Callaway Golf Company (CALY) Q4 2015 Earnings Report, Transcript and Summary

Good Day. My name is Victoria, and I will be your conference operator. At this time, I would like to welcome everyone to the fourth quarter 2015 Callaway Golf earning conference call. [Operator Instructions] I would now like to turn the call over to Patrick Burke, Head of Investor Relations. Sir, you may begin.

Thank you, Victoria, and good afternoon, everyone. Welcome to Callaway's fourth quarter 2015 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; and Robert Julian, our Chief Financial Officer. I would like to point out that any comments made during the call about future performance, events, prospects or circumstances, including statements related to estimated 2016 net sales, sales growth, gross margins, operating expenses, pre-tax income, taxes and earnings per share, future cost savings, industry or market conditions, market share gains or brand momentum, the success of the company's future products, long-term profitability or performance, the creation of long-term shareholder value, the collectibility of accounts receivable and salability of inventory, the reversal of the valuation allowance or the use of the NOLs, estimated 2016 capital expenditures and depreciation and amortization expenses, the negotiation and completion of the joint venture in Japan and other future corporate development opportunities, including the timing for projected financial effect of such initiatives as well as other statements referring to future periods and identified by words such as believe, will, could, would, expect or anticipate, are forward-looking statements subject to Safe Harbor protection under the federal securities laws. Such statements reflect our best judgment today based on current market trends and conditions. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties applicable to the company and its businesses. For details concerning these and other risks and uncertainties you should consult our earnings release issued today, as well as Part 1 Item 1A of our most recent Form 10-K for the year ended December 31, 2014, filed with the SEC, together with the company's other reports subsequently filed with the SEC from time-to-time. Also during the call, in order to provide a better understanding of the company's underlying operational performance, we will provide certain of the company's results and projections on a constant currency basis, which essentially excludes all foreign currency gains and losses recorded during the applicable period and applies to prior period exchange rates to the adjusted current or future period financial information, as those such prior-period rates were in effect during the current or future period. We will also provide information on the company's earnings, excluding interest, taxes and depreciation and amortization expenses. This information may include non-GAAP financial measures within the meaning of Regulation G. The information provided on the call today and the earnings release and related schedules we issued today include a reconciliation of such non-GAAP financial information to the most directly comparable financial information prepared in accordance with GAAP. The earnings release and related schedules are available on the Investor Relations section of the company's website at www.callawaygolf.com. I would now like to turn the call over to Chip.

Thanks, Patrick. Good afternoon, everybody, and thank you for joining us for today's call. 2015 was an excellent year for Callaway Golf, which included with a very strong quarter. In the quarter, we grew our business 14% on a GAAP basis or 19% currency-neutral, showing broad-based growth across both product categories and regions. For the year, our highlights include significant improvements in market share along with further strengthening of our financial position, including marked improvements in gross margins and the elimination of all long-term debt. Most importantly, the company has recaptured key leadership positions in our club business and developed a profitable and growing ball business. I'd like to start by thanking Callaway Golf team for their hard work and commitment to strengthening our business. The team has done a remarkable job changing this business for the better, and I want them to know how much we all appreciate their efforts. Let's start by taking a deeper look in our 2015 performance by region. In the U.S., our revenues grew nearly 6% and our hard goods dollar market share was 21.1%, up 260 basis points or 14% year-over-year. This is our highest market share since 2003 and represents a 52% improvement over the last three years. We were up significantly in irons, putters, hybrids, wedges and ball. We finished the year as a number one selling brand, looking at Datatech data at retail and green grass sell-through combined, in fairway woods, hybrids, irons, putters and total clubs and as a number two brand in golf ball and drivers. We also made excellent progress in growing our distribution sell-through strength in the green grass channel. In Asia, our revenues were down, reflecting challenging market conditions in dramatic foreign exchange movement. Our market shares remained strong though. In Japan, our hard good share was 15%, up 40 basis points year-over-year and sustaining our position as the number one American club brand in that market. Turning to Europe, we had another very strong year. Our constant currency revenues grew 7% and our most recent market share data through November for that market has us at 20.7% for the year, up 220 basis points year-over-year and placing us as a number one selling hard goods brand for Europe. Moving to the operational side of our business. Our cost management and overall operating efficiencies continue to drive upside in our business. Our full year gross margin was 42.4%, an improvement of 200 basis points year-over-year and exceeding our expectations. In support of this, we are becoming world-class in our supply chain, including custom fitting, which was up 24% in the U.S. during 2015. We are also working on further improvements, such as the recent startup of our U.K. superhub distribution center. The superhub located outside London in Swindon, England, is a shift from a third-party distribution center to our own facility, which we believe will lower our cost and improve our service levels across the European market going forward. We also finished the year with a stronger balance sheet and no debt, a position that lowers our costs and provides financial strength to support strategic opportunities, if and when they develop. Turning to the product front. We enter 2016 excited about an extensive new line of ball, accessories and clubs. In particular, we're optimistic regarding our core growth in our ball driver and irons categories over the next year. The new XR 16 driver is a significant product for us and should allow us to gain market share in the driver category this year. The product was designed in collaboration with aerodynamic experts from Boeing, thereby allowing us to make it exceptionally fast as well as wonderfully forgiving. Based on my observations, I think it's one of the best drivers I have ever seen, and it will appeal to a wide section of the golf market. It is already widely in play on tour, and I've seen it well golfers of all ability levels at demo days. Turning to irons, we're excited about the new Apex irons, which incorporate cup-faced technology for the first time in a forged construction, and we're the only game improvement irons in the 2016 Golf Digest Hot List to receive five out of five stars for performance. Apex is our premium iron brand. They combine performance, feel and esthetics in a way that makes them a statement product for us. In the iron category, overall, we've regained our rightful number one position based on our cup-faced technology, which was first launched in Q4 of 2014. This is a strategically important accomplishment for us, which we are very proud of and committed to sustaining. As a result, we have moved all irons to a two-year lifecycle, and thus we will have less new product during the first half of this year, but we anticipate making up ground in the sell-through season in the second half of the year. Lastly, on the product side, let's spend a minute talking about our ball business. Golf ball is now up, profitable, $140 million category for Callaway. Over the last year, we have grown the business nicely, finishing 2015 as the number two ball in the U.S., but we still only had an 11.4% shares, so there is still significant upside. In Q4, our overall ball shipments were up 46%, reflecting timing of some key account programs, and most importantly, a significant increase in retail sell-through. Datatech showed a 29% increase in year-over-year sell-through dollars for the U.S. market. As mentioned previously, both Supersoft and Chrome Soft have exceptionally high net promoter scores. Chrome Soft, in particular, has the highest net promoter score we've ever achieved. We will be building on our position here by launching the new Chrome Soft 16, which has the same great feel of the original Chrome Soft, but with greater consistency and a slightly faster ball speeds on the driver. This was made possible by a slight change to the mantle layer and the addition of a proprietary dual core. It is the outcome of a year of countless prototypes and testing on tour with the world's best players, including significant input from sales. Looking forward, as we move through the turnaround stage and have reestablish profitably and financial strength, we are beginning to dedicate increased resources and time to business development and future growth initiatives, both in our core business and in tangential areas. To this end, we're excited to report that we've reached agreement in principle for a Japan-based JV with TSI, a long-term apparel partner in that market, which is budget to start up in the second half of 2016. By moving from a licensing model to a 52%-48% JV, we believe we will be better aligned to jointly invest in and grow this business. For 2015, the net costs have budgeted to offset the benefits. However, we believe it will be accretive for 2017 and be an increasingly attractive proposition in the long-term. In addition to the TSI JV, we have also begun investing this in proprietary projects that we think have long-term potential. And lastly, we are now interested in opportunistically and thoughtfully exploring acquisitions and new ventures. We have staffed conservatively to support exploring opportunities here and are also increasing Investor Relation activities. As has been our trend over the last few years, we are pleased with the overall direction of our company. For 2016, on a constant currency basis, our guidance projects a significant increase in EPS with modest overall revenue growth. Most importantly, however, I am increasingly optimistic about the trends and long-term outlook for Callaway in the golf industry at large. Our relative position in the industry continues to improve, we have shown ourselves to be a formidable competitor and our organization continues to strengthen. Market shares and gross margins are excellent indicators of this. The fundamentals for the sport of golf are also improving. U.S. participation has stabilized and I believe interest in the game is growing. The popularity of the game's young guns, the addition of golf to the Olympics later this year and other initiatives including Top Golf are reason for optimism regarding the game at large. On top of all this, industry conditions and behavior are improving. On a global basis, retail sell-through is stabilizing, product lifecycles are lengthening, there has been less overall promotional activity and average selling prices are increasing. The average selling prices in the U.S. were up 9% overall last year. This improvement is being masked by significant foreign exchange movements as well as inventory reductions at retail. In the U.S., again, retail inventory for clubs were down 13% last year overall. This inventory reduction trend is playing out on a global scale. And although it creates a current headwind, we believe it is positive for the long run profitability of our industry, and that the trend will favor large scale brands like Callaway to our brand strength and operational prowess. In closing, I am confident that Callaway Golf is in a much stronger position today than it has been in quite some time. I'm proud of what we have accomplished over the last few years and optimistic for the future. Robert, over to you.

Thank you, Chip. Today we are reporting consolidated Q4 2015 net sales of $153 million compared to $135 million in Q4 2014, an increase of 14%. Foreign currency variances negatively impacted revenues by $7 million in Q4. So on a constant currency basis, year-over-year net sales increased 19% in Q4. Looking at Q4 revenue on a regional basis, net sales in the U.S. increased 38% to $69 million. Net sales in Europe increased 11% to $21 million. On a constant currency basis, Europe's Q4 sales increased 20%. In Japan, net sales decreased by 10% to $35 million in Q4 2015. This is a 5% decline on a constant currency basis. For the rest of Asia, net sales in Q4 2015 increased by 14% to $18 million. On a constant currency basis, net sales for the rest of Asia increased 20%. Net sales for other foreign countries' declined by 7% in Q4 2015 to $10 million. However, on a constant currency basis, other foreign countries net sales increased by 9%. Gross margin was 33.3% in Q4 2015 compared to 27.4% in prior year, an improvement of 590 basis points. This increase was driven by favorable price and mix variances, less closeouts, less promotional activity and continued operational improvements. This favorability was partially offset by increased cost related to new product technology and negative foreign currency variances. Operating expense was $80 million in Q4 2015, a 6% increase compared to 2014. This increase was primarily due to increased sales and marketing expenses and higher employee costs. However, operating expenses as a percentage of revenue improved 400 basis points in Q4 2015 versus prior year, on the strength of higher revenues. These results generated an operating loss of $29 million in Q4 2015 compared to an operating loss of $39 million in Q4 2014, which is a year-over-year improvement of 25%. We had other expense of $600,000 in Q4 2015 compared to $450,000 in prior year. This change was due to the net impact of changes in currency rates on outstanding foreign currency hedging contracts. These expenses were partially offset by a $900,000 decrease in net interest expense related to the conversion of our convertible notes in 2015, combined with reduced borrowings under our asset-based credit facility. The company generated a net loss of $30 million in Q4 2015 compared to a net loss of $42 million in 2014. Earnings per share improved to minus $0.33 on 92 million shares in Q4 2015 compared to minus $0.54 on 78 million shares in 2014. On a constant currency basis, Q4 2015 earnings per share are minus $0.29. Returning to net sales, I would like to provide some more details by product category all on a constant currency basis. Wood sales were $37 million in Q4 2015, a 1% increase versus Q4 2014. This was due to the success of our Great Big Bertha drivers and fairway woods, relative to the Big Bertha Alpha 815 and Big Bertha B Series drivers in prior year, partially offset by a decline in sales of Big Bertha Hybrids. Iron and wedge sales were $44 million in Q4, an increase of 15% versus prior year. This was driven by the successful launch of our Apex irons as well as continued success of our Mack Daddy 3 wedges. Putter sales were $14 million in Q4 2015, an increase of 59% compared to last year. We had continued success with our in-line putters, driven by the success of our Odyssey Works putter line. Golf ball sales were $31 million in Q4, an increase of 51% compared to prior year. This was due to the continued success of our Chrome Soft golf ball combined with an increase in sales of our Supersoft line of balls. Accessory and other sales were $34 million in Q4 2015, an increase of 12% compared to prior year. Now, turning to the balance sheet. We ended Q4 2015 with cash of $50 million compared to $38 million for Q4 of 2014, a 32% increase. Regarding our asset-based credit facilities, we had borrowings of just under $15 million at the end of Q4 2015, essentially flat compared to 2014. Available liquidity at December 31, 2015, including cash, improved to $148 million, a 60% increase versus prior year. Our consolidated net receivables were $160 million at the end of Q4 2015, an increase of 5% compared to 2014. However, DSO decreased to 69 days compared to 75 days in 2014. We remain comfortable with the overall quality of our accounts receivable. Our inventory balance was $209 million at the end of Q4 2015, an increase of 1% compared to Q4 2014. We remain comfortable with the quality of our inventory at this time. Now, I would like to discuss full year 2015 results. For the full year 2015, we are reporting consolidated net sales of $844 million compared to $887 million in prior year, a decrease of 5%. Foreign currency variances negatively impacted revenue by $53 million. So on a constant currency basis, year-over-year net sales increased by 1%. Looking at full year 2015 revenue on a regional basis. Net sales in the U.S. increased to $446 million, a 6% improvement over 2014. Net sales in Europe decreased 7% to $125 million. However, on a constant currency basis, Europe sales grew 7% compared to 2014. In Japan, net sales declined 17% to $138 million in 2015. This equates to a 5% decline on a constant currency basis. For the rest of Asia, net sales in 2015 decreased by 22% to $17 million. On a constant currency basis, net sales for the rest of Asia decreased by 17%. Net sales for other foreign countries decline by 15% in 2015 to $64 million. On a constant currency basis, other foreign countries net sales were relatively flat. Gross margin was 42.4% for full year 2015 compared to 40.4% in 2014, an improvement of 200 basis points. Foreign currency variances had a negative impact of 310 basis points on gross margin for the year. Therefore the change in gross margin versus prior year, excluding the impact of foreign currency, is an improvement of 510 basis points. This increase was driven by favorable pricing in woods and irons, better mix in balls due to the performance of Chrome Soft and the extension of lifecycles on irons, which resulted in less discounting. We also benefited from favorable manufacturing variances in our club assembly operations and golf ball manufacturing operations. Full year 2015 operating expenses were $331 million, an increase of 1% over full year 2014. Sales and marketing expenses were lower in Japan, China, Canada and the U.K., due to economic conditions and favorable currency variances. This was offset by higher U.S. marketing and tour spend and higher employee cost. The company generated pre-tax income of $20 million in 2015 compared to pre-tax income of $22 million in 2014. On a constant currency basis 2015 pre-tax income was $58 million, a year-over-year increase of 164%. Earnings per share was $0.17 in 2015, a decrease of $0.03 compared 2014 results. However, on a constant currency basis 2015 earnings per share was $0.62, a 210% increase over 2014. Total net cash flow for full year 2015 was $12 million compared to $1 million in 2014, an improvement of $11 million versus prior year. Lower net cash flow from operations and negative foreign currency changes were more than offset by reduced use of cash and financing and investing activities. Capital expenditures for the full year 2015 was $14 million compared to $11 million in 2014. Depreciation and amortization expense was $17 million in 2015 compared to $21 million in 2014. Full year 2015 EBITDA was $46 million compared to $52 million in 2014, a 12% decrease year-over-year. However, the negative impact of foreign currencies on EBITDA was approximately $40 million for the full year. I'll now comment on our Q1 and full year 2016 guidance. For the first quarter of 2016, we estimate net sales to be in the range of $270 million to $280 million compared to $284 million for the first quarter of 2015. On a constant currency basis, net sales in Q1 2016 are estimated to be $275 million to $285 million. This currency-neutral growth projection of flat-to-slightly negative is driven primarily by product launch timing and the trend towards lower inventory in the retail channel, offset by continuing share gains. For the first quarter of 2016, we estimate earnings per share to be in the range of $0.33 to $0.39 compared to $0.39 in 2015. In constant currency, the Q1 2016 earnings per share estimate is between $0.36 and $0.42. We estimate the Q1 2016 currency-neutral earnings per share to be approximately flat to 2015, due to lower sales volume offset by higher gross margins, which continue to be positively impacted by better pricing, lower closeouts and improved operational efficiencies. We estimate full year 2016 net sales on a GAAP basis to be in the range of $845 million to $870 million. This GAAP estimate includes approximately $19 million of negative currency impact. On a constant currency basis, the 2016 full year sales estimate equates to a range of $857 million to $882 million. This currency-neutral growth of 1.5% to 4.5% is driven by our continued success in the marketplace along with stabilizing industry fundamentals in 2016. I would like to mention here that our joint venture with TSI in Japan is projected to have minimal effect on our revenue in 2016, as the startup will not occur until some time in the second half of the year. However, for context, TSI has historically generated revenue in the range of $30 million to $35 million per year, and we expect that our partnership will lead to future growth and profitability for this business going forward. Full year 2016 gross margin is estimated to be 43.5%, an improvement of 110 basis points versus full year 2015. This improvement is due to continued performance in our manufacturing operations and supply chain, improved sales mix and higher prices in 2016. On a currency-neutral basis, gross margin is estimated to be 44.0% for full year 2016, representing a 160 basis point improvement versus prior year. Operating expenses are estimated to be approximately $345 million for full year 2016. This compares to $331 million in 2015. The increase primarily relates to investments in corporate development, including our new joint venture in Japan as well as other current and future business development projects, normal inflationary cost increases and some one-time cost benefits that occurred in 2015 that will not repeat in 2016. Finally, our 2016 earnings per share estimate on a fully diluted basis is a range of $0.15 to $0.25 per share on 95 million shares outstanding. On a constant currency basis, our full year 2016 EPS estimate is a range of $0.22 to $0.32 per share compared to 2015's results of $0.17 per share, an increase of 59% at the midpoint. These figures include a tax provision estimate of approximately $6 million. We estimate our capital expenditures to be approximately $15 million and our depreciation and amortization expense to be approximately $18 million in 2016. Finally, I would like to mention that our current estimates for 2016 do not include any non-recurring, non-cash charges or benefits. For example, we did not include any impact related to the tax valuation allowance on our deferred tax assets. However, as Callaway continues to demonstrate sustained profitability going forward, we expect that this valuation allowance will eventually be reversed. This will generate a large non-cash income tax benefit at that time. It will also result in an increase to our overall estimated effective tax rate to approximately 38.5% at that time as well. Of course, our cash taxes will continue to benefit from our after-tax NOL's of $96 million for some period of time going forward. That concludes our prepared remarks today. We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Lee Giordano from Sterne Agee.

Chip, I was wondering if you could comment a little bit more on the industry and maybe your key takeaways coming out over the PGA Show, a couple of weeks ago. Just seems like things are moving in the right direction. It seems like you're pretty positive. And then any other color you could provide will be helpful?

The industry had a improved year. The trends overall have been moving in the right direction. Certainly, in the U.S. retail sell-through was up last year. The mood and momentum of the business appears to be positive. And there was energy at the PGA Show, both at the demo day and then Wednesday, Thursday. The attendance was up significantly, and the polls and mood of the show as well as specific to Callaway were all positive. If you looked at the Datatech data, although up for the full year, it was a little bit softer than we had expected in November, December. And I really wouldn't read too much into that. There were some timing of launch changes among the different brands and such, but the macro trends for the industry have been positive over the last year and we're pleased with that as well as our brand momentum.

And then just secondly, can you breakout or give us anymore color on the cost for the JUV in 2016 and how that's going to impact operating expenses?

Lee, we're not going to get into much specifics there. It's slightly negative on a contribution basis for 2016, but we're obviously very optimistic on the long-term of this opportunity, and both, expect it to be accretive in '17 and to provide us a nice growth opportunity going forward.

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

Just wanted to follow-up on the new Japan JV that you announced. How will you be accounting for that in the P&L? Is that consolidated and then your partner share backed out or that just be coming through unlike in other income line?

Mike, it was the first that you mentioned. We will consolidate the results, we will see the full revenue and cost of sales and then the profitability will be split 52, 48 on the bottomline.

And then also just with regards to the first year guidance and just thinking of the cadence to the year. Could you just give us a little more color on the timing of product introductions and how that's impacting kind of, I guess, the first quarter, second quarters spilt?

Glad to do that, Mike. On the first quarter, one of the changes that we made over the last few years is lengthening some product lifecycles, and you can see that playing out well for our business. Part of that includes the XR Irons, which were launched in Q1 of 2015 and had a phenomenal year. XR was the number one selling iron models and Callaway returned to being number one in that important category for us. We won't have as big a launch of irons in Q1 of this year, so you will see a little shift in timing there. But we anticipate that we'll make that up in the sell-through season in the second half of the year.

And then just final question. I think on your prepared remarks, Chip, you commented just on the new XR 16 Driver and had some more comfort with, I guess, market share gains in the year ahead. Could you just give us a little more, I guess, color on why you're so confident in that product?

Sure. First of all, real simply, it's just a fantastic product. We were able to partner with Boeing in terms of improving the overall aerodynamics of that product in a way that I think is a comparative advantage in the marketplace. You combined that with our internal expertise and we end up with something that I think is both fast and forgiving and will be differentiatingly positive in its performance for consumers. We clearly have brand momentum. And so going into that category for next year, I expect that XR 16 Driver to do better than the predecessor products and I'm also optimistic on the Great Big Bertha Driver relative to its predecessor. So product team does a great job here. We have good brand momentum. And that's one of the areas within our core. I think you will see some continued progress.

Next question comes from the line of Scott Hamann with KeyBanc Capital Markets.

In terms of the gross margin, can you kind of give us a little bit of color around what's some of the big buckets? I mean, you highlighted the buckets, but just order of magnitude with what drove '15 and then what you anticipate it's going to look like for '16? It seems like there have been a lot of price and mix driving gross margin over the last couple of years. And I'm just curious if there is some additional buckets maybe on the operation side that Leposky is trying to hammer out there that might be something we quite haven't seen yet?

Scott, so speaking about gross margins on a full year basis, and we've talked about the currency-neutral improvement of about 500 basis points, its split between two major buckets. And the first bucket is, as you mentioned, sort of price and mix and the impact of us being less promotional, less discounting. And the second bucket is the operational improvements. And I would say that on a full year basis, actually the majority, maybe two-thirds to three quarters of it is coming from the first category. We've got a lot of improvement relative to price and mix and discounting and so on, although a good third of it also came from operational improvements. The operational side, we will approach and Mark Leposky, as you mentioned, will continue to approach in a continuous improvement-type attitude, and so we think we should always have some benefit for that going forward. On the pricing and the promotion discount that's tied somewhat to our market share position. The more that our products are successful and well-received and when we maintained share we'll get benefit on pricing and discounting and less promotional.

And then, Chip, can you talk a little bit about -- you mentioned green grass distribution in your prepared remarks. And I'm just curious, if you kind of elaborate a little bit on some of the initiatives that you put in place throughout the winter here and how much progress you might have made in getting some more distribution there?

Yes, the sales team has really done a nice job growing the green grass channel over the last few years, Scott. And it's a very important channel for us. There is a real positive brand impact by doing well in that channel that over and above its dollar contribution. But then equally importantly in the golf ball category, the green grass channel is very significant. According to Datatech 45% of the golf ball category comes from that channel. So it's important for us to strengthen our position there and we've been doing just that. We've been increasing our relationship with PGA pros, increasing the number of stat pros that are associated Callaway deepening those relationships and increasing our distribution in that channel. So a trend that we've been working on for some time and really like our results, and they're optimistic that you're going to see more of that going into 2016.

And then just final question on, there was an investment of just under $1 million in a golf related venture, is that safe to say that was TopGolf?

Yes.

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

Can we explore, I guess, more appropriately the golf ball opportunity, because it's got really good margins, its building really good margins here, and it improves kind of the consumable aspect of your business. So I guess my question is, I guess, from Chip's perspective, how do you think about where long-term penetration of the ball business relative to club business would be over the long-term? And then I guess, Robert, from your perspective, it seems like there is a more margin extension opportunity through fixed cost leverage in the ball business. I'm just trying to get a sense of where you think the margin structure of that particular category can go over the long-term?

Sure, Randy, good question. And you're exactly, right. The golf ball category has a lot of benefit to it. We're currently at 11.4% market share. We've made a nice move over the last few years. We're showing nice growth, 10% growth on a currency neutral basis for the full year, stunning result in Q4. And for the first half of the year, we were actually not showing growth, even though we knew we were doing really well, because of the timing of launches and relative price points, but you really saw it kick into gear towards the end of the year. I mentioned in my comments in the U.S. market, there was a 29% increase in sell-through dollars according to Datatech in the quarter. And as you saw, our results during the second half of the year really start to outperform expectations, golf ball was a nice contributor to that. And as a consumable, we're really excited about it. Clearly, we think there is more run way to grow. We're not going to put a number on that at this point, other than just to point to direction, and we think the direction will continue in the trends that we've had of growth. We're optimistic on that through some very solid reasons, we think. We've got a very focused branding message around soft. We have a technical advantage with soft, fast course. The product had the highest net promoter scores that we've ever seen. We're starting to be really makes some nice traction in the green grass channel, which was improved into the golf ball category. We're kind of doing a lot of the things that we think are going to be very important to building a very strategically important and sustainable business in the channel going forward. Overseas in Japan, another nice thing to help support that growth, Ryo Ishikawa who is very popular player in the Japan market, transitioned to our golf ball in the offseason, and we think that will have upside in that market for our golf ball category. So pleased with the direction, you're exactly right from the consumable perspective. And we think it will be a good solid growth category for us going forward. Robert, you want to talk a little about that?

Yes. So on the question regarding the cost structure and margins and leverage, Randy, I think you know that our manufacturing cost skew more to variable than fixed, both in sticks and balls. But relatively speaking, it is true that there is slightly more fixed cost and less variable cost in the ball operations. So there is the opportunity for a little more leverage there on volume in balls versus sticks. However, I would also say that the ball, and we've had a phenomenal turnaround in terms of the profitability of ball, and it's already under the current volume, slightly accretive to the stick business. So there is sort of a mixed benefit in accretion to growing the ball business faster than the stick business just in the math of that on our overall gross margin potential.

So I think you made the comment that. I think you said that golf ball business isn't about -- I don't know, 45% of it is or 45% of the industry of golf balls in the green grass channel. Can you give us some perspective on how under-indexed your ball business is to that channel distribution? And how long do you think based on the strategies you're undertaking with building more relationships, et cetera, where you can get that ball business, kind of the products in the channel where most of the balls are being -- or many of those balls are being sold?

What I said is that the golf ball is 45% of Datatech sell-through data. So Datatech measures two specific channels, they measure specialty retail and green grass. And so golf ball is -- green grass channel is roughly 25% of all Datatech sell-through for hard good, but the golf ball is 45% at green grass, so green grass is a very important channel among those channels. There are other channels out there that are also in this. But when I'm quoting market share data, et cetera, it is Datatech usually and usually specifically to green grass and specialty retail. And our market shares in that green grass channel are historically lower than they are in the specialty retail or retail channel. In the golf ball, I mentioned that we have an 11.4% market share overall for the full year. Green grass is, I don't have that number directly in front of me, but it's roughly 8.5% maybe a little above that. And it's trending nicely, but it lags our overall share. And we do expect growth just as we grew this year. I think we grew from somewhere 9.5% market share to 11.4% and so we made a nice progress. And I think we will continue to make progress. It's not going to an overnight sensation, but I do think we'll grow and I think we'll grow faster in the green grass channel as we move forward.

I promise my last question here, and again, on the golf ball side, how do you think about skew management, because it sounds like you have a really exciting opportunity here with the Chrome Soft 16, it sounds like our Pro V1, Pro V1X, you're utilizing that base brand power of the Chrome Soft. How should we be thinking about skew changes in the golf ball business from you perspective? And how do you think about marketing dollars and the shift of dollars or not versus fixed versus all categories going forward, that's my last question.

We are not going to breakout our marketing mix between balls and clubs. We're very comfortable, we can support both and we'll continue to do so and results indicate that. We're investing in both categories and performing well in both. In terms of product line, I think we have an advantage over some of our competitors, because we have a very focused and narrowed product line in golf ball. And a very simple message that extends across our entire line and that is soft, fast course, golf balls that are high-performance and feel better than the competition. And the net promoter scores would indicate that we're delivering on those promises. Others are trying to be a little bit all things to players, so they may have a normal tour ball and then another ball that's soft. And they also try to tell you that one is for a certain player. Our players on tour are playing Chrome Soft Golf Balls. We're marketing Chrome Soft Golf Balls. We're marketing Supersoft Golf Balls. It's a very narrow focused message and offering, and I think that should allow us to compete favorably to own that mind space with consumers.

Your next question comes from the line of Andrew Burns with D.A. Davidson.

In regards to your cash deployment strategy, it's interesting to hear about the apparel JV in Japan, exploring growth opportunities in adjacent areas including potential acquisitions. This is vastly different commentary than 2012 and '13 win. Callaway was shedding ancillary businesses to focus on equipment, and so I was hoping you could spend a little more time, maybe talk about how significant this is in terms of a change of approach, and what criteria you're using to analyze potential investments?

Great question, Andrew, and you couldn't be more right than that. It's a dramatic change. We've been at this for a little while now. And we're moving through the turnaround stage into sustainable profitability, strong balance sheet, and now driving to growth, both in the core and as announced with the JV and our stated intent to very thoughtfully look at some acquisitions and such grow with external opportunities and we're excited about that. That's a testament to the progress we've made as a company, the strong position we are in, in the core categories, and now the opportunity to again thoughtfully look at external opportunities. We aren't going to go through any specifics of what types of opportunities we'll look at. We have given that considerable consideration. We've developed a model by which we will evaluate opportunities and shift through the ones that will be a most interest to us, both with internal and external resources and also in concert with our Board. And there is nothing that we're going to be announcing imminent right now on this that we haven't discussed today. But we do think it's a significant step for the company to be in a position to look at these growth opportunities going forward. The TSI JV, we've started investing some other proprietary projects, and obviously, external looking.

In terms of the inventory reductions at retail, I believe, I heard down 13% year-over-year exiting the year with those in industry number. At some point, inventories on hand for retailers, as they shrink enough, would start to really impact their sales. I'm a little surprise to see the inventory work down continuing in the year or two. So do you think we're close to the end of that process?

That's a good question Andrew. We made great progresses in the industry last year, so we talked about it on the call probably this time last year, but there hadn't been as nearly -- I can't remember if there was progress or if we were just talking about making progress at that point. But there was a nice reduction in inventory and it's a trend that's happening on a global basis. You're exactly right, it's definitely positive for the industry, but you could go too far; not, I don't think there is any risk of that. I do think it favors companies like Callaway with our quick turnaround and global reach and the great custom fitting capabilities, you see us going up 24% in our custom fitting business in the U.S., that's a great fit for this change in environment. And I think we'll thrive and be able to support it. And are we all the way through it or are we part way through it; it's hard to be sure. People are still talking about lowering overall inventories out there, so we're not all the way through it. But inventory levels are down and we're at least part way through it, if not more than parts. So I can't really predict what that endpoint is, but I know we're making good progress there. And I think it will be a good thing in the long run.

Your last question comes from the line of Casey Alexander with Ladenburg Thalmann and Company.

Most of my questions have been answered. The only one I have left is, you talked about, you have an 11%-plus market share in balls, but 8.5% at green grass. How much of a challenge is it to get that shelf spacing green grass, particularly given the advent of sort of the Acushnet only green shops that are out there? How do you get pass that?

That's a great insider question there, that somebody knows the industry, Casey. At some places, we won't be able to, but we'll show nice progress. We're increasing our staff positions. And green grass is in general a lagging indicator, in other words, they take less risk on inventories. So we launch Chrome Soft in 2015 and shift in February of 2015, and we're trying to sell it in the fall. We were in telling them the story about how we finally got it right, and this was going to be the ball that changed the ball. And quite frankly, the green grass guys probably thought, yes, I have heard that before. And so it was a very hard sell. And our distribution at green grass was a bit of slugfest. Now, as we go into green grass, they will have seen that the Chrome Soft performed beautifully and that consumers were asking for it. And it was the fastest growing ball and the category last year. So it will be easier, as we become a proven player. Momentum is a great ally in that perspective and we are growing the green grass. So I expect us to make progress. I like the direction. There will still be some accounts that had some very strong brand labels we won't get into. But I'm already seeing, we are number two in market share and we should be number two and growing in our distribution strength at green grass as well.

Or to that point, a few years ago we saw the advent of the white driver, which was very visible on tour?

Yes.

And created sort of an ask for mentality out there amongst the consumer. Is there any chance of getting some of the Truvis technology in tour play, because that would be very visible on tour on-screen, and perhaps if people saw that, that would encourage them to be going and asking for it at retail?

Well, first, I think I got to get you playing it, Casey, but assuming that, that may take me a while -- yes, that would help. And you may or may not have seen Tom Watson played it in his debut with us in Hawaii and he created some interest and excitement about it. And we've seen accounts that have been exclusive to other brands, have never brought any Callaway balls, and they've called their rep begrudgingly needing to bring in what they called a soccer ball. And so we'll look for opportunities to have it gain more exposure including potentially some tour play. And it's not an overwhelming portion of our business right now, but it's a fun little niche that you never know, if it did catch on it, it's certainly differentiated.

Well, it seems to me that nobody who is using the white ball is going to stop using the while ball because Truvis exist, but you might get some people who are using another brand to try it, because Truvis exists?

We have a 100% market share of those that like a soccer ball [multiple speakers].

There are no further questions. Chip Brewer, do you have any closing remarks. End of Q&A

I want to just thank everybody for dialing in today, to the Callaway team, great job on strong 2015, and looking forward to keep it going in 2016. Thank you for the call.

This concludes today's conference call. You may now disconnect.