Zep Management Discusses Q4 2013 Results - Earnings Call Transcript

Oct. 9.13 | About: Zep Inc. (ZEP)

Zep (NYSE:ZEP)

Q4 2013 Earnings Call

October 09, 2013 8:30 am ET

Executives

Don De Laria - Vice President of Investor Relations & Communications

John K. Morgan - Chairman, Chief Executive Officer and President

Mark R. Bachmann - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Robert Labick - CJS Securities, Inc.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Summit Roshan - KeyBanc Capital Markets Inc., Research Division

Operator

Good morning, and welcome to the Zep Inc. Fourth Quarter and Year-End 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Don De Laria, Vice President, Investor Relations and Communications. Please go ahead, sir.

Don De Laria

Good morning, and thank you for joining Zep Inc. today for our Fourth Fiscal Quarter and Year-End 2013 Conference Call. Before I begin today's call, I'd like to remind participants that our earnings call format includes an online presentation to augment our comments. You can access this presentation, as well as this quarter's earnings press release online at www.zepinc.com in our Investors section under Webcast and Presentations. Included within this quarter's earnings press release is a reconciliation of the non-GAAP measures that are referenced in this presentation to their nearest GAAP measure.

This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts communicated during this conference call, may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's annual report on Form 10-K dated November 8, 2012. All forward-looking statements are expressly qualified in their entirety by such factors.

Here with us today are John Morgan, Chairman, President and Chief Executive Officer; Mark Bachmann, Executive Vice President and Chief Financial Officer; and other selected Zep Inc. officers.

I would now like to turn the call over to Mr. John Morgan.

John K. Morgan

Thank you, Don, and welcome, everyone, to our fourth quarter and year-end earnings call. As I stated in the press release, this quarter was about delivering on near-term commitments, while laying the foundation for growth. I want to begin by congratulating our teams for maintaining a focus on free cash flow, which allowed for substantial debt reduction, following the Zep Vehicle Care transaction.

We're very confident that we have the right strategy to accomplish our long-term goals. Over the next several months, we will complete the integration of Zep Vehicle Care and continue executing complexity-reduction initiatives, including: Aligning sales and marketing; optimizing our supply chain and products; investing in innovation; and growing sales capacity that, together, will lead to profitable growth.

Today, I'll highlight the team's achievements in the fourth quarter and the full year, and then provide more detail on our near-term strategies that are critical to achieving our long-term goals. As always, we welcome your questions at the end of the call today.

Revenue in the fourth quarter increased just over 6% to $182 million. We performed at the upper end of our previously communicated revenue guidance, bolstered by better-than-expected promotional activity with national retail partners.

In addition, our gross margin grew by 130 basis points, primarily due to favorable sales mix. We're particularly pleased that our teams were able to begin cost-reduction actions in the quarter, which, together with Zep Vehicle Care and increased promotional activity, helped to grow adjusted EBITDA by 8% to $17 million.

As a result of efforts to reduce working capital, free cash flow grew by almost $27 million, and we reduced debt by more than $29 million during the period. Since many of the restructuring efforts were implemented late in the fourth quarter, we expect those actions will have a more favorable impact on cash flow and earnings going forward.

Turning now to the full year, fiscal 2013 revenues increased 5.5%, primarily as a result of acquired revenue, which contributed nearly $56 million. Gains with both existing and newly-added national retailers were encouraging, yet were offset by volume declines in our legacy business. Legacy declines were primarily related to the residual effect of our ERP implementation in December of 2012.

We believe that average daily sales volumes in our legacy business are stabilizing, but at a new lower level. Gross margins improved 110 basis points, primarily as a result of the addition of Zep Vehicle Care. Free cash flow increased by $34 million to $38 million, or $1.69 per share, while adjusted EBITDA grew 6% to $57 million.

Following the acquisition of the Vehicle Care business, we stated that we expected to delever our balance sheet by half a term with modest EPS accretion. I'm pleased to report that we accomplished both goals with a nearly 50 basis points reduction in our leverage ratio to 3.3x and $0.02 of EPS accretion.

Now I want to turn to the near-term expectations for the business. Last quarter, we indicated that we were beginning to take steps to reduce complexity in an effort to better position our platforms for profitable growth. During the quarter, we announced that we were reducing our non-sales headcount by approximately 6%, and implemented a number of programs designed to achieve $8 million to $12 million of annualized cost savings, $9 million of which we now we believe we will realize in fiscal 2014.

We also promised to articulate our near-term plans in greater detail, including how we will invest a portion of that $9 million in savings. As such, I want to provide an overview of what we intend to achieve over the next few quarters. In September, we began focusing on alignment of our sales and marketing organizations in an effort to increase investments in new product innovation, grow sales capacity and improve sales productivity.

To accomplish this, it's imperative that we have the right people in the right place at the right time. As such, I'm pleased to announce that we have combined our commercial organizations in North America under the leadership of 2 accomplished industry veterans. Joe Seladi, who joined Zep Inc. from the Amrep acquisition, will lead our Retail and automotive OEM businesses in addition to driving our complexity-reduction initiatives. Joining Zep from our acquisition of the Ecolab carwash business is Steve Nichols, who will take responsibility for all other end markets in North America. Both Steve and Joe have over 30 years of industry experience in a variety of markets and channels.

This change will drive 2 important elements of our strategy. First, it will combine sales and marketing for all channels, leading to a more streamlined product development process and greater sales productivity. Second, it will place the necessary focus on our complexity-reduction initiatives, including the elimination of marginal business and the streamlining of various processes to eliminate waste and further improve our cost structure.

Supporting these newly-organized commercial organizations is an enterprise-wide supply chain led by Jeff Fleck, who joined us 2 years ago from Clorox. Our customers will benefit from the integration of R&D, sourcing, logistics and manufacturing under centralized leadership.

Our teams are continuing to invest in our ERP system and implementing our current supply chain simplification initiative to take advantage of sourcing opportunities, optimizing our distribution footprint and move product more efficiently through our system. We believe this will ultimately lead to better service to our customers through enhanced overall service capabilities.

I do want to remind listeners that, as previously disclosed, these improvement initiatives have already had and could continue to have a negative effect on our top line performance. However, we believe these initiatives will position the business for future growth. I'm confident that these actions we are taking, over both the near term and the long term, will drive free cash flow.

And with that, Mark, let me turn the call over to you to review the financial details.

Mark R. Bachmann

Thank you, John, and good morning, everyone. Net sales in the fourth quarter were $182.2 million, up $10.5 million or 6.1% compared to last year's results. Acquired revenues added $16.2 million, which was partially offset by an organic volume decline of $4.3 million and $2.6 million from 1 less selling day.

Price and foreign exchange positively contributed $1.2 million in the period. We benefited from acquired revenue associated with the Vehicle Care acquisition, and promotional activity with our automotive aftermarket and home improvement retailers.

Adjusting for 1 less selling day during the quarter, transportation increased 23.8%, driven by Zep Vehicle Care and the increased promotional activity with automotive aftermarket retailers. Industrial/MRO and other grew 4.6% as a result of solid gains from manufacturing, oil and gas and national distributors. Jan/San and institutional sales were off 2.6% due to the continuing impact of declines in both direct government spending and the residual effect on government contractors we also supply.

Fiscal 2013 net sales increased 5.5% to $689.6 million compared to last year's results. Acquired revenues added $55.2 million, which was partially offset by an organic volume decline of $19.4 million, and $5.2 million from 2 less selling days in the year. Additionally, price contributed $5.4 million.

The trends and drivers I discussed for the fourth quarter are also applicable for the full year. On an average daily sales basis, in fiscal 2013, transportation grew 18.9%, driven primarily by the addition of Zep Vehicle Care. Industrial/MRO and other grew 2.4% from gains in manufacturing and oil and gas. And the Jan/San and institutional end markets were off 2.6%, driven primarily by declines in government spending and its residual effects.

Turning to gross profit, fourth quarter gross profit increased 9.1%, or $7.1 million to $85.2 million compared to the same quarter of fiscal 2012. Our gross profit margin increased 130 basis points to 46.8%. Zep Vehicle Care positively impacted gross margins by 150 basis points, while performance added 40 basis points and business mix negatively impacted gross margin by 60 basis points.

On a sequential basis, gross profit, as a percentage of sales, increased 10 basis points compared to the third quarter. The combination of business mix, which added 40 basis points, was mostly offset by unfavorable performance of 40 basis points. Compared to fiscal 2012, gross profit increased 7.9%, or $23.7 million, to $324.5 million.

Our gross profit margin increased 110 basis points to 47.1% for the year. Zep Vehicle Care positively impacted gross margin by 110 basis points, while favorable performance offset unfavorable business mix. Selling, distribution and administrative expense increased by $6.1 million in the fourth quarter and $22.3 million in the fiscal year, largely due to the inclusion of Zep Vehicle Care.

During the quarter, we began implementing a number of cost-reduction efforts, including a reduction in non-sales headcount that provided approximately 1 month of benefit in the fourth quarter. We expect to realize the benefit of these initial actions as we enter into fiscal 2014 and supplement this with other cost-reduction actions.

During our fourth quarter, we generated $11.8 million of EBITDA, representing a $3.9 million decrease from the prior year. Our EBITDA was adversely impacted primarily by $5.2 million of restructuring expense, organic sales volume decline and the non-reoccurrence of a couple of items that benefited us last year. These declines were more than offset by the earnings accretion from Zep Vehicle Care acquisition and improved price cost relationship and lower selling, distribution and administrative expenses.

During our fiscal 2013, we generated approximately $52 million of EBITDA, representing a $1.7 million decrease from the prior year. Our EBITDA was adversely impacted by the same drivers I outlined for the fourth quarter, most notably, the $5.2 million restructuring charge, bringing our adjusted EBITDA to $57.1 million.

What is also apparent is the implementation of the new ERP system was far more disruptive to our business, causing both the sustained reduction in both customers and revenue, as well as higher operating expenses for a period of time until the business stabilized with the new system. We believe the impact was equally split between lower revenue and higher expenses, which, in total, might have been as much as $5 million to $7 million in EBITDA for the year. We expect the volume impact will carry over into the first half of fiscal 2014 and would like to remind listeners that this expectation was included in our previously communicated guidance.

EPS for the fourth quarter was similarly impacted by these drivers, which contributed to the reduction in EPS from $0.33 last year to $0.12 reported this year. Adjusted EPS, excluding the restructuring charges, was $0.28 compared to $0.33 in the prior comparable period. Excluding amortization expense of $0.09 per share, on a cash basis, adjusted EPS was $0.37, or equal to last year on a comparable basis.

EPS for fiscal 2013 was $0.68 this year, compared to $0.98 reported last year. Adjusted EPS, excluding the restructuring charges, was $0.83 compared to $0.98 in the prior comparable period. Excluding amortization expense of $0.32 per share on a cash basis, adjusted EPS was $1.15, down $0.01 versus last year on a comparable basis.

Free cash flow during the fourth quarter, defined as cash flow from operations less net capital expenditures, increased $26.8 million to $28.5 million compared to the fourth quarter of 2012. The increase in cash flow generated in the current quarter was driven primarily by working capital improvement and increased accruals for several operating expenses and the restructuring reserve we established during the quarter.

Free cash flow during fiscal 2013 increased $33.7 million to $38 million, representing $1.69 of free cash flow per share. The increase in cash flow generated in fiscal 2013 was driven by the same factors I just described for the quarter.

In light of the consistent free cash flow generating capability of the business, last week, we announced that the company declared a 25% increase in our quarterly dividend from $0.04 to $0.05 per share. We believe this is a balanced approach to investing and grow -- to grow the business, while providing a return to our shareholders.

We reduced our net debt by $29.2 million this quarter and our net debt position at the end of the quarter was approximately $208 million. Our performance against our debt covenants improved during the period, finishing the quarter with a debt-to-EBITDA ratio of 3.3x and a fixed charge ratio of 2.2x. We continue to believe that we will be able to generate free cash flow and delever our balance sheet.

Nothing significant has changed in the last 2 months that would alter our previous guidance on revenues for fiscal 2014. Considering current trends, restructuring objectives, simplification initiatives and other actions, we continue to expect negative pressure on top line results. In fiscal 2014, we expect our gross profit margin will range between 46% and 48%; total capital spending will be in the range of $12 million to $14 million; interest expense to be in the range of $8 million to $9 million; and our effective tax rate to be between 35.5% at 36.5%; finally, we would anticipate our leverage ratio would improve approximately another half a turn by the end of fiscal 2014.

As John previously indicated, during the next several quarters, our focus will turn to execution of near-term goals to achieve those longer-term objectives. As such, I'll end my comments by reiterating 2 of our near-term financial priorities. First, we will continue to execute our complexity reduction and restructuring plans developed in the fourth quarter to optimize our earnings and cash flow. Second, we will utilize excess cash flow to reduce debt, make strategic investments and fund our dividends.

Now we'd like to open up the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Bob Labick of CJS Securities.

Robert Labick - CJS Securities, Inc.

Just wanted to start on the -- kind of on the Retail side. You guys have had some very good growth in new accounts over the last few months, and wanted to see if you could tell us a little bit about the sales -- the organic sales, if you will, versus the initial stocking sales. And have you been able to expand your overall share on that side by going out to these -- by extending your distribution? How is that process moving along and where do you see that going in the next few years?

John K. Morgan

So, Bob, in the fiscal year of '13, I would say the majority of the increase in activity with new retailers were initial stock orders stocking shelves. And it's a little early, in some cases, to comment on what the sell-through rates are, but those that were stocked earlier in the fiscal year, we're pleased with the cash register of sales, the sale-through rates that are being reported to us in most every instance. Our largest and, historically, most important partnership has been with the Home Depot. That is not new stocking. That is a special promotion, working together on continued product line expansions and so forth. And we've been very pleased with that partnership and the way we've grown there. So I would expect that, over the coming 1 to 3 years, we will continue to try to grow through diversifying. I think the real key and the point you're making will be what we find the sell-through rates to look like in the coming year, in our fiscal '14. I think that will tell us a lot because we are rapidly running out of new places to go in retail, and it's really going to be, now, about us arming those retailers with additional product innovation to continue to grow down the aisle. But I'm very -- it's an important initiative for us. I'm very pleased with what -- with how the market has responded and what our teams have been able to accomplish there.

Robert Labick - CJS Securities, Inc.

Okay, great. And then on the transportation side in the Vehicle Care, obviously, the integration sounds like it's gone very well. And I know one of the, kind of, medium- or longer-term opportunities there was to potentially expand your share of wallet, for lack of a better term, now with the national coverage and things. And how has that progressed?

John K. Morgan

On the first part, you're absolutely right; it's gone very well, the integration. We do have a few more months of work to do to complete our integration and discontinue the support that we're getting from Ecolab, who have been terrific to work with in Transition Services Agreement. We will come out of that Transition Services Agreement here in the next few months. In terms of market share expansion, I'm really pleased that we've lengthened our relationship with the Armor group, with the Armor All brand that we now have a new 13-year program with, as well as our Zep brands, Blue Coral, Black Magic, Rain-X and so forth. And I think that what Steve Nichols and his team have available to them is, by far, the best set of capabilities and new product innovation and dispensing equipment capabilities on the market. So I'm really optimistic about their ability to continue to expand both with national accounts and with regionals across the country. That said, their focus in the last few months has really been on the integration of the backroom. So it's a little early to tell what our success rate will be there, but I have every reason to believe that they've got all the makings of a great opportunity to expand that business.

Robert Labick - CJS Securities, Inc.

Okay, great. Last one and I'll get back in queue. Obviously, some very nice and strong free cash flow and getting the leverage down. You indicated in the near-term that contains to be a focus. At what point or what leverage do you start looking for more tuck-in and acquisition opportunities?

John K. Morgan

I'm not spending any time in fiscal '14 looking for tuck-in opportunities. I think we need to be continuing to push our leverage rates down at this point in time.

Operator

Our next question will come from Matt McCall of BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So you mentioned the ERP impact and I think, Mark, you gave some full year color on the impact. I'm just -- specifically, John, you said the direct business was impacted, and I think -- and, Mark, I appreciate the numbers. But I'm curious as to exactly what happened to impact it. And you said that you felt like it was stabilizing, albeit at a lower level. Was it all ERP-related? Just kind of give us some more details about what's been going on there.

John K. Morgan

Yes. Listen, I don't know that it's all ERP-related to be accurate, but it sure looks like it. When we went live on SAP, shortly after go-live, we had a lot of difficulty in the execution and the movement of data through our system to point shipments to trucklines and various other fulfillment activities to service. And we expected the normal inefficiencies until we become proficient with the new system. But we had to rapidly bring SAP consulting back into the business and spent a good bit of expense money shortly after the go-live to repair nonworking functionality within the ERP system. And so that was very expensive. As you know, for us, $300,000 of expense is about $0.01 per share, so that adds up pretty fast when you're bringing ERP consultants in, and that was the big difference. We also had considerable partial and expedited shipments that added considerable cost to the operations because we erred on the side of doing everything we could to serve customers, even if we had to bear excess freight or partial shipments and run overtime and things like that to make sure that we took care of customers. We -- on the customer side, our uncertainty and inaccuracy and information for customers, shortly after that go-live, did push some customers to purchase product from competitors as opposed to us, and it's too early to tell whether those come back to us or not. But that's specifically what happened. We did a poor job of execution of the go-live of ERP.

Matthew Schon McCall - BB&T Capital Markets, Research Division

And, Mark, you had said -- the number you gave us, $5 million, you said that was -- is the $5 million the expenses John just referenced, kind of the nonrecurring items?

Mark R. Bachmann

The -- Matt, the $5 million to $7 million range was our estimate of the EBITDA impact of both the decline in revenue, because we did see a decline in the average daily sales before go-live and after go-live, as well as the additional expenses that John mentioned that were more temporary, or onetime, until we stabilize the system. We do believe that the revenue, those lost customers who went elsewhere and have not yet returned, that's what we're saying will likely carry over into the first half of 2014 until we anniversary the go-live of SAP.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay, and the expenses should not recur. And what's the -- is the breakdown roughly 50/50? Is that 5 to 7?

Mark R. Bachmann

Yes, that's right. We said roughly, equally, between revenue and expense.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. Sorry, I missed that. So you did some good work on the working capital front. In the quarter, inventory levels by my -- at least in my model, the lowest level as a percent of sales in quite a while. And it sounds like there's more work to do there. So is it -- help me understand how 9% of sales is sustainable in a business that's done well above that in the past? Is it -- how much is left and what's the right level?

John K. Morgan

Two-part answer. I can't honestly tell you precisely what the right level is. What I can tell you is that at our current levels, I'm really pleased with our service to customers. We track fill rates every day with our up-and-down-the-street customers, as well as our major retailers and major distributors. And I couldn't be more pleased with what we're seeing with our service levels. That said, I think we -- at the fundamental level on the business, I think we can continue to bring down some inventory levels as we continue to go through the consolidation of our logistics footprint that we've talked about previously. Now, that could be offset somewhat as we bring inventory in that currently resides at Ecolab that needs to be moved into our business. They currently hold that in the Transition Services Agreement. But the fundamentals of the business -- and a lot of that has to do with timely and accurate information in our sales and operations planning process that we're benefiting from on SAP. SAP was awfully painful, but it is bringing us some capabilities, I think, to operate at an improved working capital level.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. Okay. The final question I had, I think you -- on a previous answer, you said that on the retail front, you kind of have addressed all the best opportunities. What about on the distribution front? Are you kind of tapped out there as well and you just need to see cyclical and maybe some market share growth?

John K. Morgan

You're right, that is what I said. On Retail, I think there are a few more targeted prospects that we'd really like to be successful with. But on distribution, it's a different situation. I think there are -- I think there's a lot of headroom for greater success in the distribution sides of the business from a channel perspective. We're working awfully hard internally at putting together the organization under Steve Nichols that will run both the direct and the distribution, so that we can bring customers a more integrated set of capabilities in a channel-agnostic manner. So it may be less relevant to think about channel specifically as time goes on, but I think there's a lot of headroom still in distribution.

Matthew Schon McCall - BB&T Capital Markets, Research Division

That channel-agnostic manner is -- I know that channel conflict -- internal channel conflict has been an issue. Is there -- are you working on a process where the rep is going to work, I guess, with -- indirectly with that distribution partner and it's more of a team effort? What do you mean by that agnostic?

John K. Morgan

Steve certainly has that in mind and has been communicating with a number of reps about that. You're absolutely right. When we go through changes like this, it does create channel conflict and angst, not only for our reps, but also for distributors. But it's really clear that really large, strategic accounts need the technical capabilities that we can provide through our sales organization; but many times, wants the integrated supply capabilities of the distributor. And I think the magic bullet is to find a way to combine those capabilities for those strategic accounts. That's not to say that you don't have local small customers that will be served either directly or through distribution. But when it comes to the large strategic national accounts, I think you have to -- we have to find ways to be creative of putting that combination together. And to your point, it'll be a challenge, but that's what the clients are demanding and that's what we're going to continue to work to find a way to do.

Operator

[Operator Instructions] The next question will come from Liam Burke of Janney Capital Markets.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

John, when you talk about the complexity in the businesses or eliminating it, how much of this activity is related to discontinuing or elimination of unprofitable product line or slowing down activities in certain verticals?

John K. Morgan

Liam, it's both. You've visited here not long ago and you had the opportunity to look pretty closely at our ZBS systems, or Zep Business Systems, that includes our lean activities. And in the 80-20 analytics that's part of that system, we can begin to clearly see, in the work that's being done now, that there are -- there's some business, from a customer perspective, that is a marginal value, which we need to make better, and there are some products and brands that are of marginal value; much of which we took on as a result of the 7 acquisitions that we made in the last 2.5 years. I can't give you an exact number in terms of how much is product and how much is customer, but our focus starts with product. And it includes process, because there are also backroom processes that we think are inefficient, that will be improved through the work we've done with SAP. So I think the more direct answer to your question would be think about it in terms of product. We intend to do everything in our power to keep product elimination and brand elimination from negatively affecting customer relationships, but we -- it's been my experience that, sometimes, there is some customer fallout as we eliminate some product. But we're starting with product.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Okay. You talked about Vehicle Wash, Automotives, MRO, industrial. How is food processing or food service working into the mix here?

John K. Morgan

We include the food in our industrial category. As you know, there's food service and hospitality and that type of thing. That's not what we're talking about in our world. We're talking about food processing; it's factories processing food. And so we include that in the numbers in our industrial. Food is doing well. I believe there is more headroom there. I'm pleased that we're growing in the food. I'm unhappy with the rate of growth. I think there's opportunity to grow at a faster rate. Over the last year, we changed leadership in the food organization, and we're getting a lot of traction as a result of, I think, stronger leadership and stronger hiring of reps, specifically in the food area. So we're focused -- after having made that leadership change, we're focused on both adding reps and bringing some new product innovation to that vertical. And I'm pleased with the early signs, but I'd like to see it grow better.

Operator

The next question will come from Summit Roshan of KeyBanc.

Summit Roshan - KeyBanc Capital Markets Inc., Research Division

Most of my questions have been answered. But just looking at -- you've talked about the $8 million to $12 million in cost savings and within that, some higher costs that you're going to see from investing in things like specialized sales force and some innovation initiatives. I was wondering if you can give a little bit more color on how you're progressing on those initiatives and, in particular, innovation, maybe a new product pipeline and bringing on more specialized sales capacity?

John K. Morgan

Yes, great question. We're focused on market share growth and to grow when a market's really not growing all that much, we do need product and we do need more sales capacity. So those are really the 2 big levers. The teams did an awfully good job over the last year of beginning turning more attention to product innovation post the integration of all the previous acquisitions. And so, we'll be introducing this fall at ISSA and at the APAC show, and to our mass [ph] organization through the regional and national meetings there, a number of new products that the teams have been working on over the last year. That said, I think we can do a better job there. And I think we can be more efficient with that in the new organizational structure I referred to earlier. We're moving to an enterprise-wide, stages-engaged product development organization that will support all of our various different verticals and our various different channels from product specialists that focus on key product bundles. And so I'm optimistic about what's recently taken place, and it gives me a lot of hope for the ability to continue to accelerate that. On the side of increasing sales capacity, I think we've done a good job, just recently, of beginning to add sales capacity in our oil and gas business, in our food business and in our inside sales organizations. Where we've got a lot of work to do is to ramp back up the hiring of sales reps in our mass [ph] organization, which is an important initiative for us in our fiscal '14. But we're sort of in the early stages of that.

Summit Roshan - KeyBanc Capital Markets Inc., Research Division

Great. And then, maybe just one more. If you could comment on any transitioning in raw materials?

John K. Morgan

Within the entire market basket of raw materials, there are various different puts and takes. We are expecting that we may have to have a modest price increase in our fiscal '14 to offset some modest increases because we did not take price over the last 2 years, and so we'll have to make some modest adjustments there. But I'm not -- depending upon what happens with our political structure and negotiations and the impact that can have on the world, I -- we don't see anything draconian in our forecasts.

Summit Roshan - KeyBanc Capital Markets Inc., Research Division

Sure. And then, just to clarify, is that baked into the 46% to 48% gross margin that you've guided here for '14?

John K. Morgan

That's correct.

Operator

[Operator Instructions] And showing no additional questions in the queue, I would like to turn the conference back over to Mr. John Morgan for his closing remarks.

John K. Morgan

Great, thank you. I want to thank everybody for joining us on the call today and look forward to reporting to you the progress when we meet again in January. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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