Acushnet Holdings Corp.

Ladies and gentlemen, thank you for standing by and welcome to a Krishna Holdings Corp. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sandra Lennon, VP Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today for Krishnath Holding's fourth quarter and full year 2020 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 Akushnet'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 year-to-date or full-year results or comparisons, we are referring to the 12-month period ended December 31, 2020, and the comparable 12-month period. With that, I'll turn the call over to David.

Thanks, Sandra, and good morning, everyone. I hope you are staying safe and well as we move closer to the end of these difficult times. Key themes running through today's remarks will be the tailwinds of strong golfer participation and demand, and headwinds resulting from COVID-related supply chain challenges. As you will hear, the keys to success for Acushnet in 2020 and 2021 involve balancing new product development, demand momentum, supply chain uncertainties, short-term cost increases, and periodic regional shutdowns. Based on our track record, I'm confident that the Acushnet team is up to this task. The Kushnett and the entire golf industry are benefiting from the continued commitment from PGA professionals and golf course operators who have worked tirelessly to provide safe and fun experiences since the earliest days of the pandemic. More than 500 million rounds of golf were played in the U.S. in 2020, 60 million rounds more than 2019, and the highest annual total since 2002. I must also acknowledge and thank my teammates for their dedication and great work navigating the highs and lows of 2020 and positioning the company for continued success. Their heightened commitment to associate safety, product quality, and customer care is serving us well in these uncertain times and as we respond to strong demand across the Acushnet portfolio. Now turning to slide four, we will get right into our results for the quarter. Sales of $420 million were up 14% versus last year, with reported growth coming from every segment and in every region. Adjusted EBITDA of $48 million reflects an 8% increase. The Titleist golf ball business grew 3% as our team did good work balancing the opportunity to satisfy strong at-once demand with the need to convert production to our new Pro V1 models to support their January global launch. Golf club sales were up 21% in the quarter, led by our successful new TSI Metals line. Since its debut, TSI has been the most played driver on the PGA Tour, and we are pleased with the early results from our November launch. Demand for all Titleist Club categories is strong, and our supply chain is holding up well, although lead times are running longer than normal, given COVID-related production modifications and tight component availability. Gear was led by our Titleist golf bag business and also delivered a very strong quarter, posting a 25% gain with growth across all categories as our team did good work keeping pace with the brisk end-of-year demand. And Footjoy sales of $101 million were up 19% in the quarter with gains in all product categories and accelerated e-commerce growth. Footjoy brings great brand and product momentum into 2021. Looking at our business by region, as shown on slide five, double-digit gains in Korea and the U.S. are highlights for the quarter, and we were pleased to see the Japan market stabilize late in the year. Europe battled starts and stops and inventory shortfalls en route to posting a modest increase for the quarter. Demand for golf in Europe is similar to what we have seen in the U.S. However, COVID and Brexit-related challenges continue to slow the market's momentum. These across-the-board regional gains in the quarter reflect the resiliency of Acushnet's global forecasting and supply chain capabilities, capabilities and competencies that have become increasingly critical during these volatile times. And here on slide six, you see our full-year results with sales reaching $1.6 billion and adjusted EBITDA coming in at $233 million. And as a final note on 2020, the Kushnitz direct-to-golfer e-commerce sites also recovered from early season disruptions and closures and finished up about 50% for the year. As Tom will highlight, the company's financial position entering 2021 is in great shape, and we will continue to focus on making targeted investments in our future and expanding our dividend and share repurchase programs. I am pleased to announce that our Board of Directors has approved a 6.5% increase to our dividend, bringing the annualized payout to $0.66 per share. Since initiating our dividend program four years ago, the company has returned over $160 million to shareholders, and our annual per share dividend has increased by 38%. Additionally, moving to slide seven, I am pleased to outline two significant projects which we believe will enhance Acushnet's competitive advantages over the long term and deliver positive returns for our shareholders. The first initiative is a five-year, $120 million capital investment in our golf ball operations infrastructure and precision manufacturing capabilities. Roughly $35 million of this commitment is normalized, sustaining investment, while the remaining $85 million will be focused on new innovations, technologies, and operational enhancements. The majority of this spend will be focused on our new Bedford-based Ball Plants 2 and 3 and custom golf ball facility. With these investments, we will upgrade the speed and efficiency of Titleist Golf Ball operations, and line capacity consistent with the ongoing mix shift towards Pro-V1, AVX, and new TorSpeed urethane-covered products. We will also introduce new technologies to stretch our custom ball capabilities and support new and emerging imprinting opportunities. These capital investments will expand our production and testing capabilities and help us to further leverage a Kushnitz industry-leading golf ball patent and intellectual property portfolio, which represent some of the company's most valuable assets. We believe these investments in new technologies and operational excellence will solidify and advance Titleist's position as the golf ball performance and quality leader for many years to come. The second area of investment commenced in late 2020 and relates to our new third-party North American distribution center located in Indianapolis. This project begins with the consolidation of many of our warehousing and distribution functions, starting with foot joy and then Titleist Gear products, which have historically been warehoused and fulfilled from the east and west coasts. Over time, we will fulfill most of our e-commerce activities from this new facility and add embroidery capabilities to support custom apparel and gear. Stock golf balls will also be shipped from this new D.C. in addition to our East and West Coast facilities. This third U.S. distribution point for golf balls will enhance our service capabilities and provide a valuable hedge against unanticipated shutdowns as we experienced last year. This initiative is intended to immediately enhance the end user experience by reducing lead times and distribution costs for both our trade partners and consumers, while generating cost savings for Acushnet over the long term. And now turning to slide eight, I will frame some of the key assumptions behind our 2021 planning process. The game and industry are in good shape. Golfer engagement is strong and trade inventories are generally healthy and in some cases low. Against this backdrop, each of our businesses brings great momentum into 2021. The question is product development engines remained in high gear last year, and as you will see, new products are the foundation of our outlook and expectations for 2021. Last month, we launched new Pro V1 and Pro V1X models and are enthused by their early adoption across worldwide tours and positive early market response. Titleist golf balls are used by approximately 75% of players across worldwide tours, and our new Pro V1 and Pro V1X represent our next chapter of performance, quality, and innovation. To meet anticipated high levels of golf ball demand in 2021 and as we catch up from 2020, our golf ball plants are currently operating three shifts and Pro V1 models are on trade allocation, which we expect to continue for the coming months. Titleist Golf Clubs are also well positioned for the new year, led by the early success and high expectations around our new TSI drivers and fairways and strong momentum across all club categories. This week we are launching the complementary TSI-1 and TSI-4 drivers along with new TSI hybrids as we look to build upon the success of the TSI franchise. Our 2021 gear product line has been well received by trade partners and our supply chain is in good shape as we are poised to launch a wide range of new models in the first quarter. We are confident in our ability to satisfy first quarter demand in stock golf shops for the upcoming season, while also anticipating that Q2 availability may be challenged by supply chain uncertainties. We expect FootJoy's momentum to continue into 2021 and are especially excited about new footwear models Stratos, Premier, and Hyperflex. FJ Premier was the number one shoe at the Masters, and initial tour and consumer feedback has been overwhelmingly positive. The FJ Design team is on a great roll, and we expect to benefit from their good work as the footwear and apparel categories stabilize over the next 12 to 24 months. And finally, our shoes business was mixed in 2020 with golf and lifestyle posting gains, but these were not enough to offset ski, which remains negatively impacted by COVID, especially in Europe. We expect Shoes Golf to stay on its growth trajectory in 2021 and anticipate a broader ski recovery beginning in 2022. In closing, we are enthused about the year ahead, and especially by the exciting range of new products we are set to bring to market in the first half of the year. Based on our 2020 experiences, I'm confident that our team has a good handle on the circumstances that are within our control and and will continue to excel at adapting to the inevitable uncertainties and operational challenges that we are likely to confront thanks for your attention this morning i will now pass the call over to tom thanks david and good morning everyone i would also like to thank our associates for the resiliency they have shown in the face of the pandemic the amazing effort they put forth to get our business back up and running in a safe and healthy manner and their exceptional execution, which has resulted in a Kushnitz-strong second-half performance. Starting with our Q4 results on slide 10, consolidated net sales in the quarter were $420 million, up 14% year-over-year and up 12% in constant currency, as the strong demand we experienced in Q3 continued through the end of the year. Gross profit for the fourth quarter was $220 million, up $34 million, or 18% versus last year, and gross margin was 52.4%, up 170 basis points. The increases in gross profit and gross margin were primarily from higher sales volumes during the quarter and higher average selling prices. SG&A expense was $174 million, up $31 million, or 21% compared to 2019, and R&D expense was $14 million, up about $1 million, or 6% compared to the prior year. SG&A expenses were up with the higher sales volumes during the quarter, led by increases in selling costs and higher advertising and promotional costs. income from operations in the quarter was 27 million down about 1 million or 5 percent our q4 income tax expense was a benefit of 8 million as the result of discrete items recorded during the quarter including the release of a reserve related to an income tax audit for the period which included the sale of a kushnet to fila korea which was settled during the quarter The reversal of a corresponding indemnification receivable from Beam, our former parent company, related to the audit settlement, is recorded in other expense. Net income attributable to Akushnet Holdings was $22 million, and adjusted EBITDA was $48 million, up almost $4 million from Q4 2019. There is a reconciliation of net income to adjusted EBITDA for Q4 and the full year in our earnings release, as well as in the appendix of the slide presentation. Moving to our full year results for 2020, consolidated net sales were $1.6 billion, down 4% from last year, both on an as-reported and constant currency basis. This is quite a significant improvement given we were down 20% year-to-date at the end of Q2 compared to 2019. Gross profit for the year was $830 million, down $42 million, or 5% from 2019, and gross margin was 51.5%, down 40 basis points from the prior year. The decrease in gross margin is primarily attributable to the overall decrease in net sales and the impact of lower production volumes caused by the government-mandated shutdowns earlier in the year. SG&A expense for 2020 was $611 million, down $17 million, or 3% compared to 2019. And R&D expense was $49 million, down $3 million compared to the prior year. The decreases were driven by our strict management of operating expense during the height of the pandemic. Restructuring expense for 2020 was $13 million. Income from operations was $145 million, which was $40 million less than 2019. Interest expense was $16 million or $4 million lower than last year. Other expense was up $16 million, primarily as a result of the reversal of the indemnification receivable from BEAM related to the audit settlement in Q4 and pension settlement charges associated with our restructuring program. And income tax expense was $13 million, down almost $28 million as a result of lower income before taxes and the discrete items which I mentioned earlier. net income attributable to a cushion holdings was 96 million compared to 121 million in 2019 and adjusted EBITDA was 233 million down 7 million compared to 2019. moving to slide 11 our balance sheet continued to improve during q4 at the end of 2020 we had 149 million of unrestricted cash on hand Total debt outstanding was approximately $336 million, a decrease of $68 million from the end of last year, and we had $392 million of available borrowings under our revolving credit facility. Our leverage ratio was 1.6 at the end of 2020, down from 1.8 at the end of 2019. Consolidated accounts receivable at the end of 2020 was $202 million, down $14 million, or 6% from the end of 2019, on very strong cash collections during the fourth quarter. Our day sales outstanding were 59 days, which were down one day compared to 2019. Consolidated inventories were $358 million at the end of the year compared to $398 million last year, down $40 million or 10%, but were up $40 million from the end of Q3. The year-over-year decrease was driven by golf balls, which was down almost 13%, golf clubs, which was down almost 22%, and foot joy, which was down almost 11%, spread evenly across footwear, gloves, and apparel. most of the increase in inventory from the end of q3 was in golf balls in preparation for the q1 launch of the new pro v1 cash flow from operations was 97 million for q4 and 264 million for the full year of 2020. this compares to 39 million and 134 million for the comparable periods in 2019. The increase in cash flow from operations comes mainly from the strong cash collections and lower inventory levels I just discussed. We expect accounts receivable, inventory, and cash flow from operations will return to more normal levels in 2021. Looking to capital expenditures, we spent $9 million during Q4 and $25 million for the full year, which is down significantly from 2019 as we reduced our capital expenditures as we managed through the disruptions caused by the pandemic. For 2021, we expect our capital expenditures to increase to about $50 million, driven by the key strategic investments in golf ball operations and precision manufacturing capabilities that David discussed earlier. We expect our CapEx to remain at approximately this level for the next several years in support of this five-year initiative. Turning to slide 12, while we were more conservative with our capital allocation actions during 2020, our priorities have not changed. We fully expect to continue to make investments in the business with a focus on product innovation, golfer connection, and operational excellence. and to continue to be opportunistic with acquisitions that align with our focus on premium performance products that appeal to dedicated golfers we believe that these investments advance our long-term strategies and will drive growth at a favorable return we will also remain focused on generating strong free cash flow and returning capital to shareholders we paid a 15 and a half cent per share dividend during the fourth quarter of 2020 for a total cash outflow of 11.5 million. For the full year, total dividends paid were 46 million, up 6% compared to 2019. And as David mentioned, our board of directors today declared a cash dividend of 16.5 cents per share payable on March 26 to shareholders of record on March 12, 2021. This represents a 6.5% increase in our dividend and an expected Q1 cash outflow of approximately 12 million. As you know, we suspended our share repurchase program in Q2. Prior to that, we had repurchased approximately 244,000 shares for a total of approximately 7 million in 2020. We do expect to resume our share repurchase activities and to buy up to $40 million worth of shares in 2021. This would include open market purchases to offset dilution and the completion of our share repurchase agreement that we entered into with FILA in 2019. Our capital allocation strategy is a foundational element of a Cushman's value proposition, which we continue to believe creates a compelling long-term total return for our shareholders. Moving to our outlook on slide 13, we will not be providing guidance for 2021 net sales or adjusted EBITDA due to the continued uncertainties caused by COVID-19. As David discussed, demand for golf and golf-related products continues to be strong, trade inventories are healthy, and we will be launching several exciting new products in the first half of 2021. However, we are also managing through the COVID-related disruptions in the global supply chain temporary operational cost increases and periodic market closures all of which at a high degree of variability and unpredictability in forecasting our business we anticipate golf's momentum in our business to remain strong throughout 2021 however our sales profile will likely have a very different cadence as a result of the unusual comparisons to 2020 the global product availability outlook, and the decisions we have made around product launch timing. As a result, we project healthy first half year-over-year sales gains as compared to both 2020 and 2019, and that second half sales will be lower than both 2020 and 2019. Additionally, at this point, almost two months into the quarter, we expect first quarter sales to increase in the range of 20% to 25% compared to 2020. We expect first half 2021 gross margin to be negatively impacted by $8 to $10 million from higher freight expense driven by the recent increases in global air and container costs. For OPEX, it is better to compare 2021 to 2019 as our OPEX was significantly lower in 2020 than in recent years due to our tight management of operating expenses during the year. We currently expect 2021 OPEX to be higher compared to 2019, primarily from increased expenses associated with our North American Distribution Center and other strategic investments, a full year of SHUS operating expenses compared to only six months in 2019, higher stock-based compensation expense, and higher commissions on our retail sales in Korea. In conclusion, 2020 was an unprecedented year, and our associates and trade partners did an amazing job managing through the shutdowns and delivering an exceptional second half. While we will continue to be cautious with the uncertainties and challenges we face, we are confident in our ability to meet our full year 2021 financial goals, and we believe we will continue to be well positioned to execute our long-term strategies and to deliver a solid long-term total return for our shareholders. With that, I will now turn the call over to Sandra for Q&A.