Good morning, ladies and gentlemen, and welcome to Hayward Holdings First Quarter 2024 Earnings Call. My name is Lester, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President of Investor Relations. Mr. Maczka, you may begin. Excuse me, Mr. Maczka, you may begin.

Thank you, and good morning, everyone. We issued our first quarter 2024 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. Here, 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 filing 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.

Thanks, Kevin. Good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call. I'll start on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report first quarter results in line with expectations. We executed well during the quarter, delivering robust profitability and improved cash flow. Net sales increased 1% year-over-year through modest contributions from both price and volume. Gross margins expanded 260 basis points to 49.2% This matches the record we achieved in the fourth quarter last year at lower sequential sales volumes and represents the fifth consecutive quarter of year-over-year gross margin expansion. Cash flow also improved year-over-year during a seasonally soft period. I'm proud of the performance of the entire Hayward team during the quarter. Strong profitability and cash flow enable us to reinvest in the business to drive growth and productivity. As an innovation leader in the industry, we are introducing a number of exciting new products to share -- I'll share details on another launch in a moment. Subsequent to quarter end, we completed a voluntary early debt repayment, reflecting confidence in our outlook for business performance and cash flow generation. Eifion will provide details later in the presentation. Finally, we are maintaining our full year guidance. For full year 2024, we continue to expect a return to sales and earnings growth with net sales increasing approximately 2% to 7% and adjusted EBITDA increasing approximately 3% to 11%. Turning now to Slide 5, highlighting the results of the quarter. Net sales in the first quarter increased 1% year-over-year to $213 million, consistent with expectations. By segment, net sales increased 7% in North America and declined 17% in Europe and Rest of World. Incoming orders were healthy in Europe during the quarter, but volumes were impacted…

Thank you, Kevin, and good morning. I'll start on Slide 8. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased with our first quarter financial performance. Net sales were in line with expectations for the quarter, and we delivered outstanding gross margin expansion. The year-over-year increase in our cash balance at the end of the first quarter and strong collections expected in the second quarter have given us the confidence and flexibility to deploy cash for early debt repayment. Looking at the results in more detail. Net sales for the first quarter increased 1% to $213 million, driven by modest increases in both net price and volume. Gross profit in the first quarter of $105 million, and gross profit margin increased 260 basis points to 49.2%. This is a strong result, primarily driven by continuous improvement and efficiency gains in our manufacturing operations. Adjusted EBITDA was $45 million in the first quarter, and adjusted EBITDA margin was 21.2%. Our effective tax rate was 24% in the first quarter compared to 9% in the prior year period. The change was primarily due to the timing of discrete items. Adjusted EPS in the quarter was $0.08. Now I'll discuss our reportable segment results. Beginning on Slide 9. North America net sales for the first quarter increased 7% to $173 million, driven by largely higher volumes. Net sales increased 5% in the U.S. and 21% in Canada. The Canadian market has been significantly impacted by economic conditions and higher financing costs with increased sales in the quarter due to timing of deliveries. Gross profit margin increased 320 basis points year-over-year and 70 basis points sequentially to a robust 51.8%, representing the fifth consecutive quarter of year-over-year margin expansion. Adjusted segment income margin was 26.1%. Turning to Europe…

Thanks, Eifion. I'll pick back up on Slide 13. Before we close, let me reiterate the key takeaways from today's presentation. We delivered first quarter results consistent with expectations and reaffirmed our outlook for the year. Our team continues to execute delivering strong gross margin expansion and improved cash flow, allowing us to fund our growth strategies and fully repay our incremental term loan early. We're leading in innovation, bringing new solutions to market to improve the pool ownership experience. 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] Your first question comes from Andrew Carter from Stifel. Excuse me, your first question comes from Andrew Carter from Stifel.

Yes. Sorry about that. I can't figure out the meat function on my phone. So I wanted to ask to dig in a little bit about the gross margin here. You were up 260 basis points in the quarter. Your guidance maintained implies that slows to 125 basis points. I guess as you look at the full year gross margin, is there upside and then kind of focus on the bifurcated performance. Europe was down quite a bit in the quarter. I know you called out some onetime issues. Could you call out the margin headwind there? And just kind of puts and takes for the remainder of the year?

Andrew, it's Eifion. Yes, thanks for the question. Look, we're very pleased with the gross margin. We achieved 49.2% in Q4. We've matched our record now as we've stepped into the first quarter of 2024. The -- we've talked about this before, we have 4 main pillars of margin expansion: One is operating leverage, and we continue to maximize the output across our manufacturing footprint. We've done a lot of work over the last 4 years to progressively collapse certain facilities and convert that production volume into the remaining 4 walls of our global manufacturing footprint. . We're obviously seeing now the full benefits in 2024 of the price cost neutrality program that would be achieved in '23. We're back to basics in our lean manufacturing practices. We have, as Hayward a hallmark of practicing lean over many, many decades, we're back to seeing that. Price cost management is, as I mentioned, a strong attribute of this organization and the industry has a very disciplined and sticky pricing mechanism. Pricing was initiated October 1. Obviously, there's a higher blend of early buy in Q4 and Q1, but we should see price continue to develop as we step through the balance of the year. And as Kevin mentioned, we continue to introduce really informative new products, which typically come with higher pricing and higher margin attributes on the value-based pricing model. As it relates to the Europe situation, look, I mean, we recognize there's a delta between the North American and the European market. Obviously, there's a lack of scale in Europe in comparison to North America. We continue to tackle that issue. We have consolidated our manufacturing footprint in Spain, and we have growth plans, which will ultimately yield, we believe, leverage across that manufacturing cost installed base. It remains a fragmented market. It's a different competitive landscape and a different type of technology adoption across the European spectrum. So there are some reasons why we see the differentials. All we believe are capable of being improved over the course of time, and we're tackling that. As it relates to the balance of the year, do we believe there's upside to the margin? We talked about this in the full year call earlier this year. We do believe that we'll achieve approximately 150 basis points improvement year-over-year. We've done a nice step forward in Q1 of this year, and we do expect as leverage returns across the business that we will get margin expansion. So we feel very, very good about our margin opportunities in the business.

And second question, just wanted to drill in on readout in the quarter, how that trended? And I know that there was a lot of -- there was a weather impact pool called out in the first quarter, kind of the South. How did that kind of -- how has that kind of trended into April? And kind of remind us what your kind of full year expectations are for readout, particularly in North America?

Yes, Andrew, our guidance, which remains unchanged, obviously. It was really built around 2% pricing increase, I'll start there. But from a market standpoint, we're really calling in both U.S. and Rest of World, the aftermarket to remain flat, but really the more discretionary aspects, whether that's new build, upgrade or remodel, that to feel some pressure this year. From a discretionary standpoint, U.S., we're calling down 10% from a volume standpoint and more than that in all international markets, closer to down 20%. So as that flows through from a volume standpoint, that'd be down 6% to 7% or so after the 2% price. Obviously, the channel destock experienced last year should now reverse for us, and we feel that is about a 10% tailwind here in 2024 with a modest FX headwinds that kind of adding that up gets you to midpoint guidance there between that 2% and 7%. As for the start of Q2, obviously, that's the start of the season as spring rolls in all markets. There was some weather that impacted Q1, very very warm nationally, but some rain, which obviously prohibits or inhibits using of the pool in the year-round markets and also hurts construction, but weather seems to be improving here in April and order flow as expected is picking up for us as we're in the season. So we've said this on prior calls, with the destock really behind us, we're now back to that more historic matching our shipments into the channel with what their sales out is, and that's a much healthier position to be in and we see that playing out through Q2 and through the pool season here in 2024.

Your next question comes from Ryan Merkel from William Blair.

Congrats on a good start to the year. I had a question on sales, and I guess one on pricing. I think following up to sort of that last question. Kevin, how are you thinking about the outlook for new pools and renovation in '24? Any new thoughts as we enter the season here?

No, there really isn't new thoughts, Ryan. I think we're -- from what we're seeing, we're sticking to that original guides or the assumption in the original guide around that down 10%, down closer to 20% in the international markets. We track permits very closely. You may as well covering the industry. And we saw, frankly, something a little worse than that in Q1, but based upon input that we're hearing from some of our dealers, we think that that may improve as the year plays out. So we're -- again, in the U.S., where we have the best permit data, we're holding to that down 10%. There is some discussion that some of the remodel, which has largely been pushed to the right over the last several years, as builders prioritized new construction. Folks weren't able to get the work done. You can't defer that forever. So there does seem to be some pickup in interest and activity around the remodel. But not enough so for us to alter what our original assumption was in the guide. So we're holding to that, Ryan.

Got it. Okay. So it sounds like you believe in the pent-up demand story as it relates to renovation, but still a little early in that. We're not ready to see it yet. Got it. Okay. And then, yes, great to hear that your price will be 2% for the year. I'm just curious, how would you describe the promotional environment. Any changes there?

I guess I would say we're back to pre-pandemic more normal promotional activity. There was a need for that in the pandemic, obviously, with the demand that the industry experienced, but it feels that we're back to something more normal. So nothing that's causing us alarm. There's standard promotional activity. Obviously, the early buy, some may view that as a promotional activity. That's obviously not end market-driven, but this was much more of a normal standard early buy program offered and what we experience in terms of order flow and the delivery rates. So it feels like we're getting back to an environment that we all expected or grew to expect from the pre-pandemic period. And that's really what it feels like it's playing in out here in the start of the 2024 pool season, Ryan.

Your next question comes from Jeff Hammond from KeyBanc.

We can't hear you, Jeff, if you're talking.

Yes. Can you hear me now?

We got you now, Jeff. Yes.

Okay. Awesome. Great. So I just want to go back to Rest of World. Can you quantify kind of the disruption impact on sales and income basis from this consolidation? And then is this kind of just lost sales? Or do you pick that up in 2Q or sometime later in the year?

So overall, Europe, Rest of World was down 17%, as we said. See Europe was a little bit less than that as we look at the weighting there. The order flow in Europe was actually to our expectation in Q1. So there was nothing necessarily about the order inflow that concerned us. This really was about an aggressive schedule on consolidating from 2 locations, both in Spain into a singular location outside of Barcelona. We commissioned a new facility there about 2 years ago, really with the view that this would be the end state. And that occurred kind of late fourth quarter into Q1, and there were just some -- there were some fits and starts through the first quarter, and we're running it right now. The team has done a fantastic job of getting us to where we expected to be, but we weren't hitting those original rates earlier in first quarter. So in terms of -- the order flow continues to be good in the early Q2 for the European market. So we're -- by virtue of holding our full year guide, we're expecting to be able to make up for and close that gap that we created for ourselves in the first quarter of this year.

Okay. And then I think you said Canada is still weak, but had good numbers because of timing. Is that material enough to impact anything into 2Q where you saw some pull forward? Or is that just noise?

No. Look, the Canadian performance in Q1, frankly, is a pickup from a large shipment that slipped out of Q4. So if you really look at the Canadian performance over a 2-quarter period, Jeff, it would be on expectations. So this was a product that is built offshore, and it just wasn't received in fourth quarter. So we're not ready to call Canada that we have tailwind up there. It continues to be a market we keep close tabs on and obviously, some of the mortgage concerns and interest rate concerns winter up there. So I don't want to give the impression that a strong Q1 is necessarily win turning to our back. But things seem to be stabilizing up there, which is solid starting point.

Okay. And then just last one on this cleaner market. Can you level set us on how big of a business that is for you? And then is this more upgrade changes? Or is this kind of a brand-new product and just any kind of early feedback from customers?

Yes. It's -- as I said, it has been over the last 7-year period, this has been a double-digit CAGR. And it has grown -- actually, the whole category, so the TAM has actually increased as we've seen people really go from hand cleaning or cleaning to something more automated. It certainly had a bit of an effect on the older technology, both suction and pressure. So it's grown into a large market. We have a very solid line in the TigerShark's. But frankly, we're a bit underrepresented in the category there. So we're really excited to bring these products with great automation, great feature and performance to really start playing into more the higher end in ground segment, and we have strong aspirations and expectations with us moving more aggressively into the robotic market, Jeff. More to come on this great initial introduction here with a few key models to help building out our product line.

Your next question comes from Saree Boroditsky from Jefferies.

This is James on for Saree. So I kind of wanted to go back on the gross margin. So looking at North America specifically, you posted a higher gross margin like compared to the last quarter despite having much lower sales when the last quarter also had a volume and pricing growth. So how should we think about the margin cadence in North America going forward in 2024?

James. Yes, look, we're very pleased with what we've been able to achieve in North America. It's where we have the majority of our manufacturing base. It's where we see the greatest technology adoption. And so those are 2 of our largest underpinning pillars to margin expansion. We do expect to see margins develop as we get operating leverage across our manufacturing cost base in the peak seasonal Q2 period. So there is some expectation that there'll be modest margin development there. I don't want to get into too specifics. But obviously, with that leverage, you'd expect some margin expansion. . Plus is the mix of early buy discounted terms blends out of our top sales line, and we move more to in-season pricing, that will also be a tailwind to margin. I think what's really important to understand is what I mentioned earlier, we have done a significant amount of work over the last 5 years to improve the manufacturing cost base within our business. Our teams are very agile in the management of cost base, and we've done a lot to consolidate and collapse, really starting back in 2019, 2020, with the exit from the West Coast Pomona facility. And then progressively, as we've acquired businesses, we've collapsed those manufacturing locations into the remaining facilities of Hayward. And that's been a significant contributor to margin expansion over the course of time. A little bit mass over the pandemic period due to the price cost challenges we have, but now that that's been neutralized, you see the full benefit of that hard work coming through the margin. So we've got good expectations, or I say good ambitions to continue to grow over the course of time. I don't want to get into specifics, but we're highly encouraged with where we're at right now.

Great. Thanks for the color. And I kind of wanted to go back on the like channel inventory. So I think Paul kind of noted like continued normalization in inventory during the quarter. So can you kind of comment on what you're seeing from the customer inventory perspective?

Yes. So as we look at channel inventory, we obviously work very closely with our channel partners. We would say, as we exited 2023 that the destock through the COVID experience is really behind us. Now as we match in a more normal environment match, our shipments, since their pull through into the end market, there is some desire with the channel for them to see if they can be more judicious with their own inventory levels while preventing stock outs. So we're working closely with them. There's obviously additional expense to the carrying cost. So there's incentive to see if we can serve the market together without necessarily needing as much inventory as was there historically. So as you've heard with some other public comments that desire, we're fully aware of that and working closely with our channel partners to try and be as efficient in the levels of working capital as possible. So that places high priority internally here for us to be able to identify through forecasting the right SKUs to build at the right time so that our service levels are as good and reactive as possible to what's getting pulled through the channel. And I think that, that's something we're very good at. So we continue to work closely with them and better match sales in with their sales out of the channel. And our guidance -- I should finish by saying our guidance did contemplate some incrementally lower levels of inventory in the channels. So again, that just highlights the fact that we're working closely with the channel, and we're fully aware of what some of the actions are there.

Your next question comes from Mike Halloran from Baird.

This is Pesendorfer on for Mike. So I wanted to take a different look at kind of the splits and how growth is going. Can you maybe talk about which products are most impacted given the mix of business skewing heavily towards aftermarket? And what that impact to margins might be?

Yes. I mean look, what we see in the aftermarket, obviously, as the end of life, occurs for installed core equipment items, those get replaced almost immediately to protect the pool environment, which is a fantastic attribute for this business you have this very strong aftermarket that has an urgent need for replacement when the need arises. But we're also seeing in the aftermarket is adoption of what we've previously called and continue to calling lifestyle products, heating category, automation category, lighting and controls, those product categories continue to see good adoption as we continue our journey here. And those items tend to have higher price attributes, higher margin attributes. They create a great value proposition to the consumer, and we see high take-on rates for those products.

Understood. So maybe just a clarification just on definition. If I have an existing pool and I had some lighting as part of -- maybe I had something break, but I want to increase the amount of lighting I have, is that considered part of the aftermarket? Or would that be considered part of the upgrade bucket?

So we defined our business into 4 categories. New construction is I think clearly understood as new construction. The aftermarket represents 3 categories: Remodel, because the pool has to be remodeled, periodically, typically every 7 to 10 years. Upgrade, which is the item you just mentioned. If you're expanding the attributes that you have on your pool, we would classify that as upgrading your experience. And then we have the third pinwheel -- third element of our pinwheel in the aftermarket, which is maintenance. And aftermarket maintenance represents about 50% of the entirety of our business base. And that maintenance is defined as replacement of end of life or when needed repair.

Got it. That's helpful. And then one quick one on the addition of the COO in some of the changing roles. Where is -- I believe it was Eric, where there's going to be initially spending a time? Are there any projects that he's going to be going after to begin with? Or is this more of picking up the torch and kind of just carrying on implementation of operational excellence?

Certainly, that's -- that latter part. I mean, it's a competitive advantage, and he brings a very compelling set of experiences and skills to it. But there are several things. We've got new product launches that we want to make sure are done seamlessly. Obviously, there's a ramp in volumes here in Q2. So there's greater demand placed on our facilities. We are in the midst of ERP implementation. There's a schedule there later this year and then a go live in 2025. So obviously, that places a lot of work on the entire organization, but obviously, the operations team is a big part of that. And then obviously, working to maintain price cost neutrality, which we achieved last year and continuing to drive through on these gross margin improvement activities that Eifion has touched on a few times here this morning during the call. So a lot of work to be done, high expectations on he and that entire group to continue performing and showing results through the organization.

Your last question comes from Rafe Jadrosich from Bank of America.

The first one I wanted to ask just, I -- can you talk a little bit about the trends you're seeing by [ channel ]? I know you're primarily wholesale and distributor, but are there any differences between distribution, retail or e-commerce you're seeing out there? And then related to that, do you have a lot of home center exposure today? And then can you talk about the potential opportunities or impacts from Home Depot buying SRS and then Heritage?

Yes. The first, I wouldn't say that we have seen any kind of a mix shift across kind of channels to market rate. Distribution continues to be the primary channel to market, and we're committed to the distribution channel to serve the professional trade. There is -- obviously, there's some product that has transacted through e-commerce channels, and we have participated in that historically. . But no, we don't see any kind of a shifts playing out there. In terms of the announcement last month between Home Depot and SRS, we all know the deal has not closed yet. So certainly, more to learn as this progresses. But we've spoken with the Heritage and the SRS team. They're telling us that they expect business to remain as usual and that they're going to continue to be run really independently with the same management team in place, which we view as great that Home Depot has interest in their growth strategies across all 3 verticals, of which pool is one, obviously. And then Home Depot certainly brings plenty of resources and capabilities with them. And we see this as -- we're hopeful that with that brand behind on the SRS team that, that can help expand the TAM and have a very positive growth impact on the overall pool industry. So today, we don't have much exposure there, Rafe, I think that was part of your question. We don't have a great deal of home center exposure. And as this thing plays out over the next year or so, as the acquisition and the integration occurs, we're anxious to work closely with them and see how we can be the partner that they expect.

Okay. It could be interesting opportunity. And then I wanted to ask on what are you seeing in terms of input costs? What are you expecting on the raw material side for this year? And there's -- can you just remind us of what the key exposure is there? Like there's been some copper inflation recently. For example, like when would you expect that to start to have an impact to your P&L?

Yes. So we -- Rafe, it's Eifion. I think we appropriately called the inflation environment coming into this year. Obviously, copper is a little bit more elevated, but there are others that are compensating in our basket of goods. We've got some specialty metals, which have decreased in cost year-over-year. So on balance, I think we've got just over 2% baked into our inflation forecast, and that's kind of playing out in the aggregate basket as we'd expected. We also have, and we talked about this before, protection mechanisms, either through contractual fixed pricing or through hedging in our procurement processes. And we feel adequately protected against the current elevation of copper, at least through the primary season here. We'll have to take another look as we get into the second half of the year, but we feel comfortable with where we're at right now. I think what the last 4 years has allowed us to demonstrate is we have a great price/cost agility. And if for any reason that we need to go back to market with a price consideration to combat notable elevation in inflation, we're prepared to do that. Every year, we have a pricing opportunity on October 1. And we'll start to think about what that needs to be as we're moving to the latest summer period. But for right now, we're expecting that to be normal. And we think we've got inflation managed correctly in our current pricing structures.

There are no further questions at this time. Kevin, please proceed with your closing remarks.

Thanks, Lester. 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 with the hard work, dedication and resilience of our employers 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 second quarter earnings call. Thanks, Lester, you can now end the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.