Acushnet Holdings Corp.

Good morning everyone and welcome to today's Akushnet Company 3Q24 earnings call. My name is Drew and I'll be the moderator for today's call. This call will have a Q&A session. If you wish to register a question, please press star followed by one on your telephone keypad. And if you wish to withdraw your question, then it is star followed by two. It's now my pleasure to hand over to Sondra Lennon, Vice President FP&A and Investor Relations to begin. Please go ahead.

Good morning, everyone, thank you for joining us today for Krishna holding corpse third quarter 2024 earnings conference call. Joining me this morning or David mar our President and chief executive officer and Sean Sullivan 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 Christmas current expectations. and are subject to uncertainty and changes and 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 US Securities and Exchange Commission. Throughout this discussion, we will make reference to non-GAAP financial metrics, including items such as net sales on a constant currency basis and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to the most directly comparable gap metrics 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 net 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 are referring to the nine-month period ended September 30, 2024, and the comparable nine-month period in 2023. With that, I'll turn the call over to David.

Thanks, Sandra, and good morning, everyone. As always, we appreciate your interest in the Akushnet Company. I will start on slide four and get right to our results. During the third quarter, Acushna delivered net sales of $621 million, a 5% year-over-year increase. This growth contributed to adjusted EBITDA of $107 million in the quarter, up 9% from the third quarter of 2023. Through September, year-to-date net sales were up 3%, surpassing $2 billion, with growth coming from Titleist clubs, Titleist golf balls, and gear. Adjusted EBITDA of $392 million was up 4% compared to the first nine months of last year. And I will pause here to thank my teammates for their dedication, which fuels this company performance. Looking at our business by segment, Titleist Golf Ball net sales were down 1% in the quarter and are up 5% year to date. This growth has been led by sustaining Pro B1 momentum, especially in the U.S. market, which is benefiting from increased rounds of play. As we said on our last call, we expect golf ball sales to be down modestly in the second half as we and our trade partners lower inventories in preparation for the launch of new Pro V1 models in January. This upcoming launch, which will mark the 25th anniversary of Pro V1, is well underway as we recently debuted new Pro V1 models across worldwide tours. Player feedback has been very positive, and we have fully transitioned production lines to new models to support the upcoming launch. Titleist Golf Clubs posted a healthy 19% increase in the third quarter, as the team did great work bringing new GT drivers and fairway medals to market. Since its debut, GT has been the number one driver on the PGA, DP World, and Korn Ferry Tours, and early consumer response is meeting our high expectations and fueling segment momentum. Year to date, Titleist Golf Clubs were up 9%, with growth in all regions led by gains in the U.S. and Japan, and an especially strong year for our Vokey Wedge franchise. Gear was up 9% in the quarter and 3% year to date, primarily related to higher sales volumes and travel with the inclusion of Club Glove in 2024. And now to Foot Joy, where you see revenues were down 2% during the third quarter and off 3% year to date. Despite the decline, FJ has executed well in what has been a soft apparel and footwear market across most regions. The FJ team also continues to make good progress in diversifying and strengthening our footwear supply chain and will soon complete the full transition of our footwear production lines to a state of the art new facility in Vietnam. We continue to work with our long standing JV production partner and are confident that over time this move will facilitate enhanced innovation and speed to market. And lastly, net sales of products not allocated to a reportable segment were down in the third quarter and year to date. This Q3 shortfall is partly related to the timing of shoe shipments, which moved from late Q3 in 2023 to early Q4 this year. Now for a brief overview by region, where you see the U.S. market continues to benefit from healthy participation and resilient consumer demand, with Q3 net sales up 6%, and year-to-date up 7% with growth coming from all segments. Despite a slow start due to poor weather, U.S. rounds of play are now up 2% year-to-date and keeping pace with the record level set in 2021. During the quarter, Japan, Korea, and rest of the world were up, partially offset by a decline in EMEA. During the first nine months, Korea, EMEA, and rest of the world declined low single digits while we posted a slight increase in Japan. Again, softness in the footwear and apparel markets have been the main contributors to these declines, while our golf clubs and ball businesses have been more resilient. Rounds outside the U.S. are projected to be off 2% year-to-date, with Korea up slightly and other regions down. Looking to Q4, we are comfortable with our inventory positions both owned and at retail, and look to build upon our momentum in golf balls, clubs, and premium FJ footwear for the holiday season and heading into 2025. And we point to the attractiveness and resilience of a Kushnitz core consumer, the game's dedicated golfer, and the company's enduring commitment to product and service excellence as pillars of the company's efforts to deliver great experiences to golfers and trade partners, and in turn, drive shareholder value. These priorities, along with the company's strong balance sheet and disciplined approach to capital allocation, remain the foundation of Kushner's proven investment thesis. Thanks for your attention this morning. I will now pass the call over to Sean.

Thank you, David. Good morning, everyone. As David mentioned, we had a great third quarter and solid year-to-date performance. In the third quarter, net sales increased 5% over the same period in 2023, primarily driven by higher net sales in Titleist golf clubs. Adjusted EBITDA of $107 million was up $8.6 million. For the first nine months of 2024 net sales and adjusted EBITDA increased 3.1% and 3.8% respectively. The 19% increase in Titleist golf club net sales in the quarter was driven by the successful launch of our GT drivers and fairway metals. Titleist golf gear was also up in the quarter almost 9% compared to last year. Titleist golf balls were down 1% in the quarter, primarily due to lower sales volumes of our performance models. FootJoy was down 2% in the quarter, primarily on lower sales volumes in footwear and apparel. Gross profit in the third quarter of $337 million was up 9% or 29 million compared to 2023 primarily due to higher sales volumes and titles golf clubs and golf gear and higher average selling prices across all foot joy categories. Third quarter gross margin of 54.4% was up 240 basis points versus prior year, largely due to higher sales volumes and a favorable product mix in Titleist golf clubs. SG&A expense of $233 million in the quarter increased 23 million, or 11%, from 2023, mainly due to higher employee-related expenses related to administration and to support our golf club and ball-fitting initiatives and increases in advertising and promotional expenses, mainly supporting the launch of the GT drivers and metals in the quarter. Interest expense of $13 million in the quarter was up $4 million due to an increase in borrowings. Our effective tax rate in Q3 was 19.3% as compared to 16.5% in last year's third quarter, primarily driven by changes in our jurisdictional mix of earnings. Looking to the full year, we expect our annual effective tax rate to be in line with our year-to-date rate of 21.6%. Moving to our balance sheet and cash flow highlights, as we head into 2025, our balance sheet and cash flow positions are strong and we continue to prioritize our ongoing investments in the business and returning capital to shareholders. Our net leverage ratio at the end of Q3 using average trailing net debt was 1.8 times, sequentially down from 1.9 times in the second quarter. Our inventory position has significantly improved having declined 19% and 6% when comparing to year-end 2023 and last year's third quarter, respectively. We are comfortable with our inventory position given the current state of demand and expect inventories to increase at year-end, primarily to support the 2025 Pro V1 and Pro V1X launch as well as the 2025 club launches. Year-to-date cash flow from operations decreased from the first nine months of 2023, primarily due to decreases in net income and deferred income tax expense, as well as changes in working capital. Capital expenditures were $43 million through the first nine months of 2024, and we still expect full-year capex spend to be approximately $80 million. Through September, we returned roughly $184 million to shareholders, with $143 million in share repurchases and $41 million in cash dividends. Today, our Board of Directors declared a quarterly cash dividend of 21.5 cents per share payable on December 20 to shareholders of record on December 6, 2024. During the quarter, we repurchased 1.1 million shares for an aggregate of $70 million. Included in this amount were shares repurchased from Magnus for $37.5 million in relation with our previously disclosed March 2024 share purchase agreement. As of September 30, 2024, we had $232.2 million remaining under the current share repurchase authorization, including $62.5 million related to the June 2024 share purchase agreement. Turning to our full year 2024 outlook, we are narrowing our adjusted EBITDA range to $395 million to $405 million. With respect to our 2024 net sales outlook, we are reaffirming a range of $2.45 billion to $2.5 billion on a reported basis. As we discussed on our second quarter call, we still expect to be towards the lower end of the reported sales range, in part due to FX impacts, and closer to the midpoint of our 3.2% to 5.3% constant currency sales range. When looking at the fourth quarter, our outlook incorporates year-over-year sales growth in all segments except golf balls, which is expected in the last quarter of our two-year product lifecycle. We also expect year-over-year fourth quarter adjusted EBITDA improvement, which includes incremental investments across SG&A and R&D, as we look to build upon this year's momentum heading into 2025. Also in the fourth quarter, we anticipate incurring a restructuring charge related to the full transition of our footwear supply chain to Vietnam in early 2025, as David just highlighted. Lastly, beginning with our 2024 10-K filing, we expect to combine Titleist golf balls and golf clubs into one operating segment that will be reported as Titleist Golf Equipment. In recent years, golf balls and golf clubs have increasingly converged from a strategic and economic standpoint, and we believe this new reporting structure best reflects the way in which we are now viewing and managing the golf equipment business. Golf gear and foot joy golf wear will remain as reportable segments. In closing, really pleased with our year-to-date performance. and the team remains focused on finishing the year strong and continuing to execute on our strategic priorities for 2025 and beyond. With that, I will now turn the call over to Sandra for Q&A.

Thank you, Sean. Operator, could we please open the line for questions?

Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. And if you wish to withdraw your question, then it is staff followed by two. Our first question today comes from Matthew Boss from JP Morgan. Your line is now open. Please go ahead.

Great, thanks. So David, maybe if you could elaborate on participation and engagement trends that you're seeing in the current landscape and just any notable call-outs across geographies as we think about the U.S. market relative to international.

yeah hey matt so you know as as noted we're really pleased that the industry is really pleased with with rounds of play in the US up up just about 2% year to date. After a slow start in in January and February, primarily in the southeast and as you look at sort of the map of the country. you see all regions up versus with the exception of the southeast again, a slow start in the early part of the year. So to sit here today and look at 24 rounds on pace with the record of 21, I think is really a positive indicator and trend of what's happening in golf, both with dedicated golfers and the benefit of some of the new golfers that have joined the game in the last couple of years. As we move around the globe, Matt, we project rounds through September down about 2%, Korea up slightly, the others down modestly. A little bit of weather, a little bit of maybe macroeconomic, and we've said consistently U.S. market, U.S. consumer, stronger than we're seeing around the world. But by and large, we think rounds are holding up very well. There's always going to be a variability due to weather. As I think about where we are today versus sort of a 2019 baseline, the major markets, U.S., Korea, up 20-plus percent. Japan would be in my top three markets, up 10 percent, and worldwide rounds up about 15 percent. Structurally, Matt, the game's in a good place, and we're always going to have weather ups and downs, but net-net, we – we're really confident with where we are through the first three quarters.

Great. And then maybe just a follow up for Sean. As we think about gross margin, just any puts and takes in terms of the fourth quarter on gross margin and how best to think about the promotional landscape and inventory in the channel today?

Yes, I'll take the first one. I think gross margin, you saw the the positive trend in Q3. I think I spoke on the last call about the back half gross margin approximating where we ended the first half. That statement still holds true. Obviously, given the performance of the club business in Q3, that really helped drive. But again, it's both volume and price and efficiency. So very, very pleased with that. In terms of the promotional environment, And inventory, I'll turn it over to David.

Yeah, I'll weigh in, Matt. Just so from an equipment standpoint, balls and clubs, I would say steady state, normal. You're going to see some promotional activity at the holidays, which we always do. So again, I would characterize that as normal. I've said this before, clubs, we tend to be a little bit isolated or resilient just because so much of what we do is custom fit. So net net, I would put equipment, balls and clubs in a In a steady state normalized position if there's some watch out it's it's the continued discussion we've had all year about about footwear. While better than it has been, I would expect to see some promotional activity over over the holidays. apparel again we don't we don't we don't see too much too many swings within apparel simply because so much of what we do is custom embroidered. But I would overall characterize the landscape as within the range of normal, balls, clubs, healthiest, and maybe a watch out in footwear.

It's a great color. Best of luck.

Thanks, Matt.

As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad. And if you wish to withdraw your question, then it is star followed by two.

Okay, thanks, everybody. Short Q&A today. Everybody gets a little time back on their calendar. As always, we appreciate your interest and look forward to getting together again in three months' time. Thanks again.

That concludes today's AcushNet company call. You may now disconnect your line.