Zep CEO: Strategy has potential for negative impact
Zep, Inc. (NYSE:ZEP) CEO John Morgan said the Atlanta-based maker of cleaning and maintenance products is achieving it goal of achieving a simplified business model, but may go through a painful period over the next couple of quarters. In an effort to streamline, Zep is reducing its product offerings and reducing its headcount. Morgan made the comments during a midday Wednesday conference call with analysts and investors.
“As we eliminate products, we are focused primarily on lower-volume products and in the long term, we expect margins to improve as we reduce our cost structure,” Morgan said. “As we turn our attention to growth in the future, we will be able to take advantage of this more attractive cost structure.”
Although Morgan said Zep’s business is recession resistant, he said the company’s sales volume decreased during the recently ended third quarter due to planned reductions in its sales force. Zep recently introduced stricter performance standards for its sales team and modified its hiring practices.
As the company restructures itself, Morgan said Zep expects inconsistent financial results. The company is targeting investments now that will propel profits in the future, he said.
“While we anticipate that our strategic initiatives will positively impact our business in the future, they have the potential to adversely impact our operating results in the next couple of quarters,” Morgan said.
Zep reported early Wednesday that its adjusted third-quarter income declined to $6 million, or $0.28 per share, down 5% from $6.3 million, or $0.30 per share, a year earlier. The profit results met Wall Street’s expectation.
“Continued increases in raw material costs put downward pressure on earnings as cost inflation slightly outpaced our ability to achieve price increases in a timely fashion,” Morgan. “We did announce another price increase early in our fourth quarter, as our January increase was not sufficient. However, our most recent adjustment had no impact on the third-quarter results.”
On an unadjusted basis, Zep’s quarterly earnings totaled $0.2 million, or $0.01 per share, from $3.6 million, or $0.17 per share, a year ago. Net income during the three month period included a $9.3 million charge related to special items and restructuring. The restructuring charge was greater than anticipated due to a more aggressive set of actions than were initially envisioned, the CEO said.
Quarterly revenue declined slightly to $145.2 million from $145.4 million a year ago. The results missed Wall Street’s revenue expectation of $148.5 million. The company experienced softness in its transportation and home improvement segments, Morgan said.
The cost of products sold rose 7% to $64.7 million from $60.5 million a year earlier. Selling, distribution and administrative expenses declined 7% to $71.8 million from $77.5 million during the same period of 2007.
Gross profit fell 5% to $80.4 million from $84.9 million a year ago. Operating profit plunged 88% to $0.9 million from $7.5 million during the prior-year period.
“Despite operating in a difficult economy, we generated very solid cash flow during the quarter,” Morgan said.
During May, Zep significantly increased its minimum order size. The average order size has increased 23% while the number of related transactions decreased 19% since implementing the new policy.
“This change will eliminate smaller transactions that take valuable time away from servicing our best customers,” Morgan said. “It also encourages some smaller customers to expand their spending with us or at least consolidate their individual transactions, thereby reducing both hours and their transaction volume.”
Morgan said Zep’s entrance into the $6.4 billion industrial distribution channel is progressing as planned. The firm has begun sales calls and has nearly completed a professional-version product line and packaging, he said. Zep expects the industrial distribution channel to account for 10% to 15% of sales in coming years.
In afternoon trading, ZEP is down 1.46% to $14.83.
