Acushnet Holdings Corp.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Acushnet Holdings Corp. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Sondra Lennon, VP, Investor Relations. Please go ahead.

[Sondra Lennon:]

Good morning, everyone. Thank you for joining us today for Acushnet Holdings Fourth Quarter and Full Year 2020 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, and good morning, everyone. I hope you are staying safe and well as we move closer to the end of these difficult times. Key themes running through today's remarks will be the tailwinds of strong golfer participation and demand and headwinds resulting from COVID-related supply chain challenges. As you will hear, the keys to success for Acushnet in 2020 and 2021 involve balancing new product development, demand momentum, supply chain uncertainties, short-term cost increases and periodic regional shutdowns. Based on our track record, I am confident that the Acushnet team is up to this task. Acushnet and the entire golf industry are benefiting from the continued commitment from PGA professionals and golf course operators who have worked tirelessly to provide safe and fun experiences since the earliest days of the pandemic. More than 500 million rounds of golf were played in the U.S. in 2020, 60 million rounds more than 2019 and the highest annual total since 2002. I must also acknowledge and thank my teammates for their dedication and great work navigating the highs and lows of 2020 and positioning the company for continued success. Their heightened commitment to associate safety, product quality and customer care is serving us well in these uncertain times and as we respond to strong demand across the Acushnet portfolio.

[Tom Pacheco:]

Thanks, David, and good morning, everyone. I would also like to thank our associates for the resiliency they have shown in the face of the pandemic, the amazing effort they put forth to get our business back up and running in a safe and healthy manner and their exceptional execution, which has resulted in Acushnet's strong second half performance. Starting with our Q4 results on Slide 10, consolidated net sales in the quarter were $420 million, up 14% year-over-year and up 12% in constant currency as the strong demand we experienced in Q3 continued through the end of the year. Gross profit for the fourth quarter was $220 million, up $34 million or 18% versus last year and gross margin was 52.4%, up 170 basis points. The increases in gross profit and gross margin were primarily from higher sales volumes during the quarter and higher average selling prices. SG&A expense was $174 million, up $31 million or 21%, compared to 2019 and R&D expense was $14 million, up about $1 million or 6%, compared to the prior year. SG&A expenses were up with the higher sales volumes during the quarter, led by increases in selling costs and higher advertising and promotional costs. Income from operations in the quarter was $27 million, down about $1 million or 5%. Our Q4 income tax expense was a benefit of $8 million as the result of discrete items recorded during the quarter, including the release of a reserve related to an income tax audit for the period which included the sale of Acushnet to Fila Korea, which was settled during the quarter. The reversal of a corresponding indemnification receivable from Beam, our former parent company, related to the audit settlement is recorded in other expense. Net income attributable to Acushnet Holdings was $22 million and adjusted EBITDA was $48 million, up almost $4 million from Q4 2019. There is a reconciliation of net income to adjusted EBITDA for Q4 and the full year in our earnings release, as well as in the Appendix of the slide presentation.

[Sondra Lennon:]

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

[Operator:]

Your first question comes from the line of Daniel Imbro with Stephens Inc. Daniel, your line is open.

[Daniel Imbro:]

Yes. Hey. Thanks. Good morning, everybody and thanks for taking our questions. David, I want to start on the multiyear golf ball capacity investment. You mentioned some of the capabilities it's going to provide, but can you explain a little bit more on, is this driven by maybe a little bit of current production being at capacity? Is this to increase your competitive advantage over peers maybe as they've made investments in their capabilities? Can you just expand a little bit on why right now is the right time for this investment? And the capital, I think, Tom, you mentioned should be CapEx remains elevated for the next five years. But did we hear that right?

[Tom Pacheco:]

So, I said the next several years but, yes, you could infer it's five, because of the length of the golf ball capital investment program.

[David Maher:]

Yes. Daniel. So running – as you know, we run three ball plants, two here in Massachusetts, a third in Thailand and then we've got a comprehensive custom ball operation here in New Bedford, as well. And as I look back at sort of the cadence of investment we make in the business, you would imagine these businesses require ongoing and sustaining investment. In the 90s, we built ball plant two. In the 2000s, we built ball plant three. In 2010 or so, we built ball plant four. So we have a history of, from time-to-time, making significant investment in our operations. And while we won't get into the specifics of where the investment is to be targeted, it reflects, for us, a generational step forward that, again, when we look back over time, this is something that's been very consistent with how we've always thought about the ball business. It's the right time from an allocation standpoint, given the investments we've made in other areas of our business and other areas of golf ball operations and hey, it's also incredibly exciting as we continually look around for new technologies and advancements to introduce in our business. Some we do on an ongoing basis to stay ahead of the pack and some, like this one, just when you bundle them together, become far more comprehensive and significant. So, I would say, it fits into the long-term strategy of how we think about the ball business and again, the time is right for us to earmark capital, whereas I said in my earlier remarks for what is an incredibly important part of our business and I don't want to lose the value of allowing us to further leverage our patent portfolio and intellectual properties.

[Daniel Imbro:]

That's really helpful. I appreciate that color. And David, maybe taking a step back, what do you view as the biggest risks to golf participation this year? We finally saw nice growth in golfers, rounds played were up. It seems like that's continuing, but what do you view as the biggest risk this year? And I think your slides and you mentioned in the prepared remarks, back half sales would be beneath 2019 levels. Can you expand a little bit on why it would be down on a like-for-like product cycle versus 2019 just given these participation headwinds we see today?

[David Maher:]

Yes. So I'll take the first part of that, Daniel, and then Tom can jump on the second part. So as we think about what happened in 2020, we saw an extra 60 million rounds for the year. Really, 75 million of those rounds happened in the back half of the year. It will surprise no one when we look out on 2021, we expect rounds gains in the first half, healthy rounds gains in the first half and we don't expect to comp against that frankly historic second half. But net-net, we like the trajectory and energy of the momentum that golfer participation engagement brings to the game. I've – we've all looked at the external data out there. I think it's Pellucid who has a good projection of, hey, if you take half the incremental rounds and they stick, that results in about a 7%, 8% increase in 2021 as compared to 2019. And so it’s too early to make projections, but I think that's the right way to frame this. We would view rounds of play momentum continuing. But I think, frankly, it would be unlikely that we maintain the clip or pace that we saw in the second half. Rounds were up 40% in the U.S. in the fourth quarter. Now again, I think we are going to be living in an environment that's healthier in2021 than it is in 2019 but we're also trying to be realistic with how folks allocate their time and how life is going to change as we become a vaccinated country. And then, you apply that same logic around the world. As to timing of things, I'll make a couple of points and then I'll turn it off to Tom. The real change here is that we are just seeing an overall shift in our business from second half to first half as a result of what played out in 2020, some product decisions we've made, inventory availability and so on and so on. I'll get a little more prescriptive, in terms of our cadence, balls will be on their normal cadence, no real change there, same with gear and FootJoy. There are a couple of moving parts within clubs that I think are worth noting. I had mentioned TSi-1 and 4 drivers. Hybrids are launching in the first half. That was a second half 2019 event. We've got some limited edition putters from the second half of 2019 that won't repeat. They will but at a time to be determined. Then we've got some other miscellaneous club volume that occurred in 2019 that will perhaps moved to 2020. So round numbers, Daniel, I'd say you are looking at about 50 million to 60 million in club volume. Maybe half is going to come into the first half of 2021. Maybe a quarter is going to bump into the early part of 2022 and then another quarter is TBD, some of the limited edition stuff which is not on a strict time line. So, that's how we're framing the first half, second half journey. I'll kick it over to Tom for any more color.

[Tom Pacheco:]

Yes. The only two things I would add is, it is mainly driven by, as David said, the change in some of the timing of our launch cadence as compared to 2019. The only other piece I would add is, in 2019, we owned shoes in the second half of the year. The second half of the year for them has historically been the bigger half of the year because of their – because of the impact of the ski business on their full year. And obviously, the ski business has been significantly challenged as a result of COVID and so, we are going to see some decreases there as it relates to shoes.

[Daniel Imbro:]

Got it. That’s really helpful color. I appreciate it guys and best of luck.

[Tom Pacheco:]

Thanks.

[David Maher:]

Thanks, Daniel.

[Sondra Lennon:]

Thank you, Daniel. Operator, next question please.

[Operator:]

Your next question comes from the line of Joe Altobello with Raymond James. Joe, Your line is open.

[JoeAltobello:]

Thanks guys. Good morning. So first question, I was curious if you had any sense for how much of an increase we saw in the number of on-course golfers last year in the U.S.? Obviously, the 60 million increase in rounds played is clearly encouraging. But is that largely existing golfers playing more golf? Or do you get a sense that there was more participation last year?

[David Maher:]

We are – there are a couple of groups out there, the NGF and a few others who track and model this and I won't point to any one. But I'll point to our roll-up of all the reports we look at and give you somewhat of a summary view. One interesting piece of data I saw and they tried to capture the 60 million rounds, right, and they said, okay, 20 million of the avids played an extra couple. That’s accounted for 40 million of the rounds, 4 million to 5 million lapsed golfers. Golfers who had moved away from the game came back in contributed to a portion. And then another 4 million to 5 million new golfers contributed to a portion. So that's how we think about it. I will add, as well some good work really led by PGA of America, PGA Tour, LPGA Tour, focused on this particular area, okay. We brought in new golfers. We brought back lapsed golfers. What can the industry do to maintain and preserve them and keep them active and engaged in the game. So we are encouraged by that. But Joe, hopefully, that gives you a bit of a framework for some of the numbers and metrics behind what we saw play out in 2020.

[Joe Altobello:]

Got it. It certainly does and I guess it's a good segue for my next question, which is how you are thinking about 2021. I mean, obviously, we all hope with the vaccine that things start to go back to normal this summer and I certainly understand why you wouldn't expect to comp that second half rounds played number. But in terms of the new and lapsed golfers, would you look – is this a new plateau and we grow off of this in 2022? Or do you expect to lose some of those this year?

[David Maher:]

As I said earlier, we are still in a massive transition, right? 2020 was a massive transition year, 2021 will be a massive transition year. When the dust settles, hopefully sooner versus later, I tend to look at it, Okay, what's the world going to look like, 2022 versus 2019? And I think the golf landscape is going to have more energy, more momentum, more golfers. Again, do I think we sustain and maintain the levels we saw in the back half of 2020? That would be extraordinary for the simple reason that so many other life events are going to come back online. But hey, the game shined in 2020, lot of folks had very good experiences with the game. I keep pointing back to the great work of golf course operators and PGA professionals really driving a lot of that energy and momentum. So we are not going to pinpoint where this thing is going to go, but we tend to look at it in longer-term views and see a general positive energy around the game with the expectation and understanding, as I said earlier, you are going to see momentum in the first half. You are going to see energy in the second half but hard-pressed to keep up with the levels we saw in 2020 from a rounds of play standpoint.

[Joe Altobello:]

Got it. Okay. Thanks, David.

[David Maher:]

Yes.

[Sondra Lennon:]

Thanks Joe. Operator, next question please.

[Operator:]

Yes. Our final question comes from the line of George Kelly with ROTH Capital Partners. George, Your line is open.

[George Kelly:]

Hey everyone. Thanks for taking my questions. So, just a few for you. First, back to the guidance you gave. I just want to make sure I understand the cost side of what you said is still in the first half, there will be, I think, you said $8 million to $10 million of incremental kind of cost of goods sold charges in the first half just related to shipping. Did you say anything about the second – your expectations in the second half of the year? Did I hear you right?

[David Maher:]

You did hear me right. So we said $8 million to $10 million of headwinds, primarily in the first half. We currently do expect that the challenges we are seeing in some of the airfreight and container freight will begin to normalize in late second quarter into the second half.

[George Kelly:]

Okay. Okay. Great. And then, as far as OpEx, I think you said you expect them to be positive higher than 2019 levels, all in?

[David Maher:]

That is correct and what we said there was there is three or four factors. The first is some of the increased expenses associated with the North American distribution center initiatives and some other strategic initiatives that we have ongoing, a full year of shoes operating expenses. So in 2019, we only owned them for half a year. So there is only six months worth of OpEx in 2019 versus a full year in 2021. And then, we said higher stock-based compensation expense as a result of some changes we've made in our grant structures. And finally, higher commissions on our retail sales in Korea. If you recall, under U.S. GAAP, we have to report those as selling expenses. And so, as the sales levels increase – continue to increase in Korea, those expenses continue to go up.

[George Kelly:]

Okay. Great. That's helpful. And then, next question for me is just, I am still a little unclear on the $120 million investment in the ball plants. So is this something that – excuse me, maybe every 10 years or 15 years, this is just sort of how it works. There is things that you need to catch up on and processes, et cetera that really require this. Is this just kind of the normal cost of doing business or something more unique?

[David Maher:]

Yes. We don't see this as a catch up in any stretch. We are confident that we invest regularly in the business to keep us at the front of the pack. So we are very comfortable and confident with where we are. I do think you are right in the sense that this is how – this is how you run a leading precision golf ball manufacturing facility and custom ball operations. Again, we make ongoing investments and then from time-to-time, it makes good sense, both from a competitive and strategic standpoint and an ROI standpoint to make more meaningful investments. And as I said a while back, if you look back over our 30 plus years, that's how it's worked around here and it's worked really well. I also acknowledge too, that, hey, there is forever a shift in evolution of the type of balls you make, whether it's serling or cast urethane or thermoset or TPU, thermoplastic urethane, whether it's two piece, multi-layer, three piece, four piece, et cetera. So that requires some capital investment to stay ahead of that process, which is part of this journey as well. So again, I'll just reiterate, George, I don't see this as a catch up by any stretch. I think this is a leap forward that fits into how we've always thought about golf ball manufacturing at the Acushnet company.

[George Kelly:]

Okay. And then…

[TomPacheco:]

George, I was just going to add, of the $120 million investment over five years, I would call $35 million of it or so just normal recurring CapEx. So, we normally spend $6 million to $7 million a year in golf ball CapEx. In our last couple of years, we spent $30 million to $33 million. So $6 million or $7 million of that is golf ball. So the $85 million – the remaining $85 million of the $120 million is really that incremental investment.

[George Kelly:]

Okay. Got you. And then, last question for me around the second – the distribution facility that you talked about. Are – does this represent any kind of changes? If I heard you right, it's mostly about your e-commerce business or that's a heavy – that's a big part of it. Will this allow you to do anything in ecommerce that you really haven't been able to do or does it represent any kind of change of strategy regarding your ecommerce?

[David Maher:]

Yes. I would say this – I wouldn't characterize this as a investment focused or pointed at ecommerce. It really starts with the reality that we distribute today, FootJoy out of Fairhaven, Massachusetts and we distribute our gear business out of Carlsbad, California. There is a better way to do that. And we bring in most of those products from overseas to the East and West Coast and then we fulfill really the country and in some cases, North America from the East and West Coast. There is a better way to do that, part one. Part two is, it gives us an added advantage with regards to golf balls. We ship golf balls out of the East and West Coast today. Many years ago, we had a central U.S. distribution center. We moved away from that. So this gives us a third point of distribution, shortened lead time, shortens cost for our customers and ourselves. And hey, we experienced, this year shutdowns in California and Massachusetts and had we had this center operational, we wouldn't have incurred the shutdown ramifications that we did in 2020. It does as well, allow us to consolidate ecommerce fulfillment over time and that's an advantage and provide better service levels, quicker lead times, et cetera. But, I wouldn't point to this project as a ecommerce-centric event. It's going to really touch many parts of our business, ecommerce being one of them.

[George Kelly:]

Okay. That’s helpful. Thank you and congrats on a wonderful quarter.

[David Maher:]

Okay. Sure.

[Sondra Lennon:]

Thank you, George.

[David Maher:]

Thanks. And everybody, as always, we appreciate your time and interest. Stay safe and well. We look forward to speaking to you in a few months after the close of our first quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.