Acushnet Holdings Corp.

foot joy sales volumes, which were partially offset by lower titles gear sales and higher component costs in clubs. In addition, higher inbound freight costs across all segments negatively impacted gross profit. Gross margins were down compared to 2021, driven by lower margins from foot joy clubs in here, partially offset by higher margins in golf balls from higher overhead absorption. SG&A expense in Q1 was $196 million, up 11%. The increase comes primarily from continued investment in the business to support increased levels of demand, including higher selling, distribution, IT-related consulting, and higher advertising and promotion costs. R&D expense was $14 million, up $2 million compared to 2021. Income from operations was $105 million for the quarter, which was $15 million lower than last year. Q1 interest expense was down $2 million, and our effective tax rate was 20.4%, which is lower than the prior year as a result of a shift in our jurisdictional mix of earnings. Net income attributable to Accushnet Holdings was $81 million, down $4 million, and our Q1 adjusted EBITDA was $120 million, down $15 million compared to 2021. There is a reconciliation of Q1 net income to adjusted EBITDA in our earnings release as well as in the appendix of the slide presentation. Moving to slide 10, we continue to benefit from the strength of our balance sheet. At the end of Q1, we had about $113 million of unrestricted cash on hand, Total debt outstanding was approximately $409 million, and we had $307 million of available borrowings under our revolving credit facility. Our leverage ratio was one times at the end of Q1 2022, about the same as Q1 last year. Accounts receivable at the end of Q1 was $377 million, down $10 million from the prior year. DSOs improved by six days. Our consolidated inventory at the end of Q1 was $449 million, which was up 36% from Q1 of the prior year with increases across all segments. Although we were able to increase our inventory levels during the quarter to better enable us to meet the continued high demand for our products, we are not yet at our desired inventory levels as demonstrated by our day sales and inventory, which were down to 128 days compared to 146 at the same time last year. Cash flow from operations for the first quarter of 2022 was an outflow of $164 million compared to an outflow of $30 million in Q1 of last year. The higher cash outflow was primarily from changes in working capital, which resulted from larger increases in accounts receivable and inventory and a higher decrease in accrued expenses compared to the changes in those balances in the prior year. and we continue to make investments in the business in the form of capital expenditures. We spent $11.7 million on CapEx and Q1. Included in that, we spent about $2.6 million towards our strategic golf ball capital investment program, which brings the cumulative total to $16.3 million. We continue to expect our full-year CapEx to be approximately $60 million. Turning to slide 11, our strong financial results have enabled the continued execution of our capital allocation strategy. Our highest priority remains investing in product innovation, golfer connection, and operational excellence. We continue to pursue acquisitions that align with our focus on premium performance products that appeal to dedicated golfers. We believe that these investments will advance our long-term strategy and drive growth at a favorable return. Generating strong free cash flow and returning capital to shareholders also remains a high priority. In March, we paid our previously announced Q1 dividend, which resulted in a cash outflow to shareholders of $14 million. And as David mentioned, our Board of Directors today declared a cash dividend of $0.18 per share payable on June 17th to shareholders of record on June 3rd. During the quarter, we repurchased 1.2 million shares for a total of approximately 59 million. At the end of Q1, we had approximately 39 million of share repurchases remaining under our current authorization, and we now expect to complete this authorization in Q2. On April 28th, our Board approved a $150 million increase to our share repurchase authorization. assuming continued strong financial performance and favorable market conditions we will continue to actively repurchase shares and would expect to complete this new authorization over the next year our capital allocation strategy remains an important element of a kushnet's value proposition which we continue to believe creates a compelling long-term total return for our shareholders moving to slide 12 despite our team's effective management of supply chain challenges thus far the situation remains complicated. We continue to experience raw material constraints, rising material and component costs, and elevated inbound freight costs. We have also seen higher distribution costs as we work to manage through logistical challenges to get product to our customers. On a more positive note, our golf ball manufacturing utilization has increased, which is improving our overhead absorption. and some of our operating expenses are expected to grow at a slower rate for the year than previously anticipated. Taking these factors into consideration, we are reaffirming our previous full year guidance. We continue to expect our full year 2022 consolidated net sales to be in the range of $2.175 billion to $2.225 billion. This includes approximately $55 million of negative foreign currency impacts. On a constant currency basis, consolidated net sales are expected to be up between 3.8% and 6.1%. And we continue to expect full-year adjusted EBITDA to be in the range of $325 million to $345 million. Regarding the timing of our business in 2022, we continue to expect first-half consolidated net sales to be a little more than 50% of full-year sales, and first half adjusted EBITDA to be about 60% of the full year. In conclusion, our associates and trade partners helped us manage through a volatile environment with continued high demand and supply chain challenges to deliver solid results for Q1. While we continue to expect supply chain issues, we remain confident in our ability to meet our 2022 financial goals and to deliver a long-term total return for our shareholders. With that, I will now turn the call over to Sondra for Q&A. Thanks, Tom. Operator, could we now open up the lines for questions?

Okay. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star and then the number 1. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question will come from Kevin Heenan with JP Morgan. Your line is open.

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

Yeah, Kevin, I would say really two themes come to mind. First off, you know, the quarter came in largely within our expectations, and secondly, It's generally our practice to get through the second quarter before we make any meaningful shifts or adjustments to our full year outlook. We're still at a time of year where the game and industry is just opening up in many regions. And Q2 is always such an important and critical quarter. You've got weather potential. You've got sell-through realities that you learn from what is the sell-in and pipeline of your products in the first three, four months of the year. So I think where we sit today is generally where we typically would be this time of year. We like the way we started, as you heard on our call. A lot of puts and takes from a supply side standpoint, but more than most, we feel we navigated that journey pretty well. But again, as it relates to any meaningful changes to our long-term outlook, we generally like to get through the second quarter before we start to direct one way or the other.

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

Yeah, a couple of pieces to that, but it starts with the golfer. And it's always interesting when you try to make sense of participation in Q1. because it is largely a weather story. As I noted earlier, rounds in the U.S. were down and increased ex-U.S. for a small net positive early days in the year. What we're seeing is far more of a weather story than a structural participation story, where weather is good and and it has been good in Florida and Arizona and Hawaii. Rounds are up, and we think that's just a positive indicator for the game. The rest of the country, not surprising in the first quarter, you've had cold and wet weather, and it was colder and wetter than it was a year ago. Therefore, rounds were down. And again, around the world, early days in Q1, but the MEA, Japan, Korea, off to a nice start. nice starts. So, you know, when we talk about the structure of the industry, we always begin with which way is the golfer heading or trending. And again, we're off to a decent start. But thus far, it's been more of a weather story, which is frankly kind of a normal approach to the industry. A couple other components would be just the broader health of our trade partners, whether it be golf courses around the world or golf specialty retailers, they're very strong. They've had a very successful couple of years. They're investing in their own business. They're investing in the experience for golfers and we view that certainly as a positive. I'd layer in structurally the inventory realities in golf and certainly within the Acushnet company. We continue to play catch-up, and again, that's just a function of where our inventory levels are below their normal or what we would consider to be optimal levels. Those three components really frame our assessment of the industry as being structurally in pretty good shape for this time of year. Our outlook is buoyed and is certainly influenced by that strong structural view. Great. Thanks very much. Thanks, Kevin. Operator, next question?

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

Yeah, hi. Good morning, guys. Good morning. Maybe first question just on kind of the gross margin side, and you had provided some comments before about where you thought that would – what you thought that would look like for this year. And your comments on kind of raw material availability and some of the fulfillment items that you're doing were helpful. I guess the other question then would just be, you know, there's been changes in kind of commodity costs and stuff like that. So I'm curious if there's anything that has changed recently with regard to input costs. We've also seen movement in kind of freight costs, both on the trucking side and then also on kind of the ocean freight side. I'm wondering if any of those change how you think about kind of gross margin progression for this year.

Yeah, Brian, thank you. Coming into the year, we had anticipated that our gross margins for the year compared to last year would be down about 20 basis points. We now think that would be down closer to 40 basis points, and there's a number of puts and takes there in terms of what's driving that. As you mentioned, we have seen some raw material input cost increases higher than we had anticipated. So we came into the year with an expectation that our costs were up 5% to 10% compared to last year or the beginning of last year, and some of our inputs have gone up. higher than that. In particular, some of our golf ball core raw materials have gone up. In terms of freight, we continue to see elevated freight costs. We are air freighting a significantly larger portion of our inventory movements, our inbound inventory movements than we would historically. And we continue to do that to get product to where we need to get it and to avoid some of the congestion in sort of the ocean freight part of the market. We actually air freighted more in the first quarter than we anticipated. And so we had expected our full year inbound freight cost to be about 30% higher than what we experienced in 2021. We now think that's going to be closer to 45% for the year, and we certainly were higher in Q1, and we'll see continued elevated cost in air freight for certainly the second and third quarter. Some of that, though, has been offset by higher production utilization in our golf ball business. So we have had some improvement in the raw material situation in golf balls. And that's allowed us to operate our plants at a higher level, which has allowed us to absorb more overhead, which is a benefit. So all in all, you put it all together, and we do think that our gross margins will be down about 20 basis points more than we had anticipated. But we will have some offset to that with some of our operating expenses for the year being lower than we had anticipated.

Okay, yeah, that's very helpful. Thank you. Second question, maybe just on some of the international markets, right? Obviously, it looks like those performed very well, and, you know, lockdowns last year were kind of part of that. Do you think that that's really a tailwind through the rest of the year as, you know, you kind of called out tourism? Are you still seeing positive demand signals in some of the non-U.S. markets at this point, or was it more of a kind of one-cue phenomenon?

I think the EMEA situation is first half driven, but I do think EMEA, particularly the UK, is in line for a strong year. A large part of that is going to be driven by golf tourism. I would say, and we see it in participation where there was modest growth in Japan and modest growth in Korea in the first quarter. I think that that's going to be a more normalized comp throughout the year. But, again, the outlier we would expect is EMEA really through the first half of the year.

Great. Thank you.

Thank you, Brian. Next question, please.

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

Hey, everybody. Thanks for taking my questions.

So maybe just to start with the guidance that you provided for the first half, for the kind of first half, back half weighting to EBITDA. So the question is, if I'm doing the math right, it shows a pretty decent sequential decline in EBITDA, and that would be counter to what we've seen in most years. So just wondering if you could give us more info about what's, is there a weather impact or maybe it's some of these commodity costs and other kind of inflationary if there's anything else you can flag. You know, George, good morning. It's mostly, frankly, relative to last year. Last year was a bit of a... We had a bit of an unusual distribution of EBITDA in the first half and the second half. And if you recall, we were even in a... basically in a lost position in EBITDA in the fourth quarter. So 2022 is... is going to be more normal, if you will, from a spread perspective. In the first half last year, we had much higher volumes and our OPEX hadn't ramped as much and hadn't gotten back to that normal level you would expect at this higher level of sales. So now that we're into 2022, our OPEX is at sort of a new normal structural level, and that is kind of changing some of the comparison, if you will, to last year. And, you know, I should clarify, Tom, I was speaking more to first quarter to the sequential from first quarter to second quarter. And if I do your math, it just shows that second quarter should be, I think if I'm doing it right, it should be meaningfully below. It's a sequential decline. So I just didn't know if there was anything within that, you know, that's not the normal seasonality. So maybe there's a weathering factor or something. Just wanted to make sure I did that right. Yeah, the timing between Q1 and Q2 can vary. be different from year to year. You know, it is really weather dependent. It is dependent on when our shops open and, you know, shipments can happen in late March or early April and that can really have a sizable impact on the distribution for the first quarter, which is really why when we guide, we talk about first half, second half, because it can be difficult to pinpoint first quarter, second quarter, particularly because of weather. Okay, sure enough. And then just two other quick ones. Inventory, your comments and your prepared remarks, did I hear it right that you're going to take inventory higher again? And just curious, like what is going to be the kind of flow throughout the year of inventory and where do you expect to end the year if you could give that? We do expect inventory to go up. You know, it's a bit of a balance, right? For example, we're still on allocation on all of our golf balls, so we don't have the inventory right now to meet all of the demand, so we do need to increase that. Hard to say, you know, Q2 obviously is one of our largest quarters in terms of sell-in and sell-through, so it may be challenging to increase our inventories in in the second quarter but we we would expect by the end of the year that we would we would be at a a new normal if you will in terms of our inventory level up there however if you think about it in relation to to our sales you know inventories are are low and and need to get to a a more normalized level given our higher level of sales okay understood and then last question for me just on your share repurchase

Can you walk through most of the time you give the kind of we expect to do X amount over the next year? So can you just walk through that again?

Sure. So in the first quarter, we repurchased about 1.2 million shares for approximately $59 million. And at the end of Q1, we had $39 million remaining on our authorization. We have been purchasing shares at a bit of a faster rate than we had historically. I'd say partially from just the strength of our balance sheet and partially from the decline in the stock prices has made us be a little more aggressive in the market. And we expect to continue to do that, assuming our business continues to perform and market conditions remain the same. Our board did approve a $150 million increase to enable us to continue to be aggressive in buying shares throughout the balance of the year. We think that if things remain the same, the conditions remain the same, we would expect to exhaust that $150 million over the next year. Okay, great. Thank you. Great. Thank you, George. Operator, next question.

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

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

A little more than 50%, yes. Okay.

All right, great. That's it. That's my only question. Thanks.

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

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