The Clorox Company (NYSE:CLX)
CAGNY 2014 Conference
February 19, 2014 17:30 ET
Don Knauss - Chairman, Chief Executive Officer
Steve Robb - Chief Financial Officer, Senior Vice President
Bill Schmitz - Deutsche Bank
Wendy Nicholson - Citigroup Research
John Faucher - JPMorgan
Connie Maneaty - BMO Capital Markets
Chris Ferrara - Wells Fargo Securities
So first before we get started just logistically please remember to take your belongings after this meeting. We’ll have a break out session next door. It is my pleasure to introduce Clorox’s management team including Don Knauss, Clorox’s Chairman and CEO and Steve Robb, Clorox’s CFO. Clorox has a long history of successfully gaining market share over time and we’ve seen recently in-light of U.S. consumer spending weakness the company has really been able to step up their innovation and continue to drive solid organic sales growth. I'm sure they’ll highlight that innovation today. So Don, I’ll turn things over to you.
Good afternoon everybody. Thanks for hanging in there at 5:30 after you’ve been PowerPointed to death all day. We’ll try and make this somewhat entertaining for you. This is probably the most entertaining slide in the presentation. I would encourage you all read it in some detail so the obligatory Safe Harbor statement.
But let me get into three basic key messages that Steve and I’ll take you through. First of all, in October a number of you were out in California, we profiled the 2020 strategy for us. I'm going to go into some of the three enterprise choices we’re making for the next 20 minutes or so, tell you it’s a little bit different from what we did under centennial and we’re still committed to the top-tertile TSR performance that we certainly sustained over the last three years. I’ll show you how we stacked up versus our peer set in the second.
Obviously, I think you’ve heard this through other companies over the course of the last couple of days. We’re all managing through a pretty tough environment out there. We do think at Clorox we’ve got enough of the innovation pipeline and the cost savings pipeline to deliver on the outlook for the year and we feel good about setting up for FY 2015 as well which for us obviously starts in July. And then long-term, we think the investment case is very solid. I mean we still have 90% of our brands number one or number two, we got great cash flow in this company and I think as many of you know we have a strong commitment to getting that cash back to shareholders.
Our dividend yield today is about 3.3 and we’re putting about 60% of our cash flow back into that dividend. So we feel good about that longstanding commitment to our shareholders.
So let me get into the TSR. This is the report card we hold ourselves to, this is the last five years. This is the latest four quarters so this ends December 13th. So you can see the one year, two year, three year and five year TSRs and fair said we’ve set ourselves into. So obviously, for the last three years we’ve stayed in that top-tertile, we feel good about the performance. There is always we more we can do for our shareholders but we think we’ve delivered and that’s the same kind of commitment we have in the 2020 strategy going forward.
And if you look at what’s driven that performance its obviously the brands, I mean we have a strong portfolio of brands, I think as many of you know in these four different reporting segment I think importantly 90% of these brands are number one or number two in their space. And in a world where we see retail consolidation continuing not only in this country but in other markets, we’re also seeing a real push by retailers to get traffic back into the stores and we see a real – I’d say a real renewed focus from a lot of our retail partners to use our brands to get that traffic back in their stores. We’ll talk a little bit more about that in a few minutes.
I’ve often been asked about well that’s great you’ve got a portfolio of strong brands, but it seems pretty eclectic, I mean you got everything bleach to Glad trash bags, the Burt's Bees, the Hidden Valley Ranch to Kingsford. The real synergies are really with that customer set. Recall a few years ago, we sold the auto business that was a bit of a different channel for us, the auto zone and retailers like that, that channel is a bit different. But if you look at the customer set today its aligned, all of our brands are now sold in the four walls of those stores whether its grocery, mass, club, dollar and if you look at the scale in the supply chain all of those deliveries now at the same supply points.
And of course what we’re really good at we feel over the long-term we’re building brands and those capabilities apply whether it’s Burt’s or Kingsford or Hidden Valley. So there really is synergies across those three aspects of the house.
And that’s organized in this three legged stool, if you will, this is the way we look at out business. We’ve got our U.S. retail business which is 75% of the company and our focus there is driving 2% to 3% growth in that segment. Now Burt’s Bees is included in that segment historically the categories in this retail segment is growing 1% to 2%. And the last six months, the fiscal year-to-date they’ve grown about 0.8, they’ve slowed down most recently to about flattish in the last quarter but we’re looking for 2 to 3 points of growth and we typically have been getting about 3 points of innovation growth from that segment.
Professional 10% to 15% growth, this is our professional division, our profile in a little more in detail, but obviously the healthcare side of this business is the anchor on this business. This business has been growing at the upper end of that 10% to 15% range and of course, the half a point of growth that adds to our company in total is about 10% range it continues to grow at 15% it adds about three quarters of a point to the total company and I think that’s one of the reasons you’re seeing for example in the latest quarter I will go for a bit better than people forecast on our top line, this is in those measured syndicated data.
In international looking at about 20%, 22% of our business 5 to 7 points of growth, we did hit 7% year-to-date on currency neutral growth in that international division, so we feel good about that. Obviously, some challenges Steve will get into Venezuela and Argentina in more detail as he goes through his part of the presentation and of course underneath all of this is the margin improvement we’re aiming for 25 to 50 bps of EBIT.
If you look at the strategy 2020, the mission and objectives of the company hasn’t changed. I think one of the objectives is focused on economic profit separates us a little bit. I mean we have are strong return on invested capital company, we always maintain that focus that’s how we pay our people back 100% of our long-term incentive is based on economic profit and half of our annual or short-term incentive is based on economic profit.
And if you look at those four strategies a lot of similarities to where we were in centennial, but I want to talk about those three that are boxed in and give you a little more detail about how those have changed.
On the first one, increasing our brand investment behind superior products and this idea of more targeted 3D plans. As we move through the 2020 timeframe, we expect our 9 to 10 consumer spending to increase to 10 to 11 points in the back half of that period towards 2020. And a lot of that obviously focused not only on the adjacent – on the legacy businesses but on adjacent growth. And we’ll show you some of those adjacencies in a few minutes, 60/40 blind superiority wins is a big deal for us. About seven years ago about 15% of our brands had a 60/40 blind preference with consumers today we have about 55% of our brands at that blind preference. So I think that’s a really importantly thing in the digital world where one upset consumer can reach a lot of people quickly we want to delight people, we don’t want to irritate them and then addressing this consumer and customer fragmentation that we’re seeing out there.
So there is a little bit more about targeted 3D, it obviously starts with insights. I think we’re getting better at understanding what problems we’re trying to solve with consumers. What we’re finding is that consumers are really good at telling you what irritates them about a product or an issue. They’re not so good at telling you what they want but by really listening to them about what problem you’re trying to solve that’s really helped us.
Digital technology obviously the focus there for us is on mobile and really making sure we’re connecting with consumers when they’re most susceptible to that message whether its in-store or before they click the mouse and then a flexible supply chain. We’re now creating products uniquely for certain customers who ask for and/or certain and unique merchandising events. I’ll show you some examples of that.
So one example of that approach of in-sight digital and flexible is Burt’s Bees, now Burt’s, the insight is while consumers want a personal care product that works they also wanted to stand for something more.
Our consumer base is very concerned about not only what they put on their skin but the ethics and the authenticity of the company. Digital, if you go on burtsbees.com for example you can get a personalized regimen based on your skin type, your lifestyle any other issues you may identify. So if you get that regimen tailored to you and then of course flexible supply chain there are a couple of examples on the bottom of different merchandising vehicles and in some cases specialized products for individual retailers that we will formulate.
So we take the same targeted 3D approach of insight digital and then flexible to basically every brand in the house. And if you look at the pay off, Burt’s is basically averaged about 10% little over 10% growth compounded over the last three years and we’re expecting another good year this year. In international for example, we bought this brand six years ago, we are in about five countries, today we’re in 35 countries we’re seeing a lot of growth particularly out of Asia. So we have a lot of hopes for Burt’s to continue to expand this business globally.
If you look at the third strategy keeping the base healthy and growing into these profitable new categories channels and countries. Let me talk about the base health first of all. U.S. retail, the two biggest issues we’ve had in the last 12 to 18 months have been bleach and Clorox Disinfecting Wipes. In fact we’ve lost about 2/10 of a share point over the last year. Doesn’t sound like a lot, it is little less than 1% of our total share is about 24, but it’s not acceptable to us and 60% of our share loss has been in those two businesses. So we’re going to show you what we’re doing to turn that share loss around.
And then Clorox International, I want to talk a little bit about what we’re doing with some of the adjacencies we’re getting into like Cleaning Utensils and then I’ll get into and giving you an update on profession and some of the new channels we’re branching into.
If you look at bleach, you can see the category was really contracting a few years ago, if you look at the end of 2010 down 5% look at the end of 2011 down 2%, this was down 3%. This is the category that had been stagnant for years basically slightly declining. You can see the strong growth rates since we started compaction in 2012 and then obviously 2013 its starting to flatten out a little bit as we cycle those strong category growth numbers. But clearly the categories responded, very interesting thing happened with compaction. This category used to be about two-thirds to 96 outsize [ph] and one-third with King or the 120 plus. That’s what’s totally around in the last 12 to 18 months where now two-thirds of this category is in the larger bottle and that’s the bottle that retails for $3.50 to $4.
So one of the things we thought was a real issue was causing the $2 merchandising barrier remember on the old 96 ounce bleach and now we have people putting down $3.50 and $4, it seems without blinking and they’ve shifted this category really dramatically and that’s what’s driving a lot of those dollars into the category.
The other thing obviously is the cost savings target we had set out within that. We had over 500 basis points of margin expansion on our bleach business. The downside was we were losing share and we were obviously not happy about that. One of the big reasons for that as we did this regional compaction we’ve talked about quite a bit on earnings call, if we got out of the national merchandising cadence with a lot of our bigger customers because we had different sizes in different markets.
So what we did is, we took a 3D a comprehensive 3D approach to this, on Desire, I’ll show you a spot mix in a second, it’s a rough cut. But I want to show you some of the more valued focus advertising that we’re doing that we think harder hitting it pointing out the differences between Clorox and private label for example non-compact bleach.
Beside our merchandising is up about 20% this year, so we’re seeing more feature ad activity as we get back into the national cadence of merchandising with customers and stronger disinfecting message. You see that yellow banner there on the packaging graphics that’s new packaging that’s going in the market that really hits hard on the attributes and the benefits that we have in Clorox bleach.
And then on Delight, this is probably the strongest innovation pipeline we have seen on bleach [indiscernible] the company for about 7.5 years that twin pack is going into a lot of grocery and mass retailers over the next few weeks. You can see the scented king size that’s the category they shifted into this 121 ounce. We are now flushing out the sense and the forms like splash was in the king size, you can see smart seeking bleach. This is an interesting technology where now you can wash non-white clothes with Clorox bleach. Clothes that are somewhat whiter or predominantly white but they have colors and I'll show you an example of that. And of course Fragranzia, which is a more highly fragrant bleach, which is targeted the Latino consumers is going in market as well. So all of these innovations are hitting January, February as we speak.
So let me show you the print ad, this is Clorox bleach to bleach or not to bleach that is no longer the question. You can see those different towels and shirts that’s the kind of fabrics you can now use Clorox with bleach on. So we think this is a one of those problems that consumers identified for us was not being able to use bleach on fabrics like this now they can do that without fear of damaging the colors. So this is the print ad that is out there in the market today. And let me show you a rough cut this is a 15 second slot on our bleach against private label so we should show the spot.
Well, he did say a lot of bathtubs but it is a rough cut but its trying to get much more focus simple message we do more than the other guy does. If you look at, is the plan working you can see in January our share went back up to 61 that’s the highest share we’ve had in 10 months and we’re feeling good about as we look out the balance of the fiscal year and into 2015 with that innovation pipeline with the merchandizing calendar much more full than it has been. We think that trend can continue and that’s what we talked about at the analyst meeting last fall. We would start to see these shares come back in the first quarter of the calendar year and that’s exactly what’s happened so we feel good about that the category is starting to flatten as we lap these big numbers but clearly with the share back to 10-month high we feel good about that getting back into the 60s.
The other business, the Wipes business and I think in some cases both these businesses were a prisoner of our success. We hit 60 shares or 60 share in Wipes about a year ago so on both these products we had 60 plus shares. But again, hit hard by private label in particular over the last nine to 12 months so what do we do about it on Desire a new campaign again focused on value, focused on what we do differently from the competition. I’ll show you a rough cut on that in a second as well.
On Decide, higher merchandising you can see that shipper for example and the message we disinfect twice as much as the leading another competitor. Across Disinfecting Wipes hit an all time shipment record in October, November, December, so we feel good about this starting to gain traction as well. And then Delight, we have glass wipes and tub and shower wipes hitting in January, so those have already shipped they’re starting to show up on shelves. You could see these new graphics and a new four-pack multi-pack will start showing up in mass merchandisers this month.
So we feel like we’re getting the message out there on the packaging graphics including the innovation we’re trying to push Wipes into different occasions like with glass, no lint left behind and of course tub and shower. So let me show you the quick spot or again a rough cut. And let’s go ahead and take a look at that.
So we’re going to continue to get more comparative, more competitive in our advertising and start to really show what we can do versus our competition.
If you think about so that’s bleach and wipes and again, we’re feeling encouraged that our bleach shares are coming back. And I think in the fourth quarter of this year fiscal year so April, May, June, I think you’ll start to see our shares on Wipes coming back as well. On international keeping the base healthy, we certainly expect sales to be accretive going into the future. Let’s say we’ve had 7% currency neutral sales growth fiscal year to-date, I’ll talk a little bit more about that in a second.
Rebuilding margins is the key focus obviously with the high inflation markets of Venezuela and Argentina and price control to hit margins. But we managed to grow margins in the last quarter, we’ll talk about that and then the portfolio management. We’re staying focused on our core countries we’re not trying to as we said over a year and a half ago get after the BRICs and I think that’s been a wise decision to stay anchored into where our top-tier markets are and to grow where we had scale.
So in fact, if you look at sales negative 1% but plus 7% currency neutral, the latest quarter so this is October, November and December we hit 9% currency neutral. And in fact, Latin America which is two thirds of our international business, we hit 14% growth currency neutral. So we think the brands are very strong. We obviously have issues as I said Steve will talk to you a little bit more in detail about Venezuela and Argentina. Our operating margin is up 90 basis points so we feel good that we’re being really able to grow margin. I think a lot of that is due to our SAP investment we’re starting to get value capture out of the SAP investment we did finished over about six moths ago. So we start to see the business starting to rebound.
Now, we look at international in these three clusters you’ve got the stable cluster and that’s Canada, Australia, New Zealand fairly slow growth fairly mimics the U.S. in terms of categories in flattish to up 1 up 2. Fast growth Chile, Peru, Colombia, Asia that’s what’s really driven the 14% currency neutral growth and you can see the challenging markets which we’ll get into.
So margin the last thing, obviously, a key I think Clorox has had a good reputation and a good track record of taking about 150 basis points of cost out every year building our margins up.
One of the things that crept up over the last couple of years is our SG&A spending as we made these investments like SAP and Latin America and also the new R&D center in Pleasanton. While we’re continuing to drive cost-o-vation, which is enhancing the consumer experience with the product while taking cost out pricing to offset inflation particularly in high inflation markets, lower overhead spending and I’ll get into that in a second and then maximizing as I said our value from the SAP investment. We’re already seeing working capital coming down significantly for example in Latin America.
So before we get into that I'm going to talk a little bit more about what we’re doing to lower SG&A over the long-term we get back even below 14%, let’s talk about the third strategy of keeping the base healthy and then growing into these new categories. I want to talk a little bit about Clorox Professional because its been our fastest growing engine. We call that’s that middle leg of the three legged stool if you will that’s we’re expecting 10% to 15% growth out of.
And I want to talk a little bit about channel expansion but this healthcare business which was less than $10 million five years ago finished the year at about $120 million -- $130 million strong business, attractive tailwinds with the demographics in this country and the developing world. And obviously, this whole issue of hospital-acquired infection is a massive issue in this country, we get about 100,000 people a year dying from those. So it’s a big focus from our customers to get that right.
We think we have a differentiated right to win in that space, we got the right technology the right equities, we got the right capabilities and our technology particularly our knowledge around chemistry of stopping this spread of infection is second to none. And we think this $300 million goal from a $130 million is very achievable in the next couple of years.
Here is how we break out that goal. You can see on the far left 2017, we expect the base business to be in the 190 range, we expect another $50 million of growth really inside organically from the acquisitions we’ve made. We use to have that inorganic piece the $60 million at the top was $100 million a year ago but because of the growth rates organically we don’t think we need that much from a bolt-on acquisition standpoint so a lot of great growth here. And again at 15% growth rate that adds 3/4 a point of growth for the entire company. So it’s kind of a little engine that it’s really starting to have a material difference on the company.
This was the strategy we used to do that. Recall that our foundation is hard surface disinfection that’s where we are really good at. And that’s kind of that first blue vertical on the product side. That was about $450 million category in acute care channels, hospitals, day care centers, nursing homes, primarily hospitals. We have added $1.5 billion of more categories to participate in, and if you look at those next three blue bars to the right. So hand care, skin antisepsis and then the patient body.
If you look at the blue or the green going up the channel, we used to be in acute care only now we are moving up that continuum up all the way to dental as well. So and our acquisitions really helped us get there. I mean Healthlink had the number one antibacterial soap and lotions for doctors and dentist offices so that really enabled us to use their sales force and access those channels.
Let me show you an example of that. On the base, we are obviously focused on using bleach, using hydrogen peroxide and building out all of our chemistry, if you will, our chemical solutions disinfecting. On the other side, we are really getting after these new channels, dental long-term care and entering some of these private adjacencies like skin antisepsis.
We will just give you an example of what’s going on with dental offices because this is a massive opportunity for the company. Again, Healthlink and their sales organization gave us the access to these distributors that call on these channels. But here is a 100,000 dental offices across the United States alone. There are actually 200,000 doctors’ offices on top of that.
The need for infection control in dentist offices is obviously very high when you are dealing with people’s mouth, blood, you are dealing with saliva, there is a lot of issues potential around sterilization and infection control. So it’s really top of mind with the dentist offices and there is a strong fit with our capabilities those are the Healthlink products on the bottom that we acquired in the last 18 months.
So we are going to keep focusing on building out the product but really now it’s more of a channel expansion into doctor’s and dentist offices as we go forward. So we are going to keep building the base out in service and skin disinfection. We are driving product technology and channel expansion and we are going to support that growth by allocating the resources to where the growth is.
One thing, we just put out a press release today, we just are going into UV light as well as a bundle for hospitals and acute care facilities where we have a relationship now, UVI where we have the ultra-violet technology coupled with our chemistry technology.
So for example, walls in a patient’s room are kind of hard to get at from a disinfection standpoint. When you couple UV light with the chemistry solution you can get a really a complete clean and I think as far as we know we are the first guys to bundle these two technologies together. So we feel good about the potential for that distribution joint venture that we put together.
If you look at the four strategies before I turn it over to Steve, this is all about margins and increasing our productivity taking waste out of our system as I said, we are going to take most of the order, we agree we have a pretty good track record of doing this. Margin expansion is obviously critical to keeping us in the top-tertile of total shareholder returns. That growth is going to fund our ability to get that consumer spending from 9 to 10, to 10 to a 11. W are calling this work agile enterprise, its really, its more of a lifestyle change I would say than a diet. This isn’t a fad that we are under this, just the way we do business. And we really think its going to be part of increasing employee engagement.
So some of the principles we are using with agile enterprise streamline, simplify work. To give an example, twice a year, when we do our product innovation pipelines in January and July, we send out about 2000 pages to our sales reps and sales offices around the country profiling all of that innovation. Nobody can use more than 20% of that.
So we are just streamlining work, trying to get down to the bare essence of what we really need here. Fixing the problem right the first time, increasing speed and obviously focusing on what the consumer customer value. We are actually going through this work and asking ourselves three questions? One is, is the work you are doing something that consumer will actually pay for.
The second question is, is the work you are doing something that consumer won’t pay for but we have got to do it because we want to stay out of jail. It’s good for governance, its regulatory requirement, we got to meet payroll, people need to be paid on time, the consumer is not necessarily going to pay for that.
The third question is, what is the work you are doing that consumer will not pay for and we don’t need to do it and we are finding a lot of work falls into that third bucket, we are seeing that in – I think a number of companies going through this exercise. So we are going to get focused on what the consumer and the customer truly value. And we are pretty good at this.
This is an example of what we do with our order to cash process a few years ago and we continue to get better at it. But you can see processing the order, filling the order, transporting and then of course collecting the cash, our perfect order rates have gone up significantly, our day sales are outstanding, it has been reduced by 34%. You can see how deductions have fallen in. We actually have done this with fewer head counts.
So I think our team is pretty good at tearing apart processes inside the company and nearly getting as efficient as possible. And we believe there is another $10 million to $15 million in annual savings embedded in the SG&A portion of the company’s P&L. And building this agile mind set into the culture, we think it’s critical for us to do enable us to get that fuel for growth. And we think you will see us soon get our SG&A back below 14% to keep us in that top-tertile in terms of the efficiencies in our company’s.
So with that let me turn it over to Steve.
Thanks Don, and good evening, everyone.
So Don talked about our 2020 strategy and some of the choices we are pursuing to drive growth and build margins over time. What I would like to do now is shift gears a bit talk about our fiscal fourth 2014 outlook, the challenges we are facing and importantly what we are doing to get over those challenges. And then I will finish up with just few comments on the long-term investment case for the company.
In terms of the challenges we are facing, I think it’s similar to what a lot of companies are starting to experience. There is only three big challenges. First, is just sluggish U.S. category growth, our categories has Don mentioned historically have grown in the U.S. about 1% to 2% or about in line with population growth.
More recently, we have seen the categories go about flat and so this is certainly something that we are working against, and this is where the innovation we think of the important to get those categories growing again.
We are also seeing competitive intensity ramp up particularly in our U.S. retail business disinfecting wipes and our bleach business and again, we are taking appropriate measures to vigorously defend our shares. And then more recently in the last 12 months, we are seeing foreign currency headwinds really ramp up quite a bit particularly in South America.
So let me give you just a perspective on two businesses we have in South America and some of the challenges that’s creating for both the operations but also from a foreign currency standpoint.
And the first business is Argentina, this is a country we have been in for many year. It represents about 3% of our sales or just north of $150 million a year in sales. And I don’t think the business is fundamentally very strong. It’s a good business. We have got great brand equities, brands like Ayudin which has got 70 market share, so there is a lot to feel good about.
The challenge we have in Argentina is that we got the combination of high rates of inflation and price controls which cover most of the portfolio. That’s a bad news. The good news is we have been able to take limited pricing to try to offset some of that inflation and limited pricing combined with cost savings and productivity measures that we have been taking have enabled us to maintain profitability in the country. So I would say on balance tough situation of the country, I think we are taking the right steps and the business is performing reasonably well in that environment.
Now, most recently we talked about in our last earnings call, the fact that we have to lower our sales outlook. And part of the reason we lowered our sales outlook is because of the currency devaluation in Argentina. In the month of January, the Argentine peso devalued amount 19% and our expectation is that the currency is going to continue to depreciate from here for the foreseeable future relative to the U.S. dollar. So again, it’s a solid business, but we will certainly face some foreign currency headwinds coming from that business.
Venezuela has got some similarities to Argentina, first, I would say it’s about $100 million in sales, it’s about 2% of our sales. Just like Argentina, we got very strong brand equities. Brands that are number one and number two in the categories we compete. And for many years, this is the jewel of Latin America. It is one of our best businesses. But we have seen really high levels of inflation combined with price controls which cover more than half of our portfolio. And in fact, in the price controlled categories we have not had a price increase in over two years.
So unfortunately this is a business which is going from profitability to losses over that period. So what are we doing? The number one is we are leaning in and trying to get more pricing and I think that’s critical for the long-term health of this business. We are absolutely happy with pricing. Second, is we are pursuing cost savings and really right-sizing all of our investments to reflect the realities that we have on the ground.
And in addition to those operational challenges, there has been a lot of discussion about foreign currency exposures in Venezuela and it’s a bit complicated because there is two official exchange rates today in Venezuela, you’ve got the CADIVI which is at about 6.3 to 1 and you’ve got an alternative mechanism called SICAD which is at about 11.7 to 1. We have been reporting our numbers on a CADIVI basis and translating and what I would provide for perspective is, if we were to move from 6 to 12 or about 50% valuation of the currency the impact that would have from a balance sheet measurement is about $0.05 to $0.06 of diluted earnings per share. So that gives you some dimensionalization of what that might look like with a large valuation.
In addition to that of course, you’d also had impact on sales and earnings for using a different exchange rate. We think its not, whether there is going to be a devaluation if when and we’re certainly working through the new SICAD system to understand how that might apply to our financials and we’ll have a better update for everybody at our next earnings call.
Turning back to our sales growth algorithm. We continue to believe that over the long-term 3% to 5% sales growth makes sense and here is how we get to that number. Starts with the U.S. categories, which have historically grown at about 1% to 2% or about population growth. You add to that 3 points of innovation as Don talked about earlier and price mix, foreign currency in a good year you might pick up a point or lose a point and that on balance gets you to about 3 to 5.
Now more recently in the near term, we’ve been closer to this 1 to 2 and the two big challenges number one has been the U.S. retail environment where the categories have really slowed down and then second is foreign currency headwinds.
The headwinds we now expect are about two points or a little bit more for the full year and in fact for the second half of our fiscal year, which is going to run from January through June, we expect up to three point of foreign currency headwinds. So that’s the biggest reason why you’re seeing us in this one to two range. I would point out, however, on a foreign currency neutral basis, we think sales growth are likely being in this range of 3% to 4%
Year-to-date performance we have sales growth of about 1% take out the foreign currency headwinds it is about 3%, margins are a bit compressed because we’re seeing some rising commodity cost and I’ll talk more about that in a minute. And finally diluted earnings per share was about flat or down just to check and if you get to take out the currency effects earnings per share was up about 4%.
For our fiscal 2014 outlook that we shared on the last earnings call, again, we continue to anticipate sales growth in this range of 1% to 2% and again, that has a little over two points of foreign currency headwinds. EBIT margins flat t up modestly probably 25 basis points and then diluted earnings per share in the range of 440 to 455 which is low to mid single digit EPS growth on a full year basis.
Turning to the second half priorities, three big things we’re focused on. Number one is executing the innovation when we have with excellence. We’ve got a lot of new products coming out, we’re getting good acceptance from our retailers and we simply have to execute that well. Second, we are taking a pricing increase on our Glad business, resins prices have really moved up sharply over the last year. We recently announced we’re taking a 6% price increase on the Glad trash business, we’re already starting to see competition follow and retailers have accepted the increase. And we think this is the right thing to do to protect the margins of that business. We’re also going to continue to lean in heavily to our cost savings program which has been consistently delivering about 150 basis points of margin expansion year in and year out.
In terms of the long-term investment case for the company a couple of thoughts, first I would say the foreign currency headwinds we and other companies are experiencing that’s certainly going to continue through fiscal 2014 and its probably going to continue into fiscal 2015. I don’t see those abiding anytime in the short-term. But if you look over the long-term particularly in the South American countries is those currencies correct and return to what I’ll call fair value, I think you’ll see those headwind start to disappear a bit and as a result that will help us to get closer to this 3% to 5%.
We’ve also got plans in place to build our categories and regain share leadership and we’ve got a strong pipeline of innovation and cost savings that we continue to pursue. So there is a lot of reasons that give us optimism over the long-term we’re going to be on track with our investment case.
In terms of the innovation as Don mentioned you saw some of this in bleach, we probably have more news today than we’ve had in quite a few years. We’ve got new scents coming out on bleach, we’ve got smart bleach, we’ve got a twin pack which offers better value on shelf. In addition to that we’re coming out with a Clorox disinfecting spray that works extraordinarily well. We’re also coming out with two new versions of the wipes for the tub as well as glass and the glass does not streak and I used it this weekend and I’ll tell you that product is fabulous. So lot of exciting innovations coming in the second half of the year. So far we’re off to a very fast start, we’re feeling very good about it.
Cost savings, we talked a lot about this and I think it’s one of the hallmarks of the company. We focus on a three-year pipeline for cost savings and ideas, we look at every single line of the P&L and that gives us over $4 billion of addressable spend. And we’ve been consistently getting about a 150 basis points of margin expansion year-in and year-out from these cost savings programs. And because we do have a three-year pipeline as we look for the future, we feel very good about the ideas that we’ve got queued up.
We also, as Don mentioned, think that our SG&A cost, while they’re fairly low relative to the competitive set, we think we can do better. If you look at the history of our company, our SG&A cost has always been below 14%. So we are putting plans in place and establishing three-year targets for all of our functions to bring this cost down slowly and get this at or below 14% and we believe we’re on track to do that.
And then as we do that, again, we tend to pull up a lot of cash flow. And that gives us opportunities to return money that we don’t need back to shareholders and do other things. And these priorities have remained very consistent and we’re going to focus on driving the business growth including targeted bolt-on acquisitions. We’re going to support the dividend which is more than doubled over the last 10 years. And we’re going make to keep sure – make sure that we have a very sharp eye on our debt. We target to have a debt-to-EBITDA ratio in this range of 2 to 2.5, latest numbers were about 2.2, allows us to keep the triple-B plus rating, and we think that makes sense particularly in an environment where interest rates are likely to ramp-up over the next couple of years.
And then finally, consistent with what we’ve done for many years. If we have excess cash on our balance sheet, then we don’t need either through the dividend or through share repurchases, we look for ways to get that back to our investors. If you look at the share repurchase track record, it’s pretty impressive. We repurchased nearly 40% of our shares over the last 10 years.
During that same period, we’ve also more than doubled the dividend and the dividend yield at the end of December was selling at 3.2% so it’s a pretty nice yield. We’ve also maintained a very healthy return on invested capital. And I think this is one of the benefits of having economic profit as your focus, it’s about driving sales, its absolutely about driving margins and earnings growth. But, it’s about tightly managing your asset base and we’ve been very successful in doing that and it’s one of the reasons our return on invested capitals remains so high.
And finally, I would just end with, if you look at our total shareholder return over the last 20 years, the dark blue line is Clorox, you can see we given some pretty impressive numbers. I would also say that the peers have also done pretty well delivering almost 700% and the S&P has gone up as well, but nice track record of delivering very strong returns over a very long period of time to our shareholders.
So in conclusion, I would say that we feel good, we got the right strategy in place for 2020 and we’re getting traction against it. We do have a tough environment with the U.S. category slowing and foreign currency headwinds, but we believe we’re taking all of the right actions to address that. And finally, we believe that the long-term investment case remains very solid for the company.
So with that, I will open it up for Q&A
Thank you, Don. A question actually probably to Steve that are with regards to the second half of 2014. You mentioned that in the first half, you have 3% Forex currency neutral sales growth EPS 4%. So in the second half you have an acceleration of both profits on top-line a little high-end as you have commodities and you’re also have increasing trader spending to support innovation. So what give you the confidence that you’re going to have the leverage that we haven’t seen in the first half, is going to show up in the second half?
Couple of thoughts are there. First of all, in the first half of this fiscal year that ended in December, we had 3% sales growth on a currency neutral basis. The outlook for the full year is about 3% to 4%, sales growth again currency neutral. So as we go to the second half, number one, we’ve got a very strong innovation program queued up that we shared with you, I think like the smart bleach, the disinfecting spray, the new wipes.
We’ve also got costs that are little bit easier on a year-over-year basis. In the first half of the fiscal year we were comping almost 5.5% sales growth. So between the innovation program the easier comps in the second half not withstanding the softer categories. We think it’s reasonable to get this 3% to 4% sales growth full year which would also implies similar number in the back half.
In terms of earnings per share, same thing, we got cost savings programs continue to do well for us and we think between the cost savings programs, the pricing we’re going to take on Glad and some of the other actions including lower SG&A cost in the second half that the earnings per share growth should be better than we saw in the first half.
Hi, guys. So two questions, one is what makes you believe that the North America challenges you’re facing right now don’t get worse before they get better. And can I ask it on two dimensions, one is from the competitive situation, bleach as an example, is it just the cadence of merchandising or it’s kept getting more aggressive -- the pipeline is getting more aggressive.
And Wipes, it doesn’t look like Lysol is backing off, it looks like they’re taking the advertising fee for demand and they’re getting aggressive results, that’s one dimension. The other dimension is something you mentioned now, a couple of minutes [indiscernible] before which is like these retailers are trying to drive traffic to their store, these carriers aren’t growing, they are trying to gain share. And often times that means pricing, so some negative pricing more promotion, I get that might be innovation longer term but in short-term it feels like there is a lot of pricing that retailers want you to do in a marketplace adding more sense. So how does it not get worst potentially before it gets better along those dimensions?
Well, I think, last month I met with 15 different retailers. I heard two things from them, one was traffic central concern, the other concern they have is deflation. And when traffic is your number one concern and deflation is your number two concern, there is – I think you get somewhat a better balance between using national brands to help you get traffic, but not taking so much revenue out of the category with opening price points and really driving it down too significantly. While, we do have heavier trade spending in the back half, I mean our first half trade spending was virtually flat, we didn’t increase it, we didn’t decrease it, it was essentially flat. So I think given the retailer focus on traffic, the appreciation they have for our brand, the innovation pipeline that we’ve got, all – I feel pretty good about that and of course we are comping a lot of easier numbers in the second half. So, that’s what gives me some confidence.
My second question was about strategy number 3, not the base part of that but the new part of that?
It really focuses on professional, is that what we should expect, or are there other businesses that you might get into beyond professional in that kind of column. And then as you expand professional, you expect your margins for that business to remain above company averages?
Yes. We do it – let me take your last part of it first. We do expect gross margins always to stay above the company average. They’re significantly above the company average now. So we feel good about those margins. I think you will see us continuing to push hard on professional, we want to keep it in the 15% growth range not the 10. I think the other thing you’ll see from us is pushing our brands heavier into adjacency. So for example, we did a Hidden Valley pasta – dry pasta salad kit with Wal-Mart, took off exceptionally well. You’re going to see us pushing our brands into more adjacent spaces as well as we go forward. So both of those things are going to happen.
Bill Schmitz - Deutsche Bank
Can you just take a stab at what the P&L impact would be if you use the CADIVI – SICAD rates now?
We’re still analyzing that because as you know the SICAD rate or the CADIVI rate applies to different transactions. So you have to actually go through transactions by transaction to figure out what CADIVI applies to and what SICAD does. The best estimate I can give you today and one of the better estimate at the earnings call is, if we just revalued the balance sheet, this is the big piece of it, it’s $0.05 to $0.06 of diluted earnings per share.
That’s $10 million to $11 million Bill.
Yes. I think there will be another piece which is a transaction cost and obviously the translation but we are still working through with our legal advisors and with the financial experts on this to understand that and we’ll have a better number but it would be additional to that $0.05 to $0.06.
Bill Schmitz - Deutsche Bank
The restructuring charge that you still embed in the P&L, are you done doing those sort of restructuring programs that you kind of expense to the P&L because you talked about what the number was this year and next year? So is that program done or have you still having restructuring in front of you?
No. We continue to set money aside, it will move up and down in any year but call it $20 million to $30 million to cover the cost savings programs and the charges that we need to take. We don’t talk it as much because I would argue it’s in the base, it’s in the base, we set the money aside every year and that makes sure that we have a healthy pipeline of ideas. So we’ve got numbers in there for fiscal 2014 and certainly we would expect numbers for 2015 and 2016 but consistent with what you’ve seen over the recent years.
Bill Schmitz - Deutsche Bank
[indiscernible] the restructuring charges going on?
I’m sorry, can you repeat the question?
Bill Schmitz - Deutsche Bank
It was like 14 down to sort of like 13 or 12, but it’s got nothing to do with just having lower restructuring embedded in the P&L?
I would just say that the restructuring cost in general have been fairly consistent, it’s $20 million to $30 million range probably at the lower end more recently.
We will go to Wendy and then come back to John, Nick and Sara [ph]?
Wendy Nicholson - Citigroup Research
Thanks. Two questions, first on the Glad pricing, I think you said competition was following or the early signs were they are following, that apply to private label as well which is a branded competitors. And then second question is, on the healthcare target of $300 million in sales, is that that you’ve lowered the amount to come from acquisitions from $90 million to $60 million. Why not just raise the target? Why not they, yes and I would think you can get to $350 million of sales. Is it something about the acquisition environment that has changed or maybe comment on that? Thanks.
Why don’t you take the first one, I’ll take the second one. Go ahead.
Yes. While it’s still early days but all signs are that both the branded and the private label players are following because we’re under the same resin price as we are, so that certainly what we’re seeing right now.
Wendy, the reason we didn’t raise the overall target even though we raised the organic target is, it is really a question of control and we have control much more control, I think over the organic piece of it than the inorganic piece. So we didn’t want to put a number out there that we thought we might not be able to hit because as you know these things – these acquisitions sometimes they hit, sometimes they don’t. So we want to be more conservative on that side and be more bullish on the organic side. John?
John Faucher - JPMorgan
Thanks. Don, over the last couple of years, the advertising as moved down, you had talked about some of the changes in the geographic nature of your business and how that would – that you guys feel comfortable with the lower levels. So you look at taking the number up, which I think as an analyst most of us are going to think its great. What are the changing dynamics in the business that are leaving you to say well look by six years from now, being between 10 to 11 is the right place to be.
I think the biggest thing John has been the pushing of our brands into adjacent spaces, and the fact that we’re going to need more advertising and similar promotion to make sure we give those adjacencies a fair shot of being successful. So to support it might. We want for example Hidden Valley spends well north of 12% in advertising, but we might want to take that to 14% to 15% to make sure that if – as we stretch that brand equity out, we’ve got enough fire power if you will to make sure those adjacencies are successful. So that’s the biggest thing driving us. Next?
Steve, can you provide any sensitivity on nat gas just given the prices have gone up recently, how should we be thinking about that?
It’s actually a good question because you were talking about natural gas on the context of resin pricing. So nat gas actually does link much more closely to resin pricing because it’s the feedstock that goes into ethylene, ethane and then ultimately produce the plastic that we buy.
I think what I would say the resin market has been particularly firm and it’s actually been moving up. And the – it has more to do with supply and demand than it has to do with the underlying feedstock pricing whether that’s nat gas or anything else. I think the manufacturers have done an excellent job of taking any excess resin they have been shipping it overseas or and really trying to shutdown inefficient supply.
And so the market has been reasonably tight and as a result of that, they’ve been able to get pricing and get the pricing to stick. And it’s for that reason that we’ve decided that we needed to take pricing, we don’t like to take pricing but when your margins are being squeezed on raising resin costs, it sometimes you have to and it’s certainly what we done on Glad. There is no indication that the most recent rise in nat gas is going to drive another leg up in resin prices. The reality is, I think it’s too early to know. But if resin prices move up again, we’ll take a hard look at pricing, if prices stabilize and I think it will be better for us.
Don, can you discuss your expectations for bleach category growth going forward, now that we’re past compaction with some of the advertising and innovation, you’ve got out, do you think you can actually hold this category flat going forward, we can grow the category, where do you think we go back to the declines we saw a few years ago, pre-compaction.
Our best thinking on it right now, there is a category, will be flattish to up 1. In that kind of range it’s more of a historic level, you don’t see a declining here. And one of the things we’re seeing is that we are getting a bit of overdosing now instead of under dosing which is one of the big drags on the categories, people were just under-dosing. Now, that we’ve got proper dosage at a half a cup, we’re seeing people actually slightly overdosed. So that’s probably a good sign that will probably flatten out over time as well.
I’m also seeing people using Bleach more in cleaning and particularly with Hispanic. I mean Hispanic consumers tend to use bleach much more in a cleaning operation than they do just laundry, and when you use it to clean whether it’s the bathroom or the kitchen you tend to use a lot more of it. So our hope and our belief is that, it will continue to be flattish to up slightly.
We’re also seeing I think with all the innovation we got out there in the short-term, it should be able to a little better than that. But we are lapping in 8% and 10% growth level. But we – that’s what we think with the current trends and a little bit of overdosing now, we see it stabilizing. Connie, hello.
Connie Maneaty - BMO Capital Markets
I have to say I was really surprised that you’re shipping only 12% perfect orders since 2009. I would have thought that the 70% that is, this year’s number would have been what you were doing back then. So, can you put that in some kind of context why the level was so low, what the depth and maybe it’s a question of definition. And what’s the gold standard in perfect orders is right now?
See, you’d got a couple of question there. I would say that we were doing a job in 2009 and I think that certainly came through from the feedback we had from our retailers. Perfect order is an incredibly high standard and the definition we use is pretty high. If you have one mistake, however, small whether it’s an invoice that isn’t exactly right, whether it’s a shipment that was one minute late, you’ll drop that number down. So it doesn’t take much to drive that perfect order down even if you were to break apart the individual metrics and look at it, you might say it’s a job well done.
I think we just really tightened up over the last couple of years and have really been able to drive that number up, which is really benefited not just to retailers but ourselves because it saved a lot of money. It’s hard for me to comment on what the industry best practices because every time we’d looked at this, everybody has a different definition. I think what’s important to get a definition that works for the retailer and to make sure that you’re consistent with it and drive it but I’ve seen different definitions in different numbers. I would just say that I think Clorox does a very good job of it today.
I think part of it’s the mathematics of it Connie – I can’t say that we changed the definition but there are four metrics that you multiply against each other. So for example, you had 70% hit rate in each one of those four, you end up with about 20 perfect order when you multiply our 70 by 70 by 70 by 70. So the 70 that we have today is certainly a gold standard because you’ve got to be over 90% on every metric to get it.
Connie Maneaty - BMO Capital Markets
That’s helpful. Thanks.
Chris Ferrara - Wells Fargo Securities
Thanks. I appreciate that you – that you need to work through the numbers in Venezuela before you can kind of give guidance. But when did that switch over? When you’ve actually have to account for Venezuela, if you’re going to have at SICAD or get the balance sheet stuff prepared for in the March quarter. But is it possible that you end up having to account for the P&L impact of it and the transactions in Q1, other words, when will we know that like what you want to look like?
So I think the question is, when will we know what the impact is on the third quarter and in the Q1. The first quarter this calendar year, okay. Again, we’ve got to work through the details. When the government came out with a new official exchange rate and new set of rules and regulations around this, it’s pretty complicated. And so we’re trying to work through to understand what transactions are going to running through CADIVI, what are going through SICAD. Keep in mind today we have not as a company had anything go through SICAD okay. But that’s not actually how the rules are written, they’re written on a forward-looking basis.
So our expectations is that we’re going to take the next 30 plus days really understand these new rules and regulations and then based on that assessment make a determination what if any impact that will have on both the balance sheet and the P&L. But, we should have a clear determination on that before we through the third quarter.
And I wish I can give you more specifics but if you read the rules and I have it’s very complicated and I think we need the time to go through this and do this right. I would also indicate that there has also been an announcement that the SICAD 2, which is an currency rate that’s going to be coming out in the future, we have not seen the details on that so more to come.
Do have a follow up Chris.
Chris Ferrara - Wells Fargo Securities
Unrelated follow up. I just wanted to get an updated view on what your thought process is around gross margin in long-term, right. As we go back post first brand deal gross margin hit around 43%, it’s been a long time now, right, you had [indiscernible] where its kind of deviated a little bit, but it’s pretty much been in a very steady range for a long period of time. How do you view that, will that ever get off of the 43% level in the long-term and what do you think will drive it and will mix be a piece of that and can I see a meaningful driver going forward?
I think there is a couple of reasons to believe that over the very long-term the gross margin should expand on the company. Number one, gross margin has been pulled down quite a bit by the international businesses particularly Argentina, Venezuela. So that will resolve itself over the long-term and we need to be rebuilding our international margins and that will contribute to the company.
We have also got our professional products business which has very attractive gross margin and its growing at rates that are much faster than the rest of the portfolio, which is going to help. And businesses like Burt’s Bees natural personal care, which their gross margins are a thing of beauty and that business is growing very, very quickly. So I think we got some portfolio things that we are going to working in our favor to help gross margins over time that you will start to see but it’s going to take some time.
Okay. We are going to end things there and head to the breakout room. Thank you very much for you attendance.
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