Acushnet Holdings Corp. (NYSE:GOLF) Q4 2022 Earnings Call Transcript

Acushnet Holdings Corp. (NYSE:GOLF) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning or good afternoon and welcome to the Acushnet Company 4Q 2022 Earnings Call. My name is Adam, and I’ll be your operator for today. . I’ll now hand the floor over to Sondra Lennon to begin. Sondra, please go ahead when you are ready.

Sondra Lennon: Good morning, everyone. Thank you for joining us today for Acushnet Holding Corp.’s fourth quarter and full-year 2022 earnings conference call. Joining me this morning are David Maher, 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 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 the actual results to differ, please see today’s press release, the slides that accompany our presentation and our filings with the U.S. Securities and Exchange Commission.

Throughout this discussion, we will make reference to non-GAAP financial metrics, including items such as revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today’s press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission. Please also note that references throughout this presentation to year-on-year sales increases and decreases are on a constant currency basis, unless otherwise stated. As we feel this measurement best provides context as to the performance and trends of our business. And when referring to year-to-date or full-year results or comparisons, we will refer to the 12-month period ended December 31, 2022, and the comparable 12-month period.

With that, I’ll turn the call over to David.

David Maher: Thanks, Sondra, and good morning, everyone. Thanks for joining us on today’s call. As Tom and I will outline, Acushnet wrapped up a terrific year with a strong fourth quarter, helping our brands carry nice momentum into 2023. I will begin by acknowledging and thanking the talented Acushnet team for their hard work and great results. Their creative spirit of innovation and commitment to delivering the highest quality golf products and services are creating shareholder value and powering the company’s sustaining growth. Now to our results. Acushnet sales increased 11% in 2022 to $2.27 billion. All operating segments and geographic regions posted year-on-year gains with golf clubs, leading all segments up 16%. EMEA was our fastest-growing region, up 20% versus 2021, and Acushnet’s business in the U.S. and Korea was also especially strong, both increasing 9% on the year.

The company generated adjusted EBITDA of $338 million, a 3% increase over prior year. For the fourth quarter, revenues were up 14% to $447 million as Titleist golf clubs, gear and golf balls all grew double-digits. And adjusted EBITDA of $25 million represents a $30 million increase for the period. In summary, a strong fourth quarter finish to a very positive trending year for Acushnet. In addition, our teams have also made several operational enhancements as we invest to position the company for future success. Heading into ’23, our golf ball supply chain is more expansive and diverse as our primary raw materials partner has grown its capacity and capabilities and we have also added dynamic new suppliers. We believe these enhancements will invite new innovations, while protecting our access to raw materials in uncertain times.

Custom cloud production capacity in the U.S. and abroad have been increased to meet growing demand for Titleist golf clubs and deliver leading service levels. We have expanded footwear production into Vietnam to support growth and strengthen and diversify our supply chain. One of the keys to FJ’s sustaining success is the synergistic and mutually beneficial relationship we have had with our longtime JV footwear manufacturing partner, who shares FJ’s commitment to quality and has seamlessly implemented this capacity expansion. To keep pace with rapid demand for our apparel lines, we have increased our customization capabilities in the U.S. and U.K. where club logos are most prevalent. This expansion positions both FootJoy and shoes to be more agile and responsive to future growth opportunities, while helping to protect lead times and service levels.

And we are optimistic about the enhancements we are making across our global distribution network to increase our ability to process inbound and outbound shipments and meet our high service standards. These investments will reduce the company’s exposure to distribution bottlenecks caused by recent global supply chain disruptions. In addition to these important infrastructure investments, the company also accelerated capital returns in ’22, returning more than $240 million to shareholders through our dividend and share buyback programs. In building upon this commitment, I am pleased to announce that we have increased the company’s quarterly dividend by 8% to $0.195 per share. The company has increased our dividend each year since its inception.

Now looking at our business by segment. As you see, golf ball sales were up 12% in the quarter and 6% for the full-year. Titleist golf balls are the overwhelming choice across worldwide tours, and Pro V1 golf balls were the winning choice of Masters champ Scottie Scheffler; PGA Champion Justin Thomas, U.S. Open Winner, Matt Fitzpatrick and open Champion Cam Smith. In addition to winning all four majors in ’22, Titleist was also the golf ball of choice of 95% of the players who competed in the NCAA Women’s Golf Championship. These achievements, we believe validate the Titleist golf ball performance, quality, and consistency advantages and are foundational to our number one ball in golf positioning. New Pro V1 and Pro V1x models launched in late January and deliver advanced performance achieved through innovative new core technology and advanced aerodynamic properties.

We are pleased with initial consumer response to what we believe are the most advanced Pro V1s we have ever launched. And after a two-year hiatus, we have recently reopened Titleist Ball Plant III for tours and encourage interested golfers to join team Titleist to experience firsthand all that goes into making Pro V1, Pro V1x, and AVX and my teammates relentless commitment to product quality and process excellence. Titleist golf clubs continue to excel with fourth quarter and full-year sales up 32% and 16%, respectively. Titleist golf clubs are well positioned for ’23 as we build upon our momentum with new TSR 1 drivers and TSR hybrids, a full range of new Scotty Cameron Super Select putters and new SM9 lightweight wedges. Acushnet’s Gear business also added to the Titleist brand momentum with revenues up 26% in the quarter and 13% for the year.

Our gear team has done good work to expand customization capacity to meet strong demand and has front-loaded inventory receipts to ensure that we are able to meet peak demand levels in the first half of the year. FootJoy sales were up slightly in the quarter and grew 12% for the year with gains coming from each of our footwear, glove, and apparel categories. The ongoing success of FJ’s Premiere Series footwear line reflects the brand’s commitment to performance, style, and comfort. In addition, today marks the official launch of the all-new HyperFlex collection, which showcases the brand’s leadership in the premium athletic footwear space. FJ Apparel also carries great momentum into 2023 coming off another year of double-digit growth as our design team excels at delivering performance and style across our men’s and women’s collections.

While FootJoy is fully focused on the future, this year marks a proud milestone as we celebrate the brand’s 100th anniversary. FootJoy is golf’s most authentic and enduring footwear brand, the number one shoe in golf for over 75 years in counting. FootJoy gloves are among the highest market share products in golf at apparel and outerwear momentum add to the brand’s energy and enthusiasm. FootJoy’s future has never been brighter. And rounding out Acushnet brands, our shoes business increased by more than 25% in 2022, and our golf business has nearly doubled since our 2019 acquisition. We are enthused about the road ahead as our talented team is committed to building the shoes business for long-term sustaining success. Now here, you see that all regions posted healthy gains in ’22, led by EMEA, which was up 20%.

For the fourth quarter, you see double-digit growth in Japan and the U.S. Japan’s outsized gains reflect the timing of our TSR driver launch, which was skewed towards Q4 in Japan and Q3 in all other regions. Key takeaways from this slide are Acushnet’s ability to execute across varying marketplaces and the health of the golf consumer that we are seeing in all major regions. Now looking forward, we remain encouraged by strong golfer participation and enthusiasm for the game, including a golfer base that grew for the fifth consecutive year in 2022. Global rounds of play were resilient last year, comping against record numbers in 2021. U.S. play was down slightly, and we estimate rounds outside the U.S. increased in the low single-digit range.

Market fundamentals are strong, trade partners are financially stable and Titleist and FootJoy channel inventories are healthy across global markets. The professional game is off to a compelling start in ’23 and this energy around the tours is an important catalyst as the golf season ramps up to the masters and a full global opening in Q2. Our Titleist FootJoy and shoes brands are vibrant and healthy and we are enthused about our vast new product pipeline for 2023. We expect growth from each of our reportable segments in spite of continued currency headwinds. In addition to ongoing investments in our core businesses, we have also made recent acquisitions, which are great fits and compelling long-term value creation opportunities for Acushnet.

The first is our majority investment in TPI and long-term partnership with founders, Dave Phillips and Dr. Greg Rose. TPI is the leading provider of golf-specific health, fitness, and swing advice available through the MyTPI website. Dave Phillips and Dr. Rose are the preeminent experts in the field of biomechanics and body movements specific to golf and other rotational sports. Their work is directed in helping athletes achieve peak performance, while reducing pain and the risk of injury. They have had a profound impact on the professional game as the majority of leading tour professionals works with a TPI certified trainer. The Titleist TPI relationship goes back more than 20 years. And with this new partnership, we will invest in TPI to expand its reach and activate Dave and Greg’s expertise across our player development and R&D engines.

And last month, when we announced the acquisition of the Club Glove brand, the industry-leading provider of golf travel gear. Club Glove is known by dedicated golfers in the U.S. to be the leader in golf travel products and is the preferred choice by the overwhelming majority of PGA Tour, LPGA Tour and PGA club professionals. Club Glove’s patented travel gear has long been recognized among the industry’s most innovative and reliable products. And given the brand’s reputation for product and service excellence, we see this as an ideal fit within the Acushnet portfolio of brands. Club Glove founders will continue to operate the business at least through the end of the year, and we look forward to further developing this leading brand for years to come.

In summary, we are optimistic about the structural health of the golf industry, the great momentum behind our Titleist FootJoy shoes TPI and Club Glove brands and the resilience and engagement of the game’s dedicated golfer. And we are confident that recent investments in supply chain, technology and infrastructure, will benefit golfers and our trade partners and position the company for continued market leadership and sustaining success. Thanks for your attention this morning. I will now pass the call over to Tom.

Tom Pacheco: Thanks, David, and good morning, everyone. I also would like to begin by recognizing our talented associates for the tremendous effort they put forth to deliver a great year for Acushnet in 2022. Starting with our Q4 results on Slide 10, consolidated net sales were $447 million, up 6% reported and up 14% level FX versus 2021. Overall, our momentum continued with all reportable segments showing growth in the quarter on a constant currency basis. Gross profit for the fourth quarter was $224 million, up $19 million or 9% versus the prior year, and gross margins were 50% up 140 basis points. The increase in gross profit and gross margin was driven by golf clubs and golf balls as a result of higher sales volumes, primarily TSR metals and clubs and across all models and balls and by lower inbound freight costs.

SG&A expense in Q4 was $196 million, down $13 million or 6% and R&D expense was $14 million, down $2 million or 10% compared to the prior year. SG&A for the quarter was down across all reportable segments and across all expense categories, except for distribution, where we continue to make investments to increase our throughput, while maintaining high service levels. Income from operations for the quarter was $12 million, up $34 million or over 150% from 2021. Interest expense was $5 million up over $4 million on higher interest rates and higher outstanding borrowings and income tax expense was $2 million, up $1 million from the prior year, primarily as a result of a shift in our mix of jurisdictional earnings. Net loss income attributable to Acushnet Holdings was up $26 million compared to 2021 and adjusted EBITDA was $25 million, up $30 million from the prior year.

Moving to our full-year results. Consolidated net sales for the year were $2.27 billion, up $122 million or 6% on a reported basis compared to a record 2021. Consolidated net sales were up 11% on a constant currency basis. Gross profit was $1.18 billion, up $61 million or 5% and gross margins were 51.9%, down 20 basis points from the prior year despite higher sales volume and higher ASPs in many product categories primarily as a result of higher inbound freight, the negative impact of currency and higher input costs. SG&A expense for 2022 was $833 million, up $38 million or 5% compared to 2021. The increase came from higher selling expenses due to an increase in sales volumes higher distribution costs as we enhance our fulfillment and customization capabilities and higher G&A costs, mainly from investments we are making in technology, all of which were partially offset by reductions in A&P and employee-related expenses.

R&D was $56 million, up $1 million compared to the prior year. Income from operations was $282 million, up $22 million or 8% from 2021. Interest expense was $6 million higher with about two-thirds of the increase coming from higher interest rates and one-third coming from higher debt balances. And our effective tax rate was 20.9% compared to 25.7% in 2021 as a result of a shift in the mix of our jurisdictional earnings. Net income attributable to Acushnet Holdings was $199 million, up $20 million and adjusted EBITDA was $338 million, up $10 million or 3% compared to 2021. 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. Moving to Slide 11, we continue to benefit from the strength of our balance sheet.

At the end of 2022, we had about $57 million of unrestricted cash on hand. Total debt outstanding was approximately $568 million, and we had approximately $417 million of available borrowings under our revolving credit facility. Our leverage ratio was 1.4x at the end of 2022. Consolidated accounts receivable was $217 million, up $42 million from the prior year, and our days sales outstanding were 52 days, the same as the end of 2021. Inventory at the end of 2022 was $675 million, up $261 million from the prior year, and our days sales and inventory were 176 days. We are comfortable with our overall inventory levels as we enter 2023. And I will point out that the comparison to last year can be misleading as our year-end 2021 inventory levels were unusually low for our growing sales base.

The composition and level of our inventories varies by segment. Golf ball inventories remain lower than we would like as we continue to catch up from last year’s raw material shortage. Golf club inventories are well positioned for upcoming product launches and to meet expected demand with DSIs in line with pre-pandemic levels. Gear and FootJoy inventories are strategically elevated in advance of upcoming product launches to mitigate fulfillment risks in the early part of the year. There is some level of excess footwear and apparel inventory, however, we are confident in our plans to sell this inventory during the first half of 2023. And given the changes in our business, we expect inventory will come down in the first half at a faster rate than prior years, returning to more normal seasonal levels by mid-year.

Cash flow from operations for the fourth quarter of 2022 was an outflow of $9 million and for the full-year was an outflow of $68 million. This compares to inflows of $34 million and $314 million for the same periods in 2021. The decrease in cash flows from operations for both periods comes primarily from increases in working capital, mainly inventory. And we continue to make meaningful CapEx investments in our business. We spent $28 million on CapEx during Q4 and $61 million for the full-year, which was up $24 million from 2021. For 2023, we expect our capital expenditures to increase to about $75 million as some CapEx has shifted out into 2023 and some is being pulled forward to accelerate the realization of the benefits of those investments.

Slide 12 provides highlights of our recent acquisitions and capital allocation activities. In November, we acquired an 80% interest in TPI for $18 million. TPI is a leading supplier of online educational programs, certifications, and live seminars primarily for dedicated golfers. The impact of TPI sales and EBITDA were de minimis on our financial results for 2022. And for 2023, we expect TPI to add less than $10 million in sales and to initially be EBITDA neutral. TPI’s results will roll up into our golf club segment in our external reporting. And in February of 2023, we acquired the Club Gloves brand including all relevant trade names, domains and products from West Coast Trends, Inc. for $25 million. Club Glove is a highly respected performance leader in premium golf travel products.

West Coast trends will continue to operate in service Club Glove as a licensee of Acushnet through the end of the year, while we set up our internal operations. While under this structure, we would expect the Club Glove brand to add a very limited amount of royalty revenue and EBITDA to our results. Once we are running the business internally, we would expect initial annual Club Glove branded product sales to be under $20 million and for EBITDA to be accretive. The financial results of the Club Glove brand will roll into our Titleist Gear segment in our external reporting. Additionally, in December ’22, we acquired trademarks related to our putter business for cash consideration of $65 million. Prior to this transaction, we had been accessing these trademarks through a licensing arrangement.

In terms of capital allocation, our strong financial results support the continued execution of our capital allocation strategy. Our highest priority remains investing in the business in the form of OpEx and CapEx with a focus on product innovation, golfer connection and operational excellence. We will continue to evaluate potential acquisitions and other investments that align with our focus on premium performance products that appeal to dedicated golfers. We believe that these investments advance our long-term strategy and drive growth at a favorable return. Our focus on generating strong free cash flow and returning capital to shareholders continues to be a high priority. In December, we paid our previously announced Q4 dividend, which increased our total dividends paid for the year to $52 million, up 6% compared to 2021.

And as David mentioned, our Board of Directors today declared a quarterly cash dividend of $0.195 per share payable on March 24 to shareholders of record on March 10. This represents more than 8% increase in our dividend and an expected Q1 cash outflow of approximately $13 million. During the fourth quarter, we repurchased about 1.1 million shares of our common stock for approximately $51 million, bringing our full-year repurchases to just over 4 million shares for a total of $191 million. These repurchases reduced our share count by about 5% over the course of the year. At the end of 2022, we had about $157 million remaining under our share repurchase authorization. Between January 1 and January 13, 2023, we purchased an additional 168,000 shares of our common stock on the open market for $7.4 million, triggering the closing of our most recent share repurchase agreement with Magnus.

As a result, on January 23, we purchased about 2.2 million shares of our common stock from Magnus for $100 million to complete the agreement. This further reduced our share count by an additional 3% for a total decrease of 8% from the beginning of 2021. On February 9, 2023, our Board of Directors authorized us to repurchase up to an additional $250 million of our outstanding common stock, bringing the total authorization up to $700 million since our share repurchase program was established in 2018. Our capital allocation strategy is a foundational element of Acushnet’s value proposition, which we continue to believe creates a compelling long-term total return for our shareholders. Moving to Slide 13. Our outlook for 2023 reflects continued strong demand for golf and Acushnet products and a healthy pipeline of new product introductions.

As you would expect, our outlook is tempered somewhat by caution given the overall economic environment. While we expect that currency will continue to be a headwind mostly in the first half of the year and more so in Q1 than in Q2, we expect all segments to show growth on a constant currency basis for the full-year. And while we expect to benefit from lower inbound freight rates and reduced air freight utilization, we expect some headwinds from higher input costs and from the return of promotional activity, albeit at lower than pre-pandemic levels. Taking these factors into consideration, we expect our full-year 2023 consolidated net sales to be in the range of $2.325 billion to $2.375 billion up 3.5% on a reported basis at the midpoint. This includes a negative impact from foreign currency of about $60 million.

On a constant currency basis, consolidated net sales are expected to be up between 5% and 7.2%, and we expect full-year adjusted EBITDA to be in the range of $345 million to $365 million, up 5% compared to 2022 at the midpoint. Within this, we expect full-year gross margins to be up slightly, and we expect full-year OpEx to grow slightly faster than reported sales as we continue to make investments to support the significant growth we have seen in the business over the past few years. This outlook includes the full-year impact of the acquisitions I previously discussed. We expect the timing of our business in 2023 to be similar to 2022, with first half 2023 consolidated net sales expected to represent just above 55% of full-year sales and first half adjusted EBITDA to be in the range of 65% to 70% of full-year adjusted EBITDA.

In conclusion, our associates and trade partners enabled us to deliver strong results for Acushnet in 2022. While we are cautious given current economic uncertainty, we are pleased by the structural health of the industry, the momentum of our brands and the investments we are making in the business. We are confident we will achieve our financial goals for 2023 and beyond and deliver a solid long-term total return for our shareholders. With that, I will now turn the call over to Sondra for Q&A.

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

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Q&A Session

Operator: Of course. And our first question today comes from Brian Harbour from Morgan Stanley. Brian, please go ahead. Your line is open.

Unidentified Analyst: Hi, this is Matt on for Brian. Thanks for taking the q uestion. Maybe first, it looks like some of the Golf equipment industry data has softened a little bit in the recent months. What do you think was the driver of that? And any color on why it looks like it didn’t have much of an impact on your results?

David Maher: Good morning, Matt, can I just ask you to clarify that the Golf equipment entry data. Help me understand the question.

Unidentified Analyst: Yes. So at least through Golf Data tech, it looks like the industry sales data softened a bit in recent months. I’m not sure if that’s what you’re seeing.

David Maher: Okay. Okay. Got it. The way we look at certainly the past December, Q1, January, February, I’ll go back to holiday sales were, in our minds, healthy. What we certainly have seen is some swings, some regional swings based on weather patterns. You look at rounds of play. They were down double-digits in California, they were down double-digits in Arizona, high double-digits in California due to weather. They were up in Florida. So there’s some regional swings that we’ve seen, but we haven’t seen any meaningful blips one way or the other over the last several months.

Unidentified Analyst: Great, thanks. And then maybe one on SG&A. It looks like it’s been favorable and maybe somewhat restrained. Can this continue into ’23? And is that a kind of a key driver of the guide?

Tom Pacheco: So our SG&A, particularly in Q4, was down. That’s as much a story about our accelerated investments in Q4 of ’21 as much as it is the result in Q4 of 2022. Going forward, for 2023, we expect OpEx will grow slightly faster than sales, which it did not do that in 2022, and we expect some growth in each quarter of next year. So that trend will not continue. Q4 is a bit of an anomaly.

Unidentified Analyst: Great, thank you.

Operator: The next question comes from Daniel Imbro from Stephens Inc. Daniel, please go ahead. Your line is open.

Daniel Imbro: Hi, good morning everybody. Thanks for taking my questions. David, I want to start on the demand side. Obviously, you mentioned the participation numbers are rising and kind of looking through weather, you guys feel pretty good about the industry. But obviously, we’re coming off a strong year. So if you can take a step back, what gives you guys confidence that this will continue? And then when I think about the 6.5% constant currency guide, what are you anticipating for core golf equipment growth? What’s coming from FootJoy Shoes, I think Tom mentioned maybe $10 million from TPI. Maybe if you could walk through the building blocks there of the guide in the context of your overall industry outlook.

David Maher: Yes, hi. Good morning, Daniel. At a high level, the golf equipment apparel markets are healthy. Courses, off-course retailers are healthy. And as we’re seeing in rounds of play data, when weather cooperates, golfers are getting out and playing. So we’ve got a — step one would be we’ve got a healthy golf marketplace. Channel inventories are in a good place. They’re not where they were 18 months ago, which was very tight, but they’re in a healthy place as compared to historic levels. We then point to two other contributing factors. One is broader consumer spending, which experts will tell you is projected in the flat to low single-digit range. And then you layer on weather projections, which long-ago, we realized you don’t project weather.