Watts Water Technologies

Transcription

1 Watts Water Technologies Q Earnings Conference Call February 18, 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 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 forwardlooking 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. 2

3 2014 Overview 140 Year Celebration Record sales of $1.5 billion Adjusted operating margins expanded by 70 bps Record adjusted EPS +14% Strong free cash flow +21% Transformation/restructuring initiatives Foundry stabilizing Significant progress in EMEA. Implementing additional restructuring in response to market conditions Transitioning from analysis to implementation phase in Americas/Asia-Pacific Capital deployment Dividend payout increased 16% Share repurchases $39.6M AERCO purchase completed and integration going well 3

4 Market Overview Americas Europe/Middle East/Africa Asia-Pacific Residential Eurozone Economy Commercial 2014 Single family starts + 8.8% 2015 Single family starts + 20% LIRA expecting gradual deceleration of remodeling growth in 2015 US 2015 GDP expected to grow to 3.2% from 2.4% in 2014 Commercial Dodge Momentum Index up in 2014 Commercial lending up in 2014 ABI above 50 for 8 consecutive months through December 2014 Key growth indicators remain positive for the Americas January (2015) PMI at 52.6, up from December 2014 Real GDP at 0.9%, expected growth to 1.1% in expected unemployment 11.3%, marginal decrease Political unrest Key Countries France and Italy expecting minimal GDP growth in 2015 German GDP growth is expected to decelerate in 2015 Russia GDP trending negative Macro trends portend slow and uneven growth in EMEA China 2014 New housing projects declined about 9% 2015 New property development is expected to decline between 10-15% Economy expanded 7.4% in 2014 marking the slowest expansion in 24 years Growth expected to slow to 7% in 2015 Middle class spending on comfort Growth opportunities in key niches and geographies in Asia-Pacific 4

5 FY 2014 Financial Highlights Sales $1.51B +2.7% YOY Organic growth 2.6%, FX minimal YOY Americas 5.5% and Asia Pacific 22.6% organic growth, partially offset by EMEA reduction (3.1%) Adjusted Operating Margins * 10.2% +70 bps expansion Americas 110 bps expansion solid operating leverage EMEA 70 bps expansion despite volume reduction, cost savings realized Corporate costs up $2.2M pension, recruiting, consulting Effects of foundry and product liability net year over year Adjusted Earnings Per Share * $ % YOY GAAP Earnings Include Solid leverage from Americas sales growth and cost controls Efficiencies from EMEA transformation and restructuring programs Share buyback and FX effects offset $47.6M of restructuring/transformation/special items, EPS ($1.09 ) $29.4M restructuring - $12.9M Asia-Pacific goodwill write-off (no tax benefit), $12.9M EMEA restructuring programs, $2.9M Americas/Corporate rightsizing $18.2M transformation/special items: $9.3M deployment costs, $5.8M purchase adjustments * Adjusted excludes special items, see slide 23 for reconciliation, and excludes AERCO acquisition, see slide 24 5

6 4Q14 Financial Highlights Sales $376.5M Flat YOY Organic growth 2.0%, FX headwind ($12.2M) (3.2%), acquisition 1.3% Americas 5.9% and Asia Pacific 32.6% organic growth, partially offset by EMEA reduction (5.9%) AERCO sales in December = $5.3M (seasonal) Adjusted Operating Margins * 9.6% 20 bps reduction Americas bps, excluding 2013 rebates -10 bps lower plant volume due to inventory reductions, and incremental E&O charges EMEA 100 bps decline driven by volume reduction, increased bad debt Corporate costs up $1.6M - personnel costs, legal, consulting Adjusted Earnings Per Share * $ % YOY FX headwind ($0.03) vs. 4Q13 Effect of tax rate reduction +$0.04 4Q13 adjustment - rebates + $0.05 GAAP Earnings Include $34.6M Restructuring /transformation/special items, EPS ($0.80) $22.2M restructuring - $12.9M goodwill write-off (no tax benefit) Asia-Pacific, $7.7M new EMEA restructuring program $12.4M transformation/special items - $5.8M acquisition costs/purchase accounting, $3.5M non recurring deployment costs * Adjusted excludes special items, see slide 23 for reconciliation, and excludes AERCO acquisition, see slide 24 6

7 Primary Working Capital Excluding AERCO Balances for all periods as a % of Trailing Twelve Months Sales ($ millions) Dec 31, 2014 Dec 31, 2013 $ % $ % Receivables % % Days Sales Outstanding Inventory % % Inventory Turns Payables (116.3) (7.7%) (145.6) (9.9%) Days Payables Outstanding Primary Working Capital % % Receivable decrease due to stronger collections Higher prior year inventory levels supported lead free conversion Payables decreased due to inventory reduction/timing FX decreased primary working capital by $19M year over year 7

8 Cash Flows Year Ended ($ millions) Dec 31, 2014 Dec 31, 2013 Net income from continuing operations Depreciation and amortization Change in working capital and other Total Operating Activities Capital expenditures, net of proceeds (23.3) (26.2) Business acquisitions, net of cash acquired (272.2) - Net proceeds from sale of securities,other Total Investing Activities (295.5) (24.1) Proceeds from long-term borrowing Net payments on long-term debt, capital leases and other (5.9) (82.0) Dividends (20.5) (17.7) Payments to repurchase common stock (39.6) (23.0) Debt issue costs (2.0) - Proceeds and tax benefit of stock option activity Total Financing Activities (109.5) Effect of exchange rates (27.3) 4.1 Net cash used by discontinued operations Net increase/(decrease) in cash $ 33.2 $ (3.4) 21% increase in free cash flow Cap Ex down lead-free capital spend completed AERCO acquisition funded by long-term borrowing Stock repurchase program on target Dividend increased 16% year over year Free Cash Flow * $ $ 92.1 * See Slide 26 for calculation of free cash outflow 8

9 EMEA Transformation/Restructuring Update Transformation 2013 Restructuring 2014/15 Restructuring 2014 Net savings + $1.0M, tax savings accelerated Expected incremental net savings in 2015 = $4.4M Down $1.6M due to FX and accelerated tax savings in savings of $4M in line with expectations Costs reduced, no future expenditures Expected incremental savings 2015 = $2.5M Down $0.6M from FX Expected costs: $12.1M Severance $9.0M Asset write-offs of $1.7M $1.4M capital spend Expected annualized savings $4.7M by 2016 Expect savings of $1.2M in 2015 Significant progress made, current market conditions warrant additional actions 9

10 Americas/Asia-Pacific Transformation Completed 4Q 2014 Phase 1: Phase 2: Being finalized Strategic Review Commercial Excellence/ Portfolio Optimization / Supply Chain Further Operational Footprint Optimization Drive organizational focus towards market-valued solutions Exit commoditized/ undifferentiated products Primarily affects retail end-market Accelerate global sourcing savings using One-Watts Goals Focus on core differentiated products/solutions that customer value Drive sourcing and distribution efficiencies Operating margin improvement 10

11 Americas/Asia-Pacific Transformation Phase 1 Impact Sales Elimination $ M 2015 sales reduction $80M to $100M 2016 incremental sales reduction $75M to $120M Implementation Costs $40-50M Cash costs $15M to $20M Includes $1.8M in 4Q14 Non cash costs $25M to $30M Includes $13.4M goodwill/intangible write-off in 4Q14 Expect remaining costs to be incurred in 2015 Savings $10.5M by net sourcing approximately $4.0M 2016 incremental $4.0M Run rate savings of $10.5M beginning 2017 Operating Margin Impact +150 bps by 2017 Consolidated 2015 impact including sourcing slightly negative operating margin savings offset by stranded costs margin loss of 15% to 20% on lost sales Consolidated impact +125 bps by 2016 Consolidated impact +150 bps by

12 2015 Full Year Outlook Sales Expectations Other Items Americas organic sales growth 4% to 6% (excluding Transformation) EMEA organic sales decline 1% to 3% (on constant FX), tough H1 comps Asia-Pacific organic sales growth approximately 20% AERCO sales growth of 10%, seasonally slow Q1 and Q4 Transformation reduces sales by $80-$100M Foreign exchange could negatively impact EPS by 25 to 30 cents Capital spend $30M to $35M Depreciation/amortization $55M to $60M Global tax rate 31% to 33% $13M spend - stock comp, pension, bonus, recruiting, compliance Share buyback approximately $27M remaining on existing program Interest expense on acquisition debt $5.5-$6.0M Potential Pension Settlement Awaiting IRS approval, likely 2H15 Estimated $55-65M P&L charge Estimated $40-45M cash outflow (assuming 4Q15) 2015 forecasting another good year, investing for the future 12

13 Appendix 13

14 FY 2014 Financial Highlights (in millions except Diluted EPS; see reconciliations in Appendix; continuing ops only) Sales Operating Profit (2) Diluted EPS (2) $1,473.5 $1,508.4 (1) $153.6(1) $ % $ % $ % ** $2.52 (1) ** $2.22 FY 13 FY 14 FY 13 FY 14 FY 13 FY 14 Organic +2.6% FX down 0.2% Americas + 5.5% EMEA down 2.8% Asia- Pacific +23.5% Notes(s) (1) Excludes AERCO acquisition, refer to slide 24 (2) Excludes special items. Refer to slide 23 Americas bps EMEA +70 bps: savings offsetting volume decline Lower Asia-Pacific intercompany volume Higher Corporate costs FX and stock buyback offset each other Benefits of cost reductions and Americas growth 14

15 Americas Operations FY 2014 (in millions) FY Revenue growth of 5.5% vs. FY 2013 to $926.8M including AERCO 5.5% organic growth, FX decline and acquisition offset Wholesale and Retail grew organically 6.6% and 1.4%, respectively FY Adjusted operating margin = 12.7% (1) 110 bps increase vs. FY2013 Solid leverage on incremental growth Margins hindered by negative retail pricing Sales Sales Operating Profit* Profit (2) $878.5 $921.5 (1) Industries Served: Commercial, Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality Notes(s) (1) Excludes AERCO acquisition (2) Excludes special items. Refer to slide 25 $ % FY 13 FY 14 $116.6 (1) 12.7% 15

16 EMEA Operations FY 2014 (in millions) FY Revenue decline of 2.8% vs. FY2013 (3.1%) organic, +30 bps FX Germany sales down 6.8%, H2 decline Drains sales +1%, growth in H2 France plumbing sales down 3.3% Emerging markets down Eastern Europe & Middle East down FY Adjusted operating margin = 10.9% (1) 70 bps increase vs. FY2013 cost savings initiatives offset decline in volumes Sales Sales Operating Profit* Profit (1) $562.2 $546.4 Industries Served : Water Protection, Sanitary, HVAC-Radiant Heat, Under floor, Fuel &Gas, Instrumentation and Electronics Note (1) Excludes special items. Refer to slide 25 $ % FY 13 FY 14 $ % 16

17 Asia-Pacific Operations FY 2014 (in millions) FY 2014 Revenue growth of 23.5% vs. FY % organic, growth, +90 bps FX Growth in valves sales, expansion in East and North regions of China FY 2014 Adjusted operating margin= 16.3% (1) (1,140 bps) decline vs. FY 2013 Reduced affiliate sales volume and increased bad debt charge Stock compensation costs now allocated to Asia-Pacific Sales SalesOperating Profit* Profit (1) $32.8 $40.5 Industries Served : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC Note (1) Excludes special items. Refer to slide 25 $ % FY 13 FY 14 $ % 17

18 Q Financial Highlights (in millions except Diluted EPS; see reconciliations in Appendix; continuing ops only) Sales Operating Profit (2) Diluted EPS (2) $376.0 $371.2 (1) $36.7 $35.5 (1) 9.8% 9.6% $0.57 $0.59 (1) Q4 13 Q4 14 Q4 13 Q4 14 Q4 13 Q4 14 Organic +2.0% FX down 3.2% Americas +7.6% EMEA down 13.1% Asia-Pacific +32.6% Notes(s) (1) Excludes AERCO acquisition, refer to slide 24 (2) Excludes special items. Refer to slide 23 4Q13 Adjusted margin excluding rebate = 10.5% Under absorption lower plant volumes and higher SG&A 4Q13 excluding rebate = $0.62 FX headwind ($0.03) Tax rate pick-up $

19 Americas Operations Q (in millions) Q4 Revenue growth of 7.6% vs. 4Q13 to $237.3M including AERCO 5.9% organic growth, 2.4% acquisition, offset by 0.7% FX decline 4Q13 rebate charge of $3M $2M of wholesale lead-free load-in sales in prior year Wholesale grew organically 7.5%, retail declined 3.7% Orders up 3.9% vs. 4Q13 Q4 Adjusted operating margin = 12.6% (1) (2) 100 bps increase vs. 4Q13 (10 bps) decline excluding 4Q13 rebate charge Under absorption inventory reduction effort Incremental E&O Sales Op Profit* Sales Operating Profit (2) $220.6 $232.0 (1) Industries Served: Commercial, Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality Notes(s) (1) Excludes AERCO acquisition (2) Excludes special items. Refer to slide 25 $ % Q4 13 Q4 14 $29.3 (1) 12.6% 19

20 EMEA Operations Q (in millions) Q4 Revenue decline of 13.1% vs. 4Q13 (5.9%) organic, (7.2%) FX Germany sales down 11.5% Drains sales up 4.1% France plumbing sales down 5.3% Emerging markets up 22% Russia up 43% Order book up 2.5% vs. 4Q13 Q4 Adjusted operating margin = 10.1% (1) 100 bps decrease savings could not fully offset volume decline, and incurred incremental bad debts Sales Op Profit* Sales Operating Profit (1) $146.2 $127.0 Industries Served : Water Protection, Sanitary, HVAC-Radiant Heat, Under floor, Fuel &Gas, Instrumentation and Electronics Note (1) Excludes special items. Refer to slide 25 $ % Q4 13 Q4 14 $ % 20

21 Asia-Pacific Operations Q (in millions) Q4 Revenue growth of 32.6% vs. 4Q13 All organic growth Growth in Eastern and Northern regions of China Expanding distributor network in Tier 2 cities Order book +20% v 4Q13 Q4 Adjusted operating margin= 15.6% (1) 400 bps decline Reduced affiliate sales volume Stock compensation costs now allocated to Asia-Pacific, fixed asset writedown Sales Op Profit* Sales Operating Profit (1) $9.2 $12.2 Industries Served : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC Note (1) Excludes special items. Refer to slide 25 $ % Q4 13 Q4 14 $ % 21

22 Consolidated Statements of Operations (in millions except per share amounts) Dec. 31, 2014 Dec. 31, 2013 B/(W) % Net sales $ $ $ % Cost of goods sold GROSS PROFIT % 34.9% 34.8% +0.1p SG&A % 28.9% 29.7% +0.8p Restructuring and other charges, net (20.1) (957.1%) OPERATING INCOME (16.8) -98.2% 0.1% 4.5% (4.5p) Other expense (0.4) (6.9%) INCOME (LOSS) FROM CONTINUING OPERATIONS (5.9) 11.3 (17.2) % Provision for income taxes % NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (7.7) $ 8.2 $ (15.9) % DILUTED EPS - Continuing Operations $ (0.22) $ 0.23 $ (0.45) % 22

23 Reconciliation of GAAP As Reported To The Adjusted Non- GAAP Excluding The Effect Of Adjustments For Special Items (in millions except per share information) December 31, December 31, December 31, December 31, Net sales $ $ $ 1,513.7 $ 1,473.5 Operating income - as reported $ 0.3 $ 17.1 $ $ Operating margin % 0.1% 4.5% 7.0% 7.6% Adjustments for special items: Acquisitions / divesture related costs Restructuring / severance related costs Deployment costs related to tranformation activities Other costs Total adjustments for special items $ 34.6 $ 19.6 $ 47.6 $ 28.7 Operating income - as adjusted $ 34.9 $ 36.7 $ $ Adjusted operating margin % 9.3% 9.8% 10.1% 9.5% Net (loss) income from continuing operations - as reported $ (7.7) $ 8.2 $ 50.3 $ 60.9 Adjustments for special items - tax affected: Fourth Quarter Ended Year Ended Acquisitions / divesture related costs Restructuring / severance Deployment costs related to tranformation activities Other costs Total Adjustments for special items - tax affected: $ 28.2 $ 12.2 $ 38.5 $ 18.3 Net income from continuing operations - as adjusted $ 20.5 $ 20.4 $ 88.8 $ 79.2 Continuing operations earnings per share - diluted Diluted (loss) earnings per share - as reported $ (0.22) $ 0.23 $ 1.42 $ 1.71 Adjustments for special items Diluted earnings per share - as adjusted $ 0.58 $ 0.57 $ 2.51 $

24 Reconciliation of Adjusted Operating Margins and Adjusted Earnings per Share to Adjusted Operating Income, Adjusted Margins and Adjusted Earnings per Share Excluding the AERCO Acquisition (in millions except per share information) Fourth Quarter Ended Year Ended December 31, December 31, Net sales - as reported $ $ 1,513.7 Less acquisition sales (5.3) (5.3) Net sales - excluding acquisition $ $ 1,508.4 Operating income - as adjusted $ 34.9 $ Adjusted operating margin % 9.3% 10.1% Plus acquisition operating loss - as adjusted Operating income - as adjusted excluding acquisition $ 35.5 $ Adjusted operating margin % excluding acquisition 9.6% 10.2% Adjusted Non-GAAP earnings per share $ 0.58 $ 2.51 Acquisition Adjusted Non-GAAP earnings per share excluding acquisition $ 0.59 $

25 Adjusted Operating Income by Segment (in millions) Americas EMEA Q Q Asia- Pacific Corp. Total Americas EMEA Asia- Pacific Corp. Total Reported GAAP Operating Income (11.2) (14.2) (7.8) 17.1 % of sales 11.5% 0.3% -91.8% 0.5% 4.4% 8.8% 26.1% 4.5% Adjustments for special items (0.6) Adjusted Operating Income (8.5) (6.9) 36.7 % of sales 12.6% 10.1% 15.6% 9.6% 11.6% 11.1% 19.6% 9.8% Americas EMEA FY 2014 FY 2013 Asia- Pacific Corp. Total Americas EMEA Asia- Pacific Corp. Total Reported GAAP Operating Income (6.5) (35.9) (29.1) % of sales 12.1% 6.9% -16.0% 7.1% 9.6% 8.3% 29.6% 7.6% Adjustments for special items (0.6) Adjusted Operating Income (29.4) (27.7) % of sales 12.7% 10.9% 16.3% 10.2% 11.6% 10.2% 27.7% 9.5% Q4 and FY 2014 excludes AERCO acquisition 25

26 Reconciliation of Net Cash Provided By Continuing Operations To Free Cash Flow And Long-Term Debt (including current portion) To Net Debt and Net Debt To Capitalization Ratio (in millions) RECONCILIATION OF NET CASH PROVIDED BY CONTINUING OPERATIONS TO FREE CASH FLOW (Amounts in millions) (Unaudited) Year Ended Dec. 31 Dec Net cash provided by continuing operations - as reported $ $ Less: additions to property, plant, and equipment (23.7) (27.7) Plus: proceeds from the sale of property, plant, and equipment Free cash flow $ $ 92.1 Net income from continuing operations - as reported $ 50.3 $ 60.9 Cash conversion rate of free cash flow to net income 222.5% 151.2% RECONCILIATION OF LONG-TERM DEBT (INCLUDING CURRENT PORTION) TO NET DEBT AND NET DEBT TO CAPITALIZATION RATIO (Amounts in millions) (Unaudited) Dec. 31 Dec 31, Current portion of long-term debt $ 1.9 $ 2.2 Plus: Long-term debt, net of current portion Less: Cash and cash equivalents (301.1) (267.9) Net debt $ $ 39.8 Net debt $ $ 39.8 Plus: Total stockholders' equity ,002.1 Capitalization $ 1,191.0 $ 1,041.9 Net debt to capitalization ratio 23.4% 3.8% 26

27 Capital Structure (in millions) December 31, 2014 December 31, 2013 Cash $301.1 $267.9 Total Debt $579.7 $307.7 Equity $912.4 $1,002.1 Net Debt to Capitalization 23.4% 3.8% Solid liquidity profile, $200m available under credit facility as of December 2014 See Slide 26 for reconciliation of net debt to capitalization 27

28 Initiative Update - Detail Europe Transformation updated expectations Annual in $'s millions by 2018 Savings $ Non recurring costs $ Ongoing costs $ Revised expectations 2014 savings increased $1.0M, accelerated tax savings 2015 savings and costs both reduced 11% by FX 2015 less incremental savings due to FX and accelerated tax savings in program savings and costs in line, + tax savings, - FX Non recurring costs decreased in total by $2.2M, lower IT spend Recurring costs in line, lower due to FX 28

29 Initiative Update Detail 2013 Europe Restructuring updated expectations In $'s millions Total Costs $ Savings $ Capital Spending $ Revised expectations 2014 costs reduced by $2.7M and savings in line Savings reduced in 2015 by $600k to $6.5M due to FX 29

30 New Initiative Detail 2015 Europe Market Restructuring In $'s millions Total Costs $ Savings $ Capital Spending $ Expectations Costs $9.0M severance $1.7M asset write-offs/accelerated depreciation Affects various operations throughout Europe Savings smaller in 2015 as programs being implemented 30

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