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

Thank you, and good morning, everyone. We issued our second quarter 2024 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. There, you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2024 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and 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.

Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's Second Quarter Earnings Call. I'll start on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report second quarter results consistent with expectations. We executed well again this quarter in a challenging industry environment, delivering strong profitability, increased cash flow and an improved balance sheet. We continue to advance our growth strategy, centered-around technology leadership, brand and multichannel strength and operational excellence and expect this to result in above-market growth and shareholder value creation. I'm proud of the performance of the entire Hayward team during the quarter. Net sales increased modestly year-over-year as positive net price realization was offset by lower volumes. Gross profit margins expanded 290 basis points to a record 51%. This represents the sixth consecutive quarter of year-over-year gross margin expansion. Cash flow generation was also solid during the seasonally strong period for collections with cash from operations increasing 26% year-over-year in the first half. Strong profitability and cash flow enabled us to further strengthen the balance sheet and fund our growth initiatives. During the quarter, we reduced net leverage by more than a full turn sequentially on an organic basis from 4x to 2.8x excluding the use of cash to acquire ChlorKing at the end of the quarter and paid down our entire incremental Term Loan B on a voluntary basis. ChlorKing, a leader in commercial pool water sanitization is a great strategic fit with a strong financial profile, advancing our position in the commercial pool market. We're very excited to welcome the ChlorKing team to Hayward, and I'll share additional details on the business later in the presentation. Finally, as we enter the second half of the year, we are narrowing our full year…

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 second quarter financial performance. Net sales were in line with expectations for the quarter, and we delivered outstanding profitability. Cash flow generation was robust, enabling early debt repayment and the strategic acquisition of ChlorKing. Net leverage reduced meaningfully in the quarter. Looking at the results in more detail. Net sales for the second quarter increased modestly to $284 million. Net price realization of positive 2% was offset by 2% lower volumes. Gross profit in the second quarter increased 6% to $145 million, and gross profit margin increased 290 basis points year-over-year, a 180 basis points sequentially to a record 51%. This is a strong result, primarily driven by continuous improvement and efficiency gains in our manufacturing operations. Adjusted EBITDA increased 4% to $83 million in the second quarter, and adjusted EBITDA margin increased 100 basis points year-over-year and 780 basis points sequentially to 29%. Our effective tax rate was 20% in the second quarter compared to 32% in the prior year period. The change was primarily due to the timing of discrete tax items. Adjusted EPS in the quarter increased 11% to $0.21. Now I'll discuss our reportable segment results, beginning on Slide 9. North American net sales for the second quarter increased 2% to $241 million, driven by favorable pricing. Net sales increased 1% in the U.S. and 5% in Canada. We were pleased to see increased orders in sales in the quarter in Canada, despite the significant impact in that market due to economic conditions and higher financing costs. Gross profit margin increased 300 basis points year-over-year and 110 basis points sequentially to a robust 52.9%, representing the sixth consecutive…

Thanks, Eifion. I'll pick back up on Slide 13. Before we close, let me reiterate the key takeaways from today's call. We delivered second quarter results consistent with expectations in a challenging environment. Our team continues to execute delivering record gross margins and robust cash flow, allowing us to fund our growth strategies and fully repay our incremental term loan early. We are excited about the addition of ChlorKing's innovative technologies and the many opportunities we see to leverage a broader commercial portfolio, better serve this growing market and drive profitable growth. We added proven talent to the senior leadership team, and I'm confident that we have the right strategy 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 wanted to start off with the acquisition of ChlorKing. It sounds like a really nice business. What are one of the -- what are the one or two bigger opportunities, Kevin, that you see there?

Yes. Ryan, yes, this is a really -- it's a great company, and we're really excited to welcome them to Hayward. It positions us really well in the commercial market. Commercial has performed extremely well, aside from 2020 when so many of the commercial pools were not allowed to open. But we've seen great double-digit growth in the years since then. What I think the strength -- there's many when it comes to ChlorKing. But when you look at their leadership in the commercial standardization category, they've experienced a nice growth trajectory over the recent past, great margins. But what they really bring to the company is a real stronghold in the Class A segment of the commercial market. Commercial is really defined by 2 categories: Class A and Class B. Class A is really defined as more of those larger bodies of water, greater than 100,000 gallons, competition pools, water parks, et cetera. That's really where their sweet spot is. Hayward really participates in the Class B, which is -- the mix is about 15% Class A, 85% of the market Class B, and we really refer to that by the acronym of HMAC, which is hotel, motel, apartment, condos, we have a nice product line that speaks and plays well Class B, but ChlorKing really gives us some added exposure and a product line to be able to leverage more broadly in the Class A. There's all kinds of cross-selling opportunities for some of ChlorKing's products to be introduced more so into the Class B, where we're already participating. And likewise, some of the Hayward product into the Class A segment. So lots of great -- as I mentioned in my prepared remarks, great relationships that, frankly, we don't -- we don't have today around the pool architects and designers, builders, operator, specialty distribution. So Steve, we've actually had a relationship with Steve and the ChlorKing team for several years. We actually private label I had had, for many years, a water standardization that we sell into the Class B. So we know each other, have a lot -- have a high level of intimacy with each other and really looking forward to integrating and continuing our growth trajectory in the commercial space.

That's great. And then for my follow-up, I was curious on the longer-term outlook for new pools. Obviously, this year is going to be pretty weak. Do you still think that we can do 90,000, 100,000 pools once interest rates come down? Are you hearing from contractors that it's really just a function of rates, why the market is so weak?

Yes. I mean, you're familiar with the long-term new construction profile. And this year, most of us in the industry are sort of coalescing around this 60,000 or so, which would be another 15% decline off of last year's 25% decline. There is heavy reliance upon interest rates. I do think though that -- while I'm not sure I can -- I can predict 90,000 there. I do think that this is absolutely a low water as we do get some relief around interest rates that the long-term viability and the desire to have a pool in the backyard is still highly desirable. Our single-family home starts has not really kept up with the family formation over the last several -- several years, you can really say dating back to the -- to the GFC. So that's going to be addressed at some point, which is a -- which is a strong correlation point for new -- new pool construction. So those secular trends around migration as well as time at home, interest in having a healthy outdoor lifestyle, I think this is all tailwind for when interest rates finally start to a base -- and we're looking forward to hopefully 2024 being a low watermark, and we can get back to new pool construction in the near future.

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

Just so looking at the full year outlook, I think we're now sort of 1 to 4, excluding the impact of the acquisition. So if you can just maybe just unpack the kind of the sort of the adjustment you're making to sell-through versus maybe a bit more pressure from inventories, but about the -- that would be helpful. And obviously, we saw from POOLCORP that equipment was down 2% in their numbers. You obviously had plus 2% in North America. Just -- was just wondering what you saw on sell-through in the second quarter as well.

Yes, sure. Let me -- let me start that one. Let me first address the narrowing what contributed to the narrowing of the guidance, Nigel. Let me start with what is unchanged from our original bridge that we talked through earlier in the year. We continue to expect price to flow through at a couple of percent for the year. We continue to assume a little bit of headwind, 1% or so on FX. And really, our overall expectation for the absence of the inventory destock felt in 2023, not to repeat in 2024, we would assume that to still be kind of in the plus 10% range overall. What has changed is what we'll call just market -- market volume. Originally, we laid out in North America, the discretionary aspects of the market to be down 10%. We're now increasing that to down 15% based upon what we're seeing through permits is one data point, but also interactions with the channel and with our dealer partners and then pivoting to Europe, Rest of World, where that assumption on the discretionary aspect was up to negative 20%. Similarly, we're increasing that an extra 5% to a down 25%. So if you flow that through as a percent of our business, that would really take market volume from an original expectation of down, call it, 6.5% to now down 8.5%. And then as you mentioned, the -- the plus 1% in the -- in the second half from the ChlorKing acquisition would really get us to that midpoint revision of around 3.5% with the range of 2% to 5%.

Go ahead, Nigel.

Just the sell-through for second quarter, but that was a very fulsome answer that. But just on the -- so it sounds like ChlorKing is about $20 million of annualized revenue. I just want to make sure that's the case. And then just you talked about some of the share initiatives on the West Coast, in particular, the Sunbelt space. Maybe just talk about sort of the -- if an update in terms of the initiatives in train and then perhaps some of the success you've seen with those dealer conversions.

Just to calibrate you on the ChlorKing, it has an annualized revenue result [brent] $25 million is little bit more weighted in the first half of the year and the second half of the year around $12 million. About the dealer conversion, Kevin?

Yes. On dealer conversion, we have a lot of great initiatives underway. I would say in some of those markets where we would say we have share growth opportunities, specifically the West, as you mentioned, and then also what we call the South Central around some additional on the street selling resources with marketing sports coming out of North Carolina. Obviously, on the hub, which I spoke about in my prepared remarks, is really a pilot. We would like to see that proof-of-concept play out. And it would be our expectation that we'll continue to roll that out in some additional markets going forward to really be that one-stop shop for our dealers from a service and a support and a training standpoint. And then we've spoken in the past, there are some nuanced differences from a product standpoint, products that maybe sell in the Northeast or in Florida, small footprint heater, for example, is something we brought to market a couple of years ago, that's doing extremely well in the West Coast where there's smaller lot lines and need to get the equipment set on a -- on a smaller square foot pad. So lots of attention being paid and resources being allocated inside our organization to continue focusing on those lower share markets where, frankly, we have opportunity for growth, and we see nice trend line occurring for us in those markets.

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

Just wanted to go back to inventory. It doesn't sound like you've changed the destock assumption, but I'm just wondering with kind of the pool preannouncement and some of the softer dynamics on the discretionary what maybe you're seeing the same or different around the want to hold inventory at the channel level and then any early discussions about how early buy might play out the same or different.

Yes. From an inventory standpoint, I would say we don't have perfect information. But talking in generalities, when I was walking through the bridge just a moment ago, on guidance. I would say that plus 10 was laid out. And I think that, that still allows us to contemplate what we're seeing with the channel in terms of overall inventory held. We -- and I think our assumption still holds there. I would say in the first half, we've probably seen a little bit more aggressive movement on the channel inventory, which frankly is not unexpected when you really look at the environment that we're operating in. Less sales out the door, obviously, will require less inventory to maintain days on hand. Now by this point, I think we were all assuming or at least hoping for some interest rate reductions, which have not occurred. So carrying cost across the broad channel has not reduced at all creating that incentive for less inventory carry. And frankly, us, OEMs, I think, are pretty responsive right now from a lead time standpoint to be able to serve the demand as it comes. So we've seen some movement down for our original expectations. And as we play through the second half of the year with that assumption around the -- around the positive 10 will play out for us in full year 2024. As for early buy, it's a bit early on that. So we're still defining and writing the plan, but we are definitely intending on offering early by later this year into the 2025 season. Based on conversations that we've had, we would expect solid participation in the program as we roll it out. I know you know this, but for the broader audience, early buy is really designed as a win-win for both distributors and us manufacturers, elements of that program is avoidance of some future price increases and allows us to level load our factories and ship at our discretion. So based upon the inventory, obviously, these 2 questions are linked together with inventory reduction working through the end of the season here. What we would expect is a strong response to the early buy program that will roll out in the next, call it, month or so to the channel.

Okay. Just on ChlorKing, more critical mass with this deal in commercial pools. Maybe just talk about where you see the best opportunity for revenue synergies other than pulling you through, you pulling them through? And then just what's the market and pipeline look for other bolt-ons to continue to fill out the commercial pool space?

Yes. I think as I look -- I spent some time describing Class A and Class B there. We had some products that up -- that -- we sold into Class A, but ChlorKing really does increase the catalog that we can now offer to Class A. That said, there's still some important higher volume products in the Class A that us nor ChlorKing have that presents opportunity for us, either from an organic or an inorganic standpoint, like some larger horsepower pumps, for example, or higher capacity filters or heaters would be some that -- that I think are future opportunities that will continue to -- to solve for. But Class B, we're really happy, really pleased with what our -- what the catalog looks like there. We've been seeing for years running double-digit growth. This is really -- commercial is really not a market that Hayward focused on historically. This is -- this is a relatively new development for us over the last 5 to 8 years or so where we focus. So we're excited, and there's other opportunities organically and inorganically to now leverage a broader set of relationships that ChlorKing brings to us, and we're anxious to get on with this and keep growing this commercial business, Jeff.

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

First question I wanted to ask, looking at your free cash flow outlook for the year at $160 million. Given the year-to-date and what you're implying in the EBITDA, I'm implying a pretty heavy working capital drag more significant than the past couple of years. Is that predicated on a pre-buy, a pretty significant increase in the pre-buy, therefore, upside on to cash flow if pre-buy doesn't work or something else in the inventory purchase levels?

Yes. Andrew. We do expect a robust early buy, that will raise the account receivable position at the end of the year, year-over-year, that's -- that's contemplated in our guidance. Additionally, our inventory position, which we have worked very diligently to reduce both year-over-year from the end of 2023. We will probably take a strategic position in finished goods as we enter 2025 in anticipation of some of the ERP developments we have planned for 2025. That is still to be determined exactly how we invest in that particular working capital position, the timing of that, but we have for now improved out within the earning balance sheet forecast.

And I know that you're not going to really give any commentary around future pricing decisions today. But kind of regarding number one, kind of the pricing you've taken, is there anything you've seen prices are too low or too high for your products? I mean, equipment has been pretty resilient. And the second thing is, I know you mentioned earlier on about kind of SKU optimization value. Would you lean on -- would you potentially lean on that heavier and if you had to take a year off from pricing or something like that? Or would it give you the option to take a year off? Just anything you can help us with there.

Yes. SKU rationalization has certainly received a lot more attention in the last year or so. We had some meaningful rationalization flow through product management, operations and engineering last year. That said, there's plenty more to be done there that we're conscious that this isn't really done in episodes, but this is something that's ongoing throughout our organization and continue to tighten up that product catalog, which then allows us to obviously look at what the value creation is within each product line and go through that process. Looking very objectively at the value, the life expectancy, some of the functionality that you get from the equipment that we offer through the channel to the homeowners. So either they're absolutely linked. I'm not sure if I -- if I see it as one replacing the other in and off year. I think I think we can do both. But to your point, I think that historically, pricing has really been sort of offset inflation. This market has been able to do that, and it's stuck. But we're certainly spending a lot more time looking from a SKU count standpoint and then also from a value creation. Frankly, I think that there's still plenty of products in the lineup that are not priced commensurate with value give. So I think there's plenty of opportunity, not just to offset inflation, but to take a real objective look and see what kind of maximization we can get in future pricing.

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

I guess, first -- building on your -- on your last discussion, could you quantify the potential for SKU rationalization and just like how that impacts margin performance as we think about the out years?

Sorry, can you just repeat the question, Saree, which quarter?

Could you quantify the potential for SKU rationalization and how that impacts margin performance in the out years?

Yes, sure. So our SKU rationalization program initiated probably close to a year ago now, we've made very good progress. We're tackling the U.S. facilities first and then we'll progressively roll it out. We don't give specifics on the exact cancer SKUs that we're rationalizing, but it's been a meaningful reduction through the end of Q2 here. As it implicates all of our working capital initiatives as well as our margin initiatives, it will have a positive impact on our ability to price goods or a value-based pricing methodology. So we look to gain continued margin development through a more fund in SKU range. It will continue to enable our manufacturing locations manage the throughput in a much more efficient way. So that will be a positive there. It will continue to allow us to have best in cash procurement programs and manage inflation through the business. And then additionally, as we think about developing the product line into the future, we're more focused on the key platforms across the business. So a lot saying that, we think as we step into 2025, all of that will provide us with margin expansion opportunity and will also help our working capital as well as the channel's working capital.

I appreciate the color. Then on the lower channel inventories, you talked about distributors relying on your lead time for inventory this year. Is it -- this a 2024 response? Or do you expect distributors to continue to get more efficient on inventory and rely on OEMs more? And does that impact working capital for you?

Yes. I mean I -- I think we'll continue to work very closely with our channel partners to ensure right inventory, right time at right location. I think one of the real strengths of Hayward historically and will continue into the future is our responsiveness from a supply chain and a manufacturing standpoint. So I think -- I think our channel partners can continue to look to us to be able to respond timely to -- to whatever changes may be occurring in the -- in marketplace. But obviously, there is keen interest with the channel to have products ready at the point of sale when the dealers come in the front door. So we're going to continue to work closely with them to make sure that our demand signals out to our supply chain and our factories are commensurate and well-coordinated with the channel. And I mean we're -- we feel really good that when the destock really ended late last year, I like being in this position of having the right days on hand and being able to respond very timely and our sales in to match what their sales out into the retail marketplace. So I think that, that's been a great development here in 2024, and we'll look to -- to continue that into the future.

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

This is Pes on for Mike. I want to follow up on Saree's questions. Obviously, margin performance here is healthy against lower volumes in challenged end markets. You called out a little bit of mix benefit, but then obviously, operational efficiencies as well that should prove a little bit more structural and sustainable. Maybe talk about how you think about margin sustainability and should we expect pretty normal seasonal margin cadence here in the back half.

Yes. Do we think we are sustainable? Absolutely. I mean we've done a lot of work over the course of the last 4 years to improve the quality of our gross margin. Obviously, we were fighting for a period of time inflation, that's firmly in the rearview mirror in terms of price/cost management of inflation. And what you're seeing now as margins continue to accrete positively is a result of the very hard work that we've done to continuously improve the productivity in our manufacturing footprint. We've gone through a period of site rationalization over the course of the last 4 years. We will always have that opportunity as we continue to inorganically grow pretty much every facility that we acquired over the last couple of years, we've been able to collapse that production into the existing Hayward footprint. We'll not do that with the most recent acquisition. That's a very sufficient business operating very excellently. But as we go forward, we can platform other businesses into our manufacturer location. We have a long legacy of Six Sigma Kaizen improvements across our facility, a lean manufacturing culture that continues to produce here in the medium term. So all that saying, we feel very comfortable that we can sustain the gross margin as we continue to grow. We have tremendous capacity utilization available to us today. We're probably around approximately 60% cap utilized. So we can continue to grow this business without having to add any additional CapEx. In terms of the cadence for the balance of the year, yes, we do get a little bit of detriment in Q3. Q3 looks very similar to Q1 in terms of the size of our sales in the business. And consequently, when we step from Q2 down to Q3, we get a little bit of leverage penalty. But then as we step up in Q4, we get that leverage back. But as you know, Q4 tends to be the early by discount period so that -- that will have to wait and see how that margin opens up. We have a price announcement that goes into effect October 1. We have discounts that go into effect October 1 and early by, and then we'll be able to evaluate the net position and its impact on margin. But we feel comfortable with where we're at. We're very pleased with the year-to-date performance of gross margin greater than 50%. That's a phenomenal result for us. And as a management team, we continue to cement that in over the course of time.

That's super helpful. Maybe switching gears to capital deployment. It sounded like inorganic maybe moved its way up the priority list in the prepared remarks, but maybe I'm just leaning on the fact that we just finished on ChlorKing. Can you maybe talk about how you're thinking about prioritization of commercial versus traditional residential pool? And then are there any particular products or technologies that you're trying to prioritize or highlight as you filter through your funnel?

Let me just touch on our standard capital allocation process. We have not deviated from that. We'll always take our first priority as investment back into our business. We're an OEM. We're a manufacturer. We take care of our facilities, and we look to continue to upgrade those facilities with a capital expenditure profile between 2% to 3% per year. This year, we're calling for around $30 million. It's a little bit lower than we had originally said, and that's purely a consequence of timing of some of the investments that we're putting into our U.S. facilities. Secondly, our priority in the short term here has been to delever our balance sheet, and we've done a really good job, we believe, sequentially, we've moved down from just over 4x now to 2.8x on an organic basis, taking into consideration cooking, we're a 3.1x though will continue to move into our target range of 2x to 3x over the balance of the year. And then thirdly, our inorganic activities or M&A. It's always been a growth attribute for this organization. It will continue to be a growth attribute given the very rich cash flow profile of this organization. ChlorKing was our most recent great acquisition. We do merger a pipeline. That covers both residential and commercial in focus. And then finally, as I mentioned, our cash profile does afford us the opportunity to also think about return to shareholders. Right now, no specific commitments there, but we do have remaining $400 million on our share repurchase program that's available for deployment at the appropriate one.

I would just add, as I've mentioned, I mean, we maintain a healthy pipeline. Our market position in residential is significantly stronger than where we are in commercial. So that may afford us more opportunity from a commercial standpoint as we look at building out the product catalog. But I'd say in terms of technology, I mean, we're very strong what we call Chlor pad equipment, pumps, filters, cleaners, et cetera. So things around automation and around more of the lifestyle products will continue to be key points of emphasis for us, both organically and as we contemplate inorganic opportunities going forward.

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

I wanted to ask on some of the comment -- or just follow-up on some of the comments on the permits trend that you're seeing on the new construction side. Can you remind us the typical lag between your business and permits? Like how do we think about whenever new construction bottoms starts to inflect at some point, like when would that actually flow through into your revenue?

Yes, I think it's probably a couple of months, Rafe, is how we would define what we see in terms of permitting. If you were to follow one specifically through the process, I think you'd be somewhere between kind of 45 to 60 days or so depending upon what the workload of the specific dealer is that's filing the permit rate.

Got it. Okay. So it's a pretty quick -- it's a pretty quick turnaround from the permit to yourself. Okay. And then --

Now it is. I would say that it wasn't -- we haven't asked that question during -- during COVID that would have been a longer tail on that. But I think in general, you're kind of talking 2 months or so.

Okay. That's helpful. And then if we step back and look at the commercial market relative to resi, can you talk about -- I mean resi is pretty consolidated with you and the 2 other large players controlling the majority of the market how is commercial set up competitively in terms of like the consolidation of that size what is the relative size of commercial versus resi? And then what's the margin profile of that business compared to like your kind of legacy core business that you have today?

Yes. I think from a margin standpoint, I'll let -- I'll let Eifion add at the end here, but it's a strong margin business. And one of the real benefits of ChlorKing is pretty similar margin profile as the business that it's joining at Hayward. In terms of competitive landscape, I would say the big 3, as we're often referring to all participate in the commercial market globally to some extent. But as you do look around some of the individual product categories. It is a bit more fragmented, I guess, than what you might see in the residential space from some of the larger horsepower pumps to some of the larger BTU commercial heaters to some of the regenerative filter brands out there. So it's a bit more -- it's a bit more fragmented, I would -- I feel than maybe the residential business as we know it.

In terms of margin comparability, I'd say, generally speaking, we don't see a major difference in the adjusted EBITDA line between residential and commercial business. Maybe we have a slightly different profile within the income segment between gross margin and [NASH DNA]. But at the bottom line, it's very comparable. The nice thing about these type of acquisitions for us. Over the course of time, we have an opportunity to progressively improve the margin with the purchase power that we can bring to the raw material acquisition cost. And so we look to continue to expand the clocking acquisition over the course of time. And same applies to future acquisitions, that type of attribute that we can bring.

Our next question is a follow-up from the line of Nigel Coe with Wolfe Research.

I think a couple of quick ones for you, Eifion. I think you mentioned factory utilization right now is about 65%. What would you say is a normal level? Because I'm assuming that's about 2 points or so gross margin and absorption. So I'm just wondering if -- number one, if you agree with that view? And what is the normal level?

Yes. So for us, just to correct you, I said 60% is where approximately utilized today. When we say normal, we would say that is probably trending back to where we would normally operate in these units pre-pandemic level. During the pandemic, we accelerated shifts within the facilities to take advantage of the capacity in the machinery in the hours in the day. So we still have that opportunity as we continue to grow the business volumetrically. It was a great learning in the pandemic period to be able to tap in that latent capacity to get more shifts on to get access to those machine hours and those additional shifts in the week and over the weekend. And so that's always the awesome opportunity for us given we've proven out we can do that. We're not under-absorbing right now in our facilities. We balance, and this is a massive kudos to our operational team. They balance the variable cost labor in those facilities to match the current production level in those facilities. So we've got good absorption. It's appropriate level of absorption to the cost base we're incurring. And as we continue to grow volume, we will right sized labor to keep walkup with that absorption profile we need in the business.

Okay. I must read the comments. And then just a quick one on free cash flow. Accounts receivable fell Q-to-Q from [351] down to [148] and I know normally, we do see that drawdown in ARR but not this degree. So I'm just wondering, is that all organic? Or was there some help from factoring in the quarter? Any thoughts there?

Yes. So in terms of the accounts receivable, it normally does decline from Q1 to Q2 as a consequence of all the early bio receipts that come into the business. As you know, early buy offers a discount and up to 6 months extended payment terms. And so most of our cash in early by come -- for early power receivable comes in the second quarter, and that was the case that you saw this year. So we're very pleased with the cash collection period for early by this year. Happy to report that the vast majority have paid exactly on time, which is great to see in the current climate. And as we step through the balance of the year now, accounts receivable will increase again as we ship in Q4 early by for the 2025 season.

But no big factoring impact there?

No, no, not at all.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Holleran for any final comments.

Thank you, Melissa. I'd like to thank everyone for their interest in Hayward. Our business is very well positioned to navigate the near-term challenges and deliver value for all stakeholders in the years ahead. This wouldn't be possible without the hard work, dedication and resilience of our employees and partners around the world. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on the third quarter earnings call. Thanks, Melissa, you can now end the call.

Thank you. This concludes today’s conference. You may now disconnect at this time. Thank you for your participation.