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CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 21
Clorox(CLX)EarningsReport:Q22015ConferenceCallTranscriptThefollowingCloroxconferencecalltookplaceonFebruary4,2015,01:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
SteveAustenfeld;TheCloroxCompany;VP-IRSteveRobb;TheCloroxCompany;EVP,CFOBennoDorer;TheCloroxCompany;CEO
OtherPart icipants
JohnFaucher;JPMorganChase;AnalystChrisFerrara;WellsFargoSecurities;AnalystOliviaTong;BankofAmericaMerrillLynch;AnalystStevePowers;UBS;AnalystAliDibadj;SanfordBernstein;AnalystJoeAltobello;RaymondJames;AnalystWendyNicholson;CitiResearch;AnalystMichaelSteib;CreditSuisse;AnalystConnieManeaty;BMOCapitalMarkets;AnalystBillSchmitz;DeutscheBank;AnalystErinLash;Morningstar;AnalystLaurenLieberman;BarclaysCapital;AnalystJavierEscalante;ConsumerEdgeResearch;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
Goodday,ladiesandgentlemenandwelcometoTheCloroxCompany'ssecond-quarterfiscalyear2015earningsreleaseconferencecall.
(OperatorInstructions).
Asareminder,thiscallisbeingrecorded.Iwouldnowliketointroduceyourhostfortoday'sconference,Mr.SteveAustenfeld,VicePresidentofInvestorRelationsforTheCloroxCompany.Mr.Austenfeld,youmaybeginyourconference.
SteveAustenfeld(VP-IR):
Great,thankyou.Welcome,everyoneandthankyouforjoiningClorox'ssecond-quarterconferencecall.OnthecallwithmetodayareBennoDorer,Clorox'sChiefExecutiveOfficerandSteveRobb,ourChiefFinancialOfficer.WearebroadcastingthiscallovertheInternetandareplayofthecallwillbeavailableforsevendaysatourWebsite,TheCloroxCompany.com.
Letmeremindyouthatontoday'scallwewillrefertocertainnon-GAAPfinancialmeasures,includingbutnotlimitedtofreecashflow,EBITmargin,debttoEBITDAandeconomicprofit.Managementbelievesthat
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 21
providinginsightsonthesemeasuresenablesinvestorstobetterunderstandandanalyzeourongoingresultsofoperations.ReconciliationwiththemostdirectlycomparablefinancialmeasuresdeterminedinaccordancewithGAAPcanbefoundintoday'spressrelease,thiswebcast'spreparedremarksorsupplementalinformationavailableinthefinancialresultsareaofourWebsite,aswellasinourfilingswiththeSEC.Inparticular,itmaybehelpfultorefertotableslocatedattheendoftoday'searningsrelease.
Pleaserecognizethattoday'sdiscussioncontainsforward-lookingstatements.Actualresultsoroutcomescoulddiffermateriallyfrommanagement'sexpectationsandplans.Pleasereviewourmostrecent10-KfilingwiththeSECandourotherSECfilingsforadescriptionofimportantfactorsthatcouldcauseresultsoroutcomestodiffermateriallyfrommanagement'sexpectationsandplans.TheCompanyundertakesnoobligationtopubliclyupdateorreviseanyforward-lookingstatements.
Nowturningtoourpreparedremarks,Iwillcoverhighlightsofoursecond-quarterbusinessperformancebysegment.SteveRobbwillthenaddressourfinancialresultsandfinancialoutlookforfiscalyear2015andfinallyBennowillwrapupourpreparedremarks,aswellasopenitupforQ&A.Consistentwithtoday'spressrelease,allofourcommentarytodayisonacontinuingoperationsbasisunlessotherwisestated.
Turningtoourtop-lineresults,inthesecondquarter,volumewasup4%andsalesgrew3%,includingtheimpactof3pointsofunfavorableforeigncurrencieswiththelargestimpactcomingfromArgentina.Excludingtheimpactofforeigncurrencies,salesgrew6%.Ourgrowthreflectshighervolume,aswellasanearly2pointbenefitfrompriceincreases.Importantly,oursalesresultsreflectstrongperformanceacrossallUSsegmentsandinternationalonacurrency-neutralbasis.
InQ2,ourUS13-weekmarketsharesdecreased1/10ofapointversustheyear-agoquarter.TheslightdeclineinthequarterreflectedcontinuedintensecompetitiveactivityinourcatlitterandBritabusinesses.Conversely,wesawmarketshareimprovementsinourlaundrybusinesswithCloroxLiquidBleachandClorox2StainFighterandColorBoosterattwo-yearhighs.
Thehomecarecategoryalsocontinuestostrengthen.Foreightconsecutivemonths,wehavegrownmarketshareinthisbusinesswithstrongsecond-quartergainsinCloroxdisinfectingwipesleadingtheway.Burt'sBeesalsogrewmarketshareinthequarterwithverystronggainsinfaceandlipcare.
LookingatourUScategories,theywereupjustoverapointinthesecondquarter,aniceimprovementfollowingthehalfpointgainwesawinQ1.Wearecontinuingtoinvesttoimproveourcategorytrendsandstrengtheningourmarketsharesremainsatoppriority.
Withthat,I' llreviewoursecond-quarterresultsbysegment.Inourcleaningsegment,Q2volumeinsaleseachincreased3%behindstrongresultsinourprofessionalproductsandhomecarebusinesses.Ourprofessionalproductsbusinessdelivered21%volumegrowthand19%salesgrowthbehinddouble-digitshipmentgainsinprofessionalcleaningandhealthcare,alongwithasolidgaininfoodvolume.
WhileconcernsaboutEbolaandEnterovirushadlimitedimpactonourretailbusiness,whichIwilldiscussinamoment,healthcareinstitutionsdidrespondwithsignificantpurchasesofcleaninganddisinfectingproductscontributingtotop-linegrowthforthequarter.FollowingsuchstrongsalesinQ2,weanticipatesomeslowdowninprofessionalproductsinQ3astheseconcernshavenowabated.
Inhomecare,whichisourlargestUSbusinessunit,salesincreasedbehindstrongexecutiononseveralmerchandisingevents,alongwithdistributiongainsforourtoiletcleaners.ThissolidvolumeandsalesgrowthmorethanoffsetadistributionlossonCloroxdisinfectingwipesatamajorclubcustomerlastcalendaryear,alossthatwehavenowanniversariedbeginningthismonth.
Inthenearterm,wedon'tanticipategettingdistributionbackatthiscustomer.Forperspective,ourfocusisonprofitablegrowthforCloroxandcategoryhealth,notgrowthatanycost.Webelievewehavetherightstrategy
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 21
inplacetodriveourbusinessandcategorygrowthinaprofitablemanner.Inparticular,wecontinuetobelievethereisopportunityforincreasedhouseholdpenetrationinthewipescategory,particularlyaswelaunchmeaningfulinnovation.
Forexample,werecentlylaunchedseveralnewproducts,includingawipewithmicroscrubbers,thatisconsumer-preferredversusthosecurrentlyinmarket,aswellasnewCloroxtripleactiondustwipesthatallowconsumerstodustanentireroomwithoneextralargewipethatpicksupdust,hairandallergenssuchaspetdander.
Importantly,aspartofourstrategytoexpandwipesusagearoundthehome,wealsointroducedCloroxScrubSinglesKitchenPads,whichcomepreloadedwithCloroxcleanerandaremeanttobetossedafterusetherebyeliminatingoneofthemostgerm-ladenitemsinhouseholds,thereusablesponge.There'saversionofScrubSinglesforuseinbathroomsaswell.
Aswe'vesharedwithyoubefore,Cloroxremainstheclearleaderinthewipescategorywithmarketsharesnear50%intrackedchannels,morethantwicethatofthenearestbrandedplayerandsharetrendshavecontinuedtoimprove.Earlyinthequarter,wedidseeanuptickinwipeshipmentsheadingintothecoldandfluseasonbehindconsumerconcernsregardingEbola,butheightenedconsumerdemandmoderatedquicklyasreportedcasesdwindled.
Withthefluseasonjustnowgettingintofullswing,wewillbemonitoringconsumptionandusingregionalfludatatoworkwithretailerstohelptargetdisinfectingwipeshipmentswheretheyareneededmost.
Inourlaundrybusiness,salesdeclinedduetodecreasedCloroxbleachvolumeasaresultofcategorysoftnesscomparedtostrongcategorygrowthintheprioryear.Fromamarketsharestandpoint,ourinvestmentinthisbrandandfocusonvaluearepayingoffasDecembermarkedthefourthconsecutivequarterofmarketsharegrowthonCloroxbleach.Lookingahead,duetoincreasesforinputcostsforourbleachbusiness,we'reintheprocessofimplementinga7%averagepriceincreaseeffectiveFebruary1.
Inourhouseholdsegment,wedelivered3%volumegrowthand5%salesgrowth.Thesegment'stop-lineresultsweredrivenbystrongperformanceinourGladandCatlitterbusinesses.Ourbagsandwrapsbusinessgrewvolume3%drivenbyinnovationbehindtheHawaiianAlohascent,aswellasnewGain-scentedtrashbagsthroughourpartnershipwithProcter&Gamble.SalesonGladwereupdoubledigitsbehindpriceincreasestakenin2014.
Eveninthefaceofintensecompetition,catlittervolumeandsalesincreasedbehinddistributiongrowthofournewFreshStepExtremelightweightproduct.Wearecontinuingtoinvestaggressivelyininnovationandcommunicatingourvaluepropositionversusthecompetition,particularlyfocusingonexcellentclumpingandodorcontrolsuchaswithournewEliminateOdorfor10Dayscampaignthatwaslaunchedinthesecondquarter.
KeepinginmindthatQ2isarelativelysmallquarterforourcharcoalbusiness,salesandvolumedeclinedfollowingdouble-digitgrowthinthefirstquarterasretailerstransitionedtoournewandimprovedKingsfordCharcoalproductthatlaunchedinJanuaryinadvanceofthe2015grillingseason.
Inourlifestylesegment,volumegrewastrong5%andsalesincreased4%.Theseresultsweredrivenbyverystrongdouble-digitvolumeandsalesgrowthonBurt'sBees,largelyduetoinnovationinlipandfacecareproducts.Inparticular,ournewlipcrayonsandnewvanillabeanandwildcherrylipbalmflavorsgrewstronglyinthequartersupportedbyourfirsteverBurt'sBeestelevisionadvertising.
Ourfacialtowelettebusinessandskinbrighteningproductswerealsoverystronginthequarter.
Turningtoourfoodbusiness,salesgrewversustheyear-agoquarterbehindhighervolumeforbottledand
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 21
dryHiddenValleyproducts.Finally,thesegment'spositiveresultsonBurt'sBeesandfoodwerepartiallyoffsetbylowersalesandshipmentsofwaterfiltrationproducts,primarilyduetoconsumptiondeclinesonpour-throughfilters.
Aspreviouslycommunicated,westartedshippinganimprovedBritafilterinAugustthatisfasterandeasiertochangethancompetitivefilters.InNovember,webeganshippingimprovedpitchers.Withourfocusoninnovation,weareoptimisticthatourwaterfiltrationbusinesswillhaveastrongersecondhalfofthefiscalyear.
Turningtointernational,volumewasup5%behindstrongoperatingperformanceandvolumegrowthinnearlyallregions.However,salesdeclined2%duetotheimpactofunfavorableforeignexchangerates.Ifyouexcludetheimpactofforeigncurrencies,salesforinternationalgrew11%.Withoilandothercommoditypriceshavingfallen,capitalinvestmentinsomecountrieshasmoderatedresultinginslowingeconomicgrowthinsomeofourkeymarketssuchasChileandPeru.
Strategically,weremaincommittedtogrowingprofitablyinourinternationalmarketsandcontinuetotakestepstoovercomemacroeconomictrendssuchasnegativeforeigncurrencies,highinflationandslowingGDPgrowth.Inparticular,wecontinuetocarefullyassessspendingacrossourinternationaldivisionandimplementpriceincreasestomitigatethemacroheadwinds.
Lookingatthebalanceoffiscalyear2015,asnotedinthismorning'searningsrelease,wehaveincreasedoursalesgrowthoutlookforthefullyeartobeabout1%.Therevisedsalesoutlooktakesintoaccountthestrengthofthefirsthalf,alongwithanupdatedoutlookforthesecondhalfoftheyear.AsIdiscussed,weanticipatesomeslowdowninQ3inprofessionalproductsfollowingverystrongQ2shipmentsinpartrelatedtoEbolaandEnterovirusconcernsthathavenowgreatlyabated.
Inaddition,wenowanticipatestrongerforeignexchangeheadwinds,alongwithhighertradespendingtosupportourcategoriesandgrowmarketshares,aswellasdefendagainstreducedpricesbycompetitorsfollowingthedeclineinimportcosts.NowIwillturnitovertoSteveRobbtoprovidemoredetailonourQ2performanceandouroutlookforfiscalyear2015.
SteveRobb(EVP,CFO):
Thanks,Steveandwelcome,everyone.Wearepleasedtohavedeliveredastrongsecondquarterandasolidfirsthalfforfiscal2015.Inadditiontostrongsalesgrowthinthequarter,wedeliveredanotherquarterofverygoodearningsgrowth.Asyousawinourpressrelease,wehaveraisedourfiscalyearoutlookforsalesandearningspersharetoreflectoursolidfirst-halfresults.
Inoursecondquarter,salesgrew3%reflecting4pointsofvolumegrowthand2pointsfrompricing,partiallyoffsetby3pointsofunfavorableforeigncurrencies.Onacurrency-neutralbasis,salesgrewnearly6%.Ourtop-lineresultscameinbetterthanexpecteddrivenbystrengthinourGlad,professionalproductsandBurt'sBeesbusinesses.
Grossmarginforthequarterincreased10basispointsto42.5%reflecting130basispointsofcostsavingsand100basispointsofpricing,largelyoffsetby90basispointsofhighercommoditycosts,aswellas90basispointsofhighermanufacturingandlogisticscostsreflectingcontinuedinflationarypressuresininternational.
Andaswe'vepreviouslycommunicated,wecontinuetoseesignificantcostpressuresinthelogisticsandtransportationmarketduetothetightsupplyoftrucksandrailcars.
Sellingandadministrativeexpensewaslowerinthesecondquarterat14.2%ofsalescomparedto15%ofsalesintheyear-agoquarterwhentheCompanymadeincrementalinvestmentstochangeITservice
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 21
providers.Costsavingsalsocontributedtolowersellingandadministrativeexpenses.
Advertisingandsalespromotioninvestmentforthequarterwasmorethan9%ofsalesreflectingcontinuedstrongsupportbehindourbrands,particularlytodrivetrialofnewproducts.Notably,ourUSretailadvertisingspendwasabout11%ofsales.
Oureffectivetaxrateof34.9%wasalmostapointlowerversusyearago,butinlinewithourfull-yearprojections.Outofallofthesefactors,wedelivereddilutedearningspersharefromcontinuingoperationsof$0.97,an8%increaseversustheyear-agoquarter.
Fiscalyear-to-datefreecashflowwas$207millioncomparedwith$159millionintheyear-agoperiod.Theincreasewasdrivenbyloweremployeeincentivecompensationpayments,lowertaxpaymentsandtheinitialfundingoftheCompany'snonqualifieddeferredcompensationplanlastyear.Thesefactorswerepartiallyoffsetby$25millioninpaymentstosettleinterestratehedgesrelatedtotheCompany'sissuanceoflong-termdebt,theexpenseofwhichwillbeamortizedovertheten-yearlifeofthedebt.
InDecemberof2014,weissued$500millioninseniornotesincreasingtheCompany'squarter-endcashbalancewithproceedssubsequentlyusedtopaydownaportionofthenotesthatmaturedonJanuary15ofthisyear.Forfiscalyear2015,wecontinuetoanticipatefreecashflowasapercentageofnetsalestobeabout10%ofsales.
NowIwillturntoourfiscalyear2015outlook.AsStevementioned,ourfiscalyearsalesoutlooknowanticipatesalesgrowthofabout1%reflectingsolidfirst-halfsalesresults,productinnovationandthebenefitofpricing.Oursalesoutlookalsonowanticipatesanevengreaterimpactofunfavorableforeignexchangeratesintherangeof2%to3%.
Inaddition,fiscalyearsalesareanticipatedtobeimpactedbyslowinginternationaleconomies,aswellashigherfull-yeartradepromotionspendingaswecontinuetoinvestinourbusinessanddrivetrialofnewproducts.(Inaudible)areexpectedtomorethanoffsethighermanufacturingandlogisticscosts.
Giventhesignificantdeclineinoilprices,wenowanticipatelowerresinpricesinthesecondhalfandcommoditycostsareexpectedtobeaboutflatforthefullyear.Forfiscalyear2015,wecontinuetoanticipatesellingandadministrativeexpensesatabout14%ofsales.EBITmarginisexpectedtobeaboutflatasincrementaldemand(Inaudible)expansion.Wecontinuetoanticipateourfiscal2015taxratetobeabout34%andnetofallofthesefactors,wehaveraisedourfiscalyearoutlookfordilutedearningspersharefromcontinuingoperationsto$4.40to$4.55.
Aswelookaheadtofiscalyear2016,weanticipatethebenefitsfromcontinuingcommoditysoftnesstobepartiallyoffsetbycontinuedincreasesinlogisticscosts.Also,aswehavedonehistorically,wemayuseaportionoftheresin-relatedsavingstoaddresspotentialcompetitivepricecuts.We'llalsocloselytrackheadwindsininternationalmarkets,includingforeigncurrencydeclinesandslowingeconomies.
BeforeIturnitovertoBenno,Ididwanttoletyouknowthatmovingforwardwewillprovidenextyear'sfiscalyearoutlookstartingwithfiscal2016duringourQ4earningscall,whichtakesplaceinAugust.Thischangeallowsustoprovideyouwithanoutlookbasedonafullyearofactualsandputsusmoreinlinewiththetimingofourpeergroups'outlookannouncements.Iamhappytoaddressanyquestionsyoumighthaveonthisprocesschange,butIwantedtomakeyouawareofthispriortotheQ3earningsreleaseinMay.
Andwiththat,IwillturnitovertoBenno.
BennoDorer(CEO):
Thankyou,Steveandhello,everyone.It'sgreattobejoiningyouonmyfirstcallasClorox'sCEOgiventhestrongsecondquarterwejustcompleted.Thisquarter'sperformancefollowsaverysolidQ1anditalso
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 21
speakstothecommitmenttothe2020strategyandourfocusoncontinuitywiththeleadershiptransition.Thatcontinuityofpurposeisevidentinourcontinuedemphasisoncategoryandoverallmarketshareimprovement,profitablydrivinggrowthandstrongertop-lineperformanceandcreatingshareholdervalue.
Nowclearlyasweheadintothesecondhalf,wearefacinganumberofchallenges,includingcontinuedsoftnessinseveralcategories,worseningforeignexchangeheadwindsandslowingeconomiesinmanyinternationalmarkets.Ibelievewearetakingtherightstepstosupportourbrandswithincreasedinvestmentswhiledrivingmarginimprovementtogrowprofitablyinthisdifficultenvironment.
AsIdiscussedwithyouonlastquarter'scall,thedefiningopportunityforCloroxisacceleratingprofitablegrowth.Lookingahead,we'releaningintofourkeyelementsofour2020strategythatIbelievedrivethegreatestvalue.Theseareasofemphasis,whichwearecallingstrategyaccelerators,willdrivedecisionsaroundwherewewillinvestmoreheavily,again,withtheintenttodriveprofitablegrowth.AndIwouldliketotakeafewminutestointroducethesetoyoutodayandatananalystmeetingweplanonhostinglaterthisyear,wewilldelvemoredeeplyintohowweareactivatingthem.
Thefirstareaofemphasisisacceleratingportfoliomomentum.Inotherwords,leveragingtailwindstogeneratemoregrowthfromourportfolioandinvestingmoreheavilyagainstthosebrandsandcategoriesthathaveastronger[right]togrow.Thesecondisaccelerating3Dtechnologytransformation,whichaimstoaddressincreasingconsumerfragmentation,ashiftinhowtoday'sconsumersshopandbuytheirproductsandhowwemustengagewiththemtowinthebattleforthephysicalandvirtualshoppingcart.
Thethirdareaofemphasisisacceleratinginnovation.Nowthisisn'tjustaboutproductinnovation,it'saboutinnovationinsalesandmarketing,aswellasproductsupply.Reallyanythingthathastodowithourdemandcreationmodelbuiltaroundthe3Dsofdesire,decideanddelight.Innovationinalltheseareasdrivescategorygrowthandwearecommittedtodrivingmoreofthat.
Finally,wewanttoaccelerateourgrowthculturewhileatthesametimemaintainingourtraditionofoperationalexcellence.WewanttodialupourstrongCloroxculturetohaveanevenmoredeeplyingrainedgrowthmindset.Istronglybelievethesefourareasofemphasisarewhatweneedtodrivegrowthwhiledoingsoprofitably.AndIlookforwardtosharingmoreaboutthemwithyouovertime.
Nowwiththat,let'sopenituptoyourquestions.
QUESTIONS&ANSWERS
Operator:
(OperatorInstructions).JohnFaucher,JPMorgan.
JohnFaucher(Analyst-JPMorganChase):
Yes,thankyou.Goodafternoon,everyoneandBenno,congrats.Wanttotalkalittlebitaboutthepricingthatyoutalkedabout,andIthinkyousaiditisgoingtocomeinonFebruary1.Couldyougiveusalittlemoreofanidea--andIapologizeifImissedthis--whereyouareseeingthatpricinggoingthroughsortofdomesticversusinternational?
Andthengivenallthenewsaboutrawmaterialdeflation,etc.,howyouforeseecompetitiveresponseonthispricingbecausewe'veseenalotoftalkaboutupticksandpromotionalspendinggoingforward,sodoyoufeelcomfortablethatthepricingisinanditistheretostay?Thanks.
BennoDorer(CEO):
Ithinkwhatyouarereferencingisthe7%priceincreaseonbleach,whichisdomestic--liquidbleach.We
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 21
haveaprofitablegrowthfocus,asyouknow,andreallythesecostsarefullyjustified.Weareseeingcostinflationinseveralareas,whetherthatistransportation,logistics,corrugates,wages,benefitsandthesearecoststhatnotjustCloroxsees,butthesearecoststhatarevisibleandoccurringtoourcompetitorsinprivatelabelaswell.
Iwouldliketoremindyouthatwearepricingtoalong-termcostadvantageandnottoapeak.Andagain,thesearefullycost-justified.Wedohaveastrongtrackrecordinpricing.Sooverthelast10years,95%ofourpricingincreaseshavestuck.Theyarebasedonverystronganalyticsaswellandweareintheprocessoftalkingtoourretailersaswespeak.
Sobasedonthatstrongtrackrecordandthecostjustification,weareconfidentthatthispriceincreasewillbesuccessful.Atthesametime,we'llalwaysmonitorwhatwillhappeninthemarketplace,whatwillhappenwithcompetitionandwearecertainlyalsowillingtospendbackifneededtodefendthebusiness.
JohnFaucher(Analyst-JPMorganChase):
Thankyou.
Operator:
ChrisFerrara,WellsFargo
ChrisFerrara (Analyst-WellsFargoSecurities):
Thanks.Iguess,Benno,canyoutalkalittlebitabout,Iguess,thepointoneofthefourpointsthatyou'resayingyouwereleadinginto,Iguess,isacceleratingportfoliomomentum.Canyoutalkalittlebitabouthowitisdifferent,likewhatthatmightentail?Notnecessarilyspecifics,butjustgenerallywhatisdifferentaboutthatfromwhathasbeengoingonthelastfewyears.
BennoDorer(CEO):
Yes,Chris,IthinkwhatthiswillbeaboutisreallyidentifyingthebusinessesthathavethestrongesttailwindsandensuringthatwehavetherightinvestmentsbehindthemandIthinkthegrowthofBurt'sBeesinthelastquarterisperhapsagoodexampleofwhatthiswilllooklike.WehaveforthefirsttimelaunchedaTVadvertisingcampaignbecausewerealizedthattheawarenessbehindthebrandreallyhasalotofupsideonthebasebusinesseventhoughthebrandhasbeenaroundfor20yearsandthathasbeenleadingtoreallyniceresultsonthebasebusiness.
Weareleaningintotheinvestmentsbehindtheinnovationsmorestronglyandwe'vereallyseenhowlip,butalsofaceinnovationhasyieldedreallyniceresultslastquarter.Andfinally,weareworkingwithretailerstomakesurewehavetherightin-storesupportoutthere.Soreallyitishelpingusunderstandwherethosetailwindsare,investinginthosetailwindsbehindaportfoliolikeBurt'sBeesandlikecertainareasinhomecareandlikefoodenhancersandusingthattodrivegrowth,butgrowththerightway.
ChrisFerrara (Analyst-WellsFargoSecurities):
Gotit.Iappreciateit.Andjustonanearterm,youguysmentionedacoupleoftimesthatyouarefacingincreasingtailwindsfromeconomiesaroundtheworld,butIguessthatsortofleavesoutyourbiggesteconomywherethingslookalittlebetterandyourcategorygrowthrateisgettingbetter.Soasyoulookforward,doyouthinkgenerallyyourcategorygrowthrategloballyacrosstheportfolioisgettingbetterorworse?Isuspectbetter,right?
BennoDorer(CEO):
Well,ifyoulookatourlargestmarketinternationally,Chris,LatinAmerica,weactuallyareexperiencinga
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 21
slowdownincategories,whichevenaffectssomeofourstrongergrowthmarketslikePeruandChileandothermarkets,ofcourse,likeArgentinaandCanadahavebeenmorestableforawhile.
SoIwouldsaythegeneraltrendthatwearewatchingverycarefullyininternationalisaslowdowneconomicallyinourcategories.Ourmarketshareininternationalisgrowingandasyouhaveseenan11%salesincreaseinlocaldollarsisnothingtosneezeat.Butthat'saheadwindthatwearewatchingverycarefully.
ChrisFerrara (Analyst-WellsFargoSecurities):
I'msorry.ImeanbyyourbiggesteconomyImeanttheUS,whichhasbeengettingbetter,right?
BennoDorer(CEO):
IntheUS,whatweareseeingis--certainly,inthesecondquarter,wehaveseenaslightuptick.Allcategoriesgrewalittleover1%andthatisuphalfapointfrompreviousquarters,sothatisgood.AndifyouthinkaboutwhatishappeninghereintheUS,youseeindicationsofanincreasingconsumerconfidence.TheUniversityofMichiganjustissuedtheirConsumerSentimentIndex.Itishighestsince2004,Ibelieve.Thereishopethatthereperhapswillbehigherconsumerspendduetoloweroilprices,sothosearegoodthings.
Atthesametime,householdformationisstilllowerthanithistoricallyhasbeen.Thejobsthatarecreatedstillpaylessthanthejobsthatwerelostduringtherecessionandtherestillisthisbifurcationinsocietywherethebottomhalfisn'treallydoingwell.
Sothere'sputsandtakes.Iwouldsaywearecautiouslyoptimistic.Ourexpectationsrightnowstillarebasedonflattolowsingledigitcategorygrowthandforus,wefocusonwhatwecancontrolandthat'sinvestingininnovation.WehaveastronginnovationplanalsogoingoutinQ3ofthisfiscalyearthatweareinvestingbehindandwehavetalkedtoyouinthepastaboutincreasingourdemandspendby1pointofnetsales.Overtime,thatiscalledforbyourstrategyandwearecertainlyleaningintothat,afocusondeliveringbettervaluethancompetitorsinprivatelabel.
Sowefeellikewearedoingwhatwecandotodrivecategorygrowth,butIwouldliketoletthisplayoutinthemarketplaceforaquarterortwo.It'sreallytooearlytocallitapositivetrend.
ChrisFerrara (Analyst-WellsFargoSecurities):
Thankyou.
Operator:
OliviaTong,BankofAmericaMerrillLynch.
OliviaTong(Analyst-BankofAmericaMerrillLynch):
Wantedtoaskyouaquestionaboutcompetitioninyourcleaningcategories,particularlyasoneofyourmaincompetitorsisnotdomiciledintheUS.WehaveseeninourchannelchecksalotmoredealswithLysol,buytwogetonefree,thosekindsofthings.
Sojustcuriousonyourtakeoncompetitioninyourcleaningcategories,particularlyasoneofyourmaincompetitorsdoeshavealittlebitofatailwindfromnotbeingintheUS.Thanks.
BennoDorer(CEO):
Yes,socompetitioninparticularinhomecare,Olivia,hasalwaysbeenprettystrongandthosetypesofdeals
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 21
thatyoudescribed,theyarereallynothingnew.Theyoccurrelativelyfrequentlyandthat'spartofwhywearesayingthatinvestingmoreindemandspendingistherightthingtodo.
Iwillsaythoughthatforusthebiggestcategorythatwearecompetingwiththeminiswipes,perhaps,andifyoulookattheshareresultsonwipes,wearereallyupstronglyinwipesandwefeellikeforustherightthingtodoisfocusonconsumerfundamentals,focusondemandspendingthatdrivesourbrandequities,onstronginnovationandcertainlyinwipes,wehaveaverystronginnovationprogramandfocusingonpointingouttotheconsumerthatwearedeliveringsuperiorvalue.
That'sreallyworkinginthemarketplace.That'swhatwewillbefocusedonandthat'snottosaythatwewon'trespondappropriatelyifwefeellikethereisverystrongtradepromotiongoingoninthecategory.Wewilldefendourmarketshares,butIthinkwe'vealwayssaidthatourfocusisonearningmarketshare,notbuyingmarketshareandonwipesinparticularthatisplayingoutquitenicelyatthispoint.
SoIwouldsaythecompetitivedynamicsinhomecarearestrongastheyalwayshavebeen,butIwouldn'tcallthemelevatedatthispoint.
OliviaTong(Analyst-BankofAmericaMerrillLynch):
Gotit.Thanks.AndthenonGlad,itdoesn'tsoundlikeyousawanypushbackonyourpricingandinterestinglyitsoundslikevolumeincreasedwhileyoutookpricing,whichdoesn'ttypicallyhappen.Sowastheresometimingissue?Wasthereabigpre-buyaheadofpricemovesorhaveyoujustmanagedtoincreasevolumewhilealsotakingonpriceaswell?
BennoDorer(CEO):
IwouldsaythebiggestthingonGlad,Olivia,isthatwehavecertainlyleanedintothepriceincreaseandmerchandisinghasbeenverystronglastquarter.ButalsoourinnovationonGladisreallyworkingwellandinfact,inQ3,wearebackingthisupwithaninnovationthatwefeelverystrongaboutandthatisinpartnershipwithP&G,wearelaunchinggladwithGainscents.
TheGainscentisonethatplayedwellasascentendorsementacrossvariouscategoriesandwefeellikethisisanotheropportunityforustosupportourstrategyofdifferentiatingourtrashbagsandencouragingtradeupbydeliveringsomethingthatisuniqueandveryhardforourcompetitorstoreplicate.
Soinanutshell,reallystrongmerchandisingbutinparticularverystrongconsumeracceptanceinthispremiumtrashsegmentbehindourinnovationandasaresult,youhavealsoseenourmarketshareinthispremiumtrashsegmentupquitenicely.
OliviaTong(Analyst-BankofAmericaMerrillLynch):
Great.Thanks,Benno.
Operator:
StevePowers,UBS.
StevePowers (Analyst-UBS):
Iguessjustfirstonthecommodityfront,Steve,entertainmealittlebitandthinkaboutaworldwhereweareatsub$60oilfortheforeseeablefuture.Iknowitisearly,butwhatdoesCOGSdeflationrealisticallylooklikeinfiscal2016?Isitnegative2%,3%,5%?
Andyoumentionedpotentialoffsetsintermsoflogisticscostsgoingupandpricingpromotionalinvestmentsprobablyalsogoingupinthatworld.ButIjustwonderifyoucouldgiveussomeguardrailsaswethink
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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furtheroutintermsofhowyouarethinkingaboutthebusinessespreparingyourfiscal2016budgetinggivenwhereoilistoday.
SteveRobb(EVP,CFO):
Yes.It'sagoodquestionandtheshortanswerisitishardtoknow.AcoupleofthingsIwouldpointout.Obviouslyoilhasmoveddownprettysignificantlyoverthelast90days.Itisnotclearhowlongitwillstaydownattheselevels,soIthinkaswestartlookingatourfiscal2016planning,wewillhavetotakeahardlookathowlongwillthesepricesreallystayattoday'slevel.Ithinkcertainlyforthenextsixmonthsorsoweexpectthemtobedepressed.Beyondthat,Ithinkitremainstobeseen.
AcoupleofotherthingsIwouldpointoutabouttheresinmarket.ThesupplydemandbalancestillremainsfairlytighthereintheUSandsoresinpriceshaveyettocomedown.Actually,inthefirsthalfofourfiscalyear,resinpricingwasup.Wedoanticipateitwillgodowninthesecondhalf,butthat'smainlybeingdrivenbylowerpricesoverseasandthat'screatingsomedownwardpressurehereintheUS.Soit'sgood,butIwouldjusttemperexpectationsabittosayitisnotjustenergyprices,itisalsothesupplydemandbalance.
Andthenfinally,asyouthinkofresin,whichisthelargestcommoditythatwebuy,keepinmindhistoricallyinthiscategorywhenyouhaveseenalargemovedownwardinresinpricing,morethanhalfofthathasbeenspentbackinthecategoryandthat'scertainlywhatweareanticipating.
Soinshort,it'salwaysbettertohaveatailwindthanaheadwind,butIthinkatthispointwearecautiouslyoptimisticonhowthatmightplaythroughinfiscal2016.
StevePowers (Analyst-UBS):
Okay.I' llleavethatthere.ButIguess,Benno,maybefromatop-lineperspective,asyousay,thescannerdatahascertainlybeenpickingupandlookedabitbetter,whichisapositive,butnotnearlytotheextentthatweseeinyourreportednumbersthisquarter.
SohowmuchoftheQ2strengthisreallyattributablejusttotimingofsell-inversussell-out?Doyouthinkchannelinventoriesareokaybecauseyoudoseemtobepointingtowardsadecelerationinthesecondhalfthatgoesbeyondtheprofessionalandinternationaldynamicsthatyoumentioned?
BennoDorer(CEO):
Yes,thefirstthingIwouldsayiskeepinmindthatthepublishedsharedatadoesn'tcapturetheentireuniverse.Wefeelgoodabouttheinventoriesthatareoutthere.Thereisnothingunusualinhere.Thetwoareaswearecertainlywatchingis--oneisinprofessionalproductswherewedidseethatEbolaconcernshadsomeimpactonthatbusinessthatmayleadtodestockinginQ3.Thatwouldbemyexpectation.
Andthenwipes,certainlywipeshasbeenupverystronglyintrackedchannels.Wedon'tthinkthatEbolahadabigimpactastheconcernsfadedawayreallyquickly,butthefluseasoncertainlyhasbeenandisverystrong,soweneedtowaitandseetounderstandwhetherthatflowsthroughtoconsumerconsumption,butotherthanthatnothingparticular.Inventoriesarewheretheyneedtobe.
StevePowers (Analyst-UBS):
Okay,thanks.
Operator:
AliDibadj,Bernstein.
AliDibadj(Analyst-SanfordBernstein):
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Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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Sowantedtogobackto,Steve,Ithinkyourcommentaboutmorethanhalfofthecommoditybenefitsarespentbackandwehavecertainlyseenthatbefore,closerto60%,maybetwo-thirdsisspentback.SoIguessIamscratchingmyheadstillalittlebitaroundthepriceincreasesthataretheoreticallyjustifiedonthebleachproductsandonwrapsinparticular.
AndIworrythatyouareaskingfortroubleinsomesensebecauseweseethespotmarketinresins,USorabroad,itiscomingdown.Itwilllikelycomedownandhelpyouguysout,butalsohelpyourcompetitors.I'mjusttryingtofigureoutwhyyoutookthatpriceincreaseandagainifyou'renotjustaskingforapricegapexpansionlikeyouhavegottenbeforeinthesecategoriesandstartgettinghurtfrom[ashare]alloveragain.
SteveRobb(EVP,CFO):
SoAli,letmetakethatquestion.Afewthoughts.Firstofall,thepriceincreasesarecost-justified.Iwouldjustpointoutwhenyoulookatthetotalsupplychainwhetherit'slaborinflation,healthcarecosts,transportationcostsinparticularorevenalltheotherrawmaterialsets,thosehaveallbeenmovingup,sowetrytoprice,asBennosaid,tothelong-termaveragecost,soIthinkwefeelboththebleachincrease,aswellasGladisacost-justifiedpriceincrease.
NowasitrelatestoGlad,asyouknow,theresinmarket--itactuallytendstogoupprettyquickandcomesdownslowhasbeenthehistory,buttherehasbeenalong-standingissuewhereifpricesstarttocomedowninthespotmarketforresin,sometimesyou'llseeastepupinmerchandisingactivity.
Well,thatiscertainlywhatweareplanningforanditiscertainlybakedintotheoutlookandourexpectations,butIthinkwehavegotalongtrackrecordofmanagingtheupsanddownsofresinpricingwiththeGladbusinessquitesuccessfully.
Sowehaveseenthestorybefore.Wemanagedthroughthelong-termcostsandIthinkwefeelprettygoodaboutthedecisionswehavetakenandifconditionsaredifferentthanwethink,wewillmanagethroughit.
AliDibadj(Analyst-SanfordBernstein):
Okay,okay,that'shelpful.Idowanttogobackalittlebittotheleanin,Iguess,onportfolioandtrytogetyoursenseofhowcomfortableyouarewithbagsandwraps,professionalandBurt'sreallyleadingtheday.
Andontheonehand,itisgreatbecauseit'sdiversificationfromyour,quote/unquote,historicalbusinessorcorebusiness,buthowdowethinkaboutthatgoingforwardandwhatarewegoingtohearaboutfromyourcoreandunderlyingbusinesses?
Andifyoucantackle--asyoutalkaboutportfolio--theroleofinternationalbecause,ofcourse,themaintargetwe'vebeenhearingaboutforalittlewhileintermsofinternationalisimprovingthemarginsthere.AndIgetit;itistoughtotellwithcurrencies.Asbestaswecantell,themarginsarestillgoingdownornotgettingthatmuchbetter.
SoIamtryingtounderstandhowthatfitsinyourportfolio?DoesCloroxneedtobeaninternationalcompany?Doesitneedtotrytogrowthatbusinessorshoulditjustnot?Sobothcategoryportfolio,Iguessandalsointernationalandgeographicportfoliotoo,please.
BennoDorer(CEO):
Yes,so,oncategoryfirst,asyouknow,ifItakeastepback,weareveryfocusedondrivingthecorebusiness.Ifyoulookatthethreebusinessesthatyoureferenced,Ali,thatgrewlastquarter,twoofthemreallyhavebeengrowingstronglyforalongtimeandwehavealwayspointedoutthosetwobusinesses,professionalandBurt'sBees,asgrowthareasandlikeIsaid,weareleaningintoinvestmentsandthoseinvestmentsareshowinggoodreturns.
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Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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Glad,Iprobablywouldn'texpectgrowthratesthatwe'veseeninthelastquarteronGladonaconsistentbasisgoingforward,butifIreallylookatunderlyinggrowthdrivers,that'sinnovation.Thebusinesseswherewe'vehadstronginnovation,theyhavegrownandasyouknow,weareveryfocusedongrowingourbusinessbehindinnovationandlikeIsaid,wehaveaverystronginnovationprogramouttherealsoforthefiscalyearbackhalf.
Sowearegrowing,wearegoingtherightwayandimportantly,ifyoulookacrossthesegments,wearegrowinginallsegmentssoIfeelgoodabouthowmuchwearefocusedonthecoreandwhichbusinessesaregrowingandIcertainlywouldexpecthomecarealsogoingforwardtocontributemore.AsStevesaid,wehavejustnowafewdaysagocycledthroughadistributionlosswithamajorclubcustomer,sothatthewipesgrowththatweareseeingintrackedchannelshopefullywillbevisiblealsoinshipmentsaswecomparethemversusayearago.
Oninternational,Ithinkwhatwehavesaidininternationalisthatwhatwedowanttodoisgrowmoreprofitably.Weareexpecting5%to7%insalesgrowth,butwewanttoturnaroundourmargins.InternationalhasaroleinClorox.Weareexecutingthefundamentalswell,butIwillalsoremindeverybodythatwearenottryingtotransformtheCompanyintomoreofaglobalplayer.Itis20%ofourportfolioandifIprojectonforwardto2020,Idon'texpectthatnumbertobesignificantlyhigher.
CertainlyasyouthinkaboutthechallengesthatweareseeingfromaninflationpointofviewandinFX,Ithinkwhatitwillmeanisthatwewillbemorefocusedthaneverontheactivitiesonthemarginenhancementside,whetherthatispricing,whetherthatismarginaccretiveinnovation,applyingthestrongcostsavingfocusthatwehaveintheUSandinternational,orthisgoesbacktotheacceleratorthatImentioned,movingtheportfoliotowardsmoreprofitablecategories.ThatreallyIthinkwillbecomemoreofafocusgoingforward.
Howcanwemoveourportfoliotowardsthecategoriesthataremoreprofitableandlessperhapsvolatile?Burt'sBeesisagoodexampleandthencertainlycountriesthataremoreeconomicallystableandattractivelikePeruandlikeColombia,inandfranklyoutsideofLatinAmerica.Sointernationalhasarole,butwewillbeverymindfultomakesurethatwegrow,butgrowprofitably.
AliDibadj(Analyst-SanfordBernstein):
Thanks.Iappreciatethat.IfIcansneakinjustonequickoneaboutthecostsavingsanditlookslikeatleastinQ1,Q2versuslastyearthepaceofitslowedalittlebit.Justallayourfearsaboutthat,ifyouwouldplease,ornot.
SteveRobb(EVP,CFO):
Ali,Iamhappytoallayyourfears.Costsavingsinthegrossmargin,youareprobablylookingattheWebattachments,wehadabout130basispointsofcostsavingsingrossmargin.KeepinmindcostsavingshitseverylineoftheP&L.AgoodchunkofthecostsavingsthisquartercamethroughourSG&Aexpenses.
Sointotalforthequarter,wehad$27millionincostsavings,andIwouldsaywearecertainlyontracktoget150bpsofEBITmarginexpansionfromthecostsavingsprogramsthisyearandcontinuetofeelgoodaboutthepipelinegoingforward.Socostsavingsprogramisperformingquitewellforus.
AliDibadj(Analyst-SanfordBernstein):
Thankyou.
Operator:
JoeAltobello,RaymondJames.
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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JoeAltobello (Analyst-RaymondJames):
First,justwanttodrillalittlebitdeeperonthevolumenumberthisquarter.Backoftheenvelopelookslikeprofessionaladdedaboutapointtovolume,isthatcorrect?
SteveRobb(EVP,CFO):
Theprofessionalproductsbusinessintermsofvolumegrowth,no,thebusinesswasupdoubledigitsinbothvolumeandsales.
JoeAltobello (Analyst-RaymondJames):
Right.Butintermsofyouroverallvolumes,itaddedaboutapointinthequarter?
SteveRobb(EVP,CFO):
Onatotalcompanybasis,that'sright.
JoeAltobello (Analyst-RaymondJames):
Okay.Andthenintermsofthesecondhalf,Iunderstandwhythatwouldslow,but,Benno,youtalkedaboutyou'relappingthelostdistributioninwipes,soyouhaveeasycomparesthere.AndIthinkyouarealsolappingsomeeasiercomparesonbleachaswell.Sowouldthosetwoitemshelptooffsettheslowdowninprofessional,orthat'sprobablynotthecase?
SteveRobb(EVP,CFO):
Iwouldn'toverstatetheslowdowninprofessional.Thebusinesswasupdoubledigitsinthesecondquarter.Obviouslysomeofthatmaybeinventorythatwillgetworkedoffinthethirdquarter,but,onbalance,westillthinkprofessionalproductswillbeinthis10%to15%growth.Ithinkasyoulooktothesecondhalfofthefiscalyear--hereishowwearelookingatit.Thefull-yearoutlookfortheCompanyisforsalesgrowthofabout1%.Nowonacurrency-adjustedbasis,it'sprobablyintherangeof3%to4%.
Certainlyinthefirsthalfofthisfiscal,wewereatthehighendofthat.Wecameinatabout4%currency-neutralsalesgrowth.Aswelooktothesecondhalf,Ithinkwefeelverygoodthatweareontracktohavegoodpositivevolumegrowth.Weareverymuchontracktohavesalesgrowththatissolidfromanorganicstandpoint.
Ithinkthebigwildcardthatweareallwatchingprettycarefullyiswhathappenswithforeigncurrenciesandagain,theoutlookis2%to3%there,butwecouldbeatthemidorupperendofthatrangebasedonwherethespotratesaretoday.Butabsentthat,IthinktheorganicplansthatwehaveareperformingquitewellfortheCompany.
JoeAltobello (Analyst-RaymondJames):
Okay,gotyou.AndthenintermsofBrita,youmentionedanewpitchercameoutinNovember.ThefilterscameoutinAugust,butitseemslikethatbusinesshasn'tpickedupyet.Youmentionedearlieronthecall,yousaiditwillbestrongerinthesecondhalf,butIthinkinthepastyoutalkedaboutgrowthorareturntogrowthinthesecondhalfofthatbusiness.AmIsortofsplittinghairsthere,ordoyoustillexpectgrowth?
BennoDorer(CEO):
Look,weexpectthatbusinesstodobetterinthesecondhalfandwe'vealsosaidthatonthesharefrontweexpectthattostartgrowingagainbyperhapsmiddleofthisyear.Thekeywillbeforthatinnovationtotakeholdwiththeconsumerandthekeywillbetogetbettermerchandisingplanswithretailersandtobehonest
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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alsosupportthatinnovationwith--thefilterinnovationwiththerighttoolstogetthepricedifferentialthatwehavecomparedtoprivatelabelintotherightplace.
Sodoweexpectabetterhalf?Don'texpectthatbusinesstogrowstronglyfortherestofthefiscalyear,butcertainlybetterthanthe--inthefirsthalfofthefiscal.
JoeAltobello (Analyst-RaymondJames):
Okay,great.Thankyou.
Operator:
WendyNicholson,CitiResearch.
WendyNicholson(Analyst-CitiResearch):
Hi.JustatinylittlepointofclarificationonBrita.Howmuchofthebusinessisthepitchersandtherefillfiltersasopposedtotheon-the-goportablebusiness?
BennoDorer(CEO):
Thelargemajorityisinpitchersandfilters,Wendy.On-the-goisaniceandgrowingbusiness,butit'srelativelysmall.
WendyNicholson(Analyst-CitiResearch):
Okay.BecausethereasonIask,Isortofputitinthecontextofabiggerquestionaboutthelifestylesegmentandthemarginsthere.We'veseenmarginsuphereinthefirsthalfof2015,butoverthelastfewyears,themarginsinthatsegmenthavecomedownalittlebitandyetitisstillareallyprofitablesegmentforyouandIamjustwondering,ballpark,competitioninatleasttheon-the-gosegmentforBritalookslikeit'sgoingtogetalittlebittoughernowthatNewellhasmadesomeacquisitions.ItsoundslikeyouareinvestingmoreontheadvertisinglineforBees.
Idon'tknowwhatisgoingonwithmarginsindressingsandsauces,butIguessthequestionishowconfidentareyouthatthatlifestylesegmentcansustainamargin28%andabove,ifyouwill,apretaxmargin?
SteveRobb(EVP,CFO):
Ithinkletmegoaheadandtakethat.Ithinkwefeelprettygoodaboutthemarginsinlifestyle.WhatistrueisoverthelastcoupleofyearswehavemadesomeinvestmentsandwehavemadeinvestmentsinBurt'sBeesandsystemsandprocesses.SooveraperiodoftimethatdepressedthemarginsforBurt'sBeesandthelifestylesegment.Wehavekindofcycledthroughthat.
Wearealsoinvestingmoretodrivegrowthinthatsegment,particularlyontheBurt'sBeesbusiness.Sothemarginsarefundamentallyhealthy.Ithinkwebelievewe'vegotgoodopportunitiestoexpandthemovertime,butbecausetheyaresuchhealthymarginsleaningintothegrowthsetinthatBeesbusinesscertainlyseemsrighttousandthat'swhatyouareseeing.
WendyNicholson(Analyst-CitiResearch):
Gotit.Andsoevenwhenyou're--andIassumethegrossmarginsonBeesareprettygood,sotheincrementaladvertisingisnotmateriallygoingtomovetheneedleontheEBITmarginorthepretaxmarginforBees,isthatfairtosay?
SteveRobb(EVP,CFO):
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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Itisgoingtovaryquarterbyquarter.Wejustturnedonnationaladvertisingrecently,whichisactuallyperformingearlydays,butitlookslikeitisperformingquitewellforus.Burt'sBeesbusinesswasupstrongdoubledigitsinthesecondquarter,soithasveryhealthygrossmargins.
Soifwehaveanopportunitytoinvestabitmoreinconsumerdemand-buildinginvestmentandadvertisingtodrivethetoplinethat'sagoodinvestmentandsomethingwewilldo.IthinkagainoverthelongtermwefeellikebothgrossmarginsandEBITmarginsarejustfineforallthebusinessesinthesegmentandBurt'sBees.
BennoDorer(CEO):
AndWendy,asyouknow,wearereallyfocusedoninvestingwherewegetthehighestROIandwe'vegotverysolidanalyticstounderstandwheretheROIisbestfortheCompanyandinvestmentsinthesaidareasarebasedonwhatweknowreallyshowverysolidROI.Weareinvestingintherightareas.
WendyNicholson(Analyst-CitiResearch):
Terrific.Thankyousomuch.
Operator:
MichaelSteib,CreditSuisse.
MichaelSteib(Analyst-CreditSuisse):
Steve,Iwantedtofollowuponyourcommentsregardingfreecashflowgenerationthatimprovedsignificantlyyear-on-yearinthefirsthalfandyouhavegivenussomeofthereasonsforthat.Iwonderhowmuchofthatissustainable?IsthisanewlevelofcashgenerationfortheCompany,orweretheresomeone-offsinthere?Thanks.
SteveRobb(EVP,CFO):
ThefreecashflowhasobviouslybeenverygoodforthefirsthalfofthisfiscalyearandasIindicatedinmyopeningcomments,wecontinuetobelievethatfreecashflowasapercentageofsalesshouldbeabout10%.AndIthinkoverthelongtermwehavebeenprettyconsistentlyinbothgoodandbadyearsinthis10%to12%freecashflowasapercentageofsales.
SooneofthethingsthatwecontinuetodoquitewellwithintheCompanyisconvertsalestocashandbeverydisciplinedintheallocationofthatcash.AndIampersonallyfeelingverygoodaboutwhatwearedoinginthatspaceandhaveeveryreasontobelieveitwillcontinueintothefuture.
MichaelSteib(Analyst-CreditSuisse):
Okay,thanks.
Operator:
ConnieManeaty,BMOcapitalMarkets.
ConnieManeaty(Analyst-BMOCapitalMarkets):
Asyoutakealookattheportfolioandinvestintheonesthatgiveyouthehighestreturn,aretheresomebrandsorproductsthatyouwouldlooktoexitordeemphasizebecausetheydocostmoneytorun?
AndIamthinking--Idon'tevenknowifGoodisstillaround,butthingslikeGreenWorks.Sowhatisyouropiniononthepartsoftheportfoliothatwon'tbegettingmostofthefutureinvestment?
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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BennoDorer(CEO):
Overall,Connie,wefeelgoodabouttheportfolioandattheendoftheday,weareapplyingthesamecapabilitiesacrosstheentireportfolio,whetherthatiscapabilitieswiththeconsumerorcapabilitieswithacustomerorcapabilitieswithinthesupplychainandthesynergiesareprettyreal;strongcashflow,asStevetalkedabout.SG&AiscomparativelylowandROICisverystrong.
SoIamverycomfortablewiththeportfoliothatwehave.Thatisn'ttosaythatwewillalwayslookwiththeBoardonanannualbasisatwhetherthereisopportunitiesandwhetherwearestillthehighestvalueownerornot.Anditisquitepossiblethatwemightbelookingatthesmaller--someofthesmallerbusinesses,butingeneralvery,verycomfortablewiththeportfolioanddon'tfeeltheneedtodoanythingdifferent.
WewanttogrowbiggerratherthansmallerandIthinkwhatwehavesaidisthatweareinterestedinbolt-onacquisitionstothetuneof$25millionto$100millioninareasthataregrowthareasforusandthataremarginaccretive,onstrategy,fitwithourcapabilitiesandthatideallyareUS-centric.
Sowearelookinginwhetherthatishealthandwellnessornaturalpersonalcareorfoodenhancersandseeifwecanaddandthat'sreallythemindsetthatwearein.Whilewewillalwaysbefocusedongrowingthecorebusinessfirst,wethinkthatthereisplacesthatwecanplaythatwearenotplayinginyetandthat'sreallyourpriority.
ConnieManeaty(Analyst-BMOCapitalMarkets):
Thanks.Andjustafollow-up--IthinkIwillcallyoubacklater,Steve.
Operator:
BillSchmitz,DeutscheBank.
BillSchmitz (Analyst-DeutscheBank):
Canyoujusttalkaboutthestrategyacceleratorprocessandwhatthatmeansforthealgorithmintermsofthat9%,10%ofsalesinadvertisingandmaybethelong-termgrowthrate?Sodothingschangeorisitzero-sumwhereyouwillmovemoneyoutofplaceswhereitislesswellspentandputintoplaceswheretheremightbebettergrowthdriversandthenIhaveafollow-up,please?
BennoDorer(CEO):
Soasyouthinkabouttheaccelerators,thatreallyspotlightsonourstrategy2020.Itisveryconsistentwithwhatwehavesaidduringtheleadershiptransitionthatwearenotexpectingthestrategytochange,butwhatwearefocusedonisdoublingdownonchoicesthatstrategy2020calledfor.
SoIexpectthatthefinancialalgorithmthatweareafterwithstrategy2020willbethesame.Advertisingsalespromotion,whichIthinkiswhatyoureferenced,Bill,theideaofinvestinganotherpointinourbrands,thatwillremainthesame.Sothesearereallywaysforustofullyaccomplishour2020strategyfinancialobjectivesasopposedtoadeparturefromthem.
BillSchmitz (Analyst-DeutscheBank):
Okay.Andthenwouldyouchangeanyoftheincentivecompensationmetricsaroundthestrategyaccelerators,solikethebroaderCompanyincentivecompensationmetrics?
BennoDorer(CEO):
Wehaven'tdecidedyet.Thatisearly,butIdon'tseewhyourcompensationmetricswouldbewrongevenin
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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thiscontext.Again,thesearejustwaysforustoemphasizeaspectsofthestrategythatwehavereallystartedtoputinplaceabout16monthsago.Sotheyarenotaradicaldeparture,soIdon'texpectthat.ButwewillalwaysrevisitthatovertimealsowiththeBoard.
BillSchmitz (Analyst-DeutscheBank):
Okay,justtofollowupontheoriginalquestionthatFaucherasked,Ithinkitwasthefirstquestion,itseemslikethispromotionalspendingelevationinthefronthalfofthecalendaryearisprettyconsistentacrosstheCompaniesthatreportedsofar.It'salittlebitcoincidental,soI'mjustwondering--andobviouslyitisalsoimpactinggrossmarginbecauseofthehighergrosstonet--isthatreallycompetitive-drivenorareretailersstartingtoaskforsomemoneybackalreadybecauseifyoulookattheNielsendata,itdoesn'tseemlikethepercentageofACVondeal,it'sactuallycomingdown,itisnotgoingup?
SteveRobb(EVP,CFO):
IthinkasBennohadindicated,Idon'tthinkthecompetitivelandscapehaschangedthatmuchoverthelastcoupleofmonths.WhatIwouldsayisitishigherthanithasbeenhistorically,soit'saveryintensecompetitiveenvironmenthereintheUSascompanieshavetakensomeoftheirfocusoffsomeoftheseemergingmarketsandfocusedbackontheUS,butIwouldn'tsaythatbroadlyitismorecompetitivethanwesawsaythreeorsixmonthsago.
Allofthatsaid,theonetrendthatwearewatchingverycarefullyisthisresinprice,whichagainifitstartstomovelower,whichiswhatweanticipate,historically,whatwe'veseenisagoodpercentageofthathasbeenspentbackintothecategory.Butabsentthat,Ithinkthelandscaperemainsasintenselycompetitiveaswetalkedtoyouthreeandsixmonthsago.
BillSchmitz (Analyst-DeutscheBank):
Gotyou.Sononeofitisdrivenbyretailersaskingformoremoneyback?
SteveRobb(EVP,CFO):
No,wehaven'tseenthat.
BillSchmitz (Analyst-DeutscheBank):
Allright.Thankyousomuch.
Operator:
ErinLash,Morningstar.
ErinLash(Analyst-Morningstar):
Buildingoffanearlierquestion,Iwaswonderingifyoucouldspeaktojusttheprioritiesforcashgiventhesignificantamountoffreecashflowthatyouhavebeengenerating?
SteveRobb(EVP,CFO):
Yes,theprioritiesarecompletelyconsistentwithwhatwe'vebeensayingformanyyearsnow.Wewillsupportorganicgrowth,asBennotalkedabout,keepingthecorehealthy.Itiscertainlyworkingforusanditissomethingwearegoingtocontinuetodo.Weareinterested,obviously,inM&Aactivity.Ifwecangetbusinesseswith$25millionto$100millioninsalesthataremarginaccretiveandhavesometailwinds,weareinterestedinthat.
Aswehavetalkedinthepreviouscall,wefeelverygoodaboutourdebttoEBITDA.Attheendofthefirst
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
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quarter,itwasabout[1.9].Itiselevated,asIindicatedinthesecondquarter,butthatisjustbecausewehavepre-fundedsomedebt,butwecertainlyhavedrypowder.Ithinkwhatyoushouldexpectgoingforwardiswe'llobviouslykeepthedividendhealthy,butifcashstartstobuildupandwedon'thaveauseforit,eitherforM&Aortosupportcoregrowth,probablyintheformofsharerepurchasesatsomepointwewillleanbackintothat.Todate,wehavebeendoingjustsomemodestsharebuybacksearlierthisfiscalyear,butwehaven'tdonemuchandwehavebeenmorefocusedonrefundingofthedebttodate.
ErinLash(Analyst-Morningstar):
Gotit.Thankyou;thatisveryhelpful.Andthenwithintheadvertisingspendingline,IwaswonderingifyoucouldjusttalkaboutthedegreetowhichyouhavebeenusingdigitalIguessasa--comparedtotraditionaladvertisingmeansandhoweffectiveorhowyouaremeasuringthereturnsonthatandwhereyouseethatgoing?
BennoDorer(CEO):
Sodigitalrightnowisalittleover30%ofouroveralladvertisingsalespromotionspend.Thatis,asweunderstand,theleadinglevelinourindustryanditisalsoupquitesignificantlyoverthelastfewyearsandagain,itisreallybasedonasolidunderstandingofROIsandtheROIsthatwearegettinginthisspacearereallyattractive.
SoweexpectthatshifttoperhapscontinuesothatthereisalwaysgoingtobespaceforTV.TVcontinuestobeaveryeffectivedriverof,inparticular,awareness,especiallyaroundinnovationsandlikeIsaid,wefeelgoodaboutourinnovationprogramfortherestofthefiscalyear.
But,forus,wecallthis--whatweneedtobeisalwayson.Weneedtobewheretheconsumerisnomatterwheresheisinherpurchasecycleanddigitalandsocialmediaisparticularlysuitabletohelpusaccomplishthat.SodigitalplaysaverystrongroleandIexpectthattokeepgoing.
ErinLash(Analyst-Morningstar):
Thankyou.
Operator:
LaurenLieberman,Barclays.
LaurenLieberman(Analyst-BarclaysCapital):
Thanks,justtwoquickthings.Onewasafollow-uponthepromotionalenvironmentquestion.IstilljustamnotsurewhythecommentaryonanincreaseintradepromotioninthebackhalfoftheyearversuspriorexpectationsbecauseIwould'vethoughtthat--youweresayingifresinpricescomedown,youwillbewatchingit,soIwouldthinkthatismoreofafiscal2016dynamicthansomethinginthenextsixmonths,soanythingyoucanaddtherewouldbegreat.
SteveRobb(EVP,CFO):
Yes,toclarify,IthinkasIindicatedinmyopeningcomments,theincreaseintradepromotionalspendingisafull-yearnumber.Itislikelywewillspendabitmoreinthesecondhalf,butitismainlyafull-yearcomment.Ithinkwhatisimportantisweareagnosticonwhetheritistradeoradvertising.
Whatwelookingforisthehighestreturnsandwhatresonatesthemostwiththeconsumer.Sowhetherthatisadvertising,tradepromotionorotherthings,wewillbeinvestingmore.We'retryingtogettothis1pointofincrementaldemandbuildinginvestmentasapercentageofsalesovertimeandsowe'regoingtospendmore,Ithink,isprobablythekeytakeaway.ButyouwillseeitfallindifferentlinesoftheP&Latdifferent
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page19of 21
times.
BennoDorer(CEO):
AndLauren,addingtoSteve'spoint,asignificantportionoftradepromotionalsoisgoingagainsttheinnovationsreallytomakesurethatwedrivestrongmerchandisingandtrialoutofthegateforthose.
LaurenLieberman(Analyst-BarclaysCapital):
Okay,great.Andthenmysecondquestionwasjustactuallyontheprofessionalproductsbusiness.Ithinkyouhavebeenclearonwatchingforanykindofdestockinthethirdquarter,butIwasjustcuriousifyouthinkthattherecentphaseofworriesaroundEbolaandEnterovirus,hasthatperhapspushedsomeofthecleaningstandardsandprotocolsandmakingchangeshigherontheprioritylistofsomeofthehealthcareserviceindustrythanitwaspreviously?Likecouldthisbeasortofwatershedeventintermsofraisingtheprofileofwhatyouaretryingtodo?
BennoDorer(CEO):
Wecertainlyhaven'tseenthat,Lauren.Ithinkthecleaningprotocolshavebeeninplaceandwhathospitalshavebeendoingisjustapplycleaningprotocolsandmakesurethattheyarepreparedforapotentialincreaseinusearoundourproductstocoincidewiththesecleaningprotocols.
Sodoweexpectheightenedawarenessanddoesithelpushaveadialoguewithhospitalsgoingforwardaroundtheseandwhatourproductscandeliver?Wehopeso.Butwecertainlyhaven'tseenthatinQ2andwewillhavetoseehowitplaysout.Butclearlywethinkthatthisisagrowthcategoryandthat'swhyweareinvestinginit.
LaurenLieberman(Analyst-BarclaysCapital):
Okay,great.Thankyou.
Operator:
JavierEscalante,ConsumerEdgeResearch.
JavierEscalante (Analyst-ConsumerEdgeResearch):
QuestionwithregardstotheUSagainandIthinkthatitwasalludedearlierinthecall,butIwouldliketo,ifitispossible,togetmoreclarification,hastodowiththegrowthintheUS.Iknowthatthehospitalpartprobablyaddedapoint,butstillthatmeansthatgrowthinretailsalesinnon-trackedchannelsprobablygrewwellover10%.
AndIwonderwhetheryoucantelluswhichparticularbrands,orwhatkindofretailformatisgrowing--youguysarefindingnewpointsofdistributiontobepostingthatkindofgrowthandtowhatextenttherewereone-timers,promotionalone-timers,otherthantheonethatwasdescribedwhenitcametoEbola?Thankyou.
SteveRobb(EVP,CFO):
Javier,letmeleadoffonthis.Iwouldcharacterizethegrowthasbroad-based.Iwould--Ithinkwehadsomeverygoodpromotionsthatwereinplacethathadbeenplannedlikecoldandfluandleaningintothose,butIwouldn'tpointtoanysinglethingotherthanintheprofessionalspace,wehadstrongdouble-digitgrowthandsomeofthatisprobablyhospitalsbuildingupinventoryoutoftheconcernsforEbola.
ButIthinktheUSgrowthwasamazinglybroad-basedandwehavetalkedprofessionalproducts,wehavetalkedGlad,wetalkedBurt'sBees,whichwasupandmostoftheotherbusinesseshadaverysolidquarter.
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page20of 21
SoIthinkitwasacleansetofnumbersandthereisnotanyonethingIcanpointto.Andevenfromaretailerstandpoint,itisagainnotanyspecificchannel;Ithinkitwasjustacrosstheboard.ItwassolidhealthygrowthfortheCompany.
BennoDorer(CEO):
Yes,soforme,Javier,IwouldreallysaythetwothingsIwouldpointtothatledtothisbroad-basedgrowth,asStevesaid,areone,innovationandtwo,theincreaseindemandspend.Andevenonbusinessesthatperhapsbenefitedfromflu,thatisbasedonlong-termplanningwithretailersandwesawjustverystrongmerchandiseexecutionbehindlongplannedeventsthatcertainlybenefitedfromsomewhat(Inaudible),butitisreallybeenaboutinnovationandincreasingdemandspendandthereisnothingfunkyaboutthisgrowthatall.
JavierEscalante (Analyst-ConsumerEdgeResearch):
Thankyou.
SteveRobb(EVP,CFO):
Whydon'twetakeonemorecaller?
Operator:
ConnieManeaty,BMOCapitalMarkets.
ConnieManeaty(Analyst-BMOCapitalMarkets):
Thecostpressuresthatledtothepriceincreaseinbleachseemtobeprettygenericandnotreallylimitedtobleach.Sohealthcarecosts,wageinflation,logistics,allofthat.Soshouldweexpectpriceincreasestheninabroaderpartofyourportfoliogoingforward?
SteveRobb(EVP,CFO):
Connie,Ithinkwhatwehavesaid--theinflationarypressuresareobviouslyprettyrealandtheincreasesthatwepreviouslymentionedarethekindthattendnottoreversethemselves.Ithinkmostofthepricingwe'vetakentodatehasreallybeenfocusedontheinternationalmarketswherewearedealingwithmuchhigherratesofinflation.Youwillcontinuetoseeusleanintothat.
OntheUSside,again,whereitiscost-justifiedandwearepricingtoalong-termaveragecost,wewillcontinuetotakepricing.AsBennonoted,we'vegotaverylongtrackrecordofdoingthisandbalancingitwithvalue.Iwillsayforward-lookingthatonethingthathasworkedforusthatwewanttocontinueistryingtomarryuppricingwithinnovationbecauseIthinkifyoucanbringthosetwothingstogether,ittranslatesintogoodvaluefortheconsumer[itself]andittendstodomuchbetter.Sotheshortansweriswe'renotafraidtotakepricingintheUSwhenitiscost-justified.Wewouldliketoavoiditwhenwecanandcertainlymarryitupwithinnovation,butwefeelliketherecentpriceincreaseswe'vetakenaretherightonesforthelongterm.
BennoDorer(CEO):
AndtobuildonSteve'spointandIthinkyoumentionedthis,Steve,wewillremainfocusedonvalue.Value,ofcourse,isafunctionofpricing,butalsoinvestinginourbrandsandalsohavinginnovationoutthereanddeliveringsuperiorproducts.Allthatwon'tchange.
ConnieManeaty(Analyst-BMOCapitalMarkets):
Great.Thankyou.
CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods
Industry:ConsumerDurablesEventDescription:Q22015EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page21of 21
Operator:
Thisconcludesthequestion-and-answersession.Mr.Dorer,Iwouldnowliketoturntheprogrambacktoyou.
BennoDorer(CEO):
Thanks,everyone.Tosumup,Ifeelverygoodaboutthesecondquarterandwhatwasreallyasolidfirst-halfperformance.AndIhaveconfidenceinourplansforthebalanceoftheyear.AndIcertainlylookforwardtospeakingwithyouagainonournextcallinMay.
Operator:
Thatdoesconcludetoday'sconference.
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