Hayward Holdings, Inc.

Welcome to Hayward Holdings' fourth quarter 2022 earnings call. My name is Donyell, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note, this conference is being recorded. I will now turn the call over to Kevin Maska, Vice President of Investor Relations. Mr. Mazka, you may begin.

Thank you and good morning, everyone. We issued our fourth 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 are considered forward-looking in nature, including management's outlook for 2023 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission that could cause actual results to differ materially. 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. Reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures 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 Holler.

Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's fourth quarter earnings call. I'll start on slide four of our earnings presentation with today's key messages. As we continue to navigate a very dynamic operating environment, I'm pleased that our fourth quarter performance was in line with expectations. Consistent with the outlook we communicated a quarter ago, our results reflected the continued reduction of channel inventory days on hand. I'll make additional comments on our expectation for channel inventory in a moment. Second, we took proactive steps during the second half to realign our cost structure to current market conditions while maintaining our strategic growth investments and productivity initiatives. This includes successfully executing the previously announced enterprise cost reduction program, which was designed to drive substantial variable cost reductions and structural SG&A savings of approximately 10% on an annual basis. Under this program, we delivered approximately $9 million in SG&A savings in the fourth quarter and are on track to deliver the full annual savings of $25 to $30 million in 2023. Third, Hayward has a longstanding commitment to lean manufacturing and continuous improvement. We view operational excellence as a significant competitive advantage. We demonstrated our agile manufacturing capabilities throughout the year, continuing to ramp production in the first half to deliver on a record backlog, then reducing production in the second half to support structural margins during a period of declining volume and reducing channel inventory days on hand. Fourth, we continue to strengthen Hayward's position as the premier company in the attractive pool industry. We are seeing positive market reception of our innovative new products and are actively converting target accounts to increase Hayward's dealer base. Finally, we are introducing full year 2023 guidance. Hayward delivered tremendous growth in recent years, building upon a strong installed customer base that we expect will drive aftermarket sales for years to come. Compared to 2019, the last pre-pandemic year, our 2022 net sales and adjusted EBITDA represent increases of 79% and 113% respectively. Given current global economic conditions and difficult comparisons to this period of extremely strong growth, we now expect sales to reduce in 2023 before resuming a historic mid to high single-digit growth trajectory. We see 2023 as a year of continued channel inventory recalibration with our net sales into the channel meaningfully below sell-through. This headwind will partially be offset by the adoption of innovative new products, disciplined price cost management, and operational excellence. For the full year 2023, we expect net sales to reduce approximately 18% to 22% and adjusted EBITDA of $265 million to $285 million. Turning now to slide five, highlighting the results of the fourth quarter and full year. Net sales in the fourth quarter reduced 27% year-over-year to $259 million, largely due to lower volumes related to channel inventory movements and softer conditions in certain markets, especially Europe and Canada. We are encouraged by continued positive price realization during the quarter, more than offsetting inflation and the success of our innovative new solutions. Adjusted EBITDA in the fourth quarter was $53 million with a margin of 20.6%. We realized manufacturing cost savings and the initial SG&A savings under our cost reduction program to support structural margins as production volumes declined. Adjusted EPS in the quarter was 11 cents. For the full year 2022, net sales reduced 6%. to 1.3 billion with adjusted EBITDA of 368 million, each consistent with our guidance. Despite our reduced net sales into the channel, our primary channel partners delivered record sell-through revenue of Hayward products into the core U.S. market in 2022. Adjusted EBITDA margin was a healthy 28%. Adjusted EPS for the full year was 98 cents. Turning now to slide six for a business update. and consumer demand continues to vary significantly by region. While underlying demand trends are moderating in North America, the Sun Belt continues to be an area of relative strength, driven by secular trends related to demographics and outdoor living. We are seeing softer trends in more seasonal markets, such as the Northeast U.S. and Canada. Within Europe and rest of the world, we continue to see solid growth in the Middle East and Southeast Asia, whereas conditions are especially challenging in Northern Europe. We estimate that Hayward captured significant market share over the last three years. We believe this trend is more structural than transitory. This was most notable in the strategically important U.S. Sunbelt region and in critical products on the pool pad like controls, variable speed pumps, and water sanitization. Our strengthening IoT digital leadership position is driving the development of connected products within our omni-automation ecosystems. The market is responding favorably as we continue to gain traction with dealer additions in our totally Hayward loyalty program. Turning to price versus cost dynamic. A series of out of cycle price increases were required over the last few years to combat inflation and protect structural margin profile of the business. While we have seen some commodity and freight costs start to ease, total cost inflation remains elevated. As a result, we implemented the previously announced price increase of 4% to 5% at the beginning of January. The pool industry has been very disciplined on price historically, and we expect the recent price increases to hold. Our channel partners continue to recalibrate the level of Hayward inventory to be appropriately positioned relative to current market conditions. In the second half of 2022, distributors reduced days on hand as expected after a meaningful inventory build during a period of strong demand and significant supply chain disruptions. Based upon channel information, we estimate that our sell through increased 11% in the US on a full year basis to a record level. However, as I mentioned, we now believe the distribution channel will make additional reductions in 2023 as a result of a softer global economic outlook, lower safety stock requirements due to normalized lead times and higher costs of carrying inventory. We believe the channel will trend towards the low end of historical ranges for inventory days on hand over the course of the year, and we have reflected that in our outlook. Our 2023 guidance now contemplates an additional reduction in channel inventory days on hand with the first quarter impacted most significantly. We took proactive and responsible actions during the fourth quarter to streamline the organization and optimize the cost structure to support margins. This includes a reduction of variable costs in our manufacturing cost base and supply chain to maintain attractive gross margins in the mid to high 40s. In addition, we expect to deliver structural SG&A savings of approximately 10% on an annual basis or 25 to 30 million in 2023. These actions are intended to maintain a high 20s adjusted EBITDA profile. Finally, ESG is very important to Hayward and our shareholders. So I'm pleased to report continued progress on our journey. In 2022, we developed our ESG strategy and framework which aligns to products, people, planet, and principles, and completes our first scope one and two emission inventories in partnership with a third-party expert. These results and other reporting metrics are included on our first standalone disclosure, the Hayward ESG data sheet, which we published on our website during the year. I would encourage our shareholders to review these new disclosures. Turning now to slide seven, I'd like to share some perspective on the company's competitive moat That strengthens our market position and drives growth for our shareholders. Starting at the one o'clock position on the pie chart, we have an incredibly strong and trusted brand decades in the making. And one of the largest installed bases that comes from having a complete product line across all pool types. This provides ample opportunity to introduce new technologies into the aftermarket, which is the primary driver of our business at approximately 80% of sales. Next is our strength across multiple channels as we 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 continued growth in the number of pool builders, remodelers, and servicers to our Totally Hayward loyalty program that stake their reputation on Hayward products every day in the backyard. We also introduced a unique e-commerce approach that resulted in true multi-channel capabilities across distribution, retail, and online. Moving around the chart, Hayward is committed to operational excellence and continuous improvement, and we substantially improved our manufacturing and supply chain capabilities in recent years. We primarily manufacture domestically with approximately 85% of our production in the U.S. We are vertically integrated with shorter supply chains than others. Our facilities are highly automated and agile with the proven ability to flex up and down as appropriate with limited incremental capital. Finally, one of our biggest differentiators is our product and technology leadership, which I will discuss on the following slide. These important elements of Hayward's sustainable competitive mode form a strong foundation for profitable growth longer term. Turning to slide eight, I'd like to provide some additional detail on our industry-leading products and technologies. While operational excellence and customer service are ingrained in our culture, at its heart Hayward is a product company. Recent launches have showcased Hayward's focused new product development strategy. Key product categories have been identified as must-win with the goal of delivering compelling products capable of attracting both new customers as well as expanding our total addressable market by driving incremental content into lower technology pools in the installed base. We prioritize investment into these product categories, leveraging in-house core competencies to deliver innovative, patent-protected solutions designed to make pool ownership easier, more affordable, and sustainable. They are key to driving growth and market share gains. A few of these recent introductions are shown here on the slide. Our variable speed and XE pump DOE compliant platforms lead the way in energy efficiency and are responsible for our Energy Star Partner of the Year award. Omni continues to be the IoT automation platform of choice. Our app affords effortless and simple use for both the homeowner and trade professional. HydroPure is a novel three-in-one water treatment technology combining UV with ozone and AOP to provide the safest, purest, and clearest water. The new S3 AquaRite builds on our best-in-class salt chlorination platform, providing the ability to operate at one-third the salt concentration of legacy designs and offering unique control capability. Our LED lighting solutions span pool, spa, water features, and now landscape. Simplicity of installation and control was recently added through the introduction of smart power. Finally, the new universal HC heater offers dual fuel capability and combines efficiency and performance in the industry's smallest footprint, easiest to install heater. To summarize, technology leadership is central to our growth strategy, and we are very proud of our recent innovations. We continue to prioritize investments into new product developments to further strengthen our competitive positioning and support our customers with industry-leading products and technologies. With that, I'd now like to turn the call over to Ivian Jones, who will discuss our financial results in more detail.