Q2 2023 Latham Group Inc Earnings Call

Good morning, and welcome to the Latham group's second quarter fiscal 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero on your telephone.

One key pad after today's 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 like now to turn the conference over to Nicole Harlow Investor Relations representative.

Please go ahead.

Thank you earlier this morning, we issued our second quarter fiscal 2023 earnings press release.

Which is available on the Investor relations portion of our website, where you can also find the slide presentation that accompanies our prepared remarks.

On today's call, our Latham, President and CEO , Scott Rogacki and interim CFO Mark Borsa.

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, which reflect the company's views with respect to future events and financial performance.

Awesome today or the date specified.

Actual events and results may differ materially from those contemplated by such forward looking statements due to risks and other factors that are set forth in the company's annual report on Form 10-K, and subsequent reports filed or furnished with the FTC as well as today is hurting really.

The company expressly disclaims any obligation to update any forward looking statements, except as required by applicable law.

In addition, during today's call the company will discuss certain non-GAAP financial measures.

Reconciliation of the directly comparable GAAP measure to the non-GAAP measures can be found in the slide presentation that accompanies our prepared remarks, which can be found on our investor Relations website.

I'll now turn the call over to Scott Radecki.

Thanks, Nicole good morning, everyone. Thank you for joining us for our second quarter fiscal 2023 earnings call I'll begin today's call. When review of highlights from Q2, and a discussion of our strategic priorities I will then turn it over to Mark to review, our second quarter and first half financial results and outlook for 2023.

And we've worked our way through the first seven months of the year, we're pleased with where we sit today and given the tough macro environment and our continued confidence in our long term growth opportunity.

With our leadership position across our product category and our unique direct to home or dealer strategy. We continue to work towards driving the material conversion from concrete fiberglass.

At the same time in the near term, we are remaining nimble across operations, including focusing on reducing cost and inventory and enhancing operating efficiency.

As a result, we have put into our fiscal 'twenty three guidance for net sales and adjusted EBITDA within the initial range, we initiated at the beginning of the year.

In <unk>, we delivered sequential improvement in net sales from Q1 2023 for Q2 2023. This was expected as we entered our people building season, despite year over year declines in Q2, we were pleased to deliver quarterly sequential improvement in gross margin and adjusted EBITDA margin in Q2 from Q1.

As our fixed cost leverage improved significantly we benefit our cost reduction actions.

Our second quarter results reflect our active management of cost and align with our production levels of inventory with demand, while still maintaining best in class lead times.

Our digital tools and marketing efforts continued to drive increased website activity and leads to dealers in Q2.

Demonstrate that underlying interest in pool ownership remains robust even as the consumer purchasing decision is continuing to stretch out what we've seen over the last several years.

With a strong supply chain and enhance manufacturing capacity. We have continued to increase our focus on jewelry group, which will support the conversion of fiberglass overtime.

These efforts are bearing fruit with continued new dealers signed in Q2 in line with our expectations for the year.

As expected, we enhanced our liquidity in Q2 positioning us well for the second half of 2023.

As we've now cleared the first half of the year, we have better visibility in how we think 2023 will shake out.

Therefore, as we think about our strategic priorities for the remainder of the year. We are focused on driving operational efficiency through our continuous improvement initiatives and prudent cost management.

Our regeneration efforts continue to show strength in underlying consumer demand given us confidence and continued execution of our topline growth priorities, which places us in a strong position for long term growth.

We have continued to focus on expanding the awareness and adoption of fiberglass.

The material conversion from concrete pools to fiberglass.

Our strategy of targeting both homeowners and dealers has continued to yield results and we have continued to receive positive feedback from dealers about nathan's value proposition.

We are also excited about our new digital innovation that will strengthen our direct to consumer strategy.

Yeah.

As we saw robust pool of industry growth over the last several years, while simultaneously facing supply chain of raw material related challenges and shortages, we focused on best positioning our business to meet increased demand.

When we saw market conditions turned late last year, we took immediate actions in Q4 of 2022 to reduce our costs, which are on track to yield $12 million in cost savings in 2023.

As anticipated market conditions have remained challenging throughout 2023, we have continued to monitor this closely and respond by matching our production staffing and inventory levels to demand.

During Q2 and into early Q3, we took further actions to enhance our operating efficiency, including the continued streamlining of our manufacturing footprint further head count reductions and restricting discretionary spending.

We expect to realize $12 million in annualized cost savings with 6 million expected to be realized in fiscal 2020 from these actions.

In tandem we are gaining traction on our lean and value engineering efforts, which have allowed us to improve the efficiency of our manufacturing processes.

We have made good progress in redesigning several of our products with a focus on reducing material costs and improving productivity.

Our lean initiatives continue to free up capacity in floor space in our facilities and drive lower inventory levels.

We expect to see an increasing benefit of these actions.

The adjusted EBITDA margin in the second half of fiscal 2023.

We firmly believe the material conversion from concrete fiberglass continues to present attractive long term growth opportunities for the business.

As you'll recall, we drove fiberglass sure expansion of three percentage points to 21% of U S. Inbound residential pool installations in 2022, despite the U S Ingram residential pool installations being down 16% versus 2021.

During Q2, we celebrated the grand opening of our two new fiberglass manufacturing facilities in Kingston, Ontario in Oklahoma.

These two facilities will allow us to better serve large markets with strong fiberglass conversion opportunities as well as to drive improved lead times and reduced freight cost as we rebalanced our manufacturing across our footprint.

As we discussed on our last call. We are ramping up these facilities to match the demand we are seeing in these markets.

Our lead generation efforts continued to drive year over year growth in website activity.

In Q2, and we're seeing homeowners continue to use late and digital tools, such as the food cost estimator and my later.

And we've advanced our direct to home or strategies, we are focused on deeper analytics and opportunities to further support homeowners through the full purchase journey, notably a number of leads in 2023 that started this prospects were nurtured by US and became highly qualified the best result.

Roughly half of our lease in 2023 have an existing violate the macau, allowing us to better understand their preferences and budgets before sending them to dealers. This helps homeowners make more informed purchase decisions and allows dealers to focus less on selling and more on installation.

Beyond driving homeowner awareness and adoption of fiberglass, adding new and deepening existing dealer relationships is an important component of our strategy to drive material conversion from concrete fiberglass.

With faster installation times, and smaller crude needs compared to concrete fiberglass pools, providing dealers with the opportunity to rapidly expand their business.

Our boot camps combined with our business excellent coaching are aimed at enhancing deal of.

Activity.

Heading into peak pool building season, we had strong demand for our blue Piceance hold at our training facility and separately old Florida.

We're excited to resume training again this fall.

Continuing to enhance our value added resources will enable us to attract and retain you look partnerships as such we are excited to launch our new laser Pro website. Later this year. This online hall will house all of our comprehensive turnkey marketing tools, including exterior signage digital branding content.

New sales agent collateral and product education resources.

We believe this will be a game changer for dealers, allowing them to run their businesses more efficiently.

Lastly, we are on track to meet the internal targets for new dealers with a year over year growth in new dealer sign ups in the first half of 2023.

Takes time to ramp up new dealers and many start small, but we believe expanding our dealer network will set us up for future growth.

In closing we are excited about the progress we've made on our strategic pillars, while the macroeconomic environment remains challenging we are maneuvering our way through position us well for the future. This has also enabled us to tighten our fiscal 2023 net sales and adjusted EBITDA guidance within the initial range, we initiated at the beginning of the year.

Looking out to the rest of the year, we will remain nimble and responding to evolving market dynamics and balancing our production capabilities and capacity to ensure we are well positioned for future growth.

At the same time, we will continue driving the conversion from concrete fiberglass tools, expanding our direct to home or strategy and delivering value to our dealers.

With that I'll turn the call over to Mark to review, our second quarter and first half 2023 results in greater detail Mark.

Thank you Scott and good morning, everyone.

Please note that all comparisons will be discussed today are on a year over year basis compared to the second quarter of fiscal 2022, and the first half of fiscal 2022, unless otherwise noted.

Net sales for the second quarter of fiscal 2023, and $177 million compared to $207 million in Q2 of 2022.

A quarter in which we delivered 14% year over year growth from the same period in 2021.

The change in Q2 fiscal 2023 sales is comprised of a 17% decline in volume, partially offset by a 3% increase in price.

As expected we were pleased to see sales sequentially improved from Q1 to Q2 as we entered into the peak cool building time of the year.

Looking at our net sales results across our product categories for the quarter.

We're on pool sales were $91 million down 19% driven by continued softness in packaged pools as the channel continues to right size inventories and to a lesser degree lower year over year fiberglass pool sales as Scott.

Got mentioned, we continued to increased fiberglass penetration in the market in 2022.

However, the anticipated reduction in the number of new pool starts this year is weighing on our results.

<unk> sales were 29 million down 25%, while aligner sales were $58 million, a 3% increase versus the prior year and a reflection of the recurring revenue opportunity within this product line.

Q2, gross profit was $50 million compared to $68 million in Q2 2022.

Gross margin was 28, 4% compared to 32, 7% in Q2 of 2022.

Gross profit was primarily impacted by reduced year over year sales.

Sell through higher cost inventory and the right sizing of our inventory accounted for more than the total margin reduction versus prior year. These.

These impacts were partially offset by higher prices and benefits from our cost actions taken in Q4 of 2022 in Q2 of 2023.

As we anticipated we saw a noticeable improvement in gross margin on a sequential basis with Q2 gross margins, improving 420 basis points compared to Q1.

Our fixed cost leverage improved significantly versus Q1, as we entered peak pool building season.

Benefited from cost reduction actions in Q4 of 2022 in Q2 of this year.

We also continued to realize higher year over year prices.

As a result of these actions our year over year Q2 gross margin reduction.

It was less than half what we saw in Q1.

Looking out to the back half of the year. We expect continued gross margin improvement as we work down our higher cost inventory lower our manufacturing overhead.

Stabilize our inventory levels realize increasing productivity.

Continue to benefit from higher prices and began to see modest levels of deflation.

Selling general and administrative expenses decreased to $30 million from $42 million in Q2 of 2022.

The decrease was driven primarily by a $9 million decrease in noncash stock based compensation expense and cost reduction initiatives that are gaining traction.

Excluding noncash stock based compensation expense SG&A was $24 million, a decline of $3 million or 10% versus prior year as a result of lower employee incentive accruals and the benefits from the cost reduction actions taken in the fourth quarter of fiscal 'twenty two.

And the second quarter of this year.

As a percentage of net sales SG&A, excluding noncash stock based compensation.

Increased to 13, 4% from 12, 8% in Q2 of last year.

As a result, adjusted EBITDA for the second quarter was $31 million compared to $49 million in Q2 of 2022.

Driven by the decrease in gross profit and partially offset by the reduction in SG&A expenses, excluding noncash stock based compensation expense.

Adjusted EBITDA margin decreased to 17, 5% from 23, 5% for the prior year period.

On a sequential basis adjusted.

EBITDA increased $20 million in the second quarter versus Q1 <unk>.

Flipping a 50% incremental profit on the incremental increase in Q2 net sales versus Q1.

Adjusted EBITDA margin improved 950 basis points in Q2 versus Q1 as Scott mentioned.

Turning to the first half results net sales for the first half of fiscal 2023 were $315 million compared to $398 million in the first half of fiscal 2022.

A period in which we delivered 21% year over year growth from the same period in 2021.

Aided by elevated backlogs coming into 2022.

The year over year change for first half fiscal 2023 is comprised of a 23% reduction in volumes and a 2% increase in price.

By product line in ground pool sales for the first half or $169 million down 24%.

Weiner sales of $84 million were down 19%.

I'll cover sales of $62 million declined 13%.

Our first half results are being impacted by the same factors we experienced in the quarter.

Gross profit was $84 million compared to the first half 2020 to a $138 million and gross margin decreased to 26, 6% from 34, 7% in the prior year period.

First half 2023 gross profit was primarily affected by the lower sales levels referred to a halt.

And from the sale of higher cost inventory and the right sizing of our inventory.

Negative fixed cost leverage while significantly improved versus Q1 aided by our cost actions remained a headwind in the first half.

These impacts were partially offset by higher prices and productivity.

Selling general and administrative expenses decreased to $63 million from $87 million in the first half of fiscal 2022.

Reflecting an $18 million decrease in noncash stock based compensation as.

As well as the benefits from the cost reduction actions taken in the fourth quarter of fiscal 2022.

In the second quarter of fiscal 2023.

Excluding noncash stock based compensation SG&A was $51 million, a decrease of 5 million or 10% driven by lower employee incentive accruals and benefits from the cost reduction actions taken in the fourth quarter of fiscal 2022, and the second quarter of this year.

As a percentage of net sales SG&A, excluding noncash stock based compensation increased to 16, 1% from 14, 1% from the prior year period.

Adjusted EBITDA was $42 million compared to $97 million in the first half of 2022, driven by lower gross profit, which was partially offset by our lower SG&A spend excluding noncash stock based compensation expense as a result, adjusted EBITDA margin decreased.

13, 3% from 24, 2% for the prior year period.

Yeah.

As expected we saw an increase in our liquidity during the quarter. As this is the time of the year, we generate the majority of our cash.

We are pleased with the strength of our balance sheet and remain disciplined in our capital allocation strategy.

During the quarter, we repaid all of the $48 million of borrowings on our revolver.

As of July one, we had cash and cash equivalents of $43 million and $75 million of borrowing availability under our revolver.

Giving us total liquidity of $118 million up 44% from Q1.

Which is more than sufficient for the operation of the business.

Net cash provided by operating activities was $36 million for the first half of fiscal year 2023 versus net cash used in operating activities of $15 million in the prior year period propelled by reductions in inventories.

Total debt was $312 million at the end of Q2, and our net debt leverage ratio was 3.0 times at the end of the quarter.

Compared to two nine times at the end of the first quarter.

The modest increase was driven by the year over year reduction in adjusted EBITDA.

Looking at Capex spend capital expenditures were $14 million compared to $10 million in Q2 last year.

As expected Capex spending increased versus Q1.

We are nearing the final payments related to the construction of our new Kingston So.

As we anticipated capex for the first half of fiscal 2023 totaled $23 million compared to $17 million in the prior year period.

In our earnings release issued this morning, we tightened the range of our fiscal 2023 outlook for net sales and adjusted EBITDA.

As anticipated ongoing macroeconomic challenges are weighing on consumer spending and demand. This.

This is resulting in a decline for U S. New inbound residential pool installations in 2023.

As Scott mentioned, we continue to make progress executing our strategy to drive material conversion from concrete to fiberglass swimming pools supported by our continued momentum on our lead generation efforts and digital tools.

We continue to take a disciplined approach to capital investments with a focus on the completion of our Kingston in Oklahoma fiberglass manufacturing facilities.

As we've previously discussed the majority of this spend was weighted to the first half of fiscal 2023.

We also continue to work on improving profits and margins by focusing on operational efficiency and prudently managing our costs to better align with the current demand environment.

As Scott previously mentioned, we took action in Q2 and into early Q3 of 2023 to further reduce our manufacturing overhead headcount and discretionary spend.

We expect to realize an additional $12 million of annualized savings from these actions with $6 million to be realized this year.

This is in addition to the $12 million of savings from the cost reduction actions. We took in Q4 of 2022 and expect to realize this year.

For a total of $18 million of cost savings in 2023.

We are already seeing some benefit of our cost actions lifting margins on a quarterly sequential basis in Q2 versus Q1 as.

As we continue to sell through our higher cost inventory further lower our manufacturing overhead maintain.

We maintain our pricing levels.

Realize increasing benefits from our cost actions and productivity efforts and begin to benefit from modest amounts of deflation.

We expect to unlock margin improvement in the back half of the year versus the first half as inferred from our full year guidance.

As a result, we.

Now expect fiscal 2023, net sales of $570 million to $600 million.

Adjusted EBITDA of $90 million to $100 million and capital expenditures of $32 million to $38 million.

Scott with that I'll turn it back to you for closing remarks, thanks, Mark although our industry is facing near term headwinds, which we are proactively managing through we remain energized by the long term opportunities we see in the business the attractive dynamics of the outdoor repair and remodel industry remain intact homeowners.

Turning to migrate to the suburbs stay in their homes longer and invest in the backyard.

He was supported by our lead generation engine, which points to robust underlying interest in Bluewater ship.

We view the macroeconomic impact on consumer demand as a near term headwind for our industry and we are well positioned to help homeowners build the backyard of their dreams when they are ready to meet their pool purchase.

The installed base has grown significantly over the last several years with inbound residential pool, expanding 5% from less than $5 2 million in 2016 to $5 4 million in 2022 as the installed pool based continues to age and grow over time, we are positioning ourselves to capitalize on recurring revenue.

Opportunities within our replacement covers and liner products with the launch of our proprietary technology measure biodiesel.

As the only consumer brand in the residential pool market and the leader in every pool product category, we compete at especially fiber glass, we are well positioned to capitalize on these trends over time.

But alas offer significant benefits the homeowners and dealers alike, and we're expanding fiberglass share of the U S inbound residential swimming pool market as we drive the awareness of these benefits.

2023 will be a year of lower demand in the pool industry, but we believe the long term potential is robust for all the reasons, we have just mentioned.

We will now open the lines for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys, we ask that you. Please limit yourself to one question and one follow up if.

At any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Yes.

Our first question comes from Tim <unk> of Baird.

Hey, guys good morning.

Hey, Jim maybe hey, maybe just to start.

I was hoping maybe you could just give us a little bit more color Scott on some of the dealer activity that you mentioned in your prepared remarks, just maybe.

So maybe kind of you know.

Set us level set us a little bit on kind of where the where the dealer basis today and you know how some of those net adds that have been trending year to date.

Yeah, So good morning, Tim.

As I mentioned, we proactively got back on an aggressive dealer acquisition.

Approach mid last year late last year, you know clearly as a result of.

The supply chain in the past that we brought online and and really targeted the fiberglass deal or to drive that conversion story from concrete fiberglass.

I think we've done a really good job sales teams have done a really good job of adding a lot of new dealers in the territories, where we had a lot of opportunity to grow.

And expand the dealer base.

The northeast and the southwest no what I'd say throughout the majority of the country you know what.

What we liked about this is this will give us the opportunity to continue to drive and accelerate that growth and penetration of fiberglass.

We've been running a lot of active boot camps getting them trained up down Zephyr Hill.

We'll resume that later here this fall at the deal was kind of wind down the season.

And as we told folks time and time again, you know the goal is to really get these guys to double volume year after year and increase their efficiency you know what they can get into the ground with the consumer.

Clearly proves that these new deal with all of our lead generation activity is solid and we can funnel a lot of demand for them to build that pipeline, so where we're happy where we are or.

Maybe slightly ahead of what we thought we would be this time of the year.

Continue to add as we go through time.

Okay. Okay. Good and then I guess, just maybe on the on the consumer kind of interaction front I mean, how.

How are your lead conversions, if you kind of look at the last six months I mean, how it's kind of the leads tracked relative to maybe what you thought coming into the year and just.

What the overall consumer.

China has kind of tracked and then has the conversion from like a lead to you know an installed pool I mean has that dynamic changed at all over the last six to 12 months.

Yes, so we're happy with our with our lead activity we've had.

We've got a lot of success would lead you know both of our organic SCO and move on some regional campaigns.

Dealers wanted to see more lead let's say lead activity activity website number of people sign up for my late in Macau and just overall interest in pool ownership remains high across the board at the consumer level I think what we've seen happening over the last six to 12 months is what I would say is a delay in the consumer making them.

Purchasing decision we came into the year with a nice backlog build has been working through those and I'd say the consumer is kind of taken a little bit longer to make that purchasing decision and the uncertain macro environment that's out there.

Probably a little ahead of you know where they.

We've been maybe over the last couple of years and then they can add quit purchasing decision.

Okay, Okay, great I'll hop back in queue. Thanks for the color guys.

Yep.

Our next question comes from Keith Hughes of Truest go ahead.

Thank you kind of implicit in the guidance do you think your business will flatten out in the fourth quarter as we hit that easier comp trajectory wrong.

Hey, good morning, Keith.

Nice to speak with you and thanks for the question.

If you look at our our updated guidance and just kind of focus on the mid points for a moment.

We are expecting and that implied second half at the midpoint, we're expecting to still see some top line softness year over year in the second half.

But thanks to the cost actions that we put in place.

Selling through some of the higher cost inventory right sizing or inventory levels Diffley.

Deflation productivity et cetera, we do believe we can drive higher year over year, EBITDA and EBITDA margin in the second half of this year versus the second half of last year again looking at the mid points of our new outlook for the year.

And you had mentioned in the prepared script $18 million of cost saves for 'twenty three with via to two programs how much of that $18 million have you realized and how much is left for the second half of the year.

Yeah. Thanks, Keith we realize somewhere in the neighborhood of a third in the first half which would.

Therefore imply a two thirds in the second half.

Another driver behind.

To support that our updated guidance, we have and the improved profitability in the second half versus second half last year.

Okay, great. Thank you.

Thanks Keith.

Yes.

Our next question comes from Sean Colman of Bank of America go ahead.

Hi, guys. Thank you for taking my questions. Just first in the quarter you guys were able to outperform some of the overall new pool construction trends and can you just walk us through some of the drivers. There is it that fiberglass is taking share versus concrete or you guys are taking share within fiberglass or.

Is it a matter of just different geographical exposure for some of the permit data we've seen.

Yeah.

Yeah, Good morning, Sean and thanks again for the question.

You know as we looked at our second quarter revenue, we were very happy to see the sequential improvement versus Q1, I think our revenue jumped up $40 million.

Versus Q1.

We continue to see or feel the impact of the macroeconomic environment.

We feel very confident in our ability to continue to drive fiberglass penetration rates as we did in 2022, when we were able to increase the penetration by 3%.

So we believe that that's continuing.

But we are seeing the demand challenges on the top line, but sequential improvement I think positions us well for the balance of the year.

I think we as we enter into the second half would you have softer comps on the top line year over year, So that will help us and that's factored into the <unk>.

Updated guidance that we released this morning, and Sean I'll add on to that I think the other part of let's say the outperform on Bali, maybe versus the overall market.

<unk> revenue piece of our business with that large installed base.

We've seen good performance there with our liners and covers categories, which you know again mitigate some of that decrease in new pool installs across the board, we're pretty happy with what we saw there and expect that to.

Continue on the back half of the year as well as we enter the replay.

Replacement cover season here.

And peak.

Okay. Thank you and then just you mentioned the impact of the higher cost inventory flowing through.

Being a negative impact to the gross margin when do you expect that to kind of peak or.

Basically turned into a tailwind and can you talk about how input costs are trending today.

Yeah, Let me just start with input costs input.

Input costs are definitely moderating.

As you might imagine we buy many different products and.

And commodities and so forth. So it's a mixed bag, but in total.

We're seeing it.

Wood costs flatten with maybe very modest amounts of deflation are looking out into the second half of the year.

Some up some down but in total modest deflation in the second half of the year.

And then as far as the higher of the sell through the higher cost inventory, we would expect that to.

To become less of a drag in the second half than it was in the first and another one of the reasons why we feel that our ability to drive higher EBITDA and EBITDA margin second half versus the second half of last year is doable.

Our next question comes from Matt Bouley from Barclays Go ahead.

Morning, Scott Mark Thanks.

Thanks for taking the question guys.

Hey, Matt.

The Oh on price I think you said price was up three in the quarter and I think it was up to in the in the first quarter are you, taking additional price increases or surcharges and just higher level. I guess, what are you kind of seeing on the competitive environment around pricing out there. Thank you.

Yeah, Hey, Matt Nice to hear from you and thanks for the question you're right, we've seen 2% to 3% price increases in the first half of this year, which is more in line with our historical norms of what we've been able to do with the business.

We would expect that to continue through the balance of the year. The fiberglass surcharge is still in place.

As you recall, we put that in place.

To give us more flexibility in our ability to move pricing around as need be but that's still there we're still.

Collecting on that and again, we would expect to see that stay in place as well.

As you know Matt.

A number of different product lines here.

With prices around on all of those but we.

We still feel good about that 2% to 3% kind of falling right in the historical norm of what we've been able to its business.

Got it okay. Thanks for that Mark and then second one the a I think you called out on the packaged pool side that the that there's still some kind of destocking and I guess customer inventory right sizing still going on any any sense of kind of where we are in that process.

Our customer inventories and packaged pools.

Yeah. Thanks, Matt.

I'll take that one we are we are still continuing to see the channel take inventory levels lower.

And and you.

Whether you call that destocking or demand.

We're seeing as a result of that is a slower uptake in repeat new orders, which is baked into our updated guidance for the year.

We think that we think the channel is getting relatively low with tight, but we're going to see where that goes.

Half of this year.

But we feel good right now with the outlook that we have baked in for package pools for the balance of the year.

Alright, Thanks, Mark Good luck guys.

Thanks, Matt.

Once again, if you have a question. Please press Star then one our next question comes from Andrew Carter of Stifel. Please go ahead.

Hey, Thank you good morning, I guess looking at the performance within the quarter. The in ground pools down 19% could you give us could you quantify how much the destock and then as you think about the two businesses fiberglass advantaged package package pools.

Probably disadvantaged category in this environment, how are they kind of correlating around kind of the nine minus 30% new construction numbers that are out there. Thanks.

Andrew Good morning. Thanks.

Thanks for the question.

We saw in ground pool category I think in the second quarter was down.

19%, if I recall, right, which is an improvement over what we saw in the first quarter.

As you know, we don't we don't split out fiberglass and package schools.

The bulk of that decline is coming from the softness that we've seen in the packaged pool space as well as the channel has continued to take their inventory levels lower.

Fiberglass pools are down year over year, but not to the degree that we're seeing softness in the packaged food space and what I would what I would add in there too Andrew as you know you you had a comment on kind of the trade down I think we see the benefits of the trade down in a couple of situations right fiberglass is still 20.

5% to 30% lower cost than concrete even as both products have risen in price to the consumer so as the homeowner says I can no longer afford a concrete pool, we're seeing continued trade down with fiberglass and in that category and lets save a fiberglass well, maybe it's a little bit of out of reach for a consumer now.

All right. They they may now makes a decision to trade down and bio vinyl liner wasn't that packaged food category. So I think we went on both fronts and maybe that's why.

The performance the 19% down that Mark mentioned those that are in our comments. This morning, as you know maybe performing a little bit better overall than what the total market is doing out there or you know what.

What you guys have seen in pool permit activity in many regions of the country.

Alright. Thank you and then second question I wanted to ask about incentive comp.

Number one kind of what is kind of a tailwind for the year. This year for incentive comp and then therefore what comes back next year and I guess I wanted to ask within the guidance.

Actually it's at the midpoint just modestly down so is there a big change to incentive comp. This year. The only difference to EBITDA as you know how the incremental $6 million cost savings anything to help us on incentive comp.

Yes, it's a pretty it's a pretty small impact.

Andrew at the end of the day I think what we're doing as we mentioned we've taken these additional cost out actions in the second quarter of this year and just very early into Q3, which is going to give us another 12 million annualized $6 million. This year, so $18 million of total cost.

For the year, yes incentive comp was a small part of that.

What we're really doing is staying nimble actively looking at our cost structure looking out as the demand environment adjusting as necessary and I think that's something that we're going to continue to do as we go through the balance of the year.

Which is all baked into the guide and again part of the reason we have confidence in delivering the second half that is implied in our guidance.

Thanks, I'll pass it on.

Alright, Thanks, Andrew.

Our next question comes from Josh brokerage Penske of Morgan Stanley .

Please go ahead.

Hold on one moment.

Oh.

Okay.

If you were in the queue before we ask again. Please press Star then one for now we will take season Macquarie from Goldman Sachs. Please go ahead.

Thank you good morning, everyone and thanks for taking the questions.

It was over to them.

Good morning, and you know you talked about the ramp of the new facilities and and in Kingston, and and and in Oklahoma can you talk a bit about how you're balancing capacity against a weaker volume and any thoughts on how those facilities will ramp over the next couple of quarters.

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Yeah, Susan so.

Guards to lets say, both Kingston in Oklahoma and one of the things for everyone to remember here is it's really replacing two other facilities. We had that you know we're in those territories right specifically with Oklahoma right. This is replacing the lost manufacturing capacity, we had in Odessa.

Right, we had been manufacturing pools and other areas transporting them in so what we're doing now is ramping Oklahoma match that local regional demand, we see in that area coming with a cost savings for us from no longer having.

To frame it in so really bringing that facility up kind of as planned but see the demand signals.

<unk> similar situation, we did have the smaller facility up there supporting the greater Montreal, Greater Toronto area, you know again with the with the new facility fully operational again, just gauging the ramping of that that facility to bring it up the mass regional local demand you know offloading.

What had been being shipped off in many cases from all over the east coast out of the facilities. We have there again you know good good cost savings good benefit.

<unk> ability to kind of you know.

Variable is the nature of all of our businesses businesses in terms of how we operate these facilities.

We can quickly turn turn that capacity up as we see the demand signals change, but just trying to be very cost how we balanced total production in every plant every region to maximize the efficiency of solar.

Operation.

Okay.

That's helpful. And then you made really nice progress again this quarter on taking the inventories down as you look to the back half any thoughts on any further progress in there and in terms of working capital and you know how youre thinking about cash generation as we go through the next couple of quarters.

Hey, Susan Good morning, Yeah, we're very pleased with the progress that we've made in reducing the inventory levels. Since the end of the year and I think as we all know that that does come with a with an impact a negative impact the P&L, but the right thing to do we're still able to maintain our.

Our very strong lead times with the slower inventory levels.

We're getting to the point now where we are.

Thinking about stabilizing those levels, where we were at maybe some modest further reductions we will see what happens in the balance of the year.

And again, not having that negative P&L impact in the first half from the pretty significant reduction in inventories is another uplift Q2 or second half versus first half.

Feel really good about where our liquidity is with the way the balance sheet books $118 million of liquidity, which is cash on hand, plus revolver availability.

We did see a very modest tick up.

And our net debt leverage ratio of 3.0 times, we would expect Susan that that would drop modestly go lower modestly by the end of the year.

Okay. Thanks for the color and good luck with everything.

Sure. Thanks, Susan.

This concludes our question and answer session I would like to turn the conference back over to Scott Rydzewski for any closing remarks.

Yeah, Thank you and I'd like to take a moment to thank all of our employees dealers and our wholesale distribution partners and suppliers and all of your hard work and in partnership with US. It was really critical to our long term success and also I want to thank everyone, who joined joined US for today's call really appreciate your time and continued interest and support.

Hopefully everyone has a great rest of the summer would be safe out there and are looking forward to catching up with everyone on the next time take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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