Hayward Holdings, Inc. (HAYW) Q1 2022 Earnings Call Transcript

Hayward Holdings, Inc. (HAYW 3.35%)
Q1 2022 Earnings Call
Apr 28, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hayward Holdings first quarter 2022 earnings call. My name is Austin, and I'll be the moderator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Stuart Baker, vice president, global strategic planning and business development.

Mr. Baker, you may begin.

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

Thank you, and good morning, everyone. We issued our first quarter 2022 earnings press release this morning, which has been posted to the investor relations portion of our website at hayward.investors.com, where you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, president, chief executive officer, and Eifion Jones, senior vice president and chief financial officer. Before we begin, I'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and will be provided in our Form 10-Q for our first quarter of 2022 as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of net income calculated under U.S. GAAP to adjusted EBITDA and, 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.

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 first quarter earnings call. Near the end of the quarter, we celebrated our one-year anniversary as a public company. I'd like to personally thank our employees, dealers, channel and vendor partners for making this inaugural year a great success.

As I look back over the last 12 months, we have many accomplishments to be proud of. We have executed on key strategic initiatives and made investments in our product portfolio both organically and through M&A that have advanced our reputation as the innovative market leader in technology. We significantly strengthened Hayward's position in the market by leveraging our supply chain advantages and vertically integrated production model. This has proved especially beneficial in the current environment, resulting in share gains.

The hard work of our teammates across our global organization have led to consistently strong financial and operational performance. We look forward to many years of success as a public company as we continue to build a track record of performance and strive to create meaningful value for all our stakeholders. I'll start on slide four of our earnings presentation with some highlights from the first quarter. We delivered another very strong quarter marked by net sales growth of 23% year over year to a record $410 million net sales, which was on top of an exceptional growth of 96% in Q1 of 2021 over Q1 of 2020.

Adjusted EBITDA grew 18% year over year to a record $126 million, yielding a 31% margin. As outlined on slide five, our performance continues to be driven by our ability to execute on the core drivers of growth: digital leadership, dealer conversions, new products, operational excellence, broad channel access and environmental sustainability. Importantly, we have a wide range of factors supporting our growth, and this diversification gives me confidence as we look to expand our business in the years to come. I'll provide more detail on some of these items as we move through the presentation.

But first, let me address a key pillar of our success, that being our operational excellence. Our vertically integrated operations and our procurement expertise have provided greater supply chain flexibility, giving us the ability to increase output while maintaining the recent improvements to our structural margin profile. Our focus on operational excellence allows us to ensure product quality and availability despite the operational and logistical challenges most companies are experiencing. We're also pleased to report the opening of a new facility in Europe focused on automation and sanitization technologies that will help us to expand our sales in region through the more than doubling in the production capacity in these product lines.

On slide six, I'll focus on our IoT digital leadership driven by the powerful SmartPad conversion taking place in our industry, led by our Omni automation systems, as well as highlight the breadth of our product offering. Omni is at the heart of the SmartPad, creating the pull for IoT-enabled devices. Our adoption rate continues to improve with user base increase of 45%. The power and simplicity of use has driven connectivity of a broad array of technologies, with the top five growth categories in the industry being LED color lights, controls, variable speed pumps, heaters and sanitization.

Hayward's growth in these categories continues to outperform the industry, supported by recent new product launches including ColorLogic LED lights, Omni PL controls, XE Variable Speed pumps, Small Footprint Universal Gas Heater, and AquaRite S3 chlorine salt generator, all of which have increased our new product vitality index by 37% year over year. Our complete offering provides diversification, allowing us to fully participate across our key end markets of aftermarket upgrade, repair and replace, remodeling and new pool construction. Moving to slide seven, I'd like to highlight that an important part of our growth strategy is the aftermarket conversion upgrade opportunities for digital, chemical, and energy. There is a significantly higher take rate in new pool construction compared to the current level of aftermarket penetration for key products such as controls, salt chlorination and variable speed pumps.

Our sales teams are working with trade professionals to promote these exciting new technologies as aftermarket upgrades. We have seen greater dealer acceptance, as evidenced by our greater than 20% growth in our Totally Hayward loyalty program participation. We see this as a $6 billion incremental market opportunity by simply increasing the aftermarket penetration in these three categories to the new construction levels. On slide eight, we highlight the initial spend for new key technology adoption at the point of construction or full-scale remodel and the aftermarket lifetime revenue stream.

The difference between a SmartPad pool and a legacy lower technology, non-automated pool is typically around $7,000 for the equipment manufacturer, and the technology, feature-rich SmartPad provides compelling sustainability and energy efficiency benefits to the end user. Given the typical pool has a lifetime of around 30 years, and an equipment replacement every 10 years, there is compelling lifetime value stream associated with this conversion, one which we feel provides a long runway for growth. This opportunity is a key focus for our sales and marketing teams as we work with trade professionals to execute the vision. On slide nine, I will briefly discuss our M&A strategy, which focuses on core pool product or technology tuck-ins, as well as backyard adjacencies.

You'll recall that we announced at the beginning of the quarter the closing of three strategic tuck-in acquisitions, which have compelling technologies and further leveraging Hayward's leading Omni Control solutions to increase the ambience of the pool, spa and backyard with a variety of novel water features, all of which benefit from our leading LED lighting technology. We are making good progress integrating these businesses into the Hayward family and are excited about the contribution they will make to help increasingly differentiate our leading lifestyle product portfolio. We would expect these products to be fully launched across Hayward Channel partners in second quarter, with further product releases in time for the 2023 pool season. As we look forward, we have a strong pipeline of opportunities that we are pursuing, and acquisitions will continue to be an important component of our capital allocation.

With that, I'd like to turn the call over to Eifion Jones, who will discuss our financial results in more detail.

Eifion Jones -- Senior Vice President and Chief Financial Officer

Thank you, Kevin, and good morning. I'll start on slide 10. All comparisons will be made on a year-over-year basis. As Kevin mentioned earlier, we are pleased to report record results in the first quarter of 2022 driven by the continued adoption of our pool products that we are seeing throughout the channel, particularly our increasing suite of Omni connected SmartPad and lifestyle products, supported by healthy aftermarket adoption and improved operational capabilities with excellent production results in the quarter.

Net sales for the first quarter increased 23% to $410.5 million. The growth during the quarter was driven by a 17% price realization, 7% positive volume growth and mix, partially offset by a 1% unfavorable impact from foreign currency devaluation. The net price impact over the prior year period reflected the accumulative impact of our previously announced price increases to mitigate the escalating inflationary cost pressures. Sales volume growth continues to be driven by demand for pool equipment both in new construction and, more importantly, in the aftermarket.

Volume growth was achieved in North America, with Europe and Rest of World muted by the geopolitical circumstances in the region. Gross profit in the first quarter increased to $190.4 million, an increase of 19% year on year. Gross profit margin was 46.4%, a decrease of 144 basis points, primarily resulting from inflation pressure in certain commodities and freight costs, as well as unfavorable foreign currency impact. Our pricing initiatives and supply chain capabilities have been successful in maintaining the structural margin profile of our business, but we are navigating a challenging and lengthy inflationary cycle.

We remain confident in our ability to operate in this environment and have implemented a price surcharge at the beginning of the year to help mitigate the impact of inflation, and we're evaluating the need for the surcharge to remain in place and further price increases as inflation persists. Selling, general and administrative expenses during the first quarter increased 4% to $68.9 million, primarily driven by increased expenses in distribution, warehousing, and marketing, as well as increased regulatory costs as a public traded company and bad debt expense, which included write-offs for Russian-owned customers. This was partially offset by lower incentive compensation compared to the prior period, which also includes stock-based compensation expenses in the prior period related to the IPO. As a percentage of net sales, SG&A decreased to 16.8%, a decrease of 312 basis points, reflecting the leverage we have achieved as the business has grown.

Research, development and engineering expenses during the quarter increased 8% to $5.2 million, reflecting continued investment to support business growth and product development. As a percentage of net sales, RD&E was 1.3% and compared to 1.4% in the prior year period. Operating income increased 34% to $106.4 million in the first quarter. This increase in operating income was driven by higher net sales and conversion to profitability.

Net interest expense decreased 48% to $9.6 million for the first quarter compared to the prior year, primarily due to debt repayment and lower interest rates as a result of the second quarter 2021 amendment to the credit facilities. During the quarter, we incurred an income tax expense of $23.3 million compared to $15.2 million for the prior year period. Net income increased 101% to $74 million. Adjusted EBITDA increased to $126.2 million in the first quarter, representing an increase of 18% as a result of the higher net sales and operating income.

Adjusted EBITDA margin decreased to 30.8% or 134 basis points compared to the prior year period. The decline in margin is primarily due to the inflationary impact on raw materials, freight and labor as a result of higher demand and supply chain constraints. Now, I'll discuss our reportable segment results for the quarter. As a reminder, Hayward's operational and management structure is aligned to its key geographies and go-to-market strategy, resulting in two reportable segments, north America and Europe, and rest of the world.

Beginning on slide 11. North America net sales for the first quarter increased approximately 28% to $346.3 million. The increase was primarily driven by a 19% favorable price impact and 8% higher sales volumes. Gross profit for the quarter increased 21% to $163.1 million.

Gross margin decreased 252 basis points to 47.1% due to the stubborn inflation in raw materials and freight. Segment income increased 27% to $108.6 million. Adjusted segment income increased 19% to $114.2 million, while adjusted segment income margin decreased 231 basis points to 33%. Turning to Europe and rest of the world on Slide 12.

Net sales for the first quarter increased 2% to $64.2 million. Net sales benefited from approximately 8% net price increase but were partially offset by a negative 6% unfavorable foreign currency impact. The volume was muted due to the geopolitical circumstances in Europe at this time. Gross profit in the quarter increased 8% to $27.3 million.

Gross margin expanded 246 basis points to 42.6%, primarily driven by favorable price increases and favorable product and customer mix. Segment income increased 14% to $17 million. Adjusted segment income increased by 16% to $18.4 million, yielding an adjusted segment income margin of 28.7% or an impressive increase of 354 basis points. For the first quarter, cash flow from operations was a use of $56.9 million compared to a cash use of $131.6 million during the prior year period.

There was a seasonal cash use of $145.7 million for working capital compared to a cash use of working capital in the prior year period of $201.2 million. Despite the higher sales in the quarter, the seasonal cash used for working capital was reduced from the prior period due to a limited early buy program for the '21/'22 season in comparison to the prior early buying programs. Investing activities for the first quarter was $7.5 million, primarily comprised of capital expenditures. In the prior period, investing activities were $4.6 million, similarly primarily comprised of capital expenditures.

Net debt to adjusted EBITDA for the last 12 months was two times compared to 1.7 times as of December 31, 2021. The increase in leverage reflects the cash use to support the seasonal working capital requirement and the share repurchase, which was completed in the first quarter for $81 million. Total liquidity at the end of the first quarter was $443 million, inclusive of $118 million unrestricted cash on hand and $325 million availability on our revolving credit facility. And with that, I'll now turn the call back to Kevin.

Kevin Holleran -- President and Chief Executive Officer

Thanks, Eifion. I'll pick back up on slide 13. At Hayward, environmental, social and governance, or ESG, has always been important to us, and we know that it's important to our shareholders as well. We continue to focus on the energy consumption throughout our operations, as well as making sustainable products a key focus of our new product development road map.

We strive to promote a diverse, safe and inclusive workplace, and we pride ourselves on our strong company culture. As a recent public company, we have partnered with a third-party expert to conduct a materiality assessment and identify where we have the most impact across key ESG themes. The results of this materiality assessment has shaped the framework to guide our strategy focused on four key pillars: products, planet, people, and principles. Under the oversight of our Nominating and Corporate Governance Committee of the Board, we will be working to make a difference in these areas as we continue on our journey.

More recently, we initiated a global ERP conversion project to standardize systems worldwide. We are also pleased to report continued progress on the governance side with the nomination of Ed Ward as independent director to the board of directors subject to stockholder approval at the 2022 annual meeting of stockholders next month. As president of the client product group of Dell Technologies, Ed brings deep expertise in technology and leadership, and we look forward to adding his skills and expertise to the board and Nominating and Corporate Governance Committee. We look forward to sharing our progress and welcome stakeholder feedback on our overall approach.

On slide 14, we transitioned to the sustainable trends supporting our outlook for 2022. We are very positive about the long-term health of the pool industry. Strong secular trends have significantly raised the appreciation for the backyard of which the pool is the centerpiece. In addition, we see favorable economic data that not only supports healthy levels of new construction but even stronger aftermarket activity.

While we are closely tracking macroeconomic trends such as elevated inflation, rising interest rates along with geopolitical developments, our business continues to expand. We remain focused on the aftermarket opportunity and aging installed base presents, which made up 80% of our total sales in 2021 as upgrade, repair and replace made up 65% of the sales mix. Growth of lifestyle products incorporated onto an Omni SmartPad has outpaced other core products, and we expect this trend to continue as a key source of growth. And finally, new pool construction growth was healthy in 2021 but remains well below historical median levels.

 I'll wrap up on slide 15 and discuss our outlook for the full fiscal year 2022. We are off to a good start to the year with strong performance in sales and profitability during the first quarter. Despite some broader macroeconomic uncertainty in the second half of the year, including ongoing supply chain and inflationary pressures, we are pleased to affirm our guidance for net sales growth in the range of 9% to 12% compared to 2021. This is comprised of a combined price and volume growth range of 12% to 15% partially offset by FX and one less trading day in 2022.

We also expect adjusted EBITDA to be in the range of $460 million to $475 million for 2022, representing growth of 9% to 13% year over year. As I look at the longer-term health of the market, we see positive demographic trends, increased focus on the outdoor living space, and aging pool stock, and the ongoing conversion toward IoT SmartPad pools. While the current dynamics of the macro environment are evolving, we see home price appreciation and new demographics entering the housing market, particularly in year-round markets. With approximately 80% of sales tied to an aging existing pool base, the growth in new construction over the last two years provides a visible runway of growth.

Finally, our ability to develop technologically advanced and environmentally sustainable products, driving pool owners to upgrade their existing pool pad to Omni Smarts further strengthens growth opportunities in the aftermarket. In summary, we continue to be confident about Hayward's position within the market and the opportunity to expand upon our achievements in 2022 and the years to come. With that, operator, we're now ready to open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Jeff Hammond of KeyBanc Capital Markets. Jeff, your line is open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys.

Kevin Holleran -- President and Chief Executive Officer

Good morning.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Kevin Holleran -- President and Chief Executive Officer

Yes, I would say as for the second part of the question, Jeff, the longer these surcharges stay in place based upon the inflationary pressures that we hoped were more transitory when we implemented them. The longer they -- we have the need for them, the greater the likelihood is that we'll roll that into the structural price lists. Haven't yet done that. We still are doing it on a month-to-month basis, but the inflationary pressures are not abating.

In fact, we felt more inflationary pressure through Q1 than prior price increases had necessarily contemplated.

Eifion Jones -- Senior Vice President and Chief Financial Officer

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. So, I guess, with the strong start of the year and, I mean, I guess, the view that there's probably more pricing in there. Is the offset -- you're lowering your volume assumptions within the guide? Or what are the moving pieces? Thanks.

Eifion Jones -- Senior Vice President and Chief Financial Officer

Sure. I mean, in terms of the guide, we're still looking for a high single-digit growth year on year for price in the balance of the year. Certainly, FX is a headwind, more so against the euro than the other currencies, the Australian dollar and Canadian dollar. But FX is certainly more of a headwind than we originally thought coming into the year.

In terms of volume, we're still looking for a good volume growth in the balance of the year. It is, as we mentioned previously, for the full year, mid-single digits, and it's a little bit lower for the balance of the year than that, given the good start to the year.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Kevin Holleran -- President and Chief Executive Officer

We were -- it's a complex question because there's lots of moving parts, as you know. I would say we were really seeing some nice improvement in material flow around some critical components. We were seeing some improvement to some specialty metals that go into our sanitization product and even some components that go into our variable speed pumps. They continue to be at elevated levels, but I'd say as the quarter progressed and even as we turned into Q2, the shutdowns, the quarantines in China, the port congestions in Shanghai and other ports have certainly increased pressure on material flow and some of the pricing dynamics.

So I'd say overall, it feels like we're incrementally better than we were in second half of last year. But this feels like it's a week-to-week or a month-to-month process right now, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Thanks, guys.

Kevin Holleran -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Rob Wertheimer from Melius Research. Rob, your line is open. Rob, your line is open. You may proceed.

Kevin Holleran -- President and Chief Executive Officer

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

Operator

OK. Our next question is from Ryan Merkel of William Blair. Ryan, your line is open.

Ryan Merkel -- William Blair -- Analyst

Hey, guys. Thanks for taking the question.

Kevin Holleran -- President and Chief Executive Officer

Hey, Ryan.

Ryan Merkel -- William Blair -- Analyst

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

Kevin Holleran -- President and Chief Executive Officer

We really haven't seen any kind of cancellations. We're in pretty close contact with both channel partners and our dealers, and the work on the books and new lead generation both remain strong despite plenty of price increases. And obviously, the channel inventory position has gotten better. We're in a much better position going into the start of the season in 2022.

So no, we're still seeing robust demand and the order file on the books is still very strong and seems to be pressure tested, and product is going to be installed in the backyard.

Ryan Merkel -- William Blair -- Analyst

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

Eifion Jones -- Senior Vice President and Chief Financial Officer

Yes, Ryan, it's Eifion. We would expect that. I mean, we've -- as we mentioned before, our pricing actions, three of them accumulating up to over 20% coming into the year. We did make some concessions on price with certain fixed price arrangements.

Those roll off pretty much at the beginning of Q2. So we will get a higher price contribution in Q2 than we did in Q1, and that should be margin-accretive.

Ryan Merkel -- William Blair -- Analyst

Perfect. Thanks, guys. I'll pass it on.

Operator

Our next question is from Brian Lee from Goldman Sachs. Brian, your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Thanks for taking my question. Maybe first one, just to follow up to the prior question.

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

Eifion Jones -- Senior Vice President and Chief Financial Officer

Yes. Good question. I mean, what I would say is we're very pleased with the start to the year, a great margin in Q1 higher than the full year last year. And it's fair to say that the macroeconomic climate, both in the U.S.

and maybe a bit more particular in Europe and rest of the world, is a bit more difficult than where we had started the year. It's something we have to deal with. And we remain cautious about the second half of the year. We want to see the '22 policies and complete out strong, and every indication is it is strong.

But we'll get a view then on the start of the new '23 season as we get to the end of Q2 this year and into Q3. I'd say the underlying growth drivers remain very strong. Secular trends remain strong, as Kevin mentioned, and everything is pointing to strength in the industry and strength for Hayward. So in terms of our guidance, it really reflects just a cautionary view on how the second half may develop.

As I said before, price is still in the high single-digit growth year on year before the continued implementation of the surcharge. FX is a headwind. But in terms of the structural margin on the EBITDA line in the second half, it does represent a little bit of view of caution given the current climate. But we feel good about where we're at, and we'll update you guys as we come out of Q2.

Brian Lee -- Goldman Sachs -- Analyst

OK, great. Yes. That makes a lot of sense. And then, just one more question from me and I'll pass it on.

I might have missed this, I hopped on late. But can you kind of speak to where you're seeing pool builder backlog trends? Maybe I think, in the past, you've quantified those. And are you seeing any sort of shifts in this environment with mortgage rates going up and maybe some additional pressure showing up in the new home part of the market? Just any high-level commentary around builder trends. Thank you.

Kevin Holleran -- President and Chief Executive Officer

I'd say what we're hearing is still a really strong book for 2022. Most builders are quoting out into 2023. A recent report published by PK data had a lot of interesting statistics in it, but one that I really focused on was this increase in time between a homeowner signing. And until the job starts, the shovel is put in the ground, that has increased appreciably.

I think that speaks to certainly, the labor constraint that we're still dealing with. That said, the industry has grown kind of 20-plus percent in new construction each of the last two years. And based upon what we're hearing, Brian, the interest is still there. The demand is still there, but there's a lot of things maybe out of our control that factor into that, not least of which is labor, weather and some of this interest rates and inflationary pressures that most of the world is feeling right now.

But we feel that there is still wind at the industry's back from a new construction standpoint. I'll just pivot for a moment and say -- we've touched on this, and others in the industry have. If there is any kind of a slowing on new construction, we feel very confident in saying that the full-scale remodels have really been pent up and they have been pushed to the right over the last couple of years as labor and contractors have really focused on new construction. So I think there's a strong potential offset for the industry if new ones to start slowing down.

But we continue to look for the aftermarket that fuels our growth. Approximately 80% is aftermarket driven, and frankly, that's going to determine our success in the industry's success more than new construction.

Brian Lee -- Goldman Sachs -- Analyst

Yes. Absolutely. Appreciate it. Thanks a lot, guys.

Appreciate it.

Operator

Our next question is from Rob Wertheimer from Melius Research. Rob, your line is open.

Rob Wertheimer -- Melius Research -- Analyst

Hi. Good morning. And sorry about the confusion earlier. My fault.

Kevin Holleran -- President and Chief Executive Officer

No problem. Good morning, Rob.

Rob Wertheimer -- Melius Research -- Analyst

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

Kevin Holleran -- President and Chief Executive Officer

Yeah, I would say that what we're seeing on the -- really on that aftermarket pull-through is it's a different decision for someone who has a pool in the backyard already that's looking to do -- add a piece of equipment that maybe didn't exist or to upgrade an existing piece for greater functionality or sustainability or enjoyment in the backyard. So again, with that driving 80%, and that's not a full new pad necessarily, we feel very comfortable that even in the environment of increased interest rates that that incremental piece or a couple of pieces will continue to be installed here in 2022 and beyond despite different economic circumstances or inflationary circumstances. So that's how we look at it. That's certainly being validated by our service, Totally Hayward network and even some of the rebuilders and remodelers that are out there in our network.

Eifion Jones -- Senior Vice President and Chief Financial Officer

Yes. I'll just add to that, Rob. I mean, what we're seeing right now is, as Kevin mentioned earlier, continued new construction permitting into '23. We continue to see builders talk about strong backlogs.

But when it comes to the aftermarket, it's a not -- for the majority of the decisions, it's a non -- it's not a discretionary type of decision. You have to maintain your pool. And most of the products that we're building to market today have a qualitative attribute, which increases the enjoyment of your pool or a cost saving to your pool in the terms of the energy-efficient products we're bringing. So what we're seeing when we look at where Hayward is gaining strength in the market, it's in those qualitative product categories, and it's in those energy-saving categories.

And we think, as we've talked about before, there's three large conversion stories taking place in the industry, which is sanitization, energy efficiency and controls, and all of those for Hayward would come at higher price points and higher margin attachment. So we don't believe the aftermarket is going to suffer from the interest rate environment. We don't believe that even in new construction, it will suffer.

Rob Wertheimer -- Melius Research -- Analyst

Perfect. Thank you.

Operator

Our next question is from Mike Halloran from Baird. Mike, your line is open.

Mike Halloran -- Baird -- Analyst

Thanks. Good morning, everyone. So how do you guys thinking about balance -- how do you guys think about balance sheet usage at this point? Obviously, the buyback in the first quarter leverage, plus minus 3%. If the right transaction comes along, would you guys be in a position to be actual? I know you said over $400 million of liquidity, but just trying to gauge your willingness to put that to work in the short term.

Kevin Holleran -- President and Chief Executive Officer

We absolutely are, Mike. We have a pretty robust pipeline right now, so we're actively engaged on the M&A side. That continues to be one of three legs in our capital deployment strategy, continuing to fund organically. That's our top priority.

We have some projects on the books for use of -- that we use some of the cash there. And then, as you mentioned, we've been involved both Q1 with the directed repurchase and then also here in early Q2 with some share repurchase as well. So we're really paying close attention to all three avenues of balance sheet usage.

Mike Halloran -- Baird -- Analyst

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

Kevin Holleran -- President and Chief Executive Officer

Yes. We do keep close tabs on it with our channel partners to make sure that we all feel comfortable with the amount of inventory staged closer to point of sale, and they are largely replenished and in a much better position starting the 2022 season than they were either in the last two years. It's not a perfect balance. There are SKUs and product categories based upon a material availability that we need more of.

They need more of for sale. Maybe some solve then some sand filters, variable speed pumps, some controls, but it's much improved over the prior year. In absolute dollars, as I said, it's higher at the end of Q1 2022 than the same period. But I think there are a few things to keep in mind that as we look at it from a days on hand standpoint, obviously, that inventory value has a lot of price embedded in it.

The industry has also grown, so there needs to be additional inventory in there to support the overall industry growth, which has been 30-plus percent over the last few years. And then, from -- specifically to Hayward, some of our share gains, that would require some incremental inventory positions for the Hayward product in the channel. So all that said, we feel comfortable with our inventory position from a days on hand standpoint here at the start of the season. Our guidance assumes that there will be greater sell out than sell into the channel during the 2022 season.

And these are the things that we're going to keep close tabs on as we work through the year and start -- continue with our guidance updates and look out into 2023.

Mike Halloran -- Baird -- Analyst

Great. Really appreciate it. Thanks.

Operator

Our next question is from Nigel Coe of Wolfe. Nigel, your line is open.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning, everyone. So maybe Eifion, could you just give us a quick dedication again in sort of normal seasonality? I mean, there's nothing normal about the current environment, but in a normal year, 1Q would typically be your weakest quarter, correct, in terms of revenues and the margins?

Eifion Jones -- Senior Vice President and Chief Financial Officer

Yes. Normal seasonality has Q1 and Q3 at similar levels, 22% to 23% of the full year sales, and then Q2 and Q4 being more elevated. I would say, coming into the year, Q1 this year was slightly higher than we would have experienced in the normal year. We do see some seasonality reappearing into '22, but certainly, Q1 was a higher quarter than we think normally from a seasonal perspective.

And that's really consequential to the fact that we were still working through and still continue to work through a large backlog. We want to make sure that the channel is appropriately stocked as we mentioned in the previous call. We have to get after some specific SKUs to build out the full complement of what the channel needed to satisfy customer orders. And we were very, very pleased with the ability at the production level across our manufacturing footprint to get after those products.

Still more to do, as Kevin mentioned. But yes, normally, Q1 is a weaker period. It was a little bit higher this year than normal.

Nigel Coe -- Wolfe Research -- Analyst

Yes. OK. Thanks, Eifion. And then, I mean, so given that sort of normal seasonality reappearing, I mean, based on what you see today, would you expect Q2 to be higher as normal than Q1 based on what you see today with Q2 based -- be higher than Q1?

Eifion Jones -- Senior Vice President and Chief Financial Officer

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

Nigel Coe -- Wolfe Research -- Analyst

And then when you think about the second half of the year, obviously, you've got a very conservative back half assumption in your guide. What is your biggest concern right now, Kevin? Is it really -- is it supply chain inflation? Is it help the consumer with rates rising? Is it labor availability? I mean, what would you say is your biggest concern right now?

Kevin Holleran -- President and Chief Executive Officer

Yes. I mean, from a labor standpoint, we actually -- where that was our key focus through the middle of last year. We feel pretty good from a labor availability standpoint. There's still too much turnover that I think all companies are feeling, but I think we're able to get folks trained up and building product.

I think with what we're seeing around some of the global movement of product and some of the quarantines that are happening in manufacturing-concentrated regions, I think it's wise to be cautionary right now as we look into the second half. While consumer demand and what's on the books is still incredibly strong and gives us strong optimism as a company and an industry, there's a lot of hikes that are being -- interest rate hikes that are being talked about right now. And I think it's just wise for us as we work through the early part of the season here to just be cautious before getting out ahead of ourselves from the second half when there's so many unknowns at this point, Nigel.

Nigel Coe -- Wolfe Research -- Analyst

Great. And then, just one more if I can. The dealer conversions from last year, you also have an extraordinary number of dealer adds in North America. Maybe could you just talk about -- is that continuing? Are you still managing to convert dealers, and to what degree are they sort of adding to your growth rates in North America?

Kevin Holleran -- President and Chief Executive Officer

Yes. We continue to see -- our sales and marketing team is doing a great job of continuing to sell the Hayward story and display some of the new products that we've brought to the marketplace and expand the size of the Hayward family working in the backyard. That has absolutely contributed to some of our share gains over the last couple of years, and we fully expect it to continue into the future. When I think about -- I think it's one of really three contributors that have delivered on some of the greater than market growth and share gains that we've been able to enjoy the last few years.

Operationally, obviously, in the capacity expansions, some of the new product launches that have great early adoption into the marketplace. And then, thirdly, just more folks placing their confidence in the Hayward brand and advocating for us in the backyard. So I really think it's a combination of all three of those, Nigel, that's paid dividends for us over the last few years, and we expect that too into the future.

Nigel Coe -- Wolfe Research -- Analyst

That's great. Thanks, guys.

Operator

Our next question is from Rafe Jadrosich from Bank of America. Rafe, your line is open.

Kevin Holleran -- President and Chief Executive Officer

Good morning, Rafe.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning. Thanks for taking my questions. First, I wanted to -- it looks like you've been taking some market share over the last few quarters.

I'm wondering if you could talk about as the supply chain improves, would you expect those market share gains to be sticky? And then how do you make sure that that kind of conversion kind of stays longer term?

Eifion Jones -- Senior Vice President and Chief Financial Officer

Hi, Rafe. Good morning. Yeah, we firmly believe our share gains are sticky. And it's not predicated on just the very clear ability for us to service the market with our production capabilities.

It comes back to the products that we're introducing into the marketplace. We're very proud of the fact that our new product vitality index now has grown quite substantially year over year. We're well over 20% in terms of new products coming into the market as a percentage of our overall sales results. And these are really informative products that are addressing the needs of the consumer both in terms of energy efficiency and the qualitative experience within the pool.

We're spending quite a bit of time investing into those categories, both in terms of research development and engineering costs flowing through the income statement, but also in terms of cap of the balance sheet. We're investing in the necessary lines to build out those product capability. So we believe though our ability to supply has outpaced the competition, it really comes back to what we showed in terms of that technology platform that we're leveraging where we now are gaining share in some core categories in the industry. So yes, firmly, we believe it is sticky, and it's heavily predicated upon the product portfolio that we have.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

OK, great. That's really helpful. And then, sort of second question, just -- you commented on channel inventories, but like your own inventory has been growing faster than sales by quite a bit the last few quarters. I'm just curious, what's the inflation component of that? Like if we were to look at your inventory in terms of units, what's that growth rate compared to the 60% sales growth -- or dollar growth?

Eifion Jones -- Senior Vice President and Chief Financial Officer

Yes. So when you think about the COGS index, Q1 in '22 versus the comparable period last year, it's about 20%. So 20% of our inventory climb has really come from that COGS index increase, the inflation that's run through. But outside of the inflation, we have taken two strategic positions in the balance sheet.

One is on certain finished goods that -- where we can get the raw materials. Knowing the demand curve that we see out in the future, we are manufacturing certain products in terms of finished goods to get in into inventory to be a -- an important position to be able to service the market. And then, I'd say the second strategic position we've taken is in raw materials. And again, where we can secure a position in raw materials, particularly in those hard-to-get areas, we have taken that position.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

OK. Great. Very helpful. Thank you.

Operator

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

Kevin Holleran -- President and Chief Executive Officer

Thanks, Austin. In closing, I'd just like to thank everyone for their interest in Hayward. As you can see, our business is producing excellent operational and financial results and we're very well positioned to continue to generate growth for all stakeholders in 2022 and the years ahead. This would not be possible without the hard work, dedication and resilience of our employees and partners around the world.

Please contact our team if you have any follow-up questions, and we look forward to talking to you again on our Q2 earnings call during the week commencing July 25. Thank you.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

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

Kevin Holleran -- President and Chief Executive Officer

Eifion Jones -- Senior Vice President and Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Ryan Merkel -- William Blair -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Mike Halloran -- Baird -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

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