Q2 2022 Latham Group Inc Earnings Call
Good day and welcome to the Laser Group, Inc. Second quarter 2022 earnings conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Nicole I don't mean Investor Relations Representative. Please go ahead. Thank you and welcome to late Q2 fiscal 2020 two earnings call earlier. This morning issued our earnings press release, which is available on the Investor relations portion of our website.
But you can also find the slide presentation that accompanies our prepared remarks on today's call or at least I was president and CEO , Scott Rogacki and CFO Robert.
Following their remarks, we'll 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 he is with respect to future events as of today and are based on our management's current expectations estimates forecasts projections assumptions beliefs and information.
These statements are subject to a number of risks that could cause actual events and results to differ materially.
Such risks and other factors are set forth in the company's earnings release posted to the Investor Relations website and will be provided in our Form 10-Q for the second quarter of fiscal year 'twenty.
The company expressly disclaims any obligation to update or.
Publicly any forward looking statement, whether as a result of new information future events 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 can 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 Q2 2022 I will now turn the call over to Scott Rogacki.
Thanks, Nicole good morning, Thank you for joining us for our second quarter 2022 earnings call before we get started I would like to take the opportunity to introduce our new CFO , Rob must shop as we recently announced Rob officially joined late some on July 11, and has already hit the ground running Rob is an accomplished finance and industrial manufacturing.
<unk> nearly 20 years of experience in the aerospace and defense and industrial sectors. Please join me in welcoming Rob the way from team I'd also like to take this opportunity to thank mark worth it for his contributions to leading lead them through such a transformative moment in our company's history. We are grateful to have benefited from his leadership and for his current work.
As a strategic advisor to ensure a seamless transition.
Additionally, I also want to take this opportunity to thank our employees and dealer partners for their hard work and dedication to laid them we cannot do it without you all.
Q2 was another quarter of growth with net sales and adjusted EBITDA, both increasing 14% during the quarter. We continued to experience strong demand for fiberglass pool as well as our cover and liner products. Our previously announced price increases helped drive sales drove more than offsetting the softening volume in our packaged foods.
During the second quarter, which was primarily a result of inventory destocking in the distribution channels and weather related delays in installations.
We are pleased with our overall performance in the first half in which we posted net sales growth of 21% and adjusted EBITDA growth of 27%.
Our year to date results reflect the strength of our fiberglass material conversion strategy unique direct to consumer model and digital strategies.
In addition to investing in the long term growth of the business. We also opportunistically executed a share buyback of $15 million in the second quarter.
Let me update you a bit on the operational progress we've made in the second quarter.
Our north American fiberglass production again increased sequentially and versus prior year with 14% growth quarter over quarter in Q2, and 30% growth in the first half compared to the prior year period, we continue to work through the robots fiberglass order backlog and improved lead times.
We have taken significant steps to address the temporary flake shortage discussed on our Q1 earnings call, which had minimal impact on Q2 results. We anticipate this will be fully resolved by the end of Q3. In addition, we have continued to streamline the crux of our non PARP wife's operations, which combined with increased inventory levels allowed us to get it.
Back to our historic lead times.
We also wanted to provide a quick update on the fire at our Odessa, Texas fiberglass manufacturing facility by mid May all production had been successfully shifted to other facilities with a minimal impact on sales. These operational improvements reflect the capabilities of the team and the resilience of our business. We believe we are well positioned.
From a manufacturing and supply chain perspective, as we move into the back half of the year.
But we feel good about the results we delivered in the first half and the overall state of the business. We expect a softening of volume that we saw in the second quarter and are in ground pool product category, which was driven primarily by package tools to continue through the balance of this year in response to the recent macro uncertainty coupled with some delayed installs from.
Unseasonably wet weather in Q2.
Many of our wholesale distribution channel partners began to destock their elevated inventory levels in recent weeks, we do not expect the mist installed due to the unfavorable weather to be recovered in the back half of 2022 given many of our dealers are completely bought into early 2023.
On the positive side, we continue to expect robust growth in our fiberglass business, reflecting our efforts to drive fiberglass adoption and strong performance at our winery and cover products in the back half of the year.
That said, we do not believe this performance will be enough to offset the impact of full service wholesale distributor destocking and our package pools and unfavorable first half weather.
As a result, we are resetting our guidance for full year fiscal 2022 which now indicates net sales growth of between 19% and 22% and adjusted EBITDA growth to between 18% and 25% Rob will go into detail on this later.
Our updated guidance continues to imply impressive year over year growth and we are confident in our ability to continue to execute on our strategy and deliver growth in the near and long term.
The work we have done to strengthen our supply chain has been paying off as the breadth of our offerings and strong supplier and dealer relationships enable us to respond quickly to demand increases we are focused on keeping our manufacturing capacity ahead of demand with construction of our Kingston fiberglass manufacturing facility in full swing.
We are excited to provide additional updates in the coming quarters.
The underlying fundamentals of our growth strategy remain unchanged and position us well for continued success as we looked at 2023 and beyond.
First the material conversion to fiberglass as we have discussed before this is a key part of our growth strategy. We continue to drive awareness in education with homeowners and dealers on the value proposition associated with fiberglass pools, the low level of penetration of fiberglass pools in the north American market and our ability to drive.
Zero conversion provides significant runway for future growth and helps bolster our performance in any economic downturn, given the competitive advantages of the product.
Fiberglass pools have significantly lower upfront and lifetime costs compared to concrete pools. Additionally, fiberglass pools can be installed in less than one week and in some cases, one day compared to a three month install for some concrete pools.
This allows the homeowner to enjoy their swimming pool much more quickly and allows dealers to grow their business more rapidly by increasing the number of pool installations per year and extending the installation season.
Laythan fiberglass pools are the most durable attractive swimming pools in the market with premium quality and impressive strength that outperforms concrete pools, we're seeing our efforts play out in Google trends data with homeowner searches for fiberglass pools far exceeding a homeowner searches for concrete organic bulls boding well for future.
Demand.
Second we continue to build our exclusive network of dealers and work with our dealers to enhance their productivity and grow industry installation capacity.
We're receiving positive feedback and results from our dealer boot camp training sessions, which are all which have directly led.
Two an increase in the pools installed by those participants in 2022 so far we have trained over 200 dealer installation teams a seven fold increase compared to 2021, our dealers note that they are still booking orders into 2023 and seen strong homeowner interest.
On the lithium side, we continued to utilize our online lead generation engine to bolster the 'twenty two 'twenty three pipeline of qualified leads for our dealer partners.
We continue to focus on our branding and digital initiatives, which are a key differentiator for us our direct engagement with homeowners is transforming the pool buying process and gives us the ability to generate purchased ready leads for our dealer partners quickly and efficiently. Our lead generation engine continues to empower us to improve the quality.
<unk> and quantity of leads for our dealer partners and has generated both purchased ready leads as well as those who need further qualification.
In response to this opportunity we have implemented a new lead qualification program leveraging our my leasing platform and leading market automation software to nurture nurture leads as prospects until they are purchased ready.
National campaigns drove a majority of the volume of leads through May and we have recently kicked off new regional campaigns in major markets, where we have onboarding dealers with installation capacity and our manufacturing plants have the production capacity to respond quickly to spikes in demand.
As we turned up the lead engine in these geographies, we saw an immediate impact.
Leads increased 25% in the first week, which increased to 76% by the second week.
In the first eight weeks, we produced approximately the same number of leads focusing on regional markets as we generated for the first 20 weeks of the year when using the broader national campaigns, new rounds of plan for the back half of the year with national campaigns organic content and search engine optimization in sync with these efforts.
Before I hand, the call over to Rob I want to highlight that on July six 2022, we published our inaugural environmental social and governance report. This is just the first step in our efforts to set clear goals measure progress and increase transparency of license environmental impacts social outcomes and business practice.
We are proud of the initial progress we have made with highlights, including reducing wastewater from our plants to zero and recycling all vinyl and steel scrap to significantly reduce waste going to landfills.
To close the dynamics of the large outdoor repair and remodel market remain attractive and we will continue to work as a team to navigate the current environment. We see continued demand for our products with a generational shift in spending from indoor outdoor and continued meaningful migration to suburban areas for urban areas as well as southern states where pool.
Ownership is higher.
Our large fiberglass order backlog remains robust with many of our dealers booked out into 2023, and we continue to generate recurring revenue from our industry, leading covers and liners businesses.
As the market leader with significant scale. We are confident that we are uniquely positioned for success as we move into the back half of the year as well as 'twenty 'twenty, three and beyond with that I'll turn it over to Rob.
Thank you Scott and good morning, everyone. Today, I'll review, our second quarter and first half fiscal 2022 results and provide an update on our outlook for the full fiscal year.
Before we dive in I want to express how thrilled I am to be part of the lay some team I believe we're in an excellent position to capitalize on our unique value proposition long term.
Turning now to our results net sales for the second quarter were $207 million up $26 million or 14% year over year.
By product line. This increase was primarily attributable to growth in pool covers which increased 46% to $38 million and liners, which increased 21% to $56 million, while in ground pools expanded 4% to $112 million in the quarter in the in ground pool category. We grew sales in fiberglass tools when we <unk>.
Spirits to pullback in packaged pool sales.
26 million increase in second quarter net sales was driven by a $34 million increase in pricing and an $8 million decrease in volume. The volume decrease was primarily attributable to package pools, which were impacted by our wholesale distribution customers, who have begun to destock inventory levels as well as more days or months.
Usable weather in certain regions that limited installation days switching.
Switching now to gross profit, we generated $68 million of gross profit up $9 million or 16% on the flow through of net sales growth and a decrease in noncash stock based compensation expense.
Margin improved in Q2 to 32, 7% and was up 40 basis points compared to 32, 3% last year the year over year reduction in noncash stock based compensation expense drove the expansion excluding stock based compensation expense gross margin decreased 180 basis.
Due to the impact of inflation and negative fixed cost leverage mostly associated with lower volumes in packaged foods.
And in some cases, the investment in fiberglass capacity expansion selling general and administrative expense decreased to $42 million compared to $95 million. In Q2 of 2021. This decrease was primarily driven by a $55 million decrease in noncash stock based compensation expense excluding non.
Cash stock based compensation expense, SG&A increased 2 million or 7%, which is roughly half of our net sales growth rate. The increase was primarily due to investments in additional headcount to support growth adjusted EBITDA increased to $49 million up $6 million or 14% and adjusted EBITDA.
<unk> margin decreased 20 basis points to 23, 5%.
Yeah.
Net sales for the first half of fiscal 2022 were $398 million up $69 million or 21% year over year, we have seen net sales growth across our three product lines for the first six months of fiscal 2022 in ground pools increased 11% to 224.
Covers increased 41% $71 million and liners increased 33% to $104 million.
Gross profit increased to $138 million up 25% from $111 million in the prior year.
Gross margin for the first six months of 2022 increased to 34, 7% inclusive of noncash stock based compensation expense compared to 33, 6% for the prior year period, the $27 million increase in gross profit and the 110 basis point increase in gross.
And we're driven by the flow through benefit of pricing actions to offset inflation and a $3 million year over year reduction in noncash stock based compensation expense, partially offset by negative fixed cost leverage excluding noncash stock based compensation expense gross margin expanded 20 basis points in the first half of the year.
Adjusted EBITDA was 97 million for the first six months of 2022 up 27% from the prior year period, and adjusted EBITDA margin increased 100 basis points to 24, 2%.
From the prior year period.
Now switching to the balance sheet as of July <unk> 2022, we had cash and cash equivalents of 25 million total debt of $314 million and our net debt leverage ratio was one eight times net cash generated by operating activities was 42 million for the second quarter of 2022.
255 billion in the prior year period with the reduction primarily driven by investments in working capital mainly inventory to return to normalized lead times and the embedded impact of inflation on inventories for the first half of fiscal 2022, we used $15 million of cash in operating active.
Whereas in the first half of fiscal 2021, we generated $14 billion. The first half year over year change was also mostly due to the return to normalized lead times and the embedded impact of inflation on inventory.
Capital expenditures totaled $10 million in the second quarter of fiscal 2022 compared to $8 million in Q2 last year driven by the increased investment in fiberglass capacity, most notably the Kingston manufacturing facility project.
Capital expenditures totaled $17 million in the first six months ended July 2nd 2022 compared to $13 million in the prior year period.
Through our stock repurchase authorization, we used $15 million of cash to buy back a little over 2 million shares at an average price of $7 40.
Before we switch to our updated guidance, let me take a moment to comment on capital allocation, our capital allocation philosophy centers around maintaining the ability to execute on our strategic objectives through the cycle to maximize value for our shareholders. We do so by actively managing our capital structure through maintaining liquidity paying down.
On debt and I'm, turning cash to shareholders.
Now switching to our revised 2022 guidance based on the factors Scott outlined previously we have updated guidance for the full year fiscal 2022, we expect to deliver net sales of 750 million to $770 million, representing 19% to 22% year over year growth.
Adjusted EBITDA of 165 million to 175 billion, representing 18% to 25% year over year growth.
And now we expect our capital expenditures to be in the range of 40 million to $50 million, we remain committed to investing in fiberglass capacity and our digital transformation to drive long term growth for the business. Our revised Capex guidance is based on the prioritization of key initiatives focusing on delivering our strategic.
Yes.
As we look to our three to five year targets, it's important to remember that even as our macroeconomic environment chips. The fundamental success factors of our business remain unchanged. Our outlook reflects our ability to continue to drive material conversion to fiberglass tools to leverage our unique direct to homeowner digital strategies.
To generate qualified leads for our dealer partners and to capitalize on homeowners continued investment in their backyard.
Scott I'll turn it back to you for closing remarks, thanks, Rob I am very proud of all we have accomplished on an operational level and nowhere rising to meet the challenges of this macro environment as a stronger and more efficient business. We are looking forward to closing out the second half of the year and are on track to deliver our 13th year of net sales and <unk>.
Adjusted EBITDA growth and adjusted EBITDA margin expansion as we begin to lay the groundwork for our 2023 plants. Thank you for your time today I Hope you all enjoy what's left of summer.
We will now begin the question and answer session.
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Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Rob job growth.
Okay.
Think of America. Please go ahead.
Hi, good morning, Thanks for taking my question.
I take one Ray How're you doing.
They turned to follow up on the comments on the packaged pools, which I think is the final one of course can you talk about how the distribution varies for packaged foods compared to the the fiberglass pools, and then where are we in that destocking process for the packaged tours how much more do we have to.
To go.
Yeah. So so Ralph you know if you guys recall and I'll start with fiberglass fiberglass is really a direct model right, where we're distributing the pool from one of our factories late into the backyard of the consumer for the dealers. The installer. So that's more of a direct.
Product and it's similar to the liners and coverage for the most part as well think of those as more direct.
Some of the liners do go through distribution, but it's more of a quick pass through but the packaged pool segment of being ground category is more of a stock component products sitting in the wholesale distributor branches, where the dealer would then come in and pull that off the shelf you know I would say, we're probably about halfway through that destocking.
<unk> I think we'll see that continue through three Q and then stabilize and that's what we reflected in our in our current guidance that Rob provided the update out here. This morning.
Great very helpful. And then can you just talk about the sell out trends that your dealers are seeing or the traffic trends. There how long you know over the last few months as we've seen that the macro environment become more uncertain.
How are you.
The traffic evolved.
What are you seeing for end market demand and what are you assuming in the second half of the year.
Yeah.
I'll kind of highlight in each of the categories. The the liner business has continued to be strong and again, that's mostly a replacement business. Some of the liners are going into new pools. So that's that's been a good strength for us through the entire season and continuing here into three Q.
Cover business as the saying, we're seeing a really strong copper business both for the automatic covers and as many of you recall, we're really just starting to enter the winter safety cover season that will be ramped up here.
Later, this month and through early <unk> and the early read on that is we're expecting a real good season. They are from all indications of our dealers and the consumer level and then fiberglass continues to be strong we expect to see a really strong second half for fiberglass sales again, we've got a really good backlog will take in orders.
In 'twenty, three but more importantly, with supply chain challenges behind us.
We've got the capacity in the ground, we've got material availability and our lead times are much improved where we can quickly turn and getting getting pulled out on a frequent basis for dealers.
<unk> pool category dealers are still booked through the end of the year and booking into 'twenty three.
And again, that's the other piece being a boot category, we're not seen as the pool.
Kind of restocking orders at the distribution level as they adjust inventory positions, where they probably in a little high higher than normal got we'll see that correct through the back half of the year and then we should be good as we had all of the 2023 some dealers just back on the consumer demand at the dealer.
At a level rate you know a lot of dealers are still seeing good demand at the consumer level, but there are pockets of the country and regions and I'll say dealers and it's really a balance of a deal a region level, where they have seen a slowing of lease and that's why we've really increase the lead generation efforts for those dealers and many of those markets again, I'd say, it's still early.
<unk> from <unk>.
Where we were back in 18 19 timeframe. They just got it cost them to a much higher level of backlog at a much heavier flow will demand and lead generation and we're following those new leads back to them.
Yeah.
Okay. That's helpful. Thank you.
Welcome.
Yeah.
Your next question comes from Matthew Bouley with Barclays. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions.
I guess first one just on the pricing versus cost side, you know I I guess number one just what are you seeing in on a you know on the cost inflation side and you know if if some relief does.
You know manifested on that side of things how do you guys think about you know pricing and promotions them you know in an environment, where you may start to see cost relief. Thank you.
Yes, Matt I'll I'll I'll lead and then if there's any other color Rob wants to provide it can you know look we've not really seen a slowdown of the cost inflation on many of the front. There has been a few pullbacks in a few of the categories.
But it's still very elevated from let's say where it was.
12, 18, 24 months ago. So we're monitoring that we'll continue to watch that one and then you know at this point, we're not we're not planning or thinking about any price reductions or promotions out there to try to try to move product, especially just coming in as cover season strong fiberglass backlogs.
We think we're in a good position on the price cost inflation curve, but like we've done over the last now probably 24 months, we'll keep this one clearly in front of us and adjust as we see fit going forward, but no plans.
To do anything from a pricing standpoint at this point, where we sit right now and that's reflected in guidance and then kind of our expectations.
Got it that's super helpful. Thank you for that Scott and then.
Secondly, just on the on the.
On the margin guidance I think the you know you're implying a you know on an EBITDA basis, maybe margins declining 80 basis points year on year for the second half at the midpoint and correct me if I'm wrong, but I'm. Just curious have you kind of outlined the sort of components gross margins versus SG&A within that and kind of what.
You know what do you think you could flex I'm more aggressively if you need two thank you.
And Matthew I think for the full year, we're expecting kind of flat adjusted EBITDA margins to slightly up.
Certainly you see in the second half with our guidance if there's a there's a little bit of a headwind there on.
On the margin, but that has to do with the underlying inflationary impacts we've talked about.
Already and the expectation of that going forward.
But we don't give specific guidance.
Either SG&A breakdown or gross margin.
Alright, Thanks, Rob Thanks, Scott.
Alright, Thanks, Matt.
Oh.
Yes.
Our next question comes from Josh.
Okay.
England Morgan Stanley . Please go ahead.
Hey, Good morning, guys, you actually have a gustava Gonzalez on for Josh.
Taking the question.
Quickly in and I think you know sort of realized price than in second quarter here with them in the high teens range.
How does that compare to your second half outlook should we expect.
Moderation as we sort of start lapping some second half 'twenty one.
And then sort of talk about your expectation claims and in the third quarter and.
It's probably just like second half I think that third quarter, Destocking is like mostly where that or color there would be.
Yeah. Thanks to Sowell I think first half versus second half we expect.
The same run rate on price as we had in the first half.
Yeah.
Got it that's helpful.
Oh can you hear me.
Okay.
Yeah go ahead Gustaf there was a little bit of a pause there.
Yeah, and then I guess just on your sort of your second half.
Volume expectations.
Second half of that question.
Oh, yes, sorry, okay.
We expect continued growth in the fiberglass, although we don't break it out you know the in ground pools section.
Package pools will be similar to the to the second quarter or the first half.
In terms of volume.
Yeah.
Okay. That's helpful. And then I guess, just sort of thinking about the current environment and I know you guys had sort of targeted I think low to mid twenties on the fiberglass churn rate sort of has your expectation sort of change in in the near term or just given what's gone.
On.
Yeah, So gustaf.
Quoting what we think the actual number will be because we really cant calculate that until early spring once we see where final pool starts from PK data shake out and run our analytics, but what I would say is we're continuing to drive that material conversion story driving the acceleration no great indicator is too.
New dealers trained in fiberglass here over the last or I guess the first.
Seven months of the year, we were bringing dealers back on demand is resonating at the consumer level and I think the economics of the fiberglass pool versus the concrete floor that lower upfront cost and total cost of ownership probably resonate even now more for a consumer as they're making that pool buying decision.
And maybe looking to Sable save a few dollars and actually wind up with a much better finished product and experience in the backyard and I think what we're focused on as part of our long term strategy is driving that 40% to 50% penetration number like you see in Europe .
The 70 plus percent penetration level, we see in Australia. So no change in our focus our efforts and that's also why we're continuing to push.
Capacity expansions in that category with the move in the Ottawa Kingston facility expansion.
Okay.
Got it that's helpful. Thank that.
You're welcome Jeff.
Yeah.
Our next question comes from Tim will just swing back.
Please go ahead.
Hey, good morning, guys.
Okay.
Good morning, good morning.
Maybe just kind of starting on on the digital initiatives could you just talk to kind of what youre doing on some of these regional campaigns that have kind of picked up and.
And generated new leads and I guess, you know if you can maybe kind of break down what the cost of that is and how kind of replicable that is across the dealer base.
In other geographies.
Yeah. So there's there's several several pieces within that shame of how we run these campaigns and I'll start with the right. The the last 12 to 18 months, we've really just had normal organic.
Oh search really carry us through.
Last 18 to 24 months, where we've talked about we actually turned off our lead generation engine because dealers were flooded.
We started to hear some dealers in pockets of the country say they've seen a slowing of believe that like the league of stops or or turned down its just slowed from what they've experienced over last 12 to 18 months. So we started turning up some of the regional programs and offerings and again, we without disclosing.
And exactly how we do it we've got the ability to go into certain market territories.
<unk>, who is the lead generation engine through many different marketing and digital platforms that we use funnel those leads to our to our grand dealers in those markets and if you go back and look at the metrics I quoted upfront. The success of bad is pretty immediate you know where after the second week, 76% uptake in Lee.
Jens and you know by the eighth week of the campaign, we generate as many leads in that week as we did the first 20 of the year. So it was a very select approach.
I'm not going to disclose the cost, but I would say, it's it's it's not that expensive to run programs like this with our engine and now it's got a very high ROI on that investment on a dollar per week basis, and I'll say, it's less than a $100 per lead without giving the exact number to just kind of give you a feel.
The magnitude of what we're doing here.
And as we go forward.
We'll continue to just press as far as we can on that front for our dealers and they're seeing it and that will really help us drive.
What we see as a nice really growth here in the second half and into 'twenty three in the <unk> category.
Okay, Okay, and I guess like of the regeneration that you've kind of done regional I mean is there a way to think about how how much of.
How many dealers that touches as a percentage of the dealer base or I'm, just trying to think about how how.
Over the next six to nine months, how much you can really lean into that drive more volume next year.
Yeah. So look there's a lot more lean in and we can do here on this front and that's kind of what Joe and the marketing team are looking at doing right now we are running some regional programs.
We can dial this thing up pretty rapidly here in the second half of the year and the way the way to think of it as think of it as kind of ZIP code by ZIP code or a city by city right, we have a grand deal or a select dealer.
Particular market.
The leads will come in there's a lead prioritization and.
Elite disposition funnel that they have to go through and literally it will go to the first the biggest deal in the market first they have a certain amount of time to disposition to lead or call. The consumer back and converted to an order at that point. It would then go to other leatham dealers in particular city or area.
So if you think about market territories right. We're thinking of you know I'll pick on the Charlotte area in North Carolina right. So all of those dealers in that greater Charlotte area.
Think about northern California, we would target an area. So these campaigns go after pretty good you know territories in areas and just pushing leads with all those dealers with a quick funnel down. So it's like I said, it's been dialed in pretty well clearly something what will be ramping up and it's.
It's really the tightness of our sales team with the dealers when they ask for it.
We respond quickly to that.
Okay. Okay. Good and then just one more can you give us an expectation for what you're thinking free cash flow should be this year.
Yeah, we generally don't forecast free cash flow or give guidance on it.
We forecast of course, but we don't give guidance.
Okay sounds good thanks, guys.
I think then.
Yes.
Your next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, guys.
I wanted to ask about the second half the morning wanted to ask about the second half revenue assumptions. So it looks like about $120 million is the delta between the old guide in the New guide is the majority the destock that we're gonna see.
The above ground I'm, sorry in our packaged pools and maybe a bit for weather or did you also include a slowdown you know a bigger slowdown to be conservative.
Yeah.
Yeah, So Ryan I'll kind of takes out the high level view here you know the majority is the destock in the packaged pool in ground category, we're not we're not going to disclose actual percentages or splits or anything so, let's just say that the headline statement and.
Then it's not all just driven by a destocking right.
<unk> whether that's.
The dealers experience was also part of that equation, where they just weren't able to get pools in the ground right and that's kind of pushing some of that that demand and install into three Q and with many of the dealers I'll say sold out and again back to the sold out in terms of how many pools, they're willing to put into the year.
Just not the sprint capacity in the back half with them to make up a lot of what they lost in <unk>. So the combination of those two and I'll just come back again, and restate right Aligner category the cover category and even the fiberglass distinct as part of being ground are all strong performers across the board for us.
So we've not really seen a broad based consumer slowdown impacting the dealers yet other than at a higher level slowdown of lead generation in certain pockets of the country that we're addressing through the prior conversation.
Okay.
Yeah honest to Albert.
Yeah, I was going to.
Add that we're still delivering 19% to 22% growth in the EBITDA growth.
18% to 25% so positive year over year performance is our expectation just to underline what Scott said.
Okay.
And then following up just to dig in on the packaged pool to why that might be weak why the other categories are holding up well is that because the package pools or more to a lower end consumer and higher and you're just not seeing yet or is there a comp issue.
I'm just trying to figure out like what the underlying driver is and then should we view the slowdown in packaged pools as like a leading indicator for maybe your other categories or is that not the way to think about it.
No I hate to say, it's probably not the way to think about it I'll answer the back part of the question I really think it comes down to with all of the supply chain challenges looking back over the last 18 to 24 months with material labor availability and lead times in these particular categories, where we were out in some cases 35.
45, 60 days right that required.
The wholesale distributors and in many cases, the bigger dealers to really start to stock up on product to start working through their backlogs I think some of the backlogs are still out there for a lot of these dealers and as the weather had an and I'll say the W. D began looking at inventory levels versus where they historically have been.
And they were in a position where they were they were probably overstocked in many products and as they're looking at where they think you know.
The industry was headed and they began to kind of slow down and what I would call. The in season, Reorders and Thats really what didn't happen we didn't seem to see the peak in season reorder points you typically would.
They're drawing down stock instead of continuing to build and like I said, we started to see that kind of late <unk>. We expect that to continue on the three Q and we're believing it will normalize it for Q.
As they get to the right level that they feel comfortable with.
And I think the reason they're doing that is if you look at the capacity, we've added and where we sit overall our lead times are now back to probably the best they've ever been for the company in the packaged pool category, where we're able to push product out in a three to five day timeline on all those custom products.
Which we haven't been at and probably going back to 19 or early 'twenty and that's the other thing driving that and just one more comment right back to the dealer for a second they still see a healthy backlog of approvals at the consumer level.
And you'd probably find it hard pressed to find a deal to put upon them put a pool and rewrite now this fall.
The book and orders out into you know many cases may or June three right now.
Yeah.
Okay makes sense. Thanks Scott.
Probably won't Brian .
Okay, and if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Susan Mcclary with gold.
Fox. Please go ahead.
Thank you good morning, everyone and thanks for taking the questions.
For instance.
Got it.
My first question is on can you talk a little bit about capital allocation and you mentioned that you did narrow in and reduce that Capex Guide you also mention me.
Share buyback plan in the quarter. So can you just talk a little bit about you know what that lower capex is really reflecting what are some of those things that you are perhaps delaying and then just how youre thinking about allocating the dollars overall.
So Susan I'll start, maybe just with kind of the Capex side and turn it back to Rob on overall capital allocation.
As you recall right. If you exclude Kingston for a second which is a which is a big investment for us and a big increase year over year and the Capex Guide we provided.
Most of the other projects are smaller one off capacity additions, where it's up a mall the truck piece of machinery, let's say sub $100000 type investments across the board.
As we've worked through the first half of the year.
Couple of things we've stayed focus on from a from a capex standpoint is fiberglass expansion. We're staying the course there to stay ahead of the demand which is the story we've been we've been talking about for a while here.
<unk>, what I will say full steam ahead, we need that capacity in the in the Canadian and northeastern market.
Help us balanced production levels in some of our other facilities. The digital transformation project is ongoing which is important.
For for long term success of the company as we look out three to five plus years and then what I would say is that we did the big investment in steel with itself in any of that projects nearing completion.
Everything else at that point or small one off that we've evaluated where we sit on an overall capacity standpoint utilization those levels looking at where we are in terms of current lead times in demand.
And we felt that there was some projects that we just can kind of put on pause right now.
The reduction in the guidance, but I think the core thesis of investing in fiberglass to stay ahead of the demand is something we will continue to do which is a testament of this conversion story the strength of it and it resonated both with dealers and consumers.
And what we're seeing in the marketplace and with that I'll turn it over Rob can maybe talk to your overall capital allocation story.
Yeah. Thanks, Scott So no capital allocation overall, we see those four levers more as an equation in the top two are really as a growth company our focus so both organic growth.
And then if there is a opportunistic M&A tuck in we would do that as well. So that's the primary primary focus for us on the debt side.
Our leverage ratio is quite low we're very healthy. So we're happy with that I don't see allocating a lot there in the short term and then on the stock buyback that's more of an opportunistic if we see the right opportunity and it's against really the top side. So our focus although we have that authorization.
We've only spent 15 of the 85, we have that for the next.
Three years, we see that more as just another tool in the tool kit of our capital allocation with the primary focus being on driving growth and long term value in the company.
Okay. That's helpful color.
All of what you know, obviously, you're you're newer to the public markets and we don't have perhaps as much history on that business through cycles can you talk to your macro playbook. What are some of the things that you are watching to determine changes that you may need to make to the business and what are some of those changes that you can get.
To protect the revenue as well as the margins in a weaker macro.
Yes, So Susan me a high level.
I'll start off saying.
<unk> or private REIT, we've been around 65, plus years and I think over the history of the business, it's they've seen pretty much every cycle.
Then with the company now 10, plus years, and I've, probably seen three or four different cycles over that period as well. So we've got a really good playbook.
The things, we're looking at high level, clearly incoming order rate interactions with our dealers, what they're hearing and C N and really staying close to them from a lead generation demand standpoint, we we we don't disclose or talk about backlogs, but that's another good indicator of what we see out there on on the consumer.
And dealer front as we worked through those.
And I think overall, if we do stay close to what we think is happening with new pool starts we've got some really great.
Wholesale distribution partners that we work with to see what they're seeing from a pull through with all of their communications with dealers. So we kind of look at all signals there and what I would say is what separates us from the rest of the pack a little bit is this digital strategy, we have or we can dial up the demand kind of at a moment's notice for the dealers.
90 million homes out there that want a swimming pool and I I've used this stat several times and I love It right, there's about $1.5 million of potential pool of demand out there per year that we can go market to right. Those are the homeowners who have an interest in a pool high likelihood of buying one of the next five years pool.
Pool starts are still well off the peak. So we don't first of all we don't see a big pullback coming overall in pool starts well, let's say.
It did pull back some.
We've had a history of outperforming the overall market with with fiberglass, we've got a strong recurring revenue base with our liner and cover categories and.
Rob and the finance team I'll say the entire business, we have a good recession playbook that we can pull multiple levers of how we could quickly pull back to reduce cost high variable nation of the cost structure of the business. So we look at those things we have that sitting in the desk drawer Allstate is.
Three tiers of how it all those programs more importantly, we brought some new folks into the organization that are kicking off a whole new lean and productivity initiative for us not to say, we haven't done it. So I'd say, it's a real new focus under our new Chief operating officer, Sanjiv and her team he's standing up there building a nice <unk>.
Line of projects going forward that will probably be talking about on future calls and its probably its probably all of those and I think more importantly, if you step back right 12 consecutive years of topline Bottomline and margin expansion the guidance that we issued here. This more in the revised guidance would indicate a 13th consecutive.
A year and whats look we'd all be truthful ourselves, a pretty difficult and challenging environment overall with everything that's happened in 2022 on a global basis. So we're happy with the results we feel we're well positioned to maneuver through second half of the year and into 'twenty three and this team knows how to overcome.
<unk>, we've proven to you guys over the last 24 to 36 months.
That's great Scott Thanks for the color and good luck with everything.
Youre welcome season on the back.
Yeah.
Our next question comes from Kevin Chan. Please go ahead.
Thank you.
Question on the what you said earlier about 4% growth in pools in the quarter can you talk about fiberglass pools, what the what the units and what the dollars were just for that just for that category.
Yes, Keith I'll I'll.
And that went off you know, we don't disclose distinct fiberglass or packaged pool unit volume numbers in ground pool category.
But what I will say is we are expecting very strong double digit growth in the second half in the fiberglass segment. You know that is the result of strong backlog that we see where dealers are currently position and all the work we're doing to drive that conversion story.
So if you hit the double digit is that going to be all price or whether there'll be some unit growth in their future success.
Yeah.
Sorry about that.
Yeah.
Yeah.
And then.
We've talked a lot about the inventory situation on the the package pools.
<unk>.
Is there going to be a scenario in the future where when the inventory levels adjust to the level that the dealers want them, you'll see a little bit of a bounce back as demand kind of goes back to where sell out is is that something that could happen is somebody foreseeable for this calendar year.
Yeah, what I would say is it's a potential keys I think what we've got and what we have to determine is you know how far does the destocking go through the back half of the year before we would expect to see a rebuilding your a reset level and I think we've got our guidance based on the <unk>.
Information, we have out there from our business partners.
You know if.
If I were to call it probably wouldnt see that until probably early next year I think everyone's going to take a cautious approach is appropriate.
Six months, but that's something we're really watching closely as well.
How much that could potentially rebuild on based on that correction that's happening currently.
Okay. Thank you.
Youre welcome Keith.
Okay.
Our next question comes from Kevin <unk> with Keybanc. Please go ahead.
Good morning, gentlemen.
Good morning, Dan.
So.
Obviously, we've seen inventory impact second half guidance for you you know we started tools we saw it in decking.
You know and it's about a 23% revenue.
You know in the back half reduction.
Obviously with price it seems like there's quite a bit more volume. So there's two questions Scott that I'd like to follow up on first you talked about the first half of 'twenty.
First half of next year, let's say first of all you know somewhere in the first half things normalizing. What gives you that conviction is it really I mean, you did talk about your lead times.
Proving.
Is that what it is or was.
Because people are trying to discern.
The supply level from the demand you had answered these west talking about you know contractors going more to pay.
Pay more for leads and stuff. So people are trying to discern that where exactly is your comfort and then my next question.
It would be tied to your gross margin because you had about a 25% incrementals.
You know in the back half negative so the gross margin story changing from where it was when you guys. Initially came out in terms of that mix towards.
Higher gross margins on the fiberglass where did the cost inflation really eat that story away. Thank you very much.
Yeah, So Ken I'll hit kind of the high level first question and look we're not we're not going to talk first half 'twenty thing from a guidance or expectation standby I think that was part of what was what were going to your question but.
The conviction of.
Why why we feel good about everything is start that the liner and cover categories. Why are a strong recurring revenue business of that replacement product for the consumer right large installed base of pools out there.
If you own a pool, you're going to replace your line or and more importantly, you you have to replace your winter safety cover from the safety aspect of that so that's a nice growing business for us we've seen really good strength, there and particularly I've got to mention the auto cover category. That's similar to the fiberglass story of product that a lot of folks aren't aware of.
And a bigger and bigger adoption of that product on on our pools as well as all tools that are installed out there, including concrete on that business is performing exceptionally well. So I think as we continue to drive the story on those those categories that that's a big good base of business for us that's ongoing with fiberglass conversion store.
And everything we're doing there with capacity the conversion I'm standing up new dedicated dealers 200, new fiberglass dealers onboard and so far this year.
We haven't our supply chain at all today, which was actually great because that's solid for us at this point in time, and where we set no longer being on hard allocations. Good good raw material supply across the board lead times greatly improved and fiberglass our ability to start being aggressive in that space to bring it on board Onboarding new.
Dealers working with them to quickly and rapidly growing double that business I think it's just more of the single what we've been doing over the last decade or so.
In running the business and in packaged pool right does have a slight component of the stock product.
Everything else is constant we're producing at two in order to go out the back door. The consumer that product does have a little bit of an inventory stocking, but we don't really see a slowdown in consumer demand for that sector of the inbound category.
Hopefully that answer your question kind of with that now I'll turn over to Robin on the gross margin question you had.
Ed.
Our gross margin.
We don't give guidance on that going forward or the SG&A breakdown.
I can say is if you look at the second half were down a bit.
On volume, it's very similar to.
Second quarter, we do have inflation built in there we've talked about a little bit of that embedded in our inventory. So.
We feel pretty comfortable with where prices are today and the value proposition.
We continue to watch inflation, but that that profile over the years, what we're looking at that.
Maybe just the lower volume.
Thanks again.
Everybody.
Yeah.
EBITDA margin overall as we're forecasting is flat to up.
So that would be the 13th year of consecutive growth. So overall, we feel good about the year.
Even with those pressures.
Thank you.
Welcome Dan.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Scott Rydzewski for any closing remarks.
I think Sarah you know hey, thanks, everyone for your time on today's call. We really appreciate all of your continued interest and support of late.
And we look forward to providing further updates in future calls with all of you have.
Have a great rest of your day and again, thanks, everyone Cheers.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.