Acushnet Holdings Corp (GOLF) 2016 Q3 法說會逐字稿

Good morning. My name is Nick and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2016 Acushnet Holdings Corporation earnings call. (Operator Instructions)

Tony Takazawa, Vice President of Investor Relations, you may begin your conference.

Thank you. Good morning and welcome to Acushnet Holdings' call to discuss our 3Q 2016 financial results. This morning we are joined by Acushnet's CEO, Wally Uihlein.

Given that this is our first call as a public company, Wally will take a few minutes to level set everyone to talk about the Acushnet strategy and business model and his view of what has been happening in the golf industry. Acushnet's CFO, Bill Burke, will then spend some time discussing our business operations and how we have been executing in the third quarter and so far this year.

After the prepared remarks, Acushnet's COO, David Maher, will join us for the Q&A. We will then 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 US 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 US Securities and Exchange Commission. I would also mention that today we will not be providing Acushnet financial expectations for future periods.

With that it is my pleasure to introduce Acushnet's CEO, Wally Uihlein. Wally?

Thank you, Tony. Good morning, everyone, and welcome to our first quarterly earnings call post initial public offering of October 28, 2016.

Recognizing that we may have some people on the call who have had only limited exposure to the Company and its story, I'm going to take a couple of minutes on the front end to reinforce who we are, provide some comments on our strategy and operating model, and then offer some observations about the golf industry and the recent events that have captured everyone's attention in 2016.

As the first slide headed "Acushnet Today" reads the Company is an authentic and enduring performance-focused golf equipment Company. The Company represents one of the longest-running success stories in golf's commercial space.

We steward two of the most recognized brands in golf. Since 1949 Titleist has been the number one ball in golf and is seen by many as the gold standard of the product category. And for the past seven decades only one golf shoe brand has been able to claim itself to be number one and that is FootJoy, an authentic golf brand on its own terms.

Since the beginning our focus has been on the golf industry's dedicated golfer and the preferred trade partners who serve them. For both brands, golf's pyramid of influence has remained a timeless source of validation and testimonial. And over the years, we've constructed a differentiated operating model, an operating model whose components would include a commitment to perpetual innovation, a world-class operations platform, an unrivaled route-to-market playbook, and a robust, dedicated golfer experience and subsequent connection.

And I would be remiss if I did not add that both brands are supported by passionate cultures and long-tenured associates. Today we remain positioned to both outperform the market and to represent a long-term, total return opportunity.

Turning to the slide marked "Key Metrics," in 2015 net sales of $1.5 billion found 72% represented by Titleist-branded products and 28% by the FootJoy brand. We have a diversified portfolio with leading positions in over six product categories; a balanced mix of consumables and durables; formidable positions in the higher-margin categories of golf balls, golf clubs, wedges, and putters; and revenue diversification across all geographies. And our sustained and aggressive commitment to research and development has led us to possess 1,200 active golf ball patents and an additional 300 active patents in golf clubs, wedges, and putters, many of which from both product areas that will drive future premium performance positioned high-margin products.

Turning now to the slide marked "Acushnet Business Model," the game's dedicated golfer is the industry's high-quality and resilient customer. Representing 15% of all golfers, this serious golfer segment represents 40% of all rounds played and approximately 70% of the annual spend at retail on golf equipment and golf apparel.

By definition, these are golfers who are willing to commit time, money, and energy in pursuit of playing better golf. Additionally, these golfers have shown a propensity to pay a premium price for performance-based products that in many cases help them shoot lower scores. Our focus on the industry segment has contributed to our attention to performance products, compelled us to build out our portfolio, and in turn contributed to our revenue stability.

The most dedicated golfer is the game's professional golfer. Our mission has always been to design and to manufacture performance-superior golf products for the best players in the game. If you believe you have the best product, then your product could be used by most of the best dedicated golfers. And if it is, then that is validation that you have the best product.

Golf's pyramid of influence and the idea that all committed golfers are influenced by those with higher skills is part of the fabric of the golf industry. It is about how many and not anyone who. How many is the only endgame for any brand looking for confirmation that they are the product performance best of breed.

With the dedicated golfer as the center of attention, the differentiated Acushnet operating model all starts with product performance and product performance leadership is rooted in innovation. 150 scientists, engineers, chemists, and technicians supported by six research and development facilities and test centers are dedicated to the creation of next-generation products.

Our disciplined product introduction cadence, synchronized to dedicated golfer replacement cycle behavior, delivers next-generation product performance superiority while also protecting premium positioning and higher-margin pricing. The golf industry remains very invention intensive and today the largest portfolio of active patents in the higher-margin performance categories of golf balls, golf clubs, wedges, and putters rest with the Acushnet Company.

The Company has a long history of supply chain excellence. We were originally incorporated as the Acushnet Process Company. The control of the design, the manufacturing, the sourcing, and the distribution of our products is a key differentiator in an industry where performance and quality drive the value proposition.

Today we have the golf industry's most comprehensive supply chain footprint, which allows us to maximize working capital efficiency, drive reduction of lead times, and provide local market flexibility on both the stock and custom product fronts.

Continuing on to the next slide, our proven operating model includes an unrivaled distribution platform. Today we have 31,000 accounts, direct sales capture in 46 countries, and 370 seasoned company sale representatives. Our category management model assumes a sales representative and trade partnership relationship.

Our sales people provide product education, in-shop merchandising, and inventory management support. In exchange, these trade partners help us identify and they become our link to the industry's dedicated golfer. Our preferred trade partners, particularly where golf is played, also help activate our performance product leadership story.

In the end, our goal is to provide the dedicated golfer with an unmatched experience and connection while we build unmatched brand loyalty. Golf ball education and fitting have long been part of the category leadership success story. We believe all golf club purchases should be mediated by the custom-fitting experience and every opportunity to both demonstrate and to fit our product is an opportunity to trade up or shift share.

The focus on the game's dedicated golfer, providing them with performance-leading golf products and building out a differentiated operating model, explains our ability to establish high brand loyalty, deliver attractive margins, and produce a solid revenue and earnings track record capped off by a strong free cash flow conversion capability.

Turning now to the next slide, this background helps explain our ability to outperform the market during this most recent correction period. The beginnings of golf's oversupplied build out are traceable back near three decades. However, it took the subprime recession to reveal the scope of the industry's structural challenges.

Since 2008 the golf industry has been in an extended period of demand and supply reconciliation. With the inevitable recognition that the industry's size was what it was, this most recent extended correction has produced equipment manufacturer right-sizing, golf course closings, retail consolidation, capital structure changes, selective category exiting, and retail reorganization. All of the industry events that have commanded recent media attention are examples of the necessary right-sizing and correction of an industry suffering from overbuilt excess supply.

Fewer retail doors, less total square footage, and a reduced number of industry competitors actually portends a more rationalized industry and an improved set of go-forward fundamentals. Our performance 2011 to 2015, previously highlighted, serves as validation of our strategy and operating model. And our results year-to-date nine months 2016 would suggest we are once again outperforming the market and continuing to deliver upon our long-term total return promise.

With that overview, I would like to turn the presentation over to Bill Burke, our Chief Financial Officer, for commentary and color of Q3 and year-to-date performance 2016.

Thanks, Wally. I would also like to welcome everyone to our first quarterly earnings call. Thank you for your interest in our Company.

Wally mentioned 2016 has been a good year for Acushnet; sales and adjusted EBITDA up nicely against a backdrop of continued industry rationalization. This was punctuated by the reorganization efforts, eventual bankruptcy of Golfsmith, a large off-course golf specialty retailer in the United States.

Given what was a challenging US market in the third quarter, we are pleased with our performance. Our Q3 sales of $332 million were up 3.9% and on a constant currency basis up 2.2% over prior year.

Our quarterly net loss attributable to Acushnet Holdings was $6.2 million. This is an improvement of $7.8 million over Q3 of last year. And our third-quarter adjusted EBITDA was $27 million, up 9% over last year, as our business continues to deliver strong cash flow.

Overall, we believe our market momentum across all product categories remains strong. We've continued to grow earnings over what has been a challenging quarter. This has led to strong year-to-date results.

Sales of $1.253 billion were up $52.6 million, or 4.4% over prior year, and on a constant currency basis up 4.7%. Net income attributable to Acushnet Holdings was $45.9 million, up $26.4 million from last year, and adjusted EBITDA reached $191.4 million, up 3.4% over prior year.

Next I will take you through revenue. Before I discuss the detailed sales results there are a couple of important aspects to how our business flows that I would like to explain.

Sales and earnings in our business are skewed to the first half of the calendar year due to the normal seasonality of the golf business. As such, we tend to recognize over one half of our revenues, and often upwards of three quarters of our earnings, in the first half of the year, as customers are ramping up their businesses and going into the new golf season and retail sell-through is at its highest. As a result, it's helpful to look at our revenues and earnings on a year-to-date basis as the year progresses to get a more comprehensive view of our performance.

The second aspect of our business cadence is the two-year product lifecycle in the equipment categories. We follow regular two-year product cycles in introductions of new balls, drivers, fairways, hybrids, irons, wedges and putters. As such, we generally see stronger growth in these categories during the intro year, but then tend to see that normalize, or even decline, in the second year of availability.

In evaluating our results in the equipment categories, it's often helpful to compare our metrics over a two-year period to see how the business is fairing relative to the last launch cycle. As we discuss our results over time, we may refer to these types of comparisons so I wanted to ensure that you understand the [context].

As I mentioned earlier, consolidated revenue in Q3 was $332 million, up almost 4% from Q3 of 2015 and over 2% on constant currency in what was a challenging quarter. Top-line growth during the period was driven by a number of factors, but primarily gains in FootJoy golf wear and the Titleist golf club businesses, offset by a decline in Titleist golf balls. This partly due to it being the second model year of the Pro V1 franchise.

But golf ball sales were also impacted by off-course retail channel disruptions in the United States (technical difficulty) I will discuss in a minute general market softness in the US.

Taking a closer look at the reportable segments, Q3 Titleist golf ball revenue was down 5.5% year over year and down 6.5% in constant currency. This was driven primarily by a sales volume decline, principally in the United States for our US Pro V1 and Pro V1x golf ball models, this being the second model year for the franchise.

But what has significantly impacted the golf ball category this year has been the retail disruptions in the off-course channel in the US. The bankruptcy of Sports Authority earlier in the year, reorganization efforts of Golfsmith in (technical difficulty) both resulted in reduced sell-in to the trade compared to prior year. Despite these challenges, we are still pleased with our year-on-year results for the ball segment and the strength of the Pro V1 franchise overall.

We recently launched the new MyProV1.com website in the US to make it easier for golfers to create and order customized Pro V1 golf balls. We are also excited about the upcoming launch of the next generation Pro V1 and Pro V1x golf balls in Q1 of 2017. New product debuted on tour in October and the performance improvements have been very well received by players across all professional tours.

Our Titleist golf club business had a solid third quarter, up 10.4% versus last year and up 7.7% on constant currency, driven by success of the new 716 irons, Vokey SM6 wedges, and Scotty Cameron putters. Our new 917 drivers and fairways were recently launched and started selling in October.

Both trade and consumer response to date has been very positive, so we are very pleased that our club business is up 9% on a constant currency basis (technical difficulty) September. This reflects the strong golfer acceptance (technical difficulty) of our new product range (technical difficulty).

Q3 Titleist golf gear revenue was up 5.2% versus last year and up 3.1% on a constant currency basis, primarily driven by volume growth in our travel gear and headwear categories. Year to date the gear business has done very well, up 9.7% on constant currency. So we are also pleased with our performance in this category as well as progress we made on gear initiatives that we have underway to accelerate growth in this segment.

FootJoy golf wear Q3 revenue grew by 7.5% compared to last year and 6.2% on a constant currency basis with strength in both footwear and apparel. Our new FreeStyle, Hyperflex II, and Pro SL footwear models have been well received by consumers and have been the key drivers of our footwear category this year.

Earlier in the year we launched the new FootJoy e-commerce site and introduced a very well-received women's golf leisure apparel line and we are pleased with the results. Both have contributed to our golf wear business being up 6.8% year to date versus last year on constant currency. We expect these initiatives to continue to be successful going through 2017.

Looking at revenue across the various geographies, we feel we have had a strong performance. Our US Q3 revenue was down a little less than 1% year over year, due to the off-course retail channel disruptions I discussed earlier as well as overall soft market conditions in the US. Golf retail in the US has been sluggish this year with industry data indicating that retail sell-through in the market is down in all categories. Despite the challenging US market, our US business has proven very resilient, up 1.3% year to date versus last year.

Results in our major ex-US markets were strong in both Q3 and year to date. Korea was up 14.4% year over year in Q3, up 10.8% on constant currency. For the year-to-date period, Korea is up a strong 19.2% on constant currency.

Q3 Japan revenue was up 25.5% versus last year, up 5.4% on a constant currency basis. Nine-month revenue was up 5.1% on constant currency. EMEA revenue in Q3 was down 2.4% on a reported basis versus last year, but up 6.2% on constant currency and up 10.2% year to date, also on constant currency.

The common theme across all three of these markets has been the strong go-to-market execution by our respective ex-US teams and overall continued product category momentum in the market. This supported by generally favorable weather and [solid] rounds of play during the quarter.

Turning now to notable items from the Q3 income statement, Q3 gross profit was up 3% year over year. Gross margin was 48.7%, down 50 basis points from last year. The decline in margin was primarily due to foreign exchange contract activity, where we recorded contract gains in Q3 2015 versus a small contract loss in Q3 2016. We use foreign-exchange contracts, typically forward contracts, to stabilize our ex-US cost of sales, the majority of which is denominated in US dollars.

SG&A expense at $139.1 million was down 3.6% versus last year. To give you a better view of underlying trends, if you exclude the expense associated with our management Equity Appreciation Rights, or EAR, Plan, recorded in 2015, SG&A would have been up 4% year over year. This was principally due to the increase in bad debt expense related to the Golfsmith bankruptcy and one-time IPO transaction costs.

We continue to invest in our R&D in an effort to ensure that we deliver products of the best quality and performance. Q3 R&D expense of $12.5 million was up $1.1 million over Q3 of last year. Including the expense associated with the EAR plan in 2015, R&D was 3.8% of total revenues in Q3, up from 3.4% in the same period last year.

Our Q3 net loss attributable to Acushnet Holdings of $6.2 million was improved by $7.8 million from Q3 of last year. Our adjusted EBITDA for Q3 was $27 million, up 9% over last year. This, as with net income attributable to Acushnet Holdings, was largely due to higher income from operations. Adjusted EBITDA margin increased to 8.1% for Q3 2016 compared to 7.7% (technical difficulty) of last year.

Here I would like to explain the non-GAAP metrics that I just discussed and that we primarily use, adjusted EBITDA and adjusted EBITDA margin. We utilize adjusted EBITDA for a number of purposes, including compliance with our credit agreements, providing investors with the ability to analyze our core operating results between different periods, and as an internal measure to evaluate the effectiveness of our business strategies. It's also the primary measure used to evaluate management performance and determine executive compensation.

This supplemental measure excludes the impact of certain items that we do not consider indicative of our ongoing performance. These primarily relate to the capital structure that was put in place at the time of the acquisition of Acushnet Company from Fortune Brands in 2011, as well as legacy transactions related to the acquisition that are no longer relevant post the IPO. Reconciliation of this measure is available in today's slides.

In addition to adjusted EBITDA, we also use adjusted EBITDA margin as a key metric (technical difficulty) measures adjusted EBITDA as a percentage of net revenues. This metric is also used for reasons similar to why we utilize adjusted EBITDA, but allows us to measure how effectively we are increasing our profitability and/or leveraging our operating structure over time.

And, finally, looking to the balance sheet. At September 30 we had ample liquidity and capital resources, this being a time of year when our working capital needs are at a low point prior to us commencing our inventory build for the upcoming year. We had approximately $86 million of cash on hand, $255 million of availability under our revolving credit facility, and $66 million of availability under other local credit facilities.

In closing, we are very pleased with our Q3 performance and consolidated results year to date. Both revenue and adjusted EBITDA grew nicely. We continue to execute well and our results serve to validate the resilience of our proven business model.

As we approach the close of 2016, we are also pleased to see that the US market is beginning to normalize [with] retail channel rationalization underway, which adds a higher level of clarity to our business. We feel we are well-positioned in the market as we move through the fourth quarter and into 2017.

With that I will now turn over the call to Tony to manage Q&A. Tony?

Thank you, Bill. Nick, can we open up the lines for questions now, please?

(Operator Instructions) Matthew Boss, JPMorgan.

Thanks. So, if you parse through some of the Golfsmith noise, which we know is in the business here today and probably for the next couple quarters, can you talk to some of that normalization? Have you seen any stabilization in the core underlying business? I know things dropped off a little starting in May, but if you could just help us -- what you are seeing out there today and just the best way to think about it going forward?

Matt, David Maher here; as we see the correction play out, certainly it was largely a Q2 and Q3 event. There has been some stabilization over the last several weeks as a lot of those stores have found homes and reopened over the last several weeks.

In terms of what we are seeing at retail, certainly you had some disruption and correction in the first part of the year, but as we get into the back half and as we start looking at 2017 -- Bill mentioned it in his opening remarks -- we are seeing more clarity in the marketplace and it is becoming a bit more predictable for us.

[Two events] certainly you face the reality that you have fewer doors to sell product into, but we are seeing the migration of product sales and retail sales that used to happen at stores that no longer exist. We are seeing that migrate to ongoing doors, both within the Golfsmith franchise and, frankly, with other partners of ours.

That's great. And then just a follow-up. Can you just speak to initial reception of the 917 driver and more so just how the launch measures up to introductions you've had in the past?

So, 917 really a fourth-quarter event for us; it begin shipping in October of this year. But we are very pleased.

It's one of our most advanced products ever. It requires a whole lot of fitting expertise, which we feel is one of our core competencies. And we see it throughout the markets around the world that when we put our driver technology in the hands of a great fitter, golfers clearly get some terrific performance benefits out of that combination. So we are very pleased.

On tour the conversion has been really quicker than we otherwise would see. Near 80% of our players on tour have converted into the new 917 product, so we are very pleased with its early start.

Wow, that's great. Best of luck, guys.

Simeon Siegel, Nomura International.

Good morning. This is Julie Kim on for Simeon. Thank you for taking our question.

It looks like you ended the quarter with inventory up about 5%. Can you give more color on current inventory levels as you head into holiday and what you have seen on sell-through trends quarter to date? Thank you.

Sure; this is Bill. In an even-numbered year where we have a driver launch or a driver fairway launch in the fourth quarter, we are building up more inventory than we would in an iron year. The primary reason for the buildup is it being a metal year, where we sell more metals in the fourth quarter than we would in an iron launch.

Our ball inventory is up slightly due to less demand in the third quarter, but not the primary driver of that.

Great, thank you.

Randy Konik, Jefferies.

Thanks so much. Just curious, how do you think about your pricing architecture as we are moving across the next few years by category? Do you see room for continued modest price increases in balls, more expansion in clubs? Just want to get some thought process on how you see pricing moving along over the next few years.

That's my first question. Thanks.

Randy, two themes here. First and foremost, we've got a robust R&D activity. We spend, as mentioned by Wally and Bill, 3% of sales on R&D, so we've got R&D teams in all of our businesses and each of our categories out there looking to create product improvements and deliver greater value to golfers.

We certainly take into consideration a lot of factors when we think about pricing, one of which is the gap in delta we have versus the competition. Many of our products are already positioned at a premium to the competitive sets. We need to be mindful of that.

In balls, as an example, Pro V1 is about a 20% premium to its nearest competitors around the world. We take that into consideration as well. So, there is no one ethos we apply when we look to establish pricing. We are certainly out looking to bring improved product to market, but we do have to take into consideration the realities of our positioning versus the competition.

Then just on the cost side of things, do you envision -- if I think about the cost of goods, do you see any kind of noticeable trend changes over the foreseeable future, or is it pretty much steady as she goes?

And when you look to the business from a geographic potential or geographic dispersion, are there any types of geographies where you are underpenetrated by a specific product category or under margins, per se, were you can see opportunity in those areas of the world, or different areas of the world? I'm just curious. Thanks.

Okay, Randy, I will take the cost of goods sold section. In the ball category, we are starting to see modest increases in polybutadiene, which is the core material in our balls, and that's likely --. We've seen it modestly increase I think going into next year, but not a significant increase yet. And I think there are some factors that will stabilize that in terms of how the oil industry reacts to the dynamics of OPEC's decisions and things like that.

In the club category, we are really locked in and we are seeing it's really based on the amount of the components and what we decide and the technology we want to put into our products, but nothing significant. And it is certainly built into our upcoming forecasts.

And in the soft goods area, in leather, synthetic leather, and materials, we are seeing modest increases, but very low single digits. So nothing really significant on the horizon right now.

As we think about key markets of the US and EMEA and Japan and Korea, certainly mature markets. We are building out infrastructures around the world. We are more evolved and advanced in some areas than in others.

As we think about the nearest opportunities for low-hanging fruit, certainly two things come to mind. First off, FootJoy, an opportunity around the world as we continue to build that business in key markets, certainly Japan and Korea you've seen from our results this year. Then, secondly, we have share upside in balls and clubs in all categories around the world. Certainly the share upside opportunity is not consistent market to market and we look at some markets and see greater upside than we do elsewhere.

So, yes, two main areas would be FootJoy in ex-US markets and then again ball shares. And, frankly, as we have said through the last several months, when we look at growth opportunities, we do see white space growth opportunities every product, every region; but it is not identical market to market.

Very helpful. Thank you.

Mike Swartz, SunTrust.

Good morning, everyone. Apologize if I missed it, but did you quantify what the impact of Golfsmith was to the quarter? I think you said organic growth or growth ex-currency was up a little over 2%, but I guess what would that had been excluding the disruption going on there?

Golfsmith was a large account and so was Golf Town, who was a surviving account. We did not quantify it, but we look at it this way: that there's going to be a contraction here in the third quarter due to sell-in and in the fourth quarter as we have less stores. But we feel that the majority of that sustainable volume was going to eventually find a demand home, whether that be on course, off course, golf specialty, or sporting goods.

So we've built that into -- certainly considered that into our outlook and we feel that the viable part of the business will be sustainable going into 2017 and the following years.

Correct me if I'm wrong, but it sounds like maybe some of that demand migration is occurring faster than maybe you would have originally anticipated?

I don't know if it's happening faster, but it is certainly happening about as we've expected.

Okay. Then just in terms of the retail backdrop; I know we've talked about the softness in the market since midyear. Could you give us any quantification or just sense of maybe what you've seen in the past couple of weeks that gives you a little more comfort/confidence going into 2017?

I think three themes emerge as we at -- and this really is a US issue (technical difficulty) Canada to agree also in that Golf Town is part of Golfsmith and is a big player in Canada, but I will speak in terms of the US market.

The three themes we've seen drive the correction of 2016 have been obviously a closure of retail doors. We've seen near 500 doors close. Keep in mind there's a bit of a rounds-in-play reality that we are dealing with in 2016 as well. First-quarter rounds were up 5.5%, but in key markets of Florida and California they were actually down 10%. So that provides a bit of a different nuance in terms of the correlation between rounds played and equipment sales.

And then, thirdly, the market is selling less close-out discounted equipment and this contributes to the broader softness. Now that said, I think that's a logical and necessary part of the correction as a lot of this volume tended to be sold at a loss. But that's really the story of the first several months and quarters of the year.

In terms of what we are seeing, I will echo Bill's comments. We are seeing a lot more clarity in terms of us being able to protect our business.

Activity is migrating to the players that are left standing. Activity is migrating to other channels in our business. Is it a 1-for-1 migration? Not yet, but we are seeing that migration happen about as we expected.

William Schmitz, Deutsche Bank.

Good morning. Can you just talk about the pro forma adjusted net income? It's hard for us to wean it out of the public filing, but can you give us some help or maybe just give us the number of what you think pro forma net income would be ex the capital structure changes from the IPO? And then the share count also, because that wasn't in the press release either? And then I have a real question.

The pro forma or adjusted net income we really have used as a measure, a valuation measure, during our initial public offering. It's not a metric we plan on using on a go-forward basis. We have not created a schedule -- issued a pro forma on that, but it could easily be created by looking at adjusted EBITDA and the same items that were used in our prospectus.

Okay. Can you just help maybe with the ongoing interest expense and what the share count is? (inaudible)

Yes. The ongoing share count is going to be approximately 32 million shares outstanding and obviously that's not giving rise to the effect of any of the RSU/PSUs. And obviously after 180 days the lockup expires for the other financial investors for the other 16% of the shares outstanding.

As far as interest expense, we are expecting somewhere around $18 million to $20 million in total, which is significantly down against prior years with the capital structure we had in place with the convertible notes and bonds or warrants.

Okay, all right; that's helpful. I will follow-up also.

In terms of the international growth, is this category growth? Is it share gains, or is it distribution? Is there a way to quantify the (technical difficulty) because obviously the growth, especially in developed Asia, is really strong? Can you just talk about what is driving that?

Yes. It isn't distribution growth; it's product, it's execution. We've worked real hard over the last several years building out our infrastructures in major market. We are exporting best practices. We are shifting resources from sell-in to sell-through.

The team's executing at a very high level. We are picking up share. Our product messaging is getting tighter and tighter.

So I think more broadly speaking, in terms of what's happening around the world, it's happening in all product categories, it's happening in most regions, and it's largely a function of our route to market enhancements and improvements. We are seeing dividends from a lot of the investments we've made in the last several years in some of these key markets. Examples would be custom club assembly capabilities, custom ball imprinting capabilities in key markets around the world.

Okay, great. Then just one last one, if I could sneak it in. Can you just tell us what the percentage of business is on course now after Edwin Watts and Golfsmith? And then what your view is on pro shop inventory, because I think that's probably a big driver of the business next year?

So quick commentary. More than half our business is largely outside the US; of the US piece, more than half our business is on course. And in terms of inventories, specific to the on-course channel we've got the largest and, we think, most qualified salesforce in the industry. One of their primary responsibilities is to manage inventory, so we feel good about our inventory position at this point in time and at most points in time.

And then, more broadly, in terms of the marketplace inventory, certainly this has been a year of correction and contraction, though not surprisingly you are seeing inventories that are down from historical levels.

Okay, that's helpful. Is the salesforce paid on sell-in or sell-through?

I'm sorry; pardon me, would you repeat that question?

Sorry, for [the time]; I promise this is the last one. But is your salesforce paid on sell-in or sell-through, in terms of their compensation metrics?

The simplest way to answer that is all of the above. Certainly there is a big component of their compensation that's tied to sell-in, but more broadly, they are also attached to Company performance which has a meaningful sell-through component to it.

Dan Wewer, Raymond James.

Thank you. Bill, we've seen a lot of volatility in foreign exchange rates during the past month. Can you talk about how your hedges are set up in the fourth quarter and how this could impact items such as gross margin rate compared to a year ago? Perhaps you can remind us about gains or losses you had a year ago and how we are set up for the fourth quarter.

At September 30 we had about $350 million worth of contracts outstanding and so we felt we were well-positioned for the year and certainly for the fourth quarter. We took a longer view of our currency hedging program, so in terms of the immediate yen weakening as well as the secondary Brexit drop that we saw in the pound sterling, we were well-positioned for the fourth quarter and into the first quarter.

We are watching it closely. With the yen at around JPY113, JPY114, we need to be cautious about how we are planning and that is also going to be built into our planning for next year. But it's really not so much a fourth-quarter issue because of our mid- to long-term view of currencies. But it is an issue since the election that -- and the US dollar is strengthening -- that we have to build into our planning.

You noted that gross margin's decline of 50 basis points was influenced by the unfavorable changes in ForEx compared to the gains a year ago. If you were to look at just the merchandise margins, let's say gross margins without the impact of ForEx, how did that look year over year?

It would be about the same and I would like to not -- first off, start by saying that we don't really separate the two because we look at our foreign exchange and our currency policy as a way of stabilizing pricing in the market. So we cannot really look back and take out a foreign-currency gain or a foreign-currency loss because a decision might have been made to increase prices absent those contracts.

We have a broad awareness ex-US of our positions. Our retailers ex-US are very aware of that. So we need to -- what we are trying to do is stabilize that decision, not have to make that decision.

If you look last year to this year, we had a gain last year. Well, if we didn't, we might have increased prices earlier in the year. So when you look at 50 basis points year on year, we like to think that we are holding that margin despite that. It's really an integral equation you need to look at.

Last question I guess I have for now on golf ball revenues down 3.6% year to date. I know you called out the adverse impact of Sports Authority and Golfsmith. If you were to look at the golf ball revenues outside the US where you haven't had those two events, how are golf ball sales outside the US performing year to date?

We are doing better outside the US than in the US; share gains in markets outside the US. As Bill mentioned, I think this is really a commentary on our two-year product life cycles.

And starting the clock at the beginning of 2015, we launched Pro V1 and then we go on a two-year run with that product. We tend to take a couple steps forward from a share vantage point in year one. Sometimes we take a step back in year two, which was the case this year, offset a bit by some of the newer introductions of NXT Tour and Titleist Velocity golf balls.

So really the story of the ball business is we like to look at it in two-year blocks. In a two-year block our share is up; we feel really good about that. Our share is about 4-plus times the share of our nearest competitor.

So, really the theme -- and you'll hear us talk more about this in time -- when we look at certain businesses, we really like to look at it in two-year segments consistent with our product life cycles.

(multiple speakers) Dan, don't forget at the research analyst day we talked about what we are trying to do outside of the United States is do some of the things that we've done for a long time in the US: the golf ball fitting, the customization. And we are seeing that contribute to significant growth in markets outside of the United States.

Great, thank you.

Dave King, ROTH Capital.

Morning, thanks for taking my question. I guess first, with Nike exiting the market, is to what extent you think Titleist is positioned to capture that share? Is that already reflected in this year's results?

And what other things are you guys doing to take advantage of that, whether it's from a hiring perspective or a sponsorship perspective? Thanks.

Twofold. First off, a lot of the Nike share was at price points where we don't necessarily compete, so is a lower-end share; not sure we see a whole lot of revenue upside there. There may be some, but don't see a lot of revenue migration.

We think the broader advantage and benefit of this part of the broader correction that Wally spoke about, you are going to have less dollars; you are going to have less what we would consider to be irrational spending in the marketplace. So we should pick up some benefits in terms of advertising, in terms of route-to-market execution. Certainly some dollars will be pulled out of promotion in terms of tour and how they spend their money.

So really twofold. One, not a whole lot of revenue migration, but it should contribute to the broader endgame of a more rational and fundamentally balanced golf marketplace.

That's helpful. Then maybe just switching gears, the premium ball trend seems like it is continuing. In fact, I think Pro V1 are probably part of the drivers of that.

How are you thinking about further growing your share in the super premium category? What are you doing to combat some of the share gains you've seen out there in the $30 to $40 range? Are you guys going to try to go after that in any way? I guess just what are some high-level thoughts there?

High level on our Pro V1 franchise, you are going to see it more the next couple of months as we launch a new product. First and foremost, that game has to be won with great product. We feel that we've got great product that's only going to get better.

We are spending a whole lot of time and resources on golfer education and golf ball fitting, making sure golfers are playing the right product. That gives us a couple of opportunities. One, it allows us to share shift from the competition and, two, it allows us to trade up golfers who currently may play another Titleist model.

Product and golfer connection are really the two themes to driving our ball business forward.

Scott Hamman, KeyBanc Capital.

Thanks, good morning. My question is really just on the custom-fitting process. Can you remind us where you are as a percentage of the total across the categories, or hard goods, or however you look at it?

Then, going forward, do you have the infrastructure in place to grow that business the way you want to? You made some comments around international and we have less visibility there; maybe even on the FootJoy platform, as you think about some of the things that you are doing there. So just generally some thoughts around that. Thank you.

First part, clubs. I think we are farthest evolved and mature in terms of the buildout of our fitting network in the United States. We have over 2,500 qualified expert fitters. We feel golfers have great opportunities to seek out and connect with a fitter. As we know, that's the best way to get the best equipment in your hands.

We are building out networks around the world. We are farther along in some markets than in others. We feel real good about the progress we have made in recent years in the UK and certainly in Japan and Korea.

The next step for us and the next frontier for us is to build out the demand-creation opportunities. We are continuing to shift resources to our tech reps, towards fitting reps, to continue to provide more experience for golfers to become custom fit.

And again, broadly speaking, we see -- we are far downfield in the US. We still have continued upside and opportunity and we see that in terms of the percentage of our business that is custom in the US versus around the world. So, we look to grow the custom business around the world.

Specific to FootJoy, that's a great opportunity for us. We have a Performance Track Fitting System that we've piloted in 2016. We are going to see expansion around the world in 2017 and beyond. And we think footwear fitting to drive improved performance is one of the next frontiers for FootJoy, so we are really excited about that in the years ahead.

Kimberly Greenberger, Morgan Stanley.

This is Eddie Ryan on for Kimberly. First question is: how are you thinking about potential corporate tax reform looking forward? Have you evaluated how some of the tax plans proposed by Republicans would affect you relative to the current US corporate tax structure?

Yes, we are looking at that, but I think we are more concerned -- or not concerned, but more involved in looking at the BEPS initiatives, the base earnings profit erosion initiatives, that are being enacted by the OECD and some of the individual countries independently, like the UK. So I think there's actually more clarity around what's going to be happening on that front than there is around what the new administration will do.

And it is really an evolving thing here. Basically, it's going to be probably a two- to three-year period before we can see how that is going to play out. And so at this point in time we don't have any significant takeaways from that that would materially affect what we think our rate is right now, because we're really repatriating most of our earnings to the US.

Got it. Next question: can you talk about some of the margin drivers for golf wear going forward? And as you see that business evolving over time, maybe it's the mix the changes, maybe it's pricing that changes. How are you seeing that?

You are talking about our FootJoy footwear business and apparel business?

FootJoy golf wear more broadly, so apparel and footwear.

Which is all of FootJoy. A couple ways to get at that. One, a good example of this year is products like Hyperflex and the recent Pro SL we've launched. Premium performance, higher-ASP products; that's part of it. Better managing our mix; better managing returns; better managing our spend.

The apparel business, we see less than 6% of that business closed out or discounted, so we certainly manage the lifecycles of that business. And not unlike all of our product categories, we are continually looking for new improvements to drive golfer benefit and drive positioning and just a broader, more healthy business.

I think a good point to make as well -- and we talk a lot about custom in the ball space and the club space -- more than half our apparel business at FootJoy is logoed as well, so that's a piece too. One thing we know about logoed or customized apparel: that's all sold at a premium, full price. So it further mitigates our exposure to any kind of discounting that often plagues softwear apparel players.

And then one last question, please? (multiple speakers) I just had one last question, very quickly. Can you just talk very briefly on how the Japanese golf equipment market differs from the US market and how your strategy has evolved there?

Yes, I will handle that one. Eddie, this is Wally. In Japan, you've got a couple of things going on. You've got super-price segments in both clubs and balls that you've got to be attuned to and you've got to be regionally responsive to.

The Japanese golfer launch conditions, they are different than Western golfer launch conditions for a lot of anatomical and background reasons that is longer think this discussion allows. But that's why we are encouraged; because both at the super premium price point as well as the premium price point, Japan has been wedded to what I would call the indoor launch monitor, which is driver-centric and just attempting to maximize golf ball speed off the driver. That's not really custom fitting by our definition, so we look at the country and we think the country is a robust opportunity as we roll out our custom-fitting infrastructure.

But getting back to your question, there are two key aspects to it. Number one, there is a super premium price segment, but number two, the launch condition requirements are different for the Japanese golfer than they are the Western golfer.

Casey Alexander, Compass Point Research.

Good morning. For the last five years the Company has been operating with a very leveraged capital structure which requires an obvious amount of discipline to operate under that capital structure. So I'm curious; from a higher level, what type of opportunities the management team sees coming from operating with a much lower leverage structure going forward?

Certainly we think we have come out and made a statement with a $35 million dollar annual dividend to be commenced in the first quarter of next year, which at present would be a 2.5% yield. And obviously we are going to be looking at that dividend policy on an ongoing basis as a way to accrete value to shareholders, but there's a number of ways that we can do that as well.

We can decrease debt. We can always prepay our debt without penalty and there's always us looking at some opportunities in the market, whether they be smaller bolt-on acquisitions or whatever. But at present that is still TBD right now, but we have a number of levers we can pull with that.

Okay, great. Secondly, do you feel as though -- there are basically four companies that have about 80% of the market share now. Does the reduced competition by companies leaving the space over the long term potentially serve to harden the gross margins in the business?

We look at this correction that you speak of as generating industry fundamentals that just are a whole lot more healthy and stable and sound for those left standing, when and if the correction completes itself. We think we are well-positioned to be one of those companies left standing.

You look back over the years; we've certainly had to compete with a whole lot of discounting. We've had to compete with a whole lot of excess supply in every facet of the marketplace and that's very challenging. One of our points of optimism comes from we do believe that the conditions and fundamentals going forward are going to be better than they've been over the last several years.

All right, great. Thank you for taking my questions.

Thank you. We have time for one more question and then we will have a few concluding comments from Wally.

Christian Buss, Credit Suisse.

Was wondering if you could talk a little bit about the Korean market and what you are seeing there? The strength there has been impressive. How comfortable are you with channel inventories, which have sometimes been a problem in that market for some of our other companies?

Christian; Wally, I will handle that one. We are comfortable with our inventory position. You are absolutely right; for a period probably 1985 to 2000, it was very much a consignment-centric space and a lot of people were doing business on consignment terms.

When we entered the market 12 years ago, we went in a different direction. We've not oversaturated and taken advantage of everybody that wants to have a direct account application and arrangement with us. We've managed the number of doors that we have open and we've attempted to download the best practice that we've seen in both the US as well as Japan. And I think that has a lot to do with the success that we are having.

It's a return on the infrastructure investment that we made starting in 2004, 2006. So for 10 years we've been investing in people, investing in the account relationships, and now we are starting to see those returns.

Great. Thank you so much and best of luck.

Thank you.

Okay, just to wrap it up. We've heard from the team that we are continuing to deliver in the face of the ongoing correction. And as we pointed out, the correction, while painful, it does bode well going forward and is certain to leave the industry with a better set of go-forward fundamentals.

And last, but not least, there is still time to give the number-one gift in golf, personalized Titleist golf balls, available through your favorite golf shop or MyProV1.com. And we look forward to talking with you early next year.

Thanks to everybody for joining us today.

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