Unidentified Analyst: Got it. Thanks for the color. Then as a follow-up, you guys talked about resilient aftermarket demand and even going into 2024, but I believe one of your competitors talked about like aftermarket coming in weaker given higher interest rates. So can you provide more color on what you mean by resilience here?
Kevin Holleran: Yeah. I mean when we define the aftermarket, broadly speaking that’s everything but new construction and that certainly gets a lot of attention. But the aftermarket is a combination of that classic break fix remodel activity, and then just some upgrading where we define that as if the heater wasn’t there on the pad last year and it’s added this year that’s an upgrade. So I do think that the break fix when we’re talking about really resilient and nondiscretionary that’s the piece of the aftermarket that we’re really referring to. The other elements of the aftermarket whether it’s the remodel or some of the upgrading activity is certainly impacted by the current macro environment and the interest rates in the environment. But again we view that break fix as something in the 50% range of our overall business. And by and large that stayed very resilient through this macro environment that we’re experiencing.
Unidentified Analyst: Great. Thanks for taking my questions.
Operator: Thank you. Next question comes from the line of Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hi, everyone. Thanks for taking the questions. I wanted to start off with 4Q just coming in a lot lighter than we were expecting. What’s really the headline there? Is it the international business that’s weaker, or what else is in there?
Kevin Holleran: It is. I mean the headline is Ryan it’s Canada and some of our export markets. We were in Canada last week. I would say this — the — there’s still some destock that needs to occur in the Canadian market. That mortgage rate environment up there is very different in terms of shorter lock periods and there’s been a lot in the headlines recently about over the next couple of years what the adjustments are going to look like for the homeowner, it’s big headwind that is causing a lot of concern with the homeowner in the Canadian market and it’s obviously having an impact on really that discretionary income and what they’re looking to do at the household. So I would say from a — and as you look back over the last three to four years I would say that the response in the early periods of COVID up in Canada were even stronger than what we saw in our core US market and now that some of the macro factors are playing in the recovery seems to be even sharper than what we’re experiencing in the core US market.
So Canada really is the biggest headline affecting the Q4 outlook.
Eifion Jones: I think what’s important Ryan to also understand is the demand channel sell-through that we’ve seen in our core markets, US and Europe actually is in line with our expectations. And we have a similar expectation for channel sell-through in Q4. But as I just mentioned in the previous response, what the channel is taken in in Q4, is going to be lighter than we expected as they shift their buying patterns to be more juxtaposed to their needs, in the 2024 season. I just think it’s a general cautious approach to managing their balance sheets, as we continue to wrangle as an economy here with high interest rates.
Kevin Holleran: It was probably implied Ryan. Of course, we know you may not — we’re a high share player in the Canadian market, which is why that’s having such an impact on the Hayward outlook right now
Ryan Merkel: Got it. Okay. That’s actually really helpful. Thank you for walking through that. And then for my follow-up, can you just talk about price in 2024, I think you’ve come out with a list price increase. And then any change to incentives for the early buy? Or would you call them normal?
Eifion Jones: Tackling the first one, yes, we did announce a price increase for the 2024 season. The actual wording on the price increase up to 5% on the whole goods, slightly more on parts and that’s a US-centric comment. It does vary a little bit as you go around the hall and around the rest of our business. But generally speaking, once you put all of that into the calculation of the SKU range, we’d expect probably an average price increase of about 3% to 4% globally next year on a weighted SKU basis. And really that’s to protect against where we see inflation dynamics and most of those inflation dynamics are consequential to labor cost increases in the business. In terms of the early buy, we have given an extended discount more in line with history, on the early buy.
And in terms of terms, we have gone to a more standardized approach on payment terms of 180 days in the main. Some customers have slightly different, but generally speaking 180 days with a 2% discount to pricing.
Ryan Merkel: Perfect. Thank you.
Operator: Thank you. Next question comes from the line of Andrew Carter with Stifel. Please go ahead.
Q – Andrew Carter: Hi. Thank you. I just want to go back to this vendor incentive issue in the quarter. I guess number one, why was this so abrupt and kind of not kind of telegraphed in the quarter given the focus on pricing here? And I’m still a little confused about how the rebates could be up this year, given I know you said, it was a tailwind last year, but I would assume you probably had a better volume sell-through last year than this year than what’s implied. Can some individual customers outperforming drive the mix that much? Just some incremental clarity there. Thank you.
Eifion Jones: Yes. It is a limited Q3 dynamic, Andrew. This time last year, when we performed seasonal rebate calculations, the final calculations resulted in a positive adjustment back to income given the aggregate misses across the channel. Our rebate structures are based on channel sell-in in the main and last year, they were limited based upon channel performance. This year, we’ve restructured our programs. In the US, we’ve actually gone to a more quarterly based program structure, that’s in recognition of the dynamics we were assisting the channel with in terms of destock, and we’ve had a slightly higher rebate percentage payments this year than we have had last year. But given it all gets accounted for in Q3, you can have a year-over-year swing dynamic, has no implications to the overall gross price. Gross price still remains positive year-over-year and this adjustment really is a Q3 dynamic.
Q – Andrew Carter: So quickly, so was one more incremental thing this year a change in the program relative to last year? Did I hear that correctly?
Eifion Jones: We changed in the US. We changed our programs to more quarterly based program incentive. Last year was a typical seasonal approach. So you’re occurring for seasonal rebates, you get to the end of the season, you evaluate where the channel is and then you make your adjustments accordingly. This year it’s been more quarterly adjustments.
Q – Andrew Carter: Second question about your year-end leverage. I’m calculating right off your updated guidance I’m getting like a 3.7 to 3.4. That would assume best on best, worst on worst. Is that fair because the pre-buy will dictate cash flow. Within that what are the implications for where leverage will go into kind of first quarter. Is there – and I know that debt paydown is your highest priority. Is there – help us understand that and what the dynamics are and how much how aggressively you’re wanting to pay down debt? Thanks.
Eifion Jones: Sure. Yes. The range that you recount there is broadly correct. And it as you said is heavily dependent on the mix of business as we step through the final nine, 10 weeks of the year here. As we mentioned, lower flow orders, as the channel moves their flow in-season terminology we’re using here. As they ship those orders to closer to the 2024 season, you push that cash collection into that time period and you actually exit this year with slightly higher inventories. So we do expect to deleverage as we step into the new year. We expect to get back into our targeted range of two to three times in 2024, once we collect the early buy cash and we see these in-season orders go through in the back end of Q1, Q2 of next year.
