Latham Group, Inc. Third Quarter Fiscal 2026 Earnings - LATHAM GROUP INC

Financial Performance:

• Third-quarter net sales reached $182.2 million, a 12.5% year-over-year increase with 8.4% organic growth and 4.1% acquisition-related growth (Freedom Pools).
• Year-to-date (YTD) net sales were $497 million, up 11.4% with 7.9% organic growth.
• In-ground pool sales surged 22.6% in Q3 (13.9% organic), driven almost entirely by fiberglass pools.
• Cover sales grew 8.7% to $60 million, led by auto covers ($40 million); liner sales declined 4.9% to $30 million due to a difficult prior-year comparison.
• Gross margin expanded 130 basis points to 36.7% (vs. 35.4% prior year) due to resolved manufacturing capacity constraints, higher volume absorption, and lean initiatives.
• Adjusted EBITDA increased 18.1% to $45 million in Q3 and 14.2% to $102 million YTD; EBITDA margin reached 24.8%.
• Net income was $12 million ($0.10/share) in Q3, up 48.5% from the prior year, though including a $5 million one-time loss on debt refinancing.
• Operating cash flow was strong at $49 million for the quarter and $55 million YTD; ending cash balance stood at $95 million.
• Total debt was $293 million with a net debt leverage ratio of 1.8x, comfortably below the year-end target of 2.0x.

Guidance and Future Outlook:

• Reaffirmed and narrowed full-year 2026 guidance: Net sales between $605M–$615M (11.7% growth at midpoint) and Adjusted EBITDA between $112M–$118M (15.2% growth at midpoint).
• 2026 guidance reflects potential impacts from Middle East conflict (increased freight surcharges) and commodity pressures, partially mitigated by price increases on liners and auto covers.
• Management expects an immaterial impact from Canadian tariffs due to proactive inventory positioning; 2027 plans include leveraging U.S. manufacturing to replace Canadian supply.
• For 2027, management plans for a "flat" total pool starts market but remains confident in continued outperformance via share gains and execution of strategic priorities.
• Forecast for fiberglass market share to increase by at least 1 percentage point in 2026, potentially reaching 25% of total U.S. in-ground pool sales.

Business Segments and Product Lines:

• Fiberglass Pools: Represent ~80% of total in-ground pool sales; identified as the primary growth driver with upper-teens organic growth in Q3.
• Sand States (FL, TX, AZ): Sales grew 21% in Q3 and 16.6% YTD; new rectangular models launched for the 2027 season tailored to year-round usage.
• Auto Covers: 8.7% Q3 growth; synergies realized from CoverStar acquisitions continue to drive momentum.
• Liner Sales: Experienced a 4.9% decline, attributed to a strong comparative base in Q3 2025 rather than share loss.
• New Initiatives: Partnered with a national home builder to offer Latham pools in new Florida home construction; established a world-class commercial organization with new Chief Commercial Officer.
• Productivity: Resolved manufacturing capacity constraints that existed in Q2; added field resources in Florida with expansions planned for Texas and Arizona in 2027.

Market and Competitive Landscape:

• Latham is gaining market share in fiberglass pools despite challenging macro conditions, aiming to capture a larger portion of the U.S. market which currently stands at ~24% fiberglass penetration.
• Company is the number one searched brand among fiberglass competitors; national leads up 25% YTD, with Florida and Texas leads up 89% and 115% respectively.
• Competitive advantage in the "Sand States" is being built through direct-to-consumer marketing, community pool events, and a "neighborhood approach" to market development.
• Management notes a "K-shaped" economy where cash buyers (predominant in this sector) remain active, insulating demand from financing rate fluctuations.

Risks and Challenges:

• Input Costs: Exposure to rising oil prices, freight rates, and resin commodity costs; mitigated by surcharges and price increases implemented in Q3.
• Macro Environment: Potential for flat or weak pool starts in 2027; management does not anticipate a market rebound to drive growth.
• Geopolitical: Ongoing conflict in the Middle East impacting freight costs; proactive tariff management regarding Canadian trade.
• Perception Barriers: Overcoming consumer and builder misconceptions regarding fiberglass vs. concrete (gunite) installation and maintenance.

Management Commentary and Tone:

• Tone is highly confident and forward-looking, emphasizing that the company is "driving growth" rather than "waiting for the market to rebound."
• Management highlighted the successful execution of four strategic priorities: growing core markets, converting material to fiberglass, increasing cover attachment, and completing acquisitions.
• CEO Sean Gadd emphasized the "Sand States" as a critical growth engine and expressed confidence in the new commercial leadership structure.
• CFO Oliver Glow highlighted the strength of the balance sheet following debt refinancing and the ability to sustain margins despite inflationary pressures.

Analyst Questions and Answers:

• 2027 Market Outlook: Management confirmed expectations for a flat market in 2027, relying entirely on share gains for growth.
• Commercial Strategy: New CCO Todd Antonelli is expected to sharpen execution across dealer productivity, distribution expansion, and lead conversion, leveraging experience from Marvins and Cabinet Works.
• Pricing & Cost: Confirmed that current surcharges and price increases fully offset current inflationary headwinds in Q4 and 2027; minimal impact from financing rates as most pool purchases are cash-based.
• Fiberglass Penetration: Management indicated they may be conservative in their 1% share gain estimate and believe the actual figure is closer to 1.5%–2.0%.
• Inventory & Operations: Manufacturing constraints are resolved; inventory levels are slightly ahead of plan for the 2027 season.
• Capital Allocation: Priority is internal growth investment; M&A pipeline consists of medium-sized targets in new markets/adjacencies, alongside a new $100M, three-year stock repurchase program.

Other Key Points:

• The Board approved a $100 million, three-year stock repurchase program, signaling confidence in long-term prospects.
• Debt refinancing established a $300 million term loan (maturing 2033) and $75 million revolver (maturing 2031), receiving affirmed ratings from Moody's and S&P.
• Marketing campaigns have successfully increased website traffic and lead volume, with Latham establishing a dominant brand presence in fiberglass search queries.
• The company is investing in digital transformation and sales process discipline to improve dealer effectiveness and end-to-end consumer path-to-purchase.