Acushnet Holdings Corp (GOLF) 2016 Q4 法說會逐字稿

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2016 Acushnet Holdings Corporation earnings call. (Operator Instructions). At this time, I would like to turn the call over to Tony Takazawa, Vice President, Investor Relations.

Thank you. Good morning and welcome to Acushnet Holdings' call to discuss our financial results for the fourth quarter and full-year 2016.

This morning, we are joined by Acushnet CEO, Wally Uihlein. Wally will provide a high-level overview of the golf industry and comment a bit on our strategy and the progress we are making. Acushnet CFO, Bill Burke, will then spend some time discussing our business operations and how we have been executing in the fourth quarter and for the year. Bill will also discuss our review of 2017. After the prepared remarks, Acushnet 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, the slides that accompany this presentation and in our filings with the US Securities and Exchange Commission.

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

Thank you, Tony. Good morning, everyone and thank you for joining us on today's call. The year 2016 was a challenging 12 months for the golf industry, but a very exciting and a very busy year for Acushnet Holdings. Our bona fides reflect a history of delivering consistent results and we are very proud that 2016 was another year of solid performance.

Our results confirm the strength of the Company, the formidableness of our product category positions and the reliability of our proven operating model. While dealing with a challenged golf industry, we once again outperformed the composite industry results and we want to thank our 30,000 plus value trade partners and our 5,000 plus worldwide associate population for helping make Acushnet Holdings one of the leading golf equipment companies in the world.

We also successfully completed an initial public offering, reducing our go-forward leverage obligations and better positioning the Company to fulfill our long-term total return value proposition and we are pleased to announce that our Board of Directors today declared our first quarterly cash dividend of $0.12 per share.

Our 2016 performance was again produced by a playbook consisting of a broad product category portfolio, a favorable mix of consumables and durables, golf brands that resonate with the game's dedicated golfers and a desirable concentration in the high-margin equipment segments.

United States full-year net sales of $804 million while flat year-on-year nonetheless was a notable performance in a market that faced significant headwinds. Our net sales in Japan of $219 million represented an increase of 20%, an 8% increase on a level FX basis and demonstrated continued ability to grow share against strong home market competition.

And our net sales of $176 million in South Korea, the third largest golf market in the world, represents an increase of 21% reported and 24% level FX affirming our operating model, but also confirming our ability to grow in both of Asia-Pacific's leading premium golf markets.

As we approached the 2017 planning process, it was our sentiment that various structural conditions both here in the United States and on a worldwide basis have continued to stabilize. Total golfer count, total facilities and annual rounds of play have appeared to reach a reliable and predictive level and the exiting of certain participants from the golf industry space can only be seen as a long-term positive for those electing to play on.

At retail, fewer doors in the US, the world's largest market, increases the prospects for rational industry behavior. According to the recently published Datatech and Yano size of worldwide golf report released January 2017, the golf equipment and apparel opportunity today remains just under $12 billion at retail, which corresponds to a wholesale opportunity between $7.8 billion and $8 billion. The total annual spend by golfers remains an attractive opportunity.

Our 2017 outlook assumes that the global golf industry will show growth between 1% and 2% level FX, recognizing that we have both transaction and translation exposure. We are watching the consequences of the strong dollar closely and Bill Burke will touch upon this reality in his financial review.

We are very excited with the start to the year 2017 and the acceptance of the new and improved Titleist Pro V1 and Titleist Pro V1x additions. By the end of the first quarter, the new models will be available in over 30,000 golf shops worldwide. Recognizing that professional player acceptance is always a harbinger of product validation, our golf ball count on the US PGA Tour is 68% year-to-date, up 300 basis points year-on-year where the nearest competitor is at 10%. Worldwide the ball count increases to 72% reinforcing the global strength of our position. And of the 53 professional events played year-to-date, the Titleist golf ball has won 33 times or 62% of all events played to date.

On the golf club, wedge and putter side of the ledger, our 917 metals have been well-received and now we will rely upon our golf club fitting network, 2,500 partners here in the United States and a total of 4,000 worldwide, to provide dedicated golfers with a professional fitting experience, which is very much part of the Titleist golf club brand promise. This year, we expect to conduct in excess of 200,000 dedicated golfer fittings.

Vokey wedges and Cameron putters continue to be leading category players drafting off of our broad-based, but selective distribution platform. Vokey by Titleist wedges led by the SM6 edition continue to be number one on the worldwide professional tours and Scotty Cameron by Titleist putters, the intersection of art and technology, continue to enjoy a formidable position in the high end of the putter product category.

In golf gear, we are seeing an early return on the investments we have made transitioning from third-party dependency to greater control of the design and development process. We are focused on delivering gear with the best performance, the highest quality and the most innovative designs.

The success of this effort is clearly evident in the new line of recently introduced player stand bags. Our channel partners have certainly noticed and demand for these new products is strong.

And lastly, our FootJoy brand continues its strong momentum in the marketplace across all golf wearable product categories. We are number one in golf footwear led by exciting new franchise introductions, including Freestyle, Hyperflex II and Pro SL.

We are number one in gloves with more professionals and amateurs worldwide choosing FootJoy than any other brand and our golf apparel business has seen exceptional growth led by the highly successful fall 2016 launch of our women's golf leisure line in the United States, a collection set for worldwide rollout in 2017.

In closing, given all of the challenges faced by the golf industry in 2016, we are very pleased with our performance and we see positive industry and Company trends underpinning our enthusiasm for 2017. The portfolio remains strong, the brands continue to resonate with dedicated golfers on all fronts and the operating model has proven to be reliable and resilient.

We will continue to confront some of the 2016 correction as we comp against the previous year, but, in the end, our goal remains to outperform the market. We are confident with our ability to deliver the 2017 plan as represented to our Board of Directors and our commitment to represent a long-term total return to all of our supportive shareholders remains unabated,

And now I'd like to turn the call over to Bill Burke for a review of our Q4 and full-year 2016 financial results.

Thanks, Wally. (technical difficulty) the results, I want to make you aware of a couple of accounting changes related to immaterial revenue adjustments that we made in the fourth quarter of 2016. These relate to consignment sales at certain retail outlets in Korea and the accounting for trial club sales in the United States. The Q4 and full-year results as reported reflect these changes.

Note that these changes were not made to the corresponding periods in 2015 due to materiality. An explanation of the adjustments is available in supporting schedules in today's slide presentation and as I go through Q4 and full-year results, I will highlight the impact where appropriate.

Starting with a quick overview, we are very pleased with our performance in the fourth quarter and for the 2016 fiscal year. In 2016, we had solid growth in both sales and adjusted EBITDA in a year of continued industry right-sizing. Annual sales of $1.57 billion were up 4.6% year-over-year and on a constant currency basis up 4.5%. Excluding the impact of the accounting changes, sales were up 3.5% year-over-year and on a constant currency basis up 3.4%. Adjusted EBITDA was $228.4 million, up 6.4% over the prior year and we generated $86 million in free cash flow in 2016, up $17.4 million year-over-year.

Looking at Q4 results, consolidated revenue in the quarter was $329.8 million, up $9.5 million from Q4 of 2015 and up 1.3% in constant currency. Excluding the accounting adjustments, revenue would have been up slightly from last year and down 1.5% in constant currency. This was a challenging quarter, particularly in the United States with the off-course retail disruptions that I will speak to in a minute. Overall, we feel our consolidated fourth-quarter performance was quite strong and further demonstrated key strengths of our prudent business model, strong broad-based category positions across a global footprint.

Fourth-quarter net loss attributable to Acushnet Holdings was $0.2 million, an improvement of $20.3 million versus Q4 2015. And adjusted EBITDA for the quarter was $38.1 million, up 28.9% year-over-year.

Turning to the performance of our business segments for the fourth quarter and full year. Q4 Titleist golf ball revenue was down 5.9% year-over-year and down 6.2% in constant currency. This was driven primarily by a decline in sales in the United States as a result of the Golfsmith bankruptcy, but also due to the fact that the Pro V1 and Pro V1x golf balls were at the end of the second model year for the franchise.

For the year, Titleist golf ball revenue was down 4% versus 2015 and down 3.7% in constant currency. In addition to it being the second model year for the Pro V1, the annual results were also impacted by the bankruptcy of Sports Authority earlier in 2016 and the resulting reduced store count.

As Wally indicated, we are excited about the launch of the new Pro V1 and Pro V1x golf balls this year. The new balls debuted on tour in October and since then, we've seen broad tour adoption worldwide. We began shipping the new product in January and we are very pleased with the enthusiastic golfer reception in the first few months of availability.

Our Titleist golf club business had a solid fourth quarter. Revenue was up 19.2% versus last year on a reported basis. Excluding the accounting adjustment for trial clubs, Titleist golf clubs would have been up 15.8% versus last year and up 12.1% in constant currency. Sales growth was largely driven by the successful introduction of the new 917 drivers and fairways that were launched in the quarter.

For the year, Titleist club revenue (technical difficulty) course of the year. Note that the accounting change related to trial clubs had no impact on golf club net sales for the full year, so our Titleist club business had an exceptional year in 2016 and we are excited about our prospects in 2017.

Q4 Titleist golf gear revenue was down 11.8% versus last year and down 13.2% in constant currency. Q4 gear results were also impacted by the retail disruptions in 2016, as well as a planned shift in launch timing for our new bag line to the spring of 2017.

For the year, gear sales were up a strong 5.3% and up 5.5% in constant currency as we continue to make good progress on our initiatives to enhance our design and development process. We expect these efforts to have a positive impact on the gear business moving forward.

FootJoy golfwear Q4 revenue declined by 9.5%, down 10.1% in constant currency, with results primarily impacted by the retail disruptions we mentioned earlier. Golfwear finished full-year 2016 up 3.4% and up 3.6% in constant currency. We had a strong reception for several new footwear models, in particular Freestyle, Hyperflex II and the Pro SL. New initiatives such as women's golf leisure apparel and FootJoy e-commerce also helped to drive growth in 2016.

In the first quarter of 2017, we feel we have a solid lineup of golf footwear that we are bringing to market and we launched new men's and women's golf leisure apparel lines, which have been very well-received.

Looking at revenue across the various geographies, our Q4 revenue in the United States was down 3.6% year-over-year and down 5.8%, excluding the impact of the accounting adjustment, largely as a result of the retail disruptions referenced earlier. While the US market was challenging in 2016, our overall US business has proven very resilient, essentially flat with prior year. Our focus on the dedicated golfer, strong green grass partnerships and solid product momentum have enabled us to navigate a challenging year in the US.

Results in our major ex-US markets were also strong for the year. Q4 Japan revenue was up 31.5% versus last year, up 14.3% on a constant currency basis. The Q4 increase was largely driven by the very successful launch of the 917 driver and fairway.

For the full-year 2016, Japan revenue was up 20.2% on a reported basis and up a strong 7.6% in constant currency. This was an excellent performance in golf's second-largest market and evidence of strong brand momentum.

EMEA revenue in Q4 was down 2.3% on a reported basis versus last year, but up 8.8% on constant currency. For the full year, EMEA was up 4.5% on a reported basis and up a strong 9.9% in constant currency. This is a very encouraging full-year result driven by broad-based gains across all product categories.

Sales in Korea increased 12.2% in Q4 on a reported basis. Excluding the impact of the accounting adjustment, Q4 sales would have been down 2.4% and down 3.8% in constant currency. For full-year 2016, Korea's performance was outstanding with gains across every product segment and category. While revenue was up 21.4% on a reported basis, excluding the impact of the accounting adjustment, revenue would have been up 10.3% on a reported basis and up a strong 13.3% in constant currency.

Turning now to some notable items from the Q4 income statement. Q4 gross profit was $168 million, up about 1.5% year-over-year. Gross margin was 50.9%, down 80 basis points from last year. Excluding the impact of the accounting changes, gross margin would have been 50.3%, down 140 basis points from last year. The decline in gross margin was largely due to a loss on foreign currency hedging contracts in the fourth quarter of 2016 versus contract gains in Q4 2015. We use foreign currency contracts, typically forward contracts, to stabilize our ex-US cost of sales over time, the majority of which is denominated in US dollars.

SG&A expense of $144.4 million was down 1.6% versus last year on a reported basis. However, I'd like to give you a better sense of the underlying year-on-year SG&A comparison. Excluding the expense associated with our management equity appreciation rights, or EAR plan, recorded in 2015 and 2016, one-time transaction fees primarily associated with our IPO and the effect of the accounting adjustments we made in the fourth quarter, SG&A was down 4.4% year-over-year. This was driven by lower promotional, administrative and associate incentive expense, partially offset by expenses associated with share-based compensation under the new management equity plan.

The performance categories of golf balls and golf clubs demand a constant investment in innovation. In Q4, research and development expense of $13.5 million was up $1.5 million over Q4 of last year. Excluding expenses associated with the EAR plan, R&D expense was up $1.8 million, primarily driven by an increase in club research activity.

Our Q4 net loss attributable to Acushnet Holdings of $0.2 million improved by $20.3 million from Q4 of last year. This improvement was primarily the result of a favorable comparison to the recognition of a non-cash fair value measurement loss on our common stock warrants in the fourth quarter of 2015 and lower interest expense.

Note that the common stock warrants were fully converted into common shares in 2016 and will no longer have an impact on our net income.

Our adjusted EBITDA for Q4 was $38.1 million, up 28.9% as a result of higher income from operations primarily driven by the operating expense reductions discussed earlier.

Looking to the balance sheet at year-end, we had ample liquidity and capital resources. We had approximately $76 million of unrestricted cash on hand, $225 million of availability under our revolving credit facility and $60 million of availability under other local credit facilities.

For the full year, we had cash flow from operating activities of $105.2 million and we generated free cash flow of $86 million, up $17.4 million year-over-year. Note that we define free cash flow as cash flow from operating activities less capital expenditures.

We are also very pleased to announce that our Board of Directors has declared our first quarterly cash dividend of $0.12 per share. The dividend will be payable on April 19 to shareholders of record on April 5.

Finally, we are providing you with an overview of our business outlook for 2017. We are providing annual guidance because we believe that managing and measuring our business over longer periods of time is a more rational approach. Our business is very cyclical with our strong position in consumables impacting quarter-to-quarter comparisons that can particularly be influenced by weather.

In addition, we manage our equipment businesses over two-year product lifecycles and given the timing of new product introductions, we believe it's best to view performance of these segments on an annual basis.

For 2017, we expect consolidated GAAP revenue to be in the range of $1.565 billion to $1.595 billion. Note that this guidance range closely reflects average currency rates in effect during the month of December 2016 and that key rates, such as the Japanese yen, British pound sterling and euro experienced weakening since the US general election in November. Given the impact that changes in foreign currency rates can have on our revenues, we are also providing our outlook for consolidated revenues on a constant currency basis as we believe this is a better indicator of true market momentum. On a constant currency basis, we expect 2017 revenue to increase in the range of 1.8% to 3.7%.

Lastly, we are providing our expectations for adjusted EBITDA. We utilize and focus on adjusted EBITDA for a number of reasons, including compliance with our credit agreement, providing investors with the ability to analyze our core operating results between periods and as an internal measure to evaluate the effectiveness of our business strategies. And with comparisons to 2016 impacted by a number of legacy transactions or one-time items, we feel it is a more meaningful measure of our performance. For the full-year 2017, we expect adjusted EBITDA to be in the range of $220 million to $230 million.

In summary, we believe we had a strong performance in 2016 with solid sales growth in constant currency under the backdrop of a particularly challenging US market and we grew our adjusted EBITDA to $228 million, up 6.4%, which we believe continues to validate the resiliency and stability of our proven business model.

We also continue to refine and focus our efforts towards connection with the dedicated golfer worldwide and we are off to a good start in 2017. We do expect Q1 and to a lesser extent Q2 comps to remain difficult due to the number of store closings resulting from the retail disruptions in 2016, but we continue to feel that these are the positive signs of a necessary right-sizing that will benefit the industry in the long term and we remain confident of our prospects for the full year.

With that, I will now turn over the call to Tony for Q&A.

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

Absolutely. (Operator Instructions). Matthew Boss, JPMorgan.

So I guess higher level, can you just talk about where we stand today with the excess inventory in the channel and then once we are through the door closures, in a more steady state backdrop, where would you peg multiyear growth in the golf industry from here?

I will answer that question. So from a broader inventory standpoint, a couple themes emerge as we think about entering 2017 and really two answers. One, there's the ex-US answer, but I think your question more focused on what's happening within the US.

As Wally and Bill referenced, the market's down about 500 doors versus the year prior. We feel real good that the majority of that inventory has worked its way through the system. There was some liquidation that took place in the second, third quarters last year. So entering 2017 we feel real good about inventory levels. You've seen some early indications that those retailers and as importantly in our business green grass partners are off to a pretty good start this year and I think that's a commentary on the fact that this business is migrating; it's migrating to a variety of channels.

First and foremost, in our world, it's migrating on course; it's migrating off course, sporting goods and e-commerce as well. So broad commentary on where the channel stands. I think it's in a pretty good position and again, from an inventory standpoint, we feel good heading into 2017.

Broader commentary about long-term prospects, our position has been that, as Wally mentioned in his opening remarks, we see the global golf opportunity as a 1% to 2% growth opportunity from a broader market standpoint. As we have shared with you and others, we've built an operating model to beat the market, so that's our expectation. But the starting point is market growth in the low single digits.

Got it. And then just more specific to your model, so underlying your EBITDA dollar guide that you provided, is it best to think about gross margin expansion partially offset by continued SG&A investments? Just any color on maybe the gross margin versus SG&A would be helpful.

Yes, as we have said on several different occasions, and we are really targeting, and we look to target a 50% margin in this industry, which is, we believe, industry-leading and we do a lot of things to perpetuate that. Obviously, we look to be premium priced, we look towards customization to do that, to deliver that promise, but we are also conscious of the fact that as we grow our top line, we grow our vertically integrated business production, which also leads to improved margins over time.

In SG&A, we have a number of fixed elements of SG&A that really over time we don't have to have a lot of investment in. Headquarters, marketing and selling infrastructures are largely in place in all of our major markets. Sales coverage is appropriate in all major markets right now to service the account base. We feel that we've reached a level of tour spend we are comfortable with and also we have the fixed elements of distribution, warehousing space and all in place as we move forward.

So aside from G&A where we are going to have some public company costs this year and going forward, we also see some logistical opportunities in gear and FootJoy golfwear where there are synergies and we are going to look to pursue those and maybe yield some cost savings out of that.

Great. Best of luck.

Mike Swartz, SunTrust.

Could we just maybe touch on the topic of geographies and Wally, it looks like you guys have been doing extremely well outside of the US. I think your ex-US sales were up high single digits, low double digits in 2016. Could you maybe give us a sense of just how you are doing that? Is that distribution; is that product? And then how do we think about that going forward?

Yes, Mike, I think the major thrusts over the last two decades has been to download to all of the countries outside of the United States the best practices which have been in place in the US market for the last four to five decades. Those steps require establishing an infrastructure, not just a backroom capability, but also a salesforce representation in those countries and to get started, it's not as easy as it sounds because it's not as if you can go out and recruit from competitive entities.

So what you are seeing now is Acushnet Japan has been in existence for three decades. Acushnet Korea is in its second decade and we are starting to see the benefits of tenure and experience.

I would point out though that most of the markets that we've referenced we would define as mature and so it remains a zero-sum game. We are only going to grow in those markets, whether it's United States, Japan, South Korea, et al unless growth only comes from gaining share from very formidable competitors.

Okay. That's helpful. And then just one housekeeping item. Did I hear the comment that guidance for 2017 is based on December exchange rates?

Yes, closely relates to December average exchange rates.

And it seems like some of the major currencies that you are talking about have actually eased since December a bit, now understanding that some of that is going to be locked in on the gross margin side, but is there a way of looking at just sensitivity analysis to what the potential upside I guess to the top line could be at current rates?

Yes, I think when you look at that, you can see what happened. That really was a reaction to the Fed's decision to raise interest rates and announce their determination to probably raise them two more times this year and that gave strength to the world markets to feel like the world economy is a little bit more robust than it might be.

I would say that we don't look and change currency rates on an ongoing basis. We look for a sustainable level where currency rates are trading before we make any changes and these changes at 3% and 4% and 5% could easily reverse themselves. As we know today, we saw what the market did yesterday in reaction to the fact that there will not be probably tax reform out there. So that would have an impact on what potentially everyone thinks US earnings will be and what will happen to FX rates.

So you can actually look at these averages and move forward and model them yourself, but we internally do not make changes until we see a sustainable change and if we do, we will be updating some of that in our future guidance if there is a major change.

Okay, great. Thanks a lot.

Simeon Siegel, Nomura Instinet.

Any color you guys can give on Q1 trends just as it relates to Matt's question about gross margin? So with the new Pro V launches, I assume there should be, at least in the ball segment, maybe some improvement there. So any color you can give there. And then it looks like CapEx came down a bit, so any color on that decline? I don't know if anything was timing, but what would you expect for CapEx and D&A for this year? Thanks.

Yes, again, we are targeting that 50% margin level and we continue to do that on a full-year basis. So that is our target and that is certainly where we intend to be in the short and the long term. When you look at year-on-year, the degradation in currencies does, to some extent, impact gross margin, although we have a very robust hedging program in place that mitigates a lot of that.

So I would say that, again, for purposes of us saying -- we like to continue to say we are a 50% margin-targeted company. In terms of CapEx, we are looking at roughly $26 million or so next year. The timing of that can vary depending on when we start projects. If we start later in the year, they could carry over into the following year, but that's the approximate number right now.

Okay, great. Thanks. And then R&D has been a great weapon for you guys. It looks like it went up a little bit. What's the right way to think about the R&D line go forward?

Yes, I think we are going to continue -- the product categories that we are concentrated in, particularly balls and clubs, are very innovation-intense. So it's almost by default, if you are going to participate in those categories, you've got to maintain a requisite investment in research and development in order to be competitive going forward.

Perfect. Thanks a lot, guys. Best of luck for the year.

Dan Wewer, Raymond James.

The midpoint of the 2017 adjusted EBITDA is $225 million, so that's a reduction from the $228 million earned in 2016 and yet you are guiding revenues to be up approximately 2%. What's contributing to the lower adjusted EBITDA rate in 2017? Is it gross margin dropping back down to 50% compared to 50.5% achieved in 2016, or is it the accounting change that you alluded to? If you can give some clarity on that.

Sure. Let me start by saying both accounting changes had no impact on earnings or net income or adjusted EBITDA. Let's start right there. Secondly, I think we need to, again, reflect upon the currency rate changes that happened and still, although they have improved a bit, they are still weaker than they were last year year-on-year.

So when we look at the growth, I think you really need to look at that constant currency as being the driver of what's happening on the top line because although we can hedge our cost of goods sold and maintain and attempt to maintain our 50% margins, you can't really do anything about translation on the top line. So when the translation affects the sales, it will affect gross profit, not so much as margin. So in doing so, that, and including the impact of public company costs, are really the reasons that we are looking to be roughly flat or a little bit down from last year if you look at the midpoint.

And then as a follow-up question, if you go back to 2015, the last time there was a new Pro V1 launch, the Company achieved $535 million in golf ball sales that year. Do you think with the new launch in 2017 that you can get back to that 2015 revenue level in golf balls?

I will comment on that launch in particular. A couple things. As we have said before, one, we are off to a good start in the first quarter, particularly outside the United States where shipments have been robust and surpassed our 2015 level. In the US, as we have said, we are dealing with some meaningful store count contraction, so our pipeline is going to be smaller.

So in terms of Pro V1 2017 versus Pro V1 2015, we have very high expectations in terms of what's happening on tour, early golfer acceptance, but we are dealing with some pipeline realities that are just different in 2017 than they were in 2015.

Okay. And then the last (multiple speakers).

I just would point out that the golf ball market in 2016 was slightly smaller than both 2014 and 2015 worldwide.

And then the last question I had, you called out the increase in R&D for golf club work. Does that signal that we may see an expansion in your golf club assortment next year?

Not necessarily. We continue to invest heavily in golf club R&D. We've got a lot of positive things happening. 917 is certainly top of mind right now. We had a very good run with our AP irons. We are expanding our C16 concept products, but in terms of correlating our investment in R&D to any expanded plans or thoughts about the business, I don't know that I'd make that correlation. We certainly invest heavily and we certainly invest what we believe is the appropriate amount to drive the business going forward.

I would just add that too includes an increase in gear. We are doing some R&D work on our own gear work development right now.

Okay, great. Thank you.

Tim Conder, Wells Fargo Securities.

Just a few here, gentlemen. From a broad overview perspective, any stats that you have yet on 2016 year-over-year change in millennial participation in the sport or any other things that you can give us from a broad demographic perspective?

At this point, Tim, no real changes. As we've said in the past, the game has got -- if there are four demographic groups, the baby boomers and Gen Xers are driving a lot of the participation today. The millennials a bit of latent demand there as they are focused on other things in their lives, but we haven't seen any specific data from millennials.

The bright spot be it behind them is the junior participation, which, at least in the US, is at a record high and continues to be fueled by great initiatives like PGA Junior League. We will say that the game continues to attempt to re-face itself to be friendly to not only today's Gen Xers and baby boomers, but also anticipating the differing needs, wants and expectations of millennials.

So that's a broad stroke view of how we see the demographic profile of the game, but in terms of any hard data in 2016 versus prior years as to how millennials think about the game, no hard data to report to you.

Tim, those are more long-term trends I don't think you are going to see manifest in meaningful numbers year-to-year. I think what we've shared in the past we would expect to continue and not until 2020 would we expect to see any impact and consequence of some of the initiatives and programs that are out there being brought online by the various golf institutions.

Okay. And then on a couple of other items, gentlemen. Any comment that you can make at this point given the Kirkland Signature issue that came up and any quantification as to how that may have or may not have impacted the business in 2016? And I would assume that the new version here clearly has improved performance characteristics and that should not be a concern going forward even though it appears that for now that that ball is not being sold by Costco?

Yes, I think you know based on past experience, A, we never comment on the competition and anticipating the next question, as you would expect, we don't comment on any outstanding litigation. But we do respect the fact that you are going to ask questions, A, of a competitive nature and B, of a litigious nature and hopefully catch us at a weak moment, but we will take a pass on both those.

Not a problem, Wally. Another one that may get the same answer here, what are management's thoughts at this point and what type of opportunities potentially do you see where you stand with the divestiture of a competitor, TaylorMade?

Well, I think as I said in my comments, we think any of the landscape changes, whether it's companies vacating certain sectors and/or changes in control, my opinion is it's the Company's position that that can only contribute to more rational behavior within the industry and particularly retail going forward.

I think we've seen that in the last six to eight months where there has been less unchecked promotional discounting and just greater stability of retail. So I think from a macroeconomic point of view, again, however that plays out can only be a positive to long-term industry stability.

Okay. Thank you. And lastly, related to the border tax adjustment, any thoughts -- again, nothing has passed through Congress and there's talk now of a gradual phase-in, if it happens at all, what's the Company's thoughts and what potentially could you do on the manufacturing side should that be implemented and just any quantification as to potential impact or range of impacts that you all may be looking at?

Well, I think you said it first upfront that we wish we had more to report at present. As you know, the administration has placed tax reform really on the back burner to address healthcare reform, so we don't have a lot more clarity than we did on our last call, but we are continuing to watch the situation closely and if something definitive emerges, we can update you on that.

But I think it's important to point out though, while we import products and a lot of soft goods, like many manufacturers, we also sell products outside the United States and we also operate plants outside the United States that sell into our ex-US markets a considerable amount of product. So there's an additional dynamic there that affects the entire equation other than just imports in the United States.

And on top of that, there is still uncertainty among a number of different things -- legacy foreign tax credits, repatriation of earnings, the deduction of interest and capital expenditures. So it is a mixing pot right now, Tim, and until we get more clarity, it's difficult for us to comment on that.

Dave King, ROTH Capital.

I guess first on Pro V, curious how the changes in marketing message have resonated with consumers at this point. I understand shipments have been strong internationally, but anything you can share in terms of early sellthrough, where those balls are currently distributed?

Yes, a couple things. And this is a chance for us to speak about some of the rhythms of our two-year product lifecycle. So we enter the year; we had a nice share spike in the fourth quarter as compared to the third quarter on the strength of our holiday program. While the quarter is still underway, we seem to be off to a good start in terms of early share versus the fourth quarter of last year and share versus a year ago. So we are pleased with the trends. We are pleased with what our trade partners are providing in terms of feedback.

A couple other elements of the launch. We've seen a shift -- an increase on tour usage and we saw a very early and robust adoption and transition into new product versus prior generation. So those are always early positive indicators that we think should play out as the launch progresses.

The other side of it is the broader messaging and we feel real good about the performance story. Pro V1 is longer than its predecessor. Pro V1x offers improved in-flight performance versus its predecessor. Pro V1 softer feel, lower flight than Pro V1x and we've worked very hard with our trade partners to get that message out. We've got a legion of ball-fitting teams in the US and around the world interacting with golfers to get the message out and provide them with the knowledge and sampling opportunities to test these products.

So from the vantage point of what we think about the launch thus far, we are real pleased and as you can imagine, a lot of what happens in the early part of the year, certainly the first quarter of the year is about pipeline and launch and we are excited about what's going to happen once the broader golf season opens up in a few weeks around the country and around the world and feel our team has put ourselves in a real good position for success.

Okay, that's great color. Thank you. In terms of the guidance, how do you see the year progressing versus that full-year growth target of 2% to 4%, I think, in constant currency? I understand the first half will be difficult due to Golfsmith, but anything in terms of effective product launch timing that you can share in terms of how to think about that, just high level versus that full-year target as the year goes?

No, I would say we are launching our new Pro V1 early in the year. We are going to launch all of our golf footwear and apparel early in the year. We mentioned already we will see some headwinds due to the reduced store count in the first quarter and some of that will move slightly into the second quarter as you are continuing to do that sell-in, but other than that, we don't have any comments on any significant trends happening for the balance of the year that I can point out.

Okay, no, fair enough. And then I guess one last one for me. Decent progress on working capital both in terms of inventory and receivables. How should we be thinking about that -- you gave us the CapEx guidance, but how should we be thinking about working capital and the potential for further improvement there? Thanks.

Sure. I think you can see that inventory is relatively flat year-on-year, which is not unusual for us. We are building for a Pro V1 launch coming in, so I think you need to look at -- if you are looking at the accounts receivable number, I think this will show some of the anomalies of us having a strong international presence.

And if you might indulge me for a second, I don't want you to take that number running forward. If you look at Japan, Japan sales in the quarter on a reported basis were up 31% or about $15 million in that quarter, but that was recorded at average rates. That's how those sales are recorded and those average rates where they recorded most of those were in the $1.05 range in the months of October and November, but the balance sheet is recorded at the spot rate at the end of the year when it was $1.17, so that's a bit of an anomaly where the sales look like they are even, but by the end the year, the receivables are down. So I don't want you look at that. I think the best thing you can look at is a running average of average accounts receivable plus average inventory minus accounts payable divided by sales and we'd like to be in that 30% range.

Okay. No, that's good color. I'll step back. Thanks for taking my questions and good luck for 2017.

Randy Konik, Jefferies.

So we've gotten some good color on R&D expense and talked a little bit about customization, but I want to further go into that idea of getting closer to the consumer with customization and the My Pro V1, I guess, experience. As it relates to clubs, can you give us some perspective on just general penetration of customization, but not just in total? How does it look in the US versus Japan versus Korea and how should we think about that progression over the next five years from a penetration standpoint in those three markets? And any kind of color on differential on the ASP difference of a set of customized clubs that are being bought on average versus not would be helpful.

And then just any kind of update on the My Pro V1 customization experience; what kind of learnings and successes have you had there thus far and what are your plans to further develop that business moving forward? Thanks.

Randy, I will take the first part of the question, which is the custom golf clubs. In the United States, I would say -- and again, we are just going to speak to our numbers -- our golf club franchise, woods is 25% to 30% custom; irons are more than 50% custom and again, keep in mind that's after 20 years of being committed to a custom-centric golf club business model.

In both Japan and South Korea, the idea of custom golf clubs is still relatively recent because the business model in Japan, led by the home market competitors, was very much in store and off the rack. That changed a little bit with the advent of adjustability, but when you look at how golf clubs have been sold in the United States and again, they were rooted in a green grass outside fitting environment, that environment heretofore never existed in Japan and South Korea.

But our plan is to continue to grow that piece of our business in Japan and South Korea, but you've got to have fitting teams on the ground. You've got to have fitting locations that are amenable and provide you the resource location to do the custom fitting and that's in place. So we expect over the next 5 to 10 years, our business in those markets will continue to increase as a percentage of custom as part of the total.

And Randy, part two of your question specific to My Pro V1, My Pro V1 is in its sixth month and it has shown slow and steady progress, which we are very, very pleased about, but most important, and I think it's important to call out, the objective and intent of Pro V1 was to provide dedicated golfers and Pro V1 fans a fantastic experience with the Titleist brand and some customization opportunities that were otherwise not necessarily available in the market.

So first and foremost as we measure the progress and success of My Pro V1, we look to the feedback and experiences we are providing customers, which has been terrific and again, we are seeing slow and steady growth in that space. As we have said all along, we don't see this as a volume play. This is an experience play. We realize that this will be a small, small part of our total golf ball business, but nonetheless an important one because it hits right at the heart of our dedicated golfer audience.

Got it. And then I guess to follow up with another area, since you've obviously got the Titleist brand name extremely strong growing that golf ball business further, the club business, etc., that younger big-time focus on golf gear, maybe give us some perspective on where are we as it relates to the assortment? How much further does it need to be expanded from a SKU-count perspective, if at all and where are you from a distribution perspective with golf gear relative to golf clubs and golf balls? Meaning is there additional distribution opportunity for that segment of your business? Thanks.

Yes, the objective with gear when we a couple of years ago made a deeper commitment into this category was a couplefold. First off was to shore up and really strengthen and produce the leading supply chain in its space. So a lot of our efforts thus far have been centered around fine-tuning the supply chain, which is very important. We think long term is going to yield a competitive advantage for us.

Part two is we beefed up our design efforts and again a lot of these, whether it was supply chain, design efforts, sourcing, a lot of that was third-party sourced so we are taking a lot greater control of the gear business, number one and we are bringing a lot of expertise and resources to it, number two.

In terms of where we go with the business, our distribution is robust. We don't look at the business and see we lack distribution, so I wouldn't think of it in terms dramatic increases or expansion to distribution, but we do understand that as the productline gets better and better, there may be some incremental distribution opportunities out there for us.

But, again, primarily it's design improvement, supply chain efficiencies, better route to market execution and one of the payoffs of that will allow us to continue to make -- continue to improve the productline, but one of the payoffs longer term will be the ability to continue to move business towards customization and that's part of the supply chain enhancement we are looking towards.

So as we think about the future, sure, we think about growth and how to grow at a quicker clip than we have in the past. One of the drivers will be an increased migration towards customization and again back to that dedicated golfer, we think that yields a better experience for them.

Just to follow up. It remains an $800 million opportunity worldwide and there really is no clear-cut leader in the segment.

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

Kimberly Greenberger, Morgan Stanley.

I'm wondering if you can talk about how the Golfsmith situation played out in the fourth quarter relative to your expectations and what's your assessment of how inventory looks in the retail channel at this point.

Secondarily, it looks like there's been a recent increase in butadiene prices. I think you've got some hedging programs around that. Maybe you can just talk about how you are viewing golf ball input costs in 2017 and what sort of hedging activities you have around that? Thank you so much.

Kimberly, I will touch on the first couple and Bill will speak about polybutadiene. In terms of Golfsmith in the fourth quarter, and as Wally mentioned in his opening remarks, I think we feel as though we weathered a bit of a storm in 2016, if nothing else from a planning standpoint. It was a very challenging year to plan and forecast the business because there were just a lot of uncertainties in terms of how that was going to play out. We took, I think, a conservative approach to those expectations in the fourth quarter and in hindsight, those proved to be spot on.

So in terms of what played out in the fourth quarter with Golfsmith, we had very conservative expectations. We may have come in slightly ahead of those conservative expectations.

The second part of your question about inventory, we historically pay very close attention to our trade inventories and we also pay very close attention to broader trade inventories because we understand supply/demand imbalance from some of our competitors can cause problems as well, but in terms of our specific inventories, we entered 2017 in a real healthy position.

Again, you simply take the totals associated with what amounted to 500 doors, 400 TSAs and near 100 Golfsmiths and you take that inventory out of the equation, you are down from where you were in the start of 2016 and by and large, the selloff of those inventories as those doors closed was complete by the end of the year, was near complete by the end of the year.

So that covers really question one and two I think and I will pass the baton to Bill for your third question.

Kim, obviously, we've seen some rise in polybutadiene prices. They were coming off extreme almost 10-year lows or 8-year lows we saw here, so we expected that all along that it will rebound to some extent when the energy stocks started rebounding, but -- and oil [OPEC] cut. So we have seen some increases. They are built into our forecast. They are not something that we are concerned right now at this point in where we are seeing them go, but they can certainly increase over time, but again we've built that into our forecast before we started the year.

In terms of hedging, this is a commodity. It cannot be hedged. If it could, we would do it. We can lock in some short positions going forward or lock into some brief several month-out positions depending on what kind of supply is out there, but it's not something that can be hedged.

Thank you so much.

Okay, everyone. I want to thank everyone for joining us on today's call and until we talk again, which will be sometime in May to review our first-quarter performance, please join us in respecting the golf gods and pray for good weather. Thank you.

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