watts water technologies 3q 2020 earnings conference call...2020/11/04 · certain statements in...

© 2020 Watts Water Technologies, Inc.

Watts Water Technologies

3Q 2020 Earnings Conference Call

November 5, 2020

November 5, 2020 2

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, the impact of the COVID-19

pandemic, 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 our Quarterly Report on Form 10-Q for the

quarter ended June 28, 2020, in our most recent Annual Report on Form 10-K and in

subsequent reports filed with the SEC.

3

3Q Overview

3Q Performance Above Expectations; Markets Mixed Going Forward


• Employee Safety and Engagement

‒ Expanding protocols; promoting engagement

‒ Broad and deep customer focus

• 3Q Performance

‒ Solid results; above expectations

‒ Controlling what we can; driving smart and connected strategy

• Operations

‒ Cost mitigation actions – YTD savings $42M

‒ Reviewing further actions

• Markets

‒ Mixed – residential single family favorable; commercial markets under pressure

‒ Focus on growth opportunities with diversified portfolio, distribution capabilities

• 4Q Outlook

‒ Expect margin expansion vs. 4Q 2019

‒ COVID-19 uncertainty continues

November 5, 2020


Cost Actions Mitigated COVID Sales Impact; Strong Free Cash Flow Generation

4

3Q 2020 Financial Summary

* See Appendix for reconciliation of non-GAAP measures to their corresponding GAAP measures

Sales ($M) Adj. Operating Margin %* Adj. EPS* YTD FCF* ($M)

• -3% reported; -5% organic

‒ COVID-19 impact

• FX +$5M, +1%

• Acquired / divested +$4M, +1%

• Adjusted OP $53M, +1%

‒ Aggressive cost actions

• Margin drivers

▲ Cost actions, productivity

▼ Volume due to COVID-19

▼ Investments

• $2M investments (~55 bps)

• Operations flat

• Below the line/dilution/FX net

+$0.01

• Adjusted ETR 27.3%, -120 bps

• GAAP restructuring charge of

$3.4M; expect $1-2M in 4Q

• AR improvement more than offset

lower net income and increased

capital spending

• Strong balance sheet

‒ Gross leverage 1.1x

‒ Net leverage 0.3x

‒ Net debt to cap ratio 5.5%

Down 5%

Organic*

Down 5%

Organic*Up 50 bpsUp 50 bps Up 1%Up 1%

November 5, 2020

Up 25%Up 25%

$395 $384

2019 2020

13.3% 13.8%

2019 2020

$1.04 $1.05

2019 2020

$76

$95

2019 2020


Cost Actions Drove Regional Margin Improvements

5

3Q 2020 Regional Results

Sales ($M)

$262Down 4% Organic*



Adj. Operating

Margin %*Change (bps)

18.4%Up 30 bps

11.3%Up 10 bps

15.1%Up 640 bps

AM

ER

ICA

SE

UR

OP

EA

PM

EA

Sales / Business

Highlights

• -3% reported

‒ -4% organic

‒ +1% acquisition

• Strength in plumbing / electronics / WQ

• Weakness in heating and hot water

• -1% reported

‒ -6% organic

‒ +5% FX

• Strength in fluid solutions / electronics

• Weakness in drains

• France up; other key regions down

• -4% reported

‒ -22% organic

‒ +1% FX

‒ +17% acquisition / divestiture, net

• China down low single digits

• Outside China down double digits

Adj. Operating Profit /

Margin Commentary

• Adj. operating profit* $48.2M, -1%

‒ 8% adj. operating profit decrement

• Margin drivers

▲ Cost actions

▲ Productivity

▼ Volume, investments

• Adj. operating profit* $12.1M, flat

‒ Flat on lower volume due to cost actions

• Margin drivers

▲ Cost actions

▲ Productivity

▼ Volume, investments

• Adj. operating profit* $2.4M, +71%

• Cost actions and affiliate volume more than

offset 3rd party volume decline

• Margin drivers

▲ Cost actions, productivity

▲ Affiliate volume +7%

▼ Trade volume

* See Appendix for reconciliation of non-GAAP measures to their corresponding GAAP measures

November 5, 2020

6

4Q Assumptions

4Q Margin Expansion Despite Volume Decline

© 2020 Watts Water Technologies, Inc.November 5, 2020

Revenue 4% to 8% organic reduction YoY; COVID uncertainty

Adjusted Operating Margin 12.5% to 13.0%

Corporate Costs

Adjusted Effective Tax Rate

$9M - $10M

~27.5%

FX Impact Positive at current levels

Cash Flow Seasonally strong; capital spend ~$45M FY

7

Summary

Executing in Short-term with Focus on the Future


• Employee safety and customer service remain top priorities

• 3Q results better than anticipated with improved activity

• Continued focus on productivity and cost efficiency

• Flexible balance sheet; strong cash generation

• Investing for the future with a focus on smart and connected solutions

• Expect 4Q margin improvement YoY on reduced volume

• Proactively adjusting to market uncertainly and COVID-19 developments

November 5, 2020

Appendix


Consolidated Statement of Operations

Net sales 383.9 $394.7 ($10.8) (3%)

Cost of goods sold 225.4 226.1 0.7 -%

Gross profit 158.5 168.6 (10.1) (6%)

41.3% 42.7% - 1.4p

Selling, general & administrative expenses 106.6 119.8 13.2 11%

27.8% 30.4% +2.6p

Restructuring / impairment / disposal 4.0 - (4.0) (100%)

Operating income 47.9 48.8 (0.9) (2%)

12.5% 12.4% - 0.1p

Other expense 4.1 2.6 (1.5) (58%)

Income before taxes 43.8 46.2 (2.4) (5%)

Provision for income taxes 10.9 13.9 3.0 22%

Net income $32.9 $32.3 $0.6 2%

Diluted earnings per share $0.97 $0.94 $0.03 3%

Third Quarter

2020 2019 B/(W) %

(M)

(Unaudited)

November 5, 2020 © 2020 Watts Water Technologies, Inc. 9

November 5, 2020 10

Reconciliation of Reported Sales to Organic Sales


(in millions except per share information)Third Quarter

Americas Europe APMEA Total

Reported net sales 3Q‘20 $261.5 $106.7 $15.7 $383.9

Reported net sales 3Q'19 $270.3 $107.9 $16.5 $394.7

Dollar change ($8.8) ($1.2) ($0.8) ($10.8)

Net sales % decrease (3%) (1%) (4%) (3%)

Increase due to acquisitions / divestiture, net (1%) - (17%) (1%)

Increase due to foreign exchange - (5%) (1%) (1%)

Organic sales % decrease (4%) (6%) (22%) (5%)

Nine Months

Americas Europe APMEA Total

Reported net sales 2020 $761.3 $305.0 $38.9 $1,105.2

Reported net sales 2019 $816.2 $337.4 $46.6 $1,200.2

Dollar change ($54.9) ($32.4) ($7.7) ($95)

Net sales % decrease (6%) (10%) (16%) (8%)

Increase due to acquisitions / divestiture, net (1%) - (6%) -

Decrease due to foreign exchange - - 1% -

Organic sales % decrease (7%) (10%) (21%) (9%)

(M)

(Unaudited)

November 5, 2020 11

Reconciliation of GAAP “As Reported” to “Adjusted” Non-GAAP

Excluding Effect of Adjustments for Special Items

Third Quarter Nine Months

2020 2019 2020 2019

Net sales $383.9 $394.7 $1,105.2 $1,200.2

Operating income - as reported $47.9 $48.8 $126.7 $ 149.8

Operating margin % 12.5% 12.4% 11.5% 12.5%

Adjustments for special items:

Restructuring / impairment 3.4 - 9.7 2.7

Professional fees - 2.3 - 2.3

Acquisition / footprint optimization / disposal 1.8 1.3 2.6 1.3

Total adjustments for special items 5.2 3.6 12.3 6.3

Operating income - as adjusted $53.1 $52.4 $139.0 $156.1

Adjusted operating margin % 13.8% 13.3% 12.6% 13.0%

Net income - as reported $32.9 $32.3 $85.1 $99.7

Adjustments for special items - tax affected:

Restructuring / impairment 2.5 - 7.2 1.9

Professional fees - 2.3 - 2.3

Acquisition / footprint optimization / disposal 0.2 1.0 0.8 1.0

Total adjustments for special items, tax affected 2.7 3.3 8.0 5.2

Net income - as adjusted $35.6 $35.6 $93.1 $104.9

Earnings per share:

Diluted earnings per share - as reported $ 0.97 $0.94 $2.50 $2.91

Adjustments for special items 0.08 $0.10 0.24 $0.16

Diluted earnings per share - as adjusted $1.05 $1.04 $2.74 $3.07

(M)

(Unaudited)


November 5, 2020 12

Adjusted Operating Income by Segment

(in millions)

Third Quarter 2020

Americas Europe APMEA Corp. Total

Reported operating income (loss) $47.3 $10.4 $- ($9.8) $47.9

Operating margin % 18.1% 9.7% (0.6%) - 12.5%

Adjustments for special items 0.9 1.7 2.4 0.2 5.2

Adjusted operating income (loss) $48.2 $12.1 $2.4 ($9.6) $53.1

Adjusted operating margin % 18.4% 11.3% 15.1% 13.8%

Nine Months 2020


Reported operating income (loss) $120.2 $33.3 $0.7 ($27.5) $126.7

Operating margin % 15.8% 10.9% 1.6% - 11.5%

Adjustments for special items 7.3 1.4 3.3 0.3 12.3

Adjusted operating income (loss) $127.5 $34.7 $4.0 ($27.2) $139.0

Adjusted operating margin % 16.7% 11.4% 10.3% - 12.6%

Third Quarter 2019


$48.5 $12.1 $1.4 ($13.2) $48.8

18.0% 11.2% 8.7% 12.4%

0.4 - - 3.2 3.6

$48.9 $12.1 $1.4 ($10.0) $52.4

18.1% 11.2% 8.7% 13.3%

Nine Months 2019


$142.3 $38.1 $3.9 ($34.5) $149.8

17.4% 11.3% 8.5% 12.5%

0.4 2.7 - 3.2 6.3

$142.7 $40.8 $3.9 ($31.3) $156.1

17.5% 12.1% 8.5% 13.0%

(M)

(Unaudited)


November 5, 2020 13

Reconciliation of Net Cash Provided By Operations to Free Cash Flow


Nine Months

2020 2019

Net cash provided by operations - as reported $127.4 $94.9

Less: additions to property, plant, and equipment, net (32.3) (19.0)

Free cash flow $95.1 $75.9

Net income - as reported $85.1 $99.7

Cash conversion rate of free cash flow to net income 111.8% 76.1%

(M)

(Unaudited)

November 5, 2020 14

Reconciliation of Long-term Debt (including current portion) to Net Debt to Capitalization Ratio


(M)

(Unaudited)

September 27, 2020 December 31, 2019

Current portion of long-term debt $ - $105.0

Plus: Long-term debt, net of current portion 247.9 204.2

Less: Cash and cash equivalents (188.3) (219.7)

Net debt $59.6 $89.5

Net debt $59.6 $89.5

Plus: Total stockholders' equity 1,024.6 978.0

Capitalization $1,084.2 1,067.5

Net debt to capitalization ratio 5.5% 8.4%

November 5, 2020 15

Calculations of Gross and Net Leverage


(M)

(Unaudited)

Trailing Twelve Months

through September 27, 2020

Net income – as reported $116.6

Plus: Interest expense, net 13.0

Plus: Income taxes 43.4

Plus: Depreciation 31.6

Plus: Amortization 15.3

Earnings before interest, taxes depreciation and amortization (EBITDA) $219.9

Gross debt at September 27, 2020 $247.9

Less: Cash & cash equivalents at September 27, 2020 188.3

Net debt $59.6

Gross debt to EBITDA ratio (Gross leverage) 1.1x

Net debt to EBITDA ratio (Net leverage) 0.3x

watts water technologies 3q 2020 earnings conference call...2020/11/04 · certain statements in...

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