Hayward Holdings, Inc. Q2 FY2025 Earnings Call

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

Thank you, and good morning, everyone. We issued our second 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 the earnings slide presentation referenced 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 Forms 10-K and 10-Q 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. It's my pleasure to welcome all of you to Hayward's second quarter earnings call. I'll begin on Slide 4 of our earnings presentation with today's key messages. I'm pleased to report second quarter results exceeded expectations. Net sales increased 5% with growth across both our North America and Europe and Rest of World segments. We delivered strong profitability with gross profit margins increasing to a record 52.7% and adjusted EBITDA margin increasing to 29.5%. This represents the 10th consecutive quarter of year-over-year gross margin expansion, a direct result of the strong performance of our commercial and operations teams. Robust sales growth and profitability, coupled with effective working capital management, enabled us to significantly reduce net leverage to 2.1x. This is near the low end of our targeted range of 2 to 3x and the lowest level in over 3 years, providing enhanced financial flexibility as we execute our strategic growth plans. During this period of tariff uncertainty, we continue to aggressively execute our plans to mitigate the impact of tariffs, support margins and deliver on our commitments to shareholders and customers. We have a resilient business model with approximately 85% of our sales aligned with serving the aftermarket needs of the existing installed base. I'm confident in our team's ability to navigate this dynamic environment. We are refining our guidance for the full year 2025, raising the low end of our guidance range for net sales. We now expect net sales to increase approximately 2% to 5%, and we continue to expect adjusted EBITDA of $280 million to $290 million. Turning now to Slide 5, highlighting the results of the second quarter. Net sales increased 5% to approximately $300 million, driven by a 5% increase in net price, 2% lower volumes and a 2% contribution from the ChlorKing acquisition. By segment, total net sales increased 6% in North America and 3% in Europe and Rest of World. End demand improved in June, resulting in customer orders generally in line with normal seasonal patterns for the quarter. Nondiscretionary aftermarket maintenance demand remains resilient, but the more discretionary elements of the market have been pressured, consistent with the trend of prior quarters. Homeowners building new pools or remodeling existing pools are increasingly electing to add technology to deliver the desired ambience and experience rather than cutting costs to defeature their pool investment. Last quarter, we introduced you to OmniX, an industry-first suite of innovative products for the aftermarket. This automation platform provides a cost-effective way to accelerate technology adoption in the installed base, increasing aftermarket equipment content per pool pad and advance our technology leadership position in the market. We are pleased with the initial dealer response to the new OmniX-enabled variable speed pump and will launch other product categories with embedded OmniX control capabilities in the coming quarters. In addition, our commercial pool business continues to grow organically and benefit from the addition of the ChlorKing acquisition in June of 2024. As I reflect on our first full year of ownership, this has been a very successful integration for Hayward, providing a key building block as we expand our commercial pool business, delivering the expected sales and operational synergies. Year-to-date, our commercial sales in North America have approximately doubled while generating strong profitability. Consolidated gross profit margins increased 170 basis points to a quarterly record 52.7%. Adjusted EBITDA increased 7% to $88 million and adjusted EBITDA margin increased 50 basis points to 29.5%. We continue to make SG&A investments in the business to drive future growth. We are investing in advanced engineering and new product development to continue bringing innovative, industry-leading products to market. On the commercial side, we are increasing investments in customer care and executing targeted sales and marketing strategies to further increase our presence in high-growth regions and capture market share. During the quarter, Hayward sponsored the prestigious 2025 Pool & Spa Network Top 50 Builder Awards event. As we continue to invest in the industry and build upon our unified customer-first approach, we are seeing greater traction with higher-end builders and servicers. Finally, adjusted diluted EPS increased 14% to $0.24. Turning now to Slide 6. The tariff environment continues to evolve and will likely remain unsettled for some time. As of our last earnings call, the incremental tariffs were 145% for China and 10% for the Rest of World. Since then, we have seen movement in those rates, most significantly a reduction to 30% incremental for China. As a reminder, we are predominantly a domestic manufacturer with approximately 85% of our North America sales produced in the United States and increasing, as I'll discuss in a moment. However, we do source certain products from our Hayward facility in China and other third-party Chinese suppliers who are also impacted by the tariffs. Based on the latest available information, we estimate a total annualized tariff impact of approximately $30 million, with a partial year impact in 2025 of approximately $18 million, most related to China. This is down from an annualized impact of approximately $85 million when the China tariff was 145%. Our planning assumption is the current tariff arrangements remain in place and our outlook does not consider any changes that may potentially take effect in August. We remain agile and prepared to respond as needed. Our team is focused on aggressively executing our mitigation action plans. As previously communicated, we expect our direct sourcing from China into the U.S. as a percent of cost of goods sold to decline from approximately 10% to 3% by year-end. We intend to achieve that target regardless of the eventual tariff resolution as it derisks our supply chain and limits exposure to geopolitical uncertainty. On the pricing side, we announced a 3% tariff-related price increase in North America effective late April. This will remain in place. However, we elected not to implement a previously announced second price increase after the 145% China tariff was reduced. Our teams are working diligently to support our customers while protecting profitability. At this point, we expect to fully offset the current tariff-related cost increases. And 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 7. As Kevin stated, we are pleased with our second quarter financial performance. Net sales increased 5% and exceeded expectations. We delivered strong growth and adjusted EBITDA margin expansion to 52.7% and 29.5%, respectively, and significantly reduced net leverage to 2.1x. Looking at the results in more detail. The net sales increase of 5% to approximately $300 million was driven by a 5% positive net price realization, 2% lower volume and a 2% contribution from the acquisition of ChlorKing. Gross profit in the second quarter increased 9% to $158 million. Gross profit margin increased 170 basis points to a record 52.7%, with a 220 basis point increase in North America, offsetting a reduction in Europe and Rest of World. We took steps in recent quarters to improve the performance in Europe and Rest of World and are pleased to see the sequential margin progress again this quarter, increasing 390 basis points from 35% in the first quarter and 750 basis points from 31.4% in the fourth quarter 2024. Adjusted EBITDA increased 7% to $88 million in the second quarter, and adjusted EBITDA margin increased 50 basis points to 29.5%. 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 approximately 25% in the second quarter, consistent with our guidance. Adjusted diluted EPS increased 14% to $0.24. Turning to Slide 8 for a review of reportable segment results for the second quarter. North American net sales increased 6% to $255 million, driven by 6% net price realization, 3% lower volume and 3% from the ChlorKing acquisition. Net sales in the U.S. increased 6% and Canada was down modestly. Seasonal demand increased as expected as we entered the peak of the 2025 pool season. Income and orders were healthy and consistent with our expectations for the quarter and strong in commercial, up double digits organically. Gross profit margin increased 220 basis points to a robust 55.1% and adjusted segment income margin increased 110 basis points to 34.9%. Turning to Europe and Rest of World. Net sales for the quarter increased 3% to $44 million, driven by 1% favorable net pricing, 1% lower volume and 3% favorable foreign currency translation. Net sales reduced 4% in Europe and increased 16% in Rest of World. Certain Middle East and Asian markets were significantly impacted in the prior year by macroeconomic and geopolitical conditions, and we are encouraged by the improving year-to-date trends. We are pleased to see the continued margin progression in the quarter. On a sequential basis, gross profit margins increased 390 basis points to 38.9% compared to 35% in the first quarter, and adjusted segment income margins increased 150 basis points to 18.1%. Turning to Slide 9 for a review of our balance sheet and cash flow highlights. We are pleased with the quality of our balance sheet and the significant reduction in net leverage during the quarter and over the last 2 years. Net debt to adjusted EBITDA improved to 2.1x compared to 2.8x at the end of the first quarter and 2.8x in the year-ago period. Reduced leverage provides additional flexibility as we invest in the business and execute on our strategic growth plans. Total liquidity at the end of the second quarter was $528 million, including $365 million in cash and equivalents plus availability under our credit facilities of $163 million. We have no near-term maturities on our debt as the term debt and the undrawn ABL mature in 2028. Our borrowing rate benefits from $600 million in debt currently tied to fixed interest rate swap agreements maturing in 2026 through 2028, limiting our cash interest rate on our term facilities to 6% in the quarter. Our average interest rate earned on global cash deposits for the quarter was 3.8%. Our business has strong free cash flow generation characteristics driven by high-quality earnings. Cash flows are seasonal and the company typically has strong cash generation in the second quarter related to collection of early buy receivables. Year-to-date cash flow from operations was $188 million compared to $210 million in the year-ago period, largely reflecting strategic inventory management ahead of tariff-related cost increases. Our outlook for the full year is unchanged. CapEx of $13 million in the first half was modestly higher than the prior year, reflecting strategic growth investments and project timing. Consequently, free cash flow was $175 million. Turning now to capital allocation on Slide 10. We maintain a disciplined and balanced approach to capital allocation, emphasizing strategic growth investments and manufacturing asset investments for tariff mitigation, maximizing long-term shareholder returns while maintaining prudent financial leverage. We continue to pursue additional acquisition opportunities to augment our organic growth plans in addition to potential share repurchases. Hayward's Board of Directors recently authorized the repurchase of up to $450 million in shares over 3 years to replace a similar expired authorization. Turning now to Slide 11 for our full year 2025 outlook. We are refining our guidance for the year, raising the low end of our guidance range for net sales. For fiscal year 2025, Hayward now expects net sales to increase approximately 2% to 5% to $1.07 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 product technology adoption. We expect nondiscretionary aftermarket maintenance demand to remain resilient with pressure on the more discretionary elements of the market. In April, we implemented an out-of-cycle price increase of approximately 3% in North America to offset the anticipated tariff-related inflation. As a result of the partial year benefit of this increase, we now anticipate a positive full year net price contribution of at least 4%. Our guidance does not contemplate potential new tariffs effective on or after July 27. If these do materialize, we will take mitigation actions to offset as appropriate. We continue to 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 12. Before we close, let me reiterate how appreciative I am of the team's strong performance. In a continued challenging and uncertain environment, Hayward delivered another strong quarter, exceeding expectations. Net sales increased 5% and margins continued to expand, including a record gross margin. We significantly delevered the balance sheet to 2.1x while investing in the business to drive future growth. We refined our guidance for the full year, raising the low end of our net sales guidance and effectively implementing measures to counter the current tariff headwinds. As the macroeconomic and tariff environments continue to evolve, we are excited about the fundamentals that drive our business and confident in our ability to execute our growth strategies and create shareholder value. With that, we're now ready to open the line for questions.

The first question comes from Ryan Merkel with William Blair.

Congrats on a nice quarter in a tough market.

Thanks, Ryan.

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.

Let me start by highlighting what drove our second quarter results before we discuss our expectations for the second half. We are pleased to report a strong performance, primarily due to our margin achievements with a record of 52.7%. This reflects the collective efforts of the Hayward team across operations, supply chain, and commercial teams. I believe our second quarter results illustrate the potential of what we can accomplish. We can analyze this through four main pillars. First, we have mentioned before the productivity initiatives occurring within our facilities. These efforts may not grab headlines but are crucial. They include our continuous improvement culture and weekly Kaizens, alongside investments in automation to enhance our efficiency and productivity with the volume we handle. Second, we are rationalizing some lower-volume and low-margin products while introducing higher-value and higher-margin offerings to the market. Our second quarter performance was better than in the first and expected to be strong in the third quarter as we utilize more of our capacity globally. Additionally, we anticipate maintaining price/cost neutrality despite inflation and recent tariffs. Now, I will hand it over to Eifion to discuss how we are shaping our guidance and outlook moving forward.

Sure. Ryan, as we step into the second half, the incremental tariff price action that we took in April in North America, that will benefit the entire second half and is expected to offset approximately dollar for dollar the tariff that we expect to incur in the second half. That will keep the absolute gross profit margin dollars protected but will obviously moderate the gross profit margin percentage, given net sales is priced up and gross profit dollars remain the same as we anticipated. As we complete our operational mitigation programs, that will be the driver to open back up again the gross profit margin percentage. And as we've discussed, those programs are well progressed, and they will take through the end of this year into next year to fully execute. I think what's super positive is despite a moderating gross profit margin percentage in the second half, our full year guidance implies year-over-year gross profit margin percentage improvement, which we're super proud of. And as Kevin mentioned, it takes a village here to tackle the entirety of what's been thrown at us, and we feel really positive about how things have developed through the second quarter here.

That was great color. My second question is on the new pool outlook, I guess, a near-term question and a long-term question. So near term, what are you expecting for new pool for this year? And then it seems to me that the new pool market has been a category that's corrected the most since COVID. And do you feel like we're at a durable bottom here at this point?

Yes, I believe our outlook remains aligned with our initial forecast. We anticipated a slight decline in pool data, which was reported in the low 60s last year. As we continue to monitor the permit data, it's indicating a mid-single-digit decrease compared to last year, though we see some improvement as we progress through the year. The value of new constructions is also optimistic, as homeowners are enhancing their pools with additional features. Regarding future potential, while we are at low levels, it's important to note the context. After the last financial crisis, levels dropped even lower. The current economic situation is not exactly the same as it was 15 years ago. Looking at new construction, while the drop of 60,000 accounts is concerning, it reflects the same number of pools built a decade ago when interest rates and the housing market were vastly different. Homeowners today are facing more challenges with mortgage rates significantly higher, yet we are maintaining that same construction rate. This underscores the shift toward warmer climates where pools are increasingly sought after. I believe there’s potential for growth in new construction as interest rates and the housing market start to recover.

The next question comes from Brian Lee with Goldman Sachs.

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?

Yes, I would say your assessment is accurate. A quarter ago, we discussed a price increase of 5% to 6% due to a recently announced second off-cycle adjustment. However, we re-evaluated this shortly after when there was a significant change in the incremental situation in China. So, you are correct that the actual price is at 4%. With less pricing being introduced to the market, we anticipated a stronger volume performance than we achieved, though it still remained slightly negative. Last quarter, we were looking at a negative trend of about 2.5%, which has improved to more of a negative 1% overall in terms of volume. I would also note that the pricing adjustments we were discussing for the off-cycle were primarily directed towards the U.S., and as that has moderated, we expect the volume increases to come primarily from that market where the price is no longer affecting the market.

Thank you for the insights. I have another question regarding the gross margin performance, which is quite impressive. It seems like there is still potential for improvement, especially considering your current utilization rates and the mitigation efforts in place, which may enable you to expand margins again. Could you provide some details on these two factors and how they might contribute to increasing leverage on margins? Specifically, as utilization rates rise from around 65% to 70%, what impact do you anticipate on margins? Additionally, I would like to know your thoughts on the cost mitigation strategy and exiting China. What effect will this have on margins, and over what time frame do you expect to see these changes take effect?

We have talked about this before. When we think about gross profit margin development, approximately 10% of our cost of goods sold we would say is fixed. So if we see a 10% growth on the top line, we'd expect 1% leverage to come through the business at the gross margin line. That's the easy math on that one. When you think about adjusted EBITDA, we have mid-20s in terms of combined research development and engineering SG&A. We do expect to continue to lever that as the top line grows. It's not all fixed. Obviously, we'll continue to make investments, but that will be leverage opportunity there. In terms of the second bucket, which is the mitigation actions that we're taking to open up the margin again once we get through tariff management here, there's a range of outcomes there. Our manufacturing teams step into each new year with targets to develop the gross profit margin through lean practices and supply chain management initiatives. We've said this previously that we would expect somewhere around about a 25 basis point increase year-on-year at a minimum coming from those type of activities. It won't be linear. There will be years where we get more, years where we get more moderated results. But every single year our team set about to improve the cost of goods sold outlook for our business.

This is James on for Saree. I just wanted to touch on the SG&A. So gross margin was very strong, but SG&A as a percentage of sales increased. So could you please share kind of what drove the higher SG&A and whether this level should be expected kind of going forward?

We laid out earlier in the year our plan for some very targeted incremental investments around SG&A, and that's what you're seeing with the SG&A percentage increase, specifically around some advanced engineering and some product development augmented by some additional resource around customer care and some commercial resources, both selling as well as marketing. So we laid that out. We're spending that. We're seeing benefits for it very strategically placed, and that's what's driving the incremental SG&A.

Yes. Overall, we expect to continue leveraging our existing SG&A base. This is a time for investment to increase our revenue and ensure our new product pipelines are strong. Moving forward, we will keep leveraging our SG&A base. I have been clear about our goal, which is to reduce SG&A as a percentage of sales to the low 20s. While this goal won't be achieved this year, we will continue to work towards it in the medium term.

Great. And I guess I just wanted to get more color on this commentary that you guys put on the press release that the timing of the orders for the 2025 season kind of impacted the volume. So can you kind of elaborate on these comments?

In terms of the order profile, what we typically see is Q4 is a strong order period for us as we get early buy orders coming in. This time last year, we had some additional orders come into Q4 related to some in-season activity, including the hurricane. As we saw in the first half of this year, seasonal orders were as expected, which was great to see. In aggregate, the order profile coming into the business was sound. We don't typically see a tremendous amount of orders in Q1, given the early buy orders that we had received in the previous quarter. But in Q2 this year, the order profile came in as expected, which was growth year-over-year. So that was good to see.

The next question comes from Jeff Hammond with KeyBanc.

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?

Yes. I would say the sales in Q2 are looking good. To give you some context, Q1 is about finishing the early buy program. The year-round markets are definitely active. As we enter Q2, some of the early buy inventories are sold through, and we're in the process of replenishing. As we move through this quarter, Q3 will see those inventories decrease from a days-on-hand perspective, which enables both the channel and the dealer network to consider the early buy program. We will be publishing details on that in the coming weeks and beginning deliveries later this year into the first quarter of next year. We're very pleased with the progress regarding days on hand and how everything appears, and I believe we are well-positioned for Q3. We expect inventories to be at a historically normal level for our channel partners and dealers as we enter the early buy program. Today, more emphasis is placed on collaborating with the channel to ensure we have the right products available at the right times and locations, and I am very satisfied with how that is supporting the channel and the overall market.

Okay. And then Kevin, I think you had a question on new, but maybe just update us on what you're seeing on remodel upgrade. I know maybe you're expecting that to be most challenged. And then I think one of the distributors talked about the repair versus replace dynamic and more people repairing versus replacing equipment. I'm just wondering if you're seeing the same.

Yes. Regarding the last point, we have observed a significant year-over-year increase in parts as a percentage. This aligns with last week's comment about the aftermarket leaning towards repair instead of complete replacement. We are seeing this trend to some extent. As for remodeling, it remains somewhat subdued, similar to new construction, and is still largely a discretionary expense. The overall installed base is aging, currently around 24 years, which limits how long it can be deferred before remodeling becomes necessary. We anticipate that this will improve as interest rates go down and the housing market picks up, which is crucial for remodeling. People often invest some money to enhance their backyard or pool before selling their home, and new buyers usually want to personalize the pool they acquired with the house. We believe that this trend will gain momentum as existing home sales increase, hopefully in the near future.

The next question comes from Nigel Coe with Wolfe Research.

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 of 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.

I would say parts volume has been increasing for a couple of quarters now. We expect our parts business to continuously grow as it represents another revenue stream for us. The example you provided is probably the easiest to explain. For instance, you can use the wet end of a pump and either add a new motor or repair the existing one before deciding to do a full replacement. This approach is currently being considered. I'm not sure if it's strictly related to the most recent round of price increases, but as you know, there have been price adjustments in the market due to inflation before the latest tariffs. Therefore, parts revenue has been rising for several quarters. Recently, we've noticed a bit more growth in year-on-year parts sales.

Okay. So it sounds like some of the more higher-value parts, maybe a bit more repair activity there. And does that limit the ability to push through price next year? Do you expect next year to be a regular way 2%, 3% price increase on top of what we've seen? And then maybe if you could just address the reshoring of the China production to the U.S. How does the unit cost of a U.S.-produced parts compare to the landed cost ex tariffs for the China stuff?

Yes, I'll let Eifion address the second part of the question. As for next year, we would expect to be able to push through a price increase based upon what we see in terms of inflation. We're starting to look at that pretty closely. We are seeing some of our input costs starting to feel a little bit of pressure around some of the metals. Copper is certainly out there in the headlines, and we consume that in our basket of inputs. But we would fully expect to be able to announce and to realize kind of price/cost-neutral increase next year, Nigel.

Yes. When it comes, Nigel, to the comparison of the cost to manufacture in the U.S. versus China, it does vary by product. I would say the landed cost of Chinese manufactured goods at the current tariff levels versus the cost to manufacture that product in one of our U.S. facilities is significantly more than it was 10 years ago. And that now informs us, it makes much more sense to diversify our product manufacturing away from China and utilize our under-capacitated North American facilities. We've estimated the incremental COGS impact to reorientate the entirety of our supply chain away from China to be less than $10 million or approximately less than 1% of net sales. We will recover that margin impact as I mentioned, as we execute the operational mitigation programs, including investment into our North American facilities for greater automation. And we're moving down that line at a pace. As Kevin mentioned in his prepared remarks, by the end of this year, we expect greater than 90% of our North American product needs to be manufactured or sourced here in North America. But we've now determined that the differential between China and U.S. manufacturing costs is de minimis enough for us to make these changes.

The next question comes from Mike Halloran with Baird.

It's Pez on for Mike. 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?

Yes. We are very excited about the progress of our commercial business and its potential for future growth. As you mentioned, we are now at the one-year mark since combining our teams, which has resulted in a significant increase overall. I would say that our organic growth has been substantial, although I’m not sure if we have publicly disclosed the specific figures. Previously, our commercial segment contributed low to mid-single-digit percentages to our overall business, but by the end of 2025, we hope to elevate that to double digits and potentially reach the teens. Given the size of the commercial market, our team’s presence, relationships, and the expanding product line, we believe we have everything we need to surpass the expected growth in this area. Historically, commercial growth was not a focus for us, but we are looking forward to the opportunities ahead in this sector.

Excellent. No, I appreciate the color. And then I guess switching gears, I'll ask the required questions since nobody's got to it yet. 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.

Yes. We're really excited to be where we said we would be here with this kind of 2.1x net debt. I would say our priorities remain as we've laid out, to continue funding the organic first and foremost, whether that's new product development or with some of the reshoring or onshoring of some production that was in China into our U.S. facilities, that creates the opportunity for us to make some incremental investments around some manufacturing assets and some automation. So that's going to continue to be our top priority. But second is what you asked around M&A. We have a healthy pipeline of opportunities, ongoing discussions and information gathering. There's opportunities, both domestic and international for some bolt-ons around our core residential business. As we just spoke around ChlorKing, that's going to continue to get resources and interest. Nothing for us to talk about publicly at this point, but know that it's a healthy pipeline and good conversations, good opportunities that we're weighing right now from the M&A standpoint.

Yes. I would just add, as you know, we are very pleased again with what we've been able to do with the balance sheet getting down to 2.1x. At the low end of our communicated range of 2 to 3x, it's a great tick mark against a lot of team members that have worked diligently to improve the balance sheet to that level. We remain dedicated on our capital allocation policy to think about reinvestment into the organic side of the business first. Our CapEx took a tick up in the first half, and we'll continue to invest both in automation and other initiatives around our manufacturing and supply footprint. And just to clarify on my previous remark, even though we are reorientating our supply chain away from China to service North America, we'll continue to use that Chinese facility that we have, a great team there to support our Rest of World business. As Kevin mentioned, M&A remains a core thematic for this business. We are looking at opportunities, and we'll continue to update you as those opportunities may develop. And then lastly, return to shareholder. Given the very strong cash flow characteristics of this organization, we will have the opportunity to return to shareholders, even satisfying organic and inorganic activities. And as we mentioned in the call, we have instituted the next repurchase authorization for $450 million over the next 3 years. And as the opportunities arise, we'll execute if we feel it's appropriate to do so. So again, super pleased with what we've been able to do, and we look forward to continued improvements.

The next question comes from Rafe Jadrosich with Bank of America.

It's Rafe. 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?

I don't think we would point to any meaningful change in trend. As we look back on Q2, I know some other public comments mirror this. April was a pretty strong sell-through into the marketplace. Kind of May, mid-May, late May into early June was not great, and then it really did pick up kind of the latter half of June. And while we're not talking about the current quarter, July has kind of carried through with some of those trends. So we are feeling really positive about what the pull-through into the marketplace is. Maybe from an OEM standpoint, weather doesn't impact an OEM quite like it may a channel or a retailer. The quarter in general was extremely hot and extremely wet, except for maybe the West Coast in terms of precipitation. So I think that could have had some impact, at least the precipitation in the mid-part of the quarter there. As I said earlier, we are seeing permit data improve. It's still not positive on a year-over-year basis, but the rate of permits filed has actually improved through the second quarter. So I think that, that could well play into some of the pull-through, Rafe, around new construction or some remodeling activity.

That's helpful. And then 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.

Yes, I would say that from a share perspective, we are pleased with our pull-through and overall performance. When it comes to sales, we believe we are in a net positive position. Gaining market share in this industry requires building relationships, maintaining service levels, introducing new products, ensuring availability, and more. I think the team is doing a great job across all these areas. Regarding our opportunities, we've been transparent about where we believe we have historically underperformed. We're focusing on certain regions with additional investments, including our hubs for service and installation training, expanding field sales and customer care resources, and implementing targeted marketing programs. This approach is driving some of the specific SG&A investments that both Eifion and I mentioned during the call this morning. Thanks, Latanya. 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 third quarter earnings call. Thank you for your interest in Hayward. And Latanya, you can now end the call.

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