watts water technologies 1q 2020 earnings conference call · 2020-05-07 · inventory destocking,...

© 2020 Watts Water Technologies, Inc.

Watts Water Technologies

1Q 2020 Earnings Conference Call

May 7, 2020

May 6, 2020 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, the impact of the COVID-19

pandemic, 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.

May 6, 2020 3

1Q Overview

COVID-19 Changing 2020 Game Plan© 2020 Watts Water Technologies, Inc.

• Market / Operations Update

• Early and decisive COVID-19 response

◦ Created COVID-19 Task Force

◦ Focused on employee safety; following CDC and local country guidelines

◦ Supporting customer business continuity; providing essential products

◦ Implemented cost actions to mitigate economic impact

◦ Ample liquidity; focused on cash preservation and cash generation measures

• Solid 1Q performance despite COVID-19 headwinds

◦ Sales down 1% organically, adjusted EPS +1%

◦ Estimate $10M to $15M top line reduction due to COVID-19

◦ Adjusted operating margin up 20 bps vs 1Q 2019; cost reduction actions commenced

• Anticipating challenging 2Q

• Withdrawing full year outlook

May 6, 2020 4

Market / Operations Update

Monitoring Developments Daily; Plans in Place to Address Softening Demand

© 2020 Watts Water Technologies, Inc

.

• Markets

◦ Country / regional lockdowns beginning to loosen

◦ Inventory destocking, project delays

◦ Many US construction verticals slowed

◦ European wholesale closures, beginning to reopen

• Americas / Europe operations

◦ Solid quarter through late March

◦ All plants now open; sporadic closures in Europe through 1Q

◦ April activity weak

• APMEA operations

◦ China production ramp-up to normal in March; seeing recovery in orders

◦ Middle East / New Zealand activity returning slowly post-lockdown

May 6, 2020 5

Customer Outreach – New Hotline / Virtual Training


Watts Drainage recently expedited a critical drains order for a

mechanical contractor so that a medical facility tower could build

30 additional rooms in 45 days to care for COVID-19 patients.

Once the original construction timeline was shortened, Watts

acted quickly. The order was elevated and the Watts team

processed, packed and shipped to the customer in ~ 24

hours. The expedited service prompted the same customer to

place an additional drains order.

Watts Hotline support team

received an urgent request

from one of our Channel Partners

needing an Automatic Control

Valve expedited to a Cleveland, OH Hospital job

replacement. Our Ames facility in Woodland, CA

responded and was able to ship the order out to

support this mission critical project.

Watts established a Mission Critical Project Hotline

to support our customers in responding to COVID-19 emergencies

LOUISIANA HOSPITAL MEDICAL TOWER

CLEVELAND, OH HOSPITAL LOUISIANA CHILDREN’s HOSPITAL

Watts Hotline received an urgent request

to ship strainers, backflow preventers and

air gaps. In one day, Watts shipped all

products from distribution centers.

Watts keeps Customers “In the Know” with Virtual Training

Since January 1:

• Globally, 2,500 contractors & engineers have completed >15,000 Watts on-line courses

• US sales team hosted over 1,000 lunch-and-learn programs

May 6, 2020 6

COVID-19 Cost Management

Aligning Cost Base with Volume Reduction© 2020 Watts Water Technologies, Inc.

• Cost Actions

◦ Structural headcount reductions

◦ Temporary: merit deferrals, salary & incentive reductions, furloughs, reduced discretionary

spending

◦ Factory overheads: variable costs

◦ Material costs: aggressively negotiating cost reductions

• Cash Preservation

◦ Reduce planned capital spending

◦ Defer payroll tax payments

◦ Temporarily suspending share repurchase program

◦ Maintaining current dividend rate

• Evaluating additional cost actions, as needed

Strong Financial Position: Low Leverage and Ample Liquidity

Liquidity

© 2020 Watts Water Technologies, Inc. May 6, 2020 7

• April 2020 – Revised credit facility

◦ $800M revolver, expanded by $300M

◦ Extended term to February 2022

◦ Paid off $225M term loan

◦ Adds $75M in liquidity

• Drew down $50M as precaution in March

Total debt 379.4$

Cash & cash equivalents (245.4)$

Net debt 134.0$

Net debt to capitalization 12.2%

Gross leverage 1.5x

Net leverage 0.5x

Liquidity 649.4$

Balance Sheet Metrics Recent Capital Actions

See Appendix for calculations of net debt to capitalization, gross leverage and net leverage metrics

$M

May 6, 2020

Solid Performance Aided By Cost Actions8

1Q 2020 Financial Summary


* See Appendix for reconciliation of non-GAAP measures to their corresponding GAAP measures

Adj. Operating Margin %*Sales$M

• –2% reported

–1% organic: –1% FX

◦ COVID-19 impact ~$10M-$15M

◦ One less workday –1%

• Acquisition +$2.6M

Adjusted EPS* FCF*$M

• Adjusted OP $48M, flat

▲Price, productivity, cost actions

▼Volume due to COVID-19

▼Investments, inflation

• $2M investments (~55 bps)

• Operations +$0.01

• Below-the-line +$0.01

• FX –$0.01

• Adj. effective tax rate 28.2% +70 bps

• 73% improvement YOY

• Working capital management

Down 1 %

Organic*Up 20 bps Up 1%

2019 2020 2019 2020 2019 2020

2019 2020

($31)

($8)

May 6, 2020

All Regions Impacted to Different Degrees by COVID-199

1Q 2020 Regional Results


Sales

$263Flat Organic*

$110Down 2% Organic*

$10Down 23% Organic*

Adjusted Operating

Margin %*Change (bps)

16.7%Up 10 bps

12.4%Down 20 bps

(1.0%)Down 1,070 bps

AM

ER

ICA

SE

UR

OP

EA

PM

EA

Sales / Business

Highlights

• +1% reported; flat organic

◦ +1% acquisition

◦ 1 less workday

• Growth in water quality / drains / boilers

• Fluid solutions sales down

• COVID–19 impact ~$3-$5M

• –5% reported

◦ –2% organic; –3% FX

◦ 1 less workday

• Strong drains growth

• Plumbing / HVAC down

• Growth in Germany; France, Italy down

• COVID-19 impact ~ $3-$5M

• –26% reported

◦ –23% organic; –3% FX

• NZ / Korea growth

• Other regions down double digits

• COVID-19 impact ~$4-$5M

Adjusted Operating Profit /

Margin Commentary

• Adjusted operating profit* $44M, +2%

• Margin drivers:

▲ Price

▲ Productivity, cost actions

▼ Volume, investments, inflation

• Adjusted operating profit* $14M, –6%

• Margin drivers:

▲ Price

▲ Productivity

▼ Volume, absorption, investments,

inflation

• Adjusted operating loss* –$0.1M

• Margin drivers:

▲ Productivity, cost actions

▼ External & affiliate volume, absorption

▼ Inflation

$M

* See Appendix for reconciliation of non-GAAP measures to their corresponding GAAP measures

May 6, 2020 10

2Q Assumptions

Very Fluid Situation; Forecasting a Challenging Quarter © 2020 Watts Water Technologies, Inc.

• Revenue – expect 25% to 30% reduction from prior year

• Expect adjusted operating margin in mid to high single digits

◦ Plant under absorption

◦ Includes cost reduction actions

• Interest expense to increase sequentially ~$1M vs 1Q 2020

• Planning to repatriate ~$50M by quarter end; primarily used to pay down

debt

• Adjusted effective tax rate 28.5%

May 6, 2020 11

Summary

Addressing Near-term Challenges; Focused on Long-term Strategy© 2020 Watts Water Technologies, Inc.

• COVID-19 disruption driving worldwide recession

• Focused response

◦ Safety is key

◦ Understanding customer needs

◦ Recalibrating cost structure to meet lower market demands

◦ Monitoring daily; control what we can; adjust as necessary

• Durable capital structure

◦ Strong balance sheet; optimizing cash flow

◦ Strengthened liquidity

• Market leader

◦ Continuing to invest for the future

◦ Stronger company long-term

Appendix


May 6, 2020 13

Consolidated Statements of Operations


First Quarter

2020 2019 B/(W) %

Net sales $382.6 $388.7 ($6.1) (2%)

Cost of goods sold 219.8 224.5 4.7 2%

Gross profit 162.8 164.2 -1.4 (1%)

42.6% 42.2% +0.4p

Selling, general & administrative expenses 115.0 116.1 1.1 1%

30.1% 29.9% -0.2p

Restructuring - 1.4 1.4 100%

Operating income 47.8 46.7 1.1 2%

12.5% 12.0% +0.5p

Other expense 3.2 4.0 0.8 20%

Income before taxes 44.6 42.7 1.9 4%

Provision for income taxes 12.6 11.7 (0.9) (8%)

Net income $32.0 $31.0 $1.0 3%

Diluted earnings per share $0.94 $0.91 $0.03 3%

(M)

(Unaudited)

May 6, 2020 14

Reconciliation of Reported Sales to Organic Sales


(in millions except per share information)

(M)

(Unaudited)

First Quarter

Americas Europe APMEA Total

Reported net sales 2020 $262.4 $110.2 $10.0 $382.6

Reported net sales 2019 258.9 116.3 13.5 388.7

Dollar change $3.5 ($6.1) ($3.5) ($6.1)

Net sales % increase (decrease) 1% (5%) (26%) (2%)

Increase due to acquisition (1%) –% –% –%

Decrease due to foreign exchange –% 3% 3% 1%

Organic sales increase (decrease) –% (2%) (23%) (1%)

May 6, 2020 15

Reconciliation of GAAP “As Reported” to “Adjusted” Non-GAAP

Excluding Effect of Adjustments for Special Items


(in millions except per share information)First Quarter

2020 2019

Net Sales $382.6 $388.7

Operating income - as reported $47.8 $46.7

Operating margin % 12.5% 12.0%

Adjustments for special items:

Footprint optimization 0.4 -

Restructuring - 1.4

Total adjustment for special items $0.4 $1.4

Operating income - as adjusted $48.2 $48.1

Adjusted operating margin % 12.6% 12.4%

Net income - as reported $32.0 $31.0

Adjustments for special items - tax affected:

Footprint optimization 0.3 -

Restructuring - 1.0

Total adjustment for special items, tax affected $0.3 $1.0

Net income - as adjusted $32.3 $32.0

Earnings per share

Diluted earnings per share - as reported $0.94 $0.91

Adjustments for special items $0.01 $0.03

Diluted earnings per share - as adjusted $0.95 $0.94

(M)

(Unaudited)

May 6, 2020 16

Adjusted Operating Income by Segment


(in millions)

(M)

(Unaudited)

First Quarter 2020

Americas Europe APMEA Corp. Total

Reported operating income

(loss)$43.4 13.7 (0.1) (9.2) 47.8

Operating margin % 16.5% 12.4% (1.0%) 12.5%

Adjustments for special items $0.4 - - - 0.4

Adjusted operating income

(loss)$43.8 13.7 (0.1) (9.2) 48.2

Adjusted operating margin % 16.7% 12.4% (1.0%) 12.6%

First Quarter 2019

Americas Europe APMEA Corp. Total

$43.1 13.2 1.3 (10.9) 46.7

16.6% 11.3% 9.7% 12.0%

$ - 1.4 - - 1.4

$43.1 14.6 1.3 (10.9) 48.1

16.6% 12.6% 9.7% 12.4%

May 6, 2020 17

Reconciliation of Net Cash Used in Operations to Free Cash Flow


First Quarter

2020 2019

Net cash used in operations - as reported ($0.9) ($24.2)

Less: additions to property, plant, and equipment, net (7.5) (6.9)

Free cash flow ($8.4) ($31.1)

Net income - as reported $32.0 $31.0

Cash conversion rate of free cash flow to net income (26.3%) (100.3%)

(M)

(Unaudited)

May 6, 2020 18

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


(M)

(Unaudited)

March 29, 2020 December 31, 2019

Current portion of long-term debt $82.5 $105.0

Plus: Long-term debt, net of current portion 296.9 204.2

Less: Cash and cash equivalents (245.4) (219.7)

Net debt $134.0 $89.5

Net debt $134.0 $89.5

Plus: Total stockholders' equity 967.8 978.0

Capitalization $1,101.8 1,067.5

Net debt to capitalization ratio 12.2% 8.4%

May 6, 2020 19

Calculations of Gross and Net Leverage


(M)

(Unaudited)

Trailing Twelve Months

through March 29, 2020

Net income – as reported $132.6

Plus: Interest expense, net 13.0

Plus: Income taxes 53.4

Plus: Depreciation 31.1

Plus: Amortization 15.5

Earnings before interest, taxes depreciation and amortization (EBITDA) $245.6

Gross debt at March 29, 2020 $379.4

Less: Cash & cash equivalents at March 29, 2020 245.4

Net debt $134.0

Gross debt to EBITDA ratio (Gross leverage) 1.5x

Net debt to EBITDA ratio (Net leverage) 0.5x

watts water technologies 1q 2020 earnings conference call · 2020-05-07 · inventory destocking,...

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