8-K: Latham Group Reports Mixed 2023 Results, Provides Cautious 2024 Outlook

Latham Group's 2023 financial results show a decrease in sales but improved profitability and a record cash position, while 2024 guidance anticipates continued market challenges.

Summary

• Latham Group announced its financial results for the fourth quarter and full year 2023, showing a mixed performance.
• Full year net sales decreased by 18.6% year-over-year to $566.5 million, primarily due to lower volumes of in-ground swimming pools.
• Despite the sales decline, the company achieved a net loss of $2.4 million for the year, an improvement from the $5.7 million loss in the prior year.
• Adjusted EBITDA for the full year was $88.0 million, down 38.6% year-over-year, with a margin of 15.5%.
• The company's cost reduction programs and lean manufacturing initiatives helped improve margins throughout the year.
• Latham generated $116 million in operating cash flow and ended the year with a record cash position of $102.8 million.
• For 2024, the company anticipates a continued industry downturn with a projected 15% decline in total pool starts.
• Full year 2024 guidance projects net sales between $490 million and $520 million and adjusted EBITDA between $60 million and $70 million.
• First quarter 2024 sales are expected to be between $98 million and $104 million, with adjusted EBITDA between $6 million and $8 million.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company has improved profitability and cash flow, the significant decrease in sales and the cautious outlook for 2024 temper the positive aspects. The company is navigating a difficult market, but is taking steps to improve its position.

Positives

• Latham's net loss improved significantly in 2023 compared to 2022.
• The company achieved a record cash position of $102.8 million at year-end.
• Operating cash flow was strong at $116 million for the year.
• Latham successfully reduced its cost structure through various programs and initiatives.
• Fiberglass pool sales outperformed the overall market decline, indicating market share gains.
• The company's automatic safety covers and AI-powered measurement tool are gaining traction.
• Latham repaid $13 million in debt during the year.
• Gross margin expanded by 540 basis points in the fourth quarter to 23.3% from 17.9% in the prior year period.
• Adjusted EBITDA margin more than doubled in the fourth quarter to 10.9% from 4.1% in the prior year period.

Negatives

• Net sales decreased by 18.6% for the full year 2023.
• Adjusted EBITDA decreased by 38.6% for the full year 2023.
• The company anticipates a continued industry downturn in 2024.
• Gross margin decreased for the full year to 27.0% from 31.1% in the prior year period.
• The company expects a 15% decline in total pool starts in its markets for 2024.
• Capital expenditures totaled $33.2 million for full year 2023 compared to $39.7 million for full year 2022.

Risks

• The company faces risks related to secular shifts in consumer demand for swimming pools.
• There is a risk of a slow pace of material conversion from concrete pools to fiberglass pools.
• Changes in access to consumer credit or increases in interest rates could impact consumers' ability to finance pool purchases.
• Macroeconomic conditions could negatively affect the company's performance.
• Adverse weather conditions, natural disasters, or public health issues could disrupt operations.
• The company faces competition in the market.
• There are risks associated with product quality, warranty claims, and safety concerns.
• The company's ability to collect accounts receivables from customers is a risk.
• Cyber security breaches and data leaks pose a risk to the company's operations.
• The company is dependent on information technology systems.

Future Outlook

The company expects industry softness to continue in 2024, with a projected 15% decline in total pool starts. Full year 2024 net sales are projected to be between $490 million and $520 million, and adjusted EBITDA is projected to be between $60 million and $70 million. First quarter 2024 sales are expected to be between $98 million and $104 million, with adjusted EBITDA between $6 million and $8 million. The company anticipates positive operating cash flow for 2024.

Management Comments

• Latham navigated a very difficult market environment in 2023.
• We successfully implemented cost reduction programs and lean manufacturing initiatives that structurally reduced our cost basis, while maintaining our investments in future growth.
• These cost reduction programs improved margins as the year progressed and we expect they will enable us to considerably expand margins and overall profitability once volumes recover.
• Latham is positioned for meaningful market share gains as overall industry conditions improve.
• Our 2023 total sales outperformed U.S. new in-ground pool starts by approximately 10 percentage points, largely reflecting Lathams leadership in the design, manufacture, and sale of fiberglass pools.
• Lathams 2023 financial performance demonstrated our agility in addressing lower market demand by reducing costs, increasing productivity, and implementing continuous improvement initiatives, while continuing to successfully execute our fiberglass conversion strategy.
• Adjusted EBITDA margins improved throughout much of the year, and our cash position exceeded $100 million at year-end, the highest level in our history.
• Strategic growth initiatives to accelerate the conversion to fiberglass pools and a substantially reduced cost structure, together with our strong balance sheet, support our confidence in Lathams ability to capture market share and to expand profit margins when industry conditions improve.

Industry Context

The announcement reflects the challenges faced by the in-ground pool industry due to decreased demand and destocking in the wholesale distribution channel. Latham's focus on fiberglass pools and cost reduction strategies aligns with the need to adapt to these market conditions. The company's outperformance of the market in fiberglass sales suggests a competitive advantage in this segment.

Comparison to Industry Standards

• Latham's performance is being compared to the overall U.S. in-ground pool market, where they outperformed new pool starts by 10 percentage points, indicating a gain in market share.
• While specific competitor data is not provided, the document highlights Latham's leadership in fiberglass pool sales, suggesting a competitive edge over companies primarily focused on concrete pools.
• The company's focus on cost reduction and lean manufacturing is a common strategy in the industry to navigate market downturns, and Latham's success in improving margins through these efforts is a positive sign.
• The company's cash position of $102.8 million is a strong indicator of financial health compared to other companies in the industry, providing flexibility to manage through the downturn.
• The company's net debt leverage ratio of 2.25 is a key metric used to assess financial risk, and this ratio is within a reasonable range for companies in the manufacturing sector.

Stakeholder Impact

• Shareholders may be concerned about the decrease in sales and adjusted EBITDA, but encouraged by the improved profitability and cash position.
• Employees may be affected by cost reduction measures, including potential headcount reductions.
• Customers may benefit from the company's focus on fiberglass pools and new product innovations.
• Suppliers may be impacted by changes in production volumes and material requirements.
• Creditors may be reassured by the company's strong cash position and ability to repay debt.

Next Steps

• Latham will hold a conference call to discuss its fourth quarter and full year 2023 financial results on March 12, 2024.
• The company will continue to focus on its fiberglass conversion strategy.
• Latham will continue to implement cost reduction programs and lean manufacturing initiatives.
• The company will continue to invest in sales and marketing, engineering, and R&D to accelerate the conversion to fiberglass.
• Latham will continue its digital transformation programs.

Key Dates

Keywords

swimming pools, fiberglass pools, in-ground pools, pool covers, pool liners, EBITDA, financial results, cost reduction, market share, cash flow