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.

We are happy to report record net sales and earnings for the third quarter of 2020. We feel fortunate that both our golf equipment and soft goods businesses are recovering faster than expected as both businesses support healthy, active outdoor lifestyles and activities that are compatible with social distancing. This faster than expected recovery has placed us in a position of strength. Our available liquidity, which includes cash on hand plus availability under our credit facilities, increased to $630 million at September 30, 2020, compared to $340 million at September 30, 2019. We are also excited about our prospective merger with Topgolf, which also provides a healthy, active outdoor activity that is compatible with social distancing. At Callaway, Topgolf merger is a natural fit. With a significant overlap in golf consumers, there should be significant advantages to both businesses through increased consumer engagement, marketing and sales opportunities, and faster growth than could be achieved on a standalone basis. And the best part is that these synergies provide upside to the financial model we provided. The financial merit and returns of this transaction are so compelling, we did not need the synergies to justify the transaction. Growing the Topgolf venue and Top Tracer businesses alone will create significant shareholder value. We look forward to discussing the Topgap business further during the Virtual Investor Conference on Thursday. In evaluating our results for the third quarter, you should keep in mind some specific factors that affect year-over-year comparisons. First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred non-recurring transaction and transition-related expenses in 2019. Second, as a result of the OGO Travis Matthew and Jack Wolfskin acquisition, we incurred non-cash amortization in 2020 and 2019, including amortization of the Jack Wolfskin inventory step-up in the first quarter of 2019. Third, we also incurred other non-recurring charges, including costs related to the transition to our new North American Distribution Center in Texas. implementation costs related to the new Jack Wolfskin IT system, and severance costs related to our cost reduction initiatives. Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is not recurring and did not affect 2019 results. Fifth, we incurred and will continue to incur non-cash amortization of the debt discount on the notes issued during the second quarter of 2020. We have provided in the tables to this release a schedule breaking out the impact of these items on third quarter and first nine months' results, and these items are excluded from our non-GAAP results. With those factors in mind, I will now provide some specific financial results. Turning now to slide 10, today we are reporting record consolidated third quarter 2020 net sales of $476 million. compared to $426 million in 2019, an increase of $50 million, or 12%. This increase was driven by a 27% increase in the golf equipment segment, resulting from a faster than expected recovery and the strength of the company's product offerings across all skill levels. The company's soft goods segment is also recovering faster than expected, with third quarter 2020 sales decreasing only 3.4% versus the same period in 2019. Changes in foreign currency rates had an $8 million favorable impact on third quarter 2020 net sales. Gross margin was 42.2 percent in the third quarter of 2020, compared to 44.9 percent in the third quarter of 2019, a decrease of 270 basis points. On a non-GAAP basis, gross margin was 42.7 percent in the third quarter, compared to 44.9 percent in the third quarter of 2019, a decrease of 220 basis points. This decrease is primarily attributable to a declining gross margin in the soft goods segment due to the impact of COVID-19 on that business, including our proactive inventory reduction initiatives, partially offset by favorable changes in foreign currency exchange rates, an increase in e-commerce sales, and a slight increase in overall golf equipment gross margins. Operating expenses were $137 million in the third quarter of 2020, which is a $14 million decrease compared to $151 million in the third quarter of 2019. Non-GAAP operating expenses for the third quarter were $135 million, a $12 million decrease compared to the third quarter of 2019. This decrease is due to decreased travel and entertainment expenses and the actions we undertook to reduce costs in response to the COVID pandemic. Other expense was $6 million in the third quarter of 2020 compared to other expense of $7 million in the same period of the prior year. On a non-GAAP basis, other expense was $3 million in the third quarter of 2020 compared to $7 million for the comparable period in 2019. The $4 million improvement was primarily related to a net increase in foreign currency-related gains period over period, partially offset by a $1 million increase in interest expense related to our convertible notes. Pre-tax earnings was $58 million in the third quarter of 2020 compared to pre-tax earnings of $33 million for the same period in 2019. Non-GAAP pre-tax income was $65 million in the third quarter of 2020 compared to non-GAAP pre-tax income of $37 million in the same period of 2019. Diluted earnings per share was 54 cents on 96.6 million shares in the third quarter of 2020 compared to earnings per share of $0.32 on 96.3 million shares in the third quarter of 2019. Non-GAAP fully diluted earnings per share was $0.60 in the third quarter of 2020, compared to fully diluted earnings per share of $0.36 for the third quarter of 2019. Adjusted EBITDA was $87 million in the third quarter of 2020, compared to $57 million in the third quarter of 2019, a record for Callaway GAAP. Turning now to slide 11, the first nine months of 2020 net sales are $1.2 million compared to $1.4 million in 2019, a decrease of $174 million, or 13%. The decrease is primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business. The decrease in net sales reflects a decrease in both our top equipment segment, which decreased 7%, and our soft goods segment, which decreased 21%. This decrease also reflects a decrease in all major regions and product categories, period over period, due to COVID-19. Changes in foreign currency rates positively impacted first nine months of 2020 net sales by 2 million. Gross margin was 42.7% in the first nine months of 2020, compared to 45.8% in the first nine months of 2019, a decrease of 310 basis points. Gross margins in 2020 were negatively impacted by the North America warehouse consolidation, and in 2019 were negatively impacted by the non-recurring purchase price step-up associated with the Jack Wolfskin acquisition. On a non-GAAP basis with Fluency's recurring item, excuse me, non-recurring items, the gross margin was 43.3% in the first nine months of 2020, compared to 46.6% in the first nine months of 2019. a decrease of 330 basis points. The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with idle facilities during the government-mandated shutdown, and the company's inventory reduction initiatives. The decrease in gross margin during the first nine months was partially offset by an increase in the company's e-commerce business. Operating expense was $592 million in the first nine months of 2020, which is a $111 million increase compared to $481 million in the first nine months of 2019. This increase is due to the $174 million non-cash impairment charge related to the Jack Wolfson goodwill and trade name. Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for the first nine months of 2020 were $410 million a $58 million decrease compared to $468 million in the first nine months of 2019. This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses, as well as a reduction in variable expenses due to the lower sales. Other expenses were probably $7 million in the first nine months of 2020 compared to other expenses of $28 million in the same period of the prior year. On a non-GAAP basis, other expense was $3 million for the first nine months of 2020 compared to $24 million for the same period of 2019. The $21 million improvement is primarily related to a $22 million increase in foreign currency-related gains period over period, including the $11 million gain related to the settlement of the cross-currency swap arrangement. Pre-tax loss was $80 million in the first nine months of 2020 same period of 2019. Excluding the impairment charge and other items previously mentioned, non-GAAP pre-tax income was $113 million in the first nine months of 2020 compared to non-GAAP pre-tax income of $155 million in the same period of 2019. Loss per share was $0.92 or $94.2 million in the first nine months of 2020 compared to earnings per share of $1.13 or 96.2 million shares in the first nine months of 2019. Excluding the impairment charge in the items previously mentioned, non-GAAP fully diluted earnings per share was 98 cents in the first nine months of 2020, compared to fully diluted earnings per share of $1.35 for the first nine months of 2019. Adjusted EBITDA was $175 million in the first nine months of 2020, compared to $216 million in the first nine months of 2019. Turning now to slide 12, I will now cover certain key balance sheet and cash flow layouts. As of September 30, 2020, available liquidity, which represents additional availability under our credit facility plus cash on hand, was $637 million, compared to $340 million at the end of the third quarter of 2019. This additional liquidity reflects improved liquidity from working capital management, our cost reductions, and proceeds from the convertible notes we issued during the second quarter. We had a total net debt of $498 million, including $443 million of principal outstanding under our Term Loan B facility that was used to purchase Jack Wolfskin. Our net accounts receivable was $240 million, an increase of 7% compared to $223 million at the end of the third quarter of 2019, which is attributable to record sales in the quarter. Days outstanding decreased slightly to 55 days of September 30, 2019. We continue to remain very comfortable, if not pleasantly surprised, with the overall quality of our accounts receivable at this time. Also displayed on slide 12, our inventory balance decreased by 5% to $325 million at the end of the third quarter of 2020. This decrease was primarily due to the high demand we were experiencing in the golf equipment business, partially offset by higher self-goods inventory related to COVID-19. Our team has done an excellent job being proactive with regard to managing inventory as soon as COVID hit us. They continue to be highly focused on inventory on hand, as well as inventory in the field. We are very pleased with our overall inventory position and the inventory at retail, particularly on the golf side of the business, which remained low at this time. Capital expenditures for the first nine months of 2020 were $31 million. compared to $37 million for the first nine months of 2019. We expect our capital expenditures in 2020 to be approximately $35 to $40 million, up slightly from the estimate we provided in May, but down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions. Depreciation and amortization expense was $203 million for the first nine months of 2020. On a non-GAAP basis, Depreciation and amortization expense, excluding the $174 million impairment charge, was $29 million for the first nine months of 2020, and is estimated to be $35 million for the full year of 2020. Depreciation and amortization expense was $25 million for the first nine months of 2019, and $35 million for the full year of 2019. I now slide 13. As we previously reported, we are no longer providing other specific financial guidance at this time due to the continued uncertainty surrounding the duration and impact of COVID-19. Although we expect some level of continued volatility due to the ongoing pandemic, third quarter trends have thus far continued into the fourth quarter. Perhaps more importantly, All of our business segments, as well as the top crop business, support an outdoor, active, and healthy way of life that is compatible with the world of social distancing. And we now appreciate even further that all of our businesses are likely to be favored in both the realities of the current environment, as well as anticipated consumer trends post-pandemic. These circumstances, along with our increased liquidity, will allow us to weather the pandemic and emerge in a position of strength to the benefit of our businesses and the Top Cop business post-merger. That concludes our prepared remarks today, and we will now open the call for questions. As Chit mentioned in his remarks, due to time constraints, the primary focus of the Q&A should be the Callaway business, and we have scheduled a virtual conference on Thursday to discuss the Top Cop business further. Operator, over to you.

As a reminder, to ask a question, press star, then 1 on your telephone keypad. To withdraw a question, press the pound key. And our first question is going to come from the line of Daniel Embro with Stevens.

Yep. Good afternoon, guys. Thanks for taking our questions. Chip, just starting on the industry, you know, obviously the headlines today around a vaccine. If we do get that in the next few months, do you think the game of golf has done enough to convert some of the more transitory golfers into repeatable core players? And if so, how do you feel about your production capacity and supply chain heading into 2021, assuming demand stays strong?

Daniel, obviously, I'm speculating on the long-term impact of the positive increase in participation that we're seeing now, but I can't imagine it can be anything but positive, right? We're getting returning golfers and we're getting new entrants, and the new entrants are from multiple demographics. It's an addictive game. It's a game that once you play it, you're more likely to play again. So the only conclusion that I can make is that it is a net positive for the long-term health of the industry and that it will favor our long-term growth rates. but I'm unable to quantify that for you at this point in time. And clearly golf is going to be one of those uniquely attractive segments that's going to perform well in the pandemic and one would also believe post-pandemic based on the logic we're talking about. And our supply chain is – you know, laboring to keep up currently. But it's one of our strengths of our business. And we have, you know, high confidence in it. And, you know, we're making progress against those fronts. And it should be an asset for the company and for our shareholders going forward.

Great. And then my follow-up is on the online business and really where direct-to-consumer can go. You know, we're about eight months into this. You know, has anything surprised you about the strength in the direct-to-consumer business? And, you know, do you think longer term your DTC channels can become a bigger part of sales, either in apparel or golf equipment? And then what does that mean for margins? Thanks.

Sure, Daniel. The direct-to-consumer has been a strategic focus for us, particularly on the apparel and soft goods segment. You know, it's something that we – viewed as a long-term trend and an area that focused for the company and one of the reasons that we've invested so aggressively in that. And clearly the strength of that channel in the mix has been, you know, something that we've been very gratified with during the pandemic period and it's accelerated the movement there. Our e-com channels now in that segment are quite significant. For instance, on the Jack Wolfskin side, we've more than doubled our e-commerce business in that business since we've invested in it over the last several years. The Travis Matthew business now has a significant online percentage, and both of those businesses also have a strong and profitable retail base, which we think are strategic assets for them going forward. That clearly is attractive from a strategic basis, and it's attractive from a profitability and a margin basis.

Great. Really helpful. Thanks, guys. Best of luck.

Thanks, Hannah.

Our next question will come from the line of Susan Anderson with B. Riley.

Hi. Good evening. Nice job on the query. I was wondering if you could talk about – so it looks like the performance in Europe – significantly underperformed the U.S. Just curious the breakout between Jack driving that and the golf segment. Maybe if you could talk about the comparison of golf in Europe versus the U.S. in the quarter. Thanks.

Sure, Susan. So you broke up a little bit there, but I think the question was Europe specifically?

Correct, yes.

Okay, great. And that was specifically the overall movement there where we were down in the quarter in Europe was due to the Jack Wolfskin business. The Jack Wolfskin business, as I mentioned in my comments, was down on a U.S. dollar basis 16% for the quarter, which exceeded our expectations, and I think it's worth noting exceeded the number one and number two players in that quarter. category during the quarter. So the brand has shown itself to be exceptionally resilient and strong. Our golf business in Europe was up significantly for the quarter, as you would have expected. And what you're seeing in the regional breakout is just the sum of those two businesses added together.

Great. Perfect. And then just to follow up on Jack, maybe if you could talk about it. It sounds like you feel like in the fourth quarter all of the businesses continue to perform similar to third. I guess for Jack specifically, are you expecting some sequential improvement there from third into fourth? And then looking out to next spring, how are you feeling about the business and maybe just any color you could give around the wholesale part of the business and what you're hearing from your wholesale partners? Thanks.

Sure. Susan, as we've mentioned, we're very pleased with the Jack Wolfskin business on a global basis and how strong that business has bounced back. We are expecting some volatility in Q4 because of the business's strong position in Germany. As you know, that market has all restaurants and a lot of the restaurants and bars, et cetera, are closed. The stores are open, but it's a partial stay-at-home order, if you would, in that market. The U.K. market is really shut down, and France, which we don't do any business in to speak of, is shut down, and Germany is going to be impacted for the month of November. So I would expect there to be some volatility in the results for Q4. I wouldn't call it overly meaningful, but it will impact some of the trends. We were continuing to see very strong results prior to the recent constraints that are put into place. And then if you look forward, we're pleased with the overall trajectory of that business, and we're expecting next year to have some volatility in it and a very difficult time predicting it. given what we're seeing as upticks in the virus and volatility around that. But the long-term trend of that business is very positive. We're hearing good sell-through results, and the investments that we've made into that business are starting to resonate.

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

Thanks, Susan.

Our next question will come from the line of Joe Altabillo with Raymond James.

Hey, guys. Good afternoon. I just wanted to go back to the gross margin for a second. You did a nice job of explaining the decline year over year and all the puts and takes. I think you mentioned that there was only a slight increase in the equipment gross margin in the quarter despite the fact that sales were up pretty nicely. So maybe speak to why the gross margin on the equipment side wasn't up more in the quarter.

Sure, Joe. This is Brian. Like we said earlier, I think it was up, golf equipment was up about 20 basis points, and I think that the golf club portion was up more than that. It was offset a little bit by the ball segment. As you know, we were working on improving gross margins in that business, and then COVID hit, which slowed us down a little bit, but we've been making good progress since then, so that's coming back, but there was a little bit delayed in the improvement in that fall business gross margins during COVID.

And is that temporary, or is that something that's going to recur in the fourth quarter?

It's temporary. It was, again, recently they're making very good progress, and so it'll continue to improve, I think, as we go through the quarter.

Okay. Just to follow up, I think, Chip, you mentioned earlier that, you know, if you look at retail or inventories, there are historical lows at this point heading into Is there a way to quantify perhaps the sales tailwind that you guys could get from replenishing those inventories in 2021?

Joe, we're not quantifying that at this point, but you're correct in that the low inventory levels are unlikely to be – they won't desire to sustain those. And so in due course, we will catch up. field inventories. They are at levels right now that are below where our trade partners would like to keep them.

Okay. Thanks, guys.

And our next question will come from the line of Casey Alexander with CompassPoint.

Hi, good afternoon. A lot of people have been spending time on the revenue side. I'd like to flip over to the cost side here for a second because your SG&A as a percentage of sales is down to what your selling used to be as a percentage of sales. which I understand comes from right-sizing the business and unfortunately having to eliminate some positions. But are you learning to operate more efficiently? And so can you sustain at a lower cost level? And also, are you learning to operate with potentially a lower real estate footprint as your leases come up in the future?

Casey, it's Chip. You're exactly right. We experienced really unprecedented levels of operating expenses, a percentage of revenue during the quarter, and a lot of that, unfortunately, is not sustainable. You know, some of that was during the quarter we were continuing to operate, you And, you know, that's not going to be able to be continued, nor would it be desirable to do so. But there are a few areas that we are learning and will be more efficient going forward. Our travel and expense expenditures was significantly down during the quarter, and it won't be sustainable at this level, but there should be some net benefit in that area going forward. And on the real estate side, I think you're right in that I don't believe we will shrink our real estate, but I will be hesitant to expand real estate as the business grows because we have learned that we can do things remotely and in more efficient manners going forward. So there will be some positives from the learnings that we've experienced during this pandemic.

Okay, thank you for that. I would then peel down to the R&D line because we know how the company builds its products based on innovation, and your R&D is 22% below where it was tracking prior to the pandemic. Should we expect that to come back up to former levels, or does artificial intelligence actually, once you've made the investments, give you some sort of cost advantage?

We should continue to leverage that over time, but it will largely bounce back to more traditional absolute levels. And then we should be able to leverage that as we continue to grow the business.

Okay. And then last question, in the first quarter, any sort of one-time windfall from the absence of the PGA merchandise show?

Yes, Casey, it has to be, but it's not a meaningful number for us at this stage. But with the PGA show going virtual, you know, we will not have the expenditures associated with the PGA show and the travel and entertainment associated with that. That is not a meaningful number, but every little bit helps, and that will be a net benefit in Q1.

Well, we'll miss the entertainment portion of that travel and entertainment, and I look forward to your presentation on Thursday, and thanks for taking my questions. Thanks, David.

And our next question is going to come from the line of John Kernan with Cowan.

Yeah, excellent. Thanks for taking my question. And, John, congrats on a nice quarter. We'll focus on the Callaway brand and business here. I wanted to just – pose a longer-term question. ASPs have risen quite a bit the past several years. The innovation profile obviously supported that. I'm just wondering where you think the long-term gross margin profile of the business can go to, given that soft goods are now becoming a bigger portion of the overall business. You sound more confident on the Jack Wolfskin piece of the business. When you look at those targets you gave us, on the prior call with Topgolf included. How does the overall margin profile, and particularly the gross margin profile of the Calway business, fit into that? Thank you.

John, this is Chip. Clearly, we're anticipating over time to be able to continue to grow our gross margins. And, you know, we've been able to do that through increased operating leverage in our business as we've grown the business and making investments in efficiencies, et cetera. As we talked about right now, we just finished big investments in terms of the distribution center. We're, for the largest part, finished with our golf ball modernization. And as those ramp up in scale, you will see gross margin improvement within that. You're also going to see gross margin improvement with the soft goods segment at large and the movement of that business to its direct-to-consumer portions, which are meaningful portions of those businesses. So a lot of long-term positive outlooks relative to gross margin. We're not quantifying those at this point, and to the best of our ability, baked those into the only guidance that we have given, which is the Topgolf merger 2022 guidance. But all positive trends moving forward on the gross margin basis.

Helpful. Thanks. And maybe just one question focused more on the shorter term. It sounds like you're gaining confidence in Jack Wolfskin, the apparel business, honestly, in the third quarter had a better quarter than a lot of your peers did. So I'm just wondering how we should think about the soft goods part of the business going into the first half of next year and any signs of, you know, what signs we should be looking for in terms of Jack Wolfkin and the targets that you laid out for that brand and progress towards those targets into next year. Thank you.

Sure, John. Yeah, I think that it's fair to say we're gaining confidence in all of our businesses. We're in a very fortunate position right now. The golf business is experiencing unprecedented growth and in a position of strength, and our brands are very strong. And the Travis Matthew business is very resolute. I mean, it grew nicely during the quarter. and bouncing back very strong. We believe very much in the long-term potential there. And some of the investments we've made in the Jack Wolfskin business are also coming in nicely. And as you can see, over the last two quarters, it's outperformed its largest competitors. And so we've clearly made some nice progress there and are showing some strength there. I think looking into the first half of next year, you know, you've got to be very confident in the long-term outlook, but you're going to need to also be aware of there's likely to be continued volatility. So we don't feel confident predicting anything other than long-term trends right now, and the long-term trends are very positive for these businesses.

Got it. Thanks, Chip. Thank you.

And our next question will come from the line of Alex Morocha with Barenburg.

Hi, good afternoon, guys. How much did the Jack Wolfskin U.S. e-com business contribute to that 108% year-over-year increase? And have you started making any inroads in building out a wholesale network for that business here in the States?

The Jack Wolfskin North America was a very minor contributor, but we have started to see some nice progress there. So, yeah, We're starting to get good or much improved return on our asset spends there and, you know, starting to see positive signs coming out of that business. But it's very small at this point and insignificant contributor relative to that 108% that we just talked about. It is going to be an ongoing investment thesis for us, not Central to our success story, but we like what we're seeing there, and if it does hit, we've got significant upside. So pleased with what we're seeing there. What was the second part of the question, Alex?

The wholesale network. I know you've been trying to build that out. Have you made any inroads?

No, we have not intentionally, Alex. We are focusing that business in North America on e-com at this stage.

Okay, understood. And then a second one on golf. Given the uptick in newer entrants to the sport, can you talk about any changes you're seeing in the product price mix and how you're trying to upsell people that might be new to the brand?

We haven't really had a chance to get to that yet, Alex. We're just chasing demand right now. Our brand is uniquely good for this type of environment, though, because the research shows that we appeal to all types of golfers. Now, we are a premium brand, but we can have new entrants and higher handicappers as well as the world's elite players all fall in love with our brand and recognize its benefits. So, you know, we think there's a nice opportunity there, but we have not yet had the opportunity to work on transitioning them between their segments.

Okay. Thanks, Chip.

Thank you.

And our last question for the day will come from the line of Randy Connick with Jefferies.

Yeah, thanks a lot. Good afternoon, everybody. I got on a little late. Just back on Jack Wolfskin for a second, Chip. When you think about, you said on asset spend, are you primarily focused on incremental spend there to raise awareness in the North American market? Just want to get some thoughts on where you're incrementally investing on that brand at the moment?

Yeah, no, it's a lot of search and specifically e-com marketing spend to drive both awareness and sales since we're on a e-com direct-to-consumer model there. So it's one of those ones you can measure very quickly and quickly adjust your model almost on a daily basis as they are building that ECOM engine there.

Understood. Good. And then back on Callaway, did you give perspective on any differences you're seeing in the ASP increases in the different categories within STIX? that are interesting or of note, or anything sticks out between, you know, return customers that you probably have on file versus new ones coming in? Anything unique about any trends you're noticing in the order patterns?

You know, Randy, at the moment, the business is so strong, we're seeing it in every segment grow and, you know, across. So it's a very unique period at the moment. So nothing unique. We're experiencing strength across the line.

Got it. And my last question would be just on the investments you talked about with the ball plan kind of having been made in the past and kind of being now complete. When would you expect or when should we anticipate some of those efficiencies kind of impacting the numbers, if you will, on the margin side of things? When would that, you know, something like that from a timing standpoint, is that first half next year, second half, 2022, just getting some, just any kind of help there would be great.

It should continue to ramp. So we saw it ramping during the quarter. You know, the ball plant was shut down during Q2, opened up during Q2, was a lot of inefficiencies and scrap. Then we're also learning to operate new equipment and new processes there, and the productivity rates have ramped nicely, you know, during Q3, and we expect to continue to improve going forward. So we should start to see improved operating results on a year-over-year basis, you know, starting now.

Great.

Thanks, guys. Talk to you Thursday. Yep. Thank you.

I'd now like to turn the call to Chip Brewer for closing comments.

Well, thank you, everybody, for dialing in. We appreciate your interest and the opportunity to spend time with you. We also look forward to talking to you Thursday. And in the good things side of the world, I also want to congratulate Patrick Burke on 25 years with the company today. So celebrating an anniversary that I know you can congratulate him on on your after calls. And thank you so much for your time.

Thank you for participating in today's conference call. You may now disconnect.