The Clorox Company Presents at DbAccess 10th Annual Global Consumer Conference, Jun-12-2013 11:15 AM

| About: The Clorox (CLX)

The Clorox Company (NYSE:CLX)

June 12, 2013 5:15 am ET


Donald R. Knauss - Chairman, Chief Executive Officer and Chairman of Executive Committee

Stephen M. Robb - Chief Financial Officer and Senior Vice President


William Schmitz - Deutsche Bank AG, Research Division

William Schmitz - Deutsche Bank AG, Research Division

All right. Well, it's a great pleasure to welcome Clorox back to our conference [ph]. They've been so kind to come, I think, for, gosh, since the conference started, so I thank you Clorox. So without any further ado, I'd like to introduce the Chairman and CEO of Clorox, Don Knauss.

Donald R. Knauss

Thank you, Bill. Good morning, everyone. I've got 3 topics I want to cover with you this morning, and Steve and I will take you through these. But before that, obviously, I want to make you aware of the Safe Harbor statement. We try to make it one of the more exciting in CPG, so you can please refer to it at your leisure.

But the 3 topics -- messages, I'd like to go through with you this morning is give you a little bit of a report card on the Centennial Strategy that we embarked on about 5.5 years ago. We think it's been a particularly successful strategy. We'll show you the results of that, the metrics that we've measured that against. And I want to give you a preview of the 2020 strategy that we're going to unveil, basically, in October. We're holding our Analyst Meeting out in California in October at our new R&D facility. If you have a chance to make that out, you can actually spend the weekend in Napa or Sonoma after that. We try to make that entertaining for folks. And then talk about the long-term investment case of this business.

For those of you who aren't unfamiliar with the company, it is a pretty eclectic portfolio. The real congruency in these brands is the fact that all of these brands now, whether they're in the cleaning division, the household division, the lifestyle division or certainly, international, go through the same basic customers, so the supply chain is really the congruency here of these businesses. What Clorox does very well, I believe, is build brands regardless of whether it's Hidden Valley Ranch or Burt's Bees or Brita water filter, it's all about building brands, and we think we do that quite well. About 90% of our brands are #1 or #2 in our space, so we think that gives us some insulation against competition.

The Centennial Strategy, very quickly, the mission of this company is very simple: We make everyday life better everyday. And so people interact with our brands, our consumers interact with our brands from the time they get up in the morning to the time they go to bed at night. So we're all about that everyday mission, if you will.

Two objectives, and I think the one the differentiates us from most CPG companies is we're focused on driving economic profit. We did a lot of work looking at correlations between stock price, appreciation, total shareholder returns when we did the Centennial Strategy. And the thing that jumped out of this is the strongest correlation between stock price appreciation over time was EVA, that's growth in Economic Value Added or economic profit. So that's why we focused this company, and how we pay people is on economic profit, both for their annual incentive, as well as their long-term incentive.

And the second thing is, as I said, we are good at building brands. And this company's really been focused on one objective over the decade, and that is building big share brands in midsized categories. So trying to stay out of the categories where the larger multinationals might focus, for example, detergents, and focus on smaller categories like bleach or charcoal or water filtration or Natural Personal Care. And then those 4 strategies, I think, those have been in place for 5 years, 5.5 years, starting with our people.

Really focused on our demand building, our Desire, Decide, Delight model that we use in brand building. Think of about it as prepurchase, point-of-purchase, post purchase marketing. And then accelerating growth, not in only our core, but beyond the core. And, of course, one of the hallmarks of this company is taking waste out of the business every year. We've taken about 150 basis points of waste out every year for the last decade. And I'll talk little bit about the pipeline going forward.

These were the 4 questions we asked ourselves, developing the Centennial Strategy. And these same questions is what we're going through, as we developed the 2020 strategy. But, clearly, what are the goals and aspirations? One thing that kills companies, I think, is ambiguity about what they're trying to achieve, and we wanted no ambiguity about what we were trying to achieve. And then the next 3 questions: Where to play? Where do we participate by category, by channel, by country? How do we win? What capabilities are we focused on? And then how do we configure the business? Who has accountability for the P&L?

So just to give you a little bit of a report card on on each. On goals and aspirations, it was all about maximizing economic profit across categories, channels and countries. And you can see the compounded growth rate of about 6% over the time frame. As I said, the reason we picked economic profit, it was the most robust financial measure we could find. It was the only one we could find that had a P&L component, which, obviously, is net earnings. It had a balance sheet component, which was how much capital did you have to deploy to get those earnings? And third, it had a capital market component, or what is the cost of that capital? And we think that is the most robust metric. And regardless of what business you're in, you've got to return above your cost of capital. Economic profit really drives the decision-making in this company and really drives our choices.

If you look at where to play, look at some of the things we've acquired or divested. Obviously, we acquired Burt's Bees about 5.5 years ago, wanted to get into Natural Personal Care, divested the Auto business, the Armor All STP business. We didn't think it was consistent with the trends we were focusing on, trends such as health and wellness and sustainability. And then, third, acquired 3 companies in the healthcare space, which I'll get into a little bit more as one of the growth engines of the company going forward.

You can see the pie chart, we've got almost half the businesses now growing at north of 4 or north thereof in terms of top line growth, so we shifted into higher growth categories. And then how to win, Desire, Decide, Delight. We focused a lot on this capability of, as I said, prepurchase, point-of-purchase, post-purchase marketing and really driving hard on cost reduction to provide the fuel to keep driving that marketing.

If you look at the innovation track record of the company, last year, we hit 3.3 points of growth from new products. That was, basically, an all-time high. In terms of the absolute dollars, it was an all-time high. If you go back about 7 or 8 years, back at '05, we also hit about that range. So when you're trying to grow 3% to 5% on the top line, if you can get 3 points or north thereof from innovation, you're well on your way to hitting that target.

And you could see on the right side of the page that we've now significantly increased the amount of our products that have a blind 60-40 win. So if I gave you 2 products in white wrappers, no branding and said, "Take these home. Use them for 2 weeks. Tell me which one you prefer." We wanted 60 out of 100 consumers to say they preferred our brand. Well, it was in the almost single digits 7 or 8 years ago. Now it's 50% of our products have that kind of demonstrable win. And we think that's one of the keys to holding on and gaining share in a tough economic environment, if you have premium-priced products, is having that ability to demonstrate product superiority.

If you look at how to configure the business, we created strategic business units. There's one nose to touch basically in our company on who owns the P&L. Those general managers of the strategic business units own the P&L. And one of the things we've done is we just completed a 1,200 rollout in Latin America. Now all the countries -- all of our major countries are on SAP models, so that's going to bode well in terms of SKU rationalization, better forecasting, better working capital control as we go forward.

And if you look at the output of that strategy and the answers to those 4 questions, if you look at consistent top line growth, clearly, like many companies during the tough years of '08 and certainly in '10 and '11, when the recession -- we were just coming out of it, we have averaged 2.5% growth. Over the last 21 months though, it's been about 4% growth. So fiscal '12, 5% growth and through the first 9 months of this year about 4% growth. So we feel like we're getting the top line moving again despite the fact that categories have been flattish to up 1%.

If you look at the earnings per share, 11% compounded over this period of time. We feel good about that. And when you look at the return on invested capital, we're in the top 3 of our peer set at almost a -- we should hit about 25% this year in terms of return on invested capital with an average of 16% in our peer set.

And, of course, going back to the total shareholder returns, if you look at the last 57 months, so this is basically from July 1 of '08 when the strategy really was firmly embedded in the business until the end of the last quarter, we just about doubled our investors money. 29% of that 98% has come from the dividend. We've more than doubled the dividend in the last 5 years. We just drove an 11% increase in the dividend last month. We now have about a 3.4% yield as the stocks in the -- basically, in the low mid-80s. Even at that level, we're at about 3.4% yield now. And certainly, in the top tertile, in terms of payout ratio at about 60%. We want to get that cash back to you, our investors. You can see the peer set, and you can see where the S&P 500 was over that period of time.

If you look at the aspiration going forward, it's to stay in this top tertile. Of 18 companies we track, that TSR placed us at #6. So we want to stay in that top tertile. We think, to do that, we need 3% to 5% sales growth. We need, certainly, some EBIT margin expansion. We feel good about 25 to 50 basis points a year in margin expansion. And then continuing to support the dividend, we would certainly want to stay in the top tertile, both in terms of payout ratio but also in terms of yield.

This is the way we think about our businesses. This is the long-term financial algorithm. So if you took one slide away from this presentation, I think it would be this one, in terms of how we think about the business. Clearly, the core -- the spinal cord of this company is the U.S. retail business. It's 75% of our sales. And we didn't get tired of the U.S. business over the last few years. We stayed focused on it. In fact, the last 21 months, the U.S. business has grown almost 5%, so we feel very good about that growth rate. A bit of an outlier in our segment.

We think going forward, we can certainly drive this business at 2% to 3% growth. We see the categories here being flattish to up 1% over the short term, clearly, for FY '14. So that implies some share gain, hitting those growth rates turns about 1.5 to 2.5 points of total company growth.

And beyond the core, Professional has been an exciting place for us. This is where the healthcare business resides. It's only about 5% of the company today in total but it's growing at strong double-digit rates. We think we can sustain 10% to 15% growth rates over the coming years. And I'll show you some more detail on this business. But at those rates, it contributes about another 0.5 point of growth.

And in International, despite the challenges in Venezuela and Argentina, 2/3 of our businesses in Latin America, we think we're still capable of 5% to 7% growth internationally, and that throws off 1 to 1.5 points of growth. So you can see that algorithm being built to maintain this 3% to 5% top line going forward.

Just a key piece of that, obviously, is the innovation that we have put out there. I think one of the things we changed over the last few years is we demanded that we get new news, new product, new package news on all of our major brands, not just a few brands. This is just a sampling of some of the newest compaction, obviously, on bleach. The new tubeless technology built into the wall of the bottle on our spray cleaners, taking Hidden Valley beyond salad dressing into sandwich spreads, taking Brita beyond pictures in your refrigerator to on-the-go bottles, both soft sided and hard sided for kids and adults. And I'll talk a little bit more about Burt's and gud going forward, because it's another one of the exciting growth engines for the company.

But as you look at just the first quarter of '14. So this will be starting next month, these are just 11 examples across brands of innovation from new fragrances, splash-less bleach. One of the faster growing areas for Burt's and one of the big opportunities is the baby line. Obviously, parents are more concerned than ever of putting artificial ingredients on their children's skin. New lip balms, here's some interesting ones for you, dark chocolate and blueberry. You can actually eat these, if you'd like to. It's food, going forward. They won't hurt you.

But we've got some interesting flavors coming out on Burt's. You can see new hard-sided Brita bottles for kids. This is in partnership with Nickelodeon, like SpongeBob. It should be fun for back to school. This will fit in your child's lunchbox. Liquid Plumr, you can see some of the other items. Hidden Valley going beyond sandwich spreads into pasta salads, new pitchers on Brita, and you can see the rest. So there's a very robust pipeline. We certainly feel very comfortable we can sustain this 3 points or north thereof of new product innovation as we go forward in FY '14 and beyond.

So let me show you the trends that those innovations are focused on. The top 4 trends, and there are 5 platforms that come out of those, but health and wellness, multicultural, which really means the explosion of the Latino consumer in the U.S. and other markets around the world, Asian-America, African-American. Affordability, obviously, a key trend and then -- and sustainability. Those are the 4 trends that we've been focused on for the last 5 years, making sure our brands are relevant against those trends.

To do that, we created these 5 platforms. Under health and wellness, there are 2, stopping the spread of infection. And this is a huge issue, not only in the home, but obviously in hospitals around the world, where in the U.S., for example, we have 100,000 people a year dying from hospital-acquired infection. So don't get sick and go to the hospital. It's a -- it can be a dangerous place to be. And this is an issue in Europe, it's an issue in Latin America and Asia. It's around the world, a big issue.

Family togetherness is more on the wellness side and how we create wellness with families. The U.S. Hispanic opportunities, I said, is a huge one. In fact, with our Latin-American heritage, our shares in the U.S.I'm, with Hispanic consumers on our brands are higher than the general market shares. And that, obviously, bodes well for us, as the Hispanic consumer gains in population across the U.S.

And then, of course, value focus in green products. So let me give you a couple of examples. Let's talk about green products, and what that means for the company going forward. Brita filter for gud. Exciting category, one that had been fairly boring for years, because it was basically a future consumption product, and that it was in the home consumption only. One of the things we've seen is this trend for real growth with on-the-go. And I think that getting this brand in people's hands has helped drive the brand equity and make it a bit of a more contemporary brand. You can see the size of the category on, on-the-go bottle. We've got over 65 share of this business. It's a fledgling category but growing rapidly. And as we get more into the children side of this, we think we'll continue to expand this, and we'll also bring out new hard-sided colors, et cetera, designs for the adult side of this. But that looks good going forward.

If you look at Burt's Bees, here's a brand that over the last 3 years has averaged double-digit growth in the U.S. and very strong double-digit growth internationally. We're looking at 10%-plus growth again this year on this business. And, of course, these margins for us are hugely accretive to the company. They're typically 30% to 40% higher than our average gross margins in the company. So this is a real helpful from a mix standpoint going forward.

And then stopping the spread of infection. Just to talk to you a little bit about that, because this goes across all 3 of those businesses. U.S. Retail, Professional and International. This is a platform that has global relevance. So if you look at stopping the spread of infection, in the U.S., obviously, bleach compaction was a big initiative for us. We finished that in March, so now all 4 regions of the United States are rolled out. This is something that we think will generate about 500 basis points of margin improvement on the bleach business. Just a little aside, just compaction alone will save 50 million gallons of water a year in the U.S. So it's also a big environmental -- has an environmental impact as well. And then disinfecting products during the cold and flu season. We had a particularly tough flu season in the U.S., November through January. And I'll show you some of the results from that.

Professional, obviously, differentiated solutions for -- and one-stop shopping is what we're trying to create with hospitals. I'll show you little bit of a detail on that in a minute. And leveraging -- continuing to leverage M&A an that we think there's a real ability to consolidate this industry, which is extremely fragmented in terms of who goes into hospitals and provides disinfecting products.

International. Of course, this is -- a lot of our International markets, particularly in markets like Peru and Chile and Columbia, Mexico are on the -- kind of the early adoption curve on disinfection. And we think we've got the package sizes and the price points to drive that.

So let's talk about U.S. Retail a little bit. Many of you are probably familiar with the compaction, the rollouts completed as of March. Cost savings are on track here. As I said, very positive impact on the category. This is the strongest category growth rate on bleach we've seen in over a decade. We've got a new advertising campaign. I'll show you a couple of spots from that in a second. But clearly, we're getting younger users now into the category, which was one of our primary objectives of this campaign. We are seeing some market share under pressure, particularly in a couple of our major customers. It's really not a pricing problem as much as it is as we've transitioned regionally.

We've got out of the merchandising cycle in terms of display and feature. Now that we completed the rollout in some of these larger customers, we can get back into the merchandising cycle. So you'll see us, as we get into FY '14, really pushing back to get more normalcy into the display and future cycle, plus innovation that we think will get us back into the share position we want to be in.

Here's a couple of spots for you to take a look at on this Bleachable Moments campaign.


Donald R. Knauss

That was a Latin American spot, obviously. But some real-world situation there. It's amazing, the consumer feedback we've gotten out of this campaign, because everybody has a Bleachable Moment or 2. So we're getting lots of ideas. We think this campaign could run for about 140 years based on the feedback we're getting from consumers.

The second area of pushing was giving your home a flu shot. So during these 3 periods, basically, it's October, November, December, January and even into the spring, we see cold, flu, allergy season, et cetera give your home a flu shot, where we kill 99.9% of those bad bugs that can hurt the family. Retailers really responded to this across the U.S, because they can tie this into other items in their pharmacy, for example, over-the-counter medication.

Wipes is probably the biggest poster child for stopping flu in the home, our Clorox Disinfecting Wipes. The category was up over 7% in the first quarter of the year, January through March. We had double-digit gains on Clorox Disinfecting Wipes in the past 2 quarters. You can see, the share position, we gained about 2 share points from March of '12 to March of '13. We have seen a lot more competitive intensity as we head into the April, May, June quarter of this year. So clearly, we have some of our competitors, who aren't quite happy with our north of 50 share, obviously, trying to come after that share. So you'll see competitive intensity ramp-up on that business.

Still, this is the -- some of the spots you had seen or will -- the consumer in the U.S. have seen. Let me show you a couple of these.


Donald R. Knauss

That was my brother-in-law in our in-home situation, so worked out well.

So let me talk to you about professional for a second. This is one of the more exciting opportunities for us, and that's this whole area of stopping the spread of infection in hospitals and acute care facilities. This business today, of the 5% professional business, about $275 million, about half of it is the healthcare, the other half is food service and janitorial and cleaning products. But we think the $125 million to $130 million in healthcare, can -- which was $5 million 5 years ago can be $300 million in the next year 3 to 5 years. Extremely strong growth rates here.

One of the reasons is that, of these hospital-acquired infections in the U.S., one of the things the federal government in the U.S. did about 3 years ago, Medicare, they changed the policy that the federal government will never -- will no longer compensate hospitals for preventable injury. And they're classifying acquired infections as a preventable injury. So now you see the infection control people in these hospitals getting much more serious about cleaning and truly disinfecting, sanitizing patient rooms, particularly, in transition from one patient to another.

This is really a bit of a busy slide for you, but in very simple terms, what we have done is over the last 5 years, we've gone from competing basically in that first green box on the left, acute care, hospitals, and that first blue bar on the right, hard surface disinfection, which is about a $400 million space. We've now broadened out to many more channels, ambulatory care, dentist [ph], physicians, small clinics, dental offices and also expanded into hand care, skin antisepsis, patient body, so that now we're competing, not in $400 million but $2 billion worth of category spaces across the number of channels. And in that $2 billion, we can't find anybody with more than a 5 or 6 share, and we are the #2 player now in those spaces. So it's extremely fragmented. And some of the acquisitions we've done plugged these channels and category gaps for us, which I'll talk about in a second.

What we tried to do, really, for healthcare is to create a one-stop shop. So if you look at the triangle on the left, going from spores, which are extremely difficult to kill. C. diff is one of the #1 causes of acquired infections in hospitals and can really end in death, very viral in form of a spore. Down to the viruses on the bottom of that triangle. HIV is actually fairly easy to kill. But bleach is the only thing that the EPA and the United States is certified to kill C. diff, which is one of the #1 causes.

So if you look at those green arrows columns, we have a complete line of bleach germicidal wipes and other products, we have a complete line of hydrogen peroxide and now also a broader spectrum of quat-based disinfectant, so that we can walk into an infection control administrator in a hospital and say, "You don't need anybody else." If you have Clorox, you'll have a complete line here to deal with any of these pathogens that you see on the left side of that screen.

If you look at what we're trying to do in terms of do we have a differentiated right to win here. We now have 15 of the top 16 hospitals in the U.S. using Clorox. We've just brought on 400 new facilities across the U.S. We -- we're extending, as I said, beyond bleach. So hydrogen peroxide, we have over 300 new hospitals or facilities coming on with hydrogen peroxide.

The reason we want this wide range of disinfectants is, obviously, they deal with different pathogens. Bleach will kill everything. But if you work around bleach all day, the odor can be a bit overwhelming. So you've got to have different options for hospital staff to work with. And, of course, Caltech HealthLink and Aplicare gave us access to physicians, offices, dental offices. And Caltech gave us the #1 bleach spray. We had the #1 wipe, they gave us the #1 bleach spray. So that was the reason that we really tried to get more channels in more categories with these acquisitions.

Internationally, it's really the same thing, although as I said, a lot of our countries in Latin America -- and there are 3 examples here. The upper left is from Colombia. This was basic -- a basic sanitation message after heavy flooding in Colombia. As you would expect in a lot of the emerging markets, particularly, in the rural areas, there is a real need for sanitation. Bleach cannot only clean the house, but disinfect water. I mean, obviously, in the United States, in 1908, bleach was added to the water supply starting in New York to kill cholera and typhoid. It is still the most effective. Organisms cannot adapt to bleach, which is interesting, because it's not like an antibiotic, where diseases can adapt. Bleach actually destroys the entire cell structure of a virus or bacteria. So over 100 years, they've never been able to adapt. So it's a very important product to use in this emerging markets, not only for cleaning the house, but for water purification.

So there's examples here from Peru. You can see in the middle there, those gel bottles, gel bleach, a more -- a thicker bleach in Chile, for example, to clean counters, so you don't get to run off the counter. So we've adapted bleach to much more of a cleaning protocol than just a laundry protocol.

If you look at some of the challenges we're facing internationally, you think about our business as a -- 1/3 of it is in Argentina and Venezuela. And I'm sure you are well versed on the issues in Argentina and Venezuela, but, obviously, high inflation. We're seeing inflation north of 25%. Obviously, that puts tremendous pressure on wages and benefits. And when you combine that with price controls, there's, obviously a massive margin squeeze going on in those 2 countries. And then, of course, you have currency devaluations to deal with as well.

The remaining 2/3 of the market really split those in half, 1/3 of that -- or 1/2 of that 2/3 is Canada, Australia and New Zealand, very stable. Growing in the 1% to 3% range, sort of consistent with the U.S. The other 1/3 is the rest of Latin America growing very robustly. It's Chile, Peru, growing in strong double digits. Colombia and Mexico, doing quite well. So it's really a tale of 2 cities in Latin America. And Argentina, Venezuela are the issues we're dealing with. So our focus there is rightsizing our demand spending in those markets. Clearly, we don't want to create demand on products where the margins are being squeezed, so we're trying to innovate around the price controls. The government, obviously, has different controls on different categories, so we're trying -- there is a way to innovate potentially around that, but it's going to be tough sledding, I think, in Argentina for a number -- Venezuela for a number of months, for a number of companies going forward. But the other thing we'll do is continue to invest in the high-growth markets like Chile, Peru, Colombia and Mexico.

And then the job won for us and the message given to our folks is it's all about margin and rebuilding margin in the longer term, particularly in Venezuela, Argentina. Argentina being a little bit easier. The price controls are not as draconian as they are in Venezuela, but still a tough environment, because the inflation rates are north of 20% as well.

There are elections coming into fall in Argentina. We don't think there'll be much relaxation of price controls until we get past these elections in the fall. You might start to see some daylight on getting a relaxation of those controls after that.

If you look at the challenging environment we face. And I think you probably heard this from some of the other companies here in the last couple of days, but clearly, the consumer remains fragile. talked -- listening to John from P&G, talk about this a little bit for the U.S. If you go back to our categories in the calendar year 2012, our categories went back to historical growth rates. We were growing about 1.5%. And, typically, our categories have grown 1% to 2% if you went back 20 years, kind of consistent with population growth. So we were feeling very good about 2012. And we grew almost 5% in 2012 in the U.S., So quite a bit of ahead of the category growth rate.

Fast forward to the first 5 months of 2013, categories went flat. Now we think that probably is a temporary phenomenon. There are a few issues in the U.S., the payroll tax increase, the slowness of tax refunds with some of the IRS issues in the U.S. The weather was horrible much like it's been pretty tough in Europe. It was virtually no late early spring. So we see that starting to mitigate. We've seen some sequential improvement in the categories in May, but it's a fragile consumer out there. The unemployment rate is still stubborn at 7.6%. And the real issue is we haven't seen any wage growth in the U.S. in quite a while. So regardless of what housing is doing in some of these macro trends, I think the average consumer who shops at Wal-Mart is still under quite a bit of pressure.

High inflation price controls and obviously, Argentina, Venezuela is part of the challenge. And then as I said, the competitive intensity, as you see categories flatten, you see company starting to spend more to get volume, because clearly, if the categories are not growing, they're going for share And as they go for share, it dials up the discounting and some -- and in fact, also dials up the innovation intensity as people try and grab share. So we're seeing a bit of that, and we're really prepared to defend. And we're seeing it in, basically, the bleach category, we're seeing it in the wipes category and somewhat the litter category. That's where we're seeing the most intensity.

So our actions are going to focus on International really, cutting cost aggressively, particularly in those 2 markets, the high inflation markets that are under price control, including really ramping down demand creation spending, particularly in Venezuela, where it doesn't make a lot of sense to create demand for products where you've got very little margin on. But continuing to invest in the high-growth markets like Chile, Colombia, Peru.

And then in the U.S., really staying focused like a laser beam on the price value equation, really staying focused on our price gaps. We know that if our prices are within 25% to 30% of private label, we can maintain or build share, so we're being very careful on the price gaps but also, aggressively pushing innovation. We think we have another 3 points of growth from new products in FY '14, so we'll continue to push innovation hard and stay focused on price value. And that should allow us to maintain or, in fact, grow share. And that's what our real focus is.

So last slide before I turn it to Steve. As we look at the -- going beyond Centennial, really, no left turns or right turns and turns, particularly answering those last 3 questions, where to play, how to win, how to configure. We think we've got the portfolio where we want it now. We think we've got the marketing capabilities we need. And clearly, on the configuration, now with the SAP investments and the R&D investment we've made creating our new R&D facility in California, we think we've got the configuration right to the company to keep this growth going. And the top tertile total shareholder returns that we've delivered over the last 5 years, we think, clearly, that remains the aspiration. And we think we're -- with the business model we have and the capabilities we're building, we've got the ability to stay there.

So with that, let me turn it over to Steve, and we'll take you through a couple of more slides, and we'll open up to Q&A.

Stephen M. Robb

Thanks, Don. So Don talked about our Centennial Strategy and gave you look at some of the exciting innovation that we've got coming up. What I'd like to do now is to spend a few minutes talking a little bit more about our outlook for fiscal '14 and, specifically, we'll talk a little about the sales outlook, our plans to improve EBIT margin over time and then more -- and most importantly, our cash allocation strategy.

Turning to sales growth. Long-term goal remains unchanged. We think 3% to 5% sales growth over the long term make sense for our portfolio brands, and it really has a couple of building blocks. Number one is the categories. We think that as the economy gets back on track over the intermediate to longer term, that our categories ought to be growing 1% to 2%. And that's about in line with population growth.

Don talked to you a little bit about the 3 points of growth that we expect to get from our innovation programs. And then if you look at price mix, foreign currency. On a good year, you might get a tailwind, you might pick up 1 point. And in a tough year, you might lose 1 point. And on balance, it gets us to about 3% to 5%.

Now for fiscal '14, the outlook that we shared on the last call May, we tempered that a bit. We think these sales growth is more likely to be in the range of 2% to 4%. A couple of reasons. Number one, is the categories over the last 4 to 5 months have slowed a bit. And I think you've heard this probably from some other companies this week. And we think that categories are likely to be flat to up modestly in the fiscal '14. We feel very good about our innovation programs and delivering a solid 3 points of sales growth. And we do expect foreign currency headwinds. The dollar has strengthened a bit. But more importantly, we've got a pretty large business in Argentina. That's a country that's had ongoing devaluations. And so we think we've got about a 1 point foreign currency headwind, mainly driven from the Argentina business. So in balance, it gets you to about 2% to 4%.

Now the other thing I would just point out about the fiscal '14 outlook is we think more of the growth is going to come in the second half of the fiscal year than the first half. And there's a couple of reasons for that. Number one, is on the first half of fiscal '13, we delivered 5.5% sales growth and 16% earnings per share growth. So we, obviously, have some tough comps. In addition to that, the categories have been under pressure over the last 4 to 5 months. And as Don mentioned, we've seen a ramp-up in the competitive activity in bleach, disinfecting wipes and to some extent litter. And when you combine that with foreign currency, we think it will probably a bit more challenging in the first half than the second half. All that said, we feel very good about the 2% to 4% outlook for growth on a full year basis.

Now turning to EBIT margin. For EBIT margins, we continue to anticipate 25 to 50 bps of EBIT margin expansion over the long term. And there's couple of key drivers. Number one is the cost savings programs. We've got a very long track record of delivering consistent, solid cost savings year in and year out. And our goal is to deliver 150 basis points of margin expansion from the cost savings programs annually. We also do anticipate inflation. We've certainly seen that, but we think it'll be more moderate than we saw in fiscal '11 and fiscal '12, where it really peaked. And so as we look into fiscal '14, we think there'll probably be about 1 point of margin challenged from commodity cost. That's driven as much by supply demand balance, as it is by energy prices and probably another point from just wage and benefit of cost increases.

Over time, we're committed to price to recover inflation, and I think we've got a long track record of taking pricing, which sticks in the marketplace. In an environment like we're seeing today in the U.S., where inflation is controlled, we would expect less pricing. But over the long term, as inflation picks back up, we would expect to take more pricing to offset that.

And then, finally, SG&A. Our SG&A cost for fiscal '13, our outlook is for about 14.5% of sales. Certainly, that puts us in good stead relative to the peer set. We think it ought to be better. If you look at the long-term history of the company, we've historically had SG&A cost at 14% or less, and we think as we anniversary the investments we've made in IT systems and other infrastructure, we can get this back to 14% or less over time. Now there will be variability across quarters, but we do think that this number ought to be coming down over the next 1 to 2 years.

That should translate into strong cash flow. And, in fact, historically, we've delivered about 10% to 12% free cash flow as a percentage of sales. And I think you can see by the chart, we've seen our cash flows come back to more normal levels in fiscal '13 and certainly feel good about the strong cash flow-generating capacity that we have.

The use of cash remains generally unchanged. We're going to continue to support growth, both organic and inorganic with bolt-on acquisitions. We'll keep a healthy dividend. We're going to maintain debt-to-EBITDA ratios that we think are appropriate for the company, and we define that as 2 to 2.5x debt-to-EBITDA. At the end of the third quarter, we had a debt-to-EBITDA ratio of about 2.2x, so probably at the lower end of the range. And that allows us to have a BBB+ credit rating and access credit markets in good and bad times. So that feels right.

And then finally, as we threw off a lot of cash, if we start building cash up, we'll look for ways to return that back to our shareholders, consistent with what we've done for many years.

In fact, if you go back over the last 8 years, we've actually repurchased 40% of our outstanding shares by using the extra cash that we have. And again, it just speaks to, I think, the quality of the earnings that we generate as a company.

Over the last 5 years, as Don mentioned a few minutes ago, we've actually doubled the dividend. We took an 11% increase in the dividend in May. Our dividend now stands at $2.84 a share. And if you just use the stock price at the end of May, that gives you a very healthy 3.4% dividend yield. And again, we think it compares very favorably versus the peer set.

Well, finally, I would say that we've got a very strong track record of delivering good shareholder return. We've delivered solid results in fairly bumpy economic environment over the last couple of years. We've got leading brands, most of which are #1 and #2 in the categories we compete. We certainly have opportunities to rebuild our EBIT margins, and importantly, we have plans in place to do that. And we're committed to creating long-term shareholder value.

I would just say in closing, the Centennial Strategy that we've shared with you over the years is working. And I think you can see that in the numbers. And we're committed to building on that foundation with the new strategy that we'll be putting in place later this year. And we think the long-term investment case remains very attractive for the company.

And with that, I would just open it up for questions.

Question-and-Answer Session

Unknown Analyst

It seems as if your International presence is very focused in terms of markets. Do you see as part of the strategy in the next 5 years, the potential to expand it elsewhere? And if not, why not?

Donald R. Knauss

Yes, the potential is certainly there. I think what we're seeing in the 2020 strategy is we'd like to see the International business at least 25% of the mix. It's 21% to 22% today. The priorities to get there are really continuing to drive markets, where we have scale, so that would be Latin America. The second priority is actually the Middle East, where we have 2 strong joint ventures, one in Saudi Arabia and one in Egypt. We're seeing strong growth in those markets. We also have a company-owned business run out of Dubai in the UAE. And we you think there's real opportunity in the Levant region in Lebanon, Jordan, and that region also in North Africa. Third priority would be penetrating into Southeast Asia. We've made a conscious decision that we would not go after the BRICs. We said that a year ago, because we look at the competitive intensity and the inorganic cost of entering those markets seem prohibitively high. So those would be the geographic priorities. I think one of the growth engines in those markets right now is a real strong focus on Burt's Bees. So we're really driving Burt's internationally. It was in 5 countries when we acquired it 5 years ago. Now we're in 35 countries. We see north of 20% growth in International on Burt. So that's the geographic priority and also one of the engines, we think, would drive the growth.

Unknown Analyst

On Slide 30, you have -- you had a slide on bleach compaction. You know that your market share was under pressure , obviously, the major competitors. What was the reason for it? Is it ongoing? Or what's the actual impact in sales?

Donald R. Knauss

Yes, the real reason is as we did a staggered regional role. And as we did that, we had different sizes in different parts of the country. Obviously, we had the old 96-ounce bottle versus the 64-ounce bottle we were rolling out. So we -- in larger customers, who have a more of a national footprint like a Wal-Mart or a Kroger, for example, in the U.S., we did get out of a merchandising cycle. So as we finish this rollout now, what you'll see from us is a concerted effort to get back more into a normalized merchandising cycle with a lot of our larger customers. And also, you'll see us pick up the pace of innovation. Some of the innovations I showed on the other slide, new fragrances, new formats like -- were continuing to drive the gel bleach, splash-less bleach, things that private label can't really focus on.

Unknown Analyst

Will it normalize in fiscal 1Q? What's the expectation for 1Q?

Donald R. Knauss

No, I think it's going to take us at least the first half of '14 to get back into a more normalized pattern, so -- look forward to more normalized over the course of the first half and leading into the second half of '14. It's going to take us a little time to get back on to the traditional cycle.

Unknown Analyst

Just keen to understand a little bit about the differences in the selling process from Professional in your traditional business, and whether you can invest behind that type of distribution?

Donald R. Knauss

Yes, that was -- it's an interesting question, because it clearly is a very different selling process, and it's a different capability. I would describe it this way. The sale is a much stickier sale but a more complicated sale. It's a much more technical sale going into the hospitals, so clearly, we have a distinct, unique sales force. One of the reasons we went after HealthLink and Aplicare was to acquire their sales organizations and their relationships with distributors, as well as the product line. So it clearly is a more technical sale, but once you get in, you don't tend to get thrown out in the year. If you're consistent with their protocols, you can stay around for multiple years. So it is quite a different sale, but that is -- one of the objectives of the M&A strategy is to acquire new organizations we need to interpenetrate there -- those channels.

William Schmitz - Deutsche Bank AG, Research Division

Don, can you talk -- I know you got through a lot of work on elasticity. It seems like as the price increases from commodities roll over, the volume's really not coming back. Do you think -- I know you talked about the weather a little bit, but is there anything else more sinister going on there?

Donald R. Knauss

No, I don't think so, Bill. I think what you'll see, it's interesting. About 4 years ago when the recession was really hitting, and we saw retailers really swing hard in the U.S. back to private label in a number of categories, category growth really slowed in dollars, but volumes picked up as you would expect. I think you might start to see a little bit of that phenomenon again as we go into FY '14. I think with the competitive intensity that's out there and what we're seeing from branded players, as well as private label, I think you're going to see potentially where volumes starts to stabilize more than revenue. So stay tuned on that, but I don't there's anything dramatic going on there.

William Schmitz - Deutsche Bank AG, Research Division

Got you. And maybe I'm delusional about this, but it seems that the out of stocks in the U.S. retail is better than we're seeing them. I mean, is that fair?

Donald R. Knauss

Well, I think one of the things we're seeing clearly is a labor crunch from retailers. And you always -- about every 3 or 4 years, we hear the rumors that the retailers are going to come to the manufacturers and say, "Please pay for our labor, the stock shelves." I don't think that's going to happen, but clearly, we've seen retailers -- some of the larger retailers, cut back on labor. And I think that's part of the issue. Bleach compaction though, it's one of the interesting things. We've seen out of stocks improve on bleach, because with compaction, you're getting 25% more units on the shelf in -- of the top 20 customers we have, not one has cut back on shelf space in the category despite compaction. So we're seeing more units on the shelf there, so that's helping.

William Schmitz - Deutsche Bank AG, Research Division

Thanks. And thank you for actually being here again. I think we got a [indiscernible] just follow up afterwards. It's okay. Go ahead, then we've got a presentation. Yes, go ahead.

Unknown Analyst

Quick one. Just want to ask about margins in Professional and International? And are they higher? And will they develop in the next few years?

Donald R. Knauss

Yes, the margins on the Professional side tend to be higher than the company average. The margins Internationally, because of the pressure on Venezuela and Argentina, are lower. Now clearly, there are some countries, where they're near the company average bur that is not the case. When you aggregate all the countries up because of the downward pressure from Venezuela and Argentina, so they are lower than the company average.

Unknown Analyst


Donald R. Knauss

Still a bit lower, still a bit lower, other than Canada, where the -- in the emerging markets, they're lower. In the developed markets, they're typically is good or slightly better. So Canada, for example, a bit higher. Thanks, everyone.

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