WATERCO LIMITED — Interim / Quarterly Report 2012

Apr 10, 2012

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Half-Year Report for the six months ended 31st December 2011

www.waterco.com

REVIEW OF OPERATIONS

For the six months ended 31 December 2011 (this halfyear) Waterco Limited reported a Net Profit After Tax of $1.63 million. This compares with a reported after tax profit of $2.65 million for the previous corresponding period (PCP), the six months ended 31 December 2010.

Earnings Before Interest & Tax for this half-year were $3.28 million (PCP $4.53 million).

Total revenue was $36.49 million (PCP $37.35 million).

Detailed below is a breakdown of the sales revenue contribution for this half-year compared with the PCP:

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Dec 2011 Dec 2010
% Change
($000) ($000)
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	Dec 2011 ($000)	Dec 2010 ($000)	% Change
Australia and New Zealand	$ 27,599	$ 27,852	- 0.9%
Asia	$ 3,674	$ 3,599	+ 2.1%
North America and Europe	$ 5,002	$ 5,862	- 14.7%
Sales revenue	$ 36,275	$ 37,313	- 2.8%
Other revenue	$ 215	$ 40	NA
Total	$ 36,490	$ 37,353	- 2.3%

In the face of wet weather and uncertainty in the nonmining sector, the team in Australia and New Zealand worked hard to limit the decline in sales in Australia and New Zealand to 0.9%. There was a continuous trend of wet weather, with 2011 reported to be the third wettest year since records began in 1900, a weather pattern which continued into January 2012. Consumer confidence during the period was also low, resulting in successive interest-rate cuts by the Reserve Bank of Australia in November and December. Chemical sales to the Swimart stores accounted for most of the decline.

Sales in Asia registered an improvement of 2.1%. China performed well, with the expansion of Waterco’s product range and new customers taking up Waterco products as a premium line.

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In the United States, sales were encouraging, particularly in the water treatment sector, although they showed a decline compared with the PCP. However, this trend may be reversed in the second half-year, as there has been an increase in the size of the quote register, predominantly for filters, for the commercial pool and water treatment sector. Canada sales have similarly declined, compared with PCP, with a lower level of forward orders. This was as a result of Waterco customers clearing inventory held over from the previous season. However, this trend may also be reversed, as the company has noted an increased level of interest from customers for the coming season. European sales have held up compared with PCP.

DIVISIONAL PERFORMANCE

Detailed below is a breakdown of EBIT contributions (after consolidation adjustments for unrealised forex gains/losses on intercompany loans and intercompany dividends) by division for the half year ended 31 Dec 2011:

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Dec 2011 Dec 2010
% Change
($000) ($000)
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	Dec 2011 ($000)	Dec 2010 ($000)	% Change
Australia and New Zealand	$ 3,158	$ 4,346	- 27.3%
Asia	$ 1,355	$ 770	+ 76.0%
North America and Europe	($ 1,229)	($ 585)	- 110.1%
Consolidated Reported EBIT	$ 3,284	$ 4,531	- 27.5%

AUSTRALIA and NEW ZEALAND

Profitability this year was lower, with weaker consumer confidence, thus creating a competitive business environment. While there were gains in the pool-builder segment of the business, the keener competition restrained profit margins. Expenses were higher, as a result of a major sales campaign conducted early in the financial year.

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ASIA

Waterco Far East (WFE) consolidated its position as the Group’s principal manufacturing facility for pumps and filters for both, the commercial and the residential sectors, supplying all major overseas divisions, including Australia. In addition to being in a more central geographical location, WFE also offers the Group benefits from economies of scale and favourable labour cost. Local sales remained steady compared with PCP.

NORTH AMERICA and EUROPE

Waterco North America and Europe, incorporating the Group’s operations in the United States, Canada and Europe, reported an EBIT loss for the six months of $1.229 million which is an increase on the loss of $0.59 million from the PCP. The main business season for this division is in the second half of the financial year. Trading conditions in the United States were tough. However, the division has been busy increasing its quote register and is, therefore, looking forward to improved sales and EBIT performance.

Waterco’s larger fibreglass filters, with a higher pressure rating, have been accepted by the water treatment industry in the United States. Expenses were higher, compared with PCP, with the appointment of a sales executive specialising in the water-treatment sector. The entity treats this as an investment to spearhead the move into this specialised sector and expects positive results from it in the second half of the financial year.

Commercial filters are currently being made in Augusta, Georgia, with the largest filter made being 88 inches in diameter. The availability of a range of large filters made in Waterco’s factory in the United States has been received positively and should improve Waterco’s position as a supplier to the local market.

Of the three entities in this division, the seasonality of the business in Canada is the most pronounced, with profits skewed markedly into the second half of the financial year. Waterco has made further improvements

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in productivity and sales margins and expects results to be in the black for the full year, consolidating the turnaround achieved in the previous year.

While trading conditions in Europe continued to be tough, a return in confidence in some of the distributors aligned to Waterco products, together with new distributors appointed, improved the outlook for the division in Europe. However, as the business environment in the Euro-Zone was still weak, margins in this division continued to come under pressure. The Group, through this entity, set up a warehousing facility and a sales team in France, sustaining an increase in the operating expenses of this division. The Group expects that this strategic move will result in improved sales for the division later in the year.

PRODUCT DEVELOPMENT AND

WATER TREATMENT

In this half-year, Waterco spent approximately $0.43 million on research and development, which was fully expensed. The Group continues to believe that a strong company culture of delivering to its customers innovative, durable and energy efficient products is an important strategic measure. Several new products introduced in recent times have had satisfactory success.

WORKING CAPITAL

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Dec 2011 ($000) Dec 2010 ($000)
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	Dec 2011 ($000)	Dec 2010 ($000)
Inventory	$ 27,994	$ 28,732
Debtors	$ 12,717	$ 13,791
Creditors	($ 12,309)	($ 11,915)
TOTAL	$ 28,402	$ 30,608

The Group’s working capital position as at December 2011 has decreased by $2.21m, mainly attributable to reduced inventory and other debtors, compared with the PCP. The reduction in inventory in the Australian

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and New Zealand division would have been better, had sales not been dampened by an unusually wet summer and low consumer confidence.

DIVIDEND

Based on the half-year result, Waterco’s directors are pleased to declare a fully-franked interim dividend of 3 cents per share (last year 4 cents), payable on 15 June 2012 to shareholders on our register at 4 May 2012.

OUTLOOK

The Board of Waterco considers this half-year’s results as disappointing but, in the light of poor weather and consumer confidence, are optimistic that the continued, albeit lower, profitability will provide the Group with a firm foundation for growth in the future.

The next half-year will be more dependent on the business of Waterco’s Northern Hemisphere entities, namely North America and Europe. The availability of large filters made in the United States will help to improve Waterco’s position as a supplier there. In Canada, research and development activity has continued to improve the quality and performance of the current range of heat pumps and is expected to contribute towards future earnings. In Europe, successes in marketing activities have enabled us to export pool and water-treatment equipment into new markets like Russia.

Trading conditions in Australia and New Zealand remain difficult. The forecast Net Profit After Tax for the full year is expected to decline to $2.3 Million from the earlier forecast of $3.0 million.

PERFORMANCE SUMMARY

• Net profit after tax (NPAT) of $1.63m, compared with $2.65m in the previous corresponding period

• Earnings before interest and tax (EBIT) was $3.28m compared with the previous corresponding period of $4.53m.

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• EBIT for Asia increased 76% on the previous corresponding period

• An interim dividend of 3 cents per share, compared to 4 cents per share for the previous corresponding period

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(extracted from the Financial Report for the Half Year)

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For the Half-Year ended 31 December 2011 2011 $M 2010 $M
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For the Half-Year ended 31 December 2011	2011 $M	2010 $M
Proft/(loss) before income tax	2.445	3.738
Income tax expense	(0.809)	(1.086)
Net proft/(loss) after income tax	1.636	2.652
Non-controlling interest	(0.042)	(0.018)
Net proft/(loss) attributable to members of theparent entity	1.594	2.634
Basic earnings per share (cents)	4.8	8.4
Diluted earnings per share (cents)	4.8	8.4

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(extracted from the Financial Report for the Half Year)

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At 31 December 2011 2011 $M 2010 $M
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At 31 December 2011	2011 $M	2010 $M
Current assets	43.853	45.359
Non-current assets	36.861	34.615
Total Assets	80.714	79.974
Current liabilities	17.525	16.835
Non-current liabilities	21.562	21.123
Total liabilities	39.087	37.958
Net assets	41.627	42.016
Issued capital	35.197	34.292
Reserves	(4.931)	(4.462)
Retained profts	11.099	11.912
Parent entity interest	41.365	41.742
Non-controlling interest	0.262	0.274
Total equity	41.627	42.016

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REGISTERED OFFICE Waterco Limited A.B.N. 62 002 070 733 36 South Street, Rydalmere, NSW 2116 PO Box 230, Rydalmere BC NSW 1701 Website: www.waterco.com Tel: + 61 2 9898 8600 Fax: + 61 2 9898 1877

SHARE REGISTRY Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney, NSW 2000 Website: www.computershare.com Tel: 1300 85 05 05 (Australia) Tel: + 61 3 9415 5000 (Overseas) Fax: + 61 3 9473 2500

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