Q3 2023 Latham Group Inc Earnings Call
Good day and welcome to the late them group third quarter fiscal 2023 earnings conference call.
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Note. This event is being recorded I would now like to turn the conference over to Nicole Harlow Investor Relations Representative. Please go ahead. Thank you earlier. This morning, we issued our third quarter fiscal 2023 earnings press release, which is available on the Investor Relations portion of our website or you can also sign.
The slide presentation that accompanies our prepared remarks.
On today's call are Lisa <unk>, President and CEO, Scott Rydzewski interim CFO, Mark Borsa and incoming CFO Oliver Globe.
During their remarks, we will open up the call to questions.
During this call the company may make certain statements that constitute forward looking statements.
To reflect the company's views with respect to future events and financial performance as of 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 SEC as well as today's earnings release.
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.
Reconciliations of the directly comparable GAAP measures to these 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 will now turn the call over to Scott for Jackie.
Thanks, Nicole good morning, everyone. Thank you for joining us for our third quarter fiscal 2023 earnings call.
Before we begin I wanted to quickly introduce our incoming CFO Oliver.
Oliver joined Blackstone has over 20 years of finance experience and global manufacturing companies. Most recently served as a fortune brands innovation as the Chief financial Officer outdoors insecurity.
We believe his expertise in leading global financial operations, and implementing strategies and enhanced customer focus and improve leverages scale will be invaluable to leave them as we continue to execute on our fiberglass conversion strategies.
While all of our won't officially stepped into the role of CFO on November 13, we wanted to take today's call as an opportunity to introduce some you all I'll hand, it over to Oliver to share a few brief words.
Scott I am thrilled about the opportunity to join Nathan It has been an exciting first few days getting to meet with the team.
I see incredible opportunity in this space and believe lays them is uniquely positioned to succeed over the long term.
I look forward to working together with Scott and Mark as I transition into the CFO role.
Average my background to support Nathan fiberglass material conversion efforts.
Thanks, Oliver I'll now take us through a high level overview of our third quarter and year to date performance and strategic priorities before handing the call over to Mark to review, our financial results and guidance in greater detail.
Our Q3 results reflect our leadership position across our broad product portfolio and diligent cost actions amid a continued soft demand environment.
Together with our ongoing investments in our lead generation efforts and dealer productivity and recruitment initiatives. We are positioning the company to return to growth when demand rebounds.
Our Q3 results show how this is working.
Our structural cost reduction action and lean initiatives supported by the seasonality of our business have yielded adjusted EBITDA margin improvements, we returned to year over year adjusted EBITDA margin expansion in Q3 with margins, increasing 10 basis points to 22, 4%.
Most notably we also delivered our third consecutive quarter of sequential adjusted EBITDA margin expansion, which increased 490 basis points in Q3 versus Q2.
We remain on track to deliver 2023 net sales results.
The pace of the U S new in ground pool market are.
Our Q3 year to date in ground swimming pool net sale.
<unk> performed the anticipated decline in USD four installations versus 2022, similar to how we outpaced the market last year, driven by our leadership position in fiberglass.
We delivered strong cash flow performance in the third quarter, which further strengthened our liquidity.
This supported our ability to enhance our balance sheet strength in the quarter as we repaid $10 million of debt.
As we look out over the long term, we see continued underlying interest in pool ownership.
This is highlighted by year over year session growth, where our website year to date and homeowners continue to contemplate.
So research our products products set project budgets and educate themselves on pool points. In addition, the fiberglass value proposition is resonating with dealers as we exceeded our internal goals for dealer recruitment. This year in our efforts to enhance dealer productivity are bearing fruit.
That said, we now expect that the industry softness will last longer and more deeply than we assumed in our prior guidance and have adjusted our outlook for 2023 to reflect that expectation.
With our strong cash flow generation healthy balance sheet and continued momentum on our strategic initiatives. We are confident in our ability to successfully navigate the current environment.
As we expected 2023 has been a challenging year for the pool industry with the macroeconomic environment continuing to weigh on the consumer.
It's the largest demand contraction that I've seen in my nearly 15 years in the pool, but at.
At the same time the interest in pool ownership is as high as we've ever seen.
However, we have seen the timeline for the pool purchase decision stretch out further with homeowners remaining on the sidelines waiting for macro conditions to improve.
This has resulted in a softer pool season that we've seen in recent years with shorter and more muted peak sales period across our product categories.
We have responded to these dynamics with cost reductions and lean initiatives supporting the adjusted EBITDA margin improvements you see in our results reported this morning.
We are balancing our bottomline priorities with continued execution on our long term topline growth strategies, which are centered around our efforts to drive material conversion from concrete fiberglass tools.
Continuous improvement is deeply embedded in our culture and everything we do at Lake.
Our focus on innovation through our value engineering effort has allowed us to improve the efficiency of our manufacturing processes and reduce material costs, while maintaining our high quality operating standards and industry, leading lead times.
At the same time, we continually evaluate our cost structure to ensure we are operating in alignment with demand as such beginning in Q4 2022, we have taken a disciplined and thoughtful cost actions to best support our business in today's environment.
We streamlined and rebalanced, our facilities footprint by exiting REIT smaller manufacturing location and five warehouses.
We have decreased our fixed cost across the company from manufacturing overhead G&A, while maintaining our ability to drive our sales and marketing initiatives we.
We have executed lean initiatives, facilitating inventory reduction, while maintaining industry leading lead times.
We have also right sized our production staff, while maintaining flexibility to drive growth as market conditions improve.
Combined these actions support our return to year over year and the third consecutive quarter of sequential adjusted EBITDA margin expansion in Q3.
It's also allowed us to keep on track to meet our cost savings targets for fiscal 2023 of $18 million with an additional $6 million in cost savings to be realized in fiscal 2024.
While we are always evaluating our cost structure. These savings provide us with a more efficient cost base to drive profitability at the pool market terms.
We are energized by the momentum in our fiberglass conversion efforts. Despite our estimate of approximately 40 plus percent decline in new U S. Ingram will residential installations over the last two years.
Fiberglass pools have come a long way led by late <unk> technological and design innovations, we've designed and developed the most beautiful and innovator pools in the industry with a wider selection of colors and finishes our fiberglass who will provide a more enjoyable swim and experience for the homeowner with a smooth finish less chemical usage and saltwater friends.
Pool options the speed of installations of our fibroblast pools is unparalleled you can have your pool in your backyard in as little as two to three days or even one day and our pools are built to last with a lifetime warranty something concrete pool makers typically don't get.
This creates a strong value proposition both for the homeowner and the dealer which has propelled the fiberglass conversion forward.
Youll recall, we drove fiberglass penetration up by three percentage points to 21% of U S pool installations in 2022.
We are on track to drive further penetration for fiberglass in 2023, which we estimate will increase of 22% of U S pool installation. This year. Despite an anticipated decrease in overall U S inbound residential formulations.
We believe this is a testament to our leading position in fiberglass in North America, and the success of our dealer and homeowner awareness efforts to date.
And we still have a long one way to reach similar penetration levels compared to more mature fiberglass markets like Australia, where fiberglass suggest that about 70% of all installs.
Momentum in fiberglass adoption.
Arkadina initiatives, both at the homeowner and dealer level are resonating.
Even in a challenging market.
Our investments in our website continued to yield results leatham ranks number one in fiberglass pools and in the top 10 for in ground pool by monthly search volume in the third quarter year to date, we saw over 40% year over year website session growth defined as the series of actions a user takes on our web site over a given period of time.
Showed that homeowners are recognizing the value based and provide them planning and maintaining their dream backyard. While some homeowners are deferring pool purchase decisions in the current environment. These results will be invaluable to our ability to generate leads for dealers over time.
Our strong homeowner strategy is complemented by our successful dealer productivity and recruitment efforts the number of our north American fiberglass dealers installing greater than 10 pool. The year has increased in 2023 by nearly 102019. In addition, the percentage of our North American.
Fiberglass dealers installing greater than 10 full year has continually grown over the last several years in 2023 year to date continues to track above the 2018 and 2019 levels.
Key to this success has been our efforts would enhance your productivity, namely the continued expansion of our value added resources and he inbound trains dealers are leveraging our lethal design center, which houses our comprehensive marketing tools, including exterior signage digital branding content design and sales agent collateral.
And product education resources.
Dealers. Appreciate this new feature central allowed them easily create on brand content for their own customized marketing needs in the run their businesses more efficiently. We also see continued interest in our hands on training and boot camps. We are looking forward to our upcoming slate of fiberglass boot camp as dealers shifting their focus to preparations for the 2020.
Well Dolby CEVA.
As we've discussed on recent calls with our expanded fiberglass manufacturing capacity. We have also strengthened our efforts around dealer recruitment. We are pleased to have exceeded our internal targets for new dealers in 2023, providing us with a new group of dealers to train and grow over time.
Important to the continued momentum of fiberglass penetration are our efforts to innovate and enhance our firewall products and offerings. In 2023, we will have introduced three new fiberglass pool model sheets, presenting homeowners with the latest and most beautifully designed products to create a full scale up their dreams. Additionally, a key piece of.
Fiberglass value proposition for both homeowners and dealers is the ease and speed of installation, which is unmatched earlier. This year, we launched backfill made easy our new designs to make the installation on select model, even easier and faster.
It eliminates the extra effort of backfill and under the pooled steps with state of the builder time and materials and increases the speed of installations. We introduced this for our popular Corinthian models and are evaluating opportunities for raw backfill immediately to other popular models across our portfolio.
In short we've taken important steps to navigate the current environment, while remaining focused on supporting our ability to drive long term growth.
We continue to keep a close eye on demand, while advancing our efforts to drive homeowner and dealer awareness and adoption of fiberglass.
I will now turn the call over to Mark to review, our third quarter and year to date 2023 results in fiscal 'twenty three outlook in greater detail, but before that I wanted to take a moment to thank mark for stepping back in with our finance organization as we identified his successor to the CFO role, we are incredibly grateful for his leadership and contribution to <unk>.
Frankly in our business brought in 10 year rate Mark you will be missed.
Thank you Scott for your kind words, it's been a pleasure working with you on the entirely from team. These last few years I would also like to extend a warm welcome to all of them. He will be an excellent addition to lithium and I look forward to working closely with them to ensure a seamless transition over the coming weeks.
Turning to our results.
Please note that all comparisons we discussed today are on a year over year basis compared to the third quarter of fiscal 2022, and the first nine months of fiscal 2022, unless otherwise noted.
Net sales for the third quarter of fiscal 2023 were $161 million.
Compared to $189 million in Q3 of 2022.
For periods in which we drove 17% year over year growth from the same period in 2021.
The year over year change in Q3 fiscal 2023 sales is comprised of a 17% decline in volume, partially offset by a 2% increase in price.
Looking at our net sales results across our product lines for the quarter we.
We delivered $83 million of in ground swimming pool sales and were pleased to see our results only down 19%.
In a market where the full year new in ground pool installs are expected to be down 30%.
Performance in this product line continues to be driven by softness in demand for packaged pools.
As sales of fiberglass pools declined less than the total decline in our in ground swimming pool product line.
Cover sales were $47 million and down 9% versus last year.
As expected we saw a meaningful increase in copper sales from Q2, as we moved into the peak season for this product line as homeowners prepare to close our pool for the season.
However peak cover sales were muted in the quarter and the season tailed off quicker than normal.
Aligner sales were $30 million, a 13% decrease versus the prior year and light covers a season, which peaked at lower levels and was shorter than normal.
Q3, gross profit was $48 million compared to $59 million in Q3 2022.
Throughout fiscal 2023, we have driven consistent improvements in year over year gross margin compression.
Q3 gross margin of 29, 9% was down only 120 basis points, our best quarterly performance this year compared to 31, 1% in Q3 of 2022.
In the quarter year over year gross profit performance was primarily impacted by reduced net sales the.
The right sizing of our inventory and to a lesser degree the sell through of higher priced inventory.
This was partially offset by some material cost deflation benefits from our pricing levels and improved fixed cost as a result of our cost reduction actions.
Selling general and administrative expenses decreased to $23 million and $27 million in Q3 of 2022.
The decrease was driven by a $4 million decrease in noncash stock based compensation expense.
The net impact of noncash stock based compensation expense and one time costs associated with restructuring charges, resulting from our cost reduction actions this year as.
As well as the timing of an insurance recovery in the third quarter of 2022.
It was a $2 million year over year reduction in SG&A in Q3.
Excluding noncash stock based compensation expense and these onetime costs S.
SG&A was $20 million, a decline of about $2 million or 7% versus prior year as a result of the benefits from the cost reduction actions we took.
As a percentage of net sales SG&A, excluding noncash stock based compensation and onetime costs only increased to 12, 5% from 11, 4% in Q3 of last year.
Q3, adjusted EBITDA was $36 million.
Compared to $42 million in Q3 of 2022 driven.
Driven by the decrease in gross profit and partially offset by the reduction in SG&A expenses, excluding noncash stock based compensation expense and noted onetime costs.
Our cost reduction actions and lean initiatives have yielded the desired results on adjusted EBITDA margin.
As we drove a return to year over year adjusted margin expansion in Q3 up 10 basis points to 22, 4% versus Q3 of last year.
On a sequential basis Q3, adjusted EBITDA increased $5 million or.
Or 16% in the third quarter and adjusted EBITDA margin improved 490 basis points versus Q2 nine.
9% fewer sales.
Consistent with the seasonality of our business, we expect adjusted EBITDA margins to decline on a sequential basis in Q4 versus Q3, reflecting a natural slowdown in pool construction and repair as we move into the colder months of the year as well as continued softness in overall demand.
Turning to results for Q3 year to date.
For the first nine months of fiscal 2023, net sales were $476 million compared to $588 million in the prior year period during which we delivered 20% year over year growth from the same period in 2021.
The year over year change for the first nine months of fiscal 2023.
Is comprised of a 21% reduction in volume and a 2% increase in price.
Throughout the year, we have consistently shown year over year pricing benefits in the 2% range.
At the same time, we have seen slow improvement in our year over year volume performance.
By product line in ground swimming pool sales for the first nine months were $252 million.
Down 23% year over year.
As Scott mentioned, our year to date results for in ground continued to outpace the U S. New in ground pool installation market for 2023, which.
Which we expect will declined nearly 30% this year versus 2022.
We believe this is a strong indication of our momentum in driving the fiberglass conversion opportunity as.
As highlighted by our expectations that fiberglass penetration will continue to grow in 2023, despite another down pool market.
Aligner sales of $115 million were down 17%, while cover sales of $109 million declined 11%.
Reflecting softer homeowner demands and the current economic environment.
Gross profit was $132 million compared to $197 million in the first nine months of fiscal 2022.
Year to date gross margin was 27, 7% compared to 33, 5% in the prior year period.
<unk> 580 basis points.
As mentioned earlier, we saw improved gross margin performance in Q3 relative to the first half of the year and as a result, our year to date gross margin compression continues to steadily improve.
Gross profit was primarily affected by reduced net sales levels the.
The year over year gross margin reduction is primarily being driven by the sale of higher cost inventory and the right sizing of our inventory levels. In total. These two factors account for about 570 basis points of margin compression.
Fixed cost leverage continued to improve thanks to our cost actions and productivity and was actually a small tailwind in Q3.
What remains a headwind on a year to date basis.
These margin headwinds continue to be partially offset by benefits from our pricing levels, some material cost deflation and improve productivity.
Selling general and administrative expenses decreased to $87 million from a $114 million in the first nine months of fiscal 2022, reflecting.
Reflecting a $22 million decrease in noncash stock based compensation expense as well as the benefits from our various cost reduction actions.
Excluding noncash stock based compensation.
G&A was $72 million.
A decrease of $5 million or 6% driven by lower employee incentive accruals and benefits from our cost reduction actions.
Adjusted EBITDA was $78 million compared to $139 million in the first nine months of fiscal 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 to 16, 4% from 23, 6% for the prior year period.
Turning to the balance sheet.
As expected we saw an increase in our liquidity during the quarter, reflecting management's focus on cash flow generation and maintaining a strong balance sheet as well as the seasonality of our business. It is also an indicator of the businesses ability to generate cash flow in a variety of economic cycles.
As of September 30.
We had cash and cash equivalents of $78 million and $75 million of borrowing availability under our revolver.
Giving us total liquidity of $153 million up 30% from Q2.
Net cash provided by operating activities was $88 million for the first nine months of 2023.
Versus $5 million in the prior period.
Reflecting our actions to rightsize production in line with the current demand environment and reduce our inventory levels.
While importantly, maintaining our lead times.
We leveraged our increased cash position to pay down $10 million of our term debt during the third quarter.
Reducing our total debt to $302 million at the end of Q3.
As expected, we delivered improvements to our net debt leverage ratio ending the quarter at two seven times versus three point all times at the end of Q2.
Capital expenditures were $5 million for Q3 compared to $12 million in Q3 2022.
Capital expenditures were $28 million for the first nine months of 2023 compared to $29 million in the prior year period.
As we are completing investments in our new Kingston facility and flex back to a more normal run rate for the business, we have reduced our full year guidance for Capex investments.
With our strong balance sheet increased liquidity and disciplined capital allocation strategy, we are well positioned to navigate the current macroeconomic environment as we head into the time of the year when their business transitions to less cash generation and ultimately cash usage in Q1 of next year.
Turning to our outlook for fiscal 2023.
As we've seen throughout 2023, the macroeconomic environment continues to weigh on consumer demand for our products as reflected in our year to date year over year declines in our topline.
And as implied in our updated guidance for the year.
Homeowners are taking longer to make their pool buying decisions.
In addition, our wholesale partners have continued to bring down their inventory levels as they exited the 2023 pool season.
All of this is driving an anticipated decline in U S. New in ground pool installations of nearly 30% year over year in 2023.
As Scott outlined earlier in today's call. We have responded to these market dynamics with cost reduction actions that are delivered continued improvements to our margins.
We have reduced our manufacturing overhead head count and spend.
Resulting in an anticipated $18 million of cost savings this year with an additional $6 million to be realized in 2024.
We continue to focus on enhancing our productivity and executing on lean initiatives.
We are progressing through our higher cost inventory.
Holding on price and seeing some benefits for modest levels of deflation.
We're also being thoughtful and disciplined in our capital allocation strategy.
All of this is reflected in our updated guidance for fiscal 2023 of net sales of $555 million to $570 million adjusted.
Adjusted EBITDA of $82 million to $87 million and capital expenditures of $32 million to $35 million Scott.
Scott with that I'll turn it back to you for closing remarks, thanks, Mark as we close out 2023, we have seen the prolonged challenging macro environment have a longer and more pronounced impact on fuel demand and anticipated in our previous guidance as is reflected in our updated fiscal 2023 outlook.
We see these factors continuing as we look out for.
And anticipate another challenging year for the pool market with early reads, indicating another decline in new pool starts for next year.
We are continually monitored and adjusted our business in response to consumer demand and believe our cost reduction actions and continuous improvement initiatives have allowed us to build a strong foundation. Additionally.
Additionally, our strong balance sheet and continued positive momentum on strategic growth initiatives positions us well to emerge from this period of soft demand as an even stronger company.
Despite these continuing near term industry headwinds we are confident in the continued underlying interest in florsheim, we remain energized by the long term opportunities we see in the business driven by our strong leadership position across our product portfolio continued momentum in our fiberglass conversion efforts and the overall growing base of <unk>.
Stalled pools, presenting increased recurring revenue opportunities for our replacement liner and cover businesses.
As homeowners continue to migrate to the suburb suburbs stay in their homes longer and invest in the backyard leatham will continue to leverage our strong product portfolio and innovative marketing tools to help homeowners build the backyard of our dreams, We will now open the line to questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
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 tail at.
At this time, we will pause momentarily to assemble a roster.
Our first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, good morning, Thanks for taking the questions.
Scott can you just maybe give us a little more color on why the fourth quarter revenue guide was cut so much can.
Can you just expand on maybe by product or geography or are you seeing the channel be more cautious on inventory.
Yes, good morning, Ryan How're you doing.
I would say.
As we move through three queue, and I would say the entire season and pretty much across all the product lines. We never really saw any of the products hit the peak season I think.
The driver there is the consumer kind of taking a little longer to make the purchasing decision.
Sitting on the sidelines, a little bit longer and we saw the season start to tail off.
Faster than it has since I've been in the industry.
Thank you.
The wholesale distributors, probably be a little bit more cautious as well with inventory stocking levels and look from a dealer standpoint, we've talked to dealers.
They've had a heck of a run for the last three years or so and I think a lot of them were just looking at the demand profile backlogs and unfortunately closing up shop in China exiting this season sooner than we've seen them do in Alaska.
Three years, where they've had pretty big backlogs and I'd say, probably consistent across the majority of product lines.
The good news, though Ryan is if we do look at our performance is Mark showed the results. We believe we're outperforming the market in total we've got the good fiberglass penetration going on and then the recurring revenue piece of the business. Both liners and covers have continued to perform extremely well.
I think we're just wanting to kind of look at where we think things will shake out for the year here and the good news is we've done a lot of work with right sizing the facilities the plants personnel balancing production to demand and I think the team's done a really really nice job with sequential margin improvements.
<unk> kind of it was as we look forward into 2024.
Got it okay. Thanks for that and then for my follow up on.
Some of your peers have mentioned that Canada economy, there is a little bit weaker than maybe the U S. I think your business is fairly sizable in Canada. What are you seeing there and what's the outlook.
Yes, the Canadian market was it was a tough season across the board. So I would agree with I think what others are saying.
We've kind of said I think dropped 25% of our total revenue give or take a few points.
Tough season across the board definitely a shorter build season in the Canadian market.
But I think again, we're focused on the dealer we put the new Kingston facility and there we're seeing the fiberglass results performed fairly well in that market.
Again, I would say, yes, a little worse in the U S.
In total.
Alright, thank you.
Thank you.
Your next question comes from Matthew Bouley with Barclays. Please go ahead.
Good morning. This isn't your dock yeah on for Matt. Thanks for taking my question.
For my first question.
I appreciate the color on your demand outlook for the rest of 2023 curious if you could speak to any early thoughts that you might have on the new pool builds outlook for 2024, and when maybe you expect to see a recovery.
Yeah, Hey, good morning.
As I mentioned upfront.
With the current macro environment and what we're seeing at the consumer level. The interest of pool still remains extremely high we're seeing great activity across all fronts on the website, we're seeing really good dealer dealer productivity across the board.
Well look I think the reality is we believe neutral starts will most likely be down again in 2020 for what we will be focused on is how does how does late but how do we along with our dealers continue to outperform the market overall like we've done in the last few years, there I think that's historically.
The trend of this company Bolton.
Up markets down markets, and I would say bad weather markets. We've shown the results have shown everyone that we can continue to outperform the market overall.
Got it. Thank you and then for my follow up I'm wondering if you could outline some of the cost reduction efforts that you have left.
As I said, some $18 million for this year and then expected 6 million next year.
Kind of as expected to go into that $6 million for 2024, and then how much of these costs are temporary in nature versus more of maybe a longer term structural margin tailwind.
Sure Yes.
Thanks, Good morning, and thanks for your question.
First we're very pleased with the progress that we're making on that $18 million for this year and it's been a variety of.
Things as Scott mentioned, some more structural than others, but.
Exited some warehouse facilities I think we mentioned five we've exited three smaller manufacturing sites, we've taken headcount down.
We have effectively done all of the actions necessary. So we're well on track for the <unk> team the incremental six that we're talking about next year is essentially the the tail of those actions. We took let's say mid year this year and rolling into the first half of next year. So there's no incremental <unk>.
Actions planned at this point to help deliver that those are already essentially baked into the results of what we've already John.
And if I could if I could just add in there.
Short term versus long term a lot of the lean initiatives. The team has been driving in the organization is really what enabled us to take those facilities offline in a right sizing of inventory driving lean reducing the footprint across all of our manufacturing facilities getting getting the cost reduction out of the.
Product of the material through redesign value engineering effort. So I'd say a lot has to be sticky and will lap as we go forward and when demand bounces back.
It's not like we're going to have to go but three more facilities back in and add five more warehouses I think we'll be able to continue to become more efficient with how we manage the entire footprint.
Very helpful. Thanks, guys I'll pass it on.
Thanks.
Okay.
Our next question comes from Sean Collins with Bank of America. Please go ahead.
Hi, guys. Good morning, I have a couple of questions on capital allocation.
You've been able to take a lot of inventory out of the balance sheet. The last three quarters, which has really benefited free cash flow. How do you expect inventory to trend from here and is there room to take this lower or do you need to start building inventory heading into the 2024 season.
Hey, good morning.
Yeah. Thanks, Thanks for the question I mean, as Scott mentioned were.
We're very pleased with the performance of the team as we started <unk>.
Right sizing our production levels, where we've been right sizing our production levels and managing inventory levels down and I think it's very important that we stay in the same breath, while we're maintaining our lead times.
We number one we want to make sure we have the inventory necessary to take care of our customers.
So we've taken inventory down $20 million since the end of the second quarter, I think were down $60 million since last year.
We're getting to the point, where we're probably in the current demand environment sitting around the right inventory levels, there might be a little bit more to go.
But we're also heading into that time of the year.
When we turn from big cash generation into let's say less cash generation. We may end up building a little bit of inventory before the end of the year, but I think give or take we're probably in the right spot.
With our inventory balances.
Okay got it and then the Capex load <unk>. So how are you kind of thinking about this going forward do you feel that you're at adequate capacity levels and should we expect the lower levels.
Continue in the near term are you going to need to invest in some of these facilities like Kingston going forward.
Yeah. Thanks, Thanks again for that question as you all know we've invested more.
Meaningful dollars in capacity over the last couple of years in the third quarter, we saw capex $5 million.
Primarily down versus prior year as we are nearing completion on the investments in Kingstone. So I think we're reflecting back to let's call. It more normal run rate for the business.
That $5 million for the quarter, we will see where that goes but I think thats starting to give us a reasonable feel for where for capex.
On a run rate basis, Mike.
Okay.
Our next question comes from Keith Hughes with Suntrust. Please go ahead.
Thank you.
As you look out in the next couple of months and particularly the orders are coming in are you starting to see any kind of mix pressure in terms of customers buying a putting in smaller pools or any other sort of changes and what the order pattern looks like.
Yeah, So Keith good morning.
We really haven't seen a change in the mix of our products in terms of size of the pools consumers.
Buying our dealers were installing and I think when we look throughout the country.
Parts of the country favor smaller pools, you know what I'm, saying in the sand states versus big pools in the Midwest or the northeast.
I think the advantage we have with our performance in our in ground pool category in the fiberglass penetration growth. We've been seeing is that if we all remember right with fiberglass pool has a lower upfront cost options and a comparable concrete pool, 25% to 30%, we're seeing that dynamic hold.
And the total lower cost of ownership expands over over time. So you know closer to 40% cost differential and I think thats what were seeing in wide fiberglass and our Ingram category continue to outperform the overall market is that cost differential.
And again I think the replacement side of the business from liners and covers if you've got an existing pool.
Matter, what the issues with the pool, you can do the repair and renovation of that asset you've got in your backyard onto leverage the enjoyment of the pool.
Okay. Thank you.
Thanks, Steve.
Our next question comes from Susan Mcclary with Goldman Sachs. Please go ahead.
Hi, everyone. This is Charles Perron for Susan today, Thanks for taking my question.
Primarily yes.
From your prepared comments, Scott you seem to mention that website traffic remains strong the consumers are still delaying the purchase of pool can you detail some of the reasons behind the delay of the <unk>.
Purchased despite the strong value proposition that you guys are able to offer and what can you do to bridge. The gap between you know pricing initiatives, maybe offering smaller more affordable pools are helping your dealers with financing or other initiatives.
Yeah look I think the activity on the website the interest in pools does continue to remain strong and that's what that's what I love about the industry. The company the outlook the long term performance, we'll see.
When the bigger macro and the uncertainty kind of kind of goes away.
We've done a lot of creative things with our dealers are.
Various financing initiatives how to sell the tool to the consumer of working with our different partners, who will do financing right now we stay out of the finance the pool the transaction that's between the dealer and the consumer.
But I think look there's a lot of uncertainty out there right now in the world. Unfortunately, and I think until some of that clears.
We're seeing a reversion back to it's a longer buying decision than what we've all been accustomed to year over the last two to almost three years.
And I think they're looking out.
And that decision sitting on the sidelines now and I think when when they come back post, let's say the holiday season.
What I think will start to be thinking about that buying decision as they move into.
The 2024.
Timeframe.
Okay. That's good color thanks for that Scott.
Then looking at the price cost dynamic can you help us understand you know with the most recent move in steel and energy. How do you think about price costs into year end and early reads into 2024 based on current conditions, but also in terms of the pricing initiatives I think you talked about 2% pricing in the quarter, how should we think about the pricing on goes.
Forward and the carryover into 2024.
So let me jump in and take that one we'll be getting more specific about 24, when we get back together in March and talk about the year ahead guidance, but as I mentioned in my comments. This year, we have held prices.
Benefits of around 2% through the first nine months.
More or less in line with what this industry has typically done maybe a little bit lower.
Maybe two or three 4% is more of a historical norm, so but very pleased to have been able to hold onto that price. As you mentioned, we are seeing some modest levels of deflation in a few commodities now although prices still remain at very elevated levels. So.
So we feel good about our ability to hold the prices that we did this year they've been helping as we've seen our margin expansion both year over year as well as sequential.
And with with.
Some modest levels of deflation that we're experiencing we feel very good about where we are with pricing.
And our ability to hold price.
Okay. Thanks for the color Mark and have a great fourth quarter.
Okay.
Again, if you'd like to ask a question. Please press Star then one at this time.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Scott Rowe Jetski for any closing remarks.
Hi.
Thanks, everyone for your time on today's call and your ongoing interest in late on and as we said earlier you know, we're well positioned to continue to navigate near term industry challenges. We remain confident in the long term opportunities we see in the business and I look forward to speaking with you all again, when we report fourth quarter and full year results next year between.
Now and then I hope everyone has a safe and happy holiday season, as well take care everyone Bye.