Acushnet Holdings Corp.
Q4 2018 Earnings Call Transcript

Published: 2 Mar 2019

[Operator:]

Good morning. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the Acushnet Holdings Corporation’s Fourth Quarter and Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tony Takazawa, Vice President of Investor Relations, you may begin your conference.

[Tony Takazawa:]

Thank you. Good morning, and welcome to Acushnet Holdings' call to discuss the financial results for Q4 and full year 2018. This morning, we are joined by Acushnet President and CEO, David Maher. David will provide commentary on the conditions in the golf industry and discuss the performance of our business in the context of our long-term mission and strategy. Next, Acushnet CFO, Tom Pacheco, will spend some time discussing the overall financial results for the year and highlights from 4Q. 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 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 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. With that, it is my pleasure to introduce Acushnet CEO, David Maher. David?

[David Maher:]

Thanks, Tony. Good morning, everyone. We appreciate your time today. I'd like to begin by sharing some of Acushnet's highlights from 2018. Starting with golf balls, Titleist had a strong year, as 73% of all worldwide tour players relied on Pro V1 or Pro V1x as their golf ball equipment choice, including the winners of all four men's major championships and all five women's major championships in 2018. We believe this is powerful commentary on the performance, quality and consistency inherent in every Titleist golf ball produced by our world-class manufacturing team. In 2018, we also introduced our new AVX, a premium multilayer cast-urethane golf ball developed for golfers who benefit from lower spin in flight and prefer a softer feel. We're very pleased with this past summer's global launch and the effective and clear positioning of AVX in the marketplace. The Titleist golf club business also had a terrific year, driven by the resoundingly successful launch of TS Metals, a strong year in irons, and robust Vokey SM7 wedge and Cameron Select putter launches. We're excited about the momentum our golf club business is generating. Our gear and FootJoy businesses were resilient, in spite of some challenges inherent in their respective product categories, and we believe both segments are positioned well for 2019. Since our January acquisition of Links & Kings, we've made meaningful investment to improve and expand our supply chain to prepare this great brand for growth. And in the fourth quarter, we began the process of integrating and working closely with our new partners at PG Professional Gulf. And while Mother Nature was especially unkind to the golf business in 2018, the industry held up well despite a weather-induced loss of rounds in many global markets. Against this backdrop, Acushnet was able to capitalize, posting a 5% sales increase for the year, fueled by new product innovation and some great work by our associates. Acushnet's associates are known for their experience, expertise and passion for their work. I must acknowledge and thank my teammates for their commitment and effort, which are the foundation of Acushnet's consistent performance and future growth. We are also appreciative of our valued trade partners, who so effectively communicate Acushnet's performance, quality and consistency benefits to golfers. And affirming our commitment to our support of shareholders, I am pleased to make the following two announcements

[Tom Pacheco:]

Thanks, David, and good morning to everyone on the call. I would like to echo David's comments and thank all of our associates and trade partners for helping us deliver solid results for the year. I'm going to start off by discussing our results for the full year. As you know, we manage the business with our annual goals, two-year product life cycles and long-term strategy in mind. This has proven to be a successful approach, as our business results can be impacted in the short term by factors such as the timing of product launches and the weather. Looking at 2018 overall, we are pleased with our ability to execute our plan and to deliver the solid results we have achieved. Consolidated net sales were $1,634,000,000, up 5% over last year and up 3% on constant currency. Growth was primarily a result of innovation in our Titleist clubs business, where the newly introduced TS Drivers and Fairway Metals and the Vokey SM7 wedges helped to drive revenue. Gross profit was $842 million, up $40 million versus last year. The success of the Titleist TS Metals, Vokey wedges and higher average selling prices in golf balls were major factors in gross profit improvement. Full year gross margins were 51.6%, up 20 basis points versus last year. SG&A expense was $612 million, up 6% over 2017. As has been discussed, throughout the year, the increase in SG&A in 2018 was primarily due to planned higher selling expenses across all segments, an increase in advertising and promotion and higher IT-related costs and share-based compensation expenses. I would also note that SG&A expense included an unfavorable impact of $5 million from changes in foreign currency exchange rates. Research and development expense of $51 million was up $4 million compared to last year and about 3% of net sales. Operating income was up slightly over 2017 at $172 million. Interest expense increased by $3 million to $18 million for 2018, reflecting higher average interest rates compared to 2017. Our effective tax rate was 31.4% compared to 32% last year. We currently expect our 2019 effective tax rate to be around 30%. 2018 net income attributable to Acushnet Holdings was $100 million, up 1% over last year. And for the year, we are pleased that adjusted EBITDA was $231 million, up $7 million or 3% year-over-year. To assist you in your review of the calculation of adjusted EBITDA, we have provided a reconciliation in our earnings release as well as in the slide presentation. Now I will review our Q4 results. Consolidated net sales in the quarter were $343 million, down 2% year-over-year and down 1% on constant currency. As David mentioned, this decline was anticipated and due primarily to the drawdown of Pro V1 field inventories in advance of the 2019 Pro V1 launch and the timing associated with our golf club product launches in the second half of the year. Q4 gross profit was $175 million, down $4 million on lower sales volumes of both golf balls and golf clubs. Gross margin was basically flat at 50.9%. Looking at operating expenses. SG&A of $140 million was up $3 million or 2% versus last year. The increase in SG&A was due to higher selling expenses across all segments and included continued partner readiness expenses to support the very successful TS Metals launch. In Q4, R&D expense of $13 million increased $1 million over last year, largely attributable to higher employee-related costs. Operating income in the quarter was $20 million. This was lower than the same quarter last year due to the combination of lower revenues and higher selling expenses that I mentioned. Q4 interest expense of $4 million increased by $600,000 year-over-year due to higher average interest rates on borrowings. Our Q4 effective tax rate was 22.2%. This rate was substantially lower than the full year ETR as a result of the release of a portion of our valuation allowances on state-deferred tax assets, partially offset by the impact of the new guidance related to tax reform that was issued during the quarter. For the quarter, net income attributable to Acushnet Holdings was $11 million, and Q4 adjusted EBITDA was $36 million, down 12% from the prior year period. Now looking to the balance sheet. We had about $31 million of cash on hand at December 31, 2018. Total debt outstanding at year-end was approximately $386 million. On a rolling four quarter basis, our total debt-to-adjusted EBITDA ratio is now 1.97 times. We are very pleased to have reached our target leverage ratio as we expected. 2018 CapEx was about $33 million. While a good portion of this spend is maintenance-related, as we previously stated, we have also been making investments in innovation, technology and infrastructure to drive continued market leadership, operational efficiency and future growth. For 2019, we expect CapEx to be about $36 million. As I mentioned, we are pleased that we have reached our target leverage ratio at the end of the year as expected. We now have the flexibility to expand our capital allocation options with regard to both return on capital and return of capital. Investment in innovation, golfer connection and operational efficiency is key to the long-term success in the golf business. As such, we plan to continue to make investments in R&D, targeted sales and marketing programs and CapEx which deliver a favorable business on investment. Examples of these investments include

[Tony Takazawa:]

Thanks, Tom. Christina, can we now open up the lines for questions, please?

[Operator:]

[Operator Instructions] Our first question comes from Randy Konik from Jefferies. Your line is open.

[Randy Konik:]

Thanks very much. I guess, Dave, I want to ask about just the general – your general thoughts about the environment. You kind of alluded to, in your text, in the press release, the business of golf being structurally healthier in recent years. Just kind of just want to get your kind of pulse on the industry for the next – as you see it today and over the next couple of years, just high level.

[David Maher:]

Sure. Good morning, Randy. A couple of quick ways to get at that, and I'll start by commenting really at a high level on 2018. It was a challenging weather year globally. It really, as challenging as we've seen in quite some time, which led to rounds being off somewhere between 3% and 5% around the world. And in spite of this, the market held up well, which is, I think, commentary on the overall health and resilience of the dedicated golfer. And now certainly, consumables were hit a bit harder than clubs, but overall for the year, for the industry, it turned out a whole lot better than you would expect, given the weather, round realities. So with that as a backdrop, I'll peek forward to 2019 and I'll share several inputs that shape our thinking about 2019. First, again, the dedicated golfer is in good shape, alive and well, playing, spending, despite some weather and weather drags. Second, of course, would really be our internal product plans, which we're excited about and confident in. I would say third would be the retail channels, and we've talked a lot about this over the years. The retail channels are healthy. They're as healthy as they've been in quite some time. And for the most part, inventory levels heading into the new year are in good shape. And I would say lastly, the final piece would be the broader economic climate and consumer spending. And we did see that consumer spending was a bit less robust in the second half of 2018 than it was in the first half. And really, these second half conditions are the conditions with which we built our 2019 plans around. So net-net, Randy, we'll reiterate our position, and this has been consistent over the last couple of years, also consistent with this overall healthy retail climate, which I did note in my opening remarks, which is that we do project the industry growth, and that is our target market dedicated golfer industry growth to be in the flat to low single-digit range. So those are the key inputs we think about as we assess golf going forward into 2019.

[Randy Konik:]

Helpful. And then if we jump off that last comment around, let's say, the second half versus the first half from a industry spend kind of perspective by the consumer, how do you kind of think about that and compare that to or contrast it with some of the product acceptance you're seeing with some of the new product areas, like the AVX, the TS product line, even the colorway change on the Pro V1, the yellow coming up, et cetera? So how do you think about that as indication for your business being able to almost like sort of outperform and gain share in the upcoming year?

[David Maher:]

Yes, so certainly, from a product standpoint, we're very excited about – and I'll go sequentially. Our May introduction of AVX, our fall introduction of TS Metals and now we're in the midst of a first quarter launch of new Pro V1 and Pro V1x. So from a product standpoint, I think our team has done a great job controlling all their variables and really bringing terrific product to market and activating it with both the trade and consumers in a really effective manner. The other piece, Randy, that you can't overlook is what we saw in the fourth quarter. Rounds – and this is more U.S. commentary – rounds were off double digits in the fourth quarter. Weather was, you look at the mapping and you look at what happened from a precipitation standpoint, up dramatically. You look at it from a temperature standpoint, down dramatically. So the industry came through a pretty rugged quarter from a weather standpoint, that hit rounds some, which were off some 10%. It really is as tough a quarter as we've seen in quite some time. Again, all commentary on the inputs that have us thinking about the business as we head into 2019. So at the highest level, we feel good that we've weathered a tough weather year, pun intended. But again, the things we can control, the product stories we're bringing to market, we're very, very optimistic about.

[Randy Konik:]

Great. And last question, just would like to – you just talked about the, I guess, the return on capital and return of capital and just different uses, given that the leverage ratios have been kind of net where you want them to be. On the M&A strategy or potential M&A strategy, just curious on just what – how you think about your – what's your philosophy around M&A? Links & Kings, just kind of what – just curious on if there were to be any M&A, amongst the other ton of things you can choose to do, just curious on how you think about the M&A area in terms of what you would look at, what you wouldn't look at? Just curious.

[David Maher:]

Well, I think fair to say we're very open-minded in terms of M&A. Our preferred inputs are does it, does the product or brand resonate with the dedicated golfer? That's our sweet spot. That's where we have the most expertise. And then secondly, would it be synergistic with our global distribution platform? We have strengths on our own. We have our own fingerprint in terms of how we go to market and where we have strengths. Good example, maybe the best example, would be the Links & Kings, which again, dedicated golfer acceptance, matches nicely with our existing distribution – channel distribution strengths. So those are really the two primary drivers to how we assess and think about M&A. But that said, Randy, we are open-minded, and we're always looking at opportunities that would work well within our company. Shared with you last go around that the PG Professional Golf doesn't necessarily fit the two criteria I established, but it fit from a vertical supply chain standpoint. So that one a bit outside the lines of our typically stated M&A approach, but we think real effective and important and long term, could be very successful for Acushnet.

[Randy Konik:]

Very helpful. Thanks, guys.

[Tony Takazawa:]

Thanks, Randy. Next question, please.

[Operator:]

Our next question comes from the line of Steven Zaccone from JPMorgan. Your line is open.

[Steven Zaccone:]

Great. Thanks very much. Good morning. So encouraging top line guidance for 2019. And thanks for the commentary on the first half versus the second half cadence. But I was hoping you could talk a little bit more detail about expectations by segment. Seems like Pro V1 selling into a healthier channel than the last launch, and you also have the new yellow ball launch. So presumably, golf ball sales growth will outpace the consolidated outlook. But just could you talk a little bit more about the expectations by segment?

[Tom Pacheco:]

Sure, Steven. This is Tom. Good morning. So as you said, we – it's a Pro V1 launch year, so an odd-numbered year, we're always looking for a solid performance from the golf ball business. And as you think about the clubs business coming off a very successful 2018, you've got some challenging comps there. So certainly looking at strong performance from golf balls and a little more challenging performance from clubs. We are looking for a bit of a rebound for FootJoy as it compares to some of the challenges it had last year. So I think from a segment perspective, that's what we're looking at.

[David Maher:]

I'll reiterate, Steve, just to again make a point that Tom made earlier. A big theme here in 2019 is our launch cadence. And again, as Tom said, if you look at what we launched in the first half of 2018, we had performance models, we had wedges, we had putters, we had an AVX golf ball, all in the first half. That compares with the first half of 2019, really we have a Pro V1 launch, which is meaningful, but not meaningful enough to offset some of those high-impact pipelines that took place in the first half of the year. So if there's a theme, and it really rings true in odd years for Acushnet, is that our launch cadence differs in odd years from even years, which again, we've talked about in the past.

[Steven Zaccone:]

Yes, understood. And then just on the increase in the share purchase program, could you comment around your strategy around actually repurchasing stock? Would you expect to be a consistent repurchaser? Or maybe do it on more of an opportunistic basis?

[Tom Pacheco:]

So this is Tom again. We're not going to get into a great amount of detail in terms of our execution plans. We do expect to purchase relatively consistently throughout the year. We will obviously be cognizant of the share price and be opportunistic where we can. So we will be strategic, but we do expect to be a consistent purchaser across rest of the year.

[Steven Zaccone:]

Great. That’s it all for me and hoping for better with this year. Take care.

[Tony Takazawa:]

Thank you, Steve. Next question, please.

[Operator:]

Our next question comes from Dan Wewer from Raymond James. Your line is open.

[Dan Wewer:]

Thanks. So with the midpoint of revenue guidance in that mid-2% range for 2019, given we're going to be flat in the first half of the year, that implies the growth is going to be back-loaded. And those are two seasonally smaller periods, so we're talking about what, 4%, 5% revenue growth at a minimum, I guess, in the second half of the year. Why would we be confident about the second half rebounding at that rate? Is it due to some changes in product launches? Or is it an assumption that weather gets a lot better?

[David Maher:]

No, not at all. Not at all, Dan. It's not at all to do with weather. It's just a function of our launch cadence. Again, odd years, this is how they flow. Even years tend to be very first half-driven, as I said. But this is solely a function of our launch cadence. And it won't be – each of the segments won't perform the same. As we mentioned, the ball business takes a –- take a bit of a ride in the first quarter, whereas some of the other segments more back half-loaded. But really, solely a function of how we think about launch timing.

[Dan Wewer:]

Okay. And then second question. There's been more speculation about the domestic economy, I guess, given the global economy is slowing, it's been a over a decade since we've had a recession, but how do you think that the golf industry, how would it change in the next inevitable recession compared to what happened back in 2008 and 2009?

[David Maher:]

Yes, and we share – you're right, it's inevitable. When? Nobody knows. But in terms of how we've experienced recessions going back over the last couple of decades, I'll point to '08, '09 and if you back out the Cobra piece of our business, which was before we sold it, our business held up quite well. We certainly took a hit, but we didn't take as big a hit as the broader economy. And again, I think it's commentary on just the passion and commitment and dedication to the game of our dedicated golfer. Do they keep playing? Yes, they do. Do they keep spending? yes, they do, albeit at a lesser rate. So if we use '08, '09 as the benchmark, again, our business took a half step backwards while the broader economy may have taken a full step backwards. So there's some inherent resilience that comes with our dedicated golfer base around the world.

[Dan Wewer:]

And just the last question I have is, curious as to how you're thinking about the ultra premium end of the market? Seeing PXG taking pricing lower. There's been some speculation that maybe Titleist is going to push its Concept irons a little bit harder. But curious as to how you're thinking about the very high-end price point in the golf sector?

[David Maher:]

Yes, we're excited by it. we've got a terrific product in our Concept irons, which we launched late last year. We're very excited about it. We do understand it's a very – it's a labor-intensive business, in that I mean you have to really make a meaningful commitment to the fitting process and the fitting experience. So it's really a two-part business

[Dan Wewer:]

Okay, great. Thank you.

[Tony Takazawa:]

Thanks, Dan. Next question, please.

[Operator:]

Our last question is from Dave King from ROTH Capital Partners. Your line is open.

[Dave King:]

Thanks, good morning, guys. Maybe following up on the segment guidance line of questioning a bit. Do you have any early reads on the success of this year's Pro V1 launch versus prior launches in terms of bookings, I don't know, particularly with the new yellow ball? And then how is that TS business trending now in Q1 after some strong launches from some of your competitors?

[David Maher:]

Yes, good morning, Dave. So as to Q1, really, too soon to say, in the sense that there's not – there's not much meaningful data out there yet in terms of what's happening in the first quarter. We've had a cold and wet spring out West, which is more a long-term positive, given they need the rain and the water. We would expect rounds will be up slightly in January, but that's not out yet as well. But in terms of Pro V1, it is too early to say. Certainly, you get a lift from new, we think we'll get some interest and some new trial. On the yellow, we're excited, but again, really at this stage, tough to give you any meaningful feedback at this point. And as to TS, we're very excited about TS. But you're right, there's a whole lot of new competitive product entering the market, which was anticipated. And in the end, it's going to come down to how our product fares versus theirs on the fitting tee and on the launch monitor. And so far, we're very, very confident that our product will stand up as well as any product in the marketplace in terms of speed, overall performance, forgiveness, et cetera, et cetera. But in terms of how we're faring versus the pack and the meaningful competitive activity that's out there, we like our position at this point.

[Dave King:]

Okay, great to hear it. And then on the EBITDA guidance, I want to unpack that a bit. How should we be thinking about gross margin versus expenses, particularly with ball mix maybe providing some lift to gross margin, I think? But I seem to recall you talking about maybe accelerating some marketing or maybe changing some of your marketing plans, how should we be thinking about those factors?

[Tom Pacheco:]

So this is Tom. Dave, good morning. So as you know, we don't provide particular guidance around gross margins or operating margins. There are a lot of puts and takes, particularly in our gross margins, including the two-year product life cycle, timing of launches, et cetera. We are – if you look to our guidance, we are showing leverage and growth at the EBITDA level relative to – with a roughly 4% growth rate there versus a 2.2% growth rate on the top line. So we are forecasting leverage through the P&L, so.

[Dave King:]

Okay. Fair enough. Thanks and good luck with 2019.

[David Maher:]

Well, thank you, everyone. We appreciate your time and attention to our business and on today's call. As I've said earlier, we're excited about the upcoming golf season. Our associates have done great work planning for the year. And we're busy preparing golf shops, educating our trade partners for the upcoming season. And most importantly, we have a great range of exciting new products for golfers to experience in the coming months, which we believe will help them play their best golf and fully enjoy the game. With that, said, again, we thank you for your time and attention this morning, and we look forward to reporting back to you in the spring.

[Operator:]

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