Good morning, and welcome to the Latham Group, Inc. Fourth Quarter and Full Year Fiscal 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicole Harlowe, Latham Investor Relations representative. Please, go ahead.

Thank you, and welcome to Latham's Q4 and Full Year Fiscal 2022 Earnings Call. Earlier this morning, we issued our earnings press release, which is available on the Investor Relations portion of our website, where you can also find the slide presentation that accompanies our prepared remarks. On today's call are Latham's President and CEO, Scott Rajeski; and CFO, Rob Masson. Following their remarks, we will open up the call to questions. During this call, the company may make certain statements that constitute forward-looking statements. Such statements reflect the company’s views with respect to future events as of today and are based on our management’s current expectations, estimates, forecasts, projections, assumptions, beliefs and information. These statements are subject to a number of risks that could cause actual events and results to differ materially. Such risks and other factors are set forth in the company’s earnings release posted to its Investor Relations website and will be provided in our Form 10-K for fiscal year 2022. The company expressly disclaims any obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. In addition, during today’s call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliations of historical adjusted EBITDA to net income, loss and adjusted EBITDA margin to net income, loss, margin calculated under GAAP can be found in our earnings press release and will be included in our Form 10-K for fiscal 2022. Reconciliations of net debt and net debt leverage to the comparable GAAP measure can be found in the slide presentation that accompanies our prepared remarks, which can be found on our Investor Relations website. I'll now turn the call over to Scott Rajeski.

Good morning, everyone, and thank you for joining us for Latham's fourth quarter and full year fiscal 2022 earnings call. I'll begin today's call with a review of highlights from 2022 and a discussion of our strategic priorities and the innovation we're driving in 2023 and beyond. We delivered fourth quarter and full year 2022 performance in line with our expectations, marking the completion of our 13th consecutive year of net sales and adjusted EBITDA growth. Notably, we made progress in four areas in 2022. First, we delivered year-over-year net sales growth across all three of our product lines. Second, we made continued progress on our fiberglass pool conversion efforts from concrete. We grew fiberglass volume despite a year-over-year decline in the industry for US in-ground pool installations in 2022 as compared to 2021. We also advanced our capacity initiatives with significant progress in the construction of our state-of-the-art Kingston, Ontario fiberglass manufacturing facility, which will allow us to continue to expand into Eastern Canada and into the US Northeast and Upper Midwest. We also acquired fiberglass manufacturing assets in Oklahoma, position us well to tap into the Southwest market, which is ripe for conversion from concrete to fiberglass. Third, we strengthened our supply chain position, enabling us to enhance our North American fiberglass production and return to normal lead times across our entire product portfolio. And fourth, we drove operational efficiencies as we implemented lean initiatives, aimed at driving continuous improvement in our operations. We also took deliberate actions to manage costs and respond to the market environment, while still prioritizing our growth strategy. As anticipated, we saw a return to historical seasonality in the fourth quarter. Wholesale distributors continue to destock elevated levels of packaged pool inventory and the macroeconomic environment impacted consumer spending and demand. We are…

Thank you, Scott. Latham has a compelling long-term growth story, and it's been wonderful to be part of that journey and work alongside you, the rest of the executive leadership team and the talented finance team that I now leave back in Mark's capable hands. Turning to our results for the fourth quarter and full fiscal year 2022. Please note that all comparisons are on a year-over-year basis, compared to fourth quarter and full fiscal year 2021. In Q4 of 2022, as expected, net sales for the fourth quarter, were down $31 million or 22% year-over-year to $108 million. In the fourth quarter of 2022, we saw a return to historical seasonality, resulting in year-over-year volume declines. As a reminder, in comparison, Q4 2021 sales were unseasonably elevated as we caught up on our fiberglass order backlog. Our fourth quarter net sales results, across our product lines, reflect historical seasonality trends. In-ground swimming pools declined 28% to $59 million, which were further impacted by continued inventory destocking in the wholesale distribution channel for packaged pools. Liners declined 28% to $13 million and covers declined 6% to $36 million. Gross profit decreased by $23 million or 54% and to $19 million. Excluding non-cash stock-based compensation expense, gross profit decreased by $24 million or 55% to $20 million. Gross margin decreased to 17.9% compared to 30.5% for the prior year period. Excluding non-cash stock-based compensation expense, gross margin declined by 1,330 basis points to 18.6%. Fourth quarter gross profit and gross margin declines were primarily driven by three factors; reduced sales and the impact of our fixed costs on lower seasonal volume, continued destocking of packaged pool inventory in the wholesale distribution channel, as well as the impact of inflation. Selling, general, and administrative expenses decreased to $33 million from $47 million…

Thanks, Rob. As we move through 2023, there are five key factors that we're seeing impact our business. One, the impact of macroeconomic uncertainty on consumer spending and demand resulted in anticipated declines in the industry for US new, in-ground pool installations in 2023; two, we continue to see destocking of packaged pool inventory at the wholesale distribution level and expect normalization of inventory levels to remain a headwind through at least the first half of 2023. Three, we believe continued progress executing on our strategy to drive the material conversion from concrete pool to fiberglass will be a tailwind as we expand homeowner and dealer awareness and adoption. Four, we expect to realize the benefits from our previously announced cost reduction actions and ongoing continuous improvement initiatives. Lastly, we continue to take a disciplined approach to capital investment with 2023 CapEx spend focused on the completion of previously announced projects. This includes the completion of our Kingston, Ontario fiberglass facility as well as the ramp-up in fiberglass production in Oklahoma. All of this is reflected in our expectations for full year 2023, including net sales of $565 million to $615 million. Adjusted EBITDA of $90 million to $110 million and capital expenditures of $35 million to $40 million, the majority of which we expect to incur in the first half of the year. Throughout today's call, we have discussed the return to historical seasonality that we are seeing in the business, the impact of macroeconomic uncertainty on consumers and the continued destocking and packaged pools at the wholesale distributor level. Given these factors, we want to provide more clarity on our expectations for the first quarter and have provided an outlook for Q1 of 2023 with net sales of $120 million to $130 million and adjusted EBITDA of $6…

Good morning. You have Elizabeth on for -- Elizabeth Langan on for Matt this morning. So just to kick it off, would you mind touching on the volume and pricing expectations you've embedded in the guide for this year, specifically? And then if you could talk about the -- your assumptions for new pool construction, maybe touching on the cadence through the year as well?

Sure, Elizabeth. I'd be happy to take that. So we haven't really broken out what we're doing with price or volume in our guidance. What I can tell you is we're being very selective in our pricing actions, looking out of the market, and as we consider the year and see how it lays out. But traditionally, other than the last number of years, we've had a very deliberate process of pricing and more conservative than we've talked about before. So it's more we turn to that.

Yes. And Elizabeth on the second part of your question on new pool construction outlook, as part of the 2023 guide, we really haven't, again, given distinct numbers of where we think 2023 will come in. But I think high level, we can probably expect something similar to what we all saw in 2022. As we know, we're all awaiting the P.K. Data report to come here in a few months. But it's kind of feel like it's going to be in line with 2022 on a volume standpoint.

Okay. Thank you. And would you mind touching a little bit on -- relative to like your other product categories, maybe what you're seeing this year so far with between fiberglass volumes relative to packaged pools so far?

Yes. Look, it's pretty early to see than you know, two months in here into 1Q. We gave the 1Q guidance of what we think we'll see, I think if we look back at 2022, right, with new pool starts being down in 2022, we did see fiberglass volume up on a unit basis year-over-year what was a down full market. We saw that destocking impact with the wholesale distributors. I think if we roll that forward to 2023 and the guidance issued, we expect to see fiberglass outperform the market overall. And we expect to continue to see the destocking in the packaged pool category for at least the first half of the year. And I think that's probably the best view we can give at this point. So we really get into the peak building months of 2Q and 3Q

Okay. Thank you very much.

Thank you, Elizabeth.

And the next question will be from Tim Wojs with Baird. Please go ahead.

Yes. Hi, guys. Good morning. Maybe just to follow-up on the prior question. Just what were pools down in 2022 from a starts basis? And I think it's a pretty basic question for us to kind of understand what you think the new pool install market is going to be down in 2023?

Yes. Look, we haven't quoted a specific number. But I think if we look at what others in the industry have been saying and what's out there, Tim, it's probably fair to say new pool starts in 2022 when PK issues the number will be down 15% to 20%. Again, I hate to call an exact number because it's half. But I think down 15% to 20% feels right. And again, I think the key thing for us, right, is we grew revenue 10% in that market. But more importantly, we actually grew fiberglass unit volumes in that market, which is the demonstration of our ability to try to outperform driving that fiber less material conversion for concrete.

Yes. No, that's good. That's good to hear, kind of that gap and that conversion, yes. Sure. I guess on the -- I have -- I have one other question just on the in-ground pool segment. I mean, is there a way just to give us a flavor for what the package pool part of that business declined in 2022? And then what you're, kind of, embedding for a decline in 2023 in that business specifically?

Tim, so I can talk about it generally, which is we don't break out in-ground, but we did see volume growth in the fiberglass year-over-year. So if you think about the overall decline we've shown in that segment, fiberglass was positive and the decline was mostly attributable then to package for us.

Okay. And then can I just throw one more in, just on the front end of your business -- when you think about web traffic downloads needs. Could you just add some color around any sort of metrics that you're seeing there? And then has there been any sort of increase in like lead breakage or decrease in kind of overall conversion over the -- versus the past two to three years?

Yes. Tim, I think, Joel and the marketing team has continued to really -- have continued to do a really nice job building out the front end and the engine. All the metrics we look at time on website, nurturing of the leads, average time spent, number of mileage [ph] and pool accounts. People doing a mine pool estimate. I think all trending well. And I think overall leads are picking up. They're not at the levels we might have seen in 2021 when they went through the roof. But we're tracking ahead of last year. We're tracking ahead, let's say, 2019, 2020 type levels. We feel pretty good there. We have turned the lead generation engine back on for dealers. I think, we've talked about 250-plus fiberglass dealers went through the boot camps last year for both fiberglass and packaged pool. Our commercial team is back out there proactively engaging new dealer acquisition. We're seeing really, really good progress in signing up new dealers to join the fiberglass family with Latham. So I think early indications are a lot of -- got a good look on all of those views, really trying to nurture the leads on the website to turn into that white hot lead and hand that off to the dealer. I think conversion remains consistent. We don't really report the conversion type metrics. Well, I don't think we've seen a big drop off or fall off on the ability to convert the better leads we have out there.

Okay, okay. Good. Thanks guys. Good luck on this year.

Thank you.

The next question will be from Sean Callan from Bank of America. Please go ahead.

Hi guys. Thank you for taking my questions. Just first, can you quantify or give us an estimate of the impact of the destocking in 2022, and what you expect it to be in 2023?

Well, I'll just go back to our overall year on a price volume mix basis. We had 10% growth overall. Price was up 17% and volume down I think we've disclosed what happened in each segment over the years. And then again, I'll just reemphasize that fiberglass volume actually grew year-over-year. So you had a fairly significant headwind from the destocking included in 2022.

And do you have an estimate for 2023, whether it could be worst or better?

Sorry, would you repeat that?

Yeah. Just your forecast for the impact of the destocking in 2023 relative to 2022?

Yeah, I'll take that one, Sean. I think in the guidance we issued, right, there's the overall assumption of the macroeconomic uncertainty that's out there at the consumer level, which will continue to lead that destocking with the wholesale distributors through the first half of the year. I think until we see how the demand was going to play out at the consumer level with the wholesale distributors, we're being cautious with the guide that we issued for, let's say, 1Q most importantly, when you would typically see that restocking to be occurring. So that's the guide for 1Q to help give you guys a view there. And then I think fiberglass has always shown the ability to outperform the market. We've not given an indication of what we think fiberglass unit volumes will do for 2023, where all of our efforts and initiatives with new dealers sign up, driving the ability to have our dealers get more pools in the ground, the lead generation and more importantly, I think just the favorable economics of a fiberglass pool with lower upfront costs, total lower cost of ownership versus the concrete pool will benefit consumers as maybe they look to say, a concrete pool just gotten too expensive, far or less really great option for us.

Okay, got it. And then can you just kind of walk us through what you're assuming for gross margin in 2023, and kind of that cadence with the expectations for de-stocking to be mainly a first half of the year impact?

Yeah. I can take that. I think the important for us important thing for us. We gave you Q1 and the full year. Obviously, there's a much different gross margin there. That's primarily the result of seasonality and the impact of just the lower sales and our cost base. Of course, our cost base is set or the peak seasons on the fixed side. We are a primarily variable cost base, but we do have our fixed costs that that we leverage, obviously, for benefit in Q2 and Q3. So you will see a degradation of gross margin in Q1 and Q4, because of that. But there's no specific guidance on it. It's just -- I think it's important to really understand the seasonality and the profile of our gross margin and know that we manage very diligently our costs we announced last year. Some actions we took in Q4 that we're going to deliver $12 million of full year savings in 2023. We're on track for that. We continue to manage our shifts even in those Q1 and Q4, lower season periods. We really look at our production levels and other factors that are more on the variable side to manage that part of the business. So we remain very diligent in our cost control.

Got it. Thank you.

[Operator Instructions] The next question is from Susan Maklari from Goldman Sachs. Please go ahead. Charles Perron-Piché: Hey. Good morning everyone. This is Charles Perron on for Susan. Thanks for taking my question. I guess, first, I would love to get an update on, what you see in terms of cost inflation through your business and the ability to offset that with pricing in 2023, considering obviously the environment for volume this year?

Yeah. I think on the inflation front, we've not really seen the cost side of the equation, rapidly drop off here yet. Again, they allowed to, go back to the specialty resins that we're buying, particularly the fiberglass world. I do think it does stop accelerate many extents. We have seen some breaks in, in freight expenses and that, but labor continues to trend up. So I think we'll continue to watch the inflation views. We've got inventory we need to work through a little bit as well. On the balance sheet that was purchased at the higher prices. But I think the key thing we need to remember is that, price they're still extremely elevated from where they were back in the 2020 or 2021 timeframe. We feel pretty good with where our pricing levels are right now that we've pushed out and announced and continue to execute on. I think as Rob mentioned earlier, we'll remain nimble on what we do with pricing. But I think the headline statement is right now, we don't believe we'll need to roll any pricing back to the market, but again, inflation starts to wane and we start to see massive deflation, we would reevaluate that as we go forward. Charles Perron-Piché: That's good color there. And then, just to go back in terms of the cadence of revenue into 2023, understanding the impact of the channel de-stocking happening in the first half, but obviously, the last three years have been unprecedented in terms of the demand for pool and obviously, it's hard for us to get a good sense of the historical seasonality this business had, let's say, prior to the pandemic. So I don't know if you can help us maybe frame the first half versus half in terms of maybe revenue or EBITDA, just for us to better understand the cadence of how revenues will flow through this year and, obviously, overlaying the channel destocking impact on top of that.

Yes, Charles. We're not giving any guide on first half, second half like we have before. I think because we are entering a new dynamic from what we've all experienced over, let's say, the last three years, 2020 through 2022. Right now, I've been in the business 10-plus years and I'd say, it does feel like we are back to what we would call normal seasonality. I'll also caveat that by, there's never been a normal season in the business when you think about the weather impact and late spring or early spring and same thing with the winners in the fall months. But what I can say is, if we rewind the 4Q last year, let's set that as an anchor point, where that felt like a normal 4Q for the business going back pre-2020 timeframe. 1Q and what we've laid out for guidance, again, kind of when you think about revenue on a percentage basis of the full year, where we're sitting for 1Q with the guide, taking into account seasonality, but more importantly, does that continued destocking of the package pool piece of the business, 1Q would kind of frame back up to a normal quarter for us. So if you use those two anchor points, both peak building season for us in 2Q, 3Q with 2Q typically being a little better than Q3, first half-second half dynamics, I've seen them swing by 4 to 6 points over the year. That's why we don't want to quote it. I think we want to just really get through the first quarter here. And see how the macro environment plays, how the demand pull-through for our dealers and consumers happens and then when do we start to see restocking orders in the packaged pool world. And, look, we're going to continue to drive fiberglass far; we get a lot of new deals we signed up last year and this year and that will be a big focus for us to try to deliver what we've put out there for 2023. And just quickly touch on the EBITDA aspect of that seasonality from the revenue, if you think about the cost basis of this business on the fixed side and the variable, right, we do carry higher cost in 1Q than 4Q on those much lower volumes, which is kind of knocking down the EBITDA level that we saw last year in 4Q and that we're indicating here in 1Q. And then, clearly, there's a strong bounce back in Q2 and Q3 when the volume picks back up, running through the plants for us. Charles Perron-Piché: Thanks for the color. Appreciate it.

And the next question is from Josh Pokrzywinski from Morgan Stanley. Please, go ahead.

Hi. Good morning, guys.

Good morning, Josh.

Scott, just on the packaged pools business, we've talked about it a little bit. Maybe this is something I should already know, but can you just level set us on the size of the business in 2022 and then sort of a rough kind of inventory out in the field check, maybe days on hand or something like that, that your dealers and distributors kind of have right now maybe versus normal? Just some context for order of magnitude and what sort of the destock opportunity is relative to a normal environment?

Yes, Josh. So I think, as we've said, we've not given splits of the in-ground category between the packaged pool and the fiber glass piece. But I would tell you, the packaged pool piece of the business is still a very healthy, strong segment of the business for us in the steel and polymer world with that vinyl liner pool. I'd say the business is stronger than where it had been back in the 2019-plus time frame as we've continued to grow that. It has trended down the last couple of years, I think, as we've seen the destocking in 2022 and the continued indication of that '23, so we really haven't disclosed those split, but it's still a big piece of that in ground segment for us. On the inventory front, we get [indiscernible] visibility of what's out there. In terms of stocking levels, I'd say, they're in a better position than they were in 4Q as the destocking continue, but I'd say it's still a little bit elevated, and that's why we've got this cautious approach in the 1Q guide and the full year. And I think the comment probably Rob and myself both made earlier today, that we expect that destocking to potentially continue through at least the first half of the year and then kind of get back to more normalized inventory levels in the channel.

I don't know if this helps, but if we just talk about year-end inventory where we planted in the year-over-year increase, looking back to '21 on a total company basis, we're up about $55 million. And part of that was we had extended lead times, very low inventory exiting 2021. So you have that impact, the impact of inflation on our inventory just generally that we've seen and talked about. And then the third piece was elevated package pool that we will work down, so I don't want you to associate that whole inventory change with that, if that's helpful.

Got it. That is helpful. And then, just a follow-up, maybe a higher level question on how we should think about some of the drivers of the pool markets this year. I guess on one hand, you have pretty high home equity levels maybe not as much turnover because folks don't necessarily want to refinance or re-up at today's interest rates. By the same token, like I would imagine that a lot of folks are borrowing or maybe having home equity when they make a pool purchase. So, how do you think about this balance of hey, my home is worth a lot, and I might be here a little bit longer versus my borrowing costs are high. Is one of those more important to you guys as you guys think about the health of the industry as a whole?

Yes, Josh, I think all of them are important. And when we step back and look at the overall demand for pools, a couple things I think we all need to remember is, look, the overall interest in swimming pools is still extremely high. You guys have heard me quote the number of 90 million homes of that pool today, those who want one and have a high interest in the next five years, about $7.5 million on potential pool sales, right? If we think about pool starts and depending on where the final number shakes out for 2022, we're still 40% -- call it 40% off the peak from 2005, so there's still a lot of upside opportunity to kind of return to that 20-year, 25-year historical average of pool starts, which would still be elevated above the 21% level from where we sit today. And then you start ticking off right, delay formation of household, the migration from the city for the suburbs. The interest in investing the backyard and that repair and remodel business, the trends of the backyard living, the enjoyment that comes with that is the fastest-growing segment of recurrent remodel in the home, there was a great stat. I saw over the weekend, 40% of all the homes in the US mortgages sit -- we're done prepandemic, sitting below a 4% interest rate. So there's some good data out there that folks have low interest rates, equity there holds is at all-time high and the likelihood of them moving in a market, with an undersupply of housing, plus limits them based on where new mortgage rates sit, which means people who have cash and equity in their home are going to stay there longer, like you said. They're going to reinvest in the house…

Perfect. Excellent color, and yeah, best of luck of this year.

Thank you. The next question is from Andrew Carter from Stifel.

Hey, thank you. Good morning. So I guess I wanted to –

Hi, Andrew.

What I wanted to frame kind of the risk out there around, you mentioned the input costs that – and I think, if I calculated it right, you're 120 days of inventory, So you're sitting on some pretty high cost. Any idea of what your competitors are sitting on that would have been able to take as long a lead time? And how you're thinking about the potential out there to stay competitive on pricing for fiberglass also kind of a key tool for continuing to maintain and recruit dealers? Thanks.

Yeah. In terms of inventory, as competitors and what they're sitting on, I don't know – we don't have visibility to that. I can't even really comment on it. I think back to, take it back to Latham centric, the inventory that we're sitting on is really more packaged pool. It's really just one product category for us. And pretty much it's steel. Everything else turns pretty quickly for us based on storage capacity, shelf play for the resin and fiber glass. So you could argue a good chunk of our business, we're buying real time at market pricing that's out there, which gives us the ability to react quicker and price up and down to offset inflation, and watch in deflationary trends. So I think we feel pretty good on all of those fronts, Andrew.

Second question I would ask is kind of getting into – if I had your seasonality, right, in the fourth quarter, 16%, we know what the first quarter is, that means you're suggesting kind of a revenue decline of minus 10% to minus 2% in the peak season of this year. Can you give us any color, I guess, number one, kind of the new construction outlook out there, negative 15% to negative 25 million, so I'm guessing you're expecting fiberglass to meaningfully outperform that. What about vinyl? And then kind of getting to the point of you have a lot of confidence you're not in the lower end, final at the lowest price pool. Do you have kind of -- what's the data telling you about the homeowners that buy a fiberglass pool, their income levels relative to normal households and if you have it relative to other pool owners? Thanks.

Andrew, there was a lot helpline [ph]. I'll do my best to try to hit them. I think we're looking at the guidance for 2023 on a full year basis. Because of trend, the seasonality of the destocking through the first half of the package tool, and I think you hit on two of the key points, right? Our expectation of fiberglass outperforming the market, which we've demonstrated time and time again. The resiliency of that replaced our business on liners and folks have a tendency in a rising interest rate market. They're not taking vacations, they're thinking about where they have to spend their dollar, and they're going to be spending more time to home, they're going to repair their pool and replace their liner and not put that off, so they can use that asset that they sunk-in. And I think -- I'd say we don't really see a big difference between a fiberglass purchaser and an in-ground vinyl liner purchaser. I think it comes down to preference, shape and size of the pool the homeowner wants, the design, on the market they sit in, and our view really is to continue to drive the awareness of fiberglass and all the benefits, because even we talk a lot about fiberglass versus concrete and the cost advantages, the same thing applies in the vinyl space, where the fiberglass pool maybe a little bit more expensive upfront. But you go 10 years out with a liner replacement and the cost of chemicals to operate that pool, you quickly get to a breakeven, so we try to market fiberglass for all solutions and all levels out there. But I do think, overall, the Latham customer does tend to be on the mid to higher side from equity network and value of home that they're footing to pull into.

Got it. Thanks. I’ll pass it on. Ladies and gentlemen, this concludes our question-and-session. I would like to turn the conference back over to management for any closing remarks.

Yes. Hey, look everyone, thanks for joining us for today's call. We really, really appreciate all your continued interest and support of Latham. We look forward to providing further updates on our next earnings calls from May. I hope you guys all have a great rest of the day. Take care.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.