watts water technologies 1q 2017 earnings conference...

Watts Water Technologies

1Q 2017 Earnings Conference Call

© 2017 Watts Water Technologies, Inc.

May 5, 2017

5/4/2017 © 2017 Watts Water Technologies, Inc. 2

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.

1Q17 Overview


Quarter In-Line with Expectations

• Record Q1 operating margin and EPS

• Top-line headwinds, as expected

• Global end markets remain mixed

• Executing on key initiatives

• PVI performance on track

1Q17 Financial Summary


Record Operating Margin and EPS

Comments

• 1% sales increase

+ Acquisition, net +3%

‒ Organic (1%); FX (1%)

Product rationalization ~ ($5M)

• 3% operating profit increase

Productivity / restructuring savings

• 14% net income increase

Increased EBIT, lower interest / tax rate

• 14% EPS increase

+ Operating margin expansion +$0.01

+ Lower interest / favorable tax rate +$0.07

PVI and FX offset

1Q17 1Q16

Sales $347.2 $344.2

Operating Profit (1)

$38.4 $37.3

Margin % 11.1% 10.8%

Net Income(1)

$22.3 $19.6

EPS(1)

$0.65 $0.57

Adjusted Tax Rate 33.4% 37.4%

(1) Organic sales growth, Operating Profit, Operating Margin, Net Income and EPS are non-GAAP financial measures, see slides 12 and 13 for reconciliation

(M)

Americas


Margin Impacted by Volume and M&A

(M)

Sales

• Growth in core plumbing products, up LSD

Wholesale / OEM up; Retail down

DIY erosion (1%)

• AERCO down double digits

• PVI contributed $14M; up MSD

Operating Margin(1)

• Operating profit(1) $33.6M

Up $0.6M or 2%

• Operating margin(1) (10) bps

+ Productivity / transformation

− AERCO volume

− PVI impact (50 bps)

$228.7 $222.3

1Q17 1Q16

14.7% 14.8%

1Q17 1Q16

Up 3 %

Organic (1) (2%) (10 bps)

(1) Organic sales growth, Operating Profit and Operating Margin are non-GAAP financial measures, see slides 12 and 14 for reconciliation

Europe


Strong Margin Expansion

(M)

Sales

33

• Drains & Electronics up, HVAC down

• Growth in Germany, Nordics; Down in France, UK

• (1%) erosion from product rationalization

• FX impact ($4.6M) or (4%)

Operating Margin(1)


Up $2.4M or 24%

• Operating margin(1) +260 bps

+ Volume & product mix

+ Productivity, restructuring

12.0%

9.4%

1Q17 1Q16

$104.9 $108.3

1Q17 1Q16

Down (3%)

Organic(1) +1% +260 bps


(2) Adjusted for segment composition change, see slide 16 for details

(2)

(2)

APMEA


Slow Start; Expect Q2 Growth to Rebound

(M)

Sales

• Sales erosion from product rationalization (16%)

• Excluding product rationalization:

Sales outside China – flat; tough comps

China up 23%; heating products demand

Operating Margin(1)


Down $1.4M or 58%

• Operating margin(1) (10.2) pts

− Affiliate sales down 22%

− Product mix, investments

Flat

Organic(1) (10%) (10.2) pts


7.4%

17.6%

1Q17 1Q16

$13.6 $13.6

1Q17 1Q16

(2) Adjusted for segment composition change, see slide 16 for details

(2)

(2)

Cash Flow


Normal Seasonal Outflow

Comments

• Q1 FCF improvement

Higher income

Lower working capital; less inventory build

Lower cap-ex

• WC / Sales % down 60 bps to 26%

• Cap-ex down 36%; timing

• Repurchased 69k shares for $4.4M

(1) Free Cash Flow = Cash Flow from Operations less Capital Expenditures, a non – GAAP measure. See slide 15 for calculation and reconciliation.

(M) Except share amounts

(unaudited)

1Q 2017 1Q 2016

Net income 21.7$ 16.2$

Depreciation and amortization 12.1 12.4

Change in working capital and other (42.9) (50.5)

Total operating activities (9.1) (21.9)

Capital expenditures, net of proceeds (5.8) (9.1)

Restricted cash - (18.2)

Acquisitions, asset sale & other 2.0 (2.1)

Total investing activities (3.8) (29.4)

Net (payments) proceeds from long-term debt (32.2) 24.1

Dividends (6.2) (5.9)

Payments to repurchase common stock (4.4) (12.5)

Debt issue costs - (2.1)

Proceeds and tax benefit of stock option activity 0.3 0.6

Total financing activities (42.5) 4.2

Effect of exchange rates 4.0 10.3

Net (decrease) in cash (51.4) (36.8)

Free cash flow (1) (14.9)$ (31.0)$

DSO 53.7 55.4 DPO 46.2 51.2 3.1 2.9

Three months ended

2017 Outlook


In-Line with Original Assumptions

AMERICAS Up Low Single Digits

Flat

Up Low Single Digits

Up High Single Digits

Europe

APMEA

WTS

• Incremental sales increase ~$25M

- PVI acquisition ~+$45M

- DIY erosion 1H17 ~ ($6M)

- Portfolio rationalization Europe ($5M) / APMEA ($9M)

• Targeting ~12% operating margin, +60 bps

- Incremental savings/investments consistent w/ 2016

- PVI operating margin high single digits during integration

• Cap-ex. $36M - $40M

• Depreciation & amortization $50M-$52M

• Adjusted tax rate ~ 34%

• Buyback to offset dilution at a minimum; pay competitive

dividend

Organic Sales Growth Highlights / Assumptions

Appendix


Consolidated Statements of Operations

(M) Except EPS

(Unaudited)

April 2, 2017 April 3, 2016 B/(W) %

Net sales 347.2$ 344.2$ 3.0$ 0.9%

Cost of goods sold 203.4 209.0 5.6 2.7%

Gross profit 143.8 135.2 8.6 6.4%

41.4% 39.3% +2.1p

Selling, general & administrative expenses 107.6 102.6 (5.0) (4.9%)

31.0% 29.8% (1.2p)

Restructuring 0.5 1.4 0.9 64.3%

Operating income 35.7 31.2 4.5 14.4%

10.3% 9.1% +1.2p

Other expense 4.9 4.3 (0.6) (14.0%)

Income before taxes 30.8 26.9 3.9 14.5%

Provision for income taxes 9.1 10.7 1.6 15.0%

Net income 21.7$ 16.2$ 5.5$ 34.0%

Diluted earnings per share 0.63$ 0.47$ 0.16$ 34.0%

First Quarter Ended


Reconciliation of Reported Sales to Organic Sales

(M)

Unaudited

Americas Europe APMEA Total

Reported net sales 1Q'17 $ 228.7 $ 104.9 $ 13.6 $ 347.2

Reported net sales 1Q'16 222.3 108.3 13.6 344.2

Reported change $ 6.4 $ (3.4) $ - $ 3.0

Net sales % increase (decrease) 3% -3% - 1%

Decrease due to foreign exchange - 4% - 1%

Decrease due to divestitures 1% - - 1%

(Increase) due to acquisitions -6% - -10% -4%

Subtotal -5% 4% -10% -2%

Organic sales increase (decrease) -2% 1% -10% -1%

* 2016 results ref lect the retro spect ive change in co mpo sit io n o f repo rtable segments mo ving Watts M iddle East o ut o f Euro pe and into A P M EA .

First Quarter


Reconciliation of GAAP “As Reported” to “Adjusted”

Non-GAAP Excluding Effect of Adjustments for Special Items

(M)

Unaudited First Quarter Ended

April 2, April 3,

2017 2016

Net sales $ 347.2 $ 344.2

Operating income - as reported $ 35.7 $ 31.2

Operating margin % 10.3% 9.1%

Adjustments for special items:

Acquisitions related costs 0.2 0.1

Restructuring 0.5 1.4

Deployment costs related to tranformation activities 2.0 4.6

Total adjustments for special items $ 2.7 $ 6.1

Operating income - as adjusted $ 38.4 $ 37.3

Adjusted operating margin % 11.1% 10.8%

Net income - as reported $ 21.7 $ 16.2

Adjustments for special items - tax affected:

Acquisitions related costs (gain) 0.1 (0.9)

Restructuring 0.4 0.9

Deployment costs related to tranformation activities 1.3 2.8

Tax adjustments (1.2) 0.6

Total adjustments for special items - tax affected: $ 0.6 $ 3.4

Net income - as adjusted $ 22.3 $ 19.6

Earnings per share

Diluted earnings per share - as reported $ 0.63 $ 0.47

Adjustments for special items 0.02 0.10

Diluted earnings per share - as adjusted $ 0.65 $ 0.57


Adjusted Operating Income by Segment

(M)

Unaudited

Americas Europe APMEA Corp. Total Americas Europe APMEA Corp. Total

Operating Income (loss) - as reported 31.1 12.4 1.0 (8.8) 35.7 28.1 9.8 1.7 (8.4) 31.2

Operting margin % 13.6% 11.8% 7.4% 10.3% 12.6% 9.0% 12.5% 9.1%

Adjustments for special items 2.5 0.2 - - 2.7 4.9 0.4 0.7 0.1 6.1

Operating income (loss) as adjusted 33.6 12.6 1.0 (8.8) 38.4 33.0 10.2 2.4 (8.3) 37.3

Adjusted operting margin % 14.7% 12.0% 7.4% 11.1% 14.8% 9.4% 17.6% 10.8%

* 2016 Results reflect the retrospective change in composition of reportable segments moving Watts Middle East out of Europe and into APMEA

Q1 2017 Q1 2016


Reconciliation of Net Cash Provided by Operating

Activities to Free Cash Flow

(M)

Unaudited

April 2, April 3,

2017 2016

Net cash (used in) operating activities - as reported $ (9.1) $ (21.9)

Less: additions to property, plant, and equipment (5.8) (9.2)

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

Free cash outflow $ (14.9) $ (31.0)

Net income - as reported $ 21.7 $ 16.2

Cash conversion rate of free cash flow to net income -68.7% -191.4%

April 2, December 31,

2017 2016

Current portion of long-term debt $ 117.8 $ 139.1

Plus: Long-term debt, net of current portion 505.8 511.3

Less: Cash and cash equivalents (287.0) (338.4)

Net debt $ 336.6 $ 312.0

Net debt $ 336.6 $ 312.0

Plus: Total stockholders' equity 757.0 736.3

Capitalization $ 1,093.6 $ 1,048.3

Net debt to capitalization ratio 30.8% 29.8%

RECONCILIATION OF LONG-TERM DEBT (INCLUDING CURRENT PORTION) TO NET DEBT AND

NET DEBT TO CAPITALIZATION RATIO

First Quarter Ended


Retrospective Adjustment - Segment Information

(M)

Unaudited

For the Quarter Ended Year Ended

Americas 222.3$ 239.5$ 215.8$ 223.3$ 900.9$ 978.5$

Europe 108.3 114.3 107.0 101.7$ 431.3 436.0

APMEA 13.6 17.3 18.3 17.0$ 66.2 53.2

Total 344.2$ 371.1$ 341.1$ 342.0$ 1,398.4$ 1,467.7$


Americas 28.1$ 35.4$ 32.2$ 31.4$ 127.1$ 109.9$

Europe 9.8 10.2 12.3 7.7$ 40.0 (99.6)

APMEA 1.7 9.8 1.6 2.0$ 15.1 0.5

Corporate (8.4) (9.7) (9.6) (9.5)$ (37.2) (100.9)

Total 31.2$ 45.7$ 36.5$ 31.6$ 145.0$ (90.1)$


Americas 33.0$ 39.5$ 36.3$ 34.2$ 143.0$ 135.7$

Europe 10.2 12.8 12.7 8.9$ 44.6 40.0

APMEA 2.4 1.6 2.1 2.0$ 8.1 6.5

Corporate (8.3) (9.8) (9.7) (7.9)$ (35.7) (33.8)

Total 37.3$ 44.1$ 41.4$ 37.2$ 160.0$ 148.4$

April 3,

2016

Net Sales

December 31,

2016

December 31,

2016

December 31,

2015

July 3,

2016

October 2,

2016

October 2,

2016

GAAP Operating Income (Loss)

April 3,

2016

Note: The tables contains a retrospective revision of the quarterly, year-to-date, and annual operating results by operating segment of the Company for 2016 and

the annual operating results by operating segment for 2015 to reflect the change in composition of reportable segments moving Watts Middle East out of Europe

and into APMEA. Note the four quarters may not sum to full year due to rounding. See our current report on Form 8-K dated April 28, 2017 in the Investor

Relations section of our website (www.wattswater.com), including a reconciliation of GAAP and Non-GAAP numbers.

Adjusted Operating Income (Loss)

April 3,

2016

July 3,

2016

October 2,

2016

December 31,

2016

December 31,

2016

December 31,

2015

December 31,

2016

December 31,

2016

December 31,

2015

July 3,

2016

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