Latham Group, Inc.

Good day and welcome to the Latham Group third quarter fiscal 2023 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 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Nicole Harlow, Investor Relations Representative. Please go ahead.

Thank you. Earlier this morning, we issued our third quarter fiscal 2023 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, Interim CFO, Mark Borseth, and incoming CFO, Oliver Glow. 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, which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's annual report on Form 10-K and subsequent reports filed or furnished with the SEC, as well as today's earnings release. The company expressly disclaims any obligation to update any forward-looking statements, except as required by applicable law. In addition, during today's call, the company will discuss certain non-GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non-GAAP measures can be found in the slide presentation that accompanies our prepared remarks, which can be found on our investor relations website. I'll now turn the call over to Scott Rogeski.

Thanks, Nicole. Good morning, everyone. Thank you for joining us for our third quarter fiscal 2023 earnings call. Before we begin, I wanted to quickly introduce our incoming CFO, Oliver Glow. Oliver joined Blasen with over 20 years of finance experience within global manufacturing companies, most recently serving with Fortune Brands Innovations as the Chief Financial Officer, Outdoors and Security. We believe his expertise in leading global financial operations and implementing strategies that enhance customer focus and improve leverage of scale will be invaluable to Latham as we continue to execute on our fiberglass conversion strategies. While Oliver won't officially step into the role of CFO on November 13th, we wanted to take today's call as an opportunity to introduce him to you all. I'll hand it over to Oliver to share a few brief words.

Thank you, Scott. I'm thrilled about the opportunity to join Latham. It has been an exciting first few days getting to meet with the team. I see incredible opportunity in this space and believe Latham is uniquely positioned to succeed over the long term. I look forward to working together with Scott and Mark as I transition into the CFO role and leverage my background to support Latham's fiberglass material conversion efforts. Thanks, Oliver.

I will now take us through a high-level overview of our third quarter and year-to-date performance and strategic priorities before handing the call over to Mark to review our financial results and guidance in greater detail. Our Q3 results reflect our leadership position across our broad product portfolio in diligent cost actions amid a continued soft demand environment. Together with our ongoing investments in our lead generation efforts and dealer productivity and recruitment initiatives, we have positioned the company to return to growth when demand rebounds. Our Q3 results show how this is working. Our structural cost reduction action and lean initiatives, supported by the seasonality of our business, have yielded adjusted EBITDA margin improvements. We returned to a year-over-year adjusted EBITDA margin expansion in Q3, with margins increasing 10 basis points to 22.4%. Most notably, we also delivered our third consecutive quarter of sequential adjusted EBITDA margin expansion, which increased 490 basis points in Q3 versus Q2. We remain on track to deliver 2023 net sales results that outpace the U.S. new in-ground pool market. Our Q3 year-to-date in-ground swimming pool net sales have outperformed the anticipated decline in U.S. new pool installations versus 2022, similar to how we outpaced the market last year, driven by our leadership position in fiberglass. We delivered strong cash flow performance in the third quarter, which further strengthened our liquidity. This supported our ability to enhance our balance sheet strength in the quarter as we repaid $10 million of debt. As we look out over the long term, we see continued underlying interest in pool ownership. This is highlighted by year-over-year session drills for our website year-to-date as homeowners continue to come to Latham to research our products, set project budgets, and educate themselves on pool types. In addition, The fiberglass value proposition is resonating with dealers as we exceeded our internal goals for dealer recruitment this year and our efforts to enhance dealer productivity are bearing fruit. That said, we now expect that the industry softness will last longer and more deeply than we assumed in our prior guidance and have adjusted our outlook for 2023 to reflect that expectation. With our strong cash flow generation, healthy balance sheet, and continued momentum on our strategic initiatives, we are confident in our ability to successfully navigate the current environment. As we expected, 2023 has been a challenging year for the pool industry, with the macroeconomic environment continuing to weigh on the consumer. It's the largest demand contraction I've seen in my nearly 15 years in the pool business. At the same time, the interest in pool ownership is as high as we've ever seen. However, we've seen the timeline for the pool purchase decision stretch out further, with homeowners remaining on the sidelines waiting for macro conditions to improve. This has resulted in a softer pool season that we've seen in recent years, with shorter and more muted peak sales periods across our product categories. We have responded to these dynamics with cost reductions and lean initiatives, supporting the adjusted EVTA margin improvements you see in our results reported this morning. We are balancing our bottom line priorities with continued execution on our long-term top-line growth strategies, which are centered around our efforts to drive material conversion from concrete to fiberglass pools. Continuous improvement is deeply embedded in our culture and everything we do at LASA. Our focus on innovation through our value engineering efforts has allowed us to improve the efficiency of our manufacturing processes and reduce material costs while maintaining our high-quality operating standards and industry-leading lead types. At the same time, we continually evaluate our cost structure to ensure we are operating in alignment with demand. As such, beginning in Q4 2022, we have taken disciplined and thoughtful cost actions to best support our business in today's environment. We streamlined and rebalanced our facilities footprint by exiting three smaller manufacturing locations and five warehouses. We have decreased our fixed costs across the company from manufacturing overhead to G&A, while maintaining our ability to drive our sales and marketing initiatives. We have executed lean initiatives, facilitating inventory reductions while maintaining industry-leading lead times. We have also right-sized our production staff while maintaining flexibility to drive growth as market conditions improve. Combined, these actions supported our return to year-over-year in the third consecutive quarter of sequential adjusted EBITDA margin expansion in Q3. This also allowed us to keep on track to meet our cost savings targets for fiscal 2023 of $18 million, with an additional $6 million in cost savings to be realized in fiscal 2024. While we are always evaluating our cost structure, These savings provide us with a more efficient cost base to drive profitability as the pool market turns. We are energized by the momentum in our fiberglass conversion efforts. Despite our estimate of approximately 40-plus percent decline in new U.S. in-ground pool residential pool installations over the last two years, fiberglass pools have come a long way, led by Latham's technological and design innovations. We've designed and developed the most beautiful and innovative pools in the industry with the widest selection of colors and finishes. Our fiberglass pools provide a more enjoyable swimming experience for the homeowner with a smooth finish, less chemical usage, and saltwater-friendly pool options. The speed of installation for fiberglass pools is unparalleled. You can have your pool in your backyard in as little as two to three days or even one day. And our pools are built to last with our lifetime warranty, something concrete pool makers typically don't give. This creates a strong value proposition both for the homeowner and the dealer, which has propelled the fiberglass conversion forward. As you'll recall, we drove fiberglass penetration up by three percentage points to 21% of U.S. pool installations in 2022. We are on track to drive further penetration for fiberglass in 2023, which we estimate will increase to 22% of U.S. pool installations this year. despite an anticipated decrease in overall U.S. in-ground residential pool installations. We believe this is a testament to our leading position in fiberglass in North America and the success of our dealer and homeowner awareness efforts to date. And we still have a long runway to reach similar penetration levels compared to more mature fiberglass markets like Australia, where fiberglass sits at about 70% of pool installs. Momentum in fiberglass adoption tells us that our marketing initiatives both at the homeowner and dealer level, are resonating, even in a challenging market. Our investments in our website continue to yield results. Latham ranks number one in fiberglass pools and in the top 10 for in-ground pool by monthly search volume. In the third quarter year to date, we saw over 40% year-over-year website session growth defined as a series of actions a user takes on our website over a given period of time. This shows that homeowners are recognizing the value Latham provides in planning and maintaining their dream backyard. While some homeowners are deferring pool purchase decisions in the current environment, these results will be invaluable to our ability to generate leads for dealers over time. Our strong homeowner strategy is complemented by our successful dealer productivity and recruitment efforts. The number of our North American fiberglass dealers installing greater than 10 pools a year has increased in 2023 by nearly 100 since 2019. In addition, the percentage of our North American fiberglass dealers installing greater than 10 pools a year has continually grown over the last several years, and 2023 year-to-date continues to track above both 2018 and 2019 levels. Key to this success has been our efforts to enhance dealer productivity, namely the continued expansion of our value-added resources and hand-bound training. Dealers are leveraging our Latham Design Center, which houses our comprehensive marketing tools, including exterior signage, digital branding content, design and sales agent collateral, and product education resources. Dealers appreciate this new feature since it allows them to easily create on-brand content for their own customized marketing needs and to run their businesses more efficiently. We also see continued interest in our hands-on training and boot camps. We are looking forward to our upcoming slate of fiberglass boot camps as dealers shift their focus to preparations for the 2024 pool building season. As we've discussed on recent calls, with our expanded fiberglass manufacturing capacity, we have also strengthened our efforts around dealer recruitment. We are pleased to have exceeded our internal targets for new dealers in 2023, providing us with a new group of dealers to train and grow over time. Important to the continued momentum of fiberglass penetration are our efforts to innovate and enhance our fiberglass products and offerings. In 2023, we will have introduced three new fiberglass pool model shapes, presenting homeowners with the latest and most beautifully designed products to create the poolscape of their dreams. Additionally, a key piece of the fiberglass value proposition for both homeowners and dealers is the ease and speed of installation, which is unmatched. Earlier this year, We launched Backfill Made Easy, a new design to make the installation on select models even easier and faster. It eliminates the extra effort of backfilling under the pool steps, which saves the builder time and materials and increases the speed of installation. We introduced this for our popular Corinthian model and are evaluating opportunities to roll out Backfill Made Easy to other popular models across our portfolio. In short, we've taken important steps to navigate the current environment while remaining focused on supporting our ability to drive long-term growth. We continue to keep a close eye on demand while advancing our efforts to drive homeowner and dealer awareness in adoption of fiberglass. I will now turn the call over to Mark to review our third quarter and year-to-date 2023 results and fiscal 2023 outlook in greater detail. But before that, I want to take a moment to thank Mark for stepping back in to lead our finance organization as we identified his successor to the CFO role. We are incredibly grateful for his leadership and contributions to strengthening our business throughout his tenure at Latham. Mark, you will be missed.

Thank you, Scott, for your kind words. It's been a pleasure working with you and the entire Latham team these last few years. I would also like to extend a warm welcome to Oliver. He will be an excellent addition to Latham, and I look forward to working closely with them to ensure a seamless transition over the coming weeks. Turning to our results, please note that all comparisons we discussed today are on a year-over-year basis compared to the third quarter of fiscal 2022 and the first nine months of fiscal 2022, unless otherwise noted. Net sales for the third quarter of fiscal 2023 were $161 million, compared to $189 million in Q3 of 2022, a period in which we drove 17% year-over-year growth from the same period in 2021. The year-over-year change in Q3 fiscal 2023 sales is comprised of a 17% decline in volume partially offset by a 2% increase in price. Looking at our net sales results across our product lines for the quarter, we delivered $83 million of in-ground swimming pool sales and were pleased to see our results only down 19%, in a market where the full-year new in-ground pool installs are expected to be down 30%. Performance in this product line continues to be driven by softness in demand for packaged pools, as sales of fiberglass pools declined less than the total decline in our in-ground swimming pool product line. Cover sales were $47 million and down 9% versus last year. As expected, we saw a meaningful increase in cover sales from Q2 as we moved into the peak season for this product line as homeowners prepare to close their pool for the season. However, peak cover sales were muted in the quarter and the season tailed off quicker than normal. Liner sales were $30 million, a 13% decrease versus the prior year, and like covers, a season which peaked at lower levels and was shorter than normal. Q3 gross profit was $48 million compared to $59 million in Q3 2022. Throughout fiscal 2023, we have driven consistent improvements in year-over-year gross margin compression. Q3 gross margin of 29.9% was down only 120 basis our best quarterly performance this year, compared to 31.1% in Q3 of 2022. In the quarter, year-over-year gross profit performance was primarily impacted by reduced net sales, the right sizing of our inventory, and to a lesser degree, the sell-through of higher priced inventory. This was partially offset by some material cost deflation, benefits from our pricing levels, and improve fixed costs as a result of our cost reduction actions. Selling, general, and administrative expenses decreased to $23 million from $27 million in Q3 of 2022. The decrease was driven by a $4 million decrease in non-cash stock-based compensation expense. The net impact of non-cash stock-based compensation expense and one-time cost associated with restructuring charges resulting from our cost reduction actions this year, as well as the timing of an insurance recovery in the third quarter of 2022, was a $2 million year-over-year reduction in SG&A in Q3. Excluding non-cash stock-based compensation expense and these one-time costs, SG&A was $20 million a decline of about $2 million, or 7%, versus prior year as a result of benefits from the cost reduction actions we took. As a percentage of net sales, SG&A excluding non-cash stock-based compensation and one-time costs only increased to 12.5% from 11.4% in Q3 of last year. Q3 adjusted EBITDA was $36 million, compared to $42 million in Q3 of 2022, driven by the decrease in gross profit and partially offset by the reduction in SG&A expenses, excluding non-cash stock-based compensation expense and noted one-time costs. Our cost reduction actions and lean initiatives have yielded the desired results on adjusted EBITDA margin. As we drove a return to year-over-year adjusted margin expansion in Q3, up 10 basis points to 22.4% versus Q3 of last year. On a sequential basis, Q3 adjusted EBITDA increased $5 million or 16% in the third quarter and adjusted EBITDA margin improved 490 basis points versus Q2 on 9% fewer sales. Consistent with the seasonality of our business, we expect adjusted EBITDA margins to decline on a sequential basis in Q4 versus Q3, reflecting a natural slowdown in pool construction and repair as we move into the colder months of the year, as well as continued softness in overall demand. Turning to results for Q3 year-to-date, for the first nine months of fiscal 2023, net sales were $476 million, compared to $588 million in the prior year period, during which we delivered 20% year-over-year growth from the same period in 2021. The year-over-year change for the first nine months of fiscal 2023 is comprised of a 21% reduction in volume and a 2% increase in price. Throughout the year, we have consistently shown year-over-year pricing benefits in the 2% range. At the same time, we have seen slow improvement in our year over year volume performance. By product line, in-ground swimming pool sales for the first nine months were $252 million, down 23% year over year. As Scott mentioned, our year to date results for in-ground continue to outpace the US new in-ground pool installation market for 2023, which we expect will decline nearly 30% this year versus 2022. We believe this is a strong indication of our momentum in driving the fiberglass conversion opportunity. That's highlighted by our expectations that fiberglass penetration will continue to grow in 2023, despite another downed pool market. Liner sales of $115 million were down 17%, while cover sales of $109 million declined 11%, reflecting softer homeowner demand in the current economic environment. Gross profit was $132 million compared to $197 million in the first nine months of fiscal 2022. Year-to-date gross margin was 27.7% compared to 33.5% in the prior year period, down 580 basis points. As mentioned earlier, we saw improved gross margin performance in Q3, relative to the first half of the year, and as a result, our year-to-date gross margin compression continues to steadily improve. Gross profit is primarily affected by reduced net sales levels. The year-over-year gross margin reduction is primarily being driven by the sale of higher-cost inventory and the right sizing of our inventory levels. In total, these two factors account for about 570 basis points of margin compression. Fixed cost leverage continued to improve thanks to our cost actions and productivity and was actually a small tailwind in Q3, but remains a headwind on a year-to-date basis. These margin headwinds continue to be partially offset by benefits from our pricing levels, some material cost deflation, and improved productivity. Selling, general, and administrative expenses decreased to $87 million from $114 million in the first nine months of fiscal 2022, reflecting a $22 million decrease in non-cash stock-based compensation expense, as well as the benefits from our various cost reduction actions. Excluding non-cash stock-based compensation, SG&A was $72 million, a decrease of $5 million, or 6%, driven by lower employee incentive accruals and benefits from our cost reduction actions. Adjusted EBITDA was $78 million compared to $139 million in the first nine months of fiscal 2022, driven by lower gross profit, which was partially offset by our lower SG&A spend, excluding non-cash stock-based compensation expense. As a result, Adjusted EBITDA margin decreased to 16.4% from 23.6% for the prior year period. Turning to the balance sheet, as expected, we saw an increase in our liquidity during the quarter, reflecting management's focus on cash flow generation and maintaining a strong balance sheet, as well as the seasonality of our business. It is also an indicator of the business's ability to generate cash flow in a variety of economic cycles. As of September 30th, we had cash and cash equivalents of $78 million and $75 million of borrowing availability under our revolver, giving us total liquidity of $153 million, up 30% from Q2. Net cash provided by operating activities was $88 million for the first nine months of 2023 versus $5 million in the prior period. reflecting our actions to right-size production in line with the current demand environment and reduce our inventory levels, while importantly maintaining our lead times. We leveraged our increased cash position to pay down $10 million of our term debt during the third quarter, reducing our total debt to $302 million at the end of Q3. As expected, we delivered improvements to our net debt leverage ratio, ending the quarter at 2.7 times versus 3.0 times at the end of Q2. Capital expenditures were $5 million for Q3 compared to $12 million in Q3 2022. Capital expenditures were $28 million for the first nine months of 2023 compared to $29 million in the prior year period. As we are completing investments in our new Kingston facility and flex back to a more normal run rate for the business, we have reduced our full-year guidance for CapEx investments. With our strong balance sheet, increased liquidity, and disciplined capital allocation strategy, we are well positioned to navigate the current macroeconomic environment as we head into the time of the year when our business transitions to less cash generation and ultimately cash usage in Q1 of next year. Turning to our outlook for fiscal 2023, As we've seen throughout 2023, the macroeconomic environment continues to weigh on consumer demand for our products. As reflected in our year-to-date, year-over-year declines in our top line, and as implied in our updated guidance for the year, homeowners are taking longer to make their pool buying decisions. In addition, our wholesale partners have continued to bring down their inventory levels as they have exited the 2023 pool season. All of this is driving an anticipated decline in U.S. new in-ground pool installations of nearly 30% year-over-year in 2023. As Scott outlined earlier in today's call, we have responded to these market dynamics with cost reduction actions that have delivered continued improvements to our markets. We have reduced our manufacturing overhead, headcount, and spend, resulting in anticipated $18 million of cost savings this year, with an additional $6 million to be realized in 2024. We continue to focus on enhancing our productivity and executing on lean initiatives. We are progressing through our higher cost inventory, holding on price, and seeing some benefits for modest levels of deflation. We are also being thoughtful and disciplined in our capital allocation strategy. All of this is reflected in our updated guidance for fiscal 2023 of net sales of $555 million to $570 million, adjusted EBITDA of $82 million to $87 million, and capital expenditures of $32 million to $35 million. Scott, with that, I'll turn it back to you for closing remarks. Thanks, Mark.

As we close out 2023, we have seen the prolonged challenging macro environment have a longer and more pronounced impact on pool demand than anticipated in our previous guidance, as is reflected in our updated fiscal 2023 outlook. We see these factors continuing as we look out for 2024 and anticipate another challenging year for the pool market with early reads indicating another decline in new pool starts for next year. We have continually monitored and adjusted our business in response to consumer demand and believe our cost reduction actions and continuous improvement initiatives have allowed us to build a strong foundation. Additionally, our strong balance sheet and continued positive momentum on strategic growth initiatives positions us well to emerge from this period of soft demand as an even stronger company. Despite these continuing near-term industry headwinds, we are confident in the continued underlying interest in school ownership. we remain energized by the long-term opportunities we see in the business, driven by our strong leadership position across our product portfolio, continued momentum in our fiberglass conversion efforts, and the overall growing base of installed pools presenting increased recurring revenue opportunities for our replacement liner and cover businesses. As homeowners continue to migrate to the suburbs, stay in their homes longer, and invest in the backyards, Latham will continue to leverage our strong product portfolio and innovative marketing tools to help homeowners build the backyard of their dreams. We will now open the line to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. we ask that you please limit yourself to one question and one follow-up. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan Merkle with William Blair. Please go ahead.

Hey, good morning. Thanks for taking the questions. Scott, can you just maybe give us a little more color on why the fourth quarter revenue guide was cut so much? Can you just expand on maybe by product or geography, or are you seeing the channel be more cautious on inventory?

Yeah, good morning, Ryan. How are you doing? I'd say as we move through 3Q, and I'd say the entire season and pretty much across all the product lines, You know, we never really saw any of the products hit the peak in season. I think, you know, the driver there is, you know, the consumer kind of taking a little bit longer to make the purchasing decision, sitting on the sidelines a little bit longer. And we saw the season start to tail off, you know, faster than it has since I've been in the industry. You know, I think, you know, the wholesale distributors probably a little bit more cautious as well with inventory stocking levels. And look, from a dealer standpoint, as we've talked to dealers, you know, they've had a heck of a run for the last three years or so. And I think a lot of them are just looking at the demand profile backlogs. And, you know, unfortunately, you know, closing up shop and kind of, you know, exiting the season sooner than we've seen them do in the last, you know, three years where they've had pretty big backlogs. And I'd say probably consistent across the majority of the product lines. You know, the good news, though, Ryan, is if we do look at our performance as, you know, Mark showed the results, you know, we believe we're outperforming the market in total. You know, we've got the good fiberglass penetration going on. And then the recurring revenue piece of the business for both liners and covers have continued to perform extremely well. And I think we're just, you know, wanting to kind of, you know, look at where we think things will shake out for the year here. And the good news is, you know, we've done a lot of work with right sizing the facilities, the plants, you know, personnel, balancing production to demand. And I think the team's done a really, really nice job with sequential margin improvements, you know, position us kind of, you know, as we look forward into 2024.

Got it. Okay. Thanks for that. And then for my follow-up, some of your peers have mentioned that Canada, the economy there is a little bit weaker than maybe the U.S. I think your business is fairly sizable in Canada. What are you seeing there and what's the outlook?

Yeah, the Canadian market, you know, was a tough season across the board, you know, so I would agree with, I think, what others are saying there. You know, it's, you know, we've kind of said I think it's around 25% of our total revenue, give or take, you know, a few points. You know, tough season across the board. You know, definitely a shorter build season in the Canadian market. And, you know, but I think, again, we're focused on the dealers. You know, we put the new Kingston facility in there. You know, we're seeing the fiberglass results, you know, perform fairly well in that market. But, you know, again, I'd say, yeah, a little worse than the U.S. in total.

All right, thank you. Pass it on.

Thank you. Our next question comes from Matthew Boley with Barclays. Please go ahead.

Good morning. This is Anika Delacqua on for Matt. Thanks for taking my question. So for my first question, you know, appreciate the color on your demand outlook for the rest of 2023. Curious if you could speak to any early thoughts that you might have on the new pool builds outlook for 2024. and when maybe you expect to see a recovery. Thanks.

Yeah. Hey, good morning. You know, I think as I mentioned up front, you know, with, with the current macro environment, what we're seeing at the consumer level, you know, the interest of pools still remains extremely high. We're seeing great activity across all fronts on the website. You know, we're seeing real, really good, you know, dealer, dealer productivity across the board. But look, I think the reality is we believe new tool starts will most likely be down again in 2024. What we'll be focused on is how does Latham and how do we, along with our dealers, continue to outperform the market overall like we've done in the last two years there. I think that's historically been the trend of this company, both in up markets and down markets, and I'd say bad weather markets. We've shown the results and have shown everyone that we can continue to outperform the market overall.

Got it. Thank you. And then for my follow-up, I'm wondering if you could outline some of the cost reduction efforts that you have left. I know you guys said, so $18 million for this year and then expected $6 million next year. What kind of is expected to go into that $6 million for 2024? And then how much of these costs are temporary in nature versus more of maybe a longer-term structural margin tailwind? Thanks.

Yeah, can do. Thanks. Good morning, and thanks for your question. First, we're very pleased with the progress that we're making on that $18 million for this year. And it's been a variety of things, as Scott mentioned, some more structural than others. But we've exited some warehouse facilities. I think we mentioned five. We've exited three smaller manufacturing sites. We've taken headcount down. We've effectively done all of the actions necessary. So we're well on track for the 18. The incremental six that we're talking about next year is essentially the tail of those actions we took, let's say, mid-year this year and rolling into the first half of next year. So there's no incremental actions planned at this point to help deliver that. Those are already essentially baked into the result of what we've already done.

And if I could just add in there, you know, short-term versus long-term, you know, a lot of the lean initiatives the team's been driving in the organization is really what enabled us to take those facilities offline. You know, right size of inventory, driving lean, reducing the footprint across all of our manufacturing facilities, you know, getting the cost reduction out of the product of the material through redesign, value engineering efforts. So I'd say a lot of this would be sticky. and will last as we go forward. And when demand, you know, bounces back, you know, it's not like we're going to have to go put, you know, three more facilities back in and add five more warehouses. I think, you know, we'll be able to continue to become more efficient with how we manage the entire footprint.

Very helpful. Thanks, guys. I'll pass it on.

You're welcome. Thanks.

Our next question comes from Sean Colnan with Bank of America. Please go ahead.

Hi, guys. Good morning. I have a couple questions on capital allocation. First, you've been able to take a lot of inventory out of the balance sheet the last three quarters, which has really benefited free cash flow. How do you expect inventory to trend from here, and is there room to take this lower, or do you need to start building inventory heading into the 2024 season?

Hey, good morning. And yeah, thanks for the question. I mean, as Scott mentioned, we're very pleased with the performance of the team as we've started right-sizing our production levels, or we've been right-sizing our production levels and managing inventory levels down. And I think it's very important that we stay in the same breath while we're maintaining our lead times. We, number one, want to make sure we have the inventory necessary to take care of our customers. So we've taken inventory down 20 million since the end of the second quarter. I think we're down 60 million since last year. We're getting to the point where we're probably in the current demand environment sitting around the right inventory level. There might be a little bit more to go. But we're also heading into that time of the year when You know, we turn from big cash generation into, let's say, less cash generation. And we may end up building a little bit of inventory before the end of the year. But I think, give or take, we're probably in the right spot, you know, with our inventory balances.

Okay, got it. And then the CapEx load in 3Q. So how are you kind of thinking about this going forward? Do you feel that you're at adequate capacity levels, and should we expect these lower levels to continue in the near term, or are you going to need to invest in some of these facilities like Kingston going forward?

Oh, yeah, thanks. Thanks again for that question. As you all know, we've invested meaningful dollars in capacity over the last couple of years. In the third quarter, we saw CapEx at $5 million. primarily down versus prior year as we're nearing completion on the investments in Kingston. So I think we're flexing back to a, let's call it, more normal run rate for the business, that $5 million for the quarter. We'll see where that goes, but I think that's starting to give us a reasonable feel for where CapEx on a run rate basis might be.

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

Thank you. As you look out in the next couple months, and particularly the orders are coming in, are you starting to see any kind of next pressure in terms of customers buying or putting in smaller pools or any other sort of changes in what the order pattern looks like?

Yeah, so Keith, good morning. You know, we really haven't seen a change in the mix of our products in terms of size of pools consumers are buying or dealers are installing. And I think when we look throughout the country, you know, different parts of the country favor smaller pools, you know, let's say in the sand states versus, you know, big pools in the Midwest or the Northeast. You know, I think the advantage we have with our performance in our in-ground pool category and the fiberglass penetration growth we've been seeing is is that if we all remember, right, a fiberglass pool is a lower upfront cost option than a comparable concrete pool. You know, 25% to 30%, we're seeing that dynamic hold. And, you know, the total lower cost of ownership expands over time to, you know, closer to 40% cost differential. And I think that's what we're seeing and why fiberglass and our in-ground category continue to outperform the overall market is that cost differential issue. And, again, I think the replacement side of the business for liners and covers, if you've got an existing pool, no matter what the issue is with the pool, you're going to do the repair and renovation of that asset you've got in your backyard to leverage the enjoyment of the pool. Okay. Thank you.

Thanks, Keith.

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

Hi, everyone. This is Charles Perron for Susan today. Thanks for taking my question. From your prepared comments, Scott, you seem to mention that website traffic remains strong, but consumers are still delaying the purchase of pools. Can you detail some of the reasons behind the delay of the purchase despite the strong value proposition that you guys are able to offer? And what can you do to bridge the gap between pricing initiatives, maybe offering smaller, more affordable pools, or helping your dealers with financing or other initiatives?

Yeah, look, I think the activity on the website, the interest in pools, does continue to remain strong. And that's what I love about the industry, the company, the outlook, the long-term performance. We'll see when the bigger macro and the uncertainty kind of goes away. We've done a lot of creative things with our dealers on various financing initiatives, how to sell the pool to the consumer, working with our different partners who do financing. Right now, we stay out of the finance, the pool, the transaction. That's between the dealer and the consumer. But I think, look, there's a lot of uncertainty out there right now in the world, unfortunately. And I think until some of that clears, we're seeing a reversion back to a longer buying decision than what we've all been accustomed to here over the last two to almost three years. And I think they're looking out, evaluating that decision, sitting on the sidelines. And I think when they come back post, let's say, the holiday season, You know, that's when I think they'll start to be thinking about that buying decision as they move into the 2024 timeframe.

Okay, that's good, Collar. Thanks for that, Scott. And then looking at the price-cost dynamic, can you help us understand, you know, with the most recent move in steel and energy, how do you think about price costs into year-end and early reads into 2024 based on current conditions, but also in terms of the pricing initiative? I think you talked about 2% pricing in the quarter. How should we think about the pricing going forward and the carryover into 2024?

Yeah, so let me jump in and take that one. We'll be getting more specific about 24 when we get back together in March and talk about the year and guidance. But as I mentioned in my comments, this year we've held prices, seen price benefits of around 2% through the first nine months. More or less in line with what this industry has typically done, maybe a little bit lower. I mean, maybe 2%, 3%, 4% is more of a historical norm. But very pleased to have been able to hold on to that price. As you mentioned, we are seeing some modest levels of deflation in a few commodities now, although prices still remain at very elevated levels. So we feel good about our ability to hold the prices that we did this year. They've been helping, you know, as we've seen our margin expansion both year over year as well as sequential. And with, you know, some modest levels of deflation, you know, that we're experiencing, we feel very good about where we are with pricing and our ability to hold price.

Okay. Thanks for the call there, Mark, and have a great forequarter.

Thank you.

Again, if you'd like to ask a question, please press star, then one at this time. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Scott Rajewski for any closing remarks.

Hey, thanks everyone for your time on today's call and your ongoing interest in Latham. As we said earlier, we're well positioned to continue to navigate the near-term industry challenges. You know, and we remain confident in the long-term opportunities we see in the business. You know, look forward to speaking with you all again. We'll report fourth quarter and full year results, you know, next year. Between now and then, you know, I hope everyone has a safe and happy holiday season as well. Take care, everyone. Bye.

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