Good morning, and welcome to Acushnet Holdings Corp. Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would now like to turn the call over to your host. Sondra Lennon. Please go ahead.

Good morning everyone. Thank you for joining us today for Acushnet Holdings' third quarter 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 actual results to differ, please see today's press release, the slides that accompany our presentation and our filings with the U.S. Securities and Exchange Commission. Throughout this discussion, we will be making reference to non-GAAP financial metrics, including items such as revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a 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 when referring to segment and regional year-on-year sales increases and decreases, we are referring to sales in constant currency. And please also note that when referring to year-to-date results or comparisons, we are referring to the nine-month period ended September 30, 2020 and the comparable nine-month period. With that, I'll turn the call over to David.

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

Thanks, David, and good morning to everyone on the call. I would like to start by extending my thanks and appreciation to our associates and trade partners for their exceptional execution, which has resulted in Acushnet's strong Q3 performance. Starting on slide 9, Q3 consolidated net sales were $483 million, up $66 million or 16% versus Q3 of last year and up 15% on a constant currency basis as the very strong demand for golf and for all of our products that we saw in June and July continued into August and September. Q3 gross profit for the third quarter was $252 million, up $35 million or 16% versus last year and gross margin was 52.2%, up 10 basis points with a solid increase in golf ball gross margins partially offset by a decrease in golf club gross margins. SG&A expense in Q3 was $154 million, down $5 million or 3% compared to Q3 2019, primarily from lower advertising and promotional costs. And R&D expense was $11 million, down $2 million. Operating income was $85 million, which was $41 million or 95% higher than the prior year. Q3 interest expense was $4 million, down $700,000 from 2019 and income tax expense of $14 million was $6 million higher than 2019 as a result of our higher income before taxes. Our effective tax rate improved to 18.1% from the favorable shift of the mix of our jurisdictional earnings and the favorable impact of new regulations that were issued during the quarter related to U.S. tax reform. Net income attributable to Acushnet Holdings was $63 million, $33 million higher than in Q3 of 2019. And our Q3 2020 adjusted EBITDA was $99 million, up $43 million or 78% compared to 2019. Moving to our results for the first nine months of 2020.…

Thanks Tom. Operator, could we now open up the lines for questions?

[Operator Instructions] The first question comes from the line of Kimberly Greenberger with Morgan Stanley. The first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Hi, Kimberly, are you there?

Your line is open.

Could we take the next question operator?

The next question comes from the line of Daniel Imbro with Stephens Incorporated.

Yes. Hey good morning guys. Thanks for taking my questions and congrats on a strong quarter.

Hi, Daniel.

David, I wanted to start on production. Obviously 2Q very disrupted from both the supply chain and a production standpoint, 3Q really impressive. It didn't seem like you have called out any disruption there. How is the state of the supply chain today? And then are, there any learning from 2Q either on the CapEx or OpEx side, where you think you guys need more investment, if this demand does stay in the industry, given what we're seeing in the golf industry?

Yeah. I think you've characterized well what happened in Q3. Our team ramped up quickly and safely. And our global golf ball production and club output exceeded plan, it exceeded what we would typically see, in the third quarter. We're now operating 24/7, at Ball Plant III and Ball Plant IV. The way we're modeling the year -- and you can imagine there's a whole lot of scenarios that we're looking at for 2021. The way we're modeling the year, we're comfortable that our capacity is sufficient to meet demand. I will say one of the learnings from 2020 has been more specific to our distribution capabilities. And we distribute most of our products in North America and the U.S. from California and Massachusetts. And we are looking at, alternative options in the Midwest. And we expect to make some moves and decisions next year that will require some additional capital. But in terms of production and operations, we think we're in good shape. But again, we're operating 24/7 and we'll do that for the foreseeable future. And in time, we'll likely have some more to talk about as it relates to some changes with how we distribute products which we think hedges some of the risks we encountered earlier this year.

Yes. That's great. That's really helpful. Tom maybe moving to the SG&A side really impressive this quarter down year-over-year, despite the revenue growth. During your commentary, I didn't hear anything that sounded one-time in nature but your 4Q outlook at the end there sounds like it did step back up. So should we view the step down in 3Q really as temporary just driven by lower marketing expense? Or is there any kind of sustainable expense cuts that did come out of COVID?

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

That makes sense. And then last one for me David on the industry. Unprecedented growth in terms of playership, but historically this tends to be fleeting. So what do you think the industry needs to do better to retain these golfers and see sustained growth for the industry rather than just a flash in the pan that maybe fades over the next few years?

Well, fair to say we've been fortunate that in these uncertain times the sport has found a safe and preferred lane. And I think, it's important to note that many golfers have had very positive experiences with the game in 2020. And I made the remarks earlier that the PGA golf professionals, golf course operators around the world have done a great job, positioning the game as a welcoming and safe recreational alternative. To your question Daniel, a couple of themes emerged. One is it's a hard game, right? It's challenging. And one of the more compelling stats coming out of 2020 is the amount of lessons that are being given. And I think that's certainly a positive. The more lessons that are happening it invites improvement, which invites more play. The game has done a nice job this year welcoming all different types of play, family play, 6-hole play, 9-hole play, whatever it might be. So as we think about some of the learnings of 2020. I do point to first and foremost instruction is very important both at the beginner level and throughout. And the second piece, which I know a lot of facilities have paid close attention to is pace of play. And with this significant influx of demand – that was a risk of the game is that pace of play would get rather slow, we generally, anecdotally hear that that hasn't happened. And the game has done a good job maintaining healthy levels of pace of play. But again, I will say the – you've got to point to a couple of forces. One, the game's caretakers, the PGA club pro for their great work throughout the year. And then secondly, I think you have to give a lot of credit this year to the professional tours around the world who have done a great job bringing the game back early as early as June and getting golfers and sports fans an entertainment vehicle to showcase the games safety components, competitive components, et cetera, et cetera. So a lot of learnings for the game. I think frankly, Daniel we're still processing, what's happened here in the last three or four months since the game reopened and we've been in several conversations with leaders throughout the industry about just your question. What does the game do to capitalize on this increased interest in demand? But again, I'll point to instruction pace of play as being two key elements.

Great. Best of all and congrats again.

Thank you.

Great. Thank you, Daniel. Next question, please.

The next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Can you hear me this time?

We can. Thank you, Kimberly. Nice to speak with you.

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

Okay. Kimberly, I'll touch upon your first two questions. First specific to the game and when might we know or what signals would we look for to suggest that the behaviors we've seen in 2020 are more reflective of the long-term. Unfortunately, I'm going to lead with a lot of these answers we don't know right in terms of how this thing plays out, but I'll give you a sense for how we're thinking about it. I made the point to Daniel that a lot of golfers have had very good experiences in 2020, and I think this influences how they prioritize the game going forward of how they fit the game into their lives going forward. And the game competes for discretionary time. It competes for discretionary income. And for the past several months, the sport has fared very well as many recreational activities have been suspended. So we do acknowledge that a lot of these activities whether it's youth sports, whether it's stadiums reopening, whether it's business travel or commuting time, will begin to come back online. And we think about where does golf fit in that changing world order. And the answer is it remains to be seen. We do take a measure of comfort and optimism in saying 2020 has been in a year of tough circumstances around the world, 2020 has been a -- golf has been a bright spot for a lot of folks. And we don't think that just stops heading into the New Year. We think it changes the way, as I said a minute ago, golf it fits into their prioritization of their recreational time. As it relates to Japan, when we look around the globe, we see rounds up. We see rounds up in the U.S. high-single-digits. We see rounds…

As it relates to your question related to gross margins in clubs, the headwind there is really about the launch. Rather than having sales in the quarter of the new product, we had higher sales of the older -- the previous generation model, which tend to have lower ASPs as they reach the end of their product life cycle. So, that's really just a function of the timing of the launch and we would expect that to reverse itself or correct itself over time.

Fantastic, makes perfect sense. Thank you so much.

Thank you, Kimberly.

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

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