Hayward Holdings, Inc.

Welcome to Hayward Holdings Third Quarter 2022 Earnings Call. My name is Adam and I will be your operator today. At this time, all participants are in the 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 Kevin Machka, Vice President of Investor Relations. Mr. Machka, you may begin.

Thank you and good morning, everyone. We issued our third quarter 2022 earnings press release this morning, which has been posted to the investor relations portion of our website at investor.hayward.com. There you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Halloran, President and Chief Executive Officer, and Ivian Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would 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 release, posted on the website and in our Form 10-K and Form 10-Q filings 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 the appendix to the slide presentation.

I would now like to turn the call over to Kevin Halloran. Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's third quarter earnings call. Before we begin, I'd like to say that our thoughts are with everyone that was impacted by natural disasters in the southeastern United States and Australia, and those in Europe impacted by the ongoing war in Ukraine. We are doing what we can to assist during this extremely difficult time. I'll start on slide four of our earnings presentation with today's key messages. First, our third quarter performance was in line with our expectations. During the quarter, we continue to leverage our competitive advantages, increase market share, and capitalize on the sustainable secular trends in our industry. I am pleased to see our primary channel partners report continued growth and channel sell-through for Hayward products in our core U.S. market. However, consistent with the expectations we communicated a quarter ago, we saw a meaningful divergence between channel sell-through and our net sales into the channel as our partners reduced the level of inventory on hand in response to normalized lead times and safety stock requirements. We are making significant progress on this recalibration necessary to support 2023 with the normalized level and mix of product in the channel. Second, we're winning in the marketplace. We continue to see positive adoption of our innovative, best-in-class products, and we are actively converting target accounts to Hayward loyalty programs. I am encouraged to see this result in further market share gains during the third quarter. Third, we are taking proactive steps to realign our cost structure to current conditions while prioritizing our strategic growth investments and productivity initiatives. We expect these actions to result in substantial variable cost savings and a structural SG&A reduction of approximately 10% on an annual basis. I'll provide additional details on our cost plans in a moment. Fourth, we are refining our full year 2022 guidance to reflect higher than expected inflation impacting Q4, continued normalization of channel inventory, and the consequence of geopolitical events in Europe. We have addressed inflation with additional price announcements in the fourth quarter to be fully realized in 2023. We now expect full year 2022 net sales to decline approximately 6% and adjusted EBITDA of 365 to 370 million. Finally, ESG is very important to Hayward and our shareholders. So I am pleased to report continued progress on our journey. Following the development earlier this year, of our ESG strategy and framework, which aligns to products, people, planet, and principles, we completed our first Scope 1 and 2 emissions inventories in partnership with a third-party expert. These results and other SASB-aligned reporting metrics are included in our first standalone disclosure, the Hayward ESG Data Sheet, which we published on our website during the third quarter. I would encourage stakeholders to review these disclosures and I look forward to updating you on our accomplishments going forward. Turning now to slide five to discuss the results of our third quarter. Net sales declined 30% year-over-year to $245 million, largely due to channel inventory correction and softer conditions in certain markets, such as Europe and Canada. We are encouraged by continued price realization, market share capture, and resiliency of our core U.S. markets. As I mentioned, sell-through in the U.S. increased during the quarter, reflecting continued underlying demand in the market. Adjusted EBITDA in the third quarter was $60 million, yielding a 24.6% margin. Decremental EBITDA margins for the quarter were 36% as we initiated manufacturing and SG&A cost reduction plans and realized lower costs associated with incentive compensation and sales rebates. Turning now to slide six for a business update. Our consumer demand varies significantly by region. Within North America, the U.S. Sunbelt continues to be an area of strength, with softer trends in the Northeast U.S. and Canada following the unfavorable weather earlier in the season. Year-to-date, Sunbelt markets have grown 36% faster than seasonal markets. Within Europe and the rest of the world, economic conditions are especially challenging in Europe, whereas we continue to see solid growth in the Middle East, Southeast Asia, and Australia. We estimate that Hayward captured approximately 130 million or 200 basis points in share since 2019, which we believe is more structural than transitory. We saw evidence of further gains in the third quarter, most notably in the strategically important U.S. Sunbelt region and in critical products on the pool pad like controls, variable speed pumps, and water sanitization. I'll speak in more detail on this in a moment. We continue to see growth in our Totally Hayward partner base and strong adoption of our innovative new products. We added another 1,800 Totally Hayward partners year to date after approximately 1,500 in full year 2021. We believe these dealer additions are key to our long-term growth through their dedication and advocacy of Hayward products and evidence of stickiness of share gain. Further, in the past 12 months through September, the U.S. sales team signed new accounts with annual sales value of approximately $80 million, with over 80% being larger account conversions. This new business is overweighted in the Sunbelt markets. Our strengthening IoT digital leadership position is driving the development of connected products within our Omni automation ecosystem, resulting in 17% growth in our new product vitality index. Turning to the price versus cost dynamics, A series of out-of-cycle price increases were required over the last few years to combat inflation and protect the structural margin profile of the business. While we have seen some commodity and freight costs start to ease, our total cost of goods sold continues to increase. As a result, we announced an additional 4% to 5% price increase in the fourth quarter to take effect at the beginning of 2023. The pool industry has been very disciplined on price historically, and we expect the recent price increases to hold. As noted earlier, we're making progress on recalibrating the level of Hayward inventory held by our channel partners. Distributors are reducing safety stocks built up during the period of strong demand and significant supply chain disruption, and we estimate a reduction of approximately 80 million occurred in the third quarter of 2022 compared to a meaningful inventory build in the prior year period. After adjusting for these changes in channel inventory levels are sell through the channel increased year over year. We are working with our channel partners to be appropriately positioned entering 2023 Finally, we are taking proactive and responsible actions to streamline the organization and optimize the cost structure to support margins. This includes a reduction of variable cost with specific attention to eliminating cost inefficiencies on our supply chain and reducing variable labor in our manufacturing cost base to maintain attractive gross margins in the mid to high 40s. In addition, we are targeting a structural SG&A reduction of approximately 10% on an annual basis or 25 to 30 million when fully realized in 2023 with initial savings of approximately 8 million to be realized in 2022. We are taking actions to maintain a high 20s adjusted EBITDA profile. Turning now to slide seven, I'd like to share some perspective on the company's transformation and strong financial and operating performance over the last three years. Based on our 2022 guidance, we will have grown net sales and adjusted EBITDA by approximately 80% and 115% respectively from 2019 to 2022. This represents CAGRs of 22% for net sales and 29% for adjusted EBITDA. We are extremely proud of these accomplishments. This period was characterized by strong demand across the industry, and we substantially outperformed following a successful transformation under a new and experienced leadership team that included several initiatives. We accelerated new product development and introduced innovative best-in-class products in the industry's top growth category. I will provide some additional product detail in the following slide. We also revamped our go-to-market model to drive growth. This included restructuring the sales force and introducing dedicated business development teams focused solely on new customer acquisition. The result has been an impressive signing of pool builders, remodelers, and servicers. We also introduced a unique e-commerce approach that resulted in true multi-channel capabilities across distribution, retail, and online. Hayward has a long-standing commitment to lean enterprise and continuous improvement, and we substantially improved our manufacturing and supply chain capabilities, resulting in a doubling of production within the existing manufacturing footprint. We also established two new distribution centers in the U.S., and invested in automation where appropriate to drive productivity. As a result, we far outpaced the industry, delivering robust growth and margin expansion, and this transformation has laid a strong foundation for profitable growth longer term. Turning to slide eight, I'd like to provide some additional detail on our new product development strategies. Here we highlight the rich source of opportunity for technology upgrades in the U.S. aftermarket. As we've discussed in the past, the existing 5.4 million in-ground pools have an average age approaching 25 years. These pools have significantly less technology installed when compared to a new pool being built in 2022. This slide highlights the three key technology product segments of IoT-enabled controls, salt chlorinators, and energy-efficient variable speed pumps. When building a new pool, consumers are educated to the benefits of these products, which deliver ease and convenience of use, as well as a more affordable and enjoyable swimming experience. The take rate of these technologies when compared to penetration on existing installed pools is significantly different. The opportunity gap presents compelling opportunity for the industry to provide a runway for growth. In these three segments alone, we see a potential revenue opportunity for the industry of approximately $6.5 billion. In recognition of this opportunity, we have focused our new product development priorities to deliver exciting IP-rich products, attracting consumers and trade professionals to upgrade the installed base. Our success is evidenced in the blue column, which highlights Hayward's very strong growth over the last three years in these critical product categories relative to industry growth resulting in share gains. recent new product introductions extending our omni line of iot enabled control products our new s3 low salt chlorination system and xc ultra high efficiency doe compliant pumps are just the start of several new impact products being released to support hayward's position as the equipment supplier of choice in fact our new operoid s3 and S3 Omni salt chlorine generators are uniquely able to operate at just 800 parts per million of salt, roughly a quarter of the salinity required by most commercially available systems. This opens up significant markets in certain southern states, such as Texas, where the adoption of salt chlorine generators has been more limited. Further, our new industry-leading high-efficiency TriStar XL variable speed pump An XC multi-speed pump ranges are great examples of product leadership, resulting in shared gains in a critically important category. This work was recently recognized by the United States Environmental Protection Agency with Hayward receiving its 2022 Energy Star Partner of the Year Award. With that, I'd like to turn the call over to Ivian Jones, who will discuss our financial results in more detail.