Good morning, and welcome to Latham's third quarter fiscal 2021 earnings conference call. Please note, this event is being recorded. I would now like to turn the conference over to Nicole Briguet. Please go ahead.

Thank you, and welcome to Latham's Q3 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 slides that accompany our prepared remarks. On today's call, Latham's president and CEO, Scott Rajeski; and CFO, Mark Borseth. 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 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-Q for our third quarter of 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-Q for Q3 2021. I'll now turn the call over to Scott Rajeski.

Thank you, Nicole. Good morning, and thank you for joining us for Latham's third quarter 2021 earnings call. We are proud to say that Latham had record sales in the third quarter, delivering net sales growth of 27% to $162 million. Our success shows that homeowners' appetite for pool ownership and our products is strong and growing. We achieved this sales growth even though significant raw material shortages limited our fiberglass pool production, which in turn limited the profit flow-through of our growth. For the third quarter, adjusted EBITDA grew 2.7% to $36.1 million compared to the prior-year quarter. I'll talk more in a moment about some specific steps we're taking to overcome production constraints and to improve our adjusted EBITDA margins. First though, let's focus on our sales growth. As a market leader in the only consumer-centric brand in the residential pool industry, we continue to position Latham as a household lifestyle brand, one that homeowners aspire to own. We are evolving the pool buying experience, driving material conversion from concrete pools to fiberglass and advancing our mission of making high-quality swimming pools an attainable luxury for every homeowner's backyard. Thanks to our industry-leading sales and marketing engine and growing consumer interest in pool ownership, we are on track to deliver our 12th consecutive year of top-line growth with over $200 million more in year-to-date sales than the prior year. In fact, at the end of 2021's third quarter, we have already exceeded our comparable sales for all of 2020. Moreover, we are also on track to deliver our 12th consecutive year of profit growth. And again, at the end of this year's third quarter, we have grown year-to-date adjusted EBITDA by $46 million and exceeded our comparable full-year 2020 adjusted EBITDA. Now let's turn to raw materials. The shortages we discussed on our second-quarter call accelerated in the third quarter and limited our production of fiberglass pools at the same time that our order book was growing significantly. The primary shortfall was in resin availability, which resulted in Q3 production approximately 30% below Q2 production and less than half of our Q3 plan. Let's walk through the various supply chain events that have caused these raw material shortages and what our team has been working on over the last several months to improve the situation. Over the course of the year, several things disrupted our supply chains. There were weather-related events from last winter's deep freeze in Texas to Hurricane Ida. There were multiple disruptions that our suppliers had from upstream material shortages of their own, unplanned production outages, labor shortages, and transportation challenges all over the globe. The raw material shortfall in resin was the principal driver of our lack of profit flow-through from our sales growth. That occurred because of three reasons. First, fiberglass pools normally have higher margins than the rest of our products, so we sold a less profitable mix of sales than we had planned. Second, the raw material shortfalls caused production inefficiencies. We make a concerted effort to retain our employees even when individual plants don't have the necessary raw materials. Finally, we made the strategic decision to prioritize long-term relationship building with our dealer partners by partially passing through these increased costs to the orders already in backlog. While we have taken pricing to offset the inflation associated with the raw material issues, there's a timing gap before these increases will match the orders that are being sold. That timing gap affected us somewhat in Q2, hit bottom in Q3, and will lessen as we go forward and as our program to alleviate the raw material shortfalls takes hold. These issues did suppress short-term margins. Going forward, we feel confident that we will regain our margin trajectory from the pricing actions we've taken and from the changes we've made to how we handle pricing on new longer-dated orders. Most importantly, our efforts to increase our resin supply will allow us to ramp up production to match our order growth and to improve our sales mix through higher fiberglass sales. To overcome our resin supply challenge, our new global supply chain leader and his team conducted a search for additional manufacturers who could provide the high-quality resin that we need to manufacture our best-in-class fiberglass pools. As a result, we expanded our sources of resin toward the end of the third quarter, and we are already using the new supply to manufacture pools in our factories. In addition, we have succeeded in obtaining commitments from our existing vendors to allocate more of their production to us. This will enable increased fiberglass pool production in Q4 and into 2022. Our efforts to expand our supply base continue. We currently have several vendors in qualification, which can provide additional material for production early in the first quarter. There are also a number of other suppliers that are in the evaluation phase. The combination of all of these efforts will provide us additional resin volume and surety of supply in 2022 and beyond. While we are focused on expanding the amount of resin available to support the growth of our business, our operations team is also working on several productivity opportunities to improve our yields, which can reduce the material usage of resin in our manufacturing facilities. Longer-term, we are also developing additional storage capacity for our key raw materials. This will help minimize the manufacturing inefficiencies arising from any future product availability shortages. The next thing I'd like to call your attention to is just how much demand we have for fiberglass pools relative to our production. As you can see from the graph, ever since the beginning of 2020, homeowner demand for fiberglass pools has outpaced our supply, which was lower than expected because of a lack of raw material supply, and because the supply shortfall also disrupted our dealer's ability to time their pool installations. Latham's fast-growing demand has been driven both by the acceleration of the secular trend in favor of investing in outdoor living and the impact of our new B2B2C marketing approach, engaging homeowners directly, including our new consumer digital capabilities. You can also see from the graph when the resin supply issues began to hit, which was toward the end of the second quarter. This actually caused our fiberglass sales to decline in the third quarter, which really increased the size of our fiberglass order book and extended lead times. The implications of this are that we are in a position to sell every pool that we can produce far into 2022. Next, let's take a look at our capacity situation. The graph on the left indexes everything to our 2021 capacity. You will understand that we don't want to provide our exact capacity position for competitive reasons. Our strategy is to invest in capacity in order to stay ahead of the demand for fiberglass pools. You can see that we achieved that in 2019 and in 2020. However, in 2021, our plan called for us to operate at about 83% capacity. But because of the resin shortage, we estimate that we will end up this year's operating at around 58% capacity for the full year. We have been adding capacity steadily for quite some time. Since 2020, we have added or are in the process of adding capacity to eight of our nine North American fiberglass plants. And next year, we will break ground on our biggest plant ever, a plant located in Kingston, Canada that will serve Eastern Canada, the Northeast U.S., and the Upper Midwest. As you can see from the graph, next year, we will have an average of 22% more fiberglass capacity than we have this year, which would provide us sufficient capacity to roughly double our production versus what we expect to manufacture in 2021. That puts us in excellent position to capitalize on the demand for fiberglass pools provided that we have sufficient supplies of resin and other materials, as well as sufficient operations employees to manufacture and distribute the pools. This year, in anticipation of the sales to come, we have made every effort to keep our operations crew intact even when we didn't have enough resin to manufacture pools. We built a lot of molds this year, and our plants have never been better maintained. We have also begun hiring and training new operations associates to prepare ourselves for production in the new year. Let's turn our attention to the price gap that I mentioned earlier. When the resin supply shortage hit, it drove the price of resin considerably higher. We had a choice about whether to pass these costs along to our dealers or not. We chose to do so for all new orders and partially for orders that had already been accepted. We did this in part because in the early days, we were not sure how long the resin supply would be restricted, but mostly we did it to support our dealer partners in front of their customers, and we were eager to continue building the Latham brand and confirm the market's positive view on fiberglass. That opened up a gap because resin is much more expensive, and the units we've been selling have been from the backlog that lacks the full impact of recent price changes. As we begin selling pools to enter the backlog after we reprice that gap will narrow. This timing gap began in the second quarter and reached its maximum in the third quarter, as you can see from the gross margin compression in the third quarter's financials. We expect the price gap to narrow during the fourth quarter as we begin to sell a mix of orders that were not repriced alongside orders that have been repriced, which puts us in a position to affirm our adjusted EBITDA guidance for the year. More importantly, the pricing taken will reverse the gross margin compression and put us on track to resume our upward gross margin trajectory as we move through 2022. I want to thank all of the dedicated employees of Latham, who are using their considerable ingenuity and resourcefulness to find new sources of raw material supply to increase our manufacturing capacity and to devise other solutions that will allow us to produce substantially more pools as we move through 2022. Many of these actions have already begun. Their success paired with robust consumer demand and our proprietary approach to making pool buying simple for homeowners gives us confidence in realizing the sales and bottom-line profit goals that we've set for the business. Latham's longer-term success is anchored by the ongoing execution of our growth strategy. So I would like to provide a quick update on each of our strategic pillars. Starting with our digital and brand initiatives. Our digital strategy continues to drive strong return on investment, particularly our efforts around search engine optimization. Our website traffic remains strong on the back of continued improvements in our organic search rankings. Our ability to drive traffic to our content-rich website is placing us at the center of the consumer purchase journey, right where we need to be to drive fiberglass conversion. We continue to invest time and resources, updating our lead flow process with one main objective: To ensure that our leads are as qualified and purchase-ready as possible so that we can expedite conversion for our dealers. We have been successful in doing so, leveraging our recently launched My Latham tool and pool cost estimator application, which help homeowners define what they're looking for in a package. We share this information with our dealers so that their follow-up is more substantive, thus increasing their conversion rates. We also recently transformed the editorial section of our website, The Latham Blog. Now on a more user-friendly platform with an updated look and feel, the blog includes informative and educational information for homeowners along each step of their pool planning journey. The blog features content ranging from how to plan for a pool, what to expect with installation and ideas for landscaping to tips on seasonal maintenance and pool care. We are providing insight into all facets of the backyard experience and allowing users to cultivate a family dream of owning and maintaining a pool into a reality. The enhanced user experience of The Latham Blog strengthens our position as a go-to resource for homeowners on all aspects of the pool buying journey and is already driving solid conversion into purchase-ready leads. Turning to our product portfolio. We continue to invest in all three of our market-leading product lines and are especially excited about some of the capacity initiatives we have in place in fiberglass. We are planning to break ground in Q1 on our new fiberglass manufacturing plant in Kingston, Ontario, which will be the largest in Latham's history, demonstrating our conviction in the success of our fiberglass conversion strategy. This new plant will serve markets in both the eastern half of Canada as well as the Northeast and the upper Midwest of the United States. Additionally, we continue to expand our selection of fiberglass molds, which is already the broadest in the industry. We are launching a number of new pool designs, adding to the industry's broadest catalog. These new designs will include innovative new entry features and tanning ledges, and offer an increased perimeter with perfect 90-degree corners. These shapes can provide a sleek modern feel and are very much on trend with today's new pool buyers. Now turning to the exclusive relationships with our dealer partners. Dealers continue to see strong homeowner interest in pools with orders booking out into 2022 and even into 2023, and our focus is on enhancing their productivity to build up more capacity to meet this growing demand. Through our installation training and business excellence coaching offerings, we have a demonstrated ability to support our dealers as they grow. The investments we have made in this area are allowing us to be a key solution for a perennial industry-wide capacity constraint. We will continue our virtual training through the rest of the year with an incredible amount of new content that we are offering to both new and existing dealers.

Thank you, Scott, and good morning, everyone. Today, I'll review our results for the third quarter and first nine months of fiscal 2021 and provide an update on our outlook for the full fiscal year. All comparisons are on a year-over-year basis compared to the third quarter and first nine months of fiscal 2020. Please note that 2020 results do not include the acquisition of GLI, or our investment in Premier Pools & Spas, which occurred in the fourth quarter of last year. Net sales for the third quarter were up by $34.5 million or 27% year over year to $162 million. This year-over-year growth was primarily attributable to an increase in net sales, driven by increased volumes and price and the acquisition of GLI. These factors were partially offset by decreased year-over-year volume for our in-ground swimming pool category because of the constrained raw material supply you heard Scott speak about. If we include GLI sales in the third quarter of last year, our sales growth would have been 6.2%. By product category, net sales for in-ground pools, which includes our fiberglass products, increased 7.6% to $84.1 million. Our covers product category sales increased 71.7% to $44.1 million, and liners increased 42.4% to $33.8 million. Gross profit increased by 1.4% to $51 million, mainly from our growth in net sales. Gross margin decreased to 31.5% compared to 39.5% last year. This represents 800 basis points of compression or 680 basis points, excluding the non-cash stock-based compensation expense of $1.9 million. To provide a little additional color, fiberglass products accounted for about two-thirds of the 680 basis point gross margin compression versus last year. The raw material shortage caused lower fiberglass sales in the quarter, and therefore, a less profitable mix of sales. The lower sales level also caused a negative fixed cost leverage over our asset base and overhead since our cost structure is geared toward higher fiberglass production levels. A third factor is that we held on to as many of our operations employees as possible so that we can quickly increase production when additional resin arrives. These factors, paired with our strategic decision not to fully reprice our backlog mid-season in the face of rising costs drove a particularly acute margin pressure in Q3. As we continue to secure more resin and more fully realize the benefits of our pricing actions, we believe year-over-year margin compression will improve. Selling, general, and administrative expenses increased to $48.1 million from $20.1 million in the third quarter of 2020. This increase was primarily driven by a $24.7 million increase in non-cash stock-based compensation expenses, higher salaries and wages associated with increased customer-facing headcount to support future growth, the acquisition of GLI, and the legal audit, insurance, and professional fees associated with being a public company. This translated into SG&A as a percentage of net sales of 29.7%, up from 15.8% of net sales last year. Excluding non-cash stock-based compensation expense, SG&A was $22.4 million, an increase of $3.3 million and up 17.1% last year, or 13.8% of net sales, a 120 basis point improvement versus last year. As a result, adjusted EBITDA increased by $0.9 million or 2.7% to $36.1 million, and adjusted EBITDA margin decreased to 22.3% of sales. During the third quarter, Latham supported the expansion plans of our strategic partner, Premier Pools & Spas by agreeing to reduce our equity position to support an equity infusion by another investor. We continue to hold a 20% equity stake in Premier Pools, and our long-term strategic partnership remains unchanged. The gain associated with this transaction does not affect our adjusted EBITDA results. Net loss was $11.3 million or a $0.10 loss per share as compared to a net income of $17.7 million for the third quarter of fiscal 2020, driven primarily by non-cash stock-based compensation expense of $27.6 million. For the first nine months of 2021, net sales increased 68.7% to $491.6 million. If we include GLI sales in the first nine months of 2020, our sales growth would have been 42%. Looking at net sales performance in our three product categories, we have seen strong growth across our product lines. In-ground pools increased 68.4% to $285.7 million. Covers increased 76.3% to $94.4 million, and liners increased 63.4% to $111.5 million. Gross profit increased 54.4% to $161.8 million from $104.8 million for the prior-year period. Gross margin for the first nine months of 2021 was 32.9% compared to 35.9% for the prior-year period, primarily because of the supply chain headwinds we've discussed. Excluding non-cash stock-based compensation expense, gross margin was 34.3% or 160 basis points below the prior-year period. As a result, adjusted EBITDA grew 69.5% or $46.1 million to $112.5 million for the first nine months of 2021, and adjusted EBITDA margin increased to 22.9% from 22.8% for the prior-year period. Net loss was $56.4 million for the first nine months of 2021 compared to a net income of $18.7 million in the prior-year period, driven primarily by non-cash stock-based compensation expense of $104.6 million. Turning to the balance sheet. As of October 2, 2021, we had cash and cash equivalents of $90.9 million, total debt of $234.2 million, and our net debt leverage ratio was 1.1 times. Net cash provided by operating activities was $29.4 million for the nine months ended October 2, 2021, versus $55.1 million in the prior-year period, with the year-over-year decrease being driven by higher working capital to support our sales growth. Capital expenditures totaled $6.2 million in the third quarter of fiscal 2021 compared to $3.5 million in the third quarter of fiscal 2020. The increase in capital spending was primarily related to our fiberglass capacity expansion initiatives. Capital expenditures totaled $19.2 million in the nine months ended October 2, 2021, compared to $9.7 million in the prior-year period. I'll now share an update on our guidance for the full year fiscal 2021. We affirmed the net sales and adjusted EBITDA guidance we provided on our second-quarter earnings call. Net sales of $600 million to $620 million, adjusted EBITDA of $130 million to $138 million. Today, we have updated our 2021 capex guidance to $24 million to $28 million to reflect our estimates for the current timing of our projects cash flows. We continue to move forward with the projects that made up our original guidance. Our outlook for the year reflects our strong financial results for the first nine months of 2021, as well as our confidence in our ability to continue to drive the material conversion of fiberglass, leverage our unique direct-to-homeowner digital strategies to generate leads for our dealer partners, and capitalize on the outdoor living trends. It also reflects our many efforts to continue to manage through raw material availability and its impacts. Scott, back to you.

Thanks, Mark. We are seeing continued strength in consumer demand as we head into the fourth quarter and are taking the necessary steps to counter raw material shortages. As we look out to 2022, we are well positioned for another year of strong revenue and adjusted EBITDA growth, thanks to robust homeowner interest in pools, increasing dealer capacity and resin supply, and our pricing actions. We have excellent insight into consumer demand, especially in fiberglass. And our fiberglass order backlog is increasing, at the same time, consumers are seeing our new pricing. We expect that when the full price increases have caught up to the fiberglass backlog, we will regain our historical trajectory of growing adjusted EBITDA faster than revenue by selling a more favorable mix of products, reaping the benefits of our marketing investments, manufacturing leverage from our sales growth, and the ability to price faster than inflation. I want to thank our teams for their unwavering dedication to supporting our dealers and homeowners. With that, operator, please open the line for questions.

Thank you. And the first question will come from Matthew Bouley from Barclays. Please go ahead.

Good morning, everyone. Thank you for taking the questions. I think everyone will appreciate all the detail and visibility you gave this morning in the comments and in that slide deck. So thank you all for that. So on the backlog, obviously, you're saying you protected the backlog in recent quarters, and you're in a position, if I heard you right, to sell everything you can produce far into '22. When you get to the homeowner level, how do you gauge sort of how safe, for a lack of a better term, is the backlog in terms of preventing customers from dropping out just given lead times continue to push further and further out and you're getting quoted into '23. How do you kind of scrub the safety of that backlog? Thank you.

Yeah. So Matt, good morning. First of all, look, I think from the 2Q earnings call, we heard maybe we weren't as open with all the details of what's going on within the business. So we listened to the feedback. We wanted to make sure we clearly laid out there the situation on all fronts with resin backlog and the pricing dynamics, and I appreciate your comments on what we provided to you guys here this morning. Specifically to your question on the backlog and the consumer, would this have been a long lead time purchase decision for the homeowner. If you've been waiting for a pool for six, nine months, 1.5 years, two years in that decision-making process, which sometimes it takes and you've told the family you're getting a pool, the likelihood of a cancellation is very, very low. Second, I think we don't get the order from the dealer until they've confirmed the contract with a homeowner. And at that point, we see very few cancellations, if any, at all, at that level feeding through. They've locked their slot, they're waiting, and we see almost zero risk in terms of cancellations of the backlog.

Wonderful. That's great color. Thank you for that, Scott. Second one, it sounds like you're making a lot of permanent changes to mitigate future supply challenges. It sounds like diversifying suppliers, you're considering holding more storage capacity. And I think, Scott, I heard you say that you're making changes to how you price longer-dated orders, which seems particularly relevant here as, again, folks are getting quoted out to 2023. Can you elaborate a little bit on kind of how you're pricing now when you're thinking about these long-dated bookings? And maybe what's changed versus how you historically did it?

Yes. There's a couple of things there, Matt. One, I think working with our dealer partners to make sure they have flexibility in their contracts in the short term to reprice at the consumer level as they see prices change more dynamically, to not allowing orders to be on the books more than 90, 120 days, kind of thing like looking out 90 days from a quarter standpoint with pricing. And I think the other thing we've done is maybe using more surcharges with flexibility where we can quickly change the magnitude of that at any point in time based on when an order will be shipping out. So it's not just one thing. I think it's multiple things with more dynamic pricing based on how inflation is moving rapidly over time.

Wonderful. Well, thank you very much for that, Scott. And good luck, guys.

Thank you. And the next question will come from Josh Pokrzywinksi from Morgan Stanley. Please go ahead.

Hey, guys. It's actually Gustavo Gonzalez on for Josh. So I guess, moving toward price, can you guys kind of talk about the price step-up 3Q to 4Q? And then how should we think about carryover price into 2022?

It's great to hear from you, and I appreciate your question. We've been raising prices consistently throughout the year, including another increase in Q3. Consequently, we are noticing that the lag between the impact of costs on our profit and loss and the realization of those prices is diminishing. Therefore, we believe that the gross margin compression we faced in the third quarter marks the lowest point, and we expect to see improvement as we move into Q4. Looking ahead to 2022, we've been experiencing low double-digit price increases this year, which we anticipate will carry over into the next year.

Got it. That's helpful. And then just as a quick follow-up, how would you sort of rate availability today versus 60 days ago, just sort of on the resin situation? And are you kind of getting what you need now with the new suppliers? Or is there still kind of a shortfall? And then if possible, can you kind of highlight what the sort of missed sales opportunity was in the third quarter given the shortages?

Yes. So Gustavo, first point is, I'd say resin availability is better now than we were 30 days ago, 60 days ago. New sources coming online, situation at our upstream vendor partners improving with the outlook. And I think that trend will continue. I think more importantly, as we've talked about additional sources coming online as we move into early Q1 '22 and through the year, which is kind of why we feel so strong that every pool we can produce, we'll be able to sell next year. And with the size of the backlog, we're looking at a really good 2022. In terms of the impact, I think there's a simple way to look at this. If we produce the same number of pools in Q3 that we had produced in Q2, it would have resulted in, say, $23 million to $25 million of additional revenue out the door. We clearly had the demand. We had the capacity and the facilities; we had the labor. So that's kind of a way to just quickly frame it up on a conservative outlook.

Got it. Thanks for the call and the look out there. Thanks, guys.

And the next question will be from Susan Maklari from Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. And I also want to thank you for the increased color and the helpful information on the slides there. My first question is, when we think about the guide for 2021, it implies that the fourth quarter EBITDA margin will be up about 300 basis points or so year over year. When you think about the breakdown of that, you gave us a really helpful breakdown as we thought about the third gross margin and what the factors were there. Can you help us to understand what the step-up will be in the fourth quarter and how these different parts will come together?

Morning, Susan. Nice to hear from you. And thanks for your question. As you know, we don't provide guidance on a quarterly basis. But at this point in time, with our year-end guidance and our nine months in the bag, it's pretty easy to kind of back into what that range might be. And again, as we think about profits going into the fourth quarter, the gross margin compression that we saw in the third quarter from all the various factors, primarily fiberglass, we see alleviating somewhat in the fourth quarter as we obtain more resin, as we run our production facilities more efficiently, and as we get a more profitable mix of sales. So I think when we look at those things and the ongoing strength of the order book and the demand for the products, we feel good about our ability to reaffirm the guidance that we have out there and deliver for the year.

That's helpful. And then as a follow-up, you talked in your remarks about seeing continued improvement in the progression of margins in 2022. Can you just give us some sense of the cadence that we should be thinking about there? Maybe any thoughts on the sequential movements and any differences relative to normal seasonality that we could anticipate as we think about some of these factors starting to improve for you and perhaps coming together?

Thanks, Susan. I'll take that one as well. As we think about 2022, I think there's some fundamental things that we're thinking about as we look into the business. One is demand remains incredibly strong, as you saw in one of our charts today. So we feel very good about demand heading into 2022. I think as you also know, we have a seasonal business. So it's not just sequentially one quarter is better than the previous. And so with the demand, with the increased supply of resin, we're going to have plenty of capacity to manufacture additional fiberglass pools. So you put those things together, we feel very good about what we think we can deliver in 2022.

And Susan, I think the other key one there as well will be as the pricing of the backlog catches up as we move through that. Again, the resin supply will drive the higher production, which will clear the backlog faster, which we'll get more price on that backlog. So I think that price inflation dynamic will become a great friend of ours as we move through '22.

Just a quick follow-up on that. When we think about the seasonality of the business next year, obviously, this year, there's been a lot of moving parts that have caused things to sort of move in different directions. Do you expect that overall, the seasonality will be more normal in '22?

Yes, that's a good question, Susan. I don't have a crystal ball, and I cannot predict what will happen next year. However, I believe 2021 marked the beginning of a return to typical seasonality compared to 2020. I anticipate 2022 will also be closer to a normalized year. Nonetheless, factors like weather, including a late winter or early spring, could shift that timeline by a month or two, as we have historically observed in the business. Overall, it should be more normal, and I think we all hope it will be.

And the next question will come from David Bellinger from Wolfe Research. Please go ahead.

Good morning, everyone. I appreciate you taking my questions. Regarding the additional data you provided, it's encouraging to see that demand trends remain strong throughout the third quarter. Internally, have there been any discussions or plans to manage or limit new order growth in some way? Specifically, has there been any pullback on digital advertising or other measures to allow production to catch up with the current level of new order demand? How are you thinking about this in relation to your current growth situation and the brand opportunity?

Yes, Dave, we haven't slowed down at all. If you examine the capacity chart, you'll see we've consistently added capacity from a growth capital expenditure perspective across all business categories. We've been working to ramp up staff labor to meet our outlook and reduce the backlog created by the strong demand we are experiencing. Additionally, we're seeing orders extending into 2023. One thing we've discussed in the past is that we've somewhat moderated the lead generation efforts because the organic growth in that area has been remarkable for us. The leads we're producing significantly exceed what can actually be fulfilled. Therefore, we don’t feel the need to increase that effort. This is primarily due to the effective marketing engine our team has built. Overall, we are moving forward robustly to ensure our capacity stays well ahead of demand in order to minimize the backlog and capture revenue in 2022.

Got it. Okay. And then just a more qualitative follow-up. You mentioned the resin situation for you improving versus the last 30 or 60 days. Is that more of a comment just on the overall raw material availability or supply chain dynamic in the broader marketplace? Or is that more of a function of these internal actions you've taken recently to work around these ongoing issues?

I'd say both; it's a combination of both. If you go back to the March timeframe when the deep freeze hit, the team kind of rallied and started to look at a lot of different options. I think those options are now coming online, flowing through for us, giving us incremental volume, well more than what we'll need us to move forward. And I think the general issues around resin with some of the upstream vendors and some of the supply inputs and challenges, whether it was the epoxy or the methacrylic acid, that situation is improving kind of post the hurricane and the catch-up. And look, I think that volume is still ramping as we talk. But I think specifically for the resin, it's both from a situation getting better. And again, just working closer with our dealer partners to understand their dynamics and challenges they might be facing.

Thanks, guys. Appreciate it.

You're welcome, David.

The next question will be from Ryan Merkel from William Blair. Please go ahead.

Hey guys. Thanks for taking the question. I wanted to start off with sales. I know you have the big backlog, but talk about new order entry and website traffic and any other forward metrics that you follow. Any slowdown there? Or sort of full steam ahead on investment in the outdoors.

Ryan, good morning. I'd say it's full steam ahead from a sales order standpoint. Digital lead hits on the website, the new blog, the pool cost estimator. And I think we continue to launch new content out there, and we will continue to do that as we move through '22 with a lot of new and exciting things that will be coming, and it's really not had any impact on demand. Now again, kind of the seasonality of business as you're in 4Q, there's a natural slowdown as you approach the holidays and all of that. But other than, I'd say seasonality aspect, we're outpacing prior year, strength looks good and had a couple of opportunities to chat with several of our customers, bigger customers last week. And they don't plan on stopping until Christmas, which again bodes well. I think that was a comment we've made before, dealers are all tired. It's been a long two years for them with a lot of business, but they're all talking about working right until the end of the year and looking forward to a really, really strong '22 and into '23, which is great for all of us.

Got it. That's great to hear. All right. And then I wanted to follow up on price. Not sure how much detail you want to provide. I know you said price would be up double digits this year. But my question is in 4Q, are you exiting at sort of a mid-teens price level? And then the second part, do you need more price at this point? Or do you think you have enough?

Ryan, it's Mark. Thanks for your question. Good to hear from you. We've raised prices several times this year. We raised prices again on several product lines in the third quarter. On a cumulative basis, we're looking at low double digits at this point in time. And we're going to continue to monitor that situation as we go forward. So we'll see what the environment brings. But for right now, we like the prices that we have out there, and we expect to see that timing lag between price and our costs up continue to diminish as we go forward.

Helpful. Thank you.

The next question will come from Ken Zener from KeyBanc Capital Markets. Please go ahead.

Good morning, everyone. Great presentation this morning. Considering the equity volatility we experienced during the quarter, I believe you are on the right path, as others have mentioned, in clarifying the business. Regarding the sequential sales decline in fiberglass pools that you pointed out, Scott, can you clarify how much of that is simply a percentage mix? Given the volume declines, if I assume that the entirety of this is due to volume declines rather than mix, and as Mark mentioned, two-thirds of the gross margin decline relates to fiberglass, could you break that down in terms of volume impact versus cost impact? There are distinct metrics here, particularly related to fixed cost absorption compared to the increased costs. I’m just trying to understand that better.

Ken, good morning and thanks for your comments on the presentation. 680 basis points of margin compression with two-thirds of that in the quarter coming from fiberglass. And certainly, mix is a portion of that. I mean, Scott mentioned just sequentially what kind of sales impact that had on us Q2 to Q3, but mix being a component and then just resin availability, or lack thereof of having enough, right, drove some inefficiencies in our factories. And then we also have the timing gap on pricing versus costs that we talked about. We've not separately broken those out at this point, Ken. But that two-thirds of fiberglass as we think forward then into Q4 and around margin compression as we bring more resin in, as we produce more pools, we look for a better mix and better efficiencies in our factories to help going forward and get back on a better margin or better profit trajectory.

Good. I really appreciate your comments, Scott, regarding how you're interacting with your dealers in the current inflation environment. Can you discuss how the dealers have adapted to this new situation where we need to be more disciplined about contract duration and their communication with customers? Your surcharges have been noted, similar to the ones that Sherwin-Williams and Stanley Works have implemented for large customers. Can you explain how this relationship is developing? I don't see it as adversarial, but I'm interested in how they're navigating these changes and how this offers you confidence compared to where you were, say, two quarters ago before these challenges arose.

Yes. So look, the dealers are all really good business people out there in the industry. They've been around for a long time. They've seen a lot of different environments in markets. I think we've all had to change our business model on many fronts in terms of what we do. And we've had to have some difficult conversations. And look, I think there are some folks who've been really good in terms of how they price contracts out in the future, anticipating a level of inflation that's going to be out there. I call that a good business practice staying ahead of the curve. I think they also understand that look, no one likes a price increase, but I think the protection of the backlog was helpful for them this year to work through it. We've slowly put the surcharge out there. We've increased it a few times. We'll continue to monitor it. I think it's just having good open dialogue with our commercial team, our new commercial leader Josh out there with the sales organization, having these open honest conversations. And it's just a new way of thinking and we'll continue to work with them. And look, a lot of these folks have been with us for 20, 30, 35 years long-term relationships. And I think they appreciate the openness and the honesty. And look, they're a critical part of our supply chain across the board. And that's why we said all along, we've got great long-term business partners who kind of hang in there with us through the thick and thin.

Yes. As we reflect on 2022 and considering your slide presentation, especially Slide 6, it all looks very promising. What are your thoughts on the capacity of your dealers? Clearly, you have faced some internal throughput challenges. How do you assess the industry's capability to actually excavate and get all the necessary equipment and components in place to ensure the pool operates effectively? This aspect seems crucial. Do you believe that this channel can achieve a growth capacity of 20% next year, similar to what we witnessed this year with new pools? How would you explain that to us?

Yes. So Ken, I think you're right. Dealer capacity is a critical piece of how this industry will continue to grow. I think it goes back to the magic of the fiberglass material conversion story we've been talking about. And again, if we go back to kind of the metric I've been quoting for a while, let's just say, an average dealer's doing 10 pools a year. And in the fiberglass world with 40 installation weeks of capacity, if you did one pool a week, you could easily get to 40 as you go through that conversion cycle. So a standalone dealer with a crew of one has plenty of capability to go from 10 to 40. And we've talked that if they could get to the point where they're performing as a high-performing dealer doing three a week, that's 120 pools a year. So the capacity is there, but you had a really good point. Everything else they need to put that pool on the ground has also got to click. The equipment, the PVC piping, and other stuff. But when you look at what's happening in the rest of the supply chain in the pool industry, everything is getting better. It's all improving as we move away from the deep freeze in Texas and where we were, inventory positions improving. And again, back to the dealers. The dealers are getting smarter with how they run their businesses. Standing up on early buys and getting equipment stored and buying ahead on materials, looking out at their backlog of what they need. So I don't worry about dealer capacity as we move forward, as we continue to coach, teach, and train, and stand them up and bring more dealers into the fold, I don't think that will be a limiter as we look out into '22 and '23.

And the next question will be from Judy Merrick from Truist Securities. Please go ahead.

Thank you. This is Judy in for Keith Hughes. And just to clarify, I'm looking at the monthly resin supply slide that you had. It seems like in the first quarter, you managed your in line or a little ahead on the price increases. Is that right? And then it was not until the second quarter where you had the greater mix of price and reprice sales?

Yes. If we consider the supply issue, the lead times associated with resin, and how we stock, store, and manufacture pools, it all comes into play. We had the necessary resin and continued operations. This situation gradually intensified, particularly at the end of June and into July and August, before stabilizing around September. We had inventory available, which allowed us to sell some of it and move pools while producing custom orders. By Q3, we faced challenges due to insufficient resin, which affected our margins, leading to a 680 basis point compression, primarily driven by fiberglass. This resulted in manufacturing inefficiencies as we maintained costs and labor to prepare for production when resin supplies returned. I believe that covers your question. Mark, would you like to add anything?

I would just add that this speaks, I think, directly to the timing issue that we have between price up and the cost we're seeing on the P&L and the strategic decision not to reprice our backlog. And as we entered into Q3, we saw that cost and inflation continue to accelerate in Q3. We implemented a surcharge to partially pass some of that along to the backlog, and we just recently announced an increase in that surcharge. So we've monitored the situation very closely. And we think the margin compression, the worst of that is behind us and should start improving as we move into Q4.

Great. Thank you.

And the next question will come from Rafe Jadrosich from Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my questions. So just following up on the price cost lag. Can you just talk about how far out the backlog is that's priced lower? Like how far out is the backlog that you're protecting? And when might that start to roll off?

Yes. So we're not going to disclose specifically how far out we are in the backlog with the actual numbers, Rafe. I think as we come back and say we've bottomed out in kind of Q3 and the resin supply improves, and the pricing, the surcharges start to catch up with the flexibility and new announcements that we've launched here in the last several months. I think that will be an improving situation from a margin compression standpoint as we roll through Q4 into Q1. And I'd say we'll continue on as we go through all of '22 and out with the new dynamics of what we're doing there.

And then as you think about the price increases going forward, maybe not just the price increases that you're pushing through to the dealers. There is inflation everywhere. How do we think about the relative cost of fiberglass pools compared to concrete pools? Do you think that the value proposition is getting better with this inflation environment? Like are concrete pool prices going up more? How do you think about your supply chain situation compared to some of your competitors?

Yes. I truly believe the favorable economics for fiberglass pool versus a concrete pool still hold in our original thesis, lower upfront cost and a total lower cost of ownership. And again, concrete, steel, rebar, everything that goes into building a concrete pool is up. And more importantly, when you think about the size of a labor crew and the labor constraint that's out there and the length of how long it takes to construct a concrete pool. And again, if we said 75% of that cost is labor, that's a significant increase they're taking on the labor front as well, maintaining those crews to get the pool on the ground. So look, I'm not going to say it's better or worse. I think the thesis still holds very strong as we move forward, and we'll continue to drive that.

Thank you, Sir. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our conference call. Thank you for attending Latham's third quarter fiscal 2021 earnings conference call. You may now disconnect your lines. Take care.