Summer 2016 Analyst Presentation

Transcription

1 Summer 2016 Analyst Presentation

2 Forward Looking Statements 2 This presentation contains statements that we believe are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Forward-looking statements generally can be identified by the use of words such as may, will, expect, intend, estimate, anticipate, believe, continue, guidance or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this presentation. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further slowdown in the growth rate of the Chinese economy; potential weakening in the high efficiency boiler market segment in the U. S.; significant volatility in raw material prices; inability to implement or maintain pricing actions; potential weakening in U. S. residential or commercial construction or instability in our replacement markets; uncertain costs, savings and timeframes associated with the implementation of our new enterprise resources planning system; foreign currency fluctuations; ability to execute our acquisition strategy; competitive pressures on our businesses; and adverse general economic conditions and capital market deterioration in the U. S., Canada and China. Forward-looking statements included in this presentation are made only as of the date of this presentation, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements. This presentation contains certain non-gaap financial measures as that term is defined by the SEC. Non-GAAP financial measures are generally identified by Adjusted (Adj.) or Non-GAAP.

3 Investment Case Manufacturer of residential and commercial water heaters, boilers and water treatment products Market share leader in major businesses Stable/growing North American replacement market; operating leverage as new construction recovers Strong balance sheet and cash flow to support future growth & share repurchase Strength of our premium brand, distribution, manufacturing and innovation provide clear market advantage in China 3 Organic growth of 8 percent for next several years

4 Sales & Adjusted Operating Margin* 4 Sales in millions $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Sales * excludes corporate expenses Adj EBIT Margin Note: 2010 through 2014 adjusted for non-operating pension costs and certain non-recurring items 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

5 Adjusted EBITDA Growth $500 Adjusted EBITDA % of Sales 2016* 19.3% of Sales $473 $524 $400 $333 $374 $300 $270 $200 $158 $197 $100 5 $0 As of July 26, Forecast 2016* * Analyst consensus Note: 2010 through 2014 adjusted for non-operating pension costs and certain non-recurring items

6 Adjusted Earnings Per Share $3.75 $3.61 $3.25 $3.16 $2.75 $2.25 $2.06 $2.43 $1.75 $1.56 $1.25 $0.75 $0.25 $0.85 $ $0.25 As of July 26, Note: 2010 through 2014 adjusted for non-operating pension costs and certain non-recurring items Guidance Mid-point

7 Segment Revenue ROW China/India = 93% Europe/Middle East = 7% Rest of World 32% North America 68% NA Water heaters growing Lochinvar 10% expected growth in full year 7

8 U.S. Water Heater Market Segment 50% Residential Market 40% 30% AHRI data + tankless: AOS actual shipments and AOS estimates of competitors shipments 20% 10% 0% 2015 market share data 8 Other

9 U.S. Residential Water Heater Market Segment Wholesale Retail Wholesale channel is ~50% of the market Large Regional Distributors Retail channel is ~50% of the market 9 A. O. Smith s Customers mm Units

10 Water Heaters Strong Replacement Sales North American Residential Water Heaters 10,000 Peak housing starts: 2.1 million thousands of units 8,000 6,000 4,000 2, Replacement Note: Includes tankless New Construction

11 U.S. Water Heater Market Segment 60% 50% 40% Commercial Market* AHRI data: AOS actual shipments and AOS estimates of competitors shipments 30% 20% 10% 0% Other 2015 market share data 11 * Commercial water heater segment as defined by AHRI, total 2015 commercial units as reported by AHRI = 185,500

12 Energy Efficient Cyclone Game changing energy efficient commercial product launched in 1997 and recently upgraded Up to 96% thermal efficiency dramatically lowers operating costs offering short payback Represents 24% of AOS commercial units 12

13 U.S. Commercial Gas Market: Energy Efficient Units Doubled in Five Years 100,000 Commercial Gas Industry Units 80,000 60,000 40,000 20, : 19,000 units 2014: 38,000 units <90% Efficiency >90% Efficiency Source: AHRI Industry Data

14 Lochinvar End Markets Hydronic Space Heating 48% Parts/Other 12% Water Heating 40% 14 2/3 commercial end markets; 1/3 residential end markets

15 Trend to Higher Efficiency, Condensing Boilers 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 North American Commercial Boiler Volume (Units) Actual Forecast 15 Non-Condensing Commercial Boilers Source: BRG Building Solutions Condensing Commercial Boilers

16 Lochinvar Branded Sales Dollars Condensing vs. Non-Condensing* Condensing Non-Condensing 8% 17% 92% Non-Condensing 83% Condensing *Residential Boilers, Commercial Boilers & Commercial Water Heaters

17 China now 31% of Sales & Growing 800 China sales have grown 25% (CAGR) over the last 10 years 700 China US$ millions

18 AOS China Built on: Premium Brand Extensive Distribution and Service Network Nanjing Innovative New Products & World Class Manufacturing Local Management Team and Organizational Development 18

19 Ten-Year + Market Share Trend Market Share 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% A.O.Smith Haier Midea Macro Wanhe Rinnai Noritz Ariston Sakura Siemens Leading residential brands measured in Year currency; Tier One Market: GFK - CMM data sampling several thousand largest retail stores, November

20 Market Share by Price Category Electric Market Share Gas Market Share Value Market Share 50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% Others Siemens Ariston Midea Haier A.O.Smith Value Market Share 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% Others Haier Ariston Wanhe Macro Sakura Noritz Rinnai A.O.Smith 5.00% 10.00% % 0.00% >= <200 >= <200 Retail Price(USD) Retail Price(USD) Data Source :CMM Retail Survey November Best Selling Models

21 Broad Distribution Channel Over 8,000 outlets in China 31% of outlets in Tier 1 cities; 69% in Tier 2/3 cities Percentage of Sales Regional Stores 100% AOS Specialty Stores 80% 36% 33% 35% 35% 36% 23% Suning/Guomei E-Commerce 60% 10% 22% 26% 25% 25% 29% 40% 54% 45% 38% 37% 31% 30% 21 20% 0% 1% 3% 8% 18%

22 Product Line developed in China Residential & Commercial Heat Pump Gas & Electric Commercial Pressurized Solar Air Purifier Water Purifier 22 Combi Boiler Wall-hung Electric Gas Tankless

23 23 Professional Team of Local Management

24 Mega Trends - China Significant growth in AOS target demographic A. O. Smith customer demographic continues to grow rapidly 2010: 18 mm households 2020: 180 mm households Growth of 10 times during this decade 24 Source: McKinsey Insights China April 2012

25 China Consumers Prefer Foreign Brands Lower: Annual income <$20,000 / year Higher: Annual income >= $20,000 / year 25

26 A. O. Smith Branded Water Treatment Systems Leverage the A. O. Smith brand in our existing water heater channels Over 5,500 retail stores Reverse osmosis main focus Product development focused at customer needs and technical improvements Fast growing, highly fragmented market Industry studies we have seen indicate almost 40% CAGR during next five years China Water Treatment Market 26 Data: CMM

27 Different Water Treatment Technologies Rust Removal Pore Size 5000 nm Sediment & Colloids Pore Size 1000 nm Bacterium & Organics Pore Size 50 nm Heavy Metals, Virus & Salts Pore Size 0.2 nm Carbon MF UF RO Active Carbon - improves taste (for good incoming water areas as in the US and Europe) Micro-Filtration - removes sediment and colloids (can correct basic water pollution problem) Ultra-Filtration - removes bacterium, large organics and other pollutants resulting from water transport) Reverse Osmosis - the ultimate filtration technology; removes nearly all substances, particularly most heavy metals prevalent in China and India water supply 27

28 Reverse Osmosis Is Gaining Market Share 100% CMM Water Treatment Market by Technology 8.4% 7.8% 2.7% 5.3% 5.0% 4.0% 7.0% 7.7% 8.0% 5.9% 80% 20.7% 24.9% 31.4% 60% 44.3% 59.0% 72.4% 28 40% 20% 0% 67.6% 64.1% 55.5% 40.2% 27.0% 15.5% Ultra Filtration Reverse Osmomsis Carbon NanoFiltration Others Data: CMM

29 Side Stream Membrane Technology Unique patented design Increases RO membrane life Reduces waste water up to 50 percent Provides market place differentiation 29

30 Tankless water treatment enabled by side-stream membrane technology Provides immediate freshwater Minimizes risk of post RO membrane contamination No storage tank needed 30 Leverages membrane rolling capabilities to produce hi-flow RO products Constant flow rates up to 0.9 gallons per minute $ in Millions A. O. Smith Branded Water Treatment Sales $120 $100 $80 $60 $40 $20 $

31 Major Brands CMM Market Share By Value Water Purifier 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% A.O.Smith Midea Qinyuan Angel Litree 3M Haier Echowater 31 Data Source: CMM-GFK November -2015

32 Air purifiers - the market need is clearly visible PM 2.5 PM Bird s Nest Beijing: a healthy day (left) and a very unhealthy day (right)

33 China Air Purifier Market Growth Opportunity Unit sales per 1000 Urban Households for China and its neighbors Projection by Euromonitor 3.4% household penetration overall; 14% penetration in top 23 ( first tier ) cities Source: Euromonitor, January 2015; Note: For calculating penetration rate for China: assumed no replacement in the period 33 China s air pollution may drive urban penetration closer to Japanese levels

34 China Mega Trends Driving Growth Internet We are positioned to reach consumers using the internet Middle and affluent class trade up and value foreign brands Middle and affluent classes are growing A. O. Smith is a strong foreign brand Our Premium Consumer brand is positioned for the middle and affluent classes Urbanization in China projected to drive 29% of all global growth! the 34 A. O. Smith has manufacturing capacity and channel footprint to capitalize

35 Mega Trends - India Significant growth in AOS target demographic Millions of households, percent, 2000 prices A. O. Smith target demographic: upper middle class 35 SOURCE: India Urbanization Econometric Model Updated 2010

36 Building Distribution Headquarters and Manufacturing (Bengaluru) Major Distribution Locations A cities (pop >1.5 mm) Distribution in all 23 Class Class B cities (pop.5 to 1.5 mm) Distribution in 61 of 67 Class C cities (pop.1 to.5 mm) Distribution 314 of 400 National Retailers Regional Retailers 36

37 Business Model In India Similar to China Attractive Growth Demographics Leveraging Global Capabilities with Products Designed for the Indian Market Building Brand & Expanding our Distribution Introducing New Product Categories with Water Treatment Local Management 37

38 Acquisition Strategy

39 Growth Strategy: Acquisitions Geography Geographic Growth China India High Growth GDP markets Expand/ Grow the Core Core New Products & New Technologies Water Heating Water Treatment Adjacencies 39 Adjacencies Water-themed platforms for growth New technologies beyond water for China

40 Investment Criteria Value creation opportunities ROIC in excess of cost of capital by second or third year Meet risk adjusted IRR hurdle rates Margin accretion with growth rates higher than U.S. GDP Accretive to earnings in the first year 40

41 A. O. Smith s Capital Allocation Options Organic growth (capital expenditures) Acquisitions $385 million net cash 16 percent leverage ratio (debt/total capital) Return cash to shareholders: approximately $260 million projected in 2016 Dividends Increased 26 percent in first quarter 2016 Share repurchase Expect to repurchase approximately $135 million* in 2016 to result in net cash position of approximately $300 million 41 *subject to price, alternative investments and working capital requirements

42 Aquasana Acquisition Highlights 42 $87 million purchase price Two times sales Expect to return our cost of capital by 2019 Access to ~$2 billion U.S. residential water treatment market Fragmented No clear leader Acquasana revenue CAGR ~19 percent last three years Leader in direct-to-consumer Premium brand $25 to $30 million in revenue synergies in three years Product cross selling: China to U.S. and U.S. to China Clearly fits our strategy

43 Growth Strategy: Organic Growth China: 30% of sales growing 15% (local currency) 4.5% Lochinvar brands: 12% of sales growing 10% 1.2% NA water heaters: 58% of sales growing 4% 2.3% Total annual sales growth 8.0% 43

44 China Growth Model Water Heater Market Growth Fast Growing Ancillary Products Approx 15% growth in local currency Market Share Gains & Average Selling Price Increases 44

45 Growth and Stability Offense Organic growth of 8% China growing approximately 15 percent in local currency Lochinvar branded products growing approximately 10% Call option on NA new construction Significant cash and borrowing capacity for value creating acquisitions and share buyback Defense NA water heaters 85 to 90% replacement Market share leader in NA, China and path to become leader in India Strong balance sheet; net cash position approximately $350 million Small exposure to Europe ($50 million in revenues) 45

46 Investor Contact Vice President, Investor Relations and Treasurer Direct:

47 Appendix

48 Second Quarter Results ($ in millions) change % chg. Sales $ $ $ % Net Earnings $ 87.1 $ 71.1 $ % Earnings per Share $ 0.98 $ 0.79 $ % 48

49 Second Quarter Sales ($ in millions) change % chg. North America $ $ $ (9.9) -2% Rest of World $ % Intersegment (5.6) (10.5) $ 4.9 Total $ $ $ % 49

50 Second Quarter Earnings ($ in millions, except percentages) change % chg. North America $ $ 86.0 $ % Rest of World % Total Operating % Corporate (11.2) (11.2) - 0% Interest Expense (1.9) (2.5) % Pre-tax Earnings % Income Tax Expense (37.0) (32.1) (4.9) -15% Earnings $ 87.1 $ 71.1 $ % Operating Margin North America 24.1% 19.4% Rest of World 13.8% 14.0% 50

51 Cash Flow from Operations ($ in millions) First Half Highlights Operating cash flow of $155 million Debt to capital ratio of 16% Cash balance: $667 million Net cash position: $385 million Stock repurchase: 1.1 million shares totaling $82 million 51

52 2016 EPS Guidance and 2015 EPS 2016 Guidance 2015 Diluted EPS $ $3.64 $ $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $ % seven year EPS CAGR $0.68 $0.85 $1.07 $1.56 $2.06 $2.43 $3.16 $3.61 $ Mdpt Note: 2009 through 2014 are adjusted EPS As of July 26, 2016

53 2016 Assumptions ($ in millions) 2016 Projections Operating Cash Flow approx $340 Capital Expenditures $105 to $115 Stock Repurchase approx $175 * Depreciation and Amortization approx $70 Costs related to ERP Implementation approx $25 Corporate/Other Expense $47 Effective Tax Rate approx 30% Share Count - Diluted slightly over 88 million Voluntary Pension Contribution $30 *subject to acquisitions, cash flow and working capital needs 53 As of July 26, 2016

54 2016 Outlook 54 Organic growth of approximately 8 to 8.5 percent in local currency; 6 to 6.5 percent in USD Currency assumptions at current rates, with continued depreciation assumed for CNY against the USD North America U.S. wholesale pricing actions 5-8 percent, effective August 1 Steel prices remain firm U.S. residential water heater volume 8.9 million units similar to 2015; U.S. commercial volumes increase over 20 percent driven by increase in 55 to 90 gallon electric commercial water heaters Lochinvar branded product sales growth of six percent Incremental ERP costs of $9 million compared with 2015 Operating margin expected to be between 21.5 and 22 percent Rest of World China sales growth model of 15 percent in local currency in tact Operating margin expected to be 13 percent; similar to 2015

55 Corporate Responsibility and Sustainability Aligns with our Values A. O. Smith will preserve its good name Ethics and Compliance Social Contribution Diverse & Safe Workforce A. O. Smith will be a good place to work A. O. Smith will be a good citizen Environmental Impacts A. O. Smith will emphasize innovation Product Responsibility 55

56 Products Efficiency, Conservation and Innovation Energy Efficiency Conservation 56 We believe our global product portfolio is the most efficient in the industry Our electric residential water heaters achieve efficiency factors of.95 or above Our highly efficient Cyclone condensing commercial water heaters represent 24% of commercial units sold 83 percent of Lochinvar branded boilers achieve over 90 percent thermal efficiency 55 percent of our China products exceed government efficiency standards Our patented Reverse Osmosis (RO) membrane wastes 50 percent less water than traditional RO and represents over 90 percent of A. O. Smith branded water treatment sales

57 Manufacturing Plants Reducing Energy Usage, Water Consumption and Environmental Impacts Chairman s Green Star award established in 2009 annual competition given to the plant which demonstrates the largest social, economic and environmental benefit over a three year period Johnson City, TN - plant certified Leadership in Energy and Environmental Design (LEED) Silver since 2011 and certified Energy Star Ashland City, TN - largest water heater plant in the world reduced electricity usage by 9 percent as a result of a plant-wide lighting project in 2011 and reduced water usage by 36 percent as a result of an enhanced parts washing process implemented in Nanjing, China implemented an innovative pretreatment process as an alternative to phosphorus pretreating, reducing chemical discharges and improving corrosion resistance of our water heater tanks

58 People Doing Business Safely, with Integrity and Supporting Communities Established in 1954, the President s Safety Award annually recognizes the plant with best record for workplace safety Established in 1955, the A. O. Smith Foundation supports our communities Guiding Principles established in 1999 describes our code of conduct and values Values Recognition Program established in 1995 recognizes employee contributions to community involvement 58