Zep Inc. Investor Presentation. August 2014

Transcription

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 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, 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

3 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

4 Largest selection of high-efficacy formulas bundled with application expertise Broad product line of specific use chemicals for distribution Pro-focused line of jan/san & plumbing products for retail Pro and DIY auto care products for retail Finest house of brands in Do-it-for-me auto care Pro-Focused High Efficacy Formulas for Any Application 4

5 $18B North American Market Opportunity Target Strategic Markets % Zep Sales Drivers Examples Transportation $4.8B 38% Industrial / MRO $2.7B 22% & Other Jan / San $10.6B 40% & Institutional GDP New Vehicle Sales Miles Driven Average Vehicle Age Weather GDP Industrial Production Manufacturing Employment GDP Employment Trends in Acceptable Practices Vehicle Maint. Wash & Polish, Parts Cleaners, Degreasers, Lubricants, Fleet Wash Lubricants, Penetrants, Greases, Parts Washers, Food Processing Cleaners/Sanitizers, Metal Working Air, hand & floor care, Cleaners, Degreasers, Carpet Care, Sanitizers Disinfectants, Laundry Dispensing Systems 60%+ of Revenues from Transportation & Industrial/MRO 5

6 Vehicle Age (years) U.S. New Vehicle Sales (MM) U.S. GDP (Trillions) Seasonally Adj. U.S. Industrial Production (Index) Favorable Industry Trends Transportation U.S. Vehicle Sales & Vehicle Age Industrial/MRO GDP & Industrial Production Vehicle Age $16.0 $15.5 U.S. GDP $ U.S. New Vehicle Sales $14.5 $14.0 Seasonally Adj. Industrial Production $

7 Zep Inc. Life Cycle Spin Improve Business Acquire Platforms Complexity Reduction Drive Organic Growth Amrep Waterbury Niagara Washtronics Hale Group Mykal Ecolab Vehicle Care Complexity Reduction Will Drive Cash Flow Focus on strategic end-markets Product line & customer rationalization Supply chain Facilities Logistics Align sales & support functions 7

8 Growing Sales, Profitably Strong Revenue Growth 8.3% CAGR EBITDA Growth 22% CAGR EBITDA Margin 70 bps per year ($ Millions) ($ Millions) $800 $700 $600 $500 $501.0 Effect of acquisitions* $568.5 $646.0 $653.5 $689.6 $60 $50 $40 Effect of acquisitions* $33.9 $47.5 $53.7 $52.0 $400 $30 $23.8 $300 $200 $100 $20 $10 $0 FY09 FY10 FY11 FY12 FY13 $0 FY09 FY10 FY11 FY12 FY13 EBITDA Margin:4.7% 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. 8

9 Growing EPS and ROIC Adj. EPS Growth 15% CAGR ROIC Impacted by Acquisitions $0.52 $0.95 $0.97 $0.98 $ % 9.3% 9.6% 8.8% 6.1% FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13 Fully diluted Earnings per Share, as adjusted Return on Invested Capital (ROIC) is calculated as after tax operating profit divided by Invested Capital. 9

10 Strong/Consistent Cash Flow Generation $ Millions $40 $35 $30 $25 $20 $15 $10 $5 $0 Strong FCF Important Characteristic of Zep Model $22.9 $24.2 $29.0 Capex $7.5 $9.8 $8.9 SAP Capital spend and increased working capital $4.3 $38.0 FY09 FY10 FY11 FY12 FY13 $18.4 $12.1 $118 million in cumulative free cash flow during the past five years Use-of-Cash Strategies Fund normal operations Fund dividend Pay down long-term debt Noteworthy FCF Generation While Investing in Strategic Growth Initiatives 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. 10

11 Debt Position Net Debt Position ($MM) $236.7 $213.4 $208.5 Net debt decreased by $4.9MM during quarter Credit facility matures in July 2015 Expect to refinance in 4Q FY14 Debt to EBITDA* Fixed Charge Coverage Ratio* 3Q FY13 2Q FY14 3Q FY14 Covenants 4.00x 3.76x 3.60x 3.59x 3Q FY13 2Q FY14 3Q FY14 Covenant 1.90x 1.72x 1.67x 1.20x 3Q FY13 2Q FY14 3Q FY14 Covenant $28.2MM Reduction in Net Debt in Last 12 Months * As defined by Zep Inc. s Credit Facility 11

12 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 12

13 Near-Term and Long-Term Expectations

14 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 3 rd 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 14

15 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 15

16 Fiscal 2015 Considerations Revenue Have now anniversaried complexity reduction activities from fiscal Q Costs $3.5-$5.0MM comparative headwind ending 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 16

17 Long-Term Financial Objectives 1. $1 billion in revenue within 5 years 2. Target of 50 bps annualized EBITDA margin improvement % annualized EPS improvement 4. Return on Invested Capital (ROIC) in excess of cost of capital 17

18 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 18

19 Appendix

20 3 rd Quarter Revenue Growth 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.6% 1.5% 2.1% 2.6% 4.7% Achieving Organic Sales Pipeline Success 20

21 3 rd Quarter Revenue Highlights Increase Stable Decrease Food Processing Oil & Gas Zep Vehicle Care Hardware, Farm & Ag Auto/OEM Auto/Aftermarket Industrial/MRO Home Improvement Mass Jan/San Solid Top Line Execution Produced Sales Gworth and EBITDA Margin Expansion 21

22 3 rd Quarter Financial Highlights Q3 Growth Adj. EBITDA (1) $19.3MM 13.6% Adj. EBITDA Margin (1) 10.3% 110bps Adjusted EPS (1) $ % Adj. Cash EPS (2) $ % Improvement Opportunities Price/Cost Relationship Freight Expense Management European Restructuring Activities Solid Top Line Execution Produced Sales & Earnings Growth (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. 22

23 ($ millions) 3 rd Quarter 14 EBITDA & Adjusted EBITDA $20.0 $18.0 $16.0 $17.0 $1.1 ( $1.0 ) ( $1.0 ) ( $0.4 ) $0.6 $3.0 $19.3 $14.0 $12.0 $

24 3 rd Quarter 14 EPS & Adjusted EPS Three Months Ended May 31, Diluted EPS $0.09 $0.28 Adjustments $0.21 ($0.03) Adjusted Diluted EPS $0.30 $0.25 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 $0.25 $0.30 $0.03 ( $0.03 ) $0.08 ( $0.03 ) ( $0.01 ) $ % Increase in Adjusted Diluted Earnings Per Share 24

25 Adjusted Diluted Cash Earnings Per Share $0.50 $0.40 $0.30 $0.30 $0.09 $0.39 $0.20 $0.10 $ % Increase in Adjusted Diluted Cash Earnings Per Share 25

26 Restructuring Update Two Components Status 1.Realign & right-size headcount 2.Supply chain changes Complete Rationalization of distribution facilities in U.S. Consolidated 4 Dist. Centers Implementation of new TMS Behind Schedule Consolidate selected operations in Europe Behind Schedule On-Track to Achieve $9.0MM Savings in Fiscal 2014 Reinvested $3.5MM 26

27 Insurance Coverage Casualty & business interruption Damage to facility Increased costs to produce Profit on lost revenue General liability $1.0MM deductible $1.5MM deductible Damage to 3 rd 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 27

28 Effect of Lost Revenue 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 28

29 Effect of Higher Costs 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 Incident Related Costs Should Have Little or No Net Effect on the Gross Margin or S, D & A Expense Lines 29

30 Annual Adj. EBITDA & Adj. EPS Reconciliation Annual (Years Ended August 31) Net income $ 9.3 $ 13.5 $ 17.4 $ 21.9 $ 15.2 Interest expense Provision for income taxes Depreciation & amortization EBITDA (unaudited) $ 23.8 $ 33.9 $ 47.5 $ 53.7 $

31 Quarterly Adj. EBITDA & Adj. EPS Reconciliation Quarterly (unaudited) (millions) Q Q2 Q3 Q Q2 Q3 Net income $ 3.5 $ 2.8 $ 6.3 $ 3.1 $ (0.7) $ 2.2 Interest expense Provision for income taxes (0.3) 1.4 Depreciation & amortization 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. 31

32 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. 32

33 Questions and Answers