Q1 2018 Earnings Call
I would like to welcome everyone to the acoustic <unk> holding Corp. <unk> 2018 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 he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question.
Press the pound key thank you Tony <unk>, Vice President of Investor Relations you May begin your conference.
Thank you good morning, and welcome to <unk> Holdings call to discuss the financial results for the first quarter of 2018.
This morning, we are joined by Chris <unk>, President and CEO , David Maher.
Kevin will provide commentary on the conditions in the golf industry and discuss the performance of our business across the segments and geographies.
Next a cushion at CFO Bill Burke will spend some time discussing the overall financial results for the quarter and full year.
We will be making forward looking statements on the call. Today. These forward looking statements are based on our Kushner <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 our filings with the U S Securities and Exchange Commission.
Throughout this discussion, we will 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.
Slides that accompany this presentation and in our filings with the U S Securities and Exchange Commission.
With that it's my pleasure to introduce Kushner CEO, David Maher David.
Thanks, Tony Good morning, everyone and thank you for joining us on today's call.
I am pleased to report that the cushion it posted solid first quarter results driven by new product innovation and good execution by our global team.
Consolidated sales of $442 million were up one 9% year over year and down two 2% on a constant currency basis.
The question is performance for the quarter as you will hear this morning is reflective of our two year product life cycles, notably in golf balls and also the year to year variances and new product launch timing as is the case with Whichway golf shoes.
That said, we are pleased with how our business is tracking through the first three months of the year, which is best described as a sell in period.
Conversely, the second quarter, and especially May and June is far more about sell through custom fittings and inventory replenishment.
As the golf season opens up around the globe. The industry is structurally in a good place and generally optimistic around what has been an exciting start to the season across the worldwide professional tours.
And while global wet weather patterns have once again been a factor early this year a cushion that continues to deliver on our long term strategy, while generating positive momentum across our various product categories.
For the quarter, the Titleist Golf club business led the way driven by continued strong demand for title of 718 irons and the successful launches of new <unk>, <unk> wedges and Cameron select putters.
This was offset by the anticipated year over year sales decline in the Titleist golf ball business, which comped against last year's successful launch of new Pro <unk> and <unk> models.
For the quarter, we posted net income of $41 $5 million up $3 4 million or 9% year over year adjusted.
Adjusted EBITDA was $77 1 million.
Overall, our first quarter sell in with trade partners was on target.
And importantly, we believe the Titleist, Unfortunately leadership positions and our product category and geographic diversity position us well for market success in 2018.
Affirming the overall health of our <unk> business and our commitment to return value to our supportive shareholders I am pleased to announce that the <unk> Board of directors has approved the payout of a quarterly cash dividend of <unk> 13 per share or.
For approximately $9 $7 million to be paid on June 15.
We will now take a closer look at a kushner has four business segments with all results in percentages presented on constant currency.
Starting with golf balls shown on page five Titleist ball sales were off nine 8% for the quarter.
The early headline for the Titleist golf ball business in 2018 is the very successful launches of new tour soft and velocity in late January .
Both models have been well received and we are pleased with their early buzz and interest.
Our <unk> franchise as noted Comped against last year's new product launch, where we benefited from both a robust global pipeline and the sell off of some prior generation inventory.
Well, probably ones year to shipment profile differs from its launch here. We continue to have the highest expectations for <unk> and <unk>, which we believe provide golfers with unmatched total game performance and quality.
This is supported by our performance across the worldwide tours, where <unk> one is off to a great start with 74% usage through the Zurich classic more than seven times the nearest competitor.
Probably one golf balls have accounted for 72% of the wins across all tours, including the past seven consecutive tournaments on the U S. PGA tour.
Finally, I will note that poor weather did contribute to our golf ball performance in the quarter as domestic rounds in play were off 6% and ex U S rounds declined approximately 10% as many regions experienced cold wet start to the year.
Looking forward, we recognize that our ability to stay out in front and golf balls is rooted in an unwavering focus on innovation excellence. This is driven by a cushion its commitment to research and development patent generation.
And our manufacturing and process expertise, which contributes to the leading golf ball performance quality and consistency.
It is this commitment which is the foundation for the new title of AVX Golf ball, which was launched across the U S. In late April you.
You may recall, we test marketed AVX in three states late last year and have been very pleased with golf for feedback and interest.
<unk> offers a terrific solution for golf was looking for a combination of distance soft feel penetrating flight and durability and our new high performance cast urethane elastomer cover.
AVX is manufactured a title this ball plant three which is right down the road in New Bedford, Massachusetts.
As the season progresses, and we ramp up production, we look forward to launching AVX in ex U S markets. After the U S open.
Now moving from golf balls to golf clubs.
<unk> clubs posted a healthy 10% sales increase in the first quarter behind a good mix of that ones custom fitting demand and new product pipelines.
This growth was driven by continued momentum in 2018, irons and <unk> hybrids and the launches of new <unk> wedges and Cameron select putters.
The entire 718 iron family is performing well and meeting our high expectations and we are especially pleased with how well <unk> one and two are checking through alongside AP, three which has quickly become our top selling iron.
On the PGA tour, Titleist irons, and hybrids wedges and putters have been the most played so far this year and timeless drivers are prominently positioned as the number two driver on tour.
Titleist Golf club business is healthy and fueled by great new products robust pyramid usage and a talented network of club Fitters.
And while first quarter weather was not ideally suited to clubs fittings. We were pleased with the amount of activity and interest around title list Irons, which we attribute in part to our increased advertising support.
Next moving to slide six entitled US gear gear.
Gear sales were up four tenths of a percent for the quarter and early season response to our 2018 product line has been positive.
We continue to fortify our gear supply chain and design capabilities with the goal of making the game's best performing highest quality gear products.
We believe that our good results over the last couple of years are evidence that these efforts are paying off.
Looking forward our team will work to continue to refine and improve upon our core product lines, while mixing in special collections and limited edition offerings to generate added excitement around titleist gear.
Now moving to our final segment fluctuate the number one shoe in glove in golf.
Which was down five 7% versus last year.
The year on year sales comparison was impacted mainly by the planned timing of footwear launches and we believe to a lesser extent unfavorable weather.
To provide some context in the first quarter of this year, we launched the premium Torres golf shoe, which complements our pro SL spikelet franchise.
We did not comp against last year's contour fit launch as our new Rguest shell and FJ golf casual lines, where instead launched in April of this year.
While these factors impact the year over year comparisons we are pleased with the trends and overall architecture of the fluctuation line, which continues to set the standard for footwear performance comfort and style.
Apparel is also performing very well we are pleased to note that the mens line recently achieved the number one position on course in the U S market.
And our women's Athleisure collection has also become a leading apparel choice for golfers looking for performance and fashion and with the golf authenticity of what choice.
Lastly for Troy gloves remain the undisputed number one on tour and in the market every foot joy gloves made to the highest quality standards by our team of dedicated Kushner associates.
Now looking at our business regionally on slide seven.
Generally the geographic results were impacted by the planned for year over year comparison, and the title of the golf ball business, which I spoke to previously.
Sales were down one 7%.
On a constant currency basis, EMEA sales were up five 2% for the quarter and what was the hardest hit region from a weather perspective is rounds of play in the first quarter, we're off in excess of 20%.
A question, it's Japan sales declined one 4% the.
The Japan golf retail market, However had a strong opening quarter with retail sell through trends indexing positively in just about every product category and most notably in golf clubs.
Titleist and foot choice sell through was also strong for the period.
Korea sales were down two 3%.
Korea is vital signs remain healthy and we continue to have confidence in the market. However, it was a slow start in the region due to unseasonably cold weather.
Overall, our major markets are stable, we have strong category positions and there is excitement for our new product offerings and the start of the golf season.
We look forward to improving conditions as we soon enter the heart of the golf season.
As we look at 2018, we like our positions and remain confidently on track to achieve our goals for the year we.
We feel strongly the golf industry is structurally in a good place with supply and demand more in sync than we've seen in many years.
The professional game is captivating and benefiting from a talented group of exciting young players competing week to week.
The dedicated golfer defined by their willingness to invest and performance oriented products, which help them play their best golf remains a healthy and vibrant market opportunity.
A question on associates, and our valued trade partners are working together to deliver exceptional products and services to golfers.
The title is unfortunately innovation engines are in high gear and we have delivered a number of compelling new products recently with more to follow throughout 2018.
And our strong operating model is enabling us to invest in our future. While also returning capital to shareholders and reducing debt.
In closing my fellow associates, and I are optimistic about the future and we remain confident in our positioning as an attractive long term total return investment opportunity for our shareholders. I. Appreciate your interest in a cushion it and I will now turn over the call to Bill who will provide added insights into our first quarter financial performance.
Thanks, David and good morning to everyone on the call as David indicated we had a solid start to the new year consolidated revenue in the quarter was $441 8 million up one 9% year over year and down two 2% on constant currency.
Q1, gross profit was $227 7 million up 6% from last year and gross margin was 51, 5% down 70 basis points year over year the.
The decline in gross margin was largely expected and was the result of a mix shift from <unk> and <unk> models to a new performance models introduced in the quarter.
This decline was partially offset by higher gross margins and foot Joy golf wear title this gear and titled <unk> clubs.
Looking at operating expenses SG&A of $151 4 million was up two 4% versus last year <unk>.
SG&A, However was essentially flat year on year with the increase primarily due to changes in foreign currency exchange rates, which accounted for $3 9 million of the increase.
In Q1 research and development expense of $12 4 million was roughly flat with last year down $100000.
Q1 interest expense of $4 4 million increased by $1 5 million from last year.
This increase was primarily due to higher average outstanding borrowings compared to the first quarter of last year when our delayed draw term loan a was only outstanding for one half of the quarter.
In addition, we have now have higher average interest rates on outstanding borrowings.
Our Q1 effective tax rate was 26, 1%.
Year over year decline is primarily a result of enactment of the tax cut and jobs Act and changes in geographical earnings mix.
We continue to review interpretive guidance issued in conjunction with the act. We now believe that our ETR will be closer to 27% for the year 2018.
As a result, our Q1 net income attributable to a cushion at holdings of $41 5 million improved by $3 4 million or eight 9% over Q1 of last year.
Driven by lower income tax expense, partially offset by lower income from operations and higher interest expense.
For the quarter adjusted EBITDA was $77 1 million down $1 4 million from prior year to.
To assist in your review of this calculation, we provided a reconciliation of adjusted EBITDA in our earnings release as well as in the slide presentation.
Looking to the balance sheet, we had $46 million of unrestricted cash on hand as of March 31 2018.
Total debt outstanding at quarter end was approximately $576 million and we had ample borrowing capacity on our revolving credit facility of approximately $143 million.
On a rolling four quarter basis, our total debt to adjusted EBITDA was $2 three X.
We will continue to focus on reducing debt as we look to strengthen our balance sheet over the course of the year.
Inventory levels at quarter end appears somewhat elevated at 363 million up $49 million from last year. Please.
Please note however that changes in foreign currency rates accounts for approximately $15 million a year on year increase.
But other factors contributed to the increase include three major club launches that are straddling the first and second quarters, the timing of <unk> launches when compared to prior year and our growing presence in apparel, which is more inventory intensive.
But we're comfortable that our inventories are clean and that is new products rollout inventory levels will become normalized.
Capex for Q1 was $5 $9 million for 2018, we still expect capex to be approximately $34 million.
While a good portion of this spend is maintenance related we also plan to make additional investments in innovation and technology to drive continued market leadership and future growth.
We believe this is an excellent use of capital.
As David mentioned, we're pleased to announce that the cushion at board of directors has voted to declare a 13th dividend. This quarter. Our strong dividend continues to be indicative of the confidence we have in our strategy and cash generation capabilities moving forward.
As to the outlook for full year 2018, we continue to expect reported sales will be in the range of $1 $590 million to $1.620 billion.
On a constant currency basis, we expect revenues to increase in the range of up one 3% to up three 2% versus last year.
Though we've experienced strengthening of some key currencies over the course of the quarter. We don't typically adjust our forecast for currencies until Q2. After we've had a chance to analyze key currency movement over a longer period.
Also as a reminder, we largely hedge our international exposures. So a strengthening of ex U S currencies would positively impact revenue, but will not have a significant impact on earnings.
Lastly, we continue to forecast our adjusted EBITDA for 2018 to be approximately $225 million to $235 million.
In summary, 2018 is off to a good start as our new products are performing well and the team is executing against our plan.
We remain committed to generating shareholder value over time through a laser like focus on the dedicated golfer investing in product innovation.
<unk> operational excellence and delivering earnings growth.
We will continue to focus on debt reduction to increase our financial flexibility and our dividend policy, we will always be a subject of ongoing review to ensure we provide an attractive yield and payout.
And lastly, our capital deployment strategy will also include reviewing selective M&A opportunities that may present themselves with that I'll now turn the call over to Tony for Q&A.
Thanks, Bill Chris can we open up the lines for questions. Please.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from Simeon Siegel of Nomura Instinet. Your line is open.
Hi, This is Dan stroller on for Simeon Thanks for taking our question.
Within the gear business. We're just wondering if you could comment on the ASP increases is there any one category, where the increase was more material and then how should we think about price. It's a driver going forward. Thank you.
Hi, This is bill across really across all three categories of the gear business and its incremental across all and it really has to do with with product innovation and the quality of our products out there in the in our ability to garner higher price for it.
And then just one more if I can have you is there any color on what you've seen quarter to date, particularly with the irons and fittings.
Yes.
As mentioned in prepared remarks.
Weather worked against us from a fitting standpoint, but our iron business held up real strong and we actually had a bit more robust fitting environment and activity than we would've thought given weather, which we attribute to.
Strong demand for the product number one and also some different messaging increased advertising we employed throughout the course of the launch in the last six months so.
While while you may suggest that our weather would have been a drag on the iron business, we didn't see that in the quarter.
Thank you very much.
Thank you. The next question please.
Your next question comes from the line of Kimberly Greenberger of Morgan Stanley . Your line is open.
Okay.
Great. Thank you so much.
I wanted to ask about the gross margin in the quarter I think you mentioned that the.
There was a mix shift in your golf ball business out of that <unk> one into performance Balk given this is Matt.
Last year was the purely one launch I'm wondering if there was also a category mix shift impact in your gross margin mind meeting with lower golf ball revenue year over year on higher revenue and the other let's say lower margin categories did that was that also at play.
No. It actually is primarily the result of what you. Initially mentioned this is and this is typical of an even numbered year in one of your comping against that large probably one launch that Dave spoke of in his opening comments.
It was actually mitigated by increases in AR by increases in all three other categories are all three segments and other categories. So there wasn't so much a category mix or anything going on there. It was really as a result of probe you won with with with all three segments contributing to mitigate it.
Great. Thank you.
And then just a follow up on gross margin are.
Are you seeing any sort of input cost pressures given higher oil prices and then separately just wanted to ask about your comment on interest rates.
Given the rising interest rate environment that we're in it's obviously understandable that you would be seeing slightly higher rates. How are you thinking about the timing and pace.
Debt pay down given both what's happening in the current interest rate environment, and then that the forecast or projections here over the next year.
Okay. So the first one we have seen some oil price increase but that doesn't always translate into increases in poly butadiene, our major commodity that we use in golf balls. In fact, we are forecasting some modest increases in poly butadiene, but theyre not significant right now at present. So yeah, we are factoring in higher rates over last year.
And we certainly expect I think predominantly we're seeing that.
We're expecting at least another two rate increases this year, that's built into our forecast.
That said, we're not going to significantly impact our ability to pay down debt and achieve somewhere around our two X leverage target were looking for at year end and early 2019.
Great. Thank you so much.
Thank you next question please.
Your next question comes from Dan <unk> of Raymond James Your line is open.
Thanks.
Dave.
It makes sense why the golf ball revenues would be lower compared to last year, given last year was a new.
Product launch for the <unk> family.
But we also look at the the revenue is not against last year, but against 2016, which is the second year.
One in that product cycle and revenues are still down.
Compared to the second year of that previous cycle.
What would account for that do you think it's change in golfers preference far.
Lower compression balls that AVX.
Going to target.
Well Dan.
The two the two themes that emerge in response to your question certainly weather played a part of it right.
But notably it was it was launch cadence if you look back in 16 as well.
We were still we were still shipping product to some 600 doors in terms of stores that were opened in the market. Then that are open today. So the.
The 18% to 16 view requires some color and commentary.
But again as stated in my opening remarks, the ball business came through about as we expected for year two.
We had some highs on our performance models and tour soft and velocity, which we're real excited about.
And again a lot of this was a function of just the cadence of our business, we talked a little bit about AVX, but that story really didn't didn't unfold till till April when we started the national launch.
Okay second question on the revenue guidance, not changing but it looks like the growth rate in constant currency.
Was reduced slightly.
Correct me, if I'm wrong, but what would what would have accounted for that.
The reduction in our constant currency revenue growth rate.
No that those rates did not change from.
Okay.
And then the last question just to make sure I understand your answer to kimberly's.
Question about categories.
Are we now at a point, where the gross margin rate across these different categories are essentially the same.
Because I would've thought as well that the lower revenues in golf balls.
Would have hurt the overall gross margin rate.
No we don't actually discuss specific margin rates by segment, but we've certainly said in the past that our equipment categories garner higher margins than our soft goods categories overall, but.
That's again, it's not what we saw in the first quarter. It wasn't really a category mix so much as the comp to the <unk> launch prior year.
Okay. Thank you.
Thanks, Dan. Thank you Dan next question please.
Your next question comes from the line of Dave King of Roth Capital. Your line is open.
Thanks, Good morning, guys.
How much did how much did AVX.
Tribute to the ball revenue in the quarter, how widespread was the U S launch and then.
David do you have an early read.
Sell through there and what ball's it's been taking share from has there been any any any <unk>.
Cannibalization versus <unk>.
There yeah.
Good morning, Dave.
So so just on timing AVX launch really took place.
In the second and third weeks of April .
We did ship a very very modest amount of product into the market.
And some of our test markets.
In the first quarter, but really the story just unfolded over the last several weeks. So so the second part of your question. It's too early to say in terms of where it's coming from again here. We are roughly seven to 10 days of product in the market around the U S U S marketplace.
Okay fair enough.
Shifting gears a bit.
Appears that the on the on the guidance the constant currency growth is expected to improve.
I think for the year overall.
Versus the first quarter what are the key drivers there and then.
If you can how should we think about that.
By quarter.
And then sort of a follow up on the.
Not taking up the guidance for FX until after Q2 is it fair then to assume that all else equal you would have been taking it up given the currency moves we've seen.
Well I'll answer the first question and then last one and I'll throw the the launch cadence to Dave <unk>.
Constant currency guidance did not change from what we gave at the end of the fourth quarter. So that's that's not a.
Not theirs.
There is no change there, but if you look at what we're seeing in currencies. We don't we don't tend to do anything until the second quarter and if you look at where we look at our rates were kind of looking at December one when we're closing our plan we're getting into January and then we're selectively adjusting some currencies, but we don't react to currencies to quickly until we get into the second quarter because as.
You can see right now the pound Sterling and the euro have pulled back fairly significantly about in regards to some more worries about Brexit so.
So we don't tend to not react to that until we get through the second quarter and you actually have a lot of large portion of your sales involved in that period as far as the launch cadence for the quarters, David might want to speak to that.
Yes, David repeat I'm trying to get at what your what your question is specifically, though.
Yeah. So in constant currency it seems like the your overall revenue was down two 2% if memory serves in the first quarter, but but for the year, you're guiding to up one three I think I guess I'm trying to get a sense of what's what's the difference there is that it seems like there was improvement from the first quarter.
So how should we think about that by quarter and then what are the drivers of that.
Okay. So so what's a little bit different this go around.
Is some launch timing as we talked about we've got we've got an AVX launch.
Which is which is domestic in Q2 in and around the world and in Q3.
Talked about a couple of shoe launches that took that are playing out in April that otherwise were first quarter last year and the final pieces. As you know we've got a 919 driver launch queued up for the fourth quarter of the year, So our cadence and timing is a bit different this year.
And I'll use this to just reinforce the importance for us in Q2 and Q3.
Which are really sell through fitting replenishment periods, whereas Q1.
Really just filling the pipeline and has stated that happened.
As we expected.
Perfect. Thanks for the color and good luck with rest of the year.
Thank you. Thanks, Dave next question please.
Your next question comes from Michael Swartz of Suntrust. Your line is open.
Hey, good morning, everyone.
Morning, just wanted to touch on and I know, we're early in the year first quarters on a bigger retail piece of the piece of the year, but can we maybe talk about.
So maybe some of the differences that you've seen.
Between Golf course, and the Green grass channel here through maybe maybe April I know you are more heavily exposed to green grass. So I would assume that has a bigger impact on you relative to maybe a lot of other folks out there.
Well.
We've seen and I think youre weaving in the weather comment as well on a couple fronts. We've seen we've seen that hard goods have fared quite well this year, which is a bit at odds with weather.
But we've seen hard goods and equipment have a real good start to the year, we benefited from that both titles in irons wedges and Putters. Our club business has benefited with added sell through as well.
Consumables balls and gloves. This time of year tend to tend to be best correlated to rounds play which are down so not surprising we've seen overall this is less channel comment, but overall sell through of consumables down slightly which you would expect given given the weather.
But again coming through the first quarter and into April .
Yes again, another another thought to think about here is that the first quarter really is.
A relatively small quarter from a rounds of play standpoint in the U S. It represents less than 15% of the year with about 70% happening in Q2 and Q3.
So from a channel standpoint, not a lot.
A share standpoint, but that's a bit that can be a bit misleading because it really reflects only our three test market states.
We're gonna be a whole lot smarter on AVX in the coming months as we get a sense for sell through and and and more importantly repeat purchases. We do we do think and believe that probably one will be far and away the larger franchise.
To the tune of 456 to one the size of AVX, We're just not sure exactly where it's going to shake out so.
I'd love to give you a bit more more color and specifics on it but.
I have to ask for a little bit of time to do that.
Absolutely understood. Thanks, David Okay.
Thank you Kimberly next.
Next question please.