Ladies and gentlemen, thank you for standing by, and welcome to the Quarter Three 2019 Callaway Golf Earnings Conference Call. At this time all participants are in a listen only mode. After the speakers' presentation there will be a question and answer session [Operator Instructions].

I would now like to turn the conference over to your speaker for today Mr. Patrick Burke, Head of Investor Relations. Sir, please go ahead..

Thank you, Ian, and good afternoon, everyone. Welcome to Callaway's Third Quarter 2019 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 third quarter 2019 financial results. A copy of the press release and associated presentation are available on the Investor Relations section of the company's website at ir.callawaygolf.com. Most of the financial numbers reported and discussed on today's call are based on U.S.

generally accepted accounting principles. In the few instances where we report non-GAAP measures, we'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 that in connection with our prepared remarks, there is an accompanying PowerPoint presentation that may make it easier for you to follow the call today. This earnings presentation is available for download on the Callaway Investor Relations website under the Webcasts 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're able to flip through the slides. I would now like to turn the call over to Chip..

Thanks, Patrick. Good afternoon, everyone, and thank you for joining us for today's call. Starting on Slide 4. I'm pleased to announce another strong quarter. Our total company revenues were up more than 60% during the quarter and are up 31% year-to-date.

For the first nine months, we delivered growth across all business units, regions and major product categories.

For the quarter, we enjoyed continued strong performance in our golf equipment business, continued double-digit growth in the TravisMathew's business as well as positive results in our recently acquired Jack Wolfskin business, which is benefiting from a growing direct-to-consumer business and where new product innovation along with recent investments in marketing are beginning to bear fruit.

These results reflect the strength of our team, our brands and our long-term strategy as we're seeing key investments and other initiatives meaningfully impact the growth in the long-term earnings potential of our business.

As is my custom, I'd like to take this chance to thank the Callaway Golf team for the hard work required in delivering these results across all our brands and driving further change in growth at our company. Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and remains motivated to continue to improve.

Let's now take a look at our operating performance by business segment. Turning to Slide 5 of the presentation. Our equipment business had a strong quarter with revenues up 13% on a constant currency basis driven by continued brand strength as well as new product launches. We saw revenue growth in every major market.

Market conditions vary by region, with the U.S. and Asia up nicely for the quarter, but Europe down slightly. Overall, for year-to-date, market conditions have been slightly better than expectations delivering probably 2% to 3% growth on a global basis.

Consistent with our forecast and track record, we have grown our golf equipment revenues slightly faster than market year-to-date at plus 5% currency neutral, and for the full year we are expecting even more impressive growth rate of approximately 8% currency neutral.

This year-to-date, we are demonstrating strength across the breadth of our club lineup and proud to be able to claim the #1 market share position in clubs in the U.S., Japan as well as Europe. In the U.S. thanks to our new advancements using artificial intelligence, our Epic Flash Woods are the #1 selling driver and Fairway Wood models year-to-date.

The Epic Flash Driver has continued to sell-through very well even late into the year, a strong indicator of product performance.

We're also the #1 selling iron brand with Rogue and Apex Irons as the number one and two selling iron models year-to-date, respectively, and Callaway is the #1 driver on global tours as well as Odyssey being the #1 putter on global tours. As previously mentioned, the second half of this year benefits from more product launches relative to last year.

I'm pleased to report these new product launches have been well received. The Jaws wedges have been particularly strong and I remain optimistic on the potential of this product on a global basis.

The Epic Forged Star Irons were also very well received, especially in Japan where they have been the #2 selling iron in that market, but the #1 selling iron when excluding closeouts. Looking forward, we are also receiving strong feedback and excitement regarding the #10 Stroke Lab Putter which launches in November.

Our golf ball business also continues to do extremely well with currency neutral revenue growth of 6% year-to-date. The market reaction to our Triple Track Technology and the new ERC Golf Balls has been excellent and our U.S. market shares continue to set records.

The ball plant conversion continues on track and should be substantially complete by the end of this year. We continue to experience a little higher manufacturing costs here while we work through the transition, but we remain excited about the long-term capabilities and direction of this facility as well as our golf ball business overall.

Taking a step back and looking at the big picture, we believe that golf equipment market remains in a healthy position with a significant and stable market, improved structural dynamics over the last several years and exciting global tour creating interest in the game and potential upside demand drivers such as Topgolf.

We see a predictable and well-structured market where our leadership position, scale and operating acumen can continue to drive moderate growth and meaningful cash flows. Turning to Slide 7, looking at the soft goods segment performance.

Revenues year-to-date have surged with the acquisition of Jack Wolfskin as well as strong performance across the majority of our brand and business portfolio. TravisMathew is worthy of a special call-out here as that business continues to deliver double-digit growth, and we remain energized about its future.

International is a small piece of the TravisMathew business at present, but we see it as a nice opportunity going forward. This year we began the process of launching the TravisMathew brand in the U.K. and Japan.

The Japan launch occurred during Q3, leveraging our local Callaway Apparel business and our partnership with a local star golfer, Ryo Ishikawa, who wore the brand during a recent tournament, thereby garnering a fair amount of media attention. As luck would have it, he went on to win the event, thus making our strategy look particularly smart.

Needless to say, the sell-in promotion and sell-through on this launch have all been viewed positively. The revenue here represents small numbers at present but is a positive start and a good example of the synergies a combined brand and infrastructure can provide.

The Jack Wolfskin business had another solid quarter and remains on track with the previously communicated expectations for the full year, including what I believe are strengthening fundamentals in the face of somewhat challenging economic conditions in Central Europe and China.

We continue to see excellent performance in our direct-to-consumer business with year-to-date double-digit growth in e-com and low single-digit growth in retail. The sell-through in that one business for the fall/winter 2019 product has been at or above plan and the new product innovation and marketing initiatives appear to be resonating.

It's encouraging to see this business respond to the investments and change initiatives we are putting in place as it again speaks to the core skills we have built and our ability to work in collaboration with like-minded brands to generate returns.

While talking about the soft goods segment, we've consistently mentioned that we believe there's a lot of synergy in our strategy and efforts here. These are businesses where we know the consumer, whether that be in golf, outdoors or active lifestyle. They are businesses where there is a preference for premium style or performance.

These are markets that had growth rates well above golf equipment and the successful businesses that establish scale, deliver operating margins greater than most equipment businesses and trade at multiples higher than pure-play equipment companies.

As we develop global scale in this segment, we see synergies and scale advantages be it supply chain, sourcing, warehousing, logistics and global expansion. Some of these synergies are strategic or revenue-generating. For example, Jack Wolfskin gives us potential to have a large Central European warehouse that we can use across all our businesses.

And the Callaway TravisMathew with OGIO infrastructure in North America and Japan will provide enhanced long-term growth opportunities for Jack Wolfskin in those markets. However, some of the synergies are specifically cost-savings opportunities.

When we consummated the transaction and first communicated with you, we called out this potential, but also let you know, we'd only baked $1 million of this indoor plans. In previous calls, we mentioned that we were indeed finding more.

We're now at a point where we have a high level of confidence that these cost savings synergies will scale to at least $15 million in annual net savings. For clarity, I say net because there is some investment needed to deliver the savings, some of which will begin this year and the rest which will be phased in next year.

The investments themselves will begin to be productive and by this, I mean deliver net savings by 2021, and fully in geared by 2022. Interestingly, the majority of these cost synergies don't directly benefit the Jack Wolfskin business.

Instead, it's the scale and infrastructure of the Jack Wolfskin business that enables them in our overall soft goods business. In Brian's comments, he will add more color and specificity on this exciting finding. As I hope you can see, our soft goods business is a large and rapidly growing segment of our company.

We are confident and excited about the long-term outlook and potential here. Turning back to the business as a whole on Slide 8. Over the next several years, we anticipate further strengthening of all the brands in our portfolio and believe we are trending accordingly.

We also continue to reinvest back in our business in both golf equipment and soft goods with several key infrastructure projects underway and more planned for 2020 and extending through mid-2021.

These include the before mentioned Chicopee ball plant capital project, now in its final year, multiple distribution center expansion and consolidation projects, all aimed at increased capacity and efficiency, one of which is a 800,000 square foot multibrand facility in Dallas, Texas, several IT systems implementations and convergence related to our recent acquisitions and growth ambitions, the establishment of a global soft goods sourcing quality platform as well as the building of organizational capacity for the new markets such as Jack Wolfskin North America and Japan.

We believe these are high return opportunities that will create significant long-term shareholder value, and we have a history of making these type of investments successfully and a high confidence in our ability to execute these projects. Now on Slide 10.

We're pleased to be reiterating the majority of our previous guidance, including our estimates for full year revenue, gross margin, OpEx and EBITDA, while raising our EPS guidance by approximately $0.03 per share.

These projections have us overcoming a significant FX headwind and delivering substantial overall growth in both revenue and adjusted EBITDA. The growth is being driven by our recent strategic acquisitions as well as continued strength in our legacy business, which we project to be up approximately 8% on a constant currency basis for the full year.

We are also pleased that the golf equipment industry remains healthy, and we believe we are well positioned to continue our leadership position in the industry.

Our TravisMathew brand continues to drive significant growth, and we remain energized by the Jack Wolfskin acquisition, which had another good quarter and where we are increasingly confident about for the long term, including an increasingly positive view on long-term synergies.

In conclusion, I'm pleased with our direction and our results year-to-date. Our company is a market leader in the golf equipment space and developing a highly attractive and growth-oriented soft goods and apparel segment.

As we continue to execute our strategy, we are confident we can further transform our business and continue to deliver long-term revenue and earnings growth that can and will exceed that of the golf industry overall. Brian, over to you..

Thank you, Chip. As Chip mentioned, we're pleased with our third quarter and 9 months results. The results reflect the strong performance of our 2019 golf product lineup as well as the strength of our TravisMathew and Jack Wolfskin businesses.

This performance along with lower-than-expected tax expense has allowed us to increase our full year non-GAAP earnings per share guidance to approximately even with last year, overcoming an estimated $33 million negative impact on net sales from changes in foreign currency, an estimated $3.5 million negative impact from increased tariffs related to the China trade dispute and an incremental $34 million of interest expense primarily related to the long-term debt the company incurred in connection with the Jack Wolfskin acquisition.

We remain focused on executing our strategy in creating a premium golf equipment and active lifestyle company. We are encouraged by our progress to date and are energized by the long-term sales growth, synergies and earnings potential this strategy presents.

Before turning to our financial results for the third quarter, I'd like to provide some additional insight into the synergies we have identified related to the optimization of our global apparel and soft goods business. These synergies are substantially higher than the approximate $1 million we estimated in our initial Jack Wolfskin model.

While our acquisition of Jack Wolfskin was built around our long-term strategy of enhancing growth by building a globally scalable soft goods business, we always believe that through scale and complementary business -- businesses we could find and realize synergies as the operations team work through the integration.

Synergies identified today are targeted around sourcing and production, warehousing and transportation costs. Although many of these synergies are not novel, it is the scale of the combined soft goods businesses and the best-in-class operations team that make them possible.

While there are many initiatives we have undertaken to obtain these synergies, I want to provide a few examples. The first involves sourcing and production.

Currently, as is common practice, we utilize agents to source some products from vendors, including some of the TravisMathew products, Callaway Apparel Japan products, Jack Wolfskin footwear and Callaway Golf accessories. These agents charges a sourcing fee above what the vendor charges.

We plan to build upon what Jack Wolfskin already does for apparel and create an in-house shared soft goods sourcing platform to source some of these products directly and thereby, eliminate a majority of these agencies. The next one is warehousing.

Our new scale and geographic diversity allows us to consolidate warehouses and optimize our distribution strategy. More specifically, we will have add our other soft goods brands to the Jack Wolfskin warehouses in Germany and China.

We will create a consolidated warehouse in Japan for Callaway, TravisMathew, Jack Wolfskin and OGIO product for distribution in that region. And as we previously announced, we are creating a centralized distribution center in Dallas, Texas for the warehousing and distribution of golf equipment and soft goods in North America.

All of this will allow us to optimize the flow of soft goods across the globe and eliminate our more fragmented warehouse strategy that exists today. Third area is transportation costs. We will be able to obtain lower overall transportation rates given our increased scale, which will benefit the Jack Wolfskin business as well as the Callaway business.

And we will be able to optimize shipments from shared suppliers to ensure full shipping containers by combining shipments of our various brands.

These are just a few examples, there are many others, including volume discounts from consolidating soft goods suppliers, having the scale to bring embroidery in-house and leveraging a more diversified supply chain base to take advantage of low tariff countries.

We currently expect to realize at least $15 million annually in net savings at our current level of business by 2022, only a portion of the sales will benefit the Jack Wolfskin business. Yet it is because of the scale we achieved by adding the Jack Wolfskin business that we're able to achieve much of the synergies for our other brands as well.

There'll be investment required to achieve these synergies and these synergy savings are expected to ramp up while we implement the initiatives necessary to achieve them. As we do not expect a net benefit in 2020, but net savings should begin in 2021 with the full expected amount of net benefit in 2022.

Overall, these synergies continue to reinforce our conviction in our soft goods strategy and our ability to realize significant value in this segment. Now I will turn to our financial results. In evaluating our results for the third quarter and first 9 months, you should keep in mind some specific factors that affect the year-over-year comparisons.

First, the Jack Wolfskin acquisition occurred in January 2019 and therefore, that business is not included in our 2018 results.

Second, when discussing our non-GAAP results today, we exclude noncash purchase accounting adjustments related to the OGIO, TravisMathew and Jack Wolfskin acquisition, and we also exclude other nonrecurring transaction and transition expenses related to the acquisition and other nonrecurring advisory fees.

We exclude these items because that is how we evaluate our performance. A reconciliation of this non-GAAP information to the corresponding GAAP information is included with the earnings release we issued today. With those factors in mind, I will now provide some specific financial results. Turning to Slide 11.

Today, we are reporting consolidated third quarter 2019 net sales of $426 million compared to $263 million in 2018, an increase of $164 million or 62% and a record for net sales. In fact, 13 of the last 14 quarters have been record sales for that quarter.

The 62% growth was primarily driven by the Jack Wolfskin business, which contributed $134 million in the third quarter. In addition, we shipped more of our Jaws wedges in the quarter than we expected. A portion of that has been planned for the fourth quarter.

Changes in foreign currency exchange rates negatively impacted third quarter 2019 net sales by $6 million. On a constant currency basis and excluding the Jack Wolfskin business, third quarter 2019 net sales increased 11%.

This increase is driven by an increased sales in the golf equipment business and continued double-digit growth in the TravisMathew business. Gross margin was 44.9% in the third quarter of 2019 compared to 43.9% in the third quarter of 2018, which was in line with our expectations.

On a non-GAAP basis, gross margins were also 44.9%, a 100 basis point increase compared to the third quarter of 2018.

This increase is primarily attributable to the positive mix benefit of our soft goods business as the Jack Wolfskin and TravisMathew were accretive to our gross margins in the third quarter as well as new golf equipment launches in the third quarter of 2019.

The negative impact from tariffs and changes of foreign currency rates partially offset some of the increased margin. Operating expense was $151 million in the third quarter of 2019, which is a $46 million increase compared to $105 million in the third quarter of 2018.

Non-GAAP operating expenses were $147 million, an increase of $44 million in the quarter. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $37 million of operating expense, excluding the nonrecurring acquisition costs.

Operating income was $40 million in the third quarter of 2019 compared to operating income of $11 million for the same period in 2018, an increase of 278%.

Non-GAAP operating income was $45 million compared to non-GAAP operating income of $12 million in 2018, an increase of $33 million or 258%, which is primarily due to the Jack Wolfskin business and new product launches for the golf equipment business, partially offset by the foreign currency exchange headwinds.

Other expense was $7 million in the third quarter of 2019 compared to other income of $400,000 in the same period of the prior year. The higher other expense in 2019 resulted from an $8.5 million increase in interest expense primarily related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin.

Fully diluted earnings per share was $0.32 on 96.3 million shares in the third quarter of 2019 compared to $0.10 on 97.3 million shares in the third quarter of 2018. Non-GAAP fully diluted earnings per share was $0.36 versus non-GAAP fully diluted earnings per share of $0.11 in the third quarter of 2018.

This non-GAAP increase is primarily attributable to the Jack Wolfskin business and new product launches in the golf equipment business, partially offset by increased interest expense and foreign currency exchange headwinds.

Adjusted EBITDA increased $35 million to $57 million in the third quarter of 2019 compared to $22 million in the third quarter of 2018. Turning to Slide 12. 2019 consolidated first 9 months net sales were $1.389 billion compared to $1.062 billion in 2018, an increase of $327 million or 31% and also a record for net sales.

The 31% growth was primarily driven by the Jack Wolfskin business, which contributed $275 million in the first 9 months. Changes in foreign currency exchange rates negatively impacted net sales by $30 million year-to-date. On a constant currency basis and excluding the Jack Wolfskin business, net sales increased 6% for the first 9 months of 2019.

This increase in net sales was driven by the strengths of the 2019 golf product line as well as continued double-digit growth in the TravisMathew business. Gross margin was 45.8% in the first 9 months of 2019 compared to 47.9% in the first 9 months of 2018, which is in line with expectations.

Non-GAAP gross margins were 46.6%, a 130 basis point decrease compared to the first 9 months of 2018.

This decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix with more premium golf clubs with greater technology and therefore higher costs, all of which was partially offset by the TravisMathew business, which was accretive on a gross margin basis.

Operating expense was $481 million in the first 9 months of 2019, which is a $144 million increase compared to $337 million in the first 9 months of 2018 and it includes the first 9 months of operating expense related to the new Jack Wolfskin business.

On a non-GAAP basis, operating expenses were $468 million, an increase of $133 million for the first 9 months.

This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $113 million of operating expense, excluding the nonrecurring acquisition costs and they also reflect investments in the golf equipment and TravisMathew businesses and normal inflationary pressures.

Operating income was $155 million in the first 9 months of 2019 compared to operating income of $171 million for the same period in 2018, a decrease of 9%.

Non-GAAP operating income for the first 9 months of 2019 was $179 million compared to non-GAAP operating income of $173 million in 2018, an increase of $6 million or 3%, which is primarily related to the Jack Wolfskin and TravisMathew business and was partially offset by the negative effect of foreign currency.

Other expense was $28 million in the first 9 months of 2019 compared to other expense of $2 million in the same period of prior year. The higher other expense in 2019 primarily resulted from a $25 million increase in interest expense, which was primarily related to the new term loan.

Fully diluted earnings per share was $1.13 on 96.2 million shares in the first 9 months of 2019 compared to $1.37 in the first 9 months of 2018. Non-GAAP fully diluted earnings per share was $1.35 in the first 9 months of 2019 versus non-GAAP fully diluted earnings per share of $1.39 in the first 9 months of 2018.

This non-GAAP slight decrease is primarily attributable to the increased interest expense, offset by an increase in the core business and the new Jack Wolfskin business. Adjusted EBITDA increased $16 million to $216 million in the first nine months of 2019 compared to $200 million in the first 9 months of 2018.

Again, we are pleased with this result given the adverse headwinds from changes in foreign currency. Turning to Slide 13, I will now cover certain key balance sheet and cash flow items.

Available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $340 million at the end of the third quarter of 2019 compared to $330 million at the end of the third quarter of 2018.

Our consolidated net accounts receivables were $223 million, an increase of 72% compared to $130 million at the end of the third quarter of 2018, which is attributable to the addition of the Jack Wolfskin business in 2019. Days sales outstanding in the core business increased from 56 days to 64 days.

We remain comfortable with the quality of our accounts receivable at this time. Our inventory balance increased by 43% to $340 million at the end of the third quarter of 2019.

This increase was primarily due to the addition of the Jack Wolfskin business, additional inventory to support a growing -- to support a growing soft goods business and inventory needed to support an overall larger golf equipment business in 2019. We remain comfortable with the quality of our inventory at this time.

Capital expenditures for the first 9 months of 2019 were $37 million, an year-over-year increase of $11 million compared to the first 9 months of 2018, due mainly to continued investments in our ball plant and the addition of the Jack Wolfskin business.

Depreciation and amortization expense was $25 million in the first 9 months of 2019 compared to $15 million in the first 9 months of 2018. I'll now comment on our 2019 guidance.

Turning to Slide 14, I'd like to note that the non-GAAP guidance we are providing excludes the noncash purchase accounting adjustments for Jack Wolfskin as well as OGIO and TravisMathew and the nonrecurring transaction and transition expenses related to the Jack Wolfskin transaction as well as other nonrecurring advisory fees.

We are reconfirming our 2019 net sales range of $1.685 billion to $1.7 billion. This guidance implies a 35% to 37% growth over '18. Consistent with our previous guidance, this assumes our business excluding Jack Wolfskin will grow 7% to 9% on a constant currency full year basis when compared to 2018.

These estimates assume changes in foreign currency exchange rates in 2019 will have a negative impact of $33 million on 2019 full year net sales compared to 2018. As we look at where the foreign currency rates are currently versus the U.S.

dollar, unless rates become more favorable in the balance of the year, we expect this will be a headwind for us in 2020 from a translation perspective. Unfortunately, over the long term, prices tend to adjust to mitigate any long-term earnings impact.

Also, we've had approximately $6 million in hedge gains in non-GAAP other income in 2019, which we do not anticipate we'll repeat in 2020. We are reconfirming our full year gross margin guidance of approximately 46.7% and our full year 2019 operating expense guidance of approximately $628 million.

We are increasing our non-GAAP earnings per share to $1.06 to $1.12 compared to previous guidance of $1.03 to $1.09. The $0.03 increase is being driven by slightly lower interest expense and a lower estimated tax rate. The estimated tax rate has been reduced to 19% for 2019. The 2019 figures are based on 96.5 million shares outstanding.

We estimate our capital expenditures in 2019 to be approximately $50 million to $55 million, which includes incremental capital expenditures related to the Jack Wolfskin business, the ball plant and other infrastructure investments for the soft goods business. Capital expenditures were $37 million in 2018.

Depreciation and amortization expense is estimated to be approximately $30 million in 2019, which includes $9 million for the Jack Wolfskin business. Depreciation and amortization expense for 2018 was $20 million. The estimate excludes approximately $4 million of noncash expense related to the purchase accounting for the acquisitions.

We are also reconfirming our adjusted EBITDA guidance of $208 million to $215 million. We estimate the noncash stock compensation expense will be approximately $13 million in 2019.

One point worth noting that our guidance is based upon the estimated impact of the China tariffs announced thus far, including a 25% tariff on headwear, bags and other soft goods, also known as the List 3 tariffs, and a 15% tariff on apparel, footwear and golf equipment, also known as the List 4 tariffs.

Our operations team has done an excellent job in diversifying our supply chain outside of China and thereby mitigating our exposure to these tariffs. We currently estimate that the total impact from these tariffs for full year 2019 will be approximately $3.5 million, which is already included in our guidance.

For full year 2020, the tariff impact is expected to be $7.5 million. After 2020, we expect to be fully diversified with no material effect from such tariffs. This concludes our prepared remarks today. We will now open the call for questions..

[Operator Instructions] Our first question is from the line of Daniel Imbro from Stephens..

I wanted to start in the golf ball category. Obviously, it's been a real strong category for you guys over recent years.

Growth did slow a little bit, understanding you have pretty tough compares, but is anything changing in that business? Or can you give us an update on how you're thinking about that growth going forward?.

Daniel, it's Chip. We did slow in growth during the quarter, but that was a planned event for us. There were some business on a year-over-year basis. Specifically in 2018, we had launched Stars and Stripes through this model and then we chose to -- the demand was so strong for us that we outsold it, and we remade that in Q3 of that year.

This year we did not do that because it's at the tail end of the life cycle of the Chrome Soft product, and we did not want to put more inventory into the market at this stage. So it was a planned process and part of life cycle management for us. Our market shares in the golf ball continued to be quite strong, in fact in the U.S.

they're at record levels..

Great. That's really helpful. And then a quick follow-up, just on the manufacturing investment in the Chicopee facility. Chip, I think you mentioned, we're obviously in year three of those.

How have those tracked this year according to plan? And then in 2020, should we expect to see margin leverage improve in that category as those roll off?.

Yes, sure. Those investments are on track for us. It's been a very busy year in the Chicopee facility, in our golf ball business overall. We're excited about these investments in that they'll provide incremental capacity, but more specifically improved quality and performance capabilities, which I think position us well for the long run.

There have been some manufacturing challenges, which are totally natural as you go through that process that we've experienced this year. Going into next year, we think those will abate, and we would anticipate an improved gross margin in the category next year..

And our next questions are from the line of Joe Altobello from Raymond James..

A quick question on the guide, I mean obviously you're taking up EPS. You did beat sales and EBITDA fairly handily in the third quarter, but didn't raise those. And I know some of that relates to the timing of the shipments of the Jaws wedges that got pulled forward a little bit.

But what else is weighing on the fourth quarter that kept you from raising the sales and EBITDA guide?.

That was primarily it. We're just moving that forward..

It was from that..

Yes. If you look at the Q4 results that are imputed by the projections, they're pretty strong. We beat the market in Q3. We pulled forward because of some manufacturing dates that got favorable for us with the launch, which was a good business decision. And the rest kind of flowed as expected..

Okay. Perfect. And then shifting gears a little bit to Jack. You mentioned sales about $134 million in the third quarter. I guess by my math, that implies somewhere in the neighborhood of $85 million to $90 million of sales that you're looking for in the fourth quarter, number one.

And number two, maybe kind of remind us what the timing is of that launch in the U.S.

and maybe the impact that we should expect on 2020 results?.

Sure. This is Chip. I believe your math was roughly correct as you went through the Jack Wolfskin estimates for this year relative to our previous communication. And then the Jack Wolfskin North America launch, we're making progress. We've made some key hires in that business. We're working on systems and processes and product lines on that.

So lots of activity there. We do anticipate launching the brand next year sometime between Q1 to Q2, so in the first half of the year. It will be modest revenue for next year and an investment year from that perspective, but we're encouraged and making good progress..

And our next questions are from the line of Susan Anderson from B.Riley FBR..

Nice job on the quarter. Just a follow-up, I guess, on the Jack Wolfskin business. So it looks like maybe the wholesale part is the piece that -- which is down still year-over-year based on your revised guidance back in the fourth quarter just given the strong performance in retail and e-com.

So maybe just wanted to get kind of your updated thoughts there.

If you're seeing any different trends in the wholesale business? And then maybe if you could just break out Europe and Asia and the performance between those 2 regions for the brand?.

Sure, Susan. You're correct on the -- it's the wholesale that has been holding that business back. And basically, we saw the impact of the decline in prebooks that we had forecast for you earlier in the year. So they had a -- not a favorable winter season last year.

It led to some backup in the wholesale channel and a lower prebook that we had to adjust our expectations for and that was realized during this quarter. On the positive side, our reorders and sell-through of that product exceeded what we had expected. So we had a good quarter from that perspective.

The wholesale channel there in Central Europe is also a little bit spotty right now. It depends on the individual player, but there is some shakeout, if you would, going on in the channel there, that we're going to be working through with our channel partners. And I think everybody else is in the same boat on that regard.

And -- but the overall theme for the Jack Wolfskin business, I think, has been quite favorable over the last several quarters. And then China versus Europe, the China market is growing faster than the European market as you would expect.

Both are a little bit slower this year than they were in previous years, it is well publicized in the economic conditions of those respective markets, but the China market overall mid-single-digit growth.

We're growing a little slower than that in the Jack Wolfskin business working on the structural adjustments that we need to have -- put in place to set the right foundation for the long run. The European market, a slower growing market, but the Jack Wolfskin business is really starting to, I think, show some signs of strength and improvement there..

Great. That's great to hear. And maybe just one follow-up on the gross margin in the fourth quarter. It looks like the full year guidance implies a pretty big tick up.

Is that just, I guess, the mix shift, probably I'm thinking the apparel piece, which has higher gross margin, has a much bigger penetration of sales in the fourth quarter? Or is there another driver there going on?.

The biggest issue, Susan, is the carryover of the new product launches from Q3. If you remember, last year, we didn't have any significant product launches in the back half of the year. So the ones we launched in Q3 will continue into Q4. And that will help the golf equipment margins.

And then on the soft goods side, that's the Jack Wolfskin tightest margin quarter as a lot of the sell-in to the wholesale channel of the soft goods happened in the end of Q3, we'll just start to see more of the direct-to-consumer holiday purchase activity in Q4..

And our next questions are from the line of Casey Alexander from Compass Point..

There was no debt reduction or share repurchase during the quarter?.

Casey, nothing material on either, no..

Okay. Okay.

The direct-to-consumer success that Jack Wolfskin is having, does that have a geographical bent to it that might assist the introduction into North America?.

I don't know whether it has a geographic bent to it, but it's a -- because they're seeing it throughout all of Europe, both in the retail channel and the e-com channel. And it's -- the response rate that you would expect to see is going to be the fastest to respond to the new product innovation and the marketing changes and investments that we made.

So I think it does reflect well on the fundamentals of the business and I guess arguably on the U.S. market because when we finally get [indiscernible], we'll be utilizing the innovative product that is resonating on the European market..

Okay. And then last question is, the strength of U.S. equipment sales in the third quarter.

Is that cleaning out enough inventory and pushing away sort of any type of market closeouts to where it could lead to improved margins over the next couple of quarters?.

You know that's an interesting question. I think that some of the strength in the quarter if you look at the overall market was because of the increased amount of launch activity with us and several other manufacturers, all launching potentially more equipment than we did last year.

But I also believe when you look at the inventory numbers, the months on-hand inventory in the U.S. market is very low and ours is lower than the industry in total. So that does give you comfort going forward that there is less of a reason to get irrationally promotional out there..

And our next questions are from the line of Dave King from Roth Capital Partners..

First on the 19% or 20% organic growth that, I think, is implied for Q4.

What's driving that? Is that mainly the new putters? Or are there other big launches in there that we should be thinking about? And what you can share on that front?.

Dave, it's 2 factors. It's well, I guess it's organic, so it excludes the Jack Wolfskin. TravisMathew is continuing to grow quite significantly and it is the new product launches which are a significant increase relative to last year..

Okay.

And so -- and those product launches, it's the ones already that you launched in Q3 as well just having good incremental sell-through, or are there other launches off the cuff?.

It's nothing material in other launches. There is, that I remember off the cuff, 2 putters that are line model extensions..

Super hybrid..

The super hybrid, I guess, launches -- is that launching right now?.

Yes..

Okay. So yes, there are a couple of products but not to same levels that we launched in Q3. We still classify the products we launched in Q3 as new products through Q4 in our estimations..

Okay. That makes sense. And then on the $134 million of revenue you had from Wolfskin this quarter, how did -- how does that compare to the year-ago period that they had? And then on the $85 million to $90 million that's implied for Q4, how does that compare with their Q4 of last year? Just trying to get a sense of the trend..

They were down slightly in Q3, Dave. And that was that prebook issue, which again we've communicated long time ago or earlier this year. So that was a known issue coming forward on us. And I'm not sure we break out the Q4 at this point, but I think it's going to be roughly flat..

Correct. Roughly flat..

And our next questions are from the line of Steven Zaccone from JPMorgan..

First question I have which is on the golf industry growth rate. We've seen this acceleration in the golf market in the third quarter.

Chip, what do you think is really driving the broader improvement? And I guess on a longer-term planning basis for the market, we've seen a couple of years now of growth more in like the low to mid-single-digit range without the help from round plate.

So do you think we're kind of entering a new baseline for growth for the market versus prior planning of more like flattish? And I just have one follow-up..

Sure. Q3, I think two things. One is that it shows the consumer remains strong, but I think what drove it was new product launches, ours and others. So I think those two factors led to the increase year-over-year in what was a very strong quarter.

I think that the industry conditions have been, as we've been talking about now for some time, continuing to improve in a strong economic cycle and comforted by the fact that we are seeing industry growth rates at or slightly above what we're saying the averages should be. And so positive development that makes total sense from our perspective..

Great. And then just a follow-up. My question is on Topgolf investment. So there has been some recent headlines about a potential monetization event coming in the future.

How do you view the strategic importance of that Topgolf stake? And I guess how do you think about monetizing that investment and the potential use of proceeds?.

Sure. Obviously, as a minority investor in a private company, we're not at liberty to talk too much about Topgolf. It's been an attractive investment for us, and we continue to have confidence in that business and believe that it's improving in value. We look at monetization of that investment at the Board level routinely.

We expect to capture this value in a accretive way for shareholders at some point. But given that it continues to appreciate, we will continue to monitor that and evaluate the best time for that, Steven.

The--in terms of what the proceeds are going to be used for, given that it's not definite, I think it would be speculative at this point, but we have talked about our uses of capital in different ways in the past, which would include certainly reducing some debt, although we're not entirely uncomfortable with the level of debt we're at, and we're making progress on that front in evaluating methods for returning it to shareholders.

And we've also been blessed with good investment opportunities as well. So got a lot of good options on it in that sort of order..

And our next question is from the line of Randy Konik from Jefferies..

So Chip, you had some good commentary around Jack Wolfskin as it related to the wholesale channel as regarding reorder rates and product response -- new product response. And it sounds like the business is going to sequentially improve on the wholesale side into the fourth quarter.

If we kind of think through thereafter, should we expect that continued improvement trend? And are the inventories in the channel up pretty clean right now? Just give us some perspective of where we are in that cycle right now?.

Sure, Randy. I think it's definitely an improving situation with the Jack Wolfskin, a strengthening situation. I think the wholesale channel will continue to be the most challenging channel going forward, I hope, fingers crossed, that it will be at a lesser rate than it has been, and we're seeing the right signs for that.

The business is dependent upon weather conditions. So that will help or hurt as those develop further. And I also want to call out that the largest piece of the business for Jack Wolfskin is the direct-to-consumer.

So as we continue to move and evolve that business, and that's one of the reasons we were attracted to that business, is that it had such strength there.

One of the key metrics we wanted to see was that we could get a good reaction and response to the initiatives we put in place in that growing and largest channel, in which we've been fortunate enough to see over the last several quarters..

Got it. And then my last question is just long-term thinking.

Have you guys thought about what are -- if you think about Jack Wolfskin in Europe domiciled and TravisMathew in the United States, have you kind of thought about or looked into what are the current awareness levels of each brand in their nondominant or non-domiciled market, i.e., Jack Wolfskin in the United States and TravisMathew in Europe? And I guess based on that awareness, how do you think and their different brand positions, what would be realistic for us to think about distribution growth and revenue growth and revenue potential of these businesses from a your vantage point over the long term? I'm just trying to get a feel of size and scale of these 2 brands in their nonhome markets from your vantage point?.

Well, there's definitely -- we definitely spent time, a considerable point of time thinking about the brand awareness of these various brands in their home markets as well as in international markets.

And as we've articulated and I mentioned some of the examples, which I thought were fun to go through about how we're launching TravisMathew internationally now leveraging our infrastructure across the globe and how the reaction has been quite positive on that brand in the international markets.

And therefore, we're optimistic it will provide some incremental growth opportunity. The brands in general are going to grow faster than our legacy business. They have that potential. They have the expectation and that's one of the reasons we're quite excited about.

I mean leveraging some of the infrastructure to grow in some of these markets where they're not currently in existence, sometimes through synergies between the 2 brands and cross promotions, relationships, distribution centers. There's just so many different ways where it leverages quite nicely.

And it's a meaningful body of work for us and something that in some instances are well underway and we're starting to generate revenue and others in the investment and planning stages now..

And our next question is from the line of Michael Swartz from SunTrust..

I just wanted to clarify something quickly. I think on the soft goods synergy program that you outlined over the next couple of years, I think, the $15 million by 2022.

Did I hear correctly that you said that, that assumes you don't grow over the next 3 years?.

It's at the current rate....

Current business trend..

And is there any way of looking at that? I mean assuming that the revenue base is 10% bigger over the next three years, what that amount of synergies would potentially flex up to?.

Michael, we didn't do it that way. As you gathered from us putting $1 million in our initial projections for this, we're pretty conservative folks and we don't like to bake in numbers until we're sure that we got a good eye on them. But yes, if business was bigger, I would assume the synergies here will be bigger..

Okay. And then on the tariff commentary, I think you said the annualized rate of tariff cost for 2020 would be about $7.5 million..

Yes..

I guess what was your commentary going into 2021? Is it that it will be stable at that level? Or do you think some of the mitigating actions you can take would take that tariff headwind back to 0? I'm just trying to understand how....

We said in our comments that we will be fully diversified by then and should not have any impact from tariffs -- from China tariffs....

From the China tariffs, the current issue, we would be diversified to the point where we would not have -- forecast any impact in 2021..

Okay.

And just to be clear that, that wouldn't be built into the $15 million in synergies that you've outlined for the soft goods program?.

That is a separate issue..

And our next question is from the line of Brett Andress from KeyBanc Capital..

Just a quick one here, Chip. If you look across the international golf markets, I think you called out some weakness in Europe. So maybe if you could elaborate there.

But also how did each of those international golf markets play out in the third quarter versus your expectations?.

Yes, sure. So the U.S. market had a very strong quarter. It was up high single digits probably. The European market was, I believe, down during the quarter, reflecting both weather and I'm assuming Brexit concerns. But the European market is actually up year-to-date.

So kind of a reversal of trend during the quarter, still up year-to-date but down during the quarter. Japan is the opposite of that.

Japan is down year-to-date but was up during the quarter, reflecting a couple of different factors but -- new product launch, success of several brands, including our own and some other localized activity, they had a consumption tax that went in place in October, so there was some increased sales in front of that consumption tax. But you got the U.S.

market up for the year with a very strong quarter. The Japan market down slightly for the year or almost the same amount as the U.S. is up. And the European market up with various activities during the quarter. So it's choppy, but overall quite positive..

And our last question is from the line of Alex Maroccia from Berenberg..

So looking at the direct-to-consumer business for Callaway because I know you gave comments on Jack, can you just give an update on where you see that trending right now? And then kind of as a follow-up on that is the custom golf club business and what trends you're seeing in that?.

Sure. The direct-to-consumer segment for Callaway, it gets a little complicated. So if you look at, we have Callaway in Asia, we have an apparel business that has a high direct-to-consumer percentage because of the apparel business. The TravisMathew business has a high direct-to-consumer component.

The direct-to-consumer component of TravisMathew is growing very quickly as is the overall brand. The golf equipment size of Callaway has a very small direct-to-consumer segment, which is growing nicely but remains quite small and because of the nature of golf equipment, I don't really see that one being a major channel for us.

But in the apparel businesses -- apparel and soft goods channel, the direct-to-consumers pieces of the business are significant. And they're high growth and high brand touch. So they're very helpful from a brand and marketing perspective..

Okay. That makes sense. And then just as a second question. You last gave some market share data on golf balls back in March.

Are you able to provide any update on that?.

Our market share through the U.S. year-to-date, I believe it's 17.5%, which is at record levels..

Okay. Great.

And just on that March number in particular, do you think that might have been affected by the special golf ball releases last year?.

March number being -- I don't remember what the March number was, Alex. So I can't....

It was down to 16.3%..

The 17.5% was, what do you say, special golf balls in March. Alex, I just don't know what we had in March of last year. Last year, we would have been launching Chrome Soft. It would have been impacted by that. But as you can tell, the overall trend has been solidly steadily in the right direction is what we're most focused on..

And at this time, there are no further questions. I'd like to turn it back over to our CEO, Chip Brewer for closing remarks..

Thank you, everybody, for your time and calling in today. We look forward to updating you further at early next year..

Thanks so much..

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