Topgolf Callaway Brands Corp (MODG) 2018 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Q4 2018 Callaway Golf Earnings Conference Call.

(Operator Instructions) Please note that today's conference is being recorded.

Thank you.

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

Thank you, Catherine, and good afternoon, everyone.

Welcome to Callaway's fourth quarter and annual 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 fourth quarter and annual 2018 financial results.

A copy of the press release and the associated presentation are available on the Investor Relations section of the company's website at 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's website under Webcasts & Presentations tab.

Also in 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, and good afternoon, everybody, and thank you for joining us for today's call.

Starting on Page 4 of the presentation.

I'm pleased to announce a record year in terms of both revenue and operating profitability.

Although there was some slowing during Q4, market conditions were positive as a whole for last year, and we once again grew our core business faster than the market, while simultaneously strengthening it via strategic and tactical reinvestments.

We have also been able to find attractive opportunities for growth in areas that are tangential to our core and where we believe there are synergies that will help us create long-term value.

The Jack Wolfskin acquisition, which closed this January, is an excellent example of this.

It provides us breadth and scale in a rapidly growing apparel and lifestyle portion of our business, and we believe we can and will continue to lead the golf equipment business, while also developing and growing a strong apparel position.

And that the 2 portions of our business will benefit from each other, while providing us both higher long-term growth rates and scale that will benefit our shareholders.

As is my custom, I'd like to take this chance to thank the Callaway 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 2018 operational performance by region.

In the U.S., our revenues were up 3% for the quarter and 25% for the year.

These results were driven by market conditions that were up approximately 5% for the year in hard goods, double-digit growth in our core equipment business as well as the addition of the TravisMathew brand, which is performing at an exceptionally high level.

Looking at our equipment business.

Our full year hard goods market share, according to Golf Datatech, was 24%, down 110 basis points versus last year.

However, I believe this understates our overall market share as several key accounts are not captured in this data.

Anyway, according to Datatech, we remain the #1 in total clubs, and in golf balls we remain the #2 brand, with 16.4% dollar share, up 210 basis points year-over-year.

Turning to Page 6. Our Asia business had a strong year but a slow quarter.

In Japan, our revenues were down 22% for the quarter but up 12% for the year.

For the year, we grew in our core equipment business as well as our apparel joint venture.

Market conditions for the year were up slightly but slow during Q4.

In our equipment business, we also had less product launches versus last year and we intentionally worked to keep our field inventories in balance going into this year.

In Japan, our year-to-date hard goods dollar market share was 17%, down 250 basis points, but maintaining our #2 position in this market.

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

These additions will add to our apparel scale and presence in this market.

Moving to Page 7. In Europe, the team had another solid year, with revenues down 9% for the quarter but up 6% for the year.

As with the other regions, the quarterly variance is largely due to launch timing.

The European market overall was slightly down for the year but close to flat.

For Europe as a whole, again in 2018, we were the #1 hard goods brand with a hard goods share of 22.7%, down versus last year but in line with our expectations and 420 basis points more than the #2 brand.

During the quarter, we worked through the bankruptcy of one of our largest U.K. customers, American Golf.

They were purchased out of administration and are now once again trading with us, albeit in a slightly reduced footprint, but a more healthy financial position.

The European team has also been investing in resources to launch OGIO and TravisMathew in their markets, with plans for launching the brands this year.

Revenues will be small at first but we are energized by the prospects of leveraging our global infrastructure to grow these brands.

On the product side, across all of our businesses, we believe our new product offering for 2019 is very strong, as is our future product pipeline.

Focusing on our 2019 equipment launches, we entered the year energized by one of the strongest overall lineups that I've ever been a part of.

A few of our hero products are the Epic Flash Driver, featuring Flash Face and Jailbreak technologies.

The Apex and Apex Pro Irons, our flagship iron brand, with a complete technology overhaul in a line that hasn't been refreshed since 2016.

Stroke Lab Putters, featuring a proprietary new shaft technology that actually improves your stroke.

And the ERC Golf Ball, with Triple Track Technology, a product so innovative we named it after our founder, Ely Reeves Callaway.

All of these products are highly reviewed and our receiving strong feedback.

Of particular note, we're proud to be able to report that in the 2019 Golf Digest Hot List, the Epic Flash Driver and the Apex Irons were the only driver and irons to receive 20 out of 20 possible stars for ratings in performance, innovation, looks and feel, and demand.

Our product strength comes from our long commitment to R&D and innovation, investments we have been making for many years now.

Embedded in the Epic Flash Driver and its Flash Face Technology is what we believe to be the first commercial application of artificial intelligence in the design of golf equipment.

This ability led to a face design that was not at all intuitive and to the best of our knowledge, could not or would not have come about in any other manner.

We believe we are establishing a first-mover advantage by leading in this technology and that it will have applicability across multiple products going forward.

In fact, I'd go as far as to say that within a few years, if you're not using this approach, it'll be difficult to stay competitive.

Both the TravisMathew and OGIO acquisitions are performing very well, they also have strong lines going into 2019 and brand momentum.

Nothing to report on the Jack Wolfskin business at this point.

We successfully closed the first week in January and are now working to integrate the business from an operations, finance and IT perspective.

We are also beginning the process of looking for synergies and for developing growth initiatives for key markets such as the U.S. and Japan, where Callaway has a strong presence but Jack Wolfskin does not.

There is without a doubt a lot of work in front of us, but we also feel energized and excited about the potential.

Turning to our 2019 outlook.

We are projecting market conditions to be flat to slightly up.

We expect our core business to grow faster than the market, with low- to mid-single-digit growth in our equipment business, double-digit growth in OGIO and TravisMathew, and Jack Wolfskin performing consistent with the expectations we communicated when we announced the transaction in early January, albeit with higher financing cost due to the change in credit markets during late Q4 of last year.

We have been delivering, and over the long term expect to continue to deliver, scale-based operating leveraging improvements, the timing of which is being balanced by the fact that we are also continuing to find high-return investments in all of our businesses.

In our core business, we are now in year 3 of a 3-year capital plan for our Chicopee golf ball facility that we believe will be transformational in terms of capacity and capabilities.

This supports the strong growth we've generated in golf balls over the last several years and also sets the stage for continued improvements.

In support of our equipment business, we are also continuing to invest in sales, marketing, R&D, including furthering the AI platform previously discussed, and tour, albeit in more measured ways now.

In our apparel and soft goods businesses, we are investing on the OGIO and the TravisMathew platforms on a global basis and in Jack Wolfskin, the improved finance and IT systems as well as global operations and brand growth.

We are confident we can make these investments and continue to deliver a strong operating performance.

Looking further forward, we believe our ability and commitment to make these long-term investments will differentiate us and pave the way for long-term success, including growth above the rates inherent in our core businesses and over the long term, improved operating leverage based on economies of scale.

This strategy has served us well over the last 7 years, and we believe that it will continue to do so going forward.

In conclusion, we are looking forward to another strong year in 2019.

And perhaps more importantly, we believe we're continuing to move down a strategic path that makes us a much larger and more diverse company, with higher embedded growth prospects and a significantly higher long-term earnings outlook.

Brian, over to you.

Thank you, Chip.

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

It was a good year by almost any measure.

The golf equipment industry as a whole was strong overall, including the U.S., which grew almost 5% for the full year.

And for the full year 2018, we achieved record net sales and a 55% increase in adjusted EBITDA compared to the prior year.

In addition, the OGIO and TravisMathew brands, which we acquired in 2017, continue to meet and/or exceed expectations.

We are also excited about 2019.

Our 2019 product line is as strong as we have ever had.

And last month, we completed the acquisition of Jack Wolfskin, a leading outdoor apparel, footwear and equipment company based in Germany.

We remain excited about the Jack Wolfskin acquisition, including the strategic benefits it provides and the opportunities it presents for growth and for shareholder value creation over the mid- to long term.

All in all, it has been a very busy but enjoyable last 7 years, as we have transformed Callaway into a premium golf equipment and active lifestyle company.

In evaluating our results for the full year and fourth quarter, 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 is only partially included in our full year 2017 results.

Second, as a result of the OGIO and TravisMathew acquisitions, we incurred some nonrecurring deal-related expenses in 2017.

When comparing non-GAAP 2018 results to our 2017 non-GAAP results today, we 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, primarily related to the 2017 Tax Cuts and Jobs Act that impacted the full year, which we excluded from our 2017 non-GAAP results, as we have been.

Fourth, as a result of the 2017 Tax Cuts and Jobs Act, 2018 benefited from lower tax rates compared to 2017.

Finally, as a result of the Jack Wolfskin acquisition, we incurred some nonrecurring deal-related expenses in 2018 as well.

When discussing our 2018 non-GAAP results today, we exclude those nonrecurring deal-related items.

Again, that is how we evaluate our performance.

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

Please bear with me as there is a lot to discuss today, especially given the acquisition of Jack Wolfskin and my comments are, therefore, a little longer than usual.

Turning now to Slide 12.

Today, we are reporting consolidated full year 2018 net sales of $1.243 billion compared to $1.049 billion in 2017, an increase of $194 million or 14% -- excuse me, or 19% and a record for net sales.

Our net sales in 2018 increased in all operating segments and in all major regions.

The 19% growth was primarily due to a 26% increase in the irons category, driven by our Rogue line of irons.

A 20% increase in our golf ball business, driven by our new Chrome Soft golf balls.

And a 36% increase in the gear, accessories and other category, driven by the TravisMathew business.

Changes in foreign currency exchange rates positively impacted our 2018 net sales by $40 million for the full year.

Excluding the TravisMathew business and the effects of changes in foreign currency rates however, our core business grew over 11% in 2018.

As you can see on Slide 12, gross margin was 46.5% in 2018 compared to 45.8% in the prior year.

The 70 basis point increase compared to 2017 reflects a favorable shift in product mix towards the higher margin TravisMathew business as well as overall higher average selling prices, partially offset by higher product costs due to more technologically advanced products.

Operating expense was $450 million in 2018, which is a $48 million increase compared to $402 million in 2017 and includes a full year of operating expenses related to the new TravisMathew business.

Increased employee expenses resulting from increased headcount and inflationary pressures, higher variable expenses due to the increase in net sales and invested in the core business.

Operating expense as a percent of net sales was 36.2% in 2018 compared to 38.3% for the same period in 2017.

Operating income was $128 million in 2018 compared to operating income of $79 million for the same period in 2017, an increase of 62%.

When excluding the nonrecurring Jack Wolfskin transaction expenses from 2018 and the nonrecurring OGIO and TravisMathew transaction expenses and the tax adjustment for 2017, non-GAAP operating income for 2018 was $132 million compared to non-GAAP operating income of $90 million in 2017, an increase of 47% or $42 million.

Other income was $3 million in 2018 compared to other expense of $11 million in the prior year.

The higher other income in 2018 resulted primarily from hedging gains in 2018 versus losses in 2017, and includes a $4 million purchase price hedging gain related to the Jack Wolfskin acquisition.

That same purchase price hedge has also resulted in a $3 million loss in the first part of January 2019.

Fully diluted earnings per share was $1.08 on 97 million shares in 2018, a 157% increase compared to $0.42 in 2017.

Excluding the nonrecurring Jack Wolfskin transaction expenses in 2018, non-GAAP fully diluted earnings per share was $1.07 versus non-GAAP fully diluted earnings per share of $0.53 in 2017, which excludes OGIO and TravisMathew nonrecurring transaction expenses and the tax adjustments.

I will now briefly report on our fourth quarter results.

Turning to Slide 13.

Today, we are reporting consolidated fourth quarter 2018 net sales of $181 million compared to $192 million in the fourth quarter of 2017, a decrease of 5.7%.

The decrease was better than we had originally planned and it reflects our product launch cadence in 2018, which was heavily weighted toward the first half of the year.

With that said, we continue to see significant improvement in our golf ball business, which was up 14% in the fourth quarter, driven by our new Chrome Soft golf balls and a 13% increase in the gear, accessories and other category, driven by quarter-over-quarter increase in the TravisMathew business.

Foreign currency negatively impacted international net sales by $1 million in the fourth quarter of 2018 compared to the prior year.

As you can see on Slide 13, gross margin was 38.7% in the fourth quarter of 2018 compared to 41.6% in the prior year.

The 290 basis point decrease compared to 2017 was primarily driven by an overall decrease in sales volume and a higher product cost due to more technologically advanced products in the 2018 product line, partially offset by higher average selling prices and product mix related to the TravisMathew business.

Operating expense was $113 million in the fourth quarter of 2018, which is a $13 million increase compared to $100 million in the fourth quarter of 2017.

This increase is primarily attributable to increased employee expenses, resulting from increased headcount and inflationary pressures, increased marketing expenses and nonrecurring transaction expenses related to the Jack Wolfskin acquisition.

The operating loss from operations was $43 million in the fourth quarter of 2018 compared to an operating loss from operations of $20 million in the fourth quarter of 2017.

When excluding the nonrecurring Jack Wolfskin expenses, non-GAAP operating loss from operations was $40 million in 2018 compared to a non-GAAP operating loss of $90 million for the fourth quarter of 2017, which excludes the nonrecurring TravisMathew acquisition expenses and the tax adjustments previously discussed.

Other income was $5 million in the fourth quarter of 2018 compared to other expense of $3 million in the fourth quarter of 2017.

The higher other income in the fourth quarter of 2018 resulted primarily from a $4 million purchase price hedging gain in 2018 related to the Jack Wolfskin acquisition compared to hedging losses in 2017.

Basic loss per share was $0.30 on 94.5 million shares in the fourth quarter of 2018 compared to a loss of $0.20 for the fourth quarter of 2017.

On a non-GAAP basis, which excludes from 2018 and 2017, the applicable acquisition costs and tax adjustments previously discussed.

The 2018 loss per share was $0.32 compared to a fourth quarter loss per share of $0.15.

Turning now to Slide 14.

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

Available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $256 million at the end of 2018 compared to $239 million at the end of 2017.

Increased liquidity from our asset-based loans and cash generated from operations was partially offset by our 2018 incremental stock repurchases, increased capital expenditure and the repayment of our credit facility, which we had used to fund the OGIO and TravisMathew acquisitions in 2017.

Because we essentially financed 100% of the Jack Wolfskin purchase price, our liquidity remains good following that acquisition.

Our consolidated net accounts receivables were $71 million, a decrease of 25% compared to 2017, which is attributable to launch timing and better collection rates.

Days sales outstanding decreased to 54 days compared to 63 days at the end of 2017.

The 2018 DSO was favorably impacted by 6 days due to the change in the revenue recognition accounting policy change.

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

Also displayed on Slide 14, our inventory balance increased by 29% to $338 million at the end of 2018.

This increase was due to supporting an overall larger business in 2018, including increased launch inventory from the 2019 golf season.

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

Capital expenditures for 2018 were $37 million, a year-over-year increase of $11 million in 2017 due mainly to investments in our ball plant.

Depreciation and amortization expense was $20 million in 2018 compared to $18 million in 2017.

Finally, including both open-market repurchases and shares acquired through the settlement of equity awards, in 2018 we repurchased 1.4 million shares for approximately $22 million as compared to 2017, when we repurchased 1.5 million shares of our common stock for approximately $17 million.

We currently have remaining approximately $50 million under our current stock repurchase authorization.

I'll now comment on our guidance -- 2019 guidance, which begins on Slide 15.

Because we are still in the process of determining the amount of noncash purchase accounting adjustments for the Jack Wolfskin acquisition, we are generally only providing non-GAAP guidance at this time.

The non-GAAP guidance excludes from 2019 the purchase accounting for Jack Wolfskin as well as for OGIO and TravisMathew and the nonrecurring transaction and transition expenses related to Jack Wolfskin.

For comparability purposes, we compared this guidance to the adjusted non-GAAP 2018 results, which excludes the purchase accounting amortization expense for OGIO and TravisMathew and the nonrecurring transaction and transition expenses related to Jack Wolfskin.

We had not previously excluded the purchase accounting amortization from OGIO and TravisMathew in our non-GAAP results due to the immateriality of those.

But for consistency going forward, we will now exclude the purchase accounting amortization for those 2 acquisitions, which in the aggregate is only approximately $0.01 per year.

Our 2019 guidance assumes that overall market conditions will be flat to slightly up in 2019 compared to 2018.

We expect sales in our golf equipment business to grow faster than the market, with low- to mid-single-digit growth.

And we expect double-digit growth in OGIO and TravisMathew with Jack Wolfskin performing consistent with the sales expectations the company had previously announced, which is approximately $382 million based on the euro exchange rate of $1.14.

As seen on Slide 15, 2019 net sales are estimated to be in the range of $1.67 billion to $1.70 billion, an increase of 34% and 37% over 2018.

Incremental sales growth is expected to be driven by increases in the core business, which are expected to grow 46% full year versus 2018 and the addition of the Jack Wolfskin sales.

The company currently estimates that changes in foreign currency rates will negatively impact 2019 by approximately $6 million in net sales, with most of the impact occurring early in the year.

We estimate that full year 2019 gross margin will be 47%, which is 50 basis points higher than 2018.

50 basis point increase is driven by overall further improvement in gross margins in our business generally, including the TravisMathew and Jack Wolfskin brand, which generally have higher gross margins than the golf equipment business.

Partially offsetting this improvement are anticipated unfavorable foreign currency rates and tariff rates.

We estimate full year 2019 operating expenses to be $630 million, an increase of $185 million versus 2018 as a result of the Jack Wolfskin acquisition, select investments in growth initiatives for TravisMathew and select investments in tour, selling and R&D for the Callaway business.

Non-GAAP earnings per share are estimated to be $0.93 to $1.03.

This estimate includes an incremental $34 million of interest expense related to our term loan B financing.

The 2019 figures are based on 97 million shares outstanding.

We are also assuming a 22% tax rate for 2019.

We estimate our capital expenditures in 2019 to be approximately $55 million to $60 million, which includes incremental capital expenditures related to the Jack Wolfskin business.

Depreciation and amortization expense is estimated to be approximately $34 million in 2019, which includes $10 million for the Jack Wolfskin business compared to $20 million in 2018.

As Chip mentioned, 2019 will be the final year of our 3-year golf ball capital plan.

After that, we would expect the capital expenditures to more normalize.

We estimate adjusted EBITDA to be in the range of $200 million to $215 million.

Beginning in 2019, we will report adjusted EBITDA, excluding noncash stock compensation expense for purchases of consistency with other comparable companies.

We estimate that the noncash stock compensation expense will be approximately $13 million in 2019.

The increase in EBITDA represents an increase of 23% at the midpoint compared to our 2018 non-GAAP EBITDA, driven by the core business and approximately $33 million coming from the contributions of the Jack Wolfskin acquisition, all of which will be partially offset by unfavorable changes in foreign currency exchange rates.

Our financial results can vary from quarter to quarter based upon many factors, including the timing of new product launches, the timing of incremental investments in the business and the timing of change in the foreign currency rates.

The addition of the Jack Wolfskin business will also significantly affect our intra-year quarterly results.

The Jack Wolfskin business is counter-seasonal to the golf equipment business.

Excluding the acquisition financing cost, Jack Wolfskin business typically earns all of its profit in the second half of the calendar year and is not profitable in the first half.

Adversely, the golf equipment business typically earns all of its profit in the first half of the year and is not profitable in the second half.

Given this change in seasonality, we are providing first quarter and first half 2019 guidance as well.

Also on Slide 15, net sales are estimated to be $498 million to $508 million for the first quarter of 2019 compared to $403 million in the first quarter of 2018.

Net sales are estimated to be $928 million to $948 million in the first half of 2019 compared to $800 million in the first half of 2018.

The first quarter or first half increase in net sales is primarily attributable to the addition of Jack Wolfskin sales together with modest increases in net sales in the core business.

Earnings per share is estimated to be $0.45 to $0.49 for the first quarter of 2019 compared to $0.65 for the first quarter of 2018.

Earnings per share is estimated to be $0.71 to $0.78 for the first half of 2019 compared to $1.28 for the first half of 2018.

Adjusted EBITDA is estimated to be $79 million to $83 million for the first quarter of 2019 compared to $89 million for the first quarter of 2018.

Adjusted EBITDA is estimated to be $132 million to $141 million for the first half of 2019 compared to $178 million for the first half of 2018.

The decrease in the estimated earnings and adjusted EBITDA for the first quarter and first half of 2019 compared to the same periods in the prior year reflect the intra-year timing of the company's earnings in 2019 compared to 2018.

In 2019, a greater portion of the earnings are anticipated to occur in the second half of the year as compared to 2018, and this is due to the seasonality of the Jack Wolfskin business, which generally results in only a nominal operating profit in the first quarter and the operating loss for the second quarter, with an overall loss for the first half.

More golf equipment and new product launches in the second half of 2019 and less in the second quarter of 2019 compared to the same period in 2018.

Also the negative impact of changes in foreign currency exchange rates in the first half of 2019 compared to 2018 with the first-- we estimated $6 million for the full year but it's really $10 million for the first half and then -- negatively, and then $4 million positively for the second half.

And the timing of the incremental investments in 2019, which are weighed more heavily to the first half.

Conversely, for the same reasons, during the second half of 2019 the company anticipates much greater probability compared to second half of 2018 and a strong year overall.

That concludes our prepared remarks today.

We will now open the call for questions.

(Operator Instructions) Your first question comes from the line of Steven Zaccone with JPMorgan.

Chip, first off, I wanted to just talk through your expectations for market growth and market demand in 2019.

How do you feel about the health of the retail channel?

The green grass channel and consumer demand broadly since 2018 ended on somewhat of a choppy note?

And then along those same lines, where do you see the biggest opportunity to regain some market share this year?

Steven, we're cautiously optimistic looking at the markets going into this year, although, without a doubt, they slowed during Q4.

When you look at the economy as a whole right now, it still looks pretty good out there and we expect the markets to be up slightly this year.

And when you look at the retail health of inventories, et cetera, the absolute amount of inventory, when you look out there right now, is in a good position, so -- particularly Callaway on a global basis.

So we're optimistic and I believe should be in a good position to enter the year and have a positive year.

In terms of where we think we can gain share and we are anticipating gaining share relative to our full year numbers for last year.

Certainly, in the driver category, we're excited about the Flash Driver.

Really, strength across the line.

Our putter line should resonate very strongly, the Stroke Lab product is outstanding.

So we're really expecting a broad-based progress again this year and believe that although there was a slowness to Q4, when you look at the overall market, it's in a good position to go into 2019.

Great, it's very helpful.

And just on the cadence of revenue growth for the organic business through the year, are you expecting the 4% to 6% growth to be first-half weighted?

No, we are actually expecting it to be a little bit more second-half weighted.

So relative to last year, we have more launches in the second half of the year in our core business.

And it's more of a normal cycle, if you would.

We actually have a little less products being launched in Q2, with Q1 being fairly comparable with the year ago.

Your next question comes from the line of Dave King with Roth Capital.

I guess, first, on the guidance and unpacking the first half shortfall a bit.

I guess, first, it sounds like a big piece of that was the Jack Wolfskin seasonality.

Given that, are you able to share how much of that revenue typically occurs in the first half or even maybe the first and second quarters?

Sure.

I think just stepping back for a second, we talked about this a little bit in the last couple of calls.

It's just -- it's getting more difficult to -- every year, to evaluate quarter-over-quarter comparisons.

It's a much better view if you can look at the full year and then -- I know you have to model out quarterly, but you have to adjust.

But I think you take the bigger picture and look at our full year.

Then within that, it will vary from year to year.

We'll have product launch timing differences.

If you remember, in 2018, we launched everything in the very beginning of the year.

And this year, it will be a more normalized launch.

We also have more -- it will also be effected year-to-year based on the timing of any investments we're making.

We talked about FX for this year coming of.

FX is a pretty big hurt in the first half.

That will be $10 million, but then it's -- we anticipate it $4 million positive.

Now the Jack Wolfskin business, the seasonality does get definitely skewed this year as well.

From a sales perspective, they are close to 2/3 in the second half.

And then even with the quarters, Q3 is the biggest -- your biggest quarter for everything.

And if you look at just on the sales side, Q2 is their lowest and Q3 is probably 3x to 4x the size of Q2.

As far as earnings go and looking at the EBITDA, their EBITDA is breakeven to little EBITDA in Q1 and Q4.

They lose money in Q2, and they make almost all their money for the year during Q3.

This will be a little confusing in the first year because we don't have the Jack Wolfskin business comparison, but going forward, the counter-seasonality is actually beneficial to our business and to working capital liquidity and things like that.

So we just have to walk you through this year.

Okay.

No, that's really helpful, Brian.

Chip, then maybe turning to the product launch piece a little bit.

How big are some of these launches versus prior ones?

I'm talking about Flash and the putter and Apex and ERC.

And then what can you share about the booking so far on those to start the year?

I would say that in terms of the scale of the launches, et cetera, and the amount of product we're launching, it's very comparable to last year in Q1.

So the putter launch is a little bit larger.

We're certainly coming with more energy and much stronger offering this year in the putter category than last year.

I think our lineup, as stated, is the best I've ever seen and been part of from top to bottom.

But only in putter would I say are we launching more in the beginning of the year than last year.

And then early booking reads so far?

Early bookings, Dave, everything looks positive and consistent with guidance right now.

The feedback on the product -- much of this product now -- it's sort of Epic Flash and Apex have launched in the market but only very a short period, a weekend to a week.

The balance of it is starting to hit over the next few weeks.

We have good feedback on it from customers.

We have tour trial where that's appropriate, and we feel good about all signals.

And as mentioned on the Golf Digest Hot List, we thought that was quite a testament to being the only product to receive 20 out of 20 stars in driver and irons with Epic Flash and Apex.

Your next question comes from the line of Randy Konik with Jefferies.

I've got a few questions here.

I guess, Chip, just -- I just want to go back to the outlook.

I know the -- I believe, the outlook, word for word going into 2019, is kind of the same that you had going into 2018.

'18 ended up being a good -- a very good year for you guys.

You noted some choppiness in the fourth quarter.

I guess my question first is, what's really different, if at -- if anything at all, around your outlook going into 2019 for 2018?

The wording is the same but it does feel a slight bit of difference.

You said the economy is good, et cetera.

Is there -- so is there any difference or no in terms of how you're thinking about the industry itself versus how you thought about the industry going into the start of 2018?

I think that perhaps the word for word being -- I assume you're referencing to that we think the market's going to be up slightly or flat to slightly up this year.

That may be consistent with last year, and it's consistent with last year that we're overall in a good economic climate.

How we get there is pretty different, and, certainly, it doesn't feel the same.

But when you step back from it, I think it does have the same conclusion.

So I mean, I think that's a reflection, Randy, on a trend over the last several years, where I've continually been saying that the golf industry itself is in a good spot.

Inventories have stayed well-managed, and prospects for moderate growth are quite good, coming off of, looking further back, when everybody was talking about the industry shrinking and all the gloom and doom, which didn't turn out to be factual.

And when you look at the actual results last year, it was a decent market, always some choppiness between quarters, and we still feel good about the outlook this year as the fundamentals of the industry are remaining quite good and consumer confidence is good, et cetera.

Understood.

That's very helpful.

I guess, Brian, can I ask you a question around, I guess, gross margin?

So you noted in the press release around the gross margin on the golf and equipment side.

You talked to, I guess, product costs up related to advancing technology, which tells me, yes, that probably held back margins somewhat as you probably didn't raise the price point of the goods, of course, at the same rate, the increased cost of advanced technology.

Is that something that we should continue to expect over the next couple of years?

Meaning we saw gross margin on the equipment side move up pretty dramatically over the last couple of years.

I'm just curious of how we should be thinking about the gross margin dynamic specific to the golf equipment side.

Yes, we've been saying all along that our improvements in gross margin have -- were significant since Chip got here, but further improvements, we do believe, are available but the rate of increase will moderate for sure.

So I would not expect the historical growth rate to be the same as the growth rate going forward.

Got it, okay.

And then just on the -- when you look at the -- there's a lot of moving pieces with the revenue and just overall guidance with all these different pieces in the business now with this Jack, OGIO, TravisMathew, et cetera.

When I look at the overall -- I was crunching some numbers.

When I look at the guidance of 37% or 35% revenue growth, whatever it is, are you assuming Jack Wolfskin revenues grow in that guidance or stay flat or -- I'm just curious how we're supposed to think about the size of -- is the Jack Wolfskin like a $383 million business?

Is it growing?

I'm just curious on any metrics you can provide on how we should be thinking about that business' growth rate?

And then in addition, any other color on what the gross margins of that business look like?

Because I think when you announced the transaction and we had that call, we didn't get a lot of, I think, metrics around gross margin or EBITDA margin of the business, if I recall correctly.

If not, I'm sorry, but I just want to try to get more clarity on how we should be thinking about Jack Wolfskin in relation to the overall full company guide, if you will.

I think just on some of the specific questions then I'll let jump -- Chip jump in here.

For this year, we're anticipating Jack will be about flat with last year, $382 million.

We expect 4% to 6% of the growth to come from the company, the other portions of our business.

On the gross margin, there is slight -- the Jack Wolfskin businesses is slightly accretive to our gross margins overall, our blended gross margin.

And the EBITDA margin initially will be affected by some additional investment we're making in that business, but ultimately, we'll improve from there.

And the only thing I would add to that is that although we're projecting this year flat, we're -- clearly believe we're going to be able to grow the Jack Wolfskin business over time and that the long-term growth rate of that business will be superior to the golf industry and our core business in general.

I just had one more quick follow-up, Chip, where -- when you acquired TravisMathew, it seemed pretty clear and very straightforward, a great brand, complements our equipment.

We're going to grow the door distribution, et cetera.

OGIO, when you bought that, it was the golf bags, but there's so much more that can be done here around product category extensions, et cetera.

I guess, in thinking of either distribution or product category extensions, something like that, how should we just think holistically about how you think about expanding the Jack Wolfskin business over the medium to long term?

Is it a distribution play?

Is it a product extension play, geographic play?

I'm just trying to just get a sense of what that is?

And that's all I had for questions.

Sure, Randy.

And the simplest answer on that is we believe that we can enjoy growth rates in that business in key markets, such as Germany and China, that are at or above those market rates for those markets.

And then we will also be able to have geographical expansion where Jack Wolfskin does not have any meaningful presence to speak of in Japan and in North America, but our company has what we believe to be a meaningful presence in both the hard goods business but as well apparel businesses, which are directly applicable.

And I agree.

TravisMathew brand is a great brand but so is the Jack Wolfskin brand.

It's just not over there so people don't know it as well, but it's #1 in the DACH region.

It's one of the leading brands in China.

It's just doesn't have the recognition over here, which is great, because that' our opportunity for growth.

Your next question comes from the line of Michael Swartz with SunTrust.

Chip, just wanted to ask you a question regarding the ball business.

We had -- did have some, I don't know if I'd call it setbacks but some inefficiencies in production in '18, I think a lot of that was due to some of the new Graphene-based technology that you started rolling out during the year.

As we think about '19 and looking at the product line, it looks like you've rolled or expanded the use of Graphene across the ball portfolio.

Is that a good -- I mean, a good sign that you've now kind of ironed out some of those efficiencies?

And if so, how to think about the ball profitability in '19 and beyond?

Can we get back to that 16% to 17% range that we saw prior to '18?

Michael, I wouldn't call '18 a setback.

So I'll start there because -- but you're correct, our operating segment profitability decreased as we made investments in that facility and set ourselves up for the long run.

When you're overhauling a plant, it is likely that the efficiencies will have -- be impacted, and that's a process that you need to go through to get stronger in the long run.

We are expecting improvement in the golf ball outlook for '19.

We will continue to have the same -- some of the same efficiency challenges.

So we're not going to be optimal in '19 because we're doing significant investments in that facility still.

It's year 3 of a 3-year plan, but we will see improvement.

I think the thing that you really want to focus on here is the 20% growth in the category and the -- you know it's a consumable product.

You can see steady growth quarter-to-quarter in this product.

You can see steady market share gains, where the technologies that we're putting in place are resonating with the consumer.

We made an investment that did lead to lower category profitability as a percentage.

Although our absolute profitability has not lower, it's increased this year because we believe that's good for the long term.

You'll see a little improvement in '19, and then we think what we've got going forward there is a significant opportunity.

Okay, that's helpful color.

And then just flipping over to TravisMathew.

If we look at the growth in that business in '18, I think it was up over 30% in terms of revenue.

Could you maybe frame how much of that growth came from -- and to keep this simplistic, maybe new doors versus distribution at -- or existing accounts?

And then as we look at the growth ahead, how should we think about that mix?

Is it going to be more, I guess, highly dominated by new door expansion?

It sounds like you've got some things on tap in Europe for '19.

Yes, we do have international expansion ahead for TravisMathew.

It's going to be small at first but the potential is quite large as we build the platform and gain momentum.

In TravisMathew, you're correct on the growth rates.

It's just a phenomenal business and the brand's resonating across multiple channels.

And the growth, I don't have the specifics answers for your question regarding how much of it came from new door versus market share growth, et cetera, but my sense is that you're overestimating the amount that is new door.

They have expansion opportunities still in door growth, particularly in the green grass channel, but they're growing across all channels and that growth isn't dominating their performance.

So they don't need only -- it's not that their -- I don't see the growth moderating because they are going to run out of new doors, if you would.

This brand is really resonating.

It's resonating in golf.

It's resonating outside of golf.

And we're, as you can gather, very excited about the prospects of the business.

Your next question comes from the line of Dan Wewer with Raymond James.

Brian, first, I wanted to ask about the outlook for lower earnings in the first quarter and then the second quarters have an even larger drop year-over-year.

If you were to exclude Jack Wolfskin, just look at the organic business, would its earnings decline year-over-year in the first 2 quarters?

Yes.

It would be down versus last year in the first half because of the change in product launch timing.

Again, last year, we pulled everything forward to the front half.

And this year, you'll see less launches in Q2 and you'll see more in the second half of the year.

And FX is $10 million overall in the business this year, negative in the first half and $4 million positive in the second half.

And is the way to think about it is that we have this tremendous profit contribution from the Rogue irons last year and that's just a really difficult comparison even with the Apex launch this year.

Dan, it's Chip.

No, I don't -- it's not product-specific.

It's simply that most of our growth will be in the second half even in our core business.

And the -- we have the FX headwind and we're making further investments in our business so -- that we believe are clearly going to pay off over the long run.

We've been doing this now for 6, 7 years, pretty good track record at it.

It's certainly -- and you see the profitability come in a full year basis, but it's one of the aspects of our business.

Whenever you start cutting it into smaller pieces, it can get confusing, I guess.

But annually, these investments we're making, we believe, are going to pay off nicely.

They'll set up even more opportunity long term, but you are correct in your analysis there that the first half, that we are projecting the profitability of the core business being down a little bit as well.

Can you remind us why it's beneficial to launch or delay product launches until after Father's Day, U.S. Open, kind of thinking about the peak of the golf demand?

Spreading out the timing of launches is for multiple reasons.

You like to bring energy to the market in different ways.

You've seen products launch towards the tail end of the year very successfully.

You've seen products launch at the beginning of the year very successfully.

And at times, it's how you use your operational infrastructure, your warehousing and your sourcing strategies and where you ramp up factories and that type of thing so that you're utilizing that capacity and resource rather well.

So it really varies and there's not going to be an absolute consistency of how we're going to launch products at Callaway Golf.

We are -- we obviously launch products every year.

We obviously launch a significant portion in -- early in the year.

And beyond that, it is going to continue to vary, and we think that's part of the -- both the science and the art of building the brand and delivering energy to the marketplace.

And then the last question I have is, can you provide your thoughts as to why the industry softened in the fourth quarter?

If that was all due to the rounds played or is that more due to concerns about loss of wealth during the market meltdown?

And then also, I find it hard to believe that your market share has dropped, like the figures you quoted, but if they have, what's gone into that?

The -- Dan, I think -- I don't have any real idea better than you in terms of why the market dropped, but it dropped mostly in December.

So my guess is in the U.S. it was the uneasiness with the economic conditions and stock markets and all of the items that we're going around that.

But it was also less product launches overall probably.

So I am not particularly concerned about that.

It's -- obviously, it's not a positive but it's -- a 1-month drop is fairly explainable.

And looking into where we stand in 2019, I still feel pretty good.

And the last question was regarding the market...

All about it, yes.

I mean, I find it hard to believe that your market share fell 100 to 200 basis points but if it did...

In the U.S., yes.

I don't really -- I do believe our market share declined during the year last year.

So I think the trend, without a doubt -- now we're specifically talking to U.S., I think the market share that I report, which I report for consistency, underestimates our market share in the U.S. I think that in the club market, we were closer to flat.

Your next question comes from the line of Daniel Imbro with Stephens Inc.

I want to start on the top line outlook.

Chip, I think you mentioned core business up low to mid-single digits.

Baked within that.

Are you assuming that we see rounds played trends stabilize kind of from the decline we saw in the back half of the year?

Or what are you assuming on the rounds played side?

Gosh, I didn't -- I don't really break out rounds played, but I would hope that, that rounds played number would be consistent with the overall market at flat to slightly up.

Okay, that's helpful.

And then actually moving over to Europe, we're seeing signs of just some specific market weakness over there.

Now that the deal is closed, one, can you talk historically about how resilient the Jack Wolfskin asset is and how it performs during economic slowdown?

And then two, can you update us on your outlook for the key golf business over there in Europe for 2019?

Sure.

I can -- I'm not sure how much data we have over Jack Wolfskin, but we did look at this issue when we were doing the analysis and due diligence.

And that brand has been very resilient for a very long time.

It is a majorly entrenched position in that marketplace, and we did not see revenue swings downward that were in the -- in any periods of time.

So it was not particularly or not overly sensitive on that front.

And then in terms of our equipment business in Europe, I'd say it's the same answer arguably on a global basis right now.

We're cautiously optimistic going into the year, although the European markets are probably a little more uncertain than the North American markets for sure.

Okay, great.

And then last one from me, just turning back to the U.S. on the golf ball side.

You guys didn't roll out a Chrome Soft, but you did introduce the ERC Soft, kind of a different part of the market and a different price point.

How do you guys think about that long-term trend to market share growth?

I assume it would be -- continue to drift higher, but in the near term, is the opportunity more on targeting different segments of the market than say the premium ball side?

Or is there still room to take in the premium golf ball side as well?

I think there's room to grow in both.

And so like our largest competitor in the space, we alternate launching our tour golf ball, the Chrome Soft product, and our more value-priced golf balls, which, in this case, is Supersoft.

And I would next put ERC as a value, but it's launching in the opposite cadence of a Chrome Soft year.

And our next question comes from John Kernan with Cowen.

So I guess going back to a prior question around initial guidance, what -- last year, when you guided for the full year, I think the GAAP EPS for the year was $0.64 to $0.70.

You obviously crushed that over the course of the year.

So what was it that surprised you -- your expectations so much in early -- throughout 2018 relative to your initial outlook, and understanding that there always seems to be a little bit of conservatism in your outlook?

But I just wanted to understand the drivers of 2018 and what enabled such outperformance relative to the initial outlook.

Sure.

That one's an easy one.

We outperformed across our business but we also had wind at our backs that we had anticipated.

We didn't anticipate the U.S. market being up 5%.

And if you remember through midyear, the Asian markets were also up dramatically.

So -- and then on top of that, I believe we had FX benefits last year.

So if you get all winds behind you in a business that is hitting strides, that can be a beautiful thing.

Got it.

And then if we think about Epic Flash and the volume, I don't know if you can talk about this for competitive reason, but just the volume of Epic Flash versus maybe the massive success that the Epic -- the initial Epic launch had.

How do the 2 compare at this point?

That's an interesting question.

So Epic Flash is the -- probably the most impressive driver product I've been part of.

And with this AI platform, the -- I'm really excited about it because of the applicability of the technology not only in the driver category but others.

The market overall this year, I think the Epic came out at a time though that was a little bit of a perfect storm from the perspective.

I don't think the competitive environment was quite as strong at that time.

So I do anticipate that we're going to gain share this year, but I believe also that the competitive environment is more strong.

And so I'm not anticipating it gaining the same level of share that we had in Epic.

Countering that is, I like the strength of the product range across the entire line.

So it's game time and we're excited to get into the year.

Exciting.

Then I guess a final question.

Brian, the first half EPS and profit guidance, can you just talk about the OpEx and the amount of -- give us an idea in terms of deleverage and as a percent of sales in the first half.

It feels like it's going to be pretty significant.

Obviously, the seasonality of Jack Wolfskin plays into this, but just any color on the OpEx line items in the first half versus the second half.

Yes, John, we're not going to break it out that level of detail.

We'll just try to give some top and bottom lines just to give a general sense.

But again, I think it's better just to look at the full year if you can.

That will be more important in all these -- there'll be variations quarter to quarter.

And our next question comes from Casey Alexander with Compass Point.

Well, I've got a couple of things.

First of all, the composition of your inventory the last couple of quarters, third quarter and fourth quarter, might have led some people to think that there was even a deeper product launch coming here in the first quarter.

I think it has something to do with the change of the composition of your business, but could you color that up for us a little bit, please?

Sure, Casey.

On the inventory issue, it is up significantly year-over-year.

Part of it is we're just a much bigger business than we were last year.

And the other part was we've accelerated some of the -- well, not accelerated.

We have more inventory prepared for the launches now, or last year, we were chasing it a lot.

We were not fully -- I think for the first quarter, first half, we were understocked in retail and...

I don't know whether we were understocked at retail, but we were chasing our launches last year both in the golf ball business and in the club side due to changes we made in the product late into the cycle that we made on time this year.

So we're in the right inventory position going into the year.

And Q1 simply is good launch.

Yes.

Secondly, now that Jack Wolfskin is in, are you going to change your product segment reporting categories?

Is there going to be a separately broken out apparel category, for instance?

And will that include Jack Wolfskin and TravisMathew?

Casey, we are looking at that right now and discussing with our auditors.

We may evolve more toward a golf equipment and the other side being soft goods and we'll see -- we'll probably break out the apparel in sales, and that will combine Jack Wolfskin and Travis.

Okay.

The Jack Wolfskin does give you some exposure to China that you haven't had in the past.

And at the same point in time, we're starting to see the emergence of some real talented Chinese professional golfers on the pro tours worldwide.

What opportunity potentially exists on the club side in China that hasn't in the past?

That market is still really small, Casey, but it is growing again now.

And you're exactly right.

The talent level coming out of China is really ramping up.

And so that will probably be self-reinforcing to the growth rates over there, et cetera.

There -- we don't have it all mapped out yet, but we do expect there will be some synergies relative to the Callaway China business and the Jack Wolfskin China business with the Jack Wolfskin business being, golly, significantly larger, by far and away, the larger of the 2 businesses.

Okay.

I didn't see it in the presentation and maybe I missed it in the oral presentation.

Was there any gross margin guidance for the first quarter?

No, no, we gave EBITDA and...

And earnings and sales.

Okay.

And then lastly, from a strategic standpoint, when you purchased TravisMathew, there was obviously at least some connection to golf there.

Is there a way to connect Jack Wolfskin to the core company?

Or is it really just going to be a brand that stands aside?

It connects to our apparel business very well, and then it connects not from a consumer-facing but from a back-office and operational perspective to the entire company.

But it is not going to be a golf brand in a meaningful manner as we see it.

But our business now is a golf equipment and lifestyle apparel with both pieces of business hopefully having meaningful scale.

And we have no further questions at this time.

Thank you very much for dialing in, and we look forward to talking to you at the end of the first quarter.

This does conclude today's conference call.

Thank you for your participation.

You may now disconnect.