C I T I G R O U P I N D U S T R I A L M A N U F A C T U R I N G C O N F E R E N C E M A R C H 6, 2 0 0 7 0
Industry trends Company overview 2007 outlook Appendix 1
The HVAC industry is a highly attractive, growing industry Attractive characteristics Consolidated manufacturing base Structural benefits Top six manufacturers account for approximately 90% of unit volume HVAC industry is profitable and market shares are generally stable Stable long-term growth Highly fragmented customer base High barriers to entry Growing markets for replacements and new installations Approximately 70% of demand driven by faster growing replacement markets Two-tiered distribution system No dominate distributor / dealer Established distributor / dealer network base INDUSTRY TRENDS Low labor component, high transportation cost minimize import risk 2
Consolidated manufacturing base Residential Residential HVAC HVAC market market by by product product type type Residential Residential HVAC HVAC manufacturers manufacturers Residential Residential HVAC HVAC equipment equipment shipments shipments (000) (000) 9,533 9,961 Ventilation Goodman 8,542 Cooling 5,660 5,827 Heating INDUSTRY TRENDS Source: Frost & Sullivan 2003 Source: Goodman estimate 1986 1991 1996 2001 2006 Source: ARI, GAMA Fast growing market Top 6 manufacturers account for approximately 90% of market volume 3
Steady growth led by fast growing replacement demand Replacement accounts for approximately 70% of industry unit shipments Residential HVAC equipment shipments Less cyclical than new construction market Furnaces Split-Systems Large installed base drives replacement market Number of 10 15 year-old air-conditioning units has gown by 55% in last ten years 20 Yr CAGR: Split-Systems = 3.3% Furnaces = 2.1% Rising new home installation rates add to growth of installed base Installation rate for single family homes with air-conditioning 70% in 1985 79% in 1995 89% in 2005 Several factors influence sales growth, including Age of existing equipment leading to failure Trade-off economics - repair vs. replace INDUSTRY TRENDS Increased energy efficiency and greater environmental acceptability of replacing old with new equipment Continuing trend to larger home sizes 1982 1987 1992 1997 2002 2007 Source: ARI, GAMA 4
New home construction New construction accounts for approximately 30% of annual industry shipments New home construction: South region New construction is a growing but cyclical market Nearly 90% of new homes built in 2005 were equipped with air conditioning, compared with 75% in 1990 Over 95% of new homes built in 2005 were equipped with warm-air furnaces or heat pumps, compared with 87% in 1990 Fastest growing region, South, has highest installation rates for climate comfort systems in new homes 41% of U.S. starts 15 Yr. CAGR: 5.4% 51% of U.S. starts INDUSTRY TRENDS 1991 1996 2001 2006 Source: U.S. Census Bureau Each year s completions add to population of installed air conditioning and heating units 5
Fragmented two-tier distribution system Limited price transparency for consumer provides ability to maintain attractive margins and pass through cost inflation Households Unconsolidated structure presents potential new entrants with formidable obstacle to market access Contractors Distributors Manufacturers Manufacturer owned distribution & others Independent distribution TRENDS INDUSTRY Top 6 ~ 90% market share Over 1,000 distributors Over 100,000 contractors Over 8,000,000 installations per year 6
Significant obstacles for new entrants Purchased components, the largest cost, are acquired from global suppliers Typical 13 SEER condenser cost components Commodities costs are similar across the industry and purchased at world market prices Low labor content reduces benefit of offshore manufacturing Overhead Labor Other Purchased components Commodities Source: Goodman estimates INDUSTRY TRENDS 7
Industry trends Company overview 2007 outlook Appendix 8
COMPANY OVERVIEW Business profile Goodman is a leading manufacturer in HVAC industry $1.8 billion in annual sales 2 nd largest equipment manufacturer in North America A growing position in a growing market Strong market position, #1 selling brand in the U.S. market Consistent revenue stream ~70% of sales driven by replacement market A strong product portfolio Well-recognized branded offering The value leader with a low-cost structure A broad and growing distribution base Extensive independent network Strong Company-operated distribution network Strong earnings growth potential Substantial and consistent cash flow 9
Goodman is a leading manufacturer of residential and light commercial HVAC products Goodman Goodman sales sales by by end-market end-market Goodman Goodman revenue revenue growth growth ($000) ($000) Goodman Goodman market market share share CAGR: 12% $1,565 $1,795 ~ 20% Replacement $1,136 $1,193 $1,318 New Construction 2% COMPANY OVERVIEW Source: Goodman estimates 2002 2003 2004 2005 2006 Source: Goodman estimates Consistent growth Faster that overall market 1983 1993 2003 2006 Source: Goodman estimates 10
Extensive platform of residential HVAC products Split-system A/C, heat pumps Outdoor unit primarily for comfort cooling and heating (heat pump) of single or multifamily residences New design Air handlers, coils Indoor unit for comfort cooling and heating (heat pump) of single or multifamily residences New design Gas furnaces Indoor unit primarily for comfort heating of single or multi-family residences New design Light commercial Outdoor unit primarily for comfort cooling of smaller commercial structures In re-design COMPANY OVERVIEW Package Units Package units Combines both comfort cooling and heating in one selfcontained unit New design A full range of fresh, improved, full-featured products Package terminal air conditioners (PTAC) Primarily used to cool and heat hotels, apartments, schools and hospitals New design 11
Focused brand strategy for HVAC equipment 89% of 2006 HVAC equipment product sales 1 Value-priced brand #1 selling brand in residential cooling Brand positioning Goodman Why pay more? High quality at a value price Brand personality Smart, frugal, solid, honest, aggressive, direct 11% of 2006 HVAC equipment product sales¹ Premium brand Brand conscious target market Brand positioning Amana as the great American brand that outlasts the rest More features and product options Brand personality Pioneering, trustworthy, dependable, craftsman-like, sensible COMPANY OVERVIEW ¹ Data as of FYE 2006; In addition to Goodman and Amana HVAC products, the company sells QuietFlex, PTAC and other products Amana is a trademark of Maytag Corporation and is used under license to Goodman Company, L.P. All rights reserved. 12
Our low cost-to-market advantage Engineering Engineering Production Production Develop low-cost, installer friendly designs Standardize components for volume leverage Build quality into the products Reverse engineer to lower cost designs Global sourcing of parts and materials Low factory overhead Flexible manufacturing Flexible workforce Increasing productivity SG&A SG&A Low SG&A, as a percent of sales (10.5% in 2006) Cost conscious approach to spending Distribution Distribution Central distribution COMPANY OVERVIEW Every process contributes to the low-cost structure Cost-competitive layered distribution Mark-up rebate COD cost structure 13
Broad nationwide distribution COMPANY OVERVIEW A balance of Company-owned and Independent operations with more than 750 locations 14
Company-operated distribution network Company-operated distribution Growing number of locations COMPA NY O VERVIEW Provides key competitive advantages Continuity in large markets Florida Texas California Arizona Nevada Washington/Baltimore Direct customer contact Inventory control Managed margins Information flow management Channel for conducting market tests Rapid new product introductions Rapid removal of obsolete inventory One look One feel Common customer experience Common internal processes and operating systems Consistent controls 93 CAGR: 14.3% 115 132 139 2003 2004 2005 2006 Process enhancements Mincron system (three systems to one) Enhanced data and analysis capability Enhanced controls Contributes to SOX compliance Improves inventory management 15
Independent distribution network Independent Network growth Provides cost-effective market access Most of our distributors are exclusive Effective incentive programs 574 CAGR: 4.6% 606 613 656 Mark-up rebate program encourages aggressive pricing Individual entrepreneurial ownership in most cases Single manufacturer focus 2003 2004 2005 2006 Broad coverage Distributor selection criteria Average relationship with each of top 10 distributors is over 17 years Demonstrated ability to meet or exceed performance targets Solid financial condition Operates with a low-cost structure and competitive price strategy W COMPANY OVERVIE Over 650 stocking locations 16
Dealer recruitment program A key part of our growth strategy Building interest in Goodman in a personalized process Small-group experience (20 25 persons at a time) Meet Goodman management Tour manufacturing plants and logistics center Informational presentations on products and programs Over 3,000 dealer visits in 2005/2006 Nearly 70% commit to installing a Goodman product Complemented with investment in Goodman sales team 40 new Territory Sales Managers hired in 2006 COMPANY OVERVIEW Building interest in Goodman one experience at a time 17
Consistent revenue stream and strong cash flow Net revenues ($ millions) EBITDA, Adjusted 1 ($ million) CAGR: 12% $1,565 $1,795 CAGR: 12% $194 $226 $1,136 $1,193 $1,318 $145 $153 $164 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 COMPANY OVERVIEW 1 EBITDA is a non-gaap financial measure. For reconciliation to the appropriate GAAP financial measure, see Appendix. 18
Long-term business strategy Maintain Maintain low-cost low-cost and and value value leadership leadership Further investment in product design, operating efficiency and distribution logistics Expand Expand and and strengthen strengthen distribution distribution networks networks Grow Company-operated distribution network Encourage investment by independent distributors Increase Increase dealer dealer base base Aggressive dealer recruitment Current business opportunities Realize Realize benefits benefits from from 13 13 SEER SEER transition transition Grow Grow in in select select markets markets Develop Develop and and introduce introduce new new products products and and new new technologies technologies NY OVERVIEW Higher priced, higher margin product Expanded value market Targeted growth in add-on / replacement market National home builder market Migration to higherefficiency products International market expansion Indoor air quality RF energy management systems Light commercial products COMPA 19
Maintain low-cost and value leadership Low cost, value leader Emphasis on lean manufacturing practices Flexible assembly process for quick response to product demand Efficient demand flow to minimize raw material and in process inventories Components standardized across brands and platforms Very efficient logistics capability Customer-focused logistics management Broad systems capabilities Smart-dock and Max-load Track in-stock, fill rates, order cycle time, forecast accuracy, sales, inventory and inventory turns by customer and sku Expanded warehouse productivity Strong quality control systems Global sourcing of raw materials and components Leveragable SG&A Lean corporate organization, efficient management structure Everybody at Goodman works Leveraged with sales growth COMPANY OVERVIEW 20
COMPANY OVERVIEW Expand and strengthen distribution networks Company-operated distribution Attractive unit store economics At maturity (~3 years) new stores contribute ~$4 million in sales per store Immediate profit margin (at the factory level) from incremental sales, which results in less than one year payback period At store level, new stores break-even in second full year of operations Typical new store opening costs Store & warehouse Leasehold improvements Annual lease Independent distribution ~ 20,000 sq ft $50,000 avg. $100,000 avg. Inventory $350,000 - $500,000 Mutual commitment to profitable growth Backed-up with support programs Focused on Goodman s value position Encourages expansion and growth More points of access than any other manufacturer 21
COMPANY OVERVIEW Increase dealer base Focused on dealer satisfaction Product Comprehensive product portfolio Easy to install Quality Reliable performance Backed by an excellent manufacturer s warranty Availability Industry s broadest distribution network Supported by superior logistics Distributor relationship Layered distribution with multiple points of access Price Value priced for profitable sales Building dealer relationships Complemented with investment in Goodman sales team 40 new Territory Sales Managers hired in 2006 Generating awareness of Goodman Dealer days Dealer blitz Among the best in Overall Customer Satisfaction Source: J.D. Power and Associates and McGraw-Hill Construction, 2006 HVAC Subcontractor Satisfaction Study Building growth by increasing dealer satisfaction and profitability 22
13 SEER transition benefits HVAC HVAC industry industry 2005 2005 2007 2007 SEER SEER mix mix evolution evolution Goodman Goodman 13+ 13+ SEER SEER sales sales mix mix Goodman Goodman Split-system Split-system market market share share 10 SEER to 13 SEER transition 8.5 SEER to 10 SEER transition 100% 80% 2% COMPANY OVERVIEW 12% 2005 2006 2007E 2005 2006 2007 1983 1990 1993 2003 2006 Source: ARI, Goodman estimates Source: Goodman estimates Source: Goodman estimates All 13+ SEER mix increases revenues, gross profits and gross margin % 23
13 SEER transition benefits SEER shift plays to Goodman strengths 13 SEER transition presents a strong growth opportunity Revenues increase as result of higher price points With higher prices, consumers may become more price sensitive Value segment of HVAC market should gain share, similar to the 1992 transition Further shift to higher SEER (14+) provides incremental sales $ and margin benefits All new-generation product presents design and factory efficiency opportunities Appearance improvements Number of product platforms reduced by 38% New designs yielding manufacturing improvements Tops and bottoms on one 5-station press Interlocking louver panels, etc. reduced fastener usage by 20% New heat exchange surface design reduced coil size with improved performance Optimized reciprocating / scroll compressor application across product range New New Louver Louver Line Line New New Fin Fin Presses Presses New New Transfer Transfer Press Press COMPANY OVERVIEW 24
Growth in selective markets Targeted growth in add-on/replacement market Increased points of access to Goodman products Expanding Company-operated and independent distributor network Dealer-focused sales initiatives Dealer Days Dealer Blitz National home builder market Goodman offers great value to new home builders Broad product choice Competitive warranty Extensive service and support Programs for builders of all sizes Migration to higher-efficiency products Higher-prices & higher margins Goodman s value advantage even greater than in 13 SEER International market expansion opportunities Central & South America Middle East COMPANY OVERVIEW $ + % $ + % 13 SEER 14+ SEER 25
New products and new technologies Wireless solution to energy management Commercial customers may reduce energy usage by up to 35% In-room energy savings Property-level energy management Multi-property load management Provides diagnostic information for preventive maintenance Simple and inexpensive installation Can retrofit over 1 million PTAC units already installed COMPANY OVERVIEW 26
Industry trends Company overview 2007 outlook Appendix 27
Financial performance 2006 Results 2007 Outlook 2 0 0 7 O U T L O O K Grew profitably Net sales increased 15% Adjusted 1 Gross margins maintained Leveraged production costs and SG&A expenses Adjusted Gross margins held at 23.1% Operating efficiencies offset commodity cost increases Adjusted 1 SG&A expense ratio improved 20 bp Sales per employee increased 10% Completed 13 SEER transition in product designs, factories and logistics Achieved forecasts for EBITDA and earnings per share performance Adjusted EBITDA: $225.5 million Original forecast: $225m - $235m Pro-forma adjusted 1 Earnings per share: $1.10 Original forecast: $1.07 - $1.11 Mix shift to 100% 13+ SEER Full year of 13 SEER redesign efficiencies Benefit of 2006 price increases Carry-over of higher-cost commodity purchases into 2007 Cost of goods Further investments in Company-owned distribution Use cash flow to reduce long-term debt 2007 Outlook 1 Adjusted Gross margin, Adjusted SG&A expense and Pro-forma adjusted Earnings per share are non-gaap financial measures. For reconciliation to the appropriate GAAP financial measure, see Appendix. EBITDA: $255m - $265m Earnings per share: $1.30 - $1.40 28
2007: Sales growth and increased profitability Net Net sales sales ($ ($ million) million) Adjusted Adjusted gross gross margin margin (% (% Sales) Sales) Adjusted Adjusted SG&A SG&A expense expense (% (% Sales) Sales) $1,795 $1,565 21.8% 23.1% 23.1% $1,318 11.2% 10.7% 10.5% 2004 2006 CAGR: 16.7% 2004 2006 + 130 bp 2004 2006-70 bp 2004 2005 2006 2007 2004 2005 2006 2007E 2004 2005 2006 2007E 2 0 0 7 O U T L O O K Expect to grow sales greater than industry trends and to improve profitability 29
Long-term performance objectives Sales growth faster than industry trends New products Expanded distribution Growing dealer base Margin improvements Benefits of 13 SEER transition Migration to higher efficiency products Factory and logistics productivity SG&A leverage Strong cash flow Modest capital spending needs Working capital leverage Declining debt levels 2 0 0 7 O U T L O O K Potential for high-teens earnings growth 30
Summary Attractive industry structure Strong and improving market position Consistent revenue stream driven by non-cyclical replacement demand Extensive and growing distribution network Expanding dealer base The low-cost, value leader with industry leading EBIT margins Significant opportunities for continued sales and earnings growth Substantial and consistent cash flow 2 0 0 7 O U T L O O K 31
Industry trends Company overview 2007 outlook Appendix 32
Reconciliations EBITDA & Adjusted EBITDA 2002 2003 2004 2005 2006 Net Income $ 65.8 $ 87.4 $ 47.7 $ 24.9 $ 64.2 Add: Provision for income taxes 1.9 1.7 (5.1) 15.8 34.2 Interest expense, net 46.2 26.1 12.5 74.2 77.8 Depreciation and amortization expense 20.6 14.8 18.9 37.7 32.6 EBITDA $ 134.5 $ 130.0 $ 74.0 $ 152.6 $ 208.8 Add: Inventory valuation step-up - - 4.4 39.6 - One-time transaction-related charges and expenses - - 68.8-16.1 Strategic repositioning 8.2 4.2 3.3 - - Non-recurring items 2.7 18.7 13.8 - - Monitoring fees - - - 2.0 0.6 Adjusted EBITDA $ 145.4 $ 152.9 $ 164.3 $ 194.2 $ 225.5 Adjusted Gross margin & SG&A expense 2004 2005 2006 Sales, net $ 1,317.6 $ 1,565.4 $ 1,794.8 Cost of goods 1,024.4 1,243.4 1,380.8 Gross profit 293.2 322.0 414.0 Add: Inventory valuation step-up 4.4 39.6 - Product-related expense accruals (10.0) - - Adjusted Gross profit 287.6 361.6 414.0 Adjusted Gross margin % 21.8% 23.1% 23.1% Selling & general administrative expense 220.6 170.1 205.9 Less: One-time transaction-related charges and expenses 68.8-16.1 Monitoring fees - 2.0 0.6 Non-recurring supplemental incentive bonus 4.0 - - Adjusted Selling & general administrative expense 147.8 168.1 189.2 Adjusted Selling & general administrative expense % 11.2% 10.7% 10.5% Earnings per share: Adjusted & Pro-forma 2006 Net Income $ 64.2 Less: Preferred dividend 6.6 Net income available to common shareholders $ 57.6 Net income $ 64.2 Add: One-time transaction-related charges and expenses 12.7 Monitoring fees 0.3 Adjusted Net income 77.2 Less: Preferred dividend 6.6 Adjusted Net income available $ 70.6 to common shareholders Shares outstanding (000) Diluted 65,225 Pro-forma diluted 70,454 Earnings per share, diluted Available to common shareholders $ 0.88 Adjusted, available to common shareholders $ 1.08 Pro-forma, adjusted $ 1.10 33
Forward looking statements This presentation contains forward-looking statements. The words believe, expect, anticipate, intend, estimate and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Forward-looking statements also include statements about the following subjects: changes in weather patterns and seasonal fluctuations; changes to the 13 SEER federally mandated minimum efficiency standard; the maturation of our new company-operated distribution centers; increased competition and technological changes and advances; significant increases in the cost of raw materials and components; our relations with our independent distributors; and damage or injury caused by our products. Although forward-looking statements reflect management s good faith beliefs, they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions in the regions in which we do business; general industry conditions, including competition and product, raw material and energy prices; the realization of expected tax benefits; changes in exchange rates and currency values; capital expenditure requirements; access to capital markets and the risks and uncertainties described under Risk factors in our recent SEC filings. 34
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