Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Callaway golf fourth quarter and full year 2019 financial results Conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session. So the question. During the session. You want me to press Star one on your telephone.
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Now if you had the conference over to your Speaker today, Patrick Burke head of Investor Relations. Thank you. Please go ahead.
Thank you, Mike and good afternoon, everyone welcome to Callaway, its fourth quarter and annual 2019 earnings Conference call I'm, Patrick Burke, the company's head of Investor Relations.
Joining me on todays call or chip Brewer, our president and Chief Executive Officer, Brian Lynch, Our Chief Financial Officer, and Jennifer Thomas Our Chief Accounting Officer.
Today, the company issued a press release announcing its fourth quarter and annual 2019 financial results a copy of the press release and the associated presentation are available on the Investor Relations section of the company's website at Www Dot IR got Callaway golf Dotcom.
Most of the financial numbers reported as discussed on today's call or based on U.S. generally accepted accounting principle.
A few instances where report non-GAAP measures, we've reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with regulation G.
Please note this call when cool include forward looking statement 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 the presentation and the press release for a more complete description.
Please note in connection with our urban works, there's an accompanying powerpoint presentation that may make it easier for you to Paul 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 you the slides as a webcast participate you were able to flip through the spot.
I would now like to turn the call over to Jeff. Thanks, Patrick Good afternoon, everybody and thank you for joining us for today's call.
Starting on page four of the presentation.
I'm pleased to announce another record year, a year or strong financial broken significant strategic progress.
Market conditions as a whole were positive for 2019 every once again broad business faster than the market, while simultaneously strengthening it via strategic and tactical Reinvestments.
For the quarter. We enjoyed continued strong performance in our golf equipment business continued double digit growth in the Travis Matthews business.
Well its continued positive sellthrough trends in our Jack woken business in its core market.
These results reflect the strength of our team our brands and a long term strategy as we are seeing he investments and other initiatives meaningfully impact the growth and the long term earnings potential of our business.
As is my cost him I'd like to take this chance the thank the Callaway team for delivering these results the team should be proud of what we have accomplished.
Also sure they understand we have a lot more to do and like me are motivated to continue to improve.
Turning to slide five is now take a look at our operating performance by business segment.
In the golf equipment segment, our revenues were up 33% for the quarter and 7.3% for the year.
We saw revenue growth in every major market.
The second half of 2019 benefited from more product launches relative to the same period in 2080.
We were pleased with the quality of our launches and there were also pleased with our field inventory positions going into 2020.
Overall for the year market conditions were good delivering an approximate 3% growth on a global basis.
Consistent with our track record, we grew our golf equipment revenues faster than the overall market at approximately 8% growth on a currency neutral basis for the full year.
During the year, we demonstrated strength across the breadth of our club lineup and are proud to be on what claimed the number one market share position in clubs in both the U.S. in Europe, and the number one foreign brands, but number two overall position in Japan.
In the U.S.. We also had a number one selling driver and for would models and the number one selling iron brand.
Globally Callaway wasn't number one driver a major worldwide tours and Odyssey was number one potter.
Our golf ball business had another strong year with our market share is setting new records.
Building for the future we have been aggressively reinvesting in our Chicopee manufacturing facility and I'm pleased to report that the conversion is now substantially complete and we are phasing in this new capacity and capabilities.
Well I worked through this transition we continue to experience a little higher manufacturing costs, but we remain excited about long term capabilities and direction at this facility as well as their golf ball business overall.
I'm convinced that this investment will set us up versus same success and a differentiated compelling product positioning going for.
Stay tuned for more on this as we go through the year.
Well in the subject to that shouldn't be ball plant transformation. Our media group produced what I believe is a great documentary on the plants conversion and the impact of this plant on the new England, Alan which should operate.
Documentary airs lives on the golf Daniel February 18 at 10, 30 PM Eastern standard time.
Well the available on our social fees shortly thereafter.
I invite all you the tuning and I believe you will enjoy what is certainly a true feel good story of U.S. manufacturing evolution and resilience.
Turning to slide six on the product side, we entered the year energized about one of the strongest overall line ever been or.
The hero product for 20, Twond. He's the Maverick line of Woods Iverson Irons. This line features more in depth and robust applications of AI technology as well as high strength multi material constructions.
As those of you Oh, there's no. We believe we are establishing a first mover advantage by leading in New York.
Oh, you need goes far to say that within a few years, if you're not using this approach it will be difficult to stay competitive.
We're also launching the new stroke left black potters, including a triple track version, where as our marketing slogan says.
Sometimes things just line up.
It's early in the launch process, but market reaction to all these products has been positive thus far and we're optimistic for another year product leadership.
Later this quarter ended Q2 will be launching our 2020 versions of chrome soft in chrome soft ex golf balls.
These balls will leverage the investments we've made over the last several years to deliver new standards in performance.
Again, although we have not delivered this product yet we are encouraged by our internal and external passing including both tour and consumer feedback.
Within the golf equipment segment were continuing to invest in R&D resources, especially ally.
As well as tour in customer facing initiatives, such as video capabilities and beat of these systems.
We're also in the final stages of completing the Chicopee facility upgrade on or on the process of building out in transition to an 800000 square foot centralized North America DC.
As well as upgrading and consolidating our Dcs in Japan, China and the UK.
Taking a step back and looking at the Big picture, we believe the golf equipment market remains in a healthy position with a significant stable market improves structural dynamics of the last several years, an exciting global to work ready interest in the game and potential upside demand drivers such as alcohol, we see.
Predictable and well structured market, where our leadership positions scale and operating acumen and continue to drive moderate growth in meaningful cash flows.
Turning to slide seven and looking at the softness segment warrants last years revenue surged to do the acquisition of Jack will in as well as strong performance across the majority of our branded business portfolio.
Travis Matthew is worthy of especially a lot here is that business continues to deliver double digit growth and remain energized about its future, including a strong domestic business.
The valley International prospects and the exciting new launches equator brand of golf shoes introduced in Q4 of last year.
The Jack moves can business had another solid quarter and delivered full year financial results consistent with our previously communicated expectations. Most importantly, the consumer appears to be reacting positively to the product innovation brand investments that have been implemented in its core markets of central Europe.
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With this we continue to see promising results in the direct to consumer business highlighted by double digit growth in their E com business.
In addition, the sell through and at once business for the fall Winter 2019 product range has been at or above plan.
The Jack will talk in China business, a little softer for us last year.
During the year, we hired a new design team for this market and we are encouraged by the potential impact this change should make in the trajectory of that market starting in the fall up 2020.
We're also in process is making additional investments to strengthen and grow the global Jack will skin business long term into realise increase that's meant for synergies discussed in our last call that being at least 15 million by 2022.
These include the establishment of an apparel and soft goods sourcing center of excellence, Jack will skin North America organization based on a park city you talk with the plant soft launch Jack will skin brand in Q2 this year.
And the assumption of the Japan, Jack what else can business for Mis distributor in March of this year.
Both of these growth initiatives a plan conservatively at present, we will be an investment mode for 2020 with low revenue expectations in the first year. However, both are anticipated to be profitable in your two and both offers significant upside if and when we get the consumer position in messaging correct.
With the purchase of the remaining equity in Japan, Callaway apparel business mid last year. We're also making investments in this business aimed at both cost savings and regional Rosen issues for the Callaway apparel brand throughout Asia.
We're also investing in numerous I T projects to best managing optimizer apparel business across the globe.
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 the long term outlook in potential here.
So leader efforts here, we're also planning to hire knee BP and global soft goods and apparel and we're fairly far along in this important process.
Turning to slide eight and our 2020 outlook.
We are projecting market conditions to be flat to slightly up on a global basis, and we expect revenues to grow faster than the market at approximately 4%.
Our guidance here reflects our best estimate of the impact of the Corona virus.
Leaves the say this situation is very uncertain right now we're still assessing the potential impact and there's a lot. We just can't know yet.
We believe it will certainly have an impact on our supply chain near term demand for products in China as well as potential demand in the markets outside of China, particularly neighboring markets.
Given the lack of visibility we are really guessing on the financial impact at this point. However, I can confirm we've adjusted our forecast down over the last week or so by approximately 25 million in revenue and 12 and a half million on an EBITDA basis.
This estimate assumes our suppliers factories get up and running slower than normal ramp up to some sense, where normality by the end of them on and the consumer demand in China returns to some sat for the normality by the end of March.
Across all of our businesses, we believe we're well positioned comparatively to manage through this.
As we work through this challenging situation, our thoughts and prayers are with the people in China, including our employees customers and their families in that region as well as those affected by the virus globally.
We hope and pray for speedy resolution.
We also believe in the resilience of the Chinese people and we retain are optimistic view on the value in important. So this market over the medium to long term.
Our 2020 EBITDA forecast also reflects 3 million of incremental year over year tariff expense and 10 million of FX headwinds.
We believe we can and will continue to lead the golf equipment business, while also developing and growing as strong soft goods business.
And that the two portions of our business will benefit from each other while providing us both higher long term growth rates and scale that will benefit our shareholders.
We have been delivering and over the long term expected continued to deliver scale based operating leverage improvements the timing of which is being balanced by the fact that we're also continuing to find high return investments and all of our businesses.
2020 is a year of above average reinvestment.
We identify approximately 6 million of these as onetime in nature, but there is more embedded in our forecast, where we have low or negative return this year, but we expect high returns in future years.
We believe our ability and commitment to make these long term investments will differentiate us and pave the way for long term success, including growth above that of the golf industry overall and over the long term improved operating leverage based on the economies of scale.
Our reinvestment strategy has served us well, thus far and we believe that it will continue to do so going forward, we hope and believe our results over the last eight years give us some credibility in this regard.
In conclusion walk Corona virus tariffs and foreign currency were all providing unusual and hopefully temporary headwinds, we're still looking forward or another strong year operational financial performance in 20 Twond.
Financially, we're pleased to be forecasting increased profitability on a GAAP basis strong free cash flow generation and what I believe is compelling financial performance when considering the before mentioned macro factors.
I believe this speaks to the fundamental operating strength of our business.
On the strategy side, we're pleased to have strong internal investment opportunities, which we are confident we can actually do cans and they will continue to move us down a strategic path that makes us a much larger and diverse company with higher embedded growth prospects in a significantly higher long term earnings outlook.
Ryan overview.
I can chip.
Chip mentioned, we're very pleased with our 2019 results.
Following two record sales here in 2017 in 2018, we were able to achieve 37% sales growth and 25% adjusted EBITDA growth.
While absorbing a $31 million negative sales impact from changes in foreign currency rates as well as $5 million related to incremental tariffs.
In addition, the acquisition of Jack will skin in 2019 was an important part of our long term strategy of transforming callaway into a premium golf equipment and active lifestyle a company.
As we look forward to 2020, we're pleased with our operational Atmel.
We are facing some macro factors that will have a significant impact or financial results.
The most notable factors the Corona virus outbreak, which will affect our sales in Asia in our supply side overall.
Our financial guidance today reflects our best estimate.
The impact of the virus, but the impact is very difficult to estimate they need degree of certainty.
As chip mentioned, our heartfelt thoughts and prayers are with the people in China and around the globe were affected by this outbreak.
[laughter].
As we enter 2020, we were also facing headwinds from changes in foreign currency rates, an incremental tariffs.
And as chip mentioned 2020 than if that's your purposes.
We made the investments necessary to grow blip or golf equipment and apparel businesses.
We have attempted to quantify the estimated impact with all these items in our press release, we issued today and that will comment further later in my remarks.
But first I will comment on our specific financial results for the fourth quarter and full year 2019.
When discussing our non-GAAP results today, we exclude noncash purchase accounting adjustment related to the OTO Travis Matthew Injectables could acquisition.
We also screwed other nonrecurring transaction and transition expenses.
Related to the acquisitions enough other nonrecurring advisory.
We exclude these items because that's 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.
Turning to slide 10, we're now reporting.
We are reporting consolidated full year 2019, net sales of $1.701 billion compared to 1.2 or $3 billion in 2018.
An increase of $458 million were 37% and a record for that sale.
The 37% growth was primarily driven by the Jack was consistent with contributed 356 million net sales in 2019.
Excluding the Jack will screen business net sales increased 8% from 2019.
This increase is driven by the strength of the 2019 golf equipment line as well as continued double digit growth Travis mechanism.
In 2019 changes in foreign currency exchange rate negatively impacted sales by $31 million overall, including $18 million with regard to Injectables can do.
Non-GAAP gross margin was 45.8% in 2019 compared to 46.5% in 2008.
This 70 basis point decrease is primarily attributable to the negative impact of foreign currency.
Decrease tariff expense as well if the current year of golf equipment product mix with more premium golf clubs with more advanced technology higher costs.
These increases were partially offset by the trial, Matthew Injectables give businesses, which were accretive on a gross margin basis.
Non-GAAP operating expense was $617 billion in 2019.
Compared to 445 late in 2018.
This $172 million increase is comprised of $155 million for me this or Jack was good.
Operating expense and 17 billion of investment the golf equipment, and Travis battery businesses as well as normal inflationary pressures.
Non-GAAP operating income for 2019 was $163 million compared to non-GAAP operating income of $133 million in 2018.
An increase of $30 million were 23%.
This was primarily related to the Jack will skin Travis Matthew in golf equipment businesses.
It was partially offset by the negative effects of foreign currency and increased our expense.
Non-GAAP other expense was $33 million in 2019 compared to non-GAAP other expenses $2 billion in 2018.
The higher other expense in 2019 resulted from a $34 million increase in interest expense.
Primarily related to the Jack was good acquisition financing.
Non-GAAP fully diluted earnings per share was $1.10 in 2019 versus non-GAAP fully diluted earnings per share every dollar tree in 2018.
Non-GAAP increase was driven by the sales increases the golf equipment and Travis Matthew businesses.
As well. The addition of the new Jack Wolfcamp business.
All mostly offset by decreased interest expense.
Adjusted EBITDA increased $42 million to 210 billion in 2019.
Compared to $168 million in 2018.
Good we're pleased with this result, given the adverse headwinds for changes in foreign currency rates and increased our expense.
Turning to slide 11.
Consolidated fourth quarter 2019, net sales were $312 million.
Compared to $181 billion in 2018.
An increase of $131 billion for 72% and a record for themselves.
In fact, 14 or the last 15 quarters, a good record sales for that quarter.
The 72% growth was primarily driven by the addition of the Jack Wolfspeed business, which contributed $81 billion through the fourth quarter.
Changes in foreign currency exchange rate negatively impacted fourth quarter 2019 that fell by $1 billion.
When it comes to currency basis, excluding the Jack Wolfspeed business.
Fourth quarter 2019, net sales increased 28%.
This increase was driven by increased sales and the golf equipment business led by the recent third and fourth quarter product watches.
And continued double digit growth in Travis battery business.
Non-GAAP gross margins were 42.4%, a 370 basis point increase compared to the fourth quarter 2018.
This increase is primarily attributable to the Jack was good Travis Matthew businesses, which were accretive to our gross margins in the fourth quarter.
The negative impact from Paris, partially offset some of it increased margin.
Non-GAAP operating expense was $148 million or the fourth quarter 2019, which is a 38 million dollar increase compared to 110 in the fourth quarter 2018.
This increase is due to the addition of 2019 $41 billion in operating expenses for the Jack will skip the.
Non-GAAP loss from operations was $16 million in the fourth quarter 2019, compared to non-GAAP loss from operations of $40 million for the same period in 2018.
The $24 million over 60% improvement, which is primarily due to the Jack will skin business and new product launches for the golf equipment business.
Both partially offset by increased our expense.
Non-GAAP other expense was $9 million in the fourth quarter 2019, compared to non-GAAP other income of $200000.
Same period the prior year.
The higher other expense in 2019 resulted primarily from a $7 million increase in interest expense.
Primarily related to the Jack will skin purchase financing.
The 2018 other income also includes $4 million the purchase price hedging gains reflected in the fourth quarter related to the Jack will skin acquisition, which was completed in January of 2019.
Non-GAAP loss per share was 26 cents versus non-GAAP loss per share 32 cents in the fourth quarter 2018.
This non-GAAP increase is primarily attributable to the Jack walk in business and the new product launches in the golf equipment business, partially offset by increased interest expense.
Adjusted EBITDA increased $25 million to lots of 6 million in the fourth quarter 2019.
Paired to a loss of $31 billion into fourth quarter 2018.
Turning to slide 12, I will now cover certain balance sheet cash flow items.
Well, the liquidity, which represent additional availability under our credit facility plus cash on hand with $303 million ended the fourth quarter 2019, compared to 271 way or the ended the fourth quarter 2018.
Our consolidated net accounts receivable were $140 million, an increase of 97% compared to 71 believe it ended the fourth quarter of 2018, which is primarily attributable to the addition of the Jack will skin business in 2019.
Day sales outstanding in the core business decrease was 62 days 58 days.
We remain comfortable with the overall quality of our accounts receivable at this time.
Our inventory balance increased by 35% to $457 million at the end of the fourth quarter 2019.
This increase was primarily due to the addition of the Jack will skin business.
Additional inventory to support a growing soft goods business.
And inventory needed to support and overall larger golf equipment business.
We remain comfortable if the quality of our inventory at this time.
Capital expenditures for full year 2019 were $55 million.
Year over year increase of $18 million compared to 2018.
Due mainly to continued investments in our GAAP coal plant and the addition of the Jack Wells can do.
Depreciation and amortization expense was $35 billion in 2019 compared to 20 million in 2018.
Moving an additional $30 million from the addition of Jack will skip.
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I'll now comment on our 2020 GAAP guidance.
Turning to slide 13, the 2024 year projection Sip portfolio are based on the company's best estimates at this time <unk>.
They include the estimated impact that certain factors, including the Corona virus, which is estimated to have any negative impact of $25 billion on sales and $13 million on EBITDA.
Changes in foreign currency rates, which is estimated to have any negative impact of $9 billion hotel and $10 million EBITDA.
And the incremental tariff expense of $3 billion on cost of goods sold and even though.
For the sake of simplicity I will refer to these items collectively as the macro factors.
The global golf equipment market continues to be a healthy market. We believe we can continue to grow our so our golf equipment business from a revenue and EBITDA perspective in 2020.
We also expect sales growth from our soft goods business.
The two segments were originally estimated to grow at similar rates due to the macro factors. We now estimate the golf equipment segment, they grow slightly faster in 2020.
On the soft goods side, we expect sales growth from our Travis Matthew Jack will skin businesses, including limited sales floor. Jack was good in North America, Japan, mostly the back after year.
From a profit perspective, 2020 will be an investment yield to soft goods side of business as we invested a warehouse consolidations by new market expansion project will skin continued infrastructure investments from Travis Matthew and some incremental investments in Asia for continued expansion of the Kelway apparel business.
[noise] as seen on slide 14, 2020, net sales were estimated to be in the range of $1.75 billion to $1.78 billion.
An increase of 3% to 5% over 2019.
This assumes a flat to slightly improving golf market.
[laughter] the company currently estimate to changes in foreign currency rates will negatively impact 2020 by approximately $9 million in itself.
We estimate that full year gross margins will be 46.3%.
Which is 120 basis points higher than 2019.
This increase is being driven primarily by positive mix benefit the margin accretive apparel business and higher GAAP equipment gross margins associated with is even year cycle product launches.
2020 of the company expects the gross margins will be negatively impacted by 5 million or the nonrecurring costs related to the warehouse consolidation projects in North America Asia and Europe.
Gross margin 2019 was negatively impacted by $13 million or purchase accounting adjustment and nonrecurring costs related to reject Wolfson acquisition.
In 2020 gross margins will also be affected by the macro factors described above.
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The company estimated as full year 2020, operating expenses will be $680 million.
Actually 46 million higher than 2019 operating expenses.
This increase is being driven primarily by the continued investment in a copy of soft goods business.
Which include Newmark expansion project was good.
Teetered infrastructure and brand investment for Travis Matthew and investment in Asia to grow all of the company's apparel right.
Normal inflationary pressures that ongoing investment in the golf equipment business. We're also contribute to the increase.
2020 operating expenses will include approximately $6 million, a noncash amortization expense and a small amount of nonrecurring IP expense compared.
$18 million to purchase accounting and transaction and transition expenses were related to the Jack will begin acquisition.
The macro factors or expect to have a positive impact on operating expenses primarily related to FX.
We estimate our capital expenditures in 2020 to be approximately $55 billion.
Depreciation and amortization amortization expense estimate to be approximately $43 million in 2020.
We do expect capital expenditures to begin to normalize toward the end of 2020 as the multiyear ball plant project comes to then and the warehouse consolidation project was completed.
The company estimated full year 2020 earnings per share 80 to 94 cents.
The company's 2020 earnings per share estimates, assuming an effective tax rate <unk>.
Approximately 80%, which is slightly higher than 2019.
These estimates also silver basically 97 million fully diluted shares and 2020.
[noise] approximately flat with 2019.
The company estimated full year 2020, adjusted EBITDA of 190 $205 million.
These estimates include the reduction expenses related to purchase accounting it by recurring acquisition cost.
And the impact of the macro factors discussed above and in the press release [noise].
The 2021st quarter projection so we're.
Fourth are based on the Companys best estimate at this time.
They include the estimated impact and certain factors, including the Croda virus.
In exchange.
And the terrorists discussed above.
For the sake of simplicity these will be refer to collect we'll be able to Q1 macro factors.
As depicted on slide 14 becomes the estimate first quarter 2020, net sales to be approximately flat to slightly down in 2020 compared to 2019, primarily as a result, with the Q1 macro factors.
This assumes a flat to slightly improving overall GAAP market.
Slightly later lunch day for the new chrome soft golf balls, when compared to the RC soft golf ball launch in 2019.
The company estimates is first quarter 2020, gross margin will be approximately 10 basis points higher than the same period 2019.
This increase is being driven primarily by a positive expenses of the margin accretive apparel business and higher golf equipment gross margins associated with the even year cycle product launches.
In the first quarter 2020, the company expects that gross margin will be negatively impacted by $1 billion and nonrecurring costs related to the warehouse consolidation projects in North America Asia in Europe.
The gross margin 2019 was negatively impacted by $5 million or purchase accounting adjustment.
Nonrecurring costs related to the Jack wells can acquisitions.
2020 gross margins will also be affected by the Q1 macro factors described above.
The company estimates it as first quarter 2020, operating expenses will be approximately $7 million higher than 2019 operating expenses.
This increase is being driven primarily by normal inflationary pressures and the aforementioned strategic investments.
2020 operating expenses will include approximately $1 million and noncash comp.
Noncash amortization expense and a small amount of nonrecurring IP expense.
Compared to $6 million to purchase accounting and transaction and transition fees related to the Jack will skin acquisition.
The macro factors are expected to have a positive benefit on operating expenses primarily related to FX.
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The company estimate first quarter 2020 earnings per share of 41 to 47 cents.
The company's first quarter 2020 earnings per share estimate assumes an effective tax rate of approximately 18% compared to 16.5% same period in 2019.
Justin It's also assume a base was 97 million fully diluted shares in the first quarter 2020.
The company estimates first quarter 2020 adjusted EBITDA.
$70 billion to $79 billion compared to $79 million. So the first quarter 2019.
These estimates include the reduction in expenses related to purchase accounting and nonrecurring acquisition costs and the impact of the macro factors discussed above it in the press release.
That concludes our prepared remarks today, well now open the call for questions.
As a reminder to ask your question you will need to press star one on your telephone to withdraw your question press the pound or hash key.
In order to allow everyone for questions yes.
[noise] yourself to one question and one follow [noise].
Please standby we compile the came in a roster.
Your first question comes from Susan Anderson from B. Riley FBR.
Hi, good evening, Thanks for taking my question.
I was wondering can you talk about the investments, maybe you're making a jacqueline scan the brand this year across supply chain distribution et cetera, and then how should we think about the cadence and investments on the quarter does we go throughout the year and then maybe chip you can remind us let's pretend of Jack what skin is in China.
Sure Hi, Susan.
So the investments that we're making a around the jaktwo skin or our multifaceted right now and they really overlap on our entire soft goods in apparel business in many ways. So there's a oh supply chain center of excellence.
Which is sourcing quality and administrative functions that is interval for us to realize the synergy investments that we have mentioned across our entire softgoods supply chain. So that is one significant one.
We're doing the building out the organization for North America launch of the Jack will in brand.
Which will be based out of park city.
We're building out the organizational structure in Japan for that business, and then we're making certain I see and.
Distribution related investments.
In Jack lumped in with then.
Its primary markets, which are in China, and a central Europe.
Some considerable amount of activity around that which were excited about we think we have a high.
Confidence level in our ability to execute those internal investments.
In terms of the cadence a when they will hit.
Among the quarters, Brian do you have any.
Fields for that and broker down yeah, they Susan they probably ramp a little and they probably start a little slowly in Q1, but then probably ramp pretty quickly between Q2 in Q4.
Great that's helpful.
And then if I had a follow up and so the one chance. They travel champion brand account. She is maybe if you could talk a little bit about the response by the wholesale partners and consumers and maybe a little bit early on but then also that distribution right now and then I think you talked about the growth expectations across all the segments.
Brands it sounds like you're expecting other segments to be up in brand, but are there any winds that should be directionally higher than the others. Thanks.
Sure. The equator. Your line was launched really on a limited basis in Q4. It was primary launch direct to consumer with just a small amount of wholesale.
ER in that quarter and the market reaction was very favorable as you imagine it's a part of the Travis Matthew family that brand has quite a bit of momentum behind it and.
Both the consumers rapid favorably to it great feedback good sell through and the wholesale partners had success in their offerings that they've had it'll be on a broader launch in Q2 of this year to wholesale.
It's still fairly selective in this distribution and still relatively.
Modest revenue expectations for this year, but off to an excellent start and one of the many initiatives across our soft as an apparel line that creates good opportunity.
The.
The you know the rest of our you know we report out in two segments right now golf equipment.
Soft goods in apparel.
We believe both of those segments will be up but this year.
And you know within each segment, a little bit different growth rate by yeah individual categories within it which.
It gets pretty detailed right now Travis is obviously, a strong growth opportunity for us and we anticipate that continuing.
And then Susan last.
Question and answer is on the China business for Jack lost skin.
Jack will skin, China is about 20% of their revenues.
<unk> and China in total is about 5% of our total company revenues.
Your next question comes from Michael Sports from Suntrust Robinson Humphrey.
Hey, good evening guys.
Michael just.
Let me start able to try and it looks like in the fourth quarter gross margin came in a bit below what your guidance had implied before year. So maybe just a little color on maybe what caught you off guard during the quarter.
Sure Michael I'm somewhat expecting this question do you have full year guidance.
For our gross margins non-GAAP was 46.7%.
Versus what we delivered was 40.8% how the 90 basis points short of that.
A couple of things were going on one there was just a little different mix of the product sold during the quarter than we had estimated.
Little bit more loaded lower margin products.
And in the mix and then during the quarter. We also had an opportunity to sell some older lower margin inventory.
Out impacting our first quarter watches.
He is evidenced by the higher than expected sales in the fourth quarter.
So overall it left to get a better overall this is moving to 2020.
And there was probably a little bit of FX in there as well.
Okay. That's helpful and then <unk> chip I know, it's early but maybe anything you can provide color wise going on the launch of of Maverick you maybe the response, you've seen relative to prior launches whether.
That's a roll over epic.
You know, it's very early Michael but we're pleased with the feedback we're hearing across the.
Golf Club product line. So we've got a majority of our golf.
Six line up in this deal now and feedback has been very strong from consumers as well as wholesale or you know consistent with what we hope it would be.
As strong cross the line, particularly on the Irons I would say, but the irons just launched last weekend. So we're working on very small data right now but no.
Comparative data or for you, but ER positive feedback on the line up and we think we're in good position to continue to lead in the golf equipment segment, a particularly on the club size will have established strong leadership positions over the last several years.
Your next question comes from Joe Altobello from Raymond James.
Thanks, Hey, guys. Good afternoon first quick I want to give more color on the Opex ramp you guys are looking for a this coming here how much of that is selling versus DNA and maybe how much of that is the hijack begin making jacketed about 155 million of Opex.
Last year, how much is back number going up versus the pizza.
[noise] topics its year over year Opex.
Yes, just just from a I get function perspective, there is gonna be growth in both selling it add beds right. So as we build infrastructure is obviously there there is pieces of both of those maybe a little more than selling but definitely.
In both of those functions.
And in terms of Jack how much does that go up.
Well, we're not breaking out Jack specifically and its you know Joe it's starting to get little tougher as we integrate the soft goods businesses to kind of look at that by brand, but obviously there are definitely as infrastructure spend for the new markets. A and then we continue to invest in systems.
As well so there definitely is you know some of that investment is related to.
To those activity. If you just look at the operating expenses in 2020 versus 92.
The normal inflationary pressures and probably say half of that relates to.
That a normal inflation and increasing our business then there'll be another piece that is.
Normal increased investment as we grow would have a larger organization and then there's another piece that is probably related to we have additional investment the chip referred to in our soft goods business, where you don't see any revenue against that yet so it's definitely a rep definitely an investment year next year.
Your next question comes from Brett interest from Keybanc capital markets.
Hey, good afternoon.
Brian If you could help me with the 2020 guide a little.
In the press release, you have the starting point and 182 million for adjusted EBITDA.
But then he reported $210 million adjusted EBITDA this year so.
We all have a model based off 210 million. So is a bridge to non-GAAP number.
Essentially adding back the 5 million in gross margin in the 6 million in Opex on time.
Yeah, so they're just yes.
Part of this is last year, we reported non-GAAP initiates moving the gap, but if you. If you look I just sort of you know even does not actually gap. If you look at that we're guiding to a 190 million to 205 million versus 182 million.
Last year now if you add back sort of though what we call before for one time.
You would get a guy to 196 to 11 million for 2020 versus 210 million for last year. So that's your two can now would equate to the 196 to 11.
Then you add into that.
You know our estimated impact with the Corona virus, which was $13 million.
Estimated impact for FX and estimated impact for tariffs of three and if you were you know that would equate to essentially.
At 222 million to $237 million.
Guys. It for 2020 versus the 210 last year, which is.
6% to 13% on.
Sales estimate about three to five.
And Brett just to clarify that 6 million of <unk> of one time expenses in 2020.
Is you know the 5 billion of warehouse expense, mostly up in margin into there's about a 1 billion of ice tea onetime expenses as we're implementing new projects.
You know remember, though that extra 5 million. That's EUR 4 billion to five that's purchase price is because it's amortization doesn't flow through to Abbott out, but it will impact your EPS onetime right. That's why that's nine cents.
Versus the 6 million on the habit aside.
Got it. Thank you for the clarity there and then chip you mentioned you expect a global golf business to be flat to slightly up in 2020.
Could you maybe walk through your outlook by market what are you expecting in the U.S. UK, Japan et cetera.
Sure I guess, they and they are you getting a little positives. We go through by Mark at the U.S. is starting off a year quite solid you know Q4 was was quite good the market grew faster than what we're saying for our total global Hawk.
Passed last year.
And it remains quite a strong entering this year or so that markets quite good the Asian markets were down last year, a Japan being the largest those markets.
And the Corona virus and is.
Likely to have a bigger impact in the Asian markets than it would in the U.S. So.
You know the Japanese market is probably going to be flat to a.
A little bit down this year, depending on how the consumer react.
Europe is very weather dependent.
Last year.
A 4% or something like that.
But I think it will likely fall in line.
With that the U.S. forecast of flat to slightly up this year.
And your next question comes from Daniel improve from Stephens, Inc.
Hey, Thanks, Thanks for taking my question.
Sure.
Just first a clarifier a similar to the maybe Matthew just walked through on the EBITDA Guide as we look at the adjusted EPS guidance for the GAAP EPS guidance could you walk of new what maybe a like for like adjusted number would have been to be you added back in but could you just calling out.
Sure. So our guidance 82 cents to 94 cents versus 82 cents on 2019.
No in 2020 were estimating nine tenths of one times.
And 28 cents would've been the number for 2019.
We exclude goes you get to 91 cents to a dollar three for 2020 versus the dollar 10 for 2019.
Then you add 11 cents on the Corona virus nine cents for FX impact.
And three cents per tires.
It was good all that then you're looking at a guide for 2020 $1.14 to $1.26.
Versus the dollar 10 in 2019, so that would be you know plus 4% to 50%.
Got it.
And then when we look at the golf ball did [laughter] 20.
Understanding that yeah, we have a later chrome soft launch coming but I guess little surprised the lack of a flow through you have you had a really strong fourq you give a higher price chrome soft launch coming chicopee inefficiencies should improve with the roll off of some of those investments you are talking about how you're thinking about golf ball incremental margins and maybe what are some.
The offsetting factors that are you keeping that from flowing through to the bottom on [noise].
Yeah, Hey, I think it's just you know we don't break out the profitability by segment.
Our forecast so up whether you know we are expecting our overall golf equipment segment, which we do provide a you know segment reporting onto the up this year, both profitability and revenues.
The ball business is still in a period of transition a as mentioned as we go through that transition the.
Margins are still being compressed a little bit due to higher manufacturing costs and.
Startup normal startup issues quite frankly, as we work through yield et cetera.
The margins in the ball business are likely to improve this year versus last year, but our spend against the segment will also be higher so you know those and kind of offset each other a little bit.
What I'm most excited about on the ball side is you know we've got a large very positive momentum you know segment and increasingly confident in our long term position here and I think that's the bigger issue relative to.
The short term aspects of our investments et cetera. The long term aspect of this strategy is a.
Very exciting to us.
Hey, Daniel this is Patrick really what what is depressing margins a little bit in 2020 is that FX FX impact that that Brian mentioned, that's a pretty substantial wanted them to tear ups going up that incremental three so those both.
The vast actually vast majority of the FX and the tariffs are all hitting margins. So that is offsetting the positive mix on the golf equipment side, including golf balls, and the positive mix of Travis and Jack having you know higher margins. So so those would be the too that you have to think about when you when you balance.
The whole up 120, Bips, you know for 130 Bips versus a gap.
Your next question comes from Casey Alexander from Compass point.
Yeah. Thank you.
I'm curious if you know as horrible as their Corona virus is.
That I mean, how much worse would it have been for you. If this it happened at the end of October as you were building inventory for the new year.
And to a certain extent I believe that the company has been.
Transitioning some of their supply away from China because of the tariffs how much is that offsetting some of the impact here.
Cases, Jeff you're exactly right it would have been worse.
For Callaway golf, and perhaps for China quite frankly, if it happens earlier.
And Ah you know because we have we position most of our launch product well in advance of those launches. So it was a already here is your as our inventory shows.
At the end of last year end derived through January so.
You know we're in a relatively good position from that.
Perspective, and we're just working out how the factories get up and running or after the market starts open up which it sounds like they're starting to go through that process.
And.
The second question.
It was great mentioning I mean, our supply chain.
The other markets because of the tariffs already it certainly is help Casey it doesn't help quite as much as people think it might because there's still sub contractors trying to get yeah that in China for instance, we might have.
Irons being assembled in Vietnam, but a a component of that and that would.
Be sufficient from a tower perspective, but the badges might be out of a China a vendor and then the second thing is even the management of some of the facilities in Vietnam. They are often coming from China and the management from China cannot visit.
Vietnam right now, but it certainly has had a positive impact we've done.
Nice job in transitioning our supply chain.
And diversifying it outside of China, we're continuing on that progress we're working through second tier vendors or a this next year you know that will further insulate us from these types of things but.
When you look at it you know were more diversified from its parent perspective than we are from a China total country perspective is there's a lot of.
Interdependent, it's a across that region for us and everybody else.
Okay.
That's helpful. Thank you and and one last question.
Because I believe you mentioned that you you you changed some of your outlooks a week ago to what extent do we need to be concerned that later on in the year that there could be.
Some inventory that's not sold through as a result of changes in demand in end markets in Asia.
You know Casey I think that without.
Without question you know the consumer demand in China is.
It was down significantly and every company that is reported on their operations. There as reflected that you know we have.
About 5% of our revenues operate in China itself, and so you know demand there is significantly needed a.
And we're unsure how quickly that will come back up we had tried to capture that to the best of our abilities, but we know and everybody knows if there's a lot of speculation on that at this point.
Without a doubt since we purchased inventory ahead of that time.
You know there will be some excess inventory associated with that in those markets from us and every other a person is doing business over there.
We've tried to factor that into our estimates and plans associated with it but you're exactly right without a doubt that is one of the.
Consequences of this we will be in as good of shape as anybody to mitigate.
And you know with 5% of our revenues is it proportional of an issue to us so.
It's in the forecasted the best of our ability to this point.
Your next question comes from John Kernan from Cowen.
Good afternoon interest Christian Super on for John. Thank you for taking your questions, just just kind of which circling back to their respective D. Multiple distribution center upgrades and consolidations globally. I think you said in your earlier comments that you expect it most of that should be completed for 20 Twond. Each is there anything that's going to you.
Bleed into forward years in kind of how should we think about then your capex run rate beyond 2020, and then I just have one follow up thank you.
Oh right I mean, there's always a possibility for something to carry over <unk> point, we're not really expecting it anything to.
Carry over into 2021.
As far as [noise].
Capex run rate once it more normalized.
We're going through the process now you know apart as part of it depends on how fast Travis is going to grow their stores and some other growth initiatives, but as you know place holder, we're using 45 million at this point.
Terrific. Thank you and then final question.
Turning to the.
Fiscal 2000 guidance, assuming the global market conditions.
<unk> up slightly year on business growing faster can you parse out the drivers is and you know the percentage or what's coming from pricing, which unit growth that you're kind of your expectations around now thank you.
Oh.
So you're talking about <unk> full year 2020.
Yes. Thank you.
Yeah, because it broken out.
We don't we don't generally freight typically we have taking its probably a mix of both we have obviously taken some price, but we do you know expect to grow, especially in a category like irons, where the Maverick iron launches. It is a bigger you know is a bigger overall launch to the launch as we had last year.
Your next question comes from Alex Rodriguez from Berenberg.
Hey, good afternoon, guys outside of the Asher mentioned investments in operations, where do you guys planning for capital priorities. This year, and then does that EPS range bake in any significant debt pay down.
It does not do it because they gave some debt pay down but.
As far as capital priorities go it's pretty much the same as before where we are mostly investing back into our core business.
Port our growth and make sure we continue to perform well there.
Then the other priorities have also generally remain the same excepted debt repayment I've taken a.
A little bit more of a party for that's probably second and then third would be a return capital to shareholders through stock buybacks or dividends and then probably fourth at this point would be.
Acquisitions are just investing in growth initiatives.
Okay got it.
And then I'm just looking at the Jack Wolfcamp business right now it ended 19 at the lower end of a shelf guidance can you discuss the current wholesale versus DTC environment, there and what your expectations arent 2020 for that but.
Sure. This is chip so.
You know that a you kind of had to look at market by market. So for Jack what was getting the is the biggest part of that business is in central Europe or that is a low growth market right now and we've had good.
Progress in delivering some improvements in that business on the direct to consumer business et cetera, So, we'll probably outperform on or direct to consumer business and that that market.
We'll probably the wholesale market is improving we had good sell through a cross the Jack will stay in line in the fall winter season.
So we like how that will align us, but the wholesale business in central Europe is.
Challenge sale, so they're going to be competing factors on that basis.
China is kind of up in the air for Jack well in that due to the thrown a virus and then we have some nice growth initiatives, where we're really you know anniversary ing or starting from a zero or very low base in North America in Japan.
Where but they're gonna be small numbers, but big percentage increases.
And so you've got multiple factors going on there within the Jack will skin business, which.
Or kind of offsetting to give us a modest growth expectations for the year, but we remain very encouraged about the long term outlook.
And that was our last question at this time I will now turn the call back over to chip Brewer CEO for final comments.
Thank you everybody for.
Tuning in we appreciate your Ah Ah your time and participation a we'll look forward to updating and further as we go through the year and Oh look forward to talking to you on the Q2 call.
[noise] [noise], ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
[noise].