HAYW - NYSE

Welcome to Hayward Holdings Third Quarter 2024 Earnings Call. My name is Jesse and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President Investor Relations. Mr. Maczka you may begin.

Thank you and good morning, everyone. We issued our third quarter 2024 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. There you can also find an earnings slide presentation that we will reference during this call. I'm 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's outlook for 2024 and future periods. Such statements are subject to a variety of risks and uncertainties including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission that could cause actual results to differ materially. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures. 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's third quarter earnings call. Before we begin, I'd like to offer our deepest sympathies to those impacted by the hurricanes that devastated many regions across the Southeastern United States, including in our home state of North Carolina. We have many employees, customers and other stakeholders throughout the Southeast. Our thoughts are with our neighboring communities in this time of great need. And we are committed to assisting in any way we can. Now I'll start on slide 4 of our earnings presentation with today's key messages. I am pleased to report third quarter results consistent with expectations. We executed well again this quarter, delivering strong profitability, increased cash flow and improved balance sheet. We continue to drive our growth strategy by advancing our technology leadership position, leveraging our culture of continuous improvement and operational excellence and expanding customer relationships. Net sales increased 3% year-over-year in the third quarter driven by positive net price realization and the recent acquisition of ChlorKing. We were very pleased with the performance of this business and the first full quarter of Hayward ownership. Gross profit margins expanded 190 basis points to 49.7%. This represents the seventh consecutive quarter of year-over-year gross margin expansion. Cash flow generation was also solid with cash from operations increasing 27% year-to-date. This enabled us to fund our growth initiatives and reduce balance sheet leverage by more than a full turn on a year-over-year basis to 2.8x. After a slow start to the pool season this year, our North America business benefited from an extended season and improved in season orders. Additionally, the early buy program is progressing in line with our expected participation. Finally, we're refining our full year guidance, raising the lower end of the ranges to reflect modestly improved sales and profitability. For the full year 2024, we now expect net sales to increase approximately 3% to 5% and adjusted EBITDA to increase approximately 5% to 9% from full year 2023. Turning now to slide 5, highlighting the results of the quarter. Net sales in the third quarter increased 3% year-over-year to $228 million. The positive contributions of net price and ChlorKing were partially offset by lower volumes. By segment, net sales increased 5% in North America and declined 7% in Europe and rest of world. As I mentioned, gross profit margins expanded 190 basis points year-over-year to 49.7% despite an approximate 70 basis points diluted impact of purchase accounting related to the ChlorKing acquisition. This is a strong performance in a seasonally lower sales quarter. Adjusted EBITDA margin in the third quarter increased 110 basis points year-over-year to 22.5% and adjusted diluted EPS was $0.11. Turning now to slide 6 for a business update. In-season demand for Hayward products was generally consistent with our expectations in the quarter, with North America outperforming Europe and 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. Aftermarket repair and replacement remains resilient, but demand for the majority of new construction and remodel continues to be impacted by current economic conditions and interest rates. However, while we see the number of U.S. permits down, the value of permits remains more resilient, indicative of relative strength in the high-end, new construction, and remodel segments of the market. The early buy programs are nearing completion in North America and underway in Europe, and we are pleased with the progress to date. Incoming orders are trending in line with expectations, and we anticipate solid participation. The pool industry has always been very disciplined on price and we continue to expect positive net price realization of at least 2% in 2024. We've been implementing value-based pricing strategies and skew rationalization to optimize our price structure and ensure our products are priced appropriately relative to the exceptional value provided to pool owners. Given these initiatives, we implemented annual price increases in conjunction with the early buy program that we expect to yield approximately 3% to 5% in the US and 1% to 2% in international markets. Technology leadership and new product introduction are central to our growth strategy, and we were extremely excited to see our efforts recognized recently by the largest global distributor. Specifically, Hayward received separate awards for both innovation leadership and operational excellence. This achievement is a testament to the dedication and hard work of all of our teams and employees at Hayward. Thank you for enabling us to be such a valued partner in our industry. One example of an exciting new innovation is the Microchannel Temperature Control Unit, which we introduced you to on a prior earnings call. This industry-first product offers the ability to heat pool water, cool it to a comfortable temperature in the extreme summer heat, and even cool as low as 40 degrees if desired for a cold plunge. We are encouraged by the initial success of this unique product in the marketplace. Today, we're highlighting another new product introduction, the Paramount RDX unblockable drain. We continue to lead in drain technology, and the new RDX combines safety and high flow, ensuring swift and effective removal of debris. Compatible with concrete finishes, the design is able to collect large debris while blending seamlessly into the pool floor. Differentiated, innovative products like these add value to our customers and drive future growth. We are investing in enhanced customer service and support including new dedicated leadership and staffing, customer productivity tools, and training opportunities. During the quarter, we appointed a proven leader within Hayward to the newly created role of Vice President of Customer Experience, tasked with leading an industry-best customer care organization. We are also seeing increased adoption of our proprietary Omni Pro app, an innovative cloud-based productivity tool for trade professionals enabling real-time remote monitoring of a homeowner's pool and equipment configuration. As the industry becomes increasingly technology-oriented, we believe best-in-class support will be critical to further elevate the Hayward brand and drive customer intimacy, resulting in increased aftermarket conversion opportunities. Next, I'd like to provide a brief update on ChlorKing. We acquired the business in late June, and we're very pleased with its performance in the quarter. ChlorKing is a leader in commercial pool water sanitization and a great strategic fit with a strong financial profile advancing our position in the attractive commercial pool market. We are already seeing the synergies of the integration with Hayward's existing commercial business. Our sales teams are actively leveraging each other's customer bases to win new projects, serving the demand for sustainable, cutting edge water sanitization systems. With that, I'd like to turn the call over to Eifion, who will discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on slide 7. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased about third quarter financial performance. Consolidated net sales were in line with expectations for the quarter, and we delivered outstanding profitability and cash flow generation, enabling a further reduction in net leverage to less than three times. Looking at the results in more detail, net sales for the third quarter increased 3% to $228 million. Net price realization of positive 6% was offset by 5% lower volumes. ChlorKing performed well in the first full quarter of ownership, contributing 3%. Gross profit in the third quarter increased 7% to $113 million. Gross profit margin increased 190 basis points year-over-year to 49.7%, despite a 70 basis point diluted impact of the ChlorKing purchase accounting. This is a strong result, primarily driven by continuous improvement and efficiency gains in our manufacturing operations, notably in North America, and the benefit of normalized discounts and allowances compared to the prior year period. Adjusted EBITDA increased 8% to $51 million in the third quarter, and adjusted EBITDA margin increased 110 basis points to 22.5%. Our effective tax rate was 21% in the third quarter. Adjusted diluted EPS in the quarter increased 22% to $0.11. Now I'll discuss our report of the segments. Beginning on slide 8, North American net sales for the third quarter increased 5% to $195 million, driven by favorable pricing and the ChlorKing acquisition. Net sales increased 5% in the US and 17% in Canada. We were encouraged to see increased orders and sales in the quarter in Canada, despite the significant impact in that market due to economic conditions and financing costs. Gross profit margin increased 290 basis points to 52.3%. Adjusted segment income margin was a robust 30.5%. Turning to Europe and rest of world, net sales for the quarter decreased 7% to $33 million due to lower volumes, partially offset by favorable pricing. Net sales declined 4% in Europe and 11% in rest of the world, as certain international markets continue to feel the impact of current macroeconomic and geopolitical conditions. Gross profit margin reduced to 34.4%, largely driven by lower volumes, a discrete inventory adjustment and unfavorable mix. Adjusted segment income margin was 8.4%. Turn into slide 9 for a review of our balance sheet and cash flow highlights. We are very pleased with the balance sheet improvement and strong cash flow performance in the quarter. Net debt-to- adjusted EBITDA improved significantly to 2.8x, compared to 3.9x a year ago and 3.1x at the end of the second quarter. Total liquidity at the end of the quarter was $388 million, including cash and equivalents of $274 million, plus availability under our credit facilities of $114 million. We have no near-term maturities on our debt. The term debt matures in 2028, and the undrawn ABL matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans. Our borrowing rate benefits from the $600 million of debt currently tied to fixed interest rate swap agreements maturing in 2025 through 2027, limiting our cash interest rate on our term facilities to 6.2% in the third quarter. Our average interest rate earned on global cash deposits for the quarter was 4.7%. The business has attractive free cash flow generation attributes and seasonal strength in the second and third quarters related to timing of payment collection of early buy receivables. Year-to-date cash flow from operations was $276 million, a 27% increase compared to the prior year period, reflecting continuous improvement in working capital management. The total working capital declined 17% in the quarter, largely as a consequence of reduced receivables. Year-to-date CapEx of $18 million was below the prior year period due to project timing, resulting in a year-to-date increase in free cash flow of 34% to $258 million. We continue to expect free cash flow conversion of growth from 100% of net income and expect full year 2024 free cash flow of approximately $160 million. Turning now to capital allocation on slide 10, as we've highlighted before, we maintain a disciplined financial policy and take a balanced approach, emphasizing strategic growth investments and shareholder returns while maintaining prudent financial leverage. In the near term, we are prioritizing organic and inorganic growth investments and debt repayment. We continue to consider other strategic acquisition opportunities to complement our product offerings, geographic footprint, and commercial relationships, in addition to opportunistic share repurchases. Turning now to slide 11 for the outlook. We are refining our full year guidance ranges, raising the lower ends. For the full year 2024, we now expect net sales to increase approximately 3% to 5%, to $1.02 billion to $1.04 billion, compared to our prior guidance of $1.01 billion to $1.04 billion. We now expect adjusted EBITDA to increase approximately 5% to 9%, to $260 million to $270 million, compared to our prior guidance of $255 million to $270 million. 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. We also expect an effective tax rate of approximately 25% for the remainder of the year. Looking at beyond 2024, we remain positive about the long-term health and growth profile of the pool industry, particularly the strength of the aftermarket. We are confident in our ability to successfully execute our strategic growth plans. And with that, I'm going to turn it back to Kevin.

Thanks Eifion. I'll pick back up on slide 12. Before we close, let me reiterate the key takeaways from today's presentation. We delivered third quarter results consistent with expectations and refined our guidance ranges for the year, raising the low ends. Our team continues to execute, delivering strong gross margins and cash flow, allowing us to fund our growth strategies and delever the balance sheet. We are investing in exciting new product innovations, commercial programs and service offerings to better support our customers and improve the pool ownership experience. I am confident that we have the right strategy and talent in place to drive compelling financial results and shareholder value creation. With that, we're now ready to open the line for questions.

[Operator Instructions] Our first question is coming from the line of Andrew Carter with Stifel.

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

Good morning, Andrew. Yes, I mean, overall with this, we were extremely delighted with the margins continuing to open up here in third quarter, I think it was the result of a number of things. Namely, a couple quarters back, we indicated that we had finally gotten the price cost neutrality, and we continue to see that. From a price realization standpoint in the quarter, we had some great price in the quarter, driven partly by the fact that we had more normal discounts and allowances in third quarter on a year-over-year basis, as well as favorable mix, both product as well as regionally with North America, obviously, seeing better volume than in Europe and rest of the world. I probably shouldn't leave it to last, because it's really our core culture is just around kaizen events and continuous improvement and lean. They may not grab the headlines or be all that sexy, but every week inside our facilities, we're doing gimbal walks, and we're identifying inefficiencies and waste, and we continue to drive that out of the organization. As for some of the difference between North America and Europe 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, there is obviously some geopolitical circumstances that continue to impact business. 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 in the ERW segment within the quarter. But we are investing. This is a core growth region for us, and we feel really good about many of the things that we're accomplishing over in Europe and the rest of the world, namely some great new leaders in high-impact roles over there. We've added to the bench strength. As we have consolidated our manufacturing footprint into a Barcelona location, and we're really turning up the focus on new product introduction and technology development by recently naming one a global leader over all product development and technology. 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 will ultimately start to bring those margins back in line with each other.

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

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

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

Our next question is coming from the line of Jeff Hammond with KeyBanc Capital Markets.

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

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

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

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

Our next question is coming from the line of Saree Boroditsky with Jefferies.

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

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

Got it, great. And as a follow-up. I know it is still kind of all we want to talk about kind of 2025 but the order you're kind of hearing from like dealers and builders about their backlog and kind of their outlook on kind of new construction and remodeling.

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

Our next question is from the line of Ryan Merkel with William Blair.

Hey guys, nice quarter. I wanted to start off on the price outlook. I think you mentioned 3% to 5% price in the U.S. for ‘25. That's a little bit above the 2% to 3% 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?

Yes, I would say it's, we need fourth quarter to really finalize what our inflation assumptions are, but from a commodity or a materials standpoint, we're saying kind of high 2%, closing in on 3% maybe and labor salary wages, maybe a tick up from that. So, holding price cost, we would need 3% or so pricing. And then I really think, you could look to that Delta where some skews or product categories were priced higher than that around some of this value pricing, taking a hard look at where we believe the product is providing greater payback or value than what the historic price has been. So that's really how I lay it out for you, Ryan. The first three or so is to hold price cost neutrality and then some upside based upon some of the more strategic value pricing initiatives that our team's undertaking.

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

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

Okay, good. And then my second question is on gross margins. They're up about 500 basis points since ‘22 and sales are down and so my question is if we get a recovery scenario and you've got strategic pricing, is there still a 100 - 200 basis points of upside to gross margins if I look out the next two three years?

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

The next question is coming from the line of Nigel Coe with Wolfe Research.

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

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

Yes, I'm just wondering, the four key range, 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.

Yes, hi, Nigel. I mean, we've got what, 3% to 5% as the full year range now as we head into the final quarter, call that a 2%, $20 million time number that is really centric around, how the in-season orders flow through the balance of the year. Last year we had 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 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 some hesitation around the rest of the world segment. We expect Europe to do okay in Q4. If we look at North America in a bit more detail. 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 that how that business closes for their seasonal as they close down relatively rapidly as winter sets in, but it's just a little bit of caution here as we head into the fourth quarter around those in-season orders.

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

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

Oh, the fixed versus variable component of COGS.

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

The next question is from the line of Brian Lee with Goldman Sachs.

Hi, this is actually Nick Cash on for Brian Lee. Just wanted to dive in to SG&A real quick. As a percentage of revenue it's been slightly higher than we've seen over the past few years. And you mentioned slightly higher salary cost driven by wage inflation and investments in growth through sales end 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.

Yes, sure. I won't get into how we think about it necessarily in ‘25 but generally speaking, yes, what we have seen over the course of the last couple of years is higher than historical average salary increases when you think about professional service costs that support the business, legal services, consulting services, audit practice services. All of those have increased in the last couple of years more so they had previously not to grow 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 discrete investments into our sales capabilities as we turn our attention to geographies where we've been historically underrepresented. And you have to make those investments before you see the return so those have gone into this year and additionally, we're making investments into our systems capabilities throughout the organization and those investments have gone into 2024. We feel good about the cost space. We have ambition to continue to move the collective SG&A and our D&A cost space down into the lower 20s percentage of sales. We don't necessarily believe will achieve that next year, but that is the structural ambition we set ourselves.

Our next question is coming from the line of Rob Wertheimer with Melius Research.

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? I mean, do you see mix shifts, with higher end pools, affecting total income statement? I'll stop there. Thanks.

Yes. I'm not quite sure the mix shift comment that you're referencing. Certainly there's been a mix shift geographically in our Europe and the rest of the world segment, inside the product line, we're seeing a shift towards core product categories year-to-date, we're very pleased with increases in filtration, in heaters, in sanitization, suction, cleaners. And as you'd expect, those items which have got more attachments and new construction, inflow systems, lighting and water features, and to a certain extent, new construction controls, those have had a reduced mix in the year. But overall, we've had a dilutive impact from geographic mix, a positive impact from product mix. And then in terms of, I think, the latter part of your question, when you think about the different type pools we're servicing, certainly when you're dealing with the larger new builders, you're dealing with a much richer content per pool pad. Maybe you want to talk about that, Kevin?

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

The next question is coming from the line of Rafe Jadorschic with Bank of America.

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

So, broadly speaking, it's net pricing. I mean, gross prices are moving up 3% to 5% as long as the Euro via discount percentages and allowances rebase remain the same. You'll have the same effect at the net pricing level.

Okay, that's helpful. And then just in terms of, can you just, 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 some competition?

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

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

Yes, I don't have the data in front of me but I think I'm correct in saying that three years leading up to COVID, we were somewhere around 75,000 to 85,000 or maybe high 70s to 85,000 per year in those years leading up to COVID, obviously 2020, 2021, 2020, those two years saw a meaningful step up. Since 2022, we were, I think, 98,000, such a shy of 100,000 pools that dropped to low 70s last year. And, we believe that we're somewhere, maybe best case 60,000-ish this year. There’re some different numbers out there, but I think most coalesce around kind of a 60,000 number at this point. So call that 15% off of last year. I think that could be effective, frankly this time of year, pools get built in Florida. there in disaster recovery, big parts of that state. So I think that could have a negative effect on the final number here in Q4 in that region, right. But that's what we've seen over the last, 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 COVID.

That's helpful. If I could just a very quick thought. What do you guys estimate the sell-through value in the third quarter?

Sorry, the sell-through in the third quarter?

Yes.

Yep. Yes, so we don't, we only have dates for one specific reference point, and that's in the US of any real dependency that we place on those numbers. But it was relatively flat on the sell-through in the third quarter. So that's a positive outcome for us in that one data reference point.

There are no further questions at this time. So I'd like to turn the floor back over to Kevin Holleran for closing remarks.

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.