Tuesday, November 11, 2014

US/Venezuela: Clorox to Take $90 Million Charge on Caracas Expropriation, Sues Maduro on Restart of Plant

According to The Latin American Tribune, the Venezuelan government published a resolution last week granting a government-sponsored Special Administrative Board authority to restart and operate the business of Corporación Clorox de Venezuela SA (Clorox Venezuela), which the Venezuela Government had seized in September.

Last week, President Nicolás Maduro announced the government's intention to facilitate the resumed production of bleach and other cleaning products at Clorox Venezuela plants and to operate the business as soon as this week. He also announced his approval of a financial credit to invest in raw materials and production at the plants.

"Clorox, Clorox Spain and their affiliates do not sanction, and will play no part in, any restarting of the production facilities owned and managed by Clorox Venezuela," said Clorox. "The production of cleaning products, in particular bleach, is a highly specialized and technical process. To protect the community, Clorox Venezuela had safely secured the plants in complete shut-down mode before discontinuing operations, including removal of all chlorine and lock-down of equipment. The Venezuelan government's actions raise grave concerns, and Clorox and its affiliates cannot be responsible for the safety of any workers and the surrounding communities or any liability or damages resulting from these activities."

"In addition, Clorox, Clorox Spain and their affiliates cannot be responsible for the safety, quality or effectiveness of any products that may be produced under the government's takeover and any use of the names and trademarks of Clorox Venezuela and its affiliates, including brand names such as Mistolín® and Nevex®, is an unauthorized misappropriation."

On September 22, 2014, Clorox Venezuela discontinued its operations when it could not get access to foreign exchange to pay for supplies and could not raise the price of its products because of Venezuela government restrictions.

Clorox Spain initiated a sale process in hopes of facilitating a swift transition of the Clorox Venezuela assets to a new owner.

On September 26, the Maduro government meanwhile took over Clorox Venezuela's production facilities and administrative offices. Due to this expropriation, Clorox Spain and Clorox Venezuela faced challenges in obtaining an acceptable transaction for the Clorox Venezuela assets, given the lack of certainty that a buyer could take possession of the assets.

"Through its actions, the Venezuelan government has now foreclosed the possibility of an asset sale, and it has frustrated Clorox Spain's efforts to mitigate the adverse effects of the measures so far adopted by the Venezuelan government," said Clorox.

"Clorox Venezuela, Clorox Spain and their affiliates continue to reserve their rights under all applicable laws and treaties," said the company. "Clorox Spain intends to file a Notice of Dispute pursuant to the Agreement for the Reciprocal Promotion and Protection of Investments among the Kingdom of Spain and the Bolivarian Republic of Venezuela, signed in Caracas on November 2, 1995."

Net of anticipated tax benefits, Clorox continues to expect total exit costs and other termination-related expenses to be approximately $70 million to $80 million and cash-related exit costs to be approximately $5 million to $10 million.

COMMENT: In the first quarter, losses from discontinued operations net of income taxes were $55 million, or 42 cents diluted EPS, including net operating losses through September 22, 2014, and the impact of exit and other costs related to the termination of the business. 

Net operating losses for the first quarter, excluding the impact of exit and other costs associated with exiting Venezuela, were $6 million. In addition, the company recorded pre-tax charges for the write-down or impairment of assets of $37 million, recognition of deferred foreign currency translation losses of $30 million, and labor and other exit costs of $6 million. These charges were offset by income tax benefits of $24 million.

"Before exiting Venezuela, the company had anticipated only a modest loss from Clorox Venezuela in fiscal year 2015, as anticipated price increases were expected to reduce the current year loss versus the prior year loss of $23 million," said the company. "These expectations were based on the Venezuelan government's representations that significant price increases would be forthcoming much earlier in the year; however, the price increases ultimately approved were insufficient and would have caused Clorox Venezuela to continue operating at a significant loss."

The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with about 7,700 employees worldwide and fiscal year 2014 sales of $5.5 billion. 

Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach and cleaning products; Pine-Sol® cleaners; Liquid Plumr® clog removers; Poett® home care products; Fresh Step® cat litter; Glad® bags, wraps and containers; Kingsford® charcoal; Hidden Valley® and KC Masterpiece® dressings and sauces; Brita® water-filtration products and Burt's Bees® natural personal care products. The company also markets brands for professional services, including Clorox Healthcare®, HealthLink®, Aplicare® and Dispatch® infection control products for the healthcare industry. According to the company, more than 80% of the company's brands hold the number 1 or number 2 market share positions in their categories. 

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