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. Please be advised that today's conference is being recorded. 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 performance and momentum of the Titleist Golf Ball business. The Titleist Ball count across worldwide tours is a leading 73%, more than 7 times the nearest competitor, and our teams are doing a good job leveraging this pyramid success into strong demand across regions. And we are enthused about the recent launch of our new Pro V1 golf balls with Radar Capture Technology or RCT, which has been developed by our team to optimize the indoor user experience with TrackMan devices. While not a large volume opportunity, this product offers a good example of how the company's unwavering commitment to golf ball R&D can enhance the golfer experience and further position Titleist as the golf ball innovation and performance leader. As discussed on our prior call, golf ball production levels have been limited by raw material shortages, and we expect this dynamic will continue, resulting in tight availability for the foreseeable future. And similar to last year, we have recently converted production lines to support the launch of new Titleist Golf Ball models in the first quarter. As you would expect, the timing of this transition becomes a balancing act, as we seek to both satisfy at-once demand while also building inventories to support upcoming launches. Moving to Titleist Golf Clubs. Sales were up 12% for the quarter and 52% year-to-date with our highest growth coming in the U.S. and Japan. The global launch of our new T-Series irons in August was comprehensive and successful, a testament to the good work by our product development and operations teams to advance plan and execute in this dynamic environment. Underscoring Titleist Golf Club strength and momentum, Titleist was the most played driver, hybrid, iron, and wedge this past season on the PGA Tour, where more winners used Titleist equipment than any other brand. The Titleist Club business is in great shape. And while the fourth quarter will be down as we compare against last year's TSi driver launch, we think the business is well positioned for the future. Our Titleist Gear segment continues to grow and gain share with sales up 4% in the quarter and 33% year-to-date. Sell-through of our 2021 line has been excellent, and while availability has been impacted by factory shutdowns in Vietnam, we are seeing the situation begin to stabilize as vaccination rates climb. Moving to FootJoy, you see year-to-date sales of $462 million are up 42% on the year and 18% for the quarter. This growth is led by the success of key footwear franchises, Premiere, HyperFlex, and Traditions across all regions. And the FJ apparel business is tracking ahead of expectations, led by accelerated growth in the U.S. and Korea and a great response to our seasonal collections. And rounding out the Acushnet portfolio, we are pleased with strong performances and growth from Titleist Apparel in Asia and our Shoes Golf business in the U.S. and Europe. Now turning to Slide 6, and a review of our key geographies. As you see, all regions are healthy and posting strong year-on-year gains with growth ranging from a low of 30% in EMEA to almost 50% year-to-date growth in Japan. Acushnet's business in the U.S., which represents about half of the global golf market opportunity, is up 45% on the year. Year-to-date, rounds of play have increased in all regions with the three largest markets of the U.S., Japan, and Korea, up between 8% and 15% through September. Now looking forward, we are optimistic about the health of the game and its underlying fundamentals. Golfer engagement levels are high, and our trade partners are successfully adapting to golf's evolving new normal. Our Titleist, FootJoy, and Shoes product development pipelines are in great shape, and we look forward to launching a comprehensive range of new products over the next several months. And while we are confident in our team's ability to proactively manage supply chain complexities, we anticipate that the current environment of raw material shortages, disrupted production schedules, longer component lead times, and increased freight costs will continue for the foreseeable future. That said, we're enthused that many of our supply partners are investing in their infrastructures, which will ultimately benefit Acushnet's supply chain capabilities. Looking to the long-term, accelerated investments in our digital infrastructure over the past year are leading to continued expansion of our global B2B and B2C capabilities. These investments will drive improved service levels, shorter lead times, and enhanced user experience for our trade partners and end-user golfers. Similarly, the transition to our centralized U.S. distribution center is well down the field and will, over time, provide faster and more cost-effective fulfillment for a wide range of Acushnet products. And our $125 million capital investment in support of golf ball manufacturing, innovation, and customization is underway. And we are optimistic about how this initiative will position the Titleist Golf Ball business for future success. In closing, we are confident that Acushnet is structured and well positioned to capitalize on this vibrant golf market and that our focus on the game's dedicated golfer, coupled with a proven track record of product innovation and supply chain management, will support the company's long-term growth objectives. Thank you for your time this morning. I will now pass the call over to Tom.

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, FootJoy footwear, and apparel. But were partially offset by higher inbound freight costs across all segments and higher raw materials and manufacturing costs, primarily in Titleist 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 expenses, 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% compared to 18.1% in 2020 as a result of a change in the mix of our jurisdictional earnings and the impact of a one-time discrete benefit, which was recorded in the prior year. Net income attributable to Acushnet Holdings was $39 million, and our Q3 adjusted EBITDA was $70 million. Moving to our results for the first nine months of 2021. Consolidated net sales were $1.7 billion, up 45% compared to last year and up 41% on a constant currency basis. Gross profit for the first nine months was $914 million, up $305 million or 50% compared to the first nine months of 2020. Gross margin was 52.9%, up 180 basis points from the prior year. SG&A expense for the first nine months was $586 million, up $149 million or 34%. And R&D expense was $40 million, up $5 million or 14% compared to 2020. Operating income for the first nine months was $282 million. Interest expense for the first nine months was $6.6 million, and our effective tax rate was 23.1% compared to 21.6% in 2020, primarily because of changes in the mix of our jurisdictional earnings. Net income attributable to Acushnet Holdings for the first nine months was $205 million and adjusted EBITDA was $333 million. There is a reconciliation of net income to adjusted EBITDA for Q3 and the first nine months of 2021 in our earnings release as well as in the appendix of the slide presentation. Moving to Slide 10. Our cash and liquidity position is strong and continues to improve. At the end of Q3, we had about $319 million of unrestricted cash on hand. Total debt outstanding was approximately $320 million, a decrease of about $57 million from Q3 of last year, and we had $386 million of availability under our revolving credit facility. Our leverage ratio was 0.7x at the end of Q3, down from 1.8x at the end of Q3 2020. Consolidated accounts receivable at the end of Q3 '21 was $300 million, up $32 million from Q3 of the prior year due to higher sales. Our accounts receivable aging remains very healthy and DSOs were 53 days, down 8 days compared to the prior year. Consolidated inventories were $325 million, far lower than our optimal levels, but up $7 million from Q3 of the prior year with increases in Golf Balls, Clubs, and FootJoy, partially offset by decreases in Gear, Titleist Apparel, and Shoes. DSIs were 117 days at the end of Q3 compared to 170 days at the end of Q3 2020. Cash flow from operations was $280 million for the first nine months of 2021, up $113 million compared to last year. The increase comes mainly from higher net income, partially offset by changes in working capital. Looking to capital expenditures, we have spent $19 million during the first nine months of 2021 compared to $15 million last year. We now expect our capital expenditures for full year 2021 to be in the range of $40 million to $45 million as the receipt of some purchases has been pushed into 2022 as a result of supply chain challenges. Turning to Slide 11. Our capital allocation strategy and priorities have not changed. Investing in the business with a focus on product innovation, golfer connection, and operational excellence is still our highest priority and we continue to pursue acquisition opportunities that align with our focus on premium performance products that appeal to dedicated golfers. We believe these investments will advance our long-term strategy and drive growth at a favorable return. We also continue to focus on generating strong cash flow and returning capital to shareholders. On September 17, we paid our previously announced Q3 dividend, which totaled $12 million. I am pleased to announce that today, our Board of Directors declared a $0.165 per share dividend payable on December 17 to shareholders of record on December 3, which would also represent an expected cash outflow of approximately $12 million. During Q3, we repurchased approximately 242,000 shares for a total of about $12 million, increasing our year-to-date purchases to approximately 742,000 shares for a total of about $30 million. Reinforcing our commitment to return capital to shareholders, our Board of Directors recently increased our share repurchase authorization by $100 million to a total of $200 million. We now expect to repurchase up to an additional $50 million worth of shares by the end of 2021, making the full year total up to $80 million. Moving to Slide 12. Our outlook for the full year 2021 has improved. Demand for our Acushnet products continues to be strong. And while we have raised our forecast for the balance of the year, our outlook continues to be governed by supply chain challenges, which are causing higher raw material costs and material and component shortages across all of our businesses. These supply chain challenges are impacting our ability to meet demand and are resulting in further production disruptions and increased costs. We continue to face escalating inbound freight costs, which we expect to continue well into 2022. We now expect our reported sales for full year 2021 to be in the range of $2.08 billion to $2.11 billion, up about 30% at the midpoint compared to 2020. We expect full year adjusted EBITDA to be in the range of $305 million to $325 million, up about 35% at the midpoint. These expectations assume no significant worsening of the impact of the pandemic, including incremental closures of global markets or additional supply chain disruptions. At the midpoint, this outlook implies fourth quarter sales of $368 million, down $53 million compared to 2020 and an adjusted EBITDA loss of $18 million, down $66 million compared to 2020. The decrease in sales comes primarily from lower volumes in golf clubs as we compare against last year's TSi metals launch in Q4. Sales for the rest of our segments for Q4 are expected to be flat to slightly down compared to 2020 as supply chain challenges are expected to further limit our ability to meet strong demand. The decrease in adjusted EBITDA comes primarily from lower gross profit on the lower club sales volumes and lower gross margins from higher inbound freight and higher raw materials and manufacturing costs. Additionally, OpEx will be up about $19 million compared to 2020 from higher advertising, promotion, and selling costs as we are investing to take advantage of the current industry momentum and from higher associate-related costs. In conclusion, Acushnet delivered another strong quarter in Q3, led by tremendous execution by our associates and trade partners. We have again raised our full year 2021 financial goals, and we are confident in our ability to execute our long-term strategies and to deliver a solid long-term total return for our shareholders.

Thank you for your insight, Tom. I will now turn the call over to questions.

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 two 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 2021. 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 2021, we've taken increases in some areas, but not all. Examples would be our iron launch, gloves, and golf bags, and I think that's the right way to think about how we look at pricing going forward in 2022. 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 it 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 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 have a long-standing practice of associating price increases with new product launches. We believe this approach is in our best interests and we do not anticipate changing it in the future. While I understand the reasoning behind possible deviations, our consistent strategy has been to align any price changes with new product introductions.

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 one-time 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. Regarding Q3, there were no one-time items affecting gross margins. The performance was primarily driven by our sales volumes and some price increases we implemented, as David mentioned. We are still facing significant headwinds from freight, which affected us in Q3 and will continue to do so in Q4 and into 2022. For Q4, we anticipate our gross margins will be lower than in Q4 of 2020 and 2019. However, we expect the decline to be less severe than you suggested, likely slightly higher. Most of the decrease is attributable to volume, with a notable reduction in sales volume compared to last year, mainly due to last year's TSi metals launch. Volume is a significant factor, but we also expect a hit of about $9 million from freight in Q4 compared to 2020, with the remainder due to price and cost inflation from raw materials and other supply chain challenges.

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 would say it's overall. Our Q4 sales in 2021 appear to be about the same as 2019. We anticipate a similar seasonal trend. However, in Q4 2021, the demand environment is significantly stronger than in 2019, although some of our supply chain issues are hindering our ability to fulfill that demand. Therefore, while the demand is much higher, we are unfortunately not able to meet all of it due to these constraints.

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, it was more about our outlook for the third quarter and the second half, which was primarily focused on the supply chain and our capabilities there. As the supply chain improved, our ability to meet demand also increased. There's not a significant change in demand; it has remained strong throughout the year, even with seasonal adjustments. The third quarter performed well largely because our supply chain across all categories and segments delivered more than we had expected. This success is due to the excellent work of our team, as well as improved results and performance from our supply partners and raw material suppliers.

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 what we know today, and that's driven off the forecast provided from our supply partners around raw materials, we would expect channel inventories to remain tight well into 2022. I can’t at this point put a more definitive timeline 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, 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 harm 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, that's a good question. Everyone is competing for available raw materials. We believe we are managing this situation quite well. This is partly due to our seasonal launch schedule, which also affects our competitors. Regarding market share, we typically don’t delve into that topic since the available data only reflects some channels and not all. Therefore, we don’t focus too much on market share. We are confident in our current positioning across categories and anticipate our team will effectively leverage whatever availability exists. I know our competitors are approaching this similarly, making it challenging to measure its impact on market share at the product level. However, considering our business is up nearly 40% year-to-date, we feel pleased with our performance, especially given the constraints of the current supply chain environment.

I'm going to ask you a challenging question. Even though you haven't provided specific guidance, could you give us some insight into 2022? Understanding how we should view 2022 compared to 2021 would be very helpful.

Yes, that's a fair question. I would say that the retail environment is healthy, channel inventories are low, and consumer demand is strong. Additionally, we are very confident in our product plans for the first half of the year. The planning process is more complex now due to the current supply chain situation. As we work through the availability of raw materials, components, costs, freight, and lead times, I want to emphasize that, considering the strength and momentum of our business, we anticipate growth in all segments next year under a normalized supply chain. Ultimately, as our plan develops, it will reflect more of the supply conditions than a demand-driven forecast. While this may not be the exact answer you were seeking, from a demand perspective and based on market fundamentals, we are pleased with what we see. The situation will largely depend on what we can manage from the supply chain.

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

This is Adam speaking for Joe. Congratulations on another strong quarter. I wanted to ask for an update on the estimated impact of supply chain challenges this year. You provided some details on Q4, but I'm looking for clarification. Last year, you mentioned that the impact was around $75 million to $80 million compared to the second half of 2019. Do you have an updated figure regarding how that has changed based on your Q4 outlook? Any information would be appreciated.

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 one more. I know you guys may not share the color on the detail of the rounds played in 2021. But I think last year, a big driver was new 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?

The game is in good shape, and our facilities are busy. Looking at the U.S. perspective, rounds have increased by 8% compared to 2020 and approximately 18% compared to 2019 year-to-date. The third quarter saw a decline of about 5% versus last year, but overall, our year-to-date performance in rounds is likely better than anticipated at the beginning of the year. Full-year rounds are set to exceed last year's numbers at a strong pace. This outcome is positive, especially considering the realities brought on by COVID, and we also had more favorable weather than last year. Regarding the sources of the increased rounds, it appears to be coming from three groups: avid players are participating more, latent players have returned due to COVID, and there are new entrants to the game. Currently, we estimate that about half of the additional play is from avid golfers, one-quarter from new players, and one-quarter from returning players. We will provide updates as more industry data becomes available at the end of the year, but this seems like a reasonable framework for now. Thanks, Adam. 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.