Latham Group Q2 2026 Earnings Report

Latham Group EPS Results

• Actual EPS: $0.11
• Consensus EPS: $0.16
• Beat/Miss: Missed by -$0.05
• One Year Ago EPS: N/A

Latham Group Revenue Results

• Actual Revenue: $197.47 million
• Expected Revenue: $188.39 million
• Beat/Miss: Beat by +$9.09 million
• YoY Revenue Growth: N/A

Latham Group Announcement Details

• Quarter: Q2 2026
• Date: 8/4/2026
• Time: After Market Closes
• Conference Call Date: Tuesday, August 4, 2026
• Conference Call Time: 4:30PM ET

Latham Group (NASDAQ:SWIM) (NASDAQ: SWIM) designs, manufactures and markets residential swimming pool products. The company serves the in-ground pool market with a portfolio that includes fiberglass pools, vinyl pool liners and automatic safety covers, along with related pool components and accessories.

Latham sells its products primarily through a network of independent dealers, distributors and pool professionals. Its products are used in new pool construction as well as renovation and replacement projects, serving homeowners and contractors in the residential swimming pool industry.

The company operates manufacturing and distribution facilities across North America, Australia and New Zealand, with additional operations serving European markets. Latham Group became a publicly traded company in 2021. Scott Rajeski serves as the company's president and chief executive officer.

Latham Group Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Raised full-year 2026 guidance: Management increased the midpoint of sales growth guidance to 11.7% from 9% and adjusted EBITDA growth to 15.2% from 12.7%, citing stronger demand, share gains, and expected operating leverage.
• Positive Sentiment: Second-quarter sales rose 14% year over year to $197 million, including 10% organic growth, with particularly strong in-ground pool sales and fiberglass pool demand. Consumer leads increased 60%, website traffic rose 30%, and July sales trends were tracking toward guidance.
• Positive Sentiment: The Sand States strategy continued to gain traction, with double-digit sales growth in Florida and across the region. Latham plans to expand its targeted market-development approach into Texas, followed by Arizona and California, while funding much of the expansion through internal cost optimization.
• Negative Sentiment: Gross margin fell 160 basis points to 35.5% because the rapid demand surge caused under-absorption, inventory drawdowns, and accelerated hiring, training, and overtime costs. Management expects to recover most of the approximately $2.8 million headwind over the next two quarters, but higher transportation and commodity costs may require further pricing actions.
• Positive Sentiment: Adjusted EBITDA increased 12% to $45 million, while management expects year-end net leverage below 2.0 times versus 2.2 times at quarter-end. This is intended to preserve flexibility for reinvestment, selective acquisitions, and potentially returning capital to shareholders.

Presentation

[Operator]

Welcome to the Latham Group second quarter 2026 earnings conference call. I would now like to turn the conference over to Casey Kotary, Investor Relations Representative. Please go ahead.

[Casey Kotary, Investor Relations Representative at Latham Group]

Thank you. This afternoon, we issued our second quarter 2026 earnings press release, which is available on the Investor Relations portion of our website. On today's call are Latham's President and CEO, Sean Gadd, and CFO, Oliver Gloe. Following their remarks, we will open the call to questions. During this call, the company may make certain statements that constitute forward-looking statements, which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's annual report on Form 10-K and subsequent reports filed or furnished with the SEC, as well as today's earnings release. The company expressly disclaims any obligation to update any forward-looking statements except as required by applicable law.

[Casey Kotary, Investor Relations Representative at Latham Group]

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 is available on our Investor Relations website. I'll now turn the call over to Sean Gadd.

[Sean Gadd, President and CEO at Latham Group]

Thank you, Casey, and thank you all for joining today's call to review our second quarter and discuss our business outlook for the remainder of the year. This was a strong quarter for Latham, demonstrating our ability to execute on our strategic priorities and deliver growth despite a flat market for new U.S. pool starts, which was in line with our expectations. There is still substantial runway to outpace the market as our strategic initiatives gain traction. Now, more than two full quarters into my tenure as CEO, I've had the opportunity to develop a deep understanding of the business. I'm encouraged by the positive momentum we are seeing. Several initiatives we have put in place are already producing encouraging early results. I'm confident they position us to drive sustained growth in the quarters and years ahead.

[Sean Gadd, President and CEO at Latham Group]

With that, I would like to highlight a few key takeaways from the quarter. First, our sales grew 14% year-over-year, 10% of which was organic growth. Second, we continued to make solid progress in the Sand States, where sales increased at a double-digit rate. Building on this foundation, we are moving ahead with new strategies and resources designed to further accelerate growth. Third, we delivered solid growth in gross profit, driven by higher volumes and continued benefits from our lean manufacturing and value engineering initiatives. The sharper-than-expected surge in demand early in Q2 resulted in quarter-specific ramp-up costs that capped gross margin in the quarter at 35.5%. We expect to recapture the majority of these costs over the next two quarters and remain confident in our ability to deliver year-over-year growth and EBITDA margin expansion, Oliver will provide more detail later in the call.

[Sean Gadd, President and CEO at Latham Group]

Finally, our year-to-date results, together with the current order trends, have led us to increase our full-year sales and adjusted EBITDA guidance for 2026, raising the midpoint of our sales growth guidance to 11.7% from 9%, and the midpoint of our adjusted EBITDA growth guidance to 15.2% from 12.7%. This reflects our expectation for higher volumes due to continued share gains and the recapture of operating leverage. Let's take a closer look at the main contributors to our second quarter sales growth. In-ground pool sales were up substantially on both a total and organic basis, thereby strong growth in fiberglass pools. Fiberglass pools are on track to account for approximately 80% of our full-year 2026 in-ground pool sales, and we expect fiberglass to gain another percentage point of market share this year, representing approximately 25% of new U.S. pool starts.

[Sean Gadd, President and CEO at Latham Group]

Cover sales were up year-over-year, primarily driven by the continued growth in auto covers due to what we believe is a steady increase in auto cover attachment rate on new pool installations. Liner sales also increased in the second quarter, driven by our proprietary Measure by Latham technology and benefiting from our industry-leading lead times. Looking ahead, Latham has substantial growth opportunities that are not reliant on the rebound in new U.S. pool starts. To fully capture these opportunities, we are concentrating our efforts on four strategic priorities to drive growth. One, we wanted to continue to grow our core business in established markets, including the Northeast, Midwest, Canada, Australia, and New Zealand. Two, we want to drive material conversion to fiberglass from concrete in the Sand States. Three, we want to increase the attachment rate of our auto covers, aiming for an auto cover on every new pool installation.

[Sean Gadd, President and CEO at Latham Group]

Four, continue to complete accretive acquisitions that expand our market leadership and/or our geographic reach, and that are culturally aligned with Latham. To support these growth drivers, we need to achieve sales excellence across all of our markets, follow a disciplined market development approach, market directly to the consumer, and own their path to purchase, continue to gain efficiencies through lean manufacturing and value engineering programs, and strengthen our focus on improving safety in all of Latham's facilities. I'm pleased to report that all these initiatives are underway. Our Sand States strategy continued to gain traction in the second quarter, benefiting from the close collaboration between our sales teams and the dealer network. This contributed to another quarter of double-digit growth in Florida, our initial target market, and a double-digit growth for the Sand States overall.

[Sean Gadd, President and CEO at Latham Group]

We believe success in the Sand States has the potential to drive a step change in the company-wide growth, and we are expanding our efforts to further accelerate growth in 2027 and beyond. We introduced several initiatives designed to capture consumer demand in the Sand States, including strengthening our commercial organization, implementing a new market development framework, and adding sales resources in the field. Through our new market development framework, we are taking a highly targeted approach by identifying areas that offer the greatest growth opportunities. Beginning in Florida, we have identified multiple high-potential micro markets, communities with favorable home values, lot sizes, and household income profiles, and we have deployed additional sales resources in the field to work alongside our dealers and partners to increase market penetration.

[Sean Gadd, President and CEO at Latham Group]

At the same time, our national advertising and marketing campaigns continue to reinforce Latham's reputation for industry-leading product range, quality, and lead times. Those campaigns are resonating with consumers, generating increased demand, and supporting our growth initiatives across our target markets. In the second quarter, consumer leads were up 60% versus prior year. Latham website traffic was up 30%. Google search demand for Latham was up over 100%, and Latham remains the number one searched-for brand among fiberglass competitors. Additionally, as part of our Sand States strategy, I recently spent time in Texas, and I believe it represents the next significant growth opportunity for Latham. We plan to expand our market development framework from Florida into Texas and thereafter extend it into the other Sand States, Arizona, and California.

[Sean Gadd, President and CEO at Latham Group]

Importantly, we're funding some of this expansion through programs to optimize certain operational and administrative functions, allowing us to redeploy resources for the highest return growth initiatives. Oliver will provide additional insight on these programs, as well as the contributions from our lean manufacturing and value engineering initiatives in the second quarter. Finally, we recently launched our Zero Is Possible safety initiative, which is being rolled out across all of Latham's manufacturing facilities worldwide. More than a safety program, Zero Is Possible represents a foundational shift on how we operate, fostering greater workforce engagement and reinforcing the belief that every incident is preventable. I believe that this mindset is foundational to a world-class manufacturing organization. While safety is the immediate focus, the benefits will extend well beyond safety over time through stronger operational discipline, reliability, employee engagement, and overall performance.

[Sean Gadd, President and CEO at Latham Group]

In summary, we are pleased with our second quarter performance and the momentum we are seeing across the business. This momentum has given us increased confidence in our outlook and supported our decision to raise our full year 2026 sales and adjusted EBITDA guidance, and sales trends in July are tracking towards those expectations. Now, I will turn it over to our CFO, Oliver Gloe, for the financial review. Oliver.

[Oliver Gloe, CFO at Latham Group]

Thank you, Sean, and good afternoon, everyone. I am pleased to report on our second quarter financial performance, which clearly demonstrates Latham's continued outperformance of the market. Please note that all comparisons that I will discuss today on a year-over-year basis compared to the second quarter and the first half of fiscal 2025, unless otherwise noted. Net sales for the second quarter were $197 million, 14% above $173 million in Q2 of 2025, of which 10% represented organic growth and 4% represented growth from the Freedom Pools acquisition, which we completed at the end of February 2026. Organic growth was led by robust demand for Latham products, reflecting the strength of our sales and marketing efforts and progress of our growth strategy.

[Oliver Gloe, CFO at Latham Group]

Across our product categories, in-ground pool sales were $96 million, up 23% in the second quarter or 14% organically, driven by a rapid and better-than-anticipated influx of orders that temporarily outpaced production early in the quarter. With our manufacturing lines ramping to current demand levels, we are well positioned for the remainder of the season. Cover sales were $41 million, an increase of 10%, and liner sales were $60 million, up 6%. Gross profit increased 9.6% to $70 million. Gross margin was 35.5% in the second quarter, a 160 basis points decline compared to last year. We continue to see benefits from our lean manufacturing and value engineering programs, which had a positive impact on gross profit of approximately $2.7 million in the second quarter.

[Oliver Gloe, CFO at Latham Group]

However, the sudden surge in demand for fiberglass pools caused our ramp-ups to be more pronounced compared to prior years, resulting in approximately $2.8 million of incremental costs in the quarter, which represented a gross margin headwind of approximately 140 basis points. The majority of these costs are expected to be recovered in the second half of this year. SG&A expenses increased to $38 million, up $6 million, primarily due to investments in our growth strategies, the timing of sales and marketing initiatives related to our fiberglass conversion strategy, acquisition and integration-related costs, which includes $2.2 million of performance-based compensatory earn-out expenses related to our Coverstar Central acquisitions in 2024, and costs related to our digital transformation program. We completed a restructuring and voluntary early retirement program, resulting in $2.5 million of annualized savings.

[Oliver Gloe, CFO at Latham Group]

These savings will be redeployed to align talent, structure, and resources with the company's strategic priorities, including strengthening the commercial organization against our highest impact growth opportunities. We will incur an associated one-time charge of $1.5 million in the second half of the year. Net income was $30 million, or $0.11 per diluted share, a decrease from $60 million, or $0.13 per diluted share for the prior year's second quarter. Net income margin was 6.5% compared to 9.3%, and included an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries of $5 million. Adjusted EBITDA of $45 million increased $5 million, or 12%, from last year's $40 million, and adjusted EBITDA margins contracted to 22.6%, a 50 basis point decline from 23.1% in the prior year period.

[Oliver Gloe, CFO at Latham Group]

This decrease was primarily due to lower gross margin and the timing of sales and marketing initiatives to accelerate share gains in the sand states. Turning to our first half year-over-year results comparison. Net sales were $315 million, up 11% from $284 million, primarily due to organic growth of 7.5%, with the acquisition of Freedom Pools contributing the remainder. Gross profit increased by 11% to $107 million from $97 million. Gross margin remained flat at 34.1%. Net income was $4 million compared to $10 million in the prior year period. Net income margin was 1.3% compared to 3.5%, and included an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries of $6.4 million. Adjusted EBITDA increased by 11% to $57 million from $51 million. Adjusted EBITDA margin remained flat at 18%.

[Oliver Gloe, CFO at Latham Group]

Turning to our balance sheet and cash flow statement, we continue to maintain a strong financial position with cash of $43 million at the end of the quarter. Net cash provided by operating activities was $54 million in the second quarter. In the first half, net cash provided by operating activities was $6 million. Total debt for the period was $280 million, with a net debt leverage ratio of 2.2. Based on expected cash flow generation for the remainder of the season, we are tracking towards a net debt leverage ratio of below two by year-end. Our capital expenditures were $6 million for the second quarter of 2026. First half capital expenditures were $28.1 million, including the purchase of the four key fiberglass production sites, which we have previously discussed.

[Oliver Gloe, CFO at Latham Group]

As we've also previously discussed, the company completed the acquisition of Freedom Pools for a purchase price of $17 million in February 2026. I would like to emphasize our capital allocation priorities, which are reinvesting in the business to capture organic growth opportunities, selectively pursuing strategic acquisitions, and evaluating opportunities to return capital to shareholders over time while maintaining a strong balance sheet. Moving on to our outlook. Our first half performance reinforces our confidence that Latham has significant opportunities that extend beyond any recovery in new U.S. pool starts. We are raising our full-year outlook for both net sales and Adjusted EBITDA. At the midpoint of our revised guidance, we now expect net sales growth of 11.7%, including 8.4% organic growth and Adjusted EBITDA growth of 15.2%.

[Oliver Gloe, CFO at Latham Group]

The increase in guidance reflects stronger first half demand for our products, continued execution of our growth initiatives, and our current visibility into the remainder of the pool season. We will continue investing to strengthen our leadership position in our core markets while accelerating fiberglass conversion across the sand states. Our revised guidance takes into account our assessment of the impact of the ongoing conflict in the Middle East on our costs. To mitigate the increase in our transportation costs, we instituted a surcharge. We have additional mitigation strategies in place to fully or mostly offset commodity headwinds related to higher oil prices. With that, I will turn the call back to Sean for his closing remarks.

[Sean Gadd, President and CEO at Latham Group]

Thanks, Oliver. As you have heard, we are excited about the growth opportunities on the horizon. I see tremendous potential to expand our share in each of the markets we serve and throughout our product portfolio, and we intend to take advantage of soft markets to accelerate our Sand States strategy and strengthen our execution. This is an exciting time to be at Latham. We appreciate the commitment to excellence that our people show each day and the loyalty and trust of our dealers and customers, supporting our confidence in our future performance. Operator, please open the call for questions.

[Operator]

We will now begin the question and answer session. Our first question comes from Timothy Wojs with Baird. Please go ahead.

[Timothy Wojs, Analyst at Baird]

Hey, everybody. Good afternoon. Thanks for the questions and the detail. Maybe just to start off, if you could maybe talk about the demand environment. Obviously, you're talking about a surge in demand, so I'm just curious how the quarter played out and what specifically was better than your expectations?

[Sean Gadd, President and CEO at Latham Group]

Yeah, thanks, Tim. I'd start with understanding Q1 was pretty soft with all the bad weather we had in the country. I think there's a bit of pent-up demand through Q1, which then built on to Q2, and then with that said, the demand in Q2 was higher than we had expected. Obviously, we were planning on a, and still are planning on a flat to slightly up, probably flat housing pull start. It looked like there's just a true spike in demand, which is a result, in my mind, from us taking share over the last sort of 12 months and started culminating into the new season. We didn't get any indicators in Q1, but certainly Q2, it accelerated faster than we expected compared to previous years.

[Timothy Wojs, Analyst at Baird]

Okay. Based on the KPIs you see internally, is this just core share gain or is this a much better or faster return on some of the sales strategies that you've changed or the Sand States investments?

[Sean Gadd, President and CEO at Latham Group]

I think it's a little bit of everything. I think it's a result of our marketing campaign now further into its run. It's certainly resonating. We hear a lot from dealers that homeowners are saying they saw us, they heard about us. That's starting to kick in. I think our core markets are growing, which is really share gain, moving essentially into more market in the Northeast and Midwest and Canada. We are getting good gains in the South as well. Everything is sort of clicking, although plenty of upside still to go in terms of execution.

[Timothy Wojs, Analyst at Baird]

Okay. That's great. Just maybe on the cost side, Oliver, it sounds like price cost is going to be net neutral this year. Just verifying that. The second piece, why do you get the inefficiencies back in the back half of the year? What, I guess, happened in Q2, and why do you actually get it back?

[Oliver Gloe, CFO at Latham Group]

Yeah, Tim, let me start out by saying this was actually the second highest gross profit in our history as a public company. We were within a percent of our record, which was at the peak of COVID in Q1 2022. Gross profit and with that, gross margin could have been even higher. What held us back, as Sean said, Q1 was light, right? We had snow on the ground up until late March. We actually ran the facilities comparatively light, going into Q2, and we were met with almost an instant demand and an instant start of the season early Q2. We didn't see the usual ramp. What that caused was, A, an under-absorption in our plant, and B, we actually sold product in order to fulfill the demand out of inventory.

[Oliver Gloe, CFO at Latham Group]

That is about two-thirds of the headwind that I outlined in my prepared remarks. That is the portion that we plan to recover balance of year, as ultimately, we will restock inventory. We will get that absorption back as we need to prepare for the 2027 season.

[Timothy Wojs, Analyst at Baird]

Okay.

[Oliver Gloe, CFO at Latham Group]

Of that headwind that I outlined is actually associated with the accelerated ramp, right? We obviously, as I said, accelerated the ramp from a standpoint of overtime, hiring, training, and so forth. That's obviously not the most efficient way to ramp up. I would say that headwind is part of Q2 and is in the rear-view mirror. Ultimately, I'm very thankful to the outstanding performance of our operations team. Ultimately, we ramped up to demand. As we pointed out, at comparatively higher cost. I think to your question about the price laws equation, I think the simplest way to think through Q2 gross margin is that the combination of price and the contribution of lean and value engineering competitively offset commodity inflation, tariffs, and cost inflation in our plants.

[Oliver Gloe, CFO at Latham Group]

All of that, probably think of that as a 50 basis point tailwind, which is our normal progression. I think we've seen that in prior quarters as well. We add in Freedom. Freedom is not doing anything to the group from an EBITDA percentage, but it's slightly lower margin, lower cost business. Adding in Freedom is actually, is a headwind of about 40 basis points to group gross margin. The overriding contributor to the gap in EBITDA margin is the volume leverage that I discussed, the incremental absorption cost, the incremental cost associated with the accelerated ramp that I just walked through. I want to say we had two other impacts that are about $1 million, $1.5 million. They offset each other, but they're important to mention and understand. We did receive IEEPA tariff refunds. We collected those.

[Oliver Gloe, CFO at Latham Group]

That was a tailwind in the quarter. We obviously had transportation headwinds from the Middle East conflict. We instituted a surcharge, not day one, right? It took us a couple of weeks to announce, and then you always pre-announce and implement at a later date. The transportation surcharge from a timing perspective lagged the impact itself. We were very thoughtful of setting the surcharge, but they were not set at a level supporting an oil price and subsequent diesel price beyond $100. Temporarily, we were a little bit uncovered from a transportation surcharge perspective. Again, summarizing, gross margin could have been even higher if the ramp would've been more gradual, right?

[Oliver Gloe, CFO at Latham Group]

On the other hand, as I said, I'm glad that the operation team lived up to the challenge and enabled that 14% top-line growth at a 10% growth in gross profit. Maybe one last sentence from a gross margin cadence perspective in the quarter. The headwind was really limited to April, a little bit spilled into May. June, and let me add in July as well, shows the usual gross margin and EBITDA expansion versus prior year that you're used to seeing from us.

[Timothy Wojs, Analyst at Baird]

Okay. That's a lot of great color. I appreciate it. Nice job, good luck on the rest of you guys. Thank you.

[Oliver Gloe, CFO at Latham Group]

Thank you.

[Operator]

Our next question comes from Ryan Merkel with William Blair. Please go ahead.

[Ryan Merkel, Analyst at William Blair]

Hey, everyone. Thanks for the questions. I wanna follow up on Tim's question on the sudden surge of demand. I found that interesting as well. Is that comment broad-based across all the geographies, or did you see that surge sort of in the Midwest and the Northeast as sort of the weather thawed? I'd like your thoughts on, what I hear from contractors is everyone wants a less expensive pool because the in-ground pool has got so expensive. I wonder if you're starting to hear that from the contractors, if that's starting to help.

[Sean Gadd, President and CEO at Latham Group]

I think it's across the board. When we looked at how the quarter performed, there's no one geography outperforming another. Generally, you've got the lift everywhere, which I think is a lot to do with the fact that we are doing national advertising. I think that's a good outcome. We have got our team in place. Our sales team's been in place consistently now for quite some time in our core markets, I think we're getting the benefit of that. Our southern markets, again, are doing a lot of the right activity and then are starting to see some results through the dealers that they're working with. That would've been across the board, not just a specific geography.

[Sean Gadd, President and CEO at Latham Group]

In terms of less expensive pools, I've traveled now through the States, and I've seen a number of dealers in the last month where people are trying, or dealers are trying to get to a different price point to see if it opens up more of the market. I've got an example in Florida, I've got an example in Texas, where they're offering a pool at $50,000. It's a basic pool, but they're offering it at $50,000, and it's there to see if the market opens up. We're not hearing as much noise as you describe about looking for cheaper pools. However, our dealers are trying to see if opening at a price point of $50,000 opens up more market. It is too early to tell.

[Ryan Merkel, Analyst at William Blair]

Got it. Okay. That's helpful. Just a question on seasonality. Typically, revenues are down 6% from 2Q to 3Q. It sounds like you might actually beat that seasonality. It sounds like orders and everything is going pretty well. Just any comments on 3Q sales and the seasonality there?

[Sean Gadd, President and CEO at Latham Group]

Yeah. The order file is looking really robust. We like that. I think we feel good about Q3 and where it's gonna go. I think our challenge, only challenge I see is if for whatever reason we end up with snow coming in early. Outside of that, we think it should follow our sort of standard quarterly flow and cadence. That shouldn't be any different.

[Ryan Merkel, Analyst at William Blair]

All right. Got it. Thanks. Good quarter. Pressing on.

[Sean Gadd, President and CEO at Latham Group]

Thank you.

[Operator]

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

[Andrew Carter, Analyst at Stifel]

Thank you. Good evening. I wanted to better understand kind of the issue you had during the quarter with the ramp-up. Was it all about planning? Ideally, you're going to go to a world that pools start growing low single digits, or if some people are right, mid single digits. Does this say anything about your future ability to capitalize on a tidal wave of demand or anything else? Was this just truly a planning for this year, therefore isolated this, doesn't say anything about the network demands?

[Sean Gadd, President and CEO at Latham Group]

Thank you, Andrew. Good question. I'll start with the ramp-up was certainly more extreme than what we've seen in the past. It really is a planning issue. I will tell you, as I've thought, we've just come off our strategic planning. As we think in the future, we are going to make two adjustments. One is, I'm highly confident we're going to continue to grow in the coming years. We are going to carry a little bit of insurance, and that will be either through people or inventory or both. That'll be the adjustment we'll make moving forward. To be quite honest, we weren't in the quite the ready position when the market hit, partly because we didn't know that it was going to go that far. We thought it'd go to the traditional ramp-up as it had in the past.

[Sean Gadd, President and CEO at Latham Group]

Quite honestly, it came much quicker than we thought. It's a planning issue.

[Andrew Carter, Analyst at Stifel]

Fair enough. Second question is, I think in the deck you have the old $750 million sales, $160 million EBITDA up from today. I got at the midpoint, that's a 32% EBITDA margin. Just to confirm today, with the commercial initiatives that you have in place, essentially you have all the resources in hand right now. There's no step change in SG&A or other investments such that you should still be planning on that 32% incremental from here. Thanks.

[Oliver Gloe, CFO at Latham Group]

Yeah, I think the strategic model that we outlined, what is it? Almost two years ago, I think is still very much intact, right? I think we are very well on track to delivering the strategic part of the equation. Obviously, the market since then has been unstable, as a matter of fact, slightly going backwards. None of the assumptions have changed significantly other than the contribution towards that model is more skewed towards the execution of the strategy rather than a snap back in the market.

[Andrew Carter, Analyst at Stifel]

Got it. Thanks. I'll pass it on.

[Sean Gadd, President and CEO at Latham Group]

Thanks, Andrew.

[Operator]

Our next question comes from Jackson Schroeder with Craig-Hallum. Please go ahead.

[Jackson Schroeder, Analyst at Craig-Hallum]

Hi, sorry. This is Jackson Schroeder with Craig-Hallum. Wanted to talk a little bit more about the Sand States and the growth out there. If you could give a little bit more on the timeline to that Arizona, California expansion, where you're at with Texas, and what some of the lessons you've had from growth in Florida is going to inform that?

[Sean Gadd, President and CEO at Latham Group]

Yeah. Good question. I'll start with Texas. I think my visit in Texas would suggest that the majority of the market is going to behave similar to what you'd expect in Florida. In that, I do believe our segmentation, targeting, positioning around the neighborhoods and our raffle approach around neighborhoods, is going to work in Texas. I will tell you that part of the reason I'm expanding into Texas faster is one, we like the early signs in Florida of the work we're doing. Two, quite honestly, we're under-manned in Texas. Texas is a very big market. I see it as a really big opportunity for us and we've got Dallas covered, and that's about it. We want to get into San Antonio, want to get into Austin, want to get into Houston.

[Sean Gadd, President and CEO at Latham Group]

We are going to man out there, and obviously, that'll be self-funded through the programs that we spoke about on the call. The next step for me then is to look out at the West Coast. We have a role open for a vice president of Sand States West. That'll be the first person we want to hire, and once we get that hire, then we'll start to look at Arizona and Southern California. I'm actually in Arizona in two weeks' time to have a look at the market.

[Jackson Schroeder, Analyst at Craig-Hallum]

Perfect. Just a follow-up, as we assume the margin profile geographically, is it all the same or are those slightly different just with how the market's a little different there?

[Oliver Gloe, CFO at Latham Group]

Say again, I apologize. The line was not very clear.

[Jackson Schroeder, Analyst at Craig-Hallum]

Oh, sorry. Is it similar margin profiles across geographies or are they different with the higher volumes that are produced out there?

[Oliver Gloe, CFO at Latham Group]

No, I'd say it's a similar margin profile across the regions.

[Jackson Schroeder, Analyst at Craig-Hallum]

Perfect. I'll leave it there. Thanks.

[Oliver Gloe, CFO at Latham Group]

Thanks for the question.

[Sean Gadd, President and CEO at Latham Group]

Thank you.

[Operator]

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

[Elaine Ku, Analyst at Barclays]

Good afternoon. You have Elaine Ku on for Matthew Bouley today. Thanks for taking my question. First, I guess within your now high single digits organic growth guidance, can you just call out which category between pools, liners, covers are you seeing build towards that level? And on the ground, between customer channels, backlog, what's driving that confidence in the sustainability of this high single digit organic growth trend?

[Sean Gadd, President and CEO at Latham Group]

Thank you for the question. I think from a growth perspective, all our lines are actually growing. We feel good as across the board. That's auto covers, that's liners, that's in-ground pools. We feel good about our portfolio. The second question around, is this sustainable and is there a load in our products?

[Sean Gadd, President and CEO at Latham Group]

Start with fiberglass. Our fiberglass product line goes pretty much direct to dealers, so there's no real inventory, or pileup of inventory. Our liners actually go through distribution primarily. Yes, they're flowing right through. We're not seeing anything out of the ordinary from a sort of inventory growth perspective. I would also say that after speaking to a number of our dealers in the last two or four weeks, their backlogs look sustainable and look kind of normal in terms of the number of weeks in which jobs are out.

[Elaine Ku, Analyst at Barclays]

Awesome. Thanks. Secondly, could you elaborate a little bit more on just how some of your variable cost base is trending? Color on maybe your raw materials, freight costs, labor exposure. What does that look like now?

[Oliver Gloe, CFO at Latham Group]

Yeah, I want to say, coming out of COVID, we did a thorough job in variabilizing our cost base. I would say total cost base is about 70% variable, 30% fixed cost. We usually don't typically break down raw materials versus cost to the plant. That is different by product category. I want to say coming out of COVID and after some of the restructuring and right-sizing we've done back then, I think that split 70/30 that I just mentioned before, I think has been fairly constant.

[Elaine Ku, Analyst at Barclays]

Great. Thank you.

[Oliver Gloe, CFO at Latham Group]

Thank you.

[Operator]

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

[Charles Perron-Piché, Analyst at Goldman Sachs]

Hi, Sean, Oliver. This is Charles Perron in for Susan. Thanks for taking my question.

[Sean Gadd, President and CEO at Latham Group]

Hey, Charles.

[Charles Perron-Piché, Analyst at Goldman Sachs]

Hi. First I just wanna talk about the momentum you're seeing from the Sand State strategy, Florida. As you expand in Texas, Arizona, and California, can you talk about the investments needed to support that growth, and how does this inform your ability to get SG&A leverage in the back half and in the coming years to support that growth?

[Sean Gadd, President and CEO at Latham Group]

Yeah, I think it's gonna require a small investment, and I say small because the marketing campaign's already a national campaign. We are in pretty much in every market. The local marketing that we do, that we're carrying out in Texas actually is reasonably inexpensive. It's effective but inexpensive. As we expand those geographies, we don't see a lot of marketing spend necessarily going up. When you think about salespeople, which is essentially the majority of the investments with boots on the ground, we are funding that through some optimization programs that Oliver spoke about on the call, which is we've taken certain functions inside the business and we've eliminated a bit, some duplication, and we've been able to free up some dollars that will enable us to fund what we need to do in the southern market.

[Sean Gadd, President and CEO at Latham Group]

I would not expect SG&A as a percentage to go up necessarily, because it should all be self-funded either through volume and/or our program that I just spoke about.

[Oliver Gloe, CFO at Latham Group]

Charles, let me add the other side of the equation, the CapEx investments. You've heard us talk about an additional $10 million between this year and last year to build those molds for those models that resonate well in the Sand State. These are smaller, rectangular, feature-rich models, as well as we've taken some dollars to debottleneck and optimize the flow through our Sand State sites, especially in Florida and Oklahoma.

[Charles Perron-Piché, Analyst at Goldman Sachs]

Got it. No, that's helpful color. My second one is, you'd mentioned that you're gonna end the year with net leverage below 2x. How do you think about the ability and willingness to do more M&A in this environment, considering the weaker macro backdrop that we're seeing these days? When you think about your expansion, especially in those states, Texas, Arizona, California, do you see maybe M&A as one way to help support and your growth and your capacity across your network? More broadly, how do you think about the ability to or willingness to do more deals in this market?

[Sean Gadd, President and CEO at Latham Group]

Yeah. In terms of M&A, the reality is we are continuously and always looking for opportunities. We've got sort of a background of one a year. We are working with a number of deals, none of which are at a point where we are ready to pull the trigger on, but we certainly are doing the work to see what's out there. In terms of the Sand States and whether we think vertically integrating or doing something along those lines is necessary, it's probably, no, not probably, it is too early to tell because quite honestly, we're growing. The first few things that we're trying to do seem to be showing some signs of life. We want to play that out for a little bit of time before we consider doing anything else.

[Oliver Gloe, CFO at Latham Group]

Maybe let me add one more thing from a net debt leverage ratio perspective. With a year-end target of below two, which is very realistic, that gives us a lot of dry powder to execute on our capital allocation policy, which one arm is M&A, but it's not the only arm.

[Charles Perron-Piché, Analyst at Goldman Sachs]

Got it. Thank you for the color, guys. Good luck for next quarter.

[Sean Gadd, President and CEO at Latham Group]

Thank you.

[Oliver Gloe, CFO at Latham Group]

Thank you.

[Operator]

Our next question comes from Shaun Calnan with Bank of America. Please go ahead.

[Shaun Calnan, Analyst at Bank of America]

Hi, guys. Thank you for taking my questions. The organic growth in in-ground pool sales, obviously very impressive in the quarter. Are you able to break out the price versus volume there, and are you starting to see an acceleration in the fiberglass share gains just versus the overall in-ground pool market?

[Oliver Gloe, CFO at Latham Group]

Yeah. If you take apart the 14% reported growth, it's 10% organic, of which 3% was price, right? The majority sits in volume and with that, share. Across the product lines, it's driven by in-ground pools, and within that, it's fiberglass pools. That's where the growth is coming from, and this is where we execute our strategy.

[Shaun Calnan, Analyst at Bank of America]

Okay. If I back out the $2.8 million one-time expense, it looks like gross margin was slightly down year-over-year. Do you think you need to increase prices further this year in order to offset the input cost inflation you're seeing?

[Oliver Gloe, CFO at Latham Group]

I think what you'll see adding back what we call also as an incremental ramp-up expense, and you adjust for the adverse impact of the Freedom addition, you should see a gross margin which is slightly up. To answer your question going forward, yeah, I think some of the impacts from the Middle East, especially on the commodity side, they are now gonna start coming into the P&L towards mid or late Q3. This is where, in my prepared remarks, I mentioned we have mitigation strategies in place. Earlier this week, we have announced a price for our vinyl liners. Price is one of the mitigation strategies, not the only one. Volume and cost contribute as well. Yeah, absolutely. I think there will be additional price that is coming into Q3 based on the announcements earlier this week.

[Shaun Calnan, Analyst at Bank of America]

Okay, great. Thank you.

[Operator]

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

[Sean Gadd, President and CEO at Latham Group]

Thank you. I just wanted to say, once again, thank you for joining us. Feel very good about where the business is at. Very excited about the year. We're happy to see the progress that's getting made, both from the operational side, as Oliver discussed, in terms of the ramp-up, because it did come quicker than we thought, but also, obviously from the demand side. I think the sales organization and commercial organization is starting to come together. I think the business is running rather well. With that, I just want to conclude. I want to thank everybody, and we'll speak to you guys all soon. Thank you.

[Operator]

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

Participants

Executives

• Casey Kotary, Investor Relations Representative
• Sean Gadd, President and CEO
• Oliver Gloe, CFO

Analysts

• Timothy Wojs, Analyst at Baird
• Ryan Merkel, Analyst at William Blair
• Andrew Carter, Analyst at Stifel
• Jackson Schroeder, Analyst at Craig-Hallum
• Elaine Ku, Analyst at Barclays
• Charles Perron-Piché, Analyst at Goldman Sachs
• Shaun Calnan, Analyst at Bank of America