watts water technologies 4q and fy 2019 earnings ...19-earnings-deck.final.pdffy 2020 outlook org...

© 2020 Watts Water Technologies, Inc.

Watts Water Technologies

4Q and FY 2019 Earnings Conference Call

February 11, 2020

February 10, 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 tax legislation

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.

February 10, 2020

Record Performance in 2019; Continued Market Moderation in 20203

2019 FY Overview & 2020 Expectations


Grow Top-line Drive Margin Expansion Continue Reinvestment Record Financial Results

• Organic growth +4%

• New Products / Smart &

Connected

• Backflow Direct acquisition

• Adjusted op. margin +60 bps

• Price, volume, productivity

• Investments (> 90 bps)

• $15M total investments, +$3M

over plan

• ~80% growth; ~20% productivity

• Expanded training

• ~ 60 thousand training sessions,

150% > 2018

• Sales $1.6 billion

• Adjusted operating margin 12.9%

• Adjusted FY EPS $4.07 (+9%)

• Free cash flow conversion 125%

2020

Pri

ori

ties

2020

Mar

kets✓ Top-line growth; new product introductions

✓ Margin expansion; productivity focus

✓ Reinvestment continues

✓ Continued moderation / volatility

✓ Trade / geopolitical concerns

✓ Impact of coronavirus

* Organic sales growth, Adjusted operating margin % and Adjusted EPS are non-GAAP financial measures, see slides 15 and 16 for reconciliations

** Free Cash Flow and Free Cash Flow conversion are non-GAAP measures, see slide 18 for calculation and reconciliation.

February 10, 2020 4

Coronavirus – Update

Watching Developments Closely; Controlling What We Can© 2020 Watts Water Technologies, Inc.

• No employees infected to date

• Production ramp-up likely slow including supply chain

– Assuming “normal” activities by early March

• Transportation delays

• Operational impacts to APMEA and Americas / Europe in 1Q

• Estimated 1Q financial impact

– Sales impact $10M to $20M

– Op margin flat to down slightly vs 1Q 2019

February 10, 2020 5

Our Smart & Connected Strategy


▪ From 20k+ connected devices installed in 2018 to

more than 50k connections (+150% growth) in 2019

▪ More than 5M unique website visitors in 2019

▪ 15+ redesigned and launched websites spanning

U.S., Canada, China, Korea, Heating & Hot Water

▪ Further expansion of our embedded systems

engineering capacity (>50 full time engineers)

▪ In 2019, formed the Connected Solutions Structure

to accelerate Smart & Connected projects

▪ Further growth of specified projects through SPEC

Solutions from >5,000 in 2018 to >7,000 in 2019

▪ Leading the industry with over 140k BIM / Spec

files downloaded in 2019

February 10, 2020 6

Smart & Connected Solutions


ACCESSIBILITY AND REMOTE CONTROLRELIABILITY IN CRITICAL APPLICATIONS

In trauma care, every

second counts.” Keith Noll,

president of WellSpan York Hospital.

The Watts Snow Melt System utilizes

sensors and weather service data to begin

the slab pre-heating sequence ensuring

continuous operation of Helipads

The Valpes AXMART SOLUTION connect a

Mobile device via App to Industrial Actuated

Valves to provide remote monitoring,

programming and control of actuated valves

typically placed in inaccessible locations

SNOW MELTING SOLUTIONS by tekmar ACTUATED VALVES CONTROL by Valpes

February 10, 2020

4Q Solid Earnings Performance; Strong FY Free Cash Flow 7

4Q 2019 Consolidated Financial Summary


* Organic sales growth, Adjusted operating margin % and Adjusted EPS are non-GAAP financial measures, see slides 15 and 16 for reconciliations

** Free Cash Flow and Adjusted Free Cash Flow conversion are non-GAAP measures, see slide 18 for calculation and reconciliation.

Adj. Operating Margin %*Sales$M

• +3% reported

+ 4% organic

- 1% FX

• Acquisition +$2M

Adjusted EPS* Full Year FCF**$M

• Adjusted OP $50M, +10%

+ Price, volume productivity

- Investments, inflation

• $4M investments (100 bps)

• Operations + $0.11; includes $.0.01

from acquisition

• Below-the-line +$0.02 / FX -$0.01

• Record for Q4

• Adj. effective tax rate 27.2% -30 bps

• 22% increase YOY

• Higher income

• Inventory reductions

• Reduced tax payments / cap ex

spend

4Q18 4Q19 4Q18 4Q19 4Q18 4Q19 YTD18 YTD19

Up 4%

Organic*Up 80 bps Up 14%

Adj. FCFConversion

109%**

FCF Conversion125%**

$388

$400

$388

$400 11.7%12.5%

$0.88

$1.00

$136

$165

February 10, 2020

All Regions Delivered Growth and Margin Expansion in 4Q8

4Q 2019 Regional Results


* Organic sales growth , adjusted operating margin % and adjusted operating profit are non-GAAP financial measures, see slides 15 and 17 for reconciliations

Sales

$268Up 4% Organic*

$114Up 2% Organic*

$19Up 20% Organic*

Adjusted Operating

Margin %*Change (bps)

17.0%Up 20 bps

11.8%Up 90 bps

16%Up 470 bps

AM

ER

ICA

SE

UR

OP

EA

PM

EA

Sales / Business

Highlights

• + 5% reported

+ 4% organic

+ 1% acquisition

• Broad product line growth

• Pick-up in heating & hot water solutions

• Price realization continued to moderate

• – 1% reported

+ 2% organic

– 3% FX

• Strong Drains and Electronics growth

• Plumbing / HVAC flat

• Growth in Germany, France, Italy;

Nordic / UK down

• + 18% reported

+ 20% organic

– 2% FX

• China valve growth – data centers

• Plumbing growth in Middle East

• Korea – better execution

Adjusted Operating Profit /

Margin Commentary

• Adjusted operating profit* $46M, + 6%

• Margin drivers:

▲ Price, volume

▲ Productivity

▼ Investments, inflation


• Margin drivers:

▲ Price, volume

▲ Productivity / restructuring



• Margin drivers:

▲ Volume – third party

▲ Productivity, cost controls

▲ Product / country mix

▼ Affiliate volume down


$M

February 10, 2020

Another Record Year for Watts; Solid Sequential Trends9

Full-Year Financial Trends


* Organic sales growth, Adjusted Operating Margin % and Adjusted EPS are non-GAAP financial measures, see slides 15 and 16 for reconciliation

Sales ($B) Adjusted Operating Margin % * Adjusted EPS *

$1.46

$1.57

$1.60

11.9%

12.3%

12.9%

$3.02

$3.74

$4.07

2017 2018 2019 2017 2018 2019 2017 2018 2019

Up 1%

Organic*

Up 6%

Organic*

Up 4%

Organic*

Up 50

bps

Up 40

bps

Up 60

bpsUp 13% Up 24% Up 9%

February 10, 2020

Macro Fundamentals Moderating10

2020 Planning Framework


HEADWINDS TAILWINDSMONITORING

▲ New products

▲ One Watts Performance

System

▲ Reduced economic

uncertainties

▼ Coronavirus impact

▼ GDP / market moderation

▼ Growth investments

▼ Skilled labor scarcity

► Geopolitical concerns

► Trade conflicts

► U.S. elections

February 10, 2020

Continued Steady Growth and Margin Expansion 11

2020 Outlook – Includes Estimated Coronavirus Impact


FY 2020 Outlook

Org Rev Growth *Adjusted Margin

Growth*

AMERICAS 2 - 4%▲

Positive

EUROPE (1) - 2%▲

Positive

APMEA (5) - 5%▼

Down

WATTS 1-3%

30 to 50 bps

Includes $13M

Investments

Other Key Inputs

Item Expectation

Corporate Costs ~$43M

Interest

Expense~$12M

Adjusted Effective

Tax Rate*~28%

CAPEX / D&A ~$40M / ~$48M

Free Cash Flow

Conversion ≥100%

Share Count ~34.1M shares

* Organic revenue growth and Adjusted Margin Growth are non GAAP measures, see slide 21 for reconciliations. Adjusted Effective Tax Rate is a non GAAP measure and approximates the GAAP measure.

February 10, 2020

Executing on Our Strategy 12

Summary


2019 full year financial results solid; in line with original expectations

Continue margin expansion; drive One Watts Performance System

100% FCF conversion goal; disciplined capital allocation

Coronavirus situation is evolving; watching closely

2020 markets continue to moderate; new products key – smart & connected focus

Appendix


February 10, 2020 14

Consolidated Statements of Operations


Fourth Quarter

2019 2018 B/(W) %

Net sales $400.3 $387.6 $12.7 3%

Cost of goods sold 230.2 221.7 (8.5) (4%)

Gross profit 170.1 165.9 4.2 3%

42.5% 42.8% -30p

Selling, general & administrative expenses 121.2 120.5 (0.7) (1%)

30.3% 31.1% +80p

Restructuring 1.6 - (1.6) (100%)

Operating income 47.3 45.4 1.9 4%

11.8% 11.7% +10p

Other expense 3.1 3.9 0.8 21%

Income before taxes 44.2 41.5 2.7 7%

Provision for income taxes 12.4 9.2 (3.2) (35%)

Net income $31.8 $32.3 ($0.5) (2%)

Diluted earnings per share $0.93 $0.94 ($0.01) (1%)

(M)

(Unaudited)


Reconciliation of Reported Sales to Organic Sales


(in millions except per share information)

(M)

(Unaudited)Fourth Quarter

Americas Europe APMEA Total

Reported net sales 2019 $267.9 $113.6 $18.8 $400.3

Reported net sales 2018 256.3 115.3 16.0 387.6

Dollar change $11.6 ($1.7) $2.8 $12.7

Net sales % increase (decrease) 5% (1%) 18% 3%

Decrease due to foreign exchange — 3% 2% 1%

Increase due to acquisition (1%) — — —

Organic sales increase 4% 2% 20% 4%

Full Year

Americas Europe APMEA Total

Reported net sales 2019 $1,084.1 $451.0 $65.4 $1,600.5

Reported net sales 2018 1,032.1 467.0 65.8 1,564.9

Dollar change $52.0 ($16.0) ($0.4) $35.6

Net sales % increase (decrease) 5% (3%) (1%) 2%

Decrease due to foreign exchange — 5% 3% 2%

Increase due to acquisition — — — —

Organic sales increase 5% 2% 2% 4%


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

Excluding Effect of Adjustments for Special Items


(in millions except per share information)Fourth Quarter Year

2019 2018 2019 2018 2017

Net Sales $400.3 $387.6 $1,600.5 $1,564.9 $1,456.7

Operating income - as reported $47.3 $45.4 $197.1 $188.4 162.3

Operating margin % 11.8% 11.7% 12.3% 12.0% 11.1%

Adjustments for special items:

Footprint optimization/ impairment charge 0.4 — 0.8 — 1.0

Restructuring 1.6 — 4.3 3.4 6.8

Professional fees / acquisition / transformation 0.8 — 4.0 — 3.1

$2.8 $— $9.1 $3.4 $10.9

Operating income - as adjusted $50.1 $45.4 $206.2 $191.8 $173.2

Adjusted operating margin % 12.5% 11.7% 12.9% 12.3% 11.9%

Net income - as reported $31.8 $32.3 $131.5 $128.0 $73.1

Adjustments for special items - tax affected:

Footprint optimization/ impairment charge 0.3 — 0.6 — 0.6

Restructuring 1.3 — 3.2 2.5 4.7

Professional fees / acquisition / transformation 0.8 — 3.8 — 2.0

Other tax adjustments — 1.5 — 1.5 (1.6)

U.S. Tax Reform — (3.7) — (3.7) 25.1

$2.4 ($2.2) $7.6 $0.3 $30.8

Net income - as adjusted $34.2 $30.1 $139.1 $128.3 $103.9

Earnings per share

Diluted earnings per share - as reported $0.93 $0.94 $3.85 $3.73 $2.12

Adjustments for special items 0.07 (0.06) 0.22 0.01 0.90

Diluted earnings per share - as adjusted $1.00 $0.88 $4.07 $3.74 $3.02

(M)

(Unaudited)


Adjusted Operating Income by Segment


(in millions)

(M)

(Unaudited)

Fourth Quarter 2019

Americas Europe APMEA Corp. Total

Reported operating income (loss) $45.1 11.8 3.0 (12.6) 47.3

Operating margin % 16.8% 10.4% 16.0% 11.8%

Adjustments for special items 0.4 1.6 — 0.8 2.8

Adjusted operating income (loss) $45.5 13.4 3.0 (11.8) 50.1

Adjusted operating margin % 17.0% 11.8% 16.0% 12.5%

Fourth Quarter 2018


$43.0 12.6 1.8 (12.0) 45.4

16.8% 10.9% 11.3% 11.7%

— — — — —

$43.0 12.6 1.8 (12.0) 45.4

16.8% 10.9% 11.3% 11.7%

Year 2019


Reported operating income (loss) $187.4 49.9 6.9 (47.1) 197.1

Operating margin % 17.3% 11.1% 10.7% 12.3%

Adjustments for special items 0.8 4.3 — 4.0 9.1

Adjusted operating income (loss) $188.2 54.2 6.9 (43.1) 206.2

Adjusted operating margin % 17.4% 12.0% 10.7% 12.9%

Year 2018


$171.1 49.8 7.2 (39.7) 188.4

16.6% 10.7% 11.0% 12.0%

— 3.4 — — 3.4

$171.1 53.2 7.2 (39.7) 191.8

16.6% 11.4% 11.0% 12.3%


Reconciliation of Net Cash Provided by

Operations to Adjusted Free Cash Flow


Year Ended

2019 2018

Net cash provided by operations – as reported $194.0 $169.4

Less: additions to property, plant, and equipment (29.2) (35.9)

Plus: proceeds from the sale of property, plant, and equipment 0.1 2.2

Free cash flow $164.9 $135.7

Net income – as reported $131.5 $128.0

Cash conversion rate of free cash flow to net income 125% 106%

Net income - as reported $131.5 $128.0

Impact of U.S. Tax Reform — (3.7)

Net income – excluding the impact of U.S. Tax Reform $131.5 $124.3

Adjusted cash conversion rate of free cash flow to net income excluding the impact of U.S. Tax Reform 125% 109%

(M)

(Unaudited)


Reconciliation of Long-term Debt

(including current portion) to Net Debt to Capitalization Ratio


(M)

(Unaudited)

December 31, 2019 December 31, 2018

Current portion of long-term debt $105.0 $30.0

Plus: Long-term debt, net of current portion 204.2 323.4

Less: Cash and cash equivalents (219.7) (204.1)

Net debt $89.5 $149.3

Net debt $89.5 $149.3

Plus: Total stockholders' equity 978.0 891.3

Capitalization $1,067.5 $1,040.6

Net debt to capitalization ratio 8.4% 14.3%


Reconciliation of “Adjusted” Non-GAAP Effective Tax Rate


(in millions except per share information)Fourth Quarter Year

2019 2018 2019 2018

Income before income taxes – as reported $44.2 $41.5 $183.9 $174.6

Provision for income taxes – as reported 12.4 9.2 52.4 46.6

Effective tax rate – as reported 28.1% 22.2% 28.5% 26.7%

Income before income taxes – as reported $44.2 $41.5 $183.9 $174.6

Total adjustments for special items 2.8 — 9.1 3.4

Income before income taxes – as adjusted $47.0 $41.5 $193.0 $178.0

Provision for income taxes – as reported 12.4 9.2 52.4 46.6

Tax effect of total adjustment for special items 0.4 2.2 1.5 3.1

Provision for income taxes – as adjusted 12.8 11.4 53.9 49.7

Effective tax rate – as adjusted 27.2% 27.5% 27.9% 27.9%

(M)

(Unaudited)


Reconciliation between GAAP and Non GAAP

Measures Included in 2020 Outlook


Watts Americas Europe APMEA

Full Year

2020

Full Year

2020

Full Year

2020

Full Year

2020

Approximately Approximately Approximately Approximately

Sales Growth

1.4% to 3.4% 2.6% to 4.6% 0% to 2% 0% to 5%GAAP sales growth

Forecasted impact of acquisition ~(0.4%) ~(0.6%) —% —%

Non GAAP sales growth - Organic 1% to 3% 2% to 4% 0% to 2% 0% to 5%

Operating Margin Expansion

10 to 30 bpsGAAP operating margin growth

Forecasted restructuring / other ~20 bps

Non GAAP – adjusted operating margin

growth30 to 50 bps

Note: Assumes FX rates are consistent year to year

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