Callaway Golf Company

Ladies and gentlemen, thank you for standing by, and welcome to the 2020 Year End and Fourth Quarter Earnings Conference. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask the question during that time, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I will now hand the conference over to your speaker, Patrick Burke, head of investor relations. Please go ahead.

Thank you, Carmen, and good afternoon, everyone. Welcome to Callaway's fourth quarter and annual 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 fourth quarter and annual 2020 financial results. A copy of the press release and associated presentation are available on the investor relations sections of the company's website at www.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've 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, 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 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 should be able to flip through those slides. Finally, Earlier today, we experienced a power outage, but we've been assured by the local power company that there will be no further outages. But we do have a backup plan to restart the call just in case we get interrupted. I would now like to turn the call over to Jeff.

Thanks, Patrick. Good afternoon, everybody, and thank you for joining us for today's call. Starting on page five of the presentation, it's great to be with you today to discuss our 2020 full year and Q4 results, as well as to provide some color on the business going forward. Looking back on 2020, I have to start with a simple wow. What an interesting and eventful year. We started with business as usual, survived an unforeseen global shutdown, working our way through it in a manner that ensured we came through in a position of strength, Then as the world opened back up, we emerged to find golf experiencing record demand and participation levels. Finally, we finished the year announcing a transformational merger with Topgolf, signing Jon Rahm, and delivering on some key strategic initiatives. And now, looking forward, all things considered, we could not feel more fortunate or be happier about where our business is and our future prospects. With that said, we're also mindful that many people have been significantly negatively impacted by COVID-19, and our thoughts and prayers go out to them and their families. Looking at Q4 in isolation, the operating results in our golf equipment segment continued the strong momentum shown in Q3, while the apparel business returned to growth and showed great signs for the future. On the Topgolf side, we continue to make progress on the merger front with our shareholder vote scheduled for March 3rd and hopefully closing shortly thereafter. I'd like to take this chance to thank the Callaway Golf team for the hard work required in delivering these results and navigating the many challenges presented this past year, all the while setting us up for transformational change and growth. Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and remains highly motivated. Let's now turn to page six and jump into our Q4 results. We were pleased with our results in virtually all markets and business segments. Our golf equipment segment continued to experience unprecedented demand globally as interest in the sport and participation have surged. According to Golf Data Tech, US retail sales of golf equipment, specifically hard goods, were up 59% during Q4, the highest Q4 ever on record. Results that followed, the highest Q3 on record as well. US rounds were up 41% in Q4, and despite the shutdowns earlier in the year, delivered 14% growth for the full year. We continue to 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 location remains very strong at present, while inventory at golf retail remains at all-time lows. It is likely these low inventory levels will continue at least through Q1. Callaway's global hard goods market shares remained strong during the quarter. We estimate our U.S. market share across all channels grew slightly during both Q4 and for the full year 2020. Our share in Japan was also up slightly for the full year, allowing us to finish 2020 as the number one hard goods brand in that market. This is the first time that a non-Japanese brand has ever finished number one for the full year in total hard goods. Our full year share in Europe was down slightly, but we still finished as the number one hard goods brand in this market as well. On a global basis, I believe we remain the leading club company in terms of both market share and total revenues and the number two ball company. In the U.S., third-party research showed our brand to be the number one club brand in overall brand rating as well as the leader in innovation technology. Over the last several years, we have shown resilience with these important brand positions. We had a good year on tour in 2020, finishing the year with the number one putter and the number one driver on global tours. However, we didn't have as many wins or total brand exposure as we would have liked. As a result, we strengthened our tour positions significantly during 2020 via the signing of Jon Rahm to a full equipment, headwear, and apparel deal. The addition of Jon, along with Xander and Phil, and our ongoing strong complement of players across global men's and women's tours leaves us well positioned in this important area of our business. We also started 2021 nicely with two wins already on the PGA Tour and a lot of exposure at all events. On the product front, we're thrilled with our new 2021 lineup, a lineup that focuses on our most premium brands, those being our Epic Drivers and Apex Irons. For 2021, both brands are being supercharged with new technology, including a new speed frame version of our proprietary jailbreak technology in the woods and a new version of the Apex line called DCB, which should broaden the appeal of this already highly popular line of irons. Reaction to the lineup has been outstanding, both on tour and in the marketplace. Turning to our soft goods and apparel segment, this portion of our business, along with the apparel industry generally, was, of course, more impacted by the pandemic during Q4. However, the speed and magnitude of the recovery also continued to exceed our expectations. looking at individual businesses in this segment, starting with the Callaway Apparel business in Asia. In Japan, we had a good quarter and finished the year as the number one golf apparel brand in that market based on market share. In Korea, we plan to take back the Callaway Golf Apparel brand that has been licensed to a third party for several years and launch our own apparel business in Korea during the second half of 2021. We are investing in staffing and IT systems for this. The team there is energized by this opportunity, as this is something that they have been considering for several years now. Turning to Travis Matthew. This brand and business continues to impress. Their brand momentum is extremely strong, both in direct-to-consumer channels and at wholesale. Given their success, we are increasingly confident this can be a large and highly profitable brand presenting us an even bigger opportunity than we originally anticipated. To enable this, we have been investing in their systems and supply chain infrastructure. This investment phase will continue through 2021 and then taper off. We are also investing in direct-to-consumer efforts, both through the addition of new stores, selectively taking advantage of some great opportunities, and, of course, e-commerce. We could not be more excited about this business overall. Jack Wolfson also had a strong quarter, delivering year-over-year revenue growth. Perhaps even more importantly, we cleared some key strategic and operational hurdles during the quarter. In Europe, our new CEO of Global Jack Wolfson, Richard Collier, joined the team in December. Richard joined us from Heli Hansen, where he held the title of Global Product Officer and served in the capacity as well as de facto Chief Operating Officer. We're excited to have Richard on the team. The reaction to Richard and the new CFO, Andre, who joined us a few months earlier for Mahmoud, has been outstanding. Our previous CEO, Melody Harris-Jensbeck, transitioned at the end of the year, and we thank her for her leadership over the last two years with Callaway. We enter 2021 with a very strong leadership team fully in place. Equally importantly, prior to the full Europe retail shutdown in mid-December, The sell-through of our fall-winter lineup was excellent in both Europe and in China. This speaks to the strength of the brand in these key markets, improved channel management, and the strength of the product lineup. Noting that in China, Q4 was the first quarter to showcase the local product design by a new team that was recruited in 2019. The success of this new China for China product was a key strategic initiative for us. Across the globe, but especially in their key markets of China and Europe, we believe the combination of strong leadership and sell-through momentum bodes well for this brand as markets open up and recover. Taking a step back and looking at the larger apparel and soft goods segment, for the last nine months, the hero has certainly been e-commerce. This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day. These investments enabled our apparel business, Ecom, to deliver 64% year-over-year growth in Q4. Ecom is now a significant portion of the channel mix of this segment, and we are confident our expanded capabilities and strength here will bolster this business' growth prospects and profitability going forward. Post-COVID, we continue to expect our apparel and soft goods segment to grow faster than our golf equipment 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 this segment over the coming years. Like our company overall, this segment, with its concentration in golf and outdoor, appears to be well-positioned for both the months and years ahead. both during the pandemic and after. Turning to Topgolf, our comments here will be limited given we have not closed the transaction yet. But during late Q4, due to COVID restrictions, three of the U.S. venues were forced to shut as well as three of the U.K. venues. However, despite these headwinds, Topgolf's overall results exceeded expectations in Q4. This was driven primarily by strong walking sales. Currently, only the UK venues and one US venue, Portland, Oregon, are closed. And COVID restrictions appear to be gradually easing. Despite 2021 starting out with more COVID restrictions than we expected, strong walk-in traffic is allowing this business to continue to perform at a level consistent with achieving a total venue full year, same venue sales target of 80% to 85% of 2019 levels. Turning to new venue development, Topgolf has opened two new domestic venues already this year, Lake Mary, Florida, and Albuquerque, New Mexico, and is on track to hit their new venue plan of eight new owned venues for this year. On the international front, our third franchise location opened earlier this year in Dubai, The site has been getting strong reviews despite ongoing COVID complications in this market, and we expect this to be a flagship site for us internationally. Looking forward, given the uncertainties of the COVID situation globally, we are not currently providing 2021 guidance. We can, however, provide the following color. The golf equipment sector is likely to be slightly impacted by COVID in Q1 with the majority of European markets and portions of Asia, Tokyo, for instance, in some sort of lockdown or retail constraint, and with some supply constraints based on both capacity limitations and logistics. We are also experiencing higher operating costs associated with COVID. Our container shipping costs alone are estimated to be up approximately $13 million for the full year as these costs have surged. but we do not see this as a long-term issue, just a short-term anomaly associated with the pandemic. The demand situation is strong enough that we expect a very strong year in golf equipment despite these issues. A little constrained in Q1 based on capacity and logistics, with increasing opportunity to catch up with demand in Q2. Our soft goods and apparel segment continues to be more impacted by COVID. The Europe shutdown is expected certainly through Q1. However, the key points of operating strategic progress we mentioned earlier, along with the attractive long-term prospects of both golf and outdoor lifestyle apparel, make me increasingly confident for this business post the COVID closures and their short-term impact. Topgolf is performing consistent with plan. New venue openings are on track, and we are increasingly confident for this business overall. We hope to close in early March. If this happens, we'll have a lot more to say on this business starting on our next call. We continue to see this as a transformational opportunity. On the operating expense side, in comparison to 2019, which is the only meaningful comparison, you're going to see some further investments in 2021. These include investments in our growth infrastructure, such as the Korea apparel business, increased tour presence, and direct-to-consumer resources. We have a track record for making these kind of internal investments and are confident these will deliver high returns for shareholders. Lastly, we remain confident in the 2022 guidance we provided as part of the top-up merger process, as well as the future potential of what is going to be a unique and powerful business. Brian, over to you.