Good day and welcome to the Latham Group, Inc. Fourth Quarter and Full Year Fiscal 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicole Berge, Investor Relations representative. Please go ahead.

Thank you and welcome to Latham’s Q4 and full year fiscal 2021 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, Mark Borseth. Following their remarks, we will open the call up 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 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 on its Investor Relations website and will be provided in our Form 10-K for fiscal year 2021. The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments 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 adjusted EBITDA to net income calculated under GAAP can be found in our earnings press release and will be included in our Form 10-K for 2021. I will now turn the call over to Scott Rajeski.

Thanks, Nicole. Good morning. Thank you for joining us for Latham’s fourth quarter and full year 2021 earnings call. Today, I will review the key highlights from Q4 and full year 2021, provide an update on our growth initiatives, and briefly discuss our 2022 outlook. Mark will then give a detailed overview of our financial results and guidance. 2021 was a milestone year for Latham and our first as a publicly traded company. Latham posted a record fourth quarter, with net sales growth of 24.1% and adjusted EBITDA growth of 56.5%. In Q4, consumer interest and demand in pools remain very strong. I am also pleased to share that we made significant progress in enhancing our operations and resin supply position during Q4. Fiberglass production levels and efficiency increased as expected through the end of 2021, with our North American fiberglass production increasing 35% on a sequential basis over Q3 and we expect it to continue improving as our resin supply increases throughout 2022. This enabled us to deliver another strong year of tremendous growth for our business. Throughout 2021, we continue to execute on our growth strategy, which positions us well to capitalize on the growing consumer demand for pools and to deliver growth across our market leading product portfolio. We continue to drive the material conversion from concrete pool to fiberglass, thanks to our direct-to-consumer model and we continue to build out our digital tools with My Latham in our pool cost estimator. We also expanded our addressable market by adding a new premium quality product to our portfolio at an attractive price point for homeowners with the acquisition of Radiant Pools, a leading manufacturer of vinyl-lined insulated aluminum-walled swimming pools. This transaction completed in late Q4, demonstrates our ability to execute on attractive tuck-in opportunities and enhance…

Thank you, Scott and good morning everyone. First, I will provide an overview of our financial results for the fourth quarter and full year 2021. All comparisons are on a year-over-year basis compared to fourth quarter and full year fiscal 2020. Please note that Q4 2020 results do not include our investment in Premier Pools & Spas since we began booking our equity pickup in the first quarter of 2021. Our Q4 2020 does include results from GLI for 2 months since we closed that acquisition towards the end of October 2020. Our Q4 and full year 2021 reflect 1 month of results from Radiant since we closed that acquisition towards the end of November. Net sales for the fourth quarter of 2021 were up by $27.0 million or 24.1% year-over-year to $138.9 million. For the quarter, our 24.1% net sales increase was 16.1% for price and 8.0% from volume. All three of our product lines increased sales year-over-year led by a $15.0 million increase for in-ground swimming pools to $82.8 million, a $6.8 million increase for covers to $37.8 million and a $5.1 million increase for liners to $18.3 million. We are pleased to have sold more fiberglass pools in Q4 than Q3 in part due to the increased resin supplies and production you heard Scott talk about. On a year-over-year basis, fiberglass sales volume was slightly lower compared to a strong Q4 last year. And if we include GLI sales for the entire fourth quarter of 2020 and exclude any Radiant sales from Q4 of 2021, our pro forma sales growth for the quarter would be 16.9%. Gross profit increased by $4.4 million or 11.5% to $42.4 million, driven by an increase in net sales, which was partially offset by the addition of non-cash stock-based compensation expense of…

Thanks, Mark. We drove significant growth in 2021, and we expect to continue our strong trajectory in 2022. We serve a large and attractive outdoor repair and remodel market and are benefiting from growing consumer demand for our products. We are driving the material conversion of fiberglass, thanks to our unique direct-to-homeowner model, which continues to transform our industry and position us as a partner of choice for our dealers, and we feel good about continuing to expand fiberglass a share of the U.S. residential pool starts over time. We have the broadest portfolio of products and a strong reputation for quality, durability and aesthetics. Continued robust homeowner interest in pools, increase in installation capacity and resin supply and our pricing actions position us well for another strong year of revenue and adjusted EBITDA growth in 2022. Our consumer-driven strategy, proven ability to drive the material conversion from concrete to fiberglass pools, capacity investments and disciplined approach to pricing cost management also give us confidence in our 2022 guidance and 3 to 5-year targets. We will now open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Matthew Bouley with Barclays. Please go ahead.

Hi, good morning. This is Ashley Kim on for Matt today. Thanks for all the detail at the top and congratulations on a good quarter, and nice outlook for ‘22. So I guess my first question, just in light of the recent moves in oil, are you thinking about the pricing strategy any differently potentially building in some escalators or getting ahead with even more price just given what the impact to resins could be?

Yes. So good morning, Ashley. Thanks for filling in for Matt. Thanks for your comments. Look, we will continue to monitor, I’d say, inflation in general, not just oil but resin, all our commodities. At this point, I think the key thing is that we’ve got all the pricing in place that we need to deliver the ‘22 outlook that we’ve given. But as we talked in the Q4 call, we’ve got the surcharges in place, we can be a lot more flexible with the actions we need to take to continue to improve and grow our margin rates.

Thanks, Scott. That’s helpful. And then just anything on the growth of grand dealers or conversion from grand dealers that you can share? And maybe specifically, in the sand states as you kind of called that out as an area of growth, is that something that you’re kind of able to lean harder into with production improvements or just seeing good traction out there with dealers or any more detail on that strategy you can give?

Yes. I think it’s more of the same, Ashley. We’re just going to continue to focus on growing the dealer installation capacity across the board. More resin clearly has led to greater production, the 35% up in Q4. We do have that big sand state strategy. That’s where the Premier Pools & Spas relationship as well as all the grand dealers that those states exist. We saw really nice progress there in ‘21, and we expect we will see the more or I should say, better progress in ‘22 as the resin supply continues to improve.

Alright. Thanks, I’ll leave it here and good luck.

Thank you.

Thank you.

Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Susan.

I just wanted to follow-up, Scott, on your comment that you have all the pricing in place that you need in order for – to hit the ‘22 numbers. It feels like with the move that we are seeing in some of those underlying energy prices that the environment could shift somewhat this year. And so just wondering if you could give a little more color on the price cost, where you are with that? And maybe as it relates to lead times and the backlogs just how to think about those dynamics coming through over the next couple of quarters?

Hi, Susan, it’s Marc. Let me just jump in a little on the price. As Scott mentioned, as we head into ‘22 and baked into our guidance, we believe we’ve got the pricing in there that we need based on our current knowledge of our business and what’s going on. As we all know, there is a lot of uncertainty out there. So we continue to monitor that situation very carefully. Also, as Scott mentioned, it’s one of the reasons we decided to implement the surcharge approach on fiberglass, which is the primary backlog that we have in the business. It gives us the flexibility to move that up and down as we see the need to – as things evolve over the course of the year. So we feel good where we’re sitting right now. And obviously, we continue to monitor that, and we will take the necessary actions as we see things unfold throughout the year.

Okay. Okay. That’s helpful. And can you give a bit of color, I guess, on the backlogs, exactly where those are sitting now and how you’re thinking about the ability to get through that this year? I know you mentioned that you expect volumes to be lower in the first half of the year and then ramping in the back half. But just any color on those backlogs and sort of the timing and where we are.

Yes. Sure, Susan. Again, Mark. We saw that, let’s call it, the price gap, the gap between average selling prices running through our P&L and the inflation closed considerably in the fourth quarter of the year. We would expect that to continue to narrow in the first quarter, Susan. And as we look out through 2022, it’s probably late Q2 or early Q3 by the time that we’ve gotten to the point where we’ve run through all, let’s say, at all the lower-priced pools that are currently sitting in our backlog. So late first half more strongly in the second half of ‘22.

Okay, that’s helpful. Thank you. Good luck.

You are welcome. Thank you.

Our next question comes from Ryan Merkel with William Blair. Please go ahead.

Thanks. A couple of questions for me. So Scott, first off, you mentioned improved resin supply. Can you just unpack this a little bit more. And really, my question is, do you have enough resin to build all the pools in your backlog?

Yes. So, good morning, Ryan, resin supply really improved in Q4. I think as we talked in the back part of the year. The new source came online, we’ve recently qualified another new source which actually started to come in, in the last week or so into our facilities. And just if you look at the production numbers in Q4, fiberglass production was up 35% versus Q3. And we actually had two of our biggest production weeks in Q4 and the entire year of 2021. So as that rate continues to ramp and increase and as we work with our existing suppliers and several of the new suppliers, we’ve filled and brought online, we’re looking to bring in resin to far outpace not just what is in the backlog, but all the expectations for new orders in ‘22, what we need to deliver the guidance. And I’d say even a little bit beyond that, Ryan. We’re looking at what we need for ‘23 and ‘24, and Sanjeev is focused on making sure we have resin to build the Kingston plant when that comes online in ‘23 and more importantly, just continuing to focus on that fiberglass material conversion story. And as we drive, let’s say, to a 40% conversion number like in Europe, we are looking at long-term commitments and agreements with a diverse supply base. So, it’s more future based on the current backlog of what we are driving to. And I think we feel really good and with Sanjeev on the team now will drive that much more of a focus on that particular aspect on resin for us.

Got it. Alright. So, it sounds like you will ramp resin supply and maybe second half of this year is when you get to a point where you have enough. Is that what you are saying?

Yes. I would say we will be ramping significantly right now as we speak in 1Q. And I think it will be a nice linear ramp throughout the entire year as we will have multiple vendors coming online, another big one coming online in 2Q. The offshore sources will continue to ramp in 2Q. And then Q3 and Q4, we will continue – we will see continued improvements in that supply. And it’s almost just think about drawing a linear line out through time to match our growth rates. That’s what we are focused on.

Got it. Okay. And then just can you give us the volume and price breakout for the ‘22 guide, that would be helpful. And how are you thinking about the surcharges in that guide because it’s possible you remove those at some point or even raise them?

Hey Ryan, it’s Mark. Good morning. As we look at the guide for next year, we are talking top line growth of between 35% and 40%. As you saw in Q4, we had a price impact of about 16%. I think for the full year, it was close to 14% in 2021. So, we are thinking more than half of our growth in 2022 is likely to come from price as a result of all the pricing actions that we have taken throughout 2021. And I think as it relates to the surcharge, as we mentioned, as we sit here today, we think we have got the pricing we need for 2022. That surcharge is expected to stay in place for 2022 in our guide. But the nice thing about that is it gives us the flexibility to more quickly respond up or down to what we see in the marketplace. So, it’s a nice lever that we can use to manage through the year.

Thanks for the color.

You’re welcome Ryan.

Our next question comes from Keith Hughes with Truist. Please go ahead.

Thank you. Just to add on Ryan’s question. How much is the acquisition going to add to the – or part of the 2022 revenue guidance?

Hi. Good morning Keith, nice to hear from you. Look, we are super excited about the Radiant acquisition, and you have heard us talk about that previously. We have mentioned when we acquired the business that last year, they did around $35 million in revenue, which while we are super excited about it, it’s still a relatively small component of the overall business. And I think on top of that, like other parts, their order book is pretty well booked out for 2022. So, we are probably not going to see much growth synergy until we hit to 2023. But specifically, we don’t break out exactly what we have built into the guide for Radiant.

Okay. And on volume for the – you talked about the difference between first half, second half, do you think for the year based on the plan you laid out, do you think fiberglass pools will be up in terms of sales in total in ‘22?

Yes. I think as the volume guide goes, fiberglass sales will certainly be up year-over-year and will be a contributor to the volume growth. We are guiding softer volume year-over-year in the first half for a couple of reasons. One, pretty tough comps coming off of the first half of last year. Two, while we saw more than 35% increase in fiberglass production in Q4 versus Q3, that will continue to ramp in Q1, but we have a little bit of catching up to do versus prior year. And I think when we get to the second half, as our resin actions continue to pan out as our production continues to scale, we will be putting out even more pools in the second half than in the first half of this year. And as you know, Keith, we also then have a little bit easier comp in the second half due to the resin challenges we had in the second half of ‘21.

Okay. Finally, given what you just described in the first half of the year with fiberglass pools. We continue to see some gross margin compression just on mix alone in the first half?

Yes. We were really pleased, Keith, with the improvement in gross margin compression that we saw in Q4 versus Q3, which was expected, and we are happy to put that on board. We would expect for a variety of reasons, including the continued narrowing of the price gap on fiberglass pools. We would expect that gross margin compression to continue to shrink as we jump into Q1 and the balance of ‘22.

Okay. Thanks.

You’re welcome.

[Operator Instructions] Our next question comes from Rafe Jadrosich with Bank of America. Please go ahead.

Hi. Good morning, it’s Rafe. Thanks for taking my question.

Hi Rafe. Good morning.

The 2022 guidance has a big step-up in CapEx for the capacity expansion. Can you talk about how much you will be expanding capacity like after the Kingston facility opened? Sort of what level of sales does that support? And how do we think about the longer term run rate of CapEx?

Yes. So Rafe, I will take the first part and then maybe Mark, take the back part. So, when we – sorry, Mark, when Kingston comes online, that will ramp through 2023. So, that is a significant step-up in the CapEx number that we flash for ‘22. You could almost say the majority of it is probably Kingston related and a few other strategic capacity since we are making it. And you can argue that still take us out into mid to late ‘24. But if you step back and just look at what we have been doing over time, right, we have continued to invest in facilities in many smaller investments, whether it’s molds, vehicle base, gun, delivery equipped guns for the gunning equipment, the delivery vehicles, burners, technology to get more permitted capacity. It’s all of those small things plant-by-plant that we continue to do to try to stay at least that 12 months to 18 months out in front. This was a big step-up as a result of the fiberglass to conversion story really taking hold in the Canadian market with the Narellan brand and the Latham brand. And it got to the point where we needed the facility up there. And look, we will continue to evaluate next steps as we look at the bigger picture on specialty as we drive to that 40% conversion number like we see in Europe. Mark, any color you want to add to?

No, I think that’s well said Scott. I would just add, as we look at our guide for CapEx of $45 million to $60 million this year, I mean it’s quite a step-up from where we were in 2021. And look, we are going to continue to do all those incremental things that Scott talked about because the demand for fiberglass just continues to grow. And so we are going to continue to invest there. But look, the biggest reason for the step-up is the Kingston investment. Most of that spend is going to incur in 2022, as we start getting ready for production in ‘23. But I do also want to mention that we are also increasing CapEx spend in our packaged pool portion of the business. The demand there is very strong, and so we are bringing some incremental capacity on there. But look, the biggest cause of the jump on our Kingston investment.

Thank you. That’s really helpful. And then I think last quarter, you spoke about the utilization rate. I think it was like just below 60%. Where did that finish up for 2021? And then what is the expectation embedded in your guidance in terms of utilization as we exit 2022? How high do you expect that to get up to where will that compare to your long-term run rate?

Yes. So Rafe, if you think about what – if we just kind of look at ‘21 as an anomaly because of the resin shortage and just let’s go back to Q4, 35% improvement in production rates. Some of the biggest weeks of production all year happened in November and December on the fiberglass front. Going back to that chart, you are probably all familiar with the capacity adds coming online in 2022, using ‘21 as a baseline, we were talking 20% to 25% increase in capacity and they are going back to, let’s say, a normalized 70% to 80% utilization of the fiberglass facilities based on how the capacity ramps. And that number does not include any of the Kingston capacity add. So, Kingston will be additive to those numbers. So, you can be thinking 40% to 50% higher capacity run rate based on that investment when we get into 2024.

Okay. Great. That’s very clear. Thank you.

Thanks Rafe.

Our next question comes from Josh Chan with Baird. Please go ahead.

Hi, good morning Scott and Mark, congrats on the good quarter and outlook. I guess my first question, hopefully, we can start to use the phrase post-pandemic here a little bit. But I guess how do you see pool demand overall trending over the next, call it, 2 years to 3 years post-pandemic as consumers maybe shift their behavior from staying at home to more normal activities. Like how do you see the sustainability of industry demand trending there?

Yes. Let’s try post-pandemic. We are just in different places.

I like the enthusiasm. So, thank you for that.

Demand continues to stay strong. And if you think about our business strategy, refocusing on the consumer marketing direct to the consumer, educating on the awareness of fiberglass pools and all of the benefits at the homeowner level as well as the benefits for the dealer. That story is really resonating and it’s showing in the phenomenal growth we have been seeing. And we all know where the European market sits, but more importantly, Australia market is 70%. So, no matter what happens, if demand slows a little bit in terms of new pool starts or continues to grow at a 3% to 5% historical rate. That conversion is what’s going to drive our growth with a much faster 2x market growth there. The demand we see for ‘22 is extremely strong, make dealers top in there. We are working to kind of double if not triple capacity with those dealers. Orders in pools are being booked out into 2023 in many areas of the country. And look, the one thing to step back and look at is we are still a far cry from the peak of new pool starts in the U.S. when it was 175,000 back in ‘05. So, there’s a lot of runway. And I will go back to one of my favorite numbers. 90 million homes, existing homes in the U.S. do not have a swimming pool today. So, there is still a lot of backyards looking to have a Latham pool put into them. So, we feel really strong on the demand front. And look, just the auto cover business is also performing extremely well. I want to go back to that Covers segment. Again, that’s about the adoption of the awareness of a product that’s not known. And that story is really starting to resonate at the homeowner level as well. And I think we will see nice growth continue in that category.

That’s really encouraging color. Thanks for that. And I guess dovetailing into that, from the fiberglass conversion perspective, 2023 is close – getting closer. And so how confident are you that the industry can get to that 25% penetration that you sort of laid out for ‘23? And if it does, what does that mean in terms of your growth rate next year? Thanks.

Yes. I think if you look at the guidance we provided for ‘22, that’s the anticipation of continuing on that trend to try to get to that 25% number in ‘23 with the growth and where pool starts are. I think what we are looking at since ‘23 is now a year away, we are looking at – where do we need to be out in ‘24 and ‘25 and kind of really reset the benchmark of how do we double the fiberglass business in the next 3 years or 4 years. And that’s the capacity right in with Kingston. It’s the resin work we are doing on suppliers. So, we still feel pretty comfortable and confident we can hit that number. We will be getting the PK data on pool starts here in a few months. We will sit down, go through the analytics, but we still believe we can continue to double this business the outlook for fiberglass are extremely strong and that conversion story resonates.

That’s great. Thanks for the color and congrats on the quarter again.

Thanks Josh.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Rajeski for any closing remarks.

Yes. Thank you. So, just a few key points to kind of go back to on the call this morning, as I just said, consumer demand remains extremely strong out there on all fronts for all product categories across the globe for us. Our resin supply has greatly improved and will continue to improve as we move through 2022. We are going to continue to add capacity and stay out in front of that demand curve that’s important to us and that’s the big investment decision in Kingston. Again, I just want to thank the team and all of our dealers and partners for just great, great ‘21 results. Despite many, many challenges, ‘21 was a very tough year. I am really excited about the expectations we have laid out today to deliver exceptional growth in 2022. And more importantly, I just want to thank you all for your time this morning, your continued support, and I hope you guys all have a great safe day today. Thank you.

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