Callaway Golf Company

Ladies and gentlemen, thank you for standing by and welcome to the Calloway Gold Company third quarter 2020 financial results conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised, today's conference is being recorded. If you require any assistance, press star 0 for the operator. It's now my pleasure to hand the conference over to Head of Investor Relations, Patrick Burke. Please go ahead.

Thank you, Holly, and good afternoon, everyone. Welcome to Callaway's third 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 third quarter 2020 financial results. A copy of the press release and the associated presentation are available on the investor relations section of the company's website at ir.callowaygolf.com. 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 have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from 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 that in connection with our prepared remarks, there's 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 Webcast and Presentations tab. Also in 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 slides. I would now like to turn the call over to Chip.

Thanks, Patrick. Good afternoon, and thank you all for joining today's call. Starting on page five of the presentation, we are pleased to be with you today to discuss our Q3 results, results that have exceeded our expectations and strengthened our confidence in the future. This call will allow us to do a deeper dive and answer questions regarding the results, as well as share some views on what we believe is a positive outlook for our business. With the recently announced plans to merge with Topgolf, we are naturally anticipating further questions on that subject as well. To the degree we can, we won't certainly answer these questions, but due to time constraints, the primary focus of this call is intended to be the Callaway Golf business. To aid analysts and, by extension, investors in further understanding the Topgolf business, along with the strategic and financial merits of the merger, we are planning a two-hour Topgolf deep dive and analyst presentation for 11 o'clock Pacific time this Thursday, November 12th. This presentation will include certain key members of the Topgolf management team and will be recorded and posted on our website. Having said this, and turning to page six, let's now jump into our results. As covered in our press release, Q3 represented record results in terms of both sales and earnings. We were pleased with our results in virtually all markets and business sectors. Our golf equipment segment has been experiencing unprecedented demand globally as interest in the sport and participation have surged. We saw strong market conditions in all markets globally. According to Golf Data Tech, U.S. retail sales of golf equipment were up 42% during Q3, the highest Q3 on record. U.S. rounds were up 25% in September and are now showing full-year growth despite the shutdowns earlier this year. We also believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport. Golf retail outside of resort locations remains very strong at present, and barring a shutdown situation, has not been sensitive to the upticks in COVID cases. Inventory golf retail is at all-time lows, and it's likely these low inventory levels will continue into next year. Callaway's global hard goods market shares remain strong during the quarter. We estimate our U.S. market share is roughly flat year over year. Our share in Japan is up slightly, and our share in Europe is down slightly. On a global basis, I believe we remain the leading golf company in terms of market share and total revenues, and the number two ball company. In the U.S., third-party research showed our brand to once again be the number one club brand in overall brand rating, as well as the leader in innovation and technology. Over the last several years, we have shown resilience with these important brand positions. We have also started to show our 2021 product range to key customers and are receiving strong feedback. Turning to our soft goods and apparel segment, with total revenue only down 3.4% year over year, this segment also experienced a rapid recovery in demand during the quarter. The speed and magnitude of the recovery exceeded our expectations. Like our golf equipment business, this segment appears to be well positioned for both the months and years ahead, both during the pandemic and after. Looking at individual businesses in this segment, Both our Travis Matthew and Callaway-branded businesses experienced significant year-over-year growth during the quarter. Jack Wolfskin was down year-over-year, but only 16% on a revenue basis, with improved trends continuing into October. The hero of the soft goods and apparel segment is certainly ECOB, a channel that was strengthened by investments we made over the last several years. As a result of these investments, we were able to deliver 108% year-over-year growth in this channel during the quarter. Ecom is now a significant portion of the channel mix of this segment. We believe our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward. Long-term, we continue to expect our apparel and soft goods segment to grow faster than our overall business, and with that growth, to deliver operating leverage and enhanced profitability. And although the pandemic delayed our efforts, we still believe we'll be able to deliver 15 million of synergies in the segment over the coming years. During the quarter, we also made good progress on key initiatives, including the transition to our new 800,000 square foot Super Hub distribution center located just outside of Fort Worth, Texas. We are now completely consolidated into this new facility. We also made further progress in our Chicopee golf ball facility modernization with productivity rates in this plant ramping positively during the quarter. The primary investment phase on both of these significant projects is behind us now. Looking forward, we are in a strong financial position and are pleased with the pace of our recovery and the business trends we have seen. With the resurgence in the virus, there clearly could be some volatility over the next few months. portions of Q4 are likely to be at least partially impacted by the increase in restrictions being put into place globally. Fortunately for us, these are low-impact months for our golf equipment business, and we currently expect to continue to benefit from increased year-over-year demand. In our apparel and soft goods segment, the impact will be larger than our golf equipment business, But these businesses, too, are fortunate to be well positioned in this environment and also benefit from strong e-com capabilities, which should offset some portion of any potential negative impacts in markets where in-store shopping might be constrained. We also benefit from global scale and diversity across all of our segments. As demonstrated by our Q3 results, we are fortunate in that our principal business segments are well positioned for consumer needs and trends both during the pandemic and afterwards. In addition, we are confident that we have both the brands, human capital, and financial strength necessary to not only weather this storm, but to also perform well during it and to emerge stronger than when we entered the crisis. In closing, while we are pleased with our recent results and outlook, the safety and health of the company's employees customers, and partners continues to be paramount in our minds. As we operate our businesses, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment, and other safety precautions. In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front lines to protect, serve, and care for the rest of us. Brian, over to you. Thank you, Chip.