Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to Acushnet Holdings Corp. First Quarter 2019 Earnings Conference Call. [Operator instructions] I'd now like to turn the call over to the Vice President of Investor Relations, Tony Takazawa. Sir, please go ahead.

Thank you. Good morning, and welcome to Acushnet Holdings call to discuss the financial results for Q1 2019. This morning, we are joined by Acushnet President and CEO, David Maher. David will provide his observations regarding the start of the golf season, the cadence and timing of our business this year, and how we're positioned for the rest of 2019. Next, Acushnet CFO, Tom Pacheco, will spend some time discussing the overall financial results for Q1 and our outlook for the rest of the year. 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, 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 CEO, David Maher. David?

Thanks, Tony. Good morning, everyone. We appreciate your time on today's call. I'm now on Slide 4, enduring these prepared remarks, Tom and I will address Acushnet's first-quarter results, provide additional insight into the cadence and timing of our anticipated 2019 business and share our observations about the start of the golf season and the industry's positioning as we approach the heart, the playing and retail seasons around most of the globe. And before I commence my business update commentary, I do want to announce that our board of directors today declared our quarterly cash dividend of $0.14 per share. Acushnet's quarterly dividend has increased by 17% since it was first initiated two years ago and is consistent with our positioning of Acushnet Holdings as a long-term total return opportunity. This increased dividend also affirms our board's confidence in Acushnet's proven business model, consisting of a laser-like focus on the game's dedicated golfer, a broad and diverse product category portfolio, an attractive mix of consumables and durables, brands that are trusted by the commercial core of the golf industry and strong pyramid of influence validation. And while these are still early days and with many gold markets having only been open for a few weeks, the game is off to an exciting start in 2019. It is only May, and golf fans are already geared up for the second major of the year as the PGA championship next week heads to Long Island in one of the country's great public golf courses, the Black Course at Bethpage State Park. This builds on a historic April, where we saw on inspiring final-round display of talent and sportsmanship at the inaugural Augusta National Women's Amateur. The drive, chip, and putt final showcased how much fun Junior golf can be, while reminding all…

Thanks, David, and good morning, to everyone on the call. I would like to echo David's comments and thank all of our associates and trade partners for enabling us to deliver a solid first quarter. Overall, we are pleased with our Q1 results. While there were a number of expected puts and takes due to launch timing, we are right on track to achieve our goals for 2019. Consolidated net sales were $434 million, down 1.8% versus Q1 of last year and up almost 1% on a constant currency basis. Growth was driven by the Titleist golf ball business and the very successful introduction of the new Pro V1 and Pro V1x golf balls as well as by increased sales volumes of AVX golf balls. We also recognized sales increases in FootJoy, footwear and apparel, and Titleist travel gear and golf bags. As previously mentioned, Titleist clubs had a challenging year-over-year comparison as a result of launches of Vokey Wedges, Scotty Cameron Select model putters and VG3 irons in Q1 of 2018, as well as anticipated lower volumes of AP irons, which were in the second year of their two-year product cycle. Gross profit was $222 million, down $5.5 million versus last year. The decrease was a result of the lower sales volumes in irons, wedges and putters, partially offset by an increase in Titleist golf balls driven by the higher volumes in the Pro V1 franchise and AVX. Gross margins were 51.2%, down 30 basis points versus last year. SG&A expense was $155 million, up $4 million over Q1 2018. The increase was primarily due to an increase in selling expenses across all segments, as well as higher advertising and promotional expenses supporting the launch of the new Pro V1 and Pro V1x. Research and development expense of $13…

Thanks, Tom. James, can we now open up the line for questions.

[Operator Instructions] And our first question comes from the line of Steven Zaccone from J.P. Morgan. Your line is open.

Great. Thanks very much. Good morning, guys. I wanted to start with two product questions. The first one is on the Pro V1 launch. Just curious to get your sense how this year's launch is progressing relative to the launch two years ago? How do you feel about channel inventories for golf balls both in the U.S. and in multiple basis? And then I was hoping to get your opinion to discuss the new TS4 launch. Maybe just elaborate how it complements the existing Woods' offering? And why you saw the need to launch, well, outside of your normal metals offering cadence?

Okay. Good morning, Steve. So three questions, I'll hit Pro V1 first. We're real pleased with Pro V1's global launch. We've got a bit of a different dynamic this year as we're launching a product next to AVX and we're real pleased with how Pro V1 has established itself, both from a performance standpoint, from a tour validation and global pyramid validation. As I mentioned in my prepared remarks, the yellow's been a nice addition to the line that's added some increased interest in trial. So we're very pleased with Pro V1, one of our more successful launches in the history of Pro V1. Inventories, here we are, early May, I'll give the global flavor, and that is, we're at a time where manufacturers are effectively loading up the retail channels. Inventories ought to be robust right now. We see that. We'd have great concerns if there was a real drag on rounds around the world. We're not seeing that. So net-net inventories again, are robust and full as ought to be this time of year, but I would say, very much, in the band of normal. And then, thirdly, TSR gives you a chance to maybe, or gives us a chance to understand how we think about servicing and meeting the needs of the dedicated golfer. We've got a product line, TS2 and TS3, which we believe meets the needs of the vast majority of golfers in our dedicated golf for set. We do accept there are some, I don't want to call them outliers, but there's a small percentage of payers, who because of their launch conditions, very high speed, very high spin, very high launch, would benefit from a product that provides a different and more dialed-in launch condition. TS4 is just that smaller profile, moderate launch, lower launch, lower spin. Just to give you a frame of reference, we still think, on the worldwide tours, roughly 85% of our players will fit into a TS2 or TS3 model. TS4, again will account for about 15% of our total usage. But for us, it's really the way to showcase our fitting capabilities, our design excellence to really fine-tune all golfers, who fall into our dedicated golfer consideration set.

Great. Thanks for the detail. I just had 1 other question. I just wanted to -- I was curious if you could talk to the gross margin performance in the first quarter, maybe just to elaborate what drove the year-over-year decline since it's a bit surprising since you had a Pro V1 launch? And as we look to the balance of the year, just any help to think about how -- when we can see some more expansion on that line? Thanks.

Sure. Thanks, Steve. This is Tom. You're right. We would normally expect gross margins to be up in the first quarter of an odd-numbered year given the strength of the Pro V1 launch. However, the significant decline in gross margin in clubs, which are directly a result of the lower volumes related to the timing of product launches that we talked about, was just too large to overcome even with margin improvement in the Titleist golf club business. As you think about the balance of the year, there are some tailwinds that should help, including continued high volume -- higher volumes of Pro V1s, high volumes of clubs as -- particularly as you get into Q3 with the launch of the irons and continued performance rebounds from FootJoy and gear are all kind of tailwinds there. And so we do see gross margins improving for the balance of the year.

Your next question comes from the line of Dave King from ROTH Capital Partners. Go ahead, please. Your line is now open.

Thanks. Good morning, guys. I guess, first, on the upcoming irons launch in the third quarter, do you expect that to be as large as the 2017 launch, when I think you had yet three clubs that you launched then? How should we be thinking about that as we [indiscernible] to that?

Yeah, Dave, well, you're not -- we haven't introduced these products to the pyramid to our trade partners, etc. yet, so we will be a little bit coy in terms of how much we do want to say about them. But fair to say, the right starting point would be what happened in 2017, although, we're certainly going to try to build upon and grow that. Another thought is and we're always conservative as it relates to our launch timing, which historically straddles the third and fourth quarter. We're going to do what we can to move that forward upwards of a month to maybe catch the tail end of the golf of the summer season, late August, early September. That, again, is our intention, but we always take a conservative approach with new product launches to give you some flexibility as it relates to prepping the supply chain and organizing your supplies for a global launch. But I think the right way to think about it is just that is yes, we will look at 2017 again we're going to -- and we intend to build upon that and we may go earlier if circumstances allow.

That helps. Thank you. And then I appreciate the color on the revenue guidance by quarter. How should we be thinking about EBITDA, playing out by quarter versus the full-year guidance? In the first quarter, I think you had a fair amount of increase in marketing. Should we expect that same level of increase in Q3, when you do an iron's launch, etc.? Thanks.

Sure, Dave, this is Tom. We expect the EBITDA progression to be similar to the sales progression, with the guidance we've given or the help we've given about the progression. In terms of sort of our SG&A spend, that your mentioned, we do expect that over the balance of the year, SG&A will grow at a slower rate than revenue.

Okay. Great. Some more leverage. I appreciate it.

Thanks, Dave. Next question, please.

Next question comes from the line of Daniel Imbro from Stephens, Inc. Your line is open.

Yeah. Thanks, guys. Good morning. Wanted to start on the competitive environment, particularly on the club side. Here in the U.S. seeing a majority of manufacturers rolling out not only new drivers, but seemingly there's a number of new tour balls or tour level balls that have entered the market. How would you compare the competitive environment today to maybe last year or the last Pro V launch in 2017?

I would say, you know two -- maybe two answers, Daniel. Golf balls, very similar to what we've seen over the last handful of years. So nothing in golf balls surprises us. We're on our launch cadence and our competitors are on their launch cadence and not to say any of us don't deviate but it's -- again, it's largely as we've seen in previous cycles. So not a lot of change there. The club situation, a little bit different, notably in drivers, we've just seen a whole lot of drivers launched in the last several months, six, seven, eight of our top competitors all out there with new drivers. So the driver landscape is certainly crowded, more crowded than it was the last year or two, but the rest of the club marketplace, I would say, is as we'd expect, and as we've seen in previous cycles.

Great. And as a quick follow up on that. Over the last few years, ASPs have really been going higher, particularly as PXG kind of opened up the higher end of the market. As we're seeing now PXG lowering ASP now there is small percentage of market share, but lowering their ASPs on drivers, and rolling out a cast-iron kind of entering the more lower-price point iron market, how do you think that changes? Are we seeing any pricing dynamic shifts that are different from the last few years?

So I think part of the ASP journey is really two-fold. It's -- the industry has done a nice job bringing us some terrific products, which warrants and commands higher ASPs. And then the other part of the ASP frontline over the last couple of years certainly has to do with the retail correction. We're just seeing a whole lot less off-price discounted product available in the market, which has contributed to the ASP bump. In terms of any one competitor having an impact on that, I don't frankly see a whole lot of puts or takes, again, based on one competitor's action. So really not banking on a whole lot of change as a result of, again, one competitor's actions. But I think in general, the landscape for golf clubs, in the case of this discussion, what we're seeing is just, is a far more healthy environment than we're accustomed to over the last two, three, four years. Add to that, you see a continued push toward club fitting, which I think is only, and can only be viewed as a positive for the category.

Thanks so much.

Thanks, Dan.

Thanks, Dan.

Next question, please.

Next question comes from the line of Michael Swartz from SunTrust. Go ahead, please. Your line is open.

Hey, good morning, guys. I just wanted to touch on the club business in the quarter, and I think there were some things that maybe a bunch of us didn't appreciate with some of the comps and timing of product launches, but may be the right comparison is two years ago. So we go back two years ago to 2017, I think your sales were about $101 million, $102 million, which would still imply revenue was down from that period and I think that was, again, a driver year for you. Can you maybe talk about how we should be thinking about it from that lens? Maybe what some of the puts and takes '19 versus '17 would've been?

Sure. Michael, this is Tom. I think one fairly significant difference in '19 versus '17 is the putter. In '17, we did have a putter launch, which is normal for us for an odd-numbered year. We also had a putter launch in 18. But in '19, due to the timing of our launch and the putter launch didn't actually occur until April. So that pushes a chunk of revenue out of Q1 and into Q2. Other than that, I think '17 and '19 were reasonably similar.

Okay. Okay. That's very helpful. And then may be more of a housekeeping question. Did you, I may have missed, so I apologize, did you say what PG golf added to the quarter? And is your outlook for that business unchanged in '19? I think before you had said, it was somewhere between like $25-or-so million?

Yes. So, we didn't say PGA, as we've said, is pretty small. It was a few million dollars in the quarter and our outlook overall has not changed for the year.

Okay. Great. Thanks.

You're welcome.

Thank you. Next question, Please.

Your next question comes from the line of Simeon Siegel from Nomura Instinet. Go ahead, please. Your line is open.

Hey, good morning. This is Dan on for Simeon. Thanks for taking my questions. On the M&A front, I'm wondering if you could go into any color there in terms of opportunity and sort of the categories that you would be looking out? And then secondly on tariffs. I think you previously mentioned like a low single-digit million headwinds. Wondering if there's an update to that? Or if you've been able to mitigate any of it? Thanks.

So Dan, I will take the first question and Tom will handle your tariff questions. M&A, we've been pretty clear on our approach. We're certainly open-minded to acquisitions, and we've made a few in the last couple of years with PG golf and Links & Kings. Our broader capital strategy is focused on dividend. It's focused on organic growth. It's focused on share repurchase and M&A. And specific to M&A, we've been consistent in our approach from the beginning and that is, we look for opportunities that are synergistic with our dedicated golfer focus, number 1, and synergistic with our channel of distribution bias. We benefit greatly by having a strong profile of trade partners and when and where we see products with which we can leverage across that distribution profile, we pay especially close attention. So that's the framework and how we think about M&A. And then to your second question, I'll hand it off to Tom.

Thanks, Dave. Dan, so as it relates to tariffs, if you recall, the current Section 301 tariffs that are in place are at 10% and primarily impact our headwear, our golf bags and our travel gear. The tariffs were set to increase to 25% in on March 1, but those were delayed based on progress that was being made in the China trade talks at that time. We did say that if the tariffs were increased to 25%, we thought it would have a couple of -- a couple to $3 million impact on the year. As we've heard in the news, the Trump administration is now threatening to increase the tariffs as early as the end of this week 2% to 25%. But as we move through the season and we've done a bunch of -- received a bunch of our product of already in that $2 million to $3 million has been lowered to some extent. And so we're not expecting it to be that high, but -- and we are in the process of working on mitigation -- mitigating actions that would minimize any impact beyond 2020 -- sorry, beyond 2019.

Your next question comes from the line of Casey Alexander from Compass Point. Go ahead, please. Your line is open.

Hi, good morning. Let me ask a question. I mean clearly, as it relates to consensus estimates, this quarter is a miss. And you're talking about product cadence. These estimates were out there eight weeks ago, when you presented fourth-quarter earnings. If you had to do it over again, would you have been a little bit more transparent about the product cadence at that point in time and allowed people to right size their estimates?

Yeah, Casey, fair to say, we're -- most of our efforts were focused on the first half. We take a -- especially in the first half in golf, you know how things can swing from Q1 to Q2, but most of our efforts were really focused in on presenting and painting the picture on the first half. We run our business versus our plan, and hey, we were very much in line with our expectations. Clearly, from what we've seen, there was a bit of a misunderstanding on the club cadence realities. And might we have -- might we provide a little more quarter-to-quarter color on that, sure it's something we would think about in the future.

And were you surprised that Japan was down 20% given what you said that previously that I thought there was a statement that rounds played in Japan was -- or Japan had gotten off to a good start earlier in the year?

So to your question, no, we weren't surprised at all with Japan and it is commentary on the uniqueness of that market and how that market functions and how it differs from all other regions. In Japan, which we've said in the past is a very retail-centric market as opposed to others, which tend to be more fitting centric. New product pipelines in Japan are sizable and they represent the highest percentage of our full-year forecast anywhere in the world. It's just you load up the pipeline and then they sell it through at retail. Other markets, you tend to capture sales more in line with when it's sold through, but again, in Japan, in just tends to a big loaded market relative to other markets. May be a way to frame that, on the positive would be, as I mentioned on my remarks, our golf ball business grew faster in Japan in the quarter than anywhere else in the world. That's a commentary on the loading realities of that market. So as you'd expect, in our club journey and in our 8-quarter club journey, if the clock starts in quarter one as a year ago and even near, you do a meaningful pipeline of wedges and putters, that's all good and positive, but indexing against that, comping against that a year later will always be a challenge. So again, Japan didn't surprise us, but it does give us a good opportunity to talk about, the uniqueness of the Japan market, which, again, is so very load-in, sell-in centric in terms of newer business plan.

Okay. And my last question is just referring back to when the company became public. There was a pretty rigid view of that eight-quarter product introduction cycle. And at this point in time, I can think of three or four instances in the last year, where all of the sudden the company is deviating from that kind of rigid view of the eight-quarter product introduction cycle. Would you say that Acushnet is trying to be more flexible than in the past in relation to product introduction cycles? And is that a response to the competition also changing their product introduction cycles?

Good question, Casey. We're still -- in the 8-product cycle we're talking about is really, first and foremost, borne of how the golfer thinks about replacement cycles and it's borne of the reality that, you can imagine, with a vast product portfolio like we have to do it all in a quarter or a year, would be incredibly challenging. So we're very comfortable and confident in our approach that 2-year product lifecycles make a lot of sense. Now that said, we're always going to be nimble and agile based on needs of the consumer, based on changing market wins, based on the increasing capabilities of our R&D -- our R&D department. So it's fair to say we believe strongly in our model, in our approach, but we're as prompted and warranted by the market, by consumers and by our own capabilities, we're always going to be nimble and agile within that framework.

Okay. Thank you for taking my questions.

Thanks. Thanks, Casey. Next question, please.

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

Thank you, and thank you for the clarity on Japan and answering Casey's question. Just maybe one to continue that line of thought on Korea, not as much dramatic here as Japan, but is -- are there similar characteristics there that the costs in Korea to be down, again, versus what we're seeing in the U.S, what we're seeing in the EMEA area?

Yeah. Tim, a good question. The Korea, a lot of what I talked about in Japan doesn't apply to Korea, so I'll touch on Korea a little bit separately. You know framing what happened in Korea [ph], balls and gear had terrific performances in the first quarter and the club story was as we noted. So the question is why is Korea down while the U.S. and EMEA are up? And really it speaks to some shifts happening in FootJoy, twofold: one, we're transitioning our apparel line from what was more of a globally inspired line to what is now more of a Korea-centric, locally designed line. So that's had a bit of a hit on our calendarization. And secondly, as we shift to more of a stand-alone FootJoy store model in the market, we're shifting some of our revenue recognition from wholesale to retail. And what that says is, "hey, you capture it when you sell it through, not when you ship it in." So really, the FootJoy story is we're going through a bit of a transition and that, at the end of the day, is what distinguishes and separates it from what you're seeing in the U.S. and EMEA. But fair to say, Korea and Japan markets, very, very different in terms of how they function and how they operate.

Okay. Okay. And then on the adjusted EBITDA, just wanted to circle back there. Understand that realistically you mean that your business in two halves of the year rather than and, as much on a quarterly basis. But was there anything in Q1 that you may be pulled forwards, some R&D or the marketing expenses? Again, may be a little better communication on the cadence of the quarters, but was there anything unusual that happened in Q1 that suppressed the EBITDA margin?

Tim, this is Tom. No, I would say there was nothing unusual. I mean, the EBITDA margin and the actual EBITDA itself are purely a function of the lower operating income, which is really, you know driven by the lower sales volumes that we've discussed and its impact on revenue and gross margin.

Okay. So no pull forward or timing of R&D or marketing expenses that could have magnified that, Tom, in anyway?

No, not in an unusual manner. No, Tim. Thank you, gentlemen.

Thanks. We will have time for one more question, and then we'll have some concluding comments from David.

Your last question comes from the line of Brett Andress from KeyBanc Capital Markets. Go ahead, please. Your line is open.

I guess back to the topic of the week, tariffs and the recent escalation there. It was touched on in earlier question, but I guess, in the event of a lift four, which is really tariffs on everything from China, can you remind us what your supply chain looks like today in regards to China? And how a situation like that could manifest itself in both the P&L and from a consumer demand standpoint?

Sure. Brett, this is Tom. So you know, as you can imagine, we have, certain parts of our business do have more concentration in China from a supply chain perspective, in particular, some of our footwear and much of our apparel. So that would be a situation we would have to closely monitor and look at mitigating actions that we could take to minimize impact. But that is, that would be perhaps a more significant problem for not only us, but for much of the retail industry in general.

Brett, I'll add on that too. Our ball business, majority of our production is here in Massachusetts. Secondly, the rest of it is in our Ball Plant IV in Thailand. Clubs. Club assembly happens really in local market. So we custom fit, we tend to assemble in local markets. And gear, our gear teams has done a nice job of diversifying that supply chain. So we certainly have a lesser exposure to China than we may have had three, four, five years ago.

Understood. Thank you. And kind of back to the industry. Obviously, some level of rounds played pressure earlier in the year but from our view, retail dollars, for the industry, as reported by Datatech, I think they're holding up okay, again, some tough compares. So I mean can you just -- at least, so far this year, but can you just maybe talk about how the industry retail spend has held up relative to your expectations so far this year? And what you're expecting for 2019 from that standpoint?

Yeah. I'll -- you know much like you said, Brett, it's -- what we're seeing is it's holding up quite nicely despite some pockets where rounds are down, I would imagine it looks better in the southeast for the quarter than it does for the west, which was hit hard by weather. But again, speaking the globe rounds, global rounds are in decent shape overall. Again, echoing your comments about retail sell-through. We're seeing pretty good stability. And as you would expect, the reminder I'll put forth is that, so much of the golf season is just getting under way. Here in New England, we're two, three weeks into it. So the data we look at now is pretty good. But just as a reminder, it's from Q1. Q1 play represents globally anywhere from 10% to 15% of play for the year, and again, that's a global number. So for us, so much of our resources and efforts are geared toward sitting in sell-through, which really happens in April, in July, August and even now into September timeframe. But again, early days, but we see nothing out there that prompts any caution.

Any review on April rounds played, just from where you guys sit?

Well, if you're asking for a more recent, it was a wet April. But again, around the world, I think you're going to see similar to what we saw in the first quarter. There were pockets where it's been pretty good, Northeast and Midwest, slower than you'd like, around the globe, again, pretty good. So no outlying inputs one way or the other, which is a little bit different from where we've been certainly last year, where this time last year we had tough weather in many markets around the globe. But the key thing here is, we've got to -- as we roll into May, we've got to see how the Midwest and Northeast markets open up. And again, after a wet April, we'd like to think things will soon normalize.

Understood. I appreciate the color.

Okay. Thanks. And thanks everyone for your call. We appreciate your time and ongoing interest in Acushnet. We invite all of you to do your part to contribute to quarter two rounds of play, as whether improves here and we wish you all the best and look forward to reporting back in early Q3. Thanks, again.

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