Fitch Affirms The Clorox Company's IDR at 'BBB+'; Outlook Stable

Wed Sep 25, 2013 12:28pm EDT

(The following statement was released by the rating agency) NEW YORK, September 25 (Fitch) Fitch Ratings affirms The Clorox Company's (Clorox) ratings as follows: --Long-term Issuer Default Rating (IDR) at 'BBB+'; --Short-term IDR at 'F2'; --$1.1 billion revolving credit facility at 'BBB+'; --Senior unsecured Notes at 'BBB+'; --Commercial paper program at 'F2'. The Rating Outlook is Stable. Clorox's revolving credit facility, $200 million of outstanding commercial paper and approximately $2.2 billion in unsecured senior notes are affected by this action. KEY RATING DRIVERS: Low Business Risk: Clorox's ratings are predicated on its low business risk, focused strategy of having branded products with large or leading market shares in mid-sized categories, strong credit protection measures and ample liquidity. The company has been able to execute or lead pricing initiatives given strong market shares. As a result, Clorox's financial performance has been consistent for more than seven years. In that time frame, organic revenue growth rates have been in the 1% to 5% range, though led mainly by pricing, and EBITDA approximately $1.1 billion to $1.3 billion. More than 75% of Clorox's revenues are generated in the U.S. where it competes in mature, slow growth categories. Thus absent acquisitions, Clorox's revenue growth has been in the low single digit range and at the lower end of the peer group. For the fiscal year ended June 30, 2013 (FY13) organic revenue growth of 2.8% to $5.6 billion was substantially driven by price increases of 2.7%. EBITDA of $1.2 billion was within the company's historical range. Consistent FCF: FCF improved to $246 million and above Fitch's expectations in FY13 given a benign input cost environment for commodities such as packaging and resins. Average FCF over the past four years has been $210 million and is likely to remain in the $210 to $250 million range next year. There is some pressure on margins due to negative foreign exchange translation, increased brand support to support new product launches and a promotional environment, some increase in resin prices, and difficult inflationary environments in Venezuela and Argentina (approximately 7% of FY13's revenues). However, Fitch anticipates that cost savings and modest revenue growth should offset much of these headwinds supporting solid FCF at least at historical averages. Moderate Leverage: Clorox's commitment to operating with leverage of 2x to 2.5x is a key support to its rating and ended the year at 2.1x, as defined by its credit agreement. The company's stable business model and FCF generation provides flexibility to invest in its operations and comfortably execute moderate discretionary activities within its leverage target. Fitch expects that the company may increase discretionary activities related to additional share repurchases or bolt-on acquisitions as it is at the low end of its leverage target but should remain within 2.5x. There is room within the rating for up to $450 million in additional debt with limited impact to ratings as long as the current operating profile remains. Ample Liquidity: The company has $1.4 billion in liquidity, comprised primarily of its $1.1 billion revolving credit facility which matures in 2017. There are no long term debt maturities until 2015 providing Clorox with significant liquidity in the short term. A $575 million 5% note and a $300 million 3.55% note is due in 2015. These are likely to be refinanced. The revolving credit agreement provides the only financial covenant with a requirement that Debt/EBITDA be no more than 3.5x. As such, EBITDA would have to decline more than 40% from FY13's $1.2 billion to breach this covenant. Given its steady performance and approximately $1.1 billion in EBITDA in each of the past seven years, a marked reduction appears unlikely. Intermittent Input Cost Pressures: Commodities used in the manufacturing process such as resin and packaging can experience periods of price volatility and pressure margins. However the company has demonstrated that it will quickly adjust prices and that margin compression would likely be short term in nature. Between pricing actions and a proven ability to continually reduce costs, EBITDA is likely to remain in historical ranges. RATING SENSITIVITIES: Future developments that may, individually or collectively, lead to a negative rating action include: A change in financial strategy to operate with higher leverage, or completing a large debt-financed share buyback or acquisition is likely to trigger a negative rating action. None of these actions are expected. Future developments that may, individually or collectively, lead to a positive rating action include: The company has the financial flexibility to manage its credit metrics at higher levels given stable cash flows. Operating with leverage of less than 2x and demonstrating a commitment to staying within that band while maintaining its current business momentum would support upward migration of Clorox's rating. Contact: Primary Analyst Grace Barnett Director +1-212-908-0718 Fitch Ratings, Inc. 33 Whitehall St New York, NY 10004 Secondary Analyst Wesley E Moultrie, II, CPA Managing Director +1-312-368-3186 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (August 2013) Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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