about. It's really doing a better job of managing SKUs through a customer lens. And working on things like material substitution, converting things from one -- maybe a direct channel to a wholesale channel. Those are the types of things we're talking about. And so you're correct insomuch as saying that if you've got a long tail of SKUs, you're going to absolutely have more inventory. So we haven't specifically guided our free cash flow with that benefit, but there is absolutely a benefit resulting from that. So it's migrating towards maybe less engineered to order or one-off to a more standardized product offering that fits the majority if not almost all the applications and just doing it in a much smarter way.
Great. That makes sense. And then I guess just as a follow-up, you called out the higher tax rate in Q1. We just had a discussion around CapEx weight in H1, H2. Kind of anything else to call out in terms of timing as we think about the quarterly progression for the annual guidance?
I don't think there really is. I think one of the others that I kind of highlight, when you kind of look at our overall sales and EBITDA cadence last year to this year kind of an H1, H2, look for some consistency in 2020 as how to it's phased in '19 in -- within both platforms. But I think outside of that, we've kind of covered the key highlights on timing, space and whatnot throughout the Q&A here.
We have no further questions in the queue at this time. I will turn the call back over to Rob McCarthy for closing remarks.
Thanks to everybody who could join us on the call today. Appreciate your interest in Rexnord, and we look forward to providing our next update when we announce our fiscal 2020 first quarter results in late July. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your -- participating, and you may now disconnect. Have a great day.