Acushnet Holdings Corp

NYSE:GOLF

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:02] Good morning and welcome to a Kucinich police court, third quarter Twenty twenty earnings conference call, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, if you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now have to turn the call over to your host, Sondra Lennon, please go ahead.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:00:35] Good morning, everyone, thank you for joining us today for a current holdings third quarter 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 cushion at 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 be making 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 gap 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 when referring to segment and regional year on year, sales increases and decreases, we are referring to sales and constant currency. And please also note that when referring to year to date results or comparisons, we are referring to the nine month period ended September 30th, Twenty twenty and the comparable nine month period. With that, I'll turn the call over to David.

[David Maher, President & Chief Executive Officer]

[00:02:18] Thanks, Sandra. And good morning, everyone. As always, we appreciate your interest and of course, that holdings and hope that you are staying healthy and well. I look forward to providing an overview of the company's third quarter results and the steps we have taken to capitalize on strong demand for a Kushnick products in position, the company for long term sustaining success. Before I get into the quarter, I must acknowledge and thank my teammates for their resilience and terrific work since we resumed full operations in late May. Our results reflect the strength of a cushion its products, a company wide commitment to customer service, and our team's ability to adapt and leverage our global supply chain. I am very proud of the passion, creativity and sense of purpose that our company has demonstrated during the pandemic. And along the same lines, I must also give credit and thanks to PGA golf professionals and our trade partners for taking great care of golfers since play resumed and for positioning golf as a safe, healthy and enjoyable recreational activity, these caretakers of the game have distinguished themselves in 2020, and every golfer has benefited from their hard work and commitment to the sport. And of Kushnick, our highest priority remains the health and well-being of our associates, and this continues to have an outsized influence on our decision process of its global operations. Team has thoughtfully reconfigured workflow across the organization to adhere to all social distancing and safety requirements. And it is because of this commitment that we have been able to safely operate our facilities at peak output levels as we respond to strong demand for our entire product line.

[00:04:09] On our last call in early August, we spoke of our June and July growth, and I am glad to report that this momentum continued, as you will see, reflected in our third quarter results. As shown here on slide four, third quarter, sales of 483 million dollars were up 15 percent versus last year. Golf balls led this growth, posting a 40 percent increase for the period demand for our Proby one franchise has been especially strong while we continue to allocate supply in order to minimize out of stock situations in August. Our team successfully launched the new titles to speed golf ball to our speed is our first Tipu or Thermoplastic Urethane Golf Ball Technology. Our R&D team has been working on and refining for the past several years. Initial sell through, of course, speed has been resoundingly positive and we're excited about where we may take this Tipu process technology in the future, while Titlist club sales were up five percent for the period. We are pleased with with these results. Given a challenging comp against last year's iron launch and our decision to push our new Taci Medal's launch from August to November. We launched a new three model family of Titlist concept Ion's in September. This super premium custom only offering is an important element of our golf club innovation platform as we strive to push the boundaries of materials and product performance.

[00:05:42] Titlist gear increase 27 percent for the quarter, with gains coming from year categories. Our team did good work to keep inventories flowing in support of strong at once demand. And despite losing most of the second quarter both. The title is Bag and Glove. Businesses are now comping positive for the year, and Fitzroy posted a 12 percent gain for the quarter, with increases across all categories, including apparel, which has been the most disrupted category in 2020. These third quarter results also reflect strong gains from a cushion its e-commerce platforms, as our trade partners and direct company owned sites continue to generate increased traffic and sales adjusted EBITDA for the quarter increased 78 percent to ninety nine million dollars. These results helped to affirm our confidence in the company's proven operating model and long term outlook. And today, a caution its board of directors approved the payout of our quarterly cash dividend, equal to fifteen and a half cents per share, were approximately 12 million dollars in aggregate. Next here on slide five, you see year-to-date sales are off nine percent, while adjusted EBITDA is down five percent through September. Considering the challenges of Twenty twenty, we are pleased with these results through the first nine months of the year. As you will hear from Tom, our balance sheet is in good shape and we believe the company is well positioned to continue investing in our future growth. Now on Slide six and our performance by region, the U.S.

[00:07:16] market set the pace, posting a 26 percent increase as all segments and channels delivered gains for the quarter. EMEA also had a great quarter, with sales up 14 percent. Korea has been steady all year long. And as you see this continued in the third quarter with sales up 10 percent. Rounds of play in the U.S. and EMEA have been especially strong since play resumed in the second quarter, and play in Korea has trended up low single digits for most of the year. Japan has been most impacted by covid, Japan has an older golfing population and many golfers have elected to stay sheltered at home and not travel to the golf course. Japan's third quarter results also reflect an outsized impact from our decision to move the driver launch into November. Looking at slide seven, you see a full slate of new product introductions scheduled through the first quarter. This lineup reflects our uninterrupted commitment to R&D throughout 2020 and will be the building blocks of our 2021 business plans, new titles, taxi drivers and Fairway's launch next week and have already made a positive impact across worldwide tours and with club professionals. TSA has been the number one driver on the PGA Tour since debuting in early September. This will be one of our most comprehensive launches as our team has made the most of our decision to move our global launch dates from August to November. New, probably one and probably one ex golf balls have been out on tour for the past month and notched their first PGA Tour win last week in Bermuda as champion Brian Gay won with our new Proby.

[00:08:58] One model, Twenty twenty, has been a milestone year for fully as the brand celebrates 75 years is the number one issue in golf. Next week, the team launches the new stratus line of Spike Lee's golf shoes and in the first quarter will launch the much anticipated premier series. Premier has been out on tour since late summer and reflects Fitzroy's heritage as footwear craftsman and unwavering commitment to performance, comfort and style. And finally, our shoes. Golf business continues to build momentum across the U.S. and Europe, while the ski side has been more meaningfully impacted by covid and is not expected to recover until late next year. Looking forward, we will continue to balance strong interest in the game and healthy consumer demand with a good amount of caution as required by these uncertain times, our new product pipeline is in great shape and as noted, our supply chain is holding up well. Additionally, retail inventories are projected to be down five to 10 percent globally, which we think bodes well for upcoming product launches. Just as important, the cushion has strong balance sheet positions, the company to make key investments in our future growth, return capital to shareholders and offer a compelling long term investment opportunity. Thanks for your interest and attention this morning. I will now pass the call over to Tom.

[Tom Pacheco, Chief Financial Officer]

[00:10:25] Thanks, David, and good morning to everyone on the call. I would like to start by extending my thanks and appreciation to our associates and trade partners for their exceptional execution, which has resulted in a cushion. Its strong Q3 performance starting on slide nine to three. Consolidated net sales were 483 million, up 66 million or 16 percent versus Q3 of last year, and up 15 percent on a constant currency basis as the very strong demand for golf and for all of our products that we saw in June and July continued into August and September. Q3 gross profit for the third quarter was 252 million, up 35 million or 16 percent versus last year, and gross margin was fifty two point two percent, up 10 basis points, with a solid increase in golfball gross margins partially offset by a decrease in golf club gross margins and expense in Q3 was 154 million, down five million or three percent compared to Q3 2019, primarily from lower advertising and promotional costs. And R&D expense was 11 million down to million. Operating income was 85 million, which was 41 million or 95 percent higher than the prior year, Q3 interest expense was four million, down 700000 from 2019, an income tax expense of 14 million was six million higher than 2019 as a result of our higher income. Before taxes are effective, tax rate improved to eighteen point one percent from the favorable shift of the mix of our jurisdictional earnings and the favorable impact of new regulations that were issued during the quarter related to U.S.

[00:12:15] tax reform. Net income attributable to, of course, net holdings with 63 million 33 million higher than in Q3 of 2019 and our Q3 twenty twenty adjusted EBITDA was ninety nine million, up 43 million or 78 percent compared to 2019. Moving to our results for the first nine months of twenty twenty, consolidated net sales were one point two billion, down nine percent from last year, both on a reported and constant currency basis. This represents a significant improvement from our results for the first half, which were down 20 percent compared to the first half of 2019. Gross profit for the first nine months of Twenty twenty was 609 million, down 76 million or 11 percent, and gross margins were fifty one point one percent, down 110 basis points from the prior year. S.G. An expense for the first nine months was 437 million, down forty eight million or 10 percent compared to 2019, and the R&D expense was 35 million, down three million compared to the prior year. Restructuring expense for the first nine months was 13 million. Operating income for the first nine months of Twenty twenty was 118 million, which was 39 million less than the prior year, interest expense was 12 million or two million lower than last year. Other expense was up seven million, primarily as a result of pension settlement charges associated with our restructuring program. Income tax expense was 21 million, down 15 million in our year to date, effective tax rate was twenty one point six percent. Net income attributable to a cushion holdings for the first nine months with 74 million compared to 103 million in 2019 and adjusted EBITDA was 185 million, down 11 million to assist in your review of the calculation of adjusted EBITDA.

[00:14:21] We have provided a reconciliation to net income on slide 10. You will note that we did not add back any covid-19 related expenses during the third quarter as we had in Q1 and Q2, moving to slide 11 at the end of Q3 twenty twenty our cash and liquidity position improved significantly since the end of Q2. On September 30th, we had about one hundred and eleven million of unrestricted cash on hand and our total debt outstanding was approximately 378 million, a decrease of thirty nine million from the same time last year and 145 million from the end of Q2. Our leverage ratio was one point eight times at the end of September, down from two point three times at the end of June. And on September 30th, we had cash on hand and available borrowings under our revolving credit facility of about 470 million. At this time, we believe that our cash on hand and available borrowings will be sufficient to meet our liquidity requirements for at least the next 12 months. Consolidated accounts receivable that September 30th was 268 million, down about two percent from the prior year and from the end of Q2, DSOs were up one day compared to the prior year period. But we're down three days from the end of Q2, Twenty twenty inventory was 318 million, down over 30 million or nine percent from the prior year and was down 45 million or 13 percent from the end of Q2.

[00:16:01] The decreases were driven by golf balls and golf clubs, which were down 21 and 20 percent compared to the prior year and 13 and 11 percent compared to Q2 respectively. In addition, football inventories were down five percent compared to the prior year and 19 percent compared to Q2. Overall, we are comfortable with the quality of our accounts receivable and the amount and composition of our inventory. Cash flow from operations for the third quarter of Twenty twenty was 168 million and was 167 million for the first nine months of the year. This compares to 55 million and 95 million for the same periods in 2019. The increase in cash flow from operations for Q3 comes mainly from higher net income, stronger cash collections and lower inventory levels. CapEx was five million for Q3 and 15 million for the first nine months of the year. We expect to increase our capital spend in Q4 and now plan for full year twenty twenty capex to be in the range of 25 to 27 million. Moving to capital allocation on Slide 12, while our long term priorities have not changed, we continue to be cautious as it relates to our capital allocation actions. As I just mentioned, we now expect Twenty twenty full year CapEx to be in the range of 25 to 27 million. We did not repurchase any shares in Q3 and we currently do not expect to repurchase any shares in Q4.

[00:17:39] We did pay our previously announced Q3 dividend in September. And as David mentioned, our board of directors today declared a Q4 cash dividend of 15 and a half cents per share payable on December 18th to shareholders of record on December 4th. This represents a return of approximately 12 million dollars to shareholders. Turning to our outlook for the remainder of the year, while we are encouraged by the increase in rounds of play and demand for our products around the world in Q3 and into early Q4, we also remain cautious given the recently implemented restrictions we have seen in Europe and the rising number of cases of covid-19 in the United States considering the impact of our two year product life cycles. It is best to refer back to Q4 of 2018 when modeling Q4 of Twenty twenty as a result of the changes in the cadence of our business in Twenty twenty. There are a number of factors that will be different in Q4, but overall we expect net sales to be up slightly from Q4 2018. Despite strong demand, we currently expect golfball sales to be flat compared to Q4 twenty eighteen as a result of the limited availability of our premium performance models as we begin to ramp up production of the new Proby one, we currently expect golf clubs to be up slightly in Q4 compared to 2018 with increased sales in the U.S. led by the upcoming launch of TFI metals, partially offset by lower sales volumes in Japan.

[00:19:17] As a result of the challenging market environment, we expect foot joy to be down in Q4 twenty twenty also from lower sales volumes in Japan and for Titlist geared to be down as they are comping to their strong performance in Q4 of 2018. And finally, we expect shoes to be a positive contributor to Q4 twenty twenty net sales as we did not acquire them until July of 2019. From an operating expense perspective, we expect fourth quarter operating expenses to be up high single digits compared to Q4 2018, about half of this increase comes from Schuss and the remainder comes from higher advertising and promotion costs to support the upcoming medal's launch, the market momentum in golf balls and the elongated season for the professional tours into Q4, including the Masters. Given the significant amount of uncertainty regarding the future impact of covid-19, we will not be issuing further detailed guidance at this time. In conclusion, our associates and trade partners did great work meeting the strong consumer demand for all of our products. While we continue to exercise caution given all the uncertainties we are facing. We remain confident that Gall's momentum and energy will continue in the coming months. As noted, there have been some shifts in the timing of our business, which will impact our Q4 results. However, we remain confident in our ability to maintain and build upon our market leadership positions into the future. With that, I will now turn the call over to Sandra for Q&A.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:21:01] Thanks, Tom. Operator, could we now open up the lines for questions?

[Operator]

[00:21:09] As a reminder, if you like to ask a question, press star, about the number one, that is star one for questions. The first question comes from the line of Kimberly Greenberger with Morgan Stanley. The first question comes from the line of Kimberly Greenberger with Morgan Stanley.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:21:40] Hi, Kimberly, are you there?

[Operator]

[00:21:41] Your line is open.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:21:49] Could we take the next question, operator?

[Operator]

[00:21:59] The next question comes from the line of Daniel Imbro with Stephens, Inc..

[Daniel Imbro, Stephens]

[00:22:06] Yes. Hey, good morning, guys, thanks for taking our questions and congrats on the strong quarter. I want to start on production, you know, obviously to cue very disrupted from both the supply chain and the production standpoint, three to, you know, really impressive, didn't seem like you have called out any disruption there. How is the state of the supply chain today? And then are there any learnings from Teuku either on the CapEx or OpEx side where you think you guys need more investment if this demand does stay in the industry, given what we're seeing in the in the golf industry?

[David Maher, President & Chief Executive Officer]

[00:22:39] Yeah, I think you've characterized well what what happened in in Q3. Our team, our team ramped up quickly and safely in our our global golfball production and club output exceeded plan. It exceeded what we would typically see in the third quarter. We're now we're now operating 24/7 at Paul Plant three involve plant for the way we're modeling the year. And you can imagine there's a whole lot of scenarios that we're looking at for Twenty twenty one, the way we're modeling the year, we're comfortable that our that our capacity is is is sufficient to meet demand. I will say one of the one of the learnings from Twenty twenty has been more specific to our to our distribution capabilities. And we we distribute most of our products in North, in North America, in the U.S., from California and in Massachusetts. And we are we are looking at alternative options in the Midwest. And and we expect to make some make some moves and decisions next year that will require some additional capital. But in terms of production and operations, we think we're in good shape. But again, we're operating 24/7 and we'll and we'll do that for the foreseeable future. And in time, we'll we'll likely have some more to talk about as it relates to some changes with how we distribute products, which we think hedges some of the risks we encountered earlier this year.

[Daniel Imbro, Stephens]

[00:24:16] That's great. That's really helpful. You know, Tom, they move into the states, you know, really impressive this quarter down, year over year, despite the revenue growth during your commentary, I didn't hear anything that no one time meant nature. But you know, your forecast outlook at the end there sounds like it a step back up. So should we view this step down in 3Q really as temporaries just driven by lower marketing expense, or is there any kind of sustainable expense that did come out of covid?

[David Maher, President & Chief Executive Officer]

[00:24:43] Yeah, Daniel, I would say it's mostly temporary or or maybe better characterized as a shift. Obviously, we shifted the launch of the of the the new Nettle's into into Q4. And so, you know, a significant amount of advertising and promotion spend that we would have normally spent in Q3 is shifting into Q4. So I would characterize that more as a shift and not a permanent.

[Daniel Imbro, Stephens]

[00:25:09] And the last one for me, David, on the industry, you know, unprecedented growth in terms of players, but historically that tends to be fleeting. So, you know, what do you think the industry needs to do better to retain these golfers and these the sustained growth the industry, rather than just the flash in the pan and maybe be the next few years?

[David Maher, President & Chief Executive Officer]

[00:25:29] Well, you know, fair to say, we've we've been fortunate that that in these in these uncertain times, the sport has found a safe and prefer lane. And I think it's important to note that that many golfers have had very positive experiences with the game. And Twenty twenty and I I made the remarks earlier earlier that the PGA golf professionals, golf course operators around the world have done a great job positioning the game as a welcoming and safe recreational recreational alternative. To your question, Daniel, a couple of themes emerge. One is it's a hard game, right? It's challenging. And one of the more compelling stats coming out of Twenty twenty is the amount of lessons that are being given. And I think that's that's certainly a positive. The more lessons that are happening, it invites improvement, which invites more. Play the game. The game's done a nice job this year, welcoming all different types of play family, play six, all play nine holes, play whatever, whatever it might be. So so as we think about some of the learnings of of twenty twenty, I do point to first and foremost, instruction is very important, both at the beginner level and throughout. And the second piece, which I know a lot of facilities, have paid close attention to his pace of play. And with with this significant influx of demand that was a risk of the game is the pace of play would get would get rather slow.

[00:27:02] We generally anecdotally hear that that hasn't happened in the game's done a good job of maintaining healthy, healthy levels of pace of play. But but again, I will say the you've got to point to a couple of of forces. One, the game's caretakers, the PGA Club, pro for their great work throughout the year. And then secondly, I think you have to give a lot of credit this year to to the professional tours around the world who have done a great job bringing the game back early, as early as as June and giving golfers and sports fans a an entertainment vehicle to showcase the game's safety components, competitive components, et cetera, et cetera. So a lot of learnings for the game, I think. I think, frankly, Daniel, we're still processing what you know, what what's happened here in the last three or four months since the game reopened. And we've been in several conversations with with leaders throughout the industry about just your question, what does the game do to to to capitalize on this increased interest and demand? But again, I'll point to point to instruction. Piece of play has been to two key elements.

[Daniel Imbro, Stephens]

[00:28:19] Great. Best of luck and coming again. Thank you.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:28:24] Great, thank you, Daniel. Next question, please.

[00:28:29] The next question comes from the line of Kimberly Greenberger with Morgan Stanley.

[Kimberly Greenberger, Morgan Stanley]

[00:28:36] Can you hear me this time?

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:28:36] We can, thank you, Kimberly, nice to speak with you.

[Kimberly Greenberger, Morgan Stanley]

[00:28:40] Great. I'm not sure what happened on the technology side. I really apologize for that. But I, I thought the numbers this morning were absolutely fantastic. And it's really great to see the momentum in the business. I wanted to first start with just following up on Daniel's question. As you look out to 2021, is there what kind of signals might you be looking for that would indicate a more kind of permanent acquisition of new players to the game of golf post covid? You know, when when would you expect to have some visibility or clarity around the kind of retained play that we might see medium to long term? This strikes me, obviously, as a future growth opportunity. And then there's clearly your geographical results are quite strong across every geography. And Japan, understandably, has been more impacted by covid. I'm wondering, as we think about Japan through the upcoming year, is is the Japan bounce back just simply a matter of we need to get the virus under control and get a vaccine and then we should see some follow on response in that geography. And then my last question is just on gross margin for Tom on gross margin, obviously, balls were a very nice positive this quarter. There was a little bit of a headwind in clubs. And I'm wondering if that is a volume related headwind in the club's gross margin and if that reverses in the future or if there something else going on in the club gross margin that that we should be aware of. Thank you so much.

[David Maher, President & Chief Executive Officer]

[00:30:34] Ok, Kimberly, I'll touch upon your first two questions. First, specific to to the game and when might we know or what signals would we look for to suggest that the behaviors we've seen in 20 are more reflective of of the long term? Unfortunately, I a lead with a lot of these answers, we don't know. Right. In terms of how this thing plays out. But I'll give you a sense for how we how we're thinking about it. I made the point to Daniel that a lot of golfers have had very good experiences in Twenty twenty. And I think this I think this influences how they prioritize the game going forward and how they fit the game into their lives going forward. And the game, the game competes for discretionary time and it competes for discretionary income. And for the past several months, the sport has fared very well as many recreational activities have been suspended. So we do acknowledge that a lot of these activities, whether it's youth sports, whether it's stadiums reopening, whether it's business travel or commuting time, will begin to come back online. And we think about where does golf fit in that in the changing world order? And the answer is it remains to be seen. We do we do take a measure of comfort and optimism and saying Twenty twenty has been in and a year of tough circumstances around the world.

[00:32:06] Twenty twenty been a golf's been a bright spot for a lot of folks. And we don't think that just stops heading into the new year. We think it changes the way. As I said a minute ago, golf fits into their prior prioritization of their recreational time as it relates to to Japan. You know, when we look around, when we look around the globe, we see rounds up, we see rounds up in the U.S., high single digits. We see rounds up low single digits in Korea. EMEA has been flat up slightly. And the outlier of the major five markets certainly has been has been Japan. And I made the comment that it does have an older golfing population and been who's been inclined to shelter at home and not venture out to the golf course. We do we do expect and I'm careful I'm careful with the term bounce back, but we do expect that the marketplace starting last year, more accelerated this year as has corrected. And by that, I see rounds down, I see inventories down or is in the process of correcting is maybe a better way to say it.

[00:33:26] But as we think about Japan, longer term, our business, our business has always has. Always globally done well in markets where we are very active with custom fitting, as we shared in the past, Japan is sort of the last into the party as it relates to custom fitting. So we do see opportunity for the way we approach the market to shift in in Japan as it becomes more fitting centric. And that's happening, albeit albeit later than we've seen in many other markets. But I would I would say as we think about as we think about the globe and where opportunity lies, again, just careful about the theme and term bounceback in any market. But we do we do acknowledge that covid said the most significant impact in Japan than we've seen in any other market. And as the effects and influences of covid are over time reduced and minimized, we do think that these that that that that golfers in Japan should make their way back to the golf course in a in a in a safe way. And we think in a way that at least provides some stability to that market over the next several years.

[Tom Pacheco, Chief Financial Officer]

[00:34:46] As it relates to your question related to gross margins in clubs, you know, the headwind there is really about the launch. You know, rather than having sales in the quarter of, you know, the new product, you know, we had higher sales of the older the previous generation model, which tend to have lower ASPs as they reach the end of their product lifecycle. So that's really just a function of the timing of the launch. And we would expect that to, you know, reverse itself or correct itself over time.

[Kimberly Greenberger, Morgan Stanley]

[00:35:19] Fantastic, makes perfect sense. Thank you so much.

[Sondra Lennon, Vice President, Financial Planning & Analysis]

[00:35:21] Thank you, Kimberly.

[David Maher, President & Chief Executive Officer]

[00:35:24] We appreciate everybody's time and attention this morning, and we wish you a safe and enjoyable Thanksgiving season and look forward to catching back up to you as we report our fourth quarter results. Thanks again.

[Operator]

[00:35:40] This concludes today's conference call you may now discuss.