Callaway Golf Company (CALY) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Callaway Golf Fourth Quarter and Full-Year 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Patrick Burke, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Mike, and good afternoon, everyone. Welcome to Callaway’s fourth quarter and annual 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 fourth quarter and annual 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 www.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’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 actual results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description.Please note 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 Relations website under the 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. I’m pleased to announce another record year, a year of strong financial growth and significant strategic progress, market conditions as a whole were positive for 2019, and we once again grew our business faster than the market, while simultaneously strengthening it via strategic and tactical reinvestments.For the quarter, we enjoyed continued strong performance in our golf equipment business, continued double-digit growth in the TravisMathew business, as well as continued positive sell-through trends in our Jack Wolfskin business in its core market. These results reflect the strength of our team, our brands and our long-term strategy, as we are seeing key investments in other initiatives meaningfully impact the growth and the long-term earnings potential of our business.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 have accomplished. I’m also sure they understand we have a lot more to do, and like me, are motivated to continue to improve.Turning to Slide 5. Let’s now take a look at our operating performance by business segment. In the golf equipment segment, our revenues were up 33% for the quarter and 7.3% for the year. We saw revenue growth in every major market. The second-half of 2019 benefited from more product launches relative to the same period in 2018. We were pleased with the quality of our launches and are also pleased with our field inventory positions going into 2020.Overall, for the year, market conditions were good, delivering an approximate 3% growth on a global basis. Consistent with our track record, we grew our golf equipment revenues faster than the overall market at approximately 8.5% growth on a currency-neutral basis for the full-year.During the year, we demonstrated strength across the breadth of our club lineup and are proud to be able to claim the number one market share position in clubs in both the U.S. and Europe and the number one foreign brand, but number two overall position in Japan.In the U.S., we also had the number one selling Driver and Fairway Wood models and the number one selling iron brand. Globally, Callaway was the number one driver on major worldwide tours and Odyssey was the number one putter.Our golf ball business had another strong year with our market share setting new records. Building for the future, we have been aggressively reinvesting in our Chicopee manufacturing facility. Now pleased to report that the conversion is now substantially complete, and we are phasing in this new capacity and capabilities.While we work through this transition, we continue to experience a little higher manufacturing costs, but we remain excited about the long-term capabilities and direction of this facility, as well as our golf ball business overall.I’m convinced that this investment will set us up for sustained success and a differentiated and compelling product positioning going forward. Stay tuned for more on this as we go through the year. While on the subject of the Chicopee ball plant transformation, our media group produced what I believe is a great documentary on the plant’s conversion and the impact of this plant on the New England town, which it operates.This documentary airs live on the Golf Channel, February 18 at 10:30 PM Eastern Standard Time and will be available on our social feeds shortly thereafter. I invite all of you to tune in, and I believe you will enjoy what is certainly a true feel good story of U.S. manufacturing evolution and resilience.Turning to Slide 6. On the product side, we entered the year energized by one of the strongest overall lineups we’ve ever been part of. The hero product for 2020 is the Maverick lineup woods, hybrids and irons. This line features more in-depth and robust applications of AI technology, as well as high strength multi-material constructions.As those of you who have followed us know, we believe we’re establishing a first-mover advantage by leading in AI. I’ll even go as hard to say that within a few years, if you’re not using this approach, it will be difficult to stay competitive.We are also launching the new Stroke Lab black putters, including a triple track version, where, as our marketing slogan says, sometimes things just line up. It’s early in the launch process, but market reaction to all of these products has been positive thus far, and we are optimistic for another year of product leadership.Later this quarter and into Q2, we’ll be launching our 2020 versions of Chrome Soft and Chrome Soft X golf balls. These balls will leverage the investments we have made over the last several years to deliver new standards and performance. Again, although we have not delivered this product yet, we are encouraged by our internal and external testing, including both tour and consumer feedback.Within the golf equipment segment, we’re continuing to invest in R&D resources, especially AI, as well as tour and customer-facing initiatives, such as fitting capabilities and B2B systems. We’re also in the final stages of completing the Chicopee facility upgrade and are in the process of building out and transition to an 800,000 square foot centralized North America DC, as well as upgrading and consolidating our DCs in Japan, China and the UK.Taking a step back and looking at the big picture, we believe the golf equipment market remains in a healthy position with a significant stable market, improved structural dynamics over the last several years and exciting global tour creating interest in the game and potential upside demand drivers such as Topgolf. We assume predictable and well-structured market, where leadership positions, scale and operating acumen can continue to drive moderate growth and meaningful cash flows.Turning to Slide 7 and looking at the soft goods segment performance. Last year’s revenues surged due to the 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, including its strong domestic business, developing international prospects and the exciting new launch of the Cuater brand of golf shoes introduced in Q4 of last year.The Jack Wolfskin business had another solid quarter and delivered full-year financial results consistent with our previously communicated expectations. Most importantly, the consumer appears to be reacting positively to the product innovation and brand investments that have been implemented in its core markets of Central Europe.With this, we continue to see promising results in the direct-to-consumer business, highlighted by double-digit growth in their e-com business. In addition, the sell-through in at-once business for the Fall/Winter 2019 product range has been at or above plan.The Jack Wolfskin China business was a little softer for us last year. But during the year, we hired a new design team for this market and we are encouraged by the potential impact this change should make in the trajectory of that market starting in the fall of 2020.We’re also in process of making additional investments to strengthen and grow the global Jack Wolfskin business long-term and to realize the increased estimate for synergies discussed in our last call, that being at least $15 million by 2022.These include the establishment of an apparel and soft good sourcing center of excellence at Jack Wolfskin North America organization based out of Park City, Utah, with a planned soft launch of the Jack Wolfskin brand in Q2 of this year, and the assumption of the Japan Jack Wolfskin business from its distributor in March of this year. Both of these growth initiatives are planned conservatively at present. We will be in an investment mode for 2020, with low revenue expectations in the first year.However, both are anticipated to be profitable in year two and both offer significant upside if and when we get the consumer positioning and messaging correct. With the purchase of the remaining equity in Japan Callaway Apparel business mid-last year, we are also making investments in this business aimed at both cost savings and regional growth initiatives for the Callaway Apparel brand throughout Asia. We are also investing in numerous IT projects to best manage and optimize our apparel business across the globe.As I hope, you can see our soft goods business is a large and rapidly growing segment of our company. We are confident in and excited about the long-term outlook and potential here. To lead our efforts here, we’re also planning to hire an EVP of global soft goods and apparel and we are fairly far along in this important process.Turning to Slide 8 and our 2020 outlook. We’re projecting market conditions to be flat to slightly up on a global basis, and we expect revenues to grow faster than the market at approximately 4%. Our guidance here reflects our best estimate of the impact of the coronavirus. Needless to say, this situation is very uncertain right now, and we’re still assessing the potential impact and there’s a lot we just can’t know yet.We believe it will certainly have an impact on our supply chain, near-term demand for our products in China, as well as potential demand in the markets outside of China, particularly neighboring markets. Given the lack of visibility, we’re really guessing on the financial impact at this point.However, I can confirm we have adjusted our forecast down over the last week or so by approximately $25 million in revenue and $12.5 million on an EBITDA basis. This estimate assumes our suppliers’ factories get up and running slower than normal, but ramp up to some sense of normalcy by the end of the month, and the consumer demand in China returns to some set or of normalcy by the end of March. Across all of our businesses, we believe we’re well-positioned comparatively to manage through this.As we work through this challenging situation, our thoughts and prayers are with the people of China, including our employees, customers and their families in that region, as well as those affected by the virus globally. We hope and pray for a speedy resolution. We also believe in the resilience of the Chinese people and we retain our optimistic view on the value and importance of this market over the medium to long-term.Our 2020 EBITDA forecast also reflects $3 million of incremental year-over-year tariff expense and $10 million of FX headwinds. We believe we can and will continue to lead the golf equipment business by also developing and growing a strong soft goods business, 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.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.2020 is a year of above-average reinvestment. We identify approximately 6 million of these as one-time in nature. But there is more embedded in our forecast, where we have lower negative return in this year, but we expect higher returns in future years.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 that of the golf industry overall and over long-term improved operating leverage based on economies of scale.Our reinvestment strategy has served us well thus far and we believe that it will continue to do so going forward. We hope and believe our results over the last eight years give us some credibility in this regard.In conclusion, while coronavirus, tariffs and foreign currency are all providing unusual and hopefully temporary headwinds, we’re still looking forward to another strong year of operational and financial performance in 2020.Financially, we’re pleased to be forecasting increased profitability on a GAAP basis, strong free cash flow generation, and what I believe is compelling financial performance when considering the aforementioned macro factors. I believe this speaks to the fundamental operating strength of our business.On the strategy side, we’re pleased to have strong internal investment opportunities, which we are confident we can exit against and they will continue to move us down a strategic path that makes us a much larger and diverse company with higher embedded growth prospects and a significantly higher long-term earnings outlook.Brian, over to you.

Thank you, Chip. As Chip mentioned, we’re very pleased with our 2019 results. Following two record sales years in 2017 and 2018, we were able to achieve 37% sales growth and 25% adjusted EBITDA growth, while absorbing a $31 million negative sales impact from changes in foreign currency rates, as well as $5 million related to incremental tariffs.In addition, the acquisition of Jack Wolfskin in early 2019 was an important part of our long-term strategy of transforming Callaway into a premium golf equipment and active lifestyle company.As we look forward to 2020, we are pleased with our operational outlook, but we are facing some macro factors that will have a significant impact on our financial results. The most notable factor is the coronavirus outbreak, which will affect our sales in Asia and our supply side overall.Our financial guidance today reflects our best estimate of the impact of the virus, but the impact is very difficult to estimate any degree of certainty. As Chip mentioned, our heartfelt thoughts and prayers are with the people in China and around the globe who are affected by this outbreak.As we enter 2020, we are also facing headwinds from changes in foreign currency rates and incremental patterns. And as Chip mentioned, 2020 is an investment year for our business, as we make the investments necessary to grow, both our golf equipment and apparel businesses.We have attempted to quantify the estimated impact of all these items in our press release we issued today, and I will comment further later in my remarks. But first, I’ll comment on our specific financial results for the fourth quarter and full-year 2019.When discussing our non-GAAP results today, we exclude non-cash purchase accounting adjustments related to the OGIO, TravisMathew and Jack Wolfskin acquisition, and we also exclude other non-recurring transaction and transition expenses related to the acquisitions and other non-recurring advisory fees. We exclude these items, because that is how we evaluate our performance. A reconciliation this non-GAAP information to the corresponding GAAP information is included with the earnings release we issued today.Turning to Slide 10. We are now reporting – we’re reporting consolidated full-year 2019. net sales of $1.701 billion, compared to $1.243 billion in 2018, an increase of $458 million, or 37% and a record for net sales. The 37% growth was primarily driven by the Jack Wolfskin, which contributed $356 million in net sales in 2019.Including the Jack Wolfskin business, net sales increased 8% for 2019. This increase is driven by the strength of the 2019 golf equipment line, as well as continued double-digit growth in the TravisMathew business. In 2019, changes in foreign currency exchange rates negatively impacted net sales by $31 million overall, including $18 million with regard to the Jack Wolfskin business.Non-GAAP gross margin was 45.8% in 2019, compared to 46.5% in 2018. This 70 basis point decrease is primarily attributable to the negative impact of foreign currency, increased tariff expense, as well as the current year of golf equipment product mix with more premium golf clubs with more advanced technology and higher costs. These increases will partially offset by the TravisMathew and Jack Wolfskin businesses, which were accretive on a gross margin basis.Non-GAAP operating expense was $617 million in 2019, compared to $445 million in 2018. This $172 million increase is comprised of $155 million from the addition of Jack Wolfskin operating expense and $70 million of investments in the golf equipment and TravisMathew businesses, as well as normal inflationary pressures.Non GAAP operating income for 2019 was $163 million, compared to non-GAAP operating income of $133 million in 2018, an increase of $30 million, or 23%, which is primarily related to the Jack Wolfskin, TravisMathew and golf equipment businesses and was partially offset by the negative effect of foreign currency and increased tariff expense.Non-GAAP other expense was $33 million in 2019, compared to non-GAAP other expense of $2 million in 2018. The higher other expense in 2019 resulted from a $34 million increase in interest expense, which is primarily related to the Jack Wolfskin acquisition financing.Non-GAAP fully diluted earnings per share was $1.10 in 2019 versus non-GAAP fully diluted earnings per share of $1.08 in 2018. This non-GAAP increase was driven by the sales increases in the golf equipment and TravisMathew businesses, as well the addition of the new Jack Wolfskin business, all mostly offset by decreased interest expense.Adjusted EBITDA increased $42 million to $210 million in 2019, compared to $168 million in 2018. Again, we are pleased with this result, given the adverse headwinds from changes in foreign currency rates and increased tariffs expense.Turning to Side 11. Consolidated fourth quarter 2019 net sales were $312 million, compared to $181 million in 2018, an increase of $131 million, or 72%, and a record for net sales. In fact, 14 of the last 15 quarters have been record sales for that quarter. The 72% growth was primarily driven by the addition of the Jack Wolfskin business, which contributed to $81 million in the fourth quarter. Changes in foreign currency exchange rates negatively impacted fourth quarter 2019 net sales by $1 million.On a constant currency basis and excluding the Jack Wolfskin business, fourth quarter 2019 net sales increased 28%. This increase was driven by the increased sales in the golf equipment business, led by the recent third and fourth quarter product launches and continued double-digit growth in the TravisMathew business.Non-GAAP gross margins were 42.4%, a 370 basis point increase compared to the fourth quarter of 2018. This increase is primarily attributable to the Jack Wolfskin and TravisMathew businesses, which were accretive to our gross margins in the fourth quarter. The negative impact from tariffs partially offset some of the increased margin.Non-GAAP operating expense was $148 million in the fourth quarter of 2019, which is a $38 million increase compared to $110 million in the fourth quarter of 2018. This increase is due to the addition in 2019 of $41 million in operating expenses for the Jack Wolfskin business.Non-GAAP loss from operations was $16 million in the fourth quarter of 2019, compared to non-GAAP loss from operations of $40 million for the same period in 2018, a $24 million, or 60% improvement, which is primarily due to the Jack Wolfskin business and new product lunches for the golf equipment business, both partially offset by increased tariffs expense.Non-GAAP other expense was $9 million in the fourth quarter of 2019, compared to non-GAAP other income of $200,000 in the same period of the prior year. The higher other expense in 2019 resulted primarily from the $7 million increase in interest expense, primarily related to the Jack Wolfskin purchase financing.The 2018 other income also includes $4 million of purchase price hedging gains reflected in the fourth quarter related to the Jack Wolfskin acquisition, which was completed in January of 2019.Non-GAAP loss per share was $0.26 versus non-GAAP loss per share of $0.32 in the fourth quarter of 2018. This non-GAAP increase is primarily attributable to the Jack Wolfskin business and the new back-half product launches in the golf equipment business, partially offset by increased interest expense.Adjusted EBITDA increased $25 million to a loss of $6 million in the fourth quarter of 2019, compared to a loss of $31 million in the fourth quarter of 2018.Turning to Slide 12, I will now cover certain balance sheet and cash flow items. Available liquidity, which represents additional availability under our credit facilities, plus cash on hand, was $303 million at the end of the fourth quarter of 2019, compared to $271 million at the end of the fourth quarter of 2018.Our consolidated net accounts receivable were $140 million, an increase of 97%, compared to $71 million at the end of the fourth quarter of 2018, which is primarily attributable to the addition of the Jack Wolfskin business in 2019.Days sales outstanding in the core business decreased from 62 days to 58 days. We remain comfortable with the overall quality of our accounts receivable at this time.Our inventory balance increased by 35% to $457 million at the end of the fourth quarter of 2019. This increase was primarily due to the addition of the Jack Wolfskin business, additional inventory to support our growing soft goods business and inventory needed to support an overall larger golf equipment business. We remain comfortable with the quality of our inventory at this time.Capital expenditures for the full-year of 2019 were $55 million, a year-over-year increase of $18 million, compared to 2018, due mainly to continued investments in our golf ball plant and the addition of the Jack Wolfskin business.Depreciation and amortization expense was $35 million in 2019, compared to $20 million in 2018, including an additional $13 million in the addition of Jack Wolfskin.I’ll now comment on our 2020 GAAP guidance. Turning to Slide 13. The 2020 full-year projections set forth below are based on the company’s best estimates at this time. They include the estimated impact of certain factors, including the coronavirus, which is estimated to have a negative impact of $25 million on sales and $13 million on EBITDA.Changes in foreign currency rates, which is estimated to have a negative impact of $9 million on sales and $10 million on EBITDA, an incremental tariff expense of $3 million on cost of goods sold and EBITDA. For the sake of simplicity, I will refer to these items collectively as the macro factors.The global golf equipment market continues to be a healthy market and we believe we can continue to grow our golf equipment business from a revenue and EBITDA perspective in 2020. We also expect sales growth from our soft goods business. The two segments were originally estimated to grow at similar rates. But due to the macro factors, we now estimate the golf equipment segment may grow slightly faster in 2020.On the soft goods side, we expect sales growth from our TravisMathew and Jack Wolfskin businesses, including limited sales for Jack Wolfskin in North America and Japan, mostly in the back-half of the year.From a profit perspective, 2020 will be an investment year on the soft goods side of business, as we invest in the warehouse consolidation side, on new market expansion for Jack Wolfskin, continued infrastructure investments for TravisMathew and some incremental investments in Asia for continued expansion of the Callaway Apparel business.As seen on Slide 14, 2020 net sales are estimated to be in the range of $1.75 to $1.78 billion, an increase of 3% to 5% over 2019. This assumes a flat to slightly improving golf market.The company currently estimates that changes in foreign currency rates will negatively impact 2020 by approximately $9 million in net sales. We estimate that full-year gross margins will be 46.3%, which is 120 basis points higher than 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margins associated with this even year cycle of product launches.In 2020, the company expects that gross margins will be negatively impacted by $5 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $30 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margins will also be affected by the macro factors described above.The company estimates that its full-year 2020 operating expenses will be $680 million, approximately $46 million higher than 2019 operating expenses. This increase is being driven primarily by the continued investment in the company’s soft goods business, which include new market expansion for Jack Wolfskin, continued infrastructure and brand investment for TravisMathew and investment in Asia to grow all the companies of Callaway. Normal inflationary pressures and ongoing investment in the golf equipment business are also contributing to the increase.2020 operating expenses will include approximately $6 million in non-cash amortization expense and a small amount of non-recurring IT expense, compared to $18 million of purchase accounting and transaction and transition expenses related to the Jack Wolfskin acquisition. The macro factors are expected to have a positive impact on operating expenses, primarily related to FX.We estimate our capital expenditures in 2020 to be approximately $55 million. Depreciation and amortization expense is estimated to be approximately $43 million in 2020. We do expect capital expenditures to begin to normalize towards the end of 2020, as the multi-year ball plant project come to an end and the warehouse consolidation project is completed.The company estimates full-year 2020 earnings per share of $0.82 to $0.94. The company’s 2020 earnings per share estimate assume an effective tax rate of approximately 18%, which is slightly higher than 2019. These estimates also assume a base of 97 million fully diluted shares in 2020 and approximately flat with 2019.The company estimates full-year 2020 adjusted EBITDA of $190 million to $205 million. These estimates include the reduction expenses related to purchase accounting and non-recurring acquisition costs and the impact of the macro factors discussed above and in the press release.The 2020 first quarter projections set forth are based on the company’s best estimates at this time. They include the estimated impact of certain factors, including the coronavirus, foreign exchange and the tariffs discussed above. For the sake of simplicity, these will be referred to collectively as the Q1 macro factors.As depicted on Slide 14, the company estimates first quarter 2020 net sales to be approximately flat to slightly down in 2020, compared to 2019, primarily as a result of the Q1 macro factors. This assumes a flat to slightly improving overall golf market and a slightly later launch date for the new Chrome Soft golf balls when compared to the ERC Soft golf ball launch in 2019.The company estimates that its first quarter 2020 gross margin will be approximately 10 basis points higher than the same period in 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margin associated with the even year cycle of product launches.From the first quarter of 2020, the company expects that gross margin will be negatively impacted by $1 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $5 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margin will also be affected by the Q1 macro factors described above.The company estimates that its first quarter 2020 operating expenses will be approximately $7 million higher than 2019 operating expenses. This increase is being driven primarily by normal inflationary pressures and the aforementioned strategic investments.The 2020 operating expenses will include approximately $1 million in non-cash amortization expense and a small amount of non-recurring IT expense, compared to $6 million of purchase accounting and transaction and transition fees related to the Jack Wolfskin acquisition. The macro factors are expected to have a positive benefit on operating expenses, primarily related to FX.The company estimates first quarter 2020 earnings per share of $0.41 to $0.47. The company’s first quarter 2020 earnings per share estimate assumes an effective tax rate of approximately 18%, compared to 16.5% in the same period in 2019. These estimates also assume a base of 97 million fully diluted shares in the first quarter of 2020.The company estimates first quarter 2020 adjusted EBITDA of $72 million to $79 million, compared to $79 million for the first quarter of 2019. These estimates include the reduction in expenses related to purchase counting and non-recurring acquisition costs and the impact of the macro factors discussed above and in the press release.That concludes our prepared remarks today. We will now open the call for questions.

[Operator Instructions] Your first question comes from Susan Anderson from B Riley FBR.

Hi, good evening. Thank you for taking my questions. I was wondering, can you talk about the investments maybe you’re making in Jack Wolfskin, the brand this year across supply chain distribution, et cetera? And then how should we think about the cadence of the investments on the quarters as we go throughout the year? And then maybe, two, you could remind us what percent of Jack Wolfskin is in China? Thanks

Sure. Hi, Susan.

Hi.

So the investments that we’re making around the Jack Wolfskin are multifaceted right now, and they really overlap on our entire soft goods and apparel business in many ways. So there’s a supply chain center of excellence, which is sourcing quality and administrative functions that is integral for us to realize the synergy investments that we have mentioned across our entire soft goods supply chain. So that is one significant one.We’re doing the building out the organization for North America launch of the Jack Wolfskin brand, which will be based out of Park City. We’re building out the organizational structure in Japan for that business. And then, we’re making certain IT and distribution-related investments in Jack Wolfskin within its primary markets, which are China and Central Europe. So considerable amount of activity around that, which we’re excited about. We think we have a high confidence level in our ability to execute those internal investments.In terms of the cadence of when they will hit, among the quarters, Brian, do you have any feel for that?

They were broken down.

Yes, Susan, they probably ramp a little and they’d probably start a little slowly in Q1, but then probably ramp pretty quickly between Q2 and Q4.

Great. That’s helpful. And then if I could have a follow-up, so the launch of the TravisMathew brand of golf shoes, maybe you could talk a little bit about the response by the wholesale partners and consumers, maybe a little bit early on, but then also the distribution right now? And then I think you talked about the growth expectations across all the segments and brands. It sounds like you’re expecting other segments to be up in brand. But are there any ones that should be directionally higher than the others? Thanks?

Sure. The Cuater shoe line was launched really on a limited basis in Q4. It was primarily launched direct-to-consumer with just a small amount of wholesale in that quarter and the market reaction was very favorable. As you imagine, it’s part of the TravisMathew family that brand has quite a bit of momentum behind it.And both consumers reacted favorably to it, great feedback, good sell-through and the wholesale partners had success in their offerings that they’ve had. It’ll be a broader launch in Q2 of this year to wholesale. It’s still fairly select in this distribution and still relatively modest revenue expectations for this year, but off to an excellent start and one of the many initiatives across our soft goods and apparel line that creates good opportunity.The rest of our – we report out in two segments right now, golf equipment and soft goods and apparel. We believe both of those segments will be up this year. And within each segment, a little bit different growth rate by individual categories within it, which gets pretty detailed right now. Travis is obviously a strong growth opportunity for us and we anticipate that continuing.And then, Susan, last question and answer is on the China business for Jack Wolfskin, Jack Wolfskin China is about 20% of their revenues and China in total is about 5% of our total company revenues.

Your next question comes from Michael Swartz from SunTrust Robinson Humphrey.

Hey, good evening, guys.

Hi, Michael.

Just – maybe starting off with Brian. It looks like in the fourth quarter, gross margin came in a bit below what your guidance had implied for the full-year. So maybe just a little color on maybe what caught you off guard during the quarter?

Sure, Michael, I’m somewhat expecting this question. The full-year guidance for gross margin non-GAAP was 46.7% versus what we delivered was 40.8%, that was 90 basis points short of that.A couple of things that were going on. One, there’s just a little different mix of the product sold during the quarter than we had estimated with a little bit more lower-margin products in the mix. And then during the quarter, we also had an opportunity to sell some older and lower-margin inventory without impacting our first quarter launches, which is evidenced by the higher-than-expected sales in the fourth quarter. And so overall, it left us in a better overall position, as we move into 2020, and there was probably a little bit of FX in there as well.

Okay. That’s helpful. And then, Chip, I know it’s early, but maybe anything you can provide color-wise on the launch of Maverick and maybe the response you’ve seen relative to prior launches, whether that’s Rogue or Epic?

Yes, it’s very early, Michael, but we’re pleased with the feedback we’re hearing across the golf club product line. So we’ve got majority of our golf sticks lineup in the field now, and feedback has been very strong from consumers, as well as wholesale consistent with what we hoped it would be. And it’s strong across the line, particularly on the irons, I would say, but the irons just launched last weekend.So we’re working on very small data right now. But no comparative data for you, but positive feedback on the lineup, and we think we’re in good position to continue to lead in the golf equipment segment, particularly on the club side, where we’ve established strong leadership positions over the last several years.

Your next question comes from Joe Altobello from Raymond James.

Thanks. Hey, guys, good afternoon. First question, I wanted to do a little more color on the OpEx ramp. You guys are looking forward just coming year. How much of that is selling versus G&A? And maybe how much of that is behind Jack? I think you mentioned Jack had about $155 million of OpEx last year, how much is that number going up versus the big digits? Thanks.

OpEx, it’s year-over-year OpEx?

Yes. Just from a, I guess, function perspective, there’s going to be growth in both selling and admins, right? So as we build infrastructures, obviously, there is pieces of both of those, may be a little more than selling, but definitely in both of those functions.

And in terms of Jack, how much does that go up?

We’re not breaking out Jack specifically. And it’s, Joe, is starting to get a little tougher as we integrate the soft goods businesses to kind of look at that by brand. But obviously, there definitely is infrastructure spend for the new market and then we continue to invest in systems as well. So there definitely is – some of that investment is related to those activities.

If you just look at operating expenses in 2020 versus 2019, there’ll be the normal inflationary pressures and we’d probably say half of that relates to that just normal inflation and increase in our business. Then there’ll be another piece that is normal increase investment as we grow and have a larger organization. And then there’s another piece that is probably related to – we have additional investment that Chip referred to in our soft goods business, where you don’t see any revenue against that yet. So it’s definitely an investment year next year.

Your next question comes from Brett Andress from KeyBanc Capital Markets.

Hey, good afternoon.

Good afternoon.

Brian, if you could help me with the 2020 guide overall? In the press release, you have the starting point at $180 million for adjusted EBITDA, but then you reported $210 million of adjusted EBITDA this year. So we all have our models based off $210 million. So as a bridge to a non-GAAP number, especially with adding back the $5 million in gross margin and the $6 million in OpEx one-time?

Yes. So yes, part of this is last year, we were reporting non-GAAP, and this year, it’s moving to GAAP. But if you look at it just sort of EBITDA, it’s not actually GAAP. If you look at that, we’re guiding to $190 million to $205 million versus $182 million last year. Now if you add back sort of the – what we call, people refer to one-time, you would get a guide of $196 million to $211 million for 2020 versus $210 million for last year.So that’s your $210 million and that would equate to the $196 million to $211 million. Then you add into that, our estimated impact with the coronavirus, which is $13 million, estimated impact for FX is 10, estimated impact for tariffs is 3, And if you were – that would equate to essentially $222 million to $237 million guided for 2020 versus the $210 million last year, which is up 6% to 13% on sales estimate about 3% to 5%.

And, Brett, just to clarify that $6 million of one-time expenses in 2020 is the $5 million of warehouse expense mostly up in margin and there’s about $1 million of IT one-time expenses, as we’re implementing new projects. Remember that extra $5 million that’s, or $4 million to $5 million, that’s purchase price is because the amortization doesn’t flow through to EBITDA, but it impact your EPS one-time, right? That’s why that’s $0.09 versus the $6 million on the EBITDA side.

Got it. Thank you for the clarity there. And then, Chip, you mentioned you expect the global golf business to be flat to slightly up in 2020. Could you maybe walk through your outlook by market, what do you expect in the U.S., UK, Japan, et cetera?

Sure. I guess, I can. The – it gets a little fuzzy, as we go through by market. But the U.S. is starting off a year quite solid. Q4 was quite good. The market grew faster than what we’re saying for our total global forecast last year and it remains quite strong entering this year. So, that market is quite good.The Asian markets were down last year, Japan being the largest of those markets and the coronavirus is likely to have a bigger impact in the Asian markets than it would in the U.S. So, the Japanese market is probably going to be flat to a little bit down this year, depending on how the consumer reacts. Europe is very weather dependent, which was up last year 4% or something like that, but I think, it will likely fall in line with the U.S. forecast of flat to slightly up this year.

And your next question comes from Daniel Imbro from Stephens Inc.

Hey, thanks, guys. Thanks taking our questions.

Sure.

Brian, just first to clarify, similar to the – maybe math you just walked through on the EBITDA guide. As we look at the adjusted EPS guidance, or the GAAP EPS guidance, could you walk us through what maybe like-for-like adjusted number would have been if you added back the same bucket you just called out?

Sure. So our guide is $0.82 to $0.94 versus $0.82 in 2019. Now, in 2020, we’re estimating $0.09 of one-time and $0.28 would have been the number for 2019. So if you exclude those, you get to $0.91 to $1.03 for 2020 versus $1.10 for 2019. Then you add $0.11 on the coronavirus, $0.09 for FX impact and $0.0.3 per tariffs. If you exclude all that, then you’re looking at a guide between 2020 of $1.14 to $1.26 versus $1.10 in 2019. So that would be plus 4% to 15%.

Got it. That’s really helpful. And then we look at the golf ball business in 220, understanding that we have a later Chrome Soft launch coming. But I guess, a little surprised the lack of the flow-through, you have – you had a really strong 4Q, you have a higher price from soft launch coming, Chicopee inefficiencies should improve with the roll off of some of those investments. Can you talk about how you’re thinking about golf ball incremental margins and maybe what are some of the offsetting factors that are maybe keeping that from flowing through to the bottom line?

Yes. Daniel, I think it’s just – we don’t break out the profitability by segment in our forecast. So whether – we are expecting our overall golf equipment segment, which we do provide segment reporting on to be up this year, both profitability and revenues. The ball business is still in a period of transition.As mentioned, as we go through that transition, the margins are still being compressed a little bit due to higher manufacturing costs and startup – normal startup issues, quite frankly, as we work through yield, et cetera. The margins in the ball business are likely to improve this year versus last year, but our stand against the segment will also be higher. So, those can kind of offset each other a little bit.What I’m most excited about on the ball side is, we’ve got a large, very positive momentum segment and increasingly confident in our long-term position here. And I think that’s the bigger issue relative to the short-term aspects of our investments, et cetera. The long-term aspect of this strategy is very exciting to us.

Hey, Daniel, this is Patrick. Really what is depressing margins a little bit in 2020 is that, FX impact that Brian mentioned, that’s a pretty substantial one, and then the tariffs going up that incremental three. So those both – the vast – actually, vast majority of the FX and the tariffs are all hitting margins.So that is offsetting the positive mix on the golf equipment side, including golf balls and the positive mix of Travis and Jack having higher margins. So those will be the two that you have to think about when you balance the whole of 120 bps or 130 bps versus GAAP.

Your next question comes from Casey Alexander from Compass Point.

Yes. Thank you. I’m curious if – as horrible as the coronavirus is that, I mean, how much worse would it had been for you if this had happened at the end of October, as you were building inventory for the New Year? And to a certain extent, I believe that the company has been transitioning some of their supply away from China because of the tariffs. How much is that offsetting some of the impact here?

Casey, It’s Chip, you’re exactly right. It would have been worse for Callaway golf and perhaps for China, quite frankly, if it happened earlier. And because we have – we position most of our launch products well in advance of those launches. So it was already here as your – as our inventory shows at the end of last year and arrived through January.So, we’re in a relatively good position from that perspective and we’re just working out how the factories get up and running after the market start to open up, which it sounds like they’re starting to go through that process.And what the second question would be around…

It was transitioning from your supply chain to other markets because of the tariffs already?

It certainly helps Casey. It doesn’t help quite as much as people think it might, because there are still subcontractors trying to get that in China, for instance, we might have irons being assembled in Vietnam, but a component of that and that would be sufficient from a tariff perspective, but the badges might be out of China vendor.And then the second thing is, even the management of some of the facilities in Vietnam that are often coming from China and the management from China cannot visit Vietnam right now, but it certainly has had a positive impact. We’ve done a nice job in transitioning our supply chain and diversifying it outside of China. We’re continuing on that progress.We’re working through second tier vendors this next year, that will further insulate us from these types of things. But when you look at it, we’re more diversified from a tariff perspective than we are from a China total country perspective. There’s a lot of interdependence across that region for us and everybody else.

Okay. That’s helpful. Thank you. And one last question, because I believe you mentioned that you changed some of your outlooks a week ago. To what extent, do we need to be concerned that later on in the year that there could be some inventory that’s not sold through as a result of changes in demand in end markets in Asia?

Casey, I think that without a – without question, the consumer demand in China is down significantly, and every company that’s reported on their operations there has reflected that. We have about 5% of our revenues operate in China itself. And so, the demand there is significantly muted. And we’re unsure how quickly that will come back up. We have tried to capture that to the best of our abilities. But we know and everybody knows that there’s a lot of speculation on that at this point.Without a doubt, since we purchased inventory ahead of that time, there will be some excess inventory associated with that in those markets from us and every other person is doing business over there. We’ve tried to factor that into our estimates and plans associated with it, but you’re exactly right. And without a doubt that is one of the consequences of this. We will be in as good a shape as anybody to mitigate it. And with 5% of our revenues, it’s proportional of an issue to us. So it’s in the forecast to the best of our ability at this point.

Your next question comes from John Kernan from Cowen.

Good afternoon. This is Krista Zuber on for John. Thank you for taking our questions. Just kind of what circling back to the respect of the multiple distribution center upgrades and consolidations globally, I think, you said in your earlier comments that you expected most of that to be completed for 2020. Is there anything that’s going to bleed into forward years? And kind of how should we think about then your CapEx run rate beyond 2020? And then I just have one follow-up. Thank you.

Great. I mean, there’s always a possibility for something to carry over. But at this point, we’re not really expecting anything to carry over into 2021.As far as CapEx run rate, once it more normalizes,- we’re going through the process now. Part of it depends on how fast Travis is going to grow their stores and some other growth initiative. But as a placeholder, we’re using $45 million at this point.

Terrific. Thank you. And then final question, in terms of the fiscal 2020 guidance assuming the global market conditions up flat to up slightly, your own business growing faster. Can you sort of parse out the drivers, the percentage of what’s coming from pricing, what’s unit growth that you’re kind of – your expectations around that? Thank you.

So you’re talking about for the full-year 2020?

Yes. Thank you

We don’t break that out. We don’t really break that out.

We don’t specifically – we have taken -- it’s probably a mix of both. We have obviously taken some price. But we do expect to grow, especially in a category like irons, where the Maverick iron launches is a bigger overall launch than the launches we had last year.

Your next question comes from Alex Maroccia from Berenberg.

Hey, good afternoon, guys. Outside of the aforementioned investments and operations, where do you guys planning for capital priorities this year? And then does that EPS range bake in any significant debt pay downs?

It does not – it does bake in some debt pay downs. But as far as the capital priorities go, it’s pretty much the same as before, where we are mostly investing back into our core business that support our growth and make sure we continue to perform well there. Then the other priorities have also generally remained the same except the debt repayment has taken a little bit more of a priority. So that’s probably the second. And then third would be the return of capital to shareholders through stock buybacks or dividends. And then probably fourth at this point would be other acquisitions or investing in growth initiatives.

Okay, got it. And then just looking at the Jack Wolfskin business right now, it ended 2019 at the lower-end of the sales guidance, Can you discuss the current wholesale versus DTC environment there? And what your expectations are in 2020 for that bit?

Sure. This is Chip. So, that – you kind of have to look at market by market. So, for Jack Wolfskin, the biggest part of that business is in Central Europe. That is a low-growth market right now. And we’ve had good progress in delivering some improvements in that business on the direct-to-consumer business, et cetera. So we’ll probably outperform on the direct-to-consumer business in that market.The wholesale market is improving. We had good sell-through cross the Jack Wolfskin line in the fall winter season. So we like how that will align us, but the wholesale business in Central Europe is challenge still. So they’re going to be competing factors on that basis.China is kind of up in the air for Jack Wolfskin now due to the coronavirus and then we have some nice growth initiatives, where we’re really anniversary or starting from zero or very low base in North America and in Japan, where they’re going to be small numbers, but big percentage increases. And so you’ve got multiple factors going on there within the Jack Wolfskin business, which are kind of offsetting to give us modest growth expectations for the year. But we remain very encouraged about the long-term outlook.

And that was our last question at this time. I will now turn the call back over to Chip Brewer, CEO, for final comments.

Well, thank you, everybody, for tuning in. We appreciate your time and participation. We’ll look forward to updating you further as we go through the year and look forward to talking to you on the Q2 call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.