Callaway Golf Company

Good day and thank you for standing by. Welcome to the Callaway Golf Company fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. And during the Q&A session, we ask that you please limit your questions to one and a follow-up to allow as many participants as possible to ask a question. And I would like to hand the conference over to your speaker for today, Lauren Scott, Director of Investor Relations. Thank you. Please go ahead.

Thank you, Operator, and good afternoon, everyone. First, I'd like to thank you all for your patience. We're having a technical difficulty on our end, and we'll be extending the call by 15 minutes to be sure that we make up for any of the lost time. So thank you very much for your patience. As the Operator said, I'm Lauren Scott, the Company's Director 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. Patrick Burke Calloway is SVP 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 fourth quarter and full year 2021 financial results. In addition, there's a presentation that accompanies today's prepared remarks that 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 U.S. generally accepted accounting principles. In the instances where we report non-GET measures, we have reconciled the non-GET measures to the corresponding GET 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 and management's current expectations. We encourage you to review the safe harbor contents contained in the presentation and press release for a more complete description. And with that, I'd now like to turn the call over to Chip Brewer.

Thank you, Lauren. And happy birthday this week, by the way. Thank you. Good afternoon to everyone on the call. Thank you for joining us today, and also thank you for your patience. We apologize for the late start. I'm pleased to report another quarter of strong results. and look forward to providing more detail around our outlook for the year ahead. But first, I want to take a moment to acknowledge the incredible year we just concluded. 2021 was a pivotal year for Callaway, marked by exceptional results, significant growth, and strong momentum across all our business segments. We closed on the acquisition of Topgolf in Q1, transforming our company into the unrivaled leader in the modern golf and lifestyle apparel space. Over the past five years, we've combined a traditional golf equipment business with select lifestyle apparel brands and the world's leading tech-enabled golf entertainment company to deliver a truly differentiated business model. Amid continued high demand for our golf equipment and lifestyle products, our global sales and operations teams work tirelessly, delivering quarter after quarter of impressive results despite significant global COVID-related operating challenges. The team has proven itself to be an impressive and battle-hardened asset. In addition, we've increasingly made key investments in infrastructure and people to support a larger business and to set us up for continued growth and financial success. I want to personally thank all of our global employees for their hard work throughout the year. Our positive results would not be possible without your dedication and passion for this business. Shifting to Q4, our results came in better than expected, led by another quarter of exceptional results from Topgolf and continued high demand for both golf equipment and lifestyle apparel and gear. Total net revenue was $712 million, up 90% year over year, and adjusted EBITDA was $14 million, up $27 million. Turning to Topgolf, for the quarter, both walk-in traffic and event sales surpassed our expectations, driving same venue sales to an impressive increase of 6% over 2019 levels. For the full year, same venue sales were approximately 95% of 2019 levels, meaningfully higher than projected, and an encouraging and very strong result given the operating environment. A resurgence in corporate events business drove most of the same venue sales positive surprise in Q4. Walk-in sales and smaller social events had been strong for some time and continued their trends. Having said this, as one would expect, in the last week of December and continuing into January, we have seen some softness in same venue sales as the rise in Omicron has resulted in a decline in group events, and increased short-term staffing challenges. While this will have an impact on Q1 results, it was promising to see that our UK venues, which experienced Omicron impacts approximately a month ahead of our US venues, bounced back very quickly and are now once again performing quite well. This is a good indicator of the resiliency we expect in the US business through the remainder of Q1, and we're already starting to see some signs of this anticipated improvement. For the first quarter of 2022, we're expecting same venue sales to be down slightly compared to 2019, and for the full year, we anticipate low single-digit growth over 2019 levels. New venue openings continued on pace with our 72 Bay Fort Myers, Florida location opening strongly in mid-November. While we're on venues, I want to remind everyone on the success rate we're consistently delivering here. We had nine very successful openings in 2021, and the financial performance of this group is on track to exceed our expectations, despite the challenging operating environment. I've had a ringside seat watching Topgolf open venues for nearly 10 years now, and in my opinion, we are uniquely good here. As a result of increasing brand strength, competency of our real estate team, and our operating team's expertise, this is now a proven, and repeatable model, a fact I believe the financial community may not fully appreciate yet. For 2022, we are confident in our ability to deliver at least 10 new venues, with the potential to adding an 11th in very late Q4. We're also extremely excited about the lineup for this year, with the first two Southern California locations opening in the Los Angeles area in Q1 and Q2, one in Ontario, which is just east of L.A., and the other in El Segundo, near SoFi Stadium. The El Segundo location is particularly intriguing, as is the first venue to include an on-course element. And in true Topgolf fashion, this will not be your typical golf course. It'll be a 10-hole lighted course, perfect for nighttime rounds, incorporating elements of entertainment and our Top Tracer technology to create a truly unique guest experience. Additional locations of note include Seattle and Baltimore, both of which will feature our latest premium venue enhancements, as well as Callaway Fitting Bays. It's important to note that due to the disruption in the development activities in 2020, the timing of this year's venue openings will be heavily weighted toward the back half of the year, with five expected to open in Q4. This timing will impact this year's contribution from new venues. Shifting to Top Tracer during the We installed over 1,700 new bays, bringing our total for the year to just under 7,000 new bay installations. We remain encouraged by continued strong demand and expect to install 8,000 bays or more in 2022. Lastly, within the Topgolf media business, I'm pleased to announce that we are leveraging our mobile game development expertise from World Golf Tour to launch a new game later this year that caters to the younger, more traditional gamer, whereas the existing game focuses more on the traditional golfer. While we expect the game to have minimal contribution to our financial results in 2022, we believe that it will provide future upside as our community of digital customers continues to grow. In addition, in due time, we'll integrate this new game into our digital offerings at both our venues and Top Tracer ranges. thus driving synergies from our game development capabilities. Moving to our golf equipment segment, we're pleased to report that demand remains very high for our clubs and balls, and trade inventory remains low across the industry. According to the National Golf Foundation's annual report, the number of on-course golfers increased by approximately 300,000 in 2021 to 25.1 million players, marking the fourth straight year of increased participation in traditional golf. Off-course participation also continued to grow, with 24.8 million people visiting non-traditional venues such as Topgolf and Five Iron, and approximately half of those playing exclusively off-course. Looking out over the next 12 months and beyond, as Topgolf venues continue to expand, we expect even more new players to be introduced to the sport, both on and off course. For Q4, our golf equipment results were in line with our expectations. As we explained last quarter, we anticipated some softness in Q4 revenues as we made the decision to shift production to build 2022 new launch product. In addition, we launched several new products in the comparable fourth quarter of 2020, thus creating an uneven year-over-year comparison. As we look ahead to Q1 in the full year 2022, we are seeing promising momentum with the launch of our new Rogue ST family of woods and irons and new chrome soft golf balls. The reception has been very positive so far. Pre-books are up significantly and feedback on the product has been outstanding. With Rogue ST being the number one driver on tour in its first week on tour at the Tournament of Champions, and Callaway receiving more gold medals than any other manufacturer in Golf Digest's recent hot list. The new launch product will be available at retailers starting next week. For the full year, we're reiterating that our golf equipment business will grow based on continued strong demand from consumers, price increases on our new launch product, and the opportunity for a restocking at retail. Turning to apparel and gear, in our apparel and gear segment, revenue was up 33% year over year in Q4, led by a 40% increase in apparel and a 19% increase in gear. Travis Matthew continued to grow at a roaring pace, with her own retail comp store sales up over 67% versus 2020. E-commerce sales were also up a healthy 30% versus 2020. The team also signed a high-profile new ambassador, actor Chris Pratt, during Q4, who helped further increase brand visibility and raise awareness for a multi-day charity flash sale benefiting the Special Olympics. The event was very successful, with Travis Matthew contributing over $1 million in donations to this very worthy cause. On the product side, Travis Matthew expanded his product range to include women's apparel, as part of the His and Her Cloud collection launched in December, as well as more cold-weather gear within their outerwear collection. Both editions performed very well with the women's products selling out predominantly in the first 48 hours and jackets and pants accounting for 37% of direct-to-consumer sales. Jack Wolfskin sales were up in the quarters compared to both 2020 and 2019, as the public relaunch of the brand's fresh new image was positively received by consumers. Feedback on pre-books has been outstanding, and we're excited for the year ahead. On the sustainability front, Jack Wolfskin launched a new initiative in Q4 called the Nature Counts Campaign, which is dedicated to forestry, rewilding, and conservation efforts. In place of Black Friday and Cyber Monday sales discounts, the brand decided to donate two euros to from every purchase made during the week to Peter Wolben's Forest Academy. We love to see the brand stay true to its roots and continue to be an ambassador for environmentalism. Lastly, our Callaway apparel business in Asia continued to thrive. The Callaway golf brand in Japan held the number one share in the wholesale channel during the quarter, and direct-to-consumer efforts paid off with strong sales in our own retail stores as foot traffic in the region increased. Looking ahead to 2022 and the consolidated company, we believe revenue will increase approximately 21%, and we expect adjusted EBITDA will be between 490 and 515 million. This strong outlook is underpinned by our belief that our golf equipment business will continue to grow as participation remains high and supply continues to scale up to match exceptional consumer demand. our strong pre-books and demand trends for style apparel and gear brands, and embedded growth in the top golf business through new venue openings and year-over-year growth in same venue sales. Longer term, we remain excited and confident about the direction of the business. While macro trends over the past two years have provided favorable tailwinds for golf, we believe there has also been a more sustainable trend structural shift in the market that will support all of Callaway's businesses. These structural shifts include what we believe are long-term increases in remote and hybrid work. They increase desire to get out into nature, the momentum behind casual lifestyle apparel brands, the growth of new golfers with waiting lists to get into golf courses, and the growth and positive impact of off-course golf. Off-course golf experiences such as Topgolf are both growing rapidly in their own right and at the same time changing the way people are introduced to the sport of golf, creating increased interest and more new entrants. We believe Callaway is uniquely positioned to engage with these consumers through our differentiated portfolio of brands and look forward to unlocking the embedded growth within this business for years to come. In conclusion, and before handing the call off to Brian, I want to call out two additional items. First, I'm pleased to announce that we're planning to publish our first comprehensive sustainability report next month. As a company, we were founded in Ely Calloway's view that good ethics is good business, and we continue to operate with this ethos at our core today. You will see this theme carried out through the report and through the four strategic pillars of our sustainability strategy, people, planet, product, and procurement. I encourage you to review the report, and when it comes out, engage with the team to discuss the content. It's an important component of our long-term business strategy. Second, I'm very excited to announce our plan to hold an investor day in Q2. where you will have the opportunity to hear more from senior executives across each of our businesses and learn more about our medium and long-term vision for the company. More details for this event will be provided by the IR team in the coming weeks, and we hope you can participate. And with that, I'd like to turn the call over to Brian Lynch to discuss our financial results in more detail.