Topgolf Callaway Brands Corp.

Good day, and welcome to the Topgolf Callaway Brands First Quarter 2023. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Also, please limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Lauren Scott, Director of Investor Relations. Please go ahead.

Thank you, Dave, and good afternoon, everyone. Welcome to Topgolf Callaway Brands' first quarter 2023 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 and Chief Legal Officer. Earlier today, the company issued a press release announcing its first quarter 2023 financial results. In addition, there's 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 US 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. And with that, I would now like to turn the call over to Chip Brewer.

Thank you, Lauren. Good afternoon to everyone on our call, and thank you for joining us today. Our business is off to a strong start with first quarter revenue and adjusted EBITDA coming in ahead of our expectations. The outperformance was driven largely by continued operational momentum at the Topgolf venues, as well as a strong launch of our paradigm family of clubs. Looking forward, there's certainly some macroeconomic uncertainty around the world. However, across all of our business segments, our core consumers remain engaged. And we continue to believe our portfolio of brands is positioned to drive further growth in both revenue and profitability. We believe we are uniquely positioned to do this by meeting our consumers in a diverse set of environments that they are highly passionate about, be that on course, off course, or in their active lifestyle. This certainly includes leveraging the synergies inherent in our leadership position in both on- and off-course golf, what we like to call modern golf. Turning to Topgolf specifically, and I believe this is perhaps the key point investors should take away from today's call, the team's various initiatives combined with their brand momentum have both made us increasingly confident in our ability to drive long-term same venue sales growth and we are now pleased to be able to communicate even higher venue profitability expectations. This increased confidence and updated expectations have obvious and significant positive implications for the long-term value of our company. Shifting to our segment overview, I'll first start with Topgolf's results. The Topgolf Venues business had another great quarter, outperforming our expectations for both revenue and profitability. Own Venues delivered 11% same venue sales growth over Q1 last year, driven by continued brand momentum, increased digital access through Pi, our inventory management system, and our new marketing initiatives. Adjusted EBITDA exceeded expectations due to continued improvement in operational efficiencies. We'll speak more on this operational efficiency improvement in a moment. From a development perspective, we opened one venue during Q1 in Charleston, South Carolina, and it opened very strongly. We remain on track to open 11 new owned and operated venues in 2023, with one scheduled to open in Q2, and the balance coming in the second half of the year. And Top Tracer also had a successful quarter with over 1,550 bays installed compared to approximately 1,160 last year. For the full year, the same venue sales is now forecast to be up mid to high single digits, a little lower than we thought when we spoke with you in February due to corporate events trending lower starting late in Q1. Our corporate business was strong to start the quarter and is still expected to be at approximately 2019 levels for the full year. However, with the March banking crisis and what we believe is a trend towards many companies further reducing corporate spend, we viewed it as prudent to lower our balance of year corporate sales expectations versus our original budget. We view this revision as a reflection of near-term volatility, not a long-term concern over the viability of our corporate sales channel. And importantly, our walk-in and small events business, which is the consumer-driven portion and accounts for 80% of venue revenue, has remained robust. Like our underlying operating efficiencies, This walk-in and small event business will also benefit from the continued rollout of PIE, marketing, and other key initiatives through the balance of this year and next. As a result, we remain confident in our Topgolf earnings forecast for this year and have increased confidence in our ability to continue to deliver sustained same-venue sales growth throughout business cycles. something we recognize we must prove to the markets, and we hope that our six consecutive quarters of delivered same-venue sales growth is starting to do. Digging a little deeper into the digital access and marketing improvements at the venues, I want to highlight some of the early success metrics, starting with Topgolf's Come Play Around marketing campaign. Our goal was to increase awareness primarily in markets where we have existing venues and but also more broadly given our growing national footprint. We're happy to report that awareness in market has increased to 48%, up from 41% a year ago and 38% as recently as December 2021. High, our digital inventory management system is also showing very promising results. As of the end of March, we had implemented PIE in 36 venues across the U.S., with the expectation of being in all U.S. venues by the end of 2023. Venues with PIE in place have seen increased bay utilization, same venue sales growth, and profitability. With the help of PIE, the team grew the digital penetration of our venue business by a couple of points again last quarter, ending at just over 30%. The opportunity to further drive awareness and our digital runway are clear priorities for the Topgolf team. The results are paying off and there's significant runway ahead to grow top and bottom line through these efforts. I'll now turn to venue unit economics. To further underscore the progress we have made, As well as our confidence in the Topgolf Venue business going forward, we are now updating the target venue unit economics and return metrics. As you'll see in today's investor presentation, we're now targeting 35% four-wall adjusted EBITDA margins, up from 32% previously, and a two-and-a-half-year payback period, down from just over three years, and a 20 percent return on gross investment up from approximately 17.5 percent. With these changes, we also increased our cash-on-cash return projection from 40 to 50 percent to 50 to 60 percent. In my opinion, the updated adjusted EBITDA margin target is the big headline this quarter. It shows an approximate 10% improvement in the venue four-wall profitability versus the targets we published in early 2021, and nearly a 21% improvement versus actual results prior to our merger. This new target reflects the progress we've made on a lot of fronts, including further improving our pricing and digital reservation strategies, bay inventory and labor management, cost of goods sold, and of course our confidence in driving long-term same venue sales growth. These are sustainable, long-term changes that will benefit our long-term outlook. If you've been following our story, you know we strongly believe that our top capital allocation priority is investing in the profitable growth of our business, and that the largest portion of this is the investments we make in our venues. Given these newly disclosed targets, we have even more conviction that this investment strategy will generate outstanding shareholder returns. Moving to the golf equipment segment, I'm very proud of the performance of our new Paradigm line of clubs. The entire line is doing extremely well and delivering rave reviews from consumers. We launched Paradigm in late February, And in the very next month, the Callaway brand jumped to the number one U.S. brand position in the driver, fairy wood, and iron categories according to Data Tech. The Paradigm driver in particular continues to outperform both on tour and in the market, with eight wins on the PGA Tour year to date and finishing the month of March as the number one selling driver model in the U.S. From a brand perspective, John Rahm's historic success at the Masters was an incredible and highly visible moment for our business, with over 12 million viewers, making it the most watched golf telecast in five years. We congratulate John and are thrilled to be partnering with him on what is a terrific run of great play. On the women's side of the game, Rose Jang has also had a phenomenal season so far. recently winning the Augusta National Women's Amateur Tournament and setting the record for the most weeks as the number one ranked women's amateur. We are excited and honored to be a part of her already very promising career in golf. Looking at the overall market for golf and the health of the game, all major indicators continue to be solid. Rounds played through March in the U.S. were roughly flat year over year, but remain significantly up versus 2019 levels and also up versus even last year on a weather-adjusted playable hour basis. And overall interest in the sport, as indicated by the master's ratings, remains very high. Turning to equipment sales specifically, the market started the year a little behind our initial expectations of plat to slightly down for the full year. But we view this as totally understandable given the economic climate and how many entry-level sets were purchased over the last few years. Fortunately, our product performance is at or slightly ahead of our expectations. We see these factors essentially balancing each other out. Overall, we feel good about the health of our core golf consumer And despite macroeconomic uncertainty, we don't see meaningful risks given both our brand heat and how passionate the consumer is about both us and golf in general. As previously mentioned, based on past data, golf has not been particularly sensitive to mild recessions. And for those out there that have been looking for a post-COVID reversion in golf participation, I think that we would all have to agree that there is no sign of one in the current data as the game continues to be top of mind for what appears to be a sustainably larger audience with the resulting play levels remaining elevated. And as we look into the future, we have to keep in mind the positive long-term impact of the new structural growth now embedded in the modern golf ecosystem where our new venues alone should add 3 to 4 million new off-course golf participants each year. Turning now to our active lifestyle segment, this business met our high expectations in Q1 and is forecast to do so for the full year. We're seeing continued strong e-commerce sales growth, both from Travis Matthew and Jack Wolfskin. Travis Matthew continued to successfully expand its women's launch during Q1 and also recently introduced active apparel. Despite more challenging market conditions this year, this brand is on track for another strong year of both bottom and top-line growth. For Jack Wolfskin, performance in China outperformed expectations during the quarter and continues to trend positively. Our business in Europe was challenged by difficult business conditions and high customer inventories, but still delivered a nice quarter of growth. Overall, we're pleased with the brand's direction, the quality of the products, and despite uncertainty on market conditions in Europe for the balance of this year, we remain confident in the long-term outlook. Lastly, turning to financial items. In addition to the success of the business segments over the quarter, I want to commend our finance team on the completion of our debt refinancing. The new capital structure provides increased flexibility and a lower long-term cost of capital. It also simplifies and strengthens our capital structure while maintaining modest net leverage and increasing our liquidity by over $300 million. I'm no financial expert, but I'm certain the combination of less financial risk, increased flexibility, and a lower cost of capital has to be a good thing. In conclusion, we remain confident that the modern golf ecosystem will grow again this year, and we remain excited about the direction of our business. In the near term, we're increasingly confident in our ability to hit our 2023 expectations including transitioning to positive free cash flow this year, and then further EBITDA as well as EPS growth going forward. With this increased confidence in 2023 and the higher venue economic expectations announced today, our confidence in delivering on or exceeding our previously announced long-term economic targets has, of course, also increased. And now I'll turn the call to Brian to provide more detail on our financials and outlook.