Hayward Holdings, Inc.

Good day. Thank you for standing by and welcome to the Huard Holdings Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. In addition, if you require any further assistance, you may press star zero. Thank you. I would now like to hand the conference over to your speaker today, Mr. Kevin Holleran, Chief Executive Officer of Hayward Holdings, Inc. Sir, please go ahead.

Thank you. Good morning, everyone. We issued our fourth quarter full year 2021 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'll reference during this call. I'm joined today by Kevin Harlan, President, Chief Executive Officer, and Afin Jones, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, 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 to release posted on the website and will be provided in our Form 10-K for our full 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 also 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 calculated under GAAP to adjusted EBITDA, 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 10-K for our full fiscal year 2021. I would now like to turn the call over to Kevin Horan.

Thank you, Stuart, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's fourth quarter and full year earnings call. I'll start on slide four of our earnings presentation with some highlights from our fourth quarter results. We had another very strong quarter of growth as we delivered net sales of $352 million, an increase of 35% year-over-year, an adjusted EBITDA of $106 million, an increase of 43% year-over-year. We achieved nearly 170 basis points of margin expansion, returning to greater than 30% adjusted EBITDA margin despite continuation of inflation and supply chain headwinds during the quarter. We were also able to further strengthen the balance sheet in the quarter deleveraging the 1.7 times to support current and future growth investments as part of our balanced capital allocation strategy. The strong fourth quarter results cap an incredible full year for Hayward and its first as a public company. I would like to take this time to acknowledge the entire Hayward team for their tireless efforts to meet market demands despite many challenges. I'd also like to thank our suppliers and trade partners for their support and dedication, which allowed us to achieve incredible growth and strengthened our market position in the very attractive fuel industry. Turning to slide five, the full year we achieved net sales growth of 60% to close the full year at just over 1.4 billion as we executed on the number of growth levers such as smart pad conversion, increased market adoption of new products, and expansion of our customer base, all of which were supported by Hayward's investment in capacity and distribution, resulting in higher output levels and driven by strong secular trends in outdoor living. Record adjusted EBITDA of $422 million was an increase of 82% year over year. Caleb's strategic manufacturing footprint, operational capabilities, and vertically integrated systems are key differentiators, allowing us to successfully operate in periods of high demand and disruption as seen over the course of this past year. In addition to these key differentiators, we were able to navigate effectively through the inflationary environment by successfully implementing pricing initiatives to soften the impact of rising prices across our cost base. All of this combined together has allowed us to not only increase output but achieve significant margin expansion with our adjusted EBITDA margin expanding by more than 360 basis points for the full year to 30.1%. Turning to slide six, I would like to highlight in more detail the drivers of our growth in 2021 and beyond as we expect these drivers to continue supporting sustainable growth across the pool industry. In 2021, we saw our proprietary OmniControl app drive accelerated demand for higher value IoT products, especially in the aftermarket upgrade and replacement markets, which represents roughly 80% of our sales. As demand for IoT products and technologies grow, so does the OmniApps user base as the pool is the centerpiece of the backyard. In the year, we saw our Omni users increase by almost 50% compared to the prior year. We focused our commercial team on channel development and new customer acquisition. This resulted in our total Hayward partners base growing by more than 20% compared to prior year. The growth comes as we introduce field-based business development roles focused on increasing our dealer base and market adoption of Hayward products and broadening our omnichannel capabilities with expansion of our e-commerce platforms. 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 controls, sanitization, as well as energy-efficient pumps and LED color lights, delivering simple-to-use, environmentally sustainable solutions. In Q4, we enhanced our offerings and capabilities with the acquisition of three technology companies, all of which will join our OmniControl ecosystem, thanks to its modern architecture. On slide seven, I'll discuss the powerful SmartPAD conversion taking place in our industry, led by Omni Automation Systems. Omni is at the heart of the SmartPAD, creating the pole for IoT-enabled devices. The power and simplicity of use has driven connectivity of a broad array of technologies, with the top five growth categories in the industry being LED color lights, controls, variable speed pumps, heaters, and sanitization. Hayward's growth in these categories has outperformed the industry. A quick comment on heaters, which has received a lot of attention. As you can see, heaters have grown, but they're not tops on the list. But we do appreciate the role they play in extending the swim season for pool owners by up to 50% in some geographic markets, and thereby they increase the use of all equipment on the pool pad, which accelerates the repair, replacement, and upgrade cycle on those pools. These high-growth products are transforming the way people enjoy their pool and backyard living, and Hayward is leading the way with progressive launches of new products or upgrades to this connected ecosystem. Moving now to slide eight, we focus on a number of key aftermarket conversion upgrade opportunities. For each of the three categories shown, controls, salt chlorination, and variable speed pumps, we compare the take rate at time of new pool construction to the current level of aftermarket penetration. We believe in the premise that existing pool owners, if educated as to the merits of these compelling technologies, would desire the same benefits. Our sales teams are working with trade professionals to promote these exciting new technologies as aftermarket upgrades occur. Moving to the aftermarket to new construction penetration in these three categories alone affords a market opportunity of nearly $6 billion. On slide nine, we build upon the previous slide, which highlights key new technology adoption at the point of new construction or full-scale remodel. These new SmartPad pools, of course, have many other technology choices, including water features, LED color lights, multiple pumps, and heater solutions. The difference between a SmartPad pool and a legacy, lower technology, non-automated pool is typically around $7,000 for the equipment manufacturer. Even a typical pool has a lifetime of around 30 years. and an equipment replacement cycle every 10 years, there's compelling annuity stream associated with the conversion, one which we feel is very positive for our industry, providing future growth. This opportunity is a key focus for our sales and marketing teams as we work with trade professionals to execute the vision. Finally, on slide 10, I'd like to briefly discuss our M&A strategy, which focuses on core pool product or technology tuck-ins, as well as backyard adjacency. We recently closed on three businesses which complement each other and further leverage our Hayward's leading OmniControls technology to increase the ambiance of the pool, spa, and backyard with a variety of novel water features, all of which benefit from our LED lighting technologies. With that, I'd like to turn the call over to Ivy and Jones to discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on slide 11. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased with our fourth quarter results and the continued demand and ongoing adoption for our food products that we have seen throughout the channel, particularly our increasing suite of connected smart pad and lifestyle products supported by continued strong operational performance in a very challenging environment. Net sales for our fourth quarter fiscal 2021 increased $91.7 million, or 35%, to $352.4 million. The increase in net sales was primarily the result of 22% higher volumes, mainly in residential pool equipment, enabled by our ability to demand despite global capacity constraints.

Daily net sales in the quarter of $5.9 million was a record rate, for Hayward.

Net sales in the quarter further benefited from a 14% net price impact over the prior year period, with foreign currency effects approximately flat over the comparable period. Growth profit in the fourth quarter increased to $165.4 million, an increase of $48 million, or 41% year-on-year. Growth profit margin was 46.9%, an increase of 188 basis points. The increase in gross margin is a result of manufacturing leverage on increased output, the initial effect of pricing actions announced in 2021, which were necessary to offset the inflationary pressures in raw materials, freight, and higher import duties, and reduced inventory reserve expense. Adjusted EBITDA increased to $105.7 million in the fourth quarter, representing an increase of $31.9 million of 43%, and an adjusted EBITDA margin expansion of 169 basis expenses. We are particularly pleased with the improved strength of our balance sheet at the end of the quarter, with net leverage reduced to 1.7 times and 5.2 times at the end of prior fiscal year. Now turning to slide 12, I'll discuss our full year results. For the full fiscal year 2021, net sales increased 60% to $1,401.8 million, driven primarily by a 50% increase in volume, mostly due to higher sales of residential pool equipment, an 8% favorable price impact, and a 2%

year-on-year, and core operating equipment grew 48%.

For the full fiscal year 2021, gross profit increased 65% to $655.8 million, and a gross profit margin increase to 46.8% represented an increase of 143 basis points compared to the prior year. primarily driven by higher net sales, manufacturing leverage, favorable mix to stronger growth at higher margin with American sales, partially offset by the inflationary increases from raw materials, print, and higher import duties. We took proactive measures throughout 2021 to address these inflationary pressures, not only through managing price, but by leveraging our manufacturing footprint and disciplined cost management. the result of these initiatives being not only the protection of our structural gross profit margin, but the expansion in this margin in one of the most challenging inflationary periods over the last 40 years. For the full fiscal year 2021, adjusted EBITDA increased 82% to a record $421.7 million, and adjusted EBITDA margin of 30.1%. represented an increase of 363 basis points compared to the prior year. This is a full-year structural margin milestone in our history, and it reflects the tremendous amount of work to improve our sales mix, manage inflationary pressures, achieve operating leverage across our installed manufacturing base, as well as operating expense leverage, and servicing the increasing and recurring aftermarket, which represents approximately 80% of our sales in 2021. I'll now discuss our reportable segment results for the quarter and for the full year. As a reminder, Hayward's operational management structure and strategy resulted in two reportable segments, North America and Europe and the rest of the world. Okay, let's turn to slide 13. In North America, net sales for the fourth quarter increased approximately 40% to $297.6 million. The increase was driven by 24% higher sales volumes, 15% favorable price impact, and 1% favorable currency effect. Gross profit for the fourth quarter increased 42%. to $142.1 million. Gross margin expanded 73 basis points to 47.8%, driven by the net price increase, improved manufacturing leverage, and additional cost savings, partially offset by supply chain conditions. Segment income in the fourth quarter increased 70% to $92.9 million. Adjusted segment income increased 53% to $103.2 million, and adjusted segment income margin increased 300 basis points to 34.7%. Turning to slide 14, for the full fiscal year, North American net sales increased 64%, to $1,160.9 million, resulting from 55% higher sales volumes, 8% of favorable price impact, and 1% of favorable currency effect. Gross profit increased 67% to $559 million, and gross margin expanded 79 basis points to 48.2%. Segment income increased 110% to $359.9 million, with adjusted segment income increased 92% to $396.4 million, yielding an adjusted segment income margin of 34.1%. Let's go to Europe and the rest of the world. Turning to slide 15, for Europe and the rest of the world, net sales for the fourth quarter increased 14% to $54.8 million. The increase was due to 11% higher sales volumes, 7% favorable price impact, partially offset by negative currency effects of 4%. Gross profit in the quarter increased 34% to $23.3 million. Gross margin expanded 630 basis points to 42.5%, primarily given by favorable product mix and volume leverage.

Segment income increased $114 million to $16.4 million. Yielding an adjusted segment income margin, a 29% increase of 540 basis points.

Turning to slide 16, for the full fiscal year, Europe and Western world net sales increased 43% to $240.9 million, comprised of a 33% increase in sales volume, 4% favorable price impact, and 6% favorable currency effect. Gross profit increased 55% to $96.8 million, and gross margin improved 323 basis points to 40.2%. For the full fiscal year, segment income increased 92% to $59.2 million, with an adjusted segment income increased 79%, of $61.1 million, yielding an adjusted segment income margin of 25.4% and expansion of 510 basis points. I'd now like to make a few additional remarks regarding Hayward's financial performance below the gross profit level, which are not covered in the presentation. Selling general administrative expenses during the fourth quarter increased $1.8 million, or 3%, to $60.1 million, primarily driven by increased expenses in distribution and variable compensation as a result of the higher volumes, partially offset by insurance claim proceeds.

Sales SG&A decreased to 17.1%,

a decrease of 532 basis points driven by improved operating leverage. For the full fiscal year 2021, SG&A increased 37% to $267.3 million compared to the prior year period. As a percentage of sales, SG&A decreased to 19.1%, an improvement of 323 basis points compared to the prior year, primarily due to the increased productivity and operating leverage experience. Research development and engineering expenses during the quarter increased $0.5 million, or 9%, to $6.7 million, reflecting continued investment into new product programs for our 2022 launch period. As a percentage of net sales, R&D decreased to 1.9% and 2.4% in the prior year period, For the full fiscal year 2021, RD&E increased to $22.9 million, a 14% increase compared to the prior year period. As a percentage of net sales, RD&E decreased 1.6% compared to 2.3% in the prior year. Operating income increased by $37.7 million, or 90%, to 79%. $1.5 million in the fourth quarter. This increase in operating income was driven by higher net sales and operating leverage, partially offset by increased cost of materials and shipping costs. And for the full fiscal year 2021, operating income increased by $193.4 million to $318 million, or a 155% increase compared to the prior year. Net interest expense decreased by 56% to $8.6 million for the fourth quarter of 2021, and by 18% to $60.3 million, which includes debt extinguishment expenses for the full year 2021. Primarily due to debt repayment in the first quarter of 2021, the 2021 amendment to our credit facilities.

We incurred an income tax expense of

to $6.6 million for the prior year period. And for the full fiscal year 2021, we incurred an expense increase of $41.9 million compared to the prior year.

Our affected income tax rate decreased to 21.7% from 25.1%.

The lower affected tax rate benefited from previously valued foreign net operating losses a benefit realized by the exercise benefit associated with the exit, all of which are considered discreetly.

For the fourth quarter of 2021, net income increased $3.7 million to $63.7 million, and for the fourth-fifth school year of 2021, net income increased 371% to $203.7 million.

As mentioned earlier, net leverage as of December 31st, 2021, was 1.7 times compared to 5.2 times as of December 31st, 2020. This was facilitated by strong cash flow generation to pay down debt, as well as robust growth in our full year. For the full year ending December 31st, 2021, cash flow from operations was $187.5 million. compared to $213.8 million during the prior year period. There was a cash use of $98.3 million for working capital compared to a cash use in the prior year period of $98.8 million. Investing activities for the full year were $48.8 million primarily comprised $26.2 million in capital expenditures and $21.5 million to fund acquisitions. In the prior year, investing activities was $13 million, primarily comprised of capital expenditures. Total liquidity at the end of the year was $394.7 million. inclusive of $265.8 million of unrestricted cash on hand and $128.9 million available on our revolving credit facilities. Given our strong cash flow profile, available liquidity, and consequential reduction in net leverage, below our target range of two to three times, we have the flexibility to fund organic growth initiatives, pursue M&A, and return capital to shareholders. And with that, I'm going to send the call back to Kevin.

Thanks, Ivan. I'll pick back up on slide 17. We remain committed to the importance of ESG to our stakeholders and our business and are driven by our core values. We continue to focus on the energy consumption throughout our operations, as well as making sustainable products a key focus of our new product development roadmap. We are committed to promoting a diverse, safe, and inclusive workplace, and we pride ourselves in our strong company culture and recently completed our global employee engagement review. I'm excited to announce later this year, Hayward will publish its inaugural ESG report outlining our priorities and commitments with associated metrics for the business. Lastly, our commitment to community remains a priority. and we recently became a platinum sponsor of the Step Into Swim charity, organized by the Pool and Hot Tub Association. The association uses its resources to provide swimming lessons and access to pools to underprivileged children who wouldn't normally have these opportunities. The charity's mission is to create one million more swimmers, and at Hayward, we're excited to be part of realizing that goal. On slide 18, we transition to our outlook for 2022. We continue to be very positive about the health of the overall pool industry. Strong secular trends have significantly raised the appreciation for the backyard of which pool is the centerpiece. In addition, we continue to see favorable economic data that supports healthy levels of new residential construction and remodeling activity. These positive economic factors are accelerating growth in both new pool construction and the aftermarket. Early indications suggest new construction grew approximately 25% year-over-year with 120,000 in-ground pools. Our dealers remain bullish about 2022 as they carry strong order files into the new year. An aging pool stock supports future aftermarket sales, which made up approximately 80% of total sales in 2021 as repair, replace, and upgrade makes up 65% of the sales mix. The chart on the lower right reflects the 2021 growth of lifestyle products incorporated onto a smart pad, which outpaced other core products. As referenced in my earlier prepared remarks, we expect this trend to continue into 2022 as a key source of growth. I'll wrap up on slide 19 and discuss our outlook for the full fiscal year 2022. We expect to grow net sales in the range of 9% to 12% compared to 2021, comprised of a combined price and volume growth range of 11% to 14%, including the impact of two fewer trading days in 2022, partially offset by unfavorable FX impact year on year. This guidance reflects strong carryover demand, conversion of current order file, pricing benefits, and ongoing product adoption. We expect to deliver adjusted EBITDA in the range of $460 to $475 million for the full fiscal year 2022, a growth range of 9% to 13% year over year. In summary, we continue to be confident about the underlying demand trends in the market, Hayward's position within the market, and the opportunity for Hayward to expand upon its achievements in 2022 and the years to come. With that, we're now ready to open the line for questions.

Thank you. And as a reminder, to ask a question, you will need to press the star 1 on your telephone. To withdraw your question, you may press the pound key. And please note to limit your questions to one primary and one follow-up. One moment, please, for our first question. And your first question comes from the line of Jeff Hammond from KeyBank Capital Markets. Your line is open.

Hey, good morning, guys. Morning, Jeff. Good morning, Jeff. So just on, you know, the sequential margin improvement, maybe just talk about what were the big drivers and then just on supply chain, what you're seeing there in terms of what's getting better, you know, what's still really challenging.

Yeah, I'll take that initially, Jeff. As you saw in the fourth quarter, we had good volume growth at 22%. We started to see operating leverage come through the business at a higher rate. I'd say furthermore, the price realization in fourth quarter, which we had communicated would come, did come. We realized a collective price impact of 14% from the initiated price increases we'd announced earlier on in the year. There was a little bit of FX headwind developing in the business, but of no major concern for fourth quarter results. I would say in terms of the supply chain.

Do you want to take that, Kevin? Yeah, I mean, either of us can. You know, supply chain, I'd say we've seen some improvement, Jeff, around, you know, steel, some commodity resins, packaging, and we're starting to see a bit of relief on the freight side. Pressure's still pretty high on the broad base of electronic components. Some of the specialty metals, which go into some... You know, salt products for us, and then there are still some resins that are bottlenecking. So that's kind of the landscape from a commodity standpoint on where we're seeing some improvement and still fighting the good fight on some of the others.

Okay, great. And then just maybe on the 11 to 14 kind of volume and price growth, kind of unpack how you're thinking about, you know, kind of market growth, price, and outgrowth in that number. Thanks.

Yeah, I mean, you've heard others in the industry talk about where they see the market growth. We believe our 11 to 14% on our on our base business represents good growth against the PSN. You know, we clearly demonstrated we had outgrown the PSN in 2021 and we believe in 22. That's going to be a continuation of our theme here. In terms of overall price, you know, the majority of the guidance we've given is price year over year. There is some mid-single-digit volume growth at the high end of the guidance range that we gave. But just to be clear, the price guidance that we're giving here today does not include the surcharge that we instituted at the beginning of this year. If that surcharge continues to be necessary in 2022, then we'll update the markets on the inclusion of that surcharge. But at this current time, there is no full year impact to the surcharge in our price guidance.

Okay, thanks a lot.

Thank you. And your next question comes from the line at Nigel Crow from Wolf Research. Your line is open.

Thanks. Good morning, everyone. I was going to kick off with the price-volume mix question as well. But I just wondered, so it looks like at the low end, you're baking in no volume mix. I'm just wondering, I don't know if you can get specific here, but would it be down volumes, unit volumes, up mix? any kind of them. And the reason I'm asking is because, you know, you had a pretty strong dealer conversion in 2021, and I'm thinking that you probably get some benefit from that in 2022. So it seems like share gains are reasonable, but just wondering, you know, how you think about that.

Yeah. No, let's talk about that. I would say, firstly, in the 11% to 14% combined price volume, even at the low end, there is positive volume growth year over year. And as I just mentioned, at the upper end of the range, volume growth is close to mid-single digits. So we are expecting another growth year volumetrically in 2022 over 2021, recognizing we just completed a business increasing our volume in 2021.

And so communicating good volume growth coupled with sound price on the top line and, you know, double-digit growth at the midpoint of our guidance coming off the year we did last year, I think is a very encouraging initial view of 22.

Yeah, no question about it. In terms of things about, you know, how we enter the year, I'm guessing it's going to be a little bit symmetrical to a rather mirror image of last year. Just wondering, you know, how you've gone in impacts from the Texas storm last year when you compared it and talked about that as a factor.

Just wondering, you know, what impact you're seeing from that. Yeah, I mean, Texas certainly benefited, you know, us and the broader industry, Nigel.

We haven't really quantified that publicly, but it really wasn't just a one-year thing. I think that it will necessarily done the complete upgrade to those pads. So I don't necessarily think it's just a one-year phenomenon. Our volume guidance has lots of pluses and minuses in it. We've accounted for the Texas situation You know, to whatever extent we'll step over that and continue to post volume growth in 2022. Now, as you say, you know, the year starting out pretty similar to 2021 with some elevated backlogs, you know, starting the year. And we're working hard to converse that backlog, you know, into product in the channel. and for our dealer networks.

Okay. I'll leave it at that. Thanks a lot. Thanks.

And your next question comes from the lineup. Brian Lee from Goldman Sachs. Your line is open.

Hey, guys. Good morning. Thanks for taking the questions. Maybe just shifting gears a little bit to the margin side of things, Europe and rest of world margins, I might have missed this, but quite a bit higher than you've been trying.

tracking at historically and through the balance of 21.

I know there was maybe a reversal of an insurance settlement that helped, but even if you strip that out, it seems like segment income margins were quite a bit higher than normal and sort of in the same range of the Americas. How should we think about that? Kind of what were the drivers in 4Q? And then as you think about 2022 guidance, sort of what's embedded in that in terms of margins for that particular segment?

Yeah, it's good. I mean, we're very pleased with the way that the European and rest of the world margins are beginning to develop.

Recognizing that in Europe and rest of the world, there is a bit of a mix of business. You have continental Europe, Australia, and our export business out to the Middle East and the Mediterranean region. And it's that latter business, that Mediterranean business, that really has a good strong margin profile attachment to it. And we started to see activity improve throughout the latter half of last year as those markets began to open up. And so they contributed to a mixed positive effect into the margin. But generally speaking, there are some other structural benefits to the European market, the local manufacturing base. and they've obviously got clear cost control coming through their income statement. So we've always said that the aim here is to close the margin in our Europe and rest of the world closer to the North American, and we were very pleased with the way they stepped forward in the quarter to post up close to 30% adjusted segment income margin in the quarter and for the year now trailing up into the mid-20s, which is good to see. In terms of how they look for For 2022, again, it's another progressive step in margin development in 2022. Their price actions, price management policies will continue, and we expect them to take another step up in 2022, albeit it will be more moderate than we saw in 2021.

Okay, fair enough. I appreciate all that, Collier. And then maybe just kind of a bigger picture question. We're hearing pockets of labor availability issues. What are you kind of hearing on the ground with respect to dealers and if that's going to be any incremental headwind as you kind of move into this year?

It's a great question. I just look backwards first, Brian, to say that I think the industry did a great job of expanding capacity in 2021 for us as an industry to have, you know, grown 25%, give or take, in new pool construction operating in the backyard. You know, we know that our dealers are continuing to look at capacity expansion to be able to meet this homeowner demand for new pools as well as remodels, which we haven't really touched on in the call here, but it's really much the same for those projects. um and we are we are optimistic based upon what they're what they're reporting back that they're going to be able uh to find labor you know it wasn't that long ago that we were building a lot more pools i think those contractors found their way into other professions and uh and our dealers are are trying to bring them back to be able to meet this uh this surge in demand so we know the effort's being put in, and we as an industry are confident that they'll be able to continue meeting this demand.

All right. Thanks, guys. Appreciate it. Thank you. Thanks, Mike.

And your next question comes from the lineup. Mike Holleran from Baird, your line is open.

Hey, good morning, everyone.

Good morning. First, just on the case, price discrepancies as you think about growth in the first half versus growth in the second half?

Yeah, we are beginning to see a somewhat of a return to normal seasonality as we step into 22. I mean, typically Q1 and Q3 are the lower season buy-in periods for the channel. We've entered 22 with a very strong order file. We're concentrating in Q1.

in our production units to fill out some of the holes on certain product lines that the channel is demanding right now.

We do see and expect a strong volumetric period in Q2.

And then we'll see how the balance of the develops as we get into that time period.

But sentiment remains strong. as we've started the year here.

And second question, you know, inventory levels in the channel are at least a little closer to normal, backlogs to record levels. Maybe just reconcile those two. What do you think it means? Is it a risk from a cancellation perspective, or do you look at this more as just really good visibility as you work through the year and it says more about underlying demand?

I think it's more of the latter, Mike. I think it's a very credible order file. There's been plenty of price increases that we've had to announce into the industry. We ran kind of a modest early buy last year. If the channel was feeling as if they had too much or were unhappy with their inventory turns, I think there was opportunity for them to to slow the bookings or even cancel. And we've seen negligible cancellations through those time periods. So we feel very good about the credibility of that order file. As for inventory levels, they are getting back. to more normal levels. Good turns on it. We don't think it's elevated. But what I will acknowledge is, you know, I think that there's some shortages of some particular skews that we'd like to be able to solve. And we're working hard here the beginning part of 2022 to try and rectify that, you know, whether it's some salt or other products, we know that it's not a perfectly balanced inventory from a SKUs standpoint, but we're working hard to solve that.

Appreciate it. Thank you. Sure.

And your next question comes from the lineup. Ryan McCall from William Blair. Your line is open.

Hey, guys. Just wanted to follow up on a couple things. So first, you mentioned the surcharge that you put through in early January. That's not in the guide. If you did get that, how much would price be up in 2022 for the full year?

Well, we talked about the surcharge. We instituted an 8% price increase on core SKUs and slightly higher on specialty SKUs. That 8% is bifurcated between price list increase of 4%. and an additional 4% surcharge. So the majority of that lack of 4% is not included within the guidance.

Got it. Okay. So it sort of sounds like if you get that, price could be up somewhere in the 10% range for the full year. Is that the right ballpark?

Yeah, and if you look at the combined guidance, that would give you 11% to 14%. With that additional price, yes, it would be at that level or slightly above.

Okay. And then at the low end, volume up low single digits feels pretty conservative to me. How do we square that up just with the order file, you know, mix being positive, share gains?

Yeah. I was going to say, I think you're right, Ryan. I mean, look, we've got a level of conservatism built into our forecast here. We feel very positive about the start of the year. To your point, there's still a very strong waterfall that we have on the business right now. As we step into the primary season period of Q2, we'll get a better read on how the balance of the year is building, but it's fair to say that the guidance we're given right now does have an element of conservatism. We don't want to get ahead of ourselves right out of the gate here, but We'll update you guys as we get through our Q1 and into Q2 visibility.

Got it. You know, I get it, too. Weather is always a wild card, so I'm going to see what we get there. But last one, just quick. Are you assuming any channel load in the 22 guide?

We are not. Over the exiting of 2021, is that the basis of your question, Ryan?

Yeah.

Yeah, no, we're really not calling for – At this point, additional inventory in the channel at year-end 2022. We'll see how the year plays out. If retail demand and pull-through continue on the robust pace we've seen the last two years, in absolute terms, there could be some increase to support the forward-looking days on hand. But at this point, we're not assuming additional channel load.

Thank you. And your next question comes from the line of Josh Bukrewinski from Morgan Stanley. Your line is open.

Hey, good morning, guys. Good morning. Just on the slide eight, I think it was, looking at the aftermarket installed base penetration out there in the field, but how's that look in terms of the penetration or the mix on current sales? Like, are we...

already add a decent one rate on on what's going through today um or does that have a lot more room to to move higher as well I think that salt has has additional uh growth opportunity to it to it Josh you know uh kind of thinking up slide seven and eight you know salt certainly grew um you know it's kind of the fifth largest growing category last year um you know, which was great for the industry. It's a great experience for the pool owner. But I do think that that particular product has some additional convergence opportunities for it to start inching closer to this take rate at time of new construction.

I'm further on that. I'd further add that we're continuing to invest in our R&D progress, specifically around sanitization, and we're introducing a new low-salt product that will continue to fuel our growth in that particular category.

That's good. Any sort of way you could dimension out how that mix has evolved here over the past, you know, call it year or two, you know, maybe relative to those kind of, you know, 30%, 35% installed base penetration numbers. Again, talking about where your own kind of sales run rates are on that mix. Like, is it doubled? Has it gone up by 10 points? Sort of order of magnitude would be helpful.

You're talking R-specific growth in that salt category?

More about, like, the product mix. So if the, you know, kind of the higher spec stuff, you know, across those various categories was, you know, 30% in 2019 or 2020? Is it 50% today? Is it 80% today? Just looking at it from that perspective. But, you know, however you want to phrase it would be helpful.

Yeah, I would say in general that we're seeing kind of a mix up when it comes to, you know, these more lifestyle products. You know, people are, with the introduction of the Omni system, that is absolutely pulling along some of these higher feature IoT sustainable products along with it onto the pad. So, you know, I would say over the last couple of years, we've absolutely seen kind of a mix up, higher performing, higher price SKUs being installed on the pads.

Got it. And then just since it pertains to kind of the, some of this off season activity, you know, early buy channel load, however you want to look at it. I guess what distinguishes that from, you know, in your mind, just sort of like a normal sale. Cause I think we normally associate early buy with something a bit more kind of promotional on the pricing front, which clearly isn't happening. So is this just folks wanting to add inventory or, to make sure they're not scrambling in April? Or was there some other sort of distinction, whether it was on price or payable terms or something else that would kind of make this early buy specifically?

Yeah, I would say early buy in general this year was really targeted by us for two things. The seasonal markets, we have sufficient product on the show.

shelf for when spring broke this year.

Secondly, we wanted to make sure we had as good a market visibility on some new products that we didn't have much history on yet. so that we had their input and could build accordingly so that we were prepared for what the market acceptance was going to be early in these new products evolution. So it was a much reduced skew count this year, Josh, and from a terms and a pricing discount, also very much curtailed from a historical standpoint. because of the order file that already existed in our possession. Got it. That's helpful.

Thanks. I'll leave it there.

And your next question comes from the line up. Your line is open.

Hi. Good morning. Thanks for taking my question. Sure. Hi. Can you update us on your mix of R&R compared to new construction, where it is today compared to historical periods? And then within R&R, how much is major renovation compared to break and fix? And then how would you expect that to trend in 2022?

Yeah, I would reference back to slide 18, Rafe, in the lower left corner. We tried to preemptively... address that. New construction based upon the growth in the aftermarket, while it grew 25% and we had a nice share in that growth, it actually reduced in the overall mix from more of a 25% historically to more of a low 20% of our mix. So high 70s, we're rounding off to call it 80%. is the aftermarket. And we really do break that into a couple different categories. First would be remodel, which I'm not going to say it's been ignored, but it certainly has not gotten the amount of attention the last couple years as it has historically as contractors have been more focused on the new construction. So that's call it 13%, 15% or so. And then the balance is really all around this broader repair, replace, upgrade. And we're starting to see, you know, much more upgrades, adding some new products that never existed on the pool pad before, whether that's salt, whether that's a UV ozone product, a heater, for example, where they were operating the pool, you know, for years, but they've added that. What we're also seeing is when it's time for replacements, you know, most of the time people are actually going for a more current generation, which will be a higher priced, higher performing, a higher feature product, which is beneficial, you know, to us and to the industry. So that's really how we look at the various revenue streams in our business between new kind of low 20% and the balance of it all being around the aftermarket.

Just following up on a point you just made, I think the contractor backlog for new pool construction, it sounds like it stretches out maybe even into 2023. How do you think about that for major remodel as well?

Yeah, I think, you know, the remodel, I don't know when we're going to tap into that, but I think the industry has – That's an opportunity for future growth. I don't think homeowners really want to shut the pool down and lose access to it. So it's as much the homeowner holding back on that as that pool stock is now at a historic high in that 22, 23-year range, as well as I think most contractors are turning their attention to new construction because, frankly, it's a little bit of an easier project for them to start now with a with a pristine, you know, a lawn in the backyard and put a new pool in as opposed to tearing something down and rebuilding it. So I think that this will be an opportunity that the contractors in the industry will be able to mine in the in the out years.

And then one final quick one on price. the 14% price increase in 4Q, and it sounds like maybe in the 10% range for 2022. Can you talk about what's embedded for like-for-like price increases compared to the mixed benefit of shifting to some of these higher price categories?

I'd say still the majority of the price increase is associated with real price index announcement. There is obviously a favorable trend price mix effect built in there. A quick reference point, an easy example there is variable speed bumps. Year over year, we're going to take the full 12-month benefit of the variable speed bump inclusion, whereas we only took half of the year in 21 with variable speed bumps, which is a higher price bump in comparison to its predecessor single speed bump. But still, the short answer is the majority of the price increase that we've indicated is price index.

Thank you. And your next question comes from the line up like a call from Wolf Research. Your line is open.

Oh, thanks for the follow-up. Actually, my question was actually around bevel speed comps. Just wondering where the mix is, the way you see that mix in 22 versus 21. And I'm just curious, any intel on what the mix of the installed bases of single speed versus barrel speed is?

So, clearly, when you think about the pump category as a whole for us, in 21, pumps represented about 12% of our overall product line. There was still, as you know, about a half a year worth of single-speed, non-compliant business in there prior to the legislation change or the regulation change in mid-year. you know, like-to-like, a pump is a pump, but the quality of the pump sale in 2022 will be higher. So we do expect a mix-up of pump activity. We'll actually take it up to about 13% of our overall sales volume in 2022, just based on natural growth that we've indicated. In terms of value, we expect the business to also grow about 1% in overall mixed impact from the high value variable speed pumps. And the installed base? So I actually don't know the answer to the installed base of variable speed pumps across the pool pad today. Kevin?

I think it's about 30. It's about one in three, I would say, Nigel. OK. Variable speed. So, yeah, we've enjoyed a long history of single-speed success, and we're very excited that the industry is converting to a higher-priced, more efficient variable-speed option. Great. Thanks. Sure.

Thank you. And we have reached the end of our Q&A session. I would like to hand the conference back to Mr. Kevin Halloran for the closing remarks.

Great. Thanks, Ludi. In closing, I'd 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 growth for all stakeholders in 2022 and the years ahead. Please reach out to our team if you have any follow-on questions, and we look forward to talking to you again about our Q1 performance during the week commencing April 25th. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.