Waterco : 24/8/2016 – Preliminary Final Report

WATERCO LIMITED

A. B . N . 6 2 0 0 2 0 7 0 7 3 3

36 SOUTH ST RYDALMERE NSW 2116 AUSTRALIA

Tel: ( 612) 9898 8630

Fax: (612) 9898 1877

Email: gerard.doumit@waterco.com

www.waterco.com

WATERCO LIMITED

WATERCO LTD

Total dividend payout 5c per share (full year)

REVENUE AND PROFITABILITY

The Group is pleased to report a Net Profit After Tax (NPAT) of $2.85 million, registering an increase of 84% on the previous corresponding period (PCP) and 19% on the profit guidance provided on 23 June 2016. Earnings Before Interest and Tax (EBIT) for the year increased by 10% to $5.01 million from $4.56 million.

Activities in the Australian and New Zealand Division account for a major portion of the Group's profitability and sales. The EBIT of this Division came in lower that of the PCP as expected, as a result of a weaker AUD raising cost of goods sold and lowering trading margins.

The North America and Europe Division has reduced the level of its EBIT losses by 13%. This performance reflects the progress of the rationalization of the Division.

DIVISIONAL EBIT PERFORMANCE

The breakdown of EBIT contributions by division is as follows:

AUSTRALIA AND NEW ZEALAND (ANZ)

The Australia and New Zealand Division derives its revenue predominantly from the domestic swimming pool industry. Apart from selling a wide range of products, including chemicals for swimming pool water treatment, Waterco is also the franchisor of the Swimart chain of pool stores. Through more than three decades of experience, Waterco has acquired an extremely good understanding of the factors that drive consumer demand in the after- market. The franchise programme has been developed and improved on in-house since 1984, with the opening of a company-owned pool shop in Sydney. This shop was subsequently franchised and developed into the Swimart Pool and Spa franchising retail system. This solid foundation has enabled this Division to maintain an acceptable level of profitability through the challenging times in the last few years, during which the industry underwent consolidation and transformation.

Steady market share in the domestic pool sector has underpinned the Division's performance. The Division's introduction of a range of energy and water saving swimming pool products generated sales growth, affirming Waterco's expectation of the market's appetite for environmentally friendly products, such as Waterco's multi award winning Multicyclone centrifugal filters and Glass Pearls filter media for improved filtration performance and reduced pool water usage. This was instrumental in enabling the company to retain market share. Another product,

Hydroxypure, a unique pool sanitising system using hydrogen peroxide and ozone, has been launched in recent years and is expected to gain further traction. The product enables swimming pools to be totally chlorine-free and enriched with oxygen and benefits swimmers who suffer from eczema or allergies. Interest in the market for this product was profound. However, users desired more economy in the consumption of hydrogen peroxide. With the introduction of new chemicals with improved efficiency, we expect the market to react positively and hope to see further increase in sales of this product.

NORTH AMERICA AND EUROPE

Waterco North America and Europe comprises the Group's operations in the USA, Canada, UK and France.

Waterco USA (WUSA) The US market is the largest in the world and Waterco USA had enhanced its presence there through a substantial investment in its acquisition of Baker Hydro in March 2005. Our operations in Augusta, Georgia manufacture larger filters and assemble commercial pumps.

The relocation of the heat-pump manufacturing operations to Malaysia is now complete. There is, therefore, a smaller production team attending to the manufacture of larger filters. This has allowed WUSA to focus on marketing

The sale of surplus property, as part of this restructure, has reduced our overheads structure in the USA to a level, which will minimize our exposure to this large but complex market, while we continue in our efforts to gain more market share.

Sale of commercial and industrial filters underpinned Sales revenue in WUSA, and better results are expected for future years.

Waterco Canada (WCI) This Entity was the Group's original centre for the manufacture of heat pumps. Its expertise, developed over more than two decades, with assistance from our Research and Development division in Sydney, has improved performance of our products in both quality and cost. This continues to benefit the Group and enables other manufacturing entities in the Group to produce heat pumps of quality. WCI is now a trading entity with heat pumps as their key product, having transferred the manufacturing operations to Malaysia.

Waterco Europe (WEL), combining an entity set up in 2003 and the acquisition of Lacron in 2004, enjoys a continuous and successful history of almost 40 years in the manufacture of fibreglass filters. The renowned "Lacron" name is synonymous with quality filters and coupled with progressive manufacturing techniques - which were introduced after the acquisition - it has enabled WEL to bring to the market filters of quality at acceptable prices. As a result, both the Lacron and the Waterco brands are now well-recognised as quality products in Europe. This recognition continues, even after the manufacturing operations were transferred to Malaysia and China, because the same high standards have been maintained.

ASIA

Waterco Far East in Malaysia (WFE) was borne out of Waterco's familiarity with the Southeast Asian market. WFE was initially a sales operation designed to service Waterco Australia's Southeast Asian customer base. In 1991 WFE added manufacturing operations to our undertakings in Kuala Lumpur, Malaysia. As well as bringing the Group closer to our markets in Southeast Asia, this also gave cost-efficiency in our manufacturing operations. Since then, WFE has become the principal manufacturing facility for pumps and filters for the Waterco Group. WFE continues to deliver new products to give the Group an edge in our marketing activities.

WFE has achieved ISO9001:2008 certification, the internationally recognised standard for the quality management of businesses, and demonstrates the existence of an effective and well-designed quality management system, which stands up to the rigours of an independent external audit. A key criterion of this standard is that the management system can provide confidence in creating products that meet expectations and requirements.

Local sales in Malaysia were steady, in spite of weaker economic conditions. Increased production volume with the addition of heat pumps production line has improved overall efficiency, resulting in a higher profit in this entity.

Waterco China This entity commenced operations in 2000, delivering advantages of low operational costs and a foothold into the huge China market. The manufacturing of filters primarily for the European and the Australian markets has been relocated to Malaysia, leaving this entity to focus on development of commercial heat pumps and to improve marketing of pool equipment to the commercial pool market in China.

This Entity performed below expectation during the year, following continuance of a slow-down in the housing market in China.

Waterco International in Singapore (WI) focuses on sales in Asian countries, other than Malaysia and China, where we have our own trading entities. WI also provides technical assistance to our Indonesian entity and has been able to contribute to the growth of the latter. Performance during the year was steady.

PRODUCT DEVELOPMENT AND WATER TREATMENT

The Group continues to invest in Research and Development in order to be at the forefront of the industry. The number of patents that the Group has secured or are in the process of applying for, continues to increase.

Product innovation and research and development in the water-treatment subsector are considered to be critical to Waterco staying at the forefront of the industry. Waterco considers water-treatment products and systems to be a key revenue driver for the Group. As such, ensuring that our products and systems are appropriately protected is of value and importance.

The array of patents will improve Waterco's position in the servicing of swimming pool markets globally and are expected to improve the appeal of the Swimart franchise, as well as that of other pool shops which market the products.

Waterco's key products for the future continue to be the Hydroxypure range of products. The system uses two disinfectants (ozone and hydrogen peroxide) that actively work in harmony to increase active oxygen in the water. Continued research and development on this water-treatment process will improve market acceptance of this product. Improvements to this form of water treatment from on-going research and trials will see further enhancements to come.

DIVIDEND AND OUTLOOK

The results, with improvement of the NPAT figure, is above expectation, with interest expense savings and normalisation of tax as key contributing factors. This is especially pleasing, as losses in entities in the North America and Europe Division had not been tax-effected and have, therefore, accentuated their impact.

The Board will provide a profit guidance at a later stage for the financial year ending 30 June 2017, as more information becomes available during the year.

Waterco declares a final dividend payment of 3 cents per share, payable to shareholders on 15 December 2016. With an interim dividend of 2 cents declared after the announcement of the Half-Year results, this dividend of 3 cents brings the total dividend for the year to 5 cents, a satisfactory outcome in an environment of poor global economic conditions.