Acushnet Holdings Corp.

Good morning and welcome to Accusenet Police Corp. Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to your host, Sandra Lennon. Please go ahead.

Good morning, everyone. Thank you for joining us today for a Cushnet Holdings third quarter earnings conference call. Joining me this morning are David Marr, 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 a Cushnet'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 be making 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 segment and regional year-on-year sales increases and decreases, we are referring to sales in constant currency. And please also note that when referring to year-to-date results or comparisons, we are referring to the nine-month period ended September 30, 2020, and the comparable nine-month period. With that, I'll turn the call over to David.

Thanks, Sandra, and good morning, everyone. As always, we appreciate your interest in Acushnet Holdings and hope that you are staying healthy and well. I look forward to providing an overview of the company's third quarter results and the steps we have taken to capitalize on strong demand for Acushnet products and position the company for long-term sustaining success. Before I get into the quarter, I must acknowledge and thank my teammates for their resilience and terrific work since we resumed full operations in late May. Our results reflect the strength of Acushnet's products, a company-wide commitment to customer service, and our team's ability to adapt and leverage our global supply chain. I am very proud of the passion, creativity, and sense of purpose that our company has demonstrated during the pandemic. And along these same lines, I must also give credit and thanks to PGA Golf professionals and our trade partners, for taking great care of golfers since play resumed, and for positioning golf as a safe, healthy, and enjoyable recreational activity. These caretakers of the game have distinguished themselves in 2020, and every golfer has benefited from their hard work and commitment to the sport. At Acushnet, our highest priority remains the health and well-being of our associates, and this continues to have an outsized influence on our decision process. Acushnet's global operations team has thoughtfully reconfigured workflow across the organization to adhere to all social distancing and safety requirements. And it is because of this commitment that we have been able to safely operate our facilities at peak output levels as we respond to strong demand for our entire product line. On our last call in early August, we spoke of our June and July growth And I am glad to report that this momentum continued, as you will see reflected in our third quarter results. As shown here on slide four, third quarter sales of $483 million were up 15% versus last year. Golf Balls led this growth, posting a 40% increase for the period. Demand for our Pro B1 franchise has been especially strong while we continue to allocate supply in order to minimize out-of-stock situations. In August, our team successfully launched the new Titleist TorSpeed golf ball. TorSpeed is our first TPU, or thermoplastic urethane golf ball, a technology our R&D team has been working on and refining for the past several years. Initial sell-through of TorSpeed has been resoundingly positive, and we're excited about where we may take this TPU process technology in the future. While Titleist Club sales were off 5% for the period, we are pleased with these results, given a challenging comp against last year's iron launch and our decision to push our new TSI metals launch from August to November. We launched a new three-model family of Titleist Concept irons in September. This super-premium, custom-only offering is an important element of our golf club innovation platform as we strive to push the boundaries of materials and product performance. Titleist Gear increased 27% for the quarter with gains coming from all gear categories. Our team did good work to keep inventories flowing in support of strong at-once demand. And despite losing most of the second quarter, both the Titleist Bag and Glove businesses are now comping positive for the year. And Footjoy posted a 12% gain for the quarter with increases across all categories, including apparel, which has been the most disrupted category in 2020. These third quarter results also reflect strong gains from Acushnet's e-commerce platforms as our trade partners and direct company-owned sites continue to generate increased traffic and sales. Adjusted EBITDA for the quarter increased 78% to $99 million. These results help to affirm our confidence in the company's proven operating model and long-term outlook. And today, a Cushnet's Board of Directors approved the payout of our quarterly cash dividend equal to 15.5 cents per share, or approximately $12 million in aggregate. Next here on slide five, you see year-to-date sales are off 9%, while adjusted EBITDA is down 5% through September. Considering the challenges of 2020, we are pleased with these results for the first nine months of the year. As you will hear from Tom, our balance sheet is in good shape, and we believe the company is well positioned to continue investing in our future growth. Now on slide six, in our performance by region, the U.S. market set the pace, posting a 26% increase as all segments and channels delivered gains for the quarter. EMEA also had a great quarter with sales up 14%. Korea has been steady all year long, and as you see, this continued in the third quarter with sales up 10%. Rounds of play in the U.S. and EMEA have been especially strong since play resumed in the second quarter, and play in Korea has trended up low single digits for most of the year. Japan has been most impacted by COVID. Japan has an older golfing population, and many golfers have elected to stay sheltered at home and not travel to the golf course. Japan's third quarter results also reflect an outsized impact from our decision to move the driver launch into November. Looking at slide seven, you see a full slate of new product introductions scheduled for the first quarter. This lineup reflects our uninterrupted commitment to R&D throughout 2020 and will be the building blocks of our 2021 business plans. New Titleist TSI drivers and fairways launch next week and have already made a positive impact across worldwide tours and with club professionals. TSI has been the number one driver on the PGA Tour since debuting in early September. This will be one of our most comprehensive launches as our team has made the most of our decision to move our global launch dates from August to November. New Pro V1 and Pro V1X golf balls have been out on tour for the past month and notched their first PGA Tour win last week in Bermuda as champion Brian Gay won with our new Pro V1 model. 2020 has been a milestone year for FootJoy as the brand celebrates 75 years as the number one shoe in golf. Next week, the team launches the new Stratos line of spikeless golf shoes, and in the first quarter, we'll launch the much-anticipated Premier Series. Premier has been out on tour since late summer and reflects FootJoy's heritage as footwear craftsmen and unwavering commitment to performance, comfort, and style. And finally, our shoes golf business continues to build momentum across the U.S. and Europe, while the ski side has been more meaningfully impacted by COVID and is not expected to recover until late next year. Looking forward, we will continue to balance strong interest in the game and healthy consumer demand with a good amount of caution as required by these uncertain times. Our new product pipeline is in great shape, and as noted, our supply chain is holding up well. Additionally, retail inventories are projected to be down 5% to 10% globally, which we think bodes well for upcoming product launches. Just as important, the Kushnitz Strong balance sheet positions the company to make key investments in our future growth, return capital to shareholders, and offer a compelling long-term investment opportunity. Thanks for your interest and attention this morning.

I will now pass the call over to Tom. Thank you. Thanks, David, and good morning to everyone on the call. I would like to start by extending my thanks and appreciation to our associates and trade partners for their exceptional execution, which has resulted in a Kushnitz Strong Q3 performance. Starting on slide 9, Q3 consolidated net sales were $483 million, up $66 million, or 16% versus Q3 of last year, and up 15% on a constant currency basis, as the very strong demand for golf and for all of our products that we saw in June and July continued into August and September. Q3 gross profit for the third quarter was $252 million, up $35 million, or 16% versus last year, and gross margin was 52.2%, up 10 basis points, with a solid increase in golf ball gross margins partially offset by a decrease in golf club gross margins. SG&A expense in Q3 was $154 million, down $5 million, or 3% compared to Q3 2019, and primarily from lower advertising and promotional costs. An R&D expense was $11 million, down $2 million. Operating income was $85 million, which was $41 million, or 95% higher than the prior year. Q3 interest expense was $4 million, down $700,000 from 2019. An income tax expense of $14 million was $6 million higher than 2019 as a result of our higher income before taxes. Our effective tax rate improved to 18.1% from the favorable shift of the mix of our jurisdictional earnings and the favorable impact of new regulations that were issued during the quarter related to U.S. tax reform. Net income attributable to Akushnet Holdings was $63 million, $33 million higher than in Q3 of 2019. And our Q3 2020 adjusted EBITDA was $99 million, up $43 million, or 78% compared to 2019. Moving to our results for the first nine months of 2020, consolidated net sales were $1.2 billion, down 9% from last year, both on a reported and constant currency basis. This represents a significant improvement from our results for the first half, which were down 20% compared to the first half of 2019. Gross profit for the first nine months of 2020 was $609 million, down $76 million, or 11%, and gross margins were 51.1%, down 110 basis points from the prior year. SG&A expense for the first nine months was $437 million, down $48 million, or 10% compared to 2019, and the R&D expense was $35 million, down $3 million compared to the prior year. Restructuring expense for the first nine months was $13 million. Operating income for the first nine months of 2020 was $118 million, which was $39 million less than the prior year. Interest expense was $12 million or $2 million lower than last year. Other expense was up $7 million, primarily as a result of pension settlement charges associated with our restructuring program. Income tax expense was $21 million, down $15 million, and our year-to-date effective tax rate was 21.6%. Net income attributable to Accushnet Holdings for the first nine months was $74 million compared to $103 million in 2019, and adjusted EBITDA was $185 million down $11 million. To assist in your review of the calculation of adjusted EBITDA, we have provided a reconciliation to net income on slide 10. You will note that we did not add back any COVID-19 related expenses during the third quarter as we had in Q1 and Q2. Moving to slide 11, at the end of Q3 2020, our cash and liquidity position improved significantly since the end of Q2. On September 30th, we had about $111 million of unrestricted cash on hand, and our total debt outstanding was approximately $378 million, a decrease of $39 million from the same time last year and $145 million from the end of Q2. Our leverage ratio was 1.8 times at the end of September, down from 2.3 times at the end of June. And on September 30th, we had cash on hand and available borrowings under our revolving credit facility of about $470 million. At this time, we believe that our cash on hand and available borrowings will be sufficient to meet our liquidity requirements for at least the next 12 months. Consolidated accounts receivable at September 30th was $268 million, down about 2% from the prior year and from the end of Q2. DSOs were up one day compared to the prior year period, but were down three days from the end of Q2 2020. Inventory was $318 million, down over $30 million or 9% from the prior year, and was down $45 million or 13% from the end of Q2 2020. The decreases were driven by golf balls and golf clubs, which were down 21% and 20% compared to the prior year, and 13% and 11% compared to Q2, respectively. In addition, foot joy inventories were down 5% compared to the prior year and 19% compared to Q2. Overall, we are comfortable with the quality of our accounts receivable and the amount and composition of our inventory. Cash flow from operations for the third quarter of 2020 was $168 million and was $167 million for the first nine months of the year. This compares to $55 million and $95 million for the same periods in 2019. The increase in cash flow from operations for Q3 comes mainly from higher net income, stronger cash collections, and lower inventory levels. CapEx was $5 million for Q3 and $15 million for the first nine months of the year. We expect to increase our capital spend in Q4 and now plan for full-year 2020 CapEx to be in the range of $25 to $27 million. Moving to capital allocation on slide 12, while our long-term priorities have not changed, we continue to be cautious as it relates to our capital allocation actions. As I just mentioned, we now expect 2020 full-year CapEx to be in the range of 25 to 27 million. We did not repurchase any shares in Q3, and we currently do not expect to repurchase any shares in Q4. We did pay our previously announced Q3 dividend in September, and as David mentioned, our Board of Directors today declared a Q4 cash dividend of 15.5 cents per share, payable on December 18th to shareholders of record on December 4th. This represents a return of approximately $12 million to shareholders. Turning to our outlook for the remainder of the year, while we are encouraged by the increase in rounds of play and demand for our products around the world in Q3 and into early Q4, we also remain cautious given the recently implemented restrictions we have seen in Europe and the rising number of cases of COVID-19 in the United States. Considering the impact of our two-year product life cycles, it is best to refer back to Q4 of 2018 when modeling Q4 of 2020. As a result of the changes in the cadence of our business in 2020, There are a number of factors that will be different in Q4, but overall, we expect net sales to be up slightly from Q4 2018. Despite strong demand, we currently expect golf ball sales to be flat compared to Q4 2018 as a result of the limited availability of our premium performance models as we begin to ramp up production of the new Pro V1. We currently expect golf clubs to be up slightly in Q4 compared to 2018, with increased sales in the U.S. led by the upcoming launch of TSI Metals, partially offset by lower sales volumes in Japan as a result of the challenging market environment. We expect FootJoy to be down in Q4 2020, also from lower sales volumes in Japan. and for Titleist Gear to be down as they are comping to their strong performance in Q4 of 2018. And finally, we expect Shoes to be a positive contributor to Q4 2020 net sales as we did not acquire them until July of 2019. From an operating expense perspective, we expect fourth quarter operating expenses to be up high single digits compared to Q4 2018. About half of this increase comes from shoes, and the remainder comes from higher advertising and promotion costs to support the upcoming medals launch, the market momentum in golf balls, and the elongated season for the professional tours into Q4, including the Masters. Given the significant amount of uncertainty regarding the future impact of COVID-19, we will not be issuing further detailed guidance at this time. In conclusion, our associates and trade partners did great work meeting the strong consumer demand for all of our products. While we continue to exercise caution given all the uncertainties we are facing, we remain confident that golf's momentum and energy will continue in the coming months. As noted, there have been some shifts in the timing of our business which will impact our Q4 results. However, we remain confident in our ability to maintain and build upon our market leadership positions into the future. With that, I will now turn the call over to Sandra for Q&A.

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

As a reminder, if you would like to ask a question, press star followed by the number one. That is star one for question. The first question comes from the line of Kimberly Rainberger with Morgan Stanley. The first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly, are you there?

Your line is open. Could we take the next question, operator? The next question comes from the line of Daniel Embro with Stephen Incorporated.

Yes. Hey, good morning, guys. Thanks for checking our questions, and congrats on the strong quarter. Hey, Dan. David, I wanted to start on production. You know, obviously 2Q very disrupted for most of the supply chain and the production standpoint. 3Q, you know, really impressive. Didn't seem like you guys called out any disruption there. You know, how is the state of the supply chain today? And then are there any learnings from 2Q, either on the CapEx or OpEx side, where you think you guys need more investment if this demand does stay in the industry, given what we're seeing in the golf industry?

Yeah, I think you've characterized well what happened in Q3. Our team ramped up quickly and safely in our global golf ball production and club output. It exceeded plan. It exceeded what we would typically see in the third quarter. We're now operating 24-7 at ball plant three and ball plant four. The way we're modeling the year, and you can imagine there's a whole lot of scenarios that we're looking at for 2021. The way we're modeling the year, we're comfortable that our capacity is sufficient to meet demand. I will say one of the learnings from 2020 has been more specific to our distribution capabilities, and we distribute most of our products in North America and the U.S. from California and Massachusetts. And we are looking at alternative options in the Midwest, and we expect to make some moves and decisions next year that will require some additional capital. But in terms of production and operations, we think we're in good shape. But, again, we're operating 24-7, and we'll do that for the foreseeable future. And in time, we'll likely have some more to talk about, as it relates to some changes with how we distribute products, which we think hedges some of the risks we encountered earlier this year.

That's great. That's really helpful. Tom, moving to the SG&A side, really impressive risk order down year over year, despite the revenue growth. During your commentary, I didn't hear anything that sounded one-time in nature, but, you know, your 4Q outlook at the end there sounds like it should step back up. Should we view this step down in 3Q really as temporary, just driven by lower marketing expense, or is there any kind of sustainable expense cuts that did come out of COVID-19?

Yeah, Daniel, I would say it's mostly temporary or maybe better characterized as a shift. Obviously, we shifted the launch of the new metals into Q4, and so a significant amount of advertising and promotion spend that we would have normally spent in Q3 is shifting into Q4. So I would characterize that more as a shift and not permanent.

That makes sense. And then last one for me, David, on the industry. You know, unprecedented growth in terms of playership, but historically this tends to be fleeting. So, you know, what do you think the industry needs to do better to retain these golfers and see sustained growth in the industry rather than just a flash in the pan that maybe fades over the next few years?

Well, you know, fair to say we've been fortunate that in these uncertain times the sport has found a safe and preferred lane. And I think it's important to note that many golfers have had very positive experiences with the game in 2020, and I made the remarks earlier that PGA golf professionals, golf course operators around the world have done a great job positioning the game as a welcoming and safe recreational alternative. To your question, Daniel, a couple themes emerge. One is it's a hard game, right? It's challenging, and One of the more compelling stats coming out of 2020 is the amount of lessons that are being given. And I think that's certainly a positive. The more lessons that are happening, it invites improvement, which invites more play. The game's done a nice job this year welcoming all different types of play, family play, six-hole play, nine-hole play, whatever it might be. So as we think about some of the learnings of 2020, I do point to, first and foremost, instruction is very important, both at the beginner level and throughout. And the second piece, which I know a lot of facilities have paid close attention to, is pace of play. And with this significant influx of demand, that was a risk of the game is that pace of play would get rather slow. We generally anecdotally hear that that hasn't happened, and the game's done a good job maintaining healthy levels of pace of play. But, again, I will say you've got to point to a couple of forces. One, the game's caretakers, the PGA Club Pro, for their great work throughout the year. And then secondly, I think you have to give a lot of credit this year to the professional tours around the world who have done a great job bringing the game back early, as early as June, and getting golfers and sports fans a... an entertainment vehicle to showcase the game's safety components, competitive components, et cetera, et cetera. So a lot of learnings for the game. I think, frankly, Daniel, we're still processing what's happened here in the last three or four months since the game reopened, and we've been in several conversations with leaders throughout the industry today about just your question, what does the game do to capitalize on this increased interest and demand? But, again, I'll point to instruction, pace of play as being two key elements. Great. Well, best of luck, and congrats again.

Thank you.

Great. Thank you, Daniel.

Next question, please. The next question comes from the line of Kimberly Greenberger with Morgan Stanley. Great.

Can you hear me this time? We can. Thank you, Kimberly. Nice to speak with you.

Great. I'm not sure what happened on the technology side. I really apologize for that, but I thought the numbers this morning were absolutely fantastic. And it's really great to see the momentum in the business. I wanted to first start with just following up on Daniel's question. As you look out to 2021, what kind of signals might you be looking for that would indicate a more kind of permanent acquisition of new players to the game of golf post-COVID? When would you expect to have some visibility or clarity around um the the kind of retained uh play that we might see medium to long term this this strikes me obviously as a future growth opportunity um and then there's clearly um your geographical results are are quite strong across every geography and japan understandably, is being more impacted by COVID. I'm wondering, as we think about Japan through the upcoming year, is the Japan bounce back just simply a matter of we need to get the virus under control and get a vaccine, and then we should see some follow-on response in that geography? And then my last question is just on gross margin for Tom. On gross margin, obviously, balls were a very nice positive this quarter. there was a little bit of a headwind in clubs. And I'm wondering if that is a volume-related headwind in the club's gross margin and if that reverses in the future or if there's something else going on in the club's gross margin that we should be aware of. Thank you so much.

Okay, Kimberly, I'll touch upon your first two questions. First, specific to the game and when might we know or what signals would we look for to suggest that the behaviors we've seen in 20 are more reflective of the long term. Unfortunately, I'm going to lead with a lot of these answers. We don't know, right, in terms of how this thing plays out, but I'll give you a sense for how we're thinking about it. I made the point to Daniel that a lot of golfers have had very good experiences in 2020, and I think this – I think this influences how they prioritize the game going forward and how they fit the game into their lives going forward. And the game competes for discretionary time. It competes for discretionary income. And for the past several months, the sport has fared very well as many recreational activities have been suspended. So we do acknowledge that a lot of these activities, whether it's youth sports, whether it's stadiums reopening, whether it's business travel or commuting time, will begin to come back online. And we think about where does golf fit in that changing world order. And the answer is it remains to be seen. We do take a measure of comfort and optimism here. In a year of tough circumstances around the world, golf has been a bright spot for a lot of folks. We don't think that just stops heading into the new year. We think it changes the way, as I said a minute ago, golf fits into their prioritization of their recreational time. As it relates to Japan, when we look around the globe, we see rounds up in the U.S., high single digits. We see rounds up, low single digits in Korea. EMEA has been flat up slightly. And the outlier of the major five markets certainly has been Japan. And I made the comment that it does have an older golfing population who's been inclined to shelter at home and not venture out to the golf course. We do expect, and I'm careful with the term bounce back, but we do expect that the marketplace, starting last year, more accelerated this year, has increased. has corrected, and by that I see rounds down, I see inventories down, or is in the process of correcting is maybe a better way to say it. But as we think about Japan longer term, our business has always globally done well in markets where we are very active with custom fitting. As we've shared in the past, Japan is sort of the last end of the party as it relates to custom fitting. So we do see opportunity for the way we approach the market to shift in Japan as it becomes more fitting-centric. And that's happening, albeit later than we've seen in many other markets. But I would say, as we think about the globe and where opportunity lies... Again, just careful about the theme and term bounce back in any market. But we do acknowledge that COVID's had the most significant impact in Japan than we've seen in any other market. And as the effects and influences of COVID are over time reduced and minimized, we do think that golfers in Japan should make their way back to the golf course more in a safe way and we think in a way that at least provides some stability to that market over the next several years.

As it relates to your question related to gross margins in clubs, the headwind there is really about the launch. Rather than having sales in the quarter of the new product, we had higher sales of the previous generation model, which tend to have lower ASPs as they reach the end of their product lifecycle. So that's really just a function of the timing of the launch. and we would expect that to reverse itself or correct itself over time.

Fantastic. Makes perfect sense. Thank you so much. Thank you, Kimberly.

We appreciate everybody's time and attention this morning, and we wish you a safe and enjoyable Thanksgiving season and look forward to catching back up to you as we report our fourth quarter results. Thanks again.

This concludes today's conference call.