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Text: I'm Lauren Scott, the company's director of investor relations.
Patrick Burke, Callaway's senior vice president of global finance; and Jennifer Thomas, our chief accounting officer, are also in the room today for Q&A.
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 role, and I'm very optimistic about the road ahead.
I hope the No.
1 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 Topgolf 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 OGIO, TravisMathew, 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 that are top golf venues in Toptracer 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 owned 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 systems 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.
Toptracer expansion continued during the quarter with year-to-date installation surpassing a full year of installs in 2020 and nearly double the full year of installs in 2019.
However, COVID restriction 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 Toptracer 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 simulated 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 nonexclusive 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.
Hardgoods retail sell-through has continued to trend higher according to Golf Datatech, 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 TravisMathew and Jack Wolfskin brands, as well as the success of our Callaway branded product in Asian markets.
The TravisMathew 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 doors have been outstanding on a stand-alone basis.
But what makes them even more attractive as they tend to drive increased brand strength in 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 onetime sale we did last year.
In line with the company's sustainability initiatives, we were excited to launch the TravisMathew 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 Surfrider Foundation, an organization dedicated to protecting the world's oceans and beaches.
Jack Wolfskin experienced 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.
were also an issue in Hamburg, Germany, but the team did a wonderful job navigating the challenges, and we 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 No.
1 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.
I want to start by echoing Chip's enthusiasm about our third quarter results and positive outlook for the remainder of the year and into 2022.
The record results highlight the significant growth potential embedded in our business which we are realizing more quickly than we initially anticipated.
The demand for our golf equipment and apparel products, coupled with our operation team's ability to navigate successfully the COVID supply chain challenges, have resulted in stronger-than-anticipated financial results in those businesses.
We also benefited from very strong Topgolf revenue, driven by increased walk-in traffic and more social events business as COVID concerns ease during the past few months.
Profitability at Topgolf also exceeded our expectations due to the strong sales combined with increased operating margins.
Fortunately, we have overperformed, but we would also have liked to have been more accurate.
The reality is forecasting our business in this environment has been very challenging for a variety of reasons.
These include the ebbs and flows of COVID cases globally, a steady diet of new and exciting supply chain challenges that we have never had to work through before, unique operating conditions that cause profitability to flow a lot differently than in the past, and the increased overall scale of our business, which is new to us.
We appreciate your patience and understanding as we work through these issues.
We are learning accordingly, and we will be adjusting to return to more accurate forecasts.
In the guidance we are providing you today we are reflecting the more normalized spending levels, as well as sustainable operating leverage.
In the meantime, we hope the forecasting challenges do not overshadow what is clearly an outstanding year, as well as higher long-term expectations.
As we turn to discuss our financial results, I want to remind you that we use certain non-GAAP measures to evaluate our business performance.
Moving to Slides 12 and 13.
Consolidated net revenue for the quarter was $856 million, an increase of 80% or $381 million compared to Q3 2020.
The increase was led by the addition of Topgolf revenue of $334 million, along with an 8.4% increase in golf equipment revenue and an 11.9% increase in apparel, gear, and other.
Changes in foreign currency rates had a $4 million favorable impact on third quarter 2021 revenues.
Total cost and expenses were $772 million on a non-GAAP basis in the third quarter of 2021, compared to $406 million in the third quarter of 2020.
Of the 366 million increase, Topgolf added $310 million of total costs and expenses.
The remaining $56 million increase includes moving spending levels back to normal levels, the start-up of the new Korean Callaway apparel business and expansion of the TravisMathew business, increase corporate structure -- increase corporate costs to support a larger organization, and increase freight costs and inflationary pressures.
To date, increased sales volumes and selective price increases have balanced out the cost increases, and we believe this will continue to be the case in Q4 and into early 2022.
We are also reporting for the third quarter of 2021, non-GAAP operating income of $85 million, a $15 million increase over the same period in 2020.
The increase was led by a $24 million increase in segment profit due to the addition of the Topgolf business, and a $9 million increase in apparel, gear, and other operating income, partially offset by $11 million decrease in golf equipment operating income due to increased freight costs and return to more normalized spend.
Non-GAAP other expense was $22 million in the third quarter compared to other expense of 3 million in Q3 2020.
The $19 million increase was primarily related to a $16 million increase in interest expense related to the addition of Topgolf, as well as lower hedge gains, compared to the prior period.
On a GAAP basis, the effective tax rate for the third quarter was an unusual 132%.
You may recall that in the second quarter, we were required to use the discrete method for calculating our tax rate, and therefore, reversed a significant portion of the valuation allowance we had recorded during the first quarter as a result of the Topgolf merger.
In the third quarter, we were required to move back to using the annual rate method and once again record the valuation allowance that was reversed in the second quarter.
I have my own opinion, but we'll leave it to you to assess whether there was any value added by this round trip of the valuation allowance.
On a nine-month GAAP basis, the effective tax rate was 22%.
Excluding the valuation allowance we recorded again and the impact of the other nonrecurring items, our non-GAAP effective tax rate for the third quarter was 58% and for the nine months was 29%.
The third quarter rate was impacted by the transition from the discrete method to the annual rate method, and both periods were impacted by the deferred benefits of certain tax items.
There are a lot of moving parts with our tax rates, and the interim period rates are not always an accurate guide.
For internal purposes, we are using low 20s for our planning purposes for the non-GAAP full year rate.
Non-GAAP earnings per share was $0.14 or an approximately 194 million shares in the third quarter of 2021, compared to $0.61 per share on approximately 97 million shares in the third quarter of 2020.
The share increase is primarily related to the issuance of additional shares in connection with the Topgolf merger.
Full year estimated diluted shares is approximately 177 million shares, which includes the weighted average shares issued in connection with the merger over approximately a 10-month period.
Lastly, adjusted EBITDA was $139 million in the third quarter of 2021, compared to $88 million in the third quarter of 2020.
The $51 million increase was driven by a $59 million contribution for the Topgolf business, which performed exceptionally well this quarter and was partially offset by a return toward more normal spend levels in the golf equipment and soft goods businesses.
Turning now to Slide 15.
I will now cover certain key balance sheet and other items.
As of September 30, 2021, available liquidity, which is comprised of cash on hand and availability under our credit facilities was $918 million, compared to $630 million at September 30, 2020.
This additional liquidity reflects overperformance in all of our business segments.
At quarter end, we had a total net debt of $1 billion, including deemed landlord financing of $311 million related to the financing of Topgolf venues.
Our leverage ratios have improved significantly period over period and on a net debt basis is now 2.5 times, compared to 3.5 times at September 30, 2020.
As we look forward over the next few years, we expect the leverage ratio to trend a little higher, depending on the level of top of development and deemed landlord financing.
Consolidated net accounts receivable was $255 million, an increase of 6%, compared to $240 million at the end of the third quarter of 2020.
This increase is primarily attributable to the increase in third quarter revenue, as well as an incremental $10 million of Topgolf accounts receivable.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Legacy days sales outstanding decreased to 53 days as of September 30, 2021, compared to 55 days as of September 30, 2020.
Our inventory balance increased to $385 million at the end of the third quarter of 2021, compared to $325 million at the end of the third quarter of the prior year.
This $60 million increase was due to higher golf equipment inventory, especially toward the end of the quarter, reflecting an increase in in-transit inventory and a shift to making '22 launch product.
The Topgolf business also added $18 million to total inventory this quarter.
Capital expenditures for the first nine months of 2021 were $149 million, net of expected REIT reimbursements.
This includes $109 million related to Topgolf.
From a full year 2021 forecast perspective, the golf equipment and soft goods business forecast is $60 million.
The 2021 full year forecast for Callaway and Topgolf is approximately $225 million, net of REIT reimbursements, primarily related to the new venue openings.
The foregoing amounts do not include approximately 33 million in capital expenditures for Topgolf in January and February, which was premerger.
Non-GAAP depreciation and amortization expense was $37 million in the third quarter of 2021, compared to $8 million in 2020.
This includes $28 million of non-GAAP depreciation and amortization related to Topgolf.
For the full year 2021, we expect non-GAAP depreciation and amortization expense to be approximately $130 million, which includes $93 million for the Topgolf business.
The foregoing does not include approximately 18 million of Topgolf non-GAAP depreciation and amortization from January and February in the aggregate.
Now turning to our outlook on Slide 16.
For the full year, we expect revenue to range between 3.11 and $3.12 billion.
That compares to 1.59 billion in 2020 and 1.70 billion in 2019.
The company's full year 2021 net sales estimate assumes continued positive demand fundamentals for our golf equipment and soft goods segments and no further business, supply chain or retail shutdowns due to COVID.
It also assumes continued strong momentum in the Topgolf business, which is expected to generate 10-month segment revenue that will come in slightly above its 2019 full 12-month revenue of $1.06 billion.
Full year adjusted EBITDA is projected to be between 424 and $430 million, which assumes approximately 158 million from Topgolf.
For the fourth quarter, our implied revenue guidance is increasing by approximately 30 million, with about 50% of that flowing through to adjusted EBITDA.
The revenue increase is driven by continued over performance in the venues, increased supply and golf equipment and spend levels continue to ramp up to normalized levels.
On the operational side, as I mentioned earlier in my remarks, we are expecting continued cost pressure from increased freight costs and inflationary pressures, including labor and commodity prices, as well as negative foreign currency impacts due to a strengthening U.S. dollar for the balance of 2021 and into 2022.
However, despite these headwinds, we believe strong demand sales volumes and select price increases across our business segments will balance out these pressures, and we expect all businesses to grow next year.
Operator, over to you.

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q3 non-gaap earnings per share $0.14.
q3 2021 consolidated net revenue increased $381 million to $856 million.

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