Earnings Call Transcript - GOLF Q1 2025

Operator, Operator

Good morning all and thank you for joining us for today's Acushnet Company First Quarter 2025 Earnings Call. My name is Drew and I'll be the operator today. During today's call after the prepared remarks, there will be a Q&A session. It's now my pleasure to hand over to Sondra Lennon, Vice President FP&A and Investor Relations to begin. Please go ahead when you're ready.

Sondra Lennon, VP FP&A and Investor Relations

Good morning, everyone. Thank you for joining us today for Acushnet Holding Corp's first quarter 2025 earnings conference call. Joining me this morning are David Maher, our President and Chief Executive Officer, and Sean Sullivan, our Chief Financial Officer. Before turning the call over to David, I would like to remind everyone that we will make 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 US Securities and Exchange Commission. Throughout this discussion, we will make reference to non-GAAP financial measures, including items such as net sales on a constant currency basis and adjusted EBITDA; explanations of how and why we use these measures and reconciliations of these items to the most directly comparable GAAP measures can be found in the schedules in today's press release, the slides that accompany this presentation, and in our filings with the US Securities and Exchange Commission. Please also note that references throughout this presentation to year-on-year net sales increases and decreases are on a constant currency basis unless otherwise stated, as we feel this measurement best provides context as to the performance and trends of our business, and when referring to year-to-date results or comparisons, we are referring to the three-month period ended March 31, 2025 and the comparable three-month period in 2024. With that, I'll turn the call over to David.

David Maher, President and CEO

Thanks, Sondra, and good morning everyone. As always, we appreciate your interest in Acushnet Holdings. I am pleased to report on a solid start to the year for Acushnet led by momentum in our Titleist Golf Equipment and Golf Gear Segments. For the quarter, Acushnet delivered worldwide net sales of $703 million, a 1% increase over last year. Adjusted EBITDA was $139 million which reflects a decrease of $15 million related to our decision to step up investment in our equipment segment in 2025. Getting to our segment results, we see golf equipment net sales increased almost 4% in the quarter with gains in every region. This growth was led by the successful launch of new Pro V1 and Pro V1X golf ball models and continued momentum across our Titleist GT Metals franchise, which was expanded in Q1 with the launch of new hybrids and GT1 metals. The Titleist Golf Ball business grew 4%, with gains led by the EMEA region, which was up double digits as favorable weather contributed to an early start to their golf season. For context, golf ball revenues were up 11% on a reported basis versus two years ago in our most recent Pro-V1 launch quarter. Our Titleist Golf Club business grew 4% versus last year and 15% on a reported basis when compared to the similar product launch cycle in Q1 2023. In most cases, we would expect Q1 club sales to be down in an odd year given the challenging comp against even year Vokey wedges launches. This was obviously not the case in 2025 as GT Metals and Scotty Cameron putters contributed to our growth over last year. Acushnet Gear sales were up almost 4% in the quarter with growth in all major markets led by EMEA and Japan. Titleist Gear posted steady gains, while the combined Club Glove and Links & Kings business was up double digits. Gear margin NOI trends were also favorable as our team is doing good work generating operating leverage across the segment. FootJoy sales were down 5% in the quarter, which is attributable to lower closeout footwear sales and some targeted product line rationalization across the brand. We are pleased with the initial responses to new HyperFlex, Premier, and Quantum footwear models, and FootJoy gloves, the global category leader, also had a nice start in the quarter. As noted on our last call, we characterized 2025 as a year of stability and improving profitability for FootJoy with a higher percentage of premium sales as we exit what has been a two-year period of correction in the global footwear space. Finally, net sales of products not allocated to a reportable segment were down slightly in the quarter. Shoes again posted nice gains, which were offset by a decline in Titleist apparel as Korea's super premium apparel segment continues to correct after a period of outsized growth. Now looking at the quarter by region, you see the US market was up 1%. EMEA grew 4% with gains from all segments, and Japan and Korea were off 2% and 4%, respectively. Common themes in the quarter with our Asia business are growth in Titleist equipment and gear and declines in FootJoy and Titleist apparel. The season started slowly in Japan and Korea due to poor weather, but we have seen improved conditions in March and April. With a solid first quarter in the books, we are now focused on executing a full slate of ball, club, and footwear fitting events across all markets. Despite poor weather and a slow start in the US where rounds were off 2%, we project that total worldwide rounds of play were up slightly for the quarter, led by a nice start in EMEA and the UK, up 15%. I will now comment on how the changing tariff landscape is impacting Acushnet and some of the steps we are taking across the organization to mitigate these new costs. As we have noted in recent years, the company's supply chain is durable and regionally diverse, which provides our teams with a good amount of operational flexibility to adapt to an uncertain and evolving tariff dynamic. Our vertical integration in golf balls, golf clubs, footwear, and golf gloves, first and foremost, supports our efforts to achieve the highest quality standards in the products we produce. It also provides a good amount of control and agility as it relates to demand planning and global supply chain management. Roughly two-thirds of our worldwide golf ball output is produced in the United States, and our two Massachusetts-based ball plants supply the majority of our US golf ball demand. Our Thailand plant supplies Pro V1 models to all other regions, now including Canada. Our golf ball business has a small exposure to tariffs from China-sourced raw materials, which we expect to mitigate by the end of the year. Additionally, we ship US-produced performance model golf balls into Canada and Mexico, which are presently incurring a 25% tariff. We have not yet reacted to this temporary rate. However, if this becomes permanent, we will likely take pricing measures. Club components are sourced from China, Taiwan, Vietnam, and the US, and we operate our own assembly centers in most major regions. All of our US club demand is assembled in our Carlsbad, California facility. Our primary golf club tariff exposure today is from China-sourced clubheads shipped into the US. Over time we will reroute these heads to our international facilities and supply our US production center with components sourced from the US, Taiwan, and Vietnam. As you know, we recently relocated our footwear manufacturing center from China to Vietnam. While we are confident this move has a long-term benefit, FootJoy, like most footwear companies, is exposed to tariff uncertainty in Vietnam, which was originally posted at 46%, but is now at 10% during the current pause period. The company owns and operates a standalone glove facility in Thailand, which produces both FootJoy and Titleist gloves, number one and number two selling glove brands in the market. We are confident that Acushnet's supply chain footprint provides us with flexibility to adapt, most notably within golf equipment, our largest segment. As Sean will outline, we expect to mitigate a good portion of the current tariff impact by the end of the year and expect to realize further relief in 2026 from some of our actions that will take longer to materialize. With regards to pricing, we have not yet passed along increased tariff costs to consumers, but do anticipate taking some regional pricing action on select products as we gain clarity on the extent and timing of our mitigation efforts. In summary, we are pleased with our strong start to the year and the continued strength and resiliency of Acushnet's core consumer, the game's dedicated golfer. As you would expect, our teams are focused on providing exceptional product fitting and service experiences to golfers and our trade partners and making the right long-term-based decisions while we navigate this period of tariff uncertainty. Thanks for your attention this morning. I will now pass the call over to Sean.

Sean Sullivan, CFO

Thank you, David. Good morning, everyone. As highlighted, we started 2025 with an increase in net sales of 1.2% over last year's first quarter. Adjusted was $138.9 million, a decrease of 9.6% in the first quarter of 2024, but in line with our expectations as we continue to invest in key strategic initiatives. Net sales growth in the quarter was driven by continued momentum of our Titleist brand, with golf equipment and golf gear both growing by 4%. FootJoy net sales declined 5% in the quarter primarily due to lower footwear and apparel volumes. Geographically, Q1 net sales were up year-over-year in the US, EMEA, and the rest of the world driven by golf equipment and golf gear. First quarter net sales declined in Korea and Japan primarily due to our FootJoy golf wear segment largely in footwear and lower net sales of Titleist apparel products that are not allocated to one of our three reportable segments. Gross profit in the first quarter of $337 million was down $5 million compared to the first quarter of 2024, primarily due to higher manufacturing costs in the Titleist golf equipment segment as well as lower net sales in FootJoy golf wear. These were partially offset by higher average selling prices and lower distribution costs in golf gear and higher net sales in Titleist golf equipment. SG&A expense of $200 million in the quarter decreased almost $1 million from 2024. Increases in advertising and promotional expense to support new product launches and selling expense primarily related to fitting network investments were more than offset by lower retail commission expense in Korea as well as a $7 million decrease in restructuring expense related to a charge recognized in the first quarter of 2024 associated with our footwear production transition to Vietnam. R&D expense of $18.9 million was up to $0.4 million compared to last year's first quarter, primarily to support next-generation product introductions. Interest expense of $13.8 million in the quarter was up almost $1 million due to an increase in borrowings, partially offset by a decrease in interest rates. Moving to the other income expense line, I want to highlight a gain resulting from the transition of our footwear manufacturing from our China joint venture to Vietnam. Because of the shift in footwear manufacturing out of China, we are no longer the primary beneficiary of the joint venture, and therefore, have deconsolidated JV accounts from our financial statements. As a result of this deconsolidation, we recognized a non-cash pre-tax gain of $20.9 million during the first quarter, which has been excluded from the adjusted EBITDA calculation as noted in the reconciliation attached to our earnings release. Our effective tax rate in Q1 was 17.9%, down from 21.7% last year, primarily driven by a shift in our jurisdictional mix of earnings. Moving to our balance sheet and cash flow highlights. Our balance sheet and cash flow positions continue to be very strong, allowing us to execute our capital allocation strategy while also navigating the current macroeconomic uncertainty. Our net leverage ratio using average trailing net debt at the end of Q1 was two times. Overall, inventories declined 7% in the fourth quarter of 2024 and were roughly flat when compared to last year's first quarter. Overall, we are comfortable with our inventory quality and position. Capital expenditures were $11 million in the first quarter of 2025, and while we planned for approximately $85 million to spend in 2025, we will continue to assess considering the current environment. Through March, we returned roughly $51 million to shareholders with $36.6 million in share repurchases and $14.8 million in cash dividends. During April, our Board of Directors declared a quarterly cash dividend of $0.235 per share payable on June 20 to shareholders of record on June 6. As of March 31, we had 415.5 million remaining under the current share repurchase authorization. On April 10, 2025, we repurchased approximately 936,000 shares of our common stock from Magnus for an aggregate of $62.5 million related to our June 2024 share repurchase agreement. With respect to our previously disclosed December 2024 Magnus share repurchase agreement, through the end of April we've repurchased approximately 90% of the $62.5 million target and expect to settle the related Magnus share repurchase obligation during the third quarter of 2025. Given the current market conditions, we will continue to assess our previously stated capital allocation approach for the balance of the year while monitoring leverage, liquidity needs, and the appropriate levels of investment. Moving to guidance for 2025. The macro environment remains highly uncertain due to changing trade policy. For that reason, we are not providing any updates to our consolidated full-year outlook until there's more clarity. On a positive note, as David said, our core consumer remains strong and resilient. In terms of overall tariff exposure, based on our estimates, we expect our gross impact in 2025 to be approximately $75 million on the assumption that the current rate regime extends through year-end. The largest impact or about 70% relates to the China import tariff rate of 145%. If we had not worked to diversify our supply chain over the past two years, our tariff exposure would be much higher. We are taking actions to implement mitigation plans, including adjusting our global supply chain footprint, initiating cost and productivity programs, both internally and externally with our suppliers, and considering selective price increases. Through these actions, we believe we can offset greater than 50% of the $75 million gross tariff impact during 2025. Now turning to the first half. Similar to our 2024 fourth-quarter call, we currently expect first-half sales to be up low single digits versus the first half of 2024. We expect most of the additional tariff impact to fall in the second half based on our current inventory levels. For Q2, we expect an approximately $4 million tariff impact. Including this impact, we expect first-half adjusted EBITDA to be down low single digits as compared to last year's first half. In closing, we are very pleased with our performance in the first quarter of the year and remain focused on controlling what we can while servicing the needs of dedicated golfers. Our business and balance sheet are well positioned for the current market environment, and we'll continue to monitor the tariff situation and provide updates when appropriate.

Sondra Lennon, VP FP&A and Investor Relations

Thank you, Sean. Operator, could we now open up the lines for questions? Thank you.

Operator, Operator

We will start today's Q&A session. Our first question today comes from Megan Platt from Morgan Stanley. Your line is now open. Please go ahead.

Megan Platt, Analyst

Hey, good morning, Dave, John. Thanks for the question. I wanted to start maybe with the guidance. It seems like you're more pausing the guide to wait until there's more clarity, and it doesn't seem like anything has really changed around your second quarter expectations. So is the decision to pause, is it driven by anything you're seeing today as it relates to consumer demand or customer ordering patterns? Or is it more so just the acknowledgment that there's less visibility today than there was three months ago, and there's a lot that can occur over the next couple of months?

David Maher, President and CEO

Yeah. Hi, Megan, I'll start with that one. Typically, this time of year, we do not update guidance, right? We say often Q1 is about pipeline and shipping product into the market. Q2, you get a read on consumer behavior, you get a read on early response to your products. But as Sean said, we were prescriptive as it relates to the first half, up low single digits. That is certainly informed by what we've seen up to this point in the year. Rounds played have noted resilience. And if I look at a slight decline in the US and an uptick outside the US for a net positive, that's a nice position to be in. Looking in the US, Florida was up slightly in the quarter, and California, Arizona were up 8% and 5% in the quarter. We feel really positive about our consumer and the structural health of the industry. Certainly, we're careful and cautious with regards to what's happening from a tariff perspective. But our guide, I'm not sure it's a pause as much as this is how we generally play at this time of year. We just exit Q2 with a much more informed position. What you could infer is, we've reiterated our first half based on what we've seen today and that is rounds of play stable; consumer purchasing stable through April.

Megan Platt, Analyst

Okay. That's clear and helpful. Thank you. And then, as it relates to the tariffs, maybe a follow-up for Sean. When you think about the mitigating actions, more than 50% of the $75 million this year, it seems like pricing is maybe the last resort. But could you spend a little bit of time just bucketing the actions, maybe what's first in your minds in terms of what you’re going to do and at what point do you think you'll make a decision on pricing?

Sean Sullivan, CFO

Yeah. I can start. David, certainly, can chime in afterwards. I think that, certainly, you're right. I think the price is probably the last lever we would pull in the intervening period. We're very focused on how we redirect certain activities to markets and sourcing into the United States at the lower tariff rate, number one. Number two, we're having conversations with many of our suppliers and vendors and identifying opportunities to either cost-share or reimagine the price points at which we're procuring the product. We do have a diversified supply chain. The biggest impact, in terms of our business, is really the Club business and FootJoy. And, as David talked about, I think the Club side we have a plan and a path for later this year to source clubs in the United States out of non-China territories. So that's good. And, on the FootJoy side, certainly pleased that our footwear is in Vietnam, but there are apparel categories that we're looking at alternative opportunities. So, first and foremost, look at the supply chain, see where we can source into the country from alternative areas; and over the longer term, I think we have a plan to move out of China in certain aspects of our business.

Megan Platt, Analyst

Okay, great, super helpful. Thanks. I'll pass it on.

Sondra Lennon, VP FP&A and Investor Relations

Thanks, Megan. Operator, our next question.

Operator, Operator

Our next question today comes from Joe Altobello from Raymond James. Your line is now open. Please proceed.

Joe Altobello, Analyst

Thanks. Hey, guys. Good morning. Appreciate the clarity on tariffs, obviously. I guess one question. I'm not sure anybody expects China to stay at 145%. So, what does that $75 million look like if China was at, say, 50%, for example?

Sean Sullivan, CFO

Yeah. Joe, as I highlighted in our remarks, of our $75 million, 70% or more of that is related to China specifically. So that's about $50-some odd million dollars for China. Presumably, if it's at 50%, we're looking at a third of that number. So that's a big opportunity to mitigate it if we go from 145% to 50%. So, hopefully, I've given you those pieces to assess that.

Joe Altobello, Analyst

No, I appreciate that. I missed that; I apologize. And, maybe, kind of moving on to Asia still a little bit of weakness particularly in apparel in Korea and Japan, I think you mentioned that you saw a little bit of improvement later in the quarter and into Q2. Could you sort of elaborate on that a little bit?

David Maher, President and CEO

Yeah, Joe, slow starts in January and February. Weather turns in March and April have been pretty good, so we're back on track, but certainly a slow weather-related start there. A quick comment on Asia, and you know we like the trends of our equipment business and our gear business. As we've said recently, there's been some pressure on apparel in Asia, and just for context, this premium super premium market in Korea is outsized. It represents about 40% of the global golf apparel market opportunities, so it's a very sizable market. It went on a big run over the last four or five years, and it is correcting. We saw it last year and we see it this year. So, a, we're prepared for it. B, it's not surprising to us, but if I break up Asia and in this case really Japan and Korea which are the 2nd and 3rd largest markets, I'll park China aside just because it's not that big. But if you look at Asia and Japan and Korea, rounds are resilient after a slow start. We like the trends of balls and clubs, and a watch out continues to be apparel and footwear which again we've planned for.

Joe Altobello, Analyst

Got it. Okay. Thank you. Thank you.

Sondra Lennon, VP FP&A and Investor Relations

Thanks, Joe. Operator, next question please.

Operator, Operator

Our next question today comes from Michael Swartz from Truist. Your line is now open. Please go ahead.

Unidentified Analyst, Analyst

Hey good morning. This is Julian on for Mike. Just one question. I guess relative to your guide in February. How would a change in exchange rates that we've seen impact on outlook?

Sean Sullivan, CFO

Yeah, so as we had entered the year, Julian, we had expected, as you know, a $35 million headwind. We experienced about a $12 million impact in Q1 right in line with our $10 million to $15 million that we had highlighted. I think that if today's rate were to persist through the end of the year, it's probably worth something north of $20 million tailwind for Q2 through Q4.

Unidentified Analyst, Analyst

Great. Thank you very much.

Sondra Lennon, VP FP&A and Investor Relations

Thanks you. Operator, next question please.

Operator, Operator

Our next question today comes from Noah Zatzkin from KeyBanc Capital Markets. Your line is now open. Please go ahead.

Noah Zatzkin, Analyst

Hi. Thanks for taking my questions. I guess first, maybe just a quick follow up on the $20 million tailwind comment. Is that a kind of tailwind to overall numbers or is that a tailwind versus kind of the run rate $35 million impact that you had laid out previously?

Sean Sullivan, CFO

Yeah, it's 20 million versus prior year is what I've highlighted, right. So we've got the $12 million impact in Q1 that's a year-over-year headwind, and the $20 million would be a tailwind relative to prior year. Therefore, net $8 million for the year is how I'm laying it out for you.

Noah Zatzkin, Analyst

Okay. That's very helpful. And just as you think about kind of mitigation efforts beyond this year, is there a scenario where you'd be able to presumably fully diversify away from China, or are there some critical components that will have to remain in China? And just in general, like, if you think you can mitigate 50% this year, do you have any kind of guidepost in mind looking ahead? Thanks.

David Maher, President and CEO

Thanks. Currently, we source club heads from China, Taiwan, and Vietnam, and have assembly centers globally. We plan to move sourcing from China to Vietnam and Taiwan, which we can do quickly. However, we still expect China to supply our assembly centers in markets outside the United States. Our apparel franchises also have a diverse supply chain, with significant sourcing from China and the Far East as well as South America. The focus is on reducing our reliance on China for products sold in the U.S. and redirecting some capacity to other markets. We have the flexibility to adapt our sourcing strategy. In our golf ball business, we source some raw materials from China to our facilities in the U.S. and Thailand, and we will continue sourcing for Thailand while looking to move away from China for U.S. sourcing. This change will take some time as we need to qualify new vendors, which may not happen until next year. We're not fully exiting China; rather, we're adjusting our supply chain to minimize imports from China into the U.S., while still expecting to receive some products from China for markets outside the U.S. with no tariff implications.

Noah Zatzkin, Analyst

Very helpful.

Sean Sullivan, CFO

To answer your question, the situation is quite dynamic and appears to be changing daily. We want to be cautious in affecting demand or consumer behavior, but if the current environment remains stable, our expectation is that we would be able to fully address this impact by 2026.

David Maher, President and CEO

Yeah, I'll underscore Sean's comment. Our objective is to take a very measured long-term view in what is a period of significant uncertainty. We think it's best for our business, it's best for our trade partners, and most importantly it's best for our consumers. So if there's one takeaway, it is that we've got a lot of flexibility within our supply chain, and we're being measured and whenever we can, taking a long-term view and keeping our options open with the understanding that it's highly unlikely whatever the situation is today will be the situation it is two or three months from now.

Noah Zatzkin, Analyst

Very helpful. Thank you.

Sondra Lennon, VP FP&A and Investor Relations

Great. Thank you, operator. Next question?

Operator, Operator

Our next question comes from Carlos Gallagher from Jefferies. Your line is now open. Please proceed.

Carlos Gallagher, Analyst

Good morning. Thanks for the question. Could you guys unpack what you're seeing in terms of quarter-to-date demand trends, and are you seeing any signs of, or do you anticipate any reduced demand in international markets related to the move away from American brands?

David Maher, President and CEO

Yeah. Carlos, good question. Obviously, we're watching it very, very carefully both in the United States and in markets outside the United States. I will say early days in the golf world, so many markets just opened up in the last couple of weeks, so we don't have a deep or long bank of consumer data to work with. But what I will say is here we are in early May, and we like the state of participation and rounds. I would characterize our business in just about every market as normal for this time of year. Said differently, we haven't seen any meaningful swings or noteworthy swings in one direction or another, either in the United States or in markets outside the US. But to your question, it's something we're watching very carefully. And more notably, we're watching the state of the consumer very, very carefully. And when we do that, we also do it with the understanding and some degree of comfort that our consumer, the dedicated golfer, as we call it, over cycles has proven to be quite resilient. But as we sit today, what we're seeing is about what we expected out of the US markets and in markets around the world.

Carlos Gallagher, Analyst

Super helpful. Thanks. And then just could you give us an update on the dynamics in the footwear space just related to some of the new entrants we saw last year and channel inventories?

David Maher, President and CEO

Yes. We're really happy with our footwear business. We've got a handful of new launches that have been well received: HyperFlex, Premier, Quantum. We did comment on the top line decline. We're selling fewer closeouts, which is a net positive. We've done some product line rationalization, which we think over time will be a positive for FootJoy as well. I did comment, we look at 2025 as a year of top line stability, a greater percentage of premium performance, full-price product, if you will, and a path to improve profitability. After what's been 18, 24 months of correction in the footwear space as it worked through what we would characterize as an oversupply, generally we look around the world and we see footwear inventories at a proper level for this time of year. Said differently, stores and retailers are full as they should be at the beginning of the season. We think the year in footwear should be characterized as being more normalized than we've seen in the last couple of years. We like the early response and trends within our FootJoy business as well.

Carlos Gallagher, Analyst

Great. Thank you. I’ll pass it on.

David Maher, President and CEO

Thanks, everybody. We appreciate your interest, and hopefully, mother nature cooperates this spring, and we all get out and play some golf, and we look forward to speaking to you after Q2.

Operator, Operator

That does conclude today's call. You may now disconnect your lines.