It seemed certain that Robert Julian’s career would end where it began: at a large industrial manufacturer.
After all, he’d held a series of progressively more responsible positions at several companies of that description: Rockwell Automation, Honeywell, Cisco Systems, Thermo Fisher Scientific, and Legrand North America, where he served as CFO North America for the French electrical and digital infrastructure firm.
Like many rising finance executives, he took an opportunity to grab his first corporate CFO role at a somewhat smaller company, Lydall, which engineers specialty products for the thermal/acoustical and filtration/separation markets.
A nice career arc, to be sure. But, how did this person wind up as the finance chief of a consumer products company?
It was a case of avocation turned vocation when Julian landed at Callaway Golf, a leading golf equipment manufacturer, in May 2015. “I love golf,” says Julian, 54, who started playing in his late 20s and finds time for 60 to 70 rounds per year, including annual trips to top U.S. and international golf destinations. “I tell people all the time that if I were to win the Lotto Super Jackpot on Saturday, I would still happily show up for work on Monday. No doubt.”
Fortunately, switching from industrial to consumer products manufacturing was not nearly as mind-bending as moving to, say, a software firm would have been. Julian says he found his new position “surprisingly familiar,” making the transition easier than he thought it might be.
Both the golf industry generally and the golf equipment sector specifically face some issues that may pose challenges to their chances of future success. In a recent conversation with CFO, Julian discussed those as well as other industry trends and how he approaches finance — and how he was able to snag the job at Callaway. An edited version of the conversation follows.
With the Olympic Games fresh in our minds, let’s start with this: In Rio golf was an Olympic sport for the first time in 112 years. What’s your opinion on the value of that to the golf industry?
I would say my opinion has changed somewhat. Initially I downplayed it. It couldn’t be bad for the industry, but I didn’t know how much benefit there would be. The Olympics wouldn’t create a lot of capital or investment in places that don’t have golf, where it’s tough economically to justify it, because it’s not cheap.
But I have to say, after watching the tournament, I feel a bit differently. It was so exciting, and the genuine enthusiasm and excitement that [U.K. gold medal winner] Justin Rose showed was great for the game. Even [American bronze medalist] Matt Kuchar was just beaming afterward and couldn’t stop repeating how proud he was.
Shortly before the Olympics, Nike announced it was getting out of the golf equipment business. How will that impact Callaway?
I hate to say I saw that coming, but I’m not the least bit surprised. And I think it may be overplayed in terms of its impact on manufacturers like Callaway. The truth is, Nike really never had a significant share in golf equipment, not even in the heyday of [Nike-sponsored] Tiger Woods. We should certainly get our fair share of Nike’s equipment business, but there’s not a lot of that to fight over.
I think it does validate the idea that golf equipment manufacturing should probably be left to the experts, the folks who are fully committed and dedicated to engineering and developing superior product, while the companies that are really in the business of selling apparel should stick to that. Under Armor created an example for Nike to follow, because it’s done great selling that stuff without selling equipment.
So Tiger was playing with inferior equipment?
You may remember what [Callaway-sponsored] Phil Mickelson said [in 2003]. [Editor’s note: The choicest Mickelson quote in an interview that sparked a furor was, “Tiger is the only player who is good enough to overcome the equipment he’s stuck with.”]
There’s a lot of talk that, given the limitations on equipment specs imposed by golf’s ruling bodies, the top manufacturers may be nearing the end of their ability to further improve clubs and balls.
My opinion is the opposite of that, and it’s the thing that has surprised me the most since coming into the industry. I’ve always been very curious about manufacturing processes, and I like being on shop floors and seeing how stuff is made. And what the R&D guys are doing, the physics that go into these products, is mind-boggling. I don’t think we’re anywhere near the limit.
We’re always discovering new manufacturing processes, new materials, and new ways to connect materials, even with the welding technology [that exists] now.
Another big developing issue for golf is a shortage of water, especially in the Western United States, that could result in course closings. Is there any talk about that at the company?
Not too much, but my personal opinion is that golf will adapt. I think the golf course architects will figure it out, perhaps design courses that are more like the links courses in the U.K. I’m confident that they’ll come up with something that makes sense, and we will survive and move on.
To someone like me who follows pro golf, an extremely interesting aspect is the player sponsorships. All of the top manufacturers pay an enormous amount of money to players who use their equipment. Can you possibly calculate an ROI on that? It seems you’re just putting that money into a void and closing your eyes and hoping it comes out OK.
Well, that is a fascinating topic for sure.
Here’s what we know. People in the golf industry talk about the “pyramid of influence” — meaning, who consumers pay attention to, to validate their decisions around equipment. And at the peak of the pyramid are the professional golfers. We know there is a direct correlation between our players’ success on tour and our success in the marketplace.
But you’re right. There is some leap of faith as to whether what you invest is going to have a good return. And nobody really knows what to expect. A few years ago when Jordan Spieth came out on tour, there wasn’t a frenzied interest in him. He didn’t meet the typical criteria of what people were looking for — the tall, highly athletic guy who hits the ball 350 yards. Nobody knew he was going to turn into who he is in such a short period of time.
Where does this rank in terms of business questions that the company grapples with?
We have a guy, Tim Reed, who has been around the industry forever and knows more about golf and golf equipment than anybody. He interacts with the players on the equipment and negotiates the terms and conditions of the contracts. There are different ways to structure those deals — some are more fixed in expense, and some are more variable depending on the player’s performance and ranking. It’s complex.
But the person who makes most of those decisions [on whom to sponsor and how much to pay] is our CEO, Chip Brewer. He just has a knack, as well as knowledge and experience. We rely on his judgment more than anything. It’s not scientific. Chip has a feel for it.
Many CFOs and companies these days are basing almost every decision on data. Some will be shuddering when they read that this major aspect of a business is not determined by science.
Data is good. But I think expertise in the field, leadership, commitment, energy, and dedication all come into play.
So, just how did an industrial manufacturing guy get into this consumer products company?
My interest in the Callaway CFO job started almost four years prior to my start date. I was introduced to Chip via telephone by a former colleague of mine, Mark Leposky, who Callaway had hired as senior vice president of global operations.
Three years later, Brad Holiday retired as CFO of Callaway. At that point I reached back out to Chip and wrote him a rather long email expressing my fanatical interest in the job, which, as a golf enthusiast, I considered the best public company CFO job in the world. That got me into the consideration set — with about 100 other candidates!
Even though you play a lot of golf, did learning the business stretch you?
Certain I had to learn the industry, and I’ve spent a lot of time doing that, getting out of the office and traveling all over the world. But I’ve found my [prior experience in manufacturing] to be a big advantage. Some of the companies where I worked were well known for their operational excellence, continuous improvements, and finance functions. I’ve been able to bring a lot of that to Callaway.
Some examples of that?
I introduced a bridge analysis that very precisely isolates the elements that are impacting our results, from changes in volume to changes in price to changes in mix to foreign exchange impact. It is very precise, very sophisticated analytics to help us understand the business and make decisions to change a trajectory or a trend or get a different result. That is probably a little more intense than what [the company] had seen before.
Also, I think the previous philosophy in finance and accounting, even though half of our business is generated outside the United States, was a little too U.S.-centric. I immediately changed the reporting structures and reporting relationships so that our international operations would have more visibility and influence. We also standardized the analytical tools and forecasting cadence so that they do exactly what we do.
Back in the 1990s and early 2000s, golf was booming, in terms of the number of people taking up the game and golf courses being developed. That has run out of steam in recent years. Callaway seems to be doing well from a financial standpoint, but that must have had a big impact.
We’ve had some headwinds, yes, and without them our results would be even better. But last year and this year, the number of rounds played [nationwide] have been up slightly. Nothing to click your heels over, but at least a change in trend.
But if we’re being honest, while the amount of play is up, unit sales of equipment are down. At the same time, there’s been a dynamic where manufacturers like ourselves have been able to get price, which offsets that. There’s also been an adjustment of inventory in the retail channel, where that’s become more rational. That will be a good trend in the long run, although in the short run it’s kind of negative.
As to things that could have been better, one of the biggest impacts to us was foreign currency. While half of our revenue comes from outside the United States, essentially 100% of our costs are in U.S. dollars. We got in the habit last year of reporting our results on a currency-neutral basis. The currency [headwinds] cost us more than $50 million last year.
Even so, the company is on something of a roll. Callaway’s stock is up about 40% in the past 12 months. The company has good analyst ratings, and has beaten performance estimates for the past several quarters. After losing $19 million in 2013, Callaway had two solidly profitable fiscal years. What’s driving all that?
It’s a cliché, but the differentiator is leadership. The big change for Callaway can be traced to Chip’s arrival four years ago. He refocused the company to its core business, which is producing superior and differentiated product.
He’ll tell you that it’s not just one thing, but a symphony. All the pieces have to work together. We’ve improved the product, we dedicated ourselves to unique ways of marketing and advertising, and we rededicated ourselves to the pro tour by doubling the number of staffers there.
What part do you and your team play in this symphony to help facilitate the good financial results?
I may be biased, but I think we play a major role. My primary responsibility is to be a good business partner to our CEO. That means I’m a sounding board, an adviser, and sometimes I play devil’s advocate, all to influence the business decisions we’re making with an expectation to improve bottom-line results. That covers simple tactical things and very complex strategic initiatives.
And it’s not just me and my relationship to the CEO. It’s every finance leader who supports and provides data to a functional leader, whether in operations or marketing or engineering.
It’s well known that Brewer ramped up the allocation to R&D. How do you get confident that you’re allocating the right amount of capital to the various buckets?
I don’t think of capital allocation as expense. I’m looking for the ROI in our ability to grow the top line and bottom line.
I could answer that question relative to capital structure generally. I don’t believe in trying to shoot for an “ideal capital structure.” If you look at our balance sheet right now, we have no long-term debt and we have loads of cash. You certainly won’t hear in any MBA class that that’s an ideal capital structure. And yet we’re not going to borrow money just because it’s cheap, and we’re not going to immediately increase dividends or necessarily buy back stock to manipulate EPS just because we can.
I just feel that you have to run the business for long-term growth and profitability.