Latham Group, Inc. (NASDAQ:SWIM) Q1 2024 Earnings Call Transcript

Latham Group, Inc. (NASDAQ:SWIM) Q1 2024 Earnings Call Transcript May 11, 2024

Latham Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Latham Group First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations Representative. Please go ahead.

Casey Kotary: Thank you. This afternoon, we issued our first 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 are Latham’s President and CEO, Scott Rajeski and CFO, Oliver Gloe. 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 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 Rajeski.

Scott Rajeski: Thank you, Casey. Good afternoon, everyone, and thank you all for joining today’s call to review our first quarter 2024 results and discuss our latest business trends. In terms of key takeaways. First, we were pleased with our first quarter results. They represented a solid start to the year and exceeded the guidance we provided at the time of our fourth quarter conference call in March. Second, our performance demonstrated our ability to execute effectively during periods of uneven order flows and reflects the benefits of our reduced cost structure and actions we have taken to accelerate our value engineering efforts and lean manufacturing initiatives. These actions continue to drive ongoing production efficiencies and incremental capacity in our plants, providing us with more flexibility to serve customers with our industry-leading lead times.

And third, we continue to maintain a substantial cash position even after the usual seasonal outlay for working capital and an $18.8 million debt repayment. This cash provides Latham the significant resilience to manage through soft business conditions for the pool industry and the resources to take advantage of opportunities to drive future growth. Taking a closer look at Q1. After a slow start to the quarter, we saw a significant pickup in orders starting in mid-March. Our operations team was able to do a great job on execution, achieving lead times of 3 to 5 days. Fiberglass pool sales, while down year-on-year, showed relative strength and continue to represent the majority of our in-ground pool sales. On our last earnings conference call, we cited Latham’s priorities for 2024.

The first was to continue to drive the adoption and awareness of both fiberglass and automatic safety covers. And in the first quarter, we made considerable progress in the areas of new and refreshed product introductions as well as new dealer wins. During the quarter, we launched the Enchantment plunge pool series for our California plant, which serves the important California, Arizona and Nevada markets. Plunge pools are becoming increasingly popular as they provide the homeowner with space saving, lower cost options that are ideal for aquatic exercises and rehabilitation. In the first quarter, we also relaunched the Providence and Tuscan series in North America, which is a very trendy rectangular pool with an attractive site entry feature.

Additionally, we put the finishing touches on a new fiberglass pool model that has a broad array of features, including swim-up seating and a built-in spa that is currently available to our largest dealers. We are also in the early stages of rolling out a line of plunge pools in our vinyl liner inground pool category, more on that in the coming months. With respect to automatic safety covers, which are another key priority for us, we continue to work with our pool cover distribution network as well as many of our competitors’ dealers, including concrete pool builders to advance awareness and adoption of these products. In addition to providing unparalleled protection, these auto covers offer significant resource savings resulting in up to a 70% reduction in both pool heating costs and chemical usage.

We are continuing to drive operational improvements in our auto cover plants to reduce lead times and gain incremental capacity. Our operations team is also working on changes to our product lineup that will expand price points and capabilities and we’re making it a key focus to ensure that all of our newly launched pool models in our inground category are auto cover ready. We also continued the successful rollout of Measure by Latham, the first tool of its kind to simplify the pool measurement and quoting process for liner and cover installers. This easy-to-use AI-powered device provides dealers with high-performance measuring accuracy with precise specifications for swimming pool covers and vinyl liners, all within minutes and all integrated with our project management portal, which enables dealers to quickly and easily receive quotes and submit and track orders.

As you can imagine, this tool has been met with a very positive response from our dealers and contractors. We will continue its rollout to make sure all of our dealers have it and all the functionalities in place ahead of the 2025 pool building season. Latham’s extensive and appealing product lineup, together with our industry-leading service levels and best-in-class lead times are strengthening our ability to attract new dealers. In the first quarter, we were able to convert several new dealers in the U.S. and Canada that we believe will enable us to continue to drive penetration and growth in several key markets. For some of these dealers, while they are established pool builders, this will be their first experience with fiberglass products.

They are motivated by the much shorter installation time, which, of course, very attractive to their end consumers as well as the ease of installation and the aesthetics of the product, both of which often result in additional leads for them from neighboring homeowners. In working with Latham, even the most experienced new dealers go for a boot camp to be trained in fiberglass installation to maximize their success. The second priority for 2024 that we mentioned on our last earnings call is our programs to continue to gain additional operating efficiencies through value engineering and lean manufacturing initiatives. These structural cost benefits will have a long-term positive impact on Latham’s margin profile and will be an important factor for us in 2025, when we expect improved market conditions to drive increased volumes.

For example, the initial benefits from these programs and our largest liner and cover manufacturing plant, including 8% improvement in labor efficiency, a 20% increase in throughput and an overall improvement in employee health and safety, all of this contributed to our first quarter margin performance. Lastly, we prioritized maintaining a strong balance sheet to both retain our resilience in today’s soft market environment and retain the resources to support future growth. Oliver will provide details on that in a moment, but I can say that we’ve been very disciplined in our spending and have the operational and financial flexibility to flex up and down in response to market conditions as well as take advantage of opportunities to drive future growth.

With that, I will turn over the call to our CFO, Oliver Gloe, for our first quarter 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 first quarter of fiscal 2023, unless otherwise noted. Our first quarter results exceeded our expectations, reflecting strong execution, cost savings and our lean and value engineering initiatives. As we anticipated, first quarter comparisons reflecting the challenging macroeconomic conditions that have reduced pool starts. Net sales were $110.6 million compared to $137.7 million in Q1 of 2023, down $27.1 million or 19.7%. The 23.9% decline in inground pool sales was primarily due to lower packaged pool demand, while fiberglass pool products continue to show relative strength and continue to account for the large majority of Latham’s inground pool sales.

Liners remained more resilient, declining 9.2% due to the replacement cycle of these products, and covers were down 17.9%. We were pleased to see our gross margin increase 350 basis points to 27.7% despite lower sales. This increase was driven by carryover benefits from the cost reduction actions we took in 2023 as well as lower raw material costs and lean manufacturing initiatives. Year-on-year comparisons also benefited from two meaningful headwinds impacting Q1 2023. consuming the remainder of our high-cost inventory and our inventory reduction programs, which resulted in under-absorption at our plants. These factors more than offset the impact of lower utilization from lower volumes and wage increases. SG&A expenses decreased to $26.3 million, down $6.8 million, primarily due to our ongoing cost reduction efforts and a $5.1 million decrease in non-cash stock-based compensation expense.

For 2024, non-cash stock-based compensation is expected to amount to approximately $8 million. Net loss was $7.9 million or $0.07 per share compared to a net loss of $14.4 million or $0.13 per share for the prior year’s first quarter. Adjusted EBITDA of $12.3 million was up from the prior year period by $1.3 million or 11.4% compared to $11 million in Q1 2023. This strong performance is the result of solid execution in a difficult market, primarily due to cost savings and progress made with our lean and value engineering initiatives. Adjusted EBITDA margin was 11.1%, a considerable improvement compared to 8% in the prior year period. As you know, our full year 2024 guidance implies decremental EBITDA margins for the remainder of 2024, primarily reflecting our planned investments in future growth.

Notably, this involves continued investments in sales and marketing, engineering and R&D to accelerate conversion to fiberglass pool products, ongoing digital transformation programs and normalized performance-based compensation. Turning to our balance sheet. We continue to maintain a strong financial position with cash of $43.8 million at the end of the quarter after the repayment of $18.8 million in debt in Q1. Net cash used in operating activities was $34.5 million, reflecting a seasonal increase in net working capital of $41 million as the company enters peak pool selling season. Total debt for the period was $282.8 million with a net debt leverage ratio of 2.7, and our capital expenditures were $5.3 million for the first quarter in 2024, considerably lower than the $9.9 million in the prior year.

We expect a comparable run rate in quarterly CapEx throughout 2024. Our cash position and capital expenditures are in line with our expectations and reflect seasonality as well as our conservative capital allocation strategy given the uncertain economic outlook. That said, we will continue to deploy our capital opportunistically to best position us for accelerated profitable growth as market conditions improve. First quarter results, together with our current visibility, underpin the guidance metrics we provided at the time of our fourth quarter 2023 earnings release. With that, I will turn the call back to Scott for his closing remarks.

Scott Rajeski: Thank you, Oliver. While the first quarter represents a small percentage of our annual revenues and adjusted EBITDA, we are very pleased with how well our teams executed amid a choppy start to the season. Latham’s strong execution, cost savings and lean and value engineering initiatives all contributed to quarterly performance that exceeded our guidance and demonstrated our ability to execute efficiently. We appreciate the commitment and engagement of Latham’s team members throughout our organization who made this possible. We also want to thank all of our customers and suppliers who continue to be strong supporters of Latham. Our first quarter results support our full year guidance expectations for 2024 and underpin our confidence in Latham’s ability to effectively navigate the current market environment and emerge as an even stronger company. Operator, I would like to open the call to questions.

See also 36 Countries Where Gay Marriage Is Legal and 10 Countries with the Best Architecture in Africa.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Jonathan Bettenhausen from Truist. Please go ahead.

Jonathan Bettenhausen: I’m on for Keith Hughes this evening. Thanks for taking my question. So on the 2024 cost savings realization, I think last quarter, you indicated targeting maybe about $4 million in incremental savings. How is that progressing? It looks like maybe most of that has already been realized here in 1Q. Am I looking at that right?

Oliver Gloe: Yes. You’re absolutely right. So we had about a $4 million spillover from our cost savings initiatives. All the initiatives are fully implemented, of that $4 million about $2.7 million in our Q1 with the remainder being left for Q2.

Jonathan Bettenhausen: Okay. Got it. And were there any surprises in the sales momentum heading into the second quarter? Was the demand ramp kind of about what you expected in March?

Scott Rajeski: Yes. So I think if you look at how Q1 played out for us, and I think we’ve heard this from others, a little bit slower start in January and February right around the time we were on our Q4 earnings call. And then I think we saw a really nice pickup in the seasonality, maybe a few weeks jump start there as the season took off as we move through the back part of March. I think as we look kind of moving through April here as well, I’d say the season is kind of ramping as expected, on track with the guidance that we reconfirmed out there today.

Operator: The next question comes from Tim Wojs from Baird. Please go ahead.

Tim Wojs: Maybe just first question, Scott. Just in the prepared remarks, you talked about seeing some incremental traction on dealer adds. And I’m just kind of wondering if the investments that you’ve made and then just with the slower kind of pool environment, if you are seeing kind of an incremental propensity from dealers to kind of consider fiberglass and then also kind of consider to be part of the Latham network?

Scott Rajeski: Yes. Look, I think, Tim, as we’ve talked over the years, right, part of what we’ve always done is constantly recruit and track new dealers to Latham on all aspects of all product lines, really a big focus, fiberglass. I think when you come back and just look at the value proposition of fiberglass, right, the speed of the install and then the lower cost compared to, let’s say, concrete pools, I think that continues to resonate at both the dealer and homeowner level, giving them a lower cost option, especially as we’ve seen the cost of the pool drastically increased at the consumer level, then you combine that with cost of financing. I think it’s just giving them an opportunity to “jump in” and establish themselves as a dealer, get trained up, right?

It’s all nice incremental volume for those dealers. And again, I think we show them, look, this is a long-term play for us, right? When the market rebounds, they’ll be well positioned, they’ll be trained, they’ll have gone through their boot camps and they’ll be ready to kind of rapidly increase their productivity and efficiency for fiberglass pools.

Tim Wojs: Okay. So you say it’s kind of more of a kind of what you’ve seen over time. It’s not that, hey, there’s a slower environment and there’s any sort of kind of increased kind of view for fiberglass, it’s just kind of the constant share that you’re kind of seeing.

Scott Rajeski: Yes. Yes. I think maybe one clarification there. Tim, it’s a good point. Look, we’ve become a little bit more aggressive out there. So you could say that the number of dealers and the quality of dealers we’ve been adding is much better than maybe in the last 2, 3, 4 years during the difficult supply chain challenge issues. I think why they’re choosing this, look, if you look at our footprint, one, right, we got a great footprint throughout the entire country. So we bring a lower cost to serve for all dealers throughout the country. And if you look at the quality of our pools and then where we stand from a lead time and service standpoint, we’re in a really good position. And that’s kind of back to, it was Jonathan’s question right out of the gate here, as we came through 1Q, our ability to quickly respond to incremental demand signals in March is really what enabled us to kind of post up some really good results in 1Q there.

Tim Wojs: Okay. Okay. Good. And then I guess from a seasonality perspective, I mean, from a sequencing perspective, I mean, should revenue kind of be the highest in Q2 and then kind of lower a little bit in Q3 and then kind of see a drop off in Q4? And would that kind of be how profitability would also kind of phase through the year? Just trying to think about how to think about the seasonality impact, just we haven’t seen what, I guess, normal seasonality is in 3 or 4 years.

Scott Rajeski: Yes. So Tim, fair question. When I was driving in this morning, I was thinking about, I’ve been in the business for 14 years. I don’t think I’ve seen a normal season in 14 years. So I’m not really sure what a normal season is anymore with everything out there. But I’d say, we’re kind of returning to what has been more typical of the seasonality we’ve seen. We’ve talked over the years, you could probably argue, think of 50-50 split, right? 1Q came in just a little over 20%. Clearly, 2Q and 3Q is the bulk of the season. So I think we just said, around 30%-ish in 2Q and 3Q ballpark, give or take a few rounds, then the balance coming in 4Q. And then I’ll let Oliver address it, but you could probably argue that the EBITDA profile would be a little similar to that.

But again, we’ve had a decremental conversation on the last call. So you just got to watch that as we move through the rest of the year. But again, we’re kind of happy with how the season is ramping. I think it’s lining up really nice to our guidance and overall market expectations. Oliver, I don’t know if you want to talk about the profitability profile as it flows through.

Oliver Gloe: Yes. From an EBITDA, Tim, if you take our midpoint guidance sitting right now at $65 million, deduct our first quarter contribution to that from that, you’re left with about $52.7 million, right? Now think of that being by majority contributed by Q2, Q3. These are by far those quarters with most sales activity and therefore, EBITDA contribution with a small share [indiscernible].

Operator: The next question comes from Andrew Carter from Stifel. Please go ahead.

Andrew Carter: Just wanted to ask kind of late in the quarter related to the outperformance, and you said shipments picked up. I know you hate to talk about it, but POOLCORP called out weather, obviously, hit the south, hit the Northeast where you’re strong. In addition, again, I know something you hate to talk about but kind of the channel inventory. Did you see anything like difference between your shipments and what you think went out of the channel, particularly, I guess for the packaged pools as well as the covers? Thanks.

Scott Rajeski: Yes. So Andrew, good question there. I think as we looked at it, inground liners was really a key point for us in Q1 as that season started to ramp in the South, slowly moving up to the north. And again, kind of the regional differences, you’re right. The Northeast is a little bit tougher, wetter, a little bit colder start to the season. But in the warmer climates where it really started to take off for us, we’re sitting in some cases and a few of the plants with 1, 2-day lead times for liners, as those orders started to flow, we were able to convert those in a 2 or 3-day cycle and really take advantage of the push we saw there. And I think the other really strong point for us was fiberglass. Fiberglass performed extremely well.

We have inventory on the ground and the common models in a lot of the territories. As those orders were rolling in and let’s say, where the weather was more favorable, we were able to get pools pushed out to dealers, get them in the ground. So good execution across the board by both the operations team and our customers there. Fiberglass still is making up the majority of the chunk of the inground category. I think that part continue to be a little bit slow for us. We’ve really not seen the restocking or pull-through orders from the distribution branches, whether it’s POOLCORP or any of other big distribution partners, Heritage, et cetera, out there. And I think that’s what we’ll start to see as we move through 2Q and product really starts to move off the shelf as we hit the peak pool building season year in May, June and July.

Andrew Carter: The second question, looking kind of at your SG&A and granted, who knows my math could be wrong. But it looks like, so for the final 9 months of the year, I’ve got SG&A up $31 million to $33 million. That’s excluding charges, also excluding SBC, you were flat. Could you dimensionalize that kind of increase over the final 9s? I know there’s some incentive comp restoration in there that you can’t avoid. There’s not really any cost savings in there. But there is some also variable investment as you say get ready when starts to accelerate. And how much is that truly variable? And could you quickly pull that back and when would you know whether you wanted to pull that back or not at what point in the season? Thanks.

Scott Rajeski: Yes. I’ll hit the last part, Andrew, first. When would you be able to pull back anything on the variable portion of the spend there. Look, we typically kind of wait until we get into the late May mid-June, which will really give us a read for how the season is playing out in terms of the pool starts is in line with our expectations or anything. So we’re in that waiting game of peak build where we don’t want to start doing anything too drastic too early, but we’ve also talked about we have made incremental investments. We are trying to retain folks. We are trying to push leads out there to dealers with our sales and marketing efforts. So we don’t want to pull the trigger too quickly. But again, there’s a piece that’s variable in there that if we had the toggle, if the market worsened more than what our expectations were, and I think that’s the key point.

Our outlook for the market was probably further down than others in the industry. And we think we’re tracking to that roughly 15% down in new pool starts versus last year’s number. So we’ve got many levers we can play and pull there. Oliver, you want to address the first part of the question?

Oliver Gloe: Yes, absolutely. So two drivers that increased SG&A year-over-year. We talked about the snapback of performance-based compensation with about $7 million to $8 million. And then Scott just mentioned the investments into future growth to over-proportionately participate once the market comes back. So those are really the 2 drivers there for SG&A.

Operator: The next question comes from Shaun Calnan from Bank of America. Please go ahead.

Shaun Calnan: Just given the sales beat in the quarter and talking about the pickup as we kind of went through the quarter and through March, is there any reason you guys chose not to raise the guidance? I’m just curious if there was maybe a pull forward in demand or it doesn’t sound like it, but if you were starting to see orders slow in April versus your original expectation?

Scott Rajeski: Yes. I think you could chalk it up, Shaun, probably partly just timing, how we had the quarter’s profiled out. We had an expectation of what total market was going to do. I think as we try to work back through what does the normal season look like. We probably took a little bit more of a conservative approach in Q1, assuming a little bit of a slower start. Again, we had the luxury at that point in time of seeing how January and February was playing out when we did the quarter. And look, we did see a nice ramp-up of orders in March. I don’t believe any of it was pull forward demand. I think it was just weather was good in some markets that helped us. We were in a good position from a lead time ability to quickly turn those short-cycle orders.

And I think when we look out there and talk to dealers and others in the industry, I still believe our view of market being down 15% overall still feels about right. Look, we’ve only completed roughly a little over 20% of the year for us. We’ve really had to move through this big quarter here, 2Q, see how the season ramps, fight through the weather. As I mentioned up top, 5 weeks into the quarter so far. I’d say things are tracking extremely well, tracking towards what our guide and projections are. And I think we got to get through 2Q here. And when we chat in August that’s when I think we’ll be able to take a full assessment of what we think the full year is going to look like.

Shaun Calnan: Okay. Got it. And then do you have any early metrics on the Measure tool in terms of adoption by dealers or revenue at this point?

Scott Rajeski: Yes. Look, it’s just rolling out there for covers. And if you think about it right, the cover season really kicks in for us in the fall. So it’s a mass push of getting all the units out there deployed into the field with the dealers, with the view as they’re out there opening pools for the season. They’re evaluating the covers on the pools, or encourage them to measure the covers, inspect them, do they need a replacement, take those measurements now while they’re out there, get trained up, get geared up. So look, this is a big deploy for us in terms of units out there and the training. We’re still in the beta testing of what we’re doing, the liners. Again, early good success on that. So we’re also teaching them how they can be measuring for liners as we get ready to do that launch in the fall for the early 2025 season.

But we’re not at a point where it’s of any significance that we want to be talking about net metrics units, number of units in dealers’ hands, number of units we’re processing. We are taking orders. We are processing orders through our plants, shipping them back out to dealers. And I think the key thing here is response rate acceptance has been phenomenal. And I think we’ll eventually be able to talk about market share gains we’re going to be able to achieve again, by attracting dealers who may have been buying from other manufacturers out there coming to Latham because this is a huge productivity and time-saving device for them and also ensuring the accuracy of those measurements that they’re taking, almost fool-proofing the quality of the liner and cover they’re going to get because they will know the measurements are dead on based on the AI and intel in the device as it moves through the system.

So look, we’re really excited about it. I think this will be game breaking for us and as we move through the next couple of quarters, we’ll start disclosing more information on units deployed, number of dealers and unit volumes and stuff processing through. Just a little too early to get out there with that data yet.

Operator: [Operator Instructions] And the next question comes from Matthew Bouley from Barclays. Please go ahead.

Anika Dholakia: You have Anika Dholakia on for Matt. Thanks for taking my question. So the first question is on kind of your customer base. So we’ve seen some industry peers have spoken to more challenged demand for their lower-end pools. And I’m just curious if you’re seeing similar mix effects and maybe how you think this could trend into the second half given the current macro backdrop? Thanks.

Scott Rajeski: Yes. No, similar views. And again, there’s two sides of this coin that one that really, I’d say two that really help us and one that’s a little bit of a drag. But again, this was all contemplated in the guide we issued and the reconfirmed. For fiberglass, we’re seeing really good performance because it’s a lower-cost option versus concrete pools. So as consumers are trading down from the concrete price points, they’re stepping in to fiberglass pools which are working really well for us in a 75K to 100K consumer price point. The packaged pool or the other piece of the inground vinyl business, again, it’s doing okay, but that’s kind of more of the middle America. That’s where a lot of the pool financing occurs that’s out there.