Callaway Golf Company

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 Callaway Golf Conference Call with Chip Brewer, CEO. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. I will now turn the call over to Mr. Patrick Burke, Head of Investor Relations. Please go ahead, sir.

Thank you, Crystal, and good afternoon, everyone. Welcome to Callaway's first quarter 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 first quarter 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 ir.callowaygolf.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 the 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 Company Investor Relations website under the Webcast and Presentations tab. Also in the same tab, you can choose to join the webcast to listen to the call and view the slides. As a webcast participant, you are able to flip through the slides. I would now like to turn the call over to Jay.

Thank you, Patrick. Good afternoon, and thank you for joining us for today's call. Starting on page four of the presentation, we're pleased to be with you today to discuss our Q1 results. and to give you an update on our business with a particular focus on how we are positioning ourselves for what is an uncertain near-term future, but we believe remains a promising long-term one. As covered in our press release, through early March, our business was on track for another year of record sales. Despite challenges from COVID-19 in the quarter, our regional businesses in Japan and Korea as well as our U.S.-based Travis Matthew business all delivered year-over-year revenue growth in the quarter. We also were pleased to deliver a profitable quarter for the company as a whole and that our golf equipment market shares remained strong in all of our major markets. Through March, we held the number one share position in the U.S. for total hard goods as well as for total clubs. And in Europe, we held the number one position in hard goods through February, which is the most up-to-date data currently available. We believe we gained share in both Europe and Asia, while ceding some share in the U.S., primarily due to launch timing. During the quarter, we also made good progress on key initiatives, including the completion of our multi-year golf ball modernization effort for our Chickapee Mass facility and the initial phases of our transition to our new 800,000-square-foot Super Hub just outside of Fort Worth, Texas. The COVID-19 outbreak initially impacted just our Asian businesses and supply chain, but by early March, the issue became global. By mid-March, global regulatory responses implementing social distancing and shelter-in-place orders significantly slowed retail sales and created business challenges worldwide. During that time, our focus shifted to being proactive in actions to protect our business and its many constituencies. These actions included securing increased near-term liquidity via both our ABL and equipment loans, decreasing our operating expenses and capital expenditures in total by approximately 20 percent, aggressively decreasing inventory commitments to better match up with revised demand expectations and to minimize working capital needs, and evaluating more long-term capital options which led us to issue approximately $250 million in convertible debt last week under what we believe were favorable terms and conditions. As stated in our various press releases, given our initial actions, we believe we had adequate liquidity to make it through this pandemic crisis even before the convert debt issuance. Now, of course, we have an even higher confidence, but not only getting through this, but emerging in a position of relative strength. Throughout all of this, the safety and health of the company's employees, customers, and partners has remained paramount in our minds. Following guidelines established by health organizations across the world, we initially took actions including limiting and then suspending business travel, restricting visitors, and establishing work-from-home programs. As things developed, almost all of our North American and European operations have been shut down for various lengths of time. At present, our corporate headquarters in California is still working from home, and our golf ball plant in Chicopee, Mass., is still closed by state order. However, many of our facilities elsewhere in the US and across the globe are starting to return to more normal operations. As we transition back to normal operations, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment, and other safety precautions. Looking forward, let me give you as much perspective as I can at this time. Unfortunately, Q2 is certainly going to be down significantly, and we are unsure what to expect for the balance of this year. Experts are telling us there will likely be a significant recession, maybe a reoccurrence, which may or may not be managed well, and maybe even on the positive side of V-like recovery. With this as our backdrop, we have suspended guidance until market conditions are more predictable. Having said all this, we are seeing some encouraging signs, and these include our primary Asian businesses. They've held up or recovered better than initial expectations. After a full shutdown for a large part of Q1, our China business impressed us with April revenues in our Gulf business returning to levels roughly equivalent 2019, and our China apparel business only down slightly for the month of April. The apparel business there is also facing some additional margin pressure due to higher discounting levels, but again, better than our expectations. Korea continues its trend of being a role model for how to handle the pandemic, with business holding in at 2019 levels. Japan was performing well through Q1, although it has been recently impacted by the stay-at-home order in that market. Demand to play golf is high in both China and Korea. In Korea, tee times outside Seoul are reportedly booked through May already. We believe our Asian businesses overall will be a positive contributor for the balance of the year. Our econ businesses have performed particularly well across the globe during the pandemic, Again, exceeding expectations and delivering year-over-year growth. As a reference point, our e-com was approximately 8% of our full-year revenues in 2019. They position us well to capitalize on trends in this channel and are on track to provide growth this year. Along this theme, we're happy to announce the launch of our U.S. JackWolfskin.com site earlier this week. This is our first significant entry point for the Jack Wolfskin brand into the U.S. market. Markets in Central Europe are starting to reopen, and although retail activity is still slow there, this is the most important market for our Jack Wolfskin business, and we are encouraged by the progress. Markets in the U.S. are starting to reopen as well, especially as relevant for our golf business. By mid-May, the National Golf Foundation believes 80% of U.S. golf courses will be open in the U.S., and I have a feeling it may actually be quite a bit better than this. Anecdotal reports are that there is high utilization of the golf courses that are open, and that this is supported by third-party research that shows a pent-up demand to play. Golf retail is also starting to open, and initial sell-through data shows most of which is very limited at this point, usually with only one week or one weekend of data, has been above expectations but is expected below last year's level. We are also developing plans to best service both greengrass and retail golf accounts in a social distancing world, and we think we are well positioned to do this. Lastly, I'd like to express our point of view that CalWay's business segment and our capital structure position us well to both weather this storm and come out in a position of strength. To be more specific, we are confident that our principal products, golf equipment, golf apparel, and golf accessories, as well as outdoor apparel, gear, and accessories, are attractive segments for a world of social distancing and a new normal. The joy of being outdoors, whether it's hiking, camping, or simply taking a walk in nature, has never been more evident and is both logically and emotionally appealing today more than ever. At the same time, we expect the sport of golf to come back quickly, as it is commonly viewed as a relatively safe and healthy outdoor activity that one can enjoy while still observing social distancing guidelines. As I've already mentioned, this theory is supported by third-party research and early data across the globe. In addition, we benefit from geographic diversity which should be helpful in limiting risk in today's world. Lastly, our distribution base and go-to-market strategy fits well with the new environment and should emerge relatively strong. Our primary retail customers are relatively well capitalized and likely to survive the crisis in a position of strength, and we have trade insurance to further minimize risk here. Plus, we are well positioned to capitalize on any long-term growth in e-commerce. On the capital side, we have stated publicly that we believe we had ample liquidity to make it through the COVID-19 crisis even prior to the issuance of our convertible debt. Needless to say, our confidence here is now even higher. Having said this, I also want to emphasize that having this additional liquidity will not lessen our resolve for, and we remain committed to, maintaining our disciplined approach to managing capital expenses. We believe that this additional liquidity, together with the strength of our brands, our products, and our geographic diversity, along with the operational improvements we've made to date, will enable us to create shareholder value as we emerge from the pandemic. In closing, I also want to convey our thoughts and prayers to those directly impacted by the virus. as well as those diligently working on the front lines to protect, serve, and care for the rest of us. Brian, over to you.