Latham Group, Inc. Price & Performance (SWIM)

Thank you. This afternoon, we issued our fourth quarter and full year twenty twenty four 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 Latham, Scott Rudjewski and CFO, Oliver Glow. Following their remarks, we will open the call to questions. During this call, the company may make certain statements that constitute forward looking statements which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward looking statements due to risks and other factors that are set forth in the company's annual report on Form 10 ks and subsequent reports filed or furnished with the SEC as well as today's earnings release. The company expressly disclaims any obligation to update any forward looking statements except as required by applicable law.

In addition, during today's call, the company will discuss certain non GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non GAAP measures can be found in the slide presentation that accompanies our remarks, which can be found on our Investor Relations website. I'll now turn the call over to Scott Rijewski.

Thanks, Casey, and thank you all for participating in today's call to discuss our fourth quarter and full year 2024 results and review our outlook for 2025. We are pleased with how well the team navigated challenging industry conditions in 2024. In the face of an estimated decline of approximately 15% in U. S. Tool starts, Latham continued to outperform the market and we are positioned to achieve considerable sales growth and accelerated profitability in 2025 and beyond. Key takeaways of our full year performance include first, our success in driving increased market penetration of glass pools By our analysis, fiberglass pools represented 24% of U. S. Pool starts in 2024, up from 23% in 2023 and a gain of six percentage points since 2021. In addition to the cost advantages, our sales and marketing campaigns have been focusing on the key competitive benefits of fiberglass over concrete pools mainly the fast and easy installation, low maintenance requirements and eco friendly attributes which are resonating with consumers. In 2024, Fibro less pools represented 75% of our in ground pool sales compared to 73% in 2023. Second, our adjusted EBITDA results were a highlight of the year. Reaching just over $80,000,000 representing an adjusted EBITDA margin of 15.8%. 30 basis points ahead of the prior year and considerably lower sales.

This strong performance was led by robust gross margin expansion that reflects our structurally reduced cost structure, and disciplined SG and A spending while we continue to increase investments in growth initiatives. Third, the benefits of our acquisition of CoverStar Central which has enabled us to vertically integrate our automatic safety cover line the 29 states where CoverStar Central was our exclusive dealer and has set the stage for revenue synergy opportunities and additional acquisitions in this arena. CoverStar is a good example of the type of accretive acquisition opportunities in the market. And lastly, ended 2024 in a very strong financial position providing the flexibility to invest in organic growth projects and consider potential acquisitions. Oliver will cover the specifics of our fourth quarter and full year results later in this call. We were pleased that our performance was in line with our expectations and enabled us to exceed the midpoint of our full year sales guidance and demonstrated our ability to continuously drive operational efficiencies and savings even in a declining demand environment. Importantly, while we effectively manage through the [indiscernible] we also moved ahead with strategic investments in initiatives that are designed to drive substantial growth over time and are focused primarily on our two major growth product categories, namely [indiscernible] automatic pool safety covers.

The most prominent of these growth initiatives is the planned expansion of Layton's market share in The Sand States which we define as Florida, Texas, Arizona and California. To put this opportunity in context, the SAM states collectively account for approximately two thirds of U. S. Pool starts in The U. S. In 2024, we expect that number will be similar in 2025. Approximately 17% of Latham's total fiberglass pool sales in 2024 were in the Sand States and as we are the largest pool manufacturer in North America, with nine plants producing fiberglass pools the market share expansion opportunity for us is clear. In executing to honor SandState strategy, we are focused on four key priorities. Expanding our pool dealer base, which involves working to increase the productivity of our existing dealers, as well as standing up new builders and converting concrete builders to fiberglass. Targeting master planned communities which are large scale mixed use residential developments with robust curated amenities, the largest of which are found in Florida and Texas. Aligning our product offerings with market demand in the Sand States where builders and consumers tend to favor rectangular pool shapes pool spa combos and smaller size plumbing pools.

This year, we plan to launch several new fiberglass pool models with these characteristics to continue to increase our market share in The Sand States. And addressing our marketing campaigns specifically to consumers and builders in those markets. In other words, we're highlighting the faster installation and lower cost of ownership in concrete to consumers and stressing the benefits to builders such as being more profitable and faster to scale than concrete. And we believe the scarcity of labor will be a tailwind for fiberglass given the much greater labor intensity associated with building a concrete pool versus the fiberglass pool. Of course, gaining a meaningful but we are encouraged by the initial dealer, builder and consumer response in the short time since we began implementing this strategy. For example, our Agusa ad campaign which stands for Get Out of the Stone Age, was launched in Texas during the fourth quarter of twenty twenty four and resulted in over 40% more leads for our dealers than in the prior year. And in Florida, Latham sponsored events at Babcock Ranch, a master playing community on over 170,000 acres have attracted large crowds and solid lead generation. We have a full range of targeted marketing activities planned in Florida and Texas in the coming months and are expecting to see incremental sales from these initiatives beginning this year.

And while our primary focus in the sand space is on conversion to fiberglass pools from concrete, We also see the sand states as an excellent market for increased adoption of automatic safety covers. Latham's automatic pool covers offer unparalleled safety forming an isolation barrier when they are closed that sealed off all sides of the pool. In addition to its safety benefits, this product line offers several important savings and maintenance benefits for pool owners including significant reductions in water evaporation, lower pool heating and electricity costs, and reduced chemical usage. In essence, they often pay for themselves after four to five years of ownership and come with a multi year warranty. In August 2024, we acquired our largest automatic safety cover dealer, CoverStar Central, The vertical integration of this product line in the acquired geographies has expanded our adjusted EBITDA margin we are working together with the leadership team at CoverStar Central to accelerate the adoption of this excellent product line. Today, we are also very excited to announce two smaller but strategic acquisitions bring in our CoverStar New York and CoverStar Tennessee bars which further strengthens our position in this growing product category. Looking ahead to 2025, industry conditions are slightly more favorable than they were one year ago.

But we believe trough market conditions are likely to continue through much of the year. Therefore, we are managing to a new U. S. Pool starts in 2025 that will approximate 2024 levels. But we have the ability to quickly and efficiently ramp up to capture any increase in market demand. You have seen from our earnings release, we expect to considerably outperform the market in 2025 supported primarily by our market share gains in the SAM states, increased adoption of auto covers and the impact of last year's acquisition of CoverStar Central along with the contribution from the two small acquisitions we just completed. I will now turn the call over to Oliver, our CFO to review our fourth quarter and full year financial performance and discuss our guidance for 2025. Oliver? Thank you, Scott. And good afternoon, everyone. Please note that all comparisons we discuss today on a year over year basis compared to the fourth quarter of fiscal twenty twenty three, and full fiscal year 2023 unless otherwise noted. Net sales for the fourth quarter of twenty twenty four were $87,000,000 down 4% compared to the $91,000,000 in Q4 twenty twenty three reflecting lower volumes from industry softness partially offset by continued fiberglass conversion and the acquisition of Cavastar Central.

Based on the normal seasonal cadence, Q4 is our slowest period and our sales performance was slightly ahead of our expectations. By product line, in ground pool sales were $44,000,000 down 5% from Q4 twenty twenty three, reflecting soft industry conditions while still outperforming the overall pool market, Cover sales were $31,000,000 in the quarter down 2% with declines from industry softness partially offset by the benefits from our CoverStar Central acquisition in August. Liner sales were $12,000,000 down 5% compared to the fourth quarter of twenty twenty three remaining resilient relative to the overall pool market due to the replacement cycle of these products. Despite the decline in sales, we achieved a fourth quarter gross margin of 25% which is 130 basis points above last year's 23%. This is the result of our production efficiencies gained from our lean manufacturing and value engineering initiatives and a benefit from the acquisition of KAVASA Sentra, SG and A expenses increased to $27,000,000 up 3,600,000.0 from $24,000,000 in Q4 twenty twenty three largely driven by investments made in sales and marketing initiatives, to drive fiberglass penetration increased performance based compensation as well as by the acquisition of Caravastar Central.

Net loss was 29,000,000 or $0.25 per diluted share compared to $100,000 of net income or $0 per diluted share for the prior year fourth quarter, Our net loss for Q4 twenty twenty four includes a $9,000,000 of non recurring non cash income tax expense due to a valuation allowance established on foreign deferred tax assets and a $5,000,000 loss on foreign currency transactions associated with our international subsidiaries, Fourth quarter adjusted EBITDA was $4,000,000 down $6,000,000 or 63% from $10,000,000 in the prior period. Primarily resulting from increased sales and marketing spend and higher performance based compensation. Adjusted EBITDA margin was 4% a six seventy basis point decline year over year.

Turning to our full year results. Net sales were $5.00 9,000,000 down 10% compared to €566,000,000 in the prior year. Reflecting lower sales volume due to industry softness. By product line, LASEM's in ground pool sales for the full year $259,000,000 down 13% year over year but importantly, above the estimated 15% decline in inbound pool starts The U. S, in 2024. Throughout the year, we've outperformed the overall in ground pool market primarily as a result of our success in increasing the awareness and adoption of fiberglass pools As Scott mentioned, market penetration of fiberglass ports increased by one percentage point in 2024 and we are working to drive continued growth of fiberglass across The U. S. With particular emphasis on the SENSE states where there's significant opportunity for us, Our Lidar sales of $118,000,000 declined 8% while cover sales of $131,000,000 were down 7% reflecting softer demand due to the ongoing challenging industry environment, partially offset by our acquisition of Caravastar Central. ROSS profit was $154,000,000 slightly up compared to 2023 a strong indication of the substantial operating improvements we have made. Gross margin exceeded 30% an expansion of three twenty basis points compared to 27% in the prior year.

Primarily resulting from related to lean manufacturing and value engineering initiatives improved procurement and modest deflation. In non cash stock based compensation expense as well as the benefits from our various cost reduction [indiscernible] These savings more than offset the $8,000,000 in higher performance based and our increased investments in sales and marketing initiatives to expand the awareness and adoption of fiberglass pools, and grow our market share in the SENSE days. Net loss for the full year was $18,000,000 or $0.15 per diluted share compared to $2,000,000 or $0.02 per diluted share for the full for the prior year, The net loss for the full year 2024 included $9,000,000 of non recurring non cash income tax expense due to a valuation allowance established on foreign deferred tax assets and a 6,000,000 loss on foreign currency transactions associated with our international subsidiaries. Adjusted EBITDA was EUR 80,000,000 compared to EUR $88,000,000 in the prior year as a result of higher performance based compensation and sales and marketing spend I just mentioned while the impact of lower net sales was offset by our structurally improved cost basis. Adjusted EBITDA margin of 15.8% was 30 basis points above the 15.5% in 2023 thanks to our strong gross margin performance.

Turning to the balance sheet, we ended the year in a strong financial position which gives us the financial flexibility to pursue organic and inorganic growth opportunities. We ended the year with a cash position of €56,000,000 even after the purchase of Caravastar Central for approximately €65,000,000 in August, and the repayment of approximately €21,000,000 of debt during the year. Net cash provided by operating activities was $6,000,000 in the fourth quarter and $61,000,000 for the full year 2024. We ended the year with total debt of $282,000,000 net debt of $225,000,000 and a net debt leverage ratio at 2.8. On a pro form a basis, our net debt leverage ratio was 2.6 the end of the quarter, Capital expenditures were $20,000,000 for full year 2024 compared to €33,000,000 in the prior year. This is in line with our estimate of approximately €5,000,000 of CapEx spend [indiscernible] As Scott noted, the acquisition of two additional CoverStar Divas, We expect the combined impact to provide incremental net sales of approximately $5,000,000 and incremental adjusted EBITDA about $1,000,000 which we have included in our 2025 guide, We have successfully navigated a year of challenging market conditions Contributing to that success was our ability to drive meaningful cost structure improvements including EUR 4,000,000 of savings from restructuring programs and $9,000,000 of savings from lean manufacturing and value engineering initiatives.

We see further opportunities to gain operating efficiencies through continued lean manufacturing and value engineering initiatives in 2025 We believe these cost improvements have structurally changed our financial model positioning Latham for increased earnings potential amid an eventual industry rebound. Turning to our outlook for 2025. As Scott noted, we believe that new U. S. Pool starts this year will be similar to 2024 with some room on the upside if consumer confidence improves. With this as a backdrop, we expect to achieve meaningful growth in net sales and adjusted EBITDA underpinned by key growth drivers which primarily include accelerating share gains in the SENSE days and the benefits of the CoverStar Central New York and Tennessee acquisitions and the continued awareness and adoption of automatic safety covers. These factors have informed our 2025 guidance for net sales of between $535,000,000 and $565,000,000 and adjusted EBITDA of between $90,000,000 and €100,000,000 representing year on year growth of 819% respectively at the midpoint. With respect to the cadence of the year, we expect a measured ramp up in orders and a first quarter twenty twenty five net sales to be similar to last year's first quarter performance, and first quarter adjusted EBITDA to reflect increased investments in the build out of our presence in the Sensates.

This should be followed by progressively higher year on year comparison in the seasonally stronger second and third quarters of the year. Capital expenditures are projected to be in the range of $27,000,000 to €33,000,000 higher than 2024 by approximately 10,000,000 resulting from our decision to develop production modes for new fiberglass pool models specifically designed to appeal to the Sand States market, and the addition of usable space in our Florida and Oklahoma manufacturing facilities for future expansion anticipation of increased market penetration, in the sense states With that, I will turn back the call Scott for his closing remarks. Thanks, Oliver. To sum up, 2024 was a very productive year.

One that demonstrated the increased market penetration of fiberglass pools and automatic safety covers and the benefits of the structural [indiscernible] As Oliver noted, we expect these factors to drive LatAm's above market growth in 2025 and beyond.

During our site visit to Lakeland's Separately Hills fiber glass manufacturing facility in November 2024, we shared a longer term vision. I invite you to review the Zephyrhills site tour presentation posted to the News and Events section of our IR website. In this presentation, we describe a path for advancing our growth strategy and the results we can achieve. When new U. S. Pool starts return to 78,000 per year, we can achieve revenue of about $750,000,000 and adjusted EBITDA of around $160,000,000 The last time the market was at that level was 2019 and our revenues were $318,000,000 and our adjusted EBITDA was $61,000,000 meaning Latham is positioned for outsized growth we believe our growth has continued potential even beyond this point. We are looking forward to a growth year for Latham in 2025 and tracking toward even more expansive growth in the years to come. With that operator, I would like to open the call to questions.

Thank you. We will now begin the And your first question today will come from Ryan Merkel with William Blair.

Everyone, thanks for taking the questions. First off, on the guide for 8% sales growth, could you break that down between volume, price and So the 8% sales growth in our guide from five zero nine to five fifty breaks down at about 3% to about 3% coming from the full year run rate effect from CoverStar Central as well as the two new acquisitions, which we've closed last week. Leaving about 5% for organic growth, right? And that's the combination of fiber continued fiberglass penetration that we have driven successfully over the past few years as well as the first dividends from our growth strategy, especially the sense that as well as the continued way under the deduction of auto covers. Pricing, similar to last year, in our guidance is flattish and therefore not a major impact. Okay.

That's helpful. Thank you. And then my second question, could you just can you just talk about feedback from dealers heading into the season here? What do leads look like? And I'm specifically interested in what you're hearing in the sand states. Are you starting to see evidence that that strategy and your investment there is starting to pay off?

Yes, Ryan, good afternoon. I'll take this one.

So So feedback from dealers, I'll say, has been a lot more positive this year than last year at the same point in time. Again, as you guys are all aware, right, we're coming off of our dealer conference heavy show season a lot of time in the field with all of our builders. And think just everyone in the industry in general I think the word we've been using with everyone is I think everyone's cautiously optimistic about the year. Now clearly a lot of this before the tariff scenario we're all fighting with right now real time But the way I like to judge is just like coming into the last at the same point in time, If we look at the majority of our larger dealers, about a third of them said that their backlogs are flat, if not up this year versus the same point in time last year If I rewind a year ago when we were asked that same question, no one was seeing flatter up. So, right, so that's a good indication that they're feeling good. And specifically in the sand states, I'd say we're seeing really good progress there.

New dealers coming into the area, increase in leads. I think one of the things I like to point to is we we fired up our Goosa campaign in Texas in the fourth quarter and the number of leads that we were generating from that campaign at the end of the year was up 40% versus the prior year and we're just getting ready to launch the GUTSA campaign here in Florida as well. So I'd say early progress, as we start to ramp all of that up, bring new dealers in the new master plant communities. And specifically because we've been at Babcock Ranch a little bit longer with our dealer there, I'd say we've seen a lot of really good traction in all the events we've been hosting the last four to five months there. And we would expect that will start to translate into a nice uptick As we go forward, And I think one of the things I think we can quantify for you guys, we did see about a 2% increase in our revenue with fiberglass specifically in The Sand States year over year going from 15% to 17 of ghouls sold. So we were really happy with that starting to move in the right direction as we're kind of here in the early innings of the game.

Great.

That's encouraging. I'll pass it on. [indiscernible] And your next question today will come from Andrew Carter with Stifel.

Hey, thank you very much. Good afternoon. So I guess you mentioned it tariffs. So could you walk us through kind of your exposure? You obviously have a business in Canada. So you got some stuff moving north potentially. Some of that, I guess, is self contained. And then I guess specifically just to kind of anchor us around what Kingston is doing now, what the kind of expectations were for it? Was it not only for Canada but was it for the Northeast? And does that change at all after kind of territory tariffs, tariffs coming in? Stop there and let's just talk.

Yes. So look, it's a very dynamic situation. I think good news, bad news is, we have had some time to get out in front of this and prepare for the impact for 2025. I guess the better news is it's not a significant impact for us overall if you look at what we're importing from the currently announced tariff impacted countries Think around a $15,000,000 material buy for us overall from what we see today. What we've really been able to do is as over the years as we've completely diversified our supplier base, right? We've been dual and tri source, right? The first lever is shift the buyback to domestic providers which has been a big help to us. We have had the ability to say pre buy material and more importantly, I'll say pre stage raw material as well as finished goods into the countries ahead of any of the any of this. And we also have the ability to shift manufacturing production between the facilities Kingston specific, Andrew, as you asked, right, the original intent was to to be able to put production up there that we could shift back into the Northeast. Again, I'd say we brought a lot of pools down into our storage yard specifically here in Queensbury.

We will probably pivot and use Kingston local production in the Canadian market. And again ship production from some of the other facilities here in The U. S. To fill back into The U. S. I think that's the benefit of our really great manufacturing footprint we have have in the nine facilities, having multiple liner facilities in U. S. And Canada, we can quickly maneuver things back and forth. And look and at the end of the day to kind of mitigate the full impact of anything we would see price would be the final lever that we would be able to pull in terms of passing that on to the dealers, ultimately the consumers But again, it wouldn't need to be a big number to kind of mitigate the impact for this year.

Got you. And then second question, just going back to the site tour in November, I guess I walked away thinking like a CapEx around the Sand States would be taken with a lot of traction. You're taking some today Is that based on what you've seen? And is it how should we think about the Sand States strategy being effective? But is it going to be this kind of stepped up add $5,000,000 to $10,000,000 of CapEx per year from here for the next couple of years Or will you do another Kingston plant if it's really successful, pick pick a good location? Just how is that kind of capital plan change?

Yes. I think what we want to do Andrew, you're with us at the site in Zephyrhills. It's really about flow and continuing our journey of being better production, better flow to get more pools out of the existing location there. So one, right, it's new models and molds that we want introduce that will resonate in the sand stage. Smaller pools, more feature rich with spas and ledges built into it. And more of the plunge pool lineup. So I'd say building out that product portfolio to meet the demand profile there is one. Right two, working on some expansion opportunities at the Zephyrhills facility to encourage better flow, increased kind of capacity so we can kind of get more pools in and out the door there on a daily basis. And then a similar concept with Oklahoma, right? When we bought Oklahoma, we had a multi staged concept there of building that site out over a three to five year period as we saw demand come and we had really good success in the Southwest last year So I think we're just starting to set the stage for smaller CapEx investments in those plants I don't see a need for a Kingston like investment in the near term horizon.

We've got plenty of capacity to grow into, let's say, that 78,000 number that we talked about before we would the goal drop another big CapEx investment like a Kingston into the network for us. Thanks. I'll pass it on. Thanks, Andrew.

And your next question today will come from Tim Wise with Baird.

Afternoon. Thanks for all the information.

Maybe just on the first question on fiberglass penetration. I don't expect exact numbers, but as you kind of look at 24% penetration in total for fiberglass, Do you think the sand states just kind of based on your work is at that same level or do you think it's actually below the overall penetration of fiberglass in The U. S?

Yes. It's really good question. I think that's been one of the things we've been talking about as we've kind of laid out our strategy and the roadmap. Clearly, fiberglass is significantly underpenetrated. In the sand state market in total. I'd say significantly below, let's say, the 24% number we talked about for total U. S. That's why we really like it, right? It's a huge opportunity. Say 65% roughly of all pool starts are in. The four sand states as we've defined it. Under penetration So that's really why we're excited about what can happen in maybe a slower new pool start growth market here as we continue to take share against fiberglass there rapidly build to scale the business and grow it, We're not at a point where we want to disclose those numbers yet. I think we're still trying to do our homework on laying that all out.

But I could tell you it's well below the 24% number.

Yes.

Okay. No, that's helpful because I mean it does imply that the non non Sam state penetration would be significantly higher, I guess, than where you're seeing the Sam State side. So it seems like a pretty big opportunity.

So I guess second question just on the EBITDA bridge. Kind of of similar to Ryan's question just with revenue, Oliver. Just could you kind of kind of walk through the midpoint to midpoint, call it, dollars 15,000,000 kind of EBITDA Yes, Tim, glad to do so. So in our walk from 24 EBITDA of 80 to our midpoint 25 guide of 95 I think there are really three key tailwinds here. First one being the volume leverage. Obviously, the 8% additional volume or the organic 5% that drives an EBITDA impact we talked about. Some of the incrementals that that would drive probably in the high 30s that's the first impact.

Second impact is lean value engineering. In 2024, we realized €9,000,000 from that program relatively consistently to €2,500,000 a quarter We expect that at least to continue, if not with increased volume accelerate. And then lastly, it's the addition of the three cover cycle, the right? And then the most impactful one is run rate in CoverStar Central. That is being passed by increased SG and A spend, right? Your heard us talk about in with regards to our Sensate strategy, funding that with additional sales boots on the ground salespeople, as well as marketing, especially around our Goodsa campaign, as well as the acceleration of our efforts to digitize company, right? So that would be the key headwind here. To drive us from EUR 80,000,000 to EUR 95,000,000. There's a lot of other things happening under the hood but these are the key impacts. Okay.

And would you say the you're at a point now where like increases or the year over year kind of incremental increases in SG and A spend are you're effectively kind of self funding that through the Enterprise now? Or do you feel like there's still a lot more SG and A investment that needs to be put into the business itself?

I think we'll adjust as we go, right? And with an increasing success, I would love to add over time additional salespeople as we go into new neighborhoods and new geographies, right? I think in terms of marketing, that's more enough for an investment to drive the initial awareness. And then potentially maintaining that awareness will that probably be at a lower run rate. But for now, I would say we have what we need for 2025. We have what we need to fund that assumption of 5% organic growth Okay. Okay, great. Good luck on the year.

Thank you. Your next question today will come from Greg Palm with Craig Hallum Capital Group.

Yes. Thanks and congrats on all the progress last year, all things considered. Thanks, Ray. I'd like to come back first to the full year revenue guide. So you have the company specific driver going after the sand states, and then maybe some structural drivers out there that's potentially making pools less attractive. So I'm curious, does the guidance assume an acceleration of fiberglass penetration in 2025 or could that be a source of upside maybe?

Our guidance includes first dividends from our Sensate strategy from driving awareness and adoption of auto covers beyond what we have been used to on an annual basis, the normal kind of demand driven fiberglass penetration outside of the Sensate.

Okay. So to be clear, it does imply some sort of acceleration? That is great.

Yes. Okay. And as it relates to the SandState strategy specifically, I'm curious how are you measuring success? I don't know if there's KPIs you're looking at But trying to figure out what determines how much investment you want to make from a marketing side and B, how many other dealer locations you might want to stand up down there in those states over the coming years?

Yes. So, Gray, it's a hot question that we've been discussing here quite a bit the last several months. As we put this strat together and came into the guide here. And I think the first one is kind of what I mentioned earlier on the call percentage of fiberglass pools of our revenue units being sold in the Stan States going from 15 to 17 right. So I think that will be the first one we'll start reporting on an annual basis. I think as we start to understand what is the right penetration number down there versus let's say the national average penetration number we'll probably start to do something on that point maybe later this year or as we get through 2025, And I think when it comes to dealers, right, the the game for us in the Sand States is we've already got quite a few dealers there in the Sand States, let's say specifically in Florida, I think the two issues we have is one, the average number of pools they do versus a fiberglass dealer in the non Sand States And then two, where are they physically located? A lot of these folks are not in the circles of these master plan communities So what we're trying to do is actually get some of them to shift or create a second location in these MPCs, as we like to call them, I think the other thing is as some of our other bigger dealers nationally, let's say our grand dealers or some of our President Club award winners, they see the investments we're making, the marketing we're we're doing, the Gucci campaign we're launching, some in third territory, let's say maybe in Texas, and they're now asking us hey, I'd be willing to come and work with you guys and tackle some of these MPCs if you don't have dealers present there So I think we've made really good progress since the Zephyrhills one.

We're probably a little bit accelerate on the pace of dealers and MPC we're going into And like I said, we're really just going to start spending some money on the Gucci campaigns here in the Florida market specific.

And look, we would love to see similar gains like we saw in Texas of 40%, 50% year over year incremental leads It does take time to convert a lead to an order. And look, as we move forward, we'll give more and more color so you guys can clearly see the success we're having on there. And how it's moving the overall needle?

That's helpful. I mean, do you have a target in mind locations you want to be in, pick some amount of time, whether that's twenty four months from now, Yes. We kind of gave a tease of that when we in 2025, trying to get in the first I can't remember the exact number, Greg, I have to go back. Three or four communities, let's say, But look, there's 20 big MPCs in Florida and Texas that we've targeted We do want to go slow a little bit because I think we will learn a lot get into them, just like we've learned a ton with Concord and Babcock Ranch let's say over the last year or so, it will be an evolving strategy. And I think as we start get success and we see more dealers coming to us wanting to move to Florida and work with us. Like I said, I mentioned, we just had several existing approaches that we're working with now to get into some of those markets and communities So we'll continue to drive that. And I think when we get to a point where it cents We can start reporting on progress. And to me, it's maybe it's probably not important how many MPCs are we in, how many pools do we sell and what percentage of our total pools sold is increased and then how are we driving that overall penetration number specifically in the sand states trying to get it up, let's say, the national average, that 24% number where we believe the market landed last year.

Yes, makes sense. All right. I will leave it there. Best of luck. [indiscernible] Your next question today will come from Greg Badishkanian with Wolfe Research.

Please go ahead.

Hey guys, this is Josh Dringer on for Greg. If I heard correctly, 1Q sales 2025 expected to be sort of flattish.

That includes some M and A. So if the industry is still somewhat soft today, gives you confidence in that 8% growth for the full year? So let me start with the confirming your understanding that we think that Q1 will be flat That is essentially As I said, the first dividends from our 10 state strategy and then auto covers, right? But then the acquisition of Cover South Central has had the impact to push out some of the sales was versus last year, right? What used to be a sale from LASM to cover Central in Q1 last year end of the season is now sales from the combined entity into the market in Q2. In Q2. So those roughly offset each other, hence, in in Q1, we are thinking flat here. As you go into future quarters, they the CoverStar dynamics kind of reverse out And then as we go into the full swing of the season, you would think that fiberglass penetration of the units increase in fiberglass penetration as well as what I always call the dividends of our strategies that you will see those kicking in, right? So overall, again, we've estimated everything on a flat [indiscernible] And these are the sort of the [indiscernible] That's helpful.

I'll just leave it there. Thanks guys. [indiscernible] John.

Your next question today will come from Matthew Bouley with Barclays.

Hey, good evening everyone. Thank you for taking the questions. Just wanted to ask maybe just a little more clarity on the margin guide. So sort of fairly healthy 150 basis point increase to adjusted EBITDA margins. And twenty twenty five. I just wanted to be clear if I guess number one, if kind of the tariff exposure, I know you got a lot of mitigation efforts, maybe some of the cost of those mitigation measures just kind of if that's included in the guide or if this obviously very recent tariff issue is still not in the guide, so that's kind of part one. And then I guess just secondly, what was the implication that most of that increase in adjusted EBITDA margin anticipation of a little bit of SG and A leverage as well? Thank you.

Thanks for the question. Let me address tariffs first. What technically is in the guidance is it's China. As you have heard Scott saying, our portfolio of imports is really limited to about 15% of total of the overall raw material basket, right? The team has done not over the last few weeks, but months a great job of near shoring. We have been pre buying or admittedly that doesn't eliminate the exposure, it just delays the exposure. Then really leveraging our network to work on mitigating the exposure for 2025 and beyond, right? In our guidance, as I said, it's China.

We believe that the combination of the supply chain driven mitigation levels as well as what has proven effective to us is the pricing level to close the remaining gap that our guidance given the announcements today will not meaningful change including Mexico and Canada, right?

No, there's always a little bit of impact tariffs also on the domestic market as supply and demand balances shift and change, right? We've seen based on the recent announcements of steel and aluminum that the domestic have also seen a spike here, right? So So for the what I would call the more indirect impact of a tariff we will have to wait and see what needs to be mitigated and how we will mitigate that. In terms of our gross margin, we don't specifically guide towards gross margin, but as you recall from a previous answer, we have three tailwinds to our EBITDA margin. And they are all highly relevant for gross margin. And then our one headwind being in SG and A where we increase our SG and A spend to fund our Fenstey journey and then other growth levers that is entirely in the SG and A line, right? So that being said, right, can imagine that the gross margin outperformance over '24 And then I remind you that gross margin stands at 30.2%, so above 30% nicely, three twenty basis points up on 2023. We'll take another step towards our stated goal of 35% in 2025.

So most of the EBITDA outperformance actually more than 150 basis point in EBITDA performance sits in gross margin.

Perfect. Okay, got it. Yes. And thank you for clarifying every piece of that. So I guess secondly, just shifting to M and A, right, kind 2.6% pro form a net leverage.

I mean, I guess, are there more opportunities to kind of go downstream on the cover side? I don't know if other CoverStar regions or perhaps other targets separate to that in the sand states that kind of help move the needle there? Or is this going to be kind of a year where you guys want to digest the leverage a little bit? Thank you. Yes. No, Matt, good question. Look, there's there's always a good healthy list of M and A targets out there. [indiscernible] right, it always comes down to timing of when is someone ready to make that transaction transition. Based on their career or other, let's say, business focused priorities. They may want to shift to I think these last two that we did here CoverStar New York, CoverStar Tennessee, again smaller territory is much different than let's say the CoverStar Central acquisition. And again, I'd say two very, very unique opportunities based on dialogues and conversations we have with both of the owners there that allowed us to strike quickly And there are other CoverStar dealers or VARs out there in our network I'd say we'll continue to have dialogue with those guys We've got quite a bit.

We've got a digest right here I'd say the integration with CoverStar Central is going extremely, extremely well. Bolding these two back onto that one will really open a lot of new auto cover growth opportunities for us. Better alignment how we go to market, I think we'll continue to do extremely well with our other partners out there. And I think in, let's say, the non auto cover space, we'll continue to have dialogues with other, but I can say right now, there's nothing active pending that we're working on other than these two that we just closed. And getting them folded in along with CoverStar Central. Got it. Thanks, Scott and Oliver. Good luck guys. Thanks, Matt. Thanks, Matt. Your next question today will come from Susan Maklari with Goldman Sachs.

Please go ahead.

Thank you. Good afternoon, everyone.

Hi. My first question is hi. My first question is going back to the margin. You've done a really good job over the last year of realizing those cost savings and the lean manufacturing efforts. And I know that I think you said that you did about $2,000,000 to $2,500,000 a quarter last year. You think you could at least do that, if not more this year. Can you talk a bit more about what those opportunities are and how we should think about them coming through the business over the next several quarters?

Yes. So Susan, I'll hit level on the opportunities. I'd say it's a lot more of what we've been doing, right? So So I'll hit lean first because that's the easiest one right Just continue to do events in our plants looking at process flow, how do you drive more capacity less tact time with the product flow through the factories, taking hours out of the process, getting that labor productivity I think that journey is accelerating as we go forward here. And again, as we get more people trained on that, I'd say they're doing their own events within the plants now. It's just part of what the teams do when they show up to work every single day. And the entire manufacturing operation is done a tremendous job with the individual that's leading that for us. We continue to add new engineering talent into the organization. The value engineering products where you're looking at how parts are made, how they're constructed, what the materials are made out of, how do you redesign those products and components. Right? Those take a little bit longer, but again, we're starting to build a good mass of engineering talent that's been in the business now for a few years.

Good ROIs and paybacks And I would say, I'll let Aldrin, but I think it's fairly consistent as we go through the quarter in terms of the value engineering of lean because a lot of these projects are being built out six, nine, twelve months in advance. You have good visibility looking forward in terms of when the realization of those will hit. And again, I'd say a lot of singles, doubles, they're not going to get a triple I think the guys are starting to look at some of the bigger more structural things we could be doing in the future as we gain more expertise on the engineering front there.

And so in terms of fading, phasing, a lot of the projects live with the savings per piece. So the more pieces you sell and produce, the more savings you realize. So given all the seasonality, expect the quarters that are more towards the €25,000,000 to be Q2 and Q3 with the lighter quarters being in Q1 and Q4.

Okay. That's helpful. And then thinking about the new products that you are developing for the sand states, how should we think about the rollout of those, the timing of that? And then as they do start to gain momentum, are there any implications in terms again of the margins and the returns that should think about there?

Yes. So look, I think we just came off of pretty much the kick off of the season here in the last three or four months.

So I think we've introduced all of the new products that we put out to the market. We've gotten some really, really great press on those models on the plunge pools. I actually think some of the plunge pools actually won a few awards at a couple of the shows for us. And I think Susan that will be an ongoing initiative, right? So we've got a pipeline of products development that our product directors and marketing team are working on as we build through the capacity of how we can build these molds and launch them. But again, there is a seasonality aspect that if you want to be launching these things, in the late 4Q, early 1Q timeframe, So as the selling season starts for our dealers to the consumers, they have all the literature and brochures they need to get to that pool building season So you'll see the next wave of that come late summer, early fall for new model launches that we would be planning and wanting for 2026. As we accelerate on the capability there And I think the other part of your question was kind of the yield margin impact. I think fiberglass will be a little bit more competitive in the sand states versus let's say the concrete pool down there.

But again, I think you've seen that we've made a lot of investment in capacity in SG and A in marketing So as we start to sell more and more pools where we're under penetrated there, I think we'll have really nice leveraging in our factories which will allow us to continue to grow not only GM, but I'd say EBITDA margins as we march back to try and get back to 22%, 23% EBITDA margin consistently from where we were back, full building times of 2021, 2022 Okay. Thanks Susan. And your next question today will come from Sean Cowen with Bank of America.

You had mentioned shifting some production from Kingston to The U. S. Can you talk about the difference in margins on The U. S. Production Yes. So there's not really a difference in kind of the producer's right? You're trading the variable cost up in Q4, but the variable cost in Invest Virginia, for example, is one of the receiving box, right? I think the thought process is really about balancing tariffs with logistics. [indiscernible] So by making the shift, you mitigate on the tariff side. There'll be a little bit more logistics costs, right? In our guidance, we have not factored in the impact from the 25% Canadian and Mexican tariffs that starts earlier today. But then again, we have we have mitigated some fair amount of the impact, a fair share of the impact And then as we said, pricing has been an effective lever [indiscernible] Okay, great. And then I just wanted to clarify an earlier comment. When you were talking about the value engineering, there was a $9,000,000 benefit Last year, can you talk about what the carryover from that is into 2025? And then I think you said you expect something similar next year. Does that [indiscernible] $9,000,000 of incremental savings from value engineering.

Yes. So there's always going to be carryover. So I would say, hey, as we look for 2024, projects to pay its full dividend in 2025. There will also be 2025 projects that we will implement throughout the year that that have their full potential than in 2026, right? So at this point in time, I look at what we throw into the funnel exactly the same way what comes out of the funnel in terms of the P and L, right? And so right now on both sides of the equation, new project, project generated and what material is you had that nice $9,000,000 run rate. About $2,000,000 to $2,500,000 every quarter.

Great.

Thank you. Thanks, Joel. [indiscernible] I would like to turn the conference back over to Scott Rogeski for any closing remarks. All right. Hey, look, thanks everyone for your time here this afternoon, early this evening. We really, really appreciate all of your continued support for Latham. And I know all of myself are really looking forward to seeing all of you at upcoming conferences and meetings. As we roll through the first quarter here. And we're definitely looking forward to our 1Q earnings call once we get out into our early to mid 2Q. So again, thanks everyone. Have a good evening. Bye.

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