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

Thank you, and welcome to Latham's Q3 fiscal 2021 earnings call. Earlier this morning, we issued our earnings press release, which is available on the investor relations portion of our website, where you can also find the slides that accompany our prepared remarks. On today's call Latham's president and CEO, Scott Rajeski; and CFO, Mark Borseth.

Following their remarks, we will open up the call to questions. During this call, the company may make certain statements that constitute forward-looking statements.

Such statements reflect the company's views with respect to future events as of today and are based on management's current expectations, estimates, forecasts, projections, assumptions, beliefs, and information. These statements are subject to a number of risks that could cause actual events and results to differ materially.

Such risks and other factors are set forth in the company's earnings release posted on its investor relations website, and will be provided in our Form 10-Q for our third quarter of fiscal year 2021.

The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.

In addition, during today's call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliations of adjusted EBITDA to net income calculated under GAAP can be found in our earnings press release and will be included in our Form 10-Q for Q3 2021.

I'll now turn the call over to Scott Rajeski..

To ensure that our leads are as qualified and purchase ready as possible so that we can expedite conversion for our dealers. We have been successful in doing so, leveraging our recently launched My Latham tool and pool cost estimator application, which help homeowners define what they're looking for in a package.

We share this information with our dealers so that their follow-up is more substantive thus increasing their conversion rates. We also recently transformed the editorial section of our website, The Latham Blog.

Now on a more user-friendly platform with an updated look and feel, the blog includes informative and educational information for homeowners along each step of their pool planning journey.

The blog features content range from how to plan for a pool, what to expect with installation and ideas for landscaping to tips on seasonal maintenance and pool care. We are providing insight on all facets of the backyard experience and allowing users to cultivate a family dream of owning and maintaining a pool into a reality.

The enhanced user experience of The Latham Blog strengthens our position as a go-to resource for homeowners on all aspects of the pool buying journey and is already driving solid conversion into purchase-ready leads. Turning to our product portfolio.

We continue to invest in all three of our market-leading product lines and are especially excited about some of the capacity initiatives we have in place in fiberglass.

We are planning to break ground in Q1 on our new fiberglass manufacturing plant in Kingston, Ontario, which will be the largest in Latham's history, demonstrating our conviction in the success of our fiberglass conversion strategy.

This new plant will serve markets in both the eastern half of Canada as well as the Northeast and the upper Midwest of the United States. Additionally, we continue to expand our selection of fiberglass molds, which is already the broadest in the industry. We are launching a number of new pool designs, adding to the industry's broadest catalog.

These new designs will include innovative new entry features and tanning ledges, and offer an increased perimeter with perfect 90-degree corners. These shapes can be a sleek modern feel and are very much on trend with today's new pool buyers. Now turning to the exclusive relationships with our dealer partners.

Dealers continue to see strong homeowner interest in pools with orders booking out into 2022 and even into 2023, and our focus is on enhancing their productivity to build up more capacity to meet this growing demand.

Through our installation training and business excellence coaching offerings, we have a demonstrated ability to support our dealers as they grow. The investments we have made in this area are allowing us to be a key solution for a perennial industrywide capacity constraint.

We will continue our virtual training through the rest of the year with an incredible amount of new content that we are offering to both new and existing dealers. As we look out into 2022, we are excited to begin hosting in-person trainings at our new best-in-class training center in Florida.

Mark?.

Thank you, Scott, and good morning, everyone. Today, I'll review our results for the third quarter and first nine months of fiscal 2021 and provide an update on our outlook for the full fiscal year. All comparisons are on a year-over-year basis compared to third quarter and first nine months of fiscal 2020.

Please note that 2020 results do not include the acquisition of GLI, or our investment in Premier Pools & Spas which occurred in the fourth quarter of last year. Net sales for the third quarter were up by $34.5 million or 27% year over year to $162 million.

This year-over-year growth was primarily attributable to an increase in net sales, driven by increased volumes and price and the acquisition of GLI. These factors were partially offset by decreased year-over-year volume for our in-ground swimming pool category because of the constrained raw material supply you heard Scott speak about.

If we include GLI sales in the third quarter of last year, our sales growth would have been 6.2%. By product category, net sales for in-ground pools, which includes our fiberglass products, increased 7.6% to $84.1 million. Our covers product category sales increased 71.7% to $44.1 million and liners increased 42.4% to $33.8 million.

Gross profit increased by 1.4% to $51 million, mainly from our growth in net sales. Gross margin decreased to 31.5% compared to 39.5% last year. This represents 800 basis points of compression or 680 basis points, excluding the noncash stock-based compensation expense of $1.9 million.

To provide a little additional color, fiberglass products accounted for about two-thirds of the 680 basis point gross margin compression versus last year. The raw material shortage caused lower fiberglass sales in the quarter, and therefore, a less profitable mix of sales.

The lower sales level also caused a negative fixed cost leverage over our asset base and overhead since our cost structure is geared toward higher fiberglass production levels. A third factor is that we held on to as many of our operations employees as possible so that we can quickly increase production when additional resin arrives.

These factors, paired with our strategic decision not to fully reprice our backlog mid-season in the face of rising costs drove a particularly acute margin pressure in Q3. As we continue to secure more resin and more fully realize the benefits of our pricing actions, we believe year-over-year margin compression will improve.

Selling, general, and administrative expenses increased to $48.1 million from $20.1 million in the third quarter of 2020. This increase was primarily driven by a $24.7 million increase of noncash stock-based compensation expenses, higher salaries and wages associated with increased customer-facing headcount to support future growth.

The acquisition of GLI and the legal audit, insurance and professional fees associated with being a public company. This translated into SG&A as a percentage of net sales of 29.7%, up from 15.8% of net sales last year.

Excluding noncash stock-based compensation expense, SG&A was $22.4 million, an increase of $3.3 million and up 17.1% last year or 13.8% of net sales, a 120 basis point improvement versus last year. As a result, adjusted EBITDA increased by $0.9 million or 2.7% to $36.1 million and adjusted EBITDA margin decreased to 22.3% to sales.

During the third quarter, Latham supported the expansion plans of our strategic partner, Premier Pools & Spas by agreeing to reduce our equity position to support an equity infusion by another investor. We continue to hold a 20% equity stake in Premier Pools, and our long-term strategic partnership remains unchanged.

The gain associated with this transaction does not affect our adjusted EBITDA results. Net loss was $11.3 million or a $0.10 loss per share as compared to a net income of $17.7 million for the third quarter of fiscal 2020, driven primarily by noncash stock-based compensation expense of $27.6 million.

For the first nine months of 2021, net sales increased 68.7% to $491.6 million. If we include GLI sales in the first nine months of 2020, our sales growth would have been 42%. Looking at net sales performance in our three product categories, we have seen strong growth across our product lines. In-ground pools increased 68.4% to $285.7 million.

Covers increased 76.3% to $94.4 million and liners increased 63.4% to $111.5 million. Gross profit increased 54.4% to $161.8 million from $104.8 million for the prior-year period. Gross margin for the first nine months of 2021 was 32.9% compared to 35.9% for the prior-year period, primarily because of the supply chain headwinds we've discussed.

Excluding noncash stock-based compensation expense, gross margin was 34.3% or 160 basis points below the prior-year period. As a result, adjusted EBITDA grew 69.5% or $46.1 million to $112.5 million for the first nine months of 2021 and adjusted EBITDA margin increased to 22.9% from 22.8% for the prior-year period.

Net loss was $56.4 million for the first nine months of 2021 compared to a net income of $18.7 million in the prior-year period, driven primarily by noncash stock-based compensation expense of $104.6 million. Turning to the balance sheet.

As of October 2, 2021, we had cash and cash equivalents of $90.9 million, total debt of $234.2 million, and our net debt leverage ratio was 1.1 times.

Net cash provided by operating activities was $29.4 million for the nine months ended October 2, 2021 versus $55.1 million in the prior-year period, with the year-over-year decrease being driven by higher working capital to support our sales growth.

Capital expenditures totaled $6.2 million in the third quarter of fiscal 2021 compared to $3.5 million in the third quarter of fiscal 2020. The increase in capital spending was primarily related to our fiberglass capacity expansion initiatives.

Capital expenditures totaled $19.2 million in the nine months ended October 2, 2021, compared to $9.7 million in the prior-year period. I'll now share an update on our guidance for full year fiscal 2021. We affirmed the net sales and adjusted EBITDA guidance we provided on our second quarter earnings call.

Net sales of $600 million to $620 million, adjusted EBITDA of $130 million to $138 million. Today, we have updated our 2021 capex guidance to $24 million to $28 million to reflect our estimates for the current timing of our projects cash flows. We continue to move forward with the projects that made up our original guidance.

Our outlook for the year reflects our strong financial results for the first nine months of 2021 as well as our confidence in our ability to continue to drive the material conversion of fiberglass leverage our unique direct-to-homeowner digital strategies to generate leads for our dealer partners and capitalize on the outdoor living trends.

It also reflects our many efforts to continue to manage through raw material availability and its impacts. Scott, back to you..

Thanks, Mark. We are seeing continued strength in consumer demand as we head into the fourth quarter and are taking the necessary steps to counter raw material shortages.

As we look out to 2022, we are well positioned for another year of strong revenue and adjusted EBITDA growth, thanks to robust homeowner interest in pools, increasing dealer capacity and resin supply and our pricing actions. We have excellent insight into consumer demand, especially in fiberglass.

And our fiberglass order backlog is increasing, at the same time, consumers are seeing our new pricing.

We expect that when the full price increases have caught up to the fiberglass backlog, we will regain our historical trajectory of growing adjusted EBITDA faster than revenue by selling a more favorable mix of products, reaping the benefits of our marketing investments, manufacturing leverage from our sales growth and the ability to price faster than inflation.

I want to thank our teams for their unwavering dedication to supporting our dealers and homeowners. With that, operator, please open the line for questions..

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

Good morning, everyone. Thank you for taking the questions. I think everyone will appreciate all the detail and visibility you gave this morning in the comments and in that slide deck. So thank you all for that.

So on the backlog obviously, you're saying you protected the backlog in recent quarters, and you're in a position, if I heard you right, to sell everything you can produce far into '22.

When you get to the homeowner level, how do you gauge sort of how safe, for a lack of a better term, is the backlog in terms of preventing customers from dropping out just given lead times continue to push further and further out and you're getting quoted into '23. How do you kind of scrub the safety of that backlog? Thank you. .

Yeah. So Matt, good morning. First of all, look, I think from the 2Q earnings call, we heard maybe we weren't as open with all the details of what's going on within the business. So we listened to the feedback.

We wanted to make sure we clearly laid out there the situation on all fronts with resin backlog and the pricing dynamics, and I appreciate your comments on what we provided to you guys here this morning. Specifically to your question on the backlog and the consumer, would this have been a long lead time purchase decision for the homeowner.

If you've been waiting for a pool for six, nine months, 1.5 years, two years in that decision-making process, which sometimes it takes and you've told the family you're getting a pool, the likelihood of a cancellation is very, very low.

Second, I think we don't get the order from the dealer until they've kind of confirmed the contract with a homeowner. And at that point, we see very few cancellations, if any, at all, at that level feeding through. They've locked their slot, they're waiting, and we see almost zero risk in terms of cancellations of the backlog. .

Wonderful. That's great color. Thank you for that, Scott. Second one, it sounds like you're making a lot of permanent changes to mitigate future supply challenges. It sounds like diversifying suppliers, you're considering holding more storage capacity.

And I think, Scott, I heard you say that you're making changes to how you price longer-dated orders, which seems particularly relevant here as, again, folks are getting quoted out to 2023.

Can you elaborate a little bit on kind of how you're pricing now when you're thinking about these long-dated bookings? And maybe what's changed versus how you historically did it?.

Yes. There's a couple of things there, Matt.

One, I think working with our dealer partners to make sure they have flexibility in their contracts in the short term to reprice the consumer level as they see prices change more dynamically to not allowing orders to be on the books more than 90, 120 days, kind of thing like looking out 90 days from a quarter standpoint with pricing.

And I think the other thing we've done is maybe using more surcharges with flexibility where we can quickly change the magnitude of that at any point in time based on when an order will be shipping out. So it's not just one thing. I think it's multiple things with more dynamic pricing based on how inflation is moving rapidly on over time..

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

Thanks. .

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

Hey, guys. It's actually Gustavo Gonzalez on for Josh.

So I guess, moving toward price, can you guys kind of talk about the price step-up 3Q to 4Q? And then how should we think about carryover price into 2022?.

Nice to hear from you, and thanks for your question. We've been increasing prices throughout the year. We increased prices again in Q3. And as a result of that, we see this timing lag between the impact of the cost on our P&L and the timing of the price realization in our P&L is shrinking.

So we do believe that the gross margin compression we experienced here in the third quarter is the bottom of the trough, and we will start working upwards from this point into Q4.

As far as what we see carrying over into 2022 for -- on a cumulative basis, we've been seeing, I would say, low double-digit price increases this year that we would expect that would look to carry over into 2022..

Got it. That's helpful.

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

Yes. So Gustavo, first point is, I'd say resin availability is better now than we were 30 days ago, 60 days ago. New sources coming online, situation at our upstream vendor partners improving with the outlook. And I think that trend will continue.

I think more importantly, as we've talk about additional sources coming online as we move into early 1Q '22 and through the year, which is kind of why we feel so strong that every pool we can produce, we'll be able to sell next year. And with the size of the backlog, we're looking at a really good 2022.

In terms of the impact, I think there's a simple way to look at this. If we produce the same number of pools in Q3 that we had produced in Q2, it would have resulted in, say, $23 million to $25 million of additional revenue out the door. We clearly had the demand. We had the capacity and the facilities, we had the labor.

So that's kind of a way to just kind of quickly frame it up on a conservative outlook..

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

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

Thank you. Good morning, everyone. And I also want to thank you for the increased color and the helpful information on the slides there. My first question is, when we think about the guide for 2021, it implies that the fourth quarter EBITDA margin will be up about 300 basis points or so year over year.

When you think about the breakdown of that, you gave us a really helpful breakdown as we thought about the third gross margin and what the factors were there.

Can you help us to understand what the step-up will be in the fourth quarter and how these different parts will come together?.

Morning, Susan. Nice to hear from you. And thanks for your question. As you know, we don't provide guidance on a quarterly basis. But at this point in time, with our year-end guidance and our nine months in the bag, it's pretty easy to kind of back into what that range might be.

And again, as we think about profits going into the fourth quarter, the gross margin compression that we saw in the third quarter from all the various factors, primarily fiberglass, we see alleviating somewhat in the fourth quarter as we obtain more resin as we run our production facilities more efficiently, and as we get a more profitable mix of sales.

So I think when we look at those things and the ongoing strength of the order book and the demand for the products, we feel good about our ability to reaffirm the guidance that we have out there and deliver for the year..

That's helpful. And then as a follow-up, you talked in your remarks about seeing a continued improvement in the progression of margins in 2022.

Can you just give us some sense of the cadence that we should be thinking about there? Maybe any thoughts on the sequential movements and any differences relative to normal seasonality that we could anticipate as we think about some of these factors starting to improve for you and perhaps coming together..

Thanks, Susan. I'll take that one as well. As we think about 2022, I think there's some fundamental things that we're thinking about as we look into the business. One is demand remains incredibly strong, as you saw in one of our charts today. So we feel very good about demand heading into 2022. I think as you also know, we have a seasonal business.

So it's not just sequentially one quarter is better than the previous. And so with the demand, with the increased supply of resin, we're going to have plenty of capacity to manufacture additional fiberglass pools. So you put those things together, we feel very good about what we think we can deliver in 2022..

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

So I think that price inflation dynamic will become a great friend of ours as we move through '22..

Just a quick follow-up on that. When we think about the seasonality of the business next year, obviously, this year, there's been a lot of moving parts that have caused things to sort of move in different directions.

Do you expect that overall, the seasonality will be more normal in '22?.

Yes. Good question there, Susan. I think from -- I don't have a crystal ball, we don't know what could happen next year. But I think '21 was start of the reversion to the mean of seasonality versus '20. I think '22 will be another normalized year.

But again, weather, a late winter, early spring, could move that a month or two as we've seen historically in the business. But I'd say it should be more normal. I think we all hope it will be more normal..

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

Hey everyone. Good morning. Thanks for taking my questions here. So just in regard to some of the additional data you provided, it's nice to see the demand trends still very strong throughout the Q3 period.

So just internally, have there been any discussions or plans to sort of meter or hold back new order growth in some way? Were there -- that's sort of a pullback on digital advertising or some other actions to allow for production to catch up with the level of new order demand you're seeing.

Is there any discussion of that within your current growth situation? Just how do you think about that in terms of the brand opportunity?.

Yes, Dave, we've not slowed on any front. If you look at the capacity chart, right, we've continued to add capacity on the growth capex standpoint front across all business categories. We've continued to try to ramp labor -- staff labor, get all the rest we need for the outlook to reduce that backlog with the strong demand we're seeing.

And again, seeing orders out into 2023 as well. The one thing -- and I think we talked about this on the last call, we have kind of slowed down the lead engine from the search standpoint because the organic piece of that has taken off so great for us.

I mean the leads we're generating are still far outpacing what anyone can actually get in the ground or fulfill. So we don't feel the need to do that. Again, that's the result of the strong marketing engine that the team has created here.

So I'd say it's full steam ahead on all fronts to keep the capacity well ahead of the demand to try to shrink that backlog and realize that revenue in '22..

Got it. Okay. And then just a more qualitative follow-up. You mentioned the resin situation for you improving versus the last 30 or 60 days.

Is that more of a comment just on the overall raw material availability or supply chain dynamic in the broader marketplace? Or is that more of a function of these internal actions you've taken recently to work around these ongoing issues?.

I'd say both, it's a combination of both. If you go back to the March time frame when the deep freeze hit, the team kind of rallied and started to look at a lot of different options. I think those options are now coming online, flowing through for us, giving us incremental volume well more than what we'll need us to move forward.

And I think the general issues around resin with some of the upstream vendors and some of the supply inputs and challenges, whether it was the epoxy or the methacrylic acid, that situation is improving kind of post the hurricane and the catch-up. And look, I think that volume is still ramping as we talk.

But I think specifically for the resin, it's both from a situation getting better. And again, just working closer with our dealer partners to understand their dynamics and challenges they might be facing..

Thanks, guys. Appreciate it..

You're welcome, David..

[Operator instructions] The next question will be from Ryan Merkel from William Blair. Please go ahead..

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

Ryan, good morning. I'd say it's full steam ahead from a sales order standpoint. Digital lead hits on the website, the new blog, the pool cost estimator.

And I think we continue to launch new content out there, and we will continue to do that as we move through '22 with a lot of new and exciting things that will be coming and it's really not had any impact on demand. Now again, kind of the seasonality of business as you're in 4Q, there's a natural slowdown as you approach the holidays and all of that.

But other than I'd say seasonality aspect, we're outpacing prior year, strength looks good and had a couple of opportunities to chat with several of our customers, bigger customers last week. And they don't plan on stopping until Christmas, which again bodes well. I think that was a comment we've made before, dealers are all tired.

It's been a long two years for them with a lot of business, but they're all talking about working right until the end of the year and looking forward to a really, really strong '22 and into '23, which is great for all of us..

Got it. That's great to hear. All right. And then I wanted to follow up on price. Not sure how much detail you want to provide. I know you said price would be up double digits this year.

But my question is in 4Q, are you exiting at sort of a mid-teens price level? And then the second part, do you need more price at this point? Or do you think you have enough?.

Ryan, it's Mark. Thanks for your question. Good to hear from you. We've raised prices several times this year. We raised prices again on several product lines in the third quarter. On a cumulative basis, we're looking at low -- I will just reiterate the low double digits at this point in time.

And we're going to continue to monitor that situation as we go forward. So we'll see what the environment brings. But for right now, we like the prices that we have out there, and we expect to see that timing lag between price and our costs up, continue to diminish as we go forward..

Helpful. Thank you..

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

Good morning, everybody. Very muscular presentation this morning, guys. After all the equity volatility we saw in the quarter. So I think you guys are very much on the right track as others have commented in terms of clarifying the business. So of the sequential sales decline in fiberglass pools that you highlighted, Scott.

How much of that would you say -- can we assume -- I mean, is that just a percentage wise, was there any big mix in there? I mean, because of the volume declines, and where I'm going, if I can assume that's all volume declines as opposed to mix would be roughly, I think, Mark, you said two-thirds of the gross margin decline was related to fiberglass.

Could you split that in terms of how much of that was the volume versus cost impact, right? Because there are two different metrics, obviously, in terms of your fixed cost absorption versus the higher cost? Just trying to get a sense of that..

Ken, good morning and thanks for your comments on the presentation. 680 basis points of margin compression with two-thirds of that in the quarter coming from fiberglass. And certainly, mix is a portion of that.

I mean, Scott mentioned just sequentially what kind of sales impact that had on us Q2 to Q3, but mix being a component and then just resin availability or lack thereof of having enough, right, drove some inefficiencies in our factories. And then we also have the timing gap on pricing versus costs that we talked about.

We've not separately broken those out at this point, Ken.

But that two-thirds of fiberglass as we think forward then into Q4 and around margin compression as we bring more resin in, as we produce more pools, we look for a better mix and better efficiencies in our factories to help going forward and get back on a better margin or better profit trajectory..

Good. Is it fair to say I'd like -- I really appreciate your comments, Scott, around the -- how you're interacting with your dealers so that's kind of we talked about is how does that happen when this new inflation environment.

Can you talk about how the dealers have I guess, been understanding of this new paradigm where we need to be a little more disciplined around contract duration, how they communicate to their customers? Your surcharges, which it's not -- we've had Sherwin-Williams put in surcharges, we've had Stanley Works is putting in surcharges to large customers, obviously.

So can you kind of talk about how that relationship because I don't think it's adversarial, right? But just kind of how they're working through that and how that gives you confidence versus where you were, let's say, two quarters ago before these issues really impacted you?.

Yes. So look, the dealers are all really good business people out there in the industry. They've been around for a long time. They've seen a lot of different environments in markets. I think we've all had to change our business model on many fronts in terms of what we do. And we've had to have some difficult conversations.

And look, I think there's some folks who've been really good in terms of how they price contracts out in the future, anticipating a level of inflation that's going to be out there. I call that a good business practice staying ahead of the curve.

I think they also understand that look, no one likes a price increase, but I think the protection of the backlog was helpful for them this year to work through it. We've slowly put the surcharge out there. We've increased it a few times. We'll continue to monitor it.

I think it's just having good open dialogue with our commercial team, our new commercial leader Josh out there with the sales organization, having these open honest conversations. And it's just a new way of thinking and we'll continue to work with them. And look, a lot of these folks have been with us for 20, 30, 35 years long-term relationships.

And I think they appreciate the openness and the honesty. And look, they're a critical part of our supply chain across the board. And that's why we said all along, we've got great long-term business partners who kind of hang in there with us through the thick and thin..

Yes. Yes. As we think about '22, given your slide presentation, specifically Slide 6, all very, very good stuff. So what do you think is the capacity of your dealers, right? So obviously, you guys had your own internal capacity issues or not capacity, but throughput.

Do you think the industry's ability to actually dig holes as it relates to getting all the -- whether it's equipment or the pieces to actually get the pool functioning. What do you think that is? Because that obviously seems pretty important, right? Like what that part of the channel can do.

I mean do you think that's at the 20% growth capacity next year that we saw this year in new pools, perhaps? Or how would you frame that up for us?.

Yes. So Ken, I think you're right. Dealer capacity is a critical piece of how this industry will continue to grow. I think it goes back to the magic of the fiberglass material conversion story we've been talking about. And again, if we go back to kind of the metric I've been quoting for a while, let's just say, an average dealer's doing 10 pools a year.

And in the fiberglass world with 40 installation weeks of capacity if you did one pool a week, you could easily get to 40 as you go through that conversion cycle. So a stand-alone dealer with a crew of one has plenty of capability to go from 10 to 40.

And we've talked that if they could get to the point where they're performing as a high-performing dealer doing three a week, that's 120 pools a year. So the capacity is there, but you had a really good point everything else they need to put that pool on the ground has also got to click. The equipment, the PVC piping and other stuff.

But when you look at what's happening in the rest of the supply chain in the pool industry, everything is getting better. It's all improving as we move away from the deep freeze in Texas and where we were, inventory positions improving. And again, back to the dealers. The dealers are getting smarter with how they run their businesses.

Standing up on early buys and getting equipment stored and buying ahead on materials, looking out at their backlog of what they need.

So I don't worry about dealer capacity as we move forward, as we continue to coach, teach and train, and stand them up and bring more dealers into the fold, I don't think that will be a limiter as we look out into '22 and '23..

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

Thank you. This is Judy in for Keith Hughes. And just to clarify, I'm looking at the monthly resin supply slide that you had. It seems like in the first quarter, you managed your in line or a little ahead on the price increases.

Is that right? And then it was not until the second quarter where you headed the mix of price and reprice sales?.

Judy, could you repeat that because I didn't catch the first part of the question, sorry..

Right. I was just looking at where you -- the slide you had like in March, where you had sort of the resin supply issues and increased costs.

But it seems like in the first quarter, you kind of managed your costs and you had some increases there, but it wasn't until the second and third quarter where you had the greater mix of what was price and not repriced? So you were ahead of costs in the first quarter.

Is that right?.

Yes. So if you look at just, let's say, the supply issue, right, the way the lead times work with supply coming in on the resin base, how we stock, store, manufacture pools, lead times, inventory on the ground. You take all of that -- we had the resin we needed, we kept running.

And again, it was kind of a line to continue down and it really amplified at end of June and accelerate as say, July, August, bottoming out kind in September. And again, we had inventory on the ground. We were able to liquidate some inventory and move pools through as we're building those custom pools to order.

And I think it was really in 3Q where it really kind of caught up to us where we didn't have the resin to run hard and marks it back on the margin compression, the 680 basis points. Two-thirds of that fiberglass.

Again, a lot of the manufacturing inefficiency where we kept all the costs, kept the plans, kept the labor, redirected them to build molds, do maintenance on molds kind of -- if the factory is ready to run full steam ahead when resin came in. So I think that answers your question.

Mark, do you want to comment?.

I would just add that this speaks, I think, directly to the timing issue that we have between price up and the cost we're seeing on the P&L and the strategic decision not to reprice our backlog. And as we entered into Q3. We saw that cost and inflation continue to accelerate in Q3.

We implemented a surcharge to partially pass some of that along to the backlog, and we just recently announced an increase in that surcharge. So we've monitored the situation very closely. And we think the margin compression, the worst of that is behind us and should start improving as we move into Q4..

Great. Thank you..

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

Hi. Good morning. Thanks for taking my questions. So just following up on the price cost lag. Can you just talk about how far out the backlog is that's priced lower.

Like how far out is the backlog that you're protecting? And when might that start to roll off?.

Yes. So we're not going to disclose specifically how far out we are in the backlog with the actual numbers, Rafe.

I think as we come back and say we've bottomed out kind of in 3Q and the resin supply improves, and the pricing, the surcharges start to catch up with the flexibility and new announcements that we've launched here in the last several months.

I think that will be an improving situation from a margin compression standpoint as we roll through 4Q into 1Q. And I'd say we'll continue on as we go through all of '22 and out with the new dynamics of what we're doing there..

And then as you think about the price increases going forward, maybe not just the price increases that you're pushing through to the dealers. There is inflation everywhere.

How do we think about the relative cost of fiberglass pool compared to a concrete pool? Do you think that the value proposition is getting better with this inflation environment? Like are concrete pool prices going up more? How do you think about your supply chain situation compared to some of your competitors?.

Yes. I truly believe the favorable economics for fiberglass pool versus a concrete pool still hold in our original thesis, lower upfront cost and a total lower cost of ownership. And again, concrete steel rebar, everything that goes in to build in a concrete pool is up.

And more importantly, when you think about the size of a labor crew and the labor constraint that's out there and the length of how long it takes to construct a concrete pool.

And again, if we said the 75% of that cost is labor, that's a significant increase they're taking on the labor front as well, maintaining those crews to get the pool on the ground. So look, I'm not going to say it's better or worse. I think the thesis still holds very strong as we move forward, and we'll continue to drive that..

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