Zep's (ZEP) CEO Jim Cable on Q3 2014 Results - Earnings Call Transcript

| About: Zep Inc. (ZEP)

Zep, Inc. (NYSE:ZEP)

Q3 2014 Earnings Conference Call

July 10, 2014 04:15 pm ET


Don De Laria - VP, Investor Relations & Communications

John Morgan - Chairman of the Board, President, Chief Executive Officer

Mark Bachmann - Chief Financial Officer, Executive Vice President


Matt McCall - BB&T Capital Markets

Curt Siegmeyer - KeyBanc Capital Markets

Rosemarie Morbelli - Gabelli & Company


Good day, everyone. Welcome to the Zep Incorporated Third Quarter Fiscal Year 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note today's event is being recorded.

At this time, I would like to turn the conference call over to Mr. Don De Laria, Vice President of Investor Relations and Communications. Sir, please go ahead.

Don De Laria

Good afternoon and thank you for joining Zep, Inc. today for our third fiscal quarter conference call.

Before I begin today's call, I would 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 referred to 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 and the company's quarterly report on form 10-Q for the fiscal quarter ending May 31, 2014, which was filed with the Securities and Exchange Commission just prior to this conference call.

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 Morgan

Thank you, Don. Welcome everyone to our third quarter earnings call. We have a number of important items to discuss.

Today, I'll highlight third quarter results, provide an update with respect to the fire we experienced and review the implications of this incident on our business and financial expectations going forward. Mark will then provide a more detailed financial review after which we will open the call for questions.

First, I want to highlight how encouraged I am by the sales results our associates achieved in the quarter. On a comparable selling days' basis, we experienced growth in nearly every part of our business.

I'm pleased with the revenue growth in the quarter due in large part to the success of our organic sales pipeline initiatives. Revenue growth was 0.6% in total. It was 2.1% on the same number of selling days' basis and it would have been 4.7%, when excluding a 2.6% reduction in revenue as a result of losing certain customers during complexity, reduction activities implemented a year ago.

From an end-market standpoint, we experienced modest growth in transportation and industrial MRO, partially offset by a decline in Jan San and Institutional. In total, transportation and industrial MRO sales accounted for 63% of our North American revenue in the quarter.

Now, I will provide a few highlights by end market or by channel. Sales through our North American sales and service organization continue to remain under pressure, but are benefiting from rep hiring and its focus on strategic vertical markets like food processing and oil and gas, which were up 4.4% on a combined basis despite one less selling day.

Our food team added over 80 new accounts in the quarter and have now trained the majority of sales reps on our new food safety program. Additionally, our oil and gas team added over 200 new customers during the quarter. By placing sales capacity in the right vertical markets and geographies and with a focused product and service offering, we were able to take advantage of favorable market conditions.

The Zep Vehicle Care team grew revenue by mid-single digits and worked particularly hard on on-boarding a new national accounts customer in the convenience store space. Our performance with retailers is pronounced as we continue to expand relationships, grow with existing retailers and introduce new products.

During the third quarter, we introduced several new products at the Home Depot and experienced particularly good success with our plumbing lineup and other home improvement retailers we expanded into more locations and strengthened our cleaning products offerings.

On the hardware as well as farm and ag side, we experienced strong early bookings that slowed a bit with a prolonged cold weather in the north. Overall, sales were up double digits with our major hardware retailers driven by an increase of 25% in the cleaning aisle.

At mass merchants, we are testing a variety of products to evaluate the channel's ability to attract the professional user for our Zep commercial products are targeted. Last year, we undertook meaningful complexity reduction activities in our automotive OEM business, which resulted in selected customer losses and created difficult comparison for the past four quarters.

I'm pleased to report that despite this very difficult comparison. This team grew sales by nearly 5% in the quarter. This is a remarkable achievement given where they started last year, driving this result were new customers as well as growth with existing customers, including deliveries of our new bulk brake wash program which is already shipped to over 400 automobile dealers.

Our initial success of this program with our launch partner is providing additional opportunities to compete for new business at several other large domestic and foreign auto manufacturers. Our automotive aftermarket retail sales were up mid-single digits benefiting from the new products, new formulas and promotions.

Our Zep distribution organization grew sales in the mid-single digits benefiting from a double-digit growth in the industrial MRO vertical. In total, top-line growth contributed to overall improved results. We grew adjusted EBITDA by over 13% to $19.3 million and expanded the adjusted EBITDA margins about 110 basis points to 10.3%. Additionally, we increased adjusted earnings per share by 20% from $0.25 to $0.30.

In few minutes, Mark will explain adjustments to operational results, but I want to take a moment to provide some additional detail with respect to the largest adjustment as this topic is this topic will be (Inaudible).

In 2011, we made a $12.5 million loan to an outside innovation partner who secured the loan personally and with the assets of a subsidiary Adco. This was done with the expectation that their work and the innovation work that they do would complement our own research and development efforts. Until recently, Adco had been making principal and interest payments on the loan, totaling roughly $3 million to-date. After missing their June principal payment and requesting that we restructure the payment schedule, we evaluated recoverability of the loan receivable and believe the most appropriate course of action is to book an impairment of $5.7 million.

I am very unhappy about this new development and intend to take all appropriate measures to protect the Zep, Inc's interests.

Now with respect to our own operations, I was generally pleased with our operations in the quarter. However, there are three things I would like to see improved each of which are being addressed.

First, our pricing actions were not sufficient to offset cost increases, resulting in lower gross margins in the quarter. Second, our freight costs were higher due to unexpected carrier increases. Finally, we are experiencing delays in the restructuring of our European operations.

Now, I will turn to a review of recent events at our Marietta aerosol production facility. On May 23rd, we experience the fire at our Marietta production facility that destroyed our raw material storage warehouse, outside bulk storage tanks and operational pollution control equipment.

It's critical to understand that since the time of our 2010 acquisition of the Marietta facility, which was part of the Amrep, our associates had the foresight to make a number of investments in safety and training which were instrumental in saving lives of both, associates and first responders and in preserving the majority of the facilities including offices and manufacturing lines. At this point, the cause of the fire is yet undetermined and a number of investigations are ongoing.

Before I move on to a discussion of the financial impact and mitigation efforts, I want to commend our associates at that location who utilized their training and evacuated the plant quickly and with no loss of life. Our associates acted with unparalleled professionalism and commitment to one another and to the organization, and for I am both, grateful and humbled and want to say to them thank you.

Following the fire, we immediately implemented our previously developed business continuity plan to minimize disruption to our customers and return capacity to required levels. Within one week, we began the production of aerosol products at alternate location. As of late June, began limited operations at the Marietta facility. Again, I am impressed with our associates who quickly relocated to the new locations and those who prepared Marietta for reestablishing limited production.

We are communicating with customers across our entire business to explain what if any impacts they might expect in the supply of aerosol products in the short-term and are managing our supply chain to minimize disruption. While we managed through this process, we are benefiting from inventory in the system at both, our locations and our customers' locations. We also have the ability to offer non-aerosol versions of selected products.

Based on current estimates, we expect the combination of current inventories and alternate sources of supply to satisfy the majority of demand through the middle to the end of July, with full capacity established sometime in September. This gap in timing is expected to create a temporary inability to service some customers with aerosol products and is driving our assumptions on revenue impacts, which could affect us in the future especially if some customers depart and do not return.

With respect to overall revenue expectations, this is the way I'm currently seeing the business. First, the fundamentals of the business are sound. Previous SAP and integration distractions are behind us. The economy at least seems stable. In addition, we have now moved much of our business into areas of favorable demographics such as transportation and industrial MRO, and have adapted to the shifting channels of Jan San.

As we had forecasted, the business returned to organic growth recently, with new business more than offsetting the impact of last year's complexity reduction actions. That has continued in the fourth quarter to-date. Without the disruption of the fire, I would have expected this to continue. I do however expect some service disruption from the effects of the fire although we are not 100% certain how to predict customer reaction.

The fact is that our teams have managed the situation well to-date. We experienced little impact on sales so far. As we continue to bring more capacity online and reestablish inventories, we will have even greater capabilities than prior to the incident. In addition, this added capacity will be housed in multiple locations.

However, in the short-term, that is the next two to three quarters, we could see lost sales that are equal to or even possibly slightly greater than our fundamental growth, therefore sales could be flat or even down somewhat.

Short-term losses of business due to the fire will be an insurance claim. We expect those lost sales to have an impact on profits for the next couple of quarters. Once the insurance claims process is complete, we would expect accumulated profits over those quarters to be recovered.

To be clear, I am confident about the ability of our team to return to full capacity within just the next several weeks. I am however concerned about some potential mismatch of timing of customer demand and available capacity. We should be able to isolate and measure the impact of this disruption and we will update shareholders during future quarter calls as data becomes clear.

While Mark will provide additional detail with respect to the timing and recognition insurance payments, note that we have already received $5 million in the month of June as a pre-payment against that claim.

Before I conclude, I want to provide an update on more recent sales activity as the next several months will be critical to appreciating the longer-term impacts of the fire. We are encouraged by positive signs in the markets and our fourth quarter order rates have grown mid-single digits to-date. As mentioned, we could run into difficulty serving customers as we move into the end of the fourth quarter and ultimately the first quarter fiscal 2015.

In conclusion, our number one priority is our business continuity effort following the fire to minimize disruption to customers and regain production capacity as quickly as possible.

During this time, we will drive through the distractions to continue execution of our successful strategies. Those are, first, focusing on key vertical end markets like transportation and industrial MRO. Second, continuing our recently announced investments in specialized product and service offerings to grow our North American sales and service business.

Third, following the facility's maintenance and Jan San channel shift, thereby expanding the availability of our products. Forth, continuing with our complexity reduction initiatives and our supply chain and our product line.

Now, I will turn it over to Mark for a review of our financial performance in the quarter, for more detail on the incident of the aerosol production facility and how it might affect the future. Mark?

Mark Bachmann

Thank you, John. Good afternoon, everyone. Today, I will provide additional detail with respect to the third, review the accounting impacts related to the fire and provide a preliminary outlook for fiscal 2015.

Although John has already briefly highlighted the quarter, it's important to note that with the exception of the $1.1 million insurance deductible and related costs, our fiscal third-quarter results were not affected by the incident at our Marietta aerosol production facility.

Now let's turn to the quarterly results. Net sales in the third quarter were $187 million, up 0.06% compared to last year. We benefitted from both, price and volume gains only slightly offset by net foreign currency impacts and from one less selling day. Adjusting for the lost selling day, sales were up 2.1%.

Turning to gross profit, third-quarter gross profit was flat compared to last year at approximately $87 million. We did see 20 basis points of margin erosion, with raw materials accounting for 10 basis points and business mix accounting for an additional 10 basis points.

On a sequential basis, gross profit as a percentage of sales decreased 40 basis points compared to the second quarter, primarily as a result of business mix.

Our selling, distribution and administrative expenses, which include freight, were affected by a couple of unique items in both, the current and prior year quarter. Last year, in the third fiscal quarter, we benefited from a one-time $1.4 million legal settlement, which reduced our overall expenses.

This year, we incurred almost $500,000 of incremental California legal expenses compared to last year as a result of reaching settlements and additional cases as predicted last quarter. Excluding those two items, SD&A expenses would have improved by $2.2 million and driven 140-basis point improvement in SD&A expenses as a percent of net sales.

Our operating expenses in the quarter benefited from restructuring initiatives implemented last year, but were partially offset by significantly higher freight and healthcare expenses.

Before moving on, I want to provide an update on our restructuring efforts which were announced last year. There were two components to the plan. The first was to realign and right size our North American organization which has been completed and is on track to deliver approximately two-thirds of the total expected restructuring benefit.

The second relate to changes in our supply chain, including the rationalization of our distribution facilities in the U.S., the implementation of a new transportation management system and the consolidation of certain operations across Europe.

As of the end of the third fiscal quarter, we have consolidated four warehouse locations, but the implementation of our transportation management system and consolidation of European operations are behind schedule.

We believe that we will achieve the original $9 million in savings in fiscal 2014 from the restructuring initiatives and further estimate that we will have reinvested approximately $3.5 million back into the business.

Before detailing our adjusted results, let me take you through five adjustments that are outside of the normal course of business from last year and this year. To arrive at last year's adjusted results, we subtracted $1.4 million to account for a favorable legal settlement and then add back $400,000 related to the California legal matter and $100,000 related to restructuring charges for a net reduction in adjusted EBITDA of $900,000.

This year, we headed back $5.7 million to account for the non-cash impairment of the loan to our integration partner as a result of their failure to make a principal repayment on time and the resulting uncertainty over recoverability of the loan.

We also added back $1.1 million of fire-related charges, $800,000 related to the California legal matter and $100,000 each for restructuring costs and acquisition, and integration cost for a total of $7.8 million. During our third quarter, we generate $19.3 million of adjusted EBITDA, representing 13.6% growth over last year and 110-basis point expansion in adjusted EBITDA margin from 9.2% to 10.3%.

Reported diluted earnings per share for the third quarter were $0.09 versus $0.28 in the prior period. Adjusted diluted earnings per share increased 20% to $0.30 versus $0.25 in the prior period. For the benefit of those investors who want to understand the amortization impact of previous acquisitions on a cash basis, excluding amortization expense of almost $0.09 per share, adjusted cash EPS was $0.39 or 14.7% higher compared to $0.34, last year.

We are pleased to report that we reduced net debt by $4.9 million in the quarter and by $28.2 million since this time last year. We expect to further reduce debt in the fiscal fourth quarter.

With our current credit facility maturing in July 2015, we are actively evaluating alternatives to refinance our capital structure and we would expect to complete the refinancing and record related non-cash financing expenses in the fourth fiscal quarter. The new capital structure will anticipate the impact of the variability in our cash flows resulting from the fire and timing of insurance recoveries.

Now I will describe our insurance coverage and the accounting treatment associated with the impact of the fire. We maintained several types of insurance on our facilities, including casualty and business interruption insurance subject to a $1 million deductible and general liability insurance subject to a $1.5 million deductible. In particular, we expect our business interruption insurance to reimburse us for any lost profits associated with lost revenue.

From a cash perspective, as John indicated earlier, we have already received $5 million of proceeds as an advance against our claim. While we will request additional advances from the insurance company in future quarters, there will be a mismatch between spending and insurance claim settlements during fiscal 2015.

At this time, our insurance experts have indicated that final resolution of the claim is not expected for at least a year. When the payment is received, the reimbursement of lost profits will be reported as income in that period.

The insurance claim process and accounting is rather complicated, so I thought it might be helpful to provide an explanation of how it is expected to impact our financial statements. There are three primary categories to consider. First, I will address revenue.

To the extent that we have lost revenue due to an inability to deliver a particular product for meeting to customers' overall needs, we will pool the lost revenue and file our claim for business interruption with our insurance company. While this type of lost business would result in lower revenue in the period, at some point in the future we would be compensated for the lost profits associated with those sales.

The insurance will be available for a period of time based on how long it should take Zep to return the existing aerosol facility to normal operation. Our policy also has extended coverage to recoup lost profits, our lost revenue for an additional 365 days.

The exact time period is not known at this time. Therefore, we will realize lower revenue and operating profit for several quarters and then record income at a later date representing the lost profits for any business interruption time period.

The second category covers temporarily increased cost to manufacture and deliver a product. For example, when we incur additional manufacturing cost during the recovery period, we should be able offset those cost increases with an insurance claim receivable.

The timing of this would be in the same fiscal period and would be netted out in the cost of products sold. The coverage for this type of expense ends when the existing aerosol facility should be back to normal operations.

The third category relates to expenses we incur as part of our overall recovery effort, including in the cost of processing the claim and professional fees et, cetera. Going forward, since we have met our $1 million deductible, these increased costs will be reflected as an insurance claim receivable on our balance sheet.

I'm sure a number of investors that follows Zep, Inc. are looking to begin developing models for 2015 and beyond. As you develop thoughts on this, I want to remind you of a few key items and a number of things that are known and unknown at this time.

From a revenue perspective, John has already shared our perspectives, including the impact of the fire. I would just like to make one additional comment. Beginning in the fourth quarter of fiscal 2014, we will anniversary the complexity reduction activities we undertook late in the third quarter of fiscal 2013, eliminating a $3.5 million to $5 million headwind we faced in each of the last four quarters.

Now I will detail a few additional thoughts regarding our cost structure. We would expect our gross margins to remain in the 46% to 40% range barring any major run-up in raw materials that which could occur due to the situation in the Middle East.

As we shared last quarter, our variable selling and distribution costs which include freight and commissions range from 16% to 18% of sales. Given the potential risk to revenue, we would expect some offsetting benefit in our variable costs.

We do expect selling, distribution and administrative expenses to benefit from the continued rollout of our transportation management system, but be negatively impacted by the potential for further increases in freight cost as result of uncertainty in the oil markets and carrier increases. Also, we will incur costs with respect to becoming compliant with the new Global Harmonization Standard or GHS, which will be a requirement of every chemical manufacturer over the next 12 months. We estimate that GHS-related costs could total approximately $2 million over the next four quarters.

There are clearly a number of moving pieces in the near-term. As John indicated earlier, we are very encouraged by our top-line results this quarter and we will continue focusing on organic sales growth while implementing our business continuity plan to minimize disruptions of the business.

Now, we would like to open up the call to questions. Operator?

Question-and-Answer Session


At this time we will begin the question and answer session. (Operator Instructions) Our first question comes from Matt McCall from BB&T Capital Markets. Please go ahead with your question.

Matt McCall - BB&T Capital Markets

Good afternoon, guys. How are you?

John Morgan

Good afternoon.

Mark Bachmann

Good. How are you?

Matt McCall - BB&T Capital Markets

Good. Let's see. First, Mark, you just mentioned the freight impact. Did you quantify that freight impact? If you did, I missed it. If not, can you talk about the expectation relative to what you just faced in Q4 and beyond?

Mark Bachmann

The impact of freight in the quarter incrementally year-over-year was about $1 million.

Matt McCall - BB&T Capital Markets


Mark Bachmann

The second part of your question Matt?

Matt McCall - BB&T Capital Markets

You talked about transportation efforts may be helping, but then freight still going to hurt, so if you net those two out as we look at Q4 and beyond, how do we look at your freight expense relative to that $1 million.

Mark Bachmann

We still would expect headwinds.

Matt McCall - BB&T Capital Markets

In the same range?

John Morgan

Matt, we don't have any better estimate than that at this point in time and I will tell you why. The freight expense in the quarter caught us a little off guard. We were disappointed and surprised with the rate of increase, so as you can imagine we got an awful lot of people feeling that aggressively at this time, we don't know how to estimate it any better at this time than to say I guess we ought to expect the same range until we really get exactly at the cause of the increase in our ability to hold that back down.

We had known for some time that as we continue to consolidate warehouse operations and sort of shift the channels of business and integrate our previous acquisitions that the next step would be to put both, transportation management system in place and some third-party logistic support to analyze and help manage and reduce freight over time, so I was expecting it to be sort of relatively flat as that got rolled out, but we got hit with this surprise in the quarter and we do not fully understand it, so I apologize we can't give you better guidance on it at this time.

Matt McCall - BB&T Capital Markets

Okay. That's fine, John. The other item you mentioned was pricing now been sufficient, therefore your gross margin faced some pressure. Can you talk a little bit more about that, where are you seeing the most inflation. Again, same type of question, do you expect the stabilization or improvement in Q4 and beyond?

John Morgan

We will get that back. The business has generally had the ability to maintain that. The reason Mark has guided us to think about gross profits still in that 46% to 48% range, is with a combination of our sourcing and reformulation efforts as well as our pricing efforts we believe we will be able to stay in that range, so we had a little bit of a mismatch in this quarter.

The increase, I think, we talked in the past we had some increases that we began in parts of our business last December that we expected to come into the business over period of 60 to 90 days. Then, again, in another part of business in the March to April timeframe that we expect it to keep coming to our business and that has, but we underestimated the raw material increases in selected rows, so will have to of modestly bring up a price in a few of our products and we get that stabilized.

Matt McCall - BB&T Capital Markets

Okay. All right. That's all I had. Thank you.

Mark Bachmann

Thanks, Matt.

John Morgan

Thanks, Matt.


(Operator Instructions) We do have an additional question and this question comes from Curt Siegmeyer from KeyBanc Capital Markets. Please go ahead with your question.

John Morgan

Good evening, Curt.

Curt Siegmeyer - KeyBanc Capital Markets

Thanks. Hi, guys. How are you doing?

John Morgan


Curt Siegmeyer - KeyBanc Capital Markets

Just a quick follow-up and I apologize if I missed it. On the on the $9 million in restructuring savings, you mentioned two-thirds of it you are track to realize this year. Is that correct or you have already realized?

John Morgan

Let me clarify that. Two-thirds of its coming from our U.S. business and areas that were headcount reductions and have already occurred. Other parts of it are coming from other reductions. I think the best way to think about it is, we will achieve the $9 million in the fiscal year. We can clearly see that now. Furthermore over the last year, we had talked about the desire to invest some portions of that savings back into the business, particularly as it relates to starting to add sales rep headcount again, which we began last December, so of that $9 million, savings now we expect to invest about $3.5 million of that back into the business and that's in the current fiscal year, fiscal '14.

Curt Siegmeyer - KeyBanc Capital Markets

Okay. Then just a follow-up, then you mentioned some delays in Europe. Could you maybe just provide a little bit of color on that exactly what's kind of going on there?

John Morgan

It's Europe. It's hard for me to really, and has been for 30 years, difficult to understand why it takes longer for us to get these things done there than it does here, but the fact is that some of the effort to consolidate locations and work with our third-party logistics providers as well as the processes necessary in the legal structure there to consolidate activities takes longer than it does here and I think I was overly optimistic about the rate at which we would be able to get that done. We will get it done, but it's taking longer than that I had hoped.

Curt Siegmeyer - KeyBanc Capital Markets

Okay. Do you have any kind of estimate then as to the timeframe of that?

John Morgan

Listen, out of the of the $9 million estimate, a relatively small portion that was Europe in any event. Frankly, I thought we would modestly exceed the $9 million that we had guided to previously and I thought we would exceed it by a few hundred thousand dollars and that few hundred thousand dollars was really what I thought we would get out of Europe, so I would expect that over the next two to three quarters, we will get that but I would also expect that relative to our overall results, you would consider to be immaterial and it won't really sort of show up in the future and the way we talk about the business?

Curt Siegmeyer - KeyBanc Capital Markets

Got it. Perfect. Thanks, guys.

John Morgan

Thanks, Curt.


Our next comes from Rosemarie Morbelli from Gabelli & Company. Please go ahead with your question.

Rosemarie Morbelli - Gabelli & Company

Good afternoon, all. I was wondering John, if you could as a follow-up to this last question, why is it that consolidation in Europe is not going to really move the needle and generate additional savings and what are you doing there? I mean, how many plants are you consolidating? Could you give me a better feel as to what you are doing and why we don't have any savings?

John Morgan

Well. Yes. It's a great question, Rosemarie. Good evening. I do expect to get those. It has taken longer than what I had put into our models when I communicated it previously. Let me give it to you in a couple of pieces.

First of all, from our previous acquisitions there, the team over there did an outstanding job of the consolidations that we had considered. There were two phases, one was the consolidation of two operations that came from two previous acquisitions and that is complete. Mark, I think that was complete as we entered into this current fiscal year, correct?

Mark Bachmann

That's correct.

John Morgan

So, we fully intended and still intend to go to a further step of consolidating some logistics capabilities there, but with the timing of our leases and with the process we need to go through and notifications in those consolidations, it is simply taking us longer than what I had predicted and what I had communicated.

When I say it will be of relatively little value, what I would say is it is 9% of our overall business. So, when you think about the cost structure associated with what is 9% of our overall business and where our focus is, in the overall $700 million plus or minus business of Zep, while a few hundred thousand dollars is extremely important to us in Europe and we will continue to strive to get that, I just don't think it will have nearly the same material impact as other initiatives across the business.

Does that makes sense?

Rosemarie Morbelli - Gabelli & Company

Yes. It does. I understand. Thanks. Then I was wondering if you have made the decision. I mean, it sounded as you have, but just getting confirmation. Are you keeping and bringing back to on-stream the Marietta plant or are you taking the opportunity if I can use that word of the fire to actually manufacturing your aerosol product lines elsewhere and just shutting down that particular site after cleaning it up?

John Morgan

Great question. We have always had a combination of outsourced and in-sourced manufacturing of our aerosol product line. There are certain aerosol manufacturing capabilities that we think, that we have that are very important to our product line, our customers, our sales model, so we believe that in the long-term it will continue to be appropriate for us to have a combination of in-house and outsourced manufacturing capabilities of aerosol.

The exact mix of what is in versus out is relatively unimportant. It's our intent to utilize the best of our capabilities and the best of few our partners' capabilities to end up with that sort of optimal output. As to whether that capability is reestablished at that address or a different address down the street is a decision I have not yet made.

Rosemarie Morbelli - Gabelli & Company

Okay. Should you decide that not to start up Marietta again, what will be the financial impact? Do you lose some of the insurance benefit? How does that work?

John Morgan

My current understanding, and Mark, you can correct me if I am wrong is that the insurance benefits we will receive relative to establishing operations will be to reimburse us for the cause of reestablishing the capability we had prior to the incident.

Should we choose to enhance those capabilities that were reinvestments that would be required on our part, but the reimbursement to the company would be on the basis of reestablishing our capabilities.

Rosemarie Morbelli - Gabelli & Company

Okay. Then lastly if I may, there was an acquisition recently and of course I can't remember what it is to save my life, and I cannot find my note, but from one of your competitors, I think it was General Nation or whatever the name was, by making an acquisition that will compete with some of your products. Okay. I have it. It is the acquisition of Impact Products by S. P. Richards. Is that affecting your operations in any way? Is that picking away from some business that you were selling into S. P. Richards?

John Morgan

We do not believe that it is.

Rosemarie Morbelli - Gabelli & Company

No impact whatsoever?

John Morgan

No impact. You won't see any impact in our results from that.

Rosemarie Morbelli - Gabelli & Company

Okay. Do you have any comments as to how much they paid for it? Is that a reasonable price? Is it high? Does it affect acquisitions in the future?

John Morgan

No. I do not.

Rosemarie Morbelli - Gabelli & Company

Okay. Thank you.

John Morgan

Sorry. I can't help you with that.

Rosemarie Morbelli - Gabelli & Company

It's all right. I was not very clear to begin with.

John Morgan

No. I just would prefer not to comment on another company's acquisition strategies.

Rosemarie Morbelli - Gabelli & Company


John Morgan

They are an outstanding company. I am sure they are making good decisions.

Rosemarie Morbelli - Gabelli & Company

All right.

John Morgan

All right. Anything else, Rosemarie?


Gentlemen at this time, I am showing no additional questions. I would like to conclude the question and answer session. I would like to turn the conference call back over to Mr. John Morgan for any closing remarks.

John Morgan

Great. Well, thank you for joining us on third quarter earnings call. We look forward to speaking with you in October.


Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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