Zep presentation - february 2014 v.1

Zep Inc.
Investor Presentation
February 2014

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 "expects," "believes," "intends," "will,"
"anticipates," and similar terms that relate to future events, performance, or our results. Examples of forward-looking statements in this presentation
and our commentary include but are not limited to: statements regarding the economic environment and the impact this environment has had or could
have on our current and/or future financial results; statements regarding our expectations for pricing actions and gross margin performance; statements
regarding benefits that we may realize from our acquisitions and our restructuring activities; statements regarding investments that may be made in the
future to grow our business, either organically or otherwise, in accordance with our strategic plan, or that may be made for other purposes; and
statements and related estimates concerning the benefits that the execution of our strategic initiatives are expected to have on future financial results.
Specifically, the following statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995:
Statements regarding our optimism about future results and our ability to implement measures that will result in profitable growth; statements regarding
our ability to realize $9 million of cost savings in fiscal 2014 and reinvest a portion of those savings in strategic business initiatives; statements regarding
our top-line results during fiscal 2014; statements regarding the impact of our restructuring and simplification activities on our free cash flow and
outstanding indebtedness; statements regarding the expected magnitude of the reductions to our revenue from such activities and the timing of the
reductions; statements regarding our second quarter fiscal 2014 gross margin, cash usage and earnings per share and statements regarding utilizing
cash flow in our fiscal second half to make strategic investments, fund our dividend and reduce our debt balance.
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:








economic conditions in general;
the cost or availability of raw materials;
competition;
our ability to realize anticipated benefits from strategic planning and restructuring initiatives and the timing of the benefits of such actions;
market demand
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, 2013. We believe the 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
we undertake no obligation to update publicly any of them in light of new information or future events.

© 2014 Zep Inc. - All rights reserved.

2

Zep Inc. Value Proposition
• Zep Inc. sells a wide-variety of highly-effective,
consumable packaged chemicals that help
professionals maintain, clean & protect their assets,
facilities and environment.
• We market our products primarily to customers in the
Transportation, Industrial/MRO and
Jan/San & Institutional markets.
• Our multi-channel sales capability is valued by our
customers and enhanced by an integrated supply chain
and shared services structure, providing an additional
competitive advantage.


3

Zep Inc. Market Opportunity & Alignment
Target Strategic Markets
$4.8B

Industrial / MRO
& Other

$75B

Transportation

$2.7B

60% Revenue

Total Market

$18B

Jan / San
& Institutional


$10.6B

4

Zep Inc.’s Markets
Transportation
38%

22%

% Sales
Demand
Drivers

Market
Examples

Jan/San &
Institutional

Industrial/MRO
& Other

•
•
•
•
•

GDP
New Vehicle Sales
Miles Driven
Average Vehicle Age
Weather

Exterior/interior Cleaning,
Vehicle Maintenance,
Protectants & Polishes,
Parts Cleaners, Degreasers,
Lubricants, Automatic
Fleet Wash Equipment and
Pressure Washers,
and more…

Note: % of Fiscal 2013 Net Sales

•
•
•

GDP
Industrial
Production
Manufacturing
Employment

Lubricants, Penetrants,
Greases, Parts Washers,
Food Processing
Cleaners/Sanitizers,
Metal Working,
Adhesives, Drain Care,
Pesticides/Herbicides,
Dispensing Systems,
and more…


40%
•
•
•

GDP
Employment
Trends in
Acceptable
Practices

Air care, Cleaners, Hand
Cleaners, Degreasers,
Floor Care, Carpet Care,
Disinfectants, Sanitizers,
Laundry, Dispensing
Systems,
and more…

5

Favorable Industry Trends
Transportation
U.S. Vehicle Sales & Vehicle Age
18

8

U.S. New
Vehicle
Sales

12

10

98

$15.0

95

$14.5

Seasonally
Adj.
Industrial
Production

92

$14.0

89

$13.5

Seasonally Adj. U.S.
Industrial Production (Index)

9

14

$15.5
U.S. GDP (Trillions)

Vehicle Age (years)

16

10

101
U.S. GDP

Vehicle
Age
11

$16.0
U.S. New Vehicle Sales (MM)

12

Industrial/MRO
GDP & Industrial Production

86


6

Zep Inc. Life Cycle
2007-2008

Spin

2009-2010

2010-2013

Improve
Business

Acquire
Platforms
•
•
•
•
•
•
•

Amrep
Waterbury
Niagara
Washtronics
Hale Group
Mykal
Ecolab Vehicle Care

2014-2015

2015-2016

Complexity
Reduction

Drive
Organic
Growth

• Focus on strategic end-markets
• Product line & customer
rationalization
• Supply chain
• Facilities
• Logistics
• Align sales & support functions

Complexity Reduction Will Drive Cash Flow

7

Trusted Family of Brands for Over 75 Years
 We market over 4,000 formulas under a trusted family
of brands to over 200,000 customers

•
•
•

Largest selection of
high-efficacy formulas
Application expertise
Small to bulk
packaging

•
•
•

Broad product line of
specific use chemicals
Distributor focused
Distributor packaging

•
•
•
•

Narrow line of
formulations
Specific use
Jan/San & Plumbing
Retail packaging

Broad Range of High Efficacy Formulas

8

Revenue Drivers for Fiscal 2014
• Plan to increase investment in revenue generation.
• Zep Vehicle Care will positively impact revenue through 1st fiscal quarter
of 2014.
• Direct business has stabilized post-SAP but at new, lower level.
Comparisons improve beginning in fiscal second quarter of 2014.

• Product line and customer rationalization strategies could put pressure
on the retention of certain, larger customers.
• Robust sales pipeline was not included for purposes of sizing the costreduction activities but is expected to contribute to fiscal 2014 results.


9

Long-Term Financial Objectives
1.
2.
3.
4.

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


10

Growing Sales, Profitably
Strong Revenue Growth
8.3% CAGR

EBITDA Growth 22% CAGR
EBITDA Margin 70 bps per year

($ Millions)

$800

($ Millions)

Effect of
acquisitions*

$700
$600

$501.0

$646.0 $653.5

$689.6

Effect of
acquisitions*

$60

$40

$500
$400

$30

$300

$52.0

$47.5

$50

$568.5

$53.7

$33.9

$20

$200

$23.8

$10

$100

$0

$0
FY10

FY11

FY12

FY13

FY09

FY10

FY11

FY12

FY13

EBITDA Margin:4.7%

FY09

6.0%

7.3%

8.2%

7.5%

We estimate acquisitions since 2009 accounted for approximately
1/3 revenues and 1/2 of EBITDA during fiscal 2013
* Revenue and EBITDA excluding the effect of acquisitions based on company estimates.


11

Growing EPS and ROIC

ROIC Impacted by
Acquisitions

Adj. EPS Growth 12% CAGR

$0.95 $0.97 $0.98
$0.83
9.2%

9.8%
8.8%

8.0%
$0.52

FY09

5.9%

FY10

FY11

FY12

Fully diluted Earnings per Share, as reported

FY13

FY09

FY10

FY11

FY12

FY13

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

12

Strong/Consistent Cash Flow Generation
Strong FCF Important
Characteristic of Zep Model

Use-of-Cash Strategies

$ Millions

$38.0

$40
$35

 Fund dividend
$29.0

$30
$25

 Fund normal operations

$22.9

$24.2

 Pay down long-term debt

SAP
Capital
spend and
increased
working
capital

$20
$15
$10

$4.3

$5
$0
FY09
Capex

FY10

FY11

FY12

FY13

$7.5

$9.8

$8.9

$18.4

Noteworthy FCF
Generation While
Investing in Strategic
Growth Initiatives

$12.1

 $118 million in cumulative free cash
flow during the past five years
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

Debt Position
$248.7
$207.5

 Net debt decreased
$2.8 million
 Stable performance
against debt
covenants
 In fiscal 2Q 2014,

1Q FY13 4Q FY13 1Q FY14

Covenants
4.25x
3.77x
Debt to
EBITDA*

 Debt/EBITDA
decreases to
4.00x
 Fixed Charge
Coverage ratio
increases to 1.20x

$204.7

Net Debt
Position
($mm)

3.31x

3.30x

1Q FY 13 4Q FY13 1Q FY14 Covenant
Pro Forma

Fixed
Charge
Coverage
Ratio*

1.77x

2.16x

2.08x

1.15x

1Q FY 13 4Q FY13 Q1 FY14 Covenant
Pro Forma

* As defined by Zep Inc.’s Credit Facility

14

Fiscal 2014 Outlook







Continued negative pressure on top-line results
Gross margin between 46% - 48%
Capital spending between $12 to $14 million
Net interest expense between $8 - $9 million
Tax rate between 35.5% and 36.5%
Approximately half-turn improvement in Debt to EBITDA
ratio

Confident in Ability to Drive Cost Reduction & Long-Term Strategy
Note: Represents year-over-year comparisons.


15

Near-Term Expectations




Execute complexity-reduction and restructuring plans to optimize
our earnings and cash flow
More specifically…
–
–
–



As a result…
–
–



Sales muted due to the anniversary of the Zep Vehicle Care
acquisition and complexity reduction initiatives, could result in 0-3%
sales declines for next two quarters
Gross margin historically declines on average 200 basis points
sequentially in the second fiscal quarter
Fixed costs continue to benefit from restructuring
Second quarter EPS lower than last year
Use cash in the second fiscal quarter

Expect to generate significant cash flow in our fiscal second half for:
–
–
–

Strategic investments
Fund dividend
Reduce our debt balance


16

Zep is a Solid Investment
 Focused on growing strategic end-markets with
favorable demographics
 Developing a robust sales pipeline for 2014 and
beyond
 Revenue growth produces 25-30% operating leverage
 Business produces consistent cash flow (4-6% Sales)
 Restructuring activities delivering results with $9 million
of savings expected in fiscal 2014

Considerable Upside Margin Opportunities

17

1st Quarter ’14 North American Sales
End-market Performance
Change from
1Q ‘13 to 1Q ’14

-8.4%

-0.9%

+25%

Transportation

Industrial/
MRO &
Other

Jan/San &
Institutional

40%

24%

36%

% of 1Q ‘14 North American Revenue

0%

20%

40%

60%

80%

100%

64% of North American Revenue from
Transportation & Industrial/MRO & Other Markets

19

Fiscal Q1
2014

Fiscal Q1
2013

Reported
EBITDA

$12.7

$10.4

Adjustments

$1.4

$1.6

Adjusted
EBITDA

$14.1

$12.0

($ millions)

1st Quarter ‘14 EBITDA & Adjusted EBITDA
$16
$14
$12
$10
$8
$6
$4
$2
$0

$3.1 ( $2.8)
$12.0

$14.1
$1.5

($0.9) $1.2

Adjusted EBITDA Grew 17.3% to $14.1 Million

20

1st Quarter ‘14 EPS & Adjusted EPS
($0.08)

$0.25
Fiscal Q1
2014

Fiscal Q1
2013

GAAP EPS

$0.14

$0.16

Adjustments

$0.03
$0.17

$0.20

$0.20

$0.04

$0.17

$0.04

Adjusted EPS

$0.20

$0.02

$0.15

($0.03)
$0.02

$0.10
$0.05
$0.00


21

Adjusted Cash EPS Increased 8% from
$0.25 to $0.27
$0.10

$0.30
$0.20

$0.27

$0.17

$0.10

$0.00

Adjusted Cash EPS = Adjusted EPS +
amortization expense per share

22

Average Daily Sales Illustration Pre/Post SAP

Average Daily Sales ($)

Pre-SAP

Post SAP

Sales re-stabilized post
SAP, but within a new,
lower control band.

Sales were stabilizing
within a controlled
band prior to SAP.

SAP Go-Live


Time

23

EBITDA Reconciliation
Annual (Years Ended August 31)
Net income
Interest expense
Provision for income taxes
Depreciation & amortization
EBITDA (unaudited)

Quarterly (unaudited)
Net income
Interest expense
Provision for income taxes
Depreciation & amortization
EBITDA (unaudited)

Q1
$ 4.9
1.9
3.6
2.9
$ 13.3

2011
Q2
Q3
$ 2.2
$ 6.2
1.6
1.6
3.5
3.7
1.0
3.7
$ 8.3
$ 15.2

Q4
$ 4.1
1.5
3.5
1.7
$ 10.8

2009
$ 9.3
1.7
5.9
7.0
$ 23.8

Q1
$ 3.6
1.4
3.5
2.0
$ 10.5

2010
$ 13.5
2.0
8.2
10.3
$ 33.9

2012
Q2
Q3
$ 2.4
$ 8.6
1.4
1.4
3.5
3.6
1.5
5.1
$ 8.8
$ 18.7

2011
$ 17.4
6.6
9.3
14.2
$ 47.5

Q4
$ 7.3
1.3
3.7
3.3
$ 15.6

2012
$ 21.9
5.5
11.9
14.3
$ 53.7

Q1
$ 3.5
1.2
2.0
3.6
$ 10.4

2013
$ 15.2
9.0
7.9
19.9
$ 52.0

2013
Q2
Q3
$ 2.8
$ 6.3
2.3
3.0
1.3
3.4
5.5
5.4
$ 11.8
$ 18.0

Q4
$ 2.7
2.5
1.2
5.5
$ 11.8

2014
Q1
$ 3.1
2.3
1.7
5.5
$ 12.7

24

Zep Inc. Non-GAAP Disclosure
•

This presentation contains a supplemental table of adjusted operating results, which includes non-GAAP financial information such as EBITDA, adjusted
EBITDA, adjusted earnings per share, free cash flow and free cash flow per share. 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 share and free
cash flow may provide additional information with respect to our performance or ability to meet our future debt service obligations, capital expenditures and
working capital requirements. Free cash flow per share is provided to facilitate the comparison of our financial results to other companies on a per share basis.
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 share, free cash flow or free cash flow per
share reported by other companies because the items that affect net earnings that we exclude when calculating EBITDA, adjusted EBITDA and adjusted
earnings per share or because items that we add to reported net cash provided by operating activities in computing free cash flow and free cash flow per
share may differ from the items taken into consideration by other companies. The non-GAAP financial information included in this earnings release has been
reconciled to the nearest GAAP measure in the tables at the end of this presentation

•

Our management uses EBITDA and other non-GAAP financial information:
–
as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis as they remove the
impact of certain non-cash items as well as items not directly resulting from our core operations;
–
to evaluate the effectiveness of our operational strategies; and
–
to evaluate our capacity to fund capital expenditures and expand our business.
EBITDA and the ratios derived from these measures as calculated by us are not necessarily comparable to similarly titled measures used by other companies.
In addition, these measures: (a) do not represent net income or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of
cash available to fund our cash flow needs; and (c) should not be considered in isolation of, as alternatives to, or more meaningful measures than operating
profit, net income, cash provided by operating activities, or our other financial information as determined under GAAP.


25

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