Latham Group, Inc.

Good afternoon and welcome to the Latham Group first quarter 2026 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 Casey Coterie, Investor Relations Representative. Please go ahead. Thank you.

This afternoon we issued our first quarter 2026 earnings press release, which is available on the Investor Relations portion of our website. On today's call are Latham's President and CEO, Sean Gad, and CFO, Oliver Glow. Following their remarks, we will open 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 is available on our Investor Relations website. I'll now turn the call over to Sean Gadd.

Thank you, Katie, and thank you all for joining us today to review our first quarter results and discuss our business outlook. Our first quarter results represent a good start to 2026. We are especially pleased with our performance in the adverse weather conditions that plague most of North America. There are several key takeaways from the quarter that are worth noting. First, there was another quarter in which we saw year-on-year sales growth in each of our product lines. Nathan's category leadership position across our product portfolio and our geographic diversification are key competitive advantages for us. Secondly, we continue to effectively execute our standard stage strategy, showing double-digit sales gains in five of our pools in our priority Florida market. We are taking further actions to accelerate our growth in this region. Third, we expanded our margins, benefiting from operating leverage inherent in our business model from the lean manufacturing and value engineering initiatives that continue to yield very positive results. Oliver will provide additional detail on this later on in the call. And lastly, we are pleased to confirm our 2026 guidance, which anticipates significant sales growth and even stronger growth in adjusted EBITDA within a challenging macro environment, where full starts will be about flat for last year. Our guidance includes moderate increase in transportation and commodity costs due to today's high oil prices, which we are mitigating with temporary fuel surcharges. We are closely monitoring the dynamic situation in the Middle East and the potential impacts on cost and consumer demand. Taking a closer look at our first quarter results, in-ground pool sales increased 3.5% and virtually all of that growth can be attributed to the one-month contribution from the Freedom Pools acquisitions. Adverse weather was definitely a factor in our organic performance, keeping organic in-ground pool sales steady year on year. However, April sales trends were in line with our expectations, and we are on track for fiberglass pools to approach 80% of our full year in-ground pool sales in 2026. The Freedom Pool acquisition we completed on February 26 is integrating as expected. As we've noted, the acquisition expands our presence in Australia and New Zealand. Markets where five of our school models have a strong foothold and borders our reach into new markets in Western Australia, including Perth, which is the fastest-growing city in the country. We recently spent a week in Australia bringing together the Morellan and Freedom teams. In addition to this transaction being immediately accretive to Latham and giving us a market-leading position in the country, we anticipate achieving considerable revenue synergies from this combination over time, as well as getting first-hand experience from the direct-to-consumer business model. Cover sales advanced 6% in the first quarter, driven by growth in order cover demand as consumers increasingly recognize the safety and economic benefits of this excellent product. Our industry-leading order covers are compatible with all in-ground pool types, and in many parts of the U.S. they provide the homeowner with an alternative to fencing, or delivering additional cost savings from reduced evaporation and chemical usage. Educational marketing campaign including our partnership with Olympic gold medalist and pool safety advocate, Cody Miller and his wife, Morgan, promote pool safety and serve to build consumer awareness and increase attachment rates to new pool installations. First quarter liner sales were up 9% year-on-year, protecting increased demand and buying in advance of the pool season. We continue to gain traction with our standard stage strategy in the first quarter and are moving forward with plans to accelerate our growth in this important region. Many of the investors and analysts whom I've met since taking on the CEO role in January have asked me where I see the major growth opportunities ahead for Latham and what our playbook views for capturing that growth. Let me start by saying that the opportunity is substantial. We do not need to wait. for the recovery in the U.S. pool market to drive growth. There are enough pool starts for us to go and attack the San States now, given our relatively low penetration in that region. The key here is that fiberglass is a growing category, and we are the number one player in the U.S., and so we are best positioned to gain share. Fiberglass pools are an excellent fit for the San States for many of the same reasons that the category is growing nationally. Fast and easy installation, lasting durability, low maintenance, and we have an exceptional design range of sizes and options to choose from, many of which are smaller, rectangular-shaped pools with attached bars that are perfect for our target community. Latham has laid a good foundation for growth in the SAM states. There is definitely increased brand awareness among consumers and dealers in Florida, thanks to several high-profile marketing campaigns, paired with local activations. In 2026, we plan to build on that foundation to set the stage for accelerated long-term growth. As you know, I have many years of experience successfully selling against the standard in the building product industry. When I applied that experience to Latham's current position in the San States, I have identified several actions to capture consumer demand and provide additional value to our dealers. First, we're building out a commercial organization with the key pillars being sales strategy, sales operation, and sales execution. The responsibilities to design and drive sales plans, product leadership, and sales effectiveness. Our goal is to provide a world-class commercial organization that supports our growth, not just in Florida, but across all the fan states and all of North America. Second, we have introduced a new market development framework approach at Latham that I believe will make us even more effective in capturing share. The key element of this framework is segmentation, meaning that we'll be very selective with our targeted 10 state markets in determining the specific sections and neighbourhoods that offer the greatest opportunity for us. In essence, it's all about neighbourhoods. We're looking for neighbourhoods with a large number of homes, with home values, life sizes and household incomes that fall within our parameters. These can be in, adjacent to, or outside of marketing communities. Third, we'll be adding sales resources in the field to make sure we stay close to the consumer throughout the pool buying process. In this way, we'll be able to assist our leaders in converting more leads into sales and getting greater understanding of the consumer journey. We know that consumers are looking for designs that fit their lifestyles, and we believe that Latium has the best range of products to meet those needs. In 2026, we are increasing our investment in branding and marketing in a very targeted way to capture greater consumer awareness, together with our network of trusted leaders who are able to fulfill the demand we generate. In support of all this, we are revamping our marketing and advertising campaigns to give homeowners a full understanding of the true benefits of fiberglass and why it is the right solution for their backyard to enable their dreams of creating wonderful memories to come true. With that, I will turn the call to Oliver Glow, a CFO for Financial Review.

Oliver. Thank you, Sean. And good afternoon, everyone. I am pleased to report on what was a solid start to 2026. Please note that all comparisons we discussed today on a year-over-year basis compared to the first quarter of fiscal 2025 are less otherwise noted. Net sales for the first quarter of 2026 were $117 million, 5% above 111 million in Q1 of 2025, of which 3% represented organic growth and 2% represented the one-month benefit of the Freedom Pools acquisition we completed at the end of February. Organic growth was led by the continuous strength of order covers and increased demand for our pool liners. By product line, in-ground pool sales were 60 million, up 4% from Q1 2025, with virtually all the year-on-year growth coming from freedoms, fiberglass, pool sales. Cover sales were 33 million, up 6%, and liner sales were 24 million, up 9%, compared to the first quarter of 2025. We achieved a first quarter gross margin of 32%, reflecting a 220 basis point increase above last year's 30%. This performance is primarily due to volume leverage along with production efficiencies driven by our lean manufacturing and value engineering initiatives. SG&A expenses increased to $37 million, up 20% from $31 million in Q1 of 2025. This was largely tied to strategic investments in sales and marketing to accelerate fiberglass adoption, digital transformation initiatives, and acquisition and integration related costs, which includes 2.3 million of performance-based compensatory earn-out expenses related to our CoverStar Central acquisition in 2024. Target synergies have been realized for CoverStar Central, and we are pleased with the contribution from the acquisition, which has exceeded our initial expectations. This earn-out will total roughly $9 million over the course of the year, with similar impact in each remaining quarter in 2026. Net loss was $9 million, or $0.07 per diluted share, compared to a net loss of $6 million, or $0.05 per diluted share, for the prior year's first quarter, primarily due to the aforementioned increase in its TLA expenses. First quarter adjusted EBITDA was $12 million, 9% above $11 million in the prior year period, primarily resulting from volume leverage and efficiencies gained through our lean manufacturing and value engineering initiatives. Adjusted EBITDA margin was 10.4%, a 40 basis point expansion compared to last year's first quarter. Turning to the balance sheet. We continued to maintain a strong financial position, ending the first quarter with a cash position of $27 million. In line with our expectations, net cash used in operating activities was $48 million, reflecting a seasonal increase in working capital needs at a peak food selling season. We ended the quarter with total debt of $311 million and a net debt leverage ratio of 2.8. also in line with our expectations. Cattle expenditures were 23 million in Q1, 2026, compared to 4 million in the prior year period. The increase is primarily due to the purchase of four key fiberglass manufacturing facilities in Florida, Texas, California, and West Virginia for 18 million, including a 12 million deposit made in 2025 that was settled in Q1, 2026. Additionally, we incurred 5 million of capex relating to ongoing projects in line with our expectations. As a reminder, we expect capex to range between 42 and 48 million in 2026. This includes 25 million of maintenance capex, expenditures related to the purchase of the fiberglass manufacturing facilities that I just mentioned, and investments to upgrade our newly acquired Freedom Pools manufacturing facilities. While the beginning of 2026 was affected by adverse weather conditions across North America, we encourage that April's sales trend has been in line with the historical seasonal run. We continue to monitor geopolitical developments and their potential impact on our freight and raw material costs, but we believe we are well positioned to manage effectively through this pool building season. We are pleased by the steady progress we are seeing from our fiberglass awareness and adoption initiatives, highlighted by strong consumer engagement with our branding and marketing campaigns, and continuous gains in Florida, our initial trend stage target market. Based on our performance today and our current visibility into the remaining season, we are pleased to reaffirm our guidance for 2026 revenue growth of 9% and adjusted EBITDA growth of 13% at the midpoint, amid expectations for new U.S. foodstarts to be smashed with last year. With that, I'll turn the call back to Sean for his closing remarks. Thanks, Oliver.

In summary, we are pleased with our first quarter performance, encouraged by recent order trends, and excited by the growth opportunities we see on horizon. Latham is firmly on track to outperform the market for new US pool starts again in 2026, and we intend to take advantage of soft markets to accelerate our sand state strategy and strengthen our execution. I see tremendous opportunity for Latham to drive market penetration in the sand states, as well as the rest of North America, Australia and New Zealand. And with that, operator, please open the call to questions.

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. To withdraw your question, please press star then 2. 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 Ryan Merkle with William Blair. Please go ahead.

Hey, everyone. Appreciate the question. I want to start off with sort of the fiberglass backlog and orders as you enter the season. How is that looking? And then have you seen trends pick up now that the weather is clear?

Yeah, thank you for that question, Ryan. In terms of backlog, I think we're seeing what we would have expected to see coming out of the first quarter. The order file in April looks pretty to us and looks like it is picking up per the season and we feel good enough that we obviously have reaffirmed guidance, but generally we are seeing the pick up in orders and feel pretty good about the trends.

Got it. Okay. Thanks for that. And then my second question is the fiberglass conversion is key to the story, Sean. You know that. And you're adding a bunch of resources, it seems. I'm curious, what are the biggest tweaks that you're making to the strategy, and then any early results, or maybe it's a little too early?

Yeah, we are definitely making some tweaks. It is, I will tell you, it's too early. The main thing, and I talked about it earlier on, is We are segmenting the market a little bit differently to how we have done it in the past. We've got our criteria now built up where we know or we feel like if a neighbourhood fits that criteria, the likelihood of them going to Latham and then to Fibreglass is higher. So we like that. We're starting to test that and if we get those right, with the right dealers, we'll be able to start building out more and more neighbourhoods. And so we're early, but I feel like that's definitely on a good path for us. The second thing we're doing is adding heads. And really, I'm trying to organize the commercialization into sort of three areas. Sales strategy, which is really just understanding where is the opportunity, doing more of the segmentation, becoming a little bit smarter around sales. And then sales operations, which for me is really about converting what we think in the market, out the market, into real game plans that the sales team can execute, then measuring that sales team, and then sales team to go and execute. So just getting a little bit more organized so that we get the most out of our sales organization, naturally across the whole U.S., but including the same state.

That's great. That's interesting. Okay. Appreciate that. I'll pass it on. Thank you.

Our next question comes from Greg Palm with Craig Hallam Capital Group. Please go ahead.

Yeah, thanks. I wanted to piggyback on the first question a little bit since a lot has happened in the last couple months since we were all on the phone together. It doesn't sound like demand environment has changed all that much, I guess, relative to maybe what you would have thought a couple months ago, so maybe you can just confirm that again, but from a you know, an input cost side of things. You mentioned freight. You know, wanted to get your sense on how you're dealing with that and also anything else that's on your radar, whether it be, you know, increasing resin prices. Are you seeing any availability shortages of key inputs like that? Anything else that should be on the radar?

Thanks, Greg. I'll start by talking about the market a little bit. still see the market overall for this year look likely to remain flat so our assumption for that hasn't changed but we are seeing some green shoots coming out uh and we feel good about that so like i said our order trend for april will look strong and then this is the start of may so we feel good about that uh pk would have indicated uh that that would have indicated that uh some some more growth is starting to occur with cheaper pools. Again, we like that. That's a good sign for us. Obviously, pools are getting smaller, so that is good. Obviously, the volatility is not helping, but I think we have a sound game plan. I know we have a sound approach, so I think we'll work through that. And then from a dealer perspective, you know, when we caught up with the dealers, what they'll tell us is it's pretty competitive, four or five quotes per job, which is generally up. But from my take is, you know, It's certainly uncertain, but I believe less people will be traveling, the price of gas doesn't help, and so they're staying at home, and I think that's the opportunity, and I think that's what the green shoots are, where we're seeing that people will rather now spend time at their home and hopefully prepare for the pull.

Greg, let me address the second part of your question with regards to the conflict in the Middle East and some of the updates here on input costs. Let me start off by saying we don't see availability to be an issue as of today, and then partially that's due to our supply diversification coming out of COVID. We've got a lot to be multi-sourced and be as diversified as possible, but we are seeing obviously headwinded costs, right? That comes in two forms. One is transportation, the price of the pump, and especially in the world of fiberglass, we are also incurring You know, transportation costs, it's expensive to ship those fiberglass through the cross nation. In terms of mitigation, what we've done on that side is to introduce temporary fuel surcharges that we plan to fully mitigate us when it comes to transportation costs. I think it's too early to tell what the impact is going to be on the commodity side. Obviously, suppliers are reaching out. in the world of resins, vinyl, and so forth. Again, I think it's too early to tell. Certainly currently in discussions with the suppliers, I think we're making the first purchase orders as we speak under slightly higher price levels. You know, we'd like to see the very dynamic situation evolve. But I'm confident in the playbook that we have. We have applied that playbook during COVID. we have confidence that the trade will also work this year as we work through commodities.

Okay, great. And then on some of these initiatives that you talked about, you know, resegmentation, adding sales resources, I'm curious, you know, how do you feel about your current dealer network right now and how important of a lever can that be, not just, you know, adding... you know, new and more dealers, but also leaning into some of your more successful ones. Maybe you can talk a little bit about that as well.

Yeah, sure. I'll start with dealers are very important. They are obviously the extension of us as they sit across the kitchen tables, and so we need them. We need them to practically close themselves. Now, what I will tell you is I believe we've got the opportunity to get more out of our current network, which is my goal number one. So I'm talking really about our core, what I would call our core markets, Midwest, North East, Canada, and that's really about account management. And we're going to be defining what account management looks like for Latham and making sure our organization is trained around good account management. So I expect to get more out of our current network. Then think about adding where we've got white space. We're always going to be looking for dealers If our current dealer network doesn't get us there, that is going to be part of the strategy. And then when I think about the sand states and material conversion, we have a good network of dealers there right now that we are going to be feeding as we go into these neighborhoods. And they will be able to get the benefit of referrals and everything else that comes out of those neighborhoods. So what's good about the network in the sand states, particularly Florida, but I think it will be at a time to go ahead.

Yeah, fair enough. Okay, we'll leave it there. Thanks. Thank you.

Our next question comes from Timothy Boyce with Baird. Please go ahead.

Hey, guys. Good afternoon. Good afternoon. Maybe just first question just on the just kind of the resegmentation of of some of the Salesforce and things like that. Is the plan that there's incremental, you know, investments in terms of dollars that's going into some of the initiatives, or are you just kind of reallocating what you have?

Don't do a little bit of both. We are definitely going to get ahead a little bit because we need more people on the ground and actually thinking about our game plan. But our intention will be, if you think about sales as a, sorry, SG&A as a potential sales, over the medium and long term, that should stay the same. So we will continue to find that as we grow, and then we will look at opportunities to sort of trim back on the back side of the business to give us some space to spend on the front side of the business and invest.

Okay, okay. And then Oliver, just on the price-cost question, I guess it's not totally clear if higher resins are kind of in the guide, or is it kind of a wait-and-see approach right now? And if you do see higher resins, you guys have the ability to, you know, take costs out or improve efficiencies or pass them on price? Is that kind of the main message?

It's probably more than that. I think transportation costs is relatively foreseeable, what that means to us, and that's in the guide, right? With commodities, I think it's too early to tell. Okay. Okay.

Sounds good. Thank you, guys. Thank you.

Our next question comes from Andrew Carter with Skifull. Please go ahead.

Hey, thank you. Good afternoon. I wanted to ask and just double click to make sure we understand exactly what the pricing is for the year. You are putting in temporary fuel surcharges. Can you give a magnitude of how much that's kind of incremental to the old guidance? You are not taking any price increases on products for resins. Just want to make sure and triple check that. And I think you said we're well prepared for materials during the season. So I'm guessing is that a comment that everything's good for now and you take a price increase later, and then kind of finally, if you have to take a price increase, can you take one mid-season, or does that mess things up, or just how do those dynamics work around when you have to make a decision on pricing?

Okay. So, Andrew, I would say the transportation cost and the temporary surcharge, I'd say for the year, it's probably worth 60 basis points, but again, it's very It's very dynamic and volatile, right? And, you know, obviously as the headwinds change, that temporary surcharge can change over time as well, right? But that's just out of magnitude, right? I think, again, for commodities too early to tell, you know, quite frankly, we haven't even ordered or was just about to start ordering materials that would be subject to change in pricing. So it's really too early to tell. And then, you know, obviously the materials that ship to our sites work their way the P&L. But we'll, again, we'll have our table and we'll react in time as necessary. And if I remind you, last year, we actually did do a mid-season price increase catering to, you know, the environment last year that came in in June. So it's not preferred, but it's also not unheard of.

Thanks. I'll pass it on. Thank you.

Our next question comes from Scott Stringer with Wolf Research. Please go ahead.

Hey, guys. Thanks for the question. I'm just wondering if the adverse weather mentioned in 1Q pushes some sales into the second quarter. And the guidance obviously implies an acceleration through the rest of the year, right? So that would just be helpful to know if that went from sales being pulled into 2Q, if that is the case.

So I would say, you know, the adverse weather really means, you know, we had a lot of snow, ice on the ground in January and February. If you think of our annual organic growth of 6%, we certainly didn't achieve, didn't quite achieve that in Q1. It was probably half of that. And I would attribute that to weather. But if you translate that to shipping days, that equates to about a shipping day in today's seasonality. So, you know, I'm not reading too much into this. The season is young. Q1 today is a comparatively small quarter. Again, translating our underproportional organic growth into Q1, these will be the annual die. If the shipping day is one day, I think that's another way of saying, you know, we put in the prepared remarks the seasonal rent, whether we'll catch up on that one day in Q2 or in Q3, we will see it early in the quarter. But certainly nothing we have seen in Q1 ending our rent in April that would make us change our view on 26 and the guide.

Okay, got it. And then I think you guys talked about this a little bit earlier, but just curious on the visibility of the 2Q and 3Q for in-ground pool installs. Is that pretty much set, or just curious, you know, how much variability is there over the next few quarters for that segment?

Thanks.

Well, I'll start and then I'll hand it over to Oliver. I think from a Q2 perspective, we're all about the steps, I mean, based on our lead times currently. But it looks like, you know, as I said, we've started the quarter really well. Q3 is still obviously, while we've got orders that do fall into Q3, it's probably too early to tell. But again, from what we're hearing inside of the market, from what we're seeing, we still feel very confident with what the order file looks like, and that we'll be able to continue to hold ties.

And if I compare today's audible versus Friday, it's really nothing that would, you know, cause us to think differently about the scheme or the pattern vis-a-vis, you know, the last year. Again, all confirming, you know, .

That's helpful. Thanks for the time, guys.

Thank you.

Thanks, Mark.

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

Good afternoon, guys. You have a link on for Matt Boulay today. Good afternoon. For my first question, good afternoon. For my first question, I'm just curious, like, what are the top concerns you're seeing from buyers today? Like, between rates, economic uncertainty, you know, just the need to step up more consumer awareness of hybrid glass pools, what's kind of the biggest challenge today?

From what I've heard, you know, the number one thing would be, which is tied to interest rates, is, you know, basic financing is difficult to get. So anybody who hasn't got the cash or is able to get, has got a good FICO score, is unable to get financing. We're hearing that a fair bit, which isn't all that different to what I would have heard last year. And then, you know, I think the other part would be The dealers are saying that they're having to fight for the sale a little harder than they were previously. So when I mentioned 45 quotes, it's typically two to three quotes. So everyone's fighting for the business pretty hard. Now, we are out of the years. We feel an environment where things are tough. I actually feel good about fiberglass pools because, obviously, pools are getting smaller. That fits our trend. Pools have low maintenance, so the actual cost on an ongoing basis is lower. then the alternative is out there. So the expenditure on chemicals and, like I said, on evaporations lower, especially if you have an auto cover. And the dribbling of the pool means that there's no ongoing expenses going with the pool. So while we see the market as a little tough, we still see it not adversely affecting us as it did last year.

Got it. And in terms of your increased branding and marketing spend. Can you walk us through the cadence of what that might look like through the year and its impact on SG&A? And also, you know, what does this sort of look like? Like, is it a targeted brand program for dealers? Is it more salespeople on the ground? Or is it more on, like, the ads and marketing spend? Thank you.

Yeah, it's a bit of both. We've got it. Right now, we're running a national campaign. The national campaign is good because, you know, it lifts. all markets up, which is great. The other good part of our national campaign is when you think about the sand states, there's a trend of people moving from the West, North East, into the sand states. We like that because fiberglass is the standard in those markets, so they know us. So we like the marketing campaign being a national format. The increased And I'll just talk about the timing. The start of the timing is really set for the fall season. So we started sort of February, mid to late February, and we're moving all the way through to sort of July, August. That's the time frame for the national campaign. And then when I think about my neighbourhoods, that's going to be way more tactical in nature. So I'm talking about things like digital marketing. I'm talking about door hangers and marketing around the homes. I'm talking about doing events at the home to inspire the neighborhood. So those are pretty tactical, small expenses that we should all run in every neighborhood.

So when it comes to the increase and the cadence of the increase, as we said earlier on, I think over the foreseeable future, FCNA's percent of sales will roughly be flat. It was 20.5% last year. We expect it to be a similar amount this year, and the majority of that is spent in the sales organization and marketing. There's a little bit of digital transformation in there, and also inflation on the core GMA, but again, the majority is going into the sales organization and marketing. There's also a little bit of increase in the absolute dollar numbers, But that gives you the 22 and a half million. But I would like to remind you that in addition, we have the earn out expenses for CoverStar Central. That is about 9 million. It's tied to 2026. So it won't recur in 2027. Neither did it occur in 2025. So that is a earn out expense that is tied to 2026. But with regards to cadence, it's roughly the same as usual. You will see that Q1 and Q2 are a little bit and that is because we are running our marketing campaign, our national TV campaign earlier and longer in 26 versus 25.

Okay, thanks. We'll pass it on.

Thank you.

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

Hey, everyone. This is Charles Perron for Susan. Thanks for taking my question. First, I'd like to shift gear a little bit and talk about the auto cover and the opportunities that you see in this market. Considering, you know, the changing microdynamics, is there any impact you're seeing in terms of the adoption and any efforts you can do here to, you know, further expand the penetration over the coming years?

Yeah, I'll follow that. I think, so the answer is no, we're not seeing a decrease in adoption. We have a pretty good quarter in auto covers and covers in general. We had a very large load last year, we expect it to grow this year, and we expect it to grow in the coming years as well. It's really about awareness for us. In reality, most people still don't know that water covers are available. Water covers can fit on every pool, so it doesn't really matter if it's a fibreglass pool or not, so the market is actually very large for us. And we've got our value-added resellers set up to take advantage of that. And then we're also now getting our sales organization, latent sales organization, around that product. And it's so early for that to happen. So we see that as more upside as we go. But the product is a good product. It does what it needs to do. Consumers who have it love it, and I think we just got to make sure we continue to drive the awareness, and I don't see that trend changing.

Got it. Okay, that's helpful, Sean. And then switching gear, I appreciate all the callers so far on the call on input cost and inflation. But should we see, you know, more unfavorable dynamics coming through from a cost perspective? Can you talk about the opportunities to further lean on your lean in manufacturing and value engineering initiatives to further protect your margins?

So I think, you know, lean and value engineering continues to be a key contributor to our P&L. Like you heard me on prior calls, the contribution is about two, two and a half million per quarter. In Q1, it was two million. And that's just because you want, there's a light cord, and being in value engineering programs go up and down with volume. I think, you know, as, you know, some of those programs mature, and then, you know, you'll see the tailwind that's really, you know, getting into our DNA. This is how we lead our plants and factories, and, you know, it's part of the everyday cadence. So, you'll see a lot more programs. Maybe not of the same magnitude, because the lowering in foods, you know, are being cleared here. And that's more common for EU manufacturing, whereas value engineering, they're really in the beginning of the journey. I think there are still some low-hanging fruits out there that our team of PhD-level scientists is pursuing. So again, both initiatives under full steam, and so the EQ1 delivering what we expected them to deliver. and there's no change in our thoughts for the rest of the year.

Got it. Thank you for the color, guys, and good luck with the quarter.

Thank you. Thanks, Sean.

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

Hi, guys. Thank you for taking my questions. Just first, the double-digit growth in Florida was quite impressive. What do you think has led to the success in Florida versus the other sand states? And can you talk about what lessons you can take from Florida to apply to the other sand states?

Yeah, I'll start with, it is obviously our largest focus of all the sand states. We are set up quite well from a sales number perspective. We're working on dealers now over the last 18 months, and we've got a set of dealers that are really the right dealers for us to help fulfill the demand that we're creating. We've been running a marketing in general campaign for now 18 months, so we've seen the flow of that. And then we have got, I mean, we've got a really good strong proposition, very proposition relative to concrete. And we're getting deeper and deeper into the market and being able to communicate it. So we are seeing good growth and we feel good that, and I feel good that, if a homeowner understands benefit of fiberglass over concrete there's a really high chance that would go with fiberglass we're just very early still in the adoption curve so our mission is to make sure our awareness goes continues to get driven up and that we have the connection between that awareness and our leaders position at the kitchen table and now just remind you at the end of the day these while we are very pleased with the numbers we look to accelerate that and in reality we're still working on pretty small numbers we think about florida

Okay, great. And then just one cleanup question on the air charges. Are you aiming to offset the higher transportation costs on a dollar basis or a margin basis?

On a dollar basis. So, you know, the headwind is, you know, as we incurred is being passed on the temporary .

Okay, great. Thank you. Thanks, John.

Our next question comes from Andrew Carter with Stiefel. Please go ahead.

Hey, thanks. I wanted to double-click and make sure on that incentive cost. You're not backing that out, so if you were to put that back in, the incremental here is still 28 to 38 in investment year. I just want to understand that double-click. Thanks. No, it's probably the earn-out around CoverStar. My fault.

Right, so the... The SGN, so the earner is included in SGNA and will be sitting on top of the 22 and a half percent of revenue, but as it is an expense tied to an acquisition for EBITDA purposes, it's backed out.

Okay, so it is just not excluded. It is within guidance, that expense, just double checking.

Correct. It's an asset to EBITDA and it is in SGNA.

My fault. Sorry about that. Thank you. Thank you, Andrew.

This concludes our question and answer session. I would like to turn the call back over to management for closing remarks.

Thank you very much. I just want to thank everybody for getting on the call. We felt like we had a strong quarter. Obviously, not a little bit of weather. But the momentum's there. April looks strong, and we're still confident about our guide. With that, I want to conclude the call. I look forward to seeing all the folks on the call over the coming weeks and months at different types of events. And again, thank you, everyone, for attending. Thank you.

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