Q3 2021 Latham Group Inc Earnings Call
Good morning, and welcome to <unk> third quarter fiscal 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Nicole <unk>. Please go ahead.
Thank you and welcome to Lytham Q3 fiscal 2020 one earnings call earlier. This morning, we issued our earnings press release, which is available on the Investor Relations portion of our website, where you can also find the slides that accompany our prepared remarks.
On today's call are lethal president and CEO, Scott Rowe, Jesse and CFO Mark Borsa.
Following their remarks, we will open up the call to questions.
During this call the company may make certain statements that constitute forward looking statements such statements reflect the company's views with respect to future events as of today and are based on management's current expectations estimates forecasts projections assumptions beliefs and information. These statements are subject to and are subject to a number of risks.
Could cause actual events and results could differ materially such risks and other factors are set forth in the company's earnings release posted on its Investor Relations website.
<unk> be provided in our Form 10-Q for our third quarter of fiscal year 2021.
The company expressly disclaims any obligation to publicly update or review any forward looking statements, whether as a result of new information future developments or otherwise, except as required by applicable law.
In addition, during today's call the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance reconciliations of adjusted EBITDA to net income calculated under GAAP can be found in our earnings press release and will be included in our Form 10-Q for Q3 2021, I'll now turn the call over to Scott Rydzewski.
Thank you Nicole good morning, and thank you for joining us for Leatham third quarter 2021 earnings call. We are proud to say that leatham had record sales in the third quarter, delivering net sales growth of 27% to $162 million or success shows that homeowners appetite for pool ownership and our products.
Strong and growing we achieved this sales growth, even though significant raw material shortages limited our fiberglass pool production, which in turn limited the profit flow through of our growth for the third quarter. Adjusted EBITDA grew two 7% to $36 1 million compared to the prior year quarter I'll talk.
More in a moment about some specific steps, we're taking to overcome production constraints and to improve our adjusted EBITDA margins.
First of all let's focus on our sales growth as a market leader and the only consumer centric brand in the residential pool industry. We continue to position <unk> as a household lifestyle brand one that homeowners aspire to own we're evolving the pool by an experience driving material conversion from concrete pulled the fiberglass.
And advancing our mission of making high quality swimming pools and attainable luxury for every homeowner's backyard.
Thanks to our industry, leading sales and marketing engine and growing consumer interest in full ownership. We are on track to deliver our 12 consecutive year of top line growth with over 200 million more in year to date sales in the prior year in fact at the end of 2021 third quarter, we have already exceeded our comparable sales were off.
All of 2020. Moreover, we're also on track to deliver our 12 consecutive year of profit growth and again at the end of this year's third quarter, we have grown year to date, adjusted EBITDA by $46 million and exceeded our comparable full year 2020 adjusted EBITDA.
Now, let's turn to raw materials. The shortages, we discussed on our second quarter call accelerated in the third quarter and a limited our production of fiberglass pools at the same time that our order book was growing significantly the primary shortfall was in resin availability, which resulted in Q3 production approximately <unk> <unk>.
30% below Q2 production in less than half of our Q3 plan.
Let's walk through the various supply chain events that have caused these raw material shortages and what our team has been working on over the last several months to improve the situation.
Over the course of the year several things disrupted our supply chains.
Were weather related events from last Winter's deep freeze in Texas to Hurricane Idaho.
There were multiple disruptions that our suppliers had from upstream material shortages of the Rome unplanned production outages labor shortages and transportation challenges all over the globe.
The raw material shortfall in resin was the principal driver of our lack of profit flow through from our sales growth that occurred because of three reasons first fiberglass pools normally have higher margins than the rest of our products. So we sold a less profitable mix of sales that we had planned second raw material shortfalls caused production in.
<unk>, we make a concerted effort to retain our employees, even one individual plants don't have the necessary raw materials.
Finally, we made the strategic decision to prioritize long term relationship building with our dealer partners by partially passing through these increased cost of the orders already in backlog.
While we haven't taken pricing to offset the inflation associated with raw material issues. There is a timing gap before these increases will match. The orders that are being sold that timing gap affected us somewhat in Q2 hit bottom in Q3 and will lessen as we go forward and as our program to alleviate the raw material shortfalls takes hold.
These issues did suppress short term margins going forward, we feel confident that we will regain our margin trajectory from the pricing actions, we've taken and from the changes we've made to how we handle pricing on new longer dated orders. Most importantly, our efforts to increase our resin supply will allow us to ramp up production to match.
Our order growth and to improve our sales mix through higher fiberglass sales to.
To overcome a resin supplier challenge, our new global supply chain leader and his team conducted a search for additional manufacturers, who could provide the high quality RASM that we need to manufacture our best in class fiberglass pools. As a result, we expanded our sources of resin towards the end of the third quarter and we are already using the new.
Dominion pack manufacturer pools in our factories.
In addition, we have succeeded in obtaining commitments from our existing vendors to allocate more of their production to us. This will enable increased fiberglass pool production in Q4 and into 2022.
Our efforts to expand our supply base continue we currently have several vendors and qualification, which can provide additional material for production early in the first quarter.
There are also a number of other suppliers that are in the evaluation phase.
Combination of all of these efforts will provide us additional resin volume and surety of supply in 2022 and beyond.
While we are focused on expanding the amount of resin available to support the growth of our business. Our operations team is also working on several productivity opportunities to improve our yields which can reduce the material usage of resin in our manufacturing facilities longer term. We are also developing additional storage capacity for our key raw materials.
This will help minimize the manufacturing inefficiencies arising from any future product availability shortages.
The next thing I'd like to call. Your attention to is just how much demand we have for fiberglass pools relative to our production.
As you can see from the graph ever since the beginning of 2020 homeowner demand for fiberglass pools has outpaced our supply which was lower than expected because of a lack of raw material supply and because of the supply shortfall also disrupted our dealers' ability to time their pool installations lengthens fast growing demand has been driven.
Both by the acceleration of the secular trends in favor of investing in outdoor living and the impact of our new b to b to C marketing approach engaging homeowners directly, including our new consumer digital capabilities and I'll discuss in a bit.
You can also see from the graph when the resin supply you should begin to hit which was towards the end of the second quarter. This actually caused our fiberglass sales could decline in the third quarter, which really increased the size of our fiberglass order book and extended lead times. The implications of this are that we are in a position to sell every pool that we can produce.
As far into 2022.
Next let's take a look at our capacity situation. The graph on the left indexes everything towards 2021 capacity you will understand that we don't want to provide our exact capacity position for competitive reasons. Our strategy is to invest in capacity in order to stay ahead of the demand for fiberglass pools, you can see that we achieved.
In 2019 and in 2020, however in 2021, our plan called for us to operate at about 83% capacity.
Cause of the resin shortage, we estimate that we will end up this year is operating at around 58% capacity for the full year.
We have been adding capacity steadily for quite some time since 2020, we have added or in the process of adding capacity to eight of our nine North American fiberglass plants and next year, we will break ground on our biggest plan ever a plant located in Kingston, Canada that will serve in eastern Canada, the northeast U S and the upper.
Midwest as you can see from the graph next year, we will have an average of 22% more fiberglass capacity. Then we have this year, which would provide us sufficient capacity to roughly double our production versus what we expect to manufacturer in 2021.
That puts us in excellent position to capitalize on the demand for fiberglass pools provided that we have sufficient supplies of resin and other materials in sufficient operations employees the manufacturer and distribute the pool. This year in anticipation of the sale to come we have made every effort to keep our operations crew intact even.
When we didn't have enough resin manufacturer pools.
We built a lot of mode. This year and our plants have never been better maintained we have also begun hiring and training of new operations associates to prepare ourselves for production in the new year.
Let's turn our attention to the price gap that I mentioned earlier, when the resin supply shortage. It drove the price of resin a good deal higher we had a choice about whether to pass these costs along towards dealers or not we chose to do so for all new orders and partially for orders that had already been accepted we did this in part because of the early days, we were not sure how.
Long the resin supply would be restricted but mostly we did it to support our dealer partners in front of their customers and we were eager to continue building the leatham brand and confirm the market's positive view on fiberglass.
That opened up a gap because resin is much more expensive and the units we've been selling have been from the backlog that lacks the full impact of recent price changes.
As we begin selling pools entered the backlog after we repriced that gap will narrow this timing gap began in the second quarter and reached its maximum in the third quarter as you can see from the gross margin compression in the third quarter's financials, we expect the price gap to narrow during the fourth quarter as we begin to sell a mix of orders that were not repriced.
And orders that have been re priced which puts us in a position to affirm our adjusted EBITDA guidance for the year.
More importantly, the pricing taken will reverse the gross margin compression and put us on track to resume our upward gross margin trajectory as we move through 2022.
I want to thank all of the dedicated employees of late them, who are using their considerable ingenuity and resourcefulness to find new sources of raw material supply to increase our manufacturing capacity in to devise other solutions that will allow us to produce substantially more pools as we move through 2022.
Many of these actions have already begun their success paired with robust consumer demand and our proprietary approach to making pool buying simpler for homeowners gives us confidence in realizing the sales and bottom line profit goals that we've set for the business.
Lincoln's longer term success is anchored by the ongoing execution of our growth strategy. So I would like to provide a quick update on each of our strategic pillars.
Starting with our digital and brand initiatives. Our digital strategy continues to drive strong return on investment, particularly our efforts around search engine optimization. Our website traffic remained strong in the back of continued improvements for our organic search rankings and our ability to drive traffic to our content rich website in place methods.
Center of the consumer purchase journey, right, where we need to be to drive fiberglass conversion, we continue to invest time and resources updating our lead flow process with one main objective.
To ensure that our leads are qualified and purchase ready as possible. So that we can exploit conversion for our dealers. We have been successful in doing so leveraging our recently launched my leatham tool and pool cost estimate of application, which help homeowners define what theyre looking for in a package we share this information with our dealers said third.
Follow up is more substantive thus increasing their conversion rates.
We also recently transformed the editorial section of our website. The leatham blog now on a more user friendly platform with an updated look and feel the blog includes informative and educational information for homeowners along each step of their pool planning journey the.
The blood features content range from how to plan for a pool, what to expect with installation and ideas for landscaping to tips on seasonal maintenance and pool care, we're providing insight on all facets of the backyard experience, allowing users to cultivate a family dream of owning and maintaining a pool into a reality.
The enhanced user experience of the Laythan blog strengthens our position as a go to resource for homeowners on all aspects of the <unk> journey and is already driving solid conversion into purchase ready leads.
Turning to our product portfolio.
We continue to invest in all three of our market leading product lines and are especially excited about some of the capacity initiatives. We have in place and fiberglass. We're planning to break ground in Q1 on our new fiberglass manufacturing plant in Kingston, Ontario, which will be the largest and lengthens history, demonstrating our conviction and the success of our fiberglass conversion strategy.
This new plant will serve markets in both the eastern half of Canada, as well as the northeast and the upper Midwest of the United States. Additionally, we continue to expand our selection of fiberglass molds, which is already the broadest in the industry. We are launching a number of new pool designs, adding to the industry's broadest catalog. These new designs will incur.
<unk> innovative new entry features and tanning ledges and offer an increased perimeter with perfect 90 degree corners. These shapes convey a sleek modern feel and are very much on trend with today's new pool buyers.
Now turning to the exclusive relationships with our dealer partners dealers continue to see strong homeowner interest in pools with orders booking out into 2022, and even into 2023 and our focus is on enhancing their productivity to build up more capacity to meet this growing demand.
Through our installation training and business excellence coaching offerings, we have a demonstrated ability to support our dealers as they grow the investments. We have made in this area are allowing us to be a key solution for a perennial industrywide capacity constraints.
We will continue our virtual training through the rest of the year with an incredible amount of new content that we're offering to both new and existing dealers as we look out into 2022, we're excited to begin hosting in person training that our new best in class training Center in Florida.
Mark.
Thank you Scott and good morning, everyone.
Today I'll review our results for the third quarter and first nine months of fiscal 2021 and provide an update on our outlook for the full fiscal year.
All comparisons are on a year over year basis, compared to third quarter and first nine months of fiscal 2020.
Please note that 2020 results do not include the acquisition of Gli or our investment in premier pools, and spas, which occurred in the fourth quarter of last year.
Net sales for the third quarter were up by $34 5 million or 27% year over year to $162 million.
This year over year growth was primarily attributable to an increase in net sales driven by increased volumes and price and the acquisition of Gli.
These factors were partially offset by decreased year over year volume for our in ground swimming pool category because of the constrained raw material supply you heard Scott speak about.
If we include <unk> sales in the third quarter of last year, our sales growth would have been six 2%.
By product category net sales for in ground pools, which includes our fiberglass products increased seven 6% to $84 1 million.
Our covers product category sales increased 71, 7% to $44 1 million.
And liners increased 42, 4% to $33 8 million.
Gross profit increased by one 4% to $51 million may.
Mainly from our growth in net sales.
Gross margin decreased to 31, 5% compared to 39, 5% last year.
This represents 800 basis points of compression or.
<unk> 680 basis points, excluding the noncash stock based compensation expense of $1 9 billion.
To provide a little additional color.
Fiber glass products accounted for about two thirds of the 680 basis point gross margin compression versus last year.
The raw material shortage caused lower fiber glass sales in the quarter.
And therefore, a less profitable mix of sales.
The lower sales level also cause negative fixed cost leverage over our asset base and overhead.
Since our cost structure is geared towards higher fiberglass production levels.
A third factor is that we hold on to as many of our operations employees as possible. So that we can quickly increase production when additional resin arrives.
These factors paired with our strategic decision not to fully reprice, our backlog mid season in the face of rising costs.
Rover, particularly acute margin pressure in Q3.
As we continue to secure more RASM and more fully realize the benefits of our pricing actions, we believe year over year margin compression will improve.
Selling general and administrative expenses increased to $48 1 million from $20 1 million in the third quarter of 2020.
This increase was primarily driven by a $24 7 million increase of noncash stock based compensation expenses higher salaries and wages associated with increased customer facing head count to support future growth.
The acquisition of <unk>.
And the legal audit insurance and professional fees associated with being a public company.
This translated into SG&A as a percentage of net sales of 29, 7%.
Up from 15, 8% of net sales last year.
Excluding noncash stock based compensation expense SG&A was $22 4 million.
An increase of $3 3 million and up 17, 1% last year or 13, 8% of net sales.
120 basis point improvement versus last year.
As a result.
<unk> EBITDA increased by <unk> 9 million or two 7% to $36 1 million and adjusted EBITDA margin decreased to 22, 3% to sales.
During the third quarter lengthened supported the expansion plans of our strategic partner Premier pools, and spas by agreeing to reduce our equity position to support an equity infusion by another investor.
We continue to hold a 20% equity stake in premier pools, and our long term strategic partnership remains unchanged.
James associated with this transaction does not affect our adjusted EBITDA results.
Net loss was $11 3 million.
Or a <unk> <unk> net loss per share as compared to a net income of $17 7 million for the third quarter of fiscal 2020, driven primarily by noncash stock based compensation expense of $27 6 million.
For the first nine months of 2021 net sales increased 68, 7% to $491 6 million.
If we include <unk> sales in the first nine months of 2020, our sales growth would have been 42%.
Looking at net sales performance in our three product categories, we have seen strong growth across our product lines.
In ground pools increased 68, 4% to $285 7 million.
Covers increased 76, 3% to $94 4 million.
<unk> liners increased 63, 4% to $111 5 million.
Gross profit increased 54, 4% to $161 8 million from $104 8 million for the prior year period.
Gross margin for the first nine months of 2021.
Was 32, 9% compared to 35, 9% for the prior year period.
Primarily because of the supply chain headwinds we've discussed.
Excluding noncash stock based compensation expense gross margin was 34, 3% or 160 basis points below the prior year period.
As a result.
Adjusted EBITDA grew 69, 5%.
Our $46 1 million to $112 5 million for the first nine months of 2021.
And adjusted EBITDA margin increased to 22, 9% from 22, 8% for the prior year period.
Net loss was $56 4 million for the first nine months of 2021 compared to a net income of $18 7 million in the prior year period, driven primarily by noncash stock based compensation expense of $104 6 million.
Turning to the balance sheet.
As of October <unk>, 2021, we had cash and cash equivalents of $90 9 million.
Total debt of $234 2 million.
And our net debt leverage ratio was one one times.
Net cash provided by operating activities was $29 4 million for the nine months ended October <unk> 2021 versus $55 1 million in the prior year period with the year over year decrease being driven by higher working capital to support our sales growth.
Capital expenditures totaled $6 2 million in the third quarter of fiscal 2021 compared to $3 5 million in the third quarter of fiscal 2020.
The increase in capital spending was primarily related to our fiberglass capacity expansion initiatives.
Total expenditures totaled $19 2 million in the nine months ended October <unk> 2021 <unk>.
Compared to $9 7 million in the prior year period.
I will now share an update on our guidance for full year fiscal 2021.
We affirm the net sales and adjusted EBITDA guidance, we provided on our second quarter earnings call.
Net sales of 600 million to 620 million.
Adjusted EBITDA of $130 million to $138 million.
Today, we have updated our 2021 capex guidance to 24 million to $28 million to reflect our estimates for the current timing of our projects cash flows.
We continue to move forward with the projects that made up our original guidance.
Our outlook for the year reflects our strong financial results for the first nine months of 2021 as.
As well as our confidence in our ability to continue to drive the material conversion to fiberglass leverage our unique direct to homeowner digital strategies to generate leads for our dealer partners and capitalize on the outdoor living trends. It also reflects our many efforts to continue to manage through.
Raw material availability and its impacts.
Got back to you. Thanks, Marc we are seeing continued strength in consumer demand as we head into the fourth quarter and are taking the necessary steps to counter raw material shortages as we look out to 2022, we are well positioned for another year of strong revenue and adjusted EBITDA growth. Thanks to robust homeowner interest in pools.
Increasing dealer capacity in resin supply and our pricing actions, we have excellent insight into consumer demand, especially in fiber glass and our fiberglass order backlog is increasing at the same time consumers are seeing our new pricing, we expect that when the full price increases have caught up with the fiberglass backlog.
We will regain our historical trajectory of growing adjusted EBITDA faster than revenue by selling a more favorable mix of products reaping the benefits of our marketing investments manufacturing leverage from our sales growth and the ability to price faster than inflation I want to thank our teams for their unwavering dedication to supporting our dealers.
Homeowners with that operator, please open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Thank you and the first question will come from Matthew Bouley from Barclays. Please go ahead.
Good morning, everyone. Thank you for taking the questions.
And I think everyone will appreciate all the detail and visibility you gave this morning in the comments in that slide deck. So thank you all for that.
So on the backlog.
Obviously, you're saying you're protected the backlog in recent quarters and Youre in a position if I heard you right to sell everything you can produce far into 'twenty two.
When you get to the homeowner level, how do you gauge sort of how safe for lack of a better term is the backlog in terms of preventing customers from dropping out.
Given lead times continue to push further and further out and you get included into 'twenty three how do you kind of scrub the safety of that backlog. Thank you.
Yes, so Matt good morning, and first of all look I think from the <unk> earnings call. We heard maybe we were.
Open with all the details of what's going on within the business. So we listen to the feedback we wanted to make sure. We clearly laid out there the situation on all fronts with resin backlog and the pricing dynamics and I. Appreciate your comments on what we provided to you guys. Here. This morning, specifically to your question on the backlog and the consumer.
With this being a long lead time purchase decision for the homeowner if you've been waiting for a pool for six months nine months, a year and a half two years in that decision, making process, which sometimes it takes.
You've told the family Youre getting a pool the likelihood of a cancellation is very very low second I think we don't get the order from the deal or until they've kind of confirm the contract with a homeowner and at that point, we see very few cancellations if any at all at that level feeding through they've locked their slot theyre waiting and.
We see almost zero risk in terms of cancellations of the backlog.
Wonderful that's great color. Thank you for that Scott.
The second one it.
It sounds like Youre, making a lot of permanent changes to mitigate future supply challenges it sounds like diversifying suppliers.
Considering holding more storage capacity and I think Scott I heard you say that you are making changes to how you price longer dated orders, which seems particularly relevant here is again folks are getting quoted out to 2023 can you elaborate a little bit on kind of how you are pricing now when you are.
Thinking about these long dated bookings and maybe what's changed versus how you historically did it. Thank you.
Yeah, there's a couple of things there Matt won I think working with our dealer partners to make sure they have flexibility in their contracts in the short term to reprice the consumer level as they see prices change more dynamically.
To not allowing orders to be on the books more than 90 to 120 days trying to think like looking out 90 days from a quarter standpoint with pricing and I think the other thing. We've done is maybe using more more surcharges with flexibility, where we can quickly change the magnitude of that at any point in time based on.
When an order will be shipping out so it's not just one thing I think it's multiple things with more dynamic pricing.
Based on how inflation is moving rapidly up over time.
Wonderful well, thank you very much for that Scott Mark and good luck guys.
Thanks, Matt.
Thank you and the next question will come from Josh Poker Winski from Morgan Stanley. Please go ahead.
Hey, guys, it's actually Gustavo Gonzalez on for Josh Thanks for taking my question.
So I guess.
Moving towards price can you guys kind of talked about the price step up.
Three Q2, <unk> and then how should we think about carryover price into 2022.
Yes.
Good morning Gustaf.
Nice to hear from you.
Thanks for your question.
We've been increasing prices throughout the year, we increased prices again in Q3.
And as a result of that we see this.
Timing lag between the impact of the cost on our P&L and the timing of the price realization on our P&L is shrinking. So we do believe that the gross margin compression we experienced here in the third quarter is the bottom of the trough.
And we will start working upwards from from this point into Q4.
As far as what we see carrying over into into 2022.
On a cumulative basis, we've been seeing I would say low double digit price increases this year.
That we would expect will carryover into 2022.
Got it that's helpful.
And then just as a quick follow up how would you sort of rate.
Availability today versus 60 days ago, just sort of on the resin situation and are you kind of getting what you need now with new suppliers or is there still kind of a shortfall and then if possible can you kind of.
Highlight what the sort of missed sales opportunity was in the third quarter given the shortages.
And so it goes though.
First point is I would say resin availability is.
Now than we were 30 days ago 60 days ago.
New sources coming online situation at our upstream vendor partners improving with the outlook.
I think that trend will continue I think more importantly, as we've talked about additional sources coming online as we move into the early <unk> 'twenty two and through the year.
Which is kind of why we feel so strong that our report we can produce we'll be able to sell next year and with the size of the backlog. We're looking at a really good 2022 and two.
Terms of the impact I think there is a simple way to look at this.
If we produce the same number of pools in Q3 that we had produced in Q2 would have resulted in say, 23% to $25 million of additional revenue out the door.
Clearly had the demand we had the capacity of the facilities, we had the labor so thats kind of a way to just kind of quickly frame it up on a conservative outlook.
Got it thanks for the color and good luck out there.
Thanks Christoph.
And the next question will be from Susan Mcclary from Goldman Sachs. Please go ahead.
Thank you good morning, everyone and I also want to thank you for the increased color and.
Helpful Information on the slides there.
My first question is when we think about the guide for 2021, it implies that the fourth quarter EBITDA margin will be up about 300 basis points or so year over year. When you think about the breakdown of that you gave us a really helpful breakdown as we thought about the third quarter gross margin. What the factors were there can you help us to understand.
What the step up will be in the fourth quarter and how these different parts will come together.
Good morning, Susan.
Just to hear from you.
And thanks for your question.
As you know, we don't provide guidance on a quarterly basis, but at this point in time with our year end guidance and our nine months in the bag, it's pretty easy to kind of back into what that range might be.
And again as we think about profit is going into the fourth quarter. The gross margin compression that we saw in the third quarter from all the various factors primarily fiberglass, we see alleviating somewhat in the fourth quarter as we obtain more resin as we run our production facilities more efficiently.
And as we get a more profitable mix of sales. So I think when we look at those things and the ongoing strength of the order book and the demand for the products. We feel good about our ability to reaffirm the guidance that we have out there and deliver for the year.
Okay. That's helpful and then I have a follow up.
In your remarks about seeing a continued improvement in the progression of margins in 2022 can you just give us some sense of the cadence that we should be thinking about there maybe any thoughts on the sequential movements in any differences relative to normal seasonality that we could anticipate as we think about some of that.
These factors starting to improve for you and perhaps coming together.
Thanks, Susan I'll take that one as well.
As we think about 2022 I think there are some fundamental things that we're thinking about as we look into the business. One is demand remains incredibly strong as you saw on one of our charts. Today. So we feel very good about demand heading into 2022.
I think as you also know we have a seasonal business. So.
So it's not just sequentially one quarter is better than the previous.
And so with the demand with the increased supply of resin.
Going to have plenty of capacity to manufacture additional fiberglass pools.
So you put those things together, we feel very good about what we think we can deliver in 2022 and Susan I think the other key one there as well will be as the the pricing of the backlog catches up as we move through that again, the resin supply will drive the higher production, which will clear the backlog faster, which will get more price on that backlog.
I think that price inflation dynamic.
We will become.
A great friend of ours as we move through 'twenty two.
Okay. Just a quick follow up on that when we think about the seasonality of the business next year. Obviously this year, there's been a lot of moving parts that have cause things to sort of <unk>.
Move in different directions, do you expect that overall, the seasonality will be more normal in 'twenty two.
Yes. Good question there Susan I think from I don't have a crystal ball, but we don't know what could happen next year, but I think 'twenty. One was started the reversion to the mean of seasonality versus 'twenty I think 'twenty two will be another normalized year, but again weather.
Late winter early spring that could move that a month or two as we've seen historically in the business, but I would say it should be more normal I think we all hope it will be more normal.
Yeah, Okay. Thank you for that color I appreciate it.
Thanks, Susan.
And the next question will come from David Bellinger from Wolfe Research. Please go ahead.
Hey, everyone. Good morning, Thanks for taking my questions here.
Just in regard to some of the additional data you provided nice to see the demand trends still very strong throughout the Q3 period. So just internally have there been any discussions or plans to sort of meter or hold back new order growth in some way where there.
Sort of a pull back on digital advertising or some other action to allow for production to catch up with the level of new order demand Youre seeing is there is there.
Any discussion of that within your current growth situation is that how do you think about that in terms of the <unk>.
<unk> opportunity.
Yes, David we have not slowed down any fronts. If you look at the capacity chart right. We've continued to add capacity on the growth Capex standpoint front across all business categories. We've continued to try to ramp labor staff labor get all the resin we need for the outlook to reduce that backlog with the strong demand were.
And again <unk> seen orders out into 2023 as well.
The one thing I think we talked about this on the last call. We have kind of slowed down the lead engine from the search standpoint, because of the organic piece of that is taken off so great for us I mean, the leads we're generating are still far outpacing what anyone can actually get in the ground or fulfilled. So we don't feel the need to do that again thats. The result.
The strong marketing engine that the teams created here. So I'd say, it's full steam ahead on all fronts to keep the capacity well ahead of the demand to try to shrink that backlog and realize that revenue in 'twenty two.
Got it Okay, and then just some more qualitative follow up you mentioned that the resin situation for Ya improving versus the last 30 or 60 days.
Is that more of a comment just on the overall raw material availability or supply chain dynamics in the broader marketplace are or is that more of a function that these internal actions you've taken recently to work around these ongoing issues.
I'd say, it's both it's a combination of both.
If you go back to the March timeframe, when the deep freeze hit the <unk>.
<unk>.
Rallied and started to look at a lot of different options I think those options are now coming online flowing through for us given us incremental incremental volume well more than what we'll need is to move forward and I think the general.
Issues around resin with some of the upstream vendors and some of the supply input some challenges whether it was the epoxy or the metal acrylic acid that situations, improving kind of post the hurricane and the catch up.
And look I think that volume is still ramping as we talk.
I think specifically for the resident it's both.
From a situation getting better and again, just working closer with our dealer partners to understand their dynamics and challenges they face.
Yes, Thanks, Scott appreciate it.
Welcome David.
And once again, if you have a question. Please press Star then one.
The next question will be from Ryan Merkel from William Blair. Please go ahead.
Hey, guys. Thanks for taking the question I wanted to start off with sales I know you have the big backlog, but talk about new order entry and website traffic and any other forward metrics that you follow any slowdown there sort of full steam ahead on investment in the outdoors.
No Ryan good morning, I'd say, it's full steam ahead.
From a sales order standpoint digital lead the hits on the website the new blog the pool cost estimate are and I think we continue to launch new content out there and we will continue to do that as we move through 'twenty two with a lot of new and exciting things that will be common and it's really not had any impact on demand.
And kind of the seasonality of the business as you were in <unk>. There is a natural slowdown as you approach the holidays and all of that.
But other than I'd say seasonality aspect, we're outpacing prior year strength looks good and I had a couple opportunity to chat with several of our customers bigger customers last week and they don't plan on stopping until Christmas, which again bodes well I think that was the comment we've made before no dealers are all tired it's Ben.
Along two years for them with a lot of business there.
They are all talking about working right till the end of the year and looking forward to a really really strong 'twenty two and into 'twenty, three which is great for all of us.
Got it that's great to hear Alright, and then I wanted to follow up on price not sure how much detail you want to provide I know you said price would be up double digits. This year, but I guess my question is in <unk> are you exiting it sort of a mid teens price level and then the second part do you need more price at this point or do you think you have enough.
Hey, Ryan it's Mark Thanks for your question good to hear from you.
We've raised prices several times this year, we raised prices again on several product lines in the third quarter.
On accumulative basis, we're looking at.
I will just reiterate the low double digits at this point in time.
And we're going to continue to monitor that situation.
We as we go forward.
So we'll see what the environment brings but for right now we like the prices that we have out there and we expect to see that timing lag between price and our cost up.
Continued to diminish as we go forward.
Okay helpful. Thank you.
Thanks Ryan.
The next question will come from Ken Zenner from Keybanc capital markets. Please go ahead.
Sure.
Good morning, everybody.
Good morning, Ken.
Very muscular presentation. This morning, guys after all.
Equity volatility we saw in the quarter so.
I think you guys are very much on the right track.
Others have commented in terms of clarifying the business.
So.
Of the sequential sales.
Decline in fiberglass pools that you highlighted Scott.
How much of that would you say.
Can we assume.
Is that just percentage wise was there any big mix in there because of the volume declines and where I'm going.
I can assume thats, all volume declines as opposed to mix.
Of the roughly I think Marc you said two thirds of the gross margin decline.
Related to fiberglass could you split that in terms of how much of that was been volume.
Versus <unk>.
Cost impact right because they are two different metrics, obviously in terms of your fixed cost absorption versus the higher cost just trying to get a sense of that.
Hi, Ken Good morning, and thanks for your comments.
The presentation.
680 basis points of margin compression with two thirds of that in the quarter coming from fiberglass and certainly mix.
A portion of that Scott mentioned.
Just sequentially what kind of.
Sales impact that had on Q2 to Q3, but mixed being a component.
And then just resin availability or lack thereof of having enough right drove some inefficiencies in our factories and then we also have the timing gap.
Reising versus costs that we talked about we have not separately broken those out at this point Jim but.
Two thirds of fiberglass as we think forward then into Q4 and around margin compression as we bring more resident in as we produce more pools.
We look for a better mix and better efficiencies in our factories.
To help going forward and get better get back on a better margin or better profit trajectory.
Okay.
Good is it fair to say.
Really appreciate your comments Scott around the how you're interacting with your dealers.
So let me answer them kind of we talked about is how does that happen. When this new inflation environment can you talk about how the dealers have.
I guess been understanding of this this new paradigm, where we need to be a little more disciplined around.
Contract duration, how they communicate to their customers.
Your surcharges, which it's not we've had sherwin Williams put in surcharges. We've had Stanley works is putting in surcharges.
Large customers obviously.
So can you kind of talk about how that relationship because I don't think its adversarial right, but just to kind of how they're working through that.
That gives you confidence versus where you were let's say two quarters ago before these issues really impacted you.
And so look that the dealers are all really good business people out there in the in the industry they've been around for a long time, they've seen a lot of different environments in markets. I think we've all had to change our business model is on many fronts in terms of what we do.
We've had to have some difficult conversations and look I think there is some some folks who have been really good in terms of how they price contracts out in the future anticipating a level of inflation, that's going to be out there I call that a good business practice staying ahead of the curve.
I think they also understand that look.
No one likes a price increase but I think the protector of the backlog was helpful for them this year to work through it.
We've slowly put the surcharge out there we've increased it a few times, we'll continue to monitor it I think it is just having good open dialogue with our commercial team our new commercial leader.
Josh out there with the sales organization, having these open honest conversations and it's just a new way of thinking.
And.
And we will continue to work with them and look a lot of these folks who've been with US for 2030 35 years long term relationships and I think they appreciate the openness and the honesty and look they are a critical part of our supply chain across the board and that's why we said all along we've got great long term business partners, who kind of hanging in there with us.
That they can then.
Yeah Yeah.
As we think about 'twenty two given your slide presentation, specifically slide six.
All very very good stuff so.
What do you think.
Is the.
Capacity.
Of your dealers right. So obviously you guys had your own internal.
Alright capacity issues not capacity, but throughput.
Throughput do you think the industry's ability to actually dig holes.
As it relates to getting all of the.
Whether it's equipment or the pieces to actually get approval functioning.
What do you think that is because that's obviously seems pretty.
Imported right.
But that part of the channel and can do I mean, do you think thats accurate.
At the 20% growth capacity next year that we saw.
This year, a new pools, perhaps or how would you frame that up for us.
Yeah, So Ken I think Youre right dealer capacity is a critical piece of how this industry will continue to grow I think it goes back to the magic of the fiberglass material conversion story, we've been talking about.
And again, if we go back to kind of the metric I've been quoting for a while you know, let's just say an average dealers doing 10 pools, a year and in the fiberglass world with 40 installation weeks of capacity. If you did one pool a week you could easily get to 40 as you go through that conversion cycle. So a standalone dealer would accrue at one has plenty.
Of capability to go from 10 to 40, and we've talked it if they could get to the point, where they're performing as a high performing deal are doing three a week, that's a 120 pools.
But a year so the capacity there, but you had a really good point everything else they need to put that on the ground has also got a click.
The equipment, the PVC piping that other stuff, but when you look at what's happening in the rest of the supply chain in the pool industry everything is getting better. It's all improvement as we move away from the deep freeze in Texas, and where we were inventory positions improving I think going back to the dealers. The dealers are getting smarter with how they run their businesses standing up.
Early buys and getting equipment stored in buying ahead, our materials looking out at their backlog of what they need so I don't I don't worry about dealer capacity as we move forward as we continue to coach teach and train stand them up and bring more dealers into the fold I don't think that will be a limit or as we look out into 'twenty two and two.
93.
Thank you and the next question will be from Judy Merrick from <unk> Securities. Please go ahead.
Thank you. This is Julian for key teams and just the just to clarify Im looking at.
The monthly resin supply.
Slide that you had it seems like in the first quarter you managed your in line or a little ahead on the price increases is that right and then it was not until the second quarter, where you had a mix of <unk>.
Pricing reprice sales.
Judy.
Repeat that.
I didn't catch the first part of the question sorry.
Well I was just looking where your the slide you had like in March where you had sort of the resin supply issues and increased costs, but it seems like the first quarter you kind of managed.
Your cost you had some increases there, but it wasn't until the second or third quarter.
When you had the greater mix of.
What was price not repriced.
You are ahead of you or have you ever had a cost in the first quarter is that right.
So if you. So if you look at just let's say the supply issue right.
The way the lead times work with supply coming in and the resin base, how we stock store manufacture pools lead times inventory on the ground you take all of that.
We had the resin we need we kept running and again it was kind of align the continued down and it really amplified end of June and accelerated say July August bottoming out kind of in September.
And again, we had inventory on the ground, we were able to liquidate some inventory and moved pools through as we're building those custom tools to order and I think it was really <unk>, where it really kind of caught up to us where we didn't have the resin the run run hard in March that back on the margin compression the 680 basis points two thirds of that fiberglass.
Again, a lot of it the manufacturing inefficiency, where we kept all the costs kept the plans kept the labor redirected them to build molds do maintenance on malls.
Kind of give the factories ready to run full steam ahead, one RASM came in.
I think that answers your question Mark given our comp.
Just add that.
Because I think directly to the.
Timing issue, we have between price up.
The costs, we're seeing on the P&L and the strategic decision not to reprice our backlog.
And as we entered into Q3, we saw that.