Callaway Golf Company

Good day and thank you for standing by. Welcome to the third quarter 2021 Calgary Gulf Earnings Conference Call. At this time, all participants' lines are in a 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 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 your speaker today, Speaker Lauren Scott, Director of Investor Relations. Thank you. Just go ahead, madam.

Thank you, Nora. And good afternoon, everyone. Welcome to Callaway's third quarter 2021 earnings conference call. I'm Lauren Scott, the company's Director of Investor Relations. Joining me as speakers on today's call are Chip Berg, our President and Chief Executive Officer, and Brian Lynch, our Chief Financial Officer. Patrick Burke, Calloway's Senior Vice President of Global Finance, and Jennifer Thomas, our Chief Accounting Officer, are also in the room today for Q&A. Earlier today, the company issued a press release announcing its third quarter 2021 financial results. In addition, there's a presentation that accompanies today's prepared remarks and may make it easier for you to follow the call. This earnings presentation, as well as the earnings press release, are both available on the company's investor relations website under the financial results tab. Most of the financial numbers reported and discussed on today's call are based on US generally accepted accounting principles. In the 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. I would now like to turn the call over to Chip Brewer.

Thank you, Lauren. Good afternoon to everybody on this call, and thank you for joining us today. I'm pleased to report strong third quarter results that exceeded our expectations as Callaway continued to benefit from broad-based momentum across all segments. The operational headwinds we and nearly all consumer brands faced during the quarter were no match for our world-class team of professionals and the strong demand we are experiencing in golf equipment and apparel. In addition, Topgolf delivered exceptional results as increased walk-in traffic and social event bookings led to further gains in sales and productivity. Our company is on a roll, and I'm very optimistic about the road ahead. I hope the number one takeaway from today's call is the upside we are seeing on the long run earnings potential of this business. At a high level, total net revenue for the third quarter increased 80% year over year to $856 million, with 39% coming from the top golf segment, 34% from golf equipment, and 27% from apparel, gear, and other. Profitability also increased with adjusted EBITDA up 57% to $139 million. Before providing commentary on each segment's progress during the quarter, I want to remind everyone of the transformation that has taken place here at Callaway over the past several years. Less than five years ago, we were almost exclusively a golf equipment company, but that has changed significantly with the addition of OGO, Travis Matthew, Jack Wolfskin, and now even more so with the addition of Topgolf. When you invest in Callaway, you are now investing in what I like to call modern golf, a combination of traditional golf with lifestyle apparel and the world's leading tech enabled golf entertainment company. We are engaging with a wide range of consumers and meeting them where they play, whether that's on the golf course, off course at our Topgolf venues, in top tracer bays, out hiking a mountain, or out socializing with friends. Golf equipment is a great business with wind at its back, but is now just a portion of our business, just under 40% of this year's estimated full-year revenues. Looking ahead, we expect all of our segments and business units to deliver growth and to support each other's continued success. Topgolf in particular has exceptional growth embedded within its portfolio, and our apparel assets have strong brand momentum that will continue to drive strong results. The combined entity has a competitive advantage in scale in the golf sector and an unmatched reach to a wide range of consumers. With that said, I'll move now to segment highlights, starting with an update on our Topgolf business. I'm pleased to report that our own venues continued their positive trends with Q3 same venue sales at approximately 100% of 2019 levels. The overperformance in Q3 was driven by continued strong walk-in traffic and improved event sales, especially in the social event bookings. Our performance was particularly impressive considering the headwinds we faced from the increase in Delta COVID cases early in the quarter. Getting back to 2019 levels of same venue sales is a significant milestone for the Topgolf team and a strong indicator of more growth to come as the business fully recovers from COVID impacts. In addition, we're seeing very strong flow through to the bottom line with adjusted EBITDA of 59 million for the quarter, which significantly outpaced our forecast. To put this in perspective, Topgolf earned as much in Q3 as it did for the entire year in 2019. As we look out over the remainder of the year, we continue to believe the corporate events business will be lighter than it was in 2019. However, now that we are one week into November, we are pleased to report that the number of leads for corporate events in Q4 is improving, as is the conversion rate from those leads. Overall, relative to Q3, we see total system same venue sales stepping down in Q4, but only because corporate events are historically a larger portion of the Q4 sales mix. And we now anticipate low to mid 90 same venue sales rates for both Q4 and the full year, up nicely from our prior forecast. Like many companies, for the remainder of this year and into 2022, we anticipate above-average inflationary pressures on food, beverage, and wages, but we believe we will be able to continue to effectively mitigate the impacts of these by sustaining strong top-line revenues, continued labor efficiency, and selectively taking price. Venue expansion continued as planned during the quarter, with the opening of Colorado Springs, a 74-bay medium-sized venue, and Holtsville, Long Island, a large 102-bay venue. Year-to-date, we've opened a total of eight new venues, and we have our final venue for the year slated to open later this month in Fort Myers, Florida. We now also have a strong visibility into the 2022 development pipeline and are confident that we can hit our target of 10 new venues next year. Top Tracer expansion continued during the quarter with year-to-date installations surpassing a full year of installs in 2020 and nearly double the full year of installs in 2019. However, COVID restrictions and supply chain issues led to fewer installs during the quarter than we anticipated. Now for the full year, we anticipate that our total new bay installs will be approximately 10% below our 8,000 bay target. Most importantly, though, Demand for top trace remains very strong, as is customer feedback, with driver ranges reporting 25% to 60% revenue increases post-installation. We are confident that in a normal operating environment, we will be able to get back to our goal of 8,000-plus installations per year. Before I continue on to our other segments, I want to take a moment to highlight the five-iron golf minority investment we announced last week. as it aligns nicely with both our golf entertainment and our golf equipment segments. Five Iron is a privately owned indoor golf and entertainment concept predominantly located in major metropolitan cities. They offer simulator rentals, golf lessons, and custom club fittings, while also providing a fun space for social events. We are excited about the Five Iron investment and partnership as it increases our exposure to the off-course golf and entertainment space which we believe will be a key driver of the long-term growth of the industry as it introduces more new entrants to the sport. In addition, through the partnership, we have a non-exclusive marketing agreement where Five Iron members and guests will have the opportunity to demo Callaway clubs and balls, increasing our reach to golfers at all levels. If you're in New York, Baltimore, Chicago, or several other major cities, we encourage you to check out one of their facilities. Moving to the golf equipment segment, demand and interest in golf remains at all-time highs, and our supply chain team successfully navigated the Q3 supply chain challenges to capture more demand than we thought was possible when we last spoke. Digging deeper into the operational side, we're pleased with the trends we are now seeing in the supply chain, And although we expect both us and the industry at large to be supply constrained for the foreseeable future, we are also confident we'll be able to manage through in a manner that supports our growth and profitability initiatives. We are also cautiously optimistic that our efforts and scale are creating a competitive advantage for us here. Specific to the most recent Vietnam shutdowns, I'm pleased to report that our suppliers' factories in Vietnam are back open and ramping to support our 2022 product launch plans. Barring any foreseen new macro issues, we anticipate no meaningful disruption to our 2022 product launches. We've also been fielding questions as of late on the sustainability of the heightened interest in golf, and I want to go on the record saying that all signs show that the high level of interest is continuing and will do so through the foreseeable future. Hard goods retail sell-through has continued to trend higher according to Golf Data Tech, with Q3 up 1.3% year-over-year and up 46.5% compared to 2019. We are not seeing demand decline, and our customers are telling us that they expect a strong year for golf in 2022. Shifting to the apparel and gear segment, results for the quarter highlighted the strong momentum within the Travis Matthew and Jack Wolfskin brands, as well as the success of our Callaway branded product in Asian markets. The Travis Matthew brand continues to be on fire, gaining strong traction in newer East Coast markets while maintaining a strong following here on the West Coast. The brand is performing extremely well in all channels. Looking specifically at our own stores, Comp store sales for the quarter were very strong, up 84% versus 2020 and 50% versus 2019. During the quarter, we opened two new Travis stores in Florida, one in Boca and the other in Palm Gardens, ending the quarter with a total of 26 retail locations. We expect to open another three doors in Q4 for a total of 29 doors by year end. Needless to say, the performance of our retail doers have been outstanding on a standalone basis. But what makes them even more attractive is they tend to drive increased brand strength and wholesale demand in the regions and communities where they are located. E-commerce was also a strong driver of growth, with normalized sales up 50% year-over-year. That is excluding a one-time sale we did last year. In line with the company's sustainability initiatives, we were excited to launch the Travis Matthew Eco Collection in September in partnership with the Surfrider Foundation. The fabric blends in this collection use at least 98% organic cotton and at least 62% recycled polyester created from plastic bottles. with 100% of the profits going to the Surf Rider Foundation, an organization dedicated to protecting the world's oceans and beaches. Jack Wolfs can experience a strong Q3 as well, with 2022 spring-summer pre-books up significantly over 2020 and comp store sales increasing almost 10% over both 2019 and 2020. Similar port delays that we experienced here in the U.S. were also an issue in Hamburg, Germany, but the team did a wonderful job navigating the challenges and were able to successfully fulfill all orders in the quarter without cancellations. Lastly, Callaway Apparel in Japan continued to be a top-performing brand in the wholesale channel, holding the number one position year-to-date. And in Korea, the brand was off to a solid start as well with positive reception from the major department stores in the region. In conclusion, as I said at the top of the call, our business is on a roll. While we are not providing 2022 guidance at this time, based on the strong trends we're seeing across all segments, we believe that all business lines, all regions are poised for growth next year. And with that, I'd like to turn the call over to Brian Lynch to discuss our financials and guidance in more detail.