Hayward Earnings: Record Gross Margins Despite Volume Decline

We’ve raised our fair value estimate for narrow-moat-rated Hayward HAYW to $14.60 from $14 after the company reported solid second-quarter results, delivering record gross margins despite headwinds in the pool business. The fair value adjustment reflects our more optimistic midcycle operating margin assumptions as well as time value of money.

Hayward’s second-quarter net sales decreased by 29% from the prior-year period, after two years of strong double-digit growth, due to the ongoing inventory destocking in the distribution channel as well as softer end market demand amid a challenging macroeconomic environment. As a result of these challenges, volumes declined by 36% in North America and 25% in Europe and the rest of the world. Considering the decline in volumes, we were pleased to see Hayward deliver a 70-basis-point year-over-year gross margin expansion, from 47.4% to 48.1%, thanks to higher pricing and productivity. The price/cost spread was neutral in the second quarter.

Management lowered the top end of its full-year 2023 guidance range and now anticipates adjusted EBITDA of $265 million-$280 million, down from $285 million at the top end previously. The updated outlook now bakes in a 20%-23% net sales decline from an 18%-22% decline previously, which reflects leaner channel inventory levels. Management said on the earnings call that the guidance assumes a roughly $160 million full-year revenue impact from the channel destocking.

Although we expect headwinds to persist in the third quarter, we think that Hayward is well positioned for growth in the mid- to high-single-digit range once channel inventory conditions return to normal. We remain optimistic about Hayward’s long-term prospects as we expect the company to capitalize on opportunities in pool automation and sustainable solutions.