Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the a cushion at Holdings Corp.
For Q2 thousand 19 earnings conference call at this time, all participants are in listen only mode. After the speakers presentation they'll be a question answer session to ask a question during the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would I like to turn the conference over to.
As far as religion, I Didnt, Vice President of DNA and Investor Relations. Please go ahead.
Good morning, everyone. Thank you for joining us today for a cushion at holdings fourth quarter and full year 2019 earnings conference call.
Joining me this morning, our David Moore, our President and Chief Executive Officer, and Tom, but Chico, our Chief Financial Officer.
Before I turn the call over to David I would like to remind everyone that we will be making forward looking statements on the call. Today. These forward looking statements are based on a cushion at its current expectations and are subject to uncertainty and changes in circumstances actual results may differ materially from these expectations for <unk>.
The factors that could cause actual results to differ please see today's press release, the slides that accompany our presentation and 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 and today's press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission.
Please also note that when referring to segment and regional year on year sale increases and decreases we're referring to sales in constant currency and please also note that when referring to year to date or full year results are comparisons we're referring to the 12 month period ended December 31st 2019 is it.
Comparable 12 month period with that I'll turn the call over to David.
Thank you Sandra and good morning, everyone. We appreciate your time today.
On this morning's call, we will present, our fourth quarter and full year results for 2019.
I want to cushion its strategic priorities for 2020 and discuss our current view of how we see the corona virus impacting us over the coming months.
And I will begin by stating that 2019 was another strong year for cushioning defined by successful new product introductions.
An organization wide commitment to operational excellence.
The continued strengthening of our balance sheet.
And it increased return of capital to shareholders.
As importantly, we continue to making investments across our business as we seek to fortify or competitive advantages and strengthen our prospects for future growth.
No getting right to our results please turn to slide four.
For the fourth quarter cushion of revenues increased 7.3% or almost 8% on constant currency.
Adjusted EBITDA for the quarter was $44 million, representing a 23% increase for the period.
And as I will talk about in a minute. This growth was led by double digit gains in golf balls, with probably one having and especially strong quarter and holiday season.
As well is healthy gains posted by fluctuate Gulf where.
For the full year sales of $1.68 billion were up almost 3% and 5% on constant currency.
Full year adjusted EBITDA.
Increased 4% to just over $240 million aided by an expansion in gross margin to 51.9%.
And as Tom will discuss in more detail, we returned over $70 million to shareholders through our dividend and share repurchase programs in 2019, representing an 84% increase versus 2018.
I am, especially appreciative of the good work by my fellow cushion at associates as their efforts and commitment to excellence or the foundation of our achievements and ongoing success.
I must also think are valued trade partners for their important support throughout the year.
Now turning to slide five we will look at the performance of our core business segments, starting with golf balls. The headline for 2019 was the strength and success of new probably one and probing onex, which helped to deliver an 11% increase for the quarter and full year gain of 7%.
But just about every measure 2019 was a terrific year for the title is golf ball business.
The success begins with our leading investment in golf ball, R&D and our team's unwavering commitment to precision golf ball manufacturing.
These competitive advantages or affirmed across golf pyramid of influence with both professionals and amateurs alike.
In fact in 2019 more top 100 Grand golfers played a probably one or probably one X golf ball.
Then in any other years since the first probably one was launched in the fall of 2000.
We believe this is testimony to the performance and quality superiority of new probably one and the unmatched falls the ball consistency. The title list has long been known for.
As we've said before a challenge in golf ball manufacturing lies not only in the ability to make one great golf ball, but also in the ability to make millions of golf balls that meet the highest standards for quality and consistency.
And rounding out our golf ball performance for the year, we achieved gains and all global markets led by strong growth in the U.S. in Japan.
And we're also pleased with the fourth quarter test market of our experimental multi layer thermoplastic urethane or TP, you covered golf ball.
Test marketed as he XP Dash show one this product represents a multiyear investment to build upon or golf ball development and manufacturing capabilities.
Which we believe will help to open up new performance and construction opportunities in the years ahead.
We look forward to a late summer introduction of this new golf ball and we'll share products and launch details with you on our next call.
We see this construction and cover technology strengthening our product line outside of probably one any of the X.
In the 25 to $40 price range, which represents roughly 40% of the market opportunity.
Now moving to clubs or title is golf club business had a strong year in 2019.
Sales off 2% for the quarter and 1% for the full year.
As you know the majority of our new product launch activity takes place in EBIT numbered years and as such we're pleased with these results and the overall strength and momentum of the title is club business.
The timeless Ts driver launched in late 2018 has quickly made its mark and it was the number one driver on the PJ tour in 2019.
Tightest Irons, we're number one across the us and European PA tours invoking wedges, we're number one across all worldwide tours.
Not to be out done Scotty Cameron Putters also had a great year with our Cameron Newport model putter used by the winners of the Masters PG Championship and US Open Championships.
Timeless clubs benefited from the successful second half launch of New T series Irons, and we expect this momentum to carry into the busy spring club sitting season.
Now turning to slide six entitle us gear sales were up 7% for the quarter. However posted a 5% increase for the full year led by gains in all product categories clubs specs headwear and travel.
Your growth was fueled by the launch of our successful new links Master series bag and titles clubs strengthen their position as the definitive number two glove and golf behind only sister brand foot choice, which is long held the lead position in this category.
We are committed to the ongoing development of our gear business by investing in product creation and supply chain excellence.
We expect this will lead to continued product advancements and drive future growth and profitability in this category.
And foot choice the number one shoe and glove and golf finished the year strong with a 7% increase in the quarter and 3% gain for the year.
New flex and Fury model set the pace for footwear in 2019, new performance outerwear propelled the double digit increase in our global apparel business.
Fortunately it was especially strong in the U.S. in Korea in 2019.
And we believe is poised for a fast start in 2020 led by new footwear launches in a steady stream of new apparel and outerwear offerings throughout the year.
I'll now turn to slide seven for regional view of our business.
The picture painted here is healthy gains in the U.S. EMEA in Korea, which were aided by favorable weather and increased rounds of play in each of these markets.
In the us and EMEA our growth for the quarter was led by golf balls and choose while Korea's growth for the period comes mainly from foot choice and title as clubs.
Japan as you see was off 23% in the quarter and down 9% for the year.
This quarterly decline is mainly due to calendarization as we comped against last year's Ts driver launch, which occurred in Q4 in Japan and Q3 in all other markets.
Golf ball sales were strong in Japan, and posted double digit increase for the year. However, this was not enough to offset declines in golf clubs and foot choice.
We expect our business in Japan to stabilize in 2020 has channel inventories are improved and this will benefit our early season launch plans.
Now looking ahead to 2020 as outlined on slide eight.
As you would expect this outlook balances are in turtle enthusiasm over what we can control with caution in some degree of ins of uncertainty about the Corona virus and how it may impact our business.
We believe the golf industry is structurally healthy with rounds of play consumer spending and channel inventories all contributing to its overall stability.
The professional game is dynamic and captivating with talented athletes, taking the game to new levels and we see the tours new media rights programs as affirmation of the games popularity and growing entertainment value.
Each of a cushion its businesses carry strong momentum into the new year, and we are poised to launch a wide range of exciting new products across all categories throughout 2020.
While even years, such as 2020 present challenging golf ball comps against odd year, probably one launches.
We plan to continue to build golf ball momentum with the launches of new Adx tour soft and velocity in the first quarter and our new multi layer TP you model scheduled for global release in late summer.
Timeless Golf club introductions are weighted towards even numbered years and that is certainly the case in 2020, as we will launch new low key estimate wedges and Carmen special select putters in Q1.
Both of these franchises are in great shape and early response to these new products has been excellent.
Later this summer we plan to add to our momentum with the launch of new Ts metals scheduled for September.
Titles gear, who will continue to build upon our successful links master bag line by expanding the popular catty collection, and adding a new series a classic canvas model.
And for choice has a full pipeline of new products queued up for launch in 2020 with a heightened focus on footwear and continued enhancements to our apparel line.
New product sell carbon and Torics models highlight a busy first half for foot choice and will help to strengthen their longstanding leadership position as the number one shoe in golf.
We expect our newest business shoes to continue its rapid progress within golf and benefit from the launch of our new Gemini Rainwear technology.
Gemini as it reversible rain jacket, which provides golfers with the option for both warm and cold weather protection.
And as a Great example of the technical innovation, which use is capable of.
Theres a lot of talent within the shoes organization, we're pleased with how the team is positioning the business for the future and the investments, we're making to prepare shoes for long term growth.
The Acosta team is excited about the year ahead and has done a great job planning for what will be in especially busy first half.
At the same time, we of course share concerns about the Corona virus Global health crisis, and we offer our thoughts and support to all who have been affected by this outbreak.
As you would expect the situation is rapidly changing and we are updating our internal projections weekly.
As we regularly access new information around our supply chain and consumer demand.
Our latest projections, which assume existing disruptions continue through the second quarter.
Reflect the Corona virus is likely to have an estimated 40 million dollar impact on revenues and 18 million dollar effect on adjusted EBITDA.
Most of this impact is traceable to the slowing retail traffic and demand we have seen unfold in the past seven to 10 days in Korea, where concerns have rapidly escalated.
Greater China and southeast Asia have been impacted similarly in Japan to a lesser extent.
And while our supply chain has held up well during the past month, our reduction does reflect some level of availability related disruption to our apparel gear and club businesses to date Theres been no effect on our golf ball production capabilities.
As our company owned golf ball facilities are based in the us in Thailand.
And our dependence on China sourced raw materials is both limited and manageable.
While hedrick headwinds are stronger than they have been in several years. The a cushion to team is resilient and focused on executing our 2020 plans while at the same time, staying agile and responsive to the changing inputs associated with the Corona virus.
And as we navigate these near term uncertainties are long term outlook remains positive affirming this outlook and as a sign of a cushion its financial strength and the boards confidence in our ability to execute over the long term I am pleased to announce that the a cushion at board approved an increase to our quarterly dividend by 11%.
To 15.5 cents per share or 62 cents per year.
Additionally, the board has recently approved an increase to our share repurchase authorization in support of our efforts to return capital to shareholders and augment our dividend strategy.
As we look to 2020 and beyond we expect new product innovation will remain the engine revenue growth and share gains with the games dedicated golfer.
These golfers represent 70% of the industry's purchasing power remain and attractive demographic and are the focal point of a cushion its product development and go to market strategies.
Each of our business segments is prepared for a full calendar of new product introductions, which bring enthusiasm to both golfers and our trade partners.
We are investing both in our associates and in technologies to advance the performance and benefits of our products, while pursuing efficiencies throughout our organization as we seek to achieve operating leverage over the long term.
In closing the Acosta team has a proven track record of executing and we're confident in our ability to continue delivering favorable returns to our shareholders. I. Appreciate your time and attention. This morning, and will now pass the call over to Tom who will provide an overview of our financial performance and outlook.
Thanks, David and good morning, everyone.
I would also like to thank our associates and trade partners for their contributions to what was a strong performance in 2019.
Starting with our Q4 results on slide 10.
Consolidated net sales in the quarter were 368 million up 7% year over year end up 8% and constant currency driven primarily by increased sales of probing, one and probably one X golf balls and the impact of shoes, which we acquired in July of 2019.
Q4, gross profit was 187 million up 12 million and gross margin was 50.7% down 20 basis points from the prior year.
Tariffs negatively impacted our Q4 gross margins by 40 basis points.
SGN, a was 143 million up 3 million or 2%.
Incremental SGN expense from shoes was partially offset by lower advertising and promotion and share based compensation expense.
Income from operations in the quarter was 29 million up 9 million or 45%.
Q4 interest expense was 5 million and our Q4 effective tax rate was 18.2%.
Net income attributable to a cushion at holdings was $18 million and adjusted EBITDA was 44 million up $8 million from the prior year period.
There is a reconciliation of net income to adjusted EBITDA for Q4, and full year 2019 in our earnings release as well as in the slide presentation.
Moving to our results for the full year 2019 consolidated net sales were 1.7 billion up 3% from last year and up 5% in constant currency.
This increase was driven primarily by sales of new probably one and probably onex golf balls.
Growth in foot Joy apparel and in all products with entitle us Gulf here.
Sales were also positively impacted by the sales of shoes, and PG golf, which we acquired in the fourth quarter of 2018.
Gross profit was 872 million up $30 million from 2018.
The growth in gross profit came from all segments, except for golf clubs, which was expected in an odd numbered year.
Gross margin for the full year was 51.9% up 30 basis points versus 2018.
SGN, a expense was 628 million up $16 million or 3%.
This increase was primarily due to higher selling expenses across all segments.
Acquisition related transaction fees higher advertising and promotion spend and the impact of shoes.
The increase was partially offset by a decrease in share based compensation.
Full year income from operations was 186 million up $13 million from 2018.
Interest expense was 20 million and our full year effective tax rate was 24.6 compared to 31.4 in 2018.
We expect our 2020 effective tax rate to be about 26%.
2019, net income attributable to a cushion at holdings was 121 million up 21 million.
And adjusted EBITDA finished at $240 million up 9 million or 4% from last year.
Moving to slide 11, I will discuss some key balance sheet and cash flow items.
At the end of 2019, we had $32 million of unrestricted cash on hand.
Total debt outstanding was approximately 404 million and we had 339 million available borrowings under our revolving credit facility.
As a reminder, in December we amended and restated our senior secured credit facility.
Our new credit facility provides for a $350 million term loan and a 400 million dollar revolving line of credit both of which mature in December of 2024.
The terms of our new credit facility are generally more favorable when compared to our previous credit facility.
Consolidated accounts receivable at the end of 2019 was $215 million compared to 186 million at the end of 2018.
This increase was primarily attributable to significantly higher second half sales compared to 2018.
The accounts receivable of shoes.
And the timing of collections at the ended the year.
Our days sales outstanding were 60 days, which are flat compared to 2018.
Consolidated inventories were 398 million at the end of the year compared to 361 million last year, an increase of 10%.
The increase was primarily driven by higher ball and club inventories to support the up coming product launches and the addition of shoes.
We expect our inventory levels to come down in 2020 compared to 2019.
Overall, we are comfortable with the quality of our accounts receivable and the amount and composition of our inventory.
Cash flow from operations for 2019 was 134 million compared to 164 million in 2018.
The decrease is primarily from higher accounts receivable and inventory at the end of 2019 that I just discussed.
We expect both accounts receivable and inventory levels to come down in 2020 and that cash flow from operations will return to more normal levels.
Looking to capital expenditures, we spent 33 million in 2019, which was lower than our original 36 million dollar estimate.
And is about flat to 2018.
The largest area of spending in 2019 was for golf ball manufacturing equipment and to maintain an upgrade our facilities and infrastructure.
For 2020, we expect capital spending to be about 38 million as some project shifted into 2020.
Turning to slide 12, our capital allocation priorities have not changed.
We continue to make investments in the business with a focus on product innovation call for connection and operational efficiency.
And we will continue to be opportunistic with selective acquisitions that aligned with our focus on premium performance products that appeal to dedicated golfers.
We believe that such investments support our long term strategies and drive growth at a favorable return.
We also remain focused on being responsible stewards of shareholder capital and expect to not only invest in the business, but also to return capital to shareholders.
We paid a 14 cents per share dividend during the fourth quarter of 2019.
For a total cash outflow of $10.5 million.
For the full year total dividends paid were 43 million.
As David mentioned, our board of directors today declared a cash dividend of 15 and a half cents per share payable on March 27th to shareholders of record on March 13th 2020.
This represents an 11% increase in our dividend and than expected Q1 cash outflow of approximately 11 and a half million.
And finally during the fourth quarter, we repurchased approximately 708000 shares for a total of 18.9 million, including a 172000 shares on the open market and 536000 shares from our majority shareholder.
This increase the amount of share repurchases in 2019 to 1.128 million shares or $29.4 million.
Our board of directors recently increased our share repurchase authorization by $50 million to a total of 100 million.
We expect to purchase up to $50 million worth of shares in 2020.
We continue to believe our capital allocation strategy is a foundational element of a cushion its value proposition, which we believe creates a compelling long term total return for our shareholders.
Moving to our outlook for 2020 on slide 13, there are two factors that are impacting our outlook that you need to be aware of.
As David mentioned, we have made our best estimate of the impact of the Corona virus on our 2020 expected results and accordingly have adjusted our 2020 sales outlook down by $40 million, which is mostly from declining retail demand in Asia.
We have also decreased our adjusted EBITDA outlook down by a corresponding 18 million.
And we have lowered our 2020 adjusted EBITDA outlook by 5 million for the impact of unmitigated tariffs.
Taking these factors into consideration we expect full year 2020 reported consolidated net sales will be in the range of 1.665 billion to $1.705 billion.
On a constant currency basis, we expect a range of net sales of down 0.5% to up 1.9% compared to 2019.
And we expect our adjusted EBITDA for 2020 to be 220 million to $240 million.
If you add back the 18 million dollar impact of the Corona virus and the 5 million dollar impact of tariffs the midpoint of our expected adjusted EBITDA range would be 253 million up 5.4% versus 2019.
Of course this guidance has been significantly influenced by our estimate of the impact of the Corona virus on our business, which will depend heavily on the severity and duration of the outbreak.
We will be closely monitoring this rapidly changing situation and adjusting our estimates as required and we'll provide you with our updated view during our Q1 earnings call in early May.
As is generally the case, our product launch cadence will impact the quarterly progression of our business during the year.
With 2020 being an even numbered year, we have several major product launches in the first half, including new avionics tour soft and velocity golf balls.
Woking estimate wedges and Cameron special select partners.
The first half will also benefit from the continued momentum of the title as T series Irons, which we launched in the third quarter of 2019.
In the second half, we will launch new Ts metals, and our new thermoplastic polyurethane covered balls.
Taking into account the size and timing of these launches and our current estimate of the impact of the Corona virus. We expect sales in the first half of 2020 to be approximately 52% to 53% of the full year.
And we expect sales in the second quarter to be slightly larger than the first quarter.
We expect adjusted EBITDA to follow a similar pattern. However, we expect second quarter EBITDA to be an even larger percentage of the first half than sales.
In closing 2019 was another solid year for a cushion it.
Despite some challenges from the current a virus and tariffs we are confident in our ability to meet our full year 2020 financial goals and we believe we are well positioned to execute our long term strategies and to deliver a solid long term total return for our shareholders.
With that I will now turn the call over to Sondra for Q anyway.
Thanks, Tom Operator could we now open up the lines for questions. As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we can pipe compiler culinary roster first question comes from Daniel Umbro with Stephens, Inc.
Hey, good morning, guys. Thanks for taking the questions.
Wondering on the golf ball category really impressive momentum there in the fourth quarter North of 10% growth can you talk about how much of that with maybe driven by company specific drivers holiday promotion.
The broader industry pickup we saw on rounds played during the fourth quarter.
Yes, Daniel good morning, really all of the above and you look at rounds play environment around the world. It was it was a year, where we saw rounds increases.
In every market and rarely his mother nature that kinder consistent.
Part two is as I said in my remarks.
We had very strong year with probably one from start to finish in it. It's finished as strong as as it started.
And then the retail season played out a little bit better than we expected without any unusual promotional or or or discount activity. So I think it I think it is largely a function of healthy rounds environment.
Strength and success and momentum behind probably one.
And a and a nice retail season, but it is it is consistent with the performance we saw with probably one throughout throughout the entire year.
But that's helpful and follow up on the Gulf both out of the how maybe wondering union Green deprive you guys launch.
The golf ball brand, they would kind of love to hear your thoughts that new part of the market or how that fits into the acute portfolio strategy going out yeah, I wouldn't I wouldn't call. It a DTC Adidas Si play it if you look back in in our history 1980, 40 years ago, we launched at Pinnacle golf ball and it was this.
Turning to compete in the price segment and serve value conscious golfers.
Pinnacle did a nice job complementing title us to positioning and it allowed us to meet meet evolving needs of golfers, what I have it without having to stretch the brand.
Into products and price points that that would ultimately diminish or premium positioning of title list.
I think fair to think of Union Green is a modern version of this strategy. It's designed to appeal to consumers, who purchased golf balls in the performance in price segments of the market really under $30 retail they do tend to be less traditional about golf and the brand reflects this.
And the like Pinnacle over the past four years Union Green will have a unique identity and reason for being and we think complements title as position in the market.
Hey over over time. This this also helps provide operational in overhead efficiencies and again to my point about distribution, it's being test pilot at just under 100 golf shops in the U.S. and of course is available online. So we don't we don't we don't package this as as a data.
Play as much as a an interesting opportunity for an emerging segment of the Gulf golf ball marketplace.
Really helpful and last one for me and I'll hop back in the Q.
Obviously, I think last week.
Dave You know your report you respond to the US use report came out I know historically Wally the company had been vocal in the case for unification, but curious how conversations with you as June or they are going and.
Any kind of updated thoughts you grew about how you think that fully though for the industry.
Yeah, well I'll start by saying, we have had and continue to have ongoing and positive and productive discussions with the U.S.G. and ARNA and have a great respect for what they're attempting to do we responded because we felt a couple of themes needed to be in certain.
Into discussion.
And notably that innovation and I will add regulated equipment innovation.
Has been a critically important contributor to the games success and growth over the last.
10, 20 5000 years.
And this much but must not be over undervalued or overlooked as we look ahead and we also believe.
But it was important to note that the ability to combine distance with accuracy.
And all other components for the game required to shoot low scores is very much a special and rare skill that requires great athleticism in talent and this is one of the reasons why the professional game is so dynamic and entertaining.
We do believe and we said this in our response, we do believe that existing equipment regulations are effectively governing the game and we made the point.
That average driving distance on the PJ tour has decreased in six of the past 13 season. We believe this is.
An indicator or affirmation that regulations implemented many at regulations implemented over the last 20 years or in fact working.
And finally, Dennis to your point about unification, who we believe unification one set of rules.
Followed by all players pros and amateurs alike is part of the games Magic and Conversely, we believe that breaking apart. This rules unification would complicate the game and take away from its global understanding consistency and and appeal.
At this point to say if or how this may impact the businesses really too soon and I would just say regardless of circumstances or outcome. We we see our mission not changing of that is to be the performance and quality leader in every category in which we in which we compete and again this does.
Some change but.
As you would imagine and as outlined in their report.
They have announced an intention to work closely with stakeholders of which manufactures are certainly an important part of that over the next year to address their observations and findings. So at this point, we're really in a phase of a year of discussions and inputs around.
Around.
What the next steps might be and at this point.
I think I think too soon to speculate on what those steps could be.
Perfect really helpful. Thanks.
Thanks, Daniel Thank you. Daniel next question. Please next question comes from Kimberly Greenberger with Morgan Stanley.
Thanks. This is have you got on Kimberly on for Kimberly Greenberger.
Thanks for taking my question.
So my first question would be.
In terms of the terrorists when should we expect the impact is Harris to hit the income statement.
The impact of tariffs are already hitting the income statement. So we we certainly had an impact of tariffs in Q4.
Primarily in our gear business and in our clubs business and.
The tariffs are fully in place and we expect them to continue to hit those businesses and to hit our foot Joy footwear business in the areas of.
Primarily footwear and apparel.
Right away, so, they're they're already impacting us now.
Great. Thank you.
And in terms of that stock buybacks are you planning to buy back to slow 50 million authorization and tiny tiny like you did in 2019.
So in in 2019, we purchased roughly $30 million worth a shares on our original $50 million authorization.
Coming out of 19.
There was $20 million left in that authorization as as David and I. Both mentioned our board recently increased that authorization to $100 million.
And so for the for the total year, we anticipate purchasing up to an additional 50.
Great. Thank you so much.
Well.
Next question.
Next question comes next ill.
Joe Altobello with Raymond James.
Hey, Good morning, guys. This is Adam on for Joe I appreciate guys given some color on current of Iris.
If I could I was curious and obviously there is quite dynamic.
But I was curious on what you guys were thinking in terms of anticipation on when it may peak or maybe a range of potential outcomes if at all possible.
And then also you guys gave some good color on on margin in terms of tariffs being a 40 basis point headwind in the quarter, but any additional color on the puts and takes there will be very helpful. Thank you.
Okay. Thanks, Adam I'll answer the first and Tom will Tom will hit your second question.
You know obviously, we've we.
Like everybody is paying close attention to what's happening to our businesses and it is changing quite rapidly.
Weeks ago. This was initially a supply chain disruption and admittedly for cushion that.
We saw this has a relatively manageable situation is we're in a we're in pretty good shape one to support our various early season launches in two if you look at our business.
I'll falls as I said in my earlier remarks.
Little to no impact here, we have limited exposure to China sourced raw materials, we make most of our product in the United States and the balance in Thailand. So we felt the largest segment of our business was was was in some regards isolated from supply chain disruptions. There was a modest impact on clubs and really.
Our disruption focused on apparel gear and footwear and we thought this would this this would impact late second quarter early third quarter.
What we've seen happening in terms of our supply chain is as.
Our partners of have have ramped up production, we've seen information flow give us even more confidence that that theres some stability around the supply chain and while you. While you took an initial head from a loss anywhere from two to four weeks of production output.
In the last week or two that stabilized as I noted earlier, the more meaningful impact that we're seeing really started seven to 10 days ago.
When we saw when we saw a slowdown in in Korea.
And in Southeast Asia in terms of retail activity and this this is really the driver in our assumptions are.
Ah that this this condition, we've sort of run it out through the end of the second quarter.
But we've made no assumptions or projections beyond that this this is simply to dynamic and I think at this point.
Would be premature to speculate beyond that point in time, so that make the key inputs really are.
We've made some adjustment adjustments to our sales forecast again, notably Korea, followed by Southeast Asia, China and to a lesser extent Japan.
In terms of a Q4 gross margins they were down 20 basis points compared to the prior year.
That was really driven by a decline in volume in golf clubs in Japan.
Which was comping against a metals launching in Q4 of 2018 in Japan.
So that was certainly a significant contributor.
In addition, the tariff impact that you mentioned negatively impacted us by about 40 basis points.
Golf ball margins were seasonably normal, but up from 2018.
And for joint margins were up nicely year over year, primarily on strong results in the U.S. end in Korea.
Thanks, Thats Super helpful color and then if I could ask one follow up here and I understand if you guys don't want to provide quantification on it but you mentioned comping. Some some challenges in Japan for this quarter, but you discussed expecting some potential stabilization next year.
Anyway, we can kind of quantify what that stabilization would entail for Japan.
Yeah, I think the main the conditions of 29 team for the most part carry over into 2020 I think the big difference will see is.
As regard to channel inventories.
Japan typically runs heavy and that's the case again this year and that's just a function of their their retail dynamic.
But we did see an outsized impact last year to footwear.
Because because channel inventories of footwear were especially heavy and the byproduct of that is we saw a disproportionate mix.
In the close out or discounted off price part of the lines. So.
In terms of job, Japan, we felt again similar conditions to last year, but with a better inventory profile.
Obviously that changes a bit as we as we layer in some of the impacts of Corona virus.
Perfect. Thanks for the health guys.
Hey, Thanks. Thank you Adam operator, I think we have time for one more question. Please.
Question from Tim Conder with Wells Fargo Securities. Please go ahead.
Hey, it's actually Joe Lackey on for Tim.
I just wanted to just quickly follow up on on the Corona virus. Thank you for the clarity there.
You know it sounds like you see more impact obviously in Korea, not as much in Japan.
And obviously understand like the you know the retail traffic issues. I mean have you seen sales maybe shift any other channels like E commerce and or sides I mean, maybe too early to tell.
And in or have there been any broader impacts on rounds played obviously with the caveat that the off season, you might not have.
That visibility quite yet.
And then.
Along the lines of the supply chain impacts of the current the current a virus you have a lot riding on the momentum.
You know for your your clubs business and you've got the metals launch coming in September.
Has there been any sort of.
Sort of supply chain issues related to clubs, specifically or has that pretty much cleared through at this point. Thanks.
Thanks, Joe So.
You're right. It is very early we're working off and the shift of retail and consumer behavior in Korea release played out in the last seven to 10 days.
We have seen some themes and trends, but but frankly, we're we're being cautious about projecting these out to too far.
Rounds of play you saw some cancellations retail activity certainly slowed.
One of the one of the data points that we're hearing is that.
The broader mall Department store traffic is down more so than the single store traffic again, that's a dataset of one week.
We've seen rounds canceled the sense and sentiment is that that that Gulf will golf will endure in stabilizes.
As it is a.
A healthy activity healthy outdoor activity.
But but frankly too early to speculate as to where that where that goes.
As to as to supply chain.
Again based on what we know today, we feel pretty good about our are back half of the year launches and.
Again that all subject to change, but we're watching it very carefully very closely as I mentioned a moment ago.
Our first our first half.
Largely at least through through April and into May or launch product plans were in good shape that inventories in is in the various regions. So we're in good shape, there, but but in terms of your question about clubs again, what we know today is gives us a pretty good amount of confidence.
Again, we're going to have to update you in the cup coming weeks.
And then.
Just one question on balls, specifically I know you don't give guidance by by segment, but maybe if you could talk about the puts and takes there obviously you're lapping the probing one launch, but you've got a lot of other launches coming.
Yes, I was curious if like you got adx using green and other launches later on in the year could potentially those new launches more than offset the.
Second year of the probe you won and maybe you could we expect.
You know into best case scenario, some modest growth for that segment.
Yes, so ill start with with with just the.
The size and significance of a probably one launch in an odd year and our years are not like for like we do a lot of we do a lot of meaningful ER launch activity in even years, which you will see and that's that's tourists often velocity early that's adx early in this this new product late in the.
Sure.
But but I will say that that we look at the ball category and realize it's not a.
Over a couple of years, we take a step forward, but it's not an even it's not an even cadence event. Obviously, we do everything we can to build and manage momentum. We're excited about the year ahead.
But but short of giving guidance on the ball segment.
We're going to leave it at that.
And just say Hey, we're excited about the momentum, we're creating with our products outside of probably one but we also acknowledge.
Probably one years are tough to come up against number one and we had we had a really strong probably one year in 2019, which we also think continues into 2020, we just don't benefit from some of the meaningful launch in pipeline activities that happened in the first quarter of last year.
Great. Thanks to the details.
Well. Thank you everybody. We certainly appreciate your time at attention this morning, and a and look forward to.
Getting back to you in a couple of months with with our update so thanks again.
This concludes today's conference call you may now disconnect.
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