This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Ladies and gentlemen, thank you for standing by, and welcome to the 2020 Year End and Fourth Quarter Earnings Conference. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask the question during that time, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I will now hand the conference over to your speaker, Patrick Burke, head of investor relations. Please go ahead.
spk02: 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 sections of the company's website at www.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 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's 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 Webcast and 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 Jeff.
spk14: Thanks, Patrick. Good afternoon, everybody, and thank you for joining us for today's call. Starting on page five 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 continue to make progress on the merger front with our shareholder vote scheduled for March 3rd 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 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 six 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 Data Tech, US 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. US 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 number one hard goods brand in that market. This is the first time that a non-Japanese brand has ever finished number one for the full year in total hard goods. Our full year share in Europe was down slightly, but we still finished as the number one hard goods brand in this market as well. On a global basis, I believe we remain the leading club company in terms of both market share and total revenues and the number two ball company. In the U.S., third-party research showed our brand to be the number one club brand in overall brand rating as well as the leader in innovation 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 number one putter and the number one 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 positions 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 two 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 number one 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 launch 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 Travis Matthew. 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 Wolfson also had a strong quarter, delivering year-over-year revenue growth. Perhaps even more importantly, we cleared some key strategic and operational hurdles during the quarter. In Europe, our new CEO of Global Jack Wolfson, Richard Collier, joined the team in December. Richard joined us from Heli 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, Andre, who joined us a few months earlier for Mahmoud, has been outstanding. Our previous CEO, Melody Harris-Jensbeck, transitioned at the end of the year, and we thank her for her leadership over the last two years with Callaway. We enter 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 nine months, the hero has certainly been e-commerce. 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, Ecom, to deliver 64% year-over-year growth in Q4. Ecom 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, three of the U.S. venues were forced to shut as well as three of the U.K. venues. However, despite these headwinds, Topgolf's overall results exceeded expectations in Q4. This was driven primarily by strong walking sales. Currently, only the UK venues and one US 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 a total venue full year, same venue sales target of 80% to 85% of 2019 levels. Turning to new venue development, Topgolf has opened two new domestic venues already this year, Lake Mary, Florida, and Albuquerque, New Mexico, and is on track to hit their new venue plan of eight 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 strong reviews 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 constrained 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 expected 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 top-up merger process, as well as the future potential of what is going to be a unique and powerful business. Brian, over to you.
spk12: Thank you, Chip. As Chip mentioned, 2020 was quite a year. We were 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 were also pleased with the recovery of both our Travis Matthew 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 31st, 2020, compared to $303 million at December 31st, 2019. In addition to the core business recovery, We also remain very excited about our prospective merger with Top Cop, which clearly will be transformational for Callaway. The Top Cop 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 non-recurring transaction and transition related expenses in 2019. Second, as a result of the OGO, Travis Matthew, and Jack Wolfskin acquisitions, we incurred non-cash 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 non-recurring 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 initiative, and costs related to the proposed Topgolf merger. Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is non-recurring and did not affect 2019 results. Fifth, we incurred and will continue to incur non-cash amortization of the debt discount in 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 four-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 GOP equipment segment, resulting from high demand for GOP 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, to reduce 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 of 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. Pre-tax loss was $48 million in the fourth quarter of 2020, compared to pre-tax loss of $32 million for the same period in 2019. Non-GAAP pre-tax loss was $35 million in the fourth quarter of 2020, compared to non-GAAP pre-tax loss of $25 million in the same period of 2019. Loss per share was 43 cents on 94.2 million shares in the fourth quarter of 2020, compared to loss per share of 31 cents 94.2 million shares in the fourth quarter of 2019. Non-GAAP loss per share was 33 cents in the fourth quarter of 2020 compared to loss per share of 26 cents 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 America warehouse consolidation, and in 2019 were negatively impacted by the non-repairing purchase price inventory step-up associated with the Jack Wolfskin acquisition. On a non-GAAP basis, which excludes these non-referring 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 non-cash impairment charge related to the Jack Wolfson 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 GAAP 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. Pre-tax loss was $127 million in 2020, compared to a pre-tax income of $96 million in 2019. Excluding the impairment charge in the other non-GAAP items previously mentioned, non-GAAP pre-tax income was $79 million in 2020 compared to non-GAAP pre-tax 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 82 cents on 96.3 million shares in 2019. Excluding the impairment charge in 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 a certain key balance sheet and cash flow item. As of December 31st, 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 a 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 is $138 million, a decrease of 1.4% compared to $140 million at the end of the fourth quarter of 2019. Date 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 were 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 pre-merger basis, which includes only Callaway Golf's 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 software 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 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 pre-merger basis, full-year 2021 non-GAF 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 a 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 pre-merger 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 ProTour, and continued investment in the soft goods business, including the Travis Matthew business related to opening new retail doors, investment in infrastructure and systems and investments related to new market expansions for Jack Wolfson in North America and Japan. The company believes that these investments will continue to drive growth in sales and profits, but expect to incur the expenses for these investments prior to receiving the associated benefits. In 2020, the company realized gains from certain foreign currency hedges in the aggregate amount of approximately $25 million. These gains are 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 absorbed the initial... Excuse me. Yeah. After we absorbed the initial shock of the impact of the pandemic, including the various governmental shutdown orders and restrictions, Chip challenged us to protect our business and avail ourselves of opportunities that arise during the pandemic and take action 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 Top Cop business, support an active, outdoor, healthy way of life that 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. 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. We are still pending shareholder approval on the merger. Operator, over to you.
spk00: Thank you. And as a reminder, ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. And we do ask you to please keep your questions to one and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Randy Connick with Jefferies. Your question, please.
spk09: Yeah, thanks a lot. Thanks, guys. Good evening. Can we just go over the proactive, the power 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?
spk14: Okay, Randy, so this is Chip. The first question is on the apparel segments. Q4 revenues, is that correct?
spk09: 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, you know, something with Callaway apparel or something like that? Just trying to understand this a little bit more.
spk12: Sure, Randy. This is Brian. Obviously, you know, their business is seasonality, and it hit right during the middle of the beginning of the first quarter in their spring-summer season. You know, everybody tried to repurpose as much as they could, but there was definitely a bunch of apparel inventory issues that was pushed through out of that challenge, 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?
spk14: We're not going to be able to break out at this point how much of that was Jack Wolfskin versus Travis Matthew or Callaway Apparel. All of them had a... inventory correction issue proportionate to the scale of their business, really.
spk09: All right, great. And then just to be clear, that means that, you know, with this, the deck is admittedly should be cleared going forward. Is that correct?
spk14: 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 we're, you know, Europe, is, as you are aware, shut down starting in mid-December and is still shut down at this point. So there's going to be some implication from that as well.
spk12: Yeah, 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'll be a little bit more due to the December shutdown.
spk09: 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, Travis Matthew logo on his back. you're clearly starting to see these brands come together. And then I think Topgolf announced the nine-shot challenge of the Top Tracer 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 you know, start to blend these businesses together to kind of try to bring the ecosystem, you know, further and further together with these different branding opportunities, advertising opportunities, et cetera. Yeah, Randy, this is Chip.
spk14: You know, you're clearly, you know, seeing some of the, you know, strong potential for synergies and co-branding, you know, around what is going to be the largest golf consumer ecosystem, you know, in the world, and so we're remaining very excited about that. But for regulatory reasons, we'll not get into those too much further at this point. The merger is pending, and we're obviously excited about that potential going forward.
spk09: Fair enough. All right, good. That's helpful. Thanks, guys. Thanks, Randy.
spk00: Thank you. Our next question comes from Daniel Imbrow with Stephen. Your question, please.
spk03: Yeah, good evening, guys. Thanks for taking the question. I wanted to ask one on the top line. Obviously, golf equipment sales were strong, but I think golf balls were a little bit surprising to be light. You know, 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? I mean, was there a weak spot internationally in the golf ball side or what impacted that category first? We'll start there.
spk14: Yeah, 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, you know, 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, you know, in addition, we were capacity constrained in much of that
spk03: Yeah, that's helpful, Culler. Maybe can we dig into that capacity constraint? I think through last year, the message had been you guys through Chicopee were 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?
spk14: You know, 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 a 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 – shift in Q4 into new product launches that will shift 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, you know, we are in chase mode, but we're also performing at a high level. So it's a positive situation overall.
spk03: Got it. And I didn't catch your answer. Did you expect the supply chain issues to continue to weigh on the first half of this year?
spk14: Yes. Yeah. With the amount of demand that we're seeing, we expect to have some supply constraints, at least through Q1, with the opportunity to catch up more following that.
spk03: Got it. Thanks. I'll hop back in the queue. Sure. Sure.
spk00: Thank you. Our next question comes from Joe Altobello with Raymond James. Your question, please.
spk07: Thanks. Good afternoon. Just a couple follow-up questions on the supply constraint issue. Is that mostly balls, or are you also seeing that on the club side as well?
spk14: We're seeing it throughout the golf equipment business, balls, clubs, package sets, golf bags. 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.
spk07: So is that mostly a Callaway-specific issue, or is that an industry?
spk14: No, this is total industry. If you look at total industry inventories, Joe, I'll give you a relative basis there. Inventory in the field for the entire clubs. So this is data tech data. Last year, they had 5.2 months of inventory in the field. At the end of December, they had 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 club or a bag, but a reflection on what is really unprecedented demand.
spk07: And do you expect that field inventory to normalize by the end of 21, or might that extend to 22?
spk14: I don't have a projection that far out for you. You know, if you can tell me, you know, all the COVID implications for the balance of the year and such, or 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.
spk07: Okay. Thank you, guys. Appreciate it.
spk00: Thank you. Our next question comes from Mike Schwartz with Truist Securities. Your question, please.
spk10: Hey, good afternoon. Just I 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?
spk14: Sure. Mike, I'll take a shot at it and Brian, you know, 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, containers to ship from Asia to The U.S., you know, 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, you know. 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 exporters, 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 some ships lined up outside of Long Beach trying to unload. The efficiencies of unloading are slower. We can't stop our Staff our DCs as efficiently, so our operating costs in the DCs, because we don't know when the product's going to show up, but we have to have the people there. Our factories are having issues with regard to staffing levels and 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 strong surge and the unique environment we're in right now, and it will impact the business in the short term.
spk12: And, Mike, we are forecasting for full year 2021 that we can get back to about the same gross margin level as 2019 while absorbing all that turmoil from the COVID. But the shift point, that should abate as COVID starts to resolve itself and subside.
spk10: Okay, that's helpful. And then just a 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, you know, relative, because I think you did this a couple years ago with your Japanese apparel business, to maybe give us a sense of maybe the differences versus, you know, the Japanese business coming in-house and how to frame that financially, I guess.
spk14: 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 products 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.
spk10: All right. Thank you.
spk14: Thank you.
spk00: Thank you. Our next question comes from Susan Anderson with B Riley FBR. Your question, please.
spk01: Good evening. Nice job on 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
spk14: pans out do you think that participant participant growth rate can continue to grow this year and same with rounds played thanks sure citizen good question so uh in the market in golf is obviously experiencing unprecedented demand right now and the market sizes up uh long term i expect the trend line growth of golf equipment to be slightly higher than pre-covered as well um clearly they won't sustain these you know, 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. Give you a little bit of data in support of that. So total on-course golfers in 2020, they just reported this data, is about 24.8 million. That's people who have 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 we're playing in a non-traditional venue. And the most significant non-traditional 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's growth, we believe, is going to ramp. So Outlook for golf, very strong data supports at larger overall market size, slightly larger growth rate. I can't quantify exactly how much larger on the growth rates. 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 reasons for optimism on the non-traditional front.
spk01: Great. That's really helpful. Thanks for all those details. 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?
spk12: Sure, Susan. Thanks for the question. We do expect, especially the freight issue and some of the operational cost issues to as the year goes on. I mean, as you start to see COVID lessened, you'll start to see that. Compared to 2019, I would say it would probably, I mean, it would probably ramp this year as you go through the year. So the first half, you know, will probably be a little bit less, and then the second half would be a little bit more.
spk01: Great. Okay, that's helpful. And then also, what about the additional investment? Is that front-end loaded at all, or should we think about it being spread throughout the year?
spk12: It depends on when people implement things, but I would say generally I would assume equal throughout the year.
spk01: Okay, great. Thanks so much, you guys. Good luck next quarter. Thank you.
spk00: Thank you. Our next question comes from Brett Andres with KeyBank Capital Markets. Your question, please.
spk13: Good afternoon. So the $70 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 TOR and some of the other investments, just trying to kind of frame this out?
spk12: Sure. You know, we probably won't break out each one, but I guess the way we look at it is and this is roughly, but, you know, roughly a third is the OPEX. A third is just FX. You said OPEX. Oh, yes. It's all OPEX.
spk08: It's all OPEX.
spk12: But a third is, I even wrote the third as OPEX. A third is FX. A third is normal inflationary pressures through labor and professional services that were really two years worth. So if you go from 19, you had some that went to 20 and some more. So about a third is that. And then about a third is the additional investments. That's probably, let's call it $25 million. And that breaks up between the CREA apparel and then TOR and a little bit of investment in other soft goods business as well. But the total is probably about $25 million for those investments.
spk13: 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 the 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.
spk12: Yeah, 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, you know, COVID picks up and the challenges of the year. But I'm not sure what else I can say about that.
spk14: Yeah, Brett, you know, Q1 will be a challenging quarter to show meaningful growth versus 2019. But then after that, you know, we do have – opportunity to do that, and we don't have guidance, unfortunately, for you at this point in time.
spk13: No, understood. I gave it a shot. Yeah, I don't blame you.
spk00: And our next question comes from John Kiernan with Cohen. Your question, please. Your question, please. John, you there? Now open. Now open. John, check your mute button. All right. Sorry about that.
spk05: Switching off the AirPods onto speaker. Can you hear me now?
spk00: Yeah, John.
spk05: All right. Sorry about that. You know, the weather looked good out in San Diego during the farmers a couple weeks ago. Not quite as good here in Westchester County, New York. Yeah. Brian, maybe on slide 14 with the guidance. Would you point out to some of a 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? Is it material in 2021?
spk02: From a non-recurring, John?
spk05: Yes.
spk02: So the one-time? Yeah, the one-time. I don't have that broken down. Yeah, absolutely. We can, we'll get into that a little bit more as we go through the year, but there'll be some, you know, some Topgolf merger type expenses. They would be mostly an OBEX, right? And then, you know, depending on valuations, you know, as we get through that, but those will be most of the one-time expenses, Brian, I don't know. Yeah, the legal fees, the investment banking fees, the auditor fees. some purchase price amortization, right, which we've been one time. It should just be mostly related to that, John.
spk05: It's largely related to Topgolf, okay. The guidance felt like it was more for the core golf business, but okay, got it.
spk14: Not one time, no. I refer to them as one time 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. You know, for instance, the operating costs for the containers will be in the numbers that we report to you.
spk12: And, John, there's ongoing costs from the prior acquisitions for the amortization of intangibles, things like that, to relate to the Callaway business that will back out. That's one time. But all the new things are pretty much related to the merger.
spk05: Understood. Maybe, you know, I don't mean to beat a dead horse, but the investments in apparel look like they're, you know, obviously increasing with the Korean business and some of the investments in Travis and maybe marketing and partnerships. You know, it feels like soft lines might be causing more volatility in your business at this point. What is it that you're attracting to, I guess, on the soft bid side of things that you're upping in that category?
spk14: Well, you know, we have to look at it, you know, clearly soft goods is causing more volatility because soft goods is more impacted by COVID. So, you know, the apparel businesses are not enjoying the 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 Travis Matthew business is just candidly a wonderful business and great growth opportunity, has significant scale and significant earnings potential. And as we, you know, went through and unlocked that, we decided it was in shareholders' best interest to put the systems together 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.
spk05: Okay, thank you.
spk00: Thank you. Our next question comes from Casey Alexander with Compass Point. Your question, please.
spk06: Yeah, hi, good afternoon. 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.
spk14: Thank you, Casey.
spk06: I did want to ask, your comment that the supply constraints sort of impact across the entire golf industry, 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?
spk15: You know...
spk14: It's possible, Casey, but, you know, 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. You know, we're expecting, as I said in my comments, a strong year in golf equipment. But, you know, we just can't flex the supply chain anymore. 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. Um, your point is well taken. It's definitely true. Um, but it, it is, it's the, it's a pretty good environment to be operating in. I don't want to overemphasize the, uh, so compliant constraint issue either. We're, we're ramping and we have added capacity and, uh, expect a, a positive result.
spk06: Okay. Fair enough. Um, uh, and my one followup is, um, As it relates to – I'm already blanking out. There's age for you. Yeah, in relation to the rationalization of the apparel inventory position, because I'd see as you, you know, looking at the press release, as you worked it down, you know, yes, sales were up quarter over quarter, but clearly looking on, you know, the page on the release, the margins were clearly negative impact and did you complete the, the inventory rationalization? Is everything out or is there still some more to go here in 2021?
spk14: Casey, we're in good shape. Uh, with the only new wrinkle on that is that, you know, COVID is kind of resurfaced and surged in Europe. So, uh, uh, the European markets being shut down now since mid December, uh, will create a little bit of, uh, 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'll open, but we're guessing sometime late Q1.
spk06: 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?
spk15: Yes, I'm rounding up, I think, to 17 on data tech, and so reasonably flat year over year.
spk14: And if you look at total channels outside of just what data tech reports, we would be even stronger than that.
spk06: Yeah. Okay. Great. Great. Thanks very much. I appreciate you taking my questions.
spk00: Absolutely. Excellent. Our next question is from Alex Marosia with a Berenberg. Your question please.
spk04: Hi, good afternoon guys. Thanks for taking my questions. 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 seven. 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?
spk14: 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 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 a destocking inventory. And that's what we believe is occurring out there. And, you know, 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 ball. We've strengthened our brand position. 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, but I'm not going to project specific share by category.
spk04: 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 US 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 indoors this year?
spk14: We are still primarily focused. I'm glad to hear you say that you're seeing it more in winter sports, etc., but our focus is still hiking, if you would, hiking and outdoor, and that is a global focus, and we're the strength, 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 slash e-com business in the U.S. with only a few select relationships to start with, and that strategy continues for us.
spk04: All right. Thank you, guys. Appreciate it.
spk00: Thank you. And our last question comes from George Kelly with Ross Capital. Your question, please.
spk11: Hi, guys. Thanks for taking my questions. Just a couple for you. I'll start with Travis Matthew. So curious, you mentioned in the press release just that that's part of your 70 to 80 of incremental operating expenses for the year. I'm just curious if you could break down for Travis Matthew, what is the plan as far as opening new stores, and is that where most of it's going, or can you just kind of lay out the year for us with Travis Matthew?
spk14: George Chip, so we're not going to break out the $70 million to $80 million further than what Brian went through, which said that of the $70 million to $80 million, you've got FX, You've got the two years of inflationary pressures in there. It leaves you about $25 million of what is truly investments into the business. Travis Matthew is a 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 five doors this year, new retail doors, and we opened two 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.
spk11: Okay. And then a similar question, I guess, but with taking on the South Korean business, Is that something that you expect? 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 one to be profitable? 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?
spk14: 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 spreadsheets, 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.
spk11: Okay, gotcha. Thank you.
spk00: Thank you. And 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.
spk14: 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 what I believe will be a robust call with you at the end of our Q1, starting in Q2. Thank you very much.
spk00: And ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.
Disclaimer