zep inc. august 2014 investor presentation

Zep Inc.

Investor Presentation

August 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 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.

• 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


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

• 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

http://www.zepinc.com/our-brands/armor-all-professional/

Zep Inc. Market Opportunity & Alignment


Total Market

$75B

$18B

Target Strategic Markets

Transportation $4.8B Industrial / MRO $2.7B & Other Jan / San $10.6B & Institutional

60

% R

even

ue

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

U.S. New Vehicle Sales

Vehicle Age

10

12

14

16

18

8

9

10

11

12

U.S

. New

Ve

hic

le S

ale

s (M

M)

Ve

hic

le A

ge (

year

s)

Favorable Industry Trends


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

Seas

on

ally

Ad

j. U

.S.

Ind

ust

rial

Pro

du

ctio

n (

Ind

ex)

U.S

. GD

P (

Trill

ion

s)

Zep Inc. Life Cycle


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

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


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.

Growing EPS and ROIC


$0.52

$0.95 $0.97 $0.98

$0.83


Fully diluted Earnings per Share, as reported

8.0%

9.2% 9.8%

8.8%

5.9%


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

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


$ 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


$18.4

SAP

Capital

spend and

increased

working

capital

$12.1

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


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

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

Near-Term and Long-Term Expectations

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


Lost Aerosol Sales Could Exceed Core Growth for the Next 2-3 Quarters with Sales Flat to Down Somewhat

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


Encouraged by Recent Top-Line Success

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


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


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


Appendix

21

3rd Quarter Revenue Growth


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

Mass

Jan/San

3rd Quarter Revenue Highlights


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

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%


(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

$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

($ m

illio

ns)

24

3rd Quarter ‘14 EBITDA & Adjusted EBITDA


( ) ( )

( )

25

3rd Quarter ‘14 EPS & Adjusted EPS


$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

$0.30

$0.39 $0.09

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50


Adjusted Diluted Cash Earnings Per Share

14.7% Increase in Adjusted Diluted Cash Earnings Per Share

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


On-Track to Achieve $9.0MM Savings in Fiscal 2014 Reinvested $3.5MM

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


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


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

Annual Adj. EBITDA & Adj. EPS Reconciliation


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$

Quarterly Adj. EBITDA & Adj. EPS Reconciliation


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

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.

Questions and Answers
