Watts Water Technologies 2Q 2016 Earnings Conference Call · Driving top-line growth & margin...

© 2016 Watts Water Technologies

Watts Water Technologies2Q 2016 Earnings Conference Call

August 5, 2016


Forward Looking Statements

Certain statements in this presentation constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are related to forecasts of sales, margins, earnings, earnings per share, capital expenditures, water market growth, acquisition strategy, lead free developments, and management goals and objectives.

Watts cautions investors that any such forward-looking statements made by Watts are not guarantees of future performance. All forward-looking statements are subject to known and unknown risks, uncertainties, and contingencies, many that are beyond the control of Watts, which may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Factors that might affect forward-looking statements include overall economic and business conditions, competitive factors, changes in laws affecting Watts, future acquisitions of material assets or businesses by Watts, the demand for Watts’ products and services and other factors identified in “Item 1A. Risk Factors” in Watts’ most recent Annual Report on Form 10-K and in subsequent reports filed with the SEC.

8/4/2016 2


2Q 2016 Overview

8/4/2016

• Strong financial performance– Record 2Q adjusted operating margin; highest adjusted EPS on record– Improved organic sales performance across all regions– 1H’16 results consistent with full year outlook

• Mixed end markets– US non-residential and residential moderate growth continues– EMEA stabilization; monitoring Brexit closely– Asia Pacific - growth outside of China more than offsetting China commercial softness

• Building on foundation – Executing on operational programs – Realigning regional organizations, continuing team development– Reinvesting for growth– Driving top-line growth & margin expansion

Record 2Q Performance 3


Building on Foundation

8/4/2016

Solid Execution; Transformation Continues

Executing on programs• Transformation Phase 1 complete; China subsidiary sale finalized • Transformation Phase 2 – DCs/manufacturing on target • EMEA restructuring on track

Realigning organization& developing team

• New Europe sales organization announced • Driving One Watts; Global Drains / Electronics / Water Quality• Continue to develop leadership team; focus on next tiers

Driving top-line growth & margin expansion

• 3%* organic sales growth in 1H’16• 1H’16 operating margins 11.1%*, up 150 bps• Investment in ramp in 2H’16

• New training center operational; Voice of Customer key• Commercial focus / new product development / cross-selling• Marketing / R&D investment

Reinvesting for growth

* Excludes effect of additional shipping days, see slide 19 for estimated effect in 1H 2016

4


2Q 2016 Financial Summary

8/4/2016

• 4% sales decrease+ Organic

(1)+4%; Acq +1%

‒ Undifferentiated exit (9%)▪ FX neutral

• 5% operating profit increase▪ Volume, product mix, productivity / restructuring

• 7% net income increase▪ Increased EBT offset by higher tax rate

• 9% EPS increase + Operating margin expansion +$0.09

+ Apex + $0.01– Exit of undifferentiated products ($0.06)

+ Below the line; share repurchase +$0.02

2Q16 2Q15

Sales $371.1 $386.9

Operating Profit (1) $44.1 $42.0

Margin % 11.9% 10.9%

Net Income(1) $26.0 $24.3

EPS(1) $0.75 $0.69Tax Rate 34.6% 33.8%

EPS Growth Driven by Strong Margin Expansion (1) Organic sales growth, Operating Profit, Operating Margin, Net Income and EPS are non-GAAP financial measures, see slides 14 and 15 for reconciliation

(M)

Comments

5


16.5%14.7%

2Q16 2Q15

$239.5$262.8

2Q16 2Q15

• Operating profit(1) $39.5M Up $0.9M or 2%

• Operating margin(1) +180 bps+ Mix, volume and productivity− Investments

• Growth in backflow & valves

• AERCO double digit increase

• Undifferentiated products ($32M)

Continued Strong Margin Expansion

Up 180 bps

Americas

8/4/2016

Operating Margin(1)Sales

Down 9%Organic(1) up 4%

(M)

6

(1) Organic sales growth, Operating Profit and Operating Margin are non-GAAP financial measures, see slides 14 and 16 for reconciliation


11.1%9.5%

2Q16 2Q15

$117.4$112.2

2Q16 2Q15

Productivity and Volume Driving Margins

• Operating profit(1) $13M Up $2.4M or 23%

• Operating margin(1) +160 bps+ Volume + Productivity, restructuring

EMEA

8/4/2016

Sales Operating Margin(1)

Up 160 bps

• Growth in all platforms

• Increase in Italy, Scandinavia, Middle East; Germany and Russia down

• FX tailwind +$2M or 2%

Up 5%Organic(1) up 3%

(M)

7



9.2%

13.4%

2Q16 2Q15

$14.2$11.9

2Q16 2Q15

Strong Growth Outside of China

Asia-Pacific

8/4/2016

• Mixed performance in China continues Residential heating up, commercial valves down

• Growth outside of China +50% organically• Apex $3M; undifferentiated products ($2M)

• Operating profit(1) $1.3M Down $0.3M or 19%

• Operating margin(1) down 420 bps + Productivity, cost savings− Intercompany sales reduction – undifferentiated

• China subsidiary sale (special item) $8.3M after-tax gain; $6.9M currency translation gain

Proceeds of $8M due in 3Q

Sales Operating Margin(1)

Down 420 bps

(M)

Up 19%Organic(1) up 5%

8



Cash Flow

8/4/2016

• Impact of Americas transformation on working capital; expect 2H reduction

• Higher product liability and tax payments

• Capital spend increased 55% to support growth and productivity initiatives

• Announced 6% dividend increase− Fourth consecutive yearly increase

• YTD repurchased 359K shares for $17.6M

Expect Strong 2H Cash GenerationFCF = Cash Flow from Operations Less Capital Expenditures. FCF is a non-GAAP measure, see slide 17 for calculations.

Comments(M)

Q2 2016 Q2 2015Net income 44.8 30.9Depreciation and amortization 24.9 25.9Change in working capital and other (61.9) (14.9)

Total Operating Activities 7.8 41.9

Capital expenditures, net of proceeds (19.2) (12.4)Other (2.1) 0.7Total Investing Activities (21.3) (11.7)

Net proceeds (payments) on long-term debt 28.2 (3.7)Dividends (12.0) (11.3)Payments to repurchase common stock (17.6) (19.5)Debt issue costs (2.1) - Proceeds and tax benefit of stock option activity 2.9 1.3Total Financing Activities (0.6) (33.2)

Effect of exchange rates 4.6 (13.5)Net decrease in cash (9.5) (16.5)

Free Cash Flow (11.4) 29.5

Six months Ended

9


2H’16 Outlook

8/4/2016 10

Expect Consistent Performance

1H

* Excludes impact of shipping days in both halves, see slide 19 for 1H’16 estimate

Organic Sales Growth* Drivers/Comments

4% 3-5% • Steady market growth• Backflow & Valve, AERCO strength

2% ~Flat • Market uncertainty • Q4 tougher comps

3% 10-15% • China valves recovery • Growth outside China to continue

3% 2-4%• Steady top line growth • Margin expansion moderates • Strong 2H cash flow

2H

WTS

APAC

EMEA

AMERICAS


Summary

8/4/2016

• Record 2Q’16 and strong 1H’16

• Continuing to build on foundation

• 2H’16 outlook − Steady organic growth− FY 100 bps+ margin expansion− Targeting 100% free cash flow conversion by year end

Delivering on Commitments11


Appendix

© 2016 Watts Water Technologies 13

Consolidated Statements of Operations

8/4/2016

(in millions except per share amounts) 2016 2015 B/(W) %

Net sales 371.1$ 386.9$ (15.8)$ (4.1%)Cost of goods sold 220.4 241.1 20.7 -

Gross profit 150.7 145.8 4.9 3.4%40.6% 37.7% +2.9p

Selling, general & administrative expenses 110.5 106.3 (4.2) (4.0%)29.8% 27.5% (2.3p)

Restructuring and other charges, net 3.2 4.7 1.5 31.9%Gain on disposition 8.7 - 8.7 NM

Operating income 45.7 34.8 10.9 31.3%12.3% 9.0% +3.3p

Other (income) expense 4.3 5.3 1.0 18.9%

Income before taxes 41.4 29.5 11.9 40.3%

Provision for income taxes 12.8 10.2 (2.6) (25.5%)

Net income 28.6$ 19.3$ 9.3$ 48.2%

Diluted earnings per share 0.83$ 0.55$ 0.28$ 50.9%


Reconciliation of Reported Sales to Organic Sales

8/4/2016

(in millions except per share information)(Unaudited)(M)

Americas EMEAAsia-

Pacific Total

Reported net sales 2Q'16 $ 239.5 $ 117.4 $ 14.2 $ 371.1 Reported net sales 2Q'15 262.8 112.2 11.9 386.9 Dollar change $ (23.3) $ 5.2 $ 2.3 $ (15.8)

Net Sales % increase (decrease) -9% 5% 19% -4%Decrease (increase) due to foreign exchange - -2% 5% - Decrease due to divestitures 13% - 16% 9%(Increase) due to acquisition - - -35% -1% Subtotal 13% -2% -14% 8%Organic sales increase 4% 3% 5% 4%

Americas EMEAAsia-

Pacific Total

Reported net sales 2Q'16 $ 461.8 $ 228.4 $ 25.1 $ 715.3 Reported net sales 2Q'15 500.2 221.2 21.7 743.1 Dollar change $ (38.4) $ 7.2 $ 3.4 $ (27.8)

Net Sales % increase (decrease) -8% 3% 16% -4%Decrease (increase) due to foreign exchange 1% 1% 4% 1%Decrease (increase) due to foreign exchange 13% - 17% 9%Decrease due to divestitures - - -32% -1%(Increase) due to acquisition 14% 1% -11% 9%

Organic sales increase 6% 4% 5% 5%

Six Months Ended

Second Quarter Ended


Reconciliation of GAAP “As Reported” To “Adjusted” Non-GAAP Excluding Effect Of Adjustments For Special Items

8/4/2016

(in millions except per share information)(Unaudited) Second Quarter Ended

2016 2015 2016 2015

Net sales $ 371.1 $ 386.9 715.3 $ 743.1 Operating income - as reported $ 45.7 $ 34.8 76.9 $ 57.6

Operating margin % 12.3% 9.0% 10.8% 7.8%

Adjustments for special items:Gain on disposition (8.7) (8.7) - Acquisitions related costs 0.5 - 0.6 1.1 Restructuring / severance related costs 3.2 4.7 4.6 6.7 Deployment costs related to tranformation activities 3.4 2.5 8.0 5.9

Total adjustments for special items $ (1.6) $ 7.2 4.5 $ 13.7

Operating income - as adjusted $ 44.1 $ 42.0 81.4 $ 71.3 Adjusted operating margin % 11.9% 10.9% 11.4% 9.6%

Net income - as reported $ 28.6 $ 19.3 44.8 $ 30.9

Adjustments for special items - tax affected:Gain on disposition (8.3) (8.3) - Acquisitions related 0.4 - (0.5) 0.7 Restructuring / severance 2.2 3.4 3.0 4.7 Deployment costs related to tranformation activities 2.1 1.6 5.0 3.9 Other - tax adjustment 1.0 - 1.6 -

Total adjustments for special items - tax affected: $ (2.6) $ 5.0 0.8 $ 9.3

Net income - as adjusted $ 26.0 $ 24.3 45.6 $ 40.2

Earnings per share Diluted earnings per share - as reported $ 0.83 $ 0.55 1.30 $ 0.88 Adjustments for special items (0.08) 0.14 0.02 0.26

Diluted earnings per share - as adjusted $ 0.75 $ 0.69 1.32 $ 1.14

Six Months YTD(M)


Adjusted Operating Income by Segment

8/4/2016

(in millions)

(M)

Americas EMEAAsia -Pacific Corp. Total Americas EMEA

Asia -Pacific Corp. Total

Reported GAAP Operating Income 35.4$ 10.5 9.5 (9.7) 45.7 36.1$ 9.4 (1.8) (8.9) 34.8 % of sales 14.8% 8.9% 66.9% 12.3% 13.7% 8.4% -15.1% 9.0%

Adjustments for special items 4.1$ 2.6 (8.2) (0.1) (1.6) 2.5$ 1.3 3.4 - 7.2

Adjusted Operating Income 39.5$ 13.1$ 1.3$ (9.8)$ 44.1$ 38.6$ 10.7 1.6 (8.9) 42.0 % of sales 16.5% 11.1% 9.2% 11.9% 14.7% 9.5% 13.4% 10.9%

Americas EMEAAsia -Pacific Corp. Total Americas EMEA

Asia -Pacific Corp. Total

Reported GAAP Operating Income 63.5$ 20.7 10.8 (18.1) 76.9 60.3$ 14.8 (0.3) (17.2) 57.6 % of sales 13.8% 9.1% 43.0% 10.8% 12.1% 6.7% -1.4% 7.8%

Adjustments for special items 9.0$ 3.0 (7.5) 4.5 6.2$ 4.0 3.4 0.1 13.7

Adjusted Operating Income 72.5$ 23.7 3.3 (18.1) 81.4 66.5$ 18.8 3.1 (17.1) 71.3 % of sales 15.7% 10.4% 13.1% 11.4% 13.3% 8.5% 14.3% 9.6%

Q2 2016 Q2 2015

Six Months YTD Six Months YTD


Reconciliation of Net Cash Provided by Continuing Operations to Free Cash Flow

8/4/2016

2016 2015Net cash provided by continuing operations - as reported $ 7.8 $ 41.9 Less: additions to property, plant, and equipment (19.2) (12.5) Plus: proceeds from the sale of property, plant, and equipment - 0.1

Free cash flow $ (11.4) $ 29.5

Net income from continuing operations - as reported $ 44.8 $ 30.9

Cash conversion rate of free cash flow to net income -25.4% 95.5%

Six Months Ended

(M)


Reconciliation Long-term Debt (including current portion) to Net Debt to Capitalization Ratio

8/4/2016

July 3, December 31,2016 2015

Current portion of long-term debt $ 1.5 $ 1.1Plus: Long-term debt, net of current portion 601.5 576.2Less: Cash and cash equivalents (286.7) (296.2)

Net debt $ 316.3 $ 281.1

Net debt $ 316.3 $ 281.1Plus: Total stockholders' equity 733.8 704.9

Capitalization $ 1,050.1 $ 986.0

Net debt to capitalization ratio 30.1% 28.5%

(M)


YTD’16 Estimated Effect of Extra Shipping Days

8/4/2016 19

(M)

Organic Growth

YTD 15 YTD 16Normalized

YTD 16 *YOY

ActualNormalized

YOY*RevenueAmericas $500.2 $461.8 $453.9 6% 4%EMEA 221.2 228.4 224.6 4% 2%APAC 21.7 25.1 24.6 5% 3%Consolidated Revenue $743.1 $715.3 $703.0 5% 3%

% Inc (Dec)Operating Profit(1) Actual Normalized*Americas 66.5 72.5 70.4 9% 6%EMEA 18.8 23.7 22.7 26% 21%APAC 3.1 3.3 3.2 6% 4%Corp (17.1) (18.1) (18.1) 6% 6%Consolidated OP 71.3 81.4 78.2 14% 10%

Operating Margin(1)

Americas 13.3% 15.7% 15.5%EMEA 8.5% 10.4% 10.1%APAC 14.3% 13.1% 13.1%Consolidated OM 9.6% 11.4% 11.1%

EPS (1) $1.14 $1.32 $1.26 15% 10%* Adjusted for Shipping Days

(1) Operating profit, operating margin and EPS are non-GAAP financial measures, see slides 15 and 16 for reconciliations

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