Hayward Holdings, Inc.

Welcome to Hayward Holdings Second Quarter 2021 Earnings Call. My name is Ashley and I'll 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. During the question and answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Stuart Baker, Vice President, Global Strategic Planning and Business Development. Mr. Baker, you may begin.

Thank you, and good morning, everyone. We issued our earnings press release this morning to the investor relations portion of our website at investor.hayward.com, where you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Halloran, President, Chief Executive Officer, and Ifean Jones, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call that the company may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and will be provided in our Form 10Q for our second quarter of fiscal year 2021 as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of net income to adjusted EBITDA calculated under GAAP as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release and will be included in our form 10Q for our second quarter fiscal year 2021. I would now like to turn the call over to Kevin Halloran.

Thank you Stuart and good morning everyone. It's my pleasure to welcome all of you to Hayward's second quarter earnings call. I'll start on slide four of our earnings presentation with some highlights from our second quarter results. During the quarter, we delivered record net sales of $364 million, an increase of 66% year over year. Significant profitability growth with adjusted EBITDA of $110 million, an increase of 81% year over year, despite inflationary and supply chain headwinds. This result continued to enhance our financial flexibility through rapid deleveraging. Our results build upon the solid growth we reported during the same period last year in which net sales grew 14% and adjusted EBITDA grew 21%. Our exceptional performance this quarter is proof of Hayward's product adoption across the channel, sustainable secular industry tailwinds, operational excellence, and an expansion of totally Hayward dealers. The demand for pools and pool equipment remains strong, and we believe our innovative technology and products will continue to deliver growth, especially in the aftermarket. We are increasingly confident in our ability to continue to benefit from market expansion given our competitive advantages around product range and technology, operational platform, and partner relationships. Now moving to our guidance on slide five. I'll summarize some recent trends and why the industry's outlook continues to remain strong, not only in 2021, but as we look into 2022 and beyond. In the near term, the market backdrop is driving demand and excessive labor and global supply chain capabilities, resulting in higher inflation, which we are successfully passing through the channel. Builder backlogs greatly expanded in 2020 and 2021, and we expect this trend to continue in 2022, driven by new pool construction with upgrades to smart pad products, along with repair and remodel project activity. Our industry is supported by favorable housing dynamics, including increased levels of prospective homeownership, particularly the millennial buyer, migration to suburbs and the Sunbelt, and a strong repair and remodel market driven by an overall aging housing stock. We are also seeing evidence that pool usage levels continue to rise due to extended seasons and more upgrades with innovative capabilities with the pool as the focal point of the backyard. While these trends were magnified during the pandemic through stay-at-home conditions, we believe these are secular trends with significant runway well beyond 2021. Now turning to our full year 2021 financial guidance, which is influenced by a number of factors, including our financial results to date. As the year progresses, we have greater visibility through our channel partners and insight into builder activity levels and backlogs, which have continued to show considerable strength and sustainability. Given the strong performance in the first six months of the year, visibility into the order file, and increased confidence in our ability to execute, we are raising our guidance for the full year fiscal 2021. We now expect net sales for the year to grow 54% to 58% year over year, and adjusted EBITDA of $405 million to $425 million, a growth of 75% to 84% year over year. This compares to previous guidance for net sales growth of 40% to 45% year-over-year and adjusted EBITDA of $360 million to $390 million, or a growth range of 55% to 68% year-over-year. Turning to slide six. As a reminder, at Hayward, we segment our business into North America and Europe and the rest of the world. North America is approximately 80% of total sales, which is advantageous given this region has the best pricing and margin profile in the industry. We are also a pool pure play equipment manufacturer with the vast majority of our sales tied to the residential backyard. We offer a complete line of innovative, environmentally sustainable products, providing the pool owner everything needed to safely operate any type of pool. Hayward is the leading innovator with the most known and trusted brand in our growing industry. The industry is supported by sustainable secular trends such as de-urbanization, migration to warmer climates, and increased investment in outdoor living. New construction is a key pillar of growth, driving the overall installed base of pools that we serve. However, 75% of our revenue profile stems from a resilient, non-discretionary pool aftermarket, which includes equipment replacement, upgrades, and remodels. Turning to slide seven, Hayward has several key competitive advantages, creating customer stickiness and delivering growth for our stakeholders. The first layer is an incredibly strong and trusted brand, decades in the making, supported by a very large and growing installed base, resulting from having a complete product line across all pool types. Secondly, we have an extensive network and very strong relationship with our partners from totally Hayward dealers, comprised of builders and servicers that stake their reputation on our products each day. to distributors, retailers, e-sellers, and authorized service centers that help us sell and support Hayward products in the backyard. Through June, I am pleased to say we have already seen a double-digit growth in the number of new builders and servicers joining our Totally Hayward Reward program this year. We believe this is clear evidence of the stickiness of our share gain as trade professionals see the benefits of our products and the support and relationships they are building with Hayward. We continue to demonstrate our operational excellence and ability to leverage volume at attractive margins. We manufacture in-market with roughly 70% of our product built in the U.S., and we are vertically integrated. As such, we have a more simplified, dynamic supply chain than our competitors. We are highly automated and have capacity available to build more product while deploying very manageable levels of capital. These factors were on display during Q2 as we increased our production by over 80% year over year. The final key Hayward advantage is our innovative and product design capabilities. Products are our lifeblood and we spend in excess of $20 million per year in engineering to ensure that our products are at the forefront of technology with leading functionality. We have extensive IP that we protect with active and pending patents. We also have top product performers in many key categories, like omni controls, variable speed pumps, and salt chlorine generators, which are fueling our growth as the industry has made significant shifts towards digital and energy-efficient capabilities, and pool owners increasingly seek out these smart pad, environmentally sustainable technologies. Turning to slide eight, There are a number of key secular trends we are seeing centered around home building and the increased focus on smart homes that we believe will continue to enhance the awareness and demand for Hayward products. There is a significant percentage of new home buyers coming to the market, which is heavily concentrated in the Sunbelt states. Confidence levels in home remodeling industry continue to increase, driving demand towards repair, remodel, and upgrade activity. As previously highlighted, Hayward is at the forefront of product and technology innovation, which is driving conversion to pools with SmartPads. This coincides with the projected penetration levels of smart home systems growing from approximately 40% today to approximately 60% in 2025. With that, I'd like to turn the call over to Ivan Jones, who will discuss our financial results in more detail.

Ivan Jones Thank you, Kevin, and good morning. I'll start on slide 9. All comparisons will be made on a year-over-year basis. As mentioned earlier, we're very pleased with our second quarter results and the successful product adoption we continue to see throughout the channel, along with our operational excellence in a demanding environment. Net sales for our second quarter fiscal 2021 increased 144.4 million, or 66%, to 364.4 million for the three months ended July the 3rd, 2021. The increase in net sales is primarily the result of higher volumes, mainly in residential pool equipment sales, from continued strong demand for pool equipment driven by upgrades and an increase in new pool constructions, as well as an acceleration of outdoor living trends and a 4.1 net price increase, as well as favorable foreign currency effects compared to the same period of the prior year. Gross profit increased to $168 million, an increase of $70.1 million, or 72%. Gross profit margin was 46.1%, an increase of 160 basis points, resulting from the net price increase discussed earlier, manufacturing leverage, net cost savings, partially offset by inflationary increases in raw materials and logistic expenses. Selling general and administrative expenses increased 27.6 million or 62% to 71.8 million, primarily driven by volume-related expenses. The increase in SG&A was also a result of non-recurring costs. associated with IPO-related stock-based compensation, predominantly non-cash asset write-down costs related to the fire at our Yonkers, Spain facility, and refinancing charges consequential to the amendment of our first lean-turn facility in the second quarter. In aggregate, these one-time costs represented a drag of approximately 300 basis points, or $11.6 million, for our operating leverage during the quarter. Despite these items, as a percentage of net sales, SG&A decreased to 20% and improvement of 35 basis points. Research, development, and engineering expenses of $5 million, or 1.4% of net sales, as compared to 4 million or 1.8% in the prior year period as we continue to invest in innovative new products and features. Operating income increased 46.1 million or 132% to 81 million. This increase in operating income was driven by higher net sales and a gross profit expansion, partially offset by the higher SG&A expenses I mentioned. Net interest expense decreased by 4.6 million, or 26%, to 13 million as a result of pay down of debt with proceeds from the IPO, reduced interest rates following the amendments of our first lean term facility completed in the quarter, and a comparative reduction in the use of our ABL facility during the quarter. Additionally, we incurred 3.6 million of debt extinguishment costs during the second quarter of fiscal 2021 associated with the amendment. During the quarter, we incurred an income tax expense of $12.6 million compared to $5.4 million for the prior year period. This was primarily due to increased income from operations. Our affected income tax rate was 19.4% compared to 22.4% for the prior year period. Net income increased $34.1 million, or 182.3%, to $52.8 million. Adjusted EBITDA in the quarter increased to 110.4 million, representing an increase of 49.4 million, or 81%. Adjusted EBITDA margin increased 259 basis points to 30.3%. Now turning to our segment results beginning on slide 10. As a reminder, Hayward's operational and management structure is aligned to its key geographies and a go-to market strategy resulting in two reportable segments, North America and Europe and rest of the world. In North America, net sales increased 66% to $293.6 million for the second quarter. The increase was driven by higher sales of residential pool equipment and increased pricing. Gross profit increased 70% to $140.4 million. Gross margin expanded 128 basis points to 47.8%. Gross profit margin expansion was driven by net price increases, manufacturing leverage, and cost savings, partially offset by inflationary increases related to raw material and freight, as well as higher import tariffs. North America's segment income increased 96% to $89.3 million. Adjusted segment income increased 89% to $99.2 million. Segment income increased mainly from the higher sales, partially offset by higher volume-driven SG&A expense. Turning to slide 11, for Europe and rest of the world, net sales increased 66% to 70.8 million. The increase was due to sustained market demand and strong order entry in all territories. Gross profit increased 81% to $27.6 million. Gross margin expanded 315 basis points to 38.9%. This was primarily driven by price increases, volume leverage, partially offset by inflationary impact from higher raw material costs, as well as higher shipping costs. Europe and rest of the world segment income increased 51% to $12.4 million. Adjusted segment income increased by $9.2 million to $17.7 million from $8.5 million for the prior year period. The increase in segment income was due to higher volume, favorable mix, and a tailwind from foreign currency exchange rates. Turning to our balance sheet, we continue to strengthen our financial position as we delevered to 2.1 times as of July 3, 2021, compared to 5.2 times as of December 31, 2020. This was facilitated by the proceeds from the IPO to pay down debt as well as robust growth in our LTM adjusted EBITDA. We are well positioned to fund our organic growth initiatives, pursue M&A, and consider future return of shareholder capital. For the six months ended July the 3rd, 2021, cash flow from operations was $123.2 million compared to $72.8 million during the prior year period. Cash used in investing activities was $9.7 million compared to $9.5 million in the prior year period. Total liquidity at the end of the second quarter was $445 million, inclusive of $252 million of cash on hand. And with that, I'll now turn the call back to Kevin.

Thanks, Ivan. I'll 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've built a leadership team with unique talents and diverse backgrounds that is committed to leading by example with ethics, 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 environmentally 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 to generate approximately 1.1 billion kilowatt hours of energy savings, which is a 90% reduction in energy use compared to the previous generation of pumps. We've reduced chlorine usage by approximately 81 million pounds through the installation of salt chlorine generators. additionally following the installation of the uv ozone system the pool will require up to 50 percent less chlorine to properly treat the water finally we've saved over 2 billion gallons of chemically treated heated water with the transition to cartridge filters i'll wrap up on slide 14 and highlight hayward's market leading position as a pure play in the growing outdoor living space Hayward's competitive moat has helped us to grow share, and our innovative and environmentally conscious technology products are driving SmartPAD conversions and expanding our addressable market. Finally, our superior financial results are backed by an attractive, large, and recurring aftermarket business. With that operator, we're now ready to open the line for questions.

At this time, if you have a question, please press star, then one in your touch-tone phone. We ask that you please limit yourself to one main question and one follow-up question. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Brian Lee with Goldman Sachs and Company.

Hey, guys. Good morning. Thanks for taking the questions, and congrats on the solid quarter here. Maybe just to start off, I guess on the backlog levels and visibility, clearly first half of the year has been quite robust. Imagine you guys are tracking better than typical at this point in the year, but wondering if you can give us some quantification of whether it's backlog or other metrics you track, what's guiding your medium-term growth outlook for the business, and whether or not, you know, you're sort of on track for that longer-term growth of mid to high single digits that I think you guys outlined at the time of the IPO. And then I have a few follow-ups.

Yeah, sure. Thanks, Brian. You know, we are, the order file, excuse me, is larger than it normally is this time of year. You know, again, as we move from June into July, that's the final quarter of the seasonal year that our industry defines. And this is the time where inventories, I know you didn't ask about that, but inventories start to get reduced. But in terms of order activity, it's very strong still. We exited Q2 with a larger order file than we exited 90 days previous. Again, that's exceptional this time of year. So I think it reflects the general secular trends and the general enthusiasm that exists out there with the trade and in the channel. And really pleased with the market reception to some recent product launches, which has really put some wind in our sails. as we've unveiled those products over the last six to nine months or so. So we feel good about where the order file is and then generally what the attitude in the channel is right now with our trade partners and with our channel partners.

Yeah, that's great. In terms of the order file, maybe just to drill in a little bit more – Maybe is there a sort of a delineation between aftermarket and maybe upgrade type of activity you're seeing in that order book relative to new pool bills? It sounds like, you know, the backlog there continues to stretch out, you know, more so into 2022. So can you delineate a little bit between sort of what trends you're seeing across both segments?

Yeah, it's hard to really decipher in the order file what's going to end up on a new construction versus, you know, an upgrade or a conversion to a digital pad or a smart pad, as we've coined it. You know, what I think we're seeing, you just indicated there that the new builds are actually pushed out into 2022 at this point. That's what we're hearing. from all regions that it's out into 2022 and even beyond in some. But when you look at the products that are populating the order file, I think it highlights a couple things. On new construction, you're starting to see a richer content go in on day one. When you look at some product categories like like salt, for example, or controls. What the installed base is in the population is a much lower percentage than what the take rate is on a new construction project right now. But then the products that we're really seeing industry growth and our own performance in really do point to this smart pad conversion that's happening out there. You know, with the control, the omni-controls, being that gateway, if you will, you know, with that frequently comes LED lights, heaters, water features, variable speed pumps, salt chlorine generation. And when you look product by product in the order file, you know, it really does reinforce what we've been talking about and what the industry has been seeing now on this uptake to a more digital pad that's synchronized together and gives the homeowner the control of their backyard in the palm of their hand through our Omni app. You know, the long and short of it is we're seeing strong demand out of both new construction, but really what's driving our numbers and the industry number is this aftermarket upgrading that continues to occur at a very heightened level.

Okay, that makes a lot of sense. Maybe last one for me, and I'll pass it on, just the pricing outlook for the year. I think, you know, one of your peers recently said they've implemented something for the second half. So wondering, you know, what you're planning for price this year, maybe, you know, what's baked into the pricing views for the 2021 outlook as it's updated here, what's been realized here today, maybe what's left to be realized, and then just Lastly, on price cost, where you are on that dynamic, if you're net neutral or still trying to catch back up to net neutral and then over what time frame potentially. Thanks, guys.

Let me start that one, Brian, and then I'll turn it over to Ivan for some of the more specifics. So at this point, we have actually made two, let's call them off-cycle price increases. The first we spoke about this time last You know, last quarter we had announced at the end of March a price increase, call it 5%, that would take effect on new orders written starting May 1st. As we indicated at that point, it would be really out into, call it later Q3, before we started to realize that, because we had to work through the order file before new orders had that price attached to it. More recently, the 1st of July, we actually made an announcement on a range of, say, 5% to 7%, and this would really be considered by the channel to are more typical, kind of early buy, but with one important distinction. We announced it 1st of July. Any orders that were written or received by us in the third quarter that are not shipped by September 27th will actually be priced at the new increase. Rather than waiting to extinguish or to invoice the entire order file, we frankly couldn't wait that long. So call it an effectiveness change on the more normal price increase that it's going to be realized, you know, the start of the fourth quarter as opposed to waiting into the new year before that applied to new orders. So hopefully that helps. Now I'll turn it over to Ivy to address some of the other parts of the question.

Yeah. The price-cost dynamic, I think, will start to normalize at the very back end of Q3. And then, as Kevin mentioned, the full implication of the price increases he mentioned will come in in Q4 and normalize the price-cost dynamic with a margin that we'll be able to deliver in Q4 similar to Q1's tight margin.

All right. Thanks, guys. Appreciate all the comments. Okay, Brian, thank you.

Your next question comes from Michael Halloran with Baird.

Hey, good morning, everyone. Hey, Mike, good morning. So, you know, Can we just talk a little bit then about how you're looking at lead times, how those are stretching out, how far your backlog is stretching out, and any kind of commentary on what the spread is between where demand is currently and how quickly you guys can meet that demand?

Well, I don't think we're going to quote specifics on the size. You know, again, I was prepared today to discuss the fact that starting the third quarter, we have a larger order file than we had this time 90 days ago. We continue in our operations to do phenomenal work of pairing up supply chain material and arrival with ramping up, getting more increased staffing into our facilities, implementing some additional shifts in our facilities. We announced during the quarter that to complement our West Coast distribution center down in Phoenix, we're going to do the same in a neighboring town to Clemens, North Carolina, which then frees up additional square footage for production, uh, to move into. So, you know, the order flow continues to be very, very strong. And, you know, we obviously are doing everything possible to marry staffing material and production capacity increases, uh, to grow that, uh, that capacity. Um, as quickly as we can.

Maybe I'll ask it a little differently. When you think about all of those factors, how far out does that give you visibility? And what would visibility normally look like at about this time of year?

Yeah, this time of year, I mean, we have a much, traditionally have a much reduced order file than what we have now. I mean, it's multiples higher than where it would ordinarily be at this point in time. Frankly, the second half is as much about building and monetizing the order file to hit guidance as it really is needing a massive influx of additional orders to deliver on the second half guidance. We're obviously not halting any product launches or efforts with the channel and with totally Hayward dealers, but We have a very meaningful order file that allows our operations team to plan the factories as well as possible because we have a full file at this point.

And then the follow-up, when you think about leverage levels near two times, how does that change your thought process? Is that pay down still prioritized, or are you starting to think a little bit more offensively with capital usage?

We remain prioritized to think about growth in the company, given where we've stretched our facilities in the last 12 months. It's now time to take a hard look at our manufacturing footprint to see what else we can do to automate and expand capacity. So we are beginning to initiate those organic investment plans at a quicker rate than maybe as we've entered the year. Secondly, I'd say M&A is clearly in our line of focus. We have several opportunities that are meaningful that we continue to look at. You know, both of those initiatives, you know, remain a priority for the business. If we remain in the sustained two to three times range, closer to the bottom end of that two times range, as we've always said, we'll consider a return to shareholder policy, but not before we execute upon our growth ambitions.

Thank you. Appreciate it.

Your next question comes from Ryan Merkle with William Blair.

Thanks. Good morning, everyone. My first question is on the sales outlook or actually EBITDA outlook. So you raised guidance for the second half, and my question is, is it primarily the higher sales outlook that is the driver there, or it also sounds like there's some benefit from price costs and maybe less overdrive costs?

Yes. So, you know, look, we will continue to see top line contribution to bottom line. So sales growth will be a meaningful contributor to bottom line structurally inside the income statement. We expect margins to improve towards the very back end of Q3. And then obviously fully the price cost equilibrium will be established in Q4 and we'll see margins arise in Q4. We do expect to continue to get leverage across the SG&A base throughout the balance of the year. But when you look at the midpoint of the guidance at just over 30.3% adjusted EBITDA margin at the midpoint, it's where we were in Q2. So that's an indication of how we feel about the balance of the year. In terms of what that does for the full year, it's been a very meaningful step up year over year in terms of the structural income statement. When I look back at 2020, gross margins were 45.3%. We're definitely going to see a very significant improved step up as we have through the first half. And then in terms of the structural logistically, with our margin, we closed last year at 26.5%. And again, at the midpoint, that's a 380-bit improvement year-over-year in margin.

Got it. That's helpful. And then for my follow-up, what was capacity utilization in a quarter, and then what is the outlook for the second half? And really my question is, would sales be stronger if you had more capacity?

Yeah, you know, we think about capacity in two ways. Capacity with the shift model that we currently have. So it's fair to say that we're running in excess of 90% of capacity utilization on the current shift model. And I want to be clear clarifying that. We have further opportunity to expand our shift models to go into a more of a continuous operational mode across the six manufacturing facilities that we have. That will take some management time investment to fully realize that. But that's the next phase of capacity utilization that we're looking at. And it will contribute partially to the second half growth and into 2022.

Perfect. Thanks. I'll pass it on.

Thanks, Greg.

Your next question comes from Jeff Hammond with KeyBank Capital Markets.

Hey, good morning, guys. Good job. Just two on kind of the second half, just clarity on seasonality. 3Q, I think normally you have some dip. And then what you've baked in in terms of kind of what you're thinking is for early buy and how that kind of shifts between 4Q and 1Q.

Yeah, I can quote what our normal quarterly percentage is. I think that's just like last year. I think it'll be a different profile this year, Jeff, as you indicated there. So without giving specifics on individual quarters, I would say in terms of early buy, we are doing a program early buy. That's The price increase that I mentioned earlier was actually in concert with that announcement of the early buy program. We would largely assume that the orders that come in on the early buy program would really be a 2022 fulfillment. There might be some individual lines or SKUs that get out mid to late Q4, but I think, you know, we're looking at it as really a Q1 fulfillment timeframe on the early buy orders that will come in over the next, call it, month or so, month and a half.

Yeah, I'll just follow up there by saying it's been, you know, the last two years have been somewhat unusual, but typically speaking, the first half represents about 48% of our sales, the second half 52%. Q1 and Q3 tend to be the lower time periods. Q3 in particular tends to be the softer quarter out of the four quarters as we finish up the pool season all year. But this year is going to be slightly different. It's almost going to be the reverse. We expect to have significantly lower leaned into the order book liquidation in the first half. So I think first half sales will be 52%, second half 48%. So a slight modification to the normal seasonality that we see as an OEM.

Okay. So it sounds like, though, second half seasonality may be a little more balanced 3Q to 4Q than you normally have. Yes, yes. Okay. And then just on... Share gains, clearly you're outperforming your pool equipment peers, both in results and guidance. And I think you've spoken to new products as well as availability. And I'm just wondering how you feel about sustainability, particularly around kind of being able to ship product as some of your competitors catch up. And if you've seen any change of behavior from your distributor base around stickiness of these share gains. Thanks.

Yeah, I mean, I would really say the share gains are more the result of builders and servicers pulling through distribution. And I feel, you know, as we mentioned in the prepared remarks, I think the ramp up that we've enjoyed this year with the number of new totally Hayward dealers coming into our rewards and loyalty program, is huge. I think it's highlighting the fact that not only that we are maybe producing year-to-date better than others or better than some others, I think it really speaks to the fact that some of the new product launches and the innovation that we're bringing to the marketplace is something they want to associate with. and want to align with. So when you look at the success of the new product launches to an already competitive and complete product line and now additional builders and servicers aligning with us, we feel very good about the stickiness of our more recent market share gains.

Okay. Thanks so much.

Your next question comes from Rob Wertheimer with Milius Research.

Hey, good morning, everyone. Hey, Rob, good morning. You know, Kevin, my question was actually somewhat similar. You touched on your prepared remarks on that stickiness of share. I wonder if you could expand on it or give us a little bit of a teach-in on what that kind of means that your home builder, your servicer, you know, whether they're now familiar with their product, more comfortable selling, installing, A little bit just about the ground game on how you're doing that and creating what you seem to see as a sticky share game. Any sort of teaching would be great. Thank you.

Yeah, sure. First of all, we have a great sales team out there who understands our product line through and through and are well trained on the technology that we're now bringing. Add to that a great technical service team, kind of the co-pilot out there with our sales team, with our mobile training units that are in market, helping to do training on the ground in the environment where the product's used, I think are just, as you say, it's a great ground game. And we're seeing the conversion as we've brought some new technology in helping with this digital conversion that's happening on the pool pad. We feel very, very good about the recruitment efforts and folks that are coming in under the tent and some of their early feedback after they've installed product on new pads and replacements in existing pads. Again, that's really what's reinforcing our enthusiasm that these are sticky share gains going forward.

Okay. Thank you.

Your next question comes from Siri Borjitski with Jefferies. Hi.

Thanks for taking my questions. So you mentioned having several meaningful acquisitions in the pipeline that you're looking at. Could you just expand on the size of the deal, the technology focus that you're most interested in?

Yeah, we're not against the specifics on the side, but what I would say is we remain focused on businesses which have similar financial profiles to ourselves. They obviously have a technology attribute. That's where our focus is, both as an industry and as Hayward. Thirdly, those acquisitions that are important to us expand our position in the backyard in and around the pool. as well as looking at expanding our geographic footprint where we're presently underrepresented. So those are the thematics that drive our M&A investment. The sizing of the deals, when I say meaningful, typically the businesses have done, let's say, more smaller tuck-in type acquisitions. We'll continue to look at those. But, you know, there are several out there which are a step ahead of that. and more to come as we focus on those growth areas.

Great. And then maybe just a little bit more about the positive demand looking into 2022. Obviously, you're going to be facing some challenging comparables. Can you just talk a little bit more about what you're seeing in the channel that gives you confidence on the growth outlook for 2022? Thanks.

Yeah, I mean, I think as we look at grocery, it's really kind of five levers. It's pricing to offset inflation, it's new construction, and then really three different parts of the aftermarket from upgrade to replacement to remodeling. And really across all three of those levers, I think there's all plenty – of enthusiasm, and there's good trends that I think do not end in 2021 and will carry over into 2022. We've already touched on some of the pricing that's already been announced. Folks who want new pools built this year will not get them all built. We're quoting out into 2022. The average age of the existing pools continues to get older, needing that remodeling activity. But what I'm saving for last is really what is driving 2021, and I don't see it ending in 2022, is turning a lower functioning pool pad into something that's more connected, more environmentally sustainable, higher functioning, and that is really this digital conversion is when you look at the industry volumes out there, the products that line up with that upgrade are the ones that are growing most year over year in 2021, and there's no reason to believe that that's going to be completely satisfied with when you look at what the percentage of those products are in the installed base. I'm talking things like heaters, controls, salt, lights, variable speed pumps. All of those things can be synchronized and give the homeowner the ability to control their backyard through a smart Omni app. That gives us enthusiasm as we look out into 2022 and beyond, that we'll have a strong growth profile out into next year.

Great. I appreciate the call. Thanks, guys.

Thanks, Rory.

Again, to ask a question, please press star to the number one on your telephone keypad. And your next question comes from Josh Popleszczynski with Morgan Stanley.

Hi, good morning, guys. Good morning, Josh. Just to dig in a little bit here on mix, I think you sort of touched on it in your last answer. Mix is a few different things inside of your portfolio. If you had to break down maybe, I guess, first the components of price-volume mix, if you can, just give us any color there. And then within, I guess, replacement markets, what you would think of as sort of break-fix versus kind of a retrofit. So maybe in the case of automation, that's not replacing something that's broken or a heater going in where there previously wasn't a heater. Just trying to get a sense for what on this is kind of on the upgrade side versus how much strength you're seeing on traditional replacement.

Yeah, it's a good question. There's a lot in that. You know, when I think about, you know, the upgrade, whether that's when product fails and needs replacement or whether it's more proactively performed by a homeowner, you know, there are some categories that, you know, are definitely more part of the upgrade. So, as I've said, the controls is really the gateway of it. You know, the controls is... you know, call it, you know, low 20% or so population in the field today, but it's a much higher percentage going in on new construction. So once a mechanical pad becomes a digital pad, you know, what you're starting to see are maybe white incandescent lights being upgraded to LED, more energy efficient. Obviously with the DOE, regulation change, which is only a couple weeks in the rearview mirror, you're going to start to see much more of the multi-speed pumps, which is our new XE line, or up to the variable speed pump. This year, with some of the shortage on chlorine, I think that as people were looking for other alternatives, a lot of builders and servicers who maybe were resistant to salt historically have opened their minds to it. And just the swimming experience is so much preferred over more harsh chemical chlorine that I think that's a very obvious upgrade. I guess I would finish where cartridge filters, we don't talk about filtration a great deal, but folks upgrading from a sand to a cartridge filter is happening in the replacement cycle also. which has some obvious maintenance improvements as well as environmental improvements without having to lose as much chemically treated water down the drain as you do your backwash cycles. So those are some of the products that we see that are going in on a higher percentage on new construction. And when someone is remodeling or upgrading an existing pool, those are some of the categories that are – that are most in demand.

Got it. And I guess if you had to break down, you know, kind of the, you know, where the majority of this ramp up in growth is, is it, you know, higher mix on someone on something that is being replaced or is it these newer categories?

Yeah, I mean, what we're seeing right now is a continuous shift towards the technology side of the product line. And so we refer to it as the smart pan bundle of products. And when you look at the third-party data that we subscribe to, we're seeing a much richer mix of those type of products, controls, variable speed pumps, smart heaters, etc. And that's where we're seeing the investment from the consumer and through the channel. And just coming back to the margin side of the question, we continue to see that element at richer margins than the more legacy side of the product line. We purposely invested in Q2 into the wage rates in our U.S. facilities to make sure that we could get sustained production output where the majority of those rich products are manufactured and will get price cost deliberation in Q4 as those prices start to cover that invested cost we put into Q2 to get those type of products out.

Got it. Thanks for the call, Jeff.

Thanks, Charlie.

At this time, there are no further questions. I will now hand the call back to management for closing remarks.

Thank you, Ashley. In closing, I'd 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're 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. That concludes the call. Thanks, everyone. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.