The Clorox Co. (CLX) Q3 2014 Earnings Call Corrected Transcript: 01-May-2014
Steven Austenfeld - Vice President-Investor Relations, The Clorox Co.
Stephen M. Robb - Chief Financial Officer & Senior Vice President, The Clorox Co.Donald R. Knauss - Chairman & Chief Executive Officer, The Clorox Co. Other Participants Steve R. Powers - Analyst, UBS Securities LLC Nik H. Modi - Analyst, RBC Capital Markets LLC Jason M. English - Analyst, Goldman Sachs & Co. Olivia Tong - Analyst, Bank of America Merrill Lynch Wendy C. Nicholson - Analyst, Citigroup Chris Ferrara - Analyst, Wells Fargo Securities LLC Ali Dibadj - Analyst, Sanford C. Bernstein & Co. LLC John A. Faucher - Analyst, JPMorgan Securities LLC William G. Schmitz - Analyst, Deutsche Bank Securities, Inc. Constance M. Maneaty - Analyst, BMO Capital Markets (United States) Javier Escalante - Analyst, Consumer Edge Research LLC Leigh Ferst - Analyst, Wellington Shields & Co. LLC Erin Lash - Analyst, Morningstar Research MANAGEMENT DISCUSSION SECTION Operator: Good day, ladies and gentlemen. And welcome to The Clorox Company Third Quarter Fiscal Year 2014 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference call Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference. Steven Austenfeld, Vice President-Investor Relations Welcome, everyone, and thank you for joining Clorox's third quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; and Steve Robb, our Chief Financial Officer. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Let me remind you that on today's call, we will refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt-to-EBITDA, and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks or supplemental information available in the Financial Results area of our website, as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. Turning to our prepared remarks, I'll cover today's highlights of our third quarter business performance by segment. Steve will then address our Q3 financial results, our updated financial outlook for fiscal 2014, and our preliminary financial outlook for fiscal 2015. Finally, Don will close with his perspective on the business followed by Q&A. In the third quarter, including the impact of negative foreign currencies, sales decreased 2%. The impact from foreign currencies was particularly acute in Argentina, as well as in Venezuela, where we moved to SICAD I, effectively resulting in a meaningful devaluation. On a currency-neutral basis, sales increased more than 1%, reflecting strong growth in our International and Household segments, partially offset by softness in Home Care, due to a distribution loss and ongoing intense competitive pressures in our wipes business, as well as generally sluggish categories across our U.S. retail business. Volume decreased 0.5% in the quarter. Our U.S. 13-week market share results show a decrease of 0.3 points versus the year-ago quarter, reflecting ongoing intense competitive activity. While we saw share gains in our Laundry, Burt's Bees and Food business and flat results in Glad, these were more than offset by decreases in our Home Care, Brita, Cat Litter and Kingsford businesses. At the same time, our categories grew 0.4 points in the third quarter, although it was a bit slower than the prior quarter's growth rate of 0.6 points, due to the impact of extreme weather across much of the nation, and category growth remains below our 2020 strategy assumption of at least 1% annual growth. Improving our category trends and market shares is our number one priority right now, which Don will further discuss in a few minutes. Now let me turn to our third quarter results by segment. Our Cleaning segment volume decreased 5% with sales down 4%, driven primarily by decreases in our Home Care business from disinfecting wipes. As we have discussed, our disinfecting wipes business continues to face an intensely competitive environment, more intense than we have seen in years. After we achieved a record share a year ago, competitors have become very aggressive in the marketplace, causing us to increase trade spending to even greater levels than we anticipated a few quarters ago. Volume in our disinfecting products was also impacted by a mild cold and flu season relative to last year. In addition, the disinfecting wipes category has recently seen significant distribution swings among large retailers. During the quarter, we lost wipes distribution with a club customer, while picking up distribution at two other key retailers. Clorox remains the clear category leader with market share near 50% in tracked channels. And with recently improving share trends, we're optimistic this encouraging trend will continue. We remain committed to supporting this business across our 3D demand building model, including increased consumer promotions, consumer communication across TV, radio and digital, highlighting the value of Clorox wipes versus competitors' products, high levels of quality merchandising, and recently launched new wipes products for glass, tub and shower cleaning. Our Laundry business experienced volume and sales decreases due to category softness impacting our Clorox 2 Laundry additives. However, we are pleased with share gains in the quarter for Clorox liquid bleach, which was lapping very high growth in the year ago period and has once again surpassed a 60% market share. Finally, volume and sales gains on our Professional Products business were driven by our healthcare and professional cleaning segments. Looking ahead for the Cleaning division, we continue to expect heightened competitive pressures, which we are responding to aggressively with increased investments to drive brand and category growth. In our Household segment, volume grew 5% and sales grew 4%. The segment's top-line results were largely driven by increased sales and shipments of Kingsford and Glad products. Our Charcoal business grew in comparison to a weak year ago quarter and was also driven by increased merchandising support to help kick off the grilling season. That said, Charcoal volume and sales fell short of expectations, as weather was similar to last year, quite poor in much of the country in the third quarter. Top-line growth on our Glad business was driven or due to increased shipments in advance of a price increase and increased merchandising at a number of key retailers.