Q3 2020 Acushnet Holdings Corp Earnings Call
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I'm Lucky to accuse net oldies Corp, third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one.
On your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you I would now like to turn the call over to your host Sandra Lennon. Please go ahead.
Good morning, everyone. Thank you for joining us today for a cushion at holdings third quarter earnings Conference call.
Joining me. This morning are David Miller, our President and Chief Executive Officer, and Tom, but Chico, 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 a cushion on its 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'll 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 US 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.
And please also note that when referring to year to date results or comparisons we are referring to the nine month period ended September Thirtyth 2020, and the comparable nine month period.
With that I will turn the call over to David.
Thanks, Andrea and good morning, everyone.
As always we appreciate your interest and of course at holdings and hope that you are seeing 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 acoustic 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 a cushion thats 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 creativity and sense of purpose that our company has demonstrated during the pandemic.
And along the same lines I must also give credit and thanks to PJ golf professionals at our trade partners.
We're taking great care of golfers since play resumed and for positioning golf as a safe healthy.
And enjoyable recreational activity these.
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 a cushion at our highest priority remains the health and well being of our associates and this continues to have an outsized influence on our decision process.
Cushion its global operations team has thoughtfully reconfigured work flow 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.
Im glad to report that this momentum continued as you will see reflected in our third quarter results.
As shown here on slide four third quarter sales of $483 million were up 15% versus last year.
Golf balls led this growth posting a 40% increase for the period.
Demand for our probably one franchise has been especially strong while we continue to allocate supply in order to minimize out of stock situations.
In August our team successfully launched the new title is towards speed golf ball.
Tore speed as our first GPU or thermoplastic urethane golf ball technology, our R&D team has been working on and refining for the past several years.
Initial sell through of tour speed has been resoundingly positive.
And we're excited about where we may take this TP you process technology in the future.
While title is club sales were up 5% for the period. We are pleased with these results given the challenging comp against last year's iron launch and our decision to push our new T. OSI metals launch from August to November.
We launched a new three model family of title. This concept irons in September this super premium custom only offering is an important element of our golf club innovation platform as we strive to push the boundaries of materials and product performance.
Hi, last year increased 27% for the quarter with gains coming from all gear categories are.
Our team did good work to keep inventories flowing in support of strong at once demand.
And despite losing most of the second quarter, both the title us bag and glove businesses are now comping positive for the year.
And for July posted a 12% gain for the quarter with increases across all categories, including apparel, which has been the most disrupted category in 2020.
These third quarter results also reflect strong gains from a cushion as E commerce platforms as our trade partners and direct to company owned sites continue to generate increased traffic and sales.
Adjusted EBITDA for the quarter increased 78% to $99 million.
These results helped to affirm our confidence in the company's proven operating model and long term outlook and today a cushion its board of directors approved the payout of our quarterly cash dividend equal to 15.5 cents per share.
Approximately $12 million in aggregate.
Next year on slide five you see year to date sales are off 9%, while adjusted EBITDA is down 5% through September.
Considering the challenges of 2020, we are pleased with these results through the first nine months of the year.
As you will hear from Tom our balance sheet is in good shape and we believe the company is well positioned to continue investing in our future growth.
Now on slide six and our performance by region. The us market set the pace posting a 26% increase as all segments and channels delivered gains for the quarter.
EMEA also had a great quarter with sales up 14%.
Korea has been steady all year long and as you see this continued in the third quarter with sales up 10%.
Rounds of play on the us any M&A have been especially strong since play resumed in the second quarter and play in Korea has trended up low single digits for most of the year.
Japan has been most impacted by covert.
Japan has an older golfing population and many golfers have elected to stay sheltered at home and not traveled to the golf course.
Japan's third quarter results also reflect an outsized impact from our decision to move the driver launch into November.
Looking at slide seven you see a full slate of new product introductions scheduled through the first quarter.
This lineup reflects our uninterrupted commitment to R&D throughout 2020 and will be the building blocks of our 2021 business plans.
New title as Ts side drivers and Fairways launch next week and have already made a positive impact across worldwide tours and with club professionals.
Tia side has been the number one driver on the PG a tour since debuting in early September this.
This will be one of our most comprehensive launches as our team has made the most of our decision to move our global launch dates from August to November.
New probably one and probably one ex golf balls have been out on tour for the past month and not their first PGA tour when last week in Bermuda has championed Brian gay one with our new probably one model.
2020 has been a milestone year for full choice is the brand celebrate 75 years is the number one shoe in golf.
Next week the team launches the new Stratose line of Spike was golf shoes and in the first quarter, we will launch the much anticipated Premier series.
Premier has been out on tour since late summer and reflects what choice heritage as footwear Craftsman.
And unwavering commitment to performance comfort and style.
And finally, our shoes golf business continues to build momentum across the us and Europe.
While the ski side has been more meaningfully impacted by cobot and is not expected to recover until late next year.
Looking forward, we will continue to balance strong interest in the game and healthy consumer demand with a good amount of caution as required by these uncertain times.
Our new product pipeline is in great shape and as noted our supply chain is holding up well.
Additionally, retail inventories are projected to be down 5% to 10% globally, which we think bodes well for upcoming product launches.
Just as important the cushion and strong balance sheet positions the company to make key investments in our future growth return capital to shareholders and offer a compelling long term investment opportunity.
Thanks for your interest and attention. This morning, I will now pass the call over to Tom.
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 a cushion its strong Q3 performance.
Starting on slide nine 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.
In 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.
SGN 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 700000 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 us tax reform.
Net income attributable to a cushion 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 consolidated net sales were $1.2 billion down 9% from last year, both on a reported and constant currency basis.
This represents a significant improvement from our results for the first half which were down 20% compared to the first half of 2019.
Gross profit for the first nine months of 2020 was $609 million down $76 million or 11% and gross margins were 51.1% down 110 basis points from the prior year.
SGN expense for the first nine months was $437 million down $48 million or 10% compared to 2019.
And the R&D expense was $35 million down $3 million compared to the prior year.
Restructuring expense for the first nine months was 13 million.
Operating income for the first nine months of 2020 was $118 million, which was 39 million less than the prior year.
Interest expense was $12 million or 2 million lower than last year.
Other expense was up $7 million, primarily as a result of pension settlement charges associated with our restructuring program.
Income tax expense was $21 million down $15 million.
And our year to date effective tax rate was 21.6%.
Net income attributable to a cushion holdings for the first nine months was $74 million compared to $103 million in 2019.
Adjusted EBITDA was $185 million down $11 million.
To assist in your review of the calculation of adjusted EBITDA. We have provided a reconciliation to net income on slide 10.
You will note that we did not add back any COVID-19 related expenses during the third quarter as we had in Q1 and Q2.
Moving to slide 11 at the end of Q3, 2020, our cash and liquidity position improved significantly since the end of Q2.
On September Thirtyth, we had about a 111 million of unrestricted cash on hand, and our total debt outstanding was approximately $378 million a decrease of $39 million from the same time last year and $145 million from the end of Q2.
Our leverage ratio was 1.8 times at the end of September down from 2.3 times at the end of June.
And on September Thirtyth, we had cash on hand, and available borrowings under our revolving credit facility of about $470 million.
At this time, we believe that our cash on hand, and the level of borrowings will be sufficient to meet our liquidity requirements for at least the next 12 months.
Consolidated accounts receivable at September Thirtyth was $268 million down about 2% from the prior year and from the end of Q2.
Dsos were up one day compared to the prior year period, but were down three days from the end of Q2 2020.
Inventory was $318 million down over $30 million or 9% from the prior year and was down $45 million or 13% from the end of Q2.
The decreases were driven by golf balls, and golf clubs, which were down 21, and 20% compared to the prior year, and 13 and 11% compared to Q2, respectively.
In addition foot joy inventories were down 5% compared to the prior year and 19% compared to Q2.
Overall, we are comfortable with the quality of our accounts receivable and the amount and composition of our inventory.
Cash flow from operations for the third quarter of 2020 was $168 million and was $167 million for the first nine months of the year.
This compares to $55 million and $95 million for the same periods in 2019.
The increase in cash flow from operations for Q3 comes mainly from higher net income stronger cash collections and lower inventory levels.
Capex was 5 million for Q3 and $15 million for the first nine months of the year.
We expect to increase our capital spend in Q4, and now plan for full year 2020, capex to be in the range of $25 million to $27 million.
Moving to capital allocation on slide 12, we.
While our long term priorities have not changed we continue to be cautious as it relates to our capital allocation actions.
As I just mentioned, we now expect 2020 full year capex to be in the range of 25% to $27 million.
We did not repurchase any shares in Q3, and we currently do not expect to repurchase any shares in Q4.
We did pay our previously announced Q3 dividend in September.
And as David mentioned, our board of directors today declared a Q4 cash dividend of 15, and a half cents per share payable on December 18th to shareholders of record on December 4th.
This represents a return of approximately $12 million to shareholders.
Turning to our outlook for the remainder of the year.
While we are encouraged by the increase in rounds of play and demand for our products around the world in Q3 and into early Q4.
We also remain cautious given the recently implemented restrictions we have seen in Europe, and the rising number of cases of COVID-19 in the United States.
Considering the impact of our two year product life cycles. It is best to refer back to Q4 of 2018 when modeling Q4 of 2020.
As a result of the changes in the cadence of our business. In 2020, there are a number of factors that will be different in Q4, but overall, we expect net sales to be up slightly from Q4 2018.
Despite strong demand, we currently expect golf ball sales to be flat compared to Q4 2018 as a result of the limited availability of our premium performance models as we begin to ramp up production of the new probation.
We currently expect golf clubs to be up slightly in Q4 compared to 2018.
With increased sales in the US led by the upcoming launch of TSR metals, partially offset by lower sales volumes in Japan as a result of the challenging market environment.
We expect foot joy to be down in Q4 2020.
Also from lower sales volumes in Japan and for title is geared to be down as they're comping to their strong performance in Q4 of 2018.
And finally, we expect choose to be a positive contributor to Q4 2020 net sales as we did not acquire them until July of 2019.
From an operating expense perspective, we expect fourth quarter operating expenses to be up high single digits compared to Q4 2018.
About half of this increase comes from shoes, and the remainder comes from higher advertising and promotion costs to support the upcoming metals launch the market momentum in golf balls and the elongated season for the professional tours into Q4, including the Masters.
Given the significant amount of uncertainty regarding the future impact of COVID-19, we will not be issuing further detailed guidance at this time.
In conclusion, our associates and trade partners did great work meeting the strong for all of our products.
While we continue to exercise caution given all the uncertainties. We are facing we remain confident that cost momentum and energy will continue in the coming months.
As noted there have been some shifts in the timing of our business, which will impact. Our Q4 results. However, we remain confident in our ability to maintain and build upon our market leadership positions into the future.
With that I will now turn the call over to Sondra for Q and a.
Thanks, Tom operator could we now open up the lines for questions.
As a reminder, any of you would like to ask a question press star followed by the number one and two star one for question.
The first question comes from the line of Kimberly Greenberger with Morgan.
Thanks.
Your first question comes from the line of Kimberly Greenberger with Morgan Stanley.
Hi, Kimberly are you there.
Your line is open.
Can we take the next question operator.
The next question comes from the line of Daniel.
Steven.
Yes, Hey, good morning, guys. Thanks for taking our question and congrats on the strong quarter.
I wanted to start on production, obviously twoq you very disrupted promote the supply chain and production standpoint, Threeq you really impressing didnt seem like you have called out any disruption there how is that they have the supply chain today and then are there any learnings from Twoq you either on the Capex or Opex side.
Where you think you guys need more investment if the demand that day in the industry and given what we're seeing in the in the golf industry.
Yes, I think you've characterize well what what happened in.
In Q3, our team our team ramped up quickly and safely and our our global golf ball production and club output.
Exceeded plan it exceeded what we would typically see in the third quarter.
We're now we're now operating 24 seven at ball plant three and ball planned for.
The way we are modeling the year end you can imagine there is a whole lot of scenarios that were looking at for 2021.
The way we're modeling the year, we're comfortable that our that our capacity is sufficient to meet demand.
I will say one of the one of the learnings from 2020 has been.
More specific to our to our distribution capabilities and we will.
We distribute most of our products in North and North America in the Us from California, and Massachusetts.
And we are we are looking at alternative options in the Midwest.
And and we expect to make some make some moves in 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 seven.
And we will and we'll do that for the foreseeable future.
And in time, we'll we'll likely have some more to talk about as it relates to some changes with how we distribute product.
Which we think.
Hedges some of the risks we encountered earlier this year.
Yes, thats, great Thats really helpful. Tom maybe moving to the SDN, a really impressive this quarter down year over year, despite the revenue growth.
During your commentary I didn't hear anything that kind of onetime in nature, but you know your fourq you outlook at the end there sounds like that backup so should we view this step down in Threeq, you really as temporary is driven by lower marketing expense or is there any kind of sustainable expense that did come out to cope with.
Yes, Daniel I would say, it's mostly temporary or or maybe better characterize as a shift obviously, we shifted the launch of the new drug metals into into Q4, and so it's 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.
Then last one for me David on the industry.
Unprecedented growth in terms of players, but historically that tends to be fleeting. So what do you think the industry needs to do better to retain new gulpers and fees that same growth the industry rather than just the plasma and that may be phased over the next few years.
Well you know fair to say, we've we've been fortunate that in these in these uncertain times the sport as filed a safe and preferred lane and I think it's important to note that that many golfers.
Had very positive experiences with the game in 2020 and I.
I made the remarks earlier earlier that the PGN golf professionals golf course operators around the world.
Have done a great job positioning the game as a welcoming.
And safe recreational recreational alternative.
To your question Daniel couple of themes emerge one is it.
So our game right is challenging and one of the more compelling stats coming out of 2020 is the amount of lessons that are being given.
I think that's that's certainly a positive.
The more lessons.
That are happening it invites improvement, which invites more play.
The game the game has done a nice job this year welcoming all different types of play family play six whole play nine whole play whatever it whatever it might be so so as we think about some of the learnings of of 2020 I do point to first and foremost instruction is very important both at the begin.
Her level and throughout.
And the second piece, which I know a lot of facilities had have paid close attention to is pay supply and with with this significant influx of demand that was a risk of the game is that pace of play would get would get rather slow we generally anecdotally here that that hasn't happened.
And the games done a good job maintaining maintaining healthy healthy levels of pace of play.
But but again I will say the you've got to point to a couple of forces one.
The games caretakers, the PJ club pro.
For their great work throughout the year and then secondly, I think you have to give a lot of credit this year too.
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.
And entertainment vehicle to showcase the games.
Safety components competitive components et cetera et cetera. So.
Lot of learnings for the game I think I think frankly, Daniel we're still processing, what what what's happened here in the last three or four months since the game reopened.
And we have been in several conversations with with leaders throughout the industry.
About just your question what is the game due to capitalize on this increased interest in and demand.
But again I'll point to all point to instruction pace of play as being too two key elements.
Great well best of luck 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.
Correct.
At this time.
We can thank you Kimberly nice to speak with them.
Great.
I'm not sure what happened on the technology side, I really apologize for that but I.
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 with just following up on Daniel's question as you look out to 2021.
Hi, there what kind of signal might you be looking for that would indicate.
More kind of permanent acquisition of new players.
He is a game of golf.
Cove it when when would you expect to have.
Visibility or clarity around the the kind of retained.
Play that we might see medium to long term.
Strikes me, obviously as a future growth opportunity.
Again.
There's clearly your geographical results are quite strong across every geography and Japan.
Understandably being more impacted by Covance I'm wondering as we think about Japan through the upcoming year is is the Japan bounced back just simply a matter route.
You 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 ball, where a very nice.
But this quarter there was a little bit of a headwind and club and I'm wondering if that is a volume related.
Headwind in the club's gross margin and and if that reverses in the future where if there is something else going on in the club gross margin that 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 whats say signals would we look for.
To suggest that the behaviors, we have seen in 20 are more reflective of the long term.
Okay.
Unfortunately, we lost 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 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.
I think this influences how they prioritize the game going forward and how they fit the game.
Into their lives going forward and again the game competes.
For discretionary time it to it competes for discretionary income.
And for the past several months the sport is fair very well as many recreational activities have been suspended so we do ignore.
Acknowledge that a lot of these activities whether it's.
Youth sports, whether its stadiums reopening whether its business travel or commuting time.
We'll begin to come back online.
And we think about where does golf fit in that in that changing world order.
And the answer is it remains to be seen we do we do take a measure of comfort and optimism in.
In saying 2020 has been in any year of tough circumstances around the world.
2020 is been a golf spent 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 Gulf fits into their prior prioritization of their recreational time.
As it relates to two Japan it when we look around when we look around the globe, we see rounds up with it we see rounds up in the us high single digits we.
We see rounds up low single digits in Korea.
EMEA has been flat to up slightly and the outlier of the major five markets certainly has been has been Japan and.
And I made the comment that it does have an older golfing population has been we've been inclined to shelter at home and not venture out to the golf course.
We do we do expect and I'm careful on careful with the term bounce back, but we do expect to that.
The marketplace.
Starting last year more accelerated this year has.
Has corrected and by that I see rounds down I see inventories down.
Or is in the process of correcting is maybe a better way to say it but as we think about Japan longer term.
Our business our business is always.
As always globally done well in markets, where we are very active with custom fitting.
As we shared in the past, Japan is sort of the last into the party as it relates to custom fitting so we do see opportunity.
For the way we approach the market to shift in in Japan, as it becomes more fitting centric and thats happening, albeit albeit later than we've seen in many other markets.
But I would I would say as we think about as we think about the globe.
And we are opportunity lies.
Again, just careful about the theme and term bounce back in any market.
But we do we do acknowledge that Covance had.
The most significant impact in Japan than we've seen in any other market.
And as the effects and influences of coated are overtime reduced and minimized. We do think that these that that golfers in Japan.
Should make their way back to the golf course.
In a in a in a safe way and we think in a in a way that at least provide some stability to that market over the next several years.
As it relates to your question related to gross margins and clubs the headwind there is really about the launch.
Rather than having a 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 lifecycle. So that's really just a function of the timing of the launch.
And we would expect that to reverse reverse itself are correct itself over time.
And Capex makes perfect sense. Thank you so much.
Thank you Kimberly.
We appreciate Everybodys time and attention this morning.
And we wish you a safe and enjoyable Thanksgiving season, and look forward to catching back up to as we report our fourth quarter results. Thanks again.
This concludes today's conference call you may now disconnect.
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