Acushnet Holdings Corp

NYSE:GOLF

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, my name is Shelly, and I will be conference operator today. At this time, I would like to welcome everyone to the Acushnet Holdings Corp. Third Quarter 2018 Conference Call. [Operator Instructions] Tony Takazawa, Vice President of Investor Relations, you may begin your conference.

[Anthony Takazawa, executive]

Thank you. Good morning, and welcome to Acushnet Holdings call to discuss the financial results for the third 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 in the context of our long-term mission and strategy. Next, Acushnet CFO, Bill Burke will spend some time discussing the overall financial results for the quarter and year-to-date.

We will be making forward-looking statements on the call today. These forward-looking statements are based on Acushnet's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see our filings with the U.S. Securities and Exchange Commission.

Throughout this discussion, we will be making reference to non-GAAP financial metrics, including items such as revenues at constant currency and adjusted EBITDA.

Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today's press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission.

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

[David Maher, executive]

Thanks, Tony. Good morning, everyone. We appreciate your time today. I am pleased to report the Acushnet team, while admittedly tired from late nights watching the Red Sox team roll through the playoffs, continues to execute well on our enduring mission to steward 2 of the most revered brands in golf: Titleist and FootJoy.

We continue to focus on the game's resilient, dedicated golfer, a broad product category portfolio, our favorable mix of consumables and durables, strong pyramid validation and golf brands that represent the best in performance and quality.

We are confident this focus is resonating well with today's dedicated golfers and our trade partners. As I will briefly outline this morning, the third quarter and year-to-date results and positive brand trajectory helped to reinforce Acushnet's confidence that we have a solid footing in today's golf market and are positioned to deliver for our shareholders.

Starting on Slide 4, you will see that on a consolidated basis, sales in the quarter were $370 million, up 6.7% year-over-year and up 7% on constant currency. Growth for the period was driven primarily by higher sales volumes in Titleist clubs, notably our new TS Drivers and fairways, and in Titleist Golf balls headlined by our new AVX models. Adjusted EBITDA for the quarter was up 19% versus last year. And through September, year-to-date sales of $1.29 billion were up 7% versus the same period last year and up 4% on constant currency.

Similar to the quarter, the primary driver of growth in the period came from Titleist clubs and Titleist golf balls. Adjusted EBITDA for the first 9 months was up 7% over last year.

We like our position through the first 3 quarters and are encouraged as we look to the balance of this year and into 2019. And as a result of this confidence, I am pleased to announce that the Acushnet Board of Directors has approved the payout of a third quarter cash dividend of $0.13 per share or approximately $9.7 million to be paid on December 14 to shareholders of record as of November 30.

And I would like to take this opportunity to thank my teammates for delivering these results and their ongoing and greatly appreciated efforts to continually build upon our successes.

Now turning to segments, and starting with golf balls on Page 5.

Sales increased 6% in the quarter and 2% over the first 9 months of the year. Driving this growth has been new AVX, Tour Soft and Velocity models.

Titleist AVX launched in the U.S. in May and in most ex-U.S. markets in July, and we have been very pleased with the initial response. Golfers have quickly embraced AVX with its combination of long distance, soft feel and short game control. And we are pleased with how AVX has fit into the broader Titleist golf ball lineup. And our leading Pro V1 franchise wrapped up a strong 2018 tour season with 73% of worldwide tour players using Titleist golf balls, more than 7 times the nearest competitor.

Affirming Titleist's position as the #1 ball in golf the 8 different winners of this year's 4 men's major championships and 5 women's major championships all won using a Pro V1, or Pro V1x golf ball.

We believe this success at the game's highest levels helps to validate the strength of our R&D efforts and also the quality and consistency advantages that come from over 80 years of golf ball manufacturing expertise.

Looking forward, our new 2019 Pro V1 and Pro V1x golf balls make their PGA TOUR debut later today during the first round of the Shriners Hospital for Children's Open and are scheduled for global launch in late January.

As with all new Pro V1 launches, we're excited about the improvements made to the 2019 models and look forward to sharing more information with you in the coming months.

Now moving to Titleist golf clubs, 2018 has been a terrific year, and we continue to see positive momentum across the entire club product line, affirming our team's focus on high-performance design, craftsmanship and the custom-fitting process. Titleist clubs were up 17% in both the third quarter and for the first 9 months of the year.

The Titleist speed project has been a priority for our team for the past 2 years, and we are especially upbeat about the early enthusiasm around the TS, Metals launch, which has been one of our most comprehensive to date.

Our team and trade partners have done great work positioning and creating interest in TS drivers and fairways, and we estimate that 70% of TS sales, to date, have been custom fit, which we believe greatly enhances the golfer experience and their ultimate satisfaction index.

TS momentum in the third quarter follows on the first half successes of Titleist 7 18 irons, Vokey SM7 wedges and Cameron Select putters, all of which were introduced in the past year.

In rounding out the Titleist golf club story and demonstrating our position, as a preferred equipment provider to the game's top players, 2018 has been an especially strong year on the PGA TOUR for Titleist golf clubs with irons, hybrids, wedges and putters, not only the most played but also achieving the most wins in their respective categories.

Next, we move to Slide 6 and Titleist gear. Gear sales were off 1% for the quarter and down 2% for the first 9 months of the year. Year-to-date gains in gloves and headwear and growth in the U.S. and EMEA have been offset by shortfalls in the travel and bag categories in Korea and Japan.

Looking forward, we are optimistic about our new product pipeline for 2019, which is highlighted by a new premium caddy bag collection scheduled for market launch in March.

And now moving to our FootJoy golf-wear segment, sales in the third quarter were down 0.3% versus last year and down 1% year-to-date. As we have discussed, 2018 footwear results have been impacted by our decision to exit some lower price points, which we see as a long-term positive for the FootJoy brand. Within footwear, the Pro SL continues to be the standout performer in the FootJoy line on tour and in the market. And recent launches of SuperLites, new Pro SL and women's leisure SL are generating late-season momentum for FootJoy. FJ gloves have rebounded after the weather impact early in the season, and we have recently launched a new and improved stay soft glove, as we commemorate the 35th anniversary of this longtime market leader.

FootJoy apparel enjoyed strong sell-through results across major markets in 2018, and steady bookings support our continued momentum. FJ has robust positions in both men's and women's apparel and notable strength and a prominence in the sizable U.S. on-course channel.

And finally, the recent launch of the new FJ 1857 line of premium footwear and apparel has met our high expectations. While 1857, by design, represents a relatively small piece of our business, it allows our team to explore new product opportunities and reach a new base of consumers.

We'll now look at business regionally on Slide 7. U.S. sales were up 11% in the third quarter, and up 7% for the first 9 months of the year. EMEA sales were up 4% for the quarter and up 2% year-to-date.

Acushnet's Japan sales were up 2% in the third quarter and roughly flat in the first 9 months. And Korea sales grew 4% in the quarter and were up 3% so far this year.

As we look at our performance across all regions, I will note that poor weather has impacted rounds and consumable purchases in just about every market in 2018. That said, we are pleased with the overall resiliency of our business in 2018, and our teams have done good work responding to weather-related impacts by adjusting inventories and sales forecasts throughout the year.

And lastly, I am pleased to announce that early in the fourth quarter, Acushnet acquired an 80% interest in PG Professional Golf. PG golf is a leading supplier of pre-owned golf balls, which operates both the wholesale business and direct-to-consumer model via their website lostgolfballs.com. We planned for PG golf to remain a separate, standalone business based in Sugar Land, Texas and continue to be managed by company founders, Gary Krueger and David Jones. Gary and David are talented operators who first met at Texas A&M, where they played on the golf team, and they've built an impressive business together over the past 25 years.

The pre-owned golf ball market has been around for a long time. As Pro V1 makes up such a high percentage of this market, we believe it makes good sense for Acushnet to be a participant in this opportunity. And while the business will remain completely separate, we do anticipate operational efficiencies, one example being that PG opens up a new sales outlet for the many golf balls which we use during our day-to-day product testing and development efforts.

We are excited about this business opportunity with PG golf and confident in our ability to generate a positive financial return for our shareholders.

In summary, we are pleased with our results so far in 2018, as the Acushnet team continues to execute our long-term strategy. While Mother Nature has been a headwind this year, Acushnet's performance speaks to our ability to innovate and bring to market exciting new products and is indicative of our team's ability to meet the high performance and quality expectations of the game's passionate and resilient dedicated golfer.

Our Titleist and FootJoy brands bring market momentum into the fourth quarter and 2019. And we continue to make meaningful investments in our future by fortifying our product development engines, continually improving our manufacturing and supply chain capabilities and building upon our golfer connection efforts. As we continue to focus on delivering products of exceptional performance and quality, we are confident in our ability to provide long-term value to our shareholders.

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

[William Burke, executive]

Thanks, David. Good morning to everyone on the call. As David indicated, we're very pleased with our results in Q3. Consolidated revenue in the quarter was $370.4 million, up 6.7% year-over-year and up 7% on constant currency.

Q3 gross profit was $188.9 million, up 9% from last year and gross margin was 51%, up about 120 basis points year-over-year. The increase in gross profit was driven by a sales volume increase of our new Titleist premium performance AVX golf balls and growth of Titleist clubs, including our newly launched TS Driver and fairway metals in late Q3 as well as our 7 18 irons and SM7 wedges.

Looking at operating expenses, SG&A of $148.7 million was up $7.2 million or 5% versus last year. The increase in SG&A was primarily due to higher selling expense across all categories, in support of 2018 product-launch activities.

In Q3, research and development expense of $12.8 million increased $2 million over last year, largely due to increased investments in staffing and testing activities.

Q3 interest expense of $4.3 million increased by 300,000 year-over-year.

Other net expense in the quarter was $4.1 million. This includes a noncash pension-settlement expense of $2.5 million, associated with the retirement of a long-tenured former executive of the company. Excluding this item, other net expense would have been $1.6 million.

Our Q3 effective tax rate was 57.9%. As we said in the past, there's been a continuous stream of guidance, interpretations and tax notices that strive to reconcile legacy sections of the tax code with those in the new Tax Cuts and Jobs Act.

The latest published guidance in the quarter required us to record a noncash discrete charge of $5.1 million in the third quarter. This being an adjustment to the total tax calculation recorded in the fourth quarter of 2017. Excluding this item, our ETR would've been closer to a more normalized 30%, which is our ongoing run rate at present.

As a result, our Q3 net income attributable to Acushnet Holdings was $7.1 million versus $9.3 million in Q3 of last year. Adjusting this result for the $5.1 million discrete tax adjustment recorded in the quarter, net income attributable to Acushnet Holdings would've been approximately $12.2 million, up $2.9 million year-over-year.

For the quarter, adjusted EBITDA was $38.3 million, up $6.1 million or 19% 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 in the slide presentation.

Recapping our year-to-date results, sales of $1,290.4 million were up 6.7% over last year and up 4.4% on constant currency. Our year-to-date gross profit was $667.4 million, up $44.9 million versus the first 9 months of last year, driven primarily by sales volume increases in Titleist clubs, mainly 7 18 irons and that Vokey SM7 wedges in both performance and premium golf balls.

Year-to-date gross margin was 51.7%, up 20 basis points versus last year. Our year-to-date SG&A expenses was $471.7 million, up almost $31 million or 7% over last year. The increase in SG&A was primarily due to planned higher selling expense across all categories, an increase in advertising and promotion and higher IT-related costs.

Research and development expense of $38.1 million was up $3 million compared to last year. And interest expense increased by $2 million to $13.9 million for the first 9 months of the year, reflecting higher average interest rates compared to 2017.

Our year-to-date effective tax rate was 32.5% compared to 34.4% last year. The decrease in ETR was primarily driven by the net impact of changes resulting from the new tax act, including incremental guidance issued in 2018 and changes to our geographic mix of earnings. As previously noted, our year-to-date ETR has also been impacted by the discrete tax items we recognize year-to-date through September that totaled approximately $3.6 million.

As a result, net income attributable to Acushnet Holdings for the first 9 months was $88.5 million, up $8.1 million or 10% over last year, primarily as a result of higher income from operations. Adjusting this result for the discrete tax adjustments recorded, to date, of $3.6 million, net income attributable to Acushnet Holdings would've been $92.1 million, up $11.7 million or 14.6% over the previous year.

Year-to-date, adjusted EBITDA was $194.8 million, up $12.3 million or 6.7% year-over-year.

Looking to the balance sheet, we had about $56 million (sic) [ $57 million ] of unrestricted cash on hand as of September 30, 2018. Total debt outstanding at quarter-end was approximately $408 million.

On a rolling 4-quarter basis, our total debt-to-adjusted EBITDA is slightly over 2x. I'd like to point out that we are at our seasonally lowest level of borrowing in late Q3, as borrowings tend to build in Q4 as we ramp in anticipation of the new golf season. Nonetheless, we're confident that we're still on target to achieve our 2x debt-to-EBITDA leverage ratio by the end of these -- this year.

Year-to-date CapEx was about $20.7 million. For 2018, we now expect CapEx to be approximately $30 million. While a good portion of this spend is maintenance-related, as we've stated previously, we're also making additional investments in innovation and technology to drive continued market leadership and future growth.

Looking at our allocation of capital, as David mentioned, we're pleased to announce that our Board of Directors voted to declare a $0.13 dividend this quarter. This strong dividend is, again, indicative of the confidence we have in our strategy and our cash-generation capabilities.

As you know, we are always evaluating select M&A opportunities as a way to improve our return on capital. Early in October, we completed an investment in PG professional golf where we purchased an 80% interest for approximately $14 million. We plan for PG to continue to operate as a separate, standalone business led by the 2 founders. While we expect there to be some back-office and supply-chain synergies, we intend the business to be run autonomously. To David's comments, the primary benefit of this transaction is to allow us to have a meaningful presence in what is a viable, secondary market for Titleist golf balls. We expect that PG golf will not have a material impact to overall corporate results for the balance of 2018. In 2019, we'll incorporate this business into our outlook, which we'll discuss on the Q4 call.

Over the long term, while modest, we expect the acquisition to be accretive to revenue and earnings and anticipate a solid return on our investment.

As to the outlook for full year 2018, we now expect reported sales will be in the range of $1,620 million to $1,630 million. On a constant-currency basis, we expect revenues to increase in the range of up 2.1% to up 2.8% versus last year. And we're forecasting adjusted EBITDA for 2018 to be approximately $227 million to $233 million.

In summary, our strong results in Q3, and more importantly, through the first 9 months of 2018, are evidence that we continue to execute well on our long-term strategy. Our focus on the dedicated golfer, broad and deep product portfolio, global distribution and attractive financial framework are all important factors in our current and ongoing success. This success continues to improve our financial strength and we're on plan to achieve our 2x leverage target by the end of the year. As we move forward, we expect our capital-deployment strategy will be squarely focused on both optimizing return on capital through investment in the business and select M&A opportunities where they present themselves, balance with return of capital to shareholders through both cash dividends and share repurchases.

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

[Anthony Takazawa, executive]

Thanks, Bill. Shelly, can we now open up the line for questions?

[Operator]

[Operator Instructions] Your first question comes from the line of Simeon Siegel from Nomura Instinet.

[Dan Stroller, analyst]

This is Dan Stroller on for Simeon. Bill, you touched on the strong gross margin improvement for the quarter, but we're just wondering if could give any color on a like-for-like profit margin, that's excluding any impacts from launches or anything? And then as you face user comparison in 4Q, do you expect this trend to continue?

[William Burke, executive]

Yes. Let me talk about Q3 first. If you look at the segment results, they're largely, if not solely, in equipment, and we've always made the comment that a -- and we've always put forth that the equipment categories carry and yield a higher margin than our soft goods category. So that's the real reason why you're seeing a big uptick in Q3. Obviously, that will normalize in Q4 because Q4 is our lowest margin period of the year, for most golf companies because we're mostly in closeout period for a lot of our product lines.

[Dan Stroller, analyst]

And then, just a quick follow-up. Anything you're seeing on tariffs? Or how that's impacting the business so far?

[William Burke, executive]

Yes, I talked about this on our last earning call, but nothing has essentially changed from what we reported then. Steel tariffs have had a -- will have a minimal impact on us, at present. It's the section 301 tariffs that have some impact on our gear business, namely golf -- I mean, headwear, golf bags and travel gear. These are set to increase by 25% at year-end, it will have some impact on 2019, perhaps around $3 million, before we consider any mitigating actions we're looking into, but of course, we'll continue to monitor the situation to see if our broader categories are -- and tariffs are imposed.

[Operator]

Your next question comes from line of Randy Konik from Jefferies.

[Randal Konik, analyst]

I guess, David, I want to ask about the statistic you gave around the customization on the TS, I believe, you said 70%. How does that compare to prior launches? I'm just going to get-- I just want to get a sense of -- with that very powerful statistic, how do think about overall customization penetration growing -- going further -- going forward? And then, also just want to get your perspective on what you learned differently or what you pursued differently about the TS launch from the 917, to give us some perspective on what you changed? And how that's been more successful in early days of the launch?

[William Burke, executive]

Randy, first -- to your first question, we rolled up early activity on TS purchases and came up with a -- our best estimate, about 70% were custom fitted, and for perspective, we view that as a high for us, certainly, in metals. And it really leads into the second part of your question about what we did differently, and frankly, we did a lot of things differently, starting with obviously the name change from numerical 917 to TS. Our team set off on an internal project called the speed project, a couple of years ago, and we looked at all the ways we could, first off, start with product development, how we could better activate our Tour efforts. You saw that at the U.S. Open this summer where we hit the conforming list the week of the U.S. Open, and then came out really with a great opening statement, we think, at the U.S. Open, at Shinnecock, with a whole lot of drivers in play. That really carried through the summer, carried through our club professionals. So come launch time in late September, we had done more -- far more than we had ever done, as it relates to just activating the product line and working with tour players and club professionals around the world, really, to show them that -- how TS could help their games.

And then, back to the comment about fitting. We continue to -- and we've talked about this in the past, we continue to do all we can to activate and drive golfers towards our fitting network. We think we have one of the top fitting networks in the business, and we know the more we can move golfers towards that fitting network, the better results we're going to have. So that was the second or third piece of the effort which happened, really, prelaunch. And then at launch, again, we've talked about this as well, we did make more noise. We invested more in advertising and promotion to get the great story out, the way we have. So as you can tell by, #1, the results; and two, our enthusiasm around it; and three, the market response. We really like where we are with TS, and kudos to our team and our trade partners for a job really well done.

[Randal Konik, analyst]

And can I ask just one more follow-up just on -- now on the ball side. It seems like there was a lot of success with the AVX ball. Kind of what did you learn there? What did you pursue differently there? And how do you think about that going forward with the other -- Tour Soft and Velocity and other products that developing innovation?

[William Burke, executive]

AVX was really born of an R&D effort to better understand golfer preferences and what we can do to help golfers play their best golf. And again, through a whole lot of our ball-fitting efforts and our R&D efforts, we saw that a low-spin, long-distance soft-feeling golf ball could help some golfers. And some might have been Pro V1 users. Some might have been Tour Soft users. Some might have been competitive users. But we saw, first and foremost, a product performance opportunity that we wanted to address.

And then, in terms of how the launch was new and different. Well, first off, it was quite new and different in the sense that we got off cadence. And as you know, we launched typically Pro V1s in odd years and the rest of the line in even years. And we felt this one required a whole lot of a different approach, starting with our test market last year, our launch in the U.S. in May and then a global rollout outside the U.S. in July. To your comment about differences between TS and 917 and your comment about AVX and other balls in our line and how we think about launches in the future, I do think it speaks to just a broader connection our team has with our target audience. And we're doing a good job of understanding what their needs are and adapting our both products and go-to-market strategies to make sure we're aligned in most relevance. So again, TS, we like what's happened. AVX, we like what's happened. So fair to assume you're going to see more efforts along those lines in the future.

[Operator]

Your next question comes from Kimberly Greenberger from Morgan Stanley.

[Kimberly Greenberger, analyst]

The golf ball category has absolutely been one that surprised us very, very positively this year. And I'm wondering if the traction that you're seeing in AVX or is the growth that your golf balls have been a surprise, at all, to you internally, perhaps it was just a pleasant surprise up on the outside. I wanted to peel back the gross margin up little bit, also, if we could. The improvements there, I'm wondering if you can talk about the mix shift benefit, the mix shift -- which piece of the 120 basis points came from category mix shift. Were there any FX impacts in that gross margin? Or any other savings in cost of goods sold that you -- that are helping that gross margin grow? And if -- and whether or not those might be durable?

[David Maher, executive]

Kimberly, I'll take your first question and hand off the call to Bill for the second. As to our golf ball business, certainly, we like our position in 2018. Golf balls are very competitive, as they always have been. It's a competitive sector. I'll start with commentary on the strength of Pro V1 at the very top of the pyramid. I mentioned in my opening remarks, winners of all 9 majors on the men's and women's tours used a Pro V1. So we think it starts with performance and quality and product consistency. And that's really important at the game's highest levels and as you work your way through the pyramid. So we think that the story starts there.

AVX has been a real, real good complement to our high-performance lineup this year and, of course, a year ago, when we were devising these plans, we had some questions and thoughts about how a product like AVX might fit next to Pro V1, and here we are 1 year later feeling really good about how it fits next to Pro V1. And then, we had some real positive launches with Tour Soft and Velocity, which posted healthy gains, which met our high expectations. And final comment would be, when we grow our golf ball business in a year when rounds of play are down, as they are really in most markets due to some severe weather, we view that as a positive and this is especially so in a non-Pro V1 launch year. So we feel real good about the golf ball business, and fair to say, it's meeting our high expectations.

[William Burke, executive]

Yes, Kimberly, on the 120 basis points in the quarter. First, a very negligible FX impact. We're very well hedged, especially, when it comes to the near term on our transactional side. So a very little on the cost of goods sold. Commodities have increased some this year in polybutadiene, but we're not seeing, in the future, anything on our forecast that says, at least to us, to conclude as a steep increase or anything. It really comes around this shift in the equipment business, and we've said before that it could've been margins -- are anywhere from 600 basis points to 800 basis points higher than the soft goods, and when you have that kind of -- that mix that you see there happen, while you see the 60% and the 70% increase in the quarter, that's the single driver here I find, and if the launch would have been delayed for our TS models into Q4, you would've seen that -- some of that margin pickup in Q4.

[Operator]

Your next question comes from Dan Wewer from Raymond James.

[Daniel Wewer, analyst]

I guess, first question would be for Bill. Looking at the high-end of the updated revenue and adjusted EBITDA guidance, it implies that the fourth quarter revenues dropped year-over-year, as did your adjusted EBITDA margins. Maybe if you could talk about what are the challenges in the fourth quarter. I know it's, seasonally, the least important period of the year but, your comments would be appreciated.

[William Burke, executive]

Sure, Dan. First, our full year guidance really is in line with our original expectations. It really comes around product launch cadence. So if you look at the club side, this year, in Q3, we had a metals launch. Metals are more of a stock product. We're going to ship a lot more of their product in when we load the trade and it's pushed into the off-course channels, and we'll sell less of it after that initial loading. Last year, we had a 7 18 iron launch. 7 18 irons or any irons of ours are much more custom-fitting biased. So you'll ship some in, but you'll have more sales that will drift into Q4. So that is one of your reasons why you would look year-on-year. If you're simply looking year-on-year, I'm not looking at any consensus or anything, that's why it would be down.

But the second thing is balls. We're in a non-new Pro V1-year. So we're looking at -- really starting to take the trades inventories down and not keep them at the levels we would, and if you look in the past, in an even number year, balls would typically be down in the fourth quarter, which would include the holiday closeout.

[Daniel Wewer, analyst]

We -- will you use PG as a tool to liquidate the Pro V1 and Pro V1xs before the new product launch?

[William Burke, executive]

No.

[Daniel Wewer, analyst]

Okay. The second question I have revolves around pricing. So the TS Drivers are priced at $4.99, and I guess, your competitors' new Driver launches are going to be priced at about $5.49, if you think that's an important advantage? And then likewise, when you look at the Pro V1 balls, I don't think you've increased the price on those since 2013, if you think it would make sense to maybe bump up the price for the new launch, next year?

[David Maher, executive]

So Dan, to your first question about driver, our driver positioning and pricing in the market, we're comfortable and confident that it's positioned where it ought to be and at a place where golfers see the value. It's premium and it's a real good value we think. So we're not swayed by any competitive shifts in pricing. As you know, too, we're on a 2-year life cycle cadence with our drivers, so we'll get another chance to look at things in 2020 from a driver standpoint, but we're very comfortable where -- with where TS is positioned.

Secondly as it relates to Pro V1 and pricing for our new models for 2019, we certainly will take a look at that. Pricing has not been finalized, but we'll certainly take a look at what our options might be. You look at a variety of factors. You look at input costs. You look at competitive pricing and deltas that may exist between us and the competition. So we did make a price increase in 2013. We're comfortable where we are. We like where we are right now, but it is something we will consider, but at this point, we haven't made any final decisions about pricing.

[Daniel Wewer, analyst]

And Dave, just my last question revolves around the 70% fitting percentage. It's also my experience that your fitters are doing a better job of selling the Titleist product and benefit, compared to maybe other clubs that your customers have in their bag at the time of the fitting. I don't know if that's just a -- an experience from a few fittings or if that was actually an initiative at the corporate level to train your fitters to better sell the Titleist product.

[David Maher, executive]

Yes. Good observation, Dan. It is certainly an ongoing initiative for ours to continue to fortify and better train our fitting network. I like to think with every introduction we get a little bit better. I think we took it a nice step forward with our 7 18 irons last fall, and I'd like to think we took another big step forward with our TS model. So it's less about a driver-specific initiative, more about a broader effort to continue to do great things and do a good job training our fitters. So I agree with you. I think we did a real good job. We get out in front of it. We put a lot of time and resources behind training our fitters, and I think that's one of the reasons we're seeing the dividends that we are.

[Operator]

Your next question comes from Casey Alexander for Compass Point.

[Casey Alexander, analyst]

Yes, mine was asked and answered.

[Operator]

Next question comes from Brett Andress from KeyBanc.

[Daniel Charrow, analyst]

This is Dan Charrow on for Brett. Just 2 things on TS here. First, has it been fully rolled out internationally? And then, around your earlier comment, around the 7 18 launch having a bit of a tail, after the initial sell-in, due to the custom-fitting dynamic. Would you expect a similar dynamic to play out with TS?

[David Maher, executive]

So your first question, Dan, yes. It -- global launch, late September, every market around the world was ready to go. We had pipeline product. We had put out fitting tools all over the world. So that happened really in Q3. I'll comment on Bill's point. Bill's was more -- comment was more about when we launch an iron, you launch fitting products, and you don't put as much stock product in the market, and then the fitters go to work. So it's more about what happens at launch than it is the next 90 days. Fitters went to work with irons in the fourth quarter of '17. Fitters are going to go to work with metals in the fourth quarter of '18. But it's really more commentary about you just put a whole lot more product in the market with the metals launch than you do in iron launch, and it just changes the cadence of how those products move through. I think a -- maybe a better way to look at it would be over a 6-month period, where they'd look normalized. They look more similar than different, but it really is more about what happens with that third quarter launch.

[Daniel Charrow, analyst]

And you called out the weather impact a couple of times. From what we can see, it looks like the U.S. rounds played, was down somewhere in the mid-single-digit range, but your retail dollars were up mid-single-digits, and from what we can tell, your channel inventories are still tracking pretty nicely. Have you seen a similar dynamic to that playing out internationally?

[David Maher, executive]

I think your comments on the U.S. market what we see very similarly. Internationally, I really talk to, really, the top -- the next 2 largest markets, Japan and Korea. Not the same dynamic. They've been hit with harder weather. Really the headlines in both Japan have been weather and Korea have been weather. Inventories are in good shape, but we haven't seen those markets perform as robustly as the U.S., I think that's commentary on just a broader consumer sentiment and a positive spending environment we've seen in the U.S. But the weather has certainly been a factor in Japan and Korea. But as an overall comment, I think important to note, global inventories are in a pretty good place, despite this weather. And I made the comment on the last call that we were watching it as we do in the summer months. The industry has done a good job of normalizing inventories despite some early weather inputs.

[Daniel Charrow, analyst]

And just one more quick one if I can. Just wanted to touch on the PG professional acquisition. I'm just hoping for a bit more color around how you're seeing this business fitting in with the core over time. Should we think about this more from a channel-supply-management perspective?

[David Maher, executive]

Yes. Let me give you a little context on PG. We really first started thinking about this opportunity more than 5 years ago, and while the pre-owned equipment market, or in this case the pre-owned golf ball market, it's always been a viable segment, within golf. And in many ways, it became -- the golf ball portion became far more viable with the introduction of Pro V1 back in early 2000s because at the time, premium balls were liquid center wound, and they weren't as durable, and they just didn't -- they didn't hold up over time the way Pro V1 does. So really the Pro V1 changed. It was a bit of a paradigm shift in this space. And today, given the prominence of Pro V1 and really all Titleist golf balls within the preowned segment, it made sense for us to give this some serious consideration, which we did. And what we see is a vertical -- a compelling vertical-integration opportunity, which allows us to be involved -- as we mentioned, it allows us to be involved in the full life cycle and really in profit stream of Titleist golf balls, which we think is important. PG is the leader in this space. So this is where we really started our search in earnest. We do think users of new golf balls are separate and distinct from users of pre-owned golf balls, and we don't believe this changes with our entry into this space, and we do acknowledge this is a unique opportunity for Acushnet in terms of how we think about M&A. But ultimately, we see it as a real good fit, and we're confident in our ability to generate great returns for our shareholders. So that's, sort of, the broad strokes on how we think about this.

To the earlier question about "Do you see it as a stream for new product?" Absolutely not. We have a -- we see it as a stream for some of the used product we have in our organization that we generate through the course of the years through all our testing, but we don't see it as a stream for new or prior-generation product.

[Anthony Takazawa, executive]

Let me just add something, what might be an obvious question for everyone else or you as well. We won't be disclosing the annual revenues until 2019, and we get our plans altogether, but it's going to have a fairly negligible impact on Q4, about $3 million or so in sales, but very little net income, if any, because it's, seasonally, in the ball business, it's the lowest quarter. So I just wanted to get that commentary out.

[William Burke, executive]

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

[Operator]

And your last question comes from George Kelly from Imperial Capital.

[George Kelly, analyst]

First of all, curious about -- with Pro V1 coming in the not-too-distant future, having AVX out this year, what's your feeling towards, sort of, the historical pattern we've seen in Pro V1 launch years? Do you think it'll be any different in 2019?

[William Burke, executive]

George, good question. Really, we don't. We're on our customary and proven introduction path with Pro V1, in fact, in an hour or so, it makes its tour debut in Las Vegas. It just hit the conforming list earlier this week.

We don't see it affecting how we launch Pro V1 around the world. That's a global launch that'll play out in the first quarter. Time will tell in -- as we work our way through the year, how they live together and coexist together, but we do have -- at this point, we do have a good 6 months under our belt to understand how Pro V1 and AVX are different and to understand their consumers and how they affect one another. So as it relates to the Pro V1 launch, fair to say, we're anticipating that, that'll play out very similar to prior Pro V1 launches in the first quarter of 2019.

[George Kelly, analyst]

Okay. And then, just one additional question for me. Balance sheet is in great shape. It sounds like you're comfortable with the targets for your -- this year-end. What are your -- can you remind us what your key priorities are for free cash flow? And should we expect to see heavier, kind of -- there's been a few acquisitions done in the last 12 to 18 months, is that something that we should continue to expect going forward?

[Anthony Takazawa, executive]

Yes. George, our first -- we're very pleased with the way we've been able to quickly reduce our leverage over the past 2 years since we've went public. And we're going to continue and invest in our core businesses. We still see white space there. So innovation, CapEx and otherwise. We're going to be on the lookout for M&A, but as you know right now, we're very selective in our opportunities, but when and where they present themselves, we'll certainly look to pursue them. But as you know cash generation is really the cornerstone of our -- a cornerstone of our investment story, so we're going to continue to look to the dividend as a means of returning capital to shareholders. And with us hitting this 2x leverage, share repurchases will likely become a more prominent consideration in our tool set.

[David Maher, executive]

George, thanks. And thanks, everybody. We appreciate your calling in today and your time this morning, and as importantly, your ongoing efforts to understand the opportunity that is the Acushnet company. We look forward to connecting with you early next year. And hope you have a great finish to the year. Thank you.

[Operator]

This concludes today's conference call, and you may now disconnect.