Hayward Holdings, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Hayward Holdings, Inc. is a global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hayward’s business revolves around a mix of new construction and replacement of pool equipment. This creates a relatively stable business model, as the replacement cycle provides ongoing demand even during economic downturns, although new construction may be impacted.

Business Overview

Hayward Holdings (HAYW) is an industry leader specializing in pool equipment and technology. The company’s diverse product offerings encompass filtration, pumps, lighting, heaters, cleaners, sanitization, automation and other related products. These solutions cater to both residential and commercial pool installations, reflecting a broad customer base. Hayward operates globally, with manufacturing facilities strategically located across North America, Europe, the Middle East, and Asia, and primarily distributes its products through a wide network of retailers, distributors, buying groups, builders, and service professionals.

  • Revenue Streams: Hayward generates revenues through three principal sources, the largest being sales to the North American market (NAM), followed by Europe and the rest of the world (E&ROW), and finally through OEM channels. Sales are diversified across both new construction and replacement of existing pool systems. Sales are driven by a combination of product volume and pricing.
  • Industry Trends: The pool industry is influenced by factors like consumer spending, housing market trends, and technological advancements. An industry shift towards more energy-efficient, connected, and automated systems is notable. The company is focusing on high growth regions, such as Florida, Texas, and California. A large portion of the replacement market is related to aging pools and their respective parts that are wearing out.

Hayward is actively expanding its presence in emerging markets in areas such as Mexico. The company is also implementing strategies to better serve existing customers, as well as working on distribution for these high potential areas.

  • Margins: Hayward’s gross profit margins are driven by product mix, pricing strategies, and efficiency of production. Operating margins are affected by factors like operational costs, labor costs, and R&D expenditures. In general, the company aims for higher value-added products, which help to support higher profitability.
  • Competitive Landscape: The pool equipment market is characterized by intense competition and pricing pressure, particularly from commodity-like products. Key competitors include Pentair and Fluidra. Despite this competitive environment, brands with entrenched positions like Hayward can create differentiation based on features, quality, innovation, and scale. A key challenge is overcoming the fragmented nature of the market. For example, the large national distributors are a large threat as they can easily switch to a competitor, reducing switching costs. Another key challenge is that if the market is oversupplied, smaller players will be unable to compete because they will have fewer resources and will need to compete by price.
  • What Makes Hayward Different?: The company differentiates itself through product innovation, smart technology (particularly in the areas of automation and energy efficiency), and a wide distribution network. Hayward is focusing on integrating their equipment with other systems, providing value for the builders and the homeowners. They’re moving towards an integrated business model. The ability to tailor products to specific customer needs is another strength. Additionally, the large number of local approvals required to have their equipment installed in various municipalities acts as a barrier to entry that is hard to overcome. Finally, the company is focusing on building partnerships across their supply chain, including relationships with retailers and suppliers.
  • Other relevant factors: Some raw materials are sourced from a small number of suppliers, but they are not dependent on them. The company has a good relationship with their suppliers. The labor market for the production facilities is also tight.

Financial Analysis

A notable aspect of Hayward’s financial performance is the variability of its performance. After a period of growth, several challenges, like high inflation and supply chain issues, created headwinds for the business. This has led to a period of lower earnings growth and profitability. Management is confident in the underlying demand for the product and has been able to increase prices to keep the profitability intact and to keep ahead of inflation. In more recent quarters, they had to drastically cut their inventory, which led to lower free cash flow. This was caused by a slowdown in sales, particularly in the residential new construction market.

  • Revenues: Over the years, the company has demonstrated a general trend of consistent growth, although results may be impacted by industry conditions. They have been able to grow revenues by focusing on more innovative products and improving operations. Revenue has been growing due to both volume growth and price increases. In the third quarter, the company saw a 5% decrease in sales. While management expected some weakness, the actual decrease surprised them. North America saw a 6% decrease and Europe and the rest of the world showed a 4% decrease. They believe the decline is from channel inventory destocking, where distributors decreased their orders because they had too much inventory.
  • Gross Margins: Gross margins have been decent over the years, but there have been recent concerns that increased material costs and competition may pressure margins. The company has been focusing on increasing productivity and cost reductions in order to maintain margins. In the third quarter, gross margins increased slightly.
  • Profitability: Profits have improved through acquisitions, cost reductions, and growth in high-margin products. However, earnings have also been negatively impacted by increased interest rates and taxes. Management is trying to balance long term growth and short term profitability.
  • Capital Structure: The company is focused on improving its balance sheet and increasing its free cash flow. Management has also stated they will be reducing debt over the next few years. They are focused on maintaining liquidity and a comfortable leverage ratio. Debt is a big part of the balance sheet because Hayward uses debt to acquire other companies. The company’s weighted average cost of capital (WACC) is currently 7.6%.

Moat Assessment: Hayward possesses a moderate moat, which is mainly derived from its brand recognition, distribution network, and switching costs.

  1. Intangible Assets (Brand): Hayward has a solid brand name in the pool industry, which they claim is a leader. This recognition, as well as the company’s history, does provide some pricing power, which is an element of an economic moat. However, these are not very durable.
  2. Switching Costs: Once a customer buys and installs Hayward equipment, it becomes difficult and somewhat costly to move to a competitor. Given the tight integration of equipment and software, and the necessity to use replacement parts, there are certain switching costs that tend to keep the customer. But these are easily overcome if the company’s products or prices are not up to the mark.
  3. Cost Advantages: In general, cost advantage is difficult to achieve in this industry, because products are fairly standardized and raw material availability is common, but Hayward has the scale that allows them to have a certain advantage over smaller players. There are a lot of regulatory approvals that provide the company with some geographical mini-monopolies.
  4. Network Effects: The company does not display any direct network effects.
  5. Economic Moat: Given all the factors above, the economic moat is somewhat narrow, and I have given it a rating of 3 out of 5.
  • Risks that may erode the Moat:
    • Technological disruption: The pool equipment market is susceptible to new technologies. Competitors may develop innovative products that displace Hayward’s offerings. So, the moat in the software space and the data they collect is vulnerable.
    • Intensified competition: A more fragmented or low cost focused competitive landscape could erode pricing power and market share. Increased consolidation, price-sensitive competitors, and copycats could weaken their brand-based competitive advantages.
    • Shifting market dynamics: Changes in consumer preferences towards lower-priced solutions or new trends could leave Hayward on the backfoot. For example, there could be a shift in consumer tastes in terms of pool size or the types of materials.
    • Management missteps could lead to poor execution of strategy, poor allocation of capital, or inability to adapt.
  • Business Resilience: While Hayward does operate in a cyclical industry, certain characteristics indicate some resilience.
    • The company focuses on replacement sales, which are generally less sensitive to the economic environment, as homeowners will still need to buy parts for maintenance of their equipment.
    • A good distribution network helps with revenue visibility.
    • Hayward has had good profits in the past, and it is trying to be a reliable player in the industry that can maintain and grow its margins over time.

Understandability: The business model is somewhat straightforward, but the nuances of operations across various geographies, as well as the technical aspects of the products, do present a challenge to the investor. A more thorough understanding is needed to assess the competitive landscape and durability of value creation. So, I will give it a rating of 2 out of 5. While the products may appear simple, there is complexity when analyzing how the company builds a relationship with the customers and protects its business.

Balance Sheet Health: Hayward’s balance sheet is reasonably healthy. While debt is significant, it is not overly leveraged and has the ability to manage its existing debts. The company is also taking steps to reduce the levels of debt. The company’s liquidity and short-term assets seem to be stable, as does its cash flows. Thus the rating is 3 out of 5.

  • Current ratio and quick ratio are both over 1, showing that the company’s current assets are more than its current liabilities, providing enough liquidity to cover short-term obligations.
  • Their debt ratio is quite high, but they do have the cash flows to support it and management plans on decreasing it over the next few years.

In summary, Hayward is a business with a moderate moat, that has a reasonable growth path ahead, but faces certain challenges, like competition, economic volatility, and the need to keep innovating. Investors should keep an eye on company’s financial management and ability to increase pricing power and maintain margins in the face of these challenges.