Executive Summary / Key Takeaways

• Latham Group, the largest in-ground residential pool manufacturer in North America, is strategically positioned to outperform the current trough market conditions through focused growth initiatives and a structurally improved cost base.
• The company's core strategy centers on driving adoption of fiberglass pools and automatic safety covers, leveraging their inherent advantages (cost, installation speed, safety, maintenance) over traditional concrete pools.
• Significant investments are targeting the underpenetrated Sand States market (FL, TX, AZ, CA), which represents two-thirds of US pool starts, through expanding the dealer base, targeting master-planned communities, and aligning product offerings and marketing.
• Operational efficiencies from lean manufacturing and value engineering initiatives have structurally improved gross margins, contributing to expected Adjusted EBITDA growth of 19% at the midpoint in 2025 despite projecting flat US pool starts.
• Recent acquisitions of Coverstar Central and two smaller autocover dealers vertically integrate a key product line, expected to accelerate sales growth and be accretive to margins, further strengthening Latham's market position.

The Foundation: Building Pools, Building Relationships

Latham Group, Inc. ($SWIM) stands as the preeminent designer, manufacturer, and marketer of in-ground residential swimming pools across North America, Australia, and New Zealand. With an operating history spanning over 65 years, the company has evolved from a traditional business-to-business model, primarily serving dealers and distributors, to pioneering a direct-to-homeowner digital and social marketing strategy. This shift has been instrumental in generating consumer demand and delivering high-quality, purchase-ready leads to its extensive network of dealer partners, relationships that average over 14 years in tenure.

Latham operates as a single reportable segment, encompassing its diverse portfolio of in-ground swimming pools (fiberglass and custom vinyl), pool covers (all-season and automatic safety covers), and pool liners. While the market has faced challenging conditions, including an estimated 15% decline in US pool starts in 2024, Latham has consistently demonstrated an ability to outperform the broader industry downturn. This resilience is rooted in its market leadership position and a strategic focus on product categories and geographies poised for growth, even in a subdued demand environment.

The competitive landscape for Latham is multifaceted. While Pool Corporation (POOL) dominates wholesale distribution and Pentair plc (PNR) and Hayward Holdings, Inc. (HAYW) are strong in pool equipment and automation, Latham's core strength lies in its manufacturing capabilities and market leadership in the in-ground pool itself, particularly fiberglass. Compared to POOL's distribution model, Latham's integrated approach offers greater control over product quality and supply chain responsiveness. While PNR and HAYW excel in technology for pool operation and automation, Latham's technological edge is centered on the manufacturing process and the inherent advantages of its fiberglass product over traditional concrete construction. This positioning allows Latham to differentiate on product attributes, installation speed, and overall cost of ownership, factors becoming increasingly important to consumers and builders alike.

The Technological and Operational Edge

At the heart of Latham's competitive positioning is its focus on fiberglass pool technology and operational efficiency. Fiberglass pools, manufactured as a single piece, offer distinct advantages over labor-intensive concrete alternatives. These include faster and easier installation (often completed in days rather than weeks), lower maintenance requirements due to a non-porous surface that resists algae growth, reduced chemical usage, and eco-friendly attributes. The scarcity of qualified labor, cited by nearly half of pool builders as impacting their ability to build new pools, also serves as a tailwind for fiberglass, which requires significantly less on-site labor than concrete.

Latham has invested in and continues to refine its manufacturing processes through lean manufacturing and value engineering initiatives. These programs are designed to drive production efficiencies, reduce waste, and lower material costs. Quantifiable benefits have been realized, including a 27% year-on-year reduction in production time across North American fiberglass plants and 8% labor efficiencies in safety cover and vinyl liner facilities in the first half of 2024. Management estimates these initiatives contributed significantly to gross margin expansion in recent periods and are expected to continue generating savings.

Product innovation is also a key focus. Latham has expanded its fiberglass lineup with models like the Astoria 14 and Apollo 14, designed with features like built-in spas and tanning ledges that appeal to current consumer preferences, particularly in target growth markets. The company has also expanded its plunge pool offering, recognizing demand for smaller, space-efficient, and more affordable aquatic options, launching new fiberglass and vinyl liner models. The Measure by Latham tool, an AI-powered solution for liner and cover installers, streamlines the measurement and quoting process, improving dealer efficiency and accuracy, and is seen as a tool to attract new dealers. These technological and operational advancements are foundational to Latham's strategy, contributing to its cost structure, product differentiation, and ability to serve its dealer network effectively.

Strategic Pillars for Growth

Latham's strategy for outperforming the market is built on several interconnected pillars:

Accelerating Fiberglass Adoption: The company is actively working to increase the penetration of fiberglass pools in the overall in-ground market. Fiberglass accounted for 24% of US pool starts in 2024, a gain of one percentage point from 2023 and six points since 2021. Latham's fiberglass sales represented 75% of its in-ground pool sales in 2024, up from 73% in 2023, demonstrating its leadership in this growing segment.

Expanding in the Sand States: Recognizing that Florida, Texas, Arizona, and California collectively account for approximately two-thirds of annual new pool starts, Latham has launched a major initiative to expand its presence in these markets where it is currently underrepresented. The strategy involves:

• Expanding the pool dealer base, including converting concrete builders.
• Targeting large master-planned communities (MPCs).
• Aligning product offerings with regional demand (e.g., rectangular, plunge, pool-spa combos).
• Executing targeted marketing campaigns (like the "GOOTSA" campaign) to drive consumer and builder awareness.
  Progress is being made, with fiberglass sales in the Sand States increasing from 15% to 17% of total fiberglass sales in 2024. Latham is targeting an acceleration in this metric, aiming for a 200-300 basis point improvement in 2025. Increased capital expenditures in 2025 are specifically allocated to developing new molds and expanding facilities in Florida and Oklahoma to support this growth.

Growing Automatic Safety Covers: This product category offers significant benefits to homeowners (safety, reduced operating costs) and is a focus for increased adoption. Recent strategic acquisitions, including Coverstar Central (August 2024) and two smaller dealers in Q1 2025, vertically integrate this product line in key geographies. Coverstar Central is expected to add $20 million in net sales and expand total company Adjusted EBITDA margin by approximately 140 basis points annually, while the two smaller acquisitions add a combined $5 million in net sales and $1 million in Adjusted EBITDA. These acquisitions are expected to accelerate sales growth and provide access to a broader base of pool builders.

Financial Performance and Health

Latham's financial performance reflects the impact of challenging market conditions alongside the benefits of its strategic initiatives and operational improvements.

In the first fiscal quarter of 2025 (ended March 29, 2025), net sales saw a modest increase of 0.7% to $111.4 million compared to $110.6 million in Q1 2024. This was driven by a volume increase, partially offset by lower pricing. Sales mix saw an increase in covers (up 17.7% to $31.6 million), partially offset by decreases in in-ground pools (down 3.5% to $57.7 million) and liners (down 7.7% to $22.1 million).

Despite the slight sales increase, gross margin expanded significantly by 190 basis points to 29.5% in Q1 2025, up from 27.7% in Q1 2024. This improvement was primarily attributed to production efficiencies from lean manufacturing and value engineering initiatives, as well as the margin benefit from the recent Coverstar acquisitions.

Selling, general, and administrative (SG&A) expenses increased substantially by 16.6% to $30.6 million in Q1 2025, primarily due to increased investments in sales and marketing to drive future growth and the inclusion of expenses from the three Coverstar acquisitions. Amortization expense also increased due to the acquisitions.

The net loss for Q1 2025 narrowed to $6.0 million, an improvement from a net loss of $7.9 million in Q1 2024. However, Adjusted EBITDA decreased by 9.4% to $11.1 million in Q1 2025, down from $12.3 million in Q1 2024. This was primarily a result of the increased investment in sales and marketing programs, partially offset by operational efficiencies and acquisition benefits. The Adjusted EBITDA margin decreased by 110 basis points to 10.0%.

Looking at the full year 2024, net sales were $508.5 million, down 10% from 2023, reflecting the broader industry softness. However, full year 2024 gross margin exceeded 30%, an expansion of 320 basis points, highlighting the impact of structural cost improvements. Adjusted EBITDA margin for full year 2024 was 15.8%, a 30 basis point increase despite lower sales, demonstrating the resilience of the improved cost structure.

Latham maintains a solid financial position. As of March 29, 2025, the company had $24.0 million in cash and $306.9 million in total debt.

Availability under the Revolving Credit Facility was $50.0 million, though the company had drawn $25.0 million, which was reduced to $22.0 million by May 2, 2025, with expectations to fully repay by the end of Q2 2025. Net cash used in operating activities in Q1 2025 was $46.9 million, reflecting the seasonal build in working capital (receivables and inventory) ahead of the peak season, including accelerated inventory purchases in anticipation of tariffs.

The net debt leverage ratio was 3.6x (3.3x pro forma for acquisitions) as of March 29, 2025, reflecting this seasonal working capital build and inventory pre-purchases. The company was in compliance with all debt covenants.

The interest rate swap fixes the SOFR rate on a notional $161 million at 4.37% through May 2026, mitigating some interest rate risk.

Outlook and Risks

Despite projecting U.S. new pool starts to remain stable with 2024 levels in 2025, Latham is guiding for meaningful growth, reflecting confidence in its ability to outperform the market. The company is maintaining its 2025 guidance for net sales between $535 million and $565 million, representing 8% growth at the midpoint. This is expected to be comprised of approximately 5% organic growth and 3% growth from the Coverstar acquisitions. Adjusted EBITDA guidance is maintained between $90 million and $100 million, representing 19% growth at the midpoint, reflecting the significant operating leverage from the structurally improved cost base and the accretive impact of acquisitions. Capital expenditures are projected to increase to $27 million - $33 million in 2025, primarily to support the Sand States expansion with new molds and facility upgrades.

Management anticipates progressively higher year-on-year comparisons in the seasonally stronger second and third quarters of 2025 as the seasonal ramp-up continues.

Key risks to this outlook include potential impacts from macroeconomic and geopolitical conditions, including reduced consumer confidence and elevated tariffs on imported raw materials. While imports are a limited portion (15-20%) of raw materials, the company is actively mitigating tariff risks through strategic pre-purchasing, supply chain adjustments, and targeted price increases. The reliance on dealer partners and the seasonality of the business also present ongoing considerations. However, Latham's focus on high-value products like fiberglass and automatic safety covers, its direct-to-homeowner marketing creating pull-through demand, and its operational efficiencies are designed to enhance resilience and capture growth opportunities even in a challenging market.

Conclusion

Latham Group is navigating a period of trough market conditions in the residential pool industry, but its investment thesis is centered on its ability to drive company-specific growth and leverage operational improvements to deliver outsized performance. By focusing on the inherent advantages of fiberglass pools, strategically expanding into underpenetrated high-potential markets like the Sand States, and vertically integrating the growing automatic safety cover category through accretive acquisitions, Latham is positioning itself for accelerated growth regardless of the immediate market recovery timeline. The structural improvements in its cost base, driven by lean manufacturing and value engineering, provide a foundation for significant operating leverage as volumes increase. While macroeconomic risks and tariff uncertainties remain, Latham's proactive mitigation strategies and its established market leadership, coupled with targeted investments in product innovation and market development, support the expectation for continued outperformance and margin expansion. For investors, Latham represents an opportunity to invest in a market leader executing a clear strategy to capture share and enhance profitability, setting the stage for potentially significant upside when the broader industry eventually rebounds.