Hayward Holdings, Inc. Q2 FY2025 earnings call

• Net sales increased 5% with growth across North America and Europe/Rest of World. - Delivered strong profitability with gross profit margins at a record 52.7% and adjusted EBITDA margin at 29.5%. - Significantly reduced net leverage to 2.1x. - Aggressively executing plans to mitigate tariff impact, with direct sourcing from China into the U.S. as a percent of cost of goods sold expected to decline to 3% by year-end. - Launched OmniX, an industry-first suite of innovative products for the aftermarket. - Successfully integrated ChlorKing acquisition, with commercial sales in North America approximately doubling. - Announced a 3% tariff-related price increase in North America effective late April.

North America: Net sales increased 6% to $255 million, driven by 6% net price realization, 3% lower volume, and 3% from the ChlorKing acquisition. Gross profit margin increased 220 basis points to 55.1% and adjusted segment income margin increased 110 basis points to 34.9%. Europe and Rest of World: Net sales increased 3% to $44 million, driven by 1% favorable net pricing, 1% lower volume, and 3% favorable foreign currency translation. Gross profit margins increased 390 basis points to 38.9% compared to the first quarter, and adjusted segment income margins increased 150 basis points to 18.1%.

• Refined full-year 2025 guidance: Now expects net sales to increase approximately 2% to 5% and adjusted EBITDA of $280 million to $290 million. - Planning assumption is current tariff arrangements remain in place, with an estimated total annualized tariff impact of approximately $30 million. - Expect to fully offset current tariff-related cost increases. - Anticipate a positive full year net price contribution of at least 4% due to the partial year benefit of the April price increase.

• Tariff uncertainties, including potential changes in August tariffs. - Geopolitical risks affecting supply chain from China. - Impact of macroeconomic conditions on discretionary market segments.

Q: Congrats on a nice quarter in a tough market. My first question is on gross margin. It really pops off the page. Just curious on your thoughts on the outlook for the second half because it feels like you're not really raising the expectations there. So a little color there would be helpful.

A: Kevin P. Holleran discussed that Q2's strong result was driven by margin performance and record 52.7% gross margin, highlighting productivity, product line rationalization, and price/cost neutrality. Eifion S. Jones added that the incremental tariff price action in April will benefit the second half, offsetting tariff costs, and operational mitigation programs are well progressed.

Q: Maybe just one on the guidance to start off. I know the macro environment tariffs, all of that is pretty fluid. So last quarter, you guys with the information at hand at that time, it talked about net price increase of 5% to 6% for the year. Now you're talking about 4%. But in that same context, you raised the low end of the revenue guidance range for the year. So presumably, that's coming from a better volume outlook. Is that a fair assumption? And is that coming from the U.S.? Is it coming from Europe? Is it aftermarket? Maybe walk us through sort of the revenue guidance uptick in the face of slightly lower net price increase view.

A: Kevin P. Holleran said that price was 4% instead of 5%-6% due to moderated off-cycle pricing in the U.S., expecting stronger volume performance with negative 1% overall on volume compared to last quarter's negative 2.5%.

Q: Can you maybe just talk about what you're seeing on sell-in versus sell-through and just how you're thinking about channel inventories as we kind of get into the second half of the season?

A: Kevin P. Holleran said Q2 had early buy inventories, and Q3 would see inventories in a normal position for channel partners and dealers, with attention paid to partnering to ensure right product at right time.

Q: Just want to follow up on Jeff's question on this repair dynamic because it's something that Pentair called out as well. How long has this been sort of developing? Is it something that's been a reaction to the latest price increases? And what are we talking about here, are we talking about reconditioning pumps? I'm just not sure I understand exactly, number one, the extent to this is happening. And based on sort of prior history, when have we seen this before? And is this like a multiyear thing? Or is it something you see as very temporary.

A: Kevin P. Holleran said parts volume has been increasing for several quarters, with examples like repairing pump wet ends instead of replacing, and it's not just due to recent price increases but has been developing over quarters.

Q: I wanted to take a moment to ask about what's going on in commercial. I know, Kevin, I think you said that your commercial sales as a percentage of revenue have doubled. Can you maybe talk about how much pull-through you're seeing of Hayward legacy products to ChlorKing customers and vice versa? And then more broadly, we're about a year out from close now. How are you thinking about the trajectory for that end market? And what types of level of outperformance do you think you're experiencing against the market at this point.

A: Kevin P. Holleran said commercial sales have doubled, with meaningful pull-through and growth of the commercial organic business, aiming for double-digit share of the mix, and the team is excited about the future of the commercial space.

Q: Balance sheet is in a really healthy shape. Maybe talk about how you're thinking about the M&A pipeline, the actionability and if there's particular product categories that are sticking out as attractive in the current backdrop.

A: Kevin P. Holleran said priorities are organic growth first, with M&A having a healthy pipeline of opportunities, including bolt-ons around the core residential business, and ongoing discussions and information gathering for domestic and international opportunities.

Q: I wanted to just follow up on the trends that you saw through the quarter on sell-out. I think you mentioned there was an improvement in June. So just wondering what you saw in terms of end market demand through the quarter, what maybe drove that improvement in June? And is there any difference between discretionary and nondiscretionary in terms of the more recent trends.

A: Kevin P. Holleran said the quarter had extreme weather, with permit data improving and rate of permits filed increasing, and while discretionary is tempered, nondiscretionary aftermarket maintenance demand remains resilient.

Q: Can you talk about the market share versus the industry, how you think you're performing? And then also like some of the SG&A investments that you've talked about, like where do you see opportunity to gain share? Where do you feel like you're under-penetrated? And if you could just update us on those initiatives.

A: Kevin P. Holleran said they feel good about share performance, with opportunities in under-punched regions targeted by incremental investments in service, installation training, field sales, customer care resources, and targeted marketing programs, driving targeted SG&A investments.