Callaway Golf Company

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Callaway Golf Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Patrick Burke, head of investor relations. Thank you. Please go ahead, sir.

Thank you, Erica, and good afternoon, everyone. Welcome to Callaway's second 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 second 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.calwigoff.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 the actual results to differ material 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, That in connection with our prepared remarks, there is an accompanying PowerPoint presentation that may make it easier for you to follow the call today. This earnings presentation is available for download on the Company 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 Chip. Thank you, Patrick. Good afternoon and thank you, everybody, 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 Q2 results, results that have exceeded our expectations over the last few months and strengthened our confidence in the future. As covered in our press release, although Q2 results were heavily impacted by the various global shutdowns and stay-at-home orders, By late May, nearly all of our principal markets, manufacturing facilities, and distribution centers were open to some degree or another. As the quarter progressed, it became clear our businesses were recovering faster than we initially projected. Our e-commerce business has been and continues to be a particularly strong performer, in many cases delivering year-over-year growth of 50% or higher since reopening. Looking at our principals, this business is benefiting from both pent-up demand as well as increases in participation. The National Golf Foundation is now projecting a 20% increase in participation of juniors and either new or returning golfers this year. To various degrees, this is a global phenomenon, but looking more specifically at the U.S. for the month of June, rounds were up 14% year over year, For those of us trying to book a last-minute tee time, it probably felt even stronger than this. Equipment industry stats all suggest a double-digit increase in sales for the month, with data tech reporting hard goods sell-through up 16% versus the same month one year ago. And golf retail outside of resort locations remains very strong at present, and barring a shutdown situation or an inability to play golf, has not been particularly and it is logical that this could be the case. However, we cannot be sure yet. We'll have to keep our fingers crossed and track it over the next year or so. Callaway's global market shares also show good progress, with nice growth trends during the quarter and continued strength on a global basis. According to Datatex, in the U.S. year-to-date, Callaway remains the number one club brand and the number two ball brand. Our U.S. market share increased steadily during Q2 as markets opened up. In Japan, we remain the number two hard goods brand year-to-date and had a strong quarter from a market share perspective with an exceptionally strong growth year so far in golf ball thanks to ChromeSoft and the TripleTrack technology, which is resonating across the globe. In Europe, we remain the number one hard goods brand through May, which is the latest date available. As for market conditions, we already spoke about the U.S.' 's nice recovery during a quarter which data tech called down 27% from a sell-through perspective, and the National Golf Foundation shipment data says it was down 37%. Looking elsewhere, Japan was also significantly impacted during Q2, but the market remains relatively sound, only down approximately 7% in the first half of the year, and also showed growth in June. As we mentioned, Korea has performed very well all year. Europe was heavily impacted with no golf being allowed during their lockdown in the important U.K. market. And as a result, data tech reports that market is down nearly 40% through May. But fortunately, this market is bouncing back very strongly as well. We have new product launches planned for the second half of this year, similar to our strategy most years. As you would hope and expect, I remain confident in our new product pipeline. Our soft goods and apparel segment has also recovered above expectations, but not to the same degree golf has. Our e-com business in this segment is very strong, while retail, both our own retail and wholesale, is still down double digits, and unlike in golf equipment, has shown volatility in markets where there's been upticks in COVID outbreaks. Despite this near-term volatility, all of which is COVID or macroeconomic-based, we still feel very good about our long-term position here. We remain confident that we are invested in brands with strong prospects and that are positioned to outperform apparel as a whole, both in the COVID environment and afterwards. After a tough start to the quarter, we're pleased with the recovery of the Jack Wolfskin business in both Germany and China. noting that these are the largest markets for Jack Wolfkin and also two of the most attractive economies globally. As a primarily U.S. brand, Travis Matthew was significantly impacted during Q2, but is now bouncing back very quickly with excellent sell through at key retailers and resumed brand momentum. Ecom has been outstanding for both Travis Matthew and Jack Wolfkin. During the quarter, we also made good progress on key initiatives, including the initial phases of our transition to our new 800,000 square foot super hub DC, just outside of Fort Worth, Texas. We are now shipping all US revenue out of the facility and expect to have this conversion behind us by the end of Q3. As stated during our last call, We are pleased with our financial position and are confident we are not only going to get through this crisis, but also emerge in a position of relative financial strength. That was true then and is even more so now. As discussed in our last call, we were aggressive in taking initial actions to lower our operating expenses and conserve capital. This was an important initiative and we're still operating under this philosophy. However, As conditions continue to improve, we're also now fully able to invest in innovation, digital competencies, and strategic growth initiatives. We believe this ability to invest and our conviction to do so will pay off nicely in the years ahead. In addition, as global hotspots and opportunities transition across the globe, we believe our company will benefit from our global scale, our leadership position in the golf equipment business, as well as the diversity and attractive growth opportunities associated with our family of brands. Looking forward, although we are very pleased with the pace of our recovery, we are unfortunately not comfortable providing quantitative guidance yet. We believe we are in a strong position now, and barring a broad shelter-in-place initiative in key markets or other unforeseen setbacks, we expect our business to both continue to improve but also to remain at least moderately impacted through 2021. In closing, while we're pleased we are now in a position to fully operate our business, the safety and health of the company's employees, customers, and partners continues to be paramount in our minds. 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. In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front lines to protect, serve, and care for the rest of us. Brian, over to you. Thank you, Chip. Given the extremely challenging operational environment in the second quarter, we are pleased we were able to achieve positive non-GAAP earnings and adjusted EBITDA, and are also pleased, if not somewhat surprised, with the pace of recovery in our golf equipment and soft goods businesses. both of which have exceeded our expectations. We are especially pleased with the golf equipment business recovery, which is benefiting from increase in participation from new and returning golfers, as well as pent-up demand to play golf. We feel fortunate that our golf and outdoor lifestyle businesses support an active and healthy way of life that is compatible with social distancing. Before proceeding with the usual discussion of our financial results, I will elucidate on a couple of the announcements today. First, during the second quarter, we incurred a $174 million pre-tax, non-cash impairment charge on the carrying value of the Jack Wolfskin Goodwill and trade name. This includes running off all the Goodwill and reducing the carrying value of the trade name by $26 million. Based on a conservative view of the impact of COVID-19, and with the euro being weaker than originally projected, we believe it is appropriate to take the non-cash charge. We remain positive on the ability of this business to contribute to our earnings and revenue growth in the future. Second, we also announced today the suspension of our one-cent quarterly dividend. Given the uncertain impact COVID-19 will continue to have on the economy and our businesses in the short term, we remain focused on stringent cost management and improving capital allocation. As we re-evaluated our capital allocation strategy, we determined that our dividend was not the most efficient use of capital at this time and that the capital could be just used elsewhere. Following our convertible note offering during the second quarter, we are confident that we have adequate liquidity with over $480 million in cash and availability under our credit facilities, which will allow us to weather these uncertain times and emerge in a position of relative strength. In evaluating our results for the second quarter, 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 nine recovering transaction and transition-related expenses in 2019. Second, as a result of the OGO Travis Matthew and Jack Wolfskin acquisition, we incurred nine cash amortization and purchase accounting adjustments in 2020 and 2019, including the inventory step-up in the first quarter of 2019. Third, we also incurred other non-recurring charges, including costs related to the transition to our new North American Distribution Center in Texas, as we are incurring redundant costs during the transition, and including implementation costs related to the new Jack Wolfson IT system and severance costs related to our cost reduction initiative. Fourth, the $174 million impairment charge in the second quarter of 2020 is non-recovering and did not affect 2019 results. Fifth, we incurred and will continue to incur non-cash amortization of the debt discount on the notes issued during the second quarter of 2020. We have provided in the tables to this release a schedule breaking out the impact of these items on the second quarter and first half results, and these items are excluded from our non-GAAP results. With those factors in mind, I will now provide some specific financial results. Turning now to slide nine, today we are reporting consolidated second quarter 2020 net sales of $297 million compared to $447 million in 2019, a decrease of $150 million, or 34%. The decrease was primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business. The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 28%, and our soft goods segment, which decreased 44%. This decrease also reflects a decrease in all major regions and private categories, period over period, all due to COVID-19. Changes in foreign currency rates also negatively impacted second quarter 2020 net sales by $2 million. Gross margin was 41.1% in the second quarter of 2020 compared to 46.3% in the second quarter of 2019, a decrease of 520 basis points. On a non-GAAP basis, gross margin was 42.2% in the second quarter compared to 47.5% in the second quarter of 2019, a decrease of 530 basis points. The decrease in gross margin is primarily due to the decreased sales and business challenges caused by COVID-19, costs associated with idle facilities for a significant portion of the second quarter, a change in mix of products sold, including a decrease in sales from higher market retail sales due to temporary store closures, and increased sales of package sets, entry-level golf balls, and pre-owned products due to the increase in new and returning golfers, combined with an increase in U.S. tariffs on imports from China. Operating expenses were $300 million in the second quarter of 2020, which is a $138 million increase compared to $162 million in the second quarter of 2019. This increase is primarily due to the $174 million non-cash impairment charge related to the Jack Wolfson Goodwill and Trade Game. Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for the second quarter were $121 million a $38 million decrease compared to the second quarter of 2019. This decrease is due to the actions we undertook to reduce costs as well as a reduction of variable expenses associated with lower sales during the quarter. Other income was $2 million in the second quarter of 2020 compared to other expense of $9 million in the same period of the prior year. The $11 million increase was primarily related to a $13 million increase in foreign currency-related gains, period over period, primarily related to the settlement of a cross-currency swap arrangement. This $13 million increase was partially offset by a $2 million increase in interest expense, primarily related to our convertible notes. Pre-tax loss was $176 million in the second quarter of 2020, compared to pre-tax earnings of $36 million for the same period in 2019. including the impairment charge and other items previously mentioned, non-GAAP pre-tax income was $7 million in the second quarter of 2020, compared to non-GAAP pre-tax income of $44 million in the same period of 2019. Loss per share was $1.78 or 94.1 million shares in the second quarter of 2020, compared to earnings per share of 30 cents or 95.9 million shares in the second quarter of 2019. including the impairment charge and the other items previously mentioned. Non-GAAP fully diluted earnings per share was $0.06 in the second quarter of 2020, compared to fully diluted earnings per share of $0.37 for the second quarter of 2019. Adjusted EBITDA loss was $29 million in the second quarter of 2020, compared to $66 million in the second quarter of 2019. Now I'm turning to slide 10. First half 2020 net sales are $739 million, compared to $963 million in 2019, a decrease of $224 million, or 23%. The decrease is primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business. The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 19%, and our soft goods segment, which decreased 32%. This decrease also reflects a decrease in all major regions and product categories period over period due to COVID-19. Changes in foreign currency rates also negatively impacted first half 2020 net sales by $6 million. Gross margin was 43% in the first half of 2020 compared to 46.2% in the first half of 2019, a decrease of 320 basis points. Gross margins in 2019 were negatively impacted by the non-recurring purchase price inventory step-up associated with the Jack Wolfskin acquisition. On a non-GAAP basis, gross margin was 43.6% in the first half of 2020 compared to 47.4% in the first half of 2019, a decrease of 380 basis points. A decrease in gross margin is primarily due to the decreased sales and business challenges caused by COVID-19, costs associated with idle facilities for a significant portion of the second quarter, a change in mix of products sold, including a decrease in sales from higher-margin retail sales due to temporary store closures, and increased sales of package sets, entry-level golf balls, and pre-owned products due to the increase in new and returning golfers, combined with an increase in U.S. tariffs on imports from China, all partially offset by an increase in e-commerce business. Operating expense was $454 million in the first half of 2020, which is a $124 million increase compared to $330 million in the first half of 2019. This increase is due to the $174 million non-cash impairment charge related to the Jack Wolfson Goodwill and Trade Name. Including the impairment charge and other items previously mentioned, non-GAAP operating expenses for the first half were $275 million, a $47 million decrease compared to the first half of 2019. This decrease is due to our cost reduction initiative, as well as a reduction in variable expenses due to the lower sales. Other expense was approximately $1 million in the second quarter of 2020, compared to other expense of $21 million in the same period of the prior year. The $20 million decrease was primarily related to a $21 million increase and foreign currency-related gains, period over period, including the $11 million gain related to the settlement of a cross-currency swap arrangement. The $21 million improvement was partially offset by a $1 million increase in interest expense related to our convertible notes. Other expense in 2019 was also negatively impacted by $3 million related to hedging losses on the acquisition purchase price hedge. Pretext loss was $138 million in the first half of 2020, compared to pretext income of $94 million for the same period in 2019. Excluding the impairment charge and other items previously mentioned, non-GAAP pretext income was $48 million in the first half of 2020, compared to non-GAAP pretext income of $118 million in the same period of 2019. Wealth per share was $1.47 on 94.2 million shares in the first half of 2020, compared to earnings per share of $0.81 on 96.2 million shares in the first half of 2019. Excluding the impairment charts in the items previously mentioned, non-GAAP fully diluted earnings per share was $0.38 in the first half of 2020, compared to fully diluted earnings per share of $0.99 for the first half of 2019. Adjusted EBITDA was $89 million in the first half of 2020 compared to $159 in the first half of 2019. Turning now to slide 11, I will now cover certain key balance sheet and cash flow items. As of June 30, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $483 million compared to $273 million at the end of the second quarter of 2019. We had total net debt of $621 million, including $440 million of principal outstanding under our total loan fee facility that was used to purchase Jack Wolfson. A consolidated net sales receivable was $214 million, a decrease of 19% compared to $264 million at the end of the second quarter of 2019, which is attributable to lower sales in the quarter. State sales outstanding increased to 78 days on June 30, 2020, compared to 62 days as of June 30, 2019. Despite some of our customers taking a little longer to pay in this COVID environment, they are paying, and we remain comfortable with the overall quality of our accounts receivable at this time. Also displayed on slide 11, our inventory balance increased by 5% to $379 million at the end of the second quarter of 2020. This increase was primarily due to lower sales lines in the second quarter related to COVID-19. The teams continue to be highly focused on inventory on hand, as well as inventory in the field. Given the circumstances, we are very pleased with our overall inventory position and the inventory of retail, especially on the golf side of the business, which remains low at this time. Capital expenditures for the second quarter of 2020 were $25 million, a year-over-year increase of $2 million compared to the second quarter of 2019, due mainly to the implementation of our Super Hub distribution center in Texas. We do expect our capital expenditures in 2020 to be approximately $35 to $40 million, up slightly from the estimate we provided in May, but down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions. Depreciation and amortization expense was $18 million in the second quarter of 2020, compared to $17 million in the second quarter of 2019. Appreciation and amortization expense excluding the $174 million impairment charge is still estimated to be approximately $39 million, consistent with our estimate provided in May. I am now on slide 12. As we previously reported, we are no longer providing other specific financial guidance at this time, due to the continued uncertainty surrounding the duration and impact of COVID-19. It is just too difficult to project with any uncertainty. Amidst all this uncertainty, where does this leave us? There are some things we know for certain. We were on track for another record sales year when COVID-19 hit unexpectedly, and we had a significant negative impact on our business. Our team did a very good job of responding to the pandemic with cost cuts, managing our supply chain, and shoring up liquidity. The impact of COVID-19 will continue to negatively impact our sales and gross margins through 2021, but it is impossible to predict to what degree with any certainty, although we expect the impact to ameliorate as time passes. Both our golf equipment and soft goods businesses are recovering more quickly than we expected, especially in the golf equipment business. We are fortunate in that both our golf equipment and outdoor lifestyle businesses are ideally suited to an active and healthy way of life that is compatible with the world of social distancing. And finally, liquidity is not an issue. The convertible note offering provided us with ample cushion to weather the pandemic, continue to invest in our businesses where necessary, and to prepare us to emerge in a position of strength. That concludes our prepared remarks today. We will now open the call for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question is from Brett Andrews with KeyBank Capital Markets.

Hey, good afternoon. Appreciate the color on June in the sales inflection there. I was hoping you could shed some light on the cadence of April, May, and June, just how the Jack Wolfskin business performed in those months compared to the golf equipment business, and then also any color around July as we sit here today. Okay. Brian, April, May, and June, do you want to take that one? Sure. I think with the Jack Wolfson business, I mean, COVID hit like everyone else, and part of their business was affected earlier because in China, you know, the pandemic started over in Asia. And so their business started to get affected a little bit earlier than us, and then it continued to be affected through the full quarter. Anyone want to come and enjoy? Sure. All right. So, Brad, are you asking specifically on the April, May, June, July, is that total company or is that a Jack Wilson specific question? Yeah, I guess I'm really just trying to figure out how the, yeah, April, May, and June just to fail, how those track year over year for Jack Wilson but also for golf, the golf equipment business. I just want to see... It scaled for Jack Wolfskin just like our total company. You know, it was lower in April and scaled continually with a pickup in June. As previously mentioned, the golf segment grew or recovered faster in June than the rest of the business did. Our total revenues for June were up 8% over previous year, and the golf segment was up 21%. And Jack Wolfson, as you compare it within the segment of apparel, gear, and other, outperformed that segment. In other words, it was, in this case, down less than the segment in general. And when you compare it to others in similar categories, so North Face or Columbia who have reported, our revenue performance in the quarter outperformed theirs. So we're pleased with the Jack Wilson business. We're seeing good return to closer to normalcy there, although it is not as robust as the Gulf. turnaround, both because of new participation and up-to-date. July overall recovered for the total company faster than June, so we're showing improved performance in the

Okay.

And then the last one here, you know, I think that the June inflection in retail and then the lean channel inventories here in the U.S. for the golf industry is pretty understood with the data we have. But can you give us any color on where retail and channel inventories stand, you know, in Europe, Japan, and Korea? Just trying to think about the international market. Again, in the golf segment? Yeah, sorry, in the golf segment. Okay. You know, the U.S. market opened up faster than Europe, but Europe is seeing similar trends. The inventories in the channel are very low in Europe, and, you know, there's been a surge in demand and interest in the game and participation, et cetera. So very similar, very positive developments. Asia was a little less impacted, as you know, from COVID. So Korea managed it very successfully, and that market was up for the full year. And Japan was down, I think, 20% for the quarter, but they're only down 7% for the year total market. And they're also showing much lower field inventories and, you know, growth. since they reopened to the degree that they closed. They closed less than the U.S. and Europe, but they still had significant impact really in Japan during the quarter, and they're recovering very well. Appreciate the call. Thanks.

Your next question is from Mike Swartz with Truist Securities.

Hey guys, good evening. Just maybe wanted to touch on Chip, your comments just regarding the outlook for 2021 in a very general sense, talking about continued headwinds in terms of sales and margins. Did you see a little more color there? Is that just a high level commentary? Is there more kind of specific or acute issues you're kind of referring to with that commentary?

Very much a high-level comment, Mike. You know, our ability to predict out through 21 is very limited right now. You know, we're very pleased with what we're seeing near term. You know, we are on our internal operating models that it's likely that COVID is still going to be a factor for some portion of 21. And without... great insight beyond that. We expect it to have an impact on the global markets, but we are in segments with both in golf, golf apparel, and outdoor apparel that are well positioned for both the COVID environment and beyond. So very much a big picture comment that we don't have any more insight on than probably many others.

Maybe just to frame it in a different way, is it just to say that 2021 is probably not going to get back to 2019 levels, or do you think 2021 will actually be worse than 2020?

No, we were very trying to be, we think it may not get back to 2019 levels, but we also want to discount our ability to forecast out there. So, you know, we do expect it The data that we're seeing right now is unequivocal in that regard. There's been quick improvement, and we're feeling very positive about the near-term trends.

That's helpful. And then just a follow-up on, I think you also said you've got some big product launches slated for the second half of the year. I know it's You're guarding on those as usual, but just in terms of timing, last year you had a number of big launches, and I believe it was August, September, so in the third quarter. How should we think about the timing this year? Is there any reason to believe that some of that stuff got pushed back further into the year?

It got pushed a little further back, but the timing isn't way off from last year, so if you're the last year's quarters. That would be great. Thank you.

Thank you. Your next question is from Susan Anderson with B. Riley.

Hi. Thanks for taking my question. I was wondering if you could give a little bit more color on just kind of the gross margin outlook as we look into the back half. Are you expecting MIX to improve, especially on the golf club side, to more custom at all? Or, you know, are there any other puts and takes we should be thinking about?

Hi, Susan. This is Brian. You know, the margins in the golf equipment business were more impacted than the software business in the second quarter. And that largely had to do with the idle facilities. You know, we had the MEC. We do expect it to recover more quickly than the soft goods business for the balance of the year. Now, a lot of that is volume-related. Chip mentioned the golf ball and the golf equipment business is picking up very quickly, and so it may more improve as you go through the back half of the year.

Got it. That's helpful. And then just on Jack really quick, I guess, you know, the inventory issues you guys had last year, I guess it's kind of muddled by COVID now this year, but how are you feeling, you know, over in Europe now and in China? And then also I think you rolled out North America online. Are there any early reads, you know, which obviously is being muddled by COVID too, but any early reads on the consumer response to that thing?

Sure, Susan. This is Chip. The very early days in North America as it relates to Jack Wolfskin and making progress, but we're delayed in our efforts there due to COVID. So some early wins, but also some delays as we were able to execute the new business and put the people in place and it goes with that. So the net of it is too soon to barely get a good read on that one. But we are up and running now and remain as excited as ever about that long-term opportunity. Was the second question, Susan, about the inventory of Jack Wolfskin in Europe and China? Yeah, correct, yeah. The You know, our inventories are a little bit higher in the apparel space, but very low in the golf space because, as you well know, the seasonality of that with the spring drops that we already had the inventory when we shut down, and so customers didn't have the opportunity to sell through that. Quite a bit of that we're going to repurpose for next year. So we're basically packing that and holding it, and we're going to be able to use that for next year. And, you know, we were very aggressive in addressing some of the shipment. So it's a little higher than we'd like it on the apparel side, but not alarmingly so. And we, like many others, are repurposing much of that inventory.

Great. That's really helpful. Thanks so much. Good luck this quarter. Thank you.

Your next question is from Joe Audebello with Raymond James.

Hi, guys. This is actually Adam on for Joe. Hope you guys are staying safe. I was just curious, kind of, I know it may be too difficult given the limited visibility, but would you expect Jack Wolfskin to be EBITDA positive this year or perhaps too far-fetched or too difficult to say? And just any outlook on that business moving forward more specifically?

Adam, this is Chip. No, we do not expect Jeff Wilson to be positive this year. The apparel businesses were heavily impacted, as you can see by our segment profitability information, and is also indicated by the charge against Goodwill. But we remain very confident in that business long-term, and, you know, it's That is a business segment that has, you know, attractive growth rates and profitability opportunities, and we have a scale position. Clearly, COVID should be a net positive relative to outdoor apparel space over the long run. So, but it is heavily impacted this year. Right. That makes sense. And you

Is there any update you guys can provide on Topgolf, perhaps the likelihood of any sort of near-term monetization? Is that limited at this point, either through IPO or sale, or is it something you guys aren't really prioritizing right now?

Adam, we are certainly always prioritizing opportunities such as Topgolf, and we continue to serve on the board there, and we're pleased to be an investor. position of majority of the locations being open and trending very positively. We're pleased to be a minority investor there. We don't respond to any rumors that might be out there on that front and cannot really provide any more information beyond that at this point. That's helpful nonetheless.

And then the last one was kind of more of a housekeeping question, I guess. I was curious when do we count the shares from convertible debt offering and just learn more on how that's treated? Is it just when they go above the cap call price or is there a certain way we should be treating them? Just speaking moving forward to the convertible.

Sure. We're not including anything in there until essentially above about $27. The base amount we're assuming we repay back in cash And then there's incremental dividends once you get, not dividends, incremental share count once you get above 1761. But a large portion of that will be, in actuality, we have with our cap call transaction, there's no additional shares that we're subject to until 27, over 27 now. Perfect. Thanks a lot.

Thanks for the help. This is Jennifer. For purposes of the weighted average shares, it will be diluted over 1761, the conversion price. But upon settlement, we won't have any additional shares until over the cap call price.

Right. Right. Cap versus adjusted, yeah.

Your next question is from Daniel Ambro with Stevens, Inc.

Great. Thanks, guys. Good afternoon. Thanks for taking the questions.

Chip, I want to start on the golf industry. You know, obviously things appear to be more resilient than we would have thought. And Brian mentioned, I think, more packaged club sets. You know, are we seeing the demographics of the golfer changing? I mean, are we seeing new golfers come into the industry? How are you thinking about the long-term impact of that? Is this growing the market longer term, you think?

Is this going to be a sticky share? Daniel, yes, it is. It's bringing a new entrance in juniors, seniors, Beginners returning entrance in a significant move right now. NGS estimates that as much as 20%. And that can't help but be positive for the long run. As we look at the short run, the surge we have right now, some portion of that is pent-up demand. And some portion of that is increased interest in the game. and the increased participation. The participation and the interest in the game, I can't help but believe are positive indicators for long run. I don't know how to quantify that at this point. We'll have to track that as we go forward, but it has to be a positive for golf, I would think, over medium to long term. That's helpful, that's helpful. And then thinking about a growing market, You know, bright spot, obviously, continuing to take share in the golf ball category.

That's been a story for a number of years. But can you talk about just what you guys' long-term thoughts are on market share? Where can that get to, you know, longer term when you guys pencil out the opportunity in the golf ball category?

Yeah, I don't want to get ahead of ourselves on providing share guidance on the golf ball category. It's obviously an important category for us. We're pleased with our progress. You've seen our commitment there, the investments that we've made into our Chickapee facility in order to ensure our competitiveness there and our ability to further differentiate ourselves going forward. This is really our first year of operating under that new infrastructure. And, you know, on the internal perspective, I'm pleased with what I'm seeing there and It's still a work in progress, but we believe it will pay off over the long run, and we do believe we have further growth opportunity in the category, but I would prefer not to quantify that at this point.

Got it. And then just a last one for me, just a follow-up to an earlier question. I'm Jack Wolfkin, so EBITDA down this year, not a huge surprise, but you mentioned the long-term benefits, you know, attractive growth rates, positive for outdoor apparel. If we think back to the original EBITDA that asset generated, I think it was around $40 million when you bought it.

Is that number multi-years out, but is that still an achievable target to get back to that you guys could unlock from Jack Wolf? Can you think of that?

You know, without getting tied down to a specific date, yes.

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

Your next question is from Casey Alexander with Compass Pointe.

Hi, good afternoon. Can you tell me to what extent you've had to utilize the proceeds of the convertible offering? And if at some point in time you realize that you don't need to use all of the proceeds of the convertible offering, what would you do with the balance? Hi, Casey. This is Brian. We have not had to use the convert proceeds so far, and it's provided in a very nice cushion and safety net, so we're not worried about weathering a pandemic at this point. As we go through and emerge from the pandemic, you know, as always, we look at what available liquidity and capital we have and evaluate it against our priorities, which, you know, always best back into business first, pay down debt, which is an important piece for us. It's taken over importance in recent years. And then we look at returning money back to shareholders and then, you know, Lastly, I guess, would be acquisitions. But right now, it's just using it to get through the pandemic and make sure we don't have to worry about liquidity. Well, assuming that you don't have to use it, I mean, to pay down debt, I'm assuming you're talking about the term loan that was taken out for Jack Wolfskin? Yes. Yeah, okay. Chip, I'm just wondering what your expectation is for promotional activity in the back half of the year. Even if some of your inventories aren't sideways, certainly other people's inventories in some categories are sideways. And, you know, the competitive aspect of promotional activity sometimes is driven by what someone else does. So I'm curious what your thoughts are on the outlook for promotional activity in the back half of the year. Sure, Casey. I'll get into it by segment. So in the golf equipment, I'm not expecting it to be particularly promotional. Just giving you a look at months on hand for the total industry, according to data tech, was 2.5 months. I've never seen it that low. And so that's an industry. Our months on hand of our inventory in the field was lower than that. There are going to be some normal seasonal stops, you know, with people phasing out and preparing for some launches and related. So you'll see something that I would call normal. But I think the golf equipment space will be not very promotional towards the second half of this year. And then in the apparel space, the inventories are a little bit higher there, and there will be spotty spaces. pieces of business, but also when you bring in the fall-winter lines, which is where the majority of the revenue came from, we adjusted those. So we're not going to have excess inventory of where the majority of the meat of the market is going to be. What we're going to have excess inventory in is the spring-summer stuff, and we'll have to liquidate that a little bit carefully around the fringes, but not the fall-winter product in general. At least that's what I'm seeing.

Given how light you say that the golf equipment is, how would you characterize the cadence for new product introductions over the next three quarters or so?

I'm currently planning no change in the cadence of our launches relative to where we have been historically. And You know, listening to competitors, I'm hearing them all return to similar cadences. The only, you know, we're all having a little harder time developing new products because of our inability to fly. And so, you know, we can't get into Asia to work with the foundries to develop new products. But we're getting through that well. That plus clogged air freight channels might change. push some of these launches back a month or so. It's not going to be a meaningful push. Okay. Great. Thanks for taking my questions. I appreciate it. Thank you.

Your next question is from George Kelly with Roth Capital Partners.

Hi, everybody. Thanks for taking my questions. So, just a few for you. First, I wanted to make sure that I understood your commentary just about the recent trends. So, Did I hear you right that both the consolidated business and the golf equipment business both improved in July versus what you disclosed about June? Yes. Secondly about that, you haven't seen any slowdown in these states that have kind of emerged as COVID hot spots? Not in golf equipment. We have in the apparel space, we do. So the apparel space where you talk about going store where there's been a COVID outbreak that has slowed down traffic and the sales trends. But in the golf equipment space, even though it's the same retail or ring grass location, we have not seen it be, we haven't seen any impact, quite frankly. Okay. And the second question for me is more of a longer term post COVID, you know, whatever, Whenever that happens. Are there parts of your business and parts of your expense structure, you know, I don't know if it scales in marketing or advertising anywhere else, where you think once we're all through this, you know, and I'm talking about the golf equipment business, you could actually have a somewhat different kind of margin structure on the other end. I know it's a long time off, but... I don't know if this has caused you to rethink how you operate at all and you think it will be longer lasting. It's definitely causing us to rethink how we're going to operate. We were talking about that today and we will continue to talk about that. Our ability to do more with less travel or do more with less real estate is a topic of constant discussion. And the transition to digital is clearly accelerating in all of our businesses, but including the golf segment. So I think there will be some repercussion here, and I think it'll be more positive than negative once we get all the way through. Okay. And then last question for me. Fort Worth, can you just provide a little more detail just on what's happening there and how much, what's the timeline for you to bring more stuff there? Yeah, so we're consolidating and move DC. So we currently we're operating our apparel business. Travis Matthew had a DC in Huntington Beach. We had a separate DC in Indiana for a soft goods. And then a DC in Roanoke, Texas for the hard goods or golf equipment portion of our business. We have commission to be built and are now moving into an 800,000 square foot facility which will consolidate all of those businesses as well as the Jack Wilson North America business and provide room for further growth. We've been operating and are continuing to operate two DCs down there right now, which turns out during a COVID environment is not that efficient, we found out. But we had everything moved into the new warehouse. The warehouse management system kicked off and running. We're shipping out of that one. We still have the second warehouse, and we're phasing out of that and will be fully consolidated by the end of Q3. Okay, thank you.

Your next question is from John Kernan with Callen.

Hey, good afternoon, guys. Thanks for taking my question. Good to see Sanders Shoffley one shot off the leaderboard in Harding Park. Yeah, thanks. He's been playing great. And most of my questions have been answered. I just wanted to, Brian, on SG&A, you managed it down really nicely, certainly better than a lot of the other companies we cover across a few consumer verticals. How do we think about SG&A dollars in the back half of the year and the need for that, some of the fixed-birth variable as your top line begins to grow again? Thanks.

We did have some good success with, the cost reduction actions and reducing operating expenses this quarter and first half. As the business is picking up, though, we will begin to reinvest back into business. As you pointed out, we'll certainly have increased variable expense with the higher sales, and then we will start to reinvest in employees and marketing and other expenses like that. So we will not be down to 20% planned operating expenses that we originally had talked about because we have the opportunity on the levels. You know, I would think we are very focused on cost management, and so the investments will be measured, and, you know, hopefully you can measure it with the way the business is picking up. Got it. Thanks, guys. Thank you.

Your next question is from Alex Maracchia with Barenberg.

Hi. Good afternoon, guys. Thanks for taking my questions. Can you provide any insight into the impact that stimulus checks may have had on golf equipment and how you're viewing the potential for another round in Q3?

It was interesting. There's so much else going on at the same time. What we saw was a stimulus check, a fairly, I think it was a noticeable impact in entry-level golf equipment at that time. It could have been other factors. You know, you can't separate that. But we did see a surge in, you know, entry-level package set, the lower-priced golf balls, et cetera, associated. I'm not sure that's what the government intended, but it was – at that point, which if I remember correctly was April, we were glad to see it. The greatest thing is earmarking.

Gotcha. That's helpful. Thank you. And what have been your thoughts on marketing spend as it relates to products released earlier this year? Are we launching products given the early season weakness?

Repeat the question?

What have been your thoughts on marketing spend as it relates to products released earlier in the year? And did you have to kind of relaunch anything given early season weakness?

Yeah. Well, we shut down the marketing spend, as you saw, very hard during Q2 in the golf segment, but it didn't hurt us because nobody was playing golf at that time, and as we've seen the business improve, we've started to ramp that back up, but our shares performed very well during the quarter, so as it relates to the Maverick line and our Woods and Club lines, we were very pleased with it, and didn't really skip a beat. The golf ball side, we're pleased with the progress now. The X product, we didn't get a good launch on because of the timing, so we'll have to revisit how we bring energy around that, but it's a small percentage of the overall size. Your point is a good one. We'll have to take a look at that, but The macro trends that we're looking at indicate what we did was effective, and we're seeing our shares globally recover and improve as time progresses, which we're obviously pleased with. All right, that's great. Thank you. Stay safe out there. Thank you.

There are no further questions in queue at this time. Mr. Chip Brewer, your closing comments, please.

Well, thank you, everybody, for your time today and dialing in. We're obviously pleased with the progress of the business, and we look forward to updating you again in a few months. Thank you very much.

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