Latham Group, Inc.

Good morning and welcome to the Latham Group Inc. fourth quarter and full year fiscal 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 telephone keypad. 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 Harlow, Latham investor relations representative. Please go ahead.

Thank you and welcome to Latham's Q4 and full year 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 Rogeski, and CFO, Rob Masson. Following their 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-K for 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 historical adjusted EBITDA to net income loss and adjusted EBITDA margin to net income loss margin calculated under GAAP can be found in our earnings press release and will be included in our form 10-K for fiscal 2022. Reconciliations of net debt and net debt leverage to the comparable GAAP measure can be found in the slide presentation that accompanies our prepared remarks, which can be found on our investor relations website. I'll now turn the call over to Scott Rogeski.

Good morning, everyone, and thank you for joining us for Latham's fourth quarter and full year fiscal 2022 earnings call. I'll begin today's call with a review of highlights from 2022 and a discussion of our strategic priorities and the innovation we're driving in 23 and beyond. We delivered fourth quarter and full year 2022 performance in line with our expectations, marking the completion of our 13th consecutive year of net sales and adjusted EBITDA growth. Notably, we made progress in four areas in 2022. First, we delivered year-over-year net sales growth across all three of our product lines. Second, we made continued progress on our fiberglass pool conversion efforts from concrete. We grew fiberglass volume despite a year-over-year decline in the industry for U.S. in-ground pool installations in 2022 as compared to 2021. We also advanced our capacity initiatives with significant progress in the construction of our state-of-the-art Kingston, Ontario fiberglass manufacturing facility, which will allow us to continue to expand into Eastern Canada and into the U.S. Northeast and Upper Midwest. We also acquired fiberglass manufacturing assets in Oklahoma, positioned us well to tap into the Southwest market, which is ripe for conversion from concrete to fiberglass. Third, we strengthened our supply chain position, enabling us to enhance our North American fiberglass production in return to normal lead times across our entire product portfolio. And fourth, we drove operational efficiencies as we implemented lean initiatives aimed at driving continuous improvement in our operations. We also took deliberate actions to manage costs in response to the market environment while still prioritizing our growth strategy. As anticipated, we saw a return to historical seasonality in the fourth quarter. Wholesale distributors continue to destock elevated levels of package pool inventory, and the macroeconomic environment impacted consumer spending and demand. We are seeing these dynamics continue into 2023. Our wholesale distribution partners continue to service dealers through existing package pool inventory, and we expect the normalization of wholesale distribution inventory levels to remain a headwind through at least the first half of 2023. We believe underlying interest in pool ownership is strong, as indicated by traffic to our website, continued flow of leads, and the feedback we're hearing from our dealers. However, the impact of the uncertain macroeconomic environment is resulting in an anticipated decline in the industry for U.S. new in-ground pool installations in 2023 versus 2022. We still have a couple of months before the pool season begins to ramp up, and we are confident in our ability to navigate through the current market and position ourselves for long-term growth as we execute on our four strategic priorities. One, continuing to drive the material conversion from concrete to fiberglass. Two, leveraging our direct-to-homeowner strategy and digital innovations. Three, enhancing and expanding our strategic partnerships with Latham Grand Dealers. And four, executing on our continuous improvement initiatives and prudently managing costs. Fiberglass pools have come a long way thanks to our team's efforts. We have designed and developed the most attractive swimming pool offering on the market. Our fiberglass pools offer premium quality and aesthetics and a wide selection of stunning colors and finishes that are proprietary to Latham. And we're not finished. We continue to innovate our product offerings and installation processes which we believe will support the further adoption of fiberglass with homeowners and dealers alike. We are enhancing our well-established fiberglass model lineup in 2023 with the launch of two new fiberglass models, the Tuscan and the Enchantment, in the first half of this year. The Tuscan and Enchantment models are beautiful, unique fiberglass pool shapes that meet contemporary trends in geometric pool design and size. These two models have popular features, including swim-up seating and multiple points of entry and exit, and they will come in various sizes to fit a wide range of backyard design needs. As we've discussed, the speed of fiberglass installation is unparalleled compared to concrete pools. We are further simplifying and enhancing the installation experience by introducing Backfill Made Easy. This patent-pending innovation is a new reinforcement build process designed to make the installation on select models easier and faster for dealers. It eliminates the extra effort of backfilling under the pool steps, which saves the builder time and materials and increases the speed of installation. Backfill Made Easy will be made available for our popular Corinthian models this year, and we will evaluate opportunities to roll out across our fiberglass portfolio over time. Latham has been a leader in innovation in the pool industry. particularly as it relates to our digital tools. Earlier this year, we introduced Measure by Latham, a new AI-powered digital measuring tool that will modernize and simplify the measuring experience for dealers for safety covers and in-ground liners. Historically, dealers have had to manually take and input data for measurements for covers. This is extremely labor-intensive and time-consuming, giving the need to measure, remeasure, and correct errors throughout the process. Measure by Latham harnesses cutting-edge 3D technology and scanning techniques that allow dealers to measure the entire pool perimeter and to capture interior renderings of the pool shape and unique features. Within minutes, dealers have precise specifications for safety covers. These measurements then seamlessly integrate with the Latham Measure app and Latham's builder management portal. As a result, dealers can more quickly, easily, and cost-efficiently track measurements, receive quotes, and submit and track orders for Latham safety cover products. We have introduced measure across various trade shows over the last several months and are hearing very positive dealer feedback and excitement. We will begin the initial rollout for safety covers to select dealers this spring with plans to expand into in-ground liners at a later date. Normalized lead times, improved supply chain, and enhanced manufacturing capacity have enabled us to reignite our efforts on new dealer recruitment. Key to our ability to attract and retain dealers are the three key factors that set us apart as an attractive partner for dealers. One, our lead generation efforts. Two, our hands-on training. And three, our value-added resources. An important competitive differentiation for Latham is the hands-on installation training we provide our dealers. We continue to see tremendous demand for our Latham University trainings. In 2022, we had over 250 dealers attend the fiberglass or package pool boot camp, either in person or virtually. And we continue to book out trainings at Latham University, our world-class training center in Florida. In 2023, we are further strengthening our competitive positioning by enhancing and expanding our value-added resources with the launch of ProEssentials and the Latham ProSite tool. In January, we launched Latham ProEssentials. Our largest sales experience offering aims at creating a better buying experience for homeowners and supporting sales growth for our dealers. The Latham Pro Essentials program is comprised of categories with an interconnected experience. Exterior Essentials, Interior Essentials, Field Essentials, and Digital Essentials. Within each category is a comprehensive turnkey collection of tools to enhance marketing and business efforts for dealers in various selling contexts. This includes exterior signage, digital branded content, design and sale dates and collateral, and product education resources. The Latham ProSite tool is a central online location for all the tools and resources we provide dealers. It simplifies how we engage and communicate with builders through a carefully designed online user experience. It also offers access to sales material, loyalty and incentive programs, leads, and orders. The launch of ProEssentials and the Latham ProSite tool enhances the ease of doing business with Latham. These resources elevate our co-branding opportunities, simplify the ordering process, and give Latham increased visibility into dealer's order pipeline, all while creating a better homeowner experience. I'll now touch on our fourth strategic priority, executing on our continuous improvement and cost management initiatives. As discussed on our last earnings call, we took deliberate actions to reduce our costs in response to continued destocking and package pools, and as we saw the macroeconomic environment delay homeowner pool purchase decisions. All of those anticipated actions are complete, including the closure of our Bossier facility liner and cover manufacturing facility earlier this year. As such, we remain on track to generate annual operating expense savings of about $12 million in fiscal 2023. We have renewed our focus on continuous improvement initiatives and investments. Our lean and value engineering work is ongoing as our operations team implements and identifies opportunities to continuously improve the efficiency of our manufacturing processes. This has resulted in lower labor costs and increased efficiency and capacity in our facilities. In addition, we are actively managing inventory levels to match our current demand outlook while maintaining our lead times and service levels. We remain disciplined in our capital investment strategy. In 2023, our capex spend is focused on completing ongoing projects, including our Kingston, Ontario, and Oklahoma fiberglass manufacturing facilities. Production of our Latham fiberglass pools in Oklahoma began in Q1. We also expect to begin production in our new state-of-the-art Kingston fiberglass facility during Q2 of this year. Gearing up the Kingston and Oklahoma facilities for production will give us the opportunity to reduce freight costs, further reduce our lead times, and better serve large markets with strong fiberglass conversion opportunities. In summary, we have delivered strong full-year results. We have taken actions to navigate market challenges while continuing to make strategic investments to drive long-term growth. Delivering on this balanced approach as we move through 2023 will enable us to continue to enhance our industry-leading position and capture future demands. Before I pass it off to Rob to review our results for the fourth quarter and full year, I would like to thank him for his partnership, friendship, and contributions to the business. On behalf of all of us at Latham, Rob, we wish you the best. I'm also excited to welcome back Mark Forseth, who will serve as our interim CFO as we recruit a permanent replacement. With that, I'll turn the call over to Rob to review our results in greater detail. Thank you, Scott.