S&P Upgrades Clorox (CLX) to 'A-'; Outlook is Stable

August 12, 2016 3:07 PM EDT

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S&P Global Ratings raised its corporate credit and unsecured debt ratings on Clorox (NYSE: CLX) to 'A-' from 'BBB+'. The outlook on Clorox is stable.

At the same time, we affirmed our 'A-2' short-term and commercial paper ratings on the company.

Debt outstanding as of June 30, 2016, is about $2.8 billion.

"The upgrade reflects Clorox's solid profitability, strong cash flow generation, prudent financial policy, and continued strong market share in midsized categories," said S&P Global Ratings credit analyst Diane Shand. It is also based on our expectation that Clorox will maintain its solid credit measures, including sustaining leverage around 2.0x. Clorox's operating performance has been consistently good over the past five years because of its product innovation, focus on reducing costs, and solid marketing and distribution capabilities. This has enabled the company to expand margins each year since 2012. We expect it will continue to expand its EBITDA margin over the next few years given its cost reduction program, focus on its faster-growing brands, and ability to gain distribution. Moreover, we expect it to continue to prudently manage its balance sheet. Despite our expectation for the company to continue to make bolt-on acquisitions, pay a high dividend and repurchase shares, we expect its leverage to remain near 2.0x.

Our ratings on Clorox reflects its solid market position, diversified portfolio of consumer brands, solid cash flow generation, strong credit protection measures supported by a prudent financial policy, and participation in an intensely competitive industry.

Our rating outlook on Clorox Co. is stable. Assuming no significant debt-financed share repurchases or acquisition activity, we forecast credit ratios will remain near current levels because of relatively consistent product demand and ongoing cost-reduction initiatives. This is despite our forecast for tough competitive conditions, and some near-term foreign exchange head winds. We project leverage slightly below 2x and an FFO to total debt ratio exceed 35% for the next two years.

We could lower our ratings if the company adopts a more aggressive financial policy, likely from significant debt-financed acquisitions, or if profits unexpectedly decline, which could occur due to an inability to pass along a substantial rise in input costs combined with intensifying competition. We could lower the rating if leverage sustains near 2.5x. For this to occur debt would need to increase by about $800 million or EBITDA would need to fall about 40%.

We could raise our ratings if the company adopts a more conservative financial policy or if performance meaningfully exceeds our expectations, likely from accelerated growth in its home care and personal care products and from improved pricing power. We could raise the ratings if we believe the company will sustain leverage below 1.5x. For this to occur, we estimate debt would need to decrease by around $500 million or EBITDA would need to improve by more than 25% from current levels. Given our expectations that the company will continue to use substantially all of its free cash flow for growth initiatives, dividends and share buybacks, we believe this scenario is less likely over the next two years.



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