Hayward Holdings, Inc. Q1 FY2025 earnings call

• First quarter results exceeded expectations with net sales up 8%, gross profit margins at 49.5% and adjusted EBITDA margins at 21.5%, ninth consecutive quarter of gross margin expansion. - Launched OmniX, an industry-first suite for aftermarket pool automation. - Aggressively mitigating tariff impact through cost initiatives, supply chain alternatives, and pricing actions. - Invested in sales, marketing, customer care, and engineering, including opening additional Hub locations and forming an advanced engineering and innovation team. - Strong balance sheet with net leverage at 2.8x within targeted range.

North America: Net sales increased 8% to $187 million, driven by 3% net price realization, 2% higher volume and 3% from the ChlorKing acquisition. Gross profit margin increased 100 basis points to 52.8% and adjusted segment income margin also increased 100 basis points to 27.1%. Europe and Rest of World: Net sales for the quarter increased 7% to $42 million. Net sales benefited from 1% favorable net pricing and 8% higher volume, partially offset by 2% from foreign currency translation. Gross profit margins increased 360 basis points to 35% and adjusted segment income margins increased 380 basis points to 16.6%.

• Full year 2025 net sales expected to increase 1%-5% to $1.06 billion to $1.1 billion, adjusted EBITDA $280 million to $290 million. - Mitigation plans to offset tariff impact, including reducing direct sourcing from China to 3% of COGS by year-end, and implementing price increases. - Pragmatic view on volumes due to macroeconomic uncertainty, but resilient aftermarket maintenance.

• Annualized tariff impact of approximately $85 million, with partial year impact in 2025 of ~$30 million related to China. - Global economic uncertainty affecting discretionary market segments like new construction and remodel.

Q: Kind of two parts as I kind of close the loop on tariffs for me. USMCA, you mentioned you don't think it changes. I assume you're talking about what you have in kind of the U.S. that goes in Canada that's not affected. And then the second part of the question, just getting into kind of the actions you're taking. You mentioned China going 10% to 3%. Could you talk more about those mitigation actions? Are there costs to it? I noticed free cash flow guidance went down a little bit and then the second -- if you're going to end at 3% and I assume you plan to leave these prices in place, is that a gross margin tailwind or where you're going, have higher operating where net-net, it'd be neutral to where you would have been before Liberation Day?

A: Sure. Let me Andrew. Regarding the tariffs, the mitigation, as we said, we're seeing on an annualized basis about $85 million. That's the result primarily of China-based product. We have a facility over there bringing finished goods into the U.S. And then, of course, we have some Tier 1 and Tier 2 suppliers. And then thirdly, which is a much smaller element of the $85 million would be material coming from other tariff impacted countries. You mentioned Mexico. At this point, because of USMCA, we do have product, not finished goods, but we do have material feeding our factories in the U.S. out of Mexico, but that's not really an element of this $85 million based upon the assumption that will continue to qualify for exemption there. As I look at our -- as our global manufacturing footprint, we have 7 facilities, 4 of which are in the U.S., 1 in China. And as I said in the prepared remarks, 85% of that product sold in the U.S. is made in 1 of those 4 U.S. factories. As we work through our mitigations, that will increase to something north of 90% as we resource and move some of the manufacturing into those 4 U.S. facilities. We really are trying to get front-footed here and proactively managing the situation, working to increase certainty in our supply chain rather than having to respond to all the uncertainty created by this -- by the policies and the geopolitical events right now. I'll point out that we've really been working on this for several years in terms of trying to limit our exposure to China sourcing long before the tariff announcements over the last several weeks. That included transferring and even duplicating some tooling that was in our China facility into the U.S. and bringing some value-added assembly out of China into our domestic facilities at the same time, prioritizing capital investments to automate -- further automate some of these domestic locations. As you point out, it's really going to move us from what was even a high-teen reliance on China, probably 5 years ago to something more around the 10% mark today to a low single digit by year-end when the mitigations work through the system. So that's really our first, I'd say, prong of a 4-pronged mitigation strategy around structural sourcing alternatives. Augmenting that is really supplier price renegotiations with China-based suppliers and other tariff-impacted countries. Inventory management, we did prebuy some inventory, which allowed us to minimize the impact here in 2025. And then finally, pricing. We take out-of-cycle price increases very seriously, and we're very thoughtful about them, and that became necessary given the magnitude and the immediacy of the tariff increases. Do you want to talk about some of that?

Q: Maybe just building on that, I did think one of the larger pool distributors talked about increasing inventory levels. So just maybe quickly talk about how channel inventory looks today and then how that impacts demand as you go through the rest of the year?

A: Yes. I mean the information we see broadly across our channel partners is we feel really good about where the days on hand are for where we're at in the season. Obviously, late April here, all markets as we work through the Easter weekend, that really ushers in the season in the more seasonal markets, for. So what we see is we're very pleased with where we're at. We've spoken about this on previous earnings calls that the destock and the recalibration of the inventory levels, that's been accomplished in prior periods. Early buy has been delivered through first quarter. And we feel that inventories are appropriately -- are appropriate at this point in time.

Q: This is David Tarantino on for Jeff. I know it's early, but maybe could you give us some color on recent trends to start the selling season, particularly around if you've heard any feedback from dealers around shifts in consumer behavior following Liberation Day and the pricing actions?

A: Yes. Q1, I would say, you may have heard this from some others who reported before us. The year started a bit slowly. I think weather may have played into that a bit in January into maybe middle of February or so. But March, as it turned out, was a really strong sales out month across the entire network. So that gave us some real optimism as the weather started improving, David. I would say what we've seen in April, I'm not going to go too deep into that. I'd say what we've seen is contemplated in our confirming of the guide that we announced here this morning. So again, weather is improving. Easter is behind us. Pools are opening in all markets at this point, and we feel that it's going to be a good season. And that's being affirmed by the dealers that we talk to every day. I think that we do have, as I mentioned in the prepared remarks, I think we have really some wind at our back with the recent introduction of this OmniX platform, which we've talked about it for years, and this is a great product that really gives the service trade and the existing pool owner who doesn't have automation or control the opportunity to take more control of that backyard and the functionality of it. So we're very bullish on what OmniX represents for us and for the industry as we work through the 2025 pool season.

Q: Just a quick one. I think last year around this time, we were talking about utilization rates. I think you guys are running around 60% or 65% utilization in your factories, which was expected to bring some decent operating leverage in the outer years when volume returns. But just wondering on if you're going to bring more manufacturing to the U.S. to mitigate tariffs and those additional costs, I would assume is this going to increase some of your U.S. manufacturing utilization? And could this help margins? And is any of that uplift like included in the mitigation efforts or we could see, I guess, additional upside from there? I know you talked about variabilizing these facilities, but just wondering if there is any additional leverage embedded there.

A: Yes, it's a great question. You're right. Today, we're probably around about 60% utilized in our U.S. facilities that provides us with a large amount of capacity to onboard this production coming out of China or in-sourcing from third parties in China. Kevin mentioned, we're probably 10% today coming out of China, whether it be a combination of outsource and our own facility, that's reducing to an exit rate out of 25% to 3%. So that 7% comes into the U.S. facilities, which raises from 60% to high 60s utilization. So still quite a lot of headroom. As I mentioned a few questions ago, we're going to take the opportunity in that transfer of production to look at how to do that intelligently, smartly in a more automated way. So we'll get the leverage across the fixed cost base, but I'm hoping as well now and believe in the team that they'll actually be able to get a 2 for 1 here, get the leverage and get a bill of material reduction as we put some automation into our facilities.