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

Are we begin, I need to remind the disclosures and complete interest available on our website. We today is Kevin Holleran, President and CEO; Stuart Baker Vice President of Business Development and Kevin Maczka Vice President of Investor Relations. They were the leading pool equipment OEMs serving North America, Europe. Pool market is attractive. It's about $30 million growth globally and all require aftermarket service. And 2023 in a bit be a bit of a reset. But long term, we remain confident in the pool fundamentals. With that, Let me turn over to Kevin.

Well, thanks, Ryan. It's great to have this opportunity to present -- everyone hear me okay? To present Hayward to you today. As Ryan just said, pleased to be joined by 2 of my colleagues here, Stuart and Kevin. I will not go through our disclaimer, but just know that I will be -- or maybe make us a forward-looking statements and discuss some non-GAAP financial measures. I know that we could be new to some in the audience. So let me just take a moment and describe who Hayward is. We have 2 segments: North America and Europe, Rest of World. You can see the weighting North America predominant segment. We view that as a good thing, given the disperior pricing and margin profile that the North American market has vis-a-vis Europe and rest of world. We are a pure play with 97% of our revenue derived from pools, vast majority of that attached to the residential backyard. And then thirdly, we are a one-stop shop. We are a full line manufacturer everything from pumps to automation sanitization, you can move clockwise around the clock there. We are approximately 80% derived from aftermarket. New construction gets a lot of attention. It's still important at 20%, but vast majority of our revenue is tied to the aftermarket. So things after the pool is built, whether that's brake fix full-scale remodel or equipment [upgrade] -- and then finally, we generate about $1.1 billion on an LTM basis, very strong profitability with EBITDA margins at approximately 26%. We believe the desire for healthy outdoor living is a sustainable secular trend. The pool is often the center of that outdoor investment, things like the kitchen, the landscaping, the decking, landscape lighting, et cetera, often are built around the anchor of the backyard being in the pool. Secondly, homeowners are increasingly demanding smart connected products. We'll spend quite a bit of time talking about our offering on the connected IoT side. From a long-term standpoint, I think that in addition to the 2 secular trends I just mentioned, desire for outdoor living as well as smart connected devices. I think there's others that are benefiting us and our industry, namely Sunbelt migration where you can enjoy outdoor living, a greater percentage of the year, de-urbanization out into the suburbs where you have a backyard that you can perhaps spill out into work from home or some kind of hybrid work schedule and then increased demand for environmentally sustainable products. More specific to the pool industry, there's about 6 million in-ground pools in North America, somewhere between 25 million and 30 million pools globally, and that's increasing every year as there are more pools being built than decommissioned on an annual basis. I have a chart in a moment that will show that. That's true dating back all the way to 1970. And then I think Hayward specifically, there are some deep route competitive advantages, which I'll touch on, on the next slide that I think are very durable and defendable to our position. So from a competitive moat standpoint, as I said, I think these can be leveraged and they are sustainable. So starting in the 1:00 position, we have an incredibly strong and trusted brand, nearly a century in the making, haven't always been a pure play around pool, but Hayward was first founded in 1925. We have an incredibly large installed base that comes from that legacy as well as being the one-stop shop that we are. And it really gives us ample opportunity to introduce technology into the aftermarket. Again, that being 80% of our revenue. Next, moving clockwise, -- we sell across multiple channels into the marketplace. We really expanded that go-to-market strategy over the last 4 or 5 years by adding some dedicated business development teams that are focused solely on new customer acquisition. The result has been increased dealers. Dealer to us is a builder, a remodeler, a servicer who have joined the Hayward family and advocate for us on a daily basis in the backyard. We're also committed to operational excellence. I think that was on display during COVID as we were able to ramp really faster than many of our competitors. We do manufacture largely domestically. About 85% of our total manufacturing comes out of 3 U.S. facilities. We're more vertically integrated, thus shortening our supply chains. And again, we were able to ramp up and more recently ramp down pretty rapidly to better match market demand. And then finally, in the top left corner, one of our biggest differentiators really is product and technology leadership, which I'll touch on in just a moment. So why invest in Hayward. I think this is a great one slide overview of who we are and what's compelling. We are a pure-play leader in this attractive pool industry. It's a great industry known for a recurring aftermarket model. As I just mentioned, the durable and defendable competitive advantage is really centered around innovation, operational excellence and go-to-market, strong financial profile, which I'll touch on later and growth outlook as well as a commitment -- strong commitment to ESG. So from a pool standpoint, here are some of the attractive characteristics that we speak about specific to the pool industry. We refer to them as large, growing and predictable, 3 pretty good attributes. From a size standpoint, again, nearly 6 million pools in North America between north of 25 million globally and representing an addressable market north of $6 billion, growing both in terms of pool count as again, there are more pools constructed every year than decommissioned as well as average spend per pad. See over the last 10 years, content has actually increased about 2.5x what a pool owner was installing just 10 years ago. And then finally, from a predictability standpoint, -- the decision to build a pool or buy a home that has a pool is a decision. But once that decision is made, once that choice is made, we have a lifetime relationship with that homeowner as equipment starts to need replacement in the 7- to 15-year time frame, remodeling occurs in the 15- to 20-year time frame. And again, 2/3 of all pools out there were constructed before the turn of the century, giving us this opportunity for upgrades. The last point I'll make is the expectation around annual price increases. There's been much more price put in the market over the last, call it, 2.5 years or so, but this is an industry that expects 2% to 3% price increase that gets passed through the value chain each year. From a resiliency standpoint, I referred to this slide just a moment ago. The aftermarket is our core business. It represents 80% of our net sales. It's always increasing, as you can see, dating back to 1970, even through some of the highlighted in orange down cycles, we continue to add to the aftermarket. With that increased aftermarket, there's that lifetime need for servicing, upgrading and remodeling. Interesting fact is that over this time period, the pools per capita has actually increased nearly 3x since 1970. Back in 1970, there was about 1 pool for every 200 people in the U.S. today, it's one pool for about every 65 or so. So obviously, the enjoyment of pool ownership has continued to grow over this, call it, 50-year period or so. From an aftermarket standpoint here, I just want to touch on some of the sources of our revenue, the dark blue, those 3 wedges all add to the 80% that I've mentioned a few times. 50% of it, we believe, is truly nondiscretionary. This is repair, replace kind of end-of-life break fix. When something goes if you're not filtering, circulating, treating water, you have a swamp on your hands. So once something goes, there isn't this much of a decision, do I replace it or do I not. You're sort of on the clock to get it replaced at that point. These 2 other 15% wedges, we really view as semi-discretionary around remodeling and equipment upgrading. And then new construction is the lighter blue, again, 20%. It's an important source of revenue for it. But if you really were to balance the amount of airtime that new construction gets versus what it represents to the overall revenue stream, it's a bit disproportionate with the amount of attention that new construction gets. Here on the left-hand side, you see 2 really different ends of the spectrum from a pool feature standpoint. Today, the majority of newly constructed pools are fully remodeled pools, have IoT-enabled automation systems, controlling the equipment in some way, shape or form. That control can range maybe on the low end from simple automated water chemistry all the way up to [marrying] LED lights with water features and kind of creating that backyard Bellagio as we say. The pool on the top left there is not a smart pool. It's not interconnected. That represents, we'll call it, $3,000 at OEM costing to us versus something more like 15,000. So you play this out from the initial install, that $12,000 delta with an expected replacement cycle every 10 years, call the pool having a 30-year expected life. There's obviously quite a bit of revenue, not to mention increased margin opportunity that goes with the product that's outfitted on that SmartPad on the bottom. So we're going to continue to drive innovation technology solutions towards SmartPad and in so doing, we believe that there's great long runway for both revenue and structural margin expansion with this conversion that's occurring. Just a little bit further around 3 different specific conversion opportunities in terms of dollars that they mean to our industry. There really is substantial opportunity around digital, commercial and energy conversions. Currently, about 2/3 of new pools that are built are being equipped with higher technology products like IoT controls, variable speed pumps or [salt chlorine] generation or some form of alternate sanitization, nonchemical-based sanitization. We would expect that, call it, 2/3 to continue to increase as it has over the last -- why that's not 90% or 100%, I think it's a good question that it's really on us as an industry to continue educating the homeowner and the installers on the advantages that go along with that. But more in our wheelhouse is the fact that the aftermarket penetration, if you look down this category here, call that 1 in 3 in the installed base have any of these higher functioning, energy-efficient products out there. So again, our sales teams working very closely with our trade professionals to promote these exciting new technologies as aftermarket upgrades. From a product standpoint, we really are a clear leader around new product innovation. We're proud of this legacy, and we reinforce it every year with a new batch of product introductions into the marketplace. Starting on the left-hand side, our variable speed pump and XE pump, all DOE-compliant to some new legislation that rolled through in 2021. And that's really what's -- the superior energy efficiency is really what's led to really annual recognition from ENERGY STAR. I'll touch on Omni -- I'll skip over Omni as I'm going to touch on that on the next slide. But this HydraPure, this 3 in 1 kind of water treatment technology that combines UV ozone and AOP to provide safest, cleanest, purest water has been a great addition to the lineup. Our S3, this product here is a salt chlorine generator market leadership there. What's really great about this and the innovation you can operate your pool at 1/3 the salt chlorine content -- the salt concentration of legacy salt systems. LED lighting, more and more emphasis being placed on kind of the ambience. I mentioned the backyard Bellagio earlier. I'd say as much pools are constructed as much for the entertainment value as they are the health and wellness. And we've really made LED lighting around the pool, the spa, the water features and now landscaping, much easier from an installation and an operation standpoint with the introduction of the SmartPower product. And then finally, the universal heater here, dual fuel capacity, so the channel only has to -- only has the inventory one SKU, a smallest footprint. So it fits neatly onto some of the zero-lot-line homes out west and down south and incredibly easy to install for our professional trades folks out there. Here, I'll highlight just the SmartPad conversion, led by Haywards proprietary OmniLogic automation system and our highest rated app, both according to the App Store and Google Play. This is really the heart, Hence, the reason it's in the center of the slide there. It really is the heart of the SmartPad pulling IoT-enabled products to be paired with it, whether that's LED lighting, variable speed pumps, water, heat, water temperatures, et cetera. From a distribution standpoint, I really think that this is an area of key differentiation between ourselves and our competitors. We've long embraced lean methodologies in our manufacturing and distribution operations. We're very agile as evidenced by the rapid ramp up during COVID vertically integrated, more so than some of our competitors. Again, the fact that we're manufacturing 85% in market is very different than the profile you would see with some of our competitors out there. Our -- we nearly doubled in manufacturing during the pandemic and with very limited incremental capital demand to do that. More recently, we've been resetting manufacturing production levels with strong gross margin contributions this most recent quarter. I would say, in general, what I think allows us to respond most timely is the fact that we're really not outsourcing as much of our sub-componentry. As some of our competitors do. And we're not as reliant on a longer supply chain back to Asia for some of our complete products or some of the components that go into our products. From a distribution standpoint, we really do deploy a push pull go-to-market. So like everyone in our industry, we rely heavily on 2-step distribution. Think of POOLCORP, think of Heritage more of a regional player in the Northeast who is critically important to us, base state. And about 75% or so of our revenue goes through 2-step distribution. Secondly, kind of high teens percent of our revenue goes -- is sold directly to retail, think Leslie's or Pinch A Penny there or e-commerce providers. So e-commerce, frankly, was a bit of the Wild Wild West up until Hayward took a more leadership role in trying to define what the Internet was going to represent for us. We whittled down the basket of SKUs that were allowed to be sold. And really, what that cutoff point for us is if a homeowner with a reasonable mechanical skills can install it themselves, we'll sell it on the Internet. Things are professional. We're really looking to protect and continue to endorse the professional trade, something that needs professional installation, we will not sell across the Internet. Of course, we've been tested on this. Some people have fed some professional line or not honored map pricing, and we've actually shut down e-commerce. We put the APB out to our distribution channel that XYZ is not in compliance. It's not to be replenished as they're out of compliance with our e-commerce. But I digress. And then thirdly, kind of a high single-digit percentage, we'll sell on a direct basis. So someone like a Blue Haven, who's the largest builder in the U.S. They have franchises coast to coast. We'll sell them on a direct basis. Again, if they have the ability to manage their inventory flow and house it inventory, we will sell them on a direct basis. Another -- think of the buying groups. There's a couple out there here in the states, whether that's Carecraft or UAG, these would be service providers or builders who belong to this co-op or buying group. And again, that gives them the opportunity to buy direct from Hayward if they are selling clients. So again, we employ both a push into the channel and work closely with our professional trade, our dealers and servicers on the pull through the channel into the end marketplace. From a financial standpoint, we do have a strong historical track record around financial performance. Our historical growth algorithm is really predicated on high single-digit CAGR, which would be primarily volume growth, supplemented, call it, 2% to 3% annual expected price increases that normally go into effect with the cutover to the seasonal year. Our seasonal year really starts October 1. That's when we would publish our winter stocking programs early by is what the industry calls it. That's when new pricing takes effect and we collect orders for some of the winter stocking to have product on the shelf for when the season breaks in the spring. From a profitability standpoint, we really target gross margins in the high 40% and convert that from an adjusted EBITDA standpoint to high 20s. These margins, frankly, are having been in a few different industrial businesses over my career, they're superior to any manufacturing business. I've been a part of and simply not found in many industrial verticals. From a CapEx standpoint, we're very light, very modest from a kind of a -- think of it $25 million to $35 million annually from a CapEx standpoint, somewhere at or less than 3% of sales. From a free cash flow standpoint, we're typically converting greater than 100% of our net income into free cash flow. So a good generator of cash. And finally, we strive to maintain a disciplined capital structure targeting net leverage range of 2 to 3x. From the ESG standpoint, we're early in our journey, but we continue to make progress that I'm really, really proud of. So from a recent accomplishment standpoint, we established this reporting framework earlier last year, focused around these 4 core pillars of product, planet, people and principles. Last year, we completed our first Scope 1 and Scope 2 emissions inventories having partnered with a third-party expert to help us with that. And we published our first stand-alone disclosure, the Hayward ESG data sheet last year. I mentioned earlier, great recognition really on an annual basis from ENERGY STAR around partnerships with them primarily driven by energy efficiency of our variable speed pumps. And as we look at our product line, we would say greater than 90% of our products are impacted by key ESG themes specific to water conservation, chemical, harsh chemical reduction and energy savings. More recently, earlier this year, we received an award for ESG performance from Morningstar's Sustainalytics, one of the leading research and rating firms. Very proud to be recognized with that so early in our public life as one of the best ESG ratings for all companies in the U.S. and Canada. I will close with a slide that you've already seen, but I think it's a good place to recap and finish our discussion on why to invest in Hayward, again, great industry, recurring aftermarket model, durable competitive advantages, focused around one-stop shop, trusted, well-known brand in the marketplace, a history or a legacy of product innovation selling product into the market through all key channels, whether that's distribution, direct, e-commerce, large retail and then great financial profile and growth outlook. 2023, as Ryan said, is a little bit of a pause or a reset as we work off some inventory in the channel, and there's some market demand softness from the macro environment. And then finally, a commitment to ESG. This really existed this emphasis existed prior to being a public company, but we've just put a finer point on some of these ESG thematics since we've come public a little more than 2 years ago. So with that, I think we have a couple -- we have time for a couple of questions. If I may pull my colleagues into if you stump me, but that's why they're here, I guess. So any questions from the group?

[indiscernible]

Yes. Yes. We're keeping close tabs on it. I know more specific to Germany with some of the energy concerns. I know that they weren't able to heat their pools throughout the winter months. I think in general, truthfully that there is a need for our industry to find its voice to be able to talk about if you just want to look at it as a hole in the ground, that's holding water, there's a lot of whether it's psychological or health and wellness. I think that there are broader themes that I think can help offset some of the water consumption concerns that exist out there. And as OEMs, we're starting to talk a little bit more through some of our lobby groups to do a better job of giving kind of an offset to -- this is a hole in the ground that evaporates water, and we need to do a better job of that. Do you have anything to add?

No, I think it's the point of electrical [business] is the bigger issue. Certainly in Germany. That's what we're seeing more which is impacting.

There's another question behind you.

Why the increase in leverage [indiscernible].

You can talk about that.

Yes. So we typically, as Kevin mentioned, target 2 to 3x net leverage. We are a seasonal business in terms of sales. We're also very seasonal in terms of how we collect cash flow. So Q1 is typically very low. We use cash in the first quarter. Typically, we collect cash for the remainder of the year. So coming out of Q1, you saw our net leverage tick up to about 4x because of that seasonal dynamic. And what we've said is we have a plan by the end of the year to get back close to 3x. So similar to the leverage level we ended the prior year. So that's the plan going forward.

Anything else?

Kevin Maybe just comment on the help the consumer. Maybe just on [indiscernible].

Yes. Weather got -- I mean, the weather was not good in the West to start the year. That's a year-round market. And both from a temperature as well as rainfall, it was a bit historic in how poor it was out there. That started to normalize a little bit as we've gotten into the season. We kind of view that as maybe a couple of points of impact in first quarter. Those days aren't necessarily all lost. Some of that can be made up. But the offset to that is weather was very, very good in parts of the Southeast and Florida in the first quarter. The consumer, I would say what we're seeing is some of the discretionary aspects of our industry is starting to -- is feeling the impact of the macroeconomic, whether it's the interest rate or job security. But again, what this industry is known for is even in the great financial crisis, where new construction fell off 60%, we were still building pools in maybe the worst residential environment that our country has ever seen. We still built 55,000 pools or so in that time period. And again, with the nondiscretionary aspect of so much of the aftermarket, that's something that's going to stay very durable and very resilient through even this economic environment that we're in right now.

All right. Great. Thanks, everyone.

Thank you.