Acushnet Holdings Corp. (NYSE:GOLF) Q2 2023 Earnings Call Transcript

Acushnet Holdings Corp. (NYSE:GOLF) Q2 2023 Earnings Call Transcript August 5, 2023

Operator: Hello, everybody, and welcome to the Acushnet Holdings Corp. Second Quarter ’23 Earnings Call. My name is Sam and I’ll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Sondra Lennon, Vice President of Investor Relations and FP&A to begin. So Sondra, please go ahead.

Sondra Lennon: Good morning, everyone. Thank you for joining us today for Acushnet Holdings Corp’s Second Quarter 2023 Earnings Conference Call. Joining me this morning are David Maher, our President and Chief Executive Officer; and Sean Sullivan, 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 6-month period ended June 30, 2023, and the comparable 6-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 Company. I will begin by thanking Tom Pacheco for his contributions over the past few years and welcoming Sean Sullivan to the Acushnet team as our new CFO. Sean has been a valued member of Acushnet’s Board of Directors since 2016, having served as Audit Committee Chair and on the Nominating and Governance Committee. In addition to being an experienced CFO, he also brings a deep understanding of the company’s vision and culture to his new role. Sean is a great addition to our team and I’m confident that our analysts and investors will benefit from his contributions to Acushnet and insights into our business. Now to our results.

Acushnet delivered another strong quarter, delivering sales of $689 million, a 6% year-over-year constant currency increase. Gains in Titleist golf balls and golf clubs drove this top line growth, which contributed to adjusted EBITDA of $132 million in the quarter, a 24% increase for the period. And for the first half, sales of $1.376 billion are up almost 12%, while adjusted EBITDA of $279 million represents a 23% gain over last year. These financial results have been supplemented by many successes across the worldwide tours and throughout the pyramid of influence and are highlighted by Titleist and FootJoy ambassadors, Wyndham Clark and Brian Harman’s recent wins at the U.S. Open and Open Championships. These achievements helped to fuel positive brand momentum and validate the company’s enduring commitment to product performance and quality.

Supporting the company’s first half results, we are enthused by the golf industry’s overall health and stability with participation remaining vibrant even as golfers return to many pre-COVID activities. Some 250 million rounds of golf were played in the U.S. during the first half, a 5.5% gain versus last year and roughly 16% increase compared to 2019. Total worldwide rounds for the first half are projected to be up low single digits as domestic gains more than covered modest weather-related declines outside the U.S. The sport continues to generate strong interest and is benefiting from new golfers who have entered the game during the past few years. Now taking a look at our business by segment. Titleist golf balls posted 20% increases in both the second quarter and first half as the company executed our most successful Pro V1 launch to date.

In addition to major wins by Clark and Harman, the winners of the recent U.S. Women’s Open Evian Championship, Senior U.S. Open — Senior Open U.S. Junior Amateur and U.S. Girls Junior Amateur, all trusted Titleist Pro V1 or Pro V1x golf balls on their roads to victory. Titleist was also the most played ball at the U.S. Adaptive open, one of the sport’s most inspiring and inclusive championships. Operationally, our team continues to optimize and expand output to meet strong global demand for Titleist golf balls, contributing to double-digit growth in all global regions for the half as golfer response to new Pro V1 and Pro V1x models has been positive across all markets. Titleist golf ball retail inventories are approaching normalized levels with the exception of Pro V1 models, which we expect to remain in tight supply into the fourth quarter.

Titleist golf clubs are also excelling with sales up over 16% in both Q2 and the first half. We are seeing positive response to our entire golf club product line, which combined with our deep commitment to custom fitting are the primary catalysts to our growth and momentum. TSR drivers are the most played models on the PGA Tour and our leading our golf club games and Scotty Cameron putters are having another strong year, fueled by great response to our new super-select models introduced earlier this year. As you know, we stagger Titleist club launches over a 2-year cycle. And next up, our new T-Series irons, which we expect to begin shipping later this month. Initial response across worldwide tours and with trade partners is meeting our high expectations and we are confident in our team’s ability to execute a successful launch campaign throughout the second half.

The Titleist gear business was up 3% for the quarter and 24% ahead for the first half. This outsized growth reflects the success of our product lines, notably golf bags and travel gear and also some recalibarization of shipments in 2023 as compared to last year when we face supply constraints throughout the first half. Now to FootJoy, where you see revenues were off 9% in the quarter and about flat for the half. These results reflect declines in golf footwear sales as we confront elevated marketplace inventory levels and increased promotional activity in many regions. We are confident in our ability to protect FootJoy’s premium shares and leadership position. However, expect that it will be a few quarters until retail inventories return to healthier levels.

For added context on the footwear market, while FootJoy footwear is down compared to first half 2022, it is almost 30% larger than 2019, giving you a sense for recent category growth and providing perspective on the current market situation. FJ apparel continues its positive trend with revenues up double digits for the half as we benefit from recently expanded design, customization and fulfillment capabilities across our performance apparel and outerwear categories. And finally, we continue to be enthused by the ongoing growth and development of our shoes business, which posted double-digit gains in the half led by the U.S. market, which was up almost 25%. Now for a brief overview by region where you see the U.S. market leading the pack with second quarter sales up 14% and first half sales up 19%.

Healthy participation gains across all segments and especially strong demand for Titleist balls, clubs and gear are driving our U.S. growth and momentum. For the half, Japan was up 4%. Korea was flat and EMEA finished off 2%. These markets share similar themes with weather-related headwinds and gains across our Titleist portfolio, helping to offset FootJoy declines. Now looking forward, we are enthused by our brand momentum, the overall health of the golf market and the resilience and engagement of Acushnet’s core consumer, the game’s dedicated golfer. From a product development and supply chain readiness standpoint, our team has done good work preparing for the second half to fully support our key initiatives and capitalize on Pro V1 momentum and high expectations for new Titleist irons.

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We will increase our A&P investment in the back half of the year commensurate with the opportunities before us. Longer term, we believe the infrastructure investments we are making in golf balls and clubs, our most capital-intensive businesses, will position the company for sustaining growth and success. Most significant is our previously disclosed 5-year $120 million capital investment across golf ball operations and R&D. And consistent with past practices, we continue to leverage the company’s strong balance sheet and execute a disciplined approach to capital allocation for the long-term benefit of Acushnet and our shareholders. As Sean will outline, our recent growth has supported increased investment in our core businesses and elevated levels of shareholder returns.

In summary, the company is well positioned heading into the back half of the year and we are confident in our ability to successfully execute Acushnet’s long-range priorities. Thanks for your attention this morning. I will now pass the call over to Sean.

Sean Sullivan: Thank you, David. Good morning, everyone. I’m thrilled to have joined the Acushnet Company full time on June 1. I look forward to leveraging my experience as a Board member and I’m truly excited to work with the leadership team and the talented associates here at Acushnet as we build on the success enjoyed to date. Turning to the results. As David mentioned, we had a great quarter and a strong first half of 2023. Second quarter net sales increased 6.4% driven by higher sales across our Titleist brand portfolio, while adjusted EBITDA was $132 million, a 24% increase. For the first half of 2023, net sales and adjusted EBITDA increased 11.6% and 23.1%, respectively. Net sales growth in the quarter was driven by continued momentum of our Titleist brand with golf balls and golf clubs, growing by 19.8% and 16.3% respectively, while gear increased by 2.9%.

FootJoy sales were down 9.5% due to a slowdown in the footwear category, which was partially offset by an increase in FootJoy apparel. Quarter-over-quarter sales also declined in products that are not allocated to 1 of our 4 reportable segments. Gross profit in the quarter was $369 million, up 7.2% compared to 2022, primarily due to higher sales volumes in Titleist golf balls and golf clubs, lower golf club royalty expense and lower inbound freight across all reportable segments. FootJoy gross profit was down mainly due to lower sales volumes in footwear and unfavorable manufacturing overhead absorption. Overall, gross margin of 53.5% was up 130 basis points, largely due to lower inbound freight costs across all reportable segments. SG&A expense of $242 million in the quarter increased $2.8 million or 1.2%, mainly due to higher advertising and promotion expense to support new product launches and costs related to the optimization of our distribution and custom fulfillment capabilities.

These increases were offset by lower IT-related expenses in Q2, which has shifted to the back half of 2023. R&D expense of $17 million was up mainly due to higher employee-related expenses. Our increase in intangible amortization was due to the acquisition of trademarks related to Titleist golf clubs and golf gear in the fourth quarter of 2022 and first quarter of 2023 respectively. Interest expense of $11 million in the quarter was up $9 million due to an increase in borrowings and interest rates with a little more than half the increase coming from higher debt balances. Our effective tax rate in Q2 was 21.8%, up from 19.1% last year, primarily driven by a shift in our mix of jurisdictional earnings. Moving to our balance sheet and cash flow highlights.

Our balance sheet and strong free cash flow positions us well to support ongoing investments in the business, manage working capital needs and support our capital allocation program. Our net leverage ratio at the end of Q2 was 1.7x. Inventories declined from both last quarter and year-end, and we are comfortable with our inventory quality and position given the current state of demand in the supply chain. We expect inventories to decrease in Q3 before increasing in Q4 as we prepare for 2024 product launches. First half cash flow from operations was up significantly from the prior year, mainly due to changes in working capital, primarily inventory. Capital expenditures were $27 million in the first half of 2023 and are still expected to reach approximately $75 million in fiscal year 2023 given the back half loaded plan.

Our capital allocation priorities remain consistent with those previously articulated, investing in the business, including product innovation, golfer connection and operational excellence, returning capital to shareholders in the form of dividends and share repurchases and disciplined M&A. Through June, we returned roughly $167 million to shareholders in 2023, with approximately $140 million in share repurchases and $27 million in cash dividends. Today, our Board of Directors declared a quarterly cash dividend of $0.195 per share payable on September 15 to shareholders of record on September 1, 2023. As of June 30, we had $267 million remaining under the current share repurchase authorization. I expect our share repurchase activity to continue meaningfully into Q4, given our previously filed agreement with Magnus that is expected to settle in early November.

Moving on to our guidance for 2023. We have increased our net sales range to $2.35 billion to $2.4 billion. Our revenue at constant currency remains projected to be up 5% to 7.2% compared to 2022. Golf ball sales momentum is expected to continue in the back half, although we still have constraints on available supply of Pro V1 and Pro V1x balls. With respect to golf clubs, we are enthused about our upcoming iron launch, and it is worth noting that the second half sales will be comping against a Metals launch from last year and Metals have a larger initial inventory pipeline than irons, which are more custom fit and built to order. Titleist golf gear sales are expected to be lower in the second half, mainly due to outsized growth in 2022 in this segment as our supply chain and fulfillment capabilities caught up.

Finally, we have tempered our outlook in the FootJoy golf wear segment given the elevated marketplace inventories in the footwear category. Our adjusted EBITDA guidance has increased to $355 million to $375 million, up from $345 million to $365 million. Our updated range reflects the benefit of lower freight and reduced headwinds in currency. The second half is expected to see promotional activity, notably in footwear and unfavorable footwear manufacturing overhead absorption. We expect third quarter sales to be about 55% to 60% of second half sales and third quarter adjusted EBITDA to be about 80% of second half adjusted EBITDA. Finally, our forecasted effective tax rate for fiscal ’23 is expected to be in line with our first half rate of approximately 20%.

In closing, we are very pleased with our first half performance and remain focused on executing on our priorities for 2023 and beyond. So with that, I’ll now turn the call over to Sondra for Q&A.

Sondra Lennon: Thank you, Sean. Operator, could we now open up the line for questions?

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Matthew Boss of JPMorgan.

Amanda Douglas: It’s Amanda Douglas on for Matt. So David, could you speak to the strength you’re seeing across both golf ball and golf club categories? How much of this do you see as a function of strong overall industry backdrop maybe relative to market share gains? And then just across geographies, could you elaborate on the bifurcation of performance you’re seeing in the U.S. versus international regions?

David Maher: Yes. On the ball — your first question, on the ball side, certainly, we always correlate the ball business and golf ball demand to rounds-of-play, which have been very strong. I think up near 6% — 5.5%, 6% in the U.S. And I’ll qualify that a bit and that includes some declines in the Pacific and Mountain regions, really the whole West Coast and even here in New England. So rounds-of-play in a very good shape that correlates to nice golf ball demand. It’s a Pro V1 launch here for us. We’ve had some nice success around our new Pro V1 models. So that story, while U.S. centric and the answer really playing out around the world as the game is healthy, people are playing and they’re using golf balls. And again, we’re off to a very good start across our entire product line.

Our club business, as I said in my remarks, really led by drivers, our TSR driver franchise is off to a great start. We launched that end of last year. I mentioned we’re having success with putters as well. And then your 2 products for us would be wedges and irons, very much in line with our expectations. So we’re very pleased with both the ball and club categories. The only challenge I would add right now is in golf balls, where we’re supply constrained, while we’re operating our facilities 24/7. We’re still in tight supply with Pro V1 and Pro V1x. To your second question around what’s happening U.S. — outside the U.S. I’ll touch on a couple of key markets. The rounds of play differential we see where rounds are up slightly in the U.S., down slightly in key markets of Japan, Korea and I’ll add the U.K. I think, first and foremost, that’s probably a weather phenomenon.

But in terms of our business, there’s a similar pattern we’re seeing around the world balls, healthy in all markets, clubs healthy in all markets, gear stable. If there’s any call out, as we said in our prepared remarks, it would be footwear and there’s just — there’s an excess supply of footwear in the global markets. I will add that of the categories we compete in, balls, clubs, gear, footwear. Footwear is relatively small. So I think we need to keep that into context. So really, the key differential that we’re seeing is just a slight variance in rounds of play and that gives an added push to the U.S. market.

Operator: Our next question comes from Daniel Imbro of Stephens.

Joe Enderlin: This is Joe Enderlin on for Daniel. Sounds like golf ball demand remains — it sounds like golf ball demand remains pretty robust, but it sounds like some supply issues are still around the Pro V1. We were wondering what’s causing headwinds on the production or supply front and then what steps are being taken to more effectively match demand with capacity.

David Maher: Yes. I don’t know that it’s — there’s no single call out from a supply chain standpoint. Our availability is very good throughout the line with the exception of Pro V1 and Pro V1x. It’s still a function of strong demand. We’ve been producing Pro V1 and Pro V1x newer models since the fourth quarter last year, right? We’re building inventory to support the first quarter first half launch. We expected that we would catch up and get in front of demand. By the summer time, we’re now pushing that out a few months. We think that will be closer to the end of the third quarter, fourth quarter. But there are no constraints to call out other than very strong demands and our facilities are operating at peak capacity. We do think that normalizes as we have a chance to catch up in the fall but what happens in the fall and winter as we make more than we sell.