Q4 2020 Callaway Golf Co Earnings Call

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Ladies and gentlemen, thank you for standing by.

And welcome to day 2020 year end and fourth quarter earnings conference. At this time, all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question during that time, you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any progressive sense. Please press Star then zero I will now hand, the conference over to your Speaker, Patrick Burke head of Investor Relations. Please go ahead.

Thank you Carmen and good afternoon, everyone. Welcome to Callaway is fourth quarter and annual 2020 earnings conference call from Patrick Burke, the company's head of Investor Relations.

Joining me on today's call are chip Brewer, our president and Chief Executive Officer, Brian Lynch, Our Chief Financial Officer, and Jennifer Thomas Our Chief Accounting Officer today, The company issued a press release announcing its fourth quarter and annual 2020 financial results a copy of the press release and associated presentation.

Are available on the Investor relations sections of the company's website at Www Dot IR, Dod Callaway golf Dot Com most of the financial numbers reported and discussed on today's call are based on U S. Generally accepted accounting principles in the few instances, where we reported non-GAAP measures we have reconciled.

The non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with regulation G.

Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe Harbor statements contained in the presentation and the press release for a more complete description. Please note and can.

With our prepared remarks, there is an accompanying powerpoint presentation that may make it easier for you to follow the call today.

This earnings presentation is available for download on the Callaway Investor Relations website under the webcast and presentations tab.

Also on the same tab you can choose to join the webcast to listen to the call and view the slides as a webcast participant you should be able to flip through those slides.

Finally earlier today, we experienced a power outage in <unk>.

Been assured by the local power company that there will be no further outages, but we do have a backup plan to restart the call just in case, we get a rough interrupted.

Now like to turn the call over to chip right Patrick.

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

On page five of the presentation, it's great to be with you today to discuss our 2020 full year and Q4 results as well as supervise some color on the business going forward.

Looking back on 2020, I have to start with a simple wow what.

What an interesting and eventful year we.

We started with business as usual survived.

Survived and unforeseen global shut down working our way through it in a manner that ensure we came through in a position of strength.

And as the World open back up we emerged to find golf experiencing record demand and participation levels.

Finally, we finished the year announcing a transformational merger with top golf, signing John ROM and delivering on some key strategic initiatives.

Now looking forward all things considered we could not feel more fortunate or be happier about where our business is in our future prospects.

With that said, we're also mindful that many people who have been significantly negatively impacted by COVID-19, and our thoughts and prayers go out to them and their families.

Looking at Q4 in isolation the operating results in our golf equipment segment continued the strong momentum shown in Q3, while the apparel business returned to growth and showed great signs for the future.

On the top golf side, we continue to make progress on the merger front with our shareholder vote scheduled for March 3rd and hopefully closing shortly thereafter.

I'd like to take this chance to thank the Callaway golf team for the hard work required in delivering these results and navigating the many challenges presented this past year.

All the while setting us up from a transformational change in growth.

Like me I'm sure our team realizes that we have a lot more opportunity in front of us and it remains highly motivated.

Let's now turn to page six and jump into our Q4 results.

We were pleased with our results in virtually all markets and business segments.

Our golf equipment segment continued to experience unprecedented demand globally as interest and the support and participation of search.

According to golf datasets U S retail sales of golf equipment, specifically hard goods were up 59% during Q4, the highest Q4 ever on record.

Results that followed the highest Q3 on record as well.

U S rounds were up 41% in Q4.

And despite the shutdowns earlier in the year delivered 14% growth for the full year.

We continue to believe there will be a long term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport.

Golf retail outside of resort location remains very strongly present, while inventory at golf retail remains at all time lows.

And it's likely these low inventory levels will continue at least through Q1.

Cowboys global hard goods market share has remained strong during the quarter.

We estimate our U S market share across all channels grew slightly during both Q4 and for the full year 2020.

Our share in Japan was also up slightly for the full year, allowing us to finish 2020.

As the number one hard goods brand in that market.

This is the first time that a non Japanese brand has ever finish number one for the full year in total hard goods.

Our full year share in Europe was down slightly but we still finished as the number one hard goods brand in this market as well.

On a global basis I believe we remain the leading club company in terms of both market share and total revenues and then number two ball company.

In the U S. Third party research showed our brand to be the number one club brand and overall brand rating as well as the leader in innovation and technology over.

Over the last several years, we have shown resilience with these important brand positions.

We had a good year on tour in 2020, finishing the year with a number of powder and the number one driver on global tours.

However, we didn't have as many wins or total brand exposure as we would've liked.

As a result, we strengthened our tour positions significantly during 2020 via the assigning of John Rob to a full equipment headwear and apparel deal.

The addition of John along with Xander and Phil and our ongoing strong complement of players across global men's and women's tours leaves us well positioned in this important area of our business.

We also started 2021 nicely with two wins already on the PGA tour and a lot of exposure in all events.

On the product front, we're thrilled with our new 2021 lineup.

And I have to focus and our focus is on our most premium brands those being our epic drivers and apex irons.

For 2021, both brands are being supercharged with new technology, including a new speed frame version of our proprietary <unk> technology in the woods.

And a new version of the apex line called DCD.

It should broaden the appeal of this already highly popular line of irons.

Reaction from the lineup has been outstanding both onshore and in the marketplace.

Turning to our soft goods and apparel segment.

This portion of our business along with the apparel industry generally was of course more impacted by the pandemic during Q4.

However, the speed and magnitude of the recovery also continued to exceed our expectations.

Looking at individual businesses in this segment, starting with the Callaway apparel business in Asia.

In Japan, we had a good quarter and finish the year as the number one golf apparel branded net market based on market share.

In Korea, we plan to take back the Callaway golf apparel brand has been licensed to a third party for several years and launch our own apparel business in Korea during the second half of 2021.

We are investing in staffing and it systems for this.

The team there is energized by this opportunity as this is something that they had been considering for several years now.

Turning to Travis Matthew this branded business continues to impress.

Their brand momentum is extremely strong both in direct to consumer channels and at wholesale.

Given the success, we are increasingly confident this can be a large and highly profitable brand presenting us an even bigger opportunity than we originally anticipated.

To enable this we have been investing in their systems and supply chain infrastructure.

This investment phase will continue through 2021, and then taper off we.

We are also investing in direct to consumer efforts flow through the addition of new stores selectively taking advantage of some great opportunities and of course E. Commerce, we could not be more excited about this business overall.

Jack Wilson also had a strong quarter delivering year over year revenue growth.

Perhaps even more importantly, we've cleared some key strategic and operational hurdles during the quarter.

In Europe, our new CEO of global Jack will skin, Richard Collier joined the team in December.

Richard joins us from Helly Hansen, where he held the title global product officer and served in the capacity as well as just facto chief operating officer.

We're excited to have Richard on the team the reaction to Richard and the New CFO Andre who joined US a few months earlier from Mahmood.

<unk> has been outstanding.

Our previous CEO melody hires yen spec transitions at the end of the year and we thank her for her leadership over the last two years with Callaway.

We entered 2021 with a very strong leadership team fully in place.

Equally importantly, prior to the full Europe retail shut down in mid December the <unk>.

Well through of our fall winter lineup was excellent in both Europe and in China.

This speaks to the strength of the brand in these key markets improved channel management and the strength of the product lineup.

Noting that in China Q4 was the first quarter to showcase the local product designed by a new team that was recruited in 2019.

The success of this new China for China product was a key strategic initiative for us.

Across the globe, but especially in their key markets of China and Europe. We believe the combination of strong leadership and sell through momentum bodes well for this brand as markets open up and recover.

Taking a step back and looking at the larger apparel and soft goods segment from.

The last nine months the hero has certainly been E com.

This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day. These.

These investments enabled our apparel business E com to deliver 64% year over year growth in Q4.

E. Com is now a significant portion of the channel mix of this segment and we are confident our expanded capabilities and strength here were bolstered this business growth prospects and profitability going forward.

Post Covid, we continue to expect our apparel and soft goods segment growth faster than our golf equipment business and with that growth to deliver operating leverage and enhanced profitability.

And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15 million of synergies in this segment over the coming years.

Like our company overall this segment with its concentration in golf and outdoor appears to be well positioned from both the months and years ahead, both during the pandemic and after.

Turning to top golf, our competency will be limited given we have not closed the transaction yet.

But during late Q4 due to Covid restrictions three of the U S venues were forced to shut as well as three of the UK venues.

Despite these headwinds top golf overall results exceeded expectations in Q4.

This was driven primarily by strong bulking sales.

Currently only UK venues.

One U S. Then you reported Oregon are closed.

And COVID-19 restrictions appear to be gradually easing.

Despite 2021, starting out with more COVID-19 restrictions than we expected strong walk in traffic is allowing this business to continue to perform at a level consistent with achieving our total venue full year same venue sales target of 80% to 85% of 2019 levels.

Turning to new venue development top golf is opened two new domestic venues already this year.

Mary, Florida in Albuquerque, New Mexico.

And is on track to hit their new venue plan of eight new owned venues for this year.

On the international front, our third franchise location opened earlier this year in Dubai.

The site has been getting strong reviews, despite ongoing COVID-19 complications in this market.

And we expect this to be a flagship site for us internationally.

Looking forward given the uncertainties of the Covid situation globally, we are not currently providing 2021 guidance.

We can however provide the following color.

The golf equipment sector is likely to be slightly impacted by Covid in Q1, with the majority of European markets and portions of Asia, Tokyo for instance, in some sort of locked down on retail constrained.

And with some supply constraints based on both capacity limitations in logistics.

We are also experiencing higher operating costs associated with Covid, our container shipping costs alone are estimated to be up approximately $13 million for the full year as these costs have surged, but we do not see this as a long term issue just a short term anomaly associated with the pandemic.

The demand situation is strong enough that we expect a very strong year in golf equipment. Despite these issues.

A little constrained in Q1 based on capacity and logistics with increasing opportunity to catch up with demand in Q2.

Our soft goods and apparel segment continues to be more impacted by Covid. The Europe shutdown is especially impactful for our business there certainly through Q1.

However, the key points of operating strategic progress, we mentioned earlier, along with the attractive long term prospects of both golf and outdoor lifestyle apparel make me increasingly confident for this business post the COVID-19 closures in their short term impact.

Top golf is performing consistent with plan new venue openings are on track and we are increasingly confident for this business overall.

We hope to close in early March if this happens we will have a lot more to say on this business starting on our next call. We continue to see this as a transformational opportunity.

On the operating expense side in comparison 2019, which is the only meaningful comparison youre going to see some further investments in 2021. These include investments in our growth infrastructure, such as the Korea apparel business increased tour presence and direct to consumer resources.

We have a track record from making these kind of internal investments. We are confident these will deliver high returns for shareholders.

Lastly, we remain confident in the 2022 guidance, we provided as part of the top golf merger process as well as the future potential of what is going to be a unique and powerful business.

Brian over to you.

Thank you chip.

As chip mentioned 2020 was quite a year.

We're pleasantly surprised with how quickly our golf business and the golf industry began recovering from COVID-19, once the governmental restrictions began to abate during the second quarter.

We're also pleased with the recovery of both our Travis Matthew Injectables can businesses.

While the recovery of those businesses will not be as quick as the golf equipment business due to the longer supply chain lead times and seasonality there.

The recovery of our apparel business is pacing ahead of our expectations and that are comparable businesses.

The stronger than expected recovery has contributed to a significantly improved liquidity position.

Our available liquidity, which includes cash on hand, plus availability under our credit facilities.

Increased to $632 million at December 31, 2020.

Compared to $303 million at December 31, 2019.

Yeah.

In addition to the core business recovery. We May also we also remain very excited about our prospective merger with top golf.

Which clearly will be transformational for Callaway.

The top golf shareholders have already approved the transaction and we are holding a special Callaway shareholder meeting on March <unk> 2021 to approve the merger.

We would expect to close the merger shortly thereafter.

Yes.

Evaluating our results for the fourth quarter, a four year you should keep in mind, some specific factors that affect year over year comparisons.

First as a result of the Jack <unk> acquisition in January 2019, we incurred nonrecurring transaction and transition related expenses in 2019.

Second as a result of Eog's <unk>, Travis Matthew Injectables skin acquisitions.

We incurred noncash amortization and purchase accounting adjustments from 2020, and 2019, including the Jack <unk> inventory step up from the first quarter of 2019.

Third we also incurred other nonrecurring charges, including costs related to the transition to our North American distribution Center in Texas.

Implementation costs related to the new Jack Wills Kodak system.

<unk> costs related to our COVID-19 cost reduction initiatives and costs related to the proposed top golf merger.

Fourth the $174 million noncash impairment charge in the second quarter of 2020 is nonrecurring and did not affect 2019 results.

Fifth we incurred and will continue to incur non cash amortization of the debt discount from the notes issued during the second quarter of 2020.

We have provided in the tables to the earnings release, we issued today.

Schedule breaking out the impact of these items, our fourth quarter and full year results and these items are excluded from our non-GAAP results, we discuss today.

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

Turning now to slide 11.

Today, we reported record consolidated fourth quarter 2020, net sales of $375 million compared to $312 million per the same period in 2019, an increase of $63 million or 21%.

This increase was driven by a 40% increase in the golf equipment segment.

Moving from high demand for golf products late into the year as well as the strength of the company's product offerings across sales co levels.

The company is soft goods segment continued its faster than expected recovery with fourth quarter 2020 sales, increasing 1% versus the same period in 2019.

Changes in foreign currency rates had a $9 million favorable impact from fourth quarter 2020, and net sales.

Gross margin was 37, 1% in the fourth quarter of 2020 compared to 41, 7% in the fourth quarter of 2019, a decrease of 460 basis points.

On a non-GAAP basis gross margin was 37, 2% in the fourth quarter compared to 42, 4% in the fourth quarter of 2019, a decrease of 520 basis points.

The decrease was primarily attributable to the company's proactive inventory reduction initiatives.

Soft goods segment increased operational costs due to COVID-19, and increased freight costs freight costs associated with higher rates and a higher mix of air shipments in order to meet demand.

These decreases were partially offset by favorable changes in foreign currency exchange rates and favorable mix created by an increase from the company's ecommerce sales.

Operating expenses were $171 million in the fourth quarter of 2020, which was an $18 million increase compared to $153 million in the fourth quarter of 2019.

Non-GAAP operating expenses for the fourth quarter were $162 million, a $14 billion increase compared to the fourth quarter of 2019.

This increase was driven by the company's decision to payback to employees other than executive officers that reduced salary salary levels for a portion of the year variable expenses related to the higher revenues in the quarter.

Investments in our new businesses and other.

Unfavorable changes in foreign currency exchange rates.

Other expense was $15 million in the fourth quarter of 2020 compared to other expense of $9 million in there.

The same period of the prior year.

On a non-GAAP basis other expense was $13 million in the fourth quarter of 2020 compared to $90 million for the comparable period in 2019.

The $4 million increase in other expense was primarily related to a net decrease in foreign currency related gains as well as interest expense related to our convertible notes.

Pre tax loss was $48 million in the fourth quarter of 2020 compared to a pretax loss of $32 million per the same period in 2019.

Non-GAAP pre tax loss was $35 million in the fourth quarter of 2020 compared to non-GAAP pre tax loss of $25 million in the same period of 2019.

Loss per share was <unk> 43 cents from $94 2 million shares in the fourth quarter of 2020 compared to a loss per share of <unk> 31.

$94 2 million shares in the fourth quarter of 2019.

Non-GAAP loss per share was 33 cents in the fourth quarter of 2020.

Compared to a loss per share of <unk> 26 for the fourth quarter of 2019.

Adjusted EBITDA was negative $12 million in the fourth quarter of 2020 compared to negative $6 million in the fourth quarter of 2019.

Turning now to slide 12.

Net sales for full year 2020, we're 158 9 billion.

Compared to $1 $701 billion in 2019.

A decrease of $112 million or six 6%.

All things considered we're very pleased with the sales level given the global pandemic.

The decrease in net sales reflects a decrease in our soft goods segment, which decreased 15, 9% and our golf equipment segment increased slightly year over year.

Changes in foreign currency rates positively impacted 2020, net sales by $11 million versus 2019.

Gross margin for full year, 2020 was 41, 4% compared to 45, 1% in 2019, a decrease of 370 basis points.

Gross margins in 2020 were negatively impacted by the North American warehouse consolidation.

And in 2019 were negatively impacted by the nonrecurring purchase price inventory step up associated with project growth acquisition.

On a non-GAAP basis, which excludes these nonrecurring items.

Gross margin was 41, 8% in 2020 compared to 45, 8% in 2019.

A decrease of 400 basis points.

The decrease in non-GAAP gross margin was primarily attributable to the decrease in sales related to the COVID-19 pandemic.

Costs associated with Idaho facilities during the government mandated shutdown.

The company's inventory reduction initiatives and increased freight expense in the back half of the year.

The decrease in gross margin was partially offset by favorable changes in currency exchange rates and.

And then increasing the company's ecommerce business.

Operating expense was $763 million in 2020, which was $129 million increase compared to $634 million in 2019.

This increase is due to the $174 million noncash impairment charge related to the Jack <unk> goodwill and trade name.

Excluding the impairment charge and other items previously mentioned non-GAAP operating expenses for 2020 with $570 million, a $47 million decrease compared to $617 million in 2019.

This decrease was due to our cost reduction initiatives decreased travel and entertainment expenses lower variable expenses due to lower sales and reduced spending in marketing and tour as golf events around the world were canceled.

The decrease was partially offset by continued investments in our new businesses and the unfavorable impacts of foreign exchange rates.

Other expense was approximately $22 million in 2020 compared to other expense of $37 million in 2019.

On a non-GAAP basis other expense was $15 million per 2020 compared to $33 billion for 2019.

It's $18 million improvement from primarily related to a $19 million increase in foreign currency related gains period over period, including the $11 million gain related to the settlement.

The cross currency swap arrangement.

Pre tax loss was a $127 million in 2020 per.

Average a pretax income of $96 million in 2019.

Excluding the impairment charge in the other non-GAAP items previously mentioned non-GAAP pre tax income was $79 million from 2020.

Compared to non-GAAP pretax income of $130 million in 2019.

Loss per share was $1 35, or $94 2 million shares in 2020.

Compared to fully diluted earnings per share of <unk> 80 to $96 3 million shares in 2019.

Excluding the impairment charge in the other non-GAAP items previously mentioned.

Non-GAAP fully diluted earnings per share was <unk> 67 sites in 2020.

Compared to fully diluted earnings per share.

Of a $1 10 for 2019.

Adjusted EBITDA was $165 million from 2020.

Compared to $210 million in 2019.

Yes.

Turning now to slide 13.

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

As of December 31, 2020 available liquidity, which represents additional availability.

Under our credit facilities, plus cash on hand with $632 million.

Paired with $303 million at the end of the fourth quarter of 2019.

This additional liquidity reflects improved liquidity from working capital management cost reductions and proceeds from the convertible notes we issued during the second quarter.

Yeah.

We had total net debt of $406 million, including 442 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfcamp.

Our consolidated net accounts receivable was $138 million.

A decrease of one 4% compared to $140 million at the end of the fourth quarter of 2019.

Day sales outstanding decreased to 45 days on December 31, 2020.

Compared to 53 days at December 31, 2019.

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

Also displayed on slide 12, our inventory balance decreased by 22, 8% to $353 million at the end of the fourth quarter of 2020.

This decrease was primarily due to the high demand we're experiencing in the golf equipment business.

As well as inventory reduction efforts in our soft goods businesses.

The teams continue to be highly focused on inventory on hand, as well as inventory in the field both of which remain relatively very low at this time.

Capital expenditures for 2020 were $39 million, which is right in line with the range provided during our Q3 update.

This amount is down substantially from our $55 million of planned capital expenditures at the beginning of the year.

Our cost reduction actions in.

In 'twenty and 'twenty, one we expect our capital expenditures to be approximately $50 million per acre Callaway business.

Depreciation and amortization expense was $214 million in 2020.

G&A expense, excluding the $174 million impairment charge was $40 million in 2020 compared to $35 million in 2019.

In 2021, we expect non-GAAP depreciation and amortization expense to be approximately $45 million per the current callaway business.

I am now on slide 14.

We're not providing revenue and earnings guidance for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19.

However, we would like to highlight certain factors that are expected to affect 2021 financial results compared to 2020.

When a pre merger basis, which includes only Callaway golf business. It does not take into account top golf business. Following the proposed merger.

Consolidated net sales for the first quarter of 2021 will exceed 2020 net sales, but will continue to be negatively impacted by COVID-19.

The company's soft goods business will continue to be impacted by the regulatory shutdown orders in Europe and Asia.

Which should then strengthened during the balance of the year as the regulatory restrictions subside.

The company's golf equipment business is expected to be impacted by a temporary supply constraints caused by COVID-19 during the first quarter.

Which could affect the company's ability to fill all of the robust demand in its golf equipment business.

The company believes that there are opportunities for supply to catch up beginning in the second quarter.

On a pre merger basis full year 'twenty 'twenty, one non-GAAP gross margin will also be negatively impacted by increased operational costs.

Due to COVID-19, including higher labor costs logistical challenges as well as increased freight expense, resulting from a shortage of ocean freight containers.

The freight container shortage alone is estimated to have a negative $13 million impact on freight costs in 2021.

With the substantial majority of the impact occurring during the first half.

The company believes that its full year 2020 gross margin will be approximately the same as in 2019.

Despite these gross margin headwinds, we should be offset by increased direct to consumer sales and foreign currency exchange rates.

Yeah.

On a pre merger basis full year 2021, non-GAAP operating expenses.

Our estimated to be approximately 70 million to $80 million higher.

Compared to full year 2019, non-GAAP operating expenses.

In addition to the negative impact from changes in foreign currency rates.

Estimated to be approximately $20 million and inflationary pressures the increased operating expenses generally reflect continued investment in the company's current business.

These investments include investment needed to assume to Korea apparel business.

Investment in Pro tour and convince continued investment in the soft goods business.

Including the Travis Matthew business related to opening new retail doors.

Investment in infrastructure and systems and investments related to new market expenses project will skin in North America and Japan.

The company believes that these investments will continue to drive growth in sales and profit line.

We expect to incur the expense for these investments prior to receiving the associated benefit.

In 2020, the company realized gains from certain foreign currency hedges.

Aggregate amount of approximately $25 million.

These gains are not expected to repeat in 2021.

In sum the COVID-19 pandemic had a significant impact on our business beginning in the first quarter of 2021.

After we absorb the initial.

Yeah. After we absorb the initial shock of the impact from endemic including the various governmental shutdown orders and restrictions chip.

Chip challenged us to protect our business.

They'll ourselves of opportunities that arise during the pandemic.

Actions, so that we not only survive the pandemic.

But also emerge in a position of relative strength.

Given the recovery in our core business, our prospective merger with top golf and our increased liquidity I believe we have done that.

We are cautiously optimistic as we enter 2021, all of our business segments as well as the top golf business support enacted outdoor healthy way of life that is compatible with the world of social distancing.

And we believe this will continue to mitigate the impact of COVID-19.

We continue to believe that 2021, we will be a stepping stone to more normal conditions in 2022, and the resulting transformational growth we have projected for 2022.

That concludes our prepared remarks today, we will now open the call for questions.

Chip mentioned in his remarks, the primary focus for the Q&A should be with regard to the Callaway business, we are still pending shareholder approval on the merger.

Operator over to you.

Thank you and I'm.

As a reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone.

Draw your question press the pound or.

Cash and we do ask you to please keep your questions to one and one follow up.

Please standby, while we compile the Q&A roster.

Our first question comes from Randy <unk> with Jefferies. Your question. Please.

Yes, Thanks, a lot thanks, guys good evening.

Can we just go over the.

It's a proactive.

She was just get a little bit more color there on.

The dynamics of what actually took place and then.

Much of that impact.

The impact was to the simple the overall gross margin reduction and then within that after we unpack that can we get some perspective on how much of that was related to.

Jack will scan versus the other apparel pieces.

Other apparel brands.

Okay, Randy so.

This is chip.

The first question is on the apparel segment Q4 revenues is that correct.

No just the.

The gross margin impact net.

Sorry.

The press release highlighted these proactive apparel.

Inventory reductions so.

Just to understand what exactly that is how much of the day of the gross margin deterioration in the quarter was that item versus the free.

Item and then within that how much of it was Jack Wolfe skin versus.

Something with Callaway apparel or something like that just trying to understand this a little bit more.

Sure Randy this is Brian.

Right.

Honestly there.

The seasonality of the hit rate during the middle of the.

Beginning in the first quarter and their spring summer season.

They tried to everybody tried to repurpose as much as they could but they were definitely a bunch of apparel inventory that was pushed through outlet channel is just trying to clear and reduce the amount of inventory.

Probably overall in the majority of that the impact was related to the.

Inventory reduction initiatives.

And if it comes from something else.

Yeah, we're not we're not going to be able to break out at this point, what how much of that was Jack will scan versus.

Travis Matthew or Callaway apparel, all of them had a.

Inventory correction issue proportionate to the scale of their business really.

Alright, great and then just to be clear that means debt.

With the Dec is admittedly should be cleared.

Going forward is that correct.

Randy the only.

Yes, with the exception of the fact that there are some incremental shutdowns that occurred at the end of December So what was Europe.

Is as you are aware shut down starting in mid December.

And so.

And is still shut down at this point.

So there is going to be some implication from that as well yeah right I think they did a very good job with the inventory reduction initiatives from the initial COVID-19 shutdown and working through.

The balance of the year, but as chip mentioned there'll be a little bit more due to the December shutdown.

Great and then my last question is.

Really around just the other.

We're not going to discuss top golf, but.

From a callaway lens I wanted to get some perspective on recent items I've seen are John Rob on TD. When you know the top golf logo on his knees.

Callaway on us.

Travis Matthew Travis Matthew logo on his back.

You are clearly starting to see these brands coming together and then I think top golf announced the non shot challenge of the top tracer and WG key kind of coming together, where the consumer can use either.

Of those two channels or venues if you will to play in the tournament. So just curious from a Callaway line, how do you think about.

Starting to blend these businesses together kind of trying to bring the ecosystem youll farther and farther together with these different branding opportunities advertising opportunities et cetera.

Yes, Randy this is chip.

You're clearly seeing some of the strong potential for.

Synergies in co branding.

You know our ground what is going to be the largest golf consumer ecosystem.

In the world and so.

So we're remaining very excited about that and.

But for regulatory reasons, we will not get into those too much further at this point the merger is pending and.

We're obviously excited about that potential going forward.

Fair enough alright, that's helpful. Thanks, guys. Thanks Randy.

Thank you. Our next question comes from Daniel Enbrel, which Steven Yes.

Your question please.

Yeah, Good evening, guys and thanks for taking the question wanted to ask one on the top line, obviously golf equipment sales were strong, but I think golf balls were a little bit surprising delight.

Market share you mentioned was up sequentially, but it doesn't look like headline growth really kept up with the U S. Data. So can you share some color on maybe was there a week, but internationally in the golf ball side.

What impacted.

Debt that category first we'll start there.

Yeah sure Daniel So golf ball.

But I would think was impressive growth both in our business and in the market.

In the quarter the growth in golf ball.

Beyond the Q4 was lower than the growth in golf equipment.

And that's understandable golf.

Ball will track.

Play a little bit and.

Even though there was nice growth in that.

You know the overall participation rate for the full year.

Was was up double digit but not in the same manner that what we saw in Q4.

And in addition, we were capacity constrained and much of that golf ball.

During the quarter.

Yeah. That's helpful color and maybe can we dig into that capacity constraint I think from Andrew last year. The message had been you guys do Chicopee, we're able to catch up to where meat how strong industry demand was.

Obviously theres less absolute play in the fourth quarter. So a little surprised that capacity constraints became an issue again can you talk about what led to that was at materials would further up the supply chain from you guys and what does the outlook look like from a supply chain or from a capacity standpoint, if golf demand remained strong through the first part of this year.

We'll continue to chase.

Demand is it has surged our golf ball operations as well as with our entire supply chain is operating at a very high level and.

We continue to see continued.

Continued progress in Chicopee on the.

Productivity is.

<unk> et cetera.

You just can't Serge.

The supply chains to the full magnitude of what we saw post COVID-19 given that we didn't expect that type of a surge.

And you also have some.

Planning that you have to do for the season coming forward as we've got new product ramps et cetera. So we have to divert production that would have.

Shift in Q4 into new product launches that will ship in the coming year.

All of those are factors into what Youre seeing there Daniel but long story short, we're very pleased with our golf ball.

Operations.

We're seeing such strong current demand that we are.

In Chase mode, but we're also.

Performing at a high level, so, let's say a positive situation overall.

Got it and I didn't catch it if you answered did did you expect the supply chain issues that continue to weigh on the first half of this year.

Yes, yes.

Non of demand that we're seeing we expect to be have some supply constraints at least through Q1.

With the opportunity to.

Catch up more following that.

Got it thanks, I'll hop back in the queue.

Sure.

Thank you. Our next question comes from Joe <unk> with Raymond James Your question. Please.

Thanks, Good afternoon.

A couple of follow up questions on the supply stream.

The screen issue is that mostly ball. So are you also seeing that on the club side as well.

We're seeing it throughout the.

The golf equipment business.

Balls and clubs package debt golf bags.

Et cetera. So.

This as you can tell us.

What they say U S hard goods in Q4 was up 59% now that's that's a small quarter.

But 59% is extraordinary and.

Those are also periods of time, where we have two blacks and make production for the coming year.

Yeah, we've done a nice job on the supply chain side and it is a relative strength for callaway, but debt.

There is not enough extra capacity to surge at those levels.

So we will be constrained.

Going through Q1.

And as you can tell inventories are down in the field and it's.

It's.

A robust environment right now.

So is that mostly a callaway specific.

No. This is total industry. If you look at total industry inventories, Joe give you a relative basis, there inventory in the field for the entire.

Clubs. So this is day to take day data last year. They had five two months of inventory in the field at the end of December they have two two months.

At the end of December for clubs and.

In the industry.

And the entire industry will be in in Chase mode.

Net.

And our inventory in the field is slightly below that $2. Two in the same club category. So it is not specific to a golf ball or club or a bag.

But a reflection on.

What is.

Really unprecedented demand.

And do you expect that field inventories to normalize by the end of 'twenty, one or might that extended to 'twenty two.

I don't have a projection that far out for you.

If you can tell me.

You know all the COVID-19 implications for the balance of the year and stature I can probably give you one I expect that the golf equipment business is going to stay robust debt is expecting a good year or may be a strong year.

And I expect inventory to be constrained and it remain low at least through Q1 on an industry basis.

Okay. Thank you guys appreciate it.

Thank you. Our next question comes from Mike Swartz with Twist Securities. Your question. Please.

Hey, good afternoon.

Wanted to dig into some other COVID-19 related disruption or costs that you called out in terms of.

What youre seeing in the fourth quarter and into 2021 could you maybe give us a sense of magnitude in terms of what those total costs are and then maybe.

Looking at.

Things that are temporary versus things that may endure beyond COVID-19 is the way to look at that.

Sure, Mike I'll take a shot at it and Brian jump in so the only one that we can give you a specific.

Our call out for us as container shipment costs, which we called out so incremental 13 million non container shipping costs. So.

Painters to ship from Asia to the.

The U S. Traditionally has been about ballpark $1300 force, what it would cost us to ship a container of product from Asia and those spiked.

In Q4 and are currently it can be $10000.

So some.

Large increase.

And.

We are absorbing those that'll be mostly through the first half of the year, but that is not a long term issue. This is a simple supply demand equation and the fact that.

The surge in exports, it's across all industry that is not a golf specific issue.

And all players et cetera are big customers are experiencing the same thing it is just a.

Effect of the Covid environment, you're seeing related things in terms of the logistics and transportation networks across the globe struggle is that.

Covid situation unfolds the ports in California are backed up there's 30, some ships lined up outside of a long.

Long beach trying to unload.

The efficiencies of unloading are slower.

We can't stock our staff our D CS as efficiently so our operating costs from the Dcs because we don't know when the product is going to show up but we have to have the people. There are factories are having.

Issues with regard to you know.

Staffing levels in various parts of the plant, calling in with Covid or restrictions in terms of how we operate the plant.

We're working through all of those.

And all of those are what I believe just short term issues. If you go post COVID-19.

They go away.

But they are a related party of some of this.

A strong surge and the unique environment, we're in right now and it will impact the business in the short term.

We are forecasting for full year 2021 that we can get back to about the same gross margin level.

2019, while absorbing all that turmoil from the Covid, but to chip's point that should abate as COVID-19 started to resolve itself from subside.

Okay. That's helpful and then just.

The second question I.

Thank you you've mentioned that you are taking back the Korean apparel business in house, maybe give us a sense of how large that business is.

Relative because I think you did this a couple of years ago with your Japanese apparel business to maybe give us a sense of maybe the differences versus the you know the Japanese business coming in house and how.

Frame that financially I guess sure Mike goes as chip.

It's a little smaller than our Japanese business.

And unfortunately for competitive reasons.

We are unable to provide a more.

Specifics on the scale of that business it's.

Its material enough to bring up as it relates to some of the investments, but not material enough to break out and.

For competitive reasons.

We are uncomfortable providing more detail.

Alright, thank you.

Thank you. Thank you.

Our next question comes from Susan Anderson with B Riley FBR. Your question. Please.

Good evening nice job on the quarter.

Chip I was wondering if maybe you can talk about your thoughts around the golf industry, and where you kind of see it settling out obviously last year, we saw a significant amount of new participants enter the game I guess just from your conversations with other than the industry, where do you think this kind of pans out do you think that participant participant growth rate can.

Continue to grow this year and seen much rounds played.

Sure Susan good question so.

In the market and golf is obviously experiencing unprecedented demand right now in the market size is up.

Long term I expect the trend line growth of golf equipment to be slightly higher than pre COVID-19 as well.

Clearly they won't sustain these.

A huge surges, we have right now.

But the scale of the business is larger and I believe the growth rate is going to be positively impacted give you a little bit of data in support of that so total on course golfers in 2020.

They just reported this data is about $24 8 million that's people who played at least one round on a on a golf course in the U S.

That is up from $24 3 million or 2% up.

Versus the previous year, beginning golfers, that's about $3 million.

Up from $2 5 million or up 20%. So you are seeing a strong increase in golfers and you have to remember that in 2020. There were also many.

Golfers that didn't play because of concerns of Covid. So when you look at the segment data and deep into it there is.

A high number of golfers that were actually concerned enough not to play.

EBIT more interesting and perhaps.

Appealing for our future business and for the golf equipment business long term is that total on and off course golfers. So this is people to play it on a golf course.

We're playing in a non traditional venues and then most significant non traditional venue is top golf.

That it on and off course golfers.

In 2020, $36 9 million.

8% from $34 2 million.

And top golf is the largest contributor here and top golf growth, we believe is going to ramp.

So.

Outlook for golf.

Very strong data supports a larger overall market size.

Lately larger growth rates I can't quantify exactly how much larger on the growth rates clearly not the level that we're talking about right. Now this is incredible and unsustainable.

But clearly more than that to low single digit if you were thinking about our growth rate in the past per the golf industry on the equipment side of 2%.

You would bump that up.

A reasonable.

Percentage.

And you also have.

Greetings and for optimism on the non traditional from.

Great. That's really helpful. Thanks for all the details.

And then Brian maybe if you could give some more color just on the gross margin I guess the cadence for the year. It sounds like the freight costs are going to be more front end loaded and net.

I don't know if you can book versus 2019 levels normalized.

Normalized net are you expecting each quarter.

Quarter to be I guess similar year over year to get to that flat or should we think about the first half being more pressured in the back half kind of up versus 2019 levels.

Sure Susan.

Thanks for the question.

We do expect from especially the freight issue and some of the operational cost tissues to abate as the year goes on and as you start to feed COVID-19.

Lesson, you'll you'll start to see that.

Compared to 2019.

I'd say, we'd probably it will probably ramp this year as you go through the year. So the first half.

It will probably be a little bit less than in the second half would be a little bit more.

Great. Okay. That's helpful. And then also what about the additional investment is that front end loaded at all or is it should we think about it being spread throughout the year.

It depends on when people implement things, but I would say generally I would assume equal throughout the year.

Okay, great. Thanks, So much you guys. Good luck next quarter.

Thank you.

Thank you. Our next question comes from Brett Andress with Keybanc capital markets. Your question. Please.

Hi, good afternoon. So.

The $70 million to $80 million of Opex can you bucket those in a little more detail.

For us I think FX.

The $20 million, but I mean, how much are you spending on Korea.

Any way to kind of also quantify the benefit you get from taking that business in house and then how much is being spent on tour and some of the other investments just trying to kind of frame this out.

Sure you know, we probably won't break out each one but I guess the way we look at it and this is roughly but roughly a third is the opex at.

Third just capex ex U.

You said on that call.

[laughter], but a third a third if that ever book with 30.

FX.

A third is normal inflationary pressures through labor and professional services is really two years' worth. So if you go from 19, you had some day went for 'twenty and two more so about a third of that and then about a third is the additional investments that's probably let's call it $25 million and.

That breaks up between the creative apparel, and then tour and a little bit of investment in other soft goods business as well.

But the total is probably about 25 million for those.

<unk>.

Okay. That's helpful.

Okay and then also just appreciate the sales guidance that you've given at least here for the first quarter of.

'twenty 'twenty, one, but I guess as we start to model out the rest of the year.

Understanding you're not giving guidance for the full year.

But should we be thinking of 2019 sales levels as a starting point for 2021, I'm just trying to kind of help us walk through maybe the puts and takes.

As the rest of the year played out on the sales line.

Yeah.

It's difficult to answer that without actually giving guidance.

That's why we tried to say it was above 2020 part of it all depends on how quickly any.

Resolved COVID-19 picks up and the challenges for the year, but.

I'm not sure what I consider that yeah, yeah, Brett Q1 will be a challenging quarter to show meaningful growth versus 2019, but then after that.

We do have.

Opportunity to do that and we don't have guidance. Unfortunately for you at this point in time.

No understood I gave it a shot.

[laughter].

And our next question comes from from John Kernan with Cowen <unk> co.

Okay.

Yeah.

John you there.

Okay.

John checking alright.

Switching off the.

Top line to Speaker can you hear me now yeah, Josh Okay, alright, sorry about that.

You know the weather look good out in San Diego during the farmers in a couple of weeks ago net.

Quite as good here.

In Westchester County, New York.

[laughter] right maybe on slide 14.

With the guidance.

Could you point out too.

Some of our non-GAAP guidance on both gross margin and operating expense what are the can you quantify what charges. We should expect at this point on in.

From gross margin is it material in 2021.

Just from a nonrecurring John Yeah.

So sort of a one time, yes, the one time.

I don't have that broken out yet we can we'll get into that a little bit more as we go through the year, but there'll be some you know some top golf merger type expenses that would be mostly in opex right and then depending on valuations.

As we get through that but those will be most of the one time expenses, Brian I don't know if it's good.

The legal fees investment banking fees the auditor fees.

Price amortization right, we've been with total.

It should just be mostly related to that John is largely related to top golf. Okay. Yes. The guidance felt like it was more for the core golf business, but okay got it.

Not one times I don't know.

With that I referred to them as one time, perhaps.

John because I don't think they are reoccurring, but we're not backing them out of our numbers when we adjusted our numbers for you you know for instance that is operating.

The cost for the containers will be in the numbers.

Our debt we report to you John there is the ongoing there's ongoing.

Our costs from prior acquisitions for the amortization of intangibles things like that you relate to the Callaway business that went back back out those one times, but all the new things pretty much related to the merger.

This day.

Maybe just.

I don't need to beat a dead horse, but the investments in apparel look like there.

Obviously, increasing with the Korean business and some of the investments in Travis and maybe marketing and partnerships.

One is you know what.

It feels like soft lines might be causing more volatility in your from this point what is it that you're tracking to I guess from the software side of things that you're pumping for cash.

In that category.

Well you know we have to look at it you know clearly soft goods is causing more volatility because soft goods is more impacted by COVID-19.

You know the apparel businesses.

Are not enjoying the.

59% growth independent of any COVID-19 environment that golf equipment is enjoying.

But we're in the right sectors there.

And.

As we get deeper into those businesses for instance, the Travis Matthew business is just.

Candidly a wonderful business has great growth opportunity.

It has significant scale.

And significant earnings potential and as we.

Went through an unlocked that we.

And decided it was in shareholders' best interest to put the systems in place and the supply chain and the infrastructure to realize that potential.

And that's what you're seeing us too.

In those businesses.

Okay. Thank you.

Yeah.

Thank you. Our next question comes from Casey Alexander with Compass point Your question. Please.

Yes, hi, good afternoon first of all congratulations on re on paying.

Back to your employees.

From earlier in the year I think that's a fantastic thing to do and I'm sure that your employees really appreciate it and I think that's great for employee loyalty and morale. So congratulations for that thank you Casey.

I did want to ask I mean yours.

Your comment that that the supply constraints.

Sort of impact.

Impact across the entire golf industry.

Do you are you afraid at all that if you and others in the business are all supply constrained that.

As the year goes along and other alternative forms of entertainment start to come back on line like Theyre talking about allowing fans back into baseball stadiums and things like that that debt by not being able to fulfill demand in the first quarter that you may end up leaving some sales on the transom.

You know it's possible Casey, but you know it's.

It's still a first world.

The problem right.

The fact that demand is this strong and I don't want to overplay the supply constraints.

We're expecting as I said in my comments, a strong year in golf equipment.

Uh huh.

But.

We just can't flex the supply chain in the same manner that youre seeing some other demand. So yes, we could in theory leave some on the transom, but.

In a profitable business. That's how things are will eventually happen. When you do these types of things because we can't have the extra capacity.

That is infinite surge right or you would have too much capacity in a in a normal time so.

Your point is well taken it's definitely true but it is.

It's the it's a pretty good environment to be operating in and I don't want to.

Over emphasize the so comply constraint issue either we're ramping and we have added capacity and <unk>.

Expect a.

Positive result.

Okay fair enough.

And my one follow up is.

As it relates to share.

Already blanking out there for you.

Yeah.

Relation to the rationalization of the apparel inventory position because I see as you.

You know looking at the press release as you worked it down.

Net sales were up quarter over quarter, but clearly.

Looking on.

Page on the release the margins were clearly negative impacted did you complete the inventory rationalization is everything out or is there still some more to go here in 2021.

Casey we're in good shape with.

The only new wrinkle on that is that Covid has kind of re surfaced and surged in Europe. So.

Are they European markets being shut down now since mid December.

We'll create a little bit of.

Inventory situation there to work through.

Again, I don't want to overemphasize that.

But that prevents us from being able to say that we got through all of it we would have been through all of it.

And then.

Europe shut back down in mid December and is still shot.

With no we don't know when it'll open, but we're guessing sometime late Q1.

Okay great.

Throw in a quick what do you know what the golf ball market share was by the end of the year.

Approximately yes.

Rounding up I think to 17 on data tech and so reasonably flat year over year end.

Net.

We are if you look at total channels outside of just what data Tech reports.

We would be even stronger than that.

Okay, great great. Thanks, very much I appreciate you taking my questions absolutely.

Excellent. Our next question is from Alex My Ross you have with a bathroom Baird. Your question. Please.

Hi, Good afternoon, guys. Thanks for taking my questions I'm, just trying to reconcile some numbers on golf consumables. So with rounds played up 14% on the year, yet your golf ball sales down seven. It tells me that somebody had to have made up the delta there when retail channels and supply chains were disrupted and it seems that.

<unk> your previous comment you made to Casey. So can you just provide some commentary on if you expect any gain shares this year and who might've been making up some of the inventory constraints, how that's you're missing the inventory factor on that so the inventories in the field being down so much as the Delta that's why we held or gained share during the year.

On golf Ball you follow me.

So we're what we will report on the sales of.

Our sell through strength and then our shipments being.

You know down slightly for the full year, but our market share can be flat based on it destocking and inventory.

And that's what we believe is occurring out there.

And you know.

We're not projecting inventory, we're not going to go through specific share.

Expectations for this year, but.

I can tell you I feel very good about our performance in golf ball we've.

Strengthened our brand position.

And so it feels to me like we are.

Building strength and momentum we finished that chicopee investment, we are making the best golf balls the highest quality.

High performance.

Worked through a lot of.

Heavy lifting in that category.

Held share throughout that period, so I feel good about our golf ball business and.

But I'm not going to project specific share by category.

Okay, no that totally makes sense I appreciate it and then secondly, it's been exciting to see some Jack Wolfe skin logos up here in New York, and then out west with some of the ski resorts.

It would be wrong in saying that marketing here in the U S. It's been a little more winter sports focused versus the general outdoor leisure focus over in Europe, and then should we expect to see some group and doors this year.

Where are we are still primarily focused I'm glad to hear you say that youre seeing it more in.

Winter sports et cetera, but our focus is still hiking, if you would hiking in outdoor and that is a global focus and where the strength, but it does have a position in winter sports and.

Now that we're starting to ramp and it's still a small business in North America, but you're starting to see that business establish itself and.

Do a little bit of marketing we were pleased with the results.

We're primarily going to be a direct to consumer slash E com business in the U S with only a few select relationships to starwood.

And that strategy continues force.

Alright. Thank you guys appreciate it.

Thanks Ralph.

Thank you and our last question comes from George Kelly with Roth Capital. Your question. Please.

Hi, guys. Thanks for taking my questions.

A couple for you I'll start with Travis Matthew So curious you mentioned in the press release.

Just the debt part of your 70 to 80 of incremental operating expenses for the year and just curious if you could breakdown for Travis Matthew what is the plan as far as opening new stores and is that where most of its going or can you just kind of lay out the year force with with Travis Matthew.

Yeah.

Yes.

George Chip so.

We're not going to breakout the.

You know $70 million to $80 million further than what we would.

Brian went through which said that.

The 70 to 80 million you've got FX you got.

Two years of.

Inflationary pressures in there. It leaves you about $25 million of what is truly.

Investments into the business.

Travis Matthew as a portion of that it's not a majority of that yeah, but it is investments in systems.

We've been investing in the E com and we're expecting to open five doors this year.

New retail doors, and we opened two at the end of last year.

Which we are.

Excited about and think that there's good opportunity for our players.

Players like us that can take advantage of these opportunities.

Okay and then.

Similar question, I guess, but with the South Korea with taking on the South Korean business.

Is that something that you expect.

I understand that there is upfront investment you need to make hiring people and taking that in house, but is that something that you expect in year one to be profitable is it will that kind of revenue.

<unk> look similar to what that business did in 2020 or will it take time to kind of build it up too.

Where you were running before.

Hi, George we expect it to be profitable in its first year of operation.

Which is not going to be this year, because we're opening at some time in the second half of this year.

And so we are absorbing those cost for putting in the systems the people et cetera now.

And then.

It is on.

On our spreadsheets highly profitable at very attractive.

Even in its first year of full operation.

First year of full operation will be 2022.

But we do expect to have at startup second half of this year.

Okay got you. Thank you.

Thank you and ladies and gentlemen, this concludes our Q&A session for today I would like to turn the call back to Mr. Brewer for his final remarks.

I just want to thank everybody for calling.

Calling in today and your interest in Callaway golf, we look forward to a exciting golf season and our.

And what I believe will be a robust call with you at the end of our Q1.

Starting in Q2, and thank you very much.

And ladies and gentlemen, thank you for your participation in today's conference you may now disconnect.

[music].