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Text: I'm Patrick Burke, the company's head of investor relations.
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 TravisMathew 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.
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 6 and jump into our Q1 results by segment.
Our golf equipment segment continues to benefit from record demand levels.
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 midyear, 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 four major golf equipment brands launched metal wood 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 Datatech as well as a strategically important green grass channel.
Furthermore, we've been receiving excellent feedback on the performance of our products, especially the Epic MAX Woods, the Apex Ford tires, the two-bolt tin putter as well as our entire ball lineup.
We also remain comfortable with our brand strength and position.
In the U.S., third-party research from Datatech showed our brand to be the No.
1 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 TravisMathew, we had high expectations for growth, and still, the business exceeded these expectations.
Driving this performance, e-com was up 145% year over year in Q1, and company-owned stores comped up nearly 10% despite some code restrictions early in the quarter.
Sell-through at wholesale was also very strong.
Ryan Ellison and his team at TravisMathew 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 was starting to look like we had turned the corner on brand momentum.
Though 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-com channel and key digital partners has really moderated that negative impact.
Combine this with both nice growth in China and strong financial discipline, 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 prebooks for the full winter line have been quite strong.
As a reminder, Richard Collier joined the brand in December as CEO.
Richard joined us from Helly Hansen, where he held the title of global product officer and served in that capacity as well as de facto COO.
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 branded softwood business.
As mentioned last quarter, in Korea, we plan to take back the Callaway Golf apparel brand that's been licensed to a third party for several years and launched 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, we have been considering for several years now.
Taking a step back in 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' growth prospects and profitability going 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 Top Golf.
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 Artie Starrs as the new CEO in early April.
Artie brings a wealth of valuable experience and talent to an already strong management team and an 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 during 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 fee 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.
We see it as the manageable challenges 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.
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 Toptracer team.
We remain on track for 8,000 bays this year.
At the end of this week, we'll be launching the next global Toptracer tournament, the 9-Shot Challenge.
This time, presented by the PGA America and the PGA Championship.
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 on our previous calls, 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 TravisMathew, investments in demand creation and digital resources for all brands, as well as the apparel business.
We have a track record for making these kind of internal investments and are confident these will deliver higher 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's 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.
We are very pleased with our first-quarter results, with consolidated revenue increasing 47% and adjusted EBITDA increasing 113% compared to the same period in 2020.
Our consolidated revenue and adjusted EBITDA for the first quarter of 2021 increased by 26% and 38%, respectively compared to the first quarter of 2019.
Each of our three operating segments performed ahead of plan during the first quarter of 2021.
In addition to this better-than-expected operating performance, our liquidity has also improved substantially compared to a year ago.
As of March 31, 2021, our available liquidity, which is comprised of cash on-hand and availability under our credit facilities, was $713 million compared to $260 million at March 31, 2020.
All in all, we are pleased with the current state of our business and are optimistic for the balance of the year.
In evaluating our results for the first quarter, you should keep in mind some specific factors that affect year-over-year comparisons.
First, as a result of the OGIO, TravisMathew and Jack Wolfskin acquisition, we incurred non-cash amortization expense of intangible assets in the first quarter of 2021 and 2020.
The first quarter of 2021 also includes non-cash amortization of intangible assets related to the Topgolf merger as well as depreciation expense from the fair value step-up of Topgolf property, plant and equipment and expense related to the fair value adjustments to Topgolf's leases and debt.
Second, we also incurred other acquisition and non-recurring charges in the first quarter of 2021, including Topgolf merger transaction and transition expenses and implementation costs related to the new Jack Wolfskin IT system.
In 2020, the company incurred non-recurring integration costs related to the Jack Wolfskin acquisition and costs related to the transition to our new North American distribution center in Texas.
Third, we recognized in the first quarter of 2021 a $253 million non-cash gain related to the write-off of our premerger Topgolf investment.
Fourth, we incurred in the first quarter of 2021 and will continue to incur noncash amortization of the debt discount on the notes issued during the second quarter of 2020.
Fifth, we recorded in the first quarter of 2021, a non-cash valuation allowance related to certain of our deferred tax assets as a result of the merger.
Lastly, the Topgolf merger was completed on March 8, 2021.
Topgolf generally operates in a 13-week quarter.
As a result, our first-quarter 2021 financial statements include Topgolf results for our four-week period, commencing March 8, 2021 and ending April 4.
This can become confusing, and we would do our best to call out when we are discussing Topgolf results for the full quarter versus the four-week stub period.
But you should do care when preparing your models to ensure you are using the correct one.
We have provided in the tables to this release a schedule detailing the impact of these items on first-quarter results, and these items are excluded from our non-GAAP results.
With those factors in mind, I will now provide some specific financial results for the first quarter of 2021 compared to the first quarter of 2020.
Turning now to Slide 11.
Today, we are reporting record consolidated first-quarter 2021 net revenues of $652 million, compared to $442 million for the same period in 2020, an increase of 210 million or 47%.
This increase was led by a 26% increase in the legacy Callaway business, as well as an incremental $93 million from the four weeks of the Topgolf business.
Changes in foreign currency rates had a $17 million favorable impact on first-quarter 2021 net sales.
We are also reporting for the first quarter of 2021 operating income of $76 million, an increase of $35 million or 85%, compared to $41 million for the same period in 2020.
On a non-GAAP basis, operating income for the first quarter of 2021 was $97 million, a 54 million or 126% increase compared to 43 million for the same period in 2020.
The increase in non-GAAP operating income was led by a $50 million increase in segment operating income from the legacy Callaway business as well as an incremental $4 million from the four weeks of the Topgolf business.
Other income was $244 million in the first quarter of 2021 compared to other expense of $3 million in the same period of the prior year.
This includes the $253 million non-cash gain related to the Topgolf merger.
On a non-GAAP basis, which includes Topgolf gain, other expense was $5 million in the first quarter of 2021 compared to other expense of $3 million for the comparable period in 2020.
The $2 million increase in other expense was primarily related to higher interest expense related to incremental interest from the convertible bonds issued in May 2020, plus four weeks of Topgolf interest, partially offset by a decrease in foreign currency-related losses.
Pretax income was $320 million in the first quarter of 2021 compared to $38 million for the same period in 2020.
Non-GAAP pre-tax income was $91 million in the first quarter of 2021 compared to non-GAAP pre-tax income of $41 million in the same period of 2020.
Earnings per share was $2.19 or approximately 125 million shares in the first quarter of 2021 compared to earnings of $0.30 or approximately 96 million shares in the first quarter of 2020.
Non-GAAP earnings per share was $0.62 in the first quarter of 2021 compared to earnings per share of $0.32 for the first quarter of 2020.
Fully diluted shares were 125 million in the first quarter of 2021 compared to 96 million shares for the same period in 2020.
The net 29 million share increase is primarily related to the issuance of additional shares in connection with the Topgolf merger.
Full year estimated diluted shares is approximately 176 million shares, which represents the weighted average shares issued in connection with the merger over approximately a 10-month period.
As of March 31, 2021, we had approximately 185 million shares that were issued and outstanding.
Adjusted EBITDA was $128 million in the first quarter of 2021 compared to $60 million in the first quarter of 2020 and $93 million in the first quarter of 2019.
Topgolf contributed adjusted EBITDA of $15 million for the four-week period.
To provide some additional perspective, The Topgolf first quarter 2021 EBITDA, the full three months was $17 million.
The golf equipment segment's net revenue increased $85 million or 29% to, $377 million in the first quarter of 2021, compared to $292 million in the first quarter of 2020.
This increase was driven by the continued surge in golf demand and participation, our supply chain team's ability to secure a greater-than-expected supply of golf equipment components during the first quarter as well as the COVID-19 shutdowns across portions of our business in the first quarter of 2020.
Both golf club and golf ball sales increased by 26% and 50%, respectively.
The golf equipment segment operating income was $85 million or 22.5% of net revenues in the first quarter of 2021 compared to $59 million or 20.2% of net revenues in the first quarter of 2020, an increase of $26 million or 230 basis points.
The increase was driven by the increased revenue, operating expense leverage and favorable foreign currency exchange rates, partially offset by increased freight and product mix, including lower margins on our higher technology golf club product offerings and package sets.
The apparel, gear and other segment's net revenue increased $31 million or 21% to $182 million in the first quarter of 2021 compared to $151 million in the first quarter of 2020.
The increase was driven by a 23% increase in apparel sales as well as an 18% increase in gear and accessories and other.
Both the TravisMathew and Jack Wolfskin business had a recovery from a pandemic faster than expected, despite continued retail restrictions and other effects from COVID-19, particularly in Europe.
The apparel, gear and other segment's operating income increased $24 million to $20 million compared to a loss of $4 million for the same period in the prior year.
In 2021, this equated to 11% of segment revenue, a 1,360-basis-point improvement over the first quarter of 2020.
The increase was driven by the increased sales, operating expense and cost of revenue leverage, favorable foreign exchange rates and increased commerce revenue, partially offset by the lower retail revenue in Jack Wolfskin due to further government-mandated retail shutdowns during the first quarter in Central Europe.
The Topgolf segment net revenue was $93 million in the first quarter of 2021, which includes four weeks of the Topgolf business.
The Topgolf segment's operating income was $4 million for the four-week stub period.
To provide investors additional perspective, Topgolf's full first quarter net revenues were $236 million and full first quarter GAAP operating loss was $30 million and on a non-GAAP basis, Topgolf's operating loss was 15 million.
Turning now to Slide 13.
I will now cover certain key balance sheet and other items.
As of March 31, 2021, available liquidity was $713 million compared to $260 million at the end of the first quarter.
This additional liquidity reflects higher revenues in the legacy Callaway business, improved liquidity from working capital management, and proceeds from the convertible notes we issued during the second quarter.
At March 31, 2020, we had total net debt of $1,160 million, including 640 million of Topgolf related net debt.
The Topgolf debt includes landlord financing of $222 million related to financing the venues business.
Our consolidated net accounts receivable was $329 million, an increase of 27% compared to $260 million at the end of the first quarter of 2020.
Days sales outstanding decreased slightly to 61 days on March 31, 2021, compared to 62 days as of March 31, 2020.
The increase in net accounts receivable primarily is attributable to the increase in first quarter revenue, but also includes an incremental $9 million of accounts receivable.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Also, this on Slide 13, our inventory balance decreased by 19% to $336 million at the end of the first quarter of 2021 compared to 413 million at the end of the first quarter of the prior year.
The $77 million decrease was due to the high demand we are experiencing in the golf equipment business, recovery of our soft goods businesses, as well as inventory reduction efforts in the soft goods business.
Capital expenditures for the first quarter of 2021 were $29 million.
This includes $16 million related to Topgolf.
From a full-year 2021 forecast perspective, the legacy Callaway forecast is increasing to approximately $65 million versus the previous forecast of 50 million due to capacity investments in our plants and warehouses, as well as increasing the number of play in TravisMathew retail stores.
The full year and 12-month forecast for Callaway and Topgolf is approximately $265 million, driven primarily by the new venue openings.
If you include Topgolf for only 10 months, that would be approximately $235 million.
Depreciation and amortization expense was $20 million in the first quarter of 2021.
Non-GAAP depreciation and amortization expense was $17 million in the first quarter of 2021 compared to $8 million in 2020.
This includes $9 million of non-GAAP depreciation and amortization related to Topgolf.
To help give investors additional perspective, the Topgolf full Q1 non-GAAP depreciation and amortization was $27 million.
For the full year of 2021, we expect non-GAAP depreciation and amortization expense to be approximately $155 million, which includes 115 million for the Topgolf business.
I'm now on Slide 14.
We are not providing specific revenue and earnings guidance ranges for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19.
However, we would like to provide some guidance comments we previously made.
First, last quarter, we provided some guidance on full year consolidated gross margins and operating expenses.
Due to the merger with Topgolf, that guidance is no longer applicable.
We are no longer providing specific guidance for consolidated gross margins and operating expenses, given the disparate treatment of those items from the legacy Callaway business and the Topgolf business.
With that said, I would like to call out a few factors that have changed since our call in February.
First, we have changed our accounting for golf advertising and our golf equipment business.
For 2021, it is treated as a discount to sales as opposed to an operating expense in 2020 and 2019.
This negatively impacted gross margins for the golf equipment business in the first quarter of 2021 by approximately 85 basis points and will continue to affect comparisons with prior periods for the balance of the year as prior periods were not changed.
There is no change to operating income.
This is only a shift between gross margin and operating expenses.
We previously estimated that the freight container shortage was expected to have a negative impact of $13 million on freight costs in 2021, with a substantial majority affecting the first half.
At this point, the impact of COVID-19 in our overall freight cost is expected to be greater than the 13 million, with more costs hitting the balance of the year than originally expected.
We also previously estimated that operating expenses for the legacy Callaway business would be approximately $78 million higher than in 2019 due to the negative impact of foreign currency inflationary pressures and continued investment in the company's business, which included investment needed to assume the apparel business, investment in the other soft goods businesses and investment in Pro Tour.
We now expect these factors along with both deferred spending from the first quarter and increased variable costs associated with the increased revenue and higher stock price will have an overall greater impact than we originally anticipated for the balance of the year.
In addition, we plan to invest a little more back into our business than originally planned.
These incremental investments include additional TravisMathew stores given that brand's momentum and the availability of favorable lease terms in the current environment, and incremental investments in demand creation and digital resources for all brands as well as the Korea apparel business.
Lastly, we, along with most other companies are experiencing increased wage pressure due to a tight labor market, increased freight costs as I mentioned earlier, and increased commodity prices.
These are impacting all aspects of our business.
We're seeing increased freight costs in terms of increased container prices, but also increased air freight expense as well.
We're also seeing an increase in commodity prices from steel to titanium, from rubber urethane to textiles and from cheese to chicken wings.
As Chip mentioned, at present, demand is high enough the positive volume variances are expected to overshadow the majority of these increased costs.
But these increased costs in the aggregate will still have some impact on balance of the year operating margins.
In 2022, we will have to explore price increases if those higher costs continue.
We have previously guided that due to the impact of COVID-19, the company's revenue and adjusted EBITDA would not return to 2019 levels until 2022 for either legacy Callaway business or the Topgolf business.
Given the faster-than-expected recovery of both businesses, and with all three of our operating segments performing above plan in the first quarter, we now project that revenue and adjusted EBITDA from our legacy businesses will exceed 2019 levels, and then our Topgolf business for the full 12 months of 2021 will meet or exceed 2019 levels, which is a year faster than expected.
As a reminder, in 2019, the Calllaway legacy business reported revenue of $1.7 billion and adjusted EBITDA of $211 million.
For full year 2019, that's 12 months.
The Topgolf business reported revenue of $1.06 billion and adjusted EBITDA of $59 million in 2019.
Please note that Callaway's actual reported full year financial results will only include 10 months of Topgolf results in 2021, and therefore, will not include January and February results which were in the aggregate, $143 million in revenue and $2.3 million in adjusted EBITDA.
Operator, over to you.

user
callaway golf q1 non-gaap earnings per share $0.62.
q1 non-gaap earnings per share $0.62.
q1 earnings per share $2.19.
not providing specific net revenue and earnings guidance ranges for 2021 at this time.
expects that revenue and adjusted ebitda for full year 2021 for legacy callaway business will exceed 2019 levels.

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