Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the quarter three 2019 Callaway Golf earnings Conference call. All at this time, all participants already listen only mode. After the speakers presentation. There will be a question and answer session do ask a question during the session do we need to press star fell by 100.
Allophone keypad.
Due to gone restraints, we ask that you limit yourself to asking one main question and one follow up question.
Fewer for any further assistance. Please press star Zero I'd now like turn the conference over to your speaker for today Mr., Patrick Burke head of Investor Relations. Sir. Please go ahead.
Thank you eat and good afternoon, everyone. Welcome to Callaway third quarter 2019 earnings conference call and Patrick Burke, the company's head of Investor Relations.
Joining me on todays call or chip Brewer, our president and Chief Executive Officer.
Ryan Lynch, our Chief Financial Officer, and Jennifer Thomas Our Chief Accounting Officer.
Today, the company issued a press release announcing its third quarter 2019 financial results a copy of the press release and associated presentation are available on the Investor Relations section of the company's website at <unk> IR Dot Callaway golf Dot Com most of the financial numbers reported as discussed on todays call or based on U.S.J.
Generally accepted accounting principles.
And the few instances where report non-GAAP measures, we've reconciled the non-GAAP measures to the corresponding GAAP measures at the back in the presentation in accordance with regulation G.
Please note that this call will include forward looking statements and 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 the 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. Its earnings presentation is available for download on the Callaway Investor Relations website under the Webcasts and presentations tab.
Also on the same tab you can choose to join the webcast to listen to the call and use the slides as the webcast participants you were able to put through the slide I.
I would now like to turn the call over to Jeff. Thanks, Patrick Good afternoon, everyone and thank you for joining us for today's call.
Starting on slide four I'm pleased to announce another strong quarter. Our total company revenues were up more than 60% during the quarter and are up 31% year to date.
For the first nine months, we delivered growth across all business units regions and major product categories.
The quarter, we enjoyed continued strong performance in our golf equipment business continued double digit growth in the Travis Matthews business as well as positive results in our recently acquired Jack Wolf skin business, which is benefiting from a growing direct to consumer business, and where new product innovation along with real.
<unk> investments in marketing are beginning to bear fruit.
These results reflect the strength of our team our brands and our long term strategy.
As we are seeing key investments and other initiatives meaningfully impact the growth in the long term earnings potential of our business.
As is my cuts than I'd like to take this chance. The thanks, <expletive> I always tell team for the hard work required in delivering these results across all our brands and driving further change in growth at our company.
Like me I'm sure our team realizes that we have a lot more opportunity in front of us and remains motivated to continue to improve.
Let's now take a look at our operating performance by business segment.
Turning to slide five of the presentation.
Our equipment business had a strong quarter with revenues up 13% on a constant currency basis, driven by continued brand strength as well as new product launches, we saw revenue growth in every major market.
Market conditions vary by region with the U.S. in Asia nicely for the quarter, but Europe down slightly.
Overall per year to date market conditions have been slightly better than expectations, delivering probably 2% to 3% growth on a global basis.
Consistent with our forecasts and track record, we have grown our golf equipment revenues slightly faster than the market year to date at plus 5% currency neutral and for the full year, we're expecting even more impressive growth rate of approximately 8% currency neutral.
This year to date, we're demonstrating strength across the breadth of our club lineup and proud to be able to claim the number one market share position in clubs in the U.S., Japan as well as Europe .
In the U.S., thanks to our new advancements using artificial intelligence, our FX last words of a number one selling driver and ferry would models year to date the.
The epic Flash driver has continued to sell through very well even late into the year.
Strong indicator product performance.
We're also not one selling iron brand with Rogan apex irons in the number one and two selling iron models year to date, respectively.
And capital is the number one driver on global tourism as well as Odyssey being the number one potter on both tours.
As previously mentioned the second half of this year benefits for more product launches relative to last year.
I'm pleased to report these new product launches have been well received the jaws wedges had been particularly strong and I remain optimistic on the potential this product on a global basis.
The epic Forestar Irons, we're also very well received especially in Japan, where they had been a number two selling our in that market, but the number one selling iron when excluding closeouts looking forward. We're also receiving strong feedback and excitement regarding the number 10 stroke lab.
Which launches in November .
Our golf ball business also continues to do extremely well with currency neutral revenue growth of 6% year to date.
The market reaction to our triple tracked technology and annuity RC golf balls has been excellent and our us market shares continue to set records.
All plant conversion continues on track and should be substantially complete by the end of this year.
We continue to experience a little higher manufacturing costs here work through the transition, but we remain excited about the long term capabilities in direction of this facility as well as our golf ball business overall.
Taking a step back and looking at the Big picture, we believe the golf equipment market remains at a healthy position with a significant stable market improves structural dynamics over the last several years and exciting global tour, creating interest in the game and potential upside demand drivers such as top golf.
We see a predictable and well structured market, where our leadership position scale and operating acumen and continue to drive moderate growth and meaningful cash flows.
Turning to slide seven and looking at the soft goods segment performance.
Revenues year to date has served through the acquisition of Jack will skin as well as strong performance across the majority of our brand and business portfolio.
Travis Matthew is worthy of especial call out here is that business continues to deliver double digit growth and we remain energized about his future.
International as a small piece of the Travis Matthew business at present, but we see it has a nice opportunity going forward. This year, we began the process on launching the Travis Matthew brand in the UK in Japan.
Japan launch occurred during Q3, leveraging our local Callaway apparel business and our partnership with the local star golfer real issue cow toward the brand during a recent tournament, thereby garnering a fair amount of media attention.
Ed Lockwood habit. He went on to win the of that thus, making our strategy look particularly smart.
Needless to say the sell in promotion in sell through on this launch have all been viewed positively.
The revenue here represents small numbers at present.
But as a positive start in a good example of the synergies and combined brand and infrastructure can provide.
The Jack will skin business had another solid quarter remains on track with a previously communicated expectations for the full year, including what I believe are strengthening fundamentals in the face us somewhat challenging economic conditions in central Europe and China.
We continue to see excellent performance in their direct to consumer business with year to date double digit growth in E com and low single digit growth at retail.
The sell through and at once business for the fall Winter 2019 product has been at or above plan and the new product innovation and marketing initiatives appear to be resonate.
It's encouraging to see this business respond to the investments in change initiatives, we're putting in place as it again speaks to the course skills, we have built and our ability to work in collaboration with like minded brands to generate returns.
Well I was talking about the soft goods segment. We've consistently mentioned that we believe there is a lot of synergy in our strategy in efforts here.
These are businesses, where we know the consumer whether that be golf outdoors are active lifestyle their businesses, where there's a preference for premium style or performance.
These are markets that have growth rates, well above golf equipment.
And the successful businesses that established scale deliver operating margins greater than most equipment businesses and trade at multiples higher than pure play equipment companies.
As we develop global scale in this segment, we see synergies in scale advantages via supply chain sourcing warehousing logistics and global expansion.
Some of these synergies our strategic revenue generating for example, check will extend gives us potential that have a large central European warehouse that we can use across all our businesses.
And the Callaway Travis Matthew OGIO infrastructure in North American, Japan will provide enhance long term growth opportunities for Jack will skin in those markets.
However, some of these synergies are specifically cost savings opportunities.
When we consummated the transaction first coming in with you we called out this potential but also let you know we'd only baked 1 million of this into our plans.
In previous calls we mentioned that we were indeed finding more.
We are now at a point, where we have a high level of confidence that these cost savings synergies will scale to at least 15 million in annual net savings.
For clarity say net because there is some investment needed to deliver the savings some of which will begin this year and the rest which will be phased in next year.
Investments and so we'll begin to be productive and by this I mean delivered net savings by 2021 and fully in gear by 2022.
Interestingly the majority of these cost synergies don't directly benefit the check will skin business. Instead, it's a scale and infrastructure of the Jack will skin business that enables them in our overall softness business and Brian's comments, he will add more color and specificity on this exciting finding.
As I hope you can see our soft goods business is a large and rapidly growing segment of our company. We are confident and excited about that long term outlook and potential here.
Turning back to the business as a whole on slide eight over the next several years, we anticipate further strengthening all the brands in our portfolio and believe we're trending accordingly, we also continued to reinvest back into our business in both golf equipment and soft goods with several key infrastructure projects underway and more play.
Plan for 2020 and extending through mid 2021.
These include the before mentioned Chicopee ball plant capital project now in its final year mobile distribution center expansion and consolidation projects all aimed at increased capacity inefficiency.
One of which is that 800000 square foot Multibrand facility in Dallas, Texas, several IP systems implementations and conversions related to our recent acquisitions in growth ambitions. The establishment of a global soft goods sourcing quality platform.
As well as the building of organizational capacity for the new markets, such as Jack will skin North American Japan.
We believe these are high return opportunities will create significant long term shareholder value.
And we have a history of making these type of investments successfully and a high confidence in our ability to execute these projects.
Now on slide 10, we're pleased to be reiterating the majority of our previous guidance, including our estimates for full year revenue gross margin opex in EBITDA, while raising our EPS guidance by approximately three cents per share.
These projections have us overcoming a significant FX headwind and delivering substantial overall growth in both revenue and adjusted EBITDA.
Growth is being driven by our recent strategic acquisitions as well as continued strength in our legacy business, which we project to be up approximately 8% on a constant currency basis for the full year.
We're also pleased that the golf equipment industry remains healthy and we believe we are well positioned to continue our leadership position in the industry.
Our Travis Matthew brand continues to drive significant growth and we remain energized by the Jack will skin acquisition, which had another good quarter and where we are increasingly confident about for the long term in crude including an increasingly positive view on long term synergies.
In conclusion, I'm pleased with our direction in our results year to date.
Our company as a market leader in the golf equipment space and developing a highly attractive and growth oriented softgoods apparel segment.
As we continue to execute our strategy. We're confident we can further transformer business and continued to deliver long term revenue and earnings growth that can and will exceed that of the golf industry overall.
Ryan overview.
Thank you chip.
As chip mentioned, we're pleased with our third quarter and nine month results.
The results reflect the strong performance of our 2019 golf product lineup as well as the strength of our Travis Matthew and Jack Woolston businesses.
This performance along with lower than expected tax expense.
Has allowed us to increase our full year non-GAAP earnings per share guidance to approximately even with last year overcoming it estimated $33 million negative impact on net sales from changes in foreign currency.
An estimated 3.5 million negative impact from increased tariffs related to the China trade dispute.
And an incremental $34 million if interest expense primarily related to the long term debt the company incurred in connection with the Jack Wolfspeed acquisition.
We remain focused on executing our strategy of creating a premium golf equipment in active lifestyle company. We are encouraged by our progress today and are energized by the long term sales growth synergies and earnings potential the strategy presents.
Before turning to our financial results for the third quarter I'd like to provide some additional insight into the synergies we have identified relating to the optimization of our global apparel and soft goods business.
These synergies are substantially higher than the approximate $1 million, we estimated and our initial Jack will skin model.
While our acquisition of Jack Wolfgang will still around our long term strategy of enhancing growth by building a globally scaled soft goods business.
We always believed that through scale and complimentary business.
As we could find and realized synergies as our operations team worked through the integration.
Synergies identified today are targeted around sourcing and production.
Warehousing and transportation costs.
Although many of these synergies are not novel scaled the combined soft goods businesses.
And a best in class operations team to make impossible.
While there are many initiatives undertaken to obtain these synergies I want to provide a few examples.
The first involve sourcing and production.
Currently as is common practice, we utilized agents to source some product from vendors, including some of the Travis Matthew products.
Callaway apparel, Japan products, Jack Wolfcamp footwear, and Callaway golf accessories.
These agents charges sourcing fee above what the vendor charges.
We plan to build upon which act was can already dose for apparel and create an in house shared soft goods sourcing platform to sought to source. Some of these products directly and thereby eliminating the majority of these agencies.
Next one warehousing nuscale and geographic diversity allows us to consolidate warehouses and optimize our distribution strategy.
Specifically, we will add our other soft goods brands to the Jack will skin warehouses in Germany in China.
We will create a consolidated warehouse in Japan for Callaway, Travis Matthew Jeff will skin I know geo products for distribution in that region.
And as we previously announced we're creating a centralized distribution center in Dallas, Texas for the warehousing and distribution of golf equipment and soft goods in North America.
All of this will allow us to optimize the fall softgoods across the globe and eliminate our more fragmented warehouse strategy that exist today.
Third areas transportation costs, we will be able to obtain lower overall transportation rates, given our increased scale, which will benefit the Jack wells can business as well as the Callaway business.
And we'll be able to optimize shipments from shared suppliers to ensure a full shipping containers by combining shipments of our various brands.
These are just a few examples there are many others, including volume discounts from consolidating soft goods suppliers, having to scale to bring embroidery in house and leveraging a more diversified supply chain base to take advantage of low tariff countries.
We currently expect to realize at least $15 million annually net savings that our current level of business by 2022.
Only a portion of the savings will benefit the Jack Wolfcamp business.
Yes, it is because of the scale, we achieved by adding the Jack will stay in business that we're able to achieve much of the synergies for our other brands as well.
There will be that's been required to achieve these synergies in the synergy savings are expected to ramp up while we implement initiatives necessary to achieve them.
As as we do not expect net benefit in 2020, but net savings should begin in 2021 with the full expected amount of net benefit in 2022.
Overall, the synergies continue to reinforce our conviction in our soft goods strategy.
And our ability to realize significant value in this segment.
Now I will turn to our financial results.
In evaluating our results for the third quarter first nine months you should keep in mind, some specific factors that affect year over year comparison.
First the Jack will exclude acquisition occurred in January 2019, and therefore that business is not included in our 2018 results.
Second when discussing our non-GAAP results today, we exclude noncash purchase accounting adjustments related to the OGIO Travis Matthew inject will skin acquisitions, and we also food other nonrecurring transaction and transition expenses related to the acquisition and other nonrecurring advisory fees.
We exclude these items because that is how we evaluate our performance.
A reconciliation of this non-GAAP information to the corresponding GAAP information is included with the earnings release, we issued today.
With those factors combined I will now provide some specific financial results.
Turning to slide 11 today, we're reporting consolidated third quarter 2019, net sales of $426 million compared to $263 million in 2018.
An increase of $164 million were 62% at a record for net sales.
In fact 13 of the last 14 quarters have been record sales for that quarter.
The 62% growth was primarily driven by the Jack will skin business, which contributed $134 million in third quarter.
In addition, we ship more of our jobs, which wedges in the quarter than we expected.
A portion of that had been playing for the fourth quarter.
Changes in foreign currency exchange rates negatively impacted third quarter 2019, net sales by $6 million.
On a constant currency basis, and excluding the Jack Wolfcamp business.
Third quarter 2000, net sales increased 11%.
This increase is driven by increased sales and the golf equipment business and continued double digit growth in the Travis method business.
Gross margin was 44.9% in the third quarter 2019, compared to 43.9% in the third quarter 2018, which was inline with our expectations.
On a non-GAAP basis gross margins were also 44.9%.
100 basis point increase compared to the third quarter of 2018.
This increase is primarily attributable to the positive mix benefit of our soft goods business.
As the Jack Wolfcamp Travis map, you were accretive to our gross margins in the third quarter.
As well as new golf equipment launches in the third quarter 2019.
The negative impact from tariffs and changes in foreign currency rates, partially offset some of the increased margin.
Operating expenses $151 million in the third quarter of 2019, which is a $46 million increase compared to $105 million in the third quarter 2018.
non-GAAP operating expenses were 147 million, an increase of $44 million in the quarter.
This increase was primarily due to the addition in 2019 of operating expenses from the Jack Wells can business, which added an incremental $37 million of operating expense, excluding the nonrecurring acquisition cost.
Operating income was $40 million in the third quarter of 2019 compared to operating income of 11 million for the same period in 2018, an increase of 278%.
non-GAAP operating income was $45 million compared to non-GAAP operating income of 12 million in 2018.
An increase of $33 million or 258%, which is primarily due to the Jack will skin business and new product launches for the golf equipment business.
Partially offset by the foreign currency exchange headwinds.
Other expense was $7 million into third quarter 2019, compared to other income of $400000 in the same period the prior year.
The higher other expense in 2019 resulted from an 8.5 million dollar increase in interest expense.
Primarily related to the new term loan entered into in January 2019 to fund the purchase of Jack will scale.
Fully diluted earnings per share was 32 cents, a 96.3 million shares in third quarter 2019.
Compared to 10 cents, a 97.3 million shares in the third quarter 2018.
non-GAAP fully diluted earnings per share was 36 cents versus non-GAAP fully diluted earnings per share of 11 cents in the third quarter 2018.
This non-GAAP increase is primarily attributable to the Jack will skin business and new product launches in the golf equipment business.
Partially offset by increased interest expense and foreign currency exchange headwinds.
Adjusted EBITDA increased 35 million to $57 million in the third quarter of 2019.
Compared to $22 billion in third quarter 2018.
Turning to slide 12, 2019 consolidated first nine months net sales were $1.389 billion compared to $1.062 billion in 2018.
An increase of $327 million or 31%.
And also a record for net sales.
The 31% growth was primarily driven by the Jack will skin business, which contributed $275 million in the first nine months.
Changes in foreign currency exchange rates negatively impacted net sales by 30 million.
Year to date.
On a constant currency basis, excluding the Jack will skin business.
Net sales increased 6% for the first nine months of 2009, Steve.
This increase in net sales is driven by the strength of the 2019, Scott product line as well as continued double digit growth and try to snappy business.
Gross margin was 45.8% in the first nine months of 2019 compared to 47.9% in the first nine months of 2018, which is inline with expectations.
non-GAAP gross margins were 46.6%, a 130 basis point decrease compared to the first nine months of 2018.
This decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix with more premium golf clubs with greater technology, and therefore higher costs all of which was partially offset by the Travis Matthew business, which was accretive on a gross margin basis.
Operating expenses $481 million in the first nine months in 2019, which is a $144 million increase compared to 337 million in the first nine months in 2018.
And includes the first nine months operating expense related to the net new Jack will skin business.
On a non-GAAP basis operating expenses were 468 million.
An increase of $133 million for the first nine months.
This increase was primarily due to the addition in 2019 of operating expenses from the Jack will skin business, which added an incremental $113 million of operating expense.
Excluding the nonrecurring acquisition costs.
And they also reflect investments in the golf equipment, and Travis Matthew businesses and normal inflationary pressures.
Operating income was $155 million in the first nine months in 2019.
Compared to operating income of 171 million for the same period in 2018, a decrease of 9%.
non-GAAP operating income for the first nine months of 2019 was $179 million compared to non-GAAP operating income of 173 million in 2018 I.
An increase of $6 million or 3%.
Was primarily related to the Jack will skin Travis Matthew business and was partially offset by the negative effect of foreign currency.
Other expense was $28 million in the first nine months in 2019 compared to other expense of $2 billion in the same period of prior year.
The higher other expense in 2019, primarily resulted from a $25 million increase in interest expense, which is primarily related to the new term loan.
Fully diluted earnings per share was $1.13 or 96.2 million shares in the first nine months of 2019.
Compared to $1.37 in the first nine months of 2018.
non-GAAP fully diluted earnings per share was $1.35 in the first nine months of 2019 versus non-GAAP fully diluted earnings per share of $1.39 in the first nine months in 2018.
non-GAAP slight decrease is primarily attributable to the increased interest expense offset by an increase in the core business and the new Jack will skin business.
Adjusted EBITDA increased 60 million to 260 million in the first nine months of 2019.
Compared to 200 million in the first nine months of 202018.
Again, we're pleased with this result, given the adverse headwinds from changes in foreign currency.
Turning to slide 13 that will now cover certain key balance sheet and cash flow items.
Available liquidity, which represents additional availability under our credit facility plus cash on hand was 340 million at the end of third quarter of 2019 compared to 330 million at the end of third quarter 2000 acreage.
Our consolidated net accounts receivables were $223 million, an increase of 72% compared to $130 million at the ended the third quarter 2018, which is attributable to the addition of Jack Wolfcamp business in 2019.
Days sales outstanding in the core business increased from 56 days and 64 days.
We remain comfortable at the quality of our accounts receivable at this time.
Our inventory balance increased by 43% to $340 million at the ended the third quarter of 2019.
This increase was primarily due to the addition of the Jack was can business.
Additional inventory to support a growing to support a growing soft goods business.
And inventory needed to support and overall larger.
GAAP equipment business in 2019.
We remain comfortable with the quality of our inventory at this time.
Capital expenditures for the first nine months of 2019 were $37 million.
A year over year increase of $11 million.
Compared to the first nine months in 2018.
Due mainly to continued investments in our ball plan and the addition of that will skin business.
Depreciation and amortization expense of $25 million.
In the first nine months in 2019.
Compared to $15 million in the first nine months of 2018.
I will now coming at our 2019 guide.
Turning to slide 14, I'd like to note that the non-GAAP guidance, we are providing.
Excludes noncash purchase accounting adjustment for Jack will skin.
As well as OGIO and Travis Matthew.
And then nonrecurring transaction and transition expenses.
Related to the Jack was can transaction as well as other nonrecurring advisory fees.
We're reconfirming, our 2019 net sales range and 4.685 billion to $1.7 billion.
This guidance implies a 35% to 37% growth over 18.
Consistent with our previous guidance.
This assumes our business, excluding Jack Wolfcamp will grow 7% to 9% on a constant currency full year basis, when compared to 2018.
These estimates assume changes in foreign currency exchange rates in 2019 will have a negative impact of $33 million in 2019 full year net sales compared to 2018.
As we look at where foreign currency rates are currently versus the us dollar unless rates become more favorable in the balance of year. We expect this will be a headwind for us in 2020.
From a translation perspective.
Unfortunately over the long term.
Prices tend to adjust to mitigate any long term earnings impact.
Also we have had approximately $6 million in hedge gains and non-GAAP other income in 2019.
Which we do not anticipate will repeat in 2020.
We're reconfirming, our full year gross margin guidance of approximately 46.7%.
And our full year 2019 operating expense guidance of approximately $628 million.
We are increasing our non-GAAP earnings per share to one dollar six to $1.12.
[noise] compared to previous guidance of $1.30 to $1.90.
The three said increase is being driven by slightly lower interest expense and a lower estimated tax rate.
Yes, maybe a tax rate has been reduced to 19% for 2019.
In 2019 figures are based on 96.5 million shares outstanding.
We estimate our capital expenditures in 2019 to be approximately $50 million to $55 million, which includes incremental capital expenditures related to Jack will suit business, the bulk plant and other infrastructure investment for the soft goods business.
Capital expenditures were $37 million in 2018.
Depreciation and amortization expenses estimate to be approximately $30 million in 2019.
Which includes $9 million for the Jack will stay in business.
Depreciation and amortization expense for 2018 was 20 million.
We estimate excludes approximately 4 million of noncash expense.
Related to the purchase accounting for the acquisitions.
We're also reconfirming, our adjusted EBITDA guidance of $208 million to $215 million.
We estimate the noncash stock compensation expense will be approximately $13 million in 2019.
One point worth noting is that our guidance is based upon the estimated impact of the China tariffs announced thus far.
Including a 25% tariffs on headwear bags. Another soft goods also known as the list three towers.
And the 15% tariff on apparel footwear in golf equipment also known as the list for tariffs.
Our operations team has done an excellent job of diversifying our supply chain outside of China, and thereby mitigating our exposure to these tariffs.
We currently estimate that the total impact from these tariffs for full year 2019 will be approximately $3.5 million, which has already included in our guidance.
For full year 2022 tariff impact is expected to be $7.5 million.
After 2020, we expect to be fully diversified with no material effect from such tariffs.
This concludes our prepared remarks today, we will now open the call for questions.
Ladies and gentlemen, as a reminder.
Ask your question you need to press Star then the number one on your telephone to withdraw your question press the pound.
Also as a reminder, please limit yourself to one main question and one follow up question.
Our first question point of Daniel in broke from Stephens.
Hey.
Good afternoon, guys. Thanks, taking my question.
I wouldn't want to turn the golf ball category, obviously, it's been a real strong category. If you guys. In recent years group did slow a little bit understanding a pretty tough compares but is there anything changing in that business or can you give us an update on how you're thinking about that growth going forward.
Yes, Hey, Daniels chip.
We did slow and growth.
During the quarter, but that was a planned event for us.
There were some business on a year over year basis.
Specifically in 2018, we add launch.
The stars and start rights Truvis model and then we chose to the demand was so strong for us that we.
Out sold it and we re made.
That in Q3 of that year.
This year.
We did not do that because.
It's at the tail end of the lifecycle of the chrome soft product and we did not want to put more inventory into the market.
At this stage so.
It was a plan process and part of the lifecycle management for US our market shares in the golf ball continued to be quite strong in fact on the in the US there at record levels.
Great Thats really helpful. And then from a quick follow up just on the manufacturing investments in the JV facility.
Thank you mentioned, we're obviously in year three of the.
How those track this year. According to plan and then in 2020 should we expect to see margin leverage improving that category as those roll off thank you much.
Yes sure those those investments are on track for us.
It's been a very busy year.
You know in the Chicopee facility and our golf ball.
Business overall, we're excited about these investments in that they'll.
Provide incremental capacity, but more specifically in.
Improved quality and.
Performance capabilities, which I think position us well for the long run.
There have been some manufacturing challenges, which are totally natural as you go through that process that we've experienced this year.
Going into next year, we think those will abate and.
We would anticipate improved gross margin in the category next year.
And our next questions or from the line of Joe Altobello from Raymond James Joe.
Thanks, guys. Good good afternoon.
Quick question on the guide I mean, obviously, taking up bps.
You could be sales and EBITDA fairly handling the third quarter, but didnt raise those and I know.
Some of that relates to the timing of shipments of the yards leg is that got pulled forward a little bit, but what else is weighing on the fourth quarter the cap rate the sales and EBITDA guide.
That was primarily it primarily it was just moving up or.
It wasn't bank, yes, if you look at the Q4 results.
You know that our imputed by the projections there they are pretty strong we beat the market in Q3.
We pull forward because of some manufacturing dates that got favorable for us the launch which was good business decision.
And the rest kind of flowed as expected.
Okay, perfect and then shifting gears a little bit Jack you mentioned the sales about 134 million in the third quarter I guess by my math that implies some more than neighborhood of $85 million to $90 million sales that you're looking for in the fourth quarter number one number two maybe kind of remind us what the timing is of that launch in the last than maybe the APAC.
That we should expect on 2020 result.
Sure Hi, this is chip.
The.
I believe your math was roughly correct.
As you.
I went through the Jack low skin estimates for this year relative to our previous communication and then.
The Jack will sit in North America launch, we're making progress we.
Made some key hires that business, we're working on systems and processes and product lines on that so.
Lots of activity there.
We do anticipate launching the brand next year sometime between.
Q1 to Q2, so first half of the year.
It will be modest revenue for next year and.
And investment year from that perspective, but were encouraged and making good progress.
And our next question mine of Susan Anderson from B. Riley FBR Susan.
Hi, good evening, thank Kevin the corner and just a follow up I guess on that Jaclyn in business. So it looks like maybe the wholesale part is the piece that which is down still year over year based on your revised guidance back in fourth quarter is given the strong performance in retail and E. Com. So maybe just wanted to get kind of your updated thoughts there if you're seeing in.
Different trends in the wholesale business and then maybe if you could you could just break out Europe and Asia in that performance between as two regions for that brand. Thanks sure. Susan you are correct on the it's the wholesale that.
It is been holding that business back and basically we saw the impact of the.
Declining pre books that we had.
Forecast for you earlier in the year so.
They had a not a favorable winter season last year it led to.
Some backup in the wholesale channel.
And a lower pre book that we had to adjust our expectations for.
And that was realized during this quarter on the positive side, our reorders in sell through of that product exceeded what we had.
Expected so had a good quarter from that perspective.
The wholesale channel there in Central Europe is also.
Little bit spotty right now it depends on the individual player, but there is.
Some.
Shake out if you would going on in the channel there.
That.
We're going to be working through with our channel partners and I think everybody else is in the same boat on that regard.
And.
But the overall theme for the Jack will skin business I think has been.
Favorable over the last several quarters.
And then China versus Europe , but the China market is growing faster than the European market. As you would expect both are a little bit slower this year than they were in previous years is well publicized in the economic conditions of those respective markets but.
The China market overall.
Mid single digit growth, we're growing a little slower than that in the Jack Welch skin business working on.
The structural adjustments that we need to have put in place to set the right Foundation for the long run.
The European market slower growing market.
But the Jack will have skin business is really starting to.
I think showed some signs of strength improvement there.
Great that's great to hear and maybe just one follow up on the quest margin in the fourth quarter. It looks like and full year guidance implies a pretty big pickup and is that just I guess, a mix shift probably I'm thinking that apparel piece, which is higher gross margin has a much bigger.
Integration of sales and quicker is there another driver there going.
The biggest issue Susan is a carryover of the new product launches from Q3, if you remember last year, we didnt have any significant product launches in the back half a year. So the once we launched and then in Q3 will continue into Q4 and that will help the golf equipment margins and then on the soft goods side.
Thanks, Jack was can tightest margin quarter as a lot of via selling to the wholesale channel of the.
Soft goods happened in ended Q O Q3, we just start to see more of the direct to consumer holiday purchase activity in Q4.
And our next questions are from line of Casey Alexander from Compass point Jaycee.
Hi, good afternoon.
There was no debt reduction or share repurchase during the quarter.
Casey.
Nothing material and either now.
Okay. Okay no.
Tell me the direct to consumer success that Jack Wolf skin is having no.
You know is that.
I have a geographical bend to it that Mike assist the introduction into North America.
Hmm I don't know whether it has a geographic bent to it but it's a it's a it because they are seeing it you know through.
Out all of Europe .
Both in the retail channel and the E Com channel and it's.
The response rates that you would expect to see it's going to be the fastest to respond to the new product innovation and the.
Marketing changes and investments that we made so.
I think it does reflect well on the fundamentals of the business.
And I guess arguably on the U.S. market because when we finally get.
Last year will be utilizing innovative product that is resonating on the European market.
Okay, and then and then last question is the strength of us equipment sales in the third quarter.
Is that cleaning out enough inventory and pushing away.
You know sort of any type of market closeouts to where it could lead to improved margins over the next couple of quarters.
Yeah, that's an interesting.
Question, I think that some of the strength in the.
Quarter.
You look at the overall market was because of the increased amount of launch activity.
With us and several other manufacturers all launching.
Potentially more equipment than we did last year.
But I also believe when you look at the inventory numbers the months on hand inventory in the U.S market is very well.
And ours is lower than the industry in total.
So that does give you comfort.
Going forward that there's less of a reason to get irrationally promotional out there.
Okay, Great alright, thanks for taking my questions. Thank you paid 50.
And our next question so from line of Dave King from Roth Capital Partners Dave.
Thanks afternoon.
First on the on the 19 or 20% organic growth that I think's implied Q4.
What's driving that is that mainly the the new putters are there other big launches in there to that we should be thinking about into what can you share on that front.
David It's two factors it's the.
Well I guess, it's organic sort excludes the Jack will skin is that Travis Matthew is continuing to grow.
Right.
Significantly and it is the.
New product launches, which are a significant.
Increase relative to last year.
Okay, and so the on those product launches its the ones already that you launched in Q3 as well just having good incremental sell through are there other launches.
Hard to nothing material and other launches. The there is that I remember off the cuff two partners that are line model extensions hybrid the Super hybrid I guess launches that launch in the.
Right now okay. So yes, so there are couple products, but.
Not the same level that we launched in Q3, we still classify the products, we launched in Q3 as new products through Q4, and our estimations.
Okay makes sense and then on 134 million of revenue you had from Wolfe skin. This quarter. How did you know how does that compare to the year ago period that they had in men on the 85 to 90, that's implied for Q4, how does that compare with their Q4 last year, just trying to get a sense of the the trend.
They were down slightly in Q3.
Dave and that was that pre book issue, which again we communicated.
Long time ago earlier this year.
So that was a known.
Issue coming forward on us and.
I'm not sure we break out Q4 at this point, but I think it's going to be roughly flat glass correct and refunds.
And our next questions or line of Steven Zaccone from JP Morgan Steven.
Great. Good afternoon, guys. Thanks for taking my questions.
First question I was just on the golf industry growth rate, we've seen this acceleration in the Gulf market in the third quarter.
Check what do you think is really driving the broader improvement and I guess on longer term planning basis for for the market. We've seen a couple years now growth you know more in like the low to mid single digit range without the help from rounds played so why do you think where we're kind of entering a new baseline for growth for the market versus prior planning a more like flatter.
And I just have one follow up.
Sure.
Q3, I think two things one is it shows the consumer remained strong, but I think what drove it.
It was new product launches ours and others.
No. So I think those two factors led to the.
Increase year over year, and what was a very strong quarter.
I think that they're you know the industry conditions had been as as we've been.
Talking about now for some time continuing to improve and a strong economic cycle.
I'm comforted by the fact that we are seeing at industry growth rates at or slightly above what we're saying the average it should be and.
So positive development that makes total sense from our perspective.
Great and then just a follow up my questions on top golf investment.
So there's been some recent headlines about a potential monetization event coming in the future.
How do you view the strategic important.
We're insist that top golf Inc. and I guess, how do you think about monetizing that investment and the potential use of proceeds thanks.
Sure and obviously as a minority investor in a private company, we're not that at Liberty to talk.
Too much about top golf, it's been a.
An attractive investment for us.
And we have.
We continue to have confidence in that business and believes that its.
Improving and value.
We look at monetization of that and.
Investment on the board level routinely and we expect you to capture this value and accretive way for shareholders at some point.
But given that it continues to appreciate.
We will continue to monitor that and evaluate the best time for that Steven.
The in terms of what the proceeds are going to be used for given that it's not.
Not definite I think it would be speculative at this point, but we've talked about our uses of capital in different ways in the past which would include.
Certainly reducing some debt.
Although we're not entirely uncomfortable with the level debt were at and we're making progress on that front.
In the evaluating method for returning it to shareholders.
And.
We're also.
Last with good investment opportunities as well so a lot of lot of good options on it in that sort of order.
Great. Thank you. Thank you.
And our next question this line of Randy Konik from Jefferies Randy.
Yeah. Thanks, a lot to chip you had some good commentary around around Jack will skin as it related to the wholesale.
Channel as regarding reorder rates and products response, new product response, and it sounds like the business, it's going to sequentially.
Proven the wholesale slot into the into the fourth quarter.
We kind of think through thereafter, it should we expect that continued improvement trend and or the inventories in the channel up pretty clean right. Now just give some perspective of where we are in that cycle right now.
Sure Randy I think it's definitely an improving situation.
With the Jack will spend a strengthening situation I think the wholesale channel will continue to be the most challenging channel.
Going forward I hope fingers crossed that it will be at a lesser rate than it has been.
And we're seeing the rights signs for that.
The business is dependent upon weather conditions, so that will help or hurt.
As those develop further and I also want to call out that the largest piece of the business for Jack will skin is the direct to consumer.
So as we continue to move and evolve that business and that's one of the reasons. We were attracted to that business is that it had such strength there.
One of the key metrics, we wanted to see was that we could.
It will get a good reaction in response to the nation's we put in place in that in growing and.
Largest channel, which we've been fortunate enough to to see over the last several quarters.
Got it then my last question is just long term thinking how do you guys thought about what do you think about shackles going in Europe .
Domiciled and that tribes Matthew in the United States have you kind of thought about or looked into.
What are the car the current awareness levels each brand in their non dominant or non domiciled market I'd, Jack will skin in the United States and and Troms Matthew in Europe , and I guess based on that awareness.
How do you think and the and there are different brand positions what would be realistic for us to think about distribution growth.
And revenue growth in revenue potential of these businesses.
From your vantage point over the long term I'm, just trying to get us.
Hello size and scale of these two brands in their non home markets from your vantage point.
Well, there's definitely we definitely spend time, hey, a considerable Florida time.
Thinking about the brand awareness of these various brands in their home markets as well as in international markets and as we move.
Articulated and I mentioned some of the examples which I thought were funded go through about how we're launching Travis Matthew internationally now leveraging our infrastructure across the globe and how.
The reaction has been quite positive.
On that brand.
In the international markets and therefore.
We're optimistic it will provide some incremental growth opportunity the brands in general are going to grow faster than our.
Legacy business.
They have that potential that has that expectation.
That's a one of the reasons, we're quite excited about them and leveraging some of the infrastructure to grow in some of these markets where they're not currently in existence.
Sometimes through synergies between the two brands and.
Cross promotions relationships distribution centers, there's just so many different ways, where it leverages quite nicely.
And it's a meaningful body of work for us and.
Something that in some instances are well underway and we're starting to generate revenue and others in the in the investment it planning stages now.
Got it fair enough. Thank you. Thank you.
And our next question flight, Michael Schwartz from Suntrust Michael.
Hey, good evening guys are.
Good thanks.
Just wanted to clarify some from quickly I think on the the soft good synergy program that you outlined over the next couple of years $15 million.
2022 did I hear correctly that you said that that assumes you don't grow over the next three years.
So I it's at the current.
Rate since our emphasis.
I mean is there any way of looking at that I mean, assuming that the revenue basis.
<unk> percent bigger over the next three years, what was that amount of synergies would potentially flex up too.
Michael we didn't do it that way as Youve gathered from us putting 1 million in our initial projections for this were pretty conservative folks and we don't.
Like too.
Yes.
Baked in numbers until we're sure that we've got a good I Ana.
But yeah, if we.
Business was bigger I would assume the synergies here would be bigger.
Okay, and then on the on the tariff commentary I think that but the.
Annualized rate of era.
For 2020 would be about seven and a half million yeah, I guess, what would your commentary going into 2021 that that it will be stable at that level or do you think some of the mitigate mitigating action make would take that hair of headwind back to a zero I'm just trying to understand how should.
We said in our comments that we will be fully diversified by then it should not have any impact from tariffs.
From China, China to have started right through to try to Theres, a world, but from the China tariffs that of the current issue.
We would be diversified to the point, where would not have a forecast any impact.
In 2021.
Okay, and just the it just to be clear that that that would be built into the center. The 15 million in synergies that you've outlined for the salt that Ed that as a separate issue.
Okay, great. Thanks, guys.
Yes.
And our next question this line of Brett Andress from Keybanc capital Brent.
Hey, good afternoon.
Just a quick one here chip if you look across the international Gulf markets I think you called out some weakness.
In Europe , So maybe if you could elaborate there but also how did each of those.
International Golf markets play out.
Third quarter versus your expectation.
Yeah sure.
So the U.S. market had a very strong quarter Oh.
It was up.
Hi single digits, probably.
But the.
European business market was I believe down during the quarter, reflecting both weather and I'm, assuming Brexit concerns.
But the European market is actually up year to date.
So.
It.
Kind of a reversal trend during the quarter still up year to date, but down during the quarter.
Japan is the opposite of that Japan is down year to date, but was up during the quarter.
Reflecting a couple of different factors, but new product launch success of.
Several brands, including our own.
And.
Some other localize activity they had a consumption tax it went in place in October . So there was some increased sales as so in front of that consumption tax but.
You've got the U.S. market up for the year.
It was a very strong quarter.
The Japan market down slightly for the year almost the same amount for us is up and the European market up with various activities during the quarter. So it's choppy, but overall quite positive.
All right. Thank you.
And our likes to question is one of Alex parochial from Burnett Berg Alex.
Hey, guys. Good afternoon. Thanks for taking my question I'm, So looking out the direct to consumer business for Callaway can you give comments one Jack can you just give an update on where you see that trending right now and then kind of as a follow up on that is a custom golf club business and what trends you're seeing I'm not sure.
The.
The direct to consumer segment for Callaway.
But.
It gets a little complicated so if you look at.
We have Callaway in Asia, we haven't apparel business that as a high direct to consumer.
Percentage.
Because as the apparel business the Travis Matthew business has a high direct to consumer component.
The direct to consumer component of Travis Matthew is growing very quickly.
The as is the overall brand.
The golf equipment side of Callaway has a very small direct to consumer segment, which is growing nicely, but remains quite small and because of the nature of golf equipment I don't really see that one being a a major channel for us, but in the apparel businesses apparently.
Soft goods channels, the direct to consumers pieces of the business our significant.
And that there they are high growth and high brand touch so they're very helpful from a brand new marketing perspective.
Okay that makes sense and then just as a second question you last gave some market share data on golf balls back in March or are you able to provide any update on that.
Our market share through the U.S. year to date I believe is 17 in half percent, which is at record levels.
Okay, Great and do you just don't that March number particular, do you think that might have been affected by the special golf ball releases last year.
Mark number being I don't remember what the March number was Alex So I can't.
It was down.
Since the 17 five was.
When you say special golf balls in March.
I just don't know what we had in March of last.
Last year last year would have been launching for owns soft.
It would have been impacted by that but as you can tell the.
The overall trend is is been solidly steadily in the right direction is what we're most focused on.
Gotcha, alright, thanks, a lot. Thank you.
And at this time there are no further questions I'd like to turn it back over to our CEO chip Brewer for closing remarks. Thank.
Thank you everybody for your time and calling in today, we'll look forward to updating you further at a early next year.
Thanks, so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.