Watts Water Technologies Q2 2013 Earnings Conference Call€¦ · These statements are related to forecasts of market trends and dynamics, 2013 segment sales, ... 60 bps FX & 50 bps

Watts Water Technologies

Q2 2013 Earnings Conference Call

July 31, 2013

0

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 market trends and dynamics, 2013 segment sales,

capital expenditures, costs and savings associated with realignment activities, 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 Watts’ most recent Annual Report on Form 10-K and subsequent reports filed with

the SEC.

1

Q2 2013 Results

Financial Highlights

Revenue growth of 1.1% v 2012 - 60 bps FX & 50 bps organic

• Organic growth by region – NA +3.0%, EMEA - 4.5%, Asia +26.2%

Adjusted operating margin* = 10.1%, 70 bps above 2012

• NA adjusted margin up 190 bps to 14.1%; lead free impact $1.4m (60pbs) in quarter

• EMEA adjusted margin declined 60 bps to 8.4%, mainly due to volume decline

Adjusted EPS* = $0.57, PY = $0.52 (10% Increase)

• Net effect of share buybacks = +0.01

Retired $75m of debt in May, net debt to cap = 11.7% **

Repurchased $10m of shares, $182m cash on hand

* “Adjusted” excludes special items, see slides 23 and 25 for reconciliations

** See reconciliation on slide 24

2

Q2 Business Highlights

Key European markets - continued softness in core markets

• France – wholesale market down but some signs of stabilization

• Germany – Early Q2 OEM softness moderated in June

• Drains business solid

US lead free initiative

• Customer transition – pace quickening

• NH plant expansion officially commissioned in June

NA +4.6% unit volume increase, offset by 160bp in lower retail price

• Retail still very competitive

• Wholesale channel up 4.0%

• Residential volumes up, commercial still lags

Emerging markets continue solid growth – Asia, Middle East and Eastern Europe

3

Market Dynamics

EMEA Macro economic headwinds continued

French and German wholesale markets down since year end 2012

OEM declines moderated in late Q2 by Flood recovery

Southern Europe bouncing along the bottom

Drains business continues strong

Stable growth in emerging markets

• Middle East solid

• Pick up in Q2 in Eastern Europe

North America

Strong Residential construction trends continuing

• Projected housing starts +27% for the full year 2013 (July ‘13 - Wells Fargo)

Repair & replace steady

Commercial end market recovery slow

• Some declines in Institutional and Government verticals; growth in Hospitality

Lead free transition accelerating, although caution in taking on inventory

Asia

China GDP grew 7.5% in Q2

• Growth opportunities in Tier 2/3 cities, potential slow down in Tier 1 cities

4

Guidance Update - 2013

• Expect a sales decline in EMEA of 3% to 5% for the full year 2013, at constant exchange

rates

• Continue to expect North America core sales growth of 2% to 5% for the full year, plus

incremental 1% to 2% on top line for lead free sales

• Maintaining full year sales growth expectation in Asia of 20 to 25%

• Anticipate lead free transition to accelerate in Q3, with incremental transition costs of up

to $1m in Q3

• Expect $ 37 m in Capex for the full year

• Expect $13M in 2H on share repurchase total of $23M for the year

• Board approved Realignment Initiative (see next slide)

5

Realignment Summary

Board approved plan to reduce European manufacturing footprint by 10%

• Estimated total costs $16m, includes $2m cap ex.

• Estimate 70% of costs to be incurred through 2014

• Estimated annualized 2016 savings of $7m

• Estimate realize 50% savings in 2014, 90% in 2015

Plans may be subject to review by outside agencies and/or employee representative

bodies

BOD approved sale of Austroflex

• Underperforming asset since purchase

• Additional European footprint reduction of 6%

• Q3 loss on disposal estimate = $ 2m

6

Residential/Commercial

Flow Control

56%

HVAC/Gas 29%

Water Quality

5%

Drains and Re-use

10%

Revenue by Platform & Region

7

Q2 2012 Sales Q2 2013 Sales


Flow Control

56%

HVAC/Gas 29%

Water Quality

5%

Drains and Re-use

10%

U.S.A 53%

EMEA 39%

Asia 2%

Canada 6%

U.S.A 55%

EMEA 37%

Asia 2%

Canada 6%


Flow Control

56%

HVAC/Gas 30%

Water Quality

5%

Drains and Re-use

9%

Revenue by Platform & Region

8

YTD 2012 Sales YTD 2013 Sales


Flow Control

56%

HVAC/Gas 29%

Water Quality

5%

Drains and Re-use

10%

U.S.A 52%

EMEA 40%

Asia 2%

Canada 6%

U.S.A 54%

EMEA 38%

Asia 2%

Canada 6%

Q2 2013 Financial Highlights (in millions except DEPS; see reconciliations in Appendix; continuing ops only)

$367.4

$371.3

Q2 12 Q2 13

Sales

$34.4

$37.6

Q2 12 Q2 13

Op Profit/ Margin*

9.4%

10.1%

$0.52

$0.57

Q2 12 Q2 13

DEPS from

Continuing Operations*

Sales Growth of 1.1%

Organic 0.5%

FX 0.6%

* Excludes Special Items – see Slide 23

Net accretion +$0.01

9

June YTD 2013 Financial Highlights (in millions except DEPS; see reconciliations in Appendix; continuing ops only)

$728.6

$733.4

YTD 12 YTD 13

Sales

$62.8

$68.1

Q1 12 Q1 13

Op Profit/ Margin*

8.6%

9.3%

$0.95

$1.06

YTD 12 YTD 13

DEPS from

Continuing Operations*

Sales Growth of 0.7%

Organic 0.1%, FX 0.5%

& Acquisitions 0.1%

* Excludes Special Items – see Slide 23

Net accretion +$0.03

10

North American Operations (in millions)

Industries Served: Commercial, Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality

$218.1 $224.4

$26.6 $31.6

Q2 12 Q2 13

Sales Op Profit*

12.2% 14.1%

* Excludes Special Items – see Slides 25 and 27

Q2 revenue growth of 2.9% v Q2 2012

• 300 bps organic offset by 10 bps FX decline

• Wholesale up +4.0%, Retail down 0.7% due to pricing

• Overall volume up 4.6%

Q2 adjusted operating margin = 14.1%

• 190 bps improvement v Q2 2012

• Lead free incremental costs of $1.4m in Q2

11

North American Operations (in millions)

Industries Served: Commercial, Residential, Irrigation, Fire Protection, Marine, Waterworks, Water Quality

$425.1 $437.4

$47.4 $55.8

June YTD 12 June YTD 13

Sales Op Profit*

11.2% 12.8%


June YTD revenue growth of 2.9% v H1 2012

• 280 bps organic, 20 bps acquisition, (10 bps) FX

• Wholesale / OEM up +3.6%, DIY flat

June YTD adjusted operating margin = 12.8%

• 160 bps improvement v H1 2012

• Margin expansion hindered by competitive pricing in DIY

• Lead free incremental costs of $2m in 1st half of 2013

12

EMEA Operations (in millions)

Industries Served : Water Protection, Sanitary, HVAC-Radiant Heat, Under floor, Fuel &Gas, Instrumentation and Electronics

$142.8 $138.6

$12.8 $11.7

Q2 12 Q2 13

Sales Op Profit *

9.0% 8.4%


Q2 revenue decline of 2.9% v Q2 2012

• (450 bps) organic, 160 bps FX

• France and Germany sales down 10% v Q2 2012

• Drains, Middle East and Eastern Europe sales strong


• 60 bps reduction v Q2 2012 due to volume reduction

13

EMEA Operations (in millions)

Industries Served : Water Protection, Sanitary, HVAC-Radiant Heat, Under floor, Fuel &Gas, Instrumentation and Electronics

$292.0 $281.0

$26.8 $24.3


Sales Op Profit *

9.2% 8.6%


June YTD revenue decline of 3.8% v H1 2012

• (500 bps) organic, 120 bps FX

• France sales down 10% v H1 2012

• German sales down 8% v H1 2012

• Drains and Middle East sales strong


• 60 bps reduction v H1 2012 due to volume reduction and product mix

14

Asian Operations (in millions)

Industries Served : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC

$6.5

$8.3

$2.1 $2.4

Q2 12 Q2 13

Sales Op Profit*

32.3% 28.9%


Q2 revenue growth of 27.7% v Q2 2012

• 2620 bps organic, 150 bps FX


• (340) bps decrease v Q2 2012

• Driven by unfavorable product mix

Growth from focused strategy on heating and plumbing

15

Asian Operations (in millions)

Industries Served : Institutional, Commercial and Residential Plumbing, Fire Protection and HVAC

$11.5

$15.0

$3.2

$5.3


Sales Op Profit*

27.8%

35.3%


June YTD revenue growth of 30.4% v H1 2012

• 2960 bps organic, 90 bps FX


• 750 bps increase v H1 2012

• Driven by external and intercompany demand providing better plant absorption

16

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

($ millions)

$ % $ %

Receivables 222.5 15.3% 223.4 15.4%

Inventory 306.9 21.2% 286.8 19.7%

Payables (130.7) (9.0%) (125.9) (8.7%)

Primary Working Capital 398.7 27.5% 384.3 26.4%

June 2013 June 2012

Primary Working Capital

Inventory investments to support lead free transition

17

($ millions) June 30, 2013 July 1, 2012

Net Income 35.0$ 34.2$ Income from discontinued operations, net of taxes - 0.5 Net income from continuing operations 35.0 33.7

Depreciation and amortization 24.7 24.8 Change in working capital (40.3) (38.0) Other 1.9 2.4

Total Operating Activities 21.3 22.9

Capital expenditures (18.0) (9.6) Proceeds from the sales of property, plant and equipment 1.4 0.3 Business acquisitions, net of cash acquired (1.2) (17.5) Proceeds from sale of asset held for sale - 0.7 Proceeds from sale of securities 2.1 - Total Investing Activities (15.7) (26.1)

Payments on long-term debt, capital leases and other (78.1) (24.0) Dividends (8.5) (8.2) Proceeds of debt or other - 9.2 Payments to repurchase common stock (10.0) (63.2) Proceeds and tax benefit of stock option activity 4.6 6.4 Total Financing Activities (92.0) (79.8) Effect of exchange rates (3.5) (0.8) Net cash provided by discontinued operations - 1.0 Net Decrease in Cash (89.9)$ (82.8)$

Free Cash Flow* 4.7$ 13.6$

Cash Flows

Six Months Ended

• Net WC increase

from investment in

lead free inventory

• Lead free foundry

Investment of

$8.8m driving

higher capex

spend

• Free cash flow

reduced due to

lead free initiatives

18 * See slide 24 for calculation of free cash flow

Appendix

19

($ millions except per share amounts) Q2 2013 Q2 2012 B/(W) %

Net sales 371.3$ 367.4$ 3.9$ 1.1%

Cost of goods sold 237.6 237.0 (0.6) -

GROSS PROFIT 133.7 130.4 3.3 2.5%36.0% 35.5% +0.5p

Selling, general and administrative expenses 96.1 96.0 (0.1) (0.1%)25.9% 26.1% +0.2p

Restructuring and other charges, net 2.0 1.2 (0.8) (66.7%)

OPERATING INCOME 35.6 33.2 2.4 7.2%9.6% 9.0% +0.6p

Other expense 6.7 5.9 (0.8) (13.6%)

INCOME FROM CONTINUING OPERATIONS 28.9 27.3 1.6 5.9%

Provision for income taxes 10.0 9.1 (0.9) (9.9%)

NET INCOME FROM CONTINUING OPERATIONS 18.9$ 18.2$ 0.7$ 3.8%

DILUTED EPS 0.53$ 0.50$ 0.03$ 6.0%

CONSOLIDATED STATEMENTS OF OPERATIONS

20

($ millions except per share amounts) June 30, 2013 July 1, 2012 B/(W) %

Net sales 733.4$ 728.6$ 4.8$ 0.7%

Cost of goods sold 470.2 469.7 (0.5) -

GROSS PROFIT 263.2 258.9 4.3 1.7%35.9% 35.5% +0.4p

Selling, general and administrative expenses 195.1 196.2 1.1 0.6%26.6% 26.9% +0.3p

Restructuring and other charges, net 4.2 2.9 (1.3) (44.8%)

OPERATING INCOME 63.9 59.8 4.1 6.9%8.7% 8.2% +0.5p

Other expense 12.6 11.0 (1.6) (14.5%)

INCOME FROM CONTINUING OPERATIONS 51.3 48.8 2.5 5.1%

Provision for income taxes 16.3 15.1 (1.2) (7.9%)

NET INCOME FROM CONTINUING OPERATIONS 35.0$ 33.7$ 1.3$ 3.9%

DILUTED EPS 0.98$ 0.92$ 0.06$ 6.5%

CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended

21

Capital Structure ($ millions)

06/30/13 12/31/12

Cash $181.9 $271.8

Long-term Debt, including current

portion

$308.4 $384.6

Equity $953.2 $939.5

Net Debt to Capitalization * 11.7% 10.7%

Strong liquidity profile with $270M of availability under existing credit facility

22

* See slide 24 for a reconciliation of net debt to capitalization

June 30, July 1, June 30, July 1,

2013 2012 2013 2012

Net sales $ 371.3 $ 367.4 $ 733.4 $ 728.6

Operating income - as reported $ 35.6 $ 33.2 $ 63.9 $ 59.8

Operating margin % 9.6% 9.0% 8.7% 8.2%

Adjustments for special items:

Restructuring and other charges, net 2.0 1.2 4.2 2.9

Acquisition accounting in cost of sales - - - 0.4

Customs settlement - - - (0.3)

2.0 1.2 4.2 3.0

Operating income - as adjusted $ 37.6 $ 34.4 $ 68.1 $ 62.8

Adjusted operating margin % 10.1% 9.4% 9.3% 8.6%

Net income from continuing operations - as reported $ 18.9 $ 18.2 $ 35.0 $ 33.7

Adjustments for special items - tax affected:

Restructuring and other charges, net 1.5 0.9 3.0 1.9

Acquisition accounting - - - 0.3

Customs settlement - - - (0.9)

1.5 0.9 3.0 1.3

Net income from continuing operations - as adjusted $ 20.4 $ 19.1 $ 38.0 $ 35.0

Continuing operations earnings per share - diluted

Diluted earnings per share - as reported $ 0.53 $ 0.50 $ 0.98 $ 0.92

Adjustments for special items 0.04 0.02 0.08 0.03

Diluted earnings per share - as adjusted $ 0.57 $ 0.52 $ 1.06 $ 0.95

Second Quarter Ended Six Months Ended

RECONCILIATION OF GAAP "AS REPORTED" TO THE "ADJUSTED" NON-GAAP

EXCLUDING THE EFFECT OF ADJUSTMENTS FOR SPECIAL ITEMS

(Amounts in millions, except per share information)

(Unaudited)

23

June 30, July 1,

2013 2012

Net cash provided by continuing operations - as reported $ 21.3 $ 22.9

Less: additions to property, plant, and equipment (18.0) (9.6)

Plus: proceeds from the sale of property, plant, and equipment 1.4 1.0

Free cash flow $ 4.7 $ 14.3

Net income from continuing operations - as reported $ 35.0 $ 33.7

Cash conversion rate of free cash flow to net income 13.4% 42.4%

June 30, December 31,

2013 2012

Current portion of long-term debt $ 2.1 $ 77.1

Plus: Long-term debt, net of current portion 306.3 307.5

Less: Cash and cash equivalents (181.9) (271.8)

Net debt $ 126.5 $ 112.8

Net debt $ 126.5 $ 112.8

Plus: Total stockholders' equity 953.2 939.5

Capitalization $ 1,079.7 $ 1,052.3

Net debt to capitalization ratio 11.7% 10.7%

(Amounts in millions)

(Unaudited)

RECONCILIATION OF LONG-TERM DEBT (INCLUDING CURRENT PORTION) TO NET DEBT AND NET DEBT TO

CAPITALIZATION RATIO

RECONCILIATION OF NET CASH PROVIDED BY CONTINUING OPERATIONS TO FREE CASH

FLOW

(Amounts in millions)

(Unaudited)

Six Months Ended

24

($ millions)

North

America EMEA Asia Corporate Total

Reported GAAP Operating Income 31.5 9.8 2.4 (8.1) 35.6 % of sales 14.0% 7.1% 28.9% 9.6%

Adjustments for special items:- Restructuring and other charges, net 0.1 1.9 - - 2.0

0.1 1.9 - - 2.0

Adjusted Operating Income 31.6 11.7 2.4 (8.1) 37.6 % of sales 14.1% 8.4% 28.9% 10.1%

Adjusted Operating Income by Segment

Q2 2013

25

($ millions)

North



Adjustments for special items:- Restructuring and other charges, net 0.3 3.9 - - 4.2

0.3 3.9 - - 4.2



Six Months Ended June 30, 2013

26

($ millions)

North



Adjustments for special items:- Long-lived asset impairment charges 0.1 - - - 0.1

- Restructuring and other charges, net 0.3 0.8 - - 1.1

0.4 0.8 - - 1.2



Q2 2012

27

($ millions)

North



Adjustments for special items:- Long-lived impairment charges 0.3 0.3 - - 0.6

- Restructuring and other charges, net 0.6 1.7 - - 2.3

- Customs settlement - - (0.3) - (0.3)

- Acquisition accounting in cost of sales 0.4 - - - 0.4

1.3 2.0 (0.3) - 3.0



Six Months Ended July 1, 2012

28

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Documents

Watts Water Technologies Q2 2013 Earnings Conference Call€¦ · These statements are related to forecasts of market trends and dynamics, 2013 segment sales, ... 60 bps FX & 50 bps