Acushnet Holdings Corp. (GOLF) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Emily and I will be your conference operator today. At this time I would like to welcome everyone to the Acushnet Holdings, Q3 2017 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. Tony Takazawa, Vice President of Investor Relations; please go ahead.

Thank you. Good morning and welcome to Acushnet Holdings call to discuss the financial results for the third quarter of 2017. This morning we are joined by Acushnet’s 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’s CFO, Bill Burke, will spend some time discussing our overall financial results for the quarter. After the prepared remarks, we will be joined by Acushnet’s 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’s COO, David Maher. David.

Thanks Tony. Good morning from Fairhaven, Massachusetts and thank you to all who are participating on today’s call. We look forward to sharing Acushnet’s third quarter and year-to-date operating results outlook for the balance of 2017 and commentary on our four business segments. Before presenting our operating results, I will affirm Acushnet’s commitment to provide shareholders with a long term total return investment opportunity. Acushnet’s playbook consists of an organization wide focus on the game’s 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 represents the DNA of the Acushnet Company, which we believe lends resilience to our long-term performance. Affirming our shareholder commitment, I am pleased to announce that earlier today Acushnet’s Board of Directors declared the payout of our quarterly cash dividend of $0.12 per share or $8.9 million in aggregate, payable on December 15 to shareholders of record as of December 1. The third quarter is transitional for Acushnet and many of our trade partners. Northern markets begin the period in high gear with play and fittings at peak levels and then move into inventory management mode as summer turns to fall. Sunbelt markets conversely begin the quarter in their offseason and are in ramp up mode by quarter’s end as they prepare their golf shops for the upcoming winter season. In the third quarter Acushnet posted sales of $347 million, up over 2% on a reported basis and up near 3% on constant currency. For the first nine months of 2017, sales of $1.209 billion were off 2.7% from last year or 2% on constant currency. Adjusted EBITDA for the quarter was $32.2 million, up 15% from last year and $182.5 million for the nine month period, a 4% decline. At the segment level, golf ball sales were off 3% for the quarter and 2% year-to-date, both on constant currency. New Pro V1 golf balls have posted sales and share gains through the first three quarters of the year as golfers have embraced the new and improved Pro V1 and x models. Sales of our performance models have declined as these have been most impacted by competitive promotional activity in what is the back half of their two year product lifecycles. We see this promotional activity largely as a byproduct of the retail correction as golf ball companies come to terms with the new inventory and retail square footage realities of the market. Looking to 2018 we anticipate promotional activity will continue, albeit at lesser levels than experienced this past year. Acushnet’s golf ball business has also been impacted by wet weather in 2017, which has caused year-to-date rounds declines in the key markets of New England, Mid Atlantic and the Pacific. We are encouraged however by national rounds increases in August in September which occurred in spite of sharp declines in the Southeast and Texas resulting from hurricanes Harvey and Irma, where golf understandably took a back seat in these regions as the focus shifted to clean up and recovery, which has progressed well for most of our affected trade partners. And in the third quarter we successfully introduced the new Titleist DT TruSoft golf ball and looking ahead, our team is busy preparing for new product launches in the first quarter of 2018 as we set out to strengthen our performance ball franchises. Moving to golf clubs, Titleist posted a 10% sales increase in the third quarter with year-to-date sales down 9%, both on constant currency. The late September launch of the new 718 irons and 818 hybrids met our high expectations. From tour launch to staff player seating and trade partner education, to initial market introduction, this was one of our most comprehensive and well executed golf club launches to-date. Early demand has been strong fueled by a calendar full of fitting and starting in early September, which was aided by good weather across most markets. Feedback on both 718 irons and 818 hybrids has been very positive. The addition of the new AP3 model has been especially well received across all regions as initial interest in this players distance iron has been strong. Rounding up the Titleist golf club portfolio, our Vokey wedges and Scotty Cameron putter and both franchises have performed well and in line with our expectations. Sales of Titleist Gear increased 2% in the third quarter and have grown north of 5% year-to-date, both on constant currency. Growth in the third quarter was driven primarily by success in travel gear, while our year-to-date increase comes from across the board sales gains in gloves, bags, headwear and travel. We continue to fortify our gear design capabilities and supply chain, while pursuing the highest levels of product performance and quality. And finally, moving to FootJoy, the number one shoe and number one glove in golf, third quarter sales were up 4% and nine month sales were down 0.5% on constant currency. These quarterly and year-to-date results are healthy, especially when viewed against the backdrop of the significantly reduced U.S. store count and corresponding inventory reduction in the market place. Innovative new product has been the foundation of FootJoy’s golf footwear business in 2017. The third quarter launch of the new DNA Helix golf shoe has been very well received and this is in addition to the continued strength and momentum of our Pro/SL spike less shoe. Additional third quarter highlights include the successful introductions of LTS outerwear and FootJoy’s golf leisure for women fall collection. Now looking at our business regionally, U.S. sales for the third quarter were up almost 5% and are down 3% for the first nine months of the year. It is encouraging that the U.S. retail market is weathering its structural correction fairly well. The general consensus from our trade partners is that they are faring better now than they did in 2016 or 2015 as there are fewer competitive doors and a greater percentage of their sales is generated from inline products. We reiterate our position that the U.S. market is approaching a healthier state with the supply of OEMs, retail doors, inventory levels and golf courses were in sync with market demand. As we soon head into 2018, we continue to closely monitor the ongoing migration of volume and evolving golfer purchase behaviors as we eventually settle into this new and healthier normal for the golf industry. Now looking outside the U.S., the EMEA’s third quarter sales were up 0.5% and for the first nine months were down about 1% both on constant currency. Comping against record Acushnet sales in 2016, we’ve seen EMEA markets holding strong in the midst of Brexit related uncertainties. Year-to-date rounds in play in the region are up in the low to mid single-digit range and overall inventories are in line for this time of year. Third quarter sales in Japan were off 7% for the quarter and down 10% year-to-date, both periods reflected in constant currency. The Japan golf market has been relatively soft in 2017 and the season is starting slowly due to poor weather. While weather and rounds of play have stabilized over the past several months, the overall market is still lagging behind in 2016 levels. Korea remains strong and our team continues to capitalize on their opportunities with constant currency sales increasing 6% in the quarter and 12% through nine months. Each of our business segments is contributing to our balanced success in South Korea. In closing, I will comment on Titleist and FootJoy’s success across the world wide tours throughout 2017. Titleist golf balls continue to be the clear choice of the world’s most dedicated golfers with Titleist ball usage at 72% across the world wide professional tours, a 600 basis point increase versus a year ago. In total, Titleist golf balls have won two-thirds of all events across the world wide tours, including three U.S. PGA majors, five PGA Champions majors and four LPGA majors. At this year’s open championship Jordan Spieth threw light on the Titleist Pro V1x golf ball and 14 Titleist Golf Clubs to claim his first Claret Jug and third professional major championship. And also this past summer, Jordan’s good friend Justin Thomas also relied on a Titleist Pro V1x golf ball and 14 Titleist Golf Clubs to win the PGA Championship and PGA Tour ‘Player of the Year Award.’ Justin also trusts FootJoy, the number one shoe and number one glove in golf as his golf footwear and glove choices. And I am compelled to add that Jordan and Justin are not only great players, but are equally great role models and ambassadors for the game of golf and the Acushnet Company. Looking forward, we continue to be optimistic about the structural improvements happening in the golf industry. Titleist and FootJoy market positioning across all categories is solid with new innovation and product momentum driving Acushnet’s third quarter growth and our outlook for 2018. With over 5,000 dedicated associates worldwide, singularly focused on serving the needs of a dedicated golfer and trade partners who share the same commitment, we are well positioned in the near and long term to be the performance and quality leader in every golf product category in which we compete. And now, Bill will provide an overview of our financial performance for the quarter and year-to-date.

Thanks David and good morning to everyone on the call. I’ll start with an overview of the third quarter results and then discuss results through the first nine months of 2017. Given the seasonality of the golf business from quarter-to-quarter and the cadence of our product launches, it’s helpful to look at how the business is tracking throughout the year to gain a better appreciation of overall performance. As David indicated, consolidated revenue in the quarter was $347.3 million, up 2.3% year-over-year and up 2.9% in constant currency. Q3 gross profit was $173 million, up 3.7% from last year and gross margin was 49.8%, up 60 basis points year-over-year, both solid improvements. In the quarter, the increase in gross margin was primarily driven by its higher gross margin at Titleist Clubs and FootJoy golf wear, partially offset by a lower gross margin in Titleist golf balls. Looking at operating expenses, SG&A of $142 million was down 0.7% versus last year. The decline in SG&A was primarily due to a decrease in bad debt expense, non-repeating IPO transaction costs we incurred last year and a decrease in share based compensation. These benefits were partially offset by an increase in advertising and promotional expenses related to new product launches and higher consulting, legal and administrative costs associated with our public company status. In Q3, research and development expense of $11.1 million was down $1.4 million from last year. This decrease was mainly attributable to a reduction in experimental and employee related costs, much of which are timing related. Q3 interest expense of $4 million decreased by $11.7 million from last year. The decline was primarily due to lower average outstanding borrowings versus last year, as well as lower interest rates. Other expense was $100,000 down $2.5 million from Q3 of last year. This change was primarily due to a decrease and income related to our tax indemnification with Beam. As a reminder, income or expense associated with the tax indemnification is largely a pass through item with no cash impact to Acushnet Holdings. Our Q3 effective tax rate was 24.7%, lower than our annualized run rate and primarily due to a year-to-date true-up of our tax provision based on our geographic mix of earnings, as well as a few discrete items. Tax rate comparisons to Q3 last year aren’t very meaningful as we were in a loss position with several discrete items, including non-deductable IPO transaction costs, resulting in an abnormal ETR. As a result, our Q3 net income attributable to Acushnet Holdings of $9.3 million improved by $14.8 million from Q3 of last year, as a result of lower interest expense and higher income from operations, partially offset by higher income tax expense. For the quarter, adjusted EBITDA was $32.2 million, up $4.2 million from last year. There are still a number of one-time items that affect the year-to-year comparisons, so we provided a reconciliation of adjusted EBITDA in our earnings release, as well as the slide presentation. Turning to our year-to-date results, sales of approximately $1.209 billion were down 2.7% to last year and 2% on constant currency. Our year-to-date gross margin is 51.5%, a solid 70 basis point improvement to last year. The increase was primarily driven by a gross margin increase in the FootJoy Golf Wear segment across all categories, but primarily in footwear and apparel. Year-to-date SG&A expense was $441.8 million, down $14.6 million from last year. This decrease was primarily due to the absence of both transaction costs related to our IPO that we recorded in the first nine months of 2016 and a one-time executive bonus recorded into Q1 of last year. There was also a reduction in bad debt expense and reduced advertising and promotion costs across all segments. These were partially then offset by higher consulting, legal and administrative costs and an increase in share based compensation. Research and development expense of $35.7 million was up $400,000 over the last year and for the first nine months of the year was 2.9% of sales, up slightly year-over-year. Interest expense decreased by $32.2 million to $11.9 million for the first nine months of the year and similar to Q3 was driven by lower outstanding borrowings, as well as lower interest rates. We had other income of $400,000 for the first nine months of 2017 versus $1.4 million of expense last year, largely due to the absence of recognized losses on our previously outstanding common stock warrants. This was offset by a change in the Beam indemnification and income record last year associated with the legal judgment in our favor. Our year-to-date effective tax rate was 34.4%, down from 45% last year and similar to the quarter, the prior year ETR being an abnormal rate. We’re forecasting an approximate 35% ETR for Q4, absent any significant discreet items or shift in our geographic mix of earnings that may arise. As a result net income attributable to Acushnet Holdings for the first nine months of 2017 was $80.4 million, up $35.2 million over the prior year. Year-to-date, adjusted EBITDA was $182.5 million, down $7.8 million from last year. Despite the decrease, we view this as a solid performance given some of the challenges we face in the first nine months. Looking to the balance sheet, we had $69.8 million of unrestricted cash on hand as of September 30, 2017. Total debt outstanding at September 30 was approximately $467 million or 2.12x LTM adjusted EBITDA. We’ll continue to focus on reducing debt as we look to strengthen our balance sheet over the longer term. CapEx in the quarter was $12.8 million and we’re now forecasting total year CapEx in the $21 million range. In regards to our outlook for 2017, we are tightening up our estimates and currently expect full year reported sales will be in the range of $1.545 billion to $1.555 billion. On a constant currency basis, revenues would decrease in a range of down 1% to down 0.4% versus last year. We also expect our adjusted EBITDA for 2017 to be approximately $220 million to $225 million. In summary, we had a solid Q3, driven primarily by the successful launch of the new Titleist 718 irons and 818 hybrids. With somewhat more normalized weather trends, an encouraging mix of new products and strong operational controls, we are looking forward to finishing 2017 well with strong brand momentum going into next year. With that, I’ll now turn the call over to Tony for Q&A.

Thanks Bill. Emily, can we open up the lines for questions please.

Of course. [Operator Instructions]. Our first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

Okay great. Thank you so much. Good morning. I wanted to ask first about the golf ball segment, the Pro V1 obviously performing well. I’m wondering more about the performance models and I know there is a lot of promotional sort of a pricing pressure out in the market place. Do you think that’s the sole reason for the underperformance and should we see that business, let’s say reaccelerate in 2018 as that inventory gets cleaned up or do you think there is perhaps a way to be a little bit more competitive in that segment of the ball market through innovation or different product offerings on your part. And then secondarily, if you could just talk about inventory. Inventory here at the end of the Q3 looks similar to the end of Q2. We are just wondering how are you expecting inventory to come out at the end of the year this year and if you could just help us understand the composition of the 7.4% increase in inventory here at the end of Q3, that would be great. Thank you.

Hi Kimberly, I’ll tackle the first one and Bill will address your second question regarding inventory. You raised some good questions about our golf ball business and our performance models in particular. First off, as you stated Pro V1 meeting expectations, sales up, share up in what’s been a challenge year for a couple of reasons. First and foremost, correction related certainly in the first half of the year and then secondly with some weather issues. But net-net where we stand today, we are pleased with the introduction of Pro V1 in earlier this year and how we faired throughout the year. We said throughout the course of the year that our performance models have been challenged for a couple of reasons. First and foremost, the aggressive promotional activity which we commented as we think is a byproduct of golf ball companies attempting to come to terms with the new normal of inventory retail square footage, etcetera. So first and foremost they are being pressured from above if you will. Secondary, we understand that these products are in the second year of their product lifecycle and need a technology refresh and a technology reboot if you will, which we are in the midst of right now. We are out talking to our trade partners about what will come to them in the first quarter of 2018 as we come forward with new models to replace what is today NXT Tour in Velocity. So I think you hit on the key issues, one being weather, two being promotional activates, three being looking inward to say how do we advance our technology, innovation platform to be more relevant and competitive in this performance model space.

Yeah, the question on inventory in Q2 to Q3, we typically do see a drop in inventory in that time period, but we have seen very high interest in expectations for the 718, 818 launch and we did build additional inventory in anticipation of that. We also had a combined number of launches in FootJoy. DNA Helix which we needed to build inventory on, as well as continued strong demand for Pro SL which we need to bring onboard and we also had the LTS Apparel buildup. So it’s typically a little bit higher than what we have at this time, but we are moving through that quickly after the launch here. By year end I think we need to see how this plays out for 718 as much as everything, but I think you can kind of look at last year as a proxy, but a rough range would probably be 330 to 340.

Great, thank you both.

Next question please.

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

Thanks. So can you speak to the material accelerating that you saw on the club side of the business. As a recent buyer of your 718 personally, I’m not surprised with the strong launch. But can you talk about how best to think about momentum in this category segment and just what it may mean for gross margins over time given the delta with Clubs?

Well Matt, first of thanks for supporting the AP line and hopefully they service you well. So the Titleist iron franchise, each of our models received improvements, but one meaningful change this year in 2017 has been the introduction of the AP3, which is really our first entry in this Emerging Players Distance Category. It really is the benefits of AP1, distance and forgiveness with the playability, aesthetic workability of AP2. So on one hand we feel good about all our products in the iron family, but what’s the call out is that AP3 is really an entry into a category that’s pretty meaningful in the Golf space that we had not had a product for. So on one hand we feel real good about the entry, we feel real good about the early trial and interest and rapping it all up, it really is a product line that plays into the hands of our fitting capabilities, our fitting bias and our well trained fitting networks. So the more we can bring products to market that benefit from and require the expertise of a well trained fitting network, the better we tend to do.

That’s great. And then just a follow-up on the expense front. So you saw nice leverage of SG&A in the third quarter. I guess with the return to top line growth overall, do you expect SG&A leverage to continue into the fourth quarter and just what level of revenue growth is necessary to leverage SG&A as we think to next year and beyond?

Well, I can say in the fourth quarter we are really putting a lot of money behind our 718, 818 launch. So that would be something that we wouldn’t have had quite as much as last year than also the – if you look at the fourth quarter of this year we do have public, you know public company costs in there, so you wouldn’t see as much leverage. But to answer your second quarter, any amount of growth on the top line can generate leverage for us, because we are infrastructure. We don’t require anything in our go-to-market infrastructures around the United Sates or around the world. So really for us, any growth on top line can both generate bottom line growth in leverage, but also can result in volume absorption in our vertically integrated segments.

Great, best of luck guys.

Thank you, Matt. Next question please.

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

Thanks. I want to talk about the fourth quarter guidance. You reduced the high end of the revenue guidance. You did the same thing at the end of the second quarter as well. Could you talk about – and this is after a very strong third quarter results. Could you talk about what’s influencing this, what appears to be a more cautious fourth quarter outlook?

Yeah, I think we are just closer. We are seven to eight weeks away. We’ve had the time to experience some of the market projections and how markets are performing. In particular in Japan which continued to be a little more sluggish than we expected, so it’s just a matter of tightening the range here. The low end of the range being if all launches and we have a good holiday season go off as solid – a reasonably good holiday season. We expect the lower end of the range, the higher end of the range would obviously be if our launches take off little stronger than we expected.

So when you look at the lower end of the – the high end guidance for the last two quarters, that’s primary due to weakness in Japan?

Weakness in Japan, but also the hurricanes had some activity on us, because again as David said we had good weather. But we also had – you know if you look at some of those key markets we are in, the Irma that came was in September where a lot of courses were gearing up and ready to open. So I think we have some hurricane related activity that we need to factor in there.

And David I have one question for you, could you give me some help in the strategy for the AVX golf ball that you are testing. I think you are doing that one in Florida, Texas and California. And is the thought that this is going to reach the premium into the market looking for a lower compression ball? And at what point does this move from a test to a rollout?

Yeah, good question Dan. So where we are, we are testing in as you said three markets, Florida, Arizona, California. The AVX is a ball built on the Pro V1 chassis. Its cast urethane construction similar to Pro V1, soft lower skin, it will be longer for many Golfers. So we are very intrigued by this product. We see it as a interesting scoring solution for golfers in addition to Pro V1 and Pro V1x. So rather than launch it blindly, we decided to do a test market in the third aforementioned markers. I’ll say it’s gone well, we are month in, but really we are cautious about reading too much into the early data. We didn’t put a whole lot of product in the market place number one. Anytime you put something new out there you are going to get a lift. So while we are pleased with the early response, we do want to get a better handle of golfer for feedback, what are they are telling us about this project, what products are they coming from, is it one of our products? Is it a competitive product and I think we are going to learn a whole lot more over the course of the next six to eight weeks as we get a better sense for repeat purchases. So that’s the essence of the test market. What will happen from here is by the end of the year we are going to have to make a decision as to where we go with this and you know from a launch standpoint if we decide to move forward nationally, obviously there is a whole lot of production activity that needs to happen to support what would likely be some type of Q2 launch, albeit on a finite basis due to simple supply realities, but at this point Dan, we really like the product, number one. It’s off to a good but as expected start in the market. We still have a lot more learning to do and again, I think by end of the year we will have a good sense for where do we want to go with this gold ball.

I’m assuming there is not any extra CapEx needed to reproduce that at the existing Pro V1 facility?

Its three piece cast urethane, which is comparable to Pro V1 construction. So you wouldn’t see a need for additional capital unless things take a real turn in terms of demand. But as we stand today, we think we got it covered under our existing manufacturing footprint.

Okay, sounds good. Thank you.

Thanks Dan.

Thank you, Dan. Next question please?

Our next question comes from the line of Randy Connick from Jeffries. Your line is open.

Yeah, thanks a lot. I just wanted to get some thoughts on the promotionality on the non-Pro V side in the environment. Do you have a sense of, if there is still Nike ball inventory out there? If so, how much? And just timing of when the promotions of – you know competitive promotions in that kind of lower end market, kind of start to dissipate from your perspective and by how much? And then just on the tailor made change in ownership, I think we talked in the past about how that’s going to be probably a good thing for the industry. Have you seen anything specially yet out of that company, whether it would changes to promotional keyed in, sort of pricing architecture that you know has impacted the industry at present, positive or negative. And then just lastly, just a kind of reminder of when we had the sports authority and Golfsmith bankruptcies, where are we in terms of kind of just normalizing for that and how that kind of works through the guidance going forward? Thanks.

Okay, good morning Randy. That’s three; we are going them to pick them off, okay. First off, promotional activity, your comment pointing more towards Nike and the bottom of the food chain of you will in terms of gold balls, candidly we see it more coming from the top, so when we look at what’s happening in the golf ball space, its less about lower end product. It’s more about toper end product being discounted to the mid-level if you will. So it did not dissipate. We expect you will see more of it over the holiday season, but again just to frame how we think about it, it’s more the top coming down than the bottom going away. You know I’m not going to comment directly on tailor made, but I will say as mentioned in opening remarks, the market is becoming more rational. We are seeing average selling prices on the rise, which is a function of new technology, number one, but also a function of less discounted close out product in the market place. So again, not calling out any one competitor, but everybody is contributing to what is becoming a more rational market place, product life cycles extending, etcetera, etcetera, which again is part of our thesis that hey, this is part of a healthy correction as the golf market place finds a healthier place for all remaining participants to thrive and do well. And then your comment on the normalization of the correction, I’ll address that in the couple of fronts. One, as I talked about what’s becoming of the market, certainly as it relates to our business, it is becoming a whole lot more predictable, because we are not longer comping against closed doors. We had a little bit in the third quarter, but by and large as we now are in the fourth quarter, we are not longer comping against closed days. So that makes our business a whole lot easier to predict and forecast. What still plays out and remains to be seen, is where goes the golfer and sure they are going to existing encore shops, they are going to sporting goods, they are going to golf specialty, they are going to ecommerce, but that migration continues and hasn’t fully settled. We think in time it will. And we’ve said from the get go, this is a probably a two year correction cycle and I’ll give you a couple of examples why we think there is still more learning’s at least from our end to play out, and first off would be what played out in the third, and what will pay out in the fourth quarter. Our iron launch, this is a new iron launch for us, whereas the last time we launched irons we had the reality of a 100 additional Golfsmith doors doing a whole of promotion and a whole lot of fitting, that doesn’t happen today. As we think about the first quarter of next year, that will be our first quarter of a non-Pro V1 year in a market place with you know what will be at that time 600 fewer doors. So when we talk about what’s happening in the market, the good news is the comp realities are a whole lot tighter and cleaner. It’s a lot more predictable for us. But there is still some shakeout learning’s to take place over the next couple of quarters.

Very helpful, thank you.

Thank you, Randy. Next question please.

Our next question comes from the line of Mike Swartz from SunTrus. Your line is open.

Hey, good morning everyone. Just wanted to stick on the theme of the performance ball category and I’m just trying to get sense. I know you got some new product coming out for 2018. But just trying to get a sense of how much of this has to do with technology versus more of a price value consideration?

Mike, good question. There is not one single answer here. As we said, if you look at what’s happening with our performance line this year, its year two, its weather, its promotional, its competitive, there is not one single hand we will play that will quickly reinvigorate it. But the way we think about this, it needs to be innovation born, it needs to be performance born, it needs to be technology born. So as we think about where do we with the performance category, we understand again that it needs to come from the R&D lab first and foremost.

Okay, and then just on the iron launch, just help us better sense of an understanding your doors launch into this year versus 2015. But just trying to get a better sense of maybe the early reception to the 718, AP3 versus the 716 from two years ago?

Yeah, we are pleased. So we launched, the official market launch was September 29, so we filled the pipeline so that our resale partners were up and running for September 29. We started fittings earlier in September and as stated earlier, we really got a divided due to some good weather. Good weather promoted a whole of fitting activity, more so than we anticipated and feedback has been real good. So we are very much pleased with the launch. We are getting positive feedback on all products, but real notability as I mentioned earlier, the new one if you will is AP3, which is a new entry for us. So if there is one that’s taking most of the attention, that’s been AP3. We think some it coming from out AP1 and AP2 franchise, but certainly some of it in the form of competitive players as well.

Okay, great. Thanks a lot.

Thanks Mike. Next question please.

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

Thanks, good morning guys. Nice gross margin expansion now in your day. Can you quantify the opportunities or challenges to think about for 4Q and then into next year, I guess maybe hitting on mix, ASP, you mentioned to promos and then lapping golfsmiths. So anything there on the grosses and then just if you can, what is the expected sales for the 4Q balls and clubs embedded within the guide, the full year guide. Thank you.

The first question on gross margin, we expect solid margin for Q4 on the success of 718 and 818 where we had price increases and increased price on both, and all those models including the 818. So we expect the margin to be solid margin for Q4. And as far as the, we don’t really produce segment guidance by quarter or by year, so I would just say that looking within our range that we provided here at 336 to 346 that you would anticipate that with the 718 launch and how are seeing those categories would benefit.

Great. Thanks a lot. Best of luck for the holidays.

Thanks Simeon. Next question please.

Our next question comes from the line of Dave King of Roth Capital Partners. Your line is open.

Thanks. Good morning guys. I guess first on the sticks business, how much of the 10% increase or so was due to the Loden related to the iron hybrid? Is there anymore expected into October and then how is the sell through growth rate compared to that 10% increase and then I guess finally on that subject, having AP3, is it right to think about that as you know you get a third or you know a whole host of new placements related to that having that third one. Is it right to think about a 33% increase or so in terms of the number of replacement. Thanks.

Well, I’ll address the last one first Dave. So the Titleist iron line really is six models, now it’s seventh. So it’s with our CB/MB, AP1, AP2, TMB, etcetera. So it’s not two going to three, it’s a broad solution of irons. So I wouldn’t think of it in terms of us getting a 33% lift in placement out there if you will. I would think of it however in terms of, it allows us to reach a golfer who again is in this emerging players distance category that we haven’t reached before. So it’s less about what you’ll see in the market place, more about we’ve got a fitting solution for a group of golfers that we didn’t have before. In terms of how the business played out, you know again we did launch all products, all iron products around the world in September. So that’s done and now really we go into fitting mode. So as I said, we started strong from a fitting standpoint in September, weather has been decent, which is helped our cause in that regard, so it’s less about are there additional pipeline opportunities around the world. More so it is what’s the response going to be and how active will our fitters be and again where we stand today, we like the response, we like the activity, and golfer feedback, particularly around the newest iron has met our very high expectations.

Okay, that’s good color David, thanks. And then maybe switching gears, the ball business. I guess given that club, gear, and FootJoy were all up this quarter, even despite the weather. I think it actually even helped the irons business a little bit I think due to timing. But I guess what’s going on in Pro V with it being down over the last two quarters. You know I know it’s up for the year, but that also seemed due to Loden, even with the lower amount of doors, and then you also had the benefit of flushing all diversions. I guess, can you just talk a little bit about, are there any competitive pressures on that? Is it really just Texas and Florida, just some color there I think would be helpful.

Yeah it’s been – as we’ve lived through on several calls, it’s been an interesting year in terms of the market place with correction in the number of doors. It’s been an interesting year in terms of weather. You know largely when you see a market like New York down 20% through the first half. Good news, the weather normalized in Q3 with the exception of some areas that were hit very hard. As we think about Pro V1, we had a very, very robust first quarter, modest decline in Q2 and Q3 net-net sales in share are up for the year. So where we stand today, I’m not sure that we had scripted to go that way, but where we stand at the end of the nine months, we like our position in what’s been a challenging marketplace. Q2 is certainly promoted by weather and store closures. Q3 really the decline if you will is weather in isolated spots in the U.S. and as Bill mention the Japan market. But you hit on something very real that it’s been a different cadence for us with regards to Pro V1. We like where we started, we like where we are today, but it hasn’t been your typical quarter-to-quarter-to-quarter performance, and again that’s part of what we do within this and understanding this correcting golf market place.

Okay, thanks for talking my questions. Good luck.

Thank you

Thanks Dave. Next question please.

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

Hi guys, a couple more questions on the ball business. Can you remind me of the typical seasonality or typical kind of year-to-year trend between revenue and margins. Are Pro V1 years generally bigger revenue contributors at higher margin or how does that usually play out?

Yeah, the odd number of years are new Pro V1 years and yes typically they will allow for or provide margin enhancement in an odd number year. In an even number year we’ll see a little bit of margin degradation there, an even number year.

Okay.

And then George to round out your question, conversely clubs sort of play the other way. Clubs make more noise in the even numbered years, less so in odd years.

With margin relative stable.

Okay, and then another question on the ball business. Can you, I don’t know how specific you’ll be, but can you sort of quantify the – how big is performance versus the Pro V1 and high end stuff. And on performance, do you think the changing retail dynamic is most negatively impacting the performance side of your ball businesses?

Yeah, to your second question George, absolutely. Pro V1 has been – if nothing it’s been very resilient in this correcting marketing place, both on the worldwide tours, both with top amaters around the world and in the market place. So Pro V1 has been steady, stable and resilient, which is as much commentary on the product and its following the dedicated golfers and the efforts we put forth to whether its ball fitting teams or through our trade partners to actively educate and fit gofers into those products.

Yeah George, as far as the composition of the ball, we don’t really provide a breakdown of that, but it’s sufficed to say our Pro V1 urethane business, our franchise is over 50% our overall sales volume, net of sales.

Pro V1 is over 50%.

Yeah.

Okay. Thank you.

Thank you, George.

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

And our last question comes from the line of Casey Alexander from Compass Point Research & Trading. Your line is open.

Hi, good morning. Your debt to EBITDA is down to 2.1 and you had said previously that your target was to get it below two, so you’re getting pretty close. But my question is because of the cash conversation cycle, it would fluctuate depending upon where you were with inventory in the cash conversion cycle. When you measure that, that your goal is to get it under 2, are you looking at that, you know at any point in time or how are you measuring that? Are you trying to get all four quarters to read under 2?

That’s a good question Casey. When you are looking at the 2.12, you are looking at the point in time EBITDA at a certain debt at a point in time, and the way we look at it is in accordance with our credit agreement, our secured leverage ratio, which really is a roaring four quarter calculation that’s done on a pro forma basis. So when you have large items like the EAR payment, they are rolled back into in prior periods and it takes several months for those to roll off as adjustable items. So we are looking in terms of our secured leverage ratio, we are hitting two or less by the end of 2018, no later than 2019.

Okay, what did you say the effective tax rate was for 2018?

It’s going to be 35% roughly for the fourth quarter, absent any discreet items that would arise.

That’s for the fourth quarter ’17.

Yeah, I’m sorry, if you are asking about ’18 you know...

I thought you gave a number for ’18.

Yeah, right now I would say we are range about where we are at, but we just had a new house tax bill come out and we obviously are going to see a lot of action there and new amendments and things go forth. So we are going to have to wait and model that as we go out throughout the end of the year. Absent any change to any taxes, we would probably be in the range where we are at right now.

Okay, all right. Thank you very much.

Thanks Casey. David.

Thanks everyone. We do appreciate your ongoing interest in Acushnet and importantly, we appreciate your efforts to understand our proven and differentiated business model. The game in business of golf are finding new levels of stability and predictability with the dedicated golfer and new product innovation at the foundation of this correction. In closing, we remain resolute in our commitment to providing shareholders with long term total retune investment opportunity and once again, thanks for your time this morning and have a great holiday season.

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