Acushnet Holdings Corp. (NYSE:GOLF) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello everyone and thank you for standing by. Welcome to the Acushnet Company’s First Quarter 2023 Earnings Call. My name is Emily and I’ll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host Sondra Lennon, Vice President of Financial Planning and Analysis. Please go ahead.

Sondra Lennon: Good morning, everyone. Thank you for joining us today for Acushnet Holding Corp’s first quarter 2023 earnings conference call. Joining me this morning are David Maher, our President and Chief Executive Officer; and Tom Pacheco, our Chief Financial Officer. Before I turn 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 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 3 month period ended March 31, 2023 and the comparable 3 month period.

With that, I’ll turn the call over to David.

David Maher: Thanks, Sondra, and good morning, everyone. As always, we appreciate your interest in Acushnet Holdings. I am pleased to report on a strong start to the year and as reflected by our results, the Acushnet team is excelling on the product development, manufacturing, and supply chain management fronts. My talented teammates are doing great work adapting and strengthening our capabilities, adding agility and capacity to keep pace with steady demand. Showcasing the overall health and diversity of the Acushnet portfolio, each segment and region reported gains in the quarter with Titleist golf balls, clubs, and gear growing double digits, helping to fuel the company 17% year-over-year increase to $686 million in the quarter.

And bottom line results for the period grew by 22% as Acushnet delivered adjusted EBITDA of $147 million, generating operating leverage and benefiting from favorable mix shifts from our full slate of new product launches. We are pleased with this start to the year and the continued momentum of our core consumer, which is translating across our businesses. Tom will share greater details in a few minutes. Shifting now to our segment overview, Titleist golf balls increased 21% over last year, led by the successful launch of new Pro V1 and Pro V1x in all regions. For context, we shipped roughly 0.5 million dozen more Pro V1s compared to last year, which is commentary on the health of the franchise and our strengthening supply chain. New Pro V1 models are quickly making their mark across the worldwide professional tours and contributing to 74% usage more than 8 times the nearest competitor.

And with 70 wins through last week, Titleist golf balls have notched 58 more titles than the number two brand. Titleist was the most played ball at the Augusta National Women’s Amateur trusted by 74% of the competitors in one of their most prestigious events. And since switching to new Pro V1x, Lilia Vu has played 5 tournaments and won two of them, including her first major at last week’s Chevron Championship. During the stretch she is incredible 64 under par with her new Pro V1x golf ball. On the supply side, Titleist golf ball channel inventories are in good shape to start the year and we are steadily building our backstock to normalize levels. Our global golf ball inventories are at their healthiest levels since 2019. Although, we do anticipate that Pro V1 and AVX models will remain in tight supply through the summer months.

Titleist golf clubs also posted a strong start to the year with sales increasing 16% to $181 million. New TSR driver and fairway momentum continues to build as this franchise enters its first spring season and we are especially pleased with TSRs performance in light of so many competitive launches in the quarter. TSR is the most played driver on the PGA and DP World tours and affirming the strength of Titleist clubs across the competitive spectrum. Titleist was the number one driver, iron and wedge at the 2023 Augusta National Women’s Amateur. Our team did great work successfully launching the all new lineup of Scotty Cameron super select putters in March, as we continue to strengthen this leading putter franchise. Our overall golf club component availability is in good shape, and we expect lead times to be healthy throughout the upcoming season.

On the Titleist gear, which was up 57% for the quarter. This outsize growth reflects strong demand for our new lease legend and player sandbags, a favorable comp against last year’s supply chain limited quarter, and the early shipment of some April custom gear demand as we prioritize service and build momentum in our custom operations. Gear was most impacted by last year’s supply chain complications and as seen with these first quarter results, our team has done great work adapting to ensure product is available when and where it is most needed. Now to FootJoy, which posted sales of $205 million, an 8% increase for the quarter. FJ apparel had another terrific quarter was sales up double digits, as we realize the benefits from recently enhanced customization and fulfillment capabilities.

Similar to custom gear, we shipped some April custom apparel demand in March as we strive for on-time or early delivery to start the season. The FJ team fortified its position as the number one shoe in golf with new premier, HyperFlex and traditions launches in the quarter. FJ golf KJUS are defined by performance, style and comfort innovation. And we are especially pleased with FJs positive energy and momentum, which are helping the brand to stand out in this category. Not noted on this slide, but worthy mention is the ongoing growth and development of our KJUS business, which was up over 30% in the quarter. We are enthused about KJUS momentum and long-term growth prospects, as our team does great work building a foundation around product and operational excellence to support the brand’s continued expansion.

Now taking a look at revenues across regions, you see the U.S. market set the pace up 25% for the quarter, and with growth coming from all segments. Japan and Korea also reflect the good work of our teams to set the stage and position new Titleist and FootJoy products for the peak spring and summer periods. Our business across EMEA was flat in the quarter in line with expectations and comping against last year’s outsize growth. Globally, while the first quarter is not a major driver to annual rounds of play, U.S. rounds were flat for the period in spite of declines in the West resulting from much needed rainfall. Rounds outside the U.S. are projected down low single digits for the quarter, again due to unfavorable weather cups. Overall, global golf participation remains healthy and resilient as we enter the second quarter.

Before handing the call over to Tom, I will affirm our confidence in the company’s product lines and operational capabilities and the resilience and engagement of Acushnet’s target consumer, the games dedicated golfer. Interest in the sport is in great shape, the professional game is healthy as reflected by strong ratings, and golf courses are financially sound with many making meaningful capital investments to enhance their long-term value proposition and appeal. Acushnet’s retail inventories are very healthy and total channel inventories have returned to normal levels and golf shops are well-stocked for this time of year. As is often the case, there are pockets that have our attention, including footwear in the U.S., golf clubs in Japan, and apparel in Korea.

Our teams are well-conditioned to monitor these situations and will adapt if and as necessary. In summary, the golf industry is on firm footing and well-positioned for the future and while Acushnet is not immune to macro-economic pressures, we have over time proven to be resilient due to the avidity and favorable demographic profile of our core consumer the game’s dedicated player. Our global teams have done nice work positioning Titleist, FootJoy, KJUS products in golf shops, and we are confident in our ability to deliver compelling product and service experiences throughout the upcoming season. Thanks for your attention this morning. I will now pass the call over to Tom.

Tom Pacheco: Thanks, David, and good morning, everyone. I would like to begin by thanking our talented associates for their outstanding effort they put forth in Q1 to deliver yet another strong quarter for Acushnet. Starting with our Q1 results on Slide Nine, consolidated net sales were $686 million up 13% reported and up 17% level effects versus 2022. This is a strong start to the year with all reportable segments showing growth in the quarter on both a reported and constant currency basis. Gross profit for the first quarter was $366 million, up $49 million or 15% versus the prior year, and gross margins were 53.3% up 100 basis points. The increase in gross profit and gross margin is primarily the result of higher sales volumes and lower inbound freight costs, partially offset by the unfavorable impact of currency across all reportable segments.

SG&A expense in Q1 was $223 million up $27 million or 14% compared to 2022 and R&D expense was $15 million, up slightly compared to the prior year. The increase in SG&A was primarily from higher selling expense, due to increase sales volumes, increased advertising and promotional expense, primarily related to new product launches and an increase in administrative expense mainly due to employee related costs. Income from operations for the quarter was $125 million, up $20 million or 19% compared to 2022. Interest expense was up $9 million in the quarter compared to last year, with a little more than half of the increase coming from higher debt balances and the remainder coming from higher interest rates. Our effective income tax rate for Q1 was 18.1%, down from 20.4% last year, primarily because of a result of a shift in our mix of jurisdictional earnings.

Net income attributable to Acushnet Holdings was $93 million, up $12 million or 15% compared to 2022 and adjusted EBITDA was $147 million, up $27 million or 22% from the prior year. There was a reconciliation of net income to adjusted EBITDA for Q1 in our earnings release as well as in the appendix of the slide presentation. Moving to Slide 10, the strength of our balance sheet continues to provide us flexibility. At the end of Q1, we had about $55 million of unrestricted cash on hand. Total debt outstanding was approximately $829 million with approximately $159 million of available borrowings remaining under our revolving credit facility. Our leverage ratio was 1.8 times at the end of Q1. The increase in our total debt results primarily from an increase in working capital, our share repurchase program, and our recent acquisitions.

Consolidated accounts receivable at the end of Q1 was $435 million, up $58 million from Q1 of the prior year and our day sales outstanding was 52 days, up 1 day compared to Q1 of 2022. Inventory at the end of Q1 was $639 million down $36 million or 5% from the end of 2022. We saw overall declines in golf clubs, gear and FootJoy and an expected increase in golf balls inventory during the quarter, as we continue to play catch up from previous raw material shortages. Overall, we are comfortable with our inventory quality and position and we are confident that our inventory will continue to trend towards normal seasonal levels with further decreases in Q2 and Q3, before a slight increase in Q4, when we prepare for 2024 product launches and golf season.

Cash flow from operations for the first quarter of 2023 was an outflow of $86 million compared to an outflow of $164 million for the same period in 2022. The improvement in cash flows from operations comes primarily from a lower use of working capital, mainly inventory. And we continue to make meaningful CapEx investments in our business. We spent $12 million on CapEx during Q1, about the same as Q1 2022. We still expect our full-year capital expenditures to increase compared to the full-year 2022 to about $75 million, as we continue our golf ball Strategic Investment Program, make investments in club assembly capacity around the world, and continue to make investments in our fitting capabilities to further enhance our golfer connection. Moving to Slide 11, our strong financial results support the continued execution of our capital allocation strategy.

Our highest priority remains investing in the business in the form of OpEx and CapEx with a focus on product innovation, golfer connection, and operational excellence. And we will continue to evaluate potential acquisitions and other investments 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 drive growth at a favorable return. Our focus on generating strong free cash flow and returning capital to shareholders continues to be a high priority. In March, we paid our previously announced dividend, which resulted in a cash outflow of approximately $14 million. And our Board of Directors today declared a quarterly cash dividend of $0.195 per share, payable on June 16 to shareholders of record on June 2.

This will result in a Q2 cash outflow of approximately $13 million. During Q1, we purchased about 2.5 million shares of our common stock for approximately $116 million, including approximately 2.2 million shares from Magnus for $100 million. At the end of Q1, we had about $291 million remaining under our current share repurchase authorization. Our capital allocation strategy is a foundational element of Acushnet’s value proposition, which we continue to believe creates a compelling long-term total return for our shareholders. Shifting to our outlook on Slide 12, we are pleased with our solid start to the year and we are maintaining our guidance, as it is our practice to not make meaningful shifts in our guidance until we get through the first half of the year.

Overall, we continue to see steady demand for golf and Acushnet products, we are pleased with the success of our recent launches and they’re excited about our upcoming product introductions over the balance of the year. As you would expect, our outlook continues to be tempered somewhat by caution, given the overall economic environment or currency is still expected to be a headwind for the balance of the year and more so in Q2, we expect all segments to show growth on a constant currency basis for the full year. We expect to continue to benefit from lower inbound freight rates and reduced air freight utilization. However, we expect some headwinds from higher input costs and from the return of some promotional activity, albeit at lower than pre-pandemic levels.

Taking these factors into consideration, we are reaffirming our full-year 2023 guidance. We expect consolidated net sales to be in the range of $2.325 billion to $2.375 billion up 3.5% on a reported basis at the midpoint. On a constant currency basis, consolidated net sales are expected to be up between 5% and 7.2%. And we expect full-year adjusted EBITDA to be in the range of $345 million to $365 million up 5% compared to 2022 at the midpoint. In conclusion, our associates and trade partners enabled us to again deliver strong results in Q1. While being cautious given current economic uncertainty, we are pleased by the structural health of the industry, the momentum of our brands, and the investments we are making in the business. We remain confident, we will meet or beat our financial goals for 2023 and beyond and deliver a solid long-term total return for our shareholders.

With that, I will now turn the call over to Sondra for Q&A.

Sondra Lennon: Thanks, Tom. Operator, could we please open the line for questions?

Q&A Session

Operator: [Operator Instructions] Our first question today comes from Daniel Imbro with Stephens. Please go ahead. Daniel?

Operator: Our next question today comes from Casey Alexander with Compass Point. Casey, please go ahead.

Operator: The next question comes from JP Wollam with ROTH Capital Partners. Please go ahead.

Operator: Our next question comes from Noah Zatzkin with KeyCorp (sic) [KeyBanc]. Please go ahead, Noah.

Operator: Our next question comes from Ivan Feinseth with Tigress Financial. Ivan, please go ahead.

David Maher: Thank you. Well, thanks, everybody. As always, we appreciate your interest in Acushnet. We hope for a nice spring season and hopefully, I’ll get out and play a little bit and we look forward to talking to you after the quarter.

Operator: Thank you, everyone, for joining us today. This concludes our call and you may now disconnect your lines.