Latham Group, Inc. Q3 FY2024 earnings call

• Third quarter performance was consistent with expectations, showing resilience in a challenging industry. • Focused on growth areas like fiberglass pools and automatic safety covers. • Lean manufacturing, value engineering, and improved procurement led to stable gross profit and expanded gross margin despite lower sales. • Strong financial position with $60 million cash after Coverstar Central acquisition and debt repayment. • Growth strategies include targeting the Sand States, evolving pool product mix, and investing in sales/marketing and product development. • Successfully integrated Coverstar Central, with revenue synergy initiatives underway.

In the third quarter, net sales were $150.5 million compared to $160.8 million prior year, down 6.4%. In-ground pool sales declined 9.8%, liners declined 8.1%, and covers were roughly in line with prior year due to the Coverstar Central acquisition. Fiberglass pools accounted for approximately 75% of total in-ground pool sales in 2024.

• Net sales guidance for 2024 is $500 million to $510 million. • Adjusted EBITDA guidance is $77 million to $83 million with a midpoint of $80 million. • CapEx guidance remains $18 million to $22 million. • Guidance ranges narrowed due to hurricane impact and seasonal slowdown. • Year-over-year adjusted EBITDA comparisons are more difficult due to 2023 restructuring benefits and 2024 sales/marketing investments.

• Potential differences between forward-looking statements and actual events due to risks in the Annual Report. • Impact of hurricanes on shipments and sales, with $1.5 million to $2 million in Q3 sales affected and similar expected in Q4. • Market conditions affecting new pool starts, with a projected 15% decline in 2024.

Q: Hey, good afternoon. Thanks for taking the questions. So first off, great job on margins. And, Scott, you said something I want to dig into a little bit. You said that you think you can significantly increase profitability, you structurally change the business for higher margins, can you just unpack that a little bit more? And can we get back to 20% plus EBITDA margins in a recovery scenario?

A: Yes. So, Ryan, I'll give you a kind of high level and let Oliver kind of break it down a little bit. But, you know, let's just go back and revisit 2Q this year, go back to 3Q last year where we were over 20% EBITDA margins in both of those quarters. If you go back and revisit the restructuring initiatives we had in 2023 that carried over into early 2024, which included closing several facilities, you take that, you combine that with all of our value engineering, the lean event, the cost reduction initiatives we've been driving, trying to get to an ongoing underlying 3% roughly of think of cost reduction initiatives on a material basis going forward, I think all of that helps. Plus, we've invested in the business to be much bigger scale than we have been here in the last couple of years, invested in sales, marketing, the Kingston facility coming online, starting up Oklahoma. We've positioned ourselves to be a much bigger company. And I think you've heard Oliver speak on the last couple calls, right? The amount of margin that drops through with a little bit of incremental revenue has been pretty impressive for us. So I think that's the framework of all of that. And, Oliver, maybe you want to give a few more highlights there?

Q: Hey, thank you. Good evening. First off, I know you mentioned the hurricane, it did push some sales into the fourth quarter, push some shipments around. Could you quantify the shipments that were missed? And also, I guess with the factory down a week, were there extra cost in the quarter incurred around the hurricane? Thanks.

A: Andrew, yes let me take that one. So we saw certainly in preparation of the hurricanes and then we had Helene and Milton in the third quarter, we saw some softness. Right? Plus in addition, we had the plant shut down for a week. In terms of quantifying between products being rescheduled from Q3 into Q4, few cancellations, but then also softer demand, I would say it's probably between $1.5 million and $2 million in Q3 and probably at least an equal amount in Q4.

Q: Hey guys, good afternoon and likewise, just good job on the margins. Maybe just my first question, just Scott, just the Sand States, I mean, you've talked about trying to invest more there and make that a bigger part of your portfolio. Could you just kind of remind us like how big the Sand States are today, kind of relative to the existing pool market and where you're kind of targeting those to go?

A: Yes. So, you know, I think there are a lot of different definitions out there of Sand States and what state you quantify and the exact numbers. I think we like to call it the five, right, Florida, Texas, Arizona, Nevada, and California. And look, I think we've got some pockets of decent business and we have to do a decent job in California, maybe more north than south. We've had some really decent success with a lot of our fiberglass dealers in Texas. Very little presence in Arizona, small in Nevada, and I'd say again, small in Florida. I think if you look at those states together, some folks will say it's probably 70% to 75% of all new pool starts and we tend to be under penetrated there. So what we're doing right is, we said look, let's make a push. That's where our fiberglass facilities are mostly located in those areas of the country, so we should have a pretty good cost advantage with shipping getting pooled into those markets. We've never really targeted these planned home communities that are out there. And look, we've just really never dedicated a lot of selling and marketing dollars to those regions. So we've now stood up dedicated teams in those areas. We've got dedicated marketing initiatives. We've done a new blitz of recruiting new dealers into that area. I think maybe one or two calls ago, I think maybe two quarters ago, we talked about Babcock Ranch and getting a dealer from the north up here down into that market, Concord Pools. We just co-hosted a Founders Day there in that area. And I think this will be a big push for us to really get into those markets and show that fiberglass can resonate and again, partnering with the right dealers. And that's where we've had success in Texas, finding the right dealers who believe in the product, having the right marketing programs and doing that push. And we just felt now is the time to kind of put the focus there to try to get a higher percentage of share. And as pool starts rebound across all of North America and we can pick up share there, that's what we're looking to kind of grow our top line and outperform market as we move forward.