Q3 2024 Latham Group Inc Earnings Call
The End
San Francisco: and welcome to the late-fungroof Third Quarter 2024, our name's San Francisco. I'll participate in the next episode.
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San Francisco: Out here today's presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Casey Kotary.
Speaker Change: and Vester Relations are presented. Please go ahead. Thank you.
Casey Kotary: This afternoon we issued our third quarter 2024 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 layfins president and CEO Scott Rajeski and CFO, Oliver Gloe.
Paul and Mary 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 future events and financial performance as of today or the date specified.
Speaker Change: Actual events and results made 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 10K and subsequent reports filed or furnished with the SEC as well as today's earnings release.
The company expressly displays any obligation to update any forward-looking statements, except as required by applicable law.
Speaker Change: In addition, during today's call, the company will discuss certain non-gap financial measures. Reconciliation of the directly comparable gap measures to these non-gap measures can be found in the slide presentation that accompanies our prepared remarks, which can be found on our investor relations website.
Speaker Change: All now turn the call over to Scott Rajeski.
Speaker Change: and thank you all for participating in today's call for this cut start third quarter results and review our business outline.
Scott Rajeski: Our third quarter performance was mostly consistent with our expectations. And again, demonstrates both lathe and resilience and progress within a challenging industry environment.
In terms of this quarter's T-takeaways.
First.
Speaker Change: Marka Condition through Quarter-End played out in line with our initial expectations for a prox with 15% decline in new pool stars this year. Second, with this as a backdrop, we continue to drive awareness and adoption of fireglass pools and automatic safety covers. Two key drill theories for LAPA.
Speaker Change: Third, our Leaning Manufacturing and Value Engineering programs together with improved procurement activity, resulted in meaningful cost reduction that led to stable growth profit and expanded growth margin in the third quarter on lower year on year sales.
Speaker Change: and lastly, we ended the third quarter in a strong financial position with cash for approximately 60 million. After having dispersed approximately 65 million for the Congressar's Central acquisition in rebate approximately 20 million debt in the first nine months this year.
Speaker Change: Lake of the Grove Strategy and Leadership Position in Fireblast Pools are enabling us to outperform this industry downturn and our positioning us as a prime beneficiary of a market recovery.
Speaker Change: We have the broadest land of full configurations, the widest range of price points, and the greatest array of specialty features including spa, the titanium wedges. Also, with 12 fiberglass manufacturing facility globally, we are best positioned to serve the major US markets in Canada.
Speaker Change: In the third quarter, Lincoln's fire-lapse fool sales have contained a show role to strike. Their market differentiators are compelling, cost efficient, fast-needed, install, and requiring fewer chemicals to maintain.
Speaker Change: In our commitment to innovation to address and anticipate consumer preferences is another element driving increase in adoption of fiberglass pools.
Speaker Change: For example, we added to our Plumpool offering earlier this year with a launch of the Enchantment Series in several markets with a plan to expand to all of the US in 2025.
Speaker Change: While one fool represents only a small percentage of our full-length, they are growing category for us and they appeal to consumers looking for space-saving, affordable options for aquatic exercises, rehabilitation and recreation.
Speaker Change: The natural views are particularly attractive in the sand states where we are deploying more resources to gain share for power less in the coming years.
Speaker Change: Faced in our year-to-date results, we expect fiberglass pools to count about 75% of our total ingrown pools, sales in 2024, in line with our original projection.
Speaker Change: We also significantly strengthen our position in Automatic State Decarism in 3rd order, with the August 2nd Acquisition of Car Stars Central.
Speaker Change: The Key Integration Activities are complete and revenue synergy initiatives are underway. We are entering this 2025 season with an integrated marketing and sales strategy into the accelerated growth of this standout product line.
Speaker Change: Latham's automatic safety covers provide unparalleled safety and other significant operating cost savings including reductions in heating and electricity costs and in water and chemical usage for the homeowner.
Speaker Change: As Oliver will detail in a moment, we were pleased to be able to maintain third quarter gross profit levels that were stable with the comparable period last year and expand gross margin by 250 basis points despite lower sales.
Speaker Change: Year-to-date, we are tracking nearly $8 million in savings from our lean manufacturing and value engineering initiatives, with the largest portion coming from our fiberglass plants. Additionally, our focus on safety has yielded a significant drop in incidents across all manufacturing locations.
Speaker Change: We believe that Latham's operational and financial model has structurally changed, which has increased our underlying earnings capabilities amid an industry recovery and will enable longer-term margin expansion.
Speaker Change: The organic growth strategies we are executing are centered around driving adoption of fiberglass tools and automatic safety colors.
Speaker Change: Additionally, we are focused on continuing to gain share in the Sand States where we are underrepresented.
Speaker Change: We are evolving our mix of pool styles to offer more rectangle and plunge pools and more pool-spa combos.
Speaker Change: A laser focus on master plan communities in our target markets, where we already have seen strong lead generation and the continued conversion of top builders who recognize the benefits of the industry-leading lead times and ease of installation associated with Latham's fiberglass pools.
Speaker Change: We plan to execute on our goal of increasing the adoption of automatic safety covers in tandem with our plans for fiberglass pool market share gains, as well as through channeling the combined resources of Latham and Coverstar Central to effectively reach the builder and consumer markets.
Speaker Change: Importantly, all the capabilities to achieve our growth objectives are already resident at Latham.
Speaker Change: We now have an impressive team in place that is dedicated to driving our growth in the sand states, and we are confident in their abilities.
Speaker Change: Additionally, we have the financial flexibility to consider strategic acquisition opportunities, like CoverStar Central, that are accretive and provide us entry in the new markets, strengthen our position in existing geographies, or enable us to accelerate growth of existing product lines.
Speaker Change: Lastly, we are pleased to report that none of our employees in areas impacted by the recent hurricanes were physically hurt, and our Zephyr Hills plant did not suffer damage beyond several fallen trees.
Speaker Change: However, the plant was shut down for about a week due to power loss and limited site access and customers in Florida, Georgia, and the Carolinas pushed out some orders.
Speaker Change: Given this, along with our visibility through year-end, now that much of the pool-building season is behind us, we have narrowed our guidance ranges for net sales and adjusted EBITDA. Now, I would like to turn over the call to our CFO, Oliver Gloe, for a financial review. Oliver?
Oliver Gloe: Thank you, Scott, and good afternoon, everyone. Please note that all comparisons that I will discuss today on a year-over-year basis compared to the third quarter and first nine months of fiscal 2023 are less otherwise noted.
Oliver Gloe: Net sales for the third quarter were $150.5 million, compared to $160.8 million prior year, down $10.3 million or 6.4%.
Oliver Gloe: This decrease is primarily due to lower cell volumes.
Oliver Gloe: which is consistent with our expectations for a 15% decline in new pool starts in 2024 with the year-to-date outperformance driven by our leadership in the faster-growing fiberglass pool and out-of-cover markets.
Oliver Gloe: Across our product categories, in-ground pool sales declined 9.8% in the third quarter, liners declined 8.1%, and covers were approximately in line with prior year, aided by the acquisition of Coverstar Central.
Oliver Gloe: Gross Margin expanded by 250 basis points.
Oliver Gloe: to 32.4% in the third quarter, even in light of lower utilization rates, reflecting the continued success of our lean manufacturing and value engineering initiatives, as well as procurement improvements driving production efficiencies that resulted in lower material costs.
Speaker Change: As expected, gross margin also benefited from the accretive impact of our acquisition of Coverstar Central.
Speaker Change: SG&A expenses increased to $28.3 million, up $4.9 million, primarily due to an increase in spending on sales and marketing initiatives as we continue to invest in future growth and position ourselves for a rebound in new pool starts.
Speaker Change: It also reflects an increase in performance-based compensation expense, as well as the addition of Coverstar Central's SG&A expenses.
Speaker Change: Net income was $5.9 million or $0.05 per diluted share compared to $6.2 million or $0.05 per diluted share for the prior year's third quarter.
Speaker Change: The adjusted EBITDA was $29.8 million, a decrease of $6.3 million or 17.3% from last year's $36.1 million.
Speaker Change: and our adjusted EBITDA margin was 19.8%, a 260 basis point decline from our 22.4% in the prior year period.
Speaker Change: Now turning to our year-to-date results comparison. Net sales were $421.2 million compared to $475.6 million. Net income was $11.3 million versus a loss of $2.5 million.
Speaker Change: Adjusted EBITDA was $76.6 million, approximately in line with $78.1 million in the prior year. Adjusted EBITDA margin increased 180 basis points to 18.2% from 16.4%.
Speaker Change: Turning to our balance sheet and cash flow statement.
Speaker Change: We continue to maintain a strong financial position, with cash of $59.9 million at the end of the quarter after the purchase of Coverstar Central for approximately $65 million in August and the repayment of approximately $20 million of debt year-to-date.
Speaker Change: We continue to effectively execute on cash flow generation with net cash provided by operating activities of $37.2 million in the third quarter and $55.2 million for the first nine months.
Speaker Change: This includes over $22 million of inventory reduction year-to-date.
Speaker Change: Total debt as of the end of the period was $282.8 million with a net debt leverage ratio of 2.6 up from the prior quarter, primarily due to the acquisition of Coverstar Central.
Speaker Change: On a pro forma basis, our Net Depth Leverage Ratio was 2.4 at the end of the quarter.
Speaker Change: Our capital expenditures were $4 million for the third quarter and $13.9 million for the first nine months of 2024.
Speaker Change: CAVX continues to be in line with our guidance of approximately $5 million per quarter, and our CAVX expectations for the remainder of the year remain unchanged.
Speaker Change: Turning to our acquisition of Coverstar Central in August, the integration continues to progress as expected with key integration activities completed and revenue synergy initiatives in progress.
Speaker Change: Financial performance for the third quarter and our expectations through year end are in line with our prior guidance.
Speaker Change: We expect Coverstar Central to add 20 million of net sales and expand our total company just at EBITDA margin by approximately 140 basis points on an annual basis.
Speaker Change: We continue to expect an approximate 15% decline in new pool starts for 2024, with the bulk of the pool building season now concluded.
Speaker Change: Based on our current visibility through the end of the year, we have narrowed our guidance ranges for net sales and adjusted EBITDA.
Speaker Change: Our net sales guidance range for 2024 is now $500 to $510 million, which, as Scott explained, relates to the anticipated impact from the recent hurricanes and our visibility through the end of the year.
Speaker Change: We are also narrowing our adjusted EBITDA guidance to a range of $77-83 million and reaffirming our midpoint of $80 million.
Speaker Change: Our CAPEX guidance remains the same at $18 to $22 million.
Speaker Change: As we have previously noted, our guidance for the remainder of 2024 reflects the normal seasonal slowdown in the back half of the year, and we'd like to reiterate that year-over-year comparisons for adjusted EBITDA are more difficult now versus the first half of 2024.
Speaker Change: This is due to two factors.
Speaker Change: First, the second half of 2023 benefited from the positive impacts of our previously announced restructuring projects.
Speaker Change: With that, I will turn the call back to Scott for his closing remarks.
Scott Rajeski: Thank you, Oliver. The long-term growth opportunities for Latham are substantial. As the largest in-ground pool manufacturer in North America and the market leader across our product portfolio, we are positioned to benefit from the strength of the outdoor living category as consumer confidence builds and financing pool ownership becomes more affordable.
Speaker Change: In the meantime, we continue to invest in growth initiatives while driving operating efficiencies throughout the organization. To wrap up, I would like to thank our employees, partners, and customers for enabling Latham to continue to outperform the industry and retain our recognition for quality products and superior service levels.
Speaker Change: Operator, I would like to open the call to questions.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.
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Speaker Change: We'll pause for just a moment while we assemble our roster.
Speaker Change: Hey, good afternoon. Thanks for taking the questions.
Speaker Change: Okay, get out there, Ryan.
Speaker Change: So, first off, great job on margins and, Scott, you said something I want to dig into a little bit. You said that you think you can significantly increase profitability, you've structurally changed the business for higher margins. Can you just unpack that a little bit more and can we get back to 20% plus EBITDA margins in a recovery scenario?
Speaker Change: Yeah, so Ryan, I'll give you a kind of high level and let Oliver kind of break it down a little bit.
Speaker Change: But, you know, let's just go back and revisit, you know, 2Q this year, go back to 3Q last year where we were, you know, over 20% EBITDA margins in both of those quarters.
Speaker Change: You know, if you go back and revisit the restructuring initiatives we had in 23, that carried over into early 24, you know, which included, you know, closing several facilities, you take that, you combine that with all of our value engineering, the lead event, the cost reduction initiatives we've been driving, trying to get to an ongoing underlying, you know, 3% roughly of, you know,
Speaker Change: you know, think of cost reduction initiatives on a material basis going forward. I think all of that helps. Plus, we've invested in the business to be much bigger scale than we have been here in the last couple of years, right? Invested in sales, marketing, you know, the Kingston facility coming online, standing up Oklahoma. You know, we've positioned ourselves to be a much bigger company, and I think you've heard Oliver speak on the last couple calls, right?
Speaker Change: The amount of margin that drops through with a little bit of incremental revenue has been pretty impressive for us.
Speaker Change: So I think that's the framework of all of that, and Oliver, maybe you want to give a few more, you know, highlights there? Yeah, I think you hit it. I mean, we've reduced our cost base and now able to supply a bigger business, right? And that's a comment that I would say relates to the capacity we have in our plants. We're very pleased with where we are.
Speaker Change: as well as the backbone we have created in the various SG&A functions.
Speaker Change: And so, you know, the drops through, you know, incrementals on margin, on volume that comes as the market and new pooled sales recover, I think will compare favorably to the decrements we've seen over the last few years.
Speaker Change: With regards to your question about EBITDA margins of 20%, I mean, we have hit a few data points you know over the last four or five quarters in which we have actually exceeded that, not rather that was towards the
Speaker Change: The peak of our season was last year's to this year's. But I certainly believe that with a little bit of help from the market, especially with our structurally changed cost base, 20 to 20% is definitely our objective to return to and eventually exceed.
Speaker Change: Yeah, that's great. Okay, that's exciting.
Speaker Change: I know we're at the end of the pool season here, but I just want to ask when you talk to dealers, you know, how are they feeling about next year, you know, if interest rates come in, which it looks like they will.
Speaker Change: Will you see people get off the sidelines and maybe move ahead with the pools? Also, you mentioned increased spending on sales and marketing. Can you talk about that and what that might mean for next year too?
Speaker Change: Yeah, so, you know, in terms of looking out at 25, you know, dealers are still focused on, you know, wrapping up the 2024 build season here. You know, I think they're trying to, you know, get 24 wrapped up, closed up. I mean, we hit almost 70 degrees here in Albany, New York.
Speaker Change: which this time of the year is unheard of. So, we've seen continued good progress with dealers.
Speaker Change: I think I've said several times now, we don't see a scenario next year where pool starts to be down, or let's say the trough of this year, called a 60K kind of number, down 15%.
Speaker Change: you know, which I think we kind of called early in the year.
Speaker Change: I think once we see a couple things happen in the market out there, Ryan, we've got to get consumer confidence back up and hopefully we clear the election here today and things are going well from there on out. We see the Fed continue to reduce interest rates, which the indication is that we'll see another rate reduction later this week, and that will continue over the next several quarters.
Speaker Change: I think we've got to get that work through the system.
Speaker Change: I think, you know, back half of 25, we'll see people start to kind of get back off the sidelines, jumping back in as all that works through the system. But I think overall, dealers feel pretty good about 25, you know, I'd say better going into 25 than they did going into 24, just because of that expectation of the market, really in current situations, shouldn't really get any worse.
Speaker Change: If I may answer your question.
Speaker Change: You know, building that sand state muscle and building up FG&A.
Speaker Change: So you've heard us talk about in Q3, we invested in sales and marketing that is targeted towards the French States.
Speaker Change: I'd say in quarter the investment was about $1.5 to $2 million. That's all feet on the ground, leading us into 2025 and really driving that awareness about the production of fiberglass tools in the targeted geographies, right?
Speaker Change: These are all feet on the ground marketing, very targeted marketing that depending on market feedback, and we're not giving guidance on 25 today, but that can be dialed up and down as we get feedback from the market.
Speaker Change: Yeah, and I think one more add-on to that as well, Ryan, you know, continue to invest in the product offering out there and the marketing initiatives.
Speaker Change: MSA's and target markets.
Speaker Change: to drive the awareness at the consumer level of the benefits of that. And I think that's where, you know, we're just very focused on trying to go attack those markets where we're underpenetrated and spending money now, knowing that when the recovery comes, you know, we'll be well positioned to take full advantage of it and continue to outperform the market like we have been doing over time.
Speaker Change: Thank you. And our next question today comes from Andrew Carter at Stiefel. Please go ahead.
Andrew Carter: Hey, thank you. Good evening. First off, I know you mentioned the hurricane. It did push some sales into the fourth quarter, push some shipments around. Could you quantify the shipments that were missed and also, I guess, with the factory down a week, were there extra costs in the quarter incurred around the hurricane? Thanks.
Speaker Change: Andrew, yeah, let me take that one. So, you know, we saw certainly in preparation of the hurricanes and then we had, you know, Helene and Franklin in the third quarter.
Speaker Change: We saw some softness, right?
Speaker Change: Plus, in addition, you know, we had the plant shut down for a week.
Speaker Change: between products being rescheduled from Q3 to Q4, a few cancellations, but then also a softer demand. I would say it's probably between 1.5 and 2 million in Q3 and probably at least an equal amount in Q4.
Speaker Change: Helpful, thank you. So a second question, we're going to ask just going back on the gross margin profile between the product lines. Could you remind us of kind of the gross margin differentials and therefore with kind of the in-ground liners that they are I'm sorry sorry in-ground pool business
Speaker Change: at I think 51% of sales versus I think peak it was 60. How much of a gross margin headwind that is overall? Thanks.
Speaker Change: Yeah, well, thanks for the question. So, you know, the gross margin profile between the various product categories, actually, they're all within walking distance with, you know, to each other. There isn't a lot of, you know, that's why you never hear us talk about mix. There's really not a lot of difference between, you know, the lowest, the category with the lowest gross margin to the highest gross margin.
Speaker Change: Fair enough, I'll pass it on.
Speaker Change: Thank you. And our next question today comes from Tim Woj with Baird. Please go ahead.
Tim Woj: Hey guys, good afternoon and likewise just a good job on the margins. Maybe just my first question just Scott just the sand states I mean you've talked about you know trying to
Tim Woj: Invest more there and make that a bigger part of your portfolio. Could you just kind of remind us like how big the sand states are today, you know, kind of relative to the existing pool market and where you're kind of targeting those to go?
Scott Rajeski: Yeah, so, you know, I think there's a lot of different definitions out there of sand states and what state you quantify and the exact numbers. You know, I think we like to call it the five, right? Florida, Texas.
Tim Woj: Arizona, Nevada, South California, and I think we've got some pockets of decent business. We do a decent job in California, maybe more north than south. We've had some really decent success with a lot of our fiberglass dealers in Texas.
Tim Woj: very little presence in Arizona, small in Nevada, and I'd say, again, small in Florida. I think if you look at those states together, you know, some folks will say it's probably 70 to 75 percent of all new pool starts, and we tend to be underpenetrated there.
Speaker Change: So, what we're doing, right, is we said, look, let's make a push, that's where our fiberglass facilities are mostly located in those areas of the country, so we should have a pretty good cost advantage with shipping getting pulled into those markets.
Speaker Change: We've never really targeted these planned, you know, home communities that are out there. And look, we've just really never dedicated, you know, a lot of selling and marketing dollars to those regions.
Speaker Change: maybe one or two calls ago, I think maybe two quarters ago, we talked about, you know, Babcock Ranch and getting a dealer from the north up here down into that market, Concord Pools.
Speaker Change: You know, we just co-hosted a Founders' Day there in that area. And I think, you know, this will be a big push for us to really get into those markets.
Speaker Change: And again, partnering with the right dealers, and that's what we've had success in Texas, finding the right dealers who believe in the product, having the right marketing programs and doing that push.
Speaker Change: We just felt now is the time to kind of, you know, put the focus there to try to get, you know, a higher percentage of share. And as pools start to rebound across all of North America, and we can pick up share there, that's what we're looking to, you know, kind of grow our...
Speaker Change: I know you're not giving guidance for 2025, but
Speaker Change: Could you just kind of remind us or kind of outline what you
Speaker Change: you kind of want to target for outgrowth relative to the full market. So.
Speaker Change: Thank you.
Speaker Change: You know, just with fiberglass and automatic covers and some of the opportunities to get bigger in some of the larger pool markets, I mean, what should the outperformance relative to the underlying pool market be on kind of an annualized basis over the intermediate term?
Speaker Change: 2024
Speaker Change: you know, our view of market being down, say, 15%. I think, you know, you may argue and where the numbers may land at the end of the day, Tim, is it could be down maybe even closer to 20%. So, if we land at the midpoint with our guy down, you know, in the 10 to 12% range, give or take,
Speaker Change: You know, you can kind of start to get a feel for what the outperformance, now that's on a decline, right? But, I would think we'd see the same type of, you know, expectation on the upside. You know, the liner and cover business with that strong recurring base of business, you know, we'll have, you know, the auto cover business that's continuing to drive penetration. Again, putting more covers on pools with the existing kind of flat base.
Speaker Change: Scott Rajeski, Oliver Gloe, James Borseth, Casey Kotary
Speaker Change: But that's kind of what we've done over the last, you know, you can call it 13, you know, years or so in this business has outperformed both the up and the down. And that's really what, you know, the team's focused on. We are kind of really kicking off the 2025 season now as we, you know, wrap the 24 build season up.
Speaker Change: Okay, okay, sounds good. Good luck on the rest of your guys. Thank you.
Speaker Change: And our next question today comes from Greg Vadasanian with Wolf Research. Please go ahead.
Speaker Change: Hey guys, thanks for the questions. This is Scott Stringer on for Greg. I wanted to ask another gross margins question, so it's sort of been hard to pin down. Just what are the pluses and minuses for 4Q specifically? Where are you guys thinking we should be here on the street?
Speaker Change: And producer, cue 3 or cue 4.
Speaker Change: Thank you.
Speaker Change: Thank you for tuning in.
Speaker Change: Yeah, so the footprint takes us, you know, so again, we, you know, we continue to to estimate the year-over-year market decline as the new cool starts to be 15, you know, 15%.
Speaker Change: So that usually is...
Speaker Change: give us about a 200 basis point of headwind here. I think the single largest tailwind is the combined impact of our lean and value engineering initiatives that are almost upsetting entirely the volume impact.
Speaker Change: And then the outperformance might really come from, you know, supplier optimization where the team has done a great job of diversifying our supplier base that we are now able to leverage not just for quantity, supply stability, but also for economic reasons.
Speaker Change: and then a couple of smaller tailwinds that I would say are more in, you know, under the headline of general cost control and really being diligent and disciplined on how we manage our plants.
Speaker Change: Okay, got it. And for my follow-up question, I just saw cover sales were positive this quarter. Is that just the cover star acquisition or is there some sort of difference in business cycles between the cycles that you guys are seeing?
Speaker Change: No, it's really driven by the Coverstar Central Acquisition.
Speaker Change: With all of you, you know, you'll see more of the trends you would expect. And the ColorStar Central acquisition, as we said in our prepared remarks, the integration is going really well. You know, the bank office integration, all the key activities are
Speaker Change: are mainly complete.
Speaker Change: with now really the planning around the
Speaker Change: The Revenue Synergy Initiative that I'm going to include here.
Speaker Change: We had guided, you know, last quarter that the incremental revenue is about $20 million on an annualized basis. The EBITDA percentage list is about 140 basis points.
Speaker Change: We took up our gains last time, you know, this year about $5 million. We earmarked for Calistar Central on that sales base and $3 million.
Speaker Change: And all of that after now, I guess, three months, August, September, and October, three months under the bed, I think we're confirming, you know, those assumptions.
Speaker Change: That's all helpful. Thanks a lot.
Speaker Change: Thanks, guys.
Speaker Change: And our next question comes from Matthew Booley with Barclays. Please go ahead.
Matthew Booley: Hey, good afternoon, guys. Thanks for taking the questions. On your various products that go through distribution,
Matthew Booley: So the liners and covers and maybe the package pools. I'm curious if
Speaker Change: if you've announced any price increases into the channel.
Matthew Booley: for 2025 and also any color on kind of how you're treating the early buy with your distribution customers and just kind of the, you know, where they are from an inventory level and kind of, you know, what you're expecting around kind of filling the channel into the new year. Thank you.
Speaker Change: Yeah, so Matt, we've not had any formal price increase announcements across the board out there.
Speaker Change: like the equipment guys did. And I think as we've evaluated, let's say particularly the product lines that go through distribution, which is really the in-ground tools, non-fiberglass, right? The polymer and steel walls, liners and covers are all custom, right? So that's a real-time order we get. Those really are not stocked.
Speaker Change: products
Speaker Change: So, you know, we're trying to hold price there, you know, we don't really, you know, see early buys to the extent like the equipment guys do because, again, most of our product is custom. We're designing a kit last minute.
Speaker Change: I think with the distributors, I think where we are from an inventory standpoint, looking at what they've done, let's say, continuously through 3Q, I think they're at normalized levels now, what they wanna hold.
Speaker Change: Yeah, I would believe where we sit at this point is...
Speaker Change: They're going to kind of play a little bit of a wait-and-see game to see how the season starts in, you know, late 1Q of 2025 before they start, you know, buying to stock products for the 25 selling season. And look, I think the reason why they're able to maintain inventory levels low and not be placed in a lot of stocking orders
Matthew Booley: is our ability to serve them. We're turning orders around, in some cases, in two or three days for pool orders that they're getting, stuff that they need. Clearly, that will be tough to do in a peak season when it bounces back, but we handle that all year this way.
Speaker Change: So we don't see any more destocking likely to occur in that part of the channel.
Speaker Change: Got it. Okay, yeah, thank you for that and thanks for clarifying some of what I asked there. I guess secondly on the SG&A and specifically that the sales and marketing investments.
Speaker Change: I just wanted to see if you could elaborate a little on...
Speaker Change: I guess like the intention there, just given what we said earlier that, hey, you know, market conditions, market growth, maybe we shouldn't get too excited about a sudden inflection yet, just kind of given we're in this bit of a
Speaker Change: You know, kind of choppy, bouncing along the bottom type market backdrop. You know, what's the intention around putting dollars into sales and marketing today? And what are you kind of trying to accomplish ahead of that eventual market recovery? Thank you.
Speaker Change: Yeah, so Matt, you know, you've been around us for a while, you know, it takes a while to get, let's say, a fiberglass dealer stood up and, you know, up and running and on a stable basis where they can rapidly grow their install base over time.
Speaker Change: So, that's where we feel now is the time to start to, you know, go find dealers.
Speaker Change: We're heading into the off-seasons. This is the ideal time to do boot camps, do training, get them into our dealer conference, have them attend all of our shows that we're doing, so we can spend the next kind of cup, say,
Speaker Change: 3-6 months signing up, training, developing, teaching, getting leads generated, working with them, with the business model, picking the right dealers and the right...
Speaker Change: target markets we want to be and help them through, let's say, what would be another flat market in 2025 to get their first, you know, kind of say one to five pools in the ground. What that will enable us to do is as we, let's say, exit the back half of 2025 into 2026,
Speaker Change: We should have a new established dealer base in those sand states.
Speaker Change: And then, you know, our goal is to then teach these guys to get from 5 to 10, 10 to 20, 20 to 40 pools. And we just feel now is the time to position ourselves.
Speaker Change: where we are set with the right builders, in the right markets, with all the right marketing initiatives, all the right programs, all the right lead gen set up so we're not, let's say, chasing our tails when this thing does eventually turn, you know, back part of 25 into 26 and 27.
Speaker Change: Yep, got it. Great caller. Thanks, guys, and good luck.
Speaker Change: Thanks Matt.
Speaker Change: And our next question comes from Susan McLaurie with Golden Sacks. Please go ahead.
Susan McLaurie: Thank you. Good evening, everyone.
Susan McLaurie: My first question is around your capacity and utilization rates. As you think about the potential for demand to come back next year, how are you thinking about your ability to respond to that and to keep your service levels as those volumes perhaps move higher?
Speaker Change: Yeah, great question. Thank you very much, Susan. So, you know, a few years back when we were starting a business with 700 billion in revenue, you know, we were at that point in time, we had free capacity, right? Since then, you know, our restructuring projects took out some duplicative capacity, but then we created new capacity with the build of Kingston in Ontario as well as the extension in Oklahoma.
Speaker Change: Plus, we have created additional capacity through our lean manufacturing initiatives.
Speaker Change: That's a long way of saying that today, versus three years ago, we have increased, not decreased, capacity.
Speaker Change: And back then we were able to serve a business in excess of $700 million.
Speaker Change: So, you know, we do have the capacity that we need to, you know, as the market returns. But also the other point that I make is that we have the agility that it needs to capture the additional market opportunity when the market returns.
Speaker Change: We are a seasonal business. We are used to ramping our sites up and down. It is also a cyclical business. You know, today we have industry-leading lead times and our plants have proven, again, their agility to cater to different demand scenarios.
Speaker Change: Okay, that's helpful, Collar. And then thinking about the pricing dynamic for next year, you know, even as rates come down, there's been so much inflation that's come through over the last couple years in pools. Would you be willing to take some of that pricing off if it meant that you could perhaps get a little bit more lift on the volumes?
Speaker Change: Yeah, so, Susan, part of, I think, the magic of our business is we've been pretty successful being able to hold on to the price we've pushed through to, let's say, distribution and our dealers. And if you remember, right, we never really were able to fully offset all of the inflation we saw, let's say, to hold margin or profitability levels.
Speaker Change: I think the other important thing to think through is the cost of our product.
Speaker Change: to the end consumer, which would stimulate demand as a percentage of the total backyard pool install. If you're talking a project that's $75,000 to $100,000, our product costs as a part of that might only be 25% or 30%.
Speaker Change: So, for us to try to...
Speaker Change: Let's say you push a $1,000 reduction on a fiberglass pool or a couple hundred dollar reduction on an in-ground liner or a cover, the likelihood of that making it all the way through to the end consumer to stimulate demand of new pools and installs of the liner.
Speaker Change: is probably fairly small because that can easily be eaten up in the field during the build or the install with delays and weather out there.
Speaker Change: So that's what we feel pretty good on, but we do need to be careful with our pricing versus the competition, what the dealers are buying the product for, you know, what distributions passing on to a dealer. So, you know, we kind of monitor all of that. And look, if we need to do certain things in an area, take care of one of our builders and dealers.
Speaker Change: to be competitive. And they think it will stimulate demand. We'll look at it. But we don't see a need to do any kind of wholesale price reduction across the board. I think it's more maybe a resetting or adjustment of what it costs to get a pool installed in the backyard.
Speaker Change: And there's a lot of other optionality that consumers can do in terms of maybe a little bit less concrete, smaller pool, you know, maybe skimp on, let's say, the outdoor kitchen or the landscaping, get the pool in proper, and save $5,000, $10,000 on the build in the backyard that way. That's probably the better way to do it.
Speaker Change: Okay, Scott, that's very helpful, Collar. Thank you both, and good luck with everything.
Speaker Change: All right. Thanks, Susan.
Speaker Change: Thank you. And as a reminder, if you'd like to ask a question, please press star 1. Our next question comes from Sean Callan with Bank of America. Please go ahead.
Sean Callan: Hi guys, thank you for taking my questions. On the gross margin, the expansion was very impressive again in the third quarter. You mentioned some of the lean manufacturing benefits and modest deflation, so can you break out how much of the gross margin expansion was from these lean manufacturing benefits versus price costs?
Speaker Change: Sure. So, you know, we are very satisfied and pleased with the Q3 performance. There are 250 basis points up, and this is the fourth consecutive quarter in which we have been able to report in a gross margin expansion.
Speaker Change: So, to break the 250 apart,
Speaker Change: you know, the headwind of the 6% lower volume that we saw in the quarter, that is about 150 basis points, right? So in order after 150 basis point headwind to post a 250 basis point margin extension, you need to have 400 basis points of good news. About half of that is lean value engineering.
Speaker Change: Okay, so that's the singer's largest contributor.
Speaker Change: Again, there's a little bit of deflation, very modest, but more importantly, it's really the supply optimization, supplier management piece, where we are now in a situation to have fuel sourced on much of our supplies, and we're able to leverage that, not only for economic reasons, but also for economic reasons, right?
Speaker Change: And then the rest is, you know, as I said in one of the prior questions, is just rate cost control, in-quarter cost control, really the, you know, the disciplined spend levels that we have across the network.
Speaker Change: Okay, great. Thank you.
Speaker Change: But in absence of that, we at this point in time are...
Speaker Change: on our webcast.
Speaker Change: and then we potentially see, you know, a modest, modest...
Speaker Change: I have stability of most inflation next year, right? But it's really too early to tell.
Speaker Change: And, you know, we'll come forward with a more, you know, precise view when we give our 2025 guidance the next time we on the call and report on our Q4. Okay. Great. Thanks again.
Speaker Change: Thank you so much.
Speaker Change: Thank you, and that concludes our question and answer session. I'd like to turn the conference back over to Scott Rajeski for any closing remarks.
Scott Rajeski: All right, thanks. Hey, just want to thank you everyone for your time here this afternoon. You know, we really appreciate all your continued support for Latham, and I look forward to seeing you at upcoming conferences and meetings, and if we don't, we wish you all a great, happy holiday season, and best of luck going into 2025.
Speaker Change: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Speaker Change: Post-credits
Speaker Change: [music]