Topgolf Callaway Brands Corp (MODG) 2018 Q2 法說會逐字稿

Good afternoon.

My name is Erica, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q2 2018 Callaway Golf Earnings Conference Call.

(Operator Instructions)

Mr. Patrick Burke, Head of Investor Relations, you may begin your conference.

Thank you, Erica, and good afternoon, everyone.

Welcome to Callaway's Second Quarter 2018 Earnings Conference Call.

I'm Patrick Burke, the company's Head of Investor Relations.

Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer; and Jennifer Thomas, our Chief Accounting Officer.

Today, the company issued a press release announcing its second quarter 2018 financial results.

A copy of the press release and associated presentation are available on the Investor Relations section of the company's website at www.callawaygolf.com.

Most of the financial numbers reported and discussed on today's call are based on U.S. generally accepted accounting principles.

In the few instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation, in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from management's current expectations.

We encourage you to review the safe harbor statements contained in this presentation and the press release for a more complete description.

Please note that in connection with our prepared remarks, there is an accompanying PowerPoint presentation that may make it easier for you to follow the call today.

This earnings presentation is available for download on the Callaway Investor Relations website under the Webcasts & Presentations tab.

Also on the same tab, you can choose to join the webcast to listen to the call and view the slides.

As a webcast participant, you are able to flip through the slides.

I would like to turn the call over to Chip.

Thanks, Patrick.

Good afternoon, everybody, and thank you for joining us for today's call.

Starting on Page 4 of the presentation.

I am pleased to announce a record start to the year, based on operating performance, brand momentum and continued strong market conditions.

Revenues were up 30% for both the quarter and year-to-date and first half fully diluted EPS doubled.

Our new products, particularly the Rogue line of woods and irons as well as our new Chrome Soft golf balls featuring Graphene are resonating on a global basis.

Our putter business is gaining strength through the year, and our new business initiatives continue to perform at, or above, expectations.

On the strength of our operating performance, we continue to make select investments back into our business, including R&D, golf ball operations, tour, sales and marketing, which we believe are paying off nicely for shareholders and will continue to strengthen the company for the future.

As is my custom, I'd like to take this chance to thank the Callaway Golf team for delivering these results.

The team should be proud of what we have accomplished.

I'm also sure they understand we have a lot more to do and, like me, are motivated to take our company to the next level.

Turning to Slide 5. Let's now take a deeper look into our operational performance by region.

While doing this, it's worth noting that we launched more product in the first half of 2018 than last year, and thus quarterly comparisons should bear this in mind.

In the U.S, our revenues were up 39% for the quarter and are up 35% for the first half.

These results were driven by continued strong market conditions, double-digit growth in our core equipment business as well as the addition of Travis -- the TravisMathew brand, which is performing at an exceptionally high level.

Looking at our equipment business, our first half hard goods market share, according to Golf Datatech, is 25.6%, down 80 basis points versus the first half of 2017.

According to Datatech, we remain the #1 total hard goods brand, #1 in total clubs, woods, irons and putters.

In golf balls, we remain the #2 brand with 16.3% dollar share, up 290 basis points year-over-year.

We are showing strength across our entire line -- pretty strong revenue growth in irons and golf ball and

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continue to have strong performance in the woods category with Rogue

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#1 selling model year-to-date.

Additionally, market conditions in the U.S. continue to outperform expectations, with 10.5% growth for the first half, and field inventory levels appear to be in line for the market overall as well as Callaway.

Turning to Page 6. Our Asia business also had a strong quarter, led by an outstanding performance in Japan and Korea.

Our revenues from the Japan market were up 22% for the quarter on a currency-neutral basis, and are up 32% year-to-date.

This is driven by continued brand strength along with market conditions that have exceeded expectations.

For the quarter, our hard goods dollar market share was 19.4%, roughly flat.

And for the first half, we are 18.1%, down 230 basis points.

This puts us as a strong #2 in this market.

As in the U.S, we are seeing strength across the entire product line, but with particularly strong performance in the irons category, where the Japan market has

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well through our last several product launches.

Korea has also had a strong start to the year, with currency-neutral revenues up 30% year-to-date, and we are on track for a great year, albeit front-half loaded throughout Asia.

Moving to Page 7. In Europe, you've seen that another solid quarter of revenues up 8%

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1.7% constant currency.

Market conditions that suffered from a wet and cold start to the year improved quite a bit

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leaving the U.K. up 3.8% year-to-date and Pan Europe down 1.3% or essentially flat.

For Europe as a whole, through May, and the U.K. through June, we remained the #1 hard goods brand, with a hard goods share of roughly 23%, down versus last year but in line with our expectations and trending profitably.

Now on Slide 8. Based on the strong start to the year, we are once again raising our full year revenue and earnings forecast.

This forecast reflects current foreign exchange levels as well as low mid-single-digit market growth for the balance of the year.

These results if delivered would be record revenues, operating income and EBITDA.

You'll undoubtedly notice that our full year forecast is heavily front-half loaded.

This is driven by our product launch cadence, with more launches in the first half of this year and significantly less in the second half compared to last year as well as our estimates of competitive launch activity and our desire to manage field inventories and consumer sentiment

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position us best for the long term.

In conclusion, we're excited about our start to the year and optimistic it's going to be a positive year for Callaway and the industry as a whole.

Stepping back for a moment to look at the big picture, I hope you agree we have significantly grown and strengthened our business over the last few years, and that barring an unforeseen event, this trend is likely to continue.

We are clearly now a product and technology leader in the equipment space.

We have momentum and improving overall industry fundamentals.

We hope you also agree we are making

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active investments by reinvesting in our core

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in Topgolf, selectively repurchasing shares and in strategic acquisitions, all areas where we believe we can deliver attractive growth and returns for our shareholders.

Brian, over to you.

Thank you, Chip.

As Chip mentioned, we are pleased with how our business has performed in 2018.

Our new product introductions have exceeded our expectations.

We continue to find good opportunities to reinvest in our core business.

And our new businesses, OGIO and TravisMathew, continue to meet and/or exceed our expectations.

Overall, we had a very strong first half for 2018, setting records for revenue and profitability.

Our net sales for the second quarter and first half increased in all operating segments, in all major regions and across all major product categories.

Our results in 2018 have benefited from some positive macro headwinds.

The golf industry as a whole has been strong in many of our key markets, including the U.S., which grew approximately 10.5% in the first half.

Foreign currency has also positively impacted our net sales by $5.8 million for the second quarter and by $16.7 million for the first half.

Consistent with the first quarter, our 2018 results were also positively impacted by a front-end loaded launch cadence and by the lower tax rates resulting from the 2017 Tax Cuts and Jobs Act.

In evaluating our results for the second quarter and first half, you should keep in mind some specific factors that affect year-over-year comparisons.

First, the TravisMathew acquisition occurred in August 2017.

As a result, that business was not included in our second quarter or first half 2017 results.

Second, as a result of the 2 acquisitions, we incurred some nonrecurring deal-related expenses.

When discussing our 2017 non-GAAP results today, we've excluded the nonrecurring deal-related expenses, as that is how we evaluate our performance.

Third, during the fourth quarter of 2017, we recorded a net $3 million of additional tax expense related to the 2017 Tax Cuts and Jobs Act and other nonrecurring tax adjustments that impacted the full year, which we excluded from our 2017 non-GAAP results.

With those factors in mind, I will now provide some specific financial results.

Turning to Slide 11.

Today, we are reporting consolidated second quarter 2018 net sales of $396 million compared to $305 million in the second quarter of 2017, an increase of 30% and a record for net sales in the second quarter.

The significant improvement was primarily due to a 35% increase in the irons category, driven by our Rogue line of irons, a 35% increase in our golf ball business, driven by our new Chrome Soft golf balls and a 64% increase in the Gear, Accessories and Other category, driven by the TravisMathew business, which was acquired in August of 2017.

Foreign currency positively impacted international net sales by $6 million in the second quarter.

Excluding the foreign currency benefit in the TravisMathew business, our core business net sales increased 19.8%.

As you can see on Slide 11, gross margin was 48.6% in the second quarter of 2018 compared to 48.7% in the prior year.

The 10 basis point decrease compared to 2017 reflects continued investment in technology, partially offset by the increases in average selling price, favorable product mix related to the TravisMathew business and the favorable impact of foreign exchange translation on net sales.

Operating expense was $118 million in the second quarter of 2018, which is a $19 million increase compared to $99 million in the second quarter of 2017.

Driven by operating expenses related to the TravisMathew business, variable expenses related to higher net sales and the negative impact of foreign exchange, operating expenses as a percent of net sales was 29.9% in the second quarter of 2018 compared to 32.5% from the same period last year.

Operating income was $74 million in the second quarter of 2018 compared to operating income of $49 million in the second quarter of 2017.

When excluding the nonrecurring OGIO expenses, non-GAAP operating income for the second quarter of 2017 (sic) [2018] was $51 million, a $23 million increase over 2017.

Other income was $4 million in the second quarter of 2018 compared to other expense of $2 million in the prior year.

The higher other income in the second quarter of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017.

Fully diluted earnings per share was $0.63 on 97 million shares in the second quarter of 2018, a record for Callaway Golf, and an 85% increase compared to non-GAAP earnings per share of $0.34 for the second quarter of 2017.

On a GAAP basis, 2017 second quarter fully diluted earnings per share was $0.33.

Turning now to Slide 12.

We will now discuss our June year-to-date 2018 results.

Today, we are reporting consolidated first half 2018 net sales of $800 million compared to $613 million in the first half of 2017, an increase of $187 million, or 30%, and a record for net sales in the first half.

This significant improvement was primarily due to a 46% increase in the irons category, driven by our Rogue line of irons; a 25% increase in our golf ball business, driven by our new Chrome Soft golf balls; and a 49% increase in the Gear, Accessories and Other category, driven by the TravisMathew business, which was acquired in August of 2017.

Foreign currency positively impacted international net sales by $17 million in the first half.

As you can see on Slide 12, gross margin was 49.2% in the first half of 2018 compared to 48.2% in the prior year.

The 100 basis point increase compared to 2017 reflects increases in average selling price, product mix related to the TravisMathew business and the favorable impact of foreign exchange translation on net sales.

Operating expense was $233 million in the first half of 2018, which is a $30 million increase compared to $203 million in the first half of 2017, driven by operating expenses related to the new TravisMathew business, variable expenses related to higher net sales and the negative impact of foreign exchange.

Operating expense as a percentage of net sales was 29.1% in the first half of 2018 compared to 33% for the same period of 2017.

Operating income was $160 million in the first half of 2018 compared to operating income of $93 million for the same period in 2017, an increase of 72%.

When excluding the nonrecurring OGIO expenses, non-GAAP operating income for the first half of 2017 was $99 million, a $61 million increase over 2017.

Other expense was $2 million in the first half of 2018 compared to other expense of $7 million in the prior year.

The lower other expense in the first half of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017.

Fully diluted earnings per share was $1.28 on 97 million shares in the first half of 2018, a 100% increase compared to non-GAAP earnings per share of $0.64 for the first half of 2017.

Excluding the nonrecurring OGIO transaction expenses, 2017 first half fully diluted earnings per share on a GAAP basis was $0.59.

Turning now to Slide 13.

I will cover certain key balance sheet and cash flow items.

As you can see, cash and equivalents was $58 million, which was down $4 million year-over-year.

This includes the impact of the TravisMathew acquisition, completed in August 2017; an incremental investments in Topgolf, which was $20 million in the fourth quarter of 2017; stock repurchases; and a continued investment in our golf ball facility, offset the use of additional liquidity from our asset-based loans.

Regarding our asset-based loans, we had $96 million of borrowings at the end of the second quarter 2018 as compared to $6 million in borrowings a year ago.

Available liquidity, which represents additional availability under our credit facilities plus cash on hand was $301 million at the end of the second quarter, as compared to $247 million a year ago.

Increased liquidity from our asset-based loans was partially offset by our 2017 deployment of capital for the TravisMathew acquisition, stock repurchases and our incremental investment in Topgolf and the ball plant.

We believe we are demonstrating our ability to generate free cash flow in the core business and are finding good opportunities to deploy that excess capital in the core business and in tangential areas.

Our consolidated net accounts receivables were up $242 million, an increase of 8% compared to 2017, driven by the increase in sales in the first half, partially offset by better collection rates.

Also, DSO decreased to 60 days compared to 69 days at the end of June 2017.

We remain comfortable with the overall quality of our accounts receivable at this time.

Also displayed on Slide 13, our inventory balance increased by 38% to $237 million at the end of the second quarter 2018.

This increase was due to increased launch activity in the first half of 2018, additional inventory from the TravisMathew acquisition and low inventory levels at the end of the second quarter in 2017 as we chased demand for the EPIC product.

We remain comfortable with the quality of our inventory at this time.

Capital expenditures for the second quarter of 2018 were $9 million, a year-over-year increase of $3 million, due mainly to investments in our ball plant.

Depreciation and amortization expense was $5 million for the second quarter of 2018 compared to $4 million in 2017.

Finally, for the second quarter of 2018, the company repurchased a nominal amount of shares through the settlement of equity awards.

Year-to-date, we have repurchased 1.4 million shares of stock for approximately $22 million in cash.

This includes both open market purchases and shares acquired through the settlement of equity awards.

I'll now comment on our 2018 guidance.

As you can see on Slide 14, we are providing 2018 GAAP guidance and are comparing that to our 2017 non-GAAP financials.

The 2017 non-GAAP financials exclude $11 million of nonrecurring deal-related expenses resulting from the OGIO and TravisMathew acquisitions and $3 million of nonrecurring tax expense mentioned above.

In addition, the third quarter and second half guidance reflects the front-end loaded product launch time in 2018, with no major product launches planned for the balance of 2018 as well as an estimated negative impact of $3 million related to changes in foreign currency rates in the second half of 2018 compared to the same period in 2017.

Okay, turning to Slide 14.

2018 net sales are estimated to be in the range of $1,210,000,000 to $1,225,000,000, an increase of 15% to 17% over 2017 and $40 million higher than our previous guidance.

Incremental sales growth versus previous estimates is expected to be driven by increases in the core business, which is 8% to 10% for the full year versus 2017 on a currency-neutral basis and by a lesser degree to increases in the TravisMathew business.

The increases in core business are being driven by the Rogue line of irons and the new Chrome Soft golf ball, and anticipated healthy retail market conditions.

The company currently estimates the changes in foreign currency rates will positively impact 2018 net sales by approximately $14 million, slightly below our previous estimate.

The estimated full year 2018 gross margin will be 46.8%, which is 20 basis points lower than our previous estimate.

The decrease, though, is being driven by foreign exchange rates.

The estimated full year 2018 GAAP operating expenses to be $445 million, an increase of $1 million compared to the previous guidance.

GAAP earnings per share are estimated to be $0.95 to 100 -- to $1 compared to $0.77 to $0.82, our previous guidance.

The 2018 figures are based on 97 million shares outstanding.

We are also assuming a 21.5% tax rate for 2018.

We estimate our capital expenditures in 2018 to be approximately $40 million.

This represents a $10 million increase over our previous estimate, driven by the need to increase capacity in our ball plant, given the growth in our golf ball business.

Depreciation and amortization expense is estimated to be approximately $21 million in 2018, consistent with our previous estimate.

We estimate EBITDA to be approximately $147 million, a 47% increase versus our 2017 non-GAAP EBITDA, driven by the core business, the full load of TravisMathew and, to a lesser extent, more favorable foreign exchange rates.

Continue on Slide 14, 2018 net sales are estimated to be in the range of $243 million to $253 million, an increase of flat to 4% growth over 2017.

This projection reflects no major launches in the third quarter of 2018 versus the 2017 launch of our EPIC Star Irons and Hybrids as well as the launch of the Odyssey Red & Black Putters.

The addition of a full quarter on the TravisMathew business will partially offset the negative launch timing.

We continue to encourage investors to focus on the full year results as the quarter comparisons can be materially impacted by new product launch timing.

GAAP earnings per share for the third quarter is estimated to be minus $0.03 to plus $0.01 compared to $0.05 we earned in 2017 non-GAAP results.

The 2018 figures are based on 97 million shares outstanding.

That concludes our prepared remarks today.

We'll now open the call for questions.

(Operator Instructions) And your first question comes from Steven Zaccone from JPMorgan.

So really strong success with the golf ball this quarter.

Big acceleration in the second quarter versus the growth rate you saw in the first quarter.

Do you think you can continue to see growth in golf ball sales in the third quarter and then in the second half overall?

And along those same lines, has the competitive landscape changed at all since your largest competitor introduced a new premium ball offering?

Steven, if you look at the -- we are not going to provide granular level forecast of our product line by quarter.

But clearly, we've shown momentum in the golf ball category over an extended period of time now, with growth continuing for multiple years and a steady drumbeat, if you would, of market share growth.

We do anticipate further growth opportunities in golf ball.

It's an important category for us.

We think we've got a product that's clearly resonating.

So we're optimistic though on the category for the foreseeable future.

And we got good competition out there and continue to launch nice products.

We don't really comment on the competition very much.

But we are pleased with our results, and as you correctly identified, during the quarter, we accelerated our growth rate, which -- and we delivered record market shares for our brand.

So we seem to be able to outcompete effectively in the marketplace.

Great, that's helpful.

And then just one quick one on gross margin.

Can you a little bit -- can you elaborate in a little bit more detail on the higher product cost that impacted the second quarter gross margin?

Do you expect this to be an ongoing headwind in the second half of the year?

Steve, this is Brian.

Part of it is the increased costs related to the new technologies that we've put in to our products, but one, in particular, would be the golf ball and the new Graphene technology, which is doing extremely well to resonate with consumers.

The ball sales for the first half are up 25%.

But it is a learning curve a little bit.

So as we think over time, we will be able to make improvements.

We wanted -- we didn't reach our desired efficiency right off the bat.

So we continue to work at it, and we are making improvements.

So I think you'll see improvement in that going forward.

Yes, and I'd also, Steven, call at you to look at, on the full year basis, our forecasted margins are up relative to last year.

So we're just continuing to make progress in gross margin.

And your next question comes from Susan Anderson with B. Riley FBR.

Just a follow-up on the ball question.

I don't know if you could give a little bit of color on units versus dollars in terms of what drove the growth?

And then also on the hard goods side?

Sure.

On the ball side, I think we had a good quarter throughout.

And it was primarily dollars up more than units.

But we're experiencing good market activity overall.

The Chrome Soft product, in particular, is resonating in the marketplace, so very pleased with that.

In the club side of it, we were up in both units and dollars.

We've been able to increase our average selling prices, again, this year.

We're very much not afraid to put new technology out there and provided that it wows the consumer, they are very accepting and seem to enjoy that approach.

So we're trying to create differentiated products.

And then oftentimes, that's an expensive proposition.

We're delivering to the consumer in a way that they're enjoying that.

We do see more units this year in the club side as well because it was an iron launch year.

So with the Rogue irons, our total units are up and that certainly influences total units versus dollars.

But average selling price, is -- has been a very positive story for us.

Great.

That's a very -- [great] help.

On the hard goods market share, very nice number, obviously.

[Though a bit] down, do you guys feel like this is kind of are you going to just kind of ebb up and down against this number?

Or do you think there's more opportunity longer term?

And then if there is any more color on Europe, was there anything else going on there besides weather?

Or do you guys really think it was weather?

Just it seems to be, as you see, underperforming the other global regions.

Yes, I'm going to take Europe first.

Europe was up 8% as a market last year.

This year, they had a tough start to the year, and we'll call it flat through the first half, after a very tough start.

The rest of the world is certainly beating them this year.

They were up a lot more than the rest of the world.

I don't think there's anything endemic or to worry about there.

It is indeed weather, and the market is fine and is positioned to do very well.

What was the other question again, Susan?

Just on the hard goods market share being down, although, obviously, a very good number, is there still opportunity there?

Or do think you'll just kind of fluctuate around this 20-ish percent level?

Susan, I think that we're pleased with our market share.

We believe that we are a leader on global basis in the club market.

And the brand's resonating.

We think we're well positioned to continue in that and potentially grow it.

You can also see that our revenues are growing faster than the markets overall and faster than what their reported market shares are.

And that's because there are key areas that are not covered by some of that market share data, that is third-party data.

So we do think there's sort of an upside there.

The upside on the clubs will come hard fought.

We got good competitors out there, but we're continually getting stronger, and we are optimistic on that.

In the ball side, we have 16.3% market share, according to Datatech, in the U.S. market.

So we certainly believe that there is more room for growth there as well.

We think there is room for growth throughout our business, and that will be our goal.

And your next question comes from Dave King from Roth Capital Partners.

I guess, first on TravisMathew.

It seems like it grew faster than, I think its 20% growth rate it was growing at.

Do you have how much it contributed in the quarter?

Or possibly the organic growth, if you back that out?

And then more importantly, where are you in the process of expanding into other channels and internationally?

Dave, this is Brian.

For the second quarter, TravisMathew was about $26 million in sales.

And for the full year, it's probably closer to $80 million as compared to the $20 million that hit our results from last year, you'll probably see a $60 million increase for the full year.

Yes, and year-to-date, we grew about 20.5% core currency neutral.

So pretty decent growth rate.

TravisMathew is continuing to grow.

It has not really reached anything international yet.

But it is in a still good upside for that brand we believe.

And then expanding it to other channels, golf channels, et cetera?

Have you been able to start that up?

Well, we're continuing -- I don't know whether I'd really say we're try to expand into other channels.

It depends what you mean by that.

We are -- the brand is very strong on the West Coast.

It is gaining strength on the East Coast at green grass.

And other than that, I wouldn't say that we're trying to expand into different channels, per se, but we are growing within the channels that we find strategic.

Okay.

That helps.

And then in terms of the guidance, it sounds like the second half, where organic decline, a lot of that product launch cadence.

I guess, Chip, how are you feeling about the start of the third quarter overall?

And then big picture on product launches, given the strength of EPIC and now Rogue and Chrome Soft X, to what extent do you think you can keep up the momentum there, maybe, as we look to '19 and beyond?

When you look at -- Dave, a bunch of questions there.

So when you look into second half, I want to -- you're correct.

The -- our second half forecasts are significantly impacted by product launch cadence, and we had more launches in the first half of this year than last year.

The first half was helped by strong market conditions and FX.

The second half, we are continuing to anticipate good market conditions.

If you normalize for launch cadence, so if you took out the launches that we did last year and made the amount of launch volume equal.

We would be up based on these forecasts in the second half, in the 4% range on a currency-neutral basis.

We're still expecting good performance for the industry and for Callaway.

We're just making a strategic decision that we believe is in the best interest in the long run of the business relative to when we launch product and how much we're launching in the second half.

Relative to the long term, we're optimistic about our business, our ability to generate attractive growth rates.

We think we've demonstrated that over a reasonable period of time.

We think we're making the disciplined decisions in reinvestment that will help us sustain our leadership position in the industry, and we believe and hold ourselves to a standard of doing that and to growing our revenues at or above market conditions in a market that is growing healthy.

So we're relatively pleased, not fully satisfied, of course, but I think we're very pleased first half and optimistic going forward.

And your next question comes from Dan Wewer from Raymond James.

So Chip, as I recall, the price increase for the Chrome Soft was about 12.5% year-over-year.

So just make sure I understand, the infusing the Graphene into the ball more than offsets the price increase?

Or are we saying that there were some, maybe, some inefficiencies that you hoped to correct that's led to the lower margins in golf ball?

They -- Dan, they -- it's a little bit of both.

So higher impact cost.

Graphene is part of it, but there's also other aspects to the manufacture of the Chrome Soft, the new Chrome Soft golf ball, that make it a more expensive golf ball to make and impact our gross margin percentage on that ball.

On top of that, we are -- the ramp-up of that production takes time, and they are learnt -- going through a learning curve.

Our yields were not what we would like them to be long term during the first quarter and still not where we want them to be long term.

And then lastly, then we're going through a major modernization process in Chicopee.

We're putting significant capital into that plant.

That capital in some aspects will allow us to make these differentiated products.

It allows us to improve the overall quality and capability of the golf ball going forward, and it will also provide some capacity for future growth.

While you're putting that in, the plant's in a bit of chaos.

You're doing a lot all at once, and the efficiencies are affected by that.

So we did have a lower gross margin performance in the golf ball category relative to last year on a percentage basis although we made, obviously, gross margin -- more gross margin dollars because of revenue growth.

You'll see some improvement on that gradually, we're not going to call our coming on that.

But there is upside from where we are right now.

And most importantly, we're really excited about the fact that we're delivering a product that is cutting through and resonating, and the trends, we think, are quite good.

Right.

A second question, you -- several times in the call, you've discussed the impact of the front-loaded product launches in the first half of 2018.

But does that also imply that the year-over-year comparisons will be difficult in the first half of '19 because will be up, again, so many new launches than the prior year?

The -- it could, but I wouldn't draw that conclusion quite yet.

We'll get to that a little bit later in terms of when we get to the forecasts for '19.

And as you know, we don't provide those quite yet.

And we're still finalizing those plans as it relates to what the cadence and plans might be.

We think that the right way to look at this business is that a bigger time frame though.

And whenever you look at individual quarters or even half, it gets so influenced by launch timing, or weather conditions, et cetera.

When you look at it, perhaps, on an annualized basis or a rolling 12-month basis, much of that smooths out and the trends become a little bit more clear and revealing.

Right.

And here's the last question real quick.

When you look at the core golf business, where do you have headroom for improvement?

I guess, putters was one category, but now we're seeing a lot of momentum in your putter business.

So Brewer, just curious where do you see headroom for improvement?

Dan, we're not satisfied with where we are in anywhere yet.

So we're pleased with our progress.

We're pleased that we're a leader in the golf club segment.

We're pleased that we're a strong #2 and growing in the ball.

We -- pleased with some of the acquisitions and the growth in gear and accessories and other.

But there is nowhere I don't see progress potential at this point.

And I do see an improving -- we've been talking for 2 years about the industry getting healthier, and I think that's a pretty good evidence of that now.

And your next question comes from Michael Swartz from SunTrust.

Chip, just wanted to start with the ball, the capacity expansion project and some of the investments you're making around there.

I guess, one is, where are we in the life cycle of, yes, modernizing and expanding that ball business?

And when you think that should start to wind down?

And then two, just in terms of the ball mix, do you look at optimizing going forward some of the ball product you currently produce?

And what I'm to trying to get out there is just with the growth, and the share expansion you've seen, which I would suspect most of that's coming from Chrome Soft.

Would you plan to put a little more emphasis on that relative to the entire ball portfolio going forward?

On a -- we are -- let me answer the first question first.

The -- yes, in terms of the modernization and investments into the ball plant, we're right in the middle of it right now, halfway.

And it's already showing nice results, but we're on the 50-yard line headed to the end zone we hope.

And -- so a lot more work to do there, but team's done a wonderful job.

They got it well planned out, and we're optimistic on that.

In terms of your question on the optimizing the mix on golf ball, if I think, if I got that correct, I'm hesitant to answer too much on that just for competitive reasons.

Clearly, we're -- we think about those types of things, we have -- we're excited about our product development pipeline.

We're excited about our products that we have in the marketplace.

We absolutely have some thoughts on the exact question that you asked, but unfortunately, I'm not comfortable sharing at this point.

So I apologize for that.

No, figured I'd give it a shot anyway.

And then just, Chip, can you help us bridge some of the comments on the call?

I mean, as we've seen the U.S. golf markets up about 10%, 11% year-to-date.

You're -- in your guidance, you're talking about low to mid-single-digit growth of the industry.

So I guess, one, what is that apples to apples?

And then two, what should we be thinking about for the back half of the year?

Yes.

That low to mid-single-digit is what I think you should be thinking of for the back half of the year.

That makes sense?

Yes, that's great.

Perfect.

Your next question comes from Brett Andress from KeyBanc Capital Markets.

Chip, I just wanted of kind of follow up on that answer to the last question.

But are there any specific industry factors that we should be taking into account from a step-down, from plus 10% to low to mid-singles?

Or is that just you taking a more maybe conservative view on your end?

Because I do think that this industry growth in the first half has kind of surprised a lot of us.

Brett, I -- we're with you.

As you looked at my comments, we were pleasantly surprised by the surging growth in the first half both in the U.S. and in Japan.

But we expected the good market condition, it's -- the market was down in the first half of '17 and then picked up and was up in the second half and gained momentum in the first half.

We think it's going to be a good, solid market in the second half of '18.

We -- we're just a little bit more conservative on that forecast versus the first half.

Trends that we see overall in the global economy seem to support that.

But I think the takeaway is that it's a -- still a positive outlook for the second half and set out to be a very strong year.

Got it.

Understood.

And do you have a market share loss assumption built into that outlook?

Is it something consistent with the down 80 basis points that you had domestically in 2Q?

We don't really do our forecast that way.

So I don't have a second half market share forecast for you.

Obviously, without any product launches and such, we'll have some headwinds from that basis.

I do want also to just reiterate that on a constant-currency basis, we're expecting our core business, which is -- excludes the TravisMathew acquisition, to be up roughly 4% in that period.

And that's normalized for launches, so that's just, "Okay, we'll take out all the launch volume from both years, and we would show revenue growth that would be not too dissimilar from what we've told you our estimate for the market was." So it gives you a little bit of an indication that we're -- we continue to believe we're going to be able to track the market well on at least the revenue basis and be positioned well for the next year at the same time.

Understood.

And one more, it's just a little bit more of a clarification.

But Brian, could you maybe help unpack the other income line a little bit more?

I know you mentioned some of this in your prepared remarks.

Because it does get noisy with FX, but how should we think about that line trending in back half, I guess, if maybe we hold the FX rate constant?

Sure.

The one thing that -- as the rate changed at the end of the second quarter, so we took a lot of the benefit into the second quarter.

And so you'll see more of a negative curve in the revenue line in the back half.

But it won't be offset by the gains because they were already taken in the second quarter.

So it will have a negative impact in the second half.

Your next question comes from John Kernan from Cowen.

Just wondering what your assumptions are for irons in the back half of the year.

Because it feels like Rogue has a lot of momentum.

The comparisons, on a multiyear basis, aren't nearly as hard as they are in woods.

So I'm just curious, what you're (inaudible) embedding?

And how we should think about that segment?

Irons has been a really strong category for us, John, on a global basis now.

I know we've been the #1 iron in the U.S. market for several years now.

And as you correctly identified, Rogue is doing very well in the marketplace, #1 selling model and exceptionally well.

There are some other launches in the second half from competitors.

Those will have some level of impact from us, and since we have no big launch, I'd be surprised to see any major moves in our market share.

But we're very pleased with where we are in the category.

And been a leader there for some time and excited about the product that's in the pipeline, but nothing in the second half.

And Rogue's doing very well as you correctly identified.

Got it.

One thing that we noticed was the inventory's up pretty significantly relative to where your second half top line is implied.

So just wondering if -- where that inventory is concentrated.

And how you're thinking about your own inventory level right now?

Sure.

This is Brian.

Primarily 2 factors affecting that.

One was the addition of TravisMathew inventory, which we would not have had last year due June 3. So that was part of the increase.

The other part was, we do feel that we were under inventory last year and not able to fully service our accounts.

And so I think there was a view towards increasing inventory this year to allow us to better service the accounts.

All the inventory we feel pretty good about, and it'll just sell through in its normal course of business.

So I think we're doing pretty good there.

We have reached the end of our Q&A.

Mr. Chip Brewer, your closing comments, please?

I will just want to thank everybody for their time today and for dialing in.

We appreciate it and look forward to speaking with everybody at the end of Q3.

Thank you very much.

Thank you.

And this does conclude today's conference call, you may now disconnect.