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Zep Inc. August 2014 Investor Presentation
1.
Zep Inc. Investor Presentation August
2014
2.
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 about the receipt of insurance proceeds; statements regarding our ability to minimize the disruption that our associates, customers and business partners will experience as a result of the fire at our aerosol plant; statements regarding the timing of the resumption of production at our aerosol plant and our return to full production capacity for our aerosol products; statements and related estimates concerning the exhaustion of our aerosol inventory and the amount of our aerosol volume that could be at risk; the statement that we intend to re-establish our own aerosol manufacturing capacity in the future; statements regarding future revenue and operating income reductions resulting from the fire at our aerosol facility; and statements regarding our capital structure following our expected refinancing. 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: impact of the fire on financial results; 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 and in Part II, “Item 1A Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2014. 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. 2© 2014 Zep Inc. - All rights reserved.
3.
• 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. Zep Inc. Value Proposition 3© 2014 Zep Inc. - All rights reserved.
4.
Trusted Family of
Brands for Over 75 Years 4© 2014 Zep Inc. - All rights reserved. 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 • Narrow line of formulations • Specific use • Jan/San & Plumbing • Retail packaging • Broad product line of specific use chemicals • Distributor focused • Distributor packaging Broad Range of High Efficacy Formulas
5.
Zep Inc. Market
Opportunity & Alignment 5© 2014 Zep Inc. - All rights reserved. Total Market $75B $18B Target Strategic Markets Transportation $4.8B Industrial / MRO $2.7B & Other Jan / San $10.6B & Institutional 60%Revenue
6.
Industrial/MRO & Other Jan/San & Institutional Zep
Inc.’s Markets © 2014 Zep Inc. - All rights reserved. 6 Exterior/interior Cleaning, Vehicle Maintenance, Protectants & Polishes, Parts Cleaners, Degreasers, Lubricants, Automatic Fleet Wash Equipment and Pressure Washers, and more… Lubricants, Penetrants, Greases, Parts Washers, Food Processing Cleaners/Sanitizers, Metal Working, Adhesives, Drain Care, Pesticides/Herbicides, Dispensing Systems, and more… Air care, Cleaners, Hand Cleaners, Degreasers, Floor Care, Carpet Care, Disinfectants, Sanitizers, Laundry, Dispensing Systems, and more… Transportation • GDP • Employment • Trends in Acceptable Practices • GDP • New Vehicle Sales • Miles Driven • Average Vehicle Age • Weather • GDP • Industrial Production • Manufacturing Employment Demand Drivers Market Examples % Sales 38% 22% 40% Note: % of Fiscal 2013 Net Sales
7.
U.S. New Vehicle Sales Vehicle Age 10 12 14 16 18 8 9 10 11 12 U.S.NewVehicleSales(MM) VehicleAge(years)Favorable Industry
Trends © 2014 Zep Inc. - All rights reserved. 7 Transportation U.S. Vehicle Sales & Vehicle Age Industrial/MRO GDP & Industrial Production U.S. GDP Seasonally Adj. Industrial Production 86 89 92 95 98 101 $13.5 $14.0 $14.5 $15.0 $15.5 $16.0 SeasonallyAdj.U.S. IndustrialProduction(Index) U.S.GDP(Trillions)
8.
Zep Inc. Life
Cycle 8© 2014 Zep Inc. - All rights reserved. Complexity Reduction Will Drive Cash Flow 2007-2008 2009-2010 2010-2013 2014-2015 2015-2016 • Amrep • Waterbury • Niagara • Washtronics • Hale Group • Mykal • Ecolab Vehicle Care • Focus on strategic end-markets • Product line & customer rationalization • Supply chain • Facilities • Logistics • Align sales & support functions Spin Improve Business Acquire Platforms Complexity Reduction Drive Organic Growth
9.
9 Growing Sales, Profitably ©
2014 Zep Inc. - All rights reserved. $501.0 $568.5 $646.0 $653.5 $689.6 $0 $100 $200 $300 $400 $500 $600 $700 $800 FY09 FY10 FY11 FY12 FY13 ($ Millions) Strong Revenue Growth 8.3% CAGR EBITDA Growth 22% CAGR EBITDA Margin 70 bps per year $23.8 $33.9 $47.5 $53.7 $52.0 $0 $10 $20 $30 $40 $50 $60 FY09 FY10 FY11 FY12 FY13 EBITDA Margin:4.7% 6.0% 7.3% 8.2% 7.5% Effect of acquisitions* Effect of acquisitions* ($ Millions) 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.
10.
Growing EPS and
ROIC 10© 2014 Zep Inc. - All rights reserved. $0.52 $0.95 $0.97 $0.98 $0.83 FY09 FY10 FY11 FY12 FY13 Fully diluted Earnings per Share, as reported 8.0% 9.2% 9.8% 8.8% 5.9% FY09 FY10 FY11 FY12 FY13 Return on Invested Capital (ROIC) is calculated as after tax operating profit divided by Invested Capital. Adj. EPS Growth 12% CAGR ROIC Impacted by Acquisitions
11.
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. 11 © 2014 Zep Inc. - All rights reserved. $ Millions • $118 million in cumulative free cash flow during the past five 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 $0 $5 $10 $15 $20 $25 $30 $35 $40 FY09 FY10 FY11 FY12 FY13 $18.4 SAP Capital spend and increased working capital $12.1
12.
3.76x 3.60x 3.59x 4.00x 3Q
FY13 2Q FY14 3Q FY14 Covenant $236.7 $213.4 $208.5 3Q FY13 2Q FY14 3Q FY14 1.90x 1.72x 1.67x 1.20x 3Q FY13 2Q FY14 3Q FY14 Covenant Fixed Charge Coverage Ratio* Debt to EBITDA* Net Debt Position ($MM) Covenants Debt Position 12© 2014 Zep Inc. - All rights reserved. Net debt decreased by $4.9MM during quarter Credit facility matures in July 2015 Expect to refinance in 4Q FY14 * As defined by Zep Inc.’s Credit Facility $28.2MM Reduction in Net Debt in Last 12 Months
13.
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 13© 2014 Zep Inc. - All rights reserved. Considerable Upside Margin Opportunities
14.
Near-Term and Long-Term
Expectations
15.
Revenue Expectations Fundamentals
of the business are sound & economy is stable Focused on Transportation & Industrial/MRO w/favorable demographics Adapting to the channel shift in Jan/San 3rd Qtr. Organic growth more than offset impact of continuing complexity reduction – trend continuing Q4 to date Expect fire-related disruption but magnitude is difficult to predict Continue to bring capacity on-line, with plan to have greater capacity than prior to the incident, housed in multiple locations 15© 2014 Zep Inc. - All rights reserved. Lost Aerosol Sales Could Exceed Core Growth for the Next 2-3 Quarters with Sales Flat to Down Somewhat
16.
Near-Term Focus Fiscal
fourth quarter-to-date sales have grown mid-single digits Expect difficulty serving some customers in the future Implementation of Business Continuity Plan Recovery from the fire Minimize customer disruption Regain production capacity as quickly as possible Result in more capacity at more locations 16© 2014 Zep Inc. - All rights reserved. Encouraged by Recent Top-Line Success
17.
Fiscal 2015 Considerations Revenue
Have now anniversaried complexity reduction activities from fiscal Q3 2013 $3.5-$5.0MM comparative headwind ending Costs Gross margins in fiscal 2015 expected to be 46-48% Potential upward pressure on oil affects a portion of raw materials Selling, distribution and administrative expenses expected to be ~16-18% of sales Expect lower revenue will also lower variable costs Uncertainty with respect to freight Expect $2MM of costs associated with GHS compliance 17© 2014 Zep Inc. - All rights reserved.
18.
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 18© 2014 Zep Inc. - All rights reserved.
19.
Conclusion #1 Priority
is our Business Continuity Effort Continue successful strategies of: 1. Focusing on key end-markets like Transportation & Industrial/MRO 2. Continuing investments in North American Sales and Service specialization 3. Following Jan/San channel shift to expand availability of products 4. Continuing complexity reduction in our supply chain & products 19© 2014 Zep Inc. - All rights reserved.
20.
Appendix
21.
21 3rd Quarter Revenue
Growth © 2014 Zep Inc. - All rights reserved. 0.6% 2.1% 4.7% 1.5% 2.6% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Achieving Organic Sales Pipeline Success
22.
Mass Jan/San 3rd Quarter Revenue
Highlights 22© 2014 Zep Inc. - All rights reserved. Food Processing Oil & Gas Zep Vehicle Care Hardware, Farm & Ag Auto/OEM Auto/Aftermarket Industrial/MRO Home Improvement Increase Stable Decrease Solid Top Line Execution Produced Sales Gworth and EBITDA Margin Expansion
23.
3rd Quarter Financial
Highlights Q3 Growth Adj. EBITDA(1) $19.3MM 13.6% Adj. EBITDA Margin(1) 10.3% 110bps Adjusted EPS(1) $0.30 20.0% Adj. Cash EPS(2) $0.39 14.7% 23© 2014 Zep Inc. - All rights reserved. (1) Excludes effects of acquisition and integration costs, provision for loan loss, fire related charges, restructuring charges, California legal matter, legal settlement and contingent consideration adjustment. Adjusted EPS adjustments are the same as Adjusted EBITDA adjustments and presented net of tax. (2) Adjusted diluted earnings per share excluding effects of amortization. Improvement Opportunities • Price/Cost Relationship • Freight Expense Management • European Restructuring Activities Solid Top Line Execution Produced Sales & Earnings Growth
24.
$17.0 $19.3 $1.1 $1.0 $1.0 $0.4 $0.6 $3.0 $10.0 $12.0 $14.0 $16.0 $18.0 $20.0 ($millions) 24 3rd
Quarter ‘14 EBITDA & Adjusted EBITDA © 2014 Zep Inc. - All rights reserved. ( ) ( ) ( )
25.
25 3rd Quarter ‘14
EPS & Adjusted EPS © 2014 Zep Inc. - All rights reserved. $0.25 $0.30 $0.03 $0.03 $0.03 $0.01 $0.01 $0.08 $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 ( ) ( ) ( ) 2014 2013 Diluted EPS $0.09 $0.28 Adjustments $0.21 ($0.03) Adjusted Diluted EPS $0.30 $0.25 Three Months Ended May 31, 20% Increase in Adjusted Diluted Earnings Per Share
26.
$0.30 $0.39$0.09 $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 26© 2014 Zep
Inc. - All rights reserved. Adjusted Diluted Cash Earnings Per Share 14.7% Increase in Adjusted Diluted Cash Earnings Per Share
27.
Two Components Status 1.Realign
& right-size headcount Complete 2.Supply chain changes Rationalization of distribution facilities in U.S. Consolidated 4 Dist. Centers Implementation of new TMS Behind Schedule Consolidate selected operations in Europe Behind Schedule Restructuring Update 27© 2014 Zep Inc. - All rights reserved. On-Track to Achieve $9.0MM Savings in Fiscal 2014 Reinvested $3.5MM
28.
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 Received $5MM in June as a pre-payment against the claim Expect to file claims quarterly and a mismatch between spending and insurance settlements Final resolution of claim not expected for at least a year 28© 2014 Zep Inc. - All rights reserved.
29.
Business interruption
insurance will cover lost profit on lost sales Coverage period: Based on when existing aerosol facility should return to normal operation Benefit from extended coverage for an additional 365 days Quarterly financial impact: Potential to reduce reported profits for several quarters Once claim is approved, realize income for lost profits Effect of Lost Revenue 29© 2014 Zep Inc. - All rights reserved.
30.
Higher manufacturing
costs during the recovery period Presented net of insurance proceeds Expect higher manufacturing costs and general costs to be offset by insurance recoveries in the same period Coverage period: Based on when existing aerosol facility should return to normal operation Effect of Higher Costs 30© 2014 Zep Inc. - All rights reserved. Incident–Related Costs Should Have Little or No Net Effect on the Gross Margin or S, D & A Expense Lines
31.
Annual Adj. EBITDA
& Adj. EPS Reconciliation © 2014 Zep Inc. - All rights reserved. 31 Annual (Years Ended August 31) 2009 2010 2011 2012 2013 Net income 9.3$ 13.5$ 17.4$ 21.9$ 15.2$ Interest expense 1.7 2.0 6.6 5.5 9.0 Provision for income taxes 5.9 8.2 9.3 11.9 7.9 Depreciation & amortization 7.0 10.3 14.2 14.3 19.9 EBITDA (unaudited) 23.8$ 33.9$ 47.5$ 53.7$ 52.0$
32.
Quarterly Adj. EBITDA
& Adj. EPS Reconciliation © 2014 Zep Inc. - All rights reserved. 32 Quarterly (unaudited) (millions) Q1 Q2 Q3 Q1 Q2 Q3 Net income 3.5$ 2.8$ 6.3$ 3.1$ (0.7)$ 2.2$ Interest expense 1.2 2.3 3.0 2.3 3.4 2.5 Provision for income taxes 2.0 1.3 3.4 1.7 (0.3) 1.4 Depreciation & amortization 3.6 5.5 5.4 5.5 5.5 5.5 EBITDA (unaudited) 10.4$ 11.8$ 18.0$ 12.7$ 8.0$ 11.6$ Acquisition and integrations costs 1.2$ 1.6$ 0.1$ 0.6$ 0.4$ 0.1$ Provision for loan loss -$ -$ -$ -$ -$ 5.7$ Fire related charges, net -$ -$ -$ -$ -$ 1.1$ Restructuring charges -$ -$ -$ -$ -$ 0.1$ Legal 0.4$ 0.2$ (1.0)$ 0.8$ 2.8$ 0.8$ Other -$ (1.3)$ * -$ -$ Adjusted EBITDA (unaudited) 12.0$ 12.4$ 17.0$ 14.1$ 11.2$ 19.3$ Quarterly (unaudited) Q1 Q2 Q3 Q1 Q2 Q3 Diluted earnings (loss) per share 0.16$ 0.12$ 0.28$ 0.14$ (0.03)$ 0.09$ Acquisition and integration costs, net of tax 0.03$ 0.05$ -$ 0.01$ 0.01$ Provision for loan loss, net of tax -$ -$ -$ -$ -$ 0.15$ Fire related charges, net of tax -$ -$ -$ -$ -$ 0.03$ Restructuring, net of tax -$ -$ -$ -$ -$ -$ Legal, net of tax 0.01$ 0.01$ (0.03)$ 0.02$ 0.11$ 0.03$ Other, net of tax -$ (0.04)$ -$ -$ -$ Adjusted Diluted Earnings Per Share 0.20$ 0.14$ 0.25$ 0.17$ 0.09$ 0.30$ * Lancaster building writedown. 20142013 2013 2014
33.
Zep Inc. Non-GAAP
Disclosure © 2014 Zep Inc. - All rights reserved. 33 • 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.
34.
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2014 Zep Inc. - All rights reserved.
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