Earnings Call Transcript - HAYW Q1 2024

Operator, Operator

Good morning, everyone, and welcome to Hayward Holdings First Quarter 2024 Earnings Call. My name is Lester, and I will be your operator today. Please note that this conference is being recorded. I will now hand the call over to Kevin Maczka, Vice President of Investor Relations. Mr. Maczka, you may begin.

Kevin Maczka, Vice President of Investor Relations

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.

Kevin Holleran, President and CEO

Thanks, Kevin. Good morning, everyone. It’s my pleasure to welcome all of you to Hayward's first quarter earnings call. I'll start with today's key messages. I'm pleased to report that our first quarter results align with expectations. We executed well during the quarter, achieving strong profitability and improved cash flow. Net sales increased by 1% year-over-year, with contributions from both pricing and volume. Gross margins expanded by 260 basis points to 49.2%, matching the record we set in the fourth quarter of last year, despite lower sequential sales volumes, and marking the fifth consecutive quarter of year-over-year gross margin growth. Cash flow also improved year-over-year during a seasonally soft period. I am proud of the entire Hayward team's performance this quarter. Our strong profitability and cash flow allow us to reinvest in the business to foster growth and productivity. As an innovation leader in the industry, we are launching several new products, and I will share details on one of those shortly. After the quarter ended, we made a voluntary early debt repayment, reflecting our confidence in our business outlook and cash flow generation. Eifion will provide more details later in the presentation. Finally, we are maintaining our full year guidance. For 2024, we continue to expect a return to sales and earnings growth, with net sales projected to increase by approximately 2% to 7% and adjusted EBITDA expected to rise by about 3% to 11%. Moving on to the results of the quarter, net sales for the first quarter rose by 1% year-over-year to $213 million, in line with expectations. By segment, net sales grew by 7% in North America but dropped by 17% in Europe and the Rest of the World. Although incoming orders were solid in Europe during the quarter, volumes were affected by delays in consolidating our manufacturing operations there. With our footprint actions now complete, production is expected to ramp up in the second quarter. We are concentrating on growth in the commercial segment, and commercial pool sales in North America rose by double digits for the quarter, continuing a multiyear trend. As mentioned, gross profit margins expanded by 260 basis points year-over-year to 49.2% in the first quarter, sustaining our quarterly record. The adjusted EBITDA margin for the first quarter was 21.2%, and adjusted EPS stood at $0.08. Now, for a business update. Demand for Hayward products matched our expectations in the quarter, with solid performance in our largest market, the U.S. However, the overall near-term demand environment remains uncertain. The nondiscretionary aftermarket is proving resilient, but demand for discretionary new construction upgrades and remodels has been affected by current economic conditions and higher interest rates. As we approach the peak pool season, we anticipate a return to more normal seasonal demand patterns and improvements in the second quarter. In recent quarters, our channel partners have been rebalancing their inventory levels in response to the current economic outlook, normalized OEM lead times, and higher capital costs. While inventory levels have normalized and the post-pandemic reset is largely complete, the channel remains cautious, continuously adjusting their inventory levels to align with expected customer demand. Historically, the pool industry has maintained discipline on pricing, and we implemented annual price increases for 2024 to preserve price/cost neutrality. We still expect positive net price realization of around 2% for the year, though the initial contribution was slightly below this level in the first quarter due to early buy customer sales at discounted terms. We initiated a plan last year to consolidate facilities in Europe to be closer to key customers, leverage a modern facility in Spain, and support margins. This project is now complete, and we are achieving full production rates in the second quarter. In April, we announced the appointment of Eric Sejourne as Chief Global Operations Officer, succeeding John Collins, who now serves as Chief Commercial Officer. Operational excellence has been a competitive advantage for Hayward, and Eric brings over 30 years of experience in global operations, lean manufacturing, and supply chain leadership to advance our strategies for a world-class end-to-end supply chain. Lastly, we were honored to receive the 2024 ENERGY STAR Partner of the Year Award from the U.S. Environmental Protection Agency, marking our fourth consecutive year of ENERGY STAR recognition. This reflects our commitment to innovation and sustainability as we work to produce the most energy-efficient solutions for our customers. Now, on to the exciting news. We highlighted key new product technologies being launched in early 2024 during the fourth quarter call. Building on that momentum, I’m thrilled to announce the introduction of two new robotic cleaners to our automatic cleaner line. The R110 and R130 models target the in-ground residential market and complement our TigerShark series. With features like smart navigation, interchangeable filters, and on the R130 model, active scrubbing of all pool surfaces, these units represent the best in quality and speed of cleaning for the entire pool. Both models come with an easy-to-use programmable user interface for added convenience. Over the past seven years, the U.S. robotic cleaner market has experienced double-digit growth, outpacing other automatic cleaner technologies like suction and pressure. These new cleaner models are an initial step in a longer roadmap for robotic cleaners, and we look forward to sharing more details about our plans for this important product category and other new technologies later this year. With that, I’d like to turn the call over to Eifion to discuss our financial results in more detail.

Eifion Jones, Senior Vice President and CFO

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 was $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 and Rest of World, net sales for the first quarter decreased 17% to $39 million due to lower volumes. Net sales declined 12% in Europe and 27% in Rest of World. As Kevin noted, our footprint consolidation program in Europe resulted in a delay of certain customer deliveries. Gross profit margin was 37.6%, and adjusted segment income margin was 16.1%. Turning to Slide 10 for a review of our balance sheet and cash flow highlights. Net debt to adjusted EBITDA was 4x at the end of the first quarter. We continue to prioritize deleveraging and expect to be back within our targeted range of 2x to 3x this year. Total liquidity at the end of the quarter was $463 million, including cash and equivalents of $116 million plus availability under our credit facilities of $347 million. We have no near-term maturities on our debt. The debt matures in 2028, and the undrawn ABL matures in 2026. This attractive maturity schedule provides financial flexibility as we execute our strategic plans. Our borrowing rate benefits 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 term facilities for 6.7% in the first quarter. Our average interest rate earned on global cash deposits for the quarter was 5.1%. Overall, we are pleased with the quality of our balance sheet. The business has strong free cash flow generation attributes driven by high-quality earnings. As a reminder, cash flow is seasonal, and the company typically uses cash in the first quarter and has strong cash generation in the second quarter related to payment collection of early buy receivables. Cash flow used in operations was $77 million in the first quarter compared to $91 million in the year-ago period. This improvement reflects continuous improvement in working capital management, primarily reduced inventory levels. Total inventories declined by $54 million or 20% year-over-year. CapEx was $6 million in the first quarter, and consequently, free cash flow was a use of $83 million. We continue to expect free cash flow conversion of greater than 100% of net income, with full year 2024 free cash flow of approximately $160 million. Given the year-over-year increase in our cash balance and our confidence in strong seasonal cash collections in the second quarter, we completed a voluntary early debt repayment subsequent to the quarter end. Specifically, we used cash on hand to repay the full outstanding balance on our incremental term loan B of approximately $123 million. We expect this to result in annualized interest expense savings of approximately $10 million or $4 million net of interest income. Expected net savings for fiscal year 2024 are approximately $3 million, reflecting the partial year impact. Turning now to capital allocation on Slide 11. 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 growth CapEx, investments, and debt repayment. We also continue to consider strategic acquisition opportunities to complement our product offering, the geographic footprint in which we serve, and commercial relationships in addition to opportunistic share repurchases. Turning now to Slide 12 for our outlook. Our outlook for 2024 is unchanged. We continue to anticipate a return to sales and earnings growth for the full year, driven by solid execution across the organization, positive price realization, and increased technology adoption. Our guidance range contemplates uncertainty in global macro conditions and consumer spending trends, coupled with our current expectation regarding channel inventory levels. For the full fiscal year 2024, Hayward continues to expect net sales to increase approximately 2% to 7%, equivalent to a range of $1.01 billion to $1.06 billion, with adjusted EBITDA of $255 million to $275 million. We anticipate full year free cash flow of approximately $160 million. Our interest expense expectation is reduced by $3 million to $67 million as a result of the early debt repayment. The effective tax rate forecast remains approximately 25% for the remainder of the year, and our CapEx spending forecast is also unchanged at approximately $35 million. Looking out beyond 2024, we remain very positive about the long-term health and growth profile of the Pool industry, particularly the strength of the aftermarket. We are confident in our ability to successfully execute our strategic growth plans. And with that, I'll now turn the call back to Kevin.

Kevin Holleran, President and CEO

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, Operator

Your first question comes from Andrew Carter from Stifel.

W. Andrew Carter, Analyst

Yes. Sorry about that. I can't figure out the mute 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 one-time issues. Could you call out the margin headwind there? And just kind of puts and takes for the remainder of the year?

Eifion Jones, Senior Vice President and CFO

Thank you for the question. We are very pleased with our gross margin, achieving 49.2% in Q4, matching our record as we enter the first quarter of 2024. We've previously discussed our four main pillars of margin expansion: first is operating leverage, where we continue to enhance output across our manufacturing sites. Over the past four years, we've streamlined operations by consolidating some facilities and focusing production within our remaining global manufacturing footprint. In 2024, we are starting to see the full benefits of the price-cost neutrality program initiated last year. We are returning to our core lean manufacturing practices that we’ve honed over many decades. Our strength in price-cost management remains a key attribute of our organization, supported by a disciplined and consistent pricing mechanism in the industry. Pricing changes were implemented on October 1, and we expect to see continued price development throughout the year, particularly with a higher volume of early buying in Q4 and Q1. As Kevin pointed out, we are also launching several informative new products, which typically come with enhanced pricing and margins based on our value-based pricing model. Regarding the situation in Europe, we recognize the differences between the North American and European markets, particularly the lack of scale in Europe compared to North America. We are actively addressing this by consolidating our manufacturing in Spain and pursuing growth plans that should leverage our installed manufacturing costs. The market remains fragmented with a distinct competitive landscape and varying technology adoption across Europe, which contributes to these differences that we believe can be improved over time. As for the remainder of the year, we do expect upside in our margins. We discussed our full year expectations earlier this year, projecting an improvement of approximately 150 basis points year-over-year. We've made good progress in Q1 and anticipate that as leverage returns across our business, margin expansion will follow. Overall, we are very optimistic about our margin opportunities moving forward.

W. Andrew Carter, Analyst

I would like to follow up on the readout for the quarter and how it has progressed. I understand there was a weather impact in the South during the first quarter. How has that trend continued into April? Could you also remind us of your full-year expectations for readout, especially in North America?

Kevin Holleran, President and CEO

Yes, Andrew, our guidance, which remains unchanged, obviously. It was really built around a 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 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.

Operator, Operator

Your next question comes from Ryan Merkel from William Blair.

Ryan Merkel, Analyst

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?

Kevin Holleran, President and CEO

No, there really aren't new thoughts, Ryan. From what we're seeing, we're sticking to our original guidance, expecting a decline of 10% to closer to 20% in the international markets. We track permits very closely, as you are covering the industry. We did see something a bit worse than that in Q1, but based on input from some of our dealers, we believe that there may be improvements as the year progresses. In the U.S., where we have the best permit data, we are maintaining our forecast of a 10% decline. There is some discussion that remodeling, which has been largely postponed over the last few years as builders prioritized new construction, can't be deferred indefinitely. It seems there is a growing interest and activity in remodeling, but it's not enough for us to change our original assumptions in the guidance. So we are sticking to that, Ryan.

Ryan Merkel, Analyst

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?

Kevin Holleran, President and CEO

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 out here in the start of the 2024 pool season, Ryan.

Operator, Operator

Your next question comes from Jeff Hammond from KeyBanc.

Jeffrey Hammond, Analyst

Yes. 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?

Kevin Holleran, President and CEO

Overall, Europe and the Rest of World experienced a 17% decline. Europe saw a slightly lower decrease when considering the weighting. The order flow in Europe met our expectations in the first quarter, and there were no concerns regarding the order inflow. The primary issue was an aggressive schedule to consolidate operations from two locations in Spain into a single facility near Barcelona. We had launched this new facility about two years ago with the intention of it being our end point, and the consolidation occurred toward the end of the fourth quarter and into the first quarter. There were some challenges during the first quarter, but our team has done an excellent job of getting us back on track. However, we did not reach our anticipated rates early in the first quarter. The order flow in the European market has remained strong in early Q2, and by maintaining our full-year guidance, we expect to make up for the gap created in the first quarter.

Jeffrey Hammond, Analyst

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?

Kevin Holleran, President and CEO

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 two-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 turning to our back. But things seem to be stabilizing up there, which is a solid starting point.

Jeffrey Hammond, Analyst

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?

Kevin Holleran, President and CEO

Yes, as I mentioned, over the past seven years, this has experienced a double-digit compound annual growth rate. The entire category has grown, indicating that the total addressable market has expanded as people shift from manual cleaning to more automated solutions. This transition has impacted older technologies, such as suction and pressure systems. It has developed into a significant market, and while we have a strong presence with our TigerShark products, we recognize that we are somewhat underrepresented in this category. We are eager to introduce products that offer advanced automation, features, and performance, aiming to penetrate more deeply into the higher-end in-ground segment. We have strong goals and expectations as we become more active in the robotic market. We will have more information soon regarding this promising initial launch, which includes a few key models to enhance our product lineup.

Operator, Operator

Your next question comes from Saree Boroditsky from Jefferies.

Jae Hyun Ko, Analyst

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 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?

Eifion Jones, Senior Vice President and CFO

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 two 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, 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 five 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.

Jae Hyun Ko, Analyst

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

Kevin Holleran, President and CEO

Yes. As we evaluate channel inventory, we collaborate closely with our channel partners. As we concluded 2023, the destocking that occurred during the COVID period is largely behind us. In a more normal environment, our shipments are aligning with end-market demand. There is a desire among the channel to be more selective with their inventory levels to avoid stock outages. We are working closely with them, recognizing the added costs associated with carrying inventory. There is an incentive for us to effectively serve the market without maintaining as much inventory as in the past. We are aware of this need and are collaborating with our channel partners to optimize working capital levels. It is a high priority for us to identify through forecasting the right SKUs to produce at the right time, ensuring our service levels are responsive to what is being sold through the channel. We continue to work together to better align their sales with our inventory. Additionally, our guidance anticipates slightly lower inventory levels in the channels, highlighting our awareness of these dynamics and our ongoing efforts with our partners.

Operator, Operator

Your next question comes from Mike Halloran from Baird.

Michael Pesendorfer, Analyst

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?

Eifion Jones, Senior Vice President and CFO

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 call 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.

Michael Pesendorfer, Analyst

Understood. Could you clarify the definition? If I have an existing pool and I had some lighting that broke, but I want to increase the amount of lighting I have, would that be considered part of the aftermarket or part of the upgrade category?

Eifion Jones, Senior Vice President and CFO

So we defined our business into four categories. New construction is I think clearly understood as new construction. The aftermarket represents three 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 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.

Michael Pesendorfer, Analyst

Got it. That's helpful. I have a quick question about the addition of the COO and the changes in roles. Where will Eric be focusing his initial efforts? Are there specific projects he will be pursuing right from the start, or is it primarily about continuing the current initiatives aimed at achieving operational excellence?

Kevin Holleran, President and CEO

Certainly, that's the 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.

Operator, Operator

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

Rafe Jadrosich, Analyst

The first one I wanted to ask just, 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?

Kevin Holleran, President and CEO

We have not observed any significant changes in the mix across market channels. Distribution remains our main channel, and we are dedicated to serving the professional trade through this avenue. While some products have been sold through e-commerce, we don’t perceive a shift occurring in that area. Regarding the recent announcement between Home Depot and SRS, the deal has yet to close, so there is still much to learn as it unfolds. However, discussions with the Heritage and SRS teams indicate they expect normal operations to continue, managed independently by the same management team. We see it positively that Home Depot has an interest in their growth strategies across all three verticals, including pools. Home Depot brings substantial resources and capabilities, and we are hopeful that their backing will help expand the total addressable market and foster significant growth in the pool industry. Currently, we don’t have much exposure in that realm, particularly in home centers. As the acquisition and integration progress over the next year, we look forward to collaborating closely with them and understanding how we can fulfill their expectations as a partner.

Rafe Jadrosich, Analyst

Okay, it could be an interesting opportunity. I wanted to ask about what you are observing regarding input costs and what you anticipate for raw materials this year. Can you remind us of the key exposures in that area? There has been some recent inflation in copper, for instance. When do you expect that to start affecting your profit and loss?

Eifion Jones, Senior Vice President and CFO

Yes, Rafe, it's Eifion. I believe we accurately anticipated the inflation landscape at the start of this year. While copper prices are somewhat elevated, other items in our product mix are offsetting this rise. Some specialty metals have actually seen a decrease in cost year-over-year. Overall, we have incorporated just over 2% into our inflation forecast, and this is aligning with our expectations for the total product basket. Additionally, as we've previously mentioned, we have protective measures in place, such as fixed pricing contracts and hedging strategies in our procurement processes. We feel sufficiently safeguarded against the current rise in copper prices, at least for the initial part of the season. We'll reassess the situation as we approach the latter half of the year, but at this moment, we are comfortable with our position. The past four years have demonstrated our ability to adjust prices and costs effectively. If necessary, we are ready to revisit market pricing to address significant inflation increases. Each year, we have a pricing opportunity on October 1, and we will start considering our approach as we transition into the summer months. For now, we anticipate that pricing will remain stable, and we believe we have inflation well-managed in our current pricing strategies.

Operator, Operator

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

Kevin Holleran, President and CEO

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 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 second quarter earnings call. Thanks, Lester; you can now end the call.

Operator, Operator

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