watts water technologies 4q and fy 2016 earnings ... · up high single digits asia pacific emea wts...

Watts Water Technologies

4Q and FY 2016 Earnings Conference Call

February 10, 2017

© 2017 Watts Water Technologies, Inc.

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 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.

© 2017 Watts Water Technologies, Inc. 2/9/2017 2

Overview

Continued Improvement; Shaping the Future © 2017 Watts Water Technologies, Inc. 2/9/2017 3

2016 – Substantial progress in multi-year transformation

2017 – Pivoting toward growth

• Realigned leadership / platforms; drove One Watts culture

• Focused on customer / commercial excellence

• Executed transformation initiatives; remain on track

• Pursued balanced capital deployment; enhanced portfolio with PVI acquisition

• Record operational & EPS performance; margin +130 bps, 120%+ FCF conversion

• Drive long-term top line growth initiatives and continued margin expansion

• Execute on commercial and operational programs

• Continue reinvestment initiatives to fund future growth

• Complete Transformation – Phase 2

• Deploy capital in disciplined and balanced manner

Regional Update

2/9/2017 © 2017 Watts Water Technologies, Inc. 4

Markets Remain Mixed

Region % of Revenue Commentary

AMERICAS

EMEA

ASIA-PACIFIC

• US GDP strengthening; Canada slowing

• Institutional, office up; commercial down

• Residential moderating

• New administration – policy uncertainty

• Eurozone GDP nominal reduction

• Emerging markets slight improvement

• Euro FX under pressure

• Geopolitical concerns continue

• Asia-Pacific GDP moderate growth in 2017

• China GDP still robust at 6.5%

• China residential, commercial growth

• China yuan devaluation

4Q 2016 Financial Overview


Continued Strong Margin & EPS Expansion

• 5% sales decrease

‒ Organic (5%), flat excluding shipping days

‒ Undifferentiated products exit (3%)

‒ FX (1%)

+ Acquired +4%

• 5% operating profit increase

− Favorable product mix, productivity &

restructuring savings offset by incremental

investments

• 100 bps operating margin expansion

• 8% EPS increase; record performance

+ Operational / acquisitions +$0.05

+ Interest +$0.01

‒ Exit of undifferentiated products ($0.01)

4Q16 4Q15

Sales $342.0 $358.3

Operating Profit (1)

$37.2 $35.4

Margin % 10.9% 9.9%

Net Income(1)

$22.2 $20.6

EPS(1)

$0.64 $0.59

Tax Rate 32.9% 33.2%

Comments

(1) Organic sales growth, Operating Profit, Operating Margin, Net Income and EPS are non-GAAP financial measures, see slides 16 and 17 for reconciliation

(M)

Americas


Mix, Productivity Drives Margin Improvement

(M)

Operating Margin(1)

Sales

15.3%

14.3%

4Q16 4Q15

$223.3

$233.3

4Q16 4Q15

• Operating profit(1) $34.2M

− Up $1M or 3%

• Operating margin up 100 bps

+ Sales mix

+ Productivity

‒ Investments

‒ PVI dilutive, as expected

• Organic growth flat (excluding shipping days)

• Backflow / valves & drains offsetting softness in

Canada / specialty products

• Undifferentiated products / retail erosion ($11M)

• Heating & Hot Water Solutions flat; sequential

improvement

• PVI contributed $9M of sales

Up 100 bps Down (4%)

Organic(1) flat

(1) Organic sales growth, Operating Profit and Operating Margin are non-GAAP financial measures, see slides 16 and 18 for reconciliation

EMEA


Margin Compression Primarily Driven by Lower Volume

Operating Margin(1)

Sales


− Down ($1.4M)

• Operating margin down (50 bps)

‒ Volume

‒ Sales mix

+ Productivity (transformation, restructuring)

• Fluid Solutions flat; Drains down 3%

• Electronics continued solid growth

• Growth in Italy

• France, Germany & Eastern Europe down

• FX impact ($3M) or (2%)

Down (50 bps) Down (8%)

Organic(1) (1%)

8.5% 9.0%

4Q16 4Q15

$104.1

$113.4

4Q16 4Q15


(M)

Asia-Pacific


Another Good Quarter For Asia-Pacific

Operating Margin(1)

Sales


− Up $1.4M

• Operating margin + 840 bps

+ Volume

+ Productivity

‒ ~6% lower affiliate sales

• 18% organic growth

- China +12%

- Outside China +34%

• Residential heating sales up; commercial valve

sales down

• Acquired sales +$3.7M; undifferentiated

products ($1M)

Up 840 bps Up 26%

Organic(1) +18%

14.4%

6.0%

4Q16 4Q15

$14.6 $11.6

4Q16 4Q15


(M)

Todd Trapp |

Full Year 2016 Financial Summary


Record Margin & EPS Performance

$1.40 $1.47

2016 2015

11.4%

10.1%

2016 2015

$2.67

$2.41

2016 2015

(1) Organic sales growth, Operating Margin and EPS are non-GAAP financial measures, see slides 16 and 17 for reconciliation

Sales ($B)

~ (5%)

Organic(1)+1%

Operating Margin(1)

+130 bps

EPS(1)

~11% Growth

Cash Flow


Delivered 121% FCF Conversion

FCF = Cash Flow from Operations less Capital Expenditures. Adjusted Free Cash Flow excludes impact of long-term obligation settlements. Both are non – GAAP measures. See slide 19 for calculations.

• Working capital performance neutral

• Cap-ex up ~30%; productivity & growth

investments

• Expanded credit capacity to $800M

• Returned ~$51M to shareholders

• One-time liability settlements ($49M) impacting

2015 reported cash flow

Comments FY 2016 FY 2015

Net income (loss) 84.2$ (112.9)$

Depreciation and amortization 51.2 52.5

Change in working capital and other 2.7 169.8

Total operating activities 138.1 109.4

Capital expenditures, net of proceeds (35.9) (27.6)

Acquisitions, asset sale & other (78.1) 10.3

Total investing activities (114.0) (17.3)

Net proceeds (payments) on long-term debt 72.5 (6.0)

Dividends (24.5) (23.1)

Payments to repurchase common stock (26.8) (44.6)

Debt issue costs (2.1) -

Proceeds and tax benefit of stock option activity 8.6 2.8

Total financing activities 27.7 (70.9)

Effect of exchange rates (9.6) (26.1)

Net increase (decrease) in cash 42.2 (4.9)

Free cash flow - reported 102.2$ 81.8$

DSO 53.7 53.7 DPO 46.2 46.2

Adjusted free cash flow 102.2$ 131.0$

(M)

2017 Framework


Challenging Macro Background

HEADWINDS TAILWINDS UNCERTAIN

• Transformation benefits

• PVI acquisition

• Asia-Pacific growth

• Pricing

• Investments

• Commodities

• FX – EUR/$

• 1H17 DIY sales erosion

• Continued portfolio

rationalization

• Europe stabilization and

elections

• US policy / legislative impact

on trade, taxes, spending

2017 Outlook


Continued Margin Expansion in Slow Growth Environment

Highlights / Assumptions Organic Sales Growth

AMERICAS Up Low Single Digits

Flat

Up Low Single Digits

Up High Single Digits

EMEA

Asia Pacific

WTS

• Incremental sales increase ~$25M

- PVI acquisition ~+$45M

- DIY erosion 1H17 ~ ($6M)

- Portfolio rationalization EMEA ($5M) / A-P ($9M)

• Targeting ~12% operating margin, +60 bps

- Incremental savings/investments consistent w/ 2016

- PVI operating margin high single digits during

integration

• Cap-ex. $36M - $40M

• Depreciation & amortization $50M-$52M

• Tax rate ~ 34%; Pegging € @ 1.05

• Buyback to offset dilution at a minimum; pay

competitive dividend

Summary


Continued Productivity Offsetting Macro Challenges

• 2016 - Building on Foundation…Delivered on

Commitments

• 2017 - Macro Uncertainty; Expect Growth to Rebound 2H

• Forecasting Solid Margin Expansion while Reinvesting

• Deploying Capital in a Disciplined, Balanced Manner

Consolidated Statements of Operations


Dec. 31,

2016

Dec. 31,

2015B/(W) %

Net sales 342.0$ 358.3$ (16.3)$ -5%

Cost of goods sold 204.3 223.7 19.4 -

Gross profit 137.7 134.6 3.1 2%

40.3% 37.6% +2.7p

Selling, general & administrative expenses 106.5 112.7 6.2 6%

31.1% 31.5% +0.3p

Restructuring and other charges, net (0.4) 139.4 139.8 NM

Operating income (loss) 31.6 (117.5) 149.1 NM

9.2% -32.8% +42.0%

Other expense 4.5 4.5 - 0%

Income (loss) before income taxes 27.1 (122.0) 149.1 NM

Provision (benefit) for income taxes 9.6 (3.8) (13.4)

Net income (loss) 17.5$ (118.2)$ 135.7$ NM

Diluted income (loss) per share 0.51$ (3.41)$ 3.92$ NM

Fourth Quarter Ended

(M)

Reconciliation of Reported Sales to Organic Sales


Unaudited

Americas EMEA

Asia-

Pacific Total

Reported net sales 4Q'16 $ 223.3 $ 104.1 $ 14.6 $ 342.0

Reported net sales 4Q'15 233.3 113.4 11.6 358.3

Reported change $ (10.0) $ (9.3) $ 3.0 $ (16.3)

Net sales % increase (decrease) -4% -8% 26% -5%

Decrease due to foreign exchange - 2% 4% 1%

Decrease due to divestitures 4% - 13% 3%

(Increase) due to acquisition -4% - -32% -4%

Subtotal 0% 2% -15% 0%

Organic sales increase (decrease) -4% -6% 11% -5%

% decrease due to shipping days 4% 5% 7% 5%

Organic Sales % increase (decrease) adjusted for shipping days* 0% -1% 18% 0%

* F o urth quarter 2016 o rganic sales were adjusted to include appro ximately 3 addit io nal shipping days, as co mparable to the fo urth quarter o f 2015.

Americas EMEA

Asia-

Pacific Total

Reported net sales December 31, 2016 $ 900.9 $ 442.3 $ 55.2 $ 1,398.4

Reported net sales December 31, 2015 978.5 445.5 43.7 1,467.7

Reported change $ (77.6) $ (3.2) $ 11.5 $ (69.3)

Net sales % increase (decrease) -8% -1% 26% -5%

Decrease due to foreign exchange 0% 1% 4% 1%

Decrease due to divestitures 10% - 16% 7%

(Increase) due to acquisition -1% - -34% -2%

Subtotal 9% 1% -14% 6%

Organic sales increase (decrease) 1% 0% 12% 1%

Year

Fourth Quarter

(M)

Reconciliation of GAAP “As Reported” to the “Adjusted”

Non- GAAP Excluding the Effect of Adjustments for Special Items


Dec 31, Dec 31, Dec 31, Dec 31,2016 2015 2016 2015

Net sales $ 342.0 $ 358.3 $ 1,398.4 $ 1,467.7

Operating income (loss) - as reported $ 31.6 $ (117.5) $ 145.0 $ (90.1)

Operating margin % 9.2% -32.8% 10.4% -6.1%

Adjustments for special items:

Goodwill impairments 0.5 130.5 0.5 130.5

Acquisitions / divesture related costs 3.4 0.5 (4.7) 1.6

Restructuring / severance related costs (0.9) 8.9 4.7 21.4

Deployment costs related to tranformation activities 2.3 7.0 14.2 14.3

Pension other costs 0.3 6.0 0.3 70.7

Total adjustments for special items $ 5.6 $ 152.9 $ 15.0 $ 238.5

Operating income - as adjusted $ 37.2 $ 35.4 $ 160.0 $ 148.4

Adjusted operating margin % 10.9% 9.9% 11.4% 10.1%

Net income (loss) - as reported $ 17.5 $ (118.2) $ 84.2 $ (112.9)

Adjustments for special items - tax affected:

Goodwill impairments 0.4 126.8 0.4 126.8

Acquisitions / divesture related costs 2.0 0.3 (6.8) 0.9

Restructuring / severance (0.4) 5.6 3.2 13.9

Deployment costs related to tranformation activities 1.5 4.0 8.8 9.0

Pension / tax rate adjustments/other costs 1.2 2.1 2.6 46.7

Total adjustments for special items - tax affected: $ 4.7 $ 138.8 $ 8.2 $ 197.3

Net income - as adjusted $ 22.2 $ 20.6 $ 92.4 $ 84.4

Earnings (loss) per share - diluted

Diluted earnings (loss) per share - as reported $ 0.51 $ (3.41) $ 2.44 $ (3.24)

Adjustments for special items 0.13 4.00 0.23 5.65

Diluted earnings per share - as adjusted $ 0.64 $ 0.59 $ 2.67 $ 2.41

Year EndedFourth Quarter EndedUnaudited

(M)

Adjusted Operating Income by Segment


Americas EMEAAsia-

PacificCorp. Total Americas EMEA

Asia-

PacificCorp. Total

Reported GAAP operating income (loss) 31.4 7.6 2.1 (9.5) 31.6 19.3 (124.3) (1.4) (11.1) (117.5)

% of sales 14.1% 7.3% 14.4% 9.2% 8.3% -109.6% -12.1% -32.8%

Adjustments for special items 2.8 1.2 - 1.6 5.6 14.0 134.5 2.1 2.3 152.9

Adjusted operating income (loss) 34.2 8.8 2.1 (7.9) 37.2 33.3 10.2 0.7 (8.8) 35.4

% of sales 15.3% 8.5% 14.4% 10.9% 14.3% 9.0% 6.0% 9.9%

Americas EMEAAsia-

PacificCorp. Total Americas EMEA

Asia-

PacificCorp. Total

Reported GAAP operating income (loss) 127.1 40.8 14.3 (37.2) 145.0 109.9 (98.6) (0.5) (100.9) (90.1)

% of sales 14.1% 9.2% 25.9% 10.4% 11.2% -22.1% -1.1% -6.1%

Adjustments for special items 15.9 4.6 (7.0) 1.5 15.0 25.8 139.6 6.0 67.1 238.5

Adjusted operating income (loss) 143.0 45.4 7.3 (35.7) 160.0 135.7 41.0 5.5 (33.8) 148.4

% of sales 15.9% 10.3% 13.2% 11.4% 13.9% 9.2% 12.6% 10.1%

Q4 2016 Q4 2015

FY 2016 FY 2015

(M)

Reconciliation of Net Cash Provided by Operating

Activities to Free Cash Flow and Adjusted Free Cash Flow


Dec 31, Dec 31,

2016 2015

Net cash provided by operating activities - as reported 138.1$ 109.4$

Less: additions to property, plant, and equipment (36.0) (27.7)

Plus: proceeds from the sale of property, plant, and equipment 0.1 0.1

Free cash flow 102.2$ 81.8$

Net income (loss) - as reported 84.2$ (112.9)$

Cash conversion rate of free cash flow to net income 121.4% NM

Reported free cash flow 102.2$ 81.8$

Add back: payments made on long-term obligations - 49.2

Adjusted free cash flow 102.2$ 131.0$

ADJUSTED FREE CASH FLOW

Year Ended

(M)

watts water technologies 4q and fy 2016 earnings ... · up high single digits asia pacific emea wts...

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