Good morning, and welcome to Acushnet Holdings Corp. Third Quarter 2020 Earnings Conference Call. All lines have been muted to minimize background noise. After the speaker's remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to your host, Sondra Lennon. Please go ahead.

Good morning everyone. Thank you for joining us today for Acushnet Holdings' third quarter 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 are referring to sales in constant currency. And please also note that when referring to year-to-date results or comparisons, we are referring to the nine-month period ended September 30, 2020 and the comparable nine-month period. With that, I'll turn the call over to David.

Thanks, Sondra and good morning everyone. As always, we appreciate your interest in Acushnet Holdings and hope that you are staying healthy and well. I look forward to providing an overview of the company's third quarter results and the steps we have taken to capitalize on strong demand for Acushnet products and position the company for long-term sustained success. Before I get into the quarter, I must acknowledge and thank my teammates for their resilience and terrific work since we resumed full operations in late May. Our results reflect the strength of Acushnet's products, a company-wide commitment to customer service and our team's ability to adapt and leverage our global supply chain. I'm very proud of the passion, creativity, and sense of purpose that our company has demonstrated during the pandemic. Along these same lines, I must also give credit and thanks to PGA Golf professionals and our trade partners for taking great care of golfers since play resumed and for positioning golf as a safe, healthy, and enjoyable recreational activity. These caretakers of the game have distinguished themselves in 2020, and every golfer has benefited from their hard work and commitment to the sport. At Acushnet, our highest priority remains the health and well-being of our associates, and this continues to have an outsized influence on our decision process. Acushnet's global operations team has thoughtfully reconfigured workflow across the organization to adhere to all social distancing and safety requirements. It is because of this commitment that we have been able to safely operate our facilities at peak output levels as we respond to strong demand for our entire product line. On our last call in early August, we spoke of our June and July growth, and I am glad to report that this momentum continued as you will see reflected in our third quarter results. As shown here on slide 4, third quarter sales of $483 million were up 15% versus last year. Golf balls led this growth, posting a 40% increase for the period. Demand for our Pro V1 franchise has been especially strong while we continue to allocate supply in order to minimize out-of-stock situations. In August, our team successfully launched the new Titleist Tour Speed golf ball. Tour Speed is our first thermoplastic urethane golf ball, and the technology our R&D team has been working on and refining for the past several years. Initial sell-through of Tour Speed has been resoundingly positive, and we're excited about where we may take this TPU process technology in the future. While Titleist club sales were off 5% for the period, we are pleased with these results, given a challenging comp against last year's iron launch and our decision to push our new TSi metals launch from August to November. We launched the new three-model family of Titleist concept irons in September. This super premium custom-only offering is an important element of our golf club innovation platform, as we strive to push the boundaries of materials and product performance. Titleist gear increased 27% for the quarter, with gains coming from all gear categories. Our team did good work to keep inventories flowing in support of strong at-once demand. Despite losing most of the second quarter, both the Titleist bag and glove businesses are now comping positively for the year. FootJoy posted a 12% gain for the quarter, with increases across all categories, including apparel, which has been the most disrupted category in 2020. These third quarter results also reflect strong gains from Acushnet's e-commerce platforms, as our trade partners and direct company-owned sites continue to generate increased traffic and sales. Adjusted EBITDA for the quarter increased 78% to $99 million. These results help to affirm our confidence in the company's proven operating model and long-term outlook. Today Acushnet's Board of Directors approved the payout of our quarterly cash dividend equal to $0.155 per share or approximately $12 million in aggregate. Next year on slide 5, you see year-to-date sales are off 9%, while adjusted EBITDA is down 5% through September. Considering the challenges of 2020, we are pleased with these results for the first nine months of the year. As you will hear from Tom, our balance sheet is in good shape, and we believe the company is well positioned to continue investing in our future growth. On slide 6 and our performance by region. The U.S. market set the pace, posting a 26% increase, as all segments and channels delivered gains for the quarter. EMEA also had a great quarter with sales up 14%. Korea has been steady all year long, and as you see this continued in the third quarter, with sales up 10%. Rounds of play in the U.S. and EMEA have been especially strong since play resumed in the second quarter, and play in Korea has trended up low single digits for most of the year. Japan has been most impacted by COVID. Japan has an older golfing population, and many golfers have elected to stay sheltered at home and not travel to the golf course. Japan's third quarter results also reflect an outsized impact from our decision to move the driver launch into November. Looking at slide 7. You see a full slate of new product introductions scheduled through the first quarter. This lineup reflects our uninterrupted commitment to R&D throughout 2020 and will be the building blocks of our 2021 business plans. New Titleist TSi drivers and fairways launch next week and have already made a positive impact across worldwide tours and with club professionals. TSi has been the number one driver on the PGA Tour since debuting in early September. This will be one of our most comprehensive club launches, as our team has made the most of our decision to move our global launch dates from August to November. New Pro V1 and Pro V1x golf balls have been out on tour for the past month and notched their first PGA Tour win last week in Bermuda as Champion Brian Gay won with our new Pro V1 model. 2020 has been a milestone year for FootJoy as the brand celebrates 75 years as the number one shoe in golf. Next week the team launches the new Stratos line of spikeless golf shoes. In the first quarter, we'll launch the much anticipated Premier Series. Premier has been out on tour since late summer and reflects FootJoy's heritage as footwear craftsman and unwavering commitment to performance, comfort, and style. Finally, our shoes golf business continues to build momentum across the U.S. and Europe while the ski side has been more meaningfully impacted by COVID and is not expected to recover until late next year. Looking forward, we will continue to balance strong interest in the game and healthy consumer demand with a good amount of caution as required by these uncertain times. Our new product pipeline is in great shape, and as noted, our supply chain is holding up well. Additionally, retail inventories are projected to be down 5% to 10% globally, which we think bodes well for upcoming product launches. Just as important, Acushnet's strong balance sheet positions the company to make key investments in our future growth, return capital to shareholders, and offer a compelling long-term investment opportunity. Thanks for your interest and attention this morning. I will now pass the call over to Tom.

Thanks, David, and good morning to everyone on the call. I would like to start by extending my thanks and appreciation to our associates and trade partners for their exceptional execution, which has resulted in Acushnet's strong Q3 performance. Starting on slide 9, Q3 consolidated net sales were $483 million, up $66 million or 16% versus Q3 of last year, and up 15% on a constant currency basis as the very strong demand for golf and all of our products that we saw in June and July continued into August and September. Q3 gross profit for the third quarter was $252 million, up $35 million or 16% versus last year, and gross margin was 52.2%, up 10 basis points with a solid increase in golf ball gross margins, partially offset by a decrease in golf club gross margins. SG&A expense in Q3 was $154 million, down $5 million or 3% compared to Q3 2019, primarily from lower advertising and promotional costs. R&D expense was $11 million, down $2 million. Operating income was $85 million, which was $41 million or 95% higher than the prior year. Q3 interest expense was $4 million, down $700,000 from 2019, and income tax expense of $14 million was $6 million higher than 2019 as a result of our higher income before taxes. Our effective tax rate improved to 18.1% from the favorable shift of the mix of our jurisdictional earnings and the favorable impact of new regulations issued during the quarter related to U.S. tax reform. Net income attributable to Acushnet Holdings was $63 million, $33 million higher than in Q3 of 2019. Our Q3 2020 adjusted EBITDA was $99 million, up $43 million or 78% compared to 2019. Moving to our results for the first nine months of 2020. Consolidated net sales were $1.2 billion, down 9% from last year both on a reported and constant currency basis. This represents a significant improvement from our results for the first half, which were down 20% compared to the first half of 2019. Gross profit for the first nine months of 2020 was $609 million, down $76 million or 11%. Gross margins were 51.1%, down 110 basis points from the prior year. SG&A expense for the first nine months was $437 million, down $48 million or 10% compared to 2019. R&D expense was $35 million, down $3 million compared to the prior year. Restructuring expense for the first nine months was $13 million. Operating income for the first nine months of 2020 was $118 million, which was $39 million less than the prior year. Interest expense was $12 million, or $2 million lower than last year. Other expense was up $7 million, primarily as a result of pension settlement charges associated with our restructuring program. Income tax expense was $21 million, down $15 million and our year-to-date effective tax rate was 21.6%. Net income attributable to Acushnet Holdings for the first nine months was $74 million, compared to $103 million in 2019. Adjusted EBITDA was $185 million, down $11 million. To assist in your review of the calculation of adjusted EBITDA, we have provided reconciliation to net income on slide 10. You will note that we did not add back any COVID-19 related expenses during the third quarter as we had in Q1 and Q2. Moving to slide 11. At the end of Q3 2020, our cash and liquidity position improved significantly since the end of Q2. On September 30, we had about $111 million of unrestricted cash on hand and our total debt outstanding was approximately $378 million, a decrease of $39 million from the same time last year and $145 million from the end of Q2. Our leverage ratio was 1.8 times at the end of September, down from 2.3 times at the end of June. On September 30th, we had cash on hand and available borrowings under our revolving credit facility of about $470 million. At this time, we believe that our cash on hand and available borrowings will be sufficient to meet our liquidity requirements for at least the next 12 months. Consolidated accounts receivable at September 30 was $268 million, down about 2% from the prior year and from the end of Q2. DSOs were up one day compared to the prior year period but were down three days from the end of Q2 2020. Inventory was $318 million, down over $30 million or 9% from the prior year and was down $45 million or 13% from the end of Q2. The decreases were driven by golf balls and golf clubs, which were down 21% and 20% compared to the prior year and 13% and 11% compared to Q2 respectively. Additionally, FootJoy inventories were down 5% compared to the prior year and 19% compared to Q2. Overall, we are comfortable with the quality of our accounts receivable and the amount and composition of our inventory. Cash flow from operations for the third quarter of 2020 was $168 million and was $167 million for the first nine months of the year. This compares to $55 million and $95 million for the same periods in 2019. The increase in cash flow from operations for Q3 comes mainly from higher net income, stronger cash collections, and lower inventory levels. CapEx was $5 million for Q3 and $15 million for the first nine months of the year. We expect to increase our capital spend in Q4 and now plan for full-year 2020 CapEx to be in the range of $25 million to $27 million. Moving to capital allocation on slide 12, while our long-term priorities have not changed, we continue to be cautious, as it relates to our capital allocation actions. As I just mentioned, we now expect 2020 full-year CapEx to be in the range of $25 million to $27 million. We did not repurchase any shares in Q3. We currently do not expect to repurchase any shares in Q4. We did pay our previously announced Q3 dividend in September. As David mentioned, our Board of Directors today declared a Q4 cash dividend of $0.155 per share, payable on December 18 to shareholders of record on December 4. This represents a return of approximately $12 million to shareholders. Turning to our outlook for the remainder of the year, while we are encouraged by the increase in rounds of play and demand for our products around the world in Q3 and into early Q4, we also remain cautious, given the recently implemented restrictions we have seen in Europe and the rising number of cases of COVID-19 in the United States. Considering the impact of our two-year product life cycles, it is best to refer back to Q4 of 2018 when modeling Q4 of 2020. As a result of the changes in the cadence of our business in 2020, there are a number of factors that will be different in Q4. Overall, we expect net sales to be up slightly from Q4 2018. Despite strong demand, we currently expect golf ball sales to be flat compared to Q4 2018 as a result of the limited availability of our premium performance models as we begin to ramp up production of the new Pro V1. We currently expect golf clubs to be up slightly in Q4 compared to 2018 with increased sales in the U.S. led by the upcoming launch of TSi metals, partially offset by lower sales volumes in Japan as a result of the challenging market environment. We expect FootJoy to be down in Q4 2020 also from lower sales volumes in Japan, and Titleist Gear to be down as they are comping to their strong performance in Q4 of 2018. Finally, we expect shoes to be a positive contributor to Q4 2020 net sales as we did not acquire them until July of 2019. From an operating expense perspective, we expect fourth-quarter operating expenses to be up high single-digits compared to Q4 2018. About half of this increase comes from shoes, and the remainder comes from higher advertising and promotion costs to support the upcoming metals launch, the market momentum in golf balls, and the elongated season for the professional tours into Q4, including the Masters. Given the significant amount of uncertainty regarding the future impact of COVID-19, we will not be issuing further detailed guidance at this time. In conclusion, our associates and trade partners did great work meeting the strong consumer demand for all of our products. While we continue to exercise caution, given all the uncertainties we are facing, we remain confident that golf's momentum and energy will continue in the coming months. As noted, there have been some shifts in the timing of our business, which will impact our Q4 results. However, we remain confident in our ability to maintain and build upon our market leadership positions into the future.

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

The first question comes from Kimberly Greenberger with Morgan Stanley.

Hi, Kimberly, are you there?

Your line is open.

Could we take the next question operator?

The next question comes from the line of Daniel Imbro with Stephens Incorporated.

Yes. Hey, good morning guys. Thanks for taking my questions and congrats on a strong quarter.

Hi, Daniel.

David, I wanted to start on production. Obviously, Q2 was very disrupted from both the supply chain and a production standpoint, 3Q is really impressive. It didn't seem like you have called out any disruption there. How is the state of the supply chain today? Are there any learnings from Q2, either on the CapEx or OpEx side, where you think you guys need more investment if this demand does stay in the industry, given what we're seeing in the golf industry?

I believe you have accurately described what occurred in the third quarter. Our team scaled operations quickly and safely. We produced more golf balls and clubs than anticipated, surpassing our usual third-quarter output. We're now functioning around the clock at both Ball Plant III and Ball Plant IV. Looking at our projections for the year, we are confident that our capacity can meet the demand. One significant lesson from 2020 has focused on improving our distribution capabilities. Most of our products are distributed in North America and the U.S. from California and Massachusetts, but we are exploring alternative options in the Midwest. We plan to implement some changes next year that will require additional investment. Overall, we feel good about our production and operations. We are committed to running 24/7 for the foreseeable future, and we anticipate having more details in the future regarding changes in our product distribution, which we believe will address some of the challenges we faced earlier this year.

Yes. That's great. That's really helpful. Tom, maybe moving to the SG&A side, really impressive this quarter down year-over-year, despite the revenue growth. During your commentary, I didn't hear anything that sounded one-time in nature, but your 4Q outlook at the end there sounds like it did step back up. Should we view the step down in 3Q really as temporary, just driven by lower marketing expense? Or is there any kind of sustainable expense cuts that did come out of COVID?

Yes. Daniel, I would say it's mostly temporary or maybe better characterized as a shift. Obviously, we shifted the launch of the new metals into Q4. So a significant amount of advertising and promotion spend that we would have normally spent in Q3 is shifting into Q4. I would characterize that more as a shift and not permanent.

That makes sense. Then last one for me, David, on the industry. There’s unprecedented growth in terms of playership, but historically this tends to be fleeting. What do you think the industry needs to do better to retain these golfers and see sustained growth for the industry, rather than just a flash in the pan that may fade over the next few years?

Well, fair to say we've been fortunate that in these uncertain times the sport has found a safe and preferred lane. It’s important to note that many golfers have had very positive experiences with the game in 2020. I made the remarks earlier that the PGA golf professionals and golf course operators around the world have done a great job, positioning the game as a welcoming and safe recreational alternative. A couple of themes have emerged. One is it's a hard game, right? It's challenging. One of the more compelling stats coming out of 2020 is the amount of lessons that are being given. The more lessons that are happening invites improvement, which invites more play. The game has done a nice job this year welcoming all different types of play: family play, 6-hole play, 9-hole play, whatever it might be. As we think about the learnings of 2020, first and foremost, instruction is very important both at the beginner level and throughout. The second piece, which I know a lot of facilities have paid close attention to is pace of play. With this significant influx of demand, that was a risk of the game, that pace of play would get rather slow. We generally, anecdotally hear that that hasn't happened. The game has done a good job maintaining healthy levels of pace of play. You've got to point to a couple of forces: first, the game's caretakers, the PGA club pro for their great work throughout the year; and then secondly, a lot of credit goes to the professional tours around the world who have done a great job bringing the game back early, as early as June, and getting golfers and sports fans an entertainment vehicle to showcase the game’s safety components, competitive components, etc. A lot of learnings for the game. Frankly, Daniel, we're still processing what's happened here in the last three or four months since the game reopened, and we've been in several conversations with leaders throughout the industry about just your question: What does the game do to capitalize on this increased interest in demand? I'll point to instruction and pace of play as being two key elements.

Great. Best of luck and congrats again.

Thank you.

Great. Thank you, Daniel. Next question, please.

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

Can you hear me this time?

We can. Thank you, Kimberly. Nice to speak with you.

Great. I am not sure what happened on the technology side. I really apologize for that, but I thought the numbers this morning were absolutely fantastic, and it's really great to see the momentum in the business. I wanted to first start just following up on Daniel's question. As you look out to 2021, what kind of signals might you be looking for that would indicate a more permanent acquisition of new players to the game of golf post-COVID? When would you expect to have some visibility or clarity around the kind of retained play that we might see medium to long term? This strikes me obviously as a future growth opportunity. Your geographical results are quite strong across every geography, and Japan, understandably, is being more impacted by COVID. I'm wondering, as we think about Japan through the upcoming year, is the Japan bounce back just simply a matter of needing to get the virus under control and get a vaccine, and then we should see some follow-on response in that geography? My last question is just on gross margin for Tom. On gross margin, obviously, balls were a very nice positive this quarter. There was a little bit of a headwind in clubs. I'm wondering if that is a volume-related headwind in the club's gross margin and if that reverses in the future. Thank you so much.

Sure, Kimberly. I'll address your first two questions. Regarding the game and when we might recognize signals indicating that the trends we've seen in 2020 may reflect the long term, unfortunately, we don’t have clear answers on how this will unfold. However, I can share our perspective. I've mentioned to Daniel that many golfers had positive experiences in 2020, which likely affects how they prioritize golf in their lives moving forward. The sport competes for discretionary time and income. Over recent months, golf has performed well, especially as many other recreational activities have been paused. We acknowledge that activities like youth sports, stadium reopenings, business travel, and commuting will gradually resume. We're considering how golf fits into this evolving landscape, but the outcome is still uncertain. Nonetheless, we find some optimism in the fact that despite the challenging circumstances of 2020, golf has been a positive outlet for many people. We believe this trend will continue into the New Year and will alter how golf is integrated into their recreational time. As for Japan, when we look globally, we're seeing an increase in rounds; in the U.S., it's up in the high single digits, and in Korea, it's increased in the low single digits. The EMEA region has remained stable or slightly improved. However, Japan stands out as an exception. Its older golfing population has largely stayed home rather than going to golf courses. We expect—while being cautious with the term "bounce back"—that the market has begun to correct since last year and is accelerating this year. I see a decline in rounds and inventory, which is in the process of stabilizing. We believe these golfers in Japan will return to the golf course safely, which should help provide some stability in that market over the coming years.

As it relates to your question about gross margins in clubs, the headwind there is really about the launch. Rather than having sales in the quarter of the new product, we had higher sales of the older previous generation model, which tend to have lower ASPs as they reach the end of their product life cycle. That's really a function of the timing of the launch and we would expect that to reverse itself or correct itself over time.

Fantastic, makes perfect sense. Thank you so much.

Thank you, Kimberly.

We appreciate everybody's time and attention this morning. We wish you a safe and enjoyable Thanksgiving season, and look forward to catching back up to you as we report our fourth quarter results. Thanks again.

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