Hayward Holdings, Inc. (HAYW) Earnings Call Transcript & Summary

Hi, I'm Saree Boroditsky, and I cover industrials at Jefferies. I'm very excited we have the opportunity to host Hayward management today, including President and CEO, Kevin Holleran; CFO, Eifion Jones; and VP of Global Strategic Plan and Business Development, Stuart Baker. Management is going to start with some introductory comments and then we'll go right into Q&A. Thank you, everyone, so much for being here today. And with that, I'll turn it over to Hayward.

Great. Thanks, Saree. This is Kevin Holleran. It's nice to be with you today. I felt we'd spend just the first few minutes this morning to give an overview of Hayward Holdings and what's driving our results. Here's an illustration of who we are. We have two reporting segments, North America and Europe & Rest of World. North America represents about 80% of our business, which is advantageous, given this region has best pricing and margin profile in the industry. We're a pool pure-play with over 95% of our revenue tied to the pool industry with vast majority tied to the residential backyard. We have a complete line of innovative, environmentally sustainable products, everything you need to safely operate any type of pool, whether it's in-ground, commercial or aboveground. Hayward is benefiting from some secular trends like deurbanization, migration to warmer climates and a greater appreciation for healthy outdoor recreation. New pool construction is incredibly important as it adds more pools to the installed base. But 75% of our revenue profile stems from a resilient nondiscretionary aftermarket after the pool is built. This includes replacements, equipment upgrades and remodels. You see our financials on the right side, the business is performing quite well with the last 12 months' revenue nearly $1.2 billion and adjusted EBITDA over $350 million. This is how we think about our competitive moat that creates stickiness to our share position and delivers growth for our shareholders. Starting at 12:00, our first layer is an incredibly strong and trusted brand decades in the making and a very large installed base that comes from having a complete product line across all pool types. Then comes a large and very strong network of partners from Totally Hayward builders and servicers that stake their reputation on Hayward product each day, to the distributors, retailers, e-sellers and authorized service centers that help us sell and support Hayward product in the backyard. Third is our operational excellence and our ability to leverage volume at great margins. We manufacture in-market with roughly 80% of our product built in the U.S. and we're vertically integrated, so we have shorter supply chains than others. We're highly automated and have capacity available to build more product with very manageable capital. I think all this has been on great display the first half of this year as we've increased production year-over-year by approximately 80%. Final key Hayward advantage is our innovation and product design capabilities. Products are our lifeblood, and we spend over $20 million a year in engineering. We have extensive IP that we protect with active and pending patents. And we have top product performance in many key categories, like Omni controls, variable speed pumps and salt chlorine generation. Our industry is supported by strong secular trends in the housing market. So what do I mean by this? Millennials are becoming a larger segment of homeowners. They're tech-savvy buyers and expect smart home capabilities. They place outdoor living in high priority and appreciate the work-to-live-type mentality. Deurbanization is occurring, which is moving folks from apartments to single-family homes. There's increased flexibility to work from home or adopt a hybrid work schedule, which places greater priority on home amenities, including outdoor living space. Migration to the Sun Belt is occurring, where warmer weather creates more interest in pools and outdoor living. Then finally, there's a shortage of new home stock, which is refueling remodeling activity and is helping to educate the buyer to what's possible when they're creating that backyard oasis. The right side of the slide really highlights the growing focus on smart homes with a predictive penetration increase from 40% today to 60% in just a few years. This expectation carries over to the backyard, where our Omni control system is ushering in greater connectivity of the pool pad, something we coined SmartPad, by synchronizing variable speed pumps, heaters, LED lights, salt chlorine generators, water features, et cetera, to the control. So our Omni system can interface with other backyard features not sold by Hayward, like landscape lighting, irrigation systems or can become part of a larger ecosystem through Crestron or Savant. Let me dive into this SmartPad conversion just a little deeper before turning it over to Eifion and what it means for us and for our industry. We started with a reasonable assumption that existing pool owners want similar control and features that new pool owners are opting for. Controls is really this, the linchpin or the gateway. Once someone adds Omni, more content is coming that is higher-priced, more connected and environmentally sustainable. New construction in the U.S., as highlighted in the top left, is opting for controls about 2/3 of the time, 65% of the time, with the installed base still in the mid-20s to high 20%. This digital conversion itself at $1,500 a copy across this 40% difference and the 5.3 million pools alone is a $3 billion growth opportunity. As I said, once controls are in place, this opens the door for other things like variable speed pumps, LED lights, et cetera. So to quantify just a couple more of those focused on energy conversion, variable speed has about 40% difference between new install and -- I'm sorry, installed base and new construction. This represents about a $1.6 billion opportunity. And finally, this chemical conversion that we're seeing, a conversion from chlorine tablets to salt or more natural sanitization, that is a 25% difference between new construction and installed base, and that represents about another $1.3 billion. So this SmartPad conversion is a big part of what we started to see prior to COVID. And it certainly played out during the pandemic. And we still feel like it's very much in the early innings of this transition. Final slide will be covered by Eifion Jones, our CFO.

Great. Thanks, Kevin. Turning to our financial outlook for 2021. We've revised our guidance for the full year in terms of net sales. We're now guiding for year-over-year growth of 54% to 58%. That's an increase up from the prior guidance range of 40% to 45%. Adjusted EBITDA is now guided between $405 million to $425 million or an increase of 75% to 84% year-over-year. This compares to the prior guidance range we gave of $360 million to $390 million. At the midpoint of the updated guidance, adjusted EBITDA of $415 million yields a margin of 30.4%, which is an increase of 390 bps over our results in 2021. Our guidance update is predicated on very strong first half results and clear line of visibility into the balance of the year, obviously continued strength across all product ranges, market trends supporting outdoor living and healthy living and then finally in recognition of the inflationary trends that have developed in the first half of 2021. I think that wraps up our prepared slide remarks, Saree.

Perfect. So you just posted a very strong second quarter, sales growth of 66% and, as you mentioned, you increased your full year outlook. Could you just talk through the contribution of new builds versus aftermarket and upgrades and pricing and all the components that support your full year outlook for the 55% to 68% sales growth?

Sure. That guidance really assumes about 25% of that growth stemming from new construction. That is the historic trend, and it really does continue this year. The other 75%, as we mentioned, of our business is really what comes from that aftermarket, including the replacement, the remodeling and the upgrade activity. New construction is expected to grow mid- to maybe high-teens this year, which was similar to 2020. And while this is higher than the last decade, business in the aftermarket through increased usage and pool pad upgrading activity continues to climb also. So it's still really a 25-75 split, 25% tied to new construction and 75% tied to the aftermarket activities, Saree.

Supply chain storages have been impacting more companies right now. But you've been able to increase capacity rather quickly in this environment. Can you just talk about any bottlenecks you're seeing and how that's impacting growth in the quarter?

Yes, sure. Good question. First, I'd like to take this opportunity to express how proud and appreciative I am of the team. They've worked tirelessly to address bottlenecks, which has resulted in our ability to expand capacity, that 80% better production, that 80% that I mentioned earlier. We really methodically addressed all elements of the supply chain from raw material inputs to production conversion to outbound logistics. We have long-standing relationships with our suppliers, many of which have contracts in place that help to mitigate some inflationary headwinds and ensures continuity of supply. From a labor standpoint and a conversion standpoint, we've introduced some creative means to recruit new associate staff, some off-shifts, along with some wage increases, and we're filling the openings. We do have latent capacity in our production facilities that we can unlock with minimal capital requirements. Then really, that third link is around distribution. And we've been progressively optimizing our distribution footprint after opening a world-class distribution center in Phoenix last year. We're replicating that in the Southeast right near our Clemmons, North Carolina facility, which will free up some additional manufacturing space. So we still continue to feel some bottlenecks but really proud of how the team has really systematically worked across these three key areas to increase production capacity.

And I think you've mentioned the increased capacity with just running more hours. Is this something you're currently looking to do? And how long does it take to ramp the capacity?

Yes. Why don't I take that one, Kevin? We've expanded shifts progressively over the last year. It's enabled us to increase our production by approximately 80%. We've been able to do that substantially within a 5-day shift model. But we now have the option to permanently expand our shift structure into the weekend, which opens up at least another 30% of capacity on the installed equipment that we have. We've obviously had to match our capacity expansion with raw material capabilities and supply chain capabilities. And we continue to work with our suppliers to increase supply.

You put in a pricing increase around 5% to 7% on any order that was not shipped by the end of September. Did you see any pushback from customers that have orders in the system at the lower price now? And do you expect to see any cancellations as a result of this?

Yes, sure. Just to be clear, we've instituted two off-cycle price increases this year. One was announced back in late March of 5% effective on orders received after May 1. And then your question specifically referenced this second price increase, which was announced in early July of this range of 5% to 7%, which would be effective on orders received in Q3, not shipped during Q3, so they would be priced at the higher level, starting September 27 or 28, I believe it is. I think we've done a great job clearly communicating to the channel our rationale and the need for these price increases. I think the channel understands that our input costs have increased significantly this year. And then we only announce off-cycle increases. We cannot offset them ourselves through either contracts or productivity improvement. So the real crux of your question was pushback. No, we actually have not received pushback. I think we've done a good job of laying out the rationale and the need for it, received no cancellations to date. And frankly, I don't expect any. So that's how the team has laid out these series of price increases.

You saw double-digit growth in your Totally Hayward rewards program through June. Could you just talk about the benefits here of this program? And does it provide confidence in your ability to keep the market share gains you've made?

Yes. First of all, Totally Hayward program, first, for the audience, that's a rewards program that functions similarly to an airline mileage program. And it specifically targets builders and servicers that are in the backyard. The program rewards volume growth and purchases across all of our product lines. As you mentioned, we've had a great success adding new Totally Hayward partners to our family thus far this year, growing our overall population right at 15% to total program in just 6 months of 2021. Now there's no reason a dealer would go through the process of joining the program if they were just sourcing a Hayward product in a pinch and fully expected to go back to their other OEM that they may have done business with before Hayward. So it is for this reason we feel very confident about the stickiness of our recent share gains resulting from these new partners in the program.

And you talked about a positive growth outlook for 2022 despite a really robust growth the last couple of years. How much of this growth outlook is from the early buy program being pushed out to the first quarter? And how should we think about the cadence of growth going forward, just given the strong pricing actions in 2021?