Callaway Golf Company (CALY) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the 2020 year-end and fourth quarter earnings conference. [Operator Instructions]. I will now hand the conference over to your speaker, Patrick Burke, Head of Investor Relations. Please go ahead.

Thank you, Carmen, and good afternoon, everyone. Welcome to Callaway's Fourth Quarter and Annual 2020 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 2020 financial results. A copy of the press release and 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 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 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 should be able to flip through those slides. Finally, earlier today we experienced a power outage, but we've been assured by the local power company that there will be no further outages. But we do have a backup plan to restart the call just in case we get interrupted. 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 5 of the presentation. It's great to be with you today to discuss our 2020 full year and Q4 results as well as to provide some color on the business going forward. Looking back on 2020, I have to start with a simple wow. What an interesting and eventful year. We started with business as usual, survived an unforeseen global shutdown, working our way through it in a manner that ensured we came through in a position of strength. Then as the world opened back up, we emerged to find golf experiencing record demand and participation levels. Finally, we finished the year announcing a transformational merger with Topgolf, signing Jon Rahm and delivering on some key strategic initiatives. And now looking forward, all things considered, we could not feel more fortunate or be happier about where our business is and our future prospects. With that said, we're also mindful that many people have been significantly negatively impacted by COVID-19, and our thoughts and prayers go out to them and their families. Looking at Q4 in isolation. The operating results in our golf equipment segment continued the strong momentum shown in Q3, while the apparel business returned to growth and showed great signs for the future. On the Topgolf side, we continued to make progress on the merger front with our shareholder vote scheduled for March 3 and hopefully closing shortly thereafter. I'd like to take this chance to thank the Callaway Golf team for the hard work required in delivering these results and navigating the many challenges presented this past year, all the while setting us up for a transformational change and growth. Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and remains highly motivated. Let's now turn to Page 6 and jump into our Q4 results. We were pleased with our results in virtually all markets and business segments. Our golf equipment segment continued to experience unprecedented demand globally as interest in the sport and participation have surged. According to Golf Datatech, U.S. retail sales of golf equipment, specifically hard goods, were up 59% during Q4, the highest Q4 ever on record, results that followed the highest Q3 on record as well. U.S. rounds were up 41% in Q4, and despite the shutdowns earlier in the year, delivered 14% growth for the full year. We continue to believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport. Golf retail outside of resort location remains very strong at present, while inventory at golf retail remains at all-time lows. It is likely these low inventory levels will continue at least through Q1. Callaway's global hard goods market shares remained strong during the quarter. We estimate our U.S. market share across all channels grew slightly during both Q4 and for the full year 2020. Our share in Japan was also up slightly for the full year, allowing us to finish 2020 as the #1 hard goods brand in that market. This is the first time that a non-Japanese brand has ever finished #1 for the full year in total hard goods. Our full year share in Europe was down slightly, but we still finished as the #1 hard goods brand in this market as well. On a global basis, I believe we remain a leading club company in terms of both market share and total revenues and the #2 ball company. In the U.S., third-party research showed our brand to be the #1 club brand in overall brand rating as well as the leader in innovation and technology. Over the last several years, we have shown resilience with these important brand positions. We had a good year on tour in 2020, finishing the year with the #1 putter and the #1 driver on global tours. However, we didn't have as many wins or total brand exposure as we would have liked. As a result, we strengthened our tour position significantly during 2020 via the signing of Jon Rahm to a full equipment, headwear and apparel deal. The addition of Jon, along with Xander and Phil, and our ongoing strong complement of players across global men's and women's tours leaves us well positioned in this important area of our business. We also started 2021 nicely with 2 wins already on the PGA TOUR and a lot of exposure at all events. On the product front, we're thrilled with our new 2021 lineup, a lineup that focuses on our most premium brands, those being our Epic drivers and Apex irons. For 2021, both brands are being supercharged with new technology, including a new Speed Frame version of our proprietary Jailbreak technology in the woods and a new version of the Apex line called DCB, which should broaden the appeal of this already highly popular line of irons. Reaction to the lineup has been outstanding, both on tour and in the marketplace. Turning to our soft goods and apparel segment. This portion of our business, along with the apparel industry generally, was, of course, more impacted by the pandemic during Q4. However, the speed and magnitude of the recovery also continued to exceed our expectations. Looking at individual businesses in this segment, starting with the Callaway apparel business in Asia. In Japan, we had a good quarter and finished the year as the #1 golf apparel brand in that market based on market share. In Korea, we plan to take back the Callaway Golf apparel brand that has been licensed to a third party for several years and launched our own apparel business in Korea during the second half of 2021. We are investing in staffing and IT systems for this. The team there is energized by this opportunity as this is something that they have been considering for several years now. Turning to TravisMathew. This brand and business continues to impress. Their brand momentum is extremely strong, both in direct-to-consumer channels and at wholesale. Given their success, we are increasingly confident this can be a large and highly profitable brand, presenting us an even bigger opportunity than we originally anticipated. To enable this, we have been investing in their systems and supply chain infrastructure. This investment phase will continue through 2021 and then taper off. We are also investing in direct-to-consumer efforts both through the addition of new stores, selectively taking advantage of some great opportunities, and of course, e-commerce. We could not be more excited about this business overall. Jack Wolfskin also had a strong quarter, delivering year-over-year revenue growth. Perhaps even more importantly, we've cleared some key strategic and operational hurdles during the quarter. In Europe, our new CEO of Global Jack Wolfskin, Richard Collier, joined the team in December. Richard joined us from Helly Hansen, where he held the title of Global Product Officer and served in the capacity as well as de facto Chief Operating Officer. We're excited to have Richard on the team. The reaction to Richard and the new CFO, André, who joined us a few months earlier from Mammut, has been outstanding. Our previous CEO, Melody Harris-Jensbach, transitioned at the end of the year, and we thank her for her leadership over the last 2 years with Callaway. We entered 2021 with a very strong leadership team fully in place. Equally importantly, prior to the full Europe retail shutdown in mid-December, the sell-through of our fall/winter lineup was excellent in both Europe and in China. This speaks to the strength of the brand in these key markets, improved channel management, and the strength of the product lineup, noting that in China, Q4 was the first quarter to showcase the local product design by a new team that was recruited in 2019. The success of this new China for China product was a key strategic initiative for us. Across the globe, but especially in their key markets of China and Europe, we believe the combination of strong leadership and sell-through momentum bodes well for this brand as markets open up and recover. Taking a step back and looking at the larger apparel and soft goods segment, for the last 9 months, the hero has certainly been e-comm. This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day. These investments enabled our apparel business e-comm to deliver 64% year-over-year growth in Q4. E-comm is now a significant portion of the channel mix of this segment, and we are confident our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward. Post-COVID, we continue to expect our apparel and soft goods segment to grow faster than our golf equipment business, and with that growth, to deliver operating leverage and enhanced profitability. And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15 million of synergies in this segment over the coming years. Like our company overall, this segment, with its concentration in golf and outdoor, appears to be well positioned for both the months and years ahead, both during the pandemic and after. Turning to Topgolf. Our comments here will be limited given we have not closed the transaction yet. But during late Q4, due to COVID restrictions, 3 of the U.S. venues were forced to shut as well as 3 of the U.K. venues. However, despite these headwinds, Topgolf's overall results exceeded expectations in Q4. This was driven primarily by strong walk-in sales. Currently, only the U.K. venues and one U.S. venue, Portland, Oregon, are closed. And COVID restrictions appear to be gradually easing. Despite 2021 starting out with more COVID restrictions than we expected, strong walk-in traffic is allowing this business to continue to perform at a level consistent with achieving our total venue full year same venue sales target of 80% to 85% of 2019 levels. Turning to new venue development. Topgolf has opened 2 new domestic venues already this year: Lake Mary, Florida and Albuquerque, New Mexico, and is on track to hit their new venue plan of 8 new owned venues for this year. On the international front, our third franchise location opened earlier this year in Dubai. The site has been getting stronger views despite ongoing COVID complications in this market, and we expect this to be a flagship site for us internationally. Looking forward, given the uncertainties of the COVID situation globally, we are not currently providing 2021 guidance. We can, however, provide the following color. The golf equipment sector is likely to be slightly impacted by COVID in Q1 with the majority of European markets and portions of Asia, Tokyo for instance, in some sort of lockdown or retail constraint and with some supply constraints based on both capacity limitations and logistics. We are also experiencing higher operating costs associated with COVID. Our container shipping costs alone are estimated to be up approximately $13 million for the full year as these costs have surged. But we do not see this as a long-term issue, just a short-term anomaly associated with the pandemic. The demand situation is strong enough that we expect a very strong year in golf equipment despite these issues, a little constraint in Q1 based on capacity and logistics with increasing opportunity to catch up with demand in Q2. Our soft goods and apparel segment continues to be more impacted by COVID. The Europe shutdown is especially impactful for our business there, certainly through Q1. However, the key points of operating strategic progress we mentioned earlier, along with the attractive long-term prospects of both golf and outdoor lifestyle apparel, make me increasingly confident for this business post the COVID closures and their short-term impact. Topgolf is performing consistent with plan. New venue openings are on track, and we are increasingly confident for this business overall. We hope to close in early March. If this happens, we'll have a lot more to say on this business starting on our next call. We continue to see this as a transformational opportunity. On the operating expense side, in comparison to 2019, which is the only meaningful comparison, you're going to see some further investments in 2021. These include investments in our growth infrastructure such as the Korea apparel business, increased tour presence and direct-to-consumer resources. We have a track record for making these kind of internal investments and are confident these will deliver high returns for shareholders. Lastly, we remain confident in the 2022 guidance we provided as part of the Topgolf merger process as well as the future potential of what is going to be a unique and powerful business. Brian, over to you.

Thank you, Chip. As Chip mentioned, 2020 was quite a year. We are pleasantly surprised with how quickly our golf business and the golf industry began recovering from COVID-19 once the governmental restrictions began to abate during the second quarter. We are also pleased with the recovery of both our TravisMathew and Jack Wolfskin businesses. While the recovery in those businesses will not be as quick as the golf equipment business due to longer supply chain lead times and seasonality, the recovery of our apparel businesses is pacing ahead of our expectations and that of comparable businesses. This stronger-than-expected recovery has contributed to our significantly improved liquidity position. Our available liquidity, which includes cash on hand plus availability under our credit facilities, increased to $632 million at December 31, 2020, compared to $303 million at December 31, 2019. In addition to the core business recovery, we may -- we also remain very excited about our prospective merger with Topgolf, which clearly will be transformational for Callaway. Topgolf shareholders have already approved the transaction, and we are holding a special Callaway shareholder meeting on March 3, 2021, to approve the merger. We would expect to close the merger shortly thereafter. In evaluating our results for the fourth quarter and full year, you should keep in mind some specific factors that affect year-over-year comparisons. First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred nonrecurring transaction- and transition-related expenses in 2019. Second, as a result of the Ogio, TravisMathew and Jack Wolfskin acquisitions, we incurred noncash amortization and purchase accounting adjustments in 2020 and 2019, including the Jack Wolfskin inventory step-up in the first quarter of 2019. Third, we also incurred other nonrecurring charges, including costs related to the transition to our North American distribution center in Texas, implementation costs related to the new Jack Wolfskin IT system, severance costs related to our COVID-19 cost reduction initiatives and costs related to the proposed Topgolf merger. Fourth, the $174 million noncash impairment charge in the second quarter of 2020 is nonrecurring and did not affect 2019 results. Fifth, we incurred and will continue to incur noncash amortization of the debt discount on the notes issued during the second quarter of 2020. We have provided in the tables to the earnings release we issued today a schedule breaking out the impact of these items on fourth quarter and full year results. And these items are excluded from our non-GAAP results we discussed today. With those factors in mind, I will now provide some specific financial results. Turning now to Slide 11. Today, we are reporting record consolidated fourth quarter 2020 net sales of $375 million compared to $312 million for the same period in 2019, an increase of $63 million or 20.1%. This increase was driven by a 40% increase in the golf equipment segment resulting from high demand for golf products late into the year as well as the strength of the company's product offerings across all skill levels. The company's soft goods segment continued its faster-than-expected recovery, with fourth quarter 2020 sales increasing 1% versus the same period in 2019. Changes in foreign currency rates had a $9 million favorable impact on fourth quarter 2020 net sales. Gross margin was 37.1% in the fourth quarter of 2020 compared to 41.7% in the fourth quarter of 2019, a decrease of 460 basis points. On a non-GAAP basis, gross margin was 37.2% in the fourth quarter compared to 42.4% in the fourth quarter of 2019, a decrease of 520 basis points. The decrease is primarily attributable to the company's proactive inventory reduction initiatives in the soft goods segment, increased operational costs due to COVID-19 and increased freight costs associated with higher rates and a higher mix of air shipments in order to meet demand. These decreases were partially offset by favorable changes in foreign currency exchange rates and favorable mix created by an increase in the company's e-commerce sales. Operating expenses were $171 million in the fourth quarter of 2020, which is an $18 million increase compared to $153 million in the fourth quarter of 2019. Non-GAAP operating expenses for the fourth quarter were $162 million, a $14 million increase compared to the fourth quarter of 2019. This increase was driven by the company's decision to pay back to employees, other than executive officers, their reduced salary levels for a portion of the year; variable expenses related to the higher revenues in the quarter; continued investments in our new businesses; and unfavorable changes in foreign currency exchange rates. Other expense was $15 million in the fourth quarter of 2020 compared to other expense of $9 million in the same period of the prior year. On a non-GAAP basis, other expense was $13 million in the fourth quarter of 2020 compared to $9 million for the comparable period in 2019. The $4 million increase in other expenses primarily related to a net decrease in foreign currency-related gains as well as interest expense related to our convertible notes. Pretax loss was $48 million in the fourth quarter of 2010 compared to pretax loss of $32 million for the same period in 2019. Non-GAAP pretax loss was $35 million in the fourth quarter of 2020 compared to non-GAAP pretax loss of $25 million in the same period of 2019. Loss per share was $0.43 on 94.2 million shares in the fourth quarter of 2020 compared to a loss per share of $0.31 on 94.2 million shares in the fourth quarter of 2019. Non-GAAP loss per share was $0.33 in the fourth quarter of 2020 compared to a loss per share of $0.26 for the fourth quarter of 2019. Adjusted EBITDA was negative $12 million in the fourth quarter of 2020 compared to negative $6 million in the fourth quarter of 2019. Turning now to Slide 12. Net sales for full year 2020 were $1.589 billion compared to $1.701 billion in 2019, a decrease of $112 million or 6.6%. All things considered, we are very pleased with this sales level given the global pandemic. The decrease in net sales reflects a decrease in our soft goods segment, which decreased 15.9%. And our golf equipment segment increased slightly year-over-year. Changes in foreign currency rates positively impacted 2020 net sales by $11 million versus 2019. Gross margin for full year 2020 was 41.4% compared to 45.1% in 2019, a decrease of 370 basis points. Gross margins in 2020 were negatively impacted by the North American warehouse consolidation and in 2019 were negatively impacted by the nonrecurring purchase price inventory step-up associated with the Jack Wolfskin acquisition. On a non-GAAP basis, which excludes these nonrecurring items, gross margin was 41.8% in 2020 compared to 45.8% in 2019, a decrease of 400 basis points. The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with idle facilities during the government-mandated shutdown, the company's inventory reduction initiatives and increased freight expense in the back half of the year. The decrease in gross margin was partially offset by favorable changes in currency exchange rates and an increase in the company's e-commerce business. Operating expense was $763 million in 2020, which is a $129 million increase compared to $634 million in 2019. This increase is due to the $174 million noncash impairment charge related to the Jack Wolfskin goodwill and trade name. Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for 2020 were $570 million, a $47 million decrease compared to $617 million in 2019. This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses, lower variable expenses due to the lower sales and reduced spending in marketing and tour as golf events around the world were canceled. The decrease was partially offset by continued investments in our new businesses and unfavorable impacts of foreign exchange rates. Other expense was approximately $22 million in 2020 compared to other expense of $37 million in 2019. On a non-GAAP basis, other expense was $15 million for 2020 compared to $33 million for 2019. This $18 million improvement is primarily related to a $19 million increase in foreign currency-related gains period-over-period, including the $11 million gain related to the settlement of the cross-currency swap arrangement. Pretax loss was $127 million in 2020 compared to pretax income of $96 million in 2019. Excluding the impairment charge and the other non-GAAP items previously mentioned, non-GAAP pretax income was $79 million in 2020 compared to non-GAAP pretax income of $130 million in 2019. Loss per share was $1.35 on 94.2 million shares in 2020 compared to fully diluted earnings per share of $0.82 on 96.3 million shares in 2019. Excluding the impairment charge and the other non-GAAP items previously mentioned, non-GAAP fully diluted earnings per share was $0.67 in 2020 compared to fully diluted earnings per share of $1.10 for 2019. Adjusted EBITDA was $165 million in 2020 compared to $210 million in 2019. Turning now to Slide 13. I will now cover certain key balance sheet and cash flow items. As of December 31, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $632 million compared to $303 million at the end of the fourth quarter of 2019. This additional liquidity reflects improved liquidity from working capital management, cost reductions and proceeds from the convertible notes we issued during the second quarter. We had total net debt of $406 million, including $442 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin. Our consolidated net accounts receivable was $138 million, a decrease of 1.4% compared to $140 million at the end of the fourth quarter of 2019. Days sales outstanding decreased to 45 days on December 31, 2020, compared to 53 days at December 31, 2019. We continue to remain very comfortable with the overall quality of our accounts receivable at this time. Also displayed on Slide 12, our inventory balance decreased by 22.8% to $353 million at the end of the fourth quarter of 2020. This decrease was primarily due to the high demand we are experiencing in the golf equipment business as well as inventory reduction efforts in our soft goods businesses. The teams continue to be highly focused on inventory on hand as well as inventory in the field, both of which remain relatively very low at this time. Capital expenditures for 2020 were $39 million, which is right in line with the range provided during our Q3 update. This amount is down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions. In 2021, we expect our capital expenditures to be approximately $50 million for the current Callaway business. Depreciation and amortization expense was $214 million in 2020. D&A expense excluding the $174 million impairment charge was $40 million in 2020 compared to $35 million in 2019. In 2021, we expect non-GAAP depreciation and amortization expense to be approximately $45 million for the current Callaway business. I am now on Slide 14. We're not providing revenue and earnings guidance for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19. However, we would like to highlight certain factors that are expected to affect 2021 financial results compared to 2020. On a premerger basis, which includes only Callaway golf business and does not take into account Topgolf's business following the proposed merger, consolidated net sales for the first quarter of 2021 will exceed 2020 net sales but will continue to be negatively impacted by COVID-19. The company's soft goods business will continue to be impacted by the regulatory shutdown orders in Europe and Asia, which should then strengthen during the balance of the year as the regulatory restrictions subside. The company's golf equipment business is expected to be impacted by temporary supply constraints caused by COVID-19 during the first quarter, which could affect the company's ability to fulfill all of the robust demand in its golf equipment business. The company believes that there are opportunities for supply to catch up beginning in the second quarter. On a premerger basis, full year 2021 non-GAAP gross margin will also be negatively impacted by increased operational costs due to COVID-19, including higher labor costs, logistical challenges as well as increased freight expense resulting from a shortage of ocean freight containers. The freight container shortage alone is estimated to have a negative $13 million impact on freight costs in 2021, with the substantial majority of the impact occurring during the first half. The company believes that its full year 2020 gross margin will be approximately the same as in 2019 despite these gross margin headwinds, which should be offset by increased direct-to-consumer sales and foreign currency exchange rates. On a premerger basis, full year 2021 non-GAAP operating expenses are estimated to be approximately $70 million to $80 million higher compared to full year 2019 non-GAAP operating expenses. In addition to the negative impact of changes in foreign currency rates estimated to be approximately $20 million and inflationary pressures, the increased operating expenses generally reflect continued investment in the company's current business. These investments include investment needed to assume the Korea apparel business, investment in pro tour and continued investment in the soft goods business, including the TravisMathew business related to opening new retail doors, investment in infrastructure and systems and investments related to new market expansions for Jack Wolfskin in North America and Japan. The company believes that these investments will continue to drive growth in sales and profit but expect to incur the expenses for these investments prior to receiving the associated benefit. In 2020, the company realized gains from certain foreign currency hedges in the aggregate amount of approximately $25 million. This gain is not expected to repeat in 2021. In sum, the COVID-19 pandemic had a significant impact on our business beginning in the first quarter of 2021. After we absorb the initial -- after we absorb the initial shock of the impact of the pandemic, including the various governmental shutdown orders and restrictions, Chip challenged us to protect our business, avail ourselves of opportunities that arise during the pandemic and take actions so that we not only survive the pandemic but also emerge in a position of relative strength. Given the recovery in our core business, our prospective merger with Topgolf and our increased liquidity, I believe we have done that. We are cautiously optimistic as we enter 2021. All of our business segments as well as the Topgolf business support an active, outdoor, healthy way of life. It is compatible with the world of social distancing, and we believe this will continue to mitigate the impact of COVID-19. We continue to believe that 2021 will be a stepping stone to more normal conditions in 2022 and the resulting transformational growth we have projected for 2022. That concludes our prepared remarks today, and we will now open the call for questions. As Chip mentioned in his remarks, the primary focus of the Q&A should be with regard to the Callaway business as we are still pending shareholder approval on the merger. Operator, over to you.

[Operator Instructions]. Our first question comes from Randy Konik with Jefferies.

Can we just go over the proactive apparel reductions? Just get a little bit more color there on just the dynamics of what actually took place. And then how much of that impact was to the overall gross margin reduction? And then within that, after we unpack that, can we get some perspective on how much of that was related to Jack Wolfskin versus the other apparel pieces of the other apparel brands?

Okay. Randy, so this is Chip. The first question is on the apparel segment Q4 revenues. Is that correct?

No. Just the gross margin impact that we saw of -- the press release highlighted these proactive apparel inventory reductions. So I just wanted to understand what exactly that is. How much of the gross margin deterioration in the quarter was that item versus the freight expense item? And then within that, how much of it was Jack Wolfskin versus something with Callaway apparel or something like that? Just trying to understand this a little bit more.

Sure, Randy. This is Brian. Obviously, there's business seasonality and it hit right during the middle of the -- beginning of the first quarter and the spring/summer season. They tried to -- they tried to repurpose as much as they could, but there was definitely a bunch of apparel inventory that was pushed through of outlet channels just trying to clear and reduce the amount of inventory. Probably overall, the majority of that, the impact was related to the inventory reduction initiatives. And I forgot, was there something else?

I would -- we're not going to be able to break out at this point what -- how much of that was Jack Wolfskin versus TravisMathew or Callaway apparel. All of them had an inventory correction issue proportionate to the scale of their business really.

All right. Great. And then just to be clear, that means that with this, the deck is -- admittedly should be cleared going forward. Is that correct?

Randy, the only -- yes, with the exception of the fact that there are some incremental shutdowns that occurred at the end of December. So what were -- Europe is -- as you are aware, shut down starting in mid-December and so -- and is still shut down at this point. So there's going to be some implication from that as well.

Yes. Randy, I think they did a very good job with the inventory reduction initiatives from the initial COVID shutdown and working through for the balance of the year. But as Chip mentioned, there will be a little bit more due to the December shutdown.

Great. And then my last question is really around just the -- I know we're not going to discuss Topgolf. But maybe from a Callaway lens, I want to get some perspective on -- recent items I've seen are Jon Rahm on TV with the Topgolf logo on his sleeve, Callaway on his hat, TravisMathew logo on his back. You're clearly starting to see these brands come together. And then I think Topgolf announced a 9-Shot Challenge of the Toptracer and WGT kind of coming together, where the consumer could use either of those two channels or venues, if you will, to play in the tournament. So just curious from a Callaway lens, how do you think about starting to blend these businesses together to kind of try to bring the ecosystem further and further together with these different branding opportunities, advertising opportunities, et cetera?

Yes. Randy, this is Chip. You're clearly seeing some of the strong potential for synergies and co-branding around what is going to be the largest golf consumer ecosystem in the world. And so we remain very excited about that. And -- but for regulatory reasons, we will not get into those too much further at this point. The merger is pending, and we're obviously excited about that potential going forward.

Our next question comes from Daniel Imbro with Stephens.

I wanted to ask one on the top line. Obviously, golf equipment sales were strong, but I think golf balls were a little bit surprisingly light. Market share, you mentioned, was up sequentially. But it doesn't look like headline growth really kept up with the U.S. data. So can you share some color on maybe was there a weak spot internationally in the golf ball side? Or kind of what impacted that category first? Let's start there.

Yes, sure, Daniel. So golf ball had what I think was impressive growth both in our business and in the market in the quarter. The growth in golf ball, being the Q4, was lower than the growth in golf equipment. And that's understandable. Golf ball will track play a little bit. And even though there was nice growth in that, the overall participation rate for the full year was up double digit but not in the same manner that what we saw in Q4. And in addition, we were capacity constrained in much of that golf ball segment through the quarter.

Yes. That's helpful color. And maybe can we dig into that capacity constraint? I think through last year, the message had been you guys do Chicopee. We're able to catch up to or meet how strong industry demand was. Obviously, there's less absolute play in the fourth quarter. So a little surprised that capacity constraints became an issue again. Can you talk about what led to that? Was it materials? Was it further up the supply chain from you guys? And what does that outlook look like from a supply chain or from a capacity standpoint, if golf demand remains strong for the first part of this year?

We'll continue to chase demand as it has surged. Our golf ball operations, as with our entire supply chain, is operating at a very high level. And we continue to see continued progress in Chicopee on the productivity, et cetera. You just can't surge the supply chains to the full magnitude of what we saw post-COVID given that we didn't expect that type of surge. And you also have some planning that you have to do for the season coming forward as we've got new product ramps, et cetera. So we have to divert production that would have shipped in Q4 into new product launches that will ship in the coming year. All of those are factors into what you're seeing there, Daniel. But long story short, we're very pleased with our golf ball operations. We're seeing such strong current demand that we are in chase mode, but we're also performing at a high level. So it's a positive situation overall.

Got it. And I didn't catch if you answered. Did you expect the supply chain issues to continue to weigh on the first half of this year?

Yes, yes. With the amount of demand that we're seeing, we expect to be -- have some supply constraints, at least through Q1, with the opportunity to catch up more following that.

Our next question comes from Joe Altobello with Raymond James.

Just a couple of follow-up questions on the supply strength -- the supply constraint issue. Is that mostly balls? Or are you also seeing that on the clubs side as well?

We're seeing it throughout the golf equipment business, balls and clubs, package sets, golf bags, et cetera. So this is, as you can tell, what they say -- U.S. hard goods in Q4 was up 59%. Now that's a small quarter, but 59% is extraordinary. And those are also periods of time where we have to flex and make production for the coming year. We've done a nice job on the supply chain side, and it is a relative strength for Callaway, but there is not enough extra capacity to surge at those levels. So we will be constrained going through Q1. And as you can tell, inventories are down in the field, and it's a robust environment right now.

So was that mostly a Callaway-specific issue? Or is that an...

No, this is total industry. If you look at total industry inventories, Joe, to give you a relative basis there. Inventory in the field for the entire clubs, so this is Datatech data, last year, they had 5.2 months of inventory in the field at the end of December. They have 2.2 months at the end of December for clubs in the industry. And the entire industry will be in chase mode. And our inventory in the field is slightly below that 2.2 in the same club category. So it is not specific to a golf ball or a club or a bag but a reflection on what is really unprecedented demand.

And do you expect that field inventory to normalize by the end of '21? Or might that extend to '22?

I don't have a projection that far out for you. If you can tell me all the COVID implications for the balance of the year and such, I can probably give you one. I expect that the golf equipment business is going to stay robust. I'm expecting a good year or maybe a strong year. And I expect inventory to be constrained and remain low, at least through Q1 on an industry basis.

Our next question comes from Mike Swartz with Truist Securities.

Just wanted to dig into some of the COVID-related disruption or costs that you called out in terms of what you're seeing in the fourth quarter and into 2021. Could you maybe give us a sense of magnitude in terms of what those total costs are? And then maybe looking at things that are temporary versus things that may endure beyond COVID, is there a way to look at that?

Sure. Mike, I'll take a shot at it, and Brian, jump in. So the only one that we can give you a specific call-out for is container shipment costs, which we called out, so incremental $13 million on container shipping costs. So a container to ship from Asia to the U.S. traditionally has been about, ballpark, $1,300 for us, what it would cost us to ship a container of product from Asia. And those spiked in Q4 and are -- currently, it could be $10,000. So some large increase, and we are absorbing those. That will be mostly through the first half of the year, but that is not a long-term issue. This is a simple supply/demand equation and the fact that the surge in exports -- it's across all industries. It is not a golf-specific issue and all players, et cetera. Our big customers are experiencing the same thing. It is just an effect of the COVID environment. You're seeing related things in terms of the logistics and transportation networks across the globe struggle as the COVID situation unfolds. The ports in California are backed up. There's 30-some ships lined up outside of Long Beach trying to unload. The efficiencies of unloading are slower. We can't staff our DCs as efficiently. So our operating costs in the DCs -- because we don't know when the product is going to show up, but we have to have the people there. Our factories are having issues with regard to staffing levels in various parts of the plant calling in with COVID or restrictions in terms of how we operate the plant. We're working through all of those. And all of those are what I believe just short-term issues. If you go post-COVID, they go away. But they are a related party of some of this long -- strong surge and the unique environment we're in right now, and it will impact the business in the short term.

And Mike, we are forecasting for full year 2021 that we can get back to about the same gross margin level in 2019 while absorbing all that turmoil from the COVID. But to Chip's point, that should abate as COVID starts to resolve itself and subside.

Okay. That's helpful. And then just the second question. I think you've mentioned that you're taking back the Korean apparel business in-house. Maybe give us a sense of how large that business is relative -- because I think you did this a couple of years ago with your Japanese apparel business. Can you maybe give us a sense of maybe the differences versus the Japanese business coming in-house and how to frame that financially, I guess?

Sure, Mike. This is Chip. It's a little smaller than our Japanese business. And unfortunately for competitive reasons, we are unable to provide more specifics on the scale of that business. It's material enough to bring up as it relates to some of the investments but not material enough to break out. And for competitive reasons, we are uncomfortable providing more detail.

Our next question comes from Susan Anderson with B. Riley FBR.

Nice job in the quarter. Chip, I was wondering if maybe you can talk about your thoughts around the golf industry and where you kind of see it settling out. Obviously, last year, we saw a significant amount of new participants enter the game. I guess just from your conversations with others in the industry, where do you think this kind of pans out? Do you think that participant growth rate can continue to grow this year and same with rounds played?

Sure, Susan. Good question. So the market in golf is obviously experiencing unprecedented demand right now, and the market size is up. Long term, I expect the trend line growth of golf equipment to be slightly higher than pre-COVID as well. Clearly, they won't sustain these huge surges we have right now, but the scale of the business is larger. And I believe the growth rate is going to be positively impacted. I'll give you a little bit of data in support of that. So total on-course golfers in 2020, they just reported this data, it's about 24.8 million. That's people that played at least one round on a golf course in the U.S. That is up from 24.3 million or 2% up versus the previous year. Beginning golfers, that's about 3 million, up from 2.5 million or up 20%. So you're seeing a strong increase in golfers. And you have to remember that in 2020, there were also many golfers that didn't play because of concerns of COVID. So when you look at the segment data and deep into it, there's a high number of golfers that were actually concerned enough not to play. Even more interesting and perhaps appealing for our future business and for the golf equipment business long term is the total on- and off-course golfers. So this is people that played on a golf course or played in a nontraditional venue. And the most significant nontraditional venue is Topgolf. That is on- and off-course golfers in 2020, 36.9 million, up 8% from 34.2 million. And Topgolf is the largest contributor here. And Topgolf growth, we believe, is going to ramp. So outlook for golf, very strong, data supports it, larger overall market size, slightly larger growth rate. I can't quantify exactly how much larger on the growth rate. It's clearly not the level that we're talking about right now. This is incredible and unsustainable but clearly more than that low single digit. If you were thinking about a growth rate in the past for the golf industry on the equipment side of 2%, you would bump that up a reasonable percentage. And you also have reason for optimism on the nontraditional front.

Great. That's really helpful. And then Brian, maybe if you could give some more color just on the gross margin, I guess, the cadence for the year. It sounds like the freight costs are going to be more front-end loaded. And I don't know if you can versus 2019 levels since it's more normalized. But are you expecting each quarter to be, I guess, similar year-over-year to get to that flat? Or should we think about the first half being more pressured and then the back half kind of up versus 2019 levels?

Sure, Susan. Thanks for the question. We do expect especially the freight issue and some of the operational cost issues to abate as the year goes on. I mean as you start to see COVID lessen, you'll start to see that. Compared to 2019, I would say it would probably -- I mean it will probably ramp this year as you go through the year. So the first half would probably be a little bit less, and then the second half would be a little bit more.

Great. Okay. That's helpful. And then also what about the additional investment? Is that front-end loaded at all? Or is it -- should we think about it being spread throughout the year?

It depends on when people implement things, but I would say generally, I would assume equal throughout the year.

Our next question comes from Brett Andress with KeyBanc Capital Markets.

So the $70 million to $80 million of OpEx, can you bucket those in a little more detail for us? I think FX is $20 million. But I mean how much are you spending on Korea? If there's any way to kind of also quantify the benefit that you get from taking that business in-house. And then how much is being spent on tour and some of the other investments? Just trying to kind of frame this out.

Sure. We probably won't break out each one, but I guess the way we look at it is it's -- and this is roughly. But roughly 1/3 is the OpEx, 1/3 is just...

That's CapEx. You said OpEx.

Oh, yes. It's all OpEx.

It's all OpEx.

1/3 is FX. 1/3 is normal inflationary pressures through labor and professional services. It's really 2 years' worth. So if you go from '19, you had some that went to '20 and some more, so about 1/3 of that. And then about 1/3 is the additional investment. So that's probably, call it, $25 million. And that breaks up between the Korea apparel and then the tour and a little bit of investment in other soft goods business as well. But the total is probably about $25 million for those investments.

Okay. Helpful. Okay. And then also just appreciate the sales guidance that you've given, at least here for the first quarter of 2021. But I guess as we start to model out the rest of the year, understanding you're not giving guidance for the full year, but should we be thinking of 2019 sales levels as a starting point for 2021? I'm just trying to kind of help us walk through maybe the puts and takes as the rest of the year plays out on the sales line.

Yes. It's difficult to answer that without actually giving guidance. So that's why we try to say it was above 2020. Part of it will depend on how quickly it resolves, COVID picks up and the challenges for the year. But I'm not sure I can say without actually giving guidance.

Yes. Brett, Q1 will be a challenging quarter to show meaningful growth versus 2019. But then after that, we do have opportunity to do that. And we don't have guidance, unfortunately, for you at this point in time.

No, understood. I gave it a shot.

Yes, I don't like it.

And our next question comes from John Kernan with Cowen.

The weather looked good out in San Diego during the Farmers a couple of weeks ago, not quite as good here in Westchester County in New York.

Yes.

Brian, maybe on Slide 14 with the guidance, would you point out to some of non-GAAP guidance on both gross margin and operating expenses? What are the -- can you quantify what charges we should expect at this point in gross margin and SG&A? Is it material in 2021?

Just from nonrecurring, John?

Yes.

So the onetime?

Yes, the onetime.

I don't have that broken out.

Yes. We can -- we'll get into that a little bit more as we go through the year, but there'll be some Topgolf merger-type expenses. They would be mostly in OpEx, right? And then depending on valuations, as we get through that -- but those will be most of the onetime expenses. Brian, I don't know...

Yes. The bank -- the legal fees, the investment banking fees, the auditor fees.

Some purchase price amortization, right? We've been -- those will be onetime. It should just be mostly related to that, John.

It's largely related to Topgolf, okay.

Yes.

The guidance felt like it was more for the core golf business. But -- okay. Got it.

Not onetime, no.

I refer to them as onetime perhaps, John, because I don't think they are reoccurring. But we're not backing them out of our numbers when we adjust our numbers for you. For instance, the operating cost for the containers will be in the numbers that we report to you.

And John, there's ongoing costs from the prior acquisitions for the amortization of intangibles, things like that, that relate to the Callaway business that will back out as onetime. But all the new things are pretty much related to the merger.

Understood. Maybe just -- I don't mean to beat a dead horse, but the investments in apparel looks like they're obviously increasing with the Korean business and some of the investments in Travis and maybe marketing and partnerships. What do you -- it feels like soft lines might be causing more volatility in your business at this point. What is it that you're attracted to, I guess, on the soft goods side of things that you're offering to get through in that category?

Well, we have to look at it -- clearly, soft goods is causing more volatility because soft goods is more impacted by COVID. So the apparel businesses are not enjoying this 59% growth independent of any COVID environment that golf equipment is enjoying. But we're in the right sectors there. And as we get deeper into those businesses -- for instance, the TravisMathew business is just candidly a wonderful business, has great growth opportunity, has significant scale and significant earnings potential. And as we went through and unlocked that, we decided it was in shareholders' best interest to put the systems in place and the supply chain and the infrastructure to realize that potential. And that's what you're seeing us do in those businesses.

Our next question comes from Casey Alexander with Compass Point.

First of all, congratulations on paying back your employees from earlier in the year. I think it's a fantastic thing to do. And I'm sure that your employees really appreciate it, and I think that's great for employee loyalty and morale. So congratulations for that.

Thank you, Casey.

I did want to ask, I mean, your comment that the supply constraints sort of impact across the entire golf industry. Do you -- are you afraid at all that if you and others in the business are all supply constrained, that as the year goes along and other alternative forms of entertainment start to come back online, like they're talking about allowing fans back into baseball stadiums and things like that, that by not being able to fulfill demand in the first quarter, that you may end up leaving some sales on the transom?

It's possible, Casey, but it's still a first world problem, right? The fact that demand is this strong -- and I don't want to overplay the supply constraints. We're expecting, as I said in my comments, a strong year in golf equipment. But we just can't flex the supply chain in the same manner that you're seeing some of the demand. So yes, we could, in theory, leave some on the transom. But in a profitable business, that's how things will eventually happen when you do these types of things because we can't have the extra capacity that is infinite surge, right, or you would have too much capacity in a normal time. So your point is well taken. It is definitely true, but it is -- it's the -- it's a pretty good environment to be operating in. And I don't want to overemphasize the supply constraint issue either. We're ramping, and we have added capacity and expect a positive result.

Okay. Fair enough. And my one follow-up is as it relates to -- I'm already blanking out. There's age for you. Yes. In relation to the rationalization of the apparel inventory position because I see as you -- looking at the press release, as you work it down, yes, sales were up quarter-over-quarter. But clearly, looking on the page on the release, the margins were clearly negatively impacted. Did you complete the inventory rationalization? Is everything out? Or is there still some more to go here in 2021?

Casey, we're in good shape, with the only new wrinkle on that is that COVID has kind of resurfaced and surged in Europe. So the European market's being shut down now since mid-December, will create a little bit of inventory situation there to work through. Again, I don't want to overemphasize that, but that prevents us from being able to say that we got through all of it. We would have been through all of it. And then Europe shut back down in mid-December and is still shut with -- no, we don't know when it will open, but we're guessing sometime late Q1.

Okay. Great. I'll throw in a quick one. Do you know what the golf ball market share was by the end of the year approximately?

I'm rounding up, I think it's 17% on Datatech, and so reasonably flat year-over-year. And we -- if you look at total channels outside of just what Datatech reports, we would be even stronger than that.

Our next question is from Alex Maroccia with Berenberg.

I'm just trying to reconcile some numbers on golf consumables. So with rounds played up 14% on the year, yet your golf ball sales down 7%, it tells me that somebody had to have made up the delta there when retail channels and supply chains were disrupted. And it seems to counter your previous comment you made to Casey. So can you just provide some commentary on if you expect any gain shares this year and who might have been making up some of the inventory constraints?

Alex, you're missing the inventory factor on that. So the inventories in the field being down so much is the delta. That's why we held or gained share during the year on golf ball. You follow me? So where -- what we will report on the sales of sell-through strength and then our shipments being down slightly for the full year, but our market share can be flat based on destocking inventory. And that's what we believe is occurring out there. And we're not projecting inventory. We're not going to go through specific share expectations for this year. But I can tell you, I feel very good about our performance in golf. We've strengthened our brand position. Building -- it feels to me like we're building strength and momentum. We finished that Chicopee investment. We're making the best golf balls, the highest quality, high performance, worked through a lot of heavy lifting in that category, held share throughout that period. So I feel good about our golf ball business. And -- but I'm not going to project specific share by category.

Okay. No, that totally makes sense. I appreciate it. And then secondly, it's been exciting to see some Jack Wolfskin logos up here in New York and then out West at some of the ski resorts. Would I be wrong in saying that marketing here in the U.S. has been a little more winter sports-focused versus the general outdoor leisure focus over in Europe? And then should we expect to see some growth in doors this year?

We are still primarily focused -- I'm glad to hear you say that you're seeing it more in winter sports, et cetera. But our focus is still hiking, if you would, hiking and outdoor. And that is a global focus and where the strength is. But it does have a position in winter sports. And now that we're starting to ramp -- and it's still a small business in North America, but you're starting to see that business establish itself and do a little bit of marketing. We were pleased with the results. We're primarily going to be a direct-to-consumer/e-comm business in the U.S. with only a few select relationships to start with, and that strategy continues for us.

And our last question comes from George Kelly with ROTH Capital.

Just a couple for you. I'll start with TravisMathew. So curious, you mentioned in the press release just that that's part of your $70 million to $80 million of incremental operating expenses for the year. I'm just curious if you can break down for TravisMathew, what is the plan as far as opening new stores? And is that where most of it is going? Or can you just kind of lay out the year for us with TravisMathew?

George, it's Chip. So we're not going to break out the $70 million to $80 million further than what we -- what Brian went through, which said that of the $70 million to $80 million, you've got FX, you've got the 2 years of inflationary pressures in there. It leaves you about $25 million of what is truly investment into the business. TravisMathew is portion of that. It's not a majority of that. But it is investments in systems, IT. We've been investing in the e-comm. And we're expecting to open 5 doors this year, new retail doors. And we opened 2 at the end of last year, which we are excited about and think that there's good opportunity for players like us that can take advantage of these opportunities.

Okay. And then a similar question, I guess, but with the South -- taking on the South Korean business. Is that something that you expect in -- I understand that there's upfront investment you need to make, hiring people and taking that in-house. But is that something you expect in year 1 to be profitable? Is it -- will the kind of revenue opportunity look similar to what that business did in 2020? Or will it take time to kind of build it up to where you were running before?

George, we expect it to be profitable in its first year of operation, which is not going to be this year because we're opening it sometime in the second half of this year. And so we are absorbing those costs for putting in the systems, the people, et cetera, now. And then it is on our spreadsheet, highly profitable, very attractive, even in its first year of full operation. The first year of full operation will be 2022. But we do expect to have it start up second half of this year.

Ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to Mr. Brewer for his final remarks.

Yes. I just want to thank everybody for calling in today and your interest in Callaway Golf. We look forward to an exciting golf season and our -- what I believe will be a robust call with you at the end of our Q1, starting in Q2. And thank you very much.

And ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.