Latham Group, Inc.

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.

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.

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.