Clorox Executive Earnings Insights: Is Growth in the Guidance Cards?

On Wednesday, Clorox Company (NYSE:CLX) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Where is the Growth?

Wendy Nicholson – Citi Research: Question has to do with the outlook for 2013 and the guidance for sort of flat EBIT growth. I guess it’s a little disappointing just particularly in the context of the restructuring charges that you’ve taken kind of annually regularly and it just doesn’t seem that there are real savings dropping to the bottom line. So I guess, number one, is that just sort of a one-off thing in 2013 and you hope that that expands or accelerates as we go forward into 2014? The real question is how is the growth algorithm going to work? We’re sort of stuck in this mid-single-digit earnings growth rate range and I am wondering when we’re going to sort of tick back up into the high single-digits?

A Closer Look: Clorox Earnings Cheat Sheet>>

Stephen M. Robb – SVP and CFO: This is Steve Robb. Let me take a portion of this. First of all, let me start with margin. The big thing to recognize next year is that our EBIT margin is expected to be flat. Now, first, turning to the gross margins, our gross margin, we are expecting modest improvement in gross margin next year. The reason that we are optimistic that we are going to see margins begin to stabilize and improve as we go into next year is because; first, we’ve got the benefits of the pricing that we’ve taken which has gone extremely well. In fact, pricing has probably gone better than we expected and we’re continuing to build all-outlet market soon. We’re continuing to target cost savings of about 150 basis points each year, and also, we’re pretty optimistic on our ability to deliver innovation that will be margin-accretive over time. When you take those three factors, and then you look at commodity costs, which are expected to go up next year along with other inflationary pressures. They are going to go up, and they’re going to go up less than we saw this year. So, they’re going to be increasing, call it, 2% to 3%, versus the 3% to 4% we had this year. When you net all of that together, we believe we’re going to get modest gross margin improvement. Now that said, we are making incremental investments in the infrastructure that we’ve been talking about. So, SG&A is expected to be slightly higher in this fiscal year, and when you net it, we’re looking at flat even margins. I think longer term, as we look forward, we would expect that improvement in gross margins, anniversarying some of these infrastructure investments will enable us begin to build the EBIT margin, so that what you’ll start to see is that the earnings growth will begin to grow faster than the sales growth more consistent what we’ve seen in earlier years.

Wendy Nicholson – Citi Research: But if you’re already anticipating the commodity costs are going up, and you feel like you’ve been successful with the price increases you’ve taken, I guess – I mean we’re looking at a year that is more than 12 months out, right? And so, I guess I’m just surprised between selling Auto and making higher-margin acquisitions and all of that, it sort of surprises me that you can manage the business better, take the price increases faster, shift the mix of commodities – I don’t know what – shift the mix of the business, because flat EBIT margins kind of year-in and year-out, I mean we’re pretty far off the peak EBIT margins, I’m just surprised that we’re not recovering faster.

Stephen M. Robb – SVP and CFO: Yeah. Well, we are continuing to focus on; number one, focusing on their gross margin and getting (indiscernible). I think as we’ve indicated we do expect that gross margin will begin to increase modestly next year, although it’s going to take some time. And certainly, it is taking longer to rebuild the margins than we had originally anticipated. Again, I would just echo that as we work through these infrastructure investments and start to anniversary that into fiscal ’14, we would expect that those EBIT margins will begin to increase again and you’ll start to see that flow through.

Donald R. Knauss – Chairman and CEO: Wendy, this is Donald. I do feel good about the way we’ve managed the pricing and the cost savings, frankly. I think to reach an all-time high market share when you’ve taken 400 basis points of pricing; I think it says that we are managing these brands very well. I do think, obviously, in addition to the commodity increases we’ve seen this year and other inflation, I think in the third quarter in particular, which I don’t think is a trend, is the mix issue that we have to confront with some fairly very successful merchandising that we didn’t anticipated growing in the large sizes as fast as it did. We certainly see that moderating as we go into the fourth quarter and to fiscal ’13. So, I think we’ll continue to see some benefit there. But I think we’ve managed the pricing on these brands extremely well.


Tim Conder – Wells Fargo Securities: A couple of pieces here. Could you give a little bit more detail what’s driving the tax rate guidance? You said, clearly, that’s going to offset some of the things looking into 2013 to a degree. So, if you could give a little bit of detail there? And then, the Charcoal; do you think – you mentioned that you thought you could have seen some pull-forward here in the fiscal third quarter. I guess why do you believe that versus maybe that you would maybe be picking up a turn at retail and then still have the full benefits as you head into the summer months?

Stephen M. Robb – SVP and CFO: Let me start off and answer your tax question and maybe I’ll ask Larry to address Charcoal. Turning to the tax, historically our tax rate for Clorox (NYSE:CLX) usually runs in the range of 34% to 35%. Now for fiscal ’12 the tax rate is anticipated to be about 32% to 33%, so it’s actually a bit lower than what we’ve historically seen. And the reason for that is we’ve had some one-time tax settlements that have given us some benefits this fiscal year. So, as we look to fiscal ’13 and we project a tax rate of about 34%, we would just say that that’s basically returning to more of a normalized tax rate for the Company as opposed to something unusual.

Lawrence S. Peiros – EVP and COO: To respond to your question on Charcoal, Charcoal quarterly volume is always hard for us to project because there is obviously always weather factors and a lot of merchandising factors. Typically, we smooth that over the course of a year but the quarterly estimates have a fairly wide (error) range. I think what we’re seeing in our Charcoal business in Q3 is not only the obvious benefit of great weather but we did have – in particular at one retailer that did some really merchandising of Charcoal at a very high price, very large sizes. That sold a lot of Charcoal. And so what we’re trying to sort out how much of that is replacement of Charcoal that might be purchased at a later date, how much of that is Charcoal that may be used more because people have more in their homes. And going through all those variables is hard, but we’re thinking between the good weather and some pretty heavy merchandising in Q3 there may have been some pull forward.

Tim Conder – Wells Fargo Securities: Okay, one other if I may. Little bit more detail on the manufacturing and logistics cost pressures. I know it’s probably little bit of fuel in the logistics, but when do you anticipate those, especially on the manufacturing side, maybe getting some leverage off of those?

Stephen M. Robb – SVP and CFO: Well, we’ve continued to see inflationary pressures on manufacturing and logistics, to your point, it includes things like diesel fuel, which I think everybody is aware has run up pretty strongly. It also includes just things like wage inflation, particularly in our international markets. Healthcare costs have been increasing, it’s all of those things, and we do expect that will continue as we go into next year and we are fully anticipating that and building plans that anticipate it and making sure that the pricing and other actions that we work to recover those costs.