10-Q: Latham Group Reports Improved Profitability Despite Sales Dip in Q2 2024

Latham Group saw a decrease in net sales but an increase in net income and Adjusted EBITDA for the second quarter of 2024 compared to the same period last year.

Summary

• Latham Group's net sales decreased by 9.6% to $160.1 million in the second quarter of 2024 compared to $177.1 million in the second quarter of 2023.
• The company's net income increased to $13.3 million, representing an 8.3% net income margin, compared to $5.7 million in the same quarter of the previous year.
• Adjusted EBITDA increased to $34.5 million with a margin of 21.5%, up from $31.0 million and a 17.5% margin in the prior year's second quarter.
• For the first half of 2024, net sales were $270.8 million, a 14% decrease from $314.8 million in the first half of 2023.
• Net income for the first half of 2024 was $5.4 million, compared to a net loss of $8.7 million in the same period of 2023.
• Adjusted EBITDA for the first half of 2024 was $46.8 million, with a margin of 17.3%, compared to $42.0 million and a 13.3% margin in the first half of 2023.
• The company completed the acquisition of Coverstar Central, LLC for $64.5 million on August 2, 2024, which is expected to be immediately accretive to net income and Adjusted EBITDA.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. While sales are down, the company has improved profitability and made a strategic acquisition. The company is also taking steps to reduce costs and improve efficiency. However, the macroeconomic environment remains a concern.

Positives

• Net income and Adjusted EBITDA increased in both the second quarter and first half of 2024 compared to the same periods in 2023.
• Gross margin improved due to cost reduction programs, lean manufacturing, and lower raw material costs.
• The acquisition of Coverstar Central is expected to be immediately accretive to net income and Adjusted EBITDA.
• The company realized $4.8 million in annualized savings from cost reduction plans initiated in 2023.
• Fiberglass products continue to show strength relative to packaged pools.

Negatives

• Net sales decreased by 9.6% in the second quarter and 14% in the first half of 2024 due to macroeconomic softness.
• Sales volume decreased across all product lines, including in-ground swimming pools, liners, and covers.
• The company experienced an unfavorable change in net foreign currency transaction gains and losses.

Risks

• Ongoing macroeconomic softness is expected to continue to impact consumer spending and demand.
• The company's business is seasonal and weather is a principal external factor affecting the business.
• The company is subject to various negative, reporting, financial, and other covenants under its debt agreements.
• The company may be required to record impairment charges in future periods if there is a sustained decrease in the stock price.

Future Outlook

The company expects the Coverstar Central acquisition to be immediately accretive to net income, Adjusted EBITDA, and Adjusted EBITDA margin for the fiscal year ending December 31, 2024, and to enhance gross margins in the long-term. The company also anticipates continued macroeconomic softness impacting consumer spending and demand.

Management Comments

• Management is focused on driving adoption of fiberglass pools and automatic safety covers.
• The company is implementing cost reduction programs and lean manufacturing initiatives to reduce its cost basis.
• Management believes the Coverstar Central acquisition will accelerate sales growth and increase margins.
• The company is taking a disciplined approach to capital investments, focusing on previously announced projects.

Industry Context

The report indicates a challenging environment for the pool industry due to macroeconomic factors, which is impacting consumer spending and demand. The company's focus on fiberglass pools and automatic safety covers aligns with a trend towards more durable and technologically advanced pool products. The acquisition of Coverstar Central is a move towards vertical integration, which is a strategy often used to improve profitability and control over the supply chain.

Comparison to Industry Standards

• Latham Group's performance is mixed compared to industry standards, with improved profitability but decreased sales.
• The company's focus on cost reduction and lean manufacturing is a common strategy in the industry to mitigate the impact of economic downturns.
• The acquisition of Coverstar Central is a strategic move that could give Latham a competitive advantage in the automatic safety cover market.
• Companies like Pool Corporation and Hayward Holdings also operate in the pool industry, and their performance can be used as a benchmark for comparison. However, direct comparisons are difficult due to differences in product mix and business models.
• Latham's focus on direct-to-homeowner marketing is a differentiator in the industry, which traditionally relies on business-to-business sales.

Related Party Transactions

• BrightAI Corporation provided services to the company, with costs capitalized as internal-use software. A co-founder of BrightAI served on the company's Board of Directors until February 21, 2024.

Stakeholder Impact

• Shareholders may be encouraged by the improved profitability and strategic acquisition.
• Employees may be impacted by cost reduction programs and restructuring efforts.
• Dealers may benefit from the company's focus on fiberglass pools and automatic safety covers.
• Customers may benefit from the company's investment in product development and innovation.

Next Steps

• The company will continue to execute its strategy to drive adoption of fiberglass pools and automatic safety covers.
• The company will focus on integrating Coverstar Central and leveraging its relationships with pool builders.
• The company will continue to implement cost reduction programs and lean manufacturing initiatives.
• The company will continue to invest in sales, marketing, engineering, and research and development efforts.

Key Dates

Keywords

swimming pools, fiberglass pools, pool liners, pool covers, automatic safety covers, net sales, net income, Adjusted EBITDA, gross margin, acquisition, cost reduction, lean manufacturing