Latham Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 3 Jun 2021

[Operator:]

Good morning, everyone, and welcome to the Latham Group Incorporated First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Nicole Briguet, Latham's Investor Relations Representative. Ma'am, please go ahead.

[Nicole Briguet:]

Thank you, operator. Good morning, everyone. Welcome to Latham’s Q1 Fiscal 2021 Earnings Call. Earlier this morning, we issued our earnings press release, which is available on the Investor Relations portion of our website.

[Scott Rajeski:]

Thank you, Nicole. Good morning and welcome to Latham's first earnings call as a public company. We completed our IPO in late April, and I want to take this opportunity to thank the entire team who supported that successful process. Several years ago, we set out on a journey to reimagine the pool buying experience for customers and to increase awareness and adoption of fiberglass pools. As a public company, we now have greater opportunities and resources to continue on that path. Before we dive into the quarter, I'd like to share a little more about Latham and our industry. Latham is the largest designer, manufacturer and marketer of residential in-ground swimming pools in North America, Australia and New Zealand. We are the leader in the fiber glass pool product category of the residential in-ground swimming pool market in North America with over 50% share. We are transforming our industry with our unique direct-to-homeowner model, which places the consumer at the center of everything we do. Our strategy is powered by our leading brand and superior suite of digital technology that engages the homeowner, drive them to the Latham brand and then walk them through the decision-making process of pool selection. We are then able to deliver purchase-ready leads to our dealers.

[Mark Borseth:]

Thank you, Scott, and good morning, everyone. Today, I'll be reviewing our first quarter fiscal 2021 results and our outlook for the full fiscal year. Please note that all comparisons are on a year-over-year basis, compared to Q1 of fiscal 2020. Additionally, Q1 of 2020 results do not include the acquisition of GLI or our investment in Premier Pools and Spas, as both of those occurred in Q4 of 2020. Starting with our first quarter results. Q1 was a strong quarter as we continued to benefit from strong consumer demand and the execution of our growth strategy. Net sales were up by $97.6 million or 191% to $148.7 million, primarily attributable to continued strong consumer demand and order volumes across our product portfolio, expanded strategic partnerships with Latham exclusive dealers, our acquisition of GLI and price increases. In addition, our year-over-year strength reflects lighter comps amid the initial headwinds from the pandemic last year. If we include GLI sales in the first quarter of last year, Our Q1 sales growth would be 152%, reflecting very strong organic growth. Looking at net sales by product category, in-ground pools increased 218% and to $93.6 million, covers increased 118% $24 million. And liners increased 192% to $31.1 million, a real strong performance across the portfolio. Gross profit increased by $42.3 million to $52.4 million, driven primarily by the strong first quarter sales growth. Gross margin increased to 35.3% of sales compared to 19.8% to sales last year, driven by higher utilization of our fixed cost structure. Price increases and a mix shift towards in-ground pools, partially offset by inflation in the cost of our raw materials.

[Scott Rajeski:]

Thanks, Mark. Our amazing company is supported by an experienced team, I am confident in our ability to continue disrupting the industry in our favor with the only consumer-centric business model in the pool industry. We have delivered 11 years of consecutive annual net sales growth in adjusted EBITDA margin expansion and have a clear path to continue this growth trajectory. Looking ahead longer term over the next 3 to 5 years, we expect to deliver the following

[Operator:]

And our first question today comes from Matthew Bouley from Barclays. Please go ahead with your question.

[Matthew Bouley:]

Good morning everyone. Congrats on the results and on the first quarter out of the gates here. So, first question on that note with the -- I guess, IPO and deleveraging events sort of in the rearview mirror. Scott, you talked at the top about sort of having the resources now to -- I guess, affect your goals around boosting fiberglass adoption. Can you speak a little -- in light of all that, just about sort of your wish list here in terms of next leg of investments? Is it more to come around digital efforts, your growth CapEx plans and even how you're thinking about the M&A pipeline post the IPO? Thank you.

[Scott Rajeski:]

Yes. So, good morning Matt. Good to talk to you again here this morning. So I think it's going to be more of the same. We're going to continue to invest in growth CapEx, focused on fiberglass and staying ahead of the demand curve. We believe with the digital investments and our strategy we're making, educating the consumer on the benefits of fiberglass, we'll continue and that will drive the demand. And to go along let's say, the third pillar, it's all about the dealers, continuing to sign up premier dealers, our grand dealers and making sure we've got the capacity with the installer base to meet all that demand we're driving to them.

[Matthew Bouley:]

Perfect. Much appreciated. Second one, actually a good segue. I wanted to ask about the strategic dealer partnerships. You made a comment at the top as well about, I think you said a significant acceleration there. Is there any numbers you could put around the recent trends with the Latham Grand program here into June? And maybe broader, if you could tie that in with where you think these installers are today from a labor perspective in terms of their ability to meet all the strong demand?

[Scott Rajeski:]

Yeah. So Matt, we're not going to discuss specific numbers on the number of dealers we're signing up, but I think we're pretty confident to say, we're outpacing prior year on the grand dealer conversion. It's going extremely well. We're seeing great growth out of that base of dealer. The Premier Pools & Spas relationship, we've done a strategic session with that team, again, outpacing expectations there with the number of dealers we're converting, the pace of fiber glass conversion with that partnership. And let's not forget about the Narellan expansion in North America as well. We're standing that up simultaneously as that moves forward, and we're just seeing great progress on all three of those fronts. And then from the dealer standpoint with labor, that's the great benefit of fiberglass, right? They can use a lot less labor to get a fiberglass pool installed in the ground versus a comparable concrete pool. So it's actually a benefit for them to make that conversion to get more pools installed for consumers.

[Matthew Bouley:]

Great. Well, thank you for taking the questions, and congrats again guys.

[Scott Rajeski:]

Thanks Matt.

[Operator:]

And our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead with your question.

[Josh Pokrzywinski:]

Hey, good morning guys, and congrats on being live here.

[Scott Rajeski:]

Thanks Josh.

[Mark Borseth:]

Thanks Josh.

[Josh Pokrzywinski:]

Great. So maybe just a follow-up on the dealer question, I understand you don't want to get into maybe too many specifics here. But maybe just a progress report on all the folks that you've signed up over the last probably three to nine months, I would imagine, have been pretty solid given the market backdrop. How is that seasoning process gone with installs per dealer? Is that something that's ratcheting up to, or should we just pay attention more to dealer sign-ups? I'm just trying to get a feel for how many of these folks that are coming in are hitting the ground running versus dipping a toe in the water? Yeah, pun intended on that as well.

[Scott Rajeski:]

I like that one, Josh. We might use that in the future. Okay. Without giving the specific numbers, again, back to the strategy, right, It's signing up new dealers, but it's also working with the existing dealer base and getting them to grow, getting from, let's say, one install a week to two installs a week, eventually to five installs a week or that pool a day getting built in the ground. So our sales team and business consultants are working with that dealer partnership. We're holding more and more boot camps with the dealers to train them on what is the perfect process for installing a pool to maximize the number of installs they can get. So with both aspects of that and I would just say on all fronts, it's going extremely well for us.

[Josh Pokrzywinski:]

Got it. That's helpful. And then just thinking about some of the various pinch points, whether it's inflation on the material side or labor or transportation, all the things we hear about across the universe here. How should we think about the phasing of margins or incremental margins as we move through the year? So when do those things, you kind of reach maximum pain points? And when do you see them sort of improving?

[Scott Rajeski:]

Yes. So Josh, I'll address the pinch points, and I'll let Mark kind of talk a little about the margin. And I think when you look at inflation, part of our model is our price increases stay ahead of inflation in the marketplace, and we teach that all the way through the supply chain with our dealers to the consumer. So I think we're in a really good position there to continue to expand margins like we have historically. Materials, as we mentioned, have been a struggle across the board for every industry, not just pools or let's say, Latham. And again, I think our supply chain team has done a very good job managing through that to ensure we have all the material we need. Labor continues to be a battle on many fronts, but we've hired over 350, almost 400 employees over the last several months. We will continue to add people into our facilities as we grow. It's not been a constraint for us at this point. And I think overall, when you look at where we're headed, I think we'll continue to see nice growth throughout the rest of the year. And it's all just managing the business, and that's – look, the Latham team is a great team. That's what they have paid to do every day. We manage those challenges, and we're not going to let it stop us. Mark, do you want to comment a little bit on Europe?

[Mark Borseth:]

Hey, Josh, How are you? So thanks, Scott. Yes, we're very pleased with the first quarter results and the margin expansion that we saw in the quarter, Josh. And we did start seeing some of the impact of inflation, both on the raw material side as labor – as well as labor. We would expect that to continue throughout the year. It's reflected in our guidance. As Scott mentioned, we believe that through productivity and price, we can continue to find ways to offset that. And full year guidance, we're talking about 80 to 150 basis points of margin expansion. So as we go through the year, we would expect to be able to manage our way through that and deliver to the guidance.

[Josh Pokrzywinski:]

Great. Appreciate it guys. Best of luck.

[Mark Borseth:]

Thanks, Josh.

[Scott Rajeski:]

Thanks, Josh. See you.

[Operator:]

And our next question comes from Susan Maklari from GS. Please go ahead with your question.

[Susan Maklari:]

Thank you. Good morning. And let me add my congratulations to everyone.

[Scott Rajeski:]

Thanks, Susan.

[Susan Maklari:]

Yes. My first question is just kind of building on the last question around inflation and pricing. Can you just kind of remind us of how we should be thinking about the timing in terms of some of these costs flowing through the P&L? Where you are in terms of the pricing? And how you're thinking about price versus cost as we move through the quarters that are coming up?

[Scott Rajeski:]

Yes. So Susan, again, back to what we've shown historically. We stay ahead of the inflation with price, which has allowed us to continue to expand margins historically and what you've seen here in the first quarter, and that trend will be reflected through the rest of 2021, the guidance we provided. We've announced three price increases through the year now. So I think you'll continue to see them phase in. And I think the safe path to say is that those price increases will continue to outperform the inflation where we will not get caught behind at any point in a quarter from a margin compression standpoint. Mark, any color you want to add there?

[Mark Borseth:]

Yes. The only thing I would add – I think as well said, Scott. The only thing I would add is, Susan, as you might imagine, there might be some quarterly timing differences. But as we look at the full year, we certainly expect to be able to outperform any inflationary pressures and deliver more margin expansion.

[Susan Maklari:]

Okay. That's helpful. And then, you obviously have some pretty interesting plans as you think about ramping your CapEx to meet this growth that's coming through. Can you give us an update on where you are in terms of adding some of that capacity? And how we should be thinking about that coming online over the next couple of quarters?

[Scott Rajeski:]

Yes. So we'll continue to accelerate those investments versus what we did in the first quarter. But again, like we've talked to all of you guys over time. It's about gating the expansions on the investments when we need them, bring them on the exact right time. There's a lot of small investments in molds and equipment, delivery equipment, increasing efficiency and capacity at the different facilities, expanding the footprint of existing facilities. And again, continuing to evaluate the footprint from a regional basis, so where we might need to expand over time. I think you'll see that continue to accelerate here through the next couple of quarters. When you look specifically at, let's say, the full year guidance number for CapEx and what's been spent year-to-date. But again, we'll be very judicious on our approach with that as we have been historically.

[Susan Maklari:]

Okay. Great. Thank you.

[Scott Rajeski:]

Thanks, Susan.

[Mark Borseth:]

Thanks, Susan.

[Operator:]

Our next question comes from David Bellinger from Wolfe Research. Please go ahead with your question.

[David Bellinger:]

Hey, guys. Congrats on a nice quarter here. I apologize if this was mentioned earlier, but you talked a lot about pricing here. You mentioned a few times today your ability to raise prices and offset pressures elsewhere. But can you just talk about what you've done historically? Have you raised prices across every category? Really how much pricing power do you see now in the marketplace? And is there any -- or has there been any pushback to date?

[Scott Rajeski:]

So, again, if you go back historically on price, we've averaged around 3% a year historically. When we push price increases, we do look at it by product line based on where we're seeing the inflationary trends. So we can expand margins in every product line, not just on a total basis. And I'd say, as we push the second and third price increase throughout the year, it's varied by product line and it's varied percentage-wise. In some cases, we've seen mid-single-digit increases and a little bit higher in particular product segments. And look, I think we've done a good job educating our dealers and given visibility to what's coming on the pipeline with price was their pricing projects to the consumer. And they're looking at a project that's three to six or nine months out, they can pass that price increase on to the consumer as well. And look, no one ever likes a price increase, but I think when you're open and disciplined with the approach, being the industry leader like we are, it flows through the entire supply chain.

[David Bellinger:]

Understood. And then just my follow-up here on the introduction of the full year guidance. Can you walk us through how much of that is reflective of the better Q1 results? And also, if your -- your outlook for the remaining quarters of the year, have those moved up versus your previous internal expectations and based on everything that you've seen to date at this point?

[Mark Borseth:]

Yes. Hey, David, this is Mark, and thanks for the question on the guidance. The guidance is, our initial guidance that we put out the range of 5.80 to 6.20. That absolutely reflects what we saw in Q1. The guidance will generate somewhere between 40% and 50% year-on-year growth with margin expansion. We do expect to see tougher second half comps as we go through the year. The impact of the pandemic last year in the first half of the year and some of the early results that we're seeing from the 4 pillars of the business that Scott mentioned. So yes, our guidance is baked into what we saw in the first quarter.

[Q –David Bellinger:]

Great. Thank you very much.

[A – Scott Rajeski:]

You’re welcome, David.

[Operator:]

Our next question comes from Tim Wojs from Baird. Please go ahead with your question.

[Tim Wojs:]

Hey gentlemen, good morning and let me add my congrats. Maybe just the first question I had, we're hearing that a lot of in-ground installers are out until '22 already in terms of pool building. And I'm just curious, have you seen any evidence that consumers are shifting to fiberglass as a result of those extended lead times already for presumable pool builders?

[Scott Rajeski:]

Yes. Tim, if you made a call to a dealer who's out, give me a call later, and I'll get you a dealer if he's not sold out. You can get you pool this year. We do -- anecdotally, we do hear that quite a bit. And again, I just dealt with a consumer up in Maine who called the dealer, they were out and we're able to quickly call a dealer in New Hampshire. It's actually one of our premier dealers who said, I got the ability to put that pool in for you. So, there is a lot of flexibility there. It is out there from place to place. But the benefit is, when a homeowner calls and want a pool, again, saying we can get you a fiberglass pool a lot faster. The dealers converting to putting more fiberglass in to get more pools in the ground for consumers to meet that demand. And when you think about the buying cycle of a swimming pool, you're not waking up tomorrow saying, I want a swimming pool next week that just doesn't happen. You may make the decision of we're going to get a pool, but you start planning that project over time. I think that's what you're seeing is, people who are now coming into the summer months. This is kind of that next pool buying decision, starting to heat up. They're saying, they want a pool. And look, a lot of dealers are kind of booked through the rest of the summer. But I can state probably 20 examples of where a dealer said, if you pick fiberglass, I can squeeze you in on a Saturday. I can squeeze you in 4 weeks from now. So that's the big benefit of this whole material conversion strategy, faster install that pool can go in 1 day to 5 days versus a month versus a steel or polymer wall vinyl pool or that 3 to 6 month build cycle for a concrete pool. And think about the labor constraint of trying to build a concrete pool, the number of subs you need, it just makes that situation much more difficult for those dealers. And that's the success, I think we're seeing with Premier Pools and Spas with Paul and his team with a number of franchisees converting to do fiberglass to get all those pools in the ground for us.

[Tim Wojs:]

Okay. Okay. Very good. And then I guess second question is just kind of big picture. But when you think of the new pool construction market and kind of where we are today versus, call it, 150,000 pools, that the industry has kind of averaged historically. What have been the constraints kind of getting back to those prior averages? And do you think there's consumer demand out there that gives you visibility to do so?

[Scott Rajeski:]

Yes. I'll focus on the demand side because I think that's the easier one. There's a ton of demand out back to those levels, probably more demand and installation capacity. And if you look at the stack, there's 90 million homes, existing homes in the US that do not have a swimming pool today that have the backyard capability for one. When you then look at the interest in swimming pools, it's the number one highest consumer satisfaction purchase, you can make about pretty much anything else that's out there, a kitchen remodel, landscaping redo, buying a car. So it's a very strong high consumer interest that investment in the backyard at 2.3x, R&R spend in the backyard has been hot for a long time and has continued to accelerate. Migration from the urban areas to the suburbs will generate more demand in the housing market. And when you look through that 90 million homes and convert back to, how many people are likely to buy a swimming pool in the next five years and then heavily discount that by a significant fact like 80%, it would equate to over 1.5 million pools of demand a year over the next five years. We're building, what 96,000 pools last year. We'll target probably 105,000 to 110,000 pool installs this year. So it's not a demand issue, it’s a matter of educating the home around the benefits of the swimming pool, why fiberglass, why a Latham fiberglass pool, and then having the best dealer network out there with our grand dealers, Premier Pool & Spa dealers and our Narellan dealers were standing up and just leading them down that path to make that purchase decision.

[Tim Wojs:]

Okay. Okay, great. I hop back in queue. Good luck and congrats to you guys.

[Scott Rajeski:]

Great. Thank you.

[Mark Borseth:]

Thank you.

[Operator:]

Our next question comes from Ken Zener from KeyBanc Capital Markets. Please go ahead with your question.

[Ken Zener:]

Good morning, everybody.

[Mark Borseth:]

Hi, Ken.

[Scott Rajeski:]

Good morning Ken

[Ken Zener:]

I just want to go over a couple of different points here. So lots of conversations with clients, and I want us to use this forum to flesh out some of those quarterly questions as well as these broader ones that have come up. So your capacity, obviously, with this high growth, you have many different plants. So it's not just one answer. But focusing specifically on in-ground pools, can you talk to what your network looks like? I know you're adding capacity, but can you give us an example of what looks like a stressed out plant, what you're doing there versus a more smooth running plan in the quarter where you had sales going up, basically doubling in in-ground pools? Just give us a little context for that, if you would, Scott.

[Scott Rajeski:]

Yeah. So Ken, I think the one easy example to give and it's one we share quite a bit. It's probably one that our dealers and consumers struggle with from time-to-time. They want a particular model, let's say, I'll go to my favorite model the pool. I own the Latham Fiji. So they want a Fiji and it's coming out of -- just because they plan next, so I'm not going to be specific with the facility. It's a high-demand model in mold. The lead time on that may have gone through a typical two-week to, let's just say, two months in that particular model. So a homeowner will call and want it and they'll say, I'm sold out. So what do we do? We will add another Fiji mold, which is an x-dollar capacity investment, let's just a several hundred thousand dollar investment. We'll put another mold into that facility, and we can now get our lead time back down to two weeks. So those are the things we're working with. It's a very tactical model-by-model, plant-by-plant situation. Another example would be -- and we dealt with this yesterday afternoon in the office here. We need to add some more trucks to deliver pools in a few facilities. So it's a matter of adding a big rig, a trailer, a pilot car and being able to ship five more pools a week out of that facility because we have the demand there. So those are the types of things we'll do, and it's not major constraints. We have plenty of permitting capacity throughout the entire fiberglass network, and that applies to all of our vinyl plants, our steel plant, our polymer plant. It's just those one-off a particular pool molder model. And our dealers, I think, have done a really good job sometimes switching a homeowner that wants that pool right now from the Fiji to Panama, because it's a very similar shape and size and they can get it quicker.

[Ken Zener:]

Very good. Second, if we could talk about regional dynamics a little bit. Obviously, with the national footprint, which was built up from your acquisitions in the past. Can you talk about how regional trends and perhaps, how – obviously, the second largest competitors added some capacity through a new plant purchase. But could you talk about how regional demand is occurring as opposed to or intertwined with competitors' own behavior because they don't have necessarily the capital that you do, which one would think is an advantage for you?

[Scott Rajeski:]

Yes. I think regionally, we're seeing strength across the board in every region and territory we play in. I can't highlight one area that's growing faster than another. And I think you could argue we're seeing great success in the Stand state, Florida, Texas, Arizona, Las Vegas, Nevada, California, with fiberglass. But again, that's all related to that material conversion story, right? Those are the heavy concrete state. That's where we're attacking the concrete dealers to convert from that to fiberglass. So I think we're seeing really nice growth there. But overall, when you look in general, we're growing pretty evenly across all territories. We're actually seeing really, really great success in the Canadian market as well as just not think the US. But I think the Narellan franchisees and the classic dealers up there, we're seeing phenomenal growth in conversion rates of fiberglass. And I think with a shorter pool season up there, the benefit for a Canadian homeowner is they can have that color glass pool in a week, and they can leverage their summer versus usually, they lose an entire summer building another type of pool and it's an investment for the following year. So broad-based strength across the board. And even if I look down in Australia, New Zealand, Canada, it's the same concept. I mean I think we're seeing strong growth in every territory region down there and really nice trends overall.

[Ken Zener:]

That's perfect. I like one of the other things, I know you guys talked about, right, US sales and international, but could you clarify international versus, let's say, just North America, which would include Canada, just to maybe get some context around what's North America versus Australia, New Zealand, et cetera, or do you feel comfortable doing that?

[Scott Rajeski:]

Yes. I mean, ballpark, Ken, I think this was in the S-1 as well. If you look at international as Canada, New Zealand, Australia, it's around 20% of our total revenue. And we can follow-up with the specific number for you later. It's around 20%. Think of it that way.

[Ken Zener:]

Great. And my last question is this. You touched on it with Canada, but the more northern markets not only can benefit from the quicker install, but because of temperature differentials, tiles cracking, et cetera, et cetera. Is there a higher – is there something about the weather that might create more propensity for those non-seasonal markets to use fiberglass, not only because of the construction time, but because of the weather impact on tiles cracking, et cetera?

[Scott Rajeski:]

Look, I would say, in general, that applies to any place, Ken. I want to make it specifically a cold weather climate. The performance of a fiberglass pool is better than any other pool type in any type of climate. It will outperform a vinyl line pool, it will outperform a fiberglass pool. I had that 28% total lower upfront cost, 43% total life cycle cost, lower than another type of a concrete pool, but the benefits across the board are great. Once you build that pool and it's in the ground, you don't have to do anything to it ever again. With a concrete pool, you're right. And I know you own a concrete one, your goals were refurbished. It's going to crack, you're going to have to refinish it, you're going to have to do that every 10 to 12 years, a vinyl liner pool, you're going to need eight to 10-year replacement aligner. Fiberglass, I'd like to just say, set it and forget it, right? It's the easiest pool to own and maintain out there.

[Ken Zener:]

Thank you, gentlemen.

[Scott Rajeski:]

Thanks, Ken.

[Mark Borseth:]

You’re welcome, Ken.

[Operator:]

And ladies and gentlemen, our next question comes from Keith Hughes from Truist. Please go ahead with your question.

[Keith Hughes:]

Sorry, I was on mute there. I guess my question gets back to pacing in the quarter and the price increases you announced, do you think you'll get back to parity with the raw material inflation that's coming in the second quarter by the end of the quarter? Will that extend in the second half? Any sort of look on that would be helpful.

[Mark Borseth:]

Hey, Keith, it’s Mark. How are you?

[Keith Hughes:]

How are you?

[Mark Borseth:]

Good to hear from you. So thanks for your question. What I can mention or share with you, Keith, is in the first quarter, where we started to see some of the impact from inflation, we were able to stay ahead of inflation through price and productivity in the first quarter. We would expect that to continue through the balance of the year, based on the pricing actions we've already taken. But look, we're monitoring the situation and managing the inflation both on raw material and labor very closely. And to the extent that we need to take more price during the year to continue to stay ahead of that, we will do that. And we have baked that expectation into our guidance as we look at the margin expansion, we believe, we can deliver for the year.

[Keith Hughes:]

Okay. Thank you.

[Mark Borseth:]

You’re welcome.

[Operator:]

And ladies and gentlemen, with that, we will conclude today's question-and-answer session. I'd like to turn the floor back over to Scott Rajeski for any closing remarks.

[Scott Rajeski:]

Yes. Thank you. So, hey, I would like to thank everyone for joining us this morning for Latham's first earnings call. As you just heard, we are delivering strong results, which is a testament to the team's hard work and dedication each and every day. We have a great business and growth strategy that will continue to deliver over time, as we drive the material conversion of fiberglass as the pool brand of choice for both homeowners and dealers. We look forward to providing another update on our 2Q earnings call. Again, thank you for your time today and have a great day.

[Operator:]

Ladies and gentlemen, with that, we'll conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.