Topgolf Callaway Brands Corp.

Good day, and welcome to Topgolf Callaway Brand's first quarter of 2024 earnings conference call. Please note that today's event is being recorded, and all participants will be in a listen-only mode during the call. Should you need any assistance at any time, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. We ask that you please limit yourself to one question and one follow-up during the Q&A session. And with that, I would like to now turn the call 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 first quarter 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 first quarter financial results. We've also published an updated presentation. Our earnings presentation, as well as the earnings press release, are both available on the company's investor relations website under the financial results tab. Most of the financial numbers reported and discussed on today's call are based on US generally accepted accounting principles. In the instances where we report non-GAAP measures, we identify the non-GAAP measures in the presentation and reconcile the measures to the corresponding GAAP measures in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description. And with that, I would now like to turn the call over to Mr. Chip Brewer.

Thank you, Katina, and good afternoon, everyone. We appreciate everyone joining our call. I'm pleased to report strong Q1 results, continued brand strength across our portfolio, and improving operating efficiencies that are driving high confidence in a full-year EBITDA forecast and higher estimates for both EPS and cash flow. Focusing on Q1, our revenue of $1.14 billion was in line with guidance, as was Topgolf's same venue sales performance. As expected, we also gained market share in golf equipment based on compelling product launches in both clubs and balls. This on-track revenue performance, combined with stronger than anticipated operating efficiencies, some favorable timing of expenses, and currency hedge gains, delivering better-than-expected EBITDA of $161 million and EPS of 9 cents in the quarter. We also delivered better-than-anticipated cash flow. As we look towards the full year, we are lowering our full-year revenue expectations by $80 million, a little under 2% of full-year expected revenues, due to an approximate $45 million reduction in and expected Jack Wolfskin revenues due to challenging market conditions in its European business, as well as an additional currency headwind since our last call of approximately $35 million. Even with this revenue change, we remain confident in our overall full-year EBITDA forecast based on our currency hedging programs, improving operating margins at both our venues and our golf equipment business, as well as confidence in our core brands and market conditions. We are also increasing our full-year EPS by 5 cents per share and raising our free cash flow and embedded free cash flow estimates by approximately $60 million and $40 million, respectively. In short, we remain on track for our organic revenue growth targets in our key brands, our overall EBITDA growth targets, and we are ahead of schedule in delivering operating efficiencies, cash flow, and EPS, as well as now beginning the process of paying downturn debt. As I see it, the fundamental engine of our business continues to strengthen. Moving to our business segment performance. Topgolf continues to make strides on our three key performance drivers, same-venue sales growth, venue margin and returns, and new venue development. As I will walk you through in a moment, we have multiple initiatives in place to lay the foundation for durable growth, attractive venue returns, and the expansion of our footprint. All of which are highly complimentary to the product side of our business. First, Q1 same venue sales of down 7% was in line with our expectations. As a reminder, Q1 was impacted by a post-COVID surge in our corporate events business in early 2023, as well as extreme cold weather during January of this year, which we highlighted during our February earnings call. Our Q1 same venue sales stabilized after the January weather normalized. As we drive towards positive same venue sales growth, we are executing against three key areas of opportunity, digital, experience, and value. Digital is the most rapidly developing opportunity for us to drive sales at Topgolf, and I'm pleased that our digital revenue penetration in Q1 increased to 35% versus 33% from the same period last year. And the percentage of visitors that come through digital channels is now 62%, up 710 basis points year over year. Our new and evolving digital and commercial teams are getting smarter every day, unlocking key insights and driving results. Building on this, I'm pleased to report that our cross-brand consumer data platform is now live, ahead of schedule, and we expect this will greatly improve our ability to gather player insights, tailor more compelling products and offerings, and importantly, serve as the backbone necessary for a Topgolf Callaway brand loyalty program slated to be in trial mode at Topgolf by the end of this year. Our second area of opportunity to drive same venue sales is experience. We are continuing to uncover new ways to improve the player experience and offer more curated products. Towards this end, during Q1, we introduced Block Party, our first new Topgolf game since Angry Birds, which launched back in 2020. One of the great aspects of this new game is that it's fun for all player skill levels, as you score points by hitting the ball literally anywhere in the outfield. Player response has been extremely positive so far. and we intend to invest in media to support greater awareness as we enter our peak summer months. On the Synergy front, we held Callaway club fitting events in venues across the country during the week of the Masters. We also implemented the Callaway Club Upgrade Program, which allows players to upgrade their Topgolf gaming experience by upgrading to our latest Callaway clubs in all venues. And all venues now sell and promote our new Chrome Tour golf ball, as well as Callaway's seasonal decorated golf ball offerings. Our goal is to ensure that the Callaway brand is top of mind for the on-course golfers that visit Topgolf every day. A number we believe is approximately 40% of all U.S. golfers annually, as well as the new beginner golfers that Topgolf is creating. Value is our third sales growth opportunity. As you are aware, we launched an in-app only half-off gameplay promo on Mondays and Wednesdays in Q1 and also promoted our half-off Tuesdays. We've been pleased with the results, but perhaps more importantly, this offering was a first step towards a broader strategy to build a compelling portfolio of value offerings for our players. Looking ahead, Topgolf's commercial and digital team will continue to test and learn what works best, and our new consumer data platform will make it easier for them to gain insights as well as take action. To this end, this summer's primary value offering will be our new Free 30 campaign, which offers players 30 free additional minutes of gameplay when they book a bay online during specified hours on weekdays. The booking requires a small reservation fee consistent with our other reservation products. We believe this will increase what we know are more valuable digital consumers. And based on trial results to date, this offering is expected to be more effectively drive visits. With the help of our new consumer data platform, we will also be experimenting with passes and bundled offers to drive repeat visits within 60 to 90 days of an initial visit. It's worth mentioning that you can count on us to communicate these programs in a thoughtful manner so that they increase both our bottom line as well as our top line. And this communication will increasingly be digital, personalized, and effective. Looking forward for Q2, we are forecasting same venue sales to be down low single digits a nice improvement from Q1. This takes into account a slower than expected first three weeks of April as we, like many other companies, struggled with slow sales associated with year-over-year spring break and Easter timing. As we've moved past this period, over the past two weeks, sales trends have returned to more normalized and expected levels. However, we are now slightly behind our full-year targets And given the choppy market conditions we have seen and could continue to see, we're widening our full year same venue sales guidance from approximately flat to a new range of slightly positive down low single digits. Most importantly, we have confidence in same venue sales improving in the second half of the year as our biggest marketing spend and consumer programs go live starting Memorial Day and compares versus last year become easier. And to be clear, our internal goal is for us to transition back to positive same venue sales in the second half of this year. The teams have been working hard for this, and now that the unusual laps are behind us, they believe they will start to deliver improved results. I, for one, am confident in their direction and remain convinced that we'll be able to grow same venue sales low single digits or better over the long term. Shifting to margin expansion. In Q1, we again saw strong margin performance, including 180 basis point year-over-year increase in our venue level EBITDA margin. We continue to benefit from our PI inventory management system and new labor model, which have both now been rolled out system-wide and are delivering clear results. In addition to the efficiency gains, our Q1 margin also benefited from a shift in timing of our marketing spend to focus more on post-memorial day programs and products. We continue to feel confident in and are consistently proving our ability to drive venue operating margins over the long term and in all kinds of market conditions. With this, we remain on track to hit our 35% EBITDA margin target for the full year. Furthermore, as the profitability of our venues continue to increase and same venue sales transitions back to growth, our already attractive venue returns will become even stronger than they are today. This positions us extremely well as we continue to grow our footprint against a backdrop of significant white space. Speaking of white space and our new venue's growth opportunity, in January, we purchased a Big Shots venue in Bryan, Texas. In April, we opened a new venue in Durham, North Carolina. And just last week, we opened in Montebello, California. The Montebello venue is in our most densely populated trade area and represents our second public-private partnership. It's quite unique in that it is adjacent to two municipally-owned Greengrass golf courses, one, a traditional nine-hole course, and the second, a new par-3 nine-hole course with night lighting. While we don't own or operate these courses, we believe they will be synergistic with our venue in driving interest and excitement. We are now 92 owned and operated venues in the US, four internationally-owned venues, and over 100 globally when you include franchisees, a testament to the strength of the business and strong execution by our world-class real estate team. Today, we are also updating our venue opening expectations for 2024 due to a delay in permitting, which will push a venue plan for New Braunfels, Texas, that we expected to open in late Q4 into 2025. We now expect to add seven venues in 2024 versus the eight previously communicated, a change that should be largely immaterial to both our 2024 and long-term financial outlook. Looking ahead, excluding this year where we intentionally pulled back to accelerate cash flow, we remain confident in our ability to average 10 new venues per year over the foreseeable future. We also remain confident in our TAM of 250 venues in the United States with a similar number available internationally. Turning to golf equipment, I'm pleased to report the Callaway brand continues to shine. In Q1, thanks to the incredible work from our teams across R&D, supply chain, sales, marketing, and corporate, we gained share year over year in both golf ball and clubs. In Q1, Callaway held its position as the number one U.S. market share brand in driver, fairy woods, and hybrid. And focusing on our latest club launch, AI Smoke Woods achieved the number one U.S. model market share position in driver, fairy woods, and irons. In Q1, we also gained the number one U.S. dollar market share position in putter, a position we have not enjoyed for some time and a testament to the strength of our AI1 putter launch. Golf balls also show nice growth, especially in the premium or tour category, where Callaway achieved a new record US market share of 11% and also delivered an overall share of 19.3%, up 120 basis points year over year. That said, the strong feedback we've received on the new Chrome Tour product performance gives us conviction that we have further room to grow and hopefully more record market shares to report in the future. We're going to be driving this with strong advertising as well as field activation via our Chrome Tour speed and spin challenges. I'm very pleased with the performance of our new launches and will look forward to providing more color on the sell-through performance on our next earnings call. In other categories, we continue to see strong package set sales, which leads us to believe that the positive momentum we have seen over the last several years with new entrants into the game of golf continues. And finally, I'd also like to highlight that in Q1, we saw record 16% share in Golf Glove, leveraging our brand and distribution strength. Looking at the golf equipment business by geography, The U.S. market and our business both remain strong, with field inventories and consumer demand both in line with expectations. The European market started the year a little slower than expected due to poor weather conditions in the U.K., but we gained share and appear well-positioned to continue to do so. The Japan market overall is up slightly on a constant currency basis, but our business in Q1 was down in real terms due to the currency trends, as well as lower sell-in volumes this year versus last year as retailers are being more conservative. And lastly, the career market has been tough thus far in 2024, with sales down double digits as well as currency headwinds. As we look towards the balance of the year, it's worth mentioning that we have both more and larger product launches planned for the second half of this year than we had in 2023, and thus our growth will be more second half weighted. This was always part of our plan and consistent with similar fall launches and product cadences that we've done in previous years. We remain on track to grow the golf equipment segment for the full year, and we continue to feel good about the overall health of golf globally. Turning to our active lifestyle segment, as expected and communicated on our last call, Active Lifestyle was the one segment that was down year over year in Q1. It is also now expected to be down for the full year. We are pleased with our Q1 performance at Travis Matthew, which was in line with expectations, but as expected, down versus Q1 last year. As a reminder, as mentioned during our February call, we lapped a corporate channel sell-in that occurred primarily in Q1 last year and was significant relative to the size of this brand. Excluding this impact, underlying sales trends remain healthy and growing. We also remain on track to open approximately 10 stores this year with seven leases already signed. Travis Matthew also celebrated the one-year anniversary of our women's launch, and we remain confident in our ability to continue to grow that business. We're also pleased with the relaunch of our shoe business under the Travis Matthew brand. Finally, Jack Wolfskin remained under pressure in Q1 largely due to a tough macro environment, including an over-inventory channel and soft overall market conditions in Europe. As a result, we are lowering our full-year revenue expectations for this brand. However, I think it's worth noting that despite this market pressure, we still expect positive EBITDA growth and performance in 2024. We also continue to be pleased with the brand's performance in China. Looking forward, we're certainly not accepting of the status quo. Earlier this year, we transitioned to a new European leadership team, which has been proactively taking action to stabilize this business, return it to profitability, and drive future growth. There has been considerable progress already made with more to come in the next few months. Although this business is a relatively small portion of our annual revenues and an even smaller portion of our annual profit, we will update you further on these actions and our progress during our Q2 call. In closing, I'd like to thank the Topgolf Callaway Brands teams for their hard work and solid execution. Overall, we feel good about our start to 2024 and the strength of our core brands and markets. We remain confident in our EBITDA targets for this year and are taking up our cash flow and EPS targets, as well as starting the process of paying down debt. Perhaps most importantly, we believe the fundamental engine of our company is continuing to strengthen, and we feel great about a long-term direction and opportunity. With that, I'll turn the call over to Brian.