Q1 2022 Acushnet Holdings Corp Earnings Call
Good day, and thank you for standing by and welcome to the <unk> Holdings Corp, Q1, 2022 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star Zero I will now hand, the conference over to your first speaker today Tom.
Joe <unk> you may begin.
Good morning, everyone. Thank you for joining us today for our Krishna holding Corp. First quarter 2022 earnings Conference call. Joining me. This morning are David <unk>, 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 <unk> 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.
In 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.
Please also note that when referring to year to date results or comparisons we will refer to the three month period ended March 31, 2022, and the comparable three month period.
With that I'll turn the call over to David.
Thank you Sandra and good morning, everyone.
I am pleased to report an acoustics first quarter results and outlook sure. Our early read on the start of the 2022 golf season and.
And provide an update on the state of the Companys 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 <unk> Board of directors has approved the payout of our quarterly dividend of <unk> 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 our cushion its capital allocation strategy.
Now getting right to our results I will begin by sharing a few of cushioning. Many early season highlights across the professional and competitive amateur golf landscape.
Title and for choice after fast starts across the worldwide tours were more players choose title this golf balls than all other competitive models combined.
Same is true for Fortunately shoes, which had been the number one shoe in golf for over 75 years.
There were many highlights to report titled Unfortunately brand Ambassador Kim Smith, when the players championship Scotty Scheffler, one of the Masters trusting <unk> One Jennifer Cup show won our first major championship, playing <unk> and wearing <unk>.
And the winner of the Augusta National Women's amateur relied on probably one X title of golf clubs and <unk> on route to winning one of the most prestigious events and women's amateur golf.
Pyramid 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 title is unfortunately brands.
And with this performance validation as a backdrop I am pleased to report that a cushion that.
Followed up 33% full year sales growth in 2021.
Delivering first quarter sales of $606 million, an 8% constant currency increase or 4% gain on a reported basis as compared to Q1 2021.
Growth was driven by new product introductions across our portfolio and the company delivered adjusted EBITDA of $120 million for the period were just shy of a 20% EBITDA margin.
Now looking at our quarterly results by segment.
Golf balls were up 6% as we comp against last year's record <unk>, one launch and manage tight availability caused by raw material shortages.
Which has limited our production levels. Despite this constraint we successfully launched new AVX velocity and true feel golf ball models and built up inventory to support the upcoming global launches of new towards speed and tour soft models.
As noted on our last call. We made the decision to defer these launches from Q1 into Q2 and these plans are right on track.
Titleist golf clubs were up 3% in the quarter as demand is strong and our team did great work launching new <unk> wedges and Cameron Phantom Putters.
Title. This club sales in Q1 were up over 75% compared with pre pandemic 2019, Q1 levels, which is a testament to our product development engine and ability to flex output to meet increased demand.
And coming off last year's 29% growth the title of scanner business was down 17% in the quarter and has been impacted by supply shortages from last summer's Vietnam factory closures port congestion and warehousing and fulfillment backlogs at our Midwest DC.
In response, we have been expanding distribution capabilities to reduce our order backlog and keep pace with strong demand levels.
And fluctuate continues to build momentum growing 24% in the quarter with double digit gains in footwear apparel and gloves and great energy around New tour Alpha and F. J fuel footwear franchises and the spring 'twenty two apparel collection.
And while for choice growth has been significant it has also been constrained by the same U S fulfillment delays that have impacted title this year.
And rounding out the quarter, our shoes golf ski and lifestyle categories. All grew double digits as our team continues to build momentum and innovate with technical fabrics, and leading cold wet and warm weather performance products and.
And finally, we're also very pleased with the performance and growth of our title list apparel line in Korea as our design team continues to innovate and this premium and dynamic apparel market.
Now looking at our business by region U S sales were up 4% with golf balls, beating our expectations and gear. Unfortunately trailing as volume shifted from Q1 to the balance of the year.
EMEA grew at an accelerated rate off low comps from last year when much of the region was in lockdown.
We continue to see healthy participation and strong demand across our entire product line on both the continent and in the U K the.
U K in particular is expecting a busy year as the $150 Open Championship take center stage at the old course in July .
And golf courses prepare for a busy year as golf tourism makes a full return in 2022.
Japan was off 11% at constant currency and 19% reported this quarter.
Our quarter was in line with our expectations.
You have a new product launch timing this year, we expect Japan's performance in 2022 two.
To be weighted towards the second half.
And Korea grew at 17% constant currency, and 8% reported with gains coming for balls and clubs virtually entitle us to apparel.
The Korea market remains vibrant and our team excels at executing our playbook and connecting with our target consumer.
Now looking forward the golf industry is vital signs remain healthy and we are optimistic about the overall state of the game and industry participation.
Patient is strong golf courses of retailers are financially secure and the industry continues to play catch up against continuing heightened demand.
First looking at rounds of play.
Q1 rounds were off 8% in the U S as wet weather impacted most central and northern regions. Despite this decline we were pleased to see play increases in open markets of Arizona, Florida and Hawaii.
Outside the U S rounds increased in the quarter with gains in EMEA, Japan, and Korea more than offsetting China declines, resulting from lockdown.
We're all we see this as a healthy start to the 2022 golf season, especially given the record participation in high bar set in 2021.
And now looking at a cushion as retail inventory positions.
Channel inventories remain low in most product categories and regions and most notably in golf balls entitle us gear.
As Tom will address Acosta its inventory at the start of Q2 was about $120 million higher than last year, which will help as we seek to keep pace with demand and replenish channel inventories.
And specific to <unk> supply chain, while macro challenges are expected to persist we continue to make meaningful progress in key areas of our business.
Starting with golf balls raw materials availability has improved in recent weeks to the point, where we will be in a position to return to full production levels in June .
As you May recall, these raw material shortages, which resulted from last year's Texas storms have limited our golf ball production output since last August .
As the situation improves we expect that it will have some positive impact on 2020 to get most of the benefit will come in 2023 in the form of more normalized inventory and availability, particularly heading into Q1.
As noted earlier, we are expanding our title of skier distribution and fulfillment capabilities to improve availability and lead times, we expect to make good progress in Q2 and have modified our warehousing plans for the back half of the year, taking early receipt of second half inventories as a hedge against potential logistics delays.
And lastly, we are in the process of adding capacity to keep pace with growing demand for foot joy products.
Our JV shoe factory is operating at full capacity and we are looking to expand production into Vietnam to develop additional capacity and further diversify our footwear supply chain.
Similarly, we are also expanding embroidery capabilities to keep pace with growing demand for logo FJ apparel.
In closing I'd like to thank my pushed the teammates for their commitment to excellence as they strive to keep pace with strong demand and adapt to get the most out of our supply chain. We are enthused about 2022, and our long term prospects for growth.
Thanks for your attention this morning, and with that I will pass the call over to Tom.
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 our Cushing It getting 2022 after a very good start.
Starting on slide nine 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 remains strong and this increase was driven by higher sales volumes and asps across all four product categories and higher club sales of move Oki, <unk> wedges and T series Irons.
These increases were partially offset by decreased sales volumes entitled Golf gear and title this golf balls.
Gross profit for the first quarter was $317 million up $6 million or 2% versus 2021.
Gross margins were 52, 3% down 120 basis points.
The increase in gross profit comes from higher for choice sales volumes, which were partially offset by lower titles <unk> 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 foot Joy clubs and here, 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 investments in the business to support increased levels of demand, including higher selling distribution.
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 effective tax rate was 24%, which is lower than the prior year as a result of a shift in our jurisdictional mix of earnings.
Net income attributable to <unk> holdings was $81 million down $4 million and our Q1, adjusted EBITDA was $120 million down $15 million compared to 2021.
There is a reconciliation of Q1 net income to adjusted EBITDA in our earnings release as well as in the appendix of the slide presentation.
Moving to slide 10, we continue to benefit from the strength of our balance sheet.
At the end of Q1, we had about $113 million of unrestricted cash on hand.
Total debt outstanding was approximately $409 million.
And we had $307 million of available borrowings under our revolving credit facility.
Our leverage ratio was one times at the end of Q1 2020 to about the same as Q1 last year.
Accounts receivable at the end of Q1 was $377 million down $10 million from the prior year.
Dsos improved by six days.
Our consolidated inventory at the end of Q1 was $449 million, which was up 36% from Q1 of the prior year with increases across all segments.
Although we were able to increase our inventory levels during the quarter to better enable us to meet the continued high demand for our products. We are not yet at our desired inventory levels as demonstrated by our days sales in inventory, which were down to 128 days compared to 146 at the same time last year.
Cash flow from operations for the first quarter of 2022 was an outflow of $164 million compared to an outflow of $30 million in Q1 of last year.
The higher cash outflow was primarily from changes in working capital, which resulted from larger increases in accounts receivable and inventory and a higher decrease in accrued expenses compared to the changes in those balances in the prior year.
And we continue to make investments in the business in the form of capital expenditures.
We spent $11 7 million on Capex in Q1 <unk>.
Included in that we spent about $2 6 million towards our strategic golf ball capital investment program, which brings the cumulative total to $16 3 million.
We continue to expect our full year capex to be approximately $60 million.
Turning to slide 11, our strong financial results have enabled the continued execution of our capital allocation strategy.
Our highest priority remains investing in product innovation golfer connection and operational excellence.
We continue to pursue acquisitions that align with our focus on premium performance products that appeal to dedicated golfers.
We believe that these investments will advance our long term strategy and drive growth at a favorable return.
Generating strong free cash flow and returning capital to shareholders also remains a high priority.
In March we paid our previously announced Q1 dividend, which resulted in a cash outflow to shareholders of $14 million.
And as David mentioned, our board of directors today declared a cash dividend of <unk> 18 per share.
Payable on June 17th to shareholders of record on June 3rd.
During the quarter, we repurchased one 2 million shares for a total of approximately $59 million.
At the end of Q1, we had approximately $39 million of share repurchases remaining under our current authorization and we now expect to complete this authorization in Q2.
On April 28, our board approved a $150 million increase to our share repurchase authorization.
Assuming continued strong financial performance and favorable market conditions, we will continue to actively repurchase shares and would expect to complete this new authorization over the next year.
Our capital allocation strategy remains an important element of our Cushing its value proposition, which we continue to believe creates a compelling long term total return for our shareholders.
Moving to slide 12, despite our teams effective management of supply chain challenges, thus far the situation remains complicated.
We continue to experience raw material constraints rising material and component costs and elevated inbound freight costs.
We are also seeing higher distribution costs as we work to manage through logistical challenges to get product to our customers.
On a more positive note our golf ball manufacturing utilization has increased which is improving our overhead absorption.
And some of our operating expenses are expected to grow at a slower rate for the year than previously anticipated.
Taking these factors into consideration we are reaffirming our previous full year guidance.
We continue to expect our full year 2022 consolidated net sales to be in the range of $2 175 billion to two to $2 5 billion.
This includes approximately $55 million of negative foreign currency impacts.
On a constant currency basis consolidated net sales are expected to be up between three 8% and six 1%.
And we continue to expect full year adjusted EBITDA to be in the range of 325 million to $345 million.
Regarding the timing of our business in 2022, we continue to expect first half consolidated net sales to be a little more than 50% of full year sales.
In first half adjusted EBITDA to be about 60% of the full year.
In conclusion, our associates and trade partners helped us manage through a volatile environment with continued high demand and supply chain challenges to deliver solid results for Q1.
While we continue to expect supply chain issues, we remain confident in our ability to meet our 2022 financial goals and to deliver our long term total return for our shareholders.
With that I will now turn the call over to Sondra for Q&A.
Thanks, Tom operator could we now open up the lines for questions.
Okay and as a reminder to ask a question you will need to press star one on your telephone again that is star then the number one.
So your question press the pound key.
Please standby, while we compile the Q&A roster.
And your first question will come from Kevin Heenan with Jpmorgan. Your line is open.
Hi, guys. Good morning, and thanks for taking my question.
Congrats on the strong <unk> results as well.
Just looking at our full year outlook and following a strong one.
Q.
And you talked about the supply side.
To improve I guess are there any factors or things you are seeing in the business to.
Consider kind of in the balance of the year.
You to hold that initial outlook.
For the full year.
Yeah, Kevin I would I would say really two themes come to mind first off.
Quarter on quarter came in largely within within our expectations and secondly.
It is generally our practice to get through the second quarter before we make any meaningful shifts or adjustments to our full year outlook, we're still.
We're still at a time of year, where the gaming industry is just is just opening up in many regions.
In Q2 was always such a such an important and critical quarter <unk> got weather potential you've got you've got sell through realities that you learned from your.
What is the sell in and pipeline of your products in the first three four months of the year. So.
I think where we sit today is generally where we where we typically would be this time of year, we like the way we started as you heard on our call.
And a lot of puts and takes from a supply side standpoint, but more than most we we feel we navigated that Germany pretty well.
But again as it relates to any meaningful changes to our long term outlook.
We generally like to get through the through the second quarter before we start to.
Direct one way or the other.
Got it that's helpful.
Just a follow up on your comments about.
The industry.
What you see as structural 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.
Mystery broadly in.
<unk> 2024.
Yes, a couple of pieces to that but it does start it starts with 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.
<unk> in the U S were down.
And increased ex U S for <unk>.
A small net positive early days in the year.
But what we're what we're seeing is far more of a weather story.
Then 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 Thats just a positive indicator indicator for the game the rest of the country not surprising in the first quarter, you've had you've had cold and wet weather.
And it was colder and wetter than it was a year ago, therefore rounds rounds were down.
And again around the world.
Early days in Q1, but but but EMEA, Japan Korea after a nice nice start so.
When we talk about the structure of the industry, we always begin with with which way is the Gulf are heading or trending and again, we're off to a decent start but thus far it's been it's been more of a weather story, which is.
Which is frankly kind of a normal approach to the industry.
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 are very strong right. They've had they've had a very successful a couple of years. They are investing in their own business. They are investing in the and the experience for golfers and we view that that certainly is a positive I would layer in structurally the inventory.
Inventory realities in golf and certainly within the acoustic company.
Continue to play catch up and again Thats, just thats, just a function of where our inventory levels are below there.
Normal or what we would consider to be optimal levels. So those three components really frame.
Our assessment of.
The industry as being structurally.
Good shape.
For this time of year and our outlook.
As Boyd and.
Certainly influenced by that strong structural view.
Great. Thanks very much.
Thanks, Kevin Operator next question.
Our next question will come from Brian Harbor with Morgan Stanley .
Yes, hi, good morning, guys good morning.
Good morning.
Maybe first question just on sort of the gross margin side and you had provided some comments before about where you 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 youre doing were helpful. I guess the other question then would just be.
There has been changes in kind of commodity costs and stuff like that so I am curious if if there is anything that has changed recently with regard to input costs. We have 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 that we have seen some.
Raw material input cost increases.
Higher than we had anticipated so we came into the year with.
And expectation that our costs were up 5% to 10% compared to last year, the beginning of last year and.
Some of our inputs have.
Gone up higher than that and in particular some of our some of our golf ball core raw materials have gone up.
In.
A freight.
We continue to see elevated freight costs we are.
Air Freighting, 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.
Sort of the ocean freight.
Part of the market.
We actually.
Air Freighted more in the first quarter than we anticipated and so we we had expected our full year.
Bound freight cost to be about 30% higher than 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 will see continued elevated cost and air freight 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've we've had have had some.
Improvement in the raw materials situation in golf balls, and that's allowed us to operate our plants at a higher level, which has allowed us to.
Absorb.
Absorb more overhead, which is which is a.
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 <unk>.
Some of our operating expenses for the year being lower than we had anticipated.
Okay. That's very helpful. Thank you.
Question, maybe just on some of the international markets right.
Obviously, it looks like those performed very well.
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 <unk> phenomenon.
Well I think the.
The EMEA situation is as first half driven but I do think.
EMEA and particularly the UK is.
As in line for a for a strong year and a large part of that is going to be driven by golf tourism.
I would say and we see it 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's going to be a more normalized comp throughout the year.
But again the outlier, we would expect as EMEA really through the first half of the year.
Great. Thank you.
Thank you Brian next question please.
And your next question will come from George Kelly with Roth Capital Partners. Your line is open.
Hey, everybody thanks for taking my questions.
So maybe just to start with the guidance that you provided for the first half or the first half back half weighting to EBITDA. So the.
My question is if I'm doing the math right. It shows a pretty decent sequential decline in EBITDA.
That would be countered to what we've seen in most years. So just wondering if you could.
Give us more info about whats.
Is there a weather impact that you had some of these commodity costs and other kind of inflationary.
Next year, if there's anything else you can you can flag.
Yes.
George Good morning, it's mostly.
Frankly relative to last year last year was a bit of we had a bit of a unusual distribution of EBITDA in the first half in the second half.
If you recall, we were even in a.
Basically in a loss position in EBITDA in the fourth quarter. So.
2022 is.
Is going to be more more normal if you will.
From a from a.
Our spread perspective.
So we do see.
In the first half last year, we had.
Much higher volumes and our opex hadn't ramped as much and haven't got back to that normal level, you would expect at this higher level of sales.
So now that we're.
We're into 2022, our opex is that sort of a more new normal structure out structural level and that is kind of changing some of the.
The comparison, if you will to last year.
And I should clarify.
I was speaking more to the first quarter.
First quarter to second quarter.
If I can do your math.
The second quarter, I think if I'm doing it right it should be meaningfully below.
Sequential decline subsequent notes if there was any.
Within that.
That's not the normal seasonality. So maybe there is a weather impact is something just wanted to make sure I get that right.
Yes.
The timing between Q1 and Q2 can.
Can be.
Be different from year to year.
It is really weather dependent it is.
Dependent on when when our shops open and shipments can happen in late March or early April and that can really have a sizeable impact on on the distribution for the first quarter, which is really why when we guide we talked about first half second half because it's 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.
Hi.
Your comments in your prepared remarks did I hear it right.
Youre going to take inventory higher again, and just curious like what.
What is it going to be the kind of flow throughout the year of inventory and where do you expect it to.
And if you could give there.
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 ball. So we don't have the inventory right now to meet all of the demand. So we do need to to increase that.
Hard to say Q2, obviously is one of our largest quarters in terms of of sell in and sell through.
So it may be challenging to increase our.
Our inventories in the second quarter, but we would expect by the end of the year that we would 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.
Our LOE and need to get to a more normalized level, given our higher level of sales.
Okay. What are you seeing in la.
Last question for me just on your share repurchase can you walk through most of the time you gave 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 would say partially from just the strength of our balance sheet and partially.
The decline in the stock prices has made us be.
Be a little more aggressive in the market.
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.
Sure.
We think that is.
If things remain the same.
Conditions remain the same we would expect to exhaust that $150 million over the next year.
Okay, great. Thank you.
Great. Thank you George Operator next question.
Your next question will come from Casey Alexander with Compass Point Research. Your line is open.
Yes.
Sure.
Most of my questions were answered I just wanted to verify what you said.
First half EBITDA, you expect to be 60% of full year. It was at first half of sales do you expect to be 50% of full year is that right.
A little more than 50% yes.
Okay, Alright, great Thats it Thats my only question. Thanks.
Okay. Thanks Casey.
Thanks, Casey and thanks, everyone as always we appreciate your interest in a cushion it and we look forward to a <unk>.
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.
Sure.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Thanks.