Topgolf Callaway Brands Corp (MODG) 2018 Q3 法說會逐字稿

Good afternoon.

My name is Jesse, and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the Q3 2018 Callaway Golf Earnings Conference Call.

(Operator Instructions)

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

Thank you, Jesse, and good afternoon, everyone.

Welcome to Callaway's Third 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 third 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 http://ir.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 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 now like to turn the call over to Chip.

Thanks, Patrick.

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

My comments today will be brief, based on what was a very positive but quiet quarter.

Starting on Page 4 of the presentation, I'm pleased to announce another strong quarter of results that put us on track for a record year in terms of revenue, operating profit and EBITDA.

Overall market conditions have been favorable year-to-date, as is our brand momentum and operating performance.

For the last several years, we've grown our business faster than the market overall, and as we have realized increased scale, we have been able to deliver significant improvements in operating leverage.

Also, and perhaps more importantly, we continue to find attractive opportunities to reinvest in our core business that we firmly believe will strengthen and benefit our business over the long term.

Our new product pipeline is strong.

However, for competitive reasons, I'll not be able to speak to that today.

We are also enjoying a strong balance sheet position with no net debt.

It is a significant accomplishment after 2 successful acquisitions, incremental investments in Topgolf, share repurchases and what we believe are attractive and exciting reinvestments back into our businesses.

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've 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 our product cadence was front-half loaded this year and quarterly comparisons should bear this in mind.

In the U.S. our revenues were up 14.7% for the quarter and are up 29.4% year-to-date.

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

Looking at our equipment business, our year-to-date hard goods market share according to Golf Datatech is 24.9%, down 110 basis points versus last year.

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

In golf balls, we remain the #2 brand with 16.5% dollar share, up 250 basis points year-over-year.

We are showing strength across our entire line with very strong revenue growth in irons and golf ball and we continue to have a strong performance in the woods category with Rogue as the #1 selling model year-to-date.

Additionally, market conditions in the U.S. continue to be favorable, with 1% growth for the quarter and 7.3% growth in the market year-to-date.

Turning to Page 6. Our Asia business had a solid quarter with constant currency revenue growth of 3% in Japan and 2% in rest of Asia.

Year-to-date our revenues in Japan are up 21.5% and rest of Asia is up 20.6%, again on a constant-currency basis.

This is being driven by continued brand strength along with market conditions that exceeded expectations during the first half of this year.

Our slower revenue growth during Q3 was expected based on our launch timing.

Market conditions slowed during the quarter, but at this point, I would not read too much into this.

In Japan, our year-to-date hard goods dollar market share is 18%, down 230 basis points.

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

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

Field inventories remain in line and should finish the year in this manner.

The Japan team has been investing in capabilities to launch OGIO and TravisMathew in this market with good progress and modest revenue expected in 2019.

Moving to Page 7. In Europe, the team had another solid quarter with constant currency revenues up 3.1% for the quarter and 2.4% year-to-date.

Market conditions have been choppy in this region, with year-to-date through September market growth of 3.1% in U.K. slowing during the latest quarter and minus 2.1% year-to-date through August for greater Europe.

A lot of this is weather related, with the northern countries in this region experiencing a wet and cold spring followed by an uncomfortably warm summer.

For Europe as a whole, through August, we remain the #1 hard goods brand with a hard goods share of 23.6%, down versus last year, but in line with our expectations and trending positively.

During the quarter, one of our largest U.K. customers, American Golf, entered administration resulting in a bad debt charge for the quarter, and of course we have stopped trading with them as we work through the situation.

American Golf has been a significant customer of ours in the U.K., but has been highly leveraged and thus financially challenged for some time.

Another party has now purchased the company and we are in discussions with them regarding how to proceed with no decisions made at this point.

This situation negatively affected Q3 and could have a negative impact on the balance of the year in the region, but not in a manner that we view as material on a consolidated basis.

We are unsure of its impact for 2019 at this point.

Any business that errs such as this is always disappointing, but on the positive side, American Golf was over leveraged and thus this resolution will most likely be healthy for the U.K. market overall in the long run.

The European team has also been investing in resources to launch OGIO and TravisMathew in their markets with nice progress being made.

On the product side, not much to report this quarter.

As stated previously, most of our product launches occurred during the first half of the year with significantly less new product being launched in the second half.

We are pleased with how our products overall have resonated in the marketplace and our market positions.

Profitability in our clubs as well as our gear and accessory business segments are up nicely year-over-year.

Our ball business continues to deliver strong growth, but as noted during our last call, profitability is down versus last year.

This is due to increased advertising expense during Q3 and year-to-date manufacturing challenges, which have negatively impacted gross margins as we are significantly reinvesting in our Chicopee golf ball facility.

This reinvestment will deliver long-term benefits in quality, capabilities and capacity.

We remain very optimistic on this program.

Our new product pipeline is strong and we'll have a lot more to say about this on our next call.

Both the TravisMathew and OGIO acquisitions are performing very well.

In conclusion, we're having an excellent year.

As shown on Slide 8, we are once again raising our full year revenue and earnings guidance.

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

We are also reinvesting in a manner that we believe is best for the long run.

We remain optimistic and focused on long-run sustainable performance and shareholder value.

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, the investments we have made in our core business over the last couple of years are beginning to show benefits, and the OGIO and TravisMathew businesses continue to meet and/or exceed our expectations.

Overall, we had a very strong first 9 months for 2018, setting records for net sales and earnings.

Our net sales for the first 9 months increased in all operating segments, in all major regions and across all major product categories.

We are enjoying the macro tailwinds that we are experiencing this year.

The golf industry as a whole has been strong in many of our key markets, including the U.S. where hard goods grew approximately 7% through September.

Foreign currency has positively impacted our net sales by $15.6 million for the first 9 months.

Our 2018 year-to-date results were also positively impacted by the lower tax rate resulting from the 2017 Tax Cuts and Jobs Act.

In evaluating our results and forecast, you should keep in mind some specific factors that affect year-over-year comparisons.

First, as we have been discussing all year, our product launch cadence was front loaded in 2018 compared to 2017, which can affect quarterly comparisons.

Second, the TravisMathew acquisition occurred in August 2017.

As a result, that business was only partially included in our results for the third quarter and first 9 months of 2017.

Third, as a result of the OGIO and TravisMathew acquisitions, we incurred some nonrecurring deal-related expenses.

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

Fourth, during the fourth quarter of 2017, we recorded a net $3.4 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 exclude from our 2017 non-GAAP results.

With that overview in mind, I will now provide some specific financial results.

Turning to Slide 11.

Today we are reporting consolidated third quarter 2018 net sales of $263 million compared to $244 million in the third quarter of 2017, an increase of 8% and a record for net sales in the third quarter.

The significant improvement was primarily due to a 29% increase in the Gear, Accessories and Other category, driven by the addition of the TravisMathew business in August 2017; a 14% increase in our golf ball business, driven by our new Chrome Soft golf balls; a 28% increase in our putter business, driven by the success of our new Odyssey putter introduction; and a 7% increase in the irons category, driven by our Rogue line of irons.

Foreign currency negatively impacted international net sales by $1 million in the third quarter.

Excluding the TravisMathew business, our core business net sales increased 2.7% for the third quarter of 2018 compared to the third quarter of 2017.

As you can see on Slide 11, gross margin was 43.9% in the third quarter of 2018 compared to 43.1% in the prior year.

The 80 basis point increase compared to 2017 was primarily driven by increased average selling prices and favorable product mix related to the TravisMathew business and was partially offset by higher product cost due to more technologically-advanced products.

Operating expense was $105 million in the third quarter of 2018, which is a $6 million increase compared to $99 million in the third quarter of 2017, driven by a full quarter of operating expenses related to the new TravisMathew business as compared to a partial quarter in 2017 and also variable expenses related to higher net sales in the core business.

Operating expense as a percent of net sales was 39.8% in the third quarter of 2018 compared to 40.6% for the same period last year.

Operating income increased 77% to $11 million in the third quarter of 2018 compared to operating income of $6 million in third quarter of 2017.

When excluding the nonrecurring acquisition expenses, non-GAAP operating income for the third quarter of 2018 increased 14% compared to 2017 non-GAAP operating income of $9 million.

Other income was $400,000 in the third quarter of 2018 compared to other expense of $1 million in the prior year.

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

Fully diluted earnings per share was $0.10 on 97 million shares in the third quarter of 2018, a 100% increase compared to non-GAAP earnings per share of $0.05 for the third quarter of 2017.

On a GAAP basis, 2017 third quarter fully diluted earnings per share was $0.03.

Turning now to Slide 12.

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

Today, we are reporting consolidated first 9 months 2018 net sales of $1.062 billion compared to $857 million in the first 9 months of 2017, an increase of $205 million or 25%, and a record for net sales in the first 9 months.

The significant improvement was primarily due to a 43% increase in the Gear, Accessories and Other category as a result of the TravisMathew business; a 34% increase in the irons category, driven by our Rogue line of irons; a 22% increase in our golf ball category, driven by our new Chrome Soft golf balls; as well as a 21% increase in putters and a 5% increase in woods.

Excluding the TravisMathew business, our core business net sales increased 17.5%.

Foreign currency positively impacted international net sales by $16 million in the first 9 months.

As you can see on Slide 12, gross margin was 47.9% in the first 9 months of 2018 compared to 46.8% in the prior year.

The 110 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, all of which was partially offset by higher product cost due to increased technology into newer products.

Operating expense was $337 million in the first 9 months of 2018, which is a $36 million increase compared to $301 million in the first 9 months of 2017, driven by the addition of a full quarter of operating expenses related to the TravisMathew business, variable expenses related to higher net sales in the core business, expenses related to continued reinvestment in the core business and the negative impact of foreign exchange.

Operating expense as a percent of net sales was 31.8% in the first 9 months of 2018 compared to 35.2% for the same period in 2017.

Operating income was $171 million in the first 9 months of 2018 compared to operating income of $99 million for the same period in 2017, an increase of 72%.

Excluding the nonrecurring acquisition expenses from 2017, non-GAAP operating income for the first 9 months of 2018 increased $62 million over 2017 non-GAAP operating income of $109 million, an increase of 57%.

Other expense was $2 million in the first 9 months of 2018 compared to other expense of $8 million in the prior year.

The lower expense in the first 9 months of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017.

Fully diluted earnings per share was $1.37 on 97 million shares in the first 9 months of 2018, a 121% increase compared to earnings per share of $0.62 for the first 9 months of 2017.

Excluding the nonrecurring acquisition transaction expenses from 2017, fully diluted earnings per share for the first 9 months of 2018 increased 99% compared to non-GAAP earnings per share of $0.69 for the first 9 months of 2017.

Turning now to Slide 13.

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

As you can see, our liquidity continues to improve.

Available liquidity, which represents additional availability under our credit facilities plus cash on hand was $330 million at the end of the third quarter as compared to $195 million a year ago.

The increased liquidity from our asset-based loans and cash generated from operations was partially offset by our 2017 deployment of capital for the TravisMathew acquisition, factory purchases, our incremental investment in Topgolf and our investments in the golf 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 growth opportunities.

Our consolidated net accounts receivables were $130 million, a decrease of 15% compared to 2017, driven by launch timing and better collection rates.

Also DSO decreased to $56 -- 56 days, excuse me, compared to 66 days at the end of September 2017.

We remain comfortable with the overall quality of our accounts receivable at this time and we believe we are adequately reserved for the American Golf accounts receivable that Chip discussed earlier.

Also displayed on Slide 13, our inventory balance increased by 27% to $237 million at the end of the third quarter 2018.

This increase was due to the increased sales levels, an increase in in-transit inventory and preparation for the upcoming new golf season and low inventory levels at the end of the third quarter of 2017.

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

Capital expenditures for the first 9 months of 2018 were $26 million compared to $17 million in 2017, due mainly to investments in our ball plant.

Depreciation and amortization expense was $15 million for the first 9 months of 2018 compared to $13 million in 2017.

Finally, for the third 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 $3.4 million of nonrecurring tax expense mentioned above.

As seen on Slide 14, 2018 net sales are estimated to be in the range of $1.230 billion to $1.240 billion, an increase of 17% to 18% over 2017 and $15 million to $20 million higher than our previous guidance.

The incremental sales growth versus previous estimates is expected to be driven by increases in the core business, which is currently projected to grow 12% to 13% for full year 2018 compared to 2017.

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

The company currently estimates that changes in foreign currency rates will positively impact full year 2018 net sales by approximately $14 million, consistent with our previous estimate.

We estimate that the full year 2018 gross margin will be 46.8%, consistent with our prior guidance.

We estimate full year 2018 GAAP operating expenses to be $447 million, an increase of $2 million compared to previous guidance, due to an increase in variable costs attributable to the higher sales levels.

GAAP earnings per share are estimated to be $1.01 to $1.05 compared to prior estimates of $0.95 to $1.

The 2018 figures are based on 97 million shares outstanding.

We are also assuming a 21% tax rate for 2018, which includes additional R&D tax credit for 2018 that were not included in our prior estimates.

We estimate our capital expenditures in 2018 to be approximately $35 million to $40 million.

Generally consistent with our prior estimate of approximately $40 million.

Depreciation and amortization expense is estimated to be approximately $20 million in 2018.

We estimate adjusted EBITDA to be approximately $153 million, a 53% increase versus 2017 adjusted EBITDA, driven by the core business, the full year of TravisMathew and favorable foreign currency exchange rates.

That concludes our prepared remarks today.

We will now open the call for questions.

(Operator Instructions) Our first question comes from Steven Zaccone with JPMorgan.

Our question is on gross margin.

You saw much better performance on gross margin in the third quarter than expectation.

What's driving the embedded guidance for gross margin to decline materially in the fourth quarter, to arrive at that unchanged full year outlook?

And then along those same lines, can you elaborate a little bit more on the timeline to improve golf ball margins?

Is there a way to think about how much of a drag these costs are to the gross margin guidance this year and the ball segment overall, and should we expect this margin pressure to alleviate in the first half of next year?

Sure.

Steve, it's Brian.

Primarily, it's the decrease in the revenue that's going to affect the decline in gross margins a lot; and there's also some expenses that we shifted from Q3 to Q4 and between the combination, you'll just see lower margins in Q4.

And then...

Yes, and maybe -- this is Patrick.

Just to add that we're just launching less product.

So remember the launch product has higher margins, so that mix is -- will hurt Q4 a little bit as well.

Okay, and then on golf ball margins, Steven, it's Chip.

The -- we will see -- we've had some headwind on golf ball margin this year, which has been related to the capital investment projects that we're doing in Chicopee, and those projects are progressing nicely.

We saw some improvement during the quarter on the gross margin line relative to previous quarter.

So that trend is positive there, as we would hope and expect it to be.

And we will expect, on the gross margin of golf ball, there to be improvement next year as we work through the capital projects there and that project ramps and transitions into the later stages of its status.

Your next question comes from Susan Anderson with B. Riley.

I was wondering if maybe you could touch a little bit more on the international performance.

I think maybe you were just talking about Japan when you felt -- you said you felt like it was kind of a 1-quarter thing, but maybe just talk about the slower growth that we're seeing across all the regions?

And then a little bit more on the U.K. being -- or seeing how that should impact you guys over the next year?

Sure, Susan.

So in Japan, they've had an excellent year and we expected performance to slow in the quarter.

That market did slow during the quarter and the reason I'm saying don't read too much into that is it's, in a relatively smaller quarter, it's very sensitive to which products launch at different times and last year at Q3, they had some very significant products, one of which was our irons, launched in that market, which drove significant growth in Q3 in Japan in 2017 over '16.

When you look at the results in 2018 Q3, they're down meaningfully over 2017, but they are equal to what it was in 2016.

So it's one of those issues that Japan I think is a lot of launch timing relative to the specific quarter and not a lot to read into that.

Our business continues to perform very well there.

The market fundamentals are very solid and -- as mentioned, and I think it's very important, that the inventory levels there are in good shape and anticipated the year in the good shape.

So big picture, I like where we stand and where the market is overall.

The U.K., or Europe in general, has been a slower market than the rest of the world this year.

Some of that, of course, is weather related.

I'm sure some of it is also macroeconomic headwinds that are a little more specific to that market.

If you step back a year ago, that market was the fastest growing market on the international stage.

So it's anniversarying a more tough year too, because it grew significantly in 2017.

And at this point, the American Golf situation is worth noting and hence I brought it up, but we don't think it'll be a material factor for us, certainly within our guidance for the balance of this year.

At this point, I don't think it's a material headwind for us into next year.

Just -- but worth noting is the only reason we brought it up.

Great, that's very helpful.

And then just one more, if you could maybe talk about across the hard goods categories the unit growth versus the dollar growth, just kind of the differences you saw there?

I don't know that I have enough specific information in front of me to go category-by-category on that.

I believe we saw nice unit growth this year across hard goods in general, but that's partially because it was a very strong iron and wedge year in total hard goods.

So you see some nice growth there.

And then in...

Both irons and average selling prices are up across the board for woods, irons, putters and balls on a year-to-date basis.

And Brian, your comment is on Callaway specifically, correct?

Yes.

Correct.

Does that answer your question, Susan?

Yes.

No, that's helpful.

Your next question comes from Dave King with Roth Capital.

First maybe following up on the ball margin line of questioning a bit.

Once you get the Graphene ball yield issues behind you, is it fair to assume that the ASP increases on those should more than cover the increased product costs associated with it?

Dave, the -- on that specific product, it's going to be a little bit volume sensitive.

But if we hit our volume goals, yes, it will.

Okay, okay, that's good to hear.

And then on the slower industry growth and following up on that line of questioning as well I guess.

Specific to the Q4 revenue guide, I guess what's that reflect in terms of industry growth?

And should we be thinking about the growth for Callaway once you normalize for product launch timing, if you've got that again?

Obviously, we're very late into the year.

So as we go through our forecasting process, it's a little less dependent on estimations of market conditions.

The market's been fundamentally strong and so we are anticipating that, that will maintain itself and that we'll see continued good market conditions, flat to up low single-digits in the quarter that we're in right now and going forward.

Okay.

So then is that fair to assume then as we -- I know it's a bit early in terms of thinking about next year, but maybe perhaps helped by the strong product pipeline, is it fair to assume further industry growth next year based on everything you can see with your crystal ball today?

I think that the industry is in a very solid fundamental position if you -- it's a theme we've talked about now for 2 years on is that the fundamentals of the golf industry are significantly improving.

It's almost structurally better now and consumer sentiment goes up and down a little bit depending on near-term events and such, but it's still at very good levels.

So yes, our outlook remains positive.

Your next question comes from Brett Andress with KeyBanc.

Just building on that industry question again.

Obviously, your wholesale shipments are implied down meaningfully in the fourth quarter.

The industry comparisons do get easier.

Your own Callaway-specific retail comparisons also get easier.

So I guess are you just taking a significantly more conservative view on your share losses in the fourth quarter knowing that you're not going to launch product?

Or are you -- is this more strategic to exit this year with much cleaner channel inventories?

Well, what we're doing, Brett, is definitely disciplined.

So we told everybody all year long, it was going to be our product team is very heavily focused on the first half and that the second half would be more challenged from that perspective.

We think doing that is in the best interest of our brand and our business over the long run.

If you look at full year, or any metric over any reasonable period of time beyond the quarter, we're beating the market by a meaningful amount.

But in the quarter, we think we may not do that and I wouldn't call it overly conservative or overly aggressive.

It's our best estimate of where we will be at the end of the year.

And it is indeed part of a long-term plan.

Got it.

And I also wanted to ask on tariffs.

So List 3 went into effect in September, and are there any items or components that you source from China that we should be thinking about in this new list, or any way to quantify an impact for 2018 or 2019?

Yes, Brett, the -- it's largely headwear and bags that are affected right now and it's only nominal for 2018.

Going into '19, the rate is scheduled to go from 10% to 25% and that would have an impact on us.

It -- we're currently estimating about $4 million to $5 million effect for next year.

Okay.

And then if I could squeeze just one more, more of a housekeeping.

Can you give us some more detailed on TravisMathew in the quarter, kind of maybe what the revenue number was there?

Rather than break that out by quarter, I'll just say they're still on track to hit about the $80 million for the year, we're trending toward that.

Your next question comes from Michael Swartz with SunTrust.

Chip, or I guess, Brian, just as I look at the gear business in the quarter, margins were down, looks like pretty significantly year-over-year if I'm doing the math right, and I think you had shown some pretty good year-over-year growth in prior quarters, obviously, with the mix of TravisMathew in there.

Is there something we should be thinking of specific to the quarter that caused a little bit of that compression?

You're talking about operating margin?

He's looking at operating margins off the tables.

Yes, on the gear business, yes.

I'm showing it up slightly.

Okay, then I'm probably doing math wrong.

Because I think last year you had some embedded costs in there, due to the -- think it was due to the OGIO and the TravisMathew acquisition.

So I was backing those out, looking at it ex costs.

And on that basis, it looks like it was down, but I may be wrong on that.

Yes, I think, Michael, those costs were in the corporate line, so they weren't in the segment profitability.

So it's probably -- it was already backed out.

So I think we're up slightly in gear profit and that's more Travis business, right, versus last year.

We're showing '17 was 11% and '18 was 11.2%.

Okay.

That's what I have.

And then just in terms of the balance sheet, you've delevered pretty aggressively over the past couple quarters.

So just with the cash flow profile of this business going forward being a net 0 debt position, how do we think about usage of cash going forward?

And maybe, Brian, what's the maintenance level of cash you keep on -- you like to keep on hand on the balance sheet?

Yes, I'll take it, Michael, at least the first part of that.

So we've been able to find attractive opportunities and areas to reinvest back in the business.

So that has been first and foremost, our most desired and successful use of cash.

We also look for outside investment opportunities such as OGIOs and TravisMathew.

We're going to be strategic and disciplined about that.

But it is certainly part of our growth strategy and we believe we have the capital structure to take advantage of an attractive opportunity, if and when it happens to develop.

And then, of course, dividends, share buybacks, investments in Topgolf, et cetera, have also been part and parcel of how we deploy capital and will continue to be in the mix there.

But first and foremost has been the investments back into the core business and we're pleased with how they've delivered and the -- both driving scale and operating leverage.

And then part 2 of your question about how much cash we want to keep on hand, it varies.

But we need $50 million to $60 million around the globe just because we have operations in so many different places.

And so that's probably what you'll always see, and then part of it depends on the level of our credit facility, how we're borrowing, seasonality, it varies, so you'll see it fluctuate during the year.

Your next question comes from Dan Wewer with Raymond James.

Just wanted to ask you about pricing for drivers.

I'm hearing that one of your competitors' new product line is going to have introductory price of $549.

It's great that the industry has been able to continue to take price with any kind of blow back from the consumer, but is there a point where you think prices could get too high?

Dan, pricing is an interesting animal and it certainly can get too high at some point.

I don't know when that might be.

It's very related to how much utility is in the product.

What ELY would talk about, DSPD, commercially superior, pleasingly different product.

If you build a significantly better mousetrap, they price -- our consumers are not that price-sensitive and we certainly have been able to do -- take price over the last several years as we've delivered great product.

But you can't do it unless you actually deliver.

And so certainly something that we'll continue to evaluate and has been a positive for the industry over the last several years.

Second question I have is regarding acquisitions.

It's almost 15 months since the TravisMathew purchase.

I would have thought that you would have completed another deal by now.

Just curious as to what your enthusiasm is for acquisitions going forward?

Our enthusiasm is the same as it has been.

We're not under a timetable here.

We're going to be disciplined in this process.

We feel like we're both fortunate and also must have done some things right in that the acquisitions we've done are working.

And we're determined to continue on that track record.

So it's clearly part of our strategy, but there is no timetable and you can expect these types of things to be lumpy and us to remain disciplined on that.

And the last question I have regarding TravisMathew and OGIO, you noted that you're rolling out into Japan as well as Europe.

You sounded a bit more upbeat on Europe than Japan at this point.

But can you talk about what type of investments you will need for those 2 brands to support the international growth?

And when you roll that in with your domestic growth objectives for TravisMathew and OGIO, what kind of revenue growth are we thinking going forward?

Is this a 20% business growing, or at some point does it moderate?

TravisMathew, at some point it moderates, I don't know at what point.

We don't see that point in the near future.

It's growing at a rate faster than 20% and has for some time.

And we see continued brand strength there.

The investments that are embedded in these international growth initiatives for those 2 brands have been ongoing.

They're embedded in our results this year and will continue into next, but we're able to roll those into our general business now.

And it's, again, one of the benefits of scale at the moment.

And so I just wanted to bring it up in my comments to identify that it is one of those things that we are investing in.

It's essentially a use of capital.

The initial revenue estimates are going to be modest, but they're going to grow and they're going to grow, we hope, quickly and a reason for optimism in the future on a platform which is doing pretty well, and the TravisMathew brand has a lot, a lot of potential.

Your next question comes from Rommel Dionisio with Aegis.

So just wanted to drill down on the putter segment which has been strong all year.

Obviously, you guys cited the Odyssey brand has been doing well and that's the bulk of it.

But how is Toulon doing, can you just give us an update there?

I think it's been 2 years since the acquisition.

And could you just update on the success you're having taking on Scotty Cameron in that ultra premium segment of that market?

Well, Rommel, this is Chip again.

The putter category, thank you for recognize that, they've had a great year and there's good momentum in that category.

So very pleased with that.

The Toulon brand is gaining strength, but it's still quite small.

It is less than 10% of our putter business.

It's probably growing very quickly, but still a very small percentage of our total putter market.

I'm more pleased with what I see from the brand and strength of that product line going forward.

I think that positions it well.

But if you look at the overall putter category, Scotty Cameron still has a dominant position in the milled premium side and we have a dominant position in the technology face insert based premium side of the business.

Your next question comes from John Kernan with Cohen.

This is Krista Zuber on for John.

Just a couple here.

First, you kind of highlighted some of the product cost pressures as a partial offset to gross margin in Q3, I was just wondering if you could sort of shed some light on how we should think about that as we head into next year?

I think what we meant by product cost pressures was the fact that we are designing more and more complicated high-end products.

So following up on how do you raise average selling prices, well, you make better product and in making better product, it's often harder to make.

And I think that's what we're referring to.

At this point, we don't see any significant commodity inflation pressures in the product cost side.

Great.

And then on the inventory front, now that you've lapped TravisMathew, ideally kind of where do you think, I guess your inventory levels should sort of fall out for 2018?

Where they should fall out?

Overall, with the big -- as their business continues to increase, we're going to have higher levels of inventory to go with the higher sales.

If you look at the increase year-over-year, part of that is last year, we think we had lower -- too low of inventory to adequately service the accounts.

And then this year, we also have some additional in-transit inventory that has been compared to the prior year.

If you look at the inventory as a percent of sales, it's in line with our historical numbers.

And I think we hope that those trends continue.

I wouldn't add anything to that one other than tell you that we're excited about the product line that we'll be talking a lot more about on the next call.

Your next question comes from George Kelly with Imperial Capital.

Couple questions for me.

So first, back to TravisMathew going international.

Is that all happening in -- I mean is Europe and Japan, will those both be in 2019?

Yes, George.

I -- we probably sell a little bit there right now, but it's very small.

Depending on the market, you have to get a distribution base set up.

We've, in those various markets, had to work through where they previously worked through distributors and now we're running it through subsidiaries and that was a transition originally.

And then in Asia, you have to develop sizing options, et cetera, specific for that market, sometimes some small stylistic differences.

So and then showrooms, distribution systems, et cetera, all this back end work that goes with that.

So modest revenue probably did occur this year.

It'll be a nice percentage gain over that next year.

Probably not meaningful in the whole thing, but long term, it is attractive and we hope will trend towards a meaningful.

And in Japan, is it something that you can utilize your existing partnership, your business there, the TSI business?

There are certain assets and certain capabilities that will overlap there.

That's a JV, so it does complicate what we can and can't do there, or what we'll choose to do or not do there.

But we have scale and capabilities to handle it and as mentioned, are making good progress.

Okay.

And then just a couple additional questions on the golf ball business.

What -- so and this has come up in a few questions, but can you quantify the incremental costs this year related to -- and the incremental operating kind of, not CapEx, but operating costs related to the CapEx projects that you're doing?

The incremental operating costs related to it?

Yes, or just the production issues or things that I thought you flagged where there was some added...

Yes, no, I totally understand that.

We can't, George, or we're going to chose not to.

But you can see it was just in a quick calculation that our operating margins, that's all we reveal, are down in golf ball on a year-over-year basis.

And I can tell you a significant part of that is related to what -- the capital improvement projects.

Okay.

And then I guess what I'm trying to understand is if most of that's just sort of -- it would be onetime in -- I mean that's going to go away at some point?

Yes, some of it's going to go away, George.

It gets a little complicated, because we're also going to add D&A as these capital project go in, right?

So our fixed cost base goes up, but we're building scale and our gross margins should recover.

And I only can point you to that we're very optimistic and very positive about the project.

It's going to increase our capacity, our capabilities, our quality of that facility and we believe we will return to very attractive profitability metrics as we work our way through that, hopefully with increased scale.

That's great, that's great.

And then last question for me.

Once this -- the ball CapEx is -- the major project is complete, what would you say maintenance CapEx is on a go-forward basis, maybe as a percent of revenue, or just how you think about maintenance CapEx?

We don't have that for you right now, George.

But we're working on that and let us take that as a action item to see if we can determine something for you there.

The last question we have time for today comes from Casey Alexander with Compass Point.

Real quick, could you give me the CapEx and depreciation numbers again?

For the 9 months?

No, forecast.

$35 million to $40 million for CapEx.

And then about $20 million for D&A.

Okay, great.

Can -- when you talk about industry year-to-date growth, how would you break that down in terms of how much growth has come from average selling prices versus how much growth has come from unit growth?

Good question.

Do you have that, Patrick?

I've got dollar growth at 7.3% and then unit growth at 2.7%.

That's for -- according to Datatech.

According to Datatech for the U.S.

U.S. channels they cover.

Okay.

And then, Chip, this one is a little bit more conceptual, because I know that you guys don't do anything without having a metric applied to it.

And one of the competitors recently announced that they are leaving the PGA merchandise show, which is probably the single most expensive one-line item of the year.

And I know at the end of the PGA merchandise show, after you've moved all the people, all the equipment, all of the props and paid the bills, you know how much -- you can quantify how much it costs.

How do quantify what you get out of it?

Yes, Casey, good question.

And I don't think you can reliably quantify what you get out of it.

It's not -- you don't write a lot of orders at the PGA show anymore, and we have such good reach and scale now that we would reach customers without it.

But it is a annual gathering of the industry.

It is supported and controlled by the PGA of America, which is a very important partner of ours.

The Green Grass Channel is our largest sales channel.

We -- you would -- very importantly and different companies are going to view the same data different ways.

Interestingly, sometimes they may change their mind depending on where their individual circumstances are.

But we view it as long-term strategic to be there and furthering our position in the industry, but -- and the strength of our commitment and relationship with, particularly that PGA professional and the Green Grass Channel.

Well, and I appreciate that.

But as we all -- I mean, it used to be the forum for the platform to launch new product.

And now the new product cadence has moved all over the calendar.

And you have highly sophisticated sales teams that are interacting with a PGA professional 12 months out of the year.

And so I just begin to wonder when that incremental cost does cease to be worth it, and when you start to believe that you're subsidizing a sales opportunity for sort of the mom-and-pop neighborhood to try to develop products that pick away at your business.

Well, I see your point there, Casey.

We're committed to it and going to be at the 2019 PGA show and we're proud of that.

And we'll always look at what competitors are doing.

But I would put our results against most right now and we'll evaluate it ongoing, but right now, we think it's a good move and we're going to try to use it to the advantage of the company and our brand and shareholders.

And ladies and gentlemen, that's all the time we have for questions.

I'd now like to turn the call back over to Mr. Chip Brewer.

Well, thank you, everybody, for calling in.

We appreciate your attention on the call and all the good questions.

We are proud of the results and look forward to talking with you again early next year.

Have a great rest of the year.

Ladies and gentlemen, this does conclude today's call.

You may now disconnect.