Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Callaway Golf Co  (NYSE:ELY)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jesse, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2018 Callaway Golf Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

Patrick Burke -- Head of Investor Relations

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

Today, the Company issued a press release announcing its third quarter 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 http://ir.callawaygolf.com/. Most of the financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles. In the few instances where we report non-GAAP measures, we have reconcile for non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G.

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

Chip Brewer -- President and Chief Executive Officer

Thanks, Patrick. Good afternoon, everyone, and thank you for joining us for today's call. My comments today will be brief based on what was a very positive but quiet quarter.

Starting on Page 4 of the presentation. I'm pleased to announce another strong quarter of results that put us on track for a record year in terms of revenue, operating profit and EBITDA.

Overall market conditions have been favorable year-to-date as is our brand momentum and operating performance. For the last several years, we've grown our business faster than the market overall and as we have realized increased scale, we have been able to deliver significant improvements in operating leverage. Also, and perhaps more importantly, we continue to find attractive opportunities to reinvest in our core business that we firmly believe will strengthen and benefit our business over the long term.

Our new product pipeline is strong. However, for competitive reasons, I will not be able to speak to that today. We are also enjoying a strong balance sheet position with no net debt, a significant accomplishment after two successful acquisitions, incremental investments in Topgolf, share repurchases, and what we believe are attractive and exciting reinvestments back into our businesses.

As is my custom, I'd like to take this chance to thank the Callaway Golf team for delivering these results. The team should be proud of what we've 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 our product Kings was front-half loaded this year and quarterly comparisons should bear this in mind. In the US, our revenues were up 14.7% for the quarter and were up 29.4% year-to-date. These results were driven by continued strong market conditions, double-digit growth in our core equipment businesses, as well as the addition of the TravisMathew brand, which is performing at an exceptionally high level.

Looking at our equipment business, our year-to-date hard goods market share, according to Golf Datatech, is 24.9%, down a 110 basis points versus last year. According to Datatech, we remain number one in total clubs, woods, irons and putters. In golf balls, we remain the number two brand with 16.5% dollar share, up 250 basis points year-over-year. We are showing strength across our entire line with very strong revenue growth in irons and golf balls, and we continue to have a strong performance in the woods category with Rogue is the number one selling model year-to-date. Additionally, market conditions in the US continue to be favorable with 1% growth for the quarter and 7.3% growth in the market year-to-date.

Turning to Page 6. Our Asia business had a solid quarter with constant currency revenue growth of 3% in Japan and 2% in Rest of Asia. Year-to-date, our revenues in Japan are up 21.5% and Rest of Asia is up 20.6%, again on a constant currency basis. This is being driven by continued brand strength along with market conditions that exceeded expectations during the first half of this year. Our slower revenue growth during Q3 was expected based on our launch timing. Market conditions slow during the quarter, but at this point I would not read too much into this.

In Japan, our year-to-date hard goods dollar market share was 18%, down 230 basis points. This puts us as a strong number two in the market. As in the US, we are seeing strength across the entire product line, but with particularly strong performance in the irons category. Field inventories remain in line and should finish the year in this manner. The Japan team has been investing in capabilities to launch OGIO and TravisMathew in this market with good progress and modest revenue expected in 2019.

Moving to Page 7. In Europe, the team had another solid quarter with constant currency revenues up 3.1% for the quarter and 2.4% year-to-date. Market conditions have been choppy in this region with year-to-date through September market growth of 3.1% in the UK, slowing during the latest quarter, and minus 2.1% year-to-date through August for Greater Europe. A lot of this is weather related with the northern countries in this region experiencing a wet and cold spring, followed by an uncomfortably warm summer. For Europe as a whole, through August we remain the number one hard goods brand with a hard goods share of 23.6%, down versus last year, but in line with our expectations and trending positively.

During the quarter, one of our largest UK customers' American Golf entered administration, resulting in a bad debt charge for the quarter and, of course, we have stopped trading with them as we work through this situation. American Golf has been a significant customer for us in the UK, but it's been highly leveraged and thus financially challenged for some time. Another party has now purchased the company and we are in discussions with them regarding how to proceed with no decisions made at this point. This situation negatively affected Q3 and could have a negative impact on the balance of the year in the region, but not in the matter that we view as material on a consolidated basis. We are sure of its impact for 2019 at this point. Any business there such as this is always disappointing, but on the positive side American Golf was overleveraged and thus this resolution will most likely be healthy for the UK market overall in the long run.

The European team has also been investing in resources to launch OGIO and TravisMathew in their markets with nice progress being made.

On the product side, not much to report this quarter. As stated previously, most of our product launches occurred during the first half of the year with significantly less new products being launched in the second half. We are pleased with our products overall have resonated the marketplace and our market positions. Profitability in our clubs, as well as our gear and accessory business segments were up nicely year-over-year.

Our ball business continues to deliver strong growth, but as noted during our last call, profitability is down versus last year. This is due to increased advertising spends during Q3 and year-to-date manufacturing challenges, which have negatively impacted gross margins as we are significantly reinvesting in our Chicopee golf ball facility. This reinvestment will deliver long-term benefits in quality, capabilities and capacity. We remain very optimistic on this program. And our new product pipeline is strong and we have a lot more to say about this on our next call. Both the TravisMathew and OGIO acquisitions are performing very well.

In conclusion, we're having an excellent year. As shown on Slide 8, we are once again raising our full year revenue and earnings guidance. These results have delivered -- will be record revenues, operating income and EBITDA. We are also reinvesting in a manner that we believe is best for the long run. We remain optimistic and focused on long run sustainable performance and shareholder value.

Brian, over to you.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

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. The investments we have made in our core business over the last couple of years are beginning to show benefit, and the OGIO and TravisMathew businesses continually and/or exceed our expectations.

Overall, we had a very strong first nine months for 2018, setting records for net sales and earnings. Our net sales for the first nine months increased in all operating segments, in all major regions and across all major product categories. We are enjoying the macro tailwind that we are experiencing this year. The golf industry, as a whole, has been strong in many of our key markets, including the US where hard goods grew approximately 7% through September.

Foreign currency has positively impacted our net sales by $15.6 million for the first nine months. Our 2018 year-to-date results were also positively impacted by the lower tax rates, resulting from the 2017 Tax Cuts and Jobs Act.

In evaluating our results and forecasts, you should keep in mind some specific factors that affect year-over-year comparison. First, as we have been discussing all the year, our product launch cadence was front-loaded in 2018 compared to 2017, which can affect quarterly comparisons. Second, the TravisMathew acquisition occurred in August 2017. As a result, that business was only partially included in our results for the third quarter and first nine months of 2017. Third, as a result of the OGIO and TravisMathew acquisition, we incurred some non-recurring deal-related expenses. When discussing our 2017 non-GAAP results today, we exclude the non-recurring deal-related expenses and that is how we evaluate our performance. Fourth, during the fourth quarter of 2017, we've recorded a net $3.4 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 excluded from our 2017 non-GAAP results.

With that overview on mind, I will now provide some specific financial results. Turning to Slide 11, today we are reporting consolidated third quarter 2018 net sales of $263 million compared to $244 million in the third quarter of 2017, an increase of 8% and a record for net sales in the third quarter. The significant improvement was primarily due to a 29% increase in the gear, accessories and other categories, driven by the addition of the TravisMathew business in August 2017, a 14% increase in our golf ball business, driven by our new Chrome Soft golf balls, a 28% increase in our putter business, driven by the success of our new Odyssey putter introductions, and a 7% increase in the irons category, driven by our Rogue line of irons.

Foreign currency negatively impacted international net sales by $1 million in the third quarter. Excluding the TravisMathew business, our core business net sales increased 2.7% for the third quarter of 2018 compared to the third quarter of 2017. As you can see on Side 11, gross margin was 43.9% in the third quarter of 2018 compared to 43.1% in the prior year. The 80 basis point increase compared to 2017 was primarily driven by increased average selling prices and favorable product mix related to the TravisMathew business and was partially offset by higher product costs due to more technologically advanced products.

Operating expense was $105 million in the third quarter of 2018, which is a $6 million increase compared to $99 million in the third quarter of 2017, driven by a full quarter operating expenses related to the new TravisMathew business as compared to a partial quarter in 2017 and also variable expenses related to the higher net sales in the quarters. Operating expense as a percent of net sales was 39.8% in the third quarter of 2018 compared to 48.6% for the same period last year.

Operating income increased 77% to $11 million in the third quarter of 2018 compared to an operating income of $6 million in the third quarter of 2017. When excluding the non-recurring acquisition expenses, non-GAAP operating income for the third quarter of 2018 increased 14% compared to 2017 non-GAAP operating income of $9 million. Other income was $400,000 in the third quarter of 2018 compared to other expense of $1 million in the prior year. The higher other income in the third quarter of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017.

Fully diluted earnings per share was $0.10 or 97 million shares in the third quarter of 2018, a 100% increase compared to non-GAAP earnings per share of $0.05 for the third quarter of 2017. On a GAAP basis, 2017 third quarter fully diluted earnings per share was $0.03.

Turning now to Slide 12, we will now discuss our September year-to-date 2018 results. Today, we are reporting consolidated first nine months 2018 net sales of $1.062 billion compared to $857 million in the first nine months of 2017, an increase of $205 million or 25% and a record for net sales in the first nine months. The significant improvement was primarily due to a 43% increase in the gear accessories and other category as a result of the TravisMathew business, a 34% increase in the irons category, driven by our Rogue line of iron; a 22% increase in our golf ball category, driven by our new Chrome Soft golf ball; as well as a 21% increase in putters and a 5% increase in wood. Excluding the TravisMathew business, our core business net sales increased 17.5%. Foreign currency positively impacted international net sales by $16 million in the first nine months.

As you can see on Slide 12, gross margin was 47.9% in the first nine months of 2018 compared to 46.8% in the prior year. The 110 basis point increase compared to 2017 reflects increases in average selling price, product mix related to the TravisMathew business and the favorable impacts of foreign exchange translation on net sales, all of which was partially offset by higher product costs due to increased technology in the newer products.

Operating expense was $337 million in the first nine months of 2018, which is a $36 million increase compared to $301 million in the first nine months of 2017, driven by the addition of a full quarter of operating expenses related to the TravisMathew business, variable expenses related to higher net sales in the core business, expenses related to continued reinvestment in the core business, and a negative impact of foreign exchange. Operating expense as a percent of net sales was 31.8% in the first nine months of 2018 compared to 35.2% for the same period in 2017.

Operating income was $171 million in the first nine months of 2018 compared to operating income of $99 million for the same period in 2017, an increase of 72%. Excluding the non-recurring acquisition expenses from 2017, non-GAAP operating income for the first nine months of 2018 increased $62 million over 2017 non-GAAP operating income of $109 million, an increase of 57%.

Other expense was $2 million in the first nine of 2018 compared to other expense of $8 million in the prior year. The lower expense in the first nine months of 2018 resulted primarily from hedging gains in 2018 versus losses in 2017.

Fully diluted earnings per share was $1.37, or 97 million shares in the first nine months of 2018, a 121% increase compared to earnings per share of $0.62 for the first nine months of 2017. Excluding the non-recurring acquisition transaction expenses from 2017, fully diluted earnings per share for the first nine months of 2018 increased 99% compared to non-GAAP earnings per share of $0.69 for the first nine months of 2017.

Turning now to Slide 13. I will cover certain key balance sheet and cash flow items. As you can see, our liquidity continues to improve. Available liquidity, which represents additional availability under our credit facilities plus cash on hand was $330 million at the end of the third quarter as compared to $195 million a year ago. The increased liquidity from our asset-based loans and cash generated from operations was partially offset by our 2017 deployment of capital for the TravisMathew acquisition, stock repurchases, our incremental investment in Topgolf, and our investment in the golf 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 in the core business and growth opportunity.

Our consolidated net accounts receivables were $130 million, a decrease of 15% compared to 2017, driven by launch timing and better collection rates. Also, DSO decreased to 56 days compared to 66 days at the end of September 2017. We remain comfortable with the overall quality of our accounts receivable at this time and we believe we are adequately reserved for the American top accounts receivable, as Chip discussed earlier.

Also displaying on Slide 13, our inventory balance increased by 27% to $237 million at the end of the third quarter of 2018. This increase was due to the increased sales levels, an increase in in-transit inventory and preparation for the upcoming new golf season, and low inventory levels at the end of the third quarter of 2017. We remain comfortable with the quality of our inventory at this time.

Capital expenditures for the first nine months of 2018 were $26 million compared to $17 million in 2017, due mainly to investments in our ball plant.

Depreciation and amortization expense was $15 million for the first nine months of 2018 compared to $13 million in 2017.

Finally, for the third 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'll 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 acquisition and $3.4 million of non-recurring tax expense mentioned above.

As seen on Slide 14, 2018 net sales are estimated to be in the range of $1.230 billion to $1.240 billion, an increase of 17% to 18% over 2017 and $15 million to $20 million higher than our previous guidance. The incremental sales growth versus previous estimate is expected to be driven by increases in the core business, which is currently projected to grow 12% to 13% for full-year 2018 compared in 2017.

The increases in core business are being driven by the Rogue line of irons, Odyssey putters, the new Chrome Soft golf ball and anticipated continued favorable retail market conditions. The company currently estimates the changes in foreign currency rates, which positively impact full year 2018 net sales by approximately $14 million, consistent with our previous estimate.

The estimated full-year 2018 gross margin will be 46.8%, consistent with our prior guidance. We estimate full year 2018 GAAP operating expenses to be $447 million, an increase of $2 million compared to previous guidance, due to an increase in variable cost attributable to the higher sales levels. GAAP earnings per share are estimated to be a $1.01 to $1.05 compared to prior estimates of $0.95 to $1.00. The 2018 figures are based on 97 million shares outstanding. We are also assuming a 21% tax rate for 2018, which includes additional R&D tax credit for 2018 that were not included in our prior estimate.

We estimate our capital expenditures in 2018 to be approximately $35 million to $40 million, generally consistent with our prior estimate of approximately $40 million. Depreciation and amortization expense is estimated to be approximately $20 million in 2018. The estimated adjusted EBITDA to be approximately $153 million, a 53% increase versus 2017 adjusted EBITDA, driven by the core business, the full year of TravisMathew, and favorable foreign currency exchange rate.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Steven Zaccone with JPMorgan. Your line is open.

Steven Zaccone -- JPMorgan -- Analyst

Great. Thanks very much, guys, and congrats on another strong quarter.

Chip Brewer -- President and Chief Executive Officer

Thanks, Steven.

Steven Zaccone -- JPMorgan -- Analyst

Our question is on gross margin. You saw a much better performance on gross margin in the third quarter than expectations. What's driving the embedded guidance for gross margin to decline materially in the fourth quarter to arrive at that unchanged full year outlook? And then along those same lines, can you elaborate a little bit more on the timeline to improve golf ball margins? Fair way to think about how much of a drag these costs are to the gross margin guidance this year in the ball segment overall? And should we expect this margin pressure to alleviate in the first half of next year?

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Sure. Hey, Steve, it's Brian. Primarily, it's a lot -- it is the decrease in the revenue for the fact the decline in gross margin is a lot and there's also some expenses that we shifted from Q3 to Q4 and between the combination you'll just see lower margins in Q4.

Patrick Burke -- Head of Investor Relations

And then maybe -- this is Patrick, just to add there, we just launching less product, so remember the launch product has higher margins, so that mix is -- will hurt Q4 a little bit as well.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Okay. And then on golf ball margin, Steven, just the -- we will see -- we've had some headwind on the golf ball margin this year, which has been related to the capital investment projects that we're doing in Chicopee and those projects are progressing nicely. We saw some improvement during the quarter on the gross margin line relative to previous quarter. So that trend is positive there as we would hope and expect it to be and we will expect on the gross margin of golf ball there to be improvement next year as we work through the capital projects there and that project ramps in transitions into the later stages of its status.

Steven Zaccone -- JPMorgan -- Analyst

Great. Thanks very much, guys.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Thank you.

Operator

Your next question comes from Susan Anderson with B Riley. Your line is open.

Susan Anderson -- B Riley -- Analyst

Hi. Good evening. Nice job on another really good quarter. I was wondering if maybe you could touch a little bit more on the international performance. I think maybe you're just talking about Japan when you tell you said you felt like it was kind of a one-quarter thing, but maybe just talk about the slower growth that we're seeing across all the regions and then a little bit more on the UK bankruptcy and how they should impact you guys over the next year?

Chip Brewer -- President and Chief Executive Officer

Sure, Susan. So in Japan, they've had an excellent year and we expected performance to slow in the quarter, that market did slow during the quarter and the reason I'm saying, don't read too much into that is, that is a relatively smaller quarter, it's very sensitive to which products launch in different times. And last year Q3 they had some very significant products, one of which was our irons launched in that market, which drove significant growth in Q3 in Japan in 2017 over 2016.

When you look at the results in 2018 Q3, they're down meaningfully over 2017, but they are equal to where it was in 2016. So, it's one of those issues that Japan, I think it's a lot of launch timing relative to the specific quarter and not a lot to read into that.

Our business continues to perform very well there. The market fundamentals are very solid. And as mentioned and I think it's very important that the inventory levels there are in good shape and we anticipated it will end the year in good shape. So, big picture, I like where we stand and where the market is overall.

The UK, or Europe in general, has been a slower market than the Rest of the world this year, some of that, of course, is weather related, I'm sure some of it is also macroeconomic headwinds, they're a little more specific to that market. If you step back a year ago, that market was the fastest growing market on the international stage. So, it's anniversarying a more the tough year too, because it grew significantly in 2017. And the -- at this point, the American Golf situation is worth noting, hence I brought it up, but we don't think it will be a material factor for us certainly within our guidance for the balance of this year and, at this point, I don't think it's a material headwind for us into next year just, but worth noting is the only reason we brought it up.

Susan Anderson -- B Riley -- Analyst

Great. That's very helpful. And then just one more, if you can maybe talk about across the hard goods categories, the unit growth versus the dollar growth, just kind of the difference is out there?

Chip Brewer -- President and Chief Executive Officer

I don't know that I have enough specific information in front of me to go category by category on that. I believe we saw a nice unit growth this year across hard goods, in general, but that's partially because it was a very strong iron and wedge year in total hard goods. So, you see some nice growth there. And then.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Both volumes and average selling prices go up across the board for woods, irons, putters and balls on a year-to-date basis.

Chip Brewer -- President and Chief Executive Officer

And Brian, your comment is on Callaway specifically, correct?

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Yes.

Chip Brewer -- President and Chief Executive Officer

Right. Does that answer your question, Susan?

Susan Anderson -- B Riley -- Analyst

Yeah. That's helpful. Thanks so much. Good luck next quarter.

Chip Brewer -- President and Chief Executive Officer

Okay. Thank you.

Operator

Your next question comes from Dave King with ROTH Capital. Your line is open.

Dave King -- ROTH Capital -- Analyst

Thanks. Afternoon. First, maybe following up on the ball margin line a questioning a bit. Once you get the Graphene ball yield issues behind you, is it fair to assume that the ASP increases on those should more than cover the increased product cost associated with it?

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Dave the -- on that specific product, it's going to be a little bit volume sensitive, but it -- we hit our volume goals? Yes, it will.

Dave King -- ROTH Capital -- Analyst

Okay. That's good to here. And then, on the slower industry growth and following up on that line of questioning as well I guess, specific to the Q4 revenue guide, I guess what's that reflect in terms of industry growth? And how should we be thinking about the growth for Callaway once you normalize for product launch timing if you got that again? Thanks.

Chip Brewer -- President and Chief Executive Officer

Obviously, we're very late into the year, so as we go through our forecasting process, it's a little less dependent on estimations of market conditions. The market's been fundamentally strong and so we are anticipating that that will maintain itself and it will see continued good market conditions, flat-to-up low, single digits in the quarter that we're in right and going forward.

Dave King -- ROTH Capital -- Analyst

Okay. So then is that fair to assume then as we -- I know it's a bit early in terms of thinking about next year, but, maybe, perhaps helped by the strong product pipeline, is it fair to assume further industry growth next year based on everything you can see with your crystal ball today?

Chip Brewer -- President and Chief Executive Officer

I think that the industry is in a very solid fundamental position if you -- it's a theme we've talked about now for two years on is that the fundamentals of the golf industry are significantly improving, it's almost structurally better now and consumer sentiment goes up and down a little bit depending on near-term events and such, but it's been -- it's still at very good level. So, yeah, our outlook remains positive.

Dave King -- ROTH Capital -- Analyst

Okay. Great to hear. Thanks for taking my questions.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Brett Andress with KeyBanc. Your line is open.

Brett Andress -- KeyBanc Capital Markets, Inc. -- Analyst

Hey, good afternoon. Just building -- good afternoon, yeah. Just building on that industry question again. Obviously, your wholesale shipments are implied down meaningfully in the fourth quarter, the industry comparisons do get easier, your own Callaway specific retail comparisons also get easier. So I guess are you just taking a significantly more conservative view on your share losses in the fourth quarter knowing that you're not going to launch product or are you -- it's more strategic to exit this year with a much cleaner channel inventories?

Chip Brewer -- President and Chief Executive Officer

Well, what we're doing Brett is definitely disciplined. So we told everybody all year long it was going to be our product cases very heavily focused on the first half and that the second will be more challenged from that perspective. We think doing that is in the best interest of our brand and our business over the long run. If you look at full year or any metric over any reasonable period of time beyond the quarter that we're being in the market by a meaningful amount and -- but in the quarter we think we may not do that and I wouldn't call it overly conservative or overly aggressive, it's our best estimate of where we will be at the end of the year. It is indeed part of a long-term plan.

Brett Andress -- KeyBanc Capital Markets, Inc. -- Analyst

Got it. And I also wanted to ask on tariffs. So which three went into effect in September and are there any items or components that you source from China that we should be thinking about in this new list or any way to quantify an impact for 2018 and 2019?

Dave King -- ROTH Capital -- Analyst

Yes. Brett, it's largely headwear and bags that are affected, right now, and it's only nominal for 2018. Going into 2019, the rate is scheduled to go from 10% to 25% and that would have an impact on us. We currently estimate about $4 million to $5 million (ph) effect for next year.

Brett Andress -- KeyBanc Capital Markets, Inc. -- Analyst

Okay. And then if I could squeeze just one more, more of a housekeeping, can you give us some more detail on TravisMathew in the quarter, kind of maybe what the revenue number was there?

Chip Brewer -- President and Chief Executive Officer

I'd rather breakdown by quarter, I'll just say that we're still on track to hit about the $80 million for the year, they're trending toward that.

Brett Andress -- KeyBanc Capital Markets, Inc. -- Analyst

All right. Awesome. Thank you.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Michael Swartz with SunTrust. Your line is open.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey. Good evening, guys.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Hey, Michael.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, Chip or, I guess, Brian, just as I look at the gear business in the quarter, margins were down, it was like pretty significantly year-over-year if I'm doing the math right and I think you had showed some pretty good year-over-year growth in prior quarters obviously with the mix of TravisMathew in there. Is there something we should be thinking of to the -- specific to the quarter that caused a little bit of that compression?

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

In term of operating margin?

Chip Brewer -- President and Chief Executive Officer

Yeah, operating margins of the tables.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Or the gear business, yeah.

Chip Brewer -- President and Chief Executive Officer

(technical difficulty) up slightly.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, Then I'm probably doing math wrong. Because I think last year you had some embedded costs in there due to the -- it was due to the OGIO and the TravisMathew acquisition, so I was backing those out and looking at it ex-costs and on that basis it looks like it was down, but I'm may be wrong on that.

Chip Brewer -- President and Chief Executive Officer

Yeah. I think, Michael, those costs were in the corporate line, so they work in the segment profitability. So, it's probably -- it was already backed out. So I think we're up slightly in gear profit and that's more of Travis business, right, versus last year.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. Perfect.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

We're showing '17 was 11% and 2018 was 11.2%.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. That's what I have. And then just in terms of the balance sheet, you've delevered pretty aggressively over the past couple of quarters. So, just with the cash flow profile of this business going forward being a net zero debt position, how do we think about usage of cash going forward? And maybe, Brian, what's the maintenance level of cash you keep on -- you'd like to keep on hand on the balance sheet?

Chip Brewer -- President and Chief Executive Officer

I'll take it, Michael, at least the first part of that. So what -- we've been able to find attractive opportunities in areas to reinvest back in the business, so that is then first and foremost, our most desired and successful use of cash. We also look for outside investment opportunities, such as OGIO's and TravisMathew. We're going to be strategic and disciplined about that, but it is certainly part of our growth strategy and we believe we have the capital structure to take advantage of an attractive opportunity if and when it happens to develop and then, of course, dividends, share buybacks, investments in TopGolf, et cetera, have also been part and parcel of how we deployed capital and we'll continue to be in the mix there. But first and foremost have been the investments back into the putter (ph) business and we're pleased with how they've delivered in both driving scale and operating leverage.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

And then in the part two of your question about how much cash we want to keep on hand, it all varies, but we need $50 million to $60 million around the globe, just because we have operations in so many different places. And so, that's probably where you always see and part of it depends on the level of our credit facility, how we're borrowing and seasonality of those. So, you'll see it fluctuate during the year.

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, great. Thank you.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Dan Wewer with Raymond James. Your line is open.

Dan Wewer -- Raymond James -- Analyst

Yes. Thanks. Just want to ask you about pricing for drivers. I'm hearing that one of your competitors' new product line is going to have an introductory price of $5.49. It's great that the industry has been able to continue to take price with that and kind of blow back from the consumer, but is there a point where you think pricing to get too high?

Chip Brewer -- President and Chief Executive Officer

Dan, pricing is an interesting animal and certainly we can't get too high at some point. I don't know when that might be. It's is very related to how much utilities in the product. What -- really we can't talk about DSPD (ph) they are not only superior and pleasingly different product. If you build significantly better mousetrap, the price -- our consumers are not that price sensitive than we've certainly been able to take price over the last several years as we've delivered great product. But you can't do it unless you actually deliver. And so, certainly something that we'll continue to evaluate and it's been a positive for the industry over the last several years.

Dan Wewer -- Raymond James -- Analyst

Second question I have is regarding acquisitions. It's almost 15 months since the TravisMathew purchase. I would have thought that you would have completed another deal by anyhow. Just curious as to what you're enthusiasm is for acquisitions going forward?

Chip Brewer -- President and Chief Executive Officer

Our enthusiasm is the same as it has been. We're not under a timetable here. We're going to be disciplined in this process. We feel like we're both fortunate and also must have done some things right and the acquisitions we've done are working. And we're determined to continue on that track record. So it's clearly part of our strategy, but there is no timetable and you can expect these types of things to be lumpy and us to remain disciplined on that.

Dan Wewer -- Raymond James -- Analyst

And the last question I have regarding TravisMathew and OGIO, you noted that you're rolling out into Japan, as well as Europe, you sounded a bit more upbeat on Europe than Japan at this point. But can you talk about what type of investments you'll need for those two brands to support the international growth? And when you roll that in with your domestic growth objectives for TravisMathew and OGIO, what kind of revenue growth are we thinking going forward? Is this a 20% business growing or at some point does it moderate?

Chip Brewer -- President and Chief Executive Officer

TravisMathew, at some point it moderates. I don't know at what point. We don't see that point in the near future. It's growing at a rate faster than 20% and has for sometime, and we see continued brand strength there. The investments that are embedded in these international growth initiatives for those two brands have been ongoing. They are embedded in our results this year and will continue into next, but we're able to roll those into our general business now and it's again one of the benefits of scale at the moment. And so I just wanted to bring it up in my comments to identify that it is one of those things that we are investing in. It's essentially a use of capital. The initial revenue estimates are going to be modest, but they're going to grow and they're going to grow, we hope, quickly and a reason for optimism in the future on a platform, which is doing pretty well in a TravisMathew brand, which has a lot and lot of potential.

Dan Wewer -- Raymond James -- Analyst

Yup. Great. Thank you.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Rommel Dionisio with Aegis. Your line is open.

Rommel Dionisio -- Aegis Capital Corporation -- Analyst

Yeah. Thanks. So I would just wanted to drill down in the putter segment, which has been strong all year. Obviously, you guys started -- the Odyssey brand is doing well, that's the bulk of it, but how is Toulon doing? Could you just give us an update there? I think, it's been two years since the acquisition. And could you just update us on the success you're having taking on Scotty Cameron in that ultra premium segment of that market? Thanks.

Chip Brewer -- President and Chief Executive Officer

Well, this is Chip again. The putter category, thank you for recognizing that, we've had a great year and good momentum in that category. So very pleased with that. The Toulon brand is gaining strength, but it's still quite small. It is Less than 10% of our putter business. It's probably growing very quickly, but still a very smaller percentage of our total putter market. I'm more pleased with what I see from the brand and strength of that product line going forward. I think that positions it well. But if you look at the overall putter category, Scotty Cameron still has a dominant position in the milled premium side and we have a dominant position in the technology facings (ph) or base premium side of business.

Rommel Dionisio -- Aegis Capital Corporation -- Analyst

Okay. That's helpful. Thanks very much.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from John Kernan with Cowen. Your line is open.

Krista Zuber -- Cowen & Company -- Analyst

Good afternoon. This is Krista Zuber on for John. Thanks for taking our questions. Just a couple here. First, you've kind of highlighted some of the product cost pressures as a partial offset to gross margin in Q3. I was just wondering if you could sort of shed some light on how we should think about that as we head into next year?

Chip Brewer -- President and Chief Executive Officer

I think what we meant by product cost pressures were the fact that we are designing more and more complicated high-end products. So following up on how do you raise average selling prices, will you make better product and in making better product is often harder to make and I think that's what we're referring to. At this point, we don't see any significant commodity inflation pressures in the product cost side.

Krista Zuber -- Cowen & Company -- Analyst

Great. Thanks. And then on the inventory front now that you've lapsed TravisMathew, ideally kind of where do you think, I guess, your inventory levels should sort of fall out for 2018?

Chip Brewer -- President and Chief Executive Officer

Where they should fall out? Overall, with the -- as our business continues to increase to 1.5 (ph) higher levels of inventory to go with the higher sales. If you look at the increase year-over-year, part of that is -- last year, we think we have lower -- two lower inventory categories to service the accounts. And then this year, we also have some additional in-transit inventory that is in comparison to the prior year. If you look at the inventory to percent of sales, it's in line with our historical numbers and I think we hope those trends continue.

Krista Zuber -- Cowen & Company -- Analyst

Terrific. Thanks. And then my last question is just on the launch schedule for fiscal '19 without going obviously into product specifics for competitive reasons, is there any color you can provide on sort of the launch cadence? Is this going to be more of a 2018 cadence or sort of reverting back to the pace that you had in, I believe, 2016? Thank you.

Chip Brewer -- President and Chief Executive Officer

Good question. Unfortunately, you are one quarter ahead of us on that and I just going to overlay that one other than to tell you that we're excited about the product line that we'll be talking a lot more about on the next call.

Krista Zuber -- Cowen & Company -- Analyst

Fair enough. Thank you.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from George Kelly with Imperial Capital. Your line is open.

George Kelly -- Imperial Capital -- Analyst

Hi, guys. Couple of questions for me. So first back to TravisMathew going international. Is that all happening in 20 -- I mean is Europe and Japan, will those both be in 2019?

Chip Brewer -- President and Chief Executive Officer

Yes. Sure, George. We probably sell a little bit there right now, but it's very small. Depending on the market, you have to get a distribution base set up with -- in those various markets had to work through where they previously worked through distributors and now we're running it through subsidiaries and that was a transition originally. And then in Asia, you have to develop sizing options, et cetera, specific for that market, sometimes some small stylistic differences. And then showrooms distribution systems, et cetera, all those back and work that goes with that. So modest revenue probably did occur this year, it will be a nice percentage gain over that. Next year, probably not meaningful in the whole thing, but long term, it is attractive and we hope will trend toward meaningful.

George Kelly -- Imperial Capital -- Analyst

And in Japan, is it something that you can utilize your existing partnership of your business there, the TSI business?

Chip Brewer -- President and Chief Executive Officer

There are certain assets and certain capabilities that will overlap there and that's a JV. So it does complicated what we can and can't do there or what will choose to do or not do there. But we have scale and capabilities to handle it. And, as mentioned, they are making good progress.

George Kelly -- Imperial Capital -- Analyst

Okay. And then just a couple additional questions on the golf ball business.

Chip Brewer -- President and Chief Executive Officer

Yeah.

George Kelly -- Imperial Capital -- Analyst

What -- so and this has come up in a few questions, but can you quantify the incremental costs this year related to -- and the incremental operating kind of relate -- not the CapEx, but operating costs related to the CapEx projects that you're doing?

Chip Brewer -- President and Chief Executive Officer

The incremental credit cost.

George Kelly -- Imperial Capital -- Analyst

Yeah. (technical difficulty) with the production issues or things that I thought you flagged when there was some added benefit (multiple speakers)

Chip Brewer -- President and Chief Executive Officer

Yeah. No. I totally understand that. We can George, but we're going to choose not to. The -- but you can see it with just a quick calculation at are operating margins. That's all we reveal are down in golf ball on a year-over-year basis and I can tell you a significant part of that is related to what the capital improvement projects.

George Kelly -- Imperial Capital -- Analyst

Okay. And then, I guess what I'm trying to understand is it, most of that's just sort of -- would be one-time, I mean that's going to go away at some point?

Chip Brewer -- President and Chief Executive Officer

Yes, some of it is going to go away, George. It gets a little complicated, because we're also going to add D&A as these capital projects go in, right. So our fixed cost base goes up, but we're building scale in it and our gross margins should recover. And I -- only the point, you too, that we're very optimistic and very positive about the project is going to increase our capacity or capabilities, our quality of that facility and we believe we will return to very attractive profitability metrics as we work our way through that, hopefully, with increased scale.

George Kelly -- Imperial Capital -- Analyst

That's great. And then last question for me. Once this -- the ball CapEx is -- the major project is complete, what would you say maintenance CapEx is on a go-forward basis, maybe as a percent of revenue or just how do you think about maintenance CapEx?

Chip Brewer -- President and Chief Executive Officer

We don't have that for you right now, George, but we're working on that and let us take that as an action item to see if we can determine something for you there.

George Kelly -- Imperial Capital -- Analyst

Got you. Thank you.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Last question we have time for today comes from Casey Alexander with Compass Point. Your line is open.

Casey Alexander -- Compass Point -- Analyst

Hi. Good afternoon. Real quick, could you give me the CapEx and depreciation numbers again?

Chip Brewer -- President and Chief Executive Officer

For the (multiple speakers)

Casey Alexander -- Compass Point -- Analyst

The forecast.

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

We had $35 million to $40 million for CapEx and then about $20 million for D&A.

Casey Alexander -- Compass Point -- Analyst

Okay. Great. Thank you. When you talked about industry year-to-date growth, how would you break that down in terms of how much growth has come from average selling prices versus how much growth has come from unit growth?

Chip Brewer -- President and Chief Executive Officer

Good question. You have that, Patrick?

Patrick Burke -- Head of Investor Relations

I got dollar growth at 7.3% and then unit growth at 2.7%.

Chip Brewer -- President and Chief Executive Officer

That's correct, according to the Datatech.

Patrick Burke -- Head of Investor Relations

According to Datatech further you have.

Chip Brewer -- President and Chief Executive Officer

(inaudible)

Casey Alexander -- Compass Point -- Analyst

Okay. And then, Chip, this one is a little bit more conceptual, because I know that you guys don't do anything without having a metric applied to it and one of the competitors recently announced that they are leaving the PGA Merchandise Show, which is probably the single most expensive one line item of the year. And I know at the end of the PGA Merchandise Show after you've moved all the people, all the equipment, all of the props and paid the bills, you know how much -- you can quantify how much it costs. How do you quantify what you get out of it?

Chip Brewer -- President and Chief Executive Officer

Yeah. Casey, good question and I don't think you can reliably quantify what you get out of it, it is not -- you don't write a lot of orders at the PGA Show than you more -- and we have such good reach and scale now that we would reach customers without it. But it is an annual gathering of the industry, it is supported and controlled by the PGA of America, which is a very important partner of ours. The Green Grass Channel is our largest sales channel. We view it very importantly and different companies are going to view the same data different ways, interestingly sometimes they might change their mind and on where their individual circumstances are, but we view it as long-term strategic to be there and furthering our position in the industry, but -- and the strength of our commitment and relationship with the -- particularly that PGA professional and the Green Grass Channel.

Casey Alexander -- Compass Point -- Analyst

Well -- and I appreciate that. But as we are -- I mean it used to be the forum for the platform to launch new product and now the new product cadence has moved all over the calendar and you have highly sophisticated sales teams that are interacting with the PGA professional 12 months out of the year. And so, I just begin to wonder when that incremental cost does seize to be worth it and when you start to believe that you are subsidizing a sales opportunity for sort of the mom and pop neighborhood to try to develop products that takeaway your business?

Chip Brewer -- President and Chief Executive Officer

I see your point there, Casey. We're committed to it and going to be at the 2019 PGA Show and we're proud of that and we'll always look at what competitors are doing, but I would put our results against most right now and we'll evaluate it ongoing, but right now we think it's a good move and we're going to try to use it to the advantage of the company and our brand and shareholders.

Casey Alexander -- Compass Point -- Analyst

All right. Great. Well, thank you for taking my questions. I appreciate it.

Chip Brewer -- President and Chief Executive Officer

Sure thing, Casey. Thanks for calling in.

Operator

And ladies and gentlemen, that's all the time we have for questions. I'd now like to turn the call back over to Mr. Chip Brewer.

Chip Brewer -- President and Chief Executive Officer

Well, thank you, everybody, for calling in. We appreciate your attention on the call and all the good questions. We're proud of the results and look forward to talking with you again early next year. Have a great rest of the year.

Operator

Ladies and gentlemen, this does conclude today's call. You may now disconnect.

Duration: 59 minutes

Call participants:

Patrick Burke -- Head of Investor Relations

Chip Brewer -- President and Chief Executive Officer

Brian Lynch -- Senior Vice President, Chief Financial Officer and General Counsel

Steven Zaccone -- JPMorgan -- Analyst

Susan Anderson -- B Riley -- Analyst

Dave King -- ROTH Capital -- Analyst

Brett Andress -- KeyBanc Capital Markets, Inc. -- Analyst

Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst

Dan Wewer -- Raymond James -- Analyst

Rommel Dionisio -- Aegis Capital Corporation -- Analyst

Krista Zuber -- Cowen & Company -- Analyst

George Kelly -- Imperial Capital -- Analyst

Casey Alexander -- Compass Point -- Analyst

More ELY analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.