Hello, and welcome to the Acushnet Holdings Corporation Fourth Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ms. Sondra Lennon, Vice President of Planning and Analysis and Investor Relations. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings fourth quarter and full year 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 those 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 year-to-date or full year results or comparisons, we will refer to the 12-month period ended December 31, 2021, and the comparable 12-month period. With that, I'll turn the call over to David.

Thanks, Sondra, and good morning, everyone, and thank you for joining the call today. As we will share with you this morning, Acushnet wrapped up a terrific year, exceeding fourth quarter expectations as our team once again delivered in a challenging supply-side environment. Tom and I will also outline our initial outlook for 2022 and address how the Company is responding to leverage competitive advantages to meet strong demand while confronting supply chain complexities. First and foremost, we are encouraged by the game's momentum with U.S. rounds up 5% in 2021 and up 20% or almost 90 million rounds versus 2019. This increase over the past two years was aided by play from some 800,000 new golfers with juniors and women the fastest-growing segments as reported by the National Golf Foundation. Golf's participation story and trajectory outside the United States are similar, and we -- project rounds were up over 10% for the year in ex-U.S. markets. Acushnet's business is built around the needs and preferences of our target consumer, the game's dedicated player. This connection drives innovation and an organization-wide commitment to deliver products in services of the highest quality, which, in turn, fuels the Company's sustaining growth. This focus on product and people continues to serve the Company and our shareholders well. As was evident throughout 2021, the Acushnet team's creative spirit of innovation has powered the Company's many successes, and I am especially appreciative of my fellow associates for their dedication and resilience during the past few years. The Company's financial performance and growth are fueling strategic investments across the organization to fortify Titleist and FootJoy market leadership positions for the future. Investments in product development and golfer connection are at all-time highs. Our major capital investment in golf ball operations is well underway and increased spending…

Thanks, David, and good morning, everyone. I would like to recognize all of our associates for the amazing efforts they put forth to manage through the continued impact of the pandemic and unprecedented supply chain challenges to deliver truly exceptional results for Acushnet in 2021. Starting with our Q4 results on Slide 10. Consolidated net sales for the quarter were $421 million, essentially flat to 2020 on a reported basis and up 1% level FX. Overall, strong demand continued, and this is a solid result, especially given the comp against our metals launch in Q4 of 2020. Gross profit for the fourth quarter was $204 million, down 7% versus last year, and gross margins were 48.6%, down 380 basis points. The key drivers here were higher inbound freight costs, which continue to escalate, higher materials and production costs resulting from supply chain disruptions and lower sales volumes of golf clubs partially offset by higher sales volumes in FootJoy and higher average selling prices in golf balls. SG&A expense in Q4 was $209 million, up $35 million compared to 2020 and R&D expense was $15 million, up $1 million. Continued investment to take advantage of the increased levels of demand led to higher SG&A expense across all reportable segments mainly in advertising, promotion, selling and distribution. Income from operations for the quarter was a loss of $22 million, down $49 million from 2020. Other expense was $1 million, down almost $8 million from the prior year, primarily from the absence of the reversal of an indemnification receivable related to an audit settlement that was recorded in Q4 2020. And income tax expense was 700,000, up 9 million from the prior year, primarily as a result of the absence of the associated tax benefits on the other expense item, which was recorded…

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

[Operator Instructions] Your first question comes from the line of Brett Andress with KeyBanc Capital Markets.

Hey, good morning, guys. David, could you maybe dig a little more into your generally lean channel inventory commentary, I guess this is a multipart question, but what are you seeing from the weeks on hand or a month on hand perspective? That's the first part. And then, are there any differences in inventory levels either geographically or by product category? I think you mentioned balls staying on allocation here. And then the last part is, I guess, how do you think channel inventories really kind of evolved throughout 2020? Do we get back to normal this year at some point this year? Or do we go into '23?

Yes. Okay. Good morning, Brett. So in most regions really across all our segments, they're lean as we said. And I'd characterize that in the down 10% to 20% with balls and clubs most impacted, right? So, we're a little better off with gear and footwear than we are with balls and clubs. Fair to say, we probably held ground in the fourth quarter in that any incremental production capacity was directed towards building our inventory levels for 2022. There are little to no discrepancies regionally, right? It's a consistent story around the globe. So that's really the framing of the inventory picture. Again, macro, call it down from our product -- Acushnet products down some 10% to 20%. And I'll remind you, they're seasonally low right now, right, as they should be with so much of the golf market about to open up in March and April. I think you'll see the marketplace in good shape come March, April as us and others pipeline new products into the market. But I do think we're going to be strained throughout most of '22, and it will realistically be until the third quarter that we begin to get some assemblance of normality as it relates to inventory, but we do expect to be tight throughout the first half of the year. I made the comment earlier that as an example, with golf balls, will be allocated on all models in all regions for at least the first six months of the year.

And then just thinking about out EMEA in your exposure there. Is there any way you can breakout between maybe Eastern Europe and Western Europe? And have you factored in supply or demand disruptions into the '22 guide at this point? Just trying to get a sense of the broader exposure there.

Yes. Obviously, real time what's happening over there. The immediate impact to our business to the golf business is limited, if not minimal. How this spreads throughout EMEA is still, of course, to be determined. From a supply chain standpoint, the only thing we would point to is just the cost of oil, right, which affect so much of our business. So -- but beyond that, I don't expect any supply chain disruptions that would be above and beyond, but the biggest variable here is certainly going to be what happens to the price of oil.

Your next question comes from the line of Daniel Imbro with Stephens, Inc.

David, I want to ask one on the call of equipment and one on the apparel businesses. But starting on the golf equipment, obviously, you noted trends are strong, and it seemed like at the beginning of this year, you're seeing continuation of those trends. I guess as you're thinking about this year, what data points are you looking at to get comfort that we are seeing growth in that core dedicated golfer cohort that you mentioned, which obviously drives most of your sales? And then given what you're seeing, if we do see overall rounds played down this year, just as we [Audio Gap]

Yes, Daniel. So when you look back at our business, we would say, of course, we're experiencing strong demand. And we know and expect that most of this comes from our core dedicated golfers. We know they're playing more. We know they're purchasing greater levels of equipment and apparel. And adding to that, we know that the more golfers play, the more dedicated, they tend to become, and we're seeing this also. And sort of, I think fundamentally to your to your question is this is the growth the group, these are the players which most often prioritizes performance in their purchase decisions. And I think fair to say this group has grown proportional to the total golfer base. So that's sort of broad commentary on how we think about the market today. As we look forward and I kind of tend to agree with your premise that, hey, you're looking at 21 rounds that were at a record level, and I don't know that a 22% decline would be because of golfers getting in and out of the game, I think it's more going to be a function of just the evolution towards a new normal in society, and as folks transition maybe from remote work to hybrid work. But I think at the end of it all, you're left with a game that's still going to be up double digits versus 2019, and we're just going to be left with the ebbs and flows of how the society responds in year three of a pandemic. But I do think there are some really good habits and trends and fundamentals of the game that should stick. But again, to wrap it up, I agree that, hey, there should be some -- it should surprise nobody of round to play or down a bit in 2022. Broadly equipment, again, we like what we see. We like current demand, as I said a minute ago, inventories are lean. We think we can get enough out of our supply chains to grow the business. That is a tall ask given the base we established in '21. But when you add it up, golfer marketplace and inventories demand, we think we're in a pretty good place as we head into the new year.

Got it. That's helpful. And then on the apparel side, I think you mentioned spring pre-books are looking strong for FootJoy and Shoes right now. Any indication on the early kind of back half selling season preorders, I think a lot of that pre-selling is going on right now in the apparel side. And are you seeing any outside strength in maybe different groups of customers like resorts for green grass or in any certain regions on the apparel side as you look at the back half, maybe pre-order book.

Yes. Again, a lot of our business, most of our business would tend to be embroidered green grass apparel. And you're right. Bookings are strong for the first half of the year. They are strong. We're also balancing what we believe is the proper amount to put in the marketplace. You've got demand and you've got expected turn in sell-through. So overall, the apparel space, which I think your question gets at a reality that it was probably if equipment began to recover in the back half of '20 and had a strong '21, the apparel recovery really was a function of starting in '21, and that was because supply chains just couldn't catch up in '20 and you lost the spring season. So we are really optimistic about apparel as it relates to certainly FootJoy, Shoes and even our Titleist apparel in the Asian markets. But I do think that the primary lead here, Daniel, is the first half story. And then there's going to be a bit of a wait and see as to what plays out in the second half. But initially, second half bookings are strong as well.

Great. Super helpful. And then just a quick clarifier on the model. In terms of CapEx seasonality it looks like stepped up pretty meaningfully in the fourth quarter here. How should we think about the cadence of your CapEx guide for the year? Is going to be more back half weighted or maybe more regular by quarter by quarter?

Yes, Daniel, I think it will be more regular by quarter. The back half nature in 2021 was really a function of delays in the supply chain, and we have a lot of orders out there now that are going to come in more evenly throughout the year.

Your next question comes from the line of Mike Swartz with Truist Securities.

Just wanted to ask a quick question on guidance -- you're still seeing supply chain challenges and some inflationary headwinds, particularly through the first half of the year. But maybe give us a sense just in terms of magnitude of what that means? But maybe how much that's holding back your guidance for the year?

Yes, Michael, good morning. So, as we called out, headwinds, they'll vary by category, and maybe I'll break it down by category to give you some color. With golf balls, it's really a story of limited raw material availability, and that's preventing us from operating our ball plants at full capacity, at least in the first half of the year. We do think that eases in the second half of the year, different story in clubs, which is more a function of component availability and largely steel shafts. Last year, you may recall, we talked about a grip shortage. Now we've got some constraints on steel shafts. And then custom production for us in golf clubs has been at capacity for quite some time. And we do expect this to continue through the spring, which really has an impact on lead times, which are improving, although not as fast as anybody would like. It's a different story as we get to footwear and apparel. We've got a JV footwear partnership. It continues to serve us very well. And our challenge is less about making product -- producing products it's more about moving it around the globe. And that's an especially acute issue in the U.S. And as an example, we've delayed the launch of a couple of footwear models by about two weeks in the U.S. just because of the complexity of port issues and congestion in our distribution network. Not the case outside of the U.S. where things are on time. And I'd add in apparel and gear, similar to footwear, we're in decent shape from a production standpoint, the bottleneck is as much port-related, distribution network related and most of that exists in the U.S. So those are at minimum that are framing around how we think about some of the supply chain headwinds. I will say, coming off a year where sales were up 30-some-odd percent, we think we did a pretty good job managing those supply chain headwinds. And by virtue of us planning for growth, it should imply and does imply that we see a general sense of improvement in the supply chain environment, although still challenges and limitations.

Okay. And then maybe just talking about some of the investments that you referenced, I know that you laid out a few of those that came through in the back half of '21. But what we're seeing in the second half? Is this incremental investment? Or is it just a continuation of some of the investments you've made in capacity and product beginning last year?

Yes, it's a continuation. We've -- the business has grown substantially from, say, 2019 levels. And there's a number of investments we've had to make and will continue to make to support the business at this level. And we continue to invest in our technology infrastructure to optimize our B2B and D2C platform. So, the investments are going to continue. We think our OpEx is at sort of a new level. However, it has declined some relative to 2019, if you would, as a percentage of sales. So, we are seeing leverage, but we are going to continue to invest at these levels.

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

Just wanted to go back on the '22 guidance respectively that the sales guidance in constant currency, it looks like you're assuming an increase about 2.7% to 5%. How much of that is coming from price increases? How much of that is coming from inventory replenishment? And how much of that is more underlying demand?

Yes, that's pretty difficult to parse out at that level, especially when you think of our 2-year product life cycle cadence. As an example, you've got a Pro V1 launch last year and a price increase. And as you think about 2022, no Pro V1 launch, it's in the second model year. So you would expect volumes to be down, but we're still going to benefit from the price increase. So as you think about that across the whole portfolio, with puts and takes, it gets difficult to parse it out into those buckets.

Okay. All right. That's fair. And I guess kind of shifting over to capital allocation. You laid out your priorities nicely but your balance sheet looks a lot different today than it did a couple of years ago. And I'm curious how that's impacted the way that you think about capital allocation going forward?

At this point, I would say it hasn't impacted it very much. Our priorities and our strategy remain the same. We are still coming out of hopefully coming out of this pandemic cycle, and there's still a lot of uncertainty. So we will continue to operate, I'd say, cautiously. But we did buy $65 million worth of shares last year, and we did pay our dividends at about $50 million, and we would expect in 2022 that the dividend would be a little larger, and we're expecting to complete our current share repurchase authorization, which would put us close to $100 million of share repurchases. So I think David mentioned in his remarks, we returned $115 million of capital to shareholders in 2021, which was a record, and we would expect that to be closer to $150 million in 2022. So, we're going to continue to return capital to shareholders, and we're going to continue to look for M&A opportunities similar to what we have in the past. But I would say, despite the strength of our balance sheet, at this point, we haven't had any significant changes to our strategy, capital allocation wise.

Next question comes from the line of Casey Alexander with Compass Point Research & Trading.

Most of my questions have been answered, but I do have one question in relation to SUS, which you said had really strong growth in North America or U.S. Given your strong penetration into the green grass channel, is there an opportunity to introduce shoes into the green grass channel and continue to accelerate that growth?

Yes, Casey. So really, the bulk and the majority of Shoes' business is green grass. So that's -- I don't know if that answers your question, but when we look at Shoes' U.S. business, I did make the comment, it was up 50%. That's primarily a green grass story.

Okay, great. That's my only question. My other questions were answered. Thank you.

Thanks Casey.

Your last question comes from the line of Anna Glaessgen with Jefferies.

Thanks for the color on inventory build by segment. Could you also provide some color on the build between existing products and preparing for launches for the year or in the quarter?

Yes. So I'll start with that one, Anna. Our launch schedule really for the first half is on track. As I noted, we have a couple of adjustments to our ball launch timing from what would typically be our approach in even-numbered years and to get a little more granular on that. New AVX Velocity, TruFeel golf ball models launched in late January, and we expect to launch new Tour Speed and Tour Soft in May. And again, in a normal year, we would have launched all those together, but we felt this was the right approach as we manage tight raw materials availability and try to make the most of our production capacity. So that's changed. We're about to launch new Vokey wedges in the next week, and we'll launch Scotty Cameron putters in early April. Both of those are on track and in good shape. I mentioned FootJoy, really excited about what's happening with FootJoy in the first quarter and into April, but a couple of footwear launches have moved out a couple of weeks in the U.S. And really, as Tom noted, our inventory is up -- it's in better shape this year than we were last year, up 15%, up over $50 million year-end '21 versus year-end '20. We're obviously very pleased with this increase, but ideally, it would be even higher at a higher level, particularly in golf balls, where we're most hand to mouth.

Great. And then as the channel is replenished, and you make product capacity for the year, are you expecting promotionality to reapproach prior levels or what's being baked in from that aspect in the gross margin?

Yes. The supply-demand relationship in the marketplace has been such for the last 18 months or so that there's been little to no promotional activity. I don't know that we're going to get to a point of seeing meaningful promotional activity, at least in the first half of the year. In time, you're certainly going to see it resume to some degree, but we think that's going to be later not sooner and unlikely to see it at least in the first half of the year.

Great, thanks

Thank you. And thanks, everybody. As always, we appreciate your time and your interest in the Acushnet Company. I hope you all have a great spring and we look forward to catching back up after the first quarter. Thanks again.

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