Watts Water Technologies Watts Water Technologies Q3 Q3 2013 - - PowerPoint PPT Presentation

Watts Water Technologies Watts Water Technologies

Q3 Q3 2013 Earnings Conference Call 2013 Earnings Conference Call

October 30, 2013 October 30, 2013

Forward Forward-

• looking S

tatements looking S tatements

Certain statements in this presentation constitute forward-looking statements within the meaning of the Private S ecurities Litigation Reform Act of 1995. These statements are related to forecasts of sales, earnings, earnings per share, capital expenditures, water market growth, acquisition strategy, lead free developments and management goals and obj ectives. Watts cautions investors that any such forward-looking statements made by Watts are not y g y guarantees of future performance. All forward-looking statements are subj ect 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 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

• ther factors identified in Watts’ most recent Annual Report on Form 10 K and subsequent
• ther factors identified in Watts most recent Annual Report on Form 10-K and subsequent

reports filed with the S EC.

2

Consolidated Financial Highlights Consolidated Financial Highlights – – Q3 2013 Q3 2013

• Revenue growth of 5.4%
• 360 organic & 180 bps FX

Adj usted operating margin* 9 4% 110 bps below 2012

• Adj usted operating margin* = 9.4%

, 110 bps below 2012

• NA product liability impact approximately 95 bps; lead

free impact approximately 65 bps

• EMEA adj usted margin increased 70 bps mainly due to
• EMEA adj usted margin increased 70 bps mainly due to

S GA savings and productivity

• Price had negative impact in NA retail

Adj t d EPS * $0 58 PY $0 62

• Adj usted EPS

* = $0.58, PY = $0.62

• $0.10 – Product liability & lead free cost included in adj . EPS
• Disposed Austroflex - $2 2m loss in Disc ops
• Disposed Austroflex

$2.2m loss in Disc ops.

• Repurchased $10m shares during Q3

* “ Adj usted” excludes special items see slide 23 for reconciliation

• * “ Adj usted” excludes special items, see slide 23 for reconciliation

3

Q3 2013 Market Overview Q3 2013 Market Overview – – North America North America

• New residential market remains solid
• New starts 950k *, 22%

growth for 2013

• Repair & replace market steady
• 11%

* growth for 2013

• Commercial market – starting to see signs of pick-up
• YTD July down 2.1%

*, pockets of growth ABI trend positive credit still a bottleneck

• ABI trend positive, credit still a bottleneck

* S

• urce - Reed Construction Data

4

Q3 2013 Market Overview Q3 2013 Market Overview -

• EMEA

EMEA

• Overall market confidence appears to be improving

O k t till tt

• Our markets still spotty
• France – sales flat v Q3 2012
• Germany – down 8.2%

v Q3 2012 y

• Drains – down 5%

v Q3 2012 – tough comps

• Middle East sales down in Q3 – drains proj ect work
• Italy – still soft

Italy still soft

• S

table order entry exiting Q3

5

Q3 2013 Market Overview Q3 2013 Market Overview – –Asia Asia

• Economic environment in China still positive
• GDP 7.8%
• S

ales growth in heating and valves products

• Driven by new products
• S

trong regional growth

• Focus on Tier 2/ 3 cities
• Expanding sales in Australia through new distribution
• Continued focus on higher end market sales
• Continued focus on higher end market sales

6

Revenue by Platform and Region Revenue by Platform and Region – – Q3 Q3 2013 2013

Q3 2012 S ales

Water Quality 5% Drains and Re-use 10% Water Quality 5% Drains and Re-use 11%

Q3 2012 S ales Q3 2013 S ales

Residential/ Commercial Flow Control HVAC/Gas 25% Residential/ Commercial Flow Control 59% HVAC/Gas 25% Control 60% 59% Canada

Q3 2013 S ales Q3 2012 S ales

Canada Asia 2% 6% Asia 2% 6% U.S.A 53% EMEA 39% U.S.A 52% EMEA 40%

7

Revenue by Platform and Region Revenue by Platform and Region – – September YTD 2013 September YTD 2013

YTD 2013 S l YTD 2012 S ales

Water Quality 5% Drains and Re-use 10% Water Quality 5% Drains and Re-use 10%

YTD 2013 Sales YTD 2012 S ales

Residential/ HVAC/Gas 23% Residential/ Commercial HVAC/Gas 23% Commercial Flow Control 62% Flow Control 62% Canada

YTD 2013 S ales YTD 2012 S ales

Asia 2% Canada 6% Asia 2% Canada 6%

YTD 2013 S ales

U.S.A 54% EMEA 38% U.S.A 52% EMEA 40%

8

Q3 Q3 2013 Financial Highlights 2013 Financial Highlights

(in millions except DEPS; see reconciliations in Appendix; continuing ops only)

DEPS f DEPS f

$371.8

S ales S ales Op Op Profit/ Profit/ Margin Margin*

DEPS from DEPS from Continuing Continuing Operations* Operations*

$352.8

$36.9 $34 9 10.5%

9.4% $0.62 $0 8

$34.9

$0.58

Q3 12 Q3 13 Q3 12 Q3 13

Q3 12 Q3 13 Q Q

S ales Growth of 5.4% Organic 3.6% FX 1.8%

• $2.4m in Q3 plant LF inefficiencies/ logistics costs
• Margins impacted by $3.5M product liability increase
• $0.10 – product liability & lead free costs EPS

impact

* Excludes S

pecial Items – see S lide 23

9

September YTD 2013 Financial Highlights September YTD 2013 Financial Highlights

(in millions except DEPS; see reconciliations in Appendix; continuing ops only)

DEPS f DEPS f

S ales S ales Op Op Profit/ Profit/ Margin Margin*

9.4%

$1.65

DEPS from DEPS from Continuing Continuing Operations* Operations*

$1 097 5

$103.3

9.3%

$1,072.9 $1,097.5

$100.0 $1.57

YTD 12 YTD 13 YTD 12 YTD 13

YTD 12 YTD 13

YTD 12 YTD 13

3

S ales Growth of 2.3% Organic 1.3% FX 0.9%

Net Accretion +$0.03

• YTD LF Impact of $4.4M

Acquired 0.1%

* Excludes S

pecial Items – see S lide 23

10

North American Operations North American Operations

(in millions)

Q3 Revenue Q3 Revenue growth of growth of 8.1% 8.1% v v Q3 2012 Q3 2012

• 860 bps organic growth offset by 50 bps FX decline
• Wholesale accelerated during the quarter, up +9.6%

Q3 Adj d Q3 Adj d i i i i 2% 2% Q3 Adj usted Q3 Adj usted operating margin =

• perating margin = 11.2%

11.2%

• 210 bps decline v Q3 2012
• Product liability incremental costs of $3.5m in Q3=160 bps
• Lead-free incremental costs of $2.4m in Q3 = 110 bps
• Margin expansion hindered by competitive pricing in retail

Margin expansion hindered by competitive pricing in retail

• Lead-free pricing holding

$204.0 $220.5 S ales Op Profit*

$27.1 $24.7

Q3 12 Q3 13

13.3% 11.2%

Industries S erved: Commercial, Q Q Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality

* Excludes S

pecial Items – see S lide 24

11

North American Operations North American Operations

(in millions)

S eptember YTD Revenue S eptember YTD Revenue growth of growth of 4.6% 4.6% v v 2012 2012

• 470 bps organic growth offset by FX decline
• Wholesale growth of 5.5%

S eptember YTD Adj usted S eptember YTD Adj usted operating margin =

• perating margin = 12.2%

12.2%

• 40 bps improvement v 2012
• Margin expansion hindered by competitive pricing in

retail

• Lead-free incremental costs of $4.4m

S ales Op Profit* $629.1 $657.9 S ales Op

• t

$74.5 $80.5

11.8% 12.2%

Industries S erved: Commercial, S ept YTD 12 S ept YTD 13 Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality

* Excludes S

pecial Items – see S lide 24

12

EMEA EMEA Operations Operations

(in millions)

Q3 Q3 Revenue Revenue growth of 0.8% growth of 0.8% v v Q3 Q3 2012 2012

• (420 bps) organic, 500 bps FX
• Drains sales down 5%

v Q3 2012

• France sales flat v Q3 2012
• France sales flat v Q3 2012
• German sales down 8.2%

v Q3 2012

• Middle East sales down – 2012 maj or drains proj ect
• Q3

Q3 Adj usted operating margin = Adj usted operating margin = 11.5% 11.5%

• 70 bps increase v Q3 2012 due to productivity and

p Q p y S G&A cost savings

$141.5 $142.7 S ales Op Profit*

$15.3 $16.4

10.8% 11.5%

Industries S erved : Water Protection, S anitary, HVAC-Radiant Heat, Under Q3 12 Q3 13

* Excludes S

pecial Items – see S lide 24

floor, Fuel &Gas, Instrumentation and Electronics

13

EMEA EMEA Operations Operations

(in millions)

S eptember YTD Revenue S eptember YTD Revenue decline of decline of 2.1% 2.1% v v Q3 Q3 2012 2012

• (460 bps) organic, 250 bps FX
• Drains sales strong
• France sales down 7.6%

v 2012

• German sales down 8.5%

v 2012

• Middle East sales up 10%
• S

eptember YTD Adj usted S eptember YTD Adj usted operating margin =

• perating margin = 9.9%

9.9%

• 10 bps decrease v 2012

V l d li b t ti ll ff t b S G&A i g

• Volume decline substantially offset by S

G&A savings, price and productivity

$425.0 $416.0 S ales Op Profit*

$42.4 $41.0

S t YTD 12 S t YTD 13

10.0% 9.9%

Industries S erved : Water Protection, S anitary, HVAC-Radiant Heat, Under S ept YTD 12 S ept YTD 13

* Excludes S

pecial Items – see S lide 24

floor, Fuel &Gas, Instrumentation and Electronics

14

Asia Operations Asia Operations

(in millions)

Q3 Revenue Q3 Revenue growth of growth of 17.8% 17.8% v v Q3 2012 Q3 2012

• 1510 bps organic, 270 bps FX

Q3 Adj usted operating margin = 23.3% Q3 Adj usted operating margin = 23.3%

• (960) bps decrease v Q3 2012
• Driven by product mix

Growth from residential valve and heating products Growth from residential valve and heating products

$7 3 $8.6 S ales Op Profit* $7.3 32 9% 23 3%

$2.4 $2.0

Q3 12 Q3 13

32.9% 23.3%

Industries S erved : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC

* Excludes S

pecial Items – see S lide 24

15

Asia Operations Asia Operations

(in millions)

S eptember YTD Revenue S eptember YTD Revenue growth of growth of 25.5% 25.5% v v 2012 2012

• 2390 bps organic, 160 bps FX

S eptember YTD Adj usted operating margin = 30.9% S eptember YTD Adj usted operating margin = 30.9% p j p g g p j p g g

• 110 bps increase v 2012
• Driven by S

G&A cost containment and better plant absorption on higher volumes

Growth from focused strategy on heating and plumbing Growth from focused strategy on heating and plumbing

$23.6 S ales Op Profit* $18.8 30 9%

$5.6 $7.3

S ept YTD 12 S ept YTD 13

29.8% 30.9%

Industries S erved : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC

* Excludes S

pecial Items – see S lide 24

16

Primary Working Capital Primary Working Capital

(in millions)

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

($ illi )

Sep 13 Sep 12

($ millions)

$ % $ %

Receivables

228.9 15.8% 217.2 15.2%

Sep-13 Sep-12

DS O

55.0 55.7

Inventory

310.8 21.4% 296.1 20.8%

Inv Turns

3 1 3 1

Inv Turns

3.1 3.1

Payables

(134.6) (9.3% ) (127.7) (9.0% )

DPO

32.0 32.4

Primary Working Capital

405.1 27.9% 385.6 27.0%

S ales increase in US driving receivables up; inventory investment to support lead-free transition

17

Cash Flows Cash Flows

(in millions)

($ millions)

• Sept. 29, 2013
• Sept. 30, 2012

Net income fr om cont inuing operat ions

52.7 52.2

D i t i d t i t i

36 4 36 0

Nine Months Ended

• Net WC increase

from investment in lead free inventory

• Lead free foundry

Investment of

Depreciat ion and amor t izat ion

36.4 36.0

Change in wor king capit al and ot her

(21.4) (16.7)

Total Operating Activities 67.7

71.5

Capit al expendit ures, net of proceeds

(21.2) (17.7) Investment of $9.5m driving higher capex spend

• Free cash flow

reduced from lead free initiatives

Business acquisit ions, net of cash acquir ed

• (17.5)

Net pr oceeds fr om sale of secur it ies

2.1 2.0

Total Investing Activities

(19.1) (33.2)

Net payment s on long-t erm debt , capit al leases and ot her (80.3) (16.3) Dividends (13.1) (12.1) Payment s t o repurchase common st ock (20.0) (65.8) Proceeds and t ax benefit of st ock opt ion act ivit y 11.1 11.0

Total Financing Activities

(102.3) (83.2)

Eff f h

1 8 1 6

Effect of exchange rates

1.8 1.6

Net cash provided by discontinued operations

7.3 2.2

Net Decrease in Cash

(44.6) $ (41.1) $

Free Cash Outflow

46.5 $ 53.8 $

* S ee S lide 25 for calculation of free cash flow

18

Guidance Update Guidance Update -

• 2013

2013

Expect full year sales decline in EMEA of 4%

to 5% , at constant exchange rates E pect f ll ear North America core b siness growth of 3% to 5% pl s

Expect full year North America core business growth of 3%

to 5% , plus incremental 1% to 2%

• n top line for lead free sales

Expect full year sales growth in Asia of 20%

to 25%

Expect lead free transition to accelerat e further in Q4, with incremental costs

• f $1.0 m in Q4 – Now expect full year lead free impact to be $5.4M

Additional $3m of share repurchases in Q4, total repurchases of $23m for 2013

Additional $3m of share repurchases in Q4, total repurchases of $23m for 2013

Expect approximately $32m in total Capex spend for 2013

19

Appendix

20

Consolidated Statements of Operations Consolidated Statements of Operations -

• Q3 and YTD

Q3 and YTD

(in millions except per share amounts)

2013 2012 B/(W) % 2013 2012 B/(W) %

Net sales

371.8 $ 352.8 $ 19.0 $ 5.4% 1,097.5 $ 1,072.9 $ 24.6 $ 2.3% Third Quarter Nine Months Ended

Cost of goods sold

237.9 225.1 (12.8)

• 701.9

688.0 (13.9)

• GROSS PROFIT

133.9 127.7 6.2 4.9% 395.6 384.9 10.7 2.8%

36.0% 36.2% (0.2p) 36.0% 35.9% +0.1p

SG&A

100 7 91 7 (9 0) (9 8% ) 294 0 285 9 (8 1) (2 8% )

SG&A

100.7 91.7 (9.0) (9.8% ) 294.0 285.9 (8.1) (2.8% )

27.1% 26.0% (1.1p) 26.8% 26.6% (0.2p)

Rest ruct uring and ot her charges, net

3.0 3.5 0.5 14.3% 7.2 6.4 (0.8) (12.5% )

OPERATING INCOME

30.2 32.5 (2.3)

• 7.1%

94.4 92.6 1.8 1.9% ( )

8.1% 9.2% (1.1p) 8.6% 8.6% (0.0p)

Ot her expense

5.3 5.4 0.1 1.9% 17.9 16.4 (1.5) (9.1% ) INCOME FROM CONTINUING OPERATIONS 24.9 27.1 (2.2)

• 8.1%

76.5 76.2 0.3 0.4%

Provision for income t axes

7.4 8.8 1.4 15.9% 23.8 24.0 0.2 0.8% NET INCOME FROM CONTINUING OPERATIONS 17.5 $ 18.3 $ (0.8) $

• 4.4%

52.7 $ 52.2 $ 0.5 $ 1.0%

DILUTED EPS

0.49 $ 0.52 $ (0.03) $

• 5.8%

1.48 $ 1.44 $ 0.04 $ 2.8%

DILUTED EPS

0.49 $ 0.52 $ (0.03) $ 5.8% 1.48 $ 1.44 $ 0.04 $ 2.8%

21

Capital Structure Capital Structure

(in millions)

09/ 29/ 13 12/ 31/ 12 Cash $227.2 $271.3 Long Term Debt $308.3 $384.6 Equity $985.9 $939.5 Net Debt to Capitalization 7.6% 10.8%

S trong liquidity profile with $270m of availability under existing credit facility credit facility

22

S ee S lide 25 for reconciliation of net debt to capitalization

Reconciliation of Reconciliation of GAAP GAAP “As Reported” To The “Adjusted” Non “As Reported” To The “Adjusted” Non-

• GAAP

GAAP E Excluding The xcluding The Effect Of Adjustments For Special Items Effect Of Adjustments For Special Items

(in millions except per share information)

September 29, September 30, September 29, September 30, 2013 2012 2013 2012 Net sales $ 371.8 $ 352.8 $ 1,097.5 $ 1,072.9 Operating income - as reported $ 30.2 $ 32.5 $ 94.4 $ 92.6 Third Quarter Ended Nine Months Ended Operating margin % 8.1% 9.2% 8.6% 8.6% Adjustments for special items: Restructuring and other charges, net 2.8 (0.5) 7.0 1.8 Goodwill and other long-lived asset impairment charges 0.2 2.4 0.2 3.0 Adjustment to disposal of business 1.6 1.6 Acquisition accounting in cost of sales

• 0.4

Legal and customs settlement 1 7 1 7 (0 3) Legal and customs settlement 1.7

• 1.7

(0.3) CFO retention costs

• 0.9
• 0.9

$ 4.7 4.4 $ 8.9 7.4 Operating income - as adjusted $ 34.9 $ 36.9 $ 103.3 $ 100.0 Adjusted operating margin % 9.4% 10.5% 9.4% 9.3% Net income from continuing operations - as reported $ 17.5 $ 18.3 $ 52.7 $ 52.2 Adjustments for special items - tax affected: Restructuring and other charges, net 2.0 (0.4) 5.0 1.1 Goodwill and other long-lived asset impairment charges 0.1 1.8 0.1 2.1 Adjustment to disposal of business 1.6 1.6 Acquisition accounting in cost of sales

• 0.3

Legal and customs settlement 1.0

• 1.0

(0.9) CFO retention costs

• 0.5
• 0.5

CFO retention costs 0.5 0.5 $ 3.1 3.5 $ 6.1 4.7 Net income from continuing operations - as adjusted $ 20.6 $ 21.8 $ 58.8 $ 56.9 Continuing operations earnings per share - diluted Diluted earnings per share - as reported $ 0.49 $ 0.52 $ 1.48 $ 1.44 Adjustments for special items 0.09 0.10 0.17 0.13 Dilutedearnings per share - as adjusted $ 0 58 $ 0 62 $ 1 65 $ 1 57

23

Diluted earnings per share - as adjusted $ 0.58 $ 0.62 $ 1.65 $ 1.57

Adjusted Operating Income by Segment Adjusted Operating Income by Segment

(in millions)

North America EMEA Asia Corp. Total North America EMEA Asia Corp. Total Reported GAAP Operating Income

23.5 13.4 2.0 (8.7) 30.2 25.5 14.9 0.8 (8.7) 32.5 Q3 2013 Q3 2012 ( ) ( )

%

• f sales

10.7% 9.4% 23.3%

8.1%

12.5% 10.5% 11.0%

9.2%

Adjustments for special items:

• Restructuring and other charges, net

1.2 3.0

• 0.5

4.7 1.6 0.4 1.6 0.8 4.4 1.2 3.0

• 0.5

4.7 1.6 0.4 1.6 0.8 4.4

Adjusted Operating Income

24.7 16.4 2.0 (8.2) 34.9 27.1 15.3 2.4 (7.9) 36.9

%

• f sales

11.2% 11.5% 23.3%

9.4%

13.3% 10.8% 32.9%

10.5% September YTD 2013 September YTD 2012

North America EMEA Asia Corp. Total North America EMEA Asia Corp. Total Reported GAAP Operating Income

79.0 34.1 7.3 (26.0) 94.4 71.6 40.0 4.3 (23.3) 92.6

%

• f sales

12.0% 8.2% 30.9%

8.6%

11.4% 9.4% 22.9%

8.6%

Adjustments for special items:

• Restructuring and other charges, net

1.5 6.9

• 0.5

8.9 2.9 2.4 1.3 0.8 7.4 1.5 6.9

• 0.5

8.9 2.9 2.4 1.3 0.8 7.4

Adjusted Operating Income

80.5 41.0 7.3 (25.5) 103.3 74.5 42.4 5.6 (22.5) 100.0

12 2% 9 9% 30 9%

9 4%

11 8% 10 0% 29 8%

9 3%

%

• f sales

12.2% 9.9% 30.9%

9.4%

11.8% 10.0% 29.8%

9.3% 24

Reconciliation of Net Cash Provided By Continuing Operations To Free Cash Flow And Long Reconciliation of Net Cash Provided By Continuing Operations To Free Cash Flow And Long-

• Term Debt

Term Debt (including current portion)

(including current portion) To Net Debt and Net Debt To Capitalization Ratio

To Net Debt and Net Debt To Capitalization Ratio

(in millions)

(Unaudited)

• Sept. 29,
• Sept. 30,

2013 2012 Nine Months Ended (Unaudited) Net cash provided by continuing operations - as reported $ 67.7 $ 71.5 Less: additions to property, plant, and equipment (22.6) (18.6) Plus: proceeds from the sale of property, plant, and equipment 1.4 0.9 Free cash outflow $ 46.5 $ 53.8 Net income from continuing operations - as reported $ 52.7 $ 52.2 Cash conversion rate of free cash outflow to net income 88.2% 103.1% S t 29 D b 31 (Unaudited)

• Sept. 29,

December 31, 2013 2012 Current portion of long-term debt $ 2.1 $ 77.1 Plus: Long-term debt, net of current portion 306.2 307.5 L C h d h i l t (227 2) (271 3) Less: Cash and cash equivalents (227.2) (271.3) Net debt $ 81.1 $ 113.3 Net debt $ 81.1 $ 113.3 Plus: Total stockholders' equity 985.9 939.5 Plus: Total stockholders equity 985.9 939.5 Capitalization $ 1,067.0 $ 1,052.8 Net debt to capitalization ratio 7.6% 10.8%

25

26