Callaway Golf Company (CALY) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Callaway Golf Company Q1 2019 Earnings Release. [Operator Instructions] Thank you. Mr. Patrick Burke, company’s Head of Investor Relations, you may begin your conference.

Thank you, Rob, and good afternoon, everyone. Welcome to Callaway's first quarter 2019 earnings conference call. I'm Patrick Burke, the company's Head of Investor Relations. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer; and Jennifer Thomas, our Chief Accounting Officer. Today, the company issued a press release announcing its first quarter 2019 financial results. A copy of the press release and the associated presentation are available on the Investor Relations section of the company's website at http:ir.callawaygolf.com. Most of the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles in the few instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in 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 company’s Investor Relations website under Webcasts & Presentations tab. Also in the same tab, you can choose to join the webcast to listen to the call and view the slides. As a webcast participant, you are 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 in today's call. Starting on Page 4 of the presentation, I'm pleased to announce a strong start to the year with excellent performance in both our equipment and soft goods businesses. Revenues were up 28% overall driven by a 3.6% growth in our equipment business and 112% increase in our soft goods business driven by the recent acquisition of Jack Wolfskin as well as continued strong performance in both the TravisMathew and Callaway brands. Revenues increased in all operating segments and all major product categories and regions. Based on this start to the year and despite negative FX headwinds, we believe we are on track for another strong year of growth and we're pleased to increase our EPS guidance for the full year. As this is my custom, I'd like to take this chance to thank the Callaway Golf team for the hard work required in transforming the company over the last several years. Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and it remains motivated to continuously improve. Let's now take a look at our operating performance by business segment. Turning to Slide 5 of the presentation, our equipment business had a strong quarter with revenues up 3.6% driven by market conditions that varied widely by region, but met expectations overall. As usual, we believe we grew faster than the market which we believe was approximately flat in the first quarter and that with the exception of short-term quarterly variations and launch timing we are positioned to continue to do so over the long run. This year to-date we are demonstrating strength across the breadth of our club lineup with our new Epic Flash Driver, Apex Irons and Stroke Lab Putters all doing well. Our golf ball business also continues to do extremely well with currency neutral revenue growth of 14.4% for the quarter. The market reaction to Triple Track Technology and our new ERC Golf Balls has been excellent and our U.S. market shares continue to set records. On the brand side, we've had a strong start to the year on tour with multiple golf balls and driver wins across the globe. And as part of a new strategic initiative we have earned the claim of being the new number one driver on major worldwide tours. And we continue to be the number one putter on tour. We also received great feedback on our brand according to Golf Datatech’s 2019 spring golf product attitude and usage study Callaway has moved into either the top spot or a statistical tie for that spot in every major golf club consumer measure and the brand continues to show resilience and continued upward mobility in golf balls as well as in clubs. The brand also has the highest net brand rating, total brand rating and for the first time in over a decade is the leader or statistically tied for the lead in innovation and technology. These results are great testament to both our latent brand strength and our team's execution over the last several years. Perhaps even more importantly, we believe we are doing the right things to build on our strength here. Turning to Slide 6, in our soft goods segment, revenues surged due to the recent acquisition of Jack Wolfskin as well as strong performance across the majority of our brand and business portfolio. TravisMathew is worthy of a special call out here as that business continues to deliver double-digit-growth and we remain energized about its future. The Jack Wolfskin business met expectations for the quarter but our outlook for the full year is declined due to foreign exchange headwinds as well as softer than expected market conditions in its key markets of Central Europe and China which have led to lower than anticipated pre-books for the fall winter season. As a result of this we're anticipating our 2019 EBITDA from this business will be lower than initially expected and we reflected this in our current guidance. We believe these short-term issues –we believe these are short-term issues and we remain excited about this business for the long-term. We're also finding more potential synergies across our soft goods business as well as long-term opportunities in key markets such as China, Japan and North America that are at or above the initial expectations. Our soft goods business is the large and rapidly growing segment of our company. We are confident and excited about the long-term outlook and potential here. We also continue to reinvest back in our business with several key infrastructure projects underway, many of which will extend through mid-2021. These include the before mentioned Chicopee ball plant capital project, which now is in its final year, multiple distribution center expansion projects, all aimed at increased capacity and efficiency as well as several IT systems upgrades and convergence related to both our recent acquisitions and growth ambitions. We are also in process of establishing organizational infrastructure for our new brands in key markets where they're not currently operating. These projects are progressing nicely and we'll set the foundation for continued future growth. Now on slide 7, we believe we are on track for our full year results and are thus confirming revenue and EBITDA guidance, and raising EPS guidance based on slightly lower financing costs and tax projections. These projections have us overcoming a significant FX headwind, whether that was less than desired to start the year and slower than expected market conditions for our apparel business in China and Europe. We are pleased that the golf industry remains in a healthy position and we believe we are well positioned to continue our leadership positions in the industry. We also remain energized by the Jack Wolfskin acquisition and are both getting our arms around this business quickly and from all we are learning, we are increasingly confident about the business for the long-term. It's successful in achieving these financial results. Our adjusted EBITDA will be up double digits first last year and nearly two times what it was only two years ago. This is the type of growth in increased scale that we have been targeting with our investments and growth initiatives. In addition to revenue and EBITDA growth, we anticipate further strengthening of all the brands in our portfolio and believe we are trending accordingly. We also believe our reinvestments in long-term oriented management decisions are setting the stage for continued long-term strength in revenue growth and earnings. Brian, over to you.

Thank you, Chip. As Chip mentioned, we're pleased with our strong start to the year with good performance in both our golf equipment and soft goods businesses. We achieved record net sales in the quarter and growth in adjusted EBITDA compared to the first quarter of 2018 and we delivered these results despite further foreign exchange headwinds in a flat golf market in the first quarter. Despite these headwinds today, we expect to achieve our 2019 plan and are reiterating our net sales and adjusted EBITDA guidance. Although we are lowering our guidance for the Jack Wolfskin business in 2019, we remain excited about the long-term prospects of this business. And believe our other businesses will cover the short-term effects of the softer market conditions in Central Europe and China are having upon the Jack Wolfskin business. All in all we remain focused on transforming Callaway into a premium golf equipment and active lifestyle company and are energized by the long-term revenue growth and earnings potential this opportunity presents. Evaluating our results for the first quarter, you should keep in mind some specific factors that affect year-over-year comparisons. First, the Jack Wolfskin acquisition occurred in January, 2019, as a result that business was not included in our 2018 results. Second, as a result of the Jack Wolfskin acquisition, we encourage some non recurring transaction and transition related expenses in both 2018 and 2019. When comparing our non-GAAP 2019 results to our 2018 non-GAAP results, we exclude these nonrecurring expenses and that is how we evaluate our performance. Third, as a result of OGIO, TravisMathew and Jack Wolfskin acquisition, we incurred some noncash purchase accounting adjustments in 2019 and 2018, when discussing our non-GAAP results today we exclude these noncash adjustments that as how we evaluate our performance. Fourth, following the Jack Wolfskin acquisition, we reevaluated our segment reporting and changed our operating segments to, the first segment being golf equipment, which includes golf clubs and golf balls. And the second segment is apparel gear and other which includes Callaway Golf, TravisMathew, OGIO and Jack Wolfskin, apparel golf, and lifestyle bags, golf accessories, footwear and other gear and accessories as well as royalties from the licensing of soft goods. On a product category basis, we will break out net sales for golf clothes, golf balls, apparel, and then the remaining gear accessories. On a regional basis, we will continue to break out the U.S., Japan and Europe, but due to size we have consolidated Rest of Asia and Rest of World into simply Rest of World. Fifth, this is to remind you that for consistency with other comparable companies, our adjusted EBITDA now excludes noncash stock compensation expense in addition to the acquisition related costs. With those factors in mind, I will now provide some specific financial results. Turning now to Slide 9, today we are reporting consolidated first quarter of 2019 net sales of $516 million compared to $403 million in 2018, an increase of $113 million or 28% and a record for net sales. Changes in foreign currency rates negatively impacted first quarter 2019 net sales by $15 million. On a constant currency basis and excluding the Jack Wolfskin business, first quarter of 2019 net sales increased 7%, this increase in constant currency core net sales is driven by increased sales in all operating segments, in all major product categories and in all major regions, including double-digit growth in the TravisMathew business As you can see on Slide 9, gross margin was 46.2% in the first quarter of 2019, compared to 49.7% in the first quarter of 2018, which was slightly better than plan. Excluding non-cash purchase accounting adjustments related to the Jack Wolfskin acquisition and a 70 basis point negative impact of changes in foreign currency, gross margins was 47.9%, a 180 basis points decrease compared to the first quarter of 2018. This decrease was primarily attributable to the seasonality of the Jack Wolfskin business, as well as the current year mix of higher priced products which typically have lower gross margins due to more advanced technology, partially offset by the TravisMathew business, which is accretive on a gross margin basis. Operating expense was $169 million in the first quarter of 2019, which is a $55 million increase compared to $114 million in the first quarter of 2018, that includes the first quarter operating expenses related to the new Jack Wolfskin business. Excluding one-time costs related to the Jack Wolfskin acquisition, operating expenses were $163 million, an increase of $49 million in the quarter. This increase was primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, and continued investments in the TravisMathew business and the golf equipment business. Operating income was $70 million in the first quarter of 2019, compared to operating income of $86 million for the same period in 2018, a decrease of 19%, when excluding the non-recurring Jack Wolfskin transaction and transition related expenses and non-cash purchase accounting adjustments, non-GAAP operating income for 2019 was $81 million, compared to non-GAAP operating income of $86 million in 2018, a decrease of $5 million or 6%, which is predominantly related to the change in foreign currency rates. Other expense was $12 million in the first quarter of 2019, compared to other expense of $6 million in the same period of the prior year. When excluding the non-recurring purchase price hedging losses due to the Jack Wolfskin acquisitions, other expense was $8 million in the first quarter of 2019, an increase of $2 million compared to the first quarter of 2018. The higher other expense in 2019 resulted primarily from $8 million in interest expense related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin, it's partially offset by foreign exchange hedging gains. Fully diluted earnings per share was $0.50 or 96.4 million shares. In the first quarter of 2019 compared to $0.65 in the first quarter of 2018. Excluding the non-cash purchase accounting adjustments related to the Jack Wolfskin, OGIO and TravisMathew acquisition, and the non-recurring transaction and transition expenses related to the Jack Wolfskin transaction in 2019. Non-GAAP fully diluted earnings per share was $0.63 versus non-GAAP fully diluted earnings per share of $0.65 in the first quarter of 2018. Adjusted EBITDA increased to $93 million in the first quarter of 2019, 4.5% increase, compared to $89 million in the first quarter of 2018. We are particularly pleased with this result given the adverse headwinds from changes in foreign currency. Turning now to Slide 10, I will 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 $223 million at the end of the first quarter of 2019, compared to $220 million at the end of the first quarter of 2018. We have $479 million of principal outstanding under our term loan B facility that was used to purchase the Jack Wolfskin transaction. We have also entered into a cross currency swap agreement with regard to a portion of this facility associated approximately $200 million of this facility effectively now has a fixed interest rate of 4.6% Our consolidated net accounts receivable for $286 million, an increase of 8% compared to $265 million at the end of the first quarter of 2018, which is attributable to the addition of the Jack Wolfskin business in 2019. Days sales outstanding in the core business is generally consistent with the same period in 2018, we remain comfortable with the overall quality of our accounts receivable at this time. Also displayed on Slide 10 our inventory balance increased by 46% to $382 million at the end of the first quarter of 2019, this increase was primarily due to the addition of the Jack Wolfskin business, an increase in in-transit inventory and additional inventory needed to support an overall larger core business in 2019. We remain comfortable with the quality of our inventory at this time. Capital expenditures for the first quarter of 2019 were $11 million, a year-over-year increase of $3 million compared to the first quarter of 2018, due mainly to continued investments in our ball plant. Depreciation and amortization expense was $8 million for the first quarter of 2019, compared to $5 million in the first quarter of 2018. Finally, including both open-market repurchases and shares acquired through the settlement of equity awards, in the first quarter of 2019 we repurchased 1.65 million shares for approximately $27 million as compared to the first quarter of 2018, when we repurchased 1.3 million shares for approximately $20 million. We currently have $22 million remaining under our current stock repurchase authorization. I'll now comment on our 2019 guidance, which begins with Slide 11. I'd like to note that the non-GAAP guidance we are providing, excludes the non-cash purchase accounting adjustments for Jack Wolfskin, as well as OGIO and TravisMathew, as well as the non-recurring transaction and transition expenses related to the Jack Wolfskin transaction. As seen on Slide 11, we are reiterating our 2019 net sales range of $1.67 billion to $1.7 billion, an increase of 34% to 37% over 2018. Due to softer market conditions in Central Europe and China were approximately 75% of Jack Wolfskin set sales originates, and the concomitant decrease in pre-book sales for the upcoming fall/winter season. We now expect that Jack Wolfskin’s full year 2019 net sales will be 4% to 6% lower than previously anticipated or 2% to 3% lower on a constant currency basis. Given the strong 2019 first quarter growth in the company’s other golf equipment, apparel and accessories businesses, we anticipate that growth in those other businesses will offset the anticipated lower Jack Wolfskin business. These estimates assume changes in foreign currency exchange rates in 2019, while a negative impact of $35 million on 2019 full year net sales compared to 2018. We reiterate our previous guidance for full year 2019 gross margins of 47%, which is 50 basis higher than 2018. Further headwinds due to foreign currency exchange rates are expected to be all set by continued improvements in operating the performance. We reiterate our previous guidance for full year 2019 operating expenses of $630 million. We are increasing our non-GAAP earnings per share guidance to $0.96 to $1.06, compared to previous guidance of $0.93 to $1.03. This increase is being driven by lower interest costs and a lower effective tax rate, which is estimated to be 20.5% in 2019. 2019 figures are based on 97 million shares outstanding. Consistent with our previous guidance, we estimate our capital expenditures in 2019 to be approximately $55 million to $60 million, which includes incremental capital expenditures related to the Jack Wolfskin business. Capital expenditures were $37 million in 2018. Depreciation and amortization expense is estimated to be approximately $31 million in 2019, which includes $9 million from the Jack Wolfskin business. D&A expense for 2018 was $20 million. We are reiterating our previous adjusted EBITDA guidance of $200 million to $215 million, an increase in adjusted EBITDA on the core golf equipment, apparel and accessories business is expected to cover the negative impact of foreign currency exchanges and the expected decrease in adjusted EBITDA for the Jack Wolfskin business. We now expect the 2019 adjusted EBITDA contribution of the Jack Wolfskin business to be $20 million to $26 million, compared to prior guidance of $33 million. The decrease, which is all in the second half of 2019 is due to software market conditions in Central Europe and China, which is impacting the fall/winter pre-book orders, as well as a little foreign currency impact. We estimate that the non-cash stock compensation expense will be approximately $13 million in 2019. Also on Slide 11, we’re refining our first half 2019 net sales guidance to $933 million to $948 million, which would represent a 17% to 19% increase compared to 2018. The new guidance reflects an increase in the core equipment, apparel and accessories businesses offset by an estimated negative impact of $24 million related to changes in foreign currency exchange rates, when compared to the same period in 2018. It also reflects the shift in the timing of some sales from the second quarter into the first quarter of 2019. We are increasing our first half 2019 non-gap earnings per share guidance to $0.84 to $0.89, an increase of $0.11 to $0.13 compared to previous guidance, which is driven by net sales increases in the core golf equipment, apparel and accessories businesses and lower estimated tax rates and hedging gains recorded in the first quarter. We are increasing our first half 2019 adjusted EBITDA guidance to $142 million to $148 million for the first half of 2019, compared to the prior guidance of $132 million to $141 million. The increase is driven by net sales increases in the core golf equipment, apparel and accessories businesses and hedging gains recorded in the first quarter. Keep in mind, this adjusted EBITDA guidance excludes non-cash stock compensation expense, as well as purchase accounting adjustments and non-recurring transaction and transition expenses related to the Jack Wolfskin acquisition. As discussed last quarter, the decrease in the estimated earnings and adjusted EBITDA for the first half of 2019, compared to the same period 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, due to the seasonality of the Jack Wolfskin business which generally results in operating loss in 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. The negative impact of changes in foreign currency exchange rates in the first half of 2019 compared to 2018 with the first half being adversely affected by an estimated $24 million. As well as the timing of the incremental investments in 2019 which are weighted more heavily towards the first half. Conversely, for the same reasons, during the second half of 2019, the company anticipates increased probability compared to second half of 2018. All things considered, we are pleased with our first quarter results and the performance of our golf equipment and soft goods businesses. We also remain excited about the long-term prospects of our Jack Wolfskin business, including the strategic benefits it provides and the opportunities it presents for growth and for shareholder value creation over the long-term. That concludes our prepared remarks today. We will now open the call for questions.

[Operator Instructions] And your first question comes from the line of Steven Zaccone from JP Morgan. Your line is open.

Great. Thanks very much. So first question I have was just on the golf business. So with the new reporting segments, we don't have the details on woods, irons and putters performance. So can you just comment on which categories within the Club segments saw growth in the first quarter? And maybe how do you see the broader competitive backdrop in the clubs, thus far this year? And then I just have a follow-up.

Steven, this is Chip. We had a very good quarter on the putter category and I believe we also had a good quarter on irons, correct, and obviously the categories overall. If you look at our competitive performance in the marketplace, we're showing really strong performance across the breadth of our line up right now. So we'd like the position we’re in throughout the entire club portfolio.

Okay. Great. And then just on Jack Wolfskin, so can you elaborate a little bit more on what you're seeing that's resulting in the guidance cut for revenue and EBITDA. Is the weakness in bookings equally spread between Europe and China or is it more weighted toward one region? And along those same lines, we're still pretty early in the year here. So what gives you confidence the new guidance is an achievable level for the year?

Sure. So the Jack Wolfskin – let me answer the last part of that question first. So the apparel businesses operates differently than our traditional equipment business and that it works on longer pre-book lead times. So we have pre-books now for the fall/winter season, which is the shipments in Q3 and early Q4 of the year, those all came in basically during Q1. And so, that's a level of visibility that we don't have in our traditional core business. What we saw all over in Europe primarily, but also in China, a couple of different factors. One was a general slowing of the economies over there, which I think have been well documented. And secondly, and a probably more cute issue right now is that the weather didn't cooperate. The fall/winter period is their largest period and if they had a warm probably winter, if you would, that was also followed by last summer, which was a very warm, dry period for them. And so that backed up sales in the channel and led to lower pre-books, which we are hearing is really a bit of an industry wide issue, the wholesale channel in general is putting in less pre-books. And so we have pretty strong visibility now of our pre-books through the balance of the year and it gives us improved visibility and improved confidence relative to those numbers. Did that any answer your question, Steven on the Jack Wolfskin?

Yes. That's helpful. Thank you.

Okay.

And your next question comes from the line of Dave King from Roth Capital. Your line is open.

Thanks. Afternoon, guys. I guess first on the equipment margins. Look like those were down a fair bit year-on-year, was that mainly involves or what are some of the puts and takes there? Was ERC Soft accretive or dilutive? And then, I guess more importantly, what sort of recovery are you expecting in Q2 and beyond? Thanks.

Chip, it's – Dave, it's Chip and our ball margins were relatively flat year-over-year, as we've discussed in the past that ball plant in Chicopee is going through a transformation process, it's pretty significant. And – so we do continue to see improvement in that business and we're optimistic on that going forward. Obviously, the brand has momentum in the marketplace as well. The club margins were down in Q1 on a year-over-year basis. The majority of that comes out of the gross margin, there was some profitability impact as well on the operating expense side. The operating expenses is just strictly timing. The margin is an issue that we always see on this particular cycle and we're launching our most premium products, the Epic Flash Driver, and the Apex irons have higher average selling prices, but also higher costs, and as a result the gross margin percentages are lower. So that was an expected outcome for us. If you look at our projections for the full year, you see that our gross margins are going to be up on a year-over-year basis and that's despite FX headwinds.

Okay. That's good color there, so thank you. And then on Jack Wolfskin of the $93 million in EBITDA you reported, how much did that contribute to that number in Q1? Was it breakeven like you expected?

The $93 was revenue, Dave. So – and…

No, but then – sorry, the $93 million of EBITDA for the overall company that you reported, I think in Q1.

Got it.

Dave, Jack was actually slightly profitable from an EBITDA perspective in Q1. So pretty close to our expectations.

Okay. And then one last quick one. In terms of the Jack Wolfskin, I think last year when all was set and done, it contributed or they booked $395 million of revenue, I think it was in the pro forma. So in your outlook for $363 million call it at the midpoint? Are the booking was down kind of the high single-digits as well, is that the right way to be thinking about it, the pre-book?

Yes. Dave, the $392 million was at the last year’s average euro. So but if you would moved back to the $1.14, it would have translated those sales into $382-ish million. So the down here is, is part currency and obviously part – the Q3 pre-books.

Yes. So we're expecting the revenues at Jack Wolfskin to be on a euro basis or a constant currency basis, down 2% to 3%. So I – relevant down to adjust our guidance but in context 2% to 3% not alarming from our perspective.

Understood. So it sounds like the bookings are down kind of 2% to 3%, is that the right way to be thinking about that?

Yes. We're not going to break out the bookings but our – for you as it relates, but we factored our bookings into the revenue estimates.

All right. Fair enough. I thought, I'd try. All right, thanks, guys.

No problem.

Your next question comes from the line of Brett Andress from KeyBanc Capital. Your line is open.

Hi. Good afternoon.

Hi, Brett.

Hi. So building off some of the questions about the pre-bookings. I guess just to better understand this do softer pre-bookings historically represent loss sales? Or is there the potential that should the conditions improve in these markets, you could eventually get those sales back at some point this year?

They do usually lead to golf sales, so you can obviously make up a portion of that in at-once business. And there is also a significant portion of the Jack Wolfskin business, that’s a direct-to-consumer business both through e-com and our own retail. But the wholesale is the largest portion of that business and the pre-bookings are strong indicator. It also gives us more confidence than we would in our core business in the quality of the forecast.

Got it. Thank you for that clarification. And then Chip, can you elaborate a little bit more on how the golf industry, I guess both here in the U.S. and internationally played out in the first quarter versus your expectations? And at least at some of the DataTech data, we look at there – some share losses in the first quarter for you guys here in U.S. How much of that was expected? When do you expect to start recouping share? Just can you elaborate on the golf industry, I guess, in general?

Yes. Sure. So the golf industry is in a healthy position, overall, the – I call it flat for the first quarter on a global basis, it was down a little bit in Asia, it was up a little bit in Europe and it was flat here in North America is my estimate. Weather wasn't as cooperative as we’d like it to have been year-to-date, but the industry is still quite healthy and we're within – with lower part of our range, but within the range of what we would have expected. So we said flat 2% up for the market, we are flat and candidly we're fine with that. We think that the industry is in a good position and we like our position in that. The share, you are correct, if you look at our market shares in the U.S., we were down in the first quarter. We had a very tough comp on a share basis in the first quarter. So our shares last year were quite high. Our shares now in the channels that they report into Datatech have declined a little bit, but we're still in a very strong position. We are number one in all clubs, number one in woods, number one in drivers, number one in fairway wood, number one in hybrids, number one in irons, number one in putters and the Epic Flash Driver was the number one selling model. So I'm not all together too disappointed in our position, and I think our brand strength is pretty evident there in a healthy market. And candidly, the core business as you pour through our numbers, it is performing very strongly and showing continued momentum year-after-year.

Great. And then last one, just a housekeeping, I guess, the Apparel segment, I think you guys reported $96 million of revenue, Jack Wolfskin did $93 million and I'm assuming TravisMathew was greater than $3 million. So does the Jack Wolfskin business fall into other segments, I'm trying to understand this new reclassification?

Yes. They have a portion in apparel, as well as gear and other, they have footwear, they have tents, they have a whole host of other products, so it's not just the apparel.

And Brett, Travis continues to do – it's growing in that double-digits that Brian had referred to in his comments.

Awesome. Thank you, guys.

Thank you.

Your next question comes from the line of Michael Swartz from SunTrust Robinson Humphrey. Your line is open.

Hey guys, good evening. I just wanted a point of clarification, understanding you're taking down your expectations for Jack Wolfskin in 2019. But I think at the time of the acquisition you laid out some medium to longer-term goals, I think it was $400 million or so in revenue, it was about $50 million in EBITDA. I just wanted to confirm, are those targets still achievable? Are they still what you're kind of aiming for?

No change in the long-term outlook, Mike.

Okay. Great. And then just next question and kind of piggybacking on one of Brett's questions was, it looks like you're looking for organic growth and kind of the 5.5% to 7.5% range in 2019, I think you said, your expectations for the market are flat to up to – so I would assume that plus 5 that you're looking from Callaway. I mean how much should we think about that is being share versus unit volume or pricing?

I think that our – correct me if I'm wrong, but I think our projections in the quarter are even on the little higher than what you just articulated correct?

Currency neutral is couple of points higher than that currency impacted were…

Okay. Fair enough. And then, we really don't project share, so I don't really have a estimate for you. I do think we'll be stronger on a share basis in the second half of the year. But we also believe our revenues are going to be strong in the second half of the year. And so it's a little more difficult to give you – I basically can't give you an estimate about how much of share versus the others at this point. We do see average selling prices have been going up for us, we're in a cycle that supports that and we are being successful with the products that we have at the prices they are in the marketplace currently.

Okay. Great. And one final question also kind of clarification on the guidance, I think you're saying now that currency is going to be a $35 million headwind, I think prior you said $6 million, all right, are you including Jack Wolfskin in the year-over-year currency negative in both of those? I'm just trying to parse out was – is currency really almost $30 million, is worse than it was two months ago?

There was probably $9 million related to Jack Wolfskin in the first quarter, we had not previously included, when we gave the guidance last time, but the balance would be increased currency.

Okay. Wonderful. Thank you.

Thank you.

Your next question comes from the line of Daniel Imbro from Stephens. Your line is open.

Yes. Hey, thanks, good afternoon guys.

Good afternoon.

Chip, wanted to start on some of the long-term synergy targets you just talked about. I think in your prepared remarks, you noted you guys have identified some additional synergies between existing soft goods in the Jack Wolfskin asset. One, can you just provide some more detail on what those look like? And then two, are any of those now included in your updated guidance for the back half of the year?

The nature of the synergies really come from three areas, right now. And we're really only talking about cost base synergies. There are some others that are clearly we think we're going to be able to help them grow at certain markets and they will be able to help us and others. But it’s supply chain across our apparel and soft goods business, it’s logistics across those business and distribution centers. And as we’re diving into this and obviously been a lot of learning over the last several months. We are literally drinking from the fire hose and getting a lot of good information, we've become not only more confident but we've found some areas we think there are increased synergies, as we will get this, none of those are factored into 2019, most of those won't really even materialize till late 2021 and kind of scaling up from there. In fact, we're investing right now. So now that is in our guidance. But this is a period of incremental investment and building for the future, but that has been our practice over the last several years. And the – so far, it appears to be paying off well for shareholders with the growth of the business and such.

Definitely. Thanks. That's helpful. And then Brian one on gross margin, adjusting out some of the purchase accounting, still some heavier pressure in 1Q, I know some of that was seasonality. But could you just shed some more light on what the different buckets the pressure where? And then which of those is expected to improve to get to that full year guided target of 47%?

Sure. I think you start with 49.7%, last year we had 46.2% this year, there's probably 100 basis points related to the one timers related to the inventory step up and things like that. There was 70 basis points related to FX, so if you back all that out, it's only down 180 basis points. Some of that seasonality of the Jack Wolfskin business, they’re less profitable in the first half, than they are on the second half and then also has to do the cyclicality as Chip mentioned earlier of our products this year versus with the higher price products and having more technology, just lower margin percent. That's all – and then we have offset their TravisMathew which is accretive to gross margins.

And then, Daniel, remember because we're launching more products in the second half, you're going to have margin opportunity as your percent of new business is higher.

Got it. And we shouldn't expect headwinds like you guys called out from higher product costs on the new launches like we saw this quarter?

Well, we’ll see it being higher than the margin we had last year, but we’re not commenting at this point the nature of those new product launches if you would.

Got it. Thanks so much guys. Best of luck.

Yes. Thank you.

Your next question comes from the line of John Kernan from Cowen and Company. Your line is open.

Good afternoon, guys. Thanks for taking my questions.

Sure.

Can you just talk again to the gross margin conference in the back half of the year, it is a bit of an inflection, I know there is obvious seasonality with the Jack Wolfskin business? But it doesn't apply a pretty big inflection based on where you're walking us through the – for the first half of the year. Are you at all concerned, given some of the pre-booking weakness about gross margin in the Jack Wolfskin business? Thank you.

Just overall, I mean, we think we're very comfortable with the gross margin estimates. In the golf you just have to remember also that we have a lot of new product launches coming in the second half, which we did it and those are typically much better margins than just continue selling. So I think overall we're pretty comfortable. Anything else?

Yes. And we do continue to believe that the ball margins will continue to improve as we get more experienced in that plan. So some of that is helping, but I think to Brian's point, it's mostly related to the launches in the second half, which from a mixed perspective it is helping a good chunk.

That's helpful. That actually lead into my second question, just on the golf ball, state of golf ball profitability right now versus where you think it can go long-term, I know Triple Track and our [indiscernible] had a lot of share gain and you've invested a lot in the manufacturing part of the business. I'm just wondering where those golf ball margins lying now versus where you think they can go in, in the medium-to-near term.

The golf ball we're still in a learning curve, so we will be for the next year quite frankly, in terms of the investments we're making in Chicopee and the efficiencies of that facility. So we are paying a short-term penalty in terms of the profitability of that business and it’s still very profitable. We're very pleased with it, but we've got some upside potential in that facility as we finish up the transformation process and if we're able to continue to build volume and come up the learning curves, which we're demonstrating the ability to do on the facility, then it should be a growth opportunity for us or improvement opportunity and eventually the accretive to overall business. It is very close to neutral right now, quite frankly. But as we move further down the road, it'll probably be accretive in terms of the overall profitability and gross margin.

Got it. And then just one final thematic question about the sport of Golf, feels like there's momentum, Tiger winning the masters, and obviously a big deal, there's a lot of good young players excitement building for the PGA here in New York coming up. Just wondering where you think we are at – in the industry, you had kind of flat for the first quarter. Where are we in the overall cycle for golf in an overall consumer interest?

I think it's improving, I think your metrics are very clear. The fact that we are a flat as an industry even the rounds were down it’s a pretty good performance. We didn't have average weather, we never know when you're going through or not, but it wasn't as well as good as we expect, your right Tiger Woods is very good for the game. There are a lot of young players out there, the National Golf Foundation reported for the first time a long time increased participation and interest get these noncore golf opportunities such as Topgolf and other segments that are really growing interest in availability in the game so it's in a healthy spot right now.

Excellent, thanks guys and congrats on all the momentum in Callaway.

Thank you.

Thanks.

Your next question comes from the line of Susan Anderson from B Riley FBR. Your line is open.

Hi, good evening. Congrats on the quarter. Just a follow-up on the Jack Wolfskin business, did you guys break out the gear accessories versus apparel for the business on what percent?

We do not Susan, best of my knowledge. But the majority of the business is apparel and gear and other is [indiscernible] 25% gear and other.

Got it. Okay, that's helpful. And then I guess I was kind of curious on how you're managing inventory for that business I guess, you are making products So you have sales down two to three given the orders or are you making more maybe anticipation that self could come in better than expected or how should we think about that?

Go ahead, Brian.

In the wholesale –it varies by channel a little bit but if you look at their wholesale channel which is probably 70%, 75% of their business, pre-books count for most of it, 85% of that channel and so you have got some opportunity for to pick up in-season orders if it takes off and weather's better than you think, but it's a little bit limited given the lead times and then of course the other channel. We think they're okay on inventory right now but there's still limited opportunity to make up for little pre-books.

Got it, okay. And then last one on Jack Wolfskin, I guess – are you guys expecting your DTC business to also to be down at similar amount this fall, winter and then I guess where the lighter orders both in bags and accessories and then also apparel?

Susan, we don't have it. We're not going to break out the estimates by channel for Jack Wolfskin, but at this point, I would assume it's premature estimate it. I wouldn't be expecting to lower the forecast for direct-to-consumer based on what happened a year ago winter. The wholesale channel has no choice because of their inventory positions and open devices, et cetera that is, absolutely an industry-wide phenomenon, but the nice part of our direct-to-consumer is, it's going to be what it's going to be at that point.

Okay. And then I guess maybe you could talk a little bit about just the health of industry across the geographies. I mean, it sounds like it's obviously still very healthy in the U.S., how are you feeling in Europe with some macro pressure there and then also over in Asia?

Asia, we got off to a little bit of a slower start to the year in Japan specifically, but that has been improving. So the trend is good, but they're down that market in general this year. Our business though, has been strong there and continues to perform very well and we do like the trend. Europe, in the golf business had a very good start to the year which means the weather was warm, which means that the Jack Wolfskin business was challenged from that same weather perspective. So we are naturally hedged in Europe now on weather, but that business in the market is positive. And the market in the U.S. got off to we'll call it a slow start in Q1, roughly flat and has improved a little bit since then, but not anything outside of the trends that we're expecting.

Great. That's very helpful. Thanks so much. Good luck next quarter.

Thank you.

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

Yes, thanks. Thanks a lot. I guess you wanted to start with the success of TravisMathew, continue to talk about double digit growth. The lifestyle of the brand seems to be wider and it gets a wider [indiscernible] in terms of demand consumers that want to buy the brand. How do you guys think about your learnings from the couple of stores you have opened, a few stores you have opened now, your alternative points of wholesale distribution, when should we see international development accelerate just kind of curious on your thoughts around what's ahead of the next couple of years for TravisMathew to begin here.

Okay. Randy, you're right, the brand is really resonating and it's resonating outside of traditional golf. So it's very golf – brand is golf DNA, but it's a lifestyle brand, its largest customers are outside of golf and it is worn on the golf courts but also off golf courts. And we really find that is an attractive element of that brand because of the broader reach and scale potential with that. We're not really looking for greater wholesale distribution on that, we're going to be pretty measured on that, we've got good momentum in that brand. And we want to control that process of growth. We are investing in the brand internationally and we're in the middle of a starting up some efforts on that both in Asia, specifically Japan as well as Europe. Those are very small revenue numbers in this year's forecast. But there are revenues associated with it and efforts, and we do believe that, over time that will scale, it'll scale relative to the size of the TravisMathew business, but it is a nice added element to our total business.

Great. And on Jack Wolfskin, I think two things you said in the past one, there's plans to expand the business or the brand in North America, just curious on how you're thinking about time-lining that and I think you also said in the past that the business will be run kind of independently but, one area will be where that brand or that business can leverage, your core strength is in the digital side of community, communities you build across things like the Ship Show or Callaway Live with Callaway or Life On Tour with TravisMathew. So, just kind of curious of how you're thinking about, keeping the business I guess separately run, but also you're bringing kind of expertise or things that you've done really, really well, around this – particularly around digital marketing and, community building with digital means with Callaway and TravisMathew, just curious how you're thinking about that for Jack Wolfskin?

Yes, I think Randy you’ve come with some very good points there, they're not lost on us. So the Jack Wolfskin North America business we anticipate that will launch here in North America, sometime between early Q2 and Q3 of next year. So we're still dialing in the specifics of that, but it should in the ballpark of mid-next year. We're putting the organization together on plans on that currently. We expect it to leverage some of the synergies that we have here in the U.S. both with the TravisMathew brand and parallel positions, back office infrastructure. We expect it to leverage off of our digital and brand building expertise associated with the Callaway Golf and we're sharing some resources from that perspective. We don't anticipate to what I call co-brand, if you look at how we operate these brands, TravisMathew and Callaway are operated separately even though there are some synergies that are invisible to the consumer. And we think that will certainly be the case with the Jack Wolfskin brand and we're putting our plans in place now to launch that for us next year.

Great. And I guess last question, when you came out with the Epic Flash and the marketing campaign talked about the use of AI and the algorithm, so forth, how the customer respond to that marketing messaging and more importantly the product seems like it was well received. Is this kind of process that you use for this particular driver? How do you think about particularly using that in other product development cycles or other product categories going forward? What is the development of Epic Flesh taught you about, utilization of AI in other areas of business?

Well Epic Flash is the number one selling model, driver in golf, so it appears to have resonated nicely with the consumers. We think that the reason it does is this based on the performance of the product and the added ball speed that our technology delivers. AI is a key technology for us and candidly for anybody else in the design space. If you're not using that type of an approach, pretty soon, I think you're going to have a hard time keeping up candidly. We're learning a lot. We're starting to learn how to apply it in other areas of the business in terms of products, broader than just the face technology and I think that you're going to see that technology, others will be following it I'm sure. I believe within the space, we have the first move advantage. And I believe it's going to be something that we're going to continue to mind and understand, and we will see it impact our product line and our technologies in broad way going forward.

Very helpful. Thanks guys.

Thank you.

Thanks Randy.

Your next question comes from the line of Alex Maroccia from Berenberg Capital Markets. Your line is open.

Hey guys, good afternoon Just to expand on one of the prior questions in regards to Jack Wolfskin’s distribution going forward. It looks like there's been some expansion upon the retailers in the U.S. where the brand is currently sold, are you seeing any type of early poster there and how that’s resonating with consumers.

Alex I'm not really familiar with that in the U.S. at this point we have not really leaned in on the U.S. business at this point, if there is expanded distribution in the U.S. for Jack Wolfskin it has not hit my radar screen yet we appreciate the support that we must have received, but it's still very, very small there's been no marketing, we have not had the opportunity to lean in that, they've always had a little bit of a presence here that I think they have one employee and a few independent agents. It's been a very, very small presence and remains that but it wouldn't surprise me if just the fact that we acquired them and Jack Wolfskin is probably getting a little bit more peak hour now and retailers establishing a partnership, they probably know we're going to be coming with some energy in the near future so glad to hear somewhere we are jumping on board.

Okay, got it. That's helpful and then one more switching to golf ball specifically, you alluded to this earlier but it looks like the rounds played data came in pretty poor in Q1 and most importantly in Sungolf, and as a result where exactly are you seeing the strong growth involved, is it in market share, is it within the new products that you've released?

Yes, our market share overall, so it's within Chrome Soft and it's within ERC but our lineup across the board has candidly met or exceeded expectations throughout the quarter particularly, our biggest launch was the ERC with Triple Track technology, that Triple Track technology is clearly resonating with consumers as is that new ERC golf ball, which we're very excited about. And our Chrome Soft business remains very strong as well, really across channels so delighted with the overall view of our golf ball business.

Okay, great. Thank you for taking my question.

Sure.

Your next question comes from the line of Casey Alexander from Compass Point. Your line is open.

Yes. Hi, good afternoon. Most of the questions have been asked and answered but I will ask, most of the time when there's a technological change, like artificial intelligence that takes place in the golf club equipment business, there's a competitor set that simply can't afford to access those types of resources is that possible in the future of the industry, as you look forward the next few years?

It will be a little harder Casey, it's not like the supercomputer itself is that expensive, the supercomputer itself is not going to keep any significant – it'd be hard if you're working out of your garage, but that's not really what we're facing anymore, it's the quality of the engineering and support staff it's the integration with IT, designing your own software that integrates with other software packages, both open market and some that we have to create ourselves, the finite element analysis and predictive work that has to go into creating the algorithms. It is an example of item that could lead to further consolidation and helps to have good scale.

Yes. Okay and secondly you're still generating a lot of cash flow here, how do you think about debt repayment versus share repurchase going forward and at what point in time can you actually start to pay down on the term debt?

We hope we are generating what we think is positive free cash flow, we're finding good attractive investment opportunities as you saw, we repurchase some shares during the first quarter and as we look at our uses of free cash flow and capital we're certainly going to take a strong look at some debt repayment through the balance of the year as well.

Okay, great. Thanks very much.

Thanks, Casey.

Thanks, Casey.

And your next question comes from the line of Brett Andress from KeyBanc Capital. Your line is open.

Just a follow up are we going to get the historical segment reclassification results for 2018 quarterly at some point?

Yes, we can give you the future quarter’s obviously, Q1 has been restated, but yes, we will send that out to you guys.

Alright. Thank you.

Thank you.

There are no further questions at this time. I'll turn the call back over to Chip Brewer for some closing remarks.

Well, thanks everybody for calling in, we went a little over, so appreciate your patience on that but we wanted to answer the questions that were in the queue. Thanks for your time attention we'll look forward to talking to you again at the end of Q2.

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