Acushnet - Earnings Call - Q1 2022

Transcript

Speaker 0

Good day, and thank you for standing by. Welcome to the Acushnet Holdings Corp. Q1 twenty twenty two Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Sandra Lennon. You may begin.

Speaker 1

Good morning, everyone. Thank you for joining us today for Acushnet Holding Corp. First Quarter twenty twenty two Earnings Conference Call. Joining me this morning are David Maher, our President and Chief Executive Officer and Tom Pacheco, our Chief Financial Officer. Before turning the call over to David, I would like to remind everyone that we will be making forward looking statements on the call today.

These forward looking statements are based on Acushnet's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see today's press release, the slides that accompany our presentation and our filings with the U. S. Securities and Exchange Commission.

Throughout this discussion, we will make reference to non GAAP financial metrics, including items such as revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today's press release, the slides that accompany this presentation and in our filings with the U. S. Securities and Exchange Commission. Please also note that when referring to year to date results or comparisons, we will refer to the three month period ended 03/31/2022, and the comparable three month period.

With that, I'll turn the call

Speaker 2

over to David. Thanks, Sandra, and good morning, everyone. I am pleased to report on Acushnet's first quarter results and outlook, share our early read on the start of the twenty twenty two golf season and provide an update on the state of the company's supply chain and some of the actions we are taking to expand our capabilities for the future. And I will start off by announcing that Acushnet's Board of Directors has approved the payout of our quarterly dividend of $0.18 per share or about $13,000,000 in total. As you have often heard us say, returning capital to shareholders is an important priority within Acushnet's capital allocation strategy.

Now getting right to our results, I will begin by sharing a few of Acushnet's many early season highlights across professional and competitive amateur golf landscape. Titleist and FootJoy are off to fast starts across the worldwide tours where more players choose Titleist golf balls than all other competitive models combined. The same is true for FootJoy shoes, which have been the number one shoe in golf for over seventy five years. There were many highlights to report. Titleist and FootJoy brand ambassador Cam Smith won the Players' Championship.

Scottie Scheffler won the Masters trusting Pro V1. Jennifer Cupcho won her first major championship playing Pro V1 and wearing FootJoy shoes. And the winner of the Augusta National Women's Amateur relied on Pro V1X, Titleist golf clubs, and FootJoy shoes en route to winning one of the most prestigious events in women's amateur golf. Pyramid of influence validation and our team's ability to develop leading products to help golfers play their very best are central to the enduring and sustaining success of the Titleist and FootJoy brands. And with this performance validation as a backdrop, I am pleased to report that Acushnet followed up 33% full year sales growth in 2021 by delivering first quarter sales of $6.00 $6,000,000 an 8% constant currency increase or 4% gain on a reported basis as compared to Q1 twenty twenty one.

Growth was driven by new product introductions across our portfolio, and the company delivered adjusted EBITDA of $120,000,000 for the period or just shy of a 20% EBITDA margin. Now looking at our quarterly results by segment. Golf balls were off 6% as we comped against last year's record Pro V1 launch and managed tight availability caused by raw material shortages, which have limited our production levels. Despite this constraint, we successfully launched new AVX, Velocity and TrueField golf ball models and built up inventory to support the upcoming global launches of new TourSpeed and Tour Soft models. As noted on our last call, we made the decision to defer these launches from Q1 into Q2, and these plans are right on track.

Titleist golf clubs were up 3% in the quarter as demand is strong, and our team did great work launching new Voki SM9 wedges and Cameron Phantom putters. Titleist club sales in Q1 were up over 75% compared with pre pandemic twenty nineteen Q1 levels, which is a testament to our product development engine and ability to flex output to meet increased demand.

Speaker 1

And coming off last year's 29% growth, the Titleist gear business was down 17% in the quarter and has been impacted by supply shortages from last summer's Vietnam factory closures, port congestion and warehousing and fulfillment backlogs at our Midwest DC. In response, we have been expanding

Speaker 2

distribution capabilities to reduce our order backlog and keep pace with strong demand levels. And FootJoy continues to build momentum, growing 24% in the quarter with double digit gains in footwear, apparel and gloves and great energy around new TOR Alpha and FJ Fuel footwear franchises and the Spring twenty two apparel collection. And while FootJoy's growth has been significant, it has also been constrained by the same U. S. Fulfillment delays that have impacted Titleist gear.

And rounding out the quarter, our Schuh's golf, ski and lifestyle categories all grew double digits as our team continues to build momentum and innovate with technical fabrics and leading cold, wet and warm weather performance products. And finally, we're also very pleased with the performance and growth of our Titleist apparel line in Korea as our design team continues to innovate in this premium and dynamic apparel market. Now looking at our business by region. U. S.

Sales were off 4% with golf balls beating our expectations and Gear and FootJoy trailing as volume shifted from Q1 to the balance of the year. EMEA grew at an accelerated rate off low comps from last year when much of the region was in lockdown. We continue to see healthy participation and strong demand across our entire product line on both the continent and in The U. K. The UK, in particular, is expecting a busy year as the one hundred and fiftieth Open Championship takes center stage at the old course in July, and golf courses prepare for a busy year as golf tourism makes a full return in 2022.

Japan was off 11% at constant currency and 19% reported, yet the quarter was in line with our expectations. Given new product launch timing this year, we expect Japan's performance in 2022 to be weighted towards the second half. And Korea grew at 17% constant currency and 8% reported, with gains coming from balls, clubs, FootJoy and Titleist apparel. The Korea market remains vibrant, and our team excels at executing our playbook and connecting with our target consumer. Now looking forward, the golf industry's vital signs remain healthy, and we are optimistic about the overall state of the game and industry.

Participation is strong, golf courses and retailers are financially secure, and the industry continues to play catch up against continuing heightened demand. First, looking at rounds of play. Q1 rounds were off 8% in The U. S. As wet weather impacted most central and northern regions.

Despite this decline, we were pleased to see play increases in open markets of Arizona, Florida and Hawaii. Outside The U. S, rounds increased in the quarter with gains in EMEA, Japan and Korea more than offsetting China declines resulting from lockdown. Overall, we see this as a healthy start to the twenty twenty two golf season, especially given the record participation and high bar set in 2021. And now looking at Acoustis retail inventory positions.

Our channel inventories remain low in most product categories and regions and most notably in golf balls and Titleist gear. As Tom will address, Acoustic inventory at the start of Q2 was about $120,000,000 higher than last year, which will help as we seek to keep pace with demand and replenish channel inventories. And specific to Acushnet's supply chain, while macro challenges are expected to persist, we continue to make meaningful progress in key areas of our business. Starting with golf balls, raw materials availability has improved in recent weeks to the point where we will be in a position to return to full production levels in June. As you may recall, these raw material shortages, which resulted from last year's Texas storms, have limited our golf ball production output since last August.

As this situation improves, we expect that it will have some positive impact on 2022, yet most of the benefit will come in 2023 in the form of more normalized inventory and availability, particularly heading into Q1. As noted earlier, we are expanding our Titleist gear distribution and fulfillment capabilities to improve availability and lead times. We expect to make good progress in Q2 and have modified our warehousing plans for the back half of the year, taking early receipt of second half inventories as a hedge against potential logistics delays. And lastly, we are in the process of adding capacity to keep pace with growing demand for FootJoy products. Our JV shoe factory is operating at full capacity, and we are looking to expand production into Vietnam to develop additional capacity and further diversify our footwear supply chain.

Similarly, we are also expanding embroidery capabilities to keep pace with growing demand for logoed FJ apparel. In closing, I'd like to thank my Acushnet teammates for their commitment to excellence as they strive to keep pace with strong demand and adapt to get the most out of our supply chain. We're enthused about 2022 and our long term prospects for growth. Thanks for your attention this morning. And with that, I will pass the call over to Tom.

Thanks, David. I would like to begin by thanking all of our associates for the exceptional effort they have put forth to manage through high demand and continued supply chain challenges to help deliver yet another strong quarter for Acushnet, getting 2022 off to a very good start. Starting on Slide nine, our results were largely in line with our expectations for the quarter. Consolidated net sales were $6.00 $6,000,000 up $25,000,000 or 4% reported and almost 8% level FX compared to last year. Overall, demand remained strong and this increase was driven by higher sales volume and ASPs across all FootJoy product categories and higher club sales of new Vokey SM9 wedges and T Series irons.

These increases were partially offset by decreased sales volumes in Titleist golf gear and Titleist golf balls. Gross profit for the first quarter was $317,000,000 up $6,000,000 or 2% versus 2021, and gross margins were 52.3%, down 120 basis points. The

Speaker 1

increase

Speaker 2

in gross profit comes from higher FootJoy sales volumes, which were partially offset by lower Titleist gear sales and higher component costs in clubs. In addition, higher inbound freight costs across all segments negatively impacted gross profit. Gross margins were down compared to 2021, driven by lower margins from FootJoy, Clubs and Gear, partially offset by higher margins in golf balls from higher overhead absorption. SG and A expense in Q1 was €196,000,000 up 11%. The increase comes primarily from continued investments in the business to support increased levels of demand, including higher selling, distribution, IT related consulting and higher advertising and promotion costs.

R and D expense was $14,000,000 up $2,000,000 compared to 2021. Income from operations was $105,000,000 for the quarter, which was $15,000,000 lower than last year. Q1 interest expense was down $2,000,000 and our effective tax rate was 20.4%, which is lower than the prior year as a result of a shift in our jurisdictional mix of earnings. Net income attributable to Acushnet Holdings was $81,000,000 down $4,000,000 and our Q1 adjusted EBITDA was $120,000,000 down $15,000,000 compared to 2021. There is a reconciliation of Q1 net income to adjusted EBITDA in our earnings release as well as in the appendix of the slide presentation.

Moving to Slide 10, We continue to benefit from the strength of our balance sheet. At the end of Q1, we had about $113,000,000 of unrestricted cash on hand. Total debt outstanding was approximately $4.00 $9,000,000 and we had $3.00 $7,000,000 of available borrowings under our revolving credit facility. Our leverage ratio was 1x at the end of Q1 twenty twenty two, about the same as Q1 last year. Accounts receivable at the end of Q1 was $377,000,000 down $10,000,000 from the prior year.

DSOs improved by six days. Our consolidated inventory at the end of Q1 was $449,000,000 which was up 36% from Q1 of the prior year with increases across all segments. Although we were able to increase our inventory levels during the quarter to better enable us to meet the continued high demand for our products, we are not yet at our desired inventory levels as demonstrated by our day sales and inventory, which were down to one hundred and twenty eight days compared to one hundred and forty six at the same time last year. Cash flow from operations for the first quarter of twenty twenty two was an outflow of $164,000,000 compared to an outflow of $30,000,000 in Q1 of last year. The higher cash outflow was primarily from changes in working capital, which resulted from larger increases in accounts receivable and inventory and a higher decrease in accrued expenses compared to the changes in those balances in the prior year.

And we continue to make investments in the business in the form of capital expenditures. We spent 11,700,000 on CapEx in Q1. Included in that, we spent about $2,600,000 towards our strategic golf ball capital investment program, which brings the cumulative total to $16,300,000 We continue to expect our full year CapEx to be approximately $60,000,000 Turning to Slide 11. Our strong financial results have enabled the continued execution of our capital allocation strategy. Our highest priority remains investing in product innovation, golfer connection and operational excellence.

We continue to pursue acquisitions that align with our focus on premium performance products that appeal to dedicated golfers. We believe that these investments will advance our long term strategy and drive growth at a favorable return. Generating strong free cash flow and returning capital to shareholders also remains a high priority. In March, we paid our previously announced Q1 dividend, which resulted in a cash outflow to shareholders of 14,000,000 And as David mentioned, our Board of Directors today declared a cash dividend of $0.18 per share, payable on June 17 to shareholders of record on June 3. During the quarter, we repurchased 1,200,000.0 shares for a total of approximately $59,000,000 At the end of Q1, we had approximately $39,000,000 of share repurchases remaining under our current authorization, and we now expect to complete this authorization in Q2.

On April 28, our Board approved a $150,000,000 increase to our share repurchase authorization. Assuming continued strong financial performance and favorable market conditions, we will continue actively repurchase shares and would expect to complete this new authorization over the next year. Our capital allocation strategy remains an important element of Acushnet's value proposition, which we continue to believe creates a compelling long term total return for our shareholders. Moving to Slide 12, despite our team's effective management of supply chain challenges thus far, the situation remains complicated. We continue to experience raw material constraints, rising material and component costs and elevated inbound freight costs.

We have also seen higher distribution costs as we work to manage through logistical challenges to get product to our customers. On a more positive note, our golf ball manufacturing utilization has increased, which is improving our overhead absorption. And some of our operating expenses are expected to grow at a slower rate for the year than previously anticipated. Taking these factors into consideration, we are reaffirming our previous full year guidance. We continue to expect our full year 2022 consolidated net sales to be in the range of 2,175,000,000.000 to $2,225,000,000 This includes approximately $55,000,000 of negative foreign currency impacts.

On a constant currency basis, consolidated net sales are expected to be up between 3.86.1%. And we continue to expect full year adjusted EBITDA to be in the range of three twenty five million dollars to $345,000,000 Regarding the timing of our business in 2022, we continue to expect first half consolidated net sales to be a little more than 50% of full year sales and first half adjusted EBITDA to be about 60% of the full year. In conclusion, our associates and trade partners helped us manage through a volatile environment with continued high demand and supply chain challenges to deliver solid results for Q1. While we continue to expect supply chain issues, we remain confident in our ability to meet our twenty twenty two financial goals and to deliver a long term total return for our shareholders. With that, I will now turn the call over to Saundra for Q and A.

Speaker 1

Thanks, Tom. Operator, could we now open up the lines for questions?

Speaker 2

Okay.

Speaker 0

And your first question will come from Kevin Heaney with JPMorgan. Your line is open.

Speaker 3

Hi, guys. Good morning, and thanks for taking my question. And congrats on the strong 1Q result as well. Guess just looking at the full year outlook and following the strong 1Q, and you talked about the supply side expected to improve, I guess, are there any factors or things you're seeing in the business to consider kind of in the balance of the year that led you to hold that initial outlook for the full year?

Speaker 2

Yes. Kevin, I would say really two themes come to mind. First off, the quarter came in largely within our expectations. And secondly, it's generally our practice to get through the second quarter before we make any meaningful shifts or adjustments to our full year outlook, right? We're still at a time of year where the game and industry is just opening up in many regions.

And Q2 is always such an important and critical quarter. You've got weather potential. You've got sell through realities that you learn from your what is the sell in and pipeline of your products in the first three, four months of the year. So I think where we sit today is generally where we typically would be this time of year. We like the way we started.

As you heard on our call, a lot of puts and takes from a supply side standpoint, but more than most, feel we navigated that journey pretty well. But again, as it relates to any meaningful changes to our long term outlook, we generally like to get through the second quarter before we start to direct one way or the other.

Speaker 3

Got it. That's helpful. And if I just a follow-up on your comments about the industry, which you see as structurally healthy. I guess, could you just unpack that and elaborate a bit more on, you know, how you see, you know, participation trending as we enter the peak season here in the northern markets? And overall, what gives you confidence in that structural health of the industry broadly in 2022?

Speaker 2

Yes. A couple of pieces to that, but does start. It starts with the golfer. And it's always interesting when you try to make sense of participation in Q1 because it is largely a weather story. And as I noted earlier, rounds in The U.

S. Were down and increased ex U. S. For a small net positive early days in the year. But what we're seeing is far more of a weather story than a structural participation story, right?

Where weather is good, and it has been good in Florida and Arizona and Hawaii, rounds are up. And we think that's just a positive indicator for the game. The rest of the country, not surprising, the first quarter, you've had cold and wet weather, it was colder and wetter than it was a year ago, therefore rounds were down. And again, around the world, early days in Q1, but EMEA, Japan, Korea, to nice starts. So when we talk about the structure of the industry, we always begin with which way is the golfer heading or trending.

And again, we're off to a decent start. But thus far, it's been more of a weather story, is frankly kind of a normal approach to the industry. A couple of other components would be just a broader health of our trade partners, whether it be golf courses around the world or golf specialty retailers. They're very strong, right? They've had a very successful couple of years.

Investing in their own business. They're investing in the experience for golfers, and we view that certainly as a positive. I'd layer in structurally the inventory realities in golf and certainly within the Acushnet company. We continue to play catch up. And again, that's just a function of where our inventory levels are below their normal or what we would consider to be optimal levels.

So those three components really frame our assessment of the industry as being structurally in pretty good shape for this time of year. And our outlook is void and certainly influenced by that strong structural view.

Speaker 0

Great. Thanks very much.

Speaker 1

Thanks, Kevin. Operator, next question.

Speaker 0

Your next question will come from Brian Harbour with Morgan Stanley.

Speaker 4

Yes. Hi. Good morning, guys. Good morning. Maybe first question just on sort of the gross margin side, and you had provided some comments before about where you thought that would what you thought that would look like for this year.

In your comments on kind of raw material availability and some of the fulfillment items that you're doing were helpful. I guess the other question then would just be, there's been changes in kind of commodity costs and stuff like that. So I'm curious if there's anything that has changed recently with regard to input costs. We've also seen movement in kind of freight costs, both on the trucking side and then also on kind of the ocean freight side. I'm wondering if any of those change how you think about kind of

Speaker 2

gross margin progression for this year? Yes, Brian, thank you. Coming into the year, we had anticipated that our gross margins for the year compared to last year would be down about 20 You know, we now think that would be down closer to 40 basis points, and there's a number of puts and takes there in terms of what's driving that. You mentioned, we have seen some raw material input cost increases higher than we had anticipated.

So we came into the year with an expectation that our costs were up 5% to 10 compared to last year or the beginning of last year. And some of our inputs have gone up higher than that. In particular, some of our golf ball core raw materials have gone up. In terms of freight, we continue to see elevated freight costs. We are air freighting a significantly larger portion of our inventory movements, our inbound inventory movements than we would historically.

And we continue to do that to get product to where we need to get it and to avoid some of the congestion in sort of the ocean freight part of the market. We actually air freighted more in the first quarter than we anticipated. And so we had expected our full year inbound freight cost to be about 30% higher than what we experienced in 2021. We now think that's going to be closer to 45% for the year, and we certainly were higher in Q1, and we'll see continued elevated cost in airfreight for certainly the second and third quarter. Some of that, though, has been offset by higher production utilization in our golf ball business.

So we've had have had some improvement in the raw material situation in golf balls. And that's allowed us to operate our plants at a higher level, which has allowed us to absorb more overhead, which is a benefit. So all in all, you put it all together and we do think that our gross margins will be down about 20 sorry, 20 basis points more than we had anticipated. But we will have some offset to that with some of our operating expenses for the year being lower than we had anticipated.

Speaker 4

Okay. Yes, that's very helpful. Second question, maybe just on some of the international markets, right? Obviously, it looks like those performed very well and lockdowns last year were kind of part of that. Do you think that that's really a tailwind through the rest of the year as you kind of called out tourism?

Are you still seeing positive demand signals in some of the non U. S. Markets at this point? Or was it more of a kind of 1Q phenomenon?

Speaker 2

Well, I think the EMEA situation is first half driven, but I do think EMEA, particularly The U. K, is in line for a strong year. And a large part of that is going to be driven by golf tourism. I would say and we see it in participation where there was modest growth in Japan and modest growth in Korea in the first quarter. I think that that's going to be a more normalized comp throughout the year.

But again, the outlier we would expect is EMEA really through the first half of the year.

Speaker 4

Great. Thank you.

Speaker 1

Thank you, Brian. Next question please.

Speaker 0

And your next question will come from George Kelly with Roth Capital Partners. Your line is open.

Speaker 2

Hey, everybody. Thanks for taking my questions. So maybe just to start with the guidance that you provided for the first half, for the kind of first half, back half weighting to EBITDA. So the question is, if I'm doing the math right, it shows a pretty decent sequential decline in EBITDA, and that would be counter to to what we've seen in most years. So just wondering if you could give us more info about what's is there a weather impact or maybe some of these commodity costs and other kind of inflationary effects or if there's anything else you can flag?

George, it's mostly, frankly, relative to last year. Last year was a bit of we had a bit of an unusual distribution of EBITDA in the first half and the second half. And if you recall, we were even in a basically in a loss position in EBITDA in the fourth quarter. So 2022 is going to be more normal, if you will, from a spread perspective. And so we do see in the first half last year, we had much higher volumes and our OpEx hadn't ramped as much and hadn't gotten back to that normal level you would expect at this higher level of sales.

And so now that we're into 2022, our OpEx is at sort of a more a new normal structural level, and that is kind of changing some of the comparison, if you will, to last year. And you know I should clarify, Tom. I was I was speaking more to first quarter to the sequential from first quarter to second quarter. And if if I do your math, I it just shows that second quarter should be I think if I'm doing it right, it should be meaningfully below. It's a sequential decline.

So I just didn't know if if there was anything within that to you know, that's that's not the normal seasonality. So maybe there's a weather impact or something. Just wanted to make sure I is it that right? Yeah. The the the the timing between Q one and and Q two can, can be different from year to year.

You know, it it is really weather dependent. It is dependent on when our shops open and shipments can happen in late March or early April, and that can really have a sizable impact on the distribution for the first quarter, which is really why when we guide, we talk about first half, second half because it can be difficult to pinpoint first quarter, second quarter, particularly because of weather. Okay. Okay. Fair enough.

And then just two other quick ones. Inventory, your comments in your prepared remarks, did I hear it right that you're gonna take inventory higher again? And just curious, like, what's the what is gonna be the kind of flow throughout the year of inventory? And where do you expect to to end the year, if you could give that? We do expect inventory to go up.

You know, it's a bit of a balance, right? We for example, we're still on allocation on all of our golf balls. So we, you know, we don't have the inventory right now to meet all of the demand. So we do need to increase that. Hard to say.

Q2, obviously, is one of our largest quarters in terms of sell in and sell through. So it may be challenging to increase our inventories in the second quarter, but we would expect by the end of the year that we would be at a new normal, if you will, in terms of our inventory levels. They are, however, if you think about it in relation to our sales, inventories are low and need to get to a more normalized level given our higher level of sales.

Speaker 3

Okay. Understood. And then last question

Speaker 2

for me just on your share repurchase. Can you walk through most of the time you give the kind of we expect to do x amount over the next year. So can you just walk through that again? Sure. So in the first quarter, we repurchased about 1,200,000.0 shares for approximately $59,000,000 And at the end of Q1, we had $39,000,000 remaining on our authorization.

You know, we have been purchasing shares at a bit of a faster rate than we had historically. You know, I'd say partially from just the strength of our balance sheet and partially from the, you know, the decline in the stock prices has made us be a little more aggressive in the market. And we expect to continue to do that assuming our business continues to perform and market conditions remain the same. Our Board did approve 150,000,000 increase to enable us to continue to be aggressive in buying shares throughout the balance of the year. We think that if things remain the same, the conditions remain the same, we would expect to exhaust that $150,000,000 over the next year.

Okay, great. Thank you.

Speaker 1

Great. Thank you, George. Operator, next question.

Speaker 0

Our next question will come from Casey Alexander with Compass Point Research. Your line is open.

Speaker 2

Yes. Most of my questions were answered. I just want to verify what you said that first half EBITDA, you expect to be 60 percent of full year. And was it first half of sales you expect to be 50% of full year? Is that right?

A little more than 50%, yes.

Speaker 0

Okay. All right, great.

Speaker 2

That's it. That's my only question. Thanks. Thanks, Casey. Thanks, Casey.

And thanks, everyone. As always, we appreciate your interest in Acushnet. And we look forward to a spring of good weather and lots of golf being played hopefully by some of you. And we look forward to reporting back on our next call. Have great day, everyone.

Thank you.

Speaker 0

This concludes today's conference call. Thank you for participating. You may now disconnect.