Acushnet Holdings Corp (GOLF) 2017 Q4 法說會逐字稿

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2017 Acushnet Holdings Corp. Earnings Call.

(Operator Instructions)

Tony Takazawa, you may begin your conference.

Thank you. Good morning, and welcome to Acushnet Holdings call to discuss our financial results for the fourth quarter and the full year 2017.

This morning, we are joined by Acushnet President and CEO, 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 and full year.

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 President and CEO, David Maher. David?

Thanks, Tony. Good morning, everyone, and thank you for joining us on today's call. I am pleased to report that Acushnet had a strong fourth quarter, with each of our segments performing well as we closed the year with positive momentum heading into 2018.

New product innovation is the most important catalyst to Acushnet's long-term success, and this is the lead story behind our fourth quarter performance.

The strength of new products, including Titleist Pro V1 and 718 AP irons, and FootJoy Pro/SL golf shoes, which led our business in the quarter and throughout much of 2017. But as we look to 2018, we expect new product innovation will, once again, be the driver to revenue growth and share gains, with the game's dedicated golfers.

Looking at our top markets. In the U.S., we see continued market stabilization. Field inventories are healthy, if not leaned by historical standards, and golfers continue to adapt their purchasing habits to align with what has become golf retail's new normal.

In Japan and South Korea, the world's second and third largest golf markets, each closed out the year with positive inertia, as both regions posted year-on-year rounds increases in 2017.

The Acushnet team continued to execute on our long-term strategy and accomplished a lot in 2017. I am compelled to thank our associates and valued trade partners for their effort and terrific support throughout the year.

Affirming our commitment to our support of shareholders, as we recently completed our first full year as a public company, I am pleased to announce that Acushnet's Board of Directors approved the payout of a quarterly cash dividend of $0.13 per share, or $9.7 million in aggregate. This represents an 8% increase and is a sign of the board's confidence in Acushnet's ability to execute over the long term and commitment to providing shareholders with a long-term total return investment opportunity.

Please now turn to Page 5 and our top line results for the quarter and year. Acushnet posted fourth quarter sales of $351 million, up 7% on a reported basis and up 6% on constant currency, with all regions posting gains in the quarter.

Growth in Titleist golf balls and gear, which increased 9% and 4%, respectively, and FootJoy, which grew 15%, offset the 1% revenue decline in Titleist golf clubs, all in constant currency.

For the full year 2017, sales of $1.56 billion were off just under 1% and down 0.2% on constant currency. FootJoy and Titleist gear were the top gainers in 2017, and regionally, our South Korea team led the way growing their business 11% for the year.

While the first half of 2017 fell short of our expectations, our business bounced back nicely with gains in both the third and fourth quarters as our global team generated solid momentum, which we carry into 2018.

Now turning to Page 6, we'll take a closer look at the Acushnet's 4 business segments with results presented on constant currency. Starting with golf balls, Titleist ball sales increased 9% for the quarter and were flat for the full year 2017. New Pro V1 and Pro V1x golf balls had an especially strong quarter and performed well during the holiday season, despite heavy promotional activity from all competitors in November and December.

In the quarter, we also introduced new DT SoLo models and completed a valuable test market of the prototype Titleist AVX golf ball in Florida, Arizona, and California.

Across the worldwide professional tours, Titleist wrapped up a terrific year, with 72% of the game's best players trusting Pro V1 or Pro V1x for their success, more than 6x the usage of the nearest competitor. Pro V1 and Pro V1x golf balls also notched 207 wins across the worldwide tours in 2017, more than 7x the nearest competitor with 27.

Looking ahead, while ball sales in even-numbered years tend to trail odd years, which are Pro V1 launch years, we are optimistic about the trajectory of our ball business and look forward to introducing several new initiatives and new products in the coming months.

First is our ongoing education and promotion and support of our Pro V1 models. We will make significant investment to protect and grow golf's leading Pro V1 franchise in 2018.

We recently launched new Titleist Tour Soft and Velocity golf balls with great success during January's PGA show. New Tour Soft has the largest and softest core we have ever incorporated and delivers long distance, soft feel and good greenside spin and control.

Titleist Velocity golf balls are also new with the softer core and improved aerodynamics for great feel and improved flight and are now available in 3 new optic colors. These are white, orange and pink.

As I mentioned, our fourth quarter testing of the Titleist AVX golf ball went very well, affirming that AVX offers golfers a new and differentiated scoring solution that is different from our Pro V1 models. We will launch AVX in the U.S. and across most global markets late in the second quarter. And based on our test results, are confident that golfers seeking long-distance, lower-spin and the distinctive feel and durability of our cast-urethane cover will be very pleased with the distance, performance and feel of AVX. AVX will be price-positioned similar to our Pro V1 franchise. And while initial availability will be limited, we anticipate being able to ramp up production as the season unfolds.

Acushnet's ability to stay out front in golf balls is rooted in our unwavering focus on delivering the very best product performance and quality. Titleist industry-leading commitment to research and development and countless hours spent working with the game's best players drive our innovation engine and patent development efforts, leading contributors to future success.

Titleist golf ball performance, quality, and consistency are achieved because every Titleist golf ball is manufactured in our own plants by highly qualified Acushnet associates, long-tenured golf ball manufacturing experts.

At Titleist Ball Plant 3, which is up the road in Dartmouth, Massachusetts, our team averages 21 years of golf ball manufacturing expertise which contributes to the quality and consistency in every golf ball we make. In fact, 2 of our associates at Ball Plant 3 had been making Titleist golf balls for the past 53 years letting a standard of excellence for entire team to follow.

I am pleased to announce that for the first time we are offering facility tours of Titleist Ball Plant 3 to members of our team Titleist community. Early response has been excellent and we look forward to showing more golfers all that goes into making the #1 ball in golf.

Now moving to golf clubs. Titleist clubs posted a 1% sales decline in the fourth quarter, with full year 2017 club sales down 7%. Despite the slight fourth quarter decline, which comes against last year's 917 driver launch, the Titleist golf club business is building positive momentum. You may recall, clubs posted a 10% increase in the third quarter behind the successful launch of new 718 irons and 818 hybrids. These new products sold too well in the fourth quarter and trade and golfer response has been especially positive with particular excitement around the Titleist AP3 iron, our new entry into the players' distance iron category.

Looking ahead, our team is busy preparing for the upcoming launches in our Vokey Wedge and Scotty Cameron putter franchises. SM7 wedges were introduced to the PGA TOUR this past fall, and within 3 weeks, became the #1 wedge on tour, our fastest and most successful conversion to date. New SM7 wedges will arrive in golf shops around the world later this month. And the new line of Scotty Cameron's Select putters will be available right around April 1. Scotty uses art and technology to refine and improve upon his timeless designs and his efforts to optimize sight, sound and soul interaction has helped make Scotty Cameron the #1 putter on the PGA TOUR.

As the Masters comes around in just 4 weeks and the season opens up in Northern markets, Titleist fans will have a wide range of new Titleist golf club to choose from. As new Titleist irons, hybrids, Vokey wedges, and Cameron putters have all been updated and improved upon to help golfers play their best golf.

Next, moving to Slide 7 and Titleist gear. Gear posted a 4% increase in the quarter and a 5% increase for the full year. The theme of our gear business in 2017 was consistency, as each gear category golf bags, gloves, headwear, and travel posted gains for the year. As you may recall, we have been transitioning from third-party dependency in gear to take on greater control of product design and supply. This has been successful and our gear efforts continue to focus on fortifying our gear supply chain and design capabilities with the goal of making the game's best performing highest quality gear products.

Looking to 2018, we will build on this momentum with a wide assortment of new products in each of our gear categories.

Now moving to our final segment, FootJoy, the #1 shoe and glove in golf, which posted a 15% sales increase in the fourth quarter, while full year sales came in 2% ahead of 2017. New product innovation, performance, comfort, and style represent the core of FootJoy's identity in recent success.

Fourth quarter gains were driven by Pro SL, which continued to be quite strong across all markets and the recently introduced DNA Helix, which also ramped up well during the quarter. FootJoy's fall apparel collection and new LTS performance outerwear also posted healthy gains in the quarter.

While on the surface, a 2% sales increase in 2017 may seem modest, it does not fully reflect FootJoy's product and brand energy. The shoe category was hit hard early in the year as a result of reduced store counts, and as a result, endured a necessary inventory contraction throughout 2017, mostly reflecting the reduction of off-price inventory from what was excess retail capacity.

Looking to 2018, FootJoy will follow up on the success of Pro SL, the #1 spikeless shoe in golf by adding new and updated styles to this popular line. And our team recently launched the premium Tour-S golf shoe, which presents one of FootJoy's most significant product development efforts. Tour-S pushes limits of performance, platform stability, lightweight comfort and modern, waterproof styling. Early adoption around the worldwide tours has been strong and we recently debuted a fun new ad campaign featuring Adam Scott, Rafa Cabrera Bello, Kevin Kisner and Andrew Beef Johnston to help convey the many features and benefits of Tour-S.

And finally, we are excited about the recent introduction of FootJoy's 1857 collection of handcrafted leather footwear and luxury apparel.

The FootJoy brand name was born in 1923 in Brockton, Massachusetts by a business, which was founded in 1857, thus the naming which takes FootJoy back to the essence of its earliest days. While the 1857 collection will not be a sizable business for FootJoy, it represents an important and classic product offering for the game's most dedicated and discerning golfers and their preferred golf shops. Over time, we see the 1857 lineup hoping to bolster the entire FootJoy brand.

Now looking at our business regionally on Slide 8. U.S. sales for the fourth quarter increased 3%, and we were off 2% for the full year 2017. Our U.S. team achieved solid results in the second half as fourth quarter growth followed a solid performance in the third quarter. We like our position in the U.S. market, heading into 2018 and are optimistic that the U.S. retail channel is in the best shape it has been in for some time.

Looking outside the U.S., EMEA had a strong quarter with sales up 10% to finish the year up 1%. Japan started the year slowly but experienced steady improvement as weather, rounds and retail activity picked up as the year progressed. Acushnet sales were up 10% for the quarter and down from 5% for the full year. And South Korea remained strong and our team continues to execute their very sound strategies. Fourth quarter sales grew 9% while full year growth came in plus 11%. Rounds of play in Korea were robust in 2017, up 5% on the year.

Now on Slide 9, I'm pleased to provide some background on our recent purchase of Links & Kings, which was completed in January. Adam Heindorff founded Links & Kings in 2010 and has quickly made his mark as one of the top craftsmen in the area of goal-specific premium leather goods. Links & Kings is known for using the highest-grade leathers, fine craftsmanship and commitment to quality and has deservedly earned a strong following among dedicated golfers.

Adam has signed a long-term agreement and will serve as the CEO for Links & Kings. We see opportunity to share Acushnet's expertise and more effectively manage backroom functions of the business, in turn, freeing up Adam to devote more of his time to product creation and brand development.

Similar to our 1857 line, Links & Kings is not presently a large business, however, given its following with dedicated golfers, it is a great fit for Acushnet and brings real strategic value to our portfolio.

Now turning to Page 10 and our industry outlook for 2018. We continue to be optimistic about the structural improvements that have taken place in the U.S. market over the past few years. This rationalization on the supply side, while painful to go through, is a long-term positive for the golf industry. The on-course channel in today's golf specialty retailers is healthy, having benefited from the displaced Golfsmith golf volume from last year. This dynamic is a long-term positive for golfers and the U.S. retail landscape.

EMEA has been steady throughout the Brexit transition. Japan enters 2018 with modest momentum and is stable. Long term, we see the Japan market continuing to move down the path of customization. And the Korean golf market remains vibrant, with participation and retail activity both strong. Acushnet's focus is on the game's dedicated golfer, representing 15% of the golfer base, responsible for 70% of the purchasing power. The dedicated golfer remains an attractive market opportunity, fueled by their desire for quality and performance and ongoing commitment to the products and services that will help them improve and play their best golf.

Each of Acushnet's business segments is structured to fuel product innovation and our launch calendar is full with new product introductions, which bring enthusiasm to golfers, our trade partners and our associates.

In 2018, we will increase our capital investment in innovation, technology and automation to advance the performance of our products and improve efficiencies. And we continue to evolve and refine our selling and marketing spends and we'll wrap up advertising where necessary to drive improved golfer awareness, education and demand.

The Acushnet team is optimistic about the future and the many opportunities in front of us, and we are confident in our ability to execute and deliver as a long-term, total-return investment for our shareholders. We do appreciate your continued support.

And I will now hand it over to Bill to provide an overview of our financial performance.

Thanks, David, and good morning to everyone on the call. I'll start with an overview of the fourth quarter and then discuss results for the full year 2017.

As David indicated, we had a solid fourth quarter to close out the year. Consolidated revenue in the quarter was $351.4 million, up 6.6% year-over-year, and up 6.4% on constant currency. Q4 gross profit was $178.5 million, up 6.3% from last year and gross margin was 50.8%.

Looking at operating expenses, SG&A at $138 million was down 4.4% versus last year. The decline in SG&A was primarily due to nonrepeating EAR and IPO transaction costs incurred last year and lower share-based compensation costs. These benefits were partially offset by an increase in advertising, promotion and selling costs.

In Q4, research and development expense of $12.5 million was down $1 million from last year as a result of a reduction in experimental and employee-related costs, which were largely timing-related. Q4 interest expense of $3.8 million decreased by $2 million from last year. The decline was primarily due to lower average outstanding borrowings versus last year as well as lower interest rates.

Our Q4 effective tax rate was 46.9%. The ETR was impacted by tax adjustments necessitated in Q4 as a result of the new 2017 U.S. Tax Act. The onetime net impact to our Q4 tax provision of approximately $4.3 million was minimal and resulted in no cash impact to the company. This net impact includes the adjustments to our deferred tax assets, the total charge and other assorted impacts from the legislation. When I discuss full year results, I'll be providing an estimate of our 2018 ETR. As a result, our Q4 net income attributable to Acushnet Holdings of $11.7 million improved by $11.8 million from Q4 of last year, driven by higher income from operations, partially offset by higher income tax expense.

For the quarter, adjusted EBITDA was $40.9 million, up $2.8 million from last year. Note that 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 in the slide presentation.

Turning to our full year results. Sales of approximately $1,560,000,000 were down 0.8% to last year and 0.2% on constant currency.

Our 2017 gross margin was 51.3%, a 50 basis point improvement to last year, driven by a number of factors across various segments. SG&A expense was $579.8 million, down $21 million from last year. This decrease was primarily due to the absence of both transaction costs related to our IPO that we recorded in 2016 and a onetime executive bonus we recorded in Q1 of last year as well as a reduction in bad debt expense. These were partially offset by higher public company costs and an increase in selling expenses.

Research and development expense of $48 million was down $700,000 from last year, and for the year was 3.1% of sales, flat year-over-year.

Full year interest expense decreased by $34.2 million to $15.7 million, and as with the quarter, was driven by lower outstanding borrowings as well as lower interest rates.

We had other income of $1.1 million in 2017 versus $1.7 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 the legal judgment in our favor.

Our year-to-date effective tax rate was 36.3%, down from 44.5% last year. The decrease in ETR for the full year was primarily driven by differences in the realization of a number of discrete items in 2016 that related to our prior capital structure and initial public offering.

An explanation of all these items will be available in our 10-K, which will be filed after the close of the market today. While looking forward to 2018, and based on our analysis of the new tax legislation and all interpretive guidance we've reviewed today, our current estimate for 2018 ETR is 24%. This, of course, is subject to any additional guidance or interpretations that may be forthcoming.

Moving back to full year 2017. Net income attributable to Acushnet Holdings for the year was $92.1 million, up $47.1 million over the prior year, primarily driven by lower interest expense and higher income from operations, partially offset by the resulting higher income tax expense. Full year adjusted EBITDA was $223.4 million, down $5 million from last year. Despite the decrease, we view this as a solid performance, given the challenges we faced in 2017.

Looking to the balance sheet. We had just over $45 million of unrestricted cash on hand as of December 31, 2017. Total debt outstanding at year-end was approximately $467 million, reflecting about 2.1x LTM adjusted EBITDA. We'll continue to focus on reducing debt as we look to strengthen our balance sheet over the longer term.

CapEx for 2017 was $18.8 million. For 2018, we expect the CapEx will increase to approximately $34 million. While a good portion of this spend is maintenance related, we also plan to make additional investments in innovation and technology to drive continued market leadership and future growth. We believe that this is a very good use of capital.

As David mentioned, we're pleased to announce that the Acushnet Board of Directors has voted to declare a $0.13 dividend this quarter. This is an 8.3% increase in the quarterly dividend and is indicative of the confidence we have in our strategy and cash generation capabilities moving forward.

As to the outlook for full year 2018, we expect reported sales will be in the range of $1,590,000,000 to $1,620,000,000. On a constant currency basis, we expect revenues to increase in the range of up 1.3% to up 3.2% versus last year. We also expect adjusted EBITDA for 2018 to be approximately $225 million to $235 million.

In summary, we had a solid Q4, driven by growth in golf balls, FootJoy golf wear and Titleist gear, with good execution and strong operational controls by the team. We are optimistic about 2018, as we enter the year with strong brand momentum and a number of exciting new products on the launch calendar. We are also committed to continuing to employ a multifaceted approach to generating shareholder value, initiating key investments to drive organic growth, providing an attractive dividend yield, seeking M&A opportunities, where they're synergistic with our business segments and long-term business strategy, and continuing to reduce our debt to provide for long-term financial flexibility.

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

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

(Operator Instructions) Your first question comes from Randy Konik from Jefferies.

You ended the year with nice sequential improving trend across-the-board from a product standpoint in balls and clubs, but also on a geographic standpoint, particularly, in the United States, EMEA and Japan. When I look at the outlook for next year, it looks good. And I just wanted to get some perspective of how we should be thinking about the drivers of the revenue outlook by geography and by product standpoint, clubs versus balls, given that it seems as if the U.S. would have an easier compare, it had some tough weather this year. And then on the ball sides, some exciting new products in that area, but also, easy comparisons on the club side and you had some strengths in the iron category which is focused. I'm just trying to get some feel for how we should be thinking about the build of the entire revenue line growth rate by these different geographies, but also the balls versus clubs?

Randy, I'll tackle your question, really, from a product standpoint at the high level. We've talked a lot about our 2-year product cadences. This is even year, obviously, it's not a Pro V1 launch year. So it's the first time we really addressed an even year as a public company. But a couple of insights I can share. Obviously, a non-Pro V1 launch year is more challenging than a Pro V1 launch year, especially in the first quarter. Point two would be, this is an iron launch year for us. We launch it in the fourth quarter, third quarter. But really, a lot of the activity is -- plays out when the bulk of the fittings happen. So as we think about the new iron business, we tend to look at that as a second quarter positive. And then the final thought would be, more notably, as we think about back half of the year, we do have a driver plan for the back half of the year. So really the key drivers are what's going to happen in balls in Q1, but what's going to happen in irons in Q2. In terms of geography, there are no real outliers. There is no one market that's going to manage this cadence differently. So I think the general theme of our product cadence will flow in the U.S. and in markets around the world.

And then may I follow up and just think about how should you -- how -- do you think any differently about how the trend line of ASP byproduct category, clubs versus balls and then product margins, anything that you're thinking differently or the same there against some products versus balls -- excuse me, clubs versus balls as well?

Yes, Randy, when we look at ASP and obviously, we're in -- and starting with categories, we're looking at a non-Pro V1 year number one. So our most premium product we're in our second model year. So that's going to be a little challenging to compete with. Obviously, on clubs, we've raked price on our AP series, and we're coming in to next year with high confidence in those models. And we're looking across the board all across FootJoy's categories to push the limits of that where we can. So as we said before, we aspire to have a 50-plus margin in this business. We closed last year with a 51.3% margin and we're quite happy with that, but would we like to improve upon that? Yes, we would. But right now, that's where we're at. As far as operating margin, just to add that in there, we are -- this is an investment year and Dave made some mention of that investment for now and investment for the future, but we still expect an operating margin to, at least, hold or maybe improve upon that a bit. That would be EBIT to sales.

Randy, as we touched on Pro V1 a couple of times, I just want to clarify year 1, year 2, and how we think about it. Year 2, we're full speed ahead, but we do, and consumers generally don't think of Pro V1 as a year 2, year 1 phenomenon. They think of it as an ongoing franchise. But what we're saying is, in year 1, you simply get an ordinate benefit from the pipeline that occurs in the first quarter. And in the back of year 2, you start to see the channels work through inventories down. But in terms of consumer interface, how we drive the business, that doesn't change, it's really about what happens in Q1 and then what happens in the final quarter of a 2-year cycle.

Next question comes from Simeon Siegel from Nomura.

This Julie Kim on for Simeon. Could you just give color on your current inventory levels? It looks like you ended the year a bit elevated. And any color on what you've seen on sell-through trends quarter-to-date?

Sure, Julie. First off, our inventories are in great shape this year -- at the end of this year. We actually needed a higher build this year than -- for several reasons. Number one, this is a big club launch here. So we've got new AP irons and we have a third model in that set. And obviously, we sell a lot of our irons in the second quarter when we -- our custom-fitting activities take place. We have a new Scotty Cameron putter. We have new Vokey SM7 launch, these are big launches. But also, we made some strategic decisions to increase our carrying inventory in certain categories. Like last year, our Pro SL model was very hot, and quite frankly, we're chasing demand on that as well as we have a new Tour-S shoe out there. Our apparel is just growing, so we need to have a higher build on that as we grow that franchise around the world. And same thing with gear, we want to have a higher hold because we think we missed some opportunities probably last year in bags and headwear in the first half and when we were shipping. And so we're quite happy with the quality of them and we're quite happy we have the build right now, going into '18.

Yes. As to early signs of Q1 sell-through, we're, really, here we are in early March, it's calling for snow in New England. Too soon to say. We're always careful this time of the year to draw too many conclusions about what happens in the months of January, February. The golf business really -- you get clarity as you work your way through the second quarter, markets open up, you get a feel for weather, et cetera. But in terms of what we're saying, too soon to say. The only data out there is -- it's been a cool season in Florida, surrounds were down a little bit in January. Not surprising, given what happened there last year where they had a pretty good start of the year. But again, this early in the season, tough to draw any meaningful conclusions about what's happening at sell-through.

Next question comes from Kimberly Greenberger from Morgan Stanley.

David, you talked about the rationalization that has been taking place here in the last couple of years, I guess, primarily in the U.S. I'm wondering as you look out to 2018, are you seeing any additional moves out there that would suggest further rationalization in 2018? Or you're feeling like we're sort of largely stabilized at this point. And then I just wanted to follow up on the ball questions. With the first half, second half dynamic in 2018, I just want to make sure I understand it. Is it possible we could see growth here in balls in the first half, followed by declines in the second half? And would you be expecting sort of a relatively flat full year for the ball category?

Well as to retail stabilization, a lot has played out in the U.S. market in the last couple of years. And I think, as we said all along, coming through this, those left standing are going to look around and say they're doing okay. And when you look at what happened in the on-course channel last year. The on-course channel sell-through was up 10% when you roll up all the main categories. While many of our golf specialty partners don't report their results, anecdotally, they've all said they had a pretty good year. So clearly, the Golfsmith volume migrated, not all of it. We've said from the beginning not all of it was going to migrate, some would evaporate, not much of that would be arguably off-priced product, which was a byproduct of excess retail capacity. So where does that leave us in early '18 in terms of the U.S. market? We do think it's stable as it's ever been. I'm not sure markets are ever done correcting, but as we look on the horizon, we see stability with our key partners. Things are forever in flux, but again, by and large, it's as stable as we've seen it in a long time. We'll turn it over to Bill for your second question, Kimberly.

Kimberly, on balls, I think we've already mentioned that a non-Pro V1 year, that's a big launch in the first quarter as opposed -- than you see in prior year. So as the season plays out, we expect that, that you won't see that, that you're going to see more of our -- more of the ball business transitioning into the back half for the first half. As far as full year, we are up against a Pro V1 year in total, so we have to be cognizant of the fact that, overall, that, that's going to be a tough comp, even despite the fact that we have -- that we had performance model, some issues with the performance models last year.

Next question comes from Michael Swartz from SunTrust.

Just a question on the ball business. In the fourth quarter, obviously, top line was very strong. And as I look at gross margin, I guess, I would've expected that to be a little stronger with how balls performed. So maybe give us a sense of what some of puts and takes on the gross margin line were in the quarter?

Sure, Mike, it's Bill. If you remember though in the quarter, this is a big Pro V1 holiday period. So we do discount the Pro V1 as a #1 gift in golf. So that's part of the reason why you would naturally see that. If you look year-on-year, the difference is only about 10 basis points year-on-year. But there's a lot, this is a transition quarter, the fourth quarter. We're transitioning out of products into new products. And at that time, there's a lot of different decisions you make. As an example, in this cycle of the new SM7 wedges as opposed to last year, we decided to close out the SM6 in the fourth quarter, rather than having it coexist in the following year. So those are some of the puts and takes, as you say, that result in the 50.8% margin. But really, it's only off about 10 basis points.

Okay. That's helpful. Just a quick follow-up, if I may. Just on the AVX ball that you're launching in, I think -- I believe, the second quarter. Maybe talk about your sense of how that should perform in the market? I'm just wondering how incremental do you think that is to your premium ball business?

Well AVX born as a cast-urethane product, which is a similar product cover technology as in Pro V1. It's different. It's lower flying, lower spin, great soft feel, good greenside control, but it is different from Pro V1. So when we put out our test in that market, we were intrigued by this as a solution that some golfers would find really valuable and beneficial to their game. And we found that. So your question, I think what we're going to see and what we saw in the 3-state test market is, we know some of the business is going to come from Pro V1. We know some of the business should, ideally, come from the competition, or we think it should come from the competition. We also see some of it coming from our own products, whether it's Tour Soft or Velocity. So to your answer, obviously, we're doing this because we think there's some incrementality to it. First and foremost, however, we're doing it because we think it's an important solution for golfers who fall into a certain category of preference and spin characteristic. So net-net, we learned a lot on our test market. We learned enough to say, "Hey, we think this is something we -- it would be great to go forward with," which we again look forward to doing in the back half of the second quarter.

The next question comes from Dave King from Roth Capital.

I guess, first on the significant Pro V growth in the December quarter. How much of that was holiday related, Amazon and the like versus better sell-through at green grass and some of your other key golf accounts?

Well the quarter was -- it was competitive. It was a promotional quarter. We saw a lot of folks had holiday promotions, which I suppose is not surprising. We look at where we grew and how we did and we feel pretty good about our efforts and results in all channels. It wasn't inventory load period for us, it's fill the markets, get them ready for the retail season. So we're not going to pinpoint one channel over another, other than to say Pro V1 had a pretty good fourth quarter and we're pleased with the results both in terms of selling and sell-through, across all channels.

Okay, okay. And then in terms of quick follow-up, on the guidance, how should we think about the growth cadence by quarter? Should we be assuming down in Q1, just given the difficult Pro V compare? And then faster growth in Q2, versus the 1% to 3% maybe because of the strength you're having in irons? And then how much do you expect Links & Kings to contribute? I understand it's small, but is that -- small mean 1% to 2% of revenue, or is it smaller than that?

I'll take the first part of that. We talked about earlier, our Pro V1 launch in the first quarter is very big. So comping against the Pro V1 launch in Q1 is going to be tough. If you look at the next biggest segment of what we're introducing, it's the AP irons, and AP irons are custom-fitting buyers for us. So that's where our hay will be made in the second quarter. So it's more tied to that as -- in terms of its cadence itself as opposed to metals, which are more of a stock item when you ship them in the prior year. So if you look at that -- I would look at that as a way to look at how you might formulate your modeling and everything. And of course, we have a metals launch in the fourth quarter of this year as well.

As to Links & Kings, we're excited about Links & Kings, as I mentioned in my opening remarks, Adam's a real craftsman, he makes great products. It's a small business. It will not have a material effect on our revenues or EBITDA for 2018.

Next question comes from Andrew Burns from D.A. Davidson.

Just a quick follow-up on the gross margin line for Bill. Could you provide some color on how you're thinking about the gross margin headwinds and tailwinds for 2018, perhaps, highlighting some of the key factors you're looking at whether it's currency, pricing, mix, input cost, anything to call out there?

Yes. Again, I would, once again, point to Pro V. Pro V is our largest franchise, and that, in itself, is something -- is a bit of a headwind for us. In the club business, we tend to hold our margins pretty well on both metals and iron, and even in odd years. And in FootJoy, we also try to maintain but try to slightly improve. We're trying to improve margins in FootJoy across the board. So I think that's probably the high-level way to look at it overall. So -- but as far as currency goes, we -- our plan is based on average rates that were in place in the month of December and those rates have obviously improved a bit, but we are hedged, and we are hedged out there for a reason, and as for pricing stability as much as anything, in our ex-U. S. markets. But we'd like to see that continue, and could there be something there? Yes, but right now, we're not deeming it significant.

The next question comes from Tim Conder from Wells Fargo Securities.

David, first of all, on the channel inventory comment that you had mentioned, can you give us a little more color where, geographically, and in what lines do you feel that you're a little potentially leaner than could be, and sounds like again part of the inventory build is to address that? And then, Bill, on the side of the input cost, just to touch the steel and aluminum here, what percent of COGS are these inputs that make up of your purchase components? And then, your comment, again, back to the inventories, working capital, should we anticipate any major change there on a year-over-year basis when we look at '18 versus '17 as a whole?

So the comment about channel inventories, they're leaner than they've historically been. And that's a positive comment on the correction that's taking place in the golf markets. Not necessarily going to say, they're too lean or that we're under inventoried, I think they're as healthy as they've ever been. And my comment was as much about, maybe a comment about, hey, in the past, they were probably too heavy, and they found the right and appropriate level. So not necessarily saying we got to work hard to replenish levels as much as saying that they're lean by historical standards, but we think they're healthy, given the context of all the changes that have played out in golf retail over the last couple of years.

Tim, on your question about potential for tariffs -- and I know that's created quite a stir on Capitol Hill here, and we have to see how this plays out. Obviously, there's been a lot of talk about this, but if you look at steel that's used in -- actually used in golf clubs, if you look at what's used in heads and the actual amount of material is quite small. The cost of clubs is really a lot in the finishing, the milling, the machining, the scoring of the product and it's not -- there's not that -- all that much in there, and quite frankly, we use a lot of American steel in our products. So those -- we don't see this as a major issue even if something does transpire. And as far as working capital, we are growing gear, we are growing apparel, we are growing our soft goods. Those categories have -- are far more SKU-intensive. They -- you have to carry a lot more inventory to service them properly. So we are going to see if those -- they continue to outgrow our core equipment categories where we're very vertically integrated like balls, we're going to see that creep up. But that's not something we're overly concerned about working capital being out of control because we control those inventories very well both in in-house and in the field to make sure we're not achieving any obsolescence and we're not having to price discount too heavily.

Okay. And then as a follow-up, gentlemen, just to make sure I'm perceiving this right. It sounds like the tax savings, obviously, raised the dividend, but then R&D and M&A, is that predominantly where you're going to focus some of that excess cash?

Well we talked about the dividend being one thing and that wasn't exactly in response to tax reform. We feel that we have a lot of confidence in our cash flow going forward. But obviously, the tax rate itself, in the long term, is going to be beneficial and cash generative. As far as investments, we are investing in CapEx and that's -- it's still largely maintenance related but it's across-the-board. We're investing in our manufacturing facilities, not in any one segment. We're looking at distribution of logistics opportunities and IT. Those are some areas that we're really looking to invest additional monies in. So I think that that's -- and if anything, I would point to our -- David's comments on organic growth and how we're trying to fuel our brand momentum, our brand engine through different ways we're advertising and connect with our dedicated golfers.

We have one more question. And then we'll have a few closing comments from David.

Next question comes from Casey Alexander from Compass Point Research.

Given that Pro V1 up 9% year-over-year, which was really strong, do you have any concern that Pro V1 might pull some from Q1 and increase sort of the challenge that you see in Q1?

Casey, we've looked at that. It's always as we close the year, we're always asking ourselves what's our inventory position, what happened in the back half of the year that might affect the next half of the year? We -- the good news is, we manage our inventories very, very carefully and closely, whether it's our folks on the ground or our key retail partners. The best way to frame the answer to your question is, we're comfortable with our inventory position in the market right now. We don't think there's a meaningful excess or any jumps off the page when we look at inventory positions. So nothing we see really that leaps off the page at this point.

Okay. And when you talk about increased CapEx going -- when you say innovation and technology, what do you mean by that?

Well, it's -- there are a number of things. We are vertically integrated, we produce our own product in a lot of our areas and we have our own plants. So there's always ways to improve upon operations in a number of different ways. When you look at IT, there's so many initiatives that are tethered to IT right now, direct-to-consumer initiatives, direct-to-golfer, as we call them. And they need IT support. And obviously, everyone's always looking at logistical opportunities. Some of those are even tied to direct-to-golfer. Where you look at your product, where you put it. And also there's always opportunities as your business morphs over the years, so to say, that, hey, there's maybe an opportunity here to create a better structural footprint for how you execute to market and get to your customer.

Well, thank you, everyone. We do appreciate your time and attention on our business and on today's call. And as I said earlier, while they're calling for snow in New England today, we are very excited about the 2018 golf season which will be here soon. Acushnet's associates have done great work planning for 2018. And we are -- in March and into April, we're busy preparing golf shops, educating our trade partners for the coming season. And really, most importantly, we have a great range of exciting new products for golfers to experience in the coming months, which we believe, will help them play their best golf. So that said, we thank you for your time and attention this morning and wish you the best.

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