Hayward Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

Key Takeaways

  • Hayward delivered Q4 net sales up 8% year-over-year with record gross margins of 49.2%, adjusted EBITDA margin of 27.2%, and free cash flow up 78% despite seasonal collection headwinds.
  • For full-year 2023, sales fell 24% due to volume declines, but Hayward expanded gross margins 270 basis points to 48.1% and maintained a strong 24.9% adjusted EBITDA margin through pricing actions and operational excellence.
  • Channel inventory has largely normalized post-pandemic, with most destocking complete and 2024 guidance incorporating modest further inventory reductions alongside a 2% net price increase.
  • Full-year 2024 outlook calls for 2%–7% net sales growth, adjusted EBITDA of $255–$275 million, and approximately $160 million in free cash flow, assuming normal seasonal patterns and continued macroeconomic uncertainty.
  • Hayward continues to invest in its technology leadership and operating footprint, rolling out new connected pool products (microchannel temperature controls, OmniPro app, ColorLogic 2.0) and consolidating facilities to drive long-term profitable growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Hayward Q4 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Hayward Holdings 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Masca, Vice President of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, and good morning, everyone. We issued our Q4 2023 earnings press release this morning, which has been posted to the Investor Relations section of our Web site 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 Ivan Jones, Senior Vice President and Chief Financial Officer.

Speaker 1

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 ks 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.

Speaker 1

I would now like to turn the call over to Kevin Hollerin.

Speaker 2

Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Haywood's 4th quarter earnings call. I'll start on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report 4th quarter results in line with expectations. We executed well during the quarter and delivered net sales and earnings growth, record gross margins and solid cash flow.

Speaker 2

Net sales increased 8% year over year through positive contributions from both volume and price with gross profit margins expanding 6.90 basis points for the quarter and 2.70 basis points for the full year. We also generated better than expected cash flow during a seasonally soft period for cash collections with full year free cash flow increasing 78% and exceeding our guidance range. These are tremendous accomplishments and I'm extremely proud of the entire Hayward team. 2023 was characterized by a normalization of supply chains, channel inventory destocking and a return to establish seasonal buying patterns. We are encouraged to enter 2024 with more normalized channel inventory positions as reported by our primary distribution partners in the U.

Speaker 2

S. The channel continuously recalibrates the level of inventory on hand to align with various inputs like near term outlook for end demand and cost of capital, but the post pandemic reset is largely behind us. We executed many important strategic initiatives throughout the year to strengthen our business and drive profitable growth. This included advancing our technology leadership position with innovative connected pool solutions, leveraging our culture of continuous improvement and operational excellence and expanding commercial relationships across sales channels. I will make additional comments on our strategic accomplishments in a moment.

Speaker 2

We enter 2024 expecting a return to sales and earnings growth on a full year basis. For the full year 2024, we expect net sales to increase approximately 2% to 7%. Now turning to Slide 5, highlighting the results of the Q4 and full year. I'm pleased to report solid execution and growth in the quarter. Net sales in the 4th quarter increased 8% year over year to $278,000,000 driven by positive volume and price.

Speaker 2

By segment, net sales in North America increased 10% with our largest market, the United States, increasing 12%. Europe and Rest of World declined 4% with Europe approximately flat. I'm encouraged by the sales trends in both the U. S. And Europe.

Speaker 2

We're focused on driving growth in the commercial segment of the market and commercial pool sales increased double digits for the quarter the year. As I mentioned, we achieved a record gross margin in the 4th quarter. Gross profit margins expanded 6.90 basis points year over year and 140 basis points sequentially to 49.2%. Adjusted EBITDA margin in the 4th quarter was 27.2 percent and adjusted EPS was $0.20 For the full year 2023, net sales reduced 24% to $992,000,000 with adjusted EBITDA of $247,000,000 each consistent with our most recent guidance. We delivered strong profitability despite reduced sales volume, and I'm particularly pleased to see gross margin expansion of 270 basis points to 48.1 percent.

Speaker 2

Adjusted EBITDA margin for the full year was a healthy 24.9% and adjusted EPS was $0.56 Turning now to Slide 6 for a business update. End demand for Hayward Products was consistent with our expectations in the quarter with the U. S. Performing solidly, but the overall near term demand environment remains uncertain. Non discretionary aftermarket is resilient, but demand for discretionary new construction, upgrade and remodel has been impacted by current economic conditions and rising interest rates.

Speaker 2

Our channel partners have been rebalancing the level of inventory relative to the current economic outlook, normalized OEM lead times and higher cost of capital. While inventory levels have largely normalized at this point, the channel remains cautious and continuously recalibrates the level of inventory on hand to be appropriately positioned to support their customers. Turning to price versus cost. We implemented annual price increases to maintain price cost neutrality. The pool industry has been very disciplined on price historically and we expect to realize net price increase of approximately 2% in 2024.

Speaker 2

We demonstrated our operational excellence capabilities again in 2023, contributing to strong gross margin expansion on reduced sales volumes. We also completed footprint consolidations during the year in both North America and Europe. As a reminder, we initiated a plan during the Q3 to consolidate facilities in Spain to get closer to key customers, better leverage a modern facility and support margins. We continue to prioritize working capital management and inventory reductions. Total inventory declined 24% in 2023, contributing to positive cash flow performance and 31% since the peak in 2022.

Speaker 2

Finally, during the Q4, John Collins was promoted Chief Commercial Officer. John now leads sales, marketing, product management and customer service in North America and Global Industrial Flow Control. I'm confident in my senior leadership team and our ability to deliver on our commitments to shareholders. In addition, we continue to invest in technology leadership with the establishment of the business intelligence team in the 4th quarter, focused on progressively leveraging data analytics and scaling intelligent process capabilities. Turning now to slide 7.

Speaker 2

I'd like to share some perspective on the year. As expected, we face challenging economic conditions in 2023. I'm proud of the performance of the Hayward team as we accomplished many important strategic initiatives to strengthen our position as a premier company in attractive pool industry. As a technology leader, one of our biggest differentiators is our ability to innovate and I'll discuss some of our upcoming product introductions in a moment. We also demonstrated our long standing commitment to operational excellence and continuous improvement.

Speaker 2

This included rightsizing our production levels and cost structure, further consolidating our agile and vertically integrated manufacturing footprint and progressive investments in automation and other productivity initiatives. The individuals who build and service pools are the backbone of our industry. The voice of these customers is critical to the development of our product and commercial strategies. At Hayward, we believe in supporting our loyal dealers and investing to build strong partnerships with market leading programs and events. This includes our Totally Hayward loyalty program, customer rewards trips and partner summits to celebrate and reflect on our collective accomplishments and help dealers grow their business and thrive in the years ahead.

Speaker 2

Hayward is committed to delivering impressive operational and financial results in the most responsible way, and we continue to make great progress on our sustainability journey. During the year, Hayward received a regional top rated award by Morningstar Sustainalytics and an MSCI upgrade to A rating. As just one example of our success, the Hayward team embraced the challenge and achieved meaningful reductions in water and energy consumption in our facilities in 2023. These achievements contributed to strong profitability and cash flow during the year, allowing us to reinvest in the business to provide superior products and services for our customers and value creation for our shareholders. Turning to slide 8, I'd like to highlight some key new product technologies being introduced in early 2024.

Speaker 2

First is the new microchannel temperature control unit for pools and spas. This is the first deployment of microchannel temperature exchange technology in the pool industry. This unit provides more efficient temperature transfer, reduced weight and improved corrosion resistance for coastal installations. 3 models are available heat only, heat cool and cool only. The ability to cool to 40 degrees is important for installations in hot and humid environments where pool water temperature can be uncomfortably high.

Speaker 2

This also opens a new market opportunity for chiller only installations to satisfy the increasingly popular wellness trend of cold plunge pools. Next is our new all new OmniPro app designed for authorized trade professionals. This exciting evolution in our leading Omni app enables these professionals to have remote access to all omni connected homeowners they service. This new platform has 2 key benefits, real time proactive monitoring of the operation of the 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.

Speaker 2

Finally, the ColorLogic 2.0 platform water 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 well as increase the competitive edge Hayward enjoys in the market. With that, I'd like to turn the call over to Ivan, who will discuss our financial results in more detail. Ivan?

Speaker 3

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 Q4 financial performance. Net sales increased in line with expectations for the quarter.

Speaker 3

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 4th quarter increased 8% to $278,000,000 This was consistent with our expectations and driven by 6% increase in volume and a 2% positive net price realization. Gross profit in the Q4 was $137,000,000 Gross profit margin increased 6.90 basis points year over year and 140 basis points sequentially to a record 49.2%. Adjusted EBITDA was $76,000,000 in the 4th quarter, and adjusted EBITDA margin increased 660 basis points to 27.2%. Our effective tax rate was 20.6 percent in the Q4 compared to 30.2% in the prior year period.

Speaker 3

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 $992,000,000 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 $477,000,000 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.

Speaker 3

In 2023, we increased research development and engineering investment by 10% to $25,000,000 to support our commitment to growth and innovation. SG and A expenses for the full year declined 6% to $234,000,000 driven by lower discretionary and volume based expenses. We delivered the full year expected annualized savings of approximately $28,000,000 under our prior enterprise cost reduction program. On a full year basis, SG and A as a percentage of net sales was 23.5%. Adjusted EBITDA was $247,000,000 with an adjusted EBITDA margin of 24.9%.

Speaker 3

Our effective tax rate was 20.2% in 2023 compared to 23.4% in 2022. Adjusted EPS was $0.56 for the full year 2023. Now I'll discuss our reportable segment results in more detail. Beginning on Slide 11, North America net sales for the 4th quarter increased 10% to $238,000,000 driven by 8% higher volumes and 2% favorable net price impact. Sales in the U.

Speaker 3

S. Increased 12% in the quarter and Canada declined 11%. The Canadian market has been more significantly impacted by economic conditions and the sharp increase in financing costs. Gross profit margin increased 8 10 basis points to a robust 51.1 percent and adjusted segment income margin was 31.7%. Turning to Europe and Rest of World.

Speaker 3

Net sales for the 4th quarter decreased 4% to $40,000,000 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 world declining 7%. Gross profit margin was 38.2% and 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 percent to $823,000,000 driven by 29% lower volumes, partially offset by a 2% favorable price impact and 1% contribution from acquisitions.

Speaker 3

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 World, net sales for the full year declined 18% to $169,000,000 benefiting from a net pricing increase of approximately 4%, offset by 22% lower volumes.

Speaker 3

Sales in Europe declined 24% and rest of world reduced 10%. Gross profit margin was 39.2 percent 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 2x to 3x.

Speaker 3

Total liquidity at the end of the year was $460,000,000 including 203,000,000 dollars in cash and cash equivalents and short term investments, plus availability under our credit facilities of 256,000,000 dollars We have no near term maturities on our debt or interest rate swap agreements. Term debt of $1,100,000,000 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 $600,000,000 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%.

Speaker 3

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 $185,000,000 due to effective working capital management, primarily reduced inventory levels. Total inventories declined by $69,000,000 or 24 percent in 2023 and declined nearly $100,000,000 from the peak in the Q3 of 2022. Full year 2023 CapEx of $31,000,000 was consistent with the prior year.

Speaker 3

Free cash flow increased 78% to $154,000,000 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 2 to 3 times. We also continue consider tuck in acquisition opportunities to complement our product offering, geographic footprint and commercial relationships in addition to opportunistic share repurchases.

Speaker 3

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 regarding channel inventory levels. For the full year fiscal 2024, Haywood expects net sales to increase approximately 2% to 7% or 1.01000000000 dollars to 1 $600,000,000 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.

Speaker 3

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 Q1 representing the lowest sales quarter of the year. We anticipate full year 2024 adjusted EBITDA of $255,000,000 to $275,000,000 We also expect solid cash flow generation again in 2024. This should result in free cash flow and conversion of greater than 100 percent of net income with free cash flow of approximately 160,000,000 dollars We are confident in our ability to successfully execute in this dynamic environment and remain very positive about the long term growth outlook pool industry, particularly the strength of the aftermarket.

Speaker 3

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

Speaker 2

Thanks, Ivan. 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 Q4. We demonstrated strong execution throughout the year, delivering impressive gross margins and cash flow growth market, better supporting our customers and improving the pool ownership experience.

Speaker 2

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

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Speaker 4

Hey, guys. 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 you expect that to be up? And then can you confirm for the Q1, should we be thinking about sales at about 20% for the full year?

Speaker 3

Good morning, Ryan. In terms of the gross margin, we're calling for gross margins in 2020 4 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.

Speaker 3

In terms of Europe and rest of the world, a little bit more challenged there, but we're looking for whole margins fundamentally at the same level that we exited out of 2023.

Speaker 4

And then for the Q1, 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?

Speaker 3

Yes. I mean, as we thought previously, we're coming back to a normal seasonal trend. Q1 is typically around 20% to 22% of 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.

Speaker 3

1 seasonal sell in to in terms of Q4 early buy sell in. Got it. Okay. And then for

Speaker 4

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

Speaker 3

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

Speaker 2

Yes. So the discretionary aspects, Ryan, the new the upgrade, the remodel in U. S, we'd be seeing that potentially 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.

Speaker 2

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 and other aside from volume price, we're expecting a positive price contribution in the 2% range. And then potentially some modest, maybe a 1% FX headwind as we work through 2024.

Operator

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

Speaker 5

Hi, good morning. So you talked about inventory levels being normalized, 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?

Speaker 2

Yes. Good morning, Stuart. Yes, so from a destock standpoint, the way we look at destock up till this point was kind of getting back to historical days on hand. And as we work through really the Q3 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.

Speaker 2

Obviously, none of us want stockouts, 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 and 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.

Speaker 5

Appreciate the color. So one thing we've heard about is that 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?

Speaker 2

Yes. I mean, we hit 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.

Speaker 2

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 up 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.

Speaker 5

Great. Thanks for taking my questions.

Operator

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

Speaker 6

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, etcetera? Just trying to tie that up a little bit.

Speaker 2

Yes. So as we looked at maybe the second half of the year, early buy 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 buy really met our expectations.

Speaker 2

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.

Speaker 6

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?

Speaker 2

Here at Hayward, we believe that as the curtain closed on 2023 that the COVID experience and some of the pickups and the or the challenges that occurred through that, the dust is settled on that. We know it was an extraordinary period. 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.

Speaker 2

There's also some wholesale shipment data that would they indicated share gains for us and we were 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.

Speaker 6

Okay. Appreciate the color, Kevin.

Operator

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

Speaker 7

Yes. Hi. Thanks. Good morning, everybody. 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, real consumer demand is on upgrades, on remodels and on new pools.

Speaker 7

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

Speaker 3

Yes. Good morning, Rob. It's Arvind. We were calling for this year to be a very normalized seasonal year, which is great to get back to. We normally see the most channel sellouts in Q2

Speaker 8

and

Speaker 3

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 and Q2, Q4 being the higher quarters. So after 3 years of dissimilar 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.

Speaker 7

Okay. No, that's helpful. I kind of understand it. I'm just thinking about a lot of crosscurrents 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.

Speaker 7

And I don't know if we hit May 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

Speaker 6

I was just missing for.

Speaker 3

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.

Speaker 3

But while the economy remains in this, let's call it, uncertain macro condition, we're going to say that discretionary is going to be more impacted here in the front half given it's the seasonal period for 2024. Got it. That's clear.

Speaker 6

Okay. Thank you.

Operator

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

Speaker 9

Good morning, everyone. So just a couple here. First,

Speaker 8

could you

Speaker 9

just talk through the sellout trends 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. When you look at the cadencing and the trend there, are you seeing relative stability within the sequentials? Or

Speaker 3

basically, I know that we

Speaker 9

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?

Speaker 2

I would actually say, as we look at Q4, Mike, 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 comps 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 stand point. So the most recent data point we were encouraged by actually with some of the sellout activity in Q4 versus prior year.

Speaker 9

And sequentially though, is it pretty normal seasonally?

Speaker 3

Yes. I mean, what seeing throughout 2023 is this reversion to normal seasonality, again with sellout being reduced in Q1, higher Q2, a little bit lower Q3 and lower Q4. So we're seeing that normal curve that action 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 here most recently.

Speaker 9

Thanks for that. 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?

Speaker 3

Yes. I mean, if you go back pre pandemic, the channel held depending on what time of the PA you're dealing with all the way up to buy for 5.5 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.

Speaker 3

That's happened largely through the end of Q3 and certainly it was the end of 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 a 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 that you have the right SKU at the right time and the right location.

Speaker 3

Those working capital improvements will take some time to realize and we've got to be very thoughtful about that as 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. We see that over the course of several years as a great outcome.

Speaker 3

It's much healthier for the entire supply chain to be in a time to inventory position. Great. That was very helpful. Thanks guys. Appreciate it.

Operator

Our next

Speaker 10

price realization you have for the year, plus 2%. I want to kind of understand what exactly is 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 1st in that guidance? I think you took 1 in October 1st this year or are you hoping to go back to 25?

Speaker 10

And then the last one is kind of the vendor rebate 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've lowered the incentive levels. Have you kept incentive levels for vendor rebates the same this year as last year? Thanks.

Speaker 2

In 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 we get to it, Paul. 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.

Speaker 2

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 the 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.

Speaker 2

In terms of promotional activities, as I indicated, I forget 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-twenty 20 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 to Ivan here to see. You got anything to pick up there?

Speaker 2

Yes.

Speaker 3

Let me just quickly go through a few points, Andrew. I think just to close it off, I guess the 2% net price does assume slightly higher net price realization in North America than Europe, 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.

Speaker 3

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 yet any further price increase for Q4 next year. We'll make that determination as we get closer and we get better visibility of inflation going forward into 2025.

Speaker 10

Thank you. You 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 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%.

Speaker 10

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? Thanks.

Speaker 3

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.

Speaker 3

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 2 of our manufacturing facilities in Spain into 1 and that will yield some benefit 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.

Speaker 10

Thanks. I'll pass it on.

Operator

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

Speaker 8

Thanks. Good morning. Just a couple of kind of clarifications here. So Kevin, based on your comments about expectations between U. S.

Speaker 8

And international, so mid single digit down in terms of units down in sorry, in discretionary, just talking 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 guide embeds maybe 8 to 9 points of benefit from prior year inventory drawdown. 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. Just wondering, as we think about recovery, do we need to think about investment spending ramping up or exec comp or any other kind of discretionary costs coming back in that might crimp incremental margins from here?

Speaker 2

Nigel, I'll take the first part of the question, then I'll hand it off to Ivan 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 range or down range.

Speaker 2

We could see it high single digit, maybe 10% tailwind from the destock reversing in 2024 and then again, potentially 1% on the FVAC. So I think that should all tie out to what you were backing into when you asked the question, Nigel.

Speaker 8

So

Speaker 3

Nigel Yes, sorry, can you repeat the second half? You're fading in and out, Nigel.

Speaker 8

Yes. So it's about the discretionary cost control. You mentioned cost control, which is obviously a natural when you have volumes bound 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, etcetera, anything discretionary that might crimp incremental margins on the way back up?

Speaker 3

Yes. So I mean the guidance that we've given for the year at the adjusted EBITDA level of $255,000,000 to $275,000,000 fully contemplates all the costs that we're planning to put in there, including compensation. It also includes the continuous thematic of investing into research, development and engineering. In 2023, we invested greater than I think it was around about a 10% increase in RD and E expenditures year over year. And we will continue to do that to drive the technology We do have some plans to invest in sales We do have some plans to invest in sales personnel and that also has been contemplated within the guidance that we've given.

Speaker 3

But we're going to be very methodical as we go forward over here over the next 2 years to make sure that cost base is kept in line with the growth on the top line.

Speaker 8

Great. And then a quick follow on. The free cash flow of $160,000,000 I'm assuming the priority is debt reduction in 2024. So does the guide embeds the $160,000,000 deployed into debt reduction? Is that embedded in your interest expense guidance?

Speaker 3

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'll 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, the $160,000,000 reflects the conversion of EBITDA to free cash flow once you take out CapEx interest and tax and also considers a modest working capital improvement primarily in inventory over the course of 2024.

Speaker 8

Okay, very helpful. Thanks.

Operator

Our next question comes from the line of Rafe Shapercich with Bank of America. Please proceed with your question.

Speaker 11

Hi, good morning. Thanks for taking my question.

Speaker 6

Good morning, Rafe.

Speaker 11

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 'twenty five, how do we think about incrementals longer term either from a gross margin or EBITDA perspective?

Speaker 3

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, 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 and A purposeful investments. And so I'm a bit hesitant to give you a firm figure, but we certainly look to beat the historicals.

Speaker 11

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'd given a sort of estimated destock number, I think, of $160,000,000 Did that come in about what you were initially expecting?

Speaker 3

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.

Speaker 3

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 $100,000,000 or 10% of that not repeating in 2024, which Kevin can just walk through. 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 destock now back to historical days on hand and that was really achieved coming out of 2023.

Speaker 11

Last one just very quickly. On the it looks like this SG and 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 and A?

Speaker 3

Yes. So we have progressively built our G and 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 and A, specifically around our business intelligence capabilities. We've built up recently a team in that regard and we look for great leverage on that over the next couple of years.

Speaker 3

But we really do have an opportunity to hold that G and A base now given where we exited out of 23, maybe just slightly over inflation. 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. Great. Thank you.

Operator

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

Speaker 2

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 Q1 earnings call.

Speaker 2

Thanks, Christine. You may now end the call.

Operator

Ladies and gentlemen, this does conclude today's teleconference.

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