Topgolf Callaway Brands Corp.

Welcome to the Topgolf Callaway Brands Third 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 Metzikakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Andrea, and good afternoon, everyone. Welcome to Topgolf Callaway Brand's third quarter 2023 earnings conference call. I'm Katina Matsoudakis, 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 third quarter 2023 financial results. In addition, there is an updated presentation with supplemental information that we have not shared in the past that may make it easier for you to follow along with this call. Because we are introducing some new concepts and metrics, we will plan to extend today's call to give additional time for our question and answer session. 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 the 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 like to turn the call over to Chip.

Thank you, Katina. Good afternoon to everyone, and thank you for joining us today. Despite some volatility in Topgolf's same-venue sales, Q3 was a strong operating quarter. The team delivered solid results across all segments of our business and expects to deliver mid-single-digit growth in revenues and EBITDA for the full year. We are confident we will be free cash flow positive this year and have now begun to reduce our financial leverage. As we look across our business, we are encouraged by the fact that our golf consumer remains strong, as does the Callaway Equipment brand and product pipeline. Our active lifestyle segment continues to deliver growth in top line and operating margin. And at Topgolf, our confidence on venue economic returns remains very strong, We are delivering a compelling unit growth plan with new venues opening well and our venue margins continue to improve. An impressive and important proof point as this was delivered during a challenging same venue sales environment. Unfortunately, lower near-term sales in our venues as well as current foreign exchange rates result in lower forward projections at this time. As you would expect, we don't take these changes lightly and we did not intend to make a habit of them. Excluding 2020, this will be the first full-year earnings guide that we have missed in my 11-plus years of running this business. The teams quickly recognized the changing conditions and are now taking swift and decisive action to reduce costs, capture further synergies, and drive improved profitability. With these changes, we believe we have identified a clear path to de-risk our operating plans through a potentially softer consumer environment while maintaining both strong growth and positive cash flow. Given our strong financial resources and businesses that are well-positioned for long-term success, we remain strongly confident in our growth algorithm and the direction of our business. Let me now walk you through our business segment performance in Q3. I'll begin with Topgolf. starting with the three key performance drivers for our venue business, venue development, same venue sales growth, and venue margin expansion. We successfully opened four new venues thus far in Q4, including St. Louis Midtown, Memphis, and our first two venues in New England, in Canton, Massachusetts, outside of Boston, and Cranston, Rhode Island, outside of Providence. With seven venues open year to date, Topgolf remains on track to open 11 new venues in 2023. As usual, the new venues are performing well. While we're on this subject, I want to provide an update on our acquisition of Big Shots from Invited, the largest private golf and country club owner and operator in North America and a key strategic partner of Topgolf Callaway Brands. As part of this strategic transaction, we acquired the largest active competitor to Topgolf, including one new owned and operated venue, two franchisee relationships covering three venues, which we expect to convert to Top Tracer accounts in the near future, an enhanced and de-risked future pipeline, as we will now assume Big Shot's pipeline, some of which overlapped with ours, along with a preferred vendor agreement in which Topgolf Callaway Brands merchandise, including Callaway, Travis Matthew and OJO product will be prominently featured at invited more than 140 golf and country clubs, all for approximately the same price of building a single top golf venue. With the venue acquired through this transaction and the potential to add one additional venue in the first half of next year, we plan to build only eight to nine additional new venues in 2024. This change, along with the strategic assessment and resulting tightening of our other capital expenditure plans, will save us approximately $100 million in planned capital over the next two years. This will improve our already positive cash flow and accelerate our expected debt paydown schedule. It will therefore de-risk our business over the near to medium term, something we believe some investors will appreciate. Consistent with previous communication, we maintain high confidence in the venue returns, which remain at an 18% to 22% return on gross investment and a 50% to 60% cash-on-cash return based on targeted year five results. And thus, we expect to resume building approximately 11 venues per year again in 2025. Our projections support this new capital allocation plan as the best way to drive shareholder value And we believe we have more than enough capital available to support this growth plan. However, if business conditions necessitate it, we can pull back on these investments and all stakeholders should be confident we would do so. Moving to same venue sales. These were down 3% in Q3 due to weaker than expected demand, along with extreme heat that impacted our venues located in southern markets, including Texas, during a portion of the quarter. Our consumer or one to two-bay business, which as a reminder represents approximately 80% of our total business on an annual basis, was flat versus last year and remains up nicely versus 2019 levels. Our corporate events business declined approximately 17% year over year in Q3 as we continue to lap the post-COVID surge in demand we saw last year. That said, the corporate events business appears to have stabilized during the quarter, and the two-year stack using 2022 and 2019 was still up 4%. This two-year stack chart is included in our investor presentation on page 4. I believe it provides a helpful way to look at the performance year-to-date as it shows the lapse we are anniversarying and that the business remains up nicely versus pre-COVID on a two-year stack basis. Looking forward on same venue sales, after improving in September, our October results softened overall. But interestingly, we see a consistent trend of sales remaining strong on the weekends, as well as on Tuesdays where we offer half-off gameplay. The lower same venue sales we are seeing is largely confined to our events business, as well as Monday, Wednesday, and Thursday, where we are not providing either value or a special occasion. As you'll hear in a moment, this difference by day of the week is instructive for our action plan, and the fact that the events business is stabilizing is important for forward projections. But before I go there, let me unpack the Q4 forecast. For Q4, we're now forecasting corporate event demand down low teens year over year, which is consistent with actual current booking trends and would result in a two-year stack of approximately flat for this portion of our business. This decline is less than the corporate was down in Q2 and Q3 as we continue to see the business stabilizing. However, corporate is a higher percent of the sales mix this quarter, so it is more impactful to the total. We are forecasting the consumer portion, our one to two-bay business, down low single digits first last year for Q4, thus reflecting the results we saw in October. With this forecast, our two-year stack for consumer would be up high single digits versus 2019, as the consumer portion of our business, although slowing some, remains healthy versus historical levels. As a result, we're now guiding to down mid to high single digits for Q4 and slightly down for the full year. But please note that both of these are up nicely on a stacked basis. Moving to what we're going to do about it. Given the day of the week trends and also believing that in the current environment, consumers are being offered and are probably looking for greater value to tempt them out during the week, We are immediately doubling down on communicating our Tuesday value offering, and in test markets, we will be trialing additional value offerings aimed specifically at Wednesdays and Thursdays. We're also going to ramp up our cross-brand synergies by promoting Topgolf offers to both Callaway and Travis Matthew loyalists. In this clearly choppy environment, one of our relative strengths is that with expanding venue margins, and minimal current promotional activity, we have room to implement new promotions and still deliver strong four-wall returns at our venues. Furthermore, our recent digital efforts enable us to effectively target specific segments and days of the week. Speaking of digital, I'd like to thank and recognize the Topgolf team for the significant progress they're making here. And at the same time, I'm energized by the large runway for continued growth and improvement in front of us. The venue business ended Q3 with a total digital sales mix of nearly 36%, up from 34% in Q2 and only 5% pre-merger. We believe our long-term digital mix will be 60% or higher, and we set a strong foundation for this with the implementation of PI, our Bay Inventory Management System, which is now in all our venues except for Las Vegas. The next chapter for PIE involves more efficient stacking of our reservations to maximize utilization and offering more options on length of the reservation versus the standard two-hour option we offer today. This will effectively create more available inventory during peak hours, provide more value to the consumer, and more profit opportunities. And as more of our business is sold through reservations, we're working on further product innovation to offer add-ons and upsell things like food and beverage packages, better bay or floor location, potentially some services like introductory lessons, and maybe even upgraded equipment. Moving on to our third performance driver, venue margin expansion. The team just did an outstanding job here during Q3. The initiatives the team have been working on, such as PIE, as well as labor and COGS optimization, paid big dividends this quarter. And as a result, even with same venue sales below expectations and clearly a challenging operating environment, we were able to deliver EBITDA margins in the mid-30s and approximately 200 basis points above last year. This should provide confidence both in our ability to deliver margins in tough environments and and in our ability to hit our 35% full-year venue EBITDA margin target by 2025, if not sooner. Shifting gears to Top Tracer, golf's number one range technology is on pace to open just over 7,000 new bays this year, consistent with expectations. Market feedback and demand remain positive. Moving to our golf equipment segment. We're pleased with our results, which are largely in line with our expectations. We're also pleased to report that the U.S. golf consumer remains strong and engaged. As evidence of this, U.S. rounds played are up approximately 4% year-to-date through September. The Callaway brand continues to deliver excellent performance in both brand rating and market share. In the U.S., Callaway is the number one market share brand year-to-date in total woods, irons, fairywoods, drivers, and hybrids, and it maintains its brand leadership position in technology and innovation. Our paradigm driver has also had the most wins across worldwide tours, and we continue to grow our position in ball with market share sustaining approximately 20%, sales up 7% year-to-date, and an exciting new premium ball launch coming early next year. Turning to Asia, We've seen some softening in those markets during the second half of the year, but our business there is up for the full year on a currency-neutral basis, and our brand position and market share remains strong. That said, in reaction to the change in market conditions, we are lowering our sales and margin estimates for Q4 for this region. At this point, we do not see this as a significant concern for 2024, just something that bears mentioning and watching. In the U.S., field inventories and golf equipment remain in line with expectations, as does the promotional environment. Overall, a healthy market. Just last week, we launched a new exciting putter, Odyssey AI1, featuring a revolutionary new insert that our testing shows delivers up to 21% better distance control on putting. It's already made its way into the bags of players like Jon Rahm, Sam Burns, and Brian Lynch. We're excited about this new product and invite you to visit our website to see it for yourself. Looking further ahead, enthusiasm for and feedback from our recently completed 2024 product sales meetings and pre-lines with key customers have been very promising, and I look forward to providing you with updates on our upcoming product launches next quarter. Lastly, As you think about our golf equipment business going forward, I'd like to remind everyone of two important points. First, the golf equipment business has not historically been sensitive to mild recessions. And secondly, our brand and management team have a nice track record of performance that meets or beats the overall market, something we expect to do again this year. You can see evidence of both these points on slides 7 and 8 in the investor deck. Moving to active lifestyle, Travis Matthew continued to grow its top line by double digits, driven by continued brand momentum and new store openings. The growth here is bolstered by progress we're making on our new women's line, including a small but successful introduction of the line at Nordstrom's. Jack Wolfskin also posted encouraging results in the quarter, with solid growth despite a choppy macro environment in Europe. and the brand remains on track for growth in both revenue and profits in 2023. Now looking forward, let me briefly unpack the change in guidance. We're revising the midpoints of our 2023 revenue and EBITDA guidance to $4.25 billion and $580 million, respectively. The revision is primarily due to the lower same-venue sales at Topgolf. The slowing business conditions in Asia and the foreign exchange rate movement since last quarter had contributing but smaller impacts. As mentioned, we continue to expect to be cash flow positive this year, both at the corporate level and at Topgolf. With the above revisions, we've also done a thorough business review and refocused spend on our biggest strategic priorities, as well as accelerating synergies, lowering operating expense, including headcount, reducing capital expenditures, and developing more growth initiatives. Across OPEX and gross margin, we expect to realize savings of approximately $45 million per year. And as previously mentioned, we're reducing our planned CapEx spend by approximately $100 million over the next two years. These actions are aimed at de-risking our forward forecasts. Looking further forward, we're moving our target of at least 800 million in EBITDA from 2025 to 2026. The primary driver of this move is foreign exchange rates, as there's now 165 million revenue headwind and close to 100 million EBITDA headwind versus the rates we used in early 2022. And this, along with the economic trends we're currently experiencing, make this move appropriate at this time. To help better forecast our growth in cash flow, we're also introducing two concepts that were suggested to us by investors. The first of these is EBITDA, less cash venue financing interest. This calculation avoids the complication of us having both operating and finance leases by reducing EBITDA by the cost of both. It essentially captures all cash payments that resemble rent. which is a reasonable way to look at the business both from an EBITDA and a leverage perspective. The second is embedded cash flow, which is free cash flow before growth capex, or what our cash flow would be if we didn't continue to add new venues or retail stores. Embedded cash flow is what's available to either reinvest in future growth or return to shareholders. In conclusion and looking ahead, Topgolf Callaway Brands has strong underlying fundamentals, robust financial resources, and premium brands that have clear defensive moats, both individually and collectively. We operate primarily in the arena of modern golf, an attractive and growing market that benefits from positive long-term trends and structural growth. We're now making the important transition to the cash generation period of our economic journey. And although we're experiencing some short-term volatility, we're also taking steps to make sure we both stay cash flow positive and deliver strong growth going forward. As I look forward, I remain confident in our outlook and that our structure provides us both synergies and a long-term competitive advantage. I'll now turn the call over to Brian to provide detail on the financial side of our business.