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

[Audio Gap] new technologies. Our 2 fastest-growing product categories are our most expensive categories, controls and variable speed pumps and we're seeing tremendous adoption of those products in the marketplace, which gives us a great indication that the consumers are seeking out high-value products that -- less sensitized to price than maybe some have a concern. So we're really encouraged by that particular dynamic.

And just how is the visibility into your business from a customer demand and then channel inventory perspective? And kind of what was your biggest surprise that made you revise the guidance?

So we have good -- not excellent, but we have good channel inventory knowledge. We do get inventory positions reported to us by predominantly our U.S. distributors. We do get good sell-through information as well from a cohort of our distributors. So we have decent good information there. At the end of Q2, we saw channel inventories primarily in the U.S. at elevated levels, and that necessitated us to work with our distributors to take down the positions over the course of the next 6 months.

Obviously, we're coming off a period of very strong demand and you were able to ramp up volumes very quickly to meet this. As we think about lower volumes going forward, how should we think about your cost structure?

Yes. So we have an excellent price dynamic in the industry. So first and foremost, we believe pricing is sticky in respect to the demand profile in the business. And that's been proven out over the historical time frame in the industry. We have a very agile manufacturing footprint that allows us to decelerate production very, very rapidly because a lot of the cost base that we have within manufacturing is variable. We put in temp and contract labors to take care of surge demand and we are able to take that out at a very rapid pace. Additionally, across the SG&A base, we have an opportunity to always recalibrate that. From a margin perspective, our objective is high 40s gross margin and plus 30% structurally at the EBITDA line. And though we may take a little bit of a dip in Q3, we fully expect the full year to be at those metrics.

And then there has been some supply chain issues still impacting sales of certain products. I believe you kind of mentioned them being kind of the higher priced products, too, the variable pumps and automation. What are you seeing in the supply chain? And are any products where you could have shipped more in the quarter if you had more materials?

Yes. I would say, generally speaking, the supply chain dynamic has vastly improved in the first half of this year versus the second half of last year. We've been able to post up record production in the first half. And so the supply chain constraints, I would say, largely dealt with at this point. It has required some agility on our part and some recalibration of relationships, but fundamentally, the supply chain is rectified. That's not to say that every product category is still rectified. Electronics, PCBAs are still constrained, and we continue to want more than we can get. So -- but at the end of the day, we would say the supply side is fundamentally rectified at this time.

And then as we think about end market demand, how do you think about contractor backlogs heading in 2023? Because they've been something that's been sold out for a while now.

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Sure. First thing to say is our builders are busy. Everybody is busy right now. Most of them, I think we're seeing are pretty much sold out through 2022, many of them through the first quarter of 2023. But we're still monitoring very closely. We have seen some slowdown in permits. But permitting was at an all-time high. So I think that's a normalization of permits. The nice thing that we are seeing is that the permit values are actually higher, and that maybe speaks to a little bit of what Eifion just talked about there. Content seems to be going up. So maybe some weakness at the very entry level of the pool market, but certainly in the mid to high end, we're not seeing that weakness in permits. And we get weekly reports, and we can see that how many permits and what the permit values are, that remains still strong.

And there's been, I guess, some talk out of the pushout of remodeling projects during the pandemic as homeowners maybe didn't want their pools out of commission for a period of time. I think builders are busy. Have you seen a return of this demand? And is there some pent-up opportunity there?

I think we do think there is still pent-up demand there. As you said, most people, through the pandemic, did not want to give up their pool. The work from home dynamic is obviously the reason behind that. We -- and there was enough interest in new pool construction. It's a much -- it's like building a new house versus a restoring a house. It's a lot easier for a builder to come in into a virgin backyard, dig a pool, rather than go in and be a little uncertain what they're going to be working with and what they're finding. So they've always prioritized new construction. If we start to see some new construction tail off, I think that's a natural time. We'll see them turn their time to remodeling. I think pools still at a record age. According to PK data, it's about 23 years old, which is at the end of a lifetime really before. Once you get to over 20 years, you start to have structural issues with the pool, and that typically at that time, they sweep the pad, and to us, it looks like a new construction.

Pricing has been a larger contributor to growth than normal. How much of prices increased cumulatively since 2019? And how much of this price is structural versus surcharge? And when would you expect those surcharges to roll off? Sorry, a lot of questions there.

So just to level set, I mean, historically, the industry has had a very disciplined price mechanism. Typically, at the beginning of the pool season, which is October 1, we institute a price increase, which is there to protect against inflation and maybe a little bit more value, but typically to protect against inflation. So it's been necessary over the last 2 years to continue that philosophy and protect against inflation, albeit we're now dealing with aggregately since 2019, close to 30% in North America price increase. We believe that is sticky and necessary. We don't believe the -- we don't expect deflation. We expect the rate of inflation to decrease, but we don't necessarily expect deflation at this time. I think the more important aspect for the industry and for Hayward in particular is in order to command those prices, you have to provide a value proposition to the consumer. And when we look again at those product lines, which are increasing year-over-year in volume, it tends to be the higher value price products, which tells us that irrespective of the price that's gone into the market price, there is a level of price de-sensitivity that exists and consumers are still willing to pay for the higher priced products. You have to remember that 80% of our business is directed towards the aftermarket. It's where repair and remodel takes place. It's where the upgrading takes place. It's where attributes are sought out by the consumer, and we see that self-evident in the volume of our lifestyle product categories, heaters, lighting, controls, sanitization, high-priced products, or we're accelerating volumetrically year-over-year. So we're not concerned about the price points we put into the marketplace. As Stuart maybe have mentioned at the very low end of the market, there could be some price sensitivity. But at the end of the day, at new construction, pool equipment is still only about 10% to 11% of the overall installed cost. So it's not a major issue. If the price goes up 20%, 30%, it's only going to add a couple of percentage points on to the overall installed pool price. So it's not a major issue to the consumer.

And I guess, have prices been increasing pretty similarly across the competition?

Yes. I mean I think we've all faced the same inflationary challenges and have all necessitated these price increases to protect the margin.

And just for the audience, if you do have questions, just please raise your hand, and we're happy to take them throughout. The health of the housing market and consumers kind of sentiment has been a concern lately. Have you seen any impact so far from pool equipment demand?

No, we haven't. I think the flip side of that question is how much pent-up demand is there for pool in a compressed new construction housing sector. Historically, we would say for every 12, 10 homes that are created, 1 has a new pool put in. Additionally, in the absence of new construction that people are trying to upsize for their family reasons or for whatever, that will also be a generator for new pool growth. What we're seeing now is a larger adoption of new construction for pools. And so we'll begin to see more pools put in per new construction homes. And there is today around about 4.5 million to 5 million homes which are absent pools -- sorry, absent new construction. So there's pent-up demand for about 400,000 to 500,000 pools associated with that 4.5 million to 5 million absence of new construction. So the positive message around the housing constraints today is that there is a tremendous amount of pent-up demand for pool. That's on the [ comm line ] to come.

I believe that my family still wants to pool. So we're a future customer. So Europe accounts by roughly 10% of your sales. Could you just talk about what you saw from a demand perspective there, because we kind of always focus on North America? And how you're thinking about the rest of the year and into 2023?

Yes. So certainly, Europe has had some challenges, separate from the North American sector. I mean, obviously, we have the Ukraine situation, which kicked off in -- unfortunately, in February. We had to back out of certain Russia-owned businesses, and that was a permanent step down in that sales profile of the organization. I think the general mood in Europe right now is not great. We have 2 large regions where we do very well, Spain and France. Those are very rich pool markets, and we continue to see good demand there. But in the northern part, Germany, Switzerland, Austria and maybe up into the Netherlands and Belgium, we're seeing some constraint on demand. We do expect it to recover. We don't believe this current situation will last forever. And so we're hoping and expecting a better 2023. And then layer on to that, the translated result is not as good as we had expected with the devaluation in the euro against the dollar.