Good day, and thank you for standing by. Welcome to the Acushnet Holdings Corporation Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Sondra Lennon, VP of FP&A and Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for Acushnet Holdings Third Quarter 2021 Earnings Conference Call. Joining me this morning are David Maher, 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 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 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 U.S. Securities and Exchange Commission. Please also note that when referring to segment and regional year-on-year sales increases and decreases, we will refer to sales in constant currency. And please also note that when referring to year-to-date results or comparisons, we will refer to the 9-month period ended September 30, 2021, and the comparable 9-month period. With that, I will turn the call over to David.

Thanks, Sondra, and good morning, everyone. As announced in today's earnings release, Acushnet continues to build terrific momentum across our businesses as our team effectively navigates the current supply chain environment. Global golf market fundamentals are healthy and demand across our Titleist, FootJoy and Shoes brands is strong. Acushnet's talented associates and committed trade partners are doing great work to keep pace with this demand. While operationally, we benefit from vertical integration and geographic diversity within our supply chain and a company-wide commitment to the health and well-being of our associates. Now getting right to our results. Third quarter revenues of $522 million increased 8% versus last year and are up 25% compared to 2019. Titleist Golf Clubs, Gear and FootJoy led this growth with Clubs and FootJoy each posting double-digit gains. Golf balls were up almost 40% versus 2019, down 3% versus last year, as availability was tight throughout the quarter. The company's growth and strong top line performance contributed to adjusted EBITDA of $70 million in the quarter, which as noted on our last call, reflects incremental supply chain costs and investments throughout our business. Year-to-date, Acushnet sales exceed $1.7 billion and were up 45%, and well ahead of 2019 levels. Each of our businesses is in great shape and strong demand is driving healthy growth while we manage tight availability in just about every product category. And year-to-date adjusted EBITDA of $333 million is up 80%. These results fortify the company's strong balance sheet and provide us with great flexibility to invest in future growth opportunities and execute against our capital allocation priorities. Now turning to Slide 5 and a review of our business by segment. As noted, Titleist Golf Ball sales were down 3% in the quarter and up 37% year-to-date. We are pleased with the…

Thanks, David, and good morning, everyone. I would like to start by thanking our associates for their exceptional efforts to keep pace with demand and to navigate various supply chain complexities, which have resulted in another strong quarter for Acushnet. Starting with income statement highlights on Slide 9. Consolidated net sales for Q3 were $522 million, up 8% compared to Q3 2020 and up 7% on a constant currency basis, as demand for all our products continued and our supply chain operated at a high level despite continuing challenges. These are very solid results considering that Q3 2020 was up 16% compared to 2019 on the strength of increasing demand after the COVID-related closures in Q2 2020. Gross profit for the third quarter was $269 million, up $17 million or 7% versus 2020. However, gross margin was 51.5%, down 70 basis points. The increase in gross profit comes primarily from higher sales volumes and higher average selling prices during the quarter, mainly in Titleist Golf Clubs, in FootJoy footwear and apparel. But were partially offset by higher inbound freight costs across all segments and higher raw materials and manufacturing costs, primarily entitled as golf balls. These higher costs also drove the declines in gross margins. SG&A expense in Q3 was $200 million, up $46 million or 30% compared to 2020, and R&D expense was $15 million, up $4 million compared to 2020. The increase in SG&A was from higher selling and distribution expense as a result of the higher sales volumes during the quarter, higher G&A expense, primarily from higher employee-related costs and increased investments in our information technology platforms and higher advertising and promotional costs. Income from operations for the quarter was $52 million. Interest expense for the quarter was $1.1 million, and our effective tax rate was 20.8%…

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

[Operator Instructions]. Your first question comes from the line of Daniel Imbro of Stephens Inc.

I wanted to start on just the sustained sales growth. I guess in the release, you talked about price increases on FootJoy and some of the golf gear. Can you maybe provide some color on just how units are tracking and your ability to meet that demand on that side of the business? And then as you look to the fourth quarter and beyond, which categories you're seeing the biggest lack of availability on the unit side? And what is your ability to continue to take up price to offset that?

Okay, Daniel, I'll get into that. So at really the highest level all of our categories are constrained to some degree from an availability standpoint. As it relates to the fourth quarter, the biggest constraints are in golf balls, and that's really twofold. That's raw materials, one. But that's also our decision to stop producing current models to begin producing and building inventory to support our first quarter launch. So you've got a couple of factors at play there. The club side of our business, as we've said all along, and we typically like to run custom club lead times at about 2 days, which are among the industry best. But that's not been the case for quite some time as you know. So we continue to have a pretty good backlog of custom club inventory orders that we're working through. As it relates to price, I think the best way to think about pricing looking forward is to maybe illustrate what's happened in '21. Our preference always is to think about pricing, first and foremost, from an innovation and golfer performance enhancement perspective. And we think we've done that. But of course, we are dealing with cost inflation throughout the business. But if you look at how we're thinking about price and how we've responded to price in the back half of '21, we've taken increases in some areas, but not all. Examples would be our iron launch, gloves, golf bags, and I think that's the right way to think about how we look at pricing going forward in '22. We'll look at it on a case-by-case basis. We will take some price increases, but again, it will be specific to each product group. And won't be a sweeping approach to our total business. But I mentioned what we've done in the second half. We took a price increase on Pro V1 in the first half. So clearly, the environment, whether it's from a supply versus demand comparison. Number one, or raw materials, labor cost, distribution cost; element number two, would support the reality that, hey, there will be some price increases in 2022, again, in some parts of the line, not all.

Yes. Quickly related to that, I guess, one of your private competitors seems that they've taken up price intra launch on clubs, which is a bit odd, and something you guys haven't done yet. Is that something you guys think the consumer could handle or would handle in this environment? Or how do you guys think about intra launch price increases on hard goods just?

Yes. We really -- it's been our practice for many, many years to really attach price increases to new product launches. And that we believe is in our best interests, and we don't see any deviation from that approach going forward. Again, I understand the rationale behind it, why it may happen. But again, our approach has always been, again sync up any price changes with new product launches.

And then, Tom, just the financial one on the guidance. You did give some helpful color at the end there. I guess in the third quarter, gross margin is only down 65 basis points. Remarkably impressive, given the cost pressure. Was there any onetime benefit in the quarter? And then as we look at the fourth quarter guide, you just gave us the pieces, I think you said $18 million in costs, that seems to imply gross margins somewhere in the mid-40s, 44 to 45 range in the fourth quarter. I guess, are we backing into that guide correctly? And then any color, just if you can help us quantify what's driving that 700 basis points plus of margin pressure in the fourth quarter?

Sure, Daniel. In terms of Q3, gross margins, no, there weren't any onetime items there. So that performance was really based on our sales volumes and our -- as some of the price increases that we've taken, as David mentioned. We still have -- as you probably expect, we still have pretty significant headwinds from freight, which impacted us in Q3 and will impact us in Q4 and into 2022. In terms of Q4, our -- we do expect our gross margins to be down from Q4 of 2020 and 2019. I don't think there -- we're expecting them to be down quite as much as you suggested, probably more -- a little bit higher than that. And most of that decrease is really just coming from volume. There was a pretty sizable decrease in our sales volume compared to last year, primarily because of the -- last year, we had the TSi metals launch. So volume is clearly the largest piece there, but we are expecting about it a $9 million hit from freight in Q4 compared to 2020, and then the rest would just be sort of that price and cost inflation we're seeing as a result of some of the raw materials and other supply chain issues.

Your next question comes from the line of Kimberly Greenberger of Morgan Stanley.

This is Quinn Jacobs on for Kimberly. Congratulations on the great results. We want to get a little more insight around your guidance for the rest of the year. Third quarter sales came in 25% above 2019 levels, but then decelerated from the 35% growth in the second quarter. The implied fourth quarter guidance suggests that sales will decelerate quarter-over-quarter and come in flat compared to 2019, looking at the midpoint. Could you give us some color on the drivers of this deceleration? Is this driven by any particular products or regions?

No. I'd say it's across the board. So you're right, our Q4 sales in '21 looks to be roughly flat compared to '19. We do expect sort of similar seasonality there. But what I will say is in Q4 '21, demand -- the demand environment is much stronger than it was in 2019 and some of our supply chain constraints are making it difficult for us to meet that demand. So I think the demand environment is much stronger. But when you take into account some of our constraints, we're just not able to meet all the demand that's out there.

Your next question comes from the line of Anna Glaessgen of Jefferies.

Taking, I guess, a step back, could you walk through how the quarter progressed versus expectations clearly came in ahead. Was it more of a function of supply chain being less constrained and feared when you're contemplating the guide on the 2Q call? Or was it a better-than-expected demand environment?

Yes, Anna, much more the former, in that it was -- our outlook for the third quarter, really, our outlook for the second half, it was really built around supply chain and what we thought we could get out of our supply chain. So as that improved, our ability to meet demand improved. So not a lot of change from a demand standpoint. Demand has been strong. All year, it remains strong, albeit seasonally adjusted, but the third quarter played out largely because of our supply chain across all categories, across all segments, delivered more than we anticipated. And part of that is the very good work by our team. But a lot of that, too, comes from better results, better performance from our supply partners, from our raw material partners, et cetera.

Got it. And then thanks for touching on the ball availability. I guess, clearly, the supply chain is difficult to say when this will rectify, but how long could the channel backfill benefit extend in that segment? Is this like a 2022 and beyond, maybe mid-2022, just how to think about the retail versus wholesale dynamic?

Well, of course, it's a moving target. We would anticipate based on our -- what we know today, and that's driven off the forecast were provided from our supply partners around raw materials, we would expect channel inventories to remain tight well into 2022. And can't, at this point, put a more definitive time line on it, but we would expect inventories across the golf ball spectrum to be tight. We're at a point now when the industry is making more than we sell to gear up for spring launches and really the beginning of the '22 season. But I would expect to see inventories remain lean through the heart of '22. As I've said before, we're confident that we'll have enough product out there to meet consumer demand. But again, you're just going to see a lean channel inventory environment.

Your next question comes from the line of Casey Alexander of Compass Point Research.

I have a question. In your presentation, the one of the things that you didn't really talk about was market shares. And I'm wondering if not all supply shortages are created equal, and it seems to me that suppliers don't want to bad pun. They don't want to shaft their biggest customers. So are the supply chain shortages you're navigating it, I think, better than most allowing for some market share gains against the competition who may even be having more trouble with supply chain shortages than you are?

Casey, good question. Everybody is battling for available raw materials supply. And we think we're doing a pretty good job. Part of it is tied to where we are, seasonality from a launch cadence standpoint, and that would apply to our competitors as well. As a share -- as it relates to share, we don't often get into share commentary. I think the available data out there captures some channels, but not all, so we don't get too caught up in share commentary. We like our position right now across categories and expect that our team is going to continue to position the company to take full advantage of whatever availability is out there. And I know our competitors are thinking about it the same way. So it's tough to really quantify its impact on share at the product level. But as we look at our business up near 40% year-to-date, we certainly feel good about that performance in the context of a really constrained supply chain environment.

Okay. I'm going to put you on the spot just a little bit. If you could -- I know you haven't put out specific guidance, but if you could look forward a little bit into '22, understanding that we have to project into '22 and sort of help us contour how we're looking at 2022 in relation to 2021? I think that would be very helpful.

Yes. And great. Fair question. Not putting us on the spot, but I'd say the following, Casey, this retail is healthy. Channel inventories are lean, consumers strong. So -- and I'll add to that, as noted, we're very confident in our product plans for the first half of the year. Of course, the planning process is far more complicated today than it typically would be given supply chain environment. And as we balance raw materials, component availability, costing, freight, lead time, et cetera, et cetera. I'm going to caveat a bit and say, and given the strength and momentum of our business, we would expect growth in all segments next year in a normalized supply chain environment. Ultimately, however, as the plan comes together, it will be more reflective of the supply side than any demand-driven forecast. So not maybe the literal answer you were looking for. But again, from a demand standpoint, from a market fundamental standpoint, we really like what we see. It really is going to be a function of what can we pull out of the supply chain.

Your next question comes from the line of Joe Altobello of Raymond James.

This is Adam on for Joe. Congrats on a strong quarter again. If I could, you guys alluded to -- if I can just get -- I know you gave some detail on 4Q, but an update on just the estimated impact of covenant supply chain headwinds this year. Just kind of putting it in a vacuum. I know last year, you cited the -- roughly the $75 million to $80 million versus the second half of 2019, if I'm not mistaken. I'm not sure if you guys had an updated number there in terms of how things have changed based on your 4Q outlook now, but any update there would be helpful.

Yes. I'm not certain I recollect the numbers you just put out. I'm not sure we put out a specific number as it relates to the impact of supply chain on our results. I mean, obviously, there has been a significant impact both in top line, in our ability to meet top line sales and demand that's out there. And then also specifically things like the incremental freight costs that we've quantified in the past, but I don't think we've put out something specific around the supply chain impact.

Got you, got you. If I could squeeze in 1 more. I know you guys may not share the color on the detail of the rounds played in 2021. But I think the last year, a big driver was Avon golfers playing more. Is that still kind of what we're seeing this year? Or are you also seeing last year's new golfers increasing their play just in terms of the trends we're seeing within those rounds played data so far through September?

Yes. So as a starting point, the game's in good shape, facilities are busy, really maybe answering this through the U.S. lens. Rounds are up 8% over '20, and about 18% over 2019 year-to-date. Third quarter was down about 5% compared with last year, which I would say our year-to-date performance from a round standpoint, probably better than anybody anticipated at the start of the year. And full year rounds are on track to surpass last year is really aggressive pace. So a healthy outcome given COVID realities, and I'll add to that, the fact that weather was more favorable than last year. As to the composition, we -- anecdotally, you continue to hear that it continues to come from 3 sources, right? The Avons playing more, the latents who came back to the game because of COVID and new entrance. Best we can provide, it's still probably about half of it -- half of the incremental play coming from the Avons, 1/4 from the new and 1/4 from the latent. Again, we'll update that as we see more industry data come out at year's end, but I think that's the right way to think about it for now.

Adam, Thanks. And thanks, everybody. We appreciate your time and efforts to understand this dynamic business environment, and we look forward to speaking again on the next call. Have a great day.

This concludes today's conference call. You may now disconnect.