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Callaway Golf (NYSE:ELY)
Q3 2021 Earnings Call
Nov 09, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and thank you for standing by. Welcome to the third quarter 2021 Callaway Golf earnings conference call. [Operator instructions]. Please be advised that today's conference is being recorded.

[Operator instructions]. I would now like to hand the conference over to your speaker today, speaker Lauren Scott, director of investor relations. Thank you. Please go ahead, madam.

Lauren Scott -- Director of Investor Relations

Thank you, Nora, and good afternoon, everyone. Welcome to Callaway's third quarter 2021 earnings conference call. I'm Lauren Scott, the company's director of investor relations. Joining me as speakers on today's call are Chip Brewer, our president and chief executive officer; and Brian Lynch, our chief financial officer.

Patrick Burke, Callaway's senior vice president of global finance; and Jennifer Thomas, our chief accounting officer, are also in the room today for Q&A. Earlier today, the company issued a press release announcing its third quarter 2021 financial results. In addition, there is a presentation that accompanies today's prepared remarks and may make it easier for you to follow the call. This earnings presentation, as well as the earnings press release, are both available on the company's investor relations website under the financial results tab.

Most of the financial numbers reported and discussed on today's call are based on U.S. generally accepted accounting principles. In the instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the safe harbor statements contained in the presentation and the press release for a more complete description. I would now like to turn the call over to Chip Brewer.

Chip Brewer -- President and Chief Executive Officer

Thank you, Lauren. Good afternoon to everybody on this call, and thank you for joining us today. 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. Similar port delays that we experienced here in the U.S.

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. And with that, I'd like to turn the call over to Brian Lynch to discuss our financials and guidance in more detail.

Brian Lynch -- Chief Financial Officer

Thank you, Chip. 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. Before I get into the specific business results, I would like to acknowledge that we have not forecasted our business the last few quarters as well as we would have liked. 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. For more details on these metrics and a reconciliation to GAAP results, please reference the disclosures and tables in our earnings release and SEC filings.

Furthermore, in addition to the segment highlights we typically provide, please note that on Slide 14 of our earnings presentation, we have provided a more detailed reconciliation of Topgolf adjusted EBITDA so you can better understand the walk from segment income to Topgolf adjusted EBITDA. 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. That concludes our prepared remarks today, and we will now open the call for questions. Operator, over to you.

Questions & Answers:


Operator

[Operator instructions]. Your first question comes from the line of Daniel Imbro with Stephens. Your line is open.

Daniel Imbro -- Stephens Inc. -- Analyst

Good afternoon. Thanks for taking the questions. I want to start on Topgolf. I guess this is kind of the third quarter -- second quarter in a row that Topgolf really exceeded your internal expectations.

I guess when you look at the business, what's been the biggest surprise relative to those expectations? And maybe just tell us sustainable do you see these trends? I mean core kind of same venue sales back to flat even with weakness in events. I mean as you think to '22, how should we think about that trend line continuing?

Chip Brewer -- President and Chief Executive Officer

Sure. Daniel. We have been thrilled with the results of Topgolf. And so the surprises, as you appropriately call them, have been all on the positive side.

The same venue sales growth that we saw during the quarter did exceed our expectations. We had a particularly strong quarter on walk-in, but that has been an ongoing trend for us a strong walk-in sales. And then what we saw really grow significantly during the quarter was social events. Now what makes it -- so we were surprised on the fact that we got all the way back to approximately 100% same venue sales.

What made that particularly impressive, Daniel, is if you take a walk back in time, when we gave you our last call, COVID cases were increasing in the U.S. at that time. And so we were getting some contrary signals at that time with events kind of doubling back on us and some caution signs. But then as the quarter continued and COVID cases declined, we've seen further growth.

So that continued trend has been quite positive, has been very positive for us, and you can see us taking up our numbers through the end of the year. The only real headwind we see there is the corporate events and those are improving, but we expect them to stay down. The other positive on Topgolf, which has been well above our expectations, is the flow-through. As we went into the year, projecting that business at more historical flow-throughs or even rates that were better than historical flow-through has exceeded even those expectations.

Some of that is sustainable. Some of it is likely not as we will need to return staffing levels and marketing levels back up to closer to historical levels. But I want to congratulate the team at Topgolf for just doing a wonderful job. We knew we got a gem when we merged with Topgolf, but it's been well above expectations.

And obviously, we view the outlook along those same lines.

Daniel Imbro -- Stephens Inc. -- Analyst

Yes, that was really helpful. One follow-up on Topgolf. I guess, you mentioned the real estate team kind of already has 2022 set. Is there more availability of real estate in the aftermath of COVID? I guess just given the success you're having at the venue level what's keeping you guys maybe growing venues faster, just given that profitability you're seeing?

Chip Brewer -- President and Chief Executive Officer

Well, we're working on venues. So like if we find a new site right now, Daniel, for a venue, it's a 2024 site. So venues, first of all, the development of venues got shut down during COVID. Unique point in time.

But if you remember how the world was at that point, further development of pipeline and all progress on construction, etc., was essentially halted. So you see a hiccup, if you would, in the pace and path there. But then also these venues are large projects, they have long lead times, etc. And one of the great assets of this Topgolf business is that real estate team, and they're doing a wonderful job identifying and opening these venues.

And so we feel very confident in it. But the ability to impact it in the near term is not quite as I guess, quick as you think it might be.

Daniel Imbro -- Stephens Inc. -- Analyst

Got it. And then one last one for me on the core business. I think in the prepared remarks, you guys talked about, Brian, you mentioned maybe golf equipment profitability stepping down year-over-year due to the return of spending. Have we seen that spending return fully? Is this the right run rate we should think about ex growth going forward? Or are there still more temporary costs that need to come back into the model in 4Q, 1Q as we model out profitability?

Brian Lynch -- Chief Financial Officer

Well, it's definitely -- you've seen it ramp all during the year, and that's continued. So if you take Q4, for example, you will see not only the increase in Q4 but also the full load of that, I mean, in Q3, you'll see the full load of that into Q4 as we hire people and do other things like that. We're not giving specific guidance for next year. But I think overall, we've talked about that the ramp is lumpy, and you're getting it all a large portion of it this year.

Daniel Imbro -- Stephens Inc. -- Analyst

Got it. Congrats, guys, and thanks so much for the color.

Operator

Your next question comes from the line of Randy Konik with Jefferies. Your line is open.

Randy Konik -- Jefferies -- Analyst

Hey, guys. How are you? I just wanted to ask about channel inventories. I think in the last few quarters, you talked about, I think, there was two months of inventory on hand, when there should be about six months of inventory. So you talked a little bit about supply constraints and you'll still be constrained, but you're doing a better job of getting, I guess, more inventory produced than you would have thought.

So I'm just curious on that kind of dynamic on supply and where it stands right now, both on the manufacturing side with your vendors as well as in the channel? Thanks, guys.

Chip Brewer -- President and Chief Executive Officer

Sure, Randy. This is Chip. Supply or inventory remains very low in the channels right now. And so it has stepped up slightly from where you referenced we were previously.

And that's a seasonal thing. It always does this time of year. So in other words, at the end of Q3, the number the months on hand are slightly higher than they are at the end of Q2. But still remains very light.

We almost, call it, under inventoried in the field, and we expect that situation to continue.

Randy Konik -- Jefferies -- Analyst

Understood. And then how about just maybe an update on Jack Wolfskin. Can you talk about, I think comps are up now. The bookings are up significantly or strongly whatever you said earlier on the call.

Can you just give us maybe a refresher on where that business stands from a revenue perspective from when you bought it on a profitability perspective because it seems I think there was 40 million of EBITDA initially that you had to invest -- then you had to invest in the business. And the EBITDA disappeared, if you will. And now it seems like it has an opportunity to come back and provide some nice opportunity for -- to add to the portfolio, if you will, beyond just core Callaway and Topgolf. So maybe just give us some perspective on where that Jack Wolfskin story is right now from a sales and profitability perspective? Thanks, guys.

Chip Brewer -- President and Chief Executive Officer

Sure, Randy. And I think the key takeaway is your last point there and that it is what a good position this business is and how additive it can be. So we're expecting nice growth, and we're seeing great trends in the Jack Wolfskin business. The Jack Wolfskin business has been recovering nicely, but you've got to keep it in context that, that Europe market was heavily impacted by COVID throughout much of 2021.

So it is going to be an area of nice growth for us next year. They have done a wonderful job with the brand. Their sell-throughs have been excellent. They're bookings for next year, as I mentioned, are quite strong.

They are trending now in the right directions throughout almost all segments of their business. It is below where it was in 2019. But unlike the golf equipment business, it hasn't recovered and had the same surge but you're seeing some really positive trends in that business, Randy. So we're looking forward to some strong future there.

Randy Konik -- Jefferies -- Analyst

Understood. Thanks, guys.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Susan Anderson with B. Riley. Your line is open.

Susan Anderson -- B. Riley Financial -- Analyst

Thanks for taking my question. Nice job on the quarter. You talked about you're expecting outperformance or growth in all of the business lines and units next year. I'm just curious on the golf equipment business, kind of what's driving that confidence? And then also, are you expecting that growth to come more from the international side of that business versus the U.S.? Or would you also expect the U.S.

to see positive growth off of the pretty big numbers of the past year. Thanks.

Chip Brewer -- President and Chief Executive Officer

Sure. Susan, thank you for the nice comment. And yes, we are expecting the golf equipment business to be positive next year. As I said, we were very intentional, we think all of our segments will grow.

The U.S. should grow within golf equipment as well. So we're looking at that globally, but it would include the U.S. What gives us confidence on that is threefold.

One, we're looking at the data. And the data is showing that even in the current environment in Q3, etc., we haven't seen it slow down. Second is we're talking to our customers, and our customers are almost unanimously telling us they're expecting very strong years next year. And then thirdly, the inventory situation that we see with very low inventory in the field we think will support that as well.

So it gives us enough confidence to make the statement that we did.

Susan Anderson -- B. Riley Financial -- Analyst

Great. That's really helpful. And then I was wondering, I didn't see in the presentation, did you guys talk about your market share this quarter in balls and equipment?

Chip Brewer -- President and Chief Executive Officer

We did not, Susan. There's just so much to cover. Our market shares in BAW were up, I believe, in clubs marginally down, but not significantly. And as you know, the market share data is indicative of certain parts of the business in certain channels, but certainly not all encompassing.

So has not been a meaningful market share move relative to our position this year, although it's been close to transformational for the overall business.

Susan Anderson -- B. Riley Financial -- Analyst

Great. That's really helpful. Thanks so much. Good luck in fourth quarter.

Chip Brewer -- President and Chief Executive Officer

Thank you, Susan.

Operator

Your next question comes from the line of Joe Altobello with Raymond James. Your line is open.

Joe Altobello -- Raymond James -- Analyst

Good afternoon. I guess first question for Brian, and I want to preface my question by saying I certainly don't envy you're trying to forecast the business in this environment. But I guess I'm curious what happened in the last three weeks of the quarter that led to such a large EBITDA beat. It looks like a lot of that was on the expense side.

So I'm curious, were any expenses pushed off into the fourth quarter?

Brian Lynch -- Chief Financial Officer

So overall, I would say that a lot of what you saw was just our under-forecasting the profitability, as I mentioned earlier in my comments. That was a good portion of it. Other than that, as Chip mentioned, half of it was probably related to the Topgolf venue profitability being higher than forecasted. And I would say the other half is just spread out.

The gross margins were better than we expected. There was lower opex spend, and then we had more hedge gains. So it's just -- we tried to take that all into account when we gave our guidance for the fourth quarter, so that should all be baked in. There have been just generally during the year, just some examples we've been trying to staff up and hire people and in this environment, it is very difficult.

So some of you might have hired in Q3 and now you're trying to hire in Q4. But we tried to bake all that into our Q4 guidance.

Joe Altobello -- Raymond James -- Analyst

OK. That's helpful. And then in terms of the supply chain constraints, is there one or two businesses that are more concerning than others? Or is it pretty much across the board at this point?

Chip Brewer -- President and Chief Executive Officer

Well, it's the apparel and gear and golf equipment that is mostly constrained. We have a little bit of challenges like many companies staffing the venues. But obviously, the venues are doing very well, and that situation at the venues is getting less significant. So it's improving.

I guess the golf equipment segment has the largest difference between demand and supply right now. But both segments, golf equipment and apparel have demand exceeding supply from a macro perspective.

Joe Altobello -- Raymond James -- Analyst

OK. And just one last one, if I could. The events business, can you give us an idea of where that's tracking or indexing versus 2019?

Chip Brewer -- President and Chief Executive Officer

Yes. I won't not quantitative really, but it is improving. So if you look at -- and it varies by quarter, etc., as you would expect it to. So obviously, during Q3, we saw great results, certain same venue sales.

The event business trended up nicely driven by social events. And so a social event is a small group. It may be you and for other people that are booking a bay or two together as opposed to a large corporate event. Corporate events have been the most significantly impacted.

And we -- as I mentioned, during Q3, we saw that business cycle from a negative trend to a positive trend, and that positive trend has now continued. So we expect there to be less corporate events in Q4 than 2019, but the trend is moving in the right direction. And it's really even granular down to the bigger events are more impacted than the smaller events. Sometimes, we would have full venue buyouts, if you would.

Those are less common now as you I think would make sense. But smaller corporate events, we're starting to see some positive signs, although the lead times, et cetera, are a little bit more shorter than they used to be as well. So still some uncertainty in that that give you enough lease for some color?

Joe Altobello -- Raymond James -- Analyst

Yes. No, it does. I appreciate that. I wasn't expecting a quantitative answer, but I certainly appreciate that.

Thank you.

Chip Brewer -- President and Chief Executive Officer

Sure. My pleasure.

Operator

Your next question comes from the line of Casey Alexander with Compass Point. Your line is open.

Casey Alexander -- Compass Point -- Analyst

Good afternoon. Let me ask -- it sounds like things are easing a little bit on the supply chain side. Would you say that supply chain is switching from where there had been a lot of materials and component issues and it's switching more to logistics issues are now the primary thing that you're trying to overcome? And as it relates to the competition, does your more prominent position within the spaces that you occupy actually create a market share opportunity or has it created a market share-taking opportunity? Because even though you have supply chain issues, you've been able to navigate them better than maybe people who are further down the food chain.

Chip Brewer -- President and Chief Executive Officer

Casey, I think, first of all, you're 100% correct. The supply chain issues are a little bit ongoing fact of life, but they have eased significantly, in my view. And the teams have also just done a wonderful job. As we went into the last earnings call, Vietnam has just shut down.

We source half of our golf equipment from Vietnam or half of our clubs, and we were real and trying to figure out what all that meant. And as you can see in subsequent results, we were able to mitigate quite a bit of that by ramping up factories in China much more significantly than we were able to do and then most recently, Vietnam has back opened. The logistics challenges of time on container ships and the costs of all that, no real change in that. I'm hopeful that, that will improve at some point.

it hasn't really changed yet. And the material side, maybe we're seeing a little bit better than that. But the real big difference that we're seeing is that we've got all the factories open now. And we've also learned how to operate effectively in this environment.

So our confidence and comfort level dealing with these issues and circumstances is just much higher. In terms of our position as a leader in the golf industry and the scale advantages we have, I do think it creates a competitive advantage for us. It creates a competitive advantage for us. Our ability to move supply around to apply resources in different ways, we're constantly subbing different materials and working through issues and it also provide -- we have some very strong partnerships with large foundries where we're clearly the No.

1 customer and component manufacturers where we're clearly the No. 1 customer. And so we provide them the opportunity to partner with us accordingly. And that may lead to advantages into market share gains over time.

Casey Alexander -- Compass Point -- Analyst

Thank you for that answer. That's quite helpful. Let me ask a second question. I mean, when you took it on the Topgolf acquisition, we were guided to a reasonably significant scale-up of debt over the first couple of years that you were going to own it.

And instead, you've generated enormous cash flows. Have your capital priorities changed in terms of capital allocation? And what should we think about the company's ability to make sort of a $30 million off-hand investment in Five Iron Golf, whereas that probably a year ago would not even been something that was contemplated?

Chip Brewer -- President and Chief Executive Officer

You're 100% right, Casey. We couldn't be more pleased and feel more fortunate with how this has worked out. And if we had been able to forecast it, we could have slept a little better. But we're clearly way ahead of our cash flow, liquidity projections, amount of net debt relative to our EBITDA is significantly lower.

Our degrees of strategic freedom going forward are much higher. And things such as the Five Iron investment, which we're excited about, would not have been a likely possibility. Our overall capital allocation priorities don't really change, but our strategic flexibility and are in a lower overall risk factor because of the lower leverage is dramatically different.

Casey Alexander -- Compass Point -- Analyst

OK. Great. I got to ask you one more question. I asked you this, I think it was about three years ago.

But I was struck by one of your comments early in your presentation regarding modern golf, which is when is the corporate name change coming?

Chip Brewer -- President and Chief Executive Officer

I was thinking about Meta, but somebody took it, Casey. I'm not sure we need to change the name. But I certainly trying to convey how different this business is, how unique it is. And I thought modern golf with the combination of our leadership position in the traditional game as well as a dominant position in the future of the game and off-course golf might convey that.

So I hope it makes sense to you.

Casey Alexander -- Compass Point -- Analyst

All right. Thank you for taking my questions.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Rudy Yang with Berenberg. Your line is open.

Rudy Yang -- Berenberg Capital Markets -- Analyst

Thanks for taking my questions. So you've opened eight new domestic Topgolf venues this year so far. I'm just wondering how those new venues are performing relative to your expectations? And if you could provide some color on how that compares to how your new venues historically have performed relative to your more mature venues?

Chip Brewer -- President and Chief Executive Officer

Sure. Rudy, the -- we're very pleased with how the team has been able to open the venue. So they've all, for the most part, opened very successfully. They opened at different times in the year with different operating conditions and COVID environments, etc.

So at some point, they were operating with the same venue sales level that was below what would have been originally planned, but they're all showing great promise and the profitability of these new venues is at or above expectations as we project forward. So very pleased with them. And we've had venues of all different sizes this year, which was also strategically important. So continued what I think is a very great strength of that business and its ability to select and open it and operate these venues.

Rudy Yang -- Berenberg Capital Markets -- Analyst

Great. Super helpful. And could you just provide more color on some of the constraints you saw in Toptracer installations? So I guess, what kind of workarounds are there specifically to the access restrictions you saw in other countries? And how big of an impact did that have on installations versus supply chain disruption this quarter?

Chip Brewer -- President and Chief Executive Officer

Sure. So in different markets, we had a little bit of supply chain headwind, and supply chain is just getting it can be running cable and running power to a driving range, right, with just their ability to get resources there, etc., in today's era where it's hard to get that type of construction work done and scheduled. So that slowed down some of the efforts in a few markets. And then particularly in Asia, in the quarter, in the end of Q2 and in Q3, they were still in lockdown in some of those markets.

In the biggest market, Japan, they had several prefectures that were heavily restricted. And so that slowed the installations. This is not a demand issue at all. Our backlog is quite good.

The demand is quite strong. So as things continue to improve, even though there is some volatility here, we remain very confident in that business.

Rudy Yang -- Berenberg Capital Markets -- Analyst

Great. Thanks for that, guys.

Chip Brewer -- President and Chief Executive Officer

Thank you.

Operator

And your last question comes from the line of John Kernan with Cowen. Your line is open.

Unknown speaker

Good afternoon. This is Krista on for John. And most of our questions have been answered. But I wonder if you could just walk us through some of the puts and takes on the outlook for gross margins in Q4 as it relates to the Callaway business as well as Topgolf, particularly in relation to kind of the selective price increases you talked about and some of the supply chain issues? Thank you.

Chip Brewer -- President and Chief Executive Officer

Sure. The only thing worth calling out, Krista, in Q4, and this is obviously fully reflected in our guide is that we are anticipating volumes to go down a little bit in Q4 topped off because of the corporate events, which is still a headwind, although trending nicely improving. And then we have moved a significant amount of our production capacity on the golf equipment side toward producing our 2022 product lines. And then with the Vietnam shutdowns and the capacity restrictions of that cause, you're going to see volumes in Q4, which is fully reflected in our numbers down.

Volume is a very helpful factor in the gross margin calculation. So it will have a little negative impact there. But we're increasing our supply chain capabilities. We're increasing our capacity.

You can see it in our numbers as plaintiffs day. We're up significantly over 2019. We're continuing to add that capacity. And you've heard me talk about the confidence in the supply chain going forward, although Q4 will have a little bit of a step-down primarily around that volume issue.

Brian Lynch -- Chief Financial Officer

And we still have the increased freight costs that we're dealing with. That's been all year, and that continues into Q4, which impacts margins a little bit.

Chip Brewer -- President and Chief Executive Officer

That's a constant at this stage.

Unknown speaker

Got it. And our last question, just to circle back on the same venue sales in terms of sort of what you've been seeing the nice pickup in the walk-in traffic as well as in some of the social events impact that you've seen in Q3. I just -- could you talk a little bit of what's driving that? Is -- and I know that your marketing spend is starting to ramp or you're expected to get move forward toward normalization. Just kind of wondering what's kind of driving some of these traffic gains and improving? Is it just vaccination rates or people getting more comfortable going out and doing things? If you could just shed a little bit light on that.

Thank you.

Chip Brewer -- President and Chief Executive Officer

Well, the walk-in sales has been steadily trending back all year. Beginning of the year, we were heavily impacted still by COVID restrictions, etc., and we've gone through several new waves during the year, if you would. But the walk-in traffic has been a steady drumbeat of good news through the year and remains that. I think the popularity and the accessibility of Topgolf really helps it there.

And it's doing this while other things are opening up around it. So it's got increased competition, if you would, from other events, and yet you're still seeing it grow. The big increase during the quarter was the social events. So it's more choosing that venue, if you would, I guess, for the something else.

I really think it's mostly just positive momentum at this point. But I also want to call out what the good job the Topgolf team is obviously doing. But I can't give you any more color on it than that, unfortunately.

Unknown speaker

Thank you.

Operator

There are no further questions at this time. I would like to turn back the call over to chief executive officer, Chip Brewer. Go ahead, sir.

Chip Brewer -- President and Chief Executive Officer

Well, thank you, everybody, for calling in. We really appreciate your time and interest. Thrilled with the results and look forward to updating you again early next year. Thank you very much.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Lauren Scott -- Director of Investor Relations

Chip Brewer -- President and Chief Executive Officer

Brian Lynch -- Chief Financial Officer

Daniel Imbro -- Stephens Inc. -- Analyst

Randy Konik -- Jefferies -- Analyst

Susan Anderson -- B. Riley Financial -- Analyst

Joe Altobello -- Raymond James -- Analyst

Casey Alexander -- Compass Point -- Analyst

Rudy Yang -- Berenberg Capital Markets -- Analyst

Unknown speaker

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