Weak economy, cost cutting helps Zep grow

Few industries have escaped the worst U.S. economic downturn since the Great Depression.

But some sectors -- the specialty cleaning chemicals industry for one -- are proving more resilient.

“Recession-resistant” is how John K. Morgan, chairman and chief executive of Atlanta-based Zep Inc., describes the maker of cleaning products.

Three key reasons, he said, are what Zep sells and who it sells to; its size in the $19 billion industry; and an aggressive approach to acquisitions and strategic partnerships with retailers.

Zep, like many other businesses, has looked to cut costs and cut staff to boost the bottom line. But sales of detergents, disinfectants, hand cleaners and floor finishes to its business clients, along with a growing consumer retail segment, also helps.

Industrial, corporate and municipal clients need clean restaurant kitchens, hospitals wards and schools regardless of the economic trends.

“The nature of our customer base and our product lines is that people still sanitize the areas where they prepare their foods, they still wash their hands and they’re maintaining their older vehicles,” Morgan said.

The H1N1 influenza scare also helped drive sales in the retail channel which Zep has spent the last couple of years beefing up as it expanded beyond direct sales to business customers through its “Zep Rep” sales force.

Zep swung to profitability in its fiscal first quarter, posting a profit of $5.4 million, or 25 cents per share, compared with a loss of $1.5 million, or 7 cents a share, in the same period a year earlier.

Though sales slipped roughly 2 percent in the quarter, the decline was partly offset by favorable currency conversions into the U.S. dollar from international sales, price increases on some products and double-digit growth in retail.

The company’s shares, however, fell 9 percent in 2009. That’s as the S&P 600 Smallcap and S&P Materials indices rose more than 25 and 48 percent, respectively last year.

That’s why the company has been particularly aggressive with its retail focus and searching for potential acquisition targets.

On Monday, the company bought Amrep Inc. for about $64.4 million. Amrep specializes in chemical formulations aimed at the automotive, fleet vehicle maintenance and motorcycle segments.

Zep executives say the company is looking to buy firms whose business would complement its products and boost its retail presence.

Zep also has an agreement with Advance Auto Parts to sell several Zep professional and industrial strength products through its more than 3,400 stores and Web site.

These moves, the company says will help grow market share in a very fractured, multi-billion dollar industry, with few national competitors. Zep’s market share is about three percent.

“We operate in a sizable industry that grows at the rate of GDP,” Morgan said. “Looking at the fragmented nature of our industry, growth and acquisition in related businesses, you really create better value for shareholders.”

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