HAYW - NYSE

Greetings. Welcome to Hayward Holdings Second Quarter 2025 Earnings Call. My name is Latanya, and I will be your operator for today's call. [Operator Instructions] 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 [indiscernible] 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 is $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.

[Operator Instructions] 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.

Yes, let me just first kind of highlight what drove Q2, and then we'll transition into how we see the second half. It was great to report a strong result, which really was driven by that margin performance and the record at 52.7%. And it does represent a great work collectively that the Hayward team across the operations and the supply chain and the commercial teams are doing. In some ways, I really think what we just posted in Q2 shows the possibilities for what we can deliver. We look at it across kind of 4 main pillars. Firstly, and we've talked about this publicly before, but just to reiterate, from a productivity standpoint, the things going on inside our 4 walls. They don't really grab headlines and they're ongoing, whether they're our continuous improvement culture or weekly Kaizens, things that drive productivity and some investments we're making in automation to be more efficient and more productive with the volume that we have. Secondly is really what we're doing with the product line as we're rationalizing out some lower-volume and some low-margin SKUs, at the same time introducing higher-value, higher-margin new products to the marketplace. Q2 was better volume than we have kind of in Q1 or Q3. So again, we show there what can occur as we start utilizing more of our capacity in our global footprint. And then, of course, from a price/cost standpoint, we continue to expect to be able to deliver price/cost neutrality as we face inflation and more recently, tariffs. As for the second half, I'll -- and going forward, I'll ask Eifion to address how we pull that guide and the outlook together.

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. In terms of our outlook, I think it remains consistent with our original guide, Ryan, and that is we were calling for modestly down Pkdata, as you well know, kind of the industry source there in the U.S. calculated or communicated low 60s last year. We believe, as we continue to look closely at the permit data, there's a couple of sources for that. But as we triangulate, I would say that it's still tracking to sort of mid-single-digit count off year-on-year, but it is improving as we're working through the year. And again, the values I know it wasn't asked in your question, but the value of what is being built continues to be positive as folks are doing it right and are putting features on their pools. As for where it can go from here, it's a great question. This is near trough levels. Going back to -- immediately coming out of the GFC, it got a little bit lower at that point. I'd like to think that the macro today isn't quite what it was back 15 years ago. There's an interesting thing we talk about here around new construction. And by no means are any of us proud of a 60,000 accounts coming off the more recent highs. But if you go back 10 years ago, when interest rates were very different than they are today, when housing market or at least turnover existing homes, which is a big driver of remodeling activity was far different, we were building 60,000 pools then. So I think while the homeowner is under much more pressure today and mortgage rates are, call it, 300 basis points higher than they were at that point, we're building the same number of pools, which I think really underscores both the migration that's taken place to warmer climates where a pool is desired or maybe even needed. And I just think that there's a bit of a coiled spring here that as interest rates and housing market starts to improve, that we can inflect upward from a new construction standpoint.

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 what you laid out there is accurate. This time a quarter ago, we were talking 5% to 6% price based upon that announced second off-cycle increase that was really stem -- that was -- well, we backed off of that shortly thereafter when China incremental was changed meaningfully. So price, correct, you're correct at 4%. And with less price being put into the marketplace, we did -- we do assume a stronger volume performance than we had, still slightly negative. We were talking about negative kind of 2.5% this time last quarter to more of a negative 1% overall on volume. And I would say, since the pricing that we're talking about, off-cycle pricing was only going towards U.S. as that has moderated. That's where we expect the volume gains to come back from as that price is no longer placed into the market.

Okay. Fair enough. No, that's helpful. And then maybe just another question on the gross margin performance here because it's so notable. Kudos to you guys. It seems like there's still a lot of torque in that, though, if you think about where utilization rates are for you and also some of these mitigation efforts, which it sounds like would put you on a path to start expanding margins again. But can you maybe quantify those 2 buckets, if you think they're the right 2 buckets that could drive the most amount of incremental leverage on margins? Just sort of as utilization rates increase from this sort of, I would think at 65%, 70% level, what's sort of the drop-through to the margin? And then also, how are you thinking about -- I understand the time line on the cost mitigation and moving out of China, but what's the actual margin implications? And over what time frame could we see that materialize?

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 bp 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.

The next question comes from Saree Boroditsky with Jefferies.

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 would continue to expect -- as I just mentioned in the previous question, we'd expect to continue to lever our installed SG&A base. This is a period of investment to grow the top line and to make sure our new product pipelines are robust. But as we go forward, we will continue to lever our SG&A base. And I've been pretty vocal about our ambition here, which is to drive SG&A as a percentage of sales into the low 20s. It won't happen this year, but we will continue to march towards that goal in the medium term.

Great. And I guess I just wanted to get like more color on this commentary that you guys put on the press release that like timing of the orders for 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 -- Q2 -- well, let me step back. Q1, as you know, is kind of finishing off early buy. The year-round markets are obviously open for business. As you get into Q2 is when some of the early buy inventories get sold through, you're replenishing. And then obviously, as we work through this quarter, Q3 is when those inventories will be drawn down from a days-on-hand standpoint, which really allows both the channel and the dealer network to consider the early buy program, which we'll be publishing in the next several weeks and starting to deliver later this year into first quarter next year. In terms of what we see in terms of days on hand, we're very pleased with the progress and how things look there. I think that we're well positioned here in the upcoming quarter here in Q3. And we would expect inventories to be in a position for our channel partners and our dealers to participate at a historically normal level as we get into the early buy. So much more attention is paid today than maybe pre-COVID in partnering with the channel to make sure we've got the right product at the right time in the right locations, and I'm very pleased with how that's working to support 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 repair versus replace dynamic and more people repairing versus replacing equipment. I'm just wondering if you're seeing the same.

Yes. On that last point, we are seeing parts as a percentage on a year-over-year basis is up pretty meaningfully. I do think that, that points to the comment made last week around some of the aftermarket is looking to repair versus full scale -- sorry, to repair rather than replace. I think that is happening to some extent. In terms of remodel, Jeff, I think it's still a bit tempered kind of like the new construction. It's still largely discretionary. As you know, the overall installed base is continuing to age, somewhere up around 24 years. So there is some kind of limit to how long it can be pushed to the right before some form of remodel takes place. And we think that, that is something that will improve as interest rates improve and housing market gets going again, that is a big part of the remodel. I think folks maybe before they're about to sell, they spend a little bit of money sprucing up the backyard in the pool or certainly when a new -- when someone buys into an existing home, they look to put their own personal touch on that pool that they bought with the home. And I think that, that's going to improve as existing home sales starts to 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 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.

I would say it's -- the parts volume has been a couple of quarters now of -- I mean, we would expect our parts business to always increase. It's another revenue stream in the overall business. But I would say the example that you gave is perhaps the easiest to understand or to explain. You can use the wet end of a pump and you can put a new motor on it or replace or repair a model -- sorry, a motor before you have to fully replace it. So that is being considered. I think -- I don't know if it's -- if I would say it's the most recent round of pricing increases. As you know, there's been pricing put into the marketplace due to inflation before the more recent tariffs, Nigel. So parts have increased in revenue for several quarters. But I'd say over the last few, we've seen perhaps a little bit more escalation in the 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're really excited about what the commercial business for us has become and what it can continue to grow or how it can continue to grow in the future, Pez. It's -- as you say, we are at the 1-year mark overall, the combined business, and I say that because the ChlorKing team and our existing commercial team have become one under a common leader, and it has doubled kind of overall. Organically, I would say it's -- I don't know if we're -- if we disclose it publicly, but it's a meaningful pull-through and growth on what was our commercial organic business beforehand. In terms of aspirations, commercial was kind of a low to mid-single-digit part of our business. As we round out 2025, we're anxious to see if we can get that to double-digit overall part of our mix. And overall, we're kind of pushing or we're striving for something in the teens overall. I think the size of the commercial market, our presence there, our team, the relationships, the product line that we're building out, I think, gives us all the ingredients to be able to continue outperforming what we see in terms of commercial growth overall. As I've said many times, it was not a focal point of the business before the last few years, and we're really excited about what the future holds for us in this commercial space.

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 profile characteristics of this organization, we will have the opportunity to return to shareholder, 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 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 mean I'd say from a share standpoint, we feel good about the pull-through and our performance overall. In terms of sales out, we believe we are net positive. Share gains in this industry are hard-earned through relationship building, service levels, new product introduction, availability, et cetera. And I think we're doing -- the team is doing a good job across all those different elements, Rafe. In terms of where we think our opportunities lie, we've been pretty open in discussing where we think we're under-punching our weight historically. And we're targeting some of those regions with some incremental investment, whether it's with some of our hubs that we've spoken about for service and installation training to some additional field sales and customer care resources to some targeted marketing programs. So I'd say that's really what's driving some of the very targeted SG&A investments that both Eifion and I have spoken about on the call here this morning.

At this time, I would like to turn the call back over to Kevin Holleran for closing remarks.

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.