Welcome to today's Acushnet Holdings Corp. Second Quarter 2022 Earnings Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Sondra Lennon, Vice President of FP&A and Investor Relations, to begin. Sondra, please go ahead.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings Corp.'s second 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 I turn 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 those 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 results or comparisons, we will refer to the six-month period ended June 30th, 2022, and the comparable six-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 company. As reflected in this morning's earnings release, the Acushnet team continues to excel at generating momentum and developing our supply chains to meet and service growing demand for our Titleist, FootJoy and shoes product lines. I must acknowledge and thank Acushnet's talented associates and our committed trade partners for their great work in this dynamic golf marketplace. While last year's record second quarter set a high bar, I am pleased to report that each of our segments posted gains this past quarter. We see this as positive reinforcement of the company's commitment to product innovation, our ability to generate demand across the entire Acushnet portfolio, our strengthening supply chains, and the overall health of the golf industry and dedicated golfer. On tour, Titleist Golf Balls were used by each of the four men's major championship winners in 2022, with Scheffler, Thomas, Fitzpatrick and Smith, each trusting a Pro V1 or Pro V1x golf ball on their road to victory. Vokey wedges were also used by all four winners while Titleist drivers and Scotty Cameron putters were in the bags for three of the four wins. The company aspires to develop and produce golf equipment of the highest performance and quality standards, to help dedicated golfers play their very best, and these successes on golf's biggest stages validate the performance and quality promise we make to all golfers. Titleist and FootJoy momentum across worldwide tours is helping to fuel our market success and financial performance. In addition to presenting our second quarter results, this morning we will provide updates on the company's strengthening supply chain, overall health of the golf industry, and our outlook for the balance of 2022. We will also address some of…

Thanks, David. I would like to start by thanking all our associates for their dedication and effort in managing through continued high demand and supply chain challenges, to deliver yet another very strong quarter for Acushnet. Starting on Slide 10. Our results for the second quarter exceeded our expectations. Consolidated net sales were $659 million, up 5% and almost 11% on a constant currency basis compared to last year. Overall, demand remained strong, and all segments showed growth in the quarter on a constant currency basis as a result of higher sales volumes and higher average selling prices. Gross profit for the second quarter was $344 million, up 3% versus 2021, and gross margin was 52.2%, down 130 basis points. The increase in gross profit comes primarily from higher sales volumes in clubs and higher sales volumes and ASPs in FootJoy footwear and in gear, partially offset by higher manufacturing costs in golf balls. Additionally, we experienced higher inbound freight costs across all segments, which negatively impacted gross profit and gross margin during the quarter. SG&A expense in Q2 was $239 million, up 14% from the prior year. The increase comes from higher selling expenses as a result of higher sales volumes, higher distribution costs, primarily in FootJoy and gear, as we invest in expanding our distribution and custom fulfillment capabilities, higher IT-related consulting expense, and higher advertising and promotional expense. R&D expense was $14 million, up 7% compared to 2021. Income from operations was $89 million for the quarter, which was 19% lower than last year, and our Q2 adjusted EBITDA was $106 million, down 17% compared to 2021, but ahead of our expectations. Moving to our results for the first half of 2022. Consolidated net sales were $1.26 billion, up 5% compared to last year, and up 9%…

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

Of course. [Operator Instructions] Our first question comes from Kevin Heenan of JP Morgan. Kevin, the line is yours.

Hi. Good morning, guys, and thanks for taking my question.

Good morning, Kevin.

Good morning.

Good morning. I guess given the more challenging macro backdrop today, what do you see as the key factors driving the strength in your topline today? And maybe higher level, how do you see the health of the golf industry and participation structurally today relative to pre-pandemic? Thanks.

Yes, Kevin. So I'll start with – we've always pointed to our dedicated golfer as being a very resilient and committed consumer of the game and of equipment. And I think we're seeing that today. A couple of other factors I'd add in. You look at all the data coming out over the last couple of years, and you see new participants, and we're now getting a sense for what they look like in year two and year three and year four. There were 3 million beginners last year, I think, in 2020; I think 3.2 million beginners in 2021. So the mix of participation has changed, which is obviously favorable and a positive as you bring more participants into the game, into the industry. I commented on the strength of the dedicated player. As we think about what's happening with our business, it's really a two-part story. First and foremost, we've said all along that 2022 is going to be largely dependent on what we get out of our supply chain. And more than ever, the supply chain is start to finish. It's what are we – what kind of inputs do we get from our raw material suppliers and our component suppliers, what can we produce, what can we get through our distribution centers globally, what can we customize, et cetera, et cetera. So every area of our supply chain has been under pressure. And when we look at results like we just posted, to me, that's indicative of the supply chain at all levels is performing well. Maybe taking that logic further, as we look out, it speaks to golf's place in this developing, emerging new normal, right? And not that anybody is going to say we've landed on a new normal, but it's clear, people are prioritizing the game more today than they did, say, pre-pandemic. If you look at rounds data, we said all the while for 2022, we'd be real pleased if 2022 rounds came in somewhere between 2020 and 2021. In fact, they're doing a little bit better than that even in the face of poor weather. So I think structurally, the industry is in a very good place. Add to that, our retailers are doing great jobs. Facilities are investing. They're healthy and they're investing in their futures to be more relevant to tomorrow's consumers. So we're just seeing a golf industry that has been healthy and remains healthy today.

Great. And if I could just ask a quick follow-up on the FootJoy business. A strong result in the quarter. I guess can you maybe talk about how you see kind of the market share on the footwear side evolving for that business? And then maybe higher level what's driving the strength between footwear and apparel more broadly? Thanks very much.

Yes. I will say that the FootJoy team has been excelling in the last couple of years, and you can just see it in our numbers, and that's commentary on footwear, commentary on gloves and apparel. And it absolutely starts with product. And I think our team is really hitting the mark from a performance standpoint, from a design standpoint, from a comfort standpoint. So it starts with the very good work coming out of our product development teams. Add to that, we've got full control over our supply chain, right? We own a joint venture shoe factory. It's a factory that makes one brand of footwear, FootJoy. I mentioned earlier, we're expanding. We're expanding into Vietnam, which gives us more capacity and a better bit of geographic diversity. We own a golf factory that makes FootJoy and Titleist clubs. That's a rarity in this industry. And I would say the team continues to cultivate and develop our messaging to be complementary to the product story and the operational story and the quality story. So it starts with product. It obviously involves a lot of very talented people. But if you track the FootJoy business over the last couple of years, it's really on a nice run now to what's playing out this year. I said earlier, footwear off to a great start, gloves, terrific in a market that's in need of supply. Apparels doing fine, but we're having some challenges in the U.S. that I talked about with embroidery, and that's part of a broader supply chain pressure that we're seeing in our business when it comes to importing product into the United States, getting it through our distribution centers, getting it to our embroidery facilities and then getting it out to our trade partners. There's been a real bottleneck there. I talked about it in gear, I talked about it in apparel. So we're working on that. But more than anything, Kevin, this is a product story first and foremost. And I point to our teams for really doing exceptional work.

Great. Thanks very much, guys.

Thanks, Kevin. Next question, please.

Our next question comes from Daniel Imbro of Stephens Inc. Daniel, please go ahead.

Yes. Hey, good morning, guys. And thanks for taking our questions. David, I wanted to start on something you mentioned. You mentioned inventories, I think, are below 2019 levels across the industry. So I guess that should be supportive of pricing, but is there any risk that customers are going to overorder either on the equipment or the apparel side? Kind of what is your pipeline or forward orders look like? And then just on that pricing topic, as you think about TSR loans coming up, how do you view your customer today and the ability to handle more price increases given the broader macro backdrop?

Yes. Okay, Daniel. First off, retail inventories – my commentary in my earlier remarks, we're about our inventories, not the total. But when we look at the total, we see similar trends. It's an industry that's grown nicely over the last several years, and you've got supply chains working hard to keep up. So I think our inventories tend to be a little bit lower than the totals, but the totals are in pretty good shape. So I think we saw that this year. Even if the appetite from the trade is more than it needs to be or more than it should be, it's going to be difficult for OEMs to meet all of that demand. So net-net, there's a bit of a government in place. And as a result, we're seeing a marketplace that's from a supply-demand standpoint in a pretty good state of balance. It's something we certainly watch, right? And what you don't want to do is get into a cycle of overbuying, and we all know what can come of that. But today, we like the status of the industry, the health of the industry from a retail standpoint. Pricing, we talk about this a lot. We try to be very thoughtful and take a long-term approach to pricing. We generally address it when we introduce new products, and we do our very best to deliver added value when we take price increases. And I think our team has done a real good job of that. And add to that our two-year product life cycles, and that tends to provide consumers with a more gradual pricing slope, which we think is beneficial. Now, given rising input and freight costs, we have taken price increases with the majority of our products over the past 18 months. And to date, consumers have been understanding and accepting of those price changes. I think, again, in large part, they're attached to improved products, they're attached to added value. And then finally, as it relates to our new TSR driver launch, and pricing is up there 8% or 9%, again, our team is going to go out and work hard and show golfers why it's worth it and why we think we're bringing them something that's better and is worth more. And the final point I'll make, Daniel, is we are seeing consumers understanding of price increases throughout the golf landscape, right. They're seeing it elsewhere and they understand what's happening with input cost, what's happening with the transportation costs as well. So we haven't seen any pushback, but again, I'll add, we try to be very thoughtful about how we manage pricing and take a very long-term approach.

That was great. I appreciate all that color. And then, Tom, maybe a little bit on the guidance. I think in the release in your comments, you said you're assuming higher freight costs. Recent months we've seen ocean freight moving down, ground freight maybe improving a bit. Is it just that you guys are under contract at higher costs? Or how should we think about the other cost backdrop that you've embedded in the guidance?

Yes. We are starting to see some decreases in inbound freight rates in certain markets, but certainly not everywhere. And despite this, the freight rates obviously remain significantly elevated compared to previous levels, and we are utilizing even more airfreight than we had anticipated. And we're really doing that to protect our lead times and to get product where it needs to be. So I think what's mostly driving our increased freight is the use of air freight, and we expect to see that continue through the end of the year. We did have higher freight costs in Q2 and in the first half than we anticipated. And we've – our forecast for the balance of the year has also gone up. We're hoping that…

I just want to clarify, where did launch timing change? Anything from 4Q being pushed to next year, or no real change on timing in the guidance as well?

I'll hit on that one. So just as it relates to second half, we've got a lot of new products ready to go and we're enthused about the fall season, not a lot of shifts due to supply chain. The TSR we mentioned late September with stock product we'll start shipping custom, probably early October. We've got some colored golf balls in Japan, which is a big deal in Japan. They're popular there. We pushed these back from the first half of the year into the second half. We've got a full plate of FootJoy products, new Flex XP, new Stratos, new women's footwear lines, a lot happening on the FootJoy side. We're targeting October 1. We're going to hedge that a bit because of just supply chain and getting it in and through to our trade partners. I guess is – half will happen in Q3, half will happen in Q4. And then our typical seasonal fall apparel collections, both Titleist FootJoy and Titleist Apparel in Asia will happen on schedule. So, Daniel, really, we're back on what I would say is a normalized schedule after a couple of years of being required to move things around.

Great. Really appreciate all the color. And best of luck going forward.

Thanks, Daniel.

Thanks, Daniel. Operator, next question, please.

Our next question comes from Casey Alexander of Compass Point. Casey, please go ahead.

Yes. Good morning. First, Tom, you turned me off a little bit about the way that you presented the remaining balance of the share repurchase program. Is it $150 million plus $100 million, which makes $250 million remaining in total? Or is it $150 million remaining in total right now?

It is now $250 million. At the end of the quarter it was $150 million, and then subsequent to the end of the quarter, our Board approved an increase to that by $100 million. So the total now is $250 million.

And the $250 million you hope to satisfy over the course of the next year?

Correct.

Okay. Great. Secondly, David, this is for you. Rounds played down 6%, but weather was actually considerably worse than that. So rounds played appear to be outperforming the weather. I'm curious if the weather had been relatively normal, which would have suggested that rounds played would have been up, would you have been challenged to meet that demand, particularly on the golf ball side?

Yes. Casey, you're right. And I'll tell you, say, you're looking at the same info. They say playable hours were off 9%, but rounds were down 6%. That says utilization was favorable. I'll say, we were fairly challenged to meet existing participation in rounds. So a further spike in play or increase in play would have further stressed our supply chain, notably on consumables, right. I've said all the while for the last year, we haven't run our plants at full capacity. We're finally up to doing that. If we had been running them at full capacity for the last year, my answer would be different. But point being, it's been a challenge for us in the first half to meet existing demand, and you see that reflected in our relatively lean inventory position in golf balls.

Yes. Okay. All right. That’s helpful. Thank you.

Thanks, Casey

Thanks, Casey

Thank you, Casey. Next question?

Our next question comes from Brian Harbour of Morgan Stanley. Brian the line is yours.

Hey. Good morning, guys. Maybe just a follow-up on that. Is golf balls certainly kind of component availability, raw material availability, plant utilization has improved. Is golf ball still the area where you think there's the most unmet demand? Or maybe comment on that by some of the other product lines perhaps?

Yes. So, as we move around sort of our portfolio and we think about inventories, the balls and clubs are both below pre-pandemic levels. Footwear and gear are slightly better, but still lean. We're probably tightest in apparel in the U.S. and golf bags in the U.S., and that ties to the supply chain challenge I noted earlier. But globally, our first priority is to get golf ball inventories, production back to, I won't say normal, but I'll say an optimal level. And that optimal level is ahead of where it was in 2019.

Okay. Great. Thanks. One other, I think you guys have been in this business a long time and in past periods where consumers have cut back or been under pressure, I'm curious what you see across different product categories, across your different customer types? I think certainly, we would expect that the dedicated golfer doesn't cut back as much, and that's a higher income customer anyway. But what are some of the things that you've observed if you think about customer types and different products?

Yes. Now – you're right. Dedicated golfers are passionate, and they have the means to continue to play, and they do continue to play during downtimes. They may extend their purchasing cycles on bigger ticket items, but we certainly see from a product perspective, consumables hold up well. This demographic has a solid income profile and that works in our favor as well. And as we've said before, back in the 2008, 2009 recession, we did see our business pull back. But if you look at our business, excluding COBRA, which was really not focused on the dedicated golfer and which we subsequently sold, the rest of our business was down about 8%, while a broad set of leisure and recreation product companies within the consumer discretionary sector were down more than 15%. So we fared better than that group.

Okay. Thank you.

Thank you, Brian. Operator next question, please.

Our next question comes from George Kelly of ROTH Capital Partners. George, please go ahead.

Hi, everybody. Thanks for taking my questions. So first one – I was trying to keep up with just couldn't quite catch it up. What was the – you gave some detail about the – within your guidance, the split between third quarter and fourth quarter for revenue and EBITDA. Can you walk through that again?

Sure. So, in terms of sales, with the timing of the TSR Metals occurring later in September, we're expecting consolidated net sales for Q3 to be just over 50% of the total second half sales. And then in terms of Q3 adjusted EBITDA, we're expecting that to be about two-thirds of total second half adjusted EBITDA.

Okay. Great. And then second question for you on – another on the share repurchase. Should we – going forward, I mean, is it safe to assume that share repurchases will be sort of a heavy component of your discretionary free cash flow usage? And the reason I'm asking is if we go pre-COVID, I know you started repurchasing stock – I think it was in 2019. But just trying to get a feel for, if it's really much more of a priority now. And with the new scale that you have, you have so much free cash flow. Is it something we should just kind of bank on going forward beyond one year?

Yes. You're always cautious about giving guidance, if you will, out a year or more, but you can certainly see that. You're right, we started purchasing shares in 2019. We bought about 29 million shares that year – $29million worth of shares that year. We did take a pause in 2020. In 2021, we bought about $65 million worth of shares. And so far in the first half of 2022, we've bought $98 million. So that number has increased over time. It certainly corresponds with the increase in scale of our business and the increase in free cash flow. It will – our expectation is that – assuming conditions stay the same, our expectation is that it will continue to be a prominent important part of our capital allocation strategy. But we do have flexibility, particularly with our new all revolver. We have flexibility to do other things in our capital allocation strategy as well. But I think it's pretty safe to say all things being equal, that share repurchases will continue to be a very important part of our strategy.

George, I'll just add a bit of color. Going back to the IPO in 2016. This was our story, right. We started on that path and it was predicated on us getting our debt situation down below 2x, which we have. So, we started on that journey. We took a bit of a hiatus in – during 2020. But as Tom said, right, it's an important piece along with dividend, along with investing in the business, which we're doing a whole lot of – and finally, M&A. So I view this as a reflection of the story we painted in 2016. Six years later, it's maybe just a bigger story, and that's as much commentary on our strong balance sheet.

And then last question for me. Another one on the state of the consumer. There's been a few questions before, but I'm going to maybe ask it in a slightly different way. There's so much noise in the market these days, just a fear about budgets coming in and people's balance sheets and inflation, et cetera, and concern over the sort of spending patterns and trends. And so, just a real simple question. Have you seen any evidence of people kind of trading down or maybe having – being more timid as far as consumer spending?

George, the short answer is no. We're certainly sensitive to it and aware of it for all the reasons you just mentioned. But I'll go back to, number 1, our results; number 2, what we're seeing and hearing from our trade partners. We get that – hey, there was a big stimulus input last year that went away and that affected retail. So we're certainly sensitized to the macro forces you just talked about. We're pretty confident that we're marching through it. Are we entirely immune to it? Probably not. I don't know that anybody is, but we like where we are today. And again, as indicated by our first half results and our confidence in the second half, we're saying that, hey, what we see is pretty favorable from our end.

That’s great. Thank you so much.

Thank you, George. Operator next question, please.

Our next question comes from Joe Altobello of Raymond James. Joe, please go ahead.

Thank you. This is Mark Metelo for Joe Altobello. A quick question about demand. When it comes to industry data, it looks like it's held up very well. Have you seen a shift in consumer purchasing patterns of the deferring club purchases or trading down of ball purchases?

We haven't seen a lot of that. And clubs for us – we've been chasing it for a while. Our lead times have been longer than we'd like. I'm pleased to say they've, in the last month, come back in line as we've seen component availability improve and our team is doing a better job getting product through our system. But yes, I mean, here we are in the peak of golf season, and it's – you're going to see a seasonal slowdown here in the next couple of months, a regional slowdown in the next couple of months. That's part of golf's annual cycle. But where we stand today, again, we like our situation. Your question not dissimilar from George's. Again, of course, we're very aware of it, and we're very attentive to what some of the macro pressures might be, and we watch it very, very carefully. But as we sit here today, things are moving along very much in line with our expectations, and I'll go again, back to our ability to raise guidance. It's just indicative of two things, really, a stable consumer, and our ability to get more out of our supply chain.

Thank you. Another follow-up. Can you talk a little bit about recent market share trends in golf balls? It seems you've lost a bit of share. Is that due to the lack of availability and has it improved since you've returned to full production levels?

Yes. I'll say our golf ball business is in – we view it – it's in great shape. With the key exception being that our retail inventories are lower than we'd like, which is a function of tight raw material availability. So I think we were up 30% last year for the year in golf balls, and to be flat through the first half for us, in a non-Pro V1 year. And given our supply constraints, we're very pleased with these results. Again, with the caveat being – we accept that channel inventories, retail inventories are very lean, and there are consequences that come with that.

I will add, and it's always a bit of an odd year, even year discussion. But in the U.S. and around the globe, we're comping this year against last year's sell-off of prior generation inventory, which always comes with a bump. And our loyalty rewarded program was in full flight last year, and we didn't offer it in 2022. So it's a very different dynamic when we compare 2022 to 2021. I think as a result of that, our retail ASPs are up about 10%. And the final point would be – add to that. We had to delay our Tour Speed and Tour Soft launches which led to excessive inventory outages for much of the first half. So a lot of moving parts in the ball business, but I take a step back and say very pleased with where we are, very pleased with our performance at the top of the pyramid and our performance in the marketplace. And as we said, we're finally at a position where we can start producing full capacity, which we think is very important. So, again, a lot of puts and takes on the ball business. Final I'll add is, we're – we've had to slow down our corporate business just because of availability. We look forward to picking that back up here in the near term. So again, where we are today, we're very pleased with the state of the Titleist golf ball business.

Okay. Thank you.

Thank you.

Thanks, everybody. As always, we appreciate your time and interest in Acushnet. Hope you all have a great rest of summer and look forward to catching back up on our next call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.