Earnings Call Transcript - SWIM Q4 2025

Operator, Operator

Welcome to the Latham Group, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. This event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations representative. Please go ahead.

Casey Kotary, Investor Relations Representative

Thank you. This afternoon, we issued our Fourth Quarter and Full Year 2025 Earnings Press Release, which is available on the Investor Relations portion of our website, where you can also find a slide presentation that accompanies our prepared remarks. On today's call are Latham's President and CEO, Sean Gadd; and CFO, Oliver Gloe. Following their remarks, we will open the call to questions. During this call, the company may make certain statements that constitute forward-looking statements which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's annual report on Form 10-K and subsequent reports filed or furnished with the SEC as well as today's earnings release. The company expressly disclaims any obligation to update any forward-looking statements, except as required by applicable law. In addition, during today's call, the company will discuss certain non-GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non-GAAP measures can be found in the slide presentation that accompanies our prepared remarks, which can be found on our Investor Relations website. I'll now turn the call over to Sean Gadd.

Sean Gadd, CEO

Thank you, Casey, and thank you all for joining the call to discuss Latham's Fourth Quarter and Full Year 2025 results. In my first Conference Call as CEO of Latham, I have the good fortune to be reporting on the strong results that the company achieved in both the fourth quarter and the full year of 2025. This performance demonstrates excellent execution by the Latham team. As you have seen from this afternoon's earnings release, fourth quarter revenues were up 15%, showing solid growth across all of our product lines. We were especially pleased by the fourth quarter pickup in our In-Ground Pool sales, which brought our full year In-Ground Pool sales to 1% above 2024 levels. The impressive performance per year within an industry in which we estimate the U.S. In-Ground Pool start declined low to mid-single digits. With the benefit of good weather and an extended selling season, dealers were able to work through their backlog. The strong result reflects an increased demand for Latham's fiberglass pools. Fiberglass represented 76.5% of our In-Ground Pool sales in 2025, with the year-on-year growth of Latham's fiberglass pool sales of approximately 2.5%. As a market leader, Latham has been the key driver behind the increased adoption of fiberglass pools, which we estimate gained another percentage point of market share in 2025 to account for approximately 24% of last year's U.S. pool starts. The steady growth in fiberglass market penetration in the U.S. reflects the success of Latham's branding and marketing programs, emphasizing the benefits of our fiberglass pool against any alternative solution. Competitive strength of fiberglass pools, mainly their fast and easy installation, sleek designs matching current consumer preferences and lower maintenance requirements, all at an affordable price makes Latham fiberglass pools the best alternative in the marketplace. While the estimated 24% penetration of U.S. pool starts for 2025 represents significant growth from 16% in 2019, this is considerably below the 70% fiberglass penetration in my home country of Australia and meaningfully below the approximate 40% to 50% penetration in key European markets, which really excites me as I think about the future and the size of the opportunity. I have considered the attributes of fiberglass from the vantage point of my many years of experience successfully selling against the standard in the boating industry; I see substantial runway for accelerated conversions to fiberglass, particularly in the Sand States, which I'll talk about in a moment. Another key accomplishment for 2025 has been the positive momentum in our covers and liners product lines, which delivered a meaningful contribution in both fourth quarter and full year sales results. The 22% growth in autocover sales in 2025 was a function of a very positive consumer response to the unparalleled safety and peace of mind that autocovers offer. This is further highlighted by our partnership with Olympic Gold Medalist and Pool Safety Advocate, Bode Miller and his wife Morgan, to promote full safety and the safety advantages of our autocovers. As a reminder, Latham's autocovers are compatible with all the In-Ground Pool types with the advantage of providing the homeowner with a significantly more attractive alternative to fencing, while also delivering cost savings from reduced water evaporation, reduced energy for pool heating and reduced chemical consumption; essentially, autocovers pay for themselves within 4 to 5 years. Liner sales increased 4% in 2025, thanks to our industry-leading lead times and the successful rollout of our proprietary AI-powered measuring tool. Measure streams lines, the liner and winter safety cover measurement, process for installers, ensuring a high degree of accuracy that can be completed in as little as 30 minutes. This tool is fully integrated with the Latham order entry and processing system, which allows the installers to get real-time quotes to submit orders and track their status by providing Latham with a first look at all quoting opportunities and helps optimize schedules and operations. Approximately 20% of the installers who purchased this tool during the year were mutilated, enabling share gain in our liner and winter safety cover products. In 2025, the Latham team executed effectively on a strategic priority, expanding into the Sand States, particularly, and the company gained considerable ground in FRGP, our initial target market, achieving double-digit sales growth for the year. This good growth was achieved by expanding our dealer network, establishing a presence for Latham in several master planned communities and nurturing our strategic partnerships with select custom home builders, who will feature our fiberglass pools in their developments when they begin building. The percentage of Latham sales volumes derived from the Sand States remains steady at approximately 17%. This reflects our considerable growth in Florida and a pickup in Arizona, offset by the tough Texas markets where pool permits declined at a double-digit rate. I recently spent 2 weeks in Florida engaging with the commercial team and some of our dealers, while visiting our priority Master Plan Communities and touring our Zephyrhills manufacturing facility, which demonstrated to me that Latham has the best fiberglass pools in the industry. I came away getting more enthusiastic about the opportunity and upside in Florida more than I had originally thought, as I do my research in joining Latham. First, the opportunity for fiberglass pool penetration in Florida and other Sand States is large. Second, the advantages of fiberglass pools are resonating with qualified established dealers, several of whom indicated their desire to partner with us in our Master Plan Communities. They recognize the benefits of providing their customers with a high-quality product, which boasts lighting durability, elegant appearances, and a smooth low maintenance finish. Not only do they get to sell a great product that meets the needs of the homeowners, but they are also able to capture the benefit of quicker, easier installation. Shorter cycle times mean that dealers can improve their cash flow through the install process and triple or quadruple the number of pools they sell and install annually, resulting in more profit for them in the end. Thirdly, Latham clearly has increased its brand awareness amongst consumers and leaders in Florida. With several high-profile marketing campaigns paired with logical activations, we still need to do more of this as the #1 gap I see is ensuring that homeowners gain awareness of the true benefits of fiberglass and why it is the right solution for their backyard to enable their dreams of creating wonderful memories to come true. Together with the speed at which our pools have installed allows homeowners to enjoy pools in days instead of the traditional months when compared to the standard, which is concrete. In 2026, we plan to increase our investment in branding and marketing in a very targeted way to capture greater consumer awareness with a network of trusted dealers who are able to fulfill the demand we generate. I'm excited to bring a market development framework and approach to Latham, and I believe it will make us even more effective than we've been to date. As we continue to focus on accelerating organic growth, you can also expect Latham to continue to consider select acquisitions that provide us with revenue synergies and/or expanded geographic reach and will be accretive to our earnings. Just a few days ago, we completed an acquisition that meets all 3 criteria. Oliver will provide more details shortly. From my perspective, Freedom Pools represents an excellent acquisition, and that is: one, significantly expands our market position in Australia and New Zealand, two countries where fiberglass pools are highly preferred by consumers and builders; two, it gives us entry into new markets in Western Australia, which represent a large market in Perth, one of the fastest growing cities in Australia; and thirdly, it is immediately accretive to our earnings. We welcome the Freedom team to Latham. To sum up, our fourth quarter and full year 2025 performance demonstrates Latham's fundamental strengths and ability to drive considerable growth in sales and adjusted EBITDA in a down market. This proven capability differentiates us in the marketplace and provides the foundation for future growth and enhanced profitability. Now I'll turn over the call to our CFO, Oliver Gloe. Who will provide further detail in our Q4 and full year financial performance, including the drivers of our continued margin expansion in 2025 and in support of our 2026 guidance.

Oliver Gloe, CFO

Thank you, Sean, and good afternoon, everyone. I am pleased to review our fourth quarter and full year results and to report that our full year 2025 sales exceeded the midpoint of our guidance range, while our adjusted EBITDA performance was above our guidance range, demonstrating the benefits of volume leverage and production efficiencies. Please note that all comparisons we discussed today on a year-over-year basis compared to the fourth quarter and full fiscal year 2024, unless otherwise noted. Net sales for the fourth quarter of 2025 were $100 million, up 15% compared to $87 million in the fourth quarter of 2024, reflecting strength in fiberglass pool sales as well as increased demand for autocovers. Organic growth was 14% for the quarter. For the second consecutive quarter, all 3 of our product lines In-Ground Pools, pool covers, and pool liners experienced year-over-year growth. By product line, In-Ground pools sales were $50 million, up 15% from Q4 2024, showing strength in both fiberglass and packaged pools and representing a quarterly shift in the sales cadence given an elongated season due to favorable weather conditions in Q4. Cover sales were $37 million in the quarter, up 19%, benefiting from increased adoption of autocovers and the 2 small covers acquisitions we made in February of 2025. Liner sales were $13 million, up 2% compared to fourth quarter of 2024, remaining resilient relative to the overall pool market due to the replacement cycle of these products and our industry-leading lead times. Gross margin expanded by 340 basis points to 28% in the fourth quarter, primarily resulting from volume leverage and the continued benefits from our lean manufacturing and value engineering initiatives. SG&A expenses increased to $31 million, up $4 million from $27 million in Q4 of 2024, largely driven by investments made in sales and marketing initiatives and personnel to drive increased penetration of fiberglass pools and autocovers as well as higher performance-based compensation. Net loss was $7 million or $0.06 per diluted share compared to $29 million or $0.25 per diluted share for the prior year's fourth quarter. Fourth quarter adjusted EBITDA was $10 million, up $7 million, almost 3x the $3.6 million in the prior year period. The strong performance primarily resulted from increased fiberglass pool sales, benefits from higher plant absorption, efficiencies from lean manufacturing and value engineering initiatives, and continued cost discipline. Adjusted EBITDA margin was 11%, a 630 basis point increase year-over-year. Now turning to our full year results comparisons. Net sales were $546 million, up 7% compared to $509 million in the prior year, reflecting higher sales volume from both organic and acquisition-related growth and tariff-related price increases. Notably, this performance was achieved while we estimate the U.S. In-Ground Pool market to be down low to mid-single digits in 2025. Organic growth of 5% benefited from execution on our key strategic priorities to drive awareness and adoption of fiberglass pools and autocovers. Acquisition-related growth reflected Coverstar Central transaction that was completed in August of 2024 and the acquisitions of smaller Coverstar New York and Tennessee, which we completed in February of 2025. All 3 product lines showed year-over-year growth. Latham's In-Ground Pool sales for the full year were $262 million, up 1% year-over-year. Importantly, this growth was achieved against a backdrop of a decline in U.S. In-Ground Pool starts in 2025, primarily as a result of our success in increasing the awareness and adoption of fiberglass pools. As Sean mentioned, we estimate that market penetration of fiberglass pools increased again by 1 percentage point in 2025, and we see a long runway for continued conversion from concrete pools, especially in the important Sand States markets. Cover sales were $161 million, up 22%, driven by organic and acquisition growth. Liner sales were $123 million, up 4% compared to the prior year period, reflecting our industry-leading lead times and the increased adoption of our MeasurePRO tool, which enables pool business to accurately and efficiently measure both pool liners and covers. With the introduction of our mobile app MeasureGO in the third quarter of 2025, we broadened access to more business as we seek to make the measurement and quotation process as seamless as possible. Gross margin expanded by 320 basis points to 33% compared to 30% in the prior year, primarily resulting from our lean manufacturing and value engineering initiatives and a margin benefit from the 3 Coverstar acquisitions as well as volume leverage. SG&A expenses increased to $123 million from $108 million in 2024, reflecting our increased investments in sales and marketing initiatives to expand the awareness and adoption of fiberglass pools and grow our market share in the Sand States as well as investments in digital transformation, along with the impact of the Coverstar acquisition. Net income for the full year was $11 million or $0.09 per diluted share compared to a net loss of $18 million or $0.15 per diluted share from the prior year. Adjusted EBITDA was $100 million, up $20 million compared to $80 million in the prior year as a result of higher volume and our structurally improved business model. Adjusted EBITDA margin of 18.3% was 250 basis points above the 15.8% in 2024, thanks to our strong gross margin performance which more than offset higher SG&A expense. Turning to our balance sheet and cash flow statement. We ended the year in a strong financial position, which gives us the financial flexibility to fund organic growth projects as well as acquisition opportunities. Our cash position at year-end was $71 million. Net cash provided by operating activities was $11 million in the fourth quarter and $51 million for full year 2025. We ended the year with total debt of $280 million and a net debt leverage ratio of 2.1, in line with our expectations. Capital expenditures were $25 million for full year 2025 compared to $20 million in the prior year, with most of the additional investments going into our facilities in Florida and Oklahoma as well as malls for smaller rectangular pools with spas, which are popular in the Sand States. As Sean noted, we are pleased to have recently completed the acquisition of Freedom Pools. We expect incremental net sales of approximately $20 million and incremental adjusted EBITDA of $4 million on an annualized basis, which we have reflected in our 2026 guidance. In addition, we recently completed the purchase of 4 of our key fiberglass production sites. These sites, which previously we leased are important to our network and future growth. Including these acquisitions and the buildup of seasonal net working capital, we expect our net debt leverage ratio at the end of the first quarter to remain below 3 and to improve again thereafter. Turning to our outlook for 2026. We believe that U.S. In-Ground Pool starts this year will be approximately in line with 2025. Despite these continuing tough conditions, we believe Latham is uniquely positioned to outperform the overall market once again. This expectation is supported by our category leadership in fiberglass pools and autocovers and the continued execution of our strategic priorities, namely driving the awareness and adoption of fiberglass pools and autocovers, accelerating fiberglass conversion in the important Sand States markets and opportunistically making accretive acquisitions. With this as a backdrop, our 2026 guidance is between $580 million and $610 million in net sales and between $105 million and $120 million in adjusted EBITDA, representing year-on-year growth of 9% and 12.7%, respectively, at the midpoint. This includes our expectation for mid-single-digit organic growth combined with the benefits from the Freedom Pools acquisition and increased marketing expenses. Capital expenditures are projected to be in the range of $42 million to $48 million. In addition to the $25 million that includes maintenance CapEx for 2026 and the carryover of certain projects from 2025, the additional expenditure relates to the purchase of 4 of our fiberglass manufacturing facilities in Florida, Texas, California and West Virginia, as well as investments to upgrade the newly acquired Freedom Pools manufacturing facilities. With that, I will turn back the call to Sean for his closing remarks.

Sean Gadd, CEO

Thank you, Oliver. As you just heard, we are expecting a year of very positive performance from Latham in 2026. Our 9% growth expectations for this year at midpoint guidance is underpinned by Latham's specific performance, as we believe trough market conditions are likely to continue through much of the year with new U.S. In-Ground Pool starts approximately at 2025 levels. From my experience, soft markets are good opportunities for us to accelerate our Sand States strategy and execution as dealers and homebuilders are more willing to consider change in soft markets versus stronger markets. In 2026, we'll continue to execute on our key strategic priorities, namely to build the Latham brand and drive increased awareness and adoption of fiberglass pools and autocovers, which we expect will enable us to continue to significantly outperform the U.S. In-Ground Pool market, while maintaining our focus on safety and excellent execution. Since joining Latham, I have met many of our customers, industry leaders, and our commercial people, and have toured three of our manufacturing facilities. It is clear to me that Latham is a highly respected brand and a company with the best and broadest product lineup in the industry with a highly engaged workforce. I see tremendous opportunity for Latham to grow in the years ahead. I'm excited to drive our market penetration in the Sand States, the rest of North America, Australia, and New Zealand. With our extensive distribution network, high-quality fiberglass pools and autocovers, and best-in-class lead times, we are positioned for accelerated profitable growth, especially when the market rebounds over the coming years. I'll be leveraging my past experience to drive greater consumer awareness and demand for fiberglass and autocovers and further enhance the value we deliver to our dealers. I would like to thank our dealers, industry partners, and our employees for their contributions to our success in 2025, and I look forward to working together in 2026. Operator, please open the call for questions.

Operator, Operator

The first question is from Greg Palm with Craig-Hallum Capital Group.

Greg Palm, Analyst

Congrats on a good finish to the year. Sean, I wanted to start with you and recognize it's been a kind of short time since you've been CEO, but what do you learn? What excites you? And it's probably a little bit too early to ask this question, but in terms of any change in strategy or anything you want to lean into a little bit more going forward?

Sean Gadd, CEO

Thank you, Greg. That's a great question. The past eight weeks have flown by, and I've had the chance to see many aspects of the business. I’m particularly excited about the potential in the Sand States, which we plan to focus on moving forward. Based on my previous experience in market development, I believe I can help the team concentrate on driving meaningful growth in the MPCs. For me, this focuses on lead generation, improving lead quality, and strengthening the brand, while also bringing in qualified dealers to meet the demand in these MPCs. In terms of identifying qualified dealers, there is significant work to be done in segmentation, targeting, and clearly defining our value proposition for these dealers, which is to enhance their profitability. Additionally, it's crucial to position those dealers effectively so they can effectively articulate our fiberglass value proposition. If we execute these strategies well, I believe we can start to gain traction in the Sand States. Overall, the business is performing well, and I see growth potential even in our northern markets, which will support our initiatives to expand in the Sand States.

Greg Palm, Analyst

And you seem pretty excited about the conversion opportunity. And I'm just curious, is there any change in strategy in helping to accelerate that conversion opportunity? Or is it more just sort of leaning into some of the initiatives that have been sort of done and really accelerated over the last year or so?

Sean Gadd, CEO

I think there's a lot of leaning in, but one of the things I'll add to it is managing the installed cost of the job. So if anything, when you're selling against the standard, the natural state is to put insurances into the job, so you don't lose any money or the job doesn't go wrong. And so controlling that to some degree because again, we're a very small portion of the total cost of a job. So us being able to manage it all the way through, I think, will be an important addition to what we're trying to do.

Greg Palm, Analyst

And then just one for Oliver. Can you help just unpack the guide for '26 on a segment basis in terms of that mid-single-digit organic growth? Is that across the board in pools, covers, liners? Is it skewed towards one category versus the other? I know you're coming off of a pretty good year in covers, but what's your overall thought on a segment basis?

Oliver Gloe, CFO

Yes, Greg. So again, overall, the guide is about 9%. The organic part of it is 6%. Across the different product categories, as you would expect, the majority of the growth and key growth drivers will continue to be fiberglass, the continued conversion, especially indexing towards the Sand States as well as continued growth through the awareness and adoption of autocovers. We do, as part of our guidance, project that all 3 of our product categories continue to grow like they've done in '25, but again, indexing towards fiberglass pools as well as autocovers. The next question is from Tim Wojs with Baird.

Timothy Wojs, Analyst

Maybe just first question that I had, just I guess how would you if you kind of step back and look at the early demand indicators that you have in maybe January and February and kind of coming into '26. I guess how would you kind of frame those relative to kind of a normal year for '26?

Sean Gadd, CEO

We have recently completed a season where we met with all our dealers and industry partners. I believe that the fourth quarter was relatively strong, driven by several factors. Firstly, our team's performance was impressive. Secondly, we experienced an extended sales cycle in that quarter due to favorable weather conditions, which may differ as we enter the first quarter with some adverse weather expected. Overall, the industry appears to be anticipating a flat year ahead. Numerous challenges, such as interest rates and consumer confidence, need to improve to stimulate growth. Despite the difficult market conditions, we remain optimistic about our potential to succeed in this environment.

Timothy Wojs, Analyst

And then, Oliver, I think the midpoint of the guide is maybe 50, 60 basis points of EBITDA margin expansion. Could you just help us kind of break that down between what the gross margin contribution is and maybe what SG&A should be?

Oliver Gloe, CFO

As you would expect, right? So the majority or the margin contribution comes from higher gross margin, especially the continuation of our initiatives in lean manufacturing and value engineering. Those paid dividends in 2025. They will continue to pay dividends in '26 as well. You will, with the increased top line, see a moderate degree of volume leverage. And then to bring that down on an EBITDA percentage, which is 60 basis points up, you have higher gross margin that outperforms the increased investments in SG&A as we are ramping up our sales and marketing efforts in fiberglass, especially geared towards the Sand States.

Timothy Wojs, Analyst

I mean I guess if I look at gross margins, you you're probably up close to 300 basis points a year for the last couple of years. I mean, is it that type of magnitude of gross profit improvement? Or is it a lot more measured this year?

Oliver Gloe, CFO

I want to say it's probably not going to be the 300-plus gross margin expansion, 300 basis points plus gross margin expansion that you've seen both in '25 as well as '24. It will be a little bit more moderate, but our expectation is that we take a meaningful step towards that 35% gross margin.

Timothy Wojs, Analyst

Very good. Regarding the Sand States, did you mention that the percentage of sales is about flat year-over-year, approximately 17%? Also, how does Florida perform in that context?

Oliver Gloe, CFO

That's correct. So we stayed about flat. Within that, Florida was the shining star and certainly our focus in 2025, with double-digit growth and a strong outperformance versus the market, as measured against the permit data. I think a close follow-up to that was Arizona, obviously on a much more smaller scale for us, right? And then we had Texas, which obviously where permits were down and as a result, that reflected in our business as well as we shifted focus towards Florida.

Timothy Wojs, Analyst

Is it reasonable to think that now that you have gained more experience in Florida and have completed at least one full season, the trends in Florida could start to accelerate from this point as you continue to grow?

Sean Gadd, CEO

I believe we can increase our efforts in Florida. As I delve into the business, I'm looking for a model that we can apply in Texas. We have our Sand States strategy in place, and I think we're close to getting it right, although there are some adjustments needed. Additionally, we need to consider the new construction builders and how we engage with single-family home builders. My experience in new construction gives me insight into segmentation models that could be effective. In a downward market, there is a chance to change how business is done. Builders have two options during a downturn: they can either hunker down or find ways to stand out to sell more homes or sell them at higher prices. We see examples of both approaches, such as Lennar's strategy and Taylor Morrison offering significant upgrades or even including a pool. I want to gather more insight on this before we fully move to accelerate our operations in the South.

Operator, Operator

The next question is from Scott Stringer with Wolfe Research.

Scott Stringer, Analyst

When I dig into your 10-Ks and 10-Qs, it seems like industry pricing has been fairly muted for the past couple of years. Maybe some of that's mix. So just wondering what your outlook for pricing is in 2026 and if there's any pricing power in the industry this year?

Sean Gadd, CEO

Yes. I think you're absolutely right, pricing has been sort of flattish. I'll remind you, though, that during 2025, right around June, we did have a price increase of about $10 million to cater to the tariff headwinds that we saw at the time and still see today. So from a price perspective in 2026, you have 2 things. One is the run rate and full year impact of that June 2025 price increase. Again, for simplicity of math and modeling, take half of the $10 million plus the normal annual and seasonal price increase that we usually take to cover inflation and so forth. So I want to say price, given us being the combination of both, will probably be adding 2% to our top line.

Scott Stringer, Analyst

That's interesting. And then for my follow-up question, just on customer financing, interest rates seem to be coming down a little bit here, but the outlook for flattish pool installs. So is interest rates a tailwind in this sort of macro backdrop? Or is that not really embedded in the outlook?

Sean Gadd, CEO

Interest rates have certainly held steady and have come down, but we haven't seen a significant increase in activity as a result. I believe many homeowners are hesitant to make decisions right now, anticipating lower interest rates in the near future. This expectation means that buying a pool could be less expensive tomorrow compared to today, particularly concerning interest costs. I see this as a positive trend. My hope for 2026 is that we reach a stable new normal for interest rates, which could encourage homeowners to make purchasing decisions for pools in the upcoming season.

Operator, Operator

The next question is from Matthew Bouley with Barclays.

Anika Dholakia, Analyst

You have Anika Dholakia here for Matt today. I wanted to follow up on the MPC strategy. You mentioned focusing on conversion efforts and observed growth this quarter in Florida, which is encouraging. It appears that you are currently targeting smaller midsized communities. I'm curious about your long-term vision for this. Are you planning to collaborate with large-scale production builders, or how do you envision expanding in this area?

Sean Gadd, CEO

Thank you, Anika. I'll respond to that. We are focusing on relatively large Master Planned Communities. When I visited, I observed communities with around 65,000 homes, which is substantial. There are multiple builders involved in these communities. Most pools are typically installed about a year after purchase or when homeowners move in, often within one to three years. Currently, we are mainly targeting the aftermarket in these MPCs, but I do foresee pursuing collaborations with builders, particularly the larger national ones. It's essential to build our reputation and credibility in this area with national builders. From my viewpoint, market development starts with the highest available price point, seeking out visionary builders who want to incorporate pools as a way to set themselves apart. Gradually, we can move down to lower price points until we are directly competing with national builders. At that stage, those builders will begin to take notice of us. I believe we will eventually operate in that space, though I don't think we are ready for that just yet; however, I do see it as a future opportunity as we progressively develop our market presence to reach that price point.

Oliver Gloe, CFO

Yes. First, I want to discuss the purchase of the four fiberglass facilities. These were already part of our grid, as we leased them, and they are very strategic for us. We opted to buy them earlier in the year, specifically in early February. From a capacity perspective, I believe we have everything we need. In past earnings calls, I mentioned that when the market reached 117,000 pools in 2021, we had excess capacity, particularly in fiberglass. Since then, the market has nearly halved. We have made some reductions in redundant capacity due to this market decline, but we have also increased our capacity. We have expanded capacity through our Kingston project and the expansion in Oklahoma. Additionally, we've improved capacity through our lean and value engineering initiatives. Overall, we likely have more capacity now than we did when the market was twice its current size. From a high-level view, we have sufficient capacity for the foreseeable future. As we develop our Sand States strategy, there may be some regions, particularly in Arizona, that will require adjustments to our capacity going forward. However, for now, we have what we need. Next question is from Susan Maklari with Goldman Sachs.

Susan Maklari, Analyst

My first question is on the dealer backlog coming into this year. Can you just talk a bit about where they are? And what you're hearing from your dealers ahead of the spring?

Sean Gadd, CEO

Yes. There's two parts to that question. The first one is our dealers were able to get a lot of work done with the extended season in Q4. That said, when I think about even just our backlog, very pleasing results early in the year. Obviously, the weather is playing a little part of that right now. I mean, I'm sitting here in New York, and it's snowing. But in general, I'd say that backlogs look pretty good. I think that the dealers are feeling relatively optimistic about where the year might be.

Susan Maklari, Analyst

All right. That's encouraging. And then turning back to the margins. You've made a lot of really nice progress with the value engineering initiatives. Can you talk about where you see opportunities from here? And how we should think about the benefits of that starting to flow through.

Oliver Gloe, CFO

So I think let me start with lean manufacturing. Lean manufacturing is more working on the process, whereas value engineering is more working on the product. I think lean manufacturing between the two is the more mature program. Think of a lot of Kaizen events, workshops that are then after completion expanded to best practice learning and expanded to the other sites. I think lean manufacturing is in our DNA. It's how we improve on a year-to-year basis, lots of little projects that add up to something meaningful at year-end. And I expect that to continue over the next few years as well, whereas value engineering is more working on the product to give it a higher quality, better appearance, but also take out some costs, right, reengineer the material basis. So you would say there are more low-hanging fruit and bigger projects that we then can replicate across the grid. Again, lean manufacturing is a little bit mature; value engineering is probably more new to us. We have a great organization with Ph.D. level material scientists that we have great expectations for in 2026 as well as the years beyond.

Susan Maklari, Analyst

And maybe just building on that, Oliver. You've done a lot in terms of new product introductions or relatively recently. Can you talk about the momentum that you're seeing with those? And anything that you have planned for 2026 in terms of product launches that we should be aware of or paying attention to?

Sean Gadd, CEO

I’ll take that, Susan. From my perspective, we’ve done quite a bit of innovation. While we don’t disclose specific growth figures, I can tell you that we’ve responded to market trends and developed the appropriate product lines to align with where the market is heading. We have also completed our investment in products specifically for the Sand States. This means we now have the right product for Florida that will allow us to expand our presence, and we also have the right product for Texas. As the Sand States grow, we anticipate those product lines will also grow. Furthermore, with Measure, we have seen strong penetration in its first year of launch, and we expect that to continue as more people adopt it, enabling us to increase our offerings of liner and safety covers.

Operator, Operator

The next question is from Shaun Calnan with Bank of America.

Shaun Calnan, Analyst

Just the first one. So we've seen a pretty strong improvement in search trends for new pools and then meaningful outperformance in the search trends for Latham. What do you think is holding potential buyers back at this point? And how do you unlock that and turn those into sales? Is it just a matter of rates, consumer confidence? What do you think the key drivers are?

Sean Gadd, CEO

That's a great question. It's a complex issue. During my time in Florida and at the International Builder Show, I was surprised to find that many people were unfamiliar with fiberglass and how fiberglass pools are installed in backyards. One person even asked if they come in two pieces. This highlights the need for basic education and awareness, and you’ll notice that we are running ads on TV, which will continue to be a part of our strategy. Another factor is that homeowners don't interact with our brand frequently, as we aren't a consumer good. However, when they are in the buying cycle, they do engage with us. The key for me is to ensure that when they start their path to purchase, we don't lose their interest. I believe that what often creates hesitation for homeowners is decision-making. The first major decision is choosing the right contractors and having confidence that those contractors will be around next year if issues arise. We need to help them feel secure in that choice by ensuring the right dealers are available at the purchasing point to provide a quality experience. Another challenge pertains to options like colors, shapes, and sizes, which can frustrate homeowners and lead to delays in their decision-making. Our responsibility is to simplify these processes using tools we will develop over time, ensuring we meet our consumers' needs and make their purchasing decisions easier. While the overall market conditions may be beyond our control, once they improve, we expect to benefit from that. For now, we are focused on making the purchasing experience easier than it currently is.

Shaun Calnan, Analyst

Great. And then on the acquisition of the manufacturing facility, so that's increasing CapEx next year. Is there any impact to the P&L in terms of lease expense or depreciation and amortization? And then what are you guys expecting for free cash flow next year or this year?

Oliver Gloe, CFO

So in terms of the impact to the P&L, and I'll limit my comments to EBITDA. So the purchase replaces a lease expense in the neighborhood of about $1.5 million annually. In terms of free cash flow, we don't specifically give guidance on free cash flow. But we've disclosed our CapEx need. The acquisition in Freedom was about $17 million, and net of those 2 impacts, meaning the acquisition of the 4 fiberglass facilities as well as the acquisition of Freedom Pools, the additional EBITDA will flow through to free cash flow. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Sean Gadd, CEO

First of all, I want to thank everybody for joining us today. Obviously, this is my first call with Latham, and it's been a good time to join the business because we had a fantastic Q4 and certainly a good 2025. Very excited about what 2026 will bring and beyond. I think we've got lots of opportunity, great product, a great brand, and I think we can build on that to make it even better. With that, obviously, I've met some of you in the different shows; I look forward to catching up with you on calls post this call and then out at some conferences in the near future. So thank you very much.

Operator, Operator

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