Callaway Golf (ELY) Anika Advani Jonathan Bach Ryan

Callaway Golf (ELY) Anika AdvaniJonathan BachRyan Yaraghi

September 26, 2014

Table of Contents

I. Thesis

II. The Business: Turnaround

III. The Industry: Excessive Pessimism

IV. Hidden Value: Optionality

V. Valuation

Section

I

II

III

IV

V

1

What is not priced in?

Business: Turnaround

• New Management Team• Product Refocus• Cost Cutting

Industry: Excessive Pessimism

• U.S. Market• International Market

Hidden Value:Optionality

• Top Golf• NOLs• Sale Leasebacks

Thesis

2

I. Business

4

Business Overview

� Designs, manufactures, markets, and sells golf products and accessories

– Drivers, fairway woods, hybrids, irons, wedges and putters

– Golf balls

– Golf apparel, footwear, bags, gloves, headwear, towels, umbrellas, eyewear and travel gear

Golf Clubs, 63%

Accessories, 21%

Golf Balls, 16%

2013 Product Sales Breakdown

America, 48%

Japan, 19%

Europe, 14%

Rest of Asia, 10%

Other Foreign Countries, 9%

2013 Geographic Sales Breakdown

2013 Product and Geographic Revenue Breakdowns

Sources: Investor Presentation

History

CALLAWAY INC.

FOUNDED BY ELY

CALLAWAYCOMPANY BECOMES PUBLICLY TRADED

BIG BERTHA BECOMES #1

DRIVER

ACQUIRED ODYSSEY SPORTS

ELY CALLAWAY RETIRES &

DIES

BUYS TOP FLITE, BEN HOGAN NEW CEO

HIRED, CHIP BREWER

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

� Company proceeds to diversify business and enters poor product lines

� Loses focus on core products

� TaylorMade takes market share from Callaway

� 2007 – 2012: U.S. $ market share falls from 19.6% to 13.9%

Turnaround: Chip Brewer hired as CEO

5

Ely Callaway• Founds Callaway Golf in 1982 and grows company to $840mm revenue by 2001• Dies in 2001 of Pancreatic Cancer

Ron Drapeau• Takes over following Ely’s death in 2001• Resigns in August 2004 due to slumping sales and bad acquisitions

Patrice Hutin• Succeeds Drapeau in August 2004• Resigns position in November 2004, lasting only 4 months

William Baker• Takes over from November 2004 until August 2005

George Fellow• Takes over as CEO in August 2005, fails to maintain company through recession• Resigns in June 2011

Anthony S. Thornley• Becomes CEO in June 2011• …Only to resign in March 2012

6

Management History

7

Current ManagementChip Brewer: Case Study

President & CEO, 2012

Age: 50

Job Experience: President & CEO of Adams Golf since 2002

Reason for Hire: “Chip has extensive knowledge of all facets of the golf business, particularly in the sales and marketing area, and has a real passion for the game of golf. Chip also has great relationships with customers and others in the golf industry and he has done a great job turning around and leading Adams Golf.”

–Chairman, Ronald S. Beard.

Adams’ Golf Case Study� Chip began working at Adam’s in 1998 as VP of Sales & Marketing

– Helped establish the company as a player in the wood market

� Adam’s golf was considered a “One-hit Wonder” with its Tight Lies fairway wood but sales slumped, bottoming in 2000

� Chip takes over roll as CEO in 2002

– Helps turn the business around, profitable by 2003

– Transforms from a one-club shop to being a major player in woods, hybrids and iron markets

� Eventually succeeded in selling Adam’s Golf to TaylorMade in 2012

Sources: Investor Presentation, PGA

8

Current ManagementChip Brewer: Case Study

Pre-Chip

Post-Chip

9

Mark Leposky

SVP of Global OperationsSince 2012

Age: 49

Previous Experience: President & CEO of Gathering Storm Holding Company (2005 – 2011)

“As a senior team, we’ve seen the organization’s mentality change. I have to push a little bit as a leader, but the team I have gets that. We will push, but at the end of the day, my team and I will protect the golfers.”

–CEO, Chip Brewer

Dr. Alan Hocknell

SVP of R&DSince 2009

Age: 42

Previous Experience: Senior Manager of Advanced Technology and Senior Director, Product Design and Engineering (1998 – 2004); Vice President, Innovation and Advanced Design (2004 – 2009)

“We benchmark our competition quite diligently and we know we stand on top right now with our technology; the numbers don’t lie, our drivers produce superior numbers.”—SVP R&D, Dr. Alan Hocknell

Current Management

Harry Arnett

SVP of Global MarketingSince 2012

Age: 42

Previous Experience: VP of Global Marketing in TaylorMade, Adidas, and Ashworth Golf

“Harry has demonstrated an impressive ability to develop andexecute compelling strategies on a global scale that clearly connect with golfers.”

–CEO, Chip Brewer

Sources: 10-K, Reuters, WorldGolf

Chip Brewer looks to “bring Callaway back to its roots” with a multi-part

turnaround strategy:

10

Business TurnaroundThe Turnaround Strategy

I. Return Focus to Core Business

II. Revamp R&D to return Product Competitiveness

III. Supply Chain Consolidation & Cost Cutting Initiatives

IV. Improve Marketing and Sales Strategy

11

Business Turnaround

TopFlite Golf Balls Ben Hogan Clothing Technology Initiatives

I. Refocus on Core Brands

� Acquired in 2002 as part of $165m purchase following Spalding’s bankruptcy

� Business quickly flops – prices, market share and margins all fall

� Under Chip Brewer, brand is sold to Dicks Sporting Goods for $20m in 2012

� Acquired in 2002 as part of $165m purchase following Spalding’s bankruptcy

� Callaway largely unable to incorporate unrelated clothing business into product line

� Under Chip Brewer, brand sold to Perry Ellis in favor of licensing deal

� 2003 – Callaway enters the Golf Technology market

� Pushes GPS through uPro RangeFinder

� Becomes major cost center – never master technology, distraction from core product R&D

� Under Chip Brewer, spins technology business to Third-Party Model

By exiting periphery businesses, Callaway is allowed to refocus on core products – Callaway brand clubs & balls

2

II. Revamp Product Lines – Wood Clubs and IronsBusiness Turnaround

Woods Irons Putters Golf Balls

• New woods released under “X Hot” Brand

• 2 Woods rated “Gold” by Golf Digest

• New clubs priced at a premium to previous offerings

• Dollar Share increases from 11% in 2012 to 26% in Q1 2014

• Release three new product lines – X Hot Irons, Mack Daddy Wedges and Apex Irons

• 2 Irons rated “Gold” by Golf Digest

• New irons priced lower than previous offerings to appeal to broader segment


• Announced 2 new putters for 2014 –Versa and Tank lines

• 3 Putters rated “Gold” by Golf Digest

• Increase despite rule change eliminating anchor based putters


• After selling TopFlite, company promoted Callaway Brand Balls

• Redefines ball aerodynamics

• Increase despite rounds played in United States decreasing


Sources: Investor Presentation, Boyar Report, SEC Filings

12

2

Business Turnaround

Wood Clubs30%

Irons22%

Putters11%

Golf16%

Other21%

2013 % of Total Sales

8.4%

13.9%

8.9%7.4%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

Wood Clubs Irons Putters Golf Balls

% Sales Accretion as of H1 2014 compared to H1 2013

II. Revamp Product Lines – Sales Impact


13

II. Revamp Product Lines –Big Bertha Driver

14

Business Turnaround

� In 2013, Callaway revamps entire product line of clubs and balls

� Callaway re-engineers their “Big Bertha” line of driver, to widespread approval

● “Both drivers are making their ancestors proud and living up to the Big Bertha name by delivering higher ball speeds and distance while advancing driver technology” –Golf Digest

● 3 Drivers rated “Gold” by Golf Digest

● Can adjust for four variables: loft, lie, shot bias, center of gravity height

− Golfers can adjust spin independently of launch angle

− Never been done before in any driver

Sources: Investor Presentation, PGA

III. Implement Cost Cutting Initiatives

� Reconfigured company’s transportation network

� Eliminated underperforming suppliers

� Developed alliances with key suppliers

� Streamlined global supply chain

– Led to cut costs

– Allowed the company to manufacture technologically advanced products and handle micro launches

� Improved customer service levels

– Streamlined logistics network – 95% of customer repair orders are returned within 24 hours, compared with just 10% of orders previously

� Company had previously removed innovations if too costly to manufacture

15

Business Turnaround

Mark Leposky, Senior Vice President of Global Operations, brought in 2012 by Brewer, reduced

global operations spending by 32% over past 2 years

43.9%

29.8%

37.3% 41.7%43-44%

2007 2012 2014Guidance

FutureGoal

2013

100% 89%68%

0%

50%

100%

2011 2012 2013

Global Operations Spending

Gross Margin Expansion

Sources: Investor Presentation, Boyar Report

4. Implement new marketing and sales strategy with Harry Arnett’s (SVP Marketing & Sales) vision

16

Business Turnaround

New focus to find “long-hitting, young dynamic professionals”

Past

2014

Arnold Palmer Gary Player Johnny MillerPhil Mickelson Johnny Miller

Henrik Stenson2014 Last Week - #4

Patrick Reed2014 Last Week - #27

Harris English2014 Last Week - #57

Lydia Ko2014 Last Week - #3

Sources: Investor Presentation, Boyar Report, PGA

4. Implement new marketing, sales, & retail strategy

17

Business Turnaround

• Utilizing new methods such as social media and video to capture attention

• Derives approx. 70% of its sales from retail distributors such as golf specialty stores and sporting goods retailers.

• 30% Remainder from “green-grass” channel or on site pro shops

• Previous sales force was compensated focusing on where 30% comes from, not 70%

• Now, sell based on respective territories now and compensation given to sales force

• Allow product testing for retail associates


Result: business turnaround is proving to be a success

18

Business Turnaround

Golf Club Brand RatingOverall Quality, Value, Product Innovation & Brand Reputation

TaylorMadeCallawayTitleistPingClevelandOdysseyMizunoCobraNikeAdams

9.5

9.0

8.5

8.0

7.5

7.0

6.5

6.099 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Investor Presentation (Golf Datatech)

Result: business turnaround is proving to be a success

19

Business Turnaround

Historical Sales – Continuing Business2nd year of turnaround shows continuing sales growth

U.S. $ Market ShareLonger term market share growth potential as Callaway gains momentum

$769

$834

$890

2012 2013 2014

19.6% 17.5% 17.6% 17.3% 15.1% 13.9% 15.1% 14.2%19.3%

2007 2008 2009 2010 2011 2012 2013 March YTD2013

March YTD2014


7/24/14 – ELY announces earnings,

beating margin estimates

4/2/14 – ELY announces earnings,

beating revenue and earnings estimates

Market Misconception

20

Business Turnaround

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14

II. Industry

The golf industry isn’t doing as poorly as people think

22

Industry: Extreme Pessimism

� Net closures are largely market correction from inflated wealth due to housing bubble

– Net closures will continue, but is slowing

– Many courses that were opened were tied to RE development

� Harsh weather conditions reduced sales

� Golf to be an Olympic Sport in 2016

“We really like the position we’re in, particularly in the U.S. and Europe, coming out of Q2

because of our field inventory levels are aligned with where we want them to be, which gives us continued upside and potential for the second

half of the year.”

-CEO, Chip BrewerSources: Investor Presentation, Boyar Report

Market Conditions

Callaway 2014 Perspective

U.S. Rounds Volume—% Change Year-over-Year

23

Global Trends

� 14 new courses (in 18-hole equivalents) were built in 2014 in the United States and another 157.5 closed their doors, for a net loss of 143.5 courses

� U.S. Golf sales increased 4.4% from a low in 2011

� Rounds per day open were higher in 2013 than in 2012

Sources: Coalition National Rounds Played Report, PGA Performance Trek, NGF

6.7%

2.1%

(0.1%)

(3.0%)

(1.5%)

0.9%

0.0% 0.3%

(0.6%)

(1.8%)

(0.6%)

(2.3%) (2.5%)

5.7%

(4.9%)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014 -July

2.2%2.6%

Rounds/Day Open Adj.

U.S.: Dick’s Sporting Goods Case Study

24

Global Trends

� Poor weather highly impacted first quarter earnings

� Dick’s CEO not optimistic about golf industry

– Dick’s accounts for less than 7% of Callaway sales

� Taylor Made sales decreased, but Callaway sales improved drastically in the same quarter (22%)

� Dick’s sales also an issue of execution:

– 36 stores in PA, worse weather conditions

– 26 stores in CA, better weather conditions

– More dedicated space to TaylorMade, so product flop greatly influenced Dick’s sales

Q1 sales declined nearly 38%Reduced guidance due to golf and hunting sales

Q1 sales increased 22%


25

Global Trends

• International markets appeals to a younger, more female audience

• Between 100 – 150 courses open globally annually, a 1% increase in supply abroad each year

• Younger average age of viewers of golf are in line with Callaway’s new strategic vision to attract younger audience

“The industry has been relatively stable with regards to number of golfers after the economic crisis.

It is dangerous to read too much into weather and cyclicality, which are factors in our industry but short term factors. As recently as 2012, the industry was up

7% to 8%.

I’m also very pleased that the team at Callaway has shown the ability to compete effectively in these types

of environments which bodes well for us.”

– CEO, Chip Brewer

Market Trends

Europe Market Opportunities

26

Global Trends

UK Europe

• Hard good share through May 2014 was 18.6%, up 555 bps Y-o-Y

• Largest demand and supply in UK• Most absolute number of junior

golfers compared to Europe• 2nd most absolute female golfers

• Highest overall share since 2008 and highest driver shares since 2003

• X2 Hot is #1 selling fairway wood in the market year to date

• Callaway was #1 selling brand for April and May 2014

• Europe is up 7% on a constant currency basis

• Hard good share through May 2014 was 18.6%, up 555 bps Y-o-Y

• 2011: Europe experienced first decrease in registered golfer

• 2013: a slight increase was recorded in the # of registered players

• Increase in emerging countries• Highest percentage of Junior golfers

Mar

ket T

rend

sCa

llaw

ay A

dvan

tage


Asia Market Opportunities

27

Global Trends

Japan Korea China

• Japanese market had double digit decreases in sales as of Q2 2014, partially due to a consumption tax increase

• Used to be a ban in 1984 on the sport, but has now become an aspirational sport

• Number of courses increases as wealthy take up sport

• For Callaway, Japanese growth is still up 24% year to date, and market share for Callaway is still at an all time high

• Callaway is currently #2 selling brand and will overtake the #1 spot overall

• Excellent sales growth in Korea of 63% as of Q1 2014

• Lydia Ko, a sponsored golfer, was placed in Time’s 100 most Influential People

• 39.7MM people watch golf in China versus 24.8MM in the U.S.

• Product is highly desired as people attempt to make counterfeits, though fakes do not hold quality test

• Similar condition as the U.S. Too many courses have led to fees and prices dropping, though will stabilize soon


Mar

ket T

rend

sCa

llaw

ay A

dvan

tage

III. Hidden Value

TopGolf Driving Ranges

29

Hidden Value

� Callaway owns an unconsolidated ~17.5% stake in TopGolf, a new and fast-growing spin on the classic driving range

– Bridges the gap between the Bar and Golf experience– Currently operate 13 locations in the U.S.

● 1 million people have played an event at a TopGolf location since 2012● 84% of players have never played golf before● 40% of attendees are women

– Expansion plan to 50 locations by 2017

Other Hidden Assets

30

Hidden Value

Net Operating Losses Real-Estate Leasebacks

� Long-lived unprofitability has allowed Callaway Golf to accumulate a large amount of NOL’s

– Currently holds $429 million of NOL’s, primarily in the U.S.

– In Q1 2014, Callaway had its NOL’s valued for ~$95 million

– As the company continues to succeed with its turnaround there NOL’s will allow it to greatly offset its tax balance, unlocking shareholder value

� Callaway has recently began aggressively monetizing its real estate portfolio

– Sold building in Gloversville, NY in 2011 for ~1m

– Completed lease-back transactions on:● 3 buildings in Carlsbad, CA in 2011 for

~$18m● Golf ball manufacturing plant in Chicopee,

MA in 2013 for ~3.5m� Company currently owns 2 buildings in CA which it

plans on performing lease-back transactions on– Combined sq. ft. of ~269,000

IV. Valuation

Callaway Assumptions

32

Valuation


3.7%

5.6%

6.4% 6.5%

2.7%3.0%

3.7%4.0%

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Downside Base Upside Guidance

YE 2014 Long Term CAGR Gross Margin Opex Margin

TopGolf & NOL Valuation

33

Valuation


Top Golf Valuation

Bear Base UpsideQ2 2014 Locations 13 13 132017E Locations 40 45 50Average Rev/Location 6 8 9Revenue 240 360 450Average EBIT Margin 23% 25% 27%Revenue 240 360 450EBIT 55.2 90 121.5

TopGolf @ 1.75x Sales 420 630 788TopGolf @ 8.0x EBIT 442 720 972

Average Enterprise Value 431 675 880Discount Factor 0.7350 0.7350 0.7350

Discounted EV 317 496 647

Callaway Stake 17.50% 17.50% 17.50%S/O 77.3 77.3 77.3 TopGolf Stake per Share $0.72 $1.12 $1.46

NOL Valuation

Bear Base UpsideImplied NOL Valuation 47 63 95S/O 77.3 77.3 77.3 NOL Value per Share $0.61 $0.82 $1.22

ValuationCurrent Share Price $7.42

Callaway Standalone Value $8.34TopGolf Stake Value $1.12NOL Value $0.82Implied Share Price $10.28% Upside / Downside 39%

Weighted Average Price $8.10Weighted Average % Return 36%

Thesis

34

What is not priced in?

Business: Turnaround

• New Management Team• Product Refocus• Cost Cutting

Industry: Excessive Pessimism

• U.S. Market• International Market

Hidden Value:Optionality

• Top Golf• NOLs• Sale Leasebacks

Q & A

Documents

Callaway Golf (ELY) Anika Advani Jonathan Bach Ryan