Jefferies 2014 Industrial Conference

Transcription

1 Jefferies 2014 Industrial Conference

2 Forward Looking Statements This presentation contains statements that we believe are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Forward-looking statements generally can be identified by the use of words such as may, will, expect, intend, estimate, anticipate, believe, continue, guidance, outlook, or words of similar meaning. All statements regarding 2015 outlook are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this presentation. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: uncertain costs, savings and timeframes associated with the planned implementation of the ERP system; potential weakening in the high efficiency boiler industry in the U.S.; the ability to execute our acquisition strategy; significant volatility in raw material prices; competitive pressures on the company s businesses; inability to implement pricing actions; instability in the company s replacement markets; strength or duration of any recoveries in U.S. residential and commercial construction; a slowdown in the Chinese economy; foreign currency fluctuations and adverse general economic conditions and capital market deterioration. Forward-looking statements included in this presentation are made only as of the date of this presentation, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements. This presentation contains certain non-gaap financial measures as that term is defined by the SEC. Non-GAAP financial measures are generally identified by Adjusted (Adj.), Non-GAAP or Before Restructuring. 2

3 Investment Case Leader in water heaters in North America and China, platform to become leader in India Stable/Growing North American replacement market; operating leverage as new construction recovers Strong balance sheet and cash flow to support future growth & share repurchase Strength of our brand, distribution, manufacturing and innovation provide clear market advantage in China Energy efficient products (including boilers), China, acquisitions and new geographies are drivers for growth 3

4 Sales in millions Sales & Adjusted Operating Margin* $2,500 $2,000 Sales Adj EBIT Margin 16% 14% 12% $1,500 $1,000 $500 $ * excludes corporate expenses 10% 8% 6% 4% 2% 0% 4

5 Adjusted Earnings Per Share $3.00 $2.50 $2.37 $2.60 $2.00 $2.06 $1.50 $1.56 $1.00 $0.68 $0.85 $1.07 $0.50 $ Midpoint Guidance Outlook 5

6 Segment Revenue ROW China/India = 91% Europe/Middle East = 9% Rest of World 31% North America 69% NA Water heaters growing modestly Lochinvar 10% growth in full year 6

7 U.S. Water Heater Market Segment 50% Residential Market 40% 30% 20% AHRI data: AOS actual shipments and AOS estimates of competitors shipments 10% 0% Other 2013 market share data 7

8 U.S. Residential Water Heater Market Segment Wholesale Retail Wholesale channel is 50% of the market Large Regional Distributors Retail channel is 50% of the market A. O. Smith s Customers mm Units 8

9 thousands of units Water Heaters Strong Replacement Sales North American Residential Water Heaters 10,000 Peak housing starts: 2.1 million 8,000 6,000 4,000 2, Replacement New Construction Note: Includes tankless 9

10 U.S. Water Heater Market Segment 60% Commercial Market* 50% 40% 30% 20% AHRI data: AOS actual shipments and AOS estimates of competitors shipments 10% 0% 2013 market share data Other * Commercial water heater segment as defined by AHRI, total 2013 commercial units as reported by AHRI = 158,000 10

11 Energy Efficient Cyclone Game changing energy efficient commercial product launched in 1997 and recently upgraded Up to 96% thermal efficiency dramatically lowers operating costs offering short payback Represents 22% of AOS commercial units 11

12 Lochinvar End Markets Hydronic Space Heating 48% Parts/Other 12% Water Heating 40% 2/3 commercial end markets; 1/3 residential end markets 12

13 Trend to Higher Efficiency, Condensing Boilers 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 North American Commercial Boiler Volume (Units) Actual Forecast Non-Condensing Commercial Boilers Condensing Commercial Boilers Source: BRG Building Solutions 13

14 US$ millions China/Asia now 28% of Sales & Growing China sales have grown 28% (CAGR) over the last 10 years China India

15 Nanjing, China Since 1995 Products designed for Chinese consumers Experienced Chinese managers Strong retail presence Continued investment in innovation and engineering capabilities Consistently strong growth Second manufacturing site, opened in late 2013, will increase capacity by approximately 50 percent when fully utilized 15

16 Market Share Ten-Year + Market Share Trend 30.00% 25.00% A.O.Smith Haier Midea Macro 20.00% 15.00% 10.00% 5.00% 0.00% Wanhe Rinnai Noritz Ariston Sakura Siemens Year Leading residential brands measured in currency; Tier One Market: GFK - CMM data sampling several thousand largest retail stores, December

17 Value Market Share Value Market Share Market Share by Price Category Electric Market Share Gas Market Share 50% 45% 40% 35% 30% Others Siemens Ariston Midea Haier A.O.Smith 70% 60% 50% 40% Others Haier Ariston Wanhe Macro Sakura Noritz Rinnai A.O.Smith 25% 20% 30% 15% 20% 10% 5% 10% 0% >= <200 Retail Price(USD) 0% >= <200 Retail Price(USD) Data Source :CMM Retail Survey Best Selling Models 17

18 China Consumers Prefer Foreign Brands Lower: Annual income <$20,000 / year Higher: Annual income >= $20,000 / year 18

19 Broad Distribution Channel Over 6,000 outlets in China 40% in Tier 1 cities; 60% in Tier 2/3 cities Outlets AOS Exclusive 21% Suning 20% Regional Retail 41% Gome 18% Data as of 12/31/

20 Mega Trends - China Significant growth in AOS target demographic A. O. Smith customer demographic continues to grow rapidly Source: McKinsey Insights China April

21 A. O. Smith Branded Water Treatment Systems: Retail Channel Display Leverage the A. O. Smith brand in our existing water heater channels 3,400 retail stores at June 2014 Reverse osmosis main focus Product development focused at customer needs and technical improvements Fast growing, highly fragmented market Industry studies we have seen indicate 40% CAGR for the next five years 21

22 Innovation: Side-Stream Reverse Osmosis Membrane Higher efficiency Less waste water Longer membrane life 1 year 3 years Reduces maintenance costs Unique cartridge design Patented technology 22

23 China Mega Trends Driving Growth Internet We are positioned to reach consumers using the internet Middle and affluent class trade up and value foreign brands Middle and affluent classes are growing A. O. Smith is a strong foreign brand Our Premium Consumer brand is positioned for the middle and affluent classes Urbanization in China projected to drive 29% of all global the growth! A. O. Smith has manufacturing capacity and channel footprint to capitalize 23

24 China Video

25 India Key Initiatives Grow Profitably Bangalore manufacturing facility continues to expand and allow market expansion into Class B and Class C cities and vertical integration by end of 2014 Build A. O. Smith Brand Enter Water Treatment 25

26 India Geographic Expansion Distribution in all 23 Class A cities (pop >1.5 mm) Distribution in 61 of 67 Class B cities (pop.5 to 1.5 mm) Distribution in 314 of 400 Class C cities (pop.1 to.5 mm) $20 $15 Millions Sales $10 $5 $

27 Mega Trends - India Significant growth in AOS target demographic Millions of households, percent, 2000 prices A. O. Smith target demographic: upper middle class SOURCE: India Urbanization Econometric Model Updated

28 Energy Efficiency 28

29 Energy Efficient Products Voltex TM Effex TM Cyclone TM Cirrex TM Tankless 29

30 Acquisition Strategy

31 A. O. Smith Growth Strategy Geography Geographic Growth China India High Growth GDP markets Expand/ Grow the Core Core New Products & New Technologies Water Heating Water Treatment Adjacencies Water-Themed Adjacencies Acquire new platforms for growth 31

32 Investment Criteria Value creation opportunities ROIC in excess of cost of capital by second or third year Meet risk adjusted IRR hurdle rates Margin accretion with growth rates higher than U.S. GDP Accretive to earnings in the first year 32

33 2015 Outlook

34 Favorable Revision to 2015 Outlook 2015 Rest of World segment EBIT margins revised upward to 14 % from 13% No change to North America margins of 16% Organic revenue over $2.5 billion in Adjusted EPS from existing businesses revised upward to $2.60 from $2.50 Reflects lower estimated shares outstanding to reflect share repurchase activity and ROW margin upgrade As of July 22,

35 A. O. Smith s Capital Allocation Options Organic growth (capital expenditures) Acquisitions $250 million net cash 16 percent leverage ratio (debt/total capital) Return cash to shareholders: estimated $160 million in 2014 Dividends Increased 25 percent in first quarter 2014 Share repurchase Added 1.5 million shares to existing board authorization in April 2014 Expect to repurchase 2.3* million shares or $110 million in 2014 to maintain net cash position level similar to year-end 2013: approximately $300 million *subject to price, alternative investments and working capital requirements 35

36 2014 Outlook: 140 year Anniversary China revenue grows at least two times China GDP; higher advertising spend in the second half of 2014 China water treatment gaining traction Lochinvar branded annual sales growth approximately 10 percent Transition in North America to higher efficiency boilers continues U. S. construction benefit Residential water heater industry volumes approximately 9 million units, including tankless water heaters Commercial water heater industry volumes at approximately 162,000 units Wholesale price increase effective May 1 Incremental enterprise resources planning expense of $10 million heavily weighted to Q3 July 22,

37 Growth and Stability Offense Organic growth of 7-9 % China growing approximately 2X GDP in 2014 Lochinvar branded products 10% in 2014 Call option on NA new construction Significant cash and borrowing capacity for value creating acquisitions and share buyback Defense NA water heaters 90%+ replacement Market share leader in NA, China and path to become leader in India Strong balance sheet; net cash position approximately $250 million Small exposure to Europe (<$50 million in revenues) 37

38 Investor Contact Vice President, Investor Relations and Treasurer Direct:

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40 Appendix

41 Second Quarter 2014 Results and 2014 Full Year Guidance

42 Second Quarter Results change % chg. Sales $ $ $ % Net Earnings Non-operating Pension (after-tax) Other adjustments (see below) Adjusted Earnings $ 60.3 $ 48.2 $ % Other adjustments (after-tax) 2013: $3.1 restructuring & impairment expenses ($ in millions) 42

43 Second Quarter Adjusted EPS change % chg. EPS $0.63 $ 0.45 Non-operating Pension Other adjustments (see below) Adjusted EPS $ 0.66 $ 0.52 $ % Other adjustments: 2013: $.04 per share restructuring & impairment expenses 43

44 Second Quarter Sales change % chg. North America $ $ $ % Rest of World $ % Intersegment (8.3) (9.4) $ 1.1 Total $ $ $ % ($ in millions) 44

45 Second Quarter Adjusted Earnings North America $ 67.1 $ 62.8 $ 4.3 7% Rest of World % Total Operating % Adjusted Corporate (11.5) (13.3) % Interest Expense (1.4) (1.6) % Adjusted Pre-tax Earnings % Income Tax Expense (23.2) (22.1) (1.1) -5% Adjusted Earnings $ 60.3 $ 48.2 $ % Adjusted Operating Margin North America 16.4% 16.1% Rest of World 15.1% 13.2% change % chg. ($ in millions, except margins) 45

46 Operating Cash Flow YTD 6/30/13 YTD 6/30/14 Second Quarter Highlights Cash flow of $90 million Debt to capital ratio of 16% Cash balance: $497 million Net cash position: $246 million Year to-date stock repurchase: 1.3 million shares totaling $60.8 million $ in millions 46

47 Adjusted 2014 EPS Guidance and Adjusted 2013 EPS The following is a reconciliation of diluted EPS to adjusted EPS (non-gaap) (all items are net of tax): 2014 Guidance 2013 Diluted EPS (GAAP) $ $2.26 $ 1.83 Non-operating pension costs per diluted share Restructuring and impairment expenses per diluted share Settlement income per diluted share - (0.07) Adjusted EPS $ $ 2.06 As of July 22,

48 Relevant Data Points 2014 Projections 2013 Operating Cash Flow $240-$250 $ 282 Capital Expenditures $75 to $85 $ 98 Depreciation and Amortization $65 $ 60 Adjusted Tax Rate 28-29% 28.4 % Adjusted Corporate/Other Exp* $48 $ 53 * excludes non-operating pension costs in both years (in millions, except tax rate) 48

49 Adjusted Earnings & Adjusted EPS (dollars in millions, except per share data) Three Months Ended June 30, The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-gaap) and adjusted EPS (non-gaap): Net Earnings (GAAP) $ 57.3 $ 42.1 Non-operating pension costs, before tax Tax effect of non-operating pension costs (2.0) (1.8) Restructuring and impairment expenses, before tax Tax effect of restructuring and impairment expenses - (1.1) Settlement income, before tax - - Tax effect of settlement income - - Adjusted Earnings $ 60.3 $ 48.2 Diluted EPS (GAAP) $ 0.63 $ 0.45 Non-operating pension costs per diluted share, before tax Tax effect of non-operating pension costs per diluted share (0.02) (0.02) Restructuring and impairment expenses per diluted share, before tax Tax effect of restructuring and impairment expenses per diluted share - (0.01) Settlement income per diluted share, before tax - - Tax effect of settlement income per diluted share - - Adjusted EPS $ 0.66 $

50 Adjusted Earnings & Adjusted EPS (dollars in millions, except per share data) Six Months Ended June 30, The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-gaap) and adjusted EPS (non-gaap): Net Earnings (GAAP) $ $ 81.1 Non-operating pension costs, before tax Tax effect of non-operating pension costs (3.8) (3.6) Restructuring and impairment expenses, before tax Tax effect of restructuring and impairment expenses - (4.3) Settlement income, before tax - (11.0) Tax effect of settlement income Adjusted Earnings $ $ 92.9 Diluted EPS (GAAP) $ 1.14 $ 0.87 Non-operating pension costs per diluted share, before tax Tax effect of non-operating pension costs per diluted share (0.04) (0.04) Restructuring and impairment expenses per diluted share, before tax Tax effect of restructuring and impairment expenses per diluted share - (0.05) Settlement income per diluted share, before tax - (0.12) Tax effect of settlement income per diluted share Adjusted EPS $ 1.20 $

51 Adjusted Segment Operating Earnings (dollars in millions) The following is a reconciliation of reported segment operating earnings to adjusted segment operating earnings (non-gaap): Three Months Ended June 30, Six Months Ended June 30, Segment Operating Earnings (GAAP) North America $ 63.2 $ 55.0 $ $ Rest of World Total Segment Operating Earnings (GAAP) $ 92.5 $ 77.4 $ $ Adjustments: North America $ 3.9 $ 7.8 $ 7.7 $ 13.0 Rest of World Total Adjustments $ 3.9 $ 7.8 $ 7.7 $ 13.0 Adjusted Segment Operating Earnings North America $ 67.1 $ 62.8 $ $122.1 Rest of World Total Adjusted Segment Operating Earnings $ 96.4 $ 85.2 $ $ Three Months Ended June 30, Six Months Ended June 30, Additional Information: Adjustments: North America Segment Non-operating pension costs $ 3.9 $ 3.6 $ 7.7 $ 7.1 Restructuring and impairment expenses Settlement income (11.0) Total North America Segment Adjustments $ 3.9 $ 7.8 $ 7.7 $