Hayward Holdings, Inc.

We issued our second quarter 2024 earnings press release this morning, which has been posted to the investor relations section of our website at investor.hayward.com. There you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Halloran, President and Chief Executive Officer, and Ivian 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 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. Reconciliations 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 Halloran.

Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's second quarter earnings call. I'll start on slide four of our earnings presentation with today's key messages. I'm pleased to report second quarter results consistent with expectations. We executed well again this quarter in a challenging industry environment, delivering strong profitability, increased cash flow, and an improved balance sheet. We continue to advance our growth strategy centered around technology leadership, branded multi-channel strength, and operational excellence, and expect this to result in above market growth and shareholder value creation. I'm proud of the performance of the entire Hayward team during the quarter. Net sales increased modestly year over year as positive net price realization was offset by lower volumes. Gross profit margins expanded 290 basis points to a record 51%. This represents the sixth consecutive quarter of year over year gross margin expansion. Cashflow generation was also solid during the seasonally strong period for collections with cash from operations increasing 26% year over year in the first half. Strong profitability and cashflow enabled us to further strengthen the balance sheet and fund our growth initiatives. During the quarter, we reduced net leverage by more than a full turn sequentially on an organic basis from four times to 2.8 times, excluding the use of cash to acquire corking at the end of the quarter and paid down our entire incremental term loan B on a voluntary basis. Clore King, a leader in commercial pool water sanitization, is a great strategic fit with a strong financial profile, advancing our position in the commercial pool market. We're very excited to welcome the Clore King team to Hayward, and I'll share additional details on the business later in the presentation. Finally, as we enter the second half of the year, we are narrowing our full year guidance, reflecting better than expected margins offset by a more challenging demand environment, particularly in new construction and remodels and certain international markets. For the full year 2024, we now expect net sales to increase approximately two to 5% and adjusted EBITDA to increase approximately three to 9%. Turning now to slide five, highlighting the results of the quarter. Net sales in the second quarter increased modestly year over year to $284 million, consistent with expectations. By segment, net sales increased 2% in North America and declined 6% in Europe and rest of the world. Europe outperformed with 7% sales growth in the quarter, whereas rest of the world's sales declined 21%. We are focused on driving growth in the commercial segment of the market, both organically and inorganically, through acquisitions like Clorking. Commercial pool sales in North America continue to increase on an organic basis following a multi-year trend of robust growth. As I mentioned, gross profit margins expanded 290 basis points year over year to a record 51% in the second quarter. Adjusted EBITDA margin in the second quarter increased 100 basis points year over year to 29% and adjusted EPS increased 11% to 21 cents. Turning now to slide six for a business update. In-season demand for Hayward product was consistent with our expectation in the quarter, with North America and Europe outperforming the rest of the world. Aftermarket repair and replace remains resilient, but demand for the majority of new construction and remodel continues to be impacted by current economic conditions and higher interest rates. While we see the number of U.S. permits down in the mid to high teens, the value of permits also remains resilient, indicative of relative strength in the high-end new construction and remodel segments of the market. We expect similar trends in the second half of 2024. We continue to execute many important strategic initiatives to strengthen our business and drive profitable growth. This includes introducing innovative new products to advance our technology leadership position, furthering developing our go-to-market capabilities, and improving channel and dealer support. On the fourth quarter earnings call, we introduced the new microchannel temperature control unit, a first-of-its-kind product providing the ability to both heat pool water and cool to 40 degrees with a single unit. Customer response has been extremely positive, with pool owners excited about the ability to utilize the spa for a cold plunge. Differentiated, innovative products like this add value to our customers and drive engagement with target accounts. We continue to expand in key U.S. markets like the West and South Central through investments and focus teams working under common leadership to both support existing customers and target successful dealer conversions. These teams comprise business development managers working side by side with sales and technical service. This structure is key in managing the lifecycle for newly acquired accounts from engagement to education, conversion, and ongoing long-term support. One specific initiative of note is the launch of the Hayward hub DFW in Texas. This first of its kind Hayward facility will serve as a training service and support center for dealers and trade professionals in this important growth market, driving customer intimacy and loyalty to Hayward. Since the opening in mid Q2, nearly 200 individuals from more than 30 companies have already attended training sessions on the latest Hayward technology at the hub. we believe this will be a winning formula as we grow in this key market. To further support our existing dealers, we introduced the new OmniPro app earlier this year, providing significant value to trade professionals in the form of real-time remote monitoring of a homeowner's pool and equipment configuration via the cloud. Builders see the value of proactive remote monitoring of pools, particularly through the construction completion and warranty period of their installations. Similarly, large professional service organizations benefit from this business efficiency tool, allowing them to prioritize and respond to service needs. We are pleased with the progress of these initiatives and well positioned to drive future growth. Moving on to the channel, our partners are pursuing leaner inventory positions as they work to achieve increased efficiency goals. We continue to work with them to optimize the level of Hayward inventory on hand and the SKU mix by facility to reduce the occurrence of inventory stockouts. The pool industry has always been very disciplined on price, and we previously implemented an annual price increase for 2024 to maintain price-cost neutrality. We continue to expect positive net price realization of approximately 2% for the full year, consistent with the contribution in the first half. We are implementing value-based pricing strategies and skew rationalization to optimize pricing and ensure our products are priced appropriately relative to the exceptional value provided to pool owners. We expect to realize incremental benefits from these initiatives going forward. In May, we further strengthened our senior leadership team by filling three key roles. This included the appointment of Ray Lewis as chief human resource officer, Kevin Gallagher as chief engineering officer, and Dario Vicario as general manager of Europe and rest of the world. We were delighted to welcome these accomplished leaders to key positions within the organization. Our company is already benefiting from their diverse backgrounds and proven track record of success. Finally, we were honored that Green Builder Magazine recognized the Hayward TriStar XL variable speed pump as a sustainable product of the year. This underscores our commitment to sustainability and environmental responsibility as we strive to produce the most energy efficient solutions for our customers. Turning now to slide seven. As I mentioned previously, we are excited about the opportunities to develop our commercial pool business. And a key building block is the addition of Chlor-King, nearly doubling our sales in the commercial market. Operating in Atlanta, Georgia, Clark King has grown into the leading natural water sanitization technology company in the commercial pool and recreational water space. This business, led by co-founder and CEO Steve Pearce and his team, brings a wealth of industry knowledge and experience, as well as relationships with pool designers, trade professionals, specialty distributors, and operators. Innovative technologies are patented with products specified into projects all over the world. Key products include high-capacity salt chlorine generators and ultraviolet disinfection systems. These technologies help lower annual operating costs and are environmentally sustainable, avoiding the need to handle and store large volumes of chlorine while enhancing water quality for our customers. These products are complementary to Hayward's existing commercial product range and technologies. Importantly, CloreKing sales organization and trade relationships expand the size of the addressable market for other Hayward products. Similarly, Hayward's domestic and international scale afford CloreKing product growth opportunities. Other operational synergies related to our manufacturing base, global supply chain, and distribution network present compelling financial opportunities. CloreKing and Hayward's existing commercial pool business will integrate and operate out of Atlanta under Steve Pierce's leadership. We look forward to future reporting of our growth in this important vertical. With that, I'd like to turn the call over to Ivian, who will discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on slide eight. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased with our second quarter financial performance. Net sales were in line with expectations for the quarter, and we delivered outstanding profitability. Cash flow generation was robust, enabling early debt repayment and the strategic acquisition of Corking. Net leverage reduced meaningfully in the quarter. Looking at the results in more detail, net sales for the second quarter increased modestly to $284 million. Net price realization of positive 2% was offset by 2% lower volumes. Gross profit in the second quarter increased 6% to 145 million, and gross profit margin increased 290 basis points year over year, and 180 basis points sequentially to a record 51%. This is a strong result, primarily driven by continuous improvement and efficiency gains in our manufacturing operations. Adjusted EBITDA increased 4% to 83 million in the second quarter, and adjusted EBITDA margin increased 100 basis points year-over-year and 780 basis points sequentially to 29%. Our effective tax rate was 20% in the second quarter compared to 32% in the prior year period. The change was primarily due to timing of discrete tax items. Adjusted EPS in the quarter increased 11% to 21 cents. Now I'll discuss our reportable segment results. Beginning on slide 9, North American net sales for the second quarter increased 2% to $241 million, driven by favorable pricing. Net sales increased 1% in the U.S. and 5% in Canada. We were pleased to see increased orders and sales in the quarter in Canada, despite the significant impact in that market due to economic conditions and higher financing costs. Gross profit margin increased 300 basis points year-over-year and 110 basis points sequentially to a robust 52.9%, representing the sixth consecutive quarter of year-over-year margin expansion. Adjusted segment income margin was 33.7%. Turning to Europe and the rest of the world, net sales for the second quarter decreased 6% to 43 million due to lower volumes. Net sales increased 7% in Europe and declined 21% in the rest of the world. The increased sales in Europe is encouraging, but certain Middle East and Asian markets continue to feel the impact of current macroeconomic and geopolitical conditions. Gross profit margin increased 170 basis points year over year, AND 320 BASIS POINTS SEQUENTIALLY TO 40.8%. ADJUSTED SEGMENT INCOME MARGIN WAS 19.8%. TURNING TO SLIDE 10 FOR A REVIEW OF THE BALANCE SHEET AND THE CASH FLOW HIGHLIGHTS. WE ARE VERY PLEASED WITH THE BALANCE SHEET IMPROVEMENT AND THE STRONG CASH FLOW PERFORMANCE IN THE QUARTER. NET DEBT TO ADJUSTED EBITDA IMPROVED SIGNIFICANTLY ON A SEQUENTIAL BASIS FROM FOUR TIMES AT THE END OF THE FIRST QUARTER TO 2.8 TIMES AT THE END OF THE SECOND QUARTER, EXCLUDING THE IMPACT OF THE CLOCKING ACQUISITION. including the cash outlay for the acquisition. Net leverage was 3.1 times. Total liquidity at the end of the quarter was $448 million, including cash and equivalents of $215 million, plus availability under our credit facilities of $233 million. We have no near-term maturities on our debt. The term debt matures in 2028 and the undrawn ABL matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans. Our borrowing rate benefits 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 our term facilities to 6.5% in the second quarter. Our average interest rate earned on global cash deposits for the quarter was 4.8%. The business has attractive free cash flow generation attributes with seasonal strength in the second quarter related to payment collection of early buy receivables. Year-to-date cash flow from operations was $210 million, a 26% increase compared to the prior year period. This improvement reflects continuous improvement in working capital management, primarily a 12% year-over-year reduction in inventory levels, excluding acquired inventories. CAPEX of $11 million in the first half was below the prior year period due to project timing, resulting in the year-to-day increase in free cash flow of 32% to $199 million. We continue to expect free cash flow generation of greater than 100% of net income, with full-year 2024 free cash flow of approximately $160 million. As previously discussed, we completed a voluntary early debt repayment in the second quarter, given our increasing cash balance. Specifically, we used cash on hand to repay the full outstanding balance on our incremental term loan B of approximately $123 million. We expect this to result in annualized interest expense savings of approximately $10 million or $4 million net of interest income. Expected net savings for fiscal year 2024 are approximately $3 million, reflecting the partial year impact. Turning now to capital allocation on slide 11, 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 prudent financial leverage. In the near term, we are prioritizing organic and inorganic growth investments and debt repayment. We continue to consider other strategic acquisition opportunities to complement our product offering, geographic footprint, and commercial relationships, in addition to opportunistic share repurchases. Turning now to slide 12 for the outlook. Entering the second half of the year, we are narrowing our four-year guidance, reflecting better than expected margins, offset by a more challenging demand environment, particularly in new construction and remodels and certain international markets. The guidance range contemplates uncertainty in global macro conditions and consumer spending trends, coupled with our expectations regarding channel inventory levels. We continue to anticipate solid execution across the organization, positive price realization, and increased technology adoption. The full fiscal year 2024, we now expect net sales to increase approximately 2% to 5% to a range of $1.01 to $1.04 billion, including a contribution from the clocking acquisition of approximately 1%. We now expect adjusted EBITDA of $255 million to $270 million or an increase of approximately 3% to 9%. We anticipate full-year free cash flow of approximately 160 million. Our net interest expense expectation of 63 million refracts the early debt repayment. The effective tax rate forecast remains approximately 25% for the remainder of the year, and our capex spending forecast is approximately 30 million. Looking out beyond 2024, we remain very positive about the long-term health and growth profile of the pool industry, particularly the strength of the aftermarket. We are confident in our ability to successfully execute our strategic growth plans. Finally, I'd like to note that the recent crowd strike outage had no material impact on the company. And with that, I'll turn the call back to Gavin.

Thanks, Ivan. I'll pick back up on slide 13. Before we close, let me reiterate the key takeaways from today's call. We delivered second quarter results consistent with expectations in a challenging environment. Our team continues to execute, delivering record gross margins and robust cash flow, allowing us to fund our growth strategies and fully repay our incremental term loan early. We are excited about the addition of Clora King's innovative technologies and the many opportunities we see to leverage a broader commercial portfolio, better serve this growing market, and drive profitable growth. We added proven talent to the senior leadership team, and I'm confident that we have the right strategy 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. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. Our first question comes from the line of Ryan Markle with William Blair. Please proceed with your question.

Hey, everyone. Thanks for taking the questions. I wanted to start off with the acquisition of Clore King. Sounds like a really nice business. What are the one or two bigger opportunities, Kevin, that you see there?

Yeah. Good morning, Brian. Yeah, this is a really, it's a great company and we're really excited to welcome them to Hayward. It positions us really well in the commercial market. You know, commercial has performed extremely well, aside from 2020 when, you know, so many of the commercial pools were not allowed to open. But we've seen great double-digit growth in the years since then. You know, what I think the strength, there's many, you know, when it comes to Clark King. But, you know, when you look at their leadership in the commercial sanitization category, They've experienced a nice growth trajectory over the recent past, great margins. But what they really bring to the company is a real stronghold in the Class A segment of the commercial market. Commercial is really defined by two categories, Class A and Class B. Class A is really defined as more of those larger bodies of water, greater than 100,000 gowns, competition pools, water parks, et cetera. That's really where their sweet spot is. Hayward, you know, really participates in the class B, which is, you know, the mix is about 15% class A, 85% of the market class B. And we really refer to that by the acronym of HMAC, which is hotel, motel, apartment, condos. We have a nice product line that speaks and plays well in the Class B, but Chlor-King really gives us some added exposure and a product line to be able to leverage more broadly in the Class A. There's all kinds of cross-selling opportunities for some of Chlor-King's products to be introduced more so into the Class B, where we're already participating, and likewise, some of the Hayward products into the Class A segment. So lots of great, as I mentioned in my prepared remarks, great relationships that, frankly, we don't have today around the pool architects and designers, builders, operators, specialty distribution. So, you know, Steve, we've actually had a relationship with Steve and the Clore King team team for several years. We actually private label and have for many years a water sanitization that we sell into the Class B. So we know each other, have a high level of intimacy with each other, and really looking forward to integrating and continuing our growth trajectory in the commercial space.

That's great. Thanks for that. And then for my follow-up, I was curious on the longer-term outlook for new pools. Obviously, this year is going to be pretty weak. Do you still think that we can do 90,000, 100,000 pools once interest rates come down? Are you hearing from contractors that it's really just a function of rates, why the market is so weak?

Yeah, you know, I mean... You're familiar with the long-term new construction profile. And this year, most of us in the industry are sort of coalescing around this 60,000 or so, which would be another 15% decline off of last year's 25% decline. There is heavy reliance upon interest rates. I do think, though, that while I'm not sure I can I can predict 90,000 there. I do think that this is absolutely a low water. And as we do get some relief around interest rates, that the long-term viability and the desire to have a pool in the backyard is still highly desirable. You know, our single family home starts has not really kept up with the family formation over the last several years. You can really say dating back to the GFC. So that's going to be addressed at some point, which is a strong correlation point for new pool construction. So those secular trends around migration, as well as time at home, interest in having a healthy outdoor lifestyle, I think this is all tailwind for when interest rates you know, finally start to abate, and we're looking forward to hopefully 2024 being a low-water mark, and we can get back to new pool construction in the near future.

Got it. Thanks. I'll pass it on.

Thank you. Our next question comes from the line of Nigel Koh with Wolf Research. Please proceed with your question.

Oh, thanks. Good morning, everyone. Thanks for the question. Good morning. Just so looking at the full year outlook, I think we're now sort of one before excluding the impact of the acquisition. So maybe just unpack the adjustment you're making to sell through versus maybe a bit more pressure from inventories. That would be helpful. You know, obviously we saw from Pool Corp that equipment was down 2% in their numbers. You obviously had plus 2% in North America. Just wondering what you saw on sell-through in the second quarter as well.

Yeah, sure. Let me start that one. Let me first address the narrowing, what contributed to the narrowing of the guidance, Nigel. Let me start with what is unchanged from our original bridge that we talked through earlier in the year. We continue to expect price to flow through at a couple percent for the year. We continue to assume a little bit of headwind, a percent or so on FX. And really our overall expectation for the absence of the inventory D-stock is felt in 2023 not to repeat in 2024 we would assume that to still be kind of in the plus 10 range overall what has changed is what we'll call just market market volume uh originally we laid out uh in north america the uh the discretionary aspects of the market to be down 10 percent we're now increasing that to down 15 percent based upon What we're seeing through permits is one data point, but also interactions with the channel and with our dealer partners. And then pivoting to Europe, rest of the world, where that assumption on the discretionary aspect was at the negative 20%. Similarly, we're increasing that an extra 5% to a down 25%. So if you flow that through as a percent of our business, that would really take market volume from an original... expectation of down call it six and a half percent to now down uh eight and a half percent uh and then as you mentioned you know the uh the plus one percent in the uh in the second half uh from the core king acquisition would really get us to to that midpoint uh revision of around three and a half percent with the range of two uh two to five percent okay um important question

Go ahead, Nigel. Just to sell through for second quarter, but that was a very fulsome answer, so thanks for that. So it sounds like Clora King is about $20 million of annualized revenue. Just want to make sure that's the case. And then you talked about some of the share initiatives on the West Coast, in particular the Sunbelt States. Maybe just talk about So give us an update in terms of the initiatives in train and perhaps some of the success you've seen with those dealer conversions.

Just to calibrate you on the caulking, it has an annualized revenue result of around $25 million. It's a little bit more weighted in the first half of the year. The second half of the year, around $12 million. about dealer conversions, Bill?

Yeah, on dealer conversion, we have a lot of great initiatives underway. I would say in some of those markets where we would say we have shared growth opportunities, specifically the West, as you mentioned, and then also what we call the South Central around some additional on-the-street selling resources with marketing support, coming out of North Carolina. Obviously, the hub, which I spoke about in my prepared remarks, is really a pilot. We would like to see that proof of concept play out. And it would be our expectation that we'll continue to roll that out in some additional markets going forward to really be that one-stop shop for our dealers from our service and a support and a training standpoint. You know, and then we've spoken in the past, there are some nuanced differences. From a product standpoint, you know, products that, uh, that may be selling the Northeast or in Florida, you know, um, you know, small footprint heater, for example, is something we brought to market a couple of years ago. That's doing extremely well in the West coast where there's smaller lot lines and need to get the equipment set on a, on a, on a smaller square foot pad. So, you know, lots of, lots of attention being paid and resources being allocated inside. our organization to continue focusing on those lower share markets where, frankly, we have opportunity for growth and we see nice trend line occurring for us in those markets. Great. Thanks, Kevin.

Thanks, Knight. Thanks, Monica.

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

Hey, good morning, everyone. Good morning, Jeff. Hey, just wanted to go back to inventory. It doesn't sound like you've changed the D-stock assumption, but I'm just wondering, you know, with kind of the pool pre-announcement and some of the softer, you know, dynamics on the discretionary, what maybe you're seeing the same or different around, you know, the want to hold inventory, you know, at the channel level and then, you know, any early discussions about how, you know, early buy might play out, you know, the same or different.

Yeah, from an inventory standpoint, I would say we don't have perfect information, but talking in generalities, when I was walking through the bridge just a moment ago on guidance, I would say that plus 10 was laid out. I think that that still allows us to contemplate what we're seeing with the channel in terms of overall inventory held. And I think our assumption still holds there. I would say in the first half, we've probably seen a little bit more aggressive movement on the channel inventory, which frankly is not unexpected when you really look at the environment that we're operating in. You know, less sales out the door obviously would require less inventory to maintain days on hand. You know, by this point, I think we were all assuming or at least hoping for some interest rate reductions which have not occurred. So, carrying costs across the broad channel has not reduced at all, you know, creating that incentive for less inventory carry. And frankly, us OEMs, you know, I think are pretty responsive right now from a lead time standpoint to be able to serve the demand as it comes. So, you know, we've seen, you know, some movement down our original expectations. And as we play through the second half of the year, we still think that that assumption around the positive 10 will, uh, will play out for us in, um, in full year, 2024. Um, as for early by, you know, it's a bit early on that. So we're still defining and writing the plan, but we are definitely intending on offering, uh, early by, uh, later this year into the 2025, um, season. You know, based on conversations that we've had, we would expect solid participation in the program as we roll it out. I know you know this, but for the broader audience, you know, Early Buy is really designed as a win-win for both distributors and us manufacturers. Elements of that program, you know, is avoidance of some future price increases. and allows us to level load our factories and ship at our discretion. So, you know, based upon the inventory, obviously these two questions are linked together, you know, with inventory reduction working through the end of the season here, what we would expect is a strong response to the early buy program that will roll out in the next, you know, call it month or so to the channel.

Okay. Thanks for that, Keller. Um, just, just on clorking, um, you know, more critical mass with this deal in commercial pools, maybe just talk about where you see the best opportunity for, for revenue synergies, other than pulling you through you, pulling them through, and then just what's the, the market and pipeline look for, you know, other bolt-ons that continue to, to, to fill out the commercial pool space.

Yeah. I think as I look, I spent some time describing Class A and Class B there. We had some products that we sold into Class A, but Chlor-King really does increase the catalog that we can now offer to Class A. That said, there's still some important higher volume products uh, products in the class a that, that us nor core King have that presents opportunity for us either from an organic, uh, or an inorganic standpoint, like some larger horsepower pumps, for example, or higher capacity filters or heaters would be some that, uh, that I think are future opportunities that we'll continue to, uh, to solve, uh, for. But Class B, we're really happy, really pleased with what the catalog looks like there. We've been seeing for years running double-digit growth. Commercial is really not a market that Hayward focused on historically. This is a relatively new development for us over the last five to eight years or so where we focus. So You know, we're excited, and there's other opportunities organically and inorganically to now leverage a broader set of relationships that Clore King bring to us, and we're anxious to get on with this and keep growing this commercial business, Jeff.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.

Hey, thanks. First question I wanted to ask, looking at your free cash flow outlook for the year at 160, given the year to date and what you're implying in the EBITDA, I'm implying a pretty heavy working capital drag, more significant than the past couple years. Is that predicated on a pre-buy, a pretty significant increase in the pre-buy, therefore upside onto cash flow if pre-buy doesn't work? or something else in the inventory purchase levels? Thanks.

Yes. Good morning, Andrew. We do expect a robust early buy that will raise the cash receivable position at the end of the year, year over year. That's contemplated in our guidance. Additionally, our inventory position, which we have worked very diligently to reduce both year over year and from the end of 2023, We will probably take a strategic position in finished goods as we enter 2025 in anticipation of some of the ERP developments we have planned for 2025. That is still to be determined exactly how we invest in that particular working capital position, the timing of that, but we have for now included that within the Earnings Balance Sheet Forecast.

And I know that you're not going to really give any commentary around future pricing decisions today, but kind of regarding, number one, kind of the pricing you've taken, is there anything you've seen that prices are too low or too high for your products? I mean, equipment's been pretty resilient. And the second thing is, I know you mentioned earlier on about kind of SKU optimization value. Would you potentially lean on that heavier product? and if you had to take a year off from pricing or something like that, or would it give you the option to take a year off? Just anything you can help us with there. Thanks.

Yes, SKU rationalization has certainly received a lot more attention in the last year or so. We had some meaningful rationalization flow through product management, operations, and engineering last year. That said, there's plenty more to be done there. We're conscious that this isn't really done in episodes, but this is something that's ongoing throughout our organization and continue to tighten up that product catalog, which then allows us to obviously look at what the value creation is within each product line and go through that process of looking very objectively at the value, the life expectancy, some of the functionality that you get from the equipment that we offer through the channel to the homeowner. So they're absolutely linked. I'm not sure if I see it as one replacing the other in and off here. I think we can do both. But to your point, I think that historically pricing has really been sort of an offset inflation. This market has been able to do that and it's stuck. But we're certainly spending a lot more time looking from a skew standpoint and then also from a value creation. Frankly, I think that there's still plenty of products in the lineup that are not priced commensurate with value given. So I think there's plenty of opportunity, not just to offset inflation, but to take a real objective look and see what kind of maximization we can get in future pricing.

Thanks. I'll pass it on.

Thank you. Our next question comes from the line of Suri Boroditsky with Jefferies. Please proceed with your question.

Hi, good morning. I guess first, building on your last discussion, you know, could you quantify the potential for skew rationalization and just like how that impacts margin performance as we think about the out years?

Sorry, could you just repeat the question, Sherry? Which quarter?

Could you quantify the potential for skew rationalization and how that impacts margin performance in the out years?

Yeah, sure. So our skew rationalization program initiated probably close to a year ago now. We've made very good progress. We're tackling the U.S. facilities first, and then we'll progressively roll it out. We don't give specifics on the exact cancer skews that we're rationalizing, but it's been a meaningful reduction. through the end of Q2 here. As it implicates all of our working capital initiatives, as well as our margin initiatives, it will have a positive impact on our ability to price goods or evaluate pricing methodology. So we look to gain continued margin development through a more funded SKU range. It will continue to enable our manufacturing locations manage the throughput in a much more efficient way so that will be a positive there it will continue to allow us to have best in cash procurement programs and manage the inflation through the business and then additionally as we think about developing the product line into the future we're more focused on on the on the key platforms across the business so a lot saying that we think as we step into 2025 All of that will provide us with margin expansion opportunity and will also help our working capital as well as the channel's working capital.

I appreciate the color. Then on the lower channel inventories, you talked about distributors relying on your lead times for inventory this year. Is this a 2024 response, or do you expect distributors to continue to get more efficient on inventory and rely on OEMs more? And does that impact working capital for you? Thank you.

Yeah, I mean, I think we'll continue to work very closely with our channel partners to ensure right inventory, right time at right location. I think one of the real strengths of Hayward historically and will continue into the future is our responsiveness from a supply chain and manufacturing standpoint. So I think our channel partners can continue to look to us to be able to respond timely to whatever changes may be occurring in the marketplace, but obviously there is keen interest with the channel to have product ready at the point of sale when the dealers come in the front door. So we're going to continue to work closely with them to make sure that our demand signals out to our supply chain and our factories are commensurate and well coordinated with the channel. We feel really good that when the D-Stock really ended late last year, I like being in this position of having the right days on hand and being able to respond very timely and our sales in to match what their sales out into the retail marketplace. So, you know, I think that that's been a great development here in 2024, and we'll look to continue that into the future.

Thanks for taking the questions. Thank you. Our next question comes from the line of Mike Halloran with Baird.

Please proceed with your question.

Hey, good morning, everybody. This is for Mike. I want to follow up on Cerise's questions. You know, obviously margin performance here is healthy against lower volumes and challenge-bend markets. You called out a little bit of mixed benefit, but then obviously operational efficiencies as well that should prove a little bit more structural and sustainable. Maybe talk about how you think about margin sustainability, and should we expect pretty normal seasonal margin cadence here in the back half?

Yeah. Good morning. Do we think this is sustainable? Absolutely. I mean, we've done a lot of work over the course of the last four years to improve the quality of our gross margin. Obviously, we were fighting for a period of time inflation. That's firmly in the rearview mirror in terms of price cost management of inflation. And what you're seeing now as margins continue to accrete positively is is a result of the very hard work that we've done to continuously improve the productivity in our manufacturing footprint. We've gone through a period of site rationalization over the course of the last four years. We will always have that opportunity as we continue to inorganically grow. Pretty much every facility that we've acquired over the last couple of years. We've been able to collapse that production into the existing Hayward footprint. We'll not do that with the most recent acquisition. That's a very self-sufficient business operating very excellently. But as we go forward, we can platform other businesses into our manufacturing location. We have a long legacy of Six Sigma Kaizen, improvements across our facility, a lean manufacturing culture that continues to produce here in the medium term. So all that saying, we feel very comfortable that we can sustain the gross margin as we continue to grow. We have tremendous capacity utilization available to us today. We're probably around approximately 60% cap utilized. So we can continue to grow this business without having to add any additional capex. In terms of the cadence for the balance of the year, yes, we do get a little bit of detriment in Q3. Q3 looks very similar to Q1 in terms of the size of our sales in the business. And consequently, when we step from Q2 down to Q3, we get a little bit of leverage penalty. But then as we step up in Q4, we get that leverage back. But as you know, Q4 tends to be the early buy discount period, so that we'll have to wait and see how that margin opens up. We have a price announcement that goes into effect October 1st. We have discounts that go into effect October 1st on early buy, and then we'll be able to evaluate the net position and its impact on margin. But we feel comfortable with where we're at. We're very pleased with the year-to-date performance of gross margin, greater than 50%. That's a phenomenal result for us. And as a management team, we continue to cement that in over the course of time.

That's super helpful. Thank you. Maybe switching gears to capital deployment. You know, it sounded like inorganic maybe moved its way up the priority list in the prepared remarks, but maybe I'm just leaning on the fact that we just finished on CloreKing. Can you maybe talk about how you're thinking about prioritization of commercial versus traditional residential pool? And then are there any particular products or technologies that you're trying to prioritize or highlight as you filter through your funnel?

Let me just touch on our standard capital allocation process, because we have not deviated from that. We'll always take our first priority as investment back into our business. We're an OEM, we're a manufacturer. We take care of our facilities and we look to continue to upgrade those facilities with a capital expenditure profile of between two to 3% per year. This year we're calling for around 30 million. It's a little bit lower than we had originally said, and that's purely a consequence of timing of some of the investments that we're putting into our US facilities. Secondly, Our priority in the short term here has been to delever our balance sheet, and we've done a really good job, we believe. Sequentially, we've moved down from just over four times now to 2.8 on an organic basis, taking into consideration corking. We're at 3.1 times, and we'll continue to move into our target range two to three times over the balance of the year. And then thirdly, inorganic activities, M&A. It's always been a growth attribute for this organization. It will continue to be a growth attribute, given the very rich cash flow profile of this organization. Corking was our most recent great acquisition. We do nurture a pipeline that covers both residential and commercial in focus. And then finally, As I mentioned, our cash profile does afford us the opportunity to also think about return to shareholder. Right now, no specific commitments there, but we do have remaining $400 million on our share repurchase program that's available for deployment at the appropriate time.

I would just add, as Ivan mentioned, I mean, we maintain a healthy pipeline. Our market position is residential is is significantly stronger than where we are in commercial so that may afford us more opportunity from a commercial standpoint as we look at building out the product the product catalog but you know I'd say in terms of technology I mean we're very strong what we call core pad equipment pumps filters know cleaners etc so things around automation and around more the lifestyle products will continue uh to be key points of emphasis for us both organically and as we contemplate inorganic opportunities going forward thank you i'll pass it on thank you our next question comes from line of race jedrosic with bank of america please proceed with your question

Hi, good morning. Thanks for taking my question. I wanted to ask on some of the comments or just follow up on some of the comments on the permits trend that you're seeing on the new construction side. Can you remind us the typical lag between your business and permits? How do we think about whenever new construction bottoms starts to inflect at some point, when would that actually flow through into your revenue?

Yeah, I think it's probably a couple months, Rafe, is how we would define, you know, what we see in terms of permitting. You know, if you were to follow one specifically through the process, I think you'd be somewhere between kind of 45 to 60 days or so, depending upon what the workload of the specific dealer is that's filing the permit rate.

Okay, so it's a pretty quick... It's a pretty quick turnaround from the permit to your sale. Okay. And then... Now it is.

Now it is. I would say that wasn't, you know, if we were having to ask that question during COVID, that would have been a longer tail on that. But I think in general, you're, you know, you're kind of talking, you know, two months or so.

Okay. That's helpful. And then if we step back and look at the commercial market, you know, relative to Resi, Can you talk about, I mean, Resi is pretty consolidated with you and the two other large players controlling the majority of the market. How is commercial set up competitively in terms of like the consolidation of that size? What is the relative size of commercial versus Resi? And then what's the margin profile of that business compared to like your kind of legacy core business that you have today?

Yeah, I think from a margin standpoint, I'll let Ivan add at the end here, but it's strong margin business. And one of the real benefits of CloreKing is it's a pretty similar margin profile as the business that it's joining at Hayward. In terms of competitive landscape, I would say... You know, the big three, as we're often referred to, all participate in the commercial market globally to some extent. But as you do look around some of the individual product categories, it is a bit more fragmented, I guess, than what you might see in the residential space from some of the larger horsepower pumps to some of the larger BTU commercial heaters to some of the regenerative filter brands out there. So it's a bit more fragment, I feel, than maybe the residential business as we know it.

In terms of margin comparability, I'd say generally speaking, we don't see a major difference. They just leave with our line between residential and commercial business. Maybe they have a slightly different profile within the income statement between gross margin and national G&A. But at the bottom line, it's very comparable. The nice thing about these type of acquisitions for us over the course of time, we have an opportunity to progressively improve the margin with the purchase power that we can bring. we look to continue to expand the clocking acquisition over the course of time. And, you know, same applies to future acquisitions.

That type of attribute that we can bring. Thank you. That's helpful.

Thank you.

Our next question is a follow-up from the line of Nigel Coe with Wolf Research. Please proceed with your question.

Oh, thanks for the follow-up. I think a couple of quick ones for you, Avion. I think you mentioned factory utilization right now is about 65%. What would you say is a normal level? Because I'm assuming that's about two points or so gross margin under absorption. So I'm just wondering, number one, if you agree with that view, and what is a normal level?

Yeah, so for us, just to correct you, I said 60%, is where we're approximately utilized today. When we say normal, we would say that is probably trending back to where we would normally operate in these units pre-pandemic level. During the pandemic, we accelerated shifts within the facilities to take advantage of the capacity in the machinery in the hours in the day. So we still have that opportunity as we continue to grow the business volumetrically. It was a great learning over the pandemic period to be able to tap into that latent capacity to get more shifts on, to get access to those machine hours and those additional shifts in the week and over the weekend. So that's always there now as an opportunity for us, given we've proven how we can do that. We're not under-absorbing right now in our facilities. We balance, and this is a massive kudos to our operational team, they balance the variable cost labor in those facilities to match the current production level in those facilities. So we've got good absorption. It's appropriate level absorption to the cost base we're incurring. And as we continue to grow volume, we will right-size labor to keep lockstep with that absorption profile we need in the business.

Okay, I misread the comments. Thanks for the clarification. And then just a quick one on free cash flow. You know, Countess Siebel fell Q for Q from 351 down to 148. And I know normally we do see that drawdown in AR, but not to this degree. So I'm just wondering, you know, is that all organic or was there some help from factoring in the quarter? Any thoughts there?

Yeah, so in terms of the accounts receivable, it normally does decline from Q1 to Q2 as a consequence of all the early buy receipts that come into the business. As you know, early buy offers a discount and up to six months extended payment terms. And so most of our cash in early buy come for early buy receivable comes in the second quarter. And that was the case that you saw this year. So we're very pleased with the cash collection period for early by this year. Happy to report that the vast majority have paid exactly on time, which is great to see in the current climate. And, you know, as we step through the balance of the year now, accounts receivable will increase again as we ship in Q4 early by for the 2025 season.

But no big factoring impact there? No, no, not at all. Okay, great. Thanks, Ivan.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Halloran for any final comments.

Thank you, Melissa. I'd 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 all stakeholders in the years ahead. This wouldn't be possible without the hard work, dedication, and resilience of our employees and 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 third quarter earnings call. Thanks, Melissa. You can now end the call.