Latham Group, Inc. (SWIM) Earnings Call Transcript & Summary

Hi, good morning. I'm Josh Pokrzywinski, Morgan Stanley's electrical equipment and multi-industry analyst. Thanks for joining us for the kickoff of day three of our 9th Annual Laguna Conference virtual this year and in-person the next year, I promise. Joining me this morning in the lead off position, we have Latham Group, CEO -- President and CEO, Scott Rajeski; and CFO, Mark Borseth. Guys, thanks for joining us this morning. Good to see you. Before we dive in here, and I think Scott has some opening remarks, I do need to read a quick disclosure that I have memorized at this point after doing a few of these. So, just as a reminder for any one of those questions about our research disclosures, please visit the Morgan Stanley disclosure website at morganstanley.com/researchdisclosures. And for all other questions, please reach out to your Morgan Stanley salesperson. With that, guys, good to see you as always. Thanks for making the time this morning. Scott, why don't we jump into what you're seeing and what you guys are focused on right there, and then we'll get into some questions.

Thanks, Josh. And good morning, everyone. Look, Mark and myself are excited to be here with you guys today to talk about Latham and the story. Let me briefly introduce myself and the company. Scott Rajeski, President and CEO of Latham. Sitting next to me is Mark Borseth, our CFO. I've been in the CEO role now since 2017, actually just crossed over four years, it's hard to believe. Prior to becoming the CEO of Latham, I was the CFO since 2012. And back in the day, I also had responsibility for global supply chain, IT, HR and all of our corporate strategy. I joined Latham because I really saw the opportunity to really accelerate the growth of our company. We had the opportunity to create a very exciting lifestyle brands and really give homeowners that opportunity as soon as they thought about pool ownership. Latham became a household name and, more importantly, a brand that they would aspire to own. We also saw an opportunity to completely change the entire pool by an experience along the way and disrupt an entire industry right along with it. For those that are newer to the Latham story, we're the world's largest designer, manufacturer and marketer of residential in-ground swimming pools in North America, Australia and New Zealand. And we're the clear leader in that very exciting fiberglass pool category. We've transformed the industry with the change of our consumer-centric brand and strategy, and we're really the only pool brand out there who has developed this direct relationship with the homeowner, which is really important. With our leading brand and all of our digital tools, we engage the homeowner directly, bring them through the entire pool buying process, that decision-making process, educate them on the different pool types, why Latham, and then why fiberglass. And then what we do is, we take that purchase-ready lead from the homeowner and bring it to one of our exclusive dealers in our network, connect them up for what will then be a very exciting pool installation. That process is really what's enabling us to drive the fiberglass material conversion story that I'm sure we'll probably talk a lot about here today with Josh, and it's what's fueling the demand that we're seeing in the marketplace and the great growth. Look, we got an amazing company supported by a very experienced team. We're very confident in the attractive dynamics in our industry, the strength in the outdoor repair and replacement market that's out there, the demographic shifts of investments in the home, specifically the backyard, the [ exit is ] strong, let's say, the cities of the suburbs as the younger generation moves out with the household formation. And look, we're just excited to continue to execute on our strategy. Again, it's kind of the early innings of the game of our strategy as well. We just really launched it a few years ago. And we're seeing great, great success out of the gate. And again, Josh, thanks for having us today. And I love to be in the lead off position and get on [ beats ] first.

Awesome. Well, thanks for that, Scott. I think, maybe just to pick up on a couple things you said there, especially for those who may be less familiar, I think the material substitution component is a big differentiator from what other folks are doing in the outdoor space. Obviously outdoor has been super strong in the entire pandemic or things around the home in general. But you guys have this material substitution share gain story. So, maybe walk us through what is attractive about fiberglass for the homeowner, for the installer, anything around price points or lead times that would sort of inform why that is an interesting story.

Josh, I can spend the next 45 minutes just to answer that question, and I'll try to keep it brief though. Well, [indiscernible] excited on many fronts. The first thing that we sell a customer is, we've got the largest line of fiberglass swimming pools in the industry, and it meets 85% of all the shapes and sizes of pool being built in North America today. So, a broad offering, highly customizable. That's kind of the headline statement there. The second thing is, you never have to do anything with a fiberglass pool again. A fiberglass pool is kind of, I call it, set it and forget it. You're not having to replace the line or you're not having to acid wash your pool if you do with concrete, you're not having to replace your finish with concrete, and it's not going to crack like a concrete pool would. So, very maintenance friendly for the homeowner. If you look at the economics for the homeowner, and this is probably one of the most amazing things, 28% lower upfront cost versus a concrete pool and a 43% total lower cost of ownership versus a concrete pool. So phenomenal economics for the homeowner. For the dealer, they can install that pool much faster with less labor. They make the same amount of money per pool, but they basically are getting installation capacity. [ You can go ] from installing 20 pools a year with a crew of nine to 120 pools a year with a crew of three and basically tripling, if not quadrupling profit they make as a business owner or a small business owner. So I think when we look at all of that, great economics, both homeowner and dealer and just a beautiful, beautiful looking pool, you top it off with the installation speed, which drives that capacity. You can have a fiberglass pool installed in as fast as one day in your backyard. We tell people expect a week. A concrete pool is three to six months. You talk about disrupting our homeowner, the backyard over the summer, fiberglass pools in a day pretty quickly. They start to dig 8 o'clock in the morning. We deliver it from one of our factories. And by 5 o'clock, you're doing cannonball on that first day.

Got it. I want to get more into the model here. But as we talked about before we went live and have been talking about all week, obviously supply chain is on everyone's mind. I think, like many others in the second quarter, you guys had some -- probably some push shipments as a function of tanks not showing up to the factories and stuff like that. Maybe just update us how the past couple of months have gone. Any light at the end of the tunnel there? Anything getting worse or better in your mind?

Yes. So, if we just look at the company as a whole, and I kind of like to think back over the last 11 or 12 years, Josh, there's been a lot of different situations out there in the world that we fought through, and we've delivered 11 consecutive years of top-line growth, EBITDA growth and margin expansion. And we fought through many different cycles and economic conditions that are out there. And even if you look back at last year, the challenges with COVID and what we had to fight through and overcome it and the results that we posted up. And I think when you step back and you look at the results we'll post up this year, again, they'll be phenomenal numbers when we look at it year-over-year. But look, the supply chain is really tough out there. We see it every day in the newspaper, the headline statements, whether it's labor or resin challenges, actually logistic challenges getting containers out of Asia, getting goods through ports. And then, you compound it with the impact of weather, which was the deep freeze in Texas, different outages, hurricane Ida and now the tropical storm [ rolls ] for the Gulf again. The vendor base continues to kind of get punch after punch. We say when we show up, we're playing a game of whack a mole every day. We're wondering what is just going to pop up that the team has to fight through. I'd say, the resin situation has been the most difficult for us. You look at our product portfolio lineup and all the commodities we make. There's rolling challenges in all of them. Resin has been the most persistent one dating back to the deep freeze. We think we're starting to see some light at the end of the tunnel, Josh, but just takes one hurricane to disrupt it again, like we saw with Ida, which again delay some of the volumes we thought would be bouncing back. But the supply chain organization, we got a great team there. We're looking at other sources from around the world globally. But again, as you try to get those goods in, let's say, from Asia, you fight through getting ship bookings and everything. Well, look, it's a tough environment out there, but that's what we get paid to do is fight through it day in and day out. And I got a great team that works under me who shows up every day to make sure we can fight through it.

So, I think the other side of that is probably you're creating a bit more visibility for next year than maybe you would normally have this time of year. Can you talk about how much of what you're seeing today is getting booked into '22 and anything that sort of preliminarily tells you in terms of backlog numbers or anything else that would give you some extra confidence?

Josh, as we've talked, we don't specifically disclose backlog numbers. But look, as supply chain challenges have riveted the industry and, again, not just for us, but even for our dealers and their ability to get pools in the ground because they can't get pumps, motors, filters, PVC pipe in the goods. They need to actually finish the product. It's also impacted their installation capacity some too. So, our backlogs have extended in particular for, let's say, historical levels. We've also been trying to work with our dealers that, look, someone doesn't wake up tomorrow and say want to buy a swimming pool, right? It's a long-term decision that's made over the course of months, if not years. So, as the consumer thinks about the pool and they sign a contract with the dealer, we're also encouraging our dealers to give us that order sooner than they normally would have, so we can get better visibility to their installation capacity, their orders. We can get those into our production cycles. It can help us as we procure the goods we need from a supply chain standpoint. And I think the result of that is, we're seeing orders come on the books further and further out than normally. Specifically we're not going to talk about guidance or anything for '22. But anecdotally, I could say, there's a lot of dealers who already talked about being completely sold out for next year and doing more business next year than they did this year and some dealers taking orders all the way out into 2023. I think that's what we love about this industry. We see long-term trends driving this out for the next five, seven, 10, 15, 20 years, you tie that back to our fiberglass material conversion story. And similar to what Narellan was able to do in Australia, we see a long tailwind of being able to drive growth, specifically for Latham with this conversion of fiberglass.

And you talked about some of the delays and kind of bottlenecks in your own processes. But I got to imagine that your biggest competitor, concrete, is having similar issues because of all the labor content. I mean, any sense for what that normal three to six-month period would look like in this environment? And are you guys looking more attractive versus that in periods where everything is in short supply?

Yes. I'd say, I don't want to say we're looking more attractive. So, I think everyone's struggling out there, Josh. I think with the labor situation being just as bad as the supply chain situation, the fact that building concrete pool requires 75% of the cost is skilled labor. I've heard there's a lot of shortages. How I look at it is, our ability to convert concrete to fiberglass and seeing that trend continue to accelerate, particularly with some of our bigger dealers, premier pools and spas, some of our other [ big final ] guys, some of our larger fiberglass dealers, they continue to win and grab share in the market. I think because, one, homeowners don't want to wait that long for a pool. They don't want a backyard disrupted for six, nine, 12 months to get a pool built. They may have to wait a little bit longer to get a pool from us, but it's worth the wait the dealer can be in and out in the backyard in a week versus being there for a year.

Got it. And then, one last one on the supply chain environment. We'll get on to some more fun stuff. On -- you mentioned this that the dealer is having a hard time getting all sorts of things, right, the rest of the pool pad and some of the other ancillary products. Is there a common partnership that you guys have with some of the equipment suppliers or is that sort of left up to the dealer and they source as they need to?

Yes. It's a really good question, Josh. And I think when you look at the big three equipment providers that are out there, all phenomenal companies, we've got great partnerships with all of them. We don't dictate to our dealers what equipment to use. A lot of the dealers have preferential choices. They have a relationship with the salesperson. The homeowners sometimes knows or familiar [ just the moment ] the names were caught out specifically. But what we do is try to encourage, here's an equipment package that will work with the Latham fiberglass pool based on the gallonage. So we kind of have a preferred package that you could buy, call it, a good, better, best that we work with our vendor partners in the equipment space, but we don't dictate that. We leave that up to the individual dealer and consumer decision.

Got it. And then, just on the dealer front, I got to imagine that as they're looking around seeing things like labor shortages, seeing kind of the relative attractiveness of what you guys are doing and then hearing from consumers as well as you interface there, those guys want to be part of what you're doing. I know as part of the IPO, you kind of talked about some of the numbers around dealers, and that's not necessarily a KPI you're sharing externally. But how has that onboarding process gone with all the kind of new market chop and kind of fresh talking points that we've had over the last six months?

It's actually gone better than expected, Josh. I think we've seen a really good uptake rate of new dealers coming into Latham and the premier pool franchisees coming to join us as well and signing up all the new Narellan licensees in North America. So a great dealer onboarding uptake through the first half of the year. We've actually exceeded prior year by 2x. But look, like you said, the reason the number of dealers is not a KPI for us is, we don't see that as the key enabler for our future growth. It's having the right mix of dealers and increased the number of pools a dealer can get in the ground. The one metric we have openly talked about is an average pool builder does about 10 pools a year, okay? If you think about the number of building weeks in a year, let's just say it's 40 on average, depending on where you sit in the US, one dealer with one crew should be doing 40 pools a year. If our average dealer is only doing 10, there's the ability for us to grow 4x with them using fiberglass. If we can teach that dealer to become a much better fiberglass installer and get to two pools a week or three pools a week, and let's just say three would be the ideal state, we have some doing five. That's 120 pools a year one dealer could be doing. So our game is not to go scour the earth and have to constantly add new dealers or new storefronts like retailers typically would do, it's working with our existing dealer base, taking through Latham university, training them up, teaching them how to get in and out of the backyard faster and how they schedule the digs faster with their equipment and crew and get that number from 10 to 20, 20 to 40, 40 to 80, 80 to 120 over the next three, four years. That's what will fuel our growth. But we've seen more and more dealers coming to us wanting to join up on fiberglass, which I think is what gives us a good feel of why we have great growth out in front of us here.

And for the folks that join, are you satisfied with how they progress through that funnel or learning curve of how do we go from, hey, let's try this to -- this is going to be a large part of what I do as an installer?

Yes. Look, like anything, right, you get some that are really, really good and you get some you learn that just aren't cut out for the game and you wind up parting ways. But I think the magic of -- I'll go back to Narellan in the Australian market and how fiberglass penetration went from 50% to 70%. It was by nurturing and working in that ecosystem with the franchisees down in Australia and New Zealand, and helping them grow as one cohesive unit. Funneling all those leads them from a consumer standpoint, teach them how to be a better builder and give them all the tools they need and then the great-looking pools. So, we're somewhat doing a pivot here domestically, let's say, in the US and North America, where we want to now work with our dealers closer and coach them up. And as we pick the better dealers and grow with them, there's still spots in the country where we don't have a lot of dealer penetration where there's huge opportunity for growth against concrete, let's say, specifically the Southwest, the Arizona market. We don't have a huge presence there today. But as we move in, we will need to bring new dealers in there and do that same coaching. And look, our dealers, we have a builders counsel. They teach and coach and educate each other. When we hold a conference, we do training sessions. So, look, we'll continue to, I'll say, work through the mix of who we have, but we're really happy. We've got the best dealers in the world out there.

And you mentioned that some of the guys are booking now into '23, which is sort of a good news, bad news story from a supply chain lead time perspective. I would imagine those guys were working at breakneck pace in '21. Are they able to do more next year in your mind? Or does that require something to get better on the dealer side, never mind some of the other things you guys watch?

Yes. It is a good news, bad news situation. And that's how we drive growth with our dealers, Josh. So, the examples I gave you was a one crew example with a dealer, right? There's dealers out there that, when they tell us they're sold out, the first conversation we start to have is, that's good news. Let's talk about adding a second crew. And now you add a second crew to them, but what we have to do is we have to prove to them that we can give them all the leads they need to fill that second crew so they can be efficient with the process. Sometimes we have a conversation about what do you need to grow or add that second group, what's your reluctance? Well, I have to make an investment in another excavator or another train, another trailer to deliver pools on. So we'll work with them and say, look, we'll even be willing to co-invest or make that investment for a dealer because we know it paybacks pretty quickly. Some dealers just don't want to grow, Josh, right? Some guys are just content doing that 10, 20, 30 pools a year. So, the conversation in that case with a dealer who's sold out into '23 in a particular market, if they don't want to grow, the next conversation is, well, then we're going to have to add another dealer into that market because the market is growing. There's 90 pools of demand a year to be had there. You're only doing 20. We got to grab that share from concrete or another competitor.

And then, just thinking of specific markets geographically, there might be an opportunity. I think you guys have talked about Florida and Texas have historically been much more gunite focused, not as much on fiberglass. Have you seen kind of the needle move there? And any sense of whether it's some myth that needs to be dispelled or anything else that has prevented fiberglass from being a bigger part of those pretty big pool states historically?

Yes, a couple of things. Let's -- specifically Florida, right? Florida is about 25% of all the pool starts in the country, and let's just say the majority are concrete. So, we've been doing our crack the code project down there, which was, how do we penetrate the Florida market with fiberglass. We have one of our larger facilities sitting right there in the middle of the state that was underutilized. So it was a great project to run. I'd say, we've been having tremendous success, specifically as we attack the Florida market, and we're really seeing nice trends there. Texas is another example of, again, a very concrete dominant market where we've had a ton of success for many years with some of the really good dealers that we've established down there. And then, the Arizona market, again, is probably one of the black hole where we just don't have a presence there. And it's pretty much concrete dominant with the builders that are out there. With premier pools and spas, right, largest pool builder in North America, if not the world, right, doing roughly 5,000 concrete pools a year, that partnership with them, we're now the exclusive manufacturer for premier pools and spas, right? Paul, their business owner, has made the decision. He wants to convert every one of those pools to a fiberglass pool. We've talked about the numbers and the success with them. And again, they're located in all those sand states, those underpenetrated markets. We've gone from 40 pools to 200 pools last year. We'll do well over 750 pools with them. We like to look at that as every one of those is a conversion of concrete to fiberglass for us. And we've got some pretty good strategic plans in place where we can continue to see that number grow and expand exponentially over time.

And then, thinking about how you guys source leads, maybe unique to the space, the contractor is one piece of it. People can go, configure their own pool. I've looked at it, my wife looked at it before I shutter down, a reminder, our backyard is a flood plain. The...

[indiscernible]

I would sign me up for more CapEx, Scott. How has that relationship evolved? How much do you think you source that's really driven by a consumer versus a consumer who wants to pull and a dealer comes out and says, you should choose a Latham pool, a fiberglass pool.

Yes. We get that question. We've been getting that question more frequently. And it's something we don't track. So, I'd say, anecdotally, let's just say, if you go back three, four years prior, Josh, the number of leads was very low in terms of what a dealer was getting for that buying decision from us. I would say, it's probably 50-50 or maybe even 70-30 now, where the majority of what's happening is as we educate the [ full line ] experience, they spend time on our website. And then we connect them up with that dealer and we provide that lead to that dealer. We have dealers who keep telling us, shut the leads off. I don't need any more leads, I have more leads that I need to handle. I only say 50-50 because I don't want to swing it too high and think that we're providing all the leads to the dealers because there's still some markets where a dealer just has a great presence in an area. They've been known forever and there's just an awareness of who they are. But in areas where maybe a dealer was not known, that's where we work really well. So let's just say we're roughly 50-50, and we hear more and more from dealers that owners are walking in and asking for a fiberglass pool, which is causing them to call us and then say, I need to sign up with the Latham fiberglass dealer.

Got it. And then, I guess, one thing we touched on earlier is this whole pricing differential versus concrete from the homeowner's perspective. Obviously you guys have had to take price this year as a function of what's going on, on the input cost side, the supply chain and logistics side. How do you view that pricing envelope long-term? Do you think you need to be consistently below gunite or as a function of, hey, this is a superior product and it's way better for the contractor, can those two start to converge over time?

Look, in some markets, you could argue they are equal and in some markets, fiberglass is more expensive. I don't think there's any magic that we have to maintain that differential. The way I look at it is, if you've got great products and there's great benefits to both homeowner and dealer and it's tough to even value the pace of that one day or one week installation. I think we can continue to drive price up in the category in the segment. The differential today is a huge benefit. If it was to shrink some or even expand some, Josh, I don't really see that as the key driver because my view is the benefits of the pool, the ownership of the pool outweigh all the above.

Got it. Thinking over the medium-term, does the price that you guys have taken are looking back over past inflation cycles? Obviously none of them really compared to this one. Does price typically go backwards as you see an abatement in raw materials or other costs?

No. We've -- since I've been in the company, we've never rolled price back. I mean, we might pause price for a year or so. Again, we're in unprecedented times with the pace inflation that's coming at us. No matter -- and if you're a consumer, again, no matter what you're buying, you're seeing price just go up and up and up from everything you're buying there. I don't see a need to roll it back. Look, we could say, there's still probably the opportunity to push more price based on where inflation sits today. We've not seen a slowdown in demand or orders, Josh. We haven't talked a lot about the demand side. Demand continues to be extremely strong for us, even though we've done four, if not five, price increases now this year, which says there's room to just keep pushing this and people want to have a pool in their backyard.

So if I think about that demand equation, sort of roll up how you guys had been looking at the second half, does the margin pressure sort of get offset by demand? Or is there enough kind of throughput issues where the demand side can't quite offset it?

Yes. I think the supply chain challenges, Josh, and it's two pieces there, right? I think they'll continue to limit what can get out the door potentially to the dealers, but the dealers are also limited, right? That's the other factor. It's not just what we can make and ship out. We're shipping out and sitting on a lot of finished good pools that dealers can't take because they don't have the installation capacity because they can't get the goods and equipment to get the pool in the backyard. So you got to kind of look at that full supply chain all the way through us through the dealer back to, if they can't get the equipment on the pad, there's no sense of putting the pool on the ground. So it's kind of a tough one. But I think we'll continue to push price above inflation. That's our game. That's what we've done historically. And we'll continue to relook at that. The one thing we've done, right, tactically is, we've not repriced the backlog. So that backlog has grown, right? That's what's created some of that margin pressure we talked about back after the 2Q earnings call.

Got it. And looking out long-term, I think we can look back, was it 15 years ago to what was an even healthier pool environment for a pretty significant length of time. Given all that you've done on gaining share both as Latham and kind of the fiberglass market as a whole, what does your business look like when we get back to -- if we get back to 150,000 starts a year in the pool business? I see the smile, we're down the dream here a little bit, but it seems like there's a bit of a shift. So I think it's a relevant conversation. What does that mean for your CapEx and kind of capacity planning? Where would that sort of anchor you to on how big your business could be, knowing what you know about how the dealer mix and the consumer lead generation or kind of new phenomenon over that 15-year period?

That question was like someone just [ showed ] in my house with a new Ferrari or I just won the lottery or something. Well, look, I mean, there's two pieces, Josh. It's a good question because we believe the trend will continue and eventually get back to that number. We're not even back yet to the 20 or 25-year historical average, right? So that's the thing we really like that gets us excited. There's still a lot of room for this industry to grow to even get back to where we were before. We don't really look at it as what the new pool starts have to do for us to grow our business because we don't think that's an important part. We're focused on converting as many of those concrete pools that are being built today, which is roughly 50% of the market to fiberglass because we can continue to grow our business just with that conversion even if pool starts was to flatten out, right? So that's what we're looking at. As we see where demand is going, we look at what happened with fiberglass in Australia, New Zealand and Europe. And as we're trailing that, we're sitting at 18 today. So step one is how do we get to 25% of whatever pool starts are to be fiberglass, get that number to 40 to 50 and eventually to 70. Our CapEx story is kind of what we've talked about throughout the process here. We want to stay out in front of it and ahead of that. And I think we've proven over the last two years with the incremental output that we've been able to push out into the market that we haven't had to do crazy things capacity wise to watch our output increase drastically. It's also one of the things why we made the decision to pull the trigger on the Kingston facility for fiberglass. We don't need that demand now. But as we look at the pace of acceleration and the change, we want that plant to be coming online at the rough point in time where we can grow into that facility. And as we start looking at, let's say, future success maybe in the Southwest, we try to stay out in front of all the demand that's coming. And look, there has been a step change in our CapEx spend from historical levels over the last couple of years. And as we look out over the next few, I think that's all been incorporated into the guidance numbers we've provided. And it's just part of how we run the business. We don't want to be caught short. And like I said, if we had all the resin in the world we wanted right now, I'm sure we could be making a lot more pools and getting them out there to the dealers if the dealers had what they needed.

Understood. I see we're out of time. Thank you both for your time, Scott and Mark, for leading us off here this morning. Hope to do it all live next year. In the meantime, be well and we'll have to catch up soon.

All right. Thanks, Josh.

Thanks everyone. Have a great day.

Have a good day.