Ladies and gentlemen, thank you for standing by, and welcome to the Acushnet Holdings Corp. 4Q 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Ms.Sondra Lennon, vice president FP&A and investor relations. Please go ahead.

Good morning, everyone. Thank you for joining us today for Acushnet Holdings fourth quarter and full-year 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 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. Please also note that when referring to segment and regional year-on-year sale increases and decreases, we are referring to sales in constant currency. And please also note that when referring to year-to-date or full-year results or comparisons, we are referring to the 12-month period ended December 31, 2019, as a comparable 12-month period. With that, I'll turn the call over to David.

Thank you, Sondra, and good morning, everyone. We appreciate your time today. On this morning's call, we will present our fourth quarter and full-year results for 2019, outline Acushnet's strategic priorities for 2020 and discuss our current view of how we see the coronavirus impacting us over the coming months. And I will begin by stating that 2019 was another strong year for Acushnet, defined by successful new product introductions, an organization wide commitment to operational excellence, the continued strengthening of our balance sheet, and an increased return of capital to shareholders. As importantly, we continue to make key investments across our business as we seek to fortify our competitive advantages and strengthen our prospects for future growth. Now getting right to our results. Please turn to Slide 4. For the fourth quarter, Acushnet revenues increased 7.3%, or almost 8% on constant currency. Adjusted EBITDA for the quarter was $44 million, representing a 23% increase for the period. And as I will talk about in a minute, this growth was led by double-digit gains in golf balls, with Pro V1 having an especially strong quarter in holiday season as well as healthy gains posted by FootJoy Golf Wear. For the full year, sales of $1.68 billion were up almost 3% and 5% on constant currency. Full-year adjusted EBITDA increased 4% to just over $240 million, aided by an expansion in gross margin to 51.9%. And as Tom will discuss in more detail, we returned over $70 million to shareholders through our dividend and share repurchase programs in 2019, representing an 84% increase versus 2018. I am especially appreciative of the good work by my fellow Acushnet associates as their efforts and commitment to excellence are the foundation of our achievements and ongoing success. I must also thank our valued trade…

Thanks, David, and good morning, everyone. I would also like to thank our associates and trade partners for their contributions to what was a strong performance in 2019. Starting with our Q4 results on Slide 10. Consolidated net sales in the quarter were $368 million, up 7% year over year and up 8% in constant currency, driven primarily by increased sales of Pro V1 and Pro V1x golf balls and the impact of shoes, which we acquired in July of 2019. Q4 gross profit was $187 million, up $12 million, and gross margin was 50.7%, down 20 basis points from the prior year. Tariffs negatively impacted our Q4 gross margins by 40 basis points. SG&A was $143 million, up $3 million or 2%. Incremental SG&A expense from KJUS was partially offset by lower advertising and promotion and share-based compensation expense. Income from operations in the quarter was $29 million, up $9 million or 45%. Q4 interest expense was $5 million, and our Q4 effective tax rate was 18.2%. Net income attributable to Acushnet Holdings was $18 million, and adjusted EBITDA was $44 million, up $8 million from the prior-year period. There is a reconciliation of net income to adjusted EBITDA for Q4 and full-year 2019 in our earnings release as well as in the slide presentation. Moving to our results for the full-year 2019, consolidated net sales were $1.7 billion, up 3% from last year and up 5% in constant currency. This increase was driven primarily by sales of new Pro V1 and Pro V1x golf balls, growth in FootJoy apparel and in all products within Titleist Golf Gear. Sales were also positively impacted by the sales of KJUS and PG Golf, which we acquired in the fourth quarter of 2018. Gross profit was $872 million, up $30 million from…

Thanks, Tom. Operator, could we now open up the lines for questions?

[Operator Instructions] First question comes from Daniel Imbro with Stephens Inc.

I wanted to start on the golf ball category. Really impressive momentum there in the fourth quarter, north of 10% growth. Can you talk about how much of that was maybe driven by company-specific drivers or holiday promotions, or it was maybe just the broader industry pickup we saw in rounds played during the fourth quarter?

Really, all of the above. And you look at rounds play environment around the world. It was a year where we saw rounds increases in every market and rarely is mother nature that kind or consistent. Part two is, as I said in my remarks, we had a very strong year with Pro V1, from start to finish. And it finished as strong as it started. And then the retail season played out a little bit better than we expected, without any unusual promotional or discount activity. So, I think it is largely a function of healthy rounds environment, strength and success and momentum behind Pro V1 and a nice retail season. But it is consistent with the performance we saw with Pro V1 throughout the entire year.

And maybe as a follow-up on the golf ball side of the house. Maybe one on Union Green. Just surprised to see you guys launch a DTC golf ball brand. Dave, would kind of love to hear your thoughts. Is that a new part of the market, or how that fits into the Acushnet portfolio and strategy going forward?

I wouldn't call it a D2C play. It, if you look back in our history in 1980, 40 years ago, we launched the Pinnacle golf ball, and it was designed to compete in the price segment and serve value-conscious golfers. Pinnacle did a nice job complementing Titleist positioning and it allowed us to meet evolving needs of golfers without having to stretch the brand in products and price points that would ultimately diminish our premium positioning of Titleist. I think fair to think of Union Green as a modern version of this strategy. It's designed to appeal to consumers who purchase golf balls and the performance and price segments of the market, really under $30 retail. They do tend to be less traditional about golf, and the brand reflects this. Like Pinnacle, over the past 40 years, Union Green will have a unique identity and reason for being and, we think, complements Titleist's position in the market. Over time, this also helps provide operational and overhead efficiencies. And again, to my point about distribution, it's being test piloted at just under 100 golf shops in the U.S. and, of course, is available online. So, we don't package this as a D2C play as much as an interesting opportunity for an emerging segment of the golf ball marketplace.

That's really helpful. And then last one for me, and I'll hop back in the queue. Obviously, I think last week, Dave, your report, your response to the USGA's report came out. I know, historically, Huawei and the Company have been vocal on the case for unification, but curious how conversations with the USGA and R&A are going? And any kind of updated thoughts you can provide us on how you think this put out for the industry?

Well, I'll start by saying we have had and continue to have ongoing and positive and productive discussions with the USGA and R&A and have a great respect for what they're attempting to do. We responded because we felt a couple of themes needed to be inserted into the discussion. And notably, that innovation, and I will add, regulated equipment innovation, has been a critically important contributor to the game's success and growth over the last 10, 20, 50, 100 years, and this must not be over, undervalued or overlooked as we look ahead. And we also believe that it was important to note that the ability to combine distance with accuracy and all other components of the game required to shoot low scores is very much a special and rare skill that requires great athleticism and talent. And this is one of the reasons why the professional game is so dynamic and entertaining. We do believe, and we said this in our response, we do believe that existing equipment regulations are effectively governing the game. And we made the point that average driving distance on the PGA Tour has decreased in 6 of the past 13 season. We believe this is an indicator or affirmation that regulations implemented, many regulations implemented over the last 20 years are, in fact, working. And finally, Daniel, to your point about unification, we believe unification, one set of rules followed by all players, pros, and amateurs alike, is part of the game's magic. And conversely, we believe that breaking apart this rule's unification would complicate the game and take away from its global understanding consistency and appeal. At this point, to say if or how this may impact the business is really too soon. And I would just say, regardless of circumstances or outcome, we see our mission not changing, and that is to be the performance and quality leader in every category in which we compete. And again, this doesn't change. But as you would imagine, and as outlined in their report, they've announced an intention to work closely with stakeholders, of which, manufacturers are certainly an important part of that, over the next year to address their observations and findings. So, at this point, we're really in a phase of a year of discussions and inputs around what the next steps might be. And at this point, I think too soon to speculate on what those steps could be.

Perfect. Really helpful. Thanks so much.

Thanks, Daniel.

Thank you, Daniel. Next question, please.

Your next question comes from Kimberly Greenberger with Morgan Stanley.

Hi. This is Javi Garrao, on for Kimberly Greenberger. Thanks for taking my question. So, my first question would be in terms of the tariffs, when should we expect the impact of tariffs to hit the income statement?

The impacts of tariffs are already hitting the income statement, so we certainly had an impact of tariffs in Q4, primarily in our gear business and in our clubs business. And the tariffs are fully in place, and we expect them to continue to hit those businesses and to hit our FootJoy footwear business in the areas of, primarily, footwear and apparel right away. So, they're already impacting us now.

Great. Thank you. And in terms of the stock buybacks, are you planning to buy back the full $50 million authorization in 2020, like you did in 2019?

So, in 2019, we purchased roughly $30 million worth of shares on our original $50 million authorization. Coming out of '19, there was $20 million left in that authorization. As David and I both mentioned, our board recently increased that authorization to $100 million. And so, for the total year, we anticipate purchasing up to an additional $50 million.

Great. Thank you so much.

You're welcome.

Thank you, Javi.

Next question comes from Joe Altobello with Raymond James.

Hey, good morning, guys. This is Adam, on for Joe. I appreciate you guys giving some color on coronavirus. But if I could, I was curious, and obviously, this is quite dynamic.But I was curious on what you guys were thinking in terms of anticipation on when it may peak or maybe a range of potential outcomes, if at all possible. And then also, you guys gave some good color on margin in terms of tariffs being a 40 basis-point headwind in the quarter. But any additional color on the puts and takes there would be very helpful. Thank you.

Okay. Thanks, Adam. I'll answer the first, and Tom will hit your second question. Obviously, we, like everybody is paying close attention to what's happening to our business, and it is changing quite rapidly. Weeks ago, this was initially a supply chain disruption. And admittedly, for Acushnet, we saw this as a relatively manageable situation as we're in a pretty good shape, one, to support our various early season launches. And two, if you look at our business, golf balls, as I said in my earlier remarks, a little bit no impact here. We have limited exposure to China source raw materials. We make most of our product in the United States and the balance in Thailand. So, we felt the largest segment of our business was, in some regard, isolated from supply chain disruptions. There was a modest impact on clubs. And really, our disruption focused on apparel, gear, and footwear. And we thought this would impact late second quarter, early third quarter. What we've seen happen in terms of our supply chain is as our partners have ramped up production, we've seen information flow give us even more confidence that there's some stability around the supply chain. And while you took initial hit from a loss to anywhere from two to four weeks of production output. In the last week or two, that's stabilized. As I noted earlier, the more meaningful impact that we're seeing really started 7 to 10 days ago, when we saw a slowdown in Korea, in Southeast Asia in terms of retail activity. And this is really the driver. And our assumptions are that, this condition, we've sort of run it out through the end of the second quarter. But we've made no assumptions or projections beyond that. This is simply too dynamic and, I think at this point, would be premature to speculate beyond that point in time. So the key inputs really are. We've made some adjustments to our sales forecasts, again, notably Korea followed by Southeast Asia, China, and to a lesser extent, Japan.

In terms of Q4 gross margins, they were down 20 basis points compared to the prior year. That was really driven by a decline in volume in golf clubs in Japan, which was comping against a Metals launch in Q4 of 2018 in Japan. So that was certainly a significant contributor. In addition, the tariff impact they mentioned negatively impacted us by about 40 basis points. Golf ball margins were seasonably normal but up from 2018. And footwear margins were up nicely year over year, primarily on strong results in the U.S. and in Korea.

And then if I could ask one follow-up here, and I understand if you guys don't want to provide quantification on it, but you mentioned comping some challenges in Japan for this quarter, but you discussed expecting some potential stabilization next year. Any way we can kind of quantify what that stabilization would entail for Japan?

Yes. I think the main, the conditions of 2019, for the most part, carry over into 2020. I think the big difference we'll see in regard to channel inventories. Japan typically runs heavy, and that's the case again this year. And that's just a function of their retail dynamic. But we did see an upsized impact last year to footwear because channel inventories of footwear were especially heavy. And the byproduct of that is, we saw a disproportionate mix in the closeout or discounted off-price part of the line. So, in terms of Japan, we felt again similar conditions to last year but with a better inventory profile. Obviously, that changes a bit as we layer in some of the impacts of coronavirus.

Thank you, Adam. Operator, I think we have time for one more question, please.

We have a question from Tim Conder with Wells Fargo Securities.

Hey, it's actually Joe Lachky, on for Tim. So, I just wanted to just quickly follow up on the coronavirus. Thank you for the clarity there. It sounds like you are seeing more impact, obviously, in Korea, not as much in Japan. And obviously, I understand like the retail traffic issues. I mean, have you seen sales maybe shift to any of channels, like e-commerce or such? I mean, it may be too early to tell. And, or have there been any broader impacts on rounds played. Obviously, with the caveat that is the off season, you might not have that visibility quite yet. And then along the lines of the supply chain impacts of the coronavirus, you have a lot riding on the momentum for your clubs business, and you've got the Metals launch coming in September. Has there been any sort of supply chain issues related to club specifically? Or has that pretty much cleared through at this point?

Thanks, Joe. So, you're right. It is very early. We're working off and the shift of retail and consumer behavior in Korea really has played out in the last seven to ten days. We have seen some themes and trends, but frankly, we're being cautious about projecting these out to too far. Rounds of play, you saw some cancellations. Retail activity certainly slowed. I, one of the data points that we're hearing is that the broader mall department store traffic is down more so than the single-store traffic. Again, that's a data set of one week. We have seen rounds canceled. You know, the sense and sentiment is that golf will endure and stabilize as it is a healthy activity, healthy outdoor activity. But frankly, too early to speculate as to where that goes. As to supply chain, again, based on what we know today, we feel pretty good about our back-half-of-the-year launches. And again, that's all subject to change, but we're watching it very carefully, very closely. As I mentioned a moment ago, our first half, largely, at least through April and into May, our launch plans, we're in good shape. That inventory is in various regions. So we're in good shape there. But in terms of your question about clubs, again, what we know today is, gives us a pretty good amount of confidence. Again, we're going to have to update you in the coming weeks.

And then just one question on balls specifically. I know you don't give guidance by segment. But maybe if you could talk about the puts and takes there? Obviously, you're lapping the Pro V1 launch. But you've got a lot of other launches coming, which, so I was curious if like your AVX, Union Green and other launch later on in the year, could potentially those new launches more than offset the second year of the Pro V1? And maybe can we expect, in a best-case scenario, some modest growth for that segment?

So, I'll start with just the size and significance of a Pro V1 launch in an odd year. And our years are not like-for-like. We do a lot of meaningful launch activity in even years, which you'll see, and that's Tour Soft and Velocity early, that's AVX early, and this new product late in the year. But I will say that we look at the ball category and realize it's not a, over a couple of years, we take a step forward, but it's not an even-cadence event. Obviously, we do everything we can to build and manage momentum. We're excited about the year ahead but short of giving guidance on the ball segment. We're going to leave it at that and just say, hey, we're excited about the momentum we're creating with the products outside of Pro V1, but we also acknowledge, Pro V1 years are tough to comp against, number one. And we had a really strong Pro V1 year in 2019, which we also think continues into 2020. We just don't benefit from some of the meaningful launch and pipeline activities that happened in the first quarter of last year.

Great. Thanks for the detail.

Well, thank you everybody. We certainly appreciate your time and attention this morning and look forward to getting back to you in a couple of months with our updates. So, thanks again.

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