Topgolf Callaway Brands Corp.

Welcome to the Topgolf Callaway Brands Second Quarter 2023 Earnings Conference Call. 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. Please note that this event is being recorded. I would now like to turn the conference over to Katina Metzodakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brand's second quarter 2023 earnings conference call. I'm Katina Matsudakis, the company's Vice President of Investor Relations and Corporate Communications. 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 second quarter 2023 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 and to the corresponding gap 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'd now like to turn the call over to Chip Brewer.

Thank you, Katina, and welcome to the team. Good afternoon to everyone on the call, and thank you for joining us today. Q2 was a solid quarter for Topgolf Callaway brands, driven by strength across all our business segments. At the halfway point of 2023, here are just the highlights of what we see. Market share gains and brand growth in golf equipment. A stronger economic model and proven growth algorithm in the Topgolf venue business. and continued growth in our apparel assets. We also see a resilient and engaged consumer across all of our businesses. We remain on track to deliver strong EBITDA growth for the full year and a transition to being cash flow positive both at the corporate level as well as at Topgolf individually. This transition to being cash flow positive is an important milestone for our business and we're confident it will ramp from here. Having said this, we also recognize that there is more quarterly noise in our results than would be ideal. Most significantly, last year's retail inventory catch-up in our golf equipment business and separately the post-COVID surge in the events business at Topgolf make year-over-year quarterly comparisons difficult and and cloud the true progress we're making in improving the fundamental economic engine of our business. In our comments today, we hope to clearly explain this short-term volatility, as well as highlight the long-term positive story of continued improvement in the earnings power of our business and the resilience of our core modern golf consumers. With that said, let's shift gears and talk about the business segments. We'll start by discussing Topgolf. This is a business which is expected to add 3 to 4 million new off-course golf participants each year for every 11 new venues and thus will help drive growth across the entire modern golf ecosystem. With this growth, Topgolf will soon have more consumers visiting it than exist in all of U.S. on-course golf. including one-half of the total on-course golf population, as many now participate in both on- and off-course golf. In what is truly a synergistic relationship, Topgolf's sister brands at our company will be helping drive this growth and also have a competitive advantage and reach to all these modern golf consumers. As outlined by Artie in his June 1st fireside chat, There are three key performance drivers for our Topgolf venue business. First is our development pipeline. Second is the same venue sales growth. And third is the venue margin expansion. Let's walk through each one. Starting with our development pipeline, this quarter we successfully opened two new venues in King of Prussia, Pennsylvania and St. Petersburg, Florida, both of which drove excitement and brand heat in those regions. We're pleased to report that our new venues continue to perform extremely well and that we remain on track to open 11 new owned and operated venues in 2023 in line with our guidance. Turning to our second performance driver, same venue sales. As expected, Topgolf posted its seventh consecutive quarter of same venue sales growth despite challenges from temporary venue shutdowns from air pollution caused by the fires in Canada. Same venue sales for the quarter was within our guidance range at approximately 1%, and the two-year stack, which takes out some of the post-COVID-related volatility, shows an even more impressive 9% growth. As we discussed last quarter, we fully expected Q2 to be challenging from a comp perspective, as last year's same venue sales benefited from a post-COVID surge in the event's business. That said, we are maintaining our same menu sales guidance for the full year based on the continued strength in the consumer portion of our business along with new initiatives that will ramp during the second half and some nuances in the quarterly comparisons. Let me give you more detail on each of these and walk you through how we get to this conclusion. First and most importantly, we have seen consistent and strong growth in the consumer-led portion of our business. This category represents the lion's share of our business, and we believe it is the best indicator of brand heat. Second, as of Q2, we have made continued progress on our digital journey, including reservations. In fact, U.S. venue digital sales penetration increased eight points versus last year to approximately 34%. The largest driver of this growth is our digital inventory management system, PIE, which has now been rolled out to over half of our venues. This system allows us to maximize sales, improve the customer experience, and optimize costs. And we continue to expect to have all venues on PIE by the end of the year. More specifically to this section of our call, On an individual venue basis, it helps drive approximately a two-point increase in same venue sales post-implementation, and given the timing of the rollout, we estimate it will add at least 1% to same venue sales in Q4. Third, we have and are taking incremental pricing both in gameplay and food and beverage. Based on our experience, as well as competitive positioning, We believe this will have at least a 1% positive impact on same-menu sales, primarily in Q4. Fourth, we're excited about a new innovative marketing campaign, which will launch later this month. It is designed to both captivate and appeal to the modern golfer and to drive both incremental awareness and visits. I'm not going to ruin the surprise by trying to describe it to you on this call, but I'm sure you'll notice it, and I hope it makes you smile. Lastly, we believe our second half comp will be slightly less challenging than our Q2 comp. This is because we expect the lap of last year's especially strong events business to be somewhat less of a headwind for the second half of the year. And last year's Q4 comp was negatively impacted by approximately two points by venue closures due to extreme cold weather, which we don't expect to repeat this year. Moving on to our third performance driver, venue margin expansion. COGS and labor optimization, along with continued leverage of fixed overhead costs, drove sequential quarter-over-quarter improvement in our Q2 adjusted EBITDA margins. This, in turn, drove total segment EBITDA towards the high end of our range, despite same venue sales coming in towards the low end. This is just a fantastic story. and it highlights how our venues are becoming increasingly profitable. PIE continues to be a key ingredient to our venue margin expansion. It does so by facilitating increased reservations, which in turn support more predictable labor scheduling and increased pay utilization. As mentioned, at the end of Q2, more than half of our venues had implemented PIE, and we expect to have all venues utilizing PIE by the end of the year. The Topgolf team's excellent work over the last few years puts us well ahead of the plan laid out at the time of the merger and in a strong position to achieve the updated target venue unit economics we provided last quarter, including approximately 35% four-wall adjusted EBITDA margins, two-and-a-half-year payback period, 20% return on gross investment, and 50% to 60% cash-on-cash returns. Together, these targets represented a fundamental long-term improvement in the cash generation and profitability of our venue business. In essence, a step change in value. Lastly, turning to Top Tracer, I want to quickly highlight its success in the quarter and continued dominant leadership position as golf's number one range technology. We continue to see healthy demand for this product with accelerating bay installations versus Q1, and we are on track to install at least 7,000 bays this year in line with our guidance. Moving to our golf equipment segment and another example of strong execution. We delivered improved U.S. market share performance in the second quarter in what has been an excellent year to date for our brand in both tour exposure and product performance. In June, we saw U.S. market share gains in every category in both the on and off course channels. For both the month of June and year to date, our brand is number one in drivers, fairy woods, hybrids, total woods, and irons. We're also number two in putters and golf ball with strong shares in these categories as well. This performance shows the continued strength of our brand and our products. Our Paradigm line of clubs, which launched in Q1, was the primary driver of this success. Paradigm had continued strong demand throughout Q2 and has been exceptional on tour all year, with the Paradigm driver winning an impressive nine times on the PGA Tour year to date. Not surprisingly, Paradigm is the number one selling driver and fairway model year to date in the U.S. I'm proud of these results. and I believe our performance this year has further strengthened our brand. This, in turn, will benefit our shareholders, not only this year, but going forward. In other brand news, just last month we announced the extension of our long-term partnership with Masters champion Jon Rahm. Jon will continue to play both Callaway and Odyssey equipment, wear Callaway headwear, Travis Matthew apparel and footwear, and championed Topgolf's business, including the Topgolf logo on the side of his headwear. This is another wonderful example of how we are achieving synergies across our brands. Looking at the overall golf industry and the health of the game, the U.S. hard goods market continues to hold up quite well, down just 1.6% junior to date, consistent with our expectations. In addition, all signs point to golf participation remaining robust, with U.S. rounds played up 5.5% through June year over year and strong demand for consumables in the quarter. Looking ahead, our leadership position in R&D investment, and more specifically, our expertise in the use of AI in the development of product, gives me continued confidence in our current and future product pipelines. Turning out active lifestyle. Travis Matthew had double-digit growth again this quarter. The brand continues to successfully open new retail stores, including five-year-to-date and totaling 46 overall. The team also continues to do a tremendous job executing the new women's category expansion, which has now grown to become a mid-single-digit percent of overall sales, an early sign of success. Travis Matthew also continues to find exciting ways to grow its brand in the modern golf ecosystem, including building additional synergies across our brands. In June, the brand had a very successful marketing activation event at the ACC Golf Tournament in Lake Tahoe. This high-profile event drew participation from several Travis Matthew ambassadors, as well as Callaway brand ambassador Stephen Curry. who went on to win the event via a dramatic walk-off eagle finish. Both Callaway and Travis Matthew, including new Travis Matthew brand ambassador Reggie Bush, also participated at Topgolf's U.S. Open event at El Segundo. We feel incredibly proud to partner with ambassadors who share our excitement about the growing modern golf ecosystem, and our teams are increasingly enjoying opportunities to leverage cross-brand synergies. Moving along, Jack Wolfskin had a good first half despite choppy macro backdrop in Europe, as well as earlier shipment timing this year versus last year as supply chains corrected. Jack Wolfskin remains on track for steady growth in both revenue and profits for 2023. In conclusion, we're excited about the strategic direction of our portfolio of global brands in the growing modern golf ecosystem. In the near term, our brands are strengthening, and we remain on track to deliver impressive EBITDA growth and transition to positive free cash flow this year. This inflection point is just the first step in what will be a strong, long-duration story of overall growth in both EBITDA and cash flow. As we do this, our top capital allocation priority continues to be investing in the profitable growth of our businesses most notably in new venues. This is an area where we have demonstrated strong competency in selecting, building, opening, and operating these unique and high-performing assets. Our top golf venues are delivering increasingly attractive returns, and we have a high degree of confidence in their performance both out of the gate and over time. Looking forward, We remain excited and optimistic about our business, which benefits from a defined leadership position in modern golf, synergies across our portfolio premium brands, and a clear path to continued profitable growth. And now I'll turn the call to Brian to provide more detail on our financials and outlook.