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

Good morning. Thanks for joining us for the Wolfe Industrials Conference. We're continuing the industrial track here with Hayward Holdings. And we've got the whole team here. We've got Kevin Holleran, CEO -- President and CEO; Eifion Jones, CFO; and Stuart Baker, who's the strategy guru, I think is probably the best term for Stuart. So Kevin, I know you've got certain slides. So please, over to you. Thank you.

Great. Well, just -- I just want to just remind everyone, please read the cautionary statement on the page. This presentation will be posted up to the Investor Relations section of our website. So let's jump in on Slide 4. We're going to highlight a few things about the Hayward story and investment thesis. First, we're a pool pure-play focused primarily on North America residential. Secondly, we have a well-defined competitive moat that allows us to grow and protect our market position and share gains. Thirdly, Hayward's a very strong financial profile from top line growth to gross profit, EBITDA and free cash flow. On the next slide, from a technology and innovation standpoint, we're leading the way converting legacy low tech tools to IoT-enabled smart devices that give the pool owner control of their backyard oasis from the palm of their hand. Finally, we're extremely proud of the sustainability advances designed into our products from energy-efficient variable speed pumps, LED lights and gas heaters to water-conserving cartridge filters to reducing reliance on harsh chemicals to properly treat pool water. Here, we illustrate who we are. We have 2 segments: North America and Europe, Rest of World. North America represents over 80% of our revenue, which is advantageous given this region has the best pricing and margin profile in the industry. As I said earlier, we are a pool pure-play with 95% of our revenue tied to the residential backyard. And finally, we have a complete line of innovative, environmentally sustainable products, everything you need to safely operate any type of pool, whether that's an in-ground, commercial or above-ground pool. Here, I'll highlight the Smart Pad conversion taking place in our industry, really being led by our Omni automation system. Omni is at the heart of the SmartPad, creating this pull for IoT-enabled devices. The power and simplicity of use has driven connectivity of a broad array of technologies with the top 5 growth categories in the industry last year being LED color lights, automation and controls, variable speed pumps, heaters and water sanitization, all growing well over 40% last year. Importantly, Hayward's growth in these categories continues to outperform the industry, supported by some great recent new product launches, including our ColorLogic LED Lights, Omni ProLogic controls, XE variable speed pumps, small footprint universal gas heater and AquaRite S3 Salt Chlorine Generator, all of these combined have helped increase our new product vitality index by 37% year-over-year. At Hayward, environmental, social and governance or ESG has always been important to us, and we know it's important to our shareholders as well. We've continued to focus on the energy consumption throughout our operation as well as making sustainable products, a very key focus of our new product development road map. We strive to promote a diverse, safe and inclusive workforce, and we pride ourselves on our strong company culture. As a recent public company, we've partnered with a third-party expert to conduct a materiality assessment and identify where we have the most impact across key ESG themes. The result of this materiality assessment has shaped the framework to guide our strategy focused on 4 key pillars, those being products, planet, people and principles. Finally, we've improved the diversity of independence of our Board with 3 new members since IPO. This brings our independent director count to 6. Here, I'll start with the takeaway box so 42% revenue growth the last 12 months. This performance is driven by our ability to execute on the core drivers of growth, that being Digital Leadership, Dealer Conversions, New Products, Operational Excellence, Broad Channel Access and Environmental Sustainability. Let me touch on a few. In 2021, we saw our proprietary Omni Control app drive accelerated demand for higher-value IoT products, especially in the aftermarket upgrade and replacement market, which represents roughly 80% of our total sales. We focused our commercial teams on channel development and new customer acquisition. This resulted in our Totally Hayward loyalty Partner Program growing by more than 20% last year. The growth comes as we established field-based business development roles focused on increasing our dealer base and market adoption of Hayward products. Hayward's innovation and technology played a major role in the recent growth. As a market leader, our engineered products achieved significant growth in the key segments of control sanitization as well as energy-efficient pumps and LED lights delivering simple to use environmentally sustainable solutions. The box on the lower right illustrates some real savings derived the last 3 years from some of these new products in terms of kilowatt hours saved, chlorine, chemical usage and treated water put down the drain during regular cleaning cycles. Finally, our vertically integrated operations and procurement expertise have provided greater supply chain flexibility giving us the ability to increase output while maintaining the recent improvements to our structural margin profile. Our focus on operational excellence allows us to ensure availability and product quality despite the well-known material, labor and logistics challenges most companies are experiencing. Next slide. As you've heard, a key driver in our industry is the technology upgrade conversion occurring in the aftermarket with opportunities for digital, chemical and energy. For these 3 categories, IoT-enabled controls, salt chlorination and variable speed pumps, we compare the take rate at time of new pool construction to current level of aftermarket penetration. We believe in the simple premise that existing pool owners if educated as to the merits of these compelling technologies as consumers building new pools are they would desire the same benefits. So first, from a digital conversion standpoint with controls and automation replacing manual time clocks, adding this IoT-enabled to deliver what we call the SmartPad, which is individual equipment components being able to be dynamically controlled to make the pool easier to use and more enjoyable while lowering that cost of ownership. Second is this conversion to natural forms of water sanitization as chemical chlorine is replaced with salt chlorine generators and UV Ozone products. Finally, conversion of more energy-efficient products, notably variable speed pumps replacing single-speed pumps and color LED lights replacing white incandescent lights. Our sales teams are hard at work, working with our trade professional partners to promote these exciting new technologies as aftermarket upgrades, moving the aftermarket to new construction penetration levels in just these 3 categories alone affords a market opportunity of nearly $6 billion. With that, I'll turn it over to Eifion to walk through last few slides.

Thanks, Kevin. Turning to the next slide. When we think about sustainability, we're often asked, can you grow from here? We believe growth is possible from here based upon the secular trends that we see both deurbanization and migration as well as the trend now to work from home which we do not believe will end with the pandemic. Additionally, we see continued favorable economic data that supports housing and equity and remodeling intent. We fully recognize there's an under servicing of new homes in the U.S. market. Additionally, the aging pool stock supports future aftermarket growth, which made up approximately 80% of our sales in 2021 as repair, replace upgrades, in particular, make up about 65% of our total sales mix. According to P.K. Data, consumers are opting for a greater connected higher-priced equipment experience as they remodel and upgrade their pools. Our sales data supports this assertion. You can see in the lower left-hand section of this particular slide. Our core product sales have grown approximately 48% in 2021, whereas what we call in our lifestyle products, they grew approximately 84%, which includes products like salt, generators, UV Ozone products. This speaks to the interest that folks have in the connected richer featured pool experience, making their backyard an entertainment space and extension of the home living environment. As for new construction, in 2021, it was another strong year with total pool count growth up to 117,000 pools. It's representing about 20% growth year-over-year, still well below the historical medium. We absolutely believe the industry now is beginning to grow from a period of compression over the last 10 years. It's beginning to attract labor back into the industry and dealers remain bullish about the foreseeable future when it comes to new construction. In terms of the aftermarket, we have represented here on the slide, it's about 65% of the aftermarket is associated with repair replace and upgrades. 50 points is repair and replace, which is that nondiscretionary aspect and 15 points is attached to the upgrade defined as never had that product on that particular plant before. Let's switch over to the next slide. This is a resilient aftermarket, and the aftermarket is our core business. It represents approximately again, 80% of our total net sales. As you can see on this particular slide, the aftermarket, the installed base of pools is always increasing as new pools are adding to that particularly installed base every single year. And it's tremendously resilient. We talk a lot about the new pool count particularly about growth year-over-year. But what's really important to understand, new pools are added to the installed base every single year. And this addition creates that lifetime value for Hayward as these pools need continuous service, remodeling and upgrading. As you can see from this particular graphic, through all of the economic cycles, which is shaded here in orange, the new -- the installed base has continued to grow, reflecting what I think is a very unique resilient aspect of this particular industry. According to P.K. Data, the pool remodel market is now approximately 20% higher than the new construction market in total strength. In terms -- what does that mean for Hayward, about 13% of our overall sales is attached to the remodel market and it continues to grow. Consumers, as I just mentioned on the previous slide, are typically seeking our richer equipment for more qualitative experience, remodels occur every 9 to 12 years, and we believe there is significant pent-up demand in the remodel market as consumers most likely elected not to take their pools out of service over the last 3 years. So this provides an opportunity for growth over the foreseeable future. Upgrade capacity is another unique feature of this industry compared to other branded residential, industrial equipment We at Hayward are constantly innovating, constantly bringing new solutions to the consumer over the lifetime of their ownership. Finally, as I just mentioned, about 50 points of our overall sales is directed towards the repair and replace elements of this industry, which is that nondiscretionary base business that is creating an annuity for Hayward over the lifetime of the pool ownership. A pool owner has to replace a pump filter, et cetera. Otherwise, they will lose the quality of the pool very quickly. So in summary, the aftermarket, again, is the engine of our business. It continues to grow. New pools are added to this space every year. It provides Hayward this tremendous nondiscretionary underlying support to our business. In terms of the next slide, I'll just finish off with a quick look at some financials. Hayward has had a long track record of commercial and operational execution resulting, as I just mentioned, contributing to this large installed base. We believe we have the largest installed base of equipment in the North American market. The financial performance of the organization over the last 3 years has been impressive, with sales down approximately $1.5 billion through the Q1 '22 LTM period. That's now double where we were in 2019. Our adjusted EBITDA has grown 2.6x through 441 through that same LTM period and has yielded an adjusted EBITDA margin of just under 30% or 29.8%, which is an improvement of 600 basis points over the full year 2019. A lot of this success has been achieved through the introduction of leading technologies and energy-efficient products, a refocusing of our commercial teams to have a greater focus on builder and service and conversion to the Hayward brand, supported by our Totally Hayward Partner Program. And then finally, continued operational execution across our manufacturing platforms, harnessing just decades of quality lean manufacturing experience. And then finally, judicious use of our cash and management of our operating expenses, creating leverage throughout the income statement to yield these type of high-quality margins. So with that, I'll turn it back to yourself, Nigel.

Great. Thanks, Eifion. Thanks, Kevin. Some great slides there. And touched on a lot of the points I wanted to address. So you mentioned very clearly in the slides that you felt that there was a lot of pent-up demand for upgrades and remodeling of pools. The perception in the market or maybe some of the concerns in the market is that a lot of that happens during COVID, and that could, therefore, create an air pocket. So maybe just kind of just talk about what gives you confidence that there is that pent-up demand, maybe some backlog, maybe some dealers, but maybe talk about that.

Yes. I mean I think what gives us confidence beyond the new construction, frankly, Nigel, you and I have talked about this, new construction frankly, gets too much attention again, 80% is of our revenue, and most of the industry for that matter is really generated off this resilient aftermarket. And a couple of things are revolving around that aftermarket is what gives us confidence. Eifion just touched on the point that we know that remodels have been pushed out. We know that homeowners did not want to lose access to their pool over the last couple of years where maybe they would have, if not in a COVID environment. And we also know that the contractors, same folks oftentimes do remodels as do construction and those heavy -- much more heavy focus on new construction. So we believe that there is some pent-up demand for more full-scale remodels in the years ahead. I think more than that, though, I would really focus on this upgrade opportunity. Those slides that you showed on the conversion rate, those aren't the only 3 categories or maybe just the 3 larger opportunities around this delta between what people opt for when they build new today versus what's installed in that large 5-plus million pool population there. So some of it, frankly, is on us as the manufacturer partnering with our Hayward -- Totally Hayward dealers, bringing these advantages and these benefits and educate the consumer, giving them reason to upgrade and turning that backyard not only more functional, but a greater source of entertainment in that home life. So we're going to continue innovating. We're going to continue marketing and educating to the broader population about what the pool could be as a result of some of these IoT upgrades that exist out there. So the penetration rate is still extremely low, and we think that there are fields to harvest going forward in this large aftermarket, Nigel.

Thanks, Kevin. That's great. And then thinking about obviously the -- everyone loves their pools, but everyone hates the cost to heat them and to maintain them. So maybe just talk about what is the penetration of kind of the best-in-class, most efficient energy products, energy saving products? And obviously, with the spike in energy prices that we've seen across the globe, Europe especially, but certainly here as well. Have you seen a pickup in maybe the selling proposition of some of these higher-value products?

Yes. Nigel, we have. We've seen people from a sort of environmentally conscious decision to make some of those change -- elect to make those changes. Others have been driven by legislation, and now some of the people on the phone may or may not be aware, there was a Department of Energy mandate for variable speed pumps, and I'll just give you a quick statistic on that. The mandate came into effect in July, last June 2021. It took obviously some time to flush through into the market. The legislation was the manufacturers couldn't manufacture noncompliant single-speed pumps after July, but they could still be sold. So there was a bit of a lag as products work their way out of the channel, out of our inventory and out of the channel inventory. But just to give you a statistic in 2021, 55% of our pump sales were single speed, 45% were variable speed. In the first quarter of this year, 18% of our pumps were single speed, 82% were variable speed. So you're now seeing that very hard cutover. And as you know, variable speed pumps are anywhere between 1.5 to 2.5x the price for single speed pumps. So it's still good for the homeowners. It's a good value proposition because they -- the pumps do save a lot of energy, and they will pay for themselves in 1 to 2 years. So it's still a good value proposition for the homeowner as well as the OEMs selling the products.

Yes. So I think, Kevin, you mentioned -- or maybe it was Eifion, that growth is still possible even when you comp in the comp, the over 100% increase in revenue since 2019, but you still think growth is possible because of these different factors. Maybe just talk about how -- I mean your customer, I'm talking here about the end customer, is certainly a wealthier demographic? Maybe a bit more insulated from some of the pressures we're seeing, but certainly not immune. How does your -- how does the typical pool consumer react to rising interest rates lower discretionary spending because of inflation. What happens to pool spending in the environment?

I think it's a great question and we're asked a lot, Nigel. I would say that interest rates are generally not correlated to new pool construction. The models are upgrades. Most new pools are not financed. In fact, it's only about 40% of new pool construction actually has an element of financing. As I showed in my previous -- or in the prepared slide remarks, every economic cycle that our industry has gone through new pools have been added to the installed base. I mean pool construction is only -- it's only around 20% of our sales. So if you go back to what is often regarded as one of the deepest recession is the U.S. has faced the great financial crisis, where you saw a large reduction in the pool counts the top line of Hayward only decreased about 12% to 13% during a period where the new pool count decreased 60%. So the -- again, I can't emphasize just how critical and important that the aftermarket is to behave. That's the engine in the industry. Most people during an economic down cycle, typically cut back on things like cruises and vacations and they do staycations and they typically retreats their backyard, which becomes their haven that's proven out over the last 20 years. So interest rates, again, generally not correlated to new pool count construction as proven out historically. And it's this aftermarket and the installed base, which continues to be the engine of our organization and provides our resiliency through our both top line and the earnings.

So 12% to 13% revenue decline for Hayward's during the GFC when pool construction was down by 60%. That's...

Yes.

That implies the remodel activity and the aftermarket repair model was actually very resilient. I mean just the basic math to tell you. At that time, new construction would have been a much higher proportion of our sales as well. So it tells you that the aftermarket was pretty flat during the GFC. Is that correct?

Very much so. I mean I think that math if you assume at that point, new construction was 25% to high 20% straight math on a nearly 60% decline in new construction, when you flush that math through aftermarket more or less held its own in the darkest times of the GFC. So yes. I mean that's the most recent point in time that we can reflect upon to illustrate the resiliency of the pool aftermarket.

Okay. No. That's great. I don't know if you want to comment on where backlog sit right now, but it certainly feels like your FY '20 plan is very front-end loaded. And maybe just maybe confirm, you have 19% price growth in 1Q, of which I think 5 points of surcharge. What's the current thinking of the surcharge. Does that stay in -- I know it's not in your guidance, but does that likely stay in for the full year at this point? And maybe just touch on, Eifion, where the inflation curves are sitting right now versus plan?

Just to point out, it was actually 4. I mean, I don't know if you're rounding up there, Nigel. It's actually 4.

I usually round up. So yes.

Got it. Okay. I normally do to.

So look, I mean, we continue to monitor the price cost dynamic. We recently -- very recently in the last 2 or 3 weeks have come out with an additional price list increase. And that's roughly around 3%. It varies by product category, but the surcharge still layers on top of that, and it remains in place as we go through the month of May. But it is evaluated on a monthly basis. And so if we do see some elements of the inflation, which we acknowledge may be transitory, if we see that dissipate and we'll [ include the ] surcharge. But again, we haven't included it, have not included the surcharge in our guidance and nor will we give the current price cost situation. But it remains in place through the month of May. In terms of where we see the inflation curve, it has begun to flatten. I mean there's been a little bit of chop over the last 6 weeks. I mean that's consequential to noise in Europe. And I would say Europe has experienced more inflation of late than the U.S. has in commodities and particularly in the energy sector. But at the end of the day, I think what's really important, Nigel, is we've proven over the last 12 to 13 months that we have the agility to offset inflation with progressive price increases and we haven't seen any demand disruption at the consumer level equipment, as we said, repeatedly tends to be a very small proportion of the installed cost of the total cost of the installed pool, I don't know represents about 10% or 20% increase in pool equipment only tax on about 2% in the overall installed cost of the pool. So it's not a major needle mover for the consumer. And additionally, in the aftermarket, consumers are particularly seeking out richer features that's been proven out in the lifestyle product capture growth that we've seen over the last 12 months. So we'll stay agile on pricing, and we believe our price cost neutrality has been reached here in Q2, and we'll continue to monitor total necessary actions.

Great. That's fantastic. I've got a number of other questions I wanted to get in, but we're out of time, unfortunately. So we'll draw a line there. Kevin, Eifion and Stuart, thank you very much for your time. That was a great discussion and look forward to catching up to you.

Thank you.

Thanks for having us.