Watts Water Technologies 4Q and FY 2015 Earnings Conference Call February 17, 2016

Transcription

1 Watts Water Technologies 4Q and FY 2015 Earnings Conference Call February 17, Watts Water Technologies

2 Forward Looking Statements Certain statements in this presentation constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 Watts Water Technologies 2

3 Overview 2015 Many accomplishments in transition year - Strong finish to the year - Reshaped portfolio through rationalization / acquisitions - Continued operational excellence focus - Settled legacy liabilities - Renewed emphasis on commercial excellence 2016 Building on foundation - Execute on commercial / operational programs - Re-invest in growth initiatives - Drive solid top line growth and margin expansion - Re-align regional organization Good Progress; Continuing to Shape Future 2016 Watts Water Technologies 3

4 EMEA Update Restructuring Action Headcount reduction Right sizing to market realities Costs ~$8M, savings $3.5M; 2016 minimal impact Goodwill Impairment $130M non-cash pre-tax charge Driven by slow growth environment No effect on liquidity and debt covenants Organizational Change M. Nanda / E Melhem assuming oversight effectively immediately Commercial focus / new product development / cross-selling Drive organizational connectivity / best practices Transformation Continues 2016 Watts Water Technologies 4

5 Markets ~67% AMERICAS US GDP outlook holding firm for 2016 Residential remains positive Commercial growth moderating Remodeling growth continues in 1H16 ~30% EMEA Eurozone GDP stable Emerging markets mixed Oil impacting Middle East and Russia Geopolitical concerns continue ~3% Asia-Pacific Asia Pacific GDP moderate growth in 2016 China GDP expected to decline in 2016 Residential spend flat Commercial growth slowing Markets Remain Mixed 2016 Watts Water Technologies 5

6 4Q 15 Financial Overview Comments 4Q15 4Q14 Sales $358.3 $376.5 Operating Profit (1) $35.4 $34.9 Margin % 9.9% 9.3% Net Income (1) $20.6 $20.5 EPS (1) $0.59 $0.58 Tax Rate 33.2% 28.6% 4.8% sales decrease + Organic +4.0% + Acquired +4.1% FX (4.9%) undifferentiated exit (8.0%); less than expected 1.4% operating profit increase - Good product mix, productivity/restructuring savings offset by under absorption and incremental G&A Flat net income - Increased EBT offset by higher tax rate 1.7% EPS increase + AERCO +$0.03 FX effect ($0.05) Exit of undiff. products ($0.06) EMEA goodwill impairment - $130M non-cash, pre-tax charge 1) Operating Profit, Net Income and EPS excludes special items, see slide 16 for reconciliation Margin Expansion Driven by Restructuring & Rationalization 2016 Watts Water Technologies 6

7 Americas 4Q Sales Down 2% Organic +7% Operating Margin (1) Up 220 bps $233.3 $ % 12.1% 4Q15 4Q14 4Q15 4Q14 Organic growth +7% Operating profit $33.3M Strong AERCO performance, 3% contribution Divested products ($29M); (76%) Wholesale +6.6%, OEM (3.9%), DIY +1.4% - Backflow / valves & specialty products offsetting softness in industrial - Up $4.6M or 16% Operating margins up 220 bps + Product mix, price and productivity + Minimized losses on divested products G&A investments 1) Operating profit and operating margins excludes special items, see slide 17 for reconciliation Positive Sales Mix Offset By G&A 2016 Watts Water Technologies 7

8 EMEA 4Q Sales Down (11%) Organic +1% Operating Margin (1) Down (110 bps) $113.4 $ % 10.1% 4Q15 4Q14 4Q15 4Q14 Organic +1%; W&P offsetting drains FX impact ($14.9M) or (11.7%) OEM +6.2%, Wholesale (3.7%) France / Germany stabilizing; Middle East up; Russia down Operating profit $10.2M - Down ($2.6M) due to FX, sales mix Operating margins down (110 bps) + Productivity (transformation, restructuring) Sales mix, pricing, transactional FX 1) Operating profit and operating margins exclude special items, see slide 17 for reconciliation Sales Mix Driving Margin Reduction 2016 Watts Water Technologies 8

9 Asia-Pacific 4Q Sales Down (5%) Organic (6%) Operating Margin (1) Down (960 bps) $11.6 $ % 6.0% 4Q15 4Q14 4Q15 4Q14 Organic sales down 6% Softer valves sales while heating positive Project delays, smaller orders Apex sales $0.9M Operating profit $0.7M - Down ($1.2M) Operating margins down (960 bps) + Productivity Fixed cost absorption, ~50% lower affiliate sales Maintaining infrastructure for growth 1) Operating profit and operating margins excludes special items, see slide 17 for reconciliation Challenging End Markets 2016 Watts Water Technologies 9

10 Full Year 2015 Financial Overview FY15 FY14 Comments Sales $1,467.7 $1,513.7 Operating Profit (1) $148.4 $153.0 Margin % 10.1% 10.1% Net Income (1) $84.4 $88.8 EPS (1) $2.41 $2.51 Tax Rate 33.9% 32.0% Free Cash Flow (2) $131.0 $ % sales decrease - Organic +0.5%, Acquired +6.9%, FX (6.2%), undifferentiated exit (4.2%) 3.0% operating profit decrease - Lower volume, incremental G&A offset productivity / restructuring savings 5.0% net income decrease - Lower EBT; higher effective tax rate 4.0% EPS decrease - FX effect ($0.24) - Exit of undiff. products ($0.18) - AERCO +$0.26 $19M FCF increase - Working capital management, primarily inventory 1) Operating Profit, Net Income and EPS excludes special items, see slide 16 for reconciliation 2) FCF = Cash Flow from Operations Less Capital Expenditures adjusted for long-term obligation settlements, see slide 18 for calculation Holding Margin Rate Despite Lower Volume 2016 Watts Water Technologies 10

11 Cash Flow FY 2015 FY2014 Net income (loss) $ (112.9) $ 50.3 Depreciation and amortization Change in working capital and other Total operating activities Capital expenditures, net of proceeds (27.6) (23.3) Acquisitions, asset sale & other 10.3 (272.2) Total investing activities (17.3) (295.5) Net proceeds (payments) on long-term debt (6.0) Dividends (23.1) (20.5) Payments to repurchase common stock (44.6) (39.6) Debt issue costs - (2.0) Proceeds and tax benefit of stock option activity Total financing activities (70.9) Effect of exchange rates (26.1) (27.3) Net increase (decrease) in cash (4.9) 33.2 Free cash flow - reported $ 81.8 $ Adjusted free cash flow $ $ Comments One-time liability settlements ($49M) Working capital performance - 6% inventory turns improvement - 2% improvement in DSO - 22% of revenue, 3 pt. improvement Cap-ex up 18%; AERCO, productivity Sioux Chief sale proceeds $33M (non-core line) Returned ~$70M to shareholders Expanded credit capacity to $800M - Enhanced financial flexibility - Maintained balanced capital deployment strategy FCF = Cash Flow from Operations Less Capital Expenditures. Adjusted Free Cash Flow excludes impact of long-term obligation settlements. See slide 18 for calculations. 17% YTD Increase In Adjusted Free Cash Flow 2016 Watts Water Technologies 11

12 2016 Outlook Organic Sales Growth Highlights AMERICAS EMEA Asia-Pacific Up Low to mid Single Digits Flat to Slightly Down Up High Single Digits Relatively consistent sales growth year over year Incremental sales reduction ~$100M from rationalization Apex acquisition + $11M sales Incremental transformation savings $10M Commodities slightly favorable Cap ex. $35M to $40M; D&A $52M to $55M 100% FCF conversion WTS APAC Up Low Single Digits Tax rate 32% to 34%; 1.10 Buyback $40M to $50M, ratably over year Higher Volume & Productivity Driving Margin Growth 2016 Watts Water Technologies 12

13 Key Focus Areas Building out Leadership Team EMEA Transformation Americas / Asia-Pacific Transformation Legacy Liabilities NPD / Innovation / Customer Focus One Watts / Talent and Performance Culture Addressed Key Positions Continuous review Next levels down Achieved Results Benefits negated by volume Incremental programs identified Significant Progress Phase 1 completed; Phase 2 underway China asset sale on track Proactively Addressed Pension settled; class actions addressed Reduces P&L volatility Reinvigorated in 2015 Enhance voice of customer, training Strengthened operating process Driving Accountability Do what you say! Building momentum Significant Progress; Momentum Building 2015 Watts Water Technologies 2016 Watts Business Water Technologies Confidential & Proprietary Information 13

14 2016 Watts Water Technologies Appendix

15 Consolidated Statements of Operations Dec. 31, 2015 Fourth Quarter Ended Dec. 31, 2014 B/(W) % Net sales $ $ $ (18.2) -4.8% Cost of goods sold Gross profit % 37.6% 34.9% +2.7p Selling, general & administrative expenses (3.8) (3.5%) 31.5% 28.9% (2.5p) Restructuring and other charges, net (117.2) -528% Operating income (loss) (117.5) 0.3 (117.8) -32.8% 0.1% (32.9p) Other expense % Loss before income taxes (122.0) (5.9) (116.1) 1968% Provision (benefit) for income taxes (3.8) % Net loss $ (118.2) $ (7.7) $ (110.5) 1435% Diluted loss per share $ (3.41) $ (0.22) $ (3.19) 1450% 2016 Watts Water Technologies 15

16 Reconciliation of GAAP As Reported To The Adjusted Non- GAAP Excluding The Effect Of Adjustments For Special Items (Unaudited) (in millions except per share information) Fourth Quarter Ended Year Ended Dec 31, Dec 31, Dec 31, Dec 31, Net sales $ $ $ 1,467.7 $ 1,513.7 Operating income (loss) - as reported $ (117.5) $ 0.3 $ (90.1) $ Operating margin % -32.8% 0.1% -6.1% 7.0% Adjustments for special items: Goodwill Impairments Acquisitions / divesture related costs Restructuring / severance related costs Deployment costs related to tranformation activities Pension/other costs Total adjustments for special items $ $ 34.6 $ $ 47.6 Operating income - as adjusted $ 35.4 $ 34.9 $ $ Adjusted operating margin % 9.9% 9.3% 10.1% 10.1% Net (loss) income - as reported $ (118.2) $ (7.7) $ (112.9) $ 50.3 Adjustments for special items - tax affected: Goodwill Impairments Acquisitions / divesture related costs Restructuring / severance Deployment costs related to tranformation activities Pension/tax rate adjustments/other costs Total adjustments for special items - tax affected: $ $ 28.2 $ $ 38.5 Net income - as adjusted $ 20.6 $ 20.5 $ 84.4 $ 88.8 Earnings (loss) per share - diluted Diluted (loss) earnings per share - as reported $ (3.41) $ (0.22) $ (3.24) $ 1.42 Adjustments for special items Diluted earnings per share - as adjusted $ 0.59 $ 0.58 $ 2.41 $ Watts Water Technologies 16

17 Adjusted Operating Income by Segment (in millions) Q Q Americas EMEA Asia- Pacific Corp. Total Americas EMEA Asia-Pacific Corp. Total Reported GAAP operating income (loss) 19.3 (124.3) (1.4) (11.1) (117.5) (11.2) (14.2) 0.3 % of sales 8.3% % -12.1% -32.8% 10.7% 0.3% -91.8% 0.1% Adjustments for special items Adjusted operating income (loss) (8.8) (8.5) 34.9 % of sales 14.3% 9.0% 6.0% 9.9% 12.1% 10.1% 15.6% 9.3% Americas EMEA FY 2015 FY 2014 Asia- Pacific Corp. Total Americas EMEA Asia-Pacific Corp. Total Reported GAAP operating income (loss) (98.6) (0.5) (100.9) (90.1) (6.5) (35.9) % of sales 11.2% -22.1% -1.1% -6.1% 11.9% 6.9% -16.0% 7.0% Adjustments for special items Adjusted operating income (loss) (33.8) (29.4) % of sales 13.9% 9.2% 12.6% 10.1% 12.5% 10.9% 16.3% 10.1% 2016 Watts Water Technologies 17

18 Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow and Adjusted Free Cash Flow RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW Dec 31, Dec 31, Net cash provided by operating activities - as reported $ $ Less: additions to property, plant, and equipment (27.7) (23.7) Plus: proceeds from the sale of property, plant, and equipmen Free cash flow $ 81.8 $ Net (loss) income - as reported $ (112.9) $ 50.3 Cash conversion rate of free cash flow to net income NM 222.5% ADJUSTED FREE CASH FLOW Twelve Months Ended Reported free cash flow $ 81.8 Add back: payments made on long-term obligations 49.2 Adjusted free cash flow $ Watts Water Technologies 18