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

Welcome back, everybody. We're going to get started here again with Latham Group. I am joined by Scott Rajeski, President and CEO; and Rob Masson, Chief Financial Officer. I appreciate for the heads up on the pronunciation key there. I would have whipped on that massively. And as someone with the last name Pokrzywinski, I am sensitive to such things. Guys, thanks for joining us. Before we dive in, I do need to remind folks that if you have any question about our research disclosures, to please check the related research disclosure website or reach out to your salesperson.

Scott, thanks for joining us. If you wouldn't mind just spend a few minutes here on talking through for folks who may not be as familiar. Who is Latham? What are you guys doing? What's the value proposition? And then we can kind of dive into what you guys are seeing out there?

Yes. Thanks, Josh, and good morning, everyone. Appreciate the opportunity to be out here, speaking to you guys today, a great location being from the East Coast, my first time to this part of the country. It is just beautiful. I watched the sunset last night, it was great. Latham's the world's largest designer, manufacturer and marketer of in-ground swimming pools. We are a full-line manufacturer of covers, liners and the in-ground pools with the very exciting fiberglass category there. I've been with the company now for 10 years. I was the CFO for 5, joining the company in 2012, and I've been in the CEO chair for about the last 5 years. And we've had a great one as a company. We've posted up 12 consecutive years of top line growth, EBITDA growth and margin expansion is part of the core DNA of what we do. And I think when we've even looked at our -- the guidance that we've put out there, we believe this could be the 13th year of consecutive growth as well. When I joined the company, I really saw an opportunity to transform an entire industry. The entire pool buying experience was very fragmented. Most consumers did not know what kind of pool to ask for or what kind of pool they'd be getting. We saw the opportunity to become one of the only brand that was out there to try to make Latham a household brand name and change the entire buying experience by providing a suite of digital tools, technology, augmented reality apps that the consumer could go into the backyard with our app, download a pool, visualize it in their backyard and then walk into a dealer and specifically ask for a Latham swimming pool, calling out, I'd like a Fiji, Sapphire Blue G3, when can you install it for me? Changing the complete dynamic of how this happens by offering a premium product with a total lower upfront cost, a total lower cost of ownership than a comparable concrete pool. I think we've done a great job in this transformation. We're early stages of this growth story with the penetration of fiberglass in the North American market. And we're really excited to talk to you guys here today a little bit more about our story and where we're headed.

Excellent. So maybe just to start off with sort of the economics behind fiberglass. I mean Latham at its core is a material conversion story. I think whether people know it or not, there's not as much fiberglass out there as maybe they would appreciate. So can you maybe walk through like what's the benefit to the customer, to the installer like going with fiberglass over concrete?

Yes. So we're in the early stages of this conversion story in the North American market, roughly 20% of all pools sold are fiberglass. The comparative is 70% in the Australian market and in Europe about 40% to 50%. The only reason it's not higher yet is most people don't know about fiberglass pools. So as we drive the education, the awareness of the pools at the consumer level, one of the key things is there's a 25% to 30% lower upfront cost for a fiberglass pool versus a comparable concrete pool. If you then take that out over the course of the lifetime ownership of the pool, with fiberglass, you never have to do anything with the pool again. Once it's in there, you set it, you forget it, it's going to be maintenance free. And there's the advantage versus the concrete pools where you have to do a resurfacing of the finish. And then over the course of the ownership, it's about a 35% to 40% total cost of ownership advantage for fiberglass. So just a huge opportunity to drive it. And from a dealer standpoint, what they get is they can install a lot more pools on an annual basis with 1/3 of the labor, make the same amount of profit per pool and basically drive up the profitability of their dealership by almost a factor of 6x. So it resonates very well with both consumer and dealer. It's just taking time in the U.S. market to drive the awareness, and that's really the key focus of what myself and the team are doing. So I could understand the consumer not appreciating the difference and just how powerful that could be. I would think that dealers, especially if you sort of tease them with their wallet, would say, this is really interesting. And at the minimum, I want to be a dealer, I may not make it all my entire business, but I want to do some. What has held back that process or is that process not held back, I mean, like dealers are pretty much ubiquitous. So I'd say it's reluctance to change. We've got a lot of great dealers that have worked for us and we'll just stay in the industry in general, they're setting their ways. And what I mean by that, Josh, is if you're a concrete pool installer, you're basically a general contractor, you sub everything out. You don't own a crew, you don't own the labor, you don't own the excavator, you're really not doing any of the work other than maybe the initial design for the consumer. It's really hard to convince them to go make that investment in an excavator and stand up what's now going to be a potentially retail storefront business dealing with the consumer. Let's say on the vinyl side, if you're a steel or polymer wall in-ground pool person, that's all you've known for your entire life is how to do a steel or polymer wall. So what we'd go in and do is we try to convince some of those vinyl guys and some of the concrete builders to show them how much easier it is for a fiberglass pool. It takes 3 to 6 months to build a concrete pool out in the field with a crew of 9, and it's not an easy experience for a homeowner or a dealer. A vinyl liner pool takes about a month to build out in the field, you dig a hole, you're [ laying and plying ] panels and then you're dropping a vinyl liner in it. A fiberglass pool is what I call set it and forget it. We basically -- the dealer will show up with an excavator with 3 people. They dig the hole at 8:00 in the morning. Latham will shift that pool direct from one of our facilities right to the backyard of the consumer, offload it, set it in the hole, plum it out, backfill it, water truck shows up around 2:00 in the afternoon, will fill that pool and then they're pulling out 4:00 or 5:00 in the afternoon once they have the equipment running, that homeowner can be doing the cannonball to the pool for the first time in that afternoon, a 1-day install. So we try to sell that story to the dealers. If they're reluctant, a dealer that's in a particular market, to switch to fiberglass, what we then do is we go look for new dealers who meet a specific set of criteria to become really good pool builders. Smart business people, people who want to run and own their own business, have control of it, a very low overhead business with the opportunity to rapidly grow and make a lot of money in the industry. And we've had a lot of good luck switching both vinyl guys over to talent into the organization. And occasionally we get a win with a concrete guy, but it's just -- it's really a -- I say ZIP code by ZIP code sales process that we go through to educate them. And one of the trends we've seen over the last 5 years is as some of the older dealers start to age out, and it's a very difficult job digging a hole and being in the pit every day. As their children are entering into the business or coming back into the industry as mom and dad are thinking about retiring. The younger generation views it as a much easier job. They look at it and say, "Wait, I can be in and out of the backyard in a day or 2, make the same amount of money, dad, as you were making spending a month in a backyard. Why would you not do this? Why would we not do more?" And our average dealer does 10 pools a year. And here's what is really powerful about the story of what we're doing to drive installation capacity, which is really holding this industry back. Assume there's 40 weeks of installation time a year around the country out here, you can build year around, let's just say, back in the New York area where we're from. If we could convince these guys and teach them how to do 1 pool a week, their capacity can go from 10 to 40 with less people. If we can get them to do 2 a week, it's now 80. Get to 3 a week, which is a world-class fiberglass dealer with 1 crew of 3 individuals. They're doing 120 pools of installs a year. That's what we're trying to do. We've got a world-class training center. We just stood up in Zephyrhills, Florida, just outside of Tampa, where we bring these dealers and we teach them not only how to be a great pool builder, but how to be a great business person as well and run their business.

So when you think about the dealers you've converted, are these folks who were kind of dyed in the wool gunite guys? Were they doing vinyl? Were they doing a little bit of everything? Were they not in the industry? Like what is sort of the complexion of the dealer base?

Yes. I'd say the best success we've had is with the vinyl guys because they get the pool business, they've got a crew, they've got the excavator, the equipment, the storefront. And what we see with them is they think they're going to replace all of their vinyl business with fiberglass. The exact opposite happens. They actually wind up doing twice as many pools because they bring the fiberglass crew in, the vinyl guys keep doing the vinyl and then the fiberglass quickly ramp and they'll go from doing 150 to 300 pools. The concrete guy is a little bit harder to change over. We've had some really good success in Northern Florida. We've got some really great dealers out here on the West Coast, where they just saw the opportunity to put more pools in the ground faster for the consumers. And again, we've got this lead generation, we're funneling leads to these folks every single day, pushing demand. So the concrete guys just see it as a chance to put more pools and they're going to make more money. And as we brought new people and who just want to run a business on their own, we've had a lot of success with targeting different industries, going after landscapers, homebuilders, people who have the expertise running an excavator, digging a hole, maybe building a house, teaching them how to become pool builders. And those guys are probably better. They doubled their business every couple of years, do the first 4 or 5 before they have to add a crew and they don't have any of the bad habits that an existing pool builder might have had. So again, I think it's very, very targeted. It's different region by region throughout the entire -- all of North America.

So I would imagine that you've had pretty good inbound requests for folks to want to sign up to be new dealers. But to your point, they're not necessarily at run rate or fully productive right away. I mean if I had to think about sort of what's in that, call it, second derivative backlog, you got the guy out there who's starting to get leads, starting to get over the learning curves. Is that a material kind of boost to growth over the next couple of years as those guys get a little bit of experience?

Yes, it really excites us, Josh, because we've really turned off our new dealer acquisition strategy for the last couple of years. Just with the amount of leads we had, the business we had and some of the supply chain challenges, we've turned that engine back on. And as we've been bringing people through the boot camps, at this point, let's say, in the year, Josh, if we were to sign you up as a new dealer, we'd probably get you out and we'd probably get you to do maybe 2 or 3 pools at this point in the year. Next year, we would easily have you on a track to do 10 to 15 pools. Year 3, we would be trying to get you to do 30 to 40 pools. Year 4, we would have you on pace to do 80 pools a year. So that trajectory is what will drive a lot of what we can do because we could probably funnel 100 leads to you in this market right now that you would have as potential demand to go satisfy, you just don't have the capability or the knowledge to be able to put that many pools in. And that's what we show our dealers to get them to invest, to try to get them to come to these boot camps and realize that the demand is there, we need the dealer installation capacity to catch up to it.

What does it cost the dealer to sort of adapt himself to be a fiberglass installer? I mean you said before that like some of these guys don't really -- they're general contractors, they're kind of farming it out, they at least need to buy an excavator or maybe add some folks. Like is that standup cost something that is kind of beyond the balance sheet of most people? If I'm selling 80 pools in 2 years, I want to know what I'm in for.

No, it's not. And a lot of these folks will target those who maybe already have an excavation business, so they don't really need to go buy anything. They don't necessarily need to stand up a store front. Some of them like to do it. And the power of what we bring is we try to co-invest with a lot of these dealers. We encourage them to wrap their trucks and vehicles with the co-branding, with the Latham name, with their company name. We'll help them get started with that initial working capital. We might put a couple of pools on the ground for them as display pools, so they can get going. So we have a vested interest in co-investing with them upfront. It doesn't cost us a lot of money. You can lease an excavator out of the gate. But what we try to show them is if you're going to make the investment in that excavator, it should be running every day. You need to utilize that asset. Don't dig a hole on Monday and let us sit there for 2 weeks, digging the next hole 2 weeks from now. And they start to get to learn about the ROI and the utilization aspect. So think of it as a pickup truck, a trailer, an excavator and they can be ready to go.

Actually I think about kind of the near-term demand environment, obviously, the residential environment is sort of a little softer today. I think there's some normalization that's happening in a few markets closer to the consumer post pandemic. How is that showing up for you guys?

Yes. So as we look at the demand that's out there right now, I'd love to kind of reset where has the industry been, where is it today and where it can get back to? 2005, there was 175,000 new pools installed in the United States. That number probably sits somewhere in the 110,000 to 115,000 range now on what data set you want to look at. We're still below the 20 and 25 year average on historical range of 120,000 to 125,000 pools. So there's still a lot of opportunity for growth to get back to that much higher number. Our view is for Latham, I hate to say I don't care because I do care about everything, but we don't really care what new pool starts is going to do. We believe we can grow in any environment with our fiberglass conversion story because we're about a share shift gain. If pool starts to stay flat or pulled back slightly, we would continue to grab share against other concrete pools. We would continue to grab share from other vinyl liner dealers. And in some of the materials we put out there from an IR standpoint and during the IPO and the road show, we showed a 5 year historical view of what fiberglass pool growth did versus the overall industry, and fiberglass growth has outpaced the industry in every year no matter what the environment. If it was the wet season, like it was in 2018 and 2019, if it was a down market, if the market was up, fiberglass outperformed in every single time. And if you look at the deck we posted out on our IR website last night, we put some new data pages in there. We show that the fiberglass CAGR has outpaced the total company growth over the last 5 years as well. And that's what gets us excited about where we can take this thing.

Do you have a sort of like any given year target of how much you think you can outgrow the industry?

Now we -- well, if I go back to our long-term growth thesis of 10% to 12%, the way we look at that is a normalization of new pool starts back to a low single-digit number. Fiberglass trying to grow 2x the market in general, which kind of answers the direct question. And then a normalized average price increase of 3% to get to that 10% to 12% target. But I don't specifically tell my team, I want you to go 2x the market. Our view is, let's push as hard as we can to accelerate the pace of share as fast as we can. Because again, that share in Australia is 70% of the market is fiberglass pools. We were talking with someone earlier this morning, and as he was exiting the room, he basically said he goes, he was from Australia. He goes, no one even thinks about a concrete pool in Australia. They wake up thinking about fiberglass every single day. That market was not like that 20 years ago. That was what the Narellan business did that we recently acquired, drove in that market by consumer awareness and education and standing up a very professionalized dealer base. And that's what I think will really continue to drive this thing for us.

I think in the near term, you did have some packaged pool channel inventory overhangs that you've been trying to work down. Where are we at on that today? And sort of how did that get a little ahead?

Yes. So when we look back at 2021 and, let's say, the supply chain challenges when the demand really, really took off, when the economy opened back up post the shutdowns. Let's say, one of our big WD partners, they started to buy a little bit heavier. And that was the result of our service levels and lead times as a company. This business is typically a high custom, quick-turn, 3 to 5 day service lead time type industry. We got extended out in some cases to 60 days on our products. The wholesale distributors had to begin to stock more and more as our lead times stretched out. And I think that trend continued for a while. As we worked really hard to increase our capacity, get our lead times back in line and just be a better service provider, the wholesale distributors realized, okay, they can slow down the rate of incoming orders for us. They don't need to stock 2x what they typically had stocked and they've begun to pull back in the channel and reduce what they have. But the good news of the story is the exit rate or the sales off the shelf for them from a demand standpoint at the dealer consumer level actually continues to stay very robust. And when we called the majority of our dealers, a lot of them are sold out into May and June of 2023, may not be as far as they were a year, 1.5 years ago or in some cases they were out 12 to 18 months. But being out that far at this point in time is still much better than where they've been historically, let's say, back from a 2018 or 2019 timeframe.

And are you largely through that inventory destock?

Yes. We think with the guidance that we issued back after the 2Q or during the 2Q earnings call 1.5 months, 2 months ago, that we've got the right projections of where this thing is going to land. We expect it will continue through 3Q and 4Q, and that's reflected in what we've talked about. And I think we've got a good working relationship with all of our wholesale distributor partners. We get good visibility to inventory stocking levels pull through. And I think we're in good shape, but it just depends. They want to get back to normal levels, and they're going to try to do something a little bit further. But we're focused on the demand as long as we get the pull through, we'll keep pushing.

If I could just transition over to supply chain and I think you guys kind of have a unique supply chain relative to maybe some other folks here in terms of what your inputs look like. And sort of what the -- some of the lead times or the specialty components, where would you sort of rate kind of overall supply chain health and lead times from your suppliers today?

Yes. I think I said it on the call a few months back and someone quoted to be honest, so I've learned to be very careful with what you quote. But since it was out there, I'll say it, I'm not losing sleep anymore over supply chain challenges for us. The team has done a great job working with our vendor base, standing up the capacity we need, diversifying the sources, particularly the resin on the fiberglass side was a huge challenge for us. We've really taken a strategic partnership approach with our vendors, with our new supply chain leaders, our new Chief Operating Officer, and sharing with them the vision of the growth possibility of fiberglass and what it means for a base of business for them. They were in Albany, New York, 2 weeks ago, they met with us. They're invested in capacity for us, dedicated. And they like the partnership and relationship because it is a specialty resin. It is a higher-margin product for them. It allows them to mix up and do better. And as we continue to diversify the base and try to drive to a 40% penetration number here, it's a long-term partnership, and we're in a really good position on all fronts.

And you mentioned it's more of a specialty resin than maybe like a polypropylene, polyethylene that some other folks might feature a little bit more prominently. What does that mean for price cost for you guys? It sounds -- that doesn't sound like a resin that is particularly deflationary at the time if they're adding capacity for you.

No. I mean -- I think it does trend overall with what resins trend in general or whatever. It probably dig much faster from the deep freeze and all the challenges they ran into in '20 and '21. But again, we reflect that higher cost material in the price of our product. It's part of our price value proposition that we push out. And I think the reason we've been able to expand margins for 12 consecutive years is because we can pass that price on to the dealers. But I think more importantly, that resin we use, along with our gel coat and the construction technique of our fiberglass pool creates that premium finish for the consumer that resonates. -- kind of little side now, Rob and myself stepped out and looked at the pool in the courtyard out there. But not to within the hotel, but it's in a lot of shape for a concrete pool. We said we should have brought one of our nice little melons and plopped it next to it and filled it with water. So everyone can get the appreciation for what our finish would look like for as long as you own that pool. That pools in serious need of a refinishing and then upgrading. It's in tough shape. So that's where having that higher-end specialty resin to combine to give that beautiful finish of that pool that will last the lifetime of the homeowner is really important to us. And we get that in the price point of a fiberglass pool to the consumer dealer.

So when you think about price cost for the business over time, it's really driven more by value pricing rather than input cost volatility where like you're able to capture the downside when that happens.

Yes, I think that's absolutely right. I mean historically, as Scott said, we have a history of raising prices 3% to 5%. But we're always looking at that inflation and what it's doing. So more recently, we've had to do much more than that in our value proposition. But it is value, value to the consumer. And again, I think we put a chart in the deck to kind of update the economics and Scott led off with that, that is a good indication of that value proposition. We think both in the short term for the initial buy, but then also through the life cycle of the product.

And because this is more of a specialty material with kind of deliberate vendors or suppliers that you want to partner with. Is the contract structure around that a bit more unique, like you have certain threshold minimums or some sort of take-or-pay system that you guys run into?

Yes. We don't do any take-or-pays. But I think what we do is work closely with the vendors on where our volumes are headed, what we need. I call them more like soft commitments because we want to make sure they're going to have the material we need when we need it, and we do PO pricing, we kind of lock agreements. But I think we try to stay flexible on all fronts because we want to be able to quickly flex up if we need to ship volume from supplier A to supplier B, we will. But I think it's really just sitting down and having some good conversations with these guys of where we're headed and that it's all growth for all of these dealers as we get to that 40% number.

And then maybe just last question for me. On this fiberglass market penetration, I think regionally, Florida and maybe Texas are kind of lower penetrated relative to the rest of the U.S. You sort of mentioned that there's kind of the stubbornness in the contractor base that maybe informs that. Is there anything else between like regional or climate or soil perspective that makes that tough? And sort of how do you go about if these are big pool states that have a particularly sort of, stubborn customer from your perspective, like how do you go about penetrating those?

Florida is an interesting one because we've historically not focused on that market, and it's probably the biggest pool market out there in the country. We've got a fiberglass plant that sits right there in the middle of the state. We put our training center there. And there are regional geographic pricing differentials of concrete from the Northeast versus maybe the Southeast that changes some of the economics. But what's interesting in Florida is right, you're building a bunch of track housing, the GCs in there, putting the concrete pool and with every one of those swimming pools. So it's pretty much concrete's a new construction-driven market, right? Our plan is more, we're going into the backyard of an existing home that on average has been there for 3 years. 95% of the pools we sell are going into an existing home. And that's important because there's 90 million homes out there without a swimming pool today. But look, we've got a sand state strategy that we're attacking with how we're going to go after those markets, what we need to do to be competitive, how do we convert dealers, how do we bring new dealers to the market. Texas, we've had a lot of great success in the Texas market because we've got a lot of really strong established dealers who fell in love with fiberglass. We actually have a great fiberglass business in Northern California. Again there's a facility up there. We get down into this part of the state and maybe some into Vegas and Arizona, probably not as much a success. But 75% of the pools in this country are built in those sand states. So back to the future growth of the company, targeting those areas of the country, being very competitive, getting the right dealer base in there is important for us, and that's what's going to drive the long-term growth and profitability of Latham.

Excellent. Well, I see we're approaching time. Scott, Rob. I appreciate you guys joining us here and for the discussion today.

Thanks, Josh. Thanks, everyone. Hope you guys all have a great day.

Thanks, Josh.