Hello, everybody, and welcome to the Acushnet Holdings Corp. Second Quarter '23 Earnings Call. My name is Sam and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Sondra Lennon, Vice President of Investor Relations and FP&A to begin. So Sondra, please go ahead.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings Corp's Second Quarter 2023 Earnings Conference Call. Joining me this morning are David Maher, our President and Chief Executive Officer; and Sean Sullivan, 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 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 results or comparisons, we will refer to the 6-month period ended June 30, 2023, and the comparable 6-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 Acushnet Company. I will begin by thanking Tom Pacheco for his contributions over the past few years and welcoming Sean Sullivan to the Acushnet team as our new CFO. Sean has been a valued member of Acushnet's Board of Directors since 2016, having served as Audit Committee Chair and on the Nominating and Governance Committee. In addition to being an experienced CFO, he also brings a deep understanding of the company's vision and culture to his new role. Sean is a great addition to our team and I'm confident that our analysts and investors will benefit from his contributions to Acushnet and insights into our business. Now to our results. Acushnet delivered another strong quarter, delivering sales of $689 million, a 6% year-over-year constant currency increase. Gains in Titleist golf balls and golf clubs drove this top line growth, which contributed to adjusted EBITDA of $132 million in the quarter, a 24% increase for the period. And for the first half, sales of $1.376 billion are up almost 12%, while adjusted EBITDA of $279 million represents a 23% gain over last year. These financial results have been supplemented by many successes across the worldwide tours and throughout the pyramid of influence and are highlighted by Titleist and FootJoy ambassadors, Wyndham Clark and Brian Harman's recent wins at the U.S. Open and Open Championships. These achievements helped to fuel positive brand momentum and validate the company's enduring commitment to product performance and quality. Supporting the company's first half results, we are enthused by the golf industry's overall health and stability with participation remaining vibrant even as golfers return to many pre-COVID activities. Some 250 million rounds of golf were played in the U.S. during the first half, a…

Thank you, David. Good morning, everyone. I'm thrilled to have joined the Acushnet Company full time on June 1. I look forward to leveraging my experience as a Board member and I'm truly excited to work with the leadership team and the talented associates here at Acushnet as we build on the success enjoyed to date. Turning to the results. As David mentioned, we had a great quarter and a strong first half of 2023. Second quarter net sales increased 6.4% driven by higher sales across our Titleist brand portfolio, while adjusted EBITDA was $132 million, a 24% increase. For the first half of 2023, net sales and adjusted EBITDA increased 11.6% and 23.1%, respectively. Net sales growth in the quarter was driven by continued momentum of our Titleist brand with golf balls and golf clubs, growing by 19.8% and 16.3% respectively, while gear increased by 2.9%. FootJoy sales were down 9.5% due to a slowdown in the footwear category, which was partially offset by an increase in FootJoy apparel. Quarter-over-quarter sales also declined in products that are not allocated to 1 of our 4 reportable segments. Gross profit in the quarter was $369 million, up 7.2% compared to 2022, primarily due to higher sales volumes in Titleist golf balls and golf clubs, lower golf club royalty expense and lower inbound freight across all reportable segments. FootJoy gross profit was down mainly due to lower sales volumes in footwear and unfavorable manufacturing overhead absorption. Overall, gross margin of 53.5% was up 130 basis points, largely due to lower inbound freight costs across all reportable segments. SG&A expense of $242 million in the quarter increased $2.8 million or 1.2%, mainly due to higher advertising and promotion expense to support new product launches and costs related to the optimization of our distribution…

Thank you, Sean. Operator, could we now open up the line for questions?

[Operator Instructions] Our first question today comes from Matthew Boss of JPMorgan.

It's Amanda Douglas on for Matt. So David, could you speak to the strength you're seeing across both golf ball and golf club categories? How much of this do you see as a function of strong overall industry backdrop maybe relative to market share gains? And then just across geographies, could you elaborate on the bifurcation of performance you're seeing in the U.S. versus international regions?

Yes. On the ball -- your first question, on the ball side, certainly, we always correlate the ball business and golf ball demand to rounds-of-play, which have been very strong. I think up near 6% -- 5.5%, 6% in the U.S. And I'll qualify that a bit and that includes some declines in the Pacific and Mountain regions, really the whole West Coast and even here in New England. So rounds-of-play in a very good shape that correlates to nice golf ball demand. It's a Pro V1 launch here for us. We've had some nice success around our new Pro V1 models. So that story, while U.S. centric and the answer really playing out around the world as the game is healthy, people are playing and they're using golf balls. And again, we're off to a very good start across our entire product line. Our club business, as I said in my remarks, really led by drivers, our TSR driver franchise is off to a great start. We launched that end of last year. I mentioned we're having success with putters as well. And then your 2 products for us would be wedges and irons, very much in line with our expectations. So we're very pleased with both the ball and club categories. The only challenge I would add right now is in golf balls, where we're supply constrained, while we're operating our facilities 24/7. We're still in tight supply with Pro V1 and Pro V1x. To your second question around what's happening U.S. -- outside the U.S. I'll touch on a couple of key markets. The rounds of play differential we see where rounds are up slightly in the U.S., down slightly in key markets of Japan, Korea and I'll add the U.K. I think, first and foremost, that's probably a weather phenomenon. But in terms of our business, there's a similar pattern we're seeing around the world balls, healthy in all markets, clubs healthy in all markets, gear stable. If there's any call out, as we said in our prepared remarks, it would be footwear and there's just -- there's an excess supply of footwear in the global markets. I will add that of the categories we compete in, balls, clubs, gear, footwear. Footwear is relatively small. So I think we need to keep that into context. So really, the key differential that we're seeing is just a slight variance in rounds of play and that gives an added push to the U.S. market.

Our next question comes from Daniel Imbro of Stephens.

This is Joe Enderlin on for Daniel. Sounds like golf ball demand remains -- it sounds like golf ball demand remains pretty robust, but it sounds like some supply issues are still around the Pro V1. We were wondering what's causing headwinds on the production or supply front and then what steps are being taken to more effectively match demand with capacity.

Yes. I don't know that it's -- there's no single call out from a supply chain standpoint. Our availability is very good throughout the line with the exception of Pro V1 and Pro V1x. It's still a function of strong demand. We've been producing Pro V1 and Pro V1x newer models since the fourth quarter last year, right? We're building inventory to support the first quarter first half launch. We expected that we would catch up and get in front of demand. By the summer time, we're now pushing that out a few months. We think that will be closer to the end of the third quarter, fourth quarter. But there are no constraints to call out other than very strong demands and our facilities are operating at peak capacity. We do think that normalizes as we have a chance to catch up in the fall but what happens in the fall and winter as we make more than we sell. Right now, we're, in many respects, in the first quarter, we're selling more than we make. So -- we don't know that there's a long-term fix needed. We are as part of our long-term capital investment plan that we've talked about over the years. We are adding capacity to our Pro V1 lines and that will come on board in the next couple of cycles. So we think we're in good shape long term and we think we get out of this current situation here by the end of the third or early fourth quarter. And I will just add, we are putting -- and I mean the comment in my earlier remarks, we've put a record amount of Pro V1s into the marketplace in the first half of the year. So we feel very good about our positioning and again, I think in a few months' time, we'll get back into a state of equilibrium as it relates to demand and our output and supply.

Got it. Got it. That makes sense. As a follow-up, could you provide any update on how you see golf inventories in the retail channel? And how is sell-through at an industry level? If you're seeing -- and maybe if you're seeing any promotions increase?

Yes. So generally speaking, the golf inventories are in pretty good shape, considering all the supply chain disruptions we've -- we as an industry have experienced over the past couple of years. Demand has remained strong. Rounds-of-play has remained strong. So as an overarching characterization of the golf industry, I'd say they're in pretty good shape. I commented on balls, they're in line. And again, we're running a little lighter than we'd like to see. There may be a few pockets of club inventories following significant launch activity in the first quarter, but nothing jumps off the board. As we've said in the past, Titleist clubs is largely a build-to-order business, which makes us a little bit less susceptible to inventory corrections. The one area we called out was footwear, right, and golf footwear around the world is running a little heavier than we'd like. We're seeing some promotional activity there. The final point I'll make is, as it relates to overall promotional activity in the golf space, certainly, it is increased from where it was 2, 3 years ago. You may recall during '21 and '22, there was virtually no promotional activity in the marketplace. We have seen a resumption of promotional activity, nowhere near historical levels, but I do think in some cases, in the spring as an example, it was intentional as opposed to reactive, right? We had a promotion with our Pro V1 franchise. I think you may see some holiday promotions that are intentional more so than corrective or reactionary. So again, we're starting to see an uptick in promotional activity, nowhere near the levels we saw pre-COVID. And I think overall, in line with where the industry ought to be.

Our next question is from Casey Alexander from Compass Point.

I just have a couple of questions. One, on the share repurchase program, is there any way you can tell us how much of the 482,000 was bought after June 9 and would then be subject to the repurchase agreement with Magnus?

Yes, Casey, this is Sean. I think that you'll have -- when we file the 10-Q later today, you'll have at least some information listed in terms of what our activity has been since the end of the quarter.

No. But I mean the 482,000 that was in the quarter that was bought after June 9, which is when the agreement with Magnus began.

Yes, apologies. No, I don't believe that we disclosed that information. I do think there -- we do record a liability in the quarter. I don't believe that is -- I've to check the queue that may be. I don't know that, that's disclosed, Casey, I apologize. But I would -- sorry to talk over you. I probably roughly 1/3 of that number is my estimate.

Okay. That's helpful. That's an approximation is just fine. Secondly, in relation to footwear, I mean, how much of this is demand driven versus an increase in the competitive element. When we've seen a number of start-ups that have come into the business that -- and I think we've seen this before, it's almost cyclical that a bunch of start-ups come in with a fanfare with some capital behind them, grab some market share for a period of time. But over time, they tend to sort of fade away. Is that kind of what we're talking about here? Or it has been more sand-driven correction?

No. Casey, you're right on. I think it's 2 parts. It's -- it may be 3 parts. Part 1 is we are seeing an influx of new competitors. Part 2 is there's the reality of what's happened to supply chains and forecasting maybe a bit overzealous, so you've got a supply bubble to an extent, which we would peg at about 20% higher than is appropriate for the footwear category. That results in price compression. There's a bit of a demand story here as well as the demand is down a little bit from a year ago. And some of that as prices have fallen a bit. So you're right. It starts with supply. It starts with a lot of new competitors. I did make the point earlier to contextualize this our footwear business is still about 30% bigger than it was in 2019. That's just the state of the footwear business, and you've seen this before. I do think we march through it. This is not the first time we've seen this -- we've seen it function this way but the starting point is excess supply.

Casey, this is Sean. Just to go back and clarify. It's 286,000 shares of stock since June 9. So that will be in the queue when it's filed today.

Our next question is from Michael Swartz of Truist Securities.

This is Lucas on for Mike. I was wondering if you could comment on the Datatech data for June. There was some pullback in ball share and I was wondering if you could just give some color on that.

Yes. We don't really get too focused on 30-day blocks of time, I would point to the year and the strong success we're having in golf balls in particular. I think your question is ball driven. As I've said, our shipments are up 20% and our inventories are lower than we'd like. So we're very happy with the state of the golf ball business. There was a unique component earlier in the year where we ran our loyalty rewarded promotion buy 3 get 1 that hit mostly April and May. So overall, we're really pleased with the state of our golf ball business. We do acknowledge that there are pockets out there where Pro V1 inventory levels are less than we would like. And maybe that's contributing to what we're seeing. But overall, very strong year on the ball front. We think we're gaining share. Certainly, our sales are very strong. And again, lean inventories support just a robust sell-through environment.

Our next question is from Noah Zatzkin from KeyBanc.

Just a high-level 1 for me. Obviously, continue to hear and see so much about a softer consumer and macro pressure elsewhere. And obviously, you guys have been resilient and the game of golf has been resilient. So maybe just some color on what gives you confidence in raising the guide here as well as any comments on how you're feeling about the health of the core golf consumer would be helpful.

Yes. Your question really strikes to the heart of our target consumer. This dedicated golfer. They're passionate, they're resilient, their middle income and above. We do acknowledge we're coming off some historical highs in terms of participation and purchasing in the last couple of years. So I think we're a bit guarded on our expectations for 2023. That said, here we are in early August and rounds are terrific, right? Up 5.5%, approaching record levels. I think I saw were within 1% of the record of 2021. So our consumer -- Acushnet's target consumer is well engaged. The categories for us that are strongest are balls and clubs. And I think they're responding well to our performance stories on the ball front and the club front. So we're really pleased with the golf consumer and, in particular, this dedicated golfer, which is really the sweet spot for the Acushnet businesses. Like everybody, we're watching carefully in terms of purchase levels and participation levels. But to this point, what we've seen has been positive. And I'd add to that, we've seen some share pickups around our portfolio, which add to our story.

Our next question is from Randy Konik of Jefferies.

I guess, David, another -- a follow-up to the last question. Just I guess what's surprising you most about the continued strength of the industry? Where have you -- because you've obviously seen this all for decades and you've always been measured and tempered. What's surprising you most about the industry at this point?

Well, Randy, I would say we've been -- you know how we operate. I would say we've been careful and conservative with regards to participation coming off historic highs, right? There were ballpark 150 million more rounds played in 2021 than they were in 2019. And obviously, a whole lot changed in '21 as compared to 2019. We've been carefully monitoring how the sport holds up as the world either returns to the old normal or finds its new normal. And what we're very pleased with is despite a return of a lot of pre-COVID activities, golf has held a very strong place in people's prioritization of their time and money. So the strength and vibrancy of the game is, I think, something we're all real pleased to see coming off such historic high levels. We were cautious and careful and felt that, hey, this meaningful step-up was terrific, but we ought to be careful about, do we hold on to all of it and we're holding on to certainly a whole lot of it, which we feel good about. And I think the core of it is people are fitting golf into their lives in a more meaningful way today than they did 3, 4, 5 years ago. And then the final component of that would be you're also seeing an industry that 5 years running has added golfers, right? We've added participants in a decade before that. We couldn't say that. So I think near $1.5 million in the U.S. alone over the last 3 years. So while not everybody is playing at the level they may have played at 2, 3 years ago, that's clearly in the U.S. more than offset by incremental rounds from new participants. So again, not the biggest surprise, but the biggest observation is how well and strong the game is holding up as compared to our, I think, rightfully conservative expectations coming off the very high watermark of 2021.

Very helpful. And then just lastly, can you give us some perspective on where customization is from your perspective on the industry right now? And maybe just when you look at your own business, the amount of custom that you're doing or fittings, I should say. What's the incremental lift that you're sort of seeing just ballpark-ish on, let's say, ASPs or gross margin or anything of gross profit dollars? Because I think that's another area that's been kind of a good leg for the industry and yourself and your company in particular, just curious of kind of what are those trends you're seeing? Where do they go and obviously provide some incremental lift to revenue and profitability as well.

You're talking clubs, Randy, right? Golf clubs?

Yes.

Yes, yes. So we've been in the custom fitting game and it's been a very important part of our business, going back 30 years in the U.S., a little bit shorter time frame in some markets around the world. I think the key themes I'll start with the consumer. We know it's our best way to give the consumer the very best experience with our products, right? We think we have great products. And we think with an expert fitting, the consumer is going to have the very best experience and highest satisfaction level. So that's the biggest win. Then we'll get to the realities of what it means to the club business in general, right, far less inventory at retail, which maybe says far less risk of obsolescence or far less risk of net down and closing -- closeout rather. That's obviously very positive for us and I made the comment earlier, as we think about our club business, we are just less susceptible to some of the highs and lows of inventory swings. But the most important piece is really the consumer experience and what we know we deliver to the consumer with a combination of great product and an expert fit. The final component of it is, it really allows us to leverage and expertise our -- to leverage and benefit from the expertise we have throughout our partnership base. We've got a lot of terrific club pros and retail partners who are very skilled and adept at fitting and it allows us to leverage their expertise to the benefit of our business. So it's a great way to run our business. I will say, again, we've been at it a long time in the U.S. We've been out a long time around the world. I do make the comment from time to time. The one market that's late to the party for us, if you will, is Japan. And long term, we anticipate our business trending more and more custom centric over time because today, Japan is a bit of an outlier market where it's still mostly a stock -- ship it into retail, sell it through in a traditional fashion stock as opposed to custom built to order. So we've talked about that before, but one of our longer-term opportunities is to accelerate the movement of custom fitting with our Japan business.

Our next question is from Ivan Feinseth from Tigress Financial Partners.

Congratulations on the great results. Can you give a little bit of detail into your marketing initiatives going forward? And where do you see you make the best traction of people who are new to the game? Or -- and how are you marketing to them versus -- and how are you doing with existing players?

Yes. So Ivan, I'll point to our I guess, our results and say we're confident we're reaching our target audience. But the core consumer of Acushnet is this dedicated golfer, right? So we tend to speak most regularly to them, whether through our advertising or fitting efforts, that's sort of the sweet spot of all our advertising efforts. I did make the comments in -- earlier that we're enthused about the back half of the year, particularly in golf balls and with our new iron launch. So from a prioritization standpoint, we're going to put more A&P muscle behind those categories commensurate with the size of the opportunity. But while we're certainly pleased with the new golfers entering the marketplace, our focus is always on this core dedicated golfer who drives so much of our business and it aligns so well with our product lines. So that's how we've always approached it. It works well for us and we intend to stay on that path.

Our next question is from George Kelly of ROTH Capital Partners.

So a couple for you. First one, your share repurchase authorization. I was trying to keep up with you on the call, but can you just go through that again? How much is remaining? And then did you give us an estimate of when you expect to exhaust the current authorization?

Yes, there's about $260 million remaining on the authorization, and I did not give you an outlook more just that we would meaningfully participate through early Q4 given the Magnus agreement but I think as we've said previously, we would expect to probably extinguish that plan later this year, early into 2024.

Okay. And then second question for you. Can you give us a breakdown in your ball business with such strong growth in really the first half. But just sticking with the quarter, what was the breakdown between volume and pricing? Just ballpark if you have that.

Yes. It's mostly volume, George. We did take price, as you know, on the Pro V1 and the Pro V1x model. So -- but the majority is volume, again, speaks to what David was talking about just the momentum we have in the ball business.

Okay. Excellent. And then last question for me. Regarding your inventory and your gross margin, is your inventory now -- I mean there was a period when the costs of your inventory, you were dealing with all the kind of supply chain issues. I'm just curious if your inventory now has kind of flushed through all that, and it's more of a real-time sort of normalized number? Or is there still a bunch of kind of higher cost inventory in your mix?

Well, if I understand your question, I think input cost, we have seen those increase. As I talked about, our inventory levels, we're very comfortable where they're at. They've certainly come down sequentially, I would expect the same cadence through the third quarter and then building again in the fourth. So I think input costs across the board given inflationary pressures have affected all of us. So I don't know if that answers your question or not, but we're comfortable with where the inventory levels are. I don't want to repeat what we said in our prepared remarks, but I'll leave it at that.

Okay. Let me try one more time. There was a period last year and in 2020 -- I mean, 2021 is so long ago now but late last year as well, when it was a lot more costly to bring your inventory to the U.S. and you were dealing with all these supply chain issues and things? All of that higher-priced stuff has flushed and sold through. Is that fair? Are we looking at a more normalized kind of pricing environment for your inventory balance?

Yes. I think we're getting to a more normalized state, correct?

And everybody, thanks for your attention, as always, and your interest in the Acushnet Company. Hope you have a great rest of summer and we look forward to speaking again after our third quarter. Have a nice day.

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