Callaway Golf Company (NYSE: ELY) Q4 2018 Earnings Conference Call of February 6, 2019 at 5 pm ET

Company participants

Patrick Burke – Director of International Relations

Chip Brewer – President and Chief Executive Officer

Brian Lynch – Chief Financial Officer

Participants in the teleconference

Steven Zaccone – JPMorgan

Dave King – Roth Capital

Randy Konik – Jefferies

Michael Swartz – Suntrust

Dan Wewer – Raymond James

Daniel Imbro – Stephens Incorporated

John Kernan – Cowen

Casey Alexander – Compass Point

Operator

Good afternoon. I'm calling Catherine and I will be your conference operator today. At this time, I would like to welcome all Callaway Golf results conference callers for the fourth quarter of 2018. All lines have been muted to avoid background noise. After the president's remarks, there will be a question and answer session. [Operator Instructions]

Thank you. Mr. Patrick Burke, Investor Relations Manager, you can start your conference.

Patrick Burke

Thank you Catherine and good afternoon everyone. Welcome to the Q4 and FY 2018 teleconference with Callaway's annual results. My name is Patrick Burke, the investor relations manager for the company. With me is Chip Brewer, our president and chief executive officer; Brian Lynch, our CFO; and Jennifer Thomas, our chief accountant.

The company today issued a press release announcing its financial results for the fourth quarter and fiscal year 2018. A copy of the press release and the related presentation are available in the Investor Relations section of the Investor Relations section. Company website at ir.callawaygolf.com address. Most of the financial figures reported and discussed today in today's appeal are based on US generally accepted accounting principles. In the rare instances where we have non-GAAP measures, we have reconciled the non-GAAP measures of the corresponding GAAP measures at the end 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, as part of our prepared remarks, a PowerPoint presentation is provided to help you follow the call today. This presentation of the results is available for download on the Callaway Investor website under the Webcasts and Presentations tab. In addition, on the same tab, you can choose to join the webcast to listen to the call and view the slides. As a participant in the webcast, you can browse the slides.

I would now like to make the call to Chip.

Chip Brewer

Thank you Patrick. Good afternoon everyone and thank you for joining us for today 's call. From page 4 of the presentation, I have the pleasure of announcing a record year in terms of revenue and operating profitability. Despite a slight slowdown in the fourth quarter, market conditions were generally positive for last year and we once again expanded our core business faster than the market, while reinforcing its strategic and tactical reinvestment nature. We have also been able to find interesting growth opportunities in areas that are close to our heart and where we believe that there are synergies that will help us create long-term value.

The acquisition of Jack Wolfskin, which closed in January, is an excellent example. It gives us scope and scale in the rapidly growing portion of our apparel and lifestyle sector and we believe we can and will continue to lead the golf equipment business while developing and developing a position solid in the apparel sector and that both parts of our business will benefit. each other while providing both higher growth rates over the long term and a scale that will benefit our shareholders. As usual, I would like to take this opportunity to thank the Callaway team for these results. The team should be proud of what we have accomplished. I am also convinced that they understand that we still have a lot to do and are, like me, motivated to advance our business.

Turning to slide 5, let's take a closer look at our operational performance in 2018 by region. In the United States, our revenues increased 3% for the quarter and 25% for the year. These results are driven by durable goods market conditions, up about 5% over the year, double-digit growth in our core equipment business, and the addition of the TravisMathew brand. whose performance is exceptionally high. As for our equipment sector, our share of the durable consumer goods market for the full year, according to Golf Datatech, was 24%, down 110 basis points from the previous year. However, I think this underestimates our overall market share as several key accounts are not captured in this data. Whatever the case may be, according to Datatech, we remain the number one player in the total number of clubs and golf balls, we remain the number 2 brand with a 16.4% share in dollars, up 210 points basic compared to the previous year.

Regarding page 6, our Asian operations had a good year, but a weak quarter. In Japan, our revenues decreased by 22% for the quarter but by 12% for the year. For the year, we grew in our core equipment business as well as in our clothing joint venture. Market conditions for the year increased slightly but slowed in Q4. In our equipment business, we also had fewer product launches compared to last year and we deliberately worked to maintain the balance of our inventory in the field early this year. In Japan, our dollar market share of factory assets to date was 17%, down 250 basis points, while maintaining our second position in this market. The Japanese team has invested in the launch capabilities of Ogio and TravisMathew with satisfactory progress and modest revenues expected in 2019. These additions will enhance the size and presence of our clothing in this market.

Going to page 7 in Europe, the team had another good year with sales down 9% for the quarter, but up 6% for the year. As in other regions, the quarterly variance is largely due to the launch schedule. Overall, the European market declined slightly for the year, but remained almost stable. For the whole of Europe, again, in 2018, we were the leading brand of durable goods with a share of durable goods of 22.7%, down from the previous year but in line with our expectations and 420 basis points more than mark number 2.

During the quarter we went bankrupt with one of our biggest UK customers, American Golf. They were bought out of the administration and are trading again with us, despite a slightly reduced footprint but a healthier financial situation. The European team has also invested in the resources needed to launch Ogio and TravisMathew into their markets and plans to launch the brands this year. Revenues will be modest at first, but we are stimulated by the opportunity to leverage our global infrastructure to develop these brands.

With respect to products, in all of our businesses, we believe that our new product offering for 2019 is very strong, as is our future product portfolio. Focusing on our equipment launches in 2019, we started this year with one of the best global alignments I attend. Some of our hero products are the Epic Flash driver with Flash Face and Jailbreak technologies. Apex and Apex Pro are ironing out our flagship iron brand with a complete redesign of technology in a line that has not been updated since 2016. The Stroke Lab putters feature a new patented sheath technology that actually improves your shot 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 subject to in-depth review and positive feedback.

It should be noted that we are proud to be able to announce that in 2019, Gold Digest Hotlist, Epic Flash Driver and Apex Irons were the only driver to have received 20 out of 20 possible stars in terms of ratings and performance, Innovation, look sound sensation and demand. The strength of our products comes from our longstanding commitment to R & D and innovation. The investments we have been making for many years now. Flash Face technology is integrated with Epic Flash Driver. We believe that it is the first commercial application of artificial intelligence in the design of golf equipment.

This capability led to a phase design that was not at all intuitive and, to the best of our knowledge, could not or would not be done in any other way. We believe that we are building a first-mover advantage by leading this technology, which will then be applicable to multiple products. In fact, I will go so far as to say that in a few years, if you do not use this approach, it will be difficult to stay competitive. The acquisitions of TravisMathew and Ogio are doing very well. They also have strong lines in 2019 and the dynamics of the brand.

Nothing to report on Jack Wolfskin's business yet. We closed successfully during the first week of January and we are now working on the integration of the company from the perspective of operations, finance and IT. We are also starting the process of seeking synergies and developing growth initiatives for key markets such as the United States and Japan, where Callaway is very present but not Jack Wolfskin. There is probably a lot of work ahead of us, but we also feel stimulated and excited about the potential.

Regarding our outlook for 2019, we expect market conditions to be stable or slightly upward. We expect our core business to grow faster than the market, with growth of 1-2% in our equipment, double-digit growth for Ogio and TravisMathew and Jackie Wolfskin, in line with expectations that we communicated during the announcement of the transaction in early January. with higher financing costs due to the evolution of credit markets at the end of the fourth quarter of last year. In the long term, we expect to continue to deliver operating leverage improvements on a proportional scale, but we continue to seek high return investments in all of our businesses. In our core business, we are now in the third year of a three-year investment plan for our Chicopee golf ball facility, which we believe will transform capacity into capabilities. This supports strong growth of the golf ball in recent years and paves the way for continuous improvements.

In support of our equipment business, we also continue to invest in sales, marketing, R & D, including strengthening the aforementioned artificial intelligence platform and using more advanced tools. measured at the moment. In our apparel and non-durable goods businesses, we invest in the Ogio and TravisMathew platforms globally, as well as in Jack Wolfskin, in the enhanced financial and IT systems, as well as in global and global operations. the growth of the brand. We believe we can make these investments and continue to deliver strong operational performance. We are confident that our ability and commitment to making these long-term investments will differentiate us and pave the way for long-term success, including higher growth than our core businesses and, in the long term, a better impact. Operational leverage based on: economies of scale. This strategy has served us well over the last seven years and we believe that will continue to do so in the future.

In conclusion, we expect another strong year in 2019 and perhaps, more importantly, we believe we continue to move on a strategic path that makes us a much larger and more diversified company with growth prospects. higher integrated and long-term earnings prospects. Brain, yours.

Brian Lynch

Thank you Chip. As Chip mentioned, we are pleased with the results of our activity in 2018. It was a good year, in every respect. The entire golf equipment industry was strong, including the United States, which grew nearly 5% for the year. And for the full year of 2018, we achieved record sales and adjusted EBITDA of 55% over the prior year. In addition to the brand Ogio and TravisMathew, which we acquired in 2017, continue to meet expectations and / or exceed them. We are also excited about 2019. Our 2019 product line is as strong as ever and last month we finalized the acquisition of Jack Wolfskin, one of the leaders in the outdoor industry. clothing, footwear and equipment, based in Germany. We remain enthusiastic about the acquisition of Jack Wolfskin, including the strategic benefits it provides and the opportunity to showcase its growth potential and the creation of shareholder value in the medium and long term.

Overall, it's been a busy one, but we've used the past 7 years to turn Callaway into a high-end golf and active lifestyle business. When evaluating our results for the full fiscal year and the fourth quarter, you must keep in mind certain specific factors that affect the comparison from one year to the next. . First, the acquisition of TravisMathew took place in August 2017. As a result, this business was only partially included in our 2017 fiscal year results. Second, as a result of the acquisitions of Ogio and TravisMathew, we incurred one-time transaction-related expenses in 2017. When we compare 2018 non-GAAP results to our 201 non-GAAP results today, we exclude non-recurring expenses related to transactions: how we evaluate our performance.

In addition, during the fourth quarter of 2017, we recorded a net additional tax expense of $ 3 million, mainly related to the 2017 Tax and Employment Tax Act, which affected the full year, which we exclude from our non-GAAP 2017 results, as we have been. . Fourth, under the 2018 law on tax cuts and employment, 2017 has benefited from lower tax rates compared to 2017. Finally, as a result Acquisition of Jack Wolfskin, we also incurred non-recurring transactions related expenses in 2018. When discussing our non-GAAP 2018 results today, we excluded these non-recurring transaction-related items. . Again, that's the way we evaluate our performance.

Keeping these factors in mind, I will now give some specific financial results. Keep me nice, because there is a lot to discuss today, especially considering the acquisition of Jack Wolfskin and my comments are therefore a bit longer than I think. habit. Turning now to slide 12, today we report our consolidated net sales for the full year of 2018 at $ 1.243 billion, compared to $ 1.049 billion in 2017, an increase of $ 194 million, or 19% , with a record turnover. Our net sales in 2018 increased in all operating segments and in all major regions. The 19% growth is mainly due to a 26% increase in the category of irons, driven by our Rogue range of irons, to a 20% increase in our golf ball business, driven by our new soft golf balls chromed, and a 36% increase in the number of irons, Category Accessories and Other, driven by the TravisMathew activity.

Changes in foreign exchange rates positively impacted net sales in 2018 by $ 14 million for the full year. Excluding the TravisMathew activity and the actual changes in exchange rates, our core business grew by more than 11% in 2013. As you can see on slide 12, the gross margin was 46.5% in 2018 compared to 45.8% last year. The increase of 70 basis points from 2017 reflects a favorable shift in the product mix towards TravisMathew's higher margin businesses, as well as higher overall average selling prices, partially offset by an increase in revenue. cost of products through more technologically advanced products.

Operating expenses amounted to $ 450 million in 2018, representing an increase of $ 48 million from $ 402 million in 2017 and includes a full year of operating expenses. operations related to the new TravisMathew business. Increased staff costs as a result of increased headcount and inflationary pressures, increased variable expenses due to higher net sales and investments in the core business, operating expenses as a percentage of the figure. Businesses were 36.2% in 2018, compared with 38.3% for the same period in 2006. 2017. Operating income amounted to $ 128 million in 2018, compared to $ 79 million dollars for the same period in 2017, an increase of 62%. If we exclude Jack Wolfskin's non-recurring transaction fees from 2018 and Ogio and TravisMathew's one-time transaction fees, as well as the 2017 tax adjustment, non-GAAP operating income for 2018 amounted to $ 132 million compared to $ 90 million for non-GAAP operating income. in 2017, an increase of 47% or $ 42 million.

Other income amounted to $ 3 million in 2018 compared to $ 11 million for other expenses in the prior year. The increase in other products in 2018 mainly explained by the hedging gains in 2018 compared to the losses of 2017 and includes a $ 4 million purchase price hedging profit related to the Jack Wolfskin acquisition. This same purchase price hedge also resulted in a loss of $ 3 million during the first half of January 2019. Diluted earnings per share amounted to $ 1.08 on 97 million shares in 2018, an increase of 157% compared to 0.42 USD in 2017. Excluding effects of Jack Wolfskin. Transaction costs In 2018, non-GAAP diluted net income per share was $ 1.07 compared to the non-GAAP diluted net earnings of $ 0.53 in 2017, which excludes non-recurring transaction costs. Ogio and TravisMathew and the tax adjustment.

I will now briefly present our fourth quarter results. Turning to slide 13, we publish today a consolidated fourth quarter 2018 revenue figure of $ 181 million, compared with $ 192 million in the fourth quarter of 2017, a decrease of 5.7 percent. %. The decrease was better than initially expected and reflects the launch status of our product in 2018, which was heavily weighted for the first half. That said, we continue to see a clear improvement in our golf ball business, which grew 14% in the fourth quarter, thanks to our new Chrome Soft golf balls and a 13% increase in the Gear, Accessories and Other, driven by a quarter. quarterly increase in TravisMathew activity. Foreign currencies had a negative impact on international net sales of $ 1 million in the fourth quarter of 2018 compared to the previous year.

As you can see on slide 13, the gross margin is 38.7% in the fourth quarter of 2018, up from 41.6% last year. The 290 basis point decrease from 2017 is mainly due to the overall decline in sales volume and higher product costs due to more technologically advanced products in the 2018 product line, partially offset by average sales prices and a higher product line related to TravisMathew's business. Operating expenses were $ 113 million in the fourth quarter of 2018, an increase of $ 13 million from $ 100 million in the fourth quarter of 2017. This increase is mainly attributable to increased staff costs as a result of increased staffing and inflationary pressures, increased recurring transaction costs related to the acquisition of Jack Wolfskin.

Operating loss from operations was $ 43 million in the fourth quarter of 2018, compared with a $ 20 million operating loss in the fourth quarter of 2017. 39 excludes Jack Wolfskin's non-recurring expenses, the non-GAAP operating loss was $ 40. in 2018, compared to an operating loss of $ 19 million in the fourth quarter of 2017, excluding GAAP, which excludes TravisMathew's non-recurring acquisition costs and the tax adjustments described above.

Other income was $ 5 million in the fourth quarter of 2018 compared to $ 3 million in the fourth quarter of 2017. The increase in other revenues in the fourth quarter of 2018 is mainly due to a gain in hedging of the purchase price of $ 4 million in 2018 related to the Jack Wolfskin Acquisition compared to the loss of hedge in 2017. The loss of basis per share was $ 0.30 on 94.5 million shares in the fourth quarter of 2018, compared with a loss of $ 0.20 in the fourth quarter of 2017. On a non-GAAP basis, which excludes In 2018 and 2017 , the applicable acquisition costs and tax adjustments previously discussed, the loss per share for 2018 is set at $ 0.32, compared with a loss per share of $ 0.15 in the fourth quarter.

Turning now to slide 14, I will now cover some of the key elements of the balance sheet and cash flow. Available cash, which represents an additional availability on our credit facilities plus available cash, was $ 256 million at the end of 2018, compared with $ 239 million at the end of 2017. The increase in cash from our asset-based borrowings and cash flow from operations was partially offset by additional share repurchases, increased capital expenditures and repayment of our facility used to fund the Ogio and TravisMathew acquisitions in 2017. Since we are essentially financing Jack Wolfskin's purchase price at 100%, our liquidity remains good after this acquisition.

Our consolidated net receivables were $ 71 million, down 25% from 2017 due to the launch schedule and improved collection rates. Outstanding days decreased to 54 days from 63 days at the end of 2017. Six days due to the 2018 DSO change due to the change in the revenue recognition problem. . We remain comfortable with the overall quality of our accounts receivables at the moment.

Also posted on slide 14, our inventory balance increased by 29%, reaching $ 338 million at the end of 2018. This increase is explained by the support provided to a larger overall business activity. 2018, including an increase in launch inventory for 2019. [indiscernible]. We remain comfortable with the quality of inventory right now. Capital expenditures amounted to $ 37 million in 2018, while the $ 11 million increase in 2017 over the prior year primarily reflects investments in our growth plan. Depreciation and amortization expense was $ 20 million in 2018, compared to $ 18 million in 2017. Finally, in 2018, including free market redemptions and shares acquired through the vesting by-law. We repurchased 1.4 million shares for about $ 22 million from 2017. We repurchased 1.5 million common shares for about $ 17 million. We have about $ 50 million left under our current share buyback authority.

I will now comment on our forecast for 2019, which begins on slide 15. Since we are still in the process of determining the amount of the non-cash accounting adjustments related to Jack Wolfskin's acquisition, we generally provide only non-GAAP information. advice right now. Non-GAAP financial information excludes purchase accounting for Jack Wolfskin and Ogio and TravisMathew as of 2019. And the non-recurring transaction and transition costs related to Jack Wolfskin.

For comparability purposes, we compare this guidance to non-GAAP 2018 GAAP, which excludes amortization expense using the Ogio and TravisMathew acquisition method and transaction and transition fees. non-recurring related to Jack Wolfskin. We had not previously excluded OSC and TravisMathew's purchase accounting amortization in our non-GAAP results due to the immaterial nature of these results. But for the sake of consistency, we will now exclude depreciation by the acquisition method for these two acquisitions, which, globally, represents only about $ 0.01 per year .

Our forecast for 2019 assumes that the general market conditions will be stable or slightly up in 2019 compared to 2018. We expect higher sales growth in our golf equipment sector relative to the growth in the market. low to medium single-digit and double-digit growth in Ogio. TravisMathew and Jack Wolfskin posted performance in line with previously announced sales forecasts by the company, which rise to around 382 million USD based on a 1.14 euro exchange rate. .

As shown in Slide 15, net sales for 2019 are expected to be between $ 1.67 and $ 1.70 billion, an increase of 34% to 37% over 2018. The growth in additional sales should be driven by increases in core business, which are expected to grow by 4% to 6% over the year as a whole compared to 2018 and the addition of sales of Jack Wolfskin. La société estime actuellement que les variations des taux de change auront un impact négatif sur les ventes nettes d’environ 6 millions de dollars en 2019, dont la majeure partie se produira au début de l’année.

Nous estimons que la marge brute pour l’ensemble de l’année 2019 sera de 47%, soit 50 points de base de plus que celle de 2018. L’augmentation de 50 points de base découle de l’amélioration générale des marges brutes de nos activités en général, y compris les marques TravisMathew et Jack Wolfskin, qui ont des marges brutes supérieures à celles de l’équipement de golf. Cette amélioration est partiellement compensée par des taux de change et des tarifs douaniers défavorables. Nous estimons que les dépenses d’exploitation pour l’année 2019 s’élèveraient à 630 millions de dollars, soit une augmentation de 185 millions de dollars par rapport à 2018 en raison de l’acquisition de Jack Wolfskin, des investissements sélectionnés dans les initiatives de croissance de TravisMathew et des investissements sélectionnés dans les ventes à forfait et la R & D pour l’activité Callaway.

Le bénéfice par action non conforme aux PCGR est estimé entre 0,93 et ​​1,03 dollar. Cette estimation comprend une charge d’intérêts supplémentaire de 34 millions de dollars liée à notre financement par emprunt B. Les chiffres de 2019 sont basés sur 97 millions d'actions en circulation. Nous prévoyons également un taux d'imposition de 22% pour 2019. Nous estimons que nos dépenses en immobilisations en 2019 devraient se situer entre 55 et 60 millions de dollars environ, ce qui comprend les dépenses en immobilisations supplémentaires liées à l'entreprise Jack Wolfskin. La dépense d’amortissement est estimée à environ 34 millions de dollars en 2019, dont 10 millions pour l’entreprise Jack Wolfskin, contre 20 millions de dollars en 2018. Comme Chip l’a mentionné, 2019 sera la dernière année de notre plan d’investissement de 3 ans pour les balles de golf. Après cela, nous nous attendons à ce que les dépenses en capital se normalisent davantage.

Nous estimons que le BAIIA ajusté se situe dans une fourchette de 200 à 215 millions de dollars. À compter de 2019, nous présenterons le BAIIA ajusté, excluant la charge de rémunération en actions hors caisse, aux fins de cohérence avec d'autres sociétés comparables. Nous estimons que la charge de rémunération en actions hors caisse s’élèvera à environ 13 millions de dollars en 2019. L’augmentation du BAIIA représente une augmentation de 23% à mi-parcours par rapport à notre BAIIA non défini par les PCGR de 2018, tirée par les activités principales et par la vente d’environ 33 millions de dollars. de la contribution des acquisitions de Jack Wolfskin, qui seront tous partiellement compensés par des variations défavorables des taux de change.

Nos résultats financiers peuvent varier d’un trimestre à l’autre en fonction de nombreux facteurs, notamment le moment choisi pour le lancement de nouveaux produits, le moment des investissements supplémentaires dans l’entreprise et le moment de l’évolution des taux de change. L'ajout de l'activité de Jack Wolfskin aura également une incidence importante sur nos résultats trimestriels intra-annuels. L’activité de Jack Wolfskin va à l’encontre des activités d’équipement de golf.

Si l’on exclut le coût de financement de l’acquisition, l’activité de Jack Wolfskin génère généralement la totalité de ses bénéfices au cours du second semestre de l’année civile et n’est pas rentable au premier semestre. À l'inverse, le secteur des équipements de golf réalise généralement tous ces bénéfices au premier semestre et n'est pas rentable au second semestre. Compte tenu de ce changement de saisonnalité, nous fournissons également des prévisions pour le premier trimestre et le premier semestre 2019.

Toujours sur la diapositive 15, les ventes nettes sont estimées entre 490 millions USD et 508 millions USD pour le premier trimestre de 2019, contre 403 millions USD au premier trimestre 2018. Les ventes nettes sont estimées entre 928 millions et 948 millions USD au premier semestre 2019. contre 800 millions d'euros au premier semestre 2018. L'augmentation des ventes nettes du premier trimestre ou du premier semestre est principalement attribuable à l'ajout des ventes de Jack Wolfskin et à des augmentations modestes des ventes nettes de l'activité principale.

Le bénéfice par action est estimé entre 0,45 et 0,49 USD pour le premier trimestre de 2019, contre 0,65 USD pour le premier trimestre de 2018. Le bénéfice par action est estimé entre 0,71 et 0,78 USD pour le premier semestre de 2019, contre 1,28 USD pour le premier semestre de 2019. 2018. L’EBITDA ajusté est estimé entre 79 millions USD et 83 millions USD pour le premier trimestre de 2019, contre 89 millions USD pour le premier trimestre de 2018. Le BAIIA ajusté est estimé entre 132 millions USD et 141 millions USD pour le premier semestre de 2019, contre 178 millions EUR auparavant. millions pour le premier semestre de 2018.

La diminution du résultat estimé et du BAIIA ajusté pour le premier trimestre et le premier semestre de 2019 par rapport aux mêmes périodes de l'exercice précédent reflète le calendrier intra-annuel du bénéfice de la société en 2019, par rapport à 2018. En 2019, une plus grande partie les bénéfices devraient être réalisés au second semestre par rapport à 2018, en raison de la saisonnalité de l'activité de Jack Wolfskin, qui ne donne généralement qu'un bénéfice d'exploitation nominal au premier trimestre et une perte d'exploitation au deuxième trimestre. trimestre avec une perte globale pour le premier semestre.

Davantage de lancements de nouveaux produits d’équipement de golf au second semestre de 2019 et moins au deuxième trimestre de 2019 par rapport aux mêmes périodes de 2018. Également, l’impact négatif de la variation des taux de change du premier semestre de 2019 par rapport à 2018, le premier – nous estimons à 6 millions le total de l’année, mais il s’agit vraiment de 10 millions pour le premier semestre et ensuite – négativement, puis de 4 millions de positifs pour le second semestre. Et le calendrier des investissements supplémentaires en 2019, qui pèsent plus lourdement au premier semestre.

Inversement et pour les mêmes raisons, la société prévoit pour le deuxième semestre de 2019 une probabilité beaucoup plus grande par rapport au deuxième semestre de 2018 et une bonne année dans son ensemble. Ceci met fin à nos remarques préparées aujourd'hui. Nous allons maintenant ouvrir l'appel aux questions.

Séance de questions et réponses

Opérateur

[Operator Instructions] Votre première question vient de Steven Zaccone et de JPMorgan.

Steven Zaccone

Tout d'abord, je voulais parler de vos attentes en matière de croissance et de demande sur le marché en 2019. Que pensez-vous de la santé du canal de vente au détail, du canal Green Grass et de la demande des consommateurs depuis 2018? Remarque? Et dans le même ordre d’idées, où voyez-vous la plus grande opportunité de regagner des parts de marché cette année?

Chip Brewer

Salut Steven. Nous sommes prudemment optimistes lorsque nous examinons les marchés qui se préparent cette année, même s’ils ont sans aucun doute ralenti au quatrième trimestre. Si vous considérez l’ensemble de l’économie pour le moment, cela semble encore assez bon et nous nous attendons à une légère hausse des marchés cette année et à la santé des stocks des détaillants, et cetera, le montant absolu des stocks lorsque vous regardez en ce moment est en bonne position. Donc, particulièrement Callaway sur une base globale. Nous sommes donc optimistes et estimons que nous devrions être en bonne position pour commencer l'année et avoir une année positive.

In terms of where we think we can gain share and we are anticipating gaining share relative to the full year numbers for last year. Certainly in the driver category, we're excited about the flash driver. Really strength across the line, our cutter line should resonate very strongly. The Stroke Lab product is outstanding. So, we're really expecting 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.

Steven Zaccone

Then 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?

Chip Brewer

No. We are actually expecting it to be a little bit more second half weighted. So relative to the 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 will. We actually have a little less product being launched in Q2 with Q1 being fairly comparable with a year ago.

Opérateur

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

Dave King

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?

Brian Lynch

Sûr. I think just stepping back for a second, we talked about this a little bit in the last couple of calls, it’s getting more difficult to — every year to evaluate quarter-over-quarter comparison. It's a much better deal if you can look at the full year and then I know you have to model out quarterly, but you’ve got to adjust that. I think you take the bigger picture and look at our full year. And 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 will be more normalized launch. We also have more – it will also be effective year-to-year based on the timing of any investments we're making.

We talk about FX for this year coming up, FX is a pretty big help in the first half, it will be $10 million, but then, we’re anticipating 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 two-thirds in the second half. And then even with the quarters, 2-3 is their biggest quarter for everything.

And if you look at just on the sales side, Q2 is their lowest and Q3 is probably 3 to 4 times the size of Q2. As far as earnings goes, and looking at EBITDA, the EBITDA is breakeven to a 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 comparisons, 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 the share.

Dave King

D'accord. 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 bookings so far on those to start the year?

Chip Brewer

I would say that in terms of the scale of the launches, et cetera, and the amount of products we’re launching, it’s very profitable 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 is stated, is the best I've ever seen and have been part of top to bottom that only in Putter, would I say, are we launching more in the beginning of the year than last year.

Dave King

And then early booking read so far?

Chip Brewer

Early booking days, everything looks positive and consistent with guidance right now. The feedback on the product, much of this product now is sort of Epic Flash and Apex launched in the market, but only very short period, weekends 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 [indiscernible] where that’s appropriate and we feel good about all signals, and as mentioned on the Golf, I just thought, we thought that was quite a testament to be the only product to receive 20 out of 20 stars in driver and irons with Epic Flash and Apex.

Opérateur

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

Randy Konik

I’ve got a few questions here. I guess, Chip just, I just wanted to go back to the outlook. I know — I believe the outlook word for word going into 2019 is kind of the same that you had going in to 2018, ’18 ended up being 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 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. 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?

Chip Brewer

I think that perhaps the word for word being, I assume you're referencing 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 it certainly doesn't feel the same, but when you step back from it, I think does have the same conclusion. So, 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 of the gloom and doom, which didn't turn out to be factual. And when you look at the actual results, last year 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.

Randy Konik

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 of the golf and equipment side, you talked to, I guess, product costs up related to advancing technology, which tells me that’s probably held back margins somewhat as you probably didn't raise the price point of the goods at the same rate as the increased cost to advance the 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?

Brian Lynch

We've been saying all along that our improvements in gross margin were significance since just that year, 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 do the same as the growth rate going forward.

Randy Konik

And then just, when you look at the — there's a lot of moving pieces with the revenue and just overall guidance with all these different pieces of the business now with 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 injectables to like a $383 million business, is it growing, just curious on any metrics you can provide on how we should think 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 and get more clarity on how we should be thinking about Jack Wolfskin in relation to the overall full company guide if you will.

Brian Lynch

I think just on some of the specific questions and I’ll let 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 a company, the other portions of our business. On the gross margins, there is — the Jack Wolfskin business is slightly accretive to our gross margins, overall, our blended gross margin and the EBITDA margins initially will be affected by some additional investment we're making in that business, but ultimately will improve from there.

Chip Brewer

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

Randy Konik

Just one more follow-up Chip, where — when you acquired TravisMathew, it seemed pretty clear and very straight forward, great brand, compliments our equipment, we're going to grow the door distribution, et cetera. Ogio, when you bought that, it was – you know, their golf bag, but there's so much more that can be done here around product category extensions, et cetera. I guess in thinking of other 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, a geographic play, I'm just trying to just get a sense of what that is and that’s all I have for questions?

Chip Brewer

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

Brian Lynch

And I agree with you, the TravisMathew brand is a great brand, but so is the Jack Wolfskin brand. It’s just not over here, so people don't know what is well, but it’s number one. It’s one of the leading brands in China, [indiscernible] opportunity for growth.

Opérateur

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

Michael Swartz

Chip, just wanted to ask you a question regarding the ball business. We did have some hell of it called setbacks, but some inefficiencies and in production in ’18, I think a lot of that was due to some of the 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 way, 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?

Chip Brewer

Michael, I wouldn't call ‘18 as setback. So I’ll start there, 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 plan, it is likely that the efficiencies will have been 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 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 a investment that did lead to lower category profitability as a percentage, although our absolute profitability is not large, 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.

Michael Swartz

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 reframe how much of that growth came from, to keep the simplistic, maybe new doors versus distribution or at 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.

Chip Brewer

Ouais. We do have international expansion ahead for TravisMathew. It's going to be small first, but the potential is quite large as we build the platform and gain momentum. In TravisMathew, you're correct on the growth rates, just a phenomenal business and the brand is resonating across multiple channels and the growth, I don't have the specific 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, it's not that, I don't see the growth moderating it, because they are going to run out of new doors, if you will. This brand is really resonating, it's resonating in golf, it is resonating outside golf. And as you can gather, very excited about the prospects for the business.

Opérateur

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

Dan Wewer

Brian, first, I wanted to ask about the outlook for lower earnings in the first quarter and in the second quarter, this is having 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 two quarters?

Brian Lynch

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 will see more in the second half of the year. I guess actually it’s $10 million. Overall, negative in the first half and 4 million positive in the second half.

Dan Wewer

And as the way to think about it is that we had this tremendous profit contribution from the rogue irons last year and that’s just really difficult comparison, even with the Apex launch this year.

Chip Brewer

Hey Dan. It’s Chip. No, it's not product specific, it is simply that most of our growth will be in the second half, even in our core business and 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. 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.

Dan Wewer

Can you remind us why it's beneficial to launch or delayed product launches and for [indiscernible] golf demand?

Chip Brewer

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 product launches 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 resource rather well. So it really varies and there's not going to be a absolute consistency of how we're going to launch products at Callaway Golf. We are — we obviously launch product 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 energy to the marketplace.

Dan Wewer

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 rounds played or a bit 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 is less, like the figure that you quoted, but if they have, what’s accounted for that?

Chip Brewer

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 US, it was the uneasiness with the economic conditions and stock markets and all of the items that were 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 one month drop is fairly explainable, looking into where we stand in 2019, I still feel pretty good.

And the last question was regarding –

Dan Wewer

Ouais. I find it hard to believe that your market share fell 100 to 200 basis points?

Chip Brewer

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 US, I think the market share that I report, which I report for consistency underestimates our market share in the US. I think that in the club market, we're closer to flat.

Opérateur

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

Daniel Imbro

Why don’t I 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 round play trends stabilize kind of from the decline we saw in the back half of the year or what are you assuming on the round play side.

Chip Brewer

Gosh, I don’t really break out rounds play, but I would hope that that rounds play would be consistent with the overall market at flat to slightly up.

Daniel Imbro

And then actually moving over to Europe, we’re seeing signs of just some specific market weakness over there, none of the deal was closed. One, can you talk historically about how resilient the Jack Wolfskin asset is and how it performed during economic slowdowns and then two, can you update us on your outlook for the key golf business over there in Europe for 2019.

Chip Brewer

Sûr. 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’s been very resilient for a very long time. It is a majorly entrenched position in that marketplace and you did not see revenue swings downward that were 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 would say, it’s same answer, I rely 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.

Daniel Imbro

And then last one for me, just turning back to the US on the golf ball side, you guys didn’t roll out [indiscernible] different part of the market and on different price points, how do you guys think about the long term trend of market share growth? I assume it would be continuing 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?

Chip Brewer

I think there's room to grow in both and so like our largest competitor in the space, we are launching our tour golf ball, the current soft product and are more value priced golf balls, which in this case is super soft and I wouldn't put ERC as a value, but it’s launching in the opposite cadence of a current soft year.

Opérateur

And our next question comes from John Kernan with Cowen.

John Kernan

I guess going back to a prior question around initial guidance, 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 early throughout 2018, relative to your initial outlook and understanding this, there always seems to be a little bit of conservatism in your outlook, but just want to understand the drivers of 2018 and what enables such outperformance relative to the initial outlook?

Chip Brewer

Sûr. That was an easy one. We outperformed across our business, but we also had limit our backs that we had anticipating. We didn't anticipate the US market being up 5% and if you remember through mid-year, 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 wins behind you and the business is hitting strides, that can be a beautiful thing.

John Kernan

And then if we think about Epic Flash and the volume, I don’t know if you can talk about this for competitive reasons, but just the volumes of Epic Flash versus maybe the massive success that the Epic, the initial Epic launch had, how did the two compare at this point?

Chip Brewer

That's a interesting question. So Epic Flash is the — probably the most impressive driver product I’ve been part of and with this AI platform, 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.

John Kernan

And I guess 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 de-leverage 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 in to this, but just any color on the OpEx line items in the first half versus the second half.

Brian Lynch

John, we're not going to break it out that level of detail. We just try to get some top and bottom line, just to give you 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 will be variations quarter to quarter.

Opérateur

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

Casey Alexander

I 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.

Chip Brewer

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, or not accelerator, we have more inventory prepared for the launches now where last year we were chasing it a lot. We were not fully, I think for the first quarter, first half, we were under stock in retail and had a little under stock to 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.

Casey Alexander

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.

Chip Brewer

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. They will see – we will probably break out the apparel in sales and that will combine Jack Wolfskin and Travis.

Casey Alexander

D'accord. 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?

Chip Brewer

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'll probably be self-reinforcing to the growth rates over there, et cetera. There, we don't have it on that doubt 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 significantly larger by far and away the larger of the two businesses.

Casey Alexander

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?

Chip Brewer

No. We haven’t.

Casey Alexander

D'accord. 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.

Chip Brewer

That’s 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 matter as we see it. But our business now is golf equipment and lifestyle apparel with both pieces of the business hopefully having meaningful scale.

Opérateur

And we have no further questions at this time.

Chip Brewer

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

Opérateur

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

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