Q2 2019 Earnings Call
At this time I would like to welcome everyone to the Callaway Golf Company second quarter earnings release.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you Mr. Patrick Burke company's head of Investor Relations you May begin your conference.
Thank you Rob and good afternoon, everyone welcome to Callaway <unk> second quarter 2019 earnings Conference call.
I'm, Patrick Burke, the company's head of Investor Relations.
Joining me on today's call are chip Brewer, our president and Chief Executive Officer, Brian Lynch, Our Chief Financial Officer.
Jennifer Thomas our Chief Accounting Officer.
Today, the company issued a press release announcing its second quarter 2019 financial results a copy of the press release and associated presentation are available on the Investor Relations section of the company's website.
At IR Dot 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 report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures.
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 that in connection with our prepared remarks, there's an accompanying powerpoint presentation that may make it easier for you to follow the call today. The starting the presentation is available for download on the Callaway Investor Relations web site under the Webcasts 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 youre able to flip through the slides I would now like to turn the call over to Jeff. Thanks, Patrick and good afternoon, everybody and thank you for joining us for today's call.
I'm pleased to announce another excellent quarter.
These results reflect the strength of our strategy brand spend operating ability.
It also reinforces that we are on a path to creating substantial growth on the top and bottom line over the long term.
Over the last several years, we have realized strong results across our core metrics, including revenue growth gross margin adjusted EBITDA and EPS.
We believe our strategy will allow us to continue this trend.
In fact, our results today reflect the strength of this long term strategy as we're seeing can best moments and other initiatives meaningfully impact the growth of the businesses.
As is my cost him I'd like to take this chance to thank the Callaway golf team for the hard work required in delivering these results across all of our brands and driving further change in growth at our company.
Like me I'm sure our team realizes that we have a lot more opportunity in front of us and remains motivated to continuously improve.
In my comments today.
Quickly walk through the results of our segments and then spend more time on our growing softgoods business, hoping to provide more clarity on the outlook for that segment and the key drivers of value creation.
Turning to slide four on the presentation.
Our total company revenues were up 13% during the quarter and are up 20% year to date.
For the first pass on a currency neutral basis, we delivered growth across all business units regions and major product categories.
For the quarter, we enjoyed continued strong performance in our golf equipment business.
Continued double digit growth in the Travis Matthews business.
As well as positive results in a recently acquired <unk> well, it's good business, which saw encouraging year over year growth.
Especially in its direct to consumer business.
Our new product innovation, along with recent investments in marketing are beginning to bear fruit.
Based on our brand momentum and strong operating performance and despite negative FX headwinds, we're pleased to be able to raise our earnings guidance for the full year.
In addition, we've begun the process of paying down our long term debt.
Completing a 30 million dollar payment in late July while continuing to make what we believe are high return long term investments in our business.
And returning cash to shareholders with $27 million and share repurchases year to date.
In line with this strategy, we are announcing today that our board of directors approved a new $100 million stock repurchase program.
To avoid confusion, though investors should not think of this as a significant change in capital allocation strategy.
We only had 22 million in availability remaining on the previous authorization and we want to make sure. We had capacity continue the capital allocation strategy, we've had in place.
Which generally includes a level of annual share repurchases.
While also allowing us the flexibility to opportunistically respond as circumstances warrant.
Let's now take a look at our operating performance by business segment.
Turning to slide five of the presentation.
Our equipment business had a solid quarter with revenues roughly flat on a constant currency basis, despite less product launches on a year over year basis.
Market conditions vary widely by region, but met expectations overall for the first half we grow slightly faster than the market, which we believe was approximately flat on a global basis.
With the exception of short term quarterly variations and launch timing, we are positioned to continue to do this.
They should thing, especially true in the second half of this year, where our growth rates will be aided by favorable golf product launch cadence versus last year.
This year to date, we are demonstrating strength across the breadth of our club lineup and proud to be able to claim the number one hard goods position in the U.S. in Europe .
And the number one sticks position in Japan.
In the U.S., thanks to our new advancements using artificial intelligence technology or ethnic Flash woods.
Are the number one selling driver and early wouldn't models year to date.
And we remain the number one selling iron Brad with apex and wrote the irons the number one and number two selling iron models year to date, respectively.
Callaway is also the number one driver in global tours and Odyssey is the number one potter.
Our golf ball business also continues to do extremely well with currency neutral revenue growth of nearly 10% year to date.
The market reaction to our triple tracked technology and the new ERP golf balls has been excellent and our U.S. market shares continue to set records.
Taking a step back and looking at the Big picture, we believe the golf equipment market remains in a healthy position with a significant and stable market.
Improve structural dynamics over the last several years.
And exciting global tour, creating interest in the game and potential upside demand drivers such as top golf.
We see a predictable and well structured market, where our leadership positions scale and operating acumen and continue to drive moderate growth and meaningful cash flows.
Turning to slide six and our soft goods segment.
Before reviewing the results of this segment I'd like to talk about how we see soft goods as a growth opportunity.
The builds upon our core strengths.
I believe over the last seven years, we have consistently demonstrated a few core strengths across all of our businesses here at Callaway.
This includes driving product innovation to capture market share growth.
Leveraging industry, leading marketing and consumer insights.
Creating a supporting highly appealing brands across geographies and last but not least prioritizing operational excellence and margin improvement.
Over the last four years, we have methodically build the scale position and soft goods markets that plays to the strengths.
Prior to the Jack will skin acquisition, we had approximately 300 million in revenues in this segment.
With the Jack Welch Allyn acquisition, we are closing in on $700 million.
I'd like to add that there is a lot of synergy in this effort.
These are businesses, where we know the consumer whether that be in golf outdoors are active lifestyle.
They are businesses, where there is a preference for premium style and performance.
These are markets that have growth rates, well above golf equipment.
And the successful businesses that establish scale deliver operating margins greater than most equipment businesses.
And trade at multiples higher than pure play equipment companies.
As we develop global scale in this segment, we see significant synergies and scale advantages via supply chain.
Sourcing warehousing logistics marketing and global expansion.
For example, Jack will skin gives us potential had a large central European warehouse that we can use across all of our businesses.
We have also identified significant synergies in sourcing freight and logistics all of which we now believe had higher potential and what we baked into our initial acquisition estimates.
The significant scale and synergy potential here and the higher market growth rates will benefit our shareholders as we execute the strategy.
Turning to slide seven looking at the soft goods segment performance revenues year to date has surged due to the recent acquisition of Jaktwo skin as well as strong performance across the majority of our branded business portfolio.
Travis Matthew is worthy of a special call out here as that business continues to deliver double digit growth.
And we remain energized about its future.
Jeff well skin business grew 14% during the quarter. Thanks to the excellent performance in its direct to consumer business, where our E. Commerce business was up double digits and our own retail was up low single digits on a comp store basis and high single digits overall.
It's encouraging to see this business responds to the investments and change in initiatives, we're putting in place.
As it again speaks to the core skills, we have built and our ability to work in collaboration with like minded brands to generate returns.
We also completed the acquisition of the minority balance in our Callaway apparel, Japan joint venture during the quarter.
That's giving us a 100% control.
This represents a strategic move that will set the stage for future improvements in profitability and synergy within this segment.
These results speak to is another key tenant of our Softgoods business.
Each of these brands as highly compelling standalone prospects as well as synergies through their combined scale.
Our softgoods business, a large and rapidly growing segment of our company, we're confident in and excited about the long term outlook and potential here.
Turning back to the business as a whole on slide eight over the next several years, we anticipate further strengthening all the brands in our portfolio and we believe we are trending accordingly.
We also continue to reinvest back into our business in both the golf equipment soft goods with several key infrastructure projects underway.
Many of which will extend through mid 2021.
These include the aforementioned Chicopee Ballpoint capital project, which is now in its final year multiple distribution center expansion projects all aimed at increased.
Pasadena efficiency, one of which is a 700000 square foot Multibrand facility in Dallas, Texas.
As well as several IP systems upgrades and convergence related to our recent acquisitions and growth ambitions.
These projects are progressing nicely.
We believe our reinvestments in long term oriented management decisions are setting the stage for continued strength in revenue and earnings growth.
Now on slide nine a quick comment on the ever evolving terror conversations.
The recently announced 10% U.S. tariffs on lists for items from China.
If implemented would lead the company to experience a little higher tariff expense for the balance of the year.
Well without material impact to the business and our estimates here I've been incorporated into our guidance.
Our operations team has done an outstanding job over the last several years diversifying our supply chain outside of China.
As a result, we are not significantly impacted by this issue.
I believe this gives us a competitive advantage both in hard goods and soft goods.
Lastly, as a reminder, the Jack will skin business has not really impacted that China tariff issue at all and that neither sources, there nor sell as much product in the U.S.
As for the Brexit issue in the tariff risks between UK and Europe , we are in process of having our DC in Swindon, England certified as a bonded free trade zone.
A process, we expect to have completed by the end of this year.
We believe that will allow us to avoid enter UK in New York tariffs on our golf equipment business.
We also now have the added flexibility of using the Jack Welch can distribution center in Hamburg, Germany.
Ultimately, we are well positioned from a robust supply chain perspective, and not particularly sensitive terrorists. In fact, I believe we have a bit of a competitive advantage, we have the strength and scale of our diversified supply chain operations and infrastructure.
Now on slide 10.
We're pleased to be increasing our guidance is shown.
These projections have us overcoming a significant FX headwinds.
And delivering substantial overall growth in both revenue and adjusted EBITDA.
The growth is being driven by our recent strategic acquisitions as well as continued strength in our organic business, which we project to be up approximately 8% on a constant currency basis for the full year.
We're also pleased that the golf equipment industry remains healthy and we believe we are well positioned to continue our leadership positions in the industry.
Our Travis Matthew brand continues to drive significant growth and we remain energized by the Jack will skin acquisition, which had a strong quarter and where we are increasingly confident for the long term, including increasingly positive view on long term synergies.
I believe we have a very clear strategy.
And as evidenced by our results over the last three years, where we have seen our gross margin improved 250 basis points.
Adjusted EBITDA more than doubled adjusted EBITDA margin increased 400 basis points and 82 cents added to our EPS.
I also believe we have a track record that would support our ability to deliver on our strategy.
As we continue to execute our strategy. We are confident that we can further transformer business and continue to deliver long term growth rates that can and will significantly exceed that of the golf business overall.
As we demonstrate this to the market we are optimistic our trading multiples will reflect our results.
Brian over to you.
Thank you chip.
As chip mentioned, we are pleased with our second quarter and first half results.
The results reflect the strong performance of our 2019 golf product lineup.
As well as the strength of our Travis Matthew Injectables can businesses.
This performance allowed us to overcome the significant negative impact from changes in foreign currency exchange rates.
Which negatively impacted second quarter or first half sales by $9 million and $24 million respectively.
Despite anticipated additional foreign currency headwinds, we expect strong year over year earnings comparisons in the second half of 2019.
As a result of the continued success of our 2019 golf products and more favorable cadence for second half Cup product launches.
The continuing momentum of our Travis masking business.
And our outlook for the seasonal Jack Wolfcamp business.
Which generally earns off its profit in the second half of the year.
We remain focused on executing our strategy of creating a premium golf equipment in active lifestyle company.
We are excited by the long term revenue growth and earnings potential this strategy presents.
In evaluating our results for the second quarter first half you should keep in mind, some specific factors that affect year over year comparisons.
First Jack Wilson acquisition that occurred in January 2019, and therefore that business is not included in our 2018 results.
Second when discussing our non-GAAP results today, we exclude noncash purchase accounting adjustments related to the OGIO Travis Matthew Injectables can acquisition.
And we also scoot other nonrecurring transaction and transition expenses.
Related to the acquisitions and nonrecurring advisory fees.
We exclude these items because that is how we evaluate our performance.
A reconciliation of this non-GAAP information to the corresponding GAAP information.
It's included with the earnings release, we issued today.
With those factors in mind I will now provide some specific financial results.
Turning to slide 12.
Today, we are reporting consolidated second quarter, 2019, net sales of $447 million compared to $396 million in 2018.
An increase of $51 million or 30% and a record for net sales.
The 13% growth was primarily driven by the Jack will skin business, which contributed $48 million in the second quarter.
Changes in foreign currency exchange rates negatively impacted second quarter 2019, net sales by $9 million.
On a constant currency basis, and excluding the Jack will skin business.
Second quarter 2019, net sales increased 2%.
This increase is driven by increased sales in the golf ball business and continued double digit growth in the Travis Matthew business.
Gross margin was 46.3% in the second quarter of 2019.
Compared to 48.6% in the second quarter of 2018, which was in line with our expectations.
On a non-GAAP basis gross margins were 47.5%.
110 basis point decrease compared to the second quarter of 2018.
This decrease is primarily attributable to foreign currency headwinds.
And the current year golf equipment product mix of higher priced products.
We generally have lower gross margins due to more advanced technology.
All of which was partially offset by the trying to smack in Jack wants can businesses, which were accretive on a gross margin basis.
Operating expense was $162 million in the second quarter of 2019.
Which is a $44 million increase compared to $118 million in the second quarter of 2018.
non-GAAP operating expenses were $159 million, an increase of $41 million in the quarter.
This increase is primarily due to the addition in 2019 of operating expenses for the Jack most can business, which added an incremental $38 million of operating expense, excluding the nonrecurring acquisition costs.
Operating income was $45 million in the second quarter of 2019 compared to operating income of $74 million from the same period in 2018.
A decrease of 39%.
non-GAAP operating income for 2019 was 53 million compared to non-GAAP operating income of 75 million in 2018.
A decrease of 22 million or 29%.
Which is primarily related to the negative effect of foreign currency as well as the seasonality of injectable skin business, which generally report an operating loss in the second quarter.
Other expense was $9 million in the second quarter of 2019 compared to other income of $4 million in the same period in the prior year.
The higher other expense in 2019 resulted from a $9 million increase in interest expense.
Primarily related to the new term loan entered into in January 2019.
To fund the purchase of Jack Wolfcamp, as well as foreign exchange hedging losses as compared to hedging gains in the prior year.
Fully diluted earnings per share was 30 cents of 95.9 million shares in the second quarter of 2019 compared to 63 cents.
In the second quarter of 2018.
non-GAAP fully diluted earnings per share was 37 cents versus non-GAAP .
Diluted earnings per share of 63 cents in the second quarter of 2018.
This non-GAAP decrease is primarily attributable to the increased interest expense.
Foreign exchange hedging losses.
And the seasonality of the Jack Wolfcamp business, we generally have an operating loss in the second quarter.
Adjusted EBITDA decreased $22 million to 66 million in the second quarter 2019, compared to 88 million in the second quarter of 2018.
We are particularly pleased with this result, given the adverse headwinds from changes in foreign currency and the seasonality of Injectables can business.
Turning to slide 13.
Consolidated first half 2019, net sales were $963 million.
Compared to $800 million in 2018.
An increase of $163 million or 20%.
And another record for net sales.
The 20% growth was primarily driven by the Jack Wolfcamp business, which contributed $141 million in the first half.
Changes in foreign currency exchange rates negatively impacted first half 2009 team that failed by $24 million.
On a constant currency basis, and excluding the Jack will skin business first half 2019 net sales increased 4.5%.
This increase in net sales was driven by the strength of the 2019 got product line.
As well as continued double digit growth in the travel snappy business.
Gross margin was 46.2% in the first half of 2019 compared to 49.2% in the first half of 2018, which is in line with expectations.
non-GAAP gross margins were 47.4%.
180 basis point decrease compared to the first half of 2018.
This decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix of higher price products, which typically have lower gross margins due to more advanced technology.
All of which was partially offset by the Travis Matthew business, which was accretive on a gross margin basis.
Operating expense was $330 million in the first half of 2019, which is a $98 million increase compared to $233 million in the first half of 2018 and includes the first half operating expenses related to the new Jack will is good business.
On a non-GAAP basis operating expenses were $322 million, an increase of $89 million in the quarter.
This increase is primarily due to the addition in 2019 of operating expenses from the Jack Welch can business, which added an incremental $77 million of operating expense.
Excluding the nonrecurring acquisition costs and also reflects investments in the Travis Matthew business normal inflationary pressures.
Operating income was $115 million in the first half of 2019 compared to operating income of $160 million for the same period in 2018.
A decrease of 28%.
non-GAAP operating income for the first half of 2019 was $134 million compared to non-GAAP operating income of $161 million in 2018.
A decrease of $27 million or 17%.
Which is primarily related to the seasonality of the Jack will skin business, which generally reports in operating loss in the first half as well as the negative effects of foreign currency.
Other expense was $21 million in the first half of 2019 compared to other expense of $2 million in the same period of the prior year.
The higher other expense in 2019 resulted from a $17 million increase.
Interest expense primarily related to the new term loan.
Fully diluted earnings per share was 81 cents on 96.2 million shares in the first half of 2019 compared to $1.28 in the first half of 2018.
non-GAAP fully diluted earnings per share was 99 cents versus non-GAAP fully diluted earnings per share of $1.28 in the first half of 2018.
This non-GAAP decrease is primarily attributable to the increased interest expense.
The seasonality that Jack will skin business generally has an operating loss in the first half.
Adjusted EBITDA decreased 18 million to 159 million in the first half of 2019.
Compared to 278 million in the first half of 2018.
Again, we are pleased with this result, given the adverse headwinds from changes in foreign currency and the seasonality and Jack will skin business.
Turning to slide 14, I will now cover certain key balance sheet and cash flow items.
First I'd like to mention that with the strong 2019 first half results, we were able to pay down 30 million on our outstanding term loan debt.
This payment was made in July and therefore is not reflected in our second quarter balance sheet ending June thirtyth.
We now have a principal outstanding balance of $450 million under our term loan B facility that was used to purchase injectables can business.
Available liquidity, which represents additional availability under our credit facilities.
Plus cash on hand was $273 million at the end of the second quarter of 2019 compared to 301 billion at the end of the second quarter of 2018.
Also in July 30, Onest, we closed on a new one your asset based loan facility with M.U.S.G. back in Japan for 2 billion yen or approximately $18 million.
Based upon the exchange rate at the time of closing.
Borrowings under this facility are subject to an interest rate of approximately 1%.
This facility will be used to fund the 2 billion yen purchase price for the remaining 40% interest in the company's joint venture in Japan.
Which manufactures and distributes callaway branded apparel footwear and headwear.
Kelly acquired to 48% interest in May 2019, and the purchase price is payable on August 2019.
Acquiring the minority position gives us full control to improve profitability and provide a platform for multi branded apparel strategy in Asia.
Our consolidated net accounts receivable were $264 million, an increase of 9% compared to $242 million at the end of the second quarter of 2018.
Which is attributable to the addition of a Jack will skin business in 2019.
Day sales outstanding is in the core business is generally consistent with the same period in 2018.
We remain comfortable with the overall quality of our accounts receivable at this time.
Our inventory balance increased by 52% to $360 million at the end of the second quarter 2019.
This increase was primarily due to the addition of the Jack Woolston business as well as an increase in golf equipment inventory in anticipation of upcoming new product launches and inventory needed to support an overall larger core business in 2019.
We remain comfortable with the quality of our inventory at this time.
Capital expenditures for the first half of 2019 or $23 billion, a year over year increase of $6 million compared to the first half of 2018 due mainly to the addition of Injectables good business and the continued investments in our golf ball player.
Depreciation and amortization to amortization expense was $17 million in the first half of 2019.
Compared to $10 million in the first half of 2018.
I'll now comment on our 2019 guidance.
Turning to slide 15, I'd like to note that the non-GAAP guidance, we are providing excludes the non cash purchase accounting adjustments project will scale as well as the OGIO and Travis Matthew and the nonrecurring transaction and transit transition expenses related to the Jack will exclude transaction as well as non recurring advisory fees.
We are raising our 2019 net sales range to $1.685 billion to $1.700 billion, an increase of $7.5 million at the midpoint over prior guidance.
The new guidance implies a 35 and 37% growth over the prior year.
The growth versus previous guidance is expected to be driven by further strengthen our non Jack will screw business, which is currently estimated to grow 7% to 9% on a constant currency basis when compared to 2018.
These estimates assume changes in foreign currency exchange rates in 2019 will have a negative impact of $32 million on 2019 full year net sales.
Compared to 2018.
We are slightly revising our guidance for the full year gross margin to 46.7%.
Which is 30 basis points lower than previous guidance was still 20 basis points higher than 2018.
We are also slightly revising our guidance for full year 2019, operating expenses to $628 million as compared to previous guidance of 630 million.
We are increasing our non-GAAP earnings per share to one dollar tree to a dollar nine compared to previous guidance of 96 cents to one dollarssix.
This increase is being driven by projected increases in new sale operating expense leverage and less interest expense.
Yes, maybe tax rate remains at 20.5% for 2019.
The 2019 figures are based on 97 million shares outstanding.
Consistent with our previous guidance, we estimate our capital expenditures in 2019.
To be approximately $55 million to $60 million, which includes incremental capital expansion expenditures related to the Jack will stick business.
The ball plant and other infrastructure investments for the soft goods Justin.
Capital expenditures were $37 million in 2018.
Depreciation and amortization expense is estimated to be approximately $30 million in 2019.
Which includes 9 billion for the Jack will skin business.
Depreciation and amortization expense for 2018 was $20 million.
This estimate excludes approximately formulate a noncash expense related to the purchase accounting for the acquisitions.
We are increasing our adjusted EBITDA guidance to $280 million to $215 million.
The adjusted EBITDA increase is driven by revenue increases and operating expense leverage we estimate that noncash stock compensation expense will be approximately $14 million in 2019.
We expect third quarter 2019, net sales of $412 million to $422 million, which would represent net sales growth of over 56% compared to 2018.
This increase is driven by the addition of Injectables can business, which was acquired in January 2019.
And an increase in the new product launches, which include epic Star Irons epic flashed, our hybrid genetic ports tires.
As well as continued growth in the trend is Matthew business.
This increase is expected to be offset by $7 million of negative foreign currency exchange compared to the same period in 2018.
We expect third quarter 2019, non-GAAP earnings per share to increase approximately 11 cents to 20 to 24 cents compared to 11 cents in the third quarter of 2018.
We also expect adjusted EBITDAX increased to $48 million and $52 million compared to 22 million in third quarter of 2018.
This increased profitability is expected to be driven primarily by the addition of Jack walk in business.
Net sales increase in the core golf equipment business, driven by new product launches.
Growth in the apparel and accessories businesses.
And for earnings per share by lower estimated tax rate in the quarter compared to the third quarter of 2018.
Keep in mind. These estimates for adjusted EBITDA for the third quarter and full year 2019.
Excluding non cash stock compensation expense.
Purchase accounting adjustments nonrecurring transaction and transition expenses related to the Jack Wolfson acquisition and nonrecurring advisory fees.
One point worth noting is that our guidance is based upon the estimated impact of the Chinese tariffs announced thus far.
Including 25% paraffin headwear bags, another soft goods.
Also known as the list three carriers and that 10% tariff on apparel footwear and golf equipment.
Also known as the list for tariffs.
We currently estimate that the total impact from these tariffs for full year 2019 will be $3.5 million, which is already included in our guidance.
For full year 2020, the tariff impact is estimated to be $5 million.
After 2020, we expect to be fully diversified with no material effect from such tariffs.
Moving to slide 16.
All things considered we are pleased with our first half results and the performance of our golf equipment in soft goods businesses.
We expect to generate good free cash flow this year and as we grow our business.
We intend to use that free cash flow for the benefit of shareholders. As we generally have in the past, but with some change in priority.
That is we will first continue to invest in our business. We are confident we have identified clear opportunities for further investment will unlock synergies strictly gross profit growth prospects and improve margin across the business and as chip mentioned earlier, we already have several key infrastructure projects underway that are expected to continue through mid 2021.
With regard to other investments in acquisitions, we will consider them at the right time, if it fits well with our overall strategy.
Our current focus however is on integrating and growing the brands we already have.
Paying down our long term debt and returning capital to shareholders.
As evidenced by our decision to pay down $30 million.
Of our term loan b debt and repurchase approximately $27 million for our common stock this year.
[laughter].
Consistent with this capital deployment strategy.
The board has authorized the company to repurchase up to $100 million.
Of the company's common stock in the open market or in private transactions.
We knew the new repurchase program replaces the prior repurchase program, which has been terminated by the board of directors.
The remaining 22 million of authorization of the program prior program was cancelled.
The repurchase program does not require the company to acquire a specific number chair.
And it will remain in effect.
[laughter].
Until completed or terminated but important.
That concludes our prepared remarks today, we will now open the call for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And due to the length of today's conference and the amount of analysts on the call. We ask that you. Please limit yourself to one question and one follow up question.
And your first question comes from the line of Steven Zaccone from JP Morgan.
The line is open.
Great. Good afternoon, guys. Thanks for taking our questions. So first first question just on the crop business. We're halfway through the year and was just curious chip for how you see the launches and the phone or competitive backdrop performing versus initial expectations first quarter first half comp sales were up about 1% constant currency, what's the best way to think about the underlying performance across one iron 10, potters relevant to that consolidated growth rate.
Hi, Steven.
I'm pleased with our results I think we continue to have.
Solid or strong performance in our Oh equipment categories.
You know the wheat.
Had the issue this year of having less launches in the first half than last year.
The markets are roughly flat.
And.
You know I think we continue to show strength as a brand if you look at the.
The market share results, where we're number one model driver fairy would with the epic flash.
Number one irons overall number one and number two models number one hard goods in the us.
And Europe number one sticks in Japan.
I'd have to say that.
You know a pretty solid performance and reflective of our technology and brand strength and.
We're obviously expecting another excellent year and we're going to.
Grow significantly faster than the markets overall, when you look at the Big picture.
Great and then just.
Second question just on gross margin.
Could you talk about the decision to lower the full year Guide you know is it primarily efax and tariffs or did something change fundamentally for the second half relative to your prior thinking thanks very much.
Sure.
David the.
If you look at sort of our first half.
As we over performed by about $22 million, and we are sort of giving that $7 million of that the other $15 million for the most part represent earlier stage earlier shipments in Q2 versus Q3.
You know we receive products in our facilities.
At different times, and when they're ready weve shipped them out and so theres, probably a $15 million of that and just some customer orders towards the end that can fluctuate between quarters, depending when a customer picks them up so you probably a $50 million of earlier shipments than was expected and the balance we are moving forward by taking our guidance up in the second half.
If you look at just the gross margin element for the full year. Steven I think that is primarily just FX. It's a very minor change as you can tell 30 bips. So.
On a full year basis.
Getting close to outside of our ability to forecast, but it is indeed slightly down but still up for the full year. So.
Not a significant change we still expect growth and.
Continue to have some FX challenges.
Great Best luck Im a recipe here. Thank you.
Your next question comes from the line of Daniel Embryos from Stephens, Inc. Your line is open.
Hey, good afternoon, guys congrats on the quarter.
Thanks, Dan.
Wonderful open the gross margin question actually.
You noted in the first half Brian that the launch of New high Tech products has weighed on gross margin.
Pretty expansive product launch cadence coming up so is the growth in Jack whats going to more than offset that to drive what's implied to be pretty heavy growth margin expansion in the coming quarters.
Let me take that one if I can Daniel real quick so we do expect more new product launches in the second half of this.
Year on the.
Golf equipment side.
And so that is margin accretive versus last year, so you're going to see an improved performance in the second half, but the issue that Brian brought up.
It is really in the odd number years, and the golf equipment business, where we're going to see.
With products like epic Flash and Atex.
That was our highest technology products, but the cost of those products are also high end. So the gross margin percentage is low and thats going to be the case, its just a normal expected that.
Outcome.
That we will experience on the odd numbered years and.
We do expect the improvement in the second half so we have premium products launching in the second half, but they are really competing against no launches.
In the second half of last year, So, we'll see a margin improvement during the second half.
In that category.
As we will overall.
That's helpful. Thanks, and then to follow up on one of your comments earlier chip around Jack will scan the retail group I think low low single digit organic but high single digit total that seems to imply kind of mid single digit retail unit growth.
Should we expect that level of unit growth or store growth opportunity project will scan or how do you think about that opportunity. Thanks.
You know I am not going to provide any forecast on that going forward, but I do think it was a very important metric for us when you look at their direct to consumer business is 30% of the total business and it's the segment of the business, where we're going to see the.
The fastest and most clear reaction to the changes that we're implementing there whether that be from a product side of our marketing initiatives et cetera, and you know.
So being able to drive double digit growth on that E Commerce side and then.
Comp store growth as well as the overall growth in the retail side.
A very encouraging sign.
And.
Yeah, obviously, our goal is to continue along those trends, but not providing specific guidance around that.
Category itself.
Understood Good luck in the back half.
Thank you.
And your next question comes from the line of Bret Andrews from Keybanc capital markets. Your line is open.
Hey, good afternoon.
Chip if you look across the international golf markets.
How did those Gulf markets play out in the second quarter versus your expectations.
And then when you look into the back half of the year, what kind of growth are you underwriting for the industry.
Brett the it really.
It was.
Yes, very kind of widely I know I'm going to comment on that really for the first half as opposed to the second quarter because those numbers are.
Clear to me.
The U.S. market is roughly flat I think the data tax numbers have it up ever so slightly but not even a full 1%.
Rounds played were down 1% so were going to call the U.S. flat.
The.
Asia markets very the courses as you'd expect Japan struggling a little bit it was down about 8%, but our Japan team has really performed beautifully this year, our inventories has been in great shape and.
We continue to do a very good job there so we're growing faster than the market.
And then Europe has had an excellent year, so that market is actually up 8%.
Year to date.
So as we look at the markets kind of broadly I characterize them as roughly flat, which is roughly consistent with my expectations going into the year.
And we see the markets.
Remaining in good position going into the back half of the year. So.
No real change in expectations.
They are performing consistent with expectations and we are.
We anticipate that continuing.
Understood. Thank you.
And then my follow up Ken can you elaborate any more on the impacts of the list for tariff it sounds manageable for 2018, which is encouraging but how should we start to think about the potential impact on a full year basis in 2020.
You know as we as we stated so with everything so for 19, it's really immaterial.
It's in our guidance and.
It's roughly a million dollars.
Impact so.
As is currently stated.
Now as you projected going forward do you project that as long with the less three or next year.
You know, it's all of that was in place for the full year next year, we'd estimate that at about a 5 million dollar impact for our current business.
We're getting kind of used to this now so we do expect to all this to change.
It seems to change fairly regularly sometimes without notice.
Or very limited notice and we've got a very diversified and strong.
Supply chain.
So that any impact from the China terrorists is going to be nominal.
And by the end of 2020, we believe it would be you know.
Nonexistent.
And that we will have the ability to completely diversify.
So we're in a very good position there and as I.
I tried to articulate I think invest few tuner needs to.
Take into consideration that we're not sensitive to the terrorists I, sometimes wonder that they are confused on that but we are not particularly sensitive to that.
This tariff issue.
Understood. Thank you for the clarification.
Thank you.
Your next question comes from the line of Dave King from Roth Capital. Your line is open.
Thanks, Good afternoon.
First on the on the full year guidance, what sort of contribution.
Are you now expecting for war game versus I think it was 364 million or so last quarter, and then and then more importantly, what's sort of driving the improvement.
In that business versus I think the guidance reduction you had.
Last quarter.
Sorry, so he's asking the revenue at we were changing our full year revenue estimates for Jack we'll see.
Correct.
That's what I'm asking yes, Dave we are not changing our full year revenue estimates for Jack will skin at this time so.
They had a very good quarter.
No we're not.
On the high end of the range that we expected.
With some real clear positives.
But at this point there is no change in the estimates.
That we have for that business for the full year.
Okay, perfect and then switching gears.
In terms of the product launches that you have coming up for Q3.
Can you give just give us some color to help size them up a little bit is Apple star sort of the largest one in terms of versus some of the other two and how should we be thinking about that versus some of the prior similar launches.
Yeah, the epic forged irons I believe are the largest.
A single product category.
And.
How does it it's obviously more than last year.
But.
At or roughly consistent with what it would have been two years ago.
In terms of product cadence last year was a little bit of an aberration and that we really had nothing lot sure nothing substantial launch.
In the second half of the year, we usually do and this is a more normal cadence from that perspective.
And the epic for Giants, the just shipped.
We're hearing good anecdotal feedback on them, we're very proud of them, but.
Too soon to get a read if it's going to be above or below expectations. At this point, but we are as you would expect very optimistic.
Okay, great. Thanks for the color good luck with that.
Thanks, David.
Your next question comes from the line of Mike Swartz from Suntrust. Your line is open.
Hey, good evening guys.
Hi, Mike.
Hey, just wanted to dig into Jack was going a little bit.
Something you said on the call I think we said in the second quarter.
Previous to corporate average gross margin.
Meaning it would have been north of 47.5% I assume.
When we go back and look at.
If you go back and look at the.
That was filed I believe gross margin for that business was around 48%. So my question is how in <unk> I think it's the smallest quarter for Jack will skincare. They have margins that were in line with their full year average and should we be thinking about that north of 48% during the heaviest.
Revenue quarters in the back half of the year.
Yeah, Mike. This is Patrick it is a small revenue quarter, but its a from a direct to consumer perspective. It is a bigger mix of some of the other quarters that are more filling quarter, especially the wholesale markets. So so that's what's driving the margin.
Higher than the 47, 8% that you were talking about.
Okay. That's helpful and just the second clarification question.
Chip I think you said that terrorist in 19 will be did I hear.
3 million dollar headwind and then 20, either a 5 million dollar headwind and if so is that on a net basis, meaning is that after taking mitigate mitigating actions or is that gross before you would do anything.
That's that's net Mike So I think we said three and a half of this year all of which is in our current guidance estimates and then if it was in its current position there would be 5 million.
And is that.
No weve already forecasted what are mitigating factors would be et cetera. So that is our best estimate at this point in time.
The 1 million shipped okay great.
1 million ship referred to before was just for the new 10% tariff on lets for the other two and a half dozen from previous.
Okay. Thanks for the clarification.
Thank you Mike.
Your next question comes from the line of Randy Konik from Jefferies. Your line is open.
Hi, Good afternoon, Mrs. Anna on for Randy I'm in terms of Truvis are you still seeing some capacity constraints, there and when should we expect capacity to get closer to a catching up with demand.
Hi, Anna Chip no. We are now no longer capacity constrained on that.
Product.
That.
That issue is resolved.
Probably.
Earlier this year so.
Not not an issue going forward.
Got it thanks, and then could you speak a little bit more on the rationale behind the new DC in Texas, and then anything to call out there in terms of startup costs.
Nothing to call out on startup costs yet it's.
You know, they're they're breaking ground now and just building that facility. So that will be a consolidated facility multi brand well, we'll be able to have the callaway brand.
Consolidate both our existing DC as well as some outsourced efforts to some degree.
The Travis Matthew.
Brand and when were ready the Jack will skin North America brand into one facility.
We'll be doing that all during the year next year.
And long term that gives us much more capacity and greater efficiency than where we're currently operating it it's one of the synergies of our.
Scale and structure.
That we are able to do this and.
I will deliver the benefits for us in North America and more.
Doing similar projects really on a global basis.
Got it thanks very much thank you.
Your next question comes from the line of Susan Anderson from B. Riley FBR. Your line is open.
Hi, good evening.
And I guess looking out to the back half I think last quarter. You had talked about you are expecting some lower orders for the second half I guess I was wondering if that's still the case.
Sure Susan.
A couple of the hero products. The one was as Pat can go product, which is really an interesting or I know you specifically saw it at the.
Trey EXFO, but the.
That has done beautifully you know across their businesses so across the direct to consumer E com and both in China and in.
The Central Europe market, a great example of innovation that.
That team was able to invest in and then.
We were able to.
By adding capital resources do a better job marketing communicating so.
That would be the hero product that I would call out.
The the Europe market I guess on a relative basis.
Did well really strong performance in the direct to consumer side direct to consumers roughly 30% of their total business.
China had a good quarter as well but.
Probably a little tougher market conditions, there fairly competitive marketplace, we still love our position there.
Encouraged by that management team et cetera, but.
They are they are fighting a little harder than the European team, which had a.
At a really nice quarter.
And the reason, we didnt change our expectations for the full year is still that lower pre book order situation, which really will affect Q3.
We have fairly high visibility on that as you would expect so that's one of the nice things about this type of business is soft goods business.
You have pre books and they're a considerable portion of the total revenue mix in the time, where they shift.
And.
So.
But.
That situation is still.
In front of us and part of our expiry expectations for Q3.
Okay.
You broke up there Susan.
And we've lost Susan but your next question comes from the line of Casey Alexander from Compass Point. Your line is open.
I Hope I don't ask a question that gets me drowned.
Hi that Britain director that was not as Kate Spade.
[laughter] well I've asked questions before they got a similar risk so.
That was a different.
Management fees.
Yeah, Okay, well I have a couple of questions one sort of you know I am always yes.
So look for low hanging fruit, rather than 10 basis points somewhere so in.
The Dallas Super hub.
Is it is it in the anticipation of your plans that that would be ready at some point in time next year and seeing as how Jack will skin is a second half product that it could be ready in time for a broader distribution of Jack will skip products in North America, and similarly was part of the point of the Japanese joint venture buyout also because maybe there were some terms or exclusions that prevented you from introducing other branded products that you own in that market.
That's on the first one yes, the Jack will skew in North America launch will be handled directly out of the the new DC. So.
There is no DC services, we have very little business for Jack was going in North America, and there is no DC, so basically shifts from.
Germany, which is incredibly inefficient.
And we plan to launch when we do launch for Jack will stand out of this.
DC so.
Correct on that.
On the Japan, there were no terms that would have been impacted our ability to.
Do anything with Jack will scan or Travis Matthew or the like.
But we do see.
Synergies of now that we own 100% of that business.
Being able to share back offices theses.
Other.
Structural an infrastructure that will create significant.
Savings and operational efficiencies.
Through the acquisition of it and.
When we were able to do that and also finance it at.
Approximately 1% it seemed like a good idea for shareholders.
Yes.
Hey, Hey, again.
I'm not sure that you were specific to the point of was it in your expectation that Jack will scale could be launching broader in North America by the second half of 2012.
Yes, it is absolutely been our plan for that.
Okay, and then secondly, and if you don't want to comment on this this is fine but would you care to provide any insight with your and the board's communication with Jana partners sure Casey happy to do so.
You know.
Of course, we've been in contact with Jana as we would with any significant shareholder who wants to engage with us.
It's our policy not to comment on the specifics of any private conversations with those shareholders, though so.
Theres follow up would leave it at that.
All right great. Thanks for taking my questions I appreciate it thank you Casey.
Your next question comes from the line of George Kelly from Imperial Capital. Your line is open.
Hi, guys. Thanks for taking my questions.
So just a few for you chip.
I think I heard you say in your prepared remarks that.
The industry has a lot more rational this years. Its I think you were mostly speaking about the retail environment in pricing.
So just wondering if I heard you right if it's a lot different than it was.
There is a go.
And how does that change your thinking about your balance sheet does it give you more comfort taking.
Risks with your your balance sheet.
I think that the I'm not sure if I said the industry is more rational in this call or not but I think I have in previous so I definitely believe the industry is.
A more structurally sound.
And that includes you know higher average selling prices less excess inventory.
Consolidated.
Environment out there et cetera, which.
Does give us more confidence so when I talk about the golf equipment business now you hear me talk about it as a.
A large stable.
Environment and.
So I think yeah, I guess, it does give us more confidence and.
As it relates to.
You know, what how that impacts to our capital structure.
It's not implicit as we think through that that we would be more or less risk averse.
We are.
Balancing needs there as you can see and growing the business.
With sometimes using outside capital.
But we obviously want to be conservative in that and we believe we're managing that accordingly, we were pleased that were able to repay 30 million of debt during the quarter and.
We feel confident in the outlook and positive cash flows of the business.
Okay. That's helpful and then second question.
About check will skin.
So previous question Wes Wes person was asking about the.
Some of the investments for us distribution next year.
And so my question is about.
You mentioned in your prepared remarks that you.
I think you said you're seeing.
More synergies than originally expect yes, so I'm just trying to pass the sort of margin outlook as you make these investments and distribution into new geographies and ecommerce and all that kind of stuff how should that slow over the next couple of years not looking for specific guidance, but.
Well you know it will take us. Some you know we're going to be measured in these investments. These are going to be bet. The farms, nor do we think that you know these are.
Central to the investment thesis in Callaway, nor is it.
A.
Central point for our returns in our you know, but we do think theres upside there and we're going to be making measured investments in these key markets.
If we're successful the markets are large and the categories are large so the upside is significant.
The investments will be such that they will be you know a slower returns that start during the early stages, we're going to be spending some money.
With zero return.
During the you know.
Stages immediately following that.
We'll start to see some revenue that revenue will be modest.
And the returns that could be breakeven during those periods of time.
But if our expectations followed then we're going to deliver attractive returns.
Over the medium to long term so.
There is a a journey we're going to be going on here that I think has a lot of excitement for shareholders.
You'll have to.
Trust Us and look at our track record that we're going to be measured in that.
But.
The returns are certainly there and.
If you look at any medium to long term it should be an exciting opportunity for all of us.
Thank you.
Thank you George.
Your next question comes from the line of Joe Altobello from Raymond James Your line is open.
Thanks, Good afternoon.
Question on the equipment side it looks like profitability remains under pressure is that simply tough compare given the launch timing was there a competitive dynamic at play and maybe secondly to that how much is the second half launches improve margins for the equipment business sure. Joe I would agree with you that the equipment profitability is under pressure, it's down year over year due to FX and the fact that.
In the odd number years on the equipment business, we launched a higher value added products such as apex.
And the.
At the epic Flash and those have lower gross margins.
So.
All of the equipment profitability is what we expected.
Plus FX and now we are going to see improvement in that during the second half.
But the characteristics that are.
You know reflects itself in these odd number of years is doing what we expected it to do and ER.
Not really we're not we're not viewing it as being under pressure per se.
Okay. Thanks, and then maybe secondly for Jack will Skip you mentioned earlier that the outlook for sales is unchanged.
The EBITDA, our EBITDA outlook is unchanged as well and and if so what was the EBITDA drag for that business.
The Joe you're correct.
It does not we're not changing our.
Our estimates nor as and as we stated we're not updating them on a quarterly basis for that specific segment.
And then your question specifically, what the EBITDA drag was in Q2, I think correct, yes and.
We really don't break out we break out the revenues by.
Quarter for you, but not the.
The EBITDA contribution although as we've stated.
Oh times, it is a quarter where they.
Generally are routinely do not make money.
Okay.
Thank you guys. Thank you.
And your next question comes from the line of Alex Murray, Our CFO from Berenberg. Your line is open.
Hey, good evening guys. Thanks for taking my question.
So earlier this year you said that Q3 for Jack is about three to four times. The size of Q2 would you expect the light pre books to affect the revenue mix between DTC and wholesale versus where it's been historically for the last two quarters.
Ah Alex Yeah, I would think it would.
Okay.
And are you able to provide a bit more info about the the sales split is it going to be roughly the same as previous as well.
The sales split into three bits that between Q3 and four.
Oh in that particular business unit.
Yes.
I don't have that information Patrick do you have anything yet at a high level light because there is a little bit more sell in of of wholesale their Q3 is probably a little less DTC than Q4.
Probably very similar to Q1 versus Q2.
Talked about that I think 40% of their revenue is Q3, so we have talked about that and 40% of the full year.
Yes.
And we're not seeing any different than that right now so okay.
All right Thats helpful and then one more from you.
So after seeing the weaker numbers unexpected from a competitor on the golf ball number as well as the poor weather.
I was pretty impressed by you guys having growth year over year can you just provide a little more info on the market share at the moment and how you're driving those market share gains.
You know Alex.
Thanks for noticing.
[laughter].
We are and I think that in fairness, we had no comment on competitors, which obviously, we have a ton of respect anymore, but if you just focus on our business we have.
You know relatively consistently beaten the golf equipment market. So this is what we expect from ourselves.
And.
You know one of the confusing items as you look at our market shares our market shares are down a little bit.
But it's reflected in that our market share is only measure a portion of the business now. So that's one of the reasons I don't report out on them they are still directionally.
Important theres still a metric that matters.
But you can see in our actual revenues that were driving results that are.
Above that you know, we have really good strength and breadth of distribution and ER.
You know very broad product lines as we stated we were up every every product segment every region.
On a currency neutral basis for the first half and.
Pleased with that.
You know we've invested aggressively over the last few years in technology, and marketing resources et cetera that.
Are all aimed at delivering these types of results and we're pleased that we're able to do it.
We are optimistic for the second half as well.
All right great. Thanks, a lot good luck the quarter.
Thanks, Alex.
And that's all the time, we have for questions I will now turn the call back over to Mr., Kip Chief Executive Officer for some closing remarks.
Well, thank you everybody for making the time for today's call our comments were longer than normal and.
I apologize for that I appreciate everybody's patience, we had a lot to talk about and ER.
We look forward to speaking with you again and the end of Q3. Thanks, so much.
This concludes today's conference call you may now disconnect.