Ladies and gentlemen, thank you for standing by and welcome to the Acushnet Holdings Corp Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to hand this conference over to your speaker today, Sondra Lennon, Vice President of Financial Planning and Analysis. Please go ahead.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings third quarter 2019 earnings conference call. Joining me this morning are David Maher, our President and Chief Executive Officer; and Tom Pacheco, our Chief Financial Officer. Before I turn the call over to David. I would like to remind everyone that 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 today's press release, the slides that accompany our presentation, and our filings with the U.S. Securities and Exchange Commission. Throughout this discussion, we'll 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. Please also note that when referring to segment and regional year-on-year sales increases and decreases, we are referring to sales and constant currency. And please also note that when referring to year-to-date results or comparisons, we are referring to the nine-month period ended September 30, 2019 in the comparable nine-month period. With that, I'll turn the call over to David.

Thanks, Sondra and good morning, everyone. We appreciate your time today. I'd like to begin by welcoming Sondra Lennon to our team. Sondra has been with Acushnet for more than 20 years, and she brings a wealth of experience and perspective to our IR function. I expect she will soon become a valuable resource to all of you, and that you will enjoy working with her. Now turning to the results; it was a strong quarter for Acushnet, as our team did a great job executing several new product launches in the period. And on a macro level, the golf industry is structurally stable and most markets have benefited from favorable weather this season. There were many highlights for Acushnet during the quarter, and I must thank my fellow associates and our supportive trade partners for their dedication and good work. Their commitment to providing golfers with performance and quality superior products, and value-added services are the foundation for Acushnet's ongoing success and market-leadership positions. Turning to Slide 4; you'll see third quarter sales of $417 million, delivered a 13% year-over-year increase or 14% constant-currency gain. This growth was fueled by strong performances and gains in each of our segments, golf balls, golf clubs, Titleist skier, and FootJoy, with clubs and year, up 29% and 15%, respectively, leading this growth. This segment growth was a global story, as each recent region posted gains in the quarter led by EMEA and Japan, which were up 39% and 28%, respectively, and Korea which grew 18%. Our largest market, the U.S., posted a 6% gain. And adjusted EBITDA for the quarter was $56 million, a 46% increase over last year. These strong third quarter results were in line with our expectations and consistent with the normal cadence of our business in a number…

Thank you, David. And good morning, everyone. I, too, would like to thank all of our associates and trade partners for their performance and dedication so far this year. Turning to Slide 10; I will begin by discussing our results for the third quarter. As David said, we are very pleased with our performance for Q3. Consolidated net sales in the quarter were $417 million, up 13% year over year, and up 14% in constant currency. Q3 gross profit was $217 million, up $28 million. This growth was primarily driven by the increased volumes associated with the club launches during the quarter. Gross margin was 52.1%, up 110 basis points from Q3 2018. SG&A was $159 million, up $10 million or 7%. About half of this increase was attributable to KJUS, and the remainder was primarily from higher advertising and promotion expense to support the club launches. Income from operations in the quarter was $44 million, up $18 million or 69%. Q3 interest expense was $4.5 million, up $200,000 compared to the prior year. The Q3 effective tax rate was 20.5%. Our expectations for our normalized income tax run rate has decreased from 29% to 27%, as a result of implementing certain planning items related to tax reform. As a result, we recorded a true-up for the first half of the year in the third quarter. Net income attributable to Acushnet Holdings was $30 million and adjusted EBITDA was $56 million, up $18 million from the prior-year period. We have provided a reconciliation of net income to adjusted EBITDA in our earnings release, as well as, in the slide presentation. Moving to our results for the first nine months of 2019. Consolidated net sales were $1.3 billion, up 2% from last year and up 4% in constant currency. The increase…

Thank you, Tom. Melissa, could we now open up the lines for questions?

[Operator Instructions] Your first question comes from the line of Steven Zaccone from JPMorgan. Your line is open.

Great. Good morning, guys. Thanks for taking my question. So, first question was just on FootJoy. So, nice improvement in growth there relative to the second quarter. Should we expect that growth to continue in the fourth quarter? And then, more of a higher-level question on growth of the brand. Year-to-date you've seen strength in apparel but some declines in footwear. It sounds like there's different performance by geographies in that. But David, do you think there's opportunity for FootJoy to be seeing some higher growth, may be outpacing the overall company average?

Good morning, Steve. Let me cover a couple of those. First off, I'll reiterate FootJoy is having a very nice year, particularly, in the U.S. In Europe, fueled by some really successful footwear innovation, as I talked about Flex and Fury. You're right, we have been a little bit soft in Japan and Korea. Those are a function of heavy early season inventories. I think 2019 is an example of a job well done in the athletic segment, which has been our focus. And you will see in 2020, that this will continue with some line expansions. And we also have some launches planned in some of our more premium models, the Tour-S, as an example, will be followed on by the Tour X shoe, a new offering that we'll launch later this year, early into next year, and in some other - and some other footwear models that we're excited about. So, getting to the heart of your question, can we grow the FootJoy business at an accelerated rate? We're very confident with what FootJoy has in the pipeline. We're confident that we are positioned to gain, share, and grow. Some of the wildcards would remain. What's happening in Japan from an inventory standpoint. Although, we do see that has been cleaned up in recent months. But in terms of any specific guidance, Steven, we're not going to put any numbers to it, but I will affirm that we like our position with FootJoy in terms of what they have achieved this year, what's happening in the channels. And most importantly, what we see is a pretty robust new product pipeline.

Great. Thanks for that. And then, second question just on gross margin side. So, pretty strong results here in the third quarter. Can you talk through expectations in the fourth quarter? And maybe how you think about the puts and takes into - on the gross margin line in 2020 and beyond? Thanks very much.

Good morning, Steve. You're right, we had a very strong gross margin quarter, up 110 basis points in Q3. But we do expect gross margins to be flat to slightly up in Q4, compared to Q4 '18 and to Q4 '17. In general, our gross margins have been reasonably consistent in Q4 over the last few years if you look back at the history. As a result of our product launch cadence, and our two-year product lifecycle, we generally have Q4 gross margin improvement in golf balls in odd-numbered years. And that's generally offset somewhat by declines in golf clubs. That is - the opposite that is generally true in even years. And if you look at our implied guidance for Q4, and back out something for KJUS, you'll see that our Q4 looks very similar to our Q4 '17, as you'd expect given its in odd-numbered year.

Thank you, Steven. Next question, please?

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

Thanks. Good morning, everyone. Maybe sticking with the Q4 guidance a bit and the 4% top-line growth that's implied. Are there are any further launches embedded in that? Or is that predominantly sell-through related? And then, how is the sell-through, I know it's early, but how's the sell-through been early on in T-Series?

Good morning, Dave. First question, fourth quarter, nothing out of the ordinary from a product launch perspective in the fourth quarter. I did mention we'll ship some footwear to the U.S. market in the fourth quarter. But that's not a real driver to the fourth quarter activity. We've - that's not consistent with prior years. So, I would expect the fourth quarter will play out fairly normally. If you think about how it compares to last year and even two years prior. While early days for T-Series, we're very pleased with how that's played out. First off, from a product development standpoint, the team did a great job, integrating some new technologies into the product, which we're excited about. And we, sort of, go through a sequence of a tour launch, a trade launch, activating and educating our fitters, and market launch, and then, we start the A&P engines, and that's all gone very smoothly. And no small feat, given the significance of launch of a Titleist iron, as you know, we've got a broad product offering, upwards in six or seven different models. So, from where we stand today, we're quite pleased. There's - we have seen, and we view this as nothing but a positive that more and more of the business is trending toward custom fit, which again, we do this as a positive, both from our trade partner perspective, from a golfer satisfaction standpoint, and just - the more we can move the business in that direction, the better off we're going to be. So again, early days we're about 45 to 60 days into the launch. But all systems point to early success, meeting our expectations, which arguably were high expectations.

Great to hear that, David. And Tom, I think you previously talked about List 4 tariffs impact of $7 million to $10 million, I want to say. What are the current thoughts on the ability to mitigate any of that as we look out 2020?

That's correct. We did state that we expected the 2020 impact in the $7 million to $10 million range. We - and again, as you said, unmitigated, we still think the unmitigated would be in that range, nothing changed there. We have been taking steps to mitigate, including negotiating price concessions with some of our vendors. We've shifted some of our supply and sourcing outside of China. We've been looking at strategic pricing actions. And we certainly think, we will be able to mitigate a significant portion of that $7 million to $10 million.

Good year. Thanks for taking my questions. Good luck with the rest of the year.

Thank you.

Thank you, Dave. Next question, please?

Your next 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 start with Japan. And I apologize if I've missed part of this, but the sales in Japan this quarter were really fantastic. And - but following some softer results in the first half of the year, where you had double-digit decline. So, I'm wondering if the softness in Japan earlier this year was just, sort of, a blip and Japan this quarter, represents sort of the new run rate? Or if there is any way to parse out why there was such significant quarter-to-quarter volatility? Obviously, you're watching what happens with the consumption tax hike, I think, you mentioned that in the impact. But any, sort of, initial thoughts on how we should think about Q4 in Japan? It would be great.

Yes. Good morning, Kimberly. I'll address that in a couple of different parts, maybe by segment, because I think it's the best way to look at it. Our ball business has been steady and up nicely all year. That's - I think, commentary on success of our Pro-V1 launch and rounds of play being up nicely. So, from a ball standpoint, the market's been fairly resilient. You get to [Technical Difficulty] categories, and they have been a bit slower, obviously, our first-half results affirm that. It does speak to the reality of the Japan market, which is very big box-centric if you will. And as a result, channel inventories tend to run heavier in Japan than in all other markets. And this year, that had negative impact on our business, and I think the whole market in first half, notably for us in footwear and gear categories where inventories were backed up early in the year. What you're seeing in the third quarter really is the upside benefit of a robust launch across Titleist golf clubs, irons, utilities, and hybrids. As we think about the future of Japan, we continue to be cautious again, just because that market tends to run heavy on inventory. We feel better about balls than most other categories. And I would say, the gear and footwear business, which got off to slow starts due to heavy inventories early in the year. We've seen that normalize a bit as those inventories have worked themselves down. So again, I think you got to be careful not to read too much into Q3. It was a terrific quarter. And again, very much driven by a couple of robust product launches.

Great, that's super helpful. Thank you. And then, Tom, just a quick question for you. On the narrowing of the EBITDA guidance, it looks like depreciation, which is, obviously, factored out of EBITDA, depreciation rose $2 million this quarter. I'm wondering if that's the acquisition accounting in there. Or we just had noticed that's the change in trend from first half of the year?

That is not a result of the acquisition accounting. That is just the trend of the activity based on our historical CapEx and when things have been placed in the service.

Okay, understood. Thanks so much for the clarification.

Thank you, Kimberly. Next question, please?

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

Good morning, guys. Thanks for taking our questions. I did hop on late. So apologies if you've addressed this, Dave, in the remarks. But on the club side, really impressive revenue growth. If I remember right, that Scotty launch fell from 2Q into 3Q. Could you parse out how much that aided revenue growth in the quarter for the third quarter?

Yes. We don't - Daniel, we don't break it out by category like that. But it was, I'd say, the way to think about that probably a couple of million dollars, not overly meaningful. And I will say, as I stated in my early remarks that that second quarter supply chain issue has been fully resolved. So, a strong and robust quarter in the third quarter. I mentioned this on the last call. We didn't anticipate getting back all the volume that we lost in Q2, and that held true. We got a lot of it back into Q3 on the putter side but not all of it.

Got it. Thanks. And then, a follow-up on the golf ball category. Revenue growth down a bit of, I think, you said that's in line with your expectations for this point and for the year. But given the industry trends are accelerating, just - how does the inventory level and the channel feel today, as we're heading to the holiday season? I know Pro-V is a big holiday item. How are channel inventories as you head into that season? And do you anticipate that posing any, kind of, margin headwind here in the fourth quarter?

Yes. So, I'll just - I'll clarify one remark, Daniel, and that is balls up nicely, and up slightly in the third quarter, up, I think, 6%, up slightly I said in the third quarter. So, what - we're bullish on the ball business this year. If you look at what's happened, you'll see sell-through up, and you'll see inventories generally down, across most markets, which, obviously, we view as a real positive. As we head into the fourth quarter, golf balls have become a very popular holiday gift item. So, we see virtually every manufacturer having a ball promotion. We think that'll be similar in 2019 as it was in years past. We would also expect, and this is in the range of normal, to see some of our competitors start selling off inventories, as they prepare for new launches in early 2020. So, I think the way to think about golf balls is it's in as good shape as it's been for quite some time. Again, rounds up, sell-through up, inventory down. You're going to see it again over the next two months. A pretty robust platform of holiday promotions, which has become the norm.

Got it. Thanks so much. Best of luck.

Thank you. Next question, please?

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

Hi, guys. Thanks for taking my questions. So first, it seems like M&A is getting more attention these days. And so, I was just wondering if you could just tell us more about - and I'm not sure you, how much you're going to say here, but if you could tell us more about your strategy. Are you targeting certain geographies or product sets or U.S. gaps? And also, would you be comfortable, I mean, are you looking at things that are significantly bigger than what you have done so far?

George, good morning. Let me comment on that. As we think about M&A, our commentary guidance has been consistent from the beginning, and it would need to appeal to our dedicated golfer, which we think is an area of expertise for the company. And it would need to fit into our global go-to-market channel strategy. So, good examples would be KJUS, which again, fits nicely with our channel strategy, notably in the U.S. and Europe, and in the future likely for Asian markets. Links & Kings, again, more of a U.S. and European centric play, dedicated golfer focused, and really fits in nicely with our channel strategy in both of those markets. So, our approach to M&A has not changed. I think you need to think about the fact that we do remain opportunistic in the marketplace. We continue to look for opportunities that match those parameters. In terms of any large or transformative acquisitions, not something we're primarily focused on, but, hey, we are open to all scenarios. But I think fair to say, that's not our area of primary focus at the moment.

Okay, that's helpful. And then next question on - can you remind us, where you are in the golf ball side directly selling over the internet? And what is your thinking, have you changed your thinking there at all just as you look out? And is the competitive dynamic sort of - do you see anyone who is direct-to-consumer getting traction?

Yes. I think first off with the ball business. It's a little bit of a different answer by geography. So, I guess, I'll focus first on the U.S. We have a very broad and what we see to be advantageous distribution network. We've got a lot of terrific partners who do a great job. Golf balls are readily available virtually wherever the game is played, and at a whole lot of other golf specialty partners. So, we've got a broad distribution platform and we benefit from that. We benefit from the endorsement of so many of our trade partners. That said, we acknowledge and recognize that there are simply many, many consumers who prefer to buy direct. In the U.S., we've been selling golf balls direct through my Titleist, which has been our custom platform for the last few years. And while that continues to grow nicely, I will say, it is a small part of our business, and we anticipate it continuing to be a small part of our business, although, we do expect it to grow nicely. That's the framework for how we think about the ball business online. We've exported that around the world and we're still in the process of exporting that around the world with the primary focus being customization. We do think e-commerce lends itself to a really good consumer experience in terms of purchasing custom golf balls. But we're selling direct in many markets. We really like the business; it's going well for us. But again, I will acknowledge it remains small, and again, probably should small given the robust trade network that we have.

Okay, great. And then, last question for me just about CapEx. It's been $32 million, I think, you're guiding this year and last year it was somewhere in that range as well. Are there any other major projects you're considering going forward? Should it be pretty consistent in 2020 and beyond?

Right. We have been guiding to the $36 million for the year. We've taken that down a little bit to $32 million for 2019, as some of the projects have slipped into 2020. You're right, our CapEx over the last few years has been pretty consistent, and we would - at this point, we would expect that to continue. There's no major initiatives on the lot - on the horizon at this point. But we are early in our planning cycle, and we'll update you on that on the next call.

Okay, thanks.

Thank you, George. Melissa, I think we have time for one more question.

Your next question comes from the line of Brett Andress from KeyBanc Capital Markets. Your line is open.

Hey, good morning. Just had a quick question on the EXP01 ball. It seems like you're testing that direct-to-consumer, and I'm not sure if that's in any other retail channels at this point. But maybe, just elaborate on that launch strategy there, if there is one? And what type of market are you focused on with the ball like that?

Yes. Good morning, Brett. So, we are - it is being tested throughout the U.S. and Canada with all our trade partners, for many of our trade partners, I should say. It does represent our entry into thermoplastic urethane or TPU-covered golf ball segment. Just as background, it's an experimental multi-layer golf ball that delivers low spin on full shots for long-distance, great spin and control and in the quality, consistency, and durability, which every Titleist golf ball is known for. It's tested - we're testing it in limited quantities. We've positioned it at $39.99 which represents about a 15% premium to over Tour Soft model. And that's in parity with several competitive TPU models in the market. And our thinking there is, we're committed to establishing a leadership position in this technology, which affords us the opportunity, we think to upgrade golfers who are currently planning up a certain model, either our own or a competitive model or perhaps convert golfers currently planning a competitive TPU-covered golf ball. So, as we think about that market opportunity, if you look at the market, call it a retail, $25 to $45, it's roughly 40% of the market opportunity of the total U.S. golf ball market opportunity varies around the world. And we think, we have an opportunity to grow our share of that business through this process technology and through what we believe will be a meaningful performance upgrade to our line. So, we're very excited about it. We have been working on it for quite some time in the lab. We're not yet prepared to talk about where we go with it because we've yet to finalize plans. But we do anticipate launching a product off of this platform at some point in the middle of 2020.

All right. Thank you.

Okay. Thanks, Brett and thank you, everyone. As always, we appreciate your interest and time and attention. And we do look forward to reconnecting with you early next year. Thanks, again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.