Acushnet Holdings Corp.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Acushnet Holdings Corporation First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, we will conduct a question-and-answer session and instructions will be given at that time if you would like to ask a question. I would now like to hand the conference over to Sondra Lennon, Vice President of FP&A and Investor Relations. Please go ahead.

[Sondra Lennon:]

Good morning, everyone. Thank you for joining us today for Acushnet Holdings first quarter 2021 earnings conference call. Joining me this morning are David Maher, our President and Chief Executive Officer; and Tom Pacheco, our Chief Financial Officer.

[David Maher:]

Thanks, Sondra. Good morning, everyone and thanks for joining today's call. I am pleased to report Acushnet's first quarter results and discuss our outlook for the balance of the year. Getting right to the quarter, Acushnet revenues of $581 million are up 42% and 34%, respectively versus 2020 and 2019. Titleist brand equipment and gear sales increased 51% versus last year and 38% compared with the first quarter of 2019. And FootJoy posted gains of 22% and 13% versus 2020 and 2019. Adjusted EBITDA of $135 million increased 156% over last year and 111% as compared to the first quarter of 2019. Earlier today, Acushnet's Board of Directors approved the company's quarterly cash dividend of $0.165 per share reflecting the Board's confidence in the company's financial position and future outlook and ongoing commitment to return capital to shareholders as part of our long-term total return investment strategy. I must acknowledge and thank my fellow associates for delivering these exceptional results, which are traceable to our team's commitment and execution throughout 2020 and into the first quarter. Despite mostly remote work and limited travel during the past year, the company has and continues to benefit from the talented Acushnet team and most notably our product development, operations and supply chain management teams which have excelled given challenging circumstances.

[Tom Pacheco:]

Thanks David and good morning everyone. I would also like to thank our associates for their hard work and the resilience they have continued to show in the current environment, which has resulted in Acushnet's exceptional first quarter performance. Starting with the income statement highlights. Consolidated net sales for Q1 were $581 million, up 38% on a constant currency basis compared to Q1 2020 as the strong momentum we saw in the second half of 2020 continued and our supply chain output exceeded our expectations. Gross profit for the first quarter was $311 million, up $110 million or 55% versus 2020 and gross margin was 53.5% up 430 basis points. The increase in gross profit comes from higher sales volumes across all segments and was partially offset by higher inbound freight costs. The increase in gross margins resulted primarily from a favorable product mix shift and higher average selling prices in golf clubs, higher manufacturing absorption and a favorable mix shift in golf balls and a shift in Foot.Joy towards e-commerce and retail sales. SG&A expense in Q1 was $176 million, up $24 million or 15% compared to 2020. The increase in SG&A comes primarily from higher selling and distribution costs resulting from the higher sales volumes during the quarter which were partially offset by lower advertising and promotional costs that have shifted to later in the year.

[Sondra Lennon:]

Thank you, Tom. Operator, could we now open up the line for questions?

[Operator:]

Your first question comes from the line of Casey Alexander with Compass Point.

[Casey Alexander:]

Hi. Good morning. And normally, I don't make complements on public calls, but the ability to turn your inventory 1.6 times in one quarter is, just -- that's a remarkable achievement. So, I would congratulate your team on that.

[David Maher:]

Thanks, Casey.

[Casey Alexander:]

Yes. I am looking at your guidance to a certain extent and for the rest of the year, consensus has EBITDA at $174 million and the midpoint of your guidance is $135 million. And so I would ask, why shouldn't we look at your guidance as being somewhat overly conservative?

[David Maher:]

Well, I'll point to -- and maybe just to call back on some of the comments that Tom and I hit on. The timing of our business has been greatly altered in really the back half of last year and throughout 2021, given market demand obviously very strong and supply chain disruption and constraints. So Casey, maybe it will be helpful. I'll give you a couple of just building blocks of how we're thinking about the balance of the year. We've raised our internal projections based on a strong Q1. And as I noted, we did move a good amount of club volume from the second half -- really the second half of you would consider it 2019 into 2021. TSi, fibers, hybrids. There's also a phenomenon playing out with irons and wedges, which are at the end of their life cycle. We pulled those forward into the first half. Iron is a good example. We'll launch new irons in the third quarter. We're going to reduce the sell-off of irons and wedges. So, that's a bit of a shift from H2 to H1. We've had an incredibly strong PRo V1 loyalty program this year, which is great. It will bolster the first half we think with some offset in the second half. And then the other piece would be, we've got a -- while not overly sizable, we've got a true field launch that typically -- a golf ball launch that typically happens in the fourth quarter of odd number years. We did in 2019. We did in 2017. This was pushed into 2022. And then really, as Tom mentioned, we've got some incremental freight dynamics that we're working through. And as I talked, about another $15 million or so in OpEx associated with strategic investments. Covered a lot of ground there. But the point is there are a lot of moving parts and pieces in our business and that we benefited, because odd years typically overlap on odd years and even years typically even -- typically overlap on even years, less so the case this year for obvious macro reasons.

[Casey Alexander:]

Okay, great. Thank you for taking my question. I appreciate.

[David Maher:]

Thanks, Casey

[Operator:]

Your next question comes from the line of Randy Konik with Jefferies.

[Randy Konik:]

Hey, guys. How are you? I guess David, I just want to get your updated thoughts on the conversations you're having with your green grass partners. You mentioned last quarter. You mentioned it again on the call this morning about the idea of more lessons being taken. I just want to get some perspective on what they're saying around lessons? What they're saying about the fullness of their key sheets or not? Get some perspective on additions on the private side of the membership additions, et cetera. Just anything you can give us on that color on what they're saying to you, would be super helpful. Thanks.

[David Maher:]

Yes. Thanks, Randy. I will qualify it by timing, and that it's early May, in Gulf and the Northeast and Midwest really just opened up in the last several weeks. But pointing -- and this is broadly US commentary. But pointing to what we saw in the first quarter, US rounds were up about 25%. What we saw there was really three dynamics. Very strong in the Sunbelt, as you would expect. Northern and mid-belt markets were down, really due to weather. Again, we don't get too hung up on rounds of play in the Northeast and Midwest in the first quarter, but they were down significantly. And then we knew you had the reality that a lot of folks who would -- a lot of golfers who would typically travel from the north to the South in the first quarter to play golf didn't play -- didn't do that because they weren't getting on planes. But net of it, if you get through the first quarter up 24%, really, really strong. Anecdotally, T-sheets are full. As I've said, golf professionals are as busy as they can be. Club memberships are tighter in supply than they've been in a long time. And no surprise right given interest in demand for the game that we saw second half of 2020 and really into the first three, four months of 2021. So, you know what we see a healthy environment and we see it as healthy as we've seen in a long time. As to what we're seeing in the broader marketplace again Midwest Northeast we're going to have to really defer that to end of second quarter when we get some May and June intel under our belts.

[Randy Konik:]

Got it. And then can I just get some perspective on where you are with capacity on the ball plant side of things? And then just expand a little bit upon the success you're seeing with the loyalty program on the Pro V1 side. Anything you're learning there that you could perhaps expand that program further or into other areas of your business? Just curious on how you're thinking about the success of that program.

[Tom Pacheco:]

Yes. From a capacity perspective, we are still running 24/7 shifts. So, we are at close to -- or at our maximum capacity in terms of production. Our production capabilities have improved somewhat as COVID vaccinations become more widespread which has manifested itself in reduced absenteeism as less employees are having to call out because of potential exposures and things like that and there's been some loosening of COVID restrictions as well. So, we are seeing improvement in our production capabilities. And we are at full capacity.

[David Maher:]

Yes, Randy, I'll take the moment too to add that we've said this over the years. We like to make what we sell. And the control we have over our supply chain served us well in the first quarter, right? We have three ball plants. We have our own glove factory. We have a joint venture shoe factory. We have club assembly around the world. So, that served us real well. As Tom mentioned, capacity, we're at peak levels in some areas and we continue to see better or reduced absent T rates. Another piece of our story is our vendors and supply partners overachieved during the quarter. So, we ended up getting as an example more rubber components for golf balls, more grips, more shafts than we were initially led to believe. So, that obviously played into what was a strong first quarter for us. But I think the macro theme there is we were able to leverage the control and strength of our supply chain in the first quarter and you see that in our results. Loyalty rewarded. I look at that and see that. And when we see where that business is coming from it's really coming from all channels, green grass, of course, digital et cetera. It's coming from all channels. And I think it's as much commentary on enthusiasm for the game, right? We've got a new product this year. So, we always expect in a new Pro V1 launch year to index a little bit favorably than the prior year. But more than anything it's just -- to us it's commentary on a strong early season interest for the game.

[Randy Konik:]

Got it. Thanks guys. Very helpful.

[David Maher:]

Thanks Randy.

[Sondra Lennon:]

Thank you, Randy. Operator, next question please.

[Operator:]

Your next question comes from Kimberly Greenberger with Morgan Stanley.

[Unidentified Analyst:]

Hi all. This is Javi from Kimberly's team. I'm wondering you mentioned $15 million additional operating expenses in the back half of the year. And obviously this quarter SG&A was up 15%. So, I'm wondering if you could give a little bit of color on the cadence of those expenses throughout the quarter, particularly considering the shift in the launches that you mentioned?

[Tom Pacheco:]

Yes, the $15 million of incremental OpEx investment will be fairly evenly spread throughout the balance of the year and is really not impacted by any of the changes in the cadence of some of our product launches.

[Unidentified Analyst:]

Great. Thank you.

[Tom Pacheco:]

You're welcome.

[Sondra Lennon:]

Thanks, Javi. Next question, operator, please.

[Operator:]

Your next question is from Joe Altobello with Raymond James.

[Joe Altobello:]

Thanks guys. Good morning. Quick question on the market. Does it have any sense for what the equipment industry grew in the first quarter? I'm trying to put your Titleist growth here of 51% in content. I know it's a wholesale number not a retail number, but any color on market share trends in the quarter would be helpful.

[Tom Pacheco:]

Yes, Joe I won't get into specifics. I can put some data points out there. Certainly, we look at industry sell-through. We look at industry shipments. And our sense is that our shipments outpaced industry shipments. So, we come out of that feeling as though we -- from a share standpoint we did well. The other reality is you got to look at inventories too to see who's done a better job than others replenishing the pipeline. So, more than ever it's shipments and it's sell-through and its inventory replenishment that you need to look at. But we can add it and feel nothing but positive about share strength really in all categories. And again, our story is a bit unique because we've got drivers in the early days. We've got fairways and hybrids in the early days. But as I said we've got irons and wedges in the back half of their life cycles which as we compare that performance first two years prior, we had really strong performance in year two. But we like our position heading into the second quarter.

[Joe Altobello:]

Got it, that's helpful. And maybe in terms of channel inventories you mentioned they were very healthy if not a bit tight. Do you expect them to normalize this year, or does that extend into 2022? And are there any particular channels that are more completed than others in terms of green grass potential et cetera?

[Tom Pacheco:]

Yes. Well channels are good. We took a look at green grass in particular in the US they're strong. And as you'd expect most of those doors receive a season opening pipeline order to really fill up the shop. So, that did happen. As we look at it around the world, as I said overall, they're in decent shape Asia and EMEA are probably closest to normal US probably the most challenged, falls down just slightly. Clubs and gloves may be down more so. Gear and apparel, but really in good shape. And global footwear, which over the years certainly in the last couple of years has been on the heavy side is now on the light side, which we view as a long-term positive. The challenge of when do we get back to normal. Certainly, the industry is marching back towards normal. The challenge is -- and it's reflected in all our forecast and projections is just supply constraints, right? What can we make and the flow of raw materials and how that's going to constrain our ability to get back to normal levels. But good news is, I don't think consumers are putting the arms away right now although inventories may be down. The challenge we're facing and the entire industry is facing as so much of the industry has moved towards custom products, whether it's custom balls or custom clubs. Lead times are running far longer than anybody is comfortable with. Again, our company I think is doing as well if not better than most. But it's become an industry challenge. And golfers have been understanding as they turn a one-week lead time historically into what's become a three, four-week lead time nowadays.

[Joe Altobello:]

Got it. Thank you.

[Sondra Lennon:]

Thank you, Joe. Operator, next please?

[Operator:]

Your next question is from the line of Daniel Imbro with Stephens Inc.

[Daniel Imbro:]

Hey. Good morning, guys. Thanks for taking the question. I wanted to start on the top line. As of mid-February I think last call, Tom, you noted sales were up kind of low to mid-20s. You ended the quarter at 42%. That implied March was a pretty big number over 80%. Is that easier comps? I mean to what extent do you think stimulus supported March? And then any comment on whether that level of demand has sustained here into April as compared to even easier?

[Tom Pacheco:]

Yes. The majority of increase from what we said on the last call really had to do mostly with supply chain execution. So demand -- consumer demand was strong throughout the quarter. And the variable or the concern was really about the supply chain and how much of that demand we'd be able to meet and the supply chain came through and led us to our exceptional results. As it relates to the continued demand, what we're seeing so far is continued strong demand and momentum into April, but still two months to go in the quarter. So no, additional commentary there. But the demand is continuing to be strong in April.

[Daniel Imbro:]

Got it. And then follow-up on Casey's question from earlier just on the guidance. Yes, it looks like the revised ranges kind of flowed through the full revenue beat in 1Q. But the margin guidance did come down even accounting for the $10 million in higher freight and the $15 million in higher OpEx. It looks like underlying margins are still coming down for the rest of the year to get to the midpoint of the guide. Are there any other variables that you'd call out that are weighing on that profitability outlook?

[Tom Pacheco:]

The only thing I'd add to that, Daniel, is the gross margin impact of the shifting of some of the wedges and iron sales into the first half. Those would have been normally in the second half. And so the gross margin gross profit that comes along with those sales has shifted out of the second half and into the first half. So that would be the other piece.

[Daniel Imbro:]

All right. Great. I will follow it offline. Thanks, Tom.

[Tom Pacheco:]

Thank you.

[Sondra Lennon:]

Thank you, Daniel. Operator, could we take the next question, please?

[Operator:]

Your next question comes from the line of George Kelly with ROTH Capital Markets.

[George Kelly:]

Hi, everyone. Thanks for taking my questions. So just a couple for you. First the $15 million of incremental OpEx, can you give us a little more detail just on what that is? And specifically the golfer connection. I heard you mention a couple of times golfer connections. So just curious to learn more about that?

[Tom Pacheco:]

Yes. Hey, George, we're not going to get too detailed, but I'll help you out as best I can. And specific to golfer connection, for us that is ball fitting, that is club fitting, that is tech reps, that is more on the ground engagement with golfers, okay? It also flows through our loyalty programs et cetera, et cetera. So when we talk golfer connection that's really what we're talking about. But as I think about that spend certainly the -- spends have shifted under the golf industry in a very favorable and positive way. And with those shifts have uncovered some opportunities for us to invest across our business, again from digital to golfer connection, to A&P, to supply chain really all across our business. And as the industry has evolved and accelerated in the last couple of years again it's just uncovered opportunities that -- as I made the point earlier, our strong financial position allows us and compels us to make those investments, which we're prepared to do and frankly very excited to do over the back half of the year.

[George Kelly:]

Okay. Okay. And then next question relates to your balance sheet. So I -- just looking out over the next year 18 months I view your balance sheet just getting to a net cash position much stronger position. And I'm just curious if that will impact if you can tell us at all. It didn't sound like your cash flow priorities have changed a whole lot. And with all that strengthening that you've seen in your balance sheet over the last two, three years just curious if you'll have an ability to return more cash to shareholders or how you want it -- how you want to utilize that power, I guess?

[David Maher:]

Yes. You're right. Your capital allocation priorities at this point haven't changed. We're still investing in the business. We're still focused on dividends and share repurchases. We have reinitiated our share repurchase program. We do anticipate strong cash flow generation over the foreseeable future. And as time progresses if that comes to fruition and we have the ability to do more things within the realm of capital allocation we'll certainly consider that. But at this point we're -- there's still some uncertainty in the market and we're kind of taking it quarter-by-quarter.

[George Kelly:]

Okay. Okay. And then last question for me. This is more of a 10,000 per share kind of question. But is it -- so you're expanding some of your operating investments $15 million this year. And -- is it a fair assumption with what you're seeing today, that some of this shift and increase in gameplay and new golfers et cetera, that you're building your business model assuming that some of these shifts are permanent. And maybe if you could just talk about that, how do you think this is going to shake out a year from now?

[Tom Pacheco:]

Well, George -- and we've talked about this a little bit on the last call. And your question is something we think about often. As we look at what's played out in the last year right, with a quarter of call it shutdown and then really strong recovery. I made the point. We think there are about 0.5 million new players that entered the game in 2020. That's a U.S. number, maybe half that around the world. So the game is going to come out of COVID stronger, than it was when it went into COVID. And we say that carefully, because it's built around obvious very difficult moment in events. But the net of it is the game comes out of this period stronger. And will it be a straight-line acceleration of our business, maybe not. We talked about the reality of hey it's going to be tough to comp against the historic second half we saw last year from a rounds of play standpoint. But hey, the game and industry and rates had changed in the last 12-plus months. And we're responding to that. So whether it's our capital investments we announced a few months ago, whether it's the strategic investments we're announcing now. Those are our responses to the opportunity we see before us.

[George Kelly:]

Okay. Great. And last question for me, just CapEx expectations for the year.

[Tom Pacheco:]

Yeah. We continue to forecast $45 million to $50 million for the full year. We did about $6 million in Q1. And we continue to be on track for the $45 million to $50 million.

[George Kelly:]

Okay. Thank you.

[Tom Pacheco:]

You're welcome.

[Sondra Lennon:]

Thank you, George.

[David Maher:]

George thanks. And thanks everybody. As always, we really appreciate your interest and time on these calls. And look forward to catching up, after Q2. Have a great spring. Thanks so much.

[Operator:]

This concludes today's conference call. You may now disconnect.