Zep to shop around for growth

By Péralte C. Paul

The Atlanta Journal-Constitution

Nearly a year after changing its direct sales business model, Zep Inc. is embarking on a campaign to grow its share of the industrial cleaning chemicals business.

A key part of the strategy for the Atlanta-based company: grow by acquisition and establish a foothold in Eastern Europe.

Zep, which sells its cleaning products to schools, cities, restaurants as well as through some retailers, has been acquisition hungry for a while.

"We started on this path last fall and put it on hold when the economy began to falter," said Mark R. Bachmann, Zep's chief financial officer.

Instead, the company cut costs by trimming headcount and improving operations.

It also overhauled its direct sales team, known as Zep Reps, by instituting a more detailed and stringent employee review process. That change was designed to improve the Zep Reps' sales results and performance goals.

Zep Reps, a longstanding part of the company's sales strategy, sell directly to businesses and account for most of the its revenue.

The internal changes helped the company financially despite turmoil in the economy. In its fiscal fourth quarter ended Aug. 31, the company reported profit fell to $6.3 million, or 30 cents per share, from $7.9 million or 37 cents per share in the same quarter of 2008. That beat Wall Street expectations.

For its full fiscal year the company reported a profit of $9.3 million, or 43 cents per share,  compared with $16.3 million, or 77 cents per share for the comparable 12 months in 2008.

"We believe the company is executing well in a very difficult economic environment," John Rogers, a an analyst at Janney Montgomery Scott, wrote in a research note to investors Oct. 19.

A year ago Zep stock traded for more than $20 a share. It dropped to under $8 a share by last March but has rebounded since, closing Wednesday at $17.60.

Earlier this month,  Zep said in a filing with the  Securities and Exchange Commission that it plans to raise up to $200 million by issuing more shares or other securities.

Some of the money it wants to raise is earmarked to potential acquisitions, the company said.

"We did want to have greater flexibility and a certain amount of capital available," Bachmann said. "We are in the process of building our pipeline of acquisition candidates."

The focus on acquisitions comes two years after Zep was spun-off as a publicly traded company from Acuity Brands, the Atlanta-based lighting fixtures maker. Both companies had been units of National Service Industries, the old Atlanta conglomerate.

Zep is not publicly saying which companies are on its list of candidates. But it is looking at firms with annual sales of $50 million to $150 million. It also wants companies that will add to its stable of cleaning products, boost its domestic market share -- particularly through industrial and retail distribution channels -- and expand its geographic footprint.

The geographic footprint is of particular importance; 80 percent of Zep's current production is based in Georgia.

Bachmann said the company isn't looking to shift jobs away from the Peach State, but that having manufacturing facilities across the country would cut costs and enable better response to local or regional market changes.

"Some of the benefits are you would have lower transportation costs and a lower cost of supply of inventory," Bachmann said. "And it would allow us to be more flexible and provide greater customer service."

Part of the expansion strategy is designed to increase the proportion of sales in retail and industrial distribution channels, Bachmann said. About 82 percent of Zep's annual revenue comes from its direct sales Zep Reps. Another 16 percent comes from retail and two percent come from industrial distribution.

But in overall U.S. cleaning chemicals maintenance market , estimated to be about $16 billion, only 20 percent of sales are generated via direct sales. Industrial distribution accounts for 45 percent and retail makes up 35 percent.

That explains why the company recently inked a deal with Advance Auto Parts, giving  Zep products a new channel.

"We do believe expanding our retail presence will drive long-term growth and will enhance our value proposition and our brand awareness," Zep chairman John Morgan said in a recent conference call with analysts.

The company also signed agreements with 70 local and regional industrial distributors to market its professional line of products.