Samsung Electronics flags 23% jump in second quarter profit on solid chip demand, one-off gains By Reuters

© Reuters. FILE PHOTO: The logo of Samsung Electronics is seen at its office building in Seoul

SEOUL (Reuters) – Samsung Electronics (OTC:) Co Ltd (KS:) said on Tuesday second-quarter operating profit likely rose 23%, beating analysts’ estimates on solid chip sales to data centres catering for a work-from-home economy during the coronavirus pandemic.

The sales offset weak demand for smartphones and TVs, while one-off gains from its display business, which counts Apple Inc. (O:) as a customer, also boosted profits, the company said. It gave no further details.

The world’s top memory chip and smartphone maker said operating profit was likely 8.1 trillion won ($6.8 billion) in the quarter ended June, far above the 6.4 trillion won analyst forecast by Refinitiv SmartEstimate. It would be the highest quarterly profit since the fourth quarter of 2018.

Revenue likely fell 7% to 52 trillion won from a year earlier, Samsung said.

Work-from-home orders and growth in online learning is underpinning chip demand amid the COVID-19 pandemic and pushing up DRAM memory chip prices. U.S. DRAM supplier Micron Technology Inc (O:) forecast strong quarterly revenue last month.

“Chip demand was stronger than expected due to the COVID-19,” said Park Sung-soon, an analyst at Cape Investment & Securities.

Analysts also said the handset and TV business may have fared better than expected due to lower marketing costs and as stores resumed operations worldwide as countries lifted lockdowns.

“The damage from the pandemic was less severe than the market had expected,” said CW Chung, Nomura head of research in Korea.

Analysts, however, warned that increases in memory chip prices may not continue in the second half of the year as data centre customers are likely to be conservative in stockpiling chips given the resurgence of COVID-19 cases in the United States and other countries

While prices jumped 14% on average in the quarter, they were flat in June versus May, data from DRAMeXchange showed.

Shares of Samsung Electronics fell 0.9%, against a 0.4% rise in the wider market ().

Samsung released only limited data in Tuesday’s regulatory filing ahead of the release of its detailed earnings figures later this month.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Micron shows how the cloud is saving chip makers

Memory-chip maker Micron Technology Inc. was saved by a boom in data centers, adding to chip makers’ growth as the pandemic forces more companies to expand their cloud computing capabilities.

On Monday, Micron

reported better-than-expected fiscal second-quarter earnings and had a stronger outlook for the next quarter, despite some issues with the global supply chain due to the COVID-19 pandemic. Micron’s shares jumped nearly 6% in after-hours trading. At Monday’s close, Micron was trading at $49.15, down 8.62% for the year but a huge recovery from its plunge in March, when it hit a low of $31.13 in the early days of the pandemic.

“We continue to see healthy demand trend in cloud in the second half of the year,” Micron Chief Executive Sanjay Mehrotra told analysts on a conference call. “Cloud is still actually in early innings, and long-term trends for cloud are strong.” In the second quarter, the company said that the work-from-home economy, e-commerce and videogame streaming all drove a strong surge in demand for more cloud-computing capabilities.

Micron’s comments echo those that other chip giants, such as Intel Corp.

and Nvidia Corp.

made last quarter. On Monday, Xilinx Inc.

joined the crowd when it updated its guidance for its fiscal first quarter, noting that strong performance in wireless and data center were offsetting weakness in consumer segments.

In the second half of the year, Micron said that it expects demand for consumer technology products such as PCs and smartphones to improve. That’s in part due to the ongoing rollout of 5G networks, which will drive demand of new smartphones that have more dynamic random access memory (DRAM) chips, compared to 4G-network phones. The company said that average selling prices of both DRAM chips and NAND flash memory were up sequentially from the previous quarter.

One issue hovering over the company, and indeed most chip makers, is the growing rise in inventories, both by Micron and its customers, especially in the smartphone market. When asked by an analyst about the growing inventories, Mehrotra said its customers are trying to prepare for when consumer demand returns.

“Customers want to be prepared to supply the smartphone demand” when it returns, he said. “So, overall, you know, it’s a mixed picture with respect to the inventory on the customer front. Cloud inventories are in decent shape,” while mobile inventories are “somewhat in anticipation of demand.”


The chip industry has been amazingly resilient during the coronavirus pandemic, and most of the demand is due to data centers and the demand for more cloud computing. If the PC and smartphone markets return to growth, there could be even more upside for chip makers such as Micron. But for now, the sure thing is centered around the data center.

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GlobalFoundries eyes new chip plant as Washington mulls semiconductor stimulus: CEO By Reuters

© Reuters.

By Alexandra Alper and Stephen Nellis

WASHINGTON (Reuters) – GlobalFoundries could expand output at its flagship U.S. plant or break ground on a new one next to it, the chief executive of the semiconductor contract manufacturer told Reuters on Wednesday.

U.S.-based GlobalFoundries, a unit of Abu Dhabi’s state-owned fund Mubadala, could install new equipment to take advantage of 30% to 40% of floor space that is unused at its Malta, New York factory, which would boost output within 12 to 14 months. In a second phase, it may build an adjacent plant that could be producing chips by 2024, CEO Tom Caulfield said in interview.

Caulfield said the plans would hinge on customer demand – which has been difficult to predict during the coronavirus pandemic – and could be significantly sped up if U.S. lawmakers pass a $22.8 billion package to bolster domestic chip manufacturing.

On Tuesday, GlobalFoundries, which makes specialty chips for customers such as Advanced Micro Devices Inc (O:) and Broadcom Inc (O:), said it had secured a purchase option agreement for about 66 acres of undeveloped land adjacent to its Malta plant. Expanding the existing plant would cost “in the single-digit billions” while building a new plant would cost “high single-digits or higher,” he said without elaborating.

Lawmakers in Washington are calling for more funds to fuel growth of U.S. chip foundries, as the Trump administration faces off with Beijing to dominate the high-tech industry.

GlobalFoundries has direct and indirect business with Huawei Technologies Co Ltd, the biggest target of U.S. technology restrictions, but Caulfield said Huawei is “not a very appreciable part of our business” and that GlobalFoundries complies with all U.S. regulations.

Republican Senator John Cornyn and Democratic Senator Mark Warner introduced a bill this month to provide more than $22.8 billion in aid for semiconductor manufacturers and more legislation is expected.

“There’s only a certain pace at which we can go,” Caulfield said. “A partnership with the U.S. can accelerate that capability. … What may take us five years, we can accelerate to two years.”

In overall revenue, GlobalFoundries is the world’s third-largest foundry behind Taiwan Semiconductor Manufacturing Co Ltd (TW:) and Samsung Electronics (OTC:) Co Ltd (KS:) but ranks second-largest when factoring out the part of Samsung’s foundry business that makes chips for other elements of the Korean firm.

GlobalFoundries expects flat revenue this year of about $5.5 billion, below its initial forecast of $6 billion, after selling a custom-chip business to Marvell Technology Group Ltd (O:) for $600 million last year. GlobalFoundries viewed the business as competing with its own customers.

The manufacturer still plans an initial public offering that allows Mubadala to maintain a majority stake, but the listing may slip into 2023 from a previously projected 2022, Caulfield said, adding the timing depends more on financial milestones than a date.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Walgreens: A 4.4% Yielding Blue Chip Left Behind In The Rubble (NASDAQ:WBA)

With the market having mostly recovered from the pandemic-induced drops in March and April, it would seem that everything is back to normal. However, there are still widely dislocated sectors with the most obvious ones being the hospitality, airline, and banking industries.

While those industries are understandably challenged in the near to medium term, amidst the rubble are some stocks that have been unfairly lumped into the underperformance category, and Walgreens (NASDAQ:WBA) is one of them. I believe the stock is set for market-beating returns at the current overly pessimistic valuation today due to its transformational efforts and macro-health trends.

(Source: Drug Store News)

Shares Have Vastly Underperformed

Walgreens has vastly underperformed against the S&P 500 over the last six months. As seen below, the market recovery that began in April has left Walgreens shares in the dust, with shares underperforming by a wide 25%. Not only that, but it has also underperformed its peer CVS Health (NYSE:CVS) by 16%.

(Source: Yahoo Finance)

While it may seem based on the chart above that all is doom and gloom for Walgreens, I believe that is simply not the case, as the company has a number of things going for it.

Over-Pessimism Is Not Justified

Walgreens actually grew its revenues at 4.1% on a constant-currency basis, suggesting that demand for its stores and services is not waning.

(Source: Company Presentation)

What’s likely drawing the ire of the market is the 12% decline in operating income that it experienced. While management noted that it was partly due to the trend of lower pharmacy gross margins, it was also attributed to one-time impacts that are not expected to be repeated.

(Source: Company Presentation)

Looking past fiscal 2020 and into the future, I expect the company’s Transformational Cost Management Program to start bearing fruit, as management has communicated that it is on track to deliver in excess of $1.8 billion in annual cost savings by fiscal year 2022.

Doing some back-of-the-napkin math, by applying the 1.8 billion in savings against the $25.3 billion in operating expenses for the trailing 12 months, I calculate that this could generate a significant 7% in annual recurring earnings contribution on a like-for-like constant basis.

I expect pharmacy gross margins to stabilize at some point. Although it’s difficult to predict exactly when that will happen, I expect profitability to increase at a strong clip when a base does form. That’s because according to CMS, national healthcare spend is projected to grow at an average rate of 5.5% per year through 2027 and reach an astounding $6.0 trillion by 2027. This puts healthcare spend on pace to grow at 0.8 percentage point faster than the US GDP, resulting in 1 in 5 dollars of the GDP being healthcare related within a decade.

I also expect Walgreens to be one of the key beneficiaries of this trend, especially as it transforms its physical stores into an integrated and localized community healthcare delivery model. This is evidenced by its five VillageMD locations that are currently open and the partnership with insurance juggernaut UnitedHealth Group (NYSE:UNH) on opening up to 14 resource centers.

In addition, LabCorp is now operating in 109 Walgreens sites across 12 states. For Walgreens, I see these examples as both a participation in the healthcare growth trajectory and as a defensive move against online competition.

On the retail front, I like the new formats that management is developing, such as the 50 pilot Kroger Express (NYSE:KR) stores format, which provides an ambient atmosphere and sells a broader range of groceries including fresh produce. This helps to further the “essentialness” of Walgreens locations, even after COVID, as a staple for the communities that it operates in.

(Source: Kroger)

Lastly, share buybacks continue to be an integral part of investing in Walgreens, as buybacks contributed 1.7% to earnings growth since August of last year. For comparison, share buybacks in the prior fiscal year reduced the share count by 6%. While repurchases are down from last year due to COVID uncertainty, I like the fact that the company is getting a much better ROI for shares bought this year due to depressed prices.

Key Risks

One risk for Walgreens is its international footprint, which saw a 1.7% revenue decline in the latest quarter. Its market share in the UK is holding steady, but management noted that the overall UK retail segment is in decline, which gives pause for concern. This is mitigated by the fact that the international presence represents just 8.5% of the total company revenue based on the latest quarter.

Another risk comes from continued pressures on reimbursements and pharmacy margins. Although I expect these pressures to stabilize at some point, and eventually offset by the long-term growth trajectory in healthcare spend, it is something investors should be watchful of.

Lastly, e-commerce from the likes of Amazon’s (NASDAQ:AMZN) PillPack presents an ever-present threat, especially if Walgreens’ digitization and transformation efforts do not ramp up fast enough to offset these pressures.

Investor Takeaway

Walgreens has been undeservedly left behind by the market rally. Its revenue continued to grow, and I expect margin pressures to eventually stabilize and for profitability to grow in the coming years as healthcare spend takes an increasingly higher share of the GDP. I’m encouraged by the transformational efforts that management has undertaken on its operations and on the transition to a localized community healthcare provider model.

The dividend currently sits at a historically high 4.4% at a safe payout ratio of just 33%. I’m also encouraged by management reiterating its commitment to growing its dividend every year on the latest earnings call.

I view shares as being highly undervalued at the current price of $41.40 with a PE ratio of just 7.4. At this valuation, the market is essentially pricing in a no-growth to negative earnings growth scenario into perpetuity, which I do not believe is the case for Walgreens. I have a price target of $55 per share, which brings the PE ratio to a more reasonable 9.8 and represents significant upside from today’s levels.

(Source: F.A.S.T. Graphs)

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WBA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Callaway Golf Company’s (ELY) CEO Chip Brewer on Q1 2020 Results – Earnings Call Transcript

Callaway Golf Company (NYSE:ELY) Q1 2020 Results Earnings Conference Call May 7, 2020 5:00 PM ET

Company Participants

Patrick Burke – Head, Investor Relations

Chip Brewer – President and CEO

Brian Lynch – Chief Financial Officer

Jennifer Thomas – Chief Accounting Officer

Conference Call Participants

John Kernan – Cowen

Mark Swartz – SunTrust

Susan Anderson – B. Riley FBR

Casey Alexander – Compass Point

Daniel Imbro – Stephens

Alex Maroccia – Berenberg

George Kelly – ROTH Capital Partners


Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter 2020 Callaway Golf Conference call with Chip Brewer, CEO. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Mr. Patrick Burke, Head of Investor Relations. Please go ahead, sir.

Patrick Burke

Thank you, Krystal, and good afternoon, everyone. Welcome to Callaway’s first quarter 2020 earnings conference call. I’m Patrick Burke, the company’s Head of Investor Relations. Joining me on today’s call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer; and Jennifer Thomas, our Chief Accounting Officer.

Today, the company issued a press release announcing its first quarter 2020 financial results. A copy of the press release and associated presentation are available on the Investor Relations section of the company’s website at

Most of the financial numbers reported and discussed on today’s call are based on U.S. Generally Accepted Accounting Principles. In the few instances where we report non-GAAP measures, we reconcile the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G.

Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the management’s current expectations. We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description.

Please note in connection with our prepared remarks, there 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 company Investor Relations website under the Webcast and Presentations tab. Also on the same tab, you can choose to join the webcast to listen to the call and view the slides. As a webcast participant, you are able to flip through the through the slides.

I would now like to turn the call over to Chip.

Chip Brewer

Thank you, Patrick. Good afternoon and thank you for joining us for today’s call. Starting on page four of the presentation, we’re pleased to be with you today to discuss our Q1 results and to give you an update on our business with a particular focus on how we are positioning ourselves for what is an uncertain near-term future, but we believe remains a promising long-term one.

As covered in our press release, through early March, our business was on track for another year of record sales. Despite challenges from COVID-19 in the quarter, our regional businesses in Japan and Korea, as well as our U.S.-based TravisMathew business, all delivered year-over-year revenue growth in the quarter.

We also were pleased to deliver a profitable quarter for the company as a whole and that our golf equipment market shares remained strong in all of our major markets. Through March, we held the number one share position in the U.S. for total hardgoods, as well as for total clubs and in Europe we held the number one position in hardgoods through February, which is the most up-to-date data currently available. We believe we gained share in both Europe and Asia while seeing some share in US, primarily due to launch timing.

During the quarter, we also made good progress on key initiatives, including the completion of our multiyear golf ball modernization effort for our Chicopee, Mass facility and the initial phases of our transition to our new 800,000 square foot Superhub just outside of Fort Worth, Texas.

The COVID-19 outbreak initially impacted just our Asian businesses and supply chain, but by early March, the issue became global. By mid-March, global regulatory responses implementing social distancing and shelter-in-place orders significantly slowed retail sales and created business challenges worldwide.

During that time, our focus shifted to being proactive in actions to protect our business and its many constituencies. These actions included securing increase near-term liquidity via both our ABL and equipment loans, decreasing our operating expenses and capital expenditures in total by approximately 20%, aggressively decreasing inventory commitments to better match up with revised demand expectations and to minimize working capital needs and evaluating more long-term capital options, which led us to issue approximately $250 million in convertible debt last week under what we believe were favorable terms and conditions.

As stated in our various press releases, given our initial actions, we believe we had adequate liquidity to make it through this pandemic crisis even before the convert debt issuance. Now, of course, we have an even higher confidence, but not only getting through this, but emerging in a position of relative strength.

Throughout all of this, the safety and health of the company’s employees, customers and partners has remained paramount in our minds. Following guidelines established by health organizations across the world, we initially took actions including, limiting and then suspending business travel, restricting visitors and establishing work-from-home programs.

As things develop, almost all of our North American and European operations have been shut down for various lengths of time. At present, our corporate headquarters in California is still working from home and our golf ball plant in Chicopee, Mass is still closed by state order.

However, many of our facilities elsewhere in the U.S. and across the globe are starting to return to more normal operations. As we transition back to normal operations, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment and other safety precautions.

Looking forward let me give you as much perspective as I can at this time. Unfortunately, Q2 is certainly going to be down significantly and we are unsure what to expect for the balance of this year.

Experts are telling us there will likely be a significant recession, maybe a reoccurrence, which may or may not be managed well and maybe even on the positive side of e-life recovery. With this as our backdrop, we have suspended guidance until market conditions are more predictable.

Having said all this, we are seeing some encouraging signs and these include, our primary Asian businesses, they’ve held up or recovered better than initial expectations. After a full shutdown for a large part of Q1, our China business impressed us with April revenues and our golf business returning to levels roughly equivalent to 2019 and our China apparel business only down slightly for the month of April. The apparel business there is also facing some additional margin pressure due to higher discounting levels, but, again, better than our expectations.

Korea continues its trend of being a role model for how to handle the pandemic with business holding in at 2019 levels. Japan was performing well through Q1, although, it has been recently impacted by the stay-at-home order in that market.

Demand to play golf is high in both China and Korea. In Korea, Tee Times outside Seoul are reportedly booked through May already. We believe our Asian businesses overall will be a positive contributor for the balance of the year.

Our e-comm businesses had performed particularly well across the globe during the pandemic, again, exceeding expectations and delivering year-over-year growth. As a reference point, our e-comm was approximately 8% of our full year revenues in 2019. They positioned us well to capitalize on trends in this channel and are on track to provide growth this year.

Along this theme, we’re happy to announce the launch of our of our U.S. site earlier this week. This is our first significant entry point for Jack Wolfskin brand to the U.S. market.

Markets in Central Europe are starting to reopen and although retail activity is still slow there, this is the most important market for our Jack Wolfskin business and we are encouraged by the progress.

Markets in the U.S. are starting to reopen as well, especially as relevant for our golf business. By mid-May, the National Golf Foundation believes 80% of U.S. golf courses will be opened in the U.S. and I have a feeling it may actually be quite a bit better than this. Anecdotal reports are that there is high utilization of the golf courses that are open and this is supported by third-party research shows a pent-up demand to play.

Golf retail is also starting to open an initial sell-through data, most of which is very limited at this point, usually with only one week or one weekend of data has been above expectations but is expected below last year’s level. We are also developing plans to best service both Green Grass and retail golf accounts in a social distancing world, and we think we are well positioned to do this.

Lastly, I’d like to express our point-of-view that Callaway’s business segments and our capital structure position us well to both weather this storm and come out in a position of strength. To be more specific, we are confident that our principal products, golf equipment, golf apparel and golf accessories, as well as outdoor apparel, gear and accessories are attractive segments for a world of social distancing and a new normal.

The joy of being outdoor is whether it’s hiking, camping or simply taking a walk in nature has never been more evident and is both logically and emotionally appealing today more than ever. At the same time, we expect the sport of golf to come back quickly as it is commonly viewed as a relatively safe and healthy outdoor activity that one can enjoy while still observing social distancing guidelines.

As I’ve already mentioned, this theory is supported by third-party research and early data across the globe. In addition, we benefit from geographic diversity, which should be helpful in limiting risk in today’s world.

Lastly, our distribution base and go-to-market strategy fits well with the new environment and should emerge relatively strong. Our primary retail customers are relatively well capitalized and likely to survive the crisis in a position of strength and we have trade insurance to further minimize risk here, plus we are well positioned to capitalize on any long-term growth in e-commerce.

On the capital side, we have stated publicly that we believe we had ample liquidity to make it through the COVID-19 crisis even prior to the issuance of our convertible debt. Needless to say, our confidence here is now even higher.

Having said this, I also want to emphasize that having this additional liquidity will not lessen or resolve for and we remain committed to maintaining our disciplined approach to managing capital expenses.

We believe that this additional liquidity, together with the strength of our brands, our products, and our geographic diversity, along with the operational improvements we have made to-date will enable us to create shareholder value as we emerge from the pandemic.

In closing, I also want to convey our thoughts and prayers to those directly impacted by the virus, as well as those diligently working on the frontlines to protect, serve and care for the rest of us.

Brian, over to you.

Brian Lynch

Thank you, Chip. As Chip mentioned, we were pleased with our strong start to the year through early March and we’re on our way to another record year in net sales before COVID-19 impacted our business.

Since COVID-19, our focus has shifted to reducing costs and enhancing liquidity, managing our business to maximize opportunities during the pandemic and preparing our business to emerge from the pandemic in a position of strength.

As Chip also mentioned, we reduced 2020 planned operating and capital expenditures by approximately 20% and most recently increased liquidity substantially through the issuance of convertible notes, which I will cover in more detail later in my remarks.

In evaluating our first – our results for the first quarter, you should keep in mind some specific factors that affect year-over-year comparison. First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred some non-recurring transaction and transition-related expenses in 2019.

Second, as a result of the OGIO, TravisMathew and Jack Wolfskin acquisitions, we incurred some non-cash amortization and purchase accounting adjustments in 2020 and 2019.

Third, as a result of the transition of our North American distribution center to our new Superhub in Texas, we are incurring some redundant costs as we operate both the new and old distribution centers during the transition. We’re also still in the process of implementing Jack Wolfskin’s new IT system, and therefore, we’ll have some nonrecurring costs in 2020.

We have provided in the table to this release as scheduled breaking out the impact of these items on first quarter results. With those factors in mind, I will now provide some specific financial results, which are consistent with the preliminary estimates we provided last week.

Turning now to slide nine, today we are now reporting consolidated first quarter 2020 net sales of $442 million, compared to $516 million in 2019, a decrease of $74 million or a 14% decrease. The decrease was primarily driven by the COVID-19 pandemic, changes in foreign currency rates also negatively impacted first quarter 2020 net sales by $4 million. The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 10% and our soft goods segment, which decreased 22%.

From a regional perspective, it’s worth noting that while most regions decreased period-over-period due to COVID-19, sales in Japan and Korea actually increased during the first quarter. The TravisMathew business also grew slightly.

As you can see on slide nine, gross margin was 44.2% in the first quarter of 2020, compared to 46.2% in the first quarter of 2019, a decrease of 200 basis points. The decrease in gross margin is primarily due to the decreased sales and business challenges caused by COVID-19, combined with an increase in U.S. tariffs and imports from China, as well as $1.3 million of non-recurring redundant costs associated with the transition of our North American distribution center in Jack Wolfskin IT system.

Gross margins for 2019 were negatively impacted by the non-recurring purchase price inventory step-up associated with the Jack Wolfskin acquisition.

Operating expense was $155 million in the first quarter of 2020, which is a $14 million decrease, compared to $169 million in the first quarter of 2019. This decrease is primarily due to the actions we undertook to reduce costs, as well as a reduction in non-recurring transaction and transition costs related to the Jack Wolfskin acquisition, which in the first quarter were $4.7 million in 2019 or less than $300,000 in 2020.

Operating income was $41 million in the first quarter of 2020, compared to operating income of $70 million for the same period in 2019, a decrease of 42%. This includes non-cash amortization and purchase accounting adjustments and non-recurring transaction and transition-related costs associated with the Jack Wolfskin acquisition in the amount of $2.7 million in 2020 and $11.3 million in 2019.

Other expense was $3 million in the first quarter of 2020, compared to other expense of $12 million in the same period of the prior year.

Non-recurring purchase price hedging losses due to the Jack Wolfskin acquisition were $4 million in the first quarter of 2019. The balance of the lower other expense in 2020, resulted primarily from foreign exchange hedging gains and slightly lower interest expense.

Fully diluted earnings per share were $0.30 or 95.7 million shares in the first quarter of 2020 compared to $0.50 or 96.4 million shares in the first quarter of 2019.

The non-cash and non-recurring items discussed earlier adversely impacted the first quarter of 2020 by $0.02 and the first quarter of 2019 by $0.13.

EBITDAS was $58 million in the first quarter of 2020, compared to $79 million in the first quarter of 2019. The non-cash and non-recurring items discussed earlier adversely impacted 2020 first quarter EBITDAS by $2 million and 2019 first quarter EBITDAS by $14 million. We expect to continue to spend approximately $6 million of non-recurring expense for full year 2020 related to the Superhub transition and the Jack Wolfskin IT system upgrade.

Turning now to slide 10, I will now cover certain key balance sheet and cash flow items. As of March 31, 2020, available liquidity represents additional availability under our credit facilities plus cash on hand, was $259 million, compared to $223 million at the end of the first quarter.

We had total net debt of $631 million, including $445 million of principal outstanding under our Term Loan B facility that was used to purchase Jack Wolfskin. In addition, our convertible note offering last week substantially increased our liquidity.

Our net accounts receivable were $260 million, a decrease of 9%, compared to $286 million at the end of the first quarter of 2019, which is attributable to lower sales in the quarter.

Days sales outstanding in the core business is generally consistent with the same period in 2019. We remain comfortable with the overall quality of our accounts receivable at this time.

Given the current environment, this is an area we’re monitoring even more closely than usual. We believe our top customers are generally in good financial condition and we are working with our customers and other customers as necessary.

We have a diversified customer base and some trade credit insurance, both of which should mitigate the impact of protracted downturn on our accounts receivable. Even if the slippage in the U.S. were 2 times or 3 times what it was during the 2009 recession, it would not have a material impact on our liquidity.

Also displayed on slide10, our inventory balance increased by 8% to $413 million at the end of the first quarter of 2020. This increase was primarily due to support our planned launches at the end of the first quarter and beginning of second quarter. The teams continue to be highly focused on inventory we own, as well as inventory in the field and are comfortable with quality of our inventory at this time.

Capital expenditures for the first quarter of 2020 were $17 million, a year-over-year increase of $6 million compared to the first quarter of 2019, due mainly to the final stage of investment in our golf ball plant initiative, as well as the implementation of our Superhub in Texas.

Depreciation and amortization expense was $9 million in the first quarter of 2020, compared to $8 million in the first quarter of 2019.

Finally, including both open market repurchases and shares acquired through the settlement of equity awards, in the first quarter of 2020 we repurchased 1.17 million shares for approximately $22 million, as compared to the first quarter of 2019 when we repurchased 1.65 million shares for approximately $27 million.

We currently have $77 million remaining under our current stock repurchase authorization. We have temporarily suspended open market stock repurchases, but have the ability to restart the program in circumstances warrant.

I’m now on slide 11, we previously reported that due to the uncertain duration and full impact of the COVID-19 pandemic, we are no longer providing financial guidance at this time. With that said, we do expect our capital expenditures in 2020 to be approximately $33 million to $38 million, down substantially from our previous guidance of approximately $55 million due to our cost reduction actions.

Depreciation and amortization expense is estimated to be approximately $39 million in 2020, down from the previous guidance of approximately $43 million.

Before opening the call for questions, I want to comment further on our convertible note offering. On May 4, 2020, we consummated the issuance of 2.75% convertible senior notes due 2026. The offering was oversubscribed, which allowed us to increase the size of the $200 million planned offering to $225 million.

As this customer and transaction of this type, we also granted the initial purchasers, the option to purchase an additional 15% of convertible notes, which has already been exercised. As a result, the total notes issued were $259 million and net proceeds to the company was approximately $250 million after certain transaction costs.

We are bullish in our future prospects and therefore, used approximately $32 million of the net proceeds to pay the cost of certain cap cost transactions, which are generally expected to reduce the potential dilution to shareholders upon any conversion of the notes. We intend to use the balance of the proceeds for working capital and general corporate purposes.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of John Kernan with Cowen. John, your line is open.

John Kernan

Hey, everybody. Thanks for taking my question and congrats on managing through a tough environment.

Chip Brewer

Thank you.

Brian Lynch

Thanks, John.

John Kernan

What — some of the questions we’ve gotten from investors recently are how will golf and Callaway in particular perform in recessionary – difficult consumer conditions in recessions, we can look back at the prior 2008, 2009 cycle. I see that there were fairly difficult trends from a top-line and particularly on a gross margin side, clearly the industry has changed quite a bit since then. Just wondering how we think about this cycle versus the last, I think, there is a lot more less inventory, there’s a lot less promotions, and there typically have been – I think giving investors and analysts a framework for how to think about the cyclical nature of golf and golf equipment now versus where we were maybe in the prior cycle?

Chip Brewer

John, that’s a good question, but a difficult one, it requires some level of speculation. The industry is arguably healthier now than it was in 2008 period in terms of the lower inventory, more consolidated positions, strong customer base without any of the customer base right now going into this period being highly strained or without the larger ones being highly leveraged or in a negative position. The industry has been less promotional. So you would expect those to be favorable factors.

In addition, the – I don’t believe golf is very cyclical really. The — if you look at how we performed in recessions, in 2009, the Callaway business was down I believe 14% in revenues. But we were losing market share going into that period and is 14% down in revenues highly cyclical or not, I would argue it’s not, but you can take either position on that one. I would argue we are a much stronger business now and previous recessions have not been especially impactful for golf.

John Kernan

Got it.

Patrick Burke

Krystal, is John still there or do we need to move to the next call?


Sorry. He is still connected.

Chip Brewer


John Kernan

Hey, guys. Sorry. I’m having some technical difficulties here clearly. Just how do we think about the degree of SG&A that is fixed versus variable? Clearly, the next couple of quarters could be difficult from a top-line perspective, I was just wondering how we think about SG&A, it’s fixed versus variable, obviously, on the way down on sales, it’s going to work against you, but it could – as we come out of this in fiscal ‘21 could work in your favor. So if we look at our models, how should we adjust from a fixed versus variable perspective in your mind? Thank you.

Brian Lynch

John, this is Brian. On the – with regard to cost of goods sold, a significant portion over 80% is variable. So there’s a lot of flexibility there. On the OpEx side, it is largely fixed and — but you can see from our press release, we announced that we had reduced planned capital expenditures by 20%, so while it’s largely fixed…

Chip Brewer

We are CapEx and OpEx…

Brian Lynch


Chip Brewer


Brian Lynch


Chip Brewer

…by 20%…

John Kernan


Brian Lynch

…by 20% and so we’re taking action there to reduce the fixed costs.

John Kernan

Got it. Thank you.


Your next question comes from the line of Mark Swartz with SunTrust.

Mark Swartz

Hey, guys. Mike Swartz this is. A question on the ball business, just looking at the decline in the quarter was well above the equipment business. I guess how much of that was due to product launch timing versus just retailers pushing back on the inventory and were you able to able to even get Chrome Soft into the markets before the shutdown started to occur?

Chip Brewer

Mike, that was — it was almost – in large – most of this was just launch timing. So we had pushed out the launch date and into March as it was. And then in addition to that, a large portion of the quarter usually shifts in the last month, so there was unsatisfied demand in the golf ball business in the quarter.

Mark Swartz

Okay. And then just with the TravisMathew business, I understand some of the retail outlets or all the retail outlets were closed during the quarter and I’m surprised to hear it actually grew year-over-year. With that said, maybe give us a sense of how the e-commerce part of that business did during the quarter, and I guess, is doing here into May?

Chip Brewer

Yeah. Mike, I don’t really even remember how the e-comm did during the quarter, but I’m sure it did well because of the trends. But the TravisMathew business, as you know, has had quite a bit of positive momentum and that carried over into Q1.

That business like the rest of our businesses was impacted. We had to shut down the retail stores at the end of March. It also shifts a large segment of its business to Green Grass, which ships late March, early April.

So ship shutting down in March at the end of March is more impactful to us than it would seem if it was evenly distributed our business through March. Our business is not evenly distributed through March. It’s heavily weighted due to the seasonality of golf towards the end.

The TravisMathew e-comm business was then shutdown through at least first half of April and then opened up second half of April when local regulations permitted and it has performed quite strongly since it’s been back open.

Mark Swartz

Okay. Great. Thanks for the color.


Your next question comes from the line of Susan Anderson with B. Riley FBR.

Susan Anderson

Hi. Good evening. Thanks for taking my question. I hope everyone is well and safe. I guess, I’m kind of curious what you’re seeing now with the shutdown, I guess, between the two categories of soft lines and hard lines. Where are you seeing the most pressure from shutdown, I guess, just given that golf – some golf courses have been opened and which one do you think will end up performing better or seeing a better recovery early on?

Chip Brewer

Susan, good question, and we’re fortunate that we are doing all healthy and well here. I hope the same is true. On the opening up side, I think, I’m not sure how to comment about how they did, other than the data that’s here. Our apparel business was more impacted in Q1, because the Jack Wolfskin geographic diversity or spread of that business.

In other words, a big piece of that business is in China. China was shut down in Q1. We have a small amount of hardgood business in China. But a large or relatively large apparel business and so that was heavily impacted. And then Europe shut down ahead of North America and again, the Jack Wolfskin business, so that – you see that in the Q1 results.

And as we project forward, I would expect the golf business will recover faster than the apparel business. There is quite a bit of pent-up demand. But I think both of the businesses that we’re in, because our apparel is basically golf apparel and apparel for outdoor, trekking, hiking, camping, things that, all of which do well in the social distancing, quote-unquote, new normal environment.

But the golf business, which is our largest piece of business, I expect to recover faster and we’re seeing that in China, although, as I gave you data, we’re pleased with the recovery on both pieces of the business.

Susan Anderson

Great. That’s helpful. And then I guess with Jack Wolfskin and TravisMathew, can you maybe talk a little bit about how you are managing the inventory there, have you had cancellations from wholesale customers and have you been able to cut down on product yourselves from the vendors and then also does this change your ordering plans for the back half?

Chip Brewer

Yes, yes, and yes, Susan. We have had wholesale cancellations across all of our business and we got some visibility of that in Q1. And we were very proactive and then managing our own inventory to the best of our ability, make sure that we’re not over inventoried as we work through this process. So we – but there clearly is going to be some backup of inventory for some period of time. We believe that we’re going to be relatively well-positioned with that.

In the apparel space, we’ll be able to repurpose some of the spring/summer lines until next year. In the golf equipment side, they’re not – even though it’s a seasonal business, it doesn’t really have a spring/summer application.

So the same Mavrik Driver is easily a salable later in the year as it is now, a little different on the apparel side, as you well know. But we think we were very proactive and we’ll be in a relatively good position on the inventory side.

Susan Anderson

Great. That’s helpful. One last one, if I could fit in there, the reduction in OpEx. Is there any breakout by quarter that we should think about or is more of this coming in second quarter versus the back half?

Chip Brewer

Do you want to take that?

Brian Lynch

Sure. We don’t have the breakout by quarter, but we started implementing it late March and so they’ll start to carry through for the balance of the year.

Patrick Burke

And this is Patrick. Maybe we would add, right, you probably will see more savings in Q2 because the – obviously businesses isn’t open, there aren’t tournaments, so some of the spend related with golf being open is…

Chip Brewer

Yeah. Advertising trends since without golf on air, there’s nowhere to advertise, anyway so it’s a natural savings. But a lot of the savings is going to spread through the year but a little bit more heavily in Q2.

Susan Anderson

Great. That’s helpful. Thanks so much. Good luck. Thanks.

Chip Brewer

Thanks, Susan.


Your next question comes from the line of Casey Alexander with Compass Point.

Casey Alexander

Hi. Good afternoon and hope everybody is doing well. I take your point about a lot of your shipments are back-ended at the end of March from a seasonal aspect. And now that we’re at about 70% of the courses open and guys are starting to get access to the shops in Green Grass. Are you starting to get calls to say go ahead and ship some of that stuff?

Chip Brewer

Yes. We are, Casey. That’s an important item that we’re working through right now.

Casey Alexander

Okay. And how do you – and sort of when is sort of, I mean, not, I mean, when do you sort of have to make the decision about your inventory that says the environment maybe should get a little bit more promotional, knowing that this is kind of a little bit of a lost year anyway and the last thing if you want to do is have an impact into 2021, 2021 could otherwise be a reasonably healthy year?

Chip Brewer

We had to really make those decisions well. Our decisions on promotions will be made as the situations develop, right? And I’m not expecting the golf equipment business to be especially promotional. Although, it will be more promotional than it would be in a normal year because there will be excess inventory for some period of time out there and just natural.

It depends on your launch cadence and how much you cut the inventory back in March, quite frankly, because that’s – March and early April is when we set up the inventory situation on the hardgoods side and the apparel side through the balance of the year. And we were proactive on that, so I’m not expecting, from a Callaway perspective to have inventory pressures per se.

Casey Alexander

Okay. That’s very helpful. Two more real quick, inventory from ‘18 to ‘19, from December to March increased this year from ’19 to ‘20 from December to March it decreased. Was that due to launch cadence or was that due to rapidly halting the supply chain and managing the inventory in a proactive way because of the crisis?

Patrick Burke

Casey, this is Patrick. Some of that is – with Jack actually managing their inventory. So remember, as we were talking about in early ‘19 because of the warm weather at the end of ‘18, right? They were managing through inventory, so that was planned as we were talking to you guys on that side. There might have been a little bit of timing on inventory in the golf equipment but the Jack inventory is a good piece of that.

Casey Alexander

Okay. And then my last question is, I mean, you guys have shown that you can access capital under stressful conditions and so has Acushnet and Chip you have a pretty good pulse of how people stand around the industry. Would it be your expectation that by 2021 or 2022 we might see less competitors in the business. We’ve constantly seen sort of a migration of people get tossed out of the business for one reason or another, isn’t this another catalyst that could result in that?

Chip Brewer

Casey, I think, that – I don’t have any predictions on that but I do think that these are times where the strong could get stronger and bigger brands tend to do better in these environments, and obviously, well-capitalized brands have degrees of freedom that the others don’t.

Casey Alexander

Yeah. Okay. Great. Thanks for taking my questions. I appreciate it.

Chip Brewer

Thanks, Casey.


Your next question comes from the line of Daniel Imbro with Stephens.

Daniel Imbro

Hi. Good evening. Thanks for taking the questions. I wanted to follow-up earlier on a golf ball business. You mentioned in your remarks, Chicopee still remains closed today. I am curious, how is that going to impact your ability to handle orders when demand does return? I know you guys made a lot of investments up there but do you have Chrome sales inventory that you could ship out or when demand comes back, how are you thinking about managing the manufacturing side of that to handle the demand?

Chip Brewer

Daniel, I think, that the answer there is that it depends on how Chicopee starts up, and obviously, how much demand there is. The demand on the consumables side recently has been quite good. So I think that there’s – and this could be a good thing or a bad thing, depending on how you want to look at it, but I think there’ll be more demand than supply for our premium golf ball product for the first month or so out of the shutdown.

Daniel Imbro

Okay. That’s helpful. And then, Brian, maybe just a follow-up on the convertible offering, I’m just curious just on your thinking behind the need for it. You guys noted in late April you were taking liquidity steps. You had cash on the balance sheet, was this a reflection that cash burn was higher than you thought it would be, was there some things specifically attractive about the debt markets you saw, kind of how should we interpret your reasoning behind the offering?

Brian Lynch

Sure. As — when COVID-19 hit, again, as I mentioned earlier in my remarks, we immediately focused on cutting costs and make sure that we had sufficient liquidity. We went out and got an additional loan under our term loan facility and another loan and increased our commitments to around $40 million during the first quarter.

But after that, we ran a bunch of different scenarios — different modeling scenarios under different assumptions, how bad could this get. And under all those, we felt like we had sufficient liquidity, not necessarily that we’re swimming in it, but we have sufficient amount to get through it.

But the question would be is what if it’s wrong, what if this whole pandemic turns out to be worse than anyone thinks or there’s a significant second recurrence. So the convert is more of an insurance policy. So it will provide us with sufficient liquidity from any regional scenario that we can think of and hopefully take the liquidity discussion off the table.

In addition to that, the market conditions were very favorable. We were able to take advantage of relatively inexpensive debt. It costs less than our other debt, and as you can see, the offering was very well received by the investors and was significantly oversubscribed, which flat to obtain really quite favorable terms.

So it’s an insurance policy overall, but at the same time, it will not, as Chip mentioned, it will not get us to relaxed relax our disciplined approach to managing costs and expenses in this environment.


Your next question comes from the line of Alex Maroccia with Berenberg.

Alex Maroccia

Hey. Good afternoon, guys. Thank you for taking the questions. So right now the whole industry is dealing with the loss of professional golf visibility on TV and Patrick hit on the positive impact with the lack of marketing needed. But conversely do you think this has hurt the visibility in the short-term, I know we saw the Tiger effect last year, so I’m just trying to see how you’re thinking about that?

Chip Brewer

Alex, this is Chip. And clearly, it’s hurt the visibility, but we’re going to come back relatively quickly. And I think the thing you need to focus most on here, which is well documented with anecdotal. It’s in the experience of what we’ve seen across the globe. There’s third-party data that supports this and that is – there’s a lot of interest in playing golf.

The golf courses, as they open, are very busy, there’s a lot of reasons to believe that golf is coming back very quickly. The visibility factor isn’t a major factor in today’s world. Although in very short order, by early June, the PGA Tour will be up and running.

There’s obviously a couple of different matches coming up with Phil Mickelson and Tiger playing in a match in later in May. So the visibility is not the major factor right now. If people can play golf they’re lining up to do it.

Alex Maroccia

Got it. That’s helpful. And secondly, what are your thoughts on the financial health of smaller wholesalers, courses that are shut and other retail partners and how material could this stress be on your receivables?

Chip Brewer

At this point, Alex, we’ve taken a hard look at that. We do have trade insurance and we’re not seeing anything that concerns us on a material level there.

Alex Maroccia

All right. Great. Thank you.


Your last question comes from the line of George Kelly with ROTH Capital Partners.

George Kelly

Hi, everybody. Thanks for taking my questions. So, first one, just a follow-up to the previous question, Chip, you mentioned that courses that are open are seeing a lot of game play. I mean it sounds like people are lining up. I am wondering if you could sort of expand on that at all. What do you think that the full year impact will be, I mean, do you think there will be much of a negative impact from COVID or how would you expect rounds playing to sort of progress through the year?

Chip Brewer

George, I think there’s going to be a very material impact from COVID, given that we were shut down and that we’re only now in the start-up phase and our ability to predict that is just not there. The one prediction I will make is that golf will come back quickly right now.

There’s a lot of interest in playing and this could actually be good for the game of golf. Although, it’s going to have a material impact on the year and where it plays out in the second half of the year will be determined, but I do expect high utilization rates, et cetera. There’s – it’s a great game in general, but it’s an even better game in the world where we’ve now exist especially in comparison to your other options.

George Kelly

Right. And I’m just speaking to rounds played, I mean, I just wonder if it will have…

Chip Brewer

It has to be down. You can’t take the month of April and part of May out and not be down, I don’t think. But I don’t have the math and – but I think when it gets back up rounds played are going to be pretty healthy, so maybe I’m wrong there, too.

George Kelly

Okay. Fair enough.

Chip Brewer

We take solace in what we’re seeing on very good trends out there.

George Kelly

Okay. Okay. And then second question, this isn’t something you’ve commented on in the past, but being pretty sort of unusual circumstances here. I am just wondering if you could talk at all about Topgolf and wondering if your balance sheet now has enough flexibility to invest additional capital into Topgolf?

Chip Brewer

Well, it’s a good question. Topgolf is an attractive business and has been an attractive investment for us. Clearly, it’s been impacted by COVID-19 as all of the locations are shut. But they are in process of planning re-openings and they believe they can do so safely.

Our belief in that business is unchanged. We continue to view it as a very attractive business and attractive investment for our shareholders and we do have the financial flexibility to look at participating in investment opportunities there if they come up and we view those as favorable for our shareholders.

George Kelly

Okay. Great. Thanks.


We have reached our allotted time for questions. I will now turn the call back to Mr. Chip Brewer, Chief Executive Officer for closing remarks.

Chip Brewer

Well, thank you very much everybody for calling in. These are highly unusual times. I hope you and your families are safe and able to work through this in a healthy and productive manner. We appreciate your support and look forward to keeping in touch. Thank you.


This concludes today’s conference call. You may now disconnect.

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