Callaway Golf Company

Good day and thank you for standing by. Welcome to the Q1 2021 Callaway Golf Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Patrick Burke, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Erica, and good afternoon, everyone. Welcome to Callaway's first quarter 2021 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, Jennifer Thomas, our Chief Accounting Officer, Artie Starr, our Chief Executive Officer of Topgolf, and William Davenport, our Chief Financial Officer of Topgolf. Today, the company issued a press release announcing its first quarter 2021 financial results. A copy of the press release and associated presentation are available on the investor relations section of the company's website at www.ir.calawaygolf.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 material for 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 Investors 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 are able to flip through the slides. I would now like to turn the call over to Chip.

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 what we believe were excellent Q1 results, as well as to provide some color on the outlook for the business going forward. Our Q1 results exceeded our revenue and profitability expectations in all three of our principal business segments. Our golf equipment segment continued to experience unprecedented demand, which combined with a strong performance by our supply chain team delivered 29% revenue growth versus 2020 and 16% growth versus 2019. Our apparel and soft goods segment also overperformed our expectations, driven by positive brand momentum in both Travis Matthew and Jack Wolfskin. The fact that this segment delivered positive segment profitability was, in my opinion, an exceptional performance given the headwinds faced by COVID restrictions and shutdowns in the European markets. I believe these trends bode very well for the long-term outlook of this segment. Lastly, Topgolf outperformed expectations based on a faster than anticipated recovery in demand, as well as strong operating efficiencies. We believe it would be hard to find three better positioned business segments, both for the current environment and our expectations going forward. I'd like to take this chance to thank the entire Callaway global team, which I'm happy to call out now includes Topgolf and its related brands, for the hard work required in delivering these results, as well as navigating the many challenges presented by both these extraordinary times and the exciting strategy we're implementing. Like me, I'm sure our team remains highly motivated to capitalize on the strong list of opportunities in front of us. Let's now turn to page six and jump into our Q1 results by segment. Our golf equipment segment continues to benefit from record demand levels. According to Golf Data Tech, U.S. retail sales of golf equipment hard goods were up 49% compared to Q1 2019 and 72% compared to 2020, thus setting another record for Q1, just as the last two quarters delivered records for their respective time periods. Our supply chain team did a great job in Q1 chasing demand and exceeding our expectations on supply. Even with this great work, field inventory levels remain extremely low, and we expect them to remain so at least through mid-year, perhaps even longer. Fortunately, we also believe our supply chain is and will continue to deliver us a competitive advantage through the balance of the year, especially in custom fitting where demand is also surging right now. Although we fully expect the current unprecedented demand to moderate at some point, we have yet to see a slowdown, and we continue to see particular strength in product aimed at women's, juniors, and new entrants to the game. We are now quite confident that 2021 will be a very strong year, and we also believe there will be a long-term benefit to the golf industry as we expect it will leave the pandemic period with a significantly larger total addressable market and strong momentum. Our Q1 market share was a little weaker than desired during the quarter, as all four major golf equipment brands launched metal with product this year, while Q1 2020 only had two of the four launch. We never like to cede share, but at this point, we are not overly concerned. As our most recent share trends are improving, we expect this improvement to continue through Q2, and we are performing relatively stronger in key accounts that are not reporting to data tech, as well as a strategically important greengrass channel. Furthermore, we've been receiving excellent feedback on the performance of our products, especially the Epic Max Woods, the Apex Forged Irons, the 2-Ball 10 Putter, as well as our entire ball lineup. We also remain comfortable with our brand strength and position, In the US, third-party research from data tech showed our brand to 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. Turning to our soft goods and apparel segment, given the headwinds faced by COVID restrictions and lockdowns in the European markets, the results delivered in this segment were both better than our expectations and in my opinion, an exceptional performance. Looking at the larger individual businesses in this segment, starting with Travis Matthew, we had high expectations for growth, and still the business exceeded these expectations. Driving this performance, e-comm was up 145% year-over-year in Q1, and company-owned stores comped up nearly 10% despite some COVID restrictions early in the quarter. Sell-throat wholesale was also very strong. Ryan Ellis and his team at Travis Matthew are to be commended, as momentum for this business is at an all-time high. Turning to Jack Wolfskin, this is the business that probably most overperformed expectations in Q1. As you probably recall, this business has started to deliver some nice year-over-year growth at the end of last year, and it was starting to look like we had turned the corner on brand momentum. But with the COVID resurgence and resulting third wave shutdowns in Europe, we were naturally concerned. Although these circumstances have significantly impacted our business, how could they not? And they will continue to do so through at least Q2. Our brand momentum in our European e-comm channel and key digital partners has really moderated that negative impact. Combine this with both nice growth in China and strong financial discipline and what could have been a significant drag on our business has become manageable. On top of this, the improving brand momentum should set us up for a strong second half, assuming, of course, the European markets open up as expected by then. Our sell-through momentum in this business is good, and pre-books for the fall-winter line have been quite strong. As a reminder, Richard Collier joined the brand in December as CEO. Richard joined us from Halle-Hansen, where he held the title of Global Product Officer and served in that capacity as well as de facto COO. We also welcomed André Groubet to the brand as CFO last October, coming to us from Amut. We are really pleased with the leadership team we now have in place, and I'm increasingly confident in the future of this brand. Last but not least, a few comments on the Callaway-Burnett Soft Good business. As mentioned last quarter, in Korea, we plan to take back the Cataloy Golf apparel brand that has been licensed to a third party for several years and launch our own apparel business during the second half of this year. We remain on track for this and are investing in staffing and IT systems accordingly. The team there is energized by this opportunity as this is something they have been considering for several years now. Taking a step back and looking at the big picture, for the last year, The hero of the soft goods and apparel segment is certainly e-com. 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 enable our apparel business e-com to deliver 96% year-over-year growth in Q1. E-com 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 and 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, 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. Now turning to Topgolf. This exciting new segment also outperformed expectations based on a faster-than-anticipated recovery in demand, as well as strong operating efficiencies. We were pleased to close the transaction in early March and equally pleased to onboard Ari Stars as the new CEO in early April. already brings a wealth of valuable experience and talent to an already strong management team and exciting business. Needless to say, I'm thrilled by this combination. On the venue side, all venues are now open globally. After a challenging start to the year, COVID restrictions are continuing to ease. COVID impacted, so these include the impact of venues shut or restricted due to COVID during the period, Same venue sales versus 2019 was in the low 80s for the quarter, which was above our expectations and showed improving trends through the quarter. We now believe we will be either at the high end or modestly above our previous full year same venue sales expectations, which was 80 to 85%. Walk-in traffic remains stronger than events still, and both are trending well. Our financial results benefited from the same venue sales beat, as well as the operating efficiencies that are higher than both historical levels and our plan. Some of this is due to the fact that in the current environment, like so many other service businesses, it's hard to keep the venues fully staffed. Fortunately, we're working through this well, and so far it has neither meaningfully constrained us, nor has it had a negative impact on guest satisfaction measures. This availability of labor is an interesting development, which is likely playing out across the entire U.S. economy. We see it as a manageable challenge as of now. Also, with these results, we're increasingly confident that previously communicated venue economics will be achievable long-term. We successfully opened five new venues so far this year, two in Q1 and three so far in Q2. Globally, we have 66 company-owned venues in operation. For the full year, we are on track to open at least three more venues for a total of at least eight venues this year. We also remain confident in our pipeline for future venues. Turning to Top Tracer, we successfully installed 1,533 bays in Q1, a new record despite the COVID challenges globally. We now have just over 10,000 bays globally, which is significantly more than our largest competitor. Demand remains strong for the product, and we are finding strong synergies between the Callaway sales team and the Top Tracer team. We remain on track for 8,000 bays this year. At the end of this week, we'll be launching the next global Top Tracer tournament, the Nine Shot Challenge, this time presented by the PGA of America and the PGA Championships. This is an excellent example of how we can leverage our global scale and build a digital community. Looking forward, given the unsettled market conditions globally, we're still not providing specific revenue and earnings guidance. However, we now have enough new information and visibility to provide the following color. As discussed in our previous call, we continue to have headwinds in our supply chain, logistics, and labor. As far as I'm aware, most companies do at this point. Our cost estimates for these headwinds have increased since we last spoke. However, our supply chain and HR teams are proving up to these challenges. I believe we may even have a competitive advantage here. Also at present, the demand is high enough that positive volume variances are expected to overshadow the majority of this year's cost impacts from these challenges. We also continue to make select reinvestments back into our business. For the balance of the year, these will be marginally more than what we discussed during our last call. These include incremental new store openings at Travis Matthew, investments in demand creation and digital resources for all brands, as well as the Korea apparel business. We have a track record for making these kind of internal investments and are confident these will deliver high returns for shareholders. Although we continue to fight COVID impacts globally and business conditions remain unsettled, the strong demand equation and the momentum of our brands is such that it is clearly going to be a strong financial year, significantly stronger than previously thought. We now expect that revenue and adjusted EBITDA for the full 12 months of 2021 will meet or beat 2019 results. More specifically, We are now expecting our legacy business to exceed its 2019 results and the Topgolf business to meet or exceed its 2019 full year results as measured over the full 12-month period. It is worth noting that a couple of quarters ago, I said I thought this was not in reach. I'm happy to have to correct that previous statement. Lastly, we are increasingly confident in the future potential of this unique and powerful business. Brian, over to you.