Q3 2023 Hayward Holdings Inc Earnings Call

Welcome to Hayward Holdings third quarter 2023 earnings call.

<unk> spent you and I will be your operator for today's call. 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 you touched on for them.

Note that this conference is being recorded.

Now ill turn the call over to Kevin much call Life's President Investor Relations. Mr. <unk> you may begin.

Thank you and good morning, everyone. We issued our third quarter 2023 earnings press release. This morning, which has been posted to the Investor Relations section of our website at Investor day at Hayward Dot Com.

There you can also find an earnings slide presentation that we will reference during this call.

I'm joined today by Kevin Holleran, President and Chief Executive Officer, and IV, and Jones, Senior Vice President and Chief Financial Officer.

Before we begin I would like to remind everyone that during this call. The company may make certain statements that are considered forward looking in nature, including management's outlook for 2023 and future periods.

The statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission could cause actual results could 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 Holler.

Thank you Kevin and good morning, everyone. It's my pleasure to welcome all of you to Hayward third quarter earnings call I'll start on slide four of our earnings presentation with today's key messages I'm pleased to report solid third quarter results consistent with expectations. Our quarter was highlighted by continued execution in a challenging operating environment with strong profitability and cash flow generation.

Gross profit margin expanded nearly 400 basis points through a laser focus on management of manufacturing and freight costs and a higher mix of technology products.

We also demonstrated a robust cash flow generation characteristics again, this quarter cash flow from operations increased approximately 50% on a year to date basis as we effectively reduced working capital. This is a tremendous accomplishment by the entire heyward.

And demand for Hayward products defined as channel sell through met our expectations and exceeded our sales into the channel, resulting in further normalization of distributor inventory. We are encourage to enter the 'twenty 'twenty four pool season with leaner inventory positions reported by our primary channel partners in the U S and this sets up the Hayward to return to it.

Normal matching sales with channel sell through in this market, we are strengthening the business with investments in our industry, leading technology and operational capabilities. This includes the ongoing development of innovative Iot connected products and further footprint consolidation, allowing hayward to better support our customers and drive long term profitable.

Overall, our team continues to execute in a challenging operating environment and I'm pleased with our performance during the quarter. Finally, we are updating our guidance primarily to reflect the impact of more challenging macro conditions in certain international markets, specifically in Canada Middle East and Latin America early buy orders in our <unk>.

Primary U S market increased year over year and are trending in line with expectations. However, recent in season orders have been softer than previously anticipated, reflecting cautious approach My channel partners ahead of 'twenty 'twenty four for the full year 2023 we now expect net sales to reduce approximately 24% to 26%.

Third to last year, and adjusted EBITDA of 245 to 255 million longer term, we expect to resume our solid historical growth trajectory of mid to high single digits, turning now to slide five highlighting the results of the quarter I am pleased to report net sales in line with expectations driven by stronger execution.

The U S and Europe net sales in the third quarter reduced 10% year over year to $220 million largely due to channel inventory movements and softer market conditions by geography, net sales reduced by 9% in the U S and 15% in international markets Europe region, 6% with larger declines.

16% in Canada, and 23% and rest of World I'm encouraged to see sales trend stabilizing in our largest markets of the U S and Europe with each down less than 10% in the quarter.

Aftermarket maintenance and repair remains resilient, whereas demand for discretionary product categories has been more impacted by the challenging macro conditions, particularly in the retail and online channels in certain international markets commercial pool sales increased double digits again in the quarter.

We are focused on driving growth in these markets and are pleased with the continued robust debate a gross price list increased 5%, but was more than offset by the comparative changes in the earned annual distributor rebates and dealer incentive programs, which are finalized in the fiscal third quarter for the seasonal year end in other words more distributors earned rebates.

This year well fewer achieve rebate thresholds last year. This is a positive outcome and reflects channel partner increased target attainment and a higher mix of premium dealers in our results. Importantly, this is the third quarter dynamic and we expect positive net price realization on a full year basis as I mentioned the gross margin performance was strong again.

Third quarter, despite lower volumes and net price.

Gross profit margins expanded nearly 400 basis points year over year to 47, 8% the improvement as a result of continuous operational improvements a moderating rate of inflation in certain purchase material and freight costs and a higher mix of technology products. This has allowed us to continue expanding gross margins and lower <unk>.

Reduction volumes, while positioning for future growth adjusted EBITDA in the third quarter was 47 million with a margin of 21, 4%. We continue to deliver the expected 25 to 30 million in annual SG&A savings under our prior enterprise cost reduction program. These savings were partially offset in the third quarter by an increase in our field service warranty cost.

To accommodate higher labor cost per service call as well as our commitment to the consumer to replace with a whole. Good if a spare part is not available importantly, our first time quality metrics are consistent with prior periods and our production of spare parts is increased in response to a significant increase in early buy demand for parts subsequently.

We expect field service warranty cost to moderate going forward adjust.

Adjusted diluted EPS in the quarter was nine cents, turning now to slide six for a business update.

Demand for Hayward products was consistent with our expectations in the quarter with our largest markets U S and Europe performing solidly non discretionary aftermarket demand remains resilient, but demand for products used in discretionary new construction upgrades and Remodels has been impacted by current economic conditions and rising interest rates.

As a result customers are participating in the early buy program as expected, but taking a cautious approach of pet of 'twenty 'twenty four for in season orders. However, we are encouraged to see signs of stabilization in demand for new construction in the U S, particularly in the higher end of the market further we continue to see compelling opportunities for upgrades and remodel.

Given the record age of the installed base, we continue to see strong market acceptance of the connected suite of products within our omni Iot automation ecosystem adoption of the omni platform continues to grow with one of the largest builders in the U S. Now standardizing on our.

Our omni App is highly rated on both Apple and Google play stores, and we have seen an increase to 94% of all on these activity use by homeowners via the App. We are also excited by the uptake of our army retrofit kit, which provides a simple upgrade path from legacy pro logic controls to the latest technology.

As expected during the quarter, our channel partners continued to rebound to the level of inventory relative to the current economic outlook normalized OEM lead times and higher cost of carrying inventory our primary partners in the U S are reporting leader inventory levels in the channel and touring the new pool season, whereas some partners in.

Regions are still recalibrate.

Turning to the price versus cost dynamic, we're maintaining price cost neutrality and driving solid gross margin expansion through disciplined cost control and manufacturing productivity improvements, we continue to evaluate our global manufacturing footprint as part of our operational excellence initiatives given the merits of our newest manufacturing facility in <unk>.

So Luna we initiated a plan during the quarter to consolidate our facility near Madrid into Barcelona. This change will allow us to better leverage the benefits of a modern facility or closely aligned manufacturing engineering and product management and support margins, we continue to prioritize working capital management and deliver significant.

Improvements total working capital declined by 139 million on a year to date basis.

Shifting to the positive cash flow performance with that I'd like to turn the call over to IBM, who will discuss our financial results in more detail.

Thank you, Kevin and good morning, I'll pick up on slide seven all comparisons I will make will be on a year over year basis.

As Kevin stated, we are pleased with our third quarter financial performance net sales modestly exceeded expectations for the quarter.

<unk> returned to normal seasonality, coupled with a progressive right sizing of the channel inventory, we delivered outstanding gross margin expansion to 47, 8%.

Realizing our SG&A cost reductions in line with plan our balance sheet is strong and we generated good cash flow.

Looking at the results in more detail net sales for the third quarter decreased 10% 223 million. This was driven by an 8% reduction in volume and 3% reduction in net price the volume decline during the quarter was primarily driven by the expected distribution channel inventory movements moderates again.

<unk> trends in discretionary elements of our markets like new construction through the retail channels as well as weaker performances in Canada and certain other export markets.

Gross price increased approximately 5%, but was reduced in the quarter by comparably high annual Rebased supplements and dealer incentives, resulting in a net price.

A decrease of 3% for the quarter. This is an end of seasonal performance calculation quarter for us and can result in some swings to a rebate and incentive calculations based on final target achievements last year's final calculation for the seasonally it performed in the third quarter resulted in a favorable adjustment to income, whereas this year, though.

Rebates are more normal this dynamic is generally limited to the third quarter at key point is on price increases are holding on our incentive programs are yielding solid ballroom results with strong margins.

Gross profit in the third quarter was $105 4 million gross profit margin increased 390 basis points year over year to 47, 8% compared to 43, 9% in the prior year period, and the rapid 48, 1% achieved in the second quarter of 2023 disciplined.

On your financing cost control, a moderating input material and freight costs more than offset the impact of reduced production volumes as we have discussed before hey, with has a long standing commitment to lean manufacturing and continuous improvement and I'm excited about our plans to deliver further productivity gains across our manufacturing and supply chains.

Selling general and administrative expenses increased modestly on a sequential basis, the 59 million in the third quarter. We are delivering on the annual run rate savings of 25 to 30 million targeted on that.

Enterprise cost reduction program, how long are we increased our field service warranty accrual rate in the quarter, primarily to account for highest service labor costs and reduced spend pumps availability, we have taken proactive actions to address this and limit the impact going forward, including ramping production with Pops and we expect these costs to moderate.

Forward the increasingly cool rate was partially offset by reduced variable compensation expense in the quarter. We took a restructuring charge of $3 $3 million primarily related to the exit from our manufacturing facility in Madrid and movements of that manufacturing to our newer facility in Barcelona. This will yield an annual cost saving.

Approximately $2 million once the move is complete adjusted EBITDAR of $47 2 million in the third quarter and adjusted EBITDA margin was 21, 4%.

We are positioned to drive solid margin expansion as volume growth returns.

We recorded an income tax benefit of $2 3 million in the third quarter related to favorable discrete tax items. We continue to expect an effective tax rate of 25% for the fourth quarter adjusted diluted EPS in the quarter was more incentives on a fully diluted share count of 221 million shares last turn out to slide eight.

The review of our reportable segment results North American net sales for the third quarter declined 9% to 185 million driven by 5% lower volumes and 4% unfavorable net price impact.

Reduction in volume was largely due to both the expected right sizing with channel inventories moderating and demand trends as previously communicated sales in Canada declined 16% in the quarter. This market is going through a tougher macro period relative to the U S. It's a very short season and now closed for 2023 and there was a higher.

On Centralia, and a lower cost in ground pools and above ground pools in that market, where demand is most significantly impacted by economic condition.

And financing costs. Despite the temporary net pricing dynamic I previously mentioned gross profit margin in the quarter expanded 430 basis points year over year to a solid 49, 4% for two quarters in a row now the NAND segment has posted greater than 49% gross margins adjusted.

Net income margin was 24, 9% we were pleased with the margin performances in the quarter.

Turning to Europe, and rest of World net sales for the third quarter decreased 15% to $35 million net sales benefited from net favorable price realization of 4% and foreign currency translation benefit of 3% offset by a 22% decline in volume.

We were pleased with the performance in Europe, where sales declined 6% overall and increased 1% in southern Europe. In contrast rest of world declined 23%, we continue to invest in our expansion campaigns into Asia market. While we have established a solid share position, but we're seeing a tempering of demand in that region.

And as well as increased macro pressure in the middle East and Latin America.

Overall for the segment gross profit margin expanded 130 basis points year over year to 39, 6% and adjusted segment income margin was 18, 9% again solid margin performance is turning to slide nine for review of our balance sheet and cash flow highlights net debt to adjusted EBITDA was three.

<unk> nine times at the end of the third quarter compared to three eight times in the second quarter, we continued to prioritize deleveraging to our targeted range of two to three times I'll discuss this a little further shortly.

Total liquidity at the end of the third quarter was $402 million, including our cash and cash equivalent balance of 244 million and availability under our credit facilities of 158 million, we have no near term maturities on our debt our interest rate swap agreements, so that $1 1 billion the trove.

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 continues to benefit from the 600 million of debt currently tied to fixed interest rate swap agreements maturing in 2025 and <unk>.

27, which limits all cash interest rate on our term facilities to six 7%.

Average earned the interest rate on global cash deposits for the quarter was four 6% overall, we are pleased with the quality of our balance sheet. We have a strong seasonal cash flow generation characteristics driven by high quality earnings cash flow from operations was a robust 217 million year to date and 22.

93, compared to 144 million in the prior year period, reflecting effective working capital management, we made great progress, reducing working capital by $139 million yet today.

Capex of 23 million year to date was consistent with the prior year period year to date free cash flow generation of $194 million increased 62% compared to the prior year period last year for the full year 2023, we expect free cash flow generation of approximately 125.

Operator: Welcome to Hayward Holdings' third quarter, 2023 earnings call. My name is Svenju, and I will be your operator for today's call. Later, we will conduct a question-an-answer session. During the question-an-answer session, if you have a question, please press star, then one on your touch to inform. Please note that this conference is being recorded.

The 150 million dependent upon the mix of standard versus early by final old activity with the return to normal seasonality of the company would typically use cash in the first and fourth quarters and generate cash in the second and third quarters.

Kevin Maczka: I will now turn the call over to Kevin Maczka, vice-president in the calculations.

Kevin Maczka: Mr. Maczka, you may begin. Thank you, and good morning, everyone. We issued our third quarter, 2023 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.ayward.com. There you can also find an earning slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, president and chief executive officer, and Eifion 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 outlook for 2023 and future periods.

This year larger early bondholders with extended payment terms, which pushed the collection of some receivables into the first half of 'twenty 'twenty four 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 return.

While maintaining prudent financial leverage in the near term we are prioritizing cap.

Kevin Maczka: Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent form 10K and form 10Q filings with the Securities and Exchange Commission. It 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-gap measures. Reconciliation of historical non-gap measures discussed on this call to the comparable gap measures can be found in our earnings release and the appendix to the slide presentation.

Capex growth investments and reducing net leverage within our targeted range of two to three times, we continue to consider tuck in acquisition opportunities to complement our product offering geographic footprint and commercial relationships. In addition to opportunistic share repurchases.

Turning now to slide 11 for our outlook, we remain very positive about the long term health and growth profile of the pool industry, particularly the strength of the aftermarket and then he was leadership position within the industry. We are updating our outlook for 2020 tweets with five primarily a reduction in outlook for the Canadian and the rest.

The world markets, our outlook for the U S and Europe is moderately tempered by the more cautious stocking by our channel partners in the fourth quarter, it's clear some of our partners increasingly favorite in season purchasing rather than stocking ahead of the 2020 full season, and we'll continue to use common, albeit increasingly normalizing the trees.

Kevin Holleran: I would now like to turn the call over to Kevin Holleran. Thank you, Kevin.

Kevin Holleran: Good morning, everyone. It's my pleasure to welcome all of you to Hayward's third quarter earnings call. I'll start on slide four of our earnings presentation with today's key messages. I'm pleased to report solid third quarter results consistent with expectations. The quarter was highlighted by continued execution in a challenging operating environment with strong profitability and cash flow generation. Gross profit margins expanded nearly 400 basis points through a laser focus on management of manufacturing and freight costs and a higher mix of technology products.

So service remaining agencies in 2023 business. Consequently, we now anticipate a decrease in consolidated net sales of 24%, 26%. We now expect adjusted Ebitdas to be between 245 and $255 million with free cash flow in the range of 125 to 100.

Kevin Holleran: We also demonstrated our robust cash flow generation characteristics again this quarter. Cash flow from operations increased approximately 50% on a year-to-date basis as we effectively reduced working capital. This is what we find as channel cell through met our expectations and exceeded our sales into the channel resulting in further normalization of distributor inventory. We are encouraged to enter the 2024 pool season with leaner inventory positions reported by our primary channel partners in the U.S. And this sets up Hayward to return to a normal matching of sales with channel cell through in this market.

<unk> million dollars interest expense expectation is approximately $75 million.

And the current interest rate environment borrowing levels.

The effective tax rate forecast remains approximately 21% for the fourth quarter and our capex spending forecast for the full year is approximately $30 million.

I'll now turn the call back to Kevin.

Thanks, I can pick back up on slide 12, I'll close with this summary, we delivered third quarter 2023 results in line with expectations I'm proud of the Hayward team's ability to execute throughout this challenging period for the industry delivering net sales ahead of expectation for the quarter with strong gross margin expansion and reduced sales volumes.

Kevin Holleran: We are strengthening the business with investments in our industry leading technology and operational capabilities. This includes the ongoing development of innovative IoT connected products and further footprint consolidation allowing Hayward to better support our customers and drive long-term profitable growth. Overall, our team continues to execute a challenging operating environment and I'm pleased with our performance during the quarter.

Further cash flow generation with channel inventories, reducing to leader positions increased market share over 2019 healthy structural margins and a strong balance sheet, we are well positioned as we enter the 'twenty 'twenty four pool season.

Longer term this is a resilient industry characterized by consistent growth and ever growing aftermarket and a number of secular tailwind, including the appeal of outdoor living sunbelt migration connected smart home technologies and environmentally sustainable products as a leader in this attractive industry I'm excited about the opportunities to leverage hayward's competitive.

Kevin Holleran: Finally, we're updating our guides primarily to reflect the impact of more challenging macro conditions in certain international markets specifically in Canada, Middle East and Latin America. Early buy orders in our primary U.S, market increased year over year and are trending in line with expectations. However, recent in season orders have been softer than previously anticipated, reflecting a cautious approach by channel partners ahead of 2024. For the full year 2023, we now expect net sales to reduce approximately 24 to 26% compared to last year and adjusted EBITDA of 245 to 255 million. Longer term, we expect to resume a solid historical growth trajectory of mid to high single digits.

Vintages and drive profitable growth and shareholder value creation with that we're now ready to open the line for questions.

Thank you.

We will now be conducting a question and answer session.

Who would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your questions from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the stock East as a reminder, please restrict yourself to one question and one follow up one moment. Please while we poll for questions.

Kevin Holleran: Turning now to slide 5, highlighting the results of the quarter. I'm pleased to report net sales in line with expectations driven by stronger execution in the U.S, and Europe. Net sales in the third quarter reduced 10% year over year to 220 million largely due to channel inventory movements and softer market conditions. By geography, net sales reduced by 9% in the U.S, and 15% in international markets. Europe reduced 6% with larger declines of 16% in Canada and 23% in rest of the world.

The first question comes from the line of Jeff Hammond with Keybanc capital markets. Please go ahead.

Hey, good morning, guys.

Yeah.

Yeah, just wanted to go back to this negative pricing I guess, what's a little confusing to me is given all of the Destocking and the weaker demand why rebates are higher and just maybe help me understand you know.

Kevin Holleran: I'm encouraged to see sales transpabilizing in our largest markets of the U.S, and Europe with each down less than 10% in the quarter. After market maintenance and repair remains resilient, whereas demand for discretionary product categories has been more impacted by the challenging macro conditions, particularly in the retail and online channels and certain international markets. Commercial pool sales increased double digits again in the quarter. We are focused on driving growth in these markets that are pleased with continued robust demand.

If there's other discounting in there you know maybe how the rebate true up works that maybe you know obfuscates kind of the underlying price.

Sure more Jeff.

As we said in the prepared remarks, we're obviously very pleased with the with the 47, 8% gross profit margins posted up in the third quarter again that was up nearly 400 basis points.

Kevin Holleran: Our gross price list increased 5% in the quarter. In other words, more distributors earn rebates this year while few achieve rebate thresholds last year. This is a positive outcome and reflects channel partner increase target attainment and a higher mix of premium dealers in our results. Importantly, this is a third quarter dynamic and we expect positive net price realization on a whole year based. As I mentioned, the gross margin performance was strong again in the third quarter, despite lower volumes in that price.

With with net sales down 10%.

Maybe even more compressed citizens is knowing that that's within 30 bips of the record gross profit last quarter with net sales down sequentially, 22%, but your question is really getting at you know the pricing impact while posting those.

Margins and I would.

Kevin Holleran: Gross profit margin expanded nearly 400 basis points year over year to 47.8%. The improvement is a result of continuous operational improvements, a moderate rate of inflation in certain purchased material, and freight costs, and a higher mix of technology products. This is allowed to continue expanding gross margins at lower production volumes while positioning for future growth. Adjusted EBIT on the third quarter is 47 million with a margin of 21.4%. We continue to deliver the expected 25 to 30 million in annual S-G-A savings under our prior enterprise cost reduction program.

Just want to point out that this is not a reflection on giving back list or invoice price that was up 5% in the quarter.

The realization we've realized positive year to date, and we fully expect to post positive price on a full year basis.

In third quarter, it's a bit of a unique period for us as this wraps up the end of the seasonal year end true ups occur you know as the curtain drops on the on the full year and that's really what occurred here I'll turn it over to Ivan to maybe walk through some of the accounting of that in just a moment, but.

Kevin Holleran: These savings were partially upset in the third quarter by an increase in our field service warranty cost to accommodate higher labor costs per service call, as well as our commitment to the consumer to replace with a whole good if the spare part is not available. Importantly, our first time quality metrics are consistent with prior periods, and our production of spare parts has increased in response to a significant increase in early by demand for parts. Consequently, we expect field service warranty cost to moderate going forward.

Again, it does not reflect the loss of market pricing or the stickiness of past price increases or give back there.

It's well, it's really related to two things I'll turn it over to IV and in just a moment. It's it's it's end of season performance calculation occurs which can result in some swings to a rebate and incentive calculations last year's final calculation result.

Kevin Holleran: Adjusted deluded EPS in the quarter was nine cents.

Resulted actually in a favorable adjustment to income in the third quarter, whereas this year. The rebates are more normal and then secondly was a higher mix. This year of some qualifying dealers primarily higher end builders that earn incentives based upon based upon volume so again.

Kevin Holleran: Turning out a slide six for a business update. End demand for Hayward products was consistent with our expectations in the quarter with our largest markets, US and Europe, performing solidly. Non-discretionary after market demand remains resilient, but demand for products used in discretionary new construction, upgrades in remodels has been impacted by current economic conditions and rising interest rates. As a result, customers are participating in the early buy program as expected, but taking a cautious approach ahead of 2024 for in-season orders.

With the destock, that's occurring and the fact that kind of a mid level or the higher end pools continue to perform well.

You know in a more destock lower lower sales out in environment that became a bigger percentage of our overall mix.

Kevin Holleran: However, we are encouraged to see signs of stabilization in demand for new construction and production in the US, particularly in the higher end of the market. Further, we continue to see compelling opportunities for upgrade and remodel given the record age of the installed base. We continue to see strong market acceptance of the connected suite of products within our OMNI IoT automation ecosystem. Adoption of the OMNI platform continues to grow with one of the largest builders in the US now standardizing on OMNI.

Anything to that.

Yeah, I'd say Jack is very much limited to the third quarter last year. Its final calculation resulted in a favorable adjustment to income. So we're stepping over that favorability year on year. This year, we have a more normalized rebates as a percentage of sales. So it's strictly limited to final accounting on the seasonal rebates.

And we expect positive price realization.

Kevin Holleran: Our OMNI app is highly rated on both Apple and Google Play stores, and we have seen an increase to 94 percent of all OMNI's activity used by homeowners via the app. We are also excited by the uptake of our OMNI retrofit kit, which provides a simple upgrade path from legacy prology controls to the latest technology. As expected during the quarter, our channel partners continue to rebalance the level of inventory relative to the current economic outlook, normalized OEM lead times, and higher costs of carrying inventory.

As we go forward here.

Okay. That's very helpful. And then just you know as we look into 'twenty four maybe any update on that Destocking number 160, and then just.

How are you seeing market starting to shape up as you look into 'twenty, four and kind of your confidence you recapture on sell through.

That destock impact or most of it.

Yeah, I mean, the 160 that you just referenced that is our best estimate.

Kevin Holleran: Our primary partners in the US are reporting leader inventory levels in the channel entering the new pool season, whereas some partners in regions are still recalibrating. Turning to the price versus cost dynamic, we are maintaining price cost neutrality and driving solid growth, margin expansion through discipline cost control, and manufacturing productivity improvements. We continue to evaluate our global manufacturing footprint as part of our operational excellence initiatives. Given the merits of our newest manufacturing facility in Barcelona, we initiate a plan during the quarter to consolidate our facility near Madrid into Barcelona.

At this point, we'll be in a better position to validate that.

At year end, but.

You know again, we don't have perfect information globally, but we do get get input.

We did make great progress has made great progress.

Through September no doubt you've heard others in the industry talking about getting leaner on inventory and we agree that said theres still some pockets.

Or some regions that need some additional recalibration.

But it's largely behind us now.

Kevin Holleran: This change will allow us to better leverage the benefits of a modern facility, more closely to line manufacturing, engineering, and product management, and support margins. We continue to prioritize working capital management and deliver significant improvements. Total working capital declined by 139 million on a year-to-date basis, contributing to the positive cash flow performance.

Now.

As for 2024, you know, obviously, you're not asking for.

For guidance at this point, but you know we kind of look at it as we work through the budgeting process here.

Look there's certainly some positives that we'll be able to comp off of.

But there's obviously some things that were needing more time to better understand you know the three things I would say around the positives are the headwind from the heavy destock as we just.

Eifion Jones: With that, I'd like to turn the call over to IVEON, who will discuss our financial results in more detail. Thank you, Kevin. Good morning.

Eifion Jones: I'll pick up on slide seven. All comparisons I'll make will be on the year-to-year basis. As Kevin stated, we are pleased with our third quarter financial performance. Net sales modestly exceeded expectations for the quarter, and reflected a return to normal seasonality, coupled with a progressive rise sizing and channel inventory. We delivered outstanding gross margin expansion to 47.8%, and we're realizing our FDMA cost reductions in line with plan. Our balance sheet is strong and we generated good cash flow.

As I just spoke on is largely behind us here in 2023.

Your prior question was around net pricing, we expect that positive net pricing again, we announced increase that took effect on October 1st that are now on the price lists and out into the marketplace.

And then thirdly around this aftermarket resiliency it continues to be resilient here in 2023, we'd expect it.

It to play out again as always in 'twenty 'twenty four we don't know where new pools are going to land, but you know if at current estimates play out and it's in the 70000 range. You know again, that's going to add more pools to the installed base then.

Eifion Jones: Looking at the results in more detail, Net sales for the third quarter decreased 10% to 220.3 million. This was driven by an 8% reduction in volume, and 3% reduction in net price. The volume declined during the quarter as primarily driven by the expected distribution channel inventory movement, and moderating end demand trends in discretionary elements of our markets like new construction and through the retail channels, as well as weaker performances in Canada and some other export markets.

And then we are there and we had ending 2022 that will be needing.

Needing service and maintenance and repair and remodel into the future you know on the on the more concerning side certainly the macro.

Eifion Jones: Grosprice increased approximately 5%, but was reduced in the quarter by comparably higher annual rebate settlement and dealer incentives resulting in a high decrease of 3% for the quarter. This is an end of seasonal year performance calculation quarter for us and can result in some swings to our rebate and incentive calculations based on final target achievements. Last year's final calculation for the seasonal year performed in the third quarter resulted in a favorable adjustment to income, whereas this year the rebates are more normal.

Is giving us all some some Pos we we spoke about some of the interest rates that are hitting all markets in particularly are.

And in particular, Canada.

Some of the export markets.

And frankly at this point, we don't see.

Tailwind, that's going to meaningfully recover new construction going into 2024, particularly at that entry level, which is much more finance based or interest rate base. So those are some of the factors that were that were overlaying as we look out into 2024 and <unk>.

Eifion Jones: This dynamic is generally limited to the third quarter. The key point is our price increases are holding and our incentive programs are yielding solid volume results with strong margins. Grosprice in the third quarter was 105.4 million, Grosprice margin increased 390 basis points year over year to 47.8%, compared to 43.9% in the prior year period, and the rapid 48.1% achieved in the second quarter of 2023. Discipline manufacturing cost control and moderating input material and freight costs more than offset the impact of reduced production volumes.

We'll be back.

In February with our with our firm outlooks for 2000 and for Jeff.

Okay I appreciate the color guys.

Yeah.

Thank you.

Question comes from the line of Savi, but or did ski with Jefferies. Please go ahead.

Oh good morning. This is James on for Terry Thanks for taking questions.

So I wanted to talk about your commentary on softer than previously expected insistent workers can you provide some more color on this and how to sell through them with like in third quarter in October.

Eifion Jones: As we have discussed before, Haywood has a long-standing commitment to leading manufacturing and continuous improvement. And I'm excited about our plans to build a further productivity gains across some manufacturing and supply chains. Selling general administrative expenses increased modestly on a sequential basis for 59 million in the third quarter. We are delivering on the annual run rate savings of 25 to 30 million, targeted under our prior enterprise cost reduction program. However, we increased our field's robust warranty of cool rate in the quarter primarily to account for higher service labor costs and reduce spare parts availability.

Oh yeah.

I'd say the sell through was was kind of on expectations.

You know theres, a large distributor who is already.

Reported earnings I would say what they reported further equipment sale through is is on par with what we saw are being sold for the hayward products into the into the marketplace.

Which as you know again sort of an expectation for what we saw rounding out the season here and as for the first part of the question.

Eifion Jones: We are taking proactive actions to address this and limit the impact going forward, including ramping production of spare parts. And we expect these costs to moderate going forward. The increase in the core rate was partially offset by reduced variable compensation expense.

We saw it really in.

Throughout the third quarter and frankly, we're we're calling for it in the fourth quarter to just have some more tempered expectation around what we call in season orders and what I mean by that is now an early buy the order flow.

Eifion Jones: In the quarter, we took a restructuring charge of $3.3 million, primarily related to the exit from our manufacturing facility near Madrid, and movements of that manufacturing to our new facility in Barcelona. This will yield an annual cost savings of approximately $2 million once the move is complete. Adjust the EBITAR of $47.2 million in the third quarter, and adjust the EBITAR margin with 21.4%. We are positioned to drive solid margin expansion as volume growth returns.

In advance of the early buy season was not was not quite to expectation.

I think that that probably highlights continued villages around inventory utilization and balance sheet considerations.

So that's that's really what the commentary gets sad is is overall, we've seen a nice response were still not yet complete with the early buy season, but we've seen oh, an expectation ordering there, but when you look at it combined with what the expectation.

Eifion Jones: We recorded an income tax benefit of $2.3 million in the third quarter related favorable discrete tax items. We continue to expect an effective tax rate of 25% for the fourth quarter. Adjust the diluted EPS in the quarter was 9 cents on a fully diluted share count of $221 million shares.

Eifion Jones: Let's turn that to slide 8 for review of our reportable segment results. North American net sales for the third quarter declined 9% to 185 million driven by 5% lower volumes, and 4% unfavorable net pricing impact. The reduction in volume was largely due to both the expected right sizing of channel inventory and moderating end demand trends as previously communicated.

Was around in quarter four.

Low orders, we didnt quite a we didn't quite see that in the third quarter and that's giving us some some pause as we look out into the fourth quarter and look at the full year guidance I think James. The this is all of it I think James.

The channel is being very cautious in what they take them to inventory given the macro dynamics that you see right now, particularly around interest rates and the cost to carry inventory so the buying it when they need it and not not earlier and we see that I think across the entirety of our channel footprint.

Eifion Jones: Sales in Canada declined 16% in the quarter. This market is going through a tougher macro period relative to the US. It's a very short season and now closed for 2023. There is a higher concentration of lower costing around pools and above ground pools in that market, where demand is more significantly impacted by economic condition and financing costs. Despite the tampering their pricing dynamic, I previously mentioned gross profit margin in the quarter expanded 430 basis points year over year to a solid 49.4%. For two quarters in a row now, the NAMM segment has posted greater than 49% gross margins. Adjusted segment income margin was 24.9%.

As we said in our prepared remarks, we think that the result of that is that moving.

The purchasing all of the 24th season much closer to the in season demand as they have so given where interest rates. All the channel has just been super cautious I believe in what they're taking it.

Got it thanks for the color Oh. It then as a follow up are you guys talked about like resilient aftermarket demand.

And even going into 2020 for it but I believe one of your competitor kind of talked about like aftermarket coming in weaker given higher interest rates. So can you provide more color on what you mean by resilient here.

Eifion Jones: We were pleased with the margin performances in the quarter. Turning to Europe and the rest of the world, NET sales of a third quarter decreased 15% to 35 million, NET sales benefited from net favorable price realization of 4% and foreign currency translation benefited 3% offset by a 22% decline in volume. We were pleased with the performance in Europe, where sales declined 6% overall and increased 1% in southern Europe. In contrast, rest of the world declined 23%.

Yeah, I mean, when we when we defined the aftermarket you know broadly speaking, that's everything but new construction.

And that certainly gets a lot of attention, but the aftermarket is a combination of that classic break fix.

Remodel.

Activity and then just some just some upgrading where we define that as at the heater wasn't there on the pad last year and it's added this year. That's an upgrade so I do think that you know the break fix when we're talking about really resilient and oh and non discretionary.

Eifion Jones: We continue to invest in our expansion campaigns in the Asia markets, where we have established a solid shared position. We were seeing a tampering of demand in that region, as well as increased macro pressure in the Middle East and Latin America. Overall for the segment, gross profit margin expanded 130 basis points year earlier, for 39.6% and the adjusted segment income margin was 18.9%.

That's the piece of the aftermarket that we're really referring to the other the other elements of the aftermarket whether it's the remodel or somebody upgrading activity is certainly impacted by the current macro environment and the interest rate environment, but again, we we view that break fix says something.

Eifion Jones: Again, solid margin performances.

Eifion Jones: Turning to slide 9 for a view of our balance sheet and cash flow highlights. NET debt to adjust the EBITDA was 3.9 times at the end of the third quarter compared to 3.8 times in the second quarter. We continue to prioritize the leveraging to our targeted range of 2 to 3 times.

You know in the 50% range of our overall business and by and large that stage very resilience.

Eifion Jones: I'll discuss there's a little further shortly. Total liquidity at the end of the third quarter was 402 million, including a cash and cash equivalent balance of 244 million, and availability under our credit facilities of 158 million. We have more near-term material fees on our debt or interest trade swap agreements. Termed that at 1.1 billion, the chose in 2028, and the undrawn ABL in the chose in 2026. This attractive maturity schedule provides financial flexibility, as we execute our strategic plans.

You know through this through this macro environment that we're experiencing.

Great. Thanks for taking my questions.

Thank you next.

Next question comes from the line of Ryan Merkel with William Blair. Please go ahead.

Hey, everyone. Thanks for taking the questions I wanted to start off with four Q just coming in a lot lighter than we were expecting.

But what's really the headline there is that the international business, that's weak or what else is in there.

It is I mean, the headline the headline is Ryan, it's it's Canada and some of our export markets. We were in Canada last week.

Eifion Jones: A borrowing rate continues to benefit from the 600 million of debt currently tied to fixed interest rate swap agreements, maturing in 2025 and 2027, which limits our cash interest rate on our term facilities to 6.7%. Our average earned interest rate on global cash deposits for the quarter was 4.6%.

You know I would say this.

The.

Theres still some destock that that needs to occur in.

Eifion Jones: Overall, we are pleased with the quality of our cheap. We have a strong but seasonal cash flow generation characteristic driven by high-quality earnings. Cash flow from operations was a robust 270 million year today in 2023 compared to 144 million in the prior year period, reflecting effective working capital management. We made great progress reducing working capital by 139 million year today. Capax of 23 million year today was consistent with the prior year period. Year-to-date free cash flow generation of 194 million increased 62% compared to the prior year period last year.

In the Canadian market.

That's there.

That.

The mortgage rate environment up there is very different in terms of shorter lock periods and there has been a lot in the headlines recently about over the next couple of years, what the adjustments are going to look like for the homeowner up there. So that's a big headwind that is that as COO.

A lot of concern.

With the homeowner in the Canadian market and it's obviously, having an impact on really that discretionary income and what they're looking to do or have to households, So I would say from a.

And as you look back over the last three to four years I would say that the response in the.

Eifion Jones: For the full year 2023, we expect free cash flow generation of approximately 125 to 150 million, dependent upon the mix of standard versus early-by-final order activity, with the return to normal seasonality of the company will typically use cash in the first and fourth quarters and generate cash in the second and third quarters. This year, larger early by orders with extended payment terms will push the collection some receivable into the first half of 2024.

In the early periods of Covid up in Canada.

We're even we're even stronger than what we saw in our core U S market.

And now that some of the macro.

Factors are playing in the recovery seems to be even sharper than what we're experiencing in the core U S market. So Canada really is the biggest headline affecting.

Eifion Jones: Turning that to capital allocation on the slide turn, as we've highlighted before, we maintain a disciplined financial policy and take a balanced approach emphasising strategic growth investments and shareholder returns while maintaining prudent financial leverage. In the near term, we are prioritising tax growth investments and reducing net leverage within our targeted range of two to three times. We continue to consider tuck-in acquisition opportunities to complement our product offering, geographic footprint and commercial relationships in addition to opportunistic share repurchases.

The Q4 outlook.

Well, it's important to also understand is the demand.

<unk> sell through that we've seen in our core markets U S and Europe actually was in line with our expectations.

And we have a similar expectation for channel sell through in Q4, but as I just mentioned in the previous response or the channel has taken in in Q4 is going to be lighter than we expected as they shift their buying patterns to be more juxtaposed to their needs are in the 2024.

Kevin Holleran: Turning now to slide 11 for our outlook, we remain very positive about the long-term health and growth profile of the pool industry, particularly the strength of the aftermarket and in Hayward's leadership position within the industry.

And I just think it's a general cautious approach to managing their balance sheets.

We continue to wrangle is an economy with interest rates.

It was probably implied Ryan of course, we know you laid out where we're a high share.

Kevin Holleran: We are updating our outlook for 2023 through effect primarily a reduction in outlook to the Canadian and rest of world markets. Our outlook for the US and Europe is moderately tempered by the more cautious stocking by our channel partners in the fourth quarter. It's clear some of our partners increasingly favour in season purchasing rather than stocking ahead of the 2024 season and will continue to use current albeit increasingly normalised in the trees to service remaining in season 2023 business.

<unk> player in the Canadian market, which is why that why that's having such an impact on the Hayward our outlook right now.

Got it okay. That's actually really helpful. Thank you for walking through that and then for my follow up can you just talk about price and 24.

I think you've come out with a list price increase and then any change to incentives for the early buy or would you call them normal.

Eifion Jones: Consequently, we now anticipate a decrease in consolidating that sales of 24% to 26%. We now expect a just a bit of R to be between 245 and 255 million with free cash flow in the range of 125 to 150 million. Our interest expense expectation is approximately 75 million. We reflect on the current interest rate environment and borrow levels.

So tackling the first one yes, we did announce a price increase for 2024 season.

Actual.

Wording on the price increase up to 5% on the whole goods slightly more on Pops and that's a U S centric comment it does vary a little bit as you go around the one around the rest of our business, but generally speaking once you put all of that into the calculation of the Ku range, we'd expect probably an average price increase.

Kevin Holleran: The effective tax rate forecast remains approximately 25% for the fourth quarter and our cap-expanding forecast for the full year is approximately 30 million dollars. And with that, I'm going to film the call back to Kevin. Thanks, Ivan. I'll pick back up on slide 12.

3% to 4% globally.

Next year on our way to SKU basis, and really that's two to protect against where we see inflation dynamics in most of those inflation dynamics, a consequential to labor cost increases.

Kevin Holleran: I'll close with this summary. We delivered third quarter 2023 results in line with expectations. I'm proud of the Hayward team's ability to execute throughout this challenge and cleared for the industry, delivering net sales ahead of expectation for the quarter with strong, gross margin expansion at reduced sales volumes and further cash flow generation, which channel inventory is reducing to leader positions, increased market share over 2019, healthy structural margins and a strong balance sheet.

In the business.

In terms of the early buy we have given a standard discount more in line with history.

The early buy and in terms of terms, we have come to a more standardized approach on payment terms of 180 days in the main some some some customers up slightly different but generally speaking 180 days with a 2% discount to the pricing.

Kevin Holleran: We are well positioned as we enter the 2024 pool season. Longer term, this is a resilient industry characterised by consistent growth and ever-growing after market and a number of secular tailwinds, including the appeal of outdoor living, sunbelt migration, connected smart home technologies and environmentally sustainable products. As a leader in this attractive industry, I'm excited about the opportunities to leverage Hayward's competitive advantages and drive profitable growth and shareholder value creation.

Perfect. Thank you.

Thank you Mike.

Question comes from the line of Andrew Carter with Stifel. Please go ahead.

Yeah, Hey, Thank you I just wanted to go back to this vendor incentive issue in the quarter I guess number one why was the sole property and kind of not kind of telegraphed in the quarter you know given the focus on pricing here and I'm still a little confused about how the rebates could be up this year given I know you said it was a tailwind last year.

Operator: With that, we're now ready to open the line for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using a speaker equipment, it may be necessary to pick up the hand set before pressing the star keys. As a reminder, please restrict yourself to one question and one follow-up. One moment, please, while we pull for questions.

But I would assume you probably had a better volume sell through last year than this year than what's implied some individual.

Youll customers outperforming drive the mix that much just some incremental clarity there. Thank you.

Yeah. It is it is a limited.

Q3 dynamic and true this time last year, when we formed seized on rebate calculations. The final calculations resulted in a positive adjustment back to income given the aggregate misses across the channel.

Jeff Hammond: The first question comes on the line of Jeff Hammond with Keybank Capital Markets, please go ahead. Hey, good morning, guys. Good morning.

I'll rebate structures are based upon the channel sell in in the main.

And last year they were.

Kevin Holleran: You just want to go back to this negative pricing. I guess what's a little confusing to me is given all the destocking and the weaker demand why rebates are higher and just maybe help me understand, you know, if there's other discounting in there or, you know, maybe how the rebate true up works that maybe, you know, obfuscates kind of the underlying price. Sure. More to Jeff. You know, as we said in the prepared remarks, we're obviously very pleased with the 47.8% gross profit margin posted up in the third quarter.

They were limited based upon that channel performance.

This year, we restructured our programs are in the U S. We've actually gone to a more quarterly based program structure that's in recognition.

Recognition of the the dynamics, we were assisting the channel with in terms of Destocking, we've had slightly higher rebate percentage payments. This year than we have had last year, but given it all gets accounted for in Q3, you can have a year over year swing dynamic has no implications for the overall.

Our gross price gross price still remains positive year over year and this just this adjustment really is a Q3 dynamic.

Kevin Holleran: Again, that was up nearly 400 basis points with net sales down 10%. You know, maybe even more compressive is knowing that that's within 30 bips of the record of gross profit last quarter with net sales down sequentially 22%. But your question is really getting at, you know, the pricing impact while posting those margins. And I would, you know, just want to point out that this is not a reflection on giving back list or invoice price.

So quickly so was one more incremental thing this year a change in the program relative to last year did I hear that correctly.

We changed in the U S. We changed our program to a more healthy base program incentive last year.

<unk> was a typical seasonal approach so you're accruing for seasonal rebates you get to the end of the season, you evaluate where the channel is and then you make your adjustments accordingly. This year, it's been more quarterly adjustments.

Kevin Holleran: That was up 5% in the quarter. The realization, you know, we've realized positive year to date and we fully expect to post positive price on a full year basis. In third quarter, it's a bit of a unique period for us as this wraps up the end of the seasonal year and true ups occur, you know, as the curtain drops on the full year. And that's really what occurred here. I'll turn it over to Ivan to maybe walk through some of the accounting of that in just a moment.

Second question about your yearend leverage if I'm calculating right off of your updated guidance I'm getting like a three seven for free for that would assume Boston boss or some worse is that fair because of the pre buy will dictate cash flow.

Within that where what are the implications for where leverage will go into kind of first quarter.

There and I know that debt pay down is your highest priority is there.

Help us understand that and what the dynamics are and how much how aggressively you're wanting to pay down debt.

Kevin Holleran: But again, it does not reflect the loss of market pricing or the stickiness of past price increases or give back there. It's really related to two things. I'll turn it over to Ivan in just a moment. It's this end of season performance calculation occurs, which can result in some swings to our rebate and incentive calculations. Last year's final calculation result that actually in a favorable adjustment, the income in third quarter, whereas this year the rebates are more normal.

Sure Yeah. The range that you were against there is broadly correct.

So as you said is heavily dependent on the mix of business as we step through the final 910 weeks of the year here.

As we mentioned lowest slow orders as the channel moves theyre slow in season.

Terminology, we're using here as they ship those orders to closer to the 22 and the full season, you push that cash collection into that time crazy actually exited this year with slightly higher inventories.

So we do expect to deleverage as we stepped into the new year, we expect to get back into our targeted range of two to three times in 2024 once we collect the early by cash and we see these ing in season orders.

Kevin Holleran: And then secondly, was a higher mix this year of some qualifying dealers, primarily higher end builders that earn incentives based upon, based upon volume. So again, with the destock that's occurring and the fact that kind of the mid level or the higher end pools continue to perform well, you know, in a more destock lower, lower sales out environment that became a bigger percentage of our overall net. Yeah, I'd say Jeff is very much limited to the third quarter.

Go through in the back end of Q1 Q2 all of that.

Next year, we feel really good about our liquidity position right now we've got significant cash on the balance sheet, we remain undrawn on our ABL.

Facility.

We've done a good job on our own here, reducing our own inventory levels on our balance sheet, which has been a great source of cash. This year. So from my perspective, we feel I feel very comfortable with the liquidity position in the business and recognize that with the shift in order mix it will differ a little bit of cash collection.

Kevin Holleran: Last year's final calculation resulted in a favourable adjustment to income, so we're stepping over that favourability year on year. This year we have a more normalized rebates as a percentage of sales. It's strictly limited to final accounting on seasonal year rebates and we expect positive price realisation as we go forward here.

Into next year, whereas we had anticipated this year, but that's just a timing issue.

Thanks, I'll pass it on.

Thank you next question comes from the line of Mike Halloran with Baird. Please go ahead.

Kevin Holleran: Okay, that's very helpful. And then just, you know, as we look into 24 maybe any update on that destocking number 160 and then just, you know, how are you seeing markets starting to shape up as you look into 24 and kind of your confidence you recapture, you know, on cell through, you know, that destocking impact or most of it. Yeah, in the 160 that you just referenced, you know, that is our best estimate at this point will be in a better position to validate that at year end, but, you know, again, we don't have perfect information globally, but we do get, get input.

Hey, good morning, guys pads on for Mike a quick one for you. So obviously a lot of moving pieces given the destocking the pricing discounts impacting EBITDA margins, but can you maybe help us understand what you think the right run rate exiting this year it looks like obviously, a little bit wider range of expectations or possible outcome.

Going into <unk> and into next year than we were initially anticipating so if you could touch on that a little bit on exit rate expectations that'd be helpful.

Yes.

In terms of the quality of the income statement, we still expect to exit out of this year at a high <unk> gross margin.

Kevin Holleran: You know, we did make great progress, have made great progress through September. No doubt you've heard others in the industry talking about getting leader on inventory and we agree that said there's still some pockets or some regions that need some additional recalibration, but it's largely behind us now. As for 2024, you know, obviously you're not asking for for guidance at this point, but, you know, we've kind of look at it as we work through the budgeting process here.

And slightly out of the mid Twenty's adjusted EBITDA when you calculate our results at the midpoint. So we're very pleased with the quality of our income statement. Despite the year on year net sales decline as we go through this channel Destocking period. So you know that's that's come as a consequence, a lot of hard work in the business to two.

To protect our margin and.

As we indicated we look forward to next year to see that leverage opportunity list both of those margin dynamics. Both at the gross profit line and more importantly at the adjusted EBITDA line, but as we exit this year, we're still going to post up high <unk> gross margin and slightly out of the mid mid twenties.

Kevin Holleran: Look at there's certainly some positives that will be on the comp off of, but there's obviously some things that we're needing more time to better understand, you know, the three things I would say around the positives. The headwind from the heavy destock as we just as I just spoke on as largely behind us here in 2023. Your prior question was around net pricing. We expect that positive net pricing. Again, we announced the increase that took effect on October 1st, better now on the price list and out into the marketplace.

Adjusted EBITDA margin.

Got it that's super helpful and maybe at a high level can you just dig into the diverging trends in the gross margin and the adjusted EBITDA margin that we saw in this quarter and maybe help us with the puts and takes that drove the gain in gross margin, but the weakness in adjusted EBITDA margin.

Yeah, I think he just strictly comes down so as we've discussed before Q1 and Q3 tends to be the low cost of our seas all year.

And then when you look at the coverage you have across your SG&A base, you'll have less coverage in Q3, so you'll see a healthy margins throughout the year at the gross margin level, but less leverage across the SG&A base in Q on Q3, and that's that's what limited the adjusted EBITA margin.

Kevin Holleran: And then thirdly around this after market resiliency, it continues to be resilient here in 2023. We'd expect it to play out again as always in 2024. You know, we don't know where new pools are going to land, but you know, if in current estimates play out and it's in the 70,000 range, you know, again, that's going to add more pools to the installed base. Then we then we had ending 2022 that will be needing service and maintenance and repair and remodel into the future, you know, on the more concerning side, you know, certainly the macro is giving us all some, some pause.

In this particular quarter it will lift again in Q4, as we get more leverage across that SG&A base. We had as we mentioned a little bit of a sequential increase in SG&A costs consequential to field service warranty costs. That's.

A true up of the cool that in recognition of higher field service inflation costs rolling through but again that that will moderate as we go forward here, but it is strictly comes back to our leverage across the SG&A base in a seasonally light sales period.

Kevin Holleran: We spoke about some of the interest rates that are hitting all markets and particularly are in particular Canada and some of the export markets, and, frankly, at this point, we don't see tailwind that's going to meaningfully recover a new construction going into 2024, particularly at that entry level, which is much more finance-based or interest-rate-based. So, those are some of the factors that we're overlaying as we look out into 2024, and we'll be back, you know, in February with our firm outlooks for 2024, Jeff. Okay, appreciate the color, guys.

Thanks, I appreciate the color I'll pass it on.

Saree Boroditsky: Thank you.

Thank you next.

Next question comes from the line of Nigel Cool pool for such please go ahead.

Thanks, guys.

Yeah.

Hi, Thanks.

And I'd go How're you doing.

Yeah. Thanks, good alright, so Canada, let's say by Canada.

<unk>.

Can you remind us how big is Canada, what percentage of your North American segment is Canada and is there any material difference in margins between.

Canada in your North American business.

James Bumferseri: Next question comes from the line of Saree Boroditsky with Jeff Lee's Priskovets.

Canada on a comparison basis was nearly 10% in 2022.

James Bumferseri: Good morning. This is James Bumferseri. Thanks for taking questions. So, I wanted to talk about your commentaries known softer than previously expected in season order. Can you provide some more color on this and how the shelter was like in third quarter? Any talk over? Yeah. So, I would say the sale through was kind of on-expectations. You know, there's a large distributor who's already reported earnings. I would say what they reported for their equipment sale through is on par with what we saw being sold for the Hayward product.

And it's about two thirds of that are in our overall mix this year.

James Bumferseri: You know, into the marketplace, which is, you know, again, sort of on-expectation for what we saw rounding out the season here. And as for the first part of the question, you know, we saw really in throughout the third quarter, and frankly, we're calling for it in the fourth quarter to just have some more tempered expectation around what we call in season orders or what I mean by that. It's not an early buy.

Historically, there had been more of a margin decrement in Canada, but I'd say the team has done.

A great job over the last handful of years.

Working the priceless value basing our pricing and it's gotten much closer to our tour standard call. It U S margin rate Nigel.

Okay, that's great.

This caution you know the ship is being cautious of content I'm surprised.

But I'm curious have you seen any material change in different difference in behavior between the smaller distributors and in the larger players like tool I've got to imagine that the you know the inventory holding costs.

And the kind of rate environment, it's crippling some of the smaller player.

So I'm just wondering if there's any difference you're seeing out there I mean is it not just an end market issue as it also rate issue as well.

I'm not an.

Excuse me I have not necessarily seen irrational behavior across the various distributor partners.

You know as we said earlier I would I really see them just being maybe more cautious with the with the rate of reorder.

James Bumferseri: The order flow in advance of the early buy season was not quite to expectation. I think that that probably highlights continued villains around inventory utilization and balance sheet considerations. So, that's really what the commentary gets at is overall we've seen a nice response. We're still not yet complete with the early buy season, but we've seen an on-expectation ordering there. But when you look at it combined with what the expectation was around in quarter flow orders, we didn't quite see that. In the third quarter, and that's giving us some pause as we look out into fourth quarter and look at the full year guys.

As they as they move inventory off their balance sheet, that's kind of what we've seen as opposed to.

Some kind of irrational.

Our pricing that they're putting out into the market.

Yeah, It wasn't really a pricing comment but.

This is my final comment is really actually on pricing the day they get adjustment. So I do know I think you said you've gone to a quarterly basis now as opposed to a seasonal basis.

This true up really just purely a <unk> issue I'm just just want make sure this isn't going to be used during the fourth quarter as well.

Yeah, let me be clear Nigel it absolutely is a Q3 issue and it really is stepping over a good guy last year not repeating this year. So.

We expect positive price realization in the fourth quarter year over year.

Eifion Jones: I think James, this is Ivy. I think James, the channel is being very cautious in what they take him to inventory given the macro dynamics that you see right now, particularly around interest rates on the cost of carrying inventory. So, the buying it when they need it and not not earlier, and we see that I think across the entirety of our channel footprint. As we said in our prepared march, we think that the result of that is they're moving the purchasing of the 24 season much closer to the in season demands they have. So, give our interest rates off. The channel has just been super cautious, I believe, in what they're taking.

It's a little bit unfortunate we have these year over year seasonal true ups in the third quarter. As you mentioned as I mentioned, we moved to a multi program. This year, we've actually changed the overall structure of bonds.

Rebates to go onto a calendar year basis.

Whereas historically it used to be on a cool seasonal year basis ended in Q3.

We expect we expect to ship the quarterly.

For the balance of the year and then all of a calendar year basis as we go into 2024.

Kevin Holleran: Good, thanks for the caller. Oh, then as a follow up, you guys talked about the like resilient aftermarket demand and even going into 2024, but I really wanted your competitor kind of talked about like aftermarket coming a week or given higher interest rates, so can you provide more color on what you mean by resilience here? Yeah, I mean, when we when we define the aftermarket, you know, broadly speaking, that's everything but new construction, and that certainly gets a lot of attention.

Okay, I just killed a wholesome that one thank you very much.

[laughter].

Okay.

Thank you next question comes from the line of Sean Hannan.

With Bank of America. Please go ahead.

Hi, guys. Thanks for taking my question.

Despite the pricing headwind the gross margin was near record levels and can you talk about what youre seeing on inflation for materials and labor and what your expectations are heading into 2024.

Kevin Holleran: But the aftermarket, you know, is a combination of that classic break fix, remodel, activity, and then just some just some upgrading where we define that as if the heater wasn't there on the pad last year, and it's added this year, that's an upgrade. So I do think that, you know, the break fix when we're talking about really resilient and and non-disclosure. That's the piece of the aftermarket that we're really referring to the other elements of the aftermarket, whether it's the remodel or some of the upgrading activity is certainly impacted by the current macro environment and the interest rate in the environment.

So we have seen moderating inflation in some commodities the overall basket.

Of raw materials, including purchased items.

Still remains.

Modern inflated over the last year, but the rate of inflation is certainly decreasing I think when it comes to labor costs. We are seeing labor costs now move positive move higher.

And that was one of the main implications.

<unk> why we increased our price list as we move into 2020 full but.

Just again to come back to the price dynamic price list in the quarter was positive year over year, you've just got this one time rebate anomaly, which is unfortunately effect in the Q, but as you step into Q4, you'll see the fullness of price year over the full year, we still expect very positive price realization.

Kevin Holleran: But again, we view that break fix as something, you know, in the 50% range of our overall business and by and large, that stayed very resilient. You know, through this through this macro environment that we're experiencing.

And then margins will continue to hold into the high forties as we step through Q4.

James Bumferseri: Great. Thanks for taking my questions.

Operator: Thank you.

Great. Thank you.

Ryan Mochel: Next question comes from the line of Ryan Mochel with William Blair, please go ahead. Hey, everyone. Thanks for taking the questions.

Thank you next question comes from the line of Brian Lee with Goldman Sachs. Please go ahead.

Kevin Holleran: I wanted to start off with 4Q just coming in a lot later than we were expecting. What's really the headline there? Is it the international business that's weaker or what else is in there? It is. I mean, the headline, the headline is Ryan. It's Canada and some of our export markets. We ran Canada last week. You know, I would say this the there's still some destock that that needs to occur in the Canadian market.

Hi, everyone. This is Nick cash on the line for for Brian Lee Just had a quick question regarding destocking.

It seems that you guys still are having some destocking issues in Canada, but I just really wanted to know can gauge. How you guys are seeing the rest of North America and the rest of the world and if you have any visibility on being fully destocking in 2024 and any of these other markets.

And you also mentioned buyers being a little bit more cautious and that's I guess, the new base case or do you happen to see or expect any restocking period that could possibly be a tailwind going into 2024. Thank you.

Kevin Holleran: That that that mortgage rate environment up there is very different in terms of shorter lock periods. And there's been a lot in the headlines recently about over the next couple of years, what the adjustments are going to look like for the homeowner up there. So that's a big headwind that is that is causing a lot of concern with the homeowner in the Canadian market and it's obviously having an impact on really that discretionary income and what they're looking to do at the household.

Yeah.

Well you know as I would say we.

We've made great progress through September there are still maybe some particular chan.

Channel partners or even some regions you mentioned, Canada.

Where theres still some recalibration needing to occur.

But we felt we felt really good you know with the close of the seasonal year being September the progress that was made.

You know the normal inventory flow because of the early buy of the winter stocking programs is as you work down inventory through Q3, and then Q4 and Q1 are normally restocking periods, and then work that inventory off.

Kevin Holleran: So, you know, I would say from a as you look back over the last three to four years, I would say that the response in the in the early periods of COVID up in Canada were even were even stronger than what we saw in our core US market. And now that some of the macro factors are playing in the recovery seems to be even sharper than what we're experiencing. In the core US market.

Q2, and Q3 as the markets are open.

Everywhere.

So that's that's that's really what we're seeing around a destocking standpoint.

Forgot the second part of your question rather than 24, well I think when it comes to the rest of the world.

Kevin Holleran: So Canada really is the biggest headline affecting the Q4 out. I think what's important, Ryan, to also understand is the demand channels sell through that we've seen in our core markets, US and Europe, actually is in line with our expectations. And we have a similar expectation for channels sell through in Q4, but as I just mentioned in the previous response what the channel is taking in in Q4 is going to be lighter than we expected as they shift their buying patterns to be more juxtaposed.

Bit of a wait and see.

Some of those markets.

A bit more macro sensitivity than our primary U S and European markets. So we'll continue to monitor that situation and work with those channel partners to get that to.

Get that pulled through.

To help them move that material through those channels.

But it's something that we want to have full visibility off until we actually step into the 2024 season.

Yes, I mean with our supply chain capabilities as we exhibited through the Covid.

Sperry is whether the orders come in through an early buy program or whether they're more in season.

Kevin Holleran: And I just think it's a general cautious approach to managing that balance sheet as we continue to wrangle as an economy here with our interest rates. It was probably implied, Ryan, of course, we know you may not, we're a high share player in the Canadian market, which is why that's having such an impact on the Hayward outlook right now. Got it. Okay, that's actually really helpful. Thank you for walking through that.

We'll be we'll be partnering with our with our with our channel folks to respond.

Well, we both believe is best in class to be able to respond to the market dynamics as they play out here into 2024.

Awesome. Thank you guys appreciate the color.

Okay.

Thank you.

There are no further questions at this time I would like to turn the floor back over to Kevin Hungering for closing comments great.

Eifion Jones: And then for my follow up, can you just talk about price in 24, I think you've come out with a list price increase and then any change to incentives for the early buy or would you call them normal. So tackling the first one, yes, we did an answer price increase for the 2024 season, the actual. Working on the pricing freeze up to five percent on the old goods slightly more on parts and that the US centric comment, it does very little bit as you go around the owner and the rest of our business.

Great. Thank you in closing I'd, just like to thank everyone for their interest in Hayward, our business is well positioned to navigate the near term challenges and deliver value to all stakeholders in the year 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.

Eifion Jones: But generally speaking, once you put all of that into the calculation of the SK, you range with expect probably an average price increase of about three to four percent globally next year on a weighted queue basis. And really that's to to protect against where we see inflation dynamics. And most of those inflation dynamics are consequential to labor cost increases in the business in terms of the early buy. We have given a standard discount more in line with history on the early buy and in terms of terms, we have gone to a more standardized approach on payment terms of 180 days in the main some some. Some customers have slightly different, but generally speaking 180 days with a 2% discount to surprising. Perfect.

Operator: Thank you.

So we look forward to talking to you again on our fourth quarter earnings call. Thank you operator, you can now in the call.

Yeah.

Thank you.

Includes todays teleconference. You may disconnect your lines at this time, thank you for your participation.

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Andrew Carter: Next question comes on the line of Andrew Carter with please, please go ahead. Yeah, hey, thank you. I just want to go back to this vendor incentive issued in the quarter. I guess number one. And why was this so abrupt and kind of not kind of telegraphed in the quarter, you know, given the focus on pricing here. And I'm still a little confused about how the rebates could be up this year, given I know you said it was a tailwind last year.

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Andrew Carter: But I would assume you probably you had a better volume cell food last year than this year than what's implied can can some individual customers outperforming drive the mix that much just the incremental clarity there. Thank you.

Kevin Holleran: Yeah, it is a limited Q3 dynamic entry. This time last year when we performed seasonal rebate calculations, the final calculations resulted in a positive adjustment back to income given the aggregate misses across the channel. Our rebate structures are based upon channel cell in the main and last year they were limited based upon channel performance. This year we've restructured our programs in the US. We've actually gone to a more quarterly base program structure that's in recognition of the dynamics we were assisting the channel within terms of the stock and we've had slightly higher rebate percentage famous this year than we have had last year.

Kevin Holleran: But given it all gets accounted for in Q3 you can have a year of year swing dynamic has no implications the overall gross price. The remains positive year over year and this just this adjustment really is a Q3 dynamic. So quickly so was one more incremental thing this year a change in the program relative to last year. Did I hear correctly? We changed in the US we changed our programs for more quarterly base program incentive last year was a typical seasonal approach. So you're occurring for seasonal rebates. You get to the end of the season you evaluate where the channel is and then you make your adjustments accordingly. This year is being more quarterly adjustments.

Eifion Jones: Thank you.

Eifion Jones: The second question about your year in leverage. From calculating right off your updated guidance. I'm getting like a three seven to three four. That would assume best on best worst on worst. Is that fair because the pre-buy will dictate cash flow within that where what are the implications for where leverage will go into kind of first quarter. Is there and I know that debts pay down is your highest priority. Is there help us understand that and what the dynamics are and how much how aggressively you're wanting to pay down that thanks.

Eifion Jones: Sure. Yeah. The range that that you recount there is broadly correct. And it as you said is heavily dependent on the mix of businesses we've stepped through the final nine, ten weeks of the year here. As we mentioned lower flow orders as the channel moves their flow in season terminology we're using here. As they ship those orders to close to the 22 hour near full season you push that cash collection into that time period and you actually exit this year with slightly higher inventory.

Eifion Jones: So we do expect to the deal average as we step into the new year. We expect to get back into our targeted range two to three times in 2024 once we collect the early by cash and we see these in in season orders go through in the back end of Q1 Q2 and over next year. We feel really good about our liquidity position. Right now we've got significant cash on the balance sheet.

Eifion Jones: We remain undrawn on our AVL facility. We've done a good job on our own here reducing our own inventory levels on our balance sheet which has been a great source of cash this year. So from my perspective we feel I feel very comfortable with a liquidity position in the business and recognize that with the shift in order mix it will defer a little bit of cash collection into next year whereas we had anticipated this year but that's just the timing issue.

Eifion Jones: Thanks, I'll pass it on.

Mike Halloran: Thank you.

Eifion Jones: Next question comes from the line of Mike Halloran with bed, please go ahead. Good morning guys, Pesendorfer Mike, a quick one for you. So obviously, a lot of moving pieces, given the distance, the stocking, the pricing discounts, impacting EBITDA margins, but can you maybe help us understand what you think the right run rate exiting this year looks like? Obviously, a little bit wider range of expectations are possible outcomes going into 4Q and in the next year than we were initially anticipating.

Eifion Jones: So if you could touch on that a little bit on exit rate expectations, that'll be helpful. Yeah, let's, in terms of the quality of the income statement, we still expect to exit out this year at high 40s gross margin, and slightly over mid 20s adjust the EBITDA when you calculate our results at the mid point. So, you know, we're very pleased with the quality of our income statement, despite the year on year net sales decline as we go through this channel de-stocking period.

Eifion Jones: So, you know, that's, that's come as a consequence a lot of hard work in the business to, to protect our margin. And as we indicated, we look forward to the next year to see that leverage, opportunity, lift both of those margin dynamics both of the gross profit line and more importantly of the adjusted EBITDA line. But as we exit this year, we're still going to post up high 40s gross margin and slightly over mid 20s adjust the EBITDA margin.

Eifion Jones: Got it. That's, that's super helpful. And, and maybe at a high level, can you just dig in to the diverging trends of the gross margin and the adjusted EBITDA margin that we saw in this corner and maybe help us with the puts in case that drove the, the gaining gross margin but the weakness and adjusted EBITDA margin. Yeah, I think it just strictly comes down to, as we've discussed before, Q1 and Q3 tends to be the low cost of our season of our year.

Eifion Jones: And then when you look at the coverage you have across your SGNA base, you have less coverage in Q3. So, you'll see healthy margins throughout the year, the gross margin level, but less leverage across the SGNA base in Q1, Q3. And that's, that's what limited the, the adjusted EBITDA margin in this particular quarter. It will lift again in Q4 as we get more leverage across that SGNA base. We had, as we mentioned, a little bit of a sequential increase in SGNA costs, consequential to field service quality costs, that's a true upper view cooler in recognition of higher field service inflation costs rolling through. But again, that, that will moderate as we go forward here. But this strictly comes back to leverage across the SGNA base in a seasonally-like sales period. Thanks, I appreciate the colour I'll pass it on.

Nigel Coe: Thank you. Next question comes on the line of Nigel Coe with full research. Peace How are you doing?

Kevin Holleran: Good, thanks, good. All right, so Kanda, let's talk about Kanda. How big is Kanda? What percentage of your North American second is Kanda? And is there any material difference in margins between Kanda and your North American business? Canada on a comparison basis was nearly 10% in 2022. And it's about two-thirds of that in our overall mixed issue. Historically, there had been more of a margin decrement in Canada, but I'd say the team has done a great job over the last handful of years. Working the price list value-basing are pricing, and it's gotten much closer to our standard, called the US margin rate, Nigel.

Kevin Holleran: Okay, that's great. This portion, you know, to be in court is a concept price, but I'm curious if you've seen any material change in different, you know, difference in behavior between the smaller distributors and the larger players at tool. I've got to imagine that the, you know, the imagery holding costs in these and the current rate environments is crippling from the smaller players, so I'm just wondering if there's any difference you've seen out there?

Kevin Holleran: I mean, is it not just an end market issue? It is also a great issue as well. I've not necessarily seen irrational behavior across the various distributor partners. You know, as we said earlier, I would, I really see them just being maybe more cautious with the rate of reorder. As they, as they move inventory after balance sheet, that's kind of what we've seen as opposed to, you know, some kind of irrational pricing that they're putting out into the marketplace.

Kevin Holleran: Yeah, it wasn't really a pricing comment, but just my final comment is really actually on pricing, the adjustment. So I do, I think you said you've gone to a quarterly basis now as opposed to a seasonal basis, but is this, this true up really just purely a 3Q issue? I'm just, this one makes sure this isn't a bleeder into fourth core as well. Yeah, I want to be clear, Nigel, it absolutely is a Q3 issue, and it really is stepping over a good guy last year, not repeating this year.

Kevin Holleran: So it's, you know, we expect positive price realization in the fourth quarter year over year. It's a little bit unfortunate we have these year over year seasonal true ups in the third quarter. As you mentioned, as I mentioned, we've moved to a coffee program this year. We've actually changed the overall structure of our rebates to go on to a calendar year basis, where as historically it used to be on a cool seasonal year basis ended in Q3. So, you know, we expect, we expect to shift the quarterly for the balance of the year, and then on a calendar year basis as we go into 2024.

Nigel Coe: Okay, I just killed a horse on that one, but thank you very much there.

Operator: Thank you.

Sean Elmum: Next question comes on the line of Sean Elmum with Bank of America. Please go in. Hi guys, thanks for taking my question.

Eifion Jones: Despite the pricing headwind, the gross margin was near record levels. So can you talk about what you're seeing on inflation for materials and labor and what your expectations are heading into 2024? So we have seen moderating inflation in some commodities, the overall basket of raw materials, including purchased items, still remains moderately inflated over last year, but the rate of inflation is certainly decreasing. I think when it comes to labor costs, we are seeing labor costs now move positive move higher.

Eifion Jones: And that was one of the main implications, reasons why we increased our price list as we move into 2024. But just again to come back to price dynamic, you know, price list in the quarter was positive year over year. You've just got this one time rebate anomaly, which is unfortunately affecting the queue, but as you step into queue for, you'll see the fullness of price year over year. For four year, we still expect very positive price realization and margins will continue to hold into the high forties as we step through queue for. Great. Thank you.

Nick Cash: Next question comes on the line of Brian Lee with Goldman Sachs, please go ahead.

Kevin Holleran: Hi everyone. This is Nick Cash on the line for Brian Lee because I had a quick question regarding destocking. You know, it seems that you guys still are having some destocking issues in Canada, but I just really wanted to know and gauge how you guys are seeing the rest of North America and the rest of the world. And if you have any visibility on being fully destocked in 2024 and any of these other markets, you also mentioned buyers being a little bit more cautious.

Kevin Holleran: And that's, I guess, you know, the new base case or do you happen to see or expect any, you know, restocking period that could possibly be a tale of going to 2024. Thank you. Yeah, you know, as I would say, we've, we've made great progress through September. There are still maybe some particular channel partners or even some regions, you mentioned Canada, where there's still some recalibration needing to occur. But we felt, we felt really good, you know, with the close of the seasonal year, being September of the progress that was made.

Kevin Holleran: You know, the normal inventory flow because of the early buyer, the winter stocking programs is this, you know, you worked out inventory through Q3 and then Q4 and Q1 or normally restocking periods and then work that inventory off. Q2 and Q3 as the markets are open everywhere, so that's really what we're seeing around a destocking standpoint. I forgot the second part of the question around in 2020. I think when it comes to the rest of the world, it's a bit of a wait and see.

Kevin Holleran: Some of those markets have got a bit more macro sensitivity than our primary US and European markets. So we'll continue to monitor that situation and work with those channel partners to get that pull through to help them move that material through those channels. But it's something that we want to have full visibility up until we actually step into the 2024 season. Yeah, I mean, with our supply chain capabilities as we exhibited through the COVID experience, whether the orders come in through an early buy program or whether they're more in season, we'll be partnering with our channel folks to respond. What we both believe is best in class to be able to respond to the market dynamics as they play out here into 2024.

Operator: Awesome. Thank you guys. Appreciate the color. Thank you. There are no further questions at this time.

Kevin Holleran: I would like to turn the floor back over to Kevin Halloran for closing comments. Great. Thank you. In closing, I just want to thank everyone for their interest in Hayward. Our business is well positioned and navigate the near term challenges and deliver value to all stakeholders in the year 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 that we look forward to talk me again on the fourth quarter earnings call. Thank you operator. You can now in the call. Thank you.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you.