Latham Group, Inc. Q4 FY2021 Earnings Call

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

Thank you and welcome to Latham’s Q4 and full year fiscal 2021 earnings call. Earlier this morning, we issued our earnings press release, which is available on the Investor Relations portion of our website, where you can also find the slide presentation that accompanies our prepared remarks. On today’s call are Latham’s President and CEO, Scott Rajeski, and CFO, Mark Borseth. Following their remarks, we will open the call up to questions. During this call, the company may make certain statements that constitute forward-looking statements. Such statements reflect the company’s views with respect to future events as of today and are based on management’s current expectations, estimates, forecasts, projections, assumptions, beliefs, and information. These statements are subject to a number of risks that could cause actual events and results to differ materially. Such risks and other factors are set forth in the company’s earnings release posted on its Investor Relations website and will be provided in our Form 10-K for fiscal year 2021. The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as required by applicable law. In addition, during today’s call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliations of adjusted EBITDA to net income calculated under GAAP can be found in our earnings press release and will be included in our Form 10-K for 2021. I will now turn the call over to Scott Rajeski.

Thanks, Nicole. Good morning. Thank you for joining us for Latham’s fourth quarter and full year 2021 earnings call. Today, I will review the key highlights from Q4 and full year 2021, provide an update on our growth initiatives, and briefly discuss our 2022 outlook. Mark will then give a detailed overview of our financial results and guidance. 2021 was a milestone year for Latham and our first as a publicly traded company. Latham posted a record fourth quarter, with net sales growth of 24.1% and adjusted EBITDA growth of 56.5%. In Q4, consumer interest and demand for pools remained very strong. I am also pleased to share that we made significant progress in enhancing our operations and resin supply position during Q4. Fiberglass production levels and efficiency increased as expected through the end of 2021, with our North American fiberglass production increasing 35% on a sequential basis over Q3, and we expect it to continue improving as our resin supply increases throughout 2022. This enabled us to deliver another strong year of tremendous growth for our business. Throughout 2021, we continued to execute on our growth strategy, which positions us well to capitalize on the growing consumer demand for pools and to deliver growth across our market-leading product portfolio. We continue to drive the material conversion from concrete pools to fiberglass, thanks to our direct-to-consumer model. We also expanded our addressable market by adding a new premium quality product to our portfolio at an attractive price point for homeowners with the acquisition of Radiant Pools, a leading manufacturer of vinyl-lined insulated aluminum-walled swimming pools. This transaction, completed in late Q4, demonstrates our ability to execute on attractive tuck-in opportunities and enhance our ability to benefit from growing homeowner interest in pools. I am also very proud of the operations team and the progress they have made over the last 6 months. Latham has remained nimble in an ever-changing operating environment. We have diversified our raw material supply, especially in the resins used in manufacturing our fiberglass pools. Our current resin suppliers have improved fulfillment, and we continue to advance dialogues on future year supply agreements with them. We are also in the process of adding new sources to ensure we have plenty of resin to support our growth in 2022 and beyond. As we build our resin position, we have the manufacturing capacity to support our planned growth in 2022, and we will continue to add capacity as we prepare for 2023 and beyond. I am also excited to share that we have welcomed Sanjeev Bahl as our new COO. Sanjeev comes to Latham with over 20 years of experience in global supply chain and procurement at companies like Newell Brands, Danaher, Stanley Black & Decker, and United Technology Group. We believe he is the ideal candidate to lead our talented operations organization as we continue to advance our resin and supply chain initiatives, expand our capacity to support our long-term growth, and drive ongoing lean and productivity initiatives throughout the business. All of these efforts combined enabled us to deliver our 12th consecutive year of net sales and adjusted EBITDA growth and adjusted EBITDA margin expansion in 2021. We could not have achieved this success without the devotion of our employees and the commitment of all of our dealers. Diving more deeply into our progress on our key growth initiatives, the work we have done with our digital strategy, specifically search engine optimization, has enabled us to remain the digital market leader in our space. We have improved our search rankings for priority keywords, and our website traffic remains very strong with over 2.5 million sessions and over 7 million page views, while scaling back our paid search spend in 2021. We also saw year-over-year growth in page duration times. This means consumers are spending more time on our site. We continue to evolve and enhance the ways we reach homeowners and dealers digitally. This includes continued enhancements to our augmented reality app, which has now had over 84,000 downloads and has resulted in nearly 350,000 virtual pools being installed since 2019. As we work to drive fiberglass share of U.S. pool installs, we are expanding our capacity to meet that future demand. This includes our new fiberglass facility being built in Kingston, Canada, which we broke ground on in January. We are seeing ongoing success in expanding our strategic partnerships with Latham’s exclusive dealers. We continue to teach our dealers how to scale their business to capitalize on the tremendous demand for pools through our training programs and business excellence coaching, enabling them to add more installation capacity. We see opportunities to continue to drive fiberglass penetration, especially in the sand states: Florida, Texas, Nevada, and Arizona. And we are focused on enhancing our dealer base in these regions. Our strategic partnership with Premier Pools & Spas is one of the keys to this. We are pleased with the exceptional growth we drove with Premier in 2021, and we are very excited to continue to expand on this partnership in 2022. As we look to next year, we expect to deliver exceptional growth well above our 3 to 5-year targets. In 2022, we are expecting full year net sales to be $850 million to $880 million, and full year adjusted EBITDA to be $185 million to $205 million. We operate in a large and attractive market. Homeowner demand for our products is strong, driven by secular trends like the acceleration of investments in outdoor living and migration to suburban communities. Over the last several years, we have established a strong track record of outperforming the industry. A key to that is the success we are seeing in driving the conversion of fiberglass. Fiberglass’ share of U.S. pools installed is well below more mature markets like Australia, where fiberglass currently enjoys a 70% share of the market. This means that Latham has a long runway for growth. We look forward to continue to execute on our growth strategy in 2022 and work together with our suppliers and dealers to advance our mission of making high-quality swimming pools an attainable luxury for every homeowner. I will now turn the call over to Mark to review our financial results and outlook in greater detail.

Thank you, Scott, and good morning everyone. First, I will provide an overview of our financial results for the fourth quarter and full year 2021. All comparisons are on a year-over-year basis compared to the fourth quarter and full year fiscal 2020. Please note that Q4 2020 results do not include our investment in Premier Pools & Spas since we began booking our equity pickup in the first quarter of 2021. Our Q4 2020 includes results from GLI for 2 months since we closed that acquisition towards the end of October 2020. Our Q4 and full year 2021 reflect 1 month of results from Radiant since we closed that acquisition towards the end of November. Net sales for the fourth quarter of 2021 were up by $27.0 million or 24.1% year-over-year to $138.9 million. For the quarter, our 24.1% net sales increase was composed of 16.1% from price and 8.0% from volume. All three of our product lines increased sales year-over-year, led by a $15.0 million increase for in-ground swimming pools to $82.8 million, a $6.8 million increase for covers to $37.8 million, and a $5.1 million increase for liners to $18.3 million. We are pleased to have sold more fiberglass pools in Q4 than Q3, in part due to the increased resin supplies and production you heard Scott talk about. On a year-over-year basis, fiberglass sales volume was slightly lower compared to a strong Q4 last year. And if we include GLI sales for the entire fourth quarter of 2020 and exclude any Radiant sales from Q4 of 2021, our pro forma sales growth for the quarter would be 16.9%. Gross profit increased by $4.4 million or 11.5% to $42.4 million, driven by an increase in net sales, which was partially offset by the addition of non-cash stock-based compensation expense of $1.9 million. Our Q4 gross margin was 30.5% compared to 34.0% last year. Lower year-over-year gross margin in the quarter was due in part to non-cash stock-based compensation expense, a sales mix away from in-ground pool sales, particularly fiberglass, and the timing difference between our price increases and cost inflation, partially offset by improving fixed cost leverage and productivity in our factories. As expected, our year-over-year gross margin compression improved significantly from Q3. Excluding non-cash stock-based compensation expense, our Q4 gross margin was 31.9%, 210 basis points lower than last year compared to 680 basis points of year-over-year gross margin compression in Q3. With our improved resin supply, we saw North American fiberglass pool production increase over 35% from Q3. Combined with higher average selling prices, as we increased our fiberglass surcharge in mid-November, we were able to reduce our year-over-year margin compression in Q4 by 470 basis points compared to Q3 year-over-year results. In Q4, selling, general and administrative expenses increased to $42.7 million or 34.0% of sales from $34.6 million or 30.9% of sales in Q4 of 2020. This increase was primarily driven by a $21.9 million increase in non-cash stock-based compensation expenses to $22.3 million and ongoing public company costs. Excluding non-cash stock-based compensation expense and the net of other costs added back in the calculation of adjusted EBITDA, SG&A cost in the quarter was $20.6 million or 14.8% of sales, down $2.6 million from the prior year, primarily due to lower incentives. Q4 adjusted EBITDA increased by $9.9 million or 56.5% to $27.3 million, and the adjusted EBITDA margin increased 410 basis points to 19.7%. As Scott mentioned, results for 2021 marked our 12th consecutive year of net sales and adjusted EBITDA growth and adjusted EBITDA margin expansion. Net sales for the year increased $227.1 million or 56.3% to $630.5 million. Volumes across our product lines increased 42.6% year-over-year driven by strong market demand, homeowner preferences for Latham’s products, expanded strategic partnerships within our dealer network, and the acquisition of GLI. The balance of our year-over-year sales growth was 13.7% from higher selling prices. The increase in total net sales across our product lines was $131.1 million for in-ground swimming pools, $47.6 million for covers, and $48.4 million for liners. If we include GLI for all of 2020 and exclude Radiant from 2021, our pro forma sales growth would have been 36.5%. Gross profit in 2021 increased 43.0% to $204.2 million, largely driven by the growth in net sales. Gross margin decreased to 32.4% compared to 35.4% for the prior year period, driven by supply chain headwinds, strategic decisions to not reprice the backlog orders, which widened the gap between our price increases and the cost inflation associated with the fiberglass pools sold, and non-cash stock-based compensation expense of $8.7 million. Excluding non-cash stock-based compensation, gross margin was down 160 basis points year-over-year from 2020. Adjusted EBITDA in 2021 was up $56.0 million or 66.8% to $139.8 million, and adjusted EBITDA margin increased 130 basis points to 22.2% from 20.8% last year. Turning to the balance sheet. As of December 31, 2021, we had cash and cash equivalents of $44 million, total debt of $280.4 million, and our net debt leverage ratio was 1.7x. Net cash provided by operating activities was $33.7 million versus $63.2 million in the prior year period, with the year-over-year decrease driven by increased investments in working capital to support our sales growth. Capital expenditures totaled $25.0 million for 2021 compared to $16.3 million in 2020. The increase in capital spending was primarily related to our fiberglass capacity expansion initiatives. Subsequent to quarter end, we refinanced our term loan and revolving credit facilities. On February 23, we entered into a credit agreement that provides a senior secured term loan facility in an initial principal amount of $325 million, and a senior secured revolving line of credit in an initial principal amount of $75 million. This refinancing further enhances our financial flexibility, reduces our interest expense, increases our borrowing capacity, and extends our revolver maturity date into 2027 and term loan maturity date into 2029. Now turning to our outlook. I’d first like to share a reminder on the seasonality of our business. Although we see demand for our products throughout the year, spring and summer are typically our peak seasons as they are the height of swimming pool use, pool installation, and remodeling and repair activities. As a result, our net sales are historically highest during Q2 and Q3. Looking at net sales as a percentage of total sales for the year, we typically see a relatively even split between the first half and second half of the year. This was not the case in 2020, when the onset of the pandemic and lockdowns shifted our sales split away from the historical first half, second half split. However, we saw a return to more historical norms in 2021. As you saw in the guidance provided in our earnings release this morning, we expect to achieve another year of robust growth in 2022. Investments in outdoor living in the backyard and the demand for our products remain strong. We continue to benefit from our strategic initiatives, including our unique direct-to-homeowner model and our efforts to drive the material conversion to fiberglass. We’ve made significant progress in navigating supply chain and raw material-related headwinds, resulting in improving production levels and lead times. We are realizing the benefits of our pricing actions and surcharges, and as a result, the gap between price and inflation will continue to narrow in the first quarter. Notably, our price actions have had no impact on fiberglass demand, as the value proposition of fiberglass continues to hold compared to concrete, including faster installation times and lower upfront and lifetime costs. In addition, we’re delivering beautiful premium products to the homeowners’ backyards. Our outlook assumes softer year-over-year volume in the first half, given the comp against the very strong growth we saw in the first half of fiscal 2021, some labor availability impacts from the Omicron variant, and continued improvement in resin supply and fiberglass production, as well as an expected ramp-up in fiberglass volume growth in the back half of 2022, as we realize the benefits of our resin supply actions and compare against a period of softer volumes, driven by limited raw material availability in the second half of 2021. As a result, for the full year 2022, we expect net sales of $850 million to $880 million, representing 35% to 40% year-over-year growth. Adjusted EBITDA of $185 million to $205 million, representing 32% to 46% year-over-year growth. This growth is well above our long-term targets for net sales and adjusted EBITDA growth of 10% to 12% and 12% to 15%, respectively. We also guided capital expenditures of $45 million to $60 million. We will continue to invest in incremental fiberglass capacity throughout our network, with the majority of the year-over-year increase in CapEx driven by investments in our new Kingston manufacturing facility as well as incremental steel panel capacity for our vinyl line packaged pool products. In addition to our formal full year guidance, we also want to provide a little color around non-cash stock-based compensation expense. In 2022, we currently anticipate non-cash stock-based compensation to be about $56 million, $52 million of which would be included in SG&A and $4 million in cost of goods sold. Of the total expense of about $56 million, approximately 88% is related to the issuance of common stock upon conversion of pre-IPO Class B units. In addition, we currently expect the first half non-cash stock-based compensation to represent about 60% of our full year expense. Lastly, given the unique operating environment, we have also provided an outlook for 2022 first quarter net sales. In the first quarter, we expect to deliver net sales between $170 million and $180 million. In addition, as I mentioned earlier, we do expect to return to more normal seasonality in 2022. As such, we expect first half net sales to represent a little less than half of full year 2022 net sales.

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

Thank you. Our first question comes from Matthew Bouley with Barclays. Please go ahead.

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

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

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

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

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

Thank you.

Thank you.

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

Thank you. Good morning, everyone.

Good morning, Susan.

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

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

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

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

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

You are welcome. Thank you.

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

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

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

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

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

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

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

Thanks for the color.

You’re welcome Ryan.

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

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

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

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

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

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

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

Okay. Thanks.

You’re welcome.

Our next question comes from Rafe Jadrosich with Bank of America. Please go ahead.

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

Hi Rafe. Good morning.

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

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

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

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

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

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

Thanks, Rafe.

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

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

Yes. Let’s try post-pandemic. Demand continues to stay strong. If you think about our business strategy of refocusing on consumer marketing direct to the consumer, educating on the awareness of fiberglass pools, and all of the benefits at the homeowner level, as well as the benefits for the dealer, that story is really resonating and it’s showing in the phenomenal growth we have been seeing. We all know where the European market sits, but more importantly, the Australian market is 70%. So, no matter what happens, if demand slows a little bit in terms of new pool starts or continues to grow at a 3% to 5% historical rate, that conversion is what’s going to drive our growth with a much faster 2x market growth rate. The demand we see for ‘22 is extremely strong, making dealers top in there. We are working to double, if not triple, capacity with those dealers. Orders for pools are being booked out into 2023 in many areas of the country. The one thing to step back and look at is, we are still far from the peak of new pool starts in the U.S. at 175,000 back in ‘05. So, there’s a lot of runway. One of my favorite numbers: 90 million existing homes in the U.S. do not have a swimming pool today. There is still a lot of backyards looking to have a Latham pool put in. We feel really strong on the demand front.

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

Yes. I think if you look at the guidance we provided for ‘22, that’s the anticipation of continuing on that trend to try to get to that 25% number in ‘23 with the growth and where pool starts are. We are looking at where we need to be in ‘24 and ‘25 and really resetting the benchmark for how we can double the fiberglass business in the next 3 to 4 years. The outlook for fiberglass is extremely strong, and that conversion story resonates.

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

Thanks Josh.

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

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

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