Hayward Holdings, Inc.

Welcome to Hayward Holdings second quarter 2023 earnings call. My name is Michelle 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 one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Kevin Matzka, Vice President, Investor Relations. Mr. Matzka, you may begin.

Thank you and good morning, everyone. We issued our second quarter 2023 earnings press release this morning, which has been posted to the Investor Relations section 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 Holleran, 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 second quarter earnings call. I'll start on slide four of our earnings presentation with today's key messages. I'm pleased to report second quarter results exceeded expectations with continued strong execution resulting in robust margin expansion and cash flow generation. Our team is performing remarkably well and driving structural improvements in the business during a challenging operating environment. Channel sell-through exceeded both our expectations and our sales into the channel, resulting in further normalization of distributor inventory. We expect the channel destocking to be fundamentally complete by the end of the third quarter, positioning the channel at leaner levels entering the 2024 pool season. This sets up Hayward to return to a normal matching of sales with channel sell-through. We achieved record gross profit margins in the quarter through operational excellence and necessary price realization to offset inflation. This is a tremendous accomplishment, and I'm very proud of the Hayward team. We also demonstrated our strong cash flow generation characteristics. Cash flow from operations more than doubled on a year-to-date basis as we effectively reduced working capital. As we proactively manage costs and working capital, we continue to invest in the business to advance our technology leadership position, support our customers, and drive future growth. We continue to execute in a challenging operating environment and I'm pleased with our performance during the quarter. Finally, we are refining our guidance. For the full year 2023, we now expect adjusted EBITDA of $265 to $280 million, with the high end modestly reduced by $5 million and the low end maintained as a consequence of strong margin performance. We now expect next sales to reduce approximately 20% to 23% compared to last year, primarily due to leaner channel inventory positions at the end of Q3 ahead of expected robust early buy participation in Q4. It's important to understand our outlook for channel sell-through in 2023 is unchanged. Looking forward, we have every expectation of resuming a solid historical growth trajectory of mid to high single digits with our sales into the channel aligned with channel sell-through of Hayward products. Now turning to slide five, highlighting the results of the quarter. Net sales in the second quarter reduced 29% year-over-year to $283.5 million. largely due to channel inventory movements and softer market conditions related to global economic uncertainty. This compares to a period of extremely strong growth of 10% in the second quarter of 2022 and 66% in the second quarter of 2021. As I mentioned, based on data from our primary channel partners, sales out of the channel exceeded our expectations in the quarter. We are now seeing a return to more normal seasonality with Q2 seasonally strong and Q3 typically lower sequentially as we exit the summer pool season. We are encouraged by continued price realization to offset inflation and the success of our innovative new solutions. The market is responding favorably to the connected suite of products within our Omni automation ecosystem, with sales of IoT controls and lighting increasing in the quarter. Commercial pool sales also increased double digits in the quarter. We are increasingly focused on driving growth in these markets and are pleased with the continued robust demand. As I mentioned, the gross margin performance was again exceptional this quarter. Gross profit margins expanded 70 basis points year over year to a record 48.1% despite reduced net sales and 150 basis points sequentially. Having achieved price-cost neutrality, the improvement in our gross margin is the result of multi-year operational improvements, including consolidation of our manufacturing footprint, removing inefficiencies, realizing value engineering savings, and driving continuous improvement. This has allowed us to continue expanding gross margins at lower production volumes while positioning for future growth. Adjusted EBITDA in the second quarter was $79.5 million, with a healthy margin of 28%. We continue to deliver the expected SG&A savings under our cost reduction program. Adjusted diluted EPS in the quarter was 19 cents. Turning now to slide six for a business update. We estimate that Hayward captured significant market share over the last three years, and our teams are working hard to gain share going forward. As discussed in recent quarters, our new product development strategy is a key driver as we increase investments in innovative new products to further advance our technology leadership in the industry. Another important driver is the evolution of our go-to-market strategy. Prior restructuring of the sales force and the establishment of dedicated business development teams focused solely on new customer acquisition, resulting in solid growth in the number of new dealers converting to Hayward. To further improve the customer experience, we are enhancing the organizational structure in an important strategic region, integrating sales, technical service, support, and training under common leadership. This touches all aspects of customer engagement from new dealer orientation and training to post sales support. We're also enhancing our marketing campaigns for the service trade to incentivize conversion to Hayward products. This evolution will drive customer intimacy and deliver incremental demand for Hayward. Further in international markets, we are reallocating resources to higher growth regions, notably Southeast Asia, Australia, and Middle East. Early success of these programs is encouraging and supportive of continued market share gains and establishing Hayward as a leading brand in these regions. Channels sell through exceeded expectations in the quarter. Our channel partners continue to recalibrate the level of inventory as expected relative to the current economic outlook, normalized OEM lead times, and higher costs of carrying inventory. We continue to anticipate further reductions as we close out the pool season to a leaner position at the end of Q3 as distributors prepare to participate in the 2024 early buy program. Turning to the price versus cost dynamic, we implemented a price increase of 4% to 5% at the beginning of the year to achieve price-cost neutrality, and we continue to realize this pricing as expected. As a reminder, we took proactive actions in recent quarters to streamline the organization, optimize the cost structure, and maintain a healthy margin profile with full-year gross margins in the mid to high 40s and adjusted EBITDA margins in the high 20s. We are delivering on these commitments. Our team continues to prioritize working capital management, and we delivered significant improvements during the quarter. On a year-over-year basis, balance sheet inventory and total working capital declined by $78 million and $135 million, respectively, contributing to the strong cash flow performance. Finally, we continue to make great progress on our ESG journey and are pleased that our performance is being recognized. Since receiving a 2023 regional top-rated award from Morningstar Sustainalytics last quarter, MSCI upgraded our ESG rating from triple B to A. Additionally, I'm proud to report that our full suite of variable speed pumps is now Energy Star certified by the U.S. Environmental Protection Agency. Hayward is dedicated to developing the industry's most energy-efficient, high-performance products to drive market share gains, particularly in high-energy cost markets like California. This achievement further demonstrates why we continue to be the number one rated products brand by U.S. pool professionals. With that, I'd like to turn the call over to Ivian, who will discuss our financial results in further detail.