Acushnet Holdings Corp. (NYSE:GOLF) Q4 2017 Earnings Conference Call March 7, 2018 8:30 AM ET
Anthony Takazawa - Vice President, Investor Relations
David Maher - President and Chief Executive Officer
William Burke - Executive Vice President, Chief Financial Officer and Treasurer
Randy Connick - Jeffries
Julie Kim - Nomura Securities
Kimberly Greenberger - Morgan Stanley
Michael Schwartz - SunTrust Robinson Humphrey
David King - ROTH Capital Partners, LLC
Andrew Burns - D.A. Davidson & Co.
Timothy Conder - Wells Fargo Securities
Casey Alexander - Compass Point Research & Trading LLC
Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2017 Acushnet Holdings Corp., Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Tony Takazawa, you may begin you conference.
Thank you. Good morning and welcome to Acushnet Holdings call to discuss our financial results for the fourth quarter and full-year 2017. This morning we are joined by Acushnet’s President and CEO, David Maher. David will provide commentary on the conditions in the golf industry and discuss the performance of our business across our segments and geographies. Next, Acushnet’s CFO, Bill Burke, will spend some time discussing our overall financial results for the quarter and full-year.
We will be making forward-looking statements on the call today. These forward-looking statements are based on Acushnet's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see our filings with the U.S. Securities and Exchange Commission.
Throughout this discussion, we will be making reference to non-GAAP financial metrics, including items such as revenues at constant currency and adjusted EBITDA. Explanations of how and why we use these metrics and reconciliations of these items to a GAAP basis can be found in the schedules in today's press release, the slides that accompany this presentation and in our filings with the U.S. Securities and Exchange Commission.
With that, it is my pleasure to introduce Acushnet’s President and CEO, David Maher. David?
Thanks Tony. Good morning, everyone, and thank you for joining us on today’s call. I am pleased to report that Acushnet had a strong fourth quarter, with each of our segments performing well as we closed the year with positive momentum heading into 2018. New product innovation is the most important catalyst to Acushnet’s long-term success and this is the lead story behind our fourth quarter performance. The strength of new products including Titleist Pro V1, and 718 AP irons, and FootJoy Pro/SL golf shoes which led our business in the quarter and throughout much of 2017.
And as we look to 2018, we expect new product innovation will once again be the driver to revenue growth and share gains with the game's dedicated golfers. Looking at our top markets, in the U.S., we see continued market stabilization. Field inventories are healthy if not lean by historical standards, and golfers continue to adapt their purchasing habits to align with what has become golf retails new normal.
In Japan and South Korea, the world's second and third largest golf markets each closed out the year with positive inertia, as both regions posted year-on-year rounds increases in 2017. The Acushnet team continued to execute on our long-term strategy and accomplished a lot in 2017. I am compelled to thank our associates and valued trade partners for their effort and terrific support throughout the year.
Affirming our commitment to our support of shareholders as we recently completed our first full-year as a public company, I am pleased to announce that Acushnet’s Board of Directors approved the payout of a quarterly cash dividend of $0.13 per share or $9.7 million in aggregate. This represents an 8% increase and is a sign of the Board's confidence in Acushnet’s ability to execute over the long-term and commitment to providing shareholders with a long-term total return investment opportunity.
Please now turn to Page 5 and our topline results for the quarter and year. Acushnet posted fourth quarter sales of $351 million, up 7% on a reported basis and up 6% on constant currency with all regions posting gains in the quarter. Growth in Titleist golf balls and gear, which increased 9% and 4%, respectively, and FootJoy which grew 15%, offset a 1% revenue decline in Titleist Golf Clubs all in constant currency.
For the full-year 2017, sales of $1.56 billion were off just under 1% and down 0.2% on constant currency. FootJoy and Titleist Gear were the top gainers in 2017. And regionally, our South Korea team led the way growing their business 11% for the year. While the first half of 2017 fell short of our expectations. Our business bounced back nicely with gains in both the third and fourth quarters as our global team generated solid momentum which would carry into 2018.
Now turning to Page 6, we'll take a closer look at Acushnet’s four business segments with results presented on constant currency. Starting with golf balls, Titleist ball sales increased 9% for the quarter and were flat for the full-year 2017. New Pro V1 and Pro V1x golfs had an especially strong quarter and performed well during the holiday season despite heavy promotional activity from all competitors in November and December.
In the quarter, we also introduced new DT Solo models and completed a valuable test market of the prototype Titleist AVX golf ball in Florida, Arizona, and California. Across the worldwide professional tours, Titleist wrapped up a terrific year with 72% of the game's best players trusting Pro V1 or Pro V1x for their success, more than six times the usage of the nearest competitor. Pro V1 and Pro V1x golf balls also notched 207 wins across the worldwide tours in 2017, more than seven times the nearest competitor with 27.
Looking ahead, while ball sales and even-numbered years tend to trail odd years which are Pro V1 launch years, we are optimistic about the trajectory of our ball business and look forward to introducing several new initiatives and new products in the coming months. First is our ongoing education and promotion in support of our Pro V1 models. We will make significant investment to protect and grow golfs leading Pro V1 franchise in 2018.
We recently launched new Titleist Tour Soft and Velocity golf balls with great success during January's PGA show. New Tour Soft is the largest in softest core we have ever incorporated and delivers long distance, [soft field], and good greenside spin and control. Titleist Velocity golf balls are also new with a softer core and improved aerodynamics for great feel and improved flight, and are now available in three new optic colors, these are white, orange, and pink.
As I mentioned, our fourth quarter testing of the Titleist AVX golf ball went very well, affirming that AVX offers golfers a new and differentiated scoring solution that is different from our Pro V1 models.
We will launch AVX in the U.S. and across most global markets late in the second quarter and based on our test results are confident that golfers seeking long distance, lower spin and the distinctive feel and durability of our cast urethane cover, will be very pleased with the distance, performance and feel of AVX. AVX will be priced position similar to our Pro V1 franchise, and while initial availability will be limited, we anticipate being able to ramp up production as the season unfolds.
Acushnet’s ability to stay out front in golf balls is rooted in our unwavering focus on delivering the very best product performance and quality. Titleist industry leading commitment to research and development, and countless hours spent working with the games best player’s drive, our innovation engine and patent development efforts, leading contributors to future success. Titleist golf ball performance quality and consistent is achieved because every Titleist golf ball is manufactured in our own plants by highly qualified Acushnet associates, long tenured golf ball manufacturing experts.
At Titleist Ball Plant 3, which is up the road in Dartmouth, Massachusetts our team average is 21 years of golf ball manufacturing expertise, which contributes to the quality and consistency in every golf ball we make. In fact, two of our associates at Ball Plant 3 have been making Titleist golf balls for the past 53 years setting a standard excellence for our entire team to follow.
I am pleased to announce that for the first time, we are offering facility tours of Titleist Ball Plant 3 to members of our team Titleist community. Early response has been excellent and we look forward to showing more golfers all that goes into making the number one ball in golf.
Now moving to Golf Clubs, Titleist Clubs posted a 1% sales decline in the fourth quarter with full-year 2017 club sales down 7%. Despite the slight fourth quarter decline, which comes against last year's 917 driver launch, the Titleist Golf Club business is building positive momentum.
You may recall clubs posted a 10% increase in the third quarter, behind the successful launch of new 718 irons and 818 hybrids. These new products sold too well in the fourth quarter and trade in golf response has been especially positive with particular excitement around the Titleist AP3 iron, our new entry into the player's distance iron category.
Looking ahead, our team is busy preparing for the upcoming launches in our Vokey wedge and Scotty Cameron putter franchises. SM7 wedges were introduced to the PGA tour this past fall and within three weeks became the number one wedge on tour, our fastest and most successful conversion to-date.
New SM7 wedges will arrive in golf shops around the world later this month. At the new line of Scotty Cameron Select putters will be available right around April 1, got a uses art and technology to refine and improve upon its timeless designs and its efforts to optimize sight, sound and soul interaction has helped make Scotty Cameron the number one punter on the PGA tour.
As the masters comes around in just four weeks and the season opens up in northern markets, Titleist fans will have a wide range of new Titleist Golf Clubs to choose from as new Titleist irons, hybrids, Vokey wedges and Cameron putters have all been updated and improved upon to help golfers play their best golf.
Next movie to Slide 7 and Titleist Gear, gear posted a 4% increase in the quarter and a 5% increase for the full-year. The theme of our gear business in 2017 was consistency as each gear category golf bags, gloves, headwear and travel, posted gains for the year.
As you may recall, we have been transitioning from third-party dependency in gear to take on greater control of product design and supply. This has been successful and our gear efforts continue to focus on fortifying our gear supply chain and design capabilities with the goal of making the games best performing highest quality gear products. Looking to 2018, we will build on this momentum with a wide assortment of new products in each of our gear categories.
Now moving to our final segment FootJoy, the number one shoe and glove in golf, which posted a 15% sales increase in the fourth quarter, while full-year sales came in 2% ahead of 2017, new product innovation, performance, comfort, and style, represent the core of FootJoy’s identity and recent success.
Fourth quarter gains were driven by Pro SL, which continue to be quite strong across all markets in the recently introduced DNA Helix, which also ramped up well during the quarter. FootJoy’s fall apparel collection and new LTS performance outerwear also posted healthy gains in the quarter.
While on the surface, a 2% sales increase in 2017 may seem modest, it does not fully reflect FootJoy’s product and brand energy. The shoe category was hit hard early in the year as a result of reduced store counts and as a result endured a necessary inventory contraction throughout 2017, mostly reflecting the reduction of off-price inventory from what was excess retail capacity.
Looking to 2018, FootJoy will follow-up on the success of Pro SL, the number one spike with shoe and glove by adding new and updated styles to this popular line. And our team recently launched the premium Tour-S golf shoe, which represents one of FootJoy’s most significant product development efforts.
Tour-S pushes the limits of performance, platform stability, lightweight comfort, and modern waterproof styling. Early adoption around the worldwide tours has been strong and we recently debuted a fun new ad campaign featuring Adam Scott, Rafa Cabrera Bello, Kevin Kisner, and Andrew 'Beef' Johnston to help convey the many features and benefits of Tour-S.
And finally, we are excited about the recent introduction of FootJoy’s 1857 collection of handcrafted leather footwear and luxury apparel. The FootJoy brand name was born in 1923 in Brockton, Massachusetts by a business, which was founded in 1857, plus the naming which takes FootJoy back to the essence of its earliest days.
While the 1857 collection will not be a sizable business for FootJoy, it represents an important and classic product offering for the games most dedicated and discerning golfers and their preferred golf shops. Over time, we see the 1857 line up helping to bolster the entire FootJoy brand.
Now looking at our business regionally on Slide 8. U.S. sales for the fourth quarter increased 3% and we were off 2% for the full-year 2017. Our U.S. team achieved solid results in the second half as fourth quarter growth followed a solid performance in the third quarter. We like our position in the U.S. market heading into 2018 and are optimistic that the U.S. retail channel is in the best shape it has been in for some time.
Looking outside the U.S., EMEA had a strong quarter with sales up 10% to finish the year up 1%. Japan started the year slowly, but experienced steady improvement as weather, rounds and retail activity picked up as the year progressed. Acushnet sales were up 10% for the quarter and down 5% for the full-year.
And South Korea remains strong and our team continues to execute their very sound strategies. Fourth quarter sales grew 9%, while full-year growth came in plus 11%. Rounds of play in Korea were robust in 2017, up 5% on the year.
Now on Slide 9, I am pleased to provide some background on our recent purchase of Links & Kings, which was completed in January. Adam Heindorff, founded Links & Kings 2010 and has quickly made his mark as one of the top craftsman in the area of golf specific premium leather goods. Links & Kings is known for using the highest grade leathers, find craftsmanship, and commitment to quality and has deservedly earned a strong following among dedicated golfers.
Adam has signed a long-term agreement and will serve as the CEO for Links & Kings. We see opportunity to share Acushnet’s expertise and more effectively manage backroom functions of the business in turn freeing up Adam to devote more of his time to product creation and brand development. Similar to our 1857 line, Links & Kings is not presently a large business, however, given it’s following with dedicated golfers. It is a great fit for Acushnet and brings real strategic value to our portfolio.
Now turning to Page 10 and our industry outlook for 2018. We continue to be optimistic about the structural improvements that have taken place in the U.S. market over the past few years. This rationalization on the supply side, while painful to go through is a long-term positive for the golf industry. The on-course channel and today's golf specialty retailers are healthy having benefited from the displays Golfsmith volume from last year. This dynamic is a long-term positive for golfers and the U.S. retail landscape.
EMEA has been steady throughout the Brexit transition, Japan enters 2018 with modest momentum and is stable. Long-term, we see the Japan market continuing to move down the path of customization. And the Korean golf market remains vibrant with participation and retail activity both strong.
Acushnet’s focus is on the games dedicated golfer representing 15% of the golfer base, but responsible for 70% of the purchasing power. The dedicated golfer remains an attractive market opportunity fueled by their desire for quality and performance and ongoing commitment to the products and services that will help them improve and play their best golf. Each of Acushnet's business segments is structured to fuel product innovation and our launch calendar is full with new product introductions which bring enthusiasm to golfers, our trade partners, and our associates.
In 2018, we will increase our capital investment in innovation, technology, and automation to advance the performance of our products and improve efficiencies. And we continue to evolve and refine our selling and marketing spends and we will ramp up advertising where necessary to drive improved golfer awareness, education, and demand. The Acushnet team is optimistic about the future and the many opportunities in front of us and we are confident in our ability to execute and deliver as a long-term total return investment for our shareholders.
We do appreciate your continued support, and I will now hand it over to Bill to provide an overview of our financial performance.
Thanks David, and good morning to everyone on the call. I’ll start with an overview of the fourth quarter and then discuss results for the full-year 2017. As David indicated, we had a solid fourth quarter to close out the year. Consolidated revenue in the quarter was $351.4 million, up 6.6% year-over-year, and up 6.4% on constant currency. Q4 gross profit was $178.5 million, up 6.3% from last year and gross margin was 50.8%.
Looking at operating expenses, SG&A of $138 million was down 4.4% versus last year. The decline in SG&A was primarily due to non-repeating EAR and IPO transaction costs incurred last year and lower share-based compensation costs. These benefits were partially offset by an increase in advertising promotion and selling costs. In Q4, research and development expense of $12.5 million was down $1 million from last year as a result of a reduction in experimental and employee related costs which were largely timing related.
Q4 interest expense of $3.8 million decreased by $2 million from last year. The decline was primarily due to lower average outstanding borrowings versus last year as well as lower interest rates. Our Q4 effective tax rate was 46.9%. The ETR was impacted by tax adjustments necessitated in Q4 as a result of the new 2017 U.S. Tax Act.
The one-time net impact to our Q4 tax provision of approximately $4.3 million was minimal and resulted in no cash impact to the company. This net impact includes the adjustments to our deferred tax assets, the total charge, and other assorted impacts from the legislation. When I discuss full-year results, I'll be providing an estimate of our 2018 ETR.
As a result, our Q4 net income attributable to Acushnet Holdings of $11.7 million improved by $11.8 million from Q4 of last year, driven by higher income from operations partially offset by higher income tax expense. For the quarter, adjusted EBITDA was $40.9 million, up $2.8 million from last year. Note that there are still a number of one-time items that affect the year-to-year comparisons, so we provided a reconciliation of adjusted EBITDA in our earnings release as well as on the slide presentation.
Turning to our full-year results. Sales of approximately $1,560 million were down 0.8% to last year and 0.2% on constant currency. Our 2017 gross margin was 51.3%, a 50 basis point improvement to last year driven by a number of factors across various segments. SG&A expense was $579.8 million down $21 million from last year.
This decrease was primarily due to the absence of both transaction costs related to our IPO that we recorded in 2016 and a one-time executive bonus recorded in Q1 of last year as well as a reduction in bad debt expense. These were partially offset by higher public company costs and an increase in selling expenses.
Research and development expense of $48 million was down $700,000 from last year and for the year was 3.1% of sales flat year-over-year. Full-year interest expense decreased by $34.2 million to $15.7 million and as with the quarter was driven by lower outstanding borrowings as well as lower interest rates. We had other income of $1.1 million in 2017 versus $1.7 million of expense last year, largely due to the absence of recognized losses on our previously outstanding common stock warrants. This was offset by a change in the Beam indemnification and income recorded last year, associated with a legal judgment in our favor.
Our year-to-date effective tax rate was 36.3% down from 44.5% last year. The decrease in ETR for the full-year was primarily driven by differences in the realization of a number of discrete items in 2016 that related to our prior capital structure and initial public offering. An explanation of all these items will be available in our 10-K, which will be filed after the close of the markets today.
Looking forward to 2018 and based on our analysis of the new tax legislation and all interpretive guidance we've reviewed to-date, our current estimate for 2018 ETR’s 24%, this of course subject to any additional guidance or interpretations that may be forthcoming.
Moving back to full-year 2017, net income attributable to Acushnet Holdings for the year was $92.1 million, up $47.1 million over the prior year, primarily driven by lower interest expense and higher income from operations, partially offset by the resulting higher income tax expense. Full-year adjusted EBITDA was $223.4 million, down $5 million from last year, despite the decrease we view this is a solid performance given the challenges we faced in 2017.
Looking to the balance sheet, we had just over $45 million of unrestricted cash on hand as of December 31, 2017 total debt outstanding at year-end was approximately $467 million, reflecting about 2.12x LTM adjusted EBITDA. We will continue to focus on reducing debt as we look to strengthen our balance sheet over the longer-term.
CapEx for 2017 was $18.8 million. For 2018, we expect that CapEx will increase to approximately $34 million, while good portions of this spend is maintenance related, we also plan to make additional investments in innovation and technology to drive continued market leadership and future growth. We believe that this is a very good use of capital.
As David mentioned, we're pleased to announce that Acushnet Board of Directors has voted to declare a $0.13 dividend this quarter. This is an 8.3% increase in the quarterly dividend and is indicative of the confidence we have in our strategy and cash generation capabilities moving forward.
As to the outlook for full-year 2018, we expect reported sales will be in the range of $1,590 million to $1,620 million. On a constant currency basis, we expect revenues to increase in the range of up 1.3%, will up 3.2% versus last year. We also expect adjusted EBITDA for 2018 to be approximately $225 million to $235 million.
In summary, we had a solid Q4, driven by growth in golf balls, FootJoy golf wear and Titleist Gear with good execution and strong operational controls by the team. We're optimistic about 2018 as we enter the year with strong brand momentum and a number of exciting new products on the launch calendar.
We are also committed to continuing to employ a multifaceted approach to generating shareholder value, initiating key investments drive organic growth, providing an attractive dividend yield. Seeking M&A opportunities where they’re synergistic with our business segments and long-term business strategy and continuing to reduce our debt to provide for long-term financial flexibility.
With that, I'll now turn the call over to Tony for Q&A.
Thanks Bill. Sharon, can we now open up the lines for questions please? Thank you.
[Operator Instructions] Your first question comes from Randy Connick from Jeffries. Your line is open.
Yes, thanks a lot. You end of the year with nice sequential improving trend across the board from a product standpoint involves in clubs, but also on a geographic standpoint particularly in the United States, EMEA and Japan.
When I look at the outlook for next year, it looks good and I just wanted to get some perspective of how we should be thinking about the drivers of the revenue outlook by geography and by product standpoint clubs versus balls, given that it seems as if the U.S. would have an easier compare you had some tough weather this year, and then on the ball side, it’s an exciting new products in that area, but also easy comparisons in the club side and you had some strength in the iron category just to focus.
I am just trying to get some feel for how we should be thinking about to build of the higher revenue line growth rate by these different geographies, but also the balls versus clubs? Thanks.
Okay. Randy, good morning. I’ll tackle your question really from a product standpoint at the high level. We've talked a lot about our two-year product cadences. This is even year, obviously it's not a Pro V1 launch year. So it’s the first time we really addressed an even year is a public company, but a couple of insights I could share. Obviously, our non-Pro V1 launch year is more challenging than a Pro V1 launch year, especially in the first quarter.
Point two would be this is an iron launch year for us. We launched it in the fourth quarter, third quarter, but really a lot of the activity is plays out when the bulk of the fittings happen. So as we think about the new iron business, we tend to look at that as a second quarter positive.
And then the final thought would be, more notably as we think about back half of the year, we do have a driver planned for the back half of the year. So really that the key drivers are what's going to happen in balls in Q1? What's going to happen in irons in Q2? In terms of geography there are no real outliers. There's no one market that's going to manage this cadence differently. So I think the general theme of our product cadence will flow in the U.S. and in markets around the world.
And then may have a follow-up and just think about how should you – you think any differently about how the trend tine of ASP by product category clubs versus balls and then product margins, anything that you think differently or the same there against some products versus balls, excuse me clubs versus balls as well?
Yes. Randy, when we look at ASP and obviously we're in – and starting with categories, we're looking at our non-Pro V1 year, number one. So our most premium product, we're in our second model year, so that's going to be a little challenging to compete with. Obviously on clubs, we’ve raised price on our AP series and we're coming in to next year with high confidence in those models and we're looking across the board all across FootJoy categories to push the limits of that where we can.
So as we said before, we aspire to have a 50 plus margin in this business. We closed last year with a 51.3% margin and we're quite happy with that. Would we like to improve upon that? Yes we would. But right now, that's where we're at. As far as operating margin just to add that in there. This is an investment year and Dave made some – mention in that investment for now and investment for the future, but we still expect in operating margin to at least hold or maybe improve upon that a bit, and that would be EBITDA sales.
Randy, as we touched on Pro V1 a couple times, I just want to clarify year one, year two and how we think about it; year two, we're full speed ahead. But we do and consumers generally don't think of Pro V1 as a year two – year one phenomenon. They think of it as an ongoing franchise.
But what we're saying is in year one, you simply get an inordinate benefit from the pipeline that occurs in the first quarter. In the back of year two, you start to see the channels work through inventories down. But in terms of consumer interface, how we drive the business? That doesn't change. It's really about what happens in Q1 and what happens in the final quarter of a two year cycle.
Thanks Randy. Next question please.
Next question comes from Simeon Siegel from Nomura. Your line is open.
Good morning. This is Julie Kim on for Simeon. Thank you for taking our question. Could you just give us a color on your current inventory levels? It looks like you ended the year a bit elevated, and any color on what you've seen on sell through trends quarter to-date? Thank you.
Sure, Julie. Hope I got your name right. First of, our inventory is in great shape this year – at the end of this year. We actually needed a higher build this year than for several reasons. Number one, this is a big club launch year. So we've got eight new AP irons and we have a third model and that's said.
And obviously, we sell a lot of our irons in the second quarter when our custom fitting activities takes place. We have a new Scotty Cameron putters. We have a new Vokey SM7 launch. These are big launches. But also we made some strategic decisions to increase our carrying inventory in certain categories, like last year, our Pro SL model was very hardened, and quite frankly we're chasing demand on that as well as we have a new Tour-S shoe out there.
Our apparel is just growing, so we need to have a higher build on that as we grow that franchise around the world. And same thing with gear, we want to have a higher hold because we think we missed some opportunities probably last year in bags and headwear in the first half when we’re shipping in. So we're quite happy with the quality of them and we're quite happy we have the build right now going into 2018.
Yes. And as to early signs of Q1 sell through, we are in early March, it's calling for snow in New England. Too soon to say, we're always careful this time a year to draw too many conclusions about what happens in the months of January, February. The golf business really – you get clarity as you work your way through the second quarter, markets open up, you get a feel for weather et cetera. But in terms of what we're seeing. Too soon to say. The only data out there is – it's been a cool season in Florida, surrounds were down a little bit in January. Not surprising given what happened there last year where they had a pretty good start to the year. But again, this early in the season, tough to draw any meaningful conclusions about what's happening at sell through.
Thank you. Next question please.
Next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open.
Great. Thank you so much. David you talked about the rationalization has been taking place here at last couple of years, I guess primarily in the U.S. I'm wondering as you look out to 2018, are you seeing any additional moves out there that would suggest further rationalization in 2018 are you feeling like we're sort of largely stabilized at this point? And then I just wanted to follow-up on that the ball questions. With the first half, second half dynamic in 2018, I just want to make sure I understand it. Is it possible we could see growth here in balls in the first half followed by declines in the second half and would you be expecting sort of a relatively flat full-year for the ball category? Thanks so much.
Kimberly, good morning. Well as to retail stabilization, a lots played out in the U.S. market in the last couple of years, and I think as we said all along coming through this those left standing are going to look around and say they're doing okay, and we look at what happened in the encore channel last year. The encore channel sell through was up 10% when you roll up all the main categories.
Well many of our golf specialty partners don't report their results anecdotally. They've all said they had a pretty good year. So clearly the Golfsmith volume migrated not all – that we've said from the beginning not all that was going to migrate, some would evaporate, not much of that would be arguably off priced product which was a byproduct of excess retail capacity.
So where does that leave us in early 2018 in terms of the U.S. market? We do think it's stable as it's ever been. I'm not sure markets are ever done correcting. But as we look at on the horizon, we see stability with our key partners. Things are forever influx, but again by and large it's a stable as we've seen in a long time. I’ll turn over to Bill for your second question Kimberly.
Yes. Kimberly, on balls. I think we've already mentioned that a non-Pro V1 year, that's a big launch in the first quarter as opposed then you see in prior years. So as the season plays out, we expect that you won't see that that you're going to see more of the ball business transitioning into the back half of the first half. As far as full-year, we are up against a Pro V1 year in total. So we have to be cognizant of the fact that overall that that's going to be a tough comp even despite the fact that we have – that we had performance model, some issues with the performance models last year.
Thanks Kimberly. Next question please.
Next question comes from Michael Schwartz from SunTrust. Your line is open.
Hey. Good morning, guys. Just a question on the ball business, in the fourth quarter obviously topline was very strong. And as I look at gross margin, I guess I would have expected that to be a little stronger with how balls performed. So maybe you give us a sense of what some of the puts and takes on the gross margin line or in the quarter?
Sure. Michael, it’s Bill. If you remember though in the quarter this is a big Pro V1 holiday period, so we do discount the Pro V1 as number one gift in golf. So that's part of the reason why you would naturally see that. If you look year-on-year, the difference is only about 10 basis points year-on-year. But there's a lot – this is a transition code of the fourth quarter.
We're transitioning out of products into new products and at that time there's a lot of different decisions you make, as an example this – in this cycle of the new SM7 wedges as opposed to last year, we decided to close out the SM6 in the fourth quarter rather than having a codes existing the following year. So those are some of the puts and takes as you say that result in the 50.8% margin, but really is only off about 10 basis points.
Okay, that’s helpful. Just a quick follow-up if I may. Just on the AVX ball that you’re launching in – I believe the second quarter, maybe talk about your sense of how that should perform in the market? I'm just wondering how incremental do you think that is to your premium ball business?
Well, AVX born as a cast urethane product, which is a similar product covered technologies in Pro V1. It's different. It's lower flying, lower spin, great soft feel, good greenside control, but it is different from Pro V1. So when we put out our test in that market, we were intrigued by this as a solution that some golfers would find really valuable and beneficial to their game and we found that.
So your question I think what we're going to see and what we saw in the three state test market is, we know some of the business is going to come from Pro V1. We know some of the business should ideally come from the competition and we think it should come from the competition.
We also see some of it coming from our own products, whether it's Tour Soft or Velocity. So to your answer obviously, we're doing this because we think there's some incrementality to it. First and foremost, however we're doing it because we think it's an important solution for golfers, who fall into a certain category of preference and spin characteristics.
So net-net we learned a lot on our test market. We learned enough to say, hey we think this is something it would be great to go forward with, which we again look forward to doing in the back half of the second quarter.
Okay, great. Thank you.
Thank you. Next question please.
The next question comes from Dave King from ROTH Capital. Your line is open.
Thanks. Good morning, guys. I guess first on the significant Pro V growth in the December quarter. How much that was holiday related, I don't know Amazon and the like versus better sell through a green grass and in some your other key golf counts? Thanks.
Well, that the quarter was – it was competitive. It was a promotional quarter we saw a lot of folks have holiday promotions, which I suppose is not surprising. We look at where we grew and how we did and we feel pretty good about our efforts and results in all channels.
It wasn’t inventory load period for us. It's fill the market's, getting ready for the retail season. So we're not going to pinpoint one channel over another, other than to say Pro V1 had a pretty good fourth quarter and we're pleased with the results both in terms of sell in and sell through across all channels.
Okay. Okay, thanks. And then in terms of quick follow-up on the guidance, how should we think about the growth cadence by quarter? Should we be assuming down in Q1 just given the difficult Pro V compare and then faster growth in Q2 versus the 1% to 3% maybe because of the strength you're having in the irons? And then how much do you expect Links & Kings to contribute? I understand it's small, but is that small – I mean 1% to 2% of revenue or is it smaller than that? Thanks.
I'll take the first part of that. If we talked about earlier, Pro V1 launch in the first quarter is very big. So comping against a Pro V1 launch in Q1 is going to be tough. If you look at our – the next biggest segment of what we're introducing it’s the AP irons and AP irons are custom fitting buyers for us. That's where our – hey will be made in the second quarter.
So it's more tied to that as terms of its cadence itself as opposed to metals, which more of a stock item when you ship them in a prior year. Though if you look at that – I would look at that as a way to look at how you might formulate your modeling and everything and of course we have a metals launch in the fourth quarter of this year as well.
As to Links & Kings, we're excited about Links & Kings. As I mentioned in my opening remarks, Adam is a real craftsman, who makes great products. It's a small business. It will not have a material effect on our revenues or EBITDA for 2018.
Thanks guys. Next question please.
Next question comes from Andrew Burns from D.A. Davidson. Your line is open.
Thanks, and good morning. Just a quick follow-up on the gross margin line for Bill, could you provide some color on how you're thinking about the gross margin headwinds and tailwinds for 2018 perhaps highlighting some of the key factors you're looking at whether it's currency, pricing, mix, input costs or anything to call out there? Thank you.
Yes. Again, I would once again point to Pro V. Pro V is our largest franchise and that itself is something is a bit of a headwind for us. In the club business, we tend to hold our margins pretty well on both metals and iron, and even in odd years. And in FootJoy, we also try to maintain, but try to slightly improve. We're trying to improve margins in FootJoy across the board.
So I think that's probably the high level way to look at it overall. But as far as currency goes, our plan is based on average rates that were in place the month of December, those rates have obviously improved a bit. But we are hedged and we're hedged out there for a reason for pricing stability as much as anything in our ex-U.S. markets, but we would like to see that continue. And could there be something there? Yes. But right now, we're not deeming it significant.
Thanks. Good luck.
Thank you. Next question please.
The next question comes from Tim Conder from Wells Fargo Securities. Your line is open.
Thank you, gentlemen. David first of all on the channel inventory comment that you had mentioned. Can you give us a little more color where geographically and what lines you feel that your little – potentially leaner then could be and it sounds like again part of the inventory build is to address that.
And then Bill, on the side of the input cost just to touch the steel and aluminum here, what percent of COGS are these inputs that make up of your purchase components? And then your comment again back to the inventories working capital, should we anticipate any major change there on a year-over-year basis when we look at 2018 versus 2017 as a whole?
Okay. Good morning, Tim. So the comment about channel inventories, they are leaner than they've historically been and that's a positive comment on the correction that's taken place in the golf markets. Not necessarily going to say they're too lean or that were under inventory. I think there is healthy as they've ever been.
And my comment was as much about maybe a comment about, hey in the past, they were probably too heavy and they found the right and appropriate level. So not necessarily saying we got to work hard to replenish levels as much as saying that they're lean by historical standards, but we think they're healthy given the context of all the changes that have played out in golf retail over the last couple of years.
Yes. Tim on your question about the potential for tariffs, I know that's created quite a stir on Capitol Hill here. And we have to see how this plays out. Obviously, there has been a lot of talk about this. But if you look at steel that's used in, actually used in golf clubs, if you look at what's used and hedged, and the actual amount of material it's quite small. The cost of clubs is really a lot in the finishing, the milling, the machining, scoring of the product. There's not that all that much in there and quite frankly, we use a lot of American steel in our products.
We don't see this as a major issue even if something does transpire. And as far as working capital, we are growing gear, we are growing apparel, we are growing our soft goods. Those categories have are far more SKU intensive. You have to carry a lot more inventory to service them properly.
So we are going to see if those – they continue to outgrow our core equipment categories, we're very vertically integrated like balls. We're going to see that creep up, but that's not something we're overly concerned about working capital being out of control because we control those inventories work very well both in in-house and in the field to make sure we're not achieving any obsolescence and we're not having the price discounts heavily.
Okay. And the follow-up gentlemen, just to make sure I’m perceiving this right. It sound like the tax savings, obviously you raised the dividend, but then R&D and M&A is that predominantly where you’re going to focus some of the excess cash?
Well, we talked about the dividend being one thing and that wasn't exactly in response to tax reform. We feel that we have a lot of confidence in our cash flow going forward. But obviously the tax rate itself in the long-term is going to be beneficial in cash generative. As far as investments, we're investing in CapEx and that's – it's still largely maintenance related, but it's across the board.
We're investing in our manufacturing facilities, not in any one segment. We're looking at distribution and logistics opportunities and IT. Those are some areas that we’re really looking to invest additional monies in. And so I think that that's – and if anything I would point to are David's comments on organic growth and how we're trying to fuel our brand momentum, our brand engine through different ways we advertising and connect with our dedicated offers.
Okay. Thank you, gentlemen.
We have one more question, and then we have a few closing comments from David.
Next question comes from Casey Alexander from Compass Point Research. Your line is open.
Hi. Good morning. Given the Pro V1 up 9% year-over-year, which was really strong. Do you have any concern that Pro V1 might pull some from Q1 and an increase sort of the challenge that you see in Q1?
Casey, we've looked at that, it's always as we close the year. We're always asking ourselves, what's our inventory position? What happened in the back half of the year that might affect the next half of the year? The good news is we manage our inventories very, very carefully and closely, whether it's our folks on the ground or our key retail partners.
The best way to frame the answer to your question is we're comfortable with our inventory position in the market right now. We don't think there is a meaningful excess or anything that jumps off the page when we look at inventory positions. So nothing we see really that leaps off the page at this point.
Okay. Thank you. And when you talk about the increased CapEx, when you say innovation and technology, what do you mean by that?
Well, there are number of things. We are vertically integrated. We produce our own product in a lot of our areas and we have our own plan. So there's always ways to improve upon operations in a number of different ways. When you look at IT, there are so many initiatives that are tethered to IT right now, direct to consumer initiatives, direct to golfer as we call them.
And they need IT support and obviously everyone's always looking at logistical opportunities. Some of those are even tied to direct to golfer, where you look at your product, where you put it. And also there's always opportunities that your business – as your business works over the years so to say, hey there's maybe an opportunity here to create a better structural footprint for how you are executing to market and get your customer.
All right. Great. Thank you for answering my questions. I appreciate it.
Thank you, Casey.
End of Q&A
Well thank you, everyone. We do appreciate your time and attention on our business and on today's call. And as I said earlier while they're calling for snow in New England today, we are very excited about the 2018 golf season, which will be here soon. Acushnet's associates have done great work planning for 2018 and we are in March and into April.
We're busy preparing golf shops, educating our trade partners for the coming season. And really most importantly, we have a great range of exciting new products for golfers to experience in the coming months, which we believe will help them play their best golf. So that said, we thank you for your time and attention this morning, and wish you the best.
This concludes today's conference call. You may now disconnect.