Latham Group, Inc.

The Leiden Group, Inc. Fourth Quarter and Full Year Fiscal 2021 Earnings Conference Call. All participants will be in lesson-only mode. Should you need assistance, please signal a 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 touchtone phone. 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 Nicole Breguet, Investor Relations Representative.

Please go ahead. Thank you, and welcome to Latham's Q4 and Full Year Fiscal 2021 Earnings Call. Earlier this morning, we issued our 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 Rogeski, and CFO Mark Borseth. Following their remarks, we will open the call up to questions. During this call, the company may make certain statements that constitute forward-looking statements. Such statements reflect the company's views with respect to future events as of today and are based on management's current expectations, estimates, forecasts, projections, assumptions, beliefs, and information. These statements are subject to a number of risks that could cause actual events and results to differ materially. Such risks and other factors are set forth in the company's earnings release posted on its investor relations website and will be provided in our Form 10-K for fiscal year 2021. The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as required by applicable law. In addition, during today's call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliations of adjusted EBITDA to net income calculated under GAAP can be found in our earnings press release and will be included in our Form 10-K for 2021. I'll now turn the call over to Scott Rojeski.

Thanks, Nicole. Good morning. Thank you for joining us for Latham's fourth quarter and full year 2021 earnings call. Today, I'll review the key highlights from Q4 and full year 2021, provide an update on our growth initiatives, and briefly discuss our 2022 outlook. Mark will then give a detailed overview of our financial results and guidance. 2021 was a milestone year for Latham and our first as a publicly traded company. Latham posted a record fourth quarter with net sales growth of 24.1% and adjusted EVTA growth of 56.5%. In Q4, consumer interest and demand in pools remained very strong. I am also pleased to share that we made significant progress in enhancing our operations and resin supply position during Q4. Fiberglass production levels and efficiency increased as expected through the end of 2021, with our North American fiberglass production increasing 35% on a sequential basis over Q3. And we expect it to continue improving as our resin supply increases throughout 2022. This enabled us to deliver another strong year of tremendous growth for our business. Throughout 2021, we continue to execute on our growth strategy, which positions us well to capitalize on the growing consumer demand for pools and to deliver growth across our market-leading product portfolio. We continue to drive the material conversion from concrete pools to fiberglass, thanks to our direct-to-consumer model, and we continue to build out our digital tools with MyLatham and our pool cost estimator. We also expanded our addressable market by adding a new premium quality product to our portfolio at an attractive price point for homeowners with the acquisition of Radiant Pools, a leading manufacturer of vinyl-lined, insulated aluminum-walled swimming pools. This transaction, completed in late Q4, demonstrates our ability to execute on attractive tuck-in opportunities and enhance our ability to benefit from growing homeowner interest in pools. I am also very proud of the operations team and the progress they have made over the last six months. Latham has remained nimble in an ever-changing operating environment. We have diversified our raw material supply, especially in the resins used in manufacturing our fiberglass pools. Our current resin suppliers have improved fulfillment, and we continue advanced dialogues on future year supply agreements with them. We are also in the process of adding new sources to ensure we have plenty of resin to support our growth in 2022 and beyond. As we build our resin position, we have the manufacturing capacity to support our plain growth in 2022, and we will continue to add capacity as we prepare for 2023 and beyond. I am also excited to share that we have welcomed Sanjeev Ball as our new COO. Sanjeev comes to Latham with over 20 years of experience in global supply chain and procurement at companies like Newell Brands, Danaher, Stanley Black & Decker, and United Technology Group. We believe he is the ideal candidate to lead our talented operations organization as we continue to advance our resident supply chain initiatives, expand our capacity to support our long-term growth, and drive ongoing lean and productivity initiatives throughout the business. All of these efforts combined enabled us to deliver our 12th consecutive year of net sales and adjusted EVTA growth and adjusted EVTA margin expansion in 2021. We could not have achieved this success without the devotion of our employees and the commitment of all of our dealers. Diving more deeply into our progress and our key growth initiatives, The work we have done with our digital strategy, specifically search engine optimization, has enabled us to remain the digital market leader in our space. We have improved our search rankings for priority keywords and our website traffic remains very strong with over 2.5 million sessions and over 7 million page views, while scaling back our paid search spend in 2021. We also saw year-over-year growth in page duration times. This means consumers are spending more time on our site. We continue to evolve and enhance the ways we reach homeowners and dealers digitally. This includes continued enhancements to our augmented reality app, which has now had over 84,000 downloads and has resulted in nearly 350,000 virtual pools being installed since 2019. As we work to drive fiberglass share of U.S. pool installs, we are expanding our capacity to be able to meet that future demand. This includes our new fiberglass facility being built in Kingston, Canada, which we broke ground on in January. We are seeing ongoing success in expanding our strategic partnerships with Latham's exclusive dealers. We continue to teach our dealers how to scale their business to capitalize on the tremendous homeowner demand for pools through our training programs and business excellence coaching, enabling them to add more installation capacity. We see opportunities to continue to drive fiberglass penetration, especially in the sand states, Florida, Texas, Nevada, and Arizona. And we are focused on enhancing our dealer base in these regions. Our strategic partnership with Premier Pools and Spas is one of the keys to this. We are really pleased with the exceptional growth we drove with Premier in 2021. We are very excited to continue to expand on this partnership in 2022. As we look to next year, we expect to deliver exceptional growth well above our three- to five-year targets. In 2022, we are expecting full-year net sales to be $850 million to $880 million and full-year adjusted EBITDA to be $185 million to $205 million. We operate in a large and attractive market. Homeowner demand for our products is strong, driven by secular trends like the acceleration of investments in outdoor living and migration to suburban communities. Over the last several years, we have established a strong track record of outperforming the industry. A key to that is the success we're seeing in driving the conversion of fiberglass. Fiberglass's share of U.S. pool installs is well below more mature markets like Australia, where fiberglass currently enjoys a 70% share of the market. This means that Latham has a long runway for growth. We look forward to continuing to execute on our growth strategy in 2022 and working together with our suppliers and dealers to advance our mission of making high-quality swimming pools an attainable luxury for every homeowner. I will now turn the call over to Mark to review our financial results and outlook in greater detail.

Mark? Thank you, Scott, and good morning, everyone. First, I'll provide an overview of our financial results for the fourth quarter and full year 2021. All comparisons are on a year-over-year basis compared to fourth quarter and full year fiscal 2020. Please note that Q4 2020 results do not include our investment in Premier Pools and Spas since we began booking our equity pickup in the first quarter of 2021. Our Q4 2020 does include results from GLI for two months since we closed that acquisition towards the end of October 2020. Our Q4 and full year 2021 reflect one month of results from Radiant since we closed that acquisition towards the end of November. Net sales for the fourth quarter 2021 were up by $27.0 million, or 24.1% year-over-year, to $138.9 million. For the quarter, our 24.1% sales increase was 16.1% for Bryce, and 8.0% from volume. All three of our product lines increased sales year over year, led by a 15.0 million increase for in-ground swimming pools to 82.8 million, a 6.8 million increase for covers to 37.8 million, and a 5.1 million increase for liners to 18.3 million. We are pleased to have sold more fiberglass pools in Q4 than Q3, in part due to the increased resin supplies and production you heard Scott talk about. On a year-over-year basis, fiberglass sales volume was slightly lower compared to a strong Q4 last year. And if we include GLI sales for the entire fourth quarter of 2020 and exclude any radiant sales from Q4 of 2021, our pro forma sales growth for the quarter would be 16.9%. Gross profit increased by 4.4 million, or 11.5% to 42.4 million, driven by an increase in net sales, which was partially offset by the addition of non-cash stock-based compensation expense of 1.9 million. Our Q4 gross margin was 30.5%, compared to 34.0 percent last year. Lower year-over-year gross margin in the quarter was due in part to non-cash stock-based compensation expense, a sales mix away from in-ground pool sales, particularly in fiberglass, and the timing difference between our price increases and cost inflation, partially offset by improving fixed cost leverage and productivity in our factories. As expected, our year-over-year gross margin compression improved significantly from Q3. Excluding non-cash stock-based compensation expense, our Q4 gross margin was 31.9 percent, 210 basis points lower than last year, compared to 680 basis points of year-over-year gross margin compression in Q3. With our improved residence supply, we saw North American fiberglass pool production increase over 35% from Q3. Combined with higher average selling prices, as we increased our fiberglass surcharge in mid-November, we were able to reduce our year-over-year margin compression in Q4 by 470 basis points compared to Q3 year-over-year results. In Q4, selling general and administrative expenses increased to 42.7 million, or 34.0% of sales, from 34.6 million, or 30.9% of sales in Q4 of 2020. This increase was primarily driven by a 21.9 million increase in non-cash stock-based compensation expenses to 22.3 million, and ongoing public company costs, excluding non-cash stock-based compensation expense, and the net of other costs added back in the calculation of adjusted EBITDA. SG&A cost in the quarter was $20.6 million, or 14.8% of sales, down $2.6 million from prior year, primarily due to lower incentives. Q4 adjusted EBITDA increased by 9.9 million, or 56.5%, to 27.3 million, and adjusted EBITDA margin increased 410 basis points to 19.7%. As Scott mentioned, results for 2021 marked our 12th consecutive year of net sales and adjusted EBITDA growth and adjusted EBITDA margin expansion. Net sales for the year increased 227.1 million, or 56.3%, to 630.5 million. Volumes across our product lines increased 42.6% year-over-year, driven by strong market demand, homeowner preferences for Latham's products, expanded strategic partnerships within our dealer network, and the acquisition of GLI. the balance of our year-over-year sales growth, or 13.7%, came from higher selling prices. The increase in total net sales across our product lines was $131.1 million for in-ground swimming pools, $47.6 million for covers, and $48.4 million for liners. If we include GLI for all of 2020 and exclude Radiant from 2021, our pro forma sales growth would have been 36.5%. Gross profit in 2021 increased 43.0% to 204.2 million, largely driven by the growth in net sales. Gross margin decreased to 32.4% compared to 35.4% for the prior year period, driven by supply chain headwinds, Strategic decisions to not reprice the backlog orders, which opened a timing difference between our price increases and the cost inflation associated with the fiberglass pool sold, and non-cash stock-based compensation expense of $8.7 million. Excluding non-cash stock-based compensation, gross margin was down 160 basis points year-over-year from 2020. Adjusted EBITDA in 2021 was up 56.0 million or 66.8% to 139.8 million. And adjusted EBITDA margin increased 130 basis points to 22.2% from 20.8% last year. Turning to the balance sheet, as of December 31st, 2021, we had cash and cash equivalents of 44 million. total debt of 280.4 million, and our net debt leverage ratio was 1.7 times. Net cash provided by operating activities was 33.7 million versus 63.2 million in the prior year period, with the year-over-year decrease driven by increased investments in working capital to support our sales growth. Capital expenditures totaled 25.0 million for 2021, compared to $16.3 million in 2020. The increase in capital spending was primarily related to our fiberglass capacity expansion initiatives. Subsequent to quarter end, we refinanced our term loan and revolving credit facilities. On February 23, we entered into a credit agreement that provides a senior secured term loan facility in an initial principal amount of $325 million, and a senior secured revolving line of credit in an initial principal amount of $75 million. This refinancing further enhances our financial flexibility, reduces our interest expense, increases our borrowing capacity, and extends our revolver maturity date into 2027 and term loan maturity date into 2029. Now turning to our outlook. I'd first like to share a reminder on the seasonality of our business. Although we see demand for our products throughout the year, spring and summer are typically our peak seasons as they are the height of swimming pool use, pool installation, and remodeling and repair activities. As a result, our net sales are historically highest during Q2 and Q3. Looking at net sales as a percentage of total sales for the year, we typically see a relatively even split between the first half and second half of the year. This was not the case in 2020 when the onset of the pandemic and lockdowns shifted our sales split away from the historical first half, second half split. However, we saw a return to more historical norms in 2021. As you saw in the guidance provided in our earnings release this morning, we expect to achieve another year of robust growth in 2022. Investments in outdoor living in the backyard and the demand for our products remains strong. We continue to benefit from our strategic initiatives, including our unique direct-to-homeowner model and our efforts to drive the material conversion to fiberglass. We've made significant progress in navigating supply chain and raw material-related headwinds, resulting in improving production levels and lead times. We are realizing the benefits of our pricing actions and surcharge, And as a result, the gap between price and inflation will continue to narrow in the first quarter. Notably, our price actions have had no impact on fiberglass demand, as the volume proposition of fiberglass continues to hold versus gunite, including faster installation times and lower upfront and lifetime costs. In addition, we're delivering beautiful premium products to the homeowner's backyard. Our outlook assumes softer year-over-year volume in the first half, given the comp against the very strong growth we saw in the first half of fiscal 2021, some labor availability impacts from the Omicron variant, and continued improvement in resin supply and fiberglass production, as well as an expected ramp-up in fiberglass volume growth in the back half of 2022, as we realize the benefits of our resin supply actions and comp a period of softer volumes driven by limited raw material availability in the second half of 2021. As a result, for the full year 2022, we expect net sales of 850 to 880 million, representing 35 to 40% year-over-year growth. Adjusted EBITDA of 185 to 205 million, representing 32 to 46% year-over-year growth. This growth is well above our long-term targets for net sales and adjusted EBITDA growth of 10% to 12% and 12% to 15% respectively. We also guided the capital expenditures of $45 million to $60 million. We will continue to invest in incremental fiberglass capacity throughout our network with the majority of the year-over-year increase in CapEx driven by investments in our new Kingston manufacturing facility, as well as incremental steel panel capacity for our vinyl line package pool products. In addition to our formal full-year guidance, we also wanted to provide a little color around non-cash stock-based compensation expense. In 2022, we currently anticipate non-cash stock-based compensation to be about $56 million 52 million of which would be included in SG&A, and 4 million in cost of goods sold. Of the total expense of about 56 million, approximately 88% is related to the issuance of common stock upon conversion of pre-IPO Class B units. In addition, we currently expect the first half non-cash stock-based compensation to represent about 60% of our full year expense. Lastly, Given the unique operating environment, we've also provided an outlook for 2022 first quarter net sales. In the first quarter, we expect to deliver net sales between $170 and $180 million. In addition, as I mentioned earlier, we do expect a return to more normal seasonality in 2022. And as such, we expect first half net sales to represent a little less than half of full years. 2022 net sales. With that, I'll turn it back to Scott before opening the call for Q&A. Scott? Thanks, Mark.

We drove significant growth in 2021, and we expect to continue our strong trajectory in 2022. We serve a large and attractive outdoor repair and remodel market and are benefiting from growing consumer demand for our products. We are driving the material conversion of Fabry Labs thanks to our unique direct-to-homeowner model which continues to transform our industry and position us as a partner of choice for our dealers. And we feel good about continuing to expand Fireglass's share of the U.S. residential pool starts over time. We have the broadest portfolio of products and a strong reputation for quality, durability, and aesthetics. Continued robust homeowner interest in pools, increasing installation capacity and residence supply, and our pricing actions position us well for another strong year of revenue and adjusted EBITDA growth in 2022. Our consumer-driven strategy, proven ability to drive the material conversion from concrete to fiberglass pools, capacity investments, and disciplined approach to pricing cost management also give us confidence in our 2022 guidance and three- to five-year targets. We'll now open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Bowley with Barclays. Please go ahead.

Hey, good morning. This is Ashley Kim on for Matt today. Thanks for all the detail at the top, and congratulations on a good quarter and nice outlook for 22. So I guess my first question, just in light of the recent moves in oil, are you thinking about the pricing strategy any differently, potentially building in some escalators or getting ahead with even more price, just given what that impact to resins could be?

Yeah, so good morning, Ashley. Thanks for filling in for Matt. Thanks for your comments. You know, look, we'll continue to monitor, I'd say, inflation in general, not just oil, but resin, all of our commodities. You know, at this point, I think the key thing is that we've got all the pricing in place that we need to deliver the 22 outlook that we've given. But as we talked in the Q4 call, you know, we've got the surcharges in place. We can be a lot more flexible with the actions we need to take to continue to improve and grow our margin rates.

Thanks, Scott. That's helpful. And then just anything on the growth of grand dealers or conversion from grand dealers that you can share? And maybe specifically in the sand states, as you kind of call that out as an area of growth, is that something that you're kind of able to lean harder into with production improvements or just seeing good traction out there with dealers or any more detail on that strategy you can give?

Yeah, I think it's more of the same, Ashley. You know, we're just going to continue to focus on growing the dealer installation capacity across the board. You know, more resin clearly has led to greater production, the 35% up in Q4. We do have that big sand state strategy. That's where the Premier Pools and Spas relationship, as well as all the grand dealers that sit in those states, exist. You know, we saw really nice progress there in 21, and we expect we'll see even more, or I should say better progress in 22 as the resin supply continues to improve.

All right, thanks. I'll leave it there, and good luck. Thank you. Thank you.

Our next question comes from Susan McLaurie with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. My first question, you know, I just wanted to follow up, Scott, on your comment that you have all the pricing in place that you need in order for, you know, to hit the 22 numbers. It feels like, you know, with the move that we are seeing in some of those underlying energy prices that the inflationary environment could shift somewhat this year. And so just wondering if you could give a little more color on the price cost, where you are with that, and, you know, maybe as it relates to lead times and the backlogs, just how to think about those dynamics. coming through over the next couple of quarters?

Hey Susan, it's Mark. Let me just jump in a little on the price. As Scott mentioned, as we head into 22 and baked into our guidance, we believe we've got the pricing in there that we need based on our current knowledge of our business and what's going on. As we all know, there's a lot of uncertainty out there, so we continue to monitor that situation very carefully. Also, as Scott mentioned, it's one of the reasons we decided to implement the surcharge approach on fiberglass, which is the primary backlog that we have in the business. It gives us the flexibility to move that up and down as we see the need to as things evolve over the course of the year. So we feel good where we're sitting right now, and obviously we continue to monitor that and we'll take the necessary actions as we see things unfold throughout the year.

Okay, okay, that's helpful. And can you give a bit of color, I guess, on the backlogs, you know, exactly where those are sitting now and how you're thinking about the ability to get through that this year? I know you mentioned that you expect volumes to be lower in the first half of the year and then ramping in the back half, but just any color on those backlogs and sort of the timing and where we are?

Yeah, sure, Susan. Again, Mark, And we saw that, let's call it the price gap, the gap between average selling prices running through our P&L and the inflation closed considerably in the fourth quarter of the year. We would expect that to continue to narrow in the first quarter, Susan. And as we look out through 2022, it's probably late Q2, early Q3 by the time that we've gotten to the point where You know, we've run through all, let's say, all the lower-priced pools that are currently sitting in our backlog. So, late first half, more strongly in the second half of 22.

Okay. That's helpful. Thank you. Good luck.

You're welcome. Thank you.

Our next question comes from Ryan Merkel with William Blair. Please go ahead.

Thanks. A couple questions for me. So, Scott, first off, you mentioned improved resin supply. Can you just unpack this a little bit more? And really, my question is, do you have enough resin to build all the pools in your backlog?

Yeah, so Gamora Ryan, you know, resident supply really improved in Q4. I think as we talked, you know, in the back part of the year, the new source came online. We've recently qualified another new source, which actually started to come in in the last week or so into our facilities. And just if you look at the production numbers in Q4, you know, fiberglass production was up 35% versus Q3. And we actually had two of our biggest production weeks in Q4 in the entire year of 2021. So, you know, as that rate continues to ramp and increase, and as we worked with our existing suppliers and several of the new suppliers we've called and brought online, you know, we're looking to bring in resin to a far out pace, you know, not just what's in the backlog, but all the expectations for new orders in 2022, what we need to deliver the guidance. And I'd say it's even a little bit beyond that, Ryan. We're looking at what we need for 23 and 24. And Sanjeev's focused on making sure we have resin to build a Kingston plant when that comes online in 23. And more importantly, just continuing to focus on that fiberglass material conversion story. And as we drive, let's say, to a 40% conversion number like in Europe, we're looking at long-term commitments and agreements with a diverse supply base. You know, so it's more future-based. Let's see the current backlog of what we're driving to. And I think we feel really good. And with Sanjeev on the team now, we'll drive that much more of a focus on that particular aspect on resin for us.

Got it. All right. So it sounds like you'll ramp resin supply and maybe second half of this year is when you get to a point where you have enough. Is that what you're saying? Yeah.

Yeah, I'd say we'll be ramping significantly right now as we speak in 1Q, and I think it'll be a nice linear ramp throughout the entire year as we'll have multiple vendors coming online, another big one coming online in 2Q. The offshore sources will continue to ramp in 2Q. And then, you know, Q3 and Q4, we'll continue, we'll see, you know, continued improvements in that supply. And it's, you know, you almost just think about drawing a linear line out through time to match our growth rates. That's what we're focused on.

Got it. Okay. And then just can you give us the volume and price breakout for the 22 guide? That would be helpful. And how are you thinking about the surcharges, you know, in that guide? You know, because it's possible you remove those at some point or even raise them.

Hey, Ryan. It's Mark. Good morning. You know, as we look at the guide for next year, you know, we're talking top-line growth of between 35% and 40%. As you saw in Q4, we had a price impact of about 16%. I think for the full year, it was close to 14% in 2021. So we're thinking, you know, more than half of our growth in 2022 is likely to come from price. as a result of all the pricing actions that we've taken throughout 2021. And I think as it relates to the surcharge, as we mentioned, as we sit here today, we think we've got the pricing we need for 2022. That surcharge is expected to stay in place for 2022 in our guide. But the nice thing about that is it gives us the flexibility to more quickly respond up or down to what we see in the marketplace. So it's a nice lever that we can use to manage through the year.

Very good. Thanks for the color. You're welcome, Ryan.

Our next question comes from Keith Hughes with Truist. Please go ahead.

Thank you. Just to add on to Ryan's question, how much is the acquisition going to add to the, or part of the 2022 revenue guidance?

Hey, good morning, Keith. Nice, nice to hear from you. Um, look, we're, we're super excited about, um, the radiant acquisition and you've heard us talk about that, that previously, um, you know, we've mentioned that when we acquired the business that, you know, last year they did around 35 million in revenue. Um, You know, which while we're super excited about it, it's still a relatively small component of the overall business. And I think on top of that, like, you know, other parts, their order book is pretty well booked out for 2022. So we're probably not going to see much growth synergy until we get to 2023. But specifically, we don't break out exactly, you know, what we have built into the guide for Radiant.

Okay. And... On volume for the year, you talked about the difference between first half, second half. Do you think for the year, based on the plan you've laid out, do you think fiberglass pools will be up in terms of sales in total in 2022?

Yeah, I think as the volume guide goes, fiberglass sales will certainly be up year over year and will be a contributor to the volume growth. We are guiding softer volume year over year in the first half for a couple of reasons. One, pretty tough comps coming off of the first half of last year. Two, while we saw more than 35% increase in fiberglass production in Q4 versus Q3, that will continue to ramp in Q1. But we have a little bit of catching up to do versus prior year. And I think when we get to the second half, as our resin actions continue to pan out, as our production continues to scale, we'll be putting out even more pools in the second half than in the first half of this year. And as you know, Keith, we also then have a little bit easier comp in the second half due to the resin challenges we had in the second half of 2021.

Okay, given what you just described in the first half of the year with fabulous tools, will we continue to see some gross margin compression just on mix alone in the first half?

Yeah, you know, we were really pleased, Keith, with the improvement in gross margin compression that we saw in Q4 versus Q3, which, you know, was expected, and we were happy to put that on the board. We would expect For a variety of reasons, including the continued narrowing of the price gap on fiberglass pools, we would expect that gross margin compression to continue to shrink as we jump into Q1 and the balance of 22. Okay, thanks. You're welcome.

Again, if you'd like to ask a question, please press star, then 1 at this time. Our next question comes from Raf Jedros. Shish with Bank of America. Please go ahead.

Hi, good morning. It's Rave. Thanks for taking my question.

Hey, Rave.

Good morning, Rave. The 2022 guidance has a big step up in CapEx for the capacity expansion. Can you talk about how much you'll be expanding capacity, like after the Kingston facility opens? Through what level of sales does that support? And how do we think about the longer-term run rate of CapEx?

So, Rafe, I'll take the first part, and then maybe Mark will take the back part. So, you know, when we – sorry, Mark. You know, when Kingston comes online, you know, that will ramp through 2023. So that is a significant step up in the CapEx numbers that we flashed for 22. You could almost say the majority of it's probably Kingston-related and a few other strategic capacity since we're making – You know, you could argue that that should take us out into, you know, mid to late 24. But if you step back and just look at what we've been doing over time, right, we've continued to invest in facilities and many smaller investments, whether it's molds, vehicles, bays, guns, delivery equipped guns for the gunning equipment, the delivery vehicles, etc. You know, burners, technology to get more permitted capacity. It's all of those small things, plant by plant, that we continue to do to try to stay at least that 12 to 18 months out in front. This was a big step up as a result of the fiberglass conversion story really taking hold in the Canadian market with the Norellin brand and the Latham brand. And it got to the point where we needed the facility up there. And look, we'll continue to evaluate next steps as we look at the bigger picture, especially as we drive to that 40% conversion number like we see in Europe. Mark, any other colleague want to add?

No, I think that's well said. Scott, I would just add, you know, as we look at our guide for CapEx 45 to 60 this year, I mean, it's quite a step up from where we were in 2021. And look, we're going to continue to do all those incremental things that Scott talked about because the demand for fiberglass just continues to grow. And so we're going to continue to invest there. But look, the biggest reason for the step up is the Kingston investment. You know, most of that spend is going to incur in 2022 as we start getting ready for production in 23. But I do also want to mention that we're also, you know, increasing CapEx spend in our package pool portion of the business. The demand there is very strong, and so we're bringing some incremental capacity on there. But look, the biggest cause of the jump on your Kingston investment.

Thank you. That's really helpful. And then I think last quarter you spoke about the utilization rate. I think it was just below 60%. Where did that finish up for 2021? And then what is the expectation embedded in your guidance in terms of utilization as we exit 2022? How high do you expect that to get up to? Where will that compare to your long-term run rates?

Yeah, so, Ray, if you think about what, you know, if we just kind of look at 21 as an anomaly because of the resin shortage and, you know, just let's go back to Q4, 35% improvement in production rates. Some of the biggest weeks of production all year happened in November and December on the fiberglass front. Going back to that chart you're probably all familiar with, you know, with the capacity ads coming online in 2022, you using 21 as a baseline we were talking 20 to 25 percent increase in capacity and they going back to let's say a normalized 70 to 80 percent utilization of the fiberglass facilities based on how the capacity ramps and that number does not include any of the kingston capacity ads so kingston will be additive to those numbers so you can be thinking you know 40 to 50 percent higher capacity run rate based on that investment when we get into 2024. Okay, great.

That's very clear. Thank you. Thanks, Ray.

Our next question comes from Josh Chan with Baird. Please go ahead.

Hi, good morning, Scott and Mark. Congrats on a good quarter in Outlook. Thanks, Josh. Hi, yeah, I guess my first question, hopefully we can start to use the phrase post-pandemic here a little bit, but I guess how do you see, you know, pool demand overall trending over the next, you know, call it two to three years post-pandemic as consumers maybe shift their behavior from, you know, staying at home to more normal activities? Like how do you see the sustainability of industry demand trending there?

Yeah, you know, let's strike post-pandemic. We're just in a different crisis now. Look, I like the enthusiasm, so thank you for that. Look, demand continues to stay strong. And if you think about our business strategy, refocusing on the consumer, marketing direct to the consumer, educating on the awareness of fiberglass pools and all of the benefits at the homeowner level, as well as the benefits for the dealer, That story is really resonating and it's showing in the phenomenal growth we've been seeing. And we all know where the European market sits, but more importantly, the Australian market is 70%. So, you know, no matter what happens, if demand slows a little bit in terms of new pool starts or continues to grow at a 3% to 5% historical rate, that conversion is what's going to drive our growth with a much faster 2x market growth there. The demand we see for 22 is extremely strong. Many dealers talk and they're sold out. We're working at kind of double if not triple capacity with those dealers. Orders and pools are being booked out into 2023 in many areas of the country. And look, the one thing to step back and look at is we're still a far cry from the peak of new pool starts in the U.S. when it was 175,000 back in 05. So there's a lot of runway. And I'll go back to one of my favorite numbers. 90 million homes, existing homes in the U.S. do not have a swimming pool today. So there's still a lot of backyards looking to have a lake and pool put into them. So we feel really strong on the demand front. And, look, just, you know, the auto cover business is also performing extremely well. I want to go back to that cover segment because, again, that's about the adoption and the awareness of a product that's not known. And that story is really starting to resonate at the homeowner level as well. And I think we'll see nice growth continue in that category.

That's really encouraging, Collin. Yeah, thanks for that. And I guess dovetailing into that from the fiberglass conversion perspective, you know, 2023 is getting closer. And so how confident are you that the industry can get to that 25% penetration that you sort of laid out for 23? And if it does, what does that mean in terms of your growth rate next year? Thanks.

Yeah, I think if you look at the guidance we provided for 22, you know, that's the anticipation of continuing on that trend to try to get to that 25% number in 23. with the growth and where pool starts are. You know, I think what we're looking at since, you know, 23 is now a year away, we're looking at where do we need to be out in 24 and 25 and kind of really resetting the benchmark of how do we double the fiberglass business, you know, in the next three or four years. And that's the capacity we're riding with Kingston. It's the resin work we're doing on suppliers. So we still feel pretty comfortable and confident we can hit that number. You know, we'll be getting the PK data on pool starts here in a few months. We'll sit down, go through the analytics, but we still believe we can continue to double this business. The outlooks for fiberglass are extremely strong as that conversion story resonates.

That's great. Yeah, thanks for the color, and congrats on the quarter again. Thanks, Josh.

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

Yeah, thank you. Just a few key points to kind of go back to on the call this morning. As I just said, consumer demand remains extremely strong out there on all fronts for all product categories across the globe for us. Our resin supply is greatly improved and will continue to improve as we move through 2022. We're going to continue to add capacity and stay out in front of that demand curve that's important to us, and that's the big investment decision in Kingston. Again, just want to thank the team and all of our dealers and partners for just great, great 21 results despite many, many challenges. 21 was a very tough year. I'm really excited about the expectations we've laid out today to deliver exceptional growth in 2022. And more importantly, just want to thank you all for your time this morning, your continued support, and hope you guys all have a great, safe day today. Thank you.

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