Hayward Holdings, Inc.

Greetings and welcome to the Hayward Holdings 4th quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Masca, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you and good morning, everyone. We issued our 4th quarter 2023 earnings press release this morning, which has been posted to the Investor Relations section of our website at .hayward.com. There you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer, and Ivy and Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2024 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission that could cause actual results to differ materially. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures. Reconciliation of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation. I would now like to turn the call over to Kevin Holleran.

Thank you, Kevin. Good morning, everyone. It's my pleasure to welcome all of you to Hayward's 4th quarter earnings call. I'll start on slide four of our earnings presentation with today's key messages. I'm pleased to report 4th quarter results in line with expectations. We executed well during the quarter and delivered net sales and earnings growth, record gross margins and solid cash flow. Net sales increased 8% year over year through positive contributions from both volume and price, with gross profit margins expanding 690 basis points for the quarter and 270 basis points for the full year. We also generated better than expected cash flow during a seasonally soft period for cash collections with full year free cash flow increasing 78% and exceeding our guidance range. These are tremendous accomplishments and I'm extremely proud of the entire Hayward team. 2023 was characterized by a normalization of supply chains, channel inventory de-stocking and a return to established seasonal buying patterns. We are encouraged to enter 2024 with more normalized channel inventory positions as reported by our primary distribution partners in the US. The channel continuously recalibrates the level of inventory on hand to align with various inputs like near term outlook for end demand and cost of capital, but the post pandemic reset is largely behind us. We executed many important strategic initiatives throughout the year to strengthen our business and drive profitable growth. This included advancing our technology leadership position with innovative connected pool solutions, leveraging our culture of continuous improvement and operational excellence and expanding commercial relationships across sales channels. I will make additional comments on our strategic accomplishments in a moment. We enter 2024 expecting a return to sales and earnings growth on a full year basis. For the full year 2024, we expect net sales to increase approximately 2 to 7%. Now turning to slide five, highlighting the results of the fourth quarter and full year. I'm pleased to report solid execution and growth in the quarter. Net sales in the fourth quarter increased 8% year over year to 278 million driven by positive volume and price. By segment, net sales in North America increased 10% with our largest market, the United States, increasing 12%. Europe and rest of the world declined 4% with Europe approximately flat. I'm encouraged by the sales trends in both the US and Europe. We're focused on driving growth in the commercial segment of the market and commercial pool sales increased double digits for the quarter and the year. As I mentioned, we achieved a record gross margin in the fourth quarter. Gross profit margins expanded 690 basis points year over year and 140 basis points sequentially to 49.2%. Adjusted EBITDA margin in the fourth quarter was .2% and adjusted EPS was 20 cents. For the full year 2023, net sales reduced 24% to 992 million with adjusted EBITDA of 247 million, each consistent with our most recent guidance. We delivered strong profitability despite reduced sales volume and I'm particularly pleased to see gross margin expansion of 270 basis points to 48.1%. Adjusted EBITDA margin for the full year was a healthy .9% and adjusted EPS was 56 cents. Turning now to slide six for a business update. End demand for Hayward products was consistent with our expectations in the quarter with the US performing solidly, but the overall near-term demand environment remains uncertain. Non-discretionary aftermarket is resilient, but demand for discretionary new construction, upgrade and remodel has been impacted by current economic conditions and rising interest rates. Our channel partners have been rebalancing the level of inventory relative to the current economic outlook, normalized OEM lead times and higher cost of capital. While inventory levels have largely normalized at this point, the channel remains cautious and continuously recalibrates the level of inventory on hand to be appropriately positioned to support their customers. Turning to price versus cost. We implemented annual price increases to maintain price cost neutrality. The pool industry has been very disciplined on price historically and we expect to realize net price increase of approximately 2% in 2024. We demonstrated our operational excellence capabilities again in 2023, contributing to strong gross margin expansion on reduced sales volumes. We also completed footprint consolidations during the year in both North America and Europe. As a reminder, we initiated a plan during the third quarter to consolidate facilities in Spain to get closer to key customers, better leverage of modern facility and support margins. We continue to prioritize working capital management and inventory reductions. Total inventory declined 24% in 2023, contributing to positive cash flow performance and 31% since the peak in 2022. Finally, during the fourth quarter, John Collins was promoted Chief Commercial Officer. John now leads sales, marketing, product management, customer service in North America and global industrial flow control. I'm confident in my senior leadership team and our ability to deliver on our commitments to shareholders. In addition, we continue to invest in technology leadership with the establishment of a business intelligence team in the fourth quarter, focused on progressively leveraging data analytics and scaling intelligent process capabilities. Turning now to slide seven. I'd like to share some perspective on the year. As expected, we faced challenging economic conditions in 2023. I'm proud of the performance of the Hayward team as we accomplished many important strategic initiatives to strengthen our position as a premier company in the attractive pool industry. As a technology leader, one of our biggest differentiators is our ability to innovate and I'll discuss some of our upcoming product introductions in a moment. We also demonstrated our longstanding commitment to operational excellence and continuous improvement. This included right sizing our production levels and cost structure, further consolidating our agile and vertically integrated manufacturing footprint and progressive investments in automation and other productivity initiatives. The individuals who build and service pools are the backbone of our industry. The voice of these customers is critical to the development of our product and commercial strategies. At Hayward, we believe in supporting our loyal dealers and investing to build strong partnerships with market leading programs and events. This includes our Totally Hayward loyalty program, customer rewards trips, and partner summits to celebrate and reflect on our collective accomplishments and help dealers grow their business and thrive in the years ahead. Hayward is committed to delivering impressive operational and financial results in the most responsible way and we continue to make great progress on our sustainability journey. During the year, Hayward received a regional top rated award by Morningstar Sustainalytics and an MSCI upgrade to A rating. As just one example of our success, the Hayward team embraced the challenge and achieved meaningful reductions in water and energy consumption in our facilities in 2023. These achievements contributed to strong profitability and cash flow during the year, allowing us to reinvest in the business to provide superior products and services for our customers and value creation for our shareholders. Turning to slide eight, I'd like to highlight some key new product technologies being introduced in early 2024. First is the new Micro Channel Temperature Control Unit for pools and spas. This is the first deployment of Micro Channel Temperature Exchange technology in the pool industry. This unit provides more efficient temperature transfer, reduced weight, and improved corrosion resistance for coastal installations. Three models are available, heat only, heat cool, and cool only. The ability to cool to 40 degrees is important for installations in hot and humid environments where pool water temperature can be uncomfortably high. This also opens a new market opportunity for chiller only installations to satisfy the increasingly popular wellness trend of cold plunge pools. Next is our new all new OmniPro app designed for authorized trade professions. This exciting evolution in our leading Omni app enables these professionals to have remote access to all Omni connected homeowners they service. This new platform has two key benefits, real time proactive monitoring of the operation of the pool and remote expert configuration of equipment via the cloud. Importantly, the OmniPro app provides significant value to these professionals giving them the opportunity to promote other sales and service initiatives through a direct connection to the homeowner creating greater stickiness for hay work. Finally, the ColorLogic 2.0 platform embodies the next generation of color LED lighting. Homeowners are increasingly requesting additional lights to be added to their pools, spas, water features, and landscapes to create dramatic nighttime effects and attractive entertainment spaces. ColorLogic 2.0 offers the flexibility designers want with directional optics to ensure full light saturation of the water and a quick disconnect plug for ease of maintenance. In our future earnings calls, I look forward to introducing even more great product technologies designed to delight homeowners as well as increase the competitive edge Hayward enjoys in the market. With that, I'd like to turn the call over to Iveon who will discuss our financial results in more detail. Iveon. Thank you, Kevin, and good morning.

I'll start on slide nine. All comparisons will be made on a year over year basis. As Kevin stated, we are pleased with our fourth quarter financial performance. Net sales increased in line with expectations for the quarter. We delivered outstanding gross margin expansion and generated better than expected free cash flow. Looking at the results in more detail, net sales for the fourth quarter increased 8% to 278 million. This was consistent with our expectations and driven by 6% increase in volume and a 2% positive net price realization. Gross profit in the fourth quarter was 137 million. Gross profit margin increased 690 basis points year over year and 140 basis points sequentially to a record 49.2%. Adjusted EBITDA was 76 million in the fourth quarter and adjusted EBITDA margin increased 660 basis points to 27.2%. Our effective tax rate was .6% in the fourth quarter compared to .2% in the prior year period. The change was primarily due to the timing of discrete items. Adjusted EPS in the quarter was 20 cents. Turning now to slide 10 for a review of our full year results. Net sales for fiscal year 2023 decreased 24% to 992 million. This was in line with our most recent guidance and primarily driven by a 28% reduction in volume, partially offset by a 3% positive price realization, and a 1% contribution from acquisitions. Gross profit for the full year was 477 million. Gross profit margin increased 270 basis points to 48.1%, a very strong performance amid 28% lower volumes. Strong margins enable us to reinvest in the business. In 2023, we increased research development and engineering investment by 10% to 25 million to support our commitment to growth and innovation. SG&A expenses for the full year declined 6% to 234 million, driven by lower discretionary and volume-based expenses. We delivered the full year expected annualized savings of approximately 28 million under our enterprise cost reduction program. On a full year basis, SG&A as a percentage of net sales was 23.5%. Adjusted EBITDA was 247 million, with an adjusted EBITDA margin of 24.9%. Our effective tax rate was .2% in 2023 compared to .4% in 2022. Adjusted EPS was 56 cents for the full year 2023. Now I'll discuss our reportable segment results in more detail. Beginning on slide 11, North American net sales for the fourth quarter increased 10%, 238 million, driven by 8% higher volumes and 2% favorable net pricing back. Sales in the US increased 12% in the quarter and Canada declined 11%. The Canadian market has been more significantly impacted by economic conditions and the sharp increase in financing costs. Gross profit margin increased 810 basis points to a robust .1% and adjusted segment income margin was 31.7%. Turning to Europe and rest of the world, net sales for the fourth quarter decreased 4% to 40 million. Net sales benefited from a 2% favorable net pricing and 2% from foreign currency translation but were adversely impacted by a 9% decline in volumes. Net sales in Europe were approximately flat with the rest of the world declining 7%. Gross profit margin was .2% and adjusted segment income was 20.2%. Turning to slide 12 for a review of our reportable segment results for the full year, North American net sales declined 26% to 823 million, driven by 29% lower volumes, partially offset by a 2% favorable price impact and 1% contribution from acquisitions. Sales in the US declined 23% and Canada reduced 48%. Gross profit margin was .9% and adjusted segment income margin was 28.9%. In Europe and rest of the world, net sales for the full year declined 18% to 169 million, benefiting from a net pricing increase of approximately 4%, offset by 22% lower volumes. Sales in Europe declined 24% and rest of the world reduced 10%. Gross profit margin was .2% and adjusted segment income margin was 20.4%. Turning to slide 13 for a review of our balance sheet and cash flow highlights. Net debt to adjusted EBITDA was 3.7 times at the end of the year, we continue to prioritize the leveraging to our targeted range of two to three times. Total liquidity at the end of the year was 460 million, including 203 million in cash equivalents and short-term investments, plus availability under our credit facilities of 256 million. We have no near-term maturities on our debt or interest rate swap agreements. Term debt of 1.1 billion matures in 2028 and the undrawn APR matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans. Our borrowing rate continues to benefit from the 600 million of debt currently tied to fixed interest rate swap agreements, maturing in 2025 through 2027, limiting our cash interest rate on term facilities in 2023 to 6.5%. Our average interest rate earned on global cash deposits for the quarter was 4.9%. Overall, we are pleased with the quality of our balance sheet. The business has strong free cash flow generation characteristics driven by high quality earnings, which support our growth investments. Cash flow from operations for the full year increased 59% to 185 million due to effective work in capital management, primarily reduced inventory levels. Total inventories declined by 69 million or 24% in 2023 and declined nearly 100 million from the peak in the third quarter of 2022. Full year 2023 capex of 31 million was consistent with the prior year. Free cash flow increased 78% to 154 million in 2023. Turning now to capital allocation on slide 14. As we've highlighted before, we maintain a disciplined financial policy and take a balanced approach, emphasizing strategic growth investments and shareholder returns while maintaining premium financial leverage. In the near term, we are prioritizing capex growth investments and reducing net leverage within our targeted range of two to three times. We also continue to consider tuck in acquisition opportunities to complement our product offering, geographic footprint and commercial relationships, in addition to opportunistic share repurchases. Turning now to slide 15 for our outlook. We're introducing 2024 guidance that reflects a return to sales and earnings growth driven by solid execution across the organization, positive price realization and continued technology adoption. The guidance range also contemplates continued uncertainty around global macro conditions, consumer spending, coupled with our current expectations regarding channel inventory levels. For the full year fiscal 2024, Haywood expects net sales to increase approximately 2% to 7% or 1.01 to 1.06 billion dollars. This outlook reflects continued resiliency in the North American non-discretionary aftermarket with the more discretionary elements of the market, new construction, remodel and upgrade impacted by the economic and interest rate environment, particularly in -U.S. markets. We expect a positive net price contribution of approximately 2%. Our business is seasonal and we expect normal seasonal strength in the second and fourth quarters, with the first quarter representing the lowest sales quarter of the year. We anticipate full year 2024 adjusted EBITDA of 255 to 275 million. We also expect solid cash flow generation again in 2024. This should result in free cash flow conversion of greater than 100% net income with free cash flow of approximately 160 million. We are confident in our ability to successfully execute in this dynamic environment and remain very positive about the long term growth outlook of the pool industry, particularly the strength of the aftermarket. And with that, I'll turn it back to Kevin.

Thanks, Ivan. I'll pick back up on slide 16. Before we close, let me reiterate the key takeaways from today's presentation. Consistent with our expectations, we closed out 2023 with a return to sales and earnings growth in the fourth quarter. We demonstrated strong execution throughout the year, delivering impressive gross margins and cash flow growth, despite lower sales volumes, allowing us to fund our growth strategies. We're bringing innovative new solutions to the market, better supporting our customers and improving the pool ownership experience. With channel inventories largely normalized, we are well positioned for growth. I'm excited about the prospects for the pool industry and our performance. Momentum is building and Hayward is leading. I'm confident that we have the right strategy and talent in place to drive compelling financial results and shareholder value creation. With that, we're now ready to open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your lives in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from Ryan Merkel with William Blair. Please proceed with your question.

Hey, guys, I'd love to start with the guy right off the bat. Can you tell us what you're expecting for gross margins for the year? How much you expect that to be up? And then can you confirm for the first quarter? Should we be thinking about sales at about 20% for the full year? Good

morning, Ryan.

In terms of the gross margin, we're calling for gross margins in 2024 to be 49.6 for the full year, which is an increase of just over 150 basis points. We'll see good growth in North America. We'll actually continue the great trend that we exited out of Q4 over 50%. For a year, we're expecting over 50% in the North American business, which is a good outcome. In terms of Europe and the rest of the world, a little bit more challenge there. But we're looking for whole margins fundamentally at the same level that we exited out

of 2023. And then for the first quarter, I just want to make sure that we have it right about 20% of the full year. So looking at sales, roughly slattish year by year.

Yeah, I mean, as we thought previously, we're coming back to a normal seasonal trend. Q1 is typically around 20 to 22% of the full year. Very similar to Q3. This year, we're expecting around that 20% mark for the Q1. Q2, Q4 being the largest seasonal periods for us. One seasonal selling, in terms of Q4, early buy selling.

Got it. OK. And then for my second question, what are you assuming for stealth through at retail and the guide? Just given the D stock last year, it'd be helpful to sort of think about underlying demand.

Yeah, I mean, the guidance that is contemplated is assumes approximately about a 5% macro contractions in North America and a little bit more in the Europe and rest of world markets. So we are expecting contraction really around the discretionary side of the market, with the aftermarket remaining very resilient.

Yes, so the discretionary aspects, Ryan, do the upgrade, the remodel in US, we'd be seeing that potentially, you know, 10% off, which would flow through for the US region at about 5% volume overall, pivoting to international, which would include Canada, as I'm describing it here, the discretionary there again, new remodel upgrade, we could see that upwards of 20% off, which would flow through the international volume down about 10. Overall, and you know, the difference between those obviously is our expectation to remain flat for the more resilient aftermarket break fix aspects of the global market. I know you heard it in the prepared remarks and other, you know, aside from volume price, we're expecting a positive price contribution in the 2% range. And then potentially, you know, some modest, maybe a 1% FX headwind as we work through 2024.

Got it. Very helpful. Best of luck. Thank you,

Ron. Our next question comes

from the line of Sari Broditsky with Jefferies. Please proceed with your question.

Hi, good morning. So you talked about inventory levels being normalized, distributors remain cautious. We did hear from one that they're looking to lower inventory levels this year. So maybe just quantify how you're thinking about destocking till in this year, given potentially maybe a little bit more inventory reductions to go.

Yeah. Good morning, sir. Yeah. So from a destock standpoint, you know, the way we look, you know, at destock, you know, up till this point was kind of getting back to historical days on hand. And as we work through really the third quarter of this year, we believe that we got to that level, back to historical days on hand in the channel. As we look at the 2024 guide, you know, we are aware, we work closely with our channel partners, you know, around their desires to be more efficient with inventory management. Obviously, none of us want stock outs, but there's also a desire for some continuous improvement and efficiency gains given the higher interest rate environment. So we are guide contemplates what we believe is achievable in incremental reductions in 2024 with our channel partners. And we'll continue to work closely with them to ensure we've got the right inventory in the right places at the right time.

Appreciate the color. So one thing we've heard about is that the pull forward impact on discretionary items such as heaters that we saw during the pandemic, could you just talk about when we should think about demand for those type of products being normalized?

Yeah, I mean, we certainly some product categories that are more discretionary in nature, and I would say, you know, we saw, you know, some increased demand early on in the pandemic and then maybe some some slowing of those heaters have been mentioned. I think cleaners would be another category there. I think you could probably put above ground product in the same category. So we believe that we're getting to much healthier inventory positions with those products. You know, the overarching statement is we believe that that that our D stock is complete. But, you know, there might be some product categories in some geographies, even where there's still a little bit of work to do. But we're also light in some areas where we're seeing good sell through into the marketplace. LED lights or even controls come to mind as a few that are that are doing well. So, you know, we think as we work through the early part of 2024, any any excess in a particular product category, we're going to be able to to address that as the season opens across all markets here into into Q2 of 2024.

Great. Thanks for taking my questions.

Our next question comes from the line of Jeff Hammond with KeyBank. Please proceed with your question.

Hey, good morning, guys. Good morning. Just done. Just done. I guess just to wrap up, you know, inventory D stock. It sounds like the D stock played out as you thought. But, you know, maybe the customers are being a little more cautious to bring levels back up. But, you know, just just with respect to the early buy, what what did you learn from that around? You know, their their confidence levels or inventory levels, you know, et cetera. Just just trying to, you know, tie that up a little bit.

Yes. So, you know, as we looked at maybe the second half of the year, you know, early by really gets published, as you know, late Q3. So we start getting a read on that, as we mentioned in prior earnings calls, I would say an exiting Q3 from a flow order standpoint, which would be in season orders. Maybe saw that slow a little bit in anticipation of early by. You know, I know we mentioned this on our last earnings call. Early by really met our our expectations. It increased year over year. And we saw that as a as a positive sign, both from an inventory D stock, working that down, also with some expectation amongst the channel was very close with the end market around some opportunities for for sell through into twenty twenty four. So as we look on the on the early by, that's you know, that's just concluded. We were pleased it came in to our expectations and we saw increase year over year.

Jeff. OK. And then just around market share shifts, obviously you guys want a lot of share during covid and then we're expecting some normalization. I'm just wondering if that normalization has played out or if there's kind of more to go around, you know, that that market share settling.

You know, here at Hayward, you know, we we believe that, you know, as the curtain closed on twenty twenty three, that, you know, the covid experience and some of the pickups and the or the challenges that occurred through that, you know, the dust has settled on that. We know it was an extraordinary period. It created some opportunity for some opportunistic share pickup based upon, you know, availability or supply chain challenges. As you've heard, you know, we've been very upfront. First of all, there isn't perfect data, but we do work with our channel partners on sell through. There's also some wholesale shipment data that would, you know, that indicated share gains for us. And we were always very upfront in saying that as supply chains normalized, we would expect some of that habitual buying to to maybe go back to who the who the supplier was. We believe that as the dust settled from here on in, market share is kind of back to maybe where we were expecting to be. And from here, it's going to be customer service relationships, supply chain capabilities and product introductions is really what's going to drive future future share gains for us. And that's what what we're focused on and committed to at Hayward.

OK, appreciate the color coming.

Our next question comes from Rob Wertheimer with Milius Research. Please receive your question.

Yeah, I think somebody, my question is a little bit on how the year progresses from your view and when you kind of see what real end market, real sell out, real consumer demand is on upgrades, on remodels and on new pools. I mean, you get to June and the year is kind of baked in that front. And then we're looking forward or you just talk about how you see where that real demand is when you see it.

Yeah, good morning, Rob. It's out of here. You know, we

were calling for this year to be to be a very normalized seasonal year, which is great to get back to. You know, we normally see the most channel sell out in Q2 and then to a lesser extent in Q3 as the season comes to a close, Q1 and Q4 tend to be the slowest sell out periods in the year. But we expect that regular cadence to occur this year. And as I mentioned earlier, you know, we're going to get back to a normal sell in type cadence with Q1, Q3 being the reduced quarters for us and Q2, Q4 being the higher quarters. So, you know, after three years of this similar patterns to where this business used to be historically, we very much see the sell out looking as it did historically with Q2 being the largest sell out period.

Okay, that's helpful. I kind of understand it. I'm just thinking about a lot of cross currents for consumer where the economy is kind of healthy. You're baking in a reasonably, you know, I don't know, conservative, but reasonably measured view on discretionary spend. And I don't know if we hit, you know, may and people are actually spending. And that's when you kind of know that it

or

not, I'm not trying to predict

the direction. That's what I was just pressing for. Yeah, okay, I understand. I mean, look,

you know, the guidance, the guidance considers where the macro economy is today. It considers that, you know, we have this compression on the new construction side, remodel and upgrade, upgrade defined as equipment additions to the pool pad. You know, we want to see how the season develops as we step into Q2. And how the how the consequential permitting takes place in the second half of this year, which sets us up for our view on 2025. But, you know, while the economy remains in this, let's call it uncertain macro condition, we're going to say that discretion is going to be more impacted here in

the front half, given it's the seasonal period for 2024.

Got it.

That's clear. Okay, thank you.

Our next question comes from the line of Mike Halloran with Baird.

Please proceed with your question.

Good morning, everyone. So just a couple here. First, could you just talk through the sellout trends that you've seen from your distribution base, North America, over the last, I don't know, pick a number of six, seven, eight months here. I mean, when you look at the latency and the trend there, are you seeing relative stability within the sequentials? Or, you know, basically, I know that we see you over your pressure on a lot of the remodel, large scale remodel, the new build type work. But are we at the point where that's a little bit more stable, as you think back over the last few months here? Or has there been more volatility in there than normal?

I would actually say as we look at Q4, Mike, that, you know, overall sellout was reduction year over year was, call it high single digit reduction year on year. But if you look at the more recent data point around Q4, we actually saw improvement against that full year number. So Q4 on a year over year comps standpoint, we saw it, you know, while we're certainly not celebrating because it still has a long way to go, but we saw it as a positive indication in Q4 on a year over year standpoint. So the most recent data point we were encouraged by actually with some of the sellout activity Q4 versus prior year.

And sequentially though, is it pretty normal seasonally?

Yeah, I mean, what we're seeing throughout 23 is this reversion to normal seasonality again with sellout being reduced in Q1, higher Q2, a little bit lower Q3 and lower Q4. So we're seeing that normal curve that's in develop in the business right now. And we've seen, when we look at the regions, we've seen really strong performance in the Sunbelt regions, particularly in markets like Florida, which seem to have done super well here most recently.

Thanks for that. And then could you put the commentary that your distribution partners are being very cautious about bringing inventory on in historical context? Meaning, how does what they're doing today compared to, you know, pre COVID, I know, kind of, there's some years in the era where weather was a factor, but just thinking about what their normal inventory levels look like and what they're comfortable holding, how would you compare what they're doing today versus maybe a more normalized period?

Yeah, I mean, if you go back pre pandemic, the channel held, depending on what time of year you're dealing with, all the way up to five, five and a half months of inventory at times, particularly as they entered into the peak seasonal periods. So that, I think, given the current cost of capital, given progressive improvements in data analytics, system management, and I'll come back to that in a second, there's been a lot of movement to reduce working capital. And we define these stock as getting back to the historical days on hand. That's happened largely through the end of Q3 and certainly it was the end of 2024 on a global basis. We're largely back at those historical days on hand, but we have heard from channel partners that they would like to initiate a continuous working capital focus that will lead to further reduction of the inventory days on hand. And we believe our guidance accommodates that. But what does that mean? That means when you think about thousands of distribution points, both at the distributor level and at the retail level, and as Kevin said, make sure that you have the right time and the right location, those working capital improvements will take some time to realize and we've got to be very thoughtful about that as we step over the next several years. I think we're all as an industry investing in data analytics, you know, improving our capabilities to get visibility as to how a problem moves in relation to end demand. And we are all investing to reduce our capital in that particular area. But it's clear that across the industrial sector, everybody's looking to reduce working capital. We see that over the course of several years as a great outcome. You know, it's much healthier for the entire supply chain to be in a tighter inventory

position. Great. That was very helpful. Thanks, guys. Appreciate it.

Our next question comes from the line of Andrew

Carter with Steele. Please receive with your question.

Hey, thanks. Good morning. First question I want to ask is about the net price realization you have for the year, plus 2%. I want to kind of understand what exactly is factored in there. I'm assuming a higher price increase went into effect in North America that you're assuming versus Europe. Is there any kind of return to a more normal promotional cadence, perhaps pre-pandemic in there this year that wasn't accomplished last year? Is an increase contemplated in October 1st in that guidance? I think you took one in October 1st this year, or are you hoping to go back to 25? And then the last one is kind of the vendor rebates issue that happened last quarter. Is that anomaly kind of already done, or does it still have a catch-up? And also, I'm assuming with the vendor rebates, you've lowered the incentive levels. Have you kept incentive levels for vendor rebates the same this year as last year?

Thanks. Let's see. We'll tag-team that. I didn't get all that down, but we'll get through the questions. Redirect us if we get to it at all. So in terms of last quarter, the vendor rebates, as we indicated at that point, we saw that as a one-quarter phenomena. We indicated that would not repeat itself with the net price performance in Q4. I think that showed through in the results there. In terms of, well, what I should say on that is, we then transitioned channel partner rebates from the end of the seasonal year, which is September 30th, to more the calendar. So Q4 in 2024 will be the year where there might be some catch-up, either good or bad, depending upon what the financial results against targets indicate. In terms of programs offered, I would say they're consistent with what they've been in the past, obviously based upon some volume expectations that we set alongside with our channel partners. So I wouldn't really look for anything meaningfully to change year on year there. In terms of promotional activities, as I indicated, I forget this question I was answering on the share. I would really say, again, we're back into, I'd say, more normal post-pandemic or pre-pandemic period where the industry had some expectation of some promotional activity. And that's what we're expecting through our commercial team working with the channel and the end market, that there'll be more normalized promotional environment that we experience pre-2020 when the pandemic really dismissed the need for that, since there was such demand creation through the pandemic. I know I missed some things in there, Andrew. I'm looking to IV in here to see. You got anything to pick up there? Yeah, let me just quickly go through

a few points, Andrew, I think, just to close it off. Yes, the 2% net price does assume slightly higher net price realization in North America than Europe and the rest of the world. The rebate anomaly that was apparent in Q3 of 2023 is behind us. We returned to positive price contribution in Q4. For the four-year, we're at approximately 3% for 2023. So that anomaly is behind us. In terms of the overall 2% that we're guiding on for 2024, it matches up against our inflation expectations for the year. And we haven't, in our guide, contemplated yet any further price increase for Q4 next year. We'll make that determination as we get closer when we get better visibility of inflation going forward into 2025.

Andrew, thank you. Thank you. You got every single point, and I apologize. I have a bad habit of that, asking too many questions with one. So I'll just ask it real simple. I've got, on the second one, I've got your COGS outlook kind of down 1.3 to down 3.6, kind of matching what your underlying kind of implied volume outlook is of minus 1.2 to 3.8. That's with FX at 1%. I guess in that outlook, are you assuming inflation on the materials or anything in there? Because I guess that implies material costs are essentially neutral year over year. Thanks.

Yeah, sure. I mean, we haven't assumed underlying inflation to be 2%, but we're going to continue to drive efficiencies through our manufacturing locations. We've got a great legacy of doing a number of things in lead manufacturing principles. I've come back before over the last 18 months, and we've done a really good job there across the manufacturing footprint. Additionally, we've gone through a consolidation program in Europe. We consolidated two of our manufacturing facilities in Spain into one, and that will yield some benefit once we fully commission that facility. So we're doing a lot to continue to realize positive gross margin development despite maintaining price

cost neutrality.

Thanks. I'll pass it on.

Our next question

comes from a line of Nigel Coe with Wolf Research. Please repeat with your question.

Thanks. Good morning. Just a couple of clarifications here. So, Kevin, based on your comments about expectations between the US and international, so mid-single digit down in terms of units down in – sorry, discretionary. Let's talk about the discretionary here. It seems like we're looking at sell through down in the sort of mid-single digit zone with, and therefore with the guide embed, maybe eight to nine points of benefit from prior year inventory drawdown. Just want to make sure that the math there is correct. But my first question is really about the – you mentioned cost control throughout the slides and your prepared remarks. I'm just wondering, as we think about recovery, do we need to think about investment spending ramping up or exact comp or any other kind of discretionary costs coming back in my criminal margins from here?

Nigel, I'll take the first part of the question, then I'll hand it off to Ivan on the second half. Yeah, I think the math that you're doing is spot on. Again, I'll just walk through – I guess the first time I answered this, I didn't specifically address what we think was a headwind in 2023, how it may become a bit of a tailwind in our guide. So again, two points of price overall when you look at the global volume decline, we see that in the 6% to 7% negative range or downrange. We could see it high single digit, maybe 10% tailwind from the deed stock reversing in 2024 and then again potentially a percent on the FX. So I think that should all tie out to what you were backing into when you asked the question,

Nigel. So Nigel – yeah, sorry, can you

repeat the second half to you fading in

and out, Nigel?

Yeah, so it's about the discretionary cost control. You mentioned cost control, which is obviously very natural when you have volumes down as much as you are. But just thinking about the recovery, are there things we need to consider in terms of investment spending, exec comp, etc., anything discretionary that might crimp incremental margins on the way back up?

Yeah, so I mean the guidance that we've given to the year at the adjusted 'A'a level of 255 to 2575 fully contemplates all the costs that we're planning to put in there, including compensation. It also includes the continuous thematic of investing into research, development, and engineering. In 2023, we invested greater than – I think it was around about a 10% increase of our D&E expenditures here over the year, and we will continue to do that to drive the technology platform across the product line. We're not at the point yet where we need to reinvest in G&A. We do have some plans to invest in sales personnel, and that also has been contemplated within the guidance that we've given. But we're going to be very methodical as we go forward over the next two years to make sure that cost base is kept in line with the growth on the top line.

Great. And then a quick follow-on. The free cash flow of 160, I'm assuming the priority is debt reduction in 2024. So does the 160 deployed in debt reduction, is that embedded in your interest expense guidance?

So the free cash flow generation contemplates cash flow from operations, which obviously considers aggressive reduction in the net debt position in the business. We will make a determination on how we tackle the growth debt, but certainly the accumulated cash earnings in the business will continue to be invested and earn at a very great as demonstrated before. But at the end of the day, the 160 million reflects the conversion of the data pre-cash flow once you take out capex interest and tax, and also considers a modest work in capital improvement primarily in inventory over the

next two years. I'm not sure that's going to be a good example, but I think it's a good example. OK, very helpful.

Thanks. Our next question comes from the line of Rafe Zadrzic with Bank of America.

Please receive with your question.

Hi. Good morning. Thanks for taking my question. Morning, Rafe. First, just following up on Nigel's question, the decrementals have been really impressive over the last year. How do we think going forward here, if volume growth does improve in the second half of the year and then into 25, how do we think about incrementals longer term, either from a gross margin or without perspective?

Yeah, I mean, historically, the incrementals in the business used to be in the high 30s. We've done better than that. Most recently, as we've moved through both incrementals and decrementals, what I would say is we strive to achieve at least what we have historically, if not better, on the And then just

on the, can you talk about what the full year sellout was for 2023 versus the sell-in? I think last quarter, you'd given it sort of estimated D-stock number, I think, of 160. Did that come in about what you were initially expecting?

Yeah, so we don't get perfect sellout information across the globe, so we have to kind of triangulate that number based upon those in the U.S. that do report that type of information to us. What we do know is across the entirety of the globe, there was D-stock, meaningful D-stock over the 2023 time period. Again, what we've put into our guidance is approximately 100 million or 10% of that not repeating in 2024, which Kevin and Kat just brought through. That's what we feel comfortable with right now, given some of the macro uncertainty that we've got in the business. But what we'd say is we are largely D-stock now back to historical days on hand, and that was really achieved coming out of 2023.

The last one just very quickly. It looks like this SG&A, are you getting for maybe slight de-leverage or flatish year over year? Can you just sort of bridge us to where you're getting leverage? What are the puts and takes on SG&A?

Yeah, so we have progressively built our G&A team, our general and administrative team up over the last three years, and so we'll continue to leverage on that. We have made some discrete investments into G&A, specifically around our business intelligence capabilities. We've built up recently a team in that regard, and we look for great leverage on that investment over the next couple of years. But we really do have an opportunity to hold that G&A base now, given what we exited out of 2023, and maybe just slightly over inflation. And so that would be a great opportunity for margin leverage as we go forward. And then obviously in the manufacturing cost base, we have a good amount of latent capacity that we can continue to tap into, as well as continuing to execute on-lead manufacturing strategies to reduce cost.

Great, thank you.

Thank you. Mr. Holler, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, Christine. In closing, I'd just like to thank everyone for their interest in Hayward. Our business is very well positioned to navigate the near-term challenges and deliver value for our stakeholders in the years ahead. This wouldn't be possible without the hard work, dedication, and resilience of our employees and our partners around the world. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on the first quarter earnings call. Thanks, Christine. You may now end the call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.