Acushnet Holdings Corp.

Good morning, everyone. Thank you for joining us today for a Cushnet Holding Corp's third quarter 2022 earnings conference call. Joining me this morning are David Marr, our President and Chief Executive Officer, and Tom Pacheco, our Chief Financial Officer. Before turning the call over to David, I would like to remind everyone that we will be making forward-looking statements on the call today. These forward-looking statements are based on a Cushnet's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see today's press release, the slides that accompany our presentation, and our filings with the U.S. Securities and Exchange Commission. Throughout this discussion, we will make 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 references throughout this presentation to year-on-year sales increases and decreases are on a constant currency basis unless otherwise stated. As we feel this measurement best provides context as to the performance and trends of our business, and when referring to year-to-date results or comparisons, we will refer to the nine-month period ended September 30, 2022, and the comparable nine-month period. With that, I'll turn the call over to David.

Thanks, Sandra, and good morning, everyone. As we will share this morning, the company's third quarter performance reflects the great strength and momentum of our products and brands, ongoing expansion of Acushnet's supply chain capabilities, and the resilience, both in terms of participation and purchasing, of golfers in all major markets. And I must note, These results also point to the continued good work and dedication of Acushnet's talented associates. As noted on slide four, third quarter sales increased over 13% to $558 million. And year to date, sales have increased 10% to $1.82 billion. These results are consistent with the across the board health of our businesses. with each segment posting gains against record levels of 2021. In addition to these top line results, you will note gross margins are holding up well in spite of currency headwinds and persistent freight pressures. This gross margin strength and double digit sales gains contributed to a 23% increase in adjusted EBITDA for the quarter. Product performance and quality excellence define a CUSHNET and are the foundation of our sustaining success. We are pleased with the early success of our fall product launches, and looking forward, our teams are enthused while preparing for a wide range of new product introductions scheduled for the next six months. This momentum and confidence in our ability to execute support the company's track record of delivering against our capital allocation priorities, and we have returned more than $175 million to shareholders through our dividend and share repurchase programs during the first nine months of the year. This represents the company's largest return of capital since these programs were first implemented. Now turning to slide five, we will review our segment results. Golf ball sales increased 13% in the quarter with strong sell-through and improving production levels contributing to these gains. Demand for Pro V1, Pro V1X, and AVX remains especially strong, contributing to gains in all regions led by the U.S., which was up 16% in the period. Year-to-date, golf ball sales are up 4%, and our operations team has done good work striking the right balance between meeting at-once demand with the need to build inventories in preparation for 2023. Titleist golf ball retail inventories have improved over the past several months, yet are still 5% to 10% below where we would like to see them at this time of year. And new Pro V1 and Pro V1X golf balls were launched across worldwide tours last month, and early response and support of these new products has been excellent. The Titleist golf club business increased 20% in the quarter and is now up 12% year-to-date. Our golf club story in the quarter was fueled by new TSR drivers and fairways, which are off to great starts after their late September launch. Titleist drivers are currently used by 11 of the top 20 men in the world and three of the top four women professionals in the world. Terrific validation and endorsement for what has been the most played driver brand on the PGA Tour for the past four seasons. And as importantly, we are pleased with the progress throughout our golf club supply chain, which is delivering enhanced service levels and reduced lead times, especially with our custom fit made to order products, which make up such a large portion of our club business. Titleist gear also had a strong quarter with sales up 35%. This growth was led by successful new product launches and the carryover of some second quarter demand, which pushed into Q3 due to supply chain delays. For the first nine months of the year, Titleist Gear is up 10%. You may recall this business was pressured early in the year by logistics challenges, particularly in the U.S., and we are confident that the steps we are taking will result in improved availability and reduced lead times as we enter 2023. Most notable is our decision to reduce supply chain risks by front-loading our gear inventory receipts as we have done this fall. And foot joy posted a 2% gain for the quarter and is now up 15% year to date with footwear gloves and apparel all up double digits. which I continues to build a supply chain for the future to keep pace with strong demand for foot joy golf shoes outerwear apparel and gloves. Our team has successfully expanded and diversified our footwear production capacity, and we are now fully operational at our new state of the art embroidery Center here on our fair haven campus. We are confident that this extra capacity and enhanced service capabilities will support FootJoy's continued growth and the great product momentum that our design teams are generating. Now for a quick look at our business by region. As we have said throughout the year, the game is healthy across major markets, and the regional participation variants we see have been largely attributable to weather-related factors. Global rounds of play have held up very well in 2022 as the low single-digit decrease in the U.S. has been mostly offset by gains from ex-U.S. markets. We continue to be encouraged by the game's health and momentum as participation holds strong against the surge that the game experienced in recent years. And with this healthy global golf market as a backdrop, we have delivered year-to-date gains in the US, EMEA, Korea, and rest of the world. As you see, our Japan business is off 8% through the first nine months, which is mainly due to supply chain delays, which moved our TSR driver launch out of Q3 and into Q4. Rounds of play in Japan are up 8% year-to-date, and overall market conditions are generally healthy and consistent with other major regions. Now looking forward, our outlook is built around the belief that golfer participation and demand for Titleist foot joy and shoes products remain vibrant, even as we temper expectations given looming macroeconomic uncertainties. While a kushnet is not immune to downward consumer pressures, past experiences have shown that the dedicated golfer tends to be more resilient than many consumer groups. On the product front, we are enthused about early interest in our new TSR drivers and fairways and are confident that our supply chain will support high quality fitting and service experiences and our ability to meet anticipated demand levels. We are on track for the launch of new Pro V1 golf balls in the first quarter. Product development and tour validation are meeting our highest expectations and reflect the company's commitment to continuous improvement. Golf ball raw material availability is steadily improving and our ball plants are operating at full capacity as we prepare for the upcoming global launch. Turning to our foot joy business, we are optimistic about the initial response to our 2023 collections and our teams are focused on enhancing supply chain and fulfillment capabilities to support a foot joy business that is about 40% larger than it was in 2019. And in addition to the ongoing investments in our product development engines, we continue to prioritize and expand our investment in technology throughout the company as we strive to optimize operations and deliver leading service and support to our trade partners and golfers. In summary, the Acushnet team and our resilient operating model continue to provide stability as we navigate exchange rate, inflationary, and global logistic uncertainties. We are confident that the company is structured and well positioned to capitalize on the many market opportunities we see before us, and that our focus on the game's dedicated golfer and proven track record of product innovation and supply chain management will support the company's long-term growth objectives. Thanks for your time this morning. I will now pass the call over to Tom. Thanks, David.

I would like to start by thanking our dedicated associates and trade partners for their efforts in delivering yet another strong quarter for RecushNet. Starting on slide nine, consolidated net sales for Q3 were $558 million, up 7% reported, and up over 13% on a constant currency basis compared to last year. Overall, demand continued to be strong, and all segments showed growth in the quarter on a constant currency basis. Gross profit for the third quarter was 295 million, up 10% versus 2021, and gross margin was 52.8%, up 130 basis points. The increases were driven by higher sales volumes across all reportable segments and were partially offset by continued currency headwinds and elevated inbound freight costs, mainly in golf balls and gear. SG&A expense in Q3 was $202 million, up 1% from the prior year. Our teams did a good job balancing spending while we continued to invest incrementally in our IT platforms and in distribution as we enhance our fulfillment and customization capabilities, particularly in foot joy and gear. R&D expense was $15 million, which was flat compared to 2021. Income from operations was 76 million for the quarter, which was 45% higher than last year, and our Q3 adjusted EBITDA was 87 million, up 23%. Summarizing our year-to-date results, consolidated net sales for the first nine months of 2022 were 1.82 billion, up 6% compared to last year, and up 10% on a constant currency basis. Year-to-date gross profit of $956 million has improved by 5% compared to 2021. However, gross margins of 52.4%, although solid, were down 50 basis points. SG&A expense for the first nine months was $637 million, up 9%, and R&D expense was $43 million, up 6% compared to 2021. year to date income from operations was 270 million, which is 4% lower than last year. Our effective tax rate for the first nine months of the year was 20.6% down from 23.1% in the prior year, primarily because of a change in the mix of our jurisdictional earnings. And adjusted EBITDA was 313 million for the first nine months of 2022 down 6% year over year. There is a reconciliation of net income to adjusted EBITDA for Q3 and the first nine months of 2022 in our earnings release, as well as in the appendix of the slide presentation. Moving to slide 10, our balance sheet continues to be very strong. At the end of Q3, we had about $107 million of unrestricted cash on hand. Total debt outstanding was approximately $434 million. and we had 537 million of available borrowings under our revolving credit facility, which we refinanced earlier in the quarter. Our leverage ratio at the end of Q3 was 1.1 times. Accounts receivable at the end of Q3 was 324 million, up 24 million from the prior year. DSOs improved by two days. Consolidated inventory at the end of Q3 was 537 million, Inventory balances were up across all segments compared to last year, and we are pleased to have returned to what we feel is an appropriate level of inventory to provide high-quality service to our trade partners and meet the continued demand for our products. For context, our consolidated days sales and inventory were 155 days at the end of September, which is in line with pre-pandemic levels. Cash flow from operations for the third quarter was $32 million, compared to $128 million in Q3 of last year. And cash flow from operations for the first nine months was a cash outflow of $59 million compared to a cash inflow of $280 million last year. The decreases in both periods were primarily the result of the relative changes in our working capital compared to the prior year, most notably the increase in inventory. We spent about $13 million on CapEx in Q3 bringing the year-to-date total to $34 million. We now expect our full-year CapEx to be between approximately $50 and $55 million as the timing of some receipts has shifted into 2023. We continue to make great progress against our multi-year strategic golf ball capital investment program. Turning to slide 11, our strong financial performance fuels the continued execution of our capital allocation strategy led by investments in product innovation, golfer engagement, and our operational capabilities. And we continue to prioritize generating strong free cash flow and returning capital to shareholders. Earlier today, our board of directors declared a cash dividend of 18 cents per share payable on December 16th to shareholders of record on December 2nd. This will total a payout of about $13 million for the quarter and brings our year-to-date dividend payout to approximately $52 million. During the third quarter we repurchased 869,000 shares for a total of approximately $42 million, bringing our total for the year to almost 3 million shares and $140 million. 2022 represents our most active share repurchase period to date, resulting in a reduction of our outstanding share count of almost 4% since the beginning of the year. At the end of September, we had approximately $208 million of share repurchases remaining under our current authorization. Assuming continued strong financial performance and favorable market conditions, we expect to remain on track to complete our remaining authorization by the middle of 2023. We continue to believe our capital allocation strategy of investing in the business, returning capital to our shareholders, and executing disciplined acquisitions will generate a compelling long-term total return. Moving to our outlook on slide 12, we remain enthusiastic about the overall health of the Gulf industry and demand for our products. Our retail inventories are healthy and our supply chain continues to strengthen. Inbound freight rates are trending lower from their historical highs. However, at present, we continue to utilize a higher than normal amount of air freight to protect lead times and service levels. And as you would expect, we anticipate confronting currency headwinds and the continued impacts of inflation on our input costs for the foreseeable future. Taking these factors into consideration, we have narrowed our full year guidance. We now expect our full year 2022 consolidated net sales to be in the range of $2.225 billion to $2.250 billion. and our full year adjusted EBITDA to be in the range of $325 million to $335 million. This updated guidance reflects over $116 million of projected negative foreign currency impact, and as a result, we expect our full year constant currency net sales to be up between 9% and 10.2%. In conclusion, our dedicated associates and trade partners led Accushnet in delivering another solid quarter, demonstrating the strength and momentum of the Titleist, Footjoy, and Schuss brands. We remain confident in our ability to achieve 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 Sandra for Q&A.