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.

Thank you, Chip, and good afternoon, everyone. We are pleased with our Q2 results, which showed strength across each of our segments, and progress against each of the key top golf performance drivers Chip discussed, including continued development of 11 new venues this year, seven consecutive quarters of same venue sales growth, and good progress toward our venue margin expansion goals. This progress, together with continued high consumer demand for on and off course golf, receding inventory levels, and improved liquidity, puts us in a strong position to deliver positive free cash flow this year and to meet or exceed our long-term financial targets. Now let's turn toward our second quarter financial results. Second quarter net revenue was $1.2 billion, an increase of 5.7% year-over-year, or 6.5% on a constant currency basis, which was in line with our guidance. This increase was led by Topgolf's robust 6.6% year-over-year revenue growth, We achieved this result displaying an $8 million negative impact from changes in foreign currency exchange rates and the post-COVID inventory fill-in at retail and our products businesses, which primarily impacted the first half of 2022. Q2 non-GAAP operating income was $130.5 million, down approximately 3% and flat on a constant currency basis year over year. We are pleased with this performance, considering both the challenging lap of the inventory filling at retail and our products businesses, as well as the planned investments in labor and marketing we made in the Topgolf business. Q2 non-GAAP net income was $77.8 million, a decrease of $15.7 million compared to Q2 2022. The decrease is attributable to a $20.3 million increase in interest expense, primarily due to higher interest rates, and the additional term loan debt related to our recent debt refinancing. Lastly, Q2 adjusted EBITDA was ahead of our guidance range at $206.2 million, down 0.5% compared to last year, primarily due to unfavorable changes in foreign currency rates. Q2 adjusted EBITDA increased 2% on a constant currency basis, but it's driven primarily by operational efficiencies. Now let's turn to our segment performance. In the second quarter, Topgolf revenue increased $67.1 million to $471 million, a year-over-year increase of 16.6%, driven by the addition of 11 new venues and approximately 1% same-venue sales growth, which was within our guidance range. We estimate that the impact from temporary venue shutdowns caused by fires in Canada was worth about a point of same-venue sales. We believe it is helpful to compare same venue sales on a two-year stack basis because it removes some of the COVID-related volatility and demonstrates the strength of our venue business. On a two-year stack basis, same venue sales growth for Q2 was 9%. By comparison, Q1 2023 same venue sales was 11% and on a two-year stack basis was 14%. Topgolf's segment operating income was $44 million which was largely flat versus last year. As mentioned previously, this result in large part reflects the planned increase in marketing expenses related to Topgolf's Come Play Around marketing campaign and investments in labor we made in Q3 of 2022. Importantly, the underlying earnings power of this business continues to increase, and we remain on track to achieve our four-wall adjusted EBITDA margin target of 35% by 2025, if not sooner. TopGolf's adjusted EBITDA was $92 million, up approximately $6 million compared to Q2 last year, and at the high end of our guidance range due to solid performance in our new venues and improved operational efficiencies at existing venues. Golf equipment net revenue was $451 million, flat year over year, and up 1% in constant currency. This was good performance considering the previously mentioned retail channel fill-in last year, and the unfavorable changes in foreign currency rates. These headwinds were largely offset by our increased market share gains in golf clubs, strong golf ball sales, and continued strength in overall rounds played. Golf equipment segment operating income was $96.4 million, a 3.9% decline versus Q2 2022, primarily due to unfavorable changes in foreign currency exchange rates. This result was partly offset by stronger gross margins which increased approximately 100 basis points year over year due to increased pricing and lower freight costs. Lastly, Q2 active lifestyle segment revenue was $258 million, slightly down or flat on a constant currency basis as compared to Q2 2022. This result was in large part due to a shift in timing of wholesale shipments between Q1 and Q2 as compared to 2022. This is evident in our first half results, where active lifestyle revenue increased 13.3% year-over-year. Q2 active lifestyle operating income of $19.5 million decreased $3 million versus Q2 2022 due to planned operating expenditures to support growth and was partially offset by gross margin increases related to price increases and a higher mix of direct-to-consumer business. Moving to our balance sheet. As a reminder, we completed a significant debt refinancing in March of this year, which added approximately $300 million of additional liquidity, reduced our cost of the refinanced debt, and extended the maturities of our credit facilities. We not only simplified and strengthened our capital structure, but also gave ourselves flexibility on how to finance Topgap venues, including self-financing, which provides us with another option as we decide how to finance future venues. As of June 30th, 2023, available liquidity, which is comprised of cash on hand and availability under our credit facilities, was $648 million compared to $415 million at December 31st, 2022, and as compared to $640 million at June 30th, 2022. At quarter end, we had total net debt of $2.24 billion, which excludes convertible debt of approximately $258 million. compared to $1.44 billion at the end of Q2 2022. This increase relates primarily to incremental new venue financing, the additional $300 million of term loan debt, and normalization of working capital for the non-top cop business. Our net debt leverage, which excludes the convertible debt, was 4.1 times at June 30th, 2023, compared to 2.7 times at June 30th, 2022. The year-over-year increase was due to new venue development and increases in working capital. Our net debt leverage ratio was in line with March 31, 2023, which is a little better than we discussed last quarter. We continue to expect our leverage to decline in the back half of the year as we generate free cash flow. Consolidated net accounts receivable is $397 million compared to $376 million at the end of Q2 2022. Non-Topgolf days sales outstanding increased slightly from 55 to 58 days. Our inventory balance increased to $840 million compared to $640 million at June 30, 2022, and is down from our December 31, 2022 balance of $959 million. The team's active inventory management has led to a reduction of $119 million in the first half of 2023. Continued momentum in our golf equipment and active lifestyle segments gives us confidence that we remain on track to be at more normal levels of inventory by the end of the year. More importantly, we feel good about the quality of our inventory as much of the older inventory was cleaned up during the pandemic. Gross capital expenditures were approximately $263 million for the first six months of 2023 compared to $243 million for the first six months of 2022. Net capital expenditures, which net out the proceeds from construction reimbursements, were $148 million and $154 million in the first six months of 2023 and 2022, respectively. For full year 2023, we expect total company net capital expenditures of $270 million, which includes $190 million from Topgolf. Before moving to our outlook, I want to comment on a few other matters. First is the Form 8K we filed yesterday. Last week we identified unusual IT system activity and immediately took proactive steps in consultation with our advisors to secure our systems. We activated our incident response plan and moved portions of our network offline as a precautionary measure. The majority of our systems are back online and full access is expected to be restored in the coming days. Based on what we know now, we do not believe the incident will have a material effect on our business operations, or financial results. Second, during the quarter, we repurchased 1 million shares in open market transactions for a total cost of $17.8 million. Finally, I want to provide a brief update on our relationship with Fullswing, the owners of the SwingSuite indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors. On August 1, 2023, we acquired certain assets of the Swing Suite business for approximately $12 million. This small acquisition is strategically relevant to us as it allows us to control the use of the Topgolf brand in this channel. And from a financial perspective, it is immediately cashflow positive in year one. Now turning to our balance of the year outlook. We are maintaining our full year 2023 revenue guidance range of $4.42 billion to $4.47 billion, and our adjusted EBITDA range of $625 million to $640 million. At Topgolf, we continue to guide to approximately $1.9 billion in revenue and an adjusted EBITDA range of $315 million to $325 million. We are also reaffirming same-menu sales guidance to be mid to high single digits. For the third quarter of 2023, We estimate revenue to be within the range of $1.05 billion and $1.075 billion, compared to $989 million in Q3 2022. For Topgolf, we estimate third-quarter same-venue sales growth between 1% and 3%, which would represent 12% to 14% growth on a two-year stack basis. We estimate Q3 consolidated adjusted EBITDA of 141%, $254 million, which is slightly ahead of Q3 2022. Now, I'd like to provide some additional details so you can better understand our second half guidance, including the cadence between Q3 and Q4. Topgolf's second half venue sales growth will be more heavily weighted toward Q4 versus last year for several reasons. In Q4 2022, there was some unusually severe weather that led to the shutdown of a significant number of our venues, negatively impacting same-menu sales by approximately two percentage points. We are assuming that shutdown does not repeat in Q4 this year. Pricing we are taking at the end of Q3 should also provide at least a one percentage point lift to same-menu sales in Q4 versus Q3. Our PI initiative should also provide at least a one percentage point lift in same-menu sales in Q4 versus Q3. Further, we expect Topgolf profitability to improve in the second half, As the year-over-year comparisons for marketing and labor become much easier, an increased pricing and improved operational efficiencies in our venues from PIE and other initiatives continue. Moving to our products businesses, we expect growth in the second half as we will no longer be lapping the retail channel inventory fill-in that occurred in the first half last year. Also, our second half golf equipment launch schedule is more heavily weighted toward Q4 this year as opposed to Q3 last year. And on a consolidated basis, we expect changes in foreign currency rates and lower freight expense to be tailwinds in the second half of this year, especially in Q4. Overall, and despite the ongoing macro volatility, our business fundamentals remain strong. The modern golf consumer remains healthy and engaged. We are on track to deliver double-digit revenue and EBITDA growth this year. We are also successfully managing down our inventories, and our liquidity position is strong. And finally, we expect to generate free cash flow this year on a consolidated basis and at Topgolf, well ahead of our plan at the time of the merger, which is a significant proof point for unlocking shareholder value. That concludes my prepared remarks for today. I will pass it back over to Chip for some additional comments, and then we'll open the call for questions.

Thanks, Brian. Before we open the call for questions, I just wanted to wrap up by reiterating our confidence in our strategy and long-term outlook. Our incredible portfolio of brands provides us with unmatched scale and reach within the modern golf ecosystem, an ecosystem in which we believe we are the dominant player. Our businesses, both individually and collectively, have both high barriers to entry and are structurally positioned for accelerated, profitable growth. Overall, we see a business that is well capitalized, has a long runway for continued growth, and is set to ramp up free cash flow by year-end and beyond. With this, we remain highly confident in our ability to meet or beat our long-term financial targets. We're optimistic about the future of modern golf and believe that our portfolio of premium brands uniquely positions us to be highly successful in it. And now we'll turn the call open for questions. Operator, over to you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Boss with J.P. Morgan. Please go ahead.

Great, thanks. So, Chip, could you just elaborate on the progression of Topgolf's same venue sales that you saw through the second quarter, maybe any commentary on July, and just your overall confidence in the sequential back half improvements? that you've embedded to hit your full year same venue sales growth guide?

Sure. You know, when we look at the quarter Q2, Matthew, you know, we obviously were within our guide and it's our seventh consecutive quarter of positive same venue sales. So, you know, there really wasn't much new in that quarter that we didn't identify going into the quarter. other than a small impact from the Canadian wildfires. And, you know, the consumer business remains strong. You know, venue margins are improving. The new venue growth is on track. You know, so a lot of good positives there. And we called out in advance that we're going to have events down a little year over year due to the post-COVID surge that we experienced in late 21 and throughout 2022. When you look at the progression from there, you know, it's not much of a move to go to one to three percent that we're calling for Q3. And then, you know, we gave you several of the key initiatives that are further helping us in Q4. And You know, we talked about the marketing campaign. We talked about the strength of the general consumer, which is the lion's share of our business. We also talked about a 1% improvement in pot from pie, 1% from price, and 2% from the lap of the unusually severe cold weather that we experienced last year and don't expect to repeat. So I think that kind of at least directionally, if not provides a pretty specific walk of how we're getting to the full year number.

That's great. And then just to follow up on the equipment side, could you speak to recent retail sellout trends that you've seen maybe relative to three months ago and just market share gains that you've seen for the Callaway brand? And maybe just larger, how would you characterize the health and composition of of your inventory in the channel today as we head into the back half of the year.

Sure. And Matthew, these are all, you know, really strong stories. So we had a great quarter from a brand perspective, excellent market share results. And the market is staying very healthy. You know, the rounds played is the biggest highlight of that being up five and a half percent, but there is no question that the, core golf consumer remains engaged and active. And our inventories in the field, as you would expect, given our market share performance, they're in very strong position. They improved during the quarter, and we like where we sit going into the second half of the year from brand strength, product line, and the health of the consumer within the very important golf segment. Great color.

Best of luck. Thank you.

Our next question comes from Randy Connick with Jeffries. Please go ahead.

Yeah, thanks, guys.

Just to follow up back on Topgolf to start here, maybe just give us some perspective on how you're thinking about over the medium term where we are with the dynamic between pricing and traffic. How much further do you think you have on pricing? And how do you want us to think about normalized ability to drive, say, venue sales growth between pricing and traffic? I think in the past you said one-third pricing, two-thirds traffic. I might have that backwards. Just give us reminder parameters of how we should be thinking about the long-term opportunity to drive more productivity per box. over the medium term at Topgolf would be very helpful.

Absolutely, Randy. A really important, you know, point. So if you look at our consumer business at Topgolf, you know, it really remains strong and resilient. You know, we're consistently driving same venue sales growth there and have throughout the entire first half of this year. And we're seeing... a nice mix between pricing and traffic, so positive traffic as well as price. Price or spend per visit a little higher than traffic, but nice momentum in both, candidly. In the long term, what you can expect from us is that we are going to drive same-venue sales growth at the venues above and beyond the inflationary effects of our cost basis. So, you know, forecasting the inflationary cost basis right now is a dynamic process, right? You know, it had surged. Now it's moderating. It'll likely continue to moderate. But we've shown, you know, with clear evidence that we can take price. And when we've taken price, we've seen no negative impact. It really comes down to the strength of... demand in the consumer. And the only other thing I want to add there is, you know, we've got these initiatives in place, the marketing campaign, pie, you know, other factors that are driving margin expansion. You know, this is still early days on these. We have gas in the tank on these. These aren't going to time out in anywhere in the near future. And we're developing more.

Great, and then just my last follow-up on, I want to go back to equipment as well. In talking about gas in the tank, you know, where do you think we are in the, maybe perhaps from an industry and company-specific perspective on the ability to drive further margin opportunity on clubs or just equipment generally through either customization, fittings, and or ball plants? fixed cost leverage as you drive more and more volume gaining share on balls can you give us some perspective on that dynamic on you know where you see you know margin opportunity or just opportunity and generally speaking uh from these things would be super from these actions would be super helpful thanks yeah sure another another positive story randy because it's it's early innings on all of these we're really starting to ramp up the uh performance of the ball plan i had the

pleasure of visiting it a week ago, and they've just transformed that place. It's an impressive operation. The efficiencies are improving rapidly, as are the margins. You know, over the last several years, we've also seen a lot of inflationary pressures across the business, but a lot of those are moderating right now. You know, freight rates is a great example of that. But we're also seeing a moderate in... you know, other areas of the business. And, you know, throughout all of this, again, we have shown that we can operate quite successfully through any of these environments. In inflationary environments, we're able to pass it on. In non-inflationary environments, you know, we're able to, you know, sustain the demand side of our business. So you're seeing, even this year, margins increasing gross margins now that are improving and we feel good about the long-term outlook there.

Super helpful. Thank you.

Our next question comes from Alex Perry with Bank of America. Please go ahead.

Hi. Thanks for taking my questions. I guess just first, can you give us a little more color on how the corporate events business is doing versus walk-in and then You know, any more color on how you think about, you know, the rest of the year and sort of corporate events versus walk-in? Does the guide assume, you know, that either part of those, you know, those parts of the segment improve versus the trend you saw in the second quarter? Thanks.

Yeah. So, you know, obviously corporate events is, you know, we've mentioned is – Down year over year, but really performing well versus 2019 levels. So if you looked at the two-year stacks or you looked at the comparison that wipes out some of the post-COVID surge, it's quite good. The consumer side of our business has been steadily good and remains there. And, you know, we're really not expecting significant change in these trends through the balance of the year. So our assumptions are not for marked change on any of those trends. Does that answer your question, Alex?

Yeah, that's really helpful. Appreciate that. And then I guess back to golf equipment. So I think early in the year, you sort of said that you're thinking about the golf equipment business as sort of flat, you know, FX neutral for the year. You know, is that sort of how you're still thinking about it? And then could you just help us with any sort of quarterly fluctuations that we should be thinking about, you know, any sort of product launches we should be considering? And then, Just on golf balls, the growth there in the quarter was strong. So is that level of growth something that should continue going forward? Thanks.

Sure.

A couple questions there. Hopefully I can get them all. So the quarterly, the last two are the ones that I remember most clearly. So quarterly, we're going to have a little bit more launch timing in Q4 as we currently plan it versus Q3. But that timing happens across quarters, so we'll give you our best estimate on that. But as you know from the golf equipment business, between quarters it can move a little bit. But we do have more launch activity in the second half of half two, Q4 versus Q3. On the ball side, we've had excellent results this year. We're on track to grow for the full year. And um you know really strong results as you can see during the quarter uh we will our growth in the ball will moderate during the second half of the year uh for a couple reasons one is we were constrained last year in q2 so we had a little bit of carryover into q3 which we're we haven't been constrained this year so uh we won't have some of that carryover and then secondly uh in our launch cycles, when we're at the tail end of a product cycle for our urethane product, we have to shift the plant to producing the new product, and that's likely to be the case by the end of this year. So there will be a little constraint that happens every other year. It's a normal course of business in the golf business. But something that you, for those that want to model, you should model it. And then in terms of full year, yeah, we obviously are having an excellent year in our golf equipment segment. We had about $100 million inventory fill-in last year that we've talked about ad nauseum, and it doesn't repeat this year. So we had to cover that And we're doing a pretty good job of that and growing share and our forecast for the year remain unchanged. Perfect, that's really helpful. Oh, sorry, go ahead.

Yeah, just as Chip mentioned, there's growth in the second half, but period over period, quarter over quarter, most of the growth will occur in the Q4. Again, as Chip mentioned, it can move depending on timing of shipments, but it's definitely heavily weighted to Q4.

Perfect. That's really helpful. Best of luck going forward. Okay. Thanks, Alex.

Our next question comes from Daniel Imbrow with Stevens, Inc. Please go ahead.

Yeah, thanks, Kevin. Thanks for taking our questions. I'll start on Topgolf as well, continue the trend. You know, obviously, same store sales moderated kind of sequentially. Maybe to follow up on Randy's question, can you just give the actual numbers or detail on traffic versus ticket growth? And then when you look at the Topgolf slowdown, I guess, how do you think about the risk of other leisure activities, whether it's pickleball or, you know, travel or movies? Is that taking traffic away? Are you guys monitoring any data around, like, competitive just uses of that leisure time? Or what are you seeing in terms of that when you look at the slowdown in sales?

Well, Daniel, unless pickleball and – The movies are taking away corporate events. I don't think there's any data that suggests it's having much impact on us. The same venue sales is, again, I apologize, it's very strong on the consumer side of the business and resilient. There was no change in trend across the quarters. The We feel very good about that. The pickleball is obviously growing. From time to time, you'll have a movie that comes out. We do compete against consumer activity. Pickleball is not a new trend. We have been growing our business and our brand for seven consecutive quarters, as a matter of fact. We feel good about that.

I also think, Daniel, that People on average only go to Topgolf, you know, one and a half times a year. So it's not something they're doing every week that now they want to go do pickleball and they have to replace it. They fit this in with their rotation of other activities that they want to do.

And Daniel, steer me if I didn't answer the question completely and I can provide any further value there. But, oh, you asked about specific traffic versus price. Sorry. And the... You know, I can give you just general. You know, in the quarter, because of events, the total traffic was down a little bit. But the traffic was up nicely in the consumer side of our business. And, you know, for the full year, we expect it to be a mix of positive traffic and spend per visit. majority being spend per visit. But, you know, we're going to contribute 20% to 25% of our same venue sales growth through traffic.

Yep, thank you for all the detail. And then a follow-up on Topgolf. I guess you mentioned, obviously, corporate is the weak spot here, and that sounds specific. But if we look at pre-COVID, I think corporate was 30% of total Topgolf revenue, but that was very 4Q-weighted. And so I guess we're staring down the back half that has a much higher mix of corporate revenue historically. Corporate is the weak spot in Topgolf right now. I know Brian walked through a few points of maybe what's going to drive the acceleration into 4Q, but maybe can you just help investors bridge that gap of what you guys see to give you confidence in the improved sales given the corporate uncertainty we're seeing?

Okay, so let me just correct a few numbers for you to start with, Daniel, because you're directionally correct, but the numbers were slightly inaccurate. Corporate, since we're saying that specifically, is on average 21% of our total business in the venues for the full year. In Q4, it is roughly 28%. So maybe for Q4, you can round to that 30, but 28 would be a more precise number. And, you know, we obviously, you know, as we go through our, we've got pretty good visibility on, you know, what the corporate trends have been. And, you know, we've factored them into our guidance as best we can and given you what I think is a walk on some of the other factors. So I'm not sure if I can add too much more color right now in terms of – we prefer not to get into specific estimates by subcategory by quarter, and I'm sure you can understand why.

Absolutely. I'll hop back in queue. Thanks for the color.

Thank you.

Our next question comes from Noah Zatkin with KeyBank Capital Markets. Please go ahead.

Hi. Thanks for taking my questions. Maybe switching gears to apparel, just hoping you could provide some color both on inventory levels and channel health along with the level of promotionality you're seeing in the channel. And then I guess relatedly, within active lifestyle, strongest margin improvement in the quarter, hoping you could help bridge to the EBIT margin pressure you saw, and then just any color on how we should think about margins there moving through the back half. Thanks.

Okay. Brian, I'm going to throw that margin one year away, so I don't know whether we have anything on that at this point. But in terms of the field inventories and inventory levels in general, You know, it's a little bit of the same story in golf equipment, but it's going to take a little longer is the long and short answer of it. So inventories build up in the field over the 2022. They are in process of correcting. We had a strong sell-through quarter for our brands. We feel like we're in good position at or ahead of our plan from that basis. It's a little more promotional than it was – well, it's a lot more promotional than it was in 21 and 22 when there were no inventory and nobody promoted anything. But it's – I wouldn't call it highly promotional right now. And, you know, we feel good about those trends. Brian, do you have any color for the margin expectations for the balance of the year? I think what you might be seeing, though, is just a little bit noise between the quarters because Q1, you know, we had stronger volume than Q2. And it's another one of those COVID quarterly comparison issues because our supply chain corrected this year. So we shipped the product when we're supposed to ship it, which was Q1. Last year, we shipped a lot of it in Q2 because we couldn't get it. And so now when you compare the quarters, Q1 and Q2 look wonky. If you look at the half, it looks pretty solid and it's very representative. And we're on track or trend for our plan there.

Yeah. So for the second half, we would expect it to be up. So the trend, as Chip mentioned, is pretty good if you look at the half, the first half. But then second half, we're going to continue to get some benefits from the freight and then also from FX, and that will help those as well, and just the continued sales growth in the back half.

Thank you. Very helpful. Thank you.

Our next question comes from Martin Metello with Raymond James. Please go ahead.

Hi, this is Martin. I'm for Joe Altabello. I appreciate your commentary about the ramp up for 4Q. I'm just going to say that 3Q guidance is a little bit softer than what the street expected. I was wondering if we can get a little bit more commentary around that. Thank you.

Martin, it's hard for me to comment on what the street would have expected because the street didn't have any of the information that we had in terms of actual results. So I think It's pretty logical and believable when you look at how it ramps based on the actual facts. So I guess hence the purpose of these calls.

Okay, fair enough. And there was a comment made on this earnings call and the virtual investor days as well, which suggests that you're opening the door for self-financing for top golf venues. Just wondering if we can get a little bit of idea, you know, the reason that you're looking down that path and maybe what the implications could mean.

Sure. Thanks, Martin. This is Brian. We wanted to provide, you know, flexibility to do so. Right now the REITs, Cap rates have been holding stable for us. I know everyone else has been seeing a lot of increased interest rates, but they've held reasonably stable. And I think there's a few reasons for that. We tend to run a competitive process. We have more REITs that have interest in working with us now. The venues have become more proven and are less risky to the REITs. So everything has been holding. Occasionally you run into a site that for whatever reason a REIT may not be interested or just to keep keep them honest on the rates. We wanted the flexibility to be able to self-finance if that proves to be economically feasible for us.

Great. Thank you. That's very helpful. Thank you.

Our next question comes from John David Kiernan with TD Cowan. Please go ahead.

All right. Good afternoon, guys. Thanks for taking my question.

Sure.

Brian, I just wanted to go

to the OpEx line, specifically the deleverage that's occurring on the operating expenses percent of sales. I think it was about 400 basis points in the first half. It was based on the Q3 guidance. You probably have to have significant leverage by Q4 on this line. How should we think about the balance between top line investing in Topgolf and that operating expense line, which seems to be driving a lot of the margin deleverage?

Yeah, I think a lot of it is, you know, we've been talking about the labor and marketing all year and how those comps get a lot easier in the second half. I mean, it is significant. If you look at it being, you know, it'll shift from being a headwind to a tailwind first half, second half, and it's 400 to 500 basis points. So you get that plus the improved profitability. I mean, that's a significant lift there. And I think that's probably what you're seeing.

Okay, got it. It just seems like in Q3, it's going to remain a pretty significant headwind just based on the EBITDA guidance you gave for Q3, and then it has to switch to a pretty meaningful tailwind by Q4.

Yeah, it does, because a lot of the actions will happen in Q3, and then it ramps towards Q4. Got it.

And then is the meaningful improvement in the EBITDA margin by Q4 Is that being driven more by Topgolf, or is it balanced between the golf equipment business and Topgolf?

A lot of it is Topgolf for the things we just mentioned, plus the increase in same-venue sales. But there's also improvements in the other business gross margins as well, especially with the second-half product launch, foreign currency, freight rate. I mean, it's all adding up to be a pretty nice improvement for the EBITDA margin.

Okay, got it. Thank you.

Our next question comes from Michael Schwartz with Truist Securities.

Please go ahead.

Good evening. Just with regards to the full swing acquisition, maybe give us a little color on just the background of that acquisition, what it provides you, and then Is that a material business in terms of revenue?

Hey, Michael, it's Chip. So Swing Suites, it's more of a strategic acquisition than it is a financially material one. So Swing Suites, for those on the call that are not familiar with it, is almost a lounge business that you would find at resorts and premium hotels. So you visit Omni and it's Topgolf Swing Suites. And you'd see these bays that you can go in and hit balls and play games and entertain. And it has the Topgolf brand on it. But it was a business that we had had prior to the merger. The previous owners had licensed out, long-term license to full swing. And so it wasn't being controlled by Topgolf. It's a nice business. It has our brand on it. It has some good long-term potential, but it's a small business. It's roughly, on a gap basis, $5 million in revenue. So very small there. It'll be accretive from a cash basis, about $2 million starting next year. It'll be accretive this year, but I'm giving you annual numbers here, not partial year numbers. So not a material business, but a strategically very attractive one, part of the brand, something we do think we can grow, and something even potentially more importantly we wanted to control given, you know, how, you know, positively we feel about the Topgolf brand and the long-term potential there.

That's helpful. And maybe... Brian, with regards to the big cash flow improvements to the back half of the year, I know a big part of that is working capital and bringing down inventory in the products business. But just given the fourth quarter launch cadence, should we expect the inventory to come down more materially over the next two quarters relative to the 120 in the first half?

Well, it's come down a significant amount. And then you have to remember, toward the end of the year, we'll start ramping up for the launches next year. So you have to build that into it. But that'll be next year's launch and next year's product. But this year, it'll continue to come down. But there's usually less sales in the second half of the golf business anyway. But it'll be in good shape by the end of the year. I guess that's the bottom line. Our inventory will be in great shape in all current. Thank you.

Thank you.

Our next question comes from Eric Wold with B. Reilly Securities. Please go ahead.

Thanks. Good afternoon. One question. I know that you started your guidance, you raised it a little bit, Q1. You've reaffirmed it on this call, but it looks like a lot of confusion has been around the quarterly cadence given a number of wonky comparisons to last year, you know, the post-Omicron demand by Topgolf, the equipment catch-up, the weather shutdowns in Q4. I guess, obviously, there's still four months left in the year. You know, assuming nothing wonky happens much for months, does that kind of normalize everything such that the next year's quarterly cadence should be normal, does not set any weird comparisons to any certain quarter's?

Eric, this is Chip. The short answer with obviously fingers crossed is yes. We had a decision to make at the beginning of the year, which did we start comparing against 2022 numbers because 2019 was so long ago. And we made the obvious decision, which is probably the only decision to do that, But it has a lot. 2022 still had a lot of COVID and what we'll call one-time noise in it. This is not fundamental to our business. It doesn't really impact long-term. But we had these inventory catch-ups and inventory shortages and periods where COVID was impacting consumers at Topgolf. And, you know, so there's, you know, bear with us as we get through it in the balance of the year. And yes, it should be cleaner going forward.

No, that's perfect. I appreciate it. Thank you.

Our next question comes from Casey Alexander with Compass Point Research and Training.

Please go ahead.

Yeah, thank you. And I think there's been pulled apart in about every way possible so far. But, you know, the discussion that cash flows, you know, should turn positive for Topgolf at the end of the year is obviously a big swing. The golf business has always generated nice cash. What kind of cash flow range are you thinking about for 2024? And what would you like to do with it? Is it to pay down debt? And if so, what's kind of a net leverage ratio that you'd like to get it to on like a normalized basis?

Hi, Casey. This is Brian. We're not going to provide guidance at this point on cash flow for next year, but we agree that it will generate significant cash flow. As far as what we do with it, well, we Paying down debt is an obvious one. Investing back into business is our primary one we do. But we have plenty of availability at this point. So we'll monitor it and we'll balance it between investing back into business, making sure our leverage ratios are on track to decrease. I mean, longer term, we want to get below three times. And then a balance between returning capital to shareholders and other investments, smaller investments.

All right.

Thank you. Thank you, Casey.

This concludes our question and answer session. I would like to turn the conference back over to Chip Brewer for any closing remarks.

Well, thank you, everybody, for dialing in. We appreciate your participation and questions, and we'll look forward to engaging with you post-call where appropriate and look forward to continue to update on our journey forward. I do want to say I'm very pleased and I believe that the business is continuing to strengthen its fundamental economic engine, and I hope that came through in our comments.

Thank you for your time.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Music. me. the the Bye. Thank you. you

Welcome to the Topgolf Callaway Brand 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 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 Metzodakis, 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 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'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 Cattleway 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 top golf 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 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 the 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 three to four 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 in 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 events business. That said, we are maintaining our same venue 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, Pi, 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 PI 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 San Benito's 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 and increased bay 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. John will continue to play both Callaway and Odyssey equipment, wear Callaway headwear, Travis Matthew apparel and footwear, and champion 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% June year 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 pipeline. 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 and as well as Callaway brand ambassador, Stephen Curry, who went on to win the event via 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 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 and 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 business, 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.

Thank you, Chip, and good afternoon, everyone. We are pleased with our Q2 results, which showed strength across each of our segments and progress against each of the key top top performance drivers Chip discussed, including continued development of 11 new venues this year, seven consecutive quarters of same venue sales growth, and good progress toward our venue margin expansion goals. This progress, together with continued high consumer demand for on and off course top, receding inventory levels, and improved liquidity, puts us in a strong position to deliver positive free cash flow this year and to meet or exceed our long-term financial targets. Now let's turn toward our second quarter financial results. Second quarter net revenue was $1.2 billion, an increase of 5.7% year-over-year, or 6.5% on a constant currency basis, which was in line with our guidance. This increase was led by Topgolf's robust 6.6% year-over-year revenue growth. We achieved this result despite an $8 million negative impact from changes in foreign currency exchange rates and the post-COVID inventory fill-in at retail and our products businesses, which primarily impacted the first half of 2022. Q2 non-GAAP operating income was $130.5 million, down approximately 3%, and flat on a constant currency basis year over year. We are pleased with this performance considering both the challenging lap of the inventory filling at retail and our products businesses, as well as the planned investments in labor and marketing we made in the Topgolf business. Q2 non-GAAP net income was $77.8 million, a decrease of $15.7 million compared to Q2 2022. The decrease is attributable to a $20.3 million increase in interest expense, primarily due to higher interest rates and the additional term loan debt related to our recent debt refinancing. Lastly, Q2 adjusted EBITDA was ahead of our guidance range at $206.2 million, down 0.5% compared to last year, primarily due to unfavorable changes in foreign currency rates. Q2 adjusted EBITDA increased 2% on a constant currency basis, driven primarily by operational efficiencies. Now let's turn to our segment performance. In the second quarter, Topgolf revenue increased $67.1 million to $471 million, a year-over-year increase of 16.6%, driven by the addition of 11 new venues and approximately 1% same-venue sales growth, which was within our guidance range. We estimate that the impact from temporary venue shutdowns caused by fires in Canada was worth about a point of same venue sales. We believe it is helpful to compare same venue sales on a two-year stack basis because it removes some of the COVID-related volatility and demonstrates the strength of our venue business. On a two-year stack basis, same venue sales growth for Q2 was 9%. By comparison, Q1 2023 same venue sales was 11%, and on a two-year stack basis was 14%. Topgolf's segment operating income was $44 million, which was largely flat versus last year. As mentioned previously, this result in large part reflects the planned increase in marketing expenses related to Topgolf's Come Play Around marketing campaign and investments in labor we made in Q3 of 2022. Importantly, the underlying earnings power of this business continues to increase, and we remain on track to achieve our four-wall adjusted EBITDA margin target of 35% by 2025, if not sooner. TopGov's adjusted EBITDA was $92 million, up approximately $6 million compared to Q2 last year, and at the high end of our guidance range due to solid performance in our new venues and improved operational efficiencies at existing venues. Golf equipment net revenue was $451 million, flat year over year, and up 1% in constant currency. This was good performance considering the previously mentioned retail channel fill-in last year and the unfavorable changes in foreign currency rates. These headwinds were largely offset by our increased market share gains in golf clubs, strong golf ball sales, and continued strength in overall rounds played. Golf equipment segment operating income was $96.4 million, a 3.9% decline versus Q2 2022, primarily due to unfavorable changes in foreign currency exchange rates. This result was partly offset by stronger gross margins, which increased to approximately 100 basis points year over year due to increased pricing and lower freight costs. Lastly, Q2 active lifestyle segment revenue was $258 million, slightly down or flat on a constant currency basis as compared to Q2 2022. This result is in large part due to a shift in timing of wholesale shipments between Q1 and Q2 as compared to 2022. This is evident in our first half results where active lifestyle revenue increased 13.3% year-over-year. Q2 active lifestyle operating income of $19.5 million decreased $3 million versus Q2 2022 due to planned operating expenditures to support growth and was partially offset by gross margin increases related to price increases and a higher mix of direct-to-consumer business. Moving to our balance sheet. As a reminder, we completed a significant debt refinancing in March of this year, which added approximately $300 million of additional liquidity, reduced our cost of the refinanced debt, and extended the maturities of our credit facilities. We not only simplified and strengthened our capital structure, but also gave ourselves flexibility on how to finance Topgap venues, including self-financing, which provides us with another option as we decide how to finance future venues. As of June 30th, 2023, available liquidity, which is comprised of cash on hand and availability under our credit facilities, was $648 million compared to $415 million at December 31st, 2022, and as compared to $640 million at June 30th, 2022. At quarter end, we had total net debt of $2.24 billion, which excludes convertible debt of approximately $258 million, compared to $1.44 billion at the end of Q2 2022. This increase relates primarily to incremental new venue financing, the additional $300 million of term loan debt, and normalization of working capital for the non-top-top business. Our net debt leverage, which excludes the convertible debt, was 4.1 times at June 30, 2023, compared to 2.7 times at June 30, 2022. The year-over-year increase was due to new venue development and increases in working capital. Our net debt leverage ratio was in line with March 31, 2023, which is a little better than we discussed last quarter. We continue to expect our leverage to decline in the back half of the year as we generate free cash flow. Net accounts receivable is $397 million compared to $376 million at the end of Q2 2022. Non-top-off days sales outstanding increased slightly from 55 to 58 days. Our inventory balance increased to $840 million compared to $640 million at June 30, 2022, and is down from our December 31, 2022 balance of $959 million. The team's active inventory management has led to a reduction of $119 million in the first half of 2023. Continued momentum in our golf equipment and active lifestyle segments gives us confidence that we remain on track to be at more normal levels of inventory by the end of the year. More importantly, we feel good about the quality of our inventory as much of the older inventory was cleaned up during the pandemic. Gross capital expenditures were approximately $263 million for the first six months of 2023, compared to $243 million for the first six months of 2022. Net capital expenditures, which net out the proceeds from construction reimbursements, were $148 million and $154 million in the first six months of 2023 and 2022, respectively. For full year 2023, we expect total company net capital expenditures of $270 million, which includes $190 million from Topgolf. Before moving to our outlook, I want to comment on a few other matters. First is the Form 8K we filed yesterday. Last week, we identified unusual IT system activity and immediately took proactive steps in consultation with our advisors to secure our systems. We activated our incident response plan and moved portions of our network offline as a precautionary measure. The majority of our systems are back online, and full access is expected to be restored in the coming days. Based on what we know now, we do not believe the incident will have a material effect on our business, operations, or financial results. Second, during the quarter, we repurchased 1 million shares in open market transactions for a total cost of $17.8 million. Finally, I want to provide a brief update on our relationship with FullSwing. the owners of the Swing Suite Indoor Golf Stimulation Technology that delivers golf ball tracking data and measures ball flight indoors. On August 1, 2023, we acquired certain assets of the Swing Suite business for approximately $12 million. This small acquisition is strategically relevant to us as it allows us to control the use of the Topgolf brand in this channel, and from a financial perspective, it is immediately cash flow positive in year one. Now turning to our balance of the year outlook. We are maintaining our full year 2023 revenue guidance range of $4.42 billion to $4.47 billion, and our adjusted EBITDA range of $625 million to $640 million. At Topgolf, we continue to guide to approximately $1.9 billion in revenue and an adjusted EBITDA range of $315 million to $325 million. We are also reaffirming same-venue sales guidance to be mid to high single digits. For the third quarter of 2023, we estimate revenue to be within the range of $1.05 billion and $1.075 billion, compared to $989 million in Q3 2022. For Topgolf, we estimate third quarter same-venue sales growth between 1% and 3%, which would represent 12% to 14% growth on a two-year stack basis. We estimate Q3 consolidated adjusted EBITDA of $141 to $154 million, which is slightly ahead of Q3 2022. Now, I'd like to provide some additional details so you can better understand our second half guidance, including the cadence between Q3 and Q4. Topgolf's second half venue sales growth will be more heavily weighted toward Q4 versus last year for several reasons. In Q4 2022, there was some unusually severe weather that led to the shutdown of a significant number of our venues, negatively impacting semi-induced sales by approximately two percentage points. We are assuming that shutdown does not repeat in Q4 this year. Pricing we are taking at the end of Q3 should also provide at least a one percentage point lift to same venue sales in Q4 versus Q3. Our PI initiatives should also provide at least a one percentage point lift in same-menu sales in Q4 versus Q3. Further, we expect Topgolf profitability to improve in the second half as the year-over-year comparisons for marketing and labor become much easier and increased pricing and improved operational efficiencies in our venues from PI and other initiatives continue. Moving to our products businesses, we expect growth in the second half as we will no longer be lapping the retail channel inventory filling that occurred in the first half last year. Also, our second half golf equipment launch schedule is more heavily weighted toward Q4 this year as opposed to Q3 last year. And on a consolidated basis, we expect changes in foreign currency rates and lower freight expense to be tailwinds in the second half of this year, especially in Q4. Overall, and despite the ongoing macro volatility, our business fundamentals remain strong. The modern golf consumer remains healthy and engaged. We are on track to deliver double-digit revenue and EBITDA growth this year. We are also successfully managing down our inventories, and our liquidity position is strong. And finally, we expect to generate free cash flow this year on a consolidated basis and at Topgolf, well ahead of our plan at the time of the merger. which is a significant proof point for unlocking shareholder value. That concludes my prepared remarks for today. I will pass it back over to Chip for some additional comments, and then we'll open the call for questions.

Thanks, Brian. Before we open the call for questions, I just wanted to wrap up by reiterating our confidence in our strategy and long-term outlook. Our incredible portfolio of brands provides us with unmatched scale and reach within the modern golf ecosystem, an ecosystem in which we believe we are the dominant player. Our businesses, both individually and collectively, have both high barriers to entry and are structurally positioned for accelerated, profitable growth. Overall, we see a business that is well capitalized, has a long runway for continued growth, and is set to ramp up free cash flow by year-end and beyond. With this, we remain highly confident in our ability to meet or beat our long-term financial targets. We're optimistic about the future of modern golf and believe that our portfolio of premium brands uniquely positions us to be highly successful in it. And now we'll turn the call open for questions. Operator, over to you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Boss with JP Morgan. Please go ahead.

Great, thanks. So, Chip, could you just elaborate on the progression of Topgolf same venue sales that you saw through the second quarter, maybe any commentary on July, and just your overall confidence in the sequential back half improvement that you've embedded to hit your full year same venue sales growth guide?

Sure. You know, when we look at the quarter Q2, Matthew, you know, we obviously were within our guide and it's our seventh consecutive quarter of positive same venue sales. So, you know, there really wasn't much new in that quarter that we didn't identify going into the quarter other than a small impact from the Canadian wildfires. And, you know, The consumer business remains strong. Venue margins are improving. The new venue growth is on track. So a lot of good positives there. And we called out in advance that we're going to have events down a little year over year due to the post-COVID surge that we experienced in late 21 and throughout 2022. When you look at the progression from there, You know, it's not much of a move to go to 1% to 3% that we're calling for Q3. And then, you know, we gave you several of the key initiatives that are further helping us in Q4. You know, we talked about the marketing campaign. We talked about the strength of the general consumer, which is the lion's share of our business. We also talked about a 1% improvement in pot from pie. 1% from price, and 2% from the lap of the unusually severe cold weather that we experienced last year and don't expect to repeat. So I think that kind of at least directionally, if not, provides a pretty specific walk of how we're getting to the full year number.

That's great. And then just to follow up on the equipment side, could you speak to recent retail sellout trends that you've seen maybe relative to three months ago and just market share gains that you've seen for the Callaway brand? And maybe just larger, how would you characterize the health and composition of your inventory in the channel today as we head into the back half of the year?

Sure. And, Matthew, these are all really strong stories. So we had a great quarter from a brand perspective, excellent market share results, and the market is staying very healthy. The rounds played is the biggest highlight of that, being up 5.5%. But there is no question that the core golf consumer remains engaged and active. And our inventories in the field, as you would expect, given our market share performance, they're in very strong position. They improved during the quarter, and we like where we sit going into the second half of the year from brand strength, product line, and the health of the consumer within the very important golf segments. Great color.

Best of luck. Thank you.

Our next question comes from Randy Connick with Jefferies. Please go ahead.

Yeah, thanks, guys. Just to follow up back on Topgolf to start here.

Maybe just give us some perspective on how you're thinking about over the medium term where we are with the dynamic between pricing and traffic. How much further do you think you have on pricing and And how do you want us to think about normalized ability to drive safe venue sales growth between pricing and traffic? I think in the past you said one-third pricing, two-thirds traffic. I might have that backwards. Just give us reminder parameters of how we should be thinking about the long-term opportunity to drive more productivity per box over the medium term at Topgolf would be very helpful.

Absolutely, Randy. A really important point. So If you look at our consumer business at Topgolf, it really remains strong and resilient. We're consistently driving same venue sales growth there and have throughout the entire first half of this year, and we're seeing a nice mix between pricing and traffic, so positive traffic as well as price. price or spend per visit a little higher than traffic, but nice momentum in both, candidly. In the long term, what you can expect from us is that we are going to drive same venue sales growth at the venues above and beyond the inflationary effects of our cost basis. So forecasting the inflationary Cost basis right now is a dynamic process, right? You know, it had surged. Now it's moderating. It'll likely continue to moderate. But we've shown, you know, with clear evidence that we can take price. And when we've taken price, we've seen no negative impact. It really comes down to the strength of demand in the consumer market. And the only other thing I want to add there is, you know, we've got these initiatives in place, the marketing campaign, pie, you know, other factors that are driving margin expansion. You know, this is still early days on these. We have gas in the tank on these. These aren't going to time out in anywhere in the near future, and we're developing more.

Great. And then just my last follow-up on, I want to go back to equipment as well. In talking about gas in the tank, you know, where do you think we are in the, maybe perhaps from an industry and company specific perspective on the ability to drive further margin opportunity on clubs or just equipment generally through either customization, fittings, and or ball plant fixed cost leverage as you drive more and more volume gaining share on balls. Can you give us some perspective on that dynamic on, you know, where you see you know, margin opportunity or just opportunity in generally speaking from these things would be super, some of these actions would be super helpful. Thanks.

Yeah, sure. Another, another positive story, Randy, because it's, it's early innings on all of these. We're really starting to ramp up the performance of the ball plan. I had the pleasure of visiting it a week ago and they've just transformed that place. It's an impressive operation and, The efficiencies are improving rapidly, as are the margins. You know, over the last several years, we've also seen a lot of inflationary pressures across the business, but a lot of those are moderating right now. You know, freight rates is a great example of that. But we're also seeing a moderate in, you know, other areas of the business. And, you know, throughout all of this, again, we have shown that we can operate quite successfully through any of these environments. In inflationary environments, we're able to pass it on. In non-inflationary environments, you know, we're able to, you know, sustain the demand side of our business. So you're seeing even this year margins, gross margins now that are improving and, you know, we feel good about the long-term outlook there.

Super helpful, thank you.

Our next question comes from Alex Perry with Bank of America. Please go ahead.

Hi, thanks for taking my questions. I guess just first, can you give us a little more color on how the corporate events business is doing versus walk-in? And then any more color on how you think about the rest of the year and sort of corporate events versus walk-in? Does the guide assume... you know, that either part of those, you know, those parts of the segment improve versus the trend you saw in the second quarter? Thanks.

Yeah. So, you know, obviously corporate events is, you know, we've mentioned is down year over year, but, you know, really performing well versus 2019 levels. So if you looked at the two-year stacks or you looked at the comparison that wipes out some of the, post-COVID surge, it's quite good. The consumer side of our business has been steadily good and remains there. And we're really not expecting significant change in these trends through the balance of the year. So our assumptions are not for marked change on any of those trends. Does that answer your question, Alex?

Yeah, that's really helpful. Appreciate that. And then I guess back to golf equipment. So I think early in the year, you sort of said that you're thinking about the golf equipment business as sort of flat, FX neutral for the year. Is that sort of how you're still thinking about it? And then could you just help us with any sort of quarter quarterly fluctuations that we should be thinking about? Um, you know, any sort of product launches we should be considering. And then just on golf balls, like the, the growth there in the quarter is really, really was strong. So is that level of growth something, you know, that, that should continue going forward? Thanks.

Sure.

A couple of questions there. Hopefully I can, uh, get them all. Um, So the quarterly, the last two are the ones that I remember most clearly. So quarterly, we're going to have a little bit more launch timing in Q4 as we currently plan it versus Q3. But that timing happens, you know, across quarters. So we'll give you our best estimate on that. But as you know from the golf equipment business, you know, between quarters it can move a little bit. But we do have more launch activity in the second half of this or the second half of half two, Q4 versus Q3. On the ball side, we've had excellent results this year. We're on track to grow for the full year, and really strong results, as you can see, during the quarter. Our growth in the ball will moderate during the second half of the year for a couple reasons. One is we were constrained last year in Q2, so we had a little bit of carryover into Q3, which we haven't been constrained this year, so we won't have some of that carryover. And then secondly, in our launch cycles, when we're at the tail end of a product cycle for our urethane product, we have to shift the plant to producing the new product. And that's likely to be the case by the end of this year. So there will be a little constraint that happens every other year. It's a normal course of business in the golf business. So not a, but something that you, for those that want to model, you should model it. And then in terms of full year, yeah, we obviously have having an excellent year in our golf equipment segment. We had about a hundred million, dollar inventory fill in last year that we've talked about ad nauseum and it doesn't repeat this year. So we had to cover that and we're doing a pretty good job of that and growing share and our forecast for the year remain unchanged. Oh, sorry, go ahead.

Yeah, just as Chip mentioned, there's growth in the second half, but period over period, quarter over quarter. Most of the growth will occur in the Q4. Again, as Chip mentioned, it can move depending on timing of shipments, but it's definitely heavily weighted to Q4.

Perfect. That's really helpful. Best of luck going forward. Okay. Thanks, Alex.

Our next question comes from Daniel Imbrow with Stevens, Inc. Please go ahead.

Yep. Thanks, Kevin. Thanks for taking our questions. I'll start on Topgolf as well, continue the trend. Obviously, same store, sales moderated kind of sequentially. Maybe to follow up on Randy's question, can you just give the actual numbers or detail on traffic versus ticket growth? And then when you look at the Topgolf slowdown, I guess, how do you think about the risk of other leisure activities, whether it's pickleball or travel or movies? Is that taking traffic away? Are you guys monitoring any data around competitive uses of that leisure time? Or what are you seeing in terms of that when you look at the slowdown in sales?

Well, Daniel, unless Pickleball and the movies are taking away corporate events, I don't think there's any data that suggests it's having much impact on us. The same venue sales is, again, I apologize, it's very strong on the consumer side of the business and resilient. there was no change in trend across the quarters. We feel very good about that. The pickleball is obviously growing. From time to time, you'll have a movie that comes out. We do compete against consumer activity. Pickleball is not a new trend, and we have been growing in our business and our brand for seven consecutive quarters, as a matter of fact. So we feel good about that.

I also think, Daniel, that people on average only go to Topgolf, you know, one and a half times a year. So it's not something they're doing every week that now they want to go do pickleball and they have to replace it. They fit this in with their rotation of other activities that they want to do.

And, Daniel, steer me if I didn't answer the question completely, and I can provide any further value there. But, oh, you asked about specific traffic versus price. Sorry. And, you know, I can give you just general. You know, in the quarter, because of events, the total traffic was down a little bit. but the traffic was up nicely in the consumer side of our business. And, you know, for the full year, we expect it to be a mix of positive traffic and spend per visit, with majority being spend per visit. But, you know, we're going to contribute 20% to 25% of our same venue sales growth through traffic.

Yep, thank you for all the detail. And then a follow-up on Topgolf, I guess you mentioned obviously corporate is the weak spot here, and that sounds specific, but if we look at pre-COVID, I think corporate was 30% of total Topgolf revenue, but that was very 4Q-weighted. And so I guess we're staring down the back half that has a much higher mix of corporate revenue historically. Corporate is the weak spot in Topgolf right now. I know Brian walked through a few points of maybe what's going to drive the acceleration into 4Q, but maybe can you just help investors bridge that gap of what you guys see to give you confidence in the improved sales, given the corporate uncertainty we're seeing?

Okay, so let me just correct a few numbers for you to start with, Daniel, because you're directionally correct, but the numbers were slightly inaccurate. Corporate, since we're saying that specifically, is on average 21% of our total business in the venues for the full year. In Q4, it is... roughly 28%. So maybe for Q4, you can round to that 30, but 28 would be a more precise number. And, you know, we obviously, you know, as we go through our, we've got pretty good visibility on, you know, what the corporate trends have been and, you know, we've factored them into our guidance as best we can and given you as what I think is a, a walk on some of the other factors. So I'm not sure if I can add too much more color right now in terms of, we prefer not to get into specific estimates by subcategory, by quarter, and I'm sure you can understand why.

Absolutely. I'll hop back in queue. Thanks for the color. Thank you.

Our next question comes from Noah Zatkin with KeyBank Capital Markets. Please go ahead.

Hi. Thanks for taking my questions. Maybe switching gears to apparel, just hoping you could provide some color both on inventory levels and channel health along with the level of promotionality you're seeing in the channel. And then I guess relatedly, within active lifestyle, strongest margin improvement in the quarter, hoping you could help bridge to the EBIT margin pressure you saw, and then just any color on how we should think about margins there moving through the back half. Thanks.

Okay. Brian, I'm going to throw that margin one year away, so I don't know whether we have anything on that at this point. But in terms of the field inventories and inventory levels in general, You know, it's a little bit of the same story in golf equipment, but it's going to take a little longer is the long and short answer of it. So inventories build up in the field over the 2022. They are in process of correcting. We had a strong sell-through quarter for our brands. We feel like we're in good position at or ahead of our plan from that basis. It's a little more promotional than it was – well, it's a lot more promotional than it was in 21 and 22 when there were no inventory and nobody promoted anything. But it's – I wouldn't call it highly promotional right now. And, you know, we feel good about those trends. Brian, do you have any color for the margin expectations for the balance of the year? I think what you might be seeing, Noah, is just a little bit noise between the quarters because Q1, you know, we had stronger volume than Q2. And it's another one of those COVID quarterly comparison issues because our supply chain corrected this year. So we shipped the product when we're supposed to ship it, which was Q1. Last year, we shipped a lot of it in Q2 because we couldn't get it. And so now when you compare the quarters, Q1 and Q2 look wonky. If you look at the half, it looks pretty solid and it's very representative. And we're on track or trend for our plan there.

Yeah. So for the second half, we would expect it to be up. So the trend, as Chip mentioned, is pretty good if you look at the half, the first half. But then second half, we're going to continue to get some benefits from the freight and then also from FX, and that will help those as well, and just the continued sales growth in the back half.

Thank you. Very helpful.

Thank you.

Our next question comes from Martin Metello with Raymond James. Please go ahead.

Hi, this is Martin. I'm for Joe Altabello. I appreciate your commentary about the ramp up for 4Q. I'm just going to say that 3Q guidance is a little bit softer than what the street expected. I was wondering if we can get a little bit more commentary around that. Thank you.

Martin, it's hard for me to comment on what the street would have expected because the street didn't have any of the information that we had in terms of actual results. So I think It's pretty logical and believable when you look at how it ramps based on the actual facts. So I guess hence the purpose of these calls.

Okay, fair enough. And there was a comment made on this earnings call and the virtual investor days as well, which suggests that you're opening the door for self-financing for top golf venues. Just wondering if we can get a little bit of idea of the reason that you're looking down that path and maybe what some implications could mean.

Sure. Thanks, Martin. This is Brian. We wanted to provide flexibility to do so. Right now, the REITs Cap rates have been holding stable for us. I know everyone else has been seeing a lot of increased interest rates, but they've held reasonably stable. And I think there's a few reasons for that. We tend to run a competitive process. We have more REITs that have interest in working with us now. The venues have become more proven and are less risky to the REITs. So everything has been holding. Occasionally you run into a site that for whatever reason a REIT may not be interested or just to keep keep them honest on the rates. We wanted the flexibility to be able to self-finance if that proves to be economically feasible for us.

Great. Thank you. That's very helpful. Thank you.

Our next question comes from John David Kiernan with TD Cowan. Please go ahead.

All right. Good afternoon, guys. Thanks for taking my question.

Sure.

Brian, I just wanted to go to the OpEx line, specifically the deleverage that's occurring on the operating expenses percent of sales. I think it was about 400 basis points in the first half. It was based on the Q3 guidance. You probably have to have significant leverage by Q4 on this line. How should we think about the balance between top line investing in Topgolf and that operating expense line, which seems to be driving a lot of the margin deleverage?

Yeah, I think a lot of it is, you know, we've been talking about the labor and marketing all year and how those comps get a lot easier in the second half. I mean, it is significant. If you look at it being, you know, it'll shift from being a headwind to a tailwind first half, second half, and it's 400 to 500 basis points. So you get that plus the improved profitability. I mean, that's a significant lift there. And I think that's probably what you're seeing.

Okay, got it. It just seems like in Q3 it's going to remain a pretty significant headwind just based on the EBITDA guidance you gave for Q3, and then it has to switch to a pretty meaningful tailwind by Q4.

Yeah, it does, because a lot of the actions will happen in Q3, and then it ramps towards Q4. Got it.

And then is the meaningful improvement in the EBITDA margin by Q4 Is that being driven more by Topgolf, or is it balanced between the golf equipment business and Topgolf?

A lot of it is Topgolf for the things we just mentioned, plus the increase in same-venue sales. But there's also improvements in the other business gross margins as well, especially with the second-half product launch, foreign currency, freight rate. I mean, it's all adding up to be a pretty nice improvement for the EBITDA margin.

Okay, got it. Thank you.

Our next question comes from Michael Schwartz with Truist Securities.

Please go ahead.

Good evening. Just with regards to the full swing acquisition, maybe give us a little color on just the background of that acquisition, what it provides you, and then Is that a material business in terms of revenue?

Hey, Michael, it's Chip. So Swing Suites, it's more of a strategic acquisition than it is a financially material one. So Swing Suites, for those on the call that are not familiar with it, is almost a lounge business that you would find at resorts and premium hotels. So you visit Omni and it's Topgolf Swing Suites. And you'd see these bays that you can go in and hit balls and play games and entertain. And it has the Topgolf brand on it. But it was a business that we had had prior to the merger. The previous owners had licensed out, long-term license to full swing. And so it wasn't being controlled by Topgolf. It's a nice business. It has our brand on it. It has some good long-term potential, but it's a small business. It's roughly, on a gap basis, $5 million in revenue. So very small there. It'll be accretive from a cash basis, about $2 million starting next year. It'll be accretive this year, but I'm giving you annual numbers here, not partial year numbers. So not a material business, but a strategically very attractive one, part of the brand, something we do think we can grow, and something even potentially more importantly we wanted to control given, you know, how, you know, positively we feel about the Topgolf brand and the long-term potential there.

That's helpful. And maybe... Brian, with regards to the big cash flow improvements at the back half of the year, I know a big part of that is working capital and bringing down inventory in the products business. But just given the fourth quarter launch cadence, should we expect the inventory to come down more materially over the next two quarters relative to the, I think it was down 120 in the first half?

Well, it's come down a significant amount, and then you have to remember toward the end of the year, we'll start ramping up for the launches next year. So you have to build that into it, but that'll be next year's launch and next year's product. But this year, it'll continue to come down, but there's usually less sales in the second half of the golf business anyway. But it'll be in good shape by the end of the year. I guess that's the bottom line. Our inventory will be in great shape in all current.

Thank you.

Our next question comes from Eric Wold with B. Reilly Securities. Please go ahead.

Thanks. Good afternoon. One question. I know that you started your guidance, you raised it a little bit, Q1. You've reaffirmed it on this call. It looks like a lot of confusion has been around the quarterly cadence given a number of wonky comparisons to last year, you know, the post-Omicron demand by Topgolf, the equipment catch-up, the weather shutdowns in Q4. I guess, obviously, there's still four months left in the year. You know, assuming nothing wonky happens much more months, does that kind of normalize everything such that the next year's quarterly cadence should be normal, does not set any weird comparisons to any certain quarter's?

Eric, this is Chip. The short answer with obviously fingers crossed is yes. We had a decision to make at the beginning of the year, which did we start comparing against 2022 numbers because 2019 was so long ago. And we made the obvious decision, which is probably the only decision to do that, But it has a lot. 2022 still had a lot of COVID and what we'll call one-time noise in it. This is not fundamental to our business. It doesn't really impact long-term. But we had these inventory catch-ups and inventory shortages and periods where COVID was impacting consumers at Topgolf. And, you know, so there's, you know, bear with us as we get through it in the balance of the year. And, yes, it should be cleaner going forward.

That's perfect. I appreciate it. Thank you.

Our next question comes from Casey Alexander with Compass Point Research and Training.

Please go ahead.

Yeah, thank you. And I think there's been pulled apart in about every way possible so far. But, you know, the discussion that cash flows, you know, should turn positive for Topgolf at the end of the year is obviously a big swing. The golf business has always generated nice cash. What kind of cash flow range are you thinking about for 2024? And what would you like to do with it? Is it to pay down debt? And if so, what's kind of a net leverage ratio that you'd like to get it to on like a normalized basis?

Hi, Casey. This is Brian. We're not going to provide guidance at this point on cash flow for next year, but we agree that it will generate significant cash flow. As far as what we do with it, well, we Paying down debt is an obvious one. Investing back into business is our primary one we do. But we have plenty of availability at this point. So we'll monitor it and we'll balance it between investing back into business, making sure our leverage ratios are on track to decrease. I mean, longer term, we want to get below three times. And then a balance between returning capital to shareholders and other investments, smaller investments.

All right.

Thank you. Thank you, Casey.

This concludes our question and answer session. I would like to turn the conference back over to Chip Brewer for any closing remarks.

Well, thank you, everybody, for dialing in. We appreciate your participation and questions, and we'll look forward to engaging with you post-call where appropriate, and look forward to continue to update on our journey forward. I do want to say I'm very pleased and I believe that the business is continuing to strengthen its fundamental economic engine, and I hope that came through in our comments.

Thank you for your time.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.