Jefferies Industrials Conference 2021

Aug 4, 2021

Hi, I'm Sarah Burdisk and I cover Industrials at Jefferies. I'm very excited to have the opportunity to host Hayward Management today, including President and CEO, Kevin Holleran CFO, Ivan Jones and VP of Global Strategic Plan and Business Development, Stuart Baker. Management is going to start with some introductory comments and then we'll go right into Q and A. Thank you everyone so much for being here today. And with that, I'll turn it over to Hayward. Great. Thanks, Suri. This is Kevin Hollard. It's nice to be with you today. I thought we'd spend just the first few minutes this morning giving an overview of Hayward Holdings and what's driving our results. Here's an illustration of who we are. We have two reporting segments, North America and Europe, rest of world. North America represents about 80% of our business, which is advantageous, given this region has best pricing and margin profile in the industry. We're a pool pure play with over 95% of our revenue tied to the pool industry with vast majority tied to the residential backyard. We have a complete line of innovative, environmentally sustainable products, everything you need to safely operate any type of pool, whether it's in ground commercial or above ground. Hayward is benefiting from some secular trends like deurbanization, migration to warmer climates, and a greater appreciation for healthy outdoor recreation. New pool construction is incredibly important, as it adds more pools to the installed base, but 75 of our revenue profile stems from a resilient nondiscretionary aftermarket after the pool is built. This includes replacements, equipment upgrades and remodels. You see our financials on the right side. The business is performing quite well with the last twelve months revenue, nearly $1,200,000,000 and adjusted EBITDA over $350,000,000 This is how we think about our competitive moat that creates stickiness to our share position and delivers growth for our shareholders. Starting at 12:00, our first layer is an incredibly strong and trusted brand decades in the making and a very large installed base that comes from having a complete product line across all pool types. Then comes a large and very strong network of partners from totally Hayward builders and servicers that stake their reputation on Hayward product each day to the distributors, retailers, e sellers, and authorized service centers that help us sell and support Hayward product in the backyard. Third is our operational excellence and our ability to leverage volume at great margins. We manufacture in market with roughly 80% of our product built in The U. S. And we're vertically integrated, so we have shorter supply chains than others. We're highly automated, and have capacity available to build more product with very manageable capital. I think all this has been on great display the first half of this year as we've increased production year over year by approximately 80%. Final key, Hayward advantage is our innovation and product design capabilities. Products are our lifeblood. We spend over 20,000,000 a year in engineering. We have extensive IP that we protect with active and pending patents, and we have top product performance in many key categories like omni controls, variable speed pumps, and salt, salt chlorine generation. Our industry is supported by strong secular trends, in the housing market. So what what do I mean by this? You know, millennials are becoming a larger segment, of homeowners. They're tech savvy buyers and expect smart home capabilities. They place outdoor living in high priority and appreciate a work to live type mentality. The urbanization is occurring, which is moving folks from apartments to single family homes. There's increased flexibility to work from home or adopt a hybrid work schedule, which places greater priority on home amenities, including outdoor living space. Migration to the Sunbelt is occurring where warmer weather creates more interest in pools and outdoor living. Then finally, there's a shortage of new home stock, which is refueling remodeling activity, and is helping to educate the buyer to what's possible when they're creating that backyard oasis. The right side of the the slide really highlights the growing focus on smart homes with a predicted penetration increase from 40% today to 60% in just a few years. This expectation carries over to the backyard where our Omnicontrol system is is ushering in greater connectivity, of the pool pad, something we coined SmartPad, by synchronizing variable speed pumps, heaters, LED lights, salt chlorine generators, water features, etcetera to the control. So our Omni system can interface with other backyard features not sold by Hayward, like landscape lighting, irrigation systems, or it can be can be become part of a of a larger ecosystem through Crestron or Savant. Let me dive into this smartPAD conversion just a little deeper before turning it over to a tech to IBM and what it means for us and for our industry. We start with the reasonable assumption that existing pool owners want similar control and features that new pool owners are opting for. Controls is really this, the linchpin or the gateway. Once someone adds omni, more content is coming that is higher priced, more connected, and environmentally sustainable. New construction in The US, as highlighted in the in the top left, is opting for controls about two thirds of time, 65% of the time, with the installed base still in the mid twenties to high 20%. This digital conversion itself at $1,500, a copy across this 40% difference, and the 5,300,000 pools alone is a $3,000,000,000 growth opportunity. As I said, once controls are in place, this opens the door for other things like variable speed pumps, LED lights, etcetera. So to quantify just a couple more of those, you know, focused on energy conversion, variable speed has about a 40% difference between new install and, I'm sorry, installed base and new construction. This represents about a $1,600,000,000 opportunity. And finally, this chemical conversion that that we're seeing, a conversion of chlorine tablets to salt or a more natural sanitization, that is 25% difference between new construction and installed base, and that represents about another 1,300,000,000.0. So this smart pad conversion, is a big part, of what we started to see prior to COVID, and it certainly played out during the pandemic. And we still feel like it's very much in the early innings of this transition. Final slide will be covered by, by Ivy and Jones, our CFO. Great. Thanks, Kevin. Turning to our financial outlook for 2021. We've revised our guidance for the full year in terms of net sales. We're now guiding for year over year growth of 54% to 58%. That's an increase up from the prior guidance range of 40% to 45%. Adjusted EBITDA is now guided between $4.00 5,000,000 to $425,000,000 or an increase of 75% to 84%, year over year. This compares to the prior guidance range we gave of $360,000,000 to $390,000,000 At the midpoint of the updated guidance, EBITDA of $415,000,000 yields a margin of 30.4%, which is an increase of three ninety bps over our results in 2021. Our guidance update is predicated on very strong first half results and clear line of visibility into the balance of the year. Obviously, continued strength across all product ranges, market trends supporting outdoor living and healthy living, and then finally in recognition of the inflationary trends that have developed, in the 2021. I think that wraps up our prepared slide remarks, so sorry. Perfect. Thanks for that. So you just posted a very strong second quarter, sales growth up 66% and as you mentioned, you increased your full year outlook. Could you just talk through the contribution of new builds versus aftermarket and upgrades and pricing? And all the components that support your full year outlook for the 55% to 68% sales growth? Sure. That guidance really assumes about 25% of that growth stemming from new construction. That is the historic trend, and it really does continue this year. The other 75%, as you mentioned, is of our business is really what comes from that aftermarket, including the replacement, the remodeling and the upgrade activity. You know, new construction is expected to grow mid to maybe high teens this year, which was similar to 2020. And while this is higher than the last decade, you know, business in the aftermarket through increased usage and pool pad upgrading activity continues to climb also. So it's still really a 25, 75 split, 25% tied to to to new construction and 75% tied to the aftermarket activity, Saree. Supply chain shortages have been impacting more companies right now, but you've been able to increase capacity rather quickly in this environment. Can you just talk about any bottlenecks you're seeing and how that's impacting growth in the quarter? Yes, sure. Good question. First, I'd like to take this opportunity to express how proud and appreciative I am of the team. They've worked tirelessly to address bottlenecks, which has resulted in our ability to, to expand capacity that that 80%, that for production, that 80% that I I mentioned earlier. We've really methodically addressed all elements of the supply chain from raw material inputs to production conversion to, to outbound logistics. You know, we have long standing relationships with our with our suppliers, many of which have contracts in place that help to mitigate some inflationary headwinds and ensures continuity of supply. You know, we from a labor standpoint and a conversion standpoint, we've introduced some creative means to recruit new new associate staff, some off shifts along with some wage increases, and we're filling the openings. You know, we do have latent capacity in our production facilities that we can unlock with minimal capital requirements. Then really that third link is is is around distribution. And, you know, we've been progressively optimizing our distribution footprint after opening a world class distribution center in Phoenix last year. We're replicating that in the Southeast, right near our Clemens, North Carolina facility, which will free up some additional manufacturing space. So, we still continue to feel some bottlenecks, but really proud of how the team has really systematically worked across these three key areas, to increase production capacity. I think you've mentioned being able to increase capacity if it's running more hours. Does that mean you're currently looking to do it and how long does it take to ramp that capacity? Yes. Why don't I take that one, Kevin? You know, we've expanded shifts progressively over the last year. It's enabled us to increase our production by approximately 80%. We've been able to do that substantially within a five day shift model, but we now have the option to permanently expand our shift structure into into the weekend, which opens up at least another 30% of capacity on the installed equipment that we have. We've obviously had to match our capacity expansion with raw material capabilities and supply chain capabilities, and we continue to work with our suppliers to to increase supply. You put in a pricing fees of around 5% to 7% on any order that was not shipped by the September. Did you see any pushback from customers that have orders in the system at the lower price now? And do you expect to see any cancellations as a result of this? Yeah. Sure. You know, just to be clear, we've instituted two, off cycle price increases this year. One was announced back in late March of of 5%, effective on orders received after May 1. And then your question specifically referenced the second price increase, which was announced, in early July of this range of five to 7%, which would be effective on orders received in q three, not shipped during q three. So they would be, you know, priced at the higher level starting September 27 or twenty eighth, I believe it is. You know, I think we've done a great job clearly communicating to the channel, our rationale, and the need for these price increases. I think, you know, the channel understands that our input costs have increased significantly this year, and then we only, you know, announce off cycle increases when we cannot offset them ourselves through either contracts or productivity improvement. So, you know, the real crux of your question was pushback. No. We actually have not received pushback. I think we've done a good job laying out the, the rationale and the need for it. Received no cancellations to date, and frankly, I don't expect it. So, you know, that's that's how the team has has, laid out this, these series, of price increases. You saw double digit growth in your totally Hayward rewards program Could you just talk about the benefits to Hayward of this program? And does it provide confidence in your ability to keep the market share gains you've made? Yeah. You know, first of all, Totally Hayward program, you know, first for the audience, that's a rewards program that functions, you you know, similarly to, to an airline mileage program. It specifically targets, builders and servicers that are in the in the backyard. The program rewards, volume growth and purchases across, all of our product lines. As you mentioned, we've had a great success adding new Totally Hayward partners to our family thus far this year, growing our overall population right at 15%, to total program in just six months of 2021. Now there's no reason a dealer would go through the process of joining the program, if they were just sourcing a Hayward product in a pinch, and fully expected to go back to their other OEM, that they maybe had done business with, before Hayward. So, you know, it's for this reason we feel very confident, about the stickiness of our recent share gains resulting from these new partners in the program. And you talked about a positive growth outlook for 2022 despite a really robust growth the last couple of years. How much of this growth outlook is from the early buy program being pushed out to the first quarter? And how should we think about the cadence of growth going forward given strong pricing actions in 2021? Yeah. It's a good question. We we need to get clear on the, on the early buy. When you think about twenty twenty two's forecast early buy season against what we did in actual 2021, the cadence of shipping is gonna be the same. In '21, we shipped most of the early buy in Q1 and we'll do the same likely in 2022. So there is no difference in the cadence of shipments expected. In terms of growth, we've talked a lot about the continued new growth construction activity that we see with builders now reporting bookings well into 2022. We believe the conversion to the smart pen bundle is a key driver, of our success in the aftermarket as well as new construction. And that's a product rich bundle, which is really beginning to underlie, the growth, inside both the industry, but in more particular, Hayward, and it's gonna last for several years, at least. As mentioned, we've instituted two off cycle price increase this year, both effective, really in Q4 on invoiced activity. And as we step into 2022, those two off cycle price increases will benefit the entirety of 2022. I'd say the aggregate of everything I just mentioned will result, in an above average growth year for 2022. And then new builds, as you mentioned, appear largely sold out for this year. Do you have an idea of how far out contractors are booking for 2022? And have you seen pool contract increase capacity to take on more jobs? Or has labor and equipment shortages been a headwind here so it just extends the cycle more? Yeah. I'll take that one. Sorry. You know, as Aileen just said, builders are quoting now well out into 2022. It's a big population of builders out there, so there may be some some exceptions to this. But I don't think there's really a chance of getting a new pool built or quoted and built in the 2022. So we're definitely, in most regions, out into the latter half of of twenty twenty, two. You know, we have conversations with builders every day on this, and we understand that they are feverishly, expanding their crews, to add capacity to the to the industry. You know? And we believe, you know, in supply and demand, and that labor will migrate to our industry as demand continues to climb. You know, we do get asked a lot. I'll just take this question to kinda highlight a quest point that we get asked a lot around, you know, our thoughts on new construction and and it kinda continue on its current pace. Our industry is really forecasting around 110, maybe a 115,000 new in ground pools, this year, but that's really only getting back to the 35 average of in ground pools from 1985 to 2020. So we're not in rarefied air. This industry has has shown, you know, again, over thirty five year period that a 115 is really where it where where the median fell. And I'll just point out that this is still well below the peak capability of the industry, from 1995 to really 2008 when we were installing and building, over a 150,000, a year. So I do think that, that with demand and some of the secular, trends that we've highlighted, that there, that there is opportunity for additional new construction growth, in years to come. I know that my family really wants a pool, so I guess we're in the waiting list for that as well. So you previously talked about long term market growth in pool space being six to 8%. Given some of the recent acceleration demand following the pandemic, the interest in upgrading the pool pad, do you think near term growth over the next several years couldn't come in higher than 68 percent? And if so, what would be the key drivers between these new builds, replacement, upgrades and price? Yeah. I'll take that. Yes, we do believe in the near term, we'll see above average growth, Saree. I think it's driven by really four large categories. You know, this continued acceleration of new construction, large scale remodels, across an aged installed base of pools, which is now greater than twenty two years, all in The US. Continued upgrades to newer smartPAN technologies, which we've talked about a few times, so far, and then continued, increase in the repair and replacement market as that installed base of pools continues to grow. I'd say this growth will be driven, by this new construction activity, and the adoption of new smart bundles of products. This this the aftermarket, attribute of the smart bundle, is is quite an interesting dynamic. We see today the adoption of smart pool bundles at 65% and new construction on the installed base is at 28%. So there's a tremendous amount of conversion, that can take place, over the course of the next year to catch up the aftermarket with the new construction adoption rates. As I just mentioned, the two off cycle price increases, both effective really, in Q4 will be fully effective across the entirety of 2022. Clearly, will be a revenue driver as we go into next year. And again, the aggregate of all of, these discussion points, would say, will inform us as an industry and in particular Hayward with an above average growth profile, certainly for the next several years. I think we probably have time for one more question. So I'll just mention, during your earnings call, you mentioned the potential for larger acquisitions. Could you talk about where you're seeing those large opportunities or where you see the biggest white space in your current offering, whether it's by product or region? Yes, I just wanted to clarify that remark. I mean, we're very happy with the way that we've been able to delever the balance sheet over the course of the last six months. It's given, Hayward, the management team, a lot of optionality to think about how to deploy capital. We remain focused principally on organic growth investment into our own technical capabilities, into our core product lines. You know, we will continue to look at opportunities to expand our technology base within our bundle and tuck in other emerging technologies. And we've got a great history of being able to do that and platform those acquisitions in relatively quickly. We continue to look at the pipeline of opportunities. And again, the tremendous, balance sheet strength that we had, developed over the course of the last six months, it does allow us to think more broadly, but we do remain focused on the organic, opportunities in front of us and we'll continue to strengthen the balance sheet and look at further opportunities, over the balance of the year into 2022. And maybe just sticking with capital deployment quickly, you've obviously mentioned you've continued to delever the balance sheet. Just could you talk to how you're thinking about returning cash to shareholders and what that might look like for you guys? Yeah. Again, I mean, we're a growth orientated company. We're going to remain focused on the growth opportunities, as a first deployment of capital. But as we've stated many times, as we settle in firmly into the low end of that two to three type leverage range, we will then start to think about a return to shareholder, policy, which is yet to be defined. But, it could be the combination, dividend and buyback, but we've yet to define that policy. Again, Suri, we remain focused on the growth opportunities. We're newly into this deleverage territory. So, let's continue to manage the balance sheet within that range. As we feel comfortable, we've, appropriately exercise on our growth opportunities, then we'll address the return to shareholder policy. Well, there's obviously no shortage of growth in the full space right now. So, congratulations again on a very strong quarter and thank you so much for joining us today. Thanks, Saree. I appreciate you having us. Thank you.