Hayward Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Welcome to Hayward Earnings -- Holdings First Quarter 2021 Earnings Call. My name is Alicia, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now turn the call over to Stuart Baker, Vice President, Global Strategic Planning and Business Development. Mr. Baker, you may begin.

[Stuart Baker:]

Thank you. Good morning, everyone. We issued our earnings press release this morning to the Investor Relations portion of the website at investor.hayward.com, where you can also find an earnings slide presentation that we will reference during this call.

[Kevin Holleran:]

Thank you, Stuart, and good morning, everyone. It’s my pleasure to welcome all of you to Hayward’s first quarterly earnings call as a public company following the successful completion of our initial public offering in March. I’d like to thank all of those involved in the process for a great outcome. We look forward to partnering with our new shareholders as we focus on continuing to grow the business and creating value in the years to come. I will start on slide four of our earnings presentation with some highlights from our first quarter results. We delivered record net sales growth, which nearly doubled from a year ago and profitability which tripled on an adjusted EBITDA basis, resulting from tremendous demand for our pool equipment. We were able to generate these exceptional results by leveraging our agile manufacturing capabilities to accelerate production, particularly in the U.S., our in-market supply chain advantages and being very well-positioned with our competitive lineup of innovative products.

[Eifion Jones:]

Thank you, Kevin, and good morning. I will start on slide nine. All comparisons that I make will be made on a year-over-year basis. As mentioned earlier, we are very pleased with our first quarter results and our ability to accelerate shipments and expand our production capacity to capitalize on the surging demand environment, while delivering significant margin expansion and record earnings performance. Net sales for our first quarter of 2021 increased $164.2 million or 96% to $334.4 million for the three months ended April 3, 2021. The increase in net sales was primarily the result of higher volumes mainly in residential pool equipment sales from continued strong demand for pool equipment, upgrades and an increase in new pool constructions. An acceleration of outdoor living trends and a 2.5% gross price increase along with reduced special deal rebates resulting in a net 3% price impact, as well as favorable foreign currency effects compared to the same period of the prior year.

[Kevin Holleran:]

Thanks, Eifion. I will pick back up on slide 12. Hayward’s core values drive our commitment to ESG. You hear us talk a lot about the environmental benefits of our products, as well as our manufacturing capabilities. We have a strong culture and focus on creating an attractive and safe work environment for all employees. And finally, we have built a leadership team with unique talents and diverse backgrounds that are committed to leading by example with ethics and integrity and ensuring compliance with our strong policies throughout the organization. On slide 13, we remain focused on being at the forefront of product innovation and as we continually expand our product offerings, we are committed to providing more environmental-friendly and sustainable solutions. We design our products to be energy efficient, conserve water and avoid harsh chemical usage. To highlight a few examples, over the past three years, our variable speed pumps have helped generate approximately 1.1 billion kilowatts of energy savings, which is a 90% reduction in energy used compared to the previous generation of pump products. We reduce chlorine usage by approximately 81 million pounds through the installation of solar chlorine generators. Additionally, following the installation of the UV ozone system, the pool will require up to 50% less chlorine to properly treat the water. Finally, we have saved approximately 2 billion gallons of chemically treated heated water with the transition to cartridge filters. I will wrap up on slide 14 and highlight Hayward’s market leading position as a pure-play in the outdoor living space, our innovative and technologically driven product offerings, strong brand, and competitive positioning and our focus on operational excellence. We continue to see robust demand and structural trends supporting long-term growth opportunities. We are excited to begin our journey as a public company and look forward to getting to know our new shareholders and educating them on our company and our progress. With that, Operator, we are now ready to open the line for questions.

[Operator:]

Thank you. Your first question comes from the line of John Lovallo of Bank of America.

[John Lovallo:]

Hey, guys. Thank you for taking my questions this morning. The first one is, can you just remind us of what your key material inputs are, like, in resins and in motors on the component side and the degree of inflation that you are expecting in your forecasts? And along those lines, is the recent 5% price increase enough and what’s your ability to go back to the market with additional increases needed?

[Kevin Holleran:]

Yeah. Hey, John. I will turn to Eifion to give some of those percentages. But in terms of our key inputs, you hit on some of them. I mean, a lot of electronics, obviously, resins -- we believe we looked out with some good intel before deciding on the size of that price increase that we announced back a month and a half ago or so. We believe it’s enough, but it is a fluid situation. We also as you -- I believe we have an opportunity around a more normal time of year for price increases, which takes effect there on that October 1st timeframe. So we believe that there are opportunities to make some additional decisions if inflation continues to hit us in the face. But we believe, at this point, that what we announced there a month and a half ago is sufficient for the inflationary headwinds that we are feeling.

[Eifion Jones:]

Yeah. Good morning, John. It’s Eifion. As Kevin mentioned, our pricing action really informs you how we think about inflation for the balance of the year. Globally, we are at 5% out of cycle price increase that we initiated in March, which covers our expected inflation across the basket of raw materials, which, as Kevin mentioned, primarily on the commodity side, resins, copper, steel are the main contributors to that. When I think about the actions we have taken in addition to pricing, we have communicated previously at the beginning of the pool season, we typically establish inflation mitigation programs. Those will substantially be with us through the end of Q2 and then out of cycle price increase and we will become effective into Q3 to protect the margin.

[John Lovallo:]

Got it. That’s helpful. And then as a follow-up, can you just help us with the monthly progression of financial results? I am curious, was each month in the quarter stronger than the prior? What I am trying to get at is maybe you can help us get some of the key drivers that drove the delta between what you reported and what you have been forecasting in mid-February.

[Eifion Jones:]

Yeah. I mean, we came into the year with some cautious optimism. We have seen a very strong first quarter, 96% growth year-on-year as we had communicated. That already infers a 19% full year-on-year growth, assuming the balance of the year would be flat, which we did not project at this time, as you can see from up 40% to 45% full year guidance. We do expect Q2 to be in line with Q1 at the topline. We have great visibility through a very strong order file exiting Q1. Q3 is seasonally lower sales period into the channel, but we still expect to have a good comp up in Q3 year-over-year. Q4 is obviously the early buy period, setting up for the 2021, 2022 seasonal year. But, again, we expect that to be a good comp up period year-over-year. It’s a little bit too early to indicate beyond that time period. But as Kevin mentioned in his earlier remarks, sentiment remains strong, industry sentiment remains strong. Outdoor living continues, the focus to migration to Sun Belt continues, millennial investments. All of these themes continue to inform us of an influx in demand profile in the industry.

[John Lovallo:]

Okay. Thanks very much.

[Kevin Holleran:]

John, I would…

[John Lovallo:]

Okay. Go ahead.

[Kevin Holleran:]

I would just add, like, demand is strong. I think inside that market growth, the demand for Hayward products continues to escalate. Right now the order file is very strong. We continue to increase our production capacity quarter-on-quarter. And everything Eifion just said is really with a view to what continues to happen with the order inflow and how we can best match our production capacity and labor and material to be able to capitalize on that market demand.

[John Lovallo:]

Thanks, guys.

[Kevin Holleran:]

Thanks, John.

[Operator:]

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

[Unidentified Analyst:]

Hey. Good morning, everybody. This is Brian on for Nigel. I’d also say congrats on a very good quarter. I just wanted to dive in a little bit more on the capacity expansions. Can you just walk through how you were able to do that without extending the shifts or was there idle square footage you were able to utilize and reworking some of the product lines? And then how much capacity expansion opportunity do you have left if demand continues to remain robust?

[Kevin Holleran:]

Yes. Good question, Brian. Good morning. I would say, it’s really about bringing more labor into our company and expanding some shifts, as you mentioned, but obviously ensuring that the material and the componentry can match our desire. So it’s really working in lockstep there. Our six centers of excellence around the globe have additional capacity opportunities before we need to contemplate big capital investments. So opportunistically we can continue by increasing our production to satisfy this market demand going forward.

[Eifion Jones:]

Yeah. I mean…

[Unidentified Analyst:]

Okay.

[Eifion Jones:]

Brian, good morning. Just to build upon that. As Kevin mentioned, six large facilities globally, three in North America, which we think is an advantage to be placed with inside our primary market to give us the speedy service proposition for the channel. But as Kevin mentioned, we have expanded shifts. We have tremendous remaining capacity left within our manufacturing footprint. We have additionally, in these last six months expanded our distribution network. We have added a West Coast facility in Phoenix, Arizona, which has increased our distribution footprint by 30%, which again has further enabled us to service the marketplace in a timely way. But we continue to expand our production through our variablization model as we continue to utilize the existing machinery through additional shifts.

[Unidentified Analyst:]

Great. Thanks. And then a quick follow-up is, have you seen any shift in kind of competitive dynamics since the IPO or the announcement of the IPO? And how are competitors responding, whether it be in the marketplace or M&A or anything along those lines?

[Kevin Holleran:]

I wouldn’t say I have seen anything really change. I mean, I think, this is a well-structured industry. I think we are all interested in growing the pie and we understand that service and new product introductions is really what’s good in channel partnerships, is really what’s going to drive, share gains individually inside of there. So, I mean, we have an interest. You mentioned on the acquisition side. We are pretty active in that front right now and seeing how we can continue to grow topline both organically, as well as inorganically. So, no, I wouldn’t say in the two months or so since we have been public. There’s been much competitive shift in the aftermath of that.

[Unidentified Analyst:]

Great. Thanks. I will pass on.

[Kevin Holleran:]

Thanks.

[Eifion Jones:]

Thanks, Brian.

[Operator:]

Your next question comes from the line of Brian Lee of Goldman Sachs.

[Brian Lee:]

Hey, guys. Good morning.

[Kevin Holleran:]

Good morning.

[Brian Lee:]

Kudos on a…

[Eifion Jones:]

Good morning.

[Brian Lee:]

…great quarter here out of the gate. Maybe going back to the earlier question about sort of growth and visibility, 2021 obviously sounds like it’s delved in pretty well. Just as we think about medium-term visibility, you guys had said at the time of the IPO mid-single to sort of high single-digit organic growth that’s right for the industry and that’s right for Hayward. I am going to ask you if that’s still the right, heading into 2020. I guess just trying to think from a revenue algorithm perspective a lot of the things you talked about like 2 percentage points of price, 2 percentage points of volume and then mix, at least for this year, they are moving really far out of bounds. So is that still the right revenue algorithm as you think about just medium-term 2022 or should we be sort of out of bounds for some period of time, whether it’s on price, whether it’s on volume growth, where you can continue to kind of track at these strong growth rates?

[Kevin Holleran:]

Yeah. There’s a lot there. It’s a great question. I understand how it’s on your mind because, frankly, it’s on our mind too, Brian. That 40 to 45 that we have given here in the short-term touches on all those components that I mentioned previously from new construction. We think that could be up 20% and no reason to think that can’t continue into 2022 based upon what we hear from our builder and other dealers out there. The remodel market is there as well. Pricing -- this industry has done a great job of being able to absorb that and pass that along, which really then leads to the size of this aftermarket, which is frankly what is driving our current year outlook disproportionately just based upon usage and the overall inflection that this industry is seeing right now from upgrades, repair and replace. I think we would like to hold off on really giving clear guidance in this mid-term. Obviously, the comps are going to get larger as we play through 2021 here and look to comp off of 2022. But I think for now we would still like to leave the group with that kind of high single-digit expectation is where we believe 2022 and beyond will be. And we will stay in touch as the year plays out and if we see something different than that we will absolutely pass that through.

[Brian Lee:]

Okay. Fair enough. And then just kind of another question around thinking about how to dial in the model a bit, when we look at the adjusted EBITDA margins, 33% level here, pretty impressive, I think, the simple question is going to be just how sustainable is it. I mean, we have seen you sort of peak out in the high 20s, historically, obviously, you are running at revenue levels that are much above prior peaks. But what’s kind of sort of the target level for the balance of the year in terms of margin, should we see a leveling out or moderation as we move through the year or is this kind of 30% level for -- on an annualized basis, the right level, it’s the one moving above the high 20s like you have seen in the past?

[Eifion Jones:]

Yeah. Thanks, Brian. Again, a really good question. Look, we have been very pleased with the development of the margin, both at the gross margin level, which was up 340 bps year-over-year and 280 bps quarter-over-quarter and that really reflects the tremendous operating leverage that we are being able to achieve as we ramp production on more variablized model basis. So we believe that now is a structural shift in our business as we continue to operate at those higher levels on the learnings that we have achieved in that model structure. We continue to leverage our SG&A base and we have a strong management program to govern our cost investments within that area. So bottomline, when we think about the balance of the year, there will be a slight moderation from our 32% in Q1, but we still expect good growth toward our 30% for the full year.

[Brian Lee:]

Okay. Thanks so much. I will pass it on. Appreciate it.

[Kevin Holleran:]

Thanks, Brian.

[Operator:]

Your next question comes from the line of Ryan Merkel of William Blair.

[Ryan Merkel:]

Hey. Thanks. First question for me, just thinking about 2Q EBITDA, I think you said, it would be similar to the first quarter, but typically second quarter EBITDA lists quite a bit from the first quarter. So just to clarify, is this a typical seasonality just simply the strong 1Q? So you don’t want to get ahead of yourselves or could there be a little upside to second quarter guide?

[Kevin Holleran:]

Well, I think, there is a slight shift in the seasonality because of such a strong Q1, Ryan. The way this played out and I know you are very close with the industry, so I know you are aware of it. But Q4 last year, when us manufacturers really started looking at the early buying start to shift that, we were really still fulfilling sort of in-season 2020 orders. So we were able to start Q1 with a very strong backlog of early buys, which we were able to kind of harvest and build and deliver here. So, inventories are, frankly, there’s not enough of it out there with the rate that it’s selling through. So, we are guiding at this point to say kind of similar to Q1. But the demand is certainly there and if we are able to work through whatever headwinds, we will see what could play out here in Q2. But, again, really underscore the demand is there. The interest to -- and the usage of these pools in the backyards is extremely strong.

[Ryan Merkel:]

Okay. Yeah. Makes sense. And then, secondly, can you comment on taxes and how much of a lift did you see in the quarter from the repair work and might there be more of that in the second quarter? Thanks.

[Kevin Holleran:]

Yeah. As I think you have heard in some earlier earnings calls, I think, we would echo what’s been put out there. It’s a terrible event. There’s a lot of triaging going on. Frankly, none of us have been able to get as much product into the region, given the strong demand elsewhere as we would hope. I think it’s going to continue to play out into Q2 as more material finds its way into the region to be able to create more of a permanent fix. I think that there’s been a lot of -- if a heater can’t be found yet, I think people are kind of taking the heater offline just to get water flowing and water treated. So it is going to continue. It had some impact in Q1, but I don’t think it’s large enough for me to really put a number out there in answering your question, Ryan. It had an impact but not a huge impact on our Q1 results.

[Ryan Merkel:]

All right. Great. I will pass it on. Thanks.

[Operator:]

Your next question comes from the line of Mike Halloran of Baird.

[Mike Halloran:]

Hey. Good morning, everyone. Just some comments or questions here. First on channel, any variance you are seeing between those kinds of four major channels, whether the retail side, e-commerce, distribution or through the builders?

[Kevin Holleran:]

No. I don’t think so. I mean, I think that the, there’s real growth through all of those channels right now. As you know, our primary means to the market is through distribution. Our strong partnerships there, they are supporting retail, the builders and the servicers. I think that -- in a place like Texas to pick up on Ryan’s question, I do think that, for folks in the affected region there, they were turning to the internet to see if they could find some inventory to triage equipment quicker. So maybe a slight pickup there, but I think some pretty broad base across all of the -- all the channels.

[Mike Halloran:]

That makes sense. And then I have maybe a tough question here, but how are you guys thinking about when that backlog starts normalizing or maybe when you can start catching up to that backlog, whether that’s your own production capacity or maybe commentary from the channel what the builders are saying. How some of your major distributors are talking about things. But any kind of thoughts on the timeframe on which that can start normalizing on a little bit?

[Eifion Jones:]

Yeah. The -- good morning. This is Eifion. Great to talk to you again. The expectations will continue to build production capacity through Q2 into Q3 to address the current strong order file backlog. We expect as we move into the back end of Q3 into Q4, the backlog profile will start to normalize. Normalize is an interesting term. This business continues to inflect and we believe the absolute value of the order file will change. But in terms of daily sales within the backlog, we expect a normalization exit in Q3 into Q4.

[Mike Halloran:]

Thanks for that. Appreciate it.

[Operator:]

Your next question comes from the line of Rob Wertheimer of Melius Research.

[Rob Wertheimer:]

Hi. Good morning, everyone. So your results obviously are quite good, the industry is booming, you outperformed the industry. And I wonder if you have any comment on just -- and it seems like our operations basically allowed you to gain a little bit of share. It doesn’t seem like channel inventories have risen as much as sales by a long shot. So do you think you are in a better position with your distribution, in order to, have to go fulfilling stuff over the course of the year, maybe you gain a little bit of share in an industry that doesn’t usually see share shift or maybe there’s some stuff somewhere else. I am just curious about characterizing that growth whether you restart distribution better than others and anything else you want to point out that allowed you that to do it? Thanks.

[Kevin Holleran:]

Yeah. Great question, Mike or Rob, sorry. Yeah. I think I appreciate you highlighting the operations. You got it first in your question there because I do believe that our team around operational execution deserves a high praise for what was accomplished not just this past quarter, but frankly, it’s been several quarters running, working closely with our supply chain to be able to ramp up production. And I think that as we have been able to satisfy some of that demand, it kind of builds on itself. I do think that because of our production ramps that beget some additional orders, which I think, ultimately, could lead to some market share gains for the Hayward brand out there. So and as you said, channel inventories are not necessarily where any of us want them. The sell-through is very brisk right now. So everyone’s looking for more production. Our folks are looking to build more and our channel partners and trade partners are looking for us. I would just close by saying, I do think that we have had a nice response to some recent product launches out there. It’s our lifeblood and we believe that we are bringing some great connected environmentally sustainable products to the marketplace that’s showing strong pull-through and great initial reaction. So that’s kind of how I see it, Rob.

[Rob Wertheimer:]

Thanks so much.

[Operator:]

And your final question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

[Jeff Hammond:]

Hey. Good morning, guys.

[Kevin Holleran:]

Good morning, Jeff.

[Eifion Jones:]

Good morning.

[Jeff Hammond:]

I just want to touch on, obviously, you guys are doing a great job on sell-through and outperforming. But just -- where are you seeing constraints from a component standpoint and just what’s kind of the governor on growth around just kind of the contractor base, they have got to be obviously very, very busy?

[Eifion Jones:]

Yeah. Good question. Yeah. I think one of the differentiators that we have as Hayward is, we are a vertically integrated manufacturer, which I think sets us apart from potentially others in the industry. We take basic commodity raw materials and we convert those into components that end up with assembly into finished goods. So we are less reliant on component manufacturers, which I think gives us an edge in our supply chain capabilities. Clearly, we see and we have communicated that there’s some tightness in the supply of commodity resins, copper, steel and some specialist metals. We have continued to stay close to our suppliers. We have made some strategic investments into our suppliers to secure a volume of those commodities and we will continue to work to make sure the supply lines remain open. But, again, I think that, one of the big, large differentiators for Hayward is, we are vertically integrated and that provides us with agility in the marketplace more so than others.

[Jeff Hammond:]

Okay. Great. And then just on inventories, I mean, what does the guide kind of contemplate around inventory rebuild or your success to kind of rebuild inventories in the year end and how that -- how might that kind of impact the out years?

[Eifion Jones:]

Yeah. Look, we -- I will start by saying, three years ago, when we started to think about the balance sheet and how we can improve that inventory management was a focal area. And we have addressed overinvestment into inventory progressively over the last three years. We feel comfortable right now with our inventory positions at Hayward. You will see from the end of 2020 to the end of Q1, absolute inventory values haven’t gone up and that’s really centric around raw material investments again to ensure supply is there for production. We don’t expect at this particular point to build our inventory positions by the end of the year. We will continue to manufacture and serve the marketplace with production. As we step into the future years, I think that discipline on the balance sheet will remain and the channel has accepted the revised service model that we are introducing, which is much more real-time to their needs.

[Kevin Holleran:]

Jeff, if you are asking specifically about channel in the invent -- in the, sorry, inventory in the channel. I think, it’s going to -- we are not going to have the months of sales of inventory really through this season based upon anticipated demand. So weather dependent, I think, it’s probably out into later this year before we are able to really get the inventory positions back to historic anticipated levels.

[Jeff Hammond:]

Okay. Great. Good color, guys. Thanks.

[Eifion Jones:]

Thanks.

[Kevin Holleran:]

Thanks, Jeff.

[Operator:]

And your next question comes from the line of Saree Boroditsky of Jefferies.

[Saree Boroditsky:]

Thanks for fitting me in. You talked about additional price increases obviously going into effect. Did you see a pre-buy ahead of this price increase and is there a lag between you -- when you put in pricing and when it actually runs to your P&L just given your large backlog?

[Kevin Holleran:]

Good morning, Saree. Yeah. We announced -- the two segments announced slightly different effective dates. So here in North America, we announced late March with an effective date of May 1st. We didn’t really see much of a pre-buy before that took effect. But it probably will be Q3 before we see much of that impacting the P&L or in Europe and the Rest of the World, it took effect in April. So it could be slightly sooner in that segment than what I just indicated for North America.

[Eifion Jones:]

Yeah. I would just add the inflation mitigation programs that we have with our suppliers are typically six month to eight months in tenure and that those will be in effect through Q2. So though the price increase became effective on new orders in Q2, as we mentioned, Saree, the pricing on the invoice will really be reflected in Q3, but mitigation will cover inflationary pressures through Q2.

[Saree Boroditsky:]

Got it. Thank you. And then you talked about the benefits of new products. It looks like some of your products help reduce chlorine use. Just given the shortages there, are you seeing increased demand for these types of equipment and did that benefit the quarter?

[Kevin Holleran:]

Yeah. I think most of us OEMs are actually seeing a nice pickup there. Frankly, we worked very closely with some channel partners and some trade partners in the immediate aftermath of the loss of that capacity with Hurricane Laura. So we moved pretty aggressively toward increasing some assembly capabilities and production capabilities to get some of the salt chlorine generators in production and out in the channel. So we believe that from an ESG standpoint, salt is a great alternative and we are seeing a pickup there and it’s a nice alternative to the chemical usage. But I think you might have just touched on our HydraPure product, which was introduced late last year, which is a combo of UV and ozone. When that’s paired with any form of chlorination, whether it’s salt or tablets, the use of the HydraPure can actually cut or will actually cut chlorine usage by up to 50%. So that’s a good alternative regardless of whether you have a salt system on your pad or not.

[Saree Boroditsky:]

Great. Thanks for taking my questions. Congratulations on the quarter.

[Kevin Holleran:]

Thank you.

[Eifion Jones:]

Thanks, Saree.

[Operator:]

That concludes the Q&A session. I would now like to turn the call back over to Kevin Holleran for closing remarks.

[Kevin Holleran:]

Thanks, Alicia. In closing, I just like to thank everyone for their interest in Hayward. As you can see, our business is producing phenomenal operational and financial results, and we are very well-positioned to continue to generate value for all stakeholders in the years ahead. Please reach out to our team if you have any follow-up questions and we look forward to talking to you again soon. Thanks again.

[Operator:]

This concludes today’s conference call. You may now disconnect.