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Zep (NYSE:ZEP)

Q1 2014 Earnings Call

January 06, 2014 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.

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

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

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Rosemarie J. Morbelli - G. Research, Inc.

Operator

Good morning, and welcome to the Zep Inc. First Quarter Fiscal Year 2014 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.

Don De Laria

Good morning, and thank you for joining Zep Inc. today for our first fiscal quarter 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 Webcasts & Presentations. Reconciliations of non-GAAP measures referenced in this presentation to their nearest GAAP measure are available on the Zep Inc. website.

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 for fiscal 2013, which was filed with the Securities and Exchange Commission on November 5, 2013. 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 first quarter earnings call. First, I want to provide a high-level overview of our financial performance. I'm pleased that this quarter was straightforward and generally in line with my expectations, with only a few surprises. Our first quarter sales finished slightly above the high end of our previously communicated range, increasing 4.3% to almost $165 million. Gross margins improved 70 basis points to just above 48% due to an improved business mix. As a result of the steady progress of our restructuring efforts and the integration of Zep Vehicle Care, we generated $14 million of adjusted EBITDA during the quarter, representing 17% growth over last year. This resulted in a 90 basis points improvement in adjusted EBITDA margins over the prior year. Adjusted earnings per diluted share were $0.17 during the quarter, which excludes $0.03 per share of costs related to a California legal matter and acquisition integration expenses.

Here are my key takeaways from the quarter. Revenue losses from our complexity reduction efforts did occur as anticipated. However, we benefited from our sales pipeline successes and solid performance from Zep Vehicle Care. We remain on target with our cost savings initiatives, and our operational metrics were in line with my expectations. Our teams drove solid cash flow in the quarter, with diligent management of working capital. As mentioned in our earnings release, we did experience integration costs from previous acquisitions, and we also experienced unusually high legal fees from a 2010 California legal matter. Except for these 2 items, our results were very straightforward.

I'm pleased to report that investments in strategic markets, like transportation and oil and gas, are producing encouraging results. Our sales teams did an outstanding job of producing wins that contributed to sales in the first quarter and are expecting to contribute more wins in the future. In the first quarter, we experienced nice wins in the transportation market and in the industrial/MRO and institutional markets. Our ability to deliver high-quality products consistently and on time is a key component of our value proposition. And I'm pleased to report that our Chief Supply Channel Officer, Jeff Fleck, and his team have achieved outstanding service levels across our businesses.

Turning to Zep Vehicle Care. I'm pleased to report that we are on schedule with the integration of our Vehicle Care business. We are in the final stages of exiting our Transition Services Agreement with Ecolab, and I would like to thank the Ecolab associates for their professionalism throughout the past year. In the first quarter, we integrated Zep Vehicle Care's order entry and fulfillment systems into Zep's ERP system and shared services platform in what proved to be a seamless transition from our -- for our customers. I want to recognize all of the Zep Inc. teams that worked tirelessly to make this transition a success.

On a related note, I'm pleased to formally recognize Darrin Baum as the new General Manager of the Zep Vehicle Care business. Additionally, I'm pleased to report that Chelsea Beyer has been promoted to Senior Vice President of Sales from her previous position, overseeing corporate accounts. Recently, I visited the new Zep Vehicle Care offices in Minnesota, which, among other things, feature a dedicated R&D lab staffed with industry-renowned chemists and a state-of-the-art carwash bay for testing new products. Perhaps more than anything, I'm looking forward to seeing what the ZVC team can do now that they can dedicate 100% of their time to growing the business.

Turning now to cost. In July, we began implementing several cost-savings initiatives, beginning with the reduction in force and continuing with a number of other actions in the first quarter and beyond. The team has executed the plan well. We remain on target to realize $9 million of cost savings in fiscal 2014 and continue to expect to reinvest a portion of that to grow the business organically.

Our supply chain team has been pursuing a number of initiatives to ultimately optimize our operating platform. During the quarter, we identified 2 sales regions which will be consolidated into our Chicago and Pennsylvania distribution centers, offering customers superior service from access to broader and deeper inventory. The changes will also result in a closure of 2 existing smaller warehouse operations. Also, we are in the early stages of implementing the transportation management system, which we expect will optimize shipping logistics to our distribution centers and to our customers as it becomes operational over the next few quarters.

I would like to also commend the associates from around the organization who were involved in the implementation of a new human resource information system, which further reduced complexity by consolidating 8 individual HR and payroll systems into a single more powerful and more insightful HR management tool. With respect to organizational structure, we previously announced the appointment of 2 group presidents; Steve Nichols is leading our industrial and institutional businesses while Joe Seladi is leading the automotive and retail components of our business, in addition to spearheading many of the complexity-reduction activities. I'm pleased with their progress to date and look forward to reporting on their progress further in the future.

As I did last quarter, I want to remind listeners that these improvement initiatives have already had and could continue to have a negative impact on revenue in the next couple of quarters. However, we believe these initiatives will position the business for future profitable organic revenue growth. I'm also confident in the ability of our associates to identify and realize additional enterprise-wide cost reductions and supply chain efficiencies, which, combined with targeted investments, will enhance our selling organization, generate significant free cash flow and continue to improve our balance sheet through debt reduction. While we still have challenges ahead, the excitement about our future is building.

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

Mark R. Bachmann

Thank you, John, and good morning, everyone. Net sales in the first quarter were $164.9 million, up $6.9 million or 4.3% compared to last year's results. Acquired revenues added $16.1 million, which was partially offset by organic volume declines of $10.5 million. Price positively contributed $1.3 million in the period.

North American sales to the transportation market increased 25%, driven by Zep Vehicle Care and increased promotional activity with automotive aftermarket retailers, offset by some lower-margin customer demand shaping. Sales to the industrial/MRO and other markets were relatively flat compared to the prior year while sales to the Jan/San and institutional market were off 8.4% due in part to the continuing impact of declines in both government spending and the residual effect on government contractors we also supply, as well as the impact of lost customers experienced in conjunction with our ERP implementation in December 2012.

Turning to gross profit. First quarter gross profit increased 5.7% or $4.3 million to $79.3 million. Compared to the same quarter of fiscal 2013, our gross profit margin increased 70 basis points to 48.1%. Zep Vehicle Care positively impacted gross margins by 140 basis points while other business mix and operational performance negatively impacted gross margins by 70 basis points, which included cost increases that were not totally offset by pricing actions.

On a sequential basis, gross profit as a percentage of sales increased 130 basis points compared to the fourth quarter. Business mix added 90 basis points, while operational performance contributed an additional 40 basis points. Selling, distribution and administrative expense increased by $4.6 million in the first quarter, primarily due to increased sales volume driving higher variable selling costs, the inclusion of Zep Vehicle Care, legal expenses associated with the 2010 California sales representative litigation and increased depreciation expense resulting from our recent ERP implementation.

During our first quarter, we generated $12.7 million of EBITDA, representing a $2.3 million increase from the prior year. On an adjusted basis, after excluding the abnormally high legal costs associated with the California matter and acquisition integration expenses, adjusted EBITDA was $14.1 million or 17.3% higher than the prior year. Our EBITDA and adjusted EBITDA benefited from the inclusion of Zep Vehicle Care. The impact of the organic revenue decline and the slight deterioration in the relationship between price and product costs were partially offset by restructuring benefits and other cost reductions.

EPS for the first quarter was similarly impacted by these drivers, including the amortization and interest expense associated with the Vehicle Care acquisition. This contributed to the reduction in EPS from $0.16 last year to $0.14 reported this year. Adjusted EPS, excluding the higher legal and acquisition integration costs discussed earlier, was $0.17 per diluted share compared to $0.20 on a comparable basis to the last year. For the benefit of those investors who want to understand the impact of acquisitions, on a cash basis, excluding amortization expense of almost $0.10 per share, adjusted EPS was $0.27, up 8% over last year.

During the quarter, we reduced our net debt by $2.8 million to approximately $205 million. We finished the quarter comfortably in compliance with our debt covenants. Our debt-to-EBITDA ratio was 3.3x compared to our covenant of 4.25x. Our fixed charge ratio was 2.1x compared to our covenant of 1.15x. We continue to believe that we will be able to generate free cash flow to further delever our balance sheet in fiscal 2014.

Our focus for the next few quarters remains unchanged. We will continue to execute our complexity reduction and restructuring plans to optimize our earnings and cash flow. More specifically, we continue to expect sales to be muted as a result of the anniversary of the Vehicle Care acquisition and the impact of our complexity-reduction initiatives, which could result in sales declines of up to 3% for the next 2 quarters. As a reminder, our gross profit margin historically declines, on average, 200 basis points sequentially in the second quarter due to the normally lower sales volume during that period. We would expect fixed costs to continue to benefit from the restructuring activities. All this would likely contribute to lower reported EPS for the second quarter than a year ago.

Lastly, we typically use cash in our second quarter yet expect to generate significant cash flow in our fiscal second half that will be used to make strategic organic growth investments, fund our dividend while still reducing our debt balance.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bob Labick of CJS Securities.

Robert Labick - CJS Securities, Inc.

I just wanted to dig in a little further and just starting with the sales. They tracked well, particularly from the EVC acquisition, and on the organic side, it was basically as you had anticipated. So I was hoping you could talk a little more about on the organic sales, how much of it was SKUs or accounts that you had walked away from because they were maybe not optimal and you're doing this optimization process? Or how much of it was just overall levels of activity? Maybe you could break that down and help us understand it.

John K. Morgan

On the organics, Bob, I'm going to let Mark pipe in here, but just within a rounding here, about half of the organic decline was from lost account activity that was -- that we walked away from. About half of it continued to be the residual effects of lost accounts that we experienced early in calendar 2013, when we went live with the SAP system.

Robert Labick - CJS Securities, Inc.

Okay, great. That's helpful. And in terms of, I think Mark just mentioned, at the end of his comments, the next 2 quarters, some muted sales because you've lapped the EVC, although it sounds like it's an uptick and slightly better than this quarter on the organic basis and then continuing to rise throughout the year, with the anticipation of organic growth in Q4. Is that still the expectation?

John K. Morgan

That's correct. That continues to be our expectation.

Robert Labick - CJS Securities, Inc.

And then the driver of the improvement is the -- maybe you could talk a little bit about some of the new wins that you had talked about at the beginning of your script.

John K. Morgan

Our folks put together a -- both a new product development stages and gates pipeline, as well as sales pipeline, a little over a year ago. So some of the things that occurred in this recent quarter, in Q1, look like overnight successes. They've been working on it for several quarters now. And we've had some good success in the transportation area. We've had some good success in the oil and gas area. I'm really pleased with what's taken place in some of the retail. We continue to see expansion of sales through retail, and that's gone well for us. So we're anticipated -- our North American Sales & Service business did a great job on some maintenance contracts, such as, for example, New York City Transit Authority, a new account for us, just a number of wins that are coming out of what's a pretty organized pipeline process. I was pretty muted in my comments about that quarter or 2 because I just simply couldn't predict what the outcome might be. But I'm pleased with the way that is partially offsetting some of the losses that are coming from the complexity reduction.

Robert Labick - CJS Securities, Inc.

Okay, fantastic. And then just jumping over to the gross margin side. Obviously, it's the highest you've had since the acquisition, and I didn't look back too far, but probably for a while. Could you just remind us what you expect for the range this year? And has anything changed in that regard based on the strength in the quarter and the mix that you have now?

Mark R. Bachmann

No. The range continues to be in the 46% to 48% area. We did achieve 48.1%. That 46% to 48% is the annual average for the year. The second quarter is historically lower on average. It's averaged about 200 basis points lower just sequentially because of the lower sales volume, and then it typically picks up in Qs 3 and 4.

Operator

Our next question is from Liam Burke of Janney Capital Markets.

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

John, can you give us a little more color on the industrial/MRO market? You mentioned some significant sales wins. But generally, the sales were flat year-over-year. Are you looking at weaker end markets and are you taking share? Or what's going on, on the macro, I guess?

John K. Morgan

Well, in the industrial/MRO, which, in this category, I believe Mark includes also food processing factories.

Mark R. Bachmann

That's correct.

John K. Morgan

The food processing factories that we do business with were relatively flat. We saw considerable gains through industrial distribution, and we were relatively flat through other areas from a channel perspective. But generally speaking, the manufacturing and industrial economy in North America has improved somewhat over the last 3 or 4 quarters for us, and that is helping to offset some of the impact that I mentioned earlier from the losses from demand shaping. And so I'm reasonably optimistic about some of the wins that occurred there to help offset that.

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

Great, John. And Mark, you mentioned that you had some cost increases, and I'm not putting words in your mouth, are you anticipating price increases to lag those cost increases? So can we anticipate a little relief there in the subsequent quarters?

Mark R. Bachmann

Yes. So John can comment a little bit more on that, but we have seen some of our raw material costs increase and are evaluating pricing actions in some of our end markets.

John K. Morgan

Right. And Liam, we did just announce a price increase across a little less than -- what would affect a little less than half of our business, and we would anticipate, in the next 90 days, additional announcements. They're relatively targeted. As you know, the impact of steel and packaging that affects aerosols and packaging across our products, as well as the impact of oil, it affects plastic packaging, and some of our raw chemicals are having an impact on our costs. We have not had price increases for a couple years now, and it's unfortunately going to be time to do so. So we recently announced one in our North American Sales & Service business and are negotiating in the other areas right now.

Operator

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

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

So the half of the organic decline that came from SAP, I think, last quarter, you talked about or alluded to hopes that some of that could be regained or you could get some of those guys back. Is there any update on the trajectory of those losses?

John K. Morgan

We're not seeing any further losses, but likewise, Matt, we have not had great success in recovering accounts that were lost during that period of time. So we're coming upon a period of time which, by the way, is reflected in our estimates on revenue for the next 2 to 3 quarters. We're coming up on a time when soon we will be lapping the -- or annualizing the effect of those lost accounts.

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

Okay, okay. And I guess, on that note, did I miss it, did you give some type of outlook for the remainder of the year, Mark? Did -- I heard some outlook, but I felt like it was mostly for Q2.

Mark R. Bachmann

No. What I said, with respect to the top line is, for the next 2 quarters, that our results would be muted. And since we've anniversary-ed the Vehicle Care acquisition and the result of our complexity-reduction initiatives, our top line revenue could be as -- anywhere as much as 3% down over the next 2 quarters, and then we would expect to return to growth in Q4.

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

Okay, okay. And you've alluded to some of the new initiatives. Oil and gas is the one that jumps out at me. I know that there was a recent announcement there. But can you -- have you quantified the market opportunity in some of the -- you can talk about oil and gas, you can talk about any of the other verticals that you've started to enter. Have you talked, more recently, about some of the market opportunities and what those businesses and that revenue source could look like over the next 12 to 18 months?

John K. Morgan

Matt, we have not done so on a market-by-market basis. I would say, in aggregate, what we believe is that this industry and this business demand is still about a GDP industry. And so for us to outstrip GDP will require market share gains. And so the comments we were making earlier about the investments in organic growth implies that we're looking to add sales reps, and we're looking to invest more now in product innovation now that we've got the channels that we've invested in over the last 3 years. And so I look forward to getting back to organic growth that outstrips GDP in aggregate. But there are puts and takes in the various different markets that we serve.

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

And that actually leads into the next question, which is you referenced anticipated spending is expected to offset some of the $9 million of savings. Did you quantify that? And is it mostly reps? What are some of the areas of spending and the anticipated pace of return on that spending?

John K. Morgan

Sales reps and product innovation, and I did not quantify it publicly. We're working internally to a set of operational objectives. If we exceed the $9 million savings, I might spend a little bit more to try to pick up the pace on additional hiring. I'd very much like to do that. If, for some reason, something gets delayed, we'll have to manage that carefully. But we didn't quantify it specifically, but I do want to focus on investments in organic growth. I've already mentioned previously that we don't expect, in the immediate future, to be looking at trying to close any acquisitions. We think we now have the channels that we need. We just need to focus on the product innovation and adding sales reps.

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

Okay, okay. And then, Mark, the gross profit margin guidance, I think you said down 200 basis points sequentially, which would, at least as indicated by my model, be down year-over-year. I'm just trying to understand. It sounds like from a previous answer, you were going to get some maybe price-cost benefit over the next few quarters or couple quarters. I know there is going to be some cost savings, maybe there's not any incremental. Just walk me through the puts -- what are the assumptions to lead to a down gross margin given all those benefits?

Mark R. Bachmann

So once again, 46% to 48% is the range for the year. My comment with respect to the second quarter is looking just historically as to what happens in second quarter because of lower sales. With respect to price, it always takes us time to get the price into the marketplace and to realize that, so that will take some time to do that. And then the other piece that -- just to remind you and others, is that we can have variation quarter-to-quarter just merely because of what's happening with our inventory levels, as a result of either operational activities that we are doing or as a result of some marketing programs that we are doing, and so we can either get some favorable or unfavorable absorption on a sequential basis. And that on our size business does create some variability. So the 200 basis points is a historical average, so it's not necessarily to say what it is going to be this fiscal year, but it's been a historical average over the last 6 years.

Operator

Our next question is from Mike Sison of KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

John, in terms of the -- once you get through the cost-savings initiatives and the product rationalization efforts, where do you think -- or what's your goal in terms of getting your profitability longer term, either operating margin, EBITDA margin, whatever the benchmark of the goal would be?

John K. Morgan

A couple things, Mike. First of all, I would refer back to our long-term objectives, where we've talked, in the past, about growing EBITDA 50 bps a year over the long term. Now we've outstripped that for the last handful of years, fortunately, and that continues to be our goal. I want to leave room for expense investment back into the businesses, especially in the area of adding sales capacity and product innovation. That having been said and while we've not articulated a, for example, a 3- or 5-year plan, we've talked, in the past, about our view that this business, in aggregate, really ought to be in the 12% to 15% EBITDA range. We think that there are examples in the industry that are higher. There are examples that are lower. We think that a business such as ours should be, ultimately, in that range and still allows for investment back into the future of the business.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Right. And when you think about getting there, your gross margins are at a good level, and is it really just focusing on that selling, distribution and admin expenses and getting that down to where -- sort of 46% to 48% minus SD&A gets you to 12% to 15%?

John K. Morgan

It's really revenue, Mike. It is entirely possible that we'll continue to focus on costs in the SD&A area. But realistically, what we have is a very leverageable financial model here. Margin -- or I should say revenue would fall through to the bottom line at about 25% in this business on an incremental basis. Our fixed costs are relatively sticky as we grow. Unfortunately, it's relatively sticky if we go through a quarter of decline, as well as you've seen in the past, but it's relatively sticky as we grow. So this is an industry and a business where scale really matters, and that's why I'm pleased that we can begin to focus more attention now on adding sales and product capacity.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Right. And then in terms of getting to that goal potentially, could you do it organically? Or would you have to do a little bit of acquisitions down the road once you get everything set up to sort of get there?

John K. Morgan

I would expect that, down the road, you -- this is the kind of business platform that should be acquisitive, but we should make gains organically. I want to continue to pay down debt. I want to see our debt-to-EBITDA ratio get down below 3, in that 2.5 to 3 range like we've talked about in the past. We think we can delever the balance sheet by 0.5 turn this fiscal year after that -- after having done that last year, after the acquisition. So certainly, over time, we ought to be back in the acquisition game. But the next gains really need to come organically in my view.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

And then I think Mark mentioned that, by the fourth quarter, your hope is to have sales growth turn positive. And is that more of a function of the product rationalization efforts completing? Or are you actually going to show some of the benefits of the organic growth that you've -- you're planning to get over the next couple quarters in terms of initiatives?

John K. Morgan

No, good question. It's both. We will anniversary -- by the time we get into the summer, we will anniversary some of the actions we took in the summer of last year, of '13. But I darn sure hope that we exceed our own internal expectations with the sales pipeline work that people have.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Right. And then longer term, I'm assuming the economy is helpful, which has been sluggish over the last couple of years. What type of organic growth in total do you think Zep should be able to generate post a lot of the restructuring initiatives and sales changes?

John K. Morgan

If I go back the last 20 years in the business and the industry, it's about a GDP business and industry. It seems to me that we ought to be growing at GDP plus a point or 2 on an organic basis, and we ought to be augmenting that acquisitively.

Operator

[Operator Instructions] And our next question is from Rosemarie Morbelli of Gabelli & Company.

Rosemarie J. Morbelli - G. Research, Inc.

Could you talk about the size -- the current size of your newly formed energy division?

John K. Morgan

We have not, Rosemarie, broken out the sizes and the markets that way. It's -- let me say, it's relatively small. It's new. It was an upstart over this last year. And so I would say while it's had nice gains, it's still single digits in the millions.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. So under $10 million in revenues, is that what we are talking about?

John K. Morgan

That's correct. It's less than $10 million.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. And then I was wondering that since you have promoted Steve Nichols to division -- or large division, actually, President, has Steve come up with any new ideas, any additional changes that you should be doing in addition to what you are in the middle of? Or is it too early to tell?

John K. Morgan

I think it's a little -- or I think the simple answer is yes, he has a number of working hypotheses he has shared with me. He is -- it's been really a couple months. He's spending a lot of time in the field with sales reps and with marketing personnel sort of testing his ideas and testing his hypotheses. But I really like the kinds of things I'm hearing from him in terms of his focus on organic sales growth, and I like his 30 to 35 years of experience in this space. He's had a long track record of success with this. So I think it's a little premature for me to go public with, specifically, what he's got in mind. But internally, I am encouraged by the way he's thinking about it.

Rosemarie J. Morbelli - G. Research, Inc.

So he's bringing some of the Ecolab point of view to the operations? Am I translating this properly?

John K. Morgan

I would not say that. I'm certain that after 30 years with Ecolab, he has ideas that he developed while at Ecolab. But as you know, single most important thing about business is culture, and I would not anticipate him trying to take an Ecolab culture and force it on Zep because we think and operate differently. We serve different markets. We are moving more and more into the transportation area; they are not. We continue to have Sales & Service combined with our direct sales operations. We still focus on more regional and small accounts across the country, and it's a little bit different business model. We really don't go head to head with Ecolab to speak of in any significant way, and I think Steve is sensitive to that.

Rosemarie J. Morbelli - G. Research, Inc.

No, that is very helpful. Could you talk about what is happening on direct sales? Have you reached the bottom? Or are you still losing customers voluntarily or not?

John K. Morgan

We lost customers over the last year that, in our view, was partially some of the demand-shaping work we've done. But overwhelmingly, you could see in our internal data, it had to do with the disruption that we caused when we went live on SAP. And I think the next couple of quarters, the data that we see over the next couple of quarters will be able to answer your question a whole lot better because we will anniversary that disruption that we caused last year.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. And if I may ask one last question. What is -- if you compare the margin from your new contract in New York City, is that at a similar level of your existing operations? Or is at a lower level but it is yet -- but on the other hand, it is a much bigger contract with high volume?

Mark R. Bachmann

Honestly, I couldn't tell you off the top of my head. It went through our normal bid and order placement process. So I would assume it's in the range that we look for in that transportation sector. But I don't know off the top of my head, Rosemarie.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to John Morgan for any closing remarks.

John K. Morgan

Well, thank you, and happy New Year to everybody. We'll look forward to speaking with you soon after our second quarter concludes. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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