Acushnet Holdings Corp.

Good morning, everyone, and welcome to the Acushnet Holdings Corp's second quarter 2021 earnings conference call. My name is Emily, and I will be coordinating the call today. During the presentation, you will have the opportunity to ask a question by pressing star followed by one on your telephone keypads. I would now like to hand the call over to our host, Vice President of Investor Relations, Sondra Lennon, to begin. Sondra, please go ahead.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings second quarter 2021 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 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 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 results or comparisons, we are referring to the six-month period ended June 30th, 2021, and the comparable six-month period. With that, I'll turn the call over to David.

Thanks, Audra, and good morning, everyone. We appreciate your time on today's call. As reflected in this morning's earnings release, the Acushnet team continues to excel at building momentum while navigating a wide range of supply chain complexities. The global golf market is vibrant with rounds of play reflecting healthy gains versus both 2020 and 2019, and this energy is helping to fuel strong demand across the entire Acushnet product portfolio. Acushnet's talented associates and our committed trade partners are doing great work to keep pace with strong participation and demand while continually adapting to the dynamic golf marketplace. And operationally, we continue to go to great lengths to prioritize associate health and safety, especially in regions where vaccination levels are lagging. As we will address on today's call, product innovation is the foundation for the company's sustaining success which is led by new Titleist Pro V1 golf balls and TSI metals, FJ golf footwear, and the accelerated development of our shoes brand. We will also provide an update on our global supply chain and some of the recent challenges that are reflected in our second half outlook. Now getting right to the quarter, we will turn to slide four. The Kushnitz second quarter sales of $625 million increased 108% versus last year and are up 35% compared with 2019. The Kushnitz adjusted EBITDA for the second quarter of $128 million is $95 million over last year and $52 million or almost 70% ahead of 2019. For the first half, Sales exceeded $1.2 billion, reflecting gains of 70% and 35%, respectively, versus same periods in 2020 and 2019. This growth is coming from each of our business segments and in every region as the game and our brands build sustaining momentum around the globe. First half adjusted EBITDA of $263 million is up $177 and $123 million, respectively, as compared with the past two years. As Tom will address, the Kushnitz Strong Performance and Healthy Balance Sheet position the company to be opportunistic with our proven capital allocation strategy as we seek to invest in future growth. and return capital to our shareholders through our share repurchase and dividend programs. And consistent with this approach, I am pleased to announce that earlier today, the Cushman's Board of Directors approved the payout of our quarterly cash dividend equal to 16.5 cents per share to be distributed on September 17. Now turning to slide five, I will comment on our business by segment. Starting with golf balls, sales gains have been led by one of our most comprehensive and successful Pro V1 launches and strength across the entire Titleist golf ball product line. As you see, sales exceeded $200 million for the quarter, representing a 92% increase. On the PGA Tour, Pro V1 and Pro V1X golf balls have been played by 72% of the field this year, more than eight times the nearest competitor. And on the LPGA Tour, Titleist's 84% ball count is more than 14 times the number two brand. The Titleist Golf Ball competitive advantage is built around product performance, quality, and consistency. Our ongoing investment in the company's vertically integrated supply chain and near 90 years of golf ball design innovation and manufacturing experience continues to serve us well. And to support this first half growth, and as noted on our previous call, our ball plants have been operating 24-7, which we expect to continue for the coming months. Additionally, we continue to allocate golf balls to our trade partners, given tight supply levels. Moving to Titleist golf clubs, which are up over 100% for the quarter, this gain was led by our new lineup of TSI drivers, which are the most played on the PGA Tour and meeting our high expectations in the market. In addition, Titleist was the number one driver at this year's NCAA championship and the recent USGA Junior Boys Championship. TSI is also the choice of Women's World number one Nellie Korda, who plays Pro B1 golf balls and a full range of Titleist golf clubs, bokeh wedges, and a Scottie Cameron putter. Titleist Gear posted a 93% increase for the quarter with gains in every category. Sales of $65 million reflects supply chain excellence, as our team has done a nice job meeting healthy global demand levels. This supply chain effort continues to be complemented by excellence in design and functionality, which Titleist Gear products are known for. And moving to foot joy, robust gains in sales of footwear, apparel, and gloves are driving growth throughout the brand, with sales up 129% in the quarter. New Premier and Hyperflex footwear models have been especially well received and are helping FootJoy to earn its place as the number one shoe in golf on tour and in the marketplace. We are pleased to see the golf apparel category bounce back this year as our previous concerns about excess inventory in the channel did not materialize. FJ Apparel capitalized on this opportunity. FootJoy's leading glove franchise posted healthy gains while continuing to chase robust consumer demand and replenish tight channel inventories. And lastly, we are pleased with the growth and development of our shoes brand as our team continues to grow by focusing on product excellence and providing exceptional service experiences for our trade partners and consumers. Now turning to slide six and a regional view of our results. As you see, the company is performing well in all key markets. The US market delivered the highest growth rate for the half with golf balls and golf clubs, both up over 80%. EMEA is providing to be resilient, particularly given travel restrictions, which have limited golf tourism throughout the UK. We remain cautiously optimistic about the Japan golf market, which is in recovery mode from 2020, albeit at a slower rate than we are seeing in other regions. And Korea continues to be resilient and vibrant with their 40% first-half growth coming on top of last year's double-digit sales increase in the same period. From a rounds-and-play standpoint, the U.S. and Korea are both indexing roughly 20% ahead of 2019 levels through the first half. The U.K., Australia, and Canada have battled COVID-related lockdowns and headwinds Yet despite these disruptions, rounds in each of these markets are up low double digits as compared to 2019. Japan and mainland Europe were among the hardest hit last year, and we have seen recoveries in 2021 despite periodic starts and stops throughout the year. And now turning to slide seven, I will provide an overview of our outlook for the second half, which is both optimistic and cautious as warranted by COVID and the changing conditions we are confronting. We remain enthused about golfer participation and strong demand for Titleist, Foot Joy, and Shoes products. Our trade partners are healthy and financially stable, and overall channel inventories are down versus their historical levels, with balls, clubs, and gloves most impacted. We are excited and ready to introduce a whole new lineup of Titleist T-Series irons later this month, and our team has done great work preparing for a wide range of launch activities. Our club development team has excelled over the past 18 months, and we think their focus is evident in this new product lineup. Footjoy also has a busy fall planned with a wide range of new footwear models, new hydrodate outerwear, and new seasonal apparel lines for men and women. In addition to our healthy pipeline of new product introductions, our second half outlook is also shaped by supply chain complexities, which have expanded in recent weeks. We continue to confront golf ball raw material constraints stemming from the Texas storms earlier this year, which are limiting output and have resulted in periodic shutdowns at our new Bedford-based ball plant, too. Our glove and ball factories in Thailand are under pressure as the country confronts escalating cases and low vaccination rates. We are doing all that we can to keep our associates safe, yet the recent spike in COVID cases has prompted us to temporarily reduce production at our glove factory. This operation is also constrained by raw materials shortages, which will further limit production. And we expect that the environment for our apparel and Titleist gear businesses will continue to be challenged by tight raw material availability. And additionally, the current lockdowns in Vietnam will impact Titleist bag and headwear availability. As you will note, our outlook reflects both the positives associated with strong demand and healthy marketplace fundamentals and the risks and incremental costs inherent in our supply chain. Tom will provide greater detail during his remarks. In closing, I remain confident that Acushnet is well positioned to capitalize on the strength of our target consumer, the game's dedicated golfer, and that our team's proven track record of product innovation and supply chain management will continue to support the company's long-term growth objectives. Thanks for your attention.

I will now pass the call over to Tom. Thanks, David, and good morning, everyone. I would also like to thank our associates for their continued hard work and resiliency that has led to another exceptional quarter for Acushnet. Starting with income statement highlights on slide nine, consolidated net sales for Q2 were 625 million, up 108% compared to Q2 2020 and up 100% on a constant currency basis as demand for our products remained very strong and our supply chain continued to execute at a high level. Of course, we were comping against the prior year period in which our operations in the U.S. and across Europe were shut down for almost 10 weeks. Gross profit for the second quarter was $334 million, up $178 million, or 114% versus 2020, and gross margin was 53.5%, up 130 basis points. These increases come primarily from higher sales volume across all segments, and the absence of shutdown-related costs that we incurred in the prior year, but were partially offset by higher inbound freight costs. SG&A expense in Q2 was $210 million, up $80 million, or 61% compared to 2020. SG&A expense was up across the board as we significantly curtailed spending last year in the face of the shutdowns. Income from operations was $109 million, which was $97 million higher than 2020. Interest expense for the quarter was $1.8 million, down $2.6 million from Q2 2020. And our effective tax rate was 22.9%, compared to a benefit of 19% in 2020, as a result of a change in the mix of our jurisdictional earnings and the absence of a one-time discrete benefit, which was recorded in the prior year. Net income attributable to Akushnet Holdings was $81 million, $79 million higher than 2020, and our Q2 adjusted EBITDA was $128 million, up $95 million. Moving to our results for the first half of 2021, consolidated net sales were $1.2 billion, up 70% compared to last year, and up 64% on a constant currency basis. Gross profit for the first half was $645 million, up $288 million, or 81%, compared to the first six months of 2020. Gross margin was 53.5%, up 310 basis points from the prior year. SG&A expense for the first half was $387 million, up $103 million, or 36%, and R&D expense was $25 million, up $1 million, or 4%, compared to 2020. First half income from operations was $229 million, which was $196 million higher than 2020. Interest expense for the first half was $5.5 million, down $3 million from 2020, and our effective tax rate was 23.7% compared to 35.6% in 2020, primarily because of a change in the mix of our jurisdictional earnings. First half net income attributable to Acushnet Holdings was $166 million, $155 million higher than 2020, and first half adjusted EBITDA was $263 million, up $177 million. There is a reconciliation of our net income to adjusted EBITDA for Q2 and the first half in our earnings release, as well as in the appendix of the slide presentation. Moving to slide 10, our cash and liquidity position is strong. At the end of Q2, we had about $250 million of unrestricted cash on hand. Total debt outstanding was approximately $346 million, a decrease of $177 million from Q2 of last year. And we had $367 million of availability under our revolving credit facility. Our leverage ratio was 0.7 times at the end of Q2, down from 2.3 times at the end of Q2 2020. Consolidated accounts receivable at the end of Q2 2021 was 378 million, up 106 million from Q2 of the prior year on our strong first half sales. Our accounts receivable aging remains very healthy, and DSOs were 53 days, down 11 days compared to the prior year. Consolidated inventories were 300 million, down 63 million, or 17% from Q2 of the prior year, with double-digit decreases in each of our reporting segments. Cash flow from operations was $152 million for the first half, up $153 million compared to the first half of last year. The increase comes mainly from higher net income partially offset by changes in working capital. Looking to capital expenditures, we have spent $12 million during the first half of 2021 compared to $10 million last year. we continue to expect our capital expenditures for full year 2021 to be in the range of $45 to $50 million, with spending on CapEx accelerating in the second half of the year, driven by the key strategic investments in golf ball operations and precision manufacturing capabilities we have previously discussed. Turning to slide 11, we remain committed to our capital allocation strategy and our priorities have not changed. we continue to prioritize making targeted investments in the business with a focus on product innovation, golfer connection, and operational excellence. We also continue to seek acquisition opportunities that align with our focus on premium performance products that appeal to dedicated golfers. We believe that these investments advance our long-term strategy and will drive growth at a favorable return. We also continue to focus on generating strong free cashflow and returning capital to shareholders. On June 18th, we paid our previously announced Q2 dividend, which totaled 12 million. And as David mentioned, our board of directors today declared a 16 and a half cents per share dividend payable on September 17th to shareholders of record on September 3rd, which would represent an expected cash outflow of approximately 12 million. And during Q2, we repurchased almost 444,000 shares for a total of approximately 15.5 million. 4.4 million of these shares were from open market purchases, and 11.1 million was purchased from our majority shareholder, which completed our previously discussed share repurchase agreement. Through the end of June, we have repurchased almost 500,000 shares for a total of 17.9 million. For the full year, we expect to repurchase up to a total of 40 million worth of shares. Moving to slide 12, our outlook for full year 2021 has improved. Overall, demand for Acushnet products continues to be strong, and we are enthused about the health of the game and golf market fundamentals. We have raised our forecast for the balance of the year, yet our outlook continues to be governed by supply chain limitations, which have increased in recent weeks. As David mentioned, increasing COVID cases and low vaccination rates are causing workforce concerns and disruptions at our ball plant and glove factory in Thailand. We are also experiencing raw material shortages across many of our businesses, which is resulting in further production disruptions and increased costs. And to no surprise, like every other business, we are facing escalating inbound freight costs, which we expect to continue through the end of the year. We now expect our reported sales for full year 2021 to be in the range of $1.93 to $1.99 billion, up about 22% at the midpoint compared to 2020. And we expect full-year adjusted EBITDA to be in the range of $285 million to $305 million, up 27% at the midpoint. These expectations assume no significant worsening of the impact of the COVID-19 pandemic, including additional incremental closures of global markets and supply chain disruptions. Compared to our previous expectations, our outlook for second-half sales has increased, and our outlook for second-half adjusted EBITDA has decreased. The increase in second-half sales is a result of continued strong demand tempered somewhat by the ongoing supply chain limitations we have discussed. The decrease in second-half EBITDA is primarily the result of higher-than-expected inbound freight costs higher costs associated with production disruptions, and higher associate related costs. Our estimate for second half inbound freight costs has increased by 15 to 20 million, and we expect these higher costs to continue into 2022. In conclusion, Q2 was another exceptional quarter driven by tremendous execution by our associates and trade partners. Although increasing uncertainties have caused us to remain cautious in our planning, we have raised our full year 2021 financial goals. We believe we are 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.

Thank you, Tom. Emily, could we now open up the lines for questions?

Thank you, Sandra. If you'd like to ask a question, please press Start followed by 1 on your telephone keypads now. If you change your mind, please press Start followed by 2. When preparing to ask your question, please ensure that your line is unmuted locally. Our first question today comes from Kimberly Greenberger from Morgan Stanley. Kimberly, please go ahead. Your line is open.

Great. Thank you so much. Good morning. Really extraordinary results here. It's great to see. And I guess you're dealing with the high quality problem of having extraordinarily strong demand. I wanted to ask about inventory, which seems to be one of the sort of limiting factors on potentially limiting factors on growth here in the second half of the year. Inventory looks like it's down about 17% year over year, 8%. compared to two years ago. Could you just give us a little more color on the supply chain disruptions that you're seeing? It sounded like it's impacting glove production in Thailand, ball production in the U.S., but just any more color that you can give us on the specific categories and geographies that are being affected would be very, very helpful. And then I know that the future is difficult to predict here but do you think that you would be in more of a normalized inventory position let's say by the end of third quarter it'll be relatively temporary or do you think it's probably going to be year-end or maybe into early 2022 before we get there thanks

Okay. Hey, good morning, Kimberly. I'll address that. So as we look at balance of year, you know, the foundation is continued strong demand. You said it. Our inventories, our light channel inventories are light down, most notably in the U.S., and I would say the U.K., where they're down anywhere from 10 to 20 percent based on category. They're in a little better shape in other markets. As we think about the second half. Certainly, we're very confident in our team's ability to adapt and manage these challenges, but the fact is, as we said earlier, the challenges are changing and increasing. So as I look at it by category, golf ball supply will be constrained, and that's really driven by raw material shortages, and that stems from the Texas storms back in February. So We've been running 24-7 at all our ball plants, but within that, we've had periodic shutdowns at ball plant two here in New Bedford, really driven by periodic raw material shortages. So that's a ball perspective. We're about to launch a new iron, the T-series irons. We're in pretty good shape there. We feel confident in our ability to get that product in the market to support a complete global launch. We think metals are also in good shape in both cases. Lead times will be much longer than we'd like, which has been the case for the past year. Wedges and putters will be down versus historical levels. We did talk about this on the last call. Because of our sales profile in the first quarter, second quarter, and even into the third, we're just going to have far less product at end of life cycle, so we won't be selling off inventory significantly. prior to a launch in the first quarter of some new models. From a gear standpoint, gear looks okay. We've been stalled a bit with some lockdowns in Vietnam. Gear looks okay, but supply is certainly finite and reflected in our forecast, and we think there likely will be delays. Footwear is in pretty good shape. We are dealing with some raw materials. shortages, but the team's working through that. Gloves I spoke about, that's challenged both from a labor standpoint. We've shut down our glove factory periodically. It's not running at full capacity, and that's due to COVID cases. And we do have some raw material shortages. And then really the last piece of the puzzle would be apparel. Okay is how I'd characterize it. It may be close to normal, but again, we have some issues around timing. So that might give you a framework for how the second half should come together from a top-line standpoint. As to when we think we'll get through this current state, we had said earlier in the year we thought we'd be through it by the third quarter. We're going to push that out. Some categories could be well into the first half of 22 before we normalize that. You know, we continue to produce most products at full capacity, and the best example is golf balls. That will continue in the coming months. We'll be confronting a challenge that we faced a year ago, and that was, you know, the desire to make product for at-once demand and the desire to build inventory to support a global launch in the first quarter of 2022. So we'll confront that challenge. that fork in the road. And as always, there are trade-offs. But again, hopefully that gives you some top-line color and just the general sense that we think this current state is going to run into the early parts of 2022.

That's really, really helpful. Thank you so much. I'm wondering if I could just ask a follow-up on the extraordinary participation in golf and the growth In new golfers and rounds played overall, as you look at the data, and I know you do a lot of work internally there looking at number of golfers, rounds played, et cetera, as you're analyzing the data, there were a number of new joiners who took up the game of golf last year. What is your data analysis telling you about how sticky those new golfers are? And how do new participants in the game sort of make their way into your funnel over time? Thanks so much.

Yes. So what we saw in the second half of 2020, rounds were up 25% versus the prior year. I think 19 is a good baseline, right? We made the comment that rounds in the first half were up 20% over 2019. And just looking forward, I would think we'd see rounds of play up in the second half of this year in the 15% to 20% range versus 2019. As to the profile, the end of year industry data we shared on the last call, hasn't been updated, but our own internal data and as much of our own anecdotal responses that we get from our trade partners around the world continues to be three key themes. Team one, a lot of the energy coming from avid, dedicated players who are simply playing more. And consistently here, you hear more juniors, more women, more younger, and more families. And I'll use that to pivot to some really good work that's happening and some industry collaboration that's really being led by the PGA of America and the PGA Tour. And it's an effort built around how to best build upon the game's momentum and how to advance diversity and inclusion within the game and really throughout the golf industry. And I'll add the RNA has also done a nice job providing their perspective and insights. And really, the key themes... Kimberly, that have emerged are new participants are increasingly younger. They're hooked on the game. They want to get better. We've talked about increased lessons throughout the industry in all markets, and that continues. And as a result, the game has become less intimidating and more welcoming. There's an interesting dialogue around the physical and mental health benefits of the game, and you hear that in the U.S., you hear that in the U.K., And they're becoming more evident, and this is really one of the levers that the stakeholders are looking to develop to attract new players. And as I said, you've got a good family component to the game. But the final point I'd make is we're seeing more and more rounds played in less than 18-hole formats as the game finds new ways to fit into busy schedules, which we view as a real positive. And I'll conclude by saying that Around those comments and around those observations, the game stakeholders are building campaigns to really build upon the momentum the game has seen in the last year plus.

Very helpful. Thanks so much.

Thank you, Kimberly. Next question, please.

Our next question comes from Daniel Imbrow from Stevens, Inc. Daniel, please proceed.

Hey, good morning, everybody. Thanks for taking our questions. David, I wanted to start on, obviously, you talked about the cost backdrop and it being inflationary, but I'd love to hear your thoughts about the pricing backdrop. I think you took up the pricing on your new irons coming out relatively in line with historical averages, but curious how you think yourselves or other manufacturers handled this. Does it get passed through to the end customer given how strong demand is? And, you know, because MSRP is so broadcast to your products, What is your ability to pass through price increases, maybe between launches? Or how do you guys look to use price to offset that for your products?

Yeah, good morning, Daniel. So we think about it first and foremost when we launch new products. And we took a price increase on Pro V1 earlier this year. You referenced a price increase with regards to our new iron line. A lot of that is built around market positioning and new innovations and new materials. I wouldn't call either of those driven by inflationary forces, but certainly we're seeing inflationary forces around our business. So those were both founded on the product, the innovation, and our desired positioning within the competitive landscape. Now, we typically try to not pass along mid-cycle price increases, and globally we do a lot of hedging to support that thesis. But again, we try not to pass along costs midstream, and we intend to get at it. We typically get at it otherwise when we launch new products. But again, the foundation of those price increases, Daniel, tend to be around performance, innovation, and a in a desired market position, right, where we desire to be positioned as a premium performance category leader. And sometimes that requires us to move some things around. But as an example, a few of our irons, you know, the price increases were not constant throughout. Some went up a certain amount, some went up a lesser amount, and some even stayed static. Again, that's more about broader market positioning. I don't want to belittle the fact that certainly we're seeing some cost increases throughout our supply chain, but that's not the key driver for why we're taking price up where we do.

That's helpful. From a competitive standpoint, I'd be curious, it looks like from the golf data tech share, relatively stable, maybe dipped a little bit in golf balls. How do you think you guys held inventories or positioning relative to the broader industry? And can you complete forward buys, or are there different things you could do to ensure that you have relatively better product availability than some of your peers?

Yeah, and really it's a wide-ranging answer because it touches on all our different businesses. We look at channel inventories closely. We look at our own inventories closely. From a share standpoint, you can't get too hung up on things right now because we're making – We're selling everything we can make, so it really is a function of supply chain. We look at golf balls, and total inventories seem to be off around 15%. We're down a little more than that. I think that's a function of strong demand more than anything else. But to your final question about what are we doing about it, we're still paying a little price from being shut down for three months. last year at two of our ball plants. We're paying a price for that. And we're just dealing with robust demand. So on the ball side, that's what we see. In our other businesses, it's as much about raw material supply. It's as much about our capacity output levels. We think once we get through this phase, these next two, three quarters, And it's as much about our raw materials suppliers as anything else because a lot of our constraints are driven by third-party raw materials suppliers. So you can't solely point to a CushNet internally and say, hey, we've got to take up capacity because our capacity is constrained by what's happening around us. But your question is a good one, and we're looking at all of our businesses to either diversify our raw materials supply or working with our suppliers to expand – their capacity.

Got it. That's helpful. And then one more in there. Apologies if I missed it in the prepared remarks, but I think earlier this year you mentioned you were noting a golf ball capital investment as well as some proactive OpEx investments. Given how disruptive the industry has been, has this changed your expected timing for these programs and are there going to be lingering financial impacts maybe into 2022 now from those two projects?

At this point, we have not changed our thinking about timing. You know, as I did mention, our capex for the first half was only $12 million compared to $10 last year, and we have a forecast of $45 to $50. So obviously we're expecting acceleration in the second half, and we will monitor that closely. You know, could some of that spill into $22 million I'm sure it's possible. As it relates to some of the OPEX investments that we've decided to make, you know, those will, we think of those as sort of opportunistic and one time in nature. And, you know, those will run their course during 2021 and will not impact 2022 at this point. Thank you.

Thank you, Daniel. Next question, please.

Our next question comes from Joe Altabello from Raymond James. Please go ahead.

Hi, guys. This is Adam, one for Joe. Congrats on a strong quarter. I know you guys have talked about a lot of these factors separately, and the supply chain remains very dynamic. But I was just kind of looking at your guidance in terms of Um, you know, the sales outlook, uh, not that far off from the second half of 2019, um, on the high end, basically, uh, being in line. So the EBIT outlook, as you mentioned, um, being lower, we were seeing 60 million at the high end versus 2019. Um, you know, of course you alluded to the various supply chain challenges, um, But just any more color on helping to bridge that $60 million gap between, you know, things you've mentioned like OPEX investments, AMP, raw materials. I know you've particularly cited the 15 to 20 in freight. Just any other possible quantification, I know it may be difficult at this time, would be super helpful.

Sure. So as you think about our second half relative to 2019, you need to keep in mind, and we talked about this on the last call, that because of the timing of product launches, particularly in our clubs business, we lost about $50 to $60 million of second half sales, some of which was moved up into the first half and some of which either pushed out into 2022 or went away. So if you think about that as $50 to $60 million, you know, that drops about $25 million of gross profit to the bottom line that we lost as a result of those lost sales. We did talk about the, you know, $15 to $20 million increase in brown freight that you mentioned. We think there's about $15 million or so in costs related to the production disruptions we've talked about and other employee-related costs And then, you know, finally, we think about the $15 million of strategic OPEX investments that we talked about on the last call, most of which would hit the second half. So, you know, you add all of those impacts up, that's about $75 to $80 million that, you know, would be lost, if you will, compared to 2019.

That's super helpful. And if I could squeeze one more in, you guys alluded to the weight of the supply chain issues on sales to some degree, albeit there's very strong demand out there, which is great. Is there any way you can quantify maybe how much you could have lost in the quarter and maybe any possibility of those could be recouped in the second half or, you know, obviously, you know, the issues are quite severe industry-wide. So any – if you could quantify that at all, that would be very helpful. Otherwise, appreciate it.

Yeah, I would say it's very difficult to quantify the impact in Q2. Clearly, despite that, we had a very strong quarter, so – As it relates to could some of that be recovered in the second half, you know, as David mentioned, we're pretty much selling everything we can make. And so I don't see that necessarily sliding into the second half. You know, we're capacity constrained, and we're going to sell everything that we can.

Gotcha. Thanks, guys. Congrats on a strong quarter again.

Thanks.

Thank you.

Thank you, Adam. Next question, please.

Our next question comes from George Kelly from Roth Capital Partners. George, please go ahead.

Hey, everybody. Thanks for taking my questions. So just to start back to channel inventory, so you mentioned I think it's 10% to 20% down versus last year in the U.S. and the U.K. If I remember right, though, wasn't it at all-time historic lows last year? And so the real question that I'm trying to get to is you mentioned that you expect to be kind of caught up in the next, I don't know, maybe into early next year. How long after that do you think it'll take until channel inventory is where it should be?

So, George, I'll just clarify that that number was down versus 19. Okay. Not versus last year. Last year was such an unusual comparison. So the down 10 to 20 is versus 19. Um, to your question, it, it really will vary by category, right? The golf ball business is going to continue to, um, chase and try to get ahead of the situation. This time of year, we tend to make more than we sell. And in the first half of the year, we tend to sell more than we make. That relationship has been disrupted. Um, We've talked a lot about gloves. We've been playing catch-up for a year, and we'll probably be playing catch-up a year from now. So you look at when things could and should ease is when the winds turn a little bit on the make-and-sell relationship, and it could be middle of next year in some categories. I think clubs are probably going to be better off. I think apparel could be better off. But for us, most notably, balls is going to be a challenge. Now, that said, we're confident we're going to put a good amount of product in the marketplace. I don't think we're going to disappoint consumers, but we're still going to chase demand and we're going to be required to continue to allocate product for the foreseeable future. And if you asked me six months ago, would we still be allocating product, our response would have been probably not as we see some seasonality kick in, but we expect to continue to allocate product into the first half of next year, notably on consumables and really notably on balls and gloves.

Okay. Okay. Thanks. And then next question from me. I think it was $75 million that you just highlighted as kind of a versus 2019, you know, this increased expense environment from COVID and some of your own investments you're making, how much of that would you, you know, I know that no one knows what's going to happen with COVID. And so that's a, you know, daily changing thing, hard to forecast, but assuming that 2022 is a more normalized post COVID kind of environment, how much of that 75 million would then exit your, your expense structure?

Well, I think the wild card you mentioned obviously is COVID. The production disruptions and employee-related costs that I talked about in a normalized environment, which obviously we may or may not be in 2022, those would mostly go away. The The inbound freight costs will normalize at some point, so those costs would go – those incremental costs that I called out would go away. And, you know, the $15 million hit from OPEX investments, you know, we think of those as one time as well, you know, being opportunistic with our success this year. So I would say, you know, the majority of the expense items would go away, and then the gross profit impact will – will obviously come back depending on the sales volumes and the launches. Okay, understood.

So that $75 million is really all COVID-related. There's nothing kind of internal that you're choosing to invest more in and will continue on. It's really all a COVID-related bump.

Well, I would say the strategic OPEX investments that we've decided to make are not COVID-related, but they are intentionally timed to be one time and in 2021. Okay, great.

And then last question for me relates to your comments around CapEx priorities. And so you provided in your prepared remarks a list of things that you're most interested in investing in. Just as you look out, so I'm not really, you know, this year I think I understand what those investments are going towards, but just as you look out the next three or four years, what areas of your business are you most excited to put incremental CapEx into? And that's all I had. Thank you.

You know, I can start. I don't know, David, if you want to add anything. You know, we outlined a, you know, a multi-year investment. golf ball strategic investment program. You know, that's something we're really excited about, and it's going to help us to, you know, increase our efficiency, align our capacity with ongoing mix shifts, and improve our custom ball capabilities. So we're very excited about that. We're obviously excited about investments we're making in our IT infrastructure around e-commerce. And, you know, we're excited about investments we're making in some of our production and distribution capabilities. So those are all important strategic investments that will help continue to advance the company forward.

Yeah, George, I don't have much to add to that. The bulk of it is going to be focused on golf ball operations. It's underway. question came up earlier about is it going to be on time so far we like where we are but as you'd expect a lot of this is some heavy equipment lead times with some of the equipment that we're looking for have extended but most notably we think it brings a whole new level of innovation and opportunity to New Bedford and Thailand golf ball operations which again is the bulk of the spend

Great. Thank you, George.

Thanks, everyone. As always, we appreciate your time and interest today. Stay safe and well, and we look forward to catching up on our next quarter call. Thanks again.

Thank you, everyone, for joining us today. This now concludes today's conference call, and you may now disconnect.