Q4 2023 Latham Group Inc Earnings Call
Okay.
Good afternoon, and welcome to delay some group fourth quarter and full year 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.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Casey Coterie Investor Relations representative.
Please go ahead.
Thank you. This afternoon, we issued our fourth quarter and full year 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 are lethal president and CEO, Scott Rydzewski and CFO Oliver club.
Following their remarks, we will open 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 the 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.
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'll now turn the call over to Scott <unk>.
Thank you Stacy good afternoon, and thank you all for joining us to review our fourth quarter full year 2023 results and discuss our outlook for 2024, we were pleased that our fourth quarter results came in slightly ahead of our guidance range.
For the year, which we focus on several structural cost saving initiatives to mitigate the impact of another year.
It also was another year that showed the resilience of our business and lengthened the ability to outperform the overall market decline and to generate substantial cash flow from operations.
There are several key takeaways worth, noting that helped us navigate the challenging business environment in 2023.
That set us up to emerge an even stronger company and a competitor as business conditions improve first we continued to drive the conversions of fiberglass molds are concrete pools as a result of Lakers leadership in this category. We were able to report sales for the year outperformed the declines will starts in the U S by approximately 10.
Percentage points second.
We ended 2023, and a strong competitive position with leading market share in all product categories in which we compete and energized dealer network and greater consumer engagement, all supporting Lincoln's ability to capture additional market share as industry conditions improve third we took decisive actions early in the year.
That have fundamentally improved our cost structure by closing facilities streamlining operations and accelerating our value engineering and lean manufacturing initiatives, we have structurally reduced our costs and increase our capacity, giving us the ability to considerably increase our profit margins once volumes recall.
Lastly, we strengthened our financial position in 2023, ending the year with a record cash position of just over $100 million.
Providing substantial financial flexibility and demonstrating our ability to efficiently manage through difficult market conditions.
In summary, lethal exited a year, which saw a significant decline in new England will start and have entered 2024 with strengthened market positioning and the resources to quickly take advantage of the eventual rebound.
Specifically, we continue to see progress in fiberglass penetration of the new in ground pool market inexpensive fiberglass now accounts for approximately 22% of pool starts in the U S.
This compares with 21% and.
18% in 2022 and 2021, respectively.
Clear indication of our leadership position in fiberglass driving this ongoing conversion progress.
<unk> fiberglass product sale accounted for approximately 73% of <unk> full year 2023 in ground pool sales since 2019, we have grown our fiberglass product sale at a compounded annual rate of about 15% and.
And we have several strategic initiatives in process to leverage the share gains we've achieved to date.
Texas and the Carolinas to further penetrate the sand states, notably, California, Florida, Arizona, and Nevada, where concrete pools continue to dominate.
The value proposition is compelling.
<unk> last pools have an average 25% to 30% lower upfront cost versus concrete and a total overall lower cost of ownership of 35% to 40% over time.
They can be installed as fast as one day by some of the best dealers and approximately three days on average for the majority of our dealers compared to three to six months for most concrete pools also fiberglass pools are more eco friendly than concrete pools, using 30% less chlorine eliminating the pollution created by the production of concrete.
And not requiring the ongoing maintenance repair and refinishing generally needed for concrete pool.
In 2023, we had approximately 300 fiberglass grand dealers, who sold at least five pools, which is about 100 more than we had in 2019 and speaks to the positive momentum for both fiberglass tools interrelate with expansive dealer network.
While dealer recruitment is important to our growth strategy, increasing dealer productivity has been greater priority and we moved ahead with several initiatives in 2023 that have done just that these.
These include the laser design center, which enables our dealers to easily create branded content and customized collateral materials are.
Our fiberglass boot camp training sessions and of course, our lead generation program, which result from the direct consumer engagement that we can see.
We need to build in 2023.
Our marketing spend continues to yield very positive results recent data showed that labour ranked number one in fiberglass <unk> and in 2023, our website traffic increase substantially over 2022 levels.
The pent up consumer demand for pools, which we believe is substantial.
Our integrated marketing programs that inform and educate the consumer and feature regional builders have been successful in driving traffic along with a robust tools that give homeowners the ability to design plan and actually visualize how new pool will look in the outdoor space.
Thank you.
An increasing number of highly qualified leads in the respective markets.
While fiberglass conversion represents <unk> largest growth potential approximately 47% of our total 2023 sales came from our covers and liners product lines. The majority of which represent replacement products that are not as tied to new pool starts and are therefore more resilient during cyclical downturns.
We also continue to prioritize new product introductions within these categories to drive sales.
In particular, our automatic safety covers which can be use on any type of in ground pool experienced increased consumer adoption and demand in 2023.
In addition to their safety features. These covers provides a homeowner with significant energy water and maintenance savings.
And measure by late <unk>, our proprietary AI powered measurement tool for pool covers and liners has been met with very positive dealer response and should continue to help drive demand for these product lines, we continue to rollout through 2024 to.
To sum up there were many bright spots relate them in what was a very difficult industry environment in 2023, we.
We have entered the new year cautiously mindful that lower interest rates and improved consumer confidence levels are not likely to occur in time to benefit 2024 pool buying season.
We do expect that there will be a tailwind as we exit 2024 and heading into the 2025 season.
Our conversations with channel partners and colleagues in the field and at recent trade shows as well as our own data indicate a high level of consumer interest in former ship bulk buying decisions are being delayed, particularly by those who plan to finance the purchases.
We do not expect the projected declines in interest rates will occur quickly enough to impact our peak will building season in 2024, and therefore, we are managing to an approximate 15% decline in new pool starts in 2024 within that context, you can expect labor to continue to reduce structural cost while maintaining inverse.
<unk> and future growth and capability.
We are positioned to rapidly capture share as school starts increase which we anticipate will occur in 2025, let.
Let me now I'll turn it over the call to our CFO Oliver Globe, who will provide a review of <unk> fourth quarter and full year financial results.
<unk>.
Thank you Scott and good afternoon, everyone.
Please note that all comparisons we discussed today on a year over year basis compared to the fourth quarter of fiscal 2022, and full fiscal year 2022, unless otherwise noted.
Net sales for the fourth quarter of fiscal 2020 with $91 million compared to $108 million in Q4 of 2022, reflecting lower volumes.
Softness in demand was the key factor in the 23% decline in <unk> sales.
Our other product lines were more resilient and helped to mitigate the quarter FNC clients.
<unk> only declined 10% during the quarter to $32 million as we saw continued success in all winter coats and continued adoption of automated 50 cover.
<unk> of $13 million were essentially flat from previous year, driven by strong replacement activity.
Despite the decline in sales our fourth quarter gross margin reached 23, 3%, increasing 540 basis points compared to the 17, 9% reported in the fourth quarter of 2022.
This strong showing resulting from the benefits of our cost reduction programs lean manufacturing initiatives and site consolidation that more than offset lower absorption due to reduced production volumes at all plants.
SG&A expenses decreased to $24 million or 26% from $33 million or 31% of sales during Q4 of 2022, reflecting ongoing cost containment programs.
And a significant decrease in noncash stock based compensation expense.
Fourth quarter, adjusted EBITDA was $10 million more than doubled to $4 4 million reported in last year's fourth quarter, driving a 680 basis point expansion in adjusted EBITDA margin to 10, 9%.
Turning to our full year results net sales were 566 million compared to 696 million in the prior year periods.
Byproduct line, Nathan Ingrown swimming pool.
For the full year with $298 million down 23% year over year.
As Scott mentioned in ground pool performance outpaced the U S, new and growing pool installation market for 2023, which we estimate to have declined by 30% in 2023 compared to 2020 tool. This is a strong indication of the positive momentum we have demonstrated in driving conversion to <unk>.
Fiber glass fluids.
A year over year sales declined 20% almost 10 percentage point less than the overall market.
<unk> of $128 million were down 16%, while the cover of $141 million declined 11%.
Collecting soft a homeowner demand in the current economic environment, partially offset by a pickup in demand for ultimate safety cover.
Gross margin was 27% compared to 31, 1% in the prior year.
Fixed cost leverage improved throughout the year and actually was a slight tailwind in Q4, but was lower for the full year.
Margin headwinds continued to be partially offset by benefits from cost reduction programs as well as our lean driven site consolidation initiatives.
We have reduced the number of production sites, while maintaining capacity.
SG&A expenses decreased to $110 million from $147 million in fiscal 2022, reflecting a 28 million reduction in non cash stock based compensation expense as well as the benefits from our various cost reduction actions excluding.
Excluding non cash stock based compensation SG&A was $92 million, a decrease of $8 million or 8% <unk>.
Adjusted EBITDA was $88 million compared to $143 million in the prior year, resulting in an adjusted EBITDA margin of 15, 5% compared to 26% in 2022.
Turning to the balance sheet, we ended the year with a very strong financial position.
Net cash provided by operating activities more than tripled to 116 million for full year, 2023, which reflected the cash generation capability of Nathan's business augmented by the benefit from inventory reduction.
The strong cash flow performance year to date net cash position of $102 8 million at year end, giving laythan substantial financial flexibility to navigate a range of economic scenarios.
We also repaid $13 million of our term debt in 2023, ending the year with a total depth of $301 million and a net debt leverage ratio at 225.
Well below our debt covenant of 525.
Capital expenditures were $33 million for full year 2023, compared to $40 million in the prior you.
Now that we have completed investments in our new facility and integrated our acquired fiberglass manufacturing assets in.
Oklahoma, we expect to return to a more normalized capex run rate for the business.
Turning to our outlook for fiscal 2024, as Scott noted, while we anticipate increased consumer interest in fluid volume from easing interest rates in 2024 meaningfully lower rates are not expected to occur in time to benefit our 2024, who are building season, which peaks in Q2.
In early Q3.
Although we are managing to a down year in 2024, we are optimistic that we are reaching the bottom of the cycle and are planning for a recovery in U S flu starts to be realized in 2025.
Against this backdrop, we are providing 2024 guidance of net sales of $490 million to $520 million that reflects our expectation that our sales will outpace new U S. Fluid starts due to continued fiberglass conversion.
Adjusted EBITDA is anticipated between 60 and $70 million and assumes stable pricing.
<unk> investment in sales marketing and engineering and R&D to accelerate the conversion until fiberglass.
Going digital transformation programs and normalized performance based compensation.
Capital expenditures are projected to range from 18 million to $22 million and include continued investments in new cost reduction and lean initiatives.
New fiberglass models manufacturing facility improvements digital transformation and ongoing safety initiatives.
As we enter 2024, we are seeing a return to a normalized seasonal cadence, reflecting historical backlog levels and distributors, taking a cautious position early in the season.
We expect total Q1 sales of between 98 and $104 million and adjusted EBITDA of between six and $8 million.
As Scott noted earlier in today's call. We have responded to difficult market dynamics with cost reduction actions that have reduced our manufacturing OLED had condon spend resulting in $20 million of reduced spending in 2023 with an additional $4 million carryover benefit to be realized.
In 2020.
We continue to focus on enhancing our productivity.
Executing on value engineering and lean initiatives.
Our balance sheet remains in excellent condition.
In addition to repaying $13 million of debt in 2023, we paid down another $18 million in depth earlier this month, and we anticipate generating positive operating cash flow in 2024.
Given the economic outlook, we continue to be thoughtful and disciplined in our.
Capital allocation strategy with that I will turn back the call to Scott for his closing remarks. Thank you Oliver as you have heard Lytham has entered 2024 and a very strong financial position. Our priorities are clear continue to drive the adoption awareness of both fiberglass and automatic safety covers which will lead to increased <unk>.
Version of fiberglass pools and growth in auto covers as more consumers purchase them for peace of mind.
Continue to gain additional operating efficiencies for our ongoing value engineering and lean manufacturing initiatives.
And maintain a strong balance sheet.
The long term fundamentals of our industry are very compelling outdoor living remains one of the fastest growing categories in the repair and remodel sector.
Cool ownership is a natural addition for consumers who are spending more time in their home and want to fully enjoy their outdoor spaces by building the value of their homes. Additionally, the value proposition of fiberglass products provides an excellent opportunity for consumers to become pool owners and gives them an excellent platform to drive accelerated growth.
The actions, we took in 2023 and our priorities for this year should enable us to outperform the market again in 2024 and to achieve meaningful share gains and expanded margins and profitability as the pool industry conditions improve.
Operator, I would like to open the call to 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.
Any time Youre 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.
The first question.
Comes from.
Tim Weiss.
With Baird. Please go ahead.
Hey, guys. This is Robert <unk> on for Tim This afternoon.
First just want to say, thanks for providing the incremental data on the fiber glass sales for 'twenty. Three that's really helpful color to have to appreciate that.
And then moving on to the balance sheet, it's nice to see leverage moved a little bit lower sequentially could you provide some additional color maybe on how you are trying to manage the balance sheet for 24, and then related to that kind of what are the puts and takes to cash flow for 2024.
So let me start with.
Good good afternoon, Robert Let me start with your second question thoughts on cash.
Cash flow in 2004, we've traditionally you haven't given guidance for cash flow, specifically, but if.
I can help you one thing.
Is to start with our EBITDA midpoint guidance at $65 million deduct.
About $27 million in interest rate and $21 million, which is the midpoint of our capex range that is a good proxy for.
Cash flow and as you heard me, saying in my prepared remarks, we do expect the 'twenty 'twenty four is another year, where we stay.
Where we are cash flow positive.
In terms of your question on how do we manage the balance sheet. We are quite pleased on where we are.
That is due to a 2023 with solid cash flow generation.
<unk> bye.
Significant reductions in net working capital, especially inventory.
And all of that.
Give us the luxury to have.
Our cash position.
$102 8 million at the end of the year.
As a result of the net debt so that $200 million.
And as a result of this our net debt leverage ratio was at $2 five so all in all quite comfortable on where the balance sheet stands right now.
Great. Thanks, and then I think about the 2024 EBITA guidance. What would you say are the key bridge items to consider to get to the $65 million at the midpoint.
Well, let me take that one as well.
As you think of our 2020 for EBITDA guidance really qualify physicians to consider here.
The most impactful one that it's driving the entire EBITDA.
GAAP.
The impact from lower volume and lower fixed costs.
Yeah.
That is offset by a modest small level of deflation nothing in comparison to the inflation we've seen over the last few years.
There's another tailwind coming from our cost containment initiatives that is the carryover of about $4 million from the previously announced then all implemented.
Cost saving programs that we have discussed in prior calls as well as the increasing focus on lean and value engineering going forward.
The combination of those two we do expect not only in 2024, but also in the USA offset to more than offset cost inflation. So again tailwind from what you've also seen us talking about.
That we are protecting some investments these investments help us to fare better than the overall market.
As we look back a couple of yoga democracy.
So I invested in the market and with Showboat once the market returns to outperform the market and these are the.
Investments in network lead generation fiberglass combos and so forth.
I think the last point I would add.
Robert.
Accrual for performance based compensation, we are at the beginning of the year accruing towards full achievement of our goals, which are the basis for our guidance today.
And as that didn't fail.
Prior year that is a year over year.
Got it thanks for the color I'll leave it there.
Thank you.
The next question comes from Shawn Collins with Bank of America. Please go ahead.
Hi, guys. Thank you for taking my question.
First your assumption on new pool construction is.
Debt lower than most of your peers what.
What do you think is driving the difference there is it conservatism is it regional exposure or is that just kind of better insight from what youre hearing from the dealers.
Hey, guys. Good afternoon, Sean good to catch up the year again, I think when we step back if we look at ourselves really as the leader in the in ground pool industry. When you think about new pools going in the ground.
We've probably got some of the best insights into what's happening in the market out there versus maybe some of the other equipment guys in that.
And look we're managing the business through what we believe to be a decline of about 15% on average in the U S.
Really what we've done kind of back to Albert's point of investments we've made in the business, we've really position ourselves that we can.
<unk> ramp up production, if that number turns out to be a little too conservative and I think incrementally we're continuing to drive increased website activity trying to drive the lead generation.
And the goal will really be frost to try to outperform the overall market.
We look at 'twenty four I think similar to what we've done over the last couple of years here.
Yes.
Okay. Thanks, and then the midpoint of the guidance is down 11% year over year does that assume you're taking share on the new pool side and then.
Can you give us any insight into your expectations for the other buckets.
And covers and liners.
Yes, so Sean I'll take that.
The midpoint down at 11, again think back to the fiberglass world and driving fiberglass penetration taken a higher percentage of volume.
Share from concrete and in some cases vinyl will continue to drive that which will help some and then if you look at the recurring revenue portion of our business with the liners and covers that replacement and repair and remodel piece of the business performs a lot better for us from a stability stay.
Endpoints I think when you think of that.
Maybe being down in the low low to mid single digits I think that's what's helping the blend to the 11% number at the midpoint.
Okay.
Okay. Thank you.
The next question comes from Scott Stringer with Wolfe Research. Please go ahead.
Hi, guys. Thanks for taking my question I was wondering if you could provide some outlook for gross margins for the year in terms of cadence higher commodity cost trending and it's like sell through of higher cost inventories in impact.
I'm glad to tell you that again, we haven't traditionally provided guidance specifically around gross margin, but I'll give you the key key building blocks.
Obviously.
With my prior answer to improve EBITDA margins or gross margins would be primarily impacted by the.
The fact that we are planning for a year with lower volume.
That will be.
Slightly this will be offset by.
Cost deflation commodity cost deflation.
And again.
Small versus the <unk>.
Inflation, you've seen over the past year that some some commodities and oil bucket move down some up.
Sure.
Unbalanced.
Bucket the basket is too.
A little bit close to the highest we've seen.
The past few years.
That is also.
Oh.
Slide tailwind from our continuing cost containment actions.
So overall I would say gross margin.
Roughly in line with where we were in 2023.
Yeah.
Okay got it and then on the Capex for 'twenty 'twenty four is there any way you can parse out like maintenance Capex capex versus investment Capex. How are you feeling about investing in capacity today for the current environment.
So I think.
With regards to Capex, we certainly come from.
A couple of years investing in capacity with the Kingston, which are now fully completed as we've indicated in our last.
Earnings call or that $5 million quarterly or $20 million annual run rate is all of what we think of being being normal.
Specifically with regards to 2024, there's a lot of maintenance investment in there.
But to also.
Complemented by investments in our <unk>.
Millions nearing.
<unk> solar investments into efficiency of our assets.
And then there's.
A little bit of digital transformation in there as well.
One thing I would throw in there incrementally Scott as you know we are continuing to invest in new fiber glass models as we rollout refresh the lineup there there is a little bit of growth capex.
Fiberglass side, but more model related.
Incremental malls in certain facilities to build out network.
Great. That's helpful. That's all I had thanks.
Thanks Scott.
The next question comes from Jonathan Bettenhausen with <unk> Securities. Please go ahead.
Hi, I'm on for Keith you can see evening. Thanks for taking my question I was wondering if you could give us some more color on your current capacity utilization rates and kind of how you are planning on taking.
Taking your production levels going into the spring.
Yes, so Jonathan.
Earlier this afternoon.
Not distinctly disclose capacity utilization in some time, but if you kind of go back to the 'twenty. One 'twenty two time frame when we talked about ramping kingstone and get that fully ramped.
We're in a really good position capacity wise throughout the entire network.
Just kind of go back and look at the numbers, we have run into 'twenty, one timeframe, we've got a lot of volume.
Strength from a positioning standpoint, and all of the facilities Oliver mentioned, a couple of times some of the lean activities, we've done and the rest of the business to give us some better capacity, we sit in a really good lead time delivery position on throughout the entire network in terms of kind of I'd say back to probably some of the best lead time delivery.
Service levels since I've been in the business going back 12 years now so good position, we don't need to put more plants in the ground or anything like that but we will.
Evaluate opportunistic things that could be out there from an M&A standpoint, and just kind of your cycle back to 2023 and a lot of the activities. We did did enable us to do some rooftop consolidation close some facilities.
Which drove some of that cost savings in 'twenty, three and the carryover into 2004.
That's helpful. Thanks, and was there any price impact on our fourth quarter sales.
Price was roughly flattish with <unk>.
Most of our.
Price Anniversarying also single queue floor price again roughly flattish.
Okay I appreciate it.
Again, if you have a question. Please press Star then one the next question comes from Matthew Bouley with Barclays. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking the questions.
The commentary around the planning for that for the eventual recovery.
I guess 2025.
From your perspective, Scott what do you think it would take I guess for new pool builds to to recover is it simply a an interest rate issue kind of looking at more home turnover kind of general consumer sentiment from your perspective and history in the industry you know what what do you think it would take to kind of reinvigorate the mark.
Thank you.
I think Matt good afternoon, I think you've kind of hit several of the key points. There now with if you look back in.
Say ballpark, 50% of all tools are financed and you can kind of say most of the finances dried up it's not to say that has gone to zero, but I think a movement in interest rates seems to be the common denominator, we're hearing from consumers and our dealers that's keeping people on the sideline. If you look at if you look at the activity.
On our website on the lead generation.
Folks.
Establishing their my late in Macau the interest in the pools is definitely there and we continue to hear more and more the homeowners just awaiting a move in interest rates to get them back into the game and I think the million dollar question is how much of a move we'll start to get them off the sidelines.
In some of our prepared remarks, and the data we published it's probably not going to be enough.
To greatly impact the second half of this year, but I think its definitely we will start to create a tailwind as we move into and through 2025.
So the good news is interested they are one they're the number of homes that don't have a swimming pool that we've talked about is there. It's really just getting getting rates down 100, 200 basis points to get people back into the buying decision for pools.
Got it okay. That's helpful.
And I guess secondly, just on <unk>.
On your kind of dealer conversion efforts.
You know and you have this kind of slower pool market, how our dealers I guess approaching willingness to migrate to fiberglass given that given that that market. So.
The type of thing, where you know people don't really really want to rock the boat.
When the market is slow like this or on the other hand is it a situation where when you have this kind of slow or slower trends in the market, maybe it's actually easier to kind of convert your business from a dealer's perspective, so kind of how is that playing out in this market.
Yes, it does.
A lot of a lot of pieces in there Matt in that question I think if you go back to some of the data.
If you think about where we stood in 'twenty three with over 300 Grand dealers, who did at least five pools right 100 more than 2019, and you think about the fact that we've had two consecutive down years, but we've been able to drive more productivity at the dealer level right. We've talked many times this isn't about.
How many more dealers we need to add it's about how do we make our existing dealers more efficient with the bill and get them going I think.
Dealers are seeing the acceptance and adoption of fiberglass grow more and more so again 600 basis point improvement in the fiberglass penetration number since 19 right for our fiberglass sales have grown at about 15% CAGR since 19, while the market's declined about 3% on average per year. If you look now.
19 to 2023.
We've not had issues recruiting dealers and bringing them on board for fiberglass.
I think it's been easier.
With the slowdown it's allowed our team our marketing team to develop more tools getting the.
To build a portal out there providing really great visibility to the dealers now with the lead generation, where we can now monitor and watch.
How the lead is moving through the system with them and follow ups in getting leads close so again, it's about continuing to give them the tools to make their life easier.
And look I think we've even bridge a little bit further and helping them and how do you actually estimate of full project in the backyard for a consumer understanding their profit profile at a install <unk>.
Level of profitability and how they should properly price a pool and I think bigger picture math and you think about the cost advantage of fiberglass versus concrete.
As consumers are looking at how much the cost will pool has gone up.
Some dealers are trying to say look I struggled selling a concrete pool of 105 125, $150000 kind of where you are.
The fiberglass value proposition at the consumer level is very appealing for them to go and market and sell that.
The others.
Yeah.
Yep got it well thanks, Scott Good luck guys.
Thanks, Matt.
The next question comes from Andrew Carter with Stifel. Please go ahead.
Hey, Thank you good evening I'm, just kind of going through your guidance here and just wanted to understand well actually first clarifying question the $4 million cost savings is that all in the first quarter.
The incremental front end loaded this year.
Robin relative combination of growth in.
Second quarter.
Okay, let's see okay.
Two.
So I guess my question is then I'm looking at your decremental in <unk> and I'm getting like something in the mid teens and then for the final nine months of the year I'm getting a decremental of somewhere at the midpoint of 80%, so and I'm getting that off of a 37 million to $13 million revenue decline with EBITDA down 20.
Three of 15.
What's going on there is there a stepped up investment in SG&A do you expect a lot of gross margin pressure I know you expect to finish even.
I just had some gross margin momentum anything helps out with there.
Okay.
Yes, I think when it comes to.
First quarter. This is where you typically see a lot of marketing investments this is where our dealer conference.
And both of you in terms of SG&A.
FX season those.
Between the quarters.
But I think what Youll also see agenda.
The ability of the team to contain costs and you can see.
That and our detriment, especially in Q1.
Well I mean, I'm asking about the nine final nine months of the year, the Decrementals I'm getting a 90% decremental.
Alright.
We can take it offline.
Let's take it offline I guess the second question I have is you pretty much banked in I don't know almost like the season's gone how quickly can things turn and I guess importantly, how quickly could you flex pay at a quick quick turn demand maybe gave a surprise on interest rates.
Something of that sort is there any fear and that are not being invested for a quick turn versus your turned in 25 that you are expecting.
Yes, so Andrew I'll take that one.
Couple of pieces in there one I think as I mentioned earlier.
We've actually probably.
Not cut as much cost as we could hope we continue to stay invested in the business maybe held onto a little bit more labor with the expectation that this thing is going to turn at some point and we want to be prepare we have plenty of the capacity we need to quickly ramp up and if you just go back to 'twenty, one and look at how quick.
The business ramps in that 'twenty, one 'twenty two time frame.
We have more capacity and capability and efficiency than we had then so the ability to ramp faster is a lot better.
We've not talked supply chain.
Issues in a long time and Thats a good thing because all of that is behind US we've got a much stronger vendor base and supply chain set up.
Where and how we store materials and diversity of the base, which will enable us to turn quickly if things pivot and look at it back to the expected 15% decline in the market I think it's fair to say that we're probably taking a little bit more conservative approach.
It's early it's early in the year right, we're not mailing and say in the year is over we are starting to see the season ramp year nicely. We've got a we've got to work with our wholesale distribution partners are continuing to run lean with their inventory levels until they see how the season is going to play out and if it if it does move in Pos.
We will be able to take advantage of it.
Pretty pretty easily.
Okay.
Thanks, I'll pass it on.
Thanks, Andrew.
The next question comes from Michael Francis with William Blair. Please go ahead.
Hey, guys I'm on for Ryan Merkel today.
One clarifying question and then a follow up to that.
Did you say that liners in copper is still going to be down low single digit to mid single digits.
On a volume basis.
From a unit standpoint.
Probably in that down 3% to 5% range.
Any price on that.
I think probably probably think price flattish.
Okay and then.
My follow up is and this might be somewhat new Michael.
Michael just if I step back and clarify we talked that covers we need to remember there is that recurring revenue portion of the winter safety cover in there and there is the automatic cover a portion of the business and I think in total over probably the total covered product category.
So it's a blended rate between what we've assumed for the replace confused which is significant.
So I guess, if I can push them for both basically cover the bottom line is kind of.
Don.
Mid single digits, but then there's also the share which is.
The expense ratio.
In accordance with Youku thoughts on other types of instruments.
Okay.
So I'm, just making sure I get this straight because if I take both whiners and covers down.
The 4% that has in ground pools in my model down about 15 am I thinking about that wrong or right. Because it's down 15, there is no share gain there.
You probably end up in the in growing food category at 15, maybe slightly better driven by fiberglass combos.
Okay got it. Thank you that's all I had.
The next question comes from Susan Macquarie with Goldman Sachs. Please go ahead.
Thank you good afternoon, everyone.
Thank you.
Good Scott how are you.
Again, thanks, so much my first question Scott is around.
Thinking about the pricing on the pools.
We start to see cost deflate, and especially if we start to get bigger moves down on the cost side of things.
As an opportunity to to adjust your net pricing to help alleviate some of that affordability constraint that you talked about that's happening on the ground.
Generally how do you think about that balance between price versus volume given the conditions today.
Yes, Susan I think.
Good that's a good question I think as we've thought about it. This is part of what we like about our business and where we sit in the categories.
We're we're a small percentage of that total backyard project right. So.
So our view is to.
To change our pricing a few hundred dollars on a liner cover or 1000 or $2000 on a fibroblast tool is probably not going to get pushed all the way out to the end consumer and be enough to stimulate demand at the consumer level too.
Make that buying decision on a project that could be.
For 5004 replacement liner recover where call. It 70 580000 for fiberglass will install.
As we work with our dealers there are different regional competitive dynamics at play that we need to think about there is more than just what the list prices or.
How we would change our pricing at the list there.
Rebates Theres other marketing programs, we won what we run with them, but we think we can we can hold our price fairly well and we've not really seen a significant movement yet on the direct material cost side labor continues to trend up rates continuing to go up.
Got it.
And rates are I should say material costs are still in many cases.
Fairly elevated from where we were back in the 2019 2020 timeframe, but we took on <unk>.
100, plus.
Inflation in the business.
And really never were able to pass full pricing on to maintain margin levels, which has driven some of the compression we've seen well look it's different in every product category I think thats, where we need to maintain flexibility as we go forward and look if we get a massive tailwind from deflation.
It could be a different story as we look out in time, but right now it's.
And a flat pricing for the year or is the assumption and the approach we're taking.
Okay, that's very helpful color.
Then I'm thinking.
Thinking about the productivity and the efficiencies that you can realize I know you talked about that $4 million of carryover benefit that you'll get in the first half of the year, but are there further improvements that you can make on the cost side as we go through this year and.
The other opportunities that perhaps can come through over time.
Yes, so Susan.
Continued to ramp up our value engineering efforts and initiatives on all fronts, we've talked a lot about the lean a lot of that.
With that said.
We haven't been doing it but I think we've continued to accelerate that we've continued to add.
More engineering resources to the team.
And part of the incremental decremental margin, we're seeing as we move through the year as we ramp and bring more engineers on to start to build that pipeline of productivity and efficiency projects on the material side in fiber glass and the other product areas increased the number of lean events, we're doing in the factories.
It's going to take a little while for that ROI to kick in but what we've seen from the initial waves.
Clearly as more become from all of those initiatives, we got some really really neat things in the hopper.
I think as we as we move through time that pipeline will bill and we're trying to get onto our ongoing 3% to 5% productivity gain every year on the material front from those efforts and initiatives.
Okay. That's great. Thank you and good luck with everything.
Alright, Thanks, Susan Thank you.
This concludes our question and answer session I would like to turn the conference back over to Scott <unk> for any closing remarks.
Yes. Thanks.
Thank you for your designed everyone. They call here this afternoon and your ongoing interest in late.
As we think about laid the right we're extremely well positioned to continue to outperform the overall market and drive that continued acceleration fiberglass penetration.
As a total the new in ground pool starts like we discussed earlier today. We also remain very confident in the long term growth opportunities, we see not only in our business and the industry overall, and we look forward to catching up with all of you at upcoming investor events upcoming investor events.
Thanks for your time and have a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Good afternoon, and welcome to delay some group fourth quarter and full year 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal like conference specialist by pressing the star key followed by zero 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 now like to turn the conference over to Casey Coterie Investor Relations representative.
Please go ahead.
Thank you. This afternoon, we issued our fourth quarter and full year 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 are president and CEO, Scott Rydzewski N C F O olive urquell.
Following their remarks, we will open the call to questions during.
During this call the company may make certain statements that constitute forward looking statements, which reflect the company's views with respect to the 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'll now turn the call over to Scott Rachesky.
Thank you Stacy good afternoon, and thank you all for joining us to review, our fourth quarter and full year 2023 results and discuss our outlook for 2024, we were pleased that our fourth quarter results came in slightly ahead of our guidance range capital a year in which we focus on several structural cost saving initiatives to mitigate the impact.
With another year of lower pool.
It also was another year that showed the resilience of our business and lengthened the ability to both outperformed the overall market decline and to generate substantial cash flow from operations.
There are several key takeaways worth, noting that helped us navigate the challenging business environment in 2023 and a half.
Set us up to emerge an even stronger company competitor as business conditions improve first we continue to drive the conversion of fiberglass molds or concrete walls.
As a result of lasers leadership in this category, we were able to report sales for the year that outperformed the decline in new pool starts in the U S by approximately 10 percentage points.
Okay.
Mid 2023, and a strong competitive position with leading market share in all product categories in which we compete.
And energized dealer network and greater consumer engagement, all supporting Lincoln's ability to capture additional market share as industry conditions improve.
Third we took decisive actions early in the year that have fundamentally improved our cost structure by closing facilities streamlining operations and accelerating our value engineering and lean manufacturing initiatives, we have structurally reduced our costs and increased our capacity, giving us the ability to considerably increase our profit.
Margins once volumes recover.
Lastly, we strengthened our financial position in 2023, ending the year with a record cash position of just over 100 billion.
Regarding substantial financial flexibility and demonstrating our ability to efficiently manage through difficult market conditions.
In summary, lethal exited a year, which saw a significant decline in new England will start and has entered 2024, which strengthened market positioning and the resources to quickly take advantage of the eventual rebound specifically.
Specifically, we continue to see progress in fiberglass and penetration of the new in ground pool market unexpected fiberglass now accounts for approximately 22% of pool starts in the U S.
This compares with 21%.
18% in 2020.