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Text: I'm Patrick Burke, the company's head of investor relations.
Artie Starrs, Topgolf's CEO; William Davenport, Topgolf's CFO; and Jennifer Thomas, Callaway's chief accounting officer, are also in the room today for Q&A.
generally accepted accounting principles.
Results for the second quarter were nothing short of outstanding, and I'm extremely proud of our entire global team for the work they have put in to build this business to the powerhouse that it is today.
As you will hear throughout the call today, we are experiencing strong momentum across all of our business segments and are delivering exceptional operating results despite a challenging environment.
Revenue for the quarter was up 208% to $914 million and up over 112% to approximately $1.6 billion for the first half of 2021, both new records for our business.
Profitability also reached new highs, with adjusted EBITDA of $164 million for the quarter and $292 million for the first six months of the year.
While headwinds from COVID persist, we have strong conviction in both the long-term strategic position and impressive earnings growth prospects of this unique business.
Before shifting gears to talk specifically about each area of our business, I want to give a personal shout-out to our tour team who's having an exceptional year as well.
Congrats to Phil and John for their wins at the PGA Championship in the U.S. Open earlier this season; to Xander for his gold medal performance in Tokyo; and to Annika for her dominant victory at the U.S. Senior Women's Open.
What a summer for Callaway Golf's tour staff.
I can't tell you how excited I get seeing our players representing Callaway, along with our other brands, including TravisMathew and Topgolf, on the game's biggest stages.
From a business perspective, I'm confident this exposure is very good for our brands and will help us deliver long-term shareholder value.
Looking first at our golf equipment business.
Demand for clubs and balls remains very high as the sport continues to gain interest from both new entrants, which are driving continued unprecedented growth in package sets, junior clubs, and women's clubs, along with core golfers who are playing more than ever and showing strong enthusiasm for the game.
According to Golf Datatech, rounds played in June remained at an all-time high, and retail demand remains elevated.
Datatech's hardgoods sell-through in Q2 was up an impressive 40% versus 2019, and retail inventory levels remain extremely low, with only 2.2 months on hand at the end of June as industry supply chain strained to keep up with the last 12 months of unprecedented demand.
With more options for activities opened this spring and summer compared to last year, we were cautious that there could have been a potential slowdown in golf participation and/or demand.
However, thus far, we're pleased to report that we're not seeing this from our seat in the market.
We are also monitoring supply chain disruption due to the resurgence of the coronavirus Delta variant.
The resurgence has not had any negative demand implications yet, but it has caused further supply disruptions from factories based in and around Southeast Asia, primarily Vietnam.
The safety of the people working in these regions is top priority, and we're working with suppliers to make sure operating conditions are and remain as safe as possible.
Also, we have become accustomed to adapting to these circumstances over the last 18 months, and thus, we're able to shift some portion of our production to other less-impacted factories.
Still, given how lean inventories are already, the fact that nearly all our factories are running at 100% capacity, and that we'll need to shift production shortly toward next year's launches to protect that supply, these shutdowns will have an estimated $55 million negative impact on second-half revenues, primarily in our golf equipment segment and primarily in Q3.
Although disappointing, I view this disruption as a short-term issue, not one that will have a long-term impact on value for strategy.
On the positive side, and I recognize this is a glass-half-full view, we now believe field inventory levels will almost certainly stay lower than expected through this year, in many ways, a healthy market dynamic that bodes well for 2022.
All in all, we are very pleased with the strength of this category and our position in it.
We expect to deliver record performance for our golf equipment segment this year, and perhaps most importantly, we continue to believe the outlook for the golf equipment category is highly positive, with both a larger total market and a higher embedded growth rate.
Turning now to our apparel and soft goods segment.
The business put up another strong quarter, exceeding our expectations as retail locations reopened across the world and our brands remain top of mind for consumers.
This business strongly overperformed during the quarter and continues to see incredible growth as we move into the back half of the year.
To contextualize, year over year for the second quarter, we saw more than 30% comp store growth in our own retail stores versus 2019, the last period of unaffected by COVID as well as strong growth in sell-through at wholesale accounts and e-commerce.
Another fun fact is that we are not just seeing brand momentum in the target male audience buying for themselves, as approximately 30% of the direct-to-consumer sales that we track are her buying for him.
I'm no expert here, but when women are picking the brand for their men, I think it's a very good sign.
Jack Wolfskin was a strong performer as well this quarter.
The business has faced additional challenges given the longer COVID shutdowns in Europe than here in the U.S., but the team has worked through the issues brilliantly and is on track for a strong year.
As our owned stores in Europe reopened during the quarter, retail picked up nicely, almost reaching 2019 levels of revenue.
Most importantly, we experienced strong sell-through of the spring/summer 2021 line, as well as strong, prebooks for the spring/summer '22 line, two very important indicators for the health of the brand.
Our stores in China also continued to perform well as the brand maintains strong awareness and positioning within the outdoor apparel market there.
The team at Jack Wolfskin has done a fantastic job of revitalizing this business and putting us in a strong position to grow on the top and bottom line as COVID restrictions abate in the brand's key markets of Europe and China and as the brand grows and strengthen appeal.
Lastly, our Callaway-branded soft goods business showed strength as well, particularly in Japan, as popularity for the sport drove consumer spending.
Additionally, toward the end of the quarter, we took back the Korea apparel business, which was being licensed to a third party for several years.
Although that business is just starting up, we are very excited about the long-term opportunity it will provide to our soft goods segment, and the team did an excellent job managing this transition given the COVID travel restrictions and challenges.
With demand levels high across this business segment, we expect to enter 2022 with low retail inventory across all of our soft good brands.
In summary, we are fortunate to be in excellent categories and are on our path to deliver a good 2021 in this segment as well as future growth.
Now on to Topgolf.
Q2 marked the first full quarter of Callaway results with Topgolf included in our numbers, and they delivered beyond our expectations.
While COVID concerns remain a challenging variable for venue operations, the team put up outstanding numbers even as other options for consumers became available.
We continue to be invigorated by the momentum of this business brought to both Callaway's portfolio and to the game of golf.
Same venue sales percentage versus 2019 levels continued encouraging trend of recovery, with Q2 results in the low 90s, up substantially from the low 80s in Q1 of this year.
Results were driven by a mix of strong walk-in sales and continued recovery in the event business.
Looking forward, and this assumes no major restrictions from COVID upticks, we feel same venue sales for Q3 will be above Q2 results, while we expect Q4 sales to be slightly slower than Q2 due to the corporate events mixed in that quarter and that the full year should end at approximately 90%.
To put this in context, this is considerably above our expectations for the year and, we believe, a strong performance.
Domestic venue expansion continued as planned during the quarter, with four new venues opening.
Another venue, Holtsville, Long Island, opened recently, and yet another, Colorado Springs will open later this week.
We then expect to open one more venue in Q4 for a total of nine new domestic venues this year.
At the end of the year, we will have 67 domestic venues in operation across three owned UPA venues for a total of 70 owned venues in operation.
Internationally, our U.K. venues had an excellent quarter as they reopened strongly after COVID induced shutdowns in Q1, and our franchise international venue business continues to build capability and momentum despite various COVID challenges.
Overall, the venue business is very healthy, with profitability exceeding our expectations.
The Toptracer business had a successful quarter as well, with over 2,000 bays installed in Q2, setting a new record as we continue to see strong demand and excellent customer feedback.
While some challenges remain on the installation front due to COVID, we expect to meet or exceed our target of 8,000 new bays for the year.
One of the highlights for the quarter was the successful installation of Toptracer into what we believe is the world's largest driving range, Golf Club Daiju located outside Nagoya in Central Japan.
Lastly, Topgolf's unique position in the market as a gateway to golf is continuing to introduce new players in the sport, and we see excellent long-term potential through our preferential ability to market to these new entrants and drive synergies across a growing consumer base, both on and off course.
Looking ahead to the second half of the year and beyond, I remain excited about the opportunity ahead of us.
We operate in great categories with a unique portfolio of businesses that are all exceeding our expectations.
There are, of course, macroeconomic hurdles that we and many companies are facing, including supply chain constraints, freight costs, staffing challenges, and inflationary pressure, but at the demand level, we are experiencing and expect to experience in the foreseeable future we see these as manageable and expect to still deliver excellent financial results.
On the supply chain side, our guidance assumes an estimated $55 million negative impact to our top-line growth, primarily in Q3, to account for current disruptions.
On the inflationary side, we have already started taking some price and believe we'll largely have the ability to take price as needed.
Given the various moving parts for the remainder of the year, we are providing both third quarter and full-year guidance.
I'll let Brian discuss the numbers in more detail, but the headline is that we expect our full-year 2021 sales to be over $1.3 billion higher than 2019 and adjusted EBITDA to be between $134 million and $149 million higher than 2019.
Our EBITDA for 2021 will be very close to the number we guided to for 2022 when we provided longer-term guidance in the fall of last year.
We are essentially a year ahead of plan.
As Chip mentioned, we are very pleased with our second quarter and first-half results.
Each of our operating segments performed above our expectations, leading to record results despite a challenging operating environment.
There are some continuing challenges from the pandemic that will have effect on our business in the short term, including supply chain constraints, increased freight costs, staffing challenges, and inflationary pressures.
However, we believe that current demand levels, along with actions we can take, will mitigate the impact of these factors, and we expect to have strong financial results for the year and the foreseeable future.
We are energized by the opportunities ahead of us, and we believe we are well situated to handle the prolonged pandemic.
More specifically, each of our operating segments support an outdoor, active and healthy way of life that is compatible with the world of social distancing, and we have a strong liquidity position.
As of June 30, 2021, our available liquidity, which is comprised of cash on hand and availability under our credit facilities, was $877 million, compared to $483 million at June 30, 2020.
In evaluating our results for the second quarter and first half, you should keep in mind the following: First, our non-GAAP results exclude non-cash amortization expense of intangible assets acquired in acquisitions, including fair value adjustments to Topgolf's leases and debt; noncash depreciation expense from the fair value step-up of Topgolf assets; transaction and transition costs from the acquisitions; noncash amortization of the debt discount on the notes issued during the second quarter of 2020; the $174 million pre-tax non-cash impairment charge in the second quarter of 2020 related to the Jack Wolfskin goodwill and trade name; a $253 million non-cash gain related to the write-up of our premerger Topgolf investment; a $33 million benefit in the second quarter of 2021 from the reversal of a portion of the noncash valuation allowance related to certain of our deferred tax assets and certain other nonrecurring items.
We have provided in the tables to this release a reconciliation detailing the impact of these items on second quarter and first-half GAAP results.
Second, this is a reminder that our first-half financial results include Topgolf for four months only as the merger was completed on March 8, 2021.
With those factors in mind, I will now discuss our financial results.
Looking at Slides 10 and 11.
Following record revenues in the first quarter, our revenues continued to be very strong in the second quarter of 2021, setting another record for the company.
The second-quarter 2021 revenues benefited from incremental revenue from the Topgolf merger, and second-quarter 2020 revenues were significantly impacted as much of the company's business in golf retail will shut down then due to the pandemic.
During the second quarter of 2021, sales in all product segments and in all major regions increased compared to both 2020 and 2019.
With that said, consolidated second quarter 2020 revenues were $914 million, compared to $297 million for the same period in 2020, an increase of $617 million or 208%.
This increase was led by a 98% increase in the golf equipment and soft goods businesses as well as an incremental $325 million from the Topgolf business.
Changes in foreign currency rates had an $18 million favorable impact on second-quarter 2021 revenues.
Consolidated second-quarter 2020 revenues also increased $467 million or 105% compared to the same period in 2019, including a 37% increase in golf equipment and 21% increase in our soft goods business.
As a result, consolidated revenue for the first half of 2021 increased $826 million or 112% compared to 2020 and increased $602 million or 63% compared to the same period in 2019.
Total cost and expenses were $806 million in the second quarter of 2021, compared to $474 million in the second quarter of 2020.
On a non-GAAP basis, which excludes, among other things, the $174 million non-cash impairment charge in the second quarter of 2020, our total costs and expenses increased $503 million to $796 million for the second quarter of 2021, compared to $293 million in the second quarter of 2020.
Topgolf added $301 million of total costs and expenses.
The remainder includes increased variable expense, the restoration of some expenses that were reduced during the pandemic in 2020, planned investment in the business, increased corporate costs to support a larger organization, and increased freight and inflationary pressures, including labor and commodity prices.
To date, the overperformance of the company's business has generally allowed us to outpace the cost increases.
We are also reporting for the second quarter of 2021 operating income of $107 million, an increase of $285 million, compared to a loss of $177 million for the same period in 2020.
On a non-GAAP basis, which excludes the impairment charge in 2020, operating income for the second quarter of 2021 was $118 million, a $114 million increase, compared to $4 million for the same period in 2020.
The increase in second-quarter non-GAAP operating income was led by a $96 million increase in segment operating income from our golf equipment and soft goods businesses as well as an incremental $24 million from the Topgolf business.
Non-GAAP operating income for the first half of 2021 increased $167 million to $215 million, compared to $47 million for the first half of 2020.
Other expense was $31 million in the second quarter of 2021, compared to other income of $2 million in the same period of the prior year.
On a non-GAAP basis, other expense was $27 million in the second quarter of 2021, compared to other income of $3 million for the comparable period in 2020.
The $30 million decrease was primarily related to $14 million of higher interest expense related to the Topgolf business in the second quarter of 2021 and an $11 million gain from the settlement of a cross-currency swap arrangement in the second quarter of 2020.
Non-GAAP other expense for the first half of 2021, which excludes, among other things, the $253 million non-cash gain related to the write-up of the company's premerger investment in Topgolf, was $33 million of expense, compared to $1 million of income in the first half of 2020.
Earnings per share was $0.47 on approximately 194 million shares in the second quarter of 2021, compared to a loss per share of $1.78 on approximately 94 million shares in the second quarter of 2020.
Non-GAAP earnings per share was $0.36 in the second quarter of 2021, compared to earnings per share of $0.06 for the second quarter of 2020.
Non-GAAP fully diluted shares were 194 million in the second quarter of 2021, compared to 95 million shares for the same period in 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 178 million shares, which includes the weighted average shares issued in connection with the merger over approximately a 10-month period.
As of June 2021, we had approximately 186 million shares that were issued and outstanding.
Adjusted EBITDA was $164 million in the second quarter of 2021 compared to $29 million in the second quarter of 2020 and $66 million in the second quarter of 2019.
Topgolf contributed adjusted EBITDA of $57 million.
For the first half of 2021, adjusted EBITDA was $292 million compared to $89 million in the first half of 2020 and $159 million in the first half of 2019.
Topgolf contributed adjusted EBITDA of $17 million for the four months.
Turning now to Slide 12.
I will now cover certain key balance sheet and other items.
As of June 30, 2021, available liquidity, which represents availability under our credit facilities, plus cash on hand, was $877 million compared to $483 million at the end of the second quarter of 2020.
This additional liquidity reflects overperformance in all of our business segments and improved liquidity from working capital.
At June 30, 2021, we had total net debt of $1.1 billion, including $652 million of Topgolf-related net debt.
The Topgolf debt includes demand -- I mean, deemed landlord financing of $263 million related to financing of its venue businesses.
Our leverage ratios have improved significantly period over period, and on a funded debt basis, are now under three times.
Our consolidated net accounts receivable was $325 million, an increase of 52% compared to $214 million at the end of the second quarter of 2020.
The legacy business sales outstanding decreased to 58 days on June 30, 2020, compared to 79 days as of June 30, 2020.
The increase in net accounts receivable is primarily attributable to the increase in second-quarter revenue but also includes an incremental $9 million of Topgolf accounts receivable.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 12% to $335 million at the end of the second quarter of 2021 compared to $379 million at the end of the second quarter of the prior year.
This $44 million decrease was due to the high demand we were experiencing in the golf equipment business and better-than-expected performance in our soft goods business.
Topgolf added approximately $14 million of inventory this quarter.
Capital expenditures for the first six months of 2021 were $96 million, net of expected REIT reimbursements.
This includes $66 million related to Topgolf.
From the full-year 2021 forecast perspective, the golf equipment and soft goods business forecast is $65 million, consistent with our previous forecast.
The 2021 full-year forecast for Callaway and Topgolf is approximately $243 million, net of reimbursements, primarily related to the new venue openings.
The foregoing does not include approximately $33 million in capital expenditures for Topgolf in January and February premerger.
Depreciation and amortization expense was $43 million in the second quarter of 2021.
Non-GAAP depreciation and amortization expense was $36 million in the second quarter of 2021, compared to $8 million in 2020.
This includes $27 million of non-GAAP depreciation and amortization related to Topgolf.
For the full year in 2021, we expect non-GAAP depreciation and amortization expense to be approximately $133 million, which includes $95 million for the Topgolf business.
The foregoing does not include approximately $18 million of Topgolf non-GAAP depreciation and amortization for January and February in the aggregate.
I am now on Slide 13.
As Chip mentioned, we are providing revenue and adjusted EBITDA guidance for the full year and third quarter of 2021.
Please note this guidance only includes the post-merger Topgolf results for 10 months of 2021.
For the full year, we expect revenue to range from $3.025 billion and $3.055 billion.
That compares to $1.590 billion in 2020 and $1.701 billion in 2019.
The company's full-year 2021 net sales estimate assumes continued positive demand fundamentals for our golf equipment and soft goods segment; no further business, supply chain, and retail shutdowns due to COVID; and the Topgolf's 10 months of segment sales approach 2019 full year levels of $1.06 billion.
The outlook also assumes $55 million of supply chain risk due to the current Southeast Asia COVID shutdowns, almost all of which is expected to occur in the third-quarter 2021.
From a cost perspective, full-year 2021 non-GAAP operating expenses for our golf equipment and soft goods businesses are estimated to be approximately $100 million higher than full-year 2019 non-GAAP operating expenses.
This is $20 million to $30 million higher than we previously guided at the beginning of the year, and the increase is related primarily to variable costs associated with the strong performance of the business this year, accelerated investments in the TravisMathew brand to support its faster-than-expected growth and additional corporate infrastructure costs to support a larger organization.
Investors should also note that approximately 85% of the incremental $100 million in expense is expected to be incurred in the second half of 2021 due in part to the Callaway apparel business in Korea that we took over from our licensee in July and a more normalized level of spend in the second half of 2021 to support all of our businesses.
In addition, we are expecting continued cost pressure from increased freight costs and inflationary pressures, including labor and commodity pricing, at least through the first half of 2022.
To date, positive volume variances have outpaced the majority of these increased costs, but they will continue to have some impact.
Full-year adjusted EBITDA is projected to be between $345 million and $360 million.
The company's full-year 2021 adjusted EBITDA estimate assumes the Topgolf segment will deliver over $100 million in adjusted EBITDA for the 10 months beginning March 8, 2021.
This estimate assumes a previously mentioned supply chain revenue risk and continued elevated freight and other cost pressures, which are expected to have an overall greater impact than we originally anticipated for the balance of the year.
From a third-quarter perspective, we expect revenue to range from $775 million to $790 million versus 2020 revenue of $476 million and 2019 revenue of $426 million.
We expect adjusted EBITDA for the third-quarter 2021 to be between $51 million to $58 million versus 2020 of $87 million and 2019 of $57 million.
This projected revenue growth represents the addition of Topgolf revenue as well as growth in the soft goods segment.
Because of the previously mentioned supply constraints in the extraordinary second half the golf equipment business had in the second half of 2020, as interest in golf surge following the relaxation of COVID restrictions, we are forecasting third-quarter revenue for the golf equipment segment to be below 2020 levels but above 2019.
While not optimal, the third quarter supply constraints are not currently forecasted to affect the fourth quarter of 2021 or even 2022 to any significant degree.
In closing, I would like to emphasize a couple of points.
I know we have spent some time today discussing the short-term headwinds from COVID, particularly on the forecasted supply chain constraints in the third quarter.
Although annoying, the short-term disruption will not have a long-term impact on our value or strategy.
Investors should not lose sight of the fact we are having a tremendous year.
And yes, without those headwinds, we would be having an even better year, but this is still a great year.
We're hitting our financial goals essentially a year ahead of what we had planned despite a challenging operating environment.
Each of our segments are performing well.
The Topgolf merger has been wildly successful, and we feel well-positioned for the future, both in a COVID operating environment and after.
We also remain very excited about the opportunities and growth prospects ahead of us.
Operator, over to you.

user
q2 2021 consolidated net revenue increased $617 million (+208%) to $914 million.
qtrly earnings per share $0.47.
qtrly adjusted earnings per share $0.36.
sees q3 net revenue $775 million - $790 million.

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