Callaway Golf Company

Good day and thank you for standing by. Welcome to the Callaway Golf Company's second quarter 2021 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 second quarter 2021 earnings conference call. I'm Patrick Burke, the company's head of investor relations. Joining me as speakers on today's call are Chip Brewer, our president and chief executive officer, and Brian Lynch, our chief financial officer. Artie Stars, Topgolf CEO, William Davenport, Topgolf CFO, and Jennifer Thomas, Callaway's Chief Accounting Officer, are also in the room today for Q&A. Earlier today, the company issued a press release announcing its second 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. Most of the financial numbers reported and discussed on today's call are based on US 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, 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 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 were able to flip through the slides. I would now like to turn the call over to Chip.

Thank you, Patrick. Good afternoon, and thank you, everybody, for joining us today. Results for the second quarter were nothing short of outstanding, and I'm extremely proud of our entire global team for the work they have put in to build this business to the powerhouse that it is today. Let me start by thanking them for their ongoing focus and dedication as we navigate these extraordinary times, move the needle on our growth initiatives, and capitalize on the tremendous market opportunity ahead of us. As you'll hear throughout the call today, we are experiencing strong momentum across all of our business segments and are delivering exceptional operating results despite a challenging environment. Revenue for the quarter was up 208% to $914 million and up over 112% to approximately $1.6 billion for the first half of 2021, both new records for our business. Profitability also reached new highs with adjusted EBITDA of $164 million for the quarter and $292 million for the first six months of the year. While headwinds from COVID persist, we have strong conviction in both the long-term strategic position and impressive earnings growth prospects of this unique business. Before shifting gears to talk specifically about each area of our business, I want to give a personal shout out to our tour team who's having an exceptional year as well. Congrats to Phil and John for their wins at the PGA Championship and the US Open earlier this season. to Xander for his gold medal performance in Tokyo, and to Annika for her dominant victory at the U.S. Senior Women's Open. What a summer for Callaway Golf's tour staff. I can't tell you how excited I get seeing our players representing Callaway, along with our other brands, including Travis Matthew and Topgolf, on the game's biggest stages. From a business perspective, I'm confident this exposure is very good for our brands and will help us deliver long-term shareholder value. Looking first at our golf equipment business, demand for clubs and balls remains very high as the sport continues to gain interest from both new entrants, which are driving continued unprecedented growth in package sets, junior clubs, and women's clubs, along with core golfers who are playing more than ever and showing strong enthusiasm for the games. According to Golf Data Tech, rounds played in June remained at an all-time high and retail demand remains elevated. Data Tech's hard goods sell-through in Q2 was up an impressive 40% versus 2019, and retail inventory levels remain extremely low, with only 2.2 months on hand at the end of June as industry supply chains strain to keep up with the last 12 months of unprecedented demand. More anecdotally, private club memberships are also experienced exceptional demand with wait lists developing at many clubs across the US and the UK. With more options for activities open this spring and summer compared to last year, we were cautious that there could have been a potential slowdown in golf participation and or demand. However, thus far, we're pleased to report that we're not seeing this from our seat in the market. We are also monitoring supply chain disruption due to the resurgence of the coronavirus Delta variant. The resurgence has not had any negative demand implications yet, but it has caused further supply disruptions from factories based in and around Southeast Asia, primarily Vietnam. The safety of the people working in these regions is top priority, and we're working with suppliers to make sure operating conditions are and remain as safe as possible also we have become accustomed to adapting to these circumstances over the last 18 months and thus we're able to shift some portion of our production to other less impacted factories still given how lean inventories are already the fact that nearly all our factories are running at 100 capacity and that we'll need to shift production shortly towards next year's launches to protect that supply these shutdowns will have an estimated $55 million negative impact on second-half revenues, primarily in our golf equipment segment and primarily in Q3. Although disappointing, I view this disruption as a short-term issue, not one that will have a long-term impact on value or strategy. On the positive side, and I recognize this is a glass-half-full view, We now believe field inventory levels will almost certainly stay lower than expected through this year. In many ways, a healthy market dynamic that bodes well for 2022. All in all, we are very pleased with the strength of this category and our position in it. We expect a record performance for a golf equipment segment this year. And perhaps most importantly, we continue to believe the outlook for the golf equipment category is highly positive. with both a larger total market and a higher embedded growth rate. Turning now to our apparel and soft goods segment, the business put up another strong quarter exceeding our expectations as retail locations reopened across the world and our brands remained top of mind for consumers. Starting with Travis Matthew, this business strongly overperformed during the quarter and continues to see incredible growth as we move into the back half of the year. To contextualize, year over year for the second quarter, we saw more than 30% comp store growth in our own retail stores versus 2019, the last period of unimpacted COVID, as well as strong growth in sell-through at wholesale accounts and e-commerce. Another fun fact is that we are not just seeing brand momentum in the target male audience buying for themselves, as approximately 30% of the direct-to-consumer sales that we track are her buying for him. Now, I'm no expert here, but when women are picking the brand for their men, I think it's a very good sign. Jack Wolfskin was a strong performer as well this quarter. The business has faced additional challenges given the longer COVID shutdowns in Europe than here in the U.S., but the team has worked through the issues brilliantly, and is on track for a strong year. As our own stores in Europe reopened during the quarter, retail picked up nicely, almost reaching 2019 levels of revenue. Most importantly, we experienced strong sell-through of the spring-summer 2021 line, as well as strong pre-books for the spring-summer 22 line, two very important indicators for the health of the brand. Our stores in China also continue to perform well as the brand maintains strong awareness and positioning within the outdoor apparel market there. The team at Jack Wilson has done a fantastic job of revitalizing this business and putting us in a strong position to grow on the top and bottom line as COVID restrictions abate in the brand's key markets of Europe and China and as the brand grows in strength and appeal. Lastly, Our Callaway-branded soft goods business showed strength as well, particularly in Japan, as popularity for the sport drove consumer spending. Additionally, toward the end of the quarter, we took back the Korea apparel business, which was being licensed to a third party for several years. Although that business is just starting up, we are very excited about the long-term opportunity it will provide to our soft goods segment and the team did an excellent job managing this transition given the COVID travel restrictions and challenges. With demand levels high across this business segment, we expect to enter 2022 with low retail inventory across all of our soft good brands. In summary, we are fortunate to be in excellent categories and are on our path to deliver a good 2021 in this segment as well as future growth. Now on to Topgolf. Q2 marked the first full quarter of Callaway results with Topgolf included in our numbers, and they delivered beyond our expectations. While COVID concerns remain a challenging variable for venue operations, the team put up outstanding numbers even as other options for consumers became available. We continue to be invigorated by the momentum of this business brought to both Callaway's portfolio and to the game of golf. Same venue sales percentage versus 2019 levels continues the encouraging trend of recovery with Q2 results in the low 90s up substantially from the low 80s in Q1 of this year. Results were driven by a mix of strong walk-in sales and continued recovery in the event business. Looking forward, and this assumes no major restrictions from COVID upticks, we feel same venue sales for Q3 will be above Q2 results, while we expect Q4 sales to be slightly slower than Q2 due to the corporate events mix in that quarter, and that the full year should end at approximately 90%. To put this in context, this is considerably above our expectations for the year, and we believe a strong performance. Domestic venue expansion continued as planned during the quarter with four new venues opening. Another venue, Holtzville Long Island, opened recently, and yet another, Colorado Springs, will open later this week. We then expect to open one more venue in Q4 for a total of nine new domestic venues this year. At the end of the year, we will have 67 domestic venues in operation, across three owned UK venues for a total of 70 owned venues in operation. Internationally, our UK venues had an excellent quarter as they reopened strongly after COVID induced shutdowns in Q1. And our franchise international venue business continues to build capability and momentum despite various COVID challenges. Overall, the venue business is very healthy with profitability exceeding our expectations. The top tracer business had a successful quarter as well, with over 2,000 bays installed in Q2, setting a new record as we continue to see strong demand and excellent customer feedback. While some challenges remain on the installation front due to COVID, we expect to meet or exceed our target of 8,000 new bays for the year. One of the highlights for the quarter was the successful installation of Top Tracer into what we believe is the world's largest driving range, Golf Club Daiju, located outside Nagoya in central Japan. And more recently, we're thrilled to announce a partnership with St. Andrew's Links at the home of golf in St. Andrew's, Scotland. Lastly, Topgolf's unique position in the market as a gateway to golf, is continuing to introduce new players to the sport, and we see excellent long-term potential through our preferential ability to market to these new entrants and drive synergies across a growing consumer base, both on and off course. Looking ahead to the second half of the year and beyond, I remain excited about the opportunity ahead of us. We operate in great categories with a unique portfolio of businesses that are all exceeding our expectations. There are, of course, macroeconomic hurdles that we and many companies are facing, including supply chain constraints, freight costs, staffing challenges, and inflationary pressure. But at the demand level, we are experiencing the expected experience in the foreseeable future of We see these as manageable and expect to still deliver excellent financial results. On the supply chain side, our guidance assumes an estimated 55 million negative impact on our top line growth primarily in Q3 to account for current disruptions. On the inflationary side, we have already started taking some price and believe we'll largely have the ability to take price as needed. Given the various moving parts to the remainder of the year, we are providing both third quarter and full year guidance. I'll let Brian discuss the numbers in more detail, but the headline is that we expect our full year 2021 sales to be over $1.3 billion higher than 2019 and adjusted EBITDA to be between $134 million and $149 million higher than 2019. Our EBITDA for 2021 will be very close to the number we guided to for 2022 when we provided longer-term guidance in the fall of last year. We are essentially a year ahead of plan. And with that, I'll turn it over to you, Brian.