Acushnet Holdings Corp. (GOLF) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2017 Acushnet Holdings Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. 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 financial results for the second quarter of 2017. This morning we are joined by Acushnet COO, David Maher. David will provide commentary on the conditions in the golf industry and discuss the performance of our business across our segments and geographies. Next, Acushnet CFO, Bill Burke, will spend some time discussing our overall financial results for the quarter. After the prepared remarks, we will be joined Acushnet CEO, Wally Uihlein and then we will 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 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 our filings with the U.S. Securities and Exchange Commission. Throughout this discussion we will be making reference to non-GAAP financial metrics, including items, such as, revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today's press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission. With that, it is my pleasure to introduce Acushnet COO, David Maher. David?

Thanks, Tony. Good morning from Fairhaven, Massachusetts and thank you to all who are participating on today’s call. I look forward to sharing our second quarter and first half operating results, golf market assessment and outlook for the balance of 2017. We are pleased to leave with the ball count from this week’s PGA Championship at Quail Hollow at 62%, it is a 5 percentage points from last year. We wish good luck to all participants and especially our 20 PGA club professional partners who have so impressively earned their way into this year’s final major. Golf fans are poised for an exciting run as the PGA Championship is followed by the U.S. Men's and Women's Emitters, Solheim Cup, FedEx Cup Playoffs and Presidents Cup over the course of the next several weeks. Before outlining our operating results, I'll reiterate Acushnet’s commitment to providing shareholders with a long-term total return investment opportunity. Acushnet’s playbook consists of an organization-wide focus on the games dedicated golfer, a broad product category portfolio, a favorable mix of consumables and durables, golf brands that resonate with the commercial core of the golf industry, strong pyramid of influence validation and a desirable concentration in high margin equipment segments. This DNA of the Acushnet company we believe when's resilience to our long-term performance. Accordingly, I'm pleased to announce that earlier today our Board of Directors declared a quarterly cash dividend of $0.12 per share were $8.9 million in aggregate, payable on September 15 to shareholders of record as of September 1. And now looking at our results for the second quarter and first half, Acushnet posted second quarter sales of $428 million, down 7.6% on a reported basis and 6.6% on constant currency. For the first half of 2017, sales of $861.6 million were up 4.6% from last year, or 3.8% on constant currency. Adjusted EBITDA for the quarter was $71.8 million, down 13.5% from last year and $150.3 million for the half, a 7.4% decline. These results were influenced by a variety of factors, including weather and the ongoing U.S. retail correction, which I will expand upon. The U.S. market was particularly impacted by wet spring. According to Golf Datatech rounds of play in the mid-Atlantic, Northeast, Upper Midwest and West Coast were down between 7% and 13% for the half as rainfall was up significantly in each of these regions. New York, home to many of our investment partners and one of the industry's top golf markets had an especially wet spring causing a 20% decline in rounds through June. This has had an obvious impact on consumable purchases such as Golf Balls and Golf Gloves, while also limiting overall golf shop traffic and our partner’s ability to conduct ball and club fittings, which have become so important to optimizing golfer performance and product satisfaction. Looking at our business regionally, U.S. sales for the second quarter were off 8.5% and down 5.8% for the first half. The U.S. retail market is entering the fifth quarter of what we see to be an eight quarter to 10 quarter correction cycle. Now that we ended the back half of 2017 much of the pain from this correction is behind us, as comp sales declines to now close locations will be reduced. The migration of volume and market shakeout however will continue into 2018 at which point we expect to settle into a new normal with the end game being U.S. golf market that is fundamentally more sound and with fewer retailers and OEMs competing for a bit available revenue and profits. As we said before this journey while painful at times as we deal with 450 fewer Golf Balls distribution points and 100 fewer full product line doors reflects the necessary correction of the market that had too much retail square footage, too many golf courses and arguably too many OEMs. We are confident that the U.S. market is approaching a healthier state. And now looking outside the U.S., MEA second quarter sales were off 3.4% on constant currency and for the half were down 1.2% on level FX. Copping against record sales in 2016, we’ve seen MEA markets holding strong in the midst of Brexit related uncertainties, rounds of play in the region are up in the low to mid single-digit range for the half. Second quarter sales in Japan are most Golf Club centric market were off 13.4% for the quarter and down 12% for the half, both periods reflected in constant currency. Japan started the year slowly in Q1 due to poor weather. However, rounds rebounded nicely in Q2. The Japan retail market, however, remain soft in part due to fewer visits and spending by the affluent Chinese tourist golfer. And Korea remains strong and continues to maximize their opportunities, with constant currency sales increasing 7.5% in the quarter and 14.7% for the half. Korea’s growth comes from across the board sales gains in Golf Balls, Clubs, Gear and FootJoy. And now looking at our four business segments starting with Golf Balls, sales of the number one ball in golf were off 5.6% for the quarter and off 1.7% for the half, both on constant currency. First half Golf Balls sales gains in the MEA and Asia-Pacific regions were not enough to offset the decline in North America. The Pro V1 franchise had a strong first half with all markets posting sales gains. And overall, we are very pleased with tour and market acceptance of new Pro V1 and Pro V1x models. Pro V1 gain market share on an off course for the first half in the U.S. market, our largest and we generated similar share gains outside the United States. The first half presented some challenges for Titleist performance small Golf Balls, their second year in market made more difficult by increased competitive promotional activity. We recognize the need to reinvigorate our performance model lineup and our R&D team is actively engaged in this process as we prepare to launch new products in early 2018. Titleist club sales are down 20.3% for the quarter and 15.6% for the half, both on constant currency. Titleist irons, wedges and putters have performed well and as expected in their second years. The Titleist driver business has been challenging for a couple of reasons. First, as we said on the first quarter call, drivers were impacted early in the year by competitive activity and aggressive ad spending. This continued into the second quarter when we were also negatively impacted by poor weather in key markets, which limited our ability to connect fitting to the degree we had planned for. We are confident that our 917 driver when fit by a qualified club fitter delivers best-in-class distance and total game performance. Admittedly, we did not generate enough of these fittings and this is reflected in our first half performance. Our team recognizes the need to more effectively activate driver trial and fittings in this dynamic driver market. We are looking forward to the launch of the new family of 718 irons and 818 hybrids at this fall, really response from the tour and our trade partners has been very positive and we are especially excited to introduce AP3, a newest member of the Titleist advance performance iron family. In Titleist Gears, sales increased 6.3% in Q2 and grew 6.7% for the first half, both on constant currency. Growth in each of our gear categories, golf bags, headwear, gloves and travel affirms the progress our team is making in building out supply chain capabilities with particular focus on product performance, quality, design and materials. Our Gear team continues to strengthen our product development and supply chain capabilities which give us great confidence around each of the categories that makeup our Gear segment. And finally, moving to FootJoy, the number one shoe and glove in golf, second quarter sales were off 4.1% and first half sales were down 2% on constant currency. Much of this decline is attributable to U.S. market and its reduced store count. There are many positives within the FootJoy business which are worth highlighting. Pro/SL quickly grew to become number one spike less shoe on the U.S. PGA and European tours and the number one spike less shoe in golf. FootJoy apparel is firmly solidified as a top three selling brand in United States and held the top spot in the months of April and May. And the FootJoy glove franchise continues to be the clear market leader around the world. FootJoy bring strong brand momentum in the back half of the year fueled by newly launched D.N.A. Helix golf footwear where we are seeing fall apparel collection in the new tour LTS rain wear collection, each of these products will make a rocket debuts later this year. In closing, I will comment on Titleist and FootJoy success across the worldwide tours throughout the first half of the year. Titleist Golf Balls usage across the worldwide tours is at 72%, a 6 point increase last year, but FootJoy shoe count for the first half indexes at a commanding 62% around the world of professional golf. Additionally, it has been gratifying to see the several players who have recently return to Titleist Golf Balls, Vokey wedges and/or Scotty Cameron putter in 2017 are playing some of the best golf of their carriers. Year-to-date, Titleist Golf Balls have won 68% of the events across worldwide tours, highlighted by Jordan Spieth’s resilient victory at Royal Birkdale with the new Pro V1x golf ball and 14 Titleist Golf Clubs in his bag. On behalf of my fellow associates we entered the second half 2017 with excitement around our core positions and upcoming new product launches and cautious optimism towards the global golf markets. Field inventories are in line for this time of year and we look forward to continue executing on our promise to generate a long-term total return investment opportunity for our supportive shareholders. And now, Bill will provide an overview of our financial performance.

Thanks, David, and good morning to everyone on the call. As David commented earlier, consolidated revenue in the quarter was $428 million, down 7.6% year-over-year and down 6.6% in constant currency. Q2 gross profit was $222.9 million, down 6.3% from last year and gross margin was 52.1%, up 70 basis points year-over-year. In the quarter, the -- increase in gross margin was primarily driven by higher average selling prices in Titleist Golf Clubs and a favorable mix shift in the FootJoy footwear category. Looking at operating expenses, SG&A of $151.8 million, was down about 4% versus last year. There were a number of factors that gave rise to the $6.3 million decline, including non-repeating IPO transaction costs last year, lower advertising and professional tour costs and a decrease in our bad debt expense. These benefits were partially offset by an increase in share based compensation and higher consulting, legal and administrative costs, as a result of this now operating as a public company. In Q2, research and development expense of $12.1 million was up 3.4% over last year. This increase was mainly due to additional costs to support our new product introductions and employee -related expenses. Q2 interest expense of $4.9 million decreased by about $9.7 million from last year. This decline is primarily due to lower average outstanding borrowings versus last year as a result of the conversion of our previously outstanding convertible notes to common stock at the time of the IPO. In addition, it reflects lower interest rates as a result of our April 2016 refinancing. Other expense was $200,000, down $2.3 million versus Q2 of last year. This change was primarily due to a non-cash fair value loss on our common stock warrants recorded in Q2 of 2016. The warrants no longer exist as they were converted to common stock in July of last year. Our Q2 effective tax rate was 34.9%, compared to 44.4% for the same period last year. The decrease in ETR was primarily driven by the absence of certain discrete items in Q2 2016, primarily the loss on the common stock warrants, which are not tax affected and IPO transaction costs, which are non-deductible. As a result, our Q2 net income attributable to Acushnet Holdings of $33 million improved by about $6 million from Q2 of last year. As a result of both lower interest expense and lower other expense, partially offset by lower income from operations. For the quarter, our adjusted EBITDA was $71.8 million, down 13.5% from last year. There are still a number of one-time items that affect the year-to-year comparisons, so we provide a reconciliation of adjusted EBITDA in our earnings release, as well as in slide presentation. Recapping our year-to-date results, sales of $861.6 million were down 4.6% to last year and 3.8% on constant currency. Our year-to-date gross margin of 52.1%, a 70 basis point improvement to last year reflects a favorable mix shift to the Pro V1 franchise, as well as margin improvements in the FootJoy Golf Wear category, which included a favorable mix shift in footwear along with lower material costs in our apparel business. SG&A for the first half was $299.8 million, down $13.6 million from last year and again reflects the absence of a number of one-time charges in 2016, which are detailed in our reconciliation adjusted EBITDA. These were offset primarily by an increase in share-based compensation and higher consulting, legal and administrative costs, associated with our public company status. Research and development expense of $24.6 million was up $1.8 million compared to last year, mainly due to increase experimental activity in the Clubs segment, as well as an increase in employee-related costs. Interest expense decreased by $20.6 million to $7.8 million for the first half of the year and similar to Q2 was driven by lower outstanding borrowings, as well as lower interest rates. We had other income of $500,000 for the first half versus $3.8 million of expense last year, largely due to the absence of recognize losses on our previously outstanding common stock warrants. Our year-to-date effective tax rate was 35.6%, down from 42.4% last year and is in line with our ongoing run rate for the year, absent any significant shift in our geographic mix of earnings or any discrete items that may arise. As a result, net income attributable to Acushnet Holdings for the first half was $71.1 million, up $20.4 million over prior year. Year-to-date, adjusted EBITDA was $150.3 million, down $12 million or 7.4% year-over-year. Given the first half challenges, our solid margin improvement along with good cost controls have allowed us to whether the market conditions reasonably well as we move into the second half. Looking to the balance sheet, we had $77.7 million of unrestricted cash on hand as of June 30, 2017. Total debt outstanding as of June 30th was approximately $534 million or 2.47x LTM adjusted EBITDA, a significant reduction from our first quarter levels as we are now into our seasonal collection cycle. CapEx in the quarter was $8.8 million and at present we are still forecasting total year CapEx in the $26 million range. In regards to guidance, we remain optimistic on our prospects for the full year and as such are reaffirming our previously communicated adjusted EBITDA guidance to be in the range of $220 million to $230 million. Given the first half market challenges, we are revising our full year reported sales guidance to be in the range of $1,545 billion to $1,565 billion and our constant currency revenue to be in the range of a 0.7% decline to prior year to a year-over-year increase of 0.6%. In summary, while we face significant challenges in Q2, our team is looking to deliver a solid second half, which we believe will continue to support the underlying strength and resiliency of our proven business model. With that, I'll now turn the call over to Tony for Q&A.

Thanks, Bill. Sarah, can we now open up the lines for questions. Thanks.

Certainly. [Operator Instructions] Your first question comes from the line of Matthew Boss from J.P. Morgan. Your line is open.

Hi, guys. Good morning. This is actually Steve Zaccone on for Matt today. Thanks for taking my questions. So my question is around the guidance adjustments for the full year. So, first looking at revenue, what's the best way to think about the implied growth rate in the second half of the year, as first half revenue was down 4.5% year-over-year, so what’s giving you the underlying confidence that you will see growth in the second half of the year and then any way to think about the quarterly cadence of revenue growth would be helpful?

Yeah. We are expecting about a 4.5% increase in the back half, and as Dave alluded to earlier, we're very optimistic about the new 718 launch. We received great feedback on that, as well as a number of new FootJoy products that are already in the markets Pro/SL that’s have continued success beyond our anticipation, as well as a new DNA Helix and the fall line management introducing apparel. So we still feel pretty good about that. Most of those launches are going to be more fourth quarter than third quarter.

Okay. And then, I guess, just shifting to EBITDA, can you just explain the rationale, why not lower the EBITDA guidance, because it looks like that also implies a pretty big acceleration in the second half of the year?

Sure. With EBITDA, if you look in the first half of my comments, we've -- our gross margins have really been healthy and largely -- are not largely but mitigated a good part of the sales impact year-on-year, a favorable mix shift to the Pro V1 franchise with very strong improve margins we have in FootJoy footwear due to favorable mix, as well as lower apparel costs. So we feel pretty good about our margins. Obviously, we don’t -- we still think we have tailwinds there as we get to the back half of the year. So that's part of it and the second part of it we have exercised pretty good cost control year-to-date. We intend to do that for the back half.

Okay. Thanks very much guys.

Thank you, Steve. Next question please.

Your next question comes from the line of Dave King from ROTH Capital. Your line is open. Dave King, your line is open.

Sorry, I was on the, forgive me. I guess, sticking with that line of questioning a little bit on the expenses. I guess, how much of the EBITDA guidance in the back half is sort of the lower advertising and tour spending had in the quarter. I guess, I am trying to get a sense of how -- what leverage can you pull to kind of still hit that EBITDA guidance versus coming to gross margin. Thank you.

Most of its coming from our enthusiasm about out launches as much as anything. We don't intend on slowing down our spending especially during the launch period. So when you look at leverage we've -- I think we have change -- I know we've seen at least the worst as Dave said the pain behind us. So we're looking forward to as we move forward in the back half of the year to achieving it in that sense. So, again, it's largely from the product launches itself.

Okay. That helps. And then, I am trying to understand what’s going on Pro V, it sounds like that was up in the first half. Understandably, first quarter you had a fair amount of sell-in, any sense on how the Q2 sell-through trended and then how should we be thinking about that as we progress through the year in that contribution in the back half in the revenue guidance? Thanks.

So, Dave, we look at -- we tend to look at share in blocks and we look at in the first half and I will give you some guidance as to how it compares versus a year ago and an even going back two years ago when we last launched Pro V1. So we see for the half share up on course, up off course combined, obviously, up a couple points for ’16, up a point for ‘15 our last launch window. So we feel real good about what's played out with Pro V1 during the first half of the year. As we’ve said in prior calls, we start extra strong with new product and a whole lot of noise sometimes in the summer time you see some competitive activity and some promotional activity, but where we stand today six months into a launch we feel real good about what's playing out with Pro V1.

Okay. And then, lastly, from me on Pro V, have you seen the consumer or green grass switch to one ball versus the other. I guess, I remember at the PGA show, you guys highlighted the two were sort of going more to one ball versus the other, have you seen that happen with the consumer at all with some of your green grass stores at all, is there anything to note there? Thanks.

Yeah. We have seen in our share data a modest shift towards Pro V1 and fair to say that Pro V1x is held strong and a lot of our growth is coming Pro V1, not a dramatic swing and that, frankly, didn't surprise us Pro V1 the product changes were more meaningful intangible Pro V1 was longer, the new Pro V1 was longer than its predecessor. So we didn't -- we weren’t surprised to see a bit of a shift swing towards Pro V1, again Datatech affirms that. But it's not an overwhelming swing one way or the other.

Yeah. Okay. Thank you, Dave. Next question please.

Yeah. Thanks.

Thank you. Your next question comes from the line of Dan Wewer from Raymond James. Your line is open.

Dave, I want to follow-up on the comments about the product launches, making a lot more optimistic on the second half of the year. I thought -- it was my understanding that, while the irons stuff launch in 4Q, it’s not until you -- are able to complete the fittings until the following spring that you had really see the revenue benefit from the launch of the new irons. Is that not correct?

Well, certainly, as compared to metals, when we launch metals, you get more of an impact at launch during that first quarter than you do with irons, because again it is so fitting based. That said, we are very optimistic about the early response to product and particularly AP3. Yeah, the story in the launch window for iron is tends to be little lot longer, but we do expect to see a nice movement during that first period in the fall of 2018 -- 2017 rather.

And when you …

It is a different cadence than you get with metals.

Sure. When you look at your revenue forecast up 4.5% during the second half of the year, how are you taking into account the challenges for the 917 driver and fairways that you alluded to?

Yeah. We have certainly revised our forecast, as I said, in my opening remarks, it's incumbent upon us to continue to activate our fitting network and the team is actively pursuing more, more trial and fitting of 917. We are confident in the product for reasons I mentioned on the outset. Numbers didn't realize that the way we had anticipated. So we have reflected current state of affairs for 917 with the expectation to that the team is going to continue to drive more and more fittings to the best of their abilities. What -- you also going to realize to is -- your seasonality then kicks in, that’s the driver market gets a whole lot smaller in the next several months, third quarter into the fourth quarter so much of what happens and drivers happens in the first half of any given year…

Also I want to ask you about your comment that we’re about five quarters into eight quarter to 10 quarter domestic industry correction. I've been thinking that will be reaching the anniversary of the Golfsmith and TSA liquidation during the next two quarters. So what's going to be the headwind in 2018, because you are already cycled through the downsizing of the retail footprint in the U.S.?

Yeah. You are right. So much of the comparisons to shipments to Golfsmith and TSA are behind us. When we comments on the future, two themes emerge; one, we’re still facing the reality of fewer doors, right. So we just all have to be mindful that that we are going to deal with fewer doors. And secondly, we just -- we don't know how the consumer is going react to this new reality, a large part of the business if you can imagine the sellout and we are seeing that ASPs this year is we are selling a whole lot, the industry is selling a whole lot less discounted product. So the golfer who for years had access to deep discounted product doesn't have access to that product any longer, so who do they react and how they behave, they were waiting for product to tumble as an example the driver to tumble from 399 to 299 to 199, they are simply going to have less access to that type of product. So how do they behave in the next couple of years in terms of their product purchase behavior, so it’s much as anything as where does the consumer shake out in this new normal.

Okay. Thank you.

Next question please.

Your next question comes from the line of Michael Swartz from SunTrust. Your line is open.

Hi. This is [ph] Anna (30:36) on for Mike. Just wanted any commentary on the competitive environment in ball, you said that, there were some [inaudible] (30:45) in first half. Is that going to get any better in the third quarter?

It's -- yeah and as we said on the call, it’s certainly affected our -- it certainly affected our performance models more than Pro V1. It's isolated to a couple players. It’s steady and I think it's a commentary on manufacturers attempting to reconcile their forecasts and/or capacity with this new footprint of retail inventory. So we think it’s part of the correction and it's part of the journey to find balance in the marketplace. Again, you had had retailers with extra words now we have far fewer doors and manufactures are reorganizing their forecast and their capacity to be in sync with what the market can bear. In terms of what we are seeing in the market, yeah, it's been fairly steady for the first and second quarters. It’s still out there. But, again, as I think, a lot of that inventory flushes through. We think it will normalize a bit. We haven't seen it go away, but we still see it in pockets.

Got it. That makes sense. And then, as far as the fitting and the weather kind of played a part in that not are being as high as you thought in the first half. But could you speak to any celebrate that or how you plan further activate that in the back half?

Yeah. So, by count, we were down about 20% to 30% in terms of fittings versus what we intended to fit, what we plan to fit, and a lot of that in the regions, I mentioned, Northeast, Upper Midwest, West Coast, et cetera. So the question is what we plan to do with it? First and foremost, I will point to the calendar is going to shift on us as we launch the new product -- anytime you launch the new product there is always a strong initial interest, and therefore, a strong initial interest in fittings, so we are certainly going to heavily activate fittings on the iron front. And then the team continues to push for trial and fittings, we work very closely with our trade partners to activate our fitting network and we continue to do that and that's happening. The good news is that's happening, it's just not happening to the degree we anticipated again largely due to weather and certainly competitive activity in the first part of the year.

Got it. Thank you very much.

Your next question comes from the line of Simeon Siegel from Nomura. Your line is open.

Great. Thanks. Good morning, guys. Congrats on the nice gross margin improvement despite the volume declines. Can you quantify the drivers that you mentioned, the mix shift, the ASP improvements, maybe how much they were offset by competitor promotions, the volume declines, et cetera? And then can you quantify the gross margin opportunity for 3Q and the full year just any -- the drivers that you have that can offset the fixed cost deleverage? Thanks.

I will take the shot at the first question there, Simeon. If you're asking me about what the percentage of the margin improvement was, it was probably half-and-half Pro V1 and half for the FootJoy apparel and golf wear mix. But I think that your question really is relating to Dave, what was that looks like…

Yeah. Help us on part two, Simeon?

I am just thinking about the…

Yeah.

… as you think about volume declines that you see in the fixed cost deleverage from the lower sales that you have with your base, excuse me, what the future offset base, how you are looking at, you can qualify for us the backup gross margin opportunity?

Well, we can tell you a couple things and this may help you kind of piece together your answer. We feel little good about inventories in the marketplace, number one. We feel good about the performance of premium products that we intend to launch and the early response, so as we think about back half, we’ve talked about 718 irons, 818 hybrids, FootJoy Pro/SL continued success. It looks continued success out of our apparel, et cetera. So as we think about the mix of our business. Again, we like the profile, we like the field inventory base and I don’t know if this helps, but certainly, our calendarization all those close doors goes away. So we -- certainly there will be some comps to what were Golfsmith activity last year, but it's going to be far, far less. So realize same that kind of got added through a difference, the handful of different angles, but hopefully that helps give you some perspective on how we think about it.

Okay.

One more thing, Simeon is, I think, I'm getting to your second question is in, the first half of the year you experience your highest margins, your highest margin activities, as year goes on margins do go down as you get out and move into new cycles of your product cadence. So we still anticipate that we are going to have margin improvement despite that in the back half of year when we finish.

Great. Okay. That's helpful. And then, sorry, if I missed it, but did you talk to what you think, what’s the right way we should look at the Japan constant currency sales trajectory for the rest of the year?

Well, Japan, we have got a lot of the same dynamics playing out. On one hand we’ve got bullishness around new products, on the other as we said on the outset, the markets are little bit soft and I don’t see that changing anytime soon, rounds of play certainly picked up a bit in the second quarter as weather improved. But we are contending with the general softness in Japan. Again offset to a degree by product launches that will play out over the next couple of months.

Got it. Okay. Thanks a lot guys. Best of luck for the rest of the year.

Thanks.

Thank you. Sarah, can we have the next question, please.

Your next question comes from the line of Christian Buss from Credit Suisse. Your line is open.

Hi. This is Sara on for Christian. Going on top of that, can you gives us a little bit more color on international markets and what you're seeing there for each segment?

Yeah. So the work in our way, Sara, around the globe, we will start with Korea, as we mentioned. Korea the team continues to execute, rounds the play are robust and the market is healthy, and we continue to build out our playbook there. So, as much as anything market healthy and our team really doing great things. Japan, I mentioned, EMEA holding up steady, holding up resiliently in the face of some Brexit uncertainties. They had some soft weather last year, so their rounds are up mid-to-high-single digits is much commentary on the slow start last year but net-net that market has been very resilient. So as we think about markets around the world. Korea up and healthy, EMEA steady, Japan is the one we continue to watch that shows signs of softness.

That’s helpful. Thank you. And can you also talk about how inventories are looking in the green grass channel?

Yeah. So what we've said in the past and it holds true today is one of our core competencies is our activities and our sales activity on the ground and it is very much inventory and inventory management role is one of their key role. So, despite varied weather around the world, our inventories are very much in line. I can give you since they -- on the ball side as an example, the inventory share for Titleist Golf Balls tends to trail our sell-through share by about 10 percentage points, which says one returning and two are managing our inventory. So we feel real good about our products. Inventory positions and again it's commentary on the fact that we have got a lot of boots on the ground who are very proactive in assessing what's happening at a given retail location on course and managing inventory accordingly.

Okay. Thank you so much.

Thank you, Sara. Next question please.

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

Hi. Good morning. This is Eddie Ryan on for Kimberly. I just have one question on just overall on the competitive environment, so do you think a clear channel and improve profitability for competitors who allowed them to reinvest more in advertising?

Do we think a clear channel has allowed our competitors to invest more in advertising? That may be one of the factors, Eddie. They certainly are. But, yeah, that I think is going to be one of the outcomes of whether we are there now or whether we get there in a handful years and we all think we are is you are going to have companies doing better, you are going to have the opportunity to invest more in R&D, you are going to have the opportunity to invest more in A&P. So, I think, right now you are seeing parts of that. But I think that's part of the broader trend we have talked about and that is to stay a healthier environment with which to go to market.

Got it. And then I have one question on product launch timing. So, when you are seeing your competitors launched products especially in the club category. Are you seeing the timing that shifts or has that stayed relatively constant over time, just in terms of when they launched that within the year?

Yeah. It -- again everybody is dealing with this newly faced retail marketplace, which is part one. Part two is we’re seeing a positive trend where product life cycles are lengthening and I think that's a good commentary on the broader supply/demand realities and just a greater sense of operating responsibly within the marketplace. So, while we were seeing some modest shifts here and there, I think, the key take away and the key theme is, product life cycles are extending, number one, and subsequently you are seeing less and less product sold at discount and you are seeing products stay premium for a lot longer, which again we see as the healthy trend in the market.

Great. Thank you.

Thank you, Eddie. Next question please.

Your next question comes from the line of Tim Conder from Wells Fargo Securities. Your line is open.

Thank you. Gentlemen, any thoughts on your -- any commentary regarding the U.S. market adjustments sort of the lengthening out here a little bit and how the overall TaylorMade transition is playing in the [ph] Golfsmith (41:38)?

First on the market, certainly, it's -- as we said it's -- we are now in the fifth quarter of an eight quarter to 10 quarter journey. So a lot of the pain is behind us and we feel good about that. Candidly I am reluctant to comment on any one of our competitors and how they may be influencing or shaping or affecting the outcome of this correction. It's a correction that hit all fronts whether it's retail doors, whether it's retail doors, whether it's inventories that that's a point that, I think, we are just making and that is, if you look at the U.S. market you really break it down. You take a look at Datatech inventories. One of the key indicators and we think this is real positive, is the inventory levels are as low as we've seen in a long, long time and yeah, that’s commentary in a couple of competitors, but it's also commentary unless retail square footage and it’s commentary just on a healthier set of vital signs for the retail marketplace.

Okay. Okay. No. No. Helpful. Helpful. Thank you. Any -- I just want to maybe clarify your commentary on some of the geographic areas. Are you -- is that just through Q2 or I guess the real root question here is, have you seen any impact in the Asia markets in particular, given the unfortunate escalating of the geopolitical tensions?

Speaking to really the Korea situation, historically, Korea has been resilient over time. This one, hey, we are all watching closely and we will see. We haven't seen anything thus far, but it's certainly something that the world is paying very close attention to.

Okay. Okay. Okay. And then lastly, gentlemen, just a couple maybe housekeeping items here. Any stock-based comp in the tax guidance benefits from that? And then you talked about the constant currency, you are actually up a little bit, just any color on your hedges, any changes in your hedging outlook, given what we have seen year-to-date in the U.S. dollar?

Yeah. On the stock-based comp, I think, you can use the last three months is a good run rate for the remainder of the year. On that I did talk about ETR around that 35% being the relative run rate. And as far as FX rates goes, I think, we're seeing a lot of movement, but if you look at the end, it's actually about the same it was for the first six months of last year. So we have seen a bigger pick up in won and of late the euro. So all of those have been baked into our back half forecast. Obviously, we have hedges against some of those and some very positive hedges against the pound sterling which have been helping us over the year, but all that's built into our guidance including roughly the average -- the last 30-day average what those rates are, perhaps in the back half forecast.

Okay. Great. Thank you, gentlemen.

Thanks, Tim. Next question please.

Your next question comes from the line of Casey Alexander from Compass Point Research. Your line is open.

Hi. Good morning, David. Do you have any color on how much debt reduction you think you can pull off in the second half given that you're moving into the better part of the cash conversion cycle?

Yeah. We -- remembering that we did our delay draw on our $100 million delay draw TLI earlier this year. So we’re looking to aggressively pay that down as soon as possible. And certainly, in the back half we’re well within -- we are well into our seasonal collection cycle and by year end we should be generating enough cash to get us back on track to hit that our target which we like to see as like you as around a 2x LTM EBITDA sometime in early ’19. So, yes, we do intend for that cycle to kick in and for us to achieve debt reduction for where we at right now.

Okay. Secondly, given the fact that where you ran into some problems with the ball was in the performance line. You're now entering that period where you are selling down the performance line, preparing for re-launch of the next round of performance line. Do you have any color on how you expect that to go and where do you stand with inventories in the performance line compared to past cycles?

Yeah. Good question. We -- this time a year we do like to work down our inventories as we head into the tail end of the third quarter in northern market. So in terms of where things stand with regards to performance model inventories. They are very much in line. And part of it is we've -- we manage sell-in in that sell-through and so, therefore, they stay in line. At this point, Casey, we are not on records talking about what our product plans are, we will soon launch that to our trade partners here beginning post-Labor Day, but at this point we’re not going to comment on what the product plans are. But certainly as I made note in my opening remarks, that's a very -- that's become a very competitive part of the golf ball market and we need to think about it a little bit differently and we need to make some right moves and its going to be born in the R&D labs as to how we reinvigorate the performance model franchises.

Okay. That's fair enough. And lastly, as it relates to advertising and you called out that your competitors are advertising more aggressively and I wonder do you expect to create any type of response and particular in a changing advertising environment and where people look and consume advertising and where you're trying to find that next customer from?

So, the quick answer is, absolutely, and that we continue to follow the rhythms of dedicated golfers and think about the best ways to communicate our message to them. Often times with and through our trade partners, often times through traditional media and increasingly now through social media. So it's -- as you well know it's a moving target and we’re attempting to be very nimble in terms of how we think about spending and directing those resources.

Okay. Thank you for taking my questions.

Thank you.

Thanks. Next question please.

Your next question comes from the line of George Kelly from Imperial Capital. Your line is open.

Hi, guys. A couple of questions for you. First on the guidance that you provided on the back half ramp, I was just wondering if there's any -- I understand that you have new things coming out in a bunch of different product lines? With the market in the first half of the year has been kind of mix and some of your new product launches in the last year has maybe not hit your initial kind of targets. Have you seen anything after the quarter? Is there any other information that you can provide that would -- that kind of helps give you confidence in that back half ramp in revenue growth?

Yeah. So we go through a lot of effort prelaunch and I will use the APK study as an example, that product has been in development for a few years. We launched it on tour right around the end of June. We are out now, fitting our club pro partners and key influencer. So we are very much actively in market and we are going to get a lot of feedback and a lot of positive feedback on the product. So that's one way we gauge how we think the product will do when it reaches the market. Again, we haven't shipped product yet, but we've been out there actively fitting and working with a lot of our key influencers on it. So for a variety of reasons, similar that would play out in footwear and apparel. We talked about some new launches. Our teams out there presenting product to trade partners, getting orders for the fall season, et cetera, and again, we are just pleased with the way the early acceptance of these products has played out.

Okay. And then, similar -- second question follow-up on the previous question. Your expectation for ball growth, do you expect a similar kind of trend for the second half of the year within the ball segment?

Yeah. I think, fair to frame that, again we are on a good run with Pro V1. We like how we came through the first half and we have got work to do on performance model. So, I think, the way we think about the ball business is really through those two lenses. We are working inventories down with our performance model lineup as we prepare for launch in early ’18, if that helps. But I think the lead story there in our minds is we continue to be optimistic about the trends of Pro V1.

Okay.

Thank you, George.

Thank you.

We have time for one more question and then we will have a few closing comments from David.

Your last question comes from the line of Andrew Burns from D. A. Davidson. Your line is open.

Thanks. Good morning. Just a follow-up on the eight quarter to 10 quarter correction commentary, I'm wondering what you're hearing from your top off course retailers and how that compares to green grass, is there a general consensus of the store count, is there a healthy place right now or is there still concern that additional door closures are needed to create a really fully healthy retail environment and does that contributing perhaps to your assessment of the multiyear correction? Thanks.

Yeah. Andrew, what we are seeing now and again, Datatech, will affirm this is, our green grass partners are doing real well and if you look at what's happening in green grass, clearly some of the volume has migrated towards green grass. Our existing golf specialty and sporting goods partners are reporting pretty good golf results. They have had a pretty good first half with their golf business. Again, as you expect my business is migrating their direction. So you have got those two forces. What that doesn't capture, however, is the evaporation if you will, what part of the business didn't migrate. We know those players left standing are doing better, but can we quantify that all, it sound home and the answer is no, we can't quantify that all kind of home. But in terms of how our existing retail players doing the survivors if you will, our sense is they are doing as well as they have done in a couple years and we feel real good about that. In terms of is there a short-term outlook towards even further consolidation, never say never, but we don't see it on the near-term horizon.

Thanks and good luck.

Thanks.

There are no further questions at this time.

Well, I would like to take this opportunity. Thank you all for joining us and for your ongoing interest in our company. As we head into the second half of the year, we are confident in our ability to meet the needs of dedicated golfers and we are excited about new products, plan for the coming months as we talked about on the call. We are also cautiously optimistic about the market in general at it works through this U.S. retail consolidation and we do look for weather and rounds of play normalize in the back half of the year. Longer-term golf industry fundamentals continue to improve as the industry works through what has been this necessary correction or rationalization. We have a proven strategy, I demonstrated ability to execute and we believe we are well-positioned to continue Acushnet’s long track record of success. Thank you again.

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