John K. Morgan Chairman, President and Chief Executive Officer

Letter to Shareholders

Fiscal 2010 was a pivotal year for Zep Inc. This past year marked the completion of a three-year “makeover” of our company. In virtually every way possible, our hard-working associates have transformed our business into a far more efficient, more focused and more forward-looking company. In the face of a challenging economic environment, our associates were able to increase the value we provide to our customers, expand our access to market, improve our profit margins, and acquire and integrate businesses while generating significant cash flow. To be more specific:

• We have significantly broadened our go-to-market strategy, expanded our retail sales channel and our network of distributors, and invested in acquisitive growth. Simultaneously, in our core sales and service organization, we added experienced sales reps using a new recruitment model designed to yield a faster return on investment and provided new price optimization tools that will further empower our sales reps.
• In the past 12 months, we completed three acquisitions – Amrep, Waterbury Companies and Niagara National. Each of these companies has contributed to a brogadened product line, provide access to additional markets, as well as increase our top line growth and overall profitability.
• We have strengthened our company financially. Since becoming a publicly-traded company and prior to making any acquisitions, we reduced our debt by 53%, and, over the past two years, we reduced the breakeven of our legacy business by nearly 30%.
• We have made our company more efficient. We trimmed our product line by more than 4,000 SKUs, which affected only 1% of sales, consolidated our North American distribution network from 41 to 17 strategically located facilities and reduced our non-sales headcount by more than 28%.
• Finally, we have decentralized our business to push decisions closer to our customers, and we have dedicated ourselves to a standard of relentless execution – an ROI-driven discipline that will allow us to grow profitably and to create value for our shareholders.

To drive this process, Zep has embraced a set of values meant to ensure we operate every aspect of our business with integrity, honesty and transparency – protecting our environment, treating our people fairly and dealing honorably with our customers and suppliers.

Improved Financial Performance

Combined, these changes have allowed us to achieve one of our core company objectives – to grow at a rate exceeding GDP, a traditional benchmark for our industry. Our full-year revenue in fiscal 2010 totaled $569 million versus $501 million in the prior year, up 13.5%. Our adjusted EBITDA margins were 8.3%, a record since we became an independent company, when our EBITDA margins were 7.7%. Our adjusted net income in fiscal 2010 was $21.8 million, or $0.98 per diluted share, versus $11.3 million, or $0.52 per diluted share in fiscal 2009 – an increase of 92%.

Just as important as our increased top-line growth and profitability was our continued strong cash flow – another hallmark of our industry and a key area of focus for our Company. In fiscal 2010, we generated $34 million in cash flow from operations, an improvement of $3.6 million in fiscal 2009. We are pleased with our ability to generate this level of cash, especially considering the number of strategic initiatives undertaken during the year and the continued difficult economic environment. Nevertheless, we recognize that it is equally important to focus on our long-term plan and its emphasis on working capital management.

All these changes have come at a cost. In the past three years, Zep Inc. has recognized a total of $22.1 million in pre-tax restructuring charges, including $8.6 million in fiscal 2010. We believe charges of this magnitude are now behind us, and that in fact we have already begun to benefit from the leverage and operating efficiencies these measures afford. Further, we also believe that our non-sales workforce is appropriately sized to our needs and growth projections.

Milestones, Progress

During fiscal 2010, Zep Inc. achieved a number of significant milestones.

Our growth efforts were a key element of our 2010 plan. In addition to our year-long effort to expand and improve the productivity of our core direct sales force, we moved aggressively to expand our retail and distribution channels.

In retail, we grew our Zep Commercial and private-branded product lines with both existing and new customers, announcing new relationships with Advanced Auto Parts and AutoZone while also launching the rollout of our refreshed Enforcer brand.

In the distribution channel, the Amrep acquisition gave us the brands we needed to penetrate this channel and provided a platform for future growth. Critical to the realization of the benefits of this acquisition was the relocation of our existing aerosol production operation to Amrep's facilities, resulting in significant manufacturing efficiencies and enabling expansion of our private-brand capabilities. Not only is the integration of Amrep essentially complete, but it is also experiencing organic growth.

In just over six months after completing this acquisition, we were able to acquire selected assets from the Waterbury Companies, whose complementary aerosol-based product lines will allow additional expansion of our footprint with distributors and with specialty retailers.

Finally, in October we acquired Niagara National. This acquisition augments our already strong offering in the vehicle wash segment and gives our sales and service organization an important new product line. The Niagara acquisition is an example of how we intend to transform and strengthen our legacy business going forward with emphasis on high service need verticals.

Combined, our Amrep, Waterbury and Niagara acquisitions historically have generated annualized revenues of about $150 million. To support these and our legacy sales businesses, we increased advertising and marketing expenditures in retail and further expanded our sales force.

Fiscal 2011 and Beyond

Three years after becoming an independent public company, we can look back on our progress with a great deal of satisfaction. We now have a strong strategic, operational and financial foundation that can be leveraged as we focus on organic growth and growth through acquisition. We are on track to achieve $6 million in synergies from the Amrep acquisition and, beginning in fiscal 2012, an additional $2 to $3 million from combining the Amrep and Waterbury businesses. We expect to reinvest a portion of these savings to further grow our business.

In addition to continuing to build our cash flow and filing a $200 million shelf registration, we also strengthened our capital structure in July by entering into a $320 million, five-year senior secured credit facility with an expanded number of lenders. This recapitalization not only affords capacity in support of our acquisitive growth strategies, but also better aligns our debt covenants with those initiatives.

We have many reasons to be optimistic about our future, but it’s also clear that our North American sales and service business will continue to experience the headwinds created by a weak employment picture. The resumption of a more normalized level of GDP growth, and likewise a reduction in the unemployment rate is widely predicted to remain slow in the months ahead.

That said, we are beginning to see some year-over-year improvement in certain manufacturing segments, and in food processing and food service. In sum, we believe there is an opportunity to significantly increase our earnings and margins in the coming year. Never before have we been better positioned to capitalize on the opportunities that lie ahead.

All of our progress – as well as our future – would not be possible without the support of our customers, the diligent efforts of our associates, the guidance of our board of directors and the encouragement of our shareholders. Transformation is never easy, and without the support of all our constituencies, this would not have been possible.

Sincerely yours,

John K. Morgan
Chairman, President and Chief Executive Officer