We feel really good about our liquidity position. Right now we’ve got significant cash on the balance sheet. We remain undrawn on our ABL facility. We’ve done a good job on our own here reducing our own inventory levels on our balance sheet which has been a great source of cash this year. So from my perspective, we feel – I feel very comfortable with the liquidity position in the business and recognize that with the shift in order mix, it will defer a little bit of cash collection into next year, whereas we had anticipated this year but that’s just a timing issue.
Q – Andrew Carter: Thanks. I’ll pass it on.
Operator: Thank you. Next question comes from the line of Mike Halloran with Baird. Please go ahead.
Unidentified Analyst: Hey, good morning, guys. Paz [ph] on for Mike. A quick one for you. So obviously, a lot of moving pieces, given the destocking, the pricing discounts impacting EBITDA margins. But can you maybe help us understand what you think the right run rate exiting this year looks like? Obviously, a little bit wider range of expectations or possible outcomes going into 4Q and into next year than we were initially anticipating. So if you could touch on that a little bit on exit rate expectations that would be helpful.
Eifion Jones: Yes. Let’s – in terms of the quality of the income statement, we still expect to exit out this year at high 40s gross margin and slightly over mid-20s adjusted EBITDA when you calculate our results at the midpoint. So we’re very pleased with the quality of our income statement, despite the year-on-year net sales decline as we go through this channel destocking period. So that’s come as a consequence a lot of hard work in the business to protect our margin and as we indicated we look forward to next year to see that leverage opportunity lift both of those margin dynamics both on the gross profit line and more importantly at the adjusted EBITDA line. But as we exit this year, we’re still going to post up high 40s gross margin and slightly over mid-20s adjusted EBITDA margin.
Unidentified Analyst: Got it. That’s super helpful. And maybe at a high level, can you just dig into the diverging trends of the gross margin and the adjusted EBITDA margin that we saw in this quarter? And maybe help us with the puts and takes that drove the gain in gross margin with the weakness in adjusted EBITDA margin?
Eifion Jones: Yes. I think it just strictly comes down to as we’ve discussed before Q1 and Q3 tend to be the low part of our year. And then when you look at the coverage you have across your SG&A base you have less coverage in Q3. So you’ll see healthy margins throughout the year at the gross margin level, but less leverage across the SG&A base in Q1 and Q3. And that’s what limited the adjusted EBITDA margin in this particular quarter. It will lift again in Q4 as we get more leverage across that SG&A base. We had as we mentioned a little bit of a sequential increase in SG&A costs consequential to field service royalty costs that’s a true-up of the [indiscernible] in recognition of higher field service inflation costs rolling through. But again that will moderate as we go forward here. But it strictly comes back to leveraging across the SG&A base in a seasonally light sales period.
Unidentified Analyst: Thanks. I appreciate the color. I will pass it on.
Operator: Thank you. Next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.
Nigel Coe: Hi, Eifion.
Eifion Jones: Thanks. Hi, Nigel. How are you doing?
Nigel Coe: Good. Thanks, good. All right. So Canada – just about Canada. Can you remind us how big is Canada? What percentage of your North American segment is Canada? And is there any material difference in margins between Canada and your North American business?
Kevin Holleran: Canada on a comparison basis was nearly 10% in 2022 and it’s about two-thirds of that in our overall mix this year. Historically, there had been more of a margin decrement in Canada. But I’d say the team has done a great job over the last handful of years working the price less value basing our pricing and it’s gotten much closer to our standard call it US margin rate Nigel.
Nigel Coe: Okay. That’s great. This caution — distributors being cautious I can’t say I’m surprised but I’m curious if you’ve seen any material change in difference in behavior between the smaller distributors and the larger players like pool. I’ve got to imagine that the inventory holding costs in the current rate environment is crippling some of the smaller players. So I’m just wondering if there’s any difference you’re seeing out there? I mean is it not just an end market issue? Is it also a rate issue as well?
Kevin Holleran: I’ve not – excuse me. I’ve not necessarily seen irrational behavior across the various distributor partners. As we said earlier, I would — I really see them just being maybe more cautious with the rate of reorder. As they move inventory off their balance sheet that’s kind of what we’ve seen as opposed to some kind of irrational pricing that they’re putting out into the marketplace.
Nigel Coe: Yes. It wasn’t a pricing comment. But just my final comment is really actually on pricing the adjustment. So, Eifion, I think you said you’ve gone to a quarterly basis now as opposed to a seasonal basis. Is this true up really just purely a 3Q issue? I just want to make sure this isn’t going to be during the fourth quarter as well.
Eifion Jones: Yes, I want to be clear Nigel it absolutely is a Q3 issue and it really is stepping over a good guy last year not repeating this year. So, it’s — we expect positive price realization in the fourth quarter year-over-year. It’s a little bit unfortunate. We have these year-over-year seasonal true-ups in the third quarter. As you mentioned, as I mentioned, we’ve moved to a core fee program this year. We’ve actually changed the overall structure of our rebates to go on to a calendar year basis whereas historically it used to be on a full seasonal year basis ended in Q3. So, we expect to shift to quarterly for the balance of the year and then on a calendar year basis as we go into 2024.
Nigel Coe: Okay. I just killed a horse on that one. So, thank you very much.
Operator: Thank you. Next question comes from the line of Sean [indiscernible] with Bank of America. Please go ahead.
Unidentified Analyst: Hi guys. Thanks for taking my question. Despite the pricing headwinds the gross margin was near record levels. So, can you talk about what you’re seeing on inflation for materials and labor and what your expectations are heading into 2024?
Eifion Jones: So, we have seen moderating inflation in some commodities. The overall basket of raw materials including purchased items still remains moderately inflated over last year but the rate of inflation is certainly decreasing. I think when it comes to labor costs we are seeing labor costs now move positive move higher and that was one of the main implications reasons why we increased our price list as we move into 2024. But just again to come back to the price dynamic price list in the quarter was positive year-over-year. You’ve just got this onetime rebate anomaly which is unfortunately effect in the Q. But as you step into Q4 you’ll see the fullness of price year-over-year. And for the full year we still expect very positive price realization and margins will continue to hold into the high 40s as we step through Q4.
