Acushnet Holdings Corp. (GOLF) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Nick, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q3 2016 Acushnet Holdings Corp. Earnings Call. [Operator Instructions] Tony Takazawa, Vice President of Investor Relations, you may begin your conference.

Thank you. Good morning, and welcome to Acushnet Holdings call to discuss our 3Q 2016 financial results. This morning, we are joined by Acushnet CEO Wally Uihlein. Given that this is our first call as a public company, Wally will take a few minutes to level set everyone and talk about the Acushnet strategy and business model and his view of what has been happening in the golf industry. Acushnet CFO, Bill Burke, will then spend some time discussing our business operations and how we have been executing in the third quarter and so far this year. After the prepared remarks, Acushnet COO, David Maher, will join us for the Q&A. We will then open up the lines for your questions. We will be making forward-looking statements on the call today. These forward-looking statements are based on Acushnet's current expectations that 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 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, slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission. I would also mention that today, we will not be providing Acushnet financial expectations for future periods. With that, it is my pleasure to introduce Acushnet CEO, Wally Uihlein. Wally?

Thank you, Tony. Good morning, everyone. And welcome to our first quarterly earnings call post initial public offering of October 28, 2016. Recognizing that we may have some people on the call who would have had only limited exposure to the company and its story, I'm going to take a couple of minutes on the front end to reinforce who we are, provide some comments on our strategy and operating model and then offer some observations about the golf industry and the recent events that have captured everyone's attention in 2016. As the first slide headed Acushnet Today reads, the company is an authentic and enduring performance-focused golf equipment company. Company represents one of the longest-running success stories in golf's commercial space. We steward 2 of the most recognized brands in golf since 1949. Titleist has been the #1 ball in golf and has seen by many as the gold standard of the product category. And for the past 7 decades, only one golf shoe brand has been able to claim itself to be #1 and that is FootJoy, an authentic golf brand on its own terms. Since the beginning, our focus has been on the golf industry's dedicated golfer and the preferred trade partners who serve them. For both brands, golf's pyramid of influence has remained a timeless source of validation and testimonial. And over the years, we've constructed a differentiated operating model, an operating model whose components would include a commitment to perpetual innovation, a world-class operations platform, an unrivaled route to market playbook and a robust dedicated golfer experience and subsequent connection. And I would be remiss if I did not add that both brands are supported by passionate cultures and long-tenured associates. Today, we remain positioned to both outperform the market and to represent a long-term, total-return opportunity. Turning to the slide marked key metrics. In 2015, net sales of $1.5 billion found 72% represented by Titleist-branded products and 28% by the FootJoy brand. We have a diversified portfolio with leading positions in over 6 product categories, a balanced mix of consumables and durables, formidable positions in the higher-margin categories of golf balls, golf clubs, wedges and putters and revenue diversification across all geographies. And our sustained and aggressive commitment to research and development has led us to possess 1,200 active golf ball patents and an additional 300 active patents in golf clubs, wedges and putters, many of which from both product areas that will drive future premium performance-positioned high-margin products. Turning now to the slide marked Acushnet Business Model. The game's dedicated golfer is the industry's high quality and resilient customer. Representing 15% of all golfers, this serious golfer segment represents 40% of all rounds played and approximately 70% of the annual spend at retail on golf equipment and golf apparel. By definition, these are golfers who are willing to commit time, money and energy in pursuit of playing better golf. Additionally, these golfers have shown a propensity to pay a premium price for performance-based products that in many cases, help them shoot lower scores. Our focus on the industry segment has contributed to our attention to performance products and helped us to build our portfolio and in turn, contributed to our revenue stability. The most dedicated golfer is the game's professional golfer. Our mission has always been to design and to manufacture performance superior golf products for the best players in the game. If you believe you have the best product, then your product could be used by most of the best dedicated golfers. And if it is, then that is validation that you have the best product. Thus, pyramid of influence and the idea that all committed golfers are influenced by those with higher skills is part of the fabric of the golf industry. It is about how many and not anyone who. How many is the only endgame for any brand looking for confirmation that they are the product performance best-of-breed. The dedicated golfer is the center of attention that differentiated Acushnet operating model, all starts with product performance, and product performance leadership is rooted in innovation. 150 scientists, engineers, chemists and technicians, supported by 6 research and development facilities and test centers are dedicated to the creation of next-generation products. Our disciplined product introduction cadence synchronized to dedicated golfer replacement cycle behavior delivers next-generation product performance superiority while also protecting premium positioning and higher-margin pricing. The golf industry remains very invention intensive. And today, the largest portfolio of active patents in the high-margin performance categories of golf balls, golf clubs, wedges and putters rests with the Acushnet company. The company has a long history of supply chain excellence. We were originally incorporated as the Acushnet Process Company. The control of the design, the manufacturing, the sourcing and the distribution of our products is a key differentiator in an industry where performance and quality drive the value proposition. Today, we have the golf industry's most comprehensive supply chain footprint, which allows us to maximize working capital efficiency, drive reduction of lead times and provide local market flexibility on both the stock and custom product fronts. Continuing on to the next slide. Our proven operating model includes an unrivaled distribution platform. Today, we have 31,000 accounts, direct sales capture in 46 countries and 370 seasoned company sales representatives. Our category management model assumes the sales representative and trade partnership relationship. Our salespeople provide product education, in-shop merchandising and inventory management support. In exchange, these trade partners help us identify and they become our link to the industry's dedicated golfer. Our preferred trade partners particularly where golf is played also help activate our performance product leadership story. In the end, our goal is to provide the dedicated golfer with an unmatched experience and connection, while we build unmatched brand loyalty. Golf ball education and fitting have long been part of the category leadership success story. We believe all golf club purchases should be mediated by the custom fitting experience, and every opportunity to both demonstrate and to fit our product is an opportunity to trade up or shift share. The focus on the game's dedicated golfer, providing them with performance leading golf products and building out a differentiated operating model explains our ability to establish high brand loyalty, deliver attractive margins and produce a solid revenue and earnings track record capped off by a strong free cash flow conversion capability. Turning now to the next slide. This background helps explain our ability to outperform the market during this most recent correction period. The beginnings of golf's oversupply buildout are traceable back in 3 decades. However, it took the subprime recession to reveal the scope of the industry's structural challenges. Since 2008, the golf industry has been in an extended period of demand-and-supply reconciliation, with the inevitable recognition that the industry size was what it was. This most recent extended correction has produced equipment manufacturer rightsizing, golf course closings, retail consolidation, capital structure changes, selective category exiting and retail reorganization. All of the industry events that have commanded recent media attention are examples of the necessary rightsizing and correction of an industry suffering from overbuilt excess supply. Fewer retail doors, less total square footage and a reduced number of industry competitors actually portends a more rationalized industry and an improved set of go-forward fundamentals. Our performance 2011 to 2015, previously highlighted, serves its validation of our strategy and operating model. And our results year-to-date 9 months 2016 would suggest we are once again outperforming the market and continuing to deliver upon our long-term total return promise. And with that overview, I would like to turn the presentation over to Bill Burke, our Chief Financial Officer, for commentary and color of Q3 and year-to-date performance 2016.

Thanks, Wally. And I'd also like to welcome everyone to our first quarterly earnings call. Thank you for your interest in our company. Wally mentioned 2016 has been a good year for Acushnet. Sales and adjusted EBITDA up nicely against the backdrop of continued industry rationalization. This was punctuated by the reorganization efforts, eventual bankruptcy of Golfsmith, a large off course golf specialty retailer in the United States. Given what was a challenging U.S. market in the third quarter, we're pleased with our performance. Our Q3 sales of $332 million were up 3.9%, and on a constant currency basis, up 2.2% over prior year. Our quarterly net loss attributable to Acushnet Holdings was $6.2 million. This is an improvement of $7.8 million over Q3 of last year. And our third quarter adjusted EBITDA was $27 million, up 9% over last year. Our business continues to deliver strong cash flow. Overall, we believe our market momentum across all product categories remain strong. We've continued to grow earnings over what has been a challenging quarter. This has led to strong year-to-date results. Sales of $1,253,000,000 were up $52.6 million or 4.4% over prior year, and on a constant currency basis, up 4.7%. Net income attributable to Acushnet Holdings was $45.9 million, up $26.4 million from last year. And adjusted EBITDA reached $191.4 million, up 3.4% over prior year. Next, I'll take you through revenue. Before I discuss the detailed sales results, there are a couple of important aspects to how our business flows that I'd like to explain. Sales and earnings in our business are skewed to the first half of the calendar year due to the normal seasonality of the golf business. As such, we tend to recognize over 1/5 of our revenues and often upwards 3 quarters of our earnings in the first half of the year, as our customers are ramping up their businesses and going into the new golf season and retail sell-throughs at its highest. As a result, it's helpful to look at our revenues and earnings on a year-to-date basis as the year progresses to get a more comprehensive view of our performance. The second aspect of our business cadence is the 2-year product life cycle in the equipment categories. We follow regular 2-year product cycles in introductions of new balls, drivers, fairways, hybrids, irons, wedges and putters. As such, we generally see stronger growth in these categories during the intro year, but then tend to see that normalized or even decline in the second year of availability. In evaluating our results in the equipment categories, it's often helpful to compare our metrics over a 2-year period to see how the business is faring relative to the last launch cycle. As we discuss our results over time, we may refer to these types of comparisons so I wanted to ensure that you understand the content. As I mentioned earlier, validated revenue in Q3 was $332 million, up almost 4% from Q3 of 2015 and over 2% on constant currency in what was a challenging quarter. Up line growth during the period was driven by a number of factors, but primarily gains in FootJoy golf wear and the Titleist golf club businesses, offset by a decline in Titleist golf balls. This is partly due to it being the second model year of the Pro V1 franchise. The golf ball sales were also impacted by off-course retail channel disruptions in the United States, I'll discuss in the minute, the general market softness in the U.S. Taking a closer look at the reportable segments, Q3 Titleist golf ball revenue was down 5.5% year-over-year and down 6.5% in constant currency. This was driven primarily by a sales volume decline principally in the United States of our U.S. Pro V1 and Pro V1x golf ball models, this being the second model year for the franchise. But what has significantly impacted the golf ball category this year has been the retail disruptions in the off-course channel in the U.S. Bankruptcy of Sports Authority earlier in the year, reorganization efforts of Golfsmith in Q2 both resulted in reduced sell-ins to the trade compared to prior year. Despite these challenges, we're still pleased with our year-on-year results for the ball segment and the strength of the Pro V1 franchise overall. We recently launched the new MyProV1.com website in the U.S. to make it easier for golfers to create and order customized Pro V1 golf balls. We're also excited about the upcoming launch of the next generation Pro V1 and Pro V1x golf balls in Q1 of 2017. New product debuted on tour on October and the performance improvements have been very well-received by players across all professional tour. Our Titleist golf club business had a solid third quarter, up 10.4% versus last year and up 7.7% on constant currency. Driven by success of the new 716 irons, Vokey SM6 wedges and Scotty Cameron putters. Our new 917 drivers and fairways were recently launched and started selling in October. Both trade and consumer response to date has been very positive. So we're very pleased that our club business is up 9% on constant currency basis [Audio Gap] September. This reflects the strong golfer acceptance [Audio Gap] of our new product range introduced. Q3 Titleist golf gear revenue was up 5.2% versus last year and up 3.1% on a constant currency basis primarily driven by volume growth in our travel gear and headwear categories. Year-to-date, the gear business has done very well, up 9.7% on constant currency. So we're also pleased with our performance in this category as well as progress we've made on gear initiatives that we have underway to accelerate growth in this segment. FootJoy golf wear Q3 revenue grew by 7.5% compared to last year and 6.2% on a constant currency basis [Audio Gap] strength in both footwear and apparel. Our new FreeStyle HYPERFLEX II and Pro SL footwear models had been well received by consumers have been the key drivers of our footwear category this year. Earlier in the year, we launched the new FootJoy e-commerce site and introduced a very well-received women's golf leisure apparel line, and we're pleased with the results. Both have contributed to our golf wear business being up 6.8% year-to-date versus last year on constant currency. We expect these initiatives to continue to be successful going through 2017. Looking at revenue across the various geographies, we feel we've had a strong performance. Our U.S. Q3 revenue was down a little less than 1% year-over-year due to the off-course retail channel disruptions I discussed earlier as well as overall soft market conditions in the U.S. Golf retail in the U.S. has been sluggish this year with industry data indicating that retail sale-through in the market is down in all categories. Despite the challenging U.S. market, our U.S. business has proven very resilient, up 1.3% year-to-date versus last year. Results in our major x U.S. markets were strong in both Q3 and year-to-date. Korea was up 14.4% year-over-year in Q3, up 10.8% on constant currency. For the year-to-date period, Korea is up a strong 19.2% on constant currency. Q3 Japan revenue was up 25.5% versus last year, up 5.4% on a constant currency basis. 9 months revenue was up 5.1% on constant currency. EMEA revenue in Q3 was down 2.4% on a reported basis versus last year, but up 6.2% on constant currency and up 10.2% year-to-date, also on constant currency. Common theme across all 3 of these markets has been the strong go-to-market execution by our respective x U.S. teams. Overall, continued product category momentum in the market. This is supported by generally favorable weather and solid rounds of play during the quarter. Turning now to notable items from the Q3 income statement. Q3 gross profit was up 3% year-over-year. Gross margin was 48.7%, down 50 basis points from last year. The decline in margin was primarily due to foreign exchange contract activity where we recorded contract gains in Q3 2015 versus a small contract loss from Q3 2016. We used foreign exchange contracts, typically forward contracts that stabilize our x U.S. cost of sales, a majority which is denominated in U.S. dollars. SG&A expense of $139.1 million was down 3.6% versus last year. To give you a better view of underlying trends, if you exclude the expense associated with our management equity appreciation rights, or EAR Plan, recorded in 2015, SG&A would have been up 4% year-over-year. This was principally due to the increase in bad debt expense related to the Golfsmith bankruptcy and onetime IPO transaction costs. We continue to invest in our R&D in an effort to ensure that we deliver products of the best quality and performance. Q3 R&D expense of $12.5 million was up $1.1 million over Q3 of last year. Including the expense assaulted with the EAR Plan in 2015, R&D was 3.8% of total revenues in Q3, up from 3.4% in the same period last year. Our Q3 net loss attributable to Acushnet Holdings of $6.2 million was improved by $7.8 million from Q3 of last year. Our adjusted EBITDA for Q3 was $27 million, up 9% over last year. This, as with net income attributable to Acushnet Holdings, was largely due to higher income from operations. Adjusted EBITDA margin increased to 8.1% for Q3 2016 compared to 7.7% [Audio Gap] of last year. Here, I'd like to explain the non-GAAP metrics that I just discussed and that we primarily use. Adjusted EBITDA and adjusted EBITDA margin. We utilized adjusted EBITDA for a number of purposes including compliance with our credit agreements, providing investors with the ability to analyze our core operating results between different periods and as an internal measure to evaluate the effectiveness of our business strategies. It is also the primary measure used to evaluate management performance and determine executive compensation. This supplemental measure excludes the impact of certain items that we do not consider indicative of our ongoing performance. These primarily relate to the capital structure that was put in place a time of the acquisition of Acushnet Company from Fortune Brands in 2011, as well as legacy transactions related to the acquisition that are no longer relevant post the IPO. Reconciliation of this measure is available on today's slides. In addition to adjusted EBITDA, we also use adjusted EBITDA margin as a key metric, measures adjusted EBITDA as a percentage of net revenues. This metric is also used for reasons similar to why we utilize adjusted EBITDA that allows us to measure how effectively we're increasing our profitability and/or leveraging our operating structure over time. And finally, looking to the balance sheet. At September 30, we had ample liquidity and capital resources, this being a time of year when our working capital needs are at a low point prior to us commencing our inventory build for the upcoming year. We had approximately $86 million of cash on hand, $255 million of availability under our revolving credit facility, $66 million of availability under other local credit facility. In closing, we're very pleased with our Q3 performance and consolidated results year-to-date. Both revenue and adjusted EBITDA grew nicely. We continue to execute well. And our results serve to validate the resilience of our proven business model. As we approach the close of 2016, we're also pleased to see that the U.S. market is beginning to normalize. Retail channel rationalization underway, which adds a higher level of clarity to our business. But we feel we're well positioned in the market as we move through the fourth quarter and into 2017. With that, I'll now turn over the call to Tony to manage the Q&A. Tony?

Thank you, Bill. Nick, can we open up the lines for questions now, please.

[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan.

So if you parse through some of the Golfsmith noise, which we know is in the business here today and probably for the next couple of quarters, can you talk to some of that normalization? Have you seen any stabilization in the core underlying business? I know things dropped off a little starting in May, but if you could just help us what you're seeing out today and just the best way to think about it going forward.

Matt, David Maher here. As we see this -- as we see the correction play out, certainly, it was largely a Q2 and Q3 event. There has been some stabilization over the last several weeks as a lot of those stores have found homes and reopened over the last several weeks. So in terms of what we're seeing at retail, certainly, you had some disruption and correction in the first part of the year. But as we get into the back half and as we start looking at 2017, Bill mentioned in his opening remarks, we are seeing more clarity in the marketplace and it's becoming more predictable for us. Through events, certainly, you face the reality that you have fewer doors to sell product into, but we are seeing the migration of product sales and retail sales that used to happen at stores that no longer exist. We are seeing that migrate to ongoing doors, both within the Golfsmith franchise and frankly, with other partners of ours.

That's great. And then just a follow-up. Can you just speak to initial reception of the 917 driver and more so, just how the launch measures up to introductions you've had in the past?

Yes. So 917, really, a fourth quarter event for us. It began shipping in October of this year, but we're very pleased. It's one of our most advanced products ever. It requires a whole lot of fitting expertise, which we feel is one of our core competencies. And we see it throughout the markets around the world that when we put our driver technology in the hands of a great fitter, golfers clearly get some terrific performance benefits out of that combination. So we're very pleased. On tour, the conversion has been really quicker than we otherwise would see near 80% of our players on tour have converted into the new 917 products, so we're very pleased with its early start.

Comes from the line of Simeon Siegel from Nomura/Instinet.

This is Julie Kim on for Simeon. So it looks like you ended the quarter with inventory up about 5%. Can you give more color on current inventory levels as you head into holiday and what you've seen on sell-through trends quarter to date?

Sure, this is Bill. In an even numbered year where we have a driver launch or driver fairway launch in the fourth quarter, we are building up more inventory than we would in an iron year. So the primary reason for the buildup is it being a metal year, where we sell more metals in the fourth quarter than we would in an iron launch. Our ball inventory is up slightly due to the less demand in the third quarter but not the primary driver of that.

Comes from the line of Randy Konik from Jefferies.

Just kind of curious, how do you think about your pricing architecture as we're moving across the next few years by category? Do you see room for continued modest price increases in balls, more expansion in clubs? Just want to get some thought process on how you see your pricing kind of moving along over the next few years. That's my first question.

Yes, Randy, 2 themes here. First and foremost, we've got a robust R&D activity. We spent, as mentioned by Wally and Bill, 3% of sales and R&D. So we've got R&D teams in all of our businesses in each of our categories out there looking to create product improvements and deliver greater value to golfers. We certainly take into consideration a lot of factors when we think about pricing, one of which is the gap in delta we have versus the competition. Many of our products are already positioned at a premium to the competitive sets. We need to be mindful of that. In balls, as an example, Pro V1 is about a 20% premium to its nearest competitors around the world. We take that into consideration as well. So there's no one ethos we apply when we look to establish pricing. We're certainly out looking to bring improved product to market, but we do have taken into consideration the realities of our positioning versus the competition.

And then just on the cost side of things, do you envision if you think about the cost of goods, do you see any kind of noticeable trend changes over the foreseeable future or is it pretty much steady as she goes? And when you look about -- look to the business from a geographic potential or geographic dispersion, do you -- are there any other types of geographies where you're underpenetrated by specific product category or under margins per se where you can see opportunity in those areas of the world or different areas of the world? Just curious.

Okay, Randy, I'll take the cost of goods sold section. In the ball category, we are starting to see modest increases in polybutadiene, which is the core material in our balls and that's likely -- we've seen them modestly increase, I think, and going into next year, but not a significant increase yet. And I think there's some factors that will stabilize that in terms of how the oil industry reacts to the dynamics of OPEC's decisions and things like that. In the club category, we're really locked in, and we are seeing it's really based on the amount of the components and what we decide and the technology we want to put into our produces, but nothing significant and it's certainly built into our optimum forecast. And in the soft goods area, in leather, synthetic leather and materials, we're seeing modest increases below -- it's very low single digits. So nothing really significant on the horizon right now.

As we think about key markets of the U.S. and EMEA and Japan and Korea, certainly, mature markets. We're building out infrastructures around the world. We're more evolved and advanced in some areas than in others. As we think about the nearest opportunities for low-hanging fruits, certainly, 2 themes come to mind. First off, FootJoy, an opportunity around the world as we continue to build that business in key markets, certainly, Japan and Korea, you've seen from our results this year. And then secondly, we have share upside in balls, in clubs, in all categories around the world. Certainly, the share upside opportunity is not consistent market to market and we look at some markets that tends to see greater upside than we do elsewhere. So yes, 2 main areas would be FootJoy and in x U.S. markets and then again ball shares. And frankly, as we said throughout the last several months, when we look at growth opportunities, we do see white space growth opportunities every product category, every region, but it's not identical market to market.

Comes from the line of Mike Swartz from SunTrust.

I apologize if I missed it, but did you quantify what the impact of Golfsmith was to the quarter? I think you said organic growth or growth x currency was up a little over 2%. But I guess what would that have been excluding kind of the disruption going on there?

Well, Golfsmith was a large account, so was Golf Town, who was a surviving account. We did not quantify it, but we it was -- we look at this, this way, that there's going to be a contraction here in the third quarter due to sell-in and into the fourth quarter as we have less doors. But we feel that the majority of that sustainable volume is going to eventually find a demand home, whether that be on-course, off-course, our golf specialty or sporting goods. So we've built that into -- certainly considered that into our outlook, and we feel that the viable part of that business will be sustainable going into '17 and the following years.

And correct me if I'm wrong, but it sounds like maybe some of that demand migration is occurring faster than maybe you would have originally anticipated?

I don't know if it's happening faster, but it's certainly happening about as we've expected.

Okay. And just in terms of the retail backdrop, I know we've talked about the softness in the markets since midyear, could you give us any -- I don't know -- quantification or just sense of maybe what you've seen in the past couple of weeks that gives you a little more comfort, confidence going into '17?

I think 3 themes emerge as we look at -- and we look at -- and this really is a U.S. issue [Audio Gap] Canada due to a degree also and that Golf Town's a part of Golfsmith and is a big player Canada, but I'll speak in terms of the U.S. market. The 3 themes things we've seen drive the correction of 2016 have been obviously a closure of retail doors. We've seen near 500 doors close. Keep in mind, there's a bit a rounds of play reality that we're dealing with in 2016 as well. First quarter rounds were up 5.5%, but in key markets of Florida and California, they were actually down 10%, so that provides a bit of a different nuance in terms of the correlation between rounds played and equipment sales. And then thirdly, the market is selling less close-out discounted equipment and this contributes to the broader softness. Now that said, I think that's a logical and necessary part of the correction as a lot of those volume tended to be sold at a loss. But that's really the story of the first several months and quarters of the year. In terms of what we're seeing, I'll echo Bill's comments. We're seeing a lot more clarity in terms of us being able to predict our business, activities migrating to the players that are left standing, activities migrating to other channels in our business. So is it a one-for-one migration? Not yet, but we are seeing that migration happen about as we expected.

Comes from the line of William Schmitz from Deutsche Bank.

Can you just talk about the pro forma or adjusted net income? So I mean, it's hard for us to kind of pull it out of the public filing, but can you just give us help on the -- just give us a number what you think pro forma net income would be x to capital structure changes in the IPO and then the share count also because that wasn't in the press release either and I have a real question.

We have -- the pro forma or adjusted net income, we really have used as a measure of valuation measure during our initial public offering. It's not a metric we plan on using on a go-forward basis. We have not created a schedule or issued a pro forma on that, but it could easily be created by looking at adjusted EBITDA in the same items that were used in our prospectus.

Okay. Can you just help us maybe just the ongoing interest expense and what the share count is? Can you give me that?

Yes. The ongoing share count is going to be approximately 32 million shares outstanding and obviously, it's not giving rise to the effect of any of the RSPSU[indiscernible] used and obviously, after 180 days, the lockup expires for the other financial investors for the other 16% of the shares outstanding. And as far as interest expense, we're expecting somewhere around $18 million to $20 million in total, which is significantly down against prior years with the capital structure we had in place with the convertible notes and our bonds and warrants.

Okay. All right. [indiscernible] I'll follow up. Then in terms of international growth, is it category growth? Is it share gain? Or is it distribution? Is there a way to kind of quantify it really because, obviously, the growth especially in developed regions is really strong. Can you just talk about what's driving that?

Yes. It isn't distribution growth. It's product. It's execution. We worked real hard over the last several years building out our infrastructures in major market. We're exporting best practices. We're shifting resources from sell-in to sell-through. The team's executing at a very high level. We're picking up share. Our product messaging is getting tighter and tighter. So I think more broadly speaking, in terms of what's happening around the world, it's happening in all product categories. It's happening in most regions. And it's largely a function of our route-to-market enhancements and improvements, and we're seeing dividends from a lot of the investments we've made in the last several years in some of those key markets. Examples would be custom club assembly capabilities, custom ball imprinting capabilities in key markets around the world.

Okay. Great. And then just one last if could sneak it in. can you just tell us what the percentage of business is on course now, after Edwin Watts and Golfsmith and then what your views on pro shop inventory because I think that's probably driving the business next year?

So quick commentary. More than half our business largely is outside the U.S. Of the U.S. piece, more than half our business is on course. And in terms of inventories, specific to the on-course channel, we've got the largest and we think most qualified sales force in the industry. One of their responsibilities, primary responsibility is to manage inventories so we feel good about our inventory position at this point in time and at most points in time. And then more broadly in terms of the marketplace inventories, certainly, this has been a year of correction and contraction. So not surprisingly, you're seeing inventories that are down from historical levels.

Okay. That's helpful. Is your sales force paid on sell-in or sell-through?

Sorry. Pardon me. Would you repeat that question?

Sorry. I [indiscernible] for time and I promise it's the last one, but is your sales force paid on sell-in or sell-through in terms of the compensation metrics?

The simplest way to answer that is all of the above. Certainly, there's a big component of their compensation that's tied to sell-in. But more broadly, they're also attached to company performance, which has a meaningful sell-through component to it.

Comes from the line of Dan Wewer from Raymond James.

So Bill, we've seen a lot of volatility in the foreign exchange rates during the past month. Can you talk about how your hedges are set up in the fourth quarter? And how this could impact items such as gross margin rate compared to a year ago? Perhaps you can remind us about gains and losses you had a year ago and how we're set up for the fourth quarter?

Yes. At September 30, we had about $350 million worth of contracts outstanding. And so we felt we're well positioned for the year and certainly for the fourth quarter. We took a longer view of our currency hedging program. So in the terms of the immediate yen's weakening as well as the secondary Brexit, a drop that we saw in the pound sterling, we were well positioned for the fourth quarter and into the first quarter. So it's -- we are watching it closely. With the yen at around JPY 113 to JPY 114, we need to be cautious about how we're planning and that's also going to be built into our planning for next year, but it's really not so much a fourth quarter issue because of our long term -- or mid- to long-term view of currencies. But it is an issue since the election that -- and the US dollar strengthening that we have to build into our planning.

You noted that the gross margin's decline of 50 basis points was influenced by the unfavorable changes in ForEx compared to the gains a year ago. If you were to look at just the merchandise margins, let's say, gross margins without the impact of ForEx, how did that look year-over-year?

It would be about the same. And I'd like to not -- first off, I'll start by saying that we don't really separate the 2 because we look at our foreign exchange and our currency policy as a way of stabilizing pricing in the market. So we cannot really look back and take out a foreign currency gain or foreign currency loss because a decision might have been made to increase prices absent those contracts. So we have a broad awareness x U.S. of our positions, our retailer is x U.S. are very aware of that. So we need to -- what we're trying to do is stabilize that decision, not have to make that decision. So if you look last year to this year, if we had a gain last year, well, if we didn't, we might have increased prices earlier in the year. So when you look at 50 basis points year-on-year, we like to think that we're holding that margin despite that. So it's a really integral equation you need to look at.

Last question, I guess, I have for now. On golf ball, revenues down 3.6% year-to-date. I know you called out the adverse impact of Sports Authority and Golfsmith. If you were look at the golf ball revenues outside the U.S., where you haven't had this 2 events, how are golf ball sales outside the U.S. performing year-to-date?

Yes, so we're doing better outside the U.S. than in the U.S. share gains in markets outside the U.S. And as Bill mentioned, I think this is really a commentary on our 2-year product life cycles. And starting to collect in the beginning of 2015, we launched Pro V1 and we want a 2-year run with that product. We tend to take a couple of steps forward from a share vantage point in year 1. Sometimes, we take a step back in year 2, which was the case this year, offset a bit by some of the newer introductions of NXT Tour and Titleist Velocity golf balls. So really, the story of the ball business is we like to look at it in 2-year blocks. In a 2-year block, our share is up. We feel really good about that. Our share's about 4 plus times the share of our nearest competitor. So really, the theme and you'll hear us talk more about this in time, when we look at certain businesses, we really like to look at it in 2-year segments, consistent with our product life cycles.

Yes, Dan, don't forget at the Research Analyst Day, we talked about what we're trying to do outside the United States is do some of the things that we've done for a long time in the U.S. the golf ball fitting, the customization and we're seeing that contribute to significant growth in markets outside the United States.

Comes from the line of Dave King from Roth Capital.

I guess, first, with Nike exiting the market, to what extent you think Titleist is positioned to capture that share? Is that already reflected into this year's results? And what other things are you guys doing to take advantage of that whether it's from a hiring perspective or sponsorship perspective?

Twofold. First off, a lot of the Nike share was at price points where we don't necessarily compete. So it was at lower end shares. So not sure if we see a whole lot of revenue upside there. There may be some but don't see a lot of whole -- a lot of revenue migration. We think the broader advantage and benefit of this, part of the broader correction that Wally spoke about, you just -- you're going to have less dollars. You're going to have less what we would consider to be a rational spending in the marketplace. You're going to have -- so we should pick up some benefits in terms of advertising, in terms of route-to-market execution. Certainly, some dollars will be pulled out of promotion in terms of tour and how they spend their money. So really twofold. One, not a whole lot of revenue migration, but it should contribute to the broader endgame of a more rational and fundamentally balanced golf marketplace.

Okay, that's helpful. And then maybe shifting gears, the premium ball trends, it seems like it's continuing, in fact that Pro V1 probably part of drivers of that. I guess, how are you thinking about further growing your share sort of in the super premium kind of category? What are you doing to combat from a share gains you've seen out there in the $30 to $40 range? Are you guys going to try to go after that in anyway? I mean, where I guess -- just what are some high-level thoughts there?

High level, on our Pro V1 franchise, you're going to see it more in the next couple of months as we launch a new product. First and foremost, that game has to be won with great product. We feel we've got product that's only going to get better. We're spending a whole lot of time and resources on golfer education and golf ball fitting, making sure golfers are playing the right product that gives us a couple of opportunities. One, it allows us to share shift from the competition. And two, it allows us to trade up golfers who currently may play in other Titleist models. So product and golfer connection, really the two themes to driving our ball business forward.

Comes from the line of Scott Hamann from KeyBanc Capital.

My question is really just on the custom fitting process. Can you kind of remind us where you are as a percentage of the total across the categories of hardgoods or however you look at it? And then going forward, do you have the infrastructure in place to grow that business the way you want to? I know you made some comments around international and we have less visibility there, maybe even on the FootJoy platform as you think about some of the things that you're doing there. So just generally, some thoughts around that.

Yes, so first part, clubs, I think we're farthest of all and mature in terms of our -- the buildout of our fitting network in the United States. We have over 2,500 qualified experts fitters. We feel golfers have great opportunities to seek out and connect with a fitter because we know that's the best way to get the best equipment in your hands. We're building out networks around the world. We're further along in some markets than in others. We feel real good about the progress we've made in recent years in U.K. and certainly, in Japan and Korea. The next step for us and the next frontier for us is to build out the demand creation opportunities. We're continuing to shift resources toward tech reps, towards fittings reps to continue to provide more experienced for golfers to become custom fit. And again, broadly speaking, we see we're far downfield in the U.S. We still have continued upside and opportunity, and we see that in terms of the percentage of our business that's customed in the U.S. versus around the world. So we look to grow the custom business around the world. With the FootJoy, that's a great opportunity for us. We have a performance track fitting system that we've piloted in 2016. We're going to see expansion around the world in 2017 and beyond. And we think footwear fitting to drive improved performance is one of the next frontiers for FootJoy. So we're really excited about that in the years ahead.

Comes from the line of Kimberly Greenberger from Morgan Stanley.

This is Eddie Ryan on for Kimberly. First question is how are you thinking about potential corporate tax reform looking forward? Have you valuated how some of the tax plans proposed by the Republicans would affect you relative to the current U.S. corporate tax structure?

Yes. We're looking at that, but I think we're more concerned or not concerned but more involved in looking at the BEPS initiatives, the base earnings profit erosion initiatives that are being enacted by the OECD and some of the individual countries independently like the U.K. So I think there's actually more clarity around what's going to be happening on that front than there is around what the new administration will do. And it is really evolving thing here. We -- basically, we're going -- it's going to be probably 2 or 3 year period before we can see how that's going to play out. And so at this point in time, we don't have any significant takeaways from that, that would be a materially effect what we think -- our read is right now because we really -- we pay trading most of our earnings to the U.S.

Got it. And next question, can you just talk about some of the margin drivers for golf wear going forward? And as you see that business evolving over time, how the -- maybe it's the mix that changes, maybe it's the pricing that changes. How are you seeing that?

You're talking about our FootJoy foot wear business and apparel?

FootJoy golf wear more broadly, so apparel and footwear.

Which is all of FootJoy. So a couple of ways to get at that one. A good example this year is products like HYPERFLEX and the recent Pro SL we've launched, premium performance higher ASP products. That's part of it. Better managing our mix, better managing returns, better managing our spend. The apparel business, we see less than 6% of that business closed out or discounted, so we certainly manage the life cycles of that business. And not unlike all of our product categories, we're continually looking for new improvements to drive golf for benefit and drive positioning and just a broader, more healthy business. I think a good point to make as well and we talk a lot about custom in the ball space and club space, more than half our apparel business at FootJoy is logo-ed as well. So that's a piece to -- one thing we know about logo or customized apparel, that's all sold at a premium full price. So it further mitigates our exposure to any kind of discounting that often plagues software apparel players.

And then one last question, please.

Go ahead, Eddie.

So I just had one last question, very quickly. Can you just talk very briefly on how the Japanese golf equipment market differs from the U.S. market and how your strategy has evolved there?

Yes, I'll handle that one. Eddie, this is Wally. In Japan, you've got a couple of things going on. You've got super priced segments in both clubs and balls that you've got to be attuned to and you've got to be regionally responsive to. The Japanese golfer launch conditions are -- they're different than Western golfer launch conditions for a lot of anatomical and background reasons that is a longer than this discussion allows. But that's why we're encouraged because both at the super premium price point as well as the premium price point, Japan has been wedded to, what I would call the indoor launch monitor, which is driver-centric and just attempting to maximize golf ball speed off the driver. That's not really custom fitting by our definition. So we look at the country and we think the country is a robust opportunity as we roll out our custom fitting infrastructure. But getting back to your question, there are 2 key aspects to it. Number one, there is a super premium priced segment. But number two, the launch condition requirements are different for the Japanese golfer than they are the Western golfer.

Comes from the line of Casey Alexander, Compass Point Research.

For the last 5 years, the company has been operating with a very leveraged capital structure, which requires an obvious amount of discipline to operate under that capital structure. So I'm curious from a higher level what type of opportunities that the management team sees coming from operating with a much lower leverage structure going forward.

Yes. While, certainly, we think we've come out and made a statement with a $35 million annual dividend to be commenced in the first quarter of next year, which at present would be a 2.5% yield. And obviously, we're going to be looking at that, a dividend policy on an ongoing basis as a way to accrete value to shareholders. But there's a number of ways that we can do that as well. We can decrease debt. We can always prepay our debt without penalty and there's always us looking at some opportunities in the market, whether they be small or bolt-on acquisitions or whatever. But at present, that's still TBD right now, but we have a number of levers we can pull with that.

Okay, great. Secondly, do you feel as though -- there basically 4 companies that have about 80% of the market share now. Does the reduced competition by companies leaving the space over the long term potentially serve to harden the gross margins in the business?

We look at this correction that you speak of as generating industry fundamentals that are just a whole lot more healthy and stable and sound for those left standing. When and if the correction completes itself. So we think we're well positioned to be one of those companies left standing. If you look back over the years, we certainly have to compete with a whole lot of discounting. We've had to compete with a whole lot of excess supply in every facet of the marketplace and that's very challenging and one of our points of optimism comes from we do believe that the conditions and fundamentals going forward are going to be better than they've been over the last several years.

We have time for one more question and then we'll have a few concluding comments from Wally.

Your last question comes from the line of Christian Buss from Crédit Suisse.

Just wondering if you could talk a little bit about the Korean market and what you're seeing there. The strength there's been impressive. How comfortable are you with channel inventories, which have sometimes been a problem in that market for some of our other companies?

Yes, we're, Christian -- Wally, I'll handle that one. We're comfortable with our inventory position. You're absolutely right. For a period, probably in 1985 to 2000, it was very much a consignment-centric space, and a lot of the people we're doing business on consignment terms. When we entered the market 12 years ago, we went the different direction. We've not oversaturated and taken advantage of everybody that wants to have a direct account application and arrangement with us. So we've managed the number of doors that we have open, and we've attempted to download the best practice that we've seen in both the U.S. as well as Japan. And I think that has a lot to do with the success that we're having. It's a return on the infrastructure investment that we made starting in 2004, 2006. So for 10 years, we've been investing in people, investing in the account relationships and now, we're starting to see those returns. Okay, just to wrap it up. We've heard from the team that we're continuing to deliver in the face of the ongoing correction. And as we pointed out the correction, while painful, it does bode well going forward and it certainly the industry with a better set of go-forward fundamentals. And last but not least, there is still time to give the #1 gift in golf, personalized Titleist golf balls available through your favorite golf shop or MyProV1.com, and we look forward to talking with you early next year. Thanks to everybody for joining us today.

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