Greetings, and welcome to the Hayward Holdings Fourth Quarter 2023 Earnings Conference Call.[Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Maczka, Vice President of Investor Relations. Thank you, sir. You may begin..

Thank you, and good morning, everyone. We issued our Fourth Quarter 2023 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 Holleran..

real-time proactive monitoring of the operational pool; and remote expert configuration of equipment via the cloud.

Importantly, the OmniPro app provides significant value to these professionals, giving them the opportunity to promote other sales and service initiatives through a direct connection to the homeowner, creating greater stickiness for Hayward.

Finally, the ColorLogic 2.0 platform embodies the next generation of color LED lighting homeowners are increasingly requesting additional lights to be added to their pools, spas, order features and landscapes to create dramatic nighttime effects and attractive entertainment spaces.

ColorLogic 2.0 offers the flexibility designers want with directional optics to ensure full light saturation of the water and a quick disconnect plug for ease of maintenance.

In our future earnings calls, I look forward to introducing even more great product technologies designed to delight homeowners as well as increase the competitive edge Hayward enjoys in the market. With that, I'd like to turn the call over to Eifion, who will discuss our financial results in more detail.

Eifion?.

Thank you, Kevin, and good morning. I'll start on Slide 9. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased with our fourth quarter financial performance. Net sales increased in line with expectations for the quarter. We delivered outstanding gross margin expansion and generated better-than-expected free cash flow.

Looking at the results in more detail. Net sales for the fourth quarter increased 8% to $278 million. This was consistent with our expectations and driven by a 6% increase in volume and a 2% positive net price realization. Gross profit in the fourth quarter was $137 million.

Gross profit margin increased 690 basis points year-over-year and 140 basis points sequentially to a record 49.2%. Adjusted EBITDA was $76 million in the fourth quarter, and adjusted EBITDA margin increased 660 basis points to 27.2%. Our effective tax rate was 20.6% in the fourth quarter compared to 30.2% in the prior year period.

The change was primarily due to the timing of discrete items. Adjusted EPS in the quarter was $0.20. Turning now to Slide 10 for a review of our full year results. Net sales for fiscal year 2023 decreased 24% to $992 million.

This was in line with our most recent guidance and primarily driven by a 28% reduction in volume, partially offset by a 3% positive price realization and a 1% contribution from acquisitions. Gross profit for the full year was $477 million. Gross profit margin increased 270 basis points to 48.1%, a very strong performance amid 28% lower volumes.

Strong margins enable us to reinvest in the business. In 2023, we increased research development and engineering investments by 10% to $25 million to support our commitment to growth and innovation. SG&A expenses for the full year declined 6% and to $234 million, driven by lower discretionary and volume-based expenses.

We delivered a full year expected annualized savings of approximately $28 million under our enterprise cost reduction program. On a full year basis, SG&A as a percentage of net sales was 23.5%. Adjusted EBITDA was $247 million, with an adjusted EBITDA margin of 24.9%. Our effective tax rate was 20.2% in 2023 compared to 23.4% in 2022.

Adjusted EPS was $0.56 for full year 2023. Now I'll discuss our reportable segment results in more detail. Beginning on Slide 11, North America net sales for the fourth quarter increased 10% to $138 million, driven by 8% higher volumes and 2% favorable net price impact. Sales in the U.S. increased 12% in the quarter and Canada declined 11%.

The Canadian market has been more significantly impacted by economic conditions and a sharp increase in financing costs. Gross profit margin increased 810 basis points to a robust 15.1%, and adjusted segment income margin was 31.7%. Turning to Europe and Rest of World. Net sales for the fourth quarter decreased 4% to $40 million.

Net sales benefited from a 2% favorable net pricing and 2% from foreign currency translation, but were adversely impacted by a 9% decline in volumes. Net sales in Europe were approximately flat, with the Rest of the World, declining 7%. Gross profit margin was 38.2%, and adjusted segment income was 20.2%.

Turning to Slide 12 for a review of our reportable segment results for the full year. North America net sales declined 26% to $823 million, driven by 29% lower volumes, partially offset by a 2% favorable price impact and 1% contribution from acquisitions. Sales in the U.S. declined 23% and Canada reduced 48%.

Gross profit margin was 49.9% and adjusted segment income margin was 28.9%. In Europe and Rest of the World, net sales for the full year declined 18% to $169 million, benefiting from a net pricing increase of approximately 4%, offset by 22% lower volumes. Sales in Europe declined 24% and Rest of World reduced 10%.

Gross profit margin was 39.2%, and adjusted segment income margin was 20.4%. Turning to Slide 13 for a review of our balance sheet and cash flow highlights. Net debt to adjusted EBITDA was 3.7x at the end of the year. We continue to prioritize deleveraging to our targeted range of two to 3x.

Total liquidity at the end of the year was $460 million, including $203 million in cash and cash equivalents and short-term investments plus availability under our credit facilities of $256 million.

We have no near-term maturities on our debt or interest rate swap agreements, term debt of $1.1 billion, matures in 2028 and the undrawn ABR 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 through 2027, limiting our cash interest rate on the term facilities in 2023 to 6.5%. Our average interest rate earned on global cash deposits for the quarter was 4.9%.

Overall, we are pleased with the quality of our balance sheet. The business has strong free cash flow generation characteristics, driven by high-quality earnings, which support our growth investments.

Cash flow from operations for the full year increased 59% to $185 million due to effective working capital management, primarily reduced inventory levels. Total inventories declined by $69 million or 24% in 2023, and declined nearly $100 million from the peak in the third quarter of 2022.

Full year 2023 CapEx of $31 million was consistent with the prior year. Free cash flow increased 78% to $154 million in 2023. Turning now to capital allocation on Slide 14.

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 CapEx, growth investments and reducing net leverage within our targeted range of two to 3x.

We also 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 15 for our outlook.

We're introducing 2024 guidance that reflects a return to sales and earnings growth, driven by solid execution across the organization, positive price realization and continued technology adoption.

The guidance range also contemplates continued uncertainty around global macro conditions, consumer spending, coupled with our current expectations we've done in channel inventory levels. For the full year fiscal 2024, Hayward expects net sales to increase approximately 2% to 7% or $1.01 billion to $1.06 billion.

This outlook reflects continued resiliency in the North American non-discretionary aftermarket with the more discretionary elements of the market, new construction, remodel and upgrade impacted by the economic and interest rate environment, particularly in non-U.S. markets. We expect a positive net price contribution of approximately 2%.

Our business is seasonal, and we expect normal seasonal strength in the second and fourth quarters with the first quarter representing the lowest sales quarter of the year. We anticipate full-year 2024 for adjusted EBITDA of $255 million to $275 million. We also expect solid cash flow generation again in 2024.

This should result in free cash flow conversion of greater than 100% of net income with free cash flow of approximately $160 million. We are confident in our ability to successfully execute in this dynamic environment and remain very positive about the long-term outlook for the pool industry, particularly the strength of the aftermarket.

And with that, I'll now turn it back to Kevin..

Thanks, Eifion. I'll pick back up on Slide 16. Before we close, let me reiterate the key takeaways from today's presentation. Consistent with our expectations, we closed out 2023 with a return to sales and earnings growth in the fourth quarter.

We demonstrated strong execution throughout the year, delivering impressive gross margins and cash flow growth despite lower sales volumes, allowing us to fund our growth strategies. We're bringing innovative new solutions to the market, better supporting our customers and improving the pool ownership experience.

With channel inventories largely normalized, we are well positioned for growth. I'm excited about the prospects for the pool industry and our performance. Momentum is building and Hayward is leading. I'm 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 comes from the line of Ryan Merkel with William Blair..

I'd love to start with the guide right off the bat.

Can you tell us what you're expecting for gross margins for the year? How much do you expect that to be up? And then can you confirm for the first quarter, should we be thinking about sales at about 20% for the full year?.

In terms of the gross margin, we're calling for gross margins in 2024 to be 49.6% for the full year, which is an increase of just over 150 basis points. We'll see good growth in North America, we'll actually continue the great trend that we exited out of Q4, over 50%.

Full year, we're expecting over 50% in the North America business, which is a good outcome. In terms of Europe and rest of the world, a little bit more challenged there, but we're looking at the whole margins fundamentally at the same level that we exited out of 2023..

And then for the first quarter, I just want to make sure that we have it right, about 20% of the full year.

So looking at sales roughly flattish year-over-year?.

Yes. I mean as we've talked previously, we're coming back to a normal seasonal trend, Q1 is typically around 20% to 22%. The full year, very similar to Q3. This year, we're expecting around that 20% mark for the Q1. Q2, Q4 being the largest seasonal periods for us, one seasonal sell-in to -- in terms of Q4, early sell-in..

Got it. Okay.

And then for my second question, what are you assuming for sell-through at retail in the guide, just given the destock last year would be helpful to sort of think about underlying demand?.

Yes. I mean the guidance that is contemplated. It assumes approximately about a 5% macro contraction in North America, and a little bit lower in the Europe and Rest of World market. So we are expecting contraction really at the discretionary side of the market with the aftermarket remaining very resilient..

Yes. So the discretionary aspects, Ryan, the new -- we upgraded the remodel in U.S., we'd be seeing that potentially on 10% off, which would flow through for the U.S. region at about 5% volume overall, pivoting to international, which would include Canada as I'm describing it here.

The discretionary there, again, new remodel upgrade, we could see that upwards of 20% off, which would flow through at the international volume down about 10% overall. And the difference between those, obviously, is our expectation to remain flat for the more resilient aftermarket break-fix aspects of the global market.

I know you heard it in the prepared remarks, another -- aside from volume, price, we're expecting a positive price contribution in the 2% range. And then potentially, some modest, maybe 1% FX headwind as we work through 2024..

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

So you talked about inventory levels being normalized but distributors remain cautious. We did hear from one that they're looking to lower inventory levels this year.

So maybe just quantify how you're thinking about destocking tailwind this year, given potentially maybe a little bit more inventory reductions to go?.

Yes. Yes. So from a destock standpoint, the way we look at destock, up until this point was kind of getting back to historical days on hand. And as we work through really the third quarter of this year, we believe that we got to that level back to historical days on hand in the channel.

As we look at the 2024 guide, we are aware, we work closely with our channel partners around their desires to be more efficient with inventory management. Obviously, none of us want stock outs, but there's also a desire for some continuous improvement and efficiency gains given the higher interest rate environment.

So we -- our guide contemplates what we believe is achievable in incremental reductions in 2024 with our channel partners, and we'll continue to work closely with them to ensure we've got the right inventory in the right places at the right time..

I appreciate the color. So one thing we've heard about is the pull-forward impact on discretionary items such as heaters that we saw during the pandemic.

Could you just talk about when we should think about demand for those type of products being normalized?.

Yes. I mean we -- there's certainly some product categories that are more discretionary in nature. And I would say we saw some increased demand early on in the pandemic and then maybe some slowing of those heaters have been mentioned. I think cleaners would be another category there.

I think you can probably put above-ground product in the same category. So we believe that we're getting to much healthier inventory positions with those products. The overarching statement is we believe that our destock is complete, but there might be some product categories in some geographies, even where there's still a little bit of work to do.

But we're -- also light in some areas where we're seeing good sell-through into the marketplace. LED lights or even controls come to mind as a few that are doing well. So we think as we work through the early part of 2024.

Any excess in a particular product category, we're going to be able to address that as the season opens across all markets here into Q2 of 2024..

Our next question comes from the line of Jeff Hammond with KeyBanc..

Just on -- just -- I guess just to wrap up inventory destock. It sounds like the destock played out as you thought, but maybe the customers are being a little more cautious to bring levels back up.

But just with respect to the early buy, what did you learn from that around their confidence levels or inventory levels, et cetera? Just trying to tie that up a little bit..

Yes. So as we looked at maybe the second half of the year, early but it really gets published, as you know, late Q3. So we start getting a read on that. As we mentioned in prior earnings calls, I would say kind of exiting Q3 from a low order standpoint, which would be in-season orders maybe saw that slow a little bit in anticipation of early buy.

I know we mentioned this on our last earnings call, early by really met our expectations. It increased year-over-year and we saw that as a positive sign, both from an inventory destock working that down also with some expectation amongst the channel was very close with the end market around some opportunities for sell-through into 2024.

So as we look on the early buy, that's just concluded, we were pleased. It came in to our expectations, and we saw increase year-over-year, Jeff..

Okay. And then just around market share shifts. Obviously, you guys won a lot of share during COVID and then we're expecting some normalization.

I'm just wondering if that normalization has played out or if there's kind of more to go around that market share settling?.

Here at Hayward, we believe that as the curtain closed on 2023, that the COVID experience and some of the pickups or the challenges that occurred through that, the dust has settled on that. We know it was an extraordinary period it created some opportunity for some opportunistic share pickup based upon availability or supply chain challenges.

As you've heard, we've been very upfront -- first of all, there isn't perfect data, but we do work with our channel partners on sell-through.

There's also some wholesale shipment data that would -- that indicated share gains for us, and we're always very upfront in saying that as supply chains normalized, we would expect some of that habitual buying to maybe go back to who the supplier was.

We believe that as the dust settled from here on in, market share is kind of back to maybe where we expect it to be. And from here, it's going to be customer service relationships, supply chain capabilities and product introductions is really what's going to drive future share gains for us.

And that's what we're focused on and committed to at Hayward..

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

My question is a little bit on how the year progresses from your view and when you kind of see what real end market, real sell out or real consumer demand is on upgrades on remodels and on new pools.

I mean do you get to June and the year is kind of based on that front and then we're looking forward? Or you just talk about how you see where that real demand is when you see it..

Yes, Rob, it's Eifion. We're calling for this year to be a very normalized seasonal year, which is great to get back to. We normally see the most channel sellout in Q2. And then to a lesser extent, in Q3 as the season comes to a close, Q1 and Q4 tend to be the slower sellout periods in the year. But we expect that regular cadence to occur this year.

And as I just mentioned earlier, we're going to get back to a normal sell-in type of cadence with Q1, Q3 being the reduced quarters for us in Q2, Q4 being the higher quarters.

So after 3 years of this similar patterns to where this business used to be historically, we very much see the sellout looking as it did historically, with Q2 being the largest sellout period..

Okay. No, that's helpful. I kind of understand it. I'm just thinking about a lot of cross currents for consumer, where the economy is kind of healthy you're baking in a reasonably. I don't know, conservative, but reasonably measured view on discretionary spend.

And I don't know if we had -- and people are actually spending and that's when you kind of know that it -- or not, I'm not trying to predict a direction. That's what I was just pressing for..

Yes. Okay. I understand. I mean look, the guidance considers where the macro economy is today. It considers that we have this compression on the new construction side, remodel and upgrade, upgrade defined as equipment additions to the pool pad.

We want to see how the season develops as we step into Q2, and then how the consequential permitting takes place in the second half of this year, which sets us up for our view on 2025.

But while the economy remains in this, let's call it, uncertain macro condition, we're going to say that discretion is going to be more impacted here in the front half given it's the seasonal period for '24..

Our next question comes from the line of Mike Halloran with Baird..

So just a couple here. First, could you just talk through the sellout trend that you've seen to your distribution base in North America over the last I don't know, pick a number 6, 7, 8 months here.

I mean when you look at the cadencing and the trend there, are you seeing relative stability within the sequentials or -- basically, I know that we see year-over-year pressure on a lot of the remodel, large-scale remodel, the new build type work.

But are we at the point where that's a little bit more stable as you think back over the last few months here? Or has there been more volatility in there than normal?.

I would actually say, as we look at Q4, that overall sellout was reduction year-over-year was call it, high single-digit reduction year-on-year. But if you look at the more recent data point around Q4, we actually saw improvement against that year that full year number.

So Q4 on a year-over-year comp standpoint, we saw it -- while we're certainly not celebrating because it still has a long way to go. But we saw it as a positive indication in Q4 on a year-over-year standpoint. So the most recent data point, we were encouraged by actually with someone sell out activity in Q4 versus prior year..

And sequentially, though, is it pretty normal, seasonally?.

Yes. I mean what we're seeing throughout '23 is this reversion for normal seasonality again with sell-out being reduced in Q1, higher Q2, a little bit lower Q3 and lower Q4.

So we're seeing that normal curve that actually develop in the business right now, and we've seen -- when we look at the regions, we've seen really strong performance in the Sunbelt regions, particularly in markets like Florida, which seem to have done super well ahead -- most recently..

And then could you put the commentary that your distribution partners are being very cautious about bringing inventory on in a historical context, meaning, how does what they're doing today compared to pre-COVID? I know kind of there's some years in there where weather was a factor, but just thinking about what their normal inventory levels look like and what they're comfortable holding.

How would you compare what they're doing today versus maybe a more normalized period?.

Yes. I mean if you go back pre-pandemic, the channel held, depending on what time of year you're dealing with all the way up to five or five and a half months of inventory at times, particularly as they entered into the peak seasonal periods.

So that, I think, given the current cost of capital, given progressive improvements in data analytics, system management, and I'll come back to that in a second. There's been a lot of movement to reduce working capital. And we define destock as getting back to the historical days on hand.

That's happened largely through the end of Q3 and certainly into 2024 on a global basis, we're largely back at those historical days on hand. But we have heard from channel partners that they would like to initiate continuous working capital focus that will lead to further reduction of the inventory days on hand.

And we believe our guidance accommodates that. But what does that mean? That means when you think about thousands of distribution points, both at the distributor level and at the retail level.

And as Kevin said, make sure they have the right SKU at the right time, in the right location, those working capital improvements will take some time to realize, and we've got to be very thoughtful about that as we step over the next several years.

I think we're all, as an industry, investing in data analytics, improving our capabilities to get visibility as to how product moves in relation to end demand. And we are all investing to reduce our tech debt in that particular area. But it's clear that across the industrial sector, everybody is looking to reduce working capital.

And we see that over the course of several years, as a great outcome. It's much healthier for the entire supply chain to be in a time to inventory position..

Our next question comes from the line of Andrew Carter with Stifel..

First question I wanted to ask is about the net price realization you have for the year, plus 2%.

I want to kind of understand what exactly factored in there? I'm assuming a higher price increase that went into effect in North America that you're assuming versus Europe? Is there any kind of return to a more normal promotional cadence perhaps pre-pandemic in there this year that wasn't accomplished last year is an increase contemplated in October 1, in that guidance? I think you took one in October one this year or are you hoping to go back to 25%? And then the last one is kind of the winter rebates issue that happened last quarter.

Is that anomaly kind of already done? Or does it still have a catch-up? And also, I'm assuming with the vendor rebates, you lowered the incentive levels.

Have you kept incentive levels for vendor rebates the same this year as last year?.

Let's see, we'll tag team that. I didn't get all that down, but we'll get through the questions, redirect us if we don't -- if can't get to them all. So in terms of last quarter, the vendor rebates, as we indicated at that point, we saw that as a 1-quarter phenomenon. We indicated that would not repeat itself with the net price performance in Q4.

I think that showed through in the results there. In terms of what I should say on that is we then transitioned channel partner rebates from the end of a seasonal year, which is September 30 to more the calendar.

So Q4 in 2024 will be the year where there might be some catch up, either good or bad, depending upon what the financial results against targets indicate. In terms of programs offered, I would say they're consistent with what they've been in the past, obviously, based upon some volume expectations that we set alongside with our channel partners.

So I wouldn't really look for anything meaningfully to change year-on-year there.

In terms of promotional activities, as I indicated this question I was answering on the share, I would really say, again, we're back into I'd say, more normal post-pandemic or pre-pandemic period where the industry had some expectation of some promotional activity, and that's what we're expecting through our commercial team, working with the channel and the end market that there'll be more normalized promotional environment that we experienced pre-2020 when the pandemic really dismissed the need for that since there was such demand creation through the pandemic.

I know I missed some things in there. Andrew. I'm looking at Eifion here to see....

Yes, let me just quickly go through a few points, Andrew. I think just to close it off. Yes, the 2% net price does assume a slightly higher net price realization in North America than Europe and rest of world. The rebate anomaly that was apparent in Q3 of 2023 is behind us, we returned to positive price contribution in Q4.

For the full year, we're at approximately 3% for 2023. So that anomaly is behind us. In terms of the overall 2% that we're guiding on for 2024 it matches up against our inflation expectations for the year.

And we haven't, in our guide, contemplated to get any further price increase for Q4 next year, we'll make that determination as we get closer when we get better visibility of inflation going forward into '25..

You've got every single point, and I apologize I have a bad habit of that, asking too many questions with one. So I'll just ask it real simple. I've got -- on the second one, I've got your COGS outlook kind of down 1.3% to down 3.6%, kind of matching what your underlying kind of implied volume outlook is of minus 1.2% to 3.8%. That's with FX at 1%.

I guess in that outlook, are you assuming inflation on the materials or anything in there because that just -- I guess that implies material costs are essentially neutral year-over-year..

Yes, sure. I mean, we haven't assumed underlying inflation to be 2%, but we're going to continue to drive efficiencies through our manufacturing locations.

We've got a great legacy -- we're doing a number of things in manufacturing, lean manufacturing principles have come back to before over the last 18 months, and we've done a really good job there across the manufacturing footprint. Additionally, we've gone through a consolidation program in Europe.

We consolidated two of our manufacturing facilities in Spain into one, and that will yield some benefits. So once we fully commission that facility. So we're doing a lot to continue to realize positive gross margin development despite maintaining price cost neutrality..

Our next question comes from the line of Nigel Coe with Wolfe Research..

Just a couple of kind of clarifications here. So Kevin, based on your comments about expectations between U.S. and International. So mid-single digit down, single units down in -- sorry, discretionary -- just talk about the discretionary here.

It seems like we're looking at sell-through down in the sort of mid-single-digit zone with -- and therefore, the guidance to that maybe 8 to 9 points of benefit from prior year inventory drawdown. I just want to make sure that the math there is correct.

But my first question is really about the, you mentioned cost control throughout the slides in your prepared remarks. So just wondering, as we think about recovery.

Do we need to think about investment spending ramping up or exact comp or any other kind of discretionary costs coming back in, that might -- margins from here?.

Nigel, I'll take the first part of the question, then I'll hand it off to Eifion on the second half. Yes, I think the math that you're doing is spot on. Again, I'll just walk through, I guess, the first time I answered this, I didn't specifically address what we think what was a headwind in 2023, how it may become a bit of a tailwind in our guide.

So again, two points of price. Overall, when you look at the global volume decline. We see that in the 6% to 7% negative up range or down range. We could see it high single-digit, maybe 10% tailwind from the deep stock reversing in 2024 and then again, potentially 1% on the FX.

So I think that should all tie out to what you were backing into when you ask a question, Nigel..

So and then, Nigel? Yes, sorry, can you repeat the second half, you were fading in and out, Nigel..

Yes. So it's about the discretionary cost control. You mentioned cost control, which is obviously a natural when you have one -- as much as you are.

But just thinking about the recovery, are there things we need to consider in terms of investment spending, exec comp, et cetera, anything discretionary that might creep incremental margins on the way back up..

Yes. So I mean the guidance that we've given for the year at the adjusted EBITDA level of $255 million to $275 million fully contemplates all the costs that we're planning to put in there, including compensation. It also includes the continuing thematic investing into research development and in engineering.

In 2023, we invested greater than -- I think it was around about a 10% increase in RD&E expenditures year-over-year, and we will continue to do that, to drive the technology platform across the product line. We're not at the point yet where we need to reinvest in G&A.

We do have some plans to invest in sales personnel, and that also has been contemplated within the guidance that we've given. But we're going to be very methodical as we go forward over here over the next two years to make sure that cost base is kept in line with the growth on the top line..

Great. And then a quick follow-on. The free cash flow of $160 million. I'm assuming the priority is debt reduction in 2024.

So does the guide embeds -- the $160 million deployed in debt reduction, is that embedded in your interest expense guidance?.

So the free cash flow generation contemplates cash flow from operations, which obviously considers aggressive reduction in the net debt position in the business. We will make a determination on how we tackle the gross debt.

But certainly, the accumulated cash earnings in the business will continue to be invested and earn at a very degree, as we demonstrated before.

But at the end of the day, that $160 million reflects the conversion of EBITDA to free cash flow once you take out CapEx, interest rate and tax and also consider the modest working capital improvement, primarily in inventory over the course of 2024..

Our next question comes from the line of Rafe Jadrosich with Bank of America..

First, just following up on Nigel's question, the decrementals have been really impressive over the last year? And how do we think going forward here, if volume growth does kind of improve in the second half of the year and then into '25.

How do we think about incrementals longer term, either from a gross margin or EBITDA perspective?.

Yes. I mean historically, the incrementals in the business used to be in the high 30s. we've done better than that.

Most recently, as we've moved through both incrementals and decrementals, what I would say is we strive to achieve at least what we have historically, if not better, on the incremental side and it all comes back to manufacturing cost discipline and SG&A purposeful investments.

And so a bit hesitant to give you a firm figure, but we certainly look to beat the historical..

And then just on the -- can you talk about what the full-year sellout was for 2023 versus the sell-in? I think last quarter, you've given a sort of estimated destock number, I think, of $160 million.

Did that come in about what you were initially expecting?.

Yes. So we don't get perfect sell-out information across the globe. So we have to kind of triangulate that number based upon those in the U.S. that do report that type of information to us. And what we do know is across the entirety of the globe there was destock, meaningful destock over the 2023 time period.

Again, what we've put into our guidance is approximately $100 million or 10% of that, not repeating in 2024, which Kevin just kind of just walked through. Yes, that's what we feel comfortable with right now, given some of the macro uncertainty that we've got in the business.

But what we'd say is we are largely destocked now back to historical days on hand, and that was really achieved coming out of 2023..

And the last one, just very quickly on the -- it looks like just SG&A, are you guiding for maybe slight deleverage or flattish year-over-year? Can you just sort of bridge us to what -- where you're getting leverage, like what are the puts and takes on SG&A?.

Yes. So we have progressively built our G&A team, our general and administrative team up over the last 3 years. And so we'll continue to leverage on that. We have made some discrete investments into G&A, specifically around our business intelligence capabilities. We've built out recently a team in that regard.

And we look for great leverage on that investment over the next couple of years. But we really do have an opportunity to hold that G&A base now given where we exited out of '23, but maybe just slightly over inflation. And so that will be a great opportunity for margin leverage as we go forward.

And then obviously, in the manufacturing cost base, we have a good amount of latent capacity that we can continue to tap into as well as continuing to execute on lean manufacturing strategies to reduce cost..

Mr. Holleran, we have no further questions at this time. I would like to turn the floor back over to you for closing comments..

Thank you, Christine. In closing, I'd just 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 our stakeholders in the years ahead.

This wouldn't be possible without the hard work, dedication and resilience of our employees and our 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 first quarter earnings call. Thanks, Christine, you may now end the call..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..