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Eifion Jones

Thank you, Kevin, and good morning. I'll start from 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 the 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 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 4 times a year ago to 2.8 times at the end of the first quarter, consistent with our targeted range of 2 times to 3 times. 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 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 2025 benefited $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.

Kevin Holleran

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 delevered 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 counter-measuring 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.

Question and Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from the line of Andrew Carter with Stifel.

Andrew Carter

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

Kevin Holleran

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

Eifion Jones

Yeah, good morning, 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.

Andrew Carter

Thanks. And then you said you were being thoughtful. So as far as the price increases go, I assume they are targeted towards the affected products? Or is it a broad line increase? And then you did mention managing kind of the managing prebuys. Are you managing like the prebuys tighter than a typical prebuy? And then if you are, I mean, do you see -- is there any extra headwind implied in gross margin from like a potential disconnect of somebody buying out ahead of the increase and then reducing it later? Thanks.

Kevin Holleran

Yes. In terms of pricing, we did -- I mean, there'll be some variation when final price lists on our most recent announcement are distributed. But by and large, it's more across the line as opposed to just targeting those specific SKUs that are manufactured or most impacted. Those increases would effectively more or less take out of the market on some of those products, and we take full line -- being a full-line supplier very seriously. So there's some sharing across the entirety of the product line.
I forgot the second part of the question was?

Eifion Jones

Pricing pre-buy

Kevin Holleran

Around pre-buy. We -- I would say we probably are a little tighter in terms of the cap that we put out there right now. I mean what we normally put out there for the early buy or the winter stocking program has a little bit more flex upwards to it. At this point in time, given the time of year when these price increases take effect, early buy has been delivered. As we work with our channel partners, their inventories and days on hand are appropriate and well suited for where we are in the season.
So we're just really trying to protect all of us from overstocking here and then having to deal with the pain of a destock later on. We're really just trying to match sales out with the replenishment. The replenishment in on par with what the sales out is and that's really what's driving sort of the cap that we've announced to the channel partners.

Andrew Carter

Thanks, I'll pass it on.

Operator

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

Saree Boroditsky

Hi, thanks for taking my question. 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 demanded as you go through the rest of the year? Thank you.

Kevin Holleran

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

Saree Boroditsky

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?

Kevin Holleran

Yes. Great question and something we keep our eyes peeled on. I would say -- I think the first part of your question was really asking, has there been demand destruction with just the overall project cost. What we debate is deferral versus destruction at this point in time because of the housing market, the turnover not being what it has been historically. I think some of those larger refurbishment or even building the pool at a new house that you bought, I think that's being delayed a bit as existing home sales have struggled the last couple of years.
So we see it a bit more as a deferral around some of that discretionary spend as opposed to destruction. In terms of trading down, our guide is really trying to take that into account. We think it could happen. We don't have strong evidence of that happening. As we look at permit values, we've spoken about this in the past. While the unit count on permits the last couple of years have been down, the value of those permits have actually continued to climb, which would indicate that people who are building or doing the full-scale remodels are doing it right, and they're putting the features and the functionality on the pool as they want it.
However, again, with a couple more equipment increases rolling through the system here in the channel here in 2025, we're trying to take a pragmatic approach and protect against that if it were to happen as the year progresses.

Saree Boroditsky

Appreciate the questions. Thank you.

Operator

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

David Tarantino

Hey, good morning everyone. 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?

Kevin Holleran

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

David Tarantino

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.

Eifion Jones

Yes, sure. We've talked about this before. We have outside of China, six facilities, three large ones in the United States, 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.

David Tarantino

Great, thanks guys.

Operator

Our next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.

Sean Colman

Hi guys, 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?

Eifion Jones

Yeah, Good Morning again. 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 upgrade. 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 the 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.

Kevin Holleran

Sean, I would just add in terms of 50-plus percent amount of our revenue from the brake fix aftermarket non-discretionary 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.

Sean Colman

Got it. That's very helpful. And then just kind of following up on that trade down. So you guys in the industry have really benefited from the adoption of automation. Do you think these additional price increases can limit that adoption? And then any color you have on early trends with OmniX sales would be helpful. Thank you.

Kevin Holleran

I would say I think OmniX is the answer to both parts of your question, Sean. I -- the initial load-in with the channel and some of the early pull-through with the dealers has been encouraging for us. And I would say in terms of automation, OmniX brings a lot of things, as I spoke about in the prepared remarks, but it really does allow you to build your ecosystem one at a time as you -- as natural break fix occurs. We don't have the entire product line introduced yet. That will be phased over the next several quarters, but it's a much more cost-effective way for any homeowner, whether you're building new, whether you're refurbishing or whether you're wanting to upgrade a 20-year pool that didn't have any automation or controls, it can be done in a much more efficient, cost-effective manner, which I believe will mitigate some of the concerns you raised in your question about the overarching price to bring that control and automation to the pool owners palm of their hand.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Nick Cash

Hi everyone, this is Nick from Brian Lee. How's everybody doing today?

Kevin Holleran

Hey Nick, Good Morning.

Nick Cash

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

Kevin Holleran

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

Nick Cash

No, that's super super helpful color. Thank you.

Kevin Holleran

Yeah.

Operator

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.

Kevin Holleran

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.

Operator

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.