Acushnet Holdings Corp.

Hello and welcome to the Accushnet Holdings Corporation fourth quarter 2021 earnings 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 and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Ms. Sandra Lennon Vice President of Planning and Analysis and Investor Relations. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us today for Kushnett Holdings' fourth quarter and full year 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 the 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 those 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 will refer to the 12-month period ended December 31, 2021, and the comparable 12-month period. With that, I'll turn the call over to David.

Thanks, Chandra, and good morning, everyone, and thank you for joining the call today. As we will share with you this morning, the Cushnet wrapped up a terrific year, exceeding fourth quarter expectations as our team once again delivered in a challenging supply side environment. Tom and I will also outline our initial outlook for 2022 and address how the company is responding to leverage competitive advantages to meet strong demand while confronting supply chain complexities. First and foremost, we are encouraged by the game's momentum with U.S. rounds up 5% in 2021 and up 20% for almost 90 million rounds versus 2019. This increase over the past two years was aided by play from some 800,000 new golfers, with juniors and women the fastest-growing segments, as reported by the National Golf Foundation. Golf's participation story and trajectory outside the United States are similar. and we project rounds were up over 10% for the year in ex-U.S. markets. The Kushnitz business is built around the needs and preferences of our target consumer, the game's dedicated player. This connection drives innovation and an organization-wide commitment to deliver products and services of the highest quality, which in turn fuels the company's sustaining growth. This focus on product and people continues to serve the company and our shareholders well. As was evident throughout 2021, the Acushna team's creative spirit of innovation has powered the company's many successes, and I am especially appreciative of my fellow associates for their dedication and resilience during the past few years. The company's financial performance and growth are fueling strategic investments across the organization to fortify Titleist and Furtulite market leadership positions for the future. Investments in product development and golfer connection are at all-time highs. Our major capital investment in golf ball operations is well underway, and increased spending behind the company's digital platforms is strengthening our B2B and B2C capabilities, which will positively impact how trade partners and golfers interact with our brands. In affirming our disciplined approach to capital allocation, The company returned $115 million to shareholders in 2021 through our dividend and share repurchase programs, representing our largest annual return to date. Building upon this momentum, I am pleased to announce that a Cushness Board of Directors has approved a 9% increase to our quarterly dividend to $0.18 per share. The company has raised its dividend each year since initiating this program in 2017. And as we look to the future, we are confident that the company's strong balance sheet will fund ongoing investment in organic growth and continued support of our give-it-end and share-repurchase programs, along with targeted M&A that leverages our expertise, infrastructure, and global reach. Now moving to our results, here on slide four, we outline fourth quarter and full-year sales and earnings. For the quarter, sales of $421 million and adjusted EBITDA of negative $5 million reflect strong demand and our decisions to prioritize production capacity towards building inventory for 2022, as well as the planned decline in Q4 club sales, which prompted last year's TSI driver launch. For the full year, acoustic revenues were up 33% to $2.15 billion, and with double-digit gains in every segment and every region. Adjusted EBITDA increased 41% to $328 million, and the company generated $314 million in operating cash flow. At the core of this growth is the momentum generated by new Pro V1 golf balls, TSI drivers, T-Series irons, FJ Premier and Hyperflex golf shoes, and many other successful new products. And as Tom will address, gross margins held up well throughout the year as the tangible impacts of supply chain-related cost increases were more than offset by favorable sales mixes, higher ASPs, and reduced promotional activity. Now looking at our business by segment, Titleist Golf Ball sales of $668 million were up 32% on the year, led by record sales of new Pro-V1 and Pro-V1X models. The growth was led by the EMEA, U.S., and Japan markets, and we have been pleased to see demand for corporate custom golf balls begin to recover following the 2020 decline. Titleist Clubs also finished the year up 32%, led by new TSI medals and with gains in every product category, which is especially notable given our two-year product life cycles. In achieving this growth, our team has pushed the limits of supplier component availability and our own production capacity as we chase steady demand throughout the year. Titleist TSI drivers had an especially strong year and were the number one driver on the PGA Tour in 2021. And we are very pleased with the early response to our new T-Series irons as we enter the peak spring club fitting season. Titleist Gear posted a 29% gain on the year with growth in all product categories as our team did great work to keep product flowing as we strive to maintain field inventories and keep pace with brisk demand. And foot choice business increased by near 40% led by footwear and apparel, which grew at accelerated rates. The FJ brand is healthy and vibrant, inspired by innovative footwear, ranging from the classic-inspired Premier, the Athletic Flex, and Pro SL, the number one spikeless shoe in golf. And apparel and outerwear momentum, which is particularly strong in the U.S., in the A, and Korea. While not reportable segments, Titleist Apparel in Asia and Shoes Sports, also posted robust growth for the year. Juice was especially strong in the U.S. market, which was up over 50%. Next to slide six, and a quick look at our business by region. Here you see all markets were up over 20% for the year, as demand for accursed products was consistent across regions. Typically, we see outlier markets for one reason or another. But this was not the case in 2021, as the accursed success story played out similarly across our largest markets in the U.S., EMEA, Japan, and Korea. This is a testament to the good work of our global sales and marketing teams in positioning our products and our supply chain leaders who effectively coordinated tight availability to best meet global demand. Now looking forward, we are encouraged by strong golfer participation and enthusiasm for the game, including a golfer base that grew in both 2020 and 2021. Market fundamentals are strong, trade partners are healthy, and channel inventories are generally lean. Looking inward, the Talented Acoustic team is motivated to build upon our momentum as we structure our business for continued growth in spite of supply chain limitations, which we expect will impact our business throughout the year. The professional game is off to a great start in 2022, with especially exciting starts on the PGA, LPGA, and DP World Tours. This energy around the tours, especially in the first quarter, is an important catalyst as the golf season ramps up to a full opening in Q2. And Titleist golf ball momentum across worldwide tours is also strong, with usage of 75%, and Titleist golf balls winning 10 of the last 12 PGA Tour events and winning every tournament played on the LPGA Tour in 2022. We recently launched new Titleist ADX, Velocity, and TruField golf ball models and are poised to also launch new Tourspeed and Toursoft golf balls in Q2. You will note this split launch timing is a change from prior years as we strive to make the most of tight, raw materials availability for the first half of the year. Similar to 2021, we expect that Titleist golf balls will be on trade allocations for much of the year. First half Titleist Golf Club introductions are on schedule, led by the launches of new Vokey SM9 wedges in March and new Scotty Cameron Phantom Putters in April. New Vokey wedges made their PGA Tour debut as the most played wedge at the Tournament of Champions in January and at the number one at every PGA Tour event this year. In the first two months of the year, Scotty Cameron Putters had won half the events on the PGA Tour and added wins on the DP World and LPGA Tours. As you might expect, we're excited about both product lines. And Footroy is off to a great start, led by their new Fuel Footwear launch, and will soon introduce an expanded range of women's footwear in the new Tour Alpha series in Q2. FJ Apparel and Outerwear also carry great energy into the new year, and trade response and bookings to our spring collections have been terrific. Lastly, we have high expectations for shoes and look to build upon our golf momentum and expect the ski category will begin to recover later this year following two years of retail disruption. In closing, we are optimistic about the structural health of the game and golf industry. As golfers lock into golf shops in the coming months, they will be enthused to see and try a wide range of exciting new accretion of products designed to help them play their best golf. Our team has a good handle on circumstances that are within their control and I am confident they will continue to excel at adapting to the uncertainties that we are sure to confront as we navigate the coming months. Thanks for your attention this morning. I will now pass the call over to Tom. Thanks, David, and good morning, everyone. I would like to recognize all of our associates for the amazing efforts they put forth to manage through the continued impact of the pandemic and unprecedented supply chain challenges to deliver truly exceptional results for Krishna in 2021. Starting with our Q4 results on slide 10, consolidated net sales for the quarter were $421 million, essentially flat to 2020 on a reported basis and up 1% level FX. Overall, strong demand continued, and this is a solid result, especially given the comp against our metals launch in Q4 of 2020. Gross profit for the fourth quarter was $204 million, down 7% versus last year. and gross margins were 48.6%, down 380 basis points. The key drivers here were higher inbound freight costs, which continue to escalate, higher materials and production costs, resulting from supply chain disruptions, and lower sales volumes of golf clubs, partially offset by higher sales volumes in FlipJoy and higher average selling prices in golf balls. SG&A expense in Q4 was $209 million, up 35 million compared to 2020, and R&D expense was 15 million, up 1 million. Continued investment to take advantage of the increased levels of demand led to higher SG&A expense across all reportable segments, mainly in advertising, promotion, selling, and distribution. Income from operations for the quarter was a loss of 22 million, down 49 million from 2020. Other expense was 1 million, down almost $8 million from the prior year, primarily from the absence of the reversal of an indemnification receivable related to an audit settlement that was recorded in Q4 2020. An income tax expense was $700,000, up $9 million from the prior year, primarily as a result of the absence of the associated tax benefits on the other expense item which was recorded in Q4 2020. Net income attributable to Accushnet Holdings was a loss of $26 million, and adjusted EBITDA was a loss of $5 million. Moving to our full-year results, consolidated net sales for the year were $2.15 billion, up $536 million, or 33% on a reported basis, and up 31% level FX compared to 2020. Close profit was $1.12 billion, up 35%, and gross margins were 52.1%, up 60 basis points from the prior year. Gross profits were higher across all reportable segments, which comes primarily from higher sales volumes and higher average selling prices during the year, but partially offset by higher inbound freight across all segments and higher raw materials and manufacturing costs, primarily in Titleist golf balls. SG&A expense for 2021 was $795 million, up 30% compared to 2020, and R&D was $55 million, up $6 million. Much like I mentioned for Q4, investments we made throughout the year to take advantage of the increased levels of demand led to higher SG&A expense across all reportable segments, mainly in advertising, promotion, selling, distribution, and information technology. In addition, our strong financial results led to higher employee related costs for 2021. Income from operations was 260 million, which was up 114 million from 2020. Interest expense was 8 million, which was 8 million lower than 2020 on lower borrowings and lower average interest rates. Other expense was down 12 million, primarily due to the absence of the indemnification receivable reversal recorded in 2020 and a decrease in pension settlement charges. An income tax expense was $64 million, up $51 million, primarily because of higher income before taxes. Net income attributable to Accushion Holdings was $179 million, up $83 million, and adjusted EBITDA was $328 million, up 41%. 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 slide 11, we continue to benefit from the strength of our balance sheet. At the end of 2021, we had about 280 million of unrestricted cash on hand. Total debt outstanding was approximately 316 million, a decrease of 20 million from the end of last year. And we had $386 million of available borrowings under our revolving credit facility. Our leverage ratio was 0.8 times at the end of 2021, down from 1.6 times at the end of 2020. Consolidated accounts receivable at the end of 2021 was $174 million, down 13% from the end of 2020 on very strong cash collections during the fourth quarter. our day sales outstanding were 52 days, which were down seven days compared to 2020. While continued strong demand and supply chain challenges impacted our inventory levels throughout the year, we were able to selectively build inventory during Q4 to better position our business for the upcoming season. At the end of 2021, consolidated inventories were $413 million compared to $358 million last year, up $56 million. The year-over-year increase was driven by foot joy, which was up 34% across footwear, apparel, and gloves, and golf clubs, which was up 30%. Cash flow from operations was $34 million for Q4 and $314 million for the full year of 2021. This compares to $97 million and $264 million for the comparable periods in 2020. And we continue to make investments in the business in the form of capital expenditures. We spent $18 million on CapEx during Q4 and $38 million for the full year, which was up $13 million from 2020. For 2022, we expect our capital expenditures to increase to about $60 million as delays in receiving equipment caused by supply chain challenges shifted some of our 2021 CapEx into 2022. Turning to slide 12, our strong financial results have supported the continued execution of our capital allocation strategy. Our highest priority remains investing in the business with a focus on product innovation, golfer connection, and operational excellence. And we continue to pursue acquisitions that align with our focus on premium performance products that appeal to dedicated golfers. We believe these investments will advance our long-term strategy and drive growth at a favorable return. Our focus on generating strong free cash flow and returning capital to shareholders also remains a priority. In December, we paid our previously announced Q4 dividend, which increased our total dividends paid for the year to $49 million, up 7% compared to 2020. And as David mentioned, our board of directors today declared a cash dividend of $0.18 per share, payable on March 25th to shareholders of record on March 11th, 2022. This represents a 9% increase in our dividend and an expected Q1 cash outflow of approximately $13 million. During the fourth quarter, we repurchased approximately 662,000 shares for a total of about 35 million. For the full year, we purchased approximately 1.4 million shares for a total of almost 66 million, which left about 98 million remaining on our current share repurchase authorization at the end of the year. Through February 25th, we had repurchased a little more than 1 million shares in 2022, for a total of about 53 million, including 37.5 million from FILA, completing the share repurchase agreement we announced in November. We expect to repurchase the remaining 45 million under our current share repurchase authorization between now and the end of 2022. Our capital allocation strategy is a foundational element of a Christmas value proposition, which we continue to believe creates a compelling long-term total return for our shareholders. Moving to slide 13, our outlook for 2022 reflects continued strong demand for golf and other products, a healthy pipeline of new product introductions, and the replenishment of lean field inventories. Our outlook also continues to be governed by supply chain limitations, which are causing raw material and component shortages and higher material costs across all of our businesses, which are driving up overall production costs. And we continue to face elevated inbound freight costs, which we expect to continue throughout the year. Taking these factors into consideration, we expect our full year 2022 consolidated net sales to be in the range of $2.175 billion to $2.225 billion. On a constant currency basis, consolidated net sales are expected to be up between 2.7 and 5.0%. And we expect full-year adjusted EBITDA to be in the range of $325 million to $345 million. Within this, we expect full-year gross margins to be down about 20 to 30 basis points, and we expect full year OPEX to be higher than 2021. However, OPEX will grow at a slower rate than sales. These expectations assume no significant worsening of the impact of the pandemic, including additional supply chain disruptions and incremental closures of global markets. We expect the timing of our business in 2022 to have a more normal cadence after having been disrupted during the past two years. For the first half of 2022, consolidated net sales are expected to be a little more than 50% of full-year sales. And we expect first half 2022 adjusted EBITDA to be about 60% of the full year, down from about 80% in 2021. The decrease in first half adjusted EBITDA is mainly due to lower gross margins resulting from increased supply chain and freight costs, and from higher OpEx as we continue to make investments to support our higher level of sales and to maintain the leadership position of our brands. The second half adjusted EBITDA increase compared to 2021 comes from improvement in gross margins as we anticipate supply chain challenges begin to ease and from OpEx decreases relative to 2021. In conclusion, Our associates and trade partners helped us manage through unprecedented supply chain and pandemic-related challenges to deliver tremendous results for Acushnet in 2021. Looking forward, while we expect supply chain challenges to continue throughout the year, we are confident we will meet our financial goals for 2022 and deliver a solid long-term total return for our shareholders. With that, I will now turn the call over to Sandra for Q&A.