Latham Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

Key Takeaways

  • In Q3, Latham delivered a 22.4% adjusted EBITDA margin, marking a 10 basis point year-over-year expansion and a third consecutive quarter of sequential margin improvement through disciplined cost actions and lean initiatives.
  • Net sales in Q3 were $161 M, down 15% year-over-year, but the company continued to outpace the U.S. new in-ground pool market with fiberglass pool sales declining less than the overall market and YTD sales outperforming an anticipated 30% market drop.
  • Latham has realized $18 M in cost savings in fiscal 2023—with an additional $6 M planned in 2024—by exiting underperforming facilities, right-sizing headcount, and optimizing inventory, positioning it for improved profitability as demand recovers.
  • The company’s fiberglass conversion strategy gained momentum, driving penetration to an estimated 22% of U.S. pool installs in 2023, supported by new pool models, enhanced dealer recruitment, and a 40% year-over-year increase in website lead generation sessions.
  • Latham strengthened its balance sheet with $88 M of operating cash flow in the first nine months, paid down $10 M of debt in Q3, and ended the quarter with $153 M of total liquidity to navigate ongoing market softness.
AI Generated. May Contain Errors.
Earnings Conference Call
Latham Group Q3 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day, and welcome to the Latham Group Third Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen only mode. Followed by 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Nicole Harlow, Investor Relations representative. Please go ahead.

Speaker 1

Thank you. Earlier this morning, we issued our Q3 fiscal 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 Rajeshi Interim CFO, Mark Borseth and incoming CFO, Oliver Glow. 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 Due to risks and other factors that are set forth in the company's annual report on Form 10 ks and subsequent reports filed or furnished with the SEC as well as today's earnings release.

Speaker 1

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 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 Rudjeski.

Speaker 2

Thanks, Nicole. Good morning, everyone. Thank you for joining us for our Q3 fiscal 2023 earnings call. Before we begin, I wanted to quickly introduce our incoming CFO, Oliver Galal. Oliver joined Lakeland with over 20 years of finance within global manufacturing companies, most recently serving with Fortune Brands Innovation as the Chief Financial Officer, Outdoors and Security.

Speaker 2

We believe his expertise in leading global financial operation and implementing strategies That enhanced customer focus and improved leverage of scale will be invaluable to Latham as we continue to execute on our fiberglass conversion strategies. Hand it over to Oliver to share a few brief words.

Speaker 3

Thank you, Scott. I'm thrilled about the opportunity to join Latham. It has been an exciting first few days Getting to meet with the team. I see incredible opportunity in this space and believe LASEM is uniquely positioned to succeed over the long term. I look forward to working together with Scott and Mark as I transition into the CFO role and leverage my background to support LASEM's fiberglass material conversion efforts.

Speaker 2

Thanks, Oliver. I will now take us through a high level overview of our Q3 and year to date performance and strategic priorities Before handing the call over to Mark to review our financial results and guidance in greater detail, our Q3 results reflect our leadership position across our broad product portfolio and diligent cost actions limit a continued soft demand environment. Together with our ongoing investments in our lead generation efforts and dealer productivity and recruitment initiatives, we have positioned the company to return to growth when demand rebounds. Our Q3 results show how this is working. Our structural cost reduction action and lean initiatives Supported by the seasonality of our business have yielded adjusted EBITDA margin improvements.

Speaker 2

We returned to a year over year adjusted EBITDA margin expansion in Q3 with margins increasing 10 basis points to 22.4%. Most notably, We also delivered our 3rd consecutive quarter of sequential adjusted EBITDA margin expansion, which increased 4.90 basis In Q3 versus Q2. We remain on track to deliver 2023 net sales results that outpaced the U. S. New in ground pool market.

Speaker 2

Our Q3 year to date in ground swimming pool net sales have outperformed the anticipated decline in U. S. New pool versus 2022, similar to how we outpaced the market last year, driven by our leadership position in fiberglass. We delivered strong cash flow performance in the 3rd quarter, which further strengthened our liquidity. This supported our ability to enhance our balance sheet strength in the quarter This is highlighted by year over year session growth for our website year to date as homeowners continue to come to Latham to research our products, is resonating with dealers as we exceeded our internal goals for dealer recruitment this year and our efforts to enhance dealer productivity are bearing fruit.

Speaker 2

That said, we now expect that the industry softness will last longer and more deeply than we assumed in our prior guidance We have adjusted our outlook for 2023 to reflect that expectation. With our strong cash flow generation, healthy balance sheet And continued momentum on our strategic initiatives, we are confident in our ability to successfully navigate the current environment. As we expected, 2023 has been a challenging year for the pool industry with the macroeconomic environment continuing to weigh on the consumer. It's the largest demand contraction I've seen in my nearly 15 years in the pool business. At the same time, the interest in pool ownership As high as we've ever seen.

Speaker 2

However, we've seen the timeline for the pool purchase decision stretch out further with homeowners remaining on the sidelines waiting for macro conditions to improve. This has resulted in a softer pool season that we've seen in recent years with shorter and more muted peak sales periods across our product categories. We have responded to these dynamics with cost reductions in lean initiatives on our long term top line growth strategies, which are centered around our efforts to drive material conversion from concrete to fiberglass pools. Continuous improvement is deeply embedded in our culture and everything we do at Laidlaw. Our focus on innovation through value engineering efforts has allowed us to improve the efficiency of our manufacturing processes and reduce material costs, while maintaining our high To ensure, we are operating in alignment with demand.

Speaker 2

As such, beginning in Q4 2022, We have taken disciplined and thoughtful cost actions to best support our business in today's environment. We streamlined and rebalanced our facilities footprint by exiting 3 smaller manufacturing locations and 5 warehouses. We have decreased our fixed costs across the company from manufacturing overhead to G and A, while maintaining our ability to drive our sales and marketing initiatives. We have executed lean initiatives, facilitating inventory reductions while maintaining industry leading lead times. We have also right sized our production staff while maintaining flexibility to drive growth as market conditions improve.

Speaker 2

Combined, these actions supported our return to year over year and the 3rd consecutive quarter of sequential adjusted EBITDA margin expansion in Q3. This also allowed us to keep on track to meet our cost savings targets fiscal 2023 of $18,000,000 with an additional $6,000,000 in cost savings to be realized in fiscal 2024. While we are always evaluating our cost structure, these savings provide us with a more efficient cost base to drive profitability as the pool market turns. We are energized by the momentum in our fiberglass conversion efforts. Despite our estimate of approximately 40% plus decline in new U.

Speaker 2

S. Inground pool residential pool installations over the last 2 years. Fiberless pools have come a long way, Led by Latham's technological and design innovations, we've designed and developed the most beautiful and innovative pools in the industry with the widest selection of colors and finishes. Our fiberglass pools provide a more enjoyable swimming experience for the homeowner with a smooth finish, less chemical usage and saltwater friendly pool options. The speed of installation for fiberglass pools is unparalleled.

Speaker 2

You can have your pool in your backyard in as little as 2 to 3 days or even one day. And our pools are built to last with our lifetime warranty, something concrete pool makers typically don't give. This creates a strong value proposition both for 21% of U. S. Pool installations in 2022.

Speaker 2

We are on track to drive further penetration for Fiberglass in 2023, which we estimate will increase to 22% of U. S. Pool installations this year, despite an anticipated decrease in overall U. S. In ground residential pool installations.

Speaker 2

We believe this is a testament to our leading position in fiberglass in North America and the success of our dealer and homeowner awareness efforts to date. And we still have a long runway to reach similar penetration levels compared to more mature fiberglass markets like Australia, where fiberglass sits at about 70% of pool installs. Momentum in fiberglass adoption tells us our marketing initiatives both at the homeowner and dealer level are resonating even in a challenging market. Our investments in our website continue to yield results. Latham ranks number 1 in fiberglass pool and in the top 10 for in ground pool by monthly search volume.

Speaker 2

In the Q3 year to date, we saw over 40% year over year website session growth, Defined as a series of actions a user takes on our website over a given period of time. This shows that homeowners are recognizing the value Latham provides in planning and maintaining While some homeowners are defraying pool purchase decisions in the current environment, these results will be invaluable to our ability to generate leads for dealers over time. Our strong homeowner strategy is complemented by our successful dealer productivity and recruitment efforts. The number of our North American fiberglass dealers Installing greater than 10 pools a year has increased in 20.3 by nearly 100 since 2019. In addition, The percentage of our North American fiberglass dealers installing greater than 10 pools a year has continually grown over the last several years In 2023 year to date, we continue to track above both 2018 2019 levels.

Speaker 2

Key to this success has been our efforts to enhance dealer productivity, namely the continued expansion of our value added resources and hands on trainings. Dealers are leveraging our Latham Design Center, which houses our comprehensive marketing tools, including exterior signage, Digital branding content, design and sales agent collateral and product educational resources. Dealers appreciate this new feature since it allows them to easily create on brand content for their own customized marketing needs and to run their businesses more efficiently. We also see continued interest in our hands on training and boot camps. We are looking forward to our upcoming slate of fiberglass boot camps as dealers shift their focus The preparations for the 2024 pool building season.

Speaker 2

As we've discussed on recent calls, with our expanded fiberglass manufacturing capacity, we have also strengthened our efforts around dealer recruitment. We are pleased with it have exceeded our internal targets for new dealers in 2023, providing us with a new group of dealers to train and grow over time. Important to the continued momentum of fiberglass Our efforts to innovate and enhance our fiberglass products and offerings. In 2023, we will have introduced 3 new fiberglass pool model shapes, presenting homeowners with the latest and most beautifully designed products to create the poolscape of their dreams. Additionally, a key piece of the fiberglass The proposition for both homeowners and dealers is the ease and speed of installation, which is unmatched.

Speaker 2

Earlier this year, We launched Backfill Made Easy, a new design to make the installation on select models even easier and faster. It eliminates the extra effort of Backfill and under the pool steps, which saves the builder time and materials and increases the speed of installation. We introduced this for our popular Corinthian model and are evaluating opportunities to roll out Backfill Made Easy to other popular models across our portfolio. In short, we've taken important steps to navigate the environment while remaining focused on supporting our ability to drive long term growth. We continue to keep a close eye on demand while advancing our efforts to drive homeowner and dealer awareness I will now turn the call over to Mark to review our Q3 year to date 2023 results and fiscal 2023 outlook in greater detail.

Speaker 2

But before that, I want to take a moment to thank Mark for stepping back in to lead our finance organization As we identified his successor to the CFO role, we are incredibly grateful for his leadership and contribution to strengthen our business throughout his tenure at LatAm. Mark, you will be missed.

Speaker 4

Thank you, Scott, for your kind words. It's been a pleasure working with you and the entire Latham team these last few years. I would also like to extend a warm welcome to Oliver. He will be an excellent addition to Latham and I look forward to working closely with him to ensure a seamless transition over the coming weeks. Turning to our results, please note that all comparisons we discuss today are on a year over year basis Compared to the Q3 of fiscal 2022 and the 1st 9 months of fiscal 2022, unless otherwise noted, Net sales for the Q3 of fiscal 2023 were $161,000,000 compared to $189,000,000 In Q3 of 2022, the period in which we drove 17% year over year growth from the same period In 2021, the year over year change in Q3 fiscal 2023 sales is comprised of a 17% decline in volume, partially offset by a 2% increase in price.

Speaker 4

Looking at our net sales results across our product lines for the quarter, We delivered $83,000,000 of in ground swimming pool sales and we're pleased to see our results only down 19% In a market where the full year new in ground pool installs are expected to be down 30%. Performance in this product line continues to be driven by softness in demand for packaged pools as sales of fiberglass pools Declined less than the total decline in our in ground swimming pool product line. Cover sales were $47,000,000 and down 9% versus last year. As expected, we saw a meaningful increase in cover sales from Q2 As we moved into the peak season for this product line, as homeowners prepare to close their pool for the season. However, Peak cover sales were muted in the quarter and the season tailed off quicker than normal.

Speaker 4

Liner sales were $30,000,000 A 13% decrease versus the prior year and light covers, a season which peaked at lower levels and was shorter than normal. Q3 gross profit was $48,000,000 compared to $59,000,000 in Q3 2022. Throughout fiscal 2023, we have driven consistent improvements in year over year gross margin compression. Q3 gross margin of 29.9 percent was down only 120 basis points, Our best quarterly performance this year compared to 31.1% in Q3 of 2022. In the quarter, year over year gross profit performance was primarily impacted by reduced net sales, the rightsizing of our inventory and to a lesser degree the sell through of higher priced inventory.

Speaker 4

This was partially offset by some material cost deflation, Benefits from our pricing levels and improved fixed cost as a result of our cost reduction actions. Selling, general and administrative expenses decreased to $23,000,000 from $27,000,000 in Q3 of 2022. The decrease was driven by a $4,000,000 decrease in non cash stock based compensation expense. The net impact of non cash stock based compensation expense and one time costs associated with restructuring charges Resulting from our cost reduction actions this year as well as the timing of an insurance recovery in the Q3 of 2022 was a $2,000,000 year over year reduction in SG and A in Q3. Excluding non cash Stock based compensation expense and these one time costs, SG and A was $20,000,000 A decline of about $2,000,000 or 7% versus prior year as a result of benefits from the cost reduction actions we took.

Speaker 4

As a percentage of net sales, SG and A excluding non cash stock based compensation and one time costs only increased to 12.5 percent from 11.4% in Q3 of last year. Q3 adjusted EBITDA was $36,000,000 compared to $42,000,000 in Q3 of 2022, driven by the decrease in gross profit and partially offset by the reduction in SG and A expenses, excluding non cash stock based compensation And noted one time costs. Our cost reduction actions and lean initiatives have yielded the desired results on adjusted EBITDA margin As we drove a return to year over year adjusted margin expansion in Q3, up 10 basis points to 22.4% versus Q3 of last year. On a sequential basis, Q3 adjusted EBITDA increased $5,000,000 We're 16% in the 3rd quarter and adjusted EBITDA margin improved 4.90 basis points versus Q2, on 9% fewer sales. Consistent with the seasonality of our business, we expect adjusted EBITDA margins to decline on a sequential basis In Q4 versus Q3, reflecting a natural slowdown in pool construction and repair as we move into the colder months of the year, as well as continued softness in overall demand.

Speaker 4

Turning to results for Q3 year to date. For the 1st 9 months of fiscal 2023, net sales were $476,000,000

Speaker 2

compared to

Speaker 4

588,000,000 In the prior year period, during which we delivered 20% year over year growth from the same period in 2021. The year over year change for the 1st 9 months of fiscal 2023 is comprised of a 21% reduction in volume at a 2% increase in price. Throughout the year, we have consistently shown year over year pricing benefits in the 2% range. At the same time, we have seen slow improvement in our year over year volume performance. By product line, In ground swimming pool sales for the 1st 9 months were $252,000,000 down 23% year over year.

Speaker 4

As Scott mentioned, Our year to date results for in ground continue to outpace the U. S. New in ground pool installation market for 2023, which we expect will decline nearly 30% this year versus 2022. We believe this is a strong indication of our momentum in driving the fiberglass conversion opportunity. As highlighted by our expectations that fiberglass penetration will continue to grow in 2023 Despite another down pool market, liner sales of $115,000,000 were down 17%, While cover sales of $109,000,000 declined 11%, reflecting softer homeowner demand in the current economic environment.

Speaker 4

Gross profit was $132,000,000 compared to $197,000,000 in the 1st 9 months of fiscal 2022. Year to date gross margin was 27.7% compared to 33.5% in the prior year period, down 580 basis points. As mentioned earlier, we saw improved gross margin performance in Q3 Relative to the first half of the year and as a result, our year to date gross margin compression continues to steadily improve. Gross profit was primarily affected by reduced net sales levels. The year over year gross margin reduction primarily being driven by the sale of higher cost inventory and the rightsizing of our inventory levels.

Speaker 4

In total, These two factors account for about 5.70 basis points of margin compression. Fixed cost leverage continued to improve, Thanks to our cost actions and productivity and was actually a small tailwind in Q3, but remains a headwind on a year to date basis. These margin headwinds continue to be partially offset by benefits from our pricing levels, some material cost deflation and improved productivity. Selling, general and administrative expenses decreased to $87,000,000 from $114,000,000 in the 1st 9 months of fiscal 2022, reflecting a $22,000,000 decrease in non cash stock based compensation expense as well as the benefits from our various cost reduction actions. Excluding non cash stock based compensation, SG and A was $72,000,000 A decrease of $5,000,000 or 6%, driven by lower employee incentive accruals and benefits from our cost reduction actions.

Speaker 4

Adjusted EBITDA was $78,000,000 compared to $139,000,000 in the 1st 9 months of fiscal 2022, driven by lower gross profit, which was partially offset by our lower SG and A spend, excluding non cash stock based compensation expense. As a result, adjusted EBITDA margin decreased to 16.4% from 23.6% for the prior year period. Turning to the balance sheet. As expected, we saw an increase in our liquidity during the quarter, reflecting management's focus on cash flow generation and maintaining a strong balance sheet as well as the seasonality of our business. It is also an indicator of the business' ability to Generate cash flow in a variety of economic cycles.

Speaker 4

As of September 30, we had cash and cash equivalents of $78,000,000 and $75,000,000 of borrowing availability under our revolver, giving us total liquidity of $153,000,000 up 30% from Q2. Net cash provided by operating activities was $88,000,000 for the 1st 9 months of 2023 versus $5,000,000 in the prior period, reflecting our actions to right size production in line with the current demand environment and reduce our inventory levels, while importantly maintaining our lead times. We leveraged our increased cash position to Pay down $10,000,000 of our term debt during the Q3, reducing our total debt to $302,000,000 at the end of Q3. As expected, we delivered improvements to our net debt leverage ratio ending the quarter at 2.7 times versus 3.0x at the end of Q2. Capital expenditures were $5,000,000 for Q3 compared to $12,000,000 in Q3 2022.

Speaker 4

Capital expenditures were $28,000,000 for the 1st 9 months of 2023 compared to $29,000,000 in the prior year period. As we are completing investments in our new Kingston facility And flex back to a more normal run rate for the business, we have reduced our full year guidance for CapEx investments. With our strong balance sheet, increased liquidity and disciplined capital allocation strategy, we are well positioned to navigate current macroeconomic environment as we head into the time of the year when our business transitions to less cash generation and ultimately cash usage in Q1 of next year. Turning to our outlook for fiscal 2023. As we've seen throughout 2023, the macroeconomic environment continues to weigh on consumer demand for our products.

Speaker 4

As reflected in our year to date, year over year declines in our top line and as implied in our updated guidance for the year, Homeowners are taking longer to make their pool buying decisions. In addition, our wholesale partners have continued to bring down their inventory levels As they have exited the 2023 pool season. All of this is driving an anticipated decline in U. S. New in ground pool installations Nearly 30% year over year in 2023.

Speaker 4

As Scott outlined earlier in today's call, We have responded to these market dynamics with cost reduction actions that have delivered continued improvements to our markets. We have reduced our manufacturing overhead, headcount and spend resulting in anticipated $18,000,000 of cost savings this year With an additional $6,000,000 to be realized in 2024, we continue to focus on enhancing our productivity and executing on lean initiatives. We are progressing through our higher cost inventory, holding on price and seeing some benefits from modest levels of deflation. We are also being thoughtful and disciplined in our capital allocation strategy. All of this is reflected in our updated guidance fiscal 2023, of net sales of $555,000,000 to $570,000,000 Adjusted EBITDA of $82,000,000 to $87,000,000 and capital expenditures of $32,000,000 to $35,000,000 Scott, with that, I'll turn it back to you for closing remarks.

Speaker 2

Thanks, Mark. As we close out 2023, we have seen the prolonged challenging macro environment have a longer and more pronounced impact on pool demand We anticipate in our previous guidance as is reflected in our updated fiscal 2023 outlook. We see these factors continuing as we look out 2024 and anticipate another challenging year for the pool market with early reads indicating another decline in new pool starts for next year. We have continually monitored and adjusted our business in response to consumer demand and believe our cost reduction actions and continuous improvement initiative have allowed us to build a strong foundation. Additionally, our strong balance sheet and continued positive momentum on strategic growth initiative positions us well to emerge from this period of soft demand as an even stronger company.

Speaker 2

Despite these continuing near term industry headwinds, We are confident in the continued underlying interest in pool ownership. We remain energized by the long term opportunities we see in the business, driven by Our strong leadership position across our product portfolio, continued momentum in our fiberglass conversion efforts and the overall growing base of installed pools Presenting increased recurring revenue opportunities for replacement liner and cover businesses. As homeowners continue to migrate to the suburbs, Stay in their homes longer and invest in the backyard, Latham will continue to leverage our strong product portfolio and innovative marketing tools to help homeowners build the backyard of their dreams. We will now open the line to questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Ryan Merkel with William Blair. Please go ahead.

Speaker 5

Hey, good morning. Thanks for taking the questions. Scott, can you just maybe give us a little more color on why the 4th quarter revenue guide was cut so much? Can you just expand on maybe by Product or geography or are you seeing the channel be more cautious on inventory?

Speaker 2

Yes. Good morning, Ryan. How are you doing? I'd say As we move through 3Q and I'd say the entire season and pretty much across all the product lines, We never really saw any of the products hit the peak in season. I think the driver there is the consumer kind of taking a little bit longer to make decision, sitting on the sidelines a little bit longer and we saw the season start to tail off Faster than it has since I've been in the industry.

Speaker 2

I think the wholesale distributors probably a little bit more cautious as well With inventory stocking levels and look from a dealer standpoint as we've talked to dealers, they've had a heck of a run for the last 3 years or so. And I think a lot of them are just looking at the demand profile backlogs and unfortunately closing up shop and kind Exiting the season sooner than we've seen them do in the last 3 years where they've had pretty big backlogs. I'd say it's probably consistent across the majority of the product lines. The good news though Ryan is if we do look at our performance as Mark showed the results, We believe we're outperforming the market in total. We've got the good fiberglass penetration going on and then the recurring revenue piece of the business for both liners and covers have continued to perform extremely well.

Speaker 2

And I think we're just wanting to kind of Look at where we think things will shake out for the year here. And the good news is we've done a lot of work with rightsizing the facilities, the plants, personnel, Balancing production to demand and I think the team has done a really, really nice job with sequential margin improvements Position us kind of as we look forward into 2024.

Speaker 5

Got it. Okay. Thanks for that. Then for my follow-up, some of your peers have mentioned that Canada economy there is a little bit weaker than maybe the U. S.

Speaker 5

I think your business is fairly sizable in Canada. What are you seeing there and what's the outlook?

Speaker 2

Yes, the Canadian market was a tough season across the board. So I would agree with I think what others are saying. It's We've kind of said I think it's around 25% of our total revenue give or take a few points. Tough season across the board, Definitely a shorter build season in the Canadian market. And but I think, again, we're focused on the dealers.

Speaker 2

We put the new Kingston facility in there. We're seeing the fiberglass results perform fairly well in that market. But again, I'd say, yes, a little worse than the U. S.

Operator

Our next question comes from Matthew Bouley with Barclays. Please go ahead.

Speaker 6

Good morning. This is Anika Lakia on for Matt. Thanks for taking my question. So for my first question, appreciate the color on your demand outlook for the rest of 2023. Curious if you could speak to any early thoughts that you might have on the new pool builds outlook for 2024 and when maybe you expect to see a recovery?

Speaker 6

Thanks.

Speaker 2

Yes. Hey, good morning. I think as I mentioned upfront, With the current macro environment and what we're seeing at the consumer level, the interest of pools still remains extremely high. We're seeing great activity across all fronts on the website. We're seeing really good dealer productivity across the board.

Speaker 2

Look, I think the reality is we believe new tool starts will most likely be down Again, in 2024, what we'll be focused on is how does LatAm and how do we along with our dealers continue to outperform the market overall Like we've done in the last 2 years there, I think that's historically been the trend of this company both in up markets, down markets and I'd say bad weather markets, we've shown the results and have shown everyone that we can continue to outperform the market overall.

Speaker 6

Got it. Thank you. And then for my follow-up, wondering if you could outline some of the cost reduction efforts that you have left. I know you guys said so $18,000,000 for this year and then expected $6,000,000 next year. What kind of is expected to go into that $6,000,000 for 2024?

Speaker 6

And then how much of these costs are temporary in nature versus more of maybe a longer term structural margin tailwind? Thanks.

Speaker 4

Yes. Can do, thanks. Good morning and thanks for your question. First, we're very pleased with the progress that we're making on That $18,000,000 for this year and it's been a variety of things as Scott mentioned, some more structural than others, but we've Exited some warehouse facilities, I think we mentioned 5. We've exited 3 smaller manufacturing sites.

Speaker 4

We've taken headcount down. We've effectively done all of the actions necessary. So we're well on track for the 2018. The incremental 6 that we're Talking about next year is essentially the tail of those actions we took, let's say, mid year this year and rolling into the first half of next So there's no incremental actions planned at this point to help deliver that. Those are already essentially baked into the result of we've already done.

Speaker 2

And if I could just add in there, short term versus long term, a lot of the lean initiatives The team's been driving in the organization is really what enabled us to take those facilities offline, right side of inventory, driving lean, Reducing the footprint across all of our manufacturing facilities, getting the cost reduction out of the product of material to redesign Value engineering efforts. So I'd say a lot of this will be sticky and will last as we go forward. And when demand bounces back, It's not like we're going to have to go put 3 more facilities back in and add 5 more warehouses. I think we'll be able to continue to Become more efficient with how we manage the entire footprint.

Speaker 6

Very helpful. Thanks guys.

Speaker 2

I'll pass it on.

Operator

Thanks. Our next question comes from Sean Colin M with Bank of America. Please go ahead.

Speaker 7

Hi, guys. Good morning. I have a couple of questions about capital allocation. First, you've been able to take a lot of inventory out of the balance sheet the last three quarters, which has really benefited free cash flow. How do you expect inventory to trend from here?

Speaker 7

And is there room to take this lower? Or do you need to start building inventory heading into the 2024 season?

Speaker 4

Hey, good morning. And yes, thanks for the question. I mean, as Scott mentioned, We're very pleased with the performance of the team as we've started rightsizing our production levels where we've been rightsizing our production levels and managing inventory levels down. And I think it's very important that we stay in the same breath, while we're maintaining our lead times. We number 1 want to make sure we have the inventory necessary to take care of our customers.

Speaker 4

So we've taken inventory down $20,000,000 since the end of the second quarter. I think we're down $60,000,000 since last year. We're getting to the point where We're probably in the current demand environment sitting around the right inventory level. There might be a little bit more to go. But we're also heading into that time of the year, when we turn from big cash generation into, let's say, less cash We may end up building a little bit of inventory before the end of the year.

Speaker 4

But I think give or take, we're probably in the right spot With our inventory balances.

Speaker 7

Okay, got it. And then the CapEx slowed in 3Q, so How are you kind of thinking about this going forward? Do you feel that you're at adequate capacity levels? And should we expect these lower levels In the near term, are you going to need to invest in some of these facilities like Kingston going forward?

Speaker 4

Yes, thanks again for the question. As you all know, we've invested meaningful dollars in capacity over the Couple of years, in the Q3, we saw CapEx at $5,000,000 primarily down versus Prior years were nearing completion on the investments in Kingston. So I think we're flexing back to a, let's call it, more normal Run rate for the business, that $5,000,000 for the quarter, we'll see where that goes. But I think that's starting to give us a reasonable Feel for where for CapEx on a run rate basis might be.

Operator

Our next question comes from Keith Hughes with SunTrust. Please go ahead.

Speaker 8

Thank you. As you look out over the next couple of months and particularly the orders are coming in, are you starting to see any kind of mix pressure in terms of customers buying I'll put it in smaller pools or any other sort of changes in what the order pattern looks like?

Speaker 2

Yes. So Keith, good morning. We really haven't seen a change in the mix of our products in terms of size of pools, Consumers are buying or dealers are installing. And I think when we look throughout the country, different parts of the country favor smaller pools, let's say in the Sand states versus big pools in the Midwest or the Northeast. I think the advantage we have with our performance in our in ground pool category and in the fiberglass penetration growth we've been seeing is that if we all remember, right, a fiberglass penetration growth we've been seeing is that if we all remember, right, a fiberglass pool is a lower upfront cost option than a comparable concrete pool, 25% to 30%, we're seeing that dynamic hold and the total lower cost of ownership expands over time, so closer to 40% Cost differential, and I think that's what we're seeing and why fiberglass and our inground category continue to outperform the overall market Is that cost differential?

Speaker 2

And again, I think the replacement side of the business for liners and covers, if you've got an existing pool, No matter what the issue is with the pool, you're going to do the repair and renovation of that asset you've got in your backyard to leverage the enjoyment of the pool.

Speaker 3

Okay. Thank you. Thanks, Keith.

Operator

Our next Question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Speaker 9

Hi, everyone. This is Charles Perron in for Susan today. Thanks for taking my question. From your prepared comments, Scott, you seem to mention that website traffic remains strong, but consumers are still delaying the purchase of pools. Can you detail some of the reasons behind the delay of the purchase despite the strong value proposition that you guys are able to offer?

Speaker 9

And what can you do to bridge the gap between pricing initiatives, maybe offering smaller more affordable pools or helping your dealers with financing or other

Speaker 2

Yes. Look, I think the activity on the website, the interest in pools does continue to remain strong. And That's what I love about the industry, the company, the outlook, the long term performance, we'll see when the bigger macro and the uncertainty It kind of goes away. We've done a lot of creative things with our dealers on various financing initiatives, How to sell the pool to the consumer, working with our different partners who do financing. Right now, we stay out of the finance of the pool, The transaction that's between the dealer and the consumer, but I think look there's a lot of uncertainty out there right now in the world unfortunately.

Speaker 2

And I think until some of that clears, we're seeing a reversion back to it's a longer buying decision What we've all been accustomed to here over the last 2 to almost 3 years. And I think they're looking out, evaluating that Decision sitting on the sidelines, and I think when they come back post, let's say, the holiday season, That's when I think they'll start to be thinking about that buying decision as they move into the 2024 timeframe.

Speaker 9

Okay. That's good color. Thanks for that, Scott. And then looking at the price cost dynamic, can you help us understand with the most Moving in steel and energy, how do you think about price cost into year end and early reads into 2024 based on current But also in terms of the pricing initiative, I think you talked about 2% pricing in the quarter. How should we think about the pricing going forward and to carry over into

Speaker 4

So let me jump in and take that one. We'll be getting more specific about 2024 when we get back together In March, we'll talk about the year end guidance. But as I mentioned in my comments, this year we've held Prices, seeing price benefits of around 2% through the 1st 9 months. More or less in line with what this industry has Typically done, maybe a little bit lower. I mean, maybe 2%, 3%, 4% is more of a historical norm.

Speaker 4

So But very pleased to have been able to hold on to that price. As you mentioned, we are seeing some modest levels of deflation in a few commodities now, Although prices still remain at very elevated levels, so we feel good about our ability to hold the prices that we did this year. They've been helping As we've seen our margin expansion both year over year as well as sequential and with some modest levels of deflation that we're experiencing, we feel very good about where we are with pricing and our ability to hold price.

Operator

Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Scott Rodjetsky for any closing remarks.

Speaker 2

Hey, Thanks everyone for your time on today's call and your ongoing interest in Latham. As we said earlier, we're well positioned to continue to navigate the near term industry challenges We remain confident in the long term opportunities we see in the business. Look forward to speaking with you all again when we report Q4 and full year results next year. Between now and then, I hope everyone has a safe and happy holiday season as well. Take care, everyone.

Speaker 2

Bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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