Callaway Golf (ELY) Q2 2018 Results - Earnings Call Transcript

Callaway Golf Co. (ELY) Q2 2018 Earnings Call August 2, 2018 5:00 PM ET

Executives

Patrick S. Burke - Callaway Golf Co.

Oliver G. Brewer III - Callaway Golf Co.

Brian P. Lynch - Callaway Golf Co.

Analysts

Steven Zaccone - JPMorgan Securities LLC

Susan Anderson - B. Riley FBR, Inc.

Dave King - ROTH Capital Partners LLC

Dan R. Wewer - Raymond James & Associates, Inc.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Brett Andress - KeyBanc Capital Markets, Inc.

John Kernan - Cowen & Co. LLC

Operator

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2018 Callaway Golf Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

Thank you. Mr. Patrick Burke, Head of Investor Relations, you may begin your conference.

Patrick S. Burke - Callaway Golf Co.

Thank you, Erica, and good afternoon, everyone. Welcome to Callaway's second quarter 2018 earnings conference call. I'm Patrick Burke, the company's Head of Investor Relation. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer; and Jennifer Thomas, our Chief Accounting Officer.

Today, the company issued a press release announcing its second quarter 2018 financial results. A copy of the press release and associated presentation are available on the Investor Relations section of the company's website at www.callawaygolf.com. Most of the financial numbers reported and discussed today on today's call are based on U.S. generally accepted accounting principles. In the few instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G.

Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in this 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 & 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.

Oliver G. Brewer III - Callaway Golf Co.

Thanks, Patrick. Good afternoon, everybody and thank you for joining us for today's call. Starting on page 4 of the presentation, I'm pleased to announce a record start to the year based on operating performance, brand momentum and continued strong market conditions.

Revenues were up 30% for both the quarter and year-to-date and first half fully diluted EPS doubled. Our new products particularly the Rogue line of woods and irons, as well as our new Chrome Soft golf balls featuring Graphene are resonating on a global basis. Our putter business is gaining strength through the year and our new business initiatives continue to perform at or above expectations.

On the strength of our operating performance, we continue to make select investments back into our business including R&D, golf ball operations, tour, sales and marketing which we believe are paying off nicely for shareholders and will continue to strengthen the company for the future.

As is my custom, I'd like to take this chance and thank the Callaway Golf team for delivering these results. The team should be proud of what we have accomplished. I'm also sure they understand we have a lot more to do and like me are motivated to take our company to the next level.

Turning to slide 5, let's now take a deeper look into our operational performance by region. While doing this, it's worth noting that we launched more product in the first half of 2018 than last year and thus quarterly comparisons should bear this in mind. In the U.S., our revenues were up 39% for the quarter and are up 35% for the first half. These results were driven by continued strong market conditions, double-digit growth in our core equipment business as well as the addition of the TravisMathew brand which is performing in an exceptionally high level. Looking at our equipment business, our first half hard goods market share, according to Golf Datatech is 25.6%, down 80 basis points versus first half of 2017. According to Datatech, we remain the number one in total hard goods brand, number one in total clubs, woods, irons, and putters.

In golf balls, we remain the number two brand with 16.3% dollar share, up 290 basis points year-over-year. We are showing strength across our entire line with very strong revenue growth in irons and golf ball and we continued to have strong performance in the woods category with Rogue as the number one selling model year-to-date. Additionally, market conditions in the U.S. continued to outperform expectations with 10.5% growth for the first half and field inventory levels appeared to be in line for the market overall as well as Callaway.

Turning to Page 6, our Asia business also had a strong quarter led by an outstanding performance in both Japan and Korea. Our revenues from the Japan market were up 22% for the quarter on a currency neutral basis and are up 32% year-to-date. This is being driven by continued brand strength along with market conditions that have exceeded expectations. For the quarter, our hard goods dollar market share was 19.4%, roughly flat. And for the first half we are 18.1%, down 230 basis points. This puts us as a strong number two in this market.

As in the U.S. we are seeing strength across the entire product line, but with particularly strong performance in the irons category where the Japan market has reacted very well to our last several product launches. Korea has also had a strong start to the year with currency neutral revenues up 30% year-to-date and we are on track for a great year albeit front-half loaded throughout Asia.

Moving to page 7, in Europe the team had another solid quarter of revenues up 8% in total and 1.7% constant currency. Market conditions to suffer from a wet and cold start to the year improved quite a bit during Q2, leaving the UK up 3.8% year-to-date and Europe down 1.3% or essentially flat. For Europe as a whole through May and UK through June we remained the number one hard goods brand with a hard goods share of roughly 23% down versus last year but in line with our expectations and trending positively.

Now on slide 8, based on the strong start to the year we are once again raising our full year revenue and earnings guidance. This forecast reflects current foreign exchange levels as well as low-mid single digit market growth for the balance of the year. These results if delivered will be record revenues operating income and EBITDA. You will undoubtedly notice that our full year forecast is heavily front-half loaded. This is driven by our product launch cadence with more launches in the first half of this year and significantly less in the second half compared to last year, as well as our estimates of competitive launch activity and our desire to manage field inventories and consumer sentiment in a manner that position us best for the long-term. In conclusion, we're excited about our start to the year and optimistic it's going to be a positive year for Callaway and the industry as a whole.

Stepping back for a moment to look at the big picture. I hope you agree we've significantly grown and strengthened our business over the last few years and that barring an unforeseen event this trend is likely to continue. We are clearly now a product and technology leader in the equipment space. We have momentum improving overall industry fundamentals. We hope you also agree we are making attractive investments by reinvesting in our core investments in Topgolf, selectively repurchasing shares and in strategic acquisitions, all areas where we believe we can deliver attractive growth and returns for our shareholders.

Brian, over to you.

Brian P. Lynch - Callaway Golf Co.

Thank you, Chip. As Chip mentioned we are pleased with how our business has performed in 2018. Our new product introductions have exceeded our expectations. We continue to find good opportunities to reinvest in our core business, and our new businesses, OGIO and TravisMathew, continue to meet and/or exceed our expectation. Overall, we had a very strong first half for 2018, setting records for revenue and profitability. Our net sales for the second quarter and first half increased in all operating segments in all major regions and across all major product categories.

Our results in 2018 have benefited from some positive macro headwinds. The golf industry as a whole has been strong in many of our key markets including the U.S. which grew approximately 10.5% in the first half. Foreign currency has also positively impacted our net sales by $5.8 million for the second quarter and by $16.7 million for the first half. Consistent with the first quarter, our 2018 results were also positively impacted by a front-end loaded launch cadence and by the lower tax rates resulting from the 2017 Tax Cuts and Jobs Act.

In evaluating our results for the second quarter and first half, you should keep in mind some specific factors that affect year-over-year comparisons. First, the TravisMathew acquisition occurred in August 2017. As a result, that business was not included in our second quarter or first half 2017 results. Second, as a result of the two acquisitions, we incurred some non-recurring deal-related expenses. When discussing our 2017 non-GAAP results today, we exclude the non-recurring deal-related expenses, as that is how we evaluate our performance.

Third, during the fourth quarter of 2017, we recorded a net $3 million of additional tax expense related to the 2017 Tax Cuts and Jobs Act and other non-recurring tax adjustments that impacted the full year which we've excluded from our 2017 non-GAAP results. With those factors in mind, I will now provide some specific financial results.

Turning to slide 11, today we are reporting consolidated second quarter 2018 net sales of $396 million compared to $305 million in the second quarter of 2017, an increase of 30% and a record for net sales in the second quarter. The significant improvement was primarily due to a 35% increase in the irons category, driven by our Rogue line of irons, a 35% increase in our golf ball business driven by our new Chrome Soft golf balls and a 64% increase in the gear, accessories and other category driven by the TravisMathew business which was acquired in August of 2017.

Foreign currency positively impacted international net sales by $6 million in the second quarter. Excluding the foreign currency benefit and the TravisMathew business, our core business net sales increased 19.8%.

As you can see on slide 11, gross margin was 48.6% in the second quarter of 2018 compared to 48.7% in the prior year. The 10 basis point decrease compared to 2017 reflects continued investment in technology, partially offset by increases in average selling price, favorable product mix related to the TravisMathew business and the favorable impact of foreign exchange translation on net sales.

Operating expense was $118 million in the second quarter of 2018, which is a $19 million increase compared to $99 million in the second quarter of 2017, driven by operating expenses related to the TravisMathew business, variable expenses related to higher net sales and the negative impact of foreign exchange. Operating expense as a percent of net sales was 29.9% in the second quarter of 2018 compared to 32.5% for the same period last year.

Operating income of $74 million in the second quarter of 2018 compared to operating income of $49 million in the second quarter of 2017. When excluding the nonrecurring OGIO expenses, non-GAAP opportunity income for the second quarter of 2017 was $51 million, a $23 million increase over 2017. Other income was $4 million in the second quarter of 2018 compared to other expenses $2 million in the prior year. The higher other income in the second quarter of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017. Fully diluted earnings per share was $0.63, or 97 million shares, in the second quarter of 2018, a record for Callaway Golf and an 85% increase compared to non-GAAP earnings per share of $0.34 for the second quarter of 2017. On a GAAP basis 2017 second quarter fully diluted earnings per share was $0.33.

Turning now to slide 12, we will now discuss our June year-to-date 2018 results. Today, we are reporting consolidated first half 2018 net sales of $800 million compared to $613 million in the first half of 2017, an increase of $187 million, or 30%, and a record for net sales in the first half. The significant improvement was primarily due to a 46% increase in the irons category driven by our Rogue line of irons, the 25% increase in our golf ball business driven by our new Chrome Soft golf balls and a 49% increase in the gear, accessories and other category driven by the TravisMathew business which was acquired in August of 2017. Foreign currency positively impacted international net sales by $17 million in the first half.

As you can see on slide 12, gross margin was 49.2% in the first half of 2018 compared to 48.2% in the prior year. The 100 basis points increase compared to 2017 reflects increases in our selling price, product mix related to the TravisMathew business and the favorable impact of foreign exchange translation on net sales.

Operating expense was $233 million in the first half of 2018, which is a $30 million increase compared to $203 million in the first half of 2017, driven by operating expenses related to the new TravisMathew business, variable expenses related to higher net sales and then negative impact of foreign exchange. Operating expense as a percentage of net sales was 29.1% in the first half of 2018 compared to 33% for the same period of 2017.

Operating income was $160 million in the first half of 2018 compared to operating income of $93 million for the same period in 2017, an increase of 72%. When excluding the non-recurring OGIO expenses non-GAAP operating income for the first half of 2017 was $99 million, that's $61 million increase over 2017.

Other expense was $2 million in the first half of 2018 compared to other expense of $7 million in the prior year. The lower other expense in the first half of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017. Fully diluted earnings per share was $1.28, or 97 million shares, in the first half of 2018, a 100% increase compared to non-GAAP earnings per share of $0.64 for the first half of 2017. Excluding the non-recurring OGIO transaction expenses, 2017 first half fully diluted earnings per share on a GAAP basis was $0.59.

Turning now to slide 13, I will cover certain key balance sheet and cash flow items. As you can see cash and equivalents was $58 million which was down $4 million year-over-year. This includes the impact of the TravisMathew acquisition completed in August 2017, an incremental investment in Topgolf which was $20 million in the fourth quarter of 2017. Stock repurchases and a continued investment in our golf ball facility offset the use of additional liquidity from our asset base loans.

Regarding our asset-based loans, we had $96 million of borrowings at the end of the second quarter 2018 as compared to $6 million in borrowings a year ago. Available liquidity which represents additional availability under our credit facilities, plus cash on hand was $301 million at the end of the second quarter as compared to $247 a year ago. Increased liquidity from our asset-based loans was partially offset by our 2017 deployment of capital for the TravisMathew acquisition, stock repurchases, and our incremental investment in Topgolf and the ball plant. We believe we are demonstrating our ability to generate free cash flow in the core business and are finding good opportunities to deploy that excess capital and the core business and in tangential areas.

Our consolidated net accounts receivables were $242 million, an increase of 8% compared to 2017, driven by the increase in sales in the first half partially offset by better collection rates. Also, DSO decreased to 60 days compared to 69 days at the end of June 2017. We remain comfortable with the overall quality of our accounts receivable at this time.

Also displaying on slide 13, our inventory balance increased by 38% to $237 million at the end of the second quarter of 2018. This increase was due to increased launch activity in the first half of 2018, additional inventory from the TravisMathew acquisition and low inventory levels at the end of the second quarter in 2017, as we chase demand for EPIC products. We remain comfortable with the quality of our inventory at this time. Capital expenditures for the second quarter of 2018 were $9 million, a year-over-year increase of $3 million due mainly to investments in our ball plant. Depreciation and amortization expenses was $5 million for the second quarter of 2018 compared to $4 million in 2017.

Finally, for the second quarter of 2018, the company repurchased a nominal amount of shares through the settlement of equity awards. Year-to-date, we have repurchased 1.4 million shares of stock for approximately $22 million in cash. This includes both open-market purchases and shares acquired through the settlement of equity awards.

I will now comment on our 2018 guidance. As you can see on slide 14, we are providing 2018 GAAP guidance and are comparing that to our 2017 non-GAAP financials. The 2017 non-GAAP financials exclude $11 million of non-recurring deal-related expenses resulting from the OGIO and TravisMathew acquisitions, and $3 million of non-recurring tax expense mentioned above. In addition the third quarter and second half guidance reflects the front-end loaded product launch time in 2018 with no major product launches planned from the balance of 2018, as well as an estimated negative impact of $3 million related to changes in foreign currency rate in the second half of 2018 compared with the same period in 2017.

Turning to slide 14, 2018 net sales are estimated to be in the range of $1,210 million to $1,225 million, an increase of 15% to 17% over 2017 and $40 million higher than our previous guidance. Incremental sales growth versus previous estimate is expected to be driven by increases in the core business which is 8% to 10% for the full year versus 2017 on a currency neutral basis. And by to a lesser degree increases in the TravisMathew business. Increases in core businesses are being driven by the Rogue line of irons and the new Chrome Soft golf ball and anticipating healthy retail market conditions.

Company currently estimates the changes in foreign currency rates will positively impact 2018 net sales by approximately $14 million slightly below our previous estimate. We estimate the full year 2018 gross margin will be 46.8% which is 20 basis points lower than our previous estimate. The decrease though was being driven by foreign exchange rates. We estimate full year 2018 GAAP operating expenses $445 million, an increase of $1 million compared to the previous guidance.

GAAP earnings per share are estimated to be $0.95 to $1 compared to $0.77 to $0.82 in our previous guidance. The 2018 figures are based on 97 million shares outstanding. We're also assuming a 21.5% tax rate for 2018.

We estimate our capital expenditures in 2018 to be approximately $40 million. This represents a $10 million over our previous estimate driven by the need to increase the capacity at our ball plant given the growth in our golf ball business. Depreciation and amortization expense is estimated to be approximately $21 million in 2018, consistent with our previous estimate. We estimate EBITDA to be approximately $147 million, a 47% increase versus our 2017 non-GAAP EBITDA driven by the core business, the full load of TravisMathew and to a lesser extent more favorable foreign exchange rates.

Continuing on slide 14, 2018 net sales were estimated to be in the range of $243 million to $253 million, an increase of flat to 4% growth over 2017. This projection reflects no major launches in the third quarter of 2018 versus the 2017 launch of our EPIC Star Irons and Hybrids as well as the launch of the Odyssey Works Red & Black Putters. The addition of a full quarter of the TravisMathew business will partially offset the negative launch timing.

We continue to encourage investors to focus on our full year results as the quarter comparisons can be materially impacted by the new product launch timing. GAAP earnings per share for the third quarter is estimated to be minus $0.03 to plus $0.01 compared to $0.05 we earned in 2017 non-GAAP results. The 2018 figures are based on 97 million shares outstanding.

That concludes our prepared remarks for today. We will now open the call for questions.

Question-and-Answer Session

Operator

And your first question comes from Steven Zaccone from JPMorgan.

Steven Zaccone - JPMorgan Securities LLC

Hi, guys. Thanks for taking my question and congrats on the strong results.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Steven Zaccone - JPMorgan Securities LLC

So really strong success with the golf ball this quarter, big acceleration in the second quarter versus the growth rate you saw in the first quarter. Do you think you can continue to see growth in golf ball sales in the third quarter and then in the second half overall? And along those same lines, has the competitive landscape changed at all since your largest competitor introduced the new premium ball offering?

Oliver G. Brewer III - Callaway Golf Co.

Steven, if you look at the – we're not going to provide granular level forecast by product line by quarter, but clearly we've shown momentum in the golf ball category over an extended period of time now, with growth continuing for multiple years and a steady drumbeat, if you would, of market share growth. We do anticipate further growth opportunities in golf ball. It's an important category for us. We think we've got a product that's clearly resonating. So, we're optimistic on the category for the foreseeable future.

And we've got good competition out there and they've continually launched nice products. We don't really comment on the competition very much but we are pleased with our results. And as you correctly identified, during the quarter we accelerated our growth rate which – and we delivered record market shares for our brand. So we seem to be able to compete effectively in the marketplace.

Steven Zaccone - JPMorgan Securities LLC

Great. That's helpful. And then just one quick one on gross margin. Can you elaborate in a little bit more detail on the higher product costs that impacted the second quarter gross margin? Do you expect this to be an ongoing headwind in the second half of the year?

Brian P. Lynch - Callaway Golf Co.

Steven, this is Brian. Part of it is the increase costs related to the new technologies that we put in for our products, but one in particular would be the golf ball and the new Graphene technology which is doing extremely well; it's resonating with consumers, the ball sales for the first half were up 25%. But it is – it's a learning curve a little bit. So we think over time we will be able to make improvements. We didn't reach our desired efficiency right off the bat, but we continue to work at and are making improvements. So I think you'll see improvement in that going forward.

Oliver G. Brewer III - Callaway Golf Co.

Yeah. And I'd also – yeah, Steven, call you to look at on a full year basis, our forecasted margins are up relative to last year. So, we're continuing to make progress in gross margin.

Steven Zaccone - JPMorgan Securities LLC

Understood. Best of luck in the second half. Thanks very much.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Operator

And your next question comes from Susan Anderson from B. Riley FBR.

Susan Anderson - B. Riley FBR, Inc.

Hi, good morning. Nice job on the quarter again.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Susan Anderson - B. Riley FBR, Inc.

Just to follow up on the ball question. I don't know if you guys could give a little bit of color on units versus dollars in terms of what drove the growth and then also on the hard goods side?

Oliver G. Brewer III - Callaway Golf Co.

Sure. On the ball side, I think we had a good quarter throughout and it was primarily – dollars are up more than units – but we're experiencing good market activity overall. The Chrome Soft product in particular is resonating in the marketplace, so very pleased with that.

In the club side of it, we were up in both units and dollars. We've been able to increase our average selling prices again this year. We're very much not afraid to put new technology out there and provided that it wows the consumer, they are very accepting and seem to enjoy that approach. So we're trying to create differentiated product and then oftentimes that's an expensive proposition. We're delivering to the consumer in a way that they're enjoying that.

We do see more units this year in the club side as well because it was an iron launch year. So with the Rogue irons, our total units are up and that certainly influences total units versus dollars. But average selling price has been a very positive story for us.

Susan Anderson - B. Riley FBR, Inc.

Great. That's very helpful. On the hard goods market share, very nice number obviously, but with it down, you guys feel like this is kind of – or are you going to just kind of ebb up and down against this number or do you think there is more opportunity longer term. And then just if there is any more color on Europe, was there anything else going on there besides weather – or do you guys really think it was weather just – seems to be generally underperforming the other global regions?

Oliver G. Brewer III - Callaway Golf Co.

Yeah. Let me take Europe first. Europe was up 8% as a market last year. This year they had a tough start to the year and I'm going to call it flat through the first half after a very tough start. The rest of the world is certainly beating them this year. They were a lot more than the rest of the world. I don't think there is anything endemic or to worry about there, it is indeed weather and the market is fine and positioned to be very well. What was the other question again, Susan?

Susan Anderson - B. Riley FBR, Inc.

Just on the hard goods market share, being down although obviously a very good total number. Is there still opportunity there or do you think it would just kind of fluctuate around this 28-ish percent level?

Oliver G. Brewer III - Callaway Golf Co.

Susan, I think that – we're pleased with our market share. We believe that we are a leader on a global basis in the club market, and the brands resonate. We think we're well positioned to continue in that and potentially grow it. You can also see that our revenues are growing faster than the markets overall, and faster than what their reported market shares are and that's because there are key areas that are not powered by some of that market share data that is third party data.

So we do think there's further upside there. The upside on the clubs will come hard fought. We have good competitors out there but we're continually getting stronger and we're optimistic on that. In the ball side, we have 16.3% market share according to Datatech in the U.S. market. So we certainly believe that there's more room for growth there as well. We think there's room for growth throughout our business and that will be our goal.

Susan Anderson - B. Riley FBR, Inc.

Great. Very helpful. Thanks so much. Good luck for the next quarter.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Operator

And your next question comes from Dave King from ROTH Capital Partners.

Dave King - ROTH Capital Partners LLC

Thanks. Good afternoon, guys.

Oliver G. Brewer III - Callaway Golf Co.

Hi, Dave.

Dave King - ROTH Capital Partners LLC

I guess first on TravisMathew, it seems like it grew faster than – I think it's 20% growth rate – it was drawing at. Do you have – how much it contributed in the quarter or possibly the organic growth if you back that out and then more importantly where are you in the process of expanding into other channels and internationally?

Brian P. Lynch - Callaway Golf Co.

Hey, Dave. This is Brian. For the second quarter, TravisMathew was about $26 million in sales. For the full year it's probably closer to $80 million as compared to the $20 million that hit our results from last year. You'll probably see the $60 million increase for the full year.

Oliver G. Brewer III - Callaway Golf Co.

And year-to-date we grew about 20.5% core currency neutral. So pretty decent growth rate. TravisMathew is continuing to grow. It has not really reached anything internationally yet. There is still good upside for that brand we believe.

Dave King - ROTH Capital Partners LLC

Okay. And then expanding it to other channels, golf channels, et cetera, have you been able to start that off?

Oliver G. Brewer III - Callaway Golf Co.

Well, we're continuing – I don't know whether I'd really say we're trying to expand into other channels, it depends what you mean by that. The brand is very strong on the West Coast. It is gaining strength on the East Coast at green grass. And other than I wouldn't say that we're trying to expand to different channels per se, but we are growing within the channels that we find strategic.

Dave King - ROTH Capital Partners LLC

Okay. That helps. And then in terms of the guidance, it sounds like the second half – or organic decline, a lot of that product launch cadence. I guess, Chip, how are you feeling about the start to the third quarter overall? And then big picture on product launches, given the strength of EPIC and now Rogue and Chrome Soft X, to what extent do you think you can keep up the momentum there, maybe as we look to 2019 and beyond?

Oliver G. Brewer III - Callaway Golf Co.

When you look at, Dave, a bunch of questions there. So, when we look at the second half I want to – you're correct, our second half forecasts are significantly impacted by product launch cadence and we had more launches in the first half of this year than last year. The first half was helped by strong market conditions and FX.

The second half, we are continuing to anticipate good market conditions, if you normalize for launch cadence. So, if you took out the launches that we did last year and made the amount of launch volume equal, we would be up based on these forecasts in the second half, in the 4% range on a currency neutral basis. So we're still expecting good performance for the industry and for Callaway. We're just making a strategic decision that we believe is in the best interest in the long run in the business relative to when we launch product and how much we're launching in the second half.

Relative to the long-term, we're optimistic about our business, our ability to generate attractive growth rates. We think we've demonstrated that over a reasonable period of time. We think we're making disciplined decisions and reinvestments that will help us sustain a leadership position in the industry. And we believe and hold ourselves to a standard of doing that and to growing our revenues at or above market conditions in a market that is growing healthy. So, we're relatively pleased but not fully satisfied of course, but I think we're very pleased first half and optimistic going forward.

Dave King - ROTH Capital Partners LLC

Okay, great to hear, good color. Thanks for taking all my questions, and good luck for the rest of the year.

Oliver G. Brewer III - Callaway Golf Co.

Thanks, Dave.

Operator

And your next question comes from Dan Wewer from Raymond James.

Dan R. Wewer - Raymond James & Associates, Inc.

Thanks. So, Chip, as I recall, the price increase for the Chrome Soft was about 12.5% year-over-year. So just to make sure I understand the infusing the Graphene into the ball more than offsets the price increase? Or are we saying that there were some – maybe some inefficiencies that you hope to correct that's led to the lower margins in golf balls?

Oliver G. Brewer III - Callaway Golf Co.

Dan, maybe it's a little of both, so higher input cost. Graphene is part of it, but there is also other aspects to the manufacturer of the Chrome Soft – the new Chrome Soft golf ball that make it more expensive golf ball to make and impact our gross margin percentage on that ball. On top of that, we are – the ramp-up of that production takes time and they're going through a learning curve. Our yields were not what we would like them to be long term during the first quarter and still not where we want them to be long term.

And then lastly, Dan, we're going through a major modernization process in Chicopee where we're putting significant capital into that plant. That capital with some aspects will allow us to make these differentiated products, it allows us to improve the overall quality and capability of the golf ball going forward and it will also provide some capacity for future growth.

Why you are putting that in the plants in a bit of chaos. You're doing a lot all at once and the efficiencies are affected by that. So we did have a lower gross margin performance in the golf ball category relative to last year on a percentage basis, although we made obviously more gross margin dollars because of revenue growth. You'll see some improvement on that gradually. We're not going to call out timing on that, but there is upside from where we are right now. And most importantly we're really excited about the fact that we're delivering a product that is cutting through and resonating in the trends we think are quite good.

Dan R. Wewer - Raymond James & Associates, Inc.

Right. Second question, several times in the call you discussed the impact of the front-loaded product launches in the first half of 2018. Does that also imply that the year-over-year comparisons will be difficult in the first half of 2019 because of – again so many new launches than the prior year?

Oliver G. Brewer III - Callaway Golf Co.

It could but I wouldn't draw that conclusion quite yet. We'll get to that a little bit later in terms of when we get to the forecast for 2019. And as you know, we don't provide those quite yet. And, we're still finalizing those plans as it relates to what the cadence and plans might be. We think that the right way to look at this business is a bigger timeframe though and whenever you look at individual quarters or even half, it gets so influenced by launch timing or weather conditions, et cetera, when you look at it, perhaps on an annualized basis, or rolling 12-month basis, much of that smooths up and the trends become a little bit more clear and revealing.

Dan R. Wewer - Raymond James & Associates, Inc.

Right. And this is the last question real quick. When you look at that core golf business where do you have headroom for improvement? I guess putters was one category, but now we're seeing a lot of momentum in your putter business. But I'm just curious, where do you see headroom for improvement?

Oliver G. Brewer III - Callaway Golf Co.

Dan, we're not satisfied with where we are in – anywhere yet. So we're pleased with our progress; we're pleased that we're a leader in the golf club segment; we're pleased that we're a strong number two and growing in the ball; we're pleased with some of the acquisitions and the growth in gear, accessories and other; but there's nowhere I don't see progress potential at this point. And I do see an improving – we've been talking for two years about the industry getting healthier – and I think that there's pretty good evidence of that now.

Dan R. Wewer - Raymond James & Associates, Inc.

Sure, yeah, great. Thank you.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Operator

And your next question comes from Michael Swartz from SunTrust.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Hey, good evening everyone.

Oliver G. Brewer III - Callaway Golf Co.

Hi, Michael.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Hey. Hey, Chip. Just wanted to start with the ball, the capacity expansion project and some of the investments you're making around there. I guess, one is where are we in the lifecycle of modernizing and expanding that ball business, and when do you think that should start to wind down? And then two, just in terms of the ball mix, do you look at optimizing going forward some of the ball product you currently produce? And what I'm trying to get at there is just with the growth and the share expansion you've seen, which I would suspect most of that's coming from Chrome Soft, would you plan to put a little more emphasis on that relative to the entire ball portfolio going forward?

Oliver G. Brewer III - Callaway Golf Co.

Let me answer the first question first. Yeah, in terms of the modernization and investments into the ball plant, we're right in the middle of it right now, half way. And it's already showing nice results. But we're on the 50-yard line, headed to the end zone we hope, and so a lot more work to do there, but team's done a wonderful job. They've got it well planned out and we are optimistic on that.

In terms of your question on the optimizing the mix on golf ball, if I got that correct, I'm hesitant to answer too much on that just for competitive reasons. Clearly we're – we think about those types of things – we have, we're excited about our product development pipeline, we're excited about our products that we have in the marketplace. We absolutely have some thoughts on the exact question that you asked, but unfortunately I'm not comfortable sharing with you at this point. So I apologize for that.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Nope, figured, I gave it a shot anyway.

Oliver G. Brewer III - Callaway Golf Co.

Okay.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

And then just, Chip, can you help us bridge some of the comments on the call. I mean as we've seen that the U.S. golf markets up about 10%, 11% year-to-date.

Oliver G. Brewer III - Callaway Golf Co.

Yeah.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

In your guidance, you're talking about low- to mid-single digit growth for the industry. So, I guess one is that apples to apples and then two, what should we be thinking about for the back half of the year?

Oliver G. Brewer III - Callaway Golf Co.

Yeah. That's low- to mid-single digit is what I think you should be thinking of for the back half of the year.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Okay. Okay. Thank you.

Oliver G. Brewer III - Callaway Golf Co.

Does that make sense?

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Yeah. That's great. Thank you.

Oliver G. Brewer III - Callaway Golf Co.

Perfect.

Operator

Your next question comes from Brett Andress from KeyBanc Capital Markets.

Brett Andress - KeyBanc Capital Markets, Inc.

Hey, good afternoon and thanks for taking my question. Chip, I just wanted to kind of follow up on that answer to the last question, but are there any specific industry factors that we should be taking into account from a step-down from plus 10% to low- to mid-singles or is that just you taking a more maybe conservative view on your end because I do think that this industry growth in the first half has kind of surprised a lot of us.

Oliver G. Brewer III - Callaway Golf Co.

Brett, we're with you. If you looked at my comments we were pleasantly surprised by the surge in growth in the first half, both in the U.S. and in Japan. But we expected a good market condition. The market was down in the first half of 2017 and then picked up and was up in the second half and gained momentum in the first half. We think it's going to be a good solid market in the second half of 2018. We're just a little bit more conservative on that forecast versus the first half. Trends that we see overall in the global economy seem to support that, but I think the takeaway is that it's still a positive outlook for the second half and set up to be a very strong year.

Brett Andress - KeyBanc Capital Markets, Inc.

Got it, understood. And do you have a market share loss assumption built into that outlook? Is it something consistent with the down 80 basis points that you had domestically in 2Q?

Oliver G. Brewer III - Callaway Golf Co.

We don't really do our forecast that way, so I don't have a second half market share forecast for you. Obviously, without any product launches and such we'll have some headwinds from that basis. I do want to also though just reiterate that on a constant currency basis we're expecting our core business, which is excludes the TravisMathew acquisition to be up roughly 4% in that period and that's normalized for launches.

So that says okay, we'll take out all the launch volume from both years and we would show revenue growth that would be not too dissimilar from what we told you or our estimate for the market was. So it gives you a little bit of an indication that we continue to believe we're going to be able to track the market well – at least on revenue basis and be positioned well for next year at the same time?

Brett Andress - KeyBanc Capital Markets, Inc.

Understood. And one more, just a little more of a clarification, but Brian, could you maybe help unpack the other income line a little bit more. I know you mentioned some of this in your prepared remarks because it does get noisy with FX. But how should we think about that line trending in the back half, I guess if maybe we hold FX rates constant.

Brian P. Lynch - Callaway Golf Co.

Sure. The one thing that the rates change at the end of the second quarter, so we took a lot of the benefit into the second quarter and so you will see more of the negative occur in the revenue line in the back half. But it won't be offset by the gains because they were already taken in the second quarter. So it will have a negative impact in the second half.

Brett Andress - KeyBanc Capital Markets, Inc.

Got it, helpful. Thank you.

Operator

Your next question comes from John Kernan from Cowen.

John Kernan - Cowen & Co. LLC

Good afternoon, guys, and congrats on the execution.

Oliver G. Brewer III - Callaway Golf Co.

Thank you, John.

John Kernan - Cowen & Co. LLC

Just wondering what your assumptions are for irons in the back half of the year because it feels like Rogue has a lot of momentum, the comparisons on a multi-year basis aren't nearly as hard as they are on woods. I'm just curious what you're embedding and how we should think about that segment?

Oliver G. Brewer III - Callaway Golf Co.

Irons have been a really strong category for us, John, on a global basis now. I know we've been the number one iron in the U.S. market for several years now. And as you correctly identified, Rogue's doing very well in the marketplace, number one selling model and exceptionally well. There are some other launches in the second half from competitors, those will have some level of impact from us and since we have no big launch I'd be surprised to see any major moves in our market share. But we're very pleased with where we are in the category and we've been a leader there for some time and excited about the product that's in the pipeline but nothing in the second half and Rogue's doing very well as you correctly identified.

John Kernan - Cowen & Co. LLC

Got it. One thing that we noticed was the inventory's up pretty significantly relative to where your second half top line is implied. So just wondering if where that inventory is concentrated and how you're thinking about your own inventory level right now? Thank you.

Brian P. Lynch - Callaway Golf Co.

Sure. This is Brian. Primarily two factors affecting that. One was the addition of TravisMathew inventory which we would not have had last year, June 30. So that was part of the increase. The other part was we do feel that we were under-inventoried last year and not able to fully service our accounts. And so I think there was a view to our increasing the inventory this year to allow us to better service the accounts. All the inventory, we feel pretty good about and it will just sell-through and its normal course of business, so I think we're feeling pretty good about it.

John Kernan - Cowen & Co. LLC

All right, great. Thank you. Best of luck.

Brian P. Lynch - Callaway Golf Co.

Thank you.

Oliver G. Brewer III - Callaway Golf Co.

Thank you.

Operator

We have reached the end of our Q&A. Mr. Chip Brewer, your closing comments please.

Oliver G. Brewer III - Callaway Golf Co.

I would just want to thank everybody for their time today and for dialing in. We appreciate it. And look forward to speaking with everybody at the end of the Q3. Thank you very much.

Operator

Thank you. And this does conclude today's conference call. You may now disconnect.