8-K: Latham Group Reports Q3 2024 Results: Fiberglass Strength Offsets Market Softness

Latham Group's third-quarter results show a decrease in net sales but improved gross margins, driven by fiberglass pool sales and cost-reduction initiatives.

Summary

• Latham Group announced its financial results for the third quarter of 2024, which ended on September 28, 2024.
• Net sales for the quarter were $150.5 million, a decrease of 6.4% compared to the same period last year, primarily due to lower sales volumes.
• Despite the sales decrease, gross profit slightly increased to $48.7 million, and gross margin expanded to 32.4%, up from 29.9% year-over-year.
• Net income for the quarter was $5.9 million, or $0.05 per diluted share, consistent with the prior year.
• Adjusted EBITDA was $29.8 million, representing 19.8% of net sales, a decrease from $36.1 million in the prior year.
• For the first nine months of 2024, net sales totaled $421.2 million, a decrease of 11.4% year-over-year.
• Net income for the nine-month period was $11.3 million, or $0.10 per diluted share, compared to a net loss in the prior year.
• The company's fiberglass pool sales are expected to reach approximately 75% of total in-ground pool sales in 2024.
• Latham acquired Coverstar Central in early August, contributing to the third-quarter results.
• The company narrowed its full-year 2024 guidance for net sales to $500-510 million and adjusted EBITDA to $77-83 million.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While sales are down, the company is showing improvements in gross margin and is executing on cost-reduction strategies. The narrowing of guidance suggests some uncertainty, but the focus on fiberglass and strategic acquisitions is a positive sign.

Positives

• Gross profit increased slightly to $48.7 million in Q3 2024, up from $48.1 million in the prior year.
• Gross margin improved significantly, reaching 32.4% in Q3 2024, driven by production efficiencies and the Coverstar Central acquisition.
• Net income for the first nine months of 2024 was $11.3 million, a significant improvement from a net loss in the prior year.
• The company's lean manufacturing and value engineering initiatives are driving cost reductions.
• Latham is seeing increased adoption of fiberglass pools and automatic safety covers.
• The company has a strong market leadership position in the in-ground pool market.
• Latham repaid $19.6 million of debt in the nine months ended September 28, 2024.
• The company's net debt leverage ratio increased to 2.6 at the end of the third quarter, up from 2.1 at the end of the second quarter, primarily due to the acquisition of Coverstar Central.

Negatives

• Net sales decreased by 6.4% in Q3 2024 compared to the prior year, primarily due to lower sales volumes.
• Adjusted EBITDA decreased by 17.3% in Q3 2024 compared to the prior year.
• Selling, general, and administrative expenses increased by 20.9% in Q3 2024, primarily due to increased spending on sales and marketing and performance-based compensation.
• The company's net debt leverage ratio increased to 2.6 at the end of the third quarter, up from 2.1 at the end of the second quarter.

Risks

• The company faces unfavorable economic conditions that could impact consumer spending.
• Adverse weather conditions can significantly affect sales.
• The company is exposed to risks from natural disasters, geopolitical events, and public health issues.
• Competitive pressures could impact the company's market share and pricing.
• The company's ability to source raw materials and components could be disrupted.
• Cybersecurity breaches and data leaks pose a risk to the company's operations.
• The company's substantial indebtedness could impact its ability to secure financing.
• The company is exposed to international business risks.

Future Outlook

Latham narrowed its full-year 2024 guidance ranges for net sales to $500-510 million and adjusted EBITDA to $77-83 million, reflecting the end of much of the pool building season and potential impacts from recent hurricanes. The company expects to increase net sales and profitability amid an industry recovery and enable longer-term margin expansion.

Management Comments

• Scott Rajeski, President and CEO, stated that the company continued to execute well within a difficult industry environment.
• He highlighted the increasing awareness and adoption of fiberglass pools and automatic safety covers.
• He noted the company's success in gaining production efficiencies and controlling costs.
• He mentioned the company's investment in initiatives to drive future growth.
• He stated that the company's growth strategies, with emphasis on fiberglass conversion and automatic safety cover adoption, position them to outperform the industry.

Industry Context

The announcement indicates that Latham is navigating a challenging industry environment, with a focus on gaining market share through fiberglass pool sales and strategic acquisitions. The company's performance is being impacted by macroeconomic weakness and lower sales volumes, but they are also seeing positive results from cost-reduction initiatives and the acquisition of Coverstar Central.

Comparison to Industry Standards

• Latham's focus on fiberglass pools aligns with a broader industry trend towards more durable and faster-to-install pool options, similar to companies like Leisure Pools and Trilogy Pools.
• The company's gross margin improvement of 250 basis points in Q3 is a positive sign, indicating better cost management compared to some competitors who may be struggling with supply chain issues.
• The acquisition of Coverstar Central is a strategic move to expand product offerings, similar to how other pool companies are diversifying into related products like pool covers and automation systems.
• Latham's adjusted EBITDA margin of 19.8% in Q3 is a key metric to watch, as it indicates profitability relative to sales, and should be compared to other publicly traded pool companies like Pool Corporation (POOL) to assess relative performance.
• The company's net debt leverage ratio of 2.6x is a key metric to watch, as it indicates the company's ability to service its debt obligations, and should be compared to other companies in the industry to assess relative risk.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net sales and adjusted EBITDA, but encouraged by the improved gross margin and cost-reduction efforts.
• Employees may be impacted by the company's restructuring programs and cost containment initiatives.
• Customers may benefit from the company's focus on fiberglass pools and automatic safety covers.
• Suppliers may be affected by the company's supplier optimization programs.
• Creditors may be monitoring the company's debt levels and leverage ratio.

Next Steps

• Latham will hold a conference call to discuss its third quarter 2024 financial results on November 5, 2024.
• The company will continue to focus on fiberglass conversion and automatic safety cover adoption.
• Latham will continue to execute its growth strategies and pursue strategic acquisition opportunities.

Key Dates

Keywords

swimming pools, fiberglass pools, in-ground pools, automatic safety covers, net sales, EBITDA, gross margin, cost reduction, acquisition, manufacturing