Hayward Holdings, Inc.

Welcome to Hayward Holdings third quarter 2024 earnings call. My name is Jessie and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touch tone phone. Please note that this conference is being recorded. I will now turn the call over to Kevin Mosca, Vice President, Investor Relations and FP&A. Mr. Mosca, you may begin.

Thank you, and good morning, everyone. We issued our third 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 today joined by Kevin Halloran, President, 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 disclosed 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 third quarter earnings call. Before we begin, I'd like to offer our deepest sympathies to those impacted by the hurricanes that devastated many regions across the southeastern United States, including in our home state of North Carolina. We have many employees, customers, and other stakeholders throughout the southeast. Our thoughts are with our neighboring communities in this time of great need, and we are committed to assisting in any way we can. Now I'll start on slide four of our earnings presentation with today's key messages. I am pleased to report third quarter results consistent with expectations. We executed well again this quarter, delivering strong profitability, increased cash flow, and improved balance sheet. We continue to drive our growth strategy by advancing our technology leadership position, leveraging our culture of continuous improvement and operational excellence, and expanding customer relationships. Net sales increased 3% year over year in the third quarter, driven by positive net price realization and the recent acquisition of CloreKing. We were very pleased with the performance of this business in the first full quarter of Hayward ownership. Gross profit margins expanded 190 basis points to 49.7%. This represents the seventh consecutive quarter of year over year gross margin expansion. Cashflow generation was also solid with cash from operations increasing 27% year to date. This enabled us to fund our growth initiatives and reduce balance sheet leverage by more than a full turn on a year over year basis to 2.8 times. After a slow start to the pool season this year, our North American business benefited from an extended season and improved in season orders. Additionally, the early buy program is progressing in line with our expected participation. Finally, we're refining our full year guidance, raising the lower end of the ranges to reflect modestly improved sales and profitability. For the full year 2024, we now expect net sales to increase approximately three to 5% and adjusted EBITDA to increase approximately five to 9% from full year 2023. Turning now to slide five, highlighting the results of the quarter. Net sales in the third quarter increased 3% year over year to 228 million. The positive contributions of net price and core king were partially offset by lower volumes. By segment, net sales increased 5% in North America and declined 7% in Europe and the rest of the world. As I mentioned, gross profit margins expanded 190 basis points year over year to 49.7%, despite an approximate 70 basis point diluted impact of purchase accounting related to the Clark King acquisition. This is a strong performance in a seasonally lower sales quarter. Adjusted EBITDA margin in the third quarter increased 110 basis points year-over-year to 22.5%, and adjusted diluted EPS was 11 cents. Turning now to slide six for a business update. In-season demand for Hayward products was generally consistent with our expectations in the quarter, with North America outperforming Europe and the rest of the world. In North America, we saw increased in-season orders as the pool season started slowly on the front end but extended on the back end. Aftermarket repair and replacement remains resilient, but demand for the majority of new construction and remodel continues to be impacted by current economic conditions and interest rates. However, while we see the number of U.S. permits down, the value of permits remains more resilient, indicative of relative strength in the high-end new construction and remodel segments of the market. The early buy programs are nearing completion in North America and underway in Europe. and we are pleased with the progress to date. Incoming orders are trending in line with expectations and we anticipate solid participation. The pool industry has always been very disciplined on price and we continue to expect positive net price realization of at least 2% in 2024. We've been implementing value-based pricing strategies and skew rationalization to optimize our price structure and ensure our products are priced appropriately relative to the exceptional value provided to pool owners. Given these initiatives, we implemented annual price increases in conjunction with the early buy program that we expect to yield approximately 3 to 5% in the U.S. and 1 to 2% in international markets. Technology leadership and new product introduction are central to our growth strategy, and we were extremely excited to see our efforts recognized recently by the largest global distributor. Specifically, Hayward received separate awards for both innovation leadership and operational excellence. This achievement is a testament to the dedication and hard work of all of our teams and employees at Hayward. Thank you for enabling us to be such a valued partner in our industry. One example of an exciting new innovation is the microchannel temperature control unit, which we introduced you to on a prior earnings call. This industry-first product offers the ability to heat pool water cool it to a comfortable temperature in the extreme summer heat, and even cool as low as 40 degrees if desired for a cold plunge. We are encouraged by the initial success of this unique product in the marketplace. Today, we're highlighting another new product introduction, the Paramount RDX unblockable drain. We continue to lead in drain technology, and the new RDX combines safety and high flow, ensuring swift and effective removal of debris. Compatible with concrete finishes, the design is able to collect large debris while blending seamlessly into the pool floor. Differentiated innovative products like these add value to our customers and drive future growth. We are investing in enhanced customer service and support, including new dedicated leadership and staffing, customer productivity tools, and training opportunities. During the quarter, we appointed a proven leader within Hayward to the newly created role of Vice President of Customer Experience, tasked with leading an industry-best customer care organization. We are also seeing increased adoption of our proprietary OmniPro app, an innovative cloud-based productivity tool for trade professionals, enabling real-time remote monitoring of a homeowner's pool and equipment configuration. As the industry becomes increasingly technology-oriented, we believe best-in-class support will be critical to further elevate the Hayward brand and drive customer intimacy, resulting in increased aftermarket conversion opportunities. Next, I'd like to provide a brief update on Chlor-King. We acquired the business in late June and we're very pleased with its performance in the quarter. Chlor-King is a leader in commercial pool water sanitization and a great strategic fit with a strong financial profile, advancing our position in the attractive commercial pool market. We are already seeing the synergies of the integration with Hayward's existing commercial business. Our sales teams are actively leveraging each other's customer bases to win new projects, serving the demand for sustainable, cutting-edge water sanitization systems. With that, I'd like to turn the call over to Avian, who will discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on slide seven. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased with our third quarter financial performance. Consolidated net sales were in line with expectations for the quarter, and we delivered outstanding profitability and cash flow generation, enabling a further reduction in net leverage to less than three times. Looking at the results in more detail, net sales for the third quarter increased 3% to $228 million. Net price realization of positive 6% was offset by 5% lower volumes. Corking performed well in the first full quarter of ownership, contributing 3%. Gross profit in the third quarter increased 7% to $113 million. Gross profit margin increased 190 basis points year-over-year to 49.7%, despite a 70 basis point dilutive impact of the Corking purchase accounting. This is a strong result, primarily driven by continuous improvement and efficiency gains in our manufacturing operations, notably in North America, and the benefit of normalized discounts and allowances compared to the prior year period. Adjusted EBITDA increased 8% to $51 million in the third quarter, and adjusted EBITDA margin increased 110 basis points to 22.5%. Our effective tax rate was 21% in the third quarter. Adjusted diluted EPS in the quarter increased 22% to $0.11. Now I'll discuss our report of the sector. Beginning on slide A, North American net sales for the third quarter increased 5% to $195 million, driven by favorable pricing and the clocking acquisition. Net sales increased 5% in the U.S. and 17% in Canada. We were encouraged to see increased orders and sales in the quarter in Canada, despite the significant impact in that market due to economic conditions and financing costs. Gross profit margin increased 290 basis points to 52.3%. Adjusted segment income margin was a robust 30.5%. Turning to Europe and rest of the world, net sales for the quarter decreased 7% to 33 million due to lower volumes, partially offset by favorable pricing. Net sales declined 4% in Europe and 11% in rest of the world, as certain international markets continue to feel the impact of current macroeconomic and geopolitical conditions. Gross profit margin reduced to 34.4%, largely driven by lower volumes, a discrete inventory adjustment, and unfavorable mix. Adjusted segment income margin was 8.4%. Turning to slide 9 for a review of our balance sheet and cash flow highlights. We are very pleased with the balance sheet improvement and strong cash flow performance in the quarter. Net debt to adjusted EBITDA improved significantly to 2.8 times compared to 3.9 times a year ago and 3.1 times at the end of the second quarter. Total liquidity at the end of the quarter was $388 million, including cash and equivalents of $274 million, plus availability under our credit facilities of $114 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 6.2% in the third quarter. Our average interest rate earned on global cash deposits for the quarter was 4.7%. The business has attractive free cash flow generation attributes and seasonal strength in the second and third quarters related to timing of payment collection of early buy receivables. Year-to-date cash flow from operations was $276 million, a 27% increase compared to the prior year period, reflecting continuous improvement in working capital management. Total working capital declined 17% in the quarter, largely as a consequence of reduced receivables. Year-to-date CapEx of $18 million was below the prior year period due to project timing, resulting in a year-to-date increase in free cash flow of 34% to $258 million. We continue to expect free cash flow conversion of greater than 100% of net net income and expect full-year 2024 free cash flow of approximately $160 million. Turning now to capital allocation on slide 10. 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 11 for the outlook, we are refining our full-year guidance ranges, raising the lower ends. For the full year 2024, we now expect net sales to increase approximately 3% to 5%. to $1.02 to $1.04 billion compared to our prior guidance of $1.01 to $1.04 billion. We now expect adjusted EBITDA to increase approximately 5% to 9% to $260 to $270 million compared to our prior guidance of $255 to $270 million. We anticipate full year free cash flow at approximately $160 million. We expect full-year net interest expense of approximately 63 million and capex spending of 25 million. We also expect an effective tax rate of approximately 25% for the remainder of the year. Looking out beyond 2024, we remain 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. And with that, I'm going to turn it back to Kevin.

Thanks, Ivan. I'll pick back up on slide 12. Before we close, let me reiterate the key takeaways from today's presentation. We delivered third quarter results consistent with expectations and refined our guidance range for the year, raising the low ends. Our team continues to execute, delivering strong gross margins and cash flow, allowing us to fund our growth strategies and de-lever the balance sheet. We are investing in exciting new product innovations, commercial programs, and service offerings to better support our customers and improve the pool ownership experience. I am 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 the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove yourself 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 is coming from the line of Andrew Carter with Stiefel. Please proceed with your question.

Hey, thank you. Good morning. I wanted to ask about kind of the gross margin, specifically the differential between the North American business and Europe. How much of that is structural? How much of that is improving performance? And then as you think about growth in a more normalized world where the North America – I'm sorry, Europe rest of the world segment would outperform the base business, does that represent a dragged margin, or does the margin – or will the overall improvements within that segment – continue to drive consolidated gross margin higher? Thanks.

Morning, Andrew. Yeah, I mean, overall, we were extremely delighted with the margins continuing to open up here in third quarter. I think it was the result of a number of things. Namely, a couple quarters back, we indicated that we had finally gotten the price-cost neutrality And we continue to see that. From a price realization standpoint in the quarter, we had some great price in the quarter, driven partly by the fact that we had more normal discounts and allowances in third quarter on a year-over-year basis, as well as favorable mix, both product as well as regionally with North America, obviously, seeing better volume than in Europe. and rest of world. I probably shouldn't leave it to last because it's really our core culture is just around Kaizen events and continuous improvement and lean. They may not grab the headlines or be all that sexy, but every week inside our facilities, we're doing Gemba walks and we're identifying inefficiencies and waste, and we continue to drive that out of the organization. As for some of the difference between North America and Europe, rest of world, we continue to battle some macroeconomic challenges in Europe specifically. And then in a strong export market, specifically the Middle East, there's obviously some geopolitical circumstances that continue to impact businesses. We also, I'll ask Ivan to go a little deeper on this in a moment, but we also saw a relatively modest discrete inventory adjustment in the ERW segment within the quarter. But we are investing. This is a core growth region for us, and we feel really good about many of the things that we're accomplishing over in Europe, rest of the world, namely some great new leaders in high impact roles over there. We've added to the bench strength. As you know, we have consolidated our manufacturing footprint into a Barcelona location, and we're really turning up the focus on new product introduction and technology development by recently naming one global leader over all product development and technology. Lots going on. There is some difference, obviously, between North America and Europe, rest of the world. But we believe and we know that the investments and the process improvements that we're undertaking will ultimately start to bring those margins back in line with each other.

Yeah, and just to follow on from Kevin, as you know, we relocated our manufacturing lines from just outside Madrid. to Barcelona in the early part of this year. During Q3, we counted most of the sites across Spain, the largest sites across Spain, which resulted in a small net inventory adjustment. Overall, approximately 30-bit impact diluted total hayward margin, but it allows us to have a clean slate following that relocation of production lines as we step into Q4.

And then the second question, looking at the pricing in North America this quarter, the plus 6%, were there any anomalies in there similar to last year that was kind of a headwind? Was it a catch-up from last year? And obviously with the increases of what you're doing, I wouldn't expect pricing in any one quarter or at least annualized to be more than the three to four, or just help us out with kind of any expected variances we might see. Thanks.

Yes, I'll break down the 6%. It's basically three contributing benefits. One is the year-over-year price increase that was put in at the beginning of the seasonal year for 24. So that was back in October of 23. So you get that year-over-year benefit from that, which approximately 3% across the entirety of Hayward on the gross price list. Secondly, we had a benefit of more normalized discounts and allowances, as you know, last year. we had an end-of-year allowance charge, which was comparably higher than the prior year. This year, we have normalized discounts and allowances. And then thirdly, we did announce a price increase for the 25 season, and that went into effect in the early part of September. So we got a little bit of benefit in the last couple of weeks in September from that particular price increase.

Thank you very much. I'll pass it on. Thanks.

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

Hey, good morning, guys. So just to close the loop on rest of the world, you know, so you had the one-time inventory adjustment. So how should we think about that business, you know, margin-wise into the fourth quarter and next year and just maybe just speak to underlying, you know, stability or signs of stabilization and demand there?

Yeah, we certainly expect a step up in margin in Q4. That's reflected in our guidance for the year. It won't be to the level that we'd like it longer term, but it will certainly be an improvement over the third quarter and travel probably close to the average for the full year to date through Q3. We have ambition, obviously, to improve that margin now above 40% in the near term. near term defined as over the next several years. I would additionally say, Jeff, that during the third quarter, we had a lower mix of what we call rest of world business. which also tends to have a higher margin. So it's a little bit of a dilutive mix effect, negatively affecting Q3. But we remain very positive about what we're doing in Spain. We're doing a lot at the supply chain level to improve our manufacturing base, our distribution and logistics, go-to-market cost base there. So we do believe we have a runway here to improve margin over the near term. to get above that 40% level. It won't necessarily be in the next year, but we have pathway.

Okay. And then, you know, clearly I think, you know, break-fix has been, you know, pretty stable, pretty choppy on the new remodel. Just any kind of early framing on how you're thinking about the market into 2025? And maybe you can just, within that, touch about – touch on – you know, any kind of near-term negative hurricane impact or positive impact into 25?

Yeah, I'll touch on the last half of the question first. I mean, obviously, it's a terrible situation, as I mentioned in my opening remarks there, and we're really just focused however we can on serving our channel partners and end customers, helping them get their lives back in order. We have seen some incremental demand from the channel and some of the impacted areas as they, you know, early on help to recover and rebuild. I think we'll see this in waves, Jeff. I think initially there's some triaging that takes place to really stabilize the water, treat the water, and get it circulating again if the pump isn't working and then there may be more substantial repairs later on to other equipment that may have been affected by the weather. We actually have informed all of our channel partners with a special code that anything that is for disaster relief goes to the top of the list, front of the line. and we're filling those orders highest priority in our order flow. Second half of the question, yeah, the aftermarket continues to be very resilient, as you've heard us say throughout the year. And the year has played out generally like we called early on with our initial guide where we were saying the more discretionary aspects the of the market which we call new construction and and more substantial repair remodel are really what's being affected we called for about down 15% in North America and more like 25% in international markets around those discretionary I think that's within within the range of what we've seen play out through three quarters and unfortunately what we're going to see continue is into Q4. So, you know, we're very interested in seeing, you know, what future moves the Fed is willing to make based on data they're digesting. It was great to see the initial 50-bip cut a little over a month ago now, but we need more cuts, I think, before I think the macro environment for our industry anyway, you know, will start to be more optimistic.

Okay, thanks so much, guys.

Thank you. Our next question is coming from the line of Sari Boroditsky with Jefferies. Please proceed with your question.

Good morning. This is James on for Sari. Thanks for taking questions. I wanted to talk about the olivai. I think you mentioned that olivai kind of progressed as expected. So can you kind of elaborate on what you anticipated for olivai compared to last year? And how much coverage are you getting from Alibi in 2025?

Yeah, as I said, it's progressing sort of as we laid out. We're seeing very solid participation from our channel partners. The timing of it, it's not yet complete in any region. So we're not able to really give anything final on this as it's nearing completion. in North America, and it's underway in Europe. But we're seeing nice participation, I'd say, sort of directionally, as we saw last year, was really what our expectation was, and we're seeing a trending towards that. As you know, some of that gets shipped in the fourth quarter. That's normal for us. That's what drives some of the seasonally higher shipments in Q4 as we prepare the channel for the upcoming season. But we would need a couple more weeks for us to know ultimately how early buy concludes, but we're very pleased with how it's progressed to date. James, I know you are aware of this, but for the rest of the of the audience, let me just, you know, define what early buy is by laying out the program. It's, it's maybe in another industry would be called winter stocking, but it's, it's the method our industry, uh, has for stocking up for the, for the next season. We really view it as a win-win for both the channel as well as Hayward by offering a discount to the, uh, announced price increase that I've been just mentioned that, that it's really in concert. with the Early Buy program. We offer payment terms out into the spring of next year. It allows us to level load our facilities in a seasonally lower, well, in a cooler time of year where folks aren't in their pools using them as much, and we get to ship at our discretion into the channel. That's the structure of the program for someone who may not have known what early buy was, but I would say it's progressing very well into our expectations.

Got it. Great. And as a follow-up, I know it is still kind of early on to talk about kind of 2025, but what are you kind of hearing from like dealers and builders about their backlog and kind of their outlook on kind of new construction and remodeling?

Yeah, I'm not necessarily hearing that leads are picking up. I think, as I said a moment ago, that there is some general optimism that if additional cuts, interest rate cuts are coming, that that's going to spark demand as what we've really seen this year is more the financing-dependent portion of the market is most affected. So if there are additional cuts coming, I think that that's absolutely going to give us some tailwind as an industry. It's important to point out, I don't think it's immediate, though. I think we need to see more substantial cuts, and then that has to work through the through the system, you know, from securing the financing to deciding on who's going to build the pool and finalizing your design and pulling the permit. So there is some lead up from once the interest rate cuts occur. And I think that's also really renovation and remodel dependent as well as quite a bit of that activity is financing dependent. But I'd just like to finish by saying again, 50 plus percent of our revenue is tied to this very resilient, largely non-discretionary aftermarket break fit. So obviously new construction and large scale remodel are important to us and to the whole industry, but the aftermarket has remained very resilient through these challenging macro times that we've had the last couple of years.

Great. Thanks for taking the questions.

Thank you. Our next question is from the line of Ryan Merkle with William Blair. Please proceed with your question.

Hey, guys. Nice quarter. I wanted to start off on the price outlook. I think you mentioned 3% to 5% price in the U.S. for 25. That's a little bit above the two to three we're used to. My question is, how much of that increase is sort of your normal inflationary increase? And then how much is some of this strategic pricing that you're doing?

Yeah, I would say it's, you know, we need the fourth quarter to really finalize what our inflation assumptions are. But from a commodity or material standpoint, we're seeing kind of high two, closing in on 3% maybe, and and labor salary wages maybe a tick up from that. So, you know, holding price cost, you know, we would need 3% or so pricing. And then I really think, you know, you could look to that delta where some SKUs or product categories were priced higher than that around some of this value pricing, taking a hard look at where we believe product is providing greater payback or value than what the historic price has been. So that's really how I'd lay it out for you, Ryan. The first three or so is to hold price-cost neutrality and then some upside based upon some of the more strategic value pricing initiatives that our team's undertaking.

Got it. That's helpful. And do you expect to finish the strategic pricing in 2025?

No, no, I don't think, I mean, I mean, it's a lot of heavy lifting is going on, you know, in the, in the, maybe the early innings of this, but I, but I'm not sure from a value pricing standpoint, you know, it's ever complete because we'll constantly be bringing, you know, some, some new technology to bear and, And I think what goes hand in hand with this is some of the skew rationalization activities as we retire some either lower technology or redundant products. I think that that provides some value pricing opportunities. So one really goes with the other. And I think maybe the most impact is in some of the early innings as our organization focuses on that.

but i'm not sure i would ever say the curtain drops on that okay good uh and then my second question is on gross margins they're up about 500 basis points since 22 and sales are down and so my question is you know if we get a recovery scenario and you've got strategic pricing is there still 100 200 basis points of upside to gross margins if i look out the next two three years

Hi, Ryan. Yes, certainly, you know, we are notably up on 22. Let's not forget in 22, you're battling the inflation monster, which we kind of slayed towards the end of 22 and into 23. So I'm not quite sure 22 was a representative example of the underlying margin of business given that inflation period. But where we're at today, we feel pretty good about. And we've talked about the opportunities we have to continue to drive margin enhancement across the business. We will continue to execute on those four pillars, which I've discussed before, continue to leverage the top-line growth, We've demonstrated we can grow our business within our four walls of manufacturing today, so we should continue to get leverage as we grow volume. Productivity actions throughout the business. We have a return to our core practices of lean manufacturing, and those are yielding fantastic results in North America, and we expect the same in Europe as we drive common systems across our group progressively over the next 18 months. We've demonstrated price-cost we can handle, and that's reflected now in the margin. And then as Kevin just mentioned, we're going to continue to introduce high-value, high-margin new products and support the customer with ever-increasing investment. Also, as Kevin mentioned, so they're educated on that new technology and understand it and therefore be able to extract the appropriate margin on those products. I'm not going to get really definitive on 2025. I think we have these opportunities to improve, and we'll continue to execute on those opportunities.

Perfect. Thanks. Pass it on.

Thank you. The next question is coming from the line of Nigel Coe with Wolf Research. Please proceed with your question.

Thanks. Good morning, everyone. So when I look at your top line guide for fourth quarter, all right, it's a $20 million give or take kind of range, but it's the difference between low single digits and you know, I think maybe 10% organic in the fourth quarter. So, you know, fairly wide range there. So maybe just, can you maybe just define what's kind of the drivers of the low end and the high end of that range. And I don't know if you want to talk about where you feel more comfortable, but you know, would it be the early buy variability or other factors of play there? And then just on the early buy specifically is, Is there any correlation between sort of early buy strength and what that tells us about the season coming up? I'm sure there is, but any thoughts on what you're kind of reading into the demand environment for next year?

Yeah, the latter part of the question. I think the early buy activity is really, I think of it in two ways, Nigel. Firstly, would be maybe what the inventory position in the channel is as the season ends. I think that that really helps define maybe what the appetite is on behalf of the channel to buy forward, so to speak. But this isn't just OEM with the channel. What the channel's doing is while the early buy program is published in this window here, is they're out having conversations with the dealers. And the terms and some of the pricing and the discounts that we offer are actually now being discussed with the dealers, the servicers, the builders, the renovators. So, again, as that comes back to us as the OEM, I think that that does give some indication for what the overall attitude or what the level of optimism is down in the dealer base, working in the backyard day in and day out. You know, based upon those two factors, you know, we're seeing a pretty solid response from early buy. And, you know, we're not ready to guide on 2025 yet by any means. But, you know, this is a nice building block heading in to 2025 for us. There was another part of the question, Nigel.

I'm sorry that I... Yeah, I'm just wondering, the 4Q range, you know, we've got a kind of, I don't know, 3%, 10%. range on the fourth quarter in that kind of zone. So just just wondering what the variability is.

Yeah, hi Nigel. I mean we we've got what 3 to 5% as the as the full year range now as we head into the into the final quarter. call that a 2%, 20 million type number. That is really centric around how the in-season orders flow through the balance of the year. Last year, we had a pretty good result in that category. We know what the early buy is stacking up to look like, and so we feel pretty comfortable. We've got line of sight around early buy, but the in-season orders remain the item that we continue to to look at carefully. And that really is the underlying variance that you see in Q4. Maybe a little bit more muted performance in Europe and rest of the world versus North America reflected in our guidance. And that comes as a consequence of still some hesitation around the rest of world segment. in Q4. If we look at North America in a bit more detail, you know, we had a good performance here today in Canada, actually a little bit better than expected results in Canada here today. So it'd be interesting to see how that business closes for their seasonal orders. They close down relatively rapidly as winter sets in. But it's just a little bit of caution here as we head into the fourth quarter around those in-season orders.

Okay. Okay. That's really helpful. And then just another crack at the gross margin question. Whenever you have such great performance on gross margins in the absence of volume, there's always questions about sustainability. I think what we're hearing here is that you feel comfortable that North American gross margin is sustainable, nothing unusual in that number. And I'm just wondering if maybe you could talk about the fixed versus variable components of Cox.

Yes, we feel like the North American margin is sustainable. As I mentioned, we've got four areas that we continue to pursue for margin enhancement over the course of time. They've yielded good results over the last five years, maybe masked by the inflation battles, but coming through now and reflective in the margin will continue to execute on those margin enhancers. Nothing discreet in the quarter. I mean, we did call out. We had a dilutive impact from purchase accounting and a very small discreet inventory adjustment. But, you know, we expect margin to improve in Q4. Sorry, I missed the second part of your question, Nigel.

Oh, the fixed versus variable component of COGS.

Yep. Yes, generally speaking, we do have a relatively low fixed component in our cost of goods sold, 65% to 70% of our COGS tends to be raw materials or purchased components. And then we have variable labor and then the indirect labor and depreciation on the business as well as the utilities and rent is a much smaller proportion. think of a number of around about 10% is what would be considered to be true fixed costs in the COGS profile. Great. Thank you.

Thank you. The next question is from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hi, this is actually Nick Cash on for Brian Lee. Just wanted to dive in to SG&A real quick. As a percentage of revenue, it's been slightly higher than we've seen over the past few years. And you mentioned slightly higher salary costs driven by wage inflation and investments in growth through sales and increased professional services. Just trying to get a sense of how we should think about spending on sales and marketing going forward as you kind of balance a return to volume growth with profitability. Thank you.

Yeah, sure. I won't get into how we think about it necessarily in 2025, but generally speaking, yes, what we have seen over the course of the last couple of years is higher than historical average salary increases when you think about professional service costs. that support the business, legal services, consulting services, audits, practice services, all of those have increased in the last couple of years, more so they had previously. And I think we're all feeling that in our cost space. I think additionally, over the course of the last 18 months, a year and a half, we've made some very discreet investments. into our sales capabilities as we turn our attention to geographies where we've been historically underrepresented. And you have to make those investments before you see the return. So those have gone into this year. And additionally, we're making investments into our systems capabilities throughout the organization. And those investments have gone into 2024. We feel good about the cost base. You know, we have ambition to continue to move the collective SG&A and RD&E cost base down into the low 20s. Percentage of sales, we don't necessarily believe we'll achieve that next year. But, you know, that is the structural ambition we've set ourselves.

No, that's super helpful. Thank you. Good.

Thank you. Our next question is coming from the line of Rob Wertheimer with Milius Research. Please proceed with your question.

Oh, thanks. Good morning. Most of my questions have been answered, but just out of curiosity, I think you referenced in the premise data just an upshift or a mix shift, you know, which is probably not surprising given higher income consumers might have more stability.

ever noticeable in your financials i mean do you see mix shifts you know with higher end pools you know affecting total total income statement i'll stop there thanks yeah i'm not quite sure the mix shift comment that you're referencing certainly there's been a mix shift geographically in our europe and rest of world segment inside the the product line we're seeing a shift towards uh core product categories you know year to date we're very pleased with uh increases in filtration, in heaters, in sanitization, suction cleaners, and as you'd expect, those items which have got more attachment to new construction, in-floor systems, lighting and water features, and to a certain extent, new construction controls, those have had a reduced mix in the year. But overall, we've had a dilutive impact from geographic mix, a positive impact from product mix, And then in terms of, I think, the latter part of your question, you know, when you think about the different type of pools for servicing, certainly when you're dealing with the larger new builders, you're dealing with a much richer content per pool pad. Maybe you want to talk about that, Kevin?

Yeah, that's exactly right. I mean, the products that we see that are performing well, it's pretty much right down the fairway, Rob, that the ones that are really more core that are, resilient around the aftermarket are performing well. And some of those products, you know, that have a high concentration around new building activity or full-scale remodel, you know, are not performing as well. But, you know, as we've said many times and others have, the higher end is holding up better than the more entry level. So the pools that are being built we are seeing some of the, some of the, some of the features and the functionality being added to those, you know, around controls and automation and alternate sanitizers and in-floor systems and LED lights. So those are, those are generally high margin products for us. So, you know, we're, we're anxious for some of the rate cuts to take hold and for that to, uh, to start propping up new construction sales, although we're not sure when that's going to take hold just yet, Rob.

Okay. Thank you.

Thank you. The next question is coming from the line of Rafe Jadorsic with Bank of America. Pleased to see with your question.

Hi, good morning. Thanks for taking my question. Just to start, just a quick clarification on the pricing comment for 25, the 3% to 5% realization. Is that net or gross pricing?

So broadly speaking, it's net pricing. I mean, gross price lists are moving up 3% to 5% as long as the year-over-year discount percentages and allowances rebates remain the same. You'll have the same effect at the net pricing level.

Okay, that's helpful. And then just in terms of, can you just, I think you've probably been asked this before, just can you remind us of the potential tariff exposure that you have, and then potentially like what it means for sort of the competitive environment? It's like, what's your direct exposure to potential tariffs? And then is there an opportunity versus some competition?

Yeah, generally speaking, our imported goods from tariff-impacted regions is around 10% to 15% of cost of goods sold, probably towards the lower end of that more recently. 85% of our manufactured goods are manufactured in our core regions, that being North America and Western Europe. So we have a progressively reduced exposure to the tariffs that have been instituted now for what, six or seven years.

Okay. And then just on the like stepping back and looking at new construction now that we've sort of had the vast majority of the pool season behind us for 24, can you just walk us through like where we are on sort of number of pools that went in, do you guys think, in 24? versus where it peaked in 22, I guess, or 21 to 22, and then the pre-COVID level, just help us understand how much of this is lapping pull forward versus potential just macro headwinds. How do we think about where we are in that new construction cycle?

Yeah, I don't have the data in front of me, but I think I'm correct in saying that the three years leading up to COVID, we were somewhere around 75,000 to 85,000 or maybe high 70s to 85,000 per year in those years leading up to COVID. Obviously, 2020, 2021, 2021, those two years saw a meaningful step up. Since 2022, we were, I think 98, just shy of a hundred thousand pools that dropped to low seventies last year. And, you know, we, we believe that we're somewhere, you know, maybe best case 60,000 ish this year. There's some, you know, there's some different numbers out there, but I think, Most coalesce around kind of a 60,000 number at this point. So call that 15% off of last year. I think that could be affected, frankly. You know, this time of year, pools get built in Florida. They're in disaster recovery, big parts of that state. So I think that that could have a negative effect on the final number here in Q4 2020. in that region, Rafe. But that's what we've seen over the last, you know, the years leading up to COVID, what occurred in the height of COVID, and then maybe what's occurred in more of the challenging macro economic environment and higher interest rate environment since COVID.

That's helpful. If I could just very quick, Bob, do you know, What do you guys estimate the sell-through was in the third quarter?

Sorry, the sell-through in the third quarter?

Yes.

Yeah. Yeah, so we only have dates for one specific reference point, and that's in the U.S., so any real dependency that we place on those numbers. But it was relatively flat on the sell-through. uh in in the third quarter so that's that's a positive outcome um for us in that one data reference point okay that's helpful thank you thank you thank you there are no further questions at this time so i'd like to turn the floor back over to kevin hollerin for closing remarks thank you jesse uh in closing 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 fourth quarter earnings call. Thank you, Jesse. You can now end the call.

Thank you. Ladies and gentlemen, thank you. This does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.