Hayward Holdings, Inc. Q1 FY2021 Earnings Call

Welcome to Hayward Holdings First Quarter 2021 Earnings Call. My name is Alicia, 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. 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 earnings press release this morning to the Investor Relations portion of the website at investor.hayward.com, where you can also find an earnings slide presentation that we will reference during this call. 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 will be provided in our Form 10-Q for our first quarter of fiscal year 2021 just 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 could 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 adjusted EBITDA to net income calculated on the GAAP, 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 10-Q for our first quarter of fiscal year 2021. I would now like to turn the call over to Kevin Holleran.

Thank you, Stuart, and good morning, everyone. It’s my pleasure to welcome all of you to Hayward’s first quarterly earnings call as a public company following the successful completion of our initial public offering in March. I’d like to thank all of those involved in the process for a great outcome. We look forward to partnering with our new shareholders as we focus on continuing to grow the business and creating value in the years to come. I will start on slide four of our earnings presentation with some highlights from our first quarter results. We delivered record net sales growth, which nearly doubled from a year ago and profitability which tripled on an adjusted EBITDA basis, resulting from tremendous demand for our pool equipment. We were able to generate these exceptional results by leveraging our agile manufacturing capabilities to accelerate production, particularly in the U.S., our in-market supply chain advantages, and being very well-positioned with our competitive lineup of innovative products. The first quarter also included a very important milestone for Hayward as we completed our successful IPO on March 12th. We used the proceeds to strengthen our balance sheet and increase our financial flexibility as we pursue growth opportunities. We paid down debt which reduced our leverage ratio to 3.3 times at the end of the first quarter, compared to 5.2 times at year-end 2020. Our IPO, record first quarter results and favorable outlook, which I will touch on next, has energized our company as we look ahead at the significant value creation opportunity going forward. Now, moving to our outlook on slide five. I will summarize some recent trends that are consistent with commentary from other industry participants and highlight why the industry outlook is even stronger now than it was earlier this year. Builders ended 2020 with a sizable backlog, leads, and new pool quoting activity. This backlog alone should extend demand through 2021 and into 2022. Our industry is supported by favorable housing dynamics, including the work-from-home trend, migration to the suburbs and the Sun Belt, and a strong construction market. We believe that years of underinvestment in the U.S. housing stock will provide a sustainable tailwind as we look ahead. We are seeing strong evidence that people are extending the pool season, using their pools earlier and more often. We saw these trends in 2020 and they have continued into 2021. These factors have created an environment in which demand is outstripping supply due to labor constraints and supply chain limitations, resulting in higher inflation, which we have been able to pass through the channel. In addition to these positive industry trends, there are a number of Hayward-specific drivers given our unique position in the value chain. First, we have a very strong competitive position in key upgrade-oriented products, like salt chlorination, variable speed pumps, heaters, LED lights, and automation and controls. Second, our operating capabilities are allowing us to ramp production faster to meet industry demand, including a production and sourcing increase of more than 75% year-over-year. And third, we led an approximate 5% price increase in order to offset inflation. This new pricing was announced in late Q1 with an effective date in Q2. This pricing increase was not in our original plan for the year. Given these above trends and our performance to date, we are providing guidance for the full year 2021 of net sales growth in the range of 40% to 45% year-over-year and adjusted EBITDA of $360 million to $390 million, reflecting 55% to 68% year-over-year growth. We anticipate continued broad-based strength across our product portfolio and overall market demand to remain healthy through 2021 and beyond. As we look specifically at Q2, we expect another quarter of favorable results and believe that Q2 performance will largely be in line with Q1. Now, I’d like to turn to slide six and take a moment to talk more about what makes Hayward different. First is our focus on operational excellence. Our global in-market manufacturing capabilities, which include significant capacity in the U.S., our vertical integration, and our dedicated global supply chain resources helped to set us apart from our competitors. This, together with creative recruitment and onboarding of associates, has allowed us to ramp up our production capacity despite challenging labor availability. These early actions have allowed us to respond to the rapid increase in demand during the quarter by increasing our combined production and sourcing by more than 75%. I want to take a moment to personally thank our entire team for their resilience, commitment to a safe operating workplace, and teamwork in achieving these extraordinary results. Second, Hayward is a market pioneer and leader in connected pool products and developed highly engineered outdoor living products, which allows us to grow the market, as well as our share of it. Our market-leading brands helped establish industry standards for generations, like leading the shift of plastic constructed flow control products and energy-efficient heaters. We continued that innovation through health-conscious, energy-efficient, and connected pool products. Our top-rated proprietary Hayward Omni mobile app and automation platform provides numerous ways to manage every essential pool function. The mobile app manages everything from the scheduling of sanitization, controlling water temperature, filtration and running of automatic cleaners, to pool light shows with water features that create the ultimate backyard experience. Omni provides great value to our customers and further strengthens the relationship and level of engagement with Hayward. Third, we have a long and storied reputation in the market with key relationships that go back decades and we go to market across all key channels, including distribution, retail, builders, and e-commerce. We provide incremental value through our deep and talented sales and technical service teams and offer our customers the leading loyalty partner program called Totally Hayward. Collectively, these capabilities have historically been and continue to be important competitive advantages in this COVID-impacted environment. I’d like to spend a little time talking more about our organization and strategy beginning on slide seven. Hayward is the leading pure-play pool equipment provider, focused primarily on the global residential pool market. Hayward provides the industry’s most recognized and trusted brand, bringing innovative and environmentally sustainable products and technology to the outdoor experience. I won’t walk through all the steps on this page. But as you can see, we have a global platform, a broad and diversified product portfolio, and an attractive weighting of aftermarket and new construction, which I will touch on more shortly. We have a very strong position in North America, which represents more than 80% of our sales. We are really excited about the market we play in and the long-term opportunity. The demand for outdoor living products has increased over the past decade as retiring baby boomers are investing in their homes and millennials are showing increased interest in outdoor spaces. Consumer spending has been directed toward outdoor home improvements as consumers continue migrating to the suburbs and increase time spent at home and in their backyard. Outdoor living repair, replacement, and remodeling has grown faster than traditional home repair, replacement, and remodeling projects as homeowners choose to make larger outdoor investments. The trend toward healthy outdoor living has helped underpin continued pool industry growth. The pool equipment industry specifically has attractive market characteristics, including a growing installed base with a long tail of aftermarket recurring revenue opportunities and an expanding technologically advanced base of environmentally sustainable products, which are increasingly important to our customers. While new pool builds are important as they grow the base, the larger opportunity is the aftermarket, which represents 75% of our sales and provides an annuity of recurring sales. Over the past year, we have seen homeowners prioritize investment in the outdoor living experience, further increasing the installed base of pools globally, which we estimate is over 25 million as of 2020. A growing installed base leads to reliable aftermarket spending. Our aftermarket opportunities are primarily driven by the increasing range of new pool products, a shift to more energy-efficient and environmentally sustainable products, and higher value Internet of Things enabled technology to increase connectivity and automation. I will move ahead to slide eight and touch on the key pillars that drive our market. Our industry has historically grown in the 6% to 8% range. As we look forward, we see the growth opportunity underpinned by compelling long-term secular trends and a reset in the pool space as pent-up demand for home investment should provide a tailwind in the years ahead. With strong outdoor living trends, the pool is truly the centerpiece of the backyard and an important part of the home and healthy lifestyle. Demographic changes such as movement to the suburbs and the Sun Belt have helped drive demand, while the trend of pool owners extending the season creates more usage and the need for new equipment and upgrades. There are four components to the growth. We have one of the world’s largest installed bases of pool equipment and benefit from annuity-like repair and replacement of this equipment over time. New and innovative products provide a tailwind as customers desire upgrades and enhancements, including a connected pool experience and more sustainable, environmentally friendly products. New pool construction and remodeling provide big-ticket projects and strong order files in the industry which support continued growth in construction activity given favorable home investment and outdoor living trends. And lastly, the industry has a long track record of inflation management through annual price increases. As I mentioned earlier, the industry is experiencing inflationary pressure and our team continues to focus on inflation management. Hayward’s market position, product offering, and focus on operational excellence drive our attractive financial profile consisting of long-term revenue growth and earnings potential supported by structural trends and recent industry tailwinds. As we look ahead, we believe the strong order file for the new pool builds, a growing installed base, increased usage, rising prices, and product upgrades will support our continued growth. With that, I’d like to turn the call over to Eifion Jones who will discuss our financial results in more detail.

Thank you, Kevin, and good morning. I will start on slide nine. All comparisons that I make will be made on a year-over-year basis. As mentioned earlier, we are very pleased with our first quarter results and our ability to accelerate shipments and expand our production capacity to capitalize on the surging demand environment, while delivering significant margin expansion and record earnings performance. Net sales for our first quarter of 2021 increased $164.2 million or 96% to $334.4 million for the three months ended April 3, 2021. The increase in net sales was primarily the result of higher volumes mainly in residential pool equipment sales from continued strong demand for pool equipment, upgrades, and an increase in new pool constructions. An acceleration of outdoor living trends and a 2.5% gross price increase along with reduced special deal rebates resulting in a net 3% price impact, as well as favorable foreign currency effects compared to the same period of the prior year. Gross profit increased to $159.9 million, an increase of $84.3 million or 111.5%. The gross profit margin was 47.8%, an increase of 340 basis points, resulting from the net price increase discussed above, manufacturing leverage, net cost savings, a favorable mix of higher margin North America sales, partially offset by inflationary increases in raw materials and logistics expenses. Selling general and administrative expenses increased $23.2 million or 54% to $66.5 million driven by stock-based compensation invested as a result of the IPO, along with other IPO-related expenses in addition to volume-related expenses. As a percentage of net sales, SG&A decreased to 19.9%, an improvement of 550 basis points. Research development and engineering expenses are $4.8 million or essentially flat from $4.7 million in the prior year period. Operating income increased by $67.2 million or 533% to $79.8 million. The increase in operating income was driven by a high net sales and gross profit margin expansion, partially offset by the higher SG&A expenses. Net interest expense decreased by $1.3 million, or 7% to $18.3 million due to reduced interest rates on our floating rate debt and a reduction in the use of our ABL facility. During the first quarter, we incurred $5.8 million of debt extinguishment losses, which were associated with our debt repayments after our IPO. During the quarter, we incurred an income tax expense of $15.2 million, compared to a tax benefit of $3 million for the prior year period. This was primarily due to increased income from operations. Our effective income tax rate increased by 29.2%. Net income increased from $47.3 million to $36.9 million, compared to a net loss of $10.4 million in the prior year period. Adjusted EBITDA increased to $107.3 million, representing an increase of $71.5 million or 200%. Adjusted EBITDA margin increased to 32.1%, compared to 21% for the prior year period. Now, turning to our segment results beginning on slide 10. Hayward’s operational management structure is aligned to its key geographies and go-to-market strategy resulting in two reportable segments, North America, Europe, and Rest of World. In North America, net sales increased 105% to $271.5 million for the first quarter. The increase was driven by higher sales of residential pool equipment and increased pricing. Gross profit increased 121% to $134.7 million. The gross margin expanded by 350 basis points to 49.6%. Gross margin expansion was driven by net price increases, manufacturing leverage, and cost savings, partially offset by inflationary increases related to raw material, freight, and higher import duties. North America segment income increased 280% to $85.8 million. Adjusted segment income increased 220% to $95.8 million. The segment increased mainly from higher sales, partially offset by higher volume-driven SG&A expense. Turning to slide 11 for Europe and Rest of World, net sales increased 66% to $62.9 million. The increase was primarily driven by continued strong demand for pool products and a favorable impact from foreign currency exchange. Gross profit increased by 75% to $25.2 million. Gross margin expanded by 200 basis points to 40.1% from 38.1% for the prior year period, primarily driven by price increases and volume leverage, partially offset by the inflationary impact from higher raw material costs, as well as inbound and outbound shipping costs. In Europe and Rest of World segment income increased 166% to $14.9 million. Adjusted segment income increased by $9.4 million to $15.8 million from $6.4 million for the prior year period. The increase in segment income was due to higher volume, a favorable mix, and the tailwind from currency. Turning to our balance sheet. We continue to strengthen our position with deleveraging from 5.2 times at the end of the fiscal year 2020 to 3.3 times at the end of the first quarter of 2021, facilitated by the proceeds from the IPO to pay down debt, as well as growth in our LTM adjusted EBITDA. During the first quarter of the calendar year, we typically have cash use resulting from an increase in our accounts receivable position due to the grants of extended credit terms to our channel customers as they build their inventories in anticipation of the pool season. These receivable positions are substantially collected over the second quarter. Consequently, cash flow from operations in the first quarter was a use of $131.7 million, a decrease of $33.8 million or 35% from $97.9 million cash used in the prior year period. Cash used in investing activities was $4.6 million, compared to cash use of $3.9 million in the prior year period. The business continues to prioritize equipment investments and expand capacity. Total liquidity at the end of the first quarter was $196.8 million, comprising $13.8 million of cash on hand and $183 million available for future borrowings under our ABL revolving credit facility. As Kevin mentioned, we now issued guidance for the full year 2021 of a net sales growth in the range of 40% to 45% year-over-year and an adjusted EBITDA of $360 million to $390 million, reflecting 55% to 68% year-over-year growth. The outlook for free cash flow ranges between $190 million to $220 million. And with that, I will now turn the call back to Kevin.

Thanks, Eifion. I will pick back up on slide 12. Hayward’s core values drive our commitment to ESG. You hear us talk a lot about the environmental benefits of our products, as well as our manufacturing capabilities. We have a strong culture and focus on creating an attractive and safe work environment for all employees. And finally, we have built a leadership team with unique talents and diverse backgrounds that are committed to leading by example with ethics and integrity and ensuring compliance with our strong policies throughout the organization. On slide 13, we remain focused on being at the forefront of product innovation and as we continually expand our product offerings, we are committed to providing more environmentally friendly and sustainable solutions. We design our products to be energy efficient, conserve water, and avoid harsh chemical usage. To highlight a few examples, over the past three years, our variable speed pumps have helped generate approximately 1.1 billion kilowatts of energy savings, which is a 90% reduction in energy used compared to the previous generation of pump products. We reduce chlorine usage by approximately 81 million pounds through the installation of solar chlorine generators. Additionally, following the installation of the UV ozone system, the pool will require up to 50% less chlorine to properly treat the water. Finally, we have saved approximately 2 billion gallons of chemically treated heated water with the transition to cartridge filters. I will wrap up on slide 14 and highlight Hayward’s market-leading position as a pure-play in the outdoor living space, our innovative and technologically driven product offerings, strong brand, and competitive positioning, and our focus on operational excellence. We continue to see robust demand and structural trends supporting long-term growth opportunities. We are excited to begin our journey as a public company and look forward to getting to know our new shareholders and educating them on our company and our progress. With that, Operator, we are now ready to open the line for questions.

Thank you. Your first question comes from the line of John Lovallo of Bank of America.

Hey, guys. Thank you for taking my questions this morning. The first one is, can you just remind us of what your key material inputs are, like resins and motors on the component side and the degree of inflation that you are expecting in your forecasts? And along those lines, is the recent 5% price increase enough and what’s your ability to go back to the market with additional increases needed?

Sure. I will let Eifion provide some specific percentages. Regarding our key inputs, you've already mentioned several. We've analyzed the situation well, especially concerning electronics and resins, prior to announcing the price increase around a month and a half ago. We believe this increase is adequate, although the situation remains dynamic. Additionally, we see a chance for more typical price hikes around the October 1st timeframe. Therefore, we feel there may be options for further adjustments if inflation continues to impact us. However, we currently believe that the price increase we announced a month and a half ago is sufficient to address the inflationary challenges we are encountering.

Yeah. Good morning, John. It’s Eifion. As Kevin mentioned, our pricing action really informs you how we think about inflation for the balance of the year. Globally, we are at a 5% out-of-cycle price increase that we initiated in March, which covers our expected inflation across the basket of raw materials, which, as Kevin mentioned, primarily on the commodity side, resins, copper, and steel are the main contributors to that. When I think about the actions we have taken in addition to pricing, we have communicated previously at the beginning of the pool season, we typically establish inflation mitigation programs. Those will substantially be with us through the end of Q2 and then out-of-cycle price increase will become effective into Q3 to protect the margin.

Got it. That’s helpful. And then as a follow-up, can you just help us with the monthly progression of financial results? I am curious, was each month in the quarter stronger than the prior? What I am trying to get at is maybe you can help us get some of the key drivers that drove the delta between what you reported and what you have been forecasting in mid-February.

Yeah. I mean, we came into the year with some cautious optimism. We have seen a very strong first quarter, 96% growth year-on-year as we had communicated. That already infers a 19% full year-on-year growth, assuming the balance of the year would be flat, which we did not project at this time, as you can see from up 40% to 45% full year guidance. We do expect Q2 to be in line with Q1 at the topline. We have great visibility through a very strong order file exiting Q1. Q3 is a seasonally lower sales period into the channel, but we still expect to have a good comp up in Q3 year-over-year. Q4 is obviously the early buy period, setting up for the 2021, 2022 seasonal year. But, again, we expect that to be a good comp up period year-over-year. It’s a little bit too early to indicate beyond that time period. But as Kevin mentioned in his earlier remarks, sentiment remains strong, industry sentiment remains strong. Outdoor living continues, the focus to migration to the Sun Belt continues, and millennial investments. All of these themes continue to inform us of an influx in the demand profile in the industry.

Okay. Thanks very much.

John, I would just add, like, demand is strong. I think inside that market growth, the demand for Hayward products continues to escalate. Right now the order file is very strong. We continue to increase our production capacity quarter-on-quarter. And everything Eifion just said is really with a view of what continues to happen with the order inflow and how we can best match our production capacity and labor and material to be able to capitalize on that market demand.

Thanks, guys.

Your next question comes from the line of Nigel Coe of Wolfe Research.

Hey. Good morning, everybody. This is Brian on for Nigel. I’d also say congrats on a very good quarter. I just wanted to dive in a little bit more on the capacity expansions. Can you just walk through how you were able to do that without extending the shifts or was there idle square footage you were able to utilize and reworking some of the product lines? And then how much capacity expansion opportunity do you have left if demand continues to remain robust?

Yes. Good question, Brian. Good morning. I would say, it’s really about bringing more labor into our company and expanding some shifts, as you mentioned, but obviously ensuring that the material and the componentry can match our desire. So it’s really working in lockstep there. Our six centers of excellence around the globe have additional capacity opportunities before we need to contemplate big capital investments. So opportunistically we can continue by increasing our production to satisfy this market demand going forward.

Yeah. I mean, Brian, good morning. Just to build upon that. As Kevin mentioned, six large facilities globally, three in North America, which we think is an advantage to be placed with inside our primary market to give us the speedy service proposition for the channel. But as Kevin mentioned, we have expanded shifts. We have tremendous remaining capacity left within our manufacturing footprint. We have additionally, in these last six months expanded our distribution network. We have added a West Coast facility in Phoenix, Arizona, which has increased our distribution footprint by 30%, which again has further enabled us to service the marketplace in a timely way. But we continue to expand our production through our variablization model as we continue to utilize the existing machinery through additional shifts.

Great. Thanks. And then a quick follow-up is, have you seen any shift in kind of competitive dynamics since the IPO or the announcement of the IPO? And how are competitors responding, whether it be in the marketplace or M&A or anything along those lines?

I wouldn’t say I have seen anything really change. I mean, I think this is a well-structured industry. I think we are all interested in growing the pie and we understand that service and new product introductions is really what’s good in channel partnerships, is really what’s going to drive share gains individually inside of there. So, I mean, we have an interest. You mentioned on the acquisition side. We are pretty active in that front right now and seeing how we can continue to grow the topline both organically, as well as inorganically. So, no, I wouldn’t say in the two months or so since we have been public there’s been much competitive shift in the aftermath of that.

Great. Thanks. I will pass on.

Thanks.

Thanks, Brian.

Your next question comes from the line of Brian Lee of Goldman Sachs.

Hey, guys. Good morning.

Good morning.

Good morning.

Kudos on a great quarter here out of the gate. Maybe going back to the earlier question about sort of growth and visibility, 2021 obviously sounds like it’s delved in pretty well. Just as we think about medium-term visibility, you guys had said at the time of the IPO mid-single to sort of high single-digit organic growth that’s right for the industry and that’s right for Hayward. I am going to ask you if that’s still the right, heading into 2020. I guess just trying to think from a revenue algorithm perspective a lot of the things you talked about like 2 percentage points of price, 2 percentage points of volume and then mix, at least for this year, they are moving really far out of bounds. So is that still the right revenue algorithm as you think about just medium-term 2022 or should we be sort of out of bounds for some period of time, whether it’s on price, whether it’s on volume growth, where you can continue to track at these strong growth rates?

There’s a lot to unpack here. It’s a great question, and I understand why it’s on your mind because it’s on ours as well, Brian. The 40 to 45 range we've provided for the short-term encompasses all the elements I mentioned earlier about new construction, which we believe could increase by 20%. We see no reason why this growth shouldn’t extend into 2022 based on what we're hearing from builders and other dealers. The remodel market is also strong. The industry has effectively managed pricing, allowing us to absorb costs and pass them along, which leads to the significant size of the aftermarket. This factor is mainly driving our outlook for the current year, given the rise in usage and the overall momentum the industry is experiencing in upgrades, repairs, and replacements. We prefer not to give precise mid-term guidance at this time. The comparisons will become more challenging as we progress through 2021 and look back at 2022. For now, we would like to maintain a high single-digit growth expectation for 2022 and beyond. We will keep you updated as the year unfolds, and if we notice any changes, we will certainly let you know.

Okay. That's fair. I have another question about refining the model a bit. When we examine the adjusted EBITDA margins at 33%, it's quite impressive. The simple question is how sustainable is this? Historically, we have seen you peak in the high 20s, and currently, you are operating at revenue levels significantly higher than those previous peaks. What should we expect for the margin target for the remainder of the year? Should we anticipate a leveling off or a moderation as the year progresses, or is this 30% level on an annualized basis the right target? Is it reasonable to expect to move above the high 20s like you have seen before?

Yeah. Thanks, Brian. Again, a really good question. Look, we have been very pleased with the development of the margin, both at the gross margin level, which was up 340 bps year-over-year and 280 bps quarter-over-quarter and that really reflects the tremendous operating leverage that we are being able to achieve as we ramp production on more variablized model basis. So we believe that now is a structural shift in our business as we continue to operate at those higher levels on the learnings that we have achieved in that model structure. We continue to leverage our SG&A base and we have a strong management program to govern our cost investments within that area. So bottomline, when we think about the balance of the year, there will be a slight moderation from our 32% in Q1, but we still expect good growth toward our 30% for the full year.

Okay. Thanks so much. I will pass it on. Appreciate it.

Thanks, Brian.

Your next question comes from the line of Ryan Merkel of William Blair.

Hey. Thanks. First question for me, just thinking about 2Q EBITDA, I think you said, it would be similar to the first quarter, but typically second quarter EBITDA lifts quite a bit from the first quarter. So just to clarify, is this a typical seasonality just simply the strong 1Q? So you don’t want to get ahead of yourselves or could there be a little upside to second quarter guide?

I think there has been a slight change in seasonality due to a strong first quarter. As you know, in the fourth quarter last year, manufacturers began adjusting to early buying trends while still fulfilling 2020 orders. This allowed us to enter the first quarter with a solid backlog of early buys that we could utilize effectively. Currently, inventory levels are low given the high sales rate. We are projecting similar performance to the first quarter at this point. However, demand remains strong, and if we can navigate any challenges, we will see how things unfold in the second quarter. It's important to emphasize that the demand is there, and interest and usage of these pools in backyards is extremely high.

Okay. Yeah. Makes sense. And then, secondly, can you comment on taxes and how much of a lift did you see in the quarter from the repair work and might there be more of that in the second quarter? Thanks.

Yes, as mentioned in previous earnings calls, we agree that this is a serious situation. There is a lot of prioritization happening. Unfortunately, we haven't been able to supply as much product to the area due to high demand elsewhere, which is disappointing. This will likely continue into the second quarter as more materials arrive to help establish a more lasting solution. Many are opting to take heaters offline for now just to ensure they have access to flowing and treated water. This situation affected us in the first quarter, but I don't believe the impact was significant enough to provide a specific number in response to your question, Ryan. It had some effect, but it wasn't substantial on our first quarter results.

All right. Great. I will pass it on. Thanks.

Your next question comes from the line of Mike Halloran of Baird.

Hey. Good morning, everyone. Just some comments or questions here. First on channel, any variance you are seeing between those kinds of four major channels, whether the retail side, e-commerce, distribution, or through the builders?

No, I don’t think so. I believe there is real growth across all those channels right now. Our main approach to the market is through distribution, and our strong partnerships there are supporting retail, builders, and servicers. For example, in Texas, to respond to Ryan’s question, people in the affected area have been turning to the internet to find inventory to secure equipment more quickly. So there may be a slight increase in that area, but I see broad growth across all channels.

That makes sense. And then I have maybe a tough question here, but how are you guys thinking about when that backlog starts normalizing or maybe when you can start catching up to that backlog, whether that’s your own production capacity or maybe commentary from the channel what the builders are saying. How some of your major distributors are talking about things. But any kind of thoughts on the timeframe on which that can start normalizing on a little bit?

Good morning. This is Eifion. It’s great to talk to you again. We will continue to build production capacity through the second quarter into the third quarter to address the current strong order backlog. As we approach the end of the third quarter into the fourth quarter, we expect the backlog profile to start to stabilize. Stabilize is a nuanced term. This business continues to evolve, and we believe the overall value of the order backlog will change. However, regarding daily sales within the backlog, we anticipate a stabilization as we exit the third quarter into the fourth quarter.

Thanks for that. Appreciate it.

Your next question comes from the line of Rob Wertheimer of Melius Research.

Good morning, everyone. Your results are impressive, and the industry is thriving, with you exceeding industry performance. I’m curious if you could comment on how your operations might have enabled you to gain some market share. It seems that channel inventories haven't increased as significantly as sales. Do you believe you are in a stronger distribution position that will allow you to fulfill orders throughout the year, possibly gaining some share in an industry that typically doesn’t see shifts? I’d like to understand how you characterize this growth, whether your distribution strategies have been more effective than others, and if there's anything else you’d like to highlight that contributed to this success. Thank you.

Yeah. Great question, Mike. I think I appreciate you highlighting the operations. You got it first in your question there because I do believe that our team around operational execution deserves a high praise for what was accomplished not just this past quarter, but frankly, it’s been several quarters running, working closely with our supply chain to be able to ramp up production. And I think that as we have been able to satisfy some of that demand, it kind of builds on itself. I do think that because of our production ramps that beget some additional orders, which I think, ultimately, could lead to some market share gains for the Hayward brand out there. So and as you said, channel inventories are not necessarily where any of us want them. The sell-through is very brisk right now. So everyone’s looking for more production. Our folks are looking to build more and our channel partners and trade partners are looking for us. I would just close by saying, I do think that we have had a nice response to some recent product launches out there. It’s our lifeblood and we believe that we are bringing some great connected, environmentally sustainable products to the marketplace that’s showing strong pull-through and great initial reaction. So that’s kind of how I see it, Rob.

Thanks so much.

And your final question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

Hey. Good morning, guys.

Good morning, Jeff.

Good morning.

I want to discuss your impressive sell-through performance. However, I would like to know where you are experiencing constraints regarding components and what factors might be limiting growth among the contractor base, which must be quite busy.

Yeah. Good question. Yeah. I think one of the differentiators that we have as Hayward is, we are a vertically integrated manufacturer, which I think sets us apart from potentially others in the industry. We take basic commodity raw materials and we convert those into components that end up with assembly into finished goods. So we are less reliant on component manufacturers, which I think gives us an edge in our supply chain capabilities. Clearly, we see and we have communicated that there’s some tightness in the supply of commodity resins, copper, steel, and some specialist metals. We have continued to stay close to our suppliers. We have made some strategic investments into our suppliers to secure a volume of those commodities and we will continue to work to make sure the supply lines remain open. But, again, I think that, one of the big, large differentiators for Hayward is, we are vertically integrated and that provides us with agility in the marketplace more so than others.

Okay. Great. Regarding inventories, what does the guidance suggest about the inventory rebuild and your ability to replenish inventories by year-end, and how might that affect future years?

Sure. Three years ago, we began focusing on our balance sheet and improving inventory management. We have progressively addressed over-investment in inventory during this period. Currently, we feel confident about our inventory levels at Hayward. From the end of 2020 to the end of Q1, our absolute inventory values have not increased, mainly due to our investments in raw materials to ensure production supply. We do not anticipate increasing our inventory levels by the end of the year. We will continue to manufacture and meet market demands. Going forward, we intend to maintain discipline in our balance sheet, and the channel has accepted the new service model we are implementing, which is much more responsive to their needs.

Jeff, if you are specifically asking about channel inventory, we will not have months of sales of inventory this season based on anticipated demand. It is likely that it will be later this year before we can return inventory positions to historically expected levels.

Okay. Great. Good color, guys. Thanks.

Thanks.

Thanks, Jeff.

And your next question comes from the line of Saree Boroditsky of Jefferies.

Thank you for including me. You mentioned that additional price increases will take effect. Did you notice any pre-buying in advance of this price hike, and is there a delay between when you implement the pricing and when it impacts your profit and loss statement, considering your significant backlog?

Good morning, Saree. We announced that the two segments have slightly different effective dates. In North America, we announced late March with an effective date of May 1st. We didn’t really notice much of a pre-buy before that took effect. However, it will likely be in Q3 before we see significant impacts on the P&L. In Europe and the Rest of the World, it took effect in April, so it may be slightly sooner in that segment than what I just mentioned for North America.

Yeah. I would just add the inflation mitigation programs that we have with our suppliers are typically six months to eight months in tenure and that those will be in effect through Q2. So though the price increase became effective on new orders in Q2, as we mentioned, Saree, the pricing on the invoice will really be reflected in Q3, but mitigation will cover inflationary pressures through Q2.

Got it. Thank you. And then you talked about the benefits of new products. It looks like some of your products help reduce chlorine use. Just given the shortages there, are you seeing increased demand for these types of equipment and did that benefit the quarter?

Yeah. I think most of us OEMs are actually seeing a nice pickup there. Frankly, we worked very closely with some channel partners and some trade partners in the immediate aftermath of the loss of that capacity with Hurricane Laura. So we moved pretty aggressively toward increasing some assembly capabilities and production capabilities to get some of the salt chlorine generators in production and out in the channel. So we believe that from an ESG standpoint, salt is a great alternative and we are seeing a pickup there and it’s a nice alternative to the chemical usage. But I think you might have just touched on our HydraPure product, which was introduced late last year, which is a combo of UV and ozone. When that’s paired with any form of chlorination, whether it’s salt or tablets, the use of the HydraPure can actually cut or will actually cut chlorine usage by up to 50%. So that’s a good alternative regardless of whether you have a salt system on your pad or not.

Great. Thanks for taking my questions. Congratulations on the quarter.

Thank you.

Thanks, Saree.

That concludes the Q&A session. I would now like to turn the call back over to Kevin Holleran for closing remarks.

Thanks, Alicia. In closing, I just like to thank everyone for their interest in Hayward. As you can see, our business is producing phenomenal operational and financial results, and we are very well-positioned to continue to generate value for all stakeholders in the years ahead. Please reach out to our team if you have any follow-up questions and we look forward to talking to you again soon. Thanks again.

This concludes today’s conference call. You may now disconnect.