Good afternoon, and welcome to the Latham Group third-quarter 2024 earnings conference call. (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.
Thank you. This afternoon. We issued our third 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 Glow.
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.
Thanks Casey and thank you all for participating in today's call to discuss our third quarter results and review our business outlook. Our third quarter performance was mostly consistent with our expectations and again demonstrated both Latham's resilience and progress within a challenging industry environment.
In terms of this quarter's key takeaways. First market conditions through quarter end played out in line with our initial expectations for an approximate 15% decline in new pool starts this year. Second, with this as a backdrop, we continue to drive awareness and adoption of fiberglass pools and automatic safety covers two key growth areas for LAA.
Third, our lean manufacturing and value engineering programs together with improved procurement activities resulted in meaningful cost reductions that led to stable gross profit and expanded gross margin in the third quarter on lower year on year sales. And lastly, we ended the third quarter in a strong financial position with cash of approximately $60 million after having dispersed approximately $65 million for the covers Star Central acquisition and repaid approximately $20 million in debt in the first nine months of this year.
Latham's growth strategies and leadership position in fiberglass pools are enabling us to outperform this industry downturn and are positioning us as a prime beneficiary of a market recovery. We have the broadest lineup of pool configurations, the widest range of price points and the greatest array of specialty features including spas and tanning ledges. Also with 12 fiberglass manufacturing facilities globally. We are best positioned to serve the major US markets and Canada in the third quarter. Latham's fiberglass pool sales have continued to show relative strength. Their market differentiators are compelling, cost efficient, fast and easy to install and requiring fewer chemicals to maintain.
And our commitment to innovation to address and anticipate consumer preferences is another element driving increased adoption of fiberglass pools. For example, we added to our plunge pool offering earlier this year with the launch of the enchantment series in several markets with a plan to expand to all of the US in 2025. While plant pools represent only a small percentage of our total in ground pool sales. They are a growing category for us as they appeal to consumers. Looking for space saving, affordable options for aquatic exercises, rehabilitation and recreation.
These attributes are particularly attractive in the sand states where we are deploying more resources to gain share for fiberglass in the coming years. Based on our year-to-date results, we expect fiberglass pools to account for about 75% of our total in ground pool sales in 2024. In line with our original projection.
We also significantly strengthen our position in automatic safety covers in the third quarter. With the August 2nd acquisition of Carstar Central, the key integration activities are complete and revenue synergy initiatives are underway. We are entering the 2025 season with an integrated marketing and sales strategy aimed at accelerating the growth of this stand out product line.
Latham's automatic safety covers provide unparalleled safety and other significant operating cost savings including reductions in heating and electricity costs and water and chemical usage for the homeowner.
As a reminder, these covers can be fitted to all pool types and we see opportunities to leverage covers Star Central long standing relationships with pool builders and its markets to increase their awareness of the five or less pool value proposition.
As Oliver will detail in a moment, we were pleased to be able to maintain third quarter gross profit levels that were stable with the comparable period last year and expand gross margin by 250 basis points. Despite lower sales, these results reflect the substantial benefits that Lake has gained from actions over the last two years to reduce cost and drive production efficiencies, year-to-date. We are tracking nearly $8 million in savings from our lien manufacturing and value engineering initiatives. With the largest portion coming from our fiberglass plants. Additionally, our focus on safety has yielded a significant drop in incidence across all manufacturing locations.
We believe that Latham's operational and financial model has structurally changed which has increased our underlying earnings capabilities amid an industry recovery and will enable longer term margin expansion. And we're increasing our investments in sales and marketing and product development initiatives to ensure that we capture an incremental share of in ground pool sales once volumes rebound, the organic growth strategies we are executing are centered on driving adoption of fiberglass pools and automatic safety cars. Additionally, we are focused on continuing to gain share in the same state where we are underrepresented.
We're evolving our mix of pool styles to offer more rectangle and plunge tools and more pool spa combos. A laser focus on master plan communities in our target markets where we have already have seen strong lead generation and the continued conversion of top builders who recognize the benefits of the industry leading lead times and ease of installation associated with Latham's fiberglass pools. We plan to execute on our goal of increasing the adoption of automatic safety covers in tandem with our plans for fiber less pool market share gains as well as through channeling the combined resources of Latham and covers Star Central to effectively reach the builder and consumer markets.
Importantly, all the capabilities to achieve our growth objectives are already resident at LAT.
We now have an impressive team in place that is dedicated to driving our growth in the sand states and we are confident in their abilities. Additionally, we have the financial flexibility to consider strategic acquisition opportunities like Carstar Central that are a creative and provide us entering the new markets, strengthen our position in existing geographies or enable us to accelerate growth of existing product lines.
Lastly, we are pleased to report that none of our employees in areas impacted by the recent hurricanes were physically hurt in our whole plant did not suffer damage beyond several fallen trees. However, the plant was shut down for about a week due to power loss and limited site access and customers in Florida, Georgia and the Carolinas pushed out some orders given this along with our visibility through year end. Now that much of the pool building season is behind us. We have narrowed our guidance ranges for net sales and adjusted even D A. Now, I would like to turn over the call to our CFO Oliver Glow for a 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 third quarter and first nine months of fiscal 2023 unless otherwise noted net sales for the third quarter were $150.5 million compared to $160.8 million per year. Down $10.3 million or 6.4%. This decrease is primarily due to lower sales volumes which is consistent with our expectations for a 15% decline in new pool starts in 2024.
With the year-to-date outperformance driven by our leadership in the faster growing fiberglass pool and outer cover markets across our product categories. In ground pool sales declined 9.8% in the third quarter. Liners declined 8.1% and covers were approximately in line with prior year, aided by the acquisition of covers Star Central gross margin expanded by 250 basis points to 32.4% in the third quarter. Even in light of lower utilization rates reflecting the contingent success of our lean manufacturing and value engineering initiatives, as well as procurement improvements, driving production efficiencies that resulted in lower material costs as expected.
Gross margin also benefited from the accretive impact of our acquisition of Kars SG A expenses increased to $28.3 million up $4.9 million primarily due to an increase in spending on sales and marketing initiatives as we continue to invest in future growth and position ourselves for a rebound in new pool starts. It also reflects an increase in performance based compensation expense as well as the addition of cover Star Centrals SG&A expenses net income was $5.9 million or $0.05 per diluted share compared to$ 6.2 million or $0.05 per diluted share for the prior year's third quarter.
Adjusted EBITDA was $29.8 million. A decrease of $6.3 million or 17.3% from last year's $36.1 million. And our adjusted EBITDA margin was 19.8%, a 260 basis point decline from our 22.4% in the prior year period.
Now turning to our year-to-date results, comparisons, net sales were $421.2 million compared to $475.6 million. Net income was $11.3 million versus a loss of $2.5 million. Adjusted Ebida was $76.6 million approximately in line with $78.1 million in the prior year. Adjusted EBITDA margin increased 180 basis points to 18.2% from 16.4%.
Turning to our balance sheet and cash flow statement. We continue to maintain a strong financial position with cash of $59.9 million at the end of the quarter after the purchase of covers are central for approximately $65 million in August and the repayment of approximately $20 million of that year. Today, we continued to effectively execute on cash flow generation with net cash provided by operating activities of $37.2 million in the third quarter and $55.2 million for the first nine months. This includes over $22 million of inventory reduction, year-to-date.
Total debt as of the end of the period was $282.8 million with a net debt leverage ratio of 2.6. Up from the prior quarter. Primarily due to the acquisition of cover star settle. On a performer basis. Our net debt leverage ratio was 2.4 at the end of the quarter.
Our capital expenditures were $4 million for the third quarter and $13.9 million for the first nine months of 2024. CapEx continues to be in line with our guidance of approximately $5 million per quarter and our CapEx expectations for the remainder of the year remain unchanged.
Turning to our acquisition of Carstar Central in August. The integration continues to progress as expected with key integration activities completed and revenue synergy initiatives in progress, financial performance for the third quarter and our expectations through year end are in line with our prior guidance. We expect Carstar Central to add $20 million of net sales and expand our total company just to leave with our margin by approximately 140 basis points on an annual basis.
We continue to expect an approximate 15% decline in new pool starts for 2024 with the bulk of the pool building season now concluded based on our current visibility through the end of the year, we have narrowed our guidance ranges for net sales and adjusted EBITDA.
Our net sales guidance range for 2024 is now $500 million to $510 million, which as Scott explained relates to the anticipated impact from the recent hurricanes and our visibility through the end of the year.
We are also narrowing our adjusted EBITDA guidance to a range of $77 million to $83 million and reaffirming our midpoint of $80 million.
Our CapEx's guidance remains the same at $18 million to $22 million.
As we have previously noted, our guidance for the remainder of 2024 reflects the normal seasonal slowdown in the back half of the year. And we'd like to reiterate that year over year. Comparisons for adjusted EBIDA are more difficult now versus the first half of 2024.
This is due to two factors. First, the second half of 2023 benefited from the positive impact of our previously announced restructuring projects. And second in 2024 we've increased our investments in our sales and marketing initiatives to position Latham for accelerated growth. When the market recovers with that. I would tell him to call it back to Scott for his closing remarks.
Scott Rajeski
Thank you, Oliver. The long term growth opportunities for Latham are substantial as the largest in ground pool manufacturer in North America and the market leader across our product portfolio. We are positioned to benefit from the strength of the outdoor leading category as consumer confidence builds and financing pool ownership becomes more affordable. In the meantime, we continue to invest in growth initiatives while driving operating efficiencies throughout the organization to wrap up. I would like to thank our employees, partners and customers for enabling Latham to continue to outperform the industry and retain our recognition for quality products and superior service levels. Operator, I would like to open the call to question.
Operator
(Operator Instructions) Ryan Merkel, William Blair.
Ryan Merkel
Hey, good afternoon. Thanks for taking the questions.
Scott Rajeski
Hey, good afternoon Ryan.
Ryan Merkel
So first.
Off. Great job on margins. And Scott, you said something I want to dig into a little bit. You, you, you said that you think you can significantly increase profitability. You structurally change the business for higher margins. You just unpack that a little bit more and can we get back to 20% plus EBITDA margins in a recovery scenario?
Scott Rajeski
Yeah. So right, I'll give you a kind of high level and let let Oliver kind of break it down a little bit, but, you know, let's just go back and revisit, you know, two Q this year, go back to three Q last year where we were, you know, over 20% even the margins of both of those quarters. You know, if you go back and revisit the restructuring initiatives we had in 23 that carried over in the early '24 you know, which included, you know, closing several facilities.
You take that you combine that with all of our value engineering, the lien event, the cost reduction initiatives we've been driving trying to get to an ongoing underlying, you know, 3% roughly of of, you know, you know, think of cost reduction initiatives on a material basis going forward. I think all of that helps plus we've invested in the business to be much bigger scale than we have been here in the last couple of years, right?
Invest in sales marketing, you know, the Kingston facility coming online standing up, Oklahoma, you know, we've positioned ourselves to be a much bigger company and I think you've heard Oliver speak in the last couple of calls, right? The amount of margin that drops through with a little bit of incremental revenue has been pretty impressive for us. So I think that's the framework of all of that and I'll maybe you want to give a few more, you know, highlights there.
Oliver Gloe
So I think you, you, you hit it, I mean, we, we have reduced our cost base and now able to supply a bigger, bigger business, right? And then that's, that's a comment that I would say relates to the capacity we have in all plans, we're very pleased with where we are. As well as you know, the backbone we have created in, in, in the various CN A function.
And so, you know, the drop through, you know, incrementals on, on on margin on volume that comes as the market and new pool sales recover. I think we will compare favorably to to, to the recommend we've seen over the last few years with regards to your question about ebida margins of, of, of 20%. I mean, we, we have fit a few data point. You know, over the last 45 quarters in, in, in which we have actually exceeded that not no grant that was towards the, you know, peak of our season last year of this year. But I, but I certainly believe that with a little bit of help from the market and especially with our structurally cost change cost base, 20% is definitely our objective to return to and eventually exceed.
Ryan Merkel
Yeah, that's great. Okay, that's, that's exciting. I know we're at the end of the pool season here, but I just want to ask when you, when you talk to dealers, you know, how are they feeling about next year, you know, if interest rates come in which it looks like they will, you know, when you see people get off the sidelines and maybe move ahead with the pools. And, you know, also you, you mentioned increased spending on sales and marketing. Can you talk about that and what that might mean for next year too?
Scott Rajeski
Yeah, so, you know, in terms of looking out at 25 you know, dealers are still focused on, you know, wrapping up the 2024 build season here. You know, I think they're trying to, you know, get 24 wrapped up, closed up. I mean, we had almost 70 degrees here in Albany, New York, which this time of the year is unheard of so and we, we've seen continued good progress with dealers.
You know, I, I, I think I said, you know, several times now, you know, we don't see a scenario next year where we pool starts to be down or let's say the trough of this year of you know, called a, you know, 60,000 kind of number down 15% you know, which I think we, we kind of called early in the year. You know, look, I think once we see a couple of things happen in the market out there, Ryan, you know, we, we've got to get consumer confidence back up and, you know, hopefully, you know, we, we clear the election here today and, you know, things are going well from there on out.
You know, we see the fed continue to reduce interest rates, which the indication is that, you know, we'll see another rate reduction later this week and that will continue, you know, over the next several, several quarters. I think we got to get that work through the system. I think, you know, that half of 25 we'll see people start to kind of get back off the sidelines, jumping back in is all that works through the system. But I think overall dealers feel, feel pretty good about '25. You know, I'd say better going into 25 than they did going into the 24 just because of that expectation of the market really and in current situation shouldn't, shouldn't really get worse.
Oliver Gloe
If I, if I may answer your question, you know, building that muscle and building, building up G&A. So you've heard us talk about in Q3, we, we invested in, in, in the sales and marketing that is targeted towards, you know, the sense they, let's say in quarter the investment was about $1.5 million to $2 million. That's our feet on the ground leading us into, into 25 and really driving that awareness and ultimate of fiberglass school in the targeted, you know, ge geographies, right? These are all feet on the ground. Marketing very targeted marketing that depending on market feedback and we're not giving, you know, guidance on on 25 today, but, but that can be dialed up and down as the, as we get feedback from the market.
Scott Rajeski
Yeah, and I think one more add on to that as well, Ryan, you know, you know, continue to invest in the product offering out there in the marketing initiatives. And I think recently we, we've announced, you know, some new tools launched on specific for the same state strategy that Oliver just mentioned. We just launched our whole new a rebranding of the plunge pool line up both for, you know, not only for fiberglass, which we've had for a while, but also a more affordable vinyl liner line up as well, which I think should resonate.
And we also just recently kicked off a new campaign, should say it's kind of a refresh, it's called Good To Get Out of the Stone age. So the campaign we're running in in Texas, we'll, we'll be launching it here in Florida shortly as well. You know, again, just talk about all the benefits of fiberglass concrete pools.
And this is a, a co branded effort we're doing with dealers in particular M SAS and target markets to drive the awareness at the consumer level of the benefits of that. And I, and I think that's where, you know, we're just very focused on trying to go attack those markets where we're under penetrated and spending money. Now, knowing that when the recovery comes, you know, we'll be well positioned to take, take full advantage of it and continue to outperform the market like we have been doing over time.
Ryan Merkel
Got it very helpful. Thanks so much. Pass it on.
Operator
Andrew Carter at Stifel. Please go ahead.
Andrew Carter
Hey, thank you. Good evening. First off, I know you, you mentioned the hurricane. It did push some sales, into, into the, into the fourth quarter, push some shipments around. Could you quantify the shipments that were missed? And, and also, I guess the fourth factor down a week with the extra cost in the quarter incurred around the hurricane. Thanks.
Oliver Gloe
Andrew. Yeah, let me take that one. So, you know, we, we saw certainly in preparation of the hurricanes and then, then we had, you know, Heleen and in, in, in, in the third quarter, we saw some softness, right? Plus, in addition, you know, we, we have the plant shut down for, for a week. You know, and in terms of quantifying, you know, between, between products being, being rescheduled to, you know, from Q3 into Q4, you know, few cancellations, but then also, you know, softer demand. You know, I would say it's, it's probably between 1.5 million $and $2 million in Q3 and, and probably, you know, at least an equal amount in Q Four.
Andrew Carter
Helpful. Thank you. So a second question wanted to ask just going back on the gross margin profile between the product lines. Could you remind us of kind of the gross margin differentials and therefore with kind of the in ground liners? I think, I'm sorry, sorry, in ground pool business and I think 51% of sales versus I think peak it was 60. How much of a gross margin headwind that is overall. Thanks.
Oliver Gloe
Yeah. Well, thanks for the question. So, you know, the the gross miles and profile between the various product categories. Actually, they, they're all within walking distance with you know, to each other. There is a lot of, you know, that's why you never hear us talk about mix. There's really not a lot of difference between, you know, the lowest, the, the the category with the lowest gross miles to the highest gross mi.
Andrew Carter
Fair enough. I'll pass it on.
Oliver Gloe
Thanks Andrew. Thank.
Operator
Tim Wojs, Baird.
Tim Wojs
Hey, hey guys, good. Good afternoon. And you know, likewise just a good job on the margins. Maybe just my first question. Just Scott, just the Sand States. I mean, you've talked about, you know, trying to invest more there and make that a bigger part of port of your portfolio. Could you just kind of remind us like how big the Sand States are today, you know, kind of relative to the existing pool market and, and where you're kind of targeting us to go.
Scott Rajeski
Yeah. So, you know, I think there's a lot of different definitions out of sand states and what stage you quantify and, and the exact numbers, you know, I think we, we like to call it the five, right. Florida, Texas, Arizona, Nevada, you know, California. And look, I think we've got some pockets of decent business and we get, we do a decent job in California, maybe more north and south. We, we've had some really decent success with a lot of our fiberglass dealers in Texas, very little presence in Arizona, small and in Nevada.
And I'd say again, small in, in Florida. I think if you look at those states together, you know, some folks will say it's probably 70% to 75% of all new pool starts and we tend to be under penetrated there. So, what we're doing right is we, we said, look, let's, let's make a push. That's where our fiberglass facilities are mostly located in those areas of the country.
So we should have a pretty good cost advantage with shipping, getting pulled into those markets. We've never really targeted these planned, you know, home communities that are out there and, and look, we, we've just really never dedicated, you know, a lot of selling and marketing dollars to those regions. So we've, we've now stood up dedicated teams in those areas.
We've got dedicated marketing initiatives. We've done a new blitz of recruiting new dealers into that area. I think. Maybe one or two calls ago, I think maybe two quarters ago we talked about, you know, Babcock Ranch and, and getting a dealer from the north up here down in that market. Conquered pools. You know, we just co co hosted a Founder's Day there in that, that area. And I think, you know, this will be a big push for us to really get into those markets and show that fiberglass can resonate.
And again, partnering with the right dealers and that's what we've got success in Texas, finding the right dealers who believe in the product, having the right marketing programs and doing that push. And we just felt now is the time to kind of, you know, put the focus there to try to get, you know, a higher percentage of share. And as pool starts rebound across all of North America and we can pick up share there. That's what we're looking to, you know, kind of grow our top line in and out for market as we move forward.
Tim Wojs
Okay. Okay. That's, that's really helpful. Thanks. And then just, I, I guess, you know, I know you're not giving guidance for, for 2025 but could you just kind of remind us or, or kind of outline what you, you kind of want to target for outgrowth relative to the full market. So it pull starts are, you know, grow 5% or something like that in any given year.
You know, just with fiberglass and automatic covers and, and some of the opportunities to, to get bigger in, in some of the larger pool markets. I mean, what, what should the out performance relative to the underlying pool market be on, on kind of an annualized basis over the intermediate term?
Scott Rajeski
Yeah. Well, you know, it's a, it's a tough one to answer without really getting into what a guide would be. But I think if we frame it up this way, if we just kind of look at 2024 you know, our, our view of market being down, say 15% I think, you know, you, you, you may argue and where the numbers may land at the end of the day, Tim is, it could be down maybe even closer to 20%. So if we land at the midpoint with our guy down, you know, in the 10% to 12% range, give or take, you know, you can kind of start to get a feel for what the out performance now. That's not a decline, right?
But I would think we see the same type of, you know, expectation on the upside. You know, you know, the liner and cover business with that strong recurring base of business. You know, we'll, we'll have, you know, the auto cover on business is continuing to drive penetration, and putting more covers on pools with the existing kind of flat base fire self perform in the market overall.
So, you know, we, we, we should, you know, see an outperform overall to peg it to an actual percentage right now, I think is a little premature, but that's kind of what we've done over the last, you know, you can call 13%, you know, years or so in this business is outperform both the up and the down and that's really what, you know, the team is focused on. We are kind of really kicking off the 2025 season now as we, you know, wrap the 24 build season up.
Tim Wojs
Okay? Okay. Sounds good. Good luck on the rest of your guys. Thanks.
Operator
Greg Badishkanian, Wolfe Research.
Greg Badishkanian
Hey guys, thanks for the question. This is Scott Stringer on for Greg. I wanted to ask another gross margins question. So that's sort of been hard to pin down. Just one of the pluses and minuses for four Q specifically. Where, where are you guys thinking? We should, we should be here on the.
Street.
Oliver Gloe
And because you said Q3 or Q4.
Greg Badishkanian
Four Q, so this upcoming quarter.
Oliver Gloe
Yeah. So the, the, the put and takes, you know, so again, we, you know, we, we continue to to estimate the year over year market decline as the new tool starts to be 15%.
So that usually gives us about a, you know, let's say 200 basis point of, of, of, of headwind. Here, I think the single largest you know, tailwind is the the combined impact of our new and value engineering you know, initiatives that will will, you know, are almost upsetting entirely the the volume volume impact.
And then the the out performance might really come from, you know, supplier optimization that the team has done a great job of divers all supplier base that we're not able to leverage that before, you know, quantity supply stability, but also for economic reasons. And then a couple of smaller tail wins that I would say are more in, in, in, you know, under the under the headline of general cost control and really being diligent and disciplined on, on how we manage our plans.
Greg Badishkanian
Okay. Got it. And for my follow up question, I just saw cover sales were positive this quarter. Is that just the cover star acquisition or is there some sort of difference in business cycles between the se the segments that you guys are seeing?
Oliver Gloe
No, it's, it's, it's really, it's it's really driven by the, the covers the central acquisition with all of you, you know, you see more of the trends you would expect them and the covers star central acquisition, as we said, you know, prepared remarks, the integration is going really well.
You know, the the back office integration, all the key activities are, are, are mainly complete with, with not really the the planning around the the revenue synergies in this initiative and in full gear. We had guided you know, last quarter that the incremental revenues is about $20 million on any those base. The EBITDA percentage list is about 140 basis points. We took up our guide last time. You know, this year about $5 million, we, we earmarked for power, our central on that sales based and $3 million in terms of adjusted EBIDA and all of that after now, I guess three months, August September and in October 3 months under the bill that I think we're confirming, you know, those, those, those assumptions.
Greg Badishkanian
That's all helpful. Thanks a lot.
Oliver Gloe
Thank you.
Operator
Matthew Bouley, Barclays.
Matthew Bouley
Hey, good afternoon guys. Thanks for taking the questions on your various products that go through distribution. So the liners and covers and maybe the package pools. I'm curious if, if you've announced any price increases into the channel for 2025 and also any color on kind of how you're treating the early buy with your distribution customers and, and just kind of the, you know, where they are from an inventory level and kind of, you know what you're expecting around, kind of filling the channel into the, into the new year.
Scott Rajeski
Thank you.
Yeah. So, so Matt, we, we've not had any formal price increase announcements across the board out there like the equipment guys did. And I think, you know, as we've evaluated, let's say, particularly the the product lines that go through distribution, which is really the the in ground rules, non fiberglass, right? The polymer and steel walls, liners and covers are all custom, right? That's a real time order we get. There's really, those really are not stocked products.
So, you know, we're, we're trying to hold price there. You know, we don't really, you know, see early buys the extent like the equipment guys do because again, most of our product is custom. We're designing a kit last minute. You know, I think with the distributors, you know, I think where we are from an inventory standpoint, looking at what they've done, let's say, continue to do through three Q. You know, I, I think they're at, you know, normalized levels now of what they want to hold.
And, you know, I would believe where we sit at this point is they're going to kind of play a little of a wait and see game to see how the season starts in, you know, late one Q of 2025 before they start, you know, buying, to stock products for the 25 selling season. And look, and I think the reason why they're able to maintain it, inventory levels low and not be placed.
A lot of stocking orders is our ability to serve them. You know, they, we, we're, we're turning orders around in some cases in two or three days for pool orders that they're getting stuff that they need. You know, clearly that, that it will be tough to do in a peak season when it bounces back, but we handle that all year this way. So we don't see any more de stocking likely to occur in that part of, of the channel.
Matthew Bouley
Got it. Okay. Yeah, thank you for that and thanks for clarifying some of what I asked there. I guess secondly, on the SG&A and specifically the, the sales and marketing investments. I just wanted to see if you could elaborate a little on, on, I guess like the intention there. Just given what we said earlier that hey, you know, market conditions, market growth, maybe we shouldn't get too excited about a sudden inflection yet. I just kind of given we're in this a bit of a, you know, kind of choppy bouncing along the bottom type market backdrop. You know, what's, what's the intention around putting dollars into sales and marketing today? And what would you kind of trying to accomplish ahead of that eventual market recovery? Thank you.
Scott Rajeski
Yeah, yeah. So, so that you know, you, you've been around this for a while, you know, it takes a while to get, let's say a fiberglass dealer stood up and, you know, up and running and on a, on a stable basis where they can rapidly grow their, their install base over time. So that's where we, we feel now is the time to start to, you know, go find dealers. We're heading into the off season, this is ideal time to do boot camps, do training, get to our dealer conference, have them attend all of our shows that we're doing, you know, so we can spend the next kind of say, 3 to 6 months, sign up training, developing, teaching.
Getting leads generated working with them with the business model, picking the right dealers and the right target markets we want to be and help them through. Let's say, what would be another flat market in 25 to get their first, you know, kind of say 1 to 5 pools in the ground.
What that will enable us to do is as we, let's say, exit the back half of '25 and the '26 we should have a new established dealer base in those sand states, fairly well trained, let's say the next wave of getting ready for, for 26 trained in the 27. And then, you know, our goal is to then teach these guys to get from 5 to 10, 10 to 20, 20 to 40 pools.
And we just feel now is the time to position ourselves where we are set with the right builders in the right markets, with all the right marketing initiatives, all the right programs, all the right legion set up. So we're not, let's say chasing our tails when this, this thing does eventually turn, you know, back part of 25 to 26 and 27.
Matthew Bouley
Yes. Got it. Great color. Thanks guys and good luck.
Scott Rajeski
Yeah, thanks that.
Operator
Susan Maklari, Goldman Sachs.
Susan Maklari
Thank you. Good evening everyone.
My first question is around. Hi. My first question is around your capacity and your utilization rates. As you think about the potential for demand to come back next year. How are you thinking about your ability to respond to that and, and to keep your service levels as as those volumes perhaps come move higher?
Oliver Gloe
Yeah, great, great question. Thank you very much student. So, you know, a few years back, we were serving a business with $
700 billion in revenue. You know, we were, we were at that point in time, we had free capacity, right? Since then, you know, our restructuring project took out some duplicative capacity. But then we created new capacity with the, with the build of Kingston in Ontario, as well as the extension in in Oklahoma Plus, we have created additional capacity through our lien manufacturing initiatives. That's a long way of saying that today we have versus three years ago, we have increased the decreased capacity. And, and, and back then, we were able to serve a business in excess of $700 million.
So, you know, we do have the the capacity that that, that we need to, you know, as the market returns. But also the other point I make is that we have the agility that it needs to, to capture the additional market opportunity when the market returns. We are in a seasonal business, we are used to ramping, ramping our sites up and down.
There's also a cyclical business, you know, today we have industry leading lead times and, and our plans have proven again the agility to cater to different demand scenarios.
Susan Maklari
Okay? That, that's helpful color and then thinking about the pricing dynamic for next year, you know, e even as rates come down, there's been so much inflation that's come through over the last couple of years in, in pools, would you be willing to take some of that pricing off if it meant that you could perhaps get a little bit more lift on the volumes?
Scott Rajeski
Yeah. So Susan, and pa part of I think the magic of our business is we've, we've been pretty successful being able to hold on to the price we pushed through to, let's say distribution and our dealers. And if you remember, right, we, we never really were able to fully offset all of the inflation we saw, let's say, to hold, hold margin of profitability levels.
I think the other important thing to think through is the cost of our product to the end consumer, which would stimulate demand as a percentage of the total backyard pool install. If you're talking a project that's, you know, $75,000 to $100,000 you know, our product costs as a part of that might only be 25% or 30%. So for us to try to, let's say, push $1000 reduction on a fiberglass pool or a couple $100 reduction on an in ground line or a cover the likelihood of that making it all the way through to the end consumer to stimulate demand of new pools installed with a lot of the liner is probably fairly, fairly small. Because that can easily be, be eaten up in the field during the build of the install.
You know, with, with delays. And, and weather out there. So that's what we feel pretty good on. But we do need to be careful with our pricing versus the competition, what the dealers are buying the product for, you know, what distributions passing on to a dealer. So, you know, we, we, we kind of monitor all of that. And look if we need to do certain things in an area, take care of one of our builders and dealers, to be competitive and, and they think it will stimulate demand. We look at it but we don't, we don't see a need to do any kind of wholesale price reduction across the board.
I think it's more maybe a resetting or adjustment of, of what it costs to get a pool installed in the backyard. And there's a lot of other optionality that, that consumers can do in terms of maybe a little bit less concrete, smaller pool, you know, maybe you know, skim by, let's say the outdoor kitchen or the landscaping, get the pool in proper and, and say 5,000, 10,000 on the building in the backyard. That way, that's probably the better way to do it.
Susan Maklari
Got you. Okay, Scott. That, that's very helpful color. Thank you both and good luck with everything.
Scott Rajeski
All right, thanks, Susan.
Operator
(Operator Instructions) Shaun Calnan, Bank of America.
Shaun Calnan
Hi guys. Thank you for taking my questions just on the gross margin. The expansion was very impressive. Again, in the third quarter, you mentioned some of the lien manufacturing benefits and modest deflation. So, can you break out how much of the gross margin expansion was from the lien manufacturing benefits versus price/cost?
Oliver Gloe
Sure. So, you know, we are very satisfied and then these were the Q3 performance, you know, 250 basis points up and, and this is the fourth consecutive quarter in which we have been able to, to report in a growth margin expansion.
So to break the 250 apart, you know, as you, as you see the, the headwinds that, that volume, you know, the head, the headwind of the 6% lower volume that we saw in the quarter that is about 150 basis points, right? So in order of 100 50 basis point, headwind to, to the to you know, post a 250 basis point margin extension, you need to afford a basis point of a good news. About half of that is lien value engineering.
Okay. So that's the single largest contributor. Again, you know, there's a little bit of deflation, very modest, but, but more importantly, it's really the supply optimization, supplier management management piece where we have where we are now in a situation to have a dual source on, on much of our supplies.
And then, and we're able to, to, to leverage that, right, not only for, you know, economic reasons, but also for economic reasons, right? And then the the rest is, you know, as I said, in one of the prior questions, is, is just great cost control in Florida, the cost control. Really the, you know, the the discipline spend levels that we have across the network.
Shaun Calnan
Okay, great, thank you. And then, so it doesn't sound like you guys have plans to increase prices yet. But what are your expectations on material inflation and labor inflation going into 2020 five?
Oliver Gloe
It's really too early to, to, to say, right. You know, we are, we are watching our, our raw material basket, you know, very, very carefully. I would say so far and in the absence of considering any, you know, terrors or invo duties. But in absence of that, we, we, at this point in time, our raw material basket has actually been surprisingly stable over the last 56 quarters, right? We have modest inflation, you know, this year, the year over year. And then we, we potentially see, you know, a modest, modest, yeah, either stability or more inflation next year, right? But it's really too early to tell. And, you know, we, we, we, we come forward with, with a more, you know, precise view. When we, when we give our 2025 guidance, the next time we only call and report on our Q4.
Shaun Calnan
Okay, great. Thanks again.
Oliver Gloe
Thank you so much.
Operator
Thank you. And that concludes your question and answer session. I'd like to turn the conference back over to Scott Rajeski for any closing remarks.
Scott Rajeski
All right, thanks. Hey, just want to thank you everyone for your time here. This afternoon. You know, we really appreciate all your continued support for Latham and I look forward to seeing you at upcoming conferences and meetings and if we don't, we wish you all a great happy holiday season and best of luck going into 2025.
Operator
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
