Latham Group, Inc. Q2 FY2026 earnings call

Overall Q2 2026 performance: The company delivered strong outperformance against a flat U.S. new pool starts market, in line with management expectations, with early strategic initiatives already producing positive results.

• Core Strategic Priorities

• Grow the core business in established markets including the Northeast, Midwest, Canada, Australia, and New Zealand
• Drive material conversion from concrete pools to fiberglass pools in the Sand States
• Increase auto cover attachment rates on new pool installations, with a long-term target of an auto cover on every new full installation
• Complete accretive, culturally aligned acquisitions to expand market leadership and geographic reach
• Achieve sales excellence across all markets, pursue direct-to-consumer marketing, gain operational efficiencies via lean manufacturing and value engineering, and prioritize workplace safety

• Sand State Growth Progress

• Sand State sales grew at a double-digit rate in Q2 2026, with Florida (the initial target market) also delivering double-digit growth
• Management is implementing a targeted micro-market development framework, identifying high-potential communities with favorable demographic profiles and deploying additional on-the-ground sales resources to support dealer partners
• After successful early results in Florida, the company will expand this framework to Texas next, followed by Arizona and California
• National marketing campaigns are driving strong consumer demand: Q2 consumer leads up 60% year-over-year, website traffic up 30%, and Google search demand for Latham up over 100%, with Latham remaining the top searched fiberglass pool brand

• Operational and Organizational Initiatives

• Lean manufacturing and value engineering initiatives delivered $2.7 million in positive gross margin benefit in Q2 2026
• A restructuring and voluntary early retirement program generated $2.5 million in annualized savings, which will be redeployed to high-return growth initiatives; a one-time $1.5 million charge will be recorded in the second half of 2026
• The new "Zero is Possible" company-wide safety initiative has launched across all manufacturing facilities, representing a foundational cultural shift expected to improve operational discipline, reliability, employee engagement, and overall performance beyond safety outcomes

In Q2 2026, Latham Group reported total net sales of $197 million, representing 14% year-over-year growth, 10% of which was organic and 4% from the Freedom Pools acquisition completed in February 2026.

• In-ground pools: Net sales of $96 million, up 23% year-over-year (14% organic growth). This segment contributed 48.7% of total Q2 2026 net sales, and growth was driven by stronger-than-expected fiberglass pool demand. Fiberglass pools are on track to make up ~80% of full-year 2026 in-ground pool sales.
• Covers: Net sales of $41 million, up 10% year-over-year. This segment contributed 20.8% of total Q2 2026 net sales, with growth led by increasing demand for auto covers.
• Liners: Net sales of $60 million, up 6% year-over-year. This segment contributed 30.5% of total Q2 2026 net sales, with growth driven by Latham's proprietary measured-by-Latham technology and industry-leading lead times.

Gross profit for Q2 2026 increased 9.6% year-over-year to $70 million, with a gross margin of 35.5% (down 160 basis points year-over-year) due to $2.8 million in incremental ramp-up costs from the unexpected demand surge. Adjusted EBITDA was $45 million, up 12% year-over-year, with an adjusted EBITDA margin of 22.6% (down 50 basis points year-over-year). For the first half of 2026, total net sales were $315 million, up 11% year-over-year, with a flat gross margin of 34.1% and flat adjusted EBITDA margin of 18%.

Management raised full-year 2026 guidance for both net sales and adjusted EBITDA based on strong first-half performance, continued execution of growth initiatives, and current demand visibility:

• Full-year net sales growth guidance midpoint increased to 11.7% from 9%, with 8.4% expected organic growth
• Full-year adjusted EBITDA growth guidance midpoint increased to 15.2% from 12.7%
• The majority of the incremental $2.8 million in Q2 2026 ramp-up costs are expected to be recaptured in the second half of 2026
• The company expects to reach a net debt leverage ratio below 2.0x by the end of 2026
• Mitigation strategies including a recently implemented transportation surcharge and new price increases for vinyl liners announced in Q3 2026 are expected to fully or mostly offset commodity headwinds from higher oil prices tied to the ongoing Middle East conflict
• The long-term strategic profit model outlined two years prior remains fully intact, on track for delivery despite a stable to slightly declining overall market

• Unexpectedly sharp Q2 demand surge outpaced pre-planned production ramp-up, resulting in $2.8 million in incremental costs and a 140 basis point gross margin headwind in the quarter
• Ongoing Middle East conflict has pushed transportation and oil-linked commodity prices higher, and the recently implemented transportation surcharge did not fully cover elevated costs in Q2 due to implementation timing and price levels set below $100+ per barrel oil prices
• Fiberglass pool conversion expansion in the large underpenetrated Sand State market relies on successful deployment of additional sales resources, which depends on effective internal resource redevelopment from operational optimization programs
• Unseasonably early cold weather or snow could negatively impact Q3 2026 sales results
• Foreign currency transaction volatility negatively impacted Q2 2026 net income by $5 million and first-half 2026 net income by $6.4 million year-over-year

Q: What drove the better-than-expected Q2 demand surge, and is this driven by core share gains or faster-than-expected returns on new Sand State sales strategies? What caused the Q2 cost inefficiencies, and when will those costs be recouped?

A: Q1 2026 had unseasonably bad weather that created pent-up demand that released into Q2, combined with accelerating share gains from 12 months of strategic execution that culminated in the new selling season. Growth is broad-based, coming from national marketing traction, core market share gains in the Northeast/Midwest/Canada, and Sand State growth. The demand spike came faster than planned after light Q1 production, causing production underabsorption and overtime/hiring inefficiency; two-thirds of the $2.8 million incremental cost will be recovered in the second half as inventory is restocked, and the remaining one-third is isolated to Q2. Gross margin returned to normal trends by June/July 2026.

Q: Was the Q2 demand surge broad-based across geographies, and are you seeing increased demand for lower-priced pool options? Is Q3 2026 on track to outperform typical Q2-to-Q3 seasonality?

A: The demand lift was broad-based across all geographies, consistent with the company's national advertising strategy. Dealers are testing $50,000 entry-level fiberglass pool offerings to open new market segments, but it is too early to assess results. The Q3 order book is currently robust, and the quarter is expected to follow standard seasonal cadence barring unseasonably early bad weather.

Q: What is the expansion timeline for the Sand State strategy into Texas, Arizona, and California, and what lessons from Florida are being applied?

A: Texas is the next expansion market, and its market dynamics are very similar to Florida, so the same targeted micro-market segmentation strategy will work there. The company is currently understaffed in Texas, and will add personnel to cover San Antonio, Austin, and Houston, fully funded by internal operational optimization savings. After Texas, the company will first hire a regional vice president for Sand States West, then expand into Arizona and Southern California; the CEO will visit Arizona in two weeks to assess the market.

Q: What is the price/volume split of organic in-ground pool growth, and will further price increases be needed to offset ongoing input cost inflation?

A: Of 10% organic in-ground pool growth, 3 percentage points come from pricing and 7 percentage points come from volume/share gains, with all growth driven by fiberglass pools. After adjusting for the Q2 ramp-up cost and lower-margin Freedom Pools acquisition, core gross margin is actually slightly up year-over-year. Input cost impacts from the Middle East conflict will hit the P&L in mid-to-late Q3, and new price increases for vinyl liners were already announced earlier in Q3 as part of the company's mitigation strategy for these headwinds.

Q: How much investment is needed for Sand State expansion, and what is the company's M&A outlook with a projected year-end net leverage below 2x?

A: Sand State expansion only requires small incremental investment: national marketing is already in place, local marketing is low-cost, and new sales headcount is fully funded via internal optimization savings, so SG&A as a percentage of sales is not expected to increase. An additional $10 million in capex has already been allocated over 2025-2026 for new mold development and production debottlenecking for Sand State-specific pool models. The company is continuously evaluating M&A opportunities at its historical pace of ~1 deal per year, and a sub-2x leverage ratio gives ample dry powder for deals, but no transactions are currently ready to close; M&A is not needed for near-term Sand State expansion, which is being pursued organically first.