watts water technologies 3q 2015 earnings conference call...

Watts Water Technologies

3Q 2015 Earnings Conference Call

October 29, 2015

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.

3

3Q’15 Summary

• Progress continues, despite global macro conditions

- Revenue $366M; Operating margins 11.4%; EPS $0.67

- Pricing discipline; focus on profitable growth

- Pension obligation settled in Q3

- Strong cash flow generation, excluding pension settlement

• Significant progress on transformation efforts

- Completed sale of non-core product lines to Sioux Chief

- Executed agreement in principle to sell China assets

- Announcing Americas Phase 2

- EMEA transformation/restructuring initiatives on track

• Apex acquisition expands APAC’s base

Progress In Line; Continuing to Shape Future

Note: Operating margins and EPS excludes special items, see slide 15 for reconciliation

4

• GDP outlook holding firm

• Residential trends still positive

• Commercial improving

• Fed rate hike uncertainty

• Euro GDP stable

• Sluggish major markets (France, Germany)

• Emerging markets mixed

• Geopolitical concerns – Russia, Middle East

• China GDP lowered

• Softness in real estate markets

• Stock market volatility impacting sentiment

• Asia GDP moderate growth

Market Overview

No Major Shifts; Markets Remain Mixed

Americas

EMEA

Asia Pacific

~67%

~30%

~3%

5

• Phase 1

– Completed sale to Sioux Chief in September

– China plant – agreement in principle, expect sale by mid 2016

– Sourcing initiatives delivering planned benefits

– Final costs approximately $10M below original mid-point range

• Phase 2

– Overall 30% net reduction in Americas’ operating footprint o Leverage cost structure/underutilized space

o Improve service delivery

– Estimated total costs of $30M - $35M, plus $3M in capital o Non cash costs approximate $5M

o Majority of costs incurred in 2016

o Inventory build of approx. $20M to support transition

– Estimated annualized gross savings of ~$10M by 2018 o 3 year payback on gross cash savings

o Estimating to realize 15% of savings in 2016, 50% in 2017, remainder in 2018

• Reinvesting portion of savings in commercial excellence - innovation, R&D, training

Americas/APAC Transformation Update

Providing Margin Tailwind; Reinvesting For Future

6

3Q’15 Financial Overview

• 2.6% decrease

‒ Organic (0.7%), FX (6.5%), Acquisition +9.3%,

Divestiture (4.7%)

‒ Non-core sales (38%)

• 4.5% decrease ‒ Lower operating profit; higher interest / taxes / FX

($M except per share amounts)

3Q15 3Q14

Sales $366.3 $376.0

Operating Profit $41.7 $43.8

Margin % 11.4% 11.6%

Net Income $23.6 $24.7

EPS $0.67 $0.70

Tax Rate 35.0% 34.2%

YTD Free Cash Flow $72.0 $57.8

• 4.3% decrease ‒ FX effect ($0.06)

‒ Exit of non-core ($0.05)

‒ AERCO +$0.12

Margins Relatively Flat Despite Lower Volume

• 4.8% decrease ‒ Lower volume, incremental G&A offset

productivity/restructuring savings

‒ PY +40 bps in one-off reserve adjustments

• $14M increase ‒ Working capital management

‒ Continued capital investment 1) Operating Profit, Net Income and EPS excludes special items, see slide 15 for reconciliation

2) FCF = Cash Flow from Operations Less Capital Expenditures adjusted for long-term obligation settlements, see slide 17 for calculation

(1)

(1)

(2)

(1)

7

14.7% 14.6%

3Q15 3Q14

$245.0

$228.6

3Q15 3Q14

• Operating profit $35.9M

‒ Up $2.5M or 8%

• Operating margins up 10 bps

+ Product mix and productivity

– Volume/under absorption/G&A

– PY comps (‘14 includes +90 bps in one-off

reserve adjustments)

• Organic growth +2%

• Non-core product divestiture ($17M) (40%)

• Wholesale +3%, OEM (4%), DIY +11%

- Backflow/valves offsetting softness in

specialty products

• AERCO strong performance continues

Positive Sales Mix Offset By Non-Core Volume Loss, G&A

Up 7%

Organic +2% Up 10 bps

Sales (M) Operating Margin

Americas

1) Operating profit and operating margins excludes special items, see slide 16 for reconciliation

(1)

8

10.8% 11.9%

3Q15 3Q14


$110.9 $136.4

3Q15 3Q14

Under Absorption Driving Margin Reduction

Down (19%)

Organic (4%) Down (110 bps)


‒ Down ($4.2M) driven by volume and FX

• Operating margins down (110 bps)

+ Productivity (transformation, restructuring)

– Volume / under absorption

– Sales mix

• FX impact ($21M) or (15%)

• Wholesale +1%, OEM (7%)

‒ HVAC softness; Drains project delays

• Germany, France and Russia headwinds;

Middle East & Benelux strong

EMEA


(1)

9

16.3% 15.5%

3Q15 3Q14

$10.4 $11.0

3Q15 3Q14

Timing; Expect Q4 Recovery

Down (6%)

Organic (5%)

Up 80 bps


APAC

• Core sales decline 5%; timing related

• Project delays; destocking

• Strong Sept orders support Q4 rebound


‒ Flat with 3Q ‘14

• Operating margins up 80 bps

+ Productivity

+ Q3 ’14 bad debt charge

– Fixed cost absorption on lower affiliate sales

– Trade volume down


(1)

10

Cash Flow

• One-time liability settlements ($49M)

• Strong working capital performance

‒ 10% inventory turns improvement

• Cap-ex up 22%; AERCO

• Sioux Chief sale proceeds ($33M)

• Repurchased 235k shares in 3Q

25% YTD Increase In Adjusted Free Cash Flow

FCF = Cash Flow from Operations Less Capital Expenditures. Adjusted Free Cash Flow excludes impact of long-term obligation settlements. See slide 17 for calculations.

Sept 2015 Sept 2014

Net income from continuing operations 5.2 58.0

Depreciation and amortization 39.7 35.8

Change in working capital and other (3.0) (20.3)

Total Operating Activities 41.9 73.5

Capital expenditures, net of proceeds (19.1) (15.7)

Asset sale & other 33.8 0.0

Total Investing Activities 14.7 (15.7)

Net payments on long-term debt (4.8) (4.9)

Dividends (17.2) (15.2)

Payments to repurchase common stock (32.0) (29.1)

Debt issue costs - (2.0)

Proceeds and tax benefit of stock option activity 2.3 12.4

Total Financing Activities (51.6) (38.8)

Effect of exchange rates (17.3) (14.5)

Net decrease in cash (12.3) 4.5

Free Cash Flow - Reported 22.8 57.8DSO 53.7 55.4 DPO 46.2 51.2 3.1 2.9

Adjusted Free Cash Flow 72.0 57.8

11 © 2015 Watts Water Technologies | Business Confidential & Proprietary Information

4Q’15 Commentary

4Q Seasonally Slower Quarter

• Expect to close the Apex acquisition

• Anticipated sales growth rates marginally higher than 3Q

– Seasonal slow down for AERCO

– Non-core sales down $40 - 45M

• Operating margin expansion vs 4Q’14; down sequentially

• Q4 ETR between 32% and 34%

• FY Capital spend $25M to $30M

12 © 2015 Watts Water Technologies | Business Confidential & Proprietary Information

Key Focus Areas

Continuing To Make Progress

• Building out leadership team - hired CHRO

• EMEA transformation - driving plans; additional actions under review

• Phase 1 transformation - Americas completed, APAC on track

• Phase 2 transformation - announced today

• Pension settlement - completed in Q3

• Re-invigorate new product development and innovation pipeline - in process

• “One Watts” / talent and performance culture - in process

Appendix

14

Consolidated Statements of Operations

(in millions except per share amounts) ($M)

Sept 27, 2015 Sept 28, 2014 B/(W) %

Net sales 366.3$ 376.0$ (9.7)$ (2.6%)

Cost of goods sold 224.1 237.9 13.8 -

GROSS PROFIT 142.2 138.1 4.1 3.0%38.8% 36.7% +2.1p

SG&A 101.9 95.0 (6.9) (7.3%)

27.8% 25.3% (2.6p)

Restructuring and other charges, net 70.5 0.4 (70.1)

OPERATING (LOSS) INCOME (30.2) 42.7 (72.9) (171%)

-8.2% 11.4% (19.6p)

Other expense 5.7 6.3 0.6 9.5%

(LOSS) INCOME (35.9) 36.4 (72.3) (199%)

(Benefit) provision for income taxes (10.2) 13.8 24.0 174%

NET (LOSS) INCOME (25.7)$ 22.6$ (48.3)$ (214%)

DILUTED EPS (0.73)$ 0.64$ (1.37)$ (214%)

Third Quarter Ended

15

Reconciliation of GAAP “As Reported” to the “Adjusted” non-

GAAP Excluding the Effect of Adjustments for Special Items

(in millions except per share information) Third Quarter Ended

$(M) Sept 27 Sept 28

2015 2014

Net sales 366.3$ 376.0$

Operating income - as reported (30.2) 42.7

Operating margin % -8.2% 11.4%

Adjustments for special items:

Restructuring/severance related costs 5.8 0.4

Deployment costs related to transformation activities 1.4 0.7

Pension/other 64.7

Total adjustments for special items 71.9 1.1

Operating income - as adjusted 41.7$ 43.8$

Adjusted operating margin % 11.4% 11.6%

Net (loss) income - as reported (25.7) 22.6

Adjustments for special items - tax affected:

Restructuring/severance related costs 3.6 0.3

Deployment costs related to transformation activities 1.1 0.5

Pension/other 44.6 1.3

Total adjustments for special items - tax affected: 49.3 2.1

Net income - as adjusted 23.6 24.7

Earnings per share - diluted

Diluted (loss) earnings per share - as reported (0.73) 0.64

Adjustments for special items 1.40 0.06

Diluted earnings per share - as adjusted 0.67$ 0.70$

16

Adjusted Operating Income by Segment

(in millions)

($M)

Americas EMEA APAC Corp. Total Americas EMEA APAC Corp. Total

Reported GAAP operating income 30.3$ 10.9 1.2 (72.6) (30.2) 33.4$ 15.1 1.7 (7.5) 42.7

% of sales 12.4% 9.8% 11.5% -8.2% 14.6% 11.1% 15.5% 11.4%

Adjustments for special items 5.6$ 1.1 0.5 64.7 71.9 -$ 1.1 - - 1.1

Adjusted operating income 35.9$ 12.0 1.7 (7.9) 41.7 33.4$ 16.2 1.7 (7.5) 43.8

% of sales 14.7% 10.8% 16.3% 11.4% 14.6% 11.9% 15.5% 11.6%

Americas EMEA APAC Corp. Total Americas EMEA APAC Corp. Total

Reported GAAP operating income 90.6$ 25.7 0.9 (89.8) 27.4 85.0$ 37.1 4.7 (21.7) 105.1

% of sales 12.2% 7.7% 2.8% 2.5% 12.3% 8.8% 16.6% 9.2%

Adjustments for special items 11.8$ 5.1 3.9 64.8 85.6 2.3$ 9.9 - 0.8 13.0

Adjusted operating income 102.4$ 30.8 4.8 (25.0) 113.0 87.3$ 47.0 4.7 (20.9) 118.1

% of sales 13.7% 9.3% 15.0% 10.2% 12.7% 11.2% 16.6% 10.4%

Q3 2015 Q3 2014

Nine Months Ended Sept 27, 2015 Nine Months Ended Sept 28, 2014

17

Reconciliation of Net Cash Provided by Operating Activities to Free

Cash Flow

Sept 27, Sept 28,

2015 2014

Net cash provided by operating activities - as reported $ 41.9 $ 73.5

Less: additions to property, plant, and equipment (19.2) (16.1)

Plus: proceeds from the sale of property, plant, and equipment 0.1 0.4

Free cash flow $ 22.8 $ 57.8

Net income - as reported $ 5.2 $ 58.0

Cash conversion rate of free cash flow to net income 438.5% 99.7%

Reported free cash flow 22.8$

Add back: payments made on long-term obligations 49.2

Adjusted free cash flow 72.0$

ADJUSTED FREE CASH FLOW

RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH

FLOW

($M)

Nine Months Ended

18

Working Capital

• Inventory turns improved 10%, $35M operating reduction

• Payables decreased due to inventory reduction/timing

Balances for all periods as a % of Trailing Twelve Months Sales

($M) Sept 27, 2015 Sept 28, 2014

$ % $ %

Receivables 220.8 14.9% 223.4 14.8%

Days Sales Outstanding 55.9 55.5

Inventory * 254.3 17.2% 307.0 20.3%

Inventory Turns 3.5 3.0

Payables (103.6) (7.0%) (125.4) (8.3%)

Days Payables Outstanding 43.7 49.1

Net Working Capital 371.5 25.0% 405.0 26.8%

* $22M of inventory sold in 3Q as part of non-core asset sale

watts water technologies 3q 2015 earnings conference call...

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