Welcome to Hayward Holdings Third Quarter 2021 Earnings Call. My name is Patricia, 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 third quarter 2021 earnings press release this morning to the Investor Relations portion of our website at investor.hayward.com. You can also find an earnings slide presentation that we'll reference during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion 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 will be provided in our Form 10-Q for our third quarter fiscal 2021 as 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 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 on the 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 will be included in our Form 10-Q for the third quarter of fiscal 2021. I'd 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 third quarter earnings call. I'll start on Slide 4 of our earnings presentation with some highlights from our third quarter results. We had another very strong quarter of growth as we delivered net sales of $351 million, an increase of 56% year-over-year, and adjusted EBITDA of $98 million, an increase of 61% year-over-year. We achieved nearly 90 basis points of margin expansion despite sharp increases in inflation and supply chain headwinds that are creating challenges throughout the industry. We continue to deleverage during the quarter as a result of healthy cash generation and remain in a very favorable position to invest in growth initiatives as part of our capital allocation strategy. Strong growth levels and more pronounced supply chain disruptions are resulting in rapidly rising costs of materials and transportation across the pool industry. In this environment, our strategic manufacturing footprint and operational capabilities are key differentiators. These strengths, along with our vertically integrated capabilities and strategic pricing actions, have allowed us to not only increase output but also dampen the adverse impact of inflation on our results. As we look forward, we believe additional price increases are warranted to align with the current inflationary environment. Now moving to our guidance on Slide 5. We expect the current demand trends to continue through the end of the year and into 2022, driven by pool remodels, upgrades to SmartPad products, and new pool construction returning to historical averages. Given the strong performance to date and our ability to execute on our growth levers, we are raising the net sales guidance for the full fiscal year 2021. We now expect net sales growth of 59% to 62% year-over-year compared to our previously provided outlook of 54% to 58%. Given the demand levels and backlog growth, coupled with rapid inflationary pressure, we have been proactive in managing our price, implementing cost reductions, and improving production levels. However, during the quarter, we saw an acceleration of our supply chain and inflation headwinds, leading to higher costs than previously anticipated. We've taken strategic pricing action this year and see the runway for these actions benefiting the price-cost dynamic positively. But we also expect a volatile environment in the near term. Despite these challenges, we are pleased to reaffirm our adjusted EBITDA guidance range for the full fiscal year 2021 of $405 million to $425 million, a growth range of 75% to 84% year-over-year. We feel a lot of questions about the outlook for the pool industry, and in the next few slides, I'd like to spend a little time addressing why we continue to be very positive about the health of the industry, both in the near term and over the longer term. Turning to Slide 6, we believe the affinity for outdoor living is here to stay, with strong secular trends driving a new appreciation for the backyard, of which the pool is the centerpiece. In addition to deurbanization, migration to the pool-rich Sunbelt, and the new work-from-home dynamic, we see millennials becoming an increased force among homebuyers, and they have embraced outdoor living as a key component of the home experience. According to the National Association of Home Builders, we're also seeing solid interest from potential homebuyers and strong year-over-year improvements in confidence levels in the remodeling industry. Collectively, these factors create a favorable backdrop for pool demand. On the right side of the slide, we referenced some key metrics that capture the rapid adoption of IoT smart digital technology conversion of the home. There will be an estimated $77 million smart homes by 2025, with smart home penetration rising to 60% from about 40% today. We're seeing very strong adoption in the pool market, with smart IoT controls on 65% of new pools built compared to less than 30% of existing pools. Awareness of this increased functionality is driving upgrade conversions, and we believe we're in the early innings. This trend not only affords the homeowner greater control and ease in operating the pool features but also provides Hayward the opportunity to directly interface with the user. Turning to Slide 7, in addition to the digital conversion opportunity I just addressed, you can see similar opportunities with chemical treatment moving to natural swimming pools and energy conversion to high-efficiency variable-speed pumps. Our market-leading omni app is a gateway for controls and automation to become more mainstream, while the simplicity of use is removing the barrier for homeowners and, frankly, trade professionals to include more technology products onto the pad, as well as in and around the pool. Our product content opportunity on the technology-rich SmartPad pools can be three to four times compared to what we see in legacy pools. SmartPad truly delivers the ease of use, ambiance, and enjoyment elements homeowners desire, in addition to lower costs of ownership and providing environmentally sustainable solutions. Importantly, the equipment still only represents a small portion of the total pool cost. Finally, on Slide 8, the macro environment remains very positive, supporting the broader housing industry, and remodeling activity remains strong and poised to continue growing. Looking more specifically at the pool industry, we have a strengthening trend in new pool construction. The 2021 projected volume is just at the 35-year median levels with plenty of runway for future growth. The aftermarket of installed in-ground pools is at a record age, now on average, greater than 22 years old, providing a rich source of remodel and upgrade opportunities. Lastly, we see the trend in IoT-enabled smart technology in and around the home accelerating, with approximately 60% penetration by 2025, a statistic that we now see on new pools. To wrap up on the industry, we continue to feel confident about the health of the pool industry in the near term and over the longer term. 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'll start from Slide 9. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased with our third quarter results and the continued demand and ongoing adoption of our pool products that we have seen throughout the channel, along with our operational leverage in a very challenging environment. Net sales for our third quarter fiscal 2021 increased $126.1 million or 56% to $350.6 million. The increase in net sales was primarily the result of higher volumes, mainly in residential pool equipment and our ability to increase production capacity to keep up with demand despite global supply constraints. During the quarter, we saw growth across the product portfolio, with demand for more efficient, environmentally-friendly, and automated pool products remaining robust. The pool market is seeing extended demand cycles due to the healthy levels of upgrades in repairs, in addition to new pool construction. Net sales during the quarter benefited from a 7.1% net price increase, as well as favorable foreign currency effects compared to the same period of the prior year. Gross profit increased to $162.5 million, an increase of $66.3 million or 53%. Gross profit margin was 46.3%, a decrease of 95 basis points. The decline in gross margin is a result of the rapidly rising cost of inflation as well as global supply chain disruptions due to higher costs of raw materials and freight. The impact of these bottlenecks on costs accelerated through the quarter, dampening the impact of our previously announced price increases. As a reminder, the 5% price increase announced in March took effect on orders returned in May. During the quarter, we started realizing those new prices, although the net impact was diluted due to accelerated inflation trends. The July announcement, which raised prices an additional 5% to 7%, took effect on orders not shipped by September 27, leading to more of an expected fourth-quarter impact regarding the price-cost dynamic. We continue to proactively address these inflationary pressures not only through managing price but also by leveraging our agile manufacturing footprint and disciplined cost management. Selling, general, and administrative expenses increased by $19.4 million or 39% to $68.8 million, primarily driven by increased expenses in distribution and variable compensation as a result of higher volumes. In addition to these higher expenses, there were a number of one-time charges taken during the quarter, most notably a $3.5 million legal charge for the settlement of ongoing litigation. As a percentage of net sales, SG&A decreased to 19.6%, a decrease of 240 basis points, driven by improved operating leverage. Research, development, and engineering expenses totaled $6 million or just under 2% of net sales, compared to $5.1 million or 2% in the prior year period, as we continue to support growth with investments into new products and technology features. Operating income increased $42.6 million or 121% to $77.8 million. This increase in operating income was driven by higher net sales and operating leverage, partially offset by increased costs of materials and shipping costs. Net interest expense decreased by $6 million or 35% to $11.1 million, primarily due to debt repayment and lower interest rates resulting from the second quarter 2021 amendment to our credit facilities. During the quarter, we incurred an income tax expense of $14.3 million compared to $5.5 million for the prior year period. This was primarily due to increased income from operations. Our effective income tax rate was 22.2% compared to 26.5% for the prior year period. Net income increased $35.1 million or 231% to $50.3 million. Adjusted EBITDA increased to $98.3 million, representing an increase of $37.3 million or 61%. Adjusted EBITDA margin increased 87 basis points to 28% as higher volumes and improved operating leverage but were partially offset by the spike in costs. Now turning to our segment results, beginning on Slide 10. As a reminder, Hayward's operational management structure is aligned to its key geographies and go-to-market strategy, resulting in two reportable segments: North America and Europe and Rest of World. In North America, net sales increased 62.1% to $298.2 million in the third quarter. The increase was driven by higher sales of residential pool equipment and increased pricing. Gross profit increased 56.1% to $141.7 million. Gross margin contracted 183 basis points to 47.5%. Gross margin contraction was driven by elevated inflation from raw materials and freight as supply chain bottlenecks became more pronounced, partially offset by the net price increase, improved manufacturing leverage, and additional cost savings. North America segment income increased 87% to $91.9 million, and adjusted segment income increased 73% to $98.3 million. Segment income increased mainly from higher sales, partially offset by higher driven SG&A expense. Turning to Slide 11, in Europe and Rest of World, net sales increased 29% to $52.4 million. The increase was due to sustained market demand and favorable foreign currency effects. Gross profit increased 35.1% to $20.8 million, and gross margin expanded 167 basis points to 39.7%, primarily driven by favorable product mix and volume leverage, partially offset by the inflation impact on materials and shipping. Europe and Rest of World segment income increased 52% to $10.6 million, and adjusted segment income increased by $3.6 million to $11.2 million from $7.6 million for the prior year period. The increase in segment income was due to higher gross profit, offset in part by increased spread incentive cost. We continue to strengthen our financial position, delivering a net leverage of 1.8 times as of October 2, 2021, compared to 5.2 times as of December 31, 2020. This was facilitated by strong cash flow generation to pay down debt as well as robust growth in our LTM adjusted EBITDA. For the nine months ended October 2, 2021, cash flows from operations were $199.2 million compared to $226.4 million during the prior year period. There was a cash use of $13 million for working capital compared to a cash source of $156 million in the prior year period. Cash used in investing activities was $19.2 million compared to $12.8 million in the prior year period. Total liquidity at the end of the third quarter was $402 million, inclusive of $295 million unrestricted cash on hand and $107 million available on our revolving credit facility. Given our strong cash flow profile, available liquidity, and the consequential reduction in net leverage below our target range of two to three times, we have the flexibility to fund our organic growth initiatives, pursue M&A, and return capital to shareholders. With that, I'll turn the call back to Kevin.

Thanks, Eifion. I'll pick back up on Slide 12. We remain committed to the importance of ESG, our stakeholders, and our business, and are driven by our core values. We have continued to focus on the energy efficiency capabilities of our products and throughout our operations for which we have been awarded the 2021 ENERGY STAR Award for Excellence in product design. We strive to promote a diverse, safe, and inclusive workplace, and we pride ourselves on our strong company culture and recently completed our global employee engagement review. We have improved the diversity and independence of our Board with two new members, as well as the diversity of our executive team and management team at the Vice President level and above. We have more work to be done, but feel good about the improvements we made since becoming a public company. Lastly, our commitment to community remains a priority. We recently became a platinum sponsor of the Step Into Swim charity organized by the Pool & Hot Tub Association. The association uses its resources to provide swimming lessons and access to pools for underprivileged children who wouldn't normally have these opportunities. The charities' mission is to create one million more swimmers, and Hayward is excited to be a part of realizing this call. We look forward to enhancing our approach to ESG and engaging our stakeholders to define Hayward's most material ESG topics. I'll wrap up on Slide 13 and highlight Hayward's market-leading position as a pure play in the growing outdoor living space. Hayward's competitive advantages have helped us to grow share; our innovative and environmentally conscious technology products are driving SmartPad conversion and expanding our addressable market. Finally, our superior financial results are backed by an attractive large and recurring aftermarket business. With that, operator, we're now ready to open the line for questions.

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

So I was really impressed with the gross margins this quarter. I wasn't expecting you to make progress; we have gross margins up sequentially. Can you talk about price cost in the quarter, and then how should we think about the progression in 4Q and into early 2022?

Yes, good morning, Ryan. It's Eifion. As you know, we instituted the out-of-cycle price increase of 5% in March of 2021, which became effective on orders May 1st. Then we announced the seasonal year 2022 price increase two months earlier than normal, which was in the range of five to seven, which became effective on all orders, July 1st, onwards, that were not shipped by September 27. We saw some benefit from the earlier month price announcement in Q3; I'd say that was more pronounced in Europe. But given the size of the backlog in North America, I'd say the aggregate benefit of the combined price increases of 11% to 12% will primarily come through in Q4. Clearly, in Q3, we faced more inflation, and I would say more is projected as we step through the next two quarters. It is critical, Ryan, that we become more agile in terms of price increases. In the current inflationary environment, I believe more price action is necessary as we step along this inflation curve. I would just—and you'll see this in our 10-Q disclosures—you will see that there was a cost realignment in Q3 of about $1.7 million, which included the increase to gross margin by about 40 bps. If you discount that, there was a sequential step backwards of about 20 bps in the gross margin. So, Q3 was a challenge. We do expect price to close as we continue to execute on our price announcements, but it is taking a little bit longer than we had expected.

Okay, that's helpful. And not too different from what I was thinking. And then you managed the supply chain very well so far. I'm curious if you think the worst is over or do you expect more of the same in 4Q?

I think it's still a struggle, Ryan. I mean a struggle that I think we're managing better than many, but I don't really see an abatement. We still are seeing some shortages and some difficulty getting material line sizes; the whole industrial world is seeing that. So I'm not ready to say that it's behind us, but our operations team and supply chain team are doing an incredible job of growing production capacity and meeting this order file with this backlog that's at historic levels for us.

And just a quick follow-up, is it fair to say that there is a little more conservatism in the 4Q guide, just given what's going on out there?

Yes, I think that's absolutely correct, Ryan. I mean, we did raise the top-line guidance modestly over where we were before. We've kept the adjusted EBITDA range where it is. We are managing through these supply constraints. I think probably we've been challenged a little bit more due to the plus up 71% year-over-year in our sales profile. So as you get up to these upper echelons of growth, it's increasingly difficult to source the material, but we think it's the right thing to do to get out there and go after it to do that. I would remind everybody on the call that when I look at the fourth quarter, there are four less trading days than the comparable quarter last year and three less days in Q3, which is about a 6% reduction in available trading capacity. So, though it is a little bit conservative, the absolute level of the midpoint of our guidance does represent volume growth given the lower trading days.

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

So I'm actually wondering if you could just take a step back and look at the revenue growth, and I'm just trying to sell it into price, volume, and mix, because I think the assumption is that price might be 5%, but the rest is volume. But my guess is a mix is really impactful here. So I'm just wondering if you could take a stab at trying to quantify how much mix benefit you're seeing right now?

I'll lead off here. Yes, I mean, you will see that we have taken the price movement in the quarter, which were more pronounced in real terms in Europe as they saw the realization of the earlier off-cycle price enhancement, given that comparatively, they had a lower backlog than North America. In North America, you will also see that we did take a price step forward, but that's really a consequence of the mix that you're referring to. We did see great adoption of our variable speed product line come through in the quarter. We have also seen a significant step forward in the control adoption, so these are our control products that are coming through more progressively in the queue and year-over-year. We're very pleased with those controls coming into the mix. But the absolute real price in Q3 in North America was dampened by the size of the backlog, and it will become more of a Q4 reality for us in that particular segment.

I think the whole mix thing, Nigel, is another quarter of this progression that we're seeing to richer content being upgraded on the pads, or through remodels, or new construction. Some of the products that Eifion just mentioned are higher price points than the product that they're replacing on the pad, whether that's a variable speed replace single speed or color LED lights replacing white in convention. So you can go across the full product line, and this quarter was another proof point of that richer content and that mix, as you say in across the PoolPad.

Would you say that the mix is actually the biggest part of the - the biggest component of revenue growth as opposed to like-for-like units growth?

I would say when you look at the revenue line, we saw a greater mix in North America in the quarter than they have been seeing cumulatively. So you think about the sequential movements. Europe was down 26% Q3 to Q2, and North America was actually up 2%. So there was a bit of positive mix effect coming into the top line. Geographically, it was positive mix product line. And so, yes, it was more of a mix benefit onto the top line. Unit volume is steady, but there was more actually because the top line is a consequence of mix.

And then just my follow-on question is on the channel inventories. Obviously, we heard from bath pool con last week they've seen a significant uptick in inventories, but it sounds like they still want to get more. So I'm just curious if you could give us a bit more color in terms of what you're seeing in the channel in terms of inventory levels and what your distributors are asking for?

Yes, I mean I would say Peter's comments last week represent the industry as a whole. Inventories are in a healthier position than they were a quarter or two ago. If you look at it from a days-on-hand standpoint, it's still in an improving position, but certainly not too much by any means. Admittedly, the mix of that inventory may not be as ideal as any of us would like it; there are still some products that are in shorter supply. So we're working feverishly to address that. But in total, I think we're taking some extra shelf space right now. So we look at it really through two lenses: in absolute terms, what are the inventory levels looking like, but also then accounting for some additional shelf space through our share gains. So yes, I mean we keep close tabs on it. We have good insight from our large distributor partners, and these are conversations that we have with them in understanding what they need more of and trying to improve that mix so that we can push more product out to its ultimate use in the backyard.

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

Thanks for taking the questions. Maybe just a quick follow-up on the last one. You talked Kevin during your prepared remarks, you mentioned share gains; just in response to the question right now, you mentioned again and again, and I think it's sort of underappreciated as a part of the growth algorithm that's clearly helped you guys. Is there any way to kind of quantify what you're seeing or what you're sort of internally estimating for share gains? It seems like it's been a pretty meaningful tailwind this year. Just how much of the growth this year is coming from that? If you can quantify, and then maybe where are you seeing it most, whether geographically and market product-wise? Any trends that you're seeing that you think will also help in 2022?

Yes, great question, Brian. I think it is a big part of our story here in 2021. I'm going to be a little bit more generic in trying to identify what we think it is, because frankly, the data is not perfect, but I think it's directionally accurate. From a product standpoint, we're very excited that I think our largest improvements are around this digitization or the SmartPad conversion. We talk about things like automation and controls have been a meaningful share gain here in 2021. And then, as we've said, the products that frequently come shortly thereafter or even at the same time, things like a variable speed pump have seen share growth; gas heater has seen a share gain; salt chlorination, some of that may be the result of the Tricore situation, but frankly, the salt chlorination has been a strong product line for us for years. So that progression is multi-year in its timeline. And then we're seeing a lot more volume in the market around these color LED lights as homeowners are really looking to get more out of their backyard. So that's kind of product-wise. Market-wise, I think that we've seen some nice progress, frankly, in some underserved markets for Hayward, be that on the West Coast or the Southwest. So I think it has been a combination; while I think it has been a big piece of our success here in 2021 for sure. I think there has been some regional improvements to it, and then certainly some of the products that are better part of the SmartPad conversion are playing out nicely with several new product launches that have been very well adopted early into their introduction period.

That's great, helpful context. And then maybe just my follow-on, and I'll pass it on. Around price, I know this is getting a lot more focus just given the inflationary environment we're in, but if we take your price actions that you've articulated thus far, I think Eifion was talking about 11% to 12%, it won't all read out this year given the timing. And then I think Kevin, you mentioned probably some further price actions to come. If we assume there is another one or two here as we enter into 2022 or early 2022 in that same mid-single-digit range, is it fair to assume that the price that you expect to read out in 2022 could be sort of in that low to mid-teens type of percentage range? Is that the right way to think about sort of that piece of the growth algorithm as you head into next year?

Yes, we're not ready to announce what the 2022 price increase will be, but we are looking at further action, as I've said in the prepared remarks. I think as the baseline of the calculation, Brian, it's that 11%-12% that's been announced thus far here in 2021, really only a quarter, give or take, is what's going to be realized. So three quarters of that will roll into 2022 before the next round of actions. So I'm not going to confirm kind of that low. But we're in high single-digits, just on the actions that we've already announced here in 2021. But further actions are forthcoming, and we need to better align our invoice pricing with what the production costs are at the time that we're filling those orders. So we're spending a lot of time, and we'll be making announcements to the channel and the industry very shortly on what that next round is.

Your next question is from the line of Mike Halloran from Baird. Your line is open.

So a couple of questions here. First, leverage up two. Does this change at all with the focus? Obviously, organic investments are going to remain very front and center. I know you're thinking M&A in a targeted fashion still there, but what about dividends, buybacks, or some other return mechanisms, and how focused are you still on the debt pay down side?

Yes, I mean, our priorities really haven't changed. We remain focused, Mike, on the growth initiatives. We've got several larger organic programs outlined over the next two years, really focused on improving automation in our North American footprint, and improving our distribution footprint throughout both the North America and European geographies. We do have a healthy pipeline of M&A, which is our second priority here; we're pursuing those vigorously, and more to come in that regard. But as we pointed out, given we are sub-2, which is below the target range we previously communicated, then it does give us the flexibility to think about returning to shareholders. But we've got to formalize the policy, and it's too early to say what that would look like.

And then you talked about building visibility in the 2022. Maybe some thoughts on backlog, how you see the lead time stretching, and what gives you confidence when you look at the various components to your growth and its repair-replace and the lead for the new build, whatever, what are the factors that drive confidence on the volume side going into next year?

Yes, I mean, the backlog does stretch certainly into 2022. It's at elevated levels still despite some of our production capacity improvements. As you look at the level levers of growth, I think they continue to be very high confidence. Certainly new construction; I know others have talked about this—the builders are quoting well out into 2022, some even beyond. I know they're working feverishly to add labor and increase their crews to be able to get more pools in the ground in 2022. The remodeling segment of the market, I think, is another right opportunity. As I said in the prepared remarks, our pools are more aged now than ever, and there is an interest both with homeowners with a full-scale remodel or just looking to upgrade a piece or two on their pad that they're looking to digitize to take more control and automation over the pools or to increase the ambiance or to become more natural in the water treatment. So there are a number of different angles that continue to fuel our confidence in 2022, and we have a backlog right now that certainly supports volume growth in the early months of 2022 to start from.

And we have the next question coming from the line of Rob Wertheimer from Melius Research. Your line is open.

And please tell me if this is something we can't go into much detail, but I'm just curious about the channel response to price increases, whether your offers; I think you talked about last quarter to sort of shift how pricing goes through. Is that receiving any pushback? And just a little bit of curiosity to whether I can see the share gains you're doing. I got it, but whether if there is no raise prices faster at the end keeps the margin or channel partners in general. So just in general, how is that going through on changing the pricing mechanism, and that’s it. Thanks.

Yes, I think what you're referring to is the second price increase that Eifion mentioned earlier, which was really our seasonal increase. We announced it sooner, and there was really a change in practice to say that if orders received after July 1st weren't shipped by the end of the third quarter, that they would take the price increase. I think the channel understands that manufacturers are feeling input cost increases right now. So, actually, the announcements from a quarter ago or longer were received very well by the channel, understanding that suppliers need to offset these costs to be able to continue expanding capacity and getting product placed into the end of the channel. So I think it was great understanding and collaboration between us and our channel partners.

Your next question comes from the line of Jeff Hammond from KeyBanc. Your line is open.

Just on Europe, the sequential decline, is that just typical seasonality with vacations, or is there something else going on there?

No, I think you're right. This is typical seasonality, and then they had a strong start to the year. I mean, quarter-over-quarter, they were still up 29%, the year to date up 54%. But what you see is a little bit more of a return to normality seasonality over there, I mean Europe has a hiatus in the summer period as far as work activity. But no, it's just a reversion back to the normal seasonality, a little bit more quickly in that segment versus North America.

Okay. And then just back on 2022. Yes, I think you show the industry data on pool builds, and I think they have just a small increase, and maybe that's labor and contractor constraints. But how are you thinking about new pool builds in 2022 versus that industry data?

Yes, I think the data that you're referencing—the sources PK data there, which I know the industry, that's kind of the pre-eminent source for that data. And it is a fairly modest forecast for 2022. We continue to feel and to hear that there are tailwinds and interest in folks building out that backyard oasis. So I think what we know here in late October as we start looking into 2022, we believe that there is continued strong growth around new pool constructions in 2022.

Okay. And then last one: price cost. I think you're running a little bit negative as pricing catches up. But yes, if we started to see stabilization, which is maybe hard to believe in commodities, how long would it take you to start to get to the price-cost neutral or even positive?

Yes, you're right. We continue to see inflation. We don't believe that we've seen the worst of inflation yet. I still think, based on the commodity indices that we look at, we’re in for another couple of quarters of rising inflation; just how much of that is transitory versus structurally is yet to be determined. But I think inflation is here with us for quite some time. In terms of the price-cost lag, there is a lag. We're addressing on how to more proactively close that gap, given the size of the backlog. I think it's really important for the channel to understand that we do need more agile pricing, as Kevin mentioned—pricing that is more attached to the invoice than it is to the original placement of the order, which is not representative of the costs that we're incurring to manufacture and deliver those products to the marketplace. We believe potentially here that what we're feeling the brunt of inflation may be more so than others, given the significant uptick that we're doing in our sales profile. So hitting these 71%, 72% year-on-year growth levels is costing us, we believe proportionally more than maybe some others. But we need that more agile pricing; we're going to pursue it to close that price-cost gap.

I was hoping to ask Jeff's question, maybe a little bit differently in terms of kind of inflation buckets here. Yes, you have things like shortages, presumably expediting of material. How would you sort of break down the inflation you're seeing? Maybe something that is more commodity-based, where if we're looking at the near future, saying, 'this could be a better situation in a few quarters' versus maybe something that may stick with us for a while, like your base freight rates or labor costs, which might not dial back as quickly.

Yes, let's talk about that in the big broad buckets: raw materials, labor, freight, as well as tariffs. But in terms of raw material, our primary inflationary pressures are coming from commodity raw materials. So we think about resins. The multiple resin changes are performing to our plastic components in housing. You could probably watch the IPEX index, and you can see that the raw materials that comprise the index are elevated now, nearly 56% year-on-year, so that is challenged. In my personal belief, that will remain structurally high because the base chemical industry needs reinvestment economics in order to support the current demand profile in the industry. The next area we see is metals in our raw material, and metals are elevated. You're seeing where steel has gone over the last couple of months; copper started early and remains high, and we've got some specialty metals in our product lines, which are also reelevated and consequential to a shift in the demand dynamics, not necessarily the supply side. We think there is possibly a little bit of transitory inflation in the metal sector, which we will see come off next year. And then I would say, finally, when you look at the raw materials that are always the specialty raw materials that go into our bill of materials, microprocessors are a good example. You know where that tightness is in the marketplace, and you've heard others in the industrial sector and the car sector talk about a recovery in the micro-processor production levels. We’re following that type of commentary and expect that to improve over the course of the next 12 months. But my firm belief is we've seen a structural step-up in inflation, and then some of it may seem to be transitory in metals. We expect to see double-digit inflation stick, and we're pricing accordingly. The next one is, as you mentioned, is labor. Labor is difficult in North America. We've seen, at the entry minimum wage level, a step-up of 20%, and that's not going backwards. In terms of freight, we've seen labor impact the freight environment, ocean freights complicated; you've heard about the port congestion that's really coming back to a labor issue. So there are lots of things that need to normalize before we see freight come back under control. Lastly, tariffs, which were instituted in the U.S. at 25% from China—I'm not going to guess whether those will go away, but for the time being, we're pricing assuming they are here for a longer term than originally expected. Yes, to aggregate all of that, I would say double-digit inflation is with us to stay for a number of years before the supply side catches up, and we are taking the pricing actions to ensure we protect the business.

And then just a bit of a cleanup question. I think Nigel asked about some of the mix or some of the categories earlier, but anything on here—is that you could share? I would imagine that for all the structural elements, maybe that was one that folks stuck at home. I want to extend the pool season a little bit more maybe not. Structural, I'm curious what you think about that and how those have been doing over the past quarter?

Still doing very well, to your point, Josh. It was one of the first products that kind of became out of stock early on in the COVID experience as folks were looking to extend, well, maybe extend the season, open it earlier, and keep the pool open later. Based on the installed base, which is call it at or around 50%, there is still plenty of opportunity to add heaters, whether they're heat pumps or gas heaters, onto the pad. Add to that the fact that many pads have multiple temperature control units, whether it's running the spa and then a separate one for the pool or whatnot. There is still plenty of elevated demand for gas heaters and heat pumps; it's still one of our most backlogged products in the portfolio.

Your last question comes from the line of Joel Tiss from BMO. Your line is open.

So I think a lot, a lot has been asked and answered. And I just wondered, I'm kind of structurally, can you talk to us a little bit about how you lead consumers to want to upgrade their PoolPad and to feel the need to do it? It looked through like a better payback, or do you have any direct salespeople or online that can do that, or is that more through educating the builders and distributors and all that?

Yes, I think that there is a lot there, and I think we as an industry can certainly do more to be able to educate that homeowner. We still largely rely upon the builder and the servicer to understand those capabilities if you're comfortable selling it and installing it. But I do think that, you know, from a digital standpoint, there are opportunities to be able to increase the eyeballs on the payback opportunities that this SmartPad has, whether it's digitization or energy efficiency or natural water treatment. All of these—well, I'd say all—most of those are higher priced than the products they would be replacing, but they all have a sound business case, not to mention the fact that I believe homeowners want to operate their backyard in a very responsible, sustainable fashion. So I would say we're still largely reliant upon the trade, but we as OEMs and as the industry are looking to do a better job of making that case direct to the homeowner.

Okay, great. And one last little cleanup: you usually mention your manufacturing flexibility and incremental capacity you can squeeze out of your factories, and I didn’t hear too much about that. Are you kind of running toward the top end of your capabilities, or is there a lot more productivity to pull out of your manufacturing side? And then I'm done. Thank you.

Yes, thank you. Yes, I would say, look, we still have capacity that we can unlock in our manufacturing facilities. We've taken the most recent step to establish a new distribution center just sales. All of our primary North American manufacturing facility—that's going to free up a meaningful amount of floor space in our Clemmons manufacturing facility to add more production capability, and that was the underlying theme for that particular move. We continue to have expansion opportunities in Europe, and we're taking steps there to look at a sign of expansion. We have several automation investment programs underway to build further capability. So yes, we have more capacity expansion; we continue to look at that. We've got some really, really innovative things on the manufacturing floor over the last quarter, including converting several of our discrete product lines to multi-product capability product line. So it's not only sizing up our unit production; it's also adding agility and flexibility for the manufacturing capabilities as well. So it's all good news in terms of capacity. It is going to require some investments to take that next step over the next couple of years, but that's underway.

There are no further questions. I would now like to turn the call back to Kevin Holleran for closing remarks. Please go ahead, sir.

Thank you, Patricia. I just like to thank everyone for their interest in Hayward. As you can see, our business is producing phenomenal operational and financial results. I'm very proud of the hard work and dedication from our team, who continues to focus on providing the highest levels of service to our customers, allowing Hayward to deliver such strong results. We continue to execute during the course of the year, including very strong Q3 results highlighted by net sales growth of 56% and nearly 90 basis points of margin expansion. We raised our annual guidance last quarter, and we were able to raise our top-line guidance again this quarter while managing to an increasingly challenging supply chain and inflationary environment. We're very well positioned to continue to generate growth for all stakeholders in 2021 and 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. Thank you.

And this concludes today's conference call. You may now disconnect.