10-Q: Latham Group Reports Q1 2024 Results: Sales Decline, but Profitability Improves

Latham Group experienced a decrease in net sales but improved profitability in the first quarter of 2024 compared to the same period last year.

Summary

• Latham Group's net sales for the first quarter of 2024 decreased by 19.7% to $110.6 million, compared to $137.7 million in the first quarter of 2023.
• The company's net loss decreased to $7.9 million, a significant improvement from the $14.4 million loss in the same quarter of the previous year.
• Adjusted EBITDA increased to $12.3 million, up from $11.0 million in the first quarter of 2023.
• The decrease in sales was primarily due to lower demand for packaged pools, while fiberglass products showed relative strength.
• The company is implementing cost reduction programs and lean manufacturing initiatives, expecting to realize an additional $4.8 million in annualized savings during 2024.
• Gross margin improved to 27.7%, up from 24.2% in the prior year, driven by improved cost structure and lower material costs.
• Selling, general, and administrative expenses decreased by 20.6% due to lower stock-based compensation and reduced headcount.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company has improved profitability and reduced costs, the significant decrease in sales and the challenging macroeconomic environment temper the positive aspects. The company is taking steps to improve its position, but the overall outlook is uncertain.

Positives

• The company's net loss decreased by $6.5 million year-over-year.
• Adjusted EBITDA increased by $1.3 million year-over-year.
• Gross margin improved by 3.5% due to cost structure improvements and lower material costs.
• Selling, general, and administrative expenses decreased by $6.8 million due to lower stock-based compensation and reduced headcount.
• Interest expense decreased by $5.8 million due to changes in the fair value of interest rate swaps.
• The company is making progress on its strategy to drive adoption of fiberglass pools and automatic safety covers.
• The company is realizing cost savings from lean manufacturing initiatives.

Negatives

• Net sales decreased by $27.1 million year-over-year.
• The decrease in sales was primarily driven by lower demand for packaged pools.
• The company experienced a decrease in sales volume due to difficult economic conditions and normalized seasonality.
• Other expense increased by $1.4 million due to unfavorable foreign currency transaction losses.

Risks

• Ongoing macroeconomic challenges are 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.
• A sustained decrease in the company's stock price could lead to future impairment charges.
• The company is subject to various negative covenants under its credit agreement, which could restrict its ability to pay dividends.

Future Outlook

The company anticipates that ongoing macroeconomic challenges will continue to impact consumer spending and demand. They expect to realize additional cost savings from their cost reduction programs and lean manufacturing initiatives. The company believes that its existing cash, cash generated from operations, and availability under its Revolving Credit Facility will be adequate to fund its operating expenses and capital expenditure requirements over the next 12 months.

Management Comments

• Management noted that ongoing macroeconomic challenges have impacted consumer spending and demand.
• The company is making progress executing its strategy to drive adoption and awareness of fiberglass pools and automatic safety covers.
• Management stated that they continue to take a disciplined approach to capital investments.
• The company has responded to economic uncertainty by implementing cost reduction programs and lean manufacturing initiatives.
• Management believes that the company's existing cash, cash generated from operations and availability under its Revolving Credit Facility will be adequate to fund its operating expenses and capital expenditure requirements over the next 12 months.

Industry Context

The report indicates a challenging environment for the pool industry, with a decline in new in-ground residential pool installations, particularly for packaged pools. However, the company's focus on fiberglass pools and automatic safety covers aligns with a potential shift in consumer preferences towards more durable and convenient options. The company's cost reduction efforts are also in line with broader industry trends of seeking operational efficiencies in response to economic uncertainty.

Comparison to Industry Standards

• Latham Group's performance is mixed when compared to industry standards. While the company's gross margin improvement is a positive sign, the significant decrease in net sales indicates a potential loss of market share or a greater impact from economic conditions compared to competitors.
• Companies like Pool Corporation (POOL) and Hayward Holdings (HAYW) are key competitors in the pool industry. Pool Corp has shown more resilience in sales, while Hayward has focused on innovation and technology. Latham's focus on fiberglass pools and direct-to-consumer marketing is a differentiator, but the Q1 results suggest that these strategies have not fully offset the impact of the economic downturn.
• Latham's adjusted EBITDA margin of 11.1% is a positive sign, but it is important to compare this to the margins of its competitors to assess its relative profitability. Pool Corp, for example, has historically maintained higher margins due to its distribution model.
• The company's debt levels and interest expenses are also important to consider in comparison to its peers. Latham's interest expense decreased due to interest rate swaps, but its overall debt burden remains significant.

Corporate Governance

Legal Proceedings

• There are no current legal proceedings that are expected to have a material adverse effect on the company's business, financial condition, results of operations, or cash flows.

Related Party Transactions

• The company had no material transactions with BrightAI during the quarters ended March 30, 2024 and April 1, 2023.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net sales but encouraged by the improvement in profitability.
• Employees may be affected by the cost reduction programs, including potential headcount reductions.
• Customers may benefit from the company's focus on fiberglass pools and automatic safety covers.
• Suppliers may be impacted by changes in the company's purchasing patterns due to cost reduction efforts.
• Creditors may be reassured by the company's compliance with debt covenants and its efforts to improve financial performance.

Next Steps

• The company will continue to implement cost reduction programs and lean manufacturing initiatives.
• The company will focus on driving adoption and awareness of fiberglass pools and automatic safety covers.
• The company will continue to take a disciplined approach to capital investments.
• The company will monitor macroeconomic conditions and their impact on consumer spending and demand.

Key Dates

Keywords

swimming pools, fiberglass pools, pool liners, pool covers, residential pools, cost reduction, lean manufacturing, EBITDA, financial results, quarterly report