Hayward Holdings, Inc. (HAYW) Q3 2021 Earnings Call Transcript

Hayward Holdings, Inc. (HAYW 0.07%)
Q3 2021 Earnings Call
Oct 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Haywards Holdings third-quarter 2021 earnings call. My name is Patricia, and I will be your operator for today's call. [Operator instructions] Please note that today's conference is being recorded. I will now turn the call over to Stuart Baker, vice president, global strategic planning and business development.

Mr. Baker, you may begin.

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

Thank you. Good morning, everyone. We issued our third-quarter 2021 earnings press release this morning to the investor relations portion of our website at investor.hayward.com, 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 Jones, senior vice president and chief financial officer.

Before we begin, I'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and will be provided in our Form 10-Q for our third quarter of fiscal 2021 as filed with the Securities and Exchange Commission.

The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of net income calculated under GAAP to adjusted EBITDA, as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release and will be included in our Form 10-Q for third quarter of fiscal 2021.

I'd now like to turn the call over to Kevin Holleran.

Kevin Holleran -- President and Chief Executive Officer

Thank you, Stuart, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's third-quarter earnings call. I'll start on Slide 4 of our earnings presentation with some highlights from our third-quarter results. We had another very strong quarter of growth as we delivered net sales of $351 million, an increase of 56% year over year; and adjusted EBITDA of $98 million, an increase of 61% year over year.

We achieved nearly 90 basis points of margin expansion despite sharp increases in inflation and supply chain headwinds that are creating challenges throughout the industry. We continued to delever during the quarter as a result of healthy cash generation and remain in a very favorable position to invest in growth initiatives as part of our capital allocation strategy. Growing growth levels and more pronounced supply chain disruptions are resulting in 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 capabilities and strategic pricing actions, have allowed us to not only increase output but also dampen the adverse impact of inflation on our results. As we look forward, we believe additional price increases are warranted to align with the current inflationary environment. Now moving to our guidance on Slide 5. We expect the current demand trends through the end of the year and into 2022 driven by pool remodels, upgrades to SmartPad products and new pool construction returning to historical averages.

Given the strong performance to date and our ability to execute on our growth levers, we are raising the net sales guidance for full fiscal-year 2021. We now expect net sales growth of 59% to 62% year over year, compared to our previously provided outlook of 54% to 58%. Given the demand levels and backlog growth, coupled with rapid inflationary pressure, we have been proactive in managing our price, implementing cost reductions and improving production levels. However, during the quarter, we saw an acceleration of our supply chain and inflation headwinds, leading to higher costs than previously anticipated.

We've taken strategic pricing action this year and see the runway for these actions benefiting the price/cost dynamic positively, but we also expect a volatile environment in the near term. Despite these challenges, we're pleased to reaffirm our adjusted EBITDA guidance range for the full fiscal-year 2021 of $405 million to $425 million, a growth range of 75% to 84% year over year. We field 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 6. We believe affinity for outdoor living is here to stay, with strong secular trends driving a new appreciation for the backyard of which pool is 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 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 reference 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 existing pools.

Awareness of this increased functionality is driving upgrade conversions, and we believe we're in the early innings. This trend not only affords the homeowner greater control and ease of operating with pool features, it also provides Hayward the opportunity to directly interface with the user. Turning to Slide 7. In addition to the digital conversion opportunity I just addressed, you can see similar opportunities with chemical treatment moving to natural saline pools and energy conversion to high-efficiency variable speed pumps.

Our market-leading Omni app is a gateway for controls and automation to become more mainstream, while simplicity of use is removing the barrier for homeowners, and frankly trade professionals, to include more technology products onto the pad, as well as in and around the pool. Our product content opportunity on a technology-rich SmartPad pools can be three to four times compared to what we see in legacy pools. The SmartPad truly delivers the ease of use, ambience and enjoyment elements homeowners desire in addition to lowering cost of ownership and providing environmentally sustainable solutions. Importantly, the equipment still only represents a small portion of the total pool cost.

Finally, on Slide 8, 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. The aftermarket of installed in-ground pools is at a record age now, on average, greater than 22 years old, providing a rich source of remodel and upgrade 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 Eifion Jones, who will discuss our financial results in more detail.

Eifion Jones -- Chief Financial Officer

Thank you, Kevin, and good morning. I'll start on Slide 9. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased with our third-quarter results and the continued demand and ongoing adoption for our pool products that 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 and our ability to increase production capacity to keep up with demand despite global supply constraints. During the quarter, we saw growth across the product portfolio with demand for more efficient, environmentally friendly and automated pool products remaining robust. The pool market is seeing extended demand cycles due to the healthy levels of upgrades and repairs in addition to new pool construction.

Net sales during the quarter benefited from a 7.1% net price increase, as well as favorable foreign currency effects compared to the same period of the prior year. Gross profit increased to $162.5 million, an increase of $56.3 million or 53%. Gross profit margin was 46.3%, a decrease of 95 basis points. The decline in gross margin is a result of the rapidly rising cost inflation as global supply chain disruptions lead to higher cost of raw materials and freight.

The impact of these bottlenecks on costs accelerated through the quarter, dampening the impact of our previously announced price increases. As a reminder, the 5% price increase announced in March took effect on 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. The July announcement, which raised prices an additional 5% to 7%, took effect on orders not shipped by September 27.

So more of an expected fourth-quarter impact in terms of benefiting the price/cost dynamic. We continue to proactively address these inflationary pressures, 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-time charges taken during the quarter, most notable being a $3.5 million legal charge taken for settlements of ongoing litigation.

As a percentage of net sales, SG&A decreased to 19.6%, a decrease of 240 basis points, driven by improved operating leverage. Research, development and engineering expenses 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 or 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 amendment to our credit facilities. During the quarter, we incurred an income tax expense of $14.3 million, compared to $5.5 million for the prior-year period. This was primarily due to increased income from operations. Our effective income tax rate was 22.2%, compared to 26.5% for the prior-year period.

Net income increased $35.1 million or 231% to $50.3 million. Adjusted EBITDA increased to $98.3 million, representing an increase of $37.3 million or 61%. Adjusted EBITDA margin increased 87 basis points to 28% as higher volumes and improved operating leverage was partially offset by the spike in costs. Now turning to our segment results, beginning on Slide 10.

As a reminder, Hayward's operational and management structure is aligned to its key geographies and go-to-market strategy, resulting in two reportable segments: North America and Europe & Rest of World. In North America, net sales increased 62.1% to $298.2 million for the third quarter. The increase was driven by higher sales of residential pool equipment and increased pricing. Gross profit increased 56.1% to $141.7 million.

Gross margin contracted 183 basis points to 47.5%. Gross margin contraction was driven by elevated inflation from raw materials and freight as supply chain bottlenecks became more pronounced, partially offset by the net price increase, improved manufacturing leverage and additional cost savings. North America segment income increased 87% to $91.9 million. Adjusted segment income increased 73% to $98.3 million.

Segment income increased mainly from higher sales, partially offset by higher driven SG&A expense. Turning to Slide 11, the Europe & Rest of World. Net sales increased 29% to $52.4 million. The increase was due to sustained market demand and favorable foreign currency effects.

Gross profit increased 35.1% to $20.8 million. Gross margin expanded 167 basis points to 39.7%, primarily by favorable product mix and volume leverage, partially offset by the inflation impact on materials and shipping. Europe & Rest of World segment income increased 52% to $10.6 million. Adjusted segment income increased by $3.6 million to $11.2 million from $7.6 million for the prior-year period.

The increase in segment income was due to higher gross profit, offset in part by increased variable and incentive costs. We continue to strengthen our financial position as we delevered to net leverage of 1.8 times as of October 2, 2021, compared to 5.2 times as of December 31, 2020. This was facilitated by strong cash flow generation to pay down debt, as well as a robust growth in our LTM adjusted EBITDA. For the nine months ended October 2, 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. The cash used in investing activity 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.

And with that, I'll turn the call back to Kevin.

Kevin Holleran -- President and Chief Executive Officer

Thanks, Eifion. 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've 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 charity's 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 approach 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.

Hayward's competitive advantages has helped us to grow share. Our innovative and environmentally conscious technology products are driving SmartPad conversion and expanding our addressable market. Finally, our superior financial results are backed by an attractive, large and recurring aftermarket business. With that, operator, we're now ready to open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Ryan Merkel from William Blair.

Ryan Merkel -- William Blair -- Analyst

Good morning, and thanks for taking my question. So I was really impressed with your gross margins this quarter. I wasn't expecting you to make progress, be -- have gross margins up sequentially. Can you talk about price/cost in the quarter? And then how should we think about the progression in 4Q and into early 2022?

Eifion Jones -- Chief Financial Officer

Yeah. Good morning, Ryan. It's Eifion. As you know, we instituted the out-of-cycle price increase of 5% in March of '21, which became effective on orders May 1.

And then we announced DC's in year '22 price increase two months earlier than normal, which was in the range of 5% to 7%, which became effective on all our orders July 1 onwards that will not ship by September 27. We saw some benefit of the earlier March price announcement in Q3. I'd say that was more pronounced in Europe. But given the size of the backlog in North America, I'd say the aggregate benefit of the combined price increases of 11% to 12% will primarily come through in Q4.

Clearly, in Q3, we felt more inflation, and I would say more risk is projected as we step for the next two quarters. It's critical, Ryan, that we become more agile, I think, in terms of price increases in the current inflationary environment and do believe more price action's necessary as we step along this inflation curve. I would just -- and you'll see this in our 10-Q disclosures. You'll see that there was a cost realignment in Q3 of about $1.7 million, which improved or increased the gross margin by about 40 bps.

So if you discount that, there was sequential step backwards of about 20 bps in the gross margin. So Q3 was a challenge. We do expect price lag to close as we continue to execute on our price announcements, but it is taking a little bit longer than we had expected.

Ryan Merkel -- William Blair -- Analyst

OK. 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'm curious if you think the worst is over or do you expect more of the same in 4Q?

Kevin Holleran -- President and Chief Executive Officer

I think it's still a struggle, Ryan, I mean, a struggle that I think we're managing better than many. But I don't really see an abatement. We still are seeing some shortages and some difficulty getting material line side. The whole industrial world is seeing that.

So I'm not ready to say that it's behind us, but our operations team and supply chain team are doing an absolutely incredible job of growing production capacity and meeting this order file on this backlog that's at historic levels for us.

Ryan Merkel -- William Blair -- Analyst

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

Eifion Jones -- Chief Financial Officer

Yeah. I think that's absolutely correct, Ryan. I mean we did raise the top-line guidance modestly over where we were before. We've kept the adjusted EBITDA range where it is.

We are managing through these supply constraints. I think probably, we've been challenged a little bit more given we're plus up 71% year over year in our sales profile. So as you get up to these upper echelons of growth, it's increasingly difficult to source the materials, but we think it's the right thing to do to get out there and get after it to do that. I would remind everybody on the call that when I look at the fourth quarter, there is four less trading days than the comparable quarter last year and three less days in Q3, which is about a 6% reduction in available trading capacity.

So though it is a little bit conservative at the absolute level at the midpoint of our guidance, it does underlyingly represent more volume growth given the lower trading days.

Ryan Merkel -- William Blair -- Analyst

Thanks, guys. I appreciate it.

Operator

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

Nigel Coe -- Wolfe Research -- Analyst

Thank you. Thanks for the questions. Good morning. I'm actually wondering if you could just take a step back and look at the revenue growth and 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 could stab -- just trying to quantify how much mix benefit you're seeing right now?

Eifion Jones -- Chief Financial Officer

Hi. I'll lead off here. Yes, I mean, you'll see that we have taken a price movement in the quarter. It was more pronounced in real terms in Europe as they saw the realization of the earlier off-cycle price enhancement given they comparatively had a lower backlog than North America.

In North America, you'll also see that we did take a price step forward, but that's really a consequence of the mix that you're referring to. We did see great adoption of our variable speed product line come through in the quarter. We've also seen a significant step forward in the control adoption. So these are our control products that are coming through more progressively in the queue.

And year over, 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 segment.

Kevin Holleran -- President and Chief Executive Officer

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

Nigel Coe -- Wolfe Research -- Analyst

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

Eifion Jones -- Chief Financial Officer

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 cumulatively. So you think about the sequential movement, Europe was down 26% in Q3 to Q2, and North America was actually up 2%. So there was a bit of positive mix effect coming into the top line geographically. There was a positive mix product line.

And so yes, it was more of a mix benefit onto the top line. Unit volume was steady, but there was more attribute coming to the top line as a consequence of mix.

Nigel Coe -- Wolfe Research -- Analyst

Great. And then just my follow-up question is on the channel inventories. Obviously, we heard from POOLCORP last week. And they've seen a significant uptick in inventories, but it sounds like they still want to get more.

So I'm just curious if you can just give us a bit more color in terms of what you're seeing in the channel in terms of inventory levels and what your distributors are asking for.

Kevin Holleran -- President and Chief Executive Officer

Yeah. I mean I would say Peter's comments last week represent the industry as a whole. Inventories are in a healthier position than they were a quarter or two ago. If you look at it from a days-on-hand standpoint, it's still in a -- it's an improving position, but certainly not too much by any means.

Admittedly, the mix of that inventory may not be as ideal as any of us would like it. There's still some products that are in shorter supply. So we're working feverishly to address that. But in total, I think we're taking some extra shelf space right now.

So we look at it really through two lenses: in absolute terms, what's -- what are the inventory levels looking like, but also then are accounting for some additional shelf space through our share gains. So yeah, I mean we keep close tabs on it. We have good insight from our large distributor partners. And these are conversations that we have with them in understanding what they need more of and trying to improve that mix so that we can push more product out to its ultimate use in the backyard.

Nigel Coe -- Wolfe Research -- Analyst

That's great. Thanks very much.

Operator

Thank you. And your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open. 

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Thanks for taking my questions. Maybe just a quick follow-up on the last one.

You talked -- Kevin, during your prepared remarks, you mentioned share gains. Just in response to the question right now, you mentioned it again. And I think sort of underappreciated as a part of the growth algorithm that's clearly helped you guys. So is there any way to kind of quantify what you're seeing or what you're sort of internally estimating for share gains? It seems like it's been a pretty meaningful tailwind 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 it most, whether geographically and market, product-wise? Just any trends you're seeing that you think will also help into 2022?

Kevin Holleran -- President and Chief Executive Officer

Yeah. Great. Thanks for the question, Brian. I think it is a big part of our story here in 2021.

I'm going to be a little bit more generic in trying to identify what we think it is because, frankly, the data's not perfect, but I think it's directionally accurate. From a product standpoint, we're very excited that -- I think our largest improvements are around this digitization or the SmartPad conversion that 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 Trichlor situation. But frankly, the salt chlorination has been a strong product line for us for years. So that progression is multiyear in its time line. And then we're seeing a lot more volume into the market around these color LED lights as homeowners are really looking to get more ambience 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 part of the SmartPad conversion are playing out nicely with a number of new product launches that has been very well adopted early into their introduction period.

Brian Lee -- Goldman Sachs -- Analyst

That's great. Helpful context. And then maybe just my follow-on and 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 Eifion was talking about 11% to 12%. It won't all read out this year given the timing. And then I think, Kevin, you mentioned probably some further price actions to come. If we assume there's another one or two here as we enter into '22 or early '22 in that same mid-single-digit range, is it fair to assume that the price that you expect to read out in 2022 could be sort of in that low to mid-teens type of percentage range? Is that the right way to think about sort of that piece of the growth algorithm as we head into next year?

Kevin Holleran -- President and Chief Executive Officer

Yeah. We're not ready 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 as the baseline of the calculation, Brian, it's -- that 11%, 12% that's been announced thus far here in 2021, really only a quarter, give or take, is what's going to be realized. So three quarters of that will roll into 2022 before the next round of action.

So I'm not going to confirm kind of that low, but we're in high single digits just on the actions that we've already announced here in 2021. But further actions are coming, and we need to better align our invoice pricing with what the production costs are at the time that we're filling those orders. So we're spending a lot of time, and we'll be making announcements to the channel and to the industry very shortly on what that next round is.

Brian Lee -- Goldman Sachs -- Analyst

OK. That's great. We'll look forward to it. I'll pass it on.

Thanks, guys.

Operator

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

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Hey, good morning, everyone. So a couple of questions here. First, leverage sub two. Does this change at all what the focus is for you? Obviously, organic investment is going to remain very front and center.

I know you're thinking M&A in a targeted fashion still there. But what about dividends, buybacks or some other return mechanisms? And how focused are you still on the debt paydown side?

Eifion Jones -- Chief Financial Officer

Yeah. So I mean our priorities really haven't changed. We remain focused, Mike, on the growth initiatives. We've got several organic -- larger organic programs now outlined over the next two years, really focused on improving the automation in our North American footprint and improving our distribution footprint throughout both the North American and European geographies.

We do have a healthy pipeline of M&A, which is our second priority here. We're pursuing those vigorously, and more to come in that regard. But as you pointed out, given we are sub two, 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 there, and it's too early to say what that would look like.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Yeah. OK. Fair enough there. And then you talked about building visibility into 2022.

Maybe just some thoughts on backlog, how you see the lead time stretching and what gives you confidence when you look at the various components to your growth, whether it's repair/replace and the refurb, newbuild, whatever. What are the factors that drive confidence in the volume side going into next year?

Kevin Holleran -- President and Chief Executive Officer

Yeah. I mean the backlog does stretch certainly into 2022. It's at elevated levels still despite some of our production capacity improvements. As you look at the levers of growth, I think they continue to be very -- we have high confidence in them, certainly new construction.

I know others have talked about this. The builders are quoting well out into 2022, some even beyond. I know they're working feverishly to add labor and increase their crews to be able to get more pools in the ground in 2022. The remodeling segment of the market, I think, is another right opportunity.

As I said in the prepared remarks, our pools are more aged now than ever. And there is an interest both with the homeowner who's doing a full-scale remodel or just looking to upgrade a piece o two 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's a number of different angles that are -- that continue to fuel our confidence into 2022. And we have a backlog right now that certainly supports volume growth in the early months of 2022 to start from.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Great. Appreciate your time. Thank you. 

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

Hi. Thanks, everybody. And please tell me if this is something you can't go into in 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, whether that is receiving any pushback. And just a little bit of curiosity as to whether -- I can see the share going.

I get it. But whether -- if others don't raise price as fast as the installer keeps the margin or channel partners in general. So just in general, how is that going through on change the pricing mechanisms and is that the context?

Kevin Holleran -- President and Chief Executive Officer

Yeah. I think what you're referring to is the second price increase that Eifion mentioned earlier, which was really our seasonal increase. We announced it sooner, and there was really a change in practice to say that if orders received after July 1 weren't shipped by the end of third quarter that they would take the price increase. I think the channel understands that the manufacturers are feeling input cost increases right now.

So actually, the announcements now that's a quarter ago or longer was actually received very well by the channel, understanding that the suppliers need to offset these costs to be able to continue expanding capacity and getting product placed into the channel. So I think it was a great understanding and collaboration between us and our channel partners. I was unclear on the second question, Rob -- or the second part of your question. Maybe Eifion --

Rob Wertheimer -- Melius Research -- Analyst

No, that actually answers it adequately. So that's fine. Thank you. Anyway, thank you very much.

Operator

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. Just on Europe, the sequential decline, is that just typical seasonality with vacations? Or is there something else going on there?

Eifion Jones -- Chief Financial Officer

No. I think you're right. There's a 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. I mean 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. And then just on -- back on '22. I think you showed the industry data on pool builds, and I think they have just a small increase, and maybe that's labor and contractor constraints. But how are you thinking about new pool builds into '22 versus that industry data?

Kevin Holleran -- President and Chief Executive Officer

Yeah, I think the data that you're referencing, the source is PK data there, which I know the industry, that's kind of the preeminent source for that data. And it is a fairly modest forecast for 2022. We continue to feel and to hear that there is tailwind and interest in folks building out that backyard oasis. So I think what we know here in late October as we start looking into 2022, we believe that there's -- there will continue to be some strong growth around new pool construction in 2022.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Eifion Jones -- Chief Financial Officer

Yeah, you're right. We continue to see inflation. We don't believe that through the woods on 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 close that lag given the size of the backlog.

I think it's really important for the channel to understand that we do need more agile pricing, as Kevin mentioned, pricing which is more attached to the invoice than it is to the original placement 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 here that we're feeling the brunt of inflation may be more so than others given the significant size up that we're doing in our sales profile vis-a-vis others in the industry. So that incremental unit that we're trying to procure raw material or component in the marketplace to hit the 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Thanks so much, guys.

Operator

Your next question is from the line of Josh Pokrzywinski from Morgan Stanley. Your line is open. 

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hey, good morning, guys. 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 you're seeing as maybe something that is more commodity-based, where if like we're looking at steel futures saying this could be a better situation in a few quarters versus maybe something that may stick with us for a while, like kind of your base freight rates or labor costs which might not dial back as quickly?

Eifion Jones -- Chief Financial Officer

Yeah. So let's talk about it in the big broad buckets: raw materials, labor and freight, as well as tariffs. Let's put that on to the table as well. But in terms of raw material, our primary inflationary pressures are coming from commodity raw materials.

And we think about resins, the multiple resin change are fall into our plastic components and housing. You probably watch the IPX Index, and you can see that the raw materials that comprise that index are elevated now nearly 56% year on year. So that is challenged. And my personal belief, that will remain structurally high because the base chemical industry needs reinvestment economics in order to support the current demand profile in the industry.

The next area we see is metals in our raw material, and metals are elevated. You've seen where steel has gone over the last couple of months. Copper started early and remains high. And we've got some specialty metals in our product lines, which also are elevated and consequential to a shift in the demand dynamics, not necessarily the supply side.

And we think that there is possibly a little bit of transitory inflation in the metal sector, which we'll see come off next year. And then I would say, finally, when you look at the raw materials, there will always be specialty raw materials that go into our bill of materials. Microprocessors is a good example, and you know 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 microprocessor production levels, and we're following that type of commentary and expect that to improve over the course of the next 12 months.

But my firm belief is we've seen a structural step-up in inflation, and some of it may deem to be transitory in metals. We're expecting to see double-digit inflation stick, and we're pricing accordingly. The next level, as you mentioned, is labor, and labor is difficult in North America. We've seen the entry minimum wage level, a step-up of 20%, and that's not going backwards.

In terms of freight, we've seen labor impact the freight environment. Ocean freight's 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. of 25% from China.

And I'm not going to guess whether that's going to stay or go. But for the time being, we're pricing assuming it's here for a longer term than originally expected. So you aggregate all of that, and I would say double-digit inflation is with us to stay for a number of years before the supply side catches up. And we're taking the pricing actions to make sure we protect the business.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

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 years that you could share? I would imagine that for all the structural elements, 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?

Kevin Holleran -- President and Chief Executive Officer

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

It's still one of our most, most backlogged products in the portfolio.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. Thanks, guys. Best of luck.

Operator

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

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How's it going? So I think a lot has been asked and answered. And I just wondered, kind of structurally, can you talk to us a little bit about how you lead consumers to 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 or online that can do that? Or is that more through educating the builders and the distributors and all that?

Kevin Holleran -- President and Chief Executive Officer

Yeah. I think that there's a lot there. And I think we, as an industry, can certainly do more to be able to educate that homeowner. We still largely rely upon the builder and the servicer to understand those capabilities to feel comfortable selling it and installing it.

But I do think that from a digital standpoint that there is opportunities to be able to increase the eyeballs on the payback opportunities that this SmartPad has, whether it's digitization or the energy efficiency or the natural water treatment, all of these -- well, I'd say almost everything. Majority of those are higher-priced than the product they would be replacing, but they all have a sound business came, 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 a better job of making that case direct to the homeowner.

Joel Tiss -- BMO Capital Markets -- Analyst

OK. Great. And one last little cleanup. You usually mention your manufacturing flexibility and the incremental capacity you can squeeze out of your factories, and I didn't hear too much about that.

Are you kind of running toward the top end of your capabilities? Or are there a lot -- is there a lot more productivity to pull out of your manufacturing side? And then I'm done. Thanks.

Eifion Jones -- Chief Financial Officer

Yeah. I would say, look, we've still got capacity that we can't unlock in our manufacturing facilities. We've taken the most recent step to establish 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 in our Clemmons manufacturing facility to add more production capability, and that was the underlying theme for that particular move.

We continue to have expansion opportunities in Europe, and we're taking steps there to look at site expansion. And we have got several automation investment programs underway to build further capabilities. So yeah, we have more capacity expansion or we continue to look at that. We've done some really, really innovative things on the manufacturing floor over the last quarter, including converting several of our discrete product lines to multiproduct capability product line.

So it's not only sign enough of our unit production. It's also adding agile and flexibility to the manufacturing capabilities 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 that's underway.

Joel Tiss -- BMO Capital Markets -- Analyst

That's beautiful. Thank you.

Operator

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

Kevin Holleran -- President and Chief Executive Officer

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 nearly 90 basis points of margin expansion. We raised our annual guidance last quarter, and we're able to raise our top-line 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 ahead. Please reach out to our team if you have any follow-up questions, and we look forward to talking to you again soon.

Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

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

Kevin Holleran -- President and Chief Executive Officer

Eifion Jones -- Chief Financial Officer

Ryan Merkel -- William Blair -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

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