Earnings Call Transcript - HAYW Q1 2022

Operator, Operator

Good morning, and welcome to Hayward Holdings First Quarter 2022 Earnings Call. My name is Austin, and I'll be the moderator for today's call. 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.

Stuart Baker, Vice President, Global Strategic Planning and Business Development

Thank you, and good morning, everyone. We issued our first quarter 2022 earnings press release this morning, which has been posted to the Investor Relations portion of our website at investors.hayward.com, where you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, President, Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I'd 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 2022 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 under U.S. GAAP to adjusted EBITDA and 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. I'd now like to turn the call over to Kevin Holleran.

Kevin Holleran, President & Chief Executive Officer

Thank you, Stuart, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call. Near the end of the quarter, we celebrated our one-year anniversary as a public company. I'd like to personally thank our employees, dealers, channel, and vendor partners for making this inaugural year a great success. As I look back over the last 12 months, we have many accomplishments to be proud of. We have executed on key strategic initiatives and made investments in our product portfolio both organically and through M&A that have advanced our reputation as the innovative market leader in technology. We significantly strengthened Hayward's position in the market by leveraging our supply chain advantages and vertically integrated production model. This has proved especially beneficial in the current environment, resulting in share gains. The hard work of our teammates across our global organization has led to consistently strong financial and operational performance. We look forward to many years of success as a public company as we continue to build a track record of performance and strive to create meaningful value for all our stakeholders. I'll start on Slide 4 of our earnings presentation with some highlights from the first quarter. We delivered another very strong quarter marked by net sales growth of 23% year-over-year to a record $410 million net sales, which was on top of an exceptional growth of 96% in Q1 of 2021 over Q1 of 2020. Adjusted EBITDA grew 18% year-over-year to a record $126 million, yielding a 31% margin. As outlined on Slide 5, our performance continues to be driven by our ability to execute on the core drivers of growth: Digital Leadership, Dealer Conversions, New Products, Operational Excellence, Broad Channel Access, and Environmental Sustainability. Importantly, we have a wide range of factors supporting our growth, and this diversification gives me confidence as we look to expand our business in the years to come. I'll provide more detail on some of these items as we move through the presentation. But first, let me address a key pillar of our success, that being our Operational Excellence. Our vertically-integrated operations and our procurement expertise have provided greater supply chain flexibility, giving us the ability to increase output while maintaining the recent improvements to our structural margin profile. Our focus on operational excellence allows us to ensure product quality and availability despite the operational and logistical challenges most companies are experiencing. We're also pleased to report the opening of a new facility in Europe focused on automation and sanitization technologies that will help us to expand our sales in the region through the more than doubling in the production capacity in these product lines. On Slide 6, I'll focus on our IoT digital leadership driven by the powerful SmartPad conversion taking place in our industry, led by our Omni automation systems as well as highlight the breadth of our product offering. Omni is at the heart of the SmartPad, creating the pull for IoT-enabled devices. Our adoption rate continues to improve with user base increase of 45%. The power and simplicity of use have driven connectivity of a broad array of technologies, with the top 5 growth categories in the industry being LED color lights, controls, variable speed pumps, heaters, and sanitization. Hayward's growth in these categories continues to outperform the industry, supported by recent new product launches including ColorLogic LED lights, Omni PL controls, XE Variable Speed pumps, Small Footprint Universal Gas Heater, and AquaRite S3 chlorine salt generator, all of which have increased our new product vitality index by 37% year-over-year. Our complete offering provides diversification, allowing us to fully participate across our key end markets of aftermarket upgrade, repair and replace, remodeling, and new pool construction. Moving to Slide 7, I'd like to highlight that an important part of our growth strategy is the aftermarket conversion upgrade opportunities for Digital, Chemical, and Energy. There is a significantly higher take rate in new pool construction compared to the current level of aftermarket penetration for key products such as controls, salt chlorination, and variable speed pumps. Our sales teams are working with trade professionals to promote these exciting new technologies as aftermarket upgrades. We have seen greater dealer acceptance, as evidenced by our greater than 20% growth in our Totally Hayward loyalty program participation. We see this as a $6 billion incremental market opportunity by simply increasing the aftermarket penetration in these three categories to the new construction levels. On Slide 8, we highlight the initial spend for new key technology adoption at the point of construction or full-scale remodel and the aftermarket lifetime revenue stream. The difference between a SmartPad pool and a legacy lower technology, non-automated pool is typically around $7,000 for the equipment manufacturer, and the technology, feature-rich SmartPad provides compelling sustainability and energy efficiency benefits to the end user. Given the typical pool has a lifetime of around 30 years, and an equipment replacement every 10 years, there is a compelling lifetime value stream associated with this conversion, one which we feel provides a long runway for growth. This opportunity is a key focus for our sales and marketing teams as we work with trade professionals to execute the vision. On Slide 9, I will briefly discuss our M&A strategy, which focuses on core pool product or technology tuck-ins as well as backyard adjacencies. You'll recall that we announced at the beginning of the quarter the closing of three strategic tuck-in acquisitions, which have compelling technologies and further leverage Hayward's leading Omni Control solutions to increase the ambiance of the pool, spa, and backyard with a variety of novel water features, all of which benefit from our leading LED lighting technology. We are making good progress integrating these businesses into the Hayward family and are excited about the contribution they will make to help increasingly differentiate our leading lifestyle product portfolio. We would expect these products to be fully launched across Hayward Channel partners in the second quarter, with further product releases in time for the 2023 pool season. As we look forward, we have a strong pipeline of opportunities that we are pursuing and acquisitions will continue to be an important component of our capital allocation. With that, I'd like to turn the call over to Eifion Jones, who will discuss our financial results in more detail.

Eifion Jones, Senior Vice President & Chief Financial Officer

Thank you, Kevin, and good morning. I'll start on Slide 10. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased to report record results in the first quarter of 2022 driven by the continued adoption of our pool products that we are seeing throughout the channel, particularly our increasing suite of Omni connected SmartPad and lifestyle products, supported by healthy aftermarket adoption and improved operational capabilities with excellent production results in the quarter. Net sales for the first quarter increased 23% to $410.5 million. The growth during the quarter was driven by a 17% price realization, 7% positive volume growth and mix, partially offset by a 1% unfavorable impact from foreign currency devaluation. The net price impact over the prior year period reflected the accumulative impact of our previously announced price increases to mitigate the escalating inflationary cost pressures. Sales volume growth continues to be driven by demand for pool equipment both in new construction and, more importantly, in the aftermarket. Volume growth was achieved in North America, with Europe and Rest of World muted by the geopolitical circumstances in the region. Gross profit in the first quarter increased to $190.4 million, an increase of 19% year-on-year. Gross profit margin was 46.4%, a decrease of 144 basis points, primarily resulting from inflation pressure in certain commodities and freight costs as well as unfavorable foreign currency impact. Our pricing initiatives and supply chain capabilities have been successful in maintaining the structural margin profile of our business, but we are navigating a challenging and lengthy inflationary cycle. We remain confident in our ability to operate in this environment and have implemented a price surcharge at the beginning of the year to help mitigate the impact of inflation, and we're evaluating the need for the surcharge to remain in place and further price increases as inflation persists. Selling, general and administrative expenses during the first quarter increased 4% to $68.9 million, primarily driven by increased expenses in distribution, warehousing and marketing as well as increased regulatory costs as a public traded company and bad debt expense, which included write-offs for Russian-owned customers. This was partially offset by lower incentive compensation compared to the prior period, which also includes stock-based compensation expenses in the prior period related to the IPO. As a percentage of net sales, SG&A decreased to 16.8%, a decrease of 312 basis points, reflecting the leverage we have achieved as the business has grown. Research, development, and engineering expenses during the quarter increased 8% to $5.2 million, reflecting continued investment to support business growth and product development. As a percentage of net sales, RD&E was 1.3% compared to 1.4% in the prior year period. Operating income increased 34% to $106.4 million in the first quarter. This increase in operating income was driven by higher net sales and conversion to profitability. Net interest expense decreased 48% to $9.6 million for the first quarter compared to the prior year, primarily due to debt repayment and lower interest rates as a result of the second quarter 2021 amendment to the credit facilities. During the quarter, we incurred an income tax expense of $23.3 million compared to $15.2 million for the prior year period. Net income increased 101% to $74 million. Adjusted EBITDA increased to $126.2 million in the first quarter, representing an increase of 18% as a result of the higher net sales and operating income. Adjusted EBITDA margin decreased to 30.8%, or 134 basis points compared to the prior year period. The decline in margin is primarily due to the inflationary impact on raw materials, freight, and labor as a result of higher demand and supply chain constraints. Now, I'll discuss our reportable segment results for the quarter. As a reminder, Hayward's operational and management structure is aligned to its key geographies and go-to-market strategy, resulting in two reportable segments: North America and Europe and the rest of the world. Beginning on Slide 11, North America net sales for the first quarter increased approximately 28% to $346.3 million. The increase was primarily driven by a 19% favorable price impact and 8% higher sales volumes. Gross profit for the quarter increased 21% to $163.1 million. Gross margin decreased 252 basis points to 47.1% due to the stubborn inflation in raw materials and freight. Segment income increased 27% to $108.6 million. Adjusted segment income increased 19% to $114.2 million, while adjusted segment income margin decreased 231 basis points to 33%. Turning to Europe and the rest of the world on Slide 12. Net sales for the first quarter increased 2% to $64.2 million. Net sales benefited from approximately 8% net price increase but were partially offset by a negative 6% unfavorable foreign currency impact. The volume was muted due to the geopolitical circumstances in Europe at this time. Gross profit in the quarter increased 8% to $27.3 million. Gross margin expanded 246 basis points to 42.6%, primarily driven by favorable price increases and favorable product and customer mix. Segment income increased 14% to $17 million. Adjusted segment income increased by 16% to $18.4 million, yielding an adjusted segment income margin of 28.7% or an impressive increase of 354 basis points. For the first quarter, cash flow from operations was a use of $56.9 million compared to a cash use of $131.6 million during the prior year period. There was a seasonal cash use of $145.7 million for working capital compared to a cash use of working capital in the prior year period of $201.2 million. Despite the higher sales in the quarter, the seasonal cash used for working capital was reduced from the prior period due to a limited early buy program for the '21/'22 season in comparison to the prior early buying programs. Investing activities for the first quarter was $7.5 million, primarily comprised of capital expenditures. In the prior period, investing activities were $4.6 million, similarly primarily comprised of capital expenditures. Net debt to adjusted EBITDA for the last 12 months was 2x compared to 1.7x as of December 31, 2021. The increase in leverage reflects the cash used to support the seasonal working capital requirement and the share repurchase, which was completed in the first quarter for $81 million. Total liquidity at the end of the first quarter was $443 million, inclusive of $118 million unrestricted cash on hand and $325 million availability on our revolving credit facility.

Kevin Holleran, President & Chief Executive Officer

Thanks, Eifion. I'll pick back up on Slide 13. At Hayward, environmental, social, and governance, or ESG, has always been important to us, and we know that it's important to our shareholders as well. We continue to focus on the energy consumption throughout our operations as well as make sustainable products a key focus of our new product development roadmap. We strive to promote a diverse, safe, and inclusive workplace, and we pride ourselves on our strong company culture. As a recent public company, we have partnered with a third-party expert to conduct a materiality assessment and identify where we have the most impact across key ESG themes. The results of this materiality assessment have shaped the framework to guide our strategy focused on four key pillars: Products, Planet, People, and Principles. Under the oversight of our Nominating and Corporate Governance Committee of the Board, we will be working to make a difference in these areas as we continue on our journey. More recently, we initiated a global ERP conversion project to standardize systems worldwide. We are also pleased to report continued progress on the governance side with the nomination of Ed Ward as Independent Director to the Board of Directors subject to stockholder approval at the 2022 Annual Meeting of Stockholders next month. As President of the Client Product Group of Dell Technologies, Ed brings deep expertise in technology and leadership, and we look forward to adding his skills and expertise to the Board and Nominating and Corporate Governance Committee. We look forward to sharing our progress and welcome stakeholder feedback on our overall approach. On Slide 14, we transitioned to the sustainable trends supporting our outlook for 2022. We are very positive about the long-term health of the pool industry. Strong secular trends have significantly raised the appreciation for the backyard, of which the pool is the centerpiece. In addition, we see favorable economic data that not only supports healthy levels of new construction but even stronger aftermarket activity. While we are closely tracking macroeconomic trends such as elevated inflation, rising interest rates along with geopolitical developments, our business continues to expand. We remain focused on the aftermarket opportunity and aging installed base presents, which made up 80% of our total sales in 2021 as upgrade, repair, and replace made up 65% of the sales mix. Growth of lifestyle products incorporated onto an Omni SmartPad has outpaced other core products, and we expect this trend to continue as a key source of growth. And finally, new pool construction growth was healthy in 2021 but remains well below historical median levels. I'll wrap up on Slide 15 and discuss our outlook for the full fiscal year 2022. We are off to a good start to the year with strong performance in sales and profitability during the first quarter. Despite some broader macroeconomic uncertainty in the second half of the year, including ongoing supply chain and inflationary pressures, we are pleased to affirm our guidance for net sales growth in the range of 9% to 12% compared to 2021. This is comprised of a combined price and volume growth range of 12% to 15% partially offset by FX and one less trading day in 2022. We also expect adjusted EBITDA to be in the range of $460 million to $475 million for 2022, representing growth of 9% to 13% year-over-year. As I look at the longer-term health of the market, we see positive demographic trends, increased focus on the outdoor living space, and aging pool stock, and the ongoing conversion towards IoT SmartPad pools. While the current dynamics of the macro environment are evolving, we see home price appreciation and new demographics entering the housing market, particularly in year-round markets. With approximately 80% of sales tied to an aging existing pool base, the growth in new construction over the last two years provides a visible runway of growth. Finally, our ability to develop technologically advanced and environmentally sustainable products, driving pool owners to upgrade their existing pool pad to Omni Smarts further strengthens growth opportunities in the aftermarket. In summary, we continue to be confident about Hayward's position within the market and the opportunity to expand upon our achievements in 2022 and the years to come. With that, operator, we're now ready to open the line for questions.

Operator, Operator

Our first question is from Jeff Hammond of KeyBanc Capital Markets.

Jeffrey Hammond, Analyst

So just on the guidance, I wanted to just clarify on how you're thinking about the surcharges, because I think you didn't have that 4% in? I don't know if you're including that. And just on that topic, is the thought to kind of change those to price increases and have those stick? Just an update there.

Kevin Holleran, President & Chief Executive Officer

As for the second part of your question, Jeff, the longer these surcharges remain due to the inflationary pressures we initially believed would be temporary, the more likely it is that we will incorporate them into our permanent pricing structure. We have not made that change yet and continue to evaluate it on a month-to-month basis. However, the inflationary pressures are persisting, and we experienced more inflationary pressure in the first quarter than we had anticipated with previous price increases.

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes, Jeff. In terms of those parts of your question, no, the guidance does not consider the balance of year inclusion of the surcharge. But again, as Kevin just mentioned, it is evaluated month-to-month.

Jeffrey Hammond, Analyst

Okay. Given the strong start to the year and the belief that there might be additional pricing available, are you adjusting your volume expectations in the guidance? What are the factors at play?

Eifion Jones, Senior Vice President & Chief Financial Officer

Sure. I mean, in terms of the guide, we're still looking for a high single-digit growth year-on-year for price in the balance of the year. Certainly, FX is a headwind, more so against the euro than the other currencies, the Australian dollar and Canadian dollar. But FX is certainly more of a headwind than we originally thought coming into the year. In terms of volume, we're still looking for good volume growth in the balance of the year. It is, as we mentioned previously, for the full year, mid-single digits, and it's a little bit lower for the balance of the year than that, given the good start to the year.

Jeffrey Hammond, Analyst

Okay. And then just if I could sneak one in. Just any change, better or worse, in supply chain or freight dynamics?

Kevin Holleran, President & Chief Executive Officer

It's a complex situation with many factors at play. We have noticed some positive trends in material flow concerning key components. There has been progress with certain specialty metals used in our sanitization products and in components for our variable speed pumps. While the situation remains challenging, particularly with elevated levels of demand, as the quarter moved forward and into Q2, the shutdowns and quarantines in China, along with the port congestion in Shanghai and other locations, have intensified the pressure on material flow and pricing dynamics. Overall, we seem to be in a better position than we were in the latter half of last year, but it feels like we are experiencing changes on a week-to-week or month-to-month basis.

Operator, Operator

Our next question is from Rob Wertheimer from Melius Research.

Kevin Holleran, President & Chief Executive Officer

So why don't we try the next one in line, maybe Rob can come back.

Operator, Operator

Our next question is from Ryan Merkel of William Blair.

Ryan Merkel, Analyst

First off, just high level, are you seeing any signs of consumer spending slowing down or any cancellations in the order file? I guess I was a little surprised you didn't raise the bottom end of guidance here.

Kevin Holleran, President & Chief Executive Officer

We really haven't seen any kind of cancellations. We're in pretty close contact with both channel partners and our dealers, and the work on the books and new lead generation both remain strong despite plenty of price increases. And obviously, the channel inventory position has gotten better. We're in a much better position going into the start of the season in 2022. So no, we're still seeing robust demand and the order file on the books is still very strong and seems to be pressure tested, and product is going to be installed in the backyard.

Ryan Merkel, Analyst

Got it. That's great to hear. And then my second question is on gross margin. It sounds like inflation is running a little bit hotter as you mentioned, so are you still going to see year-over-year gross margin expansion in the second quarter?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes, Ryan, it's Eifion. We would expect that. As we mentioned before, our pricing actions, three of them totaling over 20% at the start of the year, were implemented. We did make some price concessions with certain fixed price arrangements, but those will conclude at the beginning of Q2. Therefore, we anticipate a higher price contribution in Q2 compared to Q1, which should be beneficial for our margins.

Ryan Merkel, Analyst

Perfect. Pass it on.

Operator, Operator

Our next question is from Brian Lee from Goldman Sachs.

Brian Lee, Analyst

Maybe first one, just to follow up to the prior question. Gross margins up in 2Q, pricing actions reading out, I understand all that. But if I back into, I guess, the midpoint of EBITDA guidance and the midpoint of revenue guidance and incorporating the strong start to the year in Q1, it implies EBITDA margins kind of flatlined to or down 50 to 100 bps for the rest of the year. So is something else happening below the gross margin line where you're not reading out some better EBITDA margin expansion metrics later into the year? Or is that something we just see into the second half per se on EBITDA?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes. Good question. I mean, what I would say is we're very pleased with the start to the year, a great margin in Q1 higher than the full year last year. And it's fair to say that the macroeconomic climate, both in the U.S. and maybe a bit more particular in Europe and the rest of the world, is a bit more difficult than where we had started the year. It's something we have to deal with. And we remain cautious about the second half of the year. We want to see the '22 policies and complete out strong, and every indication is it is strong. But we'll get a view then on the start of the new '23 season as we get to the end of Q2 this year and into Q3. I'd say the underlying growth drivers remain very strong. Secular trends remain strong, as Kevin mentioned, and everything is pointing to strength in the industry and strength for Hayward. So in terms of our guidance, it really reflects just a cautionary view on how the second half may develop. As I said before, price is still in the high single-digit growth year-on-year before the continued implementation of the surcharge. FX is a headwind. But in terms of the structural margin on the EBITDA line in the second half, it does represent a little bit of view of caution given the current climate. But we feel good about where we're at, and we'll update you guys as we come out of Q2.

Brian Lee, Analyst

Okay, yes. That makes a lot of sense. And then just one more question from me and I'll pass it on. I might have missed this, I hopped on late, but can you kind of speak to where you're seeing pool builder backlog trends? Maybe I think, in the past, you've quantified those. And are you seeing any sort of shifts in this environment with mortgage rates going up and maybe some additional pressure showing up in the new home part of the market? Just any high-level commentary around builder trends.

Kevin Holleran, President & Chief Executive Officer

What we're hearing indicates a strong outlook for 2022. Most builders are extending quotes into 2023. A recent report from PK data highlighted various statistics, and I noticed a significant increase in the time between when a homeowner signs and when the job actually starts. This likely reflects the ongoing labor constraints we face. However, the industry has experienced over 20 percent growth in new construction for the past two years. Based on current feedback, the interest and demand remain robust, although there are several external factors impacting the situation, including labor shortages, weather conditions, interest rates, and inflationary pressures affecting the global economy. Despite these challenges, we believe the new construction market still has potential. If there is any slowdown in new construction, we are confident that the demand for full-scale remodels, which have been deferred in recent years due to labor and contractor focus on new builds, may provide a compensatory boost to the industry. Our growth significantly relies on the aftermarket, which accounts for approximately 80% of our business, and this will play a crucial role in determining our success more than new construction will.

Brian Lee, Analyst

Yes. Absolutely. Appreciate it.

Operator, Operator

Our next question is from Rob Wertheimer from Melius Research.

Robert Wertheimer, Analyst

Sorry about the confusion earlier. My fault. So you've touched on this a couple of times, but I just wanted to go back to it. There's obviously a lot of consternation out there about rising interest rates, et cetera. What are your thoughts on what you just mentioned, Kevin, on the 80% of the business that's not a new build, that's more steady? Any sensitivity to refis or home equity loans or maybe consumers higher end, and you haven't seen historically that kind of sensitivity? I don't know if you have any guide posts for us to think about that core of the business.

Kevin Holleran, President & Chief Executive Officer

We are observing that for homeowners who already have a pool and are considering adding or upgrading equipment for improved functionality, sustainability, or enjoyment, the decision-making process is different. This segment, which drives 80% of our business, doesn't always involve creating a completely new setup. We believe that even with rising interest rates, consumers will continue to invest in incremental enhancements or a few new pieces in 2022 and beyond, regardless of the economic or inflationary environment. Our confidence in this outlook is supported by our service network, Totally Hayward, as well as feedback from remodelers and rebuilders within our network.

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes, I'll add to that, Rob. What we're seeing right now is, as Kevin mentioned earlier, continued new construction permitting into '23. Builders continue to report strong backlogs. However, regarding the aftermarket, most decisions are not discretionary. Maintaining your pool is essential. Most of the products we are bringing to market now enhance pool enjoyment or offer cost savings through energy-efficient solutions. When we look at where Hayward is gaining strength, it's in those qualitative and energy-saving product categories. We believe there are three major conversion trends in the industry: sanitization, energy efficiency, and controls, all of which will allow Hayward to command higher price points and margins. Therefore, we do not expect the aftermarket to be negatively impacted by the interest rate environment, nor do we think new construction will be affected.

Operator, Operator

Our next question is from Mike Halloran from Baird.

Michael Halloran, Analyst

How do you view the use of the balance sheet at this time? The buyback in the first quarter has leveraged around 3%. If the right opportunity arises, would you be prepared to take action? I understand you mentioned having over $400 million in liquidity, but I'm trying to assess your readiness to utilize that in the short term.

Kevin Holleran, President & Chief Executive Officer

We are actively focused on mergers and acquisitions right now as we have a strong pipeline. This approach remains a key component of our capital deployment strategy, alongside ongoing organic funding, which is our top priority. We also have some projects lined up for cash utilization. Additionally, we have participated in share repurchases both in Q1 and early Q2. We are closely monitoring all three aspects of how we utilize our balance sheet.

Michael Halloran, Analyst

And then on the inventory side, maybe just talk about how you guys are looking at channel inventory? And obviously, we can hear some chatter public markets on how some of your channel partners are thinking about inventory and restocking, and just would like to get your sense for what your view of the channel partners is in terms of their inventory expectations and how they expect to build or not build as they work through the year?

Kevin Holleran, President & Chief Executive Officer

We closely monitor our inventory levels with our channel partners to ensure everyone is comfortable with the amount positioned near the point of sale. They are in a significantly better situation going into the 2022 season compared to the past two years. While there isn't a perfect balance, certain SKUs and product categories need more stock due to material availability. This includes items like sand filters and variable speed pumps. Overall, the inventory situation has improved compared to last year. In dollar terms, the inventory at the end of Q1 2022 is higher than it was the same time last year. However, it's essential to recognize that the value of this inventory reflects embedded pricing. The industry has expanded, necessitating additional inventory to support over 30 percent growth in recent years. For Hayward specifically, our market share gains will also demand some extra inventory in the channel. That said, we are comfortable with our inventory levels as the season begins. Our guidance anticipates that sell-out will exceed sell-in during the 2022 season, and we will keep a close eye on these dynamics as we progress through the year and update our guidance for 2023.

Michael Halloran, Analyst

Great.

Operator, Operator

Our next question is from Nigel Coe of Wolfe.

Nigel Coe, Analyst

So maybe Eifion, could you just give us a quick dedication again in sort of normal seasonality? I mean, there's nothing normal about the current environment, but in a normal year, Q1 would typically be your weakest quarter, correct, in terms of revenues and the margins?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes. Our normal seasonality has Q1 and Q3 at similar levels, 22% to 23% of the full year sales, and then Q2 and Q4 being more elevated. I would say, coming into the year, Q1 this year was slightly higher than we would have experienced in the normal year. We do see some seasonality reappearing into '22, but certainly, Q1 was a higher quarter than we think normally from a seasonal perspective. And that's really consequential to the fact that we were still working through and still continue to work through a large backlog. We want to make sure that the channel is appropriately stocked as we mentioned in the previous call. We have to get after some specific SKUs to build out the full complement of what the channel needed to satisfy customer orders. And we were very, very pleased with the ability at the production level across our manufacturing footprint to get after those products. Still more to do, as Kevin mentioned. But yes, normally, Q1 is a weaker period. It was a little bit higher this year than normal.

Nigel Coe, Analyst

Yes, Eifion. Given the return of typical seasonality, do you expect Q2 to be higher than Q1 based on what you see today?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes. So we're not giving specific guidance around each quarter, but what I would say is Q2 is likely to be a higher period for us as we continue to fill out the requirements for the channel to service the season.

Nigel Coe, Analyst

When considering the second half of the year, you have a very conservative outlook in your guidance. What is your biggest concern at the moment, Kevin? Is it supply chain inflation, helping the consumer with rising rates, or labor availability? What would you identify as your primary concern right now?

Kevin Holleran, President & Chief Executive Officer

Yes, from a labor perspective, that was our main focus in the middle of last year. We feel relatively positive about labor availability. However, turnover remains high across the industry. We are managing to train new personnel and maintain production. Given the global product movement and various quarantines in manufacturing-heavy areas, it's prudent to exercise caution as we approach the second half of the year. Although consumer demand remains very strong, which boosts our optimism as a company and industry, there are discussions around upcoming interest rate hikes. It’s wise for us to take a cautious approach as we navigate the early part of the season, considering the many uncertainties that still exist.

Nigel Coe, Analyst

Great, and then just one more if I can. The dealer conversions from last year have resulted in an extraordinary number of dealer additions in North America. Could you talk about whether that trend is continuing? Are you still managing to convert dealers, and to what extent are they contributing to your growth rates in North America?

Kevin Holleran, President & Chief Executive Officer

Yes. Our sales and marketing team continues to effectively promote the Hayward brand and showcase our new products in the market, which has helped expand the Hayward family in backyards. This effort has certainly contributed to our market share gains over the past couple of years, and we anticipate it will persist in the future. I believe this is one of three key factors that have led to our growth exceeding the market. Operationally, we've seen significant capacity expansions and successful new product launches that have gained early popularity. Additionally, more people are placing their trust in the Hayward brand and recommending us in their backyards. I truly think that this combination of factors has benefitted us over the past few years, and we expect it to continue in the future.

Operator, Operator

Our next question is from Rafe Jadrosich from Bank of America.

Rafe Jadrosich, Analyst

First, I wanted to ask if you've been gaining some market share over the last few quarters. As the supply chain improves, do you think those market share gains will be sustainable? Additionally, how do you ensure that this kind of conversion lasts in the long term?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes, we firmly believe our share gains are sticky. And it's not predicated on just the very clear ability for us to service the market with our production capabilities. It comes back to the products that we're introducing into the marketplace. We're very proud of the fact that our new product vitality index now has grown quite substantially year-over-year. We're well over 20% in terms of new products coming into the market as a percentage of our overall sales results. And these are really informative products that are addressing the needs of the consumer both in terms of energy efficiency and the qualitative experience within the pool. We're spending quite a bit of time investing in those categories, both in terms of research development and engineering costs flowing through the income statement, but also in terms of capital allocation in the balance sheet. We're investing in the necessary lines to build out those product capabilities. So we believe though our ability to supply has outpaced the competition, it really comes back to what we showed in terms of that technology platform that we're leveraging where we now are gaining share in some core categories in the industry. So yes, firmly, we believe it is sticky, and it's heavily predicated upon the product portfolio that we have.

Rafe Jadrosich, Analyst

That's really helpful. Regarding your comment on channel inventories, I've noticed that our own inventory has been increasing at a faster rate than sales over the past few quarters. I'm curious about the inflation aspect of that. If we were to analyze our inventory in terms of units, how does that growth rate compare to the 60% growth in sales or revenue?

Eifion Jones, Senior Vice President & Chief Financial Officer

Yes. So when you think about the COGS index, Q1 in '22 versus the comparable period last year, it's about 20%. So 20% of our inventory climb has really come from that COGS index increase, the inflation that's run through. But outside of the inflation, we have taken two strategic positions in the balance sheet. One is on certain finished goods that where we can get the raw materials. Knowing the demand curve that we see out in the future, we are manufacturing certain products in terms of finished goods to get in into inventory to be an important position to be able to service the market. And then I'd say the second strategic position we've taken is in raw materials. And again, where we can secure a position in raw materials, particularly in those hard-to-get areas, we have taken that position.

Operator, Operator

There are no further questions at this time. There are no further questions registered, so I'd like to turn the conference back to Kevin Holleran for any closing remarks.

Kevin Holleran, President & Chief Executive Officer

Thanks, Austin. In closing, I'd just like to thank everyone for their interest in Hayward. As you can see, our business is producing excellent operational and financial results, and we're very well positioned to continue to generate growth for all stakeholders in 2022 and the years ahead. This would not be possible without the hard work, dedication, and resilience of our employees and partners around the world. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on our Q2 earnings call during the week commencing July 25. Thank you.

Operator, Operator

That concludes the Hayward Holdings First Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.