Watts Water Technologies 3Q 2016 Earnings Conference Call · Factors that might affect...

© 2016 Watts Water Technologies

Watts Water Technologies

3Q 2016 Earnings Conference Call November 3, 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.

11/2/2016 2


3Q 2016 Overview

11/2/2016 3

Solid Results; Reshaping Portfolio

• Delivered strong operating margins and EPS growth

• Top-line headwinds in Americas

• Continued investments support future growth and productivity

• Transformation initiatives on track

• End markets remain mixed

• Acquired PVI Industries LLC; continuing to enhance portfolio


3Q 2016 Financial Summary

11/2/2016 4

Strong Margin Expansion Despite Top-Line Headwinds

• 7% sales decrease

− Undifferentiated exit (7%)

Acquisition +1%; organic (1%)

• Operating profit ~flat

Lower volume and growth investments offsetting

favorable product mix and productivity

• 70 bps operating margin expansion

• 6% EPS increase

+ Operational / acquisition +$0.05

+ Interest / tax rate +$0.04

− Exit of undifferentiated products ($0.05)

3Q16 3Q15

Sales $341.1 $366.3

Operating Profit (1)

$41.4 $41.7

Margin % 12.1% 11.4%

Net Income(1)

$24.6 $23.6

EPS(1)

$0.71 $0.67

Tax Rate 33.3% 35.0%

(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


3Q16 3Q153Q16 3Q15

• Operating profit(1) $36.3M Up $0.4M or 1%

• Operating margin(1) +210 bps + Mix and productivity

+ Favorable absorption

− Volume

− Investments

• Exit of undifferentiated products ($23M)

• AERCO down double digits

Project delays, certifications, competition

• Core plumbing up LSD; drains up double digits

• Retail down, future headwind

Up 210 bps

Americas

11/2/2016 5

Record Margin Performance

Operating Margin(1)

Sales

Down 12 %

Organic(1) down 3%

(M)

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

$215.8 $245.0 16.8% 14.7%


3Q16 3Q153Q16 3Q15

• Operating profit(1) $12.9M

Up $0.9M or 7%

• Operating margin(1) +100 bps

+ Productivity

+ Restructuring

− Investments

EMEA

11/2/2016 6

Strong Productivity Driving Margins

Sales Operating Margin(1)

Up 100 bps

• Fluid Solutions and Drains relatively flat

• Strong Electronics performance continues

• Growth in Italy and Middle East; Germany, UK

and Eastern Europe down; France flat

• Brexit driving uncertainty in market

Down 1%

Organic(1) Flat

(M)


$109.8 $110.9 11.8% 10.8%


3Q16 3Q153Q16 3Q15

Asia-Pacific

11/2/2016 7

China Commercial Recovery; Growth Ex China Continues

• China growth +34%

Residential heating and commercial valves up

• Growth outside of China +19% organically

• APEX $3M, undifferentiated products ($1M)

• Operating profit(1) $1.9M

Up $0.2M, or 12%

• Operating margin(1) down 400 bps

‒ Intercompany sales reduction – undifferentiated

+ Volume, APEX contribution

+ Productivity

Sales Operating Margin(1)

Down 400 bps

(M)

Up 49%

Organic(1) up 26%


$15.5 $10.4 16.3% 12.3%


Cash Flow

11/2/2016 8

Driving for 100% Free Cash Conversion

• Strong quarterly cash flow performance

• Impact of Americas transformation on working

capital; continued reduction by year-end

• Capital spend increased 37% to support

growth and productivity initiatives

• YTD repurchased 433K shares for ~$22M

• 2015 FCF includes one-time liability

settlements of $49M

• Expect momentum to continue in 4Q’16

FCF = Cash Flow from Operations Less Capital Expenditures. FCF is a non-GAAP measure, see slide 17 for calculation of FCF

Comments

(M)

Q3 2016 Q3 2015

Net income 66.7 5.2

Depreciation and amortization 38.0 39.7

Change in working capital and other (35.1) (3.0)

Total Operating Activities 69.6 41.9

Capital expenditures, net of proceeds (26.3) (19.1)

Asset sale and Other 2.1 33.8

Total Investing Activities (24.2) 14.7

Net proceeds (payments) on long-term debt 27.3 (4.7)

Dividends (18.2) (17.2)

Payments to repurchase common stock (22.2) (32.0)

Debt issue costs (2.1) -

Proceeds and tax benefit of stock option activity 7.7 2.3

Total Financing Activities (7.5) (51.6)

Effect of exchange rates 4.5 (17.3)

Net increase (decrease) in cash 42.4 (12.3)

Free Cash Flow 43.3 22.8

Nine months Ended


4Q 2016 Outlook

Continued Strong Operating Margin Expansion

• Reduced shipping days impact in 4Q’16 (offset from 1Q’16)

Sales ~ (400 bps), Operating Margins ~ (50 bps)

• Anticipated sales growth rates marginally higher than 3Q’16

Exit of undifferentiated products impact ~$10M vs. 4Q’15

Retail sales erosion of ~$3M

• Operating margin expansion vs 4Q’15, down sequentially

• PVI included in results for two months

• Seasonally, a strong quarter for cash flow

11/2/2016 9


PVI Acquisition Summary

10

Expands WTS’ Commercial Solution Offering

Strategic Rationale

• Compelling synergies with AERCO

− Enables comprehensive heating / hot water solutions

− Complementary end markets

− Continued market shift to high efficiency solutions

• Addresses macro themes

• Strong brand recognition, product breadth

• Superior technology and engineering capabilities

• Highly regarded manufacturer representative network

• Seasoned leadership team

Transaction Financials

• ~$78M purchase price, ~ 11x EBITDA ex. synergies

• Estimate annual year 3 synergies of $2M to $3M

• Primarily funded with debt

• Accretive to 2017 EPS ~$0.06 (ex items)

Product Family Compatibility

PVI AERCO

• Leading provider of ASME commercial stainless steel

water heating equipment; focused on high capacity

market (> 500k BTU)

• ~$50M in annual sales

• Large and growing installed base

• Headquartered In Forth Worth TX; 230+ employees

11/2/2016

http://www.pvi.com/index.htm


Summary

11/2/2016 11

Making Significant Progress

• Strong YTD margin and EPS performance

• Continue to invest for growth and productivity

• Transformation on track

• Balanced capital deployment


Appendix

© 2016 Watts Water Technologies 13

Consolidated Statements of Operations

11/2/2016

(in millions except per share amounts)

(M)

(Unaudited)

2016 2015 B/(W) %

Net sales 341.1$ 366.3$ (25.2)$ (7%)

Cost of goods sold 199.1 224.1 25.0 11%

Gross profit 142.0 142.2 (0.2) (0%)

41.6% 38.8% +2.8p

Selling, general & administrative expenses 104.5 166.6 62.1 37%

30.6% 45.5% +14.9p

Restructuring and other charges, net 1.0 5.8 4.8 83%

Operating income (loss) 36.5 (30.2) 66.7 (221%)

10.7% -8.2% 18.9%

Other (income) expense 4.1 5.7 1.6 28%

Income before taxes 32.4 (35.9) 68.3 (190%)

Provision (benefit) for income taxes 10.5 (10.2) (20.7) 203%

Net income (loss) 21.9$ (25.7)$ 47.6$ (185%)

Diluted earnings per share 0.63$ (0.73)$ 1.36$ (186%)

Thrid Quarter Ended


Reconciliation of Reported Sales to Organic Sales

11/2/2016

(in millions except per share information) (Unaudited)

(M)

Americas EMEA

Asia-

Pacific Total

Reported net sales 3Q'16 $ 215.8 $ 109.8 $ 15.5 $ 341.1

Reported net sales 3Q'15 245.0 110.9 10.4 366.3

Dollar change $ (29.2) $ (1.1) $ 5.1 $ (25.2)

Net sales % increase (decrease) -12% -1% 49% -7%

Decrease due to foreign exchange - 1% 5% -

Decrease due to divestitures 9% - 16% 7%

(Increase) due to acquisition - - -44% -1%

Subtotal 9% 1% -23% 6%

Organic sales increase (decrease) -3% 0% 26% -1%

Americas EMEA

Asia-

Pacific Total

Reported net sales 3Q'16 $ 677.6 $ 338.2 $ 40.6 $ 1,056.4

Reported net sales 3Q'15 745.2 332.1 32.1 1,109.4

Dollar change $ (67.6) $ 6.1 $ 8.5 $ (53.0)

Net sales % increase (decrease) -9% 2% 26% -5%

Decrease due to foreign exchange 1% 1% 4% 1%

Decrease due to divestitures 11% - 17% 8%

(Increase) due to acquisition - - -35% -1%

Subtotal 12% 1% -14% 8%

Organic sales increase (decrease) 3% 3% 12% 3%

Nine Months Ended

Third Quarter Ended


Reconciliation of GAAP “As Reported” to “Adjusted”

Non-GAAP Excluding Effect of Adjustments for Special Items

11/2/2016

(in millions except per share information) Third Quarter Ended

2016 2015 2016 2015

Net sales $ 341.1 $ 366.3 1,056.4 $ 1,109.4

Operating income (loss) - as reported $ 36.5 $ (30.2) 113.4 $ 27.4

Operating margin % 10.7% -8.2% 10.7% 2.5%

Adjustments for special items:

Gain on disposition - - (8.7) -

Acquisitions related costs - - 0.6 1.1

Restructuring / severance related costs 1.0 5.8 5.6 12.5

Deployment costs related to tranformation activities 3.9 1.4 11.9 7.3

Pension/other - 64.7 - 64.7

Total adjustments for special items $ 4.9 $ 71.9 9.4 $ 85.6

Operating income - as adjusted $ 41.4 $ 41.7 122.8 $ 113.0

Adjusted operating margin % 12.1% 11.4% 11.6% 10.2%

Net income (loss) - as reported $ 21.9 $ (25.7) 66.7 $ 5.2

Adjustments for special items - tax affected:

Gain on disposition - - (8.3) -

Acquisitions related - - (0.5) 0.7

Restructuring / severance 0.6 3.6 3.6 8.3

Deployment costs related to tranformation activities 2.3 1.1 7.3 5.0

Pension/ other (0.2) 44.6 1.5 44.6

Total adjustments for special items - tax affected:$ 2.7 $ 49.3 3.6 $ 58.6

Net income - as adjusted $ 24.6 $ 23.6 70.3 $ 63.8

Earnings per share

Diluted earnings per share - as reported $ 0.63 $ (0.73) 1.93 $ 0.15

Adjustments for special items 0.08 1.40 0.11 1.66

Diluted earnings per share - as adjusted $ 0.71 $ 0.67 2.04 $ 1.81

Nine Months YTD(Unaudited)

(M)


Adjusted Operating Income by Segment

11/2/2016

(in millions)

Americas EMEA

Asia -

Pacific Corp. Total Americas EMEA

Asia -

Pacific Corp. Total

Reported GAAP Operating Income 32.2$ 12.5 1.4 (9.6) 36.5 30.3$ 10.9 1.2 (72.6) (30.2)

% of sales 14.9% 11.4% 9.0% 10.7% 12.4% 9.8% 11.5% -8.2%

Adjustments for special items 4.1$ 0.4 0.5 (0.1) 4.9 5.6$ 1.1 0.5 64.7 71.9

Adjusted Operating Income 36.3$ 12.9$ 1.9$ (9.7)$ 41.4$ 35.9$ 12.0 1.7 (7.9) 41.7

% of sales 16.8% 11.8% 12.3% 12.1% 14.7% 10.8% 16.3% 11.4%

Americas EMEA

Asia -

Pacific Corp. Total Americas EMEA

Asia -

Pacific Corp. Total

Reported GAAP Operating Income 95.7$ 33.2 12.2 (27.7) 113.4 90.6$ 25.7 0.9 (89.8) 27.4

% of sales 14.1% 9.8% 30.0% 10.7% 12.2% 7.7% 2.8% 2.5%

Adjustments for special items 13.1$ 3.4 (7.0) (0.1) 9.4 11.8$ 5.1 3.9 64.8 85.6

Adjusted Operating Income 108.8$ 36.6 5.2 (27.8) 122.8 102.4$ 30.8 4.8 (25.0) 113.0

% of sales 16.1% 10.8% 12.8% 11.6% 13.7% 9.3% 15.0% 10.2%

Q3 2016 Q3 2015

Nine Months YTD Nine Months YTD

(M)

(Unaudited)


Reconciliation of Net Cash Provided by

Operating Activities to Free Cash Flow

2016 2015

Net cash provided by operating activities - as reported $ 69.6 $ 41.9

Less: additions to property, plant, and equipment (26.3) (19.2)

Plus: proceeds from the sale of property, plant, and equipment - 0.1

Free cash flow $ 43.3 $ 22.8

Net income - as reported $ 66.7 $ 5.2

Cash conversion rate of free cash flow to net income 64.9% 438.5%

RECONCILIATION OF NET CASH PROVIDED BY

OPERATING ACTIVITIES TO FREE CASH FLOW

Nine Months Ended

(M)

11/2/2016

(Unaudited)


Reconciliation Long-term Debt (including current portion)

to Net Debt to Capitalization Ratio

11/2/2016

Oct. 2 December 31,

2016 2015

Current portion of long-term debt $ 1.3 $ 1.1

Plus: Long-term debt, net of current portion 601.6 574.2

Less: Cash and cash equivalents (338.6) (296.2)

Net debt $ 264.3 $ 279.1

Net debt $ 264.3 $ 279.1

Plus: Total stockholders' equity 756.4 704.9

Capitalization $ 1,020.7 $ 984.0

Net debt to capitalization ratio 25.9% 28.4%

(M)

(Unaudited)

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