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Text: I'm Patrick Burke, the company's head of investor relations.
We are pleased to be with you today to discuss our Q3 results, results that have exceeded our expectations, and strengthened our confidence in the future.
With recently announced plans to merge with Topgolf, we are naturally anticipating further questions on that subject as well.
Having said this, and turning to Page 6, let's now jump into our results.
We were pleased with our results in virtually all markets and business segments.
Our golf equipment segment has been experiencing unprecedented demand globally as interest in the sport and participation has surged.
We saw strong market conditions in all markets globally.
According to Golf Datatech, U.S. retail sales of golf equipment were up 42% during Q3, the highest Q3 on record.
U.S. rounds were up 25% in September, and are now showing full-year growth despite the shutdowns earlier this year.
We also believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport.
Golf retail, outside of resort locations, remains very strong at present and barring a shutdown situation has not been sensitive to the upticks in COVID cases.
Inventory at golf retail is at all-time lows and is likely these low inventory levels will continue into next year.
Callaway's global hard goods market shares remained strong during the quarter.
We estimate our U.S. market share is roughly flat year over year.
Our share in Japan is up slightly, and our share in Europe is down slightly.
On a global basis, I believe we remain the leading golf company in terms of market share and total revenues, and the No.
In the U.S., third-party research showed our brand to once again be the #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.
We have also started to show our 2021 product range to key customers and are receiving strong feedback.
Turning to our soft goods and apparel segment, with total revenue only down 3.4% year over year, the segment also experienced a rapid recovery in demand during the quarter.
The speed and magnitude of the recovery exceeded our expectations.
Like our golf equipment business, this segment appears to be well-positioned for both the months and years ahead, both during the pandemic and after.
Looking at individual businesses in this segment, both our TravisMathew and Callaway branded businesses experienced significant year-over-year growth during the quarter.
Jack Wolfskin was down year over year but only 16% on a revenue basis with improved trends continuing into October.
The hero of the soft goods and apparel segment is certainly e-com, a channel that was strengthened by investments we've made over the last several years.
As a result of these investments, we were able to deliver a 108% year-over-year growth in this channel during the quarter.
E-com is now a significant portion of the channel mix of this segment.
We believe our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward.
Long term, we continue to expect our apparel and soft goods segment to grow faster than our overall business, and with that growth to deliver operating leverage and enhance 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.
During the quarter, we also made good progress on key initiatives, including the transition to our new 800,000 square-foot Superhub distribution center located just outside of Fort Worth, Texas.
We are now completely consolidated into this new facility.
We also made further progress in our Chicopee golf ball facility modernization with productivity rates in this plant ramping positively during the quarter.
The primary investment phase on both of these significant projects is behind us now.
Looking forward, we are in a strong financial position and are pleased with the pace of our recovery and the business trends we have seen.
With the resurgence in the virus, there clearly could be some volatility over the next few months.
Portions of Q4 are likely to be at least partially impacted by the increase in restrictions being put into place globally.
Fortunately, for us, either low impact months for our golf equipment business, and we currently expect to continue to benefit from increased year-over-year demand.
In our apparel and soft goods segment, the impact will be larger than our golf equipment business.
But these businesses, too, are fortunate to be well-positioned in this environment and also benefit from strong e-com capabilities, which should offset some portion of any potential negative impacts in markets where in-store shopping might be constrained.
We also benefit from global scale and diversity across all of our segments.
As demonstrated by our Q3 results, we are fortunate in that our principal business segments are well-positioned for consumer needs and trends, both during the pandemic and afterward.
In addition, we are confident that we have both brands, human capital, and financial strength necessary to not only weather this storm but to also perform well during it and to emerge stronger than when we entered the crisis.
In closing, while we are pleased with our recent results and outlook, the safety and health of the company's employees, customers, and partners continue to be paramount in our minds.
As we operate our businesses, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment, and other safety precautions.
In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front line to protect, serve, and care for the rest of us.
Brian, over to you.
We are happy to report record net sales and earnings for the third quarter of 2020.
We feel fortunate that both our golf equipment and soft goods businesses are recovering faster than expected as both businesses support healthy, active outdoor lifestyles and activities that are compatible with social distancing.
This faster-than-expected recovery has placed us in a position of strength.
Our available liquidity, which includes cash on hand plus availability under our credit facilities increased to $630 million on September 30, 2020, compared to $340 million on September 30, 2019.
We are also excited about our prospective merger with Topgolf, which also provides a healthy, active, outdoor activity that is compatible with social distancing.
And Callaway Topgolf merger is a natural fit.
With the significant overlap in golf consumers, there should be significant advantages to both businesses through increased consumer engagement, marketing, and sales opportunities and faster growth than could be achieved on a stand-alone basis.
And the best part is that these synergies provide upside to the financial model we provided.
The financial returns of this transaction are so compelling, we did not need the synergies to justify the transaction.
Growing the Topgolf Venue and Toptracer businesses alone will create significant shareholder value.
We look forward to discussing the Topgolf business further during the virtual investor conference on Thursday.
In evaluating our results for the third quarter, you should keep in mind some specific factors that affect year-over-year comparisons.
First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred nonrecurring transaction and transition-related expenses in 2019.
Second, as a result of the OGIO, TravisMathew, and Jack Wolfskin acquisition, we incurred non-cash amortization in 2020 and 2019, including amortization of the Jack Wolfskin inventory step-up in the first quarter of 2019.
Third, we also incurred other nonrecurring charges including costs related to the transition to our new North American distribution center in Texas.
Implementation costs related to the new Jack Wolfskin IT system and severance costs related to our cost reduction initiatives.
Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is nonrecurring and did not affect 2019 results.
Fifth, we incurred and will continue to incur non-cash amortization of the debt discount on the notes issued during the second quarter of 2020.
We have provided in the tables to this release as scheduled breaking out the impact of these items on the third quarter and the first nine months' results, and these items are excluded from our non-GAAP results.
With those factors in mind, I will now provide some specific financial results.
Turning now to Slide 10.
Today, we are reporting record consolidated third quarter 2020 net sales of $476 million, compared to $426 million in 2019, an increase of $50 million or 12%.
This increase was driven by a 27% increase in the golf equipment segment, resulting from a faster-than-expected recovery and the strength of the company's product offerings across all skill levels.
The company's soft goods segment is also recovering faster than expected, with third-quarter 2020 sales decreasing only 3.4% versus the same period in 2019.
Changes in foreign currency rates had an $8 million favorable impact on third-quarter 2020 net sales.
Gross margin was 42.2% in the third quarter of 2020, compared to 44.9% in the third quarter of 2019, a decrease of 270 basis points.
On a non-GAAP basis, gross margin was 42.7% in the third quarter, compared to 44.9% in the third quarter of 2019, a decrease of 220 basis points.
This decrease is primarily attributable to a decline in gross margin in the soft goods segment due to the impact of COVID-19 on that business, including our proactive inventory reduction initiatives, partially offset by favorable changes in foreign currency exchange rates, an increase in e-commerce sales, and a slight increase in overall golf equipment gross margins.
Operating expenses were $137 million in the third quarter of 2020, which is a $14 million decrease, compared to $151 million in the third quarter of 2019.
Non-GAAP operating expenses for the third quarter were $135 million, a $12 million decrease compared to the third quarter of 2019.
This decrease is due to decreased travel and entertainment expenses and the actions we undertook to reduce costs in response to the COVID pandemic.
Other expense was $6 million in the third quarter of 2020, compared to other expense of $7 million in the same period of the prior year.
On a non-GAAP basis, other expense was $3 million in the third quarter of 2020, compared to $7 million for the comparable period in 2019.
The $4 million improvements were primarily related to a net increase in foreign currency-related gains period over period, partially offset by a $1 million increase in interest expense related to our convertible notes.
Pretax earnings were $58 million in the third quarter of 2020, compared to pre-tax earnings of $33 million for the same period in 2019.
Non-GAAP pre-tax income was $65 million in the third quarter of 2020, compared to non-GAAP pre-tax income of $37 million in the same period of 2019.
Diluted earnings per share were $0.54 on 96.6 million shares in the third quarter of 2020, compared to earnings per share of $0.32 on 96.3 million shares in the third quarter of 2019.
Non-GAAP fully diluted earnings per share were $0.60 in the third quarter of 2020, compared to fully diluted earnings per share of $0.36 for the third quarter of 2019.
Adjusted EBITDA was $87 million in the third quarter of 2020, compared to $57 million in the third quarter of 2019, a record for Callaway Golf.
Turning now to Slide 11.
The first nine months of 2020 net sales are $1.2 million, compared to $1.4 million in 2019, a decrease of $174 million or 13%.
The decrease was primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business.
The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 7%, and our soft goods segment, which decreased 21%.
This decrease also reflects a decrease in all major regions and product categories period-over-period due to COVID-19.
Change in the foreign currency rates positively impacted first nine months 2020 net sales by $2 million.
Gross margin was 42.7% in the first nine months of 2010 compared to 45.8% in the first nine months of 2019, a decrease of 310 basis points.
Gross margins in 2020 were negatively impacted by the North America warehouse consolidation and in 2019 were negatively impacted by the nonrecurring purchase price step-up associated with the Jack Wolfskin acquisition.
On a non-GAAP basis, which excludes these recurring items -- excuse me, nonrecurring items, gross margin was 43.3% in the first nine months of 2020 compared to 46.6% in the first nine months of 2019, a decrease of 330 basis points.
The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with idle facilities during the government-mandated shutdown, and the company's inventory reduction initiatives.
The decrease in gross margin during the first nine months was partially offset by an increase in the company's e-commerce business.
Operating expense was $592 million in the first nine months of 2020, which is a $111 million increase compared to $481 million in the first nine months of 2019.
This increase is due to the $174 million non-cash impairment charge related to the Jack Wolfskin goodwill and trade name.
Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for the first nine months of 2020 were $410 million, a $58 million decrease, compared to $468 million in the first nine months of 2019.
This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses as well as a reduction in variable expenses due to lower sales.
Other expense was approximately $7 million in the first nine months of 2020, compared to other expense of $28 million in the same period in the prior year.
On a non-GAAP basis, other expense was $3 million for the first nine months of 2020, compared to $24 million for the same period of 2019.
The $21 million improvements is primarily related to a $22 million increase in foreign currency-related gains period over period, including the $11 million gain related to the settlement of the cross-currency swap arrangement.
Pretax loss was $80 million in the first nine months of 2020, compared to pre-tax income of $127 million for the same period in 2019.
Excluding the impairment charge and other items previously mentioned, non-GAAP pre-tax income was $113 million in the first nine months of 2020 compared to non-GAAP pre-tax income of $155 million in the same period of 2019.
Loss per share was $0.92 on $94.2 million in the first nine months of 2020, compared to earnings per share of $1.13 on 96.2 million shares in the first nine months of 2019.
Excluding the impairment charge and the items previously mentioned, non-GAAP fully diluted earnings per share was $0.98 in the first nine months of 2020, compared to fully diluted earnings per share of $1.35 for the first nine months of 2019.
Adjusted EBITDAS was $175 million in the first nine months of 2020, compared to $216 million in the first nine months of 2019.
Turning now to Slide 12.
I will now cover certain key balance sheet and cash flow items.
As of September 30, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand was $637 million compared to $340 million at the end of the third quarter of 2019.
This additional liquidity reflects improved liquidity from working capital management, our cost reductions, and proceeds from the convertible notes we issued during the second quarter.
We had a total net debt of $498 million, including $443 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin.
Our net accounts receivable was $240 million, an increase of 7%, compared to $223 million at the end of the third quarter of 2019, which is attributable to record sales in the quarter.
Day sales outstanding decreased slightly to 55 days as of September 30, 2020, compared to 56 days as of September 30, 2019.
We continue to remain very comfortable, if not pleasantly surprised with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 5% to $325 million at the end of the third quarter of 2020.
This decrease was primarily due to the high demand we are experiencing in the golf equipment business, partially offset by higher soft goods inventory related to COVID-19.
Our teams have done an excellent job being proactive with regard to managing inventory as soon as COVID hit us.
They continue to be highly focused on inventory on hand as well as inventory in the field.
We are very pleased with our overall inventory position and the inventory at retail, particularly on the golf side of the business, which remains low at this time.
Capital expenditures for the first nine months of 2020 were $31 million, compared to $37 million for the first nine months of 2019.
We expect our capital expenditures in 2020 to be approximately $35 million to $40 million, up slightly from the estimate we provided in May but down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions.
Depreciation and amortization expense was $203 million for the first nine months of 2020.
On a non-GAAP basis, depreciation and amortization expense, excluding the $174 million impairment charge, was $29 million for the first nine months of 2020 and is estimated to be $35 million for the full year of 2020.
Depreciation and amortization expense was $25 million for the first nine months of 2019 and $35 million for full-year 2019.
I'm now on Slide 13.
As we previously reported, we are no longer providing other specific financial guidance at this time due to continued uncertainty surrounding the duration and impact of COVID-19.
Although we expect some level of continued volatility due to the ongoing pandemic, third-quarter trends have thus far continued into the fourth quarter.
Perhaps more importantly, all of our business segments as well as the Topgolf business support an outdoor, active, and healthy way of life that is compatible with the world of social distancing.
And we now appreciate even further that all of our businesses are likely to be favored in both the realities of the current environment as well as anticipated consumer trends post-pandemic.
These circumstances, along with our increased liquidity will allow us to weather the pandemic and emerge in a position of strength to the benefit of our businesses and the Topgolf business post-merger.
As Chip mentioned in his remarks, due to time constraints, the primary focus of the Q&A should be the Callaway business, and we have scheduled a virtual conference on Thursday to discuss the Topgolf business further.
Operator, over to you.

user
compname posts q3 non-gaap earnings per share $0.60.
q3 non-gaap earnings per share $0.60.
q3 earnings per share $0.54.
q3 2020 net sales of $476 million, a 12% increase compared to q3 of 2019.
is not providing financial guidance for q4 of 2020.
callaway golf - golf business now experiencing unprecedented demand, soft goods business is recovering significantly more quickly than expected.

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