NASDAQ: KBSX
Tom Kerr, CFA: Hello everyone, my name is Tom Kerr. I'm a senior equity analyst at Zacks Small Cap Research. Welcome to another episode of our CEO Fireside Chat program. Today, we have the CEO of FST Corp. (NASDAQ: KBSX), David Chuang. FST is a global leader in the manufacturing and distribution of steel golf shafts that are sold primarily under the KBS brand. The company's manufacturing facilities are based in Taiwan, where the company was founded, but the corporate headquarters are in Boulder, Colorado. We initiated coverage of FST in March of this year with a price target of $3 per share. Welcome David.
David Chuang: Thank you for having me, Tom.
TK: So maybe start off with a little bit of a history of the company, just spend a few minutes on the background, how you guys were founded, kind of what led us to where we are today as a fast-growing sporting goods company.
DC: The company started out as a business unit of FEMCO, or the Far East Machinery Company. It is a large, heavy industrial company in Taiwan and was founded by my grandfather in 1949. FEMCO has a large steel pipe business. They make pipes for almost everything you can imagine, for oil, water, construction of buildings, skyscrapers, things like that. I wasn't there when it happened, but I know that my father and my uncle were pretty into golf back in the 70s and 80s. If you think about what a steel golf shaft is, it's basically a small tube, so what they were thinking about golf, they were thinking about pipes. I can imagine somehow that's how the shaft business or the manufacturing of shafts started. The company started making steel shafts in 1989. And at the time, it was operated as a wholly owned subsidiary of FEMCO. And for a long time, we were only producing what we call economy and commercial grade, and then I joined the company in 2007. realized that if we wanted to be more competitive and continue to grow, we needed to create a branded product that would address the premium segments of our market. In 2007, we created the KBS line of golf shafts. Then luckily, we were successful in our endeavor, and eventually we decided to spin the business out as a completely independent company, which has led us to where we are today.
TK: And before we get into the actual product descriptions and how they came about, maybe talk about the R&D and the history. A legendary golf designer and a golf shaft designer, Kim Braly was at the forefront of the R&D and development of these shafts. Maybe explain kind of who he is and how he came to the company and sort of revolutionized the industry with these shafts.
DC: Kim used to work at a company called Royal Precision, and around the same time that we were trying to develop a branded line of shafts, Royal Precision went bankrupt and was subsequently acquired by True Temper. For some reason, Kim was not a good fit at True Temper, so he left. We were made aware of his situation, and that's when we approached him and started a discussion about him joining our company and creating the KBS line of shafts. We were able to hit it off, so that's how he became part of FST. He still leads the R&D team that deals with the design of golf shafts.
TK: Got it. For those curious, the KBSX ticker is named after him, KB. Is that correct?
DC: Yes, so KB is Kim Braly, and S is signature. It means it is Kim Braly's signature.
TK: Got it. And moving on to the products, I understand you have the premium line, which is sort of the growth driver of the higher margin shafts, but you also have the standard and economy shafts as well to a smaller degree. But maybe just break down the difference between the three categories of shafts that you offer.
DC: Sure. The premium is our top-of-the-line KBS-branded product. Each KBS product is developed by our in-house R&D team to our exact specifications. And it's made for specific golf segments. These golf segments are for every type of golfer, from the professionals to high-level amateurs to junior players and senior golfers, and everything in between. Our standard shafts are often developed in conjunction with our OEM partners. The standard shafts typically go into inline programs, and many of these shafts are proprietary designs for each specific OEM and product line. And standard sees a 20 to 30 percent margin, but it's where most of our manufacturing capacity is allocated.
Finally, the economy shaft is where we got started almost 40 years ago. These shafts represent less than 3% of our revenue currently. Most of these shafts go into box sets that you see in the big box retailers, which are often not branded. We often sell our standard shafts, which do not pass our cosmetic quality control inspections or other specification tolerances. sort them into the economy shaft.
TK: Now the company has historically been, at least throughout its history, a steel shaft manufacturer. You're probably number one or two in the world in terms of manufacturing premium steel golf shafts. But the company has made recent moves into graphite shafts. And that's kind of a growth industry on its own. But maybe just talk about the company's move in the graphite shaft and the plans for that, and why you're doing it, and all that.
DC: Steel has been our bread and butter, and it will pretty much continue to be our bread and butter in the foreseeable future. However, we do know that graphite shafts make up about 40% of all golf clubs sold today. We looked at the market and the offerings that were available and decided that we could use our brand ethos to develop graphite shafts and to bring our design into the graphite shaft segment. Just like our steel lines of product, we decided to invest in R&D and develop lines of shafts that work for specific golfers. Starting at the top, we have our KBS Tour Graphite line, or TGI, followed by our Players Graphite line, or PGI. Next is the Max line. And this year, we have released KBS Generation. KBS Generation is a brand-new line of graphite irons, which is geared for junior and senior players. But we're really pushing that for junior players. It's good to get them in early.
TK: And you recently indicated on a recent earnings call that that's going to be a big growth driver in the first quarter. And it was even a growth driver, an incremental growth driver, in 2025. Can we expect good things out of the graphite market in 2026 and beyond?
DC: We do expect continued growth in the graphite and first-quarter growth with our launch. We did launch a new driver shaft. We have some tour players who have picked up the shaft, and consumers are reacting well to the product. We do expect that to work well. And we do also expect to pick up additional OEM programs, or their OEM graphite programs, this year, which will contribute to continued growth in our graphite segment.
TK: You mentioned tour players and a lot of investors may not know this, but you have a significant number of professional golfers playing KBS Steel Shafts. And maybe look at that approach. I understand you can't really sponsor them, but a lot of them play them, and just how do you interact with that, or how many pros are playing KBS Steel Shafts?
DC: There are a significant number of professionals globally who play KBS. I would say around a third of professional players globally play KBS in their clubs.
TK: Really? And I know there's been some recent wins. I believe Gary Woodland, who just won a sort of emotional Houston Open, plays KBS Shafts, and he had had some health issues, but I thought that was a pretty good story.
DC: Yeah, for sure, especially after having brain surgery. He hadn't won in seven years. And what was great about that was the last time he won, he was playing KBS. And then he kind of switched out of KBS. But we continued to be supportive of whatever he was doing. After he had surgery and was getting treatment, he was saying he was swinging a bit slower, so he kind of switched out, but then later on, when he got his strength back, we were able to get him back into KBS, and it's good to see he's starting to win again.
TK: That's great. Another great golfer I notice is Justin Rose, who's playing with KBS shafts and really playing good golf this year and last year, but we could go on forever about the success of the pros with KBS shafts. Anyway, let's talk about expansion for a little bit. I think half the golf shaft sales are in North America, or roughly the expansion is going to go geographically. It is China, North America, South America, and Europe? Just kind of talk about where you plan to expand the market of golf shafts.
DC: Golf globally is going to continue to grow. I don't think it's going to grow as it did during the pandemic. We saw just tremendous growth; growth that we haven't seen in 20 years. We'll be seeing global golf grow, I would say, in the single digits between 3 to 5% annually. But primarily, that growth is going to come in the emerging markets. like Southeast Thailand, Malaysia, South Asia, like India. We're also seeing growth in certain areas in Africa and South America. But we are, over the next two to three years, we’re going to be expanding in those areas, but we're going to have our focus on Japan. Japan is the number two golf market in the world. That market represents about 15% of the global golf market. Right now, we're very small in Japan. We just started to make our push into the Japanese market. Like I would say two, three years ago, when we set up FST Japan. We're getting recognition from the brand, but we're having a slow start with the OEM business there. We do see tremendous. opportunity with the Japanese brands. But what's interesting is that it is a difficult market to get into. example. We do a lot of their US and worldwide products, right? They use our shafts and a lot of their programs worldwide, except Japan, so we need to change that.
TK: Well, hopefully that'll be a good source of growth. An interesting, smaller part of the business is these KBS Golf Experience stores and fitting stores. Maybe talk about where they are right now and kind of what they do for the company.
DC: Right now, we operate these stores in three places. one's in Carlsbad, California. We operate one in Taipei, Taiwan, and then there's one in Tokyo, Japan. The KBS allows us to connect with the average golfer. We can monitor and see what changes are happening in the golf market in real time. And one of the things about KBS is pushing and understanding fitting. Before these stores, we had an idea of how to go about fitting the average golfer or any golfer. But we get inputs from the retailers that we work with. We didn't really do it directly ourselves. This allows us to have that experience for us and allows us to develop better ways to give the consumer a better experience in the fitting process, which then allows us to help our retailers do a better job at selling our product.
TK: Yep, I bet you get a lot of good feedback from those stores. Are there any expansion plans with those types of stores in Japan, other parts of the world, or the US?
DC: Right now, there's nothing planned at the moment. If we do go into the emerging markets, we've thought about Korea, for example. We've thought about Malaysia or Thailand. What's interesting about the emerging market is that, unlike where we're looking at almost, I would say, probably half of all clubs being sold today are sold through a fitting process in the U.S. But if you look at the emerging market, that's not. You're still going to a big box store or a golf retail store and buying something that's on the shelf. And fitting is a relatively new concept. We see that as if there's an opportunity for us to go into a market like that, not only will it help us establish our brand, but it will also help introduce the concept of fitting.
TK: Got it, that makes sense now, that's a good story. Let's spend a few minutes on the financials. You guys had a small operating net loss last year, largely due to listing expenses and other kinds of one-time expenses, but I know you don't give guidance at this point, but sort of what is the path to profitability in 2026? What are you expecting?
DC: I think we're in a good path. The first quarter was very strong for us. We'll be releasing those numbers, hopefully, next month. I feel it's highly likely we'll be either close to profitability or be profitable this year. A big reason that I'm confident that we'll reach net profitability for the year is the expansion in operating margins, and also growth and revenue. Both of those because we have a lot of fixed costs in our manufacturing process. The more we make and the more we sell, the higher the margin, right? Because it spreads, right? If we're expecting growth, we're also expecting an increase in operating margin.
TK: It's a pretty good financial leverage story, now, with the fixed cost and the revenues coming in. There's a lot of room for a margin expansion on all levels, so it's a good growth story in that regard. Any closing comments, missing information before we let you go?
DC: Back to the Kim story, there is a lot of R&D and technology that he brought to the company, which we continue to develop. Kim and his father created the concept, and if you're a golfer, you'll know what that is. There was no standard in terms of how you sorted shafts. What did that mean? Basically, every steel shaft that you bought or every other shaft that you bought or was put in a club, and if you swung the club and it felt different from club to club, you didn't really think about it. That's just kind of how it was, or you thought maybe it was your swing. It was more like you had to fit your swing to the club or the shaft, right? But what they did was come up with a quantifiable way to sort these shafts so that now today we could fit the shaft to your swing, right? So that it fits better with how you swing. I think that's important to golf. It's been important to golf players. But it's been especially important to KBS. If you looked at when we put the KBS line of golf out at the end of 2007 into 2008, I would say 10% of all golf clubs or sets of clubs being sold in the US were through a fitting process. As I mentioned earlier, today it's closer to 50%. And the trend is that it's going to continue. That was part of how we created the brand. And that was part of the success of our growth. We will continue to create products with that in mind.
TK: Got it. Just one follow-up on the fitting is that your shafts are in a lot of unrelated fitting companies out there. Right. In other words, there are chains of club fitters and so on or golf courses, but your shafts can go in a lot of those, not just the KBS golf experience, correct?
DC: That's correct, yes. But also, if you think about the OEM brands, and today, we call them their custom programs, they will promote their product with the ability to put our shafts in. So basically, their customers would call them and say I want to buy this set of clubs, but I want KBS in them.
TK: Sounds good. You guys are hitting the growth aspects at all points, and it's a great story. I think that's all the time we have for today. To read all of our FST reports, investors can go to scr.zacks.com as well as our social media channels. And if you need more specific details on the company itself, you can go to their website at fstcorp.com. So that concludes our chat, David, and thank you for being here.
DC: Great, thank you for your time today. Thank you for having me.
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