Q3 2024 Hayward Holdings Inc Earnings Call
Jessie: Welcome to Hayward Holdings third quarter 2024 earnings call. My name is Jessie and I will be your operator for today's call.
Jessie: At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
Jessie: During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President, Investor Relations and FP&A. Mr. Maczka, you may begin.
Kevin Maczka: Thank you, and good morning, everyone. We issued our third quarter of 2024 earnings press release this morning, which has been posted to the investor relations section of our website at investor.hayward.com. There, you can also find an earnings slide presentation that we will reference during this call.
Speaker Change: I'm today joined by Kevin Holleran, President, Chief Executive Officer, and Eifion Jones, Senior Vice President and Chief Financial Officer.
Speaker Change: Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2024 and future periods.
Speaker Change: Such statements are subject to a variety of risks and uncertainties, including those disclosed in our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission, that could cause actual results to differ materially.
Speaker Change: The company does not undertake any duty to update such forward-looking statements.
Speaker Change: 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.
Speaker Change: I would now like to turn the call over to Kevin Holleran.
Kevin Holleran: Thank you, Kevin. Good morning, everyone. It's my pleasure to welcome all of you to Hayward's third quarter earnings call.
Kevin Holleran: Before we begin, I'd like to offer our deepest sympathies to those impacted by the hurricanes that devastated many regions.
Kevin Holleran: across the southeastern United States, including in our home state of North Carolina.
Kevin Holleran: We have many employees, customers, and other stakeholders throughout the Southeast. Our thoughts are with our neighboring communities in this time of great need, and we are committed to assisting in any way we can. Now I'll start on slide 4 of our earnings presentation with today's key messages.
Kevin Holleran: I am pleased to report third quarter results consistent with expectations.
Kevin Holleran: We executed well again this quarter, delivering strong profitability, increased cash flow, and improved balance sheet.
Kevin Holleran: We continue to drive our growth strategy by advancing our technology leadership position, leveraging our culture of continuous improvement and operational excellence.
Kevin Holleran: and expanding customer relationships.
Kevin Holleran: Net sales increased 3% year-over-year in the third quarter, driven by positive net price realization and the recent acquisition of Quarantine. We were very pleased with the performance of this business in the first full quarter of Hayward ownership.
Kevin Holleran: Gross profit margins expanded 190 basis points to 49.7%. This represents the seventh consecutive quarter of year-over-year gross margin expansion.
Kevin Holleran: After a slow start to the pool season this year, our North American business benefited from an extended season and improved in-season orders. Additionally, the Early Buy program is progressing in line with our expected participation.
Kevin Holleran: Finally, we're refining our full-year guidance, raising the lower end of the ranges to reflect modestly improved sales and profitability.
Kevin Holleran: For the full year 2024, we now expect net sales to increase approximately 3 to 5 percent and adjusted EBITDA to increase approximately 5 to 9 percent from full year 2023.
Kevin Holleran: Turning now to slide five.
Kevin Holleran: Highlighting the results of the quarter. Net sales in the third quarter increased 3% year-over-year to $228 million. The positive contributions of NetPrice and ClorKing were partially offset by lower volumes.
Kevin Holleran: By segment net sales increased 5% in North America and declined 7% in Europe and rest of world
Kevin Holleran: As I mentioned, gross profit margins expanded 190 basis points year-over-year to 49.7 percent despite an approximate 70 basis point dilutive impact of purchase accounting related to the Cora King acquisition.
Kevin Holleran: This is a strong performance in a seasonally lower sales quarter. Adjusted EBITDA margin in the third quarter increased 110 basis points year-over-year to 22.5% and adjusted diluted EPS was 11 cents.
Kevin Holleran: Turning now to slide six for a business update.
Kevin Holleran: In-season demand for Hayward products was generally consistent with our expectations in the quarter with North America outperforming Europe and rest of world. In North America we saw increased in-season orders as the pool season started slowly on the front end but extended on the back end.
Kevin Holleran: Aftermarket repair and replacement remains resilient, but demand for the majority of new construction and remodel continues to be impacted by current economic conditions and interest rates.
Kevin Holleran: However, while we see the number of U.S. permits down, the value of permits remains more resilient, indicative of relative strength in the high-end new construction and remodel segments of the market.
Kevin Holleran: The Early Buy programs are nearing completion in North America and underway in Europe, and we are pleased with the progress to date. Incoming orders are trending in line with expectations, and we anticipate solid participation.
Kevin Holleran: The pool industry has always been very disciplined on price, and we continue to expect positive net price realization of at least 2% in 2024.
Kevin Holleran: We've been implementing value-based pricing strategies and SKU rationalization to optimize our price structure and ensure our products are priced appropriately relative to the exceptional value provided to pool owners.
Kevin Holleran: Given these initiatives, we implemented annual price increases in conjunction with the early buy program that we expect to yield approximately 3 to 5 percent in the U.S. and 1 to 2 percent in international markets.
Kevin Holleran: Technology leadership and new product introduction are central to our growth strategy and we were extremely excited to see our efforts recognized recently by the largest global distributor. Specifically, Hayward received separate awards for both innovation leadership and operational excellence.
Kevin Holleran: This achievement is a testament to the dedication and hard work of all of our teams and employees at Hayward. Thank you for enabling us to be such a valued partner in our industry.
Kevin Holleran: One example of an exciting new innovation is the microchannel temperature control unit, which we introduced you to in a prior earnings call.
Kevin Holleran: This industry-first product offers the ability to heat pool water, cool it to a comfortable temperature in the extreme summer heat, and even cool as low as 40 degrees if desired for a cold plunge. We are encouraged by the initial success of this unique product in the marketplace.
Kevin Holleran: Today, we're highlighting another new product introduction, the Paramount RDX Unblockable Drain. We continue to lead in drain technology, and the new RDX combines safety and high flow, ensuring swift and effective removal of debris.
Kevin Holleran: Compatible with concrete finishes, the design is able to collect large debris while blending seamlessly into the pool floor.
Kevin Holleran: Differentiated, innovative products like these add value to our customers and drive future growth. We are investing in enhanced customer service and support, including new dedicated leadership and staffing.
Kevin Holleran: Customer Productivity Tools and Training Opportunities.
Kevin Holleran: During the quarter, we appointed a proven leader within Hayward to the newly created role of Vice President of Customer Experience, tasked with leading an industry-best customer care organization.
Kevin Holleran: We are also seeing increased adoption of our proprietary OmniPro app, an innovative cloud-based productivity tool for trade professionals, enabling real-time remote monitoring of a homeowner's pool and equipment configuration.
Kevin Holleran: As the industry becomes increasingly technology-oriented, we believe best-in-class support will be critical to further elevate the Hayward brand and drive customer intimacy, resulting in increased aftermarket conversion opportunities.
Kevin Holleran: Next, I'd like to provide a brief update on chloroquine.
Kevin Holleran: We acquired the business in late June and we're very pleased with its performance in the quarter.
Kevin Holleran: Clark King is a leader in commercial pool water sanitization and a great strategic fit with a strong financial profile, advancing our position in the attractive commercial pool market.
Kevin Holleran: We are already seeing the synergies of the integration with Hayward's existing commercial business.
Kevin Holleran: Our sales teams are actively leveraging each other's customer bases to win new projects, serving the demand for sustainable, cutting-edge water sanitization systems. With that, I'd like to turn the call over to Eifion, who will discuss our financial results in more detail.
Eifion Jones: Thank you, Kevin, and good morning. I'll start on slide 7.
Eifion Jones: All comparisons will be made on a year-over-year basis.
Eifion Jones: As Kevin stated, we are pleased with our third quarter financial performance. Consolidated net sales were in line with expectations for the quarter and we delivered outstanding profitability in cash flow generation, enabling a further reduction in net leverage to less than three times.
Eifion Jones: Looking at the results in more detail, net sales for the third quarter increased 3% to $228 million. Net price realisation of positive 6% was offset by 5% lower volumes.
Eifion Jones: Hawking performed well in the first quarter of ownership.
Eifion Jones: The £113 million gross profit margin increased 190 basis points year-over-year to 49.7% despite a 70 basis point dilutive impact of the Clork in Purchase Accounting.
Eifion Jones: Adjusted EBITDA increased 8% to £51 million in the third quarter and adjusted EBITDA margin increased 110 basis points to 22.5%. Our effective tax rate was 21% in the third quarter.
Eifion Jones: Adjusted diluted EPS in the quarter increased 22% to 11 cents.
Eifion Jones: Now I'll discuss our report of the sentence.
Eifion Jones: Beginning on slide 8, North American net sales for the third quarter increased 5% to $195 million, driven by favourable pricing and the clocking acquisition. Net sales increased 5% in the US and 17% in Canada. We were encouraged
Eifion Jones: to see increased orders and sales in the quarter in Canada despite the significant impact in that market due to economic conditions and financing costs.
Eifion Jones: Thank you. Bye.
Eifion Jones: Gross profit margin increased 290 basis points to 52.3%. Adjusted segment income margin was a robust 30.5%.
Eifion Jones: Turning to Europe and the rest of the world, net sales for the corset decreased 7% to $33 million due to lower volumes, partially offset by favourable pricing.
Eifion Jones: Gross profit margin reduced to 34.4%, largely driven by lower volumes, a discreet inventory adjustment and unfavourable mix. Adjusted segment income margin was 8.4%.
Eifion Jones: sent in to slide 9 for a review of our balance sheet and cash flow highlights.
Eifion Jones: We are very pleased with the balance sheet improvement and strong cash flow performance in the quarter. Net debt to adjusted EBITDA improved significantly to 2.8 times compared to 3.9 times a year ago and 3.1 times at the end of the second quarter.
Eifion Jones: Total liquidity at the end of the quarter was $388 million, including cash and equivalents of $274 million, plus availability under our credit facilities of $114 million.
Eifion Jones: We have no near-term maturities on our debt.
Eifion Jones: matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans.
Eifion Jones: are borrowing rate benefits from the £600 million of debt currently tied to fixed interest
Eifion Jones: Rates swap agreements, maturing in 2025 through 2027, limiting our cash interest rate on our term facilities to 6.2% in the third quarter. Our average interest rate earned on global cash deposits for the quarter was 4.7%.
Eifion Jones: The business has attractive free cash flow generation attributes and seasonal strength in the second and third quarters related to timing of payment collection of early buy receivables.
Eifion Jones: Year-to-date cash flow from operations was $276 million, a 27% increase compared to the prior year period, reflecting continuous improvement in working capital management.
Eifion Jones: Year-to-date CapEx of $18 million was below the prior year period due to project timing, resulting in a year-to-date increase in free cash flow of 34% to $258 million.
Speaker Change: We continue to expect free cash flow conversion of greater than 100 per cent of net income and expect full year 2024 free cash flow of approximately £160 million.
Speaker Change: and shareholder returns while maintaining prudent financial leverage.
Speaker Change: In the near term, we are prioritizing organic and inorganic growth investments and debt repayment. We continue to consider other strategic acquisition opportunities to complement our product offering, geographic footprint, and commercial relationships, in addition to opportunistic share repurchases.
Speaker Change: Turning now to slide 11 for the Outlook, we are refining our four-year guidance ranges, raising the lower ends.
Speaker Change: For the full year 2024, we now expect net sales to increase approximately 3% to 5%.
Speaker Change: to $260 to $270 million compared to our prior guidance of $255 to $270 million.
Speaker Change: We anticipate full-year free cash flow of approximately $160 million. We expect full-year net interest expense of approximately $63 million and capex spending of $25 million.
Speaker Change: for the remainder of the year. Looking out beyond 2024, we remain positive about the long-term health and growth profile of the pool industry, particularly the strength of the aftermarket. We are confident in our ability to successfully execute our strategic growth plans.
Speaker Change: And with that, I'm going to turn it back to Kevin.
Kevin: Thanks, Ivan. I'll pick back up on slide 12. Before we close, let me reiterate the key takeaways from today's presentation.
Kevin Maczka: We delivered third quarter results consistent with expectations and refined our guidance range for the year, raising the low ends.
Kevin Maczka: Our team continues to execute, delivering strong gross margins and cash flow, allowing us to fund our growth strategies and de-lever the balance sheet.
Kevin Maczka: We are investing in exciting new product innovations, commercial programs, and service offerings to better support our customers and improve the pool ownership experience.
Kevin Maczka: I am confident that we have the right strategy and talent in place to drive compelling financial results and shareholder value creation. With that, we're now ready to open the line for questions.
Speaker Change: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our first question is coming from the line of Andrew Carter with Spiefel. Please proceed with your question.
Andrew Carter: Hey, thank you. Good morning. I wanted to ask about kind of the gross margins, specifically the differential between the North American business...
Andrew Carter: and Europe. How much of that is structural? How much of that is improving performance? And as you think about growth in a more normalized world where the North America, I'm sorry, Europe rest of world segment would outperform the base business.
Andrew Carter: Does that represent a dragged margin, or will the overall improvements within that segment continue to drive consolidated gross margin higher? Thanks.
Speaker Change: Morning, Andrew. Yeah, I mean overall as we were extremely delighted with the with the margins continuing to open up here in third quarter, I think it was the result of a number of things. You know, namely a couple quarters back we indicated that we had finally gotten
Speaker Change: the price-cost neutrality, and we continue to see that.
Speaker Change: We had some great price in the quarter, driven partly by the fact that we had more normal discounts and allowances in third quarter on a year-over-year basis, as well as favorable.
Speaker Change: mix, both product as well as regionally with North America, obviously seeing better volume than in Europe and rest of the world. I probably shouldn't leave it to last because it's really our core culture.
Speaker Change: and we continue to drive that out of the organization.
Speaker Change: As for some of the difference between North America and Europe and the rest of the world, we continue to battle some macroeconomic challenges in Europe specifically, and then in a strong export market, specifically the Middle East.
Speaker Change: There's obviously some geopolitical circumstances that continue to impact business.
Speaker Change: We also, I'll ask Eifion to go a little deeper on this in a moment, but we also saw a relatively modest, discrete inventory adjustment.
Speaker Change: in the ERW segment within the quarter. But we are investing. This is a core of growth.
Speaker Change: region for us and we feel really good about many of the things that we're that we're accomplishing over in Europe, rest of the world, namely some great new leaders in high-impact roles over there. We've added to the bench strength.
Speaker Change: into a Barcelona location.
Speaker Change: and we're really turning up the focus on new product introduction and technology development.
Speaker Change: by recently naming one a global leader overall product development and technology.
Speaker Change: Lots going on, there is some difference obviously between North America and Europe and the rest of the world. But we believe and we know that the investments and the process improvements that we're undertaking
Speaker Change: will ultimately start to bring those margins back in line with each other.
Speaker Change: Yeah, and if you have to follow on from Kevin...
Speaker Change: As you know, we relocated our manufacturing lines from just outside of Madrid.
Speaker Change: to Barcelona in the early part of this year. During Q3, we counted most of the sites across Spain, the largest sites across Spain, which resulted in a small net inventory adjustment. Overall, approximately 30 BIP impact diluted total Hayward margin.
Speaker Change: But it allows us to have a clean slate following that relocation of production lines as we step into Q4.
Speaker Change: Were there any anomalies in there similar to last year that was kind of a headwind? Was it a catch-up from last year? And obviously with the increases of what you're doing, I wouldn't expect it, wouldn't expect pricing in any one quarter or at least annualized to be more than the 3 to 4. Or just help us out with kind of any expected variances we might see. Thanks.
Speaker Change: Yes, I'll break down the 6%. It's basically got three contributing benefits. One is the year-over-year price increase.
Speaker Change: In the early part of September so we've got a little bit of benefit in the last couple of weeks in September from that particular price increase
Speaker Change: Thank you very much, I'll pass it on.
Speaker Change: Thanks.
Speaker Change: Thank you. Our next question is coming from the line of Jeff Hammond with KeyBank Capital Markets. Please proceed with your question.
Speaker Change: www.mytrendyphone.co.uk
Speaker Change: Hey, good morning guys. So just to close the loop on rest of world, you know, so you had the one-time inventory adjustment. So how should we think about that business, you know, margin-wise into the fourth quarter and next year and just maybe just speak to underlying, you know, stability or signs of stabilization and demand there?
Speaker Change: We certainly expect a step up in margin in Q4.
Speaker Change: that's reflected in our guidance.
Speaker Change: and for the year.
Speaker Change: over the third quarter and traveled probably close to the average for the full year to date through Q3.
Speaker Change: We have ambition, obviously, to improve that margin now above 40% in the near term. Near term defined as over the next several years.
Speaker Change: Um...
Speaker Change: I would additionally say, Geoff, that during the third quarter we had a lower mix of what we call rest of world business.
Speaker Change: which also tends to have a higher margin, so it's a little bit of a dilutive mix effect.
Speaker Change: So we do believe we have a runway here to improve margin over the near term to get above that 40% level. It won't necessarily be in the next year, but we have pathway.
Speaker Change: Okay, and then...
Speaker Change: Thank you.
Speaker Change: You know, clearly, I think, you know, break-fix has been, you know, pretty stable and pretty choppy on the new remodel.
Speaker Change: Any kind of early framing on how you're thinking about the market into 2025 and maybe you can just, within that, touch on any kind of near-term negative hurricane impact or positive impact into 2025.
Speaker Change: Thank you.
Speaker Change: Yeah, I'll touch on the last half of the question first. I mean, obviously, it's a terrible situation, as I mentioned in my opening.
Speaker Change: there and we're really just focused however we can on serving our channel partners and end customers helping them get their lives back in order. We have seen some incremental demand from the channel and some of the impacted areas
Speaker Change: as they, you know, early on, help to recover and rebuild. I think we'll see this in waves, Jeff. I think initially there's some triaging that takes place.
Speaker Change: to really stabilize the water, treat the water, and get it circulating again if the pump...
Speaker Change: isn't working and then there may be more substantial repairs later on to other equipment that
Speaker Change: that may have been affected by the weather.
Speaker Change: We actually have informed all of our channel partners with a special code that anything that is for disaster relief,
Speaker Change: goes to the top of the list, up front of the line.
Speaker Change: And we're filling those orders highest priority
Speaker Change: in our order flow. Second half of the question, yeah, the aftermarket, you know, continues to be very resilient.
Speaker Change: As you've heard us say throughout the year
Speaker Change: and the year has played out generally like we called early on with our initial guide where we were saying the more discretionary aspects of the market, which we call new construction and more substantial repair, remodel.
Speaker Change: are really what's being affected. We called for about down 15% in North America.
Speaker Change: and more like 25% in international markets.
Speaker Change: around those discretionary. I think that's within the range of what we've seen play out through three quarters.
Speaker Change: And unfortunately, what we're going to see continue into Q4. So, you know, we're very interested in seeing, you know, what future moves the Fed.
Speaker Change: is willing to make based on data they're digesting. It was great to see the initial 50 BIP.
Speaker Change: cut a little over a month ago now but we need more cuts I think before I think the macro environment for our industry anyway you know we'll start to start to be more optimistic.
Speaker Change: Okay, thanks so much guys.
Speaker Change: Thank you. Our next question is coming from the line of Sorey Boroditsky with Jeffries. Please proceed with your question.
Speaker Change: Good morning. This is James Alphersary. Thanks for taking questions. I wanted to talk about Alibi. I think you mentioned that Alibi kind of progressed as expected. So can you kind of elaborate on what you anticipated for Alibi compared to last year, and how much coverage are you getting from Alibi in 2025?
Speaker Change: Yeah, as I said, it's progressing, you know, sort of as we wait out.
Speaker Change: We're seeing very solid participation from our channel partners.
Speaker Change: But we're seeing, you know, nice participation, I'd say, sort of directionally as we saw last year.
Speaker Change: was really what our expectation was and we're seeing a trending towards towards that.
Speaker Change: As you know, some of that gets shipped.
Speaker Change: in the fourth quarter. That's normal for us. That's what drives some of the seasonally higher shipments in Q4 as we prepare the channel for the upcoming season. But we would need a couple more weeks.
Speaker Change: for us to know ultimately how Early By concludes, but we're very pleased with how it's progressed.
Speaker Change: today. James, I know you are aware of this, but for the rest of the of the audience, let me just, you know, define what early buy is.
Speaker Change: By laying out the program, it's...
Speaker Change: it's maybe in another industry would be called winter stocking but it's it's the method our industry has for stocking up for the for the next season. We really view it as a win-win for both the channel as well as Hayward by offering a discount.
Speaker Change: To the announced price increase that I've been just mentioned that that's really in concert with the early buy program We offer payment terms out into the spring of next year
Speaker Change: It allows us to level load our facilities in a seasonally lower, well, in a cooler time of year where folks aren't in their pools using them as much, and we get to ship at our discretion.
Speaker Change: into the channel. So, that's the structure of the program for someone who may not have known what Early Buy was, but I would say it's progressing very well and to our expectations.
Speaker Change: Got it. Great. And as a follow-up, I know it is still kind of early on to talk about kind of 2025, but what are you kind of hearing from dealers and builders about their backlog and kind of their outlook on new construction and remodeling?
Speaker Change: Thanks for watching!
Speaker Change: Yeah, I'm not sure.
Speaker Change: I'm not necessarily hearing that leads are picking up. I think, as I said a moment ago, that there is some general optimism that if additional cuts, interest rate cuts are coming, that that's going to spark demand as what we've really seen this year is more the financing dependent.
Speaker Change: portion of the market is most affected. So if there are additional cuts coming, I think that that's absolutely gonna give us some tailwind.
Speaker Change: As an industry, you know, it's important to point out. I don't think it's immediate though. I think we need to see more substantial cuts and then that has to work through the
Speaker Change: through the system, you know, from securing the financing to deciding on who's going to build the pool and finalizing your design and pulling the permits. So there is some, there is some lead up from once the interest rate cuts curve.
Speaker Change: and I think that's also really renovation and remodel dependent as well as as quite a bit of that activity is financing dependent.
Speaker Change: But, you know, I'd just like to finish by saying again, you know, 50-plus percent of our revenue is tied to this very resilient, largely non-discretionary aftermarket break fix. So, obviously new construction and large-scale remodel.
Speaker Change: are important to us and to the whole industry, but the aftermarket has remained very resilient through these challenging macro times that we've had the last couple of years.
Speaker Change: Great. Thanks for taking the questions. Thanks, Jim.
Speaker Change: Thank you. Our next question is from the line of Ryan Merkle with William Blair. Please proceed with your question.
Ryan Merkle: Hey guys, nice quarter. I wanted to start off on the price outlook. I think you mentioned three to five percent price in the U.S. for 25. That's a little bit above the two to three we're used to. My question is how much of that increase is sort of your normal inflationary increase and then how much is some of this strategic pricing that you're doing?
Speaker Change: Yeah, I would say it's, you know, we need the fourth quarter to really finalize what our inflation assumptions are, but from a commodity or material standpoint, we're seeing kind of high 2, closing in on 3% maybe, and labor salary wages maybe a tick up.
Speaker Change: From that so, you know holding price cost
Speaker Change: You know, we would need 3% or so pricing.
Speaker Change: And then I really think, you know, you could look to that delta where some SKUs or product categories were priced higher than that around some of this value pricing.
Speaker Change: taking a hard look at where we believe the product is providing greater payback or value.
Speaker Change: than what the historic price has been. So, that's really how I'd lay it out for you, Ryan. You know, the first three or so is to hold price-cost neutrality and then some upside based upon some of the more strategic value pricing initiatives that our team's undertaking.
Ryan Merkle: Got it, that's helpful. And do you expect to finish the strategic pricing in 2025?
Speaker Change: No, no, I don't think I mean, I mean it's a lot of heavy lifting is going on You know in the in the maybe the early innings of this but I but I'm not sure from a value pricing standpoint
Speaker Change: It's ever complete because we'll constantly be bringing some new technology to bear.
Speaker Change: And I think what goes hand in hand with this is some of the skew rationalization activities as we retire some either lower technology or redundant.
Speaker Change: products, I think that that provides some value pricing.
Speaker Change: opportunities. So one really goes with the other and I think maybe the most impact is in some of the early innings as our as our organization focuses on that, but I'm not sure I would ever say the curtain drops on that.
Speaker Change: Okay.
Speaker Change: Good and then my second question is on gross margins. They're up about 500 basis points since 22 and sales are down.
Speaker Change: And so my question is, you know, if we get a recovery scenario and you've got strategic pricing, is there still 100, 200 basis points of upside to gross margins if I look out the next two, three years?
Speaker Change: Hi Ryan. Yes, certainly, you know, we are notably up on 22. Let's not forget in 22
Speaker Change: You're battling the inflation monster, which we kind of slayed towards the end of 22 and into 23. So I'm not quite sure 22 was a representative example of the underlying margin in the business, given that inflation period. But where we're at today, we feel pretty good about. And, you know, we've talked about the opportunities we have to continue to drive margin enhancement across the business.
Speaker Change: We will continue to execute on those four pillars which I've discussed before. You know, continue to leverage the top-line growth.
Speaker Change: We've demonstrated we can grow our business within our four walls of manufacturing today, so we should continue to get leverage as we grow volume.
Speaker Change: productivity actions throughout the business. We have a return to our core practices of lean manufacturing. Those are yielding fantastic results in North America and we expect the same in Europe as we
Speaker Change: drive common systems across our group progressively over the next 18 months.
Speaker Change: We've demonstrated price-cost we can handle, and that's reflected now in the margin. And then, as Kevin just mentioned, we're going to continue to introduce...
Speaker Change: high-value, high-margin new products.
Speaker Change: and support the customer with ever-increasing investment. Also, as Kevin mentioned, so they're educated on that new technology and understand it, and therefore be able to extract the appropriate margin on those products.
Speaker Change: I'm not going to get really definitive on 2025. I think we have these opportunities to improve, and we'll continue to execute on those opportunities.
Speaker Change: Perfect. Thanks. Pass it on.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is coming from the line of Nigel Coe with Wolf Research. Please proceed with your question.
Speaker Change: Thanks. Good morning, everyone.
Nigel Coe: So when I look at your top line guide for fourth quarter, alright, it's a 20 million dollar give or take kind of range, but
Nigel Coe: It's the difference between low single digits and you know, I think maybe 10% organic
Speaker Change: Is there any correlation between early buy strength and what that tells us about the season coming up? I'm sure there is, but any thoughts on what you're reading into the demand environment for next year?
Speaker Change: I'm sorry, I'm sorry, I'm sorry, I'm sorry, I'm sorry
Speaker Change: Yeah, the latter part of the question. I think the early buy activity is really, I think of it in two ways, Nigel.
Speaker Change: You know firstly would be maybe what the what the inventory position
Speaker Change: in the in the channel is as the season ends. I think that that that that really helps define maybe what the appetite is on behalf the channel to to buy forward so to speak
Speaker Change: Bye
Speaker Change: You know, this isn't just OEM with the channel. What the channel's doing is, while the Early Buy program is published in this window here, is they're out having conversations with the dealers.
Speaker Change: and the terms and some of the pricing and the discounts that we offer are actually now, you know, being discussed.
Speaker Change: with the dealers, the servicers, the builders, the renovators. So, you know, again, as that comes back to us as the OEM, I think that that does give some indication for what the overall attitude or what the level of optimism is.
Speaker Change: you know, down in the dealer base, you know, working in the backyard day in and day out. So, you know, based upon those two factors, you know, we're seeing a pretty
Speaker Change: Pretty solid response from early buy and we're not ready to guide on 2025 yet by any means, but this is a nice building block heading into 2025 for us.
Nigel Coe: There was another part of the question, Nigel, I'm sorry that I... Yeah, I'm just wondering, the 4Q range, you know, we've got a kind of a, I don't know, 3%, 10% range on fourth quarter in that kind of zone, so just wondering what the variability is.
Speaker Change: Hi Nigel, we've got 3-5% as the full year range now as we head into the final quarter.
Speaker Change: at Q3.
Speaker Change: a pretty good result in that category. We know what the early buy is stacking up to look like, and so we feel pretty comfortable we've got line of sight around early buy, but the in-season orders remain the item that we continue to look at carefully, and that really is
Speaker Change: the underlying variance that you see in Q4. Maybe a little bit more muted, performance in Europe and the rest of the world versus North America reflected in our guidance, and that comes as a consequence of still...
Speaker Change: some hesitation around the rest of world segment. We expect Europe to do okay in Q4. If we look at North America in a bit more detail, you know, we've had a good performance here today in Canada, actually a little bit better than expected results in Canada year to date. So it'd be interesting to see how that business closes the year for their seasonal orders. They close down relatively rapidly as winter sets in. But it's just a little bit of caution here as we head into the fourth quarter around those in-season orders.
Speaker Change: Yes, we feel like the North American margin is sustainable. As I mentioned, we've got
Speaker Change: For areas that we continue to pursue for margin enhancement over the course of time, they've yielded good results over the last five years, maybe masked by the inflation battles, but...
Speaker Change: coming through now and reflective in the margin and will continue to execute on those margin enhancers. Nothing discreet in the quarter. I mean, we did call out, we had a dilutive impact.
Speaker Change: Thank you for your time, Kevin.
Speaker Change: Sorry, I missed the second part of your question, Nigel.
Nigel Coe: Oh, the fixed versus variable component of COGS.
Nigel Coe: Yep.
Nigel Coe: of our cogs, tends to be raw materials or purchased components.
Nigel Coe: and then we have variable labor and then the indirect labor and depreciation on the business as well as the utilities and rent is a much smaller proportion. Think of a number of around about 10% is what would be considered to be true fixed costs in the COGS profile.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is from the line of Brian Lee with Goldman Sachs. Please proceed with your question.
Speaker Change: Hi, this is actually Nick Cash on for Brian Lee. I just wanted to dive in to SG&A real quick. As a percentage of revenue, it's been slightly higher than we've seen over the past few years. And you mentioned slightly higher salary costs driven by wage inflation and investments in growth through sales spend and increased professional services. Just trying to get a sense of how we should think about spending on sales and marketing going forward as you kind of balance a return to volume growth with profitability. Thank you.
Speaker Change: I won't get into how we think about it necessarily in 2025, but generally speaking, yes, what we have seen over the course of the last couple of years is higher than historical average salary increases when you think about professional service costs.
Speaker Change: that support the business, legal services, consulting services, audit practice services.
Speaker Change: All of those have increased in the last couple of years, more so than they had previously. And I think we're all feeling that in our cost space. I think additionally, over the course of the last 18 months, a year and a half, we've made some very discreet investments.
Speaker Change: into our sales capabilities as we turn our attention to geographies where we've been historically underrepresented.
Speaker Change: And you have to make those investments before you see the return, so those have gone into this year. And additionally, we're making investments into our systems capabilities.
Speaker Change: throughout the organization and those investments have gone into 2024.
Speaker Change: We feel good about the cost base, we have ambition to continue to move the collective SG&A and RD&E cost base down into the low 20s.
Speaker Change: percentage of sales. We don't necessarily believe we'll achieve that next year, but you know that that is the structural ambition we've set ourselves.
Speaker Change: Now that's super helpful. Thank you.
Speaker Change: Thank you. Our next question is coming from the line of Rob Wertheimer with Milius Research. Please proceed with your question.
Rob Wertheimer: Thanks. Good morning. Most of my questions have been answered, but just out of curiosity, I think you referenced in the premise data just an upshift or a mix shift, which is probably not surprising given higher income consumers might have more stability. Is that ever noticeable in your financials? Do you see mix shifts with higher end pools affecting total income statement? And I'll stop there. Thanks.
Speaker Change: inside the product line, we're seeing a shift towards...
Speaker Change: core product categories. Year-to-date, we're very pleased.
Speaker Change: And as you'd expect, those items which have got more attachment to new construction, infloor systems, lighting and water features, and to a certain extent, new construction controls, those have had a reduced mix in the year. But overall, we've had a dilutive impact from geographic mix, a positive impact from
Speaker Change: product mix, and then in terms of, I think, the latter part of your questions...
Speaker Change: You know, when you think about the different type of pools for servicing...
Speaker Change: Certainly when you're dealing with the larger new builders, you're dealing with a much richer content per pool pad. Maybe you want to talk about that Kevin?
Kevin: You know as we've said many times and others have the the higher end is is is holding up better
Kevin: then the more entry level, so the pools that are being built.
Kevin: We are seeing some of the...
Kevin: some of the features and the functionality being added to those.
Kevin: you know, around controls and automation, and alternate sanitizers, and in-floor systems, and LED lights. So, those are generally high-margin products for us, so, you know, we're anxious for some of the rate...
Kevin: That's to take hold and for that to to start propping up new new construction sales Although we're not we're not sure when that's going to take take hold just yet
Speaker Change: Okay, thank you.
Speaker Change: Thank you. The next question is coming from the line of Rafe Jadorshich with Bank of America. Please proceed with your question.
Rafe Jadorshich: Hi, good morning. Thanks for taking my question. Just to start, just a quick clarification on the pricing comment for 2025, that 3% to 5% realization. Is that net or gross pricing?
Speaker Change: So, broadly speaking, it's net pricing. I mean, gross price lists are moving up 3% to 5% as long as the year-over-year discount percentages and allowances rebates remain the same, you'll have the same effect at the net pricing level.
Speaker Change: In terms of, can you just, and I think you've probably been asked this before, just can you remind us of the potential tariff exposure that you have and then potentially like what it means for sort of the competitive environment? So like, what's your direct exposure to potential tariffs and then is there an opportunity versus?
Speaker Change: some competition.
Speaker Change: Yeah, generally speaking, our imported goods from tariff...
Speaker Change: impacted Regions is around 10 to 15% of cost of goods sold, probably towards the lower end of that more recently You know 85% of our manufactured goods are manufactured in our core regions that be North America and Western Europe
Speaker Change: So, we have a progressively reduced exposure to the tariffs.
Speaker Change: that have been instituting now for what, six or seven years.
Speaker Change: Okay, and then...
Speaker Change: just on stepping back and looking at new construction now that we've sort of had.
Speaker Change: vast majority of the pool season, behind us for 24.
Speaker Change: Can you just walk us through like where we are on nuclear, sort of number of pools that went in, you guys think, in 24 versus where it peaked in 22, I guess through 21 and 22, and then the pre-COVID level. Just help us understand like how much of this is, you know, lapping pull forward versus like potential just macro headwinds.
Speaker Change: like how do we think about where we are in that new construction cycle?
Speaker Change: Yeah, I don't I don't have the data in front of me, but I think I'm correct in saying that you know the three years leading up to
Speaker Change: to COVID, you know, we were somewhere around 80, 75 to 85,000 or maybe high 70s
Speaker Change: to 85,000 per year in those years leading up to COVID.
Speaker Change: Obviously, 2020, 2021, 2020, um...
Speaker Change: Those two years saw a meaningful step up.
Speaker Change: Since 2022, we were, I think, 98, so just shy of 100,000 pools. That dropped to low 70s last year.
Speaker Change: And, you know, we believe that we're somewhere, you know, maybe best-case 60,000-ish.
Speaker Change: this year. There's some, you know, there's some different numbers out there, but I think...
Speaker Change: Most coalesce around kind of a 60,000 number at this point, so call that 15% off of last year. I think that could be effective, frankly.
Speaker Change: That's what we've seen over the years leading up to COVID, what occurred in the height of COVID and then maybe what's occurred in more of the challenging macroeconomic environment and higher interest rate environment since.
Speaker Change: since COVID.
Speaker Change: That's helpful. If I could just, a very quick follow-up. Do you know, what do you guys estimate the sell-through was in the third quarter?
Speaker Change: Sorry, the sell-through in the third quarter? Yes.
Speaker Change: Yeah, so we only have date for one specific reference point, and that's in the U.S., so any real dependency that we place on those numbers. But, you know, it was relatively flat on the sales route.
Speaker Change: in the third quarter. So that's a positive outcome.
Speaker Change: for us in that one data reference point. Okay, that's helpful. Thank you.
Speaker Change: Thanks.
Speaker Change: Thank you. There are no further questions at this time, so I'd like to turn the floor back over to Kevin Holleran for closing remarks.
Kevin Holleran: Thank you, Jesse. In closing, I'd like to thank everyone for their interest in Hayward. Our business is very well positioned to navigate the near-term challenges and deliver value for all stakeholders in the years ahead. This wouldn't be possible without the hard work, dedication and resilience of our employees and partners around the world. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on the fourth quarter earnings call. Thank you, Jesse. You can now end the call.
Speaker Change: Thank you. Ladies and gentlemen, thank you. This does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.