Q3 2021 Hayward Holdings Inc Earnings Call
Welcome to Hayward's holdings.
<unk> 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.
We will conduct a question and answer session. During the question and answer session. If you'd have a question. Please press Star then one on your Touchtone phone. Please note that the conference is being recorded I will now turn the call over to Stewart Baker, Vice President Global strategic planning and business development.
Mr. Baker you may begin.
Thank you and good morning, everyone. We issued our third quarter 2021 earnings press release. This morning to the Investor Relations portion of our website at Investor Hollywood Dot Com, where you can also find an earnings slide presentation that we'll reference during this call I'm joined today by Kevin Holleran, President Chief Executive Officer, and Eifion Giants.
Senior Vice President and Chief Financial Officer before.
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 anticipations beliefs estimates forecast 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 that was filed with the Securities and Exchange Commission.
The company does not undertake any duty to update such forward looking statements. Additionally.
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 GAAP to adjusted EBITDA as well as reconciliations for the 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 Howard.
Thank you Stuart and good morning, everyone. It's my pleasure to welcome all of you to Hayward's third quarter earnings call I will start on slide four 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 continued to delever during the quarter as a result of healthy cash generation and remains a very favorable position to invest in growth initiatives as part.
Our capital allocation strategy.
Strong growth levels and more pronounced supply chain disruptions are resulting a rapidly rising cost of material 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.
Weighted capabilities and strategic pricing actions have allowed us to not only increase output, but also dampened 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 five.
We expect the current demand trends through the end of the year and into 2022, driven by pool Remodels upgrades to smart pad products and new pool construction returning to historical averages given.
Given the strong performance to date and our ability to execute on our growth levers. We are raising the net sales guidance for 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.
Sure.
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 the volatile environment in the near term. Despite these challenges we're pleased to reaffirm our adjusted EBITDA guidance range for the full fiscal year 2021 of four.
<unk> 5 million to $425 million, a growth range of 75% to 84% year over year.
We filled a lot of questions about the outlook for the pool industry and on 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 six we believe affinity for outdoor living is here to stay with strong secular trends driving a new appreciation for the backyard of which pool as the centerpiece.
In addition to de urbanization migration to the pool rich Sunbelt and 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 their home experience. According.
According to the National Association of Homebuilders, We're also seeing solid interest from potential homebuyers and strong year over year improvement 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, which 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.
<unk> pools.
Awareness of this increased functionality is driving upgrade conversions and we believe we are in the early innings of this.
Trend not only affords the homeowner greater control and ease of operating their pool features. It also provides hayward the opportunity direct to directly interface with the user.
Turning to slide seven in addition to the digital conversion opportunity I. Just address you can see similar opportunities with chemical treatment moving to natural ceiling tools and energy conversion to high efficiency variable speed pumps are market, leading omni app is a gateway for controls and automation to become more.
Mainstream while simplicity of use is removing the barrier for homeowners and frankly trade professionals to include more technology products onto the pads as well as in and around the pool or.
Our product content opportunity on the technology rich smart pad pools can be three to four times compared to what we see in legacy pools.
<unk> truly delivers the ease of use ambiance and enjoyment elements homeowners desire. In addition to lowering cost of ownership and providing environmentally sustainable solutions importantly equipment still only represents a small portion of the total pool cost.
Finally on slide eight 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 2021 projected volume is just at the 35 year median levels with plenty of runway for future growth.
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 opportunity.
Lastly, we see the trend in Iot enabled smart technology in and around the home accelerating with approximately 60% penetration by 2025, a statistic, which 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 IV, and Jones, who will discuss our financial results in more detail.
Thank you Kevin and good morning, I'll start on slide nine 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 for all products, but we are seeing 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 on our ability to increase production capacity to keep up with demand.
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 pool market is seeing extended demand cycles due to the healthy levels of upgrades and repairs. In addition to new pool construction.
Net sales during the quarter benefited from a seven 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 $56 3 million or 53% gross profit margin was 46, 3% a decrease of 95 basis points. The decline in gross margin as a result of the rapidly rising cost inflation as global supply.
Chain disruptions leads to higher costs for 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 from the orders written in May during the quarter. We started realizing those new prices, although the net impact was diluted.
Due to the accelerated inflation trends July announcement, which raised prices and additional 5% to 7% took effect. Although it has not shipped by September 27th.
More of an expected fourth quarter impact in terms of benefiting the price cost dynamic we continue to proactively address these inflationary pressure compression not only through managing price, but by leveraging our agile manufacturing footprint and disciplined cost management.
Selling general and administrative expenses increased 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 <unk>.
<unk> charges taken during the quarter, most notable being a $3 5 million legal charge taken for 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.
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Research development and engineering expenses were $6 4 million or just under 2% of net sales as compared to $5 1 million or 2% in the prior year period, as we continue to support growth with investment into new products and technology features.
Operating income increased $42 6 million, a 121% to $77 8 million. This increase in operating income was driven by higher net sales and operating leverage partially offset by increased cost 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 as a result of the second quarter 2021, the 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 billion or 231% to $53 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 was partially offset by the spike.
<unk> costs.
Now turning to our segment results beginning on slide 10, as a reminder, hey, what'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 rest of world.
In North America net sales increased 62, 1% to $298 2 million from 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 and 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 adjusted segment income increased 73% to $98 $3 million.
Segment income increased mainly from higher sales.
It should be offset by higher driven SG&A expense.
Turning to slide 11 for Europe, and rest of World net sales increased 29% of $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 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% $10 6 million.
<unk> 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 variable and incentive costs.
We continue to strengthen our financial position as we delivered to net leverage of one eight times as of October <unk> 2021.
<unk> a five two times as of December 31, 2020.
Was facilitated by strong cash flow generation to pay down debt as well as a robust growth in our LTM adjusted EBITDA.
For the nine months ended October 2nd in 2021 cash flows from operations was $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, and 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 availability 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 will turn the call back to Kevin.
Thanks, Ivy and I'll pick back up on slide 12, we remain committed to the importance of ESG to our stakeholders and our business and are driven by our core values. We've 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 in 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've made since becoming a public company.
Lastly, our commitment to community remains a priority and we recently became a platinum sponsor of the step into swim charity organized by the pool and Hot Tub Association.
The association uses its resources to provide swimming lessons and access to pools to underprivileged children, who wouldn't normally have these opportunities. The charities mission is to create 1 million more swimmers and at Hayward, We're excited to be a part of realizing this goal we look forward to enhancing our.
To ESG and to 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.
<unk> competitive advantages has helped us to grow share our innovative and environmentally conscious technology products are driving smart pad 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.
Thank you and as a reminder to ask a question you will need to press star one on your Touchtone telephone.
Again, Thats star one on your Touchtone telephone and to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Ryan Merkel from William Blair.
Good morning, and thanks for taking the questions.
Hey, Ryan.
So I was really impressed with your gross margins this quarter I wasn't expecting you to make progress B have gross margins up sequentially can you talk about price cost in the quarter and then how should we think about the progression in four Q and into early 2022.
Yeah. Good morning, Ryan at soybean as you know.
We instituted the out of cycle price increase of 5% until March of 'twenty, one which became effective on orders may for us.
When we announced the seasonal year 'twenty two price increased two months earlier than normal which was in the range of five to seven which became effective on.
July 1st onwards that will not ship by September 27, we saw some benefit of the yearly a modest price announcement in Q3, I would 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 increase it's up 11% to 12% will primarily come through.
In Q4.
Clearly in Q3, we felt more inflation and I would say more is projected as we step through the next two quarters.
Critical Ron that we become more agile I think in terms of price increases.
In the current inflationary environment I do believe more price actions necessary.
As we step along this inflation curve.
Digest and Youll see this in our 10-Q disclosures, you'll see that there was a cost realignment in Q3 of about $1 7 million.
And crude or increase the gross margin by about 40 bps, if you discount that.
While sequential step backwards of about 20 bps in the gross margins. So Q3 was a challenge.
We do expect price lag to close as we continue to execute on our price announcements.
But it has taken a little bit longer than we had expected.
Okay, that's helpful and not too different than what I was thinking and then you've managed the supply chain very well so far I am curious if you think the worst is over or do you expect more of the same in <unk>.
I think it's I think it's still a struggle right.
I mean, a struggle that I think we're managing better than better than many but I don't really see an abatement.
We still are.
Seeing some some shortages in some difficulty getting material line size.
The whole industrial world.
<unk> is seeing that so im not ready to say that.
That it's behind us.
But our operations team our supply chain team are doing an absolutely incredible job of.
Sure.
Growing production capacity and meeting this disorder 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 <unk> 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 kept adjusted EBITDA range, where it is.
We are.
We are managing through the supply constraints I think probably we've been challenged a little bit more give him a plus up 71% year over year in our sales profile. So.
As you get up to the upper echelons of growth. It is increasingly difficult to source materials, but we think it's the right thing to do.
To get out there and get after it too.
To do that.
Remind everybody on the call that.
Look at the fourth quarter, there is full less trading days then.
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 at the midpoint of our guidance it does underlying and represent a move volume.
Given the lower trading days.
Thanks, guys I appreciate it.
Thanks Ryan.
Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Thank you thanks for the questions good morning.
So good morning.
Im wondering if we could just take a step back and look at the revenue growth and I'm just trying to fit 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 that mix is really impactful here. So I'm just wondering if you take a stab at trying to quantify how much mixed benefits you're seeing right now.
Hi, I'll lead off here, yes, I mean, youll see that we have taken a price movement in the quarter.
It was.
Pronounced in real terms in Europe as they saw the realization of the earlier off cycle price announcement, given the comparatively had a lower backlog than North America in North America. You'll also see that we did take a price step forward, but thats really a consequence of the mix that you're referring to.
We did see great adoption of variable speed product line come through in the quarter. We've also seen a significant step forward.
The control adoption. So these are all controlled products that are coming through.
More progressively into Q and year over year, we're very pleased with those controls coming into the mix but.
The absolute real price in Q3 for North America was dampened by the size of the backlog and it will become more of a Q4 reality for us in that particular sector I think the whole mix thing Nigel is.
Another quarter of this progression that we're seeing to richer content.
<unk> upgraded on the pads or through Remodels or new construction some of the products that Ivy and just mentioned.
No.
Our higher price point.
Then the product that they're replacing on the pad, whether thats, a variable speed, replacing a single speed or salt.
Our nation and in many ways is a whole new install or color OLED lights, replacing white incandescence. So you can go across the full product line in this quarter was another.
Our proof points of that richer content in that mix as you say.
<unk>.
Across the pool pad.
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 unit growth.
I would say when you look at the revenue line, we saw a greater mix of North America in the quarter than we have been seeing accumulatively. So you think about the sequential movement Europe was down 26% in Q3 to Q2 in North America was actually up 2%. So there was a bit of positive mix effect coming into the top line geographic.
It was positive mix product line.
And so yes, it was more of a mix benefit on the top line unit volume was steady.
But.
That was.
More actually come into the top line as a consequence of mix.
Great and then just my follow on question is on the.
Channel inventories, obviously, we heard from poop.
Last weekend.
Scene.
That's gonna uptick in inventories, but it sounds like they still want to get more so I'm. Just curious if you can just give us a bit more color in terms of what youre seeing in the channel.
Inventory levels and you know what your distributors are asking for.
Yes.
I would say Peter's comments last week represent the industry.
As a whole.
Inventories are in.
Your position than they were a quarter or two ago.
If you look at it from a days on hand standpoint.
Still in it's an improving position, but certainly not too much by any means admittedly.
The mix of that inventory may not be as ideal.
Any of us would like it.
Still some products that are in shorter supply. So we're working feverishly to address that but.
In total.
We're taking some some extra shelf space right now so we look at it really through two lenses in absolute terms, what's what's what are the inventory levels looking like but also then our 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 from our large distributor partners and these are conversations that we have with them and understanding what they need more of it.
And trying to improve that mix. So that we can push more product out to its ultimate use in the backyard.
That's great. Thank you very much.
Thanks Nigel.
Thank you and your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the question.
And maybe just a quick follow up on the last one you talked to Kevin during your prepared remarks, you mentioned share gains.
Just in response to the question right now.
You mentioned it again.
And again I think it's sort of underappreciated is it part of the growth algorithm. That's clearly helped you guys. So.
Is there any way to kind of quantify.
What youre seeing what youre sort of internally estimating for gain share gains. It seems like it's been a pretty meaningful tailwind through the year just how much of the growth. This year is coming from that if you can quantify and then maybe where are you seeing the most whether geographically and market product wise just.
And any trends Youre seeing that you think will also help into 2022.
Yes, great question Brian.
I think it is a big part of our of our story here in 2021.
Would it be a little bit more generic.
Trying to identify what we think it is because frankly the data is not perfect, but I think it's directionally.
Accurate.
<unk>.
From a product standpoint.
We're very excited that I think our largest improvements.
Our around this digitization or the smart pad conversion.
We talk about things like automation and controls.
Has 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 we've seen share growth.
Gas heater, we've seen share gain salt chlorination.
Some of that May be the result of the tricolore situation, but frankly, the salt correlation has been.
Our strong product line for us for years, so that that progression is multiyear and its.
<unk>.
And its timeline and then we're seeing a lot.
A lot more volume.
And the market around these color OLED lights as homeowners are really look into to get more ambiance in there.
In 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 well a I think it has been a big piece of our success here in 2021 for sure I think there's been some regional improvements to it and then certainly some of the products that are better that are part of the smart pad conversion.
Our playing out nicely with the with.
With a number of 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 then I'll pass it on is.
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 I found was talking about 11% to 12%.
It won't all readout 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 'twenty. Two early 'twenty two in that same mid single digit range 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.
So that piece of the growth algorithm as we head into next year.
Yes, we're not ready to to announce what the 2022 price increase will be but we are looking at further action as I said in the prepared remarks, I think is the baseline of the calculation Brian is 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 were in high single digits. Just on the actions that we've already announced here in 2021.
One bus further actions.
Are coming and.
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 will be making announcements to the channel and to the industry very shortly on what that next round is.
Okay. That's great we'll look forward to it I'll pass it on thanks guys.
Thanks James.
Your next question is from the line of Mike Halloran from Baird. Your line is open.
Hey, good morning, everyone.
So.
So a couple of questions here first leverage sub two does this change at all with the focus is for you obviously organic investments remained very very front and center I know youre thinking.
M&A in a targeted fashion still there, but what about dividends buybacks or some other return mechanisms and <unk>.
How focused are you still on the debt pay down side.
Yeah, So our priorities really haven't changed we remain focused.
Mike on the on the growth initiatives, we've got several organic larger organic programs outlined over the next two years really focused on it.
Improving the automation in our north American footprint and improving our distribution footprint.
Throughout throughout both the North American and European geographies.
We do have a healthy pipeline of M&A, which is our second.
Second priority here, we're pursuing those vigorously and more to come in that regard, but as you 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 return to shareholder, but we've yet to formalize a policy that at.
And it's too early what that was.
Alright.
Okay Fair.
Fair enough there and then you talked about building visibility into 2022, maybe just some thoughts on backlog how you see the how you see the lead times stretching.
What gives you confidence when you look at the various components to your growth with its repair replace and B for Newbuild whatever.
What are the factors that drive confidence in the volume side going into next year.
Yes, I mean, the backlog does stretch.
Certainly into 2022.
It's at elevated levels.
Despite some some of our production capacity improvements.
As you look at the level levers of growth.
I think they continue to be very.
We have high confidence in them.
Certainly new construction.
Others have talked about this for the builders.
Our 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 ripe opportunity.
As I said in the prepared remarks.
Or more aged now than ever.
And there is an interest both with the homeowner who's doing a full scale remodel or just looking to upgrade.
A piece or two on their on their pad that they're looking to.
Digitize to take more control and automation over the pool or to increase the ambiance or to become more natural in the water treatment. So there is a number of different angles that are that continue to fuel our confidence in the 2022.
And we have a back log right now that certainly supports.
Volume growth.
In the early months of 2022.
To start from.
Great I appreciate the time thank you.
Thank you thanks, Mike.
Thank you and your next question coming from the line of Rob <unk> from Melius Research. Your line is open.
Hi, Thanks, everybody.
Please tell me if this is.
It's something you can't go into too much detail, but I'm just curious on the channel response to price increasing whether your efforts I think you talked about last quarter to sort of shift how pricing goes through with that.
Receiving any pushback.
A little bit of curiosity as to weather.
I can see the sugary and youre doing again, but weather.
If others don't raise prices fast with the installer keeps the margin or for channel partners in general So just in general how is that going through on changing the pricing mechanisms in that thanks.
Yes.
I think what you're referring to is the second price increase that IV mentioned earlier, which was really our seasonal increase we announced it sooner and there was really a.
Change in practice to to say that.
Orders received after July one.
Werent shipped by the end of third quarter that they would take the price increase.
I think the channel understands that the manufactures.
Our feeling input cost increases right now so our actually the the announcements now thats a quarter ago or longer was actually received.
Very well by the channel our understanding that the suppliers.
Need to offset these costs to be able to continue expanding capacity and getting product placed into the into the channel. So I think there was great understanding and collaboration between between US and our channel partners I was unclear on the second question or the second part of your question maybe I.
Got it.
Go ahead Rob.
That actually answers are adequately.
Thank you.
Anyway.
Thank you very much.
Okay. Thanks, Thanks, Rob.
Your next question comes from the line of Jeff Hammond from Keybanc. Your line is open.
Hey, good morning, guys.
Thanks, Paul.
Just on Europe. The sequential decline is that just typical seasonality with vacations or is there something else going on there.
No I think youre right just typical seasonality I mean, they had a strong start to the year I mean quarter over quarter. They were still up 29% and year to date up 54%, but what you see is a little bit more of a return to normality seasonality over there.
Europe.
It's a bit of 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 quicker in that segment versus North America.
Okay, and then just on back on 22, Yes, I think you show the industry data on pool builds and I think they have just a small increase and maybe thats.
Labor and contractor constraints, but how are you thinking about new pool builds into <unk> into 'twenty two versus that industry data.
Okay.
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 fairly modest.
Forecast for 2022, we continue.
To feel into here.
That there is tailwind in interest in folks building out that that that yard.
Oasis, So I think what we know here in in late October as we start looking into 2022, we believe that there is continued there will continue to be.
Some.
So strong growth around new pool construction in 2022.
Sure.
Okay, and then last one push cost.
I think youre running a little bit negative as the pricing catches up but if we started to see stabilization which is maybe.
To believe in but.
Commodities.
<unk>.
How long would it take you to start.
Start to get to price cost neutral or even positive.
Yes, Youre right. We continue to see inflation, we don't believe that through the woods similar inflation, yet I still think based on the commodity indices that we look at there's still another couple of quarters of rising inflation, just how much of that is transitory versus structural 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 closed that lag given the size of the backlog I think is really important for.
For the channel to understand that we do need more agile pricing as Kevin mentioned pricing, which is more attached to the invoice than it is to be original placements of the order, which is more representative of the costs that we're incurring to manufacture and deliver those products to the marketplace and we believe.
Potentially hit at West, we're feeling the brunt of inflation, maybe more so than others given the significant size up that we're doing in our sales profile vis vis others in the industry. So that incremental unit that were trying to procure raw material component from the marketplace to hit the <unk>.
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.
Okay. Thanks, so much guys.
Thanks, Jeff.
Okay.
Your next question is from the line of Josh <unk> from Morgan Stanley. Your line is open hi.
Good morning, guys.
Hey, Josh good morning.
I was hoping to ask.
Jeff's question, maybe a little bit differently in terms of kind of the inflation buckets here.
You have things like shortages, presumably expediting of material.
How would you sort of break down the inflation youre seeing us.
Maybe something that is more commodity based where if like we're looking at steel future, saying this could be a better situation than a few quarters versus maybe something that may stick with us for a while like kind of your base freight rates or.
Our labor costs, which might not dialed back as quickly.
Yes, let's talk about let's talk about it in the big broad buckets raw materials labor and freight as well as tariffs put that onto the onto the table as well, but in terms of raw material a primary inflationary.
Inflationary pressures are coming from commodity raw materials, and we think about resins, the multiple resin changed out performance of our plastic components in housing.
You probably watched the <unk> index and you can see that the.
The raw materials.
Prices on index elevated now nearly 56% year on year. So that that is challenged and my personal belief that will remain structurally high because the the base chemical industry needs reinvestment economics in order to support the current demand profile in the industry.
The next area, we see as metals in our raw materials and metals are elevated you've seen where steel has gone over the last couple of months copper started early remains high and we got some specialty metals.
Product lines, which also are elevated and consequential to a shift in the demand demand dynamics not necessarily the supply side and we think that there is there is possibly a little bit of a transitory inflation in the metals sector, which will see come off.
Next year, and then I would say.
Finally, when you look at.
The raw materials that are always be specialty raw materials that go into our bill of materials Micra.
Microprocessors is a good example.
And you know that that tightness is in the marketplace and you've heard others in.
The industrial sector in the car sector talk about a recovery in the Microsoft process or production levels. 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 some.
Some of it may deem to be transitory and metals.
We're expecting to see double digit inflation stick.
We're pricing accordingly, the next level and as you mentioned is labor and labor.
It was difficult to North America, we've seen.
At the entry minimum wage level of step up of 20% and that's not going backwards.
In terms of freight we've seen labor impact the freight environment Ocean freight complicated.
You've heard about the port congestion, that's really coming back to a labor issue. So there's lots of things that need to normalize before we see freight come back under control.
And then tariffs tariffs remain instituted in the U S at 25%.
China and I.
I'm not going to two to.
Gastro <unk> go but for the time being we're pricing assuming it's here for a longer longer time than originally expected. So you aggregate all of that.
And I would say double digit inflation is with us to state a number of years.
Before the supply side catches up and we were taking the pricing actions too to make sure we protect the business.
Got it that's helpful. 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 on heaters that you could share I would imagine that for all of the structural elements and maybe that was one that folks stuck at home wanting to extend the pool season, a little bit more.
Maybe not as structural.
Curious, what you think about that and how those have been doing over the past quarter.
Still doing very well to your to your point.
Josh It was 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 opening earlier keep it keep the pool open later.
Upon the installed base, which is call it at or around 50%.
Still plenty of opportunity to add heaters, whether their 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 a separate one for the pool or whatnot. There is there is there is still plenty of elevated demand for gas.
Gas heaters and heat pumps, it's still one of our most most backlog.
Products in the portfolio.
Got it that's helpful. Thanks, guys best of luck.
Thanks, Thank you.
Your last question comes from the line of Joel <unk> from BMO. Your line is open.
Hey, guys How's it going on.
Hey, Joe.
Alright, So I think a lot a lot has been asked and answered and I just wonder.
Kind of structurally can can you talk to us a little bit about how.
How you lead consumers to.
Do I want to upgrade their pool pad and to feel the need to do it is it through like a better payback or do you have any direct sales people are online that can do that or is that more through through educating the builders and the distributors and all of that.
Yes, I think that there is a lot there and I think we as an industry can certainly.
Due more to be able to educate that homeowner we still largely rely upon the builder and the servicer to understand those capabilities are feel comfortable selling it and installing it.
But I do think that.
From a digital standpoint that there is opportunities to be able to to increase the eyeballs on the on the payback opportunities that this smart pad has whether it's.
Digitization or the energy efficiency or the natural water treatment all of these well I would say, although always every majority of those are higher priced than the products they would be replacing but they all have a sound business not to mention the fact that I do believe homeowners want to operate.
Their backyard in a very responsible sustained fashion, so I would say still largely reliant upon the trade.
But we as Oems and as the industry are looking to do.
Do a better job of making that case directly to the homeowner or.
Okay great.
One last little clean up 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 you're kind of running towards the top end of your capabilities are there a lot is there a lot more productivity.
Pull out a year Youre manufacturing side, and then I'm done thank you.
Yes, yes, I would say look we still got capacity that we can unlock in our manufacturing facilities. We've.
We've taken the most recent step.
Two.
<unk> established a new distribution center, just south of our primary North American manufacturing facility, that's going to free up a meaningful amount of floor space.
Clemens manufacturing facility to add more production capability and that was the underlying theme for that for that particular move.
We continue to have expansion opportunities in Europe, and we're taking steps there to look at science expansion.
And we have got several automation investment programs underway to build further capability. So yes, we have more capacity expansion will be continue to look at that.
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 the only signs enough about unit production. It's also adding agile enough flexibility to the manufacturing.
<unk> as well so it's all good news in terms of capacity. It is going to require some investment to take that next step over the next couple of years, but thats underway.
That's beautiful thank you.
Thanks, Joe.
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'd 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 and allows hayward to deliver such strong results. We've continued to execute during the course of the year, including very strong Q3 results that were highlighted by net sales growth of 56% and <unk>.
Nearly 90 basis points of margin expansion, we raised our annual guidance last quarter and were able to raise our topline guidance again this quarter, while managing through 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.
Head 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.
Okay.
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Okay.
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