An Interview with Scott Rajeski, CEO of Latham Pool and John Ewing
John Ewing:
When people ask me what I do every day, I like to tell them I try and find great businesses that your friends have never heard of yet. And when they ask me how I do that, it’s really by applying what we would call a “private equity mindset to public companies”, specifically in the small cap market. What that means is that with public markets, stock prices can move much more wildly than the value of the underlying business, and if you know how to value a business, you can take advantage of markets; selling when markets are euphoric or buying when markets are depressed. And I think our guest, Scott, is a great person to bring both of these ideas to life.
Scott is the CEO of Latham Group, started his career at General Electric from upstate New York. What I really admire about Scott is he struck a great balance of growth and profitability, and that’s not something you always see. Latham is the biggest maker of fiberglass swimming pools in North America, and their ability to grow through different market conditions while maintaining profitability and reinvesting in the business and taking out costs has been really impressive. When I’ve walked the factory floor with Scott, you can see that he’s been there before, he knows the people, he knows what to look for and I think he’s a really great leader. Since Latham is one of these businesses that your friends probably haven’t heard of before, we’ll bring it to life.
Again, the biggest maker of in-ground swimming pools in North America, and this is a company worth almost a billion dollars, half a billion of sales, leading market share. This is a serious company, even though it’s not a household name, and Ewing Morris is delighted to be one of the largest shareholders of Latham.
Scott take us back to when you became CEO, the company had a private equity owner, tell us why you think they picked you to lead this company.
Scott Rajeski:
When I was approached to become the CEO, I always had thought of myself as a finance guy, a really good CFO, and never really had a career aspiration to go higher than that. We started interviewing potential candidates and I talked to a couple good mentors of mine, one being my uncle and he said I’ve spent my entire career trying to become a CEO and someone’s pretty much handing you this opportunity, why would you not do it? I look back at the team, my years with GE, the training I went through under Jack Welch’s tutelage and said, this is just another challenge. I was afraid of the challenge at first but once I agreed to take this thing on, I decided to try to knock it out of the park and set some aspirations for this company that they’ve never seen before. We were a little under $200 million when I took that job on and I threw the first goal out there let’s be 300 million. After the first year we saw a path and I said let’s be a $400 million company. The third year I said let’s be a $500 million company, and then I scratched it and I said there’s no reason we can’t be a billion dollar plus company top line revenue if we continue to execute on the strategy of what we’re doing. So when I stepped into that role, I think I kept the private equity mindset of growth and profitability.
But also in the PE world, you’re always constrained with growth- what are you looking for? What’s the next exit? In two or three years we’re going to sell the business, we’re not going to over-invest and we’re not going to do things that will create long-term value. Invest. With Pamplona Capital Management, who bought the company in 2018, they saw the power of what we could do. They asked me, if we gave you a bunch of capital, where would you deploy it? How would you deploy it? What do you think the company could become?
We put the plan together and we started investing in growth and new marketing. We rebranded the entire company- we used to operate under 21 different brands, you’re never going to create a household brand name with 21 different brands and you couldn’t spend enough money. So we put it all under “Latham The Pool Company” and just started that approach and process.
I also built a phenomenal management team; if you looked at our management team, the C-suite and even one level lower in the organization are all from Fortune 50 companies: GE, Danaher, Stanley Black and Decker the list goes on. We’ve brought in world-class leaders who joined Latham for the same reason I did, we’re a very small niche company, a market leader and we have competitive moats in every area we compete in. The next largest competitor to us is subscale to us, operating one facility and one product line in one region of the country. We’ve developed this model that I think has done us well.
Just listening to a few of the speakers earlier I was thinking about myself and my family’s net worth. When we took the company public, I woke up one day and all of a sudden I was worth $140 million. It didn’t change my mindset of what I did in terms of how I was going to show up every day, take care of every one of my employees, every one of our shareholders, every one of our customers and every one of our dealers. I woke up a year later worth about $8 million when the stock dropped to $2 a share. I share this story because my friends said it the best- they’re like we never thought we’d know someone worth that much money and we never thought we would know someone who would lose that much money over a period of time either!
I think that tells a lot about myself and my approach. I’m not doing it for myself and my family, I’m doing it for you guys! The shareholders, the investors, the employees and the person who’s buying that swimming pool- that’s who we are, we’re passionate. We’re dealing with small family business owners, people who are running a $5 million business, a $10 million business, a husband and wife, two brothers, the homeowner who has a dream of a swimming – it’s always been a goal of many people in the US and Canada. People are like ‘you sell swimming pools in Canada?’ Yeah! It’s a really good market, the season’s just very short- get a fiberglass pool, because you can have it in a day.
John Ewing:
Take us back to that decision to go public. Why was it the right time to sell? What were the different options? Who drove the decision, and why was IPO the ultimate decision?
Scott Rajeski:
If you go back to that time, it’s 2020. We’re just getting ready to do our ‘coming out party’. We’ve rebranded the company with a new website and lead generation effort, then COVID hits and we have to make a decision- what are we going to do? Are we going to shut our facilities down or are we going to keep them open? That was probably one of the hardest decisions I had to make. I’m thinking about 1,800 plus employees- their lives and careers. Our customers, our dealers and family businesses who we’re going to impact. I made the call to stay open and looking back, it’s probably the best decision I’ve ever made in my entire life.
We stayed running and we were one of the only pool companies to stay running. People were locked up at home and we launched our campaign and tried to support our dealers. We launched all our lead generation and we flooded our dealers with more business than they can handle. Demand took off, pools start to take off all while other companies were going bankrupt. Sometimes I was the only person on a plane flying around the country during COVID to try to get deals done. We made a couple of acquisitions and while I was in South Carolina coming back from looking at a company, Goldman Sachs called and suggested we had a perfect opportunity and should take the company public.
We spent the fall of 2020 and early 2021 drafting a prospectus meeting with potential investors, testing the waters from the den at my house. There were months I didn’t leave my house, I would be working 16-20 hours a day. We made that decision to take the company public and it was very opportunistic. Valuations and consumer demand were soaring, and the outdoor living space has always been a very strong repair and remodel market. Pamplona Capital Management saw it as an opportunity to generate a huge return for their shareholders and we launched in April of 2021- being the first company to open the bell at NASDAQ post COVID.
When I got home that Saturday my oldest son gave me a card that said congratulations on all your success. It was a little pie chart made up of hard work, effort and caffeine- him being a wise guy marked it up with luck, covid and alcohol! He then said all kidding aside dad, you’ve built a great company, you’ve built a great team and I couldn’t be happier for you.
I look back and a part of it was luck- we were at the right point in time, when something was happening in the economy and we took off. We launched at a $19 IPO share price and we were oversubscribed multiple times over, hitting $35 a share two months later. Now, I look at this chart and I want to cry every day. John probably knows better than I do, we probably started talking late 2021 about Latham, the company, our market position and our competitive moat. We questioned what should we be, what should the valuation be, where could we go? And John continued to dig in, him and Darcy. We had a meeting every single quarter, sometimes twice a quarter after the earnings calls. They stayed engaged because they saw something. They got in at a very attractive price point late 2022 and what I really liked about John, Darcy and the whole team is they were one of the first who also said we want to go to a plant. I was hesitant, they’re not great looking facilities, but they wanted to dig into another level that folks did not understand.
We met several months ago in Brantford- it’s our local facility doing steel panels, in-ground liners, above-ground liners and winter safety covers. We spent three hours going through how the product is made, spending time with the team and sitting through presentations, then a few months later they asked to see the fiberglass facility because fiberglass is really the opportunity we have as a company. They visited our facility in Kingston- it’s the world’s largest fiberglass manufacturing facility and its completely state-of-the-art. It is one of the largest investments Latham has ever made in its entire history, and we own a great lakefront property which you know may be worth a lot of money at some point down the road. John and Darcy spent several hours there just to understand how a fiberglass pool was made.
In our view, there’s a lot of people who want a swimming pool, but this is a material conversion play. 50% of the pools in the US are concrete pools and a fiberglass pool provides these options: it’s 25-30% lower upfront cost for the consumer, you’ll save 35-40% lower operating cost over the lifetime ownership of the swimming pool and you can have it in a day; a concrete pool takes three to six months to construct. Fiberglass pools are 22% of the market right now, so we don’t need to see new pool starts take off again.
We’ve driven 600 basis points of gain and share since 2019 in a market that’s down 40-50%. In the time I’ve been with the company, we have outperformed all market cycles on the upside and the downside, and that’s where we sit today. We’re at the trough of where the market is and it’s ready to turn. Consumer confidence will improve, interest rates will continue to decrease, and we’ve invested in our company to be much larger. We have the capacity, the resources, and the people to be a billion dollar revenue company, without having to invest another dollar in CapEx. If you look at our profitability, we were 22% EBITDA margins in 2021 with 117,000 pool starts. We’ve touched 22% EBITDA margins in 3Q last year, 2Q this year and just under 20% in 3Q, this last quarter, in a market that’s doing 61,000 pool starts right now. When the market turns, the company’s going to really take off- but we’re not waiting for a market turn; we’re investing in growth strategies. We’ll be in Florida next week for a conference. 75% of all pool starts in the U.S. are in the sand states: Florida, Texas, Arizona, Nevada, and California- Latham is underpenetrated there. We probably account for only 10% of the pools in those states, so we’re doing a massive sand state blitz. We’ve invested in new products, promotional opportunities, marketing, and dedicated sales teams in each of those markets. If pool starts stay flat for another year or two, which I don’t believe they will, there is a huge opportunity to gain share and accelerate the top line growth. I don’t wake up every day worrying about the stock price. Typically, I come home, and my wife will say, “What’d you do wrong today?” And I’m like, “Why?” She says, “The stock went down 25 cents.” And I’m like, “I don’t know, I didn’t talk to anyone- I held 10 meetings in my office!”. It’s a great company, like John said, and Ewing Morris have been involved early on.
John Ewing:
Is that experience with us similar to the experience with other fund managers?
Scott Rajeski:
It’s not John, and that’s why I brought it up. Most people take the financial private equity “Wall Street” approach. There was one other firm who has done some of what you have done, but they’re not an investor, they’re kicking tires and maybe they will eventually jump in because they’re doing their homework like you guys did. But it’s not typical, the approach Ewing Morris takes versus the other top eight shareholders.
John Ewing:
When the stock got low, were you surprised that there wasn’t a private equity firm that tried to come and buy the whole company when the stock got down at two or three dollars?
Scott Rajeski:
There were conversations around what we do, but I wasn’t going to take it private again. It was hard taking it public and being a public company CEO, but I just didn’t think going private again was the right thing to really unleash the valuation of our company. It was the right market and timing. interest rates were rising and we were doing all the right things. I don’t think we saw people who understood what we could truly be and where the stock price was really going to go. And that’s where you guys saw that, you got in at the right point in time. Looking back right now, I like where we sit, I like where we’re going, and there’s a lot of upside opportunity. I think our two current PE firms also were supportive of the strategy and they knew the company was way undervalued. None of us would have been happy with a $4 private equity deal or even if you could find a strategic that might pay $5. We all believed that if the stock was $19 at the IPO, and $35 at a point in time, we will get back to those revenue and EBITDA margin percentage levels, and we’ll get there a lot faster than we’ve done it before because of the structural cost changes we’ve done. Four years ago we did not have any PhD material scientists on our team, we’ve now got nine people who show up every day thinking about value engineering, lean initiatives, how to take cost out of the product, streamline the facility and create free capacity as a company. We’re a huge free cash flow generator; we ripped a lot of working capital out of the company, and we’ve got the best service and lead times we’ve ever had in the history of the company.
If someone wants a custom pool and a custom liner we can turn it around in three days, right now, no one else can do that. We’re invested in technology and AI and created the Latham Measure, it’s a pool measuring device where you can go out in the backyard and measure a liner or cover in minutes. That was a process that used to take a builder four to eight hours and then over two weeks to transmit the data to design a liner. It now happens within 30 minutes in the backyard and as the AI tool learns, it will get faster and faster at measuring that liner, measuring that cover and then sending the cut sheet instructions right to the factory to produce that liner then ship it right back to a homeowner. The team are in Dallas right now launching that device at the International Pool Show and getting it in the hands of all our dealers, which again, is an opportunity to solve a problem for the builder, the pool installer and the pool dealer. It drives productivity and efficiency for us, improves the quality of the product for the homeowner and takes cycle time out, but we will gain share in the market by selling more liners out there.
John Ewing:
Building on what Elmer said earlier about this endowment model type of portfolio where you’ve got a foundation of low-cost ETFs complemented with high conviction, very purposefully selected individual investments in places like Small Cap. Scott talked about where we were building our position in Latham. Someone else was buying there too, Scott had a really well-timed insider purchase. But you know who wasn’t buying down here? Index funds. Latham’s not in the S&P 500 and this is why I think you need this complementary portfolio to make sure you get access to these wonderful businesses like Latham that your friends have never heard of, that are run by fantastic leaders like Scott. This is really what excites the research team at Ewing Morris. Scott, I really want to thank you and appreciate you coming to speak to the room here.
Scott Rajeski:
Thanks, John, Darcy and the whole team.
John Ewing:
If you need a fiberglass pool. Scott would love to sell you one!