Hayward Holdings, Inc.

Good morning and welcome to Hayward Holdings first quarter 2022 earnings call. My name is Austin and I'll be the moderator 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 one 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. Good morning, everyone. We issued our first quarter 2022 earnings press release this morning, which has been posted 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 Holland, 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, 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 and certainties 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 first quarter of 2022 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 calculated under U.S. 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 10Q. I'd now like to turn the call over to Cameron Holman.

Thank you, Stuart, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call. Near the end of the quarter, we celebrated our one-year anniversary as a public company. I'd like to personally thank our employees, dealers, channel, and vendor partners for making this inaugural year a great success. As I look back over the last 12 months, we have many accomplishments to be proud of. We have executed on key strategic initiatives and made investments in our product portfolio, both organically and through M&A that have advanced our reputation as the innovative market leader in technology. We significantly strengthened Hayward's position in the market by leveraging our supply chain advantages and vertically integrated production model. This has proved especially beneficial in the current environment, resulting in share gains. The hard work of our teammates across our global organization have led to consistently strong financial and operational performance. We look forward to many years of success as a public company as we continue to build a track record of performance and strive to create meaningful value for all our stakeholders. I'll start on slide four of our earnings presentation with some highlights from the first quarter. we delivered another very strong quarter marked by net sales growth of 23% year over year to a record 410 million net sales, which was on top of an exceptional growth of 96% in Q1 of 2021 over Q1 of 2020. Adjusted EBITDA grew 18% year over year to a record 126 million, yielding a 31% margin. As outlined on slide five, Our performance continues to be driven by our ability to execute on the core drivers of growth, digital leadership, conversions, new products, operational excellence, broad channel access, and environmental sustainability. Importantly, we have a wide range of factors supporting our growth, and this diversification gives me confidence as we look to expand our business in the years to come. I'll provide more detail on some of these items as we move through the presentation. But first, let me address a key pillar of our success, that being our operational excellence. Our vertically integrated operations and our procurement expertise have provided greater supply chain flexibility, giving us the ability to increase output while maintaining the recent improvements to our structural margin profile. Our focus on operational excellence allows us to ensure product quality and availability despite the operational and logistical challenges most companies are experiencing. We're also pleased to report the opening of a new facility in Europe focused on automation and sanitization technologies that will help us to expand our sales in region through the more than doubling of production capacity in these product lines. On slide six, I'll focus on our IoT digital leadership driven by the powerful smart pad conversion taking place in our industry led by our Omni automation systems as well as highlight the breadth of our product offering. Omni is at the heart of the smart pad, creating the pole for IoT enabled devices. Our adoption rate continues to improve with a user base increase of 45%. 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 continues to outperform the industry, supported by recent new product launches, including ColorLogic LED lights, OmniPL controls, XC variable speed pumps, small footprint universal gas heater, and AquaRite S3 chlorine salt generator, all of which have increased our new product vitality index by 37% year over year. Our complete offering provides diversification allowing us to fully participate across our key end markets of aftermarket upgrade, repair and replace, remodeling, and new pool construction. Moving to slide seven, I'd like to highlight that an important part of our growth strategy is the aftermarket conversion upgrade opportunities for digital, chemical, and energy. There is a significantly higher take rate in new pool construction compared to the current level of aftermarket penetration for key products such as controls, salt chlorination, and variable speed pumps. Our sales teams are working with trade professionals to promote these exciting new technologies as aftermarket upgrades. We have seen greater dealer acceptance as evidenced by our greater than 20% growth in our Totally Hayward loyalty program participation. We see this as a $6 billion incremental market opportunity by simply increasing the aftermarket penetration in these three categories to the new construction levels. On slide eight, we highlight the initial spend for new key technology adoption at the point of construction or full-scale remodel and the aftermarket lifetime revenue stream. The difference between a smart pad pool and a legacy lower technology non-automated pool is typically around $7,000 for the equipment manufacturer And the technology feature rich smart pad provides compelling sustainability and energy efficiency benefits to the end user. Given a typical pool has a lifetime of around 30 years and an equipment replacement every 10 years, there is compelling lifetime value stream associated with this conversion. One which we feel provides a long runway for growth. This opportunity is a key focus for our sales and marketing teams. as we work with trade professionals to execute the vision. On slide nine, I will briefly discuss our M&A strategy, which focuses on core pool product or technology tuck-ins, as well as backyard adjacencies. You'll recall that we announced at the beginning of the quarter the closing of three strategic tuck-in acquisitions, which have compelling technologies and further leveraging Hayward's leading omni-control solutions to increase the ambiance of the pool, spa, and backyard with a variety of novel water features, all of which benefit from our leading LED lighting technology. We are making good progress integrating these businesses into the Hayward family and are excited about the contribution they will make to help increasingly differentiate our leading lifestyle product portfolio. We would expect these products to be fully launched across Hayward Channel partners in second quarter with further product releases in time for the 2023 pool season. As we look forward, we have a strong pipeline of opportunities that we are pursuing, and acquisitions will continue to be an important component of our capital allocation. With that, I'd like to turn the call over to Ivy and Jones, who will discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on slide 10. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased to report record results in the first quarter of 2022, driven by the continued adoption of our pool products that we are seeing throughout the channel, particularly our increasing suite of omni-connected smart pad and lifestyle products, supported by healthy aftermarket adoption and improved operational capabilities with excellent production results in the quarter. Net sales for the first quarter increased 23% to $410.5 million. The growth during the quarter was driven by 17% price realization, 7% positive volume growth and mix, partially offset by a 1% unfavorable impact from foreign currency devaluation. The net price impact over the prior year period reflected the accumulative impact of our previously announced price increases to mitigate the escalating inflationary cost pressures. Sales volume growth continues to be driven by demand for pool equipment, both in new construction and, more importantly, in the aftermarket. Volume growth was achieved in North America, with Europe and the rest of the world muted by the geopolitical circumstances in the region. Gross profit in the first quarter increased to $190.4 million, an increase of 19% year-on-year. Gross profit margin was 46.4%, a decrease of 144 basis points, primarily resulting from inflation pressure in certain commodities and freight costs, as well as unfavorable foreign currency impact. Our pricing initiatives and supply chain capabilities have been successful in maintaining the structural margin profile of our business, but we are navigating a challenging and lengthy inflationary cycle. We remain confident in our ability to operate in this environment and have implemented a price surcharge at the beginning of the year to help mitigate the impact of inflation, and we're evaluating the need for the surcharge to remain in place and further price increases as inflation persists. Selling general and administrative expenses during the first quarter increased 4% to $68.9 million, primarily driven by increased expenses in distribution, warehousing, and marketing, as well as increased regulatory costs as a public traded company, and bad debt expense, which included write-offs for Russian-owned customers. This was partially offset by lower incentive compensation compared to the prior period, which also includes stock-based compensation expenses in the prior period related to the IPO. As a percentage of net sales, SG&A decreased to 16.8%, a decrease of 312 basis points, reflecting the leverage we have achieved as the business has grown. Research development and engineering expenses during the quarter increased 8% to $5.2 million, reflecting continued investment to support business growth and product development. As a percentage of net sales, RD&E was 1.3% compared to 1.4% in the prior year period. Operating income increased 34% to $106.4 million in the first quarter, This increase in operating income was driven by higher net sales and conversion to profitability. Net interest expense decreased 48% to $9.6 million for the first quarter compared to the prior year, primarily due to debt repayment and lower interest rates as a result of the second quarter 2021 amendment to the credit facilities. During the quarter, we incurred an income tax expense of $23.3 million compared to $15.2 million for the prior year period. Net income increased 101% to $74 million. Adjusted EBITDA increased to $126.2 million in the first quarter, representing an increase of 18% as a result of the higher net sales and operating income. Adjusted EBITDA margin decreased to 30.8% or 134 basis points compared to the prior year period. The decline in margin is primarily due to the inflationary impact from raw materials, freight, and labor as a result of higher demand and supply chain constraints. Now I'll discuss our reportable segment results for the quarter. As a reminder, Hayward's operational and management structure is aligned to its key geographies and go-to market strategy, resulting in two reportable segments, North America and Europe and the rest of the world. Beginning on slide 11, North American net sales for the first quarter increased approximately 28% to $346.3 million. The increase was primarily driven by a 19% favorable price impact and 8% higher sales volumes. Gross profit for the quarter increased 21% to $163.1 million. Gross margin decreased 252 basis points to 47.1 percent due to the stubborn inflation in raw materials and freight. Segment income increased 27 percent to $108.6 million. Adjusted segment income increased 19 percent to $114.2 million, while adjusted segment income margin decreased 231 basis points to 33%. Turning to Europe and the rest of the world on slide 12, net sales for the first quarter increased 2% to $64.2 million. Net sales benefited from approximately 8% net price increase, but were partially offset by a negative 6% unfavorable foreign currency impact. Volume was muted due to the geopolitical circumstances in Europe at this time. Gross property in the quarter increased 8 percent to $27.3 million. Gross margin expanded 246 basis points to 42.6 percent, primarily driven by favorable price increases and favorable product and customer mix. Segment income increased 14 percent to $17 million. Adjusted segment income increased by 16 percent to $18.4 million. yielding an adjusted segment income margin of 28.7% or an impressive increase of 354 basis points. For the first quarter, cash flow from operations was a use of $56.9 million compared to a cash use of $131.6 million during the prior year period. There was a seasonal cash use of $145.7 million for working capital compared to a cash use for working capital in the prior year period of $201.2 million. Despite the higher sales in the quarter, the seasonal cash use for working capital was reduced from the prior period due to a limited early buy program for the 21-22 season in comparison to the prior early buy programs. Investing activities for the first quarter was $7.5 million, primarily comprised of capital expenditures, In the prior period, investing activities were $4.6 million, similarly primarily comprised of capital expenditures. Net debt to adjusted EBITDA for the last 12 months was two times compared to 1.7 times as of December 31st, 2021. The increase in leverage reflects the cash use to support the seasonal working capital requirement and the share repurchase, which was completed in the first quarter of for $81 million. Total liquidity at the end of the first quarter was $443 million, inclusive of $118 million unrestricted cash on hand and $325 million availability on our revolving credit facility. And with that, I'll now turn the call back to Kevin.

Thanks, Ivan. I'll pick back up on slide 13. At Hayward Environmental, Social, and Governance, or ESG, has always been important to us, and we know that it's important to our shareholders as well. We've continued 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 strive to promote a diverse, safe, and inclusive workplace, and we pride ourselves in our strong company culture. As a recent public company, we have partnered with a third-party expert to conduct a materiality assessment and identify where we have the most impact across key ESG themes. The results of this materiality assessment have shaped the framework to guide our strategy focused on four key pillars, products, planet, people, and principles. Under the oversight of our nominating and corporate governance committee of the board, we will be working to make a difference in these areas as we continue on our journey. More recently, we initiated a global ERP conversion project to standardize systems worldwide. We are also pleased to report continued progress on the governance side with the nomination of Ed Ward as an independent director to the board of directors subject to stockholder approval at the 2022 annual meeting of stockholders next month. As president of the client product group of Dell Technologies, Ed brings deep expertise in technology and leadership and we look forward to adding his skills and expertise to the board and nominating and corporate governance committee. We look forward to sharing our progress and welcome stakeholder feedback on our overall approach. On slide 14, we transitioned to the sustainable trends supporting our outlook for 2022. We are very positive about the long-term health of the pool industry. Strong secular trends have significantly raised the appreciation for the backyard of which the pool is the centerpiece. In addition, we see favorable economic data that not only supports healthy levels of new construction, but even stronger aftermarket activity. While we are closely tracking macroeconomic trends, such as elevated inflation, rising interest rates, along with geopolitical developments, our business continues to expand. We remain focused on the aftermarket opportunity and aging installed base presents, which made up 80% of our total sales in 2021 as upgrade, repair, and replace made up 65% of this sales mix. Growth of lifestyle products incorporated onto an Omni smart pad has outpaced other core products, and we expect this trend to continue as a key source of growth. And finally, new pool construction growth was healthy in 2021, but remains well below historical median levels. I'll wrap up on slide 15 and discuss our outlook for the full fiscal year 2022. We are off to a good start to the year with strong performance in sales and profitability during the first quarter. Despite some broader macroeconomic uncertainty in the second half of the year, including ongoing supply chain and inflationary pressures, we are pleased to affirm our guidance for net sales growth in the range of 9 to 12% compared to 2021. This is comprised of a combined price and volume growth range of 12% to 15%, partially offset by FX and one less trading day in 2022. We also expect adjusted EBITDA to be in the range of $460 million to $475 million for 2022, representing growth of 9% to 13% year over year. As I look at the longer-term health of the market, we see positive demographic trends increased focus on the outdoor living space, an aging pool stock, and the ongoing conversion towards IoT smart pad pools. While the current dynamics of the macro environment are evolving, we see home price appreciation and new demographics entering the housing market, particularly in year-round markets. With approximately 80% of sales tied to an aging existing pool base, the growth in new construction over the last two years provides a visible runway of growth. Finally, our ability to develop technologically advanced and environmentally sustainable products, driving pool owners to upgrade their existing pool pad to Omni smart pad, further strengthens growth opportunities in the aftermarket. In summary, we continue to be confident about Hayward's position within the market and the opportunity to expand upon our achievements in 2022 and the years to come. With that operator, we're now ready to open the line for questions.

Thank you. As a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by 2. Again, to ask a question, it is star 1. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from Jeff Hammond of KeyBain Capital Markets. Jeff, your line is open.

Hey, good morning, guys. Good morning. So just on the guidance, I wanted to just clarify on, like, how you're thinking about the surcharges, because I think you didn't have that 4% in. I don't know if you're including that. And just on that topic, you know, is the thought to kind of change those to price increases or and have those stick? Just an update there.

I would say, you know, as for the second part of the question, Jeff, the longer these surcharges stay in place based upon the inflationary pressures that we, you know, hoped were more transitory when we implemented them, the longer we have the need for them, the greater the likelihood is that we'll roll that into the structural price lists. Having yet done that, we still are doing it on a month-to-month basis, but the inflationary pressures are not abating. In fact, we felt more inflationary pressure through Q1 than prior price increases had necessarily contemplated.

Yeah, Jeff, in terms of the first part of your question, no, the guidance does not consider the balance of year inclusion of the surcharge. But again, as Kevin just mentioned, it is evaluated month-to-month.

Okay, so I guess with the strong start of the year and, I mean, I guess the view that there's probably more pricing in there, is the offset you're lowering, you know, your volume assumptions within the guide? Or, you know, what are the moving pieces? Thanks.

Sure. I mean, in terms of the guide, we're still looking for a high single-digit growth year-on-year for price in the balance of the year. Certainly, FX is a headwind, more so against the euro than the other currencies, the Australian dollar and Canadian dollar. But FX is certainly more of a headwind than we originally thought coming into the year. In terms of volume, we're still looking for – good volume growth in the balance of year. It is, as we mentioned previously, for the full year, mid-single digits, and it's a little bit lower for the balance of the year than that, given the good start of the year.

Okay, and then just if I could sneak one in, just any change, better or worse, in supply chain or freight dynamics?

You know, we were It's a complex question because there's a lot of moving parts, as you know. I would say we were really seeing some nice improvement in material flow around some critical components. We were seeing some improvement to some specialty metals that go into our sanitization product and even some components that go into our variable speed pumps. They continue to be at elevated levels, but I'd say as the quarter progressed and even as we turned into Q2, The shutdowns, the quarantines in China, the port congestions in Shanghai and other ports have certainly increased pressure on material flow and some of the pricing dynamics. So I'd say overall it feels like we're incrementally better than we were in the second half of last year, but this feels like it's a week-to-week or a month-to-month process right now, Jeff.

Okay. Thanks, guys.

Thank you.

Our next question is from Rob Wartimer from Nellius Research. Rob, your line is open. Rob, your line is open. You may proceed.

Austin, why don't we try the next one in line. Maybe Rob can come back. OK.

Our next question is from Ryan Merkle of William Blair. Ryan, your line is open.

Hey, guys. Thanks for taking the question. Hey, Ron. First off, just high level, are you seeing any signs of consumer spending slowing down or any cancellations in the order file? I guess I was a little surprised you didn't raise the bottom end of guidance here.

We really haven't seen any kind of cancellations. We're in pretty close contact with both channel partners and our And our dealers and the work on the books and new lead generation both remain strong despite plenty of price increases. And obviously, the channel inventory position has gotten better. We're in a much better position going into the start of the season in 2022. So, no, we're still seeing robust growth. demand and the order file on the books is still very strong and seems to be pressure tested and products going to be installed in the backyard.

Got it. It's great to hear. And then my second question is on gross margin. Sounds like inflation is running a little bit hotter, as you mentioned. So are you still going to see year-over-year gross margin expansion in the second quarter?

Yeah, Ryan, it's Ivan. We would expect that. I mean, we've, as we mentioned before, our pricing actions, three of them accumulating up to over 20% coming into the year. We did make some concessions on price with certain fixed price arrangements. Those roll off pretty much at the beginning of Q2. So we will get a higher price contribution in Q2 than we did in Q1, and that should be margin accretive. Perfect.

Thanks, guys. Pass it on.

Our next question is from Brian Lee from Goldman Sachs. Brian, your line is open.

Hey, guys. Good morning. Thanks for taking the questions. Maybe first one, just to follow up to the prior question, gross margins up into Q, pricing actions reading out. I understand all that. But if I back into, I guess, the midpoint of EBITDA guidance and the midpoint of revenue guidance and incorporating the strong start to the year in Q1, it implies – EBITDA margins kind of flatline to our down 50 to 100 bps for the rest of the year. So is something else happening below the gross margin line where you're not reading out some better EBITDA margin expansion metrics later into the year, or is that something we just see into the second half, per se, on EBITDA?

Yeah. Good question. I mean, what we'd say is we're really pleased with the start to the year, a great margin in Q1, higher than the full year last year. It's fair to say that the macroeconomic climate, both in the U.S. and maybe a bit more particular in Europe and the rest of the world, is a bit more difficult than where we had started the year. It's something we have to deal with. And we remain cautious about the second half of the year. We want to see the 2022 pool season complete out strong, and every indication it is strong. But we'll get a view then on the start of the new 2023 season as we get to the end of Q2 this year and into Q3. I'd say the underlying growth drivers remain very strong. Secular trends remain strong, as Kevin mentioned, and everything is pointing to strength in the industry and strength there. for Hayward. So in terms of our guidance, it really reflects just a cautionary view on how the second half may develop. As I said before, price is still in the high single-digit growth year on year before the continued implementation of the surcharge. FX is a headwind. But in terms of the structural margin of the EBITDA line in the second half, it does represent a little bit of view of caution given the current climate. But, you know, we feel good about where we're at, and we'll update you guys as we come out of Q2.

Okay, great. Yeah, that makes a lot of sense. And then just one more question from me, and I'll pass it on. I might have missed this. I hopped on late. But can you kind of speak to where you're seeing – pool builder, you know, backlog trends, maybe, you know, I think in the past you've quantified those. And are you seeing any sort of shifts in this environment with, you know, mortgage rates going up and maybe some additional pressure showing up in the new home part of the market? Just any high-level commentary around, you know, builder trends? Thank you.

I'd say what we're hearing is still a really strong book for 2022. Most builders are quoting out into 2023. A recent report published by PK Data had a lot of interesting statistics in it. that I really focused on was this increase in time between a homeowner signing and until the job starts and the shovel is put in the ground. That has increased appreciably. I think that speaks to certainly the labor constraint that we're still dealing with. That said, the industry has grown kind of 20-plus percent in new construction each of the last two years. And based upon what we're hearing, Brian, the interest is still there. The demand is still there. You know, but there's a lot of things maybe out of our control that factor into that, not least of which is, you know, labor, weather, and, you know, some of this interest rate and inflationary pressures that, you know, most of the world is feeling right now. But we feel that there is still wind at the industry's back from a new construction standpoint. You know, I'll just pivot for a moment and say, you know, we've touched on this and others in the industry have. If there is any kind of a slowing on new construction, we feel very confident in saying that the full-scale remodels have really been pent up and they've been pushed to the right over the last couple of years as labor and contractors have really focused on new construction. So I think there's a strong potential offset for the industry if new was to start slowing down. But We continue to look for the aftermarket that fuels our growth. Approximately 80% is aftermarket driven, and frankly, that's going to determine our success and the industry's success more than new construction.

Yep, absolutely. Thanks a lot, guys. Appreciate it.

Thanks.

Our next question is from Rob Wartimer from Mellius Research. Rob, your line is open.

Hi. Good morning, everyone. Sorry about the confusion earlier. My fault. No problem. Morning, Rob. Morning, Rob. So you've touched on this a couple of times, but I just wanted to go back to it. There's obviously a lot of consternation out there about rising interest rates, et cetera. What are your thoughts on what you just mentioned, Kevin, on the 80% of the business that's not a new bill, that's more steady? Any sensitivity to you know, refis or, you know, home equity loans or, you know, maybe a consumer's higher end and you haven't seen historically that kind of sensitivity. I don't know if you have any guideposts for us to think about that core of the business.

You know, I would say that what we're seeing on the, really on that aftermarket pull through is, you know, it's a different decision for someone who has a fool in the backyard already that's looking to add a piece of equipment that maybe didn't exist or to upgrade an existing piece for greater functionality or sustainability or enjoyment in the backyard. So, again, with that driving 80%, and that's not a full new pad necessarily. We feel very comfortable that even in the environment of increased interest rates that that incremental piece or couple pieces will continue to be installed here in 2022 and beyond despite different economic circumstances or inflationary circumstances. That's how we look at it. That's certainly being validated by our service, Totally Hayward Network, and even some of the rebuilders and remodelers that are out there in our network.

Yeah, I'll just add to that, Rob. I mean, what we're seeing right now is, you know, as Kevin mentioned earlier, continued new construction permitting into 23. We continue to see builders talk about strong backlogs. But when it comes to the aftermarket, for the majority of the decisions, it's not a discretionary type of decision. You have to maintain your pool. And most of the products that we're bringing to market today have a qualitative attribute, which increases the enjoyment of your pool or a cost savings to your pool in the terms of the energy efficient products we're bringing. So what we're seeing when we look at where Hayward is gaining strength in the market, it's in those qualitative product categories and it's in those energy saving categories. And we think as we've talked about before, there's three large conversion stories taking place in the industry, which is sanitization, energy efficiency, and controls. And all of those for Hayward come at high price points and higher margin attachments. So we don't believe the aftermarket is going to suffer from the interest rate environment. We don't believe that even in new construction it will suffer. Perfect. Thank you.

Our next question is from Mike Halloran from Baird. Mike, your line is open. Thanks. Morning, everyone.

So how are you guys thinking about balance sheet usage at this point? Obviously, the buyback in the first quarter leveraged plus minus 3%. If the right transaction comes along, would you guys be in a position to be actual? I know you said over $400 million of liquidity, but just trying to gauge your willingness to put that to work in the short term.

We absolutely are, Mike. You know, we have a pretty robust pipeline right now. So we're actively engaged on the M&A side. That continues to be one of three, you know, legs in our capital deployment strategy, continuing to fund organically. That's our top priority. We have some projects on the books. that will use some of the cash there. And then as you mentioned, we've been involved both Q1 with the directed repurchase and then also here in early Q2 with some share repurchase as well. So we're really paying close attention to all three avenues of balance sheet usages.

And then on the inventory side, maybe just talk about how you guys are looking at channel inventory. And, you know, obviously we can hear some chatter, public markets on, you know, how some of your channel partners are thinking about inventory and restocking. And just would like to get your sense for what your view of, of the channel partners is in terms of their inventory expectations and how they expect to build or not build as they work through the year.

Yes. You know, uh, We do keep close tabs on it with our channel partners to make sure that we all feel comfortable with the amount of inventory staged closer to point of sale. And they are largely replenished and in a much better position starting the 2022 season than they were either of the last two years. That said, it's not a perfect balance. There are skews and product categories based upon a material availability that we need more of, they need more of for sale, namely some salt and some sand filters, variable speed pumps, some controls, but it's much improved over the prior year. In absolute dollars, as I said, it's higher at the end of Q1 2022 than same period. But I think there are a few things to keep in mind that, you know, as we look at it from a days on hand standpoint, Obviously, that inventory value has a lot of price embedded in it. The industry has also grown, so there needs to be additional inventory in there to support the overall industry growth, which has been you know, 30-plus percent over the last few years. And then from specifically to Hayward, you know, some of our share gains, you know, that would require some incremental inventory positions for the Hayward product in the channel. So all that said, we feel comfortable with our inventory position from a days-on-hand standpoint here at the start of the season. Our guidance assumes that there will be greater sell-out then sell into the channel during the 2022 season. And these are the things that we're going to keep close tabs on as we work through the year and start, you know, continue with our guidance updates and look out into 2023, Mike. Great.

Really appreciate it. Thanks.

Our next question is from Nigel Coe of Wolf. Nigel, your line is open. Thanks. Good morning, everyone.

So maybe, Adrian, could you just give us a quick education again in sort of normal seasonality? I mean, there's nothing normal about current environment, but in a normal year, 1Q would typically be your weakest quarter, correct, in terms of revenues and margins? Yes.

Yeah, our normal seasonality has Q1 and Q3 at similar levels, 22% to 23% of the full year sales, and then Q2 and Q4 being more elevated. I would say coming into the year, Q1 this year was slightly higher than we would have experienced in a normal year. We do see some seasonality reappearing in Q22. But certainly Q1 was a higher quarter than we think normally from a seasonal perspective. And that's really consequential to the fact that we were still working through and still continue to work through a large backlog. We want to make sure that the channel is appropriately stocked. As we mentioned in the previous call, we had to get after some specific SKUs to build out the full complement of what the channel needed to satisfy customer orders. And we were very, very pleased with the ability at the production level across our manufacturing footprint to get after those products. Still more to do, as Kevin mentioned, but, yeah, normally Q1 is a weaker period. It was a little bit higher this year than normal.

Yeah. Okay. Thanks, Fabian. And then, I mean, so given that sort of normal seasonality reappearing, I mean, based on what you see today, would you expect Q2 to be, you know, higher as normal than Q1? based on what you see today, would Q2 be higher than Q1?

Yes, we're not giving specific guidance around each quarter, but what I would say is Q2 is likely to be a higher period for us as we continue to fill out the requirements for the child to service the season.

And then when you think about the second half of the year, obviously you've got a very conservative back-half assumption in your guides. What is your biggest concern right now, Kevin? Is it really – is it supply chain inflation? Is it the health of the consumer with rates rising? Is it labor availability? I mean, what would you say is your biggest concern right now?

Yeah, I mean, from a labor standpoint, we actually – where that was – you know, a key focus through the middle of last year. We feel pretty good from a labor availability standpoint. There's still too much turnover that I think all companies are feeling, but I think we're able to get folks trained up and building product. I think, you know, with what we're seeing around some of the global movement of product and some of the quarantines that are happening in manufacturing concentrated regions, I think it's wise to be cautionary right now as we look into the second half. You know, while consumer demand and what's on the books is still incredibly strong and gives us strong optimism as a company and an industry, you know, there's a lot of hikes that are being, interest rate hikes that are being talked about right now. And I think it's just wise for us as we work through the early part of the season here to just be cautious before getting out ahead of ourselves. from a second half when there's so many unknowns at this point, Nigel.

Great. And then just one more if I can. The dealer conversions from last year, you obviously had an extraordinary number of dealer ads in North America. Maybe could you just talk about is that continuing? Are you still managing to convert dealers? And to what degree are they sort of adding to your growth rates in North America?

Yeah, we continue to see our sales and marketing teams doing a great job of continuing to sell the Hayward story and display some of the new products that we've brought to the marketplace and expand the size of the Hayward family. working in the backyard. That has absolutely contributed to some of our shared gains over the last couple of years, and we fully expect it to continue into the future. When I think about, I think it's one of really three contributors that that have delivered on some of the greater-than-market growth in the share gains that we've been able to enjoy the last few years. Operationally, obviously, and the capacity expansions, some of the new product launches that have great early adoption into the marketplace. And then thirdly, just more folks placing their confidence in the Hayward brand and advocating for us in the backyard. So I really think it's a combination of all three of those, Nigel. that's paid dividends for us over the last few years, and we expect it to in the future.

That's good. That's great. Thanks, Mike.

Our next question is from Raf Jodrosic from Bank of America. Raf, your line is open. Morning, Ray.

Hi. Good morning. Thanks for taking my questions. First, I wanted to, it looks like you've been taking some market share over the last few quarters. I'm wondering if you could talk about, you know, as the supply chain improves, would you expect those market share gains to be sticky? And then how do you make sure that that kind of conversion kind of stays longer term?

Hi, Ray. Good morning. Yeah, we've I firmly believe our share gains are sticky and it's not predicated on just the very clear ability for us to service the market with our production capabilities. It comes back to the products that we're introducing into the marketplace. We're very proud of the fact that our new product vitality index now has grown quite substantially year over year. We're well over 20% in terms of new products coming into the market as a percentage of our overall sales results. And these are really informative products that are addressing the needs of the consumer. both in terms of controls, energy efficiency, and the qualitative experience within the pool. We're spending quite a bit of time investing into those categories, both in terms of research, development, and engineering costs thrown through the income statement, but also in terms of CapEx onto the balance sheet. We're investing in the necessary lines to build out those product capabilities. So we believe Though our ability to supply has outpaced the competition, it really comes back to what we showed in terms of that technology platform that we're leveraging, where we now are gaining in share in some core categories in the industry. So, yes, firmly we believe it is sticky and it's heavily predicated upon the product portfolio that we have.

That's really helpful. And then the second question, you commented on channel inventories, but your own inventory has been growing faster than sales by quite a bit the last few quarters. I'm just curious, what's the inflation component of that? If we were to look at your inventory in terms of units, what's that growth rate compared to the 60% dollar growth rate?

Yes. When you think about the COGS index, Q1 in 2022 versus the comparable period last year is about 20%. So 20% of our inventory climb has really come from that COGS index increase, the inflation that's rolling through. But outside of the inflation, we have taken two strategic positions in the balance sheet. One is on certain finished goods that where we can get the raw materials, knowing the demand curve that we see out in the future, we are manufacturing certain products in terms of finished goods to get into inventory. to be, A, in a quarter position to be able to service the market. And then I'd say the second strategic position we've taken is in raw materials. And, again, where we can secure a position in raw materials, particularly in those hard-to-get areas, we have taken that position. Okay, great. Very helpful.

Thank you. There are no further questions at this time. So as a reminder, it is star one on your telephone keypad. There are no further questions registered. So I'd like to turn the conference back to Kevin Hollering for any closing remarks.

Thanks, Austin. In closing, I'd just like to thank everyone for their interest in Hayward. As you can see, our business is producing excellent operational and financial results. and we're very well positioned to continue to generate growth for all stakeholders in 2022 and the years ahead. This would not be possible without the hard work, dedication, and resilience of our employees and partners around the world. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on our Q2 earnings call during the week commencing July 25th. Thank you.

That concludes the Hayward's Holding first quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.