Q2 2019 Earnings Call
At this time I'd like to welcome everyone to the action that.
Holdings, Corp. Q2, 2019 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a quick a question and answer session.
If youd like to ask a question. During this time simply press star and the number one on your telephone keypad, if youd like to withdraw your question press the pound Keith Thank you.
Tony Checkers.
Vice President of Investor Relations you May begin your conference.
Thank you.
Good morning, and welcome to a cushion at holdings call to discuss the financial results for Q2, and the first half of 29 team.
This morning, we're joined by a Christian <unk>, President and CEO , David Moore, David will provide his observations regarding the first half the cadence and timing of our business. This year and how we're positioned for the rest of 2019.
Next to Krishna CFO , Tom for Chico, we'll spend some time discussing the overall financial results for Q2, and the first half and our outlook for the rest of the year.
We will be making forward looking statements on the call. Today. These forward looking statements are based on a Christian its 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 references 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's my pleasure to introduce <unk> CEO , David Moore David.
Thanks, Tony and good morning, everyone. We appreciate your time today.
I am pleased to report a cushion its first half results and provide an overview of our various business segments.
There were many highlights during the period, including healthy gains in golf balls skier and for choice, all driven by exciting new product introductions and each of these categories.
New probably one and probably one ex golf balls are off to a great start and meeting the high expectations of the game's best players and golfers across the globe.
Our teams commitment to the golf ball product development process, and the continuing advancement of timeless precision golf ball manufacturing capabilities.
Have enabled us to provide golfers with the games to highest performing highest quality and most consistent golf balls.
Well club sales are off for the period due mainly to the cadence of product launches. We are pleased with the overall health and market momentum of our titles club business affirming the strong acceptance of T.S. metals with the game's best players title. Its drivers have wanted to count on the P.J. toward in 28 of the past 35 events dating back to last fall.
New products are also generating momentum in both care, Unfortunately Gulf where.
Our new line of cyclists golf bags and travel gear have been well received and four choices in the midst of a great run of new footwear launches with Fury Flex and Super light models, complementing strong apparel and GAAP results.
Our recently acquired links in King's business, while relatively small continues to develop nicely with first half sales more than doubling versus last year.
We are enthused about the long term outlook for this business as we continue to organize the structure and supply chain for long term and sustainable growth.
And then choose the newest addition to the coast and family.
We have acquired a branded company that shares our focus on providing dedicated athletes with performance products unmatched in innovation quality and excellence.
I am now compelled to thank my fellow associates, and our value trade partners for their many contributions to a cushion its first half success.
This team effort enables us to meet and exceed the equipment and service expectations of dedicated golfers around the world.
And I'm pleased to announce that our board of directors approved the payout earlier today of a cash dividend of 14 cents per share.
With an aggregate value of $10.6 million.
Christian its dividend is an important element of our financial model and we have now returned almost $110 million to shareholders since initiating it in 2017.
[laughter] earlier this year, we also began executing our share repurchase program as another method of returning capital to shareholders and this past quarter, we returned $6 million to shareholders through this program.
Both of these actions are signs of the boards confidence and of course, its ability to execute over the long term.
And our commitment to providing a course to shareholders with an attractive long term total return investment opportunity.
Now turning to page five.
And our topline results for the half and corner.
First half sales of $896 million were down, 2.6% and close to flat in constant currency.
Balls gear and foot show each posted gains for the period, well golf club sales were down as planned due to the timing of product launches within our two year product lifecycle strategy.
Adjusted EBITDA for the first six months was $140 million.
For the second quarter acoustic posted sales of $462 million down 3.3% versus last year and down 1.8% in constant currency adjusted EBITDA for the quarter was $76 million.
Well there were several positives in the first half, which I will address shortly these second quarter results fell short of our expectations due primarily to a supply chain shortfall affecting the global launch of our Phantom ex putter line and softer than anticipated club and footwear replenishment in Japan.
As trade partners prepare for upcoming new product launches.
Now turning to page six we will take a closer look at a cushion its four business segments with results presented in constant currency.
Starting with golf balls, Titus ball sales increased 8% year to date, and we're up almost 3% in the second quarter.
This growth includes the integration MPG golf and has been led by the success of our new probably one and probably onex models.
Across the worldwide tours tide lifts as having another great year with a 73% both account representing more than eight times the usage of our nearest competitor.
Probably one golf balls have notched 126 wins, including 10 major championships one by eight different players on the mens and womens professional tours.
And in addition to the success of probably one we're also encouraged with how AB ex has fit into the title is golf ball product line and is strengthening our share position in the premium high performance segment of the golf ball category.
Now moving to golf clubs timeless clubs achieve first half sales of $198 million, a 14% decline versus last year.
Sales for the second quarter up 7%.
Timeless clubs have performed better than expected in the U.S. However, as noted we encountered headwinds in Japan.
TS drivers and fairways are performing very well and what has been a competitive and crowded new driver market.
She is on T.S. is off to a great start at the professional level and this acceptance and endorsement at the top of the pyramid is a long term positive for the title of Striver franchise.
And we have recently added two new models to the T. as franchise with the T. S. Four designed for high speed golfers seeking lower spend and the TS won an ultra lightweight driver optimized for moderate swing speed players.
We see these new models is great complements to our inline tier two and tier three options and their addition provides are fitting partners with more options to help dedicated golfers improve and play their best golf.
[noise] irons and watches are healthy however down versus prior year launches Potter's as previously mentioned were impacted by the Phantom ex supply shortfall, while the remainder of the Cameron line has performed well aided by strong demand for select models, which were used to win three of four men's major championships. This year.
Looking ahead titles clubs is a full calendar of new product launches, which we expect to drive nice growth over the period and especially in the third quarter.
Starting with Irons, we will soon debut the new title is T series of Irons are lead model. The new T. 100 was the most played model on tour. This past week and we are well positioned for a successful global launch of three T series Irons in two new forged our models in the coming weeks.
T 100 is our modern classic a true forged players cavity construction defined by its soft feel and classic profile and utilizing advanced tungsten and our thinnest face technology to optimize performance.
New T 200, our players distance iron and T 300, or players improvement iron we both utilize newly developed Max impact technology to generate faster ball speeds and improve launch conditions without sacrificing the preferred field, which is so important to our target audience.
In addition to this full lineup of title. The Sirens. We're also set to launch new tier two and tier three hybrids and our new U 500 series have utility irons.
Initial feedback on each of these products has been very positive.
As you might expect our club team has been busy preparing for what will be an exciting second half for the title is golf club business.
Next moving to slide seven entitle us gear.
Gears up 5% for the year with nice nice gains in golf bags clubs and travel.
Highlights for the period include continued expansion of our custom business in the U.S. and double digit growth in Korea were originally designed product line has been very well received.
We see the gear opportunity is one of continuous improvement to both our design capabilities and supply chain and we continue to fortify our customization offerings to take advantage and lead growing consumer demand for personalized skier products.
And now moving to our final segment the number one shoe in glove in golf for Chile, which is up 1% so far this year and down 2% in the quarter.
Starting with footwear F G Flex Fury and Super lights have all had very strong introductions, particularly in the U.S.
These new offerings are hitting the mark with golf are seeking athletic styling with the comfort and golf specific performance features that are inherent in every pair of fluctuate golf shoes, we produce.
The foot Troy team has done a nice job, creating and satisfying demand for limited edition golf footwear, helping to drive interest and energy around the brand.
At this year's PJ championship at Bethpage, Black we introduced an F. G Flex blackout edition, which was announced by social media and sold out in less than a day.
These limited additions are a great way to keep golfers engaged with and connected to fluctuate.
And the entire foot Troy apparel line mens womens and outerwear have all performed well this year as our spring collections have experienced strong sell in and sell through.
The F. Jay apparel business continues to grow and is firmly positioned as one of the leading apparel and outerwear franchises and all of golf.
Looking to the rest of the year. There are several exciting new shoe models that will be introduced in the second half.
Continuing the momentum of the new FJ Flex we are set to introduce a waterproof version called the flex XP along with a new womens version of this popular shoe model.
We also plan to rollout new models of the popular FJ contour and adding to a full fall launch calendar, we introduce FJ hydro in it and ultra lightweight line of waterproof performance outerwear.
Like title is golf clubs, we believe FJ is well positioned for a strong back half of the year.
Now moving to slide eight I will share with you some of the background behind our recent acquisition of shoes.
[noise] the defining characteristics of the shoes brand or its focus on the dedicated athletes and unwavering passion for product performance and quality excellence.
She was founders Olympic champion lets say shoes, and DD cereno from the beginning have you'd wearables as a performance enhancing equipment category and the company has never deviated from the belief that outerwear must enhance an athlete's ability to excel.
These attributes are the most appealing to a cushion it and are the foundation of our future vision for shoes.
The global golf Outerwear apparel market is roughly $4 billion at retail comprised of some 300 different and mostly regional brands.
This acquisition strengthens a cushion its position in the sizable product category as we now approach this market opportunity with three distinct and complementary brands and product strategies.
Fortunately is our largest and most globally oriented performance position line.
Tightest apparel is a super premium performance play focused on the Korean and Japanese golf market opportunities.
And now shoes presents us with a range of technical performance opportunities across geographies style preferences and premium price points.
[noise] juices origin is in technical premium ski where where they have earned a loyal following with discerning skiers, who place a premium on performance and styling shoes is a proven leader in fabric innovation and the company has done a great job translating ski technologies and materials innovation into the Gulf wearable space for perspective, the shoe ski business represents about 60% of the total with golf and lifestyle accounting for the balance.
Shoes will be led by talented and experienced company veterans Brook, Mckenzie and Nieco Cereno, who are actively engaged in the integration process as we establish an operating model to fortify the brand's entrepreneurial spirit and category focus invite increased investment in product innovation and design.
And take advantage of a cushion its global reach and scale. We think shoes is a great fit for a cushion it and look forward to helping the shoes team further develop this compelling growth opportunity.
And now turning to page nine.
We are pleased with our results for the first half of 2019 and given some of the external headwinds I've mentioned.
Our team is doing a good job to capitalize on the upside opportunities in the second half and I'm confident in our ability to execute our balance of your priorities.
We havent, especially full launch calendar during the back half of the year, which is consistent with how our business typically flows and odd numbered years.
And as is often the case this has generated heighten enthusiasm with golfers our trade partners and our associates.
As always we appreciate your continued interest in a cushion it.
And I will now pass it over to Tom to provide an overview of our financial performance and full year outlook.
Thanks, David and good morning to everyone on the call.
I would like to Echo David's comments and thank all of our associates and trade partners for their tremendous effort and dedication so far this year.
I will begin by discussing our results for the first six months of 2019.
As you know, we manage the business with our annual goals to your product Lifecycles and long term strategy in mind.
This approach has served us well over the years as our business results can be impacted in the short term by many factors, including the timing of product launches and the weather.
As a result, we look at our results on a cumulative basis to better measure our progress as we move through the year.
For the first six months consolidated net sales were 896 million down 2.6% from last year.
But essentially flat year over year in constant currency.
We showed solid growth in total this golf balls gear and Fortunately.
We also had higher sales volumes in Ts drivers and fairways, but this was offset by the expected decline in irons and wedges.
Gross profit was $468 million down 10 million versus last year.
This decline was primarily due to lower gross profit in title is clubs as a result of the lower sales volumes in irons and wedges.
First half gross margins were 52.3% up 30 basis points versus last year.
SG and <unk> expense was $326 million up less than 1% over the first six months of 2018.
Research and development expense was $26 million or about 3% of net sales.
Operating income was $113 million down 14 million from 2018, resulting primarily from the impact of sales and gross profits on the planned decline in total was clubs.
Interest expense was 10 million up slightly from last year.
Our effective tax rate was 27.6% compared to 28.7% last year.
The decrease is primarily due to a discrete tax benefit recognized in the first quarter of 2019.
We continue to expect our 2019 effective tax rate to be around 28%.
Year to date net income attributable to a cushion in holdings was $73 million down about 8 million from last year, primarily due to the decline in income from operations.
Adjusted EBITDA for the six months was $140 million down $17 million from the same period last year.
To assist in your review of the calculation of adjusted EBITDA. We have provided a reconciliation in our earnings release as well as in the slide presentation.
Now I will review, our second quarter results.
Consolidated net sales in the quarter were 462 million down 3.3% year over year and down less than 1% in constant currency.
The decline is the result of lower sales volumes in irons and wedges.
As well as the supply chain delays that impacted the launch of the Phantom ex putters.
Slower footwear sales in Japan.
In the transition and how we go to market in Korea that we have previously mentioned.
This decline more than offset continued solid performance from Ts metals, and the new probably one and probably onex.
Q2, gross profit was 246 million down 5 million on the lower sales volumes golf clubs.
Gross margin was 53.2% up 70 basis points from Q2 2018.
Looking at operating expenses SGN AE of $170 million was down $2 million and R&D expense of $13 million was flat with last year.
Operating income in the quarter was 61 million.
This was lower than the same quarter last year due to the combination of lower sales and gross profit that I just mentioned.
Q2 interest expense was $5 million flat with last year.
Our Q2 effective tax rate was 29.4%, which is in line with our expected run rate.
For the quarter net income attributable to a cushion holdings was 39 million.
In Q2, adjusted EBITDA was 76 million down 4 million.
From the prior year period due to lower income from operations.
Now looking to the balance sheet.
We had about $43 million of cash on hand at June Thirtyth 2019.
Total debt outstanding as of June Thirtyth was approximately $407 million.
And our leverage ratio remains right at about 2.0 X.
Year to date Capex was $11 million.
While a good portion of the spend is maintenance related as we previously stated we have also been making investments in innovation technology and infrastructure.
For 2019, we expect capex to be about $36 million.
Shifting now to capital allocation.
We are focused on being good stewards of shareholder capital and as always we carefully evaluate the various opportunities we have to both invest in the business and to return capital to shareholders.
We continue to invest in the business with a focus on product innovation golfer connection and operational efficiency.
The new probably one and probably one ex golf balls and the TS metals are very good examples of the success of these investments.
We also continue to look for targeted M&A opportunities such as the acquisition of shoes earlier in July .
We believe that investments like this help support our long term strategies and will drive growth and a favorable return.
Cash dividends continue to be an important element of our capital allocation strategy.
As David mentioned this morning, our board of directors declared a cash dividend of approximately 10.6 million to be returned to shareholders.
And finally, we returned over $6 million to shareholders during the quarter via our share repurchase program.
We have $43.8 million remaining under our current authorization.
Which we intend to fully utilized in 2019.
Overall, we believe that our multifaceted capital allocation strategy is successful in both driving our business forward and providing a good long term total return to shareholders.
Moving to our outlook, while our business in the second quarter was impacted by the factors, David and I mentioned.
We are excited about the state of our business and are optimistic about the second half.
Our revised full year outlook reflects these factors.
While our back half forecast remains largely unchanged as we look to benefit from several exciting new product introductions, including the new T series Irons, Ts hybrids and new series utility clubs later, this month and robust rollout of new products coming from foot Joy.
Including.
The women's flux shoe.
The waterproof flex XP.
And the new versions of contour.
In addition, our second half results will also include the shoes business that we acquired on July Threerd.
Netting out the various puts and takes we are reaffirming our expectations for 2019.
We continue to expect our 2019 reported sales to be in the range of $1.655 billion to $1.685 billion.
Up 2.2% at the midpoint.
On a constant currency basis, we expect reported sales to grow in the range of 2.8% to 4.7%.
And adjusted EBITDA is expected to be in the range of 235 million to $245 million up about 4% at the midpoint of the range.
In summary, the dedicated golfer continues to be an attractive and resilient customer and we are a clear market leader.
Our new products are performing well and we are confident in the upcoming launches we're planning in the second half.
The team and our partners are working to execute our plan and we are very optimistic about the balance of the year.
With that I will now turn the call over to Tony for Q and a.
Thanks, Tom our Silicon can we now open up the lines for questions. Thanks.
Your first question comes from the line of Steven Zaccone from JP Morgan Your line is open.
Great. Good morning, guys. Thanks for taking my question I wanted to start off even with a higher level of focus on the U.S. Gulf market. So we've seen some challenging weather year to date, but the markets held up pretty nicely.
When you survey the market and talk industry participants what do you attribute the strength to when do you think this can continue into the back half of the year and I just have a follow up after that.
Yeah sure good good morning, Steve So when we look at the U.S. market. The first the first vital sign would be to assess.
Rounds in weather, which which.
Off 1% year to date, but it but it really is a tale of two extremes.
You look at some markets in the west down double digits and you look at some markets in the east up double digits. So it it's commentary on the volatility of of the weather Weve experienced in the first half, but as we look at our business globally.
The U.S. has certainly been one of the highlights in many cases.
Beating our expectations and posting growth in all categories with the exception of clubs, which which was really more a function of.
Product lifecycle, but but we're seeing when when weather's when weather's decent.
We're seeing the market perform pretty well and if there is one market where most pleased with it would be it would be the U.S. market. This year.
Offsetting that is the rounds decline is what we've seen around the world.
There's been a nice rebound around the world from a from around supply and participation standpoint in most major markets outside the U.S. have posted <unk> posted rounds in cases, but increases, but as we look at that our global picture that.
The market that that's got the most buoyancy and vibrancy is clearly Steve the U.S. market.
Great and then if we I mean, if we could shift to Japan like what's really driving the weakness there and do you expect that country to return to growth in the second half of the year.
Yeah, you know Japan.
And we called it out on on on what happened in the quarter again I'll take a look at a couple of vital signs in Japan, and it's not up it's not a single narrative story rounds are up by our estimate 3% for the half a bounce from last year, where they had some tough weather.
As we look at the ball category, we see the ball categories grown really commensurate with rounds.
Our business is growing similarly gear and apparel roughly running flat as I did note in my earlier remarks.
We saw a club in footwear inventories in particular running heavy not not your star products, but also the entire market and we think this was was probably a result from some soft early season sell through.
Clearly we would expect this is tied to some some of the broader economic pressures, we're facing in Japan.
As we as we look at the back half, we think our field inventories are in pretty good shape and we do expect.
We've got a wide range of product launches, but we expect them to go off very much as planned in Japan, and we're excited about what that will mean for the market in the back half of the year.
[noise] I I think Steve commentary also warranted on on just the broader Japan golf market. It is the most inventory dependent market in the world given its given it would it would be best described as a big box approach.
Other markets tend to be more fitting dependent and this this in many cases results and.
More or less in field inventory and in turn less risk. So I think the commentary on Japan. We had a couple of we had a couple of areas where inventory got got heavier than we'd like we dealt with that in the quarter.
But again, Conversely rounds are up a bit golf ball sell through.
In in positive ground so.
Again, there is not one single narrative, but we're certainly watching the market we're watching the consumer in that market and we're being we're being cautious with our outlook for Japan, but again that said, what we can see in front of us in the next in the next quarter to two.
Look solid really predicated on what we've what we've talked about earlier and that is a robust launch calendar.
Thanks, Steve Okay, well thanks, Jason.
Your next question comes from.
Your next question comes from the line of Dave King from Roth Capital Partners. Your line is open.
Thanks, Good morning, guys.
Wanted to I guess first first.
Yeah morning, first can you talk about the supply chain issues that that.
Weighed on Santa Max.
What sort of impacted that does that have on overall revenue and then to what extent of those issues been resolved.
Well you can imagine ask Scott to Cameron Putters are made of.
Have incredibly high quality materials and they tend to be made with that what can best be described as a complicated manufacturing process.
We frankly got behind on it we weren't getting the supply at the rate we anticipated we've resolved that issue we work with a couple of suppliers one of them got behind we've resolved that issue. So so it did affect.
It did affect the second quarter, we do think some of that's going to going to be made up in the third quarter, but not all of it if you Miss you Miss a you know a four to six to eight week window in Q2.
It's it's hard if not impossible to make that up but we did we were only able to get back on track from a supply and production standpoint, with Phantom Putters, and we'll see some of that uptick in in the third quarter.
But really as a function of.
Our ability to manufacture and supply the heads.
On again, what is a what is a fairly complicated production process.
Okay. That's good color and then.
Switching gears, how should we be thinking about sizing up the the T series launch versus some of your prior launches.
Just how much of the benefit do you think should come up fronts.
So that the gardens or more fittings, driven typically at least in markets outside of Japan, and then any notable changes to how you're thinking about messaging it versus abbey.
Yes, so so T. A couple of things as you as you compare maybe to HP a couple of years ago. The launches happening about a month earlier. Okay. We were late September . We're now we're now happening later this month.
There is a price increase on the T series line, which is which is a of notes.
It's it's an entirely new lineup and anytime we go to the lengths of changing and introducing a new a new model name for instance, the move from mines 17 to Ts and drivers was born out of the product was distinctly different.
The same thought process apply to your and irons, we've had a great run but they Pete.
We've got a new technology called mix impact, which we think is.
Significant enough to change the the presentation and branding of our AARP of Orion franchise. So the T series is quite different from its predecessor.
And then and then further to that you may recall, you may recall, Dave We did we did bolster our advertising in the back half of the year in 2017 in supportive of a p., we've done that again and supportive of the T series.
Both because we think the opportunity is terrific and notably also anytime you you come out with a new model. Amy you have to you have to have typically invest more to up to get the to get the message out so.
Again couple of couple of changes from what we did a couple of years ago, but most notably new technology and an increased level of S&P that youre going to see here in the back half of the year.
Okay, great. Thanks, David.
Yeah. Thanks, Thanks, David next question please.
Your next question comes from the line of Daniel Emerald from Stephens, Inc. Your line is open.
Hey, good morning, guys. Thanks for taking my question.
One follow up on an earlier comment on international markets outside of Japan. It did look like Europe .
Under some pressure kind of down mid single constant currency can you talk about what you're seeing in that market is it particular countries that are weaker than others and what are you thinking about in your guidance for the back half of the year.
So.
Hey, Dan This is Tom how are you.
<unk>.
So you know overall, the EMEA market performed pretty well you know there was some some some early weather benefits that sort of normalized.
But [noise] excuse me, but you know the performance was in line or perhaps a little ahead of our expectations in in terms of guidance. You know, we've we've not really change our expectations for for the European market for the second half and so we we expect growth there.
But we haven't really changed our expectations in the second half.
Then one final point I'll make we had a fairly conservative approach with regards to notably the UK you may recall, they had a a retailer and that was that was struggling and we were uncertain about where that would go that that's that's stabilized. So we had a fairly conservative approach that market get off to a really fast start.
As it relates to as it relates to weather and rounds of play so again conservative expectations and and we're actually running a little bit ahead of those those conservative expectations, notably in the UK, but but across across EMEA, you can imagine with with the pending uncertainty around Brexit, we're we're rightfully being cautious about that market.
Got it that's helpful and I did have a quick follow up on the golf Ball segment. You noted in the release avionics sales softened given they launched last year can you update us on how you're thinking about the timing of that line should we think about that being a two year cycle that.
On on previous years, how should we think about that going forward Oh, yeah, yes.
Well I'm not finalized, but but close enough to give you some some <unk>.
Insights as to how were thinking about it. So we launched we launched Adx last year or in the us in the second quarter and outside the U.S. in the third quarter.
Our expectations are that we will think that up likely with probably one and in launched excuse me, we'll take that up next year. So you'll see something in the middle of next year. So the middle of an even even numbered year, but but those those aren't yet finalized in terms of how we're thinking about that market opportunity, but but we do have some intention at this point of launching a new way the ex in 2020.
All right got it thanks, guys best of luck.
Thanks, Daniel next question please.
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley . Your line is open.
Hi, Good morning, this is add on for Kimberly.
We had a uh huh.
Couple of questions.
We had a couple of questions just recognizing that it's early do you have any color just on the announcement regarding list for tariffs and how you think that impacts the business.
Sure Ed.
I can take that one.
Before getting into list for.
Perhaps I'll.
Give me give you a little bit of a reminder of our overall situation as it relates to tariffs across our various businesses.
Sophie starting with golf balls, if you think about our manufacturing footprint. There golf balls are manufactured here in new Bedford in the U.S. and in Thailand.
So there is really no exposure on tariffs in the golf ball area.
If you think about our clubs business you know we have very limited exposure to some materials that are sourced in China.
But all of our clubs that are sold in the U.S. market are assembled here, so again very little impact.
Tariffs in the U.S. and in the clubs business.
Within our gear business, we've mentioned before that you know, our headwear and golf and travel bags have some exposure to China.
With about half of our headwear and a third of our bags imported into the U.S. from China.
And then finally in foot Joy, our footwear business, our golf clubs are manufactured in Thailand. So there's no exposure there.
And about 25% of our apparel is sourced from China imported to the U.S. and about 50% of our footwear.
Is manufactured in China and imported to the U.S.
So.
Thinking about the impact on the gear business.
Those tariffs, which are currently set at 25%.
You know were raised to 25%.
Mid year.
At a point, where we'd we'd had most of our receipts come in.
And so between that and a number of mitigation actions. We've taken we were able to really minimize the impact of of those tariffs on 2019.
So the impact on the gear business not material.
And we believe that.
The mitigation actions, we've put into place.
Will you know significantly contain any potential impacts.
In 2020 based on what we know at the moment.
So now the list for getting back to list for you know that that list for is really where the joy footwear and apparel come in.
You know we are we are pretty late in the year at this point by the tariffs by the time that the tariffs get enacted those are at the 10% level at this point.
And we think that absent any mitigating actions the impact could be about $2 million for the balance of the year.
We are looking at mitigating actions, though and expect that may be less than that.
If you think about 2020.
You know absent a absent any mitigation actions for the full year the impact could be in the $7 million to $10 million range, but again we are.
We are currently evaluating and putting in place mitigating actions and would expect those numbers to be much lower than that $7 million to $10 million range.
Of course this is a very fluid real time situation and we're going to continue to monitor it and react accordingly.
Hey, Thank you Thats very helpful.
And then a quick follow up question just regarding guidance is it fair to assume that.
The second half sales will still be a little more third quarter weighted just regarding the launch cadence and is that also a good way to think about the adjusted EBITDA as well.
Yes, and yes, the definitely more than 50%.
In the third quarter in both the both sales and EBITDA and you know on the on the back of the the product launches that we've we've discussed.
Thanks again.
Thanks next question please.
Our next question comes from the line of Michael Sports from Suntrust. Your line is open.
Hey, good morning, guys.
Just wanted to talk about those shoes acquisition.
Just maybe a little more color on the strategic rationale. There is this a distribution play is it a product development play and then.
I Didnt hear it maybe I missed that I apologize did you size up how large that business is because as I look at your full year guidance you did maintain your constant currency growth in your revenue outlooks, but I'm trying to get a sense of just how much shares is adding to that.
Okay, Michael I'll certainly jump on the first part you know we first we first.
Encountered shoes about two or three years ago, we started.
We started seeing it gain traction early first with our target golfer audience and then we saw more and more of the brand as it quickly gained distribution across several prominent clubs in the U.S. They they really did a great job.
Proving their their product merits to to our target an equally did a great job with with what we would call very very high quality distribution.
And that's really where the interest was founded going back a few years early on.
It became evident that the shoes golf and ski businesses were very much synergistic in that much of the shoe success in golf outerwear.
Originated from their technical expertise and capabilities and ski where so from that point forward realize that ski was an important component of the golf opportunity and it made it made no sense really to pursue golf without ski.
And as we as we got deeper into the research process of ski we saw brand with with a great reputation.
Seemed to be making the finest technical performance outerwear and they're in their space.
And importantly, their approach to ski was near identical to how we think about the golf opportunity the cushion at which really starts.
With a focus on the most dedicated participants.
Add to this some very talented leaders on the ski side and we shouldn't became very comfortable that ski would be a good fit within the cushion that operating model. So as you think about the shoes acquisition golf will still represent.
All in golf business inclusive of shoes will still represent 99% of.
Close to 99% of cushion as revenues and.
Skewed the shoe ski business. It remains a very important small in the total of a cushion it but a very important segment for us, which we intend to continue to operate with excellence, we do see.
And this is this is that the unlock for US we do see faster growth in golf and ski which is really consistent with the size of the market opportunity with the addressable golf opportunity being some three times the size of the addressable ski opportunity.
And as to size of the business.
We're not for competitive reasons, we're not disclosing the size of it.
However, it did comment earlier that it's it's it's 60% ski and 40% golf.
And maybe I can add a couple of data points for you as well.
You know as the ski business today represents the larger portion of their business. The results are skewed towards the second half.
As we talked about guidance.
If you think about the puts and takes we certainly took into account.
You know the shortfall in the first half.
Which we sized it about $15 million to $20 million as we thought about being.
Near flat is what we what we were expecting so perhaps $15 million to $20 million of impact there.
Weve, our second half guidance remains largely intact.
And then we added shoes and so when you when you take those three pieces, we get back to our our original guidance. So that should give you a little bit of a sense of how much.
Of the guidance is related to shoes.
Okay, Great and then just a just a follow up and I think you answered some of that but it just in terms of the full year guide in this might be simplistic, but yes, I think if we go back to the second half of 17, you saw EBITDA growth of 10, 11% that was the last time you had a large club irons launch this year your guidance implies about 30% to 40% growth Im just trying to bridge, the two and understand a little better how.
You know, how we should see that type of growth in the back half of this year.
Sure. So we are we are certainly anticipating some fairly sizeable growth in the second half.
As I said previously.
Skewed towards Q3, you know that the operating margin EBITDA growth is really coming from both.
Leverage in growth in gross margins and in.
In operating.
Expense leverage.
On the gross margin side the launches are oversized until when when you have a when you have a a sizable launch you have a pretty sizable increase in your gross margin and with with this with the oversize. The nature of these launches were having perhaps a larger.
Excuse me impact on the gross margin line.
And then as you think about you know SG, an a and operating expense leverage while we're certainly we'll be increasing spending.
In the second half to support all of these launches.
The increase in.
Advertising promotion and the SGN a line in the SGN a line in total is certainly.
Much smaller than the growth that we're expecting in sales so.
So again leverage on both the gross margin element and the operating expense element.
Driving that growth of operating margins and ultimately EBITDA margins.
So Michael I'll add just to two or three five points on that.
As I think about your COVID-19 versus 17 whats different 19 versus 17 also again made the comment earlier irons are going to go a month earlier, which is an extra month of fitting and sell through Thats a positive. We've got a we've got a price bump on T series.
We do have new metals in the line, we have T. S. One and Ts four that werent that weren't part of the story a couple of years ago for Troy has a more expansive launch calendar than it did in 2017. So so weve got up we've got a handful of events that that that prompts you to hopefully understand how.
Q3, 19 in particular is going to is going to differ from Q3 and 17.
Okay wonderful thank you.
Thanks, Michael next question please.
Your next question comes from the line of Joe.
The Belo from Raymond James Your line is open.
Hey, guys. Good morning, first question I apologize if I missed that what drove the gross margin improvement this quarter year over year. It seems like it's a little surprising given.
The sales shortfall in supply chain issue that you guys talked about.
Yes so.
Gross profit dollars were down as a result of the lower volumes.
But as we think about gross margins, they're the largest contributors to the growth in gross margins in the quarter were.
Coming from higher Asps, both in our primarily in our for Joy apparel business and also in clubs.
When on a quarter over quarter basis.
Got it okay, just sitting here at the club.
It sounds like pretty second half weighted obviously with what the timing of the launch in RV and the delays in pottery.
Thank you.
Club sales last year.
So while we we certainly don't guide on a category by category basis are.
Our our hope and our.
In a in an odd numbered year is to get clubs to a place where they are flat. So that is certainly where we are.
We're working towards it Joe just in this we've talked about this before the couple of year cadence with clubs. We tend to we tend to have a greater opportunity for growth and even numbered years based on product launch timing.
And then the intent is to is to get close to flat.
In the following year and that's how we think about the business from a long term I will add we had we had a quite a robust club business last year, which which makes getting back back to flat more challenging, but but but that is how we think about the business long term.
Okay, great. Thank you.
Mm.
Your next question comes from the line of Casey Alexander from Compass Point. Your line is open.
Hi couple of questions first of all.
I didn't quite hear the number how much is left on the share repurchase program.
So hey, Casey its Tom how are you.
Good thanks so.
So on the share repurchase program.
There's there's sort of two answers to that question.
So we purchased 6.2.
Million dollars worth of shares during the quarter.
On a 50 million dollar authorization, so that leaves you with the $43.8 million remaining.
But keep in mind.
It would and we filed an 8-K during the quarter.
Indicating that we wouldn't be buying an equal number of shares.
From our majority shareholder.
As we buy in the open market. So we really have.
You know less than $19 million worth of shares to buy in the open market and we will buy an equal number from our majority shareholder.
Okay. So.
All right, but it will still totaled 43.8 for the remainder of the year, assuming you finish it up for the year as we calculate our share counts.
That that is correct.
Okay.
Secondly, do you have a number for the overall forex impact on the quarter.
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We do on a on a topline basis it was.
Well done well they look forward here.
I know it was about 24 and a half million for the first half.
On the top line and it was about $12 million in the second quarter on the top line.
Okay.
Yeah. So my last question is.
First of all I can't even imagine what the competitive reason for not giving US an idea of what type of revenues shifts can do now that the acquisition is complete.
But if I understood. Your comments is it fair to say that had you not done the shoes acquisition. It is likely that you would have had to take your guidance for the full year down.
We would have considered that yes Casey.
We would have to make our our second quarter.
Results, which would not have been made up for the full year. So we certainly would have been considering.
Targeting the low end of the existing range.
Okay, and the acquisition actually closed did it close in the second quarter, the third quarter Im just trying to gauge whether or not the balance sheet impact of the acquisition has shown up yet.
It has not the acquisition closed on July 3rd So would it be a Q3 event.
That's when we'll see the impact on the balance sheet for what you spent for the acquisition.
That's correct.
So.
Sure and we just did you pay for it out of cash or or did you take down additional debt for it or how did you balance paying for the acquisition.
So you will you will see this this afternoon when we file our K.
That we paid in the high Twentys.
For the acquisition.
And we Didnt take on additional debt per se, we funded that out of working capital.
We do have a little bit of a balance on our revolving credit line. So but the balance is not out of the ordinary for this time of year so with.
If you think about cash between the balance sheet and the line of credit being fungible. It we didnt take on any long term debt for it.
Okay, Great. That's helpful. Thank you very much for taking my questions.
You're welcome. Thanks Casey next question please.
Your next question comes from the line of Bret Andres from Keybanc. Your line is open.
Hey, good morning, I just had one quick question following up on tariff, so the $7 million to $10 million impact.
For a list for.
That you mentioned for 2020, I guess, that's the starting point.
But you also mentioned mitigation, so I guess can you.
Extrapolate a little bit more on that does that involve you moving the supply chain to that involve you taking price.
Vendor negotiations, just kind of how much flexibility or or visibility you have in that.
So yeah I would say, it's all three of those are under consideration.
And you know.
We're really we're really not sizing how much lower than the range.
We may be at this point I think it's it there are too many moving parts and it's too volatile situation, but we are confident it would be.
Much lower than that range and we really just wanted to give you all a sense of what the.
What the what the high end of the range would be just so you got a sense that.
How you could size the potential but.
We have a number of mitigation opportunities.
Across all three of those possibilities you mentioned and we're actively working those.
Thank you.
Thanks, Brett we have time for one more question and then I'll have a couple of concluding comments from David.
Your last question comes from the line of Tim Conder from Wells Fargo Securities. Your line is open.
Thank you.
Gentlemen, just wanted to circle back on your on the tariffs too.
He said that given the timing of when you brought things in for a related to the non list for items, there's minimal impact obviously on this year, but.
Just wanted to revisit the you've got mitigating factors, but any color or how should we frame that looking into 2020.
And then are you seeing from the consumer.
In the UK or continent, and Germany in particular, any any worrisome signs at this point given ongoing deterioration in industrial production in Germany and.
Again, you said you had been cautious in the UK on a year to date basis.
Sure I'll take the the tariff question first.
So the non list for terrorists really relate to our gear business as I mentioned.
You know that business is heavy on the sourcing side.
And we've already implemented a number of mitigating actions.
Around our supply chain and around.
In negotiations with suppliers so.
We really don't see a material impact to our results in 2020 at this point in those areas gift and assuming no other changes to the tariffs.
Okay.
And Tim Your second question really specific to Germany, as we look at that region.
Performing largely as we expected if not slightly better so I don't have any.
I don't have any key data points that suggest unusual concerns coming out of that market.
Okay, and then lastly, gentlemen from me.
And I apologize if if if I Miss this portion but.
Your commentary on the competitive driver market.
Just in general how do you feel about your and just the industry channel inventories at this point on drivers specifically.
Yes, overall I'll break it up into a couple of parts overall, I mentioned, Japan, Japan heavy.
Runs heavy all the time and we saw it runs a little bit heavier than normal in the second quarter. This year.
Oh that was that that was part of our miss in the quarter in the U.S. inventories a I would say are in line and we're I'll remind you Tim we're we're fortunate in many regards that that so much of what we do is custom fit so in markets that are fitting centric which tend to be.
Across Europe , the U.S., Australia, New Zealand in markets that are custom fitting biased for us.
We've got a real built in governor in terms of our inventories. So they tend to stay in a nice tight range again, that's not the case in a market like Japan, but but broader inventories.
For this time of year I would say there they are within the within the range of what we would typically see but but given given there were so many launches in the early part of the year, they're probably at the high end of that range.
Okay. Thank you gentlemen for the color appreciate it.
Okay. Thanks, Tim.
And we appreciate all your time this morning, and your ongoing interest in a cushion that we've obviously got to.
A lot of work to do here at the acoustic company over the next 90 days and we look forward to getting back to you. After the close of the quarter have a great close the summer and thanks again.
This concludes today's conference call you may now disconnect.
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