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Callaway Golf (NYSE:ELY)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Bradley J. Holiday - Chief Financial Officer, Chief Accounting Officer and Senior Executive Vice President

Oliver G. Brewer - Chief Executive Officer, President and Director

Analysts

James Hardiman - Longbow Research LLC

Lee J. Giordano - Imperial Capital, LLC, Research Division

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Rommel T. Dionisio - Wedbush Securities Inc., Research Division

Casey J. Alexander - Gilford Securities Inc., Research Division

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Devin Prater - D.A. Davidson & Co., Research Division

Brenden Smith

Operator

Good afternoon. My name is Ali, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Callaway Golf Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Mr. Brad Holiday, Chief Financial Officer. Sir, you may begin your conference.

Bradley J. Holiday

Thanks, Ali, and welcome, everyone, to Callaway Golf Company's First Quarter 2013 Earnings Conference Call. Joining me today is Chip Brewer, President and CEO of Callaway Golf.

During today's conference call, Chip will provide -- I will provide some opening remarks and then Chip will -- excuse me, Chip will provide some opening remarks and then I will provide an overview of the company's financial results, and then, we will open the call for questions. We've also issued today a press release and schedules to the press release, which provide additional detail concerning our results.

I would like to point out that any comments made about future performance, events, prospects or circumstances, including statements relating to estimated net sales, gross margins, operating expenses, operating income, net income and earnings per share for 2013, future foreign currency rates or the effectiveness of the company's hedging contracts, the company's turnaround, expectations for sell-through, market share or inventory position in 2013, future improvements in operations, products, brand momentum, financial performance and shareholder value, as well as the company's estimated capital expenditures and depreciation and amortization expenses 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 certain risks and uncertainties applicable to the company and its 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, 2012, filed with the SEC, together with the company's other reports subsequently filed with the SEC from time to time.

In addition, during the call, in order to assist interested parties with period-over-period comparisons on a consistent and comparable basis, we will provide certain non-GAAP information after the company's performance, excluding the gain on the sale of the Top-Flite and Ben Hogan brands, charges related to the 2012 cost reduction initiatives and the impact of businesses that in 2012 were sold or transitioned to a third party model. We provide certain of the company's results on a constant currency basis, which essentially applies the prior year period exchange rates to the current period results.

For comparative purposes, the pro forma income and earnings information assumes a 38.5% tax rate. We also provide information on the company's earnings, excluding interests, taxes, depreciation and amortization expenses and impairment charges. This pro forma information may include non-GAAP financial measures within the meaning of Regulation G. The information provided on the call today and the earnings release we issued today include a reconciliation of such non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP. The earnings release is available on the Investor Relations section of the company's website at www.callawaygolf.com.

With that, I'd like to turn the call over to Chip.

Oliver G. Brewer

Thanks, Brad. Good afternoon, everybody, and thanks for joining us today for this call. For the first time in my tenure and, hopefully, the start of a trend, I'm happy to start by saying we're pleased with our results.

For Q1, on a constant currency continuing business basis, our team delivered a revenue increase of 12% year-over-year and our pro forma operating income more than doubled. Our sell-through, brand momentum, margins, operating efficiency and cost management were all improved.

I'll cover the sell-through and brand momentum proportion later in my comments, but I do want to also highlight the strong progress our operations team has made in improving our supply chain and manufacturing base.

When I came to Callaway last March, we had just moved our assembly operation in Mexico and we were experiencing significant cost and service issues, particularly in our custom club business. One year later, the situation looked completely different. In our Monterrey, Mexico assembly operation, we have achieved a 45% labor cost per unit improvement and are now delivering 95% of our custom club orders to the consumer within 5 days of receiving that order. These are approaching world-class performance metrics but, fortunately, we see further room for improvement and are taking steps to achieve that.

Similarly, in our golf ball business, structural and process changes are delivering a 49% year-over-year productivity gain. Congrats and well done to the operations team for this progress and for their commitment to further gains. As we all know, these changes set up and support the gross margin and sell-through improvements we are seeing in the marketplace.

Looking at the regional performance for the quarter, our U.S. revenues were up 7% year-over-year based on improved sell-through and brand momentum. On a continuing business basis, this was a 16% year-over-year increase despite challenging year-over-year weather.

Internationally, on a local currency basis, our European business was down 8% for the quarter, but our Japan business, historically, one of our strongest and most profitable businesses, was up an impressive 22% year-over-year. Unfortunately, as has well been documented, currency headwinds offset most of the gains in Japan and are anticipated to provide translation challenges going forward. Still foreign exchange aside, I want to thank and congratulate the Japan team for a great operating performance and a strong start to the year.

On most of our previous calls, I'd spent considerable time outlining our turnaround plan and talking about a new Callaway. One that builds on our considerable strengths and tradition but is also significantly more dynamic and contemporary. We are fortunately now starting to see some of the earlier results from these change efforts.

Our marketing and our product appear to be resonating well with consumers both in the U.S. and abroad, especially our X Hot product line, in particular, the X Hot Fairway Wood, which I believe is the best Fairway Wood in golf, and has returned Callaway to a position of strength in this important category.

All reports show our sell-through market shares are trending up on a global basis. In the U.S., our February year-to-date hard goods share of 13.4% is up from 12.6% the same period last year and with improved momentum and improved inventory position.

In Japan, our hard goods market share is at 12% through the first week of April, up from approximately 10% in the same time period last year. In Europe, we don't yet have market share information, but account-specific data is indicative of market share gains as well.

We are very pleased with our year-to-date hard goods sell-through and maintain strong expectations for the future. However, after further analysis, I do want to update a statement I made on our last call. In that call, I said I expected to regain hard goods market share in all of our major markets in 2013. That is certainly happening in Japan. Europe is to be determined, but we remain optimistic.

However, after more analysis, we are less confident that this will happen in the U.S. Our new launches are selling through well, and we expect to continue to gain share in this portion of our business. However, in 2012, a significant portion of our market share was from products or programs that were not possible, and during the year 2012, we lowered our field inventory position by selling through old or excess inventory that we believe was or would cloud the channel or cannibalize new product sales. If all goes as planned, we're going to sustain the lower field inventory position we are now enjoying. We are also not going to anniversary a lot of this less profitable business, and thus, our full year total market share may not be up as much as we had previously assumed.

Fortunately, I believe the quality of the share, our brand momentum and profitability are certainly headed in the right direction. I'm very comfortable with where we are and where we're headed, but I also just wanted to clarify these expectations since I know many analysts and investors also track Datatec sell-through information.

Lastly, for the first time in several years, independent brand research conducted this spring showed an uptick in consumer perceptions for the Callaway brand and purchase interest in our product. This research matches the anecdotal feedback we're receiving, as well as the sell-through market share of our premium products. It's another strong indication that we're headed in the right direction.

Turning now to market conditions. As everyone already knows, the weather patterns in North America and Europe were not very conducive for golf this winter and early spring. As a result, these markets got off to a slow start this year, which is the exact opposite of what happened last year, when the golf industry had one of the best early weather seasons in recent memory.

This year's slow start to the season, along with some market share shifting among major brands, is leading to some earlier-than-normal promotional activity and creates a higher-than-normal level of uncertainty for the all-important peak season that runs from April through August. Net-net, we are still hoping for a good peak season, but at this point, there is some added market risks.

On the positive side, we are in a relatively strong position, thanks to our sell-through and our field inventory positions. In addition to the market conditions, exchange rates, especially the yen and to a lesser extent, the pound, are continuing to provide significant headwinds. The timing of the currency movements, along with our accounting for the foreign exchange hedge contract gains, will shift our earnings towards the first half and away from the back half of the year. Brad will outline this issue with more specificity during his comments. However, for purpose of emphasis, let me clarify that to the best of our abilities, all of these comments and expectations for market conditions and foreign exchange are fully baked into our forecast and the guidance we are providing.

With that said, let me turn to the guidance. For the first half, we are decreasing our revenue forecast from $555 million to $540 million. This decrease is based on the previous discussed market conditions, as well as the foreign exchange headwinds.

For the first half, this guidance would deliver a 7% increase in continuing business constant currency revenue. On the strength of our improved operating results and the fact that our hedging gains occur in the first half, we are increasing our first half earnings guidance from $0.33 to $0.44 per share.

For the full year, we are now expecting revenues of approximately $830 million, a reduction of $20 million, which is almost entirely due to exchange rates. However, we are holding our previous earnings expectations for breakeven net income based on the hedging efforts and our improved operating performance, which includes those sell-through cost management and operational efficiencies.

Results consistent with this guidance would show a pro forma constant currency continuing business revenue increase of 12% for the year and an approximate $70 million improvement in pro forma pre-tax income.

When I step back and I look at the total picture, I'm proud of the team's results and pleased with the pace of our transformation. This transformation, paired with the strength of our global brand and recovering market conditions, is our primary investment thesis.

In closing, I remain confident that the clear and specific actions we are taking will in fact turn this business around and that we have a promising long-term outlook.

During the balance of the year, we'll be working to further drive our change effort along the same playbook that I outlined to you for over the last year. We expect continued improvement in operating efficiencies, product excellence and engaging messagings, and that this will lead to brand momentum.

Over time, we believe this, in turn, will lead to steadily improved financial performance and shareholder value. We did not predict nor can we control this year's weather pattern or foreign exchange movements. However, and this is the part I would like to emphasize, the items that are in our control are performing consistent with, or in some cases, better than expectations. We are on track for our turnaround plan, which we previously told you, and we continue to believe is a multiyear process. I look forward to continuing to keep you updated on our progress and appreciate your interest and support. Brad, over to you.

Bradley J. Holiday

Thanks, Chip. I will quickly cover some of the highlights for the first quarter, and then we'll open the call for questions. Consolidated net sales for the quarter were $288 million compared to $285 million in 2012, or an increase of 1%. This year's sales were adversely impacted by approximately $20 million due to the sale of the Top-Flite and Ben Hogan brands and the transition to a third party model for the other products, including U.S. footwear, apparel and GPS businesses as part of last year's streamlining efforts.

Excluding these sales from 2012 results, our current business had sales growth of approximately 8%. Additionally, foreign currency translation had a negative impact of $8 million on our international results. So on constant currency, our current business sales grew 12%, compared to the same period last year. The 12% increase in net sales this year was due to the early launch of our 2013 products, the strong performance of our X Hot line of products, especially the new X Hot Fairway Wood, and the first quarter launch of our new Odyssey Versa line of putters, which is seeing great sell-through already compared to last year's Odyssey Metal-X line that was launched during the second quarter.

Income from operations improved to $40 million, or an increase of 44%, compared to $28 million last year. This year's results include charges of $4 million associated with last year's cost reduction initiatives, and 2012 results include a gain of $7 million from the sale of the Top-Flite and Ben Hogan brands. Excluding these adjustments, pro forma income from operations for 2013 more than doubled to $44 million compared to $21 million last year.

Earnings per share increased 27% to $0.47, compared to $0.37 in 2012. This year's results include a $0.02 charge associated with last year's cost reduction initiatives, and 2012 results include a gain of $0.05 associated with the sale of Top-Flite and Ben Hogan businesses.

Excluding these adjustments and assuming a pro forma tax rate of 38.5% in both years, pro forma earnings per share for 2013 would have been $0.33 compared to $0.18 last year.

In looking at our regional breakout, U.S. sales increased 7% to $160 million compared to $150 million last year and represented 56% of total sales, a slight increase compared to last year.

On a comparable basis, excluding the impact of the businesses sold or transitioned last year, U.S. sales increased 16% compared to 2012. International sales for the quarter were $128 million, a decline of 5% compared to last year's sales of $135 million and represented 44% of total sales.

On a constant currency basis, international sales increased approximately 1%, driven by Japan and Korea, which grew 22% and 12%, respectively, due to the positive reception of our X Hot line of products as well as the Odyssey Versa Putters. These increases were offset by declines in Europe and Canada, due to late starts of the season due to weather.

For our product categories and excluding from 2012 sales the businesses we sold or transitioned last year, wood sales increased 10% to $100 million, compared to $91 million last year. As mentioned earlier, this increase was due to the earlier shipping of our new products this year, as well as strong sales of our X Hot line of products.

Sales of irons and wedges were $58 million, flat compared to 2012. Sales of wedges declined this year due to no new product launches during the quarter compared to last year but was offset by the successful launch of our new X Hot Irons.

Putter sales increased 35% to $33 million compared to $24 million last year, due to the earlier launch of our new Versa line of putters in January of this year compared to the Metal-X line of putters that were launched during the second quarter of last year.

Golf ball sales of $43 million increased 22% compared to last year due to an increase in the sale of mid to lower-priced golf balls more than offsetting a decrease in premium golf ball sales as we anniversary the 2012 launch of our HEX Black Tour and Chrome models.

Accessories and other sales decreased 3% compared to last year, due to lower sales of gloves, bags and package sets this year. First quarter gross margins improved to 45% of net sales compared to 44% last year. Included in 2013 gross margins are charges of $2 million associated with last year's cost reduction initiative.

Excluding these charges, pro forma gross margins improved to 46% compared to 44% last year, due to last year's cost reduction initiatives, improved manufacturing efficiency and the positive impact of eliminating from this year's mix Top-Flite, Ben Hogan and the other businesses transitioned to third parties, all of which was partially offset by the adverse impacts of FX.

Pro forma operating expenses improved to $89 million compared to $103 million last year as a result of our 2012 cost reduction initiatives and the positive impact of FX.

Looking at the balance sheet, we ended the quarter with $28 million in cash compared to $52 million last year, and the outstanding balance on our credit facility decreased to $79 million at the end of the first quarter compared to $86 million last year.

Consolidated net receivables were $256 million, flat compared to $255 million last year, and DSOs of 81 days improved 1 day compared to last year. The overall quality of our accounts receivables remained good.

Net inventory decreased 15% to $202 million compared to $236 million in 2012, due to the impact of the sale of Top-Flite and Ben Hogan brands and the transitioning to a third party of our apparel and footwear business. I would point out that this represents better inventory efficiencies, given that our current business on a constant currency basis had a 12% increase in sales on flat net revenue -- net inventories.

Capital expenditures for the quarter were $3 million compared to $9 million in 2012. We estimate full year CapEx of $15 million to $20 million, unchanged from our last estimate.

Depreciation and amortization expense was $7 million for the quarter compared to $9 million last year. We estimate full year depreciation of $30 million, also unchanged from our last estimate.

With regards to pro forma guidance, let me start with the first half. Net sales are estimated at $540 million compared to our last guidance of $555 million. This adjustment in guidances is due primarily to our expectations that FX headwinds will continue as well as the impact of the late start to the season in both the United States and Europe that Chip mentioned.

As we are increasing -- we are increasing our earnings guidance, however, from $0.33 to $0.44, due to better operating performance, as well as favorable timing of the gains on our FX hedging contracts during the first half. As you are aware, we are never more than 70% hedged on our international business due to forecast volatility. So on an annual basis, our FX hedging contracts will never completely offset the translation impact on our international results. However, for the first half of the year, because accounting rules require that we revalue all outstanding hedge contracts at current rates, we estimate the gains recognized on these contracts will be greater than the translation impact on the first half of our international operating results.

Second half results should be adversely impacted because if rates remain the same, international operating results for the second half of the year will continue to be adversely impacted with no offsetting hedging gains.

For the full year, assuming that FX rates remained flat at current spot rates, we are lowering our net sales forecast from $850 million to $830 million, which, in constant currency, would represent growth of 12% for our current business compared to 2012. We estimate that pro forma gross margins as a percent of sales will remain at approximately 40% for the full year, consistent with our last guidance, due to improved operating performance offsetting the negative impact of unfavorable FX rates.

Even though we are maintaining our gross margin percent, the reduction on our sales estimate will result in lower gross margin dollars that we estimate will be offset by hedging gains and lower pro forma operating expenses, which are estimated to improve slightly to $335 million compared to our last guidance of $340 million.

For these reasons, we are maintaining our estimate that non-GAAP net income will remain at breakeven with a non-GAAP loss per share of $0.04, due to the impact of dividends paid on the company's outstanding convertible preferred stock.

We would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from James Hardiman with Longbow Research.

James Hardiman - Longbow Research LLC

I guess my question is with regards to any visibility on the key selling season. Obviously, over the years, the first quarter doesn't really seem to have traditionally been the problem. As we work our way through the year and we see some more sell-through trends, that's really the rub here. So I guess my question, and I appreciate some of the market share data that you gave through February, but as we're almost already in March -- I'm sorry, almost already in the month of May, is there anything you can tell us about the last couple of months? And I guess, generally, have you gained more visibility into the sort of day-by-day trends of what's going on at retail?

Oliver G. Brewer

Sure, James. Thanks for the positive comments to start with. We appreciate that. We're pleased with the start. And you're absolutely right. Historically, the first quarter does not tell the full story for Callaway or really any other golf brand. But I would say it's better to have a good start than not have one. And you're exactly right. We only have Datatec market share data through February and that is premature. We have some information from individual retailers that we look at on a regular basis on sell-through, but we don't have full market data beyond that February at this point. And it is encouraging at this point. Our products are selling through well, and we're pleased with the brand momentum and progress on sell-through. The only relevant offset to that, I see, is the comments that I made that the season certainly in Europe and the U.S. got off to a slower start than normal. We anticipated that the season would have weather -- normal weather, whatever the heck that means, versus last year's great weather. And what we think we got was worse than normal. And so market conditions, as you would expect there, have been affected. And that creates a little bit of uncertainty in the quarter. But the net is, we do think things are different than they were previously. Certainly, in my tenure, which is only a year now, we're selling through better. There are certain level of risks but like the position we're in. And to keep my legal team happy, everything I just said is fully baked into the guidance we gave you.

James Hardiman - Longbow Research LLC

Very helpful. And then just moving a little bit to the timing of the new product introductions. You made a couple of comments in the prepared remarks about the like-for-like sales in the first quarter benefiting from not only new products -- or earlier product introductions but also pretty successful sell-through of those products. Is there any way to sort of tease out how much came from one versus the other? Obviously, timing -- well, I guess that's a question in and of itself. Is that timing going to reverse itself in the second quarter? And is there any way to tease out sort of how much came from solid sell-through trends versus just earlier timing?

Oliver G. Brewer

Let me try on that. So there certainly was some shift from Q2 to Q1 relative to the timing of launches on a year-over-year basis. So that creates a positive impact. And obviously, when you break down our guidance, we're saying we're going to grow faster in Q1 than we will in Q2 for various reasons. But part of it is that timing shift. I think the first half is still a very good indication though, when you look at the half in total as opposed to by quarter. And I will just reiterate that we are selling through well. So there's always room for improvement, and we're going to work hard to realize that. But a significant improvement has been made, and we are seeing that in the marketplace, and customers are reporting that to us.

Operator

And your next question comes from Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Excluding the currency impact, looks like Japan was up nicely in the quarter. Can you talk about what you're seeing in Japan trend-wise and what's driving those gains over there?

Oliver G. Brewer

Sure, the Japan team has just done a wonderful job. So as you know, that's been one of the blessings of the position here. We've got a great brand position over there, a strong management team who's done well over a long period of time. And the market in Japan was up for the first -- actually they report data a little differently, so we have data through the first week of April over there. And market conditions are also cooperating in that market. It was almost 8% up, if I remember correctly, during that period. But our business was up 22% for the first quarter on a local currency basis. So just a wonderful job. And you may recall, we signed Ryo Ishikawa to the Callaway staff. That was a big move in support of the strong team we have there and brand position that has resonated well in that marketplace. And then on top of that, the team is just executing very well and the products are being received very well, in particular, the Fairway Wood. But really more across-the-board strength there that matches what we're seeing elsewhere, but it is even stronger than anywhere else. So great job to that team and off to a strong start, but also does have good market conditions in that market.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Great. And then, just secondly, can you talk a little more about the marketing strategy for the rest of the year. It seems that you're being more aggressive in social media, putting a partnership with LinkedIn, which we saw recently. Can you talk about that strategy and how you think it's working?

Oliver G. Brewer

Yes, the marketing strategy, which I've tried to outline for you, with very little to actually show you for the last year. It's nice now to have at least a few months where you see the actual results of the change efforts and what the team has done. And again, from all measurable outside feedback, it's working. Our marketing is more authentic. It is more engaging to the consumer. It's more benefit-oriented. We are working the social media side very hard. And all of those things are combining, we think, in a positive manner. And you're going to see that same game plan for the balance of the year candidly. The LinkedIn thing you mentioned was just one element of the team strategy there, which does include a much more robust digital marketing effort. But even in the traditional space, our marketing is significantly different than it was a year ago, thus far, seems good. They're mixing in some real clever things, too. So you've seen those bomb patches that we've talked about, and hopefully, you've seen a little bit of that. In the month of May, it's Odyssey month, and you're going to see drain [ph] patches. So if they make a put of a certain length, they will get a patch for making the put. Brad and I are pretty excited because we actually might get one of those. We never actually got a bomb patch yet. So our marketing guys did, but we're suspect on that. So any further questions on the marketing?

Lee J. Giordano - Imperial Capital, LLC, Research Division

No, that's great.

Operator

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

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Just want to understand some of the guidance revisions a little bit. I mean, you've kind of alluded to a few things, but is it most -- is it fair to say that the majority or if not all if it is currency translation and there's really no change to your underlying assumptions for the business? Or is there something else in there?

Oliver G. Brewer

For the full year, the revenue revision is, for all intents and purposes, all currency. And we would have otherwise had it and we made up the balance in operating performance. So in the half, it's a little more complicated, but for the full year, it's all currency.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Okay. And so Chip, just in terms of what you're seeing in channel inventory levels, I know you really drew things down pretty aggressively at the end of last year. And it seems like things are selling through well this year. So maybe for Callaway versus the industry, where do you think you sit at retail because your implied second quarter guidance is not a tremendous amount of sales growth even constant currency. So I'm just trying to understand if that's a timing issue or if you're just being conservative?

Oliver G. Brewer

Very true. The -- if you look at the first half, which I do think is the way you should look at it, we're saying a 7% growth, constant currency continuing business. And -- but there was more in the first half than the second half. We are in, we believe, a good position in terms of field inventory levels overall. We believe we are in a better position than many of our competitors and better position in the industry in total at this point. But we want to sustain that position going forward. And Scott, I'm not sure if I can add much more to it other than that, so if you have further questions on it -- but 7% growth for the half, I think, is the right way to look at it. And we runoff on a -- well, our U.S. business -- just look at the U.S. business, 16% up on a constant -- sorry, the currency is constant. So continuing business base is 16% up in the first half. Well, the market was, we think, soft, so that would mean we have to give some of that back during the second half, but still be in a very good position.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Okay. And then, Brad, just on the currency side, you kind of given us some sensitivity, I think in past years, around what some of the flow-through would be and kind of how to think about moves in the basket of currencies, any update you can provide on that?

Bradley J. Holiday

Scott, it's about the same as it was last time we talked. About 65% of the translation would flow-through. And the way you look at it is if you have a negative hit on the sales side, you get a positive hit or a positive benefit for all of the local spending. So about 75 -- 65% to 70% flows through to operating income on a local basis. So that hasn't changed, it's about the same that it has been for the last several years. And I think, just to clarify, I think I mentioned in my comments that our policy says that we can really hedge up to about 70% of our forecast, if you will. And the reason we -- it's at 70%, is just because of forecast volatility. We never want to be over-hedged. And I would tell you that we were pretty close to that 60%, 65% hedge during -- for the year in terms of currency. So we really only kind of focused on the major currencies. And as Chip pointed out in his comments, the biggest changes that we've seen have really been in the yen, and to a lesser extent, the pound and a little bit on the Korean won. But I think the hedging program, for all practical purposes, is playing out the way we would expect. I think also, to Chip's point of view, we'll get all of the gains on those hedging contracts in the first half and assumed that the spot -- assuming the spot rates stay flat, there will be no additional gains or losses against those contracts. We know there will be because the spot rates will change a little bit, but the translation against our business happens every quarter where the rates are. So that sort of gets spread out over the entire year. But as Chip said, the benefits of the hedges are really front-end loaded.

Operator

Your next question comes from Rommel Dionisio with Wedbush Securities.

Rommel T. Dionisio - Wedbush Securities Inc., Research Division

Just sort of golf product marketplace-related question. During the economic downturn, I think some of the higher price points, especially in the woods category, the driver category, saw some consumer shift to more value price points. And I wonder, now that the economy is picking up a little, if you're seeing that sort of revert back to normal type of product mix, not just for yourself but for the industry also.

Oliver G. Brewer

Rommel, yes, we are. The -- over the last 2 years, there's been a greater acceptance and interest in the more premium product, and you are seeing both in irons and in woods. So that is happening.

Rommel T. Dionisio - Wedbush Securities Inc., Research Division

And in light of that Chip, does that sort of make you rethink your new product launches for future years? Not to ask you to front us in terms of what you're going to be launching, but does that change your strategy going forward?

Oliver G. Brewer

It's not new news to me recently since I saw it last year, so -- but it's certainly a relief. And yes, it does create degrees of freedom. But that's 2009, 2010 time period, there was a pullback in buying patterns, and that appears to be relaxing, thank goodness. So we're always going to be, at Callaway, trying to drive innovation and product performance that allows us to excite consumers, and we're not ashamed to be paying for that. So to the best of our ability, that strategy will continue, and I think consumers will accept it.

Operator

Your next question comes from Casey Alexander with Gilford Securities.

Casey J. Alexander - Gilford Securities Inc., Research Division

I'm trying to sort of parse out how the golf ball business is working. You have a $400,000 improvement in sales and a $4.5 million improvement in profitability, which is tremendous because this business has been an albatross for several years. Is this due to the absence of Top-Flite? You talked about some efficiencies, can you kind of parse this out for me so I can understand how that happened?

Oliver G. Brewer

Okay. First of all, it's pretty good results, so thanks for noticing it. The -- it is partly due to the absence of Top-Flite and the streamlining of that business. And the operation team's done just a wonderful job of streamlining that operation. We recommitted to Chicopee but rescaled and greatly improved the productivity of our operation up there. And you're seeing the -- some of the positive impacts from that in that P&L. And so the golf ball business is -- it's still a hard category. Obviously, consumer consumables didn't have a great start to the year or -- for multiple reasons, but partly because nobody was playing golf in major markets. And -- but we're in a much stronger position going forward in our golf ball business, and it's starting to show up in the financial statements.

Casey J. Alexander - Gilford Securities Inc., Research Division

Is that an apples-to-apples, or how much Top-Flite runoff sales is in that 2012 number?

Oliver G. Brewer

There is some, let's put it that way. So apples-to-apples, we grew. Where it shows flat in the reports, that does include Top-Flite business from $7 million -- include $7 million in total. So we had a good quarter and that...

Casey J. Alexander - Gilford Securities Inc., Research Division

Okay. So you grew the business pretty impressively then.

Oliver G. Brewer

Yes. And that was really serving balls that provided the growth in Q1. So golf balls, as you said, is still going to be -- what do you call it? The cage match, grudge match for market share.

Casey J. Alexander - Gilford Securities Inc., Research Division

Yes.

Oliver G. Brewer

You quoted something like that. I butchered something similar to that. But we're -- we got ourselves in shape for the battle.

Casey J. Alexander - Gilford Securities Inc., Research Division

All right, good. Now the accessories business, down $14 million year-to-year. How much of that decline is pulling the apparel business out and turning it into a royalty business?

Oliver G. Brewer

More than half is that, but we were also a little softer in some of the other businesses that go in there. And so -- but we improved the margin of those businesses. So when we took a look at that business, we needed to get -- improve some profitability aspects of that, and we're still work-in-progress there like we are elsewhere, but most of the miss there, not all of it, but more than half was the apparel and footwear.

Casey J. Alexander - Gilford Securities Inc., Research Division

Okay. And lastly, can you give me a little color on -- I think, it was yesterday's announcement about the association with LinkedIn. Is this an attempt to penetrate the corporate golf universe? And sort of how do you expect an agreement like that to sort of monetize itself? I mean, it seems to me that everything that we do in this world ought to relate to top and bottom line. How does that assist the company in its corporate goals?

Oliver G. Brewer

That's just a clever offshoot of our digital marketing effort. And LinkedIn, obviously, has a rich target demographic for us and good brand position, and running a cooperative program with them, we think, will help us both get the word out on Callaway and sell some product to them. So it's just a clever little flanking strategy that the digital marketing team and marketing team in general came up with, just one of many clever little paths that we're using to restore the growth and profitability of the brand.

Operator

[Operator Instructions] Your next question comes from Craig Kennison with Robert W. Baird.

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Chip, I wanted to ask you a question, just to get some historical context on how weather can play out in various product categories. Are you able to quantify sort of which categories are more consumable and, therefore, demand is destroyed versus the categories where look, it's just a deferral from Q1 to Q2? I'd imagine, for example, if you're going to buy a driver this year, it doesn't matter whether it happens in March or April, but golf balls are different.

Oliver G. Brewer

Yes, Craig, I think you just nailed it. So golf ball is certainly a consumable, and lost rounds are lost -- lost balls and lost rounds is lost revenue. So we have to move on, on that basis. Gloves would certainly be in there, and then you get kind of noisy in bags and such. But clubs is generally not, but what the retailers in all stages of the industry say, as long as it doesn't last too long, that the club business will just mostly shift. And then, what is too long? I can't tell you that, but I know we're right up against the edge of it right now. This year was -- the weather was a little -- it was worse than average. And so we will -- it would be better if it got good and stayed good and these courses opened up across the Midwest and Northern climate. And I think we're seeing that, but it's close this year to see where that'll end up.

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Yes, we're not seeing it where I live, unfortunately. But just to follow up on the guidance then...

Oliver G. Brewer

Yes, that's the risk right now. And the other risk is it makes people nervous out in the field.

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Yes, no doubt. If I could just follow up on the guidance then. Really, you're citing primarily currency as a risk factor. But there has to be some impact from, I guess, the loss of consumable demand related to the weather.

Oliver G. Brewer

Yes. And we factored that into our guidance. And we we're able to cover that. Our businesses as you can tell is performing well. Within the areas that we're able to control, we're meeting or exceeding expectations. And there've been some weather impacts this year, which -- we're citing those for the reason to roll back revenue guidance in the first half, but we're not citing those for the full year, and that's intentional. We believe we can more than offset those issues, the currency speaks for itself.

Operator

Your next question comes from Devin Prater with D. A. Davidson.

Devin Prater - D.A. Davidson & Co., Research Division

This is Devin Prater, on for Andrew Burns. Just a quick question for you, and I apologize if I've missed this earlier. But promotional activity in the quarter seemed pretty clean with the exception of some small discount from TaylorMade woods. How do you guys view the promotional cadence in the channel now, and what's the outlook for the rest of the season?

Oliver G. Brewer

The -- I think, Devin, there was some more promotional activity in the market early in this season than normal, and we're waiting to see whether it stabilizes now or gets worse. So that is our -- one of our risk factors into Q2. That is -- in addition to the slow weather start that just takes away the consumable portion earlier in the year, it has a tendency to make people nervous because their inventories aren't turning. There's natural reaction to that from whomever. And sometimes that stabilizes and the market behaves the way you want it to. And sometimes, it doesn't, right now. So I don't really have a good prediction for you. We're prepared to deal with whatever comes our way, but there is a slight risk that Q2 would be more promotional than "normal" but it's not a certainty at this point, it's a jump ball.

Operator

Your next question comes from Brenden Smith with Cypress Capital.

Brenden Smith

Just a couple of clarifications and then a question. I guess, first, I know they were a little bit apples and oranges here given the discontinued the operations, but 16% year-over-year growth in the U.S., when is the last time that happened?

Oliver G. Brewer

Never happened before in my tenure, Brenden.

Brenden Smith

Brad, what do you think?

Bradley J. Holiday

I'm not sure it's happened even in my tenure since I've been here, that's a big growth for a first quarter.

Brenden Smith

Okay, good. And then secondly, just to make sure that we have all the currency impacts sorted out. So the guidance before last quarter was 7% for the first half. Now at constant currency, it's also 7%, correct?

Bradley J. Holiday

Yes.

Brenden Smith

And then the full year guide previously was 10% and then now at constant currency, it's actually 12%?

Bradley J. Holiday

That's correct.

Brenden Smith

Okay. And then finally on the op [operating] margin side, I mean, 15% op margin in a Q1, obviously, pretty impressive. And Chip, I know we talked about this in the past, but -- and I know Adams is not exactly the same business mix as Callaway, but given how long you operated that business, at 10% to 12% op margins, why can't Callaway approach at least a 10% op margin over the longer term?

Oliver G. Brewer

Brenden, at this point, I'm not in a position to give you where I expect it to be long term. But I think we are headed in the right direction, and we're going to be able to return this business to viable, profitable, successful business. And we've outlined the turnaround path for you. We have plans. It's a multiyear process, and we're on that plan right now, but...

Bradley J. Holiday

And Brenden, I would just add also, I mean, comparing a full year operating margin target to a first quarter or first half, which is typically the peak season for golf, probably not a good comparison. You got to look at it on an annual basis.

Brenden Smith

Yes, no, completely. Just when you look back over history, 15% in a Q1 stands out well.

Operator

And ladies and gentlemen, we have now reached the end of our allotted time for questions-and-answers. I would like to turn the call back over to Mr. Brewer. Do you have any closing remarks, sir?

Oliver G. Brewer

No, I just want to quickly thank everybody for tuning in. Where the weather permits, go out and play some golf, we need you, and we look forward to updating you at the end of Q2. Thanks for your time.

Operator

Thank you for participating in today's conference call. This does conclude today's conference. You may now disconnect your lines.

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