Zep Inc. Investor Presentation -...

Zep Inc. Investor Presentation

February, 2015

Safe Harbor

This presentation and our commentary contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Specifically, forward-looking statements include, but are not limited to, statements relating to our future economic performance, business prospects, revenue, income, and financial condition; and statements preceded by, followed by, or that include the words “plans,“ expects," "believes," "intends," "will," "anticipates," “confident,” “strategy,” “continuing,” “to be,” “opportunity,” “well-positioned,” “excited about” and similar terms that relate to future events, performance, or our results. Examples of forward-looking statements in this presentation include, but are not limited to, statements about our sales pipeline gaining momentum, statements about favorable demographic trends continuing, statements about having mitigated risks present previously, statements regarding our expectation to experience quarter-to-quarter gross profit margin inconsistencies from mix and promotions, statements regarding the next phase of investments in training, sales management & additional sales reps, statements about achieving full manufacturing capability by the end of the fiscal second quarter, statements regarding the continued residual effects of lost customers due to the fire on sales, statements about our increasing optimism with respect to our fiscal 2015 net sales expectation, statements regarding John K. Morgan’s 10b5-1 plan, the timing of its execution and the resulting beneficial ownership, statements regarding possible benefits on raw materials purchases as a result of changing oil prices, and the timing of those benefits, statements about our intent to reduce overall inventories levels and utilize proceeds to further reduce net debt, and statements regarding low single digit revenue growth, gross profit margin of 46-48%, higher selling, distribution and administrative expenses, $6-7 million of interest expense, total capital expenditures of $25-$30 million and a tax rate of 36-38% for fiscal 2015. Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results, expectations, or outcomes to differ materially from our historical experience as well as management's present expectations or projections. These risks and uncertainties include, but are not limited to:

§  the ongoing impact of the fire that occurred at our aerosol manufacturing facility on May 23, 2014 on our financial results, operations and prospects; §  general economic conditions; §  the cost or availability of raw materials; §  competition in the markets we serve; §  our ability to realize anticipated benefits from strategic planning initiatives and the timing of the benefits of such actions; §  market demand and pricing for our products and/or services; §  our ability to maintain our customer relationships; and §  litigation and other contingent liabilities, such as environmental matters.

A variety of other risks and uncertainties could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. A number of those risks are discussed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended August 31, 2014. Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events. Reconciliations of non-GAAP measures referenced in this presentation to their nearest GAAP measure are included in the earnings press release available on the Zep Inc. website and at the end of this presentation.

2 © 2015 Zep Inc. - All rights reserved.

•  Zep Inc. sells a wide-‐variety of highly-‐effec9ve, consumable packaged chemicals that help professionals maintain, clean & protect their assets, facili9es and environment.

•  We market our products primarily to customers in the Transporta9on, Industrial/MRO and Jan/San & Ins9tu9onal markets.

•  Our mul9-‐channel sales capability is valued by our customers and enhanced by an integrated supply chain and shared services structure, providing an addi9onal compe99ve advantage.

Zep Inc. Value Proposition


4

•  Largest selec9on of high-‐efficacy formulas bundled with applica9on exper9se

• Pro-‐focused line of jan/san & plumbing products for retail

• Broad product line of specific use chemicals for distribu9on

Pro-‐Focused High Efficacy Formulas for Any Applica9on

• Pro and DIY auto care products for retail

• Finest house of brands in Do-‐it-‐for-‐me auto care

© 2015 Zep Inc. - All rights reserved.

Transporta)on $4.8B 40%

Industrial / MRO $2.7B 23% & Other

Jan / San $11.6B 37% & Ins)tu)onal

$19B North American Market Opportunity

5

Target Strategic Markets Drivers

•  GDP •  Employment •  Trends in Acceptable

Prac9ces

•  GDP •  New Vehicle Sales •  Miles Driven •  Average Vehicle Age •  Weather

•  GDP •  Industrial Produc9on •  Manufacturing

Employment

Examples % Zep Sales

Vehicle Maint. Wash & Polish, Parts Cleaners, Degreasers, Lubricants, Fleet Wash…

Lubricants, Penetrants, Greases, Parts Washers, Food Processing Cleaners/Sani9zers, Metal Working…

Air, hand & floor care, Cleaners, Degreasers, Carpet Care, Sani9zers Disinfectants, Laundry Dispensing Systems…

60%+ of Revenues from Transporta9on & Industrial/MRO © 2015 Zep Inc. - All rights reserved.

85.0

90.0

95.0

100.0

105.0

110.0

14.0

14.5

15.0

15.5

16.0

16.5

17.0

Season

ally Adj. U

.S.

Indu

stria

l Produ

c)on

(Ind

ex)

U.S. G

DP (T

rillio

ns)

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

U.S. N

ew Care Sales (MM)

Vehicle Ag

e (years)

Favorable Industry Trends

6

Transporta9on U.S. Vehicle Sales & Vehicle

Age

Industrial/MRO GDP & Industrial Produc9on

Source: Ward's, Polk Source: Federal Reserve Bank of St. Louis

Seasonally Adj.

Industrial Produc)on

U.S. GDP


Zep Inc. Life Cycle

7

Inves9ng in Growing Business Organically

2007-‐2008 2009-‐2010 2010-‐2013 2014-‐2015 2015-‐2016

•  Amrep •  Waterbury •  Niagara •  Washtronics •  Hale Group •  Mykal •  Ecolab Vehicle Care

•  Upgraded IT •  Integrated ZVC •  Seiled CA legal claims

•  Align sales & support func9ons

•  Product line ra9onaliza9on

Spin Improve Business

Acquire Plakorms ($265MM)

Complexity Reduc9on

Drive Organic Growth

•  Inves9ng in NASS •  Invest in supply chain

•  Facili9es •  Logis9cs

•  Focus on strategic end-‐markets

•  Reduced break-‐even of the business by 30%

•  Rapidly paid down inherited debt


Shifting Focus of Investment

§  Invested $265 million of capital in business for acquisitions to establish growth platforms §  Plakorms have grown organically §  Well posi9oned to capitalize on favorable market demographics

§  Operational capital spending elevated because of investments in

new in IT platforms

§  Diverted investment from North American Sales and Service business §  Rep count declines §  Sales declines


Reinvestment in NASS Business to Accelerate Organic Growth

2015 Investment Implications

§  Financial Expectations: –  Expect low single digit growth in fiscal 2015 (fire offset by organic growth) –  Investments will result in higher expenses in fiscal 2015 –  Impacts to net income Term

§  Sales capacity, advertising & training Ongoing §  Supply chain & GPTW consulting F’15 §  GHS-related OSHA compliance F’15

§  Benefits: –  Generates strong cash flow and rapid debt reduction; shifting enterprise

value from debt holders to equity holders –  Measured by:

§  Return on Invested Capital (ROIC) §  Return on Net Assets (RONA)


• $5-6 million total impact

• Approximately ½ occurring in FY ‘15 only

Long-Term Financial Objectives

1.  $1 billion in revenue within 5 years 2.  Target of 50 bps annualized EBITDA margin improvement 3.  11-13% annualized EPS improvement 4.  Return on Invested Capital (ROIC) in excess of cost of

capital


11

Growing Sales, Profitably

$501.0

$568.5

$646.0 $653.5 $689.6

$696.5

$400

$450

$500

$550

$600

$650

$700

$750

FY09 FY10 FY11 FY12 FY13 FY14

($ Millions)

Strong Revenue Growth 6.8% CAGR Adj. EBITDA Growth 18% CAGR

$27.2

$46.1 $53.9 $53.7

$59.6 $63.1

$0

$10

$20

$30

$40

$50

$60

$70


EBITDA Margin: 5.4% 8.1% 8.4% 8.2% 8.6% 9.1%

($ Millions)

* Revenue and EBITDA excluding the effect of acquisitions based on company estimates.

Consistent Revenue and Adj. EBITDA Growth


Growing EPS and ROIC

12

$0.5

2

$0.9

5

$0.9

7

$0.9

8

$0.9

1

$0.8

1

$0.

52

$1.

00

$1.

14

$1.

16

$1.

23

$1.

18


Adj. EPS

Adj. Cash EPS

Fully diluted Earnings per Share, as adjusted

8.0% 9.3% 9.6%

8.8%

6.1% 5.4%


Return on Invested Capital (ROIC) is calculated as after tax operating profit divided by Invested Capital.

Adj. EPS Growth 9.3% CAGR ROIC Impacted by Acquisitions


Strong/Consistent Cash Flow Generation

1) 2011 Free Cash Flow includes $0.9 million proceeds from the sale of property, plant, and equipment 2) Free Cash Flow is defined as Net Cash Provided by Operating Activities less Capital Expenditures plus Proceeds from Sale of Property Plant and Equipment.

13

$ Millions

•  $23 million average annual free cash flow during the past six years

Strong FCF Important Characteristic of Zep Model

Capex $7.5 $9.8 $8.9

•  Fund normal operations •  Fund dividend •  Pay down long-term debt

Use-of-Cash Strategies

Noteworthy FCF Generation While Investing in Strategic

Growth Initiatives

$22.9 $24.2 $29.0

$4.3

$38.0

$19.9

$0

$5

$10

$15

$20

$25

$30

$35

$40


$18.4

SAP Capital

spend and increased working capital

$12.1 $9.6


3.30x 3.06x 3.13x

4.50x

1Q FY14 4Q FY14 1Q FY15 Covenant

$204.7 $192.6 $198.5

1Q FY14 4Q FY14 1Q FY15

2.08x 2.22x 2.66x

1.25x

1Q FY14 4Q FY14 1Q FY15 Covenant

Fixed Charge

Coverage Ratio*

Debt to EBITDA*

Net Debt Position ($MM)

Covenants

Debt Position

14 * As defined by Zep Inc.’s Credit Facility

§  Credit facility refinanced August 2014 with favorable terms and greater financial flexibility

§  Temporarily higher inventories increased net debt position in Q1


Inventory Reduc9ons in 2H FY15 Will Generate Cash Flow

Conclusion

§  Business continuity effort – regain full aerosol production capacity §  Continuing momentum of recent sales wins due to disciplined sales

pipeline process §  Excited about investments to organically grow NASS, distribution

and retail businesses §  Distractions subsiding, momentum building and early results are

positively influencing our determination


Exci9ng to be Inves9ng in Organic Growth Again!

Appendix

-‐3.1% -‐2.3%

4.8% 2.8% 3.8%

-‐4.1%

-‐1.7%

4.3%

-‐3.4%

0.6%

2.5% 2.1%

-‐8.0%

-‐6.0%

-‐4.0%

-‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15

Raw Material Sales

Fire-‐Related Lost Sales

Selling Days

Demand Shaping

Acquired

Organic

Reported change in sales

Quarterly Composition of Revenue


Organic Revenue Growth Returned in the 2nd Half of Fiscal 2014

Q1 ’15 Chg. Revenue $168.3 +2.1% Gross margin 46.8% (130bps) Operating profit $7.4 +$0.1 Adj. EBITDA $13.4 ($0.6)

Fiscal 1st Quarter 2015 Summary


§  Results broadly in-line with our expectations §  Gross profit margin,

operating profit and EBITDA reflected §  Evolving business mix

§  Investments in organic growth initiatives

§  Expect quarter-to-quarter inconsistencies from mix and promotions

Results Broadly In-‐Line with Our Expecta9ons

Decreases

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

•  Distribu9on •  Generalist Direct Sales

•  Zep Vehicle Care

1st Quarter ‘15 Revenue Drivers


•  Auto/OEM

•  Auto/Amermarket

•  Home Improvement

•  Oil & Gas

•  Food Processing

Increases

Transporta9on

Jan/San & Ins9tu9onal

Industrial/ MRO & Other

39%

24%

37%

63%

% of Q1 2015 North American Revenue

2.0%

1.9%

4.8%

Q1 Growth

Growth in All Three Major End-‐Markets

20

1st Quarter ‘15 Revenue Drivers


$164.9

$173.2 $170.3

$168.3

$7.5 $0.8 $2.9 $2.0

$160

$165

$170

$175

$180 ($ m

illions)

( ) ( )

3.3% Growth 2.1%

Growth

5.0% Growth

Record First Quarter Revenues

$12.7

$14.1 $0.8

$0.6

$10.0

$12.0

$14.0

$16.0

($ m

illions)

21

EBITDA & Adjusted EBITDA


$12.2

$13.4 $1.3

$10.0

$12.0

$14.0

$16.0

($ m

illions)

Q1 FY14 Q1 FY15

22

1st Qtr. EPS, Adj. EPS & Adj. Cash EPS


$0.14 $0.17

$0.26

$0.03

$0.09

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

2014 2013 Diluted EPS $0.14 $0.14 Adjustments $0.03 $0.03 Adjusted diluted EPS $0.17 $0.17 Amor9za9on $0.09 $0.09 Adj. Cash EPS $0.26 $0.26

Three Months Ended November 30,

Q1 FY 15 Adj. Cash EPS of $0.26

2015 Investment Detail & Guidance

Fiscal 2015 Investments

§  Transformative Set of Policy Changes and Investments in North American Sales and Service Business

§  Compensation and policy changes effective January 1, 2015 §  Reward growth §  Simplify ordering, freight, order status & equipment

§  Sales management, recruiting & training §  Increase sales management §  Develop skills & drive accountability §  Increased focus on vertical markets

§  Increase Zep rep new hiring §  Stabilize rep count in fiscal 2015


Fiscal 2015 Investments (continued)

§  Investments in Zep Vehicle Care, Distribution & Retail Businesses

§  Sales capacity §  Zep Automotive §  Jan/San & MRO distribution

§  Marketing & advertising §  Zep Commercial

§  Zep Automotive


Fiscal 2015 Guidance

Item Expectation §  Net Sales Low Single Digit Growth §  Gross profit margin 46-48% §  Selling, distribution & admin. (16-18% variable) 41-43% §  Interest expense $6-$7 million §  Capital expenditures

§  Normal rate $10 million §  Restoration of aerosol capacity $15-20 million

§  Total $25-$30 million §  Tax Rate 36-38%


Fire-Related Information

Insurance Coverage

§  Casualty & business interruption $1.0MM deductible §  Damage to facility §  Increased costs to produce §  Profit on lost revenue

§  General liability $1.5MM deductible §  Damage to 3rd parties

§  Prepayments against claim §  Received $5MM in June

§  Received $11.9MM in September

§  Expect to file claims quarterly and a mismatch between spending and insurance settlements

§  Final resolution of claim not expected for at least a year 28 © 2015 Zep Inc. - All rights reserved.

§  Business interruption insurance will cover lost profit on lost sales

§  Coverage period: §  Based on when existing aerosol facility should return to normal

operation §  Benefit from extended coverage for an additional 365 days

§  Quarterly financial impact: §  Potential to reduce reported profits for several quarters §  Once claim is approved, realize income for lost profits

Effect of Lost Revenue


§  Higher manufacturing costs during the recovery period §  Presented net of insurance proceeds

§  Expect higher manufacturing costs and general costs to be offset by insurance recoveries in the same period

§  Coverage period: §  Based on when existing aerosol facility should return to normal

operation

Effect of Higher Costs

30

Incident–Related Costs Should Have Liile or No Net Effect on the Gross Margin or S, D & A Expense Lines


Reconciliations

Reconciliations

The unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States ("GAAP"), available as part of the Company’s earnings press

release available online at www.zepinc.com in our investor section under webcasts and presentations, are supplemented by a table that reconciles EBITDA, adjusted EBITDA, adjusted earnings per diluted share,

adjusted cash earnings per diluted share, free cash flow and adjusted net sales, which are non-GAAP financial information that are referenced in this presentation, to the nearest GAAP measure. This non-GAAP financial information is provided to enhance the user's overall understanding of our financial performance. Specifically, management believes that EBITDA, adjusted EBITDA, adjusted earnings per diluted share, adjusted cash earnings per diluted share, free cash flow and adjusted net sales may provide additional information with respect to our performance or ability to meet our future debt service obligations, capital

expenditures and working capital requirements. This non-GAAP financial information should be considered in addition to, and not as a substitute for, or superior to, results prepared in accordance with GAAP.

Moreover, this non-GAAP information may not be comparable to EBITDA, adjusted EBITDA, adjusted earnings per diluted share adjusted cash earnings per diluted share, free cash flow or adjusted net sales reported by other companies because the items that affect net earnings that we exclude when calculating

these measures may differ from the items taken into consideration by other companies. .


Reconciliations

Zep Inc. RECONCILIATION OF NON-GAAP MEASURES

(Unaudited; in thousands; except per share amounts)


2014 2013 Net income $3,138 $3,097 Interest expense, net 1,796 2,311 Income tax provision 1,802 1,740 Depreciation and amortization 5,423 5,523 EBITDA $12,159 $12,671

Acquisition & integration costs $ - $614 Restructuring (71) - California legal matter 43 772 Margin on lost sales – fire related 1,291 - Adjusted EBITDA $13,422 $14,057

Adjusted EBITDA margin 7.8% 8.5%


Reconciliations




2014 2013 Diluted earnings per share $0.14 $0.14 Acquisition & integration costs, net of tax - 0.01 California legal matter, net of tax - 0.02 Margin on lost sales – fire related, net of tax 0.03 - Adjusted diluted earnings per share $0.17 $0.17 Amortization 0.09 0.09 Adjusted diluted cash earnings per share $0.26 $0.26


Reconciliations




2014 2013 Growth Rate

Net sales $168,290 $164,892 2.1% Fire-related lost sales 2,893 - Adjusted net sales, fire related $171,183 $164,892 3.8%


2014 2013 Growth Rate Net sales $168,290 $164,892 2.1% Foreign currency impact 1,994 - Adjusted net sales, constant currency $170,284 $164,892 3.3%


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