Latham Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Latham Group Second Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference To Nicole Harlow, Investor Relations representative, please go ahead.

Speaker 1

Thank you. Earlier this morning, we issued our 2nd quarter 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 On today's call are Layfon's President and CEO, Scott Rajeski and Interim CFO, Mark Borsa. 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 reflects 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 The company expressly disclaims any obligation to update any forward looking statements except as required by applicable law.

Speaker 1

In addition, during today's call, the company will discuss certain non GAAP financial measures. Reconciliations of the directly comparable GAAP measures 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 Rudusky.

Speaker 2

Thanks, Nicole. Good morning, everyone. Thank you for joining us I will then turn it over to Mark to review our 2nd quarter and first half financial results and outlook for 2023. As we've worked our way through the 1st 7 months of the year, we're pleased with where we sit today given the tough macro environment and our continued confidence in our long term growth opportunity. With our leadership position across our product categories and our unique direct to home order and dealer strategies, we continue to work towards driving the material conversion from At the same time, in the near term, we are remaining nimble across operations, including focusing on reducing costs and inventory and enhancing operating efficiencies.

Speaker 2

As a result, We have tightened our fiscal 2023 guidance for net sales and adjusted EBITDA within the initial range we initiated at the beginning of the year. In 2Q, we delivered sequential improvement in net sales from Q1 2023 to Q2 2023. This was expected as we entered our peak pool building season. Despite year over year declines in Q2, we were pleased to deliver quarterly sequential improvements in gross margin And adjusted EBITDA margin in Q2 from Q1 as our fixed cost leverage improved significantly, we benefit from our cost reduction actions. Our second quarter results reflect our active management of costs in alignment of production levels and inventory with demand, while still maintaining best in class lead times.

Speaker 2

Our digital tools and marketing efforts continue to drive increased website activity and leads to dealers in Q2. This demonstrates that underlying interest in pool ownership remains robust even as the consumer purchasing decision It's continuing to stretch out from what we've seen over the last several years. With a strong supply chain and enhanced manufacturing We have continued to increase our focus on dealer recruitment, which will support the conversion of fiberglass over time. These efforts are bearing fruit with continued new dealer silence in Q2 in line with our expectations for the year. As expected, we enhanced our liquidity in Q2, positioning us well for the second half of twenty twenty three.

Speaker 2

As we've now cleared the first half of the year, we have better visibility in how we think 2023 will shake out. Therefore, As we think about our strategic priorities for the remainder of the year, we are focused on driving operational efficiency through our continuous improvement initiatives and prudent cost management. Our lead generation efforts continue to show strength in underlying consumer demand giving us confidence and continued execution of our top line growth priorities, which places us in a strong position for long term growth. We have continued to focus on expanding the awareness and adoption of fiberglass to support the material conversion from concrete pools to fiberglass. Our strategy of targeting both homeowners and dealers has continued to yield results and we have continued to receive positive feedback from dealers about Latham's value proposition.

Speaker 2

We are also excited about our new digital innovation that will strengthen our direct to consumer strategy. As we saw robust pools industry growth over the last several years, while simultaneously facing supply chain of raw material related challenges and shortages, We focus on best positioning our business to meet increased demand. When we saw market conditions turn late last year, We took immediate actions in Q4 of 2022 to reduce our costs, which are on track to yield $12,000,000 in cost savings in 2023. As anticipated, market conditions have remained challenging throughout 2023. We have continued to monitor this closely and respond by matching our production, staffing and inventory levels to demand.

Speaker 2

During Q2 and into early Q3, We took further actions to enhance our operating efficiency, including the continued streamline of our manufacturing footprint, Further headcount reductions and restricting discretionary spending. We expect to realize $12,000,000 in annualized cost savings with $6,000,000 expected to be realized in fiscal 2023 from these actions. In tandem, we are gaining traction on our lean and value engineering efforts, which has allowed us to improve the efficiency of our manufacturing processes. We have made good progress in redesigning several of our products with a focus on reducing material cost and improving productivity. Our lean initiatives continue to free up capacity and floor space in our facilities and drive lower inventory levels.

Speaker 2

We expect to see an increasing benefit of these actions reflected in adjusted EBITDA margins in the second half of fiscal twenty twenty three. We firmly believe the material conversion from concrete pools to fiberglass continues to present attractive long term growth opportunities for the business. As you recall, we drove fiberglass share expansion of 3 percentage points to 21% of U. S. In ground residential pool installations In 2022, despite the U.

Speaker 2

S. In ground residential pool installation being down 16% versus 2021. During Q2, we celebrated the grand opening of our 2 new fiberglass manufacturing facilities in Kingston, Ontario and Oklahoma. These two facilities will allow us to better serve large markets with strong fiberglass conversion opportunities as well as to drive improved lead times and reduce freight costs as we rebalance our manufacturing across our footprint. As we discussed on our last call, we are ramping up these facilities to match The demand we are seeing in these markets.

Speaker 2

Our lead generation efforts continue to drive year over year growth in website activity And we've been Q2 and we're seeing homeowners continue to use Latham's digital tools such as the full cost estimator and My Latham. As we've advanced to our direct to home owner strategies, we have focused on deeper analytics and opportunities to further support homeowners through the pool purchase journey. Notably, a number of leads in 2023 that started its prospects were nurtured by us and became highly qualified leads as a result. Roughly half of our leads in 2023 have an existing Mylanthan account, allow to better understand their preferences and budget before sending them to dealers. This helps homeowners make more informed purchase decisions and allow dealers to focus less on selling and more on installation.

Speaker 2

Beyond driving homeowner awareness and adoption of fiberglass, Adding new and deepening existing dealer relationships is an important component of our strategy to drive the material conversion from concrete to fiberglass. With faster installation times and smaller crew needs compared to concrete, fiberglass pools provide dealers with the opportunity to rapidly expand their business. Our boot camps combined with our business excellence coaching are aimed at enhancing dealer productivity. Heading into peak pool building season, we had strong demand for our boot camps held at our training facility in Zephyrhills, Florida, and we're excited to resume training again this fall. Continuing to enhance our value added resources will enable us to attract and retain dealer partnerships.

Speaker 2

As such, we are excited to launch our new Latham Pro website later this year. This online hub will have all of our comprehensive turnkey marketing tools, including exterior signage, digital branding content, design and sales agent collateral and product education resources. We believe this will be a game changer for dealers, allowing them to run their businesses more efficiently. Lastly, We are on track to meet the internal targets for new dealers with the year over year growth in new dealer sign ups in the first half of twenty twenty three. It takes time to ramp up new dealers and many start small, but we believe expanding our dealer network will set us up for future growth.

Speaker 2

In closing, we are excited about the progress we've made on our strategic pillars. While the macroeconomic environment remains challenging, We are maneuvering our way through, positioning us well for the future. This has also enabled us to tighten our fiscal 2023 net sales and adjusted EBITDA guidance within the initial range we initiated at the beginning of the year. Looking out to the rest of the year, we will remain nimble in market dynamics and balancing our production capabilities and capacity to ensure we are well positioned for future growth. At the same time, we will continue driving the conversion from concrete to fiberglass tools, expanding our direct to homeowner strategy in delivering value to our dealers.

Speaker 2

With that, I'll turn the call over to Mark to review our Q2 and first half twenty twenty three results in greater detail. Mark?

Speaker 3

Thank you, Scott, and good morning, everyone. Please note that all comparisons we discuss today are on a year over year basis compared to the Q2 of fiscal twenty twenty two and the first half of fiscal twenty twenty two unless otherwise noted. Net sales for the Q2 of fiscal 2023 were $177,000,000 compared to 2 0 $7,000,000 in Q2 of 2022, a quarter in which we delivered 14% year over year growth from the same period in 2021. The change in Q2 fiscal 2023 sales is comprised of a 17% decline in volume, partially offset by a 3% increase in price. As expected, we were pleased to see sales sequentially improve from Q1 to Q2 as we entered into the peak pool building time of the year.

Speaker 3

Looking at our net sales results across our product categories for the quarter, In ground pool sales were $91,000,000 down 19%, driven by continued softness in packaged pools As the channel continues to right size inventories and to a lesser degree lower year over year fiberglass pool sales. As Scott mentioned, We continue to increase fiberglass penetration in the market in 2022. However, the anticipated reduction in the number of new pool starts this year is weighing on our results. Cover sales were $29,000,000 down 25%, While liner sales were $58,000,000 a 3% increase versus the prior year and a reflection of the recurring revenue within this product line. Q2 gross profit was $50,000,000 compared to $68,000,000 in Q2 2022.

Speaker 3

Gross margin was 28.4 percent compared to 32.7% in Q2 of 2022. Gross profit was primarily impacted by reduced year over year sales. The sell through of higher cost inventory and the rightsizing of our inventory accounted for more than the total margin reduction versus prior year. These impacts were partially offset by higher prices and benefits from our cost actions taken in Q4 of 2022 and Q2 of 2023. As we anticipated, we saw a noticeable improvement in gross margin on a sequential basis, with Q2 gross margins improving 4 20 basis points Compared to Q1, our fixed cost leverage improved significantly versus Q1 as we entered peak pool building season and benefited from cost reduction actions in Q4 of 2022 and Q2 of this year.

Speaker 3

We also continue to realize higher year over year price. As a result of these actions, our year over year Q2 gross margin reduction was less than half what we saw in Q1. Looking out to the back half of the year, we expect continued gross margin improvement as we work down our higher cost inventory, Lower our manufacturing overhead further, stabilize our inventory levels, realize increasing productivity, Continue to benefit from higher prices and begin to see modest levels of deflation. Selling, general and administrative expenses decreased to $30,000,000 from $42,000,000 in Q2 of 2022. The decrease was driven primarily by a $9,000,000 decrease in non cash stock based compensation expense and cost reduction initiatives that are gaining traction.

Speaker 3

Excluding non cash stock based compensation expense, SG and A was $24,000,000 a decline of $3,000,000 or 10% versus prior year As a result of lower employee incentive accruals and the benefits from the cost reduction actions taken in the Q4 of fiscal 2022 and the Q2 of this year. As a percentage of net sales, SG and A excluding non cash stock based compensation Increased to 13.4 percent from 12.8% in Q2 of last year. As a result, Adjusted EBITDA for the Q2 was $31,000,000 compared to $49,000,000 in Q2 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 expense. Adjusted EBITDA margin decreased to 17.5% from 23.5% for the prior year period. On a sequential basis, adjusted EBITDA increased $20,000,000 in the 2nd quarter versus Q1, reflecting a 50% incremental profit on the incremental increase in Q2 net sales versus Q1.

Speaker 3

Adjusted EBITDA margin improved 9.50 basis points in Q2 versus Q1, as Scott mentioned. Turning to the first half results. Net sales for the first half of fiscal twenty twenty three were $315,000,000 Compared to $398,000,000 in the first half of fiscal twenty twenty two, a period in which we delivered 21% Year over year growth from the same period in 2021 aided by elevated backlogs coming into 2022. The year over year change for first half fiscal twenty twenty three is comprised of a 23% reduction in volumes and a 2% increase in price. By product line, in ground pool sales for the first half were $169,000,000 down 24%.

Speaker 3

Liner sales of $84,000,000 were down 19%, Well, cover sales of $62,000,000 declined 13%. Our first half results are being impacted by the same factors we experienced in the quarter. Gross profit was $84,000,000 compared to the first half twenty twenty two of $138,000,000 And gross margin decreased to 26.6 percent from 34.7% in the prior year period. 1st Half twenty twenty three gross profit was primarily affected by the lower sales levels referred to above. More than 3 quarters of the year over year gross margin reduction came from the sale of higher cost of inventory and the rightsizing of our inventory.

Speaker 3

Negative fixed cost leverage, while significantly improved versus Q1 aided by our cost actions, remained a headwind in the first half. These impacts were partially offset by higher prices and productivity. Selling, general and administrative expenses decreased to $63,000,000 from $87,000,000 in the first half of fiscal twenty twenty two, reflecting an $18,000,000 decrease in non cash stock based compensation as well as the benefits from the cost reduction actions taken in the Q4 of fiscal 2022 and the Q2 of fiscal 2023. Excluding non cash stock based compensation, SG and A was $51,000,000 a decrease of $5,000,000 or 10% driven by lower employee incentive accruals and benefits from the cost reduction actions taken in the Q4 of fiscal 2022 and the Q2 of this year. As a percentage of net sales, SG and A excluding non cash stock based compensation increased to 16.1% from 14.1 percent from the prior year period.

Speaker 3

Adjusted EBITDA was $42,000,000 compared to $97,000,000 in the first half of twenty twenty two, 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 13.3% from 24.2% for the prior year period. As expected, we saw an increase in our liquidity during the quarter As this is the time of the year, we generate the majority of our cash. We are pleased with the strength of our balance sheet and remain disciplined in our capital allocation strategy. During the quarter, we repaid all of the $48,000,000 of borrowing we had on our revolver.

Speaker 3

As of July 1, We had cash and cash equivalents of $43,000,000 $75,000,000 of borrowing availability under our revolver, giving us total liquidity of $118,000,000 up 44% from Q1, which is more than sufficient for Net cash provided by operating activities was $36,000,000 for the first half of fiscal year twenty twenty three Versus net cash used in operating activities of $15,000,000 in the prior year period propelled by reductions in inventories. Total debt was $312,000,000 at the end of Q2 and our net debt leverage ratio The modest increase was driven by the year over year reduction in adjusted EBITDA. Looking at CapEx spend, Capital expenditures were $14,000,000 compared to $10,000,000 in Q2 last year. As expected, CapEx spending increased versus Q1 As we are nearing the final payments related to the construction of our new Kingston facility. As we anticipated, CapEx for the first half of fiscal twenty twenty three totaled $23,000,000 compared to $17,000,000 in the prior year period.

Speaker 3

In our earnings release issued this morning, we tightened the range of our fiscal 2023 outlook for net sales and adjusted EBITDA. As anticipated, ongoing macroeconomic challenges are weighing on consumer spending and demand. This is resulting in a decline for U. S. New in ground residential pool installations in 2023.

Speaker 3

As Scott mentioned, we continue to make progress Executing our strategy to drive material conversion from concrete to fiberglass swimming pools supported by our continued momentum on our lead generation efforts and digital tools. We continue to take a disciplined approach to capital investments with a focus on the completion of our Kingston and Oklahoma Fiberglass Manufacturing Facilities. As we previously discussed, the majority of this spend was weighted to the first half of fiscal twenty twenty three. We also continue to work on improving profits and margins by focusing on operational efficiency and prudently managing our costs to better align with the current demand environment. As Scott previously mentioned, we took action in Q2 and into early Q3 of 2023 to further reduce our manufacturing overhead, headcount and discretionary spend.

Speaker 3

We expect to realize an additional $12,000,000 of annualized savings from these actions With $6,000,000 to be realized this year. This is in addition to the $12,000,000 of savings from the cost reduction actions we took in Q4 of 2020 and expect to realize this year for a total of $18,000,000 of cost savings in 2023. We have already seen some benefit of our cost actions lifting margins on a quarterly sequential basis in Q2 versus Q1. As we continue to sell through our higher cost inventory, further lower our manufacturing overhead, maintain our pricing levels, Realize increasing benefits from our cost actions and productivity efforts and begin to benefit from modest amounts of deflation. We expect to unlock margin improvement in the back half of the year versus the first half as inferred from our full year guidance.

Speaker 3

As a result, we now expect fiscal 2023 net sales of $570,000,000 to $600,000,000 adjusted EBITDA of $90,000,000 to $100,000,000 And capital expenditures of $32,000,000 to $38,000,000 Scott, with that, I'll turn

Speaker 2

it back to you for closing remarks. Thanks, Mark. Although our industry is facing near term headwinds, which we are proactively managing through, We remain energized by the long term opportunities we see in the business. The attractive dynamics of the outdoor repair and remodel industry remain intact. Homeowners continue to migrate to the suburbs, stay in their homes longer and invest in the backyard.

Speaker 2

This view is supported by our lead generation engine, which points to robust underlying interest in pool ownership. We view the macroeconomic impact on consumer demand as a near term headwind for our industry, and we are well positioned to help homeowners build the backyard of their dreams when they're ready to make their pool purchase. The installed pool base has grown significantly over the last several years with in ground residential pools expanding 5% from less than 5,200,000 to $5,400,000 in 2022. As the installed pool base continues to age and grow over time, We are positioning ourselves to capitalize on recurring revenue opportunities within our replacement covers and liners products with the launch of our proprietary technology As the only consumer brand in the residential pool market and the leader in every pool product category we compete in, especially fiberglass, We are well positioned to capitalize on these trends over time. Fiberglass offers significant benefits to homeowners and dealers alike And we are expanding Fiberglass share of the U.

Speaker 2

S. In ground residential swimming pool market as we drive the awareness of these benefits. 2023 will be a year of lower demand in the pool industry, but we believe the long term potential is robust for all the reasons we have just mentioned. We will now open the line to questions.

Operator

We will now begin the question and answer session. Our first question comes from Tim Wojs of Baird.

Speaker 4

Hey, guys. Good morning.

Speaker 3

Hey, Jim.

Speaker 4

Maybe just to start, I was hoping maybe you could just give us a little bit more color, Scott, on some of the dealer activity that you mentioned in your prepared remarks. Just maybe kind of set us Level set us a little bit on kind of where the dealer base is today and how some of those net adds have been trending year to date? Yes.

Speaker 2

So, good morning, Tim. As I mentioned, we proactively got back on

Speaker 3

an aggressive dealer

Speaker 2

acquisition Approach mid last year, late last year, clearly as a result of solidifying the supply Change the internal capacity we brought online and really targeted the fiberglass dealer to drive that conversion story from concrete to fiberglass. I think we've done a really good job. Sales teams have done a really good job of adding a lot of new dealers in the territories where we had a lot of opportunity To grow, and expand the dealer base in the Northeast and the Southwest, and I'd say throughout the majority of the country. What we like about this is this will give us the opportunity to continue to drive and accelerate that growth and penetration of fiberglass. We've been running a lot of active boot camps, getting them trained up down in Zephyrhills.

Speaker 2

We'll resume that later here this fall as the dealers kind of wind down the season. And as we've told folks time and time again, the goal is to really get these guys to double volume year after year and increase their efficiency, what they can get into the ground for the consumer and clearly proof that these new dealers and also our lead generation activity It's solid and we can funnel a lot of demand for them to build that pipeline. So we're happy where we are. We're Maybe slightly ahead of what we thought we would be for this time of the year and we'll continue to add as we go throughout time.

Speaker 4

Okay. Okay, good. And then I guess just maybe on the consumer kind of interaction front. I mean, how How are your lead conversions? If you kind of look at the last 6 months, I mean, how have kind of the leads tracked relative to maybe what you thought coming into the year and just Kind of what the overall consumer has kind of tracked.

Speaker 4

And then has the conversion from like a lead To an installed pool, I mean has that dynamic changed at all over the last 6 to 12 months?

Speaker 2

Yes. So we're happy with our lead activity. We've had a lot of success with leads both for organic We run some regional campaigns, like where dealers wanted to see more leads. So I'd say lead activity, activity for website, number of people sign up for My Lake And just overall interest in pool ownership remains high across the board at the consumer level. I think what we've seen happening over the last 6 The 12 months is what I would say is a delay in the consumer making the purchasing decision.

Speaker 2

We came into the year Nice backlogs, fuel has been working through those. I'd say the consumer is kind of taking a little bit longer to make that Purchasing decision in the uncertain macro environment that's out there, when it's probably a little ahead of where We've been maybe over the last couple of years with them making that quick purchasing decision.

Speaker 4

Okay. Okay, great. I'll hop back in queue. Thanks for the color guys.

Speaker 2

Yes.

Operator

Our next question comes from Keith Hughes of Truist. Go ahead.

Speaker 3

Thank you. Kind of a plus on the guidance, do you think your business will flatten out in the Q4 as we hit that easier comp? Is that the trajectory we're on? Hey, good morning, Keith. Nice to speak with you and thanks for the question.

Speaker 3

If you look at Our updated guidance and just kind of focus on the midpoints for a moment. We are expecting in that implied second half We're expecting to still see some top line softness year over year in the second half. But thanks to the cost actions that we put in place, selling through some of the higher cost inventory, rightsizing Inventory levels, deflation, productivity, etcetera, we do believe we can drive higher year over year EBITDA and EBITDA margins In the second half of this year versus the second half of last year, again, looking at the midpoints of our new outlook for the year. Okay. And you had mentioned in the prepared script $18,000,000 of cost saves for 2023 Via 2 programs.

Speaker 3

How much of that $18,000,000 have you realized and how much is left for the second half of the year? Yes. Thanks, Keith. We've realized somewhere in the neighborhood of a third in the first half, which would then therefore imply 2 thirds in the second half And be another driver behind to support that updated guidance we have and the improved profitability in the second

Operator

Our next question comes from Sean Kalman of Bank of America. Go ahead.

Speaker 5

Hi, guys. Thank you for taking my questions. Just first, in the quarter, you guys were able to outperform some of the overall New pool construction trends and can you just walk us through some of the drivers there? Is it that fiberglass is taking share versus concrete? Are you guys are taking share within fiberglass?

Speaker 5

Or is it a matter of just different geographical exposure for some of the permit data we've seen?

Speaker 3

Yes. Good morning, Sean, and thanks again for the question. As we looked at our 2nd quarter revenue, we were very happy to see the sequential improvement versus Q1. I think our revenue jumped up $40,000,000 versus Q1. Look, we continue to see the or feel the impact of the macroeconomic environment.

Speaker 3

We feel very confident in our ability to continue to drive fiberglass penetration rates as we did in 2022 when we We're able to increase the penetration by 3%. So we believe that's continuing, But we are seeing the demand challenges on the top line, but sequential improvement I think positions us well for the balance of the year. I think as we enter into the second half, we do have some softer comps on the top line year over year. So that will help us and that's back into the Updated guidance that we released this morning.

Speaker 2

Yes. And Sean, I'll add on to that. I think the other part of, let's say, the out on volume maybe versus the overall market. The recurring revenue piece of our business with that large installed base, We've seen good performance there with our liners and covers categories, which again mitigate Some of that decrease in new pool installs across the board. So we're pretty happy with what we saw there and expect that to continue in the back half As well as we enter the replacement cover season here in peak.

Speaker 5

Okay. Thank you. And then just, you mentioned the impact of the higher cost inventory flowing through Being a negative impact to the gross margin, when do you expect that to kind of peak or basically And can you talk about how input costs are trending today?

Speaker 3

Yes. Let me just start with input costs. Input costs are definitely moderating. And as you might imagine, we buy many different products and commodities and so forth. So it's a mixed bag.

Speaker 3

But in total, We're seeing input costs flatten with maybe very modest amounts of deflation looking out into the second half of the year. Some up, some down, but in total modest deflation in the second half of the year. And then as far as the higher the sell through Higher cost of inventory, we would expect that to become a less of a drag in the second half than it was in the first and another one of the reasons why we Feel that our ability to drive higher EBITDA and EBITDA margins in the second half versus the second half of last year is doable.

Operator

Our next question comes from Matt Bouley from Barclays. Go ahead.

Speaker 6

Good morning, Scott, Mark. Thanks for taking the question guys. So on price, I think

Speaker 2

you said price was up 3% in

Speaker 6

the quarter and I think it was up 2% in the Q1. Are you taking additional price increases or surcharges? And just higher level, I guess, what are you kind of seeing on the competitive environment around pricing out there? Thank you.

Speaker 3

Yes. Hey, Matt. Nice to hear from you and thanks for the question. You're right, we've seen 2% to 3% price Increases in the first half of this year, which is more in line with our historical norms of what we've been able to do with the business. We would expect that to continue through the balance of the year.

Speaker 3

The fiberglass surcharge is still in place. As you recall, we put that in place to give us more flexibility in our ability to move pricing around as need be, but that's still there. We're So, collecting on that and again we would expect to see that stay in place as well. And as you know, Matt, A number of different product lines here. We move prices around on all those, but we still feel good about that 2% to 3% kind of All right in that historical form of what we've been able to do with the business.

Speaker 6

Got it. Okay. Thanks for that, Mark. And then second one, the I think you called out on the package pool side that there's still some kind of destocking and I guess Consumer inventory rightsizing still going on. Any sense of kind of where we are in that process of customer inventories and packaged Pools?

Speaker 6

Thank you.

Speaker 3

Yes. Thanks, Matt. Again, I'll take that one. We are still continuing to The channel take inventory levels lower. And whether you call that destocking Our demand, what we're seeing as a result of that is a slower uptake in repeat new orders, which is baked into our updated guidance for the year.

Speaker 3

We think the channel is getting relatively low and tight, but we're going to see where that goes in the second This year, but we feel good right now with the outlook that we have baked in for packaged pools for the balance of the year.

Speaker 6

All right. Thanks, Mark. Good luck, guys.

Speaker 3

Thanks, Matt.

Operator

Our next question comes from Andrew Carter of Stifel. Please go ahead.

Speaker 7

Hey, thank you. Good morning. I guess looking at the performance within the quarter, the in ground pools Down 19%. Could you give us could you quantify how much was destock? And then as you think about the 2 businesses, fiberglass advantage, package pools, Probably a disadvantaged category in this environment.

Speaker 7

How are they kind of correlating around kind of the 9% -thirty percent new construction numbers that are out there? Thanks.

Speaker 3

Hey, Andrew, good morning. Thanks for the question. We saw our in ground pool category, I think in the second quarter was down 19%, if I recall right, which is an improvement over what we saw In the Q1, as you know, we don't split out fiberglass and packaged pools. The bulk of that decline It's coming from the softness that we've seen in the packaged pool space as the channel has continued to take their inventory levels lower. Fiberglass pools are down year over year, but not to the degree that we're seeing the softness in the packaged pool space.

Speaker 2

And what I would add in there too, Andrew, is you had a comment on kind of the trade down. I think we see the benefits Of the trade down in a couple of situations, right? Fiberglass is still 25% to 30% lower cost in concrete, Even as both products have risen in price to the consumer, so as the homeowner says, I can no longer afford a concrete pool, We're seeing continued trade down the fiberglass in that category. And let's say if a fiberglass tool maybe is a little bit out of reach for a consumer now, Right. They may now make the decision to trade down and buy a vinyl liner, most of that package pool category.

Speaker 2

So I think we win on both fronts and maybe that's why the performance, the 19% down that Mark mentioned that was in our comments this morning Maybe performing a little bit better overall than what the total market is doing out there or what you guys have seen in pool permit activity in many regions of the country.

Speaker 7

All right. Thank you. And then second question I wanted to ask about incentive comp. Number 1, kind of what is kind of the tailwind for the year this year for incentive comp and then therefore what comes back next year? And I guess I wanted to ask within the guidance, Actually, it's the midpoint is just modestly down.

Speaker 7

So is there a big change to incentive comp this year? The only Difference to EBITDA is you now have the incremental $6,000,000 of cost savings. Anything you can help us on incentive comps? Thanks.

Speaker 3

Yes. It's a pretty small impact, Andrew, at the end of the day. I think what we're doing is, As we mentioned, we've taken these additional cost out actions in the Q2 of this year and just very early into Q3, Which is going to give us another $12,000,000 annualized, dollars 6,000,000 this year. So $18,000,000 of total cost out for the year. Yes, incentive comp is a Small part of that.

Speaker 3

What we're really doing is staying nimble, actively looking at our cost structure, looking out at the demand environment, adjusting as And I think that's something that we're going to continue to do as we go through the balance of the year, which is all baked into the guide. And again, part of the reason We have the confidence in delivering the second half that is implied in our guidance.

Speaker 7

Thanks. I'll pass it on.

Speaker 3

All right. Thanks, Andrew.

Operator

Our next question comes from Josh Pokrzywinski of Morgan Stanley.

Speaker 3

Please go ahead.

Operator

Hold on one moment. For now, we will take Susan Maklari from Goldman Sachs. Please go ahead.

Speaker 8

Thank you. Good morning, everyone, and thanks for taking the questions.

Speaker 3

Good morning, Susan. Good morning.

Speaker 8

You talked about the ramp of the new facilities in Kingston And in Oklahoma, can you talk a bit about, how you're balancing capacity against the weaker volume? And Any thoughts on how those facilities will ramp over the next couple of quarters?

Speaker 2

Yes, Susan. So in regards to, let's say, both Kingston and Oklahoma. One of the things for everyone to remember here is it's really replacing 2 other facilities we had that were in those territories, Specifically with Oklahoma, right, this is replacing the lost manufacturing capacity we had in Odessa, right. We had been manufacturing pools in other areas transporting them in. So what we're doing now is ramping Oklahoma up to match that local regional demand we see in that area coming with a cost savings for us from no longer having to freight in.

Speaker 2

So really Bringing that facility up kind of as planned to see the demand signals. Kingston, similar situation. We did have the smaller Again, just gating the ramping of that facility, bringing it up to match the regional local demand, offloading what had been being shipped up in many cases From all over the East Coast out of the facilities we had there, again, good cost savings, good benefit, Ability to kind of variabilize the nature of all of our businesses in terms of how we operate these facilities. So we can quickly turn that capacity up as we see the demand signals change, but just trying to be very cautious about how we balance Total production in every plant, in every region to maximize the efficiency of the total operation.

Speaker 8

Okay. That's helpful. And then you made really nice progress again this quarter on taking the inventories down. As you look to the back half, any thoughts on any further progress in there in terms of working capital and How you're thinking about cash generation as we go through the next couple of quarters?

Speaker 3

Yes. Hey, Susan, good morning. Yes. We're very pleased with the progress that we've made in reducing the inventory level since the end of the year. And I think as we all know that, that does come with an impact a negative impact to the P and L, but the right thing to do, we're still able to maintain Very strong lead times with this lower inventory levels.

Speaker 3

We're getting to the point now where we're probably thinking about Stabilizing those levels where we're at, maybe some modest further reductions. We'll see what happens in the balance of the year. And again, not having that negative P and L impact in the first half from the Pretty significant reduction in inventories is another uplift Q2 or second half versus first half. Feel really good about where our liquidity is With the way the balance sheet books, dollars 118,000,000 of liquidity, which is cash on hand plus revolver availability, We did see a very modest tick up in our net debt leverage ratio to 3.0 times. We would expect Susan that that would drop modestly go lower modestly by the end of the year.

Speaker 8

Okay. Thanks for the color and good luck with everything.

Speaker 3

Sure. Thanks, Susan.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Scott Rajeski for any closing remarks.

Speaker 2

Yes, thank you. I'd like to take a moment to thank all of our employees, dealers, wholesale distribution partners and suppliers. All of your hard work and partnership with us It's really critical to our long term success. Also, I want to thank everyone who joined us for today's call. Really appreciate your time and continued interest and support of Latham.

Speaker 2

I hope everyone has a great rest of the summer, be safe out there and looking forward to catching up with everyone the next time. Take care.

Operator

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

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Earnings Conference Call
Latham Group Q2 2023
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