Good day, and thank you for standing by. Welcome to the Acushnet Holdings Corp. Q1 2022 Earnings Call. [Operator Instructions]. I will now hand the conference over to your first speaker today, Sondra Lennon, you may begin.

Good morning, everyone. Thank you for joining us today for Acushnet Holding Corp.'s First quarter 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 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 when referring to year-to-date results or comparisons, we will refer to the 3-month period ended March 31, 2022, and the comparable 3-month period. With that, I'll turn the call over to David.

Thanks, Sondra, and good morning, everyone. I am pleased to report on Acushnet's first quarter results and outlook, share our early read on the start of the 2022 golf season and provide an update on the state of the company's supply chain and some of the actions we are taking to expand our capabilities for the future. And I will start off by announcing that Acushnet's Board of Directors has approved the payout of our quarterly dividend of $0.18 per share or about $13 million in total. As you have often heard us say, returning capital to shareholders is an important priority within Acushnet's capital allocation strategy. Now getting right to our results. I will begin by sharing a few of Acushnet's many early season highlights across the professional and competitive amateur golf landscape. Titleist and FootJoy are off to fast starts across the worldwide tours where more players choose Titleist golf balls than all other competitive models combined. The same is true for FootJoy shoes, which have been the #1 shoe in golf for over 75 years. There were many highlights to report. Titleist and FootJoy brand ambassador, Cam Smith, won the Players Championship; Scottie Scheffler won the Masters trusting Pro V1; Jennifer Kupcho won her first major championship playing Pro V1 and wearing FootJoy shoes. And the winner of the Augusta National Women's Amateur relied on Pro V1X, Titleist golf clubs and FootJoy shoes en route to winning one of the most prestigious events in women's amateur golf. Clear mode of influence, validation and our team's ability to develop leading products to help golfers play their very best are central to the enduring and sustaining success of the Titleist and FootJoy brands. And with this performance validation as a backdrop, I am pleased to report that Acushnet followed…

Thanks, David. I would like to begin by thanking all of our associates for the exceptional effort they have put forth to manage through high demand and continued supply chain challenges to help deliver yet another strong quarter for Acushnet, getting 2022 off to a very good start. Starting on Slide 9. Our results were largely in line with our expectations for the quarter. Consolidated net sales were $606 million, up $25 million or 4% reported and almost 8% level FX compared to last year. Overall, demand remained strong, and this increase was driven by higher sales volumes and ASPs across all FootJoy product categories and higher club sales of new Vokey SM9 wedges and T-Series irons. These increases were partially offset by decreased sales volumes in Titleist Golf Gear and Titleist Golf Balls. Gross profit for the first quarter was $317 million, up $6 million or 2% versus 2021, and gross margins were 52.3%, down 120 basis points. The increase in gross profit comes from higher FootJoy sales volumes, which were partially offset by lower Titleist gear sales and higher component costs in clubs. In addition, higher inbound freight costs across all segments negatively impacted gross profit. Gross margins were down compared to 2021, driven by lower margins from FootJoy, clubs and gear, partially offset by higher margins in golf balls from higher overhead absorption. SG&A expense in Q1 was $196 million, up 11%. The increase comes primarily from continued investment in the business to support increased levels of demand, including higher selling, distribution, IT-related consulting and higher advertising and promotion costs. R&D expense was $14 million, up $2 million compared to 2021. Income from operations was $105 million for the quarter, which was $15 million lower than last year. Q1 interest expense was down $2 million, and our…

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

[Operator Instructions]. And your first question will come from Kevin Heenan with JPMorgan.

Congrats on the strong 1Q results as well.

Thank you.

I guess, just looking at the full year outlook and following the strong 1Q and you talked about the supply side expected to improve. I guess are there any factors or things you're seeing in the business to consider kind of in the balance of the year that led you to hold that initial outlook for the full year?

Yes. Kevin, I would say really 2 themes come to mind. First off, the quarter came in largely within our expectations. And secondly, it's generally our practice to get through the second quarter before we make any meaningful shifts or adjustments to our full year outlook, right? We're still at a time of year where the game and industry is just opening up in many regions. And Q2 is always such an important and critical quarter. You've got weather potential. You've got sell-through realities that you learned from your -- what is the sell-in and pipeline of your products in the first 3, 4 months of the year. So I think where we sit today is generally where we typically would be this time of year. We like the way we started. As you heard on our call, a lot of puts and takes from a supply side standpoint, but more than most, we feel we navigated that journey pretty well. But again, as it relates to any meaningful changes to our long-term outlook, we generally like to get through the second quarter before we start to direct one way or the other.

Got it. That's helpful. And if I -- just a follow-up on your comments about the industry, which you see as structurally healthy. I guess could you just unpack that and elaborate a bit more on how you see participation trending as we enter the peak season here in the northern markets and overall what gives you confidence in that structural health of the industry broadly in 2022.

Yes. Yes. A couple of pieces to that. But it starts with the golfer. And it's always interesting when you try to make sense of participation in Q1 because it is largely a weather story. And as I noted earlier, rounds in the U.S. were down and increased ex U.S. for a small net positive early days in the year. But what we're seeing is far more of a weather story than a structural participation story, right? Where weather is good, and it has been good in Florida and Arizona and Hawaii, rounds are up. And we think that's just a positive indicator for the game. The rest of the country, not surprising in the first quarter, you've had cold and wet weather. And it was colder in weather than it was a year ago, therefore, rounds were down. And again, around the world, early days in Q1 but EMEA, Japan, Korea, off to nice starts. So when we talk about the structure of the industry, we always begin with which way is the golf heading or trending. And again, we're off to a decent start. But thus far, it's been more of a weather story, which is, frankly, kind of a normal approach to the industry. A couple of other components would be just the broader health of our trade partners, whether it be golf courses around the world or golf specialty retailers, they're very strong, right? They've had a very successful couple of years. They're investing in their own business. They're investing in the experience for golfers and we view that certainly as a positive. I'd layer in structurally the inventory realities in golf, and certainly within the Acushnet company, we continue to play catch-up. And again, that's just a function of where our inventory levels are below their normal or what we would consider to be optimal levels. So those 3 components really frame our assessment of the industry as being structurally in pretty good shape for this time of year. And our outlook is void and is certainly influenced by that strong structural view.

The next question will come from Brian Harbour with Morgan Stanley.

Yes. Maybe first question just on sort of the gross margin side, and you've had provided some comments before about thought that would -- what you thought that would look like for this year. And your comments on kind of raw material availability and some of the fulfillment items that you're doing were helpful. I guess the other question then would just be there's been changes in kind of commodity costs and stuff like that. So I'm curious if there's anything that has changed recently with regard to input costs. We've also seen movement in kind of freight costs, both on the trucking side and then also on kind of the ocean freight side. I'm wondering if any of those changed how you think about kind of gross margin progression for this year.

Yes, Brian. Thank you. Coming into the year, we had anticipated that our gross margins for the year compared to last year would be down about 20 basis points. We now think that would be down closer to 40 basis points, and there's a number of puts and takes there in terms of what's driving that. As you mentioned, we have seen some raw material input cost increases higher than we had anticipated. So we came into the year with an expectation that our costs were up 5% to 10% compared to last year or the beginning of last year. And some of our inputs have gone up higher than that, and in particular, some of our golf ball core raw materials have gone up. In terms of freight, we continue to see elevated freight costs. We are airfreighting a significantly larger portion of our inventory movements, our inbound inventory movements than we would historically. And we continue to do that to get product to where we need to get it and to avoid some of the congestion in sort of the ocean freight part of the market. We actually airfreighted more in the first quarter than we anticipated. And so we had expected our full year inbound freight cost to be about 30% higher than what we experienced in 2021. We now think that's going to be closer to 45% for the year, and we certainly were higher in Q1 and we'll see continued elevated cost in airfreight for certainly the second and third quarter. Some of that, though, has been offset by higher production utilization in our golf ball business. So we have had some improvement in the raw material situation in golf balls and that's allowed us to operate our plants at a higher level, which has allowed us to absorb more overhead, which is a benefit. So all in all, you put it all together, and we do think that our gross margins will be down about 20% -- sorry, 20 basis points more than we had anticipated. But we will have some offset to that with some of our operating expenses for the year being lower than we had anticipated.

Okay. Yes, that's very helpful. Second question maybe just on some of the international markets, right? Obviously, did -- it looks like those performed very well and lockdowns last year were kind of part of that. Do you think that that's really a tailwind through the rest of the year as you kind of called out tourism? Are you still seeing positive demand signals in some of the non-U.S. markets at this point? Or was it more of a kind of 1Q phenomenon?

Well, I think the EMEA situation is first half driven, but I do think EMEA, and particularly the U.K., is in line for a strong year and a large part of that is going to be driven by golf tours, I would say, and we see it in participation where there was modest growth in Japan and modest growth in Korea in the first quarter. I think that that's going to be a more normalized comp throughout the year. But again, the outlier we would expect is EMEA really through the first half of the year.

And your next question will come from George Kelly with ROTH Capital Partners.

So maybe just to start with the guidance that you provided for the first half -- or the kind of first half, back half weighting to EBITDA. So the question is, if I'm doing the math right, it shows a pretty decent sequential decline in EBITDA and that would be counter to what we've seen in most years. So just wondering if you could give us more info about what's -- is there a weather impact or maybe some of these commodity costs and other kind of inflationary effects or if there's anything else you can flag?

George, it's mostly, frankly, relative to last year. Last year was a bit of a -- we had a bit of an unusual distribution of EBITDA in the first half and the second half. And if you recall, we were even in a -- basically in a loss position in EBITDA in the fourth quarter. So 2022 is going to be more normal, if you will, from a spread perspective. And so we do see in the first half last year, we had much higher volumes and our OpEx hadn't ramped as much and hadn't gotten back to that normal level you would expect at this higher level of sales. And so now that we're into 2022, our OpEx is at sort of a new normal structural level, and that is kind of changing some of the comparison, if you will, to last year.

And I should clarify, Tom. I was speaking more to first quarter -- the sequential from first quarter to second quarter. And if I do your math, it just shows that second quarter should be, I think if I'm doing it right, it should be meaningfully below, it's a sequential decline. So I just didn't know if there was anything within that that's not the normal seasonality. So maybe there's a weather impact or something. Just wanted to make sure I did that right?

Yes. The timing between Q1 and Q2 can be different from year-to-year. It is really weather dependent. It is dependent on when our shops open and shipments can happen in late March or early April, and that can really have a sizable impact on the distribution for the first quarter, which is really why when we guide, we talk about first half, second half because it can be difficult to pinpoint first quarter, second quarter, particularly because of weather.

Okay. Okay. Fair enough. And then just two other quick ones. Inventory, your comments in your prepared remarks, did I hear it right that you're going to take inventory higher again? And just curious like what's the -- what is going to be the kind of flow throughout the year of inventory? And where do you expect to end the year, if you could give that?

We do expect inventory to go up. It's a bit of a balance, right? We -- for example, we're still on allocation on all of our golf balls. So we don't have the inventory right now to meet all of the demand. So we do need to increase that. Hard to say, Q2, obviously, is one of our largest quarters in terms of sell-in and sell-through. So it may be challenging to increase our inventories in the second quarter, but we would expect by the end of the year that we would be at a new normal, if you will, in terms of our inventory levels. They are, however, if you think about it in relation to our sales, inventories are low and need to get to a more normalized level given our higher level of sales.

Okay. Understood. And then last question for me, just on your share repurchase. Can you walk through -- most of the time you give the kind of -- we expect to do x amount over the next year. So can you just walk through that again?

Sure. So in the first quarter, we repurchased about 1.2 million shares for approximately $59 million. And at the end of Q1, we had $39 million remaining on our authorization. We have been purchasing shares at a bit of a faster rate than we had historically. I'd say partially from just the strength of our balance sheet and partially from the decline in the stock price has made us be a little more aggressive in the market. And we expect to continue to do that, assuming our business continues to perform and market conditions remain the same. Our Board did approve a $150 million increase to enable us to continue to be aggressive in buying shares throughout the balance of the year. We think that if things remain the same, the conditions remain the same, we would expect to exhaust that $150 million over the next year.

Your next question will come from Casey Alexander with Compass Point Research.

Yes. Most of my questions were answered. I just want to verify what you said that first half EBITDA you expect to be 60% of full year. And was it first half of sales you expect to be 50% of full year? Is that right?

A little more than 50%, yes.

Okay. All right. Great. That's it. That's my only question.

Thanks, Casey. And thanks, everyone. As always, we appreciate your interest in Acushnet, and we look forward to a spring of good weather and lots of golf being played, hopefully, by some of you. And we look forward to reporting back on our next call. Have a great day, everyone. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.