Patrick Burke - VP, Treasury, Investor Relations & New Business Development Oliver G. Brewer - President, Chief Executive Officer & Director Robert K. Julian - Chief Financial Officer.

Susan K. Anderson - FBR Capital Markets & Co. Scott W. Hamann - KeyBanc Capital Markets, Inc. Randal J. Konik - Jefferies LLC Michael A. Swartz - SunTrust Robinson Humphrey, Inc. Dan R. Wewer - Raymond James & Associates, Inc. David Michael King - ROTH Capital Partners LLC Casey Alexander - Ladenburg Thalmann Rommel T. Dionisio - Wunderlich Securities, Inc.

George Arthur Kelly - Imperial Capital LLC Andrew S. Burns - D. A. Davidson & Co..

Good afternoon. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2016 Callaway Golf Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

And I would like to turn the call over to Mr. Patrick Burke..

Thank you, Jennifer, and good afternoon, everyone. Welcome to Callaway's second quarter 2016 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; and Robert Julian, our Chief Financial Officer.

Any comments made during the call about future performance, events, prospects, or circumstances, including statements related to estimated 2016 net sales, gross margins, operating expenses, pre-tax income, taxes and earnings per share, future industry or market conditions, the success of the company's future products, future profitability, or performance, the creation of long-term shareholder value, the collectability of accounts receivable, and saleability of inventory, estimated 2016 capital expenditures, and depreciation and amortization expenses, growth from future corporate development opportunities, the future reversal of the company's deferred tax valuation allowance, future tax rate, and the ability to use the net operating loss carryforwards, as well as other statements referring to future periods, and identified by words such as believe, will, could, would, expect, or anticipate are forward-looking statements subject to Safe Harbor protection under the Federal Securities Laws.

Such statements reflect our best judgment today based on current market trends and conditions. Actual results could differ materially from those projected in the forward-looking statements as a result of changes to or risks and uncertainties inherent in the company's business or factors affecting the company's business.

For details concerning these and other risks and uncertainties, you should consult our earnings release issued today as well as Part 1, Item 1A of our most recent Form 10-K for the year ended December 31, 2015, filed with the SEC, together with the company's other reports subsequently filed with the SEC from time to time.

Also during the call, in order to provide a better understanding of the company's underlying operational performance, we will provide certain of the company's results and projections on a constant-currency basis, which essentially excludes all foreign currency gains and losses recorded during the applicable period and applies the prior period exchange rates to the adjusted current or future period financial information as those such prior period rates were in effect during the current or future period.

We will also provide information on the company's earnings, excluding interest, taxes and depreciation and amortization expenses, and excluding the gain or proceeds from the sale of a portion of the company's Topgolf investment. This information may include non-GAAP financial measures within the meaning of Regulation G.

The information provided on the call today and the earnings release and related schedules we issued today include a reconciliation of such non-GAAP financial information to the most directly comparable financial information prepared in accordance with GAAP.

The earnings release and related schedules are available on the Investor Relations section of the company's website, www.callawaygolf.com. I would now like to turn the call over to Chip..

Thanks, Patrick. Good afternoon, everybody, and thank you for joining us for today's call. Q2 2016 was another strong quarter for our company.

We continue to be pleased with our operating performance, including revenue growth that we believe significantly outperformed industry conditions, year-over-year increases in gross margin and earnings per share, and further strengthening of our brand and market share positions on a global basis.

We remain the clear global leader in golf clubs, and we are building momentum in our golf ball business. More recently, we announced the commencement of our Japan apparel JV, which kicked off July 1. This JV is a good example and start for our growth initiatives outside our core.

Our strategy is to continue to improve our core business, while also strategically developing profitable growth in tangential areas. We believe we are tracking well against these objectives and that they will drive long-term shareholder value. Let's start by taking a deeper look into our operational performance for the quarter.

In the U.S., our revenues were up 4.3% despite soft market conditions. Our year-to-date hard goods market share through Q2 was 22.4%, up 100 basis points year over year, led by strength in our XR 16 Driver, Apex Irons and golf balls.

We both sustained our leadership position in clubs, with 25.1% share year-to-date, and strengthened our brand momentum and position in golf ball. Our Green Grass business was a particular highlight for the quarter, delivering double-digit year-over-year growth. We are very pleased with and proud of our U.S.

business performance over the last several years. This business is now strong and well positioned. Market conditions in Asia were improved year over year and our Japan business had an excellent quarter, delivering 25% revenue growth on a GAAP basis, or 10.5% on a currency-neutral basis.

Our year-to-date hard goods share in Japan was 15.4%, down 80 basis points year-over-year, but improving during the quarter. With currency trends improving year-over-year and the early start of our Callaway apparel JV, we're optimistic that this region, and Japan in particular, will be a growth and profit engine for us in the coming years.

Turning to Europe, revenues were up 5% on a GAAP basis, or 6.2% on a currency-neutral basis. For the quarter, our UK hard goods share finished at 19.6% through May, up 110 basis points year over year. We are seeing strong results in both golf balls and drivers.

Our pan-European hard goods market share through May was 21%, up 10 basis points year-over-year, and we remain the number one brand in that market. I believe our European team has built a formidable business and is also well positioned. Moving to the operational side of our business.

Our cost management and overall operating efficiencies continue to drive upside in our business. Our gross margin improved 90 basis points year over year to 45%.

This improvement is a result of strong operational performance in the manufacturing supply chain, including marked growth in our custom club business, product and marketing excellence, which has driven sell-through, higher average selling prices and less overall promotional activity. Turning to the product front.

Our 2016 product range is performing at or above expectations in nearly every category. Our golf ball business grew an impressive 14.9% during the quarter. Our golf ball share in the U.S.

was 14.4% for June, plus 240 basis points year over year and is 12.9% year-to-date, plus 180 basis points year over year, thus delivering record share of performance based on steady growth in distribution, sell-through and customer demand, all driven by a product platform that resonates both with elite players and weekend warriors alike.

Our irons and wedge business grew 7% during the quarter, led this year by our Apex Irons and MD3 wedges. In June our U.S. share for irons was 29.5%, plus 250 basis points year over year and is 25.9% year-to-date, thus building on our leadership position in the iron category, a position built on brand equity and powered by our Cup Face 360 Technology.

Last, but not least, our XR 16 Driver has delivered excellent growth and has been in the bag of three major champions already year-to-date. Moving to strategy. Continuously improving our core business has been the keystone of our strategy here at Callaway Golf, and we believe we have delivered nicely against this goal.

For example, our trailing 12-month EBITDA, excluding the one-time gain for the sale of Topgolf shares this last quarter, has increased by 24%.

This improved profitability along with the strong financial position is now allowing us to move into second stage of our strategy, one which, while continuing to focus on improvements in our core, will include strategically exploring business development opportunities, both within our core business and in tangential areas.

The announced JV with TSI in Japan is one excellent example of this. We believe there will be more opportunities like this one, not necessarily in the same space or markets, but similar, and that we are uniquely well positioned to take advantage of them. We intend to be thoughtful and strategic in this endeavor.

However, in due course, we believe this will add meaningfully to our growth and shareholder value. For the balance of this year, we are reconfirming our previous full-year guidance based on the strength of our operating performance and the early start of our Callaway apparel JV in Japan.

However, for the second half, as mentioned in our press release, there is some greater than normal amount of risk associated with Brexit as well as the challenging Q2 market conditions, primarily in the U.S., and their potential impact on the specialty retail golf channel for the balance of the year.

To the best of our ability, we have tried to incorporate these risks into our guidance. I'm only calling them out to highlight the fact that it's a little higher ambiguity than normal. It may or may not create a speed bump for us in the second half.

However, either way, it's our belief that we will be able to manage through it to deliver results consistent with our guidance and, most importantly, create the long-term shareholder value we're focused on. In closing, I'm confident that Callaway Golf is in a much stronger position today than it has been in quite some time.

I'm proud of what we've accomplished over the last few years and optimistic for the future. Robert, over to you..

Thank you Chip. Today, we are reporting consolidated Q2 2016 net sales of $245.6 million compared to $230.5 million in Q2 2015, an increase of 6.5%.

The $15.1 million increase is attributable to the success of the 2016 product lineup as demonstrated by an increase in sales in every region and across all product categories led by golf ball, which grew 14.9%. The company also continues to see improved average selling prices in nearly all product categories.

Gross margin was 45.0% in Q2 2016 compared with 44.1% in the prior year, an improvement of 90 basis points. This increase was driven by higher average selling prices in every major region and continued operational improvements. Operating expense was $89.8 million in Q2 2016, an 8.0% increase compared to 2015.

This increase was primarily due to timing of marketing expenses as we have made conscious decision to shift marketing expenditures from Q1 and Q4 into Q2 and Q3. Operating expense, as a percent of revenue was 36.6% in Q2 2016 compared to 36.1% in prior year.

As a result of higher sales and improved gross margins, operating income increased 12.2% to $20.9 million in Q2 2016 compared to operating income of $18.6 million in Q2 2015. Other expense was $2.5 million in Q2 2016 compared to $4.0 million in the prior year.

This improvement was a result of lower net interest expense related to the conversion of our convertible notes in 2015. Other income of $17.7 million was recorded in Q2 2016 for the Topgolf gain.

The company generated net income of $34.1 million in Q2 2016 compared to net income of $12.8 million in Q2 of 2015, which represents an increase of over 166%. Excluding the $17.7 million gain on Topgolf, the company increased net income by 28.3% to $16.4 million in Q2 2016.

Earnings per share improved to $0.36 on 96 million shares in Q2 2016 compared to $0.15 on 95 million shares in Q2 2015. Excluding the Topgolf game, Q2 2016 earnings per share were $0.18. Turning now to the balance sheet. We ended Q2 2016 with cash of $68 million compared to $27 million for Q2 of 2015, a 153% increase.

Excluding the $23 million in cash from the Topgolf sale, our cash balance would've increased 65%. Regarding our asset based credit facilities, we had borrowings of $5 million at the end of Q2 2016 87% lower than the $43 million of borrowings we had in 2015.

Available liquidity as of June 30, 2016, including cash, improved to $211 million, an increase of 56% versus prior year. Our consolidated net accounts receivables were $205 million at the end of Q2 2016, a decline of 7% compared to 2015. DSO decreased to 76 days compared to 87 days in 2015.

We remain comfortable with the overall quality of our accounts receivables at this time. Our inventory balance decreased by 12% to $151 million at the end of Q2 2016 compared to $171 million for Q2 2015. We remain comfortable with the quality of our inventory at this time.

Capital expenditures for Q2 2016 were $3 million compared to $4 million in 2015 consistent with our expectation. Depreciation and amortization expense was $4 million in Q2 of 2016, flat compared to Q2 of 2015. Our trailing 12-month EBITDA increased 70% to $66 million and includes Topgolf gain.

The company also repurchased 244,000 shares of stock in Q2 of 2016 for $2.25 million in cash. On a year-to-date basis, the company has repurchased 572,000 shares of stock for approximately $5 million in cash. I'll now comment on our 2016 guidance. Regarding full year, we are confirming our previous full year 2016 guidance.

As a result, we estimate net sales will be in the range of $855 million to $880 million, an increase of $11 million to $36 million over 2015. Full year 2016 gross margin continues to be estimated at 44.5%, an improvement of 210 basis points to full year 2015.

Operating expenses are estimated to be approximately $348 million for full year 2016, and we reaffirm our pre-tax income estimate of $45 million to $55 million, including the Topgolf gain. Our 2016 earnings per share estimate on a fully diluted basis remains in the range of $0.40 to $0.50 on 95 million shares outstanding.

These figures include the tax provision estimate of approximately $6 million and the $0.18 gain on Topgolf. We continue to estimate our capital expenditures to be approximately $15 million and our depreciation and amortization expense to be approximately $18 million in 2016.

I would like to add a few comments here on the timing of our estimated second half guidance by quarter. For context, we estimate second half 2016 net sales on a GAAP basis to be in the range of $335 million to $360 million, an increase of 2% to 10% versus second half 2015.

We estimate earnings per share to be in the range of negative $0.26 to negative $0.36, an improvement of $0.01 to $0.11 versus second half of 2015. However, we estimate that the second half revenue and EPS will be more evenly split in Q3 and Q4 of 2016 than it was in 2015.

As a result, we estimate Q3 2016 net sales on a GAAP basis to be in the range of $170 million to $180 million, ranging from a decrease of 3.3% to an increase of 2.4% versus Q3 2015.

We estimate Q3 2016 earnings per share on a fully diluted basis to be in the range of negative $0.10 to negative $0.15 per share on 95 million shares outstanding, a decrease of $0.06 to $0.11 per share versus Q3 of 2015.

Net sales for Q3 2016 reflect the inclusion of revenue from our new Japan apparel joint venture and the company's continued brand momentum, partially offset by the timing of new fall product launches in Japan, as well as some concern around Brexit and market conditions as Chip mentioned earlier.

The projected decline in Q3 EPS versus prior year is due to the timing of product launches, marketing spend and compensation expense. Finally, I would like to mention that our current estimates for 2016 do not include any non-cash charges or benefits. For example, it does not include any change in the tax valuation allowance on our deferred tax asset.

However, as Callaway continues to demonstrate sustained profitability going forward, we expect that this value allowance will eventually be reversed. At that time, this will generate a large non-cash income tax benefit. It will also result in an increase to our overall estimated effective tax rate to approximately 38.5%.

Of course, our cash taxes will continue to benefit from our after tax NOLs of $96 million for some period of time going forward. That concludes our prepared remarks today. We will now open the call for questions..

And our first question comes from Susan Anderson with FBR Capital Markets..

Hi, good morning or good evening, good job on the quarter..

Thank you..

I was wondering if maybe you can expand on just kind of that your comments around the environment and has it gotten a bit – a little bit tougher and I guess this is more in the U.S.

for this part of it than you originally thought, and then maybe if you could talk internally too, and just kind of what you're seeing out there? And then if you've seen any impact yet from Brexit?.

Sure. Susan, this is Chip. Glad to do so. In the U.S., yes, it's a little – the primary channels were a little softer than we anticipated for the first half of the year. Some portion of that is weather. Other the portions of it were a little bit at a loss to fully explain. If you look at Datatech, it would suggest that the market was down significantly.

Our results don't support that. And our independent surveys and conversations don't support that it was down that magnitude. But it was softer than what we would've liked or had anticipated. In Asia, the markets were improved year over year and then also helped a little bit by currency, particularly in Japan.

And the European market was up slightly for the first half of the year at, and maybe even slightly above, but we'll call it at expectations. So nothing dramatic one way or the other from a market condition perspective.

But some softness in the U.S., improved operating conditions in Asia, particularly Japan, and the European business that was about on par. The Brexit is obviously something we're keeping an eye on and we have not yet seen any measurable impact from that..

Okay.

And then in the U.S., I guess when weather improved in the quarter, did you see things bounce back a little bit?.

Yes, we did see it bounce back a little bit. But overall the U.S. market has underperformed expectations year-to-date. And so we definitely have called that out as a risk. But having said that, our business has performed very well, both globally and in the U.S.

So, clearly, we've shown our ability to operate well in that market and our expectations remain high as consistent with our guidance. But there has been some choppy data out there relative to the U.S. market..

Okay. That's helpful. And then in the U.S. also and I guess internationally, too, I know inventory had gotten cleaned up. Are you're seeing it build again at all, especially with TaylorMade struggling? It seems like they've been a pretty promotional out in the stores lately.

Is there any change there do you think? And, if so, particularly I guess as it relates to TaylorMade, do you expect it to impact your business?.

I'm not going to comment on any specific competitors as such. I will on the overall trend out in the marketplace. And inventories are significantly improved in the channel over a year ago, two year ago. That has been a long-term trend. That trend overall is continuing to move in the right direction and I would call it a reason for optimism.

The markets overall are less promotional than they used to be. I think that that trend that I talked about, the general industry conditions improving, I still feel that that's true even though there was some choppiness in the U.S. market in Q2..

Got it. And then last one on the golf balls. Good job on the growth there.

I guess my question is, how much was this related and you guys went into a number of more Green Grass outlet doors this quarter? How much of it was related to that versus growth in other retail outlets?.

We're showing growth across the board right now in the golf ball. So we have done a good job of growing our distribution at Green Grass. And that's very important to us; it's particularly important in this category. I think it's a testament to the brand, the sales team.

But we're growing our golf ball business at Green Grass, we're growing the golf ball business at retail, we're growing it in the U.S. and we're growing it internationally. So we see very positive trends really on all fronts on that business. It's good, steady growth that we're excited about, but also going to be very focused on sustaining.

So it is a nice story thus far..

Sounds good. Congrats. Good luck next quarter..

Thank you..

Your next question comes from Scott Hamann with KeyBanc Capital..

Yeah, thanks. Good afternoon. Just in terms of the second half guidance and a shift between three and four quarter. Is product launch timing driving that or is there third quarter incorporating a little bit of caution around some of these issues you highlighted? I'm just curious if anything had changed maybe from where it was at beginning of the year..

Yeah, Scott. This is Robert. And just on the figures themselves, our second half estimate for revenue is almost evenly split right down the middle between Q3 and Q4. And last year, it was much more heavily weighted to Q3. And it is primarily due to the timing of product launches, especially in Japan. Overall, we are showing growth.

But I do think that it's just that – whether it's something launches at the very end of Q3 or the very beginning of Q4, the timing is so close on that that it could make those types of shifts..

Okay.

What's going on in Japan with respect to the timing there? I thought that was a pretty straightforward season?.

Last year we launched a product, Scott, called Big Bertha Beta in Q3, that isn't launching this year, we're not anniversarying that launch in Japan in this year's Q3..

Okay. Great. Thanks..

Sure..

Your next question comes from Randy Konik with Jefferies..

Hey, can you hear me?.

Sure. Can, Randy..

All right. Great. First question. The inventory looks very well controlled on the balance sheet.

Can you give us some light – kind of thought process around is the impact of customization increasing causing that, better turning inventory or better management of inventory or efficiency with inventory? Give us some perspective on where customization is at today, what's the impact, if any, if that's having on the inventory control or efficiency, et cetera.

That's my first question. Thanks..

Sure Randy. This is Chip. I think that customization and our ability to manage that supply chain of custom product or filament effectively is certainly helping inventory management. But this is also a culmination of a continual improvement in a lot of areas in our business over several years now.

The S&OP process or supply chain planning, the lengthening of product lifecycles, the increased sell through and market share gains that we've driven and the ability to turn inventory quicker both ours and the channel's through custom product, they are all contributing to that.

And you see a very significant over a fairly long period now of improvement in working capital management and we've generated some cash flow from that accordingly. So just net-net I think a better run business..

Got it. And then the turnaround in Green Grass relative to the retail, especially retail channel seems very different. On the Green Grass side, if you did kind of very – it seems like – it sounds like very strong across the board, you feel very good about that channel.

I guess my question around the specialty retail channel was there any kind of delineation between something like the performance seen at a DICK's versus a – I don't know with Golf Galaxy or something like that, meaning, you're more broader oriented specialty retailer relative to a golf only kind of specialty retail organization? I'm just trying to get a sense of there is any kind of differences in trend of those types of retailers or within the types of retailers, within the specialty retail channel..

Randy, I'm not going to be able to comment on specific customers or channels in a lot of granularity there. We are growing our Green Grass business significantly.

And that's really a testament to the brand and sales organization, but it includes product and marketing, et cetera, because more and more Green Grass professionals are choosing to support Callaway and that has allowed us to grow our business.

If you look at the specialty retail and Green Grass business in the quarter, according to Datatech, they're moving almost in concert. It's not like one is gaining a lot of share vis-à-vis the others at this point. When Datatech reports the market up, they're both up. When Datatech reports the market down, they're both down.

So what you're seeing is a good performance by Callaway in growing our distribution at the Green Grass. And we were already very strong at that specialty retail channel. So, it gives you a little bit of color on it anyway..

Perfect. And then, any kind of commentary around ASP by category? Was it up across the board? Just curious there..

Yes. Randy, this is Robert. Selling prices has increased across the board pretty much in every category and just about every region, I mean, it's been pretty much universal..

Okay.

And then I guess my last question, back in the golf ball business continues to track very well for you, any sense of how much – we get some sort of perspective on how much of the Green Grass penetration you have now with the golf ball business? We're just trying to get a sense of where we are at, where we're going towards over the next couple of years..

This is Chip again, Randy. I'm not going to able to give you specific data for competitive reasons. We've grown that – we had double-digit growth on distribution, both Q1 – we continually operate right now at double-digit growth in distribution.

We think we still have room to grow there, but other than that, I can't give you specific numbers at this point..

Okay, that's fair enough. Thank you. Thanks, guys..

Thank you..

And your next question comes from Mike Swartz with SunTrust..

Hey, guys..

Hey, Mike..

Maybe following this topic of the Green Grass channel and given the growth, you've cited in some of the distribution gains that you've mentioned in prior calls.

Have you seen any competitive reactions kind of out of the ordinary?.

Mike, no, I guess, not, there – we have some very formidable competitors out there that have strong positions, we've got a lot of respect for them and certainly they are reacting. And we counter and that's the daily dance that goes on in the marketplace. You see a consolidation of the bigger brands throughout the entire market right now.

I've seen data which suggests the top four brands have nearly 80% of the sell through at specialty retail and Green Grass. And, I'm hearing similar stories of that consolidation on a global basis. So I think that supports some of our growth at Green Grass.

But, the overall environment is improved from a promotional perspective over the last several years. And, there is no change to that macro trend right now..

Okay, thanks. And then, just on the – on the guidance, I mean, it seems currency got a little better throughout the quarter versus April, and then you're maintaining your full-year outlook.

So I guess, are you – I guess the question is, do you feel like you're embedding enough of the risk in the back half of the year from what you're seeing at retail, I guess, what's your comfort level with that?.

The answer has to be yes there, Mike, or my lawyer is going to reach over and correct me on that. We think, we've appropriately taken into consideration all the risk factors that exist out there. And I know we have demonstrated now, an ability to operate very successfully in what are occasionally turbulent waters. So we're comfortable at this point.

We're very pleased with our results through the first half. Your comments are well taken and we're comfortable with the guidance that we're suggesting for the second half..

And, Mike, this is Robert.

You're correct, that given what currencies have done since the last time we gave guidance there would normally be some favorability in revenue and – flowing throw the EPS, but as you correctly stated, we sort of view that as the hedge or the offset to some additional risk, it sort of netted out in the grander scheme of things and let us to maintaining guidance..

Okay. And then, just a follow-up question, and I'm not sure if I missed it, but did you mention what the custom business is doing for the first half of the year? I think you've said in the past it was up 20% plus in the last couple of years.

Is that still kind of the trend line that you're seeing in the first half?.

It's certainly double-digit, Mike. We're not seeing any significant change in that growth trajectory..

Okay. Great. Thank you..

Your next question comes from Dan Wewer with Raymond James..

Thanks.

Chip, with your comments about softer domestic demand, do you think it will make the industry reluctant to push another round of price increases in 2017 as it did in 2016?.

No. I don't think so, Dan. I think that it's – it's got our attention enough for us to call it out. Clearly, there are – we're still performing well. We will evaluate those movements just as we did this year. So, I don't think there's any fundamental new news here. So, my gut is there's no change in long-term issues to think about from this perspective.

What the positives have been consistent and we'll look at the business with the same rigor as we have in the past..

Do you think that the huge drops we saw on the Datatech numbers, could that reflect TaylorMade and Callaway moving away from the two year – excuse me, from the one-year product launch to the two-year cycle, and that's just simply the big drop that we saw in May is just rolling and fewer product launches?.

I think fewer product launches will definitely contribute to more managed inventories. So, certainly that is a factor in that..

Also I want to ask about the second half revenue guidance. So a very broad range, between 2% growth and 10% growth..

Yes..

What would be the scenario that would lead to the high-end and the low-end?.

Dan, we talked about that internally and given the choppy waters, even though we're very comfortable with our business, we decided not to change the range. We recognized the range is very broad. But we thought that the right message was confirming guidance at this point and not moving that as opposed to trying to micromanage a smaller range.

So, that was a stylistic thing more than anything else..

Okay.

Then just one question for Robert, when you look at the change in the loss in the third quarter and fourth quarter compared to historic results, is that the shift in the marketing dollars that you were talking about from the 4Q to 3Q? Is that the bulk of the earnings shift?.

Yes, absolutely. It absolutely is. It's the timing of marketing dollars, it's compensation. But it's strictly timing, yes. So, there is a shift..

Yes..

Okay..

So, net-net we're favorable second half of 2016 versus 2015, but the split has changed. But it's just timing..

Right. Yeah. The seasonality looks considerably different than history, but that's all that is. There is just a shift in the....

That's correct..

Okay. Great, thank you..

Thank you..

Your next question comes from Dave King with ROTH Capital..

Thanks. Afternoon, guys..

Hey, Dave..

I guess first off on the softer market trends.

To be clear, have you seen your sell through slow at all at specialty? Or is the guidance more a function of what you are seeing for the overall market?.

We're very pleased with our performance year-to-date. And so I don't know how to add any more color to that. Some of the indicators out there, such as Datatech, suggested a significant decline in specialty retail and Green Grass during the quarter. We didn't see our results impacted that much.

We've also had numerous conversations with lots of customers who wouldn't necessarily support the same magnitude. But there was a little softness in the market, we would agree with. And going forward, we're comfortable with our guidance at this point. And we've continued to perform well in good markets last year. Datatech showed the market up.

This year, the year-to-date, Datatech shows the market a little bit down. And we've been able to perform well in each of those. So, our plan is to continue that trend..

Okay. No, that helps.

And that's both from a sell-in and a sell-through perspective then?.

Correct..

Okay. And then on the guidance. How much do you expect TSI to contribute to the top line in the back half? I want to say you guys have shared that it's like a $30 million to $40 million or something annually.

But I think there is the product launch timing around that, so how should we think about that?.

Yes. We have not broken that out, Dave. And as a policy, we're going to not call that one out separately..

Okay. And then lastly from me, gross margins potential for further improvement.

They're going forward between manufacturing facilities, mix improvements, extended product cycles, et cetera, how should we think about that going forward? And what are the drivers that are likely to continue?.

We've really done a nice job of growing the gross margins. And we've been able to continue that trend of improvement. We've given you the guidance for the balance of the year. We're not in the position now to provide guidance or any forward-looking metrics on that. But the team is going to be focused on continuing to deliver at this level or better.

And we'll update you further on that when we give you 2017 guidance..

All right. Thanks a bunch and good luck with the rest of the year..

Thank you..

Your next question comes from Casey Alexander with Compass Point Research..

Hi. Good afternoon..

Hi, Casey..

Late last year, your golf ball share was running around 11% and now you're reporting in June a 14.9% number. As your share has been moving up, it's very consistently been coming from competitors below you.

Is that starting to change? Any starting to come from the competitor above you?.

Casey, this is Chip. We're not sure. We've had nice steady progress. The golf ball business, it hasn't been a tidal wave, but it has been the tortoise, slow and steady. And where that share is coming from is speculation at this point.

What we're really focused on is trying to continue the trend and make sure that we sustain this and hopefully build on it little by little as we've done year-to-date..

Well, I asked that simply because the competitor above is so strong at Green Grass. And given your move into Green Grass, it would make some sense that you're starting to bite that into that at least a little bit..

We'd be speculating on that at this point, Casey. So I'll try to avoid that at this point..

All right.

Secondly, what is CapEx running at? And given the growth of the business, is there anywhere in the business that you're starting to feel a little capacity constrained to where some capital projects might make some sense?.

So, Casey, this is Robert. Our estimate for full year CapEx this year is $15 million. It's been fairly constant for some time at that level. We don't feel constrained. And I would say that our process by which people request capital is – what people present and justify, we approve.

And it doesn't feel like we're constraining ourselves or that there are areas where we're staved for capital that it feels like we should be spending more..

And, Casey, we don't see any capacity constraints at this point..

All right. Good.

Robert, can you put a pin in the $2.4 million other loss? Is that ForEx, Brexit related or how would you pin that?.

I think, Casey, when you strip out – this is Patrick. When you strip out the Topgolf gain, there actually was a benefit, which is all related to not being in the convert. So, currency....

Yes..

... quarter-to-quarter was pretty neutral..

Right. There's sort of other – and the other income and other loss category, there's $2.5 million of other expense, which is just – it's the interest expense, which is actually lower than it was in prior year, was $4 million prior year, $2.5 million this year..

Okay..

It's offset in that line by a $17.7 million gain due to Topgolf, but other expenses is just the $2.5 million..

So, that's off the asset backed line?.

Yes..

And, Casey, remember there is also hedge losses in Q2. Now they are just very similar to the hedge losses in Q2 of 2015. So, we're explaining the benefit it really is related to the convert being on..

Right..

ABL expense is actually a little lower than the $2 million that's in there for the quarter..

All right. Good. Thank you.

And lastly, it would seem to me that if – your custom business is growing double-digits and also it would seem to me that the bigger competitors would have better customization capabilities, that that would be having an impact on the inventory and the inventory improvement in the channel, because if I was a retailer, I'd be carrying less if was doing more fitting and custom sales.

But is there also any disruption happening in the distribution channel? And I'm thinking the Sports Authority has gone away and clearly retailers are – the retailing business overall is – just isn't what it used to be.

So is there any disruption in the distribution channel that's also forcing them to carry lower inventories?.

This is Chip. Yes, I think that they are managing their business differently and as the golf industry is re-sized they've had to re-size to stay profitable. I think there has been – I think the custom is part of that. As in everything, the strong will survive and flourish.

But there has been some choppiness with Sports Authority and Sport Chalet and Lumpy's, you know that have all failed over the last six months or so. And they're changing their business model a little bit. There is significantly less retail inventory out there now than there was a year ago..

All right. Great. Thank you for answering my questions. I appreciate it..

Sure, Casey..

Your next question comes from Rommel Dionisio with Wunderlich Securities..

Yes. Thanks. Good afternoon. I just want to chat about Japan for a second, I also heard your comments earlier, but just maybe a little more granularity on the strength that you saw in that market. Your market share is still down, but not nearly as much as first quarter.

Was there something unusual with maybe the domestic competition there or maybe new product launch that you had maybe really resonate in that market relative to some of the other markets you had? Just a little more color on what drove some of the strength in Japan in the second quarter..

Yes. Obviously, a lot of that. It helped to have the yen exchange rate movement that we've seen for that market, but even on a constant-currency basis, you saw wonderful results in that market. And part of it was market-specific information. We probably launched a little more product there in Q2 than we did a year ago.

And also we had – the number one wood company in that market had a launch towards the end of last year that had caused a significant market share shift in their favor at that time. And that affect is kind of waning as we've moved through the year.

We have a really strong operating team in Japan and what I see is they're making the right moves to regain that share and put that business back in a strong position and on top of that we have the favorable foreign currency movement..

Okay. Thanks very much. It's very helpful. Thank you..

Thank you..

Your next question comes from George Kelly with Imperial Capital..

Hi, guys. Couple of questions for you. First, wondering if the super hub distribution facility was opened in the quarter.

And if so could you talk it off trying sort of quantify what kind of savings that will drive?.

So, George this is Robert. The super hub facility is open. I did have to be the privilege of going over there and visiting and seeing firsthand. It's a very excellent facility, world-class facility, it's operating very, very efficiently. It was justified on financial benefit.

We have not specifically called out what the impact to margins, or costs have been for that facility, but we're very, very pleased with the facility, it's up and running, it went online, on time and is doing very well..

Okay.

And when did it open?.

It was really....

January..

Beginning of the year..

It was beginning of the year. okay..

January..

Yes..

Okay. Thank you.

And then second question on marketing, you mentioned that the timing of certain marketing spending is shifting around into the second quarter and third quarter, has the channel mix changed a lot as well?.

By channel mix, our revenue mix between channels?.

No, I mean, where you're allocating your marketing budget..

It's changing, it's evolving, as we move gradually to digital and social, but we're still very committed to the traditional media space, et cetera. So there has been a gradual movement in the allocation across channels that I think is consisted with many businesses.

What we've done I think uniquely well in the golf space is leverage that and I believe we're a leader in that digital and new age marketing..

Thank you..

Thank you..

And our final question comes from Andrew Burns with D.A. Davidson..

Thanks. Good afternoon. I actually just had a quick follow on, as it relates to marketing. In the script there you used the reference marketing excellence. And I know, you don't like to give too much disclosure on what's to come. But if you could just spend a little time on what's really working in terms of marketing year-to-date versus seasons past.

Thanks..

Again, I'll give the marketing team some kudos, they've clearly done a good job as have many areas of the business.

Instance here has been our steady growth in golf balls and the campaign that we've had around Chrome Soft the ball that changed the ball, the consistency of that marketing throughout the year, that is something Callaway didn't used to do, you're going to see us continue to advertise that product throughout the entire calendar year and we think that's very important for that.

Another key initiative for us on the marketing front this year was in the iron category. Last year we regained the number one position in irons, a position that Callaway had enjoyed for many years, but had reluctantly surrendered for a few years.

And we regained that position and one of the things that we wanted to do this year was re-communicate our leadership position. And you see in our marketing that message I believe loud and clear and creative in many different manners. And then in June, without any market changes of significance in the U.S.

no product launches per se that were meaningful from a revenue perspective, we had 29.5% share – dollar share in the iron category. So, as the head of marketing jokes, it obviously didn't hurt, and we're really pleased with what they're doing along with the product excellence and winning on Tour and operational improvements.

It's a symphony that makes us work. It's not any one element, but the marketing is certainly held up its side and done a nice job..

Thanks. And as you reference winning on Tour, I thought, we might see a couple more lines in the prepared remarks about your major success this year.

When you have a series of high-profile wins and a great Callaway led dual at the British Open, how do you capitalize on that buzz and do you really see any small – or a lift in the business?.

Andrew. We've had an exceptional year on Tour, winning two majors on the men side, one on the women's side already. We're continuing to grow our position across the World Tours for First Team All-Americans joined team Callaway this year as the college season ended. And it's all part of the mosaic of what makes it successful.

We do see some positive short-term sell-through when there is a big event such as a major one, but it's not material from a public company prospective. But, you can see a slight improvement and you know it's extremely positive for the brand over the long term and that's perhaps the most important issue..

Great. Thanks..

Thanks, Andrew..

And we have no further questions in queue at this time and I would like to turn the conference back over to Mr. Brewer..

Thanks, everybody, for dialing in. We appreciate your support and interest in Callaway. We'll look forward to talking to you again at the end of Q3..

Thank you for your participation. This does conclude today's conference call and you may now disconnect..