Clover Health Investments Q4 2023 Earnings Call Transcript

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November 15, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Griffin Corporation Fiscal 4th Quarter 2023 Earnings Conference Call. At this time, participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, our Chief Financial Officer.

Operator

Thank you. First, you may begin.

Speaker 1

Thank you. Good morning. It's my pleasure to welcome everybody to Griffin's Q4 and fiscal 2023 earnings call. Joining me for this morning's call is Ron Kramer, Griffin's Chairman and Chief Executive Officer. A press release was issued earlier this morning and is available on our website at www.griffin.com.

Speaker 1

Today's call is being recorded and the replay instructions are included in our earnings release. Our comments will include forward looking statements about Griffin's performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statement in today's press release and in our SEC filings. Finally, some of today's remarks will adjust for items that affect comparability between periods.

Speaker 1

These items are explained in our non GAAP reconciliations included in our press release. With that, I'll turn the call over to Ron.

Speaker 2

Good morning, everyone. Thank you for joining us. We're pleased with our results for the Q4 and the fiscal year. The record performance of our Home and Building Products, HBP segment drove our results as Clopay and CornellCookson continue to deliver strong free cash flow and operating margins. Our Consumer and Professional Products or CPP segment improved in the 4th quarter and we're optimistic about its repositioning for the future.

Speaker 2

For the year, HPP revenue increased 5 percent to $1,600,000,000 growth in commercial volume. As expected, residential volume de backlog levels normalized. HBP had favorable price and mix across all products and channels. HBP's 4th quarter performance benefited from increased investment in marketing and sales for both residential and commercial channels following 2 years of reduced activity due to elevated backlog and extended lead times. Also continues to invest in productivity and innovation to further drive growth, including expanding Clopay's Troy, Ohio Sectional door manufacturing capacity and adding advanced manufacturing equipment to better satisfy customer demand for Premium Products.

Speaker 2

Turning to Consumer and Professional Products segments, CPP's results for the year continue to reflect Challenging market conditions with revenue decreasing 18 percent to 1,100,000,000 All channels and geographies were affected by reduced consumer demand and elevated customer inventory levels. As we announced previously, to address the impact of these market conditions on certain U. S. Product lines, CPP is expanding its global sourcing strategy By utilizing an asset light structure, CPP's U. S.

Speaker 2

Operations will be better positioned to serve customers with a more flexible and cost effective global sourcing model. The global sourcing expansion pipe remains on schedule and within budget. The remaining of Famous locations will be transitioned during And we are pleased by the progress made so far.

Speaker 3

We will continue to provide an update on our

Speaker 2

Turning to capital allocation. In 2018, we took significant actions To deliver shareholder value and strengthen our balance sheet through cash dividends, stock buybacks and debt $82 per share special dividend and announced a $200,000,000 increase to our share repurchase authorization And at the end of fiscal year September 30, We've repurchased more than 4,100,000 shares. During We returned $285,000,000 dividend payments and share repurchases. It's also important to note, we were able to deliver this value while maintaining our leverage at 2.6 times. Since September 30, we purchased an additional $1,100,000 in shares.

Speaker 2

The Griffin Board announced $200,000,000 increase to its share repurchase authorization, bringing the current authorization to a total of $262,000,000 Since April, Griffin has repurchased 3,000,000 shares for a total of $96,000,000 or $37.15 per share through yesterday, November 14, 2023. The share repurchases represent 9.2% of the shares outstanding as of March 31, 2023. During fiscal 2023, we also took action to improve our financial flexibility and strengthen our balance sheet. We increased the size of our revolving credit facility from $400,000,000 to $500,000,000 and extended the maturity of the revolver to August 1, 2028. Also in the Q4, we repaid $25,000,000 of our Term Loan B facility.

Speaker 2

In fiscal 2024, we will continue to invest in our capital allocation strategy with a focus on to support our capital allocation strategy with a focus on opportunistically repurchasing shares, reducing debt and supporting our regular quarterly dividend. Also this morning, the Griffin Board authorized a dividend of $0.15 per share payable On December 14, the shareholders of record on November 28, marking the 49th consecutive quarterly dividend to shareholders. This was a 20% increase over our last quarterly dividend and a 50% increase compared to November 2022 dividend. Has grown at an annualized compounded rate of 18% since we initiated dividends in 2012. These actions reflect the strength of our business as well as our confidence in our strategic plan and outlook.

Speaker 2

I'll turn it back Brian for the financial update and to provide details about our 2024 guidance.

Speaker 1

Thank you, Ron. I'll start with our 4th decreased by 10% and adjusted EBITDA before an allocated amount of $135,000,000 decreased by 3%, both in comparison to the prior year. The related EBITDA margin was 21%, an increase of 140 basis points over the prior year Q4. Gross profit on a GAAP basis for the quarter was $246,000,000 compared to $250,000,000 in the prior year quarter. Excluding items that affect comparability from the current and prior year periods, gross profit was $250,000,000 in the current quarter compared to $253,000,000 in the prior year.

Speaker 1

Selling, general and administrative expenses were $157,000,000 compared to $166,000,000 in the prior year quarter. Excluding adjusting items from both periods, SG and A expenses were $146,000,000 or 22.8 percent of revenue compared to the prior year of $148,000,000 or 20.8 percent of revenue. 4th quarter GAAP income from continuing operations was $42,000,000 or $0.79 compared to prior year loss Corporate and non allocated expenses excluding depreciation were $13,500,000 in the quarter compared to $14,200,000 in the prior year. Net capital expenditures were $4,000,000 compared to $9,000,000 in the prior quarter. The increase was primarily driven by net 20,000,000 The acquisition of the HPP headquarters facility in Ohio, Ohio manufacturing facility for Codsmade in Ocala, Florida As we capitalize on the opportunity to acquire our commercial facilities below market value.

Speaker 1

Depreciation and amortization totaled $15,400,000 for the 4th quarter compared to $17,600,000 in the prior year. Regarding our segment performance, revenue for home and building products decreased 7% over the prior year quarter, driven by residential volume, partially offset by increased commercial volume. Adjusted EBITDA decreased 9% compared to the prior year quarter, driven by the decreased revenue coupled increased from the prior year quarter to $247,000,000 The reduction in revenue was primarily attributable to reduced volume across all channels and geographies driven by soft Consumer demand, elevated customer demand and customer supplier diversification in the U. S. Increased to $14,000,000 from the prior year of $7,000,000 driven by reduced material costs, partially offset by the impact of reduced revenue noted above.

Speaker 1

In May, we announced that CPP is a key question strategy for products manufactured and sold in the U. S. To address evolving market conditions. Utilizing our NAST model enables CPP to continue providing high quality products, positioning and leverage industry leading service and distribution that our customers and consumers expect. Further, these actions position CPP to achieve target EBITDA margins of 15% and generate substantial additional value for our shareholders.

Speaker 1

The project remains on time and on budget with completion expected by the end of calendar 2024. In the quarter ended September 30, CPP incurred pretax cash charges of $10,000,000 related to the expansion of its Global Source strategy. Regarding our balance sheet and liquidity, as of September 33, we had $4,000,000,000 in net debt to EBITDA leverage of 2.6 times as calculated based on our debt covenants. We remain net debt and leverage neutral with the prior quarter ending June 23, even after returning approximately 72,000,000 to The prior year end net debt was $1,500,000,000 and leverage was 2.9x. Regarding our 2024 guidance, we expect revenue of $2,600,000,000 and segment adjusted EBITDA of 5 anticipate 2024 HBP revenue will decrease by 3% to 5% year over year due to the first half of twenty twenty four being compared to the prior year, which included volume from significant residential door backlog and the return to normal seasonal demand patterns, which historically has less demand in our second quarter ended March.

Speaker 1

These factors will be partially offset by market share gains in both residential and commercial. HPP EBITDA margin for 20 Before the phasing of EBITDA performance will follow the same general trends as discussed with revenue with an unfavorable comparison to prior year in the first half followed by a stronger second half. With respect to CPP, we expect 2024 revenue decreased 3% to 5% year over year due to continued soft demand and high customer inventory levels, partially offset by normalized weather. The first half is expected to compare unfavorably year over year as customer destocking continues with gradual improvement during the second half as inventory levels return to normal. CPP EBITDA margin is expected to see modest improvement year over year, particularly in the second half as the AIMS U.

Speaker 1

S. Operations transition to an asset light operating model. Total capital expenditures for fiscal year 2024 are expected to be 70,000,000 This amount includes the capital required to complete the 100,000 square foot expansion and equipment upgrades at Clopay's sectional door manufacturing facility in Troy, Ohio. Depreciation and amortization is expected to be a total of $63,000,000 of which $22,000,000 is amortization. We expect to generate free cash flow for the full year in excess of net income, inclusive of the capital investments.

Speaker 1

We have seen historically, we expect a seasonal pattern with cash usage in the first half, followed by strong second half cash generation. This includes the impact of cash outflows related to the global sourcing initiative, dollars 1,000,000 for fiscal 2024. Our expected normalized tax rate will be approximately 28%. As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters that may impact rate. Now I'll turn the call back

Speaker 2

over to Ron. Thanks, Brian. We enter 20 24 with a proven strategy, skilled team and strong balance sheet positioning us for future growth while remaining flexible in We turn to questions. I want to acknowledge and thank the employee management teams of our businesses Their dedication and our outlook continues to see such operating performance. We'll continue to use the strong operating performance and free cash flow from our business to drive our capital allocation strategy to deliver long term value for our shareholders.

Speaker 2

This strategy will continue to include investing in our businesses, opportunistically repurchasing shares and reducing debt. These actions underscore the confidence of Griffin's Board and management in our outlook and strategic plan. Operator, we're happy to take any questions.

Operator

Thank you. We will now be conducting a question and answer session. At this time, we are limiting effort to one question and one follow-up question. One moment please while we poll for questions. Our first question comes from Joe Alsmaier from Deutsche Bank.

Operator

Please proceed.

Speaker 4

Hey, everybody. Good morning and thanks for taking the question.

Speaker 1

Good morning.

Speaker 4

And congrats on results and the favorable outlook. Certainly appreciate also the detail around the cash flow. Maybe just to start on the HBP business. Regarding the outlook, I think it makes sense a lot of it depends or hinging on sort of the comparison versus the first half of prior year. Sequentially, what you're seeing between your 2 kind of residential and commercial businesses within there?

Speaker 4

Just sequentially, what the momentum in the business looks like?

Speaker 1

We continue to see just residential volume, though we Some market share gains in that in 2024. On the commercial side, We had 5th increase volume in 2023 and we expect 2024 to continue that trend. We continue to have good order volume in that area.

Speaker 4

Sounds good. And then just thinking about the margin guidance in excess of 30%. Certainly, that's above the long term guide. Wondering if there's Something to kind of call out there to bridge between that and the guidance, but also if you're willing to sort of put an upper bound on that guidance rather than just 30% plus.

Speaker 1

Sure. So we do have long term expectations out there of 25% to 28%, even though HBP continues to operate at 30% plus And we expect that we were seeing nothing that is going to change that. We have that guidance out there, perhaps a little conservatism and also considering downturns in the market and that's what we think is the bottom of for our business, those types of margins.

Speaker 2

But 2024, we're off to an excellent start and we see the 30% being Well within our capabilities and sustainability. So the business has proven itself To be resilient, the positioning that Our commercial business, we have an excellent team doing the best In this industry and we continue to be the leader and we expect to both grow the business, take market share and maintain

Operator

Our next question comes from Bob Klubick with J. S. Securities. Please proceed.

Speaker 5

Good morning and congratulations on a great quarter and really great fiscal year as well.

Speaker 2

Thanks, Paul. Thanks. Good morning.

Speaker 5

So maybe my question was going to be before you mentioned Troy, where do you stand in terms of your capacity in Troy? So maybe you could elaborate on Expansion of Troy, what you're using it for and how it will change your throughput and your opportunity, how much You can grow revenue from this, etcetera, please.

Speaker 1

So the project in Troy is to Looking at the higher end of what we the project sorry, the products that we have, We can continue to get that. It also gives us a chance to make sure we have equipment in the future and spread out and maintain our footprint and get away from earnings conference call. 20 fourseven. It gives us a much more normalized cadence to ensure that we can This avoids late shifts and weekend shifts and continues to keep us in a position where we can grow our share.

Speaker 5

Okay. That sounds great. And And the last question is what we've seen in the past changes at HPD that have enabled you to drive margins so high and up to this Strong and now obviously impressive and sustainable level. Just give us kind of just elaborate on the changes from

Speaker 2

So let's start with So, 2018 and the Global Financial Crisis, in 2019, we consolidated plans, we invested in the business, And

Speaker 3

we

Speaker 2

invested in technology at both the plant level, Created software for our dealers to be able to showcase our products for consumers To make ease of the order, we've expanded our relationship over the years with Home Depot and Menards And we bought CornellCookson 5 years ago and expanded our commercial business. So the margin improvement story is a function of getting the strategy right, Getting the operating footprint of this business modernized, building the brand at The consumer level and Clopay represents the leading brand in residential garage doors. We went and expanded our business by buying CornellCookson. So between Clopay, CornellCookson and the brands that we have Clopay and Ideal, We have become the leader in both residential and in commercial. The growth in our business, which we said 5 years ago, we saw the pivot business as being both a way for us to diversify We always understood that it was going to be margin enhancing.

Speaker 2

We went through COVID, we positioned the company to be not just able to get through, but to continue to gain market share. So the margin improvement story has been Happening over a very long period of time. It's now at a level that we believe we're in an elite class of Manufacturers. We don't necessarily get value that way in the public market and we're taking advantage of it. We think this is a very valuable business.

Speaker 3

We think it's on the

Speaker 2

commercial side. The residential side continues to be Strong for us. Our dealer network, our big box positioning makes us the leader in the space And we expect to gain more share and maintain our margins going forward.

Operator

Our next question comes from Tim Wojs from Baird. Please proceed.

Speaker 6

Hey, guys. Good morning. Nice job.

Speaker 2

Thank you.

Speaker 1

Good morning.

Speaker 5

How are you doing?

Speaker 6

I'm well. I'm well.

Speaker 1

Thanks. Maybe just

Speaker 2

Just kind of curious how we

Speaker 6

should think about I know you gave guidance for fiscal 'twenty four and you expect EBITDA to be a little bit above this past year. But how would you kind of think of the cadence there, Brian? And then I'm trying to really kind of dive into like what the exit rate kind of looks like as you about fiscal 2025, just how we should kind of sequence the margin improvement in CPP over the next couple of years?

Speaker 1

Sure. So in the first half of 24, we expect to be behind the first half of twenty twenty three as we've seen high at our customers And the consumer remains soft. In the second half, we expect we have in our numbers the benefit of normalized weather. It's And some benefits from the initiative, the Global Sourcing Expansion Initiative will begin as we get into the second half of twenty twenty four. Exiting twenty The inventory levels to be at a more normalized level at our customers and entering into 2025, we will start selling Sourced material opposed to the manufactured material, which will be in 2024.

Speaker 1

As we get through 2025, we're exiting 25 I mentioned run rate and 2016 fully there.

Speaker 6

Okay. Okay. That's very helpful. Thank you. And then I guess just on the cash side of things, You guys have been really good on the capital deployment.

Speaker 6

How are you thinking about buybacks through fiscal 24, just you've been pretty active here the last few quarters. Is it fair for us to expect that to continue through the year?

Speaker 2

We continue to believe our stock is a compelling value and we'll take a look at it.

Speaker 6

Thank you, guys.

Operator

Our next Question comes from Julio Romero from Sidoti and Co. Please proceed.

Speaker 7

Hey, good morning. On Home Products, I appreciate the revenue kind of guidance you guys gave for both segments. Is the 3% to 5% unexpected sales decline for HBP Can I embed any price degradation there and just maybe speak to how price is holding up within the segment?

Speaker 1

Sure. It does not assume any price degradation. Prices hold You know, quick discipline and that is led by 4 large players.

Speaker 7

Okay. That's helpful. And then just, you guys talked about the CPP Global Sourcing is doing there. Maybe just talk about the competitive landscape within the channels that CPP sells into the larger ones of repair, remodel, retail and international and maybe just talk about How each channel is doing, if you could?

Speaker 1

Sure. Australia, I'll just start with Australia is continuing to perform very well. Canada continues to perform well. Those marketplaces are seeing reasonably good demand. The U.

Speaker 1

S. And the UK are in the same bucket where there's high inventory levels and the consumer is soft. In the UK, they haven't lost any market share. This is a matter of time. They're already an asset light model.

Speaker 1

And in the U. S, we are transitioning to the asset light model, which will help our margins going forward. And we continue to serve the pro with high quality products That are sought after by them and that will continue.

Operator

Our next question comes from Sam Darkatsh from Raymond James. Please proceed.

Speaker 8

Good morning, Ron. Good morning, Brian. How are you? Good

Speaker 2

morning, Paul. How are you, Sam?

Speaker 8

I'm well as well. Thanks for asking. I've got a bunch of questions, but I'll be mindful of time and maybe I'll get back into the queue.

Speaker 1

First one,

Speaker 8

I wanted to clarify maybe or rephrase a question Tim asked earlier. From the $103,000,000 Interest expense guidance for fiscal 2024, how much repo does that specifically assume Beyond what you've already done in October here. Got you. And then as it relates to your free cash flow guide for next Your being in excess of net income, first, does that include or exclude The prospective asset sales from CPP and then related the $70,000,000 in CapEx, is that the new normal run rate going forward? Is that a continuation of Some of the outsized CapEx that we're seeing tail end of this year.

Speaker 1

Sure. A few things there. The cash flow does not assume the sale of any real estate. It does assume the full $70,000,000 of CapEx. The outsized CapEx we saw in the Q4 related to us purchasing real estate.

Speaker 1

Opportunistically, we bought 2 facilities. So that will not continue. The $70,000,000 in $24,000,000 includes the cost for Troy expansion that we described and for that matter any CapEx related to the global expansion for CPP. We do not expect that trend to we continue and it will come down as we get into future years. On the HPP side, roughly 2% And over time on the CPP side, less than 2%.

Operator

Our next question comes from Justin Bergner from Gabelli Funds. Please proceed.

Speaker 8

Good morning, Ron. Good morning, Brian.

Speaker 1

Good morning.

Speaker 3

Good morning, Justin. Good morning.

Speaker 2

We're well. How are you?

Speaker 9

Good. Thanks. Thanks for taking my questions. Just some cleanup questions. On the free cash flow, Does that include the cost of the supplier initiative, the cash costs, the free cash flow being greater than net income?

Speaker 1

Yes.

Speaker 9

Okay. And then secondly, just help me understand, I think you made some earlier Prepared comments on the volume trajectory in HBP over the course of fiscal year 2024? And just any comments on the margin trajectory as well would be helpful.

Speaker 1

Sure. So in the first half of the year, we have a Difficult comparative to the first half of last year because it was elevated by backlog. Volume was elevated by backlog. We also expect this year to be back to seasonal norms, where Q2 is the low point for the business. And then going into Q3 and Q4, it gets back to higher volume in the second half of the year.

Speaker 1

And we expect the second half of the year to be a better comparative and be better results in the second half of this year,

Operator

This concludes our question and answer session. I would like to turn the floor back over to Ron Kramer for closing comments.

Speaker 2

It's been an excellent year and we're very excited about our future. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

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