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spk14: Good day, and welcome to the Latham Group, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After 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 from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Nicole Edelman, Investor Relations Representative. Please go ahead.
spk11: Thank you, and welcome to Latham's Q2 Fiscal 2022 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 Rajewski, and CFO, Robert Masson, Following the remarks, we will open up the call 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 our 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 to its investor relations website and will be provided in our Form 10-Q for the second quarter of fiscal year 2022. The company expressly disclaims any obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events, 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 10Q for Q2 2022. I'll now turn the call over to Scott Rajewski.
spk05: Thanks, Nicole. Good morning. Thank you for joining us for our second quarter 2022 earnings call. Before we get started, I would like to take the opportunity to introduce our new CFO, Rob Masson. As we recently announced, Rob officially joined Latham on July 11th and has already hit the ground running. Rob is an accomplished finance and industrial manufacturing leader with nearly 20 years of experience in the aerospace and defense and industrial sectors. Please join me in welcoming Rob to the Latham team. I'd also like to take this opportunity to thank Mark Borsett for his contributions to leading Latham through such a transformative moment in our company's history. We are grateful to have benefited from his leadership and for his current work as a strategic advisor to ensure a seamless transition. Additionally, I also want to take this opportunity to thank our employees and dealer partners for their hard work and dedication to Latham. We could not do it without you all. Q2 is another quarter of growth, with net sales and adjusted EBITDA both increasing 14%. During the quarter, we continue to experience strong demand for fiberglass pools, as well as our cover and liner products. Our previously announced price increases helped drive sales growth, more than offsetting the softening volume in our package pools category during the second quarter, which was primarily a result of inventory destocking in the distribution channels and weather-related delays on installations. We are pleased with our overall performance in the first half in which we posted net sales growth of 21% and adjusted EBITDA growth of 27%. Our year-to-date results reflect the strength of our fiberglass material conversion strategy, unique direct-to-consumer model, and digital strategies. In addition to investing in the long-term growth of the business, we also opportunistically executed a share buyback of $15 million in the second quarter. Let me update you a bit on the operational progress we made in the second quarter. Our North American fiberglass production again increased sequentially and versus prior year with 14% growth quarter over quarter in Q2 and 30% growth in the first half compared to the prior year period. We continue to work through the robust fiberglass order backlog and improve lead times. We have taken significant steps to address the temporary flake shortage discussed on our Q1 earnings call, which had minimal impact on Q2 results. We anticipate this will be fully resolved by the end of Q3. In addition, we have continued to streamline the production of our non-fiberglass operations, which combined with increased inventory levels allowed us to get back to our historic lead times. We also wanted to provide a quick update on the fire at our Odessa, Texas fiberglass manufacturing facility. By mid-May, all production had been successfully shifted to other facilities with a minimal impact on sales. These operational improvements reflect the capabilities of the team and the resilience of our business. We believe we are well positioned from a manufacturing and supply chain perspective as we move into the back half of the year. While we feel good about the results we delivered in the first half and the overall state of the business, we expect the softening of volume that we saw in the second quarter in our in-ground pool product category, which was driven primarily by package pools, to continue through the balance of this year. In response to the recent macro uncertainty, coupled with some delayed installs from unseasonably wet weather in Q2, many of our wholesale distribution channel partners began to destock their elevated inventory levels in recent weeks. We do not expect the missed installs due to the unfavorable weather to be recovered in the back half of 2022, given many of our dealers are completely booked into early 2023. On the positive side, we continue to expect robust growth in our fiberglass business, reflecting our efforts to drive fiberglass adoption and strong performance in our liner and cover products in the back half of the year. That said, we do not believe this performance will be enough to offset the impact of wholesale distributor destocking in our package pools and unfavorable first half weather. As a result, we are resetting our guidance for full year fiscal 2022, which now indicates net sales growth of between 19% and 22% and adjusted EBTA growth of between 18% and 25%. Rob will go into detail on this later. Our updated guidance continues to imply impressive year-over-year growth, and we are confident in our ability to continue to execute on our strategy and deliver growth in the near and long term. The work we have done to strengthen our supply chain has been paying off as the breadth of our offerings and strong supplier and dealer relationships enable us to respond quickly to demand increases. We are focused on keeping our manufacturing capacity ahead of demand and with construction of our Kingston fiberglass manufacturing facility in full swing. We are excited to provide additional updates in the coming quarters. The underlying fundamentals of our growth strategy remain unchanged and position us well for continued success as we look to 2023 and beyond. First, the material conversion to fiberglass. As we have discussed before, this is a key part of our growth strategy. We continue to drive awareness and education with homeowners and dealers on the value proposition associated with fiberglass pools. The low level of penetration of fiberglass pools in the North American market and our ability to drive material conversion provide significant runway for future growth and helps bolster our performance in any economic downturn given the competitive advantages of the product. Fiberglass pools have significantly lower upfront and lifetime costs compared to concrete pools. Additionally, fiberglass pools can be installed in less than one week, and in some cases, one day, compared to a three-month install for some concrete pools. This allows the homeowner to enjoy their swimming pool much more quickly and allow dealers to grow their business more rapidly by increasing the number of pool installations per year and extending the installation season. Latham's fiberglass pools are the most durable and attractive swimming pools in the market with premium quality and impressive strength that outperforms concrete pools. We are seeing our efforts play out in Google Trends data with homeowner searches for fiberglass pools far exceeding homeowner searches for concrete or gunite pools boning well for future demand. Second, we continue to build our exclusive network of dealers and work with our dealers to enhance their productivity and grow industry installation capacity. We are receiving positive feedback and results from our dealer boot camp training sessions, which have directly led to an increase in the pools installed by those participants. In 2022 so far, we have trained over 200 dealer installation teams, a seven-fold increase compared to 2021. Our dealers note that they are still booking orders into 2023 and seeing strong homeowner interest. On the Latham side, we continue to utilize our online lead generation engine to bolster the 2023 pipeline of qualified leads for our dealer partners. We continue to focus on our branding and digital initiatives, which are a key differentiator for us. Our direct engagement with homeowners is transforming the pool buying process and gives us the ability to generate purchase-ready leads for our dealer partners quickly and efficiently. Our lead generation engine continues to empower us to improve the quality and quantity of leads for our dealer partners and has generated both purchase-ready leads as well as those who need further qualification. In response to this opportunity, we have implemented a new lead qualification program leveraging our MyLatham platform and leading market automation software to nurture leads as prospects until they are purchase-ready. National campaigns drove a majority of the volume of leads through May, and we have recently kicked off new regional campaigns in major markets where we have onboarded dealers with installation capacity and our manufacturing plants have the production capacity to respond quickly to spikes in demand. As we turned up the lead engine in these geographies, we saw an immediate impact. Leads increased 25% in the first week, which increased to 76% by the second week. In the first eight weeks, we produced approximately the same number of leads focusing on regional markets as we generated for the first 20 weeks of the year when using the broader national campaigns. New rounds are planned for the back half of the year with national campaigns, organic content, and search engine optimization in sync with these efforts. Before I hand the call over to Rob, I want to highlight that on July 6, 2022, we published our inaugural Environmental, Social, and Governance report. This is just the first step in our efforts to set clear goals, measure progress, and increase transparency of Latham's environmental impacts, social outcomes, and business practices. We are proud of the initial progress we have made, with highlights including reducing wastewater from our plants to zero and recycling all vinyl and steel scrap to significantly reduce waste going to landfills. To close, the dynamics of the large outdoor repair and remodel market remain attractive, and we will continue to work as a team to navigate the current environment. We see continued demand for our products with a generational shift in spending from indoor to outdoor and continued meaningful migration to suburban areas from urban areas, as well as southern states where pool ownership is higher. Our large fiberglass order backlog remains robust, with many of our dealers booked out into 2023, and we continue to generate recurring revenue from our industry-leading covers and liners businesses. As the market leader with significant scale, we are confident that we are uniquely positioned for success as we move into the back half of the year, as well as 2023 and beyond. With that, I'll turn it over to Rob.
spk04: Thank you, Scott, and good morning, everyone. Today I'll review our second quarter and first half fiscal 2022 results and provide an update on our outlook for the full fiscal year. Before we dive in, I want to express how thrilled I am to be part of the Latham team. I believe we're in an excellent position to capitalize on our unique value proposition long term. Turning now to our results. Net sales for the second quarter were 207 million, up 26 million, or 14% year over year. By product line, this increase was primarily attributable to growth in pool covers, which increased 46% to $38 million, and liners, which increased 21% to $56 million, while in-ground pools expanded 4% to $112 million in the quarter. In the in-ground pool category, we grew sales in fiberglass pools when we experienced a pullback in package pool sales. The $26 million increase in second quarter net sales was driven by a $34 million increase in pricing and an $8 million decrease in volume. The volume decrease was primarily attributable to package pools, which were impacted by our wholesale distribution customers who had begun to destock inventory levels, as well as more days of unseasonable weather in certain regions that limited installation days. Switching now to gross profits. we generated 68 million of gross profit, up 9 million, or 16%, on the flow-through of net sales growth and a decrease in non-cash stock-based compensation expense. Gross margin improved in Q2 to 32.7% and was up 40 basis points compared to 32.3% last year. The year-over-year reduction in non-cash stock-based compensation expense drove the expansion. Excluding stock-based compensation expense, gross margin decreased 180 basis points due to the impact of inflation and negative fixed cost leverage, mostly associated with lower volumes in package pools and, in some case, the investment in fiberglass capacity expansion. Selling general and administrative expense decreased to $42 million compared to $95 million in Q2 of 2021. This decrease was primarily driven by a $55 million decrease in non-cash stock-based compensation expense. Excluding non-cash stock-based compensation expense, SG&A increased $2 million, or 7%, which is roughly half of our net sales growth rate. The increase was primarily due to investments in additional headcount to support growth. Adjusted EBITDA increased to $49 million, up $6 million, or 14%, and adjusted EBITDA margin decreased 20 basis points to 23.5%. Net sales for the first half of fiscal 2022 were $398 million, up $69 million, or 21% year-over-year. We have seen net sales growth across our three product lines for the first six months of fiscal 2022. In-ground pools increased 11% to $224 million. Covers increased 41%, $71 million. And liners increased 33% to $104 million. Gross profit increased to $138 million, up 25% from $111 million in the prior year. Gross margin for the first six months of 2022 increased to 34.7%, inclusive of non-cash stock-based compensation expenses. compared to 33.6% for the prior year period. The $27 million increase in gross profit and the 110 basis point increase in gross margin were driven by the flow-through benefit of pricing actions to offset inflation and the $3 million year-over-year reduction in non-cash stock-based compensation expense, partially offset by negative fixed cost leverage. Excluding non-cash stock-based compensation expense, Gross margin expanded 20 basis points in the first half of the year. Adjusted EBITDA was $97 million for the first six months of 2022, up 27% from the prior year period. And adjusted EBITDA margin increased 100 basis points to 24.2% from the prior year period. Now switching to the balance sheet. As of July 2nd, 2022, we had cash and cash equivalents of $25 million, total debt of $314 million, and our net debt leverage ratio was 1.8 times. Net cash generated by operating activities was $42 million for the second quarter of 2022 compared to $55 million in the prior year period, with the reduction primarily driven by investments in working capital. mainly inventory to return to normalized lead times and the embedded impact of inflation on inventory. For the first half of fiscal 2022, we used $15 million of cash in operating activities, whereas in the first half of fiscal 2021, we generated $14 million. The first half year-over-year change was also mostly due to the return to normalized lead times and the embedded impact of inflation on inventory. Capital expenditures totaled $10 million in the second quarter of fiscal 2022, compared to $8 million in Q2 last year, driven by the increased investment in fiberglass capacity, most notably the Kingston Manufacturing Facility project. Capital expenditures totaled $17 million in the first six months ended July 2, 2022, compared to $13 million in the prior year period. Through our stock repurchase authorization, we use $15 million of cash to buy back a little over 2 million shares at an average price of $7.40. Before we switch to our updated guidance, let me take a moment to comment on capital allocation. Our capital allocation philosophy centers around maintaining the ability to execute on our strategic objectives through the cycle to maximize value for our shareholders. We do so by actively managing our capital structure through maintaining liquidity paying down debt, and on turning cash to shareholders. Now switching to our revised 2022 guidance. Based on the factors Scott outlined previously, we have updated guidance for the full year of fiscal 2022. We expect to deliver net sales of $750 million to $770 million, representing 19% to 22% year-over-year growth. Adjusted EBITDA of $165 million to $175 million, representing 18% to 25% year-over-year growth. And now we expect our capital expenditures to be in the range of $40 million to $50 million. We remain committed to investing in fiberglass capacity and our digital transformation to drive long-term growth for the business. Our revised CapEx guidance is based on the prioritization of key initiatives focusing on delivering our strategic objectives. As we look to our three to five-year targets, it's important to remember that even as our macroeconomic environment shifts, the fundamental success factors of our business remain unchanged. Our outlook reflects our ability to continue to drive material conversion to fiberglass tools, to leverage our unique direct-to-homeowner digital strategies, to generate qualified leads for our dealer partners, and to capitalize on homeowners' continued investment in their backyard. Scott, I'll turn it back to you for closing remarks.
spk05: Thanks, Rob. I am very proud of all we have accomplished on an operational level and know we are rising to meet the challenges of this macro environment as a stronger and more efficient business. We are looking forward to closing out the second half of the year and are on track to deliver our 13th year of net sales and adjusted EBITDA growth and adjusted EBITDA margin expansion as we begin to lay the groundwork for our 2023 plans. Thank you for your time today. I hope you all enjoy what's left of summer.
spk14: We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, 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 Raf. with Bank of America. Please go ahead.
spk08: Hi. Good morning. It's Rafe. Thanks for taking my question. I just wanted to follow up on the comments on the packaged pools, which I think are the vinyl line pools. Can you talk about how the distribution varies for packaged pools compared to the fiberglass pools? And then where are we in that de-stocking process for the package pools? How much more do we have to go?
spk05: So, Rafe, if you guys recall, and I'll start with fiberglass, fiberglass is really a direct model where we're distributing the pool from one of our factories to the backyard of the consumer for the dealers, the installer. So that's more of a direct product, and it's similar to liners and covers for the most part as well. Think of those as more direct. Some of the liners do go through distribution, but it's more of a quick pass-through. The package pool segment of the in-ground category is more of a stocked component product sitting in the wholesale distributor branches where the dealer would then come in and pull that off the shelf. I would say we're probably about halfway through that destocking. I think we'll see that continue through 3Q and then stabilize. And that's what we reflected in our current guidance that Rob provided the update on here this morning.
spk08: Great. Very helpful. And then can you just talk about the sell-out trends that your dealers are seeing or the traffic trends? How over the last few months as we've seen the macro environment become more uncertain. How has the traffic evolved? What are you seeing for end market demand and what are you assuming in the second half of the year?
spk05: I'll kind of highlight in each of the categories. The liner business has continued to be strong, and again, that's mostly a replacement business. Some of those liners are going into new pools, so that's been a good strength for us through the entire season and continuing here into 3Q. The cover business is the same. We're seeing a really strong cover business, both for the automatic covers. And as many of you recall, we're really just starting to enter the winter safety cover season. That will be ramping up here later this month and through early 4Q. And the early read on that is we're expecting a real good season there from all indications of our dealers and the consumer level. And then fiberglass continues to be strong. We expect to see a really strong second half for fiberglass sales. Again, we've got a really good backlog. We're taking orders off into 23. But more importantly, with supply chain challenges behind us, we've got the capacity in the ground, we've got the material availability, and our lead times are much improved, but we can quickly turn. and get pools out on a pretty quick basis for dealers. You know, the package pool category, dealers are still booked through the end of the year and booking into 23. And again, that's the other piece being around pool category. What we're not seeing is the pools kind of restocking orders at the distribution level as they adjust inventory positions. where they probably had a little higher than normal. We'll see that correct through the back half of the year, and then we should be good as we head out into 2023. Some dealers just back on the consumer demand at the dealer-level rate. A lot of dealers are still seeing good demand at the consumer level, but there are pockets of the country and regions, and I'll say dealers, and it's really down to the dealer region level where they have seen a slowing of leads, and that's why we've really increased the lead generation efforts for those dealers in many of those markets. Again, I'd say it's still elevated from... you know, where we were back in 18-19 timeframe, they just got accustomed to a much higher level of backlog and a much heavier flow of demand and lead generation, and we're funneling those new leads back to them. That's helpful.
spk02: Thank you. You're welcome.
spk14: Your next question comes from Matthew Bowley with Barclays. Please go ahead.
spk10: Hey, good morning, everyone. Thanks for taking the questions. I guess first one, just on the pricing versus cost side, I guess number one is what are you seeing on the cost inflation side? And if some relief does manifest on that side of things, how do you guys think about pricing and promotions in an environment where you may start to see cost relief? Thank you.
spk05: Yeah, you or Matt. I'll lead, and then if there's any other call that Rob wants to provide, he can. You know, look, we've not really seen a slowdown of the cost inflation on many of the fronts. There has been a few pullbacks in a few of the categories. But it's still very elevated from, let's say, where it was 12, 18, 24 months ago. So we're monitoring that. We'll continue to watch that one. And then at this point, we're not planning or thinking about any price reductions or promotions out there to try to move product, especially just coming in this cover season, strong fiberglass backlogs. So we think we're in a good position on the price-cost inflation curve. But like we've done over the last now probably 24 months, we'll keep this one clearly in front of us and adjust as we see fit going forward. But no plans to do anything from a pricing standpoint at this point where we sit right now. And that's reflected in guidance and in kind of our expectations.
spk10: Got it. That's super helpful. Thank you for that, Scott. And then secondly, just on the – On the margin guidance, I think you're implying on an EBITDA basis maybe margins declining 80 basis points year-on-year for the second half at the midpoint, and correct me if I'm wrong, but I'm just curious if you kind of outline the sort of components, gross margins versus SG&A within that, and kind of what you think you could flex more aggressively if you need to. Thank you.
spk04: And Matthew, I think for the full year, we're expecting kind of flat adjusted EBITDA margins to slightly up. Certainly, you see in the second half with our guidance that there's a little bit of a headwind there on the margins. But that has to do with the underlying inflationary impacts we've talked about already and the expectation of that going forward. But we don't give specific guidance on either SG&A breakdown or gross margin.
spk10: All right. Thanks, Rob. Thanks, Scott. All right. Thanks, Matt.
spk14: Our next question comes from Josh Korinsky with Morgan Stanley. Please go ahead.
spk12: Hey, good morning, guys. You actually have Gustavo Gonzalez on for Josh. Thank you for taking the questions. Just quickly, and I think, you know, sort of realize price in second quarter here with someone in the high teens range, how does sort of that compare to your second half price outlook? Should we expect moderation as we sort of start lapping some second half 21 price? And then sort of talk about your expectations in the third quarter. And I guess probably just like second half, I think third quarter destocking is like mostly where that's but a different color there would be.
spk02: Yeah, thanks, Cassava.
spk04: I think, you know, first half versus second half, we expect kind of the same run rate on price as we had in the first half.
spk15: Got it. That's helpful.
spk12: Can you guys hear me? Yeah.
spk02: Yeah, go ahead, Gustav.
spk12: There was a little bit of a pause there. Yeah, and then I guess just on sort of your second half, volume expectations was the second half of that question.
spk04: Oh, yeah, sorry. Okay. You know, we expect continued growth in the fiberglass, although we don't break it out, you know, the in-ground pool section, package pools. will be similar to the second quarter or the first half in terms of volume.
spk12: Got it. That's helpful. And then I guess just sort of thinking about the current environment, and I know you guys have sort of targeted, I think, low to mid-20s on the fiberglass penetration rate. Has your expectation sort of changed in the near term or just given what's going on?
spk05: Yeah, so, Gustav, you know, without quoting what we think the actual number will be, because we really can't calculate that until early spring once we see where final pool starts from PK data shake out and, you know, run our analytics. But what I would say is, right, we're continuing to drive that material conversion story, driving the acceleration. You know, a great indicator is 200 new dealers trained in fiberglass here over the last, I guess, the first quarter. six, seven months of the year. We're bringing dealers back on. Demand is resonating at the consumer level. And I think the economics of the fiberglass pool versus the concrete pool, that lower upfront cost and total cost of ownership, Probably resonate even now more for a consumer as they're making that pool buying decision and maybe looking to save a few dollars and actually wind up with a much better finished product and experience in the backyard. I think what we're focused on as part of our long-term strategy is driving that 40% to 50% penetration number like we see in Europe and the 70-plus percent penetration number we see in Australia. So no change in our focus, our efforts. And that's also why we're continuing to push the capacity expansions in that category with moving on with the Kingston facility expansion.
spk12: Got it. That's helpful. Thanks, guys.
spk02: You're welcome, Josh.
spk14: Our next question comes from Tim Loges with Baird. Please go ahead.
spk02: Hey, good morning, guys. Morning. Morning.
spk06: Maybe just kind of starting on the digital initiatives, could you just talk to kind of what you're doing on some of these regional campaigns that have kind of picked up and generated new leads? And I guess, you know, if you could maybe kind of break down what the cost of that is and how kind of replicable that is across the dealer base and other geographies.
spk05: Yeah, so there's several pieces within that, Tim, of how we run these campaigns. And I'll start with the last 12 to 18 months, we've really just had normal organic SEO search really carry us the last 18 to 24 months where we've talked about we actually turned off our lead generation engine because dealers were flooded. You know, we started to hear some dealers in pockets of the country say they've seen a slowing of leads. It's not like the lead that stops or turned down. It's just slowed from what they've experienced over the last 12 to 18 months. So we started turning up some of the regional programs and offerings. And, again, we, you know, without disclosing exactly how we do it, we've got the ability to go in certain market territories, you know, boost the lead generation engine through many different marketing and digital platforms that we use funnel those leads to our to our grand dealers in those markets and you know if you go back and look at the metrics I quoted up front the success of that is pretty immediate you know where after the second week 76% uptake in legions and you know by the eighth week of the campaign we generated as many leads and in that week as we did the first 20 of the year and So it's a very select approach. I'm not going to disclose the cost, but I would say it's not that expensive to run programs like this with our engine. And it's got a very high ROI on that investment on a dollar per lead basis. And I'll say it's less than $100 per lead without giving the exact number to just kind of give you a feel for the magnitude of what we're doing here. And as we go forward, you know, we'll continue to just press as hard as we can on that front for our dealers, and they're seeing it, and that will really help us drive, you know, what we see as nice really growth here in the second half and in the 23 and the 5 or less category.
spk06: Okay. Okay. And I guess, like, of the lead generation that you've kind of done regionally, I mean, is there a way to think about how much of – how many dealers that touches as a percentage of the dealer base? I'm just trying to think about how – over the next six to nine months, how much you can really lean into this to drive more volume next year?
spk05: Yeah, so there's a lot more leaning in we can do here on this front, and that's kind of what Joel and the marketing team are looking at doing right now. We are running some regional programs. We can dial this thing up pretty rapidly here in the second half of the year. And the way to think of it is kind of zip code by zip code or city by city, right? We have a grand dealer, a select dealer in a particular market. The leads will come in. There's a lead prioritization and lead disposition funnel that they have to go through. And literally, it will go to the biggest dealer in the market first. They have a certain amount of time to disposition the lead or call the consumer back and convert it to an order. At that point, it will then go to other Latham dealers in the particular city or area. So if you think about market territories, right, we're thinking of, you know, I'll pick on the Charlotte area, North Carolina, right? So all those dealers in that greater Charlotte area. If you think about Northern California, we would target an area. So these campaigns go after pretty good territories and areas and just pushing leads with all those dealers with a quick funnel down. So it's, like I said, it's dialed in pretty well. Clearly something we'll be ramping up. And it's really the tightness of our sales team with the dealers. When they ask for it, we respond quickly to them.
spk06: Okay. Okay, good. And then just one more. Can you give us an expectation for what you're thinking free cash flow should be this year?
spk02: Yeah, we generally don't forecast free cash flow or give guidance on it. We forecast, of course, but we don't give guidance on it. Okay, sounds good. Thanks, guys. All right, thank you, Tim.
spk14: The next question comes from Ryan Merkle with William Blair. Please go ahead.
spk09: Hey, guys. I wanted to ask about the second half. Good morning. I wanted to ask about the second half revenue assumptions. So it looks like about $120 million is the delta between the old guide and the new guide. Is the majority the D-stock? that we're gonna see in the above ground, I'm sorry, in the package pools, and maybe a bit for weather, or did you also include a slowdown, you know, a bigger slowdown to be conservative?
spk05: Yeah, so Ryan, I'll kind of take the high level view here. You know, the majority is the D stock in the package pool in ground category. We're not gonna disclose actual percentages or splits or anything. So let's just say that's the headline statement. And then it's not all just driven by a destocking, right? The tough 2Q weather that the dealers experienced was also part of that equation where they just weren't able to get pools in the ground, right? And that's kind of pushing some of that demand and install into 3Q. And with many of the dealers, I'll say sold out, and again, back to the sold out term of how many pools they're willing to put into the year, there's just not the sprint capacity in the back half for them to make up a lot of what they lost in 2Q. So the combination of those two, and I'll just come back again and restate, right, the liner category, the cover category, and even the fiberglass distinct as part of in-ground are all strong performers across the board for us. So we've not really seen a broad-based consumer slowdown impacting the dealers yet, other than a higher-level slowdown of lead generation in certain pockets of the country that we're addressing through the prior conversation.
spk04: I was going to add that we're still delivering 19% to 22% growth in the EBITDA growth. you know, 18% to 25%. So, you know, positive year-over-year performance is our expectation, just to underline what Scott said.
spk09: Okay. And then following up, just to dig in on the packaged pools and why that might be weak, why the other categories are holding up well, is that because the packaged pools are more to a lower-end consumer and the higher-end you're just not seeing yet? Or is there a comp issue? I'm just trying to figure out what the underlying driver is, and then should we view the slowdown in package pools as a leading indicator for maybe your other categories, or is that not the way to think about it?
spk05: No, I hate to say it, but it's probably not the way to think about it. I'll answer the back part of the question. I really think it comes down to, with all of the supply chain challenges, looking back over the last 18 to 24 months with material labor availability, and lead times in these particular categories where we were out, in some cases, 35, 45, 60 days, right? That required the wholesale distributors and, in many cases, the bigger dealers to really start to stock up on product, to start working through their backlogs. And I think some of the backlogs are still out there for a lot of these dealers. And, you know, as the weather hit, And I'll say the WDs began looking at inventory level versus where they historically had been. They were in a position where they were probably overstocked in many products. And as they're looking at where they think the industry was headed, they began to kind of slow down on what I would call the in-season reorders. And that's really what didn't happen. We didn't see the peak in-season reorder points we typically would. They're drawing down stock instead of continuing to build. And like I said, we started to see that kind of late 2Q. We expect that to continue in the 3Q. And we're believing it will normalize at 4Q. as they get to the right level that they feel comfortable with. And I think the reason they're doing that is, if you look at the capacity we've added and where we sit overall, our lead times are now back to probably the best they've ever been for the company in the package pool category. We're able to push product out in a three- to five-day timeline on all those custom products. which we haven't been at and probably going back to, you know, 19 or early 20. And that's the other thing driving it. And just one more comment right back to the dealers for a second. They still see a healthy backlog of pools at the consumer level. And, you know, you probably find it hard-pressed to find a dealer to put a pool in for you right now this fall. And they're booking orders out into, you know, many cases May or June of 23 right now.
spk09: Okay, makes sense.
spk02: Thanks, Scott. You're welcome, Ryan.
spk14: Again, if you'd like to ask a question, please press star, then 1 at this time. Our next question comes from Susan McCleary with Goldman Sachs. Please go ahead.
spk00: Thank you. Good morning, everyone, and thanks for taking the questions.
spk02: Good morning, Susan. Good morning.
spk00: My first question is can you talk a little bit about capital allocation? You know, you mentioned that you did narrow and reduce that CapEx guide. You also mentioned the share buyback plan and the quarter. So can you just talk a little bit about, you know, what that lower CapEx is really reflecting? What are some of those things that you're perhaps delaying? And then just how you're thinking about allocating the dollars overall?
spk05: So Susan, I'll start maybe just with kind of the CapEx side and turn it back to Rob on overall capital allocation. As you recall, if you exclude Kingston for a second, which is a big investment for us and a big increase year over year and the CapEx guide we provided, most of the other projects are you know, smaller one-off capacity just additions where it's a mold, a truck, you know, a piece of machinery, you know, let's say sub-$100,000 type investments across the board. You know, as we've worked through the first half of the year, you know, a couple of things we've stayed focused on from a CapEx standpoint is fiberglass expansion. We're staying the course there to stay ahead of the demand, which is the story we've been talking about for a while here. Kingston is, what I'll say, full steam ahead. We need that capacity in the Canadian and Northeastern market to help us balance production levels in some of our other facilities. The digital transformation project is ongoing, which is important for long-term success of the company as we look out three to five-plus years. And then what I would say is that, you know, we did the big investment in steel with the Salvagnini. That project's nearing completion. Everything else at that point are small one-offs. We've evaluated where we sit. on an overall capacity standpoint, utilization of those levels, looking at where we are in terms of current lead times and demand. And we felt that there was some projects that we just can kind of put on pause right now, you know, thus the reduction in the guidance. But I think the core thesis of investing in fiberglass to stay ahead of the demand is something we will continue to do which is a testament of this conversion story, the strength of it, and it resonating both with dealers and consumers and what we're seeing in the marketplace. And with that, I'll turn it over to Rob to kind of talk about the overall capital allocation story.
spk04: Yeah, thanks, Scott. So, you know, in capital allocation overall, we see those four levers more as an equation, and the top two are really, as a growth company, are focused. So both organic growth and then if there's a opportunistic M&A tuck-in, we would do that as well. So that's the primary focus for us. On the debt side, you know, our leverage ratio is quite low. We're very healthy, so we're happy with that. I don't see allocating a lot there in the short term. And then on the stock buyback, that's more of an opportunistic, you know, if we see the right opportunity and it's against, really the top side. So our focus, although we have that authorization, we've only spent 15 of the 85. We have that for the next three years. We see that more as just another tool, the toolkit of our capital allocation with the primary focus being on driving growth and long-term value in the company.
spk00: Okay. That's helpful, Culler. As a follow-up, you know, obviously you're newer to the public markets and we don't have perhaps as much history on the business through cycles. Can you talk to your macro playbook? What are some of the things that you are watching to determine changes that you may need to make to the business? And what are some of those changes that you can do to protect the revenue as well as the margins in a weaker macro?
spk05: Yeah, so Susan, you know, high level, you know, I'll start off saying public or private, right? We've been around, you know, 65-plus years, and I think over the history of the business, they've seen pretty much every cycle. You know, I've been with the company now 10-plus years, and I've probably seen three or four different cycles over that period as well. So we've got a really good playbook. The things we're looking at high level clearly is, you know, incoming order rate, interactions with our dealers, what they're hearing and seeing, and really staying close to them from a lead generation demand standpoint. We don't disclose or talk about backlogs, but that's another good indicator of what we see out there on the consumer and dealer front as we work through those. And I think overall, we do stay close to what we think is happening with new pool starts. We've got some really great... wholesale distribution partners that we work with to see what they're seeing from a pull through with all their communications with dealers. So we kind of look at all signals there. And what I would say is what separates us from the rest of the pack a little bit is this digital strategy we have where we can dial up the demand kind of on a moment's notice for the dealers. You know, 90 million homes out there that want a swimming pool, and I've used this stat several times, and I love it, right? There's about 1.5 million of potential pool demand out there per year that we can go market to, right? Those are the homeowners who have an interest in a pool, high likelihood of buying one in the next five years. Pool starts are still well off the peak. So we don't, first of all, we don't see a big pullback coming overall in pool starts. Well, let's say it did pull back some. We've had a history of outperforming the overall market with fiberglass. We've got a strong recurring revenue base with our liner and cover categories. And Rob and the finance team, I'll say the entire business, We have a good recession playbook that we can pull, you know, multiple levers of how we could quickly pull back to reduce costs, high variabilization of the cost structure of the business. So we look at those things. We have that sitting in the desk drawer, and I'll say there's probably three tiers of how we pull those programs. More importantly, we've brought some new folks into the organization that are kicking off a whole new lean and productivity initiative for us. Not to say we haven't done it, but I'd say it's a real new focus under our new chief operating officer, Sanjeev, and the team he's standing up there, building a nice pipeline of projects going forward that we'll probably be talking about on future calls. And it's probably all of those, and I think more importantly, If you step back, right, 12 consecutive years of top line, bottom line, and margin expansion, the guidance that we issued here this morning, the revised guidance, would indicate a 13th consecutive year in what's, look, let's all be truthful ourselves, a pretty difficult and challenging environment overall with everything that's happened in 2022 on a global basis so we're happy with the results we feel we're well positioned to maneuver through second half of the year into 23 and this team knows how to overcome challenges as we've proven to you guys over the last you know 24 to 36 months yeah that's great scott thanks for the color and good luck with everything all right you're welcome to get back
spk14: Our next question comes from Kevin Hughes with Truist. Please go ahead.
spk13: Thank you. Question on what you said earlier about 4% growth in pools in the quarter. Can you talk about fiberglass pools, what the units and what the dollars were just for that category?
spk08: Yeah, Keith, I'll hand that one off.
spk05: We don't disclose you know, distinct fiberglass or package pool unit volume numbers in that in-ground pool category. But what I will say is, you know, we are expecting very strong double-digit growth in the second half in the fiberglass segment. You know, that's the result of strong backlogs that we see, you know, where dealers are currently positioned and all the work we're doing to drive that conversion story.
spk13: So if you hit the double-digit, is that going to be all price or will there be some unit growth in there if you're successful? Yeah, both. Both. Sorry, both. Okay. And then we've talked a lot about the inventory situation on the package pools. There are going to be a scenario in the future where when the inventory levels adjust to the level that the dealers want them, you'll see a little bit of a bounce back. as demand kind of goes back to where sell-out is? Is that something that could happen? Is it something foreseeable for this calendar year? Yeah, what I would say is it's a potential, Keith.
spk05: I think what we have to determine is how far does the destocking go through the back half of the year before we would expect to see a rebuilding to a reset level. And I think we've got our guidance set based on the information we have out there from our business partners. If I was to call, you know, I probably wouldn't do that until probably early next year. I think everyone's going to take a cautious approach here to the next, you know, six months. But that's something we're really watching closely as well of, you know, how much that could potentially rebuild based on that correction that's happening currently. Okay. Thank you.
spk02: You're welcome, Keith.
spk14: Our next question comes from Ken Dunn here with KeyBank. Please go ahead.
spk02: Good morning, gentlemen. Good morning, Dan. Good morning.
spk07: So, you know, obviously we've seen inventory impact second half guidance for you. You know, we saw it in tools. We saw it in decking. You know, and it's about a 23% revenue, you know, in the back half reduction. Obviously with price, it seems like there's quite a bit more volume. So there's two questions, Scott, that I'd like to follow up on. First, you talked about the first half of next year, let's say, somewhere in the first half, things normalizing. What gives you that conviction? Is it really, I mean, you did talk about your lead times improving. Is that what it is? Because people are trying to discern the supply level from the demand. You had Angie's list. talking about contractors going more to pay more for leads and stuff. So people are trying to discern that. Where exactly is your comfort? And then my next question is going to be tied to your gross margin because you had about a 25% incrementals in the back half negative. So is the gross margin story changing from where it was when you guys initially came out in terms of that mix towards higher gross margins on the fiberglass? Or did the cost inflation really eat that story away? Thank you very much.
spk05: Yeah, so, Ken, I'll hit kind of the high-level first question. And, look, we're not going to talk first half 23 from a guidance or expectation standpoint. I think that was part of what was what was in your question. But I think the conviction of, you know, why we feel good about everything is, you know, start that conversation. The liner and cover categories, right, are a strong recurring revenue business of that replacement product for the consumer, right? Large installed basin pools out there. If you own a pool, you're going to replace your liner, and more importantly, you have to replace your winter safety cover from the safety aspect of that. So that's a nice growing business for us. We've seen really good strength there. And particularly, you know, I've got to mention the auto cover category. That's similar to the fiberglass story, a product that a lot of folks aren't aware of. We're seeing a bigger and bigger adoption of that product on our pools as well as all pools that are installed out there, including concrete. That business is performing exceptionally well. So I think as we continue to drive the story on those categories, that's a big, good base of business for us that's ongoing. The fiberglass conversion story and everything we're doing there with capacity, the conversion, standing up new dedicated dealers, 200 new fiberglass dealers on board so far this year. We haven't lost supply chain at all today, which was actually great because that's solved for us at this point in time. And where we sit... no longer being on hard allocations, good raw material supply across the board, lead times greatly improved in fiberglass, our ability to start being aggressive in that space with bringing onboarding new dealers, working with them to quickly and rapidly grow and double the business.
spk03: I think it's just more of the same of what we've been doing over the last decade or so in running the business. And package pool, right, does have this slight component of the stock product Everything else is custom, right? We're producing it to an order. They go out the back door of the consumer. That product does have a little bit of inventory stocking, but we don't really see a slowdown of consumer demand for that segment of the in-ground pool category. So hopefully that answers your question, Ken. With that, I'll turn it over to Rob on the gross margin question you had. Yeah, Ken. On gross margin, I will say, you know, give guidance on that going forward or the SG&A breakdown. But what I can say is, you know, if you look at the second half, we're down a bit on volume. It's very similar to second quarter. We do have inflation built in there. We talked about a little bit of that embedded in our inventory. So, yeah, We feel pretty comfortable with where our prices are today and the value proposition we have. We continue to watch inflation, but that profile over the years, what we're looking at is the lower volume. Thank you very much. Even down margin overall, as we're forecasting, is flat to opposite. That would be the 13th year of consecutive growth. So overall, we feel good about the year and where we're ending up, even with those pressures.
spk02: Thank you. Welcome, Ben.
spk14: This concludes our question and answer session. I would like to turn the conference back over to Scott Rajewski for any closing remarks.
spk05: Thanks, Sarah. Hey, thanks, everyone, for your time on today's call. We really appreciate all of your continued interest and support of Latham, and we look forward to providing further updates in future calls with all of you. Have a great rest of your day.
spk02: Again, thanks, everyone. Cheers.
spk14: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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