Callaway Golf Company (CALY) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Catherine and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 2018 Callaway Golf Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Patrick Burke, Head of Investor Relations, you may begin your conference.

Thank you, Catherine, and good afternoon, everyone. Welcome to Callaway's fourth quarter and annual 2018 earnings conference call. I'm Patrick Burke, the company's Head of Investor Relation. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer; and Jennifer Thomas, our Chief Accounting Officer. Today, the company issued a press release announcing its fourth quarter and annual 2018 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.callawaygolf.com. Most of the financial numbers reported and discussed today on today's call are based on U.S. generally accepted accounting principles. In the few instances where we report non-GAAP measures, we've reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in this presentation and the press release for a more complete description. Please note that in connection with our prepared remarks, there is an accompanying PowerPoint presentation that may make it easier for you to follow the call today. This earnings presentation is available for download on the Callaway Investor website under Webcasts & Presentations tab. Also, on the same tab, you can choose to join the webcast to listen to the call and view the slides. As a webcast participant, you're able to flip through the slides. 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. Starting on page 4 of the presentation, and I'm pleased to announce a record year in terms of both revenue and operating profitability. Although there was some slowing during Q4, market conditions were positive as a whole for last year and we once again grew our core business faster than the market while simultaneously strengthening it to be a strategic and tactical reinvestment. We have also been able to find attractive opportunities for growth in areas that are tangential to our core and where we believe there are synergies that will help us create long-term value. The Jack Wolfskin acquisition, which closed this January is an excellent example of this. It provides us breadth and scale in the rapidly growing apparel and lifestyle portion of our business and we believe we can and will continue to lead the golf equipment business while also developing and growing a strong apparel position and that the two portions of our business will benefit from each other while providing us both higher long-term growth rates and scale that will benefit our shareholders. As is my custom, I’d like to take this chance to thank the Callaway team for delivering these results. The team should be proud of what we've accomplished. I'm also sure they understand we have a lot more to do and like me are motivated to take our company to the next level. Turning to slide 5, let's now take a deeper look into our 2018 operational performance by region. In the US, our revenues were up 3% for the quarter and 25% for the year. These results were driven by market conditions that were up approximately 5% for the year on hard goods, double digit growth in our core equipment business as well as the addition of the TravisMathew brand, which is performing at an exceptionally high level. Looking at our equipment business, our full year of hard goods market share according to Golf Datatech was 24%, down 110 basis points versus last year. However, I believe this understates our overall market share as several key accounts are not captured in this data. Anyway, according to Datatech, we remain the number one in total clubs and in golf balls, we remain the number 2 brand with 16.4% dollar share, up 210 basis points year over year. Turning to page 6, our Asia business had a strong year but a slow quarter. In Japan, our revenues were down 22% for the quarter, but up 12% for the year. For the year, we grew in our core equipment business as well as our apparel joint venture. Market conditions for the year were up slightly but slowed during Q4. In our equipment business, we also had less product launches versus last year and we intentionally worked to keep our field inventories in balance going into this year. In Japan, our year to date hard goods dollar market share was 17%, down 250 basis points but maintaining our number 2 position in this market. The Japan team has been investing in capabilities to launch Ogio and TravisMathew with good progress and modest revenue expected in 2019. These additions will add to our apparel scale and presence in this market. Moving to page 7, in Europe, the team had another solid year with revenues down 9% for the quarter, but up 6% for the year. As with the other regions, the quarterly variance is largely due to launch timing. The European market overall was slightly down for the year but close to flat. For Europe as a whole, again, in 2018, we were the number one hard goods brand with a hard goods share of 22.7%, down versus last year but in line with our expectations and 420 basis points more than the number 2 brand. During the quarter, we worked through the bankruptcy of one of our largest UK customers, American Golf, they were purchased out of administration and are now once again trading with us, albeit in a slightly reduced footprint but a more healthy financial position. The European team has also been investing in resources to launch Ogio and TravisMathew in their markets with plans for launching the brands this year. Revenues will be small at first, but we're energized by the prospects of leveraging our global infrastructure to grow these brands. On the product side, across all of our businesses, we believe our new product offering for 2019 is very strong as is our future product pipeline. Focusing on our 2019 equipment launches, we entered the year energized by one of the strongest overall lineups that I've ever been part of. A few of our hero products are the Epic Flash Driver featuring Flash Face and Jailbreak technologies. The Apex and Apex Pro irons our flagship iron brand with a complete technology overhaul in a line that hasn't been refreshed since 2016. Stroke Lab Putters featuring a proprietary new shaft technology that actually improves your stroke and the ERC Golf Ball with Triple Track Technology. A product so innovative, we named it after our founder Ely Reeves Callaway. All of these products are highly reviewed and are receiving strong feedback. Of particular note, we're proud to be able to report that in 2019 Gold Digest Hotlist, the Epic Flash Driver and the Apex Irons were the only driver and irons to receive 20 out of 20 possible stars for ratings and performance, innovation, look sound feel, and demand. Our product strength comes from our long commitment to R&D and innovation. Investments we've been making for many years now. Embedded in the Epic Flash Driver is Flash Face technology is what we believe to be the first commercial application of artificial intelligence in the design of golf equipment. This ability lead to a phase design that was not at all intuitive and to the best of our knowledge could not or would not have come about in any other manner. We believe we are establishing a first mover advantage by leading this technology and then it will applicability across multiple products going forward. In fact, I'll go as far as to say that within few years, if you're not using this approach, it'll be difficult to stay competitive. Both the TravisMathew and Ogio acquisitions are performing very well. They also have strong lines going into 2019 and brand momentum. Nothing to report on the Jack Wolfskin business at this point. We successfully closed in the first week January and are now working to integrate the business from an operations, finance, and IT perspective. We are also beginning the process of looking for synergies and for developing growth initiatives for key markets such as the U.S. and Japan where Callaway is a strong presence but Jack Wolfskin does not. There is without a doubt a lot of work in front of us, but we also feel energized and excited about the potential. Turning to our 2019 outlook, we are projecting market conditions to be flat to slightly up. We expect our core business to grow faster than the market with low to mid single digit growth in our equipment business, double digit growth in Ogio and TravisMathew and Jackie Wolfskin performing consistent with the expectations we communicated when we announced the transaction in early January, albeit with higher financing costs due to change in credit markets during late Q4 of last year. We have been delivering and over the long term expect to continue to deliver scale-based operating leverage improvements, the timing of which is being balanced by the fact that we are also continuing to find high return investments in all of our businesses. In our core business, we are now in year 3 of a 3-year capital plan for our Chicopee golf ball facility that we believe will be transformational in terms of capacity and capabilities. This supports a strong growth we've generated in golf ball over the last several years and also set the stage for continued improvements. In support of our equipment business, we are also continuing to invest in sales, marketing, R&D, including furthering the AI platform previously discussed and tool albeit more measured ways now. In our apparel and soft goods businesses, we're investing in the Ogio and TravisMathew platforms on a global basis and in Jack Wolfskin, the improved finance and IT systems as well as global operations and brand growth. We are confident we can make these investments and continue to deliver a strong operating performance. Looking further forward, we believe our ability and commitment to make these long-term investments will differentiate us and pave the way for long-term success including growth above the rates inherent in our core businesses and over the long-term improved operating leverage based on the economies of scale. This strategy has served us well over the last 7 years and we believe that will continue to do so going forward. In conclusion, we are looking forward to another strong year in 2019 and perhaps, more importantly, we believe we are continuing to move down a strategic path that makes us a much larger and more diverse company with higher embedded growth prospects and a significantly higher long-term earnings outlook. Brain, over to you.

Thank you, Chip. As Chip mentioned, we are pleased with how our business performed in 2018. It was a good year by almost any measure. The golf equipment industry as a whole was strong overall including the U.S. which grew almost 5% for the full year. And for the full year 2018, we achieved record net sales and 55% increase in adjusted EBITDA compared to the prior year. In addition to the Ogio and TravisMathew brand, which we acquired in 2017, continue to meet and/or exceed expectations. We are also excited about 2019. Our 2019 product line is as strong as we have ever had and last month, we completed the acquisition of Jack Wolfskin, a leading outdoor, apparel, footwear, and equipment based in Germany. We remain excited about the Jack Wolfskin acquisition including the strategic benefits it provides and the opportunity to present for growth and for shareholder value creation over the mid to long term. All in all, it has been a very busy but enjoy last 7 years as we have transformed Callaway into a premium golf equipment and active lifestyle company. In evaluating our results for the full year and fourth quarter, you should keep in mind some specific factors that affect year over year comparison. First, the TravisMathew acquisition occurred in August 2017. As a result, that business was only partially included in our full-year 2017 results. Second, as a result of the Ogio and TravisMathew acquisitions, we incurred some nonrecurring deal related expenses in 2017. When comparing non-GAAP 2018 results to our 201 non-GAAP results today, we exclude the non-recurring deal related expenses and that is how we evaluate our performance. Further, during the fourth quarter of 2017, we recorded a net $3 million of additional tax expense, primarily related to 2017 2017 Tax Cuts and Jobs Act that impacted the full year, which we exclude from our 2017 non-GAAP results as we have been. Fourth, as a result of the 2017 Tax Cuts and Jobs Act, 2018 benefited from lower tax rates compared to 2017. Finally, as a result of the Jack Wolfskin acquisition, we incurred some non-recurring deal related expenses in 2018 as well. When discussing our 2018 non-GAAP results today, we excluded those nonrecurring deal related items, again, that is how we evaluate our performance. With those factors in mind, I will now provide some specific financial results. Please bear with me, as there is a lot to discuss today, especially given the acquisition of Jack Wolfskin and my comments are therefore a little longer than usual. Turning now to Slide 12, today, we are reporting consolidated full year 2018 net sales of $1.243 billion compared to $1.049 billion in 2017, an increase of $194 million or 19% at a record for net sales. Our net sales in 2018 increased in all operating segment and in all major regions. The 19% growth was primarily due to 26% increase in the irons category driven by our Rogue line of irons, a 20% increase in our golf ball business driven by our new chrome soft golf balls, and a 36% increase in the Gear, Accessories and Other category driven by the TravisMathew business. Changes in foreign currency exchange rates positively impacted our 2018 net sales by $14 million for the full year. Excluding the TravisMathew business and the effective changes of foreign currency rates, however, our core business grew over 11% in 2013. As you can see on the Slide 12, gross margin was 46.5% in 2018 compared to 45.8% in the prior year, the 70 basis point increase compared to 2017 reflects a favorable shift in product mix toward the higher margin TravisMathew business as well as overall higher average selling prices, partially offset by higher product cost due to more technologically advanced products. Operating expense was $450 million in 2018, which is a $48 million increase compared to point $402 million in 2017 and includes a full year of operating expenses related to the new TravisMathew business. Increased employees expenses resulting from increased headcount and inflationary pressures, higher variable expenses due to the increase in net sales and investment in the core business, operating expenses as a percent of net sales was 36.2% in 2018 compared to 38.3% for the same period in 2017. Operating income was $128 million in 2018 compared to operating income of $79 million for the same period in 2017, an increase of 62%. When excluding the non-recurring Jack Wolfskin transaction expenses from 2018 and the non-recurring Ogio and TravisMathew transaction expenses, and the tax adjustment from 2017, non-GAAP operating income for 2018 was $132 million compared to non-GAAP operating income of $90 million in 2017, an increase of 47% or $42 million. Other income was $3 million in 2018 compared to other expense of $11 million in the prior year. The higher other income in 2018 resulted primarily from hedging gains in 2018 versus losses in 2017 and included $4 million purchase price hedging gain related to the Jack Wolfskin acquisition. That same purchase price hedge also resulted in a $3 million loss in the first part of January 2019. Fully diluted earnings per share was $1.08 on 97 million shares in 2018, 157% increase compared to $0.42 in 2017. Excluding the non-recurring Jack Wolfskin transaction expenses in 2018, non-GAAP fully diluted earnings per share was $1.07 versus non-GAAP fully diluted earnings per share of $0.53 in 2017, which excludes Ogio and TravisMathew non-recurring transaction expenses and the tax adjustment. I’ll now briefly report on our fourth quarter results. Turning to Slide 13, today, we're reporting consolidated fourth quarter 2018 net sales of $181 million compared to $192 million in the fourth quarter of 2017, a decrease of 5.7%. The decrease was better than we had originally planned and it reflects our product launch status in 2018 which was heavily weighted for the first half of the year. With that said, we continue to see significant improvement in our golf ball business, which was up 14% in the fourth quarter driven by our new Chrome Soft golf balls and a 13% increase in the Gear, Accessories and Other categories driven by a quarter over quarter increase in the TravisMathew business. Foreign currency negatively impact International net sales by $1 million in the fourth quarter of 2018 compared to the prior year. As you can see on Slide 13, gross margin was 38.7% in the fourth quarter 2018 compared to 41.6% in the prior year. The 290 basis points decrease compared 2017 was primarily driven by an overall decrease in sales volume and higher product cost due to more technologically advanced products in the 2018 product line, partially offset by higher average selling prices and product mix related to the TravisMathew business. Operating expense was $113 million in the fourth quarter 2018 which is a $13 million increase compared to $100 million in the fourth quarter of 2017. This increases is primarily attributable to increased employee expenses resulting from increased headcount and inflationary pressures, increased marketing expenses, and non-recurring transaction expenses related to Jack Wolfskin acquisition. The operating loss from operations was $43 million in the fourth quarter of 2018 compared to an operating loss from operations of $20 million in the fourth quarter of 2017. When excluding the non-recurring Jack Wolfskin expenses, non-GAAP operating loss from operations was $40 million in 2018 compared to a non-GAAP operating loss of $19 million for the fourth quarter of 2017 which excludes the non-recurring TravisMathew acquisition expenses and the tax adjustments previously discussed. Other income was $5 million in the fourth quarter of 2018 compared to other expense of $3 million in the fourth quarter of 2017. The higher other income in the fourth quarter of 2018 resulted primarily from a $4 million purchase price hedging gain in 2018 related to the Jack Wolfskin acquisition compared to the hedging losses in 2017. Basic loss per share was $0.30 on 94.5 million shares in the fourth quarter of 2018 compared to a loss of $0.20 for the fourth quarter of 2017. On a non-GAAP basis, which excludes from 2018 and 2017 the applicable acquisition costs and tax adjustments previously discussed, the 2018 loss per share was $0.32 compared to a fourth quarter loss per share of $0.15. Turning now to Slide 14, I’ll now cover certain key balance sheet and cash flow items. Available liquidity which represents additional availability under our credit facilities plus cash on hand was $256 million at the end of 2018 compared to $239 million at the end of 2017. Increased liquidity from our asset base loans and cash generated from operations was partially offset by a 2018 incremental stock repurchases, increased capital expenditures, and the repayment of our credit facility which we used to fund the Ogio and TravisMathew acquisitions in 2017. Because we essentially finance the 100% of Jack Wolfskin purchase price, our liquidity remains good following that acquisition. Our consolidated net accounts receivable were $71 million, a decrease of 25% compared to 2017 which is attributable to launch timing and better collection rates. Days sales outstanding decreased to 54 days compared to 63 days at the end of 2017. The 2018 DSO was favorably impacted by six days due to the change in the revenue recognition accounting problem changes. We remain comfortable with the overall quality of our accounts receivable at this time. Also displayed on slide 14, our inventory balance increased by 29% to $338 million at the end of 2018. This increase was due to supporting an overall larger business in 2018 including increased launch inventory for the 2019 [indiscernible]. We remain comfortable with the quality of the inventory at this time. Capital expenditures was 2018 were $37 million, year over year increase of $11 million in 2017 due mainly to investments in our ball plan. Depreciation and amortization expense was $20 million in 2018 compared to $18 million in 2017. Finally, including both open market repurchases and shares acquired through the settlement of equity awards, in 2018, we repurchased 1.4 million shares for approximately $22 million as compared to 2017 when we repurchased 1.5 million shares of our common stock for approximately $17 million. We currently have remaining approximately $50 million under our current stock repurchase authorization. I’ll now comment on our 2019 guidance, which begins on Slide 15. Because we're still in the process of determining the amount of non-cash purchase accounting adjustments for the Jack Wolfskin acquisition, we're generally only providing non-GAAP guidance at this time. The non-GAAP guidance excludes from 2019 the purchase accounting for Jack Wolfskin as well as for Ogio and TravisMathew. And the non-recurring transaction and transition expenses related to Jack Wolfskin. For comparability purposes, we compare this guidance to the adjusted non-GAAP 2018 results, which excludes the purchase accounting amortization expense for Ogio and TravisMathew and the non-recurring transaction and transition expenses related to Jack Wolfskin. We’ve not previously excluded the purchase accounting amortization from Ogio and TravisMathew in our non-GAAP results due to the immateriality of those. But for consistency going forward, we will now exclude the purchase accounting amortization for those two acquisition, which in the aggregate is only approximately $0.01 per year. Our 2019 guidance assumes that overall market conditions will be flat to slightly up in 2019 compared to 2018. We expect sales in our golf equipment business to grow faster than the market with low to mid-single digit growth and we expect double digit growth in Ogio and TravisMathew with Jack Wolfskin performing consistent with the sales expectations the company previously announced, which is approximately $382 million based on an euro exchange rate of 1.14. As seen on slide 15, 2019 net sales are estimated to be in a range of $1.67 billion to $1.70 billion, an increase of 34% to 37% over 2018. Incremental sales growth is expected to be driven by increases in the core business, which are expected to grow 4% to 6% full year versus 2018 and the addition of the Jack Wolfskin sales. The company currently estimates the changes in foreign currency rates will negatively impact 2019 by approximately $6 million in net sales with most of the impact occurring early in the year. We estimate that full year 2019 gross margin will be 47%, which is 50 basis points higher than 2018. 50 basis point increase is driven by overall further improvement in gross margins in our business generally, including the TravisMathew and Jack Wolfskin brands, which generally have higher gross margins than the golf equipment business. Partial offsetting this improvement are anticipated unfavorable foreign currency rate and tariff rates. We estimate full year 2019 operating expenses to be $630 million, an increase of $185 million versus 2018 as a result of the Jack Wolfskin acquisition, select investments in growth initiatives for TravisMathew and select investments in tour selling and R&D for the Callaway business. Non-GAAP earnings per share are estimated to be $0.93 to $1.03. This estimate includes an incremental $34 million of interest expense related to our term loan B financing. The 2019 figures are based on 97 million shares outstanding. We are also assuming a 22% tax rate for 2019. We estimate our capital expenditures in 2019 to be approximately $55 million to $60 million, which includes incremental capital expenditures related to the Jack Wolfskin business. Depreciation and amortization expense is estimated to be approximately $34 million in 2019, which includes 10 million for the Jack Wolfskin business compared to $20 million in 2018. As Chip mentioned, 2019 will be the final year of our 3-year golf ball capital plan. After that, we would expect the capital expenditures to more normalize. We estimate adjusted EBITDA to be in a range of $200 million to $215 million. Beginning in 2019, we will report adjusted EBITDA, excluding non-cash stock compensation expense for purposes of consistency with other comparable companies. We estimate that the non-cash stock compensation expense will be approximately $13 million in 2019. The increase in EBITDA represents an increase of 23% at the midpoint compared to our 2018 non-GAAP EBITDA, driven by the core business and approximately $33 million coming from the contribution of the Jack Wolfskin acquisitions, all of which will be partially offset by unfavorable changes in foreign currency exchange rates. Our financial results can vary from quarter-to-quarter based upon many factors, including the timing of new product launches, the timing of incremental investments in the business and the timing of changes in foreign currency rates. The addition of the Jack Wolfskin business will also significantly affect our intra-year quarterly results. The Jack Wolfskin business is counter seasonal to the golf equipment business. Excluding the acquisition financing cost, the Jack Wolfskin business typically earns all of its profit in the second half of the calendar year and it's not profitable in the first half. Conversely, the golf equipment business typically earns all this profit in the first half of the year and is not profitable in the second half. Given this change in seasonality, we are providing first quarter and first half 2019 guidance as well. Also on slide 15, net sales are estimated to be $490 million to $508 million for the first quarter of 2019 compared to 403 million in the first quarter of 2018. Net sales are estimated to be 928 million to 948 million in the first half of 2019 compared to 800 million in the first half 2018. The first quarter or first half increase in net sales is primarily attributable to the addition of Jack Wolfskin sales together with modest increases in net sales in the core business. Earnings per share is estimated to be $0.45 to $0.49 for the first quarter of 2019 compared to $0.65 for the first quarter of 2018. Earnings per share is estimated to be $0.71 to $0.78 for the first half of 2019 compared to $1.28 for the first half of 2018. Adjusted EBITDA is estimated to be $79 million to $83 million for the first quarter of 2019 compared to 89 million for the first quarter of 2018. Adjusted EBITDA is estimated to be $132 million to $141 million for the first half of 2019 compared to 178 million for the first half of 2018. The decrease in the estimated earnings and adjusted EBITDA for the first quarter and first half of 2019 compared to the same periods in the prior year reflects the intra year timing of the company's earnings in 2019, compared to 2018. In 2019, a greater portion of the earnings are anticipated to occur in the second half of the year as compared to 2018 and this is due to the seasonality of the Jack Wolfskin business, which generally results in only a nominal operating profit in the first quarter and an operating loss for the second quarter with an overall loss for the first half. More golf equipment new product launches in the second half of 2019 and less in the second quarter of 2019 compared to the same periods in 2018. Also the negative impact to changes in foreign currency exchange rates in the first half of 2019 compared to 2018, with the first – we estimated 6 million for the full year, but it’s really 10 million for the first half and then – negatively, and then 4 million positive for the second half. And the timing of the incremental investments in 2019, which are weighted more heavily to the first half. Conversely and for the same reasons, during the second half of 2019, the company anticipates much greater probability compared to second half of 2018 and a strong year overall. That concludes our prepared remarks today. We will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Steven Zaccone with JPMorgan.

Chip, first off, I wanted to just talk through your expectations for market growth and market demand in 2019. How do you feel about the health of the retail channel, the Green Grass channel and consumer demand broadly since 2018 ended on somewhat of a choppy note? And then along those same lines, where do you see the biggest opportunity to regain some market share this year?

Hi, Steven. We're cautiously optimistic, looking at the markets going into this year, although without a doubt, they slowed during Q4. When you look at the economy as a whole right now, it still looks pretty good out there and we expect the markets to be up slightly this year and when you look at the retail health of inventories, et cetera, the absolute amount of inventory when you look out there right now is in a good position. So particularly Callaway on a global basis. So, we're optimistic and believe should be in a good position to enter the year and have a positive year. In terms of where we think we can gain share and we are anticipating gaining share relative to the full year numbers for last year. Certainly in the driver category, we're excited about the flash driver. Really strength across the line, our cutter line should resonate very strongly. The Stroke Lab product is outstanding. So, we're really expecting broad based progress again this year and believe that although there was a slowness to Q4, when you look at the overall market, it’s in a good position to go into 2019.

Then just on the cadence of revenue growth for the organic business through the year, are you expecting the 4% to 6% growth to be first half weighted?

No. We are actually expecting it to be a little bit more second half weighted. So relative to the last year, we have more launches in the second half of the year in our core business and it's more of a normal cycle if you will. We actually have a little less product being launched in Q2 with Q1 being fairly comparable with a year ago.

Your next question comes from the line of Dave King with Roth Capital.

I guess first on the guidance and unpacking the first half shortfall a bit. I guess first, it sounds like a big piece of that was the Jack Wolfskin seasonality. Given that, are you able to share how much of that revenue typically occurs in the first half or even maybe the first and second quarters?

Sure. I think just stepping back for a second, we talked about this a little bit in the last couple of calls, it’s getting more difficult to -- every year to evaluate quarter-over-quarter comparison. It's a much better deal if you can look at the full year and then I know you have to model out quarterly, but you’ve got to adjust that. I think you take the bigger picture and look at our full year. And within that, it will vary from year to year. We'll have product launch timing differences. If you remember in 2018, we launched everything in the very beginning of the year. And this year will be more normalized launch. We also have more – it will also be effective year-to-year based on the timing of any investments we're making. We talk about FX for this year coming up, FX is a pretty big help in the first half, it will be $10 million, but then, we’re anticipating 4 million positive. Now, the Jack Wolfskin business, the seasonality does get definitely skewed this year as well. From a sales perspective, they are close to two-thirds in the second half. And then even with the quarters, 2-3 is their biggest quarter for everything. And if you look at just on the sales side, Q2 is their lowest and Q3 is probably 3 to 4 times the size of Q2. As far as earnings goes, and looking at EBITDA, the EBITDA is breakeven to a little EBITDA in Q1 and Q4, they lose money in Q2 and they make almost all their money for the year during Q3. This will be a little confusing in the first year because we don't have the Jack Wolfskin business comparisons, but going forward, the counter-seasonality is actually beneficial to our business and to working capital, liquidity and things like that. So we just have to walk you through the share.

Okay. No, that's really helpful, Brian. Chip, then maybe turning to the product launch piece a little bit. How big are some of these launches versus prior ones, I’m talking about Flash and the Putter and Apex and ERC. And then what can you share about the bookings so far on those to start the year?

I would say that in terms of the scale of the launches, et cetera, and the amount of products we’re launching, it’s very profitable to last year in Q1. So the Putter launch is a little bit larger. We're certainly coming with more energy and much stronger offering this year in the Putter category than last year. I think, our lineup is stated, is the best I've ever seen and have been part of top to bottom that only in Putter, would I say, are we launching more in the beginning of the year than last year.

And then early booking read so far?

Early booking days, everything looks positive and consistent with guidance right now. The feedback on the product, much of this product now is sort of Epic Flash and Apex launched in the market, but only very short period, weekends to a week. The balance of it is starting to hit over the next few weeks. We have good feedback on it from customers. We have [indiscernible] where that’s appropriate and we feel good about all signals, and as mentioned on the Golf, I just thought, we thought that was quite a testament to be the only product to receive 20 out of 20 stars in driver and irons with Epic Flash and Apex.

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

I’ve got a few questions here. I guess, Chip just, I just wanted to go back to the outlook. I know -- I believe the outlook word for word going into 2019 is kind of the same that you had going in to 2018, ’18 ended up being a very good year for you guys. You noted some choppiness in the fourth quarter. I guess my question first is, what's really different, if anything at all around your outlook going into 2019 for 2018, the wording is the same, but it does feel a slight bit of difference, you said the economy is good, et cetera. So is there any difference or no in terms of how you're thinking about the industry itself versus how you thought about the industry going into the start of 2018?

I think that perhaps the word for word being, I assume you're referencing that we think the market's going to be up slightly or flat to slightly up this year. That may be consistent with last year. And it's consistent with last year that we're overall in a good economic climate, how we get there is pretty different and it certainly doesn't feel the same, but when you step back from it, I think does have the same conclusion. So, I think that's a reflection Randy on a trend over the last several years, where I’ve continually been saying that the golf industry itself is in a good spot, inventories have stayed well managed and prospects for moderate growth are quite good, coming off of looking further back when everybody was talking about the industry shrinking and all of the gloom and doom, which didn't turn out to be factual. And when you look at the actual results, last year was a decent market. Always some choppiness between quarters and we still feel good about the outlook this year, as the fundamentals of the industry are remaining quite good and consumer confidence is good, et cetera.

I guess, Brian, can I ask you a question around, I guess, gross margin, so you noted in the press release around the gross margin of the golf and equipment side, you talked to, I guess, product costs up related to advancing technology, which tells me that’s probably held back margins somewhat as you probably didn't raise the price point of the goods at the same rate as the increased cost to advance the technology. Is that something that we should continue to expect over the next couple of years, meaning we saw gross margin on the equipment side move up pretty dramatically over the last couple of years. I'm just curious of how we should be thinking about the gross margin dynamic, specific to the golf equipment side?

We've been saying all along that our improvements in gross margin were significance since just that year, but further improvements we do believe are available, but the rate of increase will moderate for sure. So I would not expect the historical growth rate to do the same as the growth rate going forward.

And then just, when you look at the -- there's a lot of moving pieces with the revenue and just overall guidance with all these different pieces of the business now with Jack Ogio, TravisMathew, et cetera, when I look at the overall, I was crunching some numbers, when I look at the guidance of 37% or 35% revenue growth, whatever it is, are you assuming Jack Wolfskin revenues grow in that guidance or stay flat or I'm just curious how we're supposed to think about the size of injectables to like a $383 million business, is it growing, just curious on any metrics you can provide on how we should think about that business growth rate? And then in addition any other color on what the gross margins of that business look like, because I think when you announced the transaction and we had that call, we didn't get a lot of, I think, metrics around gross margin or EBITDA margin of the business, if I recall correctly, if not, I'm sorry, but I just want to try and get more clarity on how we should be thinking about Jack Wolfskin in relation to the overall full company guide if you will.

I think just on some of the specific questions and I’ll let Chip jump in here. For this year, we’re anticipating Jack will be about flat with last year, 382 million. We expect 4% to 6% of the growth to come from a company, the other portions of our business. On the gross margins, there is -- the Jack Wolfskin business is slightly accretive to our gross margins, overall, our blended gross margin and the EBITDA margins initially will be affected by some additional investment we're making in that business, but ultimately will improve from there.

And the only thing I would add to that is that although we're projecting this year as flat, we clearly believe we're going to be able to grow the Jack Wolfskin business over time and that the long term growth rates of that business will be superior to the golf industry and our core business in general.

Just one more follow-up Chip, where -- when you acquired TravisMathew, it seemed pretty clear and very straight forward, great brand, compliments our equipment, we're going to grow the door distribution, et cetera. Ogio, when you bought that, it was – you know, their golf bag, but there's so much more that can be done here around product category extensions, et cetera. I guess in thinking of other distribution or product category extensions, something like that, how should we just think holistically about how you think about expanding the Jack Wolfskin business over the medium to long term. Is it a distribution play, is it a product extension play, a geographic play, I'm just trying to just get a sense of what that is and that’s all I have for questions?

Sure, Randy. And the simplest answer on that is we believe that we can enjoy growth rates in that business, just the key markets such as Germany and China that are at or above those market rates for those markets and then we'll also be able to have geographical expansion where Jack Wolfskin does not have any meaningful presence to speak of in Japan and in North America, but our company has what we believe to be a meaningful presence in both the hard goods business but as well apparel businesses, which are directly applicable.

And I agree with you, the TravisMathew brand is a great brand, but so is the Jack Wolfskin brand. It’s just not over here, so people don't know what is well, but it’s number one. It’s one of the leading brands in China, [indiscernible] opportunity for growth.

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

Chip, just wanted to ask you a question regarding the ball business. We did have some hell of it called setbacks, but some inefficiencies and in production in ’18, I think a lot of that was due to some of the graphene based technology that you started rolling out during the year. As we think about ‘19 and looking at the product line, it looks like you've rolled or expanded the use of graphene across the ball portfolio. Is that a good way, I mean, a good sign that you've now kind of ironed out some of those efficiencies and if so, how to think about the ball profitability in ‘19 and beyond. Can we get back to that 16% to 17% range that we saw prior to ’18?

Michael, I wouldn't call ‘18 as setback. So I’ll start there, but you're correct, our operating segment profitability decreased as we made investments in that facility and set ourselves up for the long run. When you're overhauling a plan, it is likely that the efficiencies will have been impacted and that's a process that you need to go through to get stronger in the long run. We are expecting improvement in the golf ball outlook for ‘19. We will continue to have the same -- some of the same efficiency challenges. So we're not going to be optimal in ‘19. Because we're doing significant investments in that facility still. It’s year 3 of a 3 year plan. But we will see improvement. I think the thing that you really want to focus on here is the 20% growth in the category and you know it's a consumable product, you can see steady growth quarter-to-quarter in this product. You can see steady market share gains where the technologies that we're putting in place are resonating with the consumer. We made a investment that did lead to lower category profitability as a percentage, although our absolute profitability is not large, it's increased this year, because we believe that's good for the long term, you'll see a little improvement in ‘19 and then we think what we've got going forward there is a significant opportunity.

And then just flipping over to TravisMathew, if we look at the growth in that business in ’18, I think it was up over 30% in terms of revenue. Could you reframe how much of that growth came from, to keep the simplistic, maybe new doors versus distribution or at existing accounts and then as we look at the growth ahead, how should we think about that mix, is it going to be more I guess highly dominated by new door expansion, it sounds like you've got some things on tap in Europe for ‘19.

Yeah. We do have international expansion ahead for TravisMathew. It's going to be small first, but the potential is quite large as we build the platform and gain momentum. In TravisMathew, you're correct on the growth rates, just a phenomenal business and the brand is resonating across multiple channels and the growth, I don't have the specific answers for your question regarding how much of it came from new door versus market share growth, et cetera, but my sense is that you're overestimating the amount that is new door. They have expansion opportunities still in door growth, particularly in the Green Grass channel. But they're growing across all channels and that growth isn't dominating their performance. So they don't need, it's not that, I don't see the growth moderating it, because they are going to run out of new doors, if you will. This brand is really resonating, it's resonating in golf, it is resonating outside golf. And as you can gather, very excited about the prospects for the business.

Your next question comes from the line of Dan Wewer with Raymond James.

Brian, first, I wanted to ask about the outlook for lower earnings in the first quarter and in the second quarter, this is having an even larger drop year-over-year. If you were to exclude Jack Wolfskin, just look at the organic business, would its earnings decline year-over-year in the first two quarters?

Yes. It would be down versus last year in the first half, because of the change in product launch timing. Again last year, we pulled everything forward to the front half and this year, you'll see less launches in Q2 and you will see more in the second half of the year. I guess actually it’s $10 million. Overall, negative in the first half and 4 million positive in the second half.

And as the way to think about it is that we had this tremendous profit contribution from the rogue irons last year and that’s just really difficult comparison, even with the Apex launch this year.

Hey Dan. It’s Chip. No, it's not product specific, it is simply that most of our growth will be in the second half, even in our core business and we have the FX headwind and we're making further investments in our business, so that we believe are clearly going to pay off over the long run. We've been doing this now for 6, 7 years, pretty good track record at it. It’s certainly and you see the profitability come in a full year basis, but it's one of the aspects of our business, whenever you start cutting it into smaller pieces, it can get confusing I guess. Annually, these investments we're making we believe are going to pay off nicely. They'll set up even more opportunity long term, but you are correct in your analysis there that the first half that we are projecting the profitability of the core business being down a little bit as well.

Can you remind us why it's beneficial to launch or delayed product launches and for [indiscernible] golf demand?

Spreading out the timing of launches is for multiple reasons. You like to bring energy to the market in different ways. You’ve seen products launch towards the tail end of the year very successfully. You’ve seen product launches at the beginning of the year very successfully and at times, it's how you use your operational infrastructure, your warehousing and your sourcing strategies and where you ramp up factories and that type of thing so that you're utilizing that capacity resource rather well. So it really varies and there's not going to be a absolute consistency of how we're going to launch products at Callaway Golf. We are -- we obviously launch product every year, we obviously launch a significant portion in early in the year and beyond that, it is going to continue to vary and we think that’s part of the, both the science and the art of building the brand and energy to the marketplace.

And then the last question I have is, can you provide your thoughts as to why the industry softened in the fourth quarter, if that was all due to rounds played or a bit more due to concerns about loss of wealth during the market meltdown? And then also I find it hard to believe that your market share is less, like the figure that you quoted, but if they have, what’s accounted for that?

Dan, I think I don't have any real idea better than you in terms of why the market dropped, but it dropped mostly in December. So my guess is, in the US, it was the uneasiness with the economic conditions and stock markets and all of the items that were going around that, but it was also less product launches overall probably. So, I am not particularly concerned about that. It's obviously – it’s not a positive, but one month drop is fairly explainable, looking into where we stand in 2019, I still feel pretty good. And the last question was regarding –

Yeah. I find it hard to believe that your market share fell 100 to 200 basis points?

I don't really -- I do believe our market share declined during the year last year. So I think the trend, without a doubt, now, we're specifically talking to US, I think the market share that I report, which I report for consistency underestimates our market share in the US. I think that in the club market, we're closer to flat.

Your next question comes from the line of Daniel Imbro with Stephens Incorporated.

Why don’t I start on the top line outlook? Chip, I think you mentioned core business up low to mid-single digits, baked within that, are you assuming that we see round play trends stabilize kind of from the decline we saw in the back half of the year or what are you assuming on the round play side.

Gosh, I don’t really break out rounds play, but I would hope that that rounds play would be consistent with the overall market at flat to slightly up.

And then actually moving over to Europe, we’re seeing signs of just some specific market weakness over there, none of the deal was closed. One, can you talk historically about how resilient the Jack Wolfskin asset is and how it performed during economic slowdowns and then two, can you update us on your outlook for the key golf business over there in Europe for 2019.

Sure. I can -- I'm not sure how much data we have over Jack Wolfskin, but we did look at this issue when we were doing the analysis and due diligence and that’s been very resilient for a very long time. It is a majorly entrenched position in that marketplace and you did not see revenue swings downward that were in any periods of time. So it was not particularly or not overly sensitive on that front. And then in terms of our equipment business in Europe, I would say, it’s same answer, I rely on a global basis right now, we're cautiously optimistic going into the year, although the European markets are probably a little more uncertain than the North American markets for sure.

And then last one for me, just turning back to the US on the golf ball side, you guys didn’t roll out [indiscernible] different part of the market and on different price points, how do you guys think about the long term trend of market share growth? I assume it would be continuing to drift higher, but in the near term, is the opportunity more on targeting different segments of the market than say the premium ball side or is there still room to take in the premium golf ball side as well?

I think there's room to grow in both and so like our largest competitor in the space, we are launching our tour golf ball, the current soft product and are more value priced golf balls, which in this case is super soft and I wouldn't put ERC as a value, but it’s launching in the opposite cadence of a current soft year.

And our next question comes from John Kernan with Cowen.

I guess going back to a prior question around initial guidance, last year, when you guided for the full year, I think the GAAP EPS for the year was $0.64 to $0.70, you obviously crushed that over the course of the year. So what was it that surprised you, your expectations so much early throughout 2018, relative to your initial outlook and understanding this, there always seems to be a little bit of conservatism in your outlook, but just want to understand the drivers of 2018 and what enables such outperformance relative to the initial outlook?

Sure. That was an easy one. We outperformed across our business, but we also had limit our backs that we had anticipating. We didn't anticipate the US market being up 5% and if you remember through mid-year, the Asian markets were also up dramatically. So -- and then on top of that, I believe we had FX benefits last year. So if you get all wins behind you and the business is hitting strides, that can be a beautiful thing.

And then if we think about Epic Flash and the volume, I don’t know if you can talk about this for competitive reasons, but just the volumes of Epic Flash versus maybe the massive success that the Epic, the initial Epic launch had, how did the two compare at this point?

That's a interesting question. So Epic Flash is the -- probably the most impressive driver product I’ve been part of and with this AI platform, I’m really excited about it, because of the applicability of the technology, not only in the driver category, but others. The market overall this year, I think the Epic came out at a time though that was a little bit of a perfect storm from the perspective. I don't think the competitive environment was quite as strong at that time, so I do anticipate that we're going to gain share this year. But I believe also that the competitive environment is more strong and so I'm not anticipating it gaining the same level of share that we had in Epic. Countering that is, I like the strength of the product range across the entire line. So, it's game time and we're excited to get into the year.

And I guess final question, Brian, the first half EPS and profit guidance, can you just talk about the OpEx and the amount of, give us an idea in terms of de-leverage and as a percent of sales in the first half, it feels like it's going to be pretty significant obviously the seasonality of Jack Wolfskin plays in to this, but just any color on the OpEx line items in the first half versus the second half.

John, we're not going to break it out that level of detail. We just try to get some top and bottom line, just to give you a general sense. But again, I think it's better just to look at the full year, if you can, that will be more important in all these, there will be variations quarter to quarter.

And our next question comes from Casey Alexander with Compass Point.

I got a couple of things. First of all, the composition of your inventory, the last couple of quarters, third quarter and fourth quarter might have led some people to think that there was even a deeper product launch coming here in the first quarter. I think it has something to do with the change of the composition of your business, but could you color that up for us a little bit please.

Sure, Casey. On the inventory issue, it is up significantly year-over-year. Part of it is, we’re just a much bigger business than we were last year and the other part was, we've accelerated some of the, or not accelerator, we have more inventory prepared for the launches now where last year we were chasing it a lot. We were not fully, I think for the first quarter, first half, we were under stock in retail and had a little under stock to retail, but we were chasing our launches last year, both in the golf ball business and in the club side due to changes we made in the product late into the cycle that we made on time this year. So we're in the right inventory position going into the year.

Secondly, now that Jack Wolfskin is in, are you going to change your product segment reporting categories, is there going to be a separately broken out apparel category for instance and will that include Jack Wolfskin and TravisMathew.

Casey, we are looking at that right now and discussing with our auditors. We may evolve more toward a golf equipment and the other side being soft goods. They will see – we will probably break out the apparel in sales and that will combine Jack Wolfskin and Travis.

Okay. The Jack Wolfskin does give you some exposure to China that you haven't had in the past and at the same point in time, we're starting to see the emergence of some real talented Chinese professional golfers on the pro tours worldwide. What opportunity potentially exists on the club side in China that hasn't in the past?

That market is still really small, Casey, but it is growing again now and you're exactly right. The talent level coming out of China is really ramping up and so that'll probably be self-reinforcing to the growth rates over there, et cetera. There, we don't have it on that doubt yet, but we do expect there will be some synergies relative to the Callaway China business and the Jack Wolfskin China business with the Jack Wolfskin business being significantly larger by far and away the larger of the two businesses.

I didn't see it in the presentation and maybe I missed it in the oral presentation, was there any gross margin guidance for the first quarter?

No. We haven’t.

Okay. And then lastly, from a strategic standpoint, when you purchased TravisMathew, there was obviously at least some connection to golf there, is there a way to connect Jack Wolfskin to the core company or is it really just going to be a brand that stands aside.

That’s to our apparel business very well and then it connects, not from a consumer facing, but from a back office and operational perspective to the entire company, but it is not going to be a golf brand in a meaningful matter as we see it. But our business now is golf equipment and lifestyle apparel with both pieces of the business hopefully having meaningful scale.

And we have no further questions at this time.

Thank you very much for dialing in and we look forward to talking to you at the end of the first quarter.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.