Good morning. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the Acushnet Holdings Corporation’s Fourth Quarter and Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [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 the financial results for Q4 and full year 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 in the context of our long-term mission and strategy. Next, Acushnet CFO, Tom Pacheco, will spend some time discussing the overall financial results for the year and highlights from 4Q.

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 CEO, David Maher.

David?.

First, FootJoy was not as competitive in the sub-$100 price range, a category which grew in 2018. As you may recall, we decided to exit some lower-margin, lower price points last year. And while we see this as a long-term positive for the FootJoy brand, this negatively impacted our 2018 results.

Going forward, we believe we are introducing the right products to be more competitive in that sub-$100 space. Second is the continued success and growth of FootJoy men's apparel, women's athleisure apparel and performance outerwear.

FootJoy is relatively new to the golf apparel space, and the growth of our business closely parallels our expanding design, customization and supply chain capabilities.

And finally, FootJoy gloves, which have earned one of Acushnet's leading share positions, continue to innovate and set the standard in all markets for performance, quality and consistency. FootJoy and Titleist gloves are made at Acushnet's wholly-owned glove factory, which we view to be a distinct competitive advantage for both brands.

Looking to 2019, our footwear team has adapted well to ever-changing consumer preferences and has fortified our new product pipeline to capitalize on shifting market trends. Led by Pro SL and the recently introduced, athletically styled Fury and Flex models, FootJoy is positioned for an exciting first half.

FootJoy's new women's footwear line is scheduled to ship in the spring and should add to this momentum. FootJoy outerwear is the number one outerwear in U.S. green grass shops and continues to solidify its position as the best in performance outerwear.

We're excited to introduce a new innovation story in the first quarter with HydroKnit, a fully waterproof shell with a specifically engineered three-layer bonded knit fabrication that makes it one of FootJoy's lightest outerwear garments.

In 2018, our team successfully launched the FJ 1857 collection of handcrafted leather footwear and luxury apparel. 1857 sell-through met our high expectations and we anticipate its continued progress at many of the top golf shops around the U.S.

While the 1857 collection is not intended to be a sizable business for FootJoy, it represents an important and classic product offering for the game's dedicated and discerning golfer.

We report Links & Kings under our FootJoy segment and our first year integration under the Acushnet umbrella has gone well, as we improved its supply chain while managing to keep up with double-digit growth for the brand.

We are confident that Links & Kings is well positioned for future growth, first in North America and the U.K., and in time, to key markets across Asia and Continental Europe. Now looking at our business regionally on Slide 8. U.S. sales increased 5% for the year and were off 5% in the fourth quarter. Our U.S.

team achieved good results, driven by strong sales in golf clubs, golf balls and apparel. Looking outside the U.S., EMEA posted a 1% gain for the year and was roughly flat in the fourth quarter. Outside of challenges with U.K. retailer American golf, our business across EMEA has been relatively stable.

Japan was down 3% for the full year and 9% in the quarter. Rounds in Japan were off 5%, which contributed to market softness, particularly through the first three quarters of the year. We did see a rebound in the fourth quarter when both weather and rounds improved.

And lastly, our team in South Korea had another strong year, with sales up 7% as they finished the year with a great fourth quarter. And now turning to Page 9 and our outlook for 2019. We feel the global business of golf and the dedicated golfer base are structurally healthy.

As we look to 2019, we expect new product innovation will once again be the engine of revenue growth and share gains with the game's dedicated golfer. These golfers represent 70% of the industry's purchasing power, remain an especially attractive demographic and are the focal point of Acushnet's product development and go-to-market strategies.

Each of our business segments is active with new product development and a full calendar of new product introductions, which bring enthusiasm to golfers, our trade partners and our associates.

We're investing in our associates and in technology to advance the performance and appeal of our products while pursuing efficiencies throughout our organization to achieve operating leverage over the long term.

The Acushnet team has a proven track record of executing, and we are confident in our ability to continue delivering favorable returns for our shareholders. In closing, we appreciate your continued support. And I will now hand it over to Tom to provide an overview of our financial performance..

The Pro V1 and Pro V1x in Q1 and the Cameron Phantom X putters in Q2. We also expect to continue to benefit from the success of the new TS Metals. As a result, first half 2019 consolidated net sales are expected to be approximately flat compared to the first half of 2018 on a reported basis.

In summary, 2018 was a solid year, driven by our focus on innovation, our ability to deliver the best-performing and highest-quality products and our continued execution of our long-term strategy.

Our focus on the dedicated golfer, broad and deep product portfolio, global distribution, strong partner network and attractive financial framework, are all important factors in our current and ongoing success. We are well-positioned and are looking forward to an exciting 2019. With that, I will now turn the call over to Tony for Q&A..

Thanks, Tom.

Christina, can we now open up the lines for questions, please?.

[Operator Instructions] Our first question comes from Randy Konik from Jefferies. Your line is open..

Thanks very much. I guess, Dave, I want to ask about just the general – your general thoughts about the environment. You kind of alluded to, in your text, in the press release, the business of golf being structurally healthier in recent years.

Just kind of just want to get your kind of pulse on the industry for the next – as you see it today and over the next couple of years, just high level..

Sure. Good morning, Randy. A couple of quick ways to get at that, and I'll start by commenting really at a high level on 2018. It was a challenging weather year globally. It really, as challenging as we've seen in quite some time, which led to rounds being off somewhere between 3% and 5% around the world.

And in spite of this, the market held up well, which is, I think, commentary on the overall health and resilience of the dedicated golfer. And now certainly, consumables were hit a bit harder than clubs, but overall for the year, for the industry, it turned out a whole lot better than you would expect, given the weather, round realities.

So with that as a backdrop, I'll peek forward to 2019 and I'll share several inputs that shape our thinking about 2019. First, again, the dedicated golfer is in good shape, alive and well, playing, spending, despite some weather and weather drags.

Second, of course, would really be our internal product plans, which we're excited about and confident in. I would say third would be the retail channels, and we've talked a lot about this over the years. The retail channels are healthy. They're as healthy as they've been in quite some time.

And for the most part, inventory levels heading into the new year are in good shape. And I would say lastly, the final piece would be the broader economic climate and consumer spending. And we did see that consumer spending was a bit less robust in the second half of 2018 than it was in the first half.

And really, these second half conditions are the conditions with which we built our 2019 plans around.

So net-net, Randy, we'll reiterate our position, and this has been consistent over the last couple of years, also consistent with this overall healthy retail climate, which I did note in my opening remarks, which is that we do project the industry growth, and that is our target market dedicated golfer industry growth to be in the flat to low single-digit range.

So those are the key inputs we think about as we assess golf going forward into 2019..

Helpful.

And then if we jump off that last comment around, let's say, the second half versus the first half from a industry spend kind of perspective by the consumer, how do you kind of think about that and compare that to or contrast it with some of the product acceptance you're seeing with some of the new product areas, like the AVX, the TS product line, even the colorway change on the Pro V1, the yellow coming up, et cetera? So how do you think about that as indication for your business being able to almost like sort of outperform and gain share in the upcoming year?.

Yes, so certainly, from a product standpoint, we're very excited about – and I'll go sequentially. Our May introduction of AVX, our fall introduction of TS Metals and now we're in the midst of a first quarter launch of new Pro V1 and Pro V1x.

So from a product standpoint, I think our team has done a great job controlling all their variables and really bringing terrific product to market and activating it with both the trade and consumers in a really effective manner. The other piece, Randy, that you can't overlook is what we saw in the fourth quarter. Rounds – and this is more U.S.

commentary – rounds were off double digits in the fourth quarter. Weather was, you look at the mapping and you look at what happened from a precipitation standpoint, up dramatically. You look at it from a temperature standpoint, down dramatically.

So the industry came through a pretty rugged quarter from a weather standpoint, that hit rounds some, which were off some 10%. It really is as tough a quarter as we've seen in quite some time. Again, all commentary on the inputs that have us thinking about the business as we head into 2019.

So at the highest level, we feel good that we've weathered a tough weather year, pun intended. But again, the things we can control, the product stories we're bringing to market, we're very, very optimistic about..

Great. And last question, just would like to – you just talked about the, I guess, the return on capital and return of capital and just different uses, given that the leverage ratios have been kind of net where you want them to be.

On the M&A strategy or potential M&A strategy, just curious on just what – how you think about your – what's your philosophy around M&A? Links & Kings, just kind of what – just curious on if there were to be any M&A, amongst the other ton of things you can choose to do, just curious on how you think about the M&A area in terms of what you would look at, what you wouldn't look at? Just curious..

Well, I think fair to say we're very open-minded in terms of M&A. Our preferred inputs are does it, does the product or brand resonate with the dedicated golfer? That's our sweet spot. That's where we have the most expertise. And then secondly, would it be synergistic with our global distribution platform? We have strengths on our own.

We have our own fingerprint in terms of how we go to market and where we have strengths. Good example, maybe the best example, would be the Links & Kings, which again, dedicated golfer acceptance, matches nicely with our existing distribution – channel distribution strengths.

So those are really the two primary drivers to how we assess and think about M&A. But that said, Randy, we are open-minded, and we're always looking at opportunities that would work well within our company.

Shared with you last go around that the PG Professional Golf doesn't necessarily fit the two criteria I established, but it fit from a vertical supply chain standpoint. So that one a bit outside the lines of our typically stated M&A approach, but we think real effective and important and long term, could be very successful for Acushnet..

Very helpful. Thanks, guys..

Thanks, Randy. Next question, please..

Our next question comes from the line of Steven Zaccone from JPMorgan. Your line is open..

Great. Thanks very much. Good morning. So encouraging top line guidance for 2019. And thanks for the commentary on the first half versus the second half cadence. But I was hoping you could talk a little bit more detail about expectations by segment.

Seems like Pro V1 selling into a healthier channel than the last launch, and you also have the new yellow ball launch. So presumably, golf ball sales growth will outpace the consolidated outlook.

But just could you talk a little bit more about the expectations by segment?.

Sure, Steven. This is Tom. Good morning. So as you said, we – it's a Pro V1 launch year, so an odd-numbered year, we're always looking for a solid performance from the golf ball business. And as you think about the clubs business coming off a very successful 2018, you've got some challenging comps there.

So certainly looking at strong performance from golf balls and a little more challenging performance from clubs. We are looking for a bit of a rebound for FootJoy as it compares to some of the challenges it had last year. So I think from a segment perspective, that's what we're looking at..

I'll reiterate, Steve, just to again make a point that Tom made earlier. A big theme here in 2019 is our launch cadence. And again, as Tom said, if you look at what we launched in the first half of 2018, we had performance models, we had wedges, we had putters, we had an AVX golf ball, all in the first half.

That compares with the first half of 2019, really we have a Pro V1 launch, which is meaningful, but not meaningful enough to offset some of those high-impact pipelines that took place in the first half of the year.

So if there's a theme, and it really rings true in odd years for Acushnet, is that our launch cadence differs in odd years from even years, which again, we've talked about in the past..

Yes, understood.

And then just on the increase in the share purchase program, could you comment around your strategy around actually repurchasing stock? Would you expect to be a consistent repurchaser? Or maybe do it on more of an opportunistic basis?.

So this is Tom again. We're not going to get into a great amount of detail in terms of our execution plans. We do expect to purchase relatively consistently throughout the year. We will obviously be cognizant of the share price and be opportunistic where we can.

So we will be strategic, but we do expect to be a consistent purchaser across rest of the year..

Great. That’s it all for me and hoping for better with this year. Take care..

Thank you, Steve. Next question, please..

Our next question comes from Dan Wewer from Raymond James. Your line is open..

Thanks. So with the midpoint of revenue guidance in that mid-2% range for 2019, given we're going to be flat in the first half of the year, that implies the growth is going to be back-loaded. And those are two seasonally smaller periods, so we're talking about what, 4%, 5% revenue growth at a minimum, I guess, in the second half of the year.

Why would we be confident about the second half rebounding at that rate? Is it due to some changes in product launches? Or is it an assumption that weather gets a lot better?.

No, not at all. Not at all, Dan. It's not at all to do with weather. It's just a function of our launch cadence. Again, odd years, this is how they flow. Even years tend to be very first half-driven, as I said. But this is solely a function of our launch cadence. And it won't be – each of the segments won't perform the same.

As we mentioned, the ball business takes a –- take a bit of a ride in the first quarter, whereas some of the other segments more back half-loaded. But really, solely a function of how we think about launch timing..

Okay. And then second question.

There's been more speculation about the domestic economy, I guess, given the global economy is slowing, it's been a over a decade since we've had a recession, but how do you think that the golf industry, how would it change in the next inevitable recession compared to what happened back in 2008 and 2009?.

Yes, and we share – you're right, it's inevitable. When? Nobody knows. But in terms of how we've experienced recessions going back over the last couple of decades, I'll point to '08, '09 and if you back out the Cobra piece of our business, which was before we sold it, our business held up quite well.

We certainly took a hit, but we didn't take as big a hit as the broader economy. And again, I think it's commentary on just the passion and commitment and dedication to the game of our dedicated golfer. Do they keep playing? Yes, they do. Do they keep spending? yes, they do, albeit at a lesser rate.

So if we use '08, '09 as the benchmark, again, our business took a half step backwards while the broader economy may have taken a full step backwards. So there's some inherent resilience that comes with our dedicated golfer base around the world..

And just the last question I have is, curious as to how you're thinking about the ultra premium end of the market? Seeing PXG taking pricing lower. There's been some speculation that maybe Titleist is going to push its Concept irons a little bit harder.

But curious as to how you're thinking about the very high-end price point in the golf sector?.

It's one, it's the product; and two, it's the golfer experience. But we're excited about it. We haven't seen any pricing pressure on that business. If you make great product and can prove to golfers that it's worth it, pricing tends to take care of itself. But we see some upside.

We understand it's got finite size and it's going to be a modest opportunity in the context of the broader Acushnet portfolio, but we think it's an important space. We're glad we're there, and really, the effort and the enthusiasm starts with what happens in the R&D labs, which we're real confident in..

Okay, great. Thank you..

Thanks, Dan. Next question, please..

Our last question is from Dave King from ROTH Capital Partners. Your line is open..

Thanks, good morning, guys. Maybe following up on the segment guidance line of questioning a bit.

Do you have any early reads on the success of this year's Pro V1 launch versus prior launches in terms of bookings, I don't know, particularly with the new yellow ball? And then how is that TS business trending now in Q1 after some strong launches from some of your competitors?.

Yes, good morning, Dave. So as to Q1, really, too soon to say, in the sense that there's not – there's not much meaningful data out there yet in terms of what's happening in the first quarter. We've had a cold and wet spring out West, which is more a long-term positive, given they need the rain and the water.

We would expect rounds will be up slightly in January, but that's not out yet as well. But in terms of Pro V1, it is too early to say. Certainly, you get a lift from new, we think we'll get some interest and some new trial. On the yellow, we're excited, but again, really at this stage, tough to give you any meaningful feedback at this point.

And as to TS, we're very excited about TS. But you're right, there's a whole lot of new competitive product entering the market, which was anticipated. And in the end, it's going to come down to how our product fares versus theirs on the fitting tee and on the launch monitor.

And so far, we're very, very confident that our product will stand up as well as any product in the marketplace in terms of speed, overall performance, forgiveness, et cetera, et cetera. But in terms of how we're faring versus the pack and the meaningful competitive activity that's out there, we like our position at this point..

Okay, great to hear it. And then on the EBITDA guidance, I want to unpack that a bit.

How should we be thinking about gross margin versus expenses, particularly with ball mix maybe providing some lift to gross margin, I think? But I seem to recall you talking about maybe accelerating some marketing or maybe changing some of your marketing plans, how should we be thinking about those factors?.

So this is Tom. Dave, good morning. So as you know, we don't provide particular guidance around gross margins or operating margins. There are a lot of puts and takes, particularly in our gross margins, including the two-year product life cycle, timing of launches, et cetera.

We are – if you look to our guidance, we are showing leverage and growth at the EBITDA level relative to – with a roughly 4% growth rate there versus a 2.2% growth rate on the top line. So we are forecasting leverage through the P&L, so..

Okay. Fair enough. Thanks and good luck with 2019..

Well, thank you, everyone. We appreciate your time and attention to our business and on today's call. As I've said earlier, we're excited about the upcoming golf season. Our associates have done great work planning for the year. And we're busy preparing golf shops, educating our trade partners for the upcoming season.

And 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 and fully enjoy the game. With that, said, again, we thank you for your time and attention this morning, and we look forward to reporting back to you in the spring..

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