Below is the transcript of Zep Inc (NYSE:ZEP) first quarter fiscal 2015 earnings conference call took place on January 6, 2015, at 08:30 a.m. EST.
Zep Inc (NYSE:ZEP) with fiscal year 2013 net sales of $690 million, is a leading consumable packaged goods company selling a wide variety of high-performance chemicals that help professionals and prosumers clean, maintain and protect their assets.
Company Representatives:
John K. Morgan – President and Chief Executive Officer
Mark R. Bachman – Executive Vice-president and Chief Financial Officer
Moderator:
Don De Laria – Vice President for Investment Relations
Operator
Good morning and welcome to the ZEP Inc. quarter one 2015 earnings conference call. Our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad and to withdraw your question please press star than 2. Please also note this event is being recorded. I would now like to turn the conference over to Don De Laria, Vice President for investment relations. Please go ahead sir.
Don De Laria – Vice President for Investment Relations
Good morning and thank you for joining ZEP Inc today for our first fiscal quarter earning conference call. Before I begin today’s call, I would like to remind participants that earnings call format includes an online presentation to augment our comments. You can access this presentation as well as this quarter’s earning press release online at www.zepinc.com in our investors’ section under webcast and presentations, reconciliations of non-GAAP measures reference to this presentation to their nearest GAAP measures are included in the earnings press release which is available on the ZEP Inc website.
This conference call contains forward looking statements within the meaning of section 27 A of the Security Exchange Act of 1933, as amended and Section 21 E of the security exchange Act of 1934 is amended. All statements of even statements are in fact communicated during this call may constitute forward looking statements. Each forward looking statements involves risks and uncertainties. Important factors that can cause actual results to different materially from company’s expectation are disclosed in a risk factors contained in the company’s annual report on form 10 K for fiscal 2014 which was filed with the security exchange commission on November 12.
All forward looking statements are expressly qualified in there entirely by such factors. Here with us today are John Morgan – President and Chief Executive Officer. Mark Bachman – Executive Vice-president and Chief Financial Officer and other selected ZEP Inc officers. I now would like to turn over the all tor Mr. John Morgan.
John K. Morgan – President and Chief Executive Officer
Thank you, Don and welcome everyone to our first quarter earnings call and happy new year. I will begin by briefly highlighting first quarter results and then Mark will provide a more detailed financial review. As always we will answer questions before concluding a call. Overall, I was pleased with quarter. Across our entire business including those pipeline process we began implementing two years ago, continued to gain momentum. We are targeting larger customers with a well defined set of capabilities. This is the result of insignificant growth involve transportation and industrial maintenance in markets and also a cross channels of distribution in particular with home improvement and automotive aftermarket retailers. Into thinking more strategically about accommodation or capabilities and how we can best serve the need of our customers.
Our recent success has been driven by three primary factors. Let me elaborate a bit on each to provide clarity as it relates to a long term strategy. First, over the past several years, we focused our teams on specific strategic and market such as transportation and industrial maintenance. The transportation market for our products has grown meaningfully as a result of new car sales, which has nearly doubled in production over the last few years. Average vehicle age, which is now nearly 12 years and miles driven which continues to increase. The industrial maintenance market is growing with improved GDP and increased employment.
Accommodation of these favorable market demographics exist differentiated and brought value proposition provides customers many advantages as compared to specialty competitors.
Today, more than 60% of our sales are to transportation industrial applications. Second, we continue to follow the demographic shift in janitorial and markets. Our investments in retail, distribution, and whole sale channels have allowed us to participate in shifting binding pattern for customers of Jan/San products. Third, we would not be in position we are in today without the incredible effort of the associates involved in our fire recovery app. The quality and speed of the recovery operation has been truly remarkable and has been instrumental in preserving business and strengthening relationships that with many of our customers. The combination of these factors have litigated a number of risks in our business and allows me to become increasingly optimistic about our future sales brands which I will speak to within few minutes.
First let me briefly highlight the quarter. Strength in our three major North American in markets drove record of first quarter net sales of $168 million thatrepresents 2% organic growth. On constant currency basis, net sales grew about 3% and excluding the impacts of the fire, net sales grew about 5%. Our transportation business increased driven by gains in our only end retail businesses. Our sales pipeline produced strong results with home improvement retailers including multiple promotions and the introduction of several new products. Our ZEP food specialist continued to gain traction on number of fronts including the introduction of new products and increased sales force capacity. Additionally our oil and gas specialist added nearly 300 new accounts in the quarter.
As a result of our top line success in the first quarter, our sales pipeline and progress we continue to make on our fire recovery effort and increasingly optimistic about our fiscal 2015 revenue expectations. Our success with these and other actions taken during the quarter have mitigated a number of risks allowing me to increase our revenue guidance to the full year. We now expect low single digit in net sales growth for fiscal 2015 compared to our previous expectation of flat net sales.
Turning now to our operational performance, it was broadly in-line with my expectations with growth proper margins, operating profit and even reflecting our revolving the business mix and investments in laying the ground work for future organic growth. Our recorded and adjusted earnings per share were 14 and 17 cents respectively. As we have suggested in the past, I expect inconsistencies from quarter to quarter especially as the timing of promotions and minutes getting packed our growth margins, not withstanding a mixed impact in the quarter, growth market grew within our anticipated range.
You might remember from our previous call that we were in the process of ruling out a transportation set of changes to our North American sales and share this business. The first phase of this work is largely completely with a new strategy taking effect last week. While it’s still too early to judge, the impact of these changes will have on our financial results. I am very pleased with the results of these responds from our ZEP brands and from our customers and particularly decided to focus more on organic growth in that business.
The next phase will include investment and adding additional sales rep, training and sales management. Now turning to the fire recovery effort, we are making excellent progress and has previously communicated we expect to fully restore service capability to our customers by the end of second fiscal quarter. As you saw from our first quarter results, we continued to experience the residual effects from sales declines resulting from customers lost since the fire. All residual is great. Strong organic growth in other areas of the business is more than offsetting the residual loss sale due to the fire and contributing to our optimism for future revenue growth.
From an operational perspective, we received all of the necessary permits to resume aerosol manufacturing operations and in just the past few days, resumed the production. As in the past, we expect to utilize and use the mix of in source and outsource manufacturing capabilities with the ultimate percentage of it being dependent upon our negotiation with suppliers in the future. Once again I want to extend my thanks and my congratulations to all of us involved into the recovery effort for their dedication to recover quickly and safely from this event. Your hard-work was instrumental to this strengthening customer relationships and returning our organization towards organic growth.
Before I turn the call over to Mark, I want to briefly mention upcoming actions that relate to my personal ownership of Zep Inc stuff. Today my personal beneficial ownership of ZEP Inc exceeds 65% including selective options which would expire in 2015. Some time ago I established a 10 B5 trading plan to exercise the solid options in advance of their inspiration. This trading plan will begin executing soon and will be completed before the end of calendar 2015. When this trading plan has been completely executed I will beneficially fold over 4% of the ZEP Inc stuff.
I will conclude by saying how pleased I am with the collective effort of all our associates particularly over the past six months. We are growing strategic in markets driving focus on our sales pipelines process and completing our recovery effort. Now Mark will discuss the financial performance with the quarter after which we will take the questions.
Mark R. Bachman – Executive Vice-president and Chief Financial Officer
Thank you John and good morning everyone. Today I will provide additional detail with respect to the first quarter. Record first quarter net sales were $168.3 million represented 2.1% growth compared to last year and 3.3% growth on a constant currency basis. We realize $7.5 million in volume gains has achieved an $800 thousand benefit from pricing. Partially offside by an estimate $2.9 million a loss sales due the fire and $2 million of unfair of foreign exchange impact driven by a strong US dollar versus the Canadian dollar and the European currencies.
As John mentioned earlier, we experienced success in our transportation related end-markets with strong double digit games in both automotive OEM and aftermarket retail. As expected, sales through home improvement retail has benefit from strong promotional volume in the quarter finishing up double digits. Our distribution business continues to be impacted disproportionally by the fire in the end of the quarter of mid single digits. And our North American sales and service business our oil and gas team drove double digit games. Our food specialist teams increased revenues in the high single digits. Excluding the impact of the fire, our net sales would have grown modestly on a constant currency basis. First quarter growth profit margin was 46.8% or a 13 bases points lower than the last year, driven by a business mix resulting from strong sales gains with home improvement retails as well as both the automotive OEM and aftermarket retailers. Next I want to share a few toss with respect to sourcing and the recent decline and pricing of selected inputs to the raw materials we purchased.
Historically, approximately 45% of our sourcing spent is related to petrochemicals. We purchase numerous raw materials that each have unique supply and demand characteristics that influence price. For instance, acetone and high density polyethylene has not experienced the same decline and have been increasing until very recently. To the next, raw materials repurchased. It’s still too early to quantify to what extent we might benefit from recent trends. We expect it may positive but may take at least a couple of quarters for us to realize in our PNL. Our selling,distribution and immense rate of expanses increased nominally as benefits were more legal, professional fees were offset by investments in the organic growth initiatives with we articulated last quarter.
I think it’s important to note that in the second quarter we expect SG&A expense as they percent off sales to be 200 to 300 basis points sequentially higher driven by seasonality, accelerated investments in organic growth and the utilization of outside resources to analyze our supply chains strategy for the full year. We expect SG&A expense to be 41% to 43% of net sales. This was the first full quarter under our new credit facility which featured lower interest rates. As a result I am pleased to report that increased expense by roughly $500 thousand compared to last year. The effect of [inaudible]] was 36.5% compared to 36% last year. For the full year we anticipate that our effective tax rate will range between 36% and 38%. During the quarter we generate $13.4 million to adjust ebitda compared to $14.1 million last year.
The adjustments are pretty straightforward this quarter. We estimate inventory stock-outs, related to the fire primarily our nash and distribution businesses lowered revenues by $2.9 million and ebitdaby $1.3 million. Last year’s adjustments included $800 thousand in California legal expenses and $600 thousand in acquisition and integration costs. Reported, diluted, earning per share for the first quarter or even at last year with fourteen cents. Adjusted, diluted earnings per share were 17 cents. Also even with last year. For the benefit of those investors who want to understand the amortization impact a preview of acquisitions on a cash basis excluding amortization expense for 9 cents per share, adjusted, deluded, cash EPS plus 26 cents.
Net debt at the end of the quarter a total of a $198.5 million which is $6.2 million lower than last year but almost $6 million higher than the fourth quarter. We increased inventories during the quarter support promotional programs and to improve aerosol product availability. We expect to significantly reduce our inventory position over the next few quarters and return to normal levels by the end of this fiscal year. We expect to draw down an inventory to produce cash which we will use to reduce our debt position. From a cover up perspective we finish the quarter with debt ebitda ratio a 3.1 times fix charges covered ratio 2.7 times. Today we are pleased with the progress we have made in the development of our insurance claim as a reminder we have received 6.9 million dollars to date from our insurance companies as a lance against the property damage portion of our claim. We are in dialogue with our insurance companies on the business interruption portion of the claim.
Before we conclude today’s call I want to make sure we review and update our annual financial expectations. The majority of our previously issues guidance remains unchanged but as John indicated earlier, we now expect fiscal 2015 net sales to be low single digits as a result of increased confidence in our recovery efforts, our sales pipeline success and trends in the market place. Also we have updated our guidance regarding selling, distribution and administrative expenses, reflecting our rate of investment to accelerate organic growth. Thank you for your attention today. Now operator would like to open the call for questions.
Operator:
Absolutely. We will now begin the question and answer question. To answer a question you may press star than 1 on your telephone keypad. If you are using a speaker phone, we ask you to please pick up your handset before pressing the keys. To withdraw your question, please press star than 2. At this time we will pause momentarily to assemble our roster. Our first question comes from Bob Lavic of CJS Securities. Please go ahead.
Bob Lavik – CJS Securities
Good morning. Happy new year to you as well.
John Morgan
Morning Bob.
Bob Lavik – CJS Securities
That’s a nice quarter here. You walked through a lot of strength in the quarter and the sales type. So one of the focus there. Could you talk a little bit there about what changes since November in terms of expectations for the full year growth. Were you being conservative in November or, you know, what areas in particular are expected to be sustained and what’s the visibility towards that growth that you are expecting?
John K. Morgan
Yeah, Bob. Good question. It’s a couple of things. In November, I think I mentioned this although I was willing to sort of prognosticate low single digit. I mentioned November that I was increasingly optimistic because we’re hopeful that some of the promotions that we are being run across especially retail would be beneficial to us to a greater degree than we are internally planned for. But in addition and probably the primary thing is the rate of the decline.
Excuse me. The rate of lost sales due to the impact of the fire has continued to decline pretty substantially. As we ended the first quarter, sort of on net basis, we had very few lost sales due to fire. When I say on net basis, we clearly have law sales due to lack of available aerosol products that affected our distribution business and affected our North American sales and service business but the pleasant surprise was that new aerosols business and especially the automotive area of our business had begun to offset by the we got the end of the quarter and that happened very rapidly. That trend is continuing on in December and that’s what leads to the comments today.
Bob Lavik – CJS Securities
Okay, great and then regarding the sales force compensation program in North America, I know it has been five days. So it’s certainly very new but you talked a little bit about the initial reaction from the sales force. Has there been any turnover or more than expected and talked a little bit about the higher efforts for a new sales reps.
John K. Morgan
There was a very modest amount of turnover. We had continued to highlight one of the risks was when you start making changes to a structure like that it can risk turnover. I was pleased with the fact that there wasn’t any material level of turnover in the North American sales and service business. The response was very good, very professional, very thoughtful. Especially on the part of our more experience ZEP reps who had been around this business for 20 and 30 years and really understand the marketplace. They understand the need to grow the business and had been completely behind and supported of the changes. I am very pleased with that.
It’s a little early to declare victory and I am a little conservative that way. I would like to see the results of this over the next two or three quarters. But when I think about our worst fears and our most optimistic outcome, I am pretty pleased with what has ruled out. Likewise, on the higher sales reps, there wasn’t a lot that took place in our first quarter. The desire on the part of that team was to get the new structure and the new policies and the new growth and so many bonuses at place and that type of thing and then accelerate in hiring the sales reps as well as sales management trainers to go along with these sales reps. So I would say that the next several quarters in that regards are far more important than the last couple.
Bob Lavic – CJS Securities
Okay. Last one and I will get back in queue. We are just continuing your net thought. Are you still expecting the roughly 6 million incremental expenses for this year, for this program to rule out? Are those kind of in the next three quarters or is there some of it? How should we think about that? Kind of incremental for a lack of better startup expanse to get this transformation jump started?
John K. Morgan
I may have to Mark on the timing that …
Mark R. Bachman
Yeah, so Bob, we did began that spending in Q1 and will continue, in fact, accelerating it into Q2 and Q3 and as part of we gave this morning with regard to selling distribution and this ray of expense is being 200 to 300 basis point, higher in Q2, brought through by seasonality, we have what selling days and in the second quarter but we are increasing our rate of investment and that bring us in line with overall 41% to 43% of SG&A expense for the year.
Bob Lavik – CJS Securities
Okay, great, thanks very much.
Mark R. Bachman
Thanks Bob.
Operator
Thank you. Our next question comes from Matt McCole of BBNT Capital Markets. Please go ahead.
Matt McCole – BBNT Capital Markets
Thank you and good morning everyone.
Mark R. Bachman
Good morning.
Matt McCole – BBNT Capital Markets
First, John you made a comment about a focus on targeting larger customers and I am just curious about trends you are seeing because you had some success there obviously. What trends do you see in revenue per customer? I know I am getting here is how does maybe a more concentrated customer list help your visibility when you are providing this outlook?
John K. Morgan
There’s in front of me into the room but I can tell you from the internal looks of this. There is no question of what our revenue per customer continues to increase. That’s true. The processing is true about oil and gas. That’s true on our retail improvement and as well as automotive, it’s certainly true in our OEM areas and so there’s no question what it provides increased visibility and look the focus in those areas where we gain grounds in the last three years to establish position. It is really to grow now up and down the eye over to penetrate those customers to a greater extent.
So as you recall from following us for quite some time, there was a day when our average sale per customers might have been just few thousand dollars. That has grown considerably and a number of customers that we talked about now in RK, Mark I am going from memory but it’s probably about half or say it was five years ago and so you can kind of quickly see madness statistic there grown a couple of hundred million dollars at about half the customers’ account now.
Matt McCole – BBNT Capital Markets
Okay, so when I think about the new guidance and just guidance in general, seems like you are more comfortable talking about low single digit number rather than flat but I think you like to repeat things but you did more of a call of better results of a fire recovery or is it because of something that is going on separately or is it something along the line of this trend with fewer but bigger customers?
John K. Morgan
Your answer would be yes. It is these things. There is no question. The negative impact of the fire is subsiding that is having a very significant impact on us. The second thing is about 35% to 40% of our sales now go to our top 50 customers. That is a sea level change in this business over the last three years and those customers are wining in their markets. Our automotive retail customers are continuing to expand the merge consolidation as alive and well and home improvementcustomers are continuing to expand, the wholesalers are continuing to expand and so forth and so I think we have been really fortunate to have success with a lot of these top players that in their own right are winning in their markets and we are the benefactors of that.
Matt McCole – BBNT Capital Markets
Okay. Alright. That’s helpful. Mark, I think you said the outlook for this year is largely unchanged. I think you said 46% to 48% gross margin. Last quarter 67 million and interest expense and then the tax rate 37% to 39%. What about SG&A and lets go back to the previous question. Are you expecting some leverage this year even though you got this Sacramento spent?
Mark R. Bachman
Well, the increase in some of the investments for organic growth is quite a mute otherwise getting for from some of that growth match. So that was incorporated in terms of the investment backend of the business in the range of investment rates of 41% to 43% of SDNA. I think you said tax rate was 37% to 39%. It was actually 36% to 38% is what we believe the tax rate would be for this fiscal year.
Matt McCole – BBNT Capital Markets
Okay. That’s helpful. On this supply chain strategy … I am sorry about … Didn’t hear this. Is this kind of a result of this new look? Is it kind of the result of this success you have had, maybe outsourcing some of the products tossed to fire and you beside took a fresh look here, I just didn’t understand the progression there?
Mark R. Bachman
No, not really. Jeff would join us about 3 to 4 years ago, has a lot of experience in chemicals supply chain, especially you know packaged goods such as ours and since he has been here he is continually being evolving the supply chain. We made several acquisitions. We have shed the equivalent of all the capacity that has been acquired during this period of time. We continue to consolidate distribution centers to larger and fewer and Jeff believes and I agree that there is still excess capacity within our four walls that we need to continue to work towards and it’s time to take a bigger bite of the transformation. So has very little to do with outsourcing. In fact, we have clearly learned from outsourcing in the past but our manufacturing cost capabilities are in most product cases better than we can when we outsource. It’s just that we have too much capacity.
Matt McCole – BBNT Capital Markets
Okay. Thank you John, thank you, Mark.
Mark R. Bachman
Thanks Ben.
Operator
Our next question comes from Mike Saison from Key bank. Please go ahead.
Mike Saison – Key Bank
Happy new year, guys. In terms your outlook for organic sales growth from the first quarter, we talked about the fire impact but you know extra fire is more like mid single digits. Is the fire going to cause … Is this still a delta heading for 2016 and is really the run rate that you are generating on an organic basis mid single digits in nature?
John K. Morgan
Ex fire and ex foreign exchange, you would be correct. It would be higher in quarter would be about 5% and we are detracting from that sort of 5% to 6% range by the residual. Let me be clear what I mean what I say the residual effects of the fire. Early on head to the fire we lost some customers. That negative impact we think will go on into the future. Now we have been very fortunate with the great recovery effort that that team is executed against. We have actually grown aerosol sales in number of other areas during the same period of time.
The other thing that Mark just pointed out to me is in the first quarter we also benefited from promotions in the quarter in retails and as you probably recall Mike, we can fluctuate from time to time from quarter to quarter because retail promotions going to have significant impact on us either positively or negatively prompting against the previous year. At the end of Q1 we did benefit from that and so if we sort of mentally adjust that out, and benefits of that out, I would conclude that we are really more low single digit growth for the next few quarters including the negative impact of the fire over the couple of next three quarters.
Mike Saison – Key Bank
Okay. When you think about the organic growth for the rest of the year, how much of that do you think is being generated within your control versus depending on the some economic growth? It sounds like with all the sales initiatives you have done over the last couple of years, maybe it’s a little bit within your control than out of your control.
Mark R. Bachman
Yeah control is a strong term for me to use. Certainly with our influence, I think our team had done an outstanding job over the last couple of years of focusing on the new sales pipeline and they have done an outstanding job of working with customers that were really new to them within the last three years. So I think it should be seen how much further we can penetrate with those new customers but while I do believe we are benefiting from some favorable trends in the economy, it’s because over the last three years, our sales team have done excellent job of moving us into areas of more favorable demographics such as transportation and industrial MRO and so I guess the short answer would be it’s a little bit of both but I’ve to credit our sales and marketing team for moving us into the sweet spot.
Mike Saison – Key Bank
Great. Mark, I understand it may be too early to see the benefits from you know the oil phenomenon that we are seeing now but in the even event the raw material basket does indeed fall. Should that be a benefit and how much do you think that benefit could be as you head into the rest of the year?
Mark R. Bachman
We would believe that it would be a benefit. In one area we will start seeing the benefit of lower oil prices or fuel just in our transportation and the fuel surcharges that are carriers charge us. So we will see that immediately with respect to the raw materials that we purchase. As those prices do come down in some areas they are more so than others. We have to work through our inventory and so you are talking about 90 to 120 days. That’s why we don’t see a tremendous impact in the fiscal year. You know it certainly be in the later, portion of it. I go back to that range that we gave you for the rose margin of 46% to 48%. We still feel with our customer mix and with what’s happening with commodity cost that we should say in that range for the year.
Mike Saison – Key Bank
Great. And the last thing, John, when you think about earning scope this year, it sounds like organic sales growth is going to be better than you thought, I know you don’t give formal guidance but when you think about the reps for this year grew out the way you thought a quarter ago, do you feel better the growth would be a little bit stronger than you thought and particularly coupled with a potential for raw materials?
John K. Morgan
Well, I certainly feel better about our ability to make those investments in sales and sales management that I think will recruit our benefit of in future fiscal years. I think it’s increasingly important. Now that we allowed the acquisition integration behind us and allowed the systems rep work behind us and most of the fire recovery behind us and so forth, I think it’s really important for us to get back to investing in sales force expansion. So quite frank in my mind is that makes me a little less about the investments that I have felt are important in the balance of the fiscal year.
Mike Saison – Key Bank
Great. Thank you.
Operator
Our next question comes from Lee Amberk from Wonder Lake Security. Please go ahead.
Lee Amberk – Wonder Lake Security
Thank you. Morning John. Morning Mark.
John K. Morgan and Mark R. Bachman
Good morning.
Lee Amberk – Wonder Lake Security
John, I know the service wanted the [inaudible 00:36:58] initiatives but could you give a sense of where you are and the elimination of unprofitable, less profitable products and customers?
John K. Morgan
Yeah. And It’s more this time about the products and lacks about customers. The efforts that we made on the customers side most recently were really complete. Mark I am going from memory but over a year ago, a year and a half or ago, so I would think more about going forward and from a product perspective we still have quite a few thousand products, as measure by skew account. We have more than necessary. I think we made great progress in that area, in the areas of retail automotive retail and William and that kind of thing. I think there’s still a lot of work to be done in our direct sales business in our distribution business. There is a lot of work underway in that regard. If you think of a baseball analogy, I would say in about a third of our business, we are probably in the seventh or eighth inning in about two thirds of our business.
I think still in the second or the third inning. So the thing that I think about most is not so much the sheer direct margins on those items but the impact that those has on the supply chain particularly as we continue the transformation work on the supply chain trying to get to a more simplified and effective footprint. So that’s from a timing perspective why it’s concomitant with Jeff and his team are doing in supply chain transformation.
Lee Amberk – Wonder Lake Security
And John, you sort of slipped it now when you respond of the Jan/San was roughly over 60% of the product but now it’s less than, I would say roughly 35%. You are satisfied where you are and Jan/San distributions channels you have in place?
John K. Morgan
I am. The thing that had been happening and we had prognosticated this channel shift. Frankly, even I underestimated the rate of shift would take place in large distributors and large wholesalers, retailers, officer supply houses and even online are increasingly a factor in the center of Jan/San businesses. Now Jan/San product and I am extremely pleased that we find out way into those over the last couple of years. But while I think those forces on the market will continue to grow and will continue to being shared, I think we are largely now in the distribution now that we need for Jan/San products.
Lee Amberk – Wonder Lake Security
Great. Thank you, John.
Operator
Our next question comes from Rosemary Morebelly for Gabalian Company. Please go ahead.
Rosemarie Morbelli – Gabelli & Company
Thank you. Good morning and happy new year.
John K. Morgan
Good morning Rosemary. Thank you!
Rosemarie Morbelli – Gabelli & Company
I was going back to yourself growth of 2% John and the following comments regarding the investments. Am I correct in translating this that in the benefit from the highest stuff grows in the where you were previously anticipated will all go into the investments needed for growth in the future and therefore the EPS while you don’t give any guidance may just be flourished the last year or am I misreading that?
John K. Morgan
Mark, do you have a map on that?
Mark R. Bachman
Yeah. So Rosemary, we are making investments that are will in fact cause earnings to be relatively consistently with the prior year on an adjusted basis. As we said we are spending our last conference call in the range of $5 million to $6 million both to accelerate our organic growth as well as some of the consultant products we articulated in the last year as well some of the regulatory investments that we need to make to be compliant with the global harmonization standards. And so the growth that we are seeing in the top line is being reinvested and that’s when it will have a muted impact with respect to bottom lines earnings through the year.
Rosemarie Morbelli – Gabelli & Company
Okay. Thanks. That is helpful and looking at the raw material cost, Mark, you said that petroleum based was about 45% of your raw materials. What is the overall raw material cost of the percentage of your cogs?
Mark R. Bachman
So raw materials, between the chemicals we buy and the package materials are between 70% and 80% are cost of goods sold and two third of which are traditionally been chemical and one third has been packaging.
Rosemarie Morbelli – Gabelli & Company
Okay. Now the lower oil price is really going to help both categories. Isn’t it? I mean the packaging I am sure it has a lot of plastic in it and that should come down with the lower price of oil.
Mark R. Bachman
Yeah, so the high density polyethylene has been increasing for months and only in last couple of weeks that we see any break in that but it has gone against the trend in oil because of different demand and supply characteristics for that particular product. Other things like acetone have been increasing until very recently.
So it’s hard to use what’s happening with crude oil when we are saying it all covering around $50 and making that translation into our raw materials then. So we do expect to see some benefit but there is clearly anomaly out there as I mentioned. Things like acetone and the HDPE, then we have other things while you say packaging, plastic, yeah we do use some but we also a lot of product in steel and in both for aerosol cans as well as the drums. Those are increasing, core has been increasing. So there are some offsets to that.
Rosemary Morebelly – Gabalian Company
And then looking at the other side, are your customers already asking for price break because they believe that you are getting a break on under the raw material side and how much do you think you can keep actually in that net?
Mark R. Bachman
Rosemary, that has and always does occur. The thing we have been mindful is that over the last couple of years is input costs had come up, we had not been able to obtain the necessary price increase to degree appropriate and so the conversations we are having with those larger customers are about that longer term trend and that’s why I really think it’s wise to think about the gross margin range that we continue to talk about because over time there is this dynamic that you describe where it takes a little time to get increases in the market and there does comes periods of time where we are asked to respond to the lower input costs and so that’s why we think that over time it’s wise to think about a gross market range for this business model more likely we’ve guided towards.
Rosemarie Morbelli – Gabelli & Company
Okay. Thank you very much.
Mark R. Bachman
Thank you.
Rosemarie Morbelli – Gabelli & Company
As are reminder ladies and gentlemen, if you would like to ask a question, please press star than 1 at this time. Sorry, no further questions. That’s concludes our question and answer session. I would like to turn the conference back over to John Morgan, Chairman President and CEO for any closing remarks.
John K. Morgan
Well, thank you and once again happy new year and we look forward to speaking with you here at the end of our 2nd fiscal quarter. Thank you.
Operator
Thank you sir. The conference is now concluded. We thank you all for attending today’s presentation. You may disconnect your lines and have a great day.
