Hayward Holdings, Inc. (NYSE:HAYW) Q4 2023 Earnings Call Transcript

Hayward Holdings, Inc. (NYSE:HAYW) Q4 2023 Earnings Call Transcript February 29, 2024

Hayward Holdings, Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.18. Hayward Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Kevin Maczka: Thank you, and good morning, everyone. We issued our Fourth Quarter 2023 Earnings Press Release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. There, you can also find an earnings slide presentation that we will reference during this call. I’m joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward looking in nature, including management’s outlook for 2024 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission that could cause actual results to differ materially.

The company does not undertake any duty to update such forward-looking statements. Additionally, during today’s call, the company will discuss non-GAAP measures. Reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation. I would now like to turn the call over to Kevin Holleran.

Kevin Holleran: Thank you, Kevin, and good morning, everyone. It’s my pleasure to welcome all of you to Hayward’s Fourth Quarter Earnings Call. I’ll start on Slide 4 of our earnings presentation with today’s key messages. I’m pleased to report fourth 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. Net sales increased 8% year-over-year through positive contributions from both volume and price with gross profit margins expanding 690 basis points for the quarter and 270 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 established 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.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. 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 fourth quarter and full year. I’m pleased to report solid execution and growth in the quarter. Net sales in the fourth quarter increased 8% year-over-year to $278 million, driven by positive volume and price. 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.

We’re focused on driving growth in the commercial segment of the market and commercial pool sales increased double digits for the quarter and the year. As I mentioned, we achieved a record gross margin in the fourth quarter. Gross profit margins expanded 690 basis points year-over-year and 140 basis points sequentially to 49.2%. Adjusted EBITDA margin in the fourth quarter was 27.2%, and adjusted EPS was $0.20. For the full year 2023, net sales reduced 24% to $992 million, with adjusted EBITDA of $247 million, 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%. 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. 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. 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 third quarter 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.

Finally, during the fourth quarter, John Collins was promoted to 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 fourth quarter, focused on progressively leveraging data analytics and scaling intelligent process capabilities. Turning now to Slide 7. I’d like to share some perspective on the year. As expected, we faced 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 and 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. 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. 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. 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. Three 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. 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 two key benefits: real-time proactive monitoring of the operational pool; and remote expert configuration of equipment via the cloud. Importantly, the OmniPro app provides significant value to these professionals, giving them the opportunity to promote other sales and service initiatives through a direct connection to the homeowner, creating greater stickiness for Hayward. Finally, the ColorLogic 2.0 platform embodies the next generation of color LED lighting homeowners are increasingly requesting additional lights to be added to their pools, spas, order features and landscapes to create dramatic nighttime effects and attractive entertainment spaces.

ColorLogic 2.0 offers the flexibility designers want with directional optics to ensure full light saturation of the water and a quick disconnect plug for ease of maintenance. In our future earnings calls, I look forward to introducing even more great product technologies designed to delight homeowners as well as increase the competitive edge Hayward enjoys in the market. With that, I’d like to turn the call over to Eifion, who will discuss our financial results in more detail. Eifion?

Eifion Jones: Thank you, Kevin, and good morning. I’ll start on Slide 9. All comparisons will be made on a year-over-year basis. As Kevin stated, we are pleased with our fourth quarter financial performance. Net sales increased in line with expectations for the quarter. We delivered outstanding gross margin expansion and generated better-than-expected free cash flow. Looking at the results in more detail. Net sales for the fourth quarter increased 8% to $278 million. This was consistent with our expectations and driven by a 6% increase in volume and a 2% positive net price realization. Gross profit in the fourth quarter was $137 million. Gross profit margin increased 690 basis points year-over-year and 140 basis points sequentially to a record 49.2%.

Adjusted EBITDA was $76 million in the fourth quarter, and adjusted EBITDA margin increased 660 basis points to 27.2%. Our effective tax rate was 20.6% in the fourth quarter compared to 30.2% in the prior year period. The change was primarily due to the timing of discrete items. Adjusted EPS in the quarter was $0.20. Turning now to Slide 10 for a review of our full year results. Net sales for fiscal year 2023 decreased 24% to $992 million. This was in line with our most recent guidance and primarily driven by a 28% reduction in volume, partially offset by a 3% positive price realization and a 1% contribution from acquisitions. Gross profit for the full year was $477 million. Gross profit margin increased 270 basis points to 48.1%, a very strong performance amid 28% lower volumes.

Strong margins enable us to reinvest in the business. In 2023, we increased research development and engineering investments by 10% to $25 million to support our commitment to growth and innovation. SG&A expenses for the full year declined 6% and to $234 million, driven by lower discretionary and volume-based expenses. We delivered a full year expected annualized savings of approximately $28 million under our enterprise cost reduction program. On a full year basis, SG&A as a percentage of net sales was 23.5%. Adjusted EBITDA was $247 million, with an adjusted EBITDA margin of 24.9%. Our effective tax rate was 20.2% in 2023 compared to 23.4% in 2022. Adjusted EPS was $0.56 for full year 2023. Now I’ll discuss our reportable segment results in more detail.

Beginning on Slide 11, North America net sales for the fourth quarter increased 10% to $138 million, driven by 8% higher volumes and 2% favorable net price impact. Sales in the U.S. increased 12% in the quarter and Canada declined 11%. The Canadian market has been more significantly impacted by economic conditions and a sharp increase in financing costs. Gross profit margin increased 810 basis points to a robust 15.1%, and adjusted segment income margin was 31.7%. Turning to Europe and Rest of World. Net sales for the fourth quarter decreased 4% to $40 million. Net sales benefited from a 2% favorable net pricing and 2% from foreign currency translation, but were adversely impacted by a 9% decline in volumes. Net sales in Europe were approximately flat, with the Rest of the World, declining 7%.

Gross profit margin was 38.2%, and adjusted segment income was 20.2%. Turning to Slide 12 for a review of our reportable segment results for the full year. North America net sales declined 26% to $823 million, driven by 29% lower volumes, partially offset by a 2% favorable price impact and 1% contribution from acquisitions. Sales in the U.S. declined 23% and Canada reduced 48%. Gross profit margin was 49.9% and adjusted segment income margin was 28.9%. In Europe and Rest of the World, net sales for the full year declined 18% to $169 million, benefiting from a net pricing increase of approximately 4%, offset by 22% lower volumes. Sales in Europe declined 24% and Rest of World reduced 10%. Gross profit margin was 39.2%, and adjusted segment income margin was 20.4%.

Turning to Slide 13 for a review of our balance sheet and cash flow highlights. Net debt to adjusted EBITDA was 3.7x at the end of the year. We continue to prioritize deleveraging to our targeted range of two to 3x. Total liquidity at the end of the year was $460 million, including $203 million in cash and cash equivalents and short-term investments plus availability under our credit facilities of $256 million. We have no near-term maturities on our debt or interest rate swap agreements, term debt of $1.1 billion, matures in 2028 and the undrawn ABR matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans. Our borrowing rate continues to benefit from the $600 million of debt currently tied to fixed interest rate swap agreements maturing in 2025 through 2027, limiting our cash interest rate on the term facilities in 2023 to 6.5%.

Our average interest rate earned on global cash deposits for the quarter was 4.9%. Overall, we are pleased with the quality of our balance sheet. The business has strong free cash flow generation characteristics, driven by high-quality earnings, which support our growth investments. Cash flow from operations for the full year increased 59% to $185 million due to effective working capital management, primarily reduced inventory levels. Total inventories declined by $69 million or 24% in 2023, and declined nearly $100 million from the peak in the third quarter of 2022. Full year 2023 CapEx of $31 million was consistent with the prior year. Free cash flow increased 78% to $154 million in 2023. Turning now to capital allocation on Slide 14. As we’ve highlighted before, we maintain a disciplined financial policy and take a balanced approach, emphasizing strategic growth investments and shareholder returns, while maintaining prudent financial leverage.

In the near term, we are prioritizing CapEx, growth investments and reducing net leverage within our targeted range of two to 3x. We also continue to consider tuck-in acquisition opportunities to complement our product offering, geographic footprint and commercial relationships in addition to opportunistic share repurchases. Turning now to Slide 15 for our outlook. We’re introducing 2024 guidance that reflects a return to sales and earnings growth, driven by solid execution across the organization, positive price realization and continued technology adoption. The guidance range also contemplates continued uncertainty around global macro conditions, consumer spending, coupled with our current expectations we’ve done in channel inventory levels.

For the full year fiscal 2024, Hayward expects net sales to increase approximately 2% to 7% or $1.01 billion to $1.06 billion. This outlook reflects continued resiliency in the North American non-discretionary aftermarket with the more discretionary elements of the market, new construction, remodel and upgrade impacted by the economic and interest rate environment, particularly in non-U.S. markets. We expect a positive net price contribution of approximately 2%. Our business is seasonal, and we expect normal seasonal strength in the second and fourth quarters with the first quarter representing the lowest sales quarter of the year. We anticipate full-year 2024 for adjusted EBITDA of $255 million to $275 million. We also expect solid cash flow generation again in 2024.

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

Kevin Holleran: Thanks, Eifion. I’ll pick back up on Slide 16. Before we close, let me reiterate the key takeaways from today’s presentation. Consistent with our expectations, we closed out 2023 with a return to sales and earnings growth in the fourth quarter. We demonstrated strong execution throughout the year, delivering impressive gross margins and cash flow growth despite lower sales volumes, allowing us to fund our growth strategies. We’re bringing innovative new solutions to the market, better supporting our customers and improving the pool ownership experience. With channel inventories largely normalized, we are well positioned for growth. I’m excited about the prospects for the pool industry and our performance. Momentum is building and Hayward is leading. I’m confident that we have the right strategy and talent in place to drive compelling financial results and shareholder value creation. With that, we’re now ready to open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ryan Merkel with William Blair.

Ryan Merkel: I’d love to start with the guide right off the bat. Can you tell us what you’re expecting for gross margins for the year? How much do you expect that to be up? And then can you confirm for the first quarter, should we be thinking about sales at about 20% for the full year?

Eifion Jones: In terms of the gross margin, we’re calling for gross margins in 2024 to be 49.6% for the full year, which is an increase of just over 150 basis points. We’ll see good growth in North America, we’ll actually continue the great trend that we exited out of Q4, over 50%. Full year, we’re expecting over 50% in the North America business, which is a good outcome. In terms of Europe and rest of the world, a little bit more challenged there, but we’re looking at the whole margins fundamentally at the same level that we exited out of 2023.

Ryan Merkel: And then for the first quarter, I just want to make sure that we have it right, about 20% of the full year. So looking at sales roughly flattish year-over-year?

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

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

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

Kevin Holleran: Yes. So the discretionary aspects, Ryan, the new — we upgraded the remodel in U.S., we’d be seeing that potentially on 10% off, which would flow through for the U.S. region at about 5% volume overall, pivoting to international, which would include Canada as I’m describing it here. The discretionary there, again, new remodel upgrade, we could see that upwards of 20% off, which would flow through at the international volume down about 10% overall. And the difference between those, obviously, is our expectation to remain flat for the more resilient aftermarket break-fix aspects of the global market. I know you heard it in the prepared remarks, another — aside from volume, price, we’re expecting a positive price contribution in the 2% range. And then potentially, some modest, maybe 1% FX headwind as we work through 2024.

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

Saree Boroditsky: So you talked about inventory levels being normalized but distributors remain cautious. We did hear from one that they’re looking to lower inventory levels this year. So maybe just quantify how you’re thinking about destocking tailwind this year, given potentially maybe a little bit more inventory reductions to go?

Kevin Holleran: Yes. Yes. So from a destock standpoint, the way we look at destock, up until this point was kind of getting back to historical days on hand. And as we work through really the third quarter of this year, we believe that we got to that level back to historical days on hand in the channel. As we look at the 2024 guide, we are aware, we work closely with our channel partners around their desires to be more efficient with inventory management. Obviously, none of us want stock outs, but there’s also a desire for some continuous improvement and efficiency gains given the higher interest rate environment. So we — our guide contemplates what we believe is achievable in incremental reductions in 2024 with our channel partners, and we’ll continue to work closely with them to ensure we’ve got the right inventory in the right places at the right time.

Saree Boroditsky: I appreciate the color. So one thing we’ve heard about is the pull-forward impact on discretionary items such as heaters that we saw during the pandemic. Could you just talk about when we should think about demand for those type of products being normalized?

Kevin Holleran: Yes. I mean we — there’s certainly some product categories that are more discretionary in nature. And I would say we saw some increased demand early on in the pandemic and then maybe some slowing of those heaters have been mentioned. I think cleaners would be another category there. I think you can probably put above-ground product in the same category. So we believe that we’re getting to much healthier inventory positions with those products. The overarching statement is we believe that our destock is complete, but there might be some product categories in some geographies, even where there’s still a little bit of work to do. But we’re — also light in some areas where we’re seeing good sell-through into the marketplace.

LED lights or even controls come to mind as a few that are doing well. So we think as we work through the early part of 2024. Any excess in a particular product category, we’re going to be able to address that as the season opens across all markets here into Q2 of 2024.

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

Jeffrey Hammond: Just on — just — I guess just to wrap up inventory destock. It sounds like the destock played out as you thought, but maybe the customers are being a little more cautious to bring levels back up. But just with respect to the early buy, what did you learn from that around their confidence levels or inventory levels, et cetera? Just trying to tie that up a little bit.

Kevin Holleran: Yes. So as we looked at maybe the second half of the year, early but it really gets published, as you know, late Q3. So we start getting a read on that. As we mentioned in prior earnings calls, I would say kind of exiting Q3 from a low order standpoint, which would be in-season orders maybe saw that slow a little bit in anticipation of early buy. I know we mentioned this on our last earnings call, early by really met our expectations. It increased year-over-year and we saw that as a positive sign, both from an inventory destock working that down also with some expectation amongst the channel was very close with the end market around some opportunities for sell-through into 2024. So as we look on the early buy, that’s just concluded, we were pleased. It came in to our expectations, and we saw increase year-over-year, Jeff.

Jeffrey Hammond: 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?

Kevin Holleran: Here at Hayward, we believe that as the curtain closed on 2023, that the COVID experience and some of the pickups or the challenges that occurred through that, the dust has settled on that. We know it was an extraordinary period it created some opportunity for some opportunistic share pickup based upon availability or supply chain challenges. As you’ve heard, we’ve been very upfront — first of all, there isn’t perfect data, but we do work with our channel partners on sell-through. There’s also some wholesale shipment data that would — that indicated share gains for us, and we’re always very upfront in saying that as supply chains normalized, we would expect some of that habitual buying to maybe go back to who the supplier was.

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

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

Robert Wertheimer: My question is a little bit on how the year progresses from your view and when you kind of see what real end market, real sell out or real consumer demand is on upgrades on remodels and on new pools. I mean do you get to June and the year is kind of based on that front and then we’re looking forward? Or you just talk about how you see where that real demand is when you see it.

Eifion Jones: Yes, Rob, it’s Eifion. We’re calling for this year to be a very normalized seasonal year, which is great to get back to. We normally see the most channel sellout in Q2. And then to a lesser extent, in Q3 as the season comes to a close, Q1 and Q4 tend to be the slower sellout periods in the year. But we expect that regular cadence to occur this year. And as I just mentioned earlier, we’re going to get back to a normal sell-in type of cadence with Q1, Q3 being the reduced quarters for us in Q2, Q4 being the higher quarters. So after 3 years of this similar patterns to where this business used to be historically, we very much see the sellout looking as it did historically, with Q2 being the largest sellout period.

Robert Wertheimer: Okay. No, that’s helpful. I kind of understand it. I’m just thinking about a lot of cross currents for consumer, where the economy is kind of healthy you’re baking in a reasonably. I don’t know, conservative, but reasonably measured view on discretionary spend. And I don’t know if we had — and people are actually spending and that’s when you kind of know that it — or not, I’m not trying to predict a direction. That’s what I was just pressing for.

Eifion Jones: Yes. Okay. I understand. I mean look, the guidance considers where the macro economy is today. It considers that we have this compression on the new construction side, remodel and upgrade, upgrade defined as equipment additions to the pool pad. We want to see how the season develops as we step into Q2, and then how the consequential permitting takes place in the second half of this year, which sets us up for our view on 2025. But while the economy remains in this, let’s call it, uncertain macro condition, we’re going to say that discretion is going to be more impacted here in the front half given it’s the seasonal period for ’24.

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

Michael Halloran: So just a couple here. First, could you just talk through the sellout trend that you’ve seen to your distribution base in North America over the last I don’t know, pick a number 6, 7, 8 months here. I mean when you look at the cadencing and the trend there, are you seeing relative stability within the sequentials or — basically, I know that we see year-over-year pressure on a lot of the remodel, large-scale remodel, the new build type work. But are we at the point where that’s a little bit more stable as you think back over the last few months here? Or has there been more volatility in there than normal?

Kevin Holleran: I would actually say, as we look at Q4, that overall sellout was reduction year-over-year was call it, high single-digit reduction year-on-year. But if you look at the more recent data point around Q4, we actually saw improvement against that year that full year number. So Q4 on a year-over-year comp standpoint, we saw it — while we’re certainly not celebrating because it still has a long way to go. But we saw it as a positive indication in Q4 on a year-over-year standpoint. So the most recent data point, we were encouraged by actually with someone sell out activity in Q4 versus prior year.

Michael Halloran: And sequentially, though, is it pretty normal, seasonally?

Eifion Jones: Yes. I mean what we’re seeing throughout ’23 is this reversion for normal seasonality again with sell-out being reduced in Q1, higher Q2, a little bit lower Q3 and lower Q4. So we’re seeing that normal curve that actually develop in the business right now, and we’ve seen — when we look at the regions, we’ve seen really strong performance in the Sunbelt regions, particularly in markets like Florida, which seem to have done super well ahead — most recently.

Michael Halloran: 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?

Eifion Jones: Yes. I mean if you go back pre-pandemic, the channel held, depending on what time of year you’re dealing with all the way up to five or five and a half months of inventory at times, particularly as they entered into the peak seasonal periods. So that, I think, given the current cost of capital, given progressive improvements in data analytics, system management, and I’ll come back to that in a second. There’s been a lot of movement to reduce working capital. And we define destock as getting back to the historical days on hand. That’s happened largely through the end of Q3 and certainly into 2024 on a global basis, we’re largely back at those historical days on hand. But we have heard from channel partners that they would like to initiate continuous working capital focus that will lead to further reduction of the inventory days on hand.

And we believe our guidance accommodates that. But what does that mean? That means when you think about thousands of distribution points, both at the distributor level and at the retail level. And as Kevin said, make sure they have the right SKU at the right time, in the right location, those working capital improvements will take some time to realize, and we’ve got to be very thoughtful about that as we step over the next several years. I think we’re all, as an industry, investing in data analytics, improving our capabilities to get visibility as to how product moves in relation to end demand. And we are all investing to reduce our tech debt in that particular area. But it’s clear that across the industrial sector, everybody is looking to reduce working capital.

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

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

Andrew Carter: First question I wanted to ask is about the net price realization you have for the year, plus 2%. I want to kind of understand what exactly factored in there? I’m assuming a higher price increase that went into effect in North America that you’re assuming versus Europe? Is there any kind of return to a more normal promotional cadence perhaps pre-pandemic in there this year that wasn’t accomplished last year is an increase contemplated in October 1, in that guidance? I think you took one in October one this year or are you hoping to go back to 25%? And then the last one is kind of the winter rebates issue that happened last quarter. Is that anomaly kind of already done? Or does it still have a catch-up? And also, I’m assuming with the vendor rebates, you lowered the incentive levels. Have you kept incentive levels for vendor rebates the same this year as last year?

Kevin Holleran: Let’s see, we’ll tag team that. I didn’t get all that down, but we’ll get through the questions, redirect us if we don’t — if can’t get to them all. So in terms of last quarter, the vendor rebates, as we indicated at that point, we saw that as a 1-quarter phenomenon. We indicated that would not repeat itself with the net price performance in Q4. I think that showed through in the results there. In terms of what I should say on that is we then transitioned channel partner rebates from the end of a seasonal year, which is September 30 to more the calendar. So Q4 in 2024 will be the year where there might be some catch up, either good or bad, depending upon what the financial results against targets indicate. In terms of programs offered, I would say they’re consistent with what they’ve been in the past, obviously, based upon some volume expectations that we set alongside with our channel partners.

So I wouldn’t really look for anything meaningfully to change year-on-year there. In terms of promotional activities, as I indicated this question I was answering on the share, I would really say, again, we’re back into I’d say, more normal post-pandemic or pre-pandemic period where the industry had some expectation of some promotional activity, and that’s what we’re expecting through our commercial team, working with the channel and the end market that there’ll be more normalized promotional environment that we experienced pre-2020 when the pandemic really dismissed the need for that since there was such demand creation through the pandemic. I know I missed some things in there. Andrew. I’m looking at Eifion here to see…

Eifion Jones: Yes, let me just quickly go through a few points, Andrew. I think just to close it off. Yes, the 2% net price does assume a slightly higher net price realization in North America than Europe and rest of world. The rebate anomaly that was apparent in Q3 of 2023 is behind us, we returned to positive price contribution in Q4. For the full year, we’re at approximately 3% for 2023. So that anomaly is behind us. In terms of the overall 2% that we’re guiding on for 2024 it matches up against our inflation expectations for the year. And we haven’t, in our guide, contemplated to get any further price increase for Q4 next year, we’ll make that determination as we get closer when we get better visibility of inflation going forward into ’25.