雅虎香港財經 Latham Group, Inc. (NASDAQ:SWIM) Q4 2023 Earnings Call Transcript
Latham Group, Inc. (NASDAQ:SWIM) Q4 2023 Earnings Call Transcript March 12, 2024
Latham Group, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.14. Latham Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Latham Group Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations representative. Please go ahead.
Casey Kotary: Thank you. This afternoon, we issued our fourth quarter and full year 2023 earnings press release, which is available on the Investor Relations portion of our website, where you can also find the slide presentation that accompanies our prepared remarks. On today's call are Latham's President and CEO, Scott Rajeski; and CFO, Oliver Gloe. Following their remarks, we will open up the call to questions. During this call, the company may make certain statements that constitute forward-looking statements which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's annual report on Form 10-K and subsequent reports filed or furnished with the SEC as well as today's earnings release.
The company expressly disclaims any obligation to update any forward-looking statements, except as required by applicable law. In addition, during today's call, the company will discuss certain non-GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non-GAAP measures can be found in the slide presentation that accompanies our prepared remarks, which can be found on our Investor Relations website. I'll now turn the call over to Scott Rajeski.
Scott Rajeski: Thank you, Casey. Good morning, and thank you all for joining us to review our fourth quarter and full year 2023 results and discuss our outlook for 2024. We were pleased that our fourth quarter results came in slightly ahead of our guidance range, capping a year in which we focused on several structural cost saving initiatives to mitigate the impact of another year of lower pool starts. It also was another year that showed the resilience of our business and Latham's ability to both outperform the overall market decline and to generate substantial cash flow from operations. There are several key takeaways worth noting that help us navigate the challenging business environment in 2023 and that have set us up to emerge an even stronger company and competitor as business conditions improve.
First, we continued to drive the conversion to fiberglass pools over concrete pools. As a result of Latham's leadership in this category, we were able to report sales for the year that outperformed the decline in new pool starts in the U.S. by approximately 10 percentage points. Second, we ended 2023 in a strong competitive position with leading market share in all product categories in which we compete, and energized dealer network and greater consumer engagement, all supporting Latham's ability to capture additional market share as industry conditions improve. Third, we took decisive actions early in the year that have fundamentally improved our cost structure. By closing facilities, streamlining operations, and accelerating our value engineering and lean manufacturing initiatives, we have structurally reduced our costs and increased our capacity, giving us the ability to considerably increase our profit margins once volumes recover.
Lastly, we strengthened our financial position in 2023, ending the year with a record cash position of just over $100 million providing substantial financial flexibility and demonstrating our ability to efficiently manage through difficult market conditions. In summary, Latham exited a year which saw significant decline in new in-ground pool starts and has entered 2024, which strengthened market positioning and the resources that quickly take advantage of the eventual rebound. Specifically, we continue to see progress in fiberglass' penetration of the new in-ground pool market, and expect that fiberglass now accounts for approximately 22% of pool starts in the U.S. This compares with 21% and 18% in 2022 and 2021 respectively, a clear indication of our leadership position in fiberglass driving this ongoing conversion progress.
Latham's fiberglass product sales accounted for approximately 73% of Latham's full year 2023 in-ground pool sales. Since 2019, we have grown our fiberglass product sales at a compounded annual rate of about 15%, and we have several strategic initiatives in process to leverage the share gains we have achieved to date in states like Texas and the Carolinas to further penetrate the sand states, notably California, Florida, Arizona, and Nevada, where concrete pools continue to dominate. The value proposition is compelling. Fiberglass pools have an average 25% to 30% lower upfront cost versus concrete, and a total overall lower cost of ownership of 35% to 40% over time. They can be installed as fast as one day by some of the best dealers and approximately 3 days on average for the majority of our dealers, compared to 3 to 6 months for most concrete pools.
Also, fiberglass pools are more eco-friendly than concrete pools, using 30% less chlorine, eliminating the pollution created by the production of concrete, and not requiring the ongoing maintenance, repair, and refinishing generally needed for concrete pools. In 2023, we had approximately 300 fiberglass brand dealers who sold at least 5 pools, which is about 100 more than we had in 2019 and speaks to the positive momentum for both fiberglass pools and for Lakeland's expansive dealer network. While dealer recruitment is important to our growth strategy, increasing dealer productivity is an even greater priority, and we've moved ahead with several initiatives in 2023 that have done just that. These include the Latham Design Center, which enables our dealers to easily create branded content and customized collateral materials, our Fiberglass Boot Camp training sessions, and of course our lead generation programs, which result from the direct consumer engagement that we continue to build in 2023.
Our marketing spend continues to yield very positive results. Recent data show that Latham ranks number one in fiberglass pools, and in 2023 our website traffic increased substantially over 2022 levels, pointing to pent up consumer demand for pools, which we believe is substantial. Our integrated marketing programs that inform and educate the consumer and feature regional builders have been successful in driving traffic, along with our robust tools that give homeowners the ability to design, plan, and actually visualize how a new pool will look in their outdoor space. Through this direct engagement with consumers, we are able to provide our dealers with an increasing number of highly qualified leads in their respective markets. While fiberglass conversion represents Latham's largest growth potential, approximately 47% of our total 2023 sales came from our covers and liners product lines, the majority of which represent replacement products that are not as tied to new pool starts and are therefore more resilient during cyclical downturns.
We also continue to prioritize new product introductions within these categories to drive sales. In particular, our automatic safety covers, which can be used on any type of in-ground pool, experience increased consumer adoption and demand in 2023. In addition to their safety features, these covers provide the homeowner with significant energy, water and maintenance savings. And measured by Latham, our proprietary AI powered measurement tool for pool covers and liners, has been met with very positive dealer response and should continue to help drive demand for these product lines as we continue to roll it out through 2024. To sum up, there were many bright spots for Latham in what was a very difficult industry environment in 2023. We have entered the New Year, cautiously mindful that lower interest rates and improved consumer confidence levels are not likely to occur in time to benefit the 2024 pool buying season.
We do expect that there will be a tailwind as we exit 2024 and head into the 2025 season. Our conversations with channel partners and colleagues in the field and at recent trade shows, as well as our own data, indicate a high-level of consumer interest in pool ownership, but buying decisions are being delayed, particularly by those who plan to finance the purchases. We do not expect the projected declines in interest rates to occur quickly enough to impact our peak pool building season in 2024, and therefore we are managing to an approximate 15% decline in new pool starts in 2024. Within that context, you can expect Latham to continue to reduce structural costs, while maintaining investments in future growth and capability, so that we are positioned to rapidly capture share as pool starts increase, which we anticipate will occur in 2025.
Let me now turn over the call to our CFO, Oliver Gloe, who will provide a review of Latham's fourth quarter and full year financial results. Oliver?
Oliver Gloe : Thank you, Scott, and good afternoon, everyone. Please note that all comparisons we discuss today on a year-over-year basis compared to the fourth quarter of fiscal 2022 and full fiscal year 2022 unless otherwise noted. Net sales for the fourth quarter of fiscal 2023 were $91 million compared to $108 million in Q4 of 2022, reflecting lower volumes. Softness in demand was the key factor in the 23% decline in in-ground pool sales. Our other product lines were more resilient and helped to mitigate the quarter sales declines. Cover sales only declined 10% during the quarter to $32 million as we saw continued success in our winter covers and continued adoption of automatic safety covers. Liner sales of $13 million were essentially flat from previous year, driven by strong replacement activity.
Despite the decline in sales, our fourth quarter gross margin reached 23.3%, increasing 540 basis points, compared to the 17.9% reported in the fourth quarter of 2022. The strong showing resulted from the benefits of our cost reduction programs, lean manufacturing initiatives and site consolidation that more than offset low absorption due to reduced production volumes at our plants. SG&A expenses decreased to $24 million or 26% of sales from $33 million or 31% of sales during Q4 of 2022, reflecting ongoing cost containment programs and a significant decrease in non-cash stock-based compensation expense. Fourth quarter adjusted EBITDA was $10 million more than double the $4.4 million reported in last year's fourth quarter, driving a 680 basis point expansion in adjusted EBITDA margin to 10.9%.
Turning to our full year results, net sales were $566 million compared to $696 million in the prior year period. By product line, Latham's in-ground swimming pool sales for the full year were $298 million, down 23% year-over-year. As Scott mentioned, in-ground pool sales performance outpaced the U.S. new in ground pool installation market for 2023, which we estimate to have declined by 30% in 2023 compared to 2022. This is a strong indication of the positive momentum we have demonstrated in driving conversion to fiberglass pools, where our year-over-year sales declined 20%, or about 10 percentage point less than the overall market. Liner sales of a $128 million were down 16%, while cover sales of a $141 million declined 11%, reflecting softer homeowner demand in the current economic environment, partially offset by a pickup in demand for automatic safety covers.
Gross margin was 27%, compared to 31.1% in the prior year. Fixed cost leverage improved throughout the year and actually was a slight tailwind in Q4, but was lower for the full year. Margin headwinds continue to be partially offset by benefits from cost reduction programs, as well as our lean driven site consolidation initiatives, where we have reduced the number of production sites, while maintaining capacity. SG&A expenses decreased to $110 million from $147 million in fiscal 2022, reflecting a $28 million reduction in noncash stock based compensation expense, as well as the benefits from our various cost reduction actions. Excluding noncash stock-based compensation, SG&A was $92 million a decrease of $8 million or 8%. Adjusted EBITDA was $88 million compared to a $143 million in the prior year, resulting in an adjusted EBITDA margin of 15.5% compared to 20.6% in 2022.
Turning to the balance sheet, we ended the year with a very strong financial position. Net cash provided by operating activities more than tripled to $116 million for full year 2023, which reflected the cash generation capability of Latham's business, augmented by the benefit from inventory reduction. The strong cash flow performance yielded a net cash position of $102.8 million at year-end, giving Latham substantial financial flexibility to navigate a range of economic scenarios. We also repaid $13 million of our term debt in 2023, ending the year with a total debt of $301 million and a net debt leverage ratio at $2.25, well below our debt covenant of $5.5. Capital expenditures were $33 million for full year 2023, compared to $40 million in the prior year.
Now that we have completed investments in our new Kingston facility and integrated our acquired fiberglass manufacturing assets in Seminole, Oklahoma, we expect to return to a more normalized CapEx run rate for the business. Turning to our outlook for fiscal 2024, as Scott noted, while we anticipate increased consumer interest in pool buying from easing interest rates in 2024, meaningfully lower rates are not expected to occur in time to benefit our 2024 pool billing season, which peaks in Q2 and early Q3. Although we are managing to a down year in 2024, we are optimistic that we are reaching the bottom of the cycle and are planning for a recovery in U.S. pull starts to be realized in 2025. Against this backdrop, we are providing 2024 guidance of net sales of $490 million to $520 million that reflects our expectation that our sales will outpace new U.S. pool starts due to continued fiberglass conversion.
Adjusted EBITDA is anticipated between $60 million and $70 million and assumes stable pricing, continued investment in sales, marketing and engineering and R&D to accelerate the conversion to fiberglass, ongoing digital transformation programs, and normalized performance based compensation. Capital expenditures are projected to range from $18 million to $22 million and include continued investments in new cost reduction and lean initiatives, new fiberglass models, manufacturing facility improvements, digital transformation and ongoing safety initiatives. As we enter 2024, we are seeing a return to a normalized seasonal sales cadence reflecting historical backlog levels and distributors taking a cautious position early in the season. We expect total Q1 sales of between $98 million and $104 million and adjusted EBITDA of between $6 million and $8 million.
As Scott noted earlier in today's call, we have responded to difficult market dynamics with cost reduction actions that have reduced our manufacturing overhead headcount and spend resulting in $20 million of reduced spending in 2023 with an additional $4 million carryover benefit to be realized in 2024. We continue to focus on enhancing our productivity and executing on value engineering and lean initiatives. Our balance sheet remains in excellent condition. In addition to repaying $13 million of debt in 2023, we paid down another $18 million in debt earlier this month and we anticipate generating positive operating cash flow in 2024. Given the economic outlook, we continue to be thoughtful and disciplined in our capital allocation strategy.
With that, I will turn back the call to Scott for his closing remarks.
Scott Rajeski: Thank you, Oliver. As you have heard, Latham has entered 2024 in a very strong financial position. Our priorities are clear. Continue to drive the adoption and awareness of both fiberglass and automatic safety covers, which will lead to increased conversion of fiberglass pools and growth in auto covers as more consumers purchase them for peace of mind. Continue to gain additional operating efficiencies through our ongoing value engineering and lean manufacturing initiatives, and maintain a strong balance sheet. The long-term fundamentals of our industry are very compelling. Outdoor living remains one of the fastest growing categories in the repair and remodel sector. Pool ownership is a natural addition for consumers who are spending more time in their homes and want to fully enjoy their outdoor spaces while building the value of their homes.
Additionally, the value proposition of fiberglass products provides an excellent opportunity for consumers to become pool owners and gives Latham an excellent platform to drive accelerated growth. The actions we took in 2023 and our priorities for this year should enable us to outperform the market again in 2024 and to achieve meaningful share gains and expanded margins and profitability as the pool industry conditions improve. Operator, I would like to open the call to questions.
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