Fitch Ratings has assigned a 'BBB+' rating to The Clorox Company's (Clorox) $300 million 10-year senior unsecured notes that will be issued today. Management intends to use the proceeds to pay down outstanding commercial paper balances. At Sept. 30, 2011, which is the company's first fiscal quarter, the company had $434 million in outstanding commercial paper.
The notes are issued under the October 2007 Indenture. They contain the customary provision of a change of control triggering event if approximately 50% of Clorox's ownership changes or substantially all of its assets are transferred and ratings fall below investment grade. If those conditions are met, the company must repurchase the notes at 101% plus accrued interest.
Low Business Risk, Declining Leverage:
Clorox's 'BBB+/F2' ratings and Stable Outlook are predicated on its low business risk, big-share brands in mid-sized categories, strong credit protection measures, and ample liquidity. The company consistently generates meaningful free cash flow which has enabled it to reduce debt and leverage. Debt has declined by almost $900 million since 2008 to $2.6 billion at Sept. 30, 2011. Leverage has improved to 2.3 times (x) at the last 12 months ended Sept. 30, 2011, from 3.1x at June 30, 2008. Fitch expects Clorox to balance any acquisition, divestiture or share repurchase program within its 2x to 2.5x leverage target.
Slow-Growth Markets with Moderate Commodity Pressure on Margins:
More than 75% of Clorox's revenues are generated in the U.S. where it competes in mature slow-growth categories. Some categories such as trash bags and food storage have meaningful private label presence. Thus, absent acquisitions, Clorox's revenue growth has been in the low single-digit range and at the lower end of the peer group. Further, commodities used in the manufacturing process such as resin can experience periods of price volatility, and pressure the company's profit margins. However, the company has a long and successful track record of cost savings, a very fast cash conversion cycle with little variability (30-32 days), and strong brand leadership which has allowed it pricing flexibility.
For the first quarter ended Sept. 30, 2011, Clorox's revenues increased 3%, paced by pricing of 3.7%, volume momentum of 2%, and positive foreign exchange translation of 0.7%. However, the 6.4% from pricing, volume and translation was partially offset by (3.3%) in negative mix and promotional spending. Gross margins declined 2.5% to 41.8% as commodities such as resin and other manufacturing costs hampered gross margins by 5.4%, although 2.5% in pricing and cost savings blunted the impact. The first quarter's free cash flow is typically low and was $15 million.
Clorox's free cash flow has normally been in the $300 million range but is at $145 million for the last 12 months due to the negative impact of higher commodity costs, the sales of the auto-care division, and higher capital expenditures. Fitch expects that free cash flow is likely to remain hampered during fiscal 2012 as higher commodity costs in inventory flows through the manufacturing cycle in the first half. Commodity costs recently appeared to have stabilized at high levels. Some stability in prices will benefit working capital along with lower capital expenditures next fiscal year which should result in free cash flow in the $200 million range in 2013. Escalating commodity costs would be the key risk in Fitch's expectations.
Clorox's considerable liquidity is derived from its $1.1 billion unused revolver which matures in April 2013, $270 million in cash, and access to the capital markets. The company has large long-term debt maturities in fiscal 2013 when a 5.45% $350 million note matures on Oct. 15, 2012 and a 5% $500 million note matures on March 1, 2013. Fitch expects that these notes will be refinanced. Additionally, the company is likely to re-negotiate the revolver before its termination date.
Fitch currently rates Clorox's debt as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Unsecured bank facility at 'BBB+';
--Senior unsecured Notes at 'BBB+';
--Short-term IDR and commercial paper program at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011)
-- 'Fitch Removes Clorox's Ratings from Watch Negative following Icahn Withdrawal; Outlook Stable' (Sep. 27, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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