Synopsis

Hayward Holdings (NYSE:HAYW) specialises in designing, manufacturing, and marketing of a wide variety of pool equipment and associated automation systems. The majority of its sales are through specialty distributors. HAYW’s historical financials have shown a trend of declining net sales due to decreasing volume caused by macroeconomic uncertainty and distribution channel destocking. Additionally, margins also came under pressure in 2022 and 2023. For 1Q24, net sales growth was modest at 1% year-over-year, as results in both segments were mixed.

Looking ahead, the outlook for the pool market is unfavourable due to weak consumer demand driven by high interest rate. However, due to HAYW’s sales mix, whereby 50% is in aftermarket non-discretionary segment, it makes HAYW less susceptible to weak economic conditions as repairs and replacements are considered non-discretionary. However, this does not mean that they are completely immune as well. Therefore, given the mixed outlook, I am recommending a hold rating.

Historical Financial Analysis

After 2021, HAYW’s top line has been showing signs of contractions. In 2021, net sales reported was approximately $1.401 billion, which grew 60.1% year-over-year. This strong growth was mainly due to increased volume, particularly in residential pool equipment. Volume was driven by the ongoing demand for pool improvements and new pool construction.

In 2022, its net sales declined 6.3% year-over-year due to decreased volume. Firstly, volume was affected by macroeconomic uncertainty. This uncertainty was caused by the rising interest rate environment as well as the geopolitical tension in Europe. Secondly, it was caused by distribution channel destocking as supply chain pressure started to ease.

In 2023, net sales decreased 24.5% year-over-year to $992 million. Similar to 2022, the decrease in net sales was caused by the decline in volume. Volume continued to be negatively impacted by macroeconomic uncertainty and distribution channel destocking.

Regarding its margins, results were mixed, as some were expanding while others contracted. In 2023, its gross profit margin expanded to 48.06%. This expansion was driven mainly by effective manufacturing cost management. In addition, the recovery in supply chain disruption also helped to alleviate costs and bolster margin.

Although SG&A on an absolute basis fell year-over-year in 2023, SG&A as a percentage of net sales increased to 23.5% vs. 2022’s 18.9%. The percentage increase was caused by reduced operating leverage. Its R&D as a percentage of net sales increased from 1.70% to 2.47%, while acquisition and restructuring related expense as a percentage of net sales increased from 0.62% to 1.33%.

As a result, its 2023 operating income margin contracted from 21.73% to 17.66% as the expenses more than offset the gross profit margin expansion. Its net income margin contracted from 13.64% to 8.13%. On an adjusted basis, the adjusted EBITDA margin also contracted from 27.97% to 24.92%.

First Quarter 2024 Earnings Analysis

For its most recent 1Q24 result, HAYW reported net sales growth of 1% year-over-year. Net sales increased to $212.6 million. This growth was driven by modest increases in net price and volume. The volume growth was attributed to the increased Early Buy shipments.

Breaking down its net sales into segments, its North America segment’s net sales grew 7% year-over-year to $173.4 million. This growth was attributed to higher volumes and positive net price.

For its Europe and Rest of World segment, net sales fell 17% year-over-year to $39.1 million. The consolidation of HAYW’s manufacturing activities in Europe resulted in delayed shipments, which caused the decrease in volume. However, do note that this segment only accounts for approximately 18.4% of its 1Q24 net sales, while its North America segment accounts for 81.6%. HAYW’s North America segment forms the largest share of total net sales.

Moving onto margins, HAYW’s 1Q24 margins performed well year-over-year. Its gross profit margin expanded from 46.60% to 49.20%, driven by operational efficiencies achieved in its manufacturing operations. However, SG&A expense as a percentage of net sales increased from 26.1% to 28.2%, offsetting the gross profit margin expansion. This increase was driven by increased warranty costs and marketing and selling expenses. In addition, R&D expense as a percentage of net sales also increased to 3% from 1Q23’s 2.8%. The increase was due to HAYW’s continuous effort on new product development.

On an adjusted basis, HAYW’s adjusted EBITDA margin was relatively in line with previous quarter's reported figures. For 1Q24, the adjusted EBITDA margin was 21.20% vs. 21.40%. On the other hand, its adjusted net income margin expanded slightly from 7.48% to 7.82%.

Business Overview

HAYW business can be segregated into two reportable segments: North America, and Europe and Rest of World. North America [NA] accounts for 83% of 2023’s net sales, offering a complete line of swimming pool supplies, equipment, and solutions for residential and commercial pools.

Europe and Australia make up a sizeable portion of the Europe and Rest of World [ERW] segment. Segregating 2023 total net sales by its end markets, residential pool accounts for 91% of the total net sales, while commercial pool and flow control account for the remaining 9%.

Recurring Aftermarket Model

Spending on new pool construction and renovation projects surged during the pandemic as people spent more time at home, thus wanting to upgrade their homes. However, with the ongoing high interest rate and inflationary environment, discretionary spending for new construction, remodelling, and upgrading activities started to decline. Despite this, HAYW’s aftermarket maintenance remained resilient.

For context, the majority of HAYW’s business is made up of the aftermarket segments, which consist of repairs, replacement services, remodelling, and upgrades. New construction, which is considered discretionary spending, accounts for approximately 20% of total sales. Therefore, its aftermarkets segment, which includes semi-discretionary and non-discretionary, accounts for approximately 80%.

From HAYW’s total sales, 50% fall under non-discretionary spending, which consists of its aftermarket repair and replacement services. 30% of total sales fall under semi-discretionary spending, which consists of remodelling and upgrading, with each accounting for approximately 15%. With the growing installed base of US in-ground pools over the years, as shown in the chart below, it offers HAYW a robust and expanding market for its aftermarket segments.

USA Pool Industry Outlook

According to Bloomberg, the demand for pools is declining. Pool Corp (POOL) has lowered its full-year guidance by approximately 15% due to weakening consumer demand for expensive products such as swimming pools. Additionally, POOL forecasts that pool construction will decrease by approximately 20% year-over-year. Furthermore, it is also forecast that remodelling activity will fall by approximately 15% this year.

The market estimates that for this year, only 60,000 residential inground pools will be built. This figure means that it is only 50% of the amount that was built in 2021. The driver behind the weakening demand is mainly coming from the middle- and lower-income consumer groups due to high interest rates. Overall, the outlook for the pool industry is looking soft.

Looking at the following chart, new construction, which is considered discretionary spending, accounts for approximately 20% of HAYW’s sales. Remodel and upgrade account for approximately 30%. In total, they account for half of HAYW’s sales. Given the forecasted decline in new pool construction and remodelling activity, the weak outlook will create headwinds and definitely have an impact on HAYW’s outlook.

However, the saving grace of HAYW is that 50% of its sales are non-discretionary aftermarket. In general, this segment is less susceptible to weak or uncertain economic conditions due to its non-discretionary nature. One major point to take note of is that HAYW’s business is seasonal. Its sales are generally higher in the second and fourth quarters. Therefore, looking ahead, HAYW is forecasting sequential improvements in the second quarter.

Relative Valuation Model

A quick recap, HAYW specialises in the manufacturing and marketing of a wide range of pool equipment and related automation systems. In my relative valuation model, I will be comparing HAYW against its peers in terms of growth outlook and profitability margins.

For growth outlook, I will be comparing their forward revenue growth rate. This is done so because it is considered a forward-looking metric. For profitability margins, I will be comparing their EBITDA margin TTM and net income margin TTM. These metrics will give us a deeper understanding of their core business activities' performance, strengths, and how they stack against one another.

In terms of growth outlook, HAYW underperformed its peer group. HAYW has a forward revenue growth rate of -5.09%, while its peers’ median is -2.70%. Although HAYW underperformed, do take note that its peers’ median is also negative. This implies that the outlook for the industry is not favourable.

However, when it comes to profitability margins, HAYW outperformed its peers in both EBITDA margin TTM and net income margin TTM. HAYW’s EBITDA margin TTM of 24.39% is significantly higher than its peers’ median of 12.65%, which represents 1.93x over the median. For net income margin TTM, HAYW reported 8.25%, which is also higher than peers’ median of 5.12%.

Currently, HAYW’s forward non-GAAP P/E ratio is 20.50x, higher than peers’ median of 17.82x. Given HAYW’s mixed performance against its peers, I argue that it is difficult to justify its higher forward non-GAAP P/E. Therefore, in order to remain conservative in my valuation approach, I will be adjusting my 2025 target P/E for HAYW down towards peers’ median of 17.82x.

For 2024, the market revenue estimate for HAYW is approximately $1.03 billion, while non-GAAP EPS is $0.60. For 2025, the revenue estimate is approximately $1.12 billion, while non-GAAP EPS is $0.74.

When analysing its earnings release, HAYW did provide their guidance for FY2024. It is forecast that FY2024 net sales will be in the range of $1.010 billion to $1.060 billion. At the midpoint, forecasted net sales is approximately $1.035 billion, which is in line with the market's estimate. Additionally, its adjusted EBITDA is forecast to be between $255 million and $275 million. This implies a year-over-year growth of between 3% and 11%.

Taken together, the management’s guidance and my forward-looking analysis, as discussed above, support the market’s estimates. Therefore, by applying my 2025 target P/E for HAYW to its 2025 EPS estimate, my 2025 target share price is $13.19, modestly higher than its last traded share price.

Risk and Conclusion

The significant markets for HAYW are the residential market in the US, Canada, Europe, Australia, and the US and European commercial market. In the last two years, HAYW experienced sales fluctuations due to economic uncertainties. Such uncertainties have a negative impact on consumer spending, which affects HAYW’s sales as it sells its products to distributors, retailers, buying groups, and builders, who then sell the products to pool owners.

As we all know, consumer spending is affected by factors such as economic conditions, the interest rate environment, and residential housing market conditions, to name a few. If the economic outlook starts to turn positive, it might increase consumer spending, and the demand for pool equipment products and pool construction might increase, which ultimately will benefit HAYW.

After 2021, HAYW’s net sales started to decline due to decreasing volume as volume was affected by macroeconomic uncertainty and distribution channel destocking. In addition, its profit margins came under pressure as well. In its most recent 1Q24, net sales were modest due to mixed results in both of its sales segments.

Looking ahead, the outlook for the pool market, particularly new construction and remodelling, is unfavourable because of weak consumer demand. This weak demand is caused by high interest rates. On a brighter note, 50% of HAYW’s sales are in non-discretionary aftermarket. This segment is less susceptible to economic shocks due to its non-discretionary nature. Therefore, given HAYW’s mixed outlook, I am recommending a hold rating.