Q2 2022 Hayward Holdings Inc Earnings Call
It strengthens brand recognition and overall market penetration.
This has allowed us to fully participate across our key end markets of aftermarket upgrade repair and replace remodeling and new pool construction move.
Moving to slide seven I'd like to revisit an important slide that we've highlighted before with some updated market trends, reflecting an ever increasing total addressable market opportunity.
Key driver in our industry as the technology upgrade conversion occurring the aftermarket with opportunities for digital chemical and energy for each of these three categories of Iot enabled controls salt coronation and variable speed pumps, we compare the take rate at time of new pool construction to the current level of <unk>.
Aftermarket penetration.
We believe in the premise that existing pool owners, if educated as to the merits of these compelling technologies as consumers building new pools are they would desire the same benefits.
First is digital conversion with controls and automation, replacing manual time clocks, adding Iot enabled controls delivered what we call the smart pad individual equipment components dynamically controlled to make pool use easier and more enjoyable while lowering the cost of ownership.
Second is conversion to non chemical forms of water standardization as chemical chlorine is replaced with salt chlorine generators, and UV ozone products, making a safer more natural swimming experience finally, a conversion to more energy efficient products, notably variable speed pumps, replacing single speed pumps.
And color led lights, replacing white incandescent lights, our sales teams are working with trade professionals to promote these exciting new technologies is aftermarket upgrades moving aftermarket to new construction penetration levels. In these three categories alone affords a market opportunity of well over $6 billion.
On slide eight as I mentioned at the time of new construction, a full remodel homeowners have several great new technologies available to deliver comfort ambiance and convenience of pool ownership.
These technologies also offer compelling cost of ownership benefit when compared to older legacy equipment as you see here re imagining the backyard with the pool is essential feature both day or night is now a reality. These technologies provide a real win win for both the pool owner and Hayward at the point of.
<unk>, a smart pad pool on average has $7 more OEM content when compared to our legacy non smart pad pool.
Given most pools have a typical lifespan of 30 years and equipment typically needs, replacing every 10 years, there will be two replacement cycles, yielding a $21000 lifetime incremental value per pool.
Turning now to slide nine while new construction is a key part of the industry. The core driver of our business is resilient aftermarket through various economic cycles over the last 50 years shown here in Orange. The installed base has always grown and is now approximately $5 4 million in ground pools in the.
It states this creates a lifetime need for repair replace remodel and upgrade.
On slide 10, I will briefly discuss our M&A activity focused on core pool product or technology tuck ins as well as backyard adjacencies during the quarter, we completed the acquisition of J&J electronics, and solos, which represent specialty lighting business of Holdco as discussed earlier lighting is one.
The top growth categories in the industry, highlighting pool owners desire to increase the function and ambiance of their outdoor living space by leveraging the omni app.
We are pleased with the progress made to date in integrating these businesses as well as the other businesses, we added to the Hayward family late last year.
These technologies and products will increasingly differentiate our leading lifestyle product portfolio with that I would like to turn the call over time, and Jones, who will discuss our financial results in more detail.
Thank you Kevin and good morning, I'll start on slide 11, all comparisons will be made on a year over year basis. We.
We delivered another quarter of growth and profitability with performance supported by operational agility, new product adoption and successful management of ongoing inflation.
Net sales for the second quarter increased 10% to $399 $4 million the growth during the quarter was driven by 17% price realization and 1% contribution from acquisitions, partially offset by a 6% decline in volumes and unfavorable exchange rate impact of <unk>.
2%.
The net price impact over the prior year period reflected the full of the cumulative impact of our previously announced price increases over the last 18 months to mitigate the escalating inflationary cost pressures.
During the quarter. We also saw the initial contribution from the recently announced acquisitions, notably the specialty lighting acquisition from <unk>.
The volume decline during the quarter was primarily driven by a sharp reduction in our European sales. The result from the war in Ukraine, which required us to exit certain businesses in that area and that has led to a general reduction in consumer confidence across the region.
We also experienced the initial impact of the poor weather seasonal markets, namely the U S Midwest northeast and Canada.
These markets suffered from unusually cool wet conditions throughout the quarter. These conditions delayed pool construction and remodel projects as well as the openings of existing pools, all of which drive equipment demand.
Consequently channel inventory seven these regions were higher than usual at the end of the quarter.
Despite these volume challenges, we experienced good adoption of the new products as evidenced by an increased sales mix of controlled sensitization energy efficient variable speed pumps, some lighting growth in these product categories offset the expected decline in demand fajitas.
Gross profit in the second quarter increased to $189 4 million, an increase of 13% year on year. We were very pleased to improve gross profit margin to 47, 4% an increase of 130 basis points, primarily resulting from price increases.
Offsetting inflation on pricing initiatives and supply chain capabilities are being successful in protecting the structural margin profile of our business, while the price of pool equipment has increased meaningfully over the last few years. It remains a relatively small component of the overall cost of improved project compared to labor construction.
<unk> and other raw materials.
Selling general and administrative expenses during the second quarter decreased 4% to $68 $9 million, primarily driven by lower volume related incentives warranty expenses and stock based compensation as.
As a percentage of net sales SG&A decreased to 17, 3% a decrease of 244 basis points, reflecting the leverage we have achieved as the business is growing and we continue to achieve operational improvements operating income increased 27% to 102.
$2 7 million in the second quarter. This increase in operating income was driven by higher net sales and conversion to profitability.
Net income increased 25% to $66 $3 million.
Adjusted EBITDA increased to $127 $6 million at the second quarter.
Representing an increase of 16% driven by higher net sales and operating income.
Adjusted EBITDA margin of 32% was increased 166 bps compared to the prior year period, reflecting an incremental margin of 49%.
Now I'll discuss our reportable segment results for the quarter beginning on slide 12, North American net sales for the second quarter increased approximately 17% to $342 1 billion. The increase was primarily driven by a 19% favorable price impact a 2% contribution.
<unk> from acquisitions sales volumes declined 3% as demand into the channel began to moderate following the strong order flow we saw start to the year.
Initial impacts of the poor weather and seasonal markets in the beginning of the channel inventory Recalibration.
Distributes a started reducing safety stocks as a result of improved supply chains and shorter lead times with specific products.
Gross profit for the second quarter increased 19% to $166 $8 million adjusted segment income increased 24% to $122 5 million. While adjusted segment income margin increased 203 basis points to 35, 8%.
Turning to Europe , and rest of World on Slide 13, net sales for the second quarter decreased 19% to $57 $4 million net sales benefited from approximately 8% and that price increase.
Adversely impacted by a 20% decline in volumes as geopolitical circumstances in Europe have negatively weighed on consumer sentiment. In addition to a 7% headwind from unfavorable foreign currency translations.
Adjusted segment income decreased 27% to $13 million.
Yielding an adjusted segment income margin of 22, 7% or a decrease of 234 basis points.
For the six months ended July <unk> 2022 cash flow from operations was a cash source of $63 7 million compared to a cash source of $123 4 million during the prior year period.
Working capital use year to date has been comparably higher as we took safety stock positions in certain raw materials and finished goods.
Cash used in investing activities was $77 $2 million compared to $9 7 million in the prior year period. This includes acquisition expenditures of $61 $3 million, primarily for the specialty lighting business acquired from <unk>.
Total liquidity at the end of the second quarter was $239 million inclusive of $109 billion of cash on hand.
Net debt to adjusted EBITDA for the last 12 months was two three times compared to one seven times as of December 31 2021.
The increase in leverage reflects the closing of the acquisition I just mentioned and the share repurchases. We completed in the second quarter for $212 million at the end of the quarter.
Our outstanding accounts, a common stock was 216 million shares.
And with that I'll now turn the call back to Kevin Holleran.
Thanks Ivy.
I'll pick back up on slide 14 at Hayward ESG has always been important to us and we know that it is important to our shareholders as well we've continued to focus on the energy consumption throughout our operations as well as making sustainable products, a key focus of our new product development roadmap the.
The development of such products and technology was recognized by the United States Environmental Protection Agency with Hayward, earning the 2022 energy Star partner of the year Award The award recognizes industry leadership product innovation and an overall commitment to environmental protection through energy efficiency.
We appreciate the agency's acknowledgment as we continued to develop technology and products to help make pools more environmentally sustainable. In addition, we are pleased to announce that we will be publishing hayward's first ESG tear sheet during the third quarter on.
On slide 15, I will address the main trends supporting our outlook, we remain very positive about the long term health of the pool industry, particularly the strength of the aftermarket. It continues to grow every year with the addition of new pools to the installed base and provides a rich upgrade and remodel opportunity as the space continues to age.
The aftermarket has proven to be resilient across economic cycles. We firmly believe there has been a significant increase in the appreciation for the backyard as a consequence of numerous favorable secular trends.
With that as the long term backdrop, let me now describe the current operating environment.
As we all know macro conditions are especially dynamic in Europe , where the continent is dealing with an ongoing war declining consumer sentiment and a more challenging foreign exchange environment. As a result, we now expect sales in Europe to decline in 2022.
Turning to our core North American markets.
Operational agility and supply chain capabilities have enabled us to deliver on our robust backlog of orders in 2021 in the first half of 2022.
Market growth has been positive in 2022, primarily in the U S. But has softened due to economic uncertainty and unfavorable weather and seasonal markets, where we have leading market share.
All of this resulted in elevated channel inventories at the end of Q2 2022.
And reduce the level of in season restocking orders, we would typically deliver in late second quarter and third quarter.
With the close of the season approaching we have elected to reset and work with our channel partners to normalized inventory levels and prepare for 2023.
With distributors increased confidence in OEM supply chains and shorter lead times. They don't require the same level of safety stock, resulting in a recalibration of four to six weeks less channel inventory.
We are planning for reductions in channel inventory from over four months of inventory on hand to closer to three months by the end of the year. We believe this will enable us and our channel partners to start 2023, with the right level and mix of product for the 2023 pool season as.
As a result of this and the lower sales forecast for Europe . The company now anticipates, a consolidated sales decline of 2% to 6% and adjusted EBITDA of 385 million to $400 million.
We are taking proactive steps to manage production levels and cost structure I am confident our operational efforts and pricing initiatives will enable us to manage margins through this period.
Based on our revised 2022 guidance, we will have grown Hayward net sales and adjusted EBITDA by 84% in 228%, respectively. Since 2019, while enhancing our market position with new smart pad technology products and positioning <unk> for long term growth.
My Board and I have confidence in the resiliency of the business cash flow generation and growth outlook. As a result, we are reloading the share repurchase program back to $450 million over three years.
Turning now to slide 16, before we close let me reiterate the five key elements of our value proposition.
We are a pool pure play where over 95% of net sales is derived from this outdoor living category.
You have layers to our competitive moat and defend our position and deliver growth.
Hayward is leading the way as pool owners convert smart pads with our leading Iot enabled omni controls and connected products <unk>.
Conversion strategies are actively growing the addressable market within the resilient and growing aftermarket.
Finally, we're also delivering our shareholders best in class financial performance, driven by operational leverage disciplined capital allocation underpinned by strong free cash flow generation with that we're now ready to open the line for questions.
Thank you Kevin we will now begin the Q&A session.
If you'd like to ask a question again it is star one on your telephone keypad.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
We'll pause here for just a moment to compile the Q&A roster.
Our first question comes from the line of Jeff Hammond with Keybanc capital markets. Jeff Your line is open.
Hey, good morning, guys.
Good morning, gentlemen.
So just really want to hit on the Destocking.
Just.
Understand it seems like the magnitude is quite stark, particularly given that prices going through and what you had in the first half. So just kind of level set us on how you got comfortable with the level of declines in do we.
It looks like Europe is a little more weak do we hold flat for the year in North America or is that also a negative.
Let me start there Jeff.
<unk>.
Add to it.
Say no more than half.
The <unk>.
New guidance is related to the channel inventory as I mentioned in.
The prepared remarks that somewhere around four to six weeks.
It was really more than half of what the overall re guide is the balance.
<unk> comprised of a number of things from the shortened season, and the weather impacted areas like Canada and northeast Midwest.
Some demand moderation, we're still seeing.
Year over year growth, but it has not to our original <unk>.
Expectation when we laid out earlier in the year guidance and then as you mentioned Europe and Ukraine related consequences.
<unk> is clearly a headwind.
With a slight offset.
Around acquisitions, so that's sort of the <unk>.
Bridge of all the contributing factors.
How did we get here and as we discussed.
In our Q1 call the macro economic environments.
It's clearly uncertain in North America.
And especially so in Europe .
We've seen a deterioration deterioration due to the continued awards consequential effect on on.
On consumer sentiment and their economies.
We expected to sell less into the channel.
Versus sell out due to the strategic positions in many of our channel partners truck at.
At the end of 2021.
As Q2.
Occurred inventories.
Hi.
We're now actively working with channel to try and reduce those those inventories as I said supply chains have clearly improved our published lead times have substantially improved so theres that reduced need to hold these higher safety stock levels and we'd like to work with our channel partners to <unk>.
Stock and have fewer months of forward looking sales.
In the channels. So we can be more more responsive so.
That's that's what's kind of gone into our tour thinking and what played out.
In Q2.
They did that.
No as you think about the balance of the year, Jeff I would say both regions will have a.
Re stocking Recalibration program.
It will be larger in North America.
That's where the balance sheets with stronger for our channel partners.
We probably saw some destocking in the first half in Europe , but that will still be further destocking both regions will take.
That correction in the second half, but the correction will be.
Yes.
In North America, and it will be.
Europe .
Okay.
And then just one quick follow on on the on the destock. It seems like a third of your products like the variable speed. The controls saw coordinators are still in short supply. So I don't know if its skewed differently and then just secondly talk about Decrementals as you destock and.
What you think you can hold them too and what actions, you're taking to kind of mitigate that that margin decline.
Yes, I mean, as you said I think most.
Sure.
Oems are.
Trying to address short supply and some supply chain challenges around the same type of products things with chips continue to be a little and the mouth in.
That that that affects things like controls.
Salt sales from our specialty metals standpoint, maybe to a lesser extent variable speed pumps, but those are the things where there is not but we still have healthy backlogs overall, but particularly in those categories and the channel is anxious.
For us and others to test.
All of that.
We're working very aggressively have been for us.
For some time here at the end of the second quarter into the early third quarter or two to reset our production levels and taking the appropriate actions to resize the facilities to get the variable costs out as as we as we've highlighted in prior quarters, we have been able to ramp.
Up largely.
Through variable cost structure and.
We will be doing the same as we reset and we will look more broadly than just our facilities across our entire cost base and size of the business too.
The current forecast.
Okay. Thanks, guys.
Thank you Jeff.
The next question is from Brian Lee with Goldman Sachs. Brian Your line is open.
Okay.
Hey, guys. Good morning, Thanks for taking my question.
I guess.
Good morning.
Questions from my end first on demand it does sound like you guys.
Alluding to beyond beyond channel inventory build there is some moderation in demand.
Can you kind of give us.
Additional color around the different.
<unk> segments, whether youre seeing that with new pool builders, whether it's in the aftermarket.
And.
Is this an affordability issue with all the price increases just trying to get a sense for maybe where youre seeing some of that demand softening.
And maybe where you guys have been more bullish coming into the year and Thats why youre seeing some downside risk here.
Yes.
Yes, there's a lot there, but let me let me try and address it as we are as we see it.
Overall.
When we set coming into the year.
With last years.
A retail pull through in front of US we expected some moderation off of very very high pulled through the channel last year and at the halfway point I would say, while there is still growth clearly year over year.
The volume has not quite been what we expected lots of price.
There are some there are some areas where mix is contributing to us, but thats kind of the equation their price in a little bit of mix, but not quite on the volume side.
From a regional basis. There is some regions that are doing extremely well that haven't been affected by by weather or some of the geopolitical but in general the economic uncertainty.
Currently there and I think that that's what we would attribute some of the.
Some of the volume.
The volume not playing out as we originally expected new construction.
Our builders are still extremely busy.
They are saying that the leads and the quotes and we see it with the permitting is not quite what it was this time last year, but there is still extremely busy and their books are full we lost some building days for sure.
In some of these regions affected by the weather and.
If we have a late late summer or late fall, we may be able to make some of that up but that was probably lost time based upon mother nature not not cooperating. This year. So we continue to see lots of folks from a from a technology standpoint.
<unk> two two to bring omni controls on in and take control of that that yard so.
That trend is still very positive for us.
That's really how we see it.
Okay. That's great appreciate the color.
And then maybe just.
Secondly on the adult channel inventory reset.
It sounds like it came in.
Here, we're sort of real time in terms of how you guys saw it evolve what's your sort of whether it's based on historical precedence of what Youre hearing from from the channel itself.
Is this a one to two quarter reset what's sort of your thought process around the timing of kind of recalibrating that the channel to.
To the degree where maybe you've got that.
A more normalized.
Backdrop heading into heading into the 2014.
Yes, that's exactly the timing that we're looking to.
To address this Brian .
Clearly the pull through is ultimately what what affected this we've been shipping for 18 or 24 months at a really strong strong clip and we want to make sure that with all the uncertainty floating around the economy in the various markets.
The responsible thing to do is to look into the channel.
Work closely with them to get these days on hand.
Down to a more healthy level, which will give us which will allow us to really.
Our address whatever 2023 has in store for us.
Much better position to to be able to accommodate a wide range of of 2023 outlets.
Alright fair enough I'll pass it on thanks, guys.
Thank you Brian .
The next question is from the line of Ryan Merkel with William Blair.
Brian Your line is open.
Hey, guys good morning.
In a moment.
So I wanted to start off with demand.
Demand trends through the quarter, if I could I know weather was a factor for sell in April and May there would be helpful to understand with demand and then what youre seeing in July .
You broke up a little bit I think you were asking.
How it looks maybe later in the quarter and early into July , but frankly, we don't have visibility.
Specifically for July yet I would say we are seeing.
Based upon our conversations as we guided.
For the for the second half year, there were some there were some markets.
Later in the quarter, who had that had some nice.
Pull through the warmer climates.
A bit of recovery.
In the in the weather affected.
Regions, but in general when you look at Q2, it was not to our original expectations on the on the retail pull through and clearly with the volume being being net down year over year, that's really what what informed us.
As we looked hard at the at the second half guide.
Guidance.
Got it Okay. That's helpful. And then can you quantify the impact to sales from the destock. It sounds like you are being.
I guess the harder question that I wanted to ask as you think about 'twenty three could there be more destock I think you mentioned you have three months of inventory for the channel I mean could that go to two months I know, it's hard to call at this point, but just how youre thinking about that and are you being conservative.
Hi, Ryan its IV and I'd say more than half of the.
The reduction in the guidance of the top line is related to channel inventory reduction.
Down the four to six weeks.
<unk>.
Has the ability to hold.
Between sort of one off the top end and can go down to three before it starts to feel short.
We have taken the.
The channel inventory.
Forecast down to the low end of the three so basically about three to five months on hand, but we believe thats, a very healthy position to stop.
The fiscal 'twenty three time period.
Outside of the channel in which we take down the balance of the take down is really related to the consequential impacts the shortened season in the seasonal markets in the U S and Canada.
Some demand moderation that Kevin alluded to obviously the situation in Europe , which is.
Impacted by the events in the Ukraine as well as the FX and there was a slight offset for the full year impact of the newly acquired business the lighting business from nalco.
About two thirds of the I'd say just.
Just over half the takedown is associated with a reduction in channel inventory and we believe that is the right place to exit the year just over three months of inventory on hand in the channel.
Very helpful.
Thank you.
Thanks Mark.
Thank you Ryan.
The next question is from the line of Michael Halloran with Baird. Michael Your line is open.
Thank you good morning, everyone.
So just some thoughts on pricing.
Pricing holding in all else equal and if you think about the destocking any concerns that there's can be some price bleed here or has been pretty good discipline across the players in the industry at this point.
Yes look I mean, we've been instituting our cumulative price increases since January of last year around 24% globally, 25% in North America.
That's still includes a surcharge of 4%.
That aggregate cumulative price that matches up with our cost of goods sold index of around 25% increase since December 2020.
The guidance that we've given like always or at least more recently it does not include.
The continuation of the inclusion I should say of surcharge is not institutionalized at this point that gives us a little bit of flexibility.
If we see.
Some decrease in certain commodity raw materials, but as you've witnessed over the last 12 to 18 months.
Industry has great pricing power do you believe it's sticky it's always have this type of pricing power, but saying that we're conscious that we've put on close to 25% price.
The industry over the last 18 months and we're very mindful that a lot of price.
We have not contemplated any further pricing action in the balance of this year, but we will continue to monitor costs.
And we do believe it cost warrants it we can get for the price and we don't necessarily see inflation moving into a deflationary period over the next six months.
In terms of I think.
Maybe the second elements of your question was coming due we believe the destocking actions in the channel will cause some price pressure, we do not believe that is the case.
Pool equipment still remains a relatively low cost of the overall pool installation value.
We've brought products to market, which have great win wins. So the consumer if we look at the categories that have been climbing in terms of demand, we're able to speed pumps and multi speed pumps, coupled with controls. These are high priced products going into the market.
Very clearly, reflecting strong consumer demand for win win and value creating products. So we don't believe there will be price.
Hi, Steve.
Price pressure decreasing.
Price pressure increase in medium to decreases we believe prices sticky.
Margins, therefore will hold up and as far as our ability to manage our cost base in the business we've talked about.
How we've grown this organization within the whole world.
Our existing manufacturing footprint over the last 18 months, that's a lot of variables Asian of cost going into the business. We're now addressing that on the on the take down.
So we believe on absolute gross margins.
We will hold in the high forties and was setting.
It's to hold our gross I'm, sorry, our adjusted EBITDA margins.
That.
30% level as we close out the year.
Thanks for that.
And then second question just on the willingness to deploy capital here I know you mentioned.
You get the exact terms used essentially reinvigorating the share buyback side of things, maybe Todd maybe just talk about the willingness in the short term to use that as a lever as well as what kind of M&A pipeline, what's the M&A pipeline looks like from your perspective.
I mean right now we are concentrated on the organic side of the business that we've got.
Management actions right now to address the.
The reduction of.
Manufacturing cost base that we variables up over the last 18 months.
If there is a.
And interesting.
Accretive M&A opportunity certainly we continue to look at those deals, but the priority right. Now is the management team is to continue to focus on the organic business as we close out this fiscal year.
In terms of the announced.
Announcements to replenish our share repurchase program, but we believe.
The current price points.
The haywood share prices and attractive bond.
We believe in the long term fundamentals of this organization.
High margin business.
Strong cash flow generation profile.
All of this business with a very enviable opportunity to deploy capital across all of the organic M&A and share repurchase opportunities that we may have.
To remain agile.
Use our cash wisely.
But certainly at the current price points, the Haywood stock price.
Could provide an interesting opportunity.
There will be an attractive repurchase.
Much appreciate it and thanks, everyone.
Thank you Michael.
The next question is from the line of <unk> with Jefferies. Sir Your line is open.
Sorry can I confirm youre not muted.
Sorry about that I was.
So this is rather a breath.
Talk through your visibility.
How does your visibility gets you comfortable with inventory levels heading into 2023.
Yes.
And again, what we see.
Is.
From a new construction standpoint healthy healthy.
Demand there we.
We still see upgrading.
Occurring to Iot and connected products.
We continue to believe that renovation, which has been deferred over the last couple of years is an opportunity that will that will play out over the next couple of years.
And that the aftermarket will continue to be extremely.
<unk> resilient has it as it has been in prior economic down cycles.
With the with the Great financial crisis being the most recent.
New construction certainly was impacted by that but overall the aftermarket held up due to its <unk>.
Non discretionary or semi discretionary nature, we continue to feel that that's that that is very good.
Overall this industry is still experiencing growth.
Which is which is great news and it's experiencing growth that is greater than what the historic.
Mid to high single digit.
The algorithm has been.
Coming off a couple of years.
Extremely.
A great growth performance.
That's very encouraging for us and for the industry. So that we continue to remain bullish.
We did an exceptional job of getting after our backlog over the last 18 months.
The inventories in the channel and we just want to make sure that it's properly sized.
Or what the what the market consumption.
<unk> is now and what we expect it to be in the future.
Okay. Thank you and then you talked about some end customer demand moderation can you just talk about if you've seen.
Alright.
Uh huh.
Yeah.
We do we do see both wholesale shipment data across the industry.
And.
We've done really really well there.
<unk>.
From a product standpoint.
We feel good about our share performance.
Around many of these <unk>.
Products.
<unk> to the conversions.
I spoke about in the prepared remarks, whether thats <unk>.
Energy efficient variable speed pumps.
Trolls.
Continue to perform.
Stream, we well.
Perhaps.
Were very curious about is will these will these upgrades continue at the rate that we've seen.
More recently.
But thus far.
Grading is still occurring in and we're very anxious to see what the new construction profile looks like.
Going going forward.
Okay.
Hey, Thanks for taking my question.
Thank you Suri.
The next question comes from the line of Dan Oppenheim with Credit Suisse. Dan Your line is open.
Thanks, very much and I appreciate all the color on this I guess wondering about some of the comments in terms of the Nu.
And your expectations for the full year in terms of sales based on the Destocking and such.
Would would seem to imply sort of based on the full year sales to the sharp decline in obviously in the second half.
And then that much that destocking occurs here during the third quarter.
And I guess looking at the second half what the full year implies sort of a.
25% ish decline there. So are you thinking that the third quarter is worse than that essentially sort of 30% 40% decline in sales.
Yes, your second half numbers are Directionally correct.
Yes, we would expect to take more of a channel inventory correction in the third quarter, it's naturally.
A period in the pool season as it comes to a close when inventories are.
And we're working actively with the channel through this quarter to reduce those inventories. So the majority of that channel inventory correction will occur in the third quarter.
Got it okay. Thanks, and then in terms of the I.
Talks about sort of the business development in terms of adding dealers and such how much do you think you can do in that area to offset some of the easing of demand during this time and what efforts taking place there.
Yes, I mean, that's that's been a key focus.
Sure.
Our commercial teams as you know as we've as we've had some some great product launches over the last couple of years.
Recruiting and bringing more service dealers and builders remodelers.
Into the into the Hayward camp and Thats going to continue to be.
A key focus as we've been able to meet the swelling demand married with some great innovative products that are that are enabling the smart pad upgrades.
There's a lot there's a lot to offer there is a lot too.
Hum that we're arming our sales team with to recruit additional.
Additional totally hayward folks into our family so.
That's that's a key focus of our commercial team right now is to continue that effort of bringing folks over to the Hayward team.
Great. Thank you.
Thank you Mr Oppenheim.
Our final question today comes from the line of Ralph <unk> with Bank of America.
Grace Your line is open.
Hi, good morning, Thanks for taking my questions.
I'll never updated.
Sales outlook for the year can you talk about what that implies for volume in the second half of.
The year.
Just given the fact that there's been so much being put in place and Theres a lot of moving parts just trying to get a better understanding of what the volume assumptions are on second half.
Okay.
Yes, the majority obviously of the.
The take on an net sales values as a consequence of volume reduction.
Pricing will still be comparatively higher in Q3 and to a lesser extent in Q4.
We still expect obviously, a little bit of a headwind on FX in Q3, maybe slightly moderating comparatively in Q4, and we'll get a positive contribution in the second half from acquisitions, but the.
The majority of the second half takedown is volumetric base.
Got it.
<unk> percent price that I think you highlighted.
I think that was year to date.
But what would that outlook be in the second half of the year, how much price are you expecting to realize.
The average price over the second half is going to be closer to around 7% to 8% comparatively over the second half of last year.
Okay.
Okay.
Helpful. And then when you look at your inventory levels, but not not within the channel but.
On your balance sheet, how much of that.
Every year is related to price versus volume.
So our Cogs index has increased.
Just on the 20 <unk>.
Since the beginning of last year, so I would say year over year.
Dealing with probably somewhere in the magnitude of about 15% to 16% Cogs index increase in all in our balance sheet.
While raw material index increase within the balance sheet.
Okay.
And then the question with volumes coming in the second half of the year.
Hi.
The guidance implies a little bit lower margins.
Compare to what you were expecting.
Earlier.
But still pretty resilient.
Give a little bit more color on how youre going to be able to help your margins with such a sharp decline in volumes in the second half of the year.
You talked earlier about some of the leverage of the corn and the.
Sure.
The variable cost model, but margins are up a lot in the last two years.
So it hasnt been structural changes in the business in Alaska.
We've seen kind of post COVID-19 that are going to allow you to hold margins up at these higher levels.
Yes, I think there's a couple of key factors to consider here, let's just talk about price, we announced a further price increase.
In the second quarter, which will have full benefit within the second half. This year, so that will be a contributing factor to our topline secondly, what's really important to understand is we generally have a very low fixed cost base within our business.
When you look at our cost of goods sold structure slightly over 70% of it.
As raw materials about 10% of it is going to be frame sort of the aggregate of freight and raw materials is 80% variable within our cost structure.
We have been able to increase our production and our sales out into the channel or sales into the channel over the last 18 months bye bye containing that growth within the existing four walls of our manufacturing facility. We've always maintained a very agile workforce.
With a large degree of temporary labor and we are now and have been over the last four weeks.
Removing that temporary labor from the cost base, we have a little bit more work to do right clearly to.
To fully protect the margin, but we're confident over the balance of the year that we will be able to.
Reduce our cost base within the factory.
Given it was highly variable.
The raw material level.
And temp labor level, we'll be able to get that out of the cost base of course.
Over the next three months.
Confident as we move into Q4, we'll see.
Margins start to level out.
Thereafter recover SG&A, obviously is another focal point, we want to continue to make sure that we are right sized in our SG&A base.
We have opportunities there.
Two to do some improvement, but we also want to make sure that we continue to invest.
Within the within the sales force and the new products introduction development programs that we have.
Over the course through the balance of this year and obviously into next year, but we do feel comfortable with the effective margin.
Forecast that we've given implicit within our guidance.
Okay. Thank you for all of them.
One more in just how how do we think about capital allocation and your approach to M&A and service.
More challenging macro environment.
Yes.
I think I view.
Got it.
Couple of questions ago, I mean, we're really into.
Internally focused right now we want to make sure that we continue funding the organic projects.
That continues to generate topline growth for us serve our serve our customers.
We will will continue.
From an M&A standpoint, staying in contact with folks in and progressing some of those conversations, but that's really not a focus for us in the more immediate term it's much more internal organic focused from a capital allocation standpoint.
Okay. Thank.
Thank you that's very helpful.
Thank you Ralph.
That concludes our Q&A session for today. So at this time I would like to hand, the call back to Kevin Holleran for closing remarks.
In closing I'd, just like to thank everyone for their interest in Hayward, our business is very well positioned to navigate any near term challenges, while continuing to generate growth for all stakeholders in the years ahead.
This would not be possible without the hard work dedication and resilience of our employees and partners around the world. Please.
Please contact our team if you have any follow up questions and we look forward to talking to you again on our third quarter earnings call to be held the week of October 24th Sam you can.
And the call now thank you.
That concludes the Hayward Holdings second quarter 2022 earnings call. Thank you all for your participation you may now disconnect your lines.
Okay.
Yes.
[noise].