Latham Group, Inc. (NASDAQ:SWIM) Q1 2024 Earnings Call Transcript May 11, 2024
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 First Quarter 2024 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 first quarter 2024 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 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 afternoon, everyone, and thank you all for joining today's call to review our first quarter 2024 results and discuss our latest business trends. In terms of key takeaways. First, we were pleased with our first quarter results. They represented a solid start to the year and exceeded the guidance we provided at the time of our fourth quarter conference call in March. Second, our performance demonstrated our ability to execute effectively during periods of uneven order flows and reflects the benefits of our reduced cost structure and actions we have taken to accelerate our value engineering efforts and lean manufacturing initiatives. These actions continue to drive ongoing production efficiencies and incremental capacity in our plants, providing us with more flexibility to serve customers with our industry-leading lead times.
And third, we continue to maintain a substantial cash position even after the usual seasonal outlay for working capital and an $18.8 million debt repayment. This cash provides Latham the significant resilience to manage through soft business conditions for the pool industry and the resources to take advantage of opportunities to drive future growth. Taking a closer look at Q1. After a slow start to the quarter, we saw a significant pickup in orders starting in mid-March. Our operations team was able to do a great job on execution, achieving lead times of 3 to 5 days. Fiberglass pool sales, while down year-on-year, showed relative strength and continue to represent the majority of our in-ground pool sales. On our last earnings conference call, we cited Latham's priorities for 2024.
The first was to continue to drive the adoption and awareness of both fiberglass and automatic safety covers. And in the first quarter, we made considerable progress in the areas of new and refreshed product introductions as well as new dealer wins. During the quarter, we launched the Enchantment plunge pool series for our California plant, which serves the important California, Arizona and Nevada markets. Plunge pools are becoming increasingly popular as they provide the homeowner with space saving, lower cost options that are ideal for aquatic exercises and rehabilitation. In the first quarter, we also relaunched the Providence and Tuscan series in North America, which is a very trendy rectangular pool with an attractive site entry feature.
Additionally, we put the finishing touches on a new fiberglass pool model that has a broad array of features, including swim-up seating and a built-in spa that is currently available to our largest dealers. We are also in the early stages of rolling out a line of plunge pools in our vinyl liner inground pool category, more on that in the coming months. With respect to automatic safety covers, which are another key priority for us, we continue to work with our pool cover distribution network as well as many of our competitors' dealers, including concrete pool builders to advance awareness and adoption of these products. In addition to providing unparalleled protection, these auto covers offer significant resource savings resulting in up to a 70% reduction in both pool heating costs and chemical usage.
We are continuing to drive operational improvements in our auto cover plants to reduce lead times and gain incremental capacity. Our operations team is also working on changes to our product lineup that will expand price points and capabilities and we're making it a key focus to ensure that all of our newly launched pool models in our inground category are auto cover ready. We also continued the successful rollout of Measure by Latham, the first tool of its kind to simplify the pool measurement and quoting process for liner and cover installers. This easy-to-use AI-powered device provides dealers with high-performance measuring accuracy with precise specifications for swimming pool covers and vinyl liners, all within minutes and all integrated with our project management portal, which enables dealers to quickly and easily receive quotes and submit and track orders.
As you can imagine, this tool has been met with a very positive response from our dealers and contractors. We will continue its rollout to make sure all of our dealers have it and all the functionalities in place ahead of the 2025 pool building season. Latham's extensive and appealing product lineup, together with our industry-leading service levels and best-in-class lead times are strengthening our ability to attract new dealers. In the first quarter, we were able to convert several new dealers in the U.S. and Canada that we believe will enable us to continue to drive penetration and growth in several key markets. For some of these dealers, while they are established pool builders, this will be their first experience with fiberglass products.
A luxurious pool area surrounded by lush vegetation, highlighting the customer experience of the company's products.
They are motivated by the much shorter installation time, which, of course, very attractive to their end consumers as well as the ease of installation and the aesthetics of the product, both of which often result in additional leads for them from neighboring homeowners. In working with Latham, even the most experienced new dealers go for a boot camp to be trained in fiberglass installation to maximize their success. The second priority for 2024 that we mentioned on our last earnings call is our programs to continue to gain additional operating efficiencies through value engineering and lean manufacturing initiatives. These structural cost benefits will have a long-term positive impact on Latham's margin profile and will be an important factor for us in 2025, when we expect improved market conditions to drive increased volumes.
For example, the initial benefits from these programs and our largest liner and cover manufacturing plant, including 8% improvement in labor efficiency, a 20% increase in throughput and an overall improvement in employee health and safety, all of this contributed to our first quarter margin performance. Lastly, we prioritized maintaining a strong balance sheet to both retain our resilience in today's soft market environment and retain the resources to support future growth. Oliver will provide details on that in a moment, but I can say that we've been very disciplined in our spending and have the operational and financial flexibility to flex up and down in response to market conditions as well as take advantage of opportunities to drive future growth.
With that, I will turn over the call to our CFO, Oliver Gloe, for our first quarter financial review. Oliver?
Oliver Gloe: Thank you, Scott, and good afternoon, everyone. Please note that all comparisons that I will discuss today on a year-over-year basis compared to the first quarter of fiscal 2023, unless otherwise noted. Our first quarter results exceeded our expectations, reflecting strong execution, cost savings and our lean and value engineering initiatives. As we anticipated, first quarter comparisons reflecting the challenging macroeconomic conditions that have reduced pool starts. Net sales were $110.6 million compared to $137.7 million in Q1 of 2023, down $27.1 million or 19.7%. The 23.9% decline in inground pool sales was primarily due to lower packaged pool demand, while fiberglass pool products continue to show relative strength and continue to account for the large majority of Latham's inground pool sales.
Liners remained more resilient, declining 9.2% due to the replacement cycle of these products, and covers were down 17.9%. We were pleased to see our gross margin increase 350 basis points to 27.7% despite lower sales. This increase was driven by carryover benefits from the cost reduction actions we took in 2023 as well as lower raw material costs and lean manufacturing initiatives. Year-on-year comparisons also benefited from two meaningful headwinds impacting Q1 2023. consuming the remainder of our high-cost inventory and our inventory reduction programs, which resulted in under-absorption at our plants. These factors more than offset the impact of lower utilization from lower volumes and wage increases. SG&A expenses decreased to $26.3 million, down $6.8 million, primarily due to our ongoing cost reduction efforts and a $5.1 million decrease in non-cash stock-based compensation expense.
For 2024, non-cash stock-based compensation is expected to amount to approximately $8 million. Net loss was $7.9 million or $0.07 per share compared to a net loss of $14.4 million or $0.13 per share for the prior year's first quarter. Adjusted EBITDA of $12.3 million was up from the prior year period by $1.3 million or 11.4% compared to $11 million in Q1 2023. This strong performance is the result of solid execution in a difficult market, primarily due to cost savings and progress made with our lean and value engineering initiatives. Adjusted EBITDA margin was 11.1%, a considerable improvement compared to 8% in the prior year period. As you know, our full year 2024 guidance implies decremental EBITDA margins for the remainder of 2024, primarily reflecting our planned investments in future growth.
Notably, this involves continued investments in sales and marketing, engineering and R&D to accelerate conversion to fiberglass pool products, ongoing digital transformation programs and normalized performance-based compensation. Turning to our balance sheet. We continue to maintain a strong financial position with cash of $43.8 million at the end of the quarter after the repayment of $18.8 million in debt in Q1. Net cash used in operating activities was $34.5 million, reflecting a seasonal increase in net working capital of $41 million as the company enters peak pool selling season. Total debt for the period was $282.8 million with a net debt leverage ratio of 2.7, and our capital expenditures were $5.3 million for the first quarter in 2024, considerably lower than the $9.9 million in the prior year.
We expect a comparable run rate in quarterly CapEx throughout 2024. Our cash position and capital expenditures are in line with our expectations and reflect seasonality as well as our conservative capital allocation strategy given the uncertain economic outlook. That said, we will continue to deploy our capital opportunistically to best position us for accelerated profitable growth as market conditions improve. First quarter results, together with our current visibility, underpin the guidance metrics we provided at the time of our fourth quarter 2023 earnings release. With that, I will turn the call back to Scott for his closing remarks.
Scott Rajeski: Thank you, Oliver. While the first quarter represents a small percentage of our annual revenues and adjusted EBITDA, we are very pleased with how well our teams executed amid a choppy start to the season. Latham's strong execution, cost savings and lean and value engineering initiatives all contributed to quarterly performance that exceeded our guidance and demonstrated our ability to execute efficiently. We appreciate the commitment and engagement of Latham's team members throughout our organization who made this possible. We also want to thank all of our customers and suppliers who continue to be strong supporters of Latham. Our first quarter results support our full year guidance expectations for 2024 and underpin our confidence in Latham's ability to effectively navigate the current market environment and emerge as an even stronger company. Operator, I would like to open the call to questions.
