Hayward Holdings, Inc. Q1 FY2025 Earnings Call

Welcome to Hayward Holdings First Quarter 2025 Earnings Call. My name is Christine, and I will be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President, Investor Relations and FP&A. Mr. Maczka, you may begin.

Thank you, and good morning, everyone. We issued our first quarter 2025 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. There, you can also find an earnings slide presentation that we will reference during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2025 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K filed with the Securities and Exchange Commission that could cause actual results to differ materially. 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. Reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation. All comparisons will be made on a year-over-year basis unless otherwise indicated. I will now turn the call over to Kevin Holleran.

Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call. I'll begin on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report first quarter results exceeded expectations. Net sales increased 8% with growth across both segments, North America and Europe and Rest of World, and positive contributions from volume and price. We delivered solid profitability in our seasonally softest quarter with gross profit margins increasing to 49.5% and adjusted EBITDA margins increasing to 21.5%. This represents the ninth consecutive quarter of year-over-year gross margin expansion. Robust sales growth and profitability, coupled with effective working capital management enabled us to maintain net leverage within our targeted range at 2.8x while funding our growth strategies and launching innovative new products. We're especially excited about the recent launch of OmniX, an industry-first suite of innovative products for the aftermarket. The OmniX automation platform is easily deployed in the installed base, providing tremendous opportunity to unlock the addressable aftermarket of millions of non-automated pools to wireless IoT connectivity and control. I'll provide more commentary on this differentiated new solution for pool owners in a moment. During this period of increased tariffs and heightened global economic uncertainty, we are aggressively executing our plans to mitigate the impact of tariffs, support margins and position the company for continued growth while supporting our customers. Our team is rising to the occasion, and I'm very proud and appreciative of their efforts. We have a resilient business model with over 80% of our sales aligned with serving the aftermarket needs of the existing installed base and a strong balance sheet providing financial flexibility. I'm confident in our ability to navigate this rapidly evolving environment. That said, we are confirming our guidance for the full year 2025, reflecting the implications of the current tariff environment and execution of mitigation action plans. We continue to expect net sales to increase approximately 1% to 5% and adjusted EBITDA of $280 million to $290 million. This guidance is unchanged, but many of the underlying assumptions certainly have, and Eifion will detail this for you. Turning now to Slide 5, highlighting the results of the first quarter. Net sales increased 8% to $229 million, driven by 3% increases in both price and organic volume, plus a 3% contribution from the ChlorKing acquisition. Sales growth was solid and consistent across both segments, with net sales increasing 8% in North America and 7% in Europe and Rest of World. Trends improved in March after a slower start to the year with end demand for Hayward products now generally consistent with normal seasonal trends as we approach the peak pool season. During the quarter, we saw solid growth in critical product categories of pumps, lighting, automation and sanitization. In addition, our commercial pool business continues to grow organically and benefit from the integration of the ChlorKing acquisition. As we all know, the economic outlook has become increasingly uncertain, but the majority of our business is resilient and tied to nondiscretionary aftermarket maintenance. The more discretionary elements of the market, new construction and remodel, have been impacted by these economic conditions and higher interest rates as we expected entering the year. Gross profit margins increased 30 basis points to 49.5%. Adjusted EBITDA increased 9% to $49 million, and adjusted EBITDA margin also increased 30 basis points to 21.5%. We continue investing in the business to drive future growth. On the commercial side, we are executing targeted sales and marketing strategies to further increase our presence in high-growth regions and capture market share. We are increasing investments in customer care, leveraging new technologies and tools to enhance customer experience. Following the successful launch of the first Hayward Hub training and support facility in Texas, we added additional hub locations in Arizona and North Carolina to better support our dealers and trade professionals in the regions. On the product side, we are introducing a dedicated advanced engineering and innovation team to accelerate the development of new technology products. Finally, adjusted diluted EPS increased 25% to $0.10. Turning now to Slide 6 for an update on tariffs. Tariffs have, of course, been front-page news for many weeks now, and the global trade situation continues to evolve. As a reminder, we are predominantly a domestic manufacturer with approximately 85% of our North America sales produced in North America. However, we do source certain products from our Hayward facility in China and other third-party suppliers in China that are impacted by the more significant incremental tariff of 145%. Based on the latest information available, we estimate a total annualized tariff impact of approximately $85 million, with a partial year impact in 2025 of approximately $30 million, mostly related to China. Our planning assumption is that the current tariff rates remain in place. As such, we are aggressively executing mitigation action plans, including cost and supply chain initiatives plus other pricing actions. We are working to establish increased certainty in our supply chain rather than having to respond to geopolitical uncertainty. On the cost side, we're accelerating cost reduction and productivity initiatives and actioning structural supply chain alternatives. As a result, we expect our direct sourcing from China into the U.S. as a percentage of cost of goods sold to decline from approximately 10% to 3% by year-end. At this point, we expect our mitigation plans to fully offset the expected tariff-related cost increases and volume pressures. On the pricing side, we announced a 3% price increase in North America effective in late April and more recently announced another increase of 4% effective mid-June. We will continue evaluating the need for additional pricing action and managing channel inventory appropriately by limiting preorders ahead of the price increases. Our teams are working very diligently to support our customers while protecting profitability. Turning to Slide 7. For many years, Hayward has been a leader in IoT controls with our OmniLogic pool automation platform for the new construction and remodel markets in the U.S. We are now excited to announce OmniX, our breakthrough smart IoT technology designed to cost-effectively enable wireless control of the existing installed base. We estimate approximately two-thirds of the 5.4 million in-ground pools in the U.S., or 3.5 million pools, are currently not automated. Today, homeowners with an existing manually operated pool interested in IoT control are faced with just one option: the installation of a centralized control unit wired to all of the equipment. OmniX, on the other hand, is a decentralized wireless platform, eliminating the need for a stand-alone control unit. By design, it provides a far more cost-effective, simpler path to automation. Starting with our newly launched OmniX variable speed pump, we are embedding control capabilities into our key products. At the time of natural break-fix of equipment on the pool pad, homeowners can build their ecosystem one product at a time by replacing with OmniX-enabled equipment. As they do, they can utilize the OmniX app to effortlessly control their pool. This represents a great value proposition for both the homeowner as well as our service professionals now able to offer compelling, easily installed upgrades. With that, I'd like to turn the call over to Eifion to discuss our financial results in more detail.

Thank you, Kevin, and good morning. I'll start on Slide 8. As Kevin stated, we are pleased with our first quarter financial performance. Net sales increased and exceeded expectations. We delivered strong margins and maintained net leverage within our targeted range during our seasonally softest period for sales and cash collections. Looking at the results in more detail. Net sales for the first quarter increased 8% to $229 million. This was driven by 3% positive net price realization, a 3% increase in volume and a 3% contribution from the acquisition of ChlorKing, partially offset by 1% from foreign currency translation. Gross profit in the first quarter increased 8% to $113 million. Gross profit margin increased 30 basis points to 49.5% with a 100 basis point increase in North America offsetting a reduction in Europe and Rest of World. We took steps throughout 2024 to improve performance in Europe and Rest of World and are pleased to see the sequential margin progress in the quarter, increasing 360 basis points from the fourth quarter of 2024. Adjusted EBITDA increased 9% to $49 million in the first quarter, and adjusted EBITDA margin increased 30 basis points to 21.5%. As a reminder, we are strategically reinvesting in the business to drive future growth with targeted initiatives in sales and marketing, customer service, and engineering. Our effective tax rate was 23% in the first quarter, consistent with the prior year period. Adjusted diluted EPS increased 25% to $0.10. Turning to Slide 9 for a review of our reportable segment results for the first quarter. North America net sales increased 8% to $187 million, driven by 3% net price realization, 2% higher volume, and 3% from the ChlorKing acquisition. Net sales increased 9% in the U.S. and reduced 5% in Canada. Seasonal demand is increasing as expected as we approach the peak of the 2025 pool season. We did see an increase in orders late in the quarter after a slower start to the year. Importantly, we are working closely with our channel partners to manage the level of Hayward inventory on hand relative to current demand levels and forward expectations. Gross profit margin increased 100 basis points to a robust 52.8%, and adjusted segment income margin also increased 100 basis points to 27.1%. Turning to 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. Net sales increased 8% in Europe and 3% in Rest of World. We are pleased to see the volume growth and margin progression in the quarter. On a sequential basis, gross profit margins increased 360 basis points to 35%, and adjusted segment income margins increased 380 basis points to 16.6%. Turning to Slide 10 for a review of our balance sheet and cash flow highlights. We are pleased with the quality of our balance sheet. Net debt to adjusted EBITDA improved significantly from 4x a year ago to 2.8x at the end of the first quarter, consistent with our targeted range of 2 to 3x. Total liquidity at the end of the first quarter was $398 million, including $181 million in cash and cash equivalents plus availability under our credit facilities of $217 million. We have no near-term maturities on our debt. The term debt matures in 2028, and the undrawn ABL matures in 2026, and we're in the process of extending this maturity. Our borrowing rate benefits from $600 million in debt currently tied to fixed interest rate swap agreements maturing in 2025 through 2028, limiting our cash interest rate on the term facilities to 5.8% in the quarter. Our average interest rate earned on global cash deposits for the first quarter was 4.2%. The business has strong free cash characteristics driven by high-quality earnings. Cash flows are seasonal, and the company typically uses cash in the first quarter and has strong cash generation in the second quarter related to the collection of early buy receivables. Cash flow used in operations was $6 million in the first quarter compared to $77 million in the year-ago period. The first quarter of 2025 benefited from $99 million in net proceeds from the sales of accounts receivable under the receivable purchase agreement initiated in 2024. This receivable sale provides the business additional flexibility during a traditionally low cash quarter at a relatively modest cost and reduces the risk of a step-up in the term loan interest rate as a common unit penalized in the first quarter, consistent with the prior year and consequently, free cash flow was a use of $12 million. Turning now to capital allocation on Slide 11. We maintain a disciplined and balanced approach to capital allocation, emphasizing strategic growth investments and shareholder returns while maintaining prudent financial leverage. We continue to pursue additional acquisition opportunities to augment our organic growth plans in addition to opportunistic share repurchases. Turning now to Slide 12 for our full year 2025 outlook. Many of our planning assumptions have changed from a quarter ago as a consequence of the evolving tariff environment. But overall, our outlook for the year is unchanged. This is a testament to the hard work and dedication of the entire Hayward team. For fiscal year 2025, Hayward continues to expect net sales to increase approximately 1% to 5% to $1.06 billion to $1.1 billion and adjusted EBITDA of $280 million to $290 million. We continue to expect solid execution across the organization, positive price realization and continued technology adoption. We expect incremental out-of-cycle pricing of approximately 3% to offset the tariff-related inflation. As a result, we now anticipate a positive net price contribution of approximately 5% to 6%. We're also taking a more pragmatic view of volumes given the heightened global macroeconomic uncertainty. Nondiscretionary aftermarket maintenance remains resilient, but we could see pressure on the more discretionary elements of the market, namely new construction, remodel, and upgrade. We are executing structural cost and productivity initiatives to offset volume pressure and support profitability. We continue to evaluate the situation and we'll respond with appropriate supply chain and pricing actions as needed. Our business is seasonal. We expect normal seasonal strength in the second and fourth quarters with more weighting to the second half of the year due to the timing of the out-of-cycle tariff price increases. We also expect solid cash flow generation in 2025 with a conversion of greater than 100% of net income at approximately $150 million. We are confident in our ability to successfully execute in a dynamic environment and remain very positive about the long-term growth outlook for the pool industry, particularly the strength of the aftermarket. And with that, I'll now turn the call back to Kevin.

Thanks, Eifion. I'll pick back up on Slide 13. Before we close, let me reiterate how thankful I am for the team's performance during this incredibly disruptive time. In one of the more challenging and uncertain environments we've seen in decades, Hayward delivered another strong quarter, exceeding expectations. Net sales increased 8%, margins continue to expand, and we delivered the balance sheet while investing for growth and introducing a groundbreaking new technology platform for pool owners. We confirmed our guidance for the full year, effectively countermeasuring significant new tariff headwinds. As I mentioned, I'm very proud of the entire team for their performance during this quarter and the rapid and effective execution of our mitigation plans. Hayward has a solid foundation built over the last 100 years, and I'm confident we have the right strategy and talent in place to drive compelling financial results and shareholder value creation. With that, we're now ready to open the line for questions.

Our first question comes from Andrew Carter with Stifel.

To conclude my thoughts on tariffs, regarding USMCA, you mentioned it likely remains unchanged. I assume you're referring to what you export from the U.S. to Canada that isn't impacted. Then, about the actions you are taking, you noted that China's tariff is decreasing from 10% to 3%. Could you elaborate on those mitigation actions? Are there associated costs? I observed that free cash flow guidance has decreased slightly. Lastly, if you plan to maintain prices at 3%, will this create a gross margin benefit, or will higher operating costs make it neutral compared to your situation prior to Liberation Day?

Sure. Let me address that, Andrew. Regarding the tariffs, we are seeing about $85 million on an annualized basis as a result, primarily from products based in China. We operate a facility there that brings finished goods into the U.S., along with some Tier 1 and Tier 2 suppliers. A smaller portion of the $85 million comes from materials sourced from other countries affected by tariffs. You mentioned Mexico; currently, we are obtaining materials from there feeding our factories in the U.S. due to USMCA, but this aspect is not included in the $85 million assuming we continue to qualify for exemptions. In terms of our global manufacturing footprint, we have seven facilities, four in the U.S. and one in China. As I noted in the prepared remarks, 85% of the products sold in the U.S. are produced in those four U.S. factories. As we implement our mitigative strategies, that percentage will rise to over 90% as we shift more manufacturing to these U.S. facilities. We are proactively managing this situation to enhance the stability of our supply chain, addressing the uncertainty created by current policies and geopolitical events. We've been working on reducing our reliance on China for several years, even before the recent tariff announcements, by transferring and duplicating tooling from our China facility to the U.S. and moving some assembly work domestically while prioritizing investments to further automate our U.S. locations. This strategy will reduce our reliance on China from high teens five years ago to around 10% today, decreasing to a low single digit by year-end as these measures take effect. This is just one part of our four-pronged strategy for mitigating structural sourcing risks. Additionally, we are renegotiating prices with suppliers from China and other affected countries. We've also managed our inventory carefully, pre-buying stock to lessen the impact in 2025. Finally, we take pricing adjustments seriously and have implemented necessary out-of-cycle price increases due to the scope and immediacy of the tariff hikes. Would you like to discuss some of these points further?

Yes. Andrew, let me just tackle the first point around cash flow. Cash flow, we have dropped from $160 million to $150 million guidance for the year. You're right, that does include some CapEx to tool up inside the U.S. to accommodate the transfer of production out of our Wuxi facility back into the United States. Additionally, we're recognizing that the closing working capital at the end of the year will actually be a little bit more expensive for that residual 3%-ish that Kevin was suggesting there that we will still be procuring from China. But still a very handsome cash result, significantly higher than net income.

You mentioned being thoughtful regarding price increases. Are these increases specifically targeted at affected products, or is it an overall increase? Also, you referred to managing prebuys. Are you managing these prebuys more tightly than usual? If so, do you anticipate any additional challenges to gross margin from potential disconnects if someone buys in advance of the increase and then reduces their orders later?

Yes. Regarding pricing, there will be some variation when we distribute the final price lists based on our recent announcement. However, overall, the increases are more general rather than just focusing on specific products that are manufactured or most affected. These increases might remove some products from the market, and we take our role as a full-line supplier very seriously. Therefore, there is some adjustment across the entire product line. I forgot the second part of the question.

Regarding pre-buy, we are currently taking a more conservative approach with the cap we have set. Typically, the cap for the early buy or winter stocking program allows for a bit more flexibility. Given the timing of the price increases, the early buy has been completed. As we collaborate with our channel partners, their inventory levels and turnover rates are suitable for the current season. Our goal is to prevent overstocking, which could lead to challenges with destocking later. We aim to align our sales with replenishment, which is currently in line with sales, and that is what informs the cap communicated to our channel partners.

Our next question comes from the line of Saree Boroditsky with Jefferies.

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?

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. 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 the first quarter. And we feel that inventories are appropriate at this point in time.

I appreciate the color. And then maybe just a bigger picture, pool equipment has obviously gotten significantly more expensive over the last several years. I know equipment is still a small portion of the new pool build, but how are you thinking about balancing price and demand levels given the recent increases? And have you seen any customers trading down or repairing or replacing equipment?

Yes, that's a great question and something we are closely monitoring. I believe the initial part of your question pertains to whether there has been a decrease in demand due to overall project costs. What we are currently debating is whether this is a deferral of projects versus a destruction of demand, especially considering the current housing market and its turnover not being as high historically. Larger refurbishments or new pool installations are seeing delays as existing home sales have faced challenges in recent years. We view this situation more as a deferral of discretionary spending rather than a total destruction of demand. Regarding customers trading down, our guidance takes that possibility into consideration. While we think it could occur, we do not have strong evidence of it happening yet. Looking at permit values, despite a decline in the unit count of permits over the past few years, the value of those permits has actually increased. This suggests that those who are building or undertaking significant remodels are doing so thoughtfully, ensuring they include the features and functions they desire. However, with additional equipment price increases anticipated in 2025, we are taking a cautious approach to prepare for that possibility as the year unfolds.

Our next question comes from the line of Jeff Hammond with KeyBanc.

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?

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 the 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 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.

Great. And then maybe as a follow-up, just on the margin bridge on Slide 12. Could you walk us through the cost levers you're pulling kind of outside of price and reducing the China exposure to offset tariffs? Margin growth has been pretty impressive in recent years. So any color on the opportunities still out there would be helpful.

Yes, sure. We've talked about this before. We have outside of China, 6 facilities, 3 large ones in the United States, and a small one through acquisition. We can continue to variabilize the input of production into those facilities rather than having to add fixed costs. So that's the first lever that we can do, leveraging those facilities on a variable nature. The second thing is we're very honed in right now on our SKU rationalization programs, our bill of material and value engineering initiatives and looking at that collective to really hone in on the cost of manufacturing and how do we make it smarter, how do we make it less expensive as it goes through our production facilities without compromising quality, of course. And so those initiatives are in play today. As we onboard tooling into the United States, to take on the current either outsourced or in-sourced China manufacturing, we'll do that, we believe, in an intelligent way and take the opportunity to put automation into our facilities to make that new addition of production in a very cost-effective way.

Our next question comes from the line of Rafe Jadrosich with Bank of America Merrill Lynch.

This is actually Sean Colman on for Rafe. Just first, the midpoint of guidance implies it looks like a mid-single-digit to high single-digit decline in volumes for the rest of the year. So could you give us some more detail on the drivers in terms of maintenance volume, discretionary volume? And then anything around trade down and destock assumptions?

Yes. Yes, I mean, in terms of our guidance, the way it bridges out, we are calling for a further reduction in the discretionary side of the market, namely new construction, remodels, and upgrades. I think that's, as Kevin said, using his word, a pragmatic approach given where the macro situation is right now. Obviously, new construction, we see the permit data, that's trending down even though the ticket value has gone up. In terms of the remodel and upgrading, as Kevin just mentioned, we don't see that as destruction. We see that as a push sideways as the consumer defers those elements. We know that existing home sale turnover creates acceleration in remodels, whether it be the homeowner just before they sell tuning up or whether it be the new homeowner after purchase does some remodeling. So we're still waiting here for this existing home resale market to get some acceleration behind it. But as a consequence of where the macro situation stands today, we think it's pragmatic to take down that discretionary side of the marketplace. We don't believe individuals are foregoing the critical elements of the pool. You need that pool engine. That's the beauty of our industry. And if you're an existing pool owner, you have to maintain that pool. So that is a robust element. So the maintenance side of the business is very resilient.

Sean, I would just add in terms of 50-plus percent amount of our revenue from the brake fix aftermarket nondiscretionary side, where we're thinking volume will hold year-on-year, we have accounted for a little bit of a mix down trade down in the current guide that we confirmed here today.

We have reached the end of the question-and-answer session. Mr. Holleran, I would now like to turn the floor back over to you for closing comments.

Thanks, Christine. In closing, I'd like to sincerely thank our dedicated employees and valued partners around the world. Your hard work, passion, and unwavering commitment are the driving force behind our success. Please contact our team if you have any follow-up questions, and we look forward to talking to you again on the second quarter earnings call. Thank you for your interest in Hayward. Christine, you can now end the call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.