Acushnet Holdings Corp (GOLF) 2018 Q2 法說會逐字稿

Good morning, my name is Jack, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Acushnet Holdings Second Quarter 2018 Earnings Call. (Operator Instructions) Thank you.

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

Thank you. Good morning, and welcome to Acushnet Holdings call to discuss our financial results for the second quarter of 2018.

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 CFO, Bill Burke will spend some time discussing the overall financial results for the quarter and year-to-date.

We'll 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 CEO, David Maher. David?

Thanks, Tony. Good morning, everyone, we appreciate your time today. I am pleased to report that Acushnet has posted a strong first half in 2018, driven by the successful launches of several innovative new products and solid execution by the Acushnet team and our trade partners worldwide.

On a consolidated basis, sales in the quarter were $478 million, up 11.7% year-over-year and up 9% on a constant-currency basis.

Growth this quarter was driven primarily by higher sales volumes in Titleist clubs, notably 718 irons and Vokey SM7 wedges, and growth in Titleist golf balls headlined by the successful introduction of our new AVX model.

Adjusted EBITDA for the quarter was up 10.6% versus last year. First half sales were $919 million, up 6.8% versus the same period last year, and up 3.4% on a constant-currency basis.

Similar to the quarter, the primary driver of growth in the first half came from the continued success of Titleist clubs. Adjusted EBITDA, in the first half of 2018, was up 4.1% over last year.

We like our position at the mid-year mark and are encouraged as we look to the rest of 2018 and beyond. As a result of this confidence, I am pleased to announce that the Acushnet Board of Directors has approved the payout of a second quarter cash dividend of $0.13 per share or approximately $9.7 million to be paid on September 14.

We will now take a closer look at Acushnet's 4 business segments with all results and percentages presented in constant currency.

Starting with golf balls on Page 5, sales were up 9% for the quarter and roughly flat for the first 6 months, as a result of the successful new golf ball introductions of our new AVX, Tour Soft and Velocity models. The AVX premium performance ball is off to a fast start, as golfers appreciate its long distance and exceptionally soft feel.

Performance feedback from golfers has been exceptionally positive, resulting in steady sell-through throughout North America, where it was first launched in May.

In July, we began shipping AVX in ex-U. S. markets. Globally, we have also had great reception to the new Tour Soft and Velocity models. And the Pro V1 franchise continues to be the unequivocal performance and quality leader on the worldwide professional tours and in the market. At this year's U.S. Open, Titleist was again the most played ball, marking the 70th consecutive year we've captured the #1 spot at our national championship.

Year-to-date, Pro V1 and Pro V1x account for 73% of the balls played and 71% of wins in professional tours worldwide, both of which present more than 7x the nearest competitor. It is a consistent story on the PGA TOUR, with 72% of players trusting the Pro V1 franchise for their success, including the winners of the past 6 major championships.

Building on the unmatched share, position of the Pro V1 franchise, the launches of new Tour Soft, Velocity and AVX offer golfers more choices with differentiated performance characteristics. Our golf ball fitting teams are connecting with trade partners and golfers every day educating and demonstrating the unmatched performance and consistency of the #1 ball in golf.

Now moving to golf clubs. Titleist clubs posted a healthy 23% sales increase in the second quarter, leading to a 17% increase in the first half. This growth was driven by continued momentum in 718 irons and 818 hybrids and the strong early response to new Vokey SM7 wedges and Cameron Select putters.

The innovation, performance and quality of Titleist golf clubs is resonating with golfers worldwide as the season has hit its stride. Our fitting partners are doing a great job helping dedicated golfers optimize their games with well-fit equipment.

The buzz and interest around our various club launches is exciting and we continue to refine our marketing efforts to amplify our messaging and support of these great new products.

Pyramid validation for Titlist golf clubs is also very strong. On the PGA TOUR, Titleist irons, hybrids, wedges and putters have been the most played so far this year and Titleist drivers are prominently positioned as the number 2 driver on tour.

Touching again on the excitement surrounding our new product launches, we have begun the seating process for the new Titleist TS Driver and fairway metals. With the first Drivers put into competition at the U.S. Open in June.

Early adoption by professionals eclipsed our high expectations with 17 players putting the TS in play for the very first time at the U.S. Open and with TS representing 60% of all Titleist drivers in play at the open championship. We expect player adoption to steadily increase as we're able to fit more players into these exciting new products.

You will hear more about the Titleist speed project over the next several weeks as we ramp up our communication plans for the TS driver and fairway launch in late September.

Next, moving to Slide 6, and Titleist gear. Here sales were down 6% for the quarter and down 3% for the first 6 months of the year. Through the first half growth in gloves and headwear was not enough to offset declines in golf bags and travel, which were soft outside the U.S. And within the bag segment, our stand bag business met our expectations, however, cart bags fell short for the period.

Now moving to our FootJoy golf wear segment. FootJoy the #1 shoe and glove in golf was up 3% versus last year's second quarter and down 2% year-to-date.

Momentum in FootJoy apparel continues to build with strong sell-through results and healthy advance bookings supporting its continued growth. While FJ apparel has been a global success story, it is strongest within the on-course channel in the U.S., with both men's and women's collections excelling. Within footwear, the lead story is once again Pro SL, which has had a very strong sophomore season.

2018 footwear sales have been impacted by our decision to exit some price points at the low-end of the value segment, which well-planned has negatively affected our year-to-date footwear comps. We believe this we will be good for the brand over the long term and better position FJ to capture higher margin sales in more premium categories.

Looking to the balance of 2018, we are excited to introduce the next generation of Pro SL, which has been updated for performance, comfort and styling and now includes women's models, which will complete this leading golf footwear franchise.

Rounding out our fall launches are the new SuperLites XP in women's leisure lines.

And lastly, we recently began shipping our new 1857 line of premium footwear and apparel in the U.S. 1857 has been designed to meet the needs of golfers and trade partners looking for differentiated and classically styled products and we're optimistic about this new opportunity to further showcase FootJoy as a product creation engine.

Now looking at our business regionally on Slide 7. U.S. sales were up 13% in the second quarter and up 6% for the half. On a constant-currency basis, EMEA sales were up 8% for the quarter and up almost 1% year-to-date. Q2 was solid in the EMEA as it bounced back from a particularly tough first quarter, where harsh weather slowed the start of the season.

Acushnet's Japan sales were up in Q2 and down slightly in the first half. Korea sales grew 5% in the quarter and were up 2% in the first 6 months.

Both Japan and Korea also experienced late starts to their seasons as cold weather impacted rounds, which were off 3% and 5% respectively for the first half.

Overall, the major markets continue to be fairly stable and appeared to have recovered from various weather impacts early in the first half.

While there are pockets of higher-than-normal trade inventories, we like our position and have made the necessary and customary mid-season forecast adjustments in preparation for the back half of 2018.

In summary, we are pleased with our results for the second quarter and first half of 2018. Our team is resolute in their commitment to meet the needs of the dedicated golfer who's embraced our broad assortment of new products and is showing a generally positive outlook at this midpoint of the golf calendar.

Our ongoing investment in product innovation and golfer connection activities continue with the aim to further cement golfer loyalty and trust in our Titleist and FootJoy brands. And we look forward to several new product introductions over the balance of 2018, which we believe will add fuel to the momentum we have established through the first half.

Acushnet's broad-based product offerings across the consumable, equipment and wearable categories and our disciplined approach to investing in our business served us well in the first half and we believe position us well for long-term success.

As we continue to focus on delivering products of exceptional performance and quality for dedicated golfers, we are confident in our ability to provide our shareholders with a long-term total return investment opportunity.

As always, I thank you for your interest in Acushnet, and will now turn over the call to Bill, who will provide additional comments on our second quarter financial performance.

Thanks, David, and good morning to everyone on the call. As David indicated, we're pleased with our results in Q2. Consolidated revenue in the quarter was $478.1 million, up 11.7% year-over-year and up 9% on constant currency.

Q2 gross profit was $250.8 million, up 12.5% from last year and gross margin was 52.5%, up 40 basis points year-over-year. The increase in gross profit was primarily driven from a sales volume increase of our new Titleist premium performance AVX golf balls. Titleist clubs including 718 irons and Vokey SM7 wedges and higher ASPs in FootJoy golf wear. Similarly, higher FootJoy ASPs and AVX largely drove the 40 basis point increase in gross margin in the quarter.

Looking at operating expenses, SG&A of $171.7 million was up $20.1 million or 13.2% versus last year. The increase in SG&A was primarily due to higher selling expense across all categories and an increase in advertising and promotion to support new product launches in golf balls and clubs.

In Q2, research and development expense of $12.9 million was up about $1 million over the last year.

Q2 interest expense of $5.2 million increased by about $300,000 year-over-year. Our Q2 effective tax rate was 31.3%. The year-over-year decline is primarily the result of enactment of the Tax Cut and Jobs Act. As a result, our Q2 net income attributable to Acushnet Holdings of $39.9 million improved by $6.9 million, up 20.9% over Q2 of last year, driven by higher income from operations.

For the quarter, adjusted EBITDA was $79.4 million, up $7.6 million or 10.6% from the prior year period.

To assist in your review of this calculation, we've provided a reconciliation of adjusted EBITDA in our earnings release as well as on the slide presentation.

Recapping our year-to-date results, sales of $919.9 million were up 6.8% over the last year and up 3.4% on constant currency.

Our year-to-date gross profit increased by $29.1 million versus the first 6 months of last year driven primarily by sales volume increases in Titleist clubs, mainly Vokey SM7 wedges and 718 irons.

Year-to-date gross margin was 52%, slightly under last year. SG&A expense for the first half was $323 million, up about $24 million or 7.9% over the last year. As with Q2, the increase in SG&A was primarily due to higher selling expense across all categories and an increase in advertising and promotion, both of which were planned investments to support new product launches.

Research and development expense of $25.3 million was up $1 million compared to last year. Interest expense increased by $1.9 million to $9.7 million for the first half of the year, reflecting higher average interest rates compared to 2017.

Our year-to-date effective tax rate was 28.7% compared to 35.6% last year. As with Q2, the year-over-year decline is primarily a result of enactment of the Tax Cut and Jobs Act.

All companies, practitioners and the Treasury department continue to work through interpretations of various aspects of the act. Based upon the current readings of interpretive guidance, we now believe that our full year ETR will be closer to 29% for the year 2018. But we'll continue to monitor treasury guidance and assess any impacts on the company going forward. As a result, net income attributable to Acushnet Holdings for the first half was $81.4 million, up $10.3 million over the prior year, primarily as a result of lower income tax expense and higher income from operations. Year-to-date adjusted EBITDA was $156.4 million, up $6.1 million or 4.1% year-over-year.

Looking to the balance sheet. We had about $46 million of unrestricted cash on hand as of June 30, 2018. Total debt outstanding at quarter end was approximately $447 million. On a rolling 4-quarter basis, our total debt to adjusted EBITDA is now 2.14x.

Year-to-date CapEx was almost $14 million. For 2018, we still expect CapEx to be approximately $34 million. While a good portion of this spend is maintenance related, we're also making additional investment in innovation and technology to drive continued market leadership and future growth.

As David mentioned, we're pleased to announce that the Acushnet Board of Directors has voted to declare a $0.13 dividend this quarter. Our strong dividend continues to be indicative of the confidence we have in our strategy and cash generation capabilities moving forward.

As for the outlook for full year 2018, we now expect reported sales will be in the range of $1,615,000,000 to $1,635,000,00.

On a constant-currency basis, we expect revenues to increase in a range of up 1.7% to up 3% versus last year.

Our updated guidance primarily reflects the application of revised foreign currency rates. As I stated on our first quarter call, we don't typically adjust currency rates until the half-year mark, after which we've had sufficient time to assess relevant trends.

Adjusting the rates impacts, sales, cost of sales and operating expenses as a result of translation. In addition, as you know, we employ a comprehensive foreign currency hedging program to stabilize our ex-U. S. cost of sales. Given this, we're continuing to forecast our adjusted EBITDA for 2018 to be approximately $225 million to $235 million, as the revised currency rates will not materially impact our full year earnings.

In summary, we had a strong Q2 and first half. Our new products are performing well in the market and the team is executing against our plan. And we're optimistic about the balance of the year and upcoming new product launches planned in the back half. We'll continue to focus on debt reduction to increase our financial flexibility as we near our 2x leverage target and we'll also continue to review our dividend policy to ensure we provide an attractive yield and payout.

And lastly, our capital deployment strategy will include reviewing selective M&A opportunities that may present themselves as well as consideration of share repurchases.

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

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

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

This is Steve Zaccone on for Matt. Firstly, just on the top line, so congrats on the sequential improvement there in revenue. When you look at the back half of the year, how would you rank the opportunities for top line growth? And then, just shifting to SG&A, it was little elevated in the second quarter and you haven't really leveraged SG&A year-to-date. How much of the increase in 2Q was related specifically to the advertising for new products and what's the best way to think about a timeline for return to leverage?

Steve, good morning, I'll take your first question and hand off the second one to Bill, if that's okay. And I think the best way to get back to your question is to review, sort of, how we launch product in our product cadence. Starting in balls, Pro V1 being in its second year. We'll start to bring down field inventories in advance of our '19 launch in due and as we move through Q4. And then in the third quarter, we're going to rollout AVX outside the U.S., which will bring -- which will benefit Q3. But I think involves -- the big story is what you're going to see happen, which happens every fourth quarter during an even-numbered year and that is bring down field inventories of Pro V1. Really the driver of the story in the back half is TS metals. Here you're going to expect a launch to really straddle the third and fourth quarters with the primary selling happening in September as we queue up for September 28 market launch. Another thought to consider is that as metals are more of a stock product than irons, which we launched last year, you won't see the same level of fill in, in the fourth quarter that we saw with iron launch, that just -- it's just the variance between irons and metals. And then lastly, with FootJoy, we are launching some products in Q3, but the higher volume launch, really the Pro SL launch is scheduled for Q4. So that's sort of the key cadence to how we think about the back half of the year.

In terms of SG&A, I'll kind of kick it off. If you remember my prior comments, I talked about the translation effect of updating the currencies, it would have an impact on sales, cost of sales and operating expenses. So we are up by $24 million year-to-date. Of that amount, about $7 million of that was merely translation of ex-U. S. results, so we're up $17 million year-to-date, but this was a planned investment, primarily behind the multiple club launches we had and behind what we believe was a very strong 718 launch as well as in the quarter a new product, the AVX product. So I think this is a planned investment and as we look forward we'll decide exactly how we want to allocate future funding for that, but...

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

The golf club segment, David, seemed to have a much better result, frankly, than we had forecast. I'm wondering if you can talk about where -- did it surprise you in terms of your internal plan? And is there something different that's happening in this year's cycle that you didn't see, let's say, 2 years ago or 4 years ago that you think is driving that strength? And then, Bill, it was interesting, your comments on the gross margin increase in the quarter, obviously, balls, the AVX ball sales are helping, but the apparel business you talked about higher ASPs and I'm wondering there, is that just the incremental growth in women's or is there something going on in your apparel strategy that's helping to drive that ASP higher?

Kimberly, I'll take the first half and again, Bill will handle the second half of your question. So with clubs, as you think about the business, what transpired in the first half '18 versus maybe '16 and '14, I'll break it down by really the 3 categories. Irons had a really good first half.

We got off to a good staff last year in the fourth quarter, built up a lot of momentum. Lot of interest around particularly our AP3 iron. So we had a strong and robust first half in irons, as strong as we've seen in a long time, we feel real good about status of our iron franchise. And then, wedges as well, we launched our new SM7 line of wedges which we had -- which we do every other year. Last was SM6 in 2016. We had high expectations and met those high expectations. And then the final new product introduction was putters, we launched our Select series, we launch basically half the line every year, this was the Select window, and that was largely as planned. So I think the 1, 2 would be really strong performance in irons and a nice introduction in the wedge category, drove our club success really in the quarter and the first half.

Yes, Kimberly, on the gross margin, about 40 basis points year-on-year in the quarter. Again, this was AVX. Largely, offsetting -- or I should say, offsetting some of the decline we would expect to see in a non-Pro V1, our second Pro V1 launch, our second Pro V1 year. So it was a good part of it, but FootJoy really has been across the board. As David mentioned in footwear, we've exited some value price points, but also in the apparel line, we managed to raise price in Select markets and the woman's line, as we've had higher pricing on the woman's line. So I think that the story is really good across the board in terms of all categories of FootJoy golf wear.

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

I guess, firstly, a multipart question on the ball business. How did or how much did the AVX launch contribute to the business's quarter? How is it selling through? How much is Pro V down? And then, anything to share on sell-through of the newer Tour Soft and Velocity models? And then, I guess bigger picture on AVX. Any learnings thus far there in terms of who it's taking share from or is it cannibalizing Pro V at all or do you think it's growing the pie for Titleist?

Okay, Dave, I'll tackle those. Really, commentary on the broader ball business, starting with AVX. We started shipping in May and we're pleased with the early days in our key and we set out to educate golfers, what this product does. Importantly, who it's best suited for, and who may be better off playing Pro V1 or Pro V1x. We've got a lot of ball fitting activity happening around the country and around the world, and as you'd expect, it's been a frequent topic of discussion during these activities and really this forum is valuable to us because it ensures we get the message out right. We did benefit in the U.S. from our test market of last fall, as word began spreading from this test. And there really -- while we launched in May, there was an established readiness and excitement when we launched the product nationally in May. And as to share, we're seeing some nice steady share ascension over the last, again, we've -- we really got 1 or 2 months of data, really 1 month June data. But it's growing and it's settling in, where we think it ought to settle in and that is, maybe and again, this is a swag, but maybe 10% to 20% the size of the Pro V1 franchise. Looking forward with AVX, we're going to launch it, we've started launching it in ex-U. S. markets in the third quarter, just this past month. We didn't -- we need to understand we didn't have a test market around the world, so we're viewing the second half as a chance to really build awareness and education in the latter part of the season, which we think will be real helpful as we set up its first full year in 2019. As to where it's coming from, where the business is coming from, tough to say at this point. We went in thinking it was going to come from all directions. We still think it's going to come from all directions and maybe now some broader thoughts or commentary on the ball business. While we certainly get up every day looking to grow the business and grow share, we do accept in our 2-year product life cadences, they're going to be some inherent puts and takes within these lifecycles. But really, as commentary on Pro V1, we're incredibly bullish on what's happening around the worldwide tours and with the game's best players. And starting by usage and acceptance, we see Pro V1 as strong as ever, wins and usage over 70%, I made the comment in my earlier remarks, Pro V1 has won the last 6 professional majors. That's no small feat. And we do believe it's powerful commentary on the performance, quality and ball-to-ball consistency that Pro V1 affords which is really rooted in our commitment to design and manufacturing excellence. And then a final point on Pro V1 on the worldwide tours. We've seen several players recently make the switch to Pro V1 or Pro V1x from other models. Who are now playing some of their very best golf, Bubba Watson, Tommy Fleetwood, Francesco Molinari come to mind. In addition to the winners of the year's first 2 majors. So broadly speaking, we're very pleased with Pro V1's standing in the world of golf. Now that said, we're an even numbered year and the share story this year is always going to deal with some comps against, what's a meaningful sell-off of prior generation product which took place in the first half of our launch year. We see this happen every even-numbered year. And during this first half, it happened, and we all saw -- also saw higher level of competitive sell-off of prior generation early in the year. And in the market, we're seeing share gains with AVX, we're seeing share gains with Tour Soft and Velocity, so we're very bullish on the product line. And while, hey, it would be great if all these gains came from the competition, we do understand that some can come from Pro V1, especially in the early days. Pro V1 has far and away the highest share in the market. So overall, we're very pleased with the vital signs of the golf ball business.

Your next question comes from the line of Simeon Siegel with Nomura Instinet.

This is Dan on for Simeon. Just 2 tagging along from what others said. How should we think about prices or tailwind for the back half and when should we begin to lap those benefits? And then secondly, could you share any plans for the bag, the travel gear and the headgear? I think that each of those were weak.

I think your's -- if -- are you speaking of price in the back half of the year. We and all the -- we are at some of the highest price points we're at, and obviously, some of the new shoes that we're putting in the market were -- are a key price points as Dave say -- Dave said. We're exiting some of the value categories. But as far as pricing, obviously, we're not going to tilt our hand on any exact model and what we're going to be doing in the back half or even in the first quarter. But Dave did you want to add anything to that?

No, but I will, Dan, address your second question about the gear business back half of the year. Gears, gloves, bags, headwear and travel and really the headline is gloves is steady, headwear is steady, both growing around the world in the first half. The bag business -- our primary bag business is in stand bags and we had a nice first half. We took a dip in our cart bag business, couple of reasons for that. It's been a competitive segment. You've got -- you got some players giving out a bag with a purchase of clubs. You've got somebody, a player overseas giving out a cart bag with a purchase of a trolley. It's a competitive space. We're not too, too concerned from a product line standpoint. But we know, hey, we just -- we need to deal with some competitive realities. We do have some new product line launches coming in the second half of the year that will -- we think will get the business back on track. But really, a tale of 3 stories being pretty strong and we've got an issue in cart bags that we're dealing with. But again, less a product issue, more just -- it's been a competitive space the last 6 months.

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

Dave, I was going to ask a similar question about market share gains, but as it relates to the AP3 irons. Have you been able to determine how much of that business is incremental, compared to maybe some cannibalization either -- from either AP1 or AP2?

Yes. And Dan, the good news from our advantage point, when you've got a broad product line, like we have in irons, we got AP1, 2 and 3 we got MB, CBs and T-MBs, we've got a broad assortment of products really designed to cover all pieces of the dedicated golfer interest level. So the headline really is gaining share in irons, we feel good about that. I think it's fair to say, TS3 is running a little bit faster than we anticipated, which is nothing but a positive. Some coming from AP1 -- excuse me, AP1 and AP2. But AP3, really the headline story. So again, headline would be share gain overall in irons, 3 has grabbed a bit from 1 and 2, but nothing that concerns us. We think that's, if nothing else a positive as more and more players have tried and liked what they're seeing in AP3.

I was thinking that the cannibalization would be less for AP3 than it, say, was for AVX, just because your market share in irons was lower than where you had in Pro V1 balls. But this...

You got part of it -- we got this emerging new players distance category, which AP3 jumped into. But again, it's a product we needed to bring to market. We think we did it real well and the overall level of health and vibrancy of the Titleist iron business is at a level that we haven't seen in a long, long time. So we feel real good about that.

And a second question I had was on the direction of your new driver and fairway business. It was interesting you're changing the branding, I guess what now is called the TS. I guess, it would have been the 919. So I was curious as to why the change in the branding? And I guess also the buzz we're hearing is that you're going to be focusing a lot more on distance with the new drivers and fairways than you have with your prior product launches. If that's true or not?

Well, we've always focused on distance with -- certainly with Drivers. This was our in-house codenamed Titleist speed project that we've been on for the last several years as we attempt to get absolute optimal playability and speed in a Driver product. So we just felt as we do from time to time after a long run of number sequencing. We felt given the differences in this product, given the way we're approaching this product. We felt the time was right for a move away from what had been our numerical naming to this TS, which is really, it's tour speed, it's Titleist speed, it's total speed, gives you a sense for how we're thinking about the positioning of this product. And early days, as you may have seen, Dan, have been real good. We launched at the U.S. open and typically that's an event where players are going to be cautious about what they put in the bag and 17 players put it in play for the first event, it was -- we hit the conforming list on Monday, tournament started Thursday. So we really like what's happening. Successful driver requires that you take many, many steps and we've taken several of them in advance of the launch, which will happen in late September. We've taken several of those steps and we're real pleased with where we are at this point.

And just a real quick question. I believe all of your clubhead components are manufactured in China. I guess, probably, almost all of your apparel and footwear. Can you tell us what the exposure to this growing list of tariffs will be on those products?

Sure, this is Bill. The Trump administration first announced the steel and aluminum tariffs along with the automotive sector. For our company the steel tariffs did -- really doesn't have a meaningful impact on our business because steel solely as a material from a material standpoint, it's not a major component of cost of production heads. The cost of producing these products is more concentrated in the manufacturing process, the overhead and labor employed. And lot of our steel shaft offerings use American steel. But the latest section 301 tariffs that have been proposed affect a broad range of consumer products, originally proposed a 10% as late as yesterday, it was really as yesterday, considering as high as 25%. These tariffs would encompass products in our golf gear business, namely headwear, golf bags and travel gear. But our supply chain is pretty regionally diverse from a gear standpoint. So if you enact the -- either way, 10% or 25%, we will experience some cost impact, but not a material one. And certainly not anything material in 2018. But of course, we need to continue to monitor the situation to see if any broader categories of tariffs are proposed by the U.S. or any foreign country.

Your next question comes from the line of Michael Swartz with SunTrust.

Just a quick question on in -- on the updated guidance. It would imply that, this revenue growth in the back half of the year is kind of flattish, and I know David you talked about the drawdown of Pro V1 going into a Pro V1 launch year, but as I go back over the prior couple years where we've had driver launches in the back half, and I would assume we've had a similar Pro V1 drawdown, we've seen pretty healthy mid-single to high single-digit growth in those driver launch years. So just wondering maybe what's changed or what the offsets are in the back half of this year that you'd be looking at just flattish-type revenue growth?

Well, again, I'll -- Michael, I'll point to really the keys, and you hit it, it's Pro V1 drawdown, which is a fourth quarter -- late third quarter event. As really field inventories begin to right size themselves in advance of the '19 launch. Again, little bit offset, Q3 we've got some activity happening with AVX as we pipeline that, albeit in small quantities around the world. But I think the real story here is what's different this go around. We are certainly excited and bullish about our TS launch, but it is comping again -- against what was a real robust iron launch last year. So that comp is certainly baked into our balance of the year forecasts. And as stated, you get more out of a driver launch in terms of a pipeline and less out of immediate fill in than you do in irons. So the Q3 story in driver should be more robust and you'll see it level off in Q4. Whereas conversely, the iron business sort of ramps up because it's so fitting based. But I think the keying answer to your question is, you got to keep in mind a pretty strong and robust third and fourth quarter last year in irons.

Okay, that's helpful. And then just with -- I think going back to earlier this year you'd mentioned looking at marketing and maybe seeding the market a little differently when you do some of these large club launches. Just wondering maybe how it's different this time around with TS? And then, some of the ramp in incremental expense we've seen in SG&A, is that tied to maybe how you're doing things differently as you launch these new products?

Yes. And just some of the differences we've seen thus far with TS is really, because up to this point the story and the seeding process starts on the worldwide tours and works its way down to club pros and key influencers. We've been more engaged and more active than we've ever been and you see it in our counts, you see it in the number of players who've converted as quickly as they have to new product, especially, mid-season. A lot of times players will defer that to end of season, just given they're on a roll and they don't want to make any meaningful equipment changes in the middle of the season. We've sort of upended that, really focus on first and foremost the product, but also some efforts on our behalf to really do a far more comprehensive job in season, fitting players into the new product. And then, in terms of spending, as we saw, I think the way to think about the TS launch, we really like the way things played out with the iron launch. That sort of established a new baseline for us. We carried it into wedges, carried into putters to a degree and you'll see that play out in the TS line of metals as well in terms of how we think about spending behind those new product launches.

Your next question comes from the line of Brett Andress with KeyBanc Capital.

I wanted to get your take on the industry here domestically as we enter August. From the data we see the industry, our good retail was up something like 11% in 2Q, which I think is some of the best growth we've seen in several years and presumably that's continued here into 3Q. But so one, just broad strokes, what's your take on some of the drivers of that demand inflection, the growth of the sport, health of the industry, et cetera? And two, what's your confidence level that we could potentially see similar rates of industry growth as we get to the back half of this year?

Yes, and good question, Brett. I'll take it in a couple of blocks. The first thing we got to -- we always pay attention to, in golf, is weather and rounds of play. Weather wasn't great. We had a tough start in a couple of markets and rounds are down a little bit, and we don't view that as anything other than commentary on the weather. That said, we've seen some nice activity at retail. So while, traffic and rounds are down slightly, consumer spending is up and they've got consistent with the broader retail marketplace, you've caught a little bit of a consumer tailwind. In our own house, when you see rounds down, you look to a correlation and how does it correlate to activity in the marketplace. And the first is going to hit as consumables and we've seen that, hey, when you're playing less rounds you're going to be consuming fewer golf balls. But the other side of the story has been a robust environment in golf clubs and equipment, and we've certainly benefited from it, we've driven it with some new product launches as well. So that said, you had a bit of a drag with weather, but I think more than offset by a bit of a tailwind and in our house, offset by some exciting new product launches.

Got it. And maybe just I guess more for clarification question, but the AVX selling, I think, is complete domestically. Internationally, it seems like it start in July. So is it may be fair to expect a similar magnitude of selling on AVX in 3Q? Or is that international piece going to be considerably smaller?

Yes, and typically we think the U.S. we say -- U.S. is about half our business. So you'd think it would be about what we're doing in the rest of the world will be about what we're doing in the U.S. less so, because you've got a Q3 effect. And really it's at a time when just the market is a whole lot smaller and less receptive to bringing in new product in Q3. So while there be a modest bump from AVX, keep in mind it's going to be relatively small. And then the final piece is, we -- for a variety of reasons we're not launching AVX in Japan which is the second -- world's second-largest golf market. We've got a little bit of a different product line in Japan. So we haven't determined if or how we're going to fit AVX into that marketplace at this point. So again, 2 things to think about. One, third quarter smaller than second and 2, Japan not participating in the AVX launch.

Your last question comes from the line of Casey Alexander with Compass Point Research & Trading.

David, well first of all just an editorial comment. 20 years of doing this, I can't remember 17 players putting a new driver in, in the week of the U.S. Open, so that is pretty remarkable. But has the company, which has had a long-standing cadence of how it manages product introductions over an 8 quarter cycle. Have you considered evolving that cadence in order to better compete against what's become a smaller but more durable set of competitors to make sure that you're getting your product to the market at a time where it can maximize its share?

Casey, good question, and the short answer, and I'll elaborate a bit. The short answer is, yes. We're always considering what's the right window in cadence with which to launch product. And not getting off our 2-year product lifecycle, which we like and are committed to. But a couple of thoughts. Our product really comes through the pyramid first before it reaches the marketplace, so here we are talking about the U.S. Open in June and then 3 months later we're going to launch at the marketplace. So there's a lot that happens before product hits the street that we really like, a lot of pyramid activity that's very important to us. It would be for a variety of reasons a little bit difficult -- little bit more difficult for us to achieve that, would say, a January launch or a March launch. So really the pyramid is a big part of why we launch product, when we launch products and the important role of the pyramid within our launch cadence. Again, here we are, we're going to launch a product in September that's got robust tour usage, it's got a win already at the John Deere Classic with Michael Kim. We got a big story to tell in advance of the launch, which we like. That said, and I think you framed it well. The market, whether it's through the retail consolidation of the last several years or somethings that are happening at the OEM level. Sell-through timing continues to shift and evolve and it has over the last couple of years, which prompts us to say, hey, might there be a better window to do what we do in golf clubs. Obviously, at the moment we've decided to stay the course and we don't see that changing anytime soon. But of course, we're open to altering the cadence based on shifts or changes in the marketplace. But for now we really like what the pyramid allows us to do in terms of building up demand and interest in advance of a launch.

Okay. And secondly, during the quarter the company amended its cash flow to allow for the potential for share repurchase programs. Can you give us your thoughts in terms of share repurchase versus dividend and how the company expects to look at capital allocation in the quarters and years to come?

Sure, Casey. As you know and you pointed out, we announced a modest -- very modest repurchase plan of $20 million worth of shares from time to time. We did not purchase any shares in the quarter, for the record. But that's largely being -- was introduced to mitigating a share dilution associated with our equity grants. But having said that, we are still on our -- on target for our 2x leverage point at end of '18, early '19, and at that time we will feel like our leverage is good. So we'll continue to look at that dividend, make sure we have an attractive yield and payout. And obviously, M&A, as it comes up, but share repurchase will become a bigger part of our consideration set perhaps. So now we're -- as we're nearing that target, we have a lot of things that are at our disposal.

David?

Yes, thanks, everyone. In closing, we're in for a great run in the world of professional amateur golf as Titleist FootJoy -- Titleist and FootJoy brand ambassador Justin Thomas defends his title at the 100th PGA Championship next week at Bellerive. Players from both sides of the pond, jockey for final Writer Cup spots and FedExCup points, and the Women's British Open is underway in England. And the world's top amateurs head to Pebble Beach in the Golf Club of Tennessee for the respective U.S. Amateur Championships. Lots of excitement in the world of golf. And for the rest of us amateurs, golf courses tend to be in great condition in late summer and early fall. And I encourage each of you to go out and play a few rounds, enjoy the comradery, competition, challenge and exercise offered by the great game of golf. Thank you, as always, we appreciate your time and interest in the Acushnet company.

This concludes the Acushnet Holdings second quarter 2018 earnings call. We thank you for your participation. You may now disconnect.