Acushnet Holdings Corp (GOLF) 2017 Q3 法說會逐字稿

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Acushnet Holdings Q3 2017 Earnings Call. (Operator Instructions)

Tony Takazawa, Vice President of Investor Relations, please go ahead.

Thank you. Good morning, and welcome to Acushnet Holdings' call to discuss the financial results for the third quarter of 2017. This morning, we are joined by Acushnet's COO, David Maher. David will provide commentary on the conditions in the golf industry and discuss the performance of our business across our segments and geographies. Next, Acushnet's CFO, Bill Burke, will spend some time discussing our overall financial results for the quarter. After the prepared remarks, we will be joined by Acushnet's CEO, Wally Uihlein, and then we will 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 U.S. Securities and Exchange Commission.

Throughout this discussion, we will be making reference to non-GAAP financial metrics, including items, such as revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today's press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission.

With that, it is my pleasure to introduce Acushnet's COO, David Maher. David?

Thanks, Tony. Good morning from Fairhaven, Massachusetts, and thank you to all who are participating on today's call. We look forward to sharing Acushnet's third quarter and year-to-date operating results, outlook for the balance of 2017 and commentary on our 4 business segments.

Before presenting our operating results, I will affirm Acushnet's commitment to provide shareholders with a long-term total return investment opportunity.

Acushnet's playbook consists of an organization-wide focus on the game's dedicated golfer, a broad product category portfolio, a favorable mix of consumables and durables, golf brands that resonate with the commercial core of the golf industry, strong pyramid of influence validation and a desirable concentration in high-margin equipment segments. This represents the DNA of the Acushnet Company, which we believe lends resilience to our long-term performance.

Affirming our shareholder commitment, I am pleased to announce that earlier today, Acushnet's Board of Directors declared the payout of our quarterly cash dividend of $0.12 per share or $8.9 million in aggregate payable on December 15 to shareholders of record as of December 1.

The third quarter is transitional for Acushnet and many of our trade partners. Northern markets begin the period in high gear with play and fittings at peak levels and then move into inventory management mode as summer turns to fall. Sunbelt markets conversely begin the quarter in their off-season and are in ramp-up mode by quarter's end as they prepare their golf shops for the upcoming winter season.

In the third quarter, Acushnet posted sales of $347 million, up over 2% on a reported basis and up near 3% on constant currency. For the first 9 months of 2017, sales of $1,209,000,000 were off 2.7% from last year or 2% on constant currency. Adjusted EBITDA for the quarter was $32.2 million, up 15% from last year and $182.5 million for the 9-month period, a 4% decline.

At the segment level, golf ball sales were off 3% for the quarter and 2% year-to-date, both on constant currency. New Pro V1 golf balls have posted sales and share gains through the first 3 quarters of the year, as golfers have embraced the new and improved Pro V1 and x models. Sales of our performance models have declined, as these have been most impacted by competitive promotional activity in what is the back half of their 2-year product life cycles.

We see this promotional activity largely as a byproduct of the retail correction as golf ball companies come to terms with the new inventory and retail square footage realities of the market. Looking to 2018, we anticipate promotional activity will continue, albeit at lesser levels than experienced this past year. Acushnet's golf ball business has also been impacted by wet weather in 2017, which has caused year-to-date rounds declines in the key markets of New England, mid-Atlantic and the Pacific. We are encouraged, however, by national rounds increases in August and September, which occurred in spite of sharp declines in the Southeast and Texas, resulting from Hurricanes Harvey and Irma, where golf, understandably, took a backseat in these regions as the focus shifted to cleanup and recovery, which has progressed well for most of our affected trade partners. And in the third quarter, we successfully introduced the new Titleist DT TruSoft golf ball. And looking ahead, our team is busy preparing for new product launches in the first quarter of 2018, as we set out to strengthen our performance ball franchises.

Moving to golf clubs. Titleist posted a 10% sales increase in the third quarter, with year-to-date sales down 9%, both on constant currency. The late September launch of the new 718 irons and 818 hybrids met our high expectations. From tour launch to staff player seeding and trade partner education to initial market introduction, this was one of our most comprehensive and well-executed golf club launches to date. Early demand has been strong, fueled by a calendar full of fitting events starting in early September, which was aided by good weather across most markets. Feedback on both 718 irons and 818 hybrids has been very positive. The addition of the new AP3 model has been especially well received across all regions, as initial interest in this players' distance iron has been strong.

Rounding out the Titleist golf club portfolio are Vokey wedges and Scotty Cameron putters, and both franchises have performed well and in line with our expectations. Sales of Titleist gear increased 2% in the third quarter and have grown north of 5% year-to-date, both on constant currency. Growth in the third quarter was driven primarily by success in travel gear, while our year-to-date increase comes from across-the-board sales gains in gloves, bags, headwear and travel. We continue to fortify our gear design capabilities and supply chain, while pursuing the highest levels of product performance and quality.

And finally, moving to FootJoy, the #1 shoe and #1 glove in golf. Third quarter sales were up 4% and 9-month sales were down 0.5% on constant currency. These quarterly and year-to-date results are healthy, especially when viewed against the backdrop of the significantly reduced U.S. store count and corresponding inventory reduction in the marketplace. Innovative new product has been the foundation of FootJoy's golf footwear business in 2017. The third quarter launch of the new DNA Helix golf shoe has been very well received, and this is in addition to the continued strength and momentum of our Pro SL spikeless shoe. Additional third quarter highlights include the successful introductions of LTS outerwear and FootJoy's Golfleisure for women fall collection.

Now looking at our business regionally. U.S. sales for the third quarter were up almost 5% and are down 3% for the first 9 months of the year. It is encouraging that the U.S. retail market is weathering its structural correction fairly well. The general consensus from our trade partners is that they are faring better now than they did in 2016 or 2015, as there are fewer competitive doors and a greater percentage of their sales is generated from in-line products. We reiterate our position that the U.S. market is approaching a healthier state, with the supply of OEMs, retail doors, inventory levels and golf courses more in sync with market demand. As we soon head into 2018, we continue to closely monitor the ongoing migration of volume and evolving golfer purchase behaviors as we eventually settle into this new and healthier normal for the golf industry.

Now looking outside the U.S. EMEA's third quarter sales were up 0.5% and for the first 9 months were down about 1%, both on constant currency. Comping against record Acushnet sales in 2016, we've seen EMEA markets holding strong in the midst of Brexit-related uncertainties. Year-to-date, rounds of play in the region are up in the low to mid-single-digit range; and overall, inventories are in line for this time of the year. Third quarter sales in Japan were off 7% for the quarter and down 10% year-to-date, both periods reflected in constant currency. The Japan golf market has been relatively soft in 2017 and the season starting slowly due to poor weather. While weather and rounds of play have stabilized over the past several months, the overall market is still lagging behind 2016 levels. And Korea remains strong, and our team continues to capitalize on their opportunities with constant currency sales increasing 6% in the quarter and 12% through 9 months. Each of our business segments is contributing to our balance success in South Korea.

In closing, I will comment on Titleist and FootJoy success across the worldwide tours throughout 2017. Titleist golf balls continue to be the clear choice of the world's most dedicated golfers, with Titleist ball usage at 72% across the worldwide professional tours, a 600 basis point increase versus a year ago. In total, Titleist golf balls have won 2/3 of all events across the worldwide tours, including 3 U.S. PGA majors, 5 PGA Champions majors and 4 LPGA majors. At this year's open championship, Jordan Spieth relied on the Titleist Pro V1x golf ball and 14 Titleist clubs to claim his first Claret Jug and third professional major championship. And also this past summer, Jordan's good friend Justin Thomas also relied on a Titleist Pro V1x golf ball and 14 Titleist golf clubs to win the PGA championship and PGA TOUR Player of the Year award. Justin also trusts FootJoy, the #1 shoe and #1 glove in golf, as his golf footwear and glove choices. And I am compelled to add that Jordan and Justin are not only great players but are equally great role models and ambassadors for the game of golf and the Acushnet Company.

Looking forward, we continue to be optimistic about the structural improvements happening in the golf industry. Titleist and FootJoy market positioning across all categories is solid, with new innovation and product momentum driving Acushnet's third quarter growth and our outlook for 2018. With over 5,000 dedicated associates worldwide, singularly focused on serving the needs of the dedicated golfer, and trade partners who share the same commitment, we are well positioned in the near and long term to be the performance and quality leader in every golf product category in which we compete.

And now Bill will provide an overview of our financial performance for the quarter and year-to-date.

Thanks, David, and good morning to everyone on the call. I'll start with an overview of the third quarter results and then discuss results through the first 9 months of 2017. Given the seasonality of the golf business from quarter to quarter and the cadence of our product launches, it's helpful to look at how the business is tracking throughout the year to gain a better appreciation of overall performance.

As David indicated, consolidated revenue in the quarter was $347.3 million, up 2.3% year-over-year, and up 2.9% in constant currency. Q3 gross profit was $173 million, up 3.7% from last year; and gross margin was 49.8%, up 60 basis points year-over-year, both solid improvements. In the quarter, the increase in gross margin was primarily driven by a higher gross margin at Titleist clubs and FootJoy golf wear, partially offset by a lower gross margin in Titleist golf balls.

Looking at operating expenses. SG&A of $142 million was down 0.7% versus last year. The decline in SG&A was primarily due to a decrease in bad debt expense, nonrepeating IPO transaction costs we incurred last year and a decrease in share-based compensation. These benefits were partially offset by an increase in advertising and promotional expenses related to new product launches and higher consulting, legal and administrative costs associated with our public company status.

In Q3, research and development expense of $11.1 million was down $1.4 million from last year. This decrease was mainly attributable to a reduction in experimental and employee-related costs, much of which are timing related. Q3 interest expense of $4 million decreased by $11.7 million from last year. The decline was primarily due to lower average outstanding borrowings versus last year as well as lower interest rates.

Other expense was $100,000, down $2.5 million from Q3 of last year. This change was primarily due to a decrease in income related to our tax indemnification with Beam. As a reminder, income or expense associated with the tax indemnification is largely a pass-through item, with no cash impact to Acushnet Holdings.

Our Q3 effective tax rate was 24.7%, lower than our annualized run rate, primarily due to a year-to-date true-up of our tax provision based on our geographic mix of earnings as well as a few discrete items. Tax rate comparisons to Q3 last year aren't very meaningful, as we were in a loss position with several discrete items, including nondeductible IPO transaction costs resulting in an abnormal ETR. As a result, our Q3 net income attributable to Acushnet Holdings of $9.3 million improved by $14.8 million from Q3 of last year as a result of lower interest expense and higher income from operations, partially offset by higher income tax expense.

For the quarter, adjusted EBITDA was $32.2 million, up $4.2 million from last year. There are still a number of onetime items that affect the year-to-year comparisons, so we provided a reconciliation of adjusted EBITDA in our earnings release as well as the slide presentation.

Turning to our year-to-date results. Sales of approximately $1,209,000,000 were down 2.7% to last year and 2% on constant currency. Our year-to-date gross margin is 51.5%, a solid 70 basis point improvement to last year. The increase was primarily driven by a gross margin increase in the FootJoy golf wear segment across all categories but primarily in footwear and apparel. Year-to-date SG&A expense was $441.8 million, down $14.6 million from last year. This decrease was primarily due to the absence of both transaction costs related to our IPO that we recorded in the first 9 months of 2016 and a onetime executive bonus recorded in Q1 of last year. There was also a reduction in bad debt expense and reduced advertising and promotion costs across all segments. These were partially offset by higher consulting, legal and administrative costs and an increase in share-based compensation.

Research and development expense of $35.7 million was up $400,000 over last year and for the first 9 months of the year was 2.9% of sales, up slightly year-over-year. Interest expense decreased by $32.2 million to $11.9 million for the first 9 months of the year and similar to Q3 was driven by lower outstanding borrowings as well as lower interest rates. We had other income of $400,000 for the first 9 months of 2017 versus $1.4 million of expense last year, largely due to the absence of recognized losses on our previously outstanding common stock warrants. This was offset by a change in the Beam indemnification and income recorded last year associated with a legal judgment in our favor.

Our year-to-date effective tax rate was 34.4%, down from 45% last year, and similar to the quarter, the prior year ETR being an abnormal rate. We're forecasting an approximate 35% ETR for Q4, absent any significant discrete items or shift in our geographic mix of earnings that may arise.

As a result, net income attributable to Acushnet Holdings for the first 9 months of 2017 was $80.4 million, up $35.2 million over the prior year. Year-to-date, adjusted EBITDA was $182.5 million, down $7.8 million from last year.

Despite the decrease, we view this as a solid performance, given some of the challenges we faced in the first 9 months.

Looking to the balance sheet. We had $69.8 million of unrestricted cash on hand as of September 30, 2017. Total debt outstanding at September 30 was approximately $467 million, with 2.12x LTM adjusted EBITDA. We'll continue to focus on reducing debt as we look to strengthen our balance sheet over the longer term. CapEx in the quarter was $12.8 million, and we're now forecasting total year CapEx in the $21 million range.

In regards to our outlook for 2017, we're tightening up our estimates and currently expect full year reported sales will be in the range of $1,545,000,000 to $1,555,000,000. On a constant currency basis, revenues would decrease in a range of down 1% to down 0.4% versus last year. We also expect our adjusted EBITDA for 2017 to be approximately $220 million to $225 million.

In summary, we had a solid Q3, driven primarily by the successful launch of the new Titleist 718 irons and 818 hybrids. With somewhat more normalized weather trends and encouraging mix of new products and strong operational controls, we're looking forward to finishing 2017 well, with strong brand momentum going into next year.

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

Thanks, Bill. Emily, can we open up the lines for questions, please?

(Operator Instructions) Our first question comes from the line of Kimberly Greenberger from Morgan Stanley.

I wanted to ask first about the golf ball segment, the Pro V1, obviously, performing well. I'm wondering more about the performance models, and I know there is a lot of promotional, sort of, pricing pressure out in the marketplace. Do you think that's the sole reason for the underperformance and should we see that business, let's say, reaccelerate in 2018 as that inventory gets cleaned up? Or do you think there is perhaps a way to be a little bit more competitive in that segment of the ball market through innovation or different product offerings on your part? And then secondarily, if you could just talk about inventory. Inventory here at the end of Q3 looks similar to the end of Q2. We're just wondering how are you expecting inventory to come out at the end of the year this year. And if you could just help us understand the composition of the 7.4% increase in inventory here at the end of Q3, that would be great.

Kimberly, I'll tackle the first one, and Bill will address your second question regarding inventory. You raised some good questions about our golf ball business and our performance models, in particular. First off, as you stated, Pro V1 meeting expectations, sales up, share up in what's been a challenging year for a couple of reasons. First and foremost, correction related certainly in the first half of the year and then, secondly, with some weather issues. But net-net, where we stand today, we're pleased with the introduction of Pro V1 earlier this year and how we fared throughout the year. We said throughout the course of the year that our performance models have been challenged for a couple of reasons. First and foremost, the aggressive promotional activity, which we commented, as we think is a byproduct of golf ball companies attempting to come to terms with the new normal of inventory, retail square footage, et cetera. So first and foremost, they're being pressured from above, if you will. Secondarily, we understand that these products are in the second year of their product life cycle and need a technology refresh and a technology reboot, if you will, which we're in the midst of right now. We're out talking to our trade partners about what will come to them in the first quarter of 2018, as we come forth with new models to replace what is today NXT Tour and Velocity. So I think you've hit on the 3 key issues, one being weather, two being promotional activity, three being looking inward to say, hey, how do we advance our technology innovation platform to be more relevant and competitive in this performance model space.

Yes, the question on inventory in Q2 to Q3. We typically do see a drop in inventory in that time period. But we had seen very high interest and expectations for the 718, 818 launch, and we did build additional inventory in anticipation of that. We also had a combined number of launches in FootJoy: DNA Helix, which we needed to build inventory on as well as continued strong demand for Pro SL, which we needed to bring on board. And we also had the LTS apparel buildup. So it's typically a little bit higher than what we have at this time, but we are moving through that quickly after the launch here. By year-end, I think we need to see how this plays out for 718 as much as anything. But I think you can kind of look at last year as a proxy, but a rough range will probably be 330 to 340.

(Operator Instructions) Your next question comes from the line of Matthew Boss from JPMorgan.

So can you speak to the material acceleration that you saw on the club side of the business? As a recent buyer of your 718s personally, I'm not surprised with the strong launch. But can you talk about how best to think about momentum in this category segment and just what it may mean for gross margins over time, given the delta with clubs?

Well, Matt, first off, thanks for supporting the AP line. Hopefully, they serve you well. So the Titleist iron franchise, each of our models received improvements. But one meaningful change this year, in 2017, has been the introduction of the AP3, which is really our first entry in this emerging players' distance category. It really is the benefits of AP1, distance and forgiveness, with the playability, aesthetic workability of AP2. So on one hand, we feel good about all our products in the iron family. But worth a call out is that AP3 is really an entry into a category that's pretty meaningful in the golf space that we had not had a product for. So on one hand, we feel real good about the entry, we feel real good about the early trial and interest. And wrapping it all up, it really is a product line that plays into the hands of our fitting capabilities, our fitting bias and our well-trained fitting network. So the more we can bring products to market that benefit from and require the expertise of a well-trained fitting network, the better we tend to do.

That's great. And then just a follow-up. On the expense front, so you saw nice leverage of SG&A in the third quarter. I guess with the return to top line growth overall, do you expect SG&A leverage to continue into the fourth quarter? And just what level of revenue growth is necessary to leverage SG&A as we think to next year and beyond?

Well, I would say in the fourth quarter we're really putting a lot of money behind our 718, 818 launch. So we -- so that would be something that we wouldn't have had quite as much of last year. And also the -- if you look at the fourth quarter of this year, we do have public company costs in there. So you wouldn't see as much leverage. But to answer your second question, any amount of growth on the top line can generate leverage for us because we're infrastructured; we don't require anything on our go-to-market infrastructures around the United States or around the world. So really for us, any growth on the top line can both generate bottom line growth and leverage but also can result in volume absorption if it's in our vertically integrated segments.

Our next question comes from the line of Dan Wewer with Raymond James.

I want to talk about the fourth quarter guidance. You had reduced the high end of the revenue guidance. You did the same thing at the end of the second quarter as well. Could you talk about -- and this after a very strong third quarter results. Could you talk about what's influencing this what appears to be a most cautious fourth quarter outlook?

I think we're just closer. We're 7 to 8 weeks away. We've had the time to experience some of the market projections and how markets are performing, particularly in Japan, which continue to be a little more sluggish than we expected. So it's just a matter of tightening the range here. The low end of the range being if all launches and we have a good holiday season, go off a solid, a reasonably good holiday season, we expect the lower end of the range. The higher end of the range would, obviously, be if our launches take off a little bit stronger than we expected.

So when you look at the lower end of the high-end guidance from the -- for the last 2 quarters, that's primarily due to weakness in Japan?

Weakness in Japan but also the hurricanes had some activity on us. Because again, and as David said, we had good weather. But we also had, if you look at some of those key markets we're in, the Irma hurricane was in September when a lot of courses were getting -- gearing up and ready to open. So I think we have some hurricane-related activity that we needed to factor in there.

And Dave, I have one question for you. Could you give me some help in the strategy for the AVX golf ball that you're testing? I think you're doing that, what, in Florida, Texas and California. And is the thought that this is going to reach the premium end of the market looking for a lower compression ball? And at what point does this moves from a test to a rollout?

Yes, good question, Dan. So where we are, we're testing in, as you said, 3 markets, Florida, Arizona, California. It's -- the AVX is a ball built on the Pro V1 chassis. It's cast-urethane construction, similar to Pro V1. Soft lower spin, will be longer for many golfers. So we're very intrigued by this product. We see it as a interesting scoring solution for golfers in addition to Pro V1 and Pro V1x. So rather than launch it blindly, we decided to do a test market in the 3 aforementioned markets. I'd say it's gone well. We're a month in. But really, we're cautious about reading too much into the early data. We didn't put a whole lot of product in the market place, number one. Anytime you put something new out there, you're going to get a lift. So while we're pleased with the early response, we do want to get a better handle on golfer feedback, what are they telling us about this product, what products are they coming from, is it one of our products, is it a competitive product. And I think we're going to learn a whole lot more over the course of next 6 to 8 weeks as we get a better sense for repeat purchases. So that's the essence of the test market. What will happen from here is by the end of the year we're going to have to make a decision as to where we go with this. And from a launch standpoint, if we decide to move forward nationally, obviously, there's a whole lot of production activity that needs to happen to support what would likely be some type of Q2 launch, albeit on a finite basis due to simple supply realities. But at this point in, we really like the product, number one. It's off to a good, but as expected, start in the market. We still have a lot more learning to do. And again, I think by end of year, we'll have a good sense for where we want to go with this golf ball.

I'm assuming there's not any extra CapEx needed. It would be produced out of the existing Pro V1 facility?

It's 3 piece cast-urethane, which is comparable to Pro V1's construction. So you wouldn't see a need for additional capital unless things take a real turn in terms of demand. But as we stand today, we think we've got it covered under our existing manufacturing footprint.

Our next question comes from the line of Randy Konik with Jefferies.

I just wanted to get some thoughts on the promotionality on the non-Pro V side and the environment. Do you have a sense of if there's still Nike ball inventory out there? If so, how much? And just timing of when the promotions of -- competitive promotions in that kind of lower end market kind of start to dissipate from your perspective and by how much? And then, just on the TaylorMade change in ownership, I think we've talked in the past about how that's going to be a probably good thing for the industry. Have you seen anything specifically yet out of that company, whether it be changes to promotional cadence or pricing architecture, that has impacted the industry at present, positive or negative? And then just lastly, just a kind of reminder of when we had the Sports Authority and Golfsmith bankruptcies, where are we in terms of kind of just normalizing for that? And how that kind of works through the guidance going forward?

That's 3. I'm going to -- we're going to pick them off, okay. First off, promotional activity, your comment pointing more towards Nike and the bottom of the food chain, if you will, in terms of golf balls, candidly, we see it more coming from the top. So when we look at what's happening in the golf ball space, it's less about lower-end products; it's more about top-end products being discounted to the midlevel, if you will. So it did not dissipate. We expect you'll see more of it over the holiday season. But again, just to frame how we think about it, it's more the top coming down than the bottom going away. I'm not going to comment directly on TaylorMade, but I will say, as mentioned in opening remarks, the market is becoming more rational. We're seeing average selling prices on the rise, which is a function of new technology, number one, but also a function of less discounted, closeout product in the marketplace. So again, not calling out any one competitor, but everybody's contributing to what is becoming a more rational marketplace, product life cycles extending, et cetera, et cetera, which, again, is part of our thesis that, hey, this is part of a healthy correction as the golf marketplace finds a healthier place for all remaining participants to thrive and do well in. And then, your comment on the normalization of the correction. I'll address that in a couple of fronts. One, as I talked about what's becoming of the market, certainly as it relates to our business, it is becoming a whole lot more predictable because we're no longer comping against closed doors. We had a little bit in the third quarter, but by and large, as we now are in the fourth quarter, we're no longer comping against closed doors. So that makes our business a whole lot easier to predict and forecast. What still plays out and remains to be seen is where goes the golfer? And sure, they're going to existing OnCore shops. They're going to sporting goods. They're going to golf specialty. They're going to e-commerce. But that migration continues and hasn't fully settled. We think in time it will. And we've said from the get-go, this is probably a 2-year correction cycle. And I'll give you a couple of examples why we think there's still more learnings, at least from our end, to play out. And first off would be what played out in the third and what will play out in the fourth quarter. Our iron launch, this is a new iron launch for us. Whereas the last time we launched irons, we had the reality of 100 additional Golfsmith doors doing a whole lot of promotion and a whole lot of fitting, that doesn't happen today. As we think about the first quarter of next year, that will be our first quarter of a non-Pro V1 year in a marketplace with what will be at that time 600 fewer doors. So when we talk about what's happening in the market, good news is the comp realities are a whole lot tighter and cleaner. It's a lot more predictable for us. But there is still some shakeout learnings to take place over the next couple of quarters.

Our next question comes from the line of Mike Swartz from SunTrust.

Just wanted to stick on the theme of the performance ball category, and I'm just trying to get a sense -- I know you've got some new product coming out for 2018. But just trying to get a sense of how much of this has to do with technology versus more of a price-value consideration?

Mike, good question. It's -- there's not one single answer here. As we said, if you look at what's happening with our performance line this year, it's year 2, it's weather, it's promotional, it's competitive. There's not one single hand we will play that'll quickly reinvigorate it. But the way we think about this, it needs to be innovation born. It needs to be performance born. It needs to be technology born. So as we think about where do we go with the performance category, we understand, again, it needs to come from the R&D lab first and foremost.

Okay. And then just on the iron launch, just help us get a better sense of an understanding your doors to launch into this year versus 2015. But just trying to get a better sense of maybe the early reception to the 718, AP3 versus the 716s from 2 years ago?

Yes, we're pleased. So we launched, the official market launch was September 29. So we filled the pipeline so that our retail partners were up and running for September 29. We started fittings earlier in September. And as stated earlier, we really got a dividend due to some good weather. Good weather prompted a whole lot of fitting activity, more so than we anticipated. And feedback's been real good. So we're very much pleased with the launch. We're getting positive feedback on all products. But real notably, as I mentioned earlier, the new one, if you will, is AP3, which is a new entry for us. So if there's one that's taking most of the attention, that's been AP3. We think some of it coming from our own AP1 and AP2 franchise but certainly some of it in the form of competitive players as well.

Our next question comes from the line of Simeon Siegel from Nomura Securities.

Nice gross margin expansion now in year-to-date. Could you quantify the opportunities or challenges to think out for 4Q and then into next year, I guess maybe hitting on mix, ASP? You mentioned the promos, but -- and then lapping Golfsmith. So anything there on the grosses? And then just if you can, what is the expected sales for the 4Q balls and clubs embedded within the guide, the 4Q guide?

On the first question on gross margin, we expect solid margin for Q4 on the success of 718 and 818 where we had price increases and increased price on both -- all those models, including the 818. So we expect the margin to be a solid margin for Q4. And as far as the -- what we -- we don't really provide segment guidance by quarter or by year. So I would just say that looking within our range that we provided here, $336 million to $346 million, that you can anticipate that with the 718 launch and holiday season that those categories would benefit.

Our next question comes from the line of Dave King from Roth Capital Partners.

I guess, first off, on the sticks business. How much of the 10% increase or so was due to the load-in related to the irons, hybrids? Is there any more expected into October? And then how does the sell-through growth rate compare to that 10% increase? And then I guess, finally, on that subject, having AP3 is it right to think about that as you get 1/3 or a whole host of new placements related to that, having that third one. Is it right to think about the 33% increase or so in terms of the number of placements?

Well, just I'll address the last one first, Dave. So the Titleist iron line really is 6 models, now a 7th. So it's with our CB, MB, AP1, AP2, T-MB, et cetera. So it's not 2 going to 3. It's a broad solution of irons. So I wouldn't think of it in terms of us getting a 33% lift in placement out there, if you will. I would think of it, however, in terms of it allows us to reach a golfer who, again, is in this emerging players distance category that we haven't reached before. So it's less about what you'll see in the marketplace, more about we've got a fitting solution for a group of golfers that we didn't have before. In terms of how the business played out, again, we did launch all products -- all iron products around the world in September. So that's done. And now really, we go into fitting mode. So as I said, we started strong from a fitting standpoint in September. Weather has been decent, which has helped our cause in that regard. So it's less about, hey, are there additional pipeline opportunities around the world, more so is what's the response going to be and how active will our fitters be? And again, where we stand today, we like the response, we like the activity and golfer feedback, particularly, around the newest iron has met our very high expectations.

And then maybe switching gears to the ball business. I guess, given that clubs, gear and FootJoy were all up this quarter, even despite the weather, I think it actually even helped the irons business a little bit, I think due to timing. But I guess what's going on with Pro V, with it being down in the last 2 quarters? I know it's up for the year. But that was also seemingly due to load-in even with the lower amount of doors, and then you also had the benefit of flushing all diversions. I guess, can you just talk a little bit about are there any competitive pressures on that? Is it really just Texas and Florida? Just some color there I think would be helpful.

Yes, it's been -- as we've lived through on several calls, it's been an interesting year in terms of the marketplace with correction in number of doors. It's been an interesting year in terms of weather, largely when you see a market like New York down 20% through the first half. Good news, weather normalized in Q3 with the exception of some areas that were hit very hard. As we think about Pro V1, we had a very, very robust first quarter. Modest declines in Q2 and Q3. Net-net, sales and share are up for the year. So where we stand today, I'm not sure we'd scripted it to go that way. But where we stand at the end of 9 months, we like our position in what's been a challenging marketplace. Q2, certainly prompted by weather and store closures. Q3, really the decline, if you will, is weather in isolated spots in the U.S. and, as Bill mentioned, the Japan market. But you hit on something very real that has been -- it's been a different cadence for us with regards to Pro V1. We like where we started. We like where we are today. But it hasn't been your typical quarter-to-quarter-to-quarter performance. And again, that's part of what we deal within this in understanding this correcting golf marketplace.

Our next question comes from the line of George Kelly from Imperial Capital.

Couple more questions on the ball business. Can you remind me of the typical seasonality or typical, kind of, year-to-year trend between revenue and margins? Are Pro V1 years generally bigger revenue contributors at higher margin? Or how does that usually play out?

Odd numbered years are new Pro V1 years. And yes, typically, they will allow for -- or provide margin enhancement in an odd numbered year. In an even numbered year, we'll see a little bit of margin degradation there in an even numbered year.

And then George, just to round out your question, conversely, clubs sort of play the other way. Clubs make more noise in even numbered years, less so in odd years.

With margin relatively stable.

Yes.

Okay. And then another question on the ball business. Can you -- I don't know how specific you will be, but can you sort of quantify the -- how big is performance versus the Pro V1 and high-end stuff? And on performance, do you think the changing retail dynamic is most negatively impacting the performance side of your ball business?

Yes, to your second question, George, absolutely. Pro V1 has been -- if nothing, it's been very resilient in this correcting marketplace, both on the worldwide tours, both with top amateurs around the world and in the marketplace. So Pro V1 has been steady, stable and resilient, which is as much commentary on the product and its following with dedicated golfers and the efforts we put forth too, whether it's ball fitting teams or through our trade partners, to actively educate and fit golfers into those products.

George, as far as the composition of the ball, we don't really provide a breakdown of that. But suffice to say, our Pro V1 urethane business is our franchise. It's over 50% our overall sales volume and sales.

Pro V1 is over 50%, the highest.

Yes, sales.

We have time for one more question, and then we'll have a few comments from David.

And our last question comes from the line of Casey Alexander from Compass Point Research & Trading.

Your debt to EBITDA is down to 2.1, and you had said previously that your target was to get it below 2, so you're getting pretty close. But my question is because of the cash conversion cycle, if you did -- it would fluctuate depending upon where you were with inventory in the cash conversion cycle. When you measure that, that your goal is to get it under 2, are you looking at that at any point in time? Or how are your measuring that? Are you trying to get all 4 quarters to read under 2?

That's a good question, Casey. When you're looking at the 2.12, you're looking at point in time EBITDA at a certain debt at a point in time. And the way we look at it is in accordance with our credit agreement, our secured leverage ratio, which really is a rolling 4-quarter calculation that's done on a pro forma basis. So when you have large items like the EAR payment, they are rolled back into prior periods, and it takes several months for those to roll off as adjustable items. So we're looking in terms of our secured leverage ratio hitting 2 or less by the end of 2018 no later in 2019.

Okay. What did you say the effective tax rate was for 2018?

It's going to be 35% roughly for the fourth quarter, absent any discrete items that would arise.

That's for the fourth quarter of '17?

Yes. I'm sorry, if you're asking about '18...

I thought you gave a number for '18.

Right now, I would say we're range bound at where we're at, but we just had a new house tax bill come out. And we, obviously, are going to see a lot of action there, new amendments and things go forth. So we're going to have to wait and model that as we go out to the end of the year. Absent any change to any taxes, we would probably be in the range we're at right now.

David?

Thanks, everyone. We do appreciate your ongoing interest in Acushnet, and importantly, we appreciate your efforts to understand our proven and differentiated business model. The game and business of golf are finding new levels of stability and predictability with the dedicated golfer and new product innovation at the foundation of this correction. In closing, we remain resolute in our commitment to providing shareholders with a long-term total return investment opportunity. And once again, thanks for your time this morning, and have a great holiday season.

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