Hayward Holdings, Inc. (HAYW) Q1 2021 Earnings Report, Transcript and Summary

Welcome to Hayward Earnings -- Holdings First Quarter 2021 Earnings Call. My name is Alicia, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions] Please note that this conference is being recorded. I would now turn the call over to Stuart Baker, Vice President, Global Strategic Planning and Business Development. Mr. Baker, you may begin.

Thank you. Good morning, everyone. We issued our earnings press release this morning to the Investor Relations portion of the website at investor.hayward.com, where you can also find an earnings slide presentation that we will reference during this call. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, 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 first quarter of fiscal year in 2021 just filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today’s call, the company will discuss non-GAAP measures, which we believe could be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of adjusted EBITDA to net income calculated on the GAAP, as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release and will be included in our Form 10-Q for our first quarter of fiscal year 2021. I would now like to turn the call over to Kevin Holleran.

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

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

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

Thank you. [Operator instructions] Your first question comes from the line of John Lovallo of Bank of America.

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

Yeah. Hey, John. I will turn to Eifion to give some of those percentages. But in terms of our key inputs, you hit on some of them. I mean, a lot of electronics, obviously, resins -- we believe we looked out with some good intel before deciding on the size of that price increase that we announced back a month and a half ago or so. We believe it’s enough, but it is a fluid situation. We also as you -- I believe we have an opportunity around a more normal time of year for price increases, which takes effect there on that October 1st timeframe. So we believe that there are opportunities to make some additional decisions if inflation continues to hit us in the face. But we believe, at this point, that what we announced there a month and a half ago is sufficient for the inflationary headwinds that we are feeling.

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

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

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

Okay. Thanks very much.

John, I would…

Okay. Go ahead.

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

Thanks, guys.

Thanks, John.

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

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

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

Yeah. I mean…

Okay.

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

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

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

Great. Thanks. I will pass on.

Thanks.

Thanks, Brian.

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

Hey, guys. Good morning.

Good morning.

Kudos on a…

Good morning.

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

Yeah. There’s a lot there. It’s a great question. I understand how it’s on your mind because, frankly, it’s on our mind too, Brian. That 40 to 45 that we have given here in the short-term touches on all those components that I mentioned previously from new construction. We think that could be up 20% and no reason to think that can’t continue into 2022 based upon what we hear from our builder and other dealers out there. The remodel market is there as well. Pricing -- this industry has done a great job of being able to absorb that and pass that along, which really then leads to the size of this aftermarket, which is frankly what is driving our current year outlook disproportionately just based upon usage and the overall inflection that this industry is seeing right now from upgrades, repair and replace. I think we would like to hold off on really giving clear guidance in this mid-term. Obviously, the comps are going to get larger as we play through 2021 here and look to comp off of 2022. But I think for now we would still like to leave the group with that kind of high single-digit expectation is where we believe 2022 and beyond will be. And we will stay in touch as the year plays out and if we see something different than that we will absolutely pass that through.

Okay. Fair enough. And then just kind of another question around thinking about how to dial in the model a bit, when we look at the adjusted EBITDA margins, 33% level here, pretty impressive, I think, the simple question is going to be just how sustainable is it. I mean, we have seen you sort of peak out in the high 20s, historically, obviously, you are running at revenue levels that are much above prior peaks. But what’s kind of sort of the target level for the balance of the year in terms of margin, should we see a leveling out or moderation as we move through the year or is this kind of 30% level for -- on an annualized basis, the right level, it’s the one moving above the high 20s like you have seen in the past?

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

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

Thanks, Brian.

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

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

Well, I think, there is a slight shift in the seasonality because of such a strong Q1, Ryan. The way this played out and I know you are very close with the industry, so I know you are aware of it. But Q4 last year, when us manufacturers really started looking at the early buying start to shift that, we were really still fulfilling sort of in-season 2020 orders. So we were able to start Q1 with a very strong backlog of early buys, which we were able to kind of harvest and build and deliver here. So, inventories are, frankly, there’s not enough of it out there with the rate that it’s selling through. So, we are guiding at this point to say kind of similar to Q1. But the demand is certainly there and if we are able to work through whatever headwinds, we will see what could play out here in Q2. But, again, really underscore the demand is there. The interest to -- and the usage of these pools in the backyards is extremely strong.

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

Yeah. As I think you have heard in some earlier earnings calls, I think, we would echo what’s been put out there. It’s a terrible event. There’s a lot of triaging going on. Frankly, none of us have been able to get as much product into the region, given the strong demand elsewhere as we would hope. I think it’s going to continue to play out into Q2 as more material finds its way into the region to be able to create more of a permanent fix. I think that there’s been a lot of -- if a heater can’t be found yet, I think people are kind of taking the heater offline just to get water flowing and water treated. So it is going to continue. It had some impact in Q1, but I don’t think it’s large enough for me to really put a number out there in answering your question, Ryan. It had an impact but not a huge impact on our Q1 results.

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

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

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

No. I don’t think so. I mean, I think that the, there’s real growth through all of those channels right now. As you know, our primary means to the market is through distribution. Our strong partnerships there, they are supporting retail, the builders and the servicers. I think that -- in a place like Texas to pick up on Ryan’s question, I do think that, for folks in the affected region there, they were turning to the internet to see if they could find some inventory to triage equipment quicker. So maybe a slight pickup there, but I think some pretty broad base across all of the -- all the channels.

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

Yeah. The -- good morning. This is Eifion. Great to talk to you again. The expectations will continue to build production capacity through Q2 into Q3 to address the current strong order file backlog. We expect as we move into the back end of Q3 into Q4, the backlog profile will start to normalize. Normalize is an interesting term. This business continues to inflect and we believe the absolute value of the order file will change. But in terms of daily sales within the backlog, we expect a normalization exit in Q3 into Q4.

Thanks for that. Appreciate it.

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

Hi. Good morning, everyone. So your results obviously are quite good, the industry is booming, you outperformed the industry. And I wonder if you have any comment on just -- and it seems like our operations basically allowed you to gain a little bit of share. It doesn’t seem like channel inventories have risen as much as sales by a long shot. So do you think you are in a better position with your distribution, in order to, have to go fulfilling stuff over the course of the year, maybe you gain a little bit of share in an industry that doesn’t usually see share shift or maybe there’s some stuff somewhere else. I am just curious about characterizing that growth whether you restart distribution better than others and anything else you want to point out that allowed you that to do it? Thanks.

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

Thanks so much.

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

Hey. Good morning, guys.

Good morning, Jeff.

Good morning.

I just want to touch on, obviously, you guys are doing a great job on sell-through and outperforming. But just -- where are you seeing constraints from a component standpoint and just what’s kind of the governor on growth around just kind of the contractor base, they have got to be obviously very, very busy?

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

Okay. Great. And then just on inventories, I mean, what does the guide kind of contemplate around inventory rebuild or your success to kind of rebuild inventories in the year end and how that -- how might that kind of impact the out years?

Yeah. Look, we -- I will start by saying, three years ago, when we started to think about the balance sheet and how we can improve that inventory management was a focal area. And we have addressed overinvestment into inventory progressively over the last three years. We feel comfortable right now with our inventory positions at Hayward. You will see from the end of 2020 to the end of Q1, absolute inventory values haven’t gone up and that’s really centric around raw material investments again to ensure supply is there for production. We don’t expect at this particular point to build our inventory positions by the end of the year. We will continue to manufacture and serve the marketplace with production. As we step into the future years, I think that discipline on the balance sheet will remain and the channel has accepted the revised service model that we are introducing, which is much more real-time to their needs.

Jeff, if you are asking specifically about channel in the invent -- in the, sorry, inventory in the channel. I think, it’s going to -- we are not going to have the months of sales of inventory really through this season based upon anticipated demand. So weather dependent, I think, it’s probably out into later this year before we are able to really get the inventory positions back to historic anticipated levels.

Okay. Great. Good color, guys. Thanks.

Thanks.

Thanks, Jeff.

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

Thanks for fitting me in. You talked about additional price increases obviously going into effect. Did you see a pre-buy ahead of this price increase and is there a lag between you -- when you put in pricing and when it actually runs to your P&L just given your large backlog?

Good morning, Saree. Yeah. We announced -- the two segments announced slightly different effective dates. So here in North America, we announced late March with an effective date of May 1st. We didn’t really see much of a pre-buy before that took effect. But it probably will be Q3 before we see much of that impacting the P&L or in Europe and the Rest of the World, it took effect in April. So it could be slightly sooner in that segment than what I just indicated for North America.

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

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

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

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

Thank you.

Thanks, Saree.

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

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

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